1H April Global Market Recap
1st April 2022 – 15th April 2022
FULL REPORT ACCESS LINK: First Plus Market Update 1H April 2022
U.S. headline inflation rose 8.5% year over year in March, the highest since the start of the Reagan era, on the back of skyrocketing commodity costs, tightening supply and strong orders. Core CPI edged up 0.3% from the prior month, less than the 0.5% estimate. Some analysts took the slowest monthly increase in six months as a positive sign that price may be easing. The U.S. job market remains resilient as unemployment rate falls, wages rise, and labor force participation continues to increase. U.S. non-farm payrolls expanded 431,000 in March, and the U.S. unemployment rate fell to 3.6%, almost reaching its 50-year low of 3.5% in the first quarter of 2020. The headline retail sales grew 0.5% in March, driven by an 8.9% increase in fuel spending while the core retail sales dipped 0.3% as automobile and e-commerce purchases fell.
China’s PPI and CPI rose faster than expected in March as supply chains continued to be congested and strict lockdowns in some major cities added pressure on raw material cost. Imports in China unexpectedly dropped 0.1% in March for the first time since August 2020 as COVID-19 restrictions across the nation dampened domestic demand. Exports increased 14.7% year on year in March, exceeding analyst estimates for a 13% growth but slowed from a 16.3% increase in the January-February period. Economists predict that trade conditions would worsen in April due to delayed customs clearance and the impact of Shanghai's protracted lockdown. The Central Committee of the Communist Party of China and the State Council issued a policy paper in collaboration to expedite the construction of a unified domestic market. In March, the new total social financing rebounded strongly, significantly exceeding market’s expectation. The People's Bank of China kept the one-year policy interest rate unchanged, and only cut the reserve requirement ratio for most banks by 25 basis points, disappointing what the market had predicted.
All three major U.S. stock indexes posted two consecutive weekly losses in the first half of April as geopolitical conflicts, inflationary pressures, and a hawkish Federal Reserve continued to weigh on sentiment. The S&P 500 fell 3% for the first half of April, the Dow Jones Industrial Average was down 0.7% and the Nasdaq Composite dropped 6.1%.
China equities failed to maintain momentum after trading resumed post-holiday as concerns over slower domestic growth caused by the latest outbreak overshadowed optimism of stronger domestic policy easing and the progress in US-China regulatory cooperation. In the first half of April, SHCOMP dropped 1.3%, the CSI 300 fell 0.8% WoW, while the ChiNext Index dropped 7.5%. We believe the market would continue to trade sideways in an uncertain macroeconomic environment.
The 10-year U.S. treasury yield increased by 48.95bps in the month as the Federal Reserve raise interest rates last month for the first time in three years, but uncertainty stemming from Russia's invasion of Ukraine kept it from raising rates more than a quarter-of-a-percentage point, minutes from its last policy meeting showed. The market is expecting the Fed to deliver two back-to-back half-point interest rate hikes in May and June to tackle runaway inflation. The People’s Bank of China (PBOC) refrained from cutting interest rates and injecting liquidity into the economy recently, disappointing analysts who had expected more forceful action to cushion growth from worsening Covid outbreaks. The central bank reduced the reserve requirement ratio (RRR) for most banks by 25 basis points, lower than economists had expected, and dropped it by 50 basis points for smaller lenders. The European Central Bank (ECB) kept its monetary policy unchanged but confirmed it will end its bond buying in the third quarter.
The bond market has been flashing plenty of warning signs lately, with the Treasury yield curve repeatedly inverting after doing so for the first time since 2019 on the last day of March. Goldman Sachs is revising up its forecast for credit spreads, saying risk premiums are set to build as central banks withdraw stimulus and slower economic growth impacts corporate profitability. Short-dated euro zone bond yields fell as traders pared back rate hike bets after the European Central Bank refrained from switching to a more hawkish stance. China’s credit expanded faster than expected in March as economic activity resumed after the Lunar New Year holiday and local governments and companies accelerated bond sales. Business and consumer sentiment remain weak because of uncertainty surrounding the Covid situation, a property market slump, and a potential slowdown in global growth as the Federal Reserve hikes interest rates and the war in Ukraine continues.
The Dollar Index rose by 2.2% in the month and touched another two-year high, pummeling the Yen, as yields continued to rise on expectations for further rate increases by the Federal Reserve. The Euro fell by 2.3% on the news that France’s incumbent President Emmanuel Macron beat far-right challenger Marine Le Pen in the first round of presidential voting. The Japanese Yen depreciated by 3.9% as Japan’s finance minister mentioned that a rapidly weakening yen can cause problems for Japan's economy as speculation mounts that Tokyo will step in to curb the currency's slide for the first time in more than two decades. China's Yuan is reportedly replacing the Dollar and Euro in Russian banks and Russia will likely continue to add the Chinese Yuan to its foreign exchange reserves as it increasingly looks eastward for economic development amid stringent Western financial sanctions, especially following the Russia-Ukraine conflict.
Commodities gained as no compromise was reached during the latest Russia-Ukraine peace talks. Brent crude and WTI oil prices rose by 3.5% and 6.7% respectively. Russian Deputy Prime Minister Alexander Novak stated that Russia's oil production was set to decline by approximately 5% in April, as compared to a month earlier, due to logistics issues and international financial sanctions against Russia. The Russian central bank declared that gold purchases will be carried out on a negotiated price basis, canceling its previous plan in March of pegging roubles to gold at a fixed price of 5,000 roubles a gram. Gold prices hit a one-month high of $1,981 as rising inflation boosted its appeal as an investment class. Ukraine’s grain association forecast the country’s corn harvest to decline almost 40% this year, driving corn prices up 6.9%, approaching its all-time high.