Economy in Brief

EU order trends ‘improved’ slightly in January as the net diffusion reading rose from -40 to -34. Still, that improvement leaves orders below their 3-month, 6-month, or 12-month averages. The queue standard of January orders is in the lower 14th percentile of its historic queue of data. Obviously, it remains a historically weak reading. The order series is volatile as the chart shows. But it is still in a clear downtrend even with the uptick this month.

Export orders have approximately the same profile as for orders overall. But export orders weaken slightly in January compared to December. Export orders overall have a slightly weaker queue standing than total orders at a 13.4 percentile level.

The diffusion readings for stocks of finished goods weakened in January but even with its weaker January assessment, stocks have a firm-to-strong 72.5 percentile standing.

Looking ahead, the outlook for output volume over the next three months improved sharply from its stunning weak reading of -31 in December. However, the rise to -19 in January represents only a 4.8 percentile standing.

Unfortunately, average output prices for three months ahead has reading of +27 in January, up from +23 in December and +11 in November; the backtracking in prices expected, has brought the expectation level for the current reading to a high, 90-percentile standing. These rising inflation expectations are going to be a real problem for the Bank of England.

IP data lag the CBI survey responses. The manufacturing IP growth rate, year-on-year, has a 17.4 percentile standing as of its most recent observation in November 2024. That is also very weak. The CBI results are not giving a different message from the industrial production data, but they are timelier.

The ramp up in inflation expectation is not good new with CPI-H inflation at 3.5% year-over-year and with the core pace at 4.2%. Core inflation, sequentially, is looking stable around the 4.2% pace; for the headline, the pace has accelerated from 3.5% over 12 months to a pace of 5.4% over three months. These results, coupled with the rise in CBI expectations, are not good news for the U.K. or for the BOE.

New Zealand’s CPI shows an acceleration in the fourth quarter of 2024 compared to the third quarter. The year-over-year increase is at a relatively modest 2.2%; however, the New Zealand core that excludes food and household energy as well as vehicle fuels is running at 3.1% over four quarters. The inflation progression for the core takes inflation down to 2.5% over two quarters then back up to a 2.9% annual rate over one quarter. The graph shows that the decline in the year-over-year core and headline inflation rates have stopped in this most recent quarter; that raises the question about where inflation goes next.

There is nothing final about the pause that we see in the drop in inflation. It might be a pause that then continues its downward move, or it might not. However, as you can see from the chart, taking away the big inflation hump that we had during COVID and extrapolating a trend line from before COVID inflation puts inflation on an accelerating path. In fact, inflation, whether measured by the headline or the core, shows both above those previous trends even if we set aside the bulge of inflation during COVID.

However, inflation news is resplendent for its ability to give us mixed signals! The more that we look at it, the more it stares back in confusion. If we look at the CPI categories, we see inflation acceleration is not common: over four quarters it's occurring in only 8% of the categories; over two-quarters it's occurring in 25% of the categories; over one quarter it's occurring in only 42% of the categories. Comparing inflation month-to-month, the accelerations are below 50% for the fourth quarter, the third quarter, and the second quarter. Second-quarter inflation breadth was especially narrow even though the headline increase was slightly more in Q2 than it was in Q3. Such is inflation.

Assessments and expectations This ZEW survey for January shows mixed results. The economic situations in the euro area, Germany, and the United States, as currently perceived, improved month-to-month while expectations in the U.S. were essentially unchanged and economic expectations for Germany deteriorated. The U.S. had the largest increase in the assessment of the current economic situation. The U.S. diffusion reading rose by 9.1 points, the German situation improved by 2.7, points and in the euro area it improved by 1.2 points.

Inflation expectations Inflation expectations rose in all three areas with the euro area seeing expectations rise by 9.1 points, Germany is seeing an increase of 9.7 points, and the U.S. experiencing an increase of 11.9 points. Given that, economic reports have been somewhat uneven, as you can see the assessment of the current situation has nonetheless improved. Along with that, inflation expectations are beginning to rise more or less across the board. Inflation is generally already above levels that central banks are targeting.

Interest rates- short-term expectations Short-term rate expectations rose in the euro area by 12.5 diffusion points and by a whopping 32.6 diffusion points in the United States. With the election of Trump and expectations that there will be tariffs imposed, and tax cuts extended, and pro-growth policies implemented, there is a decided turn to the expectation for higher inflation and for that to create knock on effects for higher short-term interest rates. At the last policy meeting, the Federal Reserve cut its policy rate; the Federal Reserve is still looking for rate cuts sometime later in the year even though it's not looking to get back down to its inflation target this year, creating a somewhat strange perspective on Fed policy. Policy continues its inflation overshoot; yet, it continues to cut interest rates. I suspect we're on the cusp of seeing that policy change, but it has not changed yet. Here we see the ZEW experts seem to be on board for that policy undergoing some substantial changes in the months ahead.

Long-term rate expectations Long-term rate expectations declined in Germany and in the U.S. and despite the outlook for somewhat higher inflation the outlook for higher short-term interest rates may be enough to mollify expectations on longer term rates and also may be a vote of confidence that central banks will do the right thing when inflation rises by raising short-term rates enough. This survey seems to conform the expectation to contain more distant inflation pressures and allow long-term rates to hold in.

Stock markets That view would be consistent with the stock market assessments that are lower in all three areas. In the euro area, the stock market assessment falls by 5.5 diffusion points; in Germany, it falls by 12.7 diffusion points; in the U.S., it falls by 1.8 diffusion points. That means that the ZEW financial experts are looking for stock market cap performance to back off despite better current economic conditions lowered expectations for Germany but not for the U.S. and in the midst of this expectation for higher inflation and substantially higher short-term interest rates as well. It's an interesting changing view from the ZEW experts and it paints a picture of the future that seems to be increasingly likely.

Queue standings U.S. queue standings- The table also includes the queue standings for the various measures in the top part of the table. There we see only the U.S. has queue standings for some measures that are above 50% placing them above their longer-term medians (above 50% standings). Those are for the economic situation, for economic expectations and for stock market expectations. U.S. inflation expectations, however, are getting higher at 43.8%, closing in on their historic median, while short-term rate expectations are still relatively low at 13.2% and the level of long-term expectations in the U.S. is at 17.3% also relatively low.

German queue standings- Germany has an economic situation at its the 4.9 percentile standing - extremely weak. Expectations are better with the 35.6 percentile standing with inflation at the 22.7 percentile standing. The euro area short-term rate expectations (EC) are at 5.8% and the German long-term rate expectation is at 8.2%; both of those are low. The expectation for the German stock market is extremely poor with the 1.9 percentile standing.

The euro area queue standings- Compared to Germany, the euro area has a 24.9 percentile standing for the current situation. Inflation expectations are at a 20.6 percentile standing, with short-term rate expectations at a 5.8 percentile standing and stock market expectations in the eurozone around 8% still quite low.