Mixed signals
Having slowed sharply in April, job creations recovered more than expected in May, reaching 272,000 according to the business survey. The new jobs were spread across a wide range of sectors. Hourly earnings were also solid, up 0.4% during the month and 4.1% year on year. In contrast, the household survey revealed 408,000 lost jobs (see chart) and a further rise in the unemployment rate to 4.0%. However, this survey is notoriously volatile and it would not be the first time that a sharp fall was followed by a rebound. Overall, the number of job openings stalled in April and weekly jobless claims continued to rise.
In line with restrained US growth, consumer spending figures were downbeat. Following two vigorous months, household spending fell by 0.1% in April and retail sales fell short of expectations for May. The category used to calculate goods consumption in GDP rose by 0.4% over the month, but the previous month’s figures were revised downwards. Activity in the property sector also slowed, especially building permits, property developer confidence and house sales.
A more reassuring picture for the US economy emerged from the June PMI surveys. The composite PMI stabilised at 54.6, in line with growth of close to 2%. The manufacturing PMI improved slightly, in contrast with May’s weaker ISM survey. The services PMI reached its highest level in over two years. Meanwhile, imports are picking up and signalling still-strong domestic demand.
This could push prices upwards. Although April’s consumption deflator eased slightly compared to the first quarter of the year, this inflation measure remained high, up 0.25% during the month. The good news is that the rise in consumer prices, which is used to calculate the deflator, eased significantly in May. Prices excluding food and energy rose by just 0.16% over the month, the smallest increase since August 2021. Prices for services other than housing even fell for the first time in three years.
Despite this encouraging report being published ahead of the Fed’s recent meeting, FOMC members remained cautious. The median forecast for the policy rate now predicts a single quarter-point cut between now and the end of 2024, compared with three last March, which would bring the rate down to 5.00–5.25%. Opinions diverge, however, with eight members expecting two cuts, seven expecting only one and four expecting none. The markets are betting on two cuts.
The recovery continues
The European elections on 9 June did not change the composition of the European Parliament, with the outgoing coalition of conservatives, social democrats and centrists retaining a majority of almost 400 of the 720 seats. This three-way alliance reached an agreement in principle on the allocation of Europe’s top jobs, including Ursula von der Leyen’s reappointment as Head of the European Commission. The deal should ensure policy continuity.
In France, uncertainty reigns since Emmanuel Macron dissolved the National Assembly on 9 June. Polls suggest a no-majority scenario, giving Marine Le Pen’s National Rally 33–35% of the vote, the left-wing New Popular Front 26–29%, and the Macronist Together party 18–22%. As a result, France may face an institutional stalemate if it fails to form a government, since the Assembly cannot be dissolved again for at least a year.
What the National Assembly will look like on the day after the second round of voting on 7 July, and the composition of the government that will emerge from the elections, is difficult to predict with any certainty. The possibility of a government with lavish spending plans coming to power cannot be ruled out and this could strain France’s relationship with the European Commission. As things stand, the most negative scenario for the French economy and markets would be a New Popular Front government, given its costly election pledges. With presidential elections scheduled for 2027, a possible National Rally government might avoid taking too much risk, but this remains highly uncertain and the social climate could deteriorate if the far-right gains power.
Against this backdrop, the extra yield demanded by investors to hold French Treasury bonds rather than German Bunds has significantly widened to over 75 bps from 45 bps before the elections were called. A closer look reveals that this is mainly due to the fall in German yields. French yields have remained relatively stable in the past few weeks, avoiding any rise in its borrowing costs that could further dampen the country’s growth prospects.
French annual GDP growth is currently running close to potential and has been stable at around 1.0–1.3% since the end of 2022. However, recent indicators are more mixed, such as the French composite PMI for June, which is in contraction mode at 48.2. The composite eurozone PMI also fell in June, but remains in positive territory at 50.8. At this stage, the scenario of a gradual economic recovery in the eurozone is still on the table.
If a recovery materialises, the ECB could be cautious about normalising its monetary policy to avoid stoking inflation. While one or two cuts in policy rates between now and the end of the year are possible, the easing cycle that kicked off on 6 June may not go as deep as the markets currently expect (-130 bps).
A fragmented economy
May’s figures paint a mixed picture of the Chinese economy. While manufacturing exports remain buoyant, the property crisis has yet to be resolved despite the government’s new rescue plan. Although consumption has improved slightly, temporary factors may be at play. The significant misalignment between supply and demand is fuelling deflationary pressures. In July, the third plenum meeting and the politburo could give the government an opportunity to announce new measures designed to bolster the economy.
Industrial output slowed to 5.6% year on year, still a relatively strong pace. Investment spending remained stable at 3.5%. Manufacturing investment remained robust (9.4% year on year), while property investment continued to fall (-11.0% year on year). Other sector indicators were also down. House sales continued to fall and the price decline intensified. Existing property prices have fallen by 12% since their peak in the summer of 2021.
Following a marked decline in recent months, consumption and services have bounced, with retail sales rising by 3.7% year on year and services by 4.8%. Yet these are modest growth rates compared with pre-pandemic levels and base effects have played a positive role.
Foreign demand remained strong, with exports in current dollars up by more than expected at 7.6% year on year. However, at a time when trading partners, particularly the US and Europe, are increasing their tariffs, a question mark hangs over how long this will last. Meanwhile, imports slowed to 1.8%, a bad sign for domestic demand.
May’s credit data, which revealed a further decline in lending to households and businesses, was also a bad omen for domestic demand. Total credit to the economy stabilised due to an increase in government bond issuance, indicating greater fiscal support. The central bank maintained its policy rate at 2.5% despite very low year-on-year inflation of 0.3%. This was probably to avoid further downward pressure on the yuan at a time when the Fed seems in no hurry to cut rates.
See also: https://latribune.lazardfreresgestion.fr/en/macroeconomic-focus-october-2023/
The opinion expressed above is dated June 28st 2024 , and is liable to change.
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