News

US manufacturing shrinks at faster rate in May; ISM PMI declines again

01 June 2023

Summary: ISM PMI down slightly in May, slightly below expectations; ISM: US manufacturing shrinks again, faster rate of contraction; US Treasury yields fall; expectations of Fed rate cuts harden; NAB: favourable in terms of inflation outlook; ISM: reading corresponds to 0.6% US GDP contraction annualised.

The Institute of Supply Management (ISM) manufacturing Purchasing Managers Index (PMI) reached a cyclical peak in September 2017. It then started a downtrend which ended in March 2020 with a contraction in US manufacturing which lasted until June 2020. Subsequent month’s readings implied growth had resumed, with the index becoming stronger through to March 2021. Readings then declined fairly steadily through to the second quarter of 2023.

According to the ISM’s May survey, its PMI recorded a reading of 46.9%,  a touch below the generally expected figure of 47.0% as well as April’s 47.1. The average reading since 1948 is 53.0% and any reading below 50% implies a contraction in the US manufacturing sector relative to the previous month.

“The US manufacturing sector shrank again, with the Manufacturing PMI losing a bit of ground compared to the previous month, indicating a faster rate of contraction,” said Timothy Fiore, Chair of the ISM’s Manufacturing Business Survey Committee.

US Treasury yields finished the day lower. By the close of business, 2-year and 10-year Treasury bond yields had both lost 3bps to 4.34% and 3.61% respectively while the 30-year yield finished 1bp lower at 3.83%.

In terms of US Fed policy, expectations of lower federal funds rates in 2024 hardened.  At the close of business, contracts implied the effective federal funds rate would average 5.12% in June, 4bps higher than the current spot rate, and then move up to average 5.16% in July. September futures contracts implied a 5.22% average effective federal funds rate while May 2024 contracts implied 4.17%, 91bps less than the current rate.

“Although close to the consensus, the details were less favourable with New Orders slipping to 42.6 from 45.7,” said NAB Head of Market Economics Tapas Strickland. “On the other hand in terms of inflation it was favourable with Prices Paid falling to 44.2 from 53.2 and Supplier Deliveries [falling to] 43.5 from 44.6, the lowest since 2009.”

Purchasing managers’ indices (PMIs) are economic indicators derived from monthly surveys of executives in private-sector companies. They are diffusion indices, which means a reading of 50% represents no change from the previous period, while a reading under 50% implies respondents reported a deterioration on average. A reading “above 48.7%, over a period of time, generally indicates an expansion of the overall economy” according to the ISM.     

The ISM’s manufacturing PMI figures appear to lead US GDP by several months despite a considerable error in any given month. The chart below shows US GDP on a “year on year” basis (and not the BEA annualised basis) against US GDP implied by monthly PMI figures. 

According to the ISM and its analysis of past relationships between the PMI and US GDP, May’s PMI corresponds to an annualised contraction rate of 0.6%, or 0.2% over a quarter. However, regression analysis on a year-on-year basis suggests a 12-month GDP growth rate of 1.6% five months after this latest report.

The ISM index is one of two monthly US PMIs, the other being an index published by S&P Global. S&P Global produces a “flash” estimate in the last week of each month which comes out about a week before the ISM index is published. The S&P Global flash May manufacturing PMI registered 48.5%, 1.7 percentage points lower than April’s final figure.

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US quit rate still high after April decline; jobs market “robust”

31 May 2023

Summary: US quit rate falls to 2.4% in April; ANZ: supports picture of robust US jobs market; US Treasury yields down; expectations of lower Fed rates in 2024 firm; quits, separations down, openings up; NAB: some hints of looser labour market.

The number of US employees who quit their jobs as a percentage of total employment increased slowly but steadily after the GFC. It peaked in March 2019 and then tracked sideways until virus containment measures were introduced in March 2020. The quit rate then plummeted as alternative employment opportunities rapidly dried up. Following the easing of US pandemic restrictions, it proceeded to recover back to its pre-pandemic rate in the third quarter of 2020 and trended higher through 2021 before easing through 2022 and early 2023.

