News

Summary: US output expands in April; rise substantially less than expected; March figure revised up; capacity utilisation rate rises, still below January figure.

The Federal Reserve’s industrial production (IP) index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component.

US production collapsed through March and April of 2020 and then began recovering in subsequent months.

According to the Federal Reserve, US industrial production grew by 0.7% on a seasonally adjusted basis in April. The result was substantially less than the 1.3% increase which had been generally expected and March’s 2.4% expansion after it was revised up from 1.4%. On an annual basis, the expansion rate increased from March’s figure of +1.0% to +16.5%, reflecting a 12.7% fall in April 2020.

The report was released on the same day as April’s retail sales numbers and the University of Michigan’s latest consumer sentiment report. US Treasury bond yields moved lower and, by the end of the day, the 2-year Treasury yield had slipped 1bp to 0.15%, the 10-year yield had lost 2bps to 1.64% while the 30-year yield finished 6bps lower at 2.35%.

The same report includes US capacity utilisation figures which are generally accepted as an indicator of future investment expenditure and/or inflationary pressures. Capacity usage had hit a high for the last business cycle in early 2019 before it began a downtrend which ended with April 2020’s multi-decade low of 64.2%. April’s reading rose from March’s figure of 74.4% to 74.9%, a level still below that of January.

While the utilisation rate’s correlation with the US jobless rate is solid, it is not as high as Australia’s comparable correlation.

Summary: Prices received by producers rise by 0.6% in April; double expected figure; “core” PPI increases by 0.7%; annual rate now above 6%; “core” goods prices up by 8.8% annualised over past 3 months; broad range of items “adding to upstream inflation pressure”.

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 and annual rates are now well above average.

The latest figures published by the Bureau of Labor Statistics indicate producer prices rose by 0.6% after seasonal adjustments in April. The increase was double the 0.3% rise which had been generally expected although less than March’s 1.0% rise. On a 12-month basis, the rate of producer price inflation after seasonal adjustments increased from 4.3% to 6.1%. (The index fell significantly in April 2020, resulting in a noticeably lower base for annual calculations, i.e. “base effects”.)

PPI inflation excluding foods and energy rose by 0.7% after recording a 0.7% increase in March and a 0.2% increase in February. The annual rate accelerated again, this time from 3.1% to 4.2%.

US Treasury bond yields moved lower on the day. By the close of business, the 2-year yield had slipped 1bps to 0.16%, the 10-year yield had lost 3bps to 1.66% and the 30-year yield finished 1bp lower at 2.41%.

ANZ economist Kishti Sen noted “core” goods prices have “risen at an annualised rate of change of 8.8% based on the data for the past three months.”

The BLS stated higher prices for final demand services accounted for “about two-thirds” of the month’s increase after they rose by 0.6% on average. Prices of final demand goods also rose by 0.6%.

Summary: US CPI jumps in April; well above expectations; “core” rate triple expected figure; “broad-based”; non-food/energy commodities, used car/truck prices main drivers; probably reflection of pent-up demand, production bottlenecks; New York Fed UIG annual rate also up noticeably.

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; falls in the index over these three months in 2020 are expected to raise annual inflation rates temporarily over the corresponding months in 2021.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices rose by 0.8% on average in April. The result was well above the 0.2% increase which had been generally expected and above March’s 0.6% rise. On a 12-month basis, the inflation rate accelerated from March’s reading of 2.6% to 4.2%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. Core inflation, a measure of inflation which strips out the volatile food and energy components of the index, increased by 0.9% on a seasonally-adjusted basis for the month. The result was more than the expected 0.3% and triple March’s increase. The annual rate accelerated again, almost doubling from 1.6% to 3.0%.

“The key question for markets and for fears around inflation is how much of the rise in April is due to transitory one-offs, and how much reflects more permanent inflationary pressures,” said NAB senior economist Tapas Strickland. Westpac economist Lochlan Halloway noted “gains were broad-based.”

Longer-term US Treasury bond yields jumped on the day. By the close of business, the 2-year yield had inched up 1bp to 0.17% while 10-year and 30-year yields each finished 7bps higher at 1.69% and 2.42% respectively.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months remained fairly soft. May 2022 futures

Summary: Euro-zone industrial production creeps higher in March; expansion less than expected; annual growth rate jumps above zero on “base effects”; expansion in three of eurozone’s four largest 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 but subsequent months in 2020 and early 2021 produced an almost complete recovery.

According to the latest figures released by Eurostat, euro-zone industrial production increased by just 0.1% in March on a seasonally adjusted and calendar-adjusted basis. The expansion was noticeably smaller than the 1.0% increase which had been generally expected but it was also in contrast with February’s 1.2% contraction. On an annual basis, the calendar-adjusted growth rate jumped from February’s rate of -1.6% to +10.9%. (Production collapsed in March 2020, resulting in a significantly lower base for annual calculations.)

German and French 10-year sovereign bond yields moved higher on the day. By the close of business, the German 10-year bund yield had added 4bps to -0.12% and the French OAT yield had gained 5bps to 0.27%.

