| USA Nominal personal income increased 0.3% in May, a bit more than the median economist forecast calling for a 0.2% gain. Amid a labour market that remains healthy, the wage/salary component of income progressed 0.3%, while income derived from government transfers advanced 0.3%. Personal current taxes, for their part, rose 0.2%. All this translated into a 0.4% gain for disposable income Nominal personal spending, for its part, grew 0.1% in the month, a tick less than consensus expectations. Adding to the disappointment, the prior month’s result was revised downward, from 0.8% to 0.6%. Outlays on services rose 0.4% but this gain was almost completely offset by a 0.5% drop in the goods segment. As disposable income advanced at a faster pace than spending, the savings rate rose from 4.3% to 4.6%. This remains significantly below the levels observed before the pandemic (between 8.5% and 9.0%) Disposable income expanded 0.3%, whereas spending stayed unchanged. Once again, an increase in services spending (0.2%) was offset by lower spending in the goods category (-0.4%). Within services, the largest contributors to the increase were “other” services (led by international travel) and transportation (led by public transportation). Good outlays, meanwhile, suffered from a contraction in the motor vehicles/parts category. The headline PCE deflator came in at a 25-month low of 3.8% YoY, down from 4.3% the prior month and in line with consensus expectations. The core PCE measure, for its part, eased from 4.7% to 4.6%, one tick lower than the median economist forecast. On a monthly basis, the headline index crept up 0.1%, while the index excluding food and energy progressed 0.3%. While still healthy, this gain was nonetheless the weakest observed in 6 months. The all-important core services excluding housing segment, for its part, advanced just 0.23% MoM and 3.8% on a 3-month annualized basis (down from 4.4% the prior month and the lowest print registered since September last year). Although this suggests underlying inflationary pressures may be weakening, the Fed is unlikely to declare victory on the inflation front on the basis of a single month’s report. It is instead likely to wait for a clear and lasting downtrend to take hold, which could take a few more months. The central bank will also be attentive to any signs of a slowdown in the job market, without which a return to the inflation target will not be possible The third estimate of Q1 GDP growth came in at +2.0% in annualized terms, overshooting both the second estimate (+1.3%) and the median economist forecast (+1.4%). Household consumption was revised up (from +3.8% q/q annualized to +4.2%) exclusively on higher services spending (from +2.5% to +3.2%), while goods spending was revised down (from +6.3% to +6.0%). Trade, too, was revised up significantly after exports were revised up (from +5.2% to +7.8%) while imports were revised down (from +4.0% to +2.0%). Business investment in equipment (from -7.0% to -8.9%) and in intellectual property (from +5.2% to +3.1%) was downgraded, while spending on structures (from +11.0% to +15.8%) was revised up. Residential investment (from -5.4% to -4.0%) was revised up as well. Final sales to domestic purchasers (i.e., household spending plus gross business investment), a good gauge of the underlying strength of an economy, grew 3.5% annualized in the quarter (two ticks more than reported in the previous release). Meanwhile, the contribution from inventories was revised down a touch. On the inflation front, the 12-month change in the Personal Consumption Expenditures Price Index excluding food and energy was revised down a tick to 4.9% Durable goods orders blew past consensus expectations in May, springing 1.7% MoM. Orders in the transportation category grew 3.9% on a 32.5% jump in civilian aircraft and a 2.2% advance in motor vehicles and parts. Excluding transportation, orders swelled a much more subdued 0.6%, offsetting the prior month’s decline. The report showed, also, that shipments of non-defence capital goods excluding aircraft, a proxy for future capital spending, increased 0.2% MoM after rising 0.4% in April. This bodes well for a rebound in machinery and equipment investment in the second quarter of the year The Conference Board Consumer Confidence Index climbed from 102.5 in May to a seventeen-month high of 109.7 in June. This was better than the median economist forecast, which had the index ascending to only 104.0. The improvement reflected both more optimistic longer-term expectations and a better assessment of the current situation. The sub-index tracking sentiment towards the next six months surged from 71.5 to 79.3, which remains well below this indicator’s historical average. A larger proportion of respondents had a positive outlook on business conditions (from 13.2% to 14.2%) and employment (from 13.8% to 15.5%). However, less people expected income to increase (from 18.9% to 16.9%). Also, less people were planning to buy a home (from 5.9% to 5.5%), an automobile (from 11.5% to 10.5%), or a major appliance (from 48.3% to 46.8%) Sales of new homes jumped 12.2% in May to a fifteen-month high of 763K (seasonally adjusted and annualized), overshooting by far the 675K print expected by economists. This third consecutive monthly increase was accompanied by a dip in the number of homes available on the market (from 432K to 428K). With sales up and supply down slightly, the inventory-to-sales ratio continued to trend back toward its pre-pandemic level as it fell from 7.6 to 6.7. It is worth noting that a large share of the houses available