| USA Robust retail sales data were the main story on the U.S. economic data front this week. Retail sales handily exceeded expectations, rising 0.7% in March. Excluding autos, sales rose 1.1%, the biggest monthly pop in more than a year. The better-than-expected gain was further bolstered by sharp upward revisions to the data in February. Sizable jumps for non-store retailers (+2.7%), general merchandise (+1.1%) and building materials (+0.7%) lifted the headline gain. Sales at gasoline stations also rose 2.1%, but this can largely be attributed to the increase in gasoline prices that occurred during the month of March On Tuesday, the Federal Reserve Chairman and the Vice Chair at two separate events both signaled that the central bank may be changing its tune. While policymakers started the year anticipating that they would commence the rate cutting cycle soon, hotter-than-expected inflation has shifted that calculus. In a prepared remark, Vice Chair Jefferson noted that interest rates could remain at their current restrictive level for longer if inflation persisted. Later, Fed Chair Powell echoed that sentiment. He noted that excluding a sudden economic slowdown, interest rates would need to stay restrictive for longer. The Fed Chair’s new tone is essentially one of dialing back expectations as markets had aggressively priced in numerous cuts this year. Investors on average are now expecting one and two cuts Both housing starts and building permits retrenched in March. In another release, existing home sales fell 4.3% MoM in March – the largest decline in over a year. While the measure managed to post a gain for the first quarter as a whole, relative to the subdued levels in 2023 Q4, the prospect of higher for longer interest rates are likely to see these gains pared back in the future. In fact, this week, the average rate on a 30-year fixed rate mortgage climbed above 7% for the first time this year and is likely to weigh on housing activity going forward Industrial production rose 0.4% in March on the heels of an upward revision to output in February. The outturn marks a two-month streak of positive gains for the first time since early 2023. Manufacturing production, which accounts for the majority of industrial output, increased 0.5% in March and saw a decent upward revision to the prior month’s data. The factory sector is still far from booming, but the recent uptick in industrial production and the ISM manufacturing index signals some signs of life in the sector after treading water for most of the past year. Initial and continuing jobless claims were more or less unchanged in the latest week’s data and remain at low levels US President Joe Biden proposed new tariffs on China this week, in a move to increase production and employment in the steel sector within the US. If implemented, the United States will increase levies from 7.5% to 25% on certain Chinese steel and aluminum products. Following this announcement, China implemented a levy of 43.5% on US imports of propionic acid, a widely used chemical for animal feed (to prevent mold), pesticides, herbicides and drug development Stocks recorded their third consecutive week of broad losses, as concerns over tensions in the Middle East and the possibility of U.S. interest rates remaining “higher for longer” appeared to weigh on sentiment. Mega-cap technology shares lagged as rising rates placed a higher theoretical discount on future earnings. A first-quarter revenue miss from advanced chipmaker supplier ASML Holdings also seemed to weigh on the sector and on general optimism toward companies with artificial intelligence (AI)-related earnings. Small-caps continued to struggle, pushing the small-cap Russell 2000 Index further into negative territory for the year-to-date period In terms of data release, new home sales print is out on Tuesday. A dearth of existing home inventory, builder incentives and a resilient jobs market have helped to propel new home sales 5.9% higher over the past year. However, affordability continues to challenge the overall pace of sales and put downward pressure on prices. In February, new home sales dipped 0.3% as mortgage rates crept back up. The median price of a new home sold fell 7.6% over the past year to $400,500, leaving it just 3% higher than the median price of an existing home The GDP data is out on Thursday. The U.S. economy continued to power ahead at a brisk clip in the first quarter. GDP looks to have expanded at a 2.5% annualized rate, a downshift from the prior two quarters’ unsustainable strong prints but still above most estimates of the economy’s potential growth. Consumers once again seem to have been unfazed by elevated interest rates and inflation over the quarter. Hot retail sales spending in March and the largest jump in services spending in more than a year in February point to real personal consumption expenditures advancing at a 3.0% annualized pace during the quarter. A modest bounceback in equipment spending alongside steady growth in outlays for software and other intellectual property look set to push up business fixed investment by a similar degree. Meantime, residential investment is likely to post its strongest quarter of growth in three years amid a rebound in home sales and a climb in construction. UK UK Retail sales for March have come through at 0.0% MoM and -0.8% YoY, ex fuel the figures were -0.3% MoM -0.3% YoY. Looked at historically, these figures are nothing to get excited about and point to the economic recovery, such as it is, remaining firmly subdued. The only bright spot is that footfall levels do seem to have improved, so people are getting out and about, if not always opening their wallets as much as retailers might wish. Looking at the quarter, sales volumes increased by 1.9% in the three months to March 2024 when compared with the previous three months. This was following low sales volumes over the Christmas period for retailers. With inflation falling, there is hope that volume growth will start to match value, so this data gives some hope that the impact of inflation is fading. Department stores saw the biggest falls in sales, while fuel, followed by Household goods, saw positive growth. The cost-of-living crisis, which has dominated consumer confidence and spending over the past few years is set to ease over the course of 2024, with falling debt-servicing costs, falling inflation, at least some taxes falling (even if the overall tax burden continues to rise) and earnings firmly in positive territory. All in all, this should be providing a firm floor for modest rises to overall spending as the year progresses UK Inflation for March has come out at 0.6% MoM, 3.2% YoY. Core inflation (Excl. food and energy) for March was 0.6% MoM, 4.2% YoY. CPIH rose by 0.6% MoM, 3.8% YoY. The repricing of energy through the energy price cap is due to give one more drop down in inflation, but that will come through in April’s figures, due out 22 May. The largest downward contribution to the monthly change in both CPIH and CPI annual rates came from food, with prices rising by less than a year ago, while the largest, partially offsetting, upward contribution came from motor fuels, with prices now rising compared to falls which were being experienced a year ago. There were downward contributions from five divisions, most notably food and non-alcoholic beverages, offset by upward contributions from three divisions, particularly housing and household services. The latter of course have larger wage elements (in particular in areas with lower paid / lower skill workers, where the significant rise in the National Living Wage is having an impact) and point to a degree of inflationary stickiness in services inflation Higher oil prices and the somewhat sticky inflation data prompted financial markets to push out expectations for a first cut in UK interest rates from June to sometime in the fall. In contrast, BoE Governor David Bailey sounded more upbeat. “In the UK, we’re disinflation at what I call full employment,” he said at the International Monetary Fund’s (IMF) annual meeting. “I see, you know, strong evidence now that that process is working its way through.” EU A slew of European Central Bank (ECB) policymakers at the IMF meeting reiterated that June was the likely target date for lowering borrowing costs, barring unexpected economic shocks. ECB President Christine Lagarde declined to say whether there might be more than one reduction in rates. In an interview with CNBC, she argued that policy should still depend on incoming economic data, given high levels of uncertainty. She added that the ECB would monitor oil prices “very closely” amid worries about conflict in the Middle East. In an interview with Bloomberg, Governing Council member Martins Kazaks also highlighted the uncertainty but added that the three to four rate cuts this year priced in by markets were in line with the bank’s economic outlook In local currency terms, the pan-European STOXX Europe 600 Index ended 1.18% lower as tensions rose in the Middle East. Major stock indexes were mixed: Germany’s DAX fell 1.08%, Italy’s FTSE MIB gained 0.47%, and France’s CAC 40 Index was little changed. CHINA China’s new home prices fell 0.3% in March, matching February’s 0.3% drop and extending losses for the ninth consecutive month, according to the statistics bureau. Authorities have ramped up efforts to revive the troubled sector by relaxing homebuying restrictions and directing state-owned banks to step up lending to indebted property developers. However, analysts said the data showed that China’s housing slump has not yet bottomed and remains a significant drag on the economy China’s gross domestic product expanded an above-consensus 5.3% in the first quarter from a year ago, accelerating slightly from the 5.2% growth in last year’s fourth quarter. On a quarterly basis, the economy grew 1.6%, rising from the fourth quarter’s 1.4% expansion. Industrial production rose a lower-than-expected 4.5% in March from a year earlier, down from 7% growth in the January to February period. March retail sales grew a lower-than-expected 3.1% from a year ago as catering and auto revenue slowed after the Lunar New Year Holiday. Meanwhile, fixed asset investment rose more than forecast in the first quarter from a year ago, although property investment fell 9.5% year on year. The urban unemployment rate eased slightly to 5.2%, while the youth jobless rate stayed at 15.3% in March, unchanged from February. The People’s Bank of China injected RMB 100 billion into the banking system via its medium-term lending facility compared with RMB 170 billion in maturing loans and left the lending rate unchanged, as expected. The operation resulted in a net withdrawal of RMB 70 billion from the banking system, marking the second cash extraction this year Chinese equities rose after the economy expanded more than expected in the first quarter. The Shanghai Composite Index gained 1.52%, while the blue-chip CSI 300 added 1.89%. In Hong Kong, the benchmark Hang Seng Index gave up 2.89% as escalating geopolitical tensions in the Middle East hurt investor sentiment. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, TD Economics, M. Cassar Derjavets. |
