| USA According to the Bureau of Economic Analysis, real GDP expanded 2.4% annualized in the second quarter, more than the median economist forecast calling for a +1.8% print. YoY, economic output rose 2.6%. Domestic demand continued to grow at a healthy clip in the three months to June, supported by household consumption (+1.6% QoQ annualized), as well as business spending on equipment (+10.8%) and structures (+9.7%). Residential investment (-4.4%), on the other hand, fell for the ninth consecutive quarter, albeit at a relatively subdued pace. Government spending rose 2.6%. Trade had a small negative impact on growth (-0.12 percentage point), as exports (-10.8%) shrank at a faster pace than imports (-7.8%). This was more or less offset by a 0.14-pp contribution from inventories GDP came in stronger than expected in Q2, as business investment advanced at the fastest clip in two years (+4.9% QoQ annualized) and consumption proved more resilient than anticipated. On the investment side, a third consecutive expansion in the structures segment is to be noticed. The surge came in a supportive policy environment: The Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA), and the CHIPS Act each provided direct funding and tax incentives for public and private manufacturing construction. The result has been an explosion in spending in this sector, which could extend into coming quarters Nominal personal income increased 0.3% in June, less than the median economist forecast calling for a 0.5% gain. Amid a labour market that remains very healthy, the wage/salary component of income progressed 0.6%, while income derived from government transfers edged down 0.1%. Personal current taxes, for their part, rose 0.1%. All this translated into a 0.3% gain for disposable income. Nominal personal spending, for its part, grew 0.4% in the month, a tick less than consensus expectations, but the disappointment was offset by a 0.1% upward revision to the prior month’s data (to +0.2%). Outlays on services rose 0.4%, while spending on goods surged 0.8%. As disposable income advanced at a slower pace than spending, the savings rate fell from 4.6% to 4.3%. This is significantly below the levels observed before the pandemic (between 8.5% and 9.0%). Adjusted for inflation, disposable income expanded 0.2%, while spending progressed 0.4% on gains for both services (+0.1%) and goods (+0.9%). Within services, the largest contributor to the increase was financial services/insurance (led by portfolio management and investment advice). Good outlays, meanwhile, benefited from increased outlays on motor vehicles/parts and recreational goods The headline PCE deflator came in at a 27-month low of 3.0% YoY, down from 3.8% the prior month and in line with consensus expectations. The core PCE measure, for its part, eased from 4.6% to 4.1%, one tick lower than the median economist forecast and the lowest print recorded since September 2021. On a monthly basis, both the headline index and core index advanced 0.2%. The all-important core services excluding housing segment, meanwhile, advanced just 0.22% MoM. On a 3-month annualized basis, it was up 3.2%, the least in nearly a year The Employment Cost Index rose 1.0% in Q2 following a 1.2% gain the prior quarter. Wages and salaries increased 1.0% in the second quarter, while the cost of benefits rose 0.9%. YoY, the employment cost index was up 4.5%, down from 4.8% the prior month but still historically high Durable goods orders surged 4.7% MoM in June, blowing past consensus expectations. Orders in the transportation category jumped a whopping 12.1% on a massive gain for civilian aircraft (+69.4%). Excluding transportation, orders advanced a consensus-topping 0.6%. The report showed, also, that orders for non-defence capital goods excluding aircraft, a proxy for future capital spending, increased 0.2% MoM after gaining 0.5% in May. On a three-month annualized basis, “core” orders were up 2.6%, showing good momentum for business equipment spending heading into Q3 The S&P Global Flash Composite PMI cooled from 53.2 in June to 52.0 in July, signaling the weakest improvement in private sector operating conditions in five months. New orders continued to expand, albeit at the softest pace since April, with survey respondents blaming the slowdown on “constraints on client spending, including higher interest rates”. This less favorable demand environment encouraged companies to increase their workforce only marginally in July. On the inflation front, the PMI report showed the smallest increase in input prices since October 2020, with the associated sub-index slipping back in line with its long-term average after several months spent above that mark. On the other hand, output price inflation picked up in July as “[f]irms sought to pass through higher costs and increased interest rate payments to customers”. With demand fading and margins being eroded by higher prices/wages, business confidence dropped to its lowest this year The services sub-index slid from 54.4 to a five-month low of 52.4 as both output and new orders expanded at a slower pace than in the prior month. Regarding new orders, weaker demand reflected “ongoing pressure on [domestic] customers’ disposable incomes”, which was only partially offset by the fastest rise in international new business since May 2022. Employment growth, meanwhile, was the weakest in six months The manufacturing tracker, for its part, rose from 46.3 to 49.0 as input prices increased for the first time in three months (likely reflecting higher energy prices). Factory output remained broadly unchanged while new orders contracted for a third month in a row. Headcounts progressed at a decent clip, with polled managers citing “greater