Economic Outlook – 19 May 2024

The Consumer Price Index rose 0.3% in April, one tick short of the median economist forecast calling for a +0.4% print. This followed a 0.4% gain the prior month. Prices in the energy segment were up 1.1% as gains for gasoline (+2.8%) and fuel oil (+0.9%) were only partially offset by a 2.9% drop in the utility gas services category. The cost of food was unchanged month on month.  The core CPI, which excludes food and energy, rose 0.3%, in line with consensus expectations. The price of core goods dipped 0.1% on declines for new vehicles (-0.4%) and used ones (-1.4%), which were compensated for in part by higher prices for apparel (+1.2%), medical care commodities (+0.4%), and alcoholic beverages (+0.1%). Prices in the ex-energy services segment, for their part, advanced 0.4% on increases for shelter (+0.4%), medical care services (+0.4%), and transportation services (+0.9%), this last category driven by a 1.8% increase for motor vehicle insurance. Airline fares retraced 0.8%. YoY, headline inflation came in at 3.4%, down from 3.5% the prior month and in line with consensus expectations. The 12-month core measure, meanwhile, eased from 3.8% to a three-year low of 3.6%. This, too, was in line with consensus expectations. The core goods segment registered the tenth decline in 11 months, but this was more than offset by resilient price pressures in the core services grouping. Prices in the shelter category rose at the slowest pace in six months, but this was more or less expected given the weakness in home prices/rents observed last year and the fact that price movements in the housing sector are reflected in the CPI with a considerable lag   The Producer Price Index for final demand climbed 0.5% m/m in April, two ticks more than the +0.3% print anticipated by economists. The upside surprise was compensated for in part by a downward revision to the prior month’s result, from +0.2% to -0.1%. Goods prices rose 0.4% in April, as a 2.0% gain in the energy segment was only partially offset by a 0.7% decline in food prices. The services index, for its part, jumped 0.6%, the most in nine months. The core PPI, which excludes food and energy, advanced at the fastest clip in nine months as well, progressing 0.5% on a monthly basis. YoY, the headline PPI went from 1.8% to a one-year high of 2.2%. Excluding food and energy, it jumped from 2.1% to 2.4%, one tick above the median economist forecast   The Import Price Index (IPI) shot up 0.9% in April, three times as much as the median economist forecast calling for a +0.3% print. Adding to the upside surprise, the prior month’s result was revised from +0.4% to +0.6%. The headline print was positively affected by a 2.9% jump in the price of petroleum imports. Excluding this category, import prices still advanced 0.7%, the most in 16 months. On a 12-month basis, the headline IPI sprang from 0.4% to a 16-month high of 1.1%. The less volatile ex-petroleum gauge moved from -0.2% to 0.7%, its highest mark since 2023M01   Retail sales were flat in April instead of expanding 0.4% as per consensus. Adding to the disappointment, the prior month’s result was revised down from +0.7% to +0.6%. Sales of motor vehicles and parts contributed negatively to the headline print in April, as they contracted 0.8%. Without autos, outlays inched up 0.2%, as gains for gasoline stations (+3.1%), clothing (+1.6%) and electronics (+1.5%) were almost completely offset by declines for non-store retailers (-1.2%), sporting goods (-0.9%), and health/personal care (-0.6%). Sales in the month were up in 6 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, decreased 0.3%, instead of gaining 0.1% as per the median economist forecast   After sinking to a post-pandemic low of 1,287K in March (seasonally adjusted and annualized), housing starts recovered somewhat in April, rebounding 5.7% to 1,360K, but came in far below the 1,421K result expected by consensus. The monthly improvement stemmed entirely from a 30.6% gain in the multi-family segment (to 329K). Ground breaking in the single-family segment, meanwhile, slid 0.4% to 1,031K. Despite the increase in starts in April, the total number of homes currently under construction continued to decrease, slipping from 1,620K to a two-year low of 1,611K   Industrial production held steady in April instead of rising 0.1% as per consensus. Compounding this miss was a sizeable downward revision to the prior month’s result, from +0.4% to +0.1%. Manufacturing output fell 0.3% on a 2.0% decline in the motor vehicles/parts segment. Excluding autos, factory output decreased a more subdued 0.1%. Among the main subcategories, petroleum/coal products (-4.4%), electrical equipment (-1.9%), and wood products (-1.6%) were the biggest losers, while primary metals (+1.0%), aerospace products (+0.9%), and food/beverages (+0.9%) registered healthy gains. Utilities output