| USA According to the Bureau of Economic Analysis, real GDP expanded 1.6% annualized in 2024Q1, considerably less than the median economist forecast calling for a +2.5% print. As this gain was weaker than potential, the output gap narrowed from +0.8% to +0.3%. Year on year, real GDP was up 3.0%. Domes-tic demand grew at a healthy clip in the three months to March, supported by household consumption (+2.5% QoQ ann.) as well as residential investment (+13.9%) and intellectual property investment (+5.4%). Business equipment spending (+2.1%) and government spending (+1.2%) advanced a well, albeit at a slower pace. Non-residential structure investment sagged 0.1%, a first decline in six quarters for this indicator. Spending on services (+4.0%) grew at the fastest rate since 2021Q3 while spending on goods shrank slightly (-0.4%), a sign that post-pandemic household spending is still recalibrating. Trade had a negative impact on growth (-0.86 percentage point) as exports expanded at a much slower pace than imports did (+0.9% vs. +7.2%). Inventories, for their part, shaved 0.35 pp off the headline GDP figure The personal consumption expenditure price index excluding food and energy climbed an annualized 3.7% in 2024Q1, up from 2.0% in 2023Q4 and topping consensus expectations by a good margin (+3.4%). Year on year, the index slid from 3.2% to a three-year low of 2.9%. GDP growth surprised on the downside for the first time in a year in Q1. The disappointment was largely due to larger-than-expected negative contributions from inventories and international trade. Where the latter is concerned, a major increase in services imports was to blame. American consumers seem to be in the grips of travel fever; intentions to take holidays abroad (as compiled by the Conference Board) recently reached an all-time high and translated into a surge in air travel spending. Even if this in-crease is further proof of the vigor of American consumers, it nonetheless acted as a brake on growth in 2024Q1 Nominal personal income rose a consensus-matching 0.5% in March following a 0.3% increase the prior month. The wage/salary component of income jumped 0.7% whereas income derived from government transfers advanced 0.3%. Personal current taxes, meanwhile, rose 0.6%. All this translated into a 0.5% increase in disposable income. Nominal personal spending, for its part, rose a consensus-top-ping 0.8%. Outlays on goods surged 1.3% (the most in 14 months), while services spending expanded 0.6%. The headline PCE deflator came in at 2.7%, up two ticks from the prior month and one tenth above consensus expectations. The core measure, meanwhile, remained unchanged at a 3-year low of 2.8% instead of cooling to 2.7% as per consensus. On a monthly basis, both the headline and the core indices progressed 0.3%. The core services PCE deflator excluding housing, a good measure of underlying price pressures, advanced 0.4%. On a 3-month annualized basis, it was up 5.5%, marking the steepest gain registered in more than a year The S&P Global Flash Composite PMI slipped from 52.1 in March to 50.9 in April, a level indicating a modest expansion in business activity. The consensus forecast was for the index to peg in at 52.0. Output continued to expand, albeit at a slower pace than in the prior month, while new orders decreased for the first time in six months. On the employment front, the more challenging business environment prompted companies to cut payroll numbers for the first time in almost four years. Weaker demand has dampened confidence among firms: Business sentiment dipped to a five-month low but “remained positive overall amid hopes market conditions will pick up” The drop in the composite PMI was partially driven by services: The corresponding gauge slid from 51.7 to a five-month low of 50.9. To explain the decline that “some service providers suggested that elevated interest and high prices had restricted demand during the month”. The reduction in payroll was concentrated mainly in the service industry as the decline in staffing levels in April was the most pronounced since the end of 2009, excluding the opening wave of the COVID-19 pandemic Durable goods orders increased 2.6% in March, roughly in line with the median economist forecast of 2.5%. Orders in the transportation category jumped 7.7% as orders for non-defense aircraft soared 30.6% after shooting up 15.6% the previous month. Excluding transportation, orders edged up 0.2% in line with the consensus forecast. The report showed, also, that orders for non-defense capital goods excluding aircraft, a proxy for future capital spending, rose a consensus-matching 0.2% MoM after climbing 0.4% in February The Pending Home Sales Index climbed 3.4% in March, overshooting the 0.4% consensus forecast by a long shot. Despite a second monthly increase in a