Fed Officials Saw Longer Wait for Rate Cuts After Inflation Setbacks Minutes of their last meeting revealed some officials were open to raising rates if inflation reaccelerated
(…) While officials continued to think interest rates were high enough to slow the economy and inflation, they signaled they were less certain over the degree to which rates would restrain activity and price pressures, according to minutes of the April 30-May 1 meeting, which were released Wednesday with a customary three-week delay.
An unspecified number of officials “mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such action became appropriate,” said the written account of the meeting. (…)
“Right now, the probability of rate hikes is very low,” Fed governor Christopher Waller said at an event in Washington on Tuesday. While the Fed’s next move was more likely to be a reduction rather than an increase, the central bank doesn’t necessarily need to cut interest rates this year if inflation doesn’t decline as much as officials have anticipated, he said. (…)
“We’re not seeing anything right now that looks like staying here for three or four months is going to cause the economy to go off a cliff,” Waller said on Tuesday.
(Bespoke)
The minutes say that “various participants mentioned a willingness to increase rates further if certain risks to inflation materialized”. Various???
Also new from the minutes:
- “Although monetary policy was seen as restrictive, many participants commented on their uncertainty about the degree of restrictiveness.”
- “A number of participants noted uncertainty regarding the degree of restrictiveness of current financial conditions and the associated risk that such conditions were insufficiently restrictive on aggregate demand and inflation.”
In Fed speak, in order of magnitude, you get “a couple of participants”, “a few”, “some”, “a number”, “various”, “several”, “many”, “a majority”, “almost all” and “all”.
US Existing-Home Sales Unexpectedly Fall, Prices Stay High Contract closings dropped 1.9% to 4.14 million rate last month
(…) The supply of homes on the resale market increased more than 16% in April from the same month last year to 1.21 million. At the current sales pace, selling all the properties on the market would take 3.5 months. Realtors see anything below five months of supply as indicative of a tight market. (…)
About 68% of the homes sold were on the market for less than a month, up from 60% in March, while more than a quarter sold above the list price.
The NAR’s report also showed properties remained on the market for 26 days on average in April, down from 33 a month earlier and typical during the spring selling season. Sellers received an average of 3.2 offers. (…)
(FLASH PMIs
Eurozone economic recovery gathers pace as new orders rise at fastest rate in over a year
The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, posted 52.3 in May, up from 51.7 in April and signalled an increase in business activity across the euro area private sector for the third consecutive month. (…) Moreover, the rate of expansion was solid, quickening for the second month running to the fastest for a year.
The overall expansion in output was again driven by the service sector, where activity was up for a fourth consecutive month. The pace of growth was unchanged on that seen in April. Meanwhile, manufacturing production continued to fall, extending the current sequence of decline to 14 months. The rate of contraction was only marginal, however, easing further to the weakest in this period of reduction.
New order growth also strengthened in May, driven by a solid expansion in the service sector where the latest increase hit a 13-month high. Manufacturing new business continued to fall, albeit to the least extent for two years. The rise in overall new orders was limited by demand weakness in international markets. New export orders decreased for the twenty-seventh successive month, but here too the pace of decline softened and was only modest.
There were varying trends across the different geographies in May. Germany saw output rise for a second month running, with the pace of growth gathering strength and hitting a one-year high. On the other hand, business activity in France took a step back, falling following a rise in the previous month. The strongest expansion was again seen in the rest of the eurozone, where output increased at a marked pace that was the fastest since April 2023.
As has been the case throughout 2024 so far, employment increased in May as firms responded to new order growth by expanding their workforce numbers. The pace of job creation was modest, but quickened to the most marked since June last year. In line with the picture for output and new orders, the rise in staffing levels was centred on the services sector, with manufacturing employment continuing to fall. The overall expansion of capacity enabled companies to keep on top of workloads, with backlogs of work depleted for the fourteenth consecutive month. The pace of reduction was slightly stronger than that seen in April.
With output and new orders in the manufacturing sector continuing to fall in May, firms in the euro area continued to scale back their purchasing activity midway through the second quarter. Stocks of both purchases and finished goods were also reduced, and to greater extents than was the case in April. A lack of pressure on supply chains meant that suppliers’ delivery times continued to shorten, extending the current sequence of improving vendor performance to four months.
Rates of inflation of both input costs and output prices eased in May, but in each case remained above the pre-pandemic average.
