US
US Data this week generally surprised to the upside. The Bloomberg US economic surprise index rose to the highest level since the start of 2015.
New home sales popped 16.6% in April, while pending home sales jumped 5.1%.
Durable goods rose 3.4%, although most of the gain came from the volatile aircraft and defense components.
One exception was the second estimate for Q1 GDP, but the report still showed that activity was stronger than initially reported in the first three months of the year.
The big question is whether this “shaping up” is sufficiently offsetting the weak first quarter in the Fed’s judgement and, thus, keeping a June 15 rate hike firmly on the Fed’s mind. It turns out that the first quarter was not as bad as first revealed.
This week, real GDP growth was revised up to 0.8% from 0.5%, owing to less drag from reduced net exports and inventory investment.
Importantly, final private domestic demand growth was unchanged at 1.2%. The latter was no worse than 2.0% during the previous 2½ years, for an average annualised gain of 3.1%.
UK
Public sector net borrowing was GBP 7.2 billion in April 2016, GBP 0.3 billion lower than last year. The lower borrowing this April reflects a GBP 2.0 billion rise in central government spending last year that was more than offset by the combined effect of a GBP 1.5 billion rise in central government receipts, lower local authority borrowing and lower borrowing by public corporations.
The second estimate of UK GDP in Q1 was confirmed to have increased by 0.4% compared to Q4 2015 but was revised downwards (compared to Q1 2015) to 2%, down from first estimate of 2.1%.
Domestic factors continue to be the driver of economic growth while exports contributed negatively to GDP.
The trade balance deficit widened from GBP 16.4 billion in Q4 2015 to GBP 18.0 billion in Q1, as exports decreased by 0.3% while imports increased by 0.8% compared to Q4 2015.
The dark cloud in the reading was business investments, which fell by 0.5% in Q1 compared to Q4 last year.
EU
As the ECB is presently focusing on implementing the measures decided in March, the Governing Council is likely to sit tight at its meeting on Thursday.
The updated ECB projections also presumably support a holding stance, especially as the ECB is still likely to expect a moderate rise in core inflation.
Solid economic growth in the first quarter is not the beginning of a sustained upswing in the euro zone.
That is the message at least from the Purchasing Managers’ Indices, which did not leave their quite narrow range since the beginning of 2015 in May. The index for the manufacturing sector fell by 0.2 points to 51.5; the index for services remained at 53.1.
The consensus estimate that both the official manufacturing PMI and the Markit Caixin manufacturing PMI are set to fall slightly in May (each by 0.1 point).
Remember that both PMIs jumped markedly in March followed by a small fall in April. There is no reason be too worried by another slight decline in April. As long as the March jump is not reversed, the PMI data is confirming that economic growth has stabilised.
In May, the seasonal swings related to the end of the Chinese New Year celebrations are definitely out of the data, and a rather stable outcome in the two PMIs thus confirms that the jumps in March were real and not just related to the Chinese New Year.
Sources: Danske Bank, BMO Capital, Commerzbank, Haendelsbank, Wells Fargo.
