MAXIN ADVISORS Weekly Market Review adresses the issues of the moment and our views for the markets ahead.
France’s Structural Decline
“Ils sont fous, ces Gaulois !” (They are crazy those Gallics), this famous line from the series of comic books about a village of indomitable Gaulish warriors who fight the Roman Empire with the aid of a magic potion, during the era of Julius Caesar, could well describe the state of France at the moment.
Over the past few weeks, in the run up to the vote of the French Pension Reform law of President Macron, popular opposition has been building leading to widespread strikes and street protests that sent images of garbage bags burning in the street, attacks on banks and luxury shops and the police using tear gas and arrests to quell the protests in most major cities.
Last Thursday saw millions of French people taking to the street, voicing peacefully or more violently, their massive opposition ( in excess of 70 % of the population according to the various polls ) of a reform that takes retirement age from 62 to 64 years, in line with the majority of the EU neighbouring countries.
The decision of Macron’s Government to use art 47.3 of the French constitution that enables it to engage its responsibility and forces it to resign in case of a rejection not by Parliament, potentially leading to the resignation of the Government and dissolving Parliament, infuriated the masses even more, being seen as a denial of democracy.
As would be expected from a highly divided Parliament and Macron’s weak centrist political party, Renaissance , lawmakers ultimately voted the reform by fear of being crushed in early elections that would have certainly given the far right and the left a large majority in a new Parliament.
Last Thursday’s street protests came after the vote, leaving a world in disarray watching images and video footages more likely to have been shot in Beirut at the time of the civil war than in a major European capital that is jockeying to replace London as the European financial and technology hub.
What is truly amazing is that every study knows that the current pension pay-as-you-go system inherited for WW2 whereby current workers pay the pensions of past workers, is fundamentally doomed as demographics are making the burden of pensions unsustainable.
By increasing retirement age from 62 to 64, Macron’s pension reform amounts to treating a cancer with bandaids and aspirin. I simply kicks the can down the road and does not address the fundamental issue at stake. The strong reaction of the French people to the reform also comes from the realisation that with or without the reform, their future will not be better.
But beyond the cultural and historical bias of the French people to complain and take to the streets, French Revolution Oblige, the current malaise runs deep and highlights the profound inefficiencies of a society that has major imbalances and a dysfunctional governing system.
France’s Competitiveness is hampered by a bloated Public Sector
For decades now, France has had the largest public sector in terms of percentage of GDP of ANY Nation of the OECD. At 59 % of its USD 2.95 trillion GDP, Public spending represents USD 1.74 Trillion, or USD 2’550 per inhabitant, or 31 % more than the median monthly salary.
The last statistics are placing France amongst the OECD countries with higher number of civil servants.
Despite the marginal decrease of their number in the last few years, they are still almost twice as much as in Germany or Netherlands.
France counts 90 civil servants per 1000 inhabitants, the majority of them employed in the public education sector.
There are 6.1 Million Public sector employees in France, 90 civil servants per 1000 inhabitants, the majority of them employed in the civil administration and public education sectors.
That represents 15 % of the 40.2 million working population, the highest ratio of any OECD country.
France’s Competitiveness is hampered by Labor Inequalities and Rigidity
The motto of the French Republic born our of then French Revolution is “LIBERTE, EGALITE, FRATERNITE” ( Freedom, Equality, Fraternity) and it is engraved on the entrance of Franc’es every pubic service office.
Unfortunately, France has created the biggest inequality of all, INEQUALITY when it comes to LABOR.
Besides 25 million workers of the private sector that are subject to common labor laws, the 6.1 million civil servants benefit from life employment guaranteed by the State – explaining why it has been so difficult to reduce the number of civil servants over the past decades – and they also benefit from privileged special regimes as is the case with pensions.
In France, you have two categories of people, those working for the State, and the others.
As 95 % of the personal in the 1.9 million national education are civil servants with lifetime employment guaranteed, it is not a surprise if French Children are not educated in a culture of “working hard to earn more” or “get rich through your hard work”, but very much in a culture where preserving privileges and “social gains” prevails. As is the case with the pension system today, every attempt by past governments to reform a bloated and inefficient public education system was met by major social unrest and civil servants taking to the streets.
As a logical consequence of this state of affairs and lack of fear of loosing their jobs unless thy make grave mistakes, the quality of France’s public service is renown for its lack of efficiency, low quality, and low customer satisfaction culture.
The tradition of civil servants lifetime employment came form the Napoleonic era where Napoelon who built a new French administration after the revolution wanted to attract talents to the State and provide them with independence in the “Regalian” functions of Justice, Police and army, functions where political interference should not be admitted.
Unfortunately, what was a logical and defendable system at the outset and within its scope, was extended widely to functions that neither need nor require lifetime employment protection by the successive Governments since WW23.
It was extended to education, local administrations, the monopolistic energy-producers, the national railroad, and more generally, the entire cohort of people working for the state in a non duration limited capacity.
Justifying why an elementary school teacher, university professor, local town halls employees, or driving license and vehicle registration administrations has always been a subject to be avoided politically,
Moreover, France has developed a set of labor protection laws that makes employment extremely rigid.
Private sector’s workers are divided between employers who have ” Contrast a durée indeterminee” ( Unlimited duration employment contracts) where firing them is extremely complex and costly ( standard 18 months salary severance pay ) and workers working on ” Contrats a duree determinee” ( Limited term contracts ) where laying off staff is easier and costs 1 to 2 months of severance pay.
As a result, 90 % of new jobs are offered in the form of limited duration contracts making employment rather unstable.
With a structural lack of fluidity of the labor market and its extremely high cost ( see below ) it is not a surprise to see France boasting one the the highest long term unemployment rate of any Nation in the OECD. Today, 1.7 million people are on the dole and have been for a very long time.
To compensate for this situation, France’s governing elites have built a hugely costly unemployment compensation system over decades, further enticing job seekers to remain unemployed rather than taking pay cuts or switching careers.
And as most of the job offers are for limited duration contracts, there are in excess of 2 million unfulfilled job offers while the state is paying unemployment benefits to 1.6 million people.
Today, France’s cost of unemployment system represents 2.79 % of GDP, or 4.8 TIMES the OECD Average twice the next most expensive unemployment benefits system of Spain.
France’s Competitiveness is hampered by The Highest Tax Pressure in the OECD
As a consequence, Tax Pressure is also the highest of the OECD – save for Denmark – representing 45.15 % of GDP, or 32 % higher than the OECD average of 34 % and 2.1x more than Ireland.
Although France’s Income and corporate taxation are in line with the OECD average rates, France has amongst the highest Taxation of Goods and Services ( VAT ) representing 14 % of GDP, and Property Taxes at almost 4 % of GDP against the 1.8 % OECD Average
But the real issue in France is a MAJOR Structural Imbalance when it comes to taxing LABOR, where taxes on salaries and social contributions make the cost of employing people extremely uncompetitive, more than doubling the net intake by workers.
At 1.84 % of GDP, France’s taxation of payrolls is almost 4 times the OECD Average of 0.50 %
Social Contributions represent 14.8 % of GDP, as much as the entire taxation of goods and services, and 50 % more than the OECD average
Despite the yearly reports of the “Cour Des Comptes”, France’s official public finance independent audit authority that highlights regularly the high level of unnecessary expenditures of France’s public sector, its lack of productivity, the need to deeply reform the National Education, Health system, medical coverage system and pension system, the successive Governments and Parliaments have never managed or even really wanted to address France’s structural imbalances.
France’s Competitiveness is hampered by High Budget Deficits and Public Debt
With an inability to reduce public expenditure and improve the efficiency of its bloat public sector, France has NEVER run a Budget surplus in the past 22 years and has always been below the Euro Area average.
In the past two years, due to massive COVD spendings, Frances’ budget deficit reached records of -9 % and -6.5 % of GDP in years 2020 and 2021 and is expected to improve to a EUR 152 Billion, still a – 5.25 % of GDP deficit in 2022.
In fact, the last time, France recorded a Budget Surplus, 1.9 % of GDP, was in 1970, confirming that beyond COVID, the issue is systemic rand structural rather than cyclical or political.
