Weekly financial market overview 17.05.-23.05.
Main events of the previous week
On May 20, the content of the minutes of the last FED meeting was released, which took place on March 27-28, when the FED kept the base interest rate at the level of 0-0.25%. It follows from the minutes that the Fed continues to assess the coronavirus pandemic as a significant factor influencing the state of the US economy. On the one hand, the participants in the meeting noted that business activity has increased sharply, which has led to a significant increase in consumer spending, activity in the housing sector, investments in business equipment and the industrial sector. But on the other hand, the Fed notes that the overall US economy is still far from the goals set for maximum employment and price stability. The fears are caused by inflation, which is growing and has already exceeded the target of 2%. The FED predicts inflation will slow down in 2022. The target level of 2% is expected to be reached only by the end of 2023. Given this forecast, it is most likely that FED will not scale down the quantitative easing program in the next couple of years. It also follows from the protocol that some of the FED members do not exclude earlier curtailment of the quantitative easing program.
In turn, the ECB, in its financial stability review, emphasizes that among the main factors of vulnerability of the European economy are high debt levels and a bubble in the real estate market, which are putting pressure on the recovery from the coronavirus crisis. The report says large government subsidies kept much of the Eurozone afloat during the pandemic, but weaning the bloc off support will be difficult as it could lead to more bankruptcies and higher unemployment, which in turn means slower growth and risks for banks. The ECB believes that the governments of the Eurozone countries must find a “middle ground” between a premature adjustment of stimuli and the maintenance of support measures for too long. However, the continued need for private sector support could raise concerns about the sustainability of sovereign debt over the medium term in the bloc's vulnerable economies, given the sharp rise in public debt last year, the ECB added. Another risk is associated with prices in the real estate market, especially commercial real estate, which was characterized by high demand and overestimations before the pandemic. Commercial real estate prices are already undergoing a significant market correction, and a further fall in prices is possible, which will lead to possible losses for lenders or an increase in the cost of collateral for loans. The ECB added that this is a potentially serious problem, as lending to commercial real estate accounts for 7% of all banks' transactions with the private sector. The residential real estate markets are in better shape, but the revaluation is already evident. The downside risk in the residential real estate segment indicates a slowdown in price growth in the coming year, but no fall is expected, the ECB added.
Eurozone. According to the preliminary assessment of the PMI business activity index in May, the indicator increased by 3.1 points and amounted to 56.9. Of the indicators that make up the index, business activity in the service sector increased by 5.1 points, while the state of the manufacturing sector decreased by 0.1 points.
The consumer price index in April rose by 0.6% versus March, while the annual inflation was 1.6%. The growth of the core inflation rate, excluding food and energy, amounted to 2.3% y/y in April.
US. The number of initial jobless claims for the week was registered in the amount of 444 thousand, which is 34 thousand less than the previous week and 6 thousand less than predicted by analysts.
According to the preliminary assessment of the PMI business activity index in May, the indicator increased by 4.6 points and amounted to 68.1. Of the indicators that make up the index, business activity in the service sector increased by 5.4 points, and the state of the manufacturing sector increased by 1 point.
China. Retail sales in April rose 17.7% versus April 2020, while retail sales were expected to grow by 25%.
The volume of industrial production in April, as expected, increased by 9.8% compared to April 2020.
The unemployment rate in April fell by 0.2 percentage points and amounted to 5.1%.
Key events this week
- On Thursday, the US will publish data on sales of durable goods for April, as well as the number of initial jobless claims for the week.
- On Friday, data on income and expenses of citizens in April will be published in the United States.
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