News

US GDP growth misses estimates in March; core PCE deflator in spotlight

26 April 2023

Summary: US GDP up 0.3% (1.1% annualised) in March quarter, below expectations; “ugly” headline figure driven by slower inventory growth; core PCE deflator up 4.9% (annual rate), above consensus; GDP price deflator rate slows from 6.4% to 5.3%.

US GDP growth slowed in the second quarter of 2019 before stabilising at about 0.5% per quarter.  At the same time, US bond yields suggested future growth rates would be below trend. The US Fed agreed and it reduced its federal funds range three times in the second half of 2019. Pandemic restrictions in the June quarter of 2020 sent parts of the US economy into hibernation; the lifting of those same restrictions sparked a rapid recovery which lasted until 2022.

The US Bureau of Economic Analysis has now released the March quarter’s “advance” GDP estimates and they indicate the US economy expanded by 0.3% or at an annualised rate of 1.1%. The increase was less than the 0.5% increase (2.0% annualised) which had been generally expected as well as the December quarter’s 0.6% after revisions.

“The detail wasn’t as ugly as the headline, with slower inventory building subtracting 2.3 percentage points from the result,” said NAB economist Taylor Nugent. “Elsewhere, a weather boost earlier in the quarter helped consumption up 3.7% and domestic final demand up 3.2%, though business capex growth was soft.”

US GDP numbers are published in a manner which is different to most other countries; quarterly figures are compounded to give an annualised figure. In countries such as Australia and the UK, an annual figure is calculated by taking the latest number and comparing it with the figure from the same period in the previous year. The diagram above shows US GDP once it has been expressed in the normal manner, as well as the annualised figure.

US Treasury bond yields rose on the day, especially at the front of the yield curve. By the close of business, the 2-year Treasury bond yield had gained 12bps to 4.07%, the 10-year yield had added 7bps to 3.52% while the 30-year yield finished 4bps higher at 3.75%.

In terms of US Fed policy, expectations of a higher federal funds rate over the next few months firmed while expectations of rate cuts further out softened. At the close of business, contracts implied the effective federal funds rate would average 5.03% in May, 20bps higher than the current spot rate, and then move up to an average of 5.085% in June. July futures contracts implied a 5.11% average effective federal funds rate while May 2024 contracts implied 3.84%, 99bps less than the current rate.

Nugent noted attention had focussed not on the softer-than-expected result but the personal consumption expenditures deflator. “The core PCE deflator rose at a 4.9% annual rate in the quarter, above consensus for a 4.7% gain. Mechanically assuming no revisions to January and February…that would imply a 0.5% outcome for tonight’s March core PCE deflator, where the consensus is for a 0.3% gain.”

One part of the report which is often overlooked are the figures regarding the GDP price deflator, which is another measure of inflation. The GDP price deflator is restricted to new, domestically-produced goods and services and it is not based on a fixed basket as is the case for the consumer price index (CPI). The annual rate slowed from the December quarter’s revised figure of 6.4% to 5.3%.

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Banking turmoil hits; Conf. Board confidence index down in April

25 April 2023

Summary: Conference Board Consumer Confidence Index falls in April, less than expected; expectations  below level which often signals looming recession; probably picking up full effect of March banking turmoil; views of present conditions improve, short-term outlook deteriorates.

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 April indicated US consumer confidence has deteriorated. April’s Consumer Confidence Index registered 101.3 on a preliminary basis, lower than the expected figure of 104.1 and March’s final figure of 104.2.

“While consumers’ relatively favourable assessment of the current business environment improved somewhat in April, their expectations fell and remain below the level which often signals a recession looming in the short-term,” said Ataman Ozyildirim, a senior director of economics at The Conference Board.

US Treasury yields moved substantially lower on the day on the back of a bank report pointing to continuing stress in the US banking sector. By the close of business, the 2-year Treasury bond yield had dropped by 20bps to 3.93%, the 10-year yield had shed 11bps to 3.39% while the 30-year yield finished 7bps lower at 3.65%.

In terms of US Fed policy, expectations of a higher federal funds rate over the next few months softened while expectations of rate cuts further out hardened considerably. At the close of business, contracts implied the effective federal funds rate would average 5.005% in May, 18bps higher than the current spot rate, and then creep up to an average of 5.035% in June. July futures contracts implied a 5.03% average effective federal funds rate while May 2024 contracts implied 3.62%, 121bps less than the current rate.

NAB Head of FX Strategy (Markets) Ray Attrill said the result was “probably picking up the full effect of the March banking sector turmoil…”

Consumers’ views of present conditions improved while their views of the near-future deteriorated. The Present Situation Index increased from March’s revised figure of 148.9 to 151.1 while the Expectations Index declined from 74.0 to 68.1.

