| USA The S&P Global Flash Composite PMI signalled another solid expansion in private sector activity in December, as it rose from 54.9 to a 33-month high of 56.6. Business confidence was at its highest since Mary 2022, something respondents attributed to expectations of a more business friendly administration under the Trump Presidency, especially in terms of looser regulation and heightened protectionism. The increase in the composite gauge was led by the services segment, with the associated gauge moving from 56.1 to a 38-month high of 58.5. If the pandemic months are excluded, this expansion was the strongest recorded since March 2015. Incoming businesses at non-manufacturing firms rose the most since March 2022, which led to the first increase in employment since July. The manufacturing index, on the other hand, fell from 49.7 to 48.3. New orders contracted for a sixth month running, while output shrank the most since May 2020. Factories also reported a steep jump in input inflation during the month. Nominal personal income rose 0.3% in November, a tad less than the +0.4% print expected by consensus. The wage/salary component of income jumped 0.6%, while income derived from government transfers retraced 0.1%. Personal current taxes, meanwhile, rose 0.3%. All this translated into a 0.3% gain in disposable income. Nominal personal spending, for its part, advanced 0.4%, on gains for both goods (+0.8%) and services (+0.2%). As spending expanded at a slightly faster pace than disposable income, the savings rate edged down one tick to 4.4%. This remains significantly below the levels observed before the pandemic (between 6.5% and 8.5%). Adjusted for inflation, disposable income expanded 0.2%, while personal spending rose 0.3%. In the latter case, the increase reflected a 0.7% gain in the goods segment driven in part by motor vehicles and parts. Services outlays rose as well (+0.1%), but to a lesser extent. In November, the headline PCE deflator came in at 2.4%, up from 2.3% the prior month but still one tenth below the median economist forecast (2.5%). The core index, for its part, remained unchanged at 2.8% instead of rising to 2.9% as per consensus. On a monthly basis, both the headline and the core indices rose 0.1%. The core services PCE deflator excluding housing, a good measure of underlying price pressures, advanced 0.2%. On a 3-month annualised basis, it rose 3.2%. Retail sales rose 0.7% in November, slightly more than the +0.6% print expected by consensus. The prior month’s result, meanwhile, was revised upwards, from +0.4% to +0.5%. Sales of motor vehicles and parts contributed positively to the headline sales figure, as they surged 2.6%. Without autos, outlays edged up 0.2%, as gains for non-store retailers (+1.8%), sporting goods (+0.9%), building materials (+0.4%) and electronics (+0.3%) were only partially offset by declines for miscellaneous items (-3.5%), restaurant/bars (-0.4%), food beverages (-0.2%) and clothing (-0.2%). In all, sales were up in 7 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, progressed a consensus-matching 0.4%. While the jump in sales in the first segment was probably due to lower interest rates and increased inventories in the automotive sector, the good performance in the second category reflected the growing popularity of sales events such as Cyber Monday. Excluding these two segments, sales were much less impressive, falling by 0.2% on declines in no fewer than 6 categories. Of particular note was the 0.4% decline in spending in restaurants and bars, the biggest in ten months and an indication that spending on services may have weakened during the month. Despite these blemishes, consumption of goods will undoubtedly make a positive contribution to fourth-quarter growth, with core sales on pace to rise an annualised 3.6% in the quarter. Industrial production edged down 0.1% in November instead of rising 0.3% as per consensus. This marked the third consecutive monthly decline for this indicator. The disappointment was accentuated by a downward revision of the previous month’s data, from -0.3% to -0.4%. Despite the end of the strike at Boeing and a 3.5% gain in the motor vehicle/parts segment, manufacturing production increased by only 0.2%, much less than the 0.5% expected by economists. Excluding autos, factory output contracted 0.1%. Utilities output fell 1.3%, while production in the mining segment cooled 0.9%. Housing starts slid 1.8% in November to a 4-month low of 1,289K (seasonally adjusted and annualised), a result well below the median economist forecast of 1,345K. The decline reflected a sizeable drop in the multi-family