Economic Outlook – 5 March 2023

The ISM Non-Manufacturing PMI remained relatively stable in expansion territory in February, moving from 55.2 to 55.1. This stabilization confirms that the December decline in the ISM index was exacerbated by poor weather conditions which caused numerous power outages and disrupted the travel plans of several households. Growth in business activity decelerated (from 60.4 to 56.3) while new orders increased 2.2 points (from 60.4 to 62.6) after their largest monthly change on record excluding the rebound from the pandemic in January. New export orders were in expansion (from 59.0 to 61.7) while the employment sub-index returned in expansion territory (from 50.0 to 54.0). Backlog of orders growth remained relatively stable (from 52.9 to 52.8) while the supplier deliveries sub-index returned in contraction territory (from 50.0 to 47.6). The prices paid sub-index continued to be high but growth decelerated for a fourth consecutive month (from 67.8 to 65.6) The ISM Manufacturing PMI climbed from 47.4 in January to 47.7 in February, marking a fourth straight contraction in factory activity. Output (from 48.0 to 47.3) shrank for a third consecutive month, while new orders (from 42.5 to 47.0) remained below the 50-point mark separating expansion from contraction. As a result, the backlog of orders remained in contraction (from 43.4 to 45.1). Consequently, the employment gauge (from 50.6 to 49.1) indicated a contraction in payrolls, a first since November 2022 The Conference Board Consumer Confidence Index slid for the second month in a row as it went from 106.0 in January to 102.9 in February. The median economist forecast had called for the index to rise to 108.5. This deterioration was driven by worse longer-term expectations; assessment of the current situation improved. The sub-index tracking sentiment towards the next six months dropped from 76.0 to 69.7 as the proportion of respondents who expected job prospects to improve decreased from 17.7% to 14.5% and the proportion of those who expected better business conditions went from 18.4% to 14.2% Construction spending dipped 0.1% in January after sinking 0.7% in December. The consensus called for a 0.2% increase in the month. The drop was due to a 0.6% decline in public spending, while construction spending in the private sector was unchanged. Lower public outlays reflected a decrease in the non-residential segment (-0.6%, a second consecutive monthly decline), while the residential segment posted an increase (+0.2%). Relative to their pre-crisis levels, public outlays were still up 2.9%. In the private sector, residential outlays slipped 0.6% while non-residential spending increased 0.9%. Relative to their pre-pandemic levels, private outlays were still up 39.5% in the former segment and 14.0% in the latter. After outperforming during the pandemic, residential construction seems to be running out of steam since mid-2022, which is not surprising given the significant rise in mortgage rates and the marked slowdown in the home resale market According to the S&P CoreLogic Case-Shiller 20-City Index, home prices fell a seasonally adjusted 0.51% in December, marking the sixth consecutive decline for this indicator. All 20 cities included in the index were down in the month. Declines were led by Las Vegas (-1.50%), Phoenix (-1.32%), and Portland (-1.32%). Year-on-year price appreciation slowed from 6.76% to 4.65%, below the historical average of 5.32% Durable goods orders decreased 4.5% in January, more than the 4.0% expected by consensus. Orders in the transportation category dropped 13.3% as civilian aircraft collapsed by 54.6% after surging 105.6% the month before. Vehicles and parts increased marginally during the month (+0.2%). Excluding transportation, orders were up 0.7% after sagging 0.4% in December. The report showed, also, that orders for non-defense capital goods excluding aircraft (a proxy for future capital spending) increased 0.8% MoM after sinking a little in both December and November. On a three-month annualized basis, “core” orders growth increased from -0.5% to 1.3%, which suggests that business investment in machinery and equipment might improve in Q1 Seven different Federal Reserve officials spoke this week, six of whom are current voting FOMC members. Their talking points covered a range of topics, from Governor Jefferson pushing back against calls for the Fed to raise its inflation target to Chicago Fed President Goolsbee saying it would be a mistake for the Fed to rely too heavily on financial market reactions. There were also policy specific comments, with Minneapolis Fed President Kashkari noting that he is open to a 50-basis point hike at the next meeting and Atlanta Fed President Bostic (a 2024 FOMC member) saying in an essay that he sees the policy rate going to 5.00 – 5.25% and staying there well into 2024 Stocks closed higher and regained some ground following their worst weekly decline in two months. Energy and materials shares were especially strong, while communication services were helped by a gain in Facebook parent Meta Platforms. Utilities stocks lagged. A lack of notable catalysts seemed to result in low market volumes throughout much of the week. Sentiment also appeared to gain support from the S&P 500 Index staying above its 200-day moving average, a metric commonly followed by technical analysts and traders In terms of data release, consumer credit is out on Tuesday. On that day, the Federal Reserve will release data on consumer credit covering the month of January. Last year, total consumer credit outstanding increased by 7.8%. Nonrevolving credit—which includes debt obligations such as student loans and auto loans—increased 5.6%, only a bit above the 5% increase that occurred in 2019 before the pandemic. However, revolving credit, which is primarily credit cards, grew a much faster 14.8% Jolts is out on Wednesday. Much of the U.S. economic data for the month of January were unusually strong. Nonfarm payrolls increased by 517K, the ISM services index rose by six points and retail sales posted the largest monthly increase since March 2021. The Job Openings and Labor Turnover survey (JOLTS) to be released next Wednesday covers the month of January, so another strong reading would not be surprising  

