While inflation data and messaging suggest a resilient United States (US) economy and a buoyant consumer, a deeper dive into the numbers paints a slightly different picture. However, US consumer spending is nowhere close to collapsing.
Key themes for the week:
- It’s not all doom and gloom for US consumers
- Record-low eurozone unemployment
- HP earnings impress while Salesforce disappoints
- Rand prices in the election
If you had listened to Ryan McInerney, Visa Inc’s CEO, over recent quarters, you would notice that his tone around US consumer health is more upbeat than the general news flow would have you believe. McInerney has typically reinforced the messaging that consumer spending, while slowing, remains surprisingly resilient. However, a cursory read of commentary around the cost of living in the US suggests that households are under significant pressure following a period of prolonged inflation and ongoing high interest rates.
Several observations over recent quarters resonate with negative sentiment, including:
- Walmart’s increased traffic from higher-income households
- Starbucks reported negative same-store sales growth in the US
- Drinks companies, such as Diageo, experiencing overstocking in the US
- Amazon citing an increase in demand for essential goods over merchandise
These anecdotes highlight the downshift in economic growth that the US has experienced following the booming COVID-19 years. With this slowdown at play, consumer trends are starting to normalise.
Consumer credit, as a percentage of disposable income, sat at 24.5% in the fourth quarter of 2023 after reaching a low of 21% in the first quarter of 2021. While a normalisation has taken place, current debt is below pre-COVID levels, suggesting that households are in a good position to service this debt.
Foreclosure rates, which also fell in 2021, have not risen to pre-COVID levels as most households refinanced their debt at lower rates during the pandemic. This is a crucial point. Homeowners who locked in lower interest rates during 2020 and 2021 have been unaffected by higher mortgage rates as a result of Federal Reserve (Fed) rate hikes.
So, while negative sentiments are justified, the path towards slower economic growth has generally left households intact. One factor that likely contributes to the friction around cost-of-living discussions is the fall in savings. The Fed Bank of San Francisco estimates that pandemic-era excess savings in the US peaked at $2.1 trillion in August 2021 and were depleted by March 2024, which bodes badly for consumer confidence. The spending of excess funds between 2020 and 2023 supported discretionary goods and services sectors and, in turn, Visa’s prevailing view of stable consumption.
However, the ratio between outstanding credit card debt and credit limits is low, implying that households have headroom to borrow. Also, from an income perspective, the US unemployment level of 3.9% provides a firm backdrop for resilient household spending going forward. As such, it is prudent to assume that US spending trends will continue to gear down. However, a collapse in consumer demand does not seem likely at this point.
DATA IN A NUTSHELL
Annualised US gross domestic product (GDP) growth in the first quarter was revised down to 1.3% from an initial estimate of 1.6%, reflecting slower economic activity. The revision aligns with analysts’ expectations but is a significant drop from the 3.4% growth in the fourth quarter of 2023. Personal consumption rose at a slower 2% annual rate, down from the previous 2.5% and below the forecasted 2.2%. This suggests that high interest rates and lingering inflation are impacting household budgets. Core personal consumption expenditure (PCE) price growth was weaker than expected at 3.6%, below the forecasted 3.7%. Core PCE is the Fed’s preferred inflation benchmark.
The eurozone’s unemployment rate fell to a record low of 6.4% in April, down from 6.5% in March. This unexpected drop, reported by Eurostat, signals a stronger job market than anticipated. The decline, with around 100,000 fewer unemployed workers, challenges the European Central Bank’s (ECB’s) projections, which had forecasted an increase in unemployment this year.
The South African Reserve Bank (SARB) kept the repurchase rate unchanged at 8.25%, citing slower consumer inflation, which eased to 5.2%, which is better than expected. SARB is targeting 4.5% inflation by mid-2025, signalling confidence that disinflationary trends will persist. Despite economic activity indicators remaining volatile and the impact of reduced load-shedding, the SARB still forecasts GDP growth of 1.2% this year.
Equities
Over the week, multinational information technology company, HP Inc. surged 19.27% on strong quarterly results and good guidance as the market looks for sure signs of an upcycle in personal-computer (PC) demand. HP expects artificial intelligence PCs (computers with artificial intelligence chips) to represent 40% to 60% of its sales for the three years following the recent launch. Best Buy Co, a multinational electronics retailer, saw its share price climb 13.13% following upbeat earnings and positive consumer demand, while independent oil exploration and production company, Marathon Oil Corporation rose 10.52% on acquisition news by ConocoPhillips.
Conversely, cloud-based software vendor Salesforce experienced its worst trading day since July 2004, when its shares plummeted 20% on Thursday, owing to weaker-than-expected earnings guidance. Other underperformers were branded food company, Hormel Foods, and aviation firm, American Airlines, which declined 17.5% amid rising operational costs. The S&P 500 Index lost 1.53% over the week.
The JSE Top40 Index came under significant pressure on Thursday, losing 1.77% in value to settle at 35,783 points. Most of the pain was felt among companies that generate their income in South Africa, like banks and retailers, while rand hedges like luxury goods group, Richemont, tobacco giant, British American Tobacco, and global packaging and paper company, Mondi, supported the index. During the week, mining company, BHP, decided to abandon its offer for fellow miner, Anglo American, ending a potential major mining deal, due to disagreements over the deal structure.
Commodities
Copper prices fell to $465.80/ton on Thursday, extending a decline fuelled by profit-taking after recent gains. The price drop, from a high of $489.05/ton during the week, reflects market adjustments amid tighter mine supply and mixed investor sentiment on global economic prospects.
Brent crude oil prices declined to $82.63/barrel on Thursday, continuing a week of volatility marked by a high of $84.96/barrel and a low of $80.72/barrel. Concerns over prolonged high US interest rates and reduced demand for energy resources pressured the market, despite recent inventory declines in the US. The potential impact of upcoming Organization of the Petroleum Exporting Countries (OPEC) meetings adds to market uncertainty.
Gold rebounded to $2,350/ounce as the US dollar weakened following a downward revision in US GDP data and a miss on US Core PCE inflation. During the week, Minneapolis Fed President, Neel Kashkari, intimated that rate hikes were still on the table for Fed officials, a scenario that could disrupt gold’s year-to-date upswing.
Currencies
The US Dollar Index (DXY) moved above the 105 level twice over the last week and is currently close to last Friday’s close of 104.7. At its current levels, the DXY is 12% below its 2024 peak, which it achieved in mid-April.
The euro had a volatile week, falling to new monthly lows after a failed attempt to reach monthly highs of $1.089/€. Aside from US monetary policy decisions, the backdrop to the euro includes anticipated ECB interest rate cuts and a resumption of disinflationary trends in the services sector.
Rand volatility was expected going into South Africa’s election week. On Thursday, a day after the election, the rand fell as far as R18.7507/$, after opening at R18.397/$, and remained under pressure throughout the trading day. At the time of writing, only a third of the vote count has been completed.
Key Indicators:
USD/ZAR: 18.83
EUR/ZAR: 20.41
GBP/ZAR: 23.95
GOLD: $2,342.96
BRENT CRUDE: $82.00
Sources: Bloomberg, Reuters, Trading Economics, Seeking Alpha, CNBC and Federal Reserve Bank of San Francisco.
Written by: Citadel Equity Analyst, Thambo Mthwalo.