| USA The Consumer Price Index rose a consensus-matching 0.4% in February after climbing 0.3% the prior month. Prices in the energy segment rose 2.3%, on gains for gasoline (+3.8%), fuel oil (+1.1%), utility gas services (+2.3%), and electricity (+0.3%). The cost of food was unchanged month on month. The core CPI, which excludes food and energy, came in one tick stronger than expected, as it rose 0.4% for the second month in a row. The cost of core goods rose for the first time in nine months (+0.1%), as gains for tobacco/smoking products (+0.8%), apparel (+0.6%), and used vehicles (+0.5%) were only partially offset by a 0.1% decline in the new vehicles segment. The price of alcoholic beverages stayed virtually unchanged. Prices for ex-energy services, for their part, moved up 0.5% after gaining 0.7% the prior month, which had been the sharpest in-crease in 16 months. The progression in this segment reflected higher prices for shelter (+0.4%), airline fares (+3.6%), motor vehicles insurance (+0.9%), and maintenance (+0.4%). The cost of medical care services unexpectedly dipped 0.1%. YoY, headline inflation came in at 3.2%, up from 3.1% the prior month and one tick above consensus expectations (+3.1%). The 12-month core measure, meanwhile, cooled from 3.9% to a 33-month low of 3.8%, but this was still one tenth above the median economist forecast (+3.7%) Retail sales rose 0.6% in February, a bit less than expected by consensus (+0.8%). Adding to the disappointment, the prior month’s result was revised down from -0.8% to -1.1%. Sales of motor vehicles/parts contributed positively to the headline print in the second month of the year, as they bounced back a solid 1.6% after dropping 2.1% the prior month. Without autos, outlays advanced a more subdued 0.3%, as gains for building materials (+2.2%), electronics (+1.5%), gasoline stations (+0.9%), and miscellaneous items (+0.6%) were only partially offset by declines for furniture (-1.1%), clothing (-0.5%), health/personal care items (-0.3%), and non-store retailers (-0.1%). At the end of the month, sales were up in 9 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, remained flat in February instead of rising 0.4% as per consensus. While retail sales rebounded in February, spending on goods fell well short of consensus expectations after taking revisions into ac-count. The rise in spending at car dealerships was more or less expected given the higher sales reported a few days ago by Ward’s. The increase in gasoline station receipts, too, came as no surprise, although the gain could have been stronger given the 3.8% jump in pump prices flagged in Tuesday’s CPI report. The February retail sales report perhaps constitutes an early indica-tor that American consumers are beginning to lose stamina after outperforming for several quarters. However, more time is needed for more data to confirm this scenario. In the meantime, goods consumption is unlikely to contribute much to GDP growth in Q1, with core sales currently tracking a 0.3% annualized decline in the quarter The NFIB Small Business Optimism Index fell for the sixth time in seven months in February, slipping 0.5 point to a ten-month low of 89.4. Net sales expectations improved from -16% to -10%, but the net percent-age of firms that expected the economic situation to improve deteri-orated from -38% to -39%. Also noteworthy, 7% of firms cited poor sales as their biggest problem, the highest percentage in 32 months. Con-sequent with the slowdown, hiring intentions slid from 14% to 12.0%, the lowest level since October 2016 (excluding the pandemic). Consistent with this deterioration in outlook, only 21% of polled businesses planned any capital outlays in the next three months, a percentage well below the long-term average for this indicator The Producer Price Index for final demand advanced 0.6% m/m in February, three ticks more than anticipated by economists. Goods prices rose 1.2% on increases for both energy (+4.4%) and food (+1.0%). Prices in the services category, for their part, rose 0.3%, less so than in January, when they increased 0.5%. The core PPI, which excludes food and energy, also rose 0.3% on a monthly basis. YoY, the headline PPI sprang from 1.0% to 1.6%. Excluding food and energy, it climbed 2.0%, one tick above the median economist forecast The Import Price Index (IPI) progressed 0.3% in February, in line with consensus expectations. The headline print was positively affected by a 1.7% jump in the price of petroleum imports. Excluding this category, import prices advanced 0.2%. On a 12-month basis, the headline IPI contracted 0.8%, up from the -1.3% annual decline registered in January. The less volatile ex-petroleum gauge moved from -1.3% to -0.8% Industrial production edged up 0.1% in February instead of remaining unchanged as per consensus. The prior month’s result, however, was revised down from -0.1% to -0.5%. Manufacturing output rose 0.8% following a 1.1% decline in January. This increase was due in part to a 2.4% jump in wood products and to a 1.8% increase in the motor vehicles/parts segment. Excluding autos, manufacturing production still progressed 0.8%, a first decline in four months. Utilities output dipped 7.5% following the 7.4% surge in January when the cold temperatures boosted electricity demand. Finally, production in the mining sector jumped 2.2%, also a normalization from January when adverse weather conditions took a toll on oil and gas extraction Capacity utilization in the industrial sector remained unchanged at 78.3% in the month. In the manufacturing sector, it rose