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MacroEco Highlights and Report
MacroEco Highlight
It is always hard for me to start these types of periodic reviews because I start to remember about a million things that must be accounted for and acknowledged when thinking about global macro/markets. The universe of options and opportunities is vast, and the interconnectedness of its parts are complex. However, we rely on the simplicity of the Growth and Inflation Matrix to zoom in on data that can mostly impact the acceleration and deceleration of economic output and inflation.
United States
Last week we learned that US consumer inflationary pressures (Jan: +3.1% y/y vs. +2.9% y/y estimate) may be a little more ingrained than previously expected, as a result the gliding path for lower interest rates just got shallower. In addition, the pause in the decline of producer prices could be an early sign that inflationary pressures are building within the supply chain; geopolitical turmoil is also not helping.
The Fed was clear that it needs more data supporting a sustainable deceleration in inflation, but that won’t be easy. With January's CPI and PPI data in hand, Bloomberg Economics estimates the core PCE deflator - the Fed's preferred inflation indicator - will come in at a very hot +0.4% (vs. +0.2% prior) pace. Meanwhile, the preliminary one-year ahead inflation expectations from the University of Michigan survey inched higher in February and favorable news on the job market has propped up consumer sentiment.
Among small businesses the perception is a little different; the NFIB index of small business optimism declined more than expected in January to the lowest reading since May 2023. Job-creation plans are still slowing, eventually income and demand will follow.
Now it’s important to remember that sentiment and feelings are different than actions. Despite the cold weather and holiday hangover, US retail sales pull back in January was broad-based as higher borrowing costs took a toll on consumers. In contrast, January business conditions measured by the NY and Philly Fed showed data suggesting the sector is stabilizing at a weak level; word of caution, these indices have been subject to large monthly swings. Industrial production in January declined, as unseasonably cold temperatures contributed to declining nondurable goods manufacturing and mining activity, which was mostly offset by an increase in utilities output. With inventories declining faster than new orders, there is a chance that the decline in production is only temporary.
Within housing and construction, the upward revisions to the December data and an unseasonably cold January help explain the dramatic decline in housing starts in January. Though mortgage rates have stabilized — and even started rising again in February — homebuilders are increasingly optimistic, and report growing buyer traffic (NAHB Index up in February to the highest since 2023). Moreover, with still-elevated mortgage rates making existing owners hesitant to list their homes, building permits for single-family homes continued rising — something that’s likely to support building activity in coming months. We will have a better outlook for the sector once a clearer picture of the Fed’s rate path emerges; for now, there is some evidence the decline in activity is temporary heading into the spring.
Ultimately, we believe that as long as the labor market is strong, inflation will not decrease much more and a recession will not happen; as such, we have been paying close attention to the weekly initial and recurring jobless claims, down -8k to 212k and up +30k to 1,895k, respectively. With increasing numbers of CEOs expecting to reduce their workforce, claims could climb higher in the weeks ahead.
United Kingdom
In the UK, the main takeaway from the January labor market data is that wage pressures are easing but probably not quite as quickly as the Bank of England had hoped. Said that, any upside surprise in private sector wage gains will make for uncomfortable reading at the central bank and could make it more cautious about easing policy.
Also, the January CPI miss (+4% y/y vs. +4.1% y/y estimate) was a relief for the BOE after labor market data showing sticker-than-expected wage growth. A downward trajectory is expected to resume in February, with a fall below 2% likely in the spring.
A May rate cut remains in play, however chances that a cut will be delayed to June have increased despite preliminary Q4 GDP suggesting a technical recession (two consecutive quarters of negative GDP growth) in the second half of 2023. Although the UK economy has stagnated since mid-2022, with the worst of inflation (and higher rates) behind, there are a few things indicating that the outlook for 2024 is brighter — something the Bank of England has also been trying to emphasize recently. Still, the larger-than-expected fall and talk of recession could, at the margin, increase pressure to cut rates sooner rather than later, particularly with a general election on the horizon. Lastly, retail sales rebounded in January after collapsing in December, but the message is still one where consumer spending is feeling the pinch of higher interest rates.
Japan
In Japan, the surprise contraction in preliminary Q4 GDP suggests technical recession as well, and places strong doubts over whether the Bank of Japan will follow through on changing the current monetary policy of yield-curve control and negative rates. Private consumption and investment — the two main domestic growth engines — fell. The decline in GDP would have been wider if it wasn’t for an unusual increase in royalty fees pushing services exports higher to offset some of the weakness in other areas. On separate news, the preliminary Machine Tool Orders for January declined -12.8% m/m and -14.1% y/y due to lower domestic and foreign demand. Everything points to continued monetary policy accommodation; with that said, the PPI Index increased for the second consecutive month in January and y/y is no longer falling. As of now, the base case for changes in monetary policy around July is forming.
India
In India, the Reserve Bank of India (RBI) will not change its hawkish stance even as consumer inflation declined for the second consecutive month in January (as a side note, producer prices increased for the third consecutive week). The reason — a record low policy rate gap between the RBI and the Federal Reserve means India’s central bank will only begin easing after the Fed starts. The consensus for a Fed rate cut is now pushed back to May, with the Fed, and we expect the RBI to maintain its hawkish hold until then. The trade balance deficit continued to improve as the government manufacturing push took hold, presenting an alternative to imports.
Other regions and countries
With Q4 GDP basically unchanged at 0.0%, the euro-area economy barely avoided a technical recession as the 20-nation bloc economy stagnated at the end of last year. A separate report painted a brighter picture of the struggling manufacturing sector. We’ll have fresh information on the state of manufacturing sector during this week. On separate news, February ZEW confidence still trending higher; Germany ZEW survey of expectations helped.
In France, Q4 unemployment rate unchanged at 7.5% for the second month and January final CPI unchanged from preliminary reading at +3.4% y/y. Germany and Italy trade balance surplus widened in December.
In Brazil, while weekly FIPE and IPC-S inflation continues to inch higher, the latest IGP-10 inflation index still showing inflation is decelerating.