US Economy: Weekly Commentary – May 20, 2024.
US Market Review
US bond yields were mixed as short-term rates rose while long-term rates fell. Stock markets surged, buoyed by promising CPI data, with tech stocks thriving and real estate benefiting from rate cut expectations.
US bond yields saw a rise in short-term yields (2-year to 4.837%) but long-term yields falling (10-year to 4.426%). Inflation data continues to dominate the shape of the curve.
The stock markets experienced a strong week led by Tech and real estate sectors. The "7 Mag" surged by 2.45%, propelling the markets to new historical highs. Mid and large-cap companies underperformed their micro and small-cap counterparts. The USD weakened to against EUR (USD / EUR now 0.9196).
WTI crude oil prices rose by 2.30%, buoyed by upbeat Chinese industrial output, stabilization in the US job market, and favourable consumer prices in April. Gold also saw a notable increase of 2.24%, driven primarily by heightened demand from central banks amid market volatility. Meanwhile, Bitcoin saw a strong gain on the week of over 10%.
US bond yields saw a rise in short-term yields (2-year to 4.837%) but long-term yields falling (10-year to 4.426%). Inflation data continues to dominate the shape of the curve.
The stock markets experienced a strong week led by Tech and real estate sectors. The "7 Mag" surged by 2.45%, propelling the markets to new historical highs. Mid and large-cap companies underperformed their micro and small-cap counterparts. The USD weakened to against EUR (USD / EUR now 0.9196).
WTI crude oil prices rose by 2.30%, buoyed by upbeat Chinese industrial output, stabilization in the US job market, and favourable consumer prices in April. Gold also saw a notable increase of 2.24%, driven primarily by heightened demand from central banks amid market volatility. Meanwhile, Bitcoin saw a strong gain on the week of over 10%.
Highlight - China has intensified its selling of US government debt at an unprecedented pace. While steadily reducing its holdings of US Treasury securities over the past decade, China has recently expedited the divestment of both Treasuries and US agency bonds. Instead, China is focusing on accumulating significant levels of gold as part of its investment strategy.
US Market Views Synopsis
April 2024 sees mixed inflation data, with PPI exceeding expectations, while CPI aligns with forecasts. Consumer spending remains subdued. The housing market is mixed.
Inflation data presents a mixed picture, with the Producer Price Index (PPI) exceeding expectations while the Consumer Price Index (CPI) aligns with forecasts. PPI's 0.5% rise surpasses the projected 0.3%, driven by increased portfolio management and gasoline prices. However, CPI's 0.31% increase falls slightly short of the expected 0.37%, attributed to declines in used vehicle prices and gas utility costs. Amid high inflation and interest rates, consumer spending remains subdued, reflected in flat retail sales. The housing market faces challenges, with mixed results in housing starts and building permits amidst rising mortgage rates.
Inflation data presents a mixed picture, with the Producer Price Index (PPI) exceeding expectations while the Consumer Price Index (CPI) aligns with forecasts. PPI's 0.5% rise surpasses the projected 0.3%, driven by increased portfolio management and gasoline prices. However, CPI's 0.31% increase falls slightly short of the expected 0.37%, attributed to declines in used vehicle prices and gas utility costs. Amid high inflation and interest rates, consumer spending remains subdued, reflected in flat retail sales. The housing market faces challenges, with mixed results in housing starts and building permits amidst rising mortgage rates.
Inflation
Inflation data presents a mixed picture, with the PPI exceeding market expectations whilst CPI is in line. Latest data does not support cuts in September that the market is pricing in.
PPI revealed higher-than-expected inflation figures for April 2024, with factory prices rising by 0.5% from the previous month, exceeding the projected 0.3%. Service prices also surged by 0.6%, marking the largest increase since July, driven notably by a 3.9% uptick in portfolio management costs. Additionally, goods costs rebounded by 0.4%, mainly due to a 5.4% spike in gasoline prices. Core producer prices increased by 0.5%, surpassing projections, with March's figures revised downwards. CPI rose by 0.31% in April, below the expected 0.37%, with the annual rate at 3.36%. The core CPI was 0.29%, slightly lower than the 0.30% expectations, with an annual rate of 3.62%, the lowest since April 2021. Housing costs contributed significantly to the monthly CPI increase, while used vehicle prices and gas utility costs declined. Housing contributed 17.5 basis points to the core CPI monthly inflation, the lowest since December 2021, indicating a cooling in the annual CPI rate. The SuperCore, excluding housing, rose by 0.22% MoM and to 4.87% YoY, primarily driven by insurance costs for housing and vehicles. Barring housing-related services, other basic services contributed less to the annual CPI. Goods prices are deflating at the fastest rate since April 2004, while service prices remain stagnant at around 5.3% YoY.