from 76.4% to 77.0%. Despite the monthly gain, this is below the pre-pandemic level for this indicator and certainly does not point to an imminent increase in investment in machinery and equipment The Empire State Manufacturing Index of general business conditions fell from -2.4 in February to -20.9 in March. This was significantly below the median economist forecast (-7.0) and consistent with a deterioration in factory activity in New York State and surrounding areas. The shipments sub-index (from 2.8 to -6.9) moved back into contraction territory (<0), while the new orders tracker (from -6.3 to -17.2) flagged a more severe contraction. Employment consequently registered a sharper contraction than in February (from -0.2 to -7.1). Supply chain pressures continued to ease, as measured by the delivery times sub-index (from -3.2 to -1.0), which remained below the 0-mark separating expansion from contraction. The input price index continued to expand, albeit at a slower pace than in the prior month (from 33.0 to 28.7). The output price tracker (from 17.0 to 17.8), meanwhile, expanded faster in March. Finally, business expectations for the next six months (from 21.5 to 21.6) continued to improve but remained below their long-term average (36.0) The University of Michigan Consumer Sentiment index edged down from 76.9 in February to 76.5 in March. The deterioration of sentiment in November was due to a worse assessment of longer-term perspectives (from 75.2 to 74.6) as current conditions were stable (at 79.4). Twelve-month inflation expectations were stable at 3.0%, while 5/10-year expectations were also stable at 2.9%. The sub-index tracking whether consumers consider now to be a good time to buy a home rose from 46.0 to 50.0, a decent re-bound from the all-time lows reached only a few months prior. This is consistent with the slight improvement in mortgage rates but has yet to be confirmed by mortgage applications which re-main very low The key takeaway from this week’s releases is that while the labor market is normalizing as indicated by responses from the small business sector, consumers still have spending power and inflationary pressures have not fully abated. The combination suggests that the Fed is likely to remain cautious with respect to rate cuts, erring on the side of leaving rates higher for longer rather than take the risk of re-igniting price pressures by cutting prematurely This year, the first day of spring in the Northern Hemisphere will occur this Tuesday, coincidentally the first day of the FOMC meeting. Policymakers no doubt can identify with the difficulty of finding balance. In fact, during his semiannual policy report to Congress last week, Fed Chair Powell spoke specifically to that point saying: “As labor market tightness has eased and progress on inflation has continued, the risks to achieving our employment and inflation goals have been moving into better balance.” Stocks were mostly lower for the week, as investors weighed upside surprises in inflation data and signs of moderating consumer spending. The Dow Jones Industrial Average held up best among the major indexes and reached a record high on Wednesday before falling back to end the week. Energy shares outperformed on the back of higher oil prices, while technology shares lagged due to weakness in NVIDIA and other chipmakers In terms of data release, housing starts is out on Tuesday. Total housing starts fell nearly 15% in January as wide swaths of the nation experienced adverse weather conditions that hindered residential construction activity. Weakness was seen in both single and multifamily. Single-family permits were up 1.6% in January and are now nearly 36% higher than the January 2023 trough. The improvement reflects home builders becoming more confident in future sales due to their ability to boost demand through price discounts, mortgage rate buy-downs and other sales incentives. The multifamily pipeline remains robust, supported by projects started in 2022 before the Fed’s rate hike campaign began to take full effect. More recently, however, multifamily construction has pulled back in response to the elevated rate environment and rising apartment vacancy rates. The pullback is evident by the downdraft in multifamily starts and permits over the course of 2023, heralding a moderation in incoming supply down the road Existing Home Sales is out on Thursday. Existing home sales started 2024 on a positive note and improved 3.1% to a 4.0 million-unit annualized pace in January, a moderate rebound from December’s cycle low and the fastest pace since last August. Unlike new home sales, which are measured at the time of the contract signing, existing home sales are measured at the time of the closing and thus may not reflect the current mortgage rate environment. There has been a substantial improvement in mortgage rates over the past few months with the average 30-year fixed mortgage rate standing at 6.7% as of this week, down from nearly 7.8% last October. That said, the forward-looking pending home sales index unexpectedly fell 4.9% in January and points to modestly lower existing home sales activity in February. UK Labour market statistics have been published this morning. Nominal pay awards have come in slightly under market expectations: annual growth in pay from the period November 2023 – January 2024 registered at 6.1% without bonuses (exp: 6.2%) and 5.6% with bonuses (exp: 5.5%). This means that real pay growth continues to be positive (1.8% exc. bonuses & 1.4% inc. bonuses). Private and public sector pay growth are now