As a result, France’s Public debt has exploded upwards to reach nearly EUR 3 Trillion, more than doubling since the 2008 Financial crisis and increasing by 40 % since Emmanuel Macron came to power in May 2017, 6 years ago.
In terms of percentage, Public debt has almost doubled from 65 % in 2008 to 114 % of GDP today,
This ratio is far from untenable by any standards and with French inflation running at 6 / 7 %, the debt is deflated by that much in real terms.
However, with the cost of servicing the EUR 3 Trillion stock of debt increasing by EUR 30 Billion for every 1 % increase in interest rates, the impact on a n already high 150 Bln. EUR annual budget deficit at a time where tax receipts are likely to decline ahead while public sector workers are demanding higher wages could be lethal for the French public finances, leaving no choice but two increase taxation even more, or borrowing even more ahead.
France, like the US, may be soon facing a dangerous debt spiral. The OECD calculates that France needs to raise tax pressure by another 3 % just to stabilise the current pubic finances conditions of the Country.
France’s Structural Competitiveness problem finds its roots in its unique Elitist Political Culture and their lack of accountability.
At the time where he was building a new post-revolution public administration, Napoleon created schools to form the elites of the country. Many if the French ” Grandes Ecoles” were created during that period and amongst them, the most prestigious ENA – Ecole National d’Administration – where students form all the regions of France were accepted based on their results of exam results, with only the highest ranking making it to the top posts of the French administration.
This very competitive system led to a highly Elitist culture within the French Administration, where successful incumbents became part of a coterie that has been trained by and shared the work culture of a very limited number of institutions and landed life time guaranteed jobs at the highest level of the State.
They see and describe themselves as the “Grand Serviteurs de l’Etat” – The Great Servant of the State – but by the same token, Napoleon replaced what was by essence an aristocratic elite before the Revolution, by a closely-knit meritocracy elite all b red, thinking and acting the same way.
As, at the same time, the lifetime employment guaranteed, not by their job, but by their status, eliminated all sense of accountability at the highest level of the French State. Contrary to what happens in the UK, the US or Switzerland for that matter, French Civil Civil Servants make decisions, never put their names on it and never take responsibility for their failures. They even invested the concept of “Responsable Mais pas Coupables”, ( morally responsible but factually not sanctionable ).
When a French top civil servant fails or does not deliver, he is not fired ! He is just moved to another similar ranking position. And if there are no available position available, they can resort to the very French concept of “Pantouflage“. The term pantouflage refers to a practice by which high-level French civil servants, usually former students of the École Polytechnique or the École nationale d’administration, obtain work in private enterprise temporarily until they decide or are offered another high ranking position in civil service, without losing any of their rights or guarantee of lifetime employment by the State.
The natural consequences of this culture at the. top of the French ruing elites creates an environment where achieving objectives and succeeding is far less important than your personal networking within the coterie to be able to land your next high-ranking position.
It creates a culture of power for power rather than a culture of efficiency and accountability . As a result, French civil servants are people who keep on adding ” Measures” and ” Programs” to existing ones rather than reforming and making the difficult decisions to enhance productivity, save pubic money and implement the deeply needed reforms to correct the structural imbalances that have developed in the French economy over decades of this type of Management.
Moreover, the ruling elite who never face unemployment, who is never sanctioned and enjoys all the privilege of power, working form palaces, having drivers and assistants, spending public money for their own lifestyle are completely disconnected form the reality of the life of the citizens who work hard with no guarantees to pay the high cost of a bloated public sector that does not deliver quality services.
France’s ruling elite work under the political radar, they serve politicians that come and go and put themselves publicly at risk through elections, but they are the ones who ultimately hold the key to power and policies.
And over the past decades, even the politicians themselves were all issued from the same schools and part of the same coterie.
Since General de Gaulle who was brought to power by WW2, all the Presidents and Prime Ministers of France were form the same schools and in particular the ENA, from Pompidou, Giscar D’estaing, Chirac, to Mitterand, Hollande and today Emmanuel Macron.
The only exception was Nicolas Sarkozy, a lawyer form the private sector who managed to gain hold of the predominant right-wing party and came to power on a popular agenda for change.
Today’s popular uprising often reveals a considerable personal defiance vis a vis Emmanuel Macron who is seen as aloof, regalian, authoritarian and totally disconnected for the reality of the people, as all the polls show.
The current popular unrest is as much about Emmanuel Macron himself and his style of Governance as it is against the pension reform itself. His personal rating in the polls has fallen to a record low of 28 % of satisfied, despite having been re-elected for a second term less than a year ago.
And it is not the first time ! Barely a few months into his first mandate in 2017, his style of governance and the one of his then prime minister triggered the “Yellow Vest” crisis, a nationwide wave of protests that cost France a sharp economic contraction then, substantial degradation of infrastructure and a surge in the the. budget deficit and public debt.
Who is Emmanuel Macron and Where does he come from ?
As highlighted above, since the General de Gaulle who left power in 1968, France has been governed by the same ruling Elite.
The only experiment was with Nicolas Sarkozy who made timid attempts at reforming the system. His election to power was a warning signal to France’s Ruling Elite, whose dominance over the country and lack of accountability was starting to be questioned more publicly. Talks of the need to dismantle the ENA and open its doors to new blood made the headlines.
He was ultimately replaced by Francois Hollande, another énarque who surfed the wave of discontent at Sarkozy’s reformist agenda to take power at the helm of the Socialiat Party and he was ultimately elected President. His tenure proved to be a political disaster, with the anti-elite sentiment growing fast in the polls.
Coming into the 2017 elections, France was ready for change and demanded change. The Far right Front National was going power as were anti establishment populist leaders such as Jean Luc Melenchon.
Coming out of nowhere and out of the blue, at the beginning of 2016 a young and brilliant, but until then little-know, Enarque who made a brief passage in Government as Minister of the economy and had previously worked at the Ministry of finance, having done some pantouflage as an investment banker at Rothschild, emerged with an impressive machinery and powerful financing behind him, with a positioning of neither right nor left and a deeply reformist agenda.
His program, extremely well-built, provided for 74 different fa -reaching reforms, and his political machine and political party En Marche, attracted droves of young French people hoping for a new France and a new style of Government.
His youth, articulate personality and mastering of the main issues made him triumph overload-school far-right Marine Le Pen then, as again in 2022.
But Emmanuel Macron is and has always been an Enarque. And his extremely rapid rise to power was entirely engineered by the ruin Elite of France who was in danger of losing its privileges after the disastrous Presidency of Francois Hollande and the distrust off the French People for both the right hand and left hand traditional parties that had governed France for decades.
Political analysts know full well that the building up of En Marche over such a short period of time and with such strong financing was not a spontaneous construction.
And the six years of Macron in Government have demonstrated that ALL his teams in Government and at senior positions in Government and the administration are manned with people form the same shells as his and with te same careers and culture as his. From Edouard Philippe, to Alexandr Kohler, to Emmanuel Bonne, to now Prime Minister Elizabeth Borne, or her predecessor, the same ruling elite is at the helm and nothing has changed.
And they are in power for power itself.
The best indication of that is the lack of inters test of Emmanuel Macron is building behind him a true political force in parliament and on the political landscape.
EN Marche, that then acme LA Republique en Marche and then transformed into Renaissance for the 2022 elections ha son real political platform, consists of newcomers in politics wishing well but without cohesion, with little handle on the terrain and with no real reforming or counter power abilities, apart from supporting Macron’s Government.
Macron’s lack of involvement in the 2017 parliamentary elections and again in. the 2022 parliamentary elections, rarely if ever supporting candidate son the terrain and even spending the least time of any President of the French Republic in Parliament in history shows that his primary objective is not the building up of a new and solid political force, but just a tool to serve his agenda while in power.
His decisions to push the Pension reform, as presented, in the face of 80 % of opposition by the Ffrench people shows that his only agenda is tasty in history as the President who tried too reform the French Pension System.