Figures released as part of the latest Job Openings and Labor Turnover Survey (JOLTS) report show the quit rate declined for a second consecutive month in April. 2.4% of the non-farm workforce left their jobs voluntarily, down from 2.5% in March. Quits in the month fell by 49,000 while an additional 253,000 people were employed in non-farm sectors.

“Quits, which are voluntary separations and are often seen as a barometer of worker confidence in the labour market, eased a negligible 49,000 to 3.793 million, supporting the picture of a robust jobs market,” said ANZ economist Madeline Dunk.

US Treasury yields moved lower on the day. By the close of business, the 2-year had shed 9bps to 4.37% while 10-year and 30-year yields both finished 5bps lower at 3.64% and 3.84% respectively.

In terms of US Fed policy, expectations of lower federal funds rates in 2024 firmed.  At the close of business, contracts implied the effective federal funds rate would average 5.125% in June, 5bps higher than the current spot rate, and then move up to average 5.18% in July. September futures contracts implied a 5.27% average effective federal funds rate while May 2024 contracts implied 4.255%, 83bps less than the current rate.

The fall in total quits was led by 178,000 fewer resignations in the “Health care and social assistance” sector while the “Wholesale trade” sector experienced the largest gain, increasing by 29,000. Overall, the total number of quits for the month fell from March’s revised figure of 3.842 million to 3.793 million.

Ken Crompton, a senior interest rate strategist at NAB, took a somewhat less positive view of the figures than that of ANZ’s Dunk. “Although openings to applicants hit a three-month high, the quit rate has slipped to a two-year low so there are some hints of a looser labour market.“  

Total vacancies at the end of April increased by 0.358 million, or 3.7%, from March’s revised figure of 9.745 million to 10.103 million. The rise was driven by a 209,000 gain in the “Retail trade” sector while the “Accommodation and food services” sector experienced the single largest decrease, falling by 80,000. Overall, 8 out of 18 sectors experienced more job openings than in the previous month.  

Total separations decreased by 286,000, or 4.8%, from March’s revised figure of 5.994 million to 5.708 million. The fall was led by the “Construction” sector where there were 83,000 fewer separations than in March. Separations decreased in 11 of the 18 sectors.

The “quit” rate time series produced by the JOLTS report is a leading indicator of US hourly pay. As wages account for around 55% of a product’s or service’s price in the US, wage inflation and overall inflation rates tend to be closely related. Former Federal Reserve chief and current Treasury Secretary Janet Yellen was known to pay close attention to it.

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Business lending boosts April private credit growth

31 May 2023

Summary: Private sector credit up 0.6% in April, greater than expected; annual growth rate slows from 6.8% to 6.6%; Westpac: business loan growth a one-off, broader outlook remains subdued; bond yields down, rate-cut expectations soften slightly; business lending segment accounts for 60% of net growth.

The pace of lending growth in the non-bank private sector by financial institutions in Australia followed a steady-but-gradual downtrend from late-2015 through to early 2020 before hitting what appears to be a nadir in March 2021. That downtrend ended later in the same year and annual growth rates shot up through 2022, peaking in October.

According to the latest RBA figures, private sector credit increased by 0.6% in April. The result was greater than the 0.3% increase which had been generally expected as well as March’s 0.2% rise after it was revised down from 0.3%. On an annual basis, the growth rate slowed from 6.8% to 6.6%.

“Given the high likelihood of April’s monthly outcome for business being a one-off and the approaching weakness in activity, the broader outlook for credit growth remains subdued,” said Westpac economist Ryan Wells.

Commonwealth Government bond yields moved lower on the day following significant falls of US Treasury yields overnight. By the close of business, the 3-year ACGB yield had lost 6bps to 3.37%, the 10-year yield had shed 8bps to 3.61% while the 20-year yield finished 4bps lower to 4.03%.

