Kritika Jain

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Today’s UK CPI data for April revealed a sizeable drop in the headline inflation rate but the decline was not as big as forecasters had expected. And that was in part because core inflationary pressures continued to climb with services inflation now at more than 30-year highs. 

The key highlights of this report were as follows:
•	UK consumer price inflation dropped to 8.7% in April from 10.1% in March. While this drop was sizeable, it was not as large as expected. The consensus forecast, for example, was centred on a headline inflation rate of 8.3%.
•	The headline decline in inflation was the result of a big drop in energy price inflation. Electricity and gas prices specifically contributed 1.42 percentage points to the fall in annual inflation in April as last April’s rise dropped out of the annual comparison. The decline was result of the UK’s Energy Price Guarantee. The energy price cap surged a year ago as wholesale prices surged following Russia’s invasion of Ukraine. 
•	Core inflation (which excludes energy, food, alcohol and tobacco) climbed by 6.8% in the 12 months to April, up from 6.2% in March and the highest rate since March 1992. 
•	Food price inflation remained extremely high, rising by 19.2% yr/yr in March down only modestly from 19.1% in April. The CPI services index also increased by 6.9% in the year to April 2023, up from 6.6% in March, placing it at its highest level since March 1992.

In conclusion, while the big drop in headline inflation may mark a turning point in the UK inflation cycle, the news that core inflation has continued to climb will not be well received at the Bank of England. 

United Kingdom

UK Inflation Drops Below 10%, As Energy Costs Ease

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Sandy Batten

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Sales of existing homes rebounded in October, increasing 3.4% m/m (+2.9% y/y) to 3.96 million (SAAR) after having fallen in both August and September. This was the first positive annual gain since July 2021. The effective 30-year mortgage interest rate continues to rise, increasing 60 basis points during October. The Action Economics Forecast Survey expected October sales of 3.90 million units. The sales figures are based on closings of sales signed over the past couple of months.

The median price of all existing homes (NSA) edged up 0.1% m/m (4.0% y/y) in October to $407,200 from an upwardly revised $406,700 (previously $404,500) in September. This was the first monthly gain in the past four months. The median price of an existing single-family home increased 0.2% m/m (4.1% y/y) to $412,200 in October from $411,400 in September (revised up from $409,000). The median price of condos and co-ops fell 0.6% m/m (+1.6% y/y) to $360,300 in October from $362,500 in September (revised up from $361,600).

Sales of existing homes rose in October in each of the four major regions. Sales in the Northeast increased 2.2% m/m (unchanged y/y), the first monthly gain in three months, to 470,000. Sales in the Midwest jumped 6.7% m/m (1.1% y/y), the largest monthly gain since February, to 950,000. Sales in the South gained 2.9 m/m (2.3% y/y) to 1.77 million after monthly declines in both August and September. Sales in the West increased 1.3% m/m (8.5% y/y) to 770,000.

The number of existing homes for sale (NSA) rose 0.7% m/m (19.1% y/y) to 1.37 million last month, offsetting a 0.7% decline in September. The supply of homes on the market at the current selling rate (NSA) inched down to 4.2 months from 4.3 months in September. This figure has generally risen since February. The record low in supply of 1.6 months was reached in January 2022. These figures date back to January 1999.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. Mortgage interest rates can be found in the **WEEKLY** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.



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- Sales rose 3.4% m/m after declining in each of the previous two months.
- Year-ago sales increased 2.9%, the first positive annual reading since July 2021.
- Monthly sales rose in all four major regions.
- The median price increased 4.0% from a year ago.


U.S. Existing Homes Sales Rebounded in October

Tom Moeller

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Initial claims for unemployment insurance were down 6,000 to 213,000 seasonally adjusted in the week ended November 16, from 219,000 in the week ended November 9. The previous week’s level was revised up 2,000 from 217,000. The Action Economics Forecast Survey expected the latest week to be 222,000. The 4-week moving average of actual claims was 217,750 down from 221,500 in the week ended November 9.

The total number of unemployment insurance beneficiaries, also known as “continuing claims,” was 1.908 million seasonally adjusted in the week ended November 9, up 36,000 from 1.872 million in the week ended November 2, revised down marginally from 1.873 million. This is the highest level for insured unemployment since November 13, 2021 when it was 1.974 million. The 4-week moving average of continuing claims was 1.879 million in the November 9 week, up from the prior week’s 1.874 million. This is the highest level for this average since November 27, 2021 when it was 1.928 million.

Through the week ended November 9, the number of beneficiaries as a percent of covered employment was 1.3%, up from 1.2%, and the first rise since March 11, 2023.