on the market were either under construction or awaiting construction. Completed houses represented only 15.6% of the total inventory, one of the lowest proportions ever recorded and the third consecutive decline for this indicator. This statistic reflects not so much the current health of the market as its past strength. Faced with severe labour shortages, homebuilders were unable to meet the explosion in housing demand that occurred during the pandemic. As a result, construction backlogs swelled. The current context, which is less effervescent, should allow homebuilders to quickly make up for lost time. Despite the recent deceleration, the catch-up process seems well under way: Just a few months ago, completed builds accounted for only 7.7% of total unsold inventory The S&P CoreLogic Case-Shiller 20-City Home Price Index rose 0.9% in April, a second consecutive monthly increase following eight months of decline. Prices increased in all cities save Phoenix (-0.1%). Boston (+1.5%), New York (+1.3%) and Los Angeles (+1.1%) registered the strongest gains. Year on year, however, prices were down 1.7% at the national level. Could this be the beginning of a trend reversal for house prices? It is possible. Though demand remains relatively weak on the real estate market, very tight supply, combined with a strong labour market, is likely to push prices upward in the coming months. That said, only modest gains between now and the end of the year are likely, as purchasing power continues to suffer from elevated borrowing costs While Jay Powell was fairly upbeat on the outlook for the US economy, he was somewhat hawkish on rates, reiterating that the Federal Open Market Committee is likely to tighten twice more this year and said he would not rule out hikes at back-to-back meetings. He warned that the longer inflation remains high, the greater the risk that it could become entrenched. Powell said the Fed has not seen sufficient progress in curbing inflation in non-housing services. ECB President Christine Lagarde said that a hike in July is likely but that after that decisions will be made from meeting to meeting. Bank of England Governor Andrew Bailey cautioned that peak rates in the United Kingdom will not be short-lived in a world of persistent inflation A report from the inspector general of the US Small Business Administration found that more than $200 billion in pandemic-era aid to small businesses was fraudulently obtained. Upwards of 17% of the support for small business, including Paycheck Protection Program loans, was squandered, the report said Large banks in the United States passed the Fed’s annual stress test. The results show that the banking system remains strong and resilient, Fed Vice Chair for Supervision Michael Barr said in a statement. The results will allow a number of large banks to increase their dividends Positive growth and inflation surprises helped the major benchmarks round out a solid quarter on a high note, with the S&P 500 Index recording its best weekly gain since the end of March. The rally also broadened, with small-caps and value shares outperforming, and the equal-weighted S&P 500 Index handily outpacing its market-weighted counterpart. The technology-heavy Nasdaq Composite remained well ahead of the other benchmarks for the year-to-date, however, ending the week with a six-month gain of nearly 32%, its best start to the year since 1983. Notably, Apple closed trading Friday with a market capitalization above USD 3 trillion, marking a first for a publicly traded company. The Wall Street Journal reported that Apple’s valuation has surpassed that of five of the S&P 500’s 11 sectors in their entirety (materials, real estate, utilities, energy, and consumer staples) In terms of data release, the construction spending print is on Monday. The housing market has found a second wind, and it is expected to show in the latest construction data for May. In April, nonresidential categories led the way on a big 1.2% month-over-month increase in construction spending, translating to a 7.2% annual increase. Even as private single-family spending fell for the 12th month in a row, both multifamily and home improvement spending grew. The overall residential category rose for the first time since February 2023, when accounting for prior months’ revisions. In nonresidential categories, manufacturing drove much of the increase, rising 8.7% over the month. Construction spending on manufacturing and computer, electronic & electrical parts facilities continues to vastly outpace the annualized rates of spending occurred prior to COVID The ISM Manufacturing & Services indexes are out on Monday and Thursday. The Institute for Supply Management’s purchasing manager indices came in similar to past results in May, in line with consensus expectations for manufacturing, but with a slower pace of growth than expected for services. Where does that leave us? The manufacturing sector continues to be hammered by the high rate environment, leaving capital investment expensive and causing new demand to dry up. May was the ninth straight month of contraction for manufacturing new orders. Even with employment and current production in growth territory, new orders, supplier deliveries and order backlogs fell precipitously, which is consistent with recession. The services sector continues to expand, but growth signs are somewhat fading. Broad declines in hiring contradicted the May jobs report. Supply chains continue to normalize as seen with inventories expanding and order backlog subsiding. But notably, expansionary new orders continue to signal solid