registering at roughly the same levels. Note that these figures from the ONS are not affected by the current problems with the Labour Force Survey. The timelier PAYE data shows median nominal pay awards of 5.5% in February, although this is a provisional figure and subject to significant revision. Nonetheless, these figures are beginning to broadly align with expected wage growth for the year ahead: for example, the latest DMB survey suggests expected pay growth of 5.2%. The unemployment rate is largely unchanged on the latest quarter, but these figures must be treated with extreme caution given the current problems associated with the Labour Force Survey. The ONS advises “increased caution when interpreting short-term changes in series and recommend using them as part of a suite of labour market indicators”. This will no doubt be making the life of MPC members more difficult as one of the key metrics they are examining is labour market tightness UK GDP on a monthly basis grew by 0.2% MoM, -0.3% YoY in Jan, Quarterly data put the UK into a very mild recession in the latter half of 2023, but monthly data (which is calculated separately from the quarterly) has been showing a choppier picture, with negative growth in five of the last ten months, two months of flat and only three months of positive out-turns. Services output grew by 0.2% in January 2024 and was the largest contributor to the rise in GDP, but in the three months to January 2024, services output showed no growth. The biggest driver of services was an improvement in retail sales, but with preliminary (non-Government) data for February already showing a retail slowdown, this is not expected to continue. despite the reduction in National Insurance taxation coming into force in January, the picture is not one of any sort of rapid or robust recovery Bank of England (BoE) Governor Andrew Bailey said at a Bank of Italy symposium that the UK was “near or at full employment.” He asserted that the UK was experiencing an “unusual” pattern of disinflation with full employment and stated that his concerns about a potential wage-inflation spiral had diminished. EU Bloomberg reported that, in an interview Wednesday, Latvian central banker Martins Kazaks suggested that rate cuts were coming soon and stated that “the dragon of inflation is pinned to the ground; a little more and it will be defeated.” Francois Villeroy de Galhau, Robert Holzmann, and Pierre Wunsch were among the ECB policymakers who argued during the week that an interest rate cut may be needed by June. The ECB has clearly signaled its preference to cut interest rates in June. He sees the potential for the central bank to reduce borrowing costs at every subsequent meeting this year. There are risks that service inflation may pick up, but he believes policymakers will focus on slowing wage growth In local currency terms, the pan-European STOXX Europe 600 Index added 0.31%, notching an eighth consecutive weekly gain. Encouraging corporate earnings and growing hopes that the European Central Bank (ECB) would lower borrowing costs in June stoked the advance. France’s CAC 40 Index rose 1.70%, Italy’s FTSE MIB gained 1.61%, and Germany’s DAX added 0.69%. CHINA The consumer price index rose an above-consensus 0.7% in February from the prior-year period, reversing January’s 0.8% decline and marking the first positive reading since August 2023 as food and services prices increased and consumption surged during the weeklong Lunar New Year holiday. However, the producer price index fell a bigger-than-expected 2.7% from a year ago, accelerating from January’s 2.5% drop and marking the 17th monthly decline, the longest streak of declines since 2016, according to Bloomberg. Investors remained cautious on calling a trough to deflation as China grapples with weak domestic demand The People’s Bank of China injected RMB 387 billion into the banking system via its medium-term lending facility and left the lending rate unchanged at 2.5%, as expected. With RMB 481 billion in loans set to expire this month, the operation resulted in a net withdrawal of RMB 94 billion from the banking system, the first cash extraction through the liquidity instrument since November 2022 The State Council pledged to increase spending by at least 25% by 2027 from last year to encourage consumers and businesses to replace old equipment and goods. The plan aims to benefit sectors such as industry, agriculture, transport, education, and health care and is seen as a crucial step for Beijing to meet its 2023 economic growth target of 5%, which it unveiled at the National People’s Congress in early March China’s new home prices fell 0.3% in February for the eighth straight month, according to the statistics bureau. The data showed no sign of turnaround in China’s property crisis despite Beijing’s attempts to shore up demand. Earlier in the week, Moody’s lowered the credit rating for China Vanke, one of the country’s biggest developers, to junk from investment-grade and said that all of Vanke’s ratings are on review for downgrade. The downgrade by Moody’s for Vanke, a state-backed company, will likely further undermine confidence in China’s property sector Chinese stocks rose as the government’s recent market stabilization measures boosted investor confidence despite a weak economic outlook. The Shanghai Composite Index gained 0.28%, while the blue-chip CSI 300 added 0.71%. In Hong Kong, the benchmark Hang Seng Index rallied 2.25%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, TD Economics, National Bank of Canada, Marina Cassar Derjavets. |
