From US Stores to Factory Floors, Second Quarter Starts Out Slow Weaker-than-expected April results reported for key indicators
A string of reports this week illustrated a slow start for the US economy in the second quarter, adding to evidence that demand is cooling which will help set the stage for the Federal Reserve to cut interest rates.
New US home construction and manufacturing both came in softer than expected, according to data released Thursday. That followed reports that showed a steep dropoff in retail sales and the first step down in underlying inflation in six months, sending stocks soaring.
Fed officials speaking in separate events Thursday still said that rates should stay high for longer. But investors are betting that the data this week signal the economy is shifting into a lower gear, which could give policymakers the confidence they need to lower borrowing costs.
“The US economic data have consistently landed on the low side of expectations of late, suggesting the economy is losing momentum in the face of restrictive monetary policy,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note. “But the jury remains out on how quickly inflation will subside to provide some rate relief.” (…)
(Yardeni.com)
Pandemic excess savings being near depleted, the key indicators are employment and wages. Hourly earnings growth has been steadily slipping from 5.9% in January 2022 to 3.9% in April while headline inflation recently stalled around 3.4%, leaving little breathing room to consumers.
Meanwhile, employment growth peaked at 5.2% YoY in February 2022. It was +2.0% in December 2023 and +1.8% in April. Job openings declined 3.7% MoM in March and Indeed Job Postings through May 10 suggest another 3.6% slowdown in private labor demand. The NFIB reported that “Overall, 56% of owners reported hiring or trying to hire in April, unchanged for the third consecutive month.”
Aggregate payrolls (employment x wages x hours) were still rising a healthy 5.6% YoY in April but zero monthly growth in April, if persistent, could quickly erode spending power unless inflation also slows down. Recall that the personal savings rate is at 3.2%, a near all-time low.
Bank deposits, in real terms, are now below trend:
- The median reported year-over-year increase in monthly nominal household spending edged down to 4.6 percent in April from 5.0 percent in December. While the lowest reading in the series since April 2021, it remains well above pre-pandemic levels. The decline was broad-based across age and income groups.
- The share of households reporting at least one large purchase in the last four months decreased to 53.8 percent in April, the lowest such reading since April 2020.
The NY Fed survey reveals that households expect their spending to rise 3.1% over the next 12 months, unchanged from December and down from 3.4% in August 2023. The CPI was up 3.4% in April and PCE inflation was 2.7% in March.
The U. of Michigan’s latest survey show household expectations to future home price appreciation currently at the highest level since 2007:
US Puts Its 1 Million-Barrel Gasoline Reserve Up for Sale Move is timed to help lower prices for summer driving season
The Biden administration is putting its cache of 1 million barrels of gasoline on the market, after being ordered to liquidate the reserve by Congress.
The sale of the Northeast Gasoline Supply Reserve, equal to 42 million gallons, was announced Tuesday by the Energy Department, which said it was timed to help lower gasoline prices during the summer driving season. Gasoline futures hit a fresh session low of $2.4895 a gallon after the news.
The reserve was authorized in 2014, two years after Hurricane Sandy damaged refineries and left terminals underwater leading some gas stations in New York to go without fuel for as long as 30 days. But the cache, kept in commercial storage terminals in Maine and New Jersey, has never been used, according to a 2022 Government Accountability Office report. (…)
While the Biden administration said the move would lower prices at the pump, analysts have said 1 million barrels is unlikely to make a significant difference in the East Coast region which burned through more than 3 million barrels a day of gasoline last June.
Canada: Inflation cools to 2.7% in April, increasing odds of a summer interest rate cut
The Consumer Price Index rose 2.7 per cent on an annual basis in April, Statistics Canada reported on Tuesday, down from 2.9 per cent in March and matching analyst expectations.
Not only did the annual inflation rate hit a three-year low, but it’s fallen within the Bank of Canada’s target band of 1 per cent to 3 per cent for four consecutive months. Measures of core inflation, which strip out volatile movements in the CPI, are also slowing. (…)
The April inflation report showed several areas of weakening price pressures.
Grocery prices rose at an annual rate of 1.4 per cent in April, down from 1.9 per cent in March. (They had peaked at roughly 11 per cent during this inflation crisis.) Meat prices rose 1.8 per cent over the past year, while many products – such as fresh fruit, fish and milk – are experiencing price declines.
Clothing and footwear prices fell by 2.6 per cent in April, year over year, while those for household operations, furnishing and equipment dropped by 2.1 per cent.
Consumer prices rose 0.5 per cent in April from March, largely because gasoline rose by nearly 8 per cent in a single month.
Housing costs continue to be a concern for homeowners and tenants. Rents have jumped by 8.2 per cent over the past year. While this was a touch weaker than in March (8.5 per cent), the housing shortage won’t be easily fixed, all but ensuring that Canadians will face an affordability crunch in that area for years to come.