In the cash futures market, expectations regarding rate cuts in 2024 softened a touch. At the end of the day, contracts implied the cash rate would rise from the current rate of 3.82% to average 3.895% in June and then to 3.985% in July. February 2024 contracts implied a 3.94% average cash rate while May 2024 contracts implied 3.795%, 2bps less than the current rate.

Business lending accounted for about 60% of the net growth over the month, while lending in the owner-occupier segment accounted for about 25%. Investor lending accounted for the balance.

The traditional driver of overall loan growth, the owner-occupier segment, grew by 0.4% over the month, up from the 0.3% growth rate in March. The sector’s 12-month growth rate slowed again, this time from 6.0% to 5.8%.

Total lending in the non-financial business sector increased by 1.1%, substantially faster than the 0.2% increase recorded in the previous month. Growth on an annual basis remained steady at 10.6%.

Monthly growth in the investor-lending segment slowed to a near-halt in early 2018 and essentially stayed that way until mid-2021. In April, net lending grew by 0.3%, unchanged from March, taking the 12-month growth rate from 4.5% to 4.2%.

Total personal loans rose by 0.1%, in contrast with March’s figure of -0.3%, taking the annual growth rate from 0.0% to -0.3%. This category of debt includes fixed-term loans for large personal expenditures, credit cards and other revolving credit facilities.

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April home approvals figures maintain broad-based down-trend

31 May 2023

Summary: Home approval numbers down 8.1% in April, contrasts with expectations; 24.1% lower than April 2022; Westpac: significant broad-based down-trend remains firmly intact; Westpac: very large backlog of work only thing preventing big falls in new construction; house approvals down 3.6%, apartments down 16.9%; non-residential approvals up 13.5% in dollar terms, residential alterations down 1.2%.

Building approvals for dwellings, that is apartments and houses, headed south after mid-2018. As an indicator of investor confidence, falling approvals had presented a worrying signal, not just for the building sector but for the overall economy. However, approval figures from late-2019 and the early months of 2020 painted a picture of a recovery taking place, even as late as April of that year. Subsequent months’ figures then trended sharply upwards before falling back in 2021 and 2022.

The Australian Bureau of Statistics has released the latest figures from April which show total residential approvals fell by 8.1% on a seasonally-adjusted basis. The fall contrasted with the 2.0% increase which had been generally expected and it was a greater one than March’s 1.0% fall after revisions. Total approvals fell by 24.1% on an annual basis, down from the previous month’s figure of -17.6%. Monthly growth rates are often volatile.

“While housing construction was not expected to follow the firming evident across the wider market, new home sales had suggested activity was starting to find a bottom in recent months,” said Westpac senior economist Matthew Hassan. “Instead, the April update points to a significant broad-based down-trend that remains firmly intact.”

Commonwealth Government bond yields generally declined modestly on the day following falls in US Treasury yields overnight. By the close of business, the 3-year ACGB yield had returned to its starting point at 3.43%, the 10-year yield had lost 2bps to 3.69%, while the 20-year yield finished 1bp lower at 4.07%.

In the cash futures market, expectations regarding rate cuts in 2024 softened. At the end of the day, contracts implied the cash rate would remain essentially steady at the current rate of 3.82% to average 3.87% in June but then rise to 3.95% in July. February 2024 contracts implied a 3.945% average cash rate while May 2024 contracts implied 3.82%, in line with than the current rate.

Approvals for new houses fell by 3.6% over the month, a slightly smaller fall than March’s -3.7%. On a 12-month basis, house approvals were 18.2% lower than they were in April 2022, down from March’s comparable figure of -15.1%.               

Apartment approval figures are usually a lot more volatile and April’s total dropped by 16.9% after an 4.9% fall in March. The 12-month growth rate fell from March’s revised rate of -22.0% to -34.9%.

“The only thing preventing this weakening in approval playing through to big falls in new dwelling construction this year is a very large backlog of work,” Hassan added. “[A]s at December there were still around 240,000 dwellings under construction, a near record high reflecting the multitude of disruptions and delays to activity through 2022.”

