Global Daily – Shifting up another gear

door: Peter de Bruin , Georgette Boele

140528-Global-Daily-Insight.pdf (476 KB)
  • Data releases suggest that the US economy has shifted up another gear…
  • …with the composite PMI rising to the highest level since 2010, and investment making a comeback
  • These strong reports left their mark on gold prices

US Markit’s composite PMI at highest level since 2010

Various US reports all signalled that the US economy has shifted up another gear. Indeed, Markit’s services PMI rose from 55 in April to 58.4 in May, which was the highest level since March 2012. The improvement in services activity was driven by a gain in the new business sub-index, the outstanding business sub-index and a rise in the employment sub-index. Together with the increase in Markit’s manufacturing PMI earlier last week, the firm increase in the services PMI brought the composite PMI to 58.6 in May, up from 55.6 the month before, which marked the highest reading since April 2010. Although the relationship between the composite PMI and GDP growth is not always stable, at its current level, the composite PMI is consistent with GDP growth of around 5%. This is in line with our view that we are likely to see payback in the second quarter from the winter slump, and that the economy is set to rebound strongly in Q2.

…while April’s durable goods orders are in line with a pickup in investment…

This picture was reinforced by April’s durable goods report. Durable goods orders rose by 0.8% mom, which was better than the consensus forecast of a 0.7% decline. What is more, March was revised up by one percentage point to 3.6%. The largest part of the gain in durable goods orders was driven by transportation orders, which can be volatile. But ex. transportation orders were up by 0.1%, which is certainly not bad considering that ex. transportation orders rose by 2.9% in March. This helped the 3mo3m annualised growth rate to rise to 7.2%, which suggests that the manufacturing sector is clearly picking up steam. Meanwhile, capital goods orders, which are a leading indicator for investment, fell by 1.2% in April. At face value, this disappointed, but March’s core orders were revised upwards from 2.2% to 4.7%, and in the three months up till April, core orders were up by 4.9% on an annualised basis. A similar picture could be seen when looking at capital good shipments. These fell by 0.4% in April, but March’s shipment were revised up by 1.1 percentage points to 2.1%. All this suggests that investment in equipment will make a comeback in Q2, after it shrunk in the first quarter of the year.

… and consumer confidence picked up

Finally, the Conference Board’s measure of consumer confidence rose from 81.7 to 83.0 in May, keeping confidence on an upward trend. One the one hand, confidence continues to be supported by rising house prices, with the S&P Case Shiller Home Price index up by 1.2% in March, building on a 0.8% increase the month before. But on the other hand, consumers are becoming more optimistic about the labour market. Indeed, the jobs plentiful minus jobs hard to get index, which is closely correlated to the unemployment rate, rose from -19.8 to -18.2, keeping it on a clear upward trend, which implies that the labour market continues to gain traction.

Strong US data left its mark on gold prices

At the end of last week, gold prices failed to rally on the news that India slightly eased its gold import restrictions. This behaviour was a warning sign of lower prices to come. Indeed, the election outcome in Ukraine over the weekend eased (geo) political fears resulting in a deteriorating sentiment on gold. Gold prices also came under pressure on the news that China’s gold imports from Hong Kong fell, signaling lower Chinese investment demand for gold. More importantly, the stronger-than-expected US data have made gold an even less attractive asset to invest in. As a result, gold prices dropped by close to 2%. We remain negative on the outlook for gold prices, driven by our view of a strong US economy, higher US official rates in 2015, a higher US dollar and lower demand for safe-haven assets.