row, pending transactions remained weak on a historical basis. Year on year, they were still down 4.5% New-home sales sprang 8.8% in March to 693K (seasonally adjusted and annualized) after dropping 5.1% a month earlier. This was a stronger print than the 668K expected by consensus. Overall, new-home sales remained roughly in line with their pre-pandemic level owing to the complete paralysis of the resale housing market in the current interest rate environment. Despite a higher number of homes available on the market (from 465K to 477K), the higher level of sales cut the inventory-to-sales ratio from 8.8 in February to 8.3 in March, which was still far above this indicator’s historical average of 6.1. It is worth noting that a growing share of the houses available on the market were completed rather than under construction or awaiting construction. Completed houses represented 19.2% of the total inventory, up from the trough of 7.6% hit in April 2022 but still below pre-pandemic levels (about 25%). Recall that, faced with severe labour shortages, homebuilders were unable to meet the explosion in housing demand that occurred during the pan-demic. As a result, construction backlogs swelled. The current context, which is less effervescent, is allowing homebuilders to make up for lost time The US Federal Trade Commission on Tuesday issued a rule that prohibits companies from enforcing existing noncompete agreements on anyone other than senior executives. The FTC says that noncompete clauses, which typically prevent workers from taking a new job or starting a business for a certain time period after leaving an employer, hamper competition for labor and result in lower pay and reduced benefits for workers. Businesses that use them say they are an effective way to protect their intellectual property, customer relationships and other investments. Several business groups immediately sued to block the ban in federal court The US Department of Labor this week approved a rule that would extend the fiduciary requirements under the ERISA law to all advisers, brokers and insurance agents who provide advice on individual retirement accounts, including rollovers. The change begins going into effect on 23 September and the industry will then have a year to fully comply. Earlier efforts to impose a fiduciary rule have been struck down or narrowed by the courts The US Congress passed a bill this week authorizing President Joe Biden to seize Russian dollar assets, but according to Bloomberg, the majority of the approximately $280 billion in Russia’s frozen funds lie in the European Union, where a number of countries, including Germany and France, have expressed reservations over the legality of outright seizure In terms of data release the ISM Manufacturing Index is out on Wednesday. Throughout the past year or so, economic data have largely surprised to the upside, causing many forecasters to continuously upgrade their forecasts. Manufacturing has largely bucked this trend. For 16 consecutive months, the ISM manufacturing index was below 50, signaling contraction for the sector. The bellwether finally saw daylight in March when it climbed above the breakeven to 50.3. The hard manufacturing data were less dire, but not exactly consistent with the sort of stellar growth evident in the service economy the past year and a half or so. Consider, for example, that in the 18-month stretch from September 2022 through March 2024, industrial production was up nine months and down nine months for a total index level change of -0.8% The S&P 500 Index and most other major benchmarks managed to snap a string of three weekly losses as investors responded to the busiest week of the first-quarter earnings reporting season. As of the end of the week, analysts polled by FactSet were expecting overall earnings for the S&P 500 to have increased 3.7% in the first quarter relative to the year before, with “both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises… above their 10-year averages.” The technology-heavy Nasdaq Composite Index performed best, helped in part by strength in Apple and a late rebound in chipmaker NVIDIA. Shares in Google parent Alphabet also surged late in the week following its announcement of better-than-expected first-quarter earnings along with the company’s first dividend payment. Conversely, Facebook parent Meta Platforms fell sharply—at one point erasing nearly USD 200 billion in market value—after CEO Mark Zuckerberg announced plans to continue heavy spending on artificial intelligence and other new technologies FOMC Meeting will be held on Wednesday. After keeping rates on hold at its March meeting, the FOMC pointed toward the likelihood of rate cuts this year commencing in the months ahead. This dovish bias was also evident in the Summary of Economic Projections (SEP). Both the