US
- New and existing home sales in April were released and both slipped further than expected. New homes sales were down 11.4% on the month and existing sales were down by 2.3%. April’s 569,000-unit pace of new home sales follows an upwardly revised 642,000-unit pace in March which marks the cycle-high for the series. Sales of existing homes were also coming down from hitting a cycle high of 5.7 million-units in March. April resales were running at a still-strong 5.57 million-unit pace. The mild winter weather in the Midwest and Northeast allowed an earlier start for the spring selling season, pulling transactions that usually take place in April into earlier months. During the first four months of the year, new home sales were up an impressive 11.3% compared to the same period last year. Existing home sales were up 4.1% compared to the first four months of last year.
- Housing demand is strong, supported by the healthy job market and continued recovery in household finances. Demographic factors are also starting to turn in favour of homeownership. The first quarter of 2017 marked the first time during the current cycle that household formation for homeowners outpaced rental household formation. Similarly, momentum is shifting from multifamily homebuilding to single-family and from urban markets to well-connected suburbs. Homebuilders are the most optimistic in over a decade and are seeing strong shopper traffic.
- Recent data from the factory sector have been mixed. Headline durable goods orders slipped 0.7% in April (was a smaller drop than expected) and March orders were revised much higher. However, durable goods orders ex-transportation declined unexpectedly. Shipments of non-defence capital goods, ex-aircraft, slipped in April following a downward revision to March. Recent survey data from the factory sector has also been quite mixed. It appears the gap between the hard and soft data are beginning to converge, but at a slower pace than soft data had indicated earlier.
- The second look at Q1 GDP was an improvement on the first, with the economy expanding 1.2% as personal consumption expenditures was revised from just 0.3% to 0.6%, adding 0.2 percentage points more to headline. Fixed investment and net exports also added more to Q1 growth than first reported, while government spending was less of a drag.
- Minutes of the latest FOMC meeting indicate that Fed officials will consider hiking rates as soon as June. It will “soon be appropriate” to hike rates, the minutes said as “most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation”. Prices of Fed Fund Futures showed that investors see an 80% chance of a June rate hike.
- Additionally, the FED began to lay out the methodology it could use to shrink the central bank’s $4.5-trillion balance sheet. Under the proposed approach, the Fed would set a gradually increasing cap on the dollar amounts of Treasury and agency securities it would allow to run off each month. The caps would be set at low levels and then raised every three months, to their fully phased-in levels. The final values of the caps would then be maintained until the size of the balance sheet was normalised.
UK
- Rising inflation and sluggish wage gains were taking a toll on consumer spending, exacerbating downside pressure on UK’s economic growth since Brexit talks started. After expanding 0.70% quarter-on-quarter in the final quarter of 2016, the economy expanded only 0.20% quarter-on-quarter in Q1 amid stalling consumer spending (Q1 2017: +0.30% quarter-on-quarter vs Q4 2016: +0.70% quarter-on-quarter) and declining exports (Q1 2017: -1.60% quarter-on-quarter vs Q4 2016: +4.60% quarter-on-quarter).
- Following an attack outside an arena in Manchester that killed 22 and injured scores more Monday, British Prime Minister Theresa May put the country on its highest alert level, warning of the potential for an imminent follow-on attack. The general election campaign was suspended, but was expected to resume on 26 May. In the wake of the attack the prime minister has cut short her participation in the G7 summit in Sicily.
- The second estimate of UK GDP shows a downward revision of quarterly growth to 0.2%, from 0.3%. The revision was mainly due to broad-based downward revisions within the services sector. Within that sector, consumer-facing industries, such as retail and accommodation, fell. However, business services and finance continued to grow strongly. Construction and manufacturing also showed little growth. To be more specific, services increased by 0.2% in Q1, as did construction, while total production increased by 0.1%. Total production was hampered by a fall of 4.3% in electricity, gas and steam, while manufacturing increased by 0.3%. Mining and quarrying and water supply and sewerage also contributed positively. From the demand side, household spending slowed and private consumption lowered to showing growth of 0.3%, from 0.7%. This is the quarter-on-quarter growth since Q4 2014.
- On the other hand, UK government spending increased to 0.8% growth, from zero. Business investment increased more than expected and rose to show growth of 0.6%, from -0.9%. Investment was buoyed by positive contributions from other machinery and intellectual property products. Net exports were lowered, with exports cut by 1.6%, from +4.6%. Growth in imports rose to 2.7%, from -1.0%. The weak export trend is rather disappointing given the expected boost from the weakened sterling exchange rate.
China
- Moody’s has downgraded its rating of China’s creditworthiness one notch to A1 with a stable outlook. Moody’s main reason for the downgrade is China’s huge pile of credit, which continues to grow and poses a risk to public finances. Moody’s had placed China on negative watch before the downgrade. Despite the downgrade, China is still in the middle of the ‘investment grade’ rating range. A credit rating downgrade can have severe macroeconomic consequences for economies dependent on foreign finances, as foreign investors’ appetite for buying and holding the country’s debt wane. However, in China’s case, this may not be a problem. In spite of China’s ballooning credit, its total external debt (around 12% of GDP) is very low compared to international standards. Moreover foreigners hold less than 5% of outstanding government bonds. As a result, the negative effect on the overall economy should be minimal.
EU
- The Eurozone flash Composite PMI was stable in May at 56.8, slightly above expectations of a slight decline. Hence the PMI index can still be said to have been on a rising trend for the past eight months. The sentiment survey so far suggests that real GDP growth will rise in the second quarter to around 0.8% quarter-on-quarter from previously 0.5%.
- Business sentiment seems rather unscathed by the global tendencies (US and China) where there have been declines in manufacturing PMI in the past two months. Eurozone manufacturing PMI increased to 57.0 in May (a new high since 2011). Additionally, there have not been so far headwinds from a stronger EUR over the past two to three months nor higher inflation materialising so far this year. On the national level France gained some further strength, which could be isolated to a leap in Service PMI taking the Macron victory in the Presidential election into account. Also German Composite PMI proved strong with an increase to 57.3, which could be isolated to impressive manufacturing confidence rising to 59.4 in May.
- The robust business sentiment adds to the rising expectations that the ECB will change its forward guidance to neutral at the upcoming policy meeting on June 8. This was again supported by the Eurozone PMI indices on employment maintaining the high levels from the previous months.
Sources: Wells Fargo, MFS Investment Management, Handelsbanken, HongLeong Bank
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