The data last week showed that the broad economic recovery is rolling along and beginning to expand into places like Europe, which appears to be following the U.S. path of gradual reopening as vaccine distribution expands.
Increased volatility in pockets of the financial markets may have some investors concerned that overall growth is peaking; however, we see the environment as one that can be characterized as a synchronized global upswing with many quarters of strong growth yet to emerge. Even if this is as strong as it gets for some of the data, it is likely to last for many quarters.
The minutes of the latest FOMC meeting were released on Wednesday and suggested that some members were willing to begin discussing the idea of tapering quantitative easing measures. At some point in the future we’d expect the Federal Reserve to reduce its $120 billion of monthly bond purchases, but that doesn’t mean monetary policy will stop being accommodative.
As a result, the U.S. economy (and, later, other parts of the globe) should continue to prosper. We’re seeing that in broad measures of data, including the preliminary May purchasing managers’ index (PMI) reports last week. There’s also been robust growth in corporate earnings. First-quarter results have been posted by 95 percent of companies in the S&P 500 to date, and profits surprised by an average of 23 percent.
Of course, one side-effect of restarting the U.S. economy from a standstill and injecting trillions of dollars of fiscal stimulus is that inflationary pressures are rising. We will continue to monitor the persistence of increasing prices, as it remains a meaningful future risk.
In the meantime, it’s important to reiterate that the Fed views these inflationary pressures as temporary. At this point of the recovery cycle, Chair Jerome Powell is likely to remain firm and do everything in his power to keep the economy pushing forward.
WALL STREET WRAP
U.S. PMI Shows Continued Momentum in May: IHS Markit reported its preliminary May PMI data on Friday, suggesting that the domestic economy continues to expand. The Manufacturing figure increased to 61.5, which is a record high for the current series. New export orders were reported at the highest level in 14 years, suggesting that the recovery is spreading outside the U.S. The Services PMI was a blowout reading of 70.1, which was its own record dating back to 2009.
Eurozone PMI Suggests Broadening of Economic Recovery: According to IHS Markit, the European Manufacturing sector came in at 62.8 and remains near last month’s all-time high, even though the result appears to have been impacted by disruptions in the supply chain. Backlogs of work are at a record high since data was first kept in 2002, which speaks to the staying power of this recovery. Again, we are more likely reaching a sustainable plateau than a peak in the cycle. The Services sector also expanded in May, as the preliminary PMI reading increased to 55.1.
We believe this report marks the latest signpost that the global economic recovery is broadening. Most of the Eurozone has lagged a few months behind the U.S. in re-emerging from COVID-19 lockdowns, and there will likely be further expansion on the continent as travel resumes in the summer months.
Leading Index Confirms Strong Environment: On Thursday, the Conference Board said that the U.S. Leading Index increased 1.6 percent month-over-month. Nine of the ten components rose, as the index suggests that economic activity is now back to pre-pandemic levels. The 17 percent year-over-year growth was also a record in its own right.
Housing Data Show Mixed Results: The Department of Commerce reported on Tuesday that U.S. housing starts declined 9.5 percent in April, to an annualized rate of 1.57 million. The drop appears to have been fueled by supply issues, as the backlog increased to 232,000 and was the highest level since 2005. Building permits also increased slightly in April, to an annualized rate of 1.76 million.
On the sales side, the National Association of Realtors (NAR) said on Friday that existing home sales fell 2.7 percent month-over-month in April. Rising prices may be emerging as an issue in the housing market, as the median U.S. selling price increased 19.1 percent year-over-year, to a record $341,600. Prices are likely being impacted by a lack of supply, as there are only 1.16 million homes for sale, which means at current sales rates there is a supply of just 2.4 months. According to the NAR, homes are remaining on the market for an average of only 17 days, which is a record low.
THE WEEK AHEAD
PCE Price Index Offers Key Inflation Read: On Friday, the Bureau of Economic Analysis will announce the April personal consumption expenditures (PCE) price index. Excluding food and energy prices, the core PCE index is expected to increase 2.9 percent year-over-year.
Consumer Confidence on Deck: The Conference Board will announce its May consumer confidence reading on Tuesday. In addition to the headline figure, the Labor Differential measure may shed some light on the availability of jobs in the U.S.
As we continue to monitor the shift toward a broadening of the economic expansion into the Eurozone, the European Commission will also release its consumer confidence figures on Friday.
Homes Sales Back in the Spotlight: The April housing data will continue to roll in this week, beginning with the Census Bureau’s report of new home sales on Tuesday. The NAR will also announce pending home sales Thursday.
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