| USA After rising 0.1% in March, the Consumer Price Index climbed a consensus-matching 0.4% in April. Prices in the energy segment were up 0.6% as an increase for gasoline (+3.0%) was only partially offset by decreases for fuel oil (-4.5%) and utility gas services (-4.9%). The cost of food, meanwhile, remained unchanged for the second month in a row. The core CPI, which excludes food and energy, advanced 0.4%, in line with the median economist forecast. Prices for ex-energy services rose 0.4% (0.36% rounded to the second decimal, the least in 19 months) as gains for shelter (+0.4%), motor vehicle insurance (+1.4%), and motor vehicle maintenance and repair (+0.5%) were only partially offset by declines for medical care services (-0.1%) and airline fare (-2.6%). The cost of core goods, meanwhile, progressed 0.6% thanks in large part to a 4.4% jump in the price of used vehicles, which marked the first increase for this segment in 10 months and the largest since June 2021. Other goods categories saw higher prices as well, notably, alcoholic beverages (+0.5%), medical care commodities (+0.5%), and apparel (+0.3%). Alternatively, prices for new vehicles (-0.2%) declined for the first time in two years. YoY, headline inflation clocked in at a two-year low of 4.9%, down from 5.0% the prior month and one tick below consensus expectations. The 12-month core measure, meanwhile, dipped from 5.6% to a 16-month low of 5.5%. CPI data came in roughly in line with consensus expectation in April. The energy component contributed positively to the headline figure, but less so than had been anticipated. This was thanks to another steep decline in the utility gas services segment, consistent with a sharp drop in wholesale gas prices. Food prices, for their part, remained stable for a second month running and should remain tepid going forward, judging from the decline of global prices reported by the FAO index The Producer Price Index for final demand rose 0.2% in April instead of 0.2% as per consensus. Goods prices edged up 0.2% on a 0.8% increase for energy, while food was down 0.5%. Prices in the services category, meanwhile, rose 0.3%. The core PPI, which excludes food and energy, increased 0.2% in the month; economists were also expecting a 0.2% gain. YoY, the headline PPI dropped from 2.7% to 2.3%, a multi-year low. Excluding food and energy, it sank from 3.7% to a multi-month low of 3.4% The NFIB Small Business Optimism Index edged down 1.1 points in April to a 10 year low of 89.0. The net percent of firms that expected the economic situation to improve remained deep in negative territory at -49%, one of the lowest prints ever recorded. What’s more, the percent of firms that expected real sales to rise worsened from a net -15% in March to a net -19%. However, the percentage of firms that planned to create new jobs increased two points to a net 17%, after dropping to their lowest level since June 2017 Hiring in April continued to be hampered by difficulty finding good candidates: 45% of businesses reported not being able to fill one or more vacant positions, up from 43% in March. Also, 40% of small firms indicated that, to attract qualified workers, they had sweetened employee compensation in the past 3-6 months. This was down from 42% 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 (21%). Deteriorating economic prospects also translated into rather weak investment intentions as measured by the corresponding gauge, which remained well below its long-term average in the month The University of Michigan Consumer Sentiment index decreased from 63.5 in April to 57.7 in May. The deterioration of sentiment in May was due in part to a waning of assessment of current conditions, with the associated index decreasing from 68.2 to 64.5. Longer term perspectives also pulled back, with the subindex tracking future expectations regressing from 60.5 to 53.4. Twelve-month inflation expectations decreased from 4.6% to 4.5%, while 5/10-year expectations rose from 3.0% to 3.2% The Federal Reserve raised its policy rate by 25bp, to the 5-5.25 range, as anticipated by economists and priced in markets. This could be the final policy rate rise in this hiking cycle, and the FOMC’s changed press release (“statement”) wording strengthens that view. The previous forward guidance from the FOMC stated that it “anticipates that some additional policy firming may be appropriate”, but Powell and his colleagues have toned down the likelihood of further policy rate hikes by writing “in determining the extent to which additional policy firming may be appropriate”. Language changes like this are part and parcel of the well-known Fed guidance play book, used in past hiking cycles, and hence widely discussed ahead of the meeting. The statement change is a “meaningful change”, Fed chair Jerome Powell said in the press conference Q&A. However, Powell says that the FOMC will take a “data-dependent approach” in deciding future policy needs. Given that the committee will decide meeting by meeting, based on the totality of the incoming data, why expect a pause next? Credit conditions are tightening fast, which will weigh on the economy. On the one hand, the Fed characterises the US banking system as “sound and resilient”, and Powell states that conditions have “broadly improved” since the SVB failure and the March turbulence. On the other hand, Powell points