demand for services. UK Mortgage approvals for May registered at 50,500 (consensus: 49,700), up marginally from April’s reading of 49,000 but sitting considerably below average levels in the mid to late 2010s. House prices are down by around 4% in nominal terms from their August 2022 peak, according to the Nationwide index, but prices have plateaued since March this year. Lackluster mortgage approvals, which are likely to face further pressure in light of rising interest rate expectations, along with fundamentals in the housing sector would suggest that residential house prices have some way further to fall this year The average cost of new borrowing from banks by UK non-financial businesses increased sharply by 33 basis points to an effective rate of 6.32% in May. This compares to a lower effective interest rate on newly drawn mortgages that stood at 4.56% in May. Corporations continue to predominantly opt for floating rate loans, while households are typically continuing to take out fixed-rate mortgages. While 5-10-year fixed-rate mortgages became increasingly popular from 2017 onwards, it is not clear yet whether households will continue to opt for longer-term fixed mortgages. Prior to the rising interest rate environment, most corporate loans were floating rate, meaning that the higher interest rate environment hits the business community faster than households Bank of England (BoE) Governor Andrew Bailey said at the ECB’s annual Forum on Central Banking that UK interest rates are likely to stay higher for longer than financial markets expect. Derivative instruments indicate borrowing costs could rise from 5% now to 6.5% by the end of the year, before falling in late spring of 2024. “I’ve always been interested that markets think that the peak will be short-lived, in a world where we’re dealing with more persistent inflation.” Bailey said BoE rate decisions would be “evidence driven” and that the central bank was looking at both the peak level of rates and “how long (the peak) sustains beyond that”. EU Eurozone inflation in June was marginally below expectations at 5.5 percent YoY, compared to 6.1 percent the month before. Food, alcohol & tobacco is expected to have the highest annual rate in June (11.7 percent, compared with 12.5 percent in May), followed by non-energy industrial goods (5.5 percent, compared with 5.8 percent), services (5.4 percent, compared with 5.0 percent) and energy (-5.6 percent, compared with -1.8 percent). Core inflation was also marginally below expectations at 5.4 percent compared to 5.3 percent the month before. Due to higher services inflation core inflation went up from May. The HICP releases in June (May) for major eurozone countries were as follows: France 5.3 percent (6.0), Germany 6.8 percent (6.3), Italy 6.7 percent (8.0) and Spain 1.6 percent (2.9) News reports from the ECB’s annual Forum on Central Banking suggested that policymakers are still likely to vote for another interest rate increase in July. ECB President Christine Lagarde acknowledged that the central bank had made “significant progress” in combating high inflation but asserted that policymakers “cannot declare victory yet.” According to Lagarde, uncertainty over how tight labor markets and large wage increases will influence price means “it is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached.” Even so, some Governing Council members, including Vice President Luis de Guindos, opined that another hike in September was less certain, with the decision depending on incoming economic data In local currency terms, the pan-European STOXX Europe 600 Index rallied 1.94% on hopes that China would do more to boost consumption and that lower-than-expected inflation data could mean that interest rates are near their peak. Major stock indexes also posted gains. France’s CAC 40 Index advanced 3.30%, Italy’s FTSE MIB climbed 3.75%, and Germany’s DAX increased 2.01. CHINA China’s official manufacturing Purchasing Managers’ Index (PMI) ticked up to 49.0 in June—in line with expectations and an improvement from the 48.8 registered in May. Nevertheless, PMI readings less than 50 indicate a contraction in activity. The nonmanufacturing PMI eased, slipping to a below-consensus 53.2 in June from 54.5 in May. These numbers suggested that the service and construction industries continued to grow, albeit at a slower pace Profits at China’s industrial firms fell 18.8% year over year in the first five months of 2023, according to the National Bureau of Statistics. This contraction was less than the 20.6% decline recorded this year through the end of April Premier Li Qiang, the country’s second-ranking official, asserted that China is on track to reach its annual growth target of about 5%. Speaking at the World Economic Forum’s annual meeting, Li pledged that Beijing would roll out more practical and effective measures to strengthen domestic demand, boost markets, and support the country’s development and growth Domestic consumption appeared to pick up during the three-day Dragon Boat Festival holiday but fell short of pre-pandemic levels. Overall travel rose 89.1% from the prior-year period but remained 22.8% below the same period in 2019, according to the Ministry of Transport Stocks ended mixed, as weak economic indicators offset optimism that the government might implement additional measures to bolster economic growth. The Shanghai Stock Exchange Index gained 0.13% in local currency terms, but the blue-chip CSI 300 lost 0.56%. In Hong Kong, the Hang Seng Index inched up 0.14%. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, M. Cassar Derjavets. |
