| USA The Consumer Price Index edged up a consensus-matching 0.1% in May. Prices in the energy segment dropped 3.6% on declines for fuel oil (-7.7%), gasoline (-5.6%), and utility gas services (-2.6%). The cost of food, meanwhile, advanced 0.2%. The core CPI, which excludes food and energy, rose 0.4% in line with the median economist forecast. Prices for ex-energy services rose 0.4% (0.39% rounded to the second decimal, the second-smallest print in ten months) as gains for shelter (+0.6%), motor vehicle insurance (+2.0%) and motor vehicle maintenance (+0.6%) were only partially offset by declines in medical care (-0.1%) and airline fare (-3.0%). The cost of core goods, meanwhile, rose 0.6% for the second month in a row thanks in large part to a 4.4% jump in the price of used vehicles. Other goods categories, also, showed gains, notably tobacco/smoking products (+0.6%), medical care commodities (+0.6%), alcoholic beverages (+0.5%), and apparel (+0.3%). Alternatively, the price of new vehicles (-0.1%) sank for the second month in a row. YoY, headline inflation clocked in at a 26-month low of 4.0%, down from 4.9% the prior month and one tick below consensus expectations. The 12-month core measure, meanwhile, moved from 5.5% to an 18-month low of 5.3%. This was still one tick above consensus expectations For the second straight time, price increases in the core goods segment were much larger than anticipated, but once again this was largely due to a steep gain in the used vehicles segment. It looks more like a matter of temporary catch-up. Other used vehicles price indices (e.g., the Manheim index) have shown price increases in recent months that were not reflected in the CPI data. But these indices now show renewed weakness, which suggests that the jump from April to May might soon be reversed. In any case, the explosion of financing costs observed in the used vehicles market, coupled with increased supply, do not seem to us very conducive to sharp price increases going forward. And while the two markets do not always evolve in lockstep, it is encouraging to see that the price of new vehicles declined for the second time in a row in May The Producer Price Index for final demand decreased 0.3% in May instead of 0.1% as per consensus. Goods prices retreated 1.6% on a 6.8% drop for energy, while food was down 1.3%. Prices in the services category, meanwhile, rose 0.2%. The core PPI, which excludes food and energy, increased 0.2% in the month, as expected by economists. Year on year, the headline PPI went from +2.3% to +1.1%, the smallest advance since the end of 2020. Excluding food and energy, it sank from 3.2% to a multi-month low of 2.8%. The FOMC voted to leave the target range for the federal funds rate unchanged at 5.00% to 5.25%. The decision to hold follows 10 straight rate increases that saw the policy rate rise 500 basis points. Meanwhile, the Fed will continue to reduce its holdings of Treasuries and agency MBS pursuant to a preexisting program and subject to monthly caps for both Treasuries ($60 billion/month for the former and $35 billion/month for the latter). This was the eighth straight unanimous decision. Once again, there were no dissenters. On the subject of the economy, the statement noted that “activity […] continued to expand at a modest pace”, which is effectively the same message as in May. The rest of this paragraph was unchanged: Job gains were “robust”, unemployment “remained low”, and inflation “remain[ed] elevated”. This week’s decision to hold steady “allow[ed] the Committee to assess additional information and its implications for monetary policy”. However, a second straight hold is unlikely as the statement subtly hinted at future rate increases, a message that was more forcefully reinforced in the dot plot. Indeed, the latest statement says “in determining the extent of additional policy firming that may be appropriate…” rather than “in determining the extent to which additional policy firming may be appropriate”. As always, the FOMC “remain[ed] highly attentive to inflation risks”. The dot plot released this week definitely read more hawkish than before, with the median projection signaling two additional 25-bp rate hikes between now and the end of the year, that is, one more than had been anticipated by the markets before the meeting. But the surprise did not end there. The level of the policy rates anticipated at the end of the two following years was also revised upward, from 4.250% to 4.625% for 2024 and from 3.125% to 3.75% for 2025 In the end, Fed Chair Jerome Powell and the FOMC proved as predictable as ever, having effectively guided markets to the decision to hold rates steady this week. However, while this policy action was the subject of little debate, it is unclear how much further