Purchasing Manager Index (PMI) data still indicate a growing but slowing world economy, equity and credit markets rebound and the ECB highlights the risk of housing corrections in the Euro area. All these stories and more are covered in this week’s insights update from BlackBee.
The key economic data released last week revolved around the closely watched Purchasing Manager Index (PMI) readings in the US, UK, Euro area and Japan. As our chart of the week shows the broad message emanating from the indicators was that the global economy is still growing (readings over 50 are indicative of growth within the economy), albeit at a slower pace compared to a few months ago – hardly a surprise considering the challenges around inflation and war in Ukraine.
Elsewhere, the US Federal Reserve released the minutes from its recent meeting which gave some further insight into the Fed’s short term thinking on monetary policy. The minutes effectively signed off on interest rate increases of 0.5% over the next two meetings (in June and July) in response to continued high inflation although there was enough of a signal that the pace of tightening could ease through the second half of the year to help improve equity market sentiment (as well as push bond yields and the dollar lower) as the week progressed.
Finally, on the topic of inflation it was interesting to hear the comments from IMF Deputy Managing Director Gina Gopinath last week. She made the case that rising wages around the world may not necessarily lead to a wage-price inflation spiral if firms can’t pass on rising costs to consumers and absorb the extra cost through lower profit margins instead. We would argue that typically wages and prices would go hand in hand so it will be interesting to see how this dynamic plays out over the next year. If wages didn’t lead to further price rises, then that would be a welcome development given the investor concern about inflation right now. However, any relief here could be short-lived if this scenario came about at the expense of sizeable hits to corporate profit margins.
Equity markets saw their first gains in a number of weeks last week with sentiment around monetary policy improving a touch following the release of the minutes of the latest Fed meeting. Positive earnings updates from US retailers like Macys also eased investors fears about the sector following the disappointing news from Walmart and Target the previous week. After a difficult week in the social media space, sentiment towards the technology sector was also boosted by better than expected first quarter results from Chinese e-commerce giant Alibaba which reported revenues rose by 9% despite the negative impact China’s zero COVID policy has had on the economy recently.
Last week was a better week for government bond markets given the macro backdrop of slowing economic growth exemplified by the May PMI data we noted earlier. The tone of the Fed’s minutes was also seen as slightly more optimistic from a government bond perspective while credit markets also rebounded strongly helped by the recovery in risk sentiment following last week’s stock market gains.
Commodities moved slightly higher last week with much of the news flow revolving around the energy sector. G7 energy ministers called on OPEC to increase output (something we’ve also argued for) to dampen oil prices so as to take some pressure off the global economy. In the UK, Chancellor of the Exchequer Rishi Sunak took the unusual step of announcing a windfall tax on North Sea oil and gas producers raising approximately £5 Billion this year to help fund a relief package for households dealing with rising inflation.
Housing – ECB Financial Stability Review highlights risk of Euro area housing corrections
The European Central Bank (ECB) caused some shudders last week via its twice-yearly financial stability review where it pointed out the risk of higher interest rates for housing markets across the region. Although the Bank noted that “house price pressures are buttressed in the near term by tight supply conditions and continued demand amid household and investor preference for housing” it also flagged the risk that abrupt increases in real interest rates could cause a correction in house prices in the region given their strong recent increases.
In the context of these comments we think it’s crucial to remember that this is not a prediction – the ultimate objective of the ECB’s report is to highlight financial risks across the Euro area (it also addresses equity, commodity and bond markets for example). It is clear that such risks are rising at present given the stagflationary impact of the Ukraine war, market volatility and potential monetary tightening from the ECB.
In our view however, the risk of a correction in Irish house prices is low and it would require a very aggressive tightening in Euro area interest rates for us to change our view – something which we don’t see as likely. While higher interest rates could well slow house price inflation in Ireland (something which is needed), we still believe that the combination of strong demand, limited supply and a healthy (and sustainable) bank lending backdrop should lead to the Irish house price outlook in Ireland remaining stable.