Global Economy & Markets, Weekly Roundup 31/05/22
Euro area inflation accelerated to an all-time high of +8.1% year-over-year in May
Key Takeaways
US equity markets advanced by +6.6% in the past week, interrupting seven consecutive weeks of decline and trimming their year-to-date losses to -13%. The price decline has been solely driven by multiple contraction, from 21.7x to 17.6x on May 27th. On the other hand, 12-month forward earnings’ estimates have been increased by +7% year-to-date to $236.
Investors' sentiment was very negative. The American Association of Individual Investors (AAII) survey -- a contrarian indicator -- has revealed early in the past week, that optimism about the direction of the equity market six-months ahead was 19.8% (versus a long-term average of 38%), remaining below 20% for the fourth time in seven weeks.
Thus, slightly encouraging economic news were adequate to turn sentiment rapidly. US consumption entered Q2 on a strong footing, with real spending increasing by +0.7% mom in April, albeit with consumers drawing down extra savings. On the inflation front, the core PCE index increased by 0.3% mom in April, with the annual rate moderating to 4.9% yoy, from 5.2% yoy in March.
We expect increased volatility to continue, as central banks’ guidance points to significantly higher policy interest rates from current levels, in order to combat inflation. The European Central Bank is expected to exit negative interest rates by the end of the third quarter, with the flash euro area inflation estimate suggesting that price pressures remain acute.
Specifically, the headline index accelerated to +8.1% yoy in May from +7.4% in April (consensus:+7.7%). More importantly, the core index increased by +3.8% yoy in May from +3.5% in April, versus expectations for a stable outcome, with both metrics at record highs (since 1997). Energy increased on a monthly basis (+2%, nsa), with the annual rate up by +39.2% from +37.5%.
On Monday, oil prices surpassed the $120/barrel threshold, for the first time since March 25th, as European leaders reached an agreement, in principle, on a 6th package of sanctions against Russia that includes, inter alia, a partial ban on Russian oil imports. The ban will regard only oil imported by ships, which currently represents more than 2/3 of oil imports from Russia, but will temporarily exclude oil delivered via pipelines, as landlocked Hungary (c. 65% of its oil imports from Russia through the Druzhba pipeline) continued to oppose a complete oil embargo.
Germany and Poland, which could benefit from the above exemption, have volunteered to stop their oil imports through pipelines by the end of 2022, extending the ban at almost 90% of Russian oil imports.
Note that Russia was the largest supplier of oil to the EU, accounting for 25% of EU’s oil imports in 2021 (26% in 2020), in terms of trade value, well above the second largest supplier (Norway: 9% in 2021). As far as the natural gas imports are concerned, Russia was also the largest EU supplier, responsible for 39% of EU’s natural gas imports (42% in 2020), in terms of trade value. However, in April 2022, the natural gas supply from Russia via pipelines declined to 26% of EU gas consumption from 40% in April 2021, as monthly LNG deliveries to Europe reached a new record of 12.6 bcm.
Key Takeaways
US equity markets advanced by +6.6% in the past week, interrupting seven consecutive weeks of decline and trimming their year-to-date losses to -13%. The price decline has been solely driven by multiple contraction, from 21.7x to 17.6x on May 27th. On the other hand, 12-month forward earnings’ estimates have been increased by +7% year-to-date to $236.
Investors' sentiment was very negative. The American Association of Individual Investors (AAII) survey -- a contrarian indicator -- has revealed early in the past week, that optimism about the direction of the equity market six-months ahead was 19.8% (versus a long-term average of 38%), remaining below 20% for the fourth time in seven weeks.
Thus, slightly encouraging economic news were adequate to turn sentiment rapidly. US consumption entered Q2 on a strong footing, with real spending increasing by +0.7% mom in April, albeit with consumers drawing down extra savings. On the inflation front, the core PCE index increased by 0.3% mom in April, with the annual rate moderating to 4.9% yoy, from 5.2% yoy in March.
We expect increased volatility to continue, as central banks’ guidance points to significantly higher policy interest rates from current levels, in order to combat inflation. The European Central Bank is expected to exit negative interest rates by the end of the third quarter, with the flash euro area inflation estimate suggesting that price pressures remain acute.
Specifically, the headline index accelerated to +8.1% yoy in May from +7.4% in April (consensus:+7.7%). More importantly, the core index increased by +3.8% yoy in May from +3.5% in April, versus expectations for a stable outcome, with both metrics at record highs (since 1997). Energy increased on a monthly basis (+2%, nsa), with the annual rate up by +39.2% from +37.5%.
On Monday, oil prices surpassed the $120/barrel threshold, for the first time since March 25th, as European leaders reached an agreement, in principle, on a 6th package of sanctions against Russia that includes, inter alia, a partial ban on Russian oil imports. The ban will regard only oil imported by ships, which currently represents more than 2/3 of oil imports from Russia, but will temporarily exclude oil delivered via pipelines, as landlocked Hungary (c. 65% of its oil imports from Russia through the Druzhba pipeline) continued to oppose a complete oil embargo.
Germany and Poland, which could benefit from the above exemption, have volunteered to stop their oil imports through pipelines by the end of 2022, extending the ban at almost 90% of Russian oil imports.
Note that Russia was the largest supplier of oil to the EU, accounting for 25% of EU’s oil imports in 2021 (26% in 2020), in terms of trade value, well above the second largest supplier (Norway: 9% in 2021). As far as the natural gas imports are concerned, Russia was also the largest EU supplier, responsible for 39% of EU’s natural gas imports (42% in 2020), in terms of trade value. However, in April 2022, the natural gas supply from Russia via pipelines declined to 26% of EU gas consumption from 40% in April 2021, as monthly LNG deliveries to Europe reached a new record of 12.6 bcm.