We do not expect cuts until December. With inflation persisting at high levels, Powell's affirmation, "this is going to take longer than expected," reinforces the prolonged nature of the situation as we have been pointing out the sticky nature of inflation this year.
PPI revealed higher-than-expected inflation figures for April 2024, with factory prices rising by 0.5% from the previous month, exceeding the projected 0.3%. Service prices also surged by 0.6%, marking the largest increase since July, driven notably by a 3.9% uptick in portfolio management costs. Additionally, goods costs rebounded by 0.4%, mainly due to a 5.4% spike in gasoline prices. Core producer prices increased by 0.5%, surpassing projections, with March's figures revised downwards. CPI rose by 0.31% in April, below the expected 0.37%, with the annual rate at 3.36%. The core CPI was 0.29%, slightly lower than the 0.30% expectations, with an annual rate of 3.62%, the lowest since April 2021. Housing costs contributed significantly to the monthly CPI increase, while used vehicle prices and gas utility costs declined. Housing contributed 17.5 basis points to the core CPI monthly inflation, the lowest since December 2021, indicating a cooling in the annual CPI rate. The SuperCore, excluding housing, rose by 0.22% MoM and to 4.87% YoY, primarily driven by insurance costs for housing and vehicles. Barring housing-related services, other basic services contributed less to the annual CPI. Goods prices are deflating at the fastest rate since April 2004, while service prices remain stagnant at around 5.3% YoY.
We do not expect cuts until December. With inflation persisting at high levels, Powell's affirmation, "this is going to take longer than expected," reinforces the prolonged nature of the situation as we have been pointing out the sticky nature of inflation this year.
Consumer spending
US Consumers are reducing spending as they face the combination of high inflation and interest rates. Retail sales were flat in April, signalling economic strain.
Consumers in the United States may be nearing a tipping point as they grapple with heightened inflation and the highest interest rates in decades, prompting a pullback in spending. According to the Commerce Department's report last Wednesday, retail sales remained unchanged in April, following a revised 0.6% increase in March. This missed economists' projections of a 0.4% uptick. Compared to a year ago, retail sales surged by 3%. Excluding auto sales, April's retail sales saw a modest 0.2% increase, aligning with economists' forecasts. Gas stations experienced the largest monthly spending boost, up by 3.1% in April, likely reflecting recent surges in gas prices. However, these prices have begun to stabilize in recent weeks. Spending also saw upticks at clothing and accessory stores (1.6%), food and beverage stores (0.8%), and restaurants and bars (0.2%). Conversely, most other sectors witnessed declines in monthly spending, notably online retail sales, which fell by 1.2%.
The decrease in retail sales highlights how high interest rates is affecting consumers. Furthermore, the reduction in extra savings and the weight of debt exacerbate these difficulties. We expect consumer spending growth to remain stagnant, staying close to zero in the months ahead.
Consumers in the United States may be nearing a tipping point as they grapple with heightened inflation and the highest interest rates in decades, prompting a pullback in spending. According to the Commerce Department's report last Wednesday, retail sales remained unchanged in April, following a revised 0.6% increase in March. This missed economists' projections of a 0.4% uptick. Compared to a year ago, retail sales surged by 3%. Excluding auto sales, April's retail sales saw a modest 0.2% increase, aligning with economists' forecasts. Gas stations experienced the largest monthly spending boost, up by 3.1% in April, likely reflecting recent surges in gas prices. However, these prices have begun to stabilize in recent weeks. Spending also saw upticks at clothing and accessory stores (1.6%), food and beverage stores (0.8%), and restaurants and bars (0.2%). Conversely, most other sectors witnessed declines in monthly spending, notably online retail sales, which fell by 1.2%.
The decrease in retail sales highlights how high interest rates is affecting consumers. Furthermore, the reduction in extra savings and the weight of debt exacerbate these difficulties. We expect consumer spending growth to remain stagnant, staying close to zero in the months ahead.
Housing market
Housing starts rose 5.7% MoM but fell 0.6% YoY. Building permits decreased, reflecting housing market challenges from rising mortgage rates. Single-family completions surged, while multi-family permits and starts declined.
Housing starts saw a 5.7% MoM increase but dropped 0.6% YoY to reach 1.368 million in April 2023. Building permits, a forward-looking indicator, were at an annual rate of 1.440 million, marking a 3% decrease from the revised March rate of 1.485 million and a 2.0% decrease from April 2023's rate of 1.470 million. The single-family sector showed mixed results: permits decreased by 0.8% and starts by 0.4%, but completions surged by 15.4%, indicating an uptick in new supply.
