Global inflation remains mixed as US consumer sentiment weakens

Eurozone manufacturing activity declines, China factory orders flat

KUWAIT: A recent survey by the US Conference Board revealed a shift in American sentiment towards the economy with optimism declining after a period of improvement. This decline is reflected in the survey’s index, which fell in February compared to January, coming in at 106.7 from 110.9 previously and significantly below the expected 114.8 figure. While concerns about rising food and gas prices eased slightly, worries surrounding the job market increased. This negative outlook was widespread, impacting most income groups and age demographics, except for those with very low or very high incomes and those between 35 and 54 years old. Additionally, the survey suggests a potential economic downturn in the near future, with expectations for income and business conditions dropping below a concerning level. Interestingly, inflation expectations continued to decrease, falling significantly from their peak in mid-2022.

This stands in contrast to the rising job market anxieties. It’s worth noting that another survey conducted by the University of Michigan painted a slightly different picture, showing stable consumer sentiment in February. However, concerns regarding the upcoming elections and the political climate were also mentioned by respondents in The Conference Board’s survey, suggesting these factors may be contributing to the overall economic uncertainty.

While the job market remains robust, it has cooled down compared to last year, and the approaching election season may further influence economic perceptions.

Q4 GDP revised down

Gross domestic product (GDP) in the US increased at an annual rate of 3.2 percent in the fourth quarter of 2023, lower than the previous estimate of 3.3 percent for the quarter, and marginally lower than the previous quarter growth of 4.9 percent. The slight decrease in growth is mainly attributed to a downturn in private inventory investment, a slowdown in federal government spending, as well as a decrease in residential fixed investment and consumer spending. Despite the downgrade revision for the 4th quarter GDP figure, it is considered the sixth consecutive quarterly growth for the US economy, defying fears of an economic recession as monetary policy remains tight.

PCE inflation

Monthly inflation ticked up in January, meeting analysts’ expectations and remaining above the Federal Reserve’s target. The core PCE price index, excluding food and energy (a key Fed gauge), rose 0.4 percent monthly and 2.8 percent year-over-year. This was higher than December’s figures of a 0.1 percent monthly gain. Headline PCE increased 0.3 percent on the month and 2.4 percent annually, higher than December’s monthly gain of 0.1 percent. Surprisingly, personal income jumped 1 percent, surpassing forecasts of a 0.3 percent rise, while spending dipped slightly. Services prices rose faster than goods prices, both monthly and annually. Food prices also climbed slightly, but energy prices continued their decline. While core PCE reading reached the lowest level since February 2021, it remains well above the Fed’s target, and the recent monthly gains suggest inflation remains volatile and sticky as the Fed deliberates on the best time to start cutting interest rates.

Manufacturing activity contracts

A survey by the Institute for Supply Management (ISM) showed the manufacturing Purchasing Managers’ Index (PMI) dropping to 47.8 in February, down from 49.1 in January. This marks the 16th consecutive month the index has been below 50, signifying a contraction in the sector. The survey also indicates a slowdown in new orders (49.2 from 52.5 previously) and production (48.4 from 50.4 in January). Additionally, supply chain constraints seem to affect manufacturers, as supply deliveries rose to 50.1 from 49.1 previously. Readings above 50 indicate slower deliveries. Furthermore, factory employment continued to decrease, falling to 45.9, the lowest level since July 2023. On a more positive note, inflationary pressures declined slightly, with prices paid slipping to 52.5 from 52.9 in January. The greenback ended the week at 103.86.

Eurozone manufacturing Eurozone manufacturing activity further contracted in February, with the PMI falling slightly to 46.5 from 46.6 in January. This decline continues a trend of over a year. While the overall picture remains gloomy, some bright spots emerged. Greece, Ireland, and Spain all saw significant rises in their manufacturing PMI, with Greece reaching a 24-month high, Ireland a 20-month high, and Spain entering expansion territory for the first time in 20 months. In contrast, major economies like Germany and France continued to struggle. Germany’s manufacturing PMI hit a 4-month low, while France saw a slight improvement but remained in contraction territory. This highlights the uneven nature of the eurozone’s economic recovery, with some countries performing better than others. Despite the ongoing challenges, the slowing decline in new orders suggests a potential glimmer of hope for the future. This could indicate stabilizing demand and pave the way for a gradual recovery in the eurozone’s manufacturing sector.

Eurozone CPI declines

Eurozone inflation eased slightly in February, reaching 2.6 percent year-on-year. This is down from 2.8 percent in January but still above the European Central Bank’s (ECB) target of 2 percent, and slightly higher than analysts’ estimates of 2.5 percent. The slowdown is primarily driven by easing prices in services, food, and non-energy industrial goods. Energy prices, however, slow down their decline compared to January. Despite the overall slowdown, core inflation, excluding volatile items, remains above expectations at 3.1 percent, however it is the lowest level since March 2022. Looking at individual countries, inflation dipped in France, Spain, and Germany, but not quite as much as predicted. Italy’s inflation remained unchanged. These figures come at a time when the European Central Bank (ECB) is expected to meet and set interest rates next week. While inflation is showing signs of slowing, it remains above the ECB’s target, suggesting the central bank may need to continue its efforts to bring prices under control. Markets are pricing in the deposit rate to hold steady at 4 percent. On a weekly basis EUR/USD gained slightly, last trading at 1.0837.

Japan CPI higher than anticipated

Inflation in Japan came in higher than expected, with core CPI at 2 percent versus expectations of a 1.8 percent print. Headline CPI was at 2.2 percent while it was expected to come in at 1.9 percent. Despite the higher-than-expected figures, the readings mark the slowest pace of inflation increase in 22 months. The higher than forecasted readings however will likely add fuel to speculators that are betting on a pivot to tighter policy from the Bank of Japan. The USD/ JPY currency pair is down on the week, closing at 150.11.

Australia’s inflation holds steady

Inflation in Australia remained steady in the month of January, despite market expectations of an increase from the prior month. Consumer price index grew at an annual rate of 3.4 percent, matching that of December and lower than market expectations of a 3.6 percent increase. Meanwhile core CPI, which excludes food and energy, rose 4.1 percent in January, slightly lower than December’s 4.2 percent figure. While inflation is lower than the levels seen in early 2023, it remains higher than the RBA’s target, flashing warning signs that inflation might remain sticky for a prolonged period. The Central bank currently expects CPI to fall within the target by mid-2025. The Australian dollar is down, with AUD/USD declining to 0.6523.

China manufacturing

Despite Beijing’s attempts to revitalize the economy, China’s manufacturing sector declined for the fifth straight month with the official PMI reading coming in at 49.1 from 49.2 previously. New orders remain unchanged, however new export orders fell to 46.3 from 47.2 a month earlier. Composite PMI was unchanged at 50.9 after a slight improvement in the services and construction sectors. On the other hand, the Caixin manufacturing PMI print edged up to 50.9 from 50.8 previously, although it covers significantly less businesses than the official PMI survey. Recent data coming out of China is mixed, with travel showing strong signs of recovery while housing remains weak. Chinese authorities initiated a series of measures to tackle the struggling economy, including cutting key rates, lowering the threshold for down payments for real estate, and reducing the reserve requirement ratio for banks to boost lending. These measures have yet to convince markets that they are enough to resolve the multitude of issues that the Chinese economy faces. The USD/ CNY ended the week at 7.196.

Kuwaiti Dinar USD/KWD closed last week at 0.30745.