Halve And Havoc

Here are some of the biggest stories from last week:

• The IMF raised its global growth forecast due to a resilient world economy.
• China announced faster-than-expected economic growth in the first quarter.
• UK inflation fell by less than expected in March.
• The global supply of public equity is shrinking at its fastest pace in at least 25 years.
• Traders are betting big against crypto miners, anticipating profit declines after the halving event.

Dig deeper into these stories in this week’s review.

Macro

The International Monetary Fund adjusted its global growth forecast upward by a modest 0.1 percentage point from its January projection, now expecting the world economy to expand by 3.2% in 2024 – in line with last year’s growth. The upward revision reflects the economy's surprising resilience amid inflationary pressures and high interest rates. Growth is set to be led by advanced economies, with the US already exceeding its pre-Covid-19 pandemic trend. In fact, the world’s biggest economy is on track to grow at double the rate of any other G7 country this year, according to the IMF. But despite the rosier outlook, global growth remains low by historical standards due to weak productivity and increasing geopolitical fragmentation. Case in point: the IMF’s forecast for world growth five years from now, at 3.1%, is the lowest in decades.

The IMF warned of risks to the global recovery, notably the possibility of fresh increases in commodity prices resulting from rising geopolitical tensions in the Middle East. China, whose economy remains weakened by a downturn in its property market, was also cited among a series of potential downside risks facing the world economy.

Speaking of China, the country’s economic performance in the first quarter was a bit of a mixed bag, with growth topping expectations but some indicators suggesting that challenges may increase as the year progresses. The world’s second-biggest economy expanded by 5.3% in the first quarter from a year ago, marking a slight acceleration from the 5.2% growth recorded in the previous three months and surpassing forecasts of 4.6%. The strong start to the year puts the economy on track to meet the government’s 2024 growth target of about 5%, which remains unchanged from last year.

But much of the economic bounce came in the first two months of the year. In March, growth in retail sales slumped and industrial output decelerated below forecasts. What’s more, the strong headline number carries the risk that authorities get too comfortable, discouraging them from implementing much-needed economic support measures.

Over in the UK, new data this week showed the country’s annual inflation rate slowed to 3.2% in March, reaching its lowest level in two and a half years. But that was slightly above the 3.1% pace that economists and the Bank of England had predicted. And sure, the less-than-expected dip was partly due to higher fuel prices. But even core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, decelerated by less than economists had hoped. The figures further highlighted trader concerns about when the BoE might lower the highest interest rates seen in 16 years: while the central bank still expects inflation to hit its 2% target later this year, it's waiting for clearer signs that price pressures are easing sustainably before making a move.

The data comes a week after higher-than-expected inflation figures in the US led traders to slash their bets on how much central banks will cut interest rates this year. And following the UK report, traders reduced their bets even further. They now expect the first BoE cut to come in November instead of September, and see just a 30% chance of a second trim this year. That’s a sharp change from just a few weeks ago, when two or three cuts were on the table.

Finally, the March data also showed the UK’s inflation rate dipping below the US’s for the first time since 2022. Coincidently, the BoE’s governor hinted earlier this week that the UK might be able to lower interest rates before the US owing to the different inflation dynamics in the two economies. He reckons that the US is dealing more with “demand-led” pressures – that is, rising prices due to strong consumer spending. That’s the kind of heat that can be more easily snuffed out with higher interest rates, which makes borrowing more expensive and, in turn, lowers spending. The UK, on the other hand, is dealing more with “supply-led” pressures – that is, rising prices due to supply-chain shocks, which higher interest rates are not well-suited to address.

Stocks

The global supply of public equity is shrinking at its fastest pace in at least 25 years, according to new research by JPMorgan out last week. When companies already listed on the stock market sell more shares, or when private companies sell shares to the public for the first time, the supply goes up. On the other hand, when companies buy back their own shares, the supply goes down. And looking at the difference between these two figures, the global universe of public equity has already shrunk by a net $120 billion this year, exceeding the $40 billion taken out over all of 2023. That puts the net figure on course for a third consecutive year of decline – a dynamic not seen since the bank’s data series began in 1999.

The bank’s findings are puzzling and confounded even its own analysts. See, rising stock markets – like the situation we’re in today – should, in theory, encourage companies to raise funds by selling new shares at high prices rather than spending cash to buy them back. One explanation for why that’s not happening is uncertainty over the future direction of interest rates and expected volatility around November’s US presidential election, both of which are weighing on new share sales. At the same time, slowing economic growth is making it harder for companies to expand sales, pushing them to buy back their stock instead as a way to boost their earnings-per-share numbers.

Crypto

Crypto enthusiasts are excited after bitcoin’s “halving” event that took place this week. The quadrennial software update halves the reward that miners get for operating the powerful computers that process bitcoin transactions and secure the blockchain. However, the event is set to trigger huge revenue declines for the very firms that ensure bitcoin’s smooth functioning – right on the heels of a surge in their biggest costs. As a result, traders have amassed huge bets against US mining stocks, with total short interest soaring to about $2 billion. That accounts for almost 15% of the group’s outstanding shares – three times more than the US market average of 4.75%.

Put simply, the halving cut the amount of bitcoins that miners can earn each day for validating transactions from 900 to 450. And based on bitcoin’s current price, that could spell revenue losses of around $10 billion a year for the industry as a whole. Granted, previous halving events have led to big rallies in the crypto’s price, helping to offset the drop in mining rewards. But this time round, miners are grappling with a big increase in the costs required to operate the powerful, energy-intensive computers used to process bitcoin transactions and earn rewards.

There are two reasons behind the surge. First, mining difficulty, measured in terms of computing power, has swelled almost sixfold since the 2020 halving. This is due to a significant rise in the number of miners vying for a fixed amount of rewards. As mining difficulty escalates, more computing power is required to earn these rewards, making it more costly to acquire and operate the necessary equipment.

Second, miners are facing stiff competition for affordable electricity from the burgeoning and deep-pocketed AI industry. Big Tech firms are plowing loads of capital into AI-related data centers and they have an edge in acquiring favorable rates from utilities, given their consistent revenue streams and strong balance sheets. Crypto miners' revenues, in contrast, fluctuate with the rise and fall in bitcoin prices.

Next week

• Monday: China one-year loan prime rate, eurozone consumer confidence (April). Earnings: Verizon.
• Tuesday: US, UK, and eurozone PMIs (April), US new home sales (March). Earnings: Tesla, General Electric, Visa, General Motors, PepsiCo, Philip Morris International, Spotify.
• Wednesday: US durable goods orders (March). Earnings: Meta, Boeing, Ford, IBM, Thermo Fisher Scientific.
• Thursday: US GDP (Q1). Earnings: Alphabet, Microsoft, Intel, Caterpillar, Merck & Co.
• Friday: Bank of Japan interest rate announcement, eurozone M3 money supply (March). Earnings: Chevron, Exxon Mobil, AbbVie.