For the week of May 23, 2022
The outlook for above-trend U.S. economic growth over the next year has become murkier as major geopolitical events in recent months—like the Russia-Ukraine crisis and China’s COVID-19 lockdowns—stoked already-high inflation and complicated supply chain recovery. Meanwhile, a financially healthy U.S. consumer base, tight labor markets with rising wages and pent-up demand for services have kept expenditures resilient in spite of much higher prices for essentials like gas and food.
Given the strong-demand, tight-supplies backdrop, the Federal Reserve is sounding increasingly focused on slowing growth to rein in inflation. Combined with the sharp decline in equity and bond market values in the last couple of months eroding wealth effects, this is likely to result in a steeper deceleration of growth than we previously expected. Importantly, we are not predicting recession, and a soft landing remains our base case. However, we do see a fairly abrupt downshift from the boomy economic recovery in 2021 when GDP grew 5.5%, slowing to an estimated 2.4% growth rate in the second half of 2022 and down to 1-1.5% in 2023.
April retail sales suggest U.S. consumer resilience. And we also see further evidence of the shifting spend towards services. On a year-to-date basis, total retail sales rose a strong 11.3%. Growth has noticeably moderated in durable goods categories like automotives, electronics and home furnishings, while sales growth in food services increased a very robust 25%. Sales at gas stations jumped 37% through April, reflecting the recent surge in gasoline prices, and clothing stores were up a solid 15%.
Industrial production has risen for three straight months, with manufacturing capacity utilization reaching the highest level seen since 2007 at 79%. Motor vehicles and parts production (after seasonal adjustment) rose a strong 3.9% in April after a large 8.4% jump in March. Auto manufacturing output is now roughly back to 2019 levels, after being especially hard hit by supply chain constraints over the last couple of years.
It’s not surprising that some aspects of the housing market are cooling, given the sharp rise in mortgage rates over the last six months. The 30-year fixed rate mortgage has increased to 5.4% recently from 3.2% in mid-December. This is a big move in a short period of time and a headwind to affordability. The pace of single-family housing starts and existing home sales has softened lately, though it remains elevated given historically low levels of available inventory. Multifamily activity in recent months has been relatively strong.
This week includes releases on Manufacturing and Services PMI, durable goods orders, personal income, and personal spending.
Source: U.S. Census Bureau, Federal Reserve.
|Retail sales month over month
|Housing starts – single-family
Last week marked the seventh consecutive weekly decline for equities. The S&P 500 briefly touched bear market levels—a 20% decline from the January high—late last week before a modest rally to close Friday down 19%. Consumer sector stocks, both discretionary and staples, underperformed last week. The S&P 500 is roughly 15% higher than before the pandemic in February 2020 and up 75% from the March 2020 pandemic lows. The Nasdaq underperformed last week and is down 29% from its November peak.
In commodities, energy and agricultural prices are at historically elevated levels and near the high end of the last six weeks’ range. Industrial metals prices have eased 10-20% from March, likely reflecting softer economic conditions in China due to COVID-19 lockdown measures.
Corporate bond yields are near multi-year highs for both high-grade and high-yield, largely reflecting the higher move in Treasury rates, but also wider spreads. High-grade spreads are near the midpoint of the recession to non-recession range, while high-yield spreads in the low 500 area are in line with long-term averages and only 25% above non-recessionary levels.
Source: Bloomberg. Closing prices on May 20, 2022.
|Natural Gas ($/mmBtu)
|U.S. IG Yield
|U.S. HY YTW
|USD Spot Index
The 10-year Treasury rallied last week as investors sought safe havens amid volatile markets, and the yield curve slightly flattened. Thirty-year fixed rate mortgages held near 5.4%, up from 3.2% just six months ago.
Source: Bloomberg. Closing prices on May 20, 2022.
|1M CME SOFR
|2yr U.S. Treasury
|10yr U.S. Treasury
|30-yr fixed rate mortgage
Issuance / M&A volumes
The ongoing volatility in public equity markets has kept IPOs this year on hold. Private capital markets remain open, with $121 billion in equity private placements year to date. Valuations have adjusted lower in this market, and there has been an increase in structured transactions.
High-yield bond and leveraged-loan markets are open at wider concessions, but issuance has been very light in the last few months. HY bond issuance of $2.2 billion thus far in May would mark the lightest May in more than 12 years. Year-to-date HY bond issuance is 76% below this point last year, and leveraged loans are down 59%.
M&A volumes are roughly 36% below last year’s record level but in line with the past five years’ average. Technology continues to be the most active sector for M&A at about 40% of volumes.
Source: Bloomberg. Note: All issuance and M&A figures for North America. As of May 20, 2022.
|Volumes ($ billions)
||2021/2020 % Change
Chart of the week
Equity markets pricing in much more recession risk than economic data
% probability of near-term recession
Source: Bloomberg, J.P. Morgan.