to both earlier headwinds from tighter credit conditions, and on top of that strains from the banking troubles appearing to result in “even tighter conditions”. The FOMC has had access to the upcoming Senior loan officer survey (release on Monday, May 8) and Powell states that the survey results are “broadly consistent with other sources” – remember that the NFIB, the Beige book, and bank lending data all point to more material tightening of conditions. However, Powell telegraphed some calming signals by revealing that the new Fed staff forecast is “broadly similar” to the mild recession forecast that the staff had prepared ahead of the March meeting. In April, the US year-to-date budget deficit widened nearly 157%, to $924.5 billion from $360 billion a year ago, the Treasury Department announced Wednesday. The monthly budget surplus for April fell 43% from a year ago amid weak tax receipts. US income taxes are generally due every 15 April, leading to large April surpluses Negotiations at the staff level over raising the US debt ceiling continued this week after President Joe Biden and the leaders of the House of Representatives and Senate met on Tuesday to begin the discussion. The president and congressional leaders postponed a meeting scheduled for 12 May until early next week, with a White House official telling The Hillthat staffers are making progress toward an agreement. According to the Wall Street Journal, potential compromises are holding back unspent funds approved by Congress to address the coronavirus pandemic, speeding up the permitting process for energy projects, and spending caps. On Thursday, US Secretary of the Treasury Janet Yellen showed no enthusiasm for various debt-limit workarounds that have been proposed, such as the president invoking a clause in the 14th Amendment to the US Constitution, the minting of a $1 trillion platinum coin or the prioritizing of interest payments. Yellen called invoking the 14th Amendment legally questionable while labeling the other approaches “risky.” The National Association of Realtors announced Tuesday that home prices fell in more parts of the United States than they have in over a decade during the first quarter, with nearly a third of metro areas posting annual price declines. Prices went down on an annual basis in 31% of the 221 metro areas tracked by NAR, the highest percentage in 11 years. Nationwide, the median single-family existing-home sale price in the first quarter fell 0.2% from a year earlier to $371,200, the first year-over-year price decline since the first quarter of 2012, NAR said The major indexes ended mixed for the week as the flow of first-quarter earnings reports neared its end. The technology-heavy Nasdaq Composite outperformed, helped by a surge in Google parent Alphabet following the unveiling of its new artificial intelligence-based search platform. The narrowly focused Dow Jones Industrial Average lagged, weighed down by Disney, following its report of a decline in subscribers to its streaming platform, Disney+. Financials stocks underperformed, dragged lower by ongoing concerns over the strains facing certain regional banks In terms of data release, the retail sales print is out on Tuesday. Retail sales were unusually strong in January, but even with some payback the past two months, the level of sales is still almost 2% ahead of where it was in December. In short, consumers are still spending. However, the momentum is slowing. Control group retail sales, which strips out volatile categories (autos, building materials, gasoline and restaurants) and is used for PCE spending in the calculation of GDP, fell 0.3% in March, yet was still up at a 6.2% annualized rate over the past three months. Almost all categories in the retail sales report describe goods industries, with the exception of food services, or sales at restaurants. Restaurant sales rose only 0.1% in nominal terms in March, and after accounting for higher prices translated to a decline in real terms Existing home sales ins out on Thursday. Existing home sales fell 2.4% in March, as the spring selling season opened with short supply and high rates as significant headwinds to activity. The decline left sales running at a 4.44M annual pace. While mortgage rates are not as elevated as the 7.10% peak registered in late October, rates have trended higher after declining to start the year. Resale inventories have improved, but there remains only 2.6 months’ supply at March’s pace, up from 2.0 months’ supply in March 2022. Mortgage applications for purchase expanded over late March and the early half of April, but declined later on in the month. UK As expected, the Bank of England (BoE) raised rates by 25bp up to 4.5% on a vote of seven to two. This follows both the Federal Reserve and the European Central Bank hiking rates by 25bp at their latest respective meetings. The majority of Monetary Policy Committee members backed a rate hike on the basis that it helps address the risk of more persistent strength in domestic price and wage setting. For some weeks now, markets and economists have been expecting a rate hike in May following hotter than expected inflation and earnings data The BoE paints a much more sanguine picture for UK economic growth, dramatically improving its growth forecast for the UK compared to projections it set out in its February report. This reflects