Input costs were up sharply again, with the pace of inflation only slightly softer than seen in April. Once again, the service sector was the principal source of inflationary pressure, with input costs rising rapidly. That said, the rate of services input price inflation eased to a three-year low. Meanwhile, manufacturing input costs decreased slightly again, though to the least marked extent in the current 15-month sequence of decline.
The pace of output price inflation also softened in May, and was the weakest since November 2023. A slower increase in services charges was partially offset by a weaker reduction in manufacturing selling prices. Softer output price inflation was seen across Germany, France and the rest of the eurozone.
Eurozone companies were more optimistic regarding the future path for business activity in May, with confidence the highest since February 2022. Sentiment was also higher than the series average as the economic recovery gained momentum. Stronger optimism was seen across both the manufacturing and services sectors. A jump in optimism in Germany helped to drive up overall confidence, while a renewed fall in output in France dented sentiment there. Confidence in the 12-month outlook for activity was little changed across the rest of the euro area.
Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:
“This looks as good as it could be. The PMI composite for May indicates growth for three months straight and that the eurozone’s economy is gathering further strength. Encouragingly, new orders are growing at a healthy rate while the companies’ confidence is reflected by a steady hiring pace. This time, there is also some good news for the European Central Bank (ECB) as the rates of inflation for input and output prices in the services sector has softened compared to the month before. This will be supportive for the apparent stance of the ECB to cut rates at the meeting on June 6. However, the better inflation outlook will be most probably not be enough for the central bank to announce that further rate cuts will follow suit.
“We are heading in the right direction. Considering the PMI numbers in our GDP nowcast, the Eurozone will probably grow at a rate of 0.3% during the second quarter, putting aside the spectre of recession. Growth is mainly driven by the service sector whose expansion was extended to four months. Manufacturing acts less and less as a stumbling block for the economy and optimism about future output has increased further in this sector. With all this in place it seems plausible that GDP growth of almost 1% could be reached this year, and there is even some upward risk.
“Looking for the fly in the ointment? Well, you will find plenty of them, especially in the manufacturing sector. While manufacturers have almost stopped reducing their production levels, inventories of purchased goods and final goods continue to shrink at even faster paces than during the last month. And while the indices for new orders, employment and backlogs of work have all increased, they are still well below the expansionary threshold. Thus, according to our Nowcast calculation, which considers the PMI indices, the recession in the manufacturing sector remains present in the current quarter.
Here’s a longer term chart via Bloomberg:
Japan: Fastest business activity expansion in nine months
Japan’s private sector expansion accelerated for a third successive month to the fastest since August 2023. This indicated that growth momentum continued to improve midway into the second quarter of 2024 and hints at a better Q2 GDP reading, after the disappointing first quarter print. The expansion in business activity remained services-led, but the near-stabilisation of manufacturing output offers hope of growth broadening out later in the year.
That said, overall new orders expanded at a slower pace in May, which alongside a renewed decline in the levels of backlogged work, spells a likely moderation in growth in the coming months. Sentiment levels remained elevated, however, even as confidence slipped to a seven-month low according to the Future Output Index. This signalled that Japanese private sector firms remain optimistic that growth will sustain in the year ahead.
Finally, the rates of input cost and output price inflation both eased in May, preluding softer inflationary pressures across official gauges. A closer look at the sectors reveal that this is services-led, as manufacturers faced rising cost pressures in May, partly attributed to yen fluctuations, which remains an area to monitor.
Euro-Zone Wage Growth Picks Up in Inflation Warning to ECB Negotated pay rose 4.7% from a year ago in first quarter
That’s up from 4.5% in the final three months of 2023 and matches a record set in the third quarter of last year. Most economists had anticipated a drop or a stable reading.
Indications of sustained upward pressure emerged on Wednesday as the Bundesbank said pay in Europe’s biggest economy shot up by 6.2% between January and March, boosted by tax-free one-off payments to compensate workers for soaring living costs.
(…) “However, wage pressures look set to decelerate in 2024. ECB wage-tracker data for the first few months of the year, when most agreements take place, indicate that negotiated wage pressures are moderating.” (…)
More evidence on workers’ pay will be revealed a day after next month’s decision, when Eurostat publishes compensation per employee — a metric ECB Chief Economist Philip Lane has called the most comprehensive indicator of wage pressures. In March, the central bank forecast that growth in that gauge will average 4.5% this year and slow to 3% in 2026. That’s a level it deems broadly in line with its inflation goal. (…)
Canada Bank Watchdog Warns of Housing-Payment Shock by 2026 Three-quarters of residential mortgages to renew by that time
The “payment shock” faced by some borrowers is among the most important risks currently in the financial system, according to the latest risk outlook from the Office of the Superintendent of Financial Institutions, released Wednesday.
The regulator said that 76% of outstanding residential mortgages as of February will be coming up for renewal by the end of 2026. Most worrisome are the 15% of mortgages that have variable rates with fixed payments. Some of those loans are negatively amortizing — that is, the regular payments no longer cover the full interest costs because rates have gone up so quickly, so the principal balance is increasing.
Eventually, those borrowers have to make lump-sum payments or accept much higher monthly outlays, the regulator said.
“We expect payment increases to lead to a higher incidence of residential mortgage loans falling into arrears or defaults,” OSFI said. (…)
Peter Routledge, the superintendent of financial institutions, said the issue of variable-rate mortgages with fixed payments is like a “mouse in the snake” — it’s a sizable problem the banks are slowly digesting, but it still has the potential to lead to outsized losses.
“The good news is that banks and Canadians are managing that problem early, and part of the reason we’ve been vocal about it is to prompt a bit of early action,” Routledge said in an interview on BNN Bloomberg Television. (…)
China asks carmakers to use up to 25% local chips by 2025 Policy push aims to purge foreign automotive semiconductors in coming years
The FT reports that the Ministry of Industry and Information Technology has asked Chinese carmakers to increase their local procurement of automotive-related chips to 20-25% by next year from about 10%. “China also aims to increase local procurement of other electric vehicle components, such as electronic control units, displays, thermal and charging supply systems, Nikkei Asia has learned.”
“The majority of chips used in vehicles, such as for sensors, microcontrollers and power management, do not need cutting-edge production tools and technologies.”
The FT adds that “Semiconductor value per car is forecast to increase to $912 by 2028 from $540 in 2022, with the market size to nearly double to $84.3bn from $43bn over the same period thanks to significantly more electric features, according to chip research company Yole Group.”
More than 30 million cars are sold in China each year and 18% were EVs in 2023 vs 14% in 2022.
G-7 Finance Chiefs Are Once Again Sidelining Their Debt Load Stresa G-7 agenda suggests no appetite for fiscal discussion
Despite a trajectory of rising borrowings and the International Monetary Fund’s declaration last month that “now is the time” to restore sustainable budget policies, that subject doesn’t appear on the formal agenda for G-7 central bankers and finance ministers set to gather in the lakeside town of Stresa. (…)
“Debt is definitely the elephant in the room at this G-7,” said Koen De Leus, chief economist at BNP Paribas Fortis in Brussels and co-author of a new book focusing on public finances, The New World Economy in 5 Trends. “But it’s hard to address this issue now, pre-elections, because there are no easy solutions.” (…)
The IMF’s forecast last month shows the G-7’s debts rising again this year after a post-pandemic trough, and doing so through 2029. The overall deficit will narrow only slightly to 4.6% in that time.
The fund singled out the US, predicting that if current loose policies stay in place, its debt will nearly double within three decades, and will already be just shy of 134% of output within five years.
The UK and France face rising borrowings too, and both countries received advice from the IMF this week to do something about that. (…)
Japan’s pile of borrowings meanwhile is seen stabilizing at the eye-watering level of more than 250% of GDP. Within the G-7, only Germany and Canada will cut down debt.
While each country’s situation differs, common themes explaining the mounting load include rising liabilities linked to aging populations and climate change, increasing defense costs to deter Russian aggression, and limited tolerance among voters for fiscal restraint.
Elections taking place this year in the US and the UK too — just announced for July 4 — as well as the European Parliament ballot in June that is coloring discourse in the region, underscore the difficulty of doing much to fix public finances for now.
Reticence to discuss fiscal challenges isn’t restricted to the G-7. Its larger equivalent, the Group of 20, avoided the matter with intent when meeting in February, after objections by China for a mention in their meeting statement. (…)
Something Just Flipped in the Credit Market for the First Time Since 2020 More risk of downgrades to junk.
While the big story in credit markets has been booming sales of new debt, ultra-low credit spreads and resilient corporate balance sheets as recognized by the billions of dollars worth of bonds being upgraded by rating agencies, the trend may be fading.