But political analysts are quick to point out that only 5 of the 74 reform propositions that got him elected in the first place in 2017 have not been fulfilled. By contrast, his presidency will leave France with the largest ever increase in public debt of any president behind him, and that even before COVID as the Yellow Vest crisis did in 2017/2018.
On the International scene, Macron’s noisy gesticulations in favour of Iran, in Lebanon, or with Putin have made him lost credibility, and he failed to build momentum for a stronger Europe with Angel Merkel first and with Olaf Schultz today.
With 4 years left at the helm of the country, a weak parliament, a weak political formation, and the French people in the streets against him, the coming years will be difficult for France.
For now, he benefits from the lack of credible alternative in the French political landscape, but the daunting economic and social challenges facing France in the next few years may well mark the end of his rule and the final end of France’s Enarque ruling Elite.
In the mean time, Frances structural imbalances will continue to cripple its economic development.
Weekly Market Review
26 Mar 2023
MACRO HIGHLIGHTS
Chicago Fed National Activity Index Falls
The Chicago Fed National Activity Index declined to -0.19 in February 2023 from +0.23 in January. All four broad categories of indicators used to construct the index made negative contributions, and three categories deteriorated from January. Production-related indicators contributed -0.08, down from +0.15 in January; employment-related indicators contributed -0.02, down from +0.10; and the contribution of the personal consumption and housing category decreased to -0.08 from +0.10. On the other hand, the contribution of the sales, orders, and inventories moved up to -0.02 from -0.12 in the previous month. The three-month moving average improved to -0.13 in February from -0.27 in January. The CFNAI Diffusion Index, which is also a three-month moving average, moved up to +0.02 in February from -0.07 in January.
US Durable Goods Orders Fall for 2nd Month
Durable goods orders in the US which measure the cost of orders received by manufacturers of goods meant to last at least three years, dropped 1% month-over-month in February of 2023, following an upwardly revised 5% plunge in January and compared to market forecasts of a 0.6% increase. Transportation equipment was the biggest drag, down 2.8%, namely nondefense aircraft and parts (-6.6%), defense aircraft and parts (-11.1%) while those for motor vehicles and parts went down 0.9%. Excluding transportation, new orders were virtually unchanged. Orders were also down for capital goods (-2.2%), namely nondefense ones (-1.2%), machinery (-0.5%) and computers and electronic products (-0.1%) but rose for fabricated metal products (0.4%) and primary metals (0.3%). Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, increased 0.2%, after a 0.3% rise in January.
US Private Sector Activity Expands the Most in 10 Months
The S&P Global US Composite PMI jumped to 53.3 in March of 2023, expanding from 50.1 in the previous month and firmly above market estimates, according to preliminary data. It was the fastest pace of expansion in private-sector activity since May 2022, as growth for the services sector (53.8 vs 50.6 in February) offset a slower decline for manufacturers (49.3 vs 47.3). Output grew in both sectors, underpinned by the greatest improvement in delivery times on record. In the meantime, new orders increased for the first time since September 2022 as firms scored new clients and introduced new products. Higher demand for new business led backlogs of work to rise for the first time in six months, driving companies to turn up hiring activity. Meanwhile, input inflation softened to its second-slowest pace since October 2020, although price growth remained high by historical standards. Still, uncertainty in financial markets pressure business confidence to a three-month low.
US Service Sector Rises More than Expected
The S&P Global US Services PMI rose to 53.8 in March 2023 from 50.6 in January, easily beating market expectations of 50.5, preliminary estimates showed. It was the fastest rise in output since April 2022, with firms linking the upturn to stronger demand conditions and a renewed increase in new business. New orders increased for the first time since last September, and at the fastest since May 2022 with domestic and foreign client demand both improving. Input prices rose markedly, despite the rate of cost inflation softening to the second-slowest since October 2020. Firms’ pricing power was buoyed by stronger demand conditions, as they raised their selling prices at the sharpest rate for five months. Pressure on capacity drove job creation, as service sector employment rose at the steepest rate since last September. Finally, concerns relating to inflation and higher interest rates weighed on confidence, as the degree of optimism dipped to below the series average.
US Factory Activity Shrinks the Least in 5 Months
The S&P Global US Manufacturing PMI increased to 49.1 in March of 2023 from 47.3 in February, beating forecasts of 47, preliminary estimates showed. The reading pointed to the smallest contraction in the current five-month sequence of falling factory activity, amid a renewed rise in production and a softer fall in new orders. Also, inflationary pressures softened amid less marked supplier price hikes and moderations in some raw material costs. There was also an unprecedented improvement in supplier delivery times which in turn led to a slower fall in input buying and a softer depletion of pre-production inventories. Lead times were reduced to the greatest extent on record, allowing firms to start replenishing stocks and process backlogs of work, which fell solidly. Employment continued to rise at a modest pace and firms noted further difficulties finding skilled candidates. Finally, confidence was the lowest for three months amid inflationary concerns and uncertainty about demand.
US Mortgage Rates Fall for 2nd Week
The average rate on a 30-year fixed mortgage decreased to 6.42% as of March 23, 2023, down from 6.60% in the previous week, according to a survey of lenders by mortgage giant Freddie Mac. It was the biggest one-week decline since mid-January. The 15-year fixed-rate mortgage averaged 5.68%, below 5.90% last week. “Mortgage rates continued to slide down as financial market concerns came to the fore over the last two weeks,” said Sam Khater, Freddie Mac’s Chief Economist. “However, on the homebuyer front, the news is more positive with improved purchase demand and stabilizing home prices. If mortgage rates continue to slide over the next few weeks, look for a continued rebound during the first weeks of the spring homebuying season.”
US New Home Sales Strongest in 6 Months
Sales of new single-family houses in the US increased 1.1% month-over-month to a seasonally adjusted annualised rate of 640K in February of 2023, the highest level since August last year but below forecasts of 650K. It follows a downwardly revised 633K in January. Sales increased 8.1% in the West to 133K and 3% in the South to 415K, offsetting decreases in the Midwest (-1.4% to 71K) and the Northeast (-40% to 21K). The median price of new houses sold was $438,200 while the average sales price was $498,700, compared to $427,400 and $522,200 respectively a year ago. There were 436K houses left to sell, the lowest since April of 2022, corresponding to 8.2 months of supply at the current sales rate.
Canadian Retail Sales Seen Lower in February
Retail sales in Canada likely fell by 0.6% month-over-month in February of 2023, preliminary estimates showed. Considering January 2022, retail sales jumped by 1.4% from a month earlier, following a revised flat reading in December and above preliminary estimates of a 0.7% advance. Sales increased in 9 of the 11 subsectors, led by a sixth consecutive increase for motor vehicles and parts (3%) as retail in new car dealers rose by 3%, the most since May 2022. Sales also increased at gas stations and fuel vendors (2.9%), clothing, accessories, and leather goods retailers (1.8%), and food and beverage retailers (0.8%). Excluding autos, retail sales edged 0.9% higher in January, above estimates of 0.6%. Year-on-year, Canadian retail expanded by 5%, easing from the downwardly revised 5.9% drop in the previous month.
Canada Wholesale Sales Fall in February
Wholesale sales in Canada fell 1.6 percent month-over-month in February 2023, after a 2.4 percent advance in January, preliminary estimates showed. The decrease largely reflected lower sales in the motor vehicles & motor vehicle parts & accessories (-5.6%) and food, beverage & tobacco products (-3.9%). Sales were also down for building material & supplies (-2.9%) and personal & household goods (-0.6%). By contrast, sales surged for farm products (+2.7%), miscellaneous goods (+1.4%) and machinery, equipment & supplies (+0.8%).
Mexican Economic Activity Accelerates in January
Economic activity in Mexico increased by 4.4 percent year-on-year in January of 2023, picking up from the 2.6 percent expansion in the previous month and beating market estimates of a 3 percent increase. Output advanced sharply for services (5.6 percent vs 2.6 percent in December) and rose to a slightly lower extent for manufacturing (2.8 percent vs 3 percent). On the other hand, production fell for mining and agriculture (-1.1 percent vs 8 percent). On a seasonally adjusted monthly basis, economic activity rose by 0.6 percent in the period, advancing from the upwardly revised 0.4 percent increase in the previous month.