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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ifo index creeps up in April; German worries “abating”

24 April 2023

Summary: ifo business climate index slightly higher in April, above expected figure; German worries “abating” but economy “lacking dynamism”; current conditions index down, expectations index up; expectations index implies euro-zone GDP contraction of 1.9% in year to July.

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 improved for a sixth consecutive month, albeit to a level which is still lower than the long-term average. April’s Business Climate Index recorded a reading of 93.6, slightly higher than the generally expected figure of 93.4 and March’s final reading of 93.2. The average reading since January 2005 is just under 97.

“German business’s worries are abating but the economy is still lacking dynamism,” said Clemens Fuest, President of the ifo Institute.

German firms’ views of current conditions deteriorated while their collective outlook improved. The current situation index slipped from March’s figure of 95.4 to 95.0 while the expectations index increased from 91.0 after revisions to 92.2.

German and French long-term bond yields both increased, noticeably so in France’s case. By the close of business, the German 10-year bund yield had added 2bps to 2.50% while the French 10-year OAT yield finished 8bps higher at 3.08%.

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. April’s expectations index implies a 1.9% year-on-year GDP contraction to the end of July.

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Conference Board leading index down again in March; US recession expected this year

20 April 2023

Summary: Conference Board leading index down 1.2% in March, fall greater than expected; consistent with worsening economic conditions; CB expects US recession this year; regression analysis implies 2% contraction in year to June.

The Conference Board Leading Economic Index (LEI) is a composite index composed of ten sub-indices which are thought to be sensitive to changes in the US economy. The Conference Board describes it as an index which attempts to signal growth peaks and troughs; turning points in the index have historically occurred prior to changes in aggregate economic activity. Readings from March and April of 2020 signalled “a deep US recession” while subsequent readings indicated the US economy would recover rapidly. More recent readings have implied US GDP growth rates will turn negative.

The latest reading of the LEI indicates it decreased by 1.2% in March. The result was worse than the expected -0.4% as well as February’s revised figure -0.5%.

“The US LEI fell to its lowest level since November of 2020, consistent with worsening economic conditions ahead,” said Justyna Zabinska-La Monica of The Conference Board.

US Treasury bond yields fell noticeably on the day. By the close of business, the 2-year Treasury yield had shed 11bps to 4.15%, the 10-year yield had lost 7bps to 3.53% while the 30-year yield finished 5bps lower at 3.74%.

In terms of US Fed policy, expectations of a higher federal funds rate over the next few months softened while expectations of rate cuts further out firmed. At the close of business, contracts implied the effective federal funds rate would average 4.83% in April, in line with the current spot rate, and then climb to an average of 5.03% in May. June futures contracts implied a 5.08% average effective federal funds rate while April 2024 contracts implied 4.145%, 68bps less than the current rate.

Zabinska-La Monica added she expects “economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023.”

Regression analysis suggests the latest reading implies a -2.1% year-on-year growth rate in June, down from May’s revised figure of -1.6%.

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Euro household sentiment improves in April

20 April 2023

Summary: Euro-zone households less pessimistic in April; consumer confidence index up 1.7 points; still well below long-term average, lower bound of “normal” readings; euro-zone yields fall.

EU consumer confidence plunged during the GFC and again in 2011/12 during the European debt crisis. After bouncing back through 2013 and 2014, it fell back significantly in late 2018 but only to a level which corresponds to significant optimism among households. Following the plunge which took place in April 2020, a recovery began a month later, with household confidence returning to above-average levels from March 2021. However, recent readings have been extremely low by historical standards.

Consumer confidence improved in April according to the latest survey conducted by the European Commission. Its Consumer Confidence Indicator recorded a reading of -17.5, above the generally expected figure of -18.5 as well as March’s -19.2. However, this latest reading is still well below the long-term average of -10.4 as well as the lower end of the range in which “normal” readings usually occur.

Sovereign bond yields fell in major euro-zone bond markets on the day. By the end of it, the German 10-year bund yield had shed 7bps to 2.44% while the French 10-year OAT yield finished 4bps lower at 2.96%.

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Below-trend growth through 2023: Westpac-MI leading index

19 April 2023

Summary: Leading index growth rate up slightly in March; consistent with below-trend growth through 2023; reading implies annual GDP growth of around 2.00%; ACGB yields higher; rate-rise expectations firm.

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 early part of 2023.

The March reading of the six month annualised growth rate of the indicator registered -0.75%, up a touch from February’s revised figure of -0.79%.

“The Index for March is now consistent with below-trend growth extending throughout the remainder of this year,” said Westpac Chief Economist Bill Evans. “Westpac is forecasting growth of only 1% in 2023.”

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 increased on the day, ignoring generally downward movements of US Treasury yields overnight. By the close of business the 3-year ACGB yield had gained 9bps to 3.15%, the 10-year yield had added 4bps to 3.52% while the 20-year yield finished 3bps higher at 3.94%.

