| USA The third and final estimate of Q1 GDP growth came in at +1.4% in annualised terms, in line with economist survey expectations and a tick higher than the second estimate last month. Household consumption was revised down another half percentage point (from +2.0% to +1.5%), marking a full percentage-point change from the advance estimate in April. On the other hand, both international trade (from -0.89 to – 0.65 pp) and inventories (from -0.45 to -0.42 pp) were revised up.Business fixed investment was upgraded to 7.0%, a significant change also seen in the second estimate (from 5.3% to 6.0%). Final sales to domestic purchasers (i.e., household spending plus gross business investment), a good gauge of the underlying strength of an economy, ticked down from the second estimate to 2.4% annualised. Lastly, core PCE inflation (excluding food and energy) edged up from 3.6% to 3.7%, matching the advance estimate. The headline PCE deflator came in at 2.6%, down one tick from the prior month and in line with consensus expectations. The core measure, meanwhile, cooled two ticks to a 3-year low of 2.6%. On a monthly basis, the headline index stayed unchanged, while the core gauge rose 0.1% following an upwardly revised 0.3% gain the prior month. The core services PCE deflator excluding housing, a good measure of underlying price pressures, advanced just 0.1% MoM, the least since August of last year. On a 12-month annualised basis, it eased from 3.5% to 3.4%. The Conference Board Consumer Confidence Index edged down from 101.3 in May to 100.4 in June, roughly in line with the consensus calling for a 100.0 print. As a result, the index continued to sink well below the series’ pre-pandemic level. Consumer assessment of the present situation improved, with this sub-index rising from 140.8 to 141.5. The share of respondents that deemed current business conditions bad decreased from 18.4% to 17.7%, while the proportion that considered jobs hard to find slid from 14.3% to 14.1%. At the same time, the share of respondents that deemed jobs plentiful increased for the first time in four months, climbing from 37.0% to 38.1%. The sub-index tracking longer-term expectations decreased during the month, declining from 74.9 in May to 73.0 in June. As a result, it, too, remained far below the series’ long-run average. The decline occurred on the back of a lower share of respondents with a positive view of future business conditions (from 13.7% to 12.5%), employment (from 13.1% to 12.6%), and income (from 17.7% to 15.2%). Furthermore, proportionally less respondents planned to buy major appliances (from 48.9% to 46.3%) or a car (12.2% to 11.6%) in June, while the proportion planning to buy a home remained stable at 5.2%. Finally, consumer inflation was expected to stand at 5.3% for the next 12 months, down from 5.4% in May. New-home sales tumbled 11.3% in May to 619K (seasonally adjusted and annualised) after climbing 2.0% a month earlier. This was far weaker than the 633K print expected by consensus. Overall, new-home sales were only slightly below their pre-pandemic level owing to the complete paralysis of the resale housing market in the current interest rate environment. The decrease in sales combined with an increase in homes available on the market (from 474K to 481K) hoisted the inventory-to-sales ratio up from 8.1 in April to 9.3 in May, a level never seen before outside a recession period (excluding the pandemic). 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 20.0% 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 pandemic. As a result, construction backlogs swelled. The current context, which is less effervescent, is al-lowing homebuilders to make up for lost time. The S&P CoreLogic Case-Shiller 20-City Home Price Index rose 0.38% MoM in April, its 14th consecutive monthly advance. (The index thus struck an all-time high in the month.) This overshot the median economist forecast calling for a 0.30% increase. Prices were up in 16 of the markets covered, led by Cleveland (+1.18%), New York (+0.78%), Chicago (+0.75%), and Boston (+0.58%). Year on year, prices rose 7.20% at the national level for a tenth consecutive increase. Very tight supply and a strong labour market are likely to keep driving prices up in the coming months despite persistently weak demand in the real estate market. Global mergers and acquisitions hit $1.5 trillion in the first half of 2024 as a surge in US takeovers and an uptick in large mergers offset a decline in the overall number of deals. The value of deals inked rose 22% from a year earlier, according to data compiled by the London Stock Exchange Group, but the total number of deals fell 25%, with acquisitions worth $500 million or less falling 13% by value. The Fed reported that the 31 largest US banks, those with assets exceeding $100 billion, passed their annual stress tests. In a hypothetical recession, the common equity tier 1 capital ratio for the group as a whole would bottom out at 9.9%, well above the 4.5% minimum requirement, the Fed said. The conditions of this year’s test for a severe global recession included a 40% decline in commercial real estate prices, a substantial increase in office vacancies, and a 36% decline in house prices. The unemployment rate for the test rose nearly 6.5 percentage points to a peak of 10%, and economic output declines commensurately. Most major US stock indexes posted gains in a light news week during what seemed to be a bit of a lull in market activity ahead of second-quarter earnings reports. Small-cap companies and information technology stocks performed best, with growth stocks outpacing their value cousins. Index provider FTSE Russell was due to rebalance its series of Russell indexes after the close on Friday, so some of the week’s activity may have stemmed from positioning adjustments by investors tracking those indexes. The ISM Services Index reached 53.8 in May, marking the highest monthly jump in 16 months. Even as consumers lean into non-discretionary purchases like housing and healthcare, services spending continues to grow at a remarkable rate. Real personal consumption expenditures on services has only slipped in three of the past 30 months. Unfortunately, formidable services demand is working against the Fed’s goal of price stability. Fourteen industries reported higher input costs in May, while none reported a decrease in