| USA The S&P Global Flash Composite PMI jumped 3.2 points in March to a 10-month high of 53.3, signalling a solid improvement in private sector activity. New orders (from 48.5 to 51.2) expanded for the first time in six months, while output grew at the fastest pace since last May. Headcounts, for their part, increased the most in six months. Business confidence for future output slipped to a 3-month low, with survey respondents citing “inflationary pressures, financial market uncertainty an higher interest rates” as potential headwinds. The increase in the composite index was driven by the services sector. The associated tracker climbed from 50.6 in February to an 11-month high of 53.8 in March as new business increased for the first time since May 2022. Polled businesses also reported an acceleration in hiring. Although input price inflation eased, services providers continued to complain about greater wage bills. They thus raised selling prices at the fastest pace in 5 months in an effort to protect their margins The manufacturing sub-index rose as well (from 47.3 to 49.3) but remained below the 50-point mark separating expansion from contraction. Factory output rose for the first time since last October, while new orders declined at a softer pace than in the prior month. Firms operating in the manufacturing sector also reported the greatest improvement in delivery times since the inception of the survey in May 2007, something which allowed them to replenish stocks and process backlogs of work. Output price inflation in the manufacturing sector was the softest in two and a half years Durable goods orders contracted 1.0% in February instead of rising 0.2% as per consensus. Adding to the disappointment, the prior month’s result was revised from -4.5% to -5.0%. Orders in the transportation category dropped 2.8% on declines for defense aircraft (-11.1%), civilian aircraft (-6.6%) and motor vehicles/parts (-0.9%). Excluding transportation, orders stayed flat in the month. The report also showed shipments of non-defense capital goods excluding aircraft, a proxy for capital spending, remaining flat in February. On a three-month annualized basis, “core” shipments were up 1.8%, the least since July 2020. This suggests business investment in machine and equipment is losing steam in Q1 after a period of meteoric growth in 2022 Existing-home sales advanced for the first time in thirteen months in February, jumping 14.5% to a five-month high of 4,580K (seasonally adjusted and annualized). This was comfortably above the median economist forecast calling for a 4,200K print. Contract closings rose in both the single-family and the condo segments (+15.3% and +7.3%, respectively). With the number of homes available on the market stagnant at 980K, the inventory-to-sales ratio declined three ticks to 2.6 market for the National Association of Realtors). Properties that sold in February 2023 had been on the market for 34 days on average, nearly twice as long as those that sold a year earlier. Insufficient supply and low interest rates during the pandemic helped push prices up at breakneck speed. But waning demand and still elevated mortgage rates seem to be having the opposite effect now. The median price paid for a previously owned home stood at $363,000 in February, down 0.2% on a 12-month basis. This was the first annual decline recorded since February 2012 Sales of new homes edged up 1.1% in February to 640K (seasonally adjusted and annualized), a tad less than the 650K print expected by economists. The monthly increase was accompanied by a dip in the number of homes available on the market (from 439K to 436K). As sales increased and supply shrank, the inventory-to-sales ratio ticked down from 8.3 to 8.2, which remains high historically. It is worth noting that a high proportion of the houses available on the market were either under construction or awaiting construction. Completed houses represented only 17.6% of the total inventory, one of the lowest proportions ever recorded. This statistic reflects not so much the current health of the market as its past strength. Recall that, faced with severe labour shortages, homebuilders were unable to meet the explosion in housing demand that occurred during the pandemic The FOMC opted to raise the target range for the federal funds rate 25 basis points. Though consensus was not unanimous among forecasters, this was discounted as the most likely outcome. This ninth straight rate increase brought the target range for the federal funds rate to 4.75%–5.00%. The Fed also said it would continue to reduce its holdings of Treasuries and mortgage-backed securities (MBS) pursuant to a preexisting program and subject to monthly caps for both Treasuries ($60 billion/month) and agency MBS ($35 billion/month). There were no dissenters in this week’s decision Addressing concerns about the health of U.S. banks, the statement noted that the “banking system [was] sound and resilient”. However, it said recent developments were “likely to result in tighter credit conditions” even though the extent of this was “uncertain”. The characterization of the economy/inflation was upgraded as the Fed noted that job gains had “picked up” and were running at a “robust pace”. Gone from the statement was the acknowledgement that inflation had “eased somewhat”. The statement also stressed that the Committee “remain[ed] highly attentive to inflation risks” and that FOMC members anticipated that “some additional policy firming [might] be appropriate” (they had previously signaled “ongoing increases”) One of the key focuses leading up to this week’s statement was the Fed’s updated dot plot. Just a few weeks ago, economists expected the central bank to signal additional rate hikes beyond those flagged in December. Needless