UK Retail Sales Unexpectedly Rise 1.2%
Retail sales in the UK unexpectedly surged 1.2% month-over-month in February of 2023, following an upwardly revised 0.9% rise in January and compared to forecasts of a 0.2% gain. It is the biggest increase in four months, boosted by sales at non-food stores (2.4%), namely discount department stores, clothing, second-hand goods stores, such as auction houses and charity shops. Sales also increased in food stores (0.9%), with some anecdotal evidence of reduced spending in restaurants and on takeaways because of cost-of-living pressures. Non-store retailing (predominantly online retailers) sales rose by 0.2% while sales of automotive fuel went down 1.1%, reversing a 1.1% rise in January when rail strikes may have increased car travel. With the February 2023 increase, retail sales returned to February 2020 pre-coronavirus pandemic levels. Considering the three months to February 2023 however, retail sales were down 0.3%.
UK Service Sector Activity Picks Up for the 2nd Month
The S&P Global/CIPS UK Services PMI went down to 52.8 in March 2023 from 53.5 in February, below market expectations of 53, preliminary estimates showed. New orders growth accelerated due to improved client confidence, resilient demand for consumer services and a boost to spending from falling inflationary pressures. Meanwhile, job creation hit a three-month low in the service economy. On the price front, service providers continued to signal a much steeper rise in input prices than manufacturing companies. Looking ahead, confidence across the service economy was unchanged since February, despite recent volatility across global financial markets.
UK Factory Activity Unexpectedly Shrinks at Faster Pace
The S&P Global/CIPS Manufacturing PMI for the UK fell to 48 in March of 2023 from 49.3 in February, well below forecasts of 49.8, preliminary estimates showed. The reading pointed to an eighth straight month of falling factory activity, with production declining once again, and held back by subdued order books. At the same time, manufacturers cut their staffing numbers at a faster pace. Meanwhile, cost pressures softened and many firms noted that lower commodity prices and falling freight rates had been passed on by suppliers. Manufacturers continued to report improving supply conditions, with delivery times shortening to the greatest extent since April 2009. Finally, business expectations increased amid hopes of a rebound in customer demand and a boost from improving supply chain performance.
UK Private Sector Growth Below Expectations in March
The S&P Global/CIPS UK Composite PMI fell to 52.2 in March 2023 from the 8-month high of 53.1 in February, below market expectations of 52.8, flash data showed. The latest reading pointed to a sustained increase in the private sector, largely reflecting a strong performance by the service economy. New business received by service sector companies rose at the sharpest pace for 12 months, although staff shortages acted as a constraint on growth. Manufacturing production dipped in March and was once again held back by subdued order books. Input price inflation meanwhile fell to a two-year low in March, mostly reflecting a considerable softening of cost pressures in the manufacturing sector. Many firms noted that lower commodity prices and falling freight rates had been passed on by suppliers. Manufacturers continued to report improving supply conditions, with delivery times shortening to the greatest extent since April 2009. Looking ahead, confidence rose to the highest since March 2022.
Swiss National Bank Rises Interest Rate by 50bps
The Swiss National Bank raised its policy rate by 50 bps to 1.5% in its March meeting, following a similar move in December and bringing borrowing costs the highest since November 2008. The central bank also said that additional hikes in the policy rate could not be ruled out to ensure price stability over the medium term. To provide appropriate monetary conditions, the SNB remains willing to be active in the foreign exchange market as necessary. The central bank now sees average annual inflation at 2.6% for 2023 (compared to previous projections of 2.4%), and 2.0% for 2024 (from 1.8).
Eurozone Private Sector Grows More than Expected
The S&P Global Eurozone Composite PMI rose to 54.1 in March of 2023 from 52 in February, ahead of market estimates of 51.9 to mark the fastest expansion since May 2022, according to preliminary estimates. Growth was driven solely by the services sector, expanding the most in 10 months (55.6 vs 53.7 in February), which offset the contraction for the manufacturers (47.1 vs 48.5). Aggregate output increased during the period, underpinned by the further revival of financial services and real estate despite recent concerns of banking instability. New orders rose for a second month, strengthening aggregate backlogs of work. Meanwhile, employment growth reached a 9-month high. On the price front, the record easing of supply constraints, low demand, and the sharp downturn in energy prices during the period allowed input prices to fall for the first time since July 2020.
Eurozone Services PMI Rises to 10-Month High
The S&P Global Eurozone Services PMI rose to 55.6 in March 2023 from 52.7 in February, above market expectations of 52.5, preliminary estimates showed. Business activity rose for a third straight month to register the strongest expansion since last May. A key development was the further revival of growth in financial services, with a notable turnaround in real estate activity compared to late last year, despite recent concerns regarding banking sector stability and higher interest rates. Consumer services activity also continued to revive from the downturn seen late last year, notably in respect to travel and tourism. New orders rose faster leading backlogs of work accumulating at the steepest rate since last May, which will help support further growth in the coming months. Employment growth picked up to a 10-month high as firms sought to keep pace with rising demand. Finally, optimism about the year ahead slipped lower but remained far above the levels seen late last year.
Euro Area Manufacturing PMI Below Expectations
The S&P Global Eurozone Manufacturing PMI fell to 47.1 in March 2023 from 48.5 in February, below market expectations of 49, preliminary estimates showed. The latest reading suggested manufacturing output broadly stagnated for a second consecutive month, which nevertheless represents an improvement on the solid declines seen throughout the second half of last year. The autos sector in particular reported a stronger performance, linked in part to improved supply chains. Supply chain improvements, combined with falling demand, took further pressure off industrial input prices, which fell for the first time since July 2020. Meanwhile, employment growth held steady at a relatively slower pace that was among the lowest seen over the past two years. New orders fell for the 11th straight month and at a faster rate, leading to the steepest drop in backlogs for four months. Existing output is only being sustained by eating into previously placed orders, posing downside risks to future output.
German Services Sector Rise the Most in 10 Months
The S&P Global Germany Services PMI rose to 53.9 in March of 2023 from 50.9 in the previous month, ahead of expectations of 51 to mark the third consecutive expansion and the fastest since May 2022. The sharp upturn in business activity was underpinned by strong inflows of new work in the period, supporting output and sharply increasing backlogs of work. Hence, employment growth continued to accelerate in March. In the meantime, services inflation was kept high as growing wage demands pushed cost pressures upwards. Looking forward, confidence in the service sector improved slightly, enough to notch its highest in 13 months.
Germany Factory Activity Shrinks the Most in 3 Years
The S&P Global Manufacturing for Germany unexpectedly fell to 44.4 in March of 2023 from 46.3 in February and well below forecasts of 47, preliminary estimates showed. The reading pointed to a ninth straight month of falling factory activity and the deepest contraction since May of 2020 in the height of the coronavirus pandemic, predominantly due to supplier delivery times which surged to a new record high. At the same time, manufacturing output and job creation were little-changed, order books fell at a faster pace and outstanding business reduced markedly. Meanwhile, factory gate charge inflation slowed to its lowest since January 2021 and overall input costs dropped the most since May of 2020 due to softer raw material and energy prices and the rebalancing of supply and demand for materials, as falling order books and easing supply bottlenecks led goods producers to cut back their buying levels and reduce holdings of inputs.
France Factory Activity Shrinks for 2nd Month
The S&P Global Manufacturing PMI for France edged higher to 47.7 in March of 2023 from 47.4 in February, but slightly below forecasts of 48, preliminary estimates showed. The reading pointed to a second consecutive month of falling factory activity, with production falling for a tenth month, new orders continuing to decline and employment ticking up only marginally. At the same time, sufficient stock levels at clients reportedly weighed on demand for manufactured goods. In fact, reduced sales contributed to another increase in post-production inventories, while stocks of inputs fell further amid firms’ efforts to align their material supplies with production schedules. Meanwhile, improving supply conditions helped alleviate some inflationary pressures, with input costs rising only moderately and at the softest pace in two-and-a-half years. Finally, manufacturers turned pessimistic towards the 12-month outlook for the first time since last November.
