Weekly Analysis

Macro Bullets – 06/03/23

U.S. Treasury yields pullback as services data paints a healthier picture for the economy!

Indices

Futures

Forex

– U.S. stocks moved higher on Friday, with the S&P 500 and Nasdaq up 1.61% and 1.97% respectively. Services data painted a healthier picture for the economy in stark contrast with the disappointing manufacturing data seen earlier in the week.
– Treasury yields suffered a notable pullback last week ahead of Powell’s testimony scheduled for Tuesday 7th March. The 2- & 10-year treasury yield slipped by 4.1 and 10.7 basis points on Friday, closing at 4.863% and 3.967% respectively. Volatility will remain as U.S. macro data continues to outperform the rest of G10 countries.
– Interestingly, the 10 & 2 year yield curve has become even more inverted and is now at its largest inversion since 1981! Inverted yield curves are unusual since longer-term debt should carry greater risk and higher interest rates.
– Friday will show the release of the non farm payrolls (NFP). The last NFP showed the U.S. economy added 517,000 jobs which was extremely strong and higher than estimates. The February report is expected to show 215,000 jobs having been added to the U.S. economy.

– Headline inflation in the Eurozone fell to 8.5% in February, a small reduction from 8.6% in January but above analyst estimates at 8.2%. The European Central Bank is set to raise rates by another 50 basis points in its March decision to try and tackle the “inflation monster”. Critics say previous hikes need time to positively impact inflation.
– European stock markets closed higher last week with the European STOXX 600 index having its best week since the beginning of the year. The index is up 1.31% over the past month helped in part by strength in luxury giant LVMH and airline Lufthansa.
– The Bank of England governor suggested interest rates may have peaked after 10 successive increases since December 2021. However, at the same time Andrew Bailey warned of repeating historical mistakes, stating they would not hesitate to raise rates if inflationary pressures became more embedded.

– Japan’s consumer price index (CPI) hit a 41-year high in January rising 4.2% year on year, this adds more pressure on the Bank of Japan. Policymakers have come under scrutiny as soaring prices of necessities impacts households as wages lag behind inflationary pressure (chart below).
– In China, the manufacturing sector expanded at its fastest rate in more than a decade. February data showed demand recovered after Beijing has eased its restrictions. Solid PMI official manufacturing and non-manufacturing PMI indices came in at 52.6 and 56.3, respectively. GDP growth targets are now expected to be 5.5 to 6%.

Conclusion

There is a continued risk of a U.S. recession as key indicators point towards trouble for the economy despite positive data. U.S. Equity markets appear to be shrugging off Fed rate hike concerns and disappointing corporate earning reports. Looking ahead we have the non-farm payrolls and US Fed’s Powell testifies, wholesale inventories, IBD/TIPP’s economic optimism, consumer credit, API’s inventory readings.

Written by:

Harry Bennett

Harry Bennett

Harry started as a commodity consultant in November 2017, having previously worked for a wealth management firm in Hong Kong. Harry first entered the financial services sector upon graduating from his Civil Engineering degree in 2015. Whilst still early in his career, Harry’s passion and ambition to develop his knowledge within the sector are clear. Harry is currently studying all aspects of the commodity markets, and his spare time is spent on the golf course or socialising with family and friends.

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