Global Economy & Markets, Weekly Roundup 15/04/24

Higher geopolitical risk foreshadows elevated market volatility

Global equity markets declined on Friday (-1.2%) and “safe-haven” Treasuries rallied, in anticipation of an Iranian military strike against Israel, which eventually took place in the weekend. On Monday, market volatility continued, with global leaders calling for restraint. 

Middle East and oil price developments will remain top of mind for investors. In addition, attention turns to the Q1:2024 earnings season, which gradually enters full speed in the US, with major financial institutions reporting in the past week and profits surprising positively, albeit guidance was not uniformly strong.

10-Year US Treasury yields are re-approaching 4.60%, with CPI exceeding consensus estimates for a fourth consecutive month in March. Underlying price pressures are gaining steam as the monthly pace of increase of the core CPI index has averaged +3.9% saar in the past six months (core PCE +3%, see graph below) and pressures have broadened past the shelter component.

Given strong economic activity data (March’s core retail sales surprised on the upside by a wide margin), uncertainty on whether inflation remains on track to return to the Fed’s target of 2% has increased. As a result, market-implied expectations regarding the commencement of rate cuts by the Fed, have been pushed back to July or later, instead of June a couple of weeks ago (a 12% chance of no cuts at all by end-2024 is now also priced-in).

The ECB stood pat on April 11th, as expected, for a fifth consecutive meeting, with the Deposit Facility Rate at +4.0%. The ECB continued to hint at a potential rate cut in the next meeting on June 6th, when comprehensive data on wages will be available and updated ECB staff economic projections will take place, with President Lagarde notably citing that “a few” members contemplated a cut even in the latest meeting.

Having said that, the ECB refrained from pre-committing to any specific monetary policy path, highlighting its data dependency. At the same, President Lagarde repeated that the ECB is not “Fed-dependent”, also given the divergence between strong US real GDP growth and stagnant euro area real GDP since Q4:2022. Nevertheless, deviating monetary policy paths could have FX repercussions, with the EUR down by -3% in the past month, below $1.07.

Attention in the current week turns to China’s Q1:2024 GDP. The annual growth came out at +5.3% from +5.2% in Q4:2023, surprising to the upside (consensus for +4.6%). Recall that according to the annual government work report, the real GDP growth target is maintained at “around 5%”. The actual outcome in 2023 was +5.2%. The annual growth in 2024 though, will lack a post-pandemic recovery boost, as was the case in 2023, while a higher base of comparison adds a further challenge amid property market jitters.

Regarding Chinese fiscal policy, a deficit target of 3% of GDP was set for 2024 from an actual outcome of 3.8% in 2023. Nevertheless, the central government plans to issue CNY 1tn ($139 billion) or 0.8% of GDP in special (mostly for infrastructure projects) ultra-long term treasury bonds, which will not be included in the deficit count.
Global Economy & Markets, Weekly Roundup 15/04/24