USA
• Markit’s flash composite PMI came in at 56.0 in February, up sharply from 51.1 the month before. Polled managers reported a “notable recovery in demand from COVID-related disruptions at the start of the year” and linked growth to “substantial gains in new business, employees returning from sick leave, increased travelling and greater availability of raw materials”. The manufacturing tracker rose from 55.5 to 57.5, buoyed by a slight improvement in supply bottlenecks. New orders and output expanded at a faster pace than in the prior month, though the latter continued to be hampered by “raw material scarcity, supply-chain disruptions and labour shortages”. Input price inflation eased to a nine-month low but this did not prevent additional cost burdens from being transferred to clients, as evidenced by the steepest increase in factory gate charges in three months
• The Conference Board Consumer Confidence Index slid from 111.1 in January to 110.5 in February. Though the result was better than the 110.0 reading expected by consensus, it nonetheless suggested that the Omicron wave and rising inflation were beginning to sap the morale of American households. The monthly decline was entirely due to a deterioration of the medium-term outlook. Indeed, the expectations sub-index, which tracks consumer sentiment toward the next six months, cooled from 88.8 to 87.5. A smaller share of respondents had a positive outlook on business conditions (from 23.6% to 23.4%), employment (from 22.1% to 21.3%), and income (from 16.2% to 15.7%). Furthermore, less people planned to buy a home (from 7.0% to 6.5%), an automobile (from 11.5% to 11.0%), or major appliances (from 49.2% to 47.2%). It is also worth noting that consumer inflation expectations for the next 12 months stood at 7.0% in February, which is less than the 7.3% registered last November but is still one of the highest prints since the 1990s
• Durable goods orders sprang 1.6% in January, a steeper gain than the one expected by consensus (+1.0%). Adding to the good news, the prior month’s result was upgraded significantly, from -0.7% to +1.2%. Orders in the transportation category jumped 3.4% in the first month of the year on a sizeable gain in the civilian aircraft segment (+15.6%). Bookings in the vehicles/parts segment, on the other hand, cooled 0.4%. The report showed, also, that orders of non-defence capital goods excluding aircraft, a proxy for future capital spending, progressed 0.9% in the month and were up 7.2% on a 3-month annualized basis. This suggests that business investment in machine/equipment has further room to improve in the first quarter of the year
• Nominal personal income remained unchanged in January (+0.0%) after a 0.4% gain the prior month. As the labour market continued to recover, the wage/salary component of income progressed 0.5%. Income derived from government transfers, meanwhile, sank 1.3%, primarily reflecting the end of advance Child Tax Credit payments authorized to be paid out through December by the American Rescue Plan Act of 2021. All this translated into a 0.1% monthly gain for disposable income. Nominal personal spending , for its part, expanded 2.1% with increases for both goods (+5.2%) and services (+0.5%). As disposable income edged up and spending spiked, the saving rate fell from 8.2% to 6.4%, its lowest level since 2013. Adjusted for inflation, disposable income shrank 0.5%, whereas spending swelled 1.5%
• Still in January, the headline PCE deflator came in at 6.1% YoY, up from 5.8% the prior month and reaching its highest point since February 1982. The core PCE measure, meanwhile, climbed from 4.9% to a 39-year high of 5.2%
• After hitting a nine-month high of 839K in December (initially estimated at 811K), new home sales sank 4.5% to 801K in January. This retreat, together with a rise in the number of homes available on the market (from 394K to 406K), pushed the inventory-to-sales ratio up from 5.6 to 6.1, indicating a roughly balanced market. The median transaction price, meanwhile, increased 7.0% MoM to $423,000. On a 12-month basis, the median price was up 13.4%. After the buying frenzy of the past two years, the new homes market seems to be stabilizing at a level roughly in line with where it was before the pandemic. While high prices could continue to dampen buyer enthusiasm going forward, rising inventories might alleviate some of the pressure. In this regard, there were more new homes available on the market in December than at any time since August 2008. What’s more, a lot more are on the way judging from the number of single-family homes currently under construction in the United States
• Initial jobless claims eased from 249K to 232K in the week to February 19. Continued claims, for their part, declined from 1,588K to a 52-year low of 1,476K. Such low levels suggest not only that the worst of the Omicron wave is now behind us but also that the job market is booming
• The second estimate of Q4 GDP growth pegged in at +7.0% in annualized terms, a shade stronger than the preliminary estimate of +6.9%. The details of the report showed slight downgrades to household consumption and exports, but these was more than offset by stronger showings for business investment, residential investment and government spending. The contribution from inventories was unchanged and remained the main driver of growth in the quarter
• The major indexes closed mostly higher after a holiday-shortened week of historic volatility sparked by Russia’s invasion of Ukraine. (Markets were closed Monday in observation of Presidents Day.) On Thursday, the Nasdaq Composite Index swung by 6.8%, the largest intraday range since the World Health Organization declared the start of the coronavirus pandemic in March 2020. As one example of the volatility, Tesla added USD 100 billion to its market capitalization over the course of the day on Thursday but declined roughly 5.5% over the week as a whole
UK
• UK consumers were already set to be clobbered in April with a combination of tax rises and inflationary pressures, which was projected to suppress consumer spending over the course of 2022 and act as a drag on GDP growth. The outlook now suggests that consumers will face an even more problematic inflationary environment as the economy will suffer from the consequences of increasing global energy prices arising from the Ukraine conflict. UK consumers should expect inflation to peak even higher than the 7.25% projected by the Bank of England’s (BoE’s) February outlook and to be at elevated levels for longer as the energy price cap, due to be reviewed for a second time this year in October, will likely be hiked once again. Business investment have been rising – currently around 8% below its pre-crisis peak to drive the UK’s GDP growth in 2022. But while business investment is expected to grow as corporations seek to deploy some of their excess savings developed during the pandemic, this will be moderated by the dampening effect that geopolitical tensions will have on business confidence