to say, that the banking crisis that unfolded in the interim turned these expectations on their head, with markets moving to price rate cuts by mid-year. In the end, the dot plot published this week was not that different from the one presented three months ago. While a few dots moved higher in 2023, the median projection still saw rates culminating at 5.125% at the end of the year. On a more distant horizon, policymakers still expected policy rates to drop, albeit at a slightly slower pace than in their previous estimate. They saw benchmark rates down to 4.25% at the end of 2024 (against 4.125% in the December dot plot) and 3.125% at the end of 2025 (unchanged). The points remained widely dispersed in the two most distant years of the horizon, a sign of the high level of uncertainty surrounding these forecasts First Republic continues to face volatility. Fitch ratings downgraded First Republic’s long-term issuer default rating again, this time to B from BB amid concerns over the bank’s funding and earnings prospects. In search for ways to increase capital, the bank hired J.P. Morgan to advise on strategic alternatives. Further, on Wednesday, Treasury Secretary Janet Yellen stated that the US Department of the Treasury is not considering providing blanket insurance on deposits without discussing with lawmakers and that the executives responsible for a bank’s collapse should be held accountable. However, she has reassured that the Treasury Department is willing to take actions to protect depositors of smaller lenders if necessary and hinted that the FDIC is looking into the possibility of temporarily raising the deposit insurance cap of $250,000, as a one-time deal, without the need of Congressional approval. Immediately following Yellen’s speech, the regional bank market took a dip — with First Republic and PacWest shares declining double digits — but have since slightly rebounded Major benchmark returns varied widely as banking industry and recession worries weighed on value stocks and small-caps, while large-cap growth stocks benefited from falling interest rates. The technology-heavy Nasdaq Composite outperformed the small-cap Russell 2000 Index by 828 basis points (8.28 percentage points). Relatedly, financials underperformed for a third consecutive week, and the small real estate sector suffered from worries about how stresses in the regional banking system would affect the commercial real market, where regional banks are the primary lenders In terms of data release, the consumer confidence print is out on Tuesday. Consumers have more or less been downbeat since the pandemic hit, and the consumer confidence is expected to slip to 101.0 from 102.9 in February. Confidence readings can be volatile month to month, but the Consumer Confidence Index has averaged around 104 the past 12 months, well below the near-129 reading averaged in the 12 months pre-pandemic The third estimated of the Q4 GDP is out on Thursday. The Bureau of Economic Analysis third estimate of GDP doesn’t normally get much attention. While there may be some fine-tuning for major components, no significant revision of the headline GDP is expected and Q4 growth will likely rise at a 2.7% annualized rate. But it’s worth watching this release as it provides the first estimate of Q4 corporate profits. UK The YoY CPI rate of inflation rose in February to 10.4%, up from 10.1% in January and significantly above consensus expectations of 9.9%. YoY core CPI also increased, rising from 5.8% to 6.2%. The largest upward contributions in CPI came from restaurants and cafes, food and clothing, partially offset by downward contributions from recreational and cultural goods and services, and motor fuels. Last week, the Office for Budget Responsibility forecast that inflation will drop faster this year than previously projected. They now predict that CPI will end the year just shy of 3%. Despite the latest CPI figure coming in hotter than expected, inflation is expected to fall significantly over the course of 2023. Both spot and future energy prices have come down sharply, world food prices have moderated since last year, and core goods inflation will be suppressed by falling shipping costs and lower supply chain disruption. Base effects will begin to show up strongly in the y-o-y CPI figures from April Last week, the Office for Budget Responsibility forecast that inflation will drop faster this year than previously projected. They now predict that CPI will end the year just shy of 3%. Despite the latest CPI figure coming in hotter than expected, inflation is expected to fall significantly over the course of 2023. Both spot and future energy prices have come down sharply, world food prices have moderated since last year, and core goods inflation will be suppressed by falling shipping costs and lower supply chain disruption. Base effects will begin to show up strongly in the YoY CPI figures from April The BoE has set out guidance saying that further monetary policy tightening could be required. Yesterday the Federal Reserve increased interest rates by 25bp. However, investors are now expecting that US rates have finally peaked, and that they will start falling later this year. This is significant in looking at how the BoE will act moving forward. The primary driver of sterling’s exchange rate remains interest rates, and the differentials between the BoE against the Fed and the ECB is material. MPC members are of course mindful of the impact of exchange rates on future inflation and expectations, particularly given the UK’s high import-dependence. However, given the market-implied pathway of future US interest rates, there is reason to suggest that the MPC no longer needs to worry about widening interest rate differentials leading to sterling depreciating against the dollar, which in turn reduces the pressure on rate setters to further increase rates. This, accompanied by the more consequential impact of financial stability concerns arising from recent financial turbulence, reinforces the view that the BoE has now reached its peak level of interest rates UK Retail Sales for February have come through at 1.2% MoM, -3.5% YoY, retail sales excl-fuel were 1.5% MoM and -3.3% YoY. Non-food stores sales volumes rose by 2.4% over the month because of strong sales in discount department stores. Food store sales volumes rose by 0.9% in February 2023 following a rise of 0.1% in January 2023, with some anecdotal evidence of reduced spending in restaurants and on takeaways because of cost-of-living pressures. There is continuing divergence between volume and value (indicating inflation), against the monthly increase, sales volumes fell by 0.3% in the three months to February 2023. While these numbers represent a slight improvement on what was expected, it is a modest improvement. Online sales are now 25.4% of retail sales, they had been 20% of retail sales before the pandemic, peaking at 38% during lockdown, but they seem likely to steady down around current levels. Clearly not all retail outlets will suffer equally from this shift to online, with “destination” shopping areas with the right mix of shops (particularly clothing), pleasant environment and transport doing relatively well against those areas without these advantages, the latter being in increasing competition with people’s sitting rooms, a contest they are going to find difficult. EU The S&P Global Flash Composite PMI for the Eurozone rose from 52.0 in February to 54.1 in March, signaling a third consecutive expansion in business activity in the private sector and the sharpest since May last year. The services gauge jumped from 52.7 to a 10-month high of 55.6 as growth in new orders and employment accelerated and business activity rose for a third month in a row. S&P Global’s report described the further revival of growth in financial services as a “key development” explaining the good performance of non-manufacturing firms, “with a notable turnaround in real estate activity compared to late last year.” Travel and tourism also showed strength thanks in part to the return of Chinese tourists. Higher input prices, meanwhile, were often associated with high wages The manufacturing sub-index, for its part, moved further into contraction territory, slipping from 48.5 to a 4-month low of 47.1. Output stayed more or less unchanged while new orders contracted for the eleventh month running. European factories reported the sharpest decline in supplier delivery times since data collection began in 1997, a development linked to “an improvement in supply logistics, such as reduced port congestion and fewer container shortages, but also lower demand for inputs… and further efforts by companies to unwind high inventory levels.” Price pressures eased in the manufacturing sector, with output inflation easing and input prices retreating for the first time since July 2020 French President Emmanuel Macron’s highly unpopular pension reforms have been cleared to be implemented after two no-confidence votes failed in Parliament. The opposition is pursuing an appeal to France’s constitutional council to prevent part or all of the pension reforms from going into effect Shares in Europe gained ground, despite weakness in bank stocks. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.87% higher. Major stock indexes advanced as well. Italy’s FTSE MIB climbed 1.56%, France’s CAC 40 Index gained 1.30%, and Germany’s DAX advanced 1.28% Bank stocks in the STOXX Europe 600 Index resumed their sharp decline at the end of the week on renewed worries over the health of the financial sector. The slide reversed earlier gains on the news that UBS Group agreed to buy Credit Suisse in a deal brokered by the Swiss authorities. Although there were no specific headlines that triggered a move lower, some reported that the market focus appeared to have shifted to concerns about banks with exposure to commercial real estate. CHINA China’s fiscal revenues fell 1.2% in the first two months of 2023 from a year earlier, while expenditures rose by 7%. State land sales revenue, a large source of direct funds for local governments, slumped 29% amid persistent housing market weakness despite the government’s efforts to shore up the property sector China’s economic indicators have picked up in recent months as consumption and infrastructure investment rebounded from pandemic lockdowns. However, many analysts predict that policymakers will maintain an accommodative stance as banking industry turmoil strains the global growth outlook The People’s Bank of China (PBOC) left its benchmark one-year and five-year loan prime rates (LPR) at 3.65% and 4.3%, respectively, for the seventh consecutive month. The LPRs, which are based on the interest rates that 18 banks offer their best customers and published monthly by the PBOC, are quoted as a spread over the rate on the central bank’s one-year policy loans, known as the medium-term lending facility (MLF). The move was largely anticipated after the central bank left its MLF unchanged the prior week and unexpectedly announced a 25-basis-point cut in the reserve requirement ratio for most banks, a move widely interpreted as an easing measure to support the economy Chinese stocks rose on hopes that the country’s central bank will maintain an accommodative stance amid the global banking turmoil. The Shanghai Stock Exchange Index gained 0.46% and the blue-chip CSI 300 added 1.72% in local currency terms. In Hong Kong, the benchmark Hang Seng Index added 2.03%. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets |
