| USA In hindsight, Fed officials had every reason to remain cautious in timing the pivot to policy easing. Since the January 30th-31st FOMC meeting, the economic data has done little to instill further confidence that inflationary pressures will continue to recede over the coming months. Not only did the January employment report come in more than double expectations, but a few inflation indicators (including CPI, PPI, and ISM price sub-indices) all came in much hotter-than-expected in January. Market pricing has adjusted accordingly in recent weeks, with investors now positioned for a June rate cut and 100 basis points (bps) of policy easing by year-end. While Fed officials acknowledged that inflation and employment risks are coming back into better balance, the minutes revealed that most participants remain concerned about the risk of “moving too quickly to ease the stance of policy”. Moreover, some officials cited the risk that stronger aggregate demand or a slow-down in the supply-side recovery could impede further progress on the inflation front. All of this argues for a more agile, data dependent approach to reducing the policy rate The core PCE deflator, the Fed’s preferred measure of inflation, to have edged down in January on a year-ago basis, the upside surprise in the CPI is not a confidence booster in the campaign to get inflation back down to 2% on a sustainable basis LEI slipped 0.4 point in January to a 44-month low of 102.7. This was the 23rd consecutive decline for this indicator, marking the longest negative streak since the Great Recession. Six of the ten underlying economic indicators acted as a drag on the headline index, with the biggest negative contributions coming from average workweek (-0.18 pp), the interest rate spread (-0.16 pp) and average consumer expectations (-0.08 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. Only one of these conditions was met in December: The LEI index fell 6.0% annualized over six months but the six-month diffusion index stood at 60% The S&P Global Flash Composite PMI slightly deteriorated from 52.0 in January to 51.4 in February, signalling a weaker improvement in private sector operating conditions. The services sub-index decreased from 52.5 to a 3-month low of 51.3. The manufacturing tracker, for its part, moved from 50.7 to 51.5 (a 17-month high), which indicated an expansion of activity in the sector. The figures for the new orders sub-index showed that the manufacturing saw the fastest expansion since May 2022 while the services sector was more subdued. The improvement in manufacturing attributed (to) the expansion to stronger client demand and quicker delivery times enabled faster processing of orders. The employment subindex stayed in expansion territory, but the workforce increased only marginally. On the inflation front, the PMI report showed that input prices increased at a slower pace while output prices saw an increase in pace. Expectations among firms regarding the 12-month outlook were lower in February but remained largely in line with the series average Existing-home sales picked up in January, rising 3.1% MoM to 4,000K. As a result, sales stood 1.7% below the mark registered a year ago. Contract closings rose only in the single-family segment (+3.4% to 3,600K) while the condo portion was flat in the month (+0,0% to 400K). In light of the uptick of sales in January, the inventory-to-sales ratio fell by one tick to 3.0. While this figure is not far off where it was before the pandemic, it remained well below its historical average and at levels consistent with tight supply. This situation was largely due to the fact that the number of homes available on the market remains at a very low level Mortgage rates have declined significantly in the past few months, which is why home sales is expected to continue stabilizing in the coming months, if not rise a little. That said, they should remain below the levels observed before the pandemic at least until the Federal Reserve changes its tune and opens the door to rate cuts, something that might not occur before the second half of 2024 The administration of US President Joe Biden plans to invest $20 billion to enhance port security, including replacing cranes made in China because of concerns that the China could gain access to information about the shipment of materiel in or out of the US to support US military operations. Chinese-made cranes account for nearly 80% of the cranes in use at US ports, officials said Equity indexes generally moved higher during a week shortened by the Presidents’ Day holiday on Monday, although the small-cap Russell 2000 Index lost ground. The S&P 500 Index hit new intraday highs, as did the Nasdaq Composite Index, which posted its biggest daily gain in about a year on Thursday, when NVIDIA added a record USD 277 billion to its market capitalization. After