segment, where starts sank 23.2% to an 8-month low of 278K. Single-family starts, on the other hand, rose 6.4% to 1,011K. The report also showed a 10.2% jump in housing starts in the southern region, likely reflecting a bounce back in residential construction following the passage of severe storms the prior month. US stocks declined during the week, although a rally on Friday helped major indexes recover some of their lost ground. Losses were broad-based, though smaller-cap indexes generally fared worst. Last Thursday marked the 14th consecutive trading session with more decliners than gainers in the S&P 500 Index, the longest streak since 1978, which seemed to add some concern regarding the durability of the recent run for major indexes. The event dominating sentiment during the week appeared to be the Federal Reserve’s rate announcement following its highly anticipated policy meeting that concluded Wednesday. As was largely expected, policymakers announced a quarter point (25 basis points, or 0.25 percentage points) cut to the Fed’s policy rate following the meeting, bringing the total reduction in rates to 100 basis points (1.00 percentage point) since the start of the rate-cutting cycle in September. The Federal Reserve delivered some sour candy to cap off 2024, cutting its policy rate by 25 basis points, but signaling a more moderate pace of cuts next year. This hawkish tilt sent Treasury yields higher, with the 10-year rising from just under 4.4% to briefly over 4.6%. Equity markets took the news hard, with the S&P 500 down roughly 3.5% from pre-meeting levels at time of writing. Part of the weak equity market performance may also have to do with a looming government shutdown. Washington has only a few hours to pass a funding bill into law. Failure to do so will lead to a partial government shutdown. Essential services would continue, but most federal workers wouldn’t receive a paycheck. In addition, some workers would be furloughed until Congress passes new funding. The Bipartisan Policy Center estimates that some 875,000 federal workers would be furloughed. The Fed’s quarter point interest rate cut was as expected, but the accompanying Summary of Economic Projections (SEP) raised a few eyebrows. While the median forecasts for economic growth and the unemployment rate were little changed, the outlook for inflation and the policy rate were raised noticeably. Focusing on the year ahead, the median projection now has the Fed Funds Rate ending next year 50 basis points higher than expected in September. This is in tune with a firmer outlook for core inflation. These included the economy growing at a better pace and inflation coming in a bit hotter than expected recently. UK Inflation for November came out and the broad inflation rate (CPI) was 0.1% MoM, 2.6% YoY while the heavily watched core inflation figures were 0.1% MoM, 3.5% YoY. PPI Input inflation was 0.0% MoM, -1.9% YoY, while PPI Output inflation was 0.3% MoM, -0.6% YoY. The Retail Price Index (little used, but it does determine payments from index-linked Gilts) was 0.1% MoM, 3.6% YoY (consensus 3.6%). Numbers are some way above where had been hoped by the Bank of England and investors as recently as August, although more recent forecasts have been anticipating stickier inflation, which has in fact prevailed. The Monetary Policy Committee‘s most watched indicator is core inflation (stripping out volatile fuel and food), which came out at 4.4%, it continues to show far less volatility than the overall figures; and services inflation at 5.7% is reflective of the earnings figures. The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from transport (fuel and used car prices), with a further large upward effect in CPIH from housing and household services (owner occupied housing costs and rent increases). These upward pressures were only countered by a 0.03% fall in restaurant and hotel prices. Much of the difficulty was highlighted in the earnings figures, which saw earnings grow by 5.4% in the private sector, a level more or less double the rate they can be and achieve the inflation target of 2%. Even at the low end of the labour market where hoarding might be less prevalent, next April’s bumper rise in the National Living Wage will insure there is no let up from inflationary pressures. The Monetary Policy Committee held rates at 4.75% at its December meeting. This was, however, a more dovish hold than expected with three of the nine members voting to reduce rates by 0.25pp while the other six members backed a hold in rates. The Bank of England is now signalling that it is weighing up factors constraining supply that could