- Raytheon wins $1.23 billion contract with the U.S. Army; the company also wins two Navy contracts
- Apple announces Pay Later service
- Disney announces layoffs
- ABB announces it will begin its $1 billion share buyback
Domestic Economic News
A key gauge of US inflation cooled last month by more than expected and consumer spending stabilized, suggesting the Federal Reserve may be close to ending its most aggressive cycle of interest-rate hikes in decades. Excluding food and energy, the Fed’s preferred inflation gauge — the personal consumption expenditures price index — rose 0.3% in February after the prior month was revised down slightly. The overall PCE climbed by the same amount, Commerce Department data showed Friday. Consumer spending, adjusted for prices, fell 0.1% after surging an upwardly revised 1.5% at the start of the year. The decrease reflected a drop in outlays for both goods and services. The PCE price index was up 5% from a year earlier, a deceleration from January and far higher than the central bank’s 2% goal. Excluding food and energy, the core PCE price index climbed 4.6%, matching the smallest increase since October 2021. US stock futures rose and Treasury yields declined as traders wagered the Fed would be done hiking interest rates soon. The core PCE measure came in slightly below the median estimate of 0.4% in a Bloomberg survey of economists. While the step down in inflation is welcome, price growth remains far too high for the Fed, and they must balance that with maintaining financial stability. Officials hiked rates by a quarter point last week and said some more tightening may be needed, making clear that inflation is their top priority while monitoring risks from a slew of bank collapses. The stickiness of service sector inflation in particular, in part due to strong wage growth in those industries, risks keeping price growth above the Fed’s target for the foreseeable future. That said, services inflation excluding housing and energy services increased 0.3% in February, a deceleration from the prior month, according to Bloomberg calculations. Fed Chair Jerome Powell has emphasized the importance of looking at such a measure to assess the outlook for inflation. On a year-over-year basis, the metric ticked up to 4.6%. On the spending side, the report suggests resilience in personal outlays in February after warm weather paired with a strong job market helped drive a surge in outlays in January. It also offers a benchmark for the economy’s main driver in the weeks before the latest banking turmoil, which is anticipated to lead to further tightening of credit conditions and ultimately constrain household spending.
On an additional positive note for future inflation, the US housing slump stretched into a seventh month in January. Home prices nationally fell 0.2% from December, according to seasonally adjusted data from S&P CoreLogic Case-Shiller. The index is now down 3% from its record high, reached in June. Prices have continued to soften as seller discounts become more common in a market where buyer demand has been sagging for months. Toward the end of 2022 and into January, mortgage rates eased slightly from the peak in November, giving some house hunters incentive to negotiate a deal. While prices in January were still higher than they were a year earlier, the pace of gains has cooled. The national index was up 3.8% annually, down from the 5.6% gain in December, non-seasonally adjusted data show. Not all cities had year-over-year increases. Prices declined 7.6% in San Francisco and 5.1% in Seattle. They were down 1.4% in San Diego and 0.5% in Portland, Oregon. Despite turmoil in the banking industry “the Federal Reserve remains focused on its inflation-reduction targets, which suggest that rates may remain elevated in the near term,” Craig Lazzara, managing director at S&P Dow Jones Indices, said in a statement Tuesday. “Mortgage financing and the prospect of economic weakness are therefore likely to remain a headwind for housing prices for at least the next several months.” The housing market is now in what’s traditionally its busiest season, when families rush to settle into new homes before the next school year starts. But higher borrowing costs and uncertainty over the economy are likely to continue to limit demand this spring, according to Hannah Jones, economic data analyst at Realtor.com. In addition, Fed Chair Jerome Powell signaled last week that the regional banking crisis may lead to stricter lending requirements, which in turn could make getting a mortgage more difficult. “This spring’s sales pace is expected to remain lower than last year,” Jones said. “Many sellers will feel the pressure to list their home for a lower price to ensure sufficient buyer attention and a quick sale.”
The US merchandise-trade deficit widened slightly in February for a third month as a decline in the value of exports exceeded a drop in imports. The trade gap in goods grew 0.6% to $91.6 billion, Commerce Department data showed Tuesday. The figures, which aren’t adjusted for inflation, compared with a median estimate in a Bloomberg survey of economists for a $90 billion deficit. Exports fell 3.8% to $167.8 billion, while imports dropped 2.3% to $259.5 billion. US exports of autos slid nearly 12%, the most in almost three years. Outbound shipments of consumer goods fell 4.6%. Even though a decline in the dollar late last year has given exports some room to breathe at the start of the year, the currency has shown signs of stabilizing. The decline in imports also reflected decreases in vehicles and consumer merchandise. Auto imports fell 7.1% after solid increases in the prior two months, while inbound shipments of consumer goods declined for the first time since November. The value of imported consumer goods has largely been declining after hitting a record early last year as many retailers sought to get inventories more in line with sales. Moreover, aggressive rate increases by the Federal Reserve are seen taking a bigger toll on demand. Meantime, the recent upheaval in the US and European banking systems risks curbing the availability of credit, potentially weighing even more on worldwide demand and trade flows. Net exports have added to gross domestic product for the last three quarters as US companies pared orders to foreign producers. Prior to the February figures, the Atlanta Fed’s GDPNow forecast pointed to another modest contribution to the economy in the first quarter. The advance economic indicators report also showed retail inventories rose 0.8% last month to $747.3 billion. Stockpiles at wholesalers increased 0.2% to $920.3 billion. More complete February trade figures that include the balance on the services account will be released on April 5.