stronger than expected global growth, lower energy prices and fiscal support provided at the Spring Budget. The May report also argues that the impact of tightening credit conditions related to recent developments in the global bank sector will likely only have a small impact on GDP. Inflation, however, is expected to remain higher for longer compared to February’s projections. Expectations are for CPI inflation to end the year at just over 5% (versus projections of around 4% in February), with inflation only falling below 2% by 2025 This morning’s GDP release strongly suggests the UK economy is currently going through a period of flatlining growth. M-o-m growth was -0.3% but Q1’s QoQ growth figure registered at 0.1%. The main sectors of the economy saw modest growth in the quarter: services grew by 0.1%, driven by information and communication and admin and support service activities; while the construction, production and manufacturing sectors grew by 0.7%, 0.1% and 0.5% respectively QoQ business investment outperformed expectations, yet absolute levels remain underwhelming registering at 1.4% below pre-COVID levels. Note, of course, that business investment data can be subject to significant revisions: it was initially thought that business investment had seen a surge in 2022 Q4, but this was subsequently revised to show that investment had plateaued. It seems likely that business investment will remain muted for the rest of 2023 given the squeeze on the business community. The super-deduction has now been replaced with less generous capital allowances, the higher interest rate environment is hitting businesses especially hard given most corporate loans are floating rate and, of course, corporation tax rates have seen a significant jump. EU ECB President Christine Lagarde said in an interview with the Nikkei newspaper that the central bank “has moved in a very deliberate and decisive way in order to fight inflation,” adding, however, that “we still have more ground to cover.” She said that “there are factors that can induce significant upside risks to the inflation outlook” and that “we are still in a situation where uncertainty about the path of inflation is high, so we have to be extremely attentive to those potential risks.” Lagarde’s comments echoed the views hawkish policymakers have expressed since last week’s quarter-point rate increase German manufacturing orders shrank more than expected in March, declining 10.7% sequentially on a seasonally and calendar-adjusted basis—a sign that the economy might be heading for a recession. German manufacturing orders shrank more than expected in March, declining 10.7% sequentially on a seasonally and calendar-adjusted basis—a sign that the economy might be heading for a recession In local currency terms, the pan-European STOXX Europe 600 Index ended roughly flat, with gains earlier in the week dissipating as the market digested the likelihood of further rate increases from the European Central Bank (ECB). Major stock indexes posted mixed results. France’s CAC 40 Index slipped 0.24%, while Germany’s DAX eased 0.30%. CHINA China’s consumer price index (CPI) edged up 0.1% in April from a year earlier, down from a 0.7% rise in March. The latest CPI marked the lowest rate since February 2021 and missed economists’ forecasts, according to Reuters. Core inflation, which excludes volatile food and energy prices, was unchanged from the previous month, suggesting little demand-driven inflation in the economy. The producer price index fell a worse-than-expected 3.6% and marked the weakest reading since May 2020. April’s CPI reading trailed the government’s 2023 consumer inflation target of around 3% growth and raised concerns that China may have entered a deflationary period. New bank loans fell to RMB 719 billion in April from March’s RMB 3.89 trillion, central bank data showed, reflecting lower credit demand. The latest data appeared to support expectations that China’s central bank will ease policy in the near term to support an economy that has lately showed signs of losing momentum following a post-pandemic rebound. The yield on China’s 10-year government bond fell to the lowest level since last November as traders priced in the possibility of further monetary easing China’s exports rose 8.5% in April from a year ago, easing from 14.8% growth in March. Imports fell a greater-than-expected 7.9%, from a 1.4% decline the previous month, reinforcing growth concerns following disappointing manufacturing and services activity readings in the prior week. China’s official manufacturing Purchasing Managers’ Index unexpectedly contracted in April for the first time since December, when Beijing abandoned its zero-COVID policy US National Security Advisor Jake Sullivan met his Chinese counterpart, Wang Yi, in Vienna on Wednesday and Thursday to try to dial down tensions between the countries. It was the highest-level bilateral engagement since the spy balloon incident in February Chinese equities retreated in the first full week of trading after the five-day Labor Day holiday as investors grew concerned about the strength of the country’s recovery. The Shanghai Stock Exchange Index gave up 1.86% while the blue-chip CSI 300 fell 1.97% in local currency terms. In Hong Kong, the benchmark Hang Seng Index declined 2.11%. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets. |
