US
- Industrial production jumped 1.0% in April, surpassing expectations for a more modest increase. The series is now 2.2% above its year-ago level, which marks the strongest pace since 2014. The report details showed broad-based strength, as production rose across most household and business goods. Notably, manufacturing output climbed 1.0% on the month, and with that increase the overall level of manufacturing production is at a fresh cycle high.
- The positive print for industrial production was accompanied by mixed results in the survey data. Post-election euphoria has largely receded from the sky-high levels registered earlier this year, with the ISM manufacturing index edging lower in recent months. The New York and Philadelphia Fed surveys, released this week, offered a first look at May manufacturing sentiment. The New York Empire State index slumped into contraction territory in May, while the Philly Fed index soared higher. Despite the month-to-month fluctuations, the hard data are improving incrementally, and a gradual firming in the factory sector remains likely.
- Housing starts missed in April, declining 2.6% to a 1.172 million-unit annualised rate, disappointing consensus expectations for a modest gain. The pullback was entirely driven by continued weakness in multifamily, which dwarfed a slight pickup in single-family starts. Multifamily starts fell 9.2% in April, marking the sector’s fourth consecutive decline. Growth in multifamily construction is expected to continue to slow amid lessening demand and the onslaught of supply that has inundated the market in recent years.
- The shift toward single-family homes is also supported by recent household formation data. The number of owner-occupied homes rose faster than renter-occupied housing in Q1 for the first time since 2006. With residential construction increasingly expected to be supported by growth in single-family housing. Single-family starts inched up 0.4% in April, driven by gains in the Midwest and West. For the first four months of the year, single-family starts are running a healthy 7.0% ahead of their year-ago level. Leading indicators for single-family construction are mixed, however. Single-family permits, an indicator for future construction activity, have edged down over the past two months and are now trending below the pace of starts.
- US president Donald Trump embarked on his first overseas trip as president this week, leaving behind a swirl of controversy in Washington. Trump will visit Saudi Arabia, Israel and the Vatican before a stop in Sicily for the G7 summit. On Wednesday, the US Department of Justice appointed former FBI director Robert Mueller as special counsel to investigate Russia’s intervention in the 2016 presidential election as well as any improper contact between Russian agents and the Trump campaign. Revelations that Trump disclosed extremely sensitive intelligence to the Russian foreign minister and ambassador during an Oval Office visit last week added to the firestorm.
- The FOMC minutes from the May meeting will be released on Wednesday, which may give more insight into what the FOMC members think about the timing of the next Fed hike and not least quantitative tightening (however, notice that the meeting took place before Friday’s weak CPI inflation print).
- Preliminary Markit PMIs for May are also due on Wednesday. Looking at the PMI services index, it has been on the weak side in recent months and is expected to increase from 53.1 in April to 54.0 in May. The manufacturing index is also expected to fall to 52.3 in May from 52.8.
- On Friday, the preliminary core capex data for April will be out, which will give the first indication of whether the rebound in capital investments in Q1 has continued in Q2.
UK
- CPI inflation in the UK was 2.7% year-on-year in April, up from 2.3% in March. The consensus expectation was for 2.6%, while the BoE had expected 2.7%. Core inflation was also 0.1 percentage points above the consensus expectation at 2.4% in April, up from 1.8 % in March. According to the ONS, air fares were the main contributor to the increase in the inflation rate in April, although this balanced out a downward effect of similar magnitude in March and was due to Easter falling later than last year. Rising prices for clothing, vehicle excise duty and electricity also contributed to the increase in the inflation rate. These contributions were partially offset by a fall in motor fuel prices. Price pressures as measured by the PPI input price inflation, though still high, eased a bit further to 16.6% year-on-year in April from 17.4% in March (revised from 17.9%). PPI output inflation was 3.6% year-on-year, unchanged from March.
- The Bank of England (BoE) noted in its Inflation Report in May that pass-through from the depreciation of sterling to import prices so far had been less that suggested by the past average. This could mean that there is further pass through to come, but there is also a risk that the rise in import prices will be more muted than what is suggested by the pass-through in the past. Ahead, price inflation will not become high enough for the BoE to rein in monetary policy. Decelerating economic growth and muted wage growth are expected to lead the BoE to keep the bank rate unchanged at 0.25% over the next three years.
- UK prime minister Theresa May unveiled the Conservative Party manifesto on Thursday, setting the stage for the general election on 8 June. On Brexit, the manifesto says that no deal is better than a bad one and that the United Kingdom seeks an agreement with the European Union that would take the UK out of the single market and customs union but continue close ties through a comprehensive trade and customs agreement. Meanwhile, the UK this week reported that its unemployment rate stands at 4.6%, its lowest level since 1975.
- The second estimate of GDP growth in Q1 is due for release on Thursday and an unchanged print of 0.3% quarter-on-quarter is to be expected (Bank of England expects it to be revised up to 0.4% quarter-on-quarter). More interestingly, it is the first time the subcomponents such as private consumption and business investments for Q1 are released, which will give more insight into why growth slowed at the beginning of the year.
China
- Following a stronger-than-expected Q1, China’s economy has now started to slow. Growth for all three activity indicators fell in April, even more than expected by consensus, confirming the weaker trend that had already been signalled by, for instance, the PMI indicators. Growth in retail sales fell from 10.9% year-on-year in March to 10.7% in April following stable growth since November. Industrial production growth fell from 7.6% year-on-year to 6.9%, thereby reversing the spike in March. Finally, growth in fixed investments fell from 9.2% year-on-year year-to-date to 8.9% according to the published figures which masks an even greater decline in the ordinary growth rate from 9.5% to 8.1% year-on-year.
- The industrial sector is driving the slowdown for now. Apart from slower industrial production growth led by car production, fixed investments by manufacturers are also cooling off. Meanwhile, growth in infrastructure investments and property investments is still holding up satisfactorily for now amid booming house prices. The property market boom should fade too, however, as many measures taken to dampen price increases have not kicked in yet. With the authorities also seeming more determined than earlier to tackle the credit bubble and lowering financial risks, the growth slowdown should continue.
- The key thing to watch in China over the next two weeks is PMI data for May and the Chinese bond markets, which have been under severe stress lately. A further weakening in PMIs over the coming quarters is possible but a small increase in May is on the table as well since the sharp drop in April may have been a bit too big compared to underlying developments. Downside risks to growth in China have emerged lately as financial stress picked up on the back of tightening of regulation towards shadow banking. This should be watched closely in the coming months.
EU
- The euro zone’s economy expanded 0.5% quarter-on-quarter last quarter, affirming that economic recovery in on track. Germany, the bloc’s largest economy, grew 0.6% from the previous quarter while France and Italy expanded 0.3% and 0.2% respectively. Investors remained optimistic about the economy, according to a survey. The ZEW expectation index climbed to 35.1 in May (April: 26.3), the highest level since August 2015.
- After being sworn in on Sunday, French president Emmanuel Macron on Monday appointed Édouard Philippe as prime minister. Phillipe is a member of the Republicans, and his appointment is an effort to woo support from the center-right in case Macron’s En Marche! party fails to secure a majority in next month’s parliamentary elections. Later in the week, during a meeting with European Council president Donald Tusk, Macron vowed to work for the overhaul of Europe. Tusk praised Macron, saying Europe needs his energy, imagination and courage.
- The German IFO expectations are due for release on Tuesday. The IFO expectations saw a small decline in April to 105.2 from 105.7 in March. Similar to the PMIs, the German business expectations are likely to be dragged down by declining business cycle indicators in US and China but could gain tailwind from the outcome of the French election. IFO expectations are likely to see a small decline to 104.9 in line with the minor slowdown in the PMI figures.
- The PMI figures are released on Wednesday. The focus will be on whether the euro area PMI figures can continue upwards, opposing the weakness in manufacturing PMI observed in recent months in the US and China. A minor slowdown is possible in the euro area PMIs, but the figures should remain at a high level and still show continued expansion.
Sources: Commerzbank, Wells Fargo, Danske Bank, MFS Investment Management, Handelsbanken, HongLeong Bank
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