| USA The Consumer Price Index climbed 0.3% in January, topping the median economist forecast calling for a 0.2% increase. The index rose 0.2% the prior month. Prices in the energy segment fell 0.9% as gains for utility gas services (+2.0%) and electricity (+1.2%) were more than offset by steep declines for fuel oil (-4.5%) and gasoline (-3.3%). The cost of food, meanwhile, was up 0.4%. The core CPI, which excludes food and energy, also came in one tick above consensus expectations, rising 0.4% MoM, the most in a year. The cost of core goods fell for the eighth month running in January (-0.3%) on drops for used vehicles (-3.4%), medical care commodities (-0.6%), and apparel (-0.7%). Alternatively, prices were up for both alcoholic beverages (+0.3%) and to-bacco/smoking products (+0.3%). New vehicle prices stayed un-changed on a monthly basis. Prices in the ex-energy services segment, for their part, moved up 0.7% (the most in 16 months), supported by gains for motor vehicle insurance (+1.4%), airline tickets (+1.4%), motor vehicle maintenance (+0.8%), medical care services (+0.7%), and shelter (+0.6%). The core goods segment registered an eighth consecutive monthly decline and was tracking a 2.4% annualized drop over the past three months. This bout of weakness reflects a host of factors, including a rebalancing of consumer demand towards services, a loosening of supply chain constraints, and a drop in producer prices in China, which is helping to lower import prices The Producer Price Index for final demand advanced 0.3% MoM in January, two ticks more than the +0.1% results anticipated by economists. The upside surprise was compensated in part by a downward revision to the prior month’s results -0.1% to -0.2%. Goods prices cooled 0.2% in January on declines for both energy (-1.7%) and food (-0.3%). Prices in the services category, for their part, rose 0.6%, the most in 6 months. The core PPI, which excludes food and energy, also rose at the fastest clip in 6 months, rising 0.5% on a monthly basis. Year on year, the headline PPI eased from 1.0% to 0.9%. Excluding food and energy, it rose from 1.7% to 2.0%, four ticks above the median economist forecast The Import Price Index (IPI) progressed 0.8% in January instead of remaining flat as per consensus, but this surprise on the upside was almost entirely offset by a big downward revision to the prior month’s result% to from 0.0 to -0.7%. The headline print was positively affected by a 2.3% jump in the price of petroleum imports. Excluding this category, import prices advanced 0.6%. On a 12- month basis, the headline IPI strengthened from -2.4% to -1.3%. The less volatile ex-petroleum gauge moved from -1.6% to -1.4%. Retail sales fell 0.8% in January, much more than expected by consensus (-0.2%). Adding to the disappointment of prior month’s result was revised downward, from 0.6% to 0.4%. Sales of motor vehicle and parts contributed negatively to the headline print, as they contracted a whopping 1.7% (the steepest drop in 11 months). Without autos, outlays still cooled 0.6% as gains for furniture (+1.5%) and restaurant/bars (+0.7%) were more than offset by steep declines for building materials (-4.1%), miscellaneous items (-3.0%), gasoline stations (-1.7%), health/personal care items (-1.1%), and non-store retailers (-0.8%). Sales were down 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, shrank 0.4% instead of expanding 0.2% as per consensus. Retail sales came in below consensus expectations in January, marking the first miss in seven months for this indicator. However, the results were certainly influenced by several temporary factors, notably a drop in pump prices that weighed significantly on gasoline station receipts. The bad weather during the month probably also contributed to dampen consumer enthusiasm and explains at least in part the widespread drop in spending. It should also be noted that the contraction in sales is likely to look a little less impressive when expressed in real terms given the drop in goods prices in the month (-0.3% according to the CPI report released Tuesday). However, though all of these factors were known, this week’s data still disappointed consensus by a wide margin. Auto sales fell at their fastest pace in 11 months, while out-lays at non-store retailers (which are less dependent on fair weather conditions) contracted the most since 2022M11. The sales diffusion, too, was pretty bad, with only four retail categories seeing increases, the fewest in ten months. Not everything was bad in the report, though. The increase in spending at restaurants/bars suggests spending on services (which accounts for a bigger portion of GDP than spending on goods does) remained healthy during the month Industrial production edged down 0.1% in January instead of climbing 0.2% as per consensus. Manufacturing output fell for the first time in three months, sliding 0.5%. This decline was due in part to a 0.2% contraction in the motor vehicles/parts segment. Recall that this category experienced solid gains in November (+7.2%) and December (+3.2%) after auto workers returned to work from a strike. Excluding autos, manufacturing production shrank 0.6%, marking a fourth consecutive decline for this gauge and the steepest in 10 months. Where the main subcategories are concerned, petroleum/coal products (-3.7%), primary metals (-0.9%), and machinery (-0.7%) were the biggest losers, while electrical equipment (+1.5%) and computer electronics (+0.9%) registered healthy gains. Utilities output surged 6.0% as the cold temperatures in the month boosted electricity demand. Finally, production in the mining sector fell the most in nearly three years (-2.3%) as adverse weather conditions took a toll on oil and gas extraction (-2.9%) Capacity utilization in the industrial sector slipped from 78.7% to a 28-month low of 78.5%. In the manufacturing sector, it moved down from 77.1% to a 33-month low of 76.6%. 