Not so PCEasy Peasy

• Equities broadly recovered, with Asia, the UK and emerging markets delivering the strongest sterling performance (c. +3%)
• Oil strengthened +2.5% in dollar terms

• Japanese equities continued to soften, falling -0.2% in sterling terms
• Bonds were broadly weaker, with gilts down -0.5%

Ahead of this week’s Fed meeting, US economic data remains under scrutiny. Minutes and statements from the March meeting suggest that US Federal Open Market Committee (FOMC) members were confident that the economy was cooling, despite stronger inflation (CPI) prints and volatile labour market data. In recent weeks, that conviction has been questioned by a strong March payroll report and inflation continuing to be stronger than expected. Will this data change the Fed’s view on the economy and therefore rate cuts?

Growth (GDP) data for the first quarter was published last week, showing a sharp slowdown. GDP decelerated from a quarter-on-quarter annualized rate of 3.4% in Q4 to 1.6% in Q1, behind consensus of 2.5%.

Looking within the print, the drag came from lower consumption spending (0.6% quarter-on-quarter down from 0.8%) due to softer goods demand, though services spending remained resilient. Trade was another drag, as exports slowed and imports accelerated dramatically, and inventories continued to unwind after the surge in the third quarter of 2023. Trade can be volatile, while inventories are likely to become a support for GDP growth at some point in coming quarters, once destocking is complete.

While the print was softer than economists anticipated, growth had been expected to slow in the first quarter and to slow further this year reflecting the restrictive stance of monetary policy and making the case for some easing.

Personal Consumption Expenditure (PCE) data was also released last week and was marginally ahead of expectations. Core PCE inflation rose 0.32% in March, compared to consensus of 0.3%, while year-on-year PCE was flat at 2.8%. This makes it likely that PCE will be slightly ahead of the Fed’s forecast this year, and that forecasts, updated in June, will be revised higher. This is also likely to nudge FOMC members’ expectations of where the policy rate should be upward. Futures currently imply one to two cuts this year.

Beijing announced details of a car trade-in programme, designed to boost consumption spending. The programme was announced at the start of the year but details have been scarce until now.

The project is more ambitious than analysts had expected. Car owners replacing internal combustion engine vehicles (ICEVs) with stage III emission standards or earlier or Neighborhood Electric Vehicles (NEVs) registered before April 2018 with eligible autos can benefit from subsidies of Rmb10,000 ($1,381) or Rmb7,000 ($966), respectively in 2024.

There is no cap on the package and central government is pledging to fund 60% of the scheme, with local governments financing the balance. If all eligible cars are replaced, estimated at 16m autos, the package could be worth over Rmb130bn (0.1% of GDP). Stronger consumption spending should support growth, though this does not tackle the significant headwinds China’s economy faces. Chief amongst these are the burden placed on households to finance elder care, and the challenges faced by the real estate sector.

Last week’s PMI business surveys provided a snapshot of global business sentiment. The global manufacturing sector has been suffering for some time, in the wake of a dramatic post-pandemic restocking cycle. This restocking has taken several years to unwind, reflecting softer economic growth, softer goods demand as people prioritise spending on experiences, and overzealous restocking after supply chain difficulties caused problems.

In contrast, the services sector has remained resilient.

Surveys from Asia show signs of recovery in the manufacturing sector, with PMIs improving in Japan, albeit still in negative territory. However, in the Eurozone, the US, and the UK manufacturing indicators actually deteriorated.

We continue to expect an improvement in manufacturing activity this year, though evidence suggests this is not around the corner.

 

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