SVET Reports
SVET Markets Weekly Update (June 26–30, 2023)
In Week 26, NASDAQ (open: 13,468, close: 13,787) added +2.4%, driven up by continuing positive AI-sentiments, as well as by macroeconomic data that seemed to show an easing inflation, despite the hawkish rhetoric of world central banks. Meanwhile, BTC (open: 30,359, close: 30,372) lingered just below 31K, its important resistance zone, still restrained by its low liquidity and negative news coverage.
Notable Macroeconomic Updates:
Core PCE Price Index YoY (May): 4.6 percent (fact), 4.7 percent (previous); 4.7 percent (consensus);
GDP Growth Rate (Q1): 2 percent (fact), 1.4 percent (consensus), 2.6 percent (previous);
Durable Goods Orders MoM (May): 1.7 percent (fact), -1 percent (consensus), 1.2 percent (previous);
Case-Shiller Home Price YoY (April): -1.7 percent (fact), -2.6 percent (consensus), -1.1 percent (previous);
Initial Jobless Claims (June/24): 239K (fact), 265K (consensus), 265K (previous).
World’s Updates
China: The yuan rebounded but factory activity contracted;
Italy: Annual inflation rate fell;
Germany: Consumer sentiment deteriorated;
Japan: Inflation rate steady and consumer confidence rose;
Vietnam: International arrivals skyrocketed;
Brazil: The unemployment rate fell.
Commodities
Gold: Prices fell;
Steel: Futures rebounded;
Sugar: Futures fell;
Wheat: Futures retreated;
Oil: Brent crude futures edged up;
Copper: Prices fell to a one-month low;
Gas: Natural gas futures in Europe rose.
On Monday, Dallas Index went up a bit, but NASDAQ (open: 13,468, close: 13,335) continued to correct on a downside, while BTC (o: 30,359, c: 30,243) fluctuated sideways.
Details:
The Dallas Fed’s manufacturing index in Texas rose to -23.2 in June, the highest in three months. However, the reading still showed worsening business conditions, with contractions in production, new orders, shipments, and capacity utilization. Labor market measures also pointed to weaker employment growth and declining work hours. On the price front, raw materials prices fell slightly while wage pressures remained elevated. Expectations for future manufacturing activity were mixed, with the future production index rising but the future general business activity index remaining negative.
Other Markets Updates:
China: The yuan rebounded from seven-month lows after the PBOC set a stronger-than-expected mid-point rate for the second consecutive day. This raised speculation that Beijing was growing more uncomfortable with the currency’s weakness. The yuan fell sharply in June as economic data disappointed, leading banks to downgrade GDP growth forecasts. The central bank cut interest rates and is expected to ease policy further. This stands in contrast to other major economies that are tightening policy.
A Note on Russia’s recent Political and Military Developments:
This blog is for macroeconomic and crypto analysis, not for political discussions. However, the recent geopolitical development — the uprising of the Wagner private militant unit in Russia, has captured the attention of many of my readers. Therefore, I have decided to briefly formulate my opinion on the causes and consequences of this event.
The haphazard and chaotic nature of this revolt, its short duration, and its location (Rostov-on-Don is not the best strategic position to launch an attack on the Kremlin’s wall by any means) along with the absence of external political and military support from third parties, as well as its peculiar “finale,” all indicate that this was a spontaneous, unplanned tumult caused by unforeseen internal developments, unknown to us.
Because this militant unit is essentially the private property of its commander, Eugeniy Prigozhin, I can speculate that the life, livelihood, or position of the Wagner chief were critically threatened by someone in a higher echelon of power, presumably affiliated with the Defense Ministry. This situation may have led him to initiate this ‘march of madness’ in order to attract attention of Kremlin and obtain some security guarantees directly from its main stakeholders.
From a military standpoint, the chances of a 20,000-strong (highly disputable) unit successfully storming a city with a population of 10 million, after covering nearly a seven hundred miles on highways without air cover, and subsequently seizing control of its most fortified position — the Kremlin — without heavy artillery and an abundant supply of shells, were almost zero.