Economic conditions vary widely across states and territories. In the week ended November 2, the highest unemployment rates were in New Jersey (2.18%), California (1.98%), Puerto Rico (1.89%), Washington (1.71%) and Alaska (1.62%). The lowest rates were in South Dakota (0.29%), Florida (0.37%), Virginia (0.40%), Alabama and Kentucky (both 0.42%), and New Hampshire (0.45%). Rates in other notable states include New York (1.51%), Illinois (1.44%), Pennsylvania (1.38%) and Texas (1.00%). These state rates are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor, 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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- Jobless claims on very slight downward trend.
- Continuing claims are rising gradually.
- The insured unemployment rate inched up to 1.3%, the first rise since March 2023.


U.S. Unemployment Insurance Claims Rose 6,000 in Latest Week

Robert Brusca

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**UK improvement is shallow** - The UK total orders position improved in November, but the reading went up to -19 from -27 in October, remaining deeply in negative territory. Looking ahead over the next three-months, finds volume improved to a +9 reading from -1 in October, while prices expected over the next three-months move sharply higher to a reading a + 11 from a reading of zero in October.  The month-to-month movements show changes in the positive direction; however, the readings show that orders are still net negative readings and the broader standings for these assessments are still low.

**Orders**- Total orders in November that moved to a - 19 reading also represent an improvement from the 12-month average of -25, export orders that were unchanged month-to-month at -27 we're also stuck at the same average value they've had over 12-months at -27. On the export front, orders reveal that nothing has changed at all.

**Stocks assessments**- Stocks of finished goods rose to a + 21 level from +17 in October and compare to a 12-month average of 13.  Rising inventories at a time when orders are not improving may be an ominous indication of what lies ahead. The outlook for volume three-months ahead improved month-to-month but the +9 reading from November compares to a +8 reading over its six-month average and a + 8 reading for its 12-months average.  November shows an improvement from October but not much of an improvement from what had been the main conditions over the last 6- and 12-months.

**Prices firm**- Meanwhile prices are showing some pressure with the reading of +11 that is stronger than the +6 that we've seen over three-months and the average of +9 over 6-months. The November reading is slightly weaker than the +13 reading over 12-months.  However, this sequence of readings seems to suggest that the disinflationary forces are abating and inflation at some level once again is going to become an issue.

**Broader standing evaluated in November**- Backing away from the diffusion levels and the survey levels per se, we can look at the queue standings for these levels to get a better assessment of where this months’ survey responses lie and a broader historic perspective than just month-to-month or over 12-months.  Total orders evaluated over data back to 1992 have a standing in their 35th percentile. Export orders occupy their 31st percentile. The stocks reading for finished goods has a very high, 93.9 percentile standing, which, as I noted above, is not good news in an environment where the outlook for sales and orders is not expanding solidly. Output volume for three months ahead has a 46-percentile standing which is below the median value that occurs at a percentile standing of 50%. And while that's slightly below median, it's not dramatically below the median, and it comes closer to putting the UK economy back into some kind of moderate equilibrium even though there's a modest shortfall form the median in November. On the price front, the percentile standing is about at its 65th percentile, which makes it mildly inflationary. Inflation forces are above their median value on data back to 1992, however, a reading in the 65th percentile is only moderately firm. The more pressing issue is that it comes in a period where the UK has been running persistently excessive rates of inflation.

**Compared to lagging IP trends**- UK industrial production data are up-to-date through September. September showed a decline in industrial production of 1%, the three-month decline in this lagged industrial production reading is at about -4% annualized; over 6-months it's -2 1/2% annualized, and over 12-months it's a little bit less than a 1% decline. These sequential readings are not reassuring because they show that industrial production has been declining at increasingly faster rates of change rather than at diminishing rates of change. Output does not seem to be righting itself, even though in the CBI survey the outlook for volume has been firming back to 12-month average levels.

**Summary and assessment**- The outlook for volume has been oscillating in a very low range for the last two-years after going through a bust and boom cycle related to COVID and its aftermath. The expected volume series now is making some upward adjustment after a minor downturn that seems to have followed a modest upswing. There's nothing in this report that suggests that there's any kind of lasting improvement in the works, although it's reassuring to see that the recent weakness is dissipating. The order book balance, however, remains in deeply negative territory and while the CBI order readings had been much weaker during the COVID period, apart from the COVID period, we are looking at a string of consistent weakness that otherwise hasn't been seen at least back to 2014. In addition, there is some resurging pressure on inflation. All this makes picture for UK industry less than positive, despite some month-to-month improvement in November.  


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UK Industry Strengthens as Outlook Improves, Right Direction/Marginal Moves

Andrew Cates

**Global equity markets**
There has been a sharp divergence between the performance of US equity markets in recent weeks compared with broader global equity markets (excluding the US). A US-led surge, visible in the S&P 500 index, reflects investor confidence in a more market-friendly domestic policy shift under a new Trump administration, including anticipated tax cuts and deregulation. In contrast, the Dow Jones global ex-US index has declined sharply, as the prospect of renewed trade tensions and unilateral US energy policies have raised concerns about the outlook for the rest of the world (see chart 1). 

