Louise Curley

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<p><a href="/comment/100621b_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100621b.png"></a> <a href="/comment/100621c_big.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100621c.png"></a></p>
<p>The
Central Bank of China announced an end to its peg of the yuan to the
dollar last Saturday.&nbsp; The announcement comes one week before
the G20 meeting in Toronto where pressure was expected to be put on
China to revalue its currency.&nbsp; How much and how soon is the
yuan likely to appreciate?&nbsp; And to what extent is the yuan
undervalued?&nbsp;</p>
<p> To answer the first question, the Bank of China's
subsequent comments that a substantial appreciation of the yuan was not
in China's interest and that the exchange rate would remain basically
stable suggest that any appreciation of the yuan will be slow and
gradual.&nbsp;&nbsp; In addition, past experience supports this
view.</p>
<p> The last time the yuan was unpegged was the period
from July 2005 to July 2008.&nbsp; During that period the yuan
appreciated 21% from 8.3 yuan to the dollar to 6.8 yuan to the dollar
or about 0.6 yuan a month.&nbsp; The trade weighted exchange rate
which allows for changes in trade patterns is more volatile than the
spot exchange rate as can be seen in the first chart.&nbsp; While
it also appreciated in the July 2005 to July 2008 period, it
depreciated following the world financial crisis but has appreciated
again since early 2010.&nbsp; Data on China's spot exchange rate
and it trade weighted exchange rate are available in several of the
Haver data bases: Daily data are in INTDAILY, weekly data in INTWKLY
and monthly in CHINA, EMERGEPR,
and EMERGE.</p>
<p> To answer the second question a rough estimate can
be made comparing the spot rate with a purchasing power parity exchange
rate.&nbsp; Haver's WDI (World Development Indicators) data base
provides conversion factors to adjust spot exchange rates to purchasing
power parity rates.&nbsp;&nbsp; The data are annual and are
only through 2008.&nbsp; However, they suggest that the
undervaluation of the yuan narrowed in the 2005-2008 period, but is
still significant.&nbsp; In 2005 the difference between the PPP
exchange rate and the spot rate was 4.8 yuan.&nbsp; By 2008, the
difference was 3.1 yuan.&nbsp; The second chart show the spot rate
and PPP rate.</p>

<table  width="100%" cellspacing="0">
<colgroup><col><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col">&nbsp;</th>
<th scope="col"><b>Jun 21</b></th>
<th scope="col"><b>Jun 14</b>
</th><th scope="col"><b>May 28</b></th>
<th scope="col"><b>2009</b></th>
<th scope="col"><b>2008</b></th>
<th scope="col"><b>2007</b></th>
<th scope="col"><b>2006</b></th>
<th scope="col"><b>2005</b></th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Spot
Rate (Yuan/Dollar)</td>
<td>6.8282</td>
<td>6.8280</td>
<td>6.8279</td>
<td>6.83042</td>
<td>6.94865</td>
<td>7.60753</td>
<td>7.98344</td>
<td>8.18432</td>
</tr>
<tr class="odd">
<td class="firstcol">PPP
Rate (Yuan/Dollar)</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>3.44161</td>
<td>3.42858</td>
<td>3.65161</td>
<td>3.44161</td>
</tr>
<tr>
<td class="firstcol">JPMorgan
Narrow Nominal Ex Rate
(2000=100)</td>
<td>108.7</td>
<td>109.2</td>
<td>110.3</td>
<td>108.4</td>
<td>105.0</td>
<td>99.4</td>
<td>96.9</td>
<td>94.0</td>
</tr>
</tbody>
</table>

</html>

The Central Bank of China announced an end to its peg of the yuan to the dollar last Saturday. The announcement comes one week before the G20 meeting in Toronto where pressure was expected to be put on China to revalue its currency. [...]

