Macro recap

Traveling, as of late last week, so some slight catch up to things of interest from then on.

PMIs

Note the robust US PMI composite print (see bottom right); 54.8 (services) and a strong recovery from the nadir in 2023.

Overall, PMI’s have bounced pretty hard almost everywhere. Now, to the degree they falsely heralded a recession in late ’22 and across ’23, perhaps neither should we put much stock in this sudden bounce. Hard data, like GDP growth, employment, retail sales never really wavered, and so, to a degree, the “soft data” of the PMI’s are simply catching up to what the “hard data” were telling us all along.

Housing

US housing starts were very weak over April, printing at 634K vs 678K expected (see bottom right graph). James Hardie (which we wrote about last week) had quite a poor update (relative to prior expectations) based on lower housing turnover, and difficult housing markets overall, given where mortgage rates are sitting (7.38%, for the US 30yr fixed rate mortgage, pretty horrendous trying to service that thing).

The NAHB market index (National Association of Home Builders) continues to read poorly, at 45, although it does seem to be finding something of a floor (surveys and sentiment from builders, similar to the PMI’s).

Still, as we wrote about last week, it seems difficult to get excited about JHX, BSL, and RWC given the slowdown in housing turnover, which is the key driver/catalyst for R&R work.

Unemployment

Not actually a new release, but shoehorning it into this note; the unemployment data continues to hold us back from getting “more bullish”. The global growth backdrop is quite reasonable, corporate profit margins are high, employment growth has been solid, and yet, we see the “turn is on” in unemployment.

We look to NZ, where policy, north of 5%, seems to be really impacting the labour market, Canada, not shown, is quite similar with a sharp uptick in UR, and, to lesser degrees, Australia, Germany, the UK and even the US (from very low levels) have all seen turns since the bottom of between 40-60bps worth of movement.

Monetary policy is sufficiently restrictive, as the below suggests, with the Fed Funds rate above most estimates (academic, institutional) of the natural rate, and we get confirmation that policy is indeed tight through the above movements in the unemployment rate, and the ongoing broad disinflationary impulse that’s been at play for some time (i.e., trending lower towards target).

You don’t get inflation down with unemployment up unless policy is tight.

A key thorny question is (something like) “are governments keen to offset this through generous fiscal policy, by running larger than otherwise deficits”.

That we don’t know. It does depend somewhat on what the consumer does with it. Surveys suggest households plan to save it, or pay down debt with it, in which case it shouldn’t be inflationary. But if they don’t, if they decide to put on the Sunday best and pop down to Westfield, armed with a new air fryer, than it probably will be, in which case it is likely that the RBA (and central banks more generally) will lean against it (i.e., refuse to accommodate it).

That’s how you wind up going down the “hard landing” path, because policy has to go hard enough to unambiguously crush demand. Either path, soft or hard, leads to lower yields over the medium run, but the soft path (in which rates and the stance of policy can be gently relaxed having achieved their target outcomes) is clearly the more pleasant one, compared to “rates go much higher until they go lower due to a recession”.

Difficult to see, the future is.

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