ease of hiring” and “improvement in employee retention”. Though desirable, the increase in factory employment in July was at odds with yet another steep decline in unfilled orders. Supply chain constraints continued to ease as evidenced by yet another decline in supplier delivery times The Conference Board Consumer Confidence Index jumped from 110.1 in June to a two-year high of 117.0 in July. Longer-term expectations improved dramatically. The sub-index tracking sentiment towards the next six months vaulted 8.3 points to 88.3 as a larger proportion of respondents expressed positive opinions about future business conditions (from 14.6% to 17.1%) and employment (from 15.4% to 16.4%). These brighter prospects did not prevent a drop in the ratio of people who expected to see their income increase, from 18.6% to 16.3%. More people were planning to buy a car in the next six months (from 11.0% to 12.0%), while a smaller percentage expected to spend on major appliances (from 49.8% to 45.9%). Sentiment towards home purchases stayed more or less unchanged. Consumer inflation was expected to stand at 5.7% for the next 12 months, down from 5.8% the prior month and the lowest level since November 2020 Sales of new homes fell 2.5% MoM in June to 697K (seasonally adjusted and annualized), below consensus expectations calling for a 725K print. This decline, combined with a slight increase in the number of homes available on the market (from 429K to 432K), translated into a two-tick rise in the inventory-to-sales ratio to 7.4, a level above the historical average for this indicator (6.1). It is worth noting that a large share of the houses available on the market were either under construction or awaiting construction. Completed houses represented only 15.4% 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. As a result, construction backlogs swelled. The current context, which is less effervescent, should allow homebuilders to make up for lost time. The catch-up process seems well under way: Just a few months ago, completed builds accounted for only 7.7% of total unsold inventory The S&P CoreLogic Case-Shiller 20-City Home Price Index rose for the fourth consecutive month in May, climbing 1.0% MoM. Price increases in New York (+1.76%), Cleveland (+1.69%), Detroit (+1.60%) San Diego (+1.46%), and Chicago (+1.43%) were only partially offset by a 0.06% decline in Phoenix. YoY, prices were down 1.70% at the national level, marking the biggest decline since March 2012. Although demand remains relatively weak on the real estate market, very tight supply, combined with a strong labour market, is likely to continue to push prices upward in the coming months Initial jobless claims fell to a five-month low of 221K in the week to July 22 instead of climbing to 235K as per consensus. Continued claims, for their part, dropped from 1,749K to a six-month low of 1,690K The FOMC voted to raise the target range for the federal funds rate 25 basis points to a 22-year high of 5.50% (upper bond). This hike came after policymakers held rates steady in June for the first time since January 2022. The Fed also stated it would continue to reduce its holdings of Treasuries and MBS pursuant to a pre-existing program and subject to monthly caps for both Treasuries ($60 billion/month) and agency MBS ($35 billion/month). Once again, there were no dissenters in the decision, making for a ninth consecutive unanimous vote. The statement remained essentially unchanged except for the fact that economic expansion was described as “moderate”, an upgrade from the term “modest” used back in June. As for the forward-looking segment, the Committee reiterated that it would “continue to assess information and its implications for monetary policy”, taking into account “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”. In his press conference, Fed Chair Jerome Powell kept the Committee’s options open for future decisions. He was quick to dismiss the notion that the Fed was locked into a ‘hike-pause-hike-pause’ pattern and said that another turn of the screw in September remained a possibility. As always, the decision would be based on the “totality of the data”, with a particular focus on inflation. On that topic, Powell mentioned that FOMC members had welcome June’s positive CPI print, but he stressed that it was only one report. While Powell by no means closed the door to further rate increases, it was also clear that the need to move quickly/aggressively no longer existed. In his opinion, the Fed had now reached a point where the risks associated with under tightening had moved into better balance with those associated with not raising rates enough. Further emphasizing this point, he pointed out that the real policy rate was now more clearly restrictive: “If you take the nominal funds rate and subtract the estimate of near-term inflation expectations, you get a real federal funds rate that is well above most estimates of the longer-term neutral rate. So, I would say monetary policy is restrictive, more so after today’s decision, meaning that it is putting downward pressure on economic activity.” The University of Michigan Consumer Sentiment index increased from 64.4 in June to 71.6 in July. The improvement of sentiment in July was due to a better assessment of both current (from 69.0 to 76.6) and longer-term perspectives (from 61.5 to 68.3). Twelve-month inflation expectations increased from 3.3% to 3.4%, Meanwhile, 5/10-year expectations remained unchanged at 3.0% Stocks ended higher over a week notable for the Dow Jones Industrial Average’s notching its 13th consecutive daily gain on Wednesday, which marked its longest winning streak since 1987. However, trading was relatively subdued, as the summer vacation