Non-residential approvals rose by 13.5% in dollar terms over the month and were 29.8% higher on an annual basis. Figures in this segment also tend to be rather volatile.

Residential alteration approvals declined by 1.2% in dollar terms over the month and were 2.7% lower than in April 2022.

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May Conf. Board confidence index falls; presents “bearish picture”

30 May 2023

Summary: Conference Board Consumer Confidence Index falls in May, reading more than expected; notable worsening in outlook among older consumers; NAB: report details reveal bearish picture; views of present conditions, short-term outlook deteriorate.

US consumer confidence clawed its way back to neutral over the five years after the GFC in 2008/2009 and then went from strength to strength until late 2018. Measures of consumer confidence then oscillated within a relatively narrow band at historically high levels until they plunged in early 2020. Subsequent readings then fluctuated around the long-term average until March 2021 when they returned to elevated levels. However, a noticeable gap has since emerged between the two most-widely followed surveys.

The latest Conference Board survey held during the first three weeks of May indicated US consumer confidence has deteriorated. May’s Consumer Confidence Index registered 101.3 on a preliminary basis, above the generally-expected figure of 99.0 but below April’s final figure of 103.7. “While consumer confidence has fallen across all age and income categories over the past three months, May’s decline reflects a particularly notable worsening in the outlook among consumers over 55 years of age,” said Ataman Ozyildirim, a senior director of economics at The Conference Board.

US Treasury yields moved substantially lower on the day, especially at the short end of the curve. By the close of business, the 2-year Treasury bond yield had shed 15bps to 4.46%, the 10-year yield had lost 8bps to 3.56% while the 30-year yield finished 4bps lower at 3.89%.

In terms of US Fed policy, expectations of lower federal funds rates in 2024 firmed.  At the close of business, contracts implied the effective federal funds rate would average 5.17% in June, 9bps higher than the current spot rate, and then move up to average 5.26% in July. September futures contracts implied a 5.32% average effective federal funds rate while May 2024 contracts implied 4.355%, 74bps less than the current rate.

“US consumer confidence fell to a six-month low with details in the report also revealing a bearish picture, the Conference Board business expectations index fell to its lowest reading since 2011 while the share of consumers who said jobs were plentiful fell to the lowest level in more than two years,” noted NAB currency strategist Rodrigo Catril.

Consumers’ views of present conditions and of the near-future both deteriorated. The Present Situation Index decreased from April’s revised figure of 151.8 to 148.6 while the Expectations Index declined from 71.7 to 71.5.

The Consumer Confidence Survey is one of two widely followed monthly US consumer sentiment surveys which produce sentiment indices. The Conference Board’s index is based on perceptions of current business and employment conditions, as well as respondents’ expectations of conditions six months in the future. The other survey, conducted by the University of Michigan, is similar and it is used to produce an Index of Consumer Sentiment. That survey differs in that it does not ask respondents explicitly about their views of the labour market and it also includes some longer-term questions.

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May euro-zone composite sentiment index falls back

30 May 2023

Summary: Euro-zone composite sentiment indicator down in May, below expectations; readings down in four of five  sectors; down in three of four largest euro-zone economies; German, French 10-year yields considerably lower; index implies annual GDP growth rate of 0.5%.

The European Commission’s Economic Sentiment Indicator (ESI) is a composite index comprising five differently weighted sectoral confidence indicators.  It is heavily weighted towards confidence surveys from the business sector, with the consumer confidence sub-index only accounting for 20% of the ESI. However, it has a good relationship with euro-zone GDP growth rates, although not necessarily as a leading indicator.

The ESI posted a reading of 96.5 in May, below the consensus expectation of 99.0 as well as April’s revised reading of 99.0. The average reading since 1985 is just under 100.

German and French 10-year bond yields finished the day considerably lower. By the close of business, the German 10-year bund yield had shed 9bps to 2.34% while the French 10-year OAT yield finished 11bps lower at 2.90%.

Confidence deteriorated in four of the five sectors of the economy. On a geographical basis, the ESI decreased in three of the euro-zone’s four largest economies, Germany, Italy and Spain, but improved in France.

