USA
• Markit’s flash composite PMI signaled a strong, but slower increase in business activity across the private sector in April. The headline index came in at 55.1, down from 57.7 the month before. The manufacturing sector tracker advanced from 58.8 to a 7-month high of 59.7 as the rate of increase of both output and new orders accelerated. Purchasing managers reported another marked deterioration in vendor lead times. When combined with difficulties retaining and acquiring new staff, longer supplier delays were linked to a further rise in work backlogs. Input costs, meanwhile, rose at the fastest pace since last November’s series on higher prices for fuel and transportations. Markit’s report mentioned that “frequent increases in costs resulted in the sharpest rise in output charges on record as firms sought to passthrough greater input prices to clients.” The services sub-index, for its part, eased from 58.0 to 54.7 amid reports of labor and supply shortages and inflation dampening customer willingness to spend. Input prices surged at an unprecedented pace at non-manufacturing businesses thanks in part to higher wage bills. “In response, service providers hiked their selling prices at the steepest rate on record in an effort to pass-through greater cost burdens.” Work backlogs continued to lengthen, with many companies highlighting challenges in hiring new employees
• Housing starts advanced from 1,788K in February to 1,793K in March, a result far above the 1,740K expected by consensus and the highest since June 2006. The monthly gain was entirely due to a 4.6% increase in the multi-family segment (to a 26-month high of 593K). On the flip side, starts in the single-family category sagged 1.7% to 1,200K. For Q1 as a whole, total starts expanded 5.0%, hinting at a positive contribution to GDP growth from residential construction in the quarter. Still in March, building permits edged up 0.4% to 1,873K, not far from the multi-year high attained in January (1,895K). A sizeable gain in the multi-family segment (+10.0% to 726K) was only partially offset by a decrease for single-family dwellings (-4.8% to 1,147K)
• In March, existing-home sales retraced 2.7% to a 21-month low of 5,770K (seasonally adjusted and annualized). Despite this decline, sales remained slightly above their pre-recession peak of 5,620K. Contract closings faded for both single-family dwellings (-2.7%) and condos (-3.0%). Reflecting lower sales volumes, the inventory-to-sales ratio rose three ticks to 2.0 but continued to indicate extremely scarce supply. (According to the National Association of Realtors, a ratio <5 indicates a tight market.) The inventory of properties available for sale totaled just 0.95 million (not seasonally adjusted) in the month. Not only was this down 9.5% from a year earlier, it also represented the lowest March level ever recorded. Perhaps because of relatively scarce supply, listed properties remained on the market for only 17 days on average in March, the shortest time ever recorded. Lack of supply (and, for a time, low interest rates) has been the main factor supporting prices since the beginning of the COVID-19 crisis. In March, the median price paid for a previously owned home stood at an all-time high of $375,300. This was up 15.0% on a 12-month basis
• Initial jobless claims remained more or less stable at 184K in the week to April 16. Continued claims, for their part, slid from 1,475K to a 52-year low of 1,417K. Such low levels of claims reflect the exceptional vitality of the job market in the United States
• James Bullard, president of the Federal Reserve Bank of St. Louis, reiterated his view that, to try to curb elevated inflation, the central bank should move “expeditiously” to bring interest rates to neutral or to a level that neither stimulates nor impedes economic growth. Bullard indicated that a rate increase of as much as 75 basis points (0.75 percentage points) could be up for discussion, although he also said that a move of this magnitude would not be his base case and suggested that the economy should expand this year and in 2023. At an event hosted by the International Monetary Fund (IMF), Fed Chair Jerome Powell said a 50-basis-point rate increase could be “on the table” for the May 3‒4 policy meeting and stated that “it is appropriate…to be moving a little more quickly.” While acknowledging the challenges of engineering a soft landing, Powell disputed fears that the Fed’s rate-hiking cycle would risk pushing the economy into recession, citing the historically strong labor market
• After a stellar 2021, bank shares are coming under pressure, falling around more than 10% year to date. Typically, rising longer term rates benefit banks by increasing their net interest margin — the difference between the rate at which they borrow and lend. However, many US banks now have significant US Treasury holdings, which have fallen in price as interest rates have risen in 2022. Slower corporate deal flow and slowing consumer spending have also been headwinds to the industry
• The major U.S. equity indexes ended the week lower. The Russell 1000 Growth Index stocks gave up more ground than its value counterpart, while the large-cap S&P 500 Index posted steeper losses than the S&P SmallCap 600 Index and the S&P MidCap 400 Index. Within the S&P 500, the communication services sector pulled back the most. Shares of Netflix tumbled more than 35% during the week, as the company reported disappointing quarterly results that were headlined by a sequential decline in its global subscriber rolls. Only the consumer staples sector gained ground
• In terms of economic release, durable goods print is out on Tuesday. Orders increased a strong 1.4% in March after declining 2.1% the prior month, mainly at the hands of a large drop in aircraft orders. However, all the blame for February’s fallout could not be chalked up to aircraft, as bookings elsewhere were not something to write home about. Motor vehicle orders fell 0.4% in March, the second straight monthly decline, while machinery (-2.9%), computers & electronics (-1.1%) and primary metals (-0.9%) were also among the categories that experienced a decline in orders over the month. Granted, it was unclear how much of February’s weakness was due to diminished demand opposed to further supply chain complications from Russia’s invasion of Ukraine