In the cash futures market, expectations regarding another 25bps rate rise firmed. At the end of the day, contracts implied the cash rate would rise from the current rate of 3.57% to average 3.655% in May and then rise to an average of 3.785% in August. November contracts implied a 3.745% average cash rate while May 2024 contracts implied 3.55%, just 2bps below the current cash rate.

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US producer prices down 0.5% in March as gasoline prices drop

13 April 2023

Summary: US producer price index (PPI) down 0.5% in March, less than expected; annual rate slows to 3.4%; “core” PPI down 0.1%; fall attributable to 11.6% gasoline price drop; longer-term Treasury yields up; rate-rise expectations soften; goods prices down 1.0%, services prices down 0.3%.

Around the end of 2018, the annual inflation rate of the US producer price index (PPI) began a downtrend which continued through 2019. Months in which producer prices increased suggested the trend may have been coming to an end, only for it to continue, culminating in a plunge in April 2020. Figures returned to “normal” towards the end of that year but annual rates through 2021 and 2022 have been well above the long-term average.

The latest figures published by the Bureau of Labor Statistics indicate producer prices decreased by 0.5% after seasonal adjustments in March. The fall was in contrast with a flat outcome which had been generally expected as well as February’s flat result after it was revised up from -0.1%. On a 12-month basis, the rate of producer price inflation after seasonal adjustments and revisions slowed from 5.0% in February to 2.8%.

Producer prices excluding foods and energy, or “core” PPI, declined by 0.1% after seasonal adjustments. The result contrasted with the expected 0.2% increase as well as February’s 0.2% rise and the annual rate slowed from February’s revised figure of 4.9% to 3.4%.

“The fall in the headline print was attributable to a 6.4% drop in energy costs, which can mainly be traced back to an 11.6% drop in the price of gasoline,” said ANZ Head of FX Research Mahjabeen Zaman.

Longer-term US Treasury bond yields rose on the day. By the close of business, the 10-year Treasury yield had gained 5bps to 3.45% and the 30-year yield had added 6bps to 3.69%. The 2-year yield finished 1bp lower at 3.96%.

In terms of US Fed policy, expectations of a higher federal funds rate over the next few months softened a touch while expectations of rate cuts further out firmed slightly. At the close of business, contracts implied the effective federal funds rate would average 4.83% in April, in line with the current spot rate, and then climb to an average of 4.99% in May. June futures contracts implied a 5.005% average effective federal funds rate while April 2024 contracts implied 3.91%, 92bps less than the current rate.

The BLS stated higher prices for final demand good fell by 1.0% on average. Prices of final demand services fell by 0.3%.

The producer price index is a measure of prices received by producers for domestically produced goods, services and construction. It is put together in a fashion similar to the consumer price index (CPI) except it measures prices received from the producer’s perspective rather than from the perspective of a retailer or a consumer. It is another one of the various measures of inflation tracked by the US Fed, along with core personal consumption expenditure (PCE) price data. 

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Euro-zone output beats expectations in February

13 April 2023

Summary: Euro-zone industrial production up 1.0% in February, rise more than expected; annual growth rate accelerates from 1.0% to 2.0%; German, French 10-year yields creep higher; output expands in three of four largest euro economies.

Following a recession in 2009/2010 and the debt-crisis which flowed from it, euro-zone industrial production recovered and then reached a peak four years later in 2016. Growth rates then fluctuated for two years before beginning a steady and persistent slowdown from the start of 2018. That decline was transformed into a plunge in March and April of 2020 which then took over a year to claw back. Production levels in more-recent months have generally stagnated in trend terms.

According to the latest figures released by Eurostat, euro-zone industrial production expanded by 1.5% in February on a seasonally-adjusted and calendar-adjusted basis. The result was more than the 1.0% expansion which had been generally expected and greater than January’s 1.0% after revisions. The calendar-adjusted growth rate on an annual basis accelerated from January’s revised rate of +1.0% to +2.0%.

German and French sovereign bond yields crept a little higher on the day. By the close of business, German and French 10-year yields had both added 1bp to 2.37% and 2.88% respectively.

Industrial production expanded in three of the euro-zone’s four largest economies. Germany’s production increased by 2.1% over the month while the comparable figures for France, Spain and Italy were 1.1%, 0.6% and -0.2% respectively.

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“Good news” from March US CPI figures; core inflation remains elevated

12 April 2023

Summary: US CPI up 0.1% in March, less than expected; “core” rate up 0.4%; “good news” in headline CPI but core inflation remains “elevated”; Treasury yields generally fall; rate-cut expectations firm; main downside surprise from easing in shelter prices; non-energy services prices main driver, adds 0.23 ppts.