US consumer confidence unexpectedly improved in March as Americans grew more optimistic about the outlook for business conditions and the labor market. The Conference Board’s index increased to 104.2 from a 103.4 reading in February, data out Tuesday showed. The median forecast in a Bloomberg survey of economists called for the gauge to fall to 101. A measure of expectations — which reflects consumers’ six-month outlook — climbed to 73. However, the group’s gauge of current conditions dropped to 151.1. “Driven by an uptick in expectations, consumer confidence improved somewhat in March, but remains below the average level seen in 2022,” said Ataman Ozyildirim, senior director of economics at the Conference Board. “The gain reflects an improved outlook for consumers under 55 years of age and for households earning $50,000 and over.” The figures — which captured responses up to March 20, a little over a week after Silicon Valley Bank failed — suggest the latest financial turmoil is having little immediate impact on consumer confidence. While high inflation and recession concerns remain front of mind for many Americans, a strong job market and low unemployment continue to prop up sentiment. That said, more and more companies — particularly in the technology sector — have announced sweeping layoffs in recent months. Moreover, if the banking crisis leads credit conditions to tighten significantly, sentiment may deteriorate further. The share of respondents who said jobs were “plentiful” decreased to 49.1%, the first decline in five months but still historically elevated. The number who said they were hard to get was about the same as last month. The difference between the two — a metric watched closely by economists to gauge the tightness of the labor market — dropped for the first time since November. A special question in March asked about consumers’ spending plans over the next six months. They said they plan to spend less on highly discretionary categories such as visiting amusement parks and dining, while they’ll spend more on things like health care and auto repair. For larger purchases, buying plans were mixed. More consumers plan to buy cars and TVs but overall expectations to purchase major appliances fell in the month. The shares of respondents who anticipate buying a new or lived-in home edged higher but remain depressed. The median inflation rate seen over the next 12 months ticked up.
US pending home sales unexpectedly rose in February for a third month, adding to signs that the housing market may be stabilizing after a tumultuous year. The National Association of Realtors’ index of contract signings to purchase previously owned homes increased 0.8% last month to 83.2 — the highest since August — according to data released Wednesday. The median estimate in a Bloomberg survey of economists called for a 3% decline. The increase in sales indicates the housing market may be getting back on its feet after last year’s rapid run-up in borrowing costs. Mortgage rates eased last week to a six-week low, helping drive demand to purchase a home. They may decline further if the unfolding banking crisis continues to drive down Treasury yields, and the Federal Reserve has signaled it’s nearly done hiking interest rates. “After nearly a year, the housing sector’s contraction is coming to an end,” Lawrence Yun, NAR’s chief economist, said in a statement. Signings rose in February in all regions but the West, while the increase was led by a 6.5% advance in the Northeast. However, on an unadjusted basis, contract signings were down 21.1% from a year ago. There are some other signs the residential real estate sector is feeling a reprieve. Separate data last week showed sales of previously owned homes surged by the most since mid-2020 in February, ending a year-long decline. It also pointed to the first decline in pre-owned home prices in more than a decade. The pending home sales report is often seen as a leading indicator of existing home sales given homes typically go under contract a month or two before they’re sold.
Applications for US unemployment benefits ticked up for the first time in three weeks, suggesting some softening in what’s still a robust labor market in which employers are hesitant to let people go. Initial unemployment claims increased by 7,000 to 198,000 in the week ended March 25, Labor Department data showed Thursday. The median forecast of economists was for 196,000 applications. Continuing claims, which include people who have received unemployment benefits for a week or more and are a good indicator of how hard it is for people to find work after losing their job, was little changed around 1.69 million in the week ended March 18. Despite the increase, the report showcases a labor market that’s shown continued strength after a year’s worth of interest-rate hikes by the Federal Reserve. Unemployment is historically low, there are nearly two job openings for every American who wants one and job creation remains robust. Still, economists expect jobless claims to eventually reflect layoff announcements that have spanned across the tech, finance and media sectors. It’s not yet clear how the banking crisis might affect unemployment filings, but the economy will likely show some signs of strain in the coming weeks and months.