prices paid. UK Britain’s economy pulled out of recession at a faster pace than previously thought in the first three months of this year, but the broader economic backdrop remains fragile ahead of next week’s election. British gross domestic product expanded by 0.7% from the previous quarter, above an initial estimate of 0.6% growth, the Office for National Statistics said. GDP fell for two quarters in a row in the second half of 2023. The figures come less than a week before Britons vote in an election that opinion polls suggest the Labour Party looks set to win comfortably over the Conservative Party. First-quarter gross domestic product was just 0.3% higher than a year earlier, above an initial estimate of 0.2%. Real household disposable income (a measure of living standards) was 0.6% lower per head in the first quarter of 2024 than it was in the final quarter of 2019, the time of Britain’s last national election and just before the COVID-19 pandemic. Income growth over the parliament so far has been worse than in any other since the 1950s, and the third worst in post-Edwardian Britain. Addressing this great living standards slowdown is the ultimate test for whomever wins the election. Britain’s economy has struggled since its last election, hurt not just by the pandemic (which dealt a lasting blow to the labour force) but also by a surge in inflation after Russia’s invasion of Ukraine and post-Brexit trade frictions. Britain’s economy in the first quarter of 2024 was 1.8% larger than in the final quarter of 2019, the weakest performer after Germany among the world’s seven largest advanced economies (though neither France nor Japan have done much better). Sterling was on track for its biggest monthly rise versus the Euro since January as political concerns weigh on the single currency ahead of general elections in the UK and France. The pound edged higher on Friday after revised data showed Britain’s economy pulled out of recession at a faster pace than previously thought in the first three months of this year. It was up 0.06% versus a flat dollar at $1.2646. It was up 0.05% against the single currency at 84.72 pence per euro and set for a monthly rise of 0.6%. Investors believe that the expected significant Labour majority after the vote of July 4 would bring more stability to UK politics and open up the potential for relations with the European Union to improve in the coming years. Meanwhile, the most likely outcomes in France could threaten the safe-haven status of the national debt, weakening the Euro. There are clear reasons why markets should retain a short EUR/GBP bias, relative political stability around elections; strong and improving macro performance in the UK and a higher terminal rate versus Euro. EU Eurozone PMI disappointed with a drop in the composite output index to 50.8 in June from 52.2 in May, with a marked drop in manufacturing from 49.3 to 46 and a smaller drop in service activity from 52.6 from 53.2. The drop in the composite index comes after a positive trend since the end of last year and suggests that eurozone growth remains fragile. In particular, the manufacturing survey signals sluggish growth with all sub-indices below or much below historical averages. From an inflation perspective, manufacturing price indicators are also low despite a recent slight increase. For the service sector, PMI is close to its historical average, but the drop in expectations, incoming new business and backlogs are worrying signals for growth going forward. The continued easing in service prices compared to last month is welcome, but price increases remain above normal. A rise in unemployment and an unexpected deterioration in business confidence highlighted the German economy’s difficulty in overcoming stagnation. The jobless rate rose to 6.0% in June, the highest level in just over three years, from 5.9% in May. The Ifo think tank’s business confidence indicator weakened to 88.6 in June from 89.3 in May as expectations in manufacturing and trade worsened. Even though the country is holding the European Championship for soccer this month, consumers grew more cautious overall, expressing more willingness to save and less willingness to spend. The GfK Consumer Climate Indicator dropped to -21.8 for July from a revised -21.0 in June. Slower increases in fuel and food prices drove the harmonised rate of inflation lower in France and Spain in June, according to preliminary data. In France, the annual rate fell to 2.5% in June from 2.6%; in Spain, inflation dropped from just over a one-year high of 3.8% to 3.5%. In local currency terms, the pan-European STOXX Europe 600 Index ended 0.72% lower amid heightened political uncertainty in France as the snap election called by President Emmanuel Macron approaches. Major stock indexes were mixed. Germany’s DAX rose 0.40%, Italy’s FTSE MIB fell 0.46%, and France’s CAC 40 Index lost 1.96%. CHINA Foreign selling also contributed to the week’s declines. Global funds sold about RMB 49.4 billion of onshore shares via trading links with Hong Kong in June through last Wednesday, Bloomberg reported, putting China’s market on track for its first monthly outflow since January. The selling pressure from overseas investors comes as many Chinese companies have disappointed investors with lower-than-expected quarterly earnings, underscoring the economy’s weak growth outlookIndustrial profits at large companies edged up 0.7% in May from a year earlier, the National Bureau of Statistics reported, down from April’s 4% gain. Analysts attributed the earnings improvement to higher commodity prices, which boosted profits for mining companies. However, the month-on-month decline reflected sluggish consumption amid China’s prolonged property downturn and persistent deflationary pressure. Looking ahead, investors will watch out for China’s official purchasing managers’ index, to be released on Sunday, followed by the private sector Caixin factory survey on July 1. Chinese stocks weakened as a light economic calendar and concerns about the slowing economy curbed risk appetite. The Shanghai Composite Index and the blue-chip CSI 300 Index both recorded slight declines for the week, while Hong Kong’s benchmark Hang Seng Index slid 1.5%. |
| Sources: T. Rowe Price, Wells Fargo, Handelsbanken Capital Markets, TD Economics, National Bank of Canada, MFS Investments, Marina Cassar Derjavets. |
