Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.
Eurozone Market Update
With no April meetings for the ECB, BoE or Federal Reserve, the focus shifted to economic data points critical to central bank monetary policy. Euro area Q1 GDP growth of 0.1% slightly missed market expectations of 0.2%. Germany’s GDP print was flat as public and private consumption contracted while investment and export contributed positively to growth. In April, Germany had 7.2% inflation and France had 6.9% inflation, slightly below market expectations of 7.3% and 6.7%, respectively. The eurozone’s growth continued to pick up, with April’s flash composite Purchasing Managers’ Index (PMI) coming in at 54.4 thanks to robust consumer demand, and with the services PMI improving to 56.6. EU industrial production growth of 1.5% also surpassed market expectations of 1%.
Euro Short Term Rates
Source: Bloomberg, data as at 28 April 2023
UK Market Update
Annual UK headline inflation in March was 10.1%, down from 10.4% but above market expectations of 9.8%, partially due to food inflation at 19.1%. Core inflation moved sideways at 6.2%. There is a continued tightness in the UK labour market, with employment up 169,000 in the three months to February, outpacing expectations of 50,000. April’s UK flash composite PMI readings grew faster than expected, posting a 12-month high of 53.9. UK household confidence also shot up, with GfK’s sentiment index up a surprise six points to minus 30 in April, a 14-month high. However, weakness in the UK housing market was again evident. The Nationwide House Price Index shows that annual prices tumbled 3.1% in March, the sharpest drop since July 2009.
GBP Short Term Rates
Source: Bloomberg, data as at 28 April 2023
US Market Update
As the US regional banking turmoil has continued to play out, so too has the risk posed by the debt ceiling. The potential timing remains uncertain even after both Treasury Secretary Janet Yellen and the Congressional Budget Office flagged risks as soon as early June. Treasury bill yields suggest June through much of the summer are at most significant risk, and those rates remain notably elevated compared to securities maturing in the very near-term. The labour market remains relatively robust, although the growth of nonfarm (228,000) and private (188,000) payrolls in March missed expectations of 230,000 and 218,000, respectively. Unemployment fell to 3.5% and, following the employment report, fed funds futures priced a 70% probability of a 25 bps rate hike in May, compared to 50% the day prior.
USD Short Term Rates
Source: Bloomberg, data as at 28 April 2023
Looking Ahead
While elevated fears of a systemic banking crisis have subsided, the dangers of further US regional bank failures remain. The initial market reaction to the banking turmoil was to price in a high likelihood of a recession and central banks’ subsequent easing of monetary policy. However, as the market pressure on bigger banks in the US and Europe eased, this initial probability waned, reducing the market expectations of monetary policy easing. The market is now pricing a high chance that the ECB and BoE will hike 25 bps at their May meetings (the Fed already has), aligned with our own views. We will pay particular attention to any hints of the future path of monetary policy as some might be close to pausing their hiking cycles while others still have some work to do.
Chart of the Month: Positive economic data helps US market rate expectations bounce back
Source: Bloomberg, data as at 28 April 2023
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