Personal income has increased by less than expected, while personal spending increased by more than anticipated. The saving rate rose to 4.7% from an upwardly-revised 4.5% in December, compared to the previously reported rate of 3.4%. Additionally, the January core PCE price index increased by 0.57% month-over-month, which was above consensus expectations, reflecting a boost from start-of-year price increases. The year-over-year rate also rose to 4.71%. My analysis, which includes the GS trimmed core PCE inflation measure, indicates that there was a 0.47% month-over-month increase in January, and a 4.02% increase from a year earlier. These consumption details are stronger than our previous assumptions, and suggest potential upside to our Q1 forecasts. As more data becomes available later in the day, I will be monitoring the developments and will provide further insights as appropriate.
The US personal saving rate increased during the pandemic, leading to a significant amount of “excess savings” that have helped support consumer spending. A recent paper from Federal Reserve staff estimates that there is around $1.2 trillion in excess savings remaining. However, this estimate is likely to be a conservative estimate, as it assumes that households will save unusually high amounts during this cycle. Using more realistic assumptions about household spending patterns, the actual amount of excess savings may be several hundred billion dollars higher. In short, the stockpile of excess savings may be larger than currently believed, which could have important implications for the US economy going forward. –Citi
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Durable goods orders
I anticipate that there will be a decrease in headline durable goods orders in January, likely driven by a reduction in aircraft orders for Boeing. This slowdown is expected to follow a 5.6% increase in December. The orders for this month will not include the Air India purchase. Additionally, there may be some payback after the significant surge in transportation orders last month. Consequently, I expect durable goods orders to increase by a more moderate 0.2% m/m when excluding transportation. Meanwhile, core capital goods orders are expected to come in at 0.1% m/m. I predict that shipments will remain flat over the month due to the 0.1% decrease in core capital goods orders seen in December.
Pending home sales
Pending home sales are on my radar, and I predict that they will increase by 1.0% m/m in January. As mortgage rates cool off, some buyers are likely to return to the market. While declining rates have helped to stabilize the housing market and inventory has eased from last year’s lows, affordability challenges remain unresolved, posing potential downside risks to home sales. I’ll be closely monitoring pending home sales data to see if my forecast holds and if the housing market continues to stabilize in the coming months.
Advance goods trade
I’m keeping an eye on the advance goods trade and anticipate the January deficit to narrow down to $87.0B from the previous month’s deficit of $89.7B. I predict that imports will decline more significantly than exports, likely due to the high interest rates that are slowing domestic demand. Weaker imports may be the result of the payback from the rise in imports during the holiday season. I’ll be monitoring the trade deficit closely to see if my forecast holds and if there are any potential impacts on the domestic economy.
Case-Shiller home price index
I anticipate that the S&P CL CS national home prices index will show a 6.0% y/y growth in December, which is a further cooling from the 7.7% y/y growth observed in November. I predict that home prices will continue to soften due to high mortgage rates and affordability challenges faced by buyers in the market. Additionally, inventory of homes for sale remains well below pre-pandemic levels, which further limits the options available to potential buyers. I’ll be keeping a close eye on the Case-Shiller home price index to see if this forecast holds and if there are any potential impacts on the overall housing market.
Chicago purchasing managers index
I predict that the Chicago purchasing managers index will increase from 44.3 in January to 45.5 in February, indicating a relative improvement in business activity in the region. I take my signal from the Philadelphia Fed and Empire State manufacturing indices. The average of these two measures, ISM adjusted February prints, is expected to increase by 1.1 points in February. I believe that the Chicago PMI will follow suit and increase to a level only slightly above the December print of 45.1. However, it’s important to note that the measure is likely to remain below the breakeven level of 50 for a sixth consecutive month. Although I anticipate an improvement on a sequential basis, I believe that activity in the region will continue to remain depressed.
ISM manufacturing
I anticipate that the ISM manufacturing index will increase slightly from 47.4 in January to 48.0 in February, which would mark the first increase in six months. Although regional indicators released to date have improved slightly relative to January, they only represent a small portion of the overall gross manufacturing output across the country. Despite this, I take my signal from these measures and predict that the ISM manufacturing will increase slightly. However, I also anticipate that the measure will print below 50 for a fourth consecutive month due to weak goods demand, which continues to show signs of converging to its pre-pandemic trend from above. Additionally, the new orders and new export orders indices in January suggest that demand remains weak. Therefore, I expect the production index to drop for a fourth consecutive month. If my forecast proves accurate, it would be the fourth consecutive print below 50. Since 1948, there have been 23 instances where the ISM has been below 50 for four consecutive months. Although this is not a guarantee of a recession, particularly given the diminishing size of the manufacturing sector, the US economy has been in a recession or gone into a recession within the next six months in 15 of the 23 instances.
ISM Services
Based on my analysis, the ISM services will increase from 55.2 in January to 56.0 in February, which would continue to show improvement after a surprising drop to 49.2 in December. I suspect that the incremental improvement will reflect the ongoing temperate weather across the country, which should result in more positive responses from certain services industries and the construction sector. Furthermore, BEA card spending data suggest strong spending on services such as accommodation, food services, and drinking places during the first half of February. I’ll be closely monitoring the ISM services index to see if my forecast holds, and if the US services sector continues to show signs of improvement in the coming months.
