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Daniel Richards - MENA Economist
Published Date: 28 June 2022
Source: Bloomberg, Emirates NBD Research
Our data scorecard for the US looks moderately brighter than that for April, with a few more bright spots of green (indicating an improvement on the previous month or beating estimates) amongst the red compared with last month. However, the most notable miss was the CPI inflation print, which helped move the Federal Reserve into a more aggressive tightening stance at its June meeting, when it raised the Fed funds target range by 75bps (the largest move upward since 1994) and left the door open for further such moves in subsequent meetings. The Fed arguably has room to do this given that the labour market has held up to now, with the gain in non-farm payrolls in May beating expectations (albeit down on the previous month) while initial jobless claims have been relatively stable, but it remains to be seen whether the ‘softish’ landing can still be engineered.
There were two data releases in particular that helped swing the pendulum towards a faster pace of tightening, both of them released on June 10 (five days prior to the FOMC decision and into the pre-meeting purdah period). The CPI inflation print for May surprised to the upside as it rose once more to 8.6% y/y, confounding expectations that it would stay steady at the 8.3% rate recorded in April and suggesting that price pressures were more durable than expected and would require greater action to curb. Looking at the makeup of headline inflation, while the contribution from goods has diminished (1.7pp), services are increasingly important (3.0pp), with energy (2.4pp) also salient.
Meanwhile, the University of Michigan consumer sentiment index fell to 50.0 (subsequently revised down from 50.2 on the first reading), down from 58.4 the previous month and missing consensus projections of a similar reading of 58.1. This was a record low for a series that goes back to 1952, but most pertinent for the Fed was the data on inflation. Inflation was cited by 46% of respondents as the reason for their diminished confidence and the inflation expectations included in the survey report were cited by Chair Jerome Powell as ‘quite eye-catching’ when holding the post-FOMC meeting press conference. This diminished confidence is starting to manifest itself more in activity as retail sales declined -0.3% m/m in May, contrary to expectations of a modest gain.
On the output side, the data was more mixed. The ISM manufacturing survey showed an improvement on the previous month as it rose to 56.1 from 55.4, but the S&P Global manufacturing survey slipped to 52.4. Firms in the survey reported a drop-off in demand as consumers in the US reel from rising costs while higher interest rates, supply chain issues and uncertainty over demand are all weighing on the outlook. Industrial production in the US rose 0.2% m/m in May, down from 1.4% growth in April.
There were notable bright spots in the data towards the end of the month, however, as both durable goods orders and new home sales came in far above expectations despite rising interest rates. Durable goods orders rose 0.7% m/m in May, up from the (revised) 0.4% m/m rise in April and suggesting that US businesses continue to invest in the future even in the face of a darkening growth outlook – although the still tight labour market may have forced their hand in some cases. Meanwhile, new home sales hit 696,000 in May, up markedly from the 629,000 sold in April and representing a 10.7% gain, the first this year. In both cases these better-than-expected figures could simply be a case of firms and households looking to lock in borrowing prior to the greater rate hikes that are yet to come, but in any event, they suggest that there remains the wherewithal to invest in the US for the time being even as rates head higher.
Monthly Insights - July 2022
Monthly Insights - May 2022