• The BoE increased interest rates by 0.25 percentage points to 0.5% in February, with four out of nine rate-setters pushing for a higher increase of 0.5 percentage points. Rates are expected to rise again in March to 0.75% and increase yet further to 1% by early summer at the latest. The increase to 0.5% has, of course, triggered the process of quantitative tightening (QT). This initial phase of QT will involve the BoE not re-investing the proceeds from maturing assets in its Asset Purchase Programme, most immediately the £25bn of gilts set to mature on 7 March. This QT marks the start of a process which will see over one-fifth of the Bank’s bond holdings being wound down by the end of 2025. This process could be accelerated if the BoE enacts its guidance, reiterated in February, that once rates hit 1% it will consider speeding up QT by actively selling off its bond holdings, although this was stated prior to the Ukraine crisis and could therefore be re-visited. It is nonetheless estimated that the impact of QT this year could be the equivalent of a 25 – 40 basis point interest rate rise. Following the invasion of Ukraine, the BoE will continues its hawkish stance on interest rates and QT as inflation is now projected to be even more acute and, crucially, more persistent, meaning rate-setters will have added concerns about the development of a wage-price spiral
• UK business activity rebounded in February after disruptions caused by the omicron variant of the coronavirus at the turn of the year, according to initial PMI data. The UK Composite Output Index surged to an eight-month high of 60.2, up from 54.2 in January. Both services and manufacturing activity accelerated sharply
EU
• The eurozone flash Composite PMI rose above expectations to 55.8 in February, compared with 52.3 in the previous month. Manufacturing PMI was 58.4, slightly below expectations, compared with 58.7 the month before, and Services PMI was 55.8 compared with 51.1, and above expectations. Both Germany and France saw significant increases in the pace of economic activity, with both growing the fastest since last summer. These accelerations were evident in both sectors but the improvement was especially large in the service sector. Meanwhile, inflationary pressures remained evident in both countries as well
• Activity rebounded in February although at a faster pace, especially in the services sector, than that foreseen by analysts. In the services sector, incoming new business and future expectations saw large one-month jumps, although inflationary pressures (both on the input and output side) increased. In the manufacturing sector, output remained roughly unchanged even as future expectations and new orders rose slightly. Moreover, there were continuing signs of reduced supply-side pressures – albeit still remaining at very high levels – even though backlogs of work rose in both sectors. Markit’s own commentary pointed to wage and energy price growth as driving the price pressures in the services sector
• The ECB is likely to take particular notice on the IHS Markit’s commentary regarding wage growth, as it foresees labor costs this year growing by 3.8 percent, higher than most other analysts. All things being equal, this release pushes the ECB towards ending QE this year and raising rates in March next year, although recent speeches by some members of the Governing Council have suggested an even earlier timetable to tighten policy
• EU Executive Vice President Valdis Dombrovskis said the European Commission will soon ask governments to start withdrawing pandemic-related fiscal stimulus in 2023 because the economy has recovered and is growing strongly, Reuters reported. “Of course, we need to remain agile, and, if there are new shocks and new problems, we need to be able to react and adjust our policy response accordingly,” he said
• Shares in Europe fell as Russia’s invasion of Ukraine fueled fears of higher inflation and an economic slowdown. In local currency terms, the pan-European STOXX Europe 600 Index ended 1.58% lower. Germany’s DAX Index, one of the most exposed to Russia, declined 3.16%. France’s CAC 40 Index gave up 2.56%, while Italy’s FTSE MIB Index lost 2.77%
CHINA
• The People’s Bank of China’s (PBOC) decision to keep interest rates steady also dampened buying sentiment. The central bank left the one-year and five-year loan prime rates unchanged, surprising some experts who had forecast a reduction in the benchmark lending rate. However, the Chinese government’s earlier easing efforts to support the economy are slowly gaining traction
• In China’s debt-laden property sector, home prices rose 2.3% in January from a year earlier, the slowest year-over-year growth pace since December 2015, though a slight improvement from December marked the first monthly increase in home prices since September. China appears to be moving toward incremental easing on the housing side, with some cities reportedly reducing down payments for first-time buyers and state banks cutting mortgage rates in a major province
• The country’s property sector remains in dire straits. All of China’s largest listed developers that disclose monthly sales data reported double-digit sales drops in January, according to Nikkei Asia, underscoring the challenges facing the sector. Chinese property developers need to repay almost USD 100 billion of debt this year, Bloomberg reported
• Moody’s Investors Service cut its rating for Shimao Group deeper into junk territory after a trustee said a note guaranteed by the developer may not be redeemed in March. The downgrade reflects Shimao’s “heightened liquidity risks over the next six to 12 months given the company’s slower-than-expected fundraising progress to address its large upcoming debt maturities,” the agency said. Shimao, once regarded as one of China’s more financially healthy developers, defaulted on a trust loan in January. Meanwhile, developer Zhenro Properties asked its creditors for more time to pay back about USD 1 billion in debts due to mature this year, citing liquidity pressure. The company also said it was exploring the possibility of asset sales to improve its liquidity
• Markets in China recorded a weekly loss as the Ukraine conflict depressed risk sentiment. The Shanghai Composite Index dropped 1.1%, and the large-cap CSI 300 Index shed 1.6%. The yield on the 10-year Chinese government bond fell to 2.806% from the prior week’s 2.814%. The yuan rose slightly against the U.S. dollar to end the week at around 6.3135 per dollar from 6.33 a week ago, boosted by foreign inflows into Chinese assets
Sources: T. Rowe Price, National Bank of Canada, MFS Investment Management, Handelsbank Capital Markets, TD Economics, M. Cassar Derjavets