expanded 2.8%, but this was partially offset by a 0.6% contraction in the mining segment   The NFIB Small Business Optimism Index rose for the first time this year in April, climbing from an 11-year low of 88.5 to a still-depressed 89.7. The net percentage of firms that expected the economic situation to improve moved down from -36% to -37%. Net sales expectations, on the other hand, rose from -18% to -12%, which may explain why hiring intentions moved up from 11% to 12%. Consistent with this slight improvement in outlook, the percentage of polled businesses that planned to make capital outlays in the next three months increased from 20% to 22%, a level still far below the long-term average for this indicator (≈29%). Perhaps this weak propensity to invest has to do with the fact that a net 9% 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 cooled from -14.3 in April to -15.6 in May, a level consistent with a sharp deterioration in factory activity in New York State and surrounding areas. The shipments sub-index improved (from -14.4 to -1.2) but remained below the zero-mark separating expansion from contraction for a third month running. Meanwhile, new orders continued to drop sharply (from -16.2 to -16.5). Consistent with lackluster demand, order books dwindled (from -10.1 to -8.1) and payrolls shrank (from -5.1 to -6.4) for a seventh consecutive month. Supply chain pressures continued to ease as evidenced by a further decline in the delivery times tracker (from -7.9 to -9.1). The input price index, for its part, moved back below its long-term average (≈30), slipping from 33.7 to 28.3. Completing a rather bleak report, business expectations for the next six months sagged to their lowest level in five months (from 16.7 to 14.5).   The Philly Fed Manufacturing Business Outlook Index declined as well, moving from 15.5 in April to 4.5 in May, but remained consistent with a modest expansion in factory activity. Both the shipments sub-index (from 19.1 to -1.2) and the new orders sub-index (from 12.2 to -7.9) moved back into contraction territory, while the employment gauge (from -10.7 to -7.9) signalled a seventh consecutive contraction in payrolls. Like the Empire survey, the Philly report signalled an easing of input price inflation, with the associated gauge sliding from 23.0 to 18.7. Finally, the index tracking future business activity slipped below its long-term moving average, moving from 34.3 to 32.4. The Conference Board’s index of leading economic indicators (LEI) fell 0.6 point in April to 101.8. Five of the ten underlying economic indicators contributed to the decline, led by average consumer expectations (-0.16 percentage points), ISM new orders (-0.14 pp) and interest rate spread (-0.10 pp). Historical analysis shows that an annualized drop of 3.5% in the LEI index over six months, coupled with a six-month diffusion index below 50%, is generally symptomatic of a pending recession. Both of these conditions were met in March: The LEI index fell 3.8% annualized over six months and the six-month diffusion index stood at 40%   The Fed had much to digest this week as they ponder their next policy move. While the break in inflation’s heat streak is a welcome development, it’s still too early to breathe a sigh of relief. As is stands, markets expect any rate cut to materialize closer to the end of the year. The Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite climbed to record highs during the week, with the Dow crossing the 40,000 thresholds for the first time. As inflation and interest rate worries appeared to dissipate, growth stocks outperformed, perhaps due in part to the lower implied discount placed on future earnings   In terms of data release, existing home sales is out on Wednesday. Conditions are slowly improving in the resale market. Existing home sales slipped 4.3% in March after two solid months of gains, corresponding to a pickup in mortgage rates in the last half of February. But resales have now moved higher in three of the past five months, bringing the sales pace in March 8.8% above last year’s low. The supply picture has also brightened a bit. Inventories in March had expanded 14.4% from the year prior. Although the housing market remains far from a full recovery, growing supply and moderating home price appreciation appear to be bringing buyers back from the sidelines. Durable goods order is out on Friday. High financing costs and monetary policy uncertainty continue to foster an unfavourable environment for new capital investment. Durable goods orders ticked up 0.9% in March after accounting for the latest benchmark revisions made by the Department of Commerce. As has been the case in recent months, aircraft orders continue to play an outsized role. Durable goods orders excluding transportation were essentially unchanged over the month, making March the latest in a long string of modest prints.