Wednesday’s trading session, the chipmaker reported strong quarterly revenue and earnings that topped Wall Street estimates. The company also increased its full-year guidance on robust demand for its chips, which are used in artificial intelligence applications In terms of data release, personal & income spending are out on Thursday attention for a few reasons. First, it includes the Fed’s preferred inflation gauge, the PCE deflator. However, the hot January CPI and PPI data suggest firmer monthly prints for both the headline and core (0.3% and 0.4%, respectively), driven by broad-based strength in services. UK Composite PMI edged up by 0.4pp to 53.3 (market expectations: 52.9), firmly above 50 and therefore continuing to indicate private sector expansion. This means that, according to the PMI measure, business activity across the UK’s private sector has now expanded in four consecutive months. The services sector is driving growth prospects forward, with the Services PMI registering at a very respectable 54.3, unchanged from the previous month. However, the manufacturing sector continues to struggle with the PMI coming in at 47.1, indicating contraction. Those reporting a drop in manufacturing production often comment that market conditions remain unfavourable and order books are depleted This release contains good news for UK economic growth prospects in 2024 – as do other indicators such as the rebound in retail sales in January – but price pressures remain a challenge. It is reported that higher labour costs continue to be the main factor pushing up business expenses, especially in the service sector, and the latest data indicates a renewed acceleration in prices charged inflation across the private sector. In slightly better news, while manufacturers are reporting rising freight costs due to the Red Sea crisis, the latest overall increases in purchasing prices remain modest. Shipping costs did spike earlier this year but have now begun to plateau. EU Early PMI data for February suggested that the eurozone economy could be stabilizing, helped by a recovery in the services sector. A provisional estimate of the HCOB eurozone composite PMI for output rose to 48.9 from 47.9 in January, an eight-month high but still in contractionary territory. (PMI readings below 50 indicate that business activity shrank.) The composite PMI for Germany’s economic output declined for the eighth month in a row. Output likewise weakened in France. However, output in the rest of the eurozone expanded for a second month running Separately, final data confirmed Germany’s economy contracted 0.3% in the fourth quarter. Government consumption fell sharply due to budget constraints, and gross fixed capital formation shrank as companies cut investment. Meanwhile, the German government sharply reduced its forecast for economic growth this year to 0.2% from 1.3%, citing weaker global demand, geopolitical uncertainty, and higher inflation In local currency terms, the pan-European STOXX Europe 600 Index climbed to a record level, ending the week 1.15% higher. The benchmark rose as stellar quarterly results from NVIDIA stoked a global rally and demand for technology stocks. France’s CAC 40 Index gained 2.56%, Italy’s FTSE MIB added 3.05%, and Germany’s DAX advanced 1.76%. CHINA In monetary policy news, the People’s Bank of China (PBoC) injected RMB 500 billion into the banking system via its medium-term lending facility, compared with RMB 499 billion in maturing loans, and left the lending rate unchanged as expected. The operation was targeted at maintaining ample liquidity in the banking system, the central bank said in a statement. The PBoC announced that the five-year loan prime rate was lowered by a bigger-than-expected 25 basis points to 3.95%, marking the largest cut since the reference rate was introduced in 2019. Lowering the five-year rate, a key gauge for mortgages, will reduce mortgage rates for homebuyers and aims to shore up demand in the troubled property sector. Policymakers left the one-year lending rate unchanged Tourism revenue over the weeklong Lunar New Year holiday surged 47% over the 2023 holiday and surpassed pre-pandemic levels, according to data from the Ministry of Culture and Tourism. Domestic trips rose 34% from last year, and international trips also increased. However, average spending per trip fell 9.5% from 2019, signaling lingering caution among consumers. Moreover, this year’s holiday lasted eight days, a day longer than the 2019 break Chinese equities rallied as recovery hopes rose following buoyant holiday spending during the prior week’s Lunar New Year holiday. The Shanghai Composite Index rose 4.85%, while the blue-chip CSI 300 gained 3.71%. In Hong Kong, the benchmark Hang Seng Index advanced 2.36%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, TD Economics, National Bank of Canada, M. Cassar Derjavets. |
