Markets brace for ‘no landing’ world economy. Plus, ETF picks and the no-hassle way to safely park cash and earn 4%
Markets, bracing for a “no landing” scenario where global economic growth is resilient and inflation stays higher for longer, are dialing back appetite for both risk assets and government debt.
For months, investors have bet on global growth softening just enough to cool inflation and persuade hawkish central banks to pause their rate hikes.
The notion of the U.S. Federal Reserve and other central banks using monetary tightening to engineer a mild, soft landing before pivoting to avoid a deep recession has supported a cross-asset rally since October, depressed the dollar and sent capital flowing into emerging markets.
But recent data reflecting still tight jobs markets has traders entertaining a new scenario where economic growth holds up and inflation remains sticky.
That means rates could be pushed higher too – a negative for risk assets. World stocks hit one-month lows on Wednesday, while Wall Street had its worst day of the year so far on Tuesday.
“We’ve gone from softer landing to no landing – no landing being that (financing) conditions will remain tight,” said David Katimbo-Mugwanya, head of fixed income at EdenTree Asset Management.
U.S. jobs growth accelerated sharply in January, U.S. and German inflation remained high, while U.S. and European business activity rebounded in February.
Investors have now ditched expectations for rate cuts later this year and renewed their bets on higher rates, which in the U.S. are now seen peaking in July at about 5.3%, up from about 4.8% in early February.
Deutsche Bank said this week it expects European Central Bank rates to peak at 3.75% from 3.25% previously.
China’s reopening, an easing in Europe’s gas crisis and strong U.S. consumer spending “are probably more bearish than positive for markets,” said Richard Dias, founder of macro-economic research house Acorn Macro Consulting.
“We’re getting into a situation where good news is bad news,” he said.
For Paul Flood, head of mixed assets at Newton Investment Management, “if wage growth stays high and demand stays high, then the Fed will push up interest rates further and that’s not a good environment for equity or bond markets.”
Bond prices fall, and yields rise, when expectations of higher rates on cash make their fixed interest payments less appealing. Stocks typically move lower when bond yields rise to account for the extra risk of owning shares.
U.S. 10-year Treasury yields are near their highest since November at almost 4%, up from a January low of 3.3% . An index measuring the dollar against other major currencies is set for its first monthly gain in five as rate-hike bets lift the greenback.
In December, most economists expected the U.S. economy to contract slightly this year but the consensus now is for 0.7% growth. Fed officials have signaled that they will likely keep raising rates for longer than previously forecast.
Euro zone recession expectations mostly faded in mid January as energy prices tumbled. Economists polled by Reuters see inflation in the bloc remaining above its 2% target into 2025 as growth holds up.
“The road map was one of a shallow recession and declining inflation,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers. “That consensus is being challenged by the data.”
Many investors still believe inflation will subside, and see recent strong data as probably supported by one-time factors such as an unseasonably mild winter and the remainder of consumer savings accumulated during the COVID-19 pandemic.
“There should be more signs of a slowdown as the year unfolds and weather normalizes, and there’s just not another pent up savings to spend as we go into the second half of the year,” said Rhys Williams, chief strategist at Spouting Rock Asset Management.
Thomas Hayes, chairman and managing member of New York-based Great Hill Capital, said a soft landing is still likely as declining U.S. rental costs start weighing on inflation metrics and labor market participation increases as consumers run out of savings, helping contain wage growth.
“If oil doesn’t spike above $100 it is going be very hard for inflation to re-accelerate after the Fed pauses,” he said.
– Naomi Rovnick and Davide Barbuscia, Reuters
UK economy avoids recession but businesses still wary
LONDON, March 31 (Reuters) – Britain’s economy avoided a recession as it grew in the final months of 2022, according to official data which showed a boost to households’ finances from state energy bill subsidies but falling investment by businesses.
With the economy still hobbled by high inflation and worries about a weak growth outlook, gross domestic product (GDP) increased by 0.1% between October and December after a preliminary estimate of no growth.
GDP in the third quarter was also revised to show a 0.1% contraction, a smaller fall than initially thought, the Office for National Statistics (ONS) said on Friday.
Two consecutive quarters of contraction would have represented a recession.
Despite the improvement, British economic output remained 0.6% below its level of late 2019, the only G7 economy not to have recovered from the COVID-19 pandemic.
“The latest release takes the UK a little further away from the recessionary danger zone although the report does not change the overall picture that the economy’s performance was lacklustre over the second half of 2022 as the cost of living crisis hit hard,” Investec economist Philip Shaw said.
The International Monetary Fund forecast in January that Britain would be the only Group of Seven major advanced economy to shrink in 2023, in large part because of an inflation rate that remains above 10%.
Since then, a string of economic data has come in stronger than expected by analysts.
Ruth Gregory at Capital Economics said Friday’s figures showed high inflation had taken a slightly smaller toll than previously thought.
“But with around two-thirds of the drag on real activity from higher rates yet to be felt, we still think the economy will slip into a recession this year,” she said.
