Louise Curley

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/081209f.jpg" align="left" border="0" height="265" width="353">

The ZEW Center for European Economic Research in Mannheim,
Germany released the results of its December survey today. In spite of
an increase of 8.3 percentage points in the balance of opinion of
German investors and analystsregarding the macroeconomic outlook, they
are still about as pessimistic as they ever have been. The recent
decline in sentiment began in mid 2007 with the spreading effects of
the United States housing crisis and reached a low in July of this year
when the excess of pessimists over optimists reached 63.9%. The only
other period when pessimists exceeded optimists for a prolonged period
took place in 1992 and early 1993. At that time, the excess of
pessimists reached a peak of 62.2% in December1993 as shown in the
attached chart, which shows the history of the ZEW indicators. 


The reduction in the key interest rate of the European
Central Bank, which now stands at 2.5%, down from 5.25% in September
and the recent passage of a 32 billion euro stimulus plan by the German
government may have helped to arrest the downward trend in pessimism
regarding the outlook and to lead to the modest improvement in
sentiment.


In contrast to the improvement in sentiment regarding the
outlook, investors and analysts became more pessimistic in December
about current conditions . The excess of pessimists over optimists
regarding current condition now stands at 64.5%, up from 50.4% in
November and not far from the high negatives of 1993 and 2003, as can
be seen in the attached chart. While the fiscal and monetary measures
undertaken in recent weeks may have improved sentiment concerning the
outlook, there have been few, if any, encouraging developments in the
real economy.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">GERMANY&nbsp;&nbsp;</th>
<th scope="col">Dec 08</th>
<th scope="col">Nov&nbsp; 08&nbsp;</th>
<th scope="col">Dec&nbsp; 07&nbsp;</th>
<th scope="col">M/M&nbsp; chg&nbsp;</th>
<th scope="col">Y/Y&nbsp; chg&nbsp;</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">ZEW
INDICATOR&nbsp;&nbsp; (% BALANCE)</td>
<td>-</td>
<td>-</td>
<td>-</td>
<td>-</td>
<td>-</td>
<td>-</td>
<td>-</td>
<td>-</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Current
Situation</td>
<td>-64.5</td>
<td>-50.4</td>
<td>63.5</td>
<td>-14.1</td>
<td>-128.0</td>
<td>7.3</td>
<td>75.9</td>
<td>18.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Future
Conditions</td>
<td>-45.2</td>
<td>-53.5</td>
<td>-37.2</td>
<td>8.3</td>
<td>-8.0</td>
<td>-47.5</td>
<td>-3.0</td>
<td>22.3</td>
</tr>
</tbody>
</table>
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German Investors Slightly Less Pessimistic About The Outlook, But See Current Conditions Worsening

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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).

250116Z1.jpg

**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%.

250116Z2.jpg

**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.

250116Z3.jpg

**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.

250116Z4.jpg

**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. 


250116Z5.jpg

**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.

250116Z6.jpg

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 (charts 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.

Charts of the Week: Yielding Conclusions

Winnie Tapasanun

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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% previously).

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

250116P9.jpg

250116Q9.jpg

- 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

250116J20.jpg

250116K20.jpg

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.

250116L20.jpg

250116M20.jpg

- 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.

U.S. Import and Export Prices Rose in December

Carol Stone, CBE

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Initial claims for unemployment insurance were 217,000, seasonally adjusted, in the week ended January 11, up from 203,000 in the January 4 week; that was revised modestly from 201,000 reported before. The Action Economics Forecast Survey had expected the latest week to be 214,000. The latest four-week moving average was 213,000, down from 214,000 the prior week.

The total number of unemployment insurance beneficiaries, also known as “continued claims,” was 1.859 million in the week ended January 4, down from 1.877 million the week before; that earlier amount was revised up from 1.867 initially reported. The small change left the insured unemployment rate at 1.2%, the same amount as the week before. This is the total number of insured unemployed as a percent of covered employment. Except for three weeks at 1.3% back in November, this rate has been at 1.2% since March 11, 2023.

Unemployment rates vary widely across states. The Labor Department reports that for the week ended December 28, the insured unemployment rate was highest in Rhode Island (2.95%), New Jersey (2.90%), Minnesota (2.79%), Washington (2.53%) and Massachusetts (2.33%). The insured unemployment rates were lowest in Kentucky (0.33%), Florida (0.34%), Virginia (0.42%), Virgin Islands (0.55%), and Tennessee and Alabama (both 0.57%). Rates in other notable states include California (2.22%), Pennsylvania (2.15%), New York (2.03%) and Texas (1.19%). These state rates are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Total beneficiaries decline in prior week.
- Insured unemployment rate holds at 1.2%.
- Rates in states range from 0.33% in Kentucky to 2.95% in Rhode Island.

German Investors Slightly Less Pessimistic About The Outlook, But See Current Conditions Worsening

Louise Curley

More Economy in Brief

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

U.S. Modest Rise in Initial Claims for Unemployment Insurance in Jan. 11 Week

GERMANY	Dec 08	Nov 08	Dec 07	M/M chg	Y/Y chg	2007	2006	2005
ZEW INDICATOR (% BALANCE)	-	-	-	-	-	-	-	-
Current Situation	-64.5	-50.4	63.5	-14.1	-128.0	7.3	75.9	18.3
Future Conditions	-45.2	-53.5	-37.2	8.3	-8.0	-47.5	-3.0	22.3