• New home sales is also out on Tuesday. It suffered a setback in February, slipping 2% over the month following an 8.4% decline the prior month as supply issues continued to impede builders’ ability to meet demand. In March, sales might have regained some of their lost traction as sales rose 1.3% to 782,000-unit pace, but between rising mortgage rates, scarce materials and climbing input prices, much of the factors that have caused new home sales to falter so far this year remain intact. Next week’s new home sales data is one of the final pieces of housing market information, as March data for housing starts and existing home sales were released this week
UK
• Retails sales UK retail sales for March were down -1.4% MoM, +0.9% YoY (consensus -0.3% MoM, +2.8% YoY). While these figures will reflect concerns over the Ukrainian crisis, consumers will be becoming concerned about impending tax and energy rises, the latter did not come into effect until April. Stripping out expenditure on fuel the numbers were -1.1% MoM, -0.6% YoY (consensus -0.4% MoM, +0.7% YoY). Food store sales were down by 1.1% MoM, as people continued to slowly return to eating in pubs and restaurants. Nonfood store sales were up 1.3% MoM, mostly driven by household good rising by 2.9%, much of this on items such as DIY goods. Looking at the volume and value of retail sales, volumes over the last three months were up 5.5%, while value was up 13.8%, implying a price deflator of around 8.4% against those of a year ago. However, any numbers being compared against pandemic data need to be treated carefully, although there is clearly a degree of inflation in this data. Whether retailers are able to resist putting up prices and hopefully gain market share as a result remains to be seen
• The April GfK UK Consumer confidence measure also came out at -38 (consensus -33), down from -31 in March. This is the second lowest this has been in 50 years. While such pessimism is perhaps overdone, it does give an indication of how much the cost of living crisis is impacting ordinary UK consumers. With inflation looking set to remain high and further energy rises set for October, any movement on taxes only possible in the run up to the 2024 General Election, a rapid turn around looks unlikely. It will be interesting to see if the Purchasing Managers Index starts to reflect this negative sentiment
EU
• The Eurozone flash Composite PMI accelerated above expectations to 55.8 in April, compared with 54.9 in the previous month. The Manufacturing PMI fell less than expected to 55.3, compared with 56.5 the month before, and the Services PMI increased significantly above expectations to 57.7, compared with 55.6
• French PMI strengthened unexpectedly across all sectors, and indicators of future output also recovered some of the fall from the previous month. In particular, supportive demand following the further removal of pandemic restrictions appears to have driven the acceleration in services sector growth. Supply shortages continued to hinder manufacturing output
• In Germany, Composite PMI fell less than expected, as manufacturing PMI weakened but services strengthened. Meanwhile, indicators of future output all continued to weakened compared to the previous month. Moreover, the data pointed to a further surges in inflationary pressures, as the April release showed record increases in output prices for both sectors
• The services sector rebound strongly in April, making up for a weaker manufacturing sector. In the former sector, incoming new business strengthened to historically high levels and indicators of future output bounced back somewhat from last month’s sharp fall. Meanwhile, in the manufacturing sector, output continued to fall, as did new orders. Future output was largely unchanged following last month’s fall, and inflationary pressures in output prices continued to rise
• After several ECB officials made hawkish comments in the press, European bond yields backed up with 10-year German bunds rising to 0.97% after starting the year in negative territory. Money markets are now pricing in nearly 80 basis points of rate hikes in 2022 by the ECB. The ECB’s quantitative easing program could also end as early as July, but recent warnings of slowing growth by ECB President Christine LaGarde could complicate the path
CHINA
• The Chinese economy lost some momentum in Q1, expanding 1.3% QoQ (non-annualized), down from 1.6% the prior quarter. Year on year, GDP grew 4.8%, overshooting the median economist forecast of 4.2% growth. Although the quarterly numbers were better than expected, the economic impact of strict lockdowns in several cities (notably Shenzhen and Shanghai) was clearly visible in the monthly data. Indeed, retail sales dropped 3.5% YoY in March, marking the first decline for this indicator since July 2020. Growth in industrial production (from 7.5% YoY to 5.0%) and in fixed asset investment (from 12.2% YoY to 9.3%), also, slowed in March. The infrastructure component continued to be a major contributor to total investment, while property investment showed some weakness, dropping 2.4% YoY in March. With Beijing clinging fiercely to its zero-Covid policy, further confinements cannot be excluded, especially considering the extreme contagiousness of the Omicron variant. Such shutdowns could put the brakes on growth at a time when China is beset by other problems, notably, a painful process of deleveraging in the real estate market
• The People’s Bank of China (PBOC) kept interest rates steady, leaving the one-year loan prime rate at 3.70% and the five-year rate at 4.60%. Economists had expected the central bank to modestly trim both rates, which serve as China’s de facto benchmark lending costs. PBOC Governor Yi Gang pledged to keep policy accommodative to support China’s slowing economy, comments that raised expectations for further easing measures
• Foreign investors sold a net USD 1.01 billion worth of Chinese stocks so far in April via the Hong Kong Stock Connect program, Reuters reported. The latest outflow comes after foreigners sold roughly USD 7.1 billion in March, which was the largest outflow in nearly two years. The outflows have stoked official concern, with the China Securities Regulatory Commission reportedly calling upon the country’s National Social Security Fund, banks, and insurers to boost their equity investments, Bloomberg reported
• Chinese markets slid as investors worried about the economic fallout from coronavirus lockdowns after officials said tough restrictions would remain in place. The CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 4.2% this week in its worst five-day performance since mid-March, according to Bloomberg
Sources: T. Rowe Price, MFS Investment Management, National Bank of Canada, Wells Fargo, M. Cassar Derjavets