China Unpegs The Yuan

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Winnie Tapasanun

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Total housing starts jumped 15.8% m/m to a higher-than-expected 1.499 million units at a seasonally adjusted annual rate (SAAR) in December after declines of 3.7% to 1.294 million in November (-1.8% m/m, 1.289 million initially) and 0.8% to 1.344 million in October (-3.2% m/m, 1.312 million previously), data from the U.S. Census Bureau showed. The Action Economics Forecast Survey had expected 1.320 million starts for December. The December reading was the first m/m rise since August and the highest level since February 2024. The year-on-year rate was at -4.4% in December, the smallest y/y decline since September and less severe than -14.3% in November; it was +17.0% y/y in December 2023. Starts were 18.0% below a recent peak of 1.828 million in April 2022. During all of 2024, housing starts fell 4.0% after falling 8.4% in 2023 and 3.3% in 2022.

Single-family starts rose 3.3% (-2.6% y/y) to 1.050 million in December on top of a 7.7% rise to 1.016 million in November (1.011 million initially), registering the fourth m/m rise in five months and the highest level since February 2024. They reached a high of 1.222 million in November 2021 and a high of 1.286 in December 2020. Multi-family starts surged 61.5% (-8.4% y/y) to 449,000, the highest level since December 2023, reversing a 30.7% November decrease to 278,000. They reached a high of 624,000 units in November 2022 and a high of 627,000 units in April 2022.

Housing starts gained in all the major regions except in the West. Starts in the Northeast jumped 40.2% (22.7% y/y) to a three-month-high 157,000 in December, the third m/m increase in four months, after a 2.8% rebound in November. Starts in the Midwest recovered 20.0% (1.0% y/y) to 204,000, up for the second month in three, following a 32.5% November slump. Starts in the South advanced 17.7% (0.1% y/y) to 853,000, the highest level since February 2024, following a 10.2% November rise and two consecutive m/m declines. To the downside, starts in the West fell 0.7% (-26.2% y/y) to 285,000 on top of an 11.7% decrease, registering the third m/m fall in four months and the lowest level since July 2024. Notably, the South continued to post the largest level figure (853,000) for housing starts among the four regions. It showed a peak of 1.048 million in April 2022.

Building permits slid 0.7% (-3.1% y/y) to 1.483 million in December, the third m/m slide in four months, following a 5.2% rise to 1.493 million in November (compared to 1.493 million recently revised on December 23 and 1.505 million initially reported on December 18). They reached a high of 1.915 million in January 2022 and a high of 1.883 million in January 2021. Single-family permits rose 1.6% (-2.5% y/y) to 992,000, the third straight m/m rise and the highest level since February 2024, after a 0.5% increase to 976,000. They reached a high of 1.251 million in January 2022 and a high of 1.250 in January 2021. Multi-family permits fell 5.0% (-4.3% y/y) to 491,000, down for the third month in four, after having recovered 15.4% to 517,000. They reached a peak of 813,000 units in February 2023 and a high of 799,000 units in June 2022.

The housing starts and permits figures can be found in Haver's **USECON** database. The expectations figure is contained in the **AS1REPNA** database.

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- Housing starts +15.8% (-4.4% y/y) to 1.499 mil. in Dec. vs. -3.7% (-14.3% y/y) to 1.294 mil. in Nov.
- Single-family starts highest since Feb. ’24; multi-family starts highest since Dec. ’23.
- Housing starts up m/m and y/y in the Northeast, Midwest and South but down in the West.
- Building permits fall for the third month in four, due to a drop in multi-family permits.

U.S. Housing Starts Rebound in December; Highest Level Since February 2024

Andrew Cates

**Global bond markets**
The sell-off in bond markets has been a global phenomenon. This is illustrated in chart 1 showing the movement in 10-year government bond yields in the US, UK and Germany over the past 12 months. Still, as the chart’s scaling indicates, divergences in yield levels between the US and UK versus Germany suggest different dynamics have been at play. The US and UK, for example, have been leading the sell-off compared with Germany (and other eurozone members).