End-of-quarter ESI readings and annual euro-zone GDP growth rates are highly correlated. This latest reading corresponds to a year-to-May GDP growth rate of 0.5%, down from April’s implied growth rate of 1.1% after revisions.

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Fed’s preferred inflation index provides “little progress” in April

26 May 2023

Summary: US core PCE price index up 0.4% in April, in line with expectations; annual rate accelerates from 4.6% to 4.7%; NAB: deflater indicates “little progress” on inflation fight; short-term Treasury yields rise; Fed rate-cut expectations for 2024 soften.

One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising back to around 1.5% in the September quarter of that year. It has since increased significantly above the Fed’s target.

The latest figures have now been published by the Bureau of Economic Analysis as part of the March personal income and expenditures report. Core PCE prices rose by 0.4% over the month, in line with expectations but higher than March’s 0.3% increase. On a 12-month basis, the core PCE inflation rate accelerated from March rate of 4.6% to 4.7%.

“The core PCE deflator continues to show little progress on the current phase of the inflation fight,” said NAB economist Taylor Nugent. “In 3 month-annualised terms, the core PCE deflator is 4.3%, the same rate it was a year ago in April 2022.”

Short-term US Treasury bond yields rose on the day, while longer-term yields fell. By the close of business, the 2-year Treasury bond yield had gained 3bps to 4.56%, the 10-year yield had lost 2bps to 3.80% while the 30-year yield finished 4bps lower at 3.96%.

In terms of US Fed policy, expectations of lower federal funds rates in 2024 softened.  At the close of business, contracts implied the effective federal funds rate would average 5.16% in June, 8bps higher than the current spot rate, and then move up to average 5.25% in July. September futures contracts implied a 5.315% average effective federal funds rate while May 2024 contracts implied 4.475%, about 60bps less than the current rate.

The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It is not the only measure of inflation used by the Fed; the Fed also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.

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Discretionary spending weakness spreads: retail sales flat in April

26 May 2023

Summary: Retail sales flat in April, below expectations; UBS: volumes are falling solidly given rising prices; ANZ:  discretionary spending weakness may be spreading; largest influences on result from household goods and clothing sales.

Growth figures of domestic retail sales spent most of the 2010s at levels below the post-1992 average. While economic conditions had been generally favourable, wage growth and inflation rates were low. Expenditures on goods then jumped in the early stages of 2020 as government restrictions severely altered households’ spending habits. Households mostly reverted to their usual patterns as restrictions eased in the latter part of 2020 and throughout 2021.

According to the latest ABS figures, total retail sales remained unchanged in April on a seasonally adjusted basis. The result was below the generally-expected figure of 0.3% as well as March’s 0.4% increase. Sales increased by 4.2% on an annual basis, down from March’s comparable figure of 5.4%.

“Putting aside the issues of monthly volatility and seasonal measurement, the trend has clearly weakened sharply,” said UBS economist George Tharenou, “and now been close to flat for many months, with the level in April 2023 the same as October 2022, which means volumes are falling solidly, given rising prices.”

Commonwealth Government bond yields generally moved modestly higher on the day, ignoring large rises in US Treasury yields overnight. By the close of business, 3-year and 10-year ACGB yields had both added 3bps to 3.44% and 3.74% respectively while the 20-year yield finished 1bp lower at 4.12%.

In the cash futures market, expectations regarding rate cuts in 2024 softened. At the end of the day, contracts implied the cash rate would remain essentially steady at the current rate of 3.82% to average 3.85% in June but then rise to 3.915% in July. February 2024 contracts implied a 3.935% average cash rate while May 2024 contracts implied 3.805%, 1bp less than the current rate.

“While goods-related spending has been soft for some time, dining/takeaway had been holding up well…But dining/takeaway fell 0.2%in April, suggesting weakness may be spreading to more areas of discretionary spending,” ANZ economist Madeline Dunk observed.

