Empire State Survey Fuels Recession Fears
Economic news and commentary for April 17, 2023
US Empire State Manufacturing Survey
The Empire State Manufacturing Survey showed a marked decline in activity in March as the Business Conditions index fell a sharp -18.8 pts to -24.6. Both the New Orders and Shipments indexes declined substantially by -13.9 pts and -13.5 pts to -21.7 and -13.4, respectively. Alongside the intensifying contraction came a continued improvement in supply conditions as unfilled orders and delivery times continued to decline, though only at a slight pace. Additionally, inflation pressures eased slightly as the Prices Paid and Prices Received indexes approached 2017-2018 levels. The most important development of the survey is in the employment indexes. Both the Number of Employees and Average Employee Workweek readings turned more negative in March, reaching new post-pandemic lows. The former fell -3.5 pts to -10.1, and the latter fell -6.4 pts to -18.5. The forward-looking indicators of employment growth are still positive but only faintly.
This month’s Empire State Manufacturing Survey fuels the recession argument with evidence of a robust slowdown in business activity which is leading to softer labor demand. While the forward-looking indicators of hiring are still positive, they are typically optimistic and overshoot what the current indicators end up being. The deterioration of activity and hiring is also feeding through to lower prices. Historically, firms are still reporting an excess amount of increases in prices, but we are at least in territory that we have seen before. Data is shaping up to signal that a shift in the economy is coming in Q2 which will allow the Fed to move away from its hawkishness.
Still to come…
10:00 am (EST) - US Housing Marketin Index
9:30 pm - Reserve Bank of Australia Minutes
10:00 pm - China GDP, Industrial Production, Fixed Asset Investment, and Retail Sales
Morning Reading List
India's WPI was flat MoM and up 1.3% YoY in March, down from 3.9% YoY in February. Energy and food wholesale prices both fell to 9.0% YoY (Feb 14.8% YoY) and 2.3% YoY (Feb 2.8% YoY) respectively. Primary goods saw just marginal inflation at 2.4% YoY (Feb 3.3% YoY), while the prices of manufactured goods fell -0.8% YoY (Feb 1.9% YoY).
Italian CPI growth in March saw a slight downgrade from -0.3% MoM to -0.4% MoM. The annual pace stayed at 9.1% YoY. Goods deflation was slightly stronger at -1.0% MoM instead of -0.9% MoM due to a smaller increase in ex-energy goods.
US Retail Sales
U.S. Retail Sales: Spring Break (BMO) - American consumers are pulling back, but it's unclear how much of the fade is normal payback from an earlier binge and how much is underlying weakness. We suspect the headwinds are starting to dominate, and still look for a mild contraction in both spending and the economy through mid-year.
Retail sales fall sharply in March, recording a second consecutive month of declines (TD Bank) - As expected, spending continued to give back some of the gains from earlier in the quarter, after a solid start to the year. Accounting for revisions, nominal retail trade grew by 7% (annualized) in Q1 2023 and 3.1% when removing the effect of rising prices. Most of the gains came from sales at restaurants with the second biggest contribution coming from the auto sector where improvement in production helped fuel stronger sales. While auto sales will likely continue to tick higher given the build-up of pent-up demand, discretionary service spending is likely to soften over the coming months as the effect of higher interest rates starts to bare down on the economy. We expect consumer spending to slow from 4.2% in Q1 to a stall speed by Q2.
US consumer remains resilient, for now (ABN AMRO) - Retail sales cooled in March, but the fall was only marginal compared with the surge in January and February.
US Retail sales falter as consumers become more cautious (CIBC) - US retail sales fell sharply in March as consumers became more cautious, adding to other recent data releases that have signaled a deterioration in activity. Total retail sales fell by 1.0%, worse than the 0.5% drop expected by the consensus, as autos, building materials, and gasoline sales decreased, and the decline was magnified by the drop in gasoline prices, which left more money for spending in other categories.
