US Economic Growth Beats Expectations

For the week ending 26 January 2024

As of midday on Friday, global equities rose from a week ago as the US economy grew at a faster rate than expected. The yield on the benchmark US 10-year note remains relatively unchanged at 4.15%. The price of a barrel of West Texas Intermediate crude oil rose to $77.51 from $73.43 last Friday. Volatility, as measured by the Cboe Volatility Index (VIX), remains flat at 13.38.

MACRO NEWS

US economy grew at a faster pace than expected

The US economy came in stronger than predicted in the fourth quarter of 2023, growing 3.3% at an annualized rate and adjusted for inflation. The consensus estimate was for a 2% expansion. Economic activity was lifted by strong consumer and government spending as well as subsiding inflation. The US Federal Reserve’s preferred inflation measure, core personal consumption expenditures (PCE), rose 2.9% on an annual basis in December, the slowest pace in three years. 2023 marked a year where inflation moderated at a much faster rate than anticipated. Overall, the economy grew 2.5% in 2023, remaining resilient despite forecasts of a recession and further increasing the chances for a “soft landing.”

US Flash PMIs indicate healthy overall economic activity

The US flash composite purchasing managers index rose to 52.3, up from 50.9 in December, driven by an increase in both services and manufacturing activity. Flash manufacturing PMI hit 50.3 and services came in at 52.9. Typically, a level above 50 indicates expansion in the private sector, while below 50 signals contraction. These readings further support predictions that the economy will continue to expand this year. Japan, Australia and the United Kingdom saw an increase in business activity and signs of an improving manufacturing sector, while flash PMIs for France, Germany and the eurozone remain below 50.

China easing monetary policy to stimulate growth

China has pledged to cut the reserve ratio requirements for banks by 50 basis points, starting February 5, to boost its economy, with the People’s Bank of China stating that there is room for additional monetary policy easing. With lackluster economic and credit growth, China hopes to encourage borrowing and spending by reducing the amount of liquidity that banks are required to hold as reserves. The cut to bank reserves will pump roughly $140 billion of cash into the banking system. Chinese equities and the yuan rallied following the announcement. Meanwhile, the Bank of Japan, the Bank of Canada and the European Central Bank held their policy rates steady, with expectations of rate cuts for the BoC and ECB sometime in 2024, while signs of future rate hikes are emerging for the BOJ.

QUICK HITS

The Conference Board Leading Economic Index, a measure that predicts turning points in the business and economic cycle, slightly contracted by 0.1% in December and declined 2.9% over the past six months. While many leading indicators continue to signal economic weakness, several are showing signs of improvement.

US new home sales recovered by 8% in December amid declining mortgage rates and a continuing shortage in previously owned homes. On a year-over-year basis, sales rose 4.4%.

US durable goods orders, new orders that last for at least three years, were unchanged at 5.5% in December, compared to expectations for a slight increase.

While unchanged nationally in December, the unemployment rate increased in fifteen states, compared to only three in November. Thirteen states and Washington D.C. have rates at or above 4%.

Spain’s unemployment rate fell to 11.76% in Q4 2023, the lowest level since 2007.

Inflation is moderating across several regions. New Zealand’s prices increased by 4.7% year over year, the smallest increase since mid-2021, while Malaysia’s inflation rate remained constant at 1.5%. Prices in Hong Kong and Singapore rose 2.1% and 3.7%, respectively, from a year ago.

Japan’s inflation fell short of its central bank’s 2% target, rising 1.6% year over year in January compared to forecasts of a 1.9% gain.

Japan saw strong exports growth in December, with the country’s trade balance coming in at a surplus of ¥62.1 billion. Overall exports grew 2.8% in December to ¥100.89 trillion, the highest level on record, with exports to the United States up by 11%.

Malaysia’s central bank decided to hold rates steady at 3%, in line with expectations, despite signs of a slowing economy.

Norges Bank kept its policy rate at 4.5% and is likely to keep rates at this level as inflation is expected to remain elevated due to a depreciating krone and high wage growth.

Denmark’s consumer confidence indicator increased from -13 to -8.4 in January as consumer optimism improved amid a rise in wages, which surpassed price increases. The United Kingdom and France also saw a rise in consumer confidence in January, with their consumer confidence indicators increasing to -19 from -22 and 91 from 89, respectively.

Germany’s consumer confidence is expected to deteriorate in February, with a forward-looking consumer sentiment index predicting that confidence will drop to -29.7 from -25.4 in January. Consumers are reluctant to spend amid ongoing concerns over inflation.

EARNINGS NEWS

With close to 25% of the constituents of the S&P 500 Index having reported for Q4 2023, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings fell 1.6% compared with the same quarter a year ago, according to data from FactSet. Sales growth is up 3.1% year over year.