The central bank’s preferred measures of core inflation rose at an average annual rate of 2.75 per cent in April, down from 3.05 per cent in March. This was the first reading below 3 per cent since mid-2021.
The CPI, excluding food and energy, rose by 2.7 per cent in April, year-over-year, compared with 2.9 per cent in March. On a three-month annualized basis, this measure of core inflation is running below 2 per cent. (…)
Goldman Sachs:
Today’s report confirmed that underlying inflationary pressures in Canada are moderating, with preferred and traditional three-month core measures running well below 2%, and services inflation finally showing clearer signs of easing. The confirmation of the softer inflation trend since the start of 2024 increases our confidence that the BoC will initiate its easing cycle at the June meeting with a 25bp cut.
China will control property sector risk, says vice premier
China will control the intertwined risks in the property sector, local government debt and small local financial institutions, Vice Premier He Lifeng said on Tuesday.
China is seeking to restore confidence in its financial system, which is mired in a property crisis and mounting local government debt, as the economy faces a host of challenges.
The country will also seek to prevent systemic risks and crack down on illegal financial activities, state broadcaster CCTV quoted He as saying.
“At present, we must comprehensively and strictly control the intertwined risks in the real estate sector, local government debt and small and medium-sized local financial institutions, and crack down on illegal financial activities,” He was quoted as saying at a financial meeting.
China will promote high-quality economic and social development, stepping up financial support for key strategic sectors, He said.
China’s $10,000 EV Is Coming for Europe’s Carmakers BYD’s Seagull hatchback is set to start Europe sales next year, beating the competition on price
(…) The car offers premium features like a rotating touch screen and wireless phone charging and sells for less than $10,000 in China. Even after tariffs and modifications to meet European standards, BYD executives expect to sell the Seagull for less than €20,000 ($21,500) on the continent.
That would price the four-seater thousands below electric runabouts that Stellantis NV, Renault SA and others are counting on to help them bridge the energy transition. Its impending arrival is ratcheting up pressure on Europe’s automakers for dominance in the post-combustion engine era. An anti-subsidy investigation by Brussels is unlikely to extinguish the threat.
The Seagull has won plaudits for the build quality, design and technology BYD has packed in for the price. And it’s no one-off: The company plans to introduce a higher-end €25,000 EV before the city car, European Managing Director Michael Shu said at an industry event in London this month. BYD’s plans for two plants in the region will help it blunt the effects of any European Union tariffs meant to slow its path.
The model is already doing well abroad. In Mexico, where the car is dubbed the Dolphin Mini, drivers have been flocking to the 358,800-peso ($19,780) car since its introduction in February, despite patchy charging infrastructure that’s still in its infancy. (…)
BYD is in the vanguard of Chinese carmakers that are increasingly targeting exports after seizing control of their home market. Tesla CEO Elon Musk warned in January they’ll “pretty much demolish” most other carmakers if trade barriers aren’t erected.
While President Joe Biden has moved to almost quadruple US duties on Chinese EVs, essentially slamming the door on those imports, tariffs are more complicated for Europe. The region’s carmakers are more dependent on the Chinese market than their US counterparts, making them vulnerable to retaliatory measures from Beijing. Europe’s plan to phase out sales of combustion-engine cars also will require cheaper cars to boost mass-market adoption. (…)
“Tariffs should not be used to shield our lead manufacturers from meaningful competition,” said Julia Poliscanova, senior director for vehicles and e-mobility supply chains at lobby group Transport & Environment. “What matters on top of climate targets, which are critical, is actually to have local jobs and for decarbonization not to result in de-industrialization.” (…)
Incumbent European carmakers are considering unorthodox steps to counter the challenge, including new alliances. Renault is openly shopping around for partners to cut costs on a small-car platform, while Stellantis will start sales in September of cars made through its joint venture with China’s Zhejiang Leapmotor Technologies Ltd.
“We have no intention to let this price band open for our Chinese competitors,” Stellantis Chief Executive Officer Carlos Tavares said last week about the upcoming European Seagull, dismissing calls for tariffs. “We don’t think that protectionism will give us a long-term way out of this competition.” (…)
While the overall share of Chinese brands in Europe’s electric market was around 7% last year, Transport & Environment projects they could reach 11% this year and 20% in 2027.
Judging by the reviews, incumbent automakers in Europe and the US are right to take the Seagull seriously. Caresoft Global, a Michigan engineering firm that tears down vehicles to evaluate quality and manufacturing techniques, pored over the Seagull to assess money-saving details in its construction.
