US Advanced Economic Indicators Point to Slowdown in Q1
Economic news and commentary for March 28, 2023
US Advance Economic Indicators
Advanced economic indicators for February have come out to show how the US economy did after the hot start to the new year. The US international trade increased slightly, up 0.6% MoM to $91.6 billion in February as exports tanked -$6.7 billion (-3.8% MoM) to $167.8 billion and imports fell -$6.2 billion (-2.3% MoM) to $259.5 billion. The sharp slowdown in trade shows that there is significant weakness in demand both locally and abroad. Trade in the auto vehicle segment was especially weak with exports down -11.9% MoM and exports down -7.1% MoM. Consumer goods imports are down -11.7% YoY as retailers have looked to lighten their inventories in anticipation of the Fed’s intentional demand destruction. However, inventories are still growing. In February, wholesale inventories grew 0.2% MoM with durable goods inventories up 0.6% MoM, and retail inventories grew 0.8% MoM, driven by a huge 1.9% MoM increase in motor vehicle inventories. It looks like for the most part that supply chains in durable goods markets have slowed down, but high-interest rates are keeping businesses from churning through the inventory that is coming in as a result of the drawdown on unfilled orders. This is especially true for auto dealers that are faced with some of the largest consumer auto loans interest rate increases on record. One would expect this slowdown in trade and bloatedness in inventories to continue as the US economy starts to digest the full effects of interest rate hikes. This effect is likely to be amplified by the new banking crisis that will tighten lending standards and dampen both corporate and consumer sentiment.
Still to come…
9:00 am (EST) - US Case-Shiller Home Price Index
9:00 am - US FHFA House Price Index
10:00 am - US Consumer Confidence
10:00 am - US Richmond Fed Manufacturing Survey
Morning Reading List
US
The Fed Waffles (First Trust Portfolios) - The Federal Reserve raised short-term interest rates by another quarter point on Wednesday. That, by itself, was clear,
with the Fed now targeting a range for short-term rates between 4.75% and 5.00%. The problem was that the Fed continues to ignore the most important issue in monetary policy.
US Weekly Economic Commentary: Fed keeps thumb on inflation after banking turmoil (S&P Global) - During a light week of relatively uneventful data releases, we nudged down our tracking forecast of first quarter real GDP growth by 0.1 percentage point, to 0.5%.
Financial Stress and the Current Macroeconomic Outlook (Jim Bullard, St Louis Fed) - St. Louis Fed President Jim Bullard presented “Financial Stress and the Current Macroeconomic Outlook” at a meeting of Greater St. Louis Inc. He noted that financial stress has been on the rise in recent days and that the macroprudential policy response has been swift and appropriate. He added that regulators stand ready to take additional action if necessary.
Banking Trends: Has the Banking Industry Become Too Concentrated? (Philadelphia Fed) - By one key measure, the banking market has become highly concentrated, but other measures suggest a more nuanced story.
US flash PMI signals faster economic growth in March, but also warns of rising price pressures (S&P Global) - March saw a welcome acceleration of output growth to the fastest since May of last year, according to the flash PMI surveys. The upturn is uneven, however, being driven largely by the service sector. Although manufacturing eked out a small production gain, this was mainly a reflection of improved supply chains allowing firms to fulfil backlogs of orders that had accumulated during the post-pandemic demand surge.
US - Further pain needed to bring inflation back to target (ABN AMRO) - Bad news on the inflation front in the US likely means rates stay higher for longer.
Europe
Eurozone - Underlying inflation not yet easing (ABN AMRO) - The eurozone economy is clearly slowing, but underlying inflation is not easing yet, with wage growth higher than expected in Q4. We still expect moderate contractions in GDP during the next few quarters, as the impact of interest rate hikes hits the economy.
Bond Watch: Green light for the new EU issuance (Nordea) - The EU will tap its green 2048 benchmark tomorrow. The levels on the bond have improved, and the bond now looks relatively attractive vs both its curve neighbours as well as shorter EU bonds. Further bouts of market volatility remain a risk, though.
European CO2 emissions reduction still well short of pace (ABN AMRO) - Many major EU countries are still well behind on their CO2 reduction targets. While the transition to low or zero carbon is now well under way in many countries and climate sectors, the pace of this transition is often still slow. Particularly in transport, CO2 reduction is lagging, while in other climate sectors CO2 reduction trends are somewhat more positive in many countries.
China
China - Recovery broadens, with property sector bottoming out (ABN AMRO) - Growth target for 2023 of ‘around 5%’ in line with our expectations. China’s reopening rebound broadens, with retail sales firming and the property sector bottoming out. Support to remain targeted/piecemeal, as Beijing aims to contain leverage and prevent overheating.
Canada
BMO Business Activity Index — Winter's Cold Grasp (BMO) - The Canadian economy appears to be cooling off based on the latest reading from BMO's Canadian Business Activity Index (BAI). The BAI fell 0.1% in February after jumping 0.5% last month amid unseasonably warm weather. That should come as a relief to the Bank of Canada, whose Q1 forecast from the January Monetary Policy Report of 0.5% (annualized) was increasingly looking light. It would take an even more sluggish print in March to align with their call.
Developed Economies
Flash PMI data signal accelerating developed world economic growth in March (S&P Global) - Economic growth accelerated across the four largest developed economies on average in March, pointing to a surprising resilience of growth amid headwinds of higher interest rates, the cost-of-living crisis and recent stress in the banking sector.
Emerging Markets
EM Traffic Light March 2023 (Nordea) - The EM space has not been affected by the latest turmoil in the banking sector in Europe and North America or the aggressive rate hikes. Thus, the risk sentiment in the EM countries within our sample continues to ease in March.
Inflation
Inflation Monitor for March 27 (BMO) - Canadian inflation is trending lower on both the headline and core measures. That will likely keep the BoC comfortably on the sidelines—unlike the Fed and many other major central banks, which have signalled more rate hikes are possible amid persistent underlying price pressures.
Real Estate
Europe’s banks and U.S. real estate (DWS Group) - The renewed turbulence in European bank stocks on Friday based on concerns about their exposure to U.S. commercial real estate shows that investors are still not at ease with European banks, even after Credit Suisse’s rescue.
Energy
COT: WTI crude long plunges to seven-year low (Saxo Bank) - Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to Tuesday, March 21. The second week of banking and liquidity stress saw the dollar and yields trade softer while money managers dumped crude oil at the fastest pace in a decade with the WTI long plunging to a seven-year low. Gold buying continued although some hesitancy emegerge around $2000 while net short positions were maintained in silver and copper.
FX
FX Update: Waiting game for next shoe to drop (Saxo Bank) - Markets are maintaining a nervous calm, as we avoided banking-system drama at the weekend for the first time in three weeks. But even if we avoid further systemic risks in the financial system for now, tightening credit conditions have brought recession risks sharply forward. FX has navigated the recent market turmoil with considerable churn and little conviction on where this leads. The economic data calendar this week, meanwhile, is a light one.
Outlook
U.S. Economic Outlook, March 2023 (Northern Trust) - The Northern Trust Economics team shares its outlook for growth, inflation, employment, and interest rates.
Research
Expanding Unemployment Insurance Coverage (Minneapolis Fed) - This paper develops a quantitative framework to study the impact of Unemployment Insurance (UI) expansions to workers earning below eligibility thresholds. A model of how UI affects welfare and labor supply is developed and calibrated with microeconomic data, including consumption. The model predicts that the current ineligible would choose to stay on UI longer than the current eligible and the margins of why this is the case are quantified. The model is applied to the Great Recession by identifying ineligible workers in the data using machine learning and to an actual expansion during COVID-19 using administrative data. The UI duration for newly eligible under the expansion was 1.7 times longer than the previous eligible but is one-third shorter than the model's economic incentives predict. This suggests caution in extrapolating from the COVID-19 data and the model is used to predict impacts of smaller scale expansions during non-pandemic times.
House Prices Respond Promptly to Monetary Policy Surprises (San Francisco Fed) - New evidence based on listings of homes for sale from 2000 to 2019 suggests house prices adjust to monetary policy changes over weeks rather than years, faster than previously thought. Housing list prices fall within two weeks after the Federal Reserve announces an unexpected policy tightening, similar to responses of other financial assets. House prices respond more strongly to unexpected changes in long-term interest rates than to surprises in the short-term federal funds rate. Changes in mortgage rates following Fed announcements are key to explaining this rapid house price reaction
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