France Services Growth Highest since May 2022
The S&P Global France Services PMI rose to 55.5 in March of 2023, the highest since May of 2022, compared to 53.1 in February, and above market forecasts of 52.5, preliminary estimates showed. Services companies reported an increase in workloads, hiring and optimism, while there was a considerably sharper increase in operating expenses, due to rising wage bills and general inflation. The latest PMI “reflects well on the underlying health of France’s domestic economy despite the strain that cost-of-living pressures, increased borrowing costs and recession concerns has put on consumer and business finances”, Joe Hayes, Senior Economist at S&P Global Market Intelligence said.
Netherlands Current Account Surplus Narrows in Q4
The current account surplus in the Netherlands shrank to EUR 4.3 billion in the fourth quarter of 2022 from EUR 10.3 billion in the corresponding period of the previous year. The primary income shortfall widened to EUR 19.2 billion from EUR 12.9 billion and the secondary income gap expanded to EUR 2.7 billion from EUR 0.8 billion. Meanwhile, the services surplus slightly fell to EUR 8.1 billion from EUR 8.3 billion, while the goods surplus rose to EUR 18.2 billion from EUR 15.8 billion.
Spain Q4 GDP Growth Confirmed at 0.2%
Spain’s gross domestic product expanded by 0.2% quarter-on-quarter in the last three months of 2022, the same as in the previous period and in line with preliminary estimates. Government spending continued to rise (1.9% vs 1.6% in Q3), but both household consumption (-1.8% vs 1.8%) and fixed investment (-3.8% vs -0.5%) declined sharply, reflecting tightened financial conditions and an ongoing cost of living crisis. Regarding net external demand, exports (-1.1% vs 0.3%) fell less than imports (-4.2% vs 3.2%). On a yearly basis, the GDP rose 2.6%, the least in almost two years and less than earlier estimates of 2.7%. Looking ahead, the bank of Spain sees Spanish first-quarter GDP growing 0.3% from the preceding quarter and puts 2023 economic growth at 1.6%.
Dutch GDP Growth Confirmed at 0.6% in Q4
The gross domestic product (GDP) in Netherlands expanded by 0.6% on quarter in the three months to December 2022, after revised data showed no growth in the previous period and confirming market expectations and earlier estimates. The economic growth was prompted by the increases seen for both the private consumption (1.2% vs 0.6% in Q3), amid higher household spending on services particularly catering, recreation and culture; and government spending (1.3% vs 0.7%), due to higher expenditures by municipalities. Moreover, fixed investments grew by 0.5%, recovering from a two-year low of 1.1% contraction in the third quarter. On net trade, imports increased by 1.6% (vs 1.3%), while exports rose at a softer 1.5% (vs 1%). For the whole of 2022, the economy expanded by 4.5%.
Belgium Business Confidence Improves for 4th Month
The business confidence barometer in Belgium rose to -7.6 in March of 2023 from -12.8 in the previous month, marking the fourth consecutive month of improvement since hitting the two-year low of -16.6 in November 2022. Sentiment for business-related services swung to show optimism (8.4 vs -7.6 in February), amid sharp rebounds for activity expectations and market demand expectations in the sector. At the same time, pessimism eased for the manufacturing sector (-10.8 vs -14.8), trade (-21.6 vs -24.4), and the building industry (-5 vs -5.8).
Swedish Producer Inflation Lowest Since 2021
Annual producer inflation in Sweden eased to 9.3 percent in February of 2023, from 11.8 percent a month earlier. It was the lowest producer inflation since May of 2021, due to softer rises in prices of energy-related products (5.9 percent vs 11.7 percent in January), capital goods (11.4 percent vs 11.8 percent) and consumer goods (15.4 percent vs 15.7 percent). Excluding energy-related products, producer prices surged 11.2 percent, slowing from a 12.9 percent gain in the previous month. On a monthly basis, producer prices declined 1 percent, following a 5.2 percent drop in January.
Danish Business Confidence Highest in 6 Months
The manufacturing confidence indicator in Denmark increased to -14 in March 2023 from -15 in the previous month, pointing to the highest reading since last September. The assessment of finished products stock improved (17 vs 15 in February), while the assessment for orders books remained pessimistic but less negative (-24 vs -27), and entrepreneurs’ sentiment about the production was unchanged (at -2).
Japan Inflation Rate Eases from 41-Year High
The annual inflation rate in Japan fell to 3.3% in February 2023 from January’s 41-year high of 4.3%. The latest figure also marked the lowest print since last September, as cost of transport rose the least in 5 months (1.7% vs 2.1% in January); while prices of fuel, light, and water charges dropped for the first time since May 2021 (-0.3% vs 14.9%), mainly electricity (-5.5% vs 20.2%) and gas (12.5% vs 24.3%). In contrast, inflation was unchanged for housing (at 1.3%), while accelerated for clothes (3.6% vs 3.1%), furniture & household utensils (8.7% vs 7.7%), medical care (0.9% vs 0.5%), education (0.9% vs 0.7%), and miscellaneous (1.3% vs 1.1%). Also, cost of food increased the most since September 1980 (7.5% vs 7.3% in January). Core consumer prices went up 3.1% yoy, the least in 5 months, matching forecasts but above the Bank of Japan’s 2% target for the 11th straight month. On a monthly basis, consumer prices declined by 0.6% in February, the first fall since October 2021.
Japan Services Growth at Over 9-Year High
The au Jibun Bank Japan Services PMI rose to 54.2 in March 2022 from a final reading of 54.0 in February. This was the seventh successive month of rise in services activity and the strongest pace since October 2013, as the sustained government support for the sector continued while the lifting of remaining COVID restrictions in China brought inbound tourism to Japan. New orders rose the most in ten months, and new export orders increased at the joint-quickest rate since the series began in September 2014. At the same time, employment growth quickened while backlogs of work rose at a softer rate. On the cost side, input prices eased but stronger demand conditions encouraged firms to raise selling prices for the eleventh month in a row, and at the fastest rate since October 2019. Finally, confidence was more upbeat, as the impact of pandemic receded globally.
Japan Manufacturing Shrinks at Softer Pace
The au Jibun Bank Japan Manufacturing PMI increased to 48.6 in March 2023 from February of 47.7, which was the lowest reading since September 2020, a preliminary estimate showed. This was the fifth straight month of contraction in the sector, as both output and new orders shrank at the softest pace in five months, while a decline in new export orders moderated. Meanwhile, firms increased employment levels for the twenty-fourth month running, though the rate of job creation eased, with backlogs of work declining at a faster pace. On the pricing front, input cost inflation slowed to the lowest since August 2021. As a result, output cost inflation also eased. Vendor performance improved to the smallest extent for 29 months, as supply pressures eased further. Finally, business sentiment strengthened to a five-month high.
Japan Private Sector Activity Grows the Most in 9 Months
The au Jibun Bank Japan Composite PMI increased to 51.9 in March 2023 from a final 51.1 a month earlier, a flash print showed. This was the third straight month of growth in private sector output and the steepest pace since June 2022, with the services sector expanding the most since October 2013 amid sustained government support and the lifting of remaining COVID curbs in China that brought inbound tourism to Japan. Meantime, manufacturing firms signaled further downbeat figures, contracting for the fifth successive month. Both new orders and employment grew faster, foreign sales fell at a softer rate, while a decline in backlogs of work accelerated. On inflation, input cost eased while selling prices rose faster. Lastly, confidence strengthened.
Singapore Manufacturing Shrinks the Most in 4 Years
Singapore’s manufacturing production dropped by 8.9% year-on-year in February 2023, well above market expectations of 1.9% fall, and from 3.1% decline in the previous month. This was the largest contraction since November 2019, mainly due to declines in pharmaceuticals & biological products (-59% vs 41.8% in January), textiles (-57% vs -52%), chemicals & chemical products (-19.8% vs -18.3%), and computer, electronic & optical products (-8.7% vs -4.9%). On the other hand, production rebounded for food, beverage & tobacco (4.4% vs -3.6%), leather products (22.6% vs -22.4%), and paper & paper products (26.1% vs -10.2%). On a monthly basis, manufacturing output unexpectedly fell by 11.7%, following a 0.4% decline in January and missing market expectations of 0.7% rise.
