Note: I am travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.
Must watch: https://research.gavekal.com/content/webinar-forward-to-the-1970s-investing-for-an-inflationary-age/
SURVEY SAYS
The Fed’s Beige Book (On or before April 8)
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Overall economic activity expanded slightly, on balance, since late February. Ten out of twelve Districts experienced either slight or modest economic growth—up from eight in the previous report, while the other two reported no changes in activity.
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Consumer spending barely increased overall (…). Several reports mentioned weakness in discretionary spending, as consumers’ price sensitivity remained elevated.
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Manufacturing activity declined slightly, as only three Districts reported growth in that sector.
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Residential construction increased a little, on average, and home sales strengthened in most Districts. In contrast, nonresidential construction was flat, and commercial real estate leasing fell slightly.
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The economic outlook among contacts was cautiously optimistic, on balance.
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Employment rose at a slight pace overall, with nine Districts reporting very slow to modest increases, and the remaining three Districts reporting no changes in employment.
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Most Districts noted increases in labor supply and in the quality of job applicants.
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Wages grew at a moderate pace in eight Districts, with the remaining four noting only slight to modest wage increases. Multiple Districts said that annual wage growth rates had recently returned to their historical averages. On balance, contacts expected that labor demand and supply would remain relatively stable, with modest further job gains and continued moderation of wage growth back to pre-pandemic levels.
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Price increases were modest, on average, running at about the same pace as in the last report.
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Another frequent comment was that firms’ ability to pass cost increases on to consumers had weakened considerably in recent months, resulting in smaller profit margins.
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On balance, contacts expected that inflation would hold steady at a slow pace moving forward. At the same time, contacts in a few Districts—mostly manufacturers—perceived upside risks to near-term inflation in both input prices and output prices.
Contrast that with S&P Global’s latest PMI survey (12-26 March 2024):
- The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) was above the 50.0 no-change mark for the third successive month in March, thereby signalling a further monthly strengthening in the health of the sector. That said, at 51.9 the index was down from 52.2 in February, pointing to a slightly less pronounced improvement at the end of the opening quarter of the year.
- Manufacturers recorded a solid and accelerated rise in production during March, with the rate of growth the sharpest in almost two years. Respondents mentioned signs of improving demand conditions. Stronger demand was also evident in data for new orders, which showed an increase for the third month running. The pace of expansion was solid, but softer than that seen in February.
- Although modest, the pace of job creation was the most pronounced since July last year.
- Input costs increased sharply, with the rate of inflation ticking up from that seen in February.
- Meanwhile, the impact of rising labor costs was mentioned as a factor pushing up selling prices at a number of manufacturers. As a result, the rate of output price inflation quickened for the fourth month running to a sharp pace that was the fastest in just under a year.
- The seasonally adjusted S&P Global US Services PMI® Business Activity Index ticked down to a three-month low of 51.7 in March from 52.3 in February. That said, the index remained above the 50.0 no-change mark and therefore signalled a rise in business activity for the fourteenth consecutive month.
- The rate of growth in new orders also eased in March, to a modest pace that was the slowest since last November.
- Service providers continued to expand their staffing levels in response to higher new business volumes, the forty-fifth successive month of job creation. The latest increase was only slight, however, and the weakest since last November. Some companies indicated that cost considerations had led them to hold off on hiring.
- In fact, higher wages were a key factor behind the latest increase in input costs, according to respondents. Panellists also reported rises in transportation and material prices. As a result, input costs increased sharply during the month, with the rate of inflation accelerating to a six-month high. The latest rise was also sharper than the series average as
23% of companies recorded inflation over the month. - In turn, the pace of output price inflation also quickened markedly from that seen in February to the fastest since July 2023 as companies passed higher input costs through to their customers. As with input prices, the rise in charges was also faster than the average since the survey began in 2009.
It seems that the Fed district staff are not talking to the same people as S&P Global does. The only area of agreement is on slower employment growth. S&P Global’s survey is much less optimistic on wages and inflation.
CONSUMER WATCH
Bank of America data confirm my contention that March retail demand was not as strong as generally thought after Monday’s release (Roaring Lion???). It also looks like services were also on the weak side in March.
Bank of America aggregated credit and debit card spending per household rose 0.3% year-over-year (YoY) in March, following the 2.9% YoY rise in February, which was boosted by the extra day due to the leap year. Looking through the monthly swings, Exhibit 1 illustrates that consumer spending momentum remained soft but stable.
March was also impacted by calendar effects due to a relatively early Easter this year, as the holiday fell on March 31 compared to April 9, last year. This pulled some holiday-related spending into March from April, likely inflating spending somewhat at the expense of next month.
In fact, on a seasonally adjusted (SA) basis, total card spending per household fell 0.7% month-over-month (MoM) in March, following the 0.4% rise in February.
Spending on services fell 1.1% MoM SA in March, with weakness in both lodging and restaurant spending, while retail spending (excluding restaurants) decreased by 0.3% MoM. But looking at the level of spending over time, services spending still appears to be trending higher and was well above 2019 levels (Exhibit 2).
BofA data also support my views that rent growth is stabilizing in the 4.5% range.
Looking at Bank of America deposit account data on customer payments for monthly rent and mortgage payments, we find that the YoY growth in the median rent payment has slowed significantly over 2023-24, following the surge in 2021 and 2022 (Exhibit 8). Rent growth is now at levels not seen since mid to late 2021 – while still higher than overall CPI (Consumer Price Index) inflation, rent growth is more in line with wage growth.
FYI:
Source: FinanceBuzz
SENTIMENT WATCH
Bank of America’s monthly global Fund Manager Survey shows just how sentiment has shifted on what has become the core question of the last year — will the economy make a hard landing, a soft one, or none at all? BofA has been asking managers to choose between these three options since last June, and the result beautifully illustrates why markets have moved as they have. A soft landing, with a mild economic slowdown needed to bring inflation back to target, has been the most popular option throughout. But a year ago, no landing was regarded as a somewhat extreme probability. Only 3% expected it, while 26% were braced for a hard landing. A soft landing has fewer adherents now than at any time since the BofA started asking, while no landing is favored by 36%. A third of fund managers have been won over from initial skepticism:
