Retail sales edged up 0.1% in May, less than the +0.3% print expected by consensus. Adding to the disappointment, the prior month’s result was revised downward, from +0.0% to -0.2%. Sales of motor vehicles and parts contributed positively to the headline print in May, as they expanded 0.8%. Without autos, outlays cooled 0.1%, as gains for sporting goods (+2.8%), clothing (+0.9%), and non-store retailers (+0.8%) were more than offset by declines for gasoline stations (-2.2%), furniture (-1.1%), building materials (-0.8%), and restaurants/bars (-0.4%). Sales were up in 8 of the 13 categories surveyed. Core sales (i.e., sales excluding food services, auto dealers, building materials, and gasoline stations), which are used to calculate GDP, increased 0.4%, one tick shy of consensus expectations and not enough to erase the prior month’s -0.5% result.
After climbing to 1,352K in April (seasonally adjusted and annualised), housing starts tumbled 5.5% in May to a post-pandemic low of 1,277K, a result far below the 1,370K print expected by consensus. The deterioration reflected declines in both the single-family segment (-5.2% to a seven-month low of 982K) and the multi-family segment (-6.6% to 295K).
Building permits cooled, moving from 1,440K in April to a near four-year low of 1,386K in May. Applications to build retraced in both the single-family segment (-2.9% to an eleven-month low of 949K) and the multi-family segment (-5.6% to a four-year low of 437K). Although it remained high on a historical basis, the number of authorised residential projects for which construction had not yet begun fell from 275K in April to 273K in May. The decline suggests that capacity pressures are easing in the real estate sector, allowing builders to turn their attention to reducing bloated work backlogs.
Interest rates remain very high by the standards of recent years, making for one of the least affordable real estate markets in history. It is hardly surprising, then, that homebuilder confidence remains very low Existing-home sales fell for the fourth month running in May, cooling 0.7% to a 4,110K (seasonally adjusted and annualised). Contract closings decreased in the single-family segment (-0.8% to 3,710K), while they remained unchanged in the condo segment (at 400K). On a 12-month basis, the total number of transactions was down 2.8%, but seeing how the level of transactions in May 2023 was already depressed, this figure does not accurately reflect the sharp slowdown in the resale market since mortgage rates began to rise. Homeowners were understandably reluctant to put their properties up for sale at a time where moving could entail having to renegotiate one’s mortgage, which could result in a substantial increase in monthly payments. Consequently, the fact that supply and demand were equally depressed at the same time helped buoy prices: The median price paid in May for a previously owned home was $419,300, up 5.8% on a 12-month basis
Industrial production advanced a consensus-topping 0.9% in May following a flat reading the month before. Manufacturing output jumped 0.9%, thanks in part to a 0.6% progression in the motor vehicle/parts segment. Excluding autos, factory output still advanced 0.9%. Among the main subcategories, petroleum and coal products (+2.8%), wood products (+2.6%), and machinery (+2.3%) registered healthy gains, while furniture (-2.6%) and miscellaneous items (-0.9%) were the biggest losers. Utilities output expanded 1.6%, while production in the mining sector grew 0.3% The S&P Global Flash Composite PMI rose from 54.5 in May to 54.6 in June, signalling the strongest expansion in 26 months in the private sector. Employment increased for the first time in 3 months and at the fastest pace since September of last year. The increase in the composite PMI was driven by the services sector, with the associated gauge rising from 54.8 to a 26-month high of 55.1. Incoming new business piled up at the fastest pace in nearly a year, while payrolls expanded the most in 5 months. The manufacturing PMI increased as well, rising from 51.3 to 51.7 and marking a fifth consecutive expansion. Output growth decelerated a little, but that did not prevent a sixth consecutive expansion in employment. Despite this positive backdrop. Future sentiment fell to a 17-month low, with manufacturers commonly citing “concerns over the demand environment in the months ahead as well as election-related uncertainty, notably relating to policy.
The Empire State Manufacturing Index of general business conditions continued to signal a deterioration in factory activity in New York State and surrounding areas. The shipments sub-index (from -1.2 to 3.3) moved back into expansion territory, while the new orders tracker (from -16.5 to -1.0) flagged a much less severe contraction. A more favourable demand backdrop did not prevent payrolls (from -6.4 to -8.7) from shrinking for the eighth month in a row and at the fastest pace since March 2023. Supply chain pressures continued to ease, as measured by the delivery times sub-index (from -9.1 to -4.1), which remained below the 0 mark separating expansion from contraction. The input price index, for its part, fell further below its long-term average (≈30), slipping from 28.3 to 24.5. Business expectations for the next six months improved significantly, with the corresponding gauge moving from 14.5 to a 27-month high of 30.1.