Australian Manufacturing PMI Falls to 34-Month Low
The Judo Bank Australia Manufacturing PMI fell to 48.7 in March 2023, from 50.5 in the previous month, preliminary estimates showed. It pointed to the sharpest contraction since May 2020, led by falls in new orders and outputs as higher interest rates and inflationary pressures affected demands. Manufacturing output shrank for a fourth straight month driven by falls in new orders, as new orders contacted at the fasted rate since August 2021. Labor demand continued to ease while Australian businesses are still looking to expand their workforce levels in early 2023. Meantime, the overall level of business confidence declined further and was the lowest in almost three years.
Australian Private Sector at 3-Month Low
The Judo Bank Australia Composite PMI fell to 48.1 in March of 2023 from 50.6 the prior month, flash estimates showed. It was the lowest reading since December 2022 as both Australian manufacturing and service sectors recorded declines in activities that led to a broad deterioration in private sector output. Business activity contraction occurred at a faster pace in the manufacturing sector compared to services. The fall in the overall output was due to lower demand as higher interest rates, elevated inflation and softer economic conditions affected new business for both Australian goods and services. Foreign demand also shrank led by weakness in manufacturing export orders. Input prices remained at an above-average level, due to higher raw material, energy and labor costs. In turn, private sector firms shared higher input costs with their clients, but the pace of selling price inflation eased to a two-year low.
Hong Kong Inflation Rate at 9-Month Low
The annual inflation rate in Hong Kong increased to 1.7% in February 2023, easing from a 2.4% rise in the previous month. It was the lowest increase in consumer prices since May 2022, as prices increased at a slower pace for food (2.4% vs 5% in January), clothing & footwear (5.5% vs 5.8%), and miscellaneous goods (0.7% vs 1%) while services increased faster (0.9% vs 0.2%). Meanwhile, the underlying inflation rate was also at 1.7%, 0.7 percentage points lower compared to January. On a monthly basis, consumer prices showed no growth, following a 0.6% increase in the previous month.
Taiwan Jobless Rate at 22-Year Low
The seasonally adjusted unemployment rate in Taiwan dropped to 3.58% in February 2023, the lowest reading since January 2001, from 3.6% in the previous month. The number of unemployed increased by 4 thousand to 420 thousand, in comparison with the previous month, while the number of workers went up by 14 thousand to 11.485 million. Meantime, the labor force participation rate edged up to 59.18% from 59.17% in January.
Baltic Index Falls for 1st Week in 5
The Baltic Exchange’s main sea freight index, which measures the cost of shipping goods worldwide, declined 3% this week to 1489, the most in five weeks. The capesize index, which typically transports 150,000-tonne cargoes such as iron ore and coal, lost 1.6% for the week to 1882. The panamax index, which tracks coal or grain cargoes of about 60,000 to 70,000 tonnes, tumbled 8.8% for the week, the most since the week ended February 3. Among smaller vessels, the supramax index was up for the sixth consecutive week.Meanwhile, the panamax index, which tracks coal or grain cargoes of about 60,000 tonnes to 70,000 tonnes, fell for the sixth straight day, down about 1.4% to its lowest since March 7th at 1,584 points; and the supramax index shed 4 points at 1,333 points.
THE WEEK AHEAD
In the US, the banking crises will dominate the headlines. Vice Chair for Supervision Michael S. Barr will testify before the U.S. Senate Committee on Banking, Housing, and Urban Affairs and U.S. House Financial Services Committee. Investors will also closely watch PCE and core PCE figures, the Federal Reserve’s preferred inflation gauge, to assess how price pressures on the economy are evolving. Other data to follow include private spending and income; the Conference Board consumer confidence; and the latest estimate for GDP growth in Q4. Due are also several housing indicators, such as the S&P/Case Shiller house price index and the FHFA housing index; pending home sales; and regional PMIS, namely the Richmond Fed, Dallas Fed, and Chicago PMI.
In America, GDP growth figures for Canada, interest rate decisions from Banxico, and industrial production and PPI figures for Brazil will be released.
In Europe, key inflation and unemployment reports will be released for the Eurozone, including those for Germany, France, Italy, and Spain. The annual inflation rate in the Euro Area is expected to slow further in March, reaching a 13-month low of 7.3% compared to 8.5% in February. At the same time, the labor market will likely remain tight, with unemployment in the region holding close to record levels of 6.6% hit in October 2022. Germany’s business outlook is set to deteriorate due to concerns over the banking sector. Other data will cover Euro Area’s monetary indicators and business survey; Germany’s retail sales and Gfk consumer confidence; Switzerland’s KOF leading indicators and retail trade; and Turkey’s business morale. In the United Kingdom, the ONS will be publishing the final fourth-quarter GDP numbers, while the Bank of England’s monetary indicators and the CBI gauge of distributive trades will also be eyed.
In China March NBS PMI will reveal the pace of the impact of the country’s economic reopening after February’s factory activity expanded at the fastest pace in over 10 years.
In Japan, retail sales; industrial production; the unemployment rate; and housing starts for February will be published.
In India will divulge its fourth-quarter current account balance following the historical-high deficit from the previous period. Elsewhere, South Korea will post consumer and business confidence for March, and the Bank of Thailand will deliver its monetary policy decision.
In Australia, economic releases will be headlined by retail sales data and the monthly inflation print for February. In New Zealand, the attention will fall on business confidence for March.
Calendar
INFLATION
BONDS
USA
US 10-Year Treasury Yield Falls to 6-Month Low
The yield on the US 10-year Treasury note fell by 11bps to 3.29% on Friday, the lowest since September of 2022, amid a flight to safety as the banking sector turmoil continued. Deutsche Bank shares were under heavy pressure after the bank announced the redemption of $1.5 billion in a set of tier 2 notes due in 2028, and its credit default swaps surged to the highest level since their first introduction in 2019. News of a U.S. probe on Credit Suisse and UBS and a big drop in Deutsche Bank shares also weighed on traders’ confidence. Meanwhile, the two-year yield dropped over 20bps to 3.59%. Bonds were already rising since Wednesday after the Federal Reserve delivered dovish rhetoric along with the loosely-expected 25bps hike in the fund’s rate, indicating that it was on the verge of pausing its tightening campaign to address recent risks to financial stability.
US 2-Years Government Bonds
US 10 -Years Government Bonds
US 30-Years Government Bonds
Europe
European Bond Yields Tumble on Risk Aversion
Government bond yields in Europe fell for a second session on Friday, with the benchmark 10-year Bund yield tumbling almost 20bps to 2.02%, the lowest in nearly two months, prompted by flight to safety as banks came under renewed pressure and investors pared bets on future rate increases. News of a U.S. probe on Credit Suisse and UBS and a big drop in Deutsche Bank shares weighed on traders’ confidence. Deutsche Bank suffered losses after it announced the redemption of $1.5 billion in a set of tier 2 notes due in 2028, and its credit default swaps surged to the highest level since their first introduction in 2019. At the same time, bets on prolonged monetary tightening from the ECB eased after the Federal Reserve signaled only one more rate hike for 2023. Meanwhile, the German 2-year yield dropped 21 bps to 2.29%. Key 10-year bond yields were also lower by around 10bps in France, Italy, and Spain to 2.58%, 3.96%, and 3.1%, respectively.
UK 10-Year Bond Yield Tumbles to Almost 7-Week Low
The yield on the United Kingdom’s 10-year Gilt tumbled to below 3.2%, closing in on the lowest level in almost 7 weeks, as lingering concerns about the global financial sector boosted demand for government bonds. Meanwhile, the latest data showed a sustained increase in UK private sector output, largely reflecting a strong performance by the service economy. The PMIs survey suggested that the UK economy grew by 0.2% from the preceding quarter in the first three months of 2023. On Thursday, the Bank of England raised the bank rate by 25bps to 4.25% as expected, and signaled further increases could be necessary if there is evidence of more persistent pressures.