season diverted some of the focus on a slew of important data releases, a Federal Reserve (Fed) policy meeting, and some high-profile corporate earnings reports. Growth stocks handily outpaced their value counterparts, and the gains were led by the technology-heavy Nasdaq Composite In terms of data release, construction spending is out on Tuesday. Construction spending rose solidly for the fifth consecutive month in May. But in a reversal of recent trends, residential spending improved while nonresidential dragged. Residential outlays were bolstered by renewed strength in home improvement spending and a recovery in single-family spending, prompting its best gain since January 2022. Multifamily outlays provided a slight drag on residential, as softer apartment market conditions have spurred builders to pull back on construction. Nonresidential outlays inched down 0.3% in May, marking the first over-the-month drop since May 2022. The decline was largely attributed to slowdowns in commercial, healthcare, retail and power spending. Meanwhile, spending on manufacturing projects continued to be a source of strength, driven by firms’ efforts to build new semiconductor and electric vehicle production facilities The ISM Manufacturing & Services prints are out on Tuesday and Thursday. The Institute for Supply Management’s purchasing manager indices moved in opposite directions in June. The manufacturing PMI fell more than expected with all components coming in below 50. The highly rate-sensitive manufacturing sector has not exhibited the same resilience as other sectors of the economy, contracting for eight straight months. Conversely, new orders, which have been a considerable drag on the headline number, contracted at a slower rate in June. The services PMI fared better in June, surpassing expectations for a modest rise and leaping to a four-month high. The unexpected jump reflects still-robust consumer demand for services. Firms have been happy to respond, leading the employment component to jump to a four-month high. The prices component continued to expand, albeit at a slightly slower pace. UK UK’s FTSE 100 ended Friday flat after a rally fizzled on worries of higher interest rates sparked by the Bank of Japan’s surprise tweak to its yield control policy, while AstraZeneca led gains in the pharmaceutical sector. The index (.FTSE) ended at 7,694.27 points, after clocking its highest level in nine weeks earlier in the session. It scored its third weekly gain in a row. Pharma stocks jumped 1.8% after AstraZeneca (AZN.L) climbed 3.3% as it beat quarterly profit expectations. Rate-sensitive real estate stocks (.FTUB3510) slipped 1.3% as the UK 10-year gilt yield rose to its highest since July 18 earlier in the session, after the BOJ move was perceived as a shift away from its years of ultra-loose monetary policy. Investors now await the Bank of England’s decision on interest rates next week, with a hike by 25 bps widely anticipated. The banking index was up 0.9 % after major lenders reported results England and Wales saw the most company insolvencies since 2009 during the second quarter of this year, government figures showed on Friday – a total which risks rising as higher Bank of England interest rates begin to bite. On a seasonally adjusted basis, 6,342 companies were registered as insolvent in the three months to the end of June, 13% more than a year earlier and the highest since the second quarter of 2009, the official Insolvency Service agency said. England and Wales saw the most company insolvencies since 2009 during the second quarter of this year, government figures showed on Friday – a total which risks rising as higher Bank of England interest rates begin to bite. On a seasonally adjusted basis, 6,342 companies were registered as insolvent in the three months to the end of June, 13% more than a year earlier and the highest since the second quarter of 2009, the official Insolvency Service agency said. “These numbers don’t come as a surprise as many businesses navigate a turbulent macro environment having exited the pandemic already overleveraged,” said Matthew Ingram, a managing director at risk advisory firm Kroll. The most common form of insolvency – creditors’ voluntary liquidations, where directors agree to wind up a company without a formal court order – rose to the highest since records began in 1960, at 5,240 The Bank of England looks likely to raise rates by a quarter-point to 5.25% on Aug. 3, though economists and markets see a risk of a repeat of June’s surprise half-point hike as inflation remains hotter than in other big economies. Both the U.S. Federal Reserve and the European Central Bank increased interest rates by a quarter of a percentage point this week, but unlike the BoE, markets think they are at or near the end of their rate-tightening cycle. In contrast, bets on where BoE rates will peak have swung sharply since the central bank’s last rate move on June 22 as investors try to work out if Britain has a deep-rooted inflation problem, or if rapid price growth is on the cusp of the sharp slowdown seen elsewhere. “Where rates go after August will depend on the extent to which second-round effects persist,” said Andrew Goodwin, chief UK economist at Oxford Economics, referring to the knock-on impact on wages and prices of last year’s surge in energy costs. Expectations for peak BoE rates reached 6.5% on July 11 after data showed record wage growth. But they fell back after a bigger-than-expected decline in consumer price inflation. Investors are now split fairly evenly between a peak of 5.75% or 6% late this year or early in 2024. The surge in rate expectations has pushed mortgage costs to their highest since 2008, and higher rates are weighing on house-building and some other sectors. A survey on Monday showed private-sector growth had fallen to a six-month low this month. EU The Governing Council decided to raise its policy rates by 25 basis points, stating that the inflation outlook continues to be too high for too long. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.25%, 4.50% and 3.75% respectively, with effect from August 2, 2023. The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to the 2% medium-term target. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. The Governing Council also decided to set the remuneration of minimum reserves at 0%. The change will become effective as of the beginning of the reserve maintenance period starting on September 20, 2023 The data-dependent, no forward guidance approach will continue as long as the ECB breaks the back of the inflation. In other words, the ECB will follow a meeting-by-meeting approach and the incoming data will have key importance on the future monetary policy decisions. Lagarde mentioned that a possible pause at the September meeting does not rule out hiking after September, in the same way as the Fed did during the summer. If the ECB were to pause in September, it would mean that inter-meeting inflation numbers and the ECB staff September macroeconomic forecasts would have to show clearly moderating price pressures. The path forward is not very clear, as the ECB does not provide clear guidance and the future decisions are made in a data-dependent and meeting-by-meeting fashion The S&P Global Flash Composite PMI for the Eurozone slid from 49.9 in June to 48.9 in July, signaling a second consecutive reduction in business activity in the single-currency area and the sharpest since last November. New orders and work backlogs contracted at an accelerated pace, leading businesses to rely on previously placed orders to support current operating levels. Weaker demand conditions translated into the smallest monthly increase in employment since February 2021. Price pressures moderated further, with the input/output price inflation gauges cooling to two-and-a-half-year lows. Supplier delivery times, meanwhile, improved at a rate not seen since 2009. Business expectations for the year ahead fell further below their long-term average. Operating conditions deteriorated for a tenth consecutive time according to the manufacturing sub-index, which moved from 43.4 to three-year low of 42.7. Output growth was the weakest in 38 months while new orders contracted at one of the briskest rates since 2009. Outside of the COVID-19 shock, work backlogs declined the most since February 2013, which explains why employment shrank for the second month in a row. “Over the 25-year survey history,” S&P Global report stated, “only the six-month period to May 2009 has seen a steeper rate of decline in average factory input prices than witnessed in July.” In Germany, the IFO business climate index fell for the third straight month to 87.3 in July from 88.6 the previous month. On an encouraging note, the UK business sentiment index recorded a positive score for the three months to July In what was a busy week of economic news and data, the pan-European STOXX Europe 600 Index, Italy’s FTSE MIB, France’s CAC 40 Index, Germany’s DAX, and the UK’s FTSE 100 Index advanced. Despite the Federal Reserve and the European Central Bank (ECB) announcing interest rate increases, investor sentiment appeared to receive a lift from the dovish tone struck by policymakers. Reports from China early in the week, which suggested that authorities are considering further support to boost the world’s second-largest economy, also encouraged investors. CHINA Profits at industrial firms declined 8.3% in June from a year earlier, a slower pace than the 12.6% drop recorded in May, according to China’s statistics bureau. Industrial profits fell 16.8% from January to June from a year earlier, better than the 18.8% drop recorded in the first five months of 2023. Despite an overall improvement in manufacturing activity, profits have been under pressure as recent data indicated that China is on the verge of slipping into deflation Economists lowered their growth forecasts for China as it continues to grapple with weak demand. China’s gross domestic product is projected to expand 5.2% this year, down from previous estimates of 5.5%, while growth for 2024 is forecast to expand 4.8%, according to economists surveyed by Bloomberg. The revisions came after China recently reported its economy grew at a slower-than-expected pace in the second quarter amid weakening domestic and external demand In central bank news, China’s leadership appointed Pan Gongsheng as the governor of the People’s Bank of China. The move was expected after Pan was named the Communist Party’s secretary at the central bank earlier in July The Communist Party’s Politburo, China’s top decision-making body led by President Xi Jinping, pledged to provide stimulus to boost domestic consumption amid a flagging recovery after the end of pandemic lockdowns in December. Officials also vowed to enhance support for the ailing real estate sector following the Politburo’s latest meeting, during which leaders set economic policy for the rest of 2023. Despite signaling a pro-growth stance, however, the post-meeting statement contained no specific policy measures Chinese equities rallied after Beijing signaled it will provide more stimulus to support the economy. The Shanghai Stock Exchange Index gained 3.42%, while the blue-chip CSI 300 soared 4.47%. In Hong Kong, the benchmark Hang Seng Index rose 4.41%. |
| Sources: T. Rowe Price, MFS Investments, Wells Fargo, National Bank of Canada, Handelsbanken Capital Markets, Reuters, M. Cassar Derjavets. |