The Philly Fed Manufacturing Business Outlook Index painted a similar picture of the situation prevailing in the manufacturing sector as it moved down from 4.5 in May to 1.3 in June. The shipments (from -1.2 to -7.2) and new orders (from -7.9 to -2.2) indices remained in contraction territory, as did the employment gauge (from -7.9 to -2.5). Contrary to the Empire survey, the Philly report signaled an intensification of input price inflation, with the corresponding tracker rising from 18.7 to 22.5. Prices received (from 6.6 to 13.7), also, increased at an accelerated pace. Finally, the index tracking future business activity sank from 32.4 to a four-month low of 13.8.
The Conference Board’s index of leading economic indicators (LEI) fell 0.5 point in May to a 4-year low of 101.2. Five of the ten underlying economic indicators contributed to the decline, led by ISM new orders (-0.22 percentage points), average consumer expectations (-0.16 pp) and building permits (-0.12 pp). Historical analysis shows that an annualised drop of 3.5% in the LEI index over six months, coupled with a six-month diffusion index below 50%, is generally symptomatic of a pending recession. Both of these conditions were met in May: The LEI index fell 4.0% annualised over six months and the six-month diffusion index stood at 40%.
The Congressional Budget Office substantially revised its 2024 US budget deficit estimate upward to $1.9 trillion from a February estimate of $1.5 trillion while raising its forecast for the deficit to GDP ratio to 6.7% from 5.3%. The revisions come after the CBO incorporated recent additions to government spending, including PresidentJoe Biden’s student loan forgiveness plans, which added $145 billion in red ink, aid to Ukraine, Israel and Taiwan, which helped to boost discretionary spending by $60 billion, a $70 billion reduction in the estimated amount the Federal Deposit Insurance Corporation will recoup from payments made to cover bank failures in 2023 and 2024, and an increase in estimated Medicaid spending.
Stocks recorded modest gains over the shortened trading week, helping push the S&P 500 Index to fresh all-time highs. The week also saw modest signs of a broadening and rotation in the market, with value stocks outperforming growth shares and most of the major benchmarks outperforming the technology-heavy Nasdaq Composite. Friday was a so-called triple-witching day, with roughly USD 5.5 trillion in options related to indexes, individual stocks, and exchange-traded funds set to expire, according to Bloomberg and options platform SpotGamma.
UK
Retail Sales numbers for May have been released, sales were up 2.9% m-o-m, and 1.3% y-o-y (consensus +1.5% m-o-m, and -0.9% y-o-y); retail sales ex-fuel were up 2.9% m-o-m, and 1.2% y-o-y (consensus +1.3% m-o-m, and -0.8% y-o-y). This was the largest monthly rise since April 2021, and follows a fall of 3.0% in April 2024. April’s figures had been dampened by considerable rain (155% of average for the month), so an improvement simply on the basis of less dire weather was forecast and in fact May was the warmest month on record. This drove up retail footfall and in store promotions were seen to be effective as well. Retail sales were up across all sectors with non-store retailing (online to you and me) up 5.9%, clothing store sales up 5.4% and household goods up 3.5%.
Consumer confidence for June, as measured by GfK, moved up to -14 (consensus -16) from -17 in May (-10 is the long term “neutral” reading). The improvement can be put down to slow easing of the cost of living issues, and while interest rates have obviously not yet fallen, at least inflation is down and for the moment tax rates are static. That said, the number remains in firmly negative territory and whether a fresh government can improve the mood will be one of the early tests of the next PM and Chancellor.
The Bank of England’s Monetary Policy Committee (MPC) has voted to hold rates at 5.25%. The vote was split with seven members backing a freeze in rates and two members voting for a 25bp reduction, the same breakdown as the vote at the previous meeting in May. It is notable that the overall positioning of the MPC remains the same. In advance of the next meeting in August, the committee will continue to closely monitor signs of persistent inflationary pressures, including measures looking at labour market tightness, wage growth and services inflation. However, “a range of views” remains among the seven members backing a rate freeze as to what evidence is required to back a rate cut.
While the UK’s inflation rate has recently fallen to the Bank of England’s 2% inflation target, the rate is expected to rise by year-end due to base effects in the energy component of inflation and it is notable that services inflation has surprised on the upside in both April’s and May’s CPI print. This has stopped the majority of MPC members backing a rate cut, but there are now two clear schools of thought emerging among these members. One school of thought is that the higher-than-expected services inflation is pointing to second-round effects maintaining persistent upward pressure on inflation. The other, much more sanguine view, is that the recent strength in services inflation has been prompted by factors such as volatile components and the large increase in the National Living Wage, which will not end up embedding into medium-term inflation. MPC members subscribing to this view have indicated that the policy decision “was finely balanced”, suggesting a number of additional members were very close to backing a rate cut at this meeting.
EU
Private sector business activity in the eurozone unexpectedly slowed in June as services lost momentum and manufacturing contracted more sharply, purchasing managers’ surveys showed. The HCOB Composite Purchasing Managers’ Index (PMI), combining activity in manufacturing and services, fell to 50.8 from 52.2 in May, according to preliminary figures compiled by S&P Global. (A PMI reading greater than 50 indicates expansion).
In Germany, overall business activity increased slightly, with the slowdown in the rate of expansion reflecting weakness in manufacturing production.
In France, a decrease in new orders caused output to contract for a second month in a row.
The Swiss National Bank lowered rates by a quarter of a percentage for the second consecutive meeting, taking its policy rate to 1.25%. The accompanying statement noted that inflation pressure has decreased since the previous quarter.
Meanwhile, Norway’s Central Bank, Norges Bank, kept its rate at 4.5%. It said that based on its current assessment of the outlook and balance of risks, the policy rate will likely be kept at this level for the rest of the year before gradually being reduced.
The European Union on Tuesday warned France, Italy, Belgium, Poland, Malta, Slovenia and Hungary that their fiscal deficits are too high and will need to be addressed in the coming months. The warning comes amid a French parliamentary election campaign in which none of the three main political blocs are pledging fiscal discipline. EU rules typically require member countries to maintain budgetary discipline or face hefty fines if debt climbs above 60% of gross domestic product or if budget deficits reach more than 3%. France is in debt to the tune of around €3 trillion, or more than 110% GDP, and a deficit of €154 billion, representing 5.5% of economic output.
In local currency terms, the pan-European STOXX Europe 600 Index ended 0.79% higher, rebounding as worries about political uncertainty appeared to ebb and the outlook for monetary policy easing brightened. Major stock indexes rose.
Germany’s DAX gained 0.90%, France’s CAC 40 Index put on 1.67%, and Italy’s FTSE MIB climbed 1.97%.
CHINA
China’s new home prices fell 0.7% in May, accelerating from a 0.6% drop in April, marking the steepest month-on-month contraction in nearly a decade, according to the statistics bureau. The data, which showed that new home prices declined for the 11th straight month, came after Beijing unveiled a historic rescue package in May to revive the property sector. Some analysts have cautioned that the measures may not be sufficient to draw a line under the housing market slump, which remains a significant drag on the economy.
Industrial production rose a weaker-than-expected 5.6% in May from a year earlier, slowing from April’s 6.7%. Fixed asset investment grew 4% in the calendar year to May compared with a year ago but eased from the January to April period as real estate investment declines deepened. Meanwhile, retail sales increased an above-consensus 3.7% in May from a year earlier and outpaced April’s 2.3% gain. The nationwide urban unemployment rate remained steady at 5%.
The People’s Bank of China injected RMB 182 billion into the banking system via its medium-term lending facility and left the lending rate unchanged at 2.5%, as expected. With RMB 237 billion in loans set to expire this month, the operation resulted in a net withdrawal of RMB 55 billion from the banking system, but the central bank boosted funding by injecting RMB 4 billion in short-term loans. Chinese banks left their one- and five-year loan prime rates unchanged at 3.45% and 3.95%, respectively Chinese stocks retreated as mixed economic data dampened investor sentiment.
The Shanghai Composite Index fell 1.14%, while the blue-chip CSI 300 gave up 1.3%.
In Hong Kong, the benchmark Hang Seng Index gained 0.48%.