Industrial production growth expanded in three of the eurozone’s four largest economies. Germany’s production expanded by 0.8% while the comparable figures for France, Italy and Spain were +0.7%, +3.4%, and -0.1% respectively.

Summary: US quit rate holds in March; supply of labour limiting factor, mismatch between skills and jobs available; job openings jump, separations down.

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 plummeted as alternative employment opportunities rapidly dried up but then recovered back to its pre-pandemic rate in the third quarter of 2020.

Figures released as part of the most recent JOLTS report show the quit rate remained at a series high in March. 2.4% of the non-farm workforce left their jobs voluntarily, the same rate as in February after it was revised up from 2.3%. While there were 125,000 additional quits, the number of people employed in the non-farm sector grew by 770,000 in March, leaving the quit rate unchanged after rounding.

Long-term US Treasury bond yields increased modestly on the day. By the close of business, 10-year and 30-year Treasury yields had both added 2bps to 1.62% and 2.35% respectively. The 2-year yield finished unchanged at 0.16%.

“The survey will add to the suspicion that April’s disappointing payrolls report was related to supply of labour,” said Westpac economist Lochlan Halloway. ANZ economist Rahul Khare noted the openings rate was not all that less than the jobless rate “but there is a mismatch between the skills of those out of work and the jobs available. There is little doubt there is a strong appetite to re-hire workers where possible.”

The largest sources of additional quits came from the “Accommodation and food services” and the “Health care and social assistance” sectors while the “State and local government” sector experienced the greatest decline. Overall, the total number of quits for the month rose from February’s revised figure of 3.383 million to 3.508 million.

Total vacancies at the end of March increased by 597,000, or 7.9%, from February’s revised figure of 7.526 million to 8.123 million, driven by a 185,000 rise in the “Accommodation and food services” sector and a 155,000 rise in the “State and local government”” sector. 218,000 fewer openings in the “Health care and social assistance” sector provided the single largest offset. Overall, 14 out of 18 sectors experienced more job openings than in the previous month.

Summary: Business conditions improve in April, hits new record high; confidence also hits record high; “many aggregate indicators reaching new highs”; capacity usage rate increases again; all eight sectors of economy at or above respective long-run averages; implies further falls in jobless rate; ‘super-boom’ in economy; economists split on inflation outlook.

NAB’s business survey indicated Australian business conditions were robust in the first half of 2018, with a cyclical-peak reached in April of that year. Readings from NAB’s indices then began to slip, declining to below-average levels by the end of 2018. Forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 and the indices trended lower, hitting a nadir in April 2020 as pandemic restrictions were introduced. Conditions have improved markedly since then and NAB’s indices are both back at elevated levels.

According to NAB’s latest monthly business survey of over 400 firms conducted over the second half of April, business conditions improved again as the NAB index hit a new record high. NAB’s conditions index registered 32, up from March’s revised reading of 24.

Business confidence also improved; NAB’s confidence index increased from March’s revised reading of 17 to 26, also a record high. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences have appeared in the past from time to time.

“This month’s survey saw another very strong result, with many aggregate indicators reaching new highs,” said NAB chief economist Alan Oster.

Long-term Commonwealth Government bond yields increased on the day, rising more than their US counterparts had overnight. By the end of the day, 10-year and 20-year ACGB yields had each gained 3bps to 1.66% and 2.39% respectively. The 3-year yield remained unchanged at 0.25%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, remained fairly stable. At the end of the day, contract prices implied the cash rate would creep up to around 0.11% by October 2022.

Summary: March non-farm payrolls increase much less than expected; previous two months’ figures revised down; jobless rate ticks up, participation rate up; “a shocker”; average hourly pay up noticeably; jobs-to-population ratio inches up; underemployment rate falls closer to 10%; hourly pay growth slows to near-zero on “base effects”.

The US economy ceased producing jobs in net terms as infection controls began to be implemented in March 2020. The unemployment rate had been around 3.5% but that changed as job losses began to surge through March and April of 2020. The May 2020 non-farm employment report represented a turning point and subsequent months provided substantial employment gains. Changes in recent months have been more modest but mostly positive.

According to the US Bureau of Labor Statistics, the US economy created an additional 266,000 jobs in the non-farm sector in April. The increase was well below the 950,000 which had been generally expected earlier in the week and less than half the 770,000 jobs which had been added in March after revisions. Employment figures for February and March were revised down by a total of 78,000.

The unemployment rate ticked up from March’s rate of 6.0% to 6.1%. The total number of unemployed increased by 102,000 to 9.812 million while the total number of people who are either employed or looking for work increased by 430,000 to 160.988 million. The additional number of people in the labour force led to rise in the participation rate from March’s rate of 61.5% to 61.7%.

NAB economist Tapas Strickland described the report as a “shocker”.

