US Retail Sales Stabilize After Strong January, Chinese Economy Rebounds to Start 2023
Economic news and commentary for March 15, 2023
US Retail Sales
US retail sales fell -0.4% MoM in February but were still up 5.4% YoY. This slight decline followed a strong gain in January sales which were actually upgraded from 3.0% MoM to 3.2% MoM. Stripping out auto and gas station sales reveals that there was actually no decline in the more core group of sales on the month. The sector breakdown of the data shows a mixed picture which many gains and declines offsetting. However, steeper slowdowns in sales in furniture (-2.5% MoM), food service (-2.2% MoM), and auto (-1.8% MoM) sales were what caused the headline sales measure to fall. Some of this was expected. Auto sales saw a huge bump from rental company purchases in January, and food services had a favorable seasonal comparison as better-than-expected weather in January boosted activity. Outside of these adjustments, sales were stable in order categories with electronics, food & beverages, and general merchandise sales all posting modest gains.
Consumer spending data reinforces the stabilization in inflation as well since demand hasn’t really tapered off as many thought it would which is supportive of firms’ pricing power. The first step towards weakening this trend is a softer labor market which will cool wage growth and disposable income gains. Combined with the last few drops of excess savings, strong incomes are almost single-handedly fueling the economy. The Fed will not have any growth worries and move towards a 25 bps hike later in March.
China Retail Sales, Investment & Industrial Production
Chinese data looks to finally be coming around to what many thought it should look like after the reopening. Retail sales growth returned to positive after ending the year with three straight months of negative year-over-year growth in 2022. Sales grew 3.5% YoY in the January-February period, up from -1.8% YoY in December. This is the highest reported since August 2022. General consumer activity seemed to return to a more normal pace with strong growth in the sales of basic categories like daily necessities (3.9% YoY), food (9.2% YoY), and clothing (5.4% YoY). However, it seemed that there was still some weakness in the sales for categories of larger purchases. Auto sales were down a sharp -9.4% YoY, and the real estate-related segments household appliances and building materials were down -1.9% YoY and -0.9% YoY, respectively. So while there has been a major reparation of confidence, there is still some work to be done to get consumers at full force again.
Some slight improvement in investment data provides evidence for the improvement in confidence on the business side. Chinese fixed asset investment ticked up from 5.1% YoY in December to 5.5% YoY in the January-February period. This is far from the 12.2% YoY growth seen in the 2022 January-February period, but there are signs that the credit crunch caused by COVID restrictions is easing. The details of the data are slightly discouraging, with state investment driving the refurnishing of financial conditions, up 10.5% YoY, while private investment growth was weak, up only 0.8% YoY. Additionally, there only seem to be a few industries that are experiencing a strong increase in investment which include highly specialized technology manufacturing like electrical equipment manufacturing (33.7% YoY), electronics manufacturing(17.3% YoY), and special equipment manufacturing (12.2% YoY). Of course, this is consistent with Beijing’s motives in the last few government conferences (including “Two Sessions”) to expand China’s market share in technology manufacturing markets, notably semiconductors and semiconductor parts. With that being said, there will be an uneven recovery in investment centered on these areas while other categories are a bit more mixed.
Similar trends can be found in industrial production data. Chinese industrial production increased 2.4% YoY in the January-February period, up from 1.3% YoY in December. The acceleration in growth was only slightly above the pace seen in November and still lags most of 2022, so it is clear that the industrial sector is not operating at full capacity yet. However, gains in certain industries helped to spur on general production levels. While manufacturing production was up just 2.1% YoY specific categories like electrical equipment production, up 13.9% YoY, and special equipment manufacturing production, up 3.9% YoY, were bright spots in the mixed data. Auto and general machinery production growth were still negative and the agricultural processing industry saw basically no growth (0.3% YoY) over the last year. However, Chinese metal production did recover to start 2023 after it had been a major issue over the past two years, contributing to supply chain pressures in the supply of steel and iron. Ferrous and non-ferrous metal production were both up around 5-6% YoY each, and the production of pig iron, crude steel, and steel were up 7.3% YoY, 5.6% YoY, and 3.6% YoY respectively.