Recent trends reflect growing challenges in the housing market. Single-family starts have declined amid rising mortgage rates, with permits down for three consecutive months, suggesting potential further declines in production. Builder sentiment has also turned negative, with drops in current sales conditions, buyer traffic, and sales expectations. Higher mortgage rates continue to impact affordability and suppress home sales, though new home builders can still offer incentives like rate buydowns. On a positive note, single-family completions increased significantly, reaching the highest level since November 2022, helping to alleviate housing shortages. In the multi-family sector, permits and starts have both fallen sharply year-over-year, though completions are up, potentially easing rent growth pressures.
We do not anticipate a recovery until interest rates decrease, driving down mortgage rates. We expect the housing market to start recovering in 2025 when interest rate cuts impact the economy.
Housing starts saw a 5.7% MoM increase but dropped 0.6% YoY to reach 1.368 million in April 2023. Building permits, a forward-looking indicator, were at an annual rate of 1.440 million, marking a 3% decrease from the revised March rate of 1.485 million and a 2.0% decrease from April 2023's rate of 1.470 million. The single-family sector showed mixed results: permits decreased by 0.8% and starts by 0.4%, but completions surged by 15.4%, indicating an uptick in new supply.
Recent trends reflect growing challenges in the housing market. Single-family starts have declined amid rising mortgage rates, with permits down for three consecutive months, suggesting potential further declines in production. Builder sentiment has also turned negative, with drops in current sales conditions, buyer traffic, and sales expectations. Higher mortgage rates continue to impact affordability and suppress home sales, though new home builders can still offer incentives like rate buydowns. On a positive note, single-family completions increased significantly, reaching the highest level since November 2022, helping to alleviate housing shortages. In the multi-family sector, permits and starts have both fallen sharply year-over-year, though completions are up, potentially easing rent growth pressures.
We do not anticipate a recovery until interest rates decrease, driving down mortgage rates. We expect the housing market to start recovering in 2025 when interest rate cuts impact the economy.
Industrial production
Industrial production remained unchanged in April. Despite a surge in utilities output, declines in mining and manufacturing offset growth, resulting in stagnant overall production levels.
Industrial production held steady in April, as reported by the Federal Reserve on Thursday. Despite a notable increase in utilities output, declines in both mining and manufacturing sectors balanced out the overall figures, resulting in no change compared to the previous month. This stagnant growth followed a minimal 0.1% uptick in March, revised downward. Notably, utility output saw a significant surge of 2.8% in April, while mining and manufacturing outputs experienced declines of 0.6%and 0.3%, respectively. Excluding motor vehicles and parts, manufacturing output saw a slight decrease of only 0.%. Moreover, the report highlighted a slight dip in capacity utilization within the industrial sector, down to 78.4 from a revised 78.5 in March. In contrast, capacity utilization in the utilities sector rose to 71.0, while the manufacturing and mining sectors saw declines to 76.9 and 92.1, respectively.
The economy shows signs of weakness, mainly due to high interest rates affecting the industry. We anticipate no rate cuts until December because of ongoing inflationary pressures. The economy remains strong enough to provide the Federal Reserve with the opportunity to maintain higher rates for an extended period.
Industrial production held steady in April, as reported by the Federal Reserve on Thursday. Despite a notable increase in utilities output, declines in both mining and manufacturing sectors balanced out the overall figures, resulting in no change compared to the previous month. This stagnant growth followed a minimal 0.1% uptick in March, revised downward. Notably, utility output saw a significant surge of 2.8% in April, while mining and manufacturing outputs experienced declines of 0.6%and 0.3%, respectively. Excluding motor vehicles and parts, manufacturing output saw a slight decrease of only 0.%. Moreover, the report highlighted a slight dip in capacity utilization within the industrial sector, down to 78.4 from a revised 78.5 in March. In contrast, capacity utilization in the utilities sector rose to 71.0, while the manufacturing and mining sectors saw declines to 76.9 and 92.1, respectively.
The economy shows signs of weakness, mainly due to high interest rates affecting the industry. We anticipate no rate cuts until December because of ongoing inflationary pressures. The economy remains strong enough to provide the Federal Reserve with the opportunity to maintain higher rates for an extended period.
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No representation or warranty, express or implied, is made by Dolfin Fund Management Ltd or any of its directors, officers or employees as to the accuracy, completeness or fairness of the information in this document and no responsibility or liability is accepted for any such information (save in respect of fraudulent representation or warranty).
This document may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose without the prior written consent of Dolfin Fund Management Ltd.
Dolfin Fund Management Ltd, a company registered in Malta (registered number C71750), authorised and regulated by the Malta Financial Services Authority (licence number IS71750)
Copyright © 2023 Dolfin Fund Management Ltd. All rights reserved