sustain inflationary pressures versus factors weakening demand that could lead to an emergence of spare capacity in the economy and push down inflation. It is also notable that the MPC have re-committed to a gradual approach to removing monetary policy constraint. The minutes of the meeting do address the issue of how developments in the United States may affect the UK, noting that indicators of trade policy uncertainty have increased materially. However, the BoE states that the magnitude and direction of the impact of any such policies on UK inflation is unclear at present. Current data points appear to be factoring into decision-making much more materially. The six members backing a rate hold at this meeting have emphasised that CPI inflation, wage growth and inflation expectations have risen, which have, in turn, increased the risk of inflation persistence. The three members arguing for a cut in rates place more emphasis on worries around growth, citing sluggish demand and a weakening labour market as reasons why an unduly large output gap could emerge, and suppress medium-term inflation below target. EU Positive signals from the service sector lifts eurozone composite PMI to 49.5 in December from 48.3 in November, above Bloomberg survey estimates at 48.2. The service sector reading came in at 51.4, markedly above 49.5 in November, and above survey estimates of an unchanged index. The improved outlook for services was broad among sub-components for activity (backlogs, activity and expectations), while employment fell compared to November. While this raises hopes of a recovery in domestic demand, PMI still suggest that service sector momentum is slower than normal, with only the price indicators above their historical average. Moreover, the manufacturing slump continues in a worrying sign for (global) industrial activity. The overall manufacturing index remained unchanged at 45.2, just below survey expectations at 45.3, and still much below the historical average. Except for stocks of finished products, the manufacturing sub-components were broadly unchanged from November, and all told, the signal remains weak but not worse. The readings for France and Germany, also send mixed signals from services and manufacturing, with the former improving from low levels and the latter worsening from already very low levels In local currency terms, the pan-European STOXX Europe 600 Index ended 2.76% lower, its biggest weekly loss in more than three months. US President-elect Donald Trump’s warning about potential trade tariffs on the European Union and concerns about the outlook for interest rates undermined sentiment. Major stock indexes also fell. Germany’s DAX dropped 2.55%, Italy’s FTSE MIB lost 3.22%, and France’s CAC 40 Index declined 1.82%. CHINA New home prices in 70 cities fell 0.1% in November, slowing from October’s 0.5% drop, according to the National Bureau of Statistics. While November’s dip marked the 17th monthly decline, it was the slowest pace since June last year, according to Reuters. China’s property market has showed signs of stabilising after Beijing unveiled a sweeping package in late September aimed at reviving the crisis-hit sector. Analysts anticipate that the government will ramp up efforts to stimulate growth as China’s economy faces higher tariffs and other challenges under the incoming Trump administration. China’s youth unemployment rate eased for the third consecutive month after hitting its highest level this year in August. The jobless rate for 16- to 24-year-olds, excluding students, was 16.1% in November, down from 17.1% in October, according to official data. Urban unemployment remained steady at 5%. November activity data pointed to the uneven nature of China’s recovery amid a looming trade war with the US. Retail sales expanded a below-consensus 3% from a year ago, down from October’s 4.8% rise and highlighting Chinese consumers’ unwillingness to spend. Fixed asset investment grew 3.3% in the January to November period, lagging forecasts, and less than the 3.4% increase in the calendar year to October. Property investment in the period fell 10.4%. Industrial production was a bright spot, rising a better-than-expected 5.4% from a year earlier amid demand for robots, passenger cars, and solar panels. Chinese equities retreated as disappointing data raised concerns about the economy. The Shanghai Composite Index declined 0.7%, while the blue-chip CSI 300 lost 0.14%. In Hong Kong, the benchmark Hang Seng Index fell 1.25%. |
| Sources: T. Rowe Price, Wells Fargo, National Bank of Canada, MFS Investments, TD Economics, Handelsbanken, M. Cassar Derjavets. |