The Chinese economy looks to finally be on the right track after December data disappointed. The pick up in consumer activity is especially optimistic as it will be essential for demand to restrengthen in order to inspire more confidence in the business sector. Firms seem to be relying heavily on the intentions of the Chinese government to make liquidity available and facilitate investments into the sectors that its growth plan has championed. Both fiscal and monetary policy moves are expected this year, but not necessarily to the same degree as what has been put in place to rejuvenate financial conditions in the past. It will take some revving of the Chinese economic engine to get it back up to speed, so that it can help drive global growth once again.
Euro Area Industrial Production
Euro area industrial production bounced back from a weak December, growing 0.7% MoM and 0.9% YoY in January. Industry data in Europe continues to be very volatile. Despite the headline index growing, only one segment of production actually recorded a gain. Intermediate goods production was up 1.5% MoM while capital goods (-0.2% MoM), durable consumer goods (-0.7% MoM), energy (-0.8% MoM), and non-durable consumer goods (-2.1% MoM) all fell. It seems like the data can’t really decide whether manufacturers in Europe are actually growing or not, but this isn’t necessarily a bad sign since a sharp decline has been expected to start 2023 due to financial conditions tightening and consumption slowing. Indeed, capital goods production is actually up a sharp 8.2% YoY which directly opposes that pessimism. With more data like this, the euro area can maintain little to no growth and avoid a contraction in Q1.
Still to come…
10:00 am (EST) - US Business Inventories
10:00 am - US Housing Market Index
10:00 am - US Atlanta Fed Business Inflation Expectations
10:30 am - US EIA Petroleum Status Report
7:50 pm - Japan Trade & Machinery Orders
8:30 pm - Australia Employment
Morning Reading List
Other Data Releases Today
French CPI growth in Feb was revised up slightly from 0.9% MoM and 6.2% YoY, to 1.0% MoM and 6.3 YoY today. HICP inflation was also upgraded by 0.1 ppt to 7.3% YoY on upward revisions in food, goods, and services prices. These upward revisions were partially offset by a slight downgrade in energy prices.
US PPI fell -0.1% MoM to 4.6% YoY in February, down from 5.7% YoY in January. Core PPI grew 0.2% MoM and the annual pace remained at 4.4% YoY (0.2% MoM). Segment breakdown: energy -0.2% MoM, food -2.2% MoM, other goods 0.3% MoM, and services 0.3% MoM.
The Empire State Manufacturing Survey Business Conditions index fell -18.8 pts to -24.6. The new orders and shipments indexes tanked -13.9 pts and -13.5 pts to -21.7 and -13.4. The number of employees index fell down -3.5 pts to -10.1, and the prices paid index fell down -3.1 pts to 41.9.
US CPI
US financial stability trumps near-term inflation (ING) - US core inflation came in hotter and has nudged expectations for a rate hike higher. While the Fed is probably inclined to hike 25bp, this is contigent of calm being restored to the financial system. Irrespective of this, the fallout from recent events will inevitably lead to a tightening of lending conditions which will weigh on growth and inflation.
U.S. CPI: Caught Between A... (BMO) - Inflation is proving too sticky for the Fed's liking and, at the moment, likely weighs toward a 25 bp rate increase next week. In fact, futures markets are now pricing in material odds of such. But the central bank is also caught between the rock of stubborn inflation and a hard place of financial instability, which likely rules out a 50 bp hike. That was the odds-on favourite after Powell's testimony last week...but that was so last week.
Bad news for inflation (ABN AMRO) - Core CPI inflation picked up further in February, rising 0.5% m/m, up from 0.4% in January, and the highest reading since last September. This almost brought to a halt the decline in annual core inflation, which edged down just one tenth to 5.5% y/y from 5.6% in January. Headline inflation in contrast continued to move more substantially lower, to 6% from 6.4%, helped by the lagged pass-through of significant declines in utility gas prices, which fell 8% m/m.
Hey, Remember Inflation? (Wells Fargo) - Consumer price inflation did not show many signs of cooling in the February CPI. There were only a few positive developments in the data. Prices at the grocery store rose just 0.3%, the smallest increase since March 2021. Used auto prices continued to come back down to Earth and fell another 2.8% in the month.
US core service inflation keeps 25bp Fed hike in play next week (CIBC) - Neither rain, nor snow nor some trouble spots in banking will fully deter the US Fed from raising rates next week, as February inflation reminded markets today. Price pressures were just too heated, as core inflation accelerated to 0.5% m/m, a tick above the consensus expectation.
Inflation shows greater staying power in February (TD Bank) - Inflationary pressures refuse to go away quietly. The three-month annualized change on core rose to 5.2% in February, marking the second consecutive month of acceleration. Over the near-term, it is unlikely that we see much reprieve. Much of the disinflationary force on goods prices has been the result of falling used vehicle prices, but with the wholesale Manheim UVPI having shown steady gains in recent months, it's unlikely that we see further price declines in the months ahead.
Inflation Eased Despite Sticky Housing Costs (NAHB) - Consumer prices in February saw the smallest year-over-year gain since September 2021 with an eighth consecutive month of a deceleration. However, the shelter index (housing inflation) continued to rise at an accelerated pace and was the largest contributor to the total increase, accounting for over 70% of the increase. Shelter inflation is a lagging indicator and will primarily be cooled in the future via additional housing supply. Real-time data from private data providers indicate that rent growth is cooling, and this is not yet reflected in the CPI data. It will be reflected in the coming months.
The Consumer Price Index (CPI) Rose 0.4% in February (First Trust Portfolios) - Given recent turmoil in the banking system, the Federal Reserve is likely to only raise short-term interest rates by a quarter percentage point next week, or maybe not raise rates at all. But inflation is still a major problem and needs to be addressed. Consumer prices rose 0.4% in February while “core” prices, which strip out the often volatile food and energy categories, rose 0.5%.
China
China: The return of the consumer (ABN AMRO) - Retail sales bounce back. China's activity data for January/February combined, published today, do confirm a broad rebound of economic activity following China’s rapid zero-Covid exit, with private consumption showing the largest potential for catching-up.
China shows a gradual recovery (ING) - The market focus will be on retail sales and real estate in this set of activity data. We also focus on infrastructure investment. This is a "supplementary" growth factor in case consumption is not growing adequately. But it is at the same time limited by high levels of local government debt.
China | The broad-based economic recovery after lifting “zero Covid (BBVA) - China's economic indicators in January-February 2023 have significantly rebounded after the authorities lifted the "zero Covid" restrictions.
China | Banking Monitor (BBVA) - Although bank assets continued to expand in 2022, banks' profitability is weighed by narrowing interest margins amid a challenging operating environment. Asset risks are rising, the risks associated with the property market could exacerbate the debt overhang problem.
Euro Area Industrial Production
Eurozone industrial production ticks up in January (ING) - Production rose 0.7% between December 2022 and January 2023 but maintains a broad trend of stagnation. Strong German and Irish production figures mask weakness elsewhere in Europe. The outlook remains very uncertain with weak orders but improving supply chain problems and lower energy prices.
US
Small Business Optimism Index rises for the second straight month in February (TD Bank) - The Small Business Optimism Index improved in February, following a modest rebound in January. Warmer weather and expectations of stronger real sales helped support the sentiment that remained decidedly downbeat over the past year. As we saw over the past months, rapid demand deterioration makes it harder for firms to continue to raise sales prices, which in turn makes small business owners worry about their ability to keep profits. In addition, more owners are now apply for credit to support operations, but as credit conditions continue to tighten, capex intentions will remain subdued.
Macro Insights: The Fed question lingers - to hike or not to hike (Saxo Bank) - US CPI release was broadly in-line with expectations although the core came in hotter-than expected MoM, bringing a 25bps rate hike from the Fed back on the table for next week if further market disorders are avoided. However, growth concerns have risen with banks likely to tighten lending standards which could have a larger and quicker impact on the real economy compared to a rate hike. Near-term volatility could persist but heightening margin pressures especially in smaller enterprises could mean further flight to quality.