comments and the forward-looking rate estimates were characterized as “data dependent” and the data have not been particularly supportive of those expectations since March. What had been a trend decline in inflation has been disrupted over the past several months, most recently with Friday’s update that puts the PCE deflator at 2.7% over the past year. Sustained resilience in economic activity, particularly in the service sector, gives policymakers little indication that the time is right to start easing policy. UK PMI release contains the latest set of figures to show that the UK has firmly emerged from last year’s recession. Both the composite PMI and services PMI notably exceeded expectations: composite PMI registered at 54 (market exp: 52.6) and services PMI registered at 54.9 (market exp: 53). Both figures are notably above 50, which indicates private sector expansion. Service providers in the UK have indicated a robust rise in business activity during the month of April, with the rate of growth the fastest for 11 months. The strong performance in the services sector was slightly offset by a marginal decline in manufacturing production, with lower output levels being linked to weak market conditions While the latest release shows some good news for UK economic growth prospects, the data contains evidence of an increase in cost burdens across the private sector. Stronger reported cost burdens have been linked to higher staff wages, with many respondents noting the pressure arising from costs associated with the near 10% increase in the National Living Wage. Latest published ONS earnings figures only go up to February, and the majority of MPC members will likely want to observe the exact impact of April’s large increase in the National Living Wage on overall nominal pay awards before acting on interest rate cuts. The Bank of England’s latest forecast suggests that, while the UK is expected soon to meet the 2% inflation target due to various base effects, y-o-y CPI inflation is likely to rise again by the year end. This latest PMI release would suggest that this may end up materializing. EU The PMI flash composite output index rose to 51.4 in April, up from 50.3 in March and above expectations of 50.7. Manufacturing PMI is still weak at 45.6, slightly down from 46.1 in March and below expectations of a rise to 46.5. Service PMI rose to 52.9, from 51.5 in March, beating expectations of a rise to 51.8. It would have been nice to see more evidence of the European economy moving closer to a soft landing, instead of continued weakness in manufacturing and continued stubborn service prices. However, the release did not include any signals threatening the ECB rate cut scheduled for June. Germany’s PMI and the Ifo Institute’s barometer of business confidence provided further evidence that the country’s economic downturn may be bottoming out. The private sector returned to growth in April, as services activity increased and a decline in manufacturing eased. Overall business sentiment improved for a third consecutive month, and the government increased its forecast for economic growth this year to 0.3% from 0.2% In local currency terms, the pan-European STOXX Europe 600 Index snapped a three-week losing streak and ended 1.74% higher. An easing of Middle East tensions and some encouraging corporate earnings results helped to boost sentiment. Most major stock indexes also advanced. Germany’s DAX gained 2.39%, France’s CAC 40 Index added 0.82%, and Italy’s FTSE MIB climbed 0.97%. CHINA China’s economy is expected to grow 4.8% this year, up from a median forecast of 4.6% last month, according to 15 economists surveyed by Bloomberg. China’s gross domestic product grew an above-consensus 5.3% in the first quarter from a year earlier, accelerating slightly from the 5.2% year-over-year expansion in the fourth quarter of 2023. However, economists downgraded their inflation forecasts as declining producer prices and a persistent property market slump remain a drag on the economy China’s economy is expected to grow 4.8% this year, up from a median forecast of 4.6% last month, according to 15 economists surveyed by Bloomberg. China’s gross domestic product grew an above-consensus 5.3% in the first quarter from a year earlier, accelerating slightly from the 5.2% year-over-year expansion in the fourth quarter of 2023. However, economists downgraded their inflation forecasts as declining producer prices and a persistent property market slump remain a drag on the economy Chinese stocks rose as investors grew more optimistic about the economy. The Shanghai Composite Index gained 0.76%, while the blue-chip CSI 300 added 1.2%. In Hong Kong, the benchmark Hang Seng Index soared 8.8%, according to FactSet. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, TD Economics, M. Cassar Derjavets. |
