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The most anticipated data release of the week was yesterday's US GDP print, which created more turmoil than usual by not meeting expectations. Growth was much weaker than expected in Q1, while price pressure remained red hot. Meanwhile, the local data calendar was quiet, with a slight acceleration in factory gate inflation and a welcome uptick in the leading business cycle indicator.
The US GDP growth rate essentially halved from 3.4% q-o-q in Q4 to 1.6% in Q1. This was well below expectations for a mid-2% figure (with some big forecasters even calling for an above 3% growth). In recent months, any miss in US data results in market participants readjusting their expectations for the first interest rate cut by the Fed. On its own, a collapse in US growth would call for cuts to be brought forward, but the GDP deflator complicates the story. In short, a deflator is a measure of price changes (i.e. akin to inflation) and is used to transform data from nominal (i.e. current prices) to real (constant prices). While growth was lower than expected, the deflator was higher than anticipated and accelerated from 1.6% in Q4 to 3.1%. Worryingly, the core measure for Q1 rose from 2% to 3.7% - also higher than expected. This data would fit with the higher-for-longer narrative we have seen dominating of late. In the end, the concerns about persistent price pressure won, and markets are now turning to just one rate cut, in the November Fed meeting of the year. This meeting takes place after the US election, and the lack of cuts before then is unlikely to do President Joe Biden any favours at the polls. The Fed’s preferred measure of inflation will be released this afternoon and might give some further direction. The monthly change in the core PCE price index is expected to remain unchanged at 0.3%. An upward or downward surprise could lead to some volatility in the markets.
In monetary policy news, the Bank of Japan (BoJ) kept its monetary policy settings unchanged earlier this morning, as expected. A (first?) victim of the higher-for-longer dollar strength seems to be Indonesia. The Bank of Indonesia delivered a surprise hike as the rupiah weakened to a four-year low, and the central bank acted to ‘strengthen the stability of the currency’. The rand is, of course, also under pressure. The SA Reserve Bank (SARB) would not be this explicit on exchange rates, but would not hesitate to act should it start to worry about the second-round implications on the inflation outlook of a weaker rand. On the SARB, they published their Monetary Policy Review last week. The review was in line with recent SARB statements and speeches in the sense that it stressed caution on the way forward, and concern about sticky inflation.
In financial markets, the rand failed to close below R19/$ this week, but clawed back some losses yesterday to close somewhat stronger w-o-w against the dolar. The dollar, however, also weakened against the euro, suggesting it is more a weak dollar rather than a better rand story that resulted in the rand appreciating. The JSE Alsi was slightly weaker on Thursday, but rose by 1.4% w-o-w. There was some buzz yesterday following the announcement of a £31 billion offer for Anglo American by BHP. Anglo’s share price, which is listed on the Johannesburg and London stock exchanges, surged higher on the news. US stocks snapped a three-day winning streak yesterday as sentiment soured following the GDP print (and sticky price data), with a big drop in the Meta share price a further drag. US yields rose as markets digested the US GDP print, while gold trimmed gains.
Following this week’s GDP data (and today’s core PCE price data), next week will keep market participants glued to the US with the US Fed interest rate decision scheduled for Wednesday. To be sure, the policy rate is expected to be left unchanged, but as has been the case in most recent meetings, the interest will be on insights into the monetary policy path going forward. The US jobs data, for release on Friday, will be scrutinised for the same reason.
Across the Atlantic, we will see the preliminary Q1 GDP data for the Eurozone and major economies. Germany is expected to have eked out slight quarterly growth, which should also translate into an expansion for the broader common currency region after growth stalled in Q4.
Several PMI releases are also scheduled for next week, with the first data coming from China. Their manufacturing PMI prints came in above 50 points in March and are expected to remain in positive territory in April. S&P Global PMI will release final data for the preliminary PMIs this week, which should not differ much from the figures unpacked in the international section below. There will be some fresh insights from the US ISM manufacturing print mid-week and the services ISM on Friday.
Locally, the Absa PMI will be released on Thursday. The PMI dipped back below 50 points in March but, on a positive note, the survey showed tentative signs of improved workings at the harbours filtering through faster supplier deliveries. It would be a very welcome development to see this sustained in April. Other local data releases include private sector credit and the budget and trade balance for March, with naamsa new vehicle sales for April due on Thursday.
Annual producer price inflation (PPI) accelerated to 4.6% in March from 4.5% in February, in line with expectations but a touch below our expectations. Higher price pressures from the food products, beverages and tobacco category (up 4.4% y-o-y; adding 1.3%pts) as well as the coke, petroleum, chemical, rubber and plastic grouping (+4.5% y-o-y; contributing 1.1%pts) underpinned the rise in factory gate inflation. On a monthly basis, the rate of increase in PPI quickened to 1.1% in March from 0.5% in February. Among other reasons, higher electricity costs and fuel price hikes are set to keep PPI elevated through Q2 and the first months of Q3. It should slow during the last months of the year.
According to the SARB, following two consecutive months of contraction, the composite leading business cycle indicator expanded 1.7% m-o-m in February. The main drivers of the acceleration were twofold, that is, a rise in the six-month smoothed growth rate of job advertisements as well as an improvement in the number of residential building plans approved. To be clear, the leading indicator should not be seen as a forecast estimate of near-term GDP outcomes.
According to an advance estimate, US economic growth came in lower than expected in 2024Q1. Real GDP grew at an annualised rate of 1.6% q-o-q in Q1 (vs. the 2.5% expected). This follows a 3.4% q-o-q increase in Q4 and marks the slowest growth rate since the first half of 2022, when the economy contracted. In Q1, consumer spending slowed (2.5% vs 3.3% in Q4), as did exports (0.9% vs 5.1%) and government spending (1.2% vs 4.6%). However, residential investment (13.9% vs 2.8%) and imports (7.2% vs 2.2%) soared.
Amid signs of demand weakness, the second quarter saw a moderation in US private sector activity. Indeed, the S&P Global Composite flash PMI edged lower to 50.9 in April from 52.1 in March. This was the weakest expansion since December, with manufacturing and services experiencing slower growth. Manufacturing reached a three-month low of 51.1, while services reached a five-month low of 50.9. This slowdown was accompanied by the first reduction in employment since June 2020, predominantly within the services sector. Interestingly, inflation pressures eased at the start of Q2, with input costs and output prices recording slower rises. However, manufacturing input cost inflation reached a one-year high.
Across the Atlantic, private sector economic activity had a much stronger performance at the start of Q2. The S&P Global UK Composite flash PMI increased to an above-consensus 54 from 52.8 in March. This was the highest growth in business activity since May 2023, led by the services sector (54.9 in April vs 53.1 in March). In contrast, manufacturing reversed the previous positive trend and fell into contractionary territory (49.1 vs 50.9). There was a mixed bag on the price front, with input costs rising the most in nearly a year while selling prices rose the slowest since February 2021.
In the Eurozone (EZ), the HCOB Composite flash PMI also surprised on the upside. The headline PMI increased to 51.4 in April, up from 50.3 the previous month. This rise was the fastest growth in output since May 2023, led by an increase in service sector output, the most in 11 months (52.9 vs 51.5). In contrast, manufacturing continued to decline, though at the slowest pace in a year (47.3 vs 47.1). Encouragingly, private sector activity in Germany, the EZ’s largest economy, returned to growth, ending a nine-month contraction. However, price pressures intensified in April, with input costs across the goods and services sectors recording the joint-fastest increase over the past year. The rate at which selling prices rose also quickened, rebounding from a four-month low observed in March.
Meanwhile, according to a preliminary estimate, consumer confidence in the EZ improved to -14.7 in April from -14.9 in March. Although in negative territory, the headline reading was the highest since February 2022. This improvement suggests growing optimism, likely influenced by anticipated ECB interest rate cuts.
Editor: Lisette IJssel de Schepper
Tel: +27 (21) 808 9777
Email: lisette@sun.ac.za
Click here for previous editions of this publication.
Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 26 Apr 2024