The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March 2020 to May 2020 and they remained below 2% until March 2021. Rates have since risen significantly although they have been declining in recent months.

The latest US CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices increased by just 0.1% on average in March. The result was noticeably lower than 0.4% increase which had been generally expected as well as February’s 0.4% rise. On a 12-month basis, the inflation rate slowed from 6.0% to 5.0%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. The core prices index, the index which excludes the more variable food and energy components, increased by 0.4% on a seasonally-adjusted basis for the month. The rise was in line with expectations but less than February’s 0.5% increase. However, the annual growth rate ticked up from 5.5% to 5.6%.

“Overall the US CPI report was mixed. While there was good news in the headline print with an easing in food price inflation, core inflation remains elevated; the ‘supercore’ services component of CPI …remains high at 6.4% YoY,” said NAB Head of Markets Strategy Skye Masters.

US Treasury bond yields mostly fell on the day. By the close of business, the 2-year Treasury yield had shed 5bps to 3.97%, the 10-year yield had lost 3bps to 3.40% while the 30-year yield finished 1bp higher at 3.63%.

In terms of US Fed policy, expectations of a higher federal funds rate over the next few months softened while expectations of rate cuts further out hardened. At the close of business, contracts implied the effective federal funds rate would average 4.83% in April, in line with the current spot rate, and then climb to an average of 4.99% in May. June futures contracts implied a 5.015% average effective federal funds rate while April 2024 contracts implied 3.915%.

“The main downside surprise to March’s CPI was the long-awaited easing in shelter prices finally starting to materialise,” said Citi economist Veronica Clark. “While slowing shelter prices increase the uncertainty around upcoming monthly CPI prints, our forecast for consistent strength in non-shelter core services and renewed increases in components like used cars lead us to continue to expect 0.4-0.6% increases in core CPI in April and May.”

The largest influence on headline results is often the change in fuel prices. Prices of “Energy commodities”, the segment which contains vehicle fuels, decreased by 4.6% and subtracted 0.16 percentage points from the total. However, prices of non-energy services, the segment which includes actual and implied rents, again had the largest effect on the total, adding 0.23 percentage points after increasing by 0.4% on average.  

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Households celebrate RBA pause; “strong recovery” in Westpac-MI sentiment index

11 April 2023

Summary: Household sentiment improves in April; “strong recovery” attributable to RBA’s April decision; households’ reaction comparable to that of July 2010; all five sub-indices higher; fewer respondents expecting higher jobless rate.

After a lengthy divergence between measures of consumer sentiment and business confidence in Australia which began in 2014, confidence readings of the two sectors converged again in mid-July 2018. Both measures then deteriorated gradually in trend terms, with consumer confidence leading the way. Household sentiment fell off a cliff in April 2020 but, after a few months of to-ing and fro-ing, it then staged a full recovery. However, consumer sentiment has deteriorated significantly over the past year, while business sentiment has been more robust.

According to the latest Westpac-Melbourne Institute survey conducted in the week before Easter, household sentiment has improved, although only to level which is still low. Their Consumer Sentiment Index increased from March’s reading of 78.5 to 85.8, a reading which is still well below the “normal” range and significantly lower than the long-term average reading of just over 101.

“This strong recovery in the Index can be largely attributed to the decision by the Board of the Reserve Bank to break the sequence of ten consecutive meetings when the cash rate was increased by deciding to pause at the April meeting,” said Westpac Chief Economist Bill Evans.

Any reading of the Consumer Sentiment Index below 100 indicates the number of consumers who are pessimistic is greater than the number of consumers who are optimistic.

Commonwealth Government bond yields rose on the day, especially at the short end. By the close of business, the 3-year ACGB yield had gained 6bps to 2.84%, the 10-year yield had added 4bps to 3.22%, while the 20-year yield finished 1bp higher at 3.65%.

In the cash futures market, expectations regarding future rate cuts softened. At the end of the day, contracts implied the cash rate would rise from the current rate of 3.57% to average 3.62% in May and then decline to an average of 3.585% in August. November contracts implied a 3.49% average cash rate while May 2024 contracts implied 3.23%, 34bps below the current cash rate.

Evans compared households’ reaction to the RBA’s latest pause to a period in 2009/2010 in which the RBA paused in June 2010 after raising the target rate by 1.50% over six meetings. “Following a second pause in July [2010] consumers became convinced that the pause could be sustained and Confidence increased by a solid 11%, not dissimilar from the result for April 2023.”

All five sub-indices registered higher readings, with the “Economic conditions – next 12 months” sub-index posting the largest monthly percentage gain.

The Unemployment Expectations index, formerly a useful guide to RBA rate changes, declined from 122.9 to 118.9. Lower readings result from fewer respondents expecting a higher unemployment rate in the year ahead.

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