Retail Sales Slip Again in March After Unusually Strong Start to Year (Wells Fargo) - Retail sales continued to reverse in March after a temporary surge to start the year. But the level of spending remains elevated and demonstrates there remains an underlying resilience among consumers.
Wary consumers tighten the purse strings (EY Parthenon) - Retail sales fell more than expected in March amid rising financial and economic uncertainty, and consumers continued to grapple with elevated prices, higher interest rates and reduced access to credit. Nominal sales declined 1% over the month while the volume of sales also fell 1% given the soft increase in consumer prices.
Retail Sales Declined 1.0% in March (First Trust Portfolios) - Retail sales continued to cool in March, falling 1.0%, after an abnormally strong print in January that had more to do with one-off factors (seasonal adjustments and unusually warm weather) rather than economic fundamentals. The weakness in retail sales in March itself was fairly widespread as eight of thirteen retail categories declined, led by gas stations, general merchandise stores (think department stores), and autos.
US Industrial Production
Industrial Production Weak Under the Hood (BMO) - Industrial production managed a modest advance in the first quarter, but the recent weakness provides a soft hand-off for the second quarter and signals that the goods sectors are slowing as a result of tightening financial conditions and weakening consumer and business demand.
Rise in March Industrial Production Masks Manufacturing Weakness (Wells Fargo) - The 0.4% rise in March industrial production was due entirely to a jump in utilities production after weather-related weakness in February. Manufacturing output declined and continued to demonstrate a stalling in the sector.
Industrial Production Increased 0.4% in March (First Trust Portfolios) - Industrial production came in better than expected in March, rising for a third consecutive month. Upward revisions to data in the first two months of 2023 show activity was stronger than previously believed, although the details in March itself were
weaker than the headline numbers suggested.
US
US: Fed set to hike in May, but it is likely to mark the peak (ING) - Fed hawkishness indicates officials feel the need to do more to ensure inflation returns to target in a timely fashion, especially with consumer spending and jobs growth performing well in the first quarter. Recession risks are mounting and inflation pressures are moderating, which we think will result in the Fed reversing course in the fourth quarter.
US core inflation remains stubbornly high (ABN AMRO) - Core inflation for March was in line with consensus expectations at 0.4% m/m, but below our forecast (0.5%). The strength in core inflation was driven by continued pass-through of housing rents to the shelter component as well as a pickup in core goods inflation.
US | Spring meetings of the IMF and the World Bank: tense calm (BBVA) - This week the meetings organized each year by the International Monetary Fund (IMF) and the World Bank are taking place, just a few weeks after episodes of financial turbulence occurred.
Fiscally Fanning Inflationary Flames (BMO) - We’ve long talked about three pillars buffeting the U.S. economy against mighty interest-rate headwinds. Excess savings, deferred demand, and labour hoarding are giving the economy extra oomph. But there’s a fourth bulwark as well: expansionary fiscal policy.
Spring Break Is Over (Wells Fargo) - On balance, this week's data show the U.S. economy is losing momentum, as the lagged effects of the FOMC's rapid pace of monetary policy tightening appear to be slowing growth as intended. In March, retail sales fell 1.0%, manufacturing production slipped 0.5% and the consumer price index rose a modest 0.1%.
The Cadence of Crisis (Northern Trust) - Banking stress spread with dizzying speed last month. Rumors about Silicon Valley Bank (SVB) moved rapidly through social media and private communication channels. Some SVB depositors apparently rushed to the exits after seeing other depositors engaged frantically with their mobile devices on buses and in coffee shops.
Mitigating the Risk of Runs on Uninsured Deposits: the Minimum Balance at Risk (Liberty Street Economics, NY Fed) - The incentives that drive bank runs have been well understood since the seminal work of Nobel laureates Douglas Diamond and Philip Dybvig (1983). When a bank is suspected to be insolvent, early withdrawers can get the full value of their deposits. If and when the bank runs out of funds, however, the bank cannot pay remaining depositors. As a result, all depositors have an incentive to run. The failures of Silicon Valley Bank and Signature Bank remind us that these incentives are still present for uninsured depositors, that is, those whose bank deposits are larger than deposit insurance limits. In this post, we discuss a policy proposal to reduce uninsured depositors’ incentives to run.