Mortgage approvals decreased to 39,600 (net) in January from 40,500 in December; this is the fifth consecutive monthly decrease in mortgage approvals. Leaving aside the anomaly of Covid, this was the lowest number of approvals since January 2009. Consensus expectation remains for house prices to dip by 8% (peak to trough), but that the even bigger correction will be in the number of transactions, which is expected to fall by 40%. Most potential vendors will be willing to wait out a market downturn and subsequent correction on their biggest financial asset, leaving only forced sellers in the market Households deposited an additional £3.5 billion (net) with banks and building societies in January. This was driven by a net flow of £6.9 billion into time deposits, but this was partly offset by money moving from sight deposits. With banks offering far better deals on time deposits, this has become the preferred home for medium-term savings. In contrast, businesses withdrew a record £20.3 billion in deposits, a part of this (£3.5 billion) being used to repay now increasingly expensive bank debt, remembering that business loans are generally floating rate Bank of England (BoE) Governor Andrew Bailey warned that policymakers may still have to raise interest rates above 4% but that another hike is not inevitable. “At this stage, I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more,” he said in a speech. “Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided.” He added that a decision would be data dependent After years of negotiations, the United Kingdom and European Union reached an amended trade agreement covering Northern Ireland called the Windsor Framework. The accord reduces customs checks for goods traveling between Northern Ireland and the UK while granting the UK veto power over EU legislation to which it objects. British Prime Minister Rishi Sunak said the deal is the best of both worlds for Northern Ireland, allowing it to retain access to both the internal markets of both the EU and the UK. The ratification of the agreement is expected to take months   

Eurozone inflation in February decreased less than expected to 8.5 percent YoY, compared to 8.6 percent the month before. Food, alcohol & tobacco is expected to have the highest annual rate in February (15.0 percent, compared with 14.1 percent in January), followed by energy (13.7 percent, compared with 18.9 percent), non-energy industrial goods (6.8 percent, compared with 6.7 percent) and services (4.8 percent, compared with 4.4 percent). Meanwhile, core inflation came in well above expectations rising to 5.6 percent compared to 5.3 percent the month before. The HICP releases in February for major eurozone countries were as follows: France 7.2 percent (7), Germany 9.3 percent (9.2), Italy 9.9 percent (10.7) and Spain 6.1 percent (5.9). The unemployment rate in the eurozone for January was 6.7 percent, and above expectations, compared to 6.6 percent in the month before European Central Bank President Christine Lagarde indicated that a further half-point interest rate increase would likely be forthcoming at the March 16 meeting. “We have every reason to believe that there will be another 50-basis-point increase at our next meeting in March,” she said. “I don’t have any reason to believe that it won’t be like that.” Meanwhile, minutes from the February policy meeting said there was only limited evidence of a stabilization so far in underlying measures of inflation. “Further increases were required for the Governing Council’s policy rates to enter restrictive territory,” the minutes said In February, the European Commission’s Economic Sentiment Index eked down from 99.8 to 99.7. This stabilization occurred after three consecutive monthly increases. Despite this, the mounting optimism in recent months suggests that if there is an economic downturn, respondents expect it to be shallow, despite soaring energy prices, a cost-of-living crisis, and the war in Ukraine. Sentiment improved in three of the five sectors surveyed: consumers (from -20.7 to -19.0), retail (from -0.7 to -0.1), and construction (from 1.4 to 1.8). On the other hand, the index fell in services (from 10.4 to 9.5) and manufacturing (from 1.2 to 0.5). At the national level, Germany saw an improvement and Italy remained stable (at 102.5) while Spain (from 101.5 to 99.5) and France (from 98.5 to 97.1) decreased Shares in Europe rose as markets overcame worries about interest rates and focused on signs of an improving economic outlook. In local currency terms, the pan-European STOXX Europe 600 Index gained 1.43%. Major stock indexes also advanced. Germany’s DAX Index added 2.42%, France’s CAC 40 Index gained 2.24%, and Italy’s FTSE MIB Index climbed 3.11% 

China’s official manufacturing PMI data rose to 52.6 in February from January’s 50.1, marking the highest reading since April 2012 as domestic activity picked up. Both production and new orders were strong as supply and demand recovered but raw materials remained in contraction. The nonmanufacturing PMI rose to 56.3 from 54.4 the previous month. Both indexes beat economists’ forecasts. Separately, the private Caixin/S&P Global survey of manufacturing activity returned to growth and marked its first expansion in seven months The People’s Bank of China (PBOC) Governor Yi Gang signaled at a press briefing Friday that the central bank could cut the reserve requirement ratio for banks to support the economy. Yi Gang also said that China will keep the yuan exchange rate “basically stable” this year, Reuters reported. The prior week, the PBOC released its quarterly policy report in which the central bank affirmed its prudent policy stance to support economic growth and stability in 2023. The PBOC also said it seeks to maintain sufficient liquidity and credit growth while upholding its commitment to financial risk management and market-oriented foreign exchange policy New home sales at China’s top 100 developers rose by 14.9% following a 19-month slump as demand recovered after the government lifted its zero-COVID policy and unveiled measures to bolster the property sector at the end of 2022. The real estate sector, which accounts for almost a quarter of China’s economy, has seen the first year-on-year growth since July 2021 Chinese stocks rose for the second week ahead of the National People’s Congress (NPC) meeting as strong economic data raised prospects for a better-than-expected recovery. The Shanghai Stock Exchange Index increased 1.87%, and the blue-chip CSI 300 gained 1.71% in local currency terms. In Hong Kong, the benchmark Hang Seng Index advanced after four weeks of losses and added 2.79%, according to Reuters. The meeting of the NPC, China’s parliament, starts Sunday, March 5, and is expected to last about one week. The meeting happens every five years and is closely watched for signs about economic policy shifts and any senior leadership changes      
Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets