Global Daily – Is the US recovery fading?

by: Maritza Cabezas , Kim Liu

Global-Daily-Insight-8-April-2015.pdf ()
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  • Slowdown in job growth and ISM manufacturing in March, but other reports solid…
  • …US economy likely slowed to a crawl in Q1, but fundamentals point to a rebound
  • ECB QE purchases are well on track, peripheral bond buys had on average a longer maturity than core

Recent data in the US unquestionably weak

We have seen a string of disappointing US economic numbers in Q1. There have been weak outcomes for manufacturing output, consumption, export volumes, construction and only last week a significant slowdown in jobs growth. We think that this weakness is to a large extent the result of special factors.

 Special factors at play…

Indeed, in the first quarter, the severe winter weather in the North East and port strikes in the West Coast have resulted in a larger than expected slowdown of the US economy. The experience of 2014, suggests that weather distortions had a large impact of US economic growth in Q1. The economy quickly recovered though, growing by 4.6% in the second quarter of 2014. We think that something similar may be occurring this time. Moreover, monetary easing by other central banks has resulted in a faster than expected pace of dollar appreciation, affecting export growth, while lower oil prices, since the summer 2014, have resulted in cut backs in oil & gas capex. This all, prompted some weeks ago, a revision of our GDP forecast in 2015 to 3.2% from 3.8% for 2015.

 …but bright spots suggest this is only a dip

However, overall fundamentals remain good. Indeed, other reports released recently suggest that the labour market will improve. Initial jobless claims were very strong last week and have been trending down since February. Indeed, despite the downward shift in economic activity, unemployment has fallen to 5.5%. Meanwhile,  the Beige Book, based on surveys from Fed regional banks on the labour market for end-March begin April, suggest that payrolls should remain robust. On top of this, data released yesterday on job openings were upbeat. They rose to the highest level in 14 years in February. Other surveys released in March, including the ISM non-manufacturing, which edged down to 56.5, as well as consumer confidence, which rebounded, suggest that domestic demand is still strong in underlying terms. Overall, we remain of the view the that the economy, as well as labour market conditions, will rebound  in coming months. This suggests that the FOMC will still gradually begin to hike rates later in the year, with a start likely in September.

ECB purchases are well on track

The ECB announced that, under the Public Sector Purchase Programme (PSPP), it bought a total of EUR 47.356bn of public sector bonds in its first month. The average remaining maturity of these public sector bonds was 8.56 years. The remainder of its EUR 60bn monthly target comprised of covered bond and ABS purchases.

 German bonds were bought most but…

The data shows that the lion share consists of German government and agency bonds. The central bank bought more than EUR 11bn of German bonds. The data also suggests that the ECB followed its capital key when conducting its purchases. This means that German, French, Italian and Spanish purchases of public sector debt ranked at the top.

 … peripheral bond buys had a longer maturity

We observe that peripheral bond purchases had on average a longer remaining maturity than core bond purchases. The statistics show that purchases of Spanish debt had the longest maturity (11.66 years). Core countries like Germany and especially the Netherlands rank low on this list. This implies that the German and Dutch national central banks skewed their purchases towards shorter maturing bonds. However, they will likely shift up the curve in the coming months.

8 Apr