| USA The S&P Global Flash Composite PMI progressed 1.2 point in April to an 11-month high of 53.5, signaling a solid expansion in private sector activity. New orders piled up at the fastest pace in almost a year, while output rose for the third month running. Growth in private sector headcounts was the strongest since last July. Following back-to-back months of softening price pressure, the PMI report signaled a pick-up in inflation. To be sure, input costs rose at a faster pace than in the prior month, something panelists blamed on “greater incremental increases in material costs.” Meanwhile, output price inflation was the most acute since September, with firms stating that “accommodative demand conditions [had] allowed them to continue passing through higher interest rates, staff wages, utility bills and material costs to clients.” Business confidence for future output ticked up but remained below its long-term average as survey respondents continued to express concerns about higher interest rates and inflationary pressures. The increase in the composite index was driven by the services sector, with the associated tracker climbing from 52.6 in March to a 12-month high of 53.7 in April. Despite a slight decline in international demand, new business at services providers increased for the second month in a row and at the sharpest rate in almost a year. Polled businesses also reported an acceleration in hiring and noted that their ability to hire had improved. Cost inflation quickened “as companies noted that higher borrowing costs and general inflationary pressures added to business expenses.” The manufacturing sub-index rose as well (from 49.2 to 50.4), signaling the first improvement in operating conditions since October last year. After 7 months of contraction, the new orders sub-index finally swung back above the 50-point mark, albeit only fractionally. Factory output growth, meanwhile, was the strongest in 11 months. As was the case in the services sector, manufacturing payrolls expanded, with panelists reporting an increase in candidate availability. Finally, firms operating in the manufacturing sector reported the greatest improvement in delivery times since the inception of the survey in May 2007 The Empire State Manufacturing Index of general business conditions recorded the third largest monthly gain in its history in April, surging 35.4 points to 10.8. This was far better than expected by consensus (-18.0) and consistent with a decent improvement of operating conditions at factories in New York State and surrounding areas. The shipments (from -13.4 to 23.9) and new orders (from -21.7 to 25.1) sub-indices swung back into expansion territory in dramatic fashion, with the latter measure registering its largest one-month progression on record (+46.8 points). As demand recovered, delivery times (from -7.6 to 0.0) and unfilled orders (from -6.7 to 0.0) stopped contracting. However, this did not prevent a third consecutive decline in employment (from -10.1 to -8.0). Input prices (from 41.9 to 33.0) continued to advance, albeit at a slower pace than in the prior month. Business expectations for the next six months (from 2.9 to 6.6) improved but remained well below their long-term average (36.4) The Philly Fed Manufacturing Business Outlook Index painted a completely different picture of the situation prevailing in the manufacturing sector. It moved from -23.2 in March to -31.3 in April, marking the steepest deterioration in operating conditions in 14 years outside of the early pandemic period. A whopping 42.1 points thus separated the general conditions index published by the Philadelphia Fed from that of the New York Fed, the widest gap ever recorded. New orders (from -28.2 to -22.7), shipments (from -25.4 to -7.3) and employment (from -10.3 to -0.2) continued to contract at factories operating in eastern Pennsylvania, southern New Jersey and Delaware, but they did so at a slower pace than in March. Supplier delivery times (from -24.3 to -25.0) shortened at the fastest clip since the great Recession, and input price inflation (from 23.5 to 8.2) was the weakest since June 2020. The prices received gauge (from 7.9 to -3.3) dipped below 0 for the first time in nearly three years, signaling a rapid moderation in price pressure in the manufacturing sector. The index tracking future business activity, meanwhile, rose from -8.0 to -1.5, which remained significantly below the long-term average for this indicator (~34.0) In April, housing starts declined for the sixth time in seven months, edging down 0.8% to 1,420K (seasonally adjusted and annualized). This was nevertheless better than what was expected by consensus (1,400K), though the positive surprise was somewhat tarnished by a downward revision to the previous month’s print (from 1,450K to 1,432K). The slight deterioration in starts in March was entirely due to a 5.9% drop in the multi-family segment (to 559K). Ground breaking in the single-family category, on the other hand, increased 2.7% to 861K. The number of homes under construction also fell in the month, slipping from 1,663K to 1,656K, the lowest level in a year. Given that this indicator tends to follow the trend in housing starts with some delay, the number of homes under construction could continue to decline in the coming months Building permits, for their part, fell 8.8% in March to 1,413K on a steep decline in the multi-family segment (-22.1% to 595K). Permits delivered for construction of single-family dwellings, meanwhile, progressed 4.1% to 818K. Although it remained close to the 50-year high reached