Basically, what happened was not a coup d’état, as many described it in the media. It was negotiations.
The results of that uprising might be significant for administering the ongoing war. For example, it might lead to reinforcing special services’ control and surveillance over higher and middle echelons of military commanders. However, it is unlikely to have any long-term social or political ramifications.
On Tuesday, Durable Goods orders, the Case-Shiller Index, and New Home sales unexpectedly jumped, driving the NASDAQ (o: 13,389, c: 13,555) higher by 1.2%. Meanwhile, BTC (o: 30,713, c: 30,648) continued to drift sideways.
Details:
Durable goods orders rose 1.7% in May, with transportation equipment leading the increase. Nondefense aircraft and parts orders rose 32.5%, while orders for other transportation equipment rose 2.2%. Excluding transportation, orders rose 0.6%, with nondefense capital goods orders up 6.7%. Orders for nondefense capital goods excluding aircraft rose 0.7%.
The S&P Case-Shiller 20-city home price index increased by 1.7% MoM in April — 3rd month of rising prices. This is a sign that the housing market is continuing to strengthen, despite rising mortgage rates and other headwinds. The index measures the change in home prices in 20 major metropolitan areas across the country. In April, all 20 cities saw their home prices increase, led by Phoenix, which saw prices rise by 3.2%. Other cities with strong gains included Miami (2.9%), Tampa (2.8%), and Las Vegas (2.7%). The increase in home prices is being driven by a number of factors, including low inventory, strong demand from buyers, and rising wages. However, rising mortgage rates could start to weigh on the market in the coming months.
Also, new home sales jumped 12.2% in May (to 763K), beating expectations (0.675M). Sales increased across all regions, with the biggest gains in the Northeast and West. The median price of new homes sold was $416,300.
Other Markets Updates:
Italy: Annual inflation rate fell to 6.4% in June, the lowest in 14 months. The decline was largely due to base effects, as energy costs have retreated from their June 2022 peaks. The CPI slowed significantly for non-regulated energy, processed food, and transportation services. However, consumer prices continued to accelerate for unprocessed food, limiting a further slowdown to inflation. The core rate eased to 5.6%. The CPI was stagnant on a monthly basis.
Germany: Consumer sentiment deteriorated in July, with the GfK Consumer Climate Indicator falling to -25.4. This was the first decline in nine months, and was driven by a drop in economic and income expectations. Persistent high inflation is eroding households’ purchasing power, hindering private consumption. However, there was a marginal increase in the propensity to buy.
On Wednesday, Powell issued distressing comments, projecting more rate hikes, and the Fed tested bank’s resilience to the crisis. However, the NASDAQ (o: 13,506, c: 13,591) ticked up, driven by megacap momentum tech stocks, while BTC (o: 30,102, c: 30,100) continued to hover above 30K.
Details:
Powell said at the ECB Forum that more rate hikes are coming, with at least two more hikes this year. He also said that a recession is possible, but not the most likely case. The Fed left the target for the funds rate unchanged in June, but signaled that rates may go to 5.6% by year-end. The funds rate is now seen higher this year, compared to March projections (5.1%). Upward revisions for 2024: 4.6% vs 4.3%; and 2025: 3.4% vs 3.1%.
The Fed has released the results of its annual bank stress test, which demonstrates that large banks are well positioned to weather a severe recession and continue to lend to households and businesses even during a severe recession. Vice Chair for Supervision Michael S. Barr said that the banking system remains strong and resilient. The stress test assumes a severe global recession with a 40% decline in commercial real estate prices, a 38% decline in house prices, and a 6.4 percentage point increase in the unemployment rate. The banks in the test would experience heavy losses, but they would still be able to continue lending. The total projected losses are $541 billion, including over $100 billion in losses from commercial real estate and residential mortgages, plus $120 billion in credit card. The aggregate is 2.3 percentage point decline in capital.