the Fed is prepared to tighten (if at all) after this week’s “skip”. Based on the updated dot plot, this skip is not expected to turn into a more permanent pause. Indeed, policymakers are signaling that another 50 basis points will be in order before the year is out. Presumably, tightening will resume in July. It should be noted, though, that there no longer is an upward skew to the policy rate assessments. Unlike in March, more dots lie below the median than above. Consequently, if a new hike is likely in July, another one later in the year might not be a forgone conclusion. That decision will depend on the data. In this regard, the Fed’s unemployment rate projection for yearend 2023 was lowered significantly. In theory, this lowers the bar for economic weakness enough to keep the Fed sidelined The NFIB Small Business Optimism Index edged up 0.4 point in May but remained near its 10-year low reached in April. The net percentage of firms that expected the economic situation to improve remained deep in negative territory at -50%, one of the lowest prints ever recorded. What’s more, the percentage of firms that expected real sales to rise worsened from a net -19% in April to a net -21% in May. However, the percentage of firms planning to create new jobs rose two points to a net 19% Hiring in May continued to be hampered by difficulty finding good candidates: 44% of businesses reported not being able to fill one or more vacant positions, slightly down from 45% in April. Also, 41% of small firms indicated that, to attract qualified workers, they had sweetened employee compensation in the past 3-6 months. This was up from 40% the previous month. However, with margins squeezed by higher input and financing costs, fewer businesses planned to do the same again in the coming months (22%) The University of Michigan Consumer Sentiment index increased from 59.2 in May to 63.9 in June. The improvement of sentiment in June was due to a better assessment of both current (from 64.9 to 68.0) and longer-term perspectives (from 55.4 to 61.3). Twelvemonth inflation expectations decreased from 4.2% to 3.3%, which was this indicator’s lowest level since March 2021, Meanwhile, 5/10-year expectations slipped from 3.1% to 3.0% Retail sales advanced 0.3% in May instead of declining 0.2% as per consensus. The prior month’s result was left unchanged at +0.4%. Sales of motor vehicles/parts contributed positively to the headline print as they jumped 1.4% in the second month of Q2. Without autos, retail outlays edged up just 0.1% as a big gain for building materials (+2.2%) was almost completely offset by declines for gasoline stations (-2.6%) and miscellaneous items (- 1.0%). Spending at restaurants and bars, meanwhile, rose 0.4%. In all, sales were up in 10 of the 13 categories surveyed. Core sales (i.e., sales excluding food services, auto dealers, building materials, and gasoline stations), which are used to calculate GDP, grew a consensus-matching 0.2% The Empire State Manufacturing Index of general business conditions jumped more than 38 points from -31.8 in May to 6.6 in June 2023. This indicates a slight increase in manufacturing activity in New York State. The shipments (from -16.4 to +22.0) and the new orders (-28.0 to 3.1) gauges rose substantially (38.4 and 31.1 points, respectively). The indices for delivery times (from -5.7 to -1.1) and unfilled orders (from -13.2 to -8.0) suggested that delivery times changed slightly and that unfilled orders continued to decline. The employment index remained in negative territory for a fifth consecutive month, pegging in at -3.6. Input prices fell considerably according to the corresponding gauge (from 34.9 to 22.0). Business expectations for the next six months (from 9.8 to 18.9) continued to improve and did so at a faster pace than in the prior month though still well below their long-term average (36.4). The Philly Fed Manufacturing Business Outlook Index moved from -10.4 in May to -13.7 in June, its tenth consecutive negative reading. The new orders index slipped two points (from -8.9 to – 11.0), its 13th consecutive negative reading, while the shipments index climbed nearly 15 points (from -4.7 to 9.9), its highest reading since January. The employment index rose from -8.6 to a near-zero rate, the index’s first positive reading since February. The index for supplier delivery times (from -9.3 to -16.1) had its tenth consecutive negative reading while the input price inflation index (from 10.9 to 10.5) fell slightly after increasing slightly the previous month. The prices received gauge (from -7.0 to 0.1) rose back over the zero line from a three-year low in May, marking the index’s first increase since the beginning of 2023. The index tracking future business activity, meanwhile, sprang from -10.3 