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 Housing starts dropped to 1,331K in January, which was significantly below consensus expectations (1,460K). The deterioration was due in large par to a 35.6% drop in the multi-family segment (to a post-pandemic low of 327K). Groundbreakings in the single-family segment (-4.7% to 1,004K) declined as well, albeit to a lesser extent. Building permits, for their part, fell 1.5% to 1,470K, pulled down by a 7.9% decline to a near 4-year low of 455K in the multi-family segment. Applications to build in the single-family category, meanwhile, increased 1.6% to a 20-month high of 1,015K The NFIB Small Business Optimism Index fell the most in 13 months in January, slipping 2.0 points to an eight-month low of 89.9. The net percentage of firms that expected the economic situation to improve moved from -36% to -38%. Net sales expectations, for their part, slumped from -4% to -16%, which might explain why hiring intentions moved down from 16% to a post-pandemic low of 14.0%. Consistent with this deterioration in outlook, only 23% of polled business planned to make capital outlays in the next three months, a percentage well below the long-term average for this indicator. Perhaps this also had to do with the fact that a net 8% of respondents expected credit conditions to deteriorate going forward. In fact, loans were already harder to access judging by the increase in interest paid on short-term loans reported by the NFIB over the past few months The Empire State Manufacturing Index of general business conditions rose from a post-pandemic low of -43.7 in January to -2.4 in February. Though this was significantly better than the median economist forecast (-12.5), the index remained consistent with a deterioration in factory activity in New York State and surrounding areas. The shipments sub-index (from -31.3 to 2.8) moved back into expansion territory (>0), while the new orders tracker (from -49.4 to -6.3) flagged a much less severe contraction. Employment (from -6.9 to -0.2), meanwhile, shrank for the fourth month running, albeit only marginally. Supply chain pressures continued to ease, as measured by the delivery times sub-index (from -8.4 to -3.2), which remained below the 0 mark separating expansion from contraction. Less encouragingly, the input price index (from 23.2 to 33.0) rose to a nine-month high, hinting at a worsening of price pressures. The output price tracker (from 9.5 to 17.0), too, moved up, albeit by a smaller measure. Finally, business expectations for the next six months (from 18.8 to 21.5) continued to improve but remained below their long-term average (36.0) The Philly Fed Manufacturing Business Outlook Index painted a slightly more upbeat picture of the situation prevailing in the manufacturing sector as it moved up from -10.6 in January to a six-month high of 5.2 in February. The sub-indices tracking shipments (from -6.2 to 10.7) and new orders (from -17.9 to -5.2) im-proved, but that did not prevent the sharpest contraction in employment (from -1.8 to -10.3) since the early days of the pan-demic. The report also signaled an intensification of input price inflation, with the associated gauge moving from 11.3 to 16.6 Overall, data for January largely came in below expectations. This has left many market participants wondering what it all means for the timing of rate cuts. FOMC members have repeatedly stated that they need to see steady evidence that inflation is on a consistent path back to 2%. While the CPI and PPI data suggest that progress may be slow going for a bit, the pullback in other indicators point to an economy that is cooling. As such, Fed members may soon have the evidence that they need to begin the cutting cycle – it may just be later than markets desire US regulators are “closely focused” on risks in commercial real estate loans and have stepped up downgrades of banks’ supervisory ratings and increased enforcement actions amid a continued downturn in the real estate sector, according to Fed Vice Chair for Supervision Michael Barr. On Thursday, the central bank issued guidelines for its annual stress tests that emphasize the risks inherent in commercial real estate Some favorable earnings surprises balanced against discouraging inflation data left the major benchmarks mixed, with the S&P 500 Index recording its first weekly decline since the start of the year. The declines were concentrated in large-cap growth stocks, however, with an equally weighted version of the S&P 500 reaching a record intraday high on Thursday. After suffering its biggest daily drop since June on Tuesday, the small-cap Russell 2000 Index rebounded to lead the gains for the week In terms of data release, the Leading Economic Indicator is out Tuesday. While many economists no longer look for recession in the near term, some time-honored recession indicators, such as the inverted yield curve and Leading Economic Index (LEI), are still blinking red. At the end of 2023, the LEI posted its 22nd consecutive decline and stood only three points higher than it did in April 2020. It is likely the index continued to fall in Januar. Stock prices marched higher over the month, consumer expectations jumped, the new orders component of the ISM manufacturing index broke into expansionary territory and initial jobless claims were essentially flat. Despite these positive developments, consumer sentiment and manufacturing new orders are rebounding from low levels, and the interest rate spread remains deeply inverted. Since these components are heavily weighted in the LEI, the monthly outturn is likely to be modestly negative. Should sentiment continue to strengthen in the coming months, the LEI may finally post an increase this year The for-sale home market has seen better days. Existing home sales moderated to a 3.78 million-unit annual pace in December—the slowest since 2010. Most of the contracts that closed in