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09 May 2022

Economic Highlights

Welcome to our Economic Highlights, bringing you market updates from across the UK, US, Europe and China, as well as the FTSE weekly winners and losers.

London skyline showing the financial district
UK

The Bank of England raised the base rate by 0.25% to 1%, but with the committee effectively splitting into three groups (those who see no more tightening, those that want some and those who voted for 0.5%). Still, the majority saw the need for further tightening and we would expect 25 basis points increases in June and August. The Monetary Policy Commitee took the hatchet to its growth forecast, projecting a recession in all but name and an eventual rise in the unemployment rate to 5.5%, as it doubled down on its view that markets are pricing in way too much in the way of rate rises over the coming year. This now-familiar dovish message is partly undermined by the Bank of England (BoE) having taken a similar stance last December but then increasing rates at four consecutive meetings. The difference now is that the BoE has provided inflation forecasts which make it harder for them to be surprised to the upside – 10.2% for the peak in the fourth quarter of this year. Nevertheless, the main driver of rates will be how the labour market responds to the real income shock. Resilience would probably mean the tightening continues beyond August, even if the MPC claims that wages and inflation have not exceeded its new forecast.

New York skyline
US

The non-farm payrolls figure came in close to consensus, increasing by 428k in April versus consensus expectations of 391k (although that beat was neutralised by a downward revision of 39k to the two previous months’ data). Large employment increases were once again recorded in leisure and hospitality, with the sector adding 78k jobs, as well as manufacturing (+55k). The alternative household survey reported an unchanged unemployment rate of 3.6% in April, slightly higher than consensus of 3.5%. The most disappointing part of an overall strong labour report, given the shortages of workers in the US economy, was the tick down in the participation rate to 62.2%. The participation rate has, however, been rising steadily back to pre-pandemic levels for the past few months and not too much should be read into one month’s data.

EU flags
Europe

On the face of it, the data was not bad in Europe last week. Unemployment continues to sit at all-time lows (since the inception of the euro) of 6.8%. The final PMI readings for April suggested expansion in the economy, with the S&P Global Composite PMI reading steady at 55.8, with Services quite robust at 57.7. But with Producer Input Prices rising at an incredible 36.8% year-on-year, the European Central Bank (ECB) is getting ready to start tightening policy, and words to that effect were forthcoming from several central bank speakers last week, notably the Chief Economist, Philip Lane. The market is now looking for rate lift-off in July.

Chinese temple
China

The April Caixin Services PMI dropped to a two-year low of 36.2 from 42, below expectations of 40. This confirmed the signal from the official state non-manufacturing PMI which also suggested that service sector activity is contracting in China. The report continues to testify to weak demand conditions. New orders contracted at the second fastest rate on record, while new export orders declined to a pandemic-era low. Input costs continue to rise, but prices charged dropped, highlighting that poor demand is preventing services companies from passing on higher prices to consumers. This will squeeze corporate profit margins. The ongoing rotation of activity from manufacturing to services that has been unfolding globally is yet to materialise in China, where strict lockdowns continue to weigh on demand for services and manufacturing activity. Meanwhile, high input costs and low income growth are taking their toll on consumption and housing demand. With the authorities showing no signs of abandoning their zero-COVID policy, economic conditions are likely to remain weak in the coming quarter. Although a willingness to scale up stimulus has been signalled, no concrete policies have been announced.

FTSE 100 Weekly Winners and Losers

Source: FactSet

Year to Date Market Performance

     Source: FactSet

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