Bank Failures and the Fed (PIMCO) - One could consider the Federal Reserve’s monetary tightening policy strategy as akin to the apologue of boiling a frog – or slowly turning up the heat until it’s too late. Last week, during his semiannual Humphrey-Hawkins testimony, FOMC Chair Jerome Powell turned up the heat by signaling that the Fed could once again increase its fed funds overnight benchmark rate by 50 basis points (bps), and this coincided with a run on Silicon Valley Bank (SVB).
The Fed Faces an Even More Difficult Task Amid Financial System Turmoil (Wells Fargo) - The failures of Silicon Valley Bank (SVB) and Signature Bank since Friday, March 10, the second and third largest bank failures in U.S. history, have sent shock-waves through the financial system.
Banking sector stress and policy implications (EY Parthenon) - Our view is that slower job growth in the goods sector, easing hours worked, moderating sequential wage growth momentum and a rise in the labor force participation rate indicate a welcome easing of labor market tightness, which should favor more dovish monetary policy. The elevated banking sector uncertainty should also reinforce that sentiment, but the Federal Reserve communication black-out period until the next meeting will make for a volatile period.
Silicon Valley Bank failure complicates Fed’s job to slow inflation to 2% (S&P Global) - The failure of Silicon Valley Bank (SVB) on March 10 and the subsequent closure over the weekend of Signature Bank led to fears of a widespread deposit run at smaller regional banks — many of which are still large banks — where a large percentage of deposits are above the FDIC deposit insurance cap of $250,000. Moreover, impacted firms would potentially have difficulty meeting payroll and other payment obligations, with adverse ramifications beyond the banking sector. The concentration of tech-sector firm's deposits at SVB made this a particularly acute problem for the tech sector and venture capital ecosystem.
Regional Bank Stress Puts Spotlight on Cash Management (PIMCO) - The challenges roiling some regional banks in recent days have stressed financial markets as investors and depositors have been forced to consider the basic safety of bank accounts. As in past crises, U.S. policymakers are stepping in to provide solutions for those banks suddenly facing an unexpected wave of withdrawals.
Australia
Silicon Valley Bank developments overtake RBA (NAB) - This week, we consider the likelihood of further tightening by the RBA and what impact – if any – the recent failure of Silicon Valley Bank might have.
Canada
Unhappy in its own way (CIBC) - As Tolstoy said about families, so it is for economies: happy ones are all alike, but unhappy economies are unhappy in their own way. When central banks raise interest rates to cool growth and inflation, they intend to create some economic pain. That shows up in trouble somewhere, but not necessarily in the same manner as in other countries or prior cycles. We don’t replay the 2008 US mortgage and derivatives losses, the Asian financial crisis, or the slower rolling Savings and Loan debacle. It’s often something new.
Mexico
Mexico | Consumption grew 1.5% in February driven by the services sector (BBVA) - The behavior of private spending was fueled by the growth of 3.4% in the services segment, while the consumption of goods fell (-)0.8%.
Energy
Crude oil drops with OECD demand outlook in focus (Saxo Bank) - Crude oil prices trade lower for a second day with traders reducing exposure for fear that a sudden banking crisis started by last week’s collapse of the Silicon Valley Bank will spread to the wider economy and trigger a recession, and with that reduced demand for crude oil and fuel products. So far, however the selling has mostly been driven by speculative long liquidation and not yet a notable change in an otherwise supportive demand outlook, driven by non-OECD countries like China and India.
Real Estate
Permits Decline At The Start of 2023 (NAHB) - Over the first month of 2023, the total number of single-family permits issued year-to-date (YTD) nationwide reached 53,062. On a year-over-year (YoY) basis, this is 36.4% below the January 2022 level of 83,404.
Green
Are synthetic fuels the solution for cars? (ABN AMRO) - One of the key measures to achieve the EU’s emissions target is to end new sales of internal combustion cars and vans by 2035. However, the vote at the European Council was delayed because some countries proposed an exemption for cars with internal combustion engines fuelled by synthetic fuels. Synthetic fuels are not currently the most viable or efficient solution for cars, though there are some advantages as well.
Aluminium smelter shutdowns threaten Europe’s green transition (ING) - Another aluminium smelter in Europe is shutting down amid the ongoing threat posed by high energy prices. Since the start of the energy crisis, European aluminium output has fallen by more than half. These closures could also prove to be an obstacle to Europe’s green transition.
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