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**Global inflation expectations**
That suggests that inflation expectations coupled with inflation uncertainty have been a driver of higher yields. Chart 2 below shows the evolution of consensus forecasts for CPI inflation in 2025 across the US, UK, the euro area (and Japan) throughout 2024. Notably, expectations for inflation in the US and UK inflation rose steadily over the year. In contrast, euro area inflation forecasts remained relatively stable, hovering close to the ECB’s target of around 2%. We will focus more on this again below but for the record Japan’s inflation forecasts saw a gradual uptick, at the same time, but remained modest, increasing from 1.5% to just above 2%.

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**Overseas demand**
The role of overseas demand for US government debt in driving US yields higher could also have been significant. Chart 3 below shows the evolution of foreign holdings of US Treasury securities from 2013 to 2024, segmented by key regions: Japan, China, Europe, and the rest of the world. Over the period, total foreign holdings steadily increased, surpassing $9 trillion by 2024. Notably, Japan has now emerged as the largest single holder of US Treasuries, with its share growing significantly, while China’s holdings, though substantial, have showed some decline in recent years. But a new US administration led by President-elect Trump could now be further disrupting this picture. A potential pivot toward more protectionist policies alongside some question marks about the independence of the Fed and the dollar’s role as the world’s reserve currency could be combining to undermine overseas demand for safe-haven assets in the United States.

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**Japan**
Japan is worthy of some further separate comment in this regard. That’s because its capital flows are highly significant for global financial markets due to Japan's status as one of the world’s largest net creditor nations. Changes in Japanese capital flows—such as a shift back to domestic assets driven by rising yields or inflation expectations—usually create ripple effects, influencing global bond yields, currency markets (particularly the yen), and risk sentiment. This is why, notwithstanding relatively stable consensus inflation forecasts for 2025 that we noted above, the sharp rise in longer-term market-based inflation forecasts is noteworthy. Chart 5 below illustrates Haver’s calculations for the 5-year breakeven inflation rate in Japan from 2019 to 2024, and shows a sustained increase in those expectations in recent years. That follows several years of subdued expectations driven by entrenched deflationary pressures and weak demand. That the 5-year breakeven inflation rate crossed 2% toward the end of last year is also noteworthy given the Bank of Japan’s inflation objectives. For it potentially signals that monetary policy is still loose and that a further campaign to normalise policy beckons in the months ahead.

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**Quantitative tightening** 
Central bank monetary policies more generally are also worthy of some discussion and particularly their balance sheet policies. Chart 5 below depicts the relationship between central banks' asset holdings as a percentage of GDP (a four-quarter change of an unweighted average for the US, Japan, and the euro area) and the real 10-Year bond yield in the US. The chart underscores the close connection between central bank asset purchases and real yields. In combination with looser US fiscal policy – and a higher degree of government bond issuance – the underlying supply and demand dynamics in the US Treasury market (and other government debt markets) have been shifting. Reduced demand from central banks, in other words, has coincided with additional supply from governments, and thereby amplifying upward pressure on real yields. 


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**US and UK inflation**
The key takeaway from this discussion is that a confluence of factors has driven global yields higher in recent weeks. Inflation and monetary policy concerns, fiscal policy uncertainty, and shifts in capital flows have all likely contributed. As highlighted earlier, the trajectory of yields from here will hinge on incoming economic data and how policymakers respond. On that first point, however, it was notable that this week brought some encouraging news: the latest CPI inflation reports from both the US and UK came in weaker than expected. Notably, the details were also reassuring, with service-sector inflation showing further signs of moderation in both economies (see chart 6 below). This could ease some of the pressure on central banks to keep monetary policy restrictive in the period immediately ahead.