Asia
EQUITIES
World Indexes
USA
Wall Street Books Weekly Gain Despite Banks Concerns
The Dow Jones closed more than 130 points higher on Friday, while the S&P 500 and the Nasdaq added nearly 0.6% and 0.3%, respectively. The upward movement came in while the concerns about the stability of banks still persist. Deutsche Bank’s US-listed shares were down only 3.1% rebounding from a 14% decline earlier in the session. In the morning, DB said it would redeem $1.5 billion in a set of tier 2 notes due in 2028 creating a market panic and pushing banking stocks in Europe sharply lower. ECB President Christine Lagarde tried to ease concerns by telling EU leaders the euro area banking sector was resilient and that the central bank toolkit was equipped to provide liquidity to the financial system if needed. For the week, the three major averages are set to book gains.
For the week, the Dow edged up by 0.1%, while the S&P 500 and the Nasdaq gained 1% and 2.1%, respectively.
Americas
Canadian Shares Stabilize
The S&P/TSX Composite index closed 0.2% higher at around the 19,500 mark on Friday, after it reached the lowest since the start of the year during the session, tracked by gains on Wall Street amid concerns about instability for banks renewed. The heavyweight financial sector in Canada finished marginally in the green, as BMO, TD Bank ended almost flat, after European Central Bank President Lagarde tried to ease concerns, saying eurozone banks are resilient with strong capital and liquidity positions and the ECB could provide liquidity if needed. Energy shares were also pressured by the sharp decline in crude oil prices, were down by 0.5%. On the flip side, shares of miners (0.7%) and utilities (1.7%) rose. On the data front, preliminary data showed that Canadian retail sales fell by 0.6% in February.
For the week, the Canadian index was flat.
Brazilian Stocks Book Weekly Losses
Brazil’s Ibovespa stock index finished 0.8% higher at the 98,700 mark on Friday, tracked by gains of its peers on Wall Street after reaching an eight-month low in the previous session. Persistent clashes between the country’s new government and its central bank, while investors continued to worry about the delay of the government’s presentation of new fiscal limits. Fresh data showed that Brazilian inflation has slowed less than expected in the first half of March, backing concerns that the central bank may leave its key interest rate at 13.75% for a longer period. Among stocks, BRF (11.3%), YDUQS (10.4%) and Hapvida (8.7%) outperformed, while Cogna (-8.8%), LocaWeb (-8%), Sendas (-2%) booked the top losses.
For the week, the Brazilian index dropped by 3%.
Europe
Banks Drag European Stocks Lower
European equity market fell on Friday, extending the previous session’s decline, as concerns over the health of the banking sector mounted. The benchmark Stoxx 600 lost 1.4% and the Stoxx bank index declined 3.8%, with shares of Deutsche Bank down by over 3% after falling as much as 15% earlier in the session. In the morning, DB said it would redeem $1.5 billion in a set of tier 2 notes due in 2028 creating a market panic and pushing its credit default swaps to the highest since their introduction in 2019. ECB President Lagarde tried to ease concerns by telling EU leaders the euro area banking sector was resilient and that the central bank toolkit was equipped to provide liquidity to the financial system if needed. Meanwhile, flash PMI data for March showed services sector in France, Germany and the Euro Area grew at a much faster pace than initially anticipated while the manufacturing sector surprised on the downside.
On the week, both the DAX and the EUROSTOXX 50 were up.
UK Shares Close Week Lower
London equities came under renewed selling pressure, with the FTSE 100 sliding 1.3% to close at 7,400 on Friday, extending the volatile momentum from recent trading as investors continued to question whether banks can withstand the ongoing confidence crisis, while investors digested the impact of several rate hikes by key central banks this week. Standard Chartered sank 6.4%, while Barclays and Prudential shares both lost 4% of their value as further scrutiny of banking health triggered a surge in credit default swaps for the sector. Energy producers also pulled back as crude oil prices halted their rebound, with a 3.2% drop for Shell. On the data front, retail sales in the UK were hotter than expected, while flash PMI figures missed forecasts but pointed to another expansion. on Thursday, the BoE raised its key Bank Rate by 25bps, as expected, and underscored the willingness to continue hiking borrowing costs to curb inflation.
The FTSE 100 closed the week 0.8% higher.
French Stocks Fall Led by Banks
The CAC 40 index declined 1.7% to 7,015 on Friday, snapping a four-day gain, amid concerns about the health of the banking sector, with news of a US investigation into Credit Suisse and UBS. Also, the Deutsche Bank said it would redeem $1.5 billion in a set of tier 2 notes due in 2028, with its default swaps surging to their highest level since the first introduction in 2019. Banking shares were among the worst performers: Société Générale (-6%), BNP Paribas (-5%) and Credit Agricole (-2%). Domestically, fresh S&P Global PMIs showed the growth of the services sector in France topped forecasts while manufacturing activity fell for the second consecutive month in March. Meanwhile, strikes and protests against the increase in the pension age to 64 continue in France, but President Macron will press on with the reform.
For the week, the CAC 40 gained 1.3%.
Madrid Stocks End Session Lower But Post Weekly Gain
The IBEX 35 plunged to 8792 on Friday, extending falls into the third day as volatility hanged over the financial sector. Spanish banks suffered a wave of selling after the news broke out about US DoJ’s investigation of UBS and Credit Suisse for aiding Russian oligarchs. Additionally, one of the major European lenders, the Deutsche Bank, said it would redeem $1.5 billion in a set of tier 2 notes due in 2028, with its default swaps surging to their highest level since the first introduction in 2019. Bankinter, Sabadell, and BBVA were the most penalized values, down by 5.38%, 4.28%, and 4.06%, respectively. By contrast, Cellnex Tel was the only value to escape punishment (+1.34%) after the market learned of Chris Hohn becoming the company’s first shareholder. Domestically, investors digested the latest GDP figures, showing the country’s economy expanded in Q4 of 2022 but signaled the stagnation trend.
For the week, the IBEX index booked 1% gains.
Banks Continue to Pressure Milan Stocks
The FTSE MIB index closed 2.2% lower at 25,892 on Friday, dropping for the third session in a row amid renewed selling pressure for banks as investors continued to scrutinize the sector’s stability and digest the batch of key interest rate hikes from the week. Banks across Europe were in the red after two German banks declined to exercise their call options on AT1 bonds, while the US DoJ probe on UBS and Credit Suisse for aiding Russian oligarchs further hurt confidence in the sector. UniCredit, Banco BPM, and BPER Banca all tumbled over 4% to lead the losses for financial companies. Meanwhile, STMicroelectronics dropped 3.8% after its dividend announcement underwhelmed investors.
The FTSE MIB index closed the week 1.5% higher.
Japan
Japanese Shares Fall After Inflation Data
The Nikkei 225 Index fell 0.13% to close at 27,385 while the broader Topix Index dropped 0.1% to 1,955 on Friday, sliding for the second straight session as investors reacted to data showing Japan’s annual inflation rate retreated sharply from 41-year highs, reflecting easing global inflationary pressures and slowing economic activity worldwide. Investors also digested data pointing to further improvement in Japanese manufacturing and services activities for March. Meanwhile, investors continued to grapple with tightening global monetary conditions and an ongoing banking crisis. Financial stocks led the decline, with losses from Mitsubishi UFJ (-1.1%), Sumitomo Mitsui (-0.5%) and Mizuho Financial (-0.8%). Other index heavyweights also slumped, including Fast Retailing (-1%), Nippon Steel (-0.7%) and Toyota Motor (-0.2%).
China
China Stocks Ease on Weak Global Sentiment
The Shanghai Composite fell 0.6% to around 3,267 while the Shenzhen Component shed 0.1% to 11,595 on Friday, snapping a three-day advance, weighed down by weak global sentiment as investors contended with tightening monetary conditions and lingering concerns about the global banking crisis. Meanwhile, it will be a quiet day on the data front for China, though investors look ahead to a raft of manufacturing, services and industrial activity data in the following weeks. Telecommunications stocks led the decline, with sharp losses from China Telecom (-4.4%), ZTE Corp (-5.3%) and China Mobile (-4.8%). Other heavyweight firms also slumped, including Naura Technology (-3.1%), Semiconductor Manufacturing (-2.4%), China State Construction (-3.4%), Jiangsu Pacific (-6.2%) and Sany Heavy Industry (-3.1%).
