Weekly house view | Discretionary recession
Markets rose last week on hopes a deal could be reached on the US debt ceiling—only for Republicans to walk out of Friday’s meeting at the White House. President Biden said he is confident an agreement can be reached, but it is not a done deal yet. Comments by more hawkish Fed speakers saw markets assign a greater probability to a rate hike in June. But Federal Reserve chairman Jerome Powell hinted strongly at a pause (in line with our scenario), given the friction in the economy caused by reduced bank lending. US data remain mixed. Industrial production surged in April thanks to a big rise in auto output. Retail sales rebounded last month after two months of decline—but much less than expected. Moreover, quarterly results from large retailers pointed to a broad-based slowdown in consumer discretionary spending. S&P Global reported a large rise in corporations filing for bankruptcy in the US (Chapter 11) so far this year. But at the same time the National Association of Home Builders reported a rise in its sentiment index in April, to 50 from 45. In markets, bond yields rose and the S&P 500 put in its best weekly performance since March, reflecting the overall resilience in economic data and better-than-expected quarterly results. We are generally positive on oil prices, noting that the US is set to purchase 3 million barrels for its Strategic Reserve and expecting supply shortfalls in H2.
In Europe, the terms-of-trade shock is over, with the euro area turning in a seasonally adjusted EUR17 bn trade surplus in March compared to a EUR0.2 bn deficit in February. The brightening outlook contributed to a rise in European bond yields, as did comments from ECB president Christine Lagarde that interest rates would have to be kept ‘sustainably higher’. We are generally more positive on European equities than US ones. But we will watch geopolitical developments intently as some European countries move closer to delivering F-16 combat planes to Ukraine.
Asian markets showed very different faces. In China, the latest industrial production, fixed-asset investment and retail sales data all came in below expectations. It looks like the Chinese economy is hitting an air pocket after a strong start post reopening. Thus, Chinese equity indexes have been trailing of late. Perhaps more worryingly, China’s real estate index extended its year-to-date losses last week. Consequently, the renminbi fell below the psychologically threshold of 7 to the USD. Political pressure intensified over the weekend with G7 leaders criticising China’s economic policies. In Japan, the Topix reached a 30-year high on the back of stronger-than-expected Q1 GDP, while reforms to improve capital efficiency have been gathering traction. New buybacks are attracting foreign investors to Tokyo. We are increasingly upbeat on Japanese equities.