December were likely locked in at the above-7% rates that prevailed in late October and November. The average 30-year fixed mortgage rate has edged lower since then and was hovering around 6.6% in late December and throughout January, per Freddie Mac. The move appeared to support the 8% jump seen in both pending home sales and mortgage purchase applications in December. As these series tend to lead existing home sales by one to two months, their rebounds suggest resales perked up at the beginning of the year. UK Retail figures for January Sales by volume jumped by 3.4%, the largest rise since April 2021 and comfortably beating market expectations for an increase of just 1.5%. Sales in all subsectors except clothing stores increased over the month with food stores contributing the most to the increase. This strong retail sales print reverses December’s dire figures. December saw a major drop in sales due to a combination of consumers bringing forward purchases to take advantage of November Black Friday discounts as well as reported plans by consumers to spend less money due to cost of living pressures UK GDP for Q4 has come through at -0.3% QoQ and -0.2% YoY. Month on month GDP (which is calculated differently) has come through at -0.3%. The annual figure for 2023 GDP was thus 0.3%. There were falls in all three main sectors, -0.2% in services, -1.0% in production and -1.3% in construction. These are initial estimates and an upward revision is possible, but the conclusion has to be that the UK suffered a technical recession in the latter half of 2023. This is the slowest annual growth since the Global Financial Crisis of 2009 (excluding Covid-ravaged 2020). The downturn was headed by falls in motor vehicle trade (consumers avoiding big ticket purchases), Information and Communications, education (strikes), rises in such areas as Admin services not proving enough to change the overall downward direction. Looking to the array of other data, which has also been released. Business investment came out at 1.5% QoQ, 3.7% YoY, the Government’s incentivisation of investment potentially helping to boost the figures here. Industrial production was 0.6% MoM, 0.6% YoY and Construction was down -3.2% in December and a whopping 30.2% YoY. The trade picture is slowly improving, with the Goods Trade balance falling to -GBP 14.0bn (consensus GBP -14.9bn) and the non-EU balance falling to GBP 2.8bn, the overall balance of trade now standing at GBP -2.6bn, a figure which stood at over GBP 10bn at the start of 2022 UK YoY inflation in January stayed flat at 4%, slightly undershooting market expectations of 4.1%. Similarly, YoY core CPI came in 0.1pp below market expectations and held steady at the previous month’s print of 5.1%. Upward contributions to the monthly change in YoY CPI came from housing and household services, primarily higher gas and electricity charges, while the downward contributions typically came from furniture and household goods, and food and non-alcoholic beverages. BoE Governor Andrew Bailey sought to downplay the GDP data before the figures had been released, asserting that a recession would be “very shallow” and that more emphasis should be placed on recent indicators, which “have shown some signs of an upturn.” He later told a parliamentary committee that the inflation data were “good news,” with the caveat that services inflation was still too high and more clear evidence was required that wage growth was slowing. Wages, excluding bonuses, grew 6.2% in the three months through December, down from 6.7% in September to November, the slowest pace in over a year. EU The European Commission cut its forecast for eurozone economic growth in 2024 to 0.8% from the 1.2% predicted in November. This downward revision reflected inflation, which has eroded purchasing power, and higher interest rates, which curbed credit. The EC projected that economic growth would accelerate to 1.5% in 2025, slightly less than the previous estimate of 1.6%, it said. Separately, the second GDP estimate confirmed that the economy stagnated in the fourth quarter of last year, after shrinking 0.1% in the previous three months In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.39% higher as signs of cooling inflation and a better outlook for interest rate cuts cheered investors. Germany’s DAX gained 1.13%, and France’s CAC 40 Index advanced 1.58% on upbeat corporate earnings, hitting new highs during the week. Italy’s FTSE MIB climbed 1.85%. CHINA Financial markets in mainland China were closed, and no official indicators were released due to the weeklong Lunar New Year holiday, which began Saturday, February 10 Early data showed a pickup in consumer spending over the Lunar New Year, China’s most important holiday. More than 61 million rail trips were made in the first six days of the national holiday, a 61% increase over last year’s holiday, according to official media reported by Bloomberg. Travel by road and airplane also improved, while hotel sales on Chinese e-commerce platforms increased more than 60%, according to state media. However, analysts cautioned that the YoY consumption surge was less impressive considering that China was battling nationwide coronavirus outbreaks in early 2023 after Beijing rolled back pandemic restrictions in December 2022. Box office receipts in the first four days of the holiday declined from last year, according to Bloomberg using data from online movie ticket platform Maoyan Entertainment, suggesting that consumers may have reduced their spending per trip. Nevertheless, evidence of strong holiday spending will likely be welcome news for China’s government, which is grappling with deflation and a yearslong property sector crisis that has dampened consumer confidence. China’s stock markets resume trading on Monday 19 February 204. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, TD Economics, National Bank of Canada, M. Cassar Derjavets. |
