US data remains solid despite fears of recession in financial markets
Recession fears are gripping financial markets, but US economic data suggests the situation is nowhere near that serious, at least not yet.
People movement data, airline passenger numbers, April retail sales and industrial production reports all point to a healthy rebound in growth in Q2 22, while a strong labor market means employment and wages are rising. However, we recognize that inflation is depressing household incomes and this poses risks for consumer spending, while rising mortgage rates are already showing signs of weighing heavily on housing activity. With the Fed holding back growth through higher interest rates, we expect economic activity to slow in the second half of the year, but a recession is not our base case at this time.
This week’s data highlights will be April’s Personal Income and Expenditure Report, which will also include the Fed’s preferred measure of inflation – the central personal spending deflator. This should show decent real spending growth, with households poised to shed some of the savings accumulated by the pandemic and high inflation, which could bring some relief to markets. Durable goods orders should be firm, according to manufacturing surveys and continue to point to a positive outlook for business investment, while Q1 GDP could be revised up a few tenths of a percentage point on revisions in retail sales. However, housing numbers will be weak amid rising borrowing costs and consumer caution.
It’s a fairly quiet week for Fed officials, but minutes from the May FOMC meeting are expected to confirm that raising rates by 50 basis points at the June and July FOMC meetings is the overwhelmingly preferred path for monetary policy.
Eurozone PMIs in focus after surprisingly strong services data last month
Not too much euro-zone data is due next week, but Tuesday’s Purchasing Managers’ Index will be widely watched. Last month saw a surprisingly strong PMI as services performed very well on post-pandemic reopening effects. Manufacturing has been plagued by supply chain issues and flagging demand. The question that arises is how long consumers will continue to spend more on services once prices have risen. This month’s data will shed more light.
UK services activity will slow on consumer caution
There is quite a big gap between UK consumer confidence, which is currently at an all-time low, and service sector business surveys, which have so far shown greater resilience. However, we expect the former to gradually catch up with the latter and next week’s PMIs should point to a further contraction in demand for services. The combination of weaker consumer and healthcare delivery after free Covid testing has largely been phased out and the impact of an extra bank holiday in 2022 likely means UK GDP will contract slightly in the second quarter.
Important events next week
Source: ING
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