| USA The Consumer Price Index sprang 0.5% in January, the most in seven months. This was roughly in line with consensus expectations. Prices in the energy segment jumped 2.0% as a decline for fuel oil (-1.2%) was more than offset by steep increases for gasoline (+2.4%) and utility gas services (+6.7%). The cost of food, meanwhile, rose 0.5%. The core CPI, which excludes food and energy, increased a consensus-matching 0.4% Nominal personal income increased 0.6% in January, below consensus expectations calling for a 1.0% increase. Amid a labor market that remains solid, the wage/salary component of income progressed 0.9% in the month, while income derived from government transfers remained unchanged. Personal current taxes, for their part, sank 7.9%. All this translated into a 2.0% monthly gain for disposable income. Nominal personal spending, for its part, expanded 1.8% with increases for both goods (+2.8%) and services (+1.3%). As disposable income edged up more than spending, the saving rate increased from 4.5% to 4.7%, which remains below pre-pandemic levels. Adjusted for inflation, disposable income grew 1.4%, whereas spending swelled 1.1% The headline PCE deflator came in at 5.4% YoY, up from 5.3% the prior month (revised from 5.0%) and above consensus expectations calling for a 5.0% increase. The core PCE measure, meanwhile, climbed from 4.6% (revised from 4.4%) to 4.7% The S&P Global Flash Composite PMI climbed 3.4 points in January to 50.2, signaling a modest improvement in operating conditions in the private sector. Domestic and international orders continued to contract, albeit at a slower pace than in the prior month. Work backlogs eased further as a result but this did not prevent job creation to accelerate to its fastest rate (from 50.7 to 51.7) since last September. The sub-indices tracking price pressures sent mixed signals, with input price inflation softening and output charges rising at the quickest pace since October. According to the S&P Global note, “Despite reports of raw material and component price pressures easing, hikes in wages reportedly drove costs higher and kept inflation at an historically elevated rate.” Business confidence for future output, meanwhile, sprang to a nine-month high The increase in the composite index was driven by services, which benefited from unseasonably warm weather. Their tracker climbed from 46.8 in January to 50.5 in February. Incoming new business shrank at a slower pace while headcounts increased the most in five months Existing-home sales slipped another 0.7% in January to 4,000K (seasonally adjusted and annualized), bringing the total drawback since the beginning of 2022 to 36.9%. This was also the lowest level of sales observed in more than 12 years. Contract closings sagged in the single-family segment (-0.8%) and were flat for condos (0.0%). Despite lower sales, the inventory-to sales ratio remained unchanged at 2.9 (<5 indicates a tight market for the National Association of Realtors) as supply remained very low. Indeed, inventory totaled just 980K properties for sale (not seasonally adjusted), the second-lowest level ever in a month of January. Still, properties that sold in December of 2022 had been on the market for 33 days on average, almost twice as long as a year earlier Further emphasizing the weakness of the housing market, the Mortgage Bankers Association’s index tracking mortgage applications made for the purpose of buying a house (excluding refinancing) fell 18.1% in the week to February 17 to a 28-year low 147.1. This was the steepest weekly drop recorded since 2015 The second estimate of Q2 GDP growth came in at +2.7% in annualized terms, a weaker result than both the advance estimate (+2.9%) and the median economist forecast calling for a +2.9% print. Household consumption was revised downward (from +2.1% QoQ annualized to +1.4%) on lower spending on both goods (from +1.1% to -0.5%) and services (from +2.6% to +2.4%). Business investment, meanwhile, was upgraded (from +1.4% to +3.7%), with spending on structures (from +0.4% to +8.5%) and intellectual property (from +5.3% to +7.4%) proving stronger input than initially reported. Final sales to domestic purchasers (i.e., household spending plus gross business investment), a good gauge of the underlying strength of an economy, expanded just 0.1% annualized in the quarter (less that the +0.2% of the previous release). Outside of the pandemic, this was the weakest print recorded since 2009Q4. Contributions from inventories, government spending and international trade remained more or less unchanged Investors continue to price in additional rate hikes from the US Federal Reserve. Fed funds futures now suggest that the central bank will hike 0.25% at each of its next three meetings while the odds of a 0.5% hike in March have increased to 27%. The minutes of the February FOMC meeting released this week indicate that participants felt it was “important that overall financial conditions be consistent with the degree of policy restraint that the committee is putting in place in order to bring inflation back to the two percent goal,” suggesting that policymakers were displeased with the equity and bond market rallies that were underway at the time of the early-February meeting and that tighter monetary policy may be needed to offset an unwarranted loosening of conditions. Since that meeting, new data show that economic activity was stronger than expected and that slower progress is being made on inflation, which could keep the Fed raising rates longer than anticipated The White House is considering a number of candidates to become vice chair of the Board of Governors of the Federal Reserve System, but two economists, Janice Eberly and Karen Dynan, are seen as the favorites A cascade of upside inflation and growth surprises pushed the S&P 500 Index to its worst weekly loss since early December. At its close on Friday, the index had surrendered roughly 35% of the rally that began in October, but it remained up 3.40% for the year to date. The declines pushed the narrowly focused Dow Jones Industrial Average into negative territory for 2023, however. Communication services and consumer discretionary stocks performed worst within the S&P 500, but the declines were widespread, and growth stocks fell only modestly more than value shares In terms of data release, the construction spending is out on Wednesday. While elevated input prices and financing costs have hampered