US Treasury yields reacted in a mixed fashion on the day. By the close of business, the 2-year bond yield had slipped 1bp to 0.15%, the 10-year yield had inched up 1bp to 1.58% while the 30-year yield finished 4bps higher at 2.28%.

However, Strickland pointed to one part of the report “which surprised to the upside.” Average hourly earnings increased by 0.7% over the month “despite the influx of traditionally lower-paid leisure and hospitality workers.” He noted anecdotal evidence of “businesses having to pay up for labour” despite the large gap between expectations and April’s actual increase.

Summary: ADP payroll numbers increase in April; less than consensus figure; March increase revised up; point to “significant acceleration” in US jobs market; led by leisure/hospitality sector; figures up across firms of all sizes; gain predominantly in services sector.

The ADP National Employment Report is a monthly report which provides an estimate of US non-farm employment in the private sector. Since publishing of the report began in 2006, its employment figures have exhibited a high correlation with official non-farm payroll figures, although a large difference can arise in any individual month.

The latest ADP report indicated private sector employment increased by 742,000 in April, less than the 900,000 which had been generally expected. March’s increase was revised up by 48,000 to 565,000.

“While markets focussed on the miss, the data point to a significant acceleration in the jobs market from March,” said ANZ economist John Bromhead.

Long-term US Treasury yields declined on the day. By the close of business, 10-year and 30-year Treasury bond yields had each lost 2bps to 1.57% and 2.25% respectively. The 2-year yield remained unchanged at 0.16%.

In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months remained soft. Federal funds futures contracts for May 2022 implied an effective federal funds rate of 0.105%, about 4bps above the current spot rate.

Employment numbers in net terms increased across businesses of all sizes, with gains fairly evenly distributed for a second consecutive month. Firms with less than 50 employees filled a net 235,000 positions, mid-sized firms (50-499 employees) gained 230,000 positions while large businesses (500 or more employees) accounted for 277,000 additional employees.

Employment at service providers accounted for about 85% of the total net increase, or 636,000 positions. The “Leisure & Hospitality” sector was the largest single source of gains, with 237,000 additional positions filled while the “Trade, Transportation & Utilities” sector accounted for 155,000 positions. Total jobs among goods producers increased by a net 106,000.

A Brisbane-based residential mortgage business, Firstmac, has set what appears to be a new record for the largest residential mortgage-backed securities (“RMBS”) issued by an Australian non-bank.

Such was the market hunger for yield, the $2 billion issue was upsized from the $1 billion that was telegraphed to potential investors a week ago.

The deal was segmented into eight different tranches, with each tranche representing mortgages of a certain risk-type. The $1.7 billion Class A1 tranche holds the bulk of the mortgages and it is rated as having the lowest risk. The $10 million Class F tranche is rated the highest risk.

The Class A1 tranche was sold to investors at yield of 1m BBSW + 73bps. Firstmac claimed this to be “the tightest margin paid by any non-bank since the GFC in 2007.”  Unfortunately for Firstmac, there has been at least half a dozen RMBS deals done by non-banks at 1m BBSW + 70bps or lower in recent years, the most recent by Columbus Capital just over a week ago.

An indication of how investors are chasing yield is that there were 29 backers for the deal, with six of them first-time participants. Mortgage originators such as Firstmac have been taken advantage of this demand, with seven RMBS transactions in April alone.

According to reports, there were as many as five other borrowers in the market at around the same time which would suggest that the hot property market is increasing the level of funding required by home buyers. The heat in the property market is starting to raise concerns about potential regulatory intervention. However, for the moment non-bank lenders are keen to do as much business as they can.

Summary: ISM purchasing managers index (PMI) down; below consensus expectation; reading “still very expansionary”; supply side “key factor” behind decline, “momentum building”; implies US economy still growing at rapid pace.

US purchasing managers’ index (PMI) readings reached a cyclical peak in September 2017.  They 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 and the early months of 2021 have provided elevated readings.

According to the latest Institute of Supply Management (ISM) survey, its Purchasing Managers Index recorded a reading of 60.7% in April. The result was below the generally expected figure of 65.1% and lower than March’s reading of 64.7%. The average reading since 1948 is 52.9% and any reading above 50% implies an expansion in the US manufacturing sector relative to the previous month.

“The ISM manufacturing was a big miss… but details in the report showed supply and inflationary pressures continue to intensify,” said NAB currency strategist Rodrigo Catril.

Longer-term US Treasury bond yields fell on the day while shorter-term yields remained stable. By the close of business, the 2-year Treasury bond yield remained unchanged at 0.16%, the 10-year yield had lost 3bps to 1.60% while the 30-year yield 1bp lower at 2.29%.

ANZ economist Rahul Khare noted the latest reading is “still very expansionary” and “still consistent with a vigorous US recovery.

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. According to the ISM, a reading “above 42.8%, over a period of time, generally indicates an expansion of the overall economy.”

Khare pointed to changes on the supply side as “the key factor behind the retracement, with backlogs at a record high, inventories down, and materials prices pushing higher.” All industries reported growth, “a sign that there is real momentum building in the US.”