Economic Highlights

The UK suffered an unwelcome hat-trick of poor data on Friday. First, GfK's measure of UK consumer confidence fell to -38 in April, the second lowest reading on record (Jul 2008 was -39). Consumers were pessimistic about their personal finances as well as the general economic situation, and all the sub-components of the index saw declines. Next up were UK retail sales for March. The ONS revealed that sales volumes fell by 1.4% on the month, against consensus expectations for a 0.3% drop. The largest contribution to the fall came in non-store (i.e. online) retailing, which fell by 7.9%. Food store sales also endured a meaningful fall of 1.1%, with the ONS citing higher spending in pubs & restaurants and the impact of rising prices as the reasons for the decline. Finally, a fall in the composite PMI in April suggested that GDP growth slowed, but did not collapse, as the cost-of-living crisis intensified. Beneath the headline numbers, the survey suggested price pressures remain elevated. The S&P Global/CIPS Flash Composite PMI fell from a ten-month high of 60.9 in March to 57.6 in April (vs an expected 59). It was the services PMI which did the damage, falling from 62.6 to 58.3 in response to price rises. Even though everyone knows that higher utility prices are on the way, the reality has yet to hit, as most direct debt price increases will not be implemented until April’s bills are paid. The input prices balance of the composite PMI rose from 82.2 to 82.9. The Bank of England is stuck between a rock (weaker demand) and a hard place (sticky inflation), but is expected to push on with another quarter point base rate rise in May.
 

Last week was a quiet one for US economic data. With 30-year mortgage rates at 5.3%, a level not seen since early 2010, there are growing concerns about what might happen to the housing market. So far, at least, it remains steady, with Housing Starts (+0.3% month-on-month) and Building Permits (+0.4%) both doing a bit better than expected. And even though Existing Home Sales were 2.7% lower in March than in February, that figure was better than forecast. However, there was some deceleration in Mortgage Applications, which were 5% lower on the month. It seems inconceivable that such a sharp rise in the mortgage rate (from 3.27% at the start of the year) will not have some effect on dampening demand, either from new buyers or those refinancing for cash, but the current structure of both the housing and mortgage markets suggest much less risk of the sort of crisis that engulfed the markets in 2007.
 

The final year-on-year inflation reading for the eurozone of 7.4% highlights the pressure that the European Central Bank finds itself under at a time when high energy prices and supply chain disruption threaten to tip Europe into a recession. The headline Euro area manufacturing PMI fell to 55.3 from 56.5 (consensus forecast 54.7), but what was more eye-catching was the output sub-component, which dropped from 53.1 to 50.4, a 22-month low. Businesses also reported a further widening of supply chain disruptions, emanating from the war in Ukraine and fresh lockdowns in China.

Q1 real GDP growth in China came in at +4.8% year-on-year, beating market expectations of +4.2%. Specifically, March industrial and investment data were broadly above (low) expectations, while consumption data missed slightly, reflecting the impact of the worsened Covid situation and increased restrictions. Retail sales growth slumped to a slightly weaker-than-expected -3.5% year-on-year in March from +6.7% in January-February, with Covid-sensitive catering sales contracting by 16.4% year-on-year in March (vs. a 8.9% gain in January-February). Automobile sales dropped 7.5% in March (vs. +3.9% in January-February). Fixed asset investment growth slowed to +7.2% year-on-year in March from +12.2% in January-February on a single month basis, beating expectations. Surveyed unemployment rates increased in March from 5.5% to 5.8%. As the domestic Covid situation remains concerning and regions directly impacted by related restrictive measures still account for around 20% of national GDP, these headwinds will continue to hold back growth.