US Labour Market Monitor - The Fed welcomes early signs of easing labour markets (Danske Bank) - While the March Jobs Report continued to illustrate strong headline employment growth, it also brought some welcome news for the Fed. Make no mistake, US labour markets still remain historically tight, with 1.7 unfilled vacancies per unemployed (compared to around 1.2 pre-pandemic). Consumer surveys show that workers' confidence in finding new jobs remains very high.
Europe
Riksbank preview: March inflation makes 50bp more likely in April - we adjust our call (Danske Bank) - Peak inflation seems to finally have arrived in Sweden, and while the February inflation print showed a significant upside surprise, the March inflation print surprised on the low side to expectations. That said, core inflation at 0.6% MoM and 8.9% YoY is still far too high for the Riksbank and it is also still a broadbased inflation. The gap in core inflation compared to the Riksbank's February is 1.4p.p.
Euro macro notes - Germany is falling back into old habits (Danske Bank) - When it came to power in 2021, Germany's 'traffic light' coalition of Social Democrats (SPD), Greens and Liberals (FDP) planned to embark on an ambitious investment offensive under the mantra 'daring more progress'. But after recurring crises, implementation of the coalition agreement's goals have run into headwinds and internal divisions between the parties - especially on financing - are increasingly holding up policy implementation that is key to revive the economy's growth prospects and not least defence capabilities.
Swedish March inflation review: Core inflation levelling out (Nordea) - CPIF-inflation stood at 8.0% y/y in March, down from 9.4% in February and down from the peak at 10.2% in December. This was lower than we had expected. Core inflation was lower than our call too.
Canada
Canadian home sales increased in March (TD Bank) - March marks the second consecutive month of higher sales, with some boost likely coming from lower interest rates amid a solid job market. In addition, buyer psychology was probably helped by the Bank of Canada's pause early in the month. Our forecast assumes further sales gains are in the cards this year, although an important downside risk stems from looming regulatory changes that will make it harder to qualify for mortgage.
Cdn. Existing Home Sales (Mar.) — Laying the Floor? (BMO) - Canadian housing activity is still subdued, but a dearth of new listings has tightened the market significantly and set a floor, at least for now, under prices in a number of markets.
Rate Cuts? Maybe Next Year (BMO) - Why does Governor Macklem push back at the prospect of rate cuts this year? After all, the Bank of Canada itself projects that headline inflation will drop to 2.5% by the end of 2023, and that the economy will be in “excess supply” by the second half of the year (i.e., operating below potential).
Loonie’s Spring Fever Dream (BMO) - In the five weeks since the failure of Silicon Valley Bank, the U.S. dollar has dropped roughly 4% against a basket of major currencies. And the Canadian dollar has been right on the other side of that, bouncing from near-three-year lows to almost 75 cents now (or $1.338/US$).
Inflation
Macro Insights: Too soon to take inflation concerns off the table (Saxo Bank) - The inflation vs. recession debate continues to heat for the global markets even as a sense of calm is prevailing on banking stress. This week’s inflation data out from the US did not materially change the expectations of the Fed path as sticky core pressures remained the highlight. Risks on inflation remain tilted to the upside for H2 with activity levels in China improving and commodity prices surging higher again. That makes us question whether the pricing of rate cuts for this year may be too aggressive.
Pay watch (CIBC) - You can’t blame workers for inflation. For one, statistical
evidence suggests that changes in price inflation lead changes in wage inflation more than the reverse is true. But rising wages are still a necessary condition for sustained inflation due to their role in business costs, particularly in services, and in supporting purchasing power for consumers.