back in October (302K), the number of authorized residential projects for which construction had not yet begun dropped from 300K in February to 291K in March Existing-home sales retraced for the thirteenth time in 14 months in March, sliding 2.4% to 4,440K (seasonally adjusted and annualized). This was weaker than the median economist forecast calling for a 4,500K print. Contract closings declined 2.7% in the single-family segment (to 3,990K) and held steady in the condo segment (at 450K). Despite lower sales, the inventory-to-sales ratio stayed put at 2.6 (<5 indicates a tight market for the National Association of Realtors) as the number of homes available on the market remained extremely low. Indeed, there were only 980K properties on sale in the month (not seasonally adjusted), the second lowest level ever recorded in a month of March. Properties that sold in February 2023 had been on the market for 29 days on average, 5 days less than in the prior month The Conference Board’s index of leading economic indicators (LEI) declined for the twelfth straight month in March, sliding 1.3 points to a two-and-a-half-year low of 108.4. Seven of the ten underlying economic indicators acted as a drag on the headline index, with the biggest negative contributions coming from building permits (-0.28 percentage point), ISM new orders (-0.24 pp), and consumer expectations (-0.23 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 conditions were met in March: The LEI index dropped 8.8% annualized over six months and the six-month diffusion index stood at 20% According to the latest edition of the Fed’s Beige Book, overall economic activity remained more or less unchanged in March and early April, a downgrade from the “slight” improvement reported in the prior iteration of the survey. Consumer spending, manufacturing, transportation, and construction were all described as flat or down slightly. Lending volumes, meanwhile, were said to have declined across consumer and business loan types, with several Districts noting that banks had tightened lending standards “amid increased uncertainty and concerns about liquidity While visiting the New York Stock Exchange, US Speaker of the House of Representatives Kevin McCarthy indicated that House Republicans will bring forth a plan to raise the debt ceiling. The proposed deal would raise the country’s borrowing limit for one year, cut federal spending back to 2022 levels, constrain spending growth to 1% annually over the next 10 years, and modify or block certain aid and tax credit programs. McCarthy reiterated that a “no-strings-attached debt limit increase” is not an option and plans to present the Republican proposal to the House next week. The debt ceiling standoff is likely to continue as President Joe Biden stated that he will not negotiate on a plan that includes concessions to avoid default Biden is expected to sign an executive order in the coming weeks that will curb American businesses’ investment in key parts of China’s economy for national security reasons. A final decision on the order is expected by 19 May, when the G7 summit will be held in Japan Ten Fed officials spoke and six are voting members. Most of the speakers noted that they were continuing to monitor credit conditions for signs of further stress. The Fed’s regional monitoring in April’s Beige Book stating that “several Districts noted that banks tightened lending standards amid increased uncertainty and concerns about liquidity”. Although this may aid the Fed in tightening credit conditions, as noted by Chicago Fed President Goolsbee, most members seemed to agree that further policy tightening would be required to sustainably return inflation to the Fed’s 2% target. Markets are expecting the Fed to hike by 25bps in May, and then hold in June The major benchmarks ended mixed following a week in which first-quarter earnings reports seemed to grab the spotlight from a relatively light economic calendar. Despite the week’s losses, the Cboe Volatility Index (VIX), Wall Street’s so-called fear gauge, fell to its lowest level since late 2021. Market volumes were especially light early in the week, as investors awaited more earnings news. According to Refinitiv I/B/E/S, 88 S&P 500 Index companies had reported earnings as of Friday, with firms in the S&P MidCap 400 Index suffering a much larger year-over-year aggregate decline in earnings (almost 18%) than those in the S&P 500 (roughly 7%). Once the remaining reports are in, analysts polled by both Refinitiv I/B/E/S and FactSet expect them to show overall earnings for the S&P 500 to have declined for the second consecutive quarter, although early reports have generally surprised to the upside In terms of data release, the durable goods orders are out on Wednesday. The goods sector of the economy appears to be going through correction as new demand slows amid increased economic uncertainty. Orders for core durable goods orders (excluding defense and aircraft) slipped 0.1% in February, marking the fourth decline in six months. Other industrial data have also been bleak. The ISM manufacturing index has signaled contraction for five consecutive months and manufacturing output has stalled. Conditions for new capital investment continue to grow less favorable and small business plans to make new capital expenditures have rolled over and are approaching new lows The Q1 GDP growth print is out on Thursday. A strong start to the year positioned the economy to grow at a solid clip during the first quarter, the real GDP is expected to have expanded at a 1.8% annualized pace in