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Week’s Numbers
Review Last week’s numbers here.
Earnings
Source I/B/E/S data from Refinitiv
Aggregate Estimates and Revisions
- 22Q4 Y/Y earnings are expected to be -3.2%. Excluding the energy sector, the Y/Y earnings estimate is -7.4%.
- Of the 465 companies in the S&P 500 that have reported earnings to date for 22Q4, 67.5% have reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 75.5%.
- During the week of Feb. 27, 26 S&P 500 companies are expected to report quarterly earnings.
According to aggregate estimates and revisions, the fourth quarter of 2022 is expected to see year-over-year earnings of -3.2% in the S&P 500. However, when excluding the energy sector, the estimated earnings drop to -7.4%. Despite these numbers, the majority of the 465 companies in the S&P 500 that have reported earnings to date for 22Q4, 67.5%, have reported earnings above analyst estimates, which is slightly above the long-term average of 66.3%. This is, however, lower than the prior four quarter average of 75.5%. In the upcoming week of Feb. 27, 26 S&P 500 companies are expected to report quarterly earnings, which could have a significant impact on the overall earnings for the quarter. Investors and analysts will likely closely monitor the earnings reports and compare them to previous quarters and overall market trends.
Macro Market
Growth
• In 2022 (4Q/4Q), GDP growth decelerated to a sluggish 0.9%, and we anticipate it will further devaluate to -0.4% in 2023 ( 4Q/4Q) due to the delayed repercussions of more stringent monetary policy and economic conditions cooling off the economy.
Inflation
• This year’s recession and deflation of goods could lead to a decrease in prices next year. The Personal Consumption Expenditure (PCE) increased by 5.7% from 2022-2023, while the core rate grew at 4.8%. We project that these rates will drop slightly to 3.0% and 2.9%, respectively, during 2023-2024; yet our estimate is still aligned with the Federal Reserve’s target inflation rate of two percent by 2024 end!
Policy
• Anticipating a 25-basis point rate increase from the Fed in June, after similar hikes seen in March and May, we predict that the terminal will be 5.25-5.5%. Our forecast maintains a first cut as early as March 2024.
Global Spotlight
As Serbian President Aleksandar Vucic and Kosovar Prime Minister Albin Kurti prepare to meet in Brussels on February 27, all eyes will be on the two leaders as they are expected to formally accept an EU-sponsored Franco-German proposal for the normalization of their bilateral relationship. If accepted, the plan will bind both parties to continue normalization talks until a comprehensive agreement is reached, after which the two countries could be considered for EU membership. The plan includes the creation of an association of semiautonomous Serb-majority municipalities in Kosovo, while Belgrade will not be required to formally recognize Kosovar independence, but will have to de facto do so by ceasing to obstruct Kosovar membership in international organizations. The proposed plan is expected to end months of escalating tensions in Serb-majority northern Kosovo that have significantly increased the risk of a new armed conflict in the volatile region.
China’s Central Committee is set to hold its Second Plenum from Feb. 26-28, in preparation for the annual Two Sessions legislative meetings of the Chinese People’s Political Consultative Conference and National People’s Congress, which will begin on March 4 and March 5. During this plenum, Chinese leaders will discuss a reform plan for key government bodies, including the congress and consultative conference themselves, and who will fill state and Party leadership positions at the Two Sessions. The plenum’s outcome may provide some initial insights into the direction of China’s legislative and economic plans for 2023, which will be shaped by the upcoming Two Sessions.
The upcoming G-20 meeting in India, which will host foreign ministers on March 1-2, is expected to highlight divergent priorities between different G-20 members. Reports suggest that China could send lethal drones to Russia as early as April for use against Ukraine, a topic that is likely to feature during the G-20 meeting. However, New Delhi reportedly pushed to keep the war in Ukraine off the table during the recent meeting of the heads of G-20 central banks and finance ministers hosted in India from Feb. 22-25, as it tried to focus discussions on issues more important to the Global South, such as World Bank reforms to increase climate funding capacity. France and Germany, on the other hand, are reportedly pushing to label the conflict in Ukraine a “war,” indicating Western countries’ focus on using the G-20 meeting to discuss the situation in Ukraine and deter China-Russia cooperation.
Vietnam’s Central Committee is set to select a new president and nominate two new Politburo members, following former President Nguyen Xuan Phuc’s forced resignation on Jan. 17 and the ousting of Pham Binh Minh and Vu Duc Dam on Jan. 5. The personnel changes are expected to reflect the declining influence of liberal, business-minded technocrats and the growing influence of acolytes who share Communist Party chief Nguyen Phu Trong’s national security and ideological views. Trong is looking to solidify his control over the Party and state apparatuses before his 2026 retirement, which could lead to political infighting that may threaten Vietnam’s comparative advantage over its neighbors in terms of political stability. However, it is unlikely that there will be a full reversal of Vietnam’s market-oriented economy.
Stratfor.com
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