Other Markets Updates:
Japan: Consumer confidence rose to 36.2 in June, the highest level in 17 months. Households’ sentiment strengthened for both employment and income growth, but deteriorated for the willingness to buy durable goods.
Vietnam: International arrivals rose 312% year-on-year to 975K in June, mainly led by China (1,475.2%), South Korea (453.6%), Japan (217.7%), and Taiwan (946.6%). Arrivals from the US (146.5%), Europe (138.3%, of which Russia added 343.7%), and Australia also increased significantly. From January to June, international arrivals surged 826% to 5.57 million.
Commodities:
Gold: Prices fell to the lowest level in three months — below $1,910 — as Fed Chair Powell said two more rate hikes are likely this year. ECB President Lagarde also signaled further tightening, while BOJ Governor Ueda reiterated ultra-easy policy.
Steel: Futures rebounded on hopes of stimulus from China. Premier Li Qiang pledged to activate market vitality and expand demand (5% GDP growth is promised by Li). At the same time, new yuan loans fell short of expectations, while industrial production and imports slowed. That might result in Beijing reducing steel output by 2.5%.
Sugar: Futures fell to the lowest level in nearly three months as concerns of tight supply eased. Favorable weather in Brazil and increased subsidized farm loans in the country underpinned expectations of strong production. In India, cheap oil and higher domestic prices drove producers to allocate sugarcane for sweetener crushing instead of biofuel blending, raising supply.
Wheat: Futures retreated back to the $7 per bushel mark after soaring to a four-month high of $7.56 on June 26th after a mutiny in Russia eased supply concerns. Wheat prices remain high due to Russia’s threat to halt grain exports past July 17th and dry conditions in the US Midwest.
On Thursday, GDP increased above expectations, core PCI rose and jobless claims fell leading to NASDAQ (o:13592, c:13591) and BTC (o:30623, c:30584) sidetracking.
Details
US economy grew 2% in Q1 2023, above 1.3% est., driven by strong consumer spending (+4.2%) and exports (+7.8%). Nonresidential fixed investment (+0.6%) and government spending (+5%) were revised lower. The Fed sees 1% growth this year.
Weekly jobless claims fell to 239K, lowest since October 2021. Continuing claims fell to 1.742M, lowest in 4 months. Labor market resilient to Fed tightening.
Also, core PCE rose 4.9% in Q1 2023, the strongest since Q1 2022. Excluding food and energy, inflation remains elevated.
Other Markets Updates:
China: Factory activity contracted for the third straight month in June, with the manufacturing PMI rising to 49 from 48.8 in May. New orders, buying activity, and export sales all declined, while employment fell for the fourth straight month. Input cost fell at a softer pace, while output charges dropped for the fourth successive month. Business sentiment remained upbeat but hit its lowest level in six months, suggesting country’s post-enclosure recovery lost momentum.
Japan: Tokyo’s core inflation rate remained at 3.2% in June, below expectations but still above the BOJ’s target. Pressure on the central bank to tighten policy remains, but Governor Ueda says there is still work to do in sustainably achieving 2% inflation accompanied by sufficient wage growth.
What a contrast to the short-sighted and misinformed Fed’s rate politics of shutting down the economy and suppressing wages before they adjust to increased prices, driven up by corporations according to the new economic realities of the divided and belligerent world.
Commodities:
Oil: Brent crude futures edged up (above $74 per barrel), supported by tightening global supply and Saudi Arabia’s output cuts. US crude inventories fell by 9.6 million barrels, while the Fed’s tightening and China’s factory activity weighed.
Copper: Prices fell to a one-month low due to a stronger dollar and weak manufacturing demand. The Chinese government has not provided support to its struggling manufacturing sector, while central banks around the world are raising interest rates, which could further dampen industrial output. However, some market participants are still concerned about copper supply. Copper inventories at the LME and COMEX fell 7% in the past week, and Chile’s output is expected to decline by 7% this year. Peru’s central bank has also cut its expectations for mining investment this year, which is set to fall by nearly 20%.