The proportion of BBB-rated bonds — those at the lowest tier of investment-grade — that are now on watch for a downgrade has recently surpassed the proportion of debt on watch for upgrades for the first time since early 2020, during the depths of the pandemic.
While “credit fundamentals are generally strong and ratings momentum is positive, the risk of downgrades to high-yield has increased recently,” say Bank of America analysts led by Yuri Seliger. “Moreover, some of the capital structures potentially at risk of a downgrade are large.”
Analysts have for years been warning of a ‘Triple B bubble, or the idea that a swelling amount of investment-grade debt is at risk of being downgraded into junk, or transforming into proverbial “fallen angels” in market parlance.
So far, that’s failed to materialize and 2023 instead market one of the slowest years for fallen angels on record, with just $19.1 billion of US debt dropping from investment-grade to high-yield status, according to CreditSights Inc. data.
Billions of dollars worth of debt sold by BBB-rated companies has instead been upgraded in recent months as companies continued to shore up their balance sheets. And so great has been the surge in upgrades that some analysts have argued that it’s helping to keep spreads, or risk premiums, on corporate debt low despite the highest benchmark interest rates in decades. (…)
Taking advantage of market holiday bias
This test analyzes the performance of the S&P 500 Index solely on the three trading days before and after each market holiday
We will refer to these days as “Holiday Days.” The holidays included are:
*- Before 1971, President’s Day entailed two separate market holidays – Washington’s Birthday and Lincoln’s Birthday
** – Martin Luther King Day became a holiday in 1986
*** – Juneteenth became a holiday in 2022
There is typically an overlap between the three days after Christmas and the three days before New Year’s. Holiday Days account for roughly 19% of all trading days or approximately 1 out of every 5.
- Buying three days before and selling three days after
The strategy followed below is simple: Buy and hold the S&P 500 Index only during the three trading days before and the three trading days after every market holiday starting in December 1933. The chart below shows the hypothetical growth of $1 using the holiday strategy.
But let’s try to put these results into some perspective. The chart below shows the same results as above in a slightly different format – a logarithmic scale. Once again, the key thing to note is the generally consistent nature of Holiday Days’ performance.
The chart below is quite enlightening. It displays the growth of $1 for the S&P 500 Index held only during Holiday Days (black line) compared to the growth of $1 in the S&P 500 Index during all other trading days (blue line).
Despite representing only 19% of all trading days, Holiday Days gained +2,354% versus All Other Days (representing 81% of all trading days), which earned only +2,083%. The bottom line: Holiday Days have delivered more total return in just a fifth of the time.
The table below summarizes daily performance results for Holiday Days separate from performance results for all other trading days.
Key things to note – Holiday Days had:
- A higher % of UP days (54.7% versus 52.0%)
- A significantly higher average and median daily return
- A slightly lower standard deviation of daily returns
- A 3.67-to-1 edge in risk-adjusted return (average daily % divided by standard deviation)
The table below summarizes the performance of the S&P 500 Index during all Holiday Day periods.
Roughly three of every five Holiday Day periods showed a gain, and the average and median gains are greater than the average and median loss.
The next period – around Memorial Day – begins at the close on May 21st and extends through the close on May 30th.
The table below displays the Holiday Dates for the remainder of 2024.
Sorry, I am one day late, but the S&P 500 was down yesterday. FYI only.
WHAT DO YOU KNOW?
The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)
It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)
More than half of Americans think the U.S. is in a recession. It’s not.
More than half of Americans — 56% — mistakenly believe the U.S. is currently in a recession and that Biden is responsible for a worsening economy, according to a stunning new poll conducted by Harris for The Guardian. (…)
It looks like inflation and the higher cost of living — indicators not typically part of the recession call by the NBER — could be shaping Americans’ views.
- 70% of Americans said that cost of living is their biggest economic concern, followed by inflation at 68%.
- Two-thirds of Americans, including 65% of Democrats, report it’s difficult to be happy about positive economic news when they feel financially squeezed each month.
- 49% believe the S&P 500 is down for the year (it’s up).
- Figuring out the right answers is tough because 64% of Americans say they don’t know who to trust when it comes to learning about the economy. And that number is relatively bipartisan.
- Even if the information on the economy is reported correctly, 62% of Americans think the economy is worse than the media makes it out to be.