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A steep sell-off in global bond markets has dominated financial headlines over the past week or so, drawing intense scrutiny from investors and policymakers alike (chart 1). The implications of this for the global economy, however, will depend on the underlying drivers that have been fuelling the rout. With our charts this week, we examine the data to identify some of the likely culprits. Inflation concerns are front and centre, with rising consumer prices in recent months (chart 2) reigniting fears of tighter monetary policy. Waning overseas demand, particularly from Japan and China (charts 3 and 4), may also be playing a significant role. Meanwhile, quantitative tightening (chart 5) has possibly siphoned liquidity from financial markets, while fiscal policy uncertainties are further rattling investor confidence. The easy conclusion is that all these factors—ranging from inflationary pressures to fiscal risks—are complicit to varying degrees. However, whether this marks the beginning of a broader reckoning or merely a passing squall hinges on how incoming data now evolve and how policymakers respond to these challenges. On that first point, weaker-than-expected inflation data from the US and UK this week appear to have stopped the rot for now (chart 6). On the latter, a new US administration could add another layer of unpredictability and the coming weeks could prove pivotal in shaping market expectations and the trajectory of the global economy.

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Charts of the Week: Yielding Conclusions

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Total retail sales increased a less-than-expected 0.4% m/m in December after an upwardly revised rises of 0.8% in November (+0.7% initially) and 0.6% in October (+0.5% previously), data from the U.S. Census Bureau showed. The December m/m reading was the fourth consecutive m/m gain and the fifth in six months. A 0.6% m/m December increase had been expected in the Action Economics Forecast Survey. The year-on-year rate decelerated to 3.9% in December from 4.1% in November. The latest y/y figure, below 5.2% in December 2023, was also lower than a high of 17.1% in February 2022 and significantly below a peak of 52.5% in April 2021. During all of 2024, retail sales rose 2.6% after gaining 3.6% in 2023 and 9.1% in 2022.

Excluding motor vehicles & parts, retail sales rose 0.4% (2.9% y/y) in December after an unrevised 0.2% increase in November, registering the fourth successive m/m rise and the sixth in seven months. A 0.5% m/m December increase had been expected. Sales of motor vehicles & parts grew 0.7% (8.4% y/y), the fourth straight m/m gain, on top of a 3.1% November increase; this compared to a 3.1% rise (7.2% y/y) in unit light vehicle sales following a 3.0% November increase.

Sales in the retail control group, which excludes autos, building materials, gasoline stations, and food services, rose 0.7% (4.1% y/y) in December, up for the third month in four, following a 0.4% rise in November. These sales are used in the construction of personal consumption expenditures in NIPA accounts. Nonauto sales excluding gasoline & building materials grew 0.5% (3.8% y/y), the fourth consecutive m/m gain, after a 0.3% November increase.

Sales by category were mostly positive in December. Miscellaneous store sales jumped 4.3% (3.7% y/y) in December, the first m/m gain since September, reversing a 3.9% drop in November. Sporting goods, hobby shop, book & music store sales rose 2.6% (1.8% y/y), the first m/m rise in three months, following a 0.3% November decline. Furniture & home furnishing store sales advanced 2.3% (8.4% y/y), the eighth m/m gain in nine months, on top of a 1.3% November increase. Clothing & accessory store sales rebounded 1.5% (2.4% y/y), the third m/m gain in four months, following a 0.8% November drop. Gasoline station sales rose 1.5% (-1.2% y/y) in December after rising 0.2% in the prior two months. Electronics & appliance store sales rose 0.4% (5.8% y/y), the third straight m/m rise, after a 0.9% November increase. General merchandise store sales rose 0.3% (2.6% y/y), up for the third month in four, after holding steady in November; within this grouping, department store sales edged up 0.1% (-1.8% y/y) after falling 0.4% in November and October. Nonstore retail sales grew 0.2% (6.0% y/y), the third m/m increase in four months, after a 1.7% November gain.

To the downside, building materials & garden equipment store sales slid 2.0% (-1.8% y/y), the third consecutive m/m slide, on top of a 0.8% November decrease.

In the nondiscretionary sales categories, health & personal care store sales fell 0.2% (+3.4% y/y) in December, down for the second month in three, following a 0.3% increase in November. Food & beverage store sales, however, rose 0.8% (3.1% y/y), the third m/m rise in four months, reversing a 0.2% November decline.