Interest Rate Insight and the Fed
The big news which lent support to equities when trading opened Monday morning was the news released Sunday evening that First Citizens BancShares Inc. agreed to buy Silicon Valley Bank after a run on deposits wiped out the company in the biggest US bank failure in more than a decade. The deal to settle SVB’s fate could help tamp down some of the turmoil that has engulfed the financial world, and shares of regional banks rallied on the news, with First Citizens up as much as 44% in early Monday trading. The Federal Deposit Insurance Corp. seized SVB earlier this month amid concern that bank runs could spread. The acquisition transforms First Citizens into one of the top 15 US banks, according to Bloomberg Intelligence, with help from some favorable terms. First Citizens is buying about $72 billion of SVB’s assets at a discount of $16.5 billion, according to an FDIC statement. This leaves about $90 billion in securities and other SVB assets in the hands of the FDIC, and an estimated cost of the failure to the Deposit Insurance Fund of about $20 billion. Meanwhile, the FDIC gets equity appreciation rights in First Citizens with a potential value of $500 million. This sounds like it was actually a well-structured deal for both parties. Silicon Valley Bank unraveled in less than 48 hours earlier this month after outlining a proposal to shore up capital. When that plan failed, a run on deposits forced the lender to take huge losses on sales of securities that had lost value as interest rates climbed. Shares of regional lenders across the US have plummeted amid concern they too could fall victim to the same threats that destroyed SVB.
“This has been a remarkable transaction in partnership with the FDIC that should instill confidence in the banking system,” said Frank Holding Jr., chief executive officer of Raleigh, North Carolina-based First Citizens. Bloomberg News reported earlier that First Citizens was nearing a deal. First Citizens said it will assume $56 billion in deposits, and 17 legacy branches will begin operating as Silicon Valley Bank, a division of First Citizens. There will be no immediate change to customer accounts. Holding said SVB has complementary businesses, including private banking, wealth and small-business banking. The deal will also extend First Citizens’ reach into venture capital and technology businesses, he said. “We are excited about layering on the expertise that SVB brings,” he said. “We will have strong liquidity and strong capital.” Regulators had been racing to lock down a deal for all or parts of the bank in a bid to cover the uninsured deposits of its startup customers, but an earlier auction attempt passed without a buyer. Then the FDIC extended the bidding process after receiving “substantial interest” from multiple potential acquirers. To simplify the process and expand the pool of bidders, the FDIC allowed parties to submit separate offers for the Silicon Valley Private Bank subsidiary and Silicon Valley Bridge Bank NA — the firm created by the FDIC after SVB went into receivership. Valley National Bancorp also submitted a bid last week, people familiar with the matter have said. First Republic Bank led a rally across regional lenders in early New York trading on Monday as sentiment improved following a Bloomberg report that US authorities are considering more support for banks.
Impactful International News
China’s economic recovery was mixed in March with business confidence and the housing market improving but the global outlook darkening amid heightened financial market turmoil. Bloomberg’s latest aggregate index of eight early indicators showed growth momentum steadied from February, with the overall gauge remaining at 4. Falling car sales and weak global demand were the main drags on the index. China’s reopening after three years of strict pandemic rules has boosted confidence, with consumers once again filling up restaurants and subways, and businesses returning to normal. The housing market slump, which has been a major drag on the economy, is also showing signs of bottoming out as home sales and prices rebounded recently. The global environment remains uncertain, though, with central banks continuing to hike interest rates to curb inflation and a banking crisis fueling investor concern. A weakening global economy means a further slump in demand for Chinese exports, which have already plummeted in recent months. Economists are betting the recovery in consumer spending will underpin China’s growth this year, which is expected to now reach 5.3% this year, according to the latest survey by Bloomberg, up from a previous forecast of 5.2%. Growth in the second quarter is forecast to accelerate to 7.3%, which would be the fastest pace in two years, according to the survey, largely due to a lower base of comparison from last year.
British businesses expect a return to growth in the next three months for the first time since shortly after Russia’s invasion of Ukraine in a further sign of the country’s improving economic prospects. The CBI employer group said there were “signs of green shoots” as its monthly business survey found a net majority expect growth in private sector activity from April to June – the first time the reading has been positive since April 2022. “It’s encouraging that the private sector is expected to return to growth in the months ahead, chiming with a range of other data indicating some resilience in economic activity,” said Alpesh Paleja, the CBI’s lead economist. The CBI survey follows a series of other upbeat indicators. Retail sales last week beat expectations and private-sector activity, as measured by the purchasing managers’ index, showed order books growing and confidence at its highest level since the invasion of Ukraine 13 months ago. Both the Bank of England and the Office for Budget Responsibility have recently ditched forecasts for a recession this year.
On another positive note, German inflation eased significantly, thanks largely to natural gas costs tumbling following their surge after Russia invaded Ukraine just over a year ago. Consumer prices in Europe’s biggest economy rose 7.8% in March compared with 9.3% in February, the statistics office said Thursday. The result was more than the 7.5% median estimate in a Bloomberg poll of economists, but still offers some relief for the European Central Bank, whose officials have hiked rates by 350 basis points since last July to tackle the worst spike in prices of the euro era. Many policymakers, however, fret that underlying inflation — which strips out volatile items like food and energy — remains elevated. Despite Spain’s headline gauge almost halving this month to 3.1%, its core measure only edged down to 7.5%. While Germany doesn’t provide an underlying reading in its initial report, regional data suggest that core inflation accelerated to 5.7% in March from 5.4% in February, according to Bloomberg Economics.We hope all of our clients are safe and well. Our planning and client service team has been engaging in a client outreach program to check to see how all our clients are doing – so please do not be surprised when you receive an email and/or phone call from a member of our outstanding team. As always, stay tuned!
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