Hong Kong Stocks Book Strong Gains Weekly
The Hang Seng slipped 133.96 points or 0.67% to finish at 19,915.68 on Friday after gaining in the prior three sessions, as tensions between Washington and Beijing reemerged after US lawmakers Thursday accused TikTok inflicted emotional distress on young users. Financials, consumers, and property mainly fell while the tech sector gained. Semiconductor Manufacturing tumbled 4.3%, Wuxi Biologics shed 3.5%, and China Tower Corp. and China Longyuan Power retreated 3% and 2.7%, each.
Still, the HSCEI index rose 2.71% on the week, outperforming mots world indexes.
India
Indian Shares Close at 5-Month Low
The BSE Sensex extended early losses to close 360 points lower at 57,570 on Friday, notching a near 1% drop on the week to its lowest in over five months, pressured by renewed selling activity for banks and raw-material shares. The fall mirrored the pullback in sentiment for equities worldwide, after the US DoJ launched a probe against UBS and Credit Suisse for aiding Russian Oligarchs while German banks declined to exercise a call option on AT1 bonds due to recent plunges in prices of the risky bond. The developments come on top of US Treasury Secretary Yellen’s comments that the government will not insure all deposits in the country’s banking system. Bajaj Finserv sank 4% while Bajaj Finance and the State Bank of India sank 3.3% and 1.4%, respectively. Aggressive declines for base metals in China also impacted Indian equities, as Tata Steel shares dropped nearly 3%.
Asia
Middle East
CURRENCIES
US dollar Index marks a higher Low
The dollar index strenghtened past 103 on Friday, moving further away from a 7-week low of 102 hit in the preivous session, as investors took shelter in the US currency amid instability in the banking sector. The Deutsche Bank said it would redeem $1.5 billion in a set of tier 2 notes due in 2028 and as its credit default swaps surged to the highest since they were introduced in 2019. At the same time, Bloomberg reported that UBS and Credit Suisse are under scrutiny in a US Justice Department probe into whether financial professionals helped Russian oligarchs evade sanctions. On Thursday, Treasury Secretary Yellen said authorities are prepared for further steps to protect deposits if needed. Earlier this week, the Fed delivered a widely expected 25 basis point rate hike and hinted at only one more rate increase. Still, Fed Chair Jerome Powell said that officials don’t see rate cuts this year and are prepared to prolong their tightening cycle if needed.
Euro Falls Almost 1%
The Euro was down nearly 1% to $1.07 on Friday, moving further away from seven-week highs touched on Wednesday, as renewed concerns over the health of the banking sector weighed on investors’ risk appetite. News on a U.S. probe on Credit Suisse and UBS and a big drop in Deutsche Bank shares prompted deeper banking worries. Deutsche Bank suffered losses after it announced the redemption of $1.5 billion in a set of tier 2 notes due in 2028, and its credit default swaps surged to the highest level since their first introduction in 2019. Meanwhile, preliminary PMIs for France, Germany, and the Euro Area showed a robust services sector and fragile manufacturing during March. On the monetary policy front, Bundesbank President Joachim Nagel has recently stated, “if inflation develops as projected, this should in my view not mark the end of the hike sequence”, signaling further interest rate increases from the ECB.
Sterling Rises on the week
The British pound fell to below $1.22, weakening from two sessions of gains on renewed banking concerns following reports that UBS and Credit Suisse are under scrutiny in a US Justice Department probe into whether financial professionals helped Russian oligarchs evade sanctions. Still, the sterling is recording a second consecutive week of gains, after the Bank of England raised its key bank rate by 25bps to 4.25%, as largely expected, and left the door open for more rate hikes should inflation persist. The latest data showed a sustained increase in UK private sector output, largely reflecting a strong performance by the service economy. The PMIs survey suggested that the UK economy grew by 0.2% from the preceding quarter in the first three months of 2023.
Chinese Yuan Climbs to 5-Week Highs
The offshore yuan strengthened past 6.83 per dollar, hitting its highest levels in five weeks as the Federal Reserve delivered a widely expected 25 basis point rate hike and signaled the nearing end of its tightening campaign. Still, traders remained cautious as Fed Chair Jerome Powell said officials don’t see rate cuts this year and are prepared to prolong tightening if needed. At the same time, US Treasury Secretary Janet Yellen’s latest comments reignited concerns about the banking crisis. The yuan came under pressure from prospects of increased liquidity after the People’s Bank of China announced a surprise cut to banks’ reserve requirement ratio for the first time this year to aid the economic recovery. The central bank also held its key lending rates steady at its March fixing, with the one-year loan prime rate at 3.65% and that of the five-year at 4.3%.
CRYPTO- CURRENCIES
COMMODITIES
Energy
Oil Rebounds
WTI crude futures slumped more than 3% to below $68 per barrel on Friday, as US Energy Secretary Jennifer Granholm told lawmakers that it will be “difficult” to refill strategic oil reserves this year, prompting speculations that the US government would only start buying at even lower prices. Signs of robust crude supply from Russia also weighed on prices, as the previously announced cut in the country’s oil production would come from a higher base of output than initially indicated. Moreover, the global banking sector remains mired in uncertainties even after Treasury Secretary Janet Yellen said authorities are prepared to take more action if needed to stabilize US banks, prompting investors to avoid risky assets.
For the week, Oil prices rose +3.78 %
Copper
Copper Near 3-Week High
Copper futures extended hovered near $4.1 per pound in late March, the highest in three weeks, as expectations of strong demand and concerns of lower supply offset the sharp rebound for the greenback. Fresh data showed that copper demand in China rose by 13 percent year-on-year in February, supported by the increase in infrastructure construction and new energy investments amid the country’s economic reopening. In the meantime, mining exports from major producer Peru sank nearly 20% annually in January due to the widespread protests, while inventories at the Shanghai Futures Exchange remained at lower levels. Depleting stocks in Shanghai and robust demand drove key commodity trader Trafigura to forecast that copper prices could rise to a record-high this year, while supply and demand imbalances led Goldman Sachs to expect the world may run out of visible copper inventories by September.
Precious Metals
Gold Touches $2,000 before reversing
Gold prices touched $2,000 per ounce, the highest level in one year but failed to hold, closing on a weekly decline to 1978. wPrecious Metal prices were supported by a fresh flight to safety due to concerns about the banking crisis. The Deutsche Bank said it would redeem $1.5 billion in a set of tier 2 notes due in 2028 and as its credit default swaps surged to the highest since they were introduced in 2019. At the same time, Bloomberg reported that UBS and Credit Suisse are under scrutiny in a US Justice Department probe into whether financial professionals helped Russian oligarchs evade sanctions. On Thursday, Treasury Secretary Yellen said authorities are prepared for further steps to protect deposits if needed. This week, the US central bank raised its funds rate by 25bps, as widely expected, but struck a dovish tone in its policy report and Summary of Economic Projections.
Silver Extends Strong Momentum
Silver futures rose past $23 per ounce, the highest in nearly two months, supported by the dovish rhetoric from the Federal Reserve and a renewed flight to safety amid instability for banks. Projections from the Fed suggest that only a quarter-point interest rate increase is left in its tightening cycle, pointing to added caution from the FOMC to address recent stress on the US financial sector. Also, the persistent turmoil for US banks triggered a flight to the safety of bullion after US Treasury Secretary Yellen denied that the government will protect all of the deposits in the US banking system. On the supply side, steady outflows in bullion inventories continued to support silver prices.
Soft Commodities
Soybeans Futures Tumble to 4-Month Low
Soybeans futures extended losses to below $14.2 per bushel, the lowest in four months as the market is being flooded by freshly harvested record Brazilian crop, offsetting concerns over supplies from Argentina. Buenos Aires grains exchange maintained its 2022/2023 soybean production forecast at 25 million tonnes, following sharp cuts, and warned of the possibility of further cuts, as the crop continues to be battered by a prolonged drought. On top of that, investors welcomed the renewal of the deal allowing Black Sea exports of Ukrainian grains.
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