- Broad sell off across US and Asian equities overnight
- Tech stocks under most pressure
- Bank of England GDP figures incoming tomorrow
If you are looking for inflation signals, China’s factory gate prices are a pretty good leading indicator. So today’s report showing that producer price inflation rose 6.8 per cent from a year earlier in April, the fastest pace in more than three years, could be of concern. Tomorrow’s US CPI numbers are going to be closely watched. On Friday we saw the market show that an easier-for-longer Fed ought to help risk assets. But whatever the Fed tries and sticks to in terms of its employment mandate, the bond market will move if inflation takes off. The wage component of the jobs report was underappreciated. A lack of employees will drive up wages and end prices. Wage-push inflation is more ‘dangerous’ than cost-push. My worry is we have a perfect storm of wage-push, cost-push and demand-pull pressures that won’t be as transitory as the Fed thinks (ignoring the fact that inflation is here already, has been for years in asset prices, just not in the narrow gauges used by central banks). US 10-year yields at 1.62 per cent are at the highest in a couple of weeks, whilst 5-year breakeven inflation expectations remain elevated at multi-year highs above 2.7 per cent.
The inflation story matters for the stock market as rising inflation expectations push up nominal yields and the discount rate on the tech/growth/momentum parts of the market that have underpinned the last decade's bull run. We saw this yesterday. Tech stocks took a beating and dragged the rest of the market down with them. The Dow Jones retreated into the red in the closing part of the session, having earlier hit a record high, as the Nasdaq composite tumbled 2.5 per cent. The Nasdaq 100 fell more than 2.6 per cent and closed below its 50-day simple moving average for the first time the end of March. Tesla fell 6 per cent, the ARK Innovation ETF was 5 per cent lower and Apple fell over 2.5 per cent. The heavy weighting of tech in the broader market left the S&P 500 down 1 per cent for the day. Overnight Asian markets fell sharply, with the Nikkei 224 off 3 per cent and the Hang Seng down 2 per cent. The more commodity focused ASX dropped 1 per cent. US futures point to further losses when Wall Street opens later.
This is shaping up to be another tech bleed as we saw in September last year, with a sea of red on the boards in Europe this morning. Tech stocks in Europe took the cue from across the pond, dragging the major bourses lower but the risk-off tone is permeating the whole market. The FTSE 100 retreated under the psychologically important 7,000 level, having hit a post-pandemic high of 7,164 in the earlier part of Monday’s session. NatWest fell over 3 per cent to 190p after the government offloaded a 5 per cent stake at this price. IAG fell close to 5 per cent as investors showed more displeasure at the government’s green list. Scottish Mortgage dropped over 4 per cent on its exposure to the US and other tech stocks. Whilst this was a tech-led sell-off, the worst sectors are the reflation plays (i.e, the new ‘momentum’ stocks) - basic materials, financials and energy. On the Stoxx 600, the worst sectors this morning are consumer cyclicals, tech and basic materials with only a handful of stocks in the green.
Meanwhile, oil, gasoline and heating oil fell as fears of a prolonged outage of the Colonial pipeline eased. The company said it is working in phases to have the pipe working again by the end of the week. Weaker risk sentiment in the Asian session also sent crude futures lower.
Gold remains well supported on the 38.2 per cent as bulls pause.
UK preliminary GDP q/q preview (Wed, 07:00 BST)
The Bank of England anticipates UK economic output contracted by 1.5 per cent in the first quarter of the year, which should be pretty much our reference point for the print on Wednesday, with the consensus at –1.6 per cent. The –2.2 per cent in January was stronger than expected and was followed by a 0.4 per cent expansion in February. Whilst March data does not capture the reopening of non-essential shops, there is evidence that spending and activity were already picking up before the 12 April easing of lockdown restrictions. Moreover, the UK economy has proved to be a lot more resilient to lockdown 3 than lockdown 1. Put that down to the adjustment of people and business to the displacement; for instance the embrace of remote working, as well the lockdown rules themselves being less restrictive to economic activity than the first lockdown a year before. Better and more comprehensive testing has also played an important part in keeping in most economic activity going.
The March IHS Markit / CIPS services PMI showed a strong rebound in March, with the index rising to 56.3 from 49.5 in February. The robust PMI coupled with other evidence of increased card spending and mobility suggest a solid bounce back in the final month of the quarter, with a month-on-month expansion of around 1.3 per cent expected. Whilst not a direct read on the Q1 numbers, Barclays today says that April card spending has exceeded pre-pandemic levels.
But this all remains rear-view fare: the market is more interested in the +7 per cent growth expected in 2021 which is going to imply some pretty impressive expansion in the third and fourth quarters in particular. Strongest expansion since WW2 is more eye-catching than a mild contraction in Q1 that has been well and truly priced. Going forward, we are not really going to know what the true size of the economy really is for some time because there has been a huge displacement in economic activity as well as the velocity of people. Adjusting to this new normal will take time and measures of output will always lag what is really happening. Moreover, as Friday’s nonfarm payrolls report in the US evinces, hard data is liable to being way off forecasts because it’s so hard to get a handle on what we are comparing it with; furlough and other emergency schemes masked the true depth of the economic contraction. Just as the pandemic led to an unprecedented contraction, there is not really a playbook for this recovery, so we should be careful not to over-read individual prints.
By way of context, the NIESR this morning estimates that the UK economy will recover 2019 levels by the end of 2022. The recovery is strong but it’s coming from a low base. To add further context, as of Feb the British economy remains 7.8 per cent smaller than it was a year before. Moreover, it is still 3.1 per cent below where it was at the peak of the post-lockdown recovery in October 2020 – evidence that this long third lockdown over the first quarter has set things back some way. NIESR also estimates that UK unemployment will peak at 6.5 per cent rather than 7.5 per cent, reflecting the extent to which government support schemes have masked what is really going on.
Neil Wilson is chief markets analyst at Markets.com