Retail sales are typically segmented into six categories (see below), with the “Food” segment accounting for 40% of total sales. However, the largest influences on the month’s total came from the “Household goods” and “Clothing” segments where sales increased by -1.0% and 1.9% respectively on average over the month.

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German firms “sceptical”; ifo index falls in May

24 May 2023

Summary: ifo business climate index falls in May, below expected figure; German firms “sceptical” about upcoming summer; current conditions index, expectations index both down; expectations index implies euro-zone GDP contraction of 1.3% in year to August.

Following recessions in euro-zone economies in 2009/2010, the ifo Institute’s Business Climate Index largely ignored the European debt-crisis of 2010-2012, mostly posting average-to-elevated readings through to early-2020. However, the index was quick to react in the March 2020 survey, falling precipitously. Readings through much of 2021 generally fluctuated around the long-term average before dropping away in 2022.

According to the latest report released by ifo, German business sentiment has had its first setback after increasing for the previous six months. May’s Business Climate Index recorded a reading of 91.7, below the generally expected figure of 93.0 as well as April’s final reading of 93.4. The average reading since January 2005 is just under 97.

“German companies are sceptical about the upcoming summer,” said Clemens Fuest, President of the ifo Institute.

German firms’ views of current conditions and their collective outlook both deteriorated. The current situation index slipped from April’s figure of 95.1 to 94.8 while the expectations index decreased from 91.7 after revisions to 88.6.

German and French long-term bond yields barely moved on the day. By the close of business, the German 10-year bund yield had slipped 1bp to 2.46% while the French 10-year OAT yield finished unchanged at 3.04%.

The ifo Institute’s business climate index is a composite index which combines German companies’ views of current conditions with their outlook for the next six months. It has similarities to consumer sentiment indices in the US such as the ones produced by The Conference Board and the University of Michigan.

It also displays a solid correlation with euro-zone GDP growth rates. However, the expectations index is a better predictor as it has a higher correlation when lagged by one quarter. May’s expectations index implies a 1.3% year-on-year GDP contraction to the end of August.

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Westpac-MI leading index slips; slow growth extending into 2024

24 May 2023

Summary: Leading index growth rate slips in April; slowdown likely to extend into early 2024; reading implies annual GDP growth of around 2.00%; ACGB yields decline; rate-cut expectations firm; Westpac: GDP growth of 1%, 1.5% in 2023, 2024.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth in the short-term. After reaching a peak in early 2018, the index trended lower through 2018 and 2019 before plunging to recessionary levels in the second quarter of 2020. Subsequent readings spiked towards the end of 2020 but then trended lower through 2021, 2022 and the first quarter of 2023.

The April reading of the six month annualised growth rate of the indicator registered -0.78%, down from March’s revised figure of -0.69%.

“The Leading Index has recorded below-trend growth for a ninth consecutive month, indicating the slowdown that began late last year is likely to extend through to the end of 2023 and into early 2024,” said Westpac senior economist Matthew Hassan.

Index figures represent rates relative to “trend” GDP growth, which is generally thought to be around 2.75% per annum in Australia. The index is said to lead GDP by “three to nine months into the future” but the highest correlation between the index and actual GDP figures occurs with a three-month lead. The current reading thus represents an annual GDP growth rate of around 2.00% in the next quarter.

Domestic Treasury bond yields declined on the day. By the close of business the 3-year ACGB yield had lost 4bps to 3.33% while 10-year and 20-year yields both finished 1bp lower at 3.65% and 4.08% respectively.

In the cash futures market, expectations regarding rate cuts in 2024 firmed. At the end of the day, contracts implied the cash rate would remain essentially steady at the current rate of 3.82% to average 3.845% in June and 3.90% in July. February 2024 contracts implied a 3.845% average cash rate while May 2024 contracts implied 3.705%, 11bps less than the current rate.

Hassan said Westpac expects GDP growth of only 1% in 2023, rising to 1.5% in 2024. These forecasts are only slightly below the RBA’s latest figures of 1.2% and 1.7% for 2023 and 2024 respectively.

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