House prices slid in March at the fastest annual rate since the financial crisis, mortgage lender Nationwide said.
The Bank of England (BoE) last week raised interest rates for the 11th consecutive meeting and investors are split on the possibility of another increase in May.
Britain’s dominant services sector rose by 0.1%, boosted by a nearly 11% jump for travel agents, echoing other data which has pointed to a surge in demand for holidays.
Manufacturing grew by 0.5%, driven by the often erratic pharmaceutical sector, and construction grew by 1.3%.
Individuals’ savings were boosted by the government’s energy bill support scheme and households’ disposable income increased by 1.3% after four consecutive quarters of negative growth.
The BoE expects Britain’s economy to have contracted by 0.1% in the first three months of 2023 but it forecasts slight growth in the second quarter.
The outlook has improved thanks in large part to falling international energy prices and a strong jobs market.
But the picture could darken again if recent turmoil in the global banking sector leads to lenders reining in loans.
BUSINESS INVESTMENT FALLS
The data suggested businesses remained cautious. Business investment fell 0.2% in quarterly terms, a sharp downgrade from a first estimate of a 4.8% rise after changes to the way the ONS calculates seasonal adjustments.
Earlier on Friday, a survey painted a more upbeat picture for businesses.
Finance minister Jeremy Hunt this month announced new tax incentives to encourage companies to invest, although they were less generous than a previous scheme and came just as corporate tax is due to jump.
The ONS said Britain posted a shortfall in its current account in the fourth quarter of 2.5 billion pounds ($3.1 billion), or 0.4% of GDP.
Excluding volatile swings in precious metals, the shortfall fell to 3.3% of GDP from 4.2% in the third quarter.
The ONS said increased foreign earnings by companies, particularly in the energy sector, helped narrow the deficit.
Britain’s financial account surplus – which shows how the current account deficit was funded – comprised large net inflows of short-term, “hot” money. Foreign direct investment was negative in net terms for a sixth quarter running.
($1 = 0.8073 pounds)
Our Standards: The Thomson Reuters Trust Principles.
Canada’s economic growth resumed in January: StatCan
Statistics Canada says economic growth resumed in January following a small contraction in December.
The agency says real gross domestic product rose 0.5 per cent to start the year after contracting 0.1 per cent in the final month of 2022.
It also says that its initial estimate for February indicates growth continued with a gain of 0.3 per cent, though it cautioned the figure will be updated.
For January, the growth came as the wholesale trade, transportation and warehousing, and mining, quarrying and oil and gas extraction sectors all rebounded after falling in December.
Wholesale trade gained 1.8 per cent in January, helped by wholesalers of machinery, equipment and supplies, while the mining, quarrying and oil and gas extraction sector grew 1.1 per cent after falling 3.3 per cent in December.
The transportation and warehousing sector added 1.9 per cent in January, more than offsetting a drop of 1.1 per cent in December that was due in part to bad weather.
This report by The Canadian Press was first published March 31, 2023
China’s No. 2 leader says economy improved in March
BO’AO, China –
China’s new No. 2 leader said Thursday its economic recovery improved in March and tried to reassure foreign companies the country is committed to opening to the world.
Premier Li Qiang spoke before an international audience of businesspeople and politicians as the government tries to revive business and consumer confidence after anti-virus controls that isolated China were abruptly dropped in December.
The economy showed “encouraging momentum of rebounding” in January and February, Li said at the Boao Forum for Asia on the southern island of Hainan.
“The situation in March is even better,” Li said. He said consumption and investment picked up and “market expectations improved.”
Chinese retail sales rose 3.5% over a year earlier in January and February, recovering from December’s 1.8% contraction, government data showed earlier. Spending on restaurants rose 9.2%. Growth in investment in real estate and other fixed assets accelerated to 5.5% from December’s 5.1%.
Li’s audience included Prime Ministers Lee Hsien Loong of Singapore, Pedro Sanchez of Spain and Anwar Ibrahim of Malaysia and International Monetary Fund Managing Director Kristalina Georgieva.
A former Communist Party secretary for Shanghai, Li took office earlier this month in a once-a-decade change of government that installed loyalists of Chinese leader Xi Jinping to enforce his vision of tighter political control over the economy and society.
The premier sought to counter unease about growing state dominance in the economy and tension with the United States over security, technology and trade.
“No matter how the world situation may evolve, we will stay committed to reform, opening up and innovation-driven development,” Li said. “We welcome countries around the world to share in the opportunities and benefits that come with China’s development.”
Li called China a global “anchor of peace,” a statement that conflicts with the ruling Communist Party’s military buildup and menacing behavior toward Taiwan, Japan and other neighbours.
The military budget, the world’s second-largest after the United States, was increased this month for a 29th straight year. Xi’s government has stepped up efforts to intimidate Taiwan, which Beijing claims as part of its territory, by flying fighter jets and firing missiles into the sea near the self-ruled island democracy.
“To achieve greater success, chaos and conflict must not happen in Asia,” the premier said. “Otherwise, the future of Asia would be lost.”
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