Consumers seemed to eat out less frequently in December amid still-high inflation (December CPI +0.4% m/m, +2.9% y/y; core CPI +0.2% m/m, +3.2% y/y). Restaurant & drinking place sales fell 0.3% (+2.4% y/y) in December, the first m/m fall since March 2024, following an upwardly revised 0.1% uptick in November (-0.4% initially).

Retail sales data can be found in Haver’s **USECON** database. The expectations figures are from the Action Economic Forecast Survey in **AS1REPNA**.

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- December total retail sales +0.4% (+3.9% y/y), w/ m/m rises in most categories.
- Ex-auto sales +0.4% (+2.9% y/y); auto sales +0.7% (+8.4% y/y).
- Rebounds in miscellaneous store sales (+4.3%) and sporting goods store sales (+2.6%).
- Drops in building materials & garden equipt. store sales (-2.0%) and restaurant & drinking place sales (-0.3%).

U.S. Retail Sales Rise for the Fourth Straight Month in December

Sandy Batten

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U.S. import prices edged up 0.1% m/m (2.2% y/y) in December, the same monthly increase as in October and November. The Action Economics Forecast Survey had expected a 0.3% m/m decline in December. Export prices increased 0.3% m/m (1.8% y/y) after having been unchanged in November. Expectations were for a 0.1% monthly gain.

Import prices excluding fuels rose 0.1% m/m (2.4% y/y) in December following an upwardly revised 0.1% m/m increase in November (previously unchanged). Import prices for fuels and lubricants jumped 1.4% m/m (unchanged y/y) in December, the largest monthly increase since last April, after a 0.6% monthly gain in November. Prices of imported foods, feeds and beverages soared 2.8% m/m (9.2% y/y) in December on top of a 1.4% monthly increase in November. Prices of imported consumer foods excluding autos were unchanged m/m in December while prices of imported capital goods and imported autos each fell 0.2% m/m.

The rise in export prices in December was relatively widespread across the major end-use categories. Higher prices for nonagricultural and agricultural exports each contributed to the December increase. Prices of U.S. exports rose 1.8% from December 2023 to December 2024, the largest y/y advance for the index since a 2.0% increase in January 2023. Prices of agricultural exports were up 0.5% m/m (-1.2% y/y) while prices of nonagricultural exports rose 0.3% m/m (2.2% y/y). Higher prices for nonagricultural industrial supplies and materials and automotive vehicles more than offset lower capital goods prices. Prices of nonagricultural industrial supplies and materials increased 0.8% m/m (2.9% y/y), driven by higher fuel prices; prices of exported autos and parts increased 0.2% m/m (2.7% y/y); prices of exported capital goods edged down 0.1% m/m (2.0% y/y).

Each of these monthly trade price numbers are not seasonally adjusted. The import and export price series can be found in Haver’s **USECON** database. Detailed figures are available in the **USINT** database. The expectations figure from the Action Economics Forecast Survey is in the **AS1REPNA** database.

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- Import prices advanced 0.1% m/m, the same monthly gain as in October and November.
- Both imported fuel and nonfuel prices rose in December.
- Export prices increased a larger-than-expected 0.3% in December. Gains were widespread across end-use categories.

China Unpegs The Yuan

Summary

Louise Curley

More Economy in Brief

U.S. Housing Starts Rebound in December; Highest Level Since February 2024

Charts of the Week: Yielding Conclusions

U.S. Retail Sales Rise for the Fourth Straight Month in December

U.S. Import and Export Prices Rose in December

	Jun 21	Jun 14	May 28	2009	2008	2007	2006	2005
Spot Rate (Yuan/Dollar)	6.8282	6.8280	6.8279	6.83042	6.94865	7.60753	7.98344	8.18432
PPP Rate (Yuan/Dollar)	--	--	--	--	3.44161	3.42858	3.65161	3.44161
JPMorgan Narrow Nominal Ex Rate (2000=100)	108.7	109.2	110.3	108.4	105.0	99.4	96.9	94.0