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**US financial conditions**
A strong performance from the equity market over the past several months has, more generally, served to loosen financial conditions in the US economy. This can be seen in chart 2 below showing the Fed’s calculations for the impulse to US growth from aggregate financial conditions together with the contributions from the underlying components. That decomposition specifically shows that since the beginning of this year, there were some modest headwinds to future growth stemming from changes in short- and long-term interest rates as well as from an appreciating US dollar. But higher house prices and firmer equity prices have been more significant tailwinds to GDP growth, offsetting the tightening from elsewhere.

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**Asia’s trade exposure to the US**
How important is the US economy as an export destination for economies in the Asian time zone? Chart 3 below provides some context. The data suggest that Vietnam leads the pack, with nearly 30% of its exports destined for the US, and reflecting its role as a manufacturing hub for goods such as electronics, textiles, and furniture. Taiwan, Japan and South Korea follow closely, driven by their strong integration into US-supply chains, and especially in semiconductors and high-tech components. In contrast, Australia and Indonesia chalk up some of the lowest shares, due to their relatively heavy reliance on commodity exports to China. 

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**Japan’s economy**
Japan’s economic dependence on global growth fluctuations is underscored by the significant role net exports have played in driving the economy. As chart 4 below indicates, domestic demand—and particularly consumption and fixed investment—has been sluggish in recent years, leaving net trade to shoulder the burden in sustaining economic growth. That said, private consumption showed signs of improvement in the Q2 and Q3 of 2024, while net trade weighed on the overall pace of growth during the same period. However, this rebound in consumption may prove fleeting, as real wage growth has recently lost momentum. And as previously discussed, export growth and capital investment could face additional headwinds in an increasingly uncertain and protectionist global environment, posing further challenges to Japan’s fragile recovery.. 

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**Global electricity prices**
Energy policy has been a key focal point over the past few days owing to the UN Climate Change Conference (COP29) in Azerbaijan. And likely shifts in US policies toward climate change and the energy transition may generate some political and economic instability in the months ahead. To elaborate on this, chart 5 below shows current levels of electricity prices measured in US dollars per KW/h. The UK, Japan, and Germany top the list with prices exceeding $90/MWh, reflecting a combination of factors, including a high reliance on imported energy. Canada and the US, in the meantime, enjoy the lowest prices, below $40/MWh, due to the former’s abundant hydroelectric resources, and the latter’s low reliance on global energy markets. Against that backdrop, it is no coincidence that Canada and the US have seen a relatively robust growth rate over the past few months. Germany, the UK and Japan, in the meantime, have experienced a relatively weak pace of growth. To be sure there are other reasons for this growth disparity. But energy prices have been important. 

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**Germany’s energy mix**
Germany's economic challenges, particularly the role of its energy sector, warrant closer scrutiny. Chart 6 below highlights the evolution of Germany's per capita electricity generation mix, showcasing a significant shift over the past two decades away from fossil fuels toward renewable energy. However, total per capita electricity generation has declined in recent years, underscoring the difficulties from replacing conventional energy sources with renewables. Critics argue that the rapid rollout of renewable energy, without adequate investment in grid and storage infrastructure, has created inefficiencies and escalated costs. These energy challenges have likely compounded broader economic instability and potentially raise questions about the sustainability and strategic execution of Germany's energy transition.

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The potential policy implications of a new US administration have been driving financial markets over the past two weeks. Global investors have responded with a more optimistic take on the outlook for the US economy but with more pessimistic views about the rest of the world (chart 1). A potential easing of US fiscal policy (e.g. via tax cuts) has also triggered a re-evaluation of Fed policy, causing US yields and the value of the dollar to climb (chart 2). The reverberations for the rest of the world will, in part, be felt via this impact on the US dollar. But trade channels will also be significant not least for economies with large US exposures (chart 3) and/or those that have been heavily reliant on US import demand to fuel economic growth (chart 4). Energy policies have also been under the spotlight over the past few days thanks to the UN Climate Change Conference (COP29) in Azerbaijan. And potential shifts in US energy policy under a new administration could certainly intensify global tensions surrounding the energy transition. For Europe more specifically, such a shift could complicate its transition strategies and sow the seeds for further economic underperformance compared with the US in the period ahead (charts 5 and 6).

UK Inflation Drops Below 10%, As Energy Costs Ease

Kritika Jain

More Economy in Brief

U.S. Existing Homes Sales Rebounded in October

U.S. Unemployment Insurance Claims Rose 6,000 in Latest Week

UK Industry Strengthens as Outlook Improves, Right Direction/Marginal Moves

Charts of the Week: Policy conflict