to 12.7. This was its first positive reading in four month (highest since May 2022) but remained well below its long-term average (~34.0) Industrial production decreased 0.2% MoM in May instead of increasing 0.1% as per the median economist forecast. After expanding 0.9% the prior month, manufacturing output grew a slim 0.1% in May as a gain in the durable goods segment (+0.3%) was partly offset by a drop in nondurable goods (-0.2%). Production in the motor vehicles and parts segment rose 0.2%. Utilities output, meanwhile, slipped 1.8% on a 2.1% loss for electricity while natural gas remained unchanged. Finally, production in the mining sector retreated 0.4% US Secretary of the Treasury Janet Yellen testified before the Financial Services Committee of the House of Representatives that decoupling from China on trade would be disastrous but said it is essential to de-risk by breaking away from Chinese industries and entities that abuse human rights Favorable inflation and growth signals appeared to help stocks continue a rally that began with only a few interruptions in late May. The S&P 500 Index notched its longest stretch of daily gains since November 2021 and its best weekly performance since the end of March. The market’s advanced nara bit, however, as reflected in the renewed outperformance of growth stocks and large-caps. Markets were scheduled to be closed the following Monday in observance of the Juneteenth holiday In terms of data release, housing starts is out on Tuesday. The housing market was the first domino to fall in the Fed’s inflation fight. However, residential construction has recently emerged as a relative bright spot in the economy. Housing starts rose 2.2% in April, a turnaround from March’s 4.5% decline. Single-family construction in particular has picked up as builders work to satisfy buyer demand amid low resale inventory, prompting single-family building permits to trend upward for three consecutive months. Builders, in contrast, are faced with waning apartment demand and a daunting supply of new multifamily units already in the pipeline. The number of multifamily units under construction jumped to 977K in April, the highest level in five decades. Builders have significantly pulled back on multifamily permits as a result, prompting overall permits to slide for two consecutive months Leading Economic Indicator is out on Thursday. In a world chock-full of backward-looking economic data, forward-looking indicators like the Leading Economic Index (LEI) are decidedly valuable. Unfortunately, the LEI has been quite consistent in its signal of recession. The six-month average change of this index has registered below the threshold historically consistent with a downturn for 10 straight months. The LEI’s downdraft is also picking up speed, suggesting that a turn in the business cycle is more likely than not. UK Monthly GDP figures for April, the first month of Q2, have been released this morning. MoM GDP growth registered as expected at 0.2% following a fall of 0.3% in March. Growth in April was driven by the services sector, which grew 0.3% in April, although this comes after a fall of 0.5% in the previous month. The reverse trend was seen in the production and construction sectors. Production fell by 0.3% in April following an increase of 0.7% in March, while construction dropped by 0.6% after growth of 0.2% in March. These figures suggest that UK growth continues to show a flatlining trend. Monthly GDP has now edged above its pre-pandemic level, yet quarterly GDP remains below pre-crisis levels. In recent weeks, forecasters have been upgrading short-term economic growth prospects for the UK, following stronger-than-expected global growth, lower energy prices and fiscal measures introduced at the Spring Budget. However, inflation and earnings numbers consistently overshooting expectations, indicate that rate setters at the Bank of England may need to suppress growth in the short term in order to get prices under control in the medium term. Markets are currently pricing in around 125bp of additional interest rate tightening, which would further affect those coming off fixed-rate mortgages this year: it is estimated that around 7% of fixed-rate mortgages will mature every quarter in 2023 BoE Governor Andrew Bailey told the House of Lords Economic Affairs Committee after the figures were released that the labor market was “very tight.” He added: “We still think the rate of inflation is going to come down, but it’s taking a lot longer than we expected. UK employment and earnings data for April came out this morning. Average earnings (without bonus) were up 7.2% and with bonus were up 6.5%. Unemployment rose to 3.8% (consensus 4%), the more up-to-date unemployment claimant count for May saw a fall of 13.6k (from