On Friday, core PCE decreased, driving the NASDAQ (o: 13,719, c: 13,787) up. Meanwhile, BTC (o: 31,100, c: 30,372) closed the day lower on the SEC’s rejection of BlackRock’s Bitcoin ETF.
Details:
The core personal consumption expenditure (PCE) price index, excluding food and energy, matched expectations, rising 0.3% in May, down from 0.4% the previous month. Yearly change was 4.6%, slightly lower than April’s 4.7%. Including food and energy costs, the PCE price index rose 0.1% from the previous month and 3.8% YoY.
Other Markets Updates:
Brazil: The unemployment rate fell to 8.3% in the three months leading to May 2023. This is in line with market estimates and is the lowest level since December 2022. The unemployed population fell by 280,000 people, while the employed population was unchanged. The labor force participation rate was also unchanged at 56.4%. Real earnings were broadly stable at R$2,901 per month.
Commodities
Gas: Natural gas futures in Europe rose 39% in June, the largest monthly increase in a year. The rise was driven by supply disruptions from Norway and Russia, as well as forecasts for hotter-than-usual weather next month. Norway has replaced Russia as one of the biggest sources of natural gas imports in the European Union. Gas imports from Russia to the European Union have been significantly reduced since the invasion of Ukraine, but still represented about 25% last year. Europe’s gas storage is almost 77% full, a record level for this time of the year.
Currencies
EURO: The euro fell below $1.09 at the end of Q2, as investors digested mixed inflation data and the ECB’s pledge to continue raising rates. Headline inflation eased to 5.5% in June, but the core rate rose to 5.4%. Inflation is moving in different directions across the Eurozone, with Germany seeing an acceleration to 6.4%, while Italy and France saw a slowdown. Spain’s inflation fell to 1.9%, making it the first country in the region to meet the ECB’s target of 2%. The ECB is expected to raise rates again in July and September, with traders anticipating a peak rate of 4%. The euro is set to finish Q2 little changed, only slightly below $1.1.
Key economic data to watch next week:
United States: ISM Manufacturing PMI for June (previous: 46.9, consensus: 47) on Monday; FOMC Minutes on Wednesday; June’s ISM Services PMI (previous: 50.3, consensus: 51) and May’s JOLTs Job Openings (previous: 10.103M, consensus: 9.9M) on Thursday; June’s Unemployment Rate (previous: 3.7%, consensus: 3.7%) on Friday.
Global: S&P Global Manufacturing PMI for India, Russia, Spain, Italy, Switzerland, South Korea, and Canada, along with Services PMI for Spain, Italy, and Brazil.
Others: Inflation rates for Indonesia, Switzerland, South Korea, the Philippines, Turkey, and Mexico.
Also: Australian interest rate decision, Canada employment data, China Caixin Services and Manufacturing PMI, and Japan Tankan Manufacturers Index.
Investors will be closely watching these data releases for signs of how the global economy is faring. The payrolls report is the most important economic data release in the United States, and it will be closely watched for signs of how strong the labor market is. The FOMC Minutes will be released after the Federal Reserve’s meeting next week, and they will provide insights into the central bank’s thinking on monetary policy. The ISM Manufacturing and Services PMIs are also important indicators of economic activity, and they will be watched for signs of growth.
The data releases next week will also provide insights into inflation pressures around the world. Inflation rates are rising in many countries, and investors will be looking for signs that inflation is starting to peak. The Australian interest rate decision will be closely watched, as it will be the first rate hike by the Reserve Bank of Australia in more than a decade.
As BTC continues to hold its ground, hovering near its yearly highs, some traders might try to push it further up despite adversities. However, crypto markets remain highly volatile due to the bombardment of all-directional news and very low liquidity, making them contingent to sudden drops.