“Everyone in the industry should be talking about this car, seriously, because it’s quite a vehicle,” Caresoft President Terry Woychowski said in a video posted on InsideEVs. “It changes the definition of cheap and cheery, which basically said, ‘Oh, sell something that’s just really cheap.’ This doesn’t come across that way at all.” (…)
Tesla’s Sales in Europe Fall to a 15-Month Low Registrations drop 2.3% to less than 14,000 vehicles in April
Tesla’s result was an exception in an otherwise encouraging month for battery-electric vehicle sales, which rose 14% industrywide.
Tesla similarly reported a downturn in shipments from its Shanghai factory for the month, in contrast with strong growth for China’s broader plug-in car industry. Musk told investors on April 23 that the company expected to bounce back from several issues that affected production in the first quarter, including Red Sea shipping disruptions and the suspected arson of power lines near its German sport utility vehicle plant. (…)
Countries including Germany and Sweden have ceased or dialed back EV subsidies in recent months, which has put a damper on Europe’s sales growth. Manufacturers including Volkswagen AG and Mercedes-Benz Group AG have meanwhile been rethinking product plans, with VW preparing more plug-in hybrids and Mercedes keeping combustion cars in production well into the 2030s.
While most brands have struggled with the pullback of incentives in Germany — Europe’s biggest car market — Tesla underperformed peers last month. Overall EV registrations were broadly flat, whereas Tesla’s sales plunged 32%.
In the UK, Tesla registrations fell 25% in April and have slumped 14% in the first four months of the year.
Chinese Business Group Warns of Tariff Increases on Car Imports in Response to U.S., EU Moves The group cited insiders as saying that Beijing is considering temporary extra tariffs on imported cars with large-displacement engines
The Brussels-based China Chamber of Commerce to the EU said in a statement Tuesday that it had been informed by insiders that Beijing is considering temporary extra tariffs on imported cars equipped with large-displacement engines.
“This potential action carries implications for European and U.S. carmakers, particularly in light of recent developments such as Washington’s announcement of tariff hikes on Chinese electric vehicles and Brussels’ preparations for preliminary measures in a high-profile antisubsidy investigation into Chinese EVs,” the chamber said. (…)
“In the short term, we suggest raising the temporary tariff rate on imported sedans and sport-utility vehicles that have engines larger than 2.5 liters, so as to reduce imports and guide consumption expectations,” said Liu, who has participated in drafting China’s auto policies.
Based on WTO rules, China’s temporary tariff rate on imported vehicles could be raised to a maximum 25 percent, Liu added. The potential move is in line with China’s efforts to cut emissions and green its auto industry, Liu said.
China imported 250,000 cars with engines larger than 2.5 liters in 2023, accounting for 32 percent of its total car imports, the Global Times said, citing official data. (…)
Risky Bonds Join Everything Rally High-yield debt has been swept up in a broad market rally fueled by signs of cooling inflation and hopes for interest-rate cuts.
The premium that investors demand to hold debt from sub-investment-grade companies instead of relatively safe Treasurys has shrunk to near pandemic-era lows, a sign of dwindling worries about an economic slowdown that would cause a big jump in defaults and bankruptcies.
Low-rated debt has been swept up in a broad market rally fueled by signs of cooling inflation and hopes for interest-rate cuts. Attracted by yields around 8%, investors have added a net $3.7 billion into junk-bond funds so far this year, according to Refinitiv Lipper—the first inflows in that period since 2020.
That demand has powered bond sales from companies including Jack Dorsey’s Block SQ -2.76%decrease; red down pointing triangle<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> and Carl Icahn’s Icahn Enterprises IEP -1.38%decrease; red down pointing triangle in recent weeks. Collectively, low-rated businesses issued $131 billion of speculative-grade debt this year through mid-May, according to PitchBook LCD, up from about $71 billion during the same period of 2023.
Investors and analysts closely watch junk bonds because companies with weaker credit ratings tend to be hit by economic problems first. Strong demand there—along with a recent surge in profits among S&P 500 companies—boosts hopes that the economy will cool enough for rates to come down, without sliding into a recession.
There are signs of stress lurking. The default rate has ticked up to 5.8% of junk bond issuers over the 12 months through March, its highest level in three years, according to a Moody’s Ratings analysis. That figure includes bankruptcies and out-of-court debt restructurings.
The rise reflects ongoing financial difficulties at some private-equity-owned companies that had struggled to refinance debt at today’s higher rates, said Julia Chursin, a senior analyst with Moody’s leveraged-finance and private-credit team. (…)
Still, technical factors could keep spreads on high-yield bonds relatively low. Over the past few years, more businesses climbed into investment-grade territory, or returned there, while fewer fell into junk. That cuts into the supply available for investors, analysts said.
“It’s more money chasing the same amount of paper outstanding, and that’s also been very supportive of the market valuations,” said Michael Anderson, head of U.S. credit strategy at Citigroup.