the construction industry, construction spending still has room to rise. Construction on the nonresidential side of the ledger appears to be holding up a little stronger in this tough environment for builders. The Architecture Billing Index showed mild improvement in December, but remained in contractionary territory. On the other hand, building contracts went from steady to growing. Interest rate hikes continue to hammer demand, with firm comments including a “wait-and-see” mindset as the industry awaits the terminal fed funds rate The ISM manufacturing and services indices are out on Wednesday and Friday. Both indices are expected to be seen in contractionary territory. UK UK Retail sales data for January has been released, sales were up 0.5% MoM, -5.1% YoY. Non-food stores sales volumes rose by 0.6% in January, following a fall of 2.5% in December with what growth there was supported by sales promotions. Despite this pickup, sales volumes were 2.9% below their pre-pandemic levels. Food sales volumes fell by 0.5% in January 2023 following a fall of 0.7% in December due to customers buying less because of the increased cost of living and food prices. While at least a portion of these rises was due to increased amount spent (0.6%) and the increase in quantity bought was slightly lower (0.5%), there was clearly an actual increase not due to inflation February’s PMI readings have dramatically exceeded expectations. The UK Composite Output Index registered at 53, far higher than market predictions of 49 and a 4.5pp increase from January’s print. This is the first time the index has come in above 50 (which indicates private sector expansion) since July 2022. The UK services PMI is also comfortably in expansionary territory at 53.3, up from 48.7 in January, although the flash manufacturing PMI came in at 49.2, indicating marginal contraction Service providers have reported stronger demand for business services as a result of an improving global economic outlook and reduced domestic political uncertainty, while the manufacturing sector is now also benefiting from recovering client demand and improving supply conditions. The degree of optimism regarding business activity over the next 12 months is now the highest it has been since March 2022, and this index has risen in each of the past four months. On the inflation front, there is good news from the manufacturing sector: factory-gate prices are the weakest since January 2021. However, many service providers have suggested that rising staff salaries are leading to a sustained increase in their prices charged EU The Eurozone flash Composite PMI rose above expectations to 52.3 in February, compared with 50.3 the previous month. The Manufacturing PMI fell more than expected to 48.5, compared with 48.8 earlier, and the Services PMI rose more than expected to 53, compared with 50.8 the month before. Economic activity in France increased in February for the first time since October last year, and the economy also experienced a modest expansion in employment and an easing of input cost inflation. Still, new order intakes continued to decline, a sign of weak demand conditions, and business confidence weakened further February’s headline statistics reflected an improved performance of the service sector and a return to growth of manufacturing output: rising demand, easing supply chains, reduced order book backlogs and was also accompanied by improvements in confidence. Input price growth in the manufacturing sector fell considerably but remain high in the services sector. New orders and export orders remain well below historical medians The German economy shrank more than expected in the fourth quarter, spurring fears of a recession. Gross domestic product declined 0.4% compared with the previous three months – worse than the early estimate of a 0.2% contraction. The final data showed household consumption and capital investment were weaker than initially estimated Shares in Europe fell as better-than-expected economic data and corporate earnings raised the prospect that central banks might persist with interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.42% lower. Major stock indexes also declined. Germany’s DAX Index lost 1.76%, France’s CAC 40 Index slid 2.18%, and Italy’s FTSE MIB Index dropped 2.76% CHINA The People’s Bank of China (PBOC) left its benchmark one-year and five-year loan prime rates unchanged for the sixth consecutive month, as expected. Signs of economic growth appeared to dampen the need to loosen policy after Beijing’s removal of pandemic restrictions in December resulted in a batch of better-than-expected indicators. Many analysts forecast the central bank will continue its accommodative stance to support the economy amid a sluggish property market, tumbling exports, and fragile consumer confidence. However, the PBOC instructed lenders to control the pace of new loans after they reached a record level in January, Reuters reported. New loans jumped to RMB 4.9 trillion in January driven by state-backed infrastructure projects even as demand from businesses remained weak, according to Reuters. In regulatory news, China’s securities regulator published new rules to revive offshore initial product offerings following a regulatory freeze that began in July 2021. The rules grant oversight of variable interest entity structures and allow access to foreign capital as Beijing attempts to boost overseas listings, which it cited as vital for letting domestic companies access liquid capital markets. The guidelines go into effect on March 31 China’s yuan currency dropped to a seven-week low against the dollar after the release of unexpectedly strong U.S. inflation data on Friday raised expectations that the Federal Reserve would keep raising interest rates. Signs of worsening U.S.-China relations—a key factor influencing currency trading in recent years—also pressured the yuan amid reports that the U.S. plans to increase the number of troops helping train Taiwanese forces Chinese stocks advanced after three weeks of losses as hopes for stepped-up regulatory support offset concerns about elevated U.S. tensions. The Shanghai Stock Exchange Index gained 1.34% and the blue-chip CSI 300 added 0.66% in local currency terms. In Hong Kong, the benchmark Hang Seng Index fell 3.43% as a resurgent U.S. dollar added to concerns over the strength of China’s economic recovery. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets. |