a rise of 23.4k last month), this is a slight falling away from the top of the claimant count range seen over the past few years (stripping out the anomalous pandemic period). The area with the least pay increases was arts and entertainment. This is a reversal of what happened over much of last year when labour shortages coming out of the pandemic led to a surge in wages for people in these sectors. Given the upcoming busy summer entertainment season, this does suggest that wage inflation might be abating. Less positively, the leaders in wage increases are health and social work and education, clearly public sector strikes are having an impact since in the past these are not areas where productivity gains to justify wage increases have ever been easy. EU The Governing Council (GC) decided to raise its policy rates by 25 basis points stating that the inflation outlook continues to be too high for too long. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.00%, 4.25% and 3.50% respectively, with effect from June 21 2023. The GC meeting press release states that future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary. The Governing Council confirms, as signalled in May, that it will discontinue the reinvestments under the asset purchase programme (APP) as of July 2023 According to the June macroeconomic projections, Eurosystem staff expect headline inflation to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. Indicators of underlying price pressures remain strong, although some show tentative signs of moderating. Core inflation forecasts were revised up especially for this year and next year, due to past upward surprises. They now see it reaching 5.1% in 2023, before it declines to 3.0% in 2024 and 2.3% in 2025. GDP forecasts were slightly lowered for this year and next year. GDP is expected to grow by 0.9% in 2023, 1.5% in 2024 and 1.6% in 2025 Industrial production in the eurozone rebounded by a greater-than-expected 1.0% in April due to a strong increase in capital goods output. Meanwhile, investors in Germany were slightly less pessimistic in June. An economic sentiment index compiled by the ZEW research institute came in at -8.5 points, up from -10.7 points in May In local currency terms, the pan-European STOXX Europe 600 Index rallied 1.47% as the U.S. Federal Reserve refrained from raising rates this month. Hopes that China might implement stimulus measures likewise appeared to lift stocks. Major equity indexes also advanced. Germany’s DAX gained 2.56%, France’s CAC 40 Index tacked on 2.43%, and Italy’s FTSE MIB climbed 2.58%. CHINA New home prices in 70 of China’s largest cities rose 0.1% in May in its fifth successive monthly expansion but slower than April’s 0.3% growth, according to the statistics bureau. The month-on-month decline came after data earlier in the week showed property investment and sales fell sharply in May. China’s property sector showed signs of stabilizing earlier this year after the government rolled out a rescue package to help cash-strapped developers last November. But recent weeks’ evidence has suggested that the recovery momentum in the property sector is slowing, which has fueled calls for more stimulus A trio of indicators showed that China’s economic activity weakened last month. Industrial output, retail sales, and fixed asset investment grew at a slower-than-expected pace in May from a year earlier, according to official data. Unemployment remained unchanged at 5.2%, but youth unemployment jumped to a record 20.8% in May. The lackluster data in recent weeks have led economists at several key banks to lower their 2023 growth forecasts for China, which is dealing with slowing export demand, a yearslong housing market slump, and weak business and consumer confidence The People’s Bank of China (PBOC) cut its medium-term lending facility rate by 10 basis points to 2.65% on Thursday, marking the first reduction since last August. The move was largely anticipated after the PBOC unexpectedly lowered the seven-day reverse repurchase rate, a short-term policy rate, by the same amount earlier in the week. The central also bank rolled over RMB 237 billion into the banking system compared with RMB 200 billion in maturing loans. Analysts predict that the central bank’s pivot toward stimulus may lead to targeted support for some industries as Beijing steps up measures to bolster the recovery Chinese stocks soared after the central bank cut several interest rates, raising hopes for more stimulus to industries that are slowing amid the fading post-pandemic recovery. The Shanghai Stock Exchange Index gained 1.3% while the blue-chip CSI 300 added 3.3%. In Hong Kong, the benchmark Hang Seng Index rallied 3.35%. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, M. Cassar Derjavets. |