Q1. Growth was likely specifically lifted by a jump in consumer spending, as real personal consumption expenditures jumped 1.5% in the month of January alone. Even as growth began to moderate over the course of the first quarter, strong activity in January positioned for a solid outturn in overall output. UK Employment and earnings data showed some tentative signs of labour market loosening, but nominal wages registered at much higher levels than expected with average pay including bonuses coming in at 5.9% for December 2022 to February 2023 versus consensus of just 5.1%. On the following day, the YoY CPI inflation figure for March was released which, while down from the previous month, came in higher than expectations at 10.1%. These developments suggest a further 25bp hike on 11 May is likely, which will take rates up to 4.5% as MPC members battle to grip domestically-generated inflation. The full effects of monetary policy changes will probably take around six quarters, and as a result MPC members will take the view that an increase in May will be the last hike in this cycle. UK retail sales for March have been released and down 0.9% MoM and down 3.1% YoY, excluding fuel which is down 1.0% MoM and down 3.2% YoY. These are slightly below expectations, primarily as non-food stores’ sales volumes fell by 1.3% in March 2023, following a rise of 2.4% in February, with feedback from retailers being that poor weather conditions throughout most of March affected sales. Overall, online sales fell slightly, down 0.8% in March 2023, following a rise of 0.3% in February. Despite the fall, sales were 19.3% above their pre-coronavirus February 2020 volume. It is likely there has been a shift in consumer behavior that is having an ongoing impact on retail property valuations. EU The Eurozone flash Composite PMI rose above expectations to 54.4 in April, compared with 53.7 the previous month. The Manufacturing PMI fell more than expected to 45.5, compared with 47.3 earlier, and the Services PMI rose more than expected to 56.6, compared with 55 the month before. Economic activity in France increased in April at the fastest pace since May 2022. A resurgence in the Service sector was the main driver and new service orders increased. The Manufacturing sector continued to perform poorly as demand remained weak. Employment improved in both sectors. The April Services PMI was also strong Germany, as inflows of new work increased. However, the manufacturing sector remained in the doldrums as new factory orders declined. In Germany, the labour market remained tight and employment increased in both sectors The minutes of the March meeting of the ECB showed policymakers were split over the decision to raise benchmark interest rates by half a percentage point. A “very large majority” voted in favor of the decision, as “inflation remained far too high and was projected to remain high for too long.” Still, some members of the Governing Council said they would prefer a pause until tensions in the financial market have subsided. Subsequent comments by policymakers have echoed this divergence in views In local currency terms, the pan-European STOXX Europe 600 Index gained 0.45%, as optimism about the economic outlook outweighed concerns about interest rates staying higher for longer. Major stock indexes were mixed. Germany’s DAX added 0.47%, while France’s CAC 40 Index gained 0.76%. Italy’s FTSE MIB, on the other hand, fell 0.45%. CHINA New home prices increased for a third consecutive month, rising 0.5% in March after February’s 0.3% gain and marking the fastest increase since June 2021, according to the National Bureau of Statistics. China’s real estate sector has been in a downturn in recent years as Beijing sought to reduce leverage among developers, triggering a wave of defaults and causing many firms to struggle with slowing sales and high debt levels. The sector has shown signs of stabilizing this year, bolstered by a government rescue package last November that included measures such as stepping up financial support for property companies, lowering mortgage rates, and easing homebuyer restrictions in many cities The People’s Bank of China (PBOC) injected a lower-than-expected RMB 170 billion into the banking system via its one-year medium-term lending facility, compared with RMB 150 billion in maturing loans. The central bank’s latest cash injection was the smallest since November, which markets interpreted as a sign that policymakers were evaluating the impact of March’s easing measures. In a statement following its quarterly monetary policy committee meeting, the PBOC pledged to maintain sufficient credit growth and liquidity as it does not yet see a solid foundation for the domestic economy. The central bank left the medium-term lending rate unchanged, as expected China’s gross domestic product (GDP) expanded a better-than-expected 4.5% in the first quarter of 2023 from a year earlier, compared with last year’s growth pace of 3.0%. Robust export growth and infrastructure investment, and a rebound in retail spending and property prices, drove the recovery. The data prompted several banks to raise their annual growth forecasts for China as consumption continues to recover Chinese equities fell as mixed economic data and news that the U.S. may introduce fresh investment curbs against China weighed on sentiment. The Shanghai Stock Exchange Index declined 1.11%, while the blue-chip CSI 300 gave up 1.45% in local currency terms. In Hong Kong, the benchmark Hang Seng Index lost 1.78%. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets. |
