Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
UK GDP fell in Q1 but recent data boosts expectations for a strong Q2
UK GDP rose 2.1% month-on-month in March, coming in ahead of consensus (1.5%) and meaning overall Q1 GDP fell by 1.5% quarter-on-quarter. Goods, services, and construction output all rose in March, with the 5.8% jump in construction over Q1 taking overall output to 2.4% above its pre-pandemic peak. Declines in household and business spending were more than the consensus forecast in Q1, but survey data points to a sharp recovery going forward.
China’s credit growth slows slightly in April
China’s total social financing, a broad measure of credit and liquidity in the economy which includes government bond issuance, was 12.0% higher year-on-year in April, but down from 12.6% in March.
Credit growth should continue to gradually decline over the rest of the year, causing credit impulse (the gap between TSF growth and nominal GDP growth) to become slightly negative in the second half of the year. This is important for stabilising debt/GDP measures after the very rapid expansion delivered in response to the COVID-19 pandemic.
The People’s Bank of China published its Monetary Policy Operations Report for Q1 2021. The bank commented that “China’s inflation remains stable and does not face the pressure of sustainable inflation or deflation”. Notably, that’s despite the ongoing surge in the price of raw materials like industrial metals.
US inflation surged in April but the FED insists it’s down to transitory factors
The US saw year-on-year price gains of 4.2% in April (as measured by headline CPI), coming in notably ahead of consensus estimates of 3.6%. It was the sectors and components most sensitive to economies reopening, where a sudden surge in demand is overwhelming supply, that saw outsized price rises. For example, used vehicle prices rose 10.0% month-on-month and hotel lodging rates were up 7.6%, bolstered by the $380bn of economic impact payments that have been made to households under the American Rescue Plan since mid-March.
The Fed continues to insist that transitory factors are boosting incoming data and these will start to reverse in the coming months, but this view is likely to be increasingly challenged by the bond market.
US retail sales unexpectedly declined in April, but the recent trajectory remains strong
Headline US retail sales were flat in April coming in below consensus expectations for a 1.0% increase. The key control measure (which excludes the volatile autos, gasoline, and building materials components) declined by 1.5%, notably below expectations for a 0.2% decrease.
However, control readings were revised up strongly for March by 0.7% to 7.6%, modestly revised up 0.1% to 3.3% for February and January’s were revised down 0.3% to a still impressive 8.4%. In general, services particularly leisure, are surging, whilst goods sales, particularly e-commerce, are slowing.
Markets
Equities sold off over the week, with tech stocks in particular troubled by the potential for rising long-term bond yields in the wake of the bumper US inflation numbers. There was some recovery into the weekend, particularly on Friday after tepid US retail sales. With the Fed being keenly scrutinised for signs it is losing faith in its “flexible average inflation targeting” (i.e. ultra-dovish) approach in the face of data strength, bad news is definitely good news for equities at the current time. The tech-heavy Taiwanese equity market, having materially outperformed the Nasdaq all year, was a particular casualty of rising inflation (not helped by renewed lockdown fears).
Look out for next week’s update, where we’ll be focusing on UK inflation, employment and retail sales data, as well as flash PMI survey data for May in Europe and the US.
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