GDP figures for Q1 have come though, showing the economy expanded by 0.6% QoQ, 0.2% YoY. While these figures were better than expected, they are quite far below what used to be considered “trend”, but critically they do mean the UK is no longer in recession. In expenditure terms, there were increases in the volume of net trade, household spending and government spending, partially offset by falls in investment. Real household expenditure in Q1 grew by 0.2%, following declines in the previous two quarters. There were contributions to the growth from housing, utilities, recreation, restaurants, and household goods and services. The broad basing of this growth points to an ongoing revival of consumer confidence and suggests that this trend can be expected to run for several quarters   UK earnings data has been published and annual pay awards for the period January to March, according to the ONS measure, have registered at levels slightly above market expectations. Annual earnings growth including bonuses were 5.7% and 6% excluding bonuses. More timely PAYE data for April shows annual median pay awards slightly higher at 6.9%. Turning back to the ONS figures, public sector earnings growth (6.3%) is currently slightly higher than that in the private sector (5.9%), and the sectors seeing the highest level of pay growth are the manufacturing and the finance and business services industries.

Eurozone industrial production rose for a second month running in March, increasing 0.6% sequentially. However, the stronger-than-expected reading was driven by a jump in Ireland’s output, a data point that historically has been quite volatile.  ECB policymakers Francois Villeroy de Galhau, Madis Muller, and Martins Kazaks indicated that a rate cut is likely in June but that the path thereafter is uncertain. Executive Board member Isabel Schnabel told the Nikkei newspaper that the current data did not justify another reduction in July, in part because the disinflation process appears to have slowed significantly. Belgian central bank Governor Pierre Wunsch told the Handelsblatt newspaper “the first half a percentage point of interest rate cuts is close to a no brainer” but slower policy easing by the Federal Reserve could delay further moves. He stressed that he was not backing a second rate cut in July   In local currency terms, the pan-European STOXX Europe 600 Index rose 0.42% but slipped from the record high hit during the week. Cautious comments from European Central Bank (ECB) members appeared to cool optimism about the extent to which monetary policy might ease this year. Major stock indexes were mixed. Germany’s DAX fell 0.36%, while France’s CAC 40 Index declined 0.63%. Italy’s FTSE MIB advanced 2.14%.

Industrial production rose an above-forecast 6.7% in April from a year earlier, accelerating from March’s 4.5% increase. However, fixed-asset investment and retail sales both increased less than expected, underscoring anemic domestic demand. The urban unemployment rate fell to 5.0% from 5.2% in March   Inflation data showed that deflationary pressure continued to weigh on China’s economy. China’s consumer price index rose 0.3% in April from a year ago, accelerating from March’s 0.1% increase and marking the third consecutive positive reading. However, the producer price index fell 2.5% from a year ago compared with a 2.8% drop in March.  The People’s Bank of China (PBOC) lowered the minimum down payment ratio by 5% to 15% for first-time buyers and to 25% for second home purchases in an attempt to ignite demand. The PBOC also said that it would scrap the nationwide floor level of mortgage rates and allow cities to make their own decisions on what mortgage rates to charge. Under a so-called re-lending program, the central bank said it would extend RMB 300 billion in low-cost funds to a select group of state-owned banks to lend to local state-owned entities for the purchase of unsold homes.   The unprecedented support package came as data showed no sign of turnaround in China’s yearslong housing crisis. New home prices in China fell by 0.6% month on month in April, according to the statistics bureau, marking the 10th straight monthly decline and the steepest drop since November 2014. Real estate investment fell a higher-than-expected 9.8% in the January-to-April period from a year earlier, following a 9.5% drop in the first quarter.  Chinese equities were little changed after the central government unveiled on Friday a historic rescue package to stabilize the country’s ailing property sector. The Shanghai Composite Index was broadly flat, while the blue-chip CSI 300 added 0.32%. In Hong Kong, the benchmark Hang Seng Index gained 3.11%, according to FactSet.                 
Sources: T. Rowe Price, Wells Fargo, Handelsbanken Capital Markets, TD Economics, National Bank of Canada, M. Cassar Derjavets.