The energy intensity of the Consumer Prices Index: 2022 (ONS) - Estimates of the direct and indirect energy intensity of the Consumer Prices Index.
Real Estate
Steep Year-over-Year Decline for Single-Family Permits in February 2023 (NAHB) - Over the first two months of 2023, the total number of single-family permits issued year-to-date (YTD) nationwide reached 112,131. On a year-over-year (YoY) basis, this is 34.3% below the February 2022 level of 170,716.
Houses of Cards? (Northern Trust) - Tighter monetary policy and the accompanying sharp rise in mortgage rates have pushed many housing markets into steep downturns. Policy rates have increased an average of four percentage points across major economies, to levels last seen prior to the 2008 global financial crisis. The average 30-year fixed rate mortgage in the U.S. rose to a two-decade high of 7.1% late last year. Though down from the highs of October 2022, mortgage rates in the U.K. are still well above the levels seen before the pandemic.
FX
USD breaks down, if not yet broadly (Saxo Bank) - The US dollar has broken down to new lows against four of the G10 currencies after soft PPI data yesterday. EURUSD has posted a new 12-month high and getting the most attention, while USDJPY remains stuck in the range and the Antipodeans and Scandies have yet to confirm the greenback’s breakdown. Extension of the move lower will require a delicate balance of avoiding volatility in rates and “just right” economic data.
The Dollar Is Not Doomed (Northern Trust) - Is the end of the dollar’s reign is upon us? The prospect is worrisome to Americans. The dollar’s leading status has conferred “exorbitant privilege” to the U.S. in all matters of international trade. U.S. businesses and consumers have benefitted from cheap imports and ease of transacting when the world caters to our currency; reliable demand for U.S. Treasuries has allowed the nation to run deficits at little cost.
PMI
Consumer services drive global economic expansion in March amid travel surge (S&P Global) - Detailed sector Purchasing Managers' Index (PMI) from S&P Global reveal how faster than anticipated economic growth in March can be traced to a boost from resurgent spending by consumers on services such as travel and tourism. Especially strong growth of which is evident in Asia following the recent loosening of COVID-19 health precautions in mainland China, though a broader loosening of travel restrictions globally has also helped so far in 2023 compared to prior years.
Markets
Banks Run (BMO) - Equity markets rose this week, helped by softer headline inflation and solid bank earnings. The S&P 500 rose 0.8%, with banks jumping almost 6% as some bigger-cap names in the sector topped earnings expectations. Industrials and energy were also strong, while utilities and tech lagged. The TSX added 1.9%, with higher oil prices driving a 2.8% advance in energy.
Taking cues from economic data again (Danske Bank) - In the absence of further banking turmoil, it has been relatively calm waters in financial markets over the last two weeks. VIX volatility has traded at fairly low levels and yields have started to edge higher again, as focus turns away from risk of a banking crisis and back to data. Back in risk-on mode we have seen further USD weakening also supported by soft US data releases.
Macro & Markets: In Limbo (Nordea) - The data over the past two weeks has not surprised, yet financial markets are still in limbo when it comes to central bank’s actions ahead. Expectations for rate cuts are too aggressive, we think. In the FX space, the NOK is the weakest link.
Outlook
Global Growth: The Fog Hasn’t Lifted Yet (BMO) - When the situation changes, so does the view. Take the IMF for instance. At this week’s Spring Meetings in Washington D.C., it announced a cut to its 2023 global growth forecast, from the previous call of 2.9% to 2.8%.
Week Ahead Economic Preview: Week of 17 April 2023 (S&P Global) - A busy week for economy watchers culminates with flash PMI updates, which will provide important assessments of business conditions at the start of the second quarter for the US, Eurozone, UK, Japan and Australia.
Global | What lies ahead (BBVA) - The Intergovernmental Panel on Climate Change (IPCC) painted a bleak picture in its Sixth Synthesis Report on climate change: the window of opportunity to achieve the goals of the Paris Agreement is continuing to close.
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