Economy in Brief

Portugal's headline inflation rate in October shows the HICP falling by 0.3%. Portugal's National CPI index drops by 0.1% and the National core inflation rate drops by 0.1% as well. These breaks for inflation in October across all the measures reflect reversals from what had been strong gains in September. In September, the HICP measure rose 0.8% month-to-month, the National CPI headline rose by 0.5%, and the National core rate rose by 0.6% month-to-month. Monthly inflation is volatile; good news comes, and good news goes. This month, the good news has come; however, placed in context, the good news doesn't really seem to have been quite good enough.

Portugal’s sequential inflation: Sequential inflation in Portugal shows that the HICP inflation rate is up 2.6% year-over-year; it's up at a 2.5% annual rate over six months and at a 2.5% annual rate over three months. All of these growth rates are above the 2% pace targeted for the euro area as a whole by the European Central Bank. Of course, not every country has to meet that target. The ECB target is for the economic-weighted HICP, which gives each country a weight in accordance with its economic contribution to the euro area.

Portugal’s nation inflation barometer- We look at the National index because it allows us to get an earlier view of the core inflation rate which is not available on an earlier basis in the HICP format. The National data on the CPI in Portugal show 12-month inflation at 2.3%, six-month inflation dipping under that magical 2% level at 1.8% at an annual rate, then moving back up to 2.2% at an annual rate over three months. Meanwhile the National core inflation rate is 2.6% year-over-year; it runs at a 2.5% annual rate over six months and accelerates to a 3.1% annual rate over three months.

The chart’s trends- The chart in this report shows these trends very clearly. It is only a chart of year-over-year inflation, but it includes both the HICP headline and the National core index. It shows that inflation progress had been in train; it since has given way to moving sideways or higher. It's the domestic core index that seems to be trending slightly higher - and that's not good news.

Inflation diffusion (breadth): At the bottom of the table, we look at the various categories in the national CPI index to chronicle whether inflation is accelerating or decelerating. In October we see there are more decelerating pressures with only 41.7% of the categories showing inflation acceleration. September showed 50% of the categories showing acceleration- a balanced result. In August, two-thirds of the categories were showing acceleration- clear pressure. These differences are not so surprising because monthly data do tend to move around quite a lot.

Sequential trends in Portugal- Sequentially, we see the good news in the 12-month index where only 33.3% of the items show acceleration compared to their 12-month ago inflation rate. It's over this long-term comparison that inflation progress is clearest. However, looking at six-month inflation compared to 12-month inflation, deceleration is only at 50% marking overall inflation pressures as balanced with disinflation factors. Over three months, the acceleration factor ramps up to 58.3% showing that there's more acceleration in progress than there is deceleration on the nearest horizon.

ZEW current economic conditions deteriorate in Europe and improve in the United States in November. Expectations drop for Germany but rise in the U.S.

Remarkable shifts- The U.S. shows two remarkable shifts as U.S. inflation expectations moved from -36.7 in October to +2.7 in November, the second sharpest change in the history of the U.S. series exceeded only by the shift that occurred post-covid in March 2022. U.S. macroeconomic expectations also shifted sharply to +13.3 in November from -8.2 in October. That shift is the 14th largest in the history of that series. Both of these series have a history of nearly 33 years.

Survey BEFORE the U.S. elections finds firmness- The strength of the U.S. shift is impressive; it comes for a survey conducted BEFORE the U.S. presidential elections but after the Fed began its easing campaign. U.S. inflation expectations are still low at the November reading, which has a 23-percentile ranking. But now macroeconomic expectations have risen above their median (above a ranking of 50%) for a standing in their 61.4 percentile. U.S. current conditions have improved slightly in the month as well, rising to a net positive reading of 27.2 with a month-to-month rise of about 3 points to a standing at its 45.2 percentile, a bit short of its historic median at a diffusion value of 29.3.

Normalcy ahead for U.S./not so for Europe- The U.S. survey is climbing back into the normal zone whereas Europe and Germany are weak and getting weaker. In the case of Germany, the economic situation erodes to -91.4 in November from -86.9 in October, falling to a 4.1 percentile standing. That bad combination represents a significant month-to-month drop to an extremely weak level. The U.S. and Europe are in very different circumstances and apparently in different phases of their business cycles as well. Despite the ECB cutting rates, Germany is sinking, and Europe’s politics also are frayed. German expectations are still deteriorating in November and demonstrate half the ranking for U.S. expectations. Inflation expectations in Germany and in the euro area improved somewhat in November.

In this week’s letter, we explore the potential impacts of President-elect Trump’s recent electoral victory on Asia. One key implication is that Trump’s policies could limit the room for policy easing by Asian central banks, particularly if his policies prove inflationary and prompt the US Fed to enact a tighter-for-longer monetary policy. As a result, market expectations for yield differentials between the US and other Asian economies may turn less favourable for the latter, potentially putting downward pressure on Asian currencies.

Beyond this, the most significant effect of Trump’s win could be on trade. Proposed tariffs of up to 60% on US imports from China and up to 20% on imports from other countries create a substantial risk of trade disruption. These measures could provoke retaliatory actions from affected economies or, alternatively, lead to the US negotiating bilateral agreements to reduce the impact, as we saw during Trump’s first term.

Additionally, Trump’s trade policies might prompt a fundamental shift in business strategies, both in the US and abroad. Companies could reconsider their global supply chains, potentially accelerating reshoring or onshoring efforts, while investments in overseas operations could be discouraged. Finally, while Trump’s “drill, baby, drill” stance may be initially expected to lower energy prices, the overall impact on global oil prices may not be so straightforward. This is due to the role of other major producers, such as OPEC+, as well as the potential for renewed geopolitical tensions and changes in global demand dynamics.

Monetary policy The impact of the recent US election – resulting in President-elect Trump’s victory – is set to reverberate globally. Governments, businesses, and market observers alike are now likely scrambling to assess the potential policy implications. One key area of focus is the future direction of US monetary policy, which, in turn, may lead to reassessments of monetary policies across Asian economies. Specifically, the US Fed may not need to cut interest rates as aggressively as previously expected, thanks to the potentially reflationary effects of some of Trump’s proposed fiscal measures. This could result in a higher terminal rate for the Fed in its current easing cycle. Such a shift may, in turn, influence the policy paths of central banks in Asia. If yield differentials become a factor in their decision-making, these banks could face more limited room for easing should they need to adjust rates (see Chart 1). However, several Asian central banks have yet to begin easing cycles due to country-specific factors. These include high household indebtedness, persistent inflation, or simply the absence of a compelling reason to ease, as growth remains strong in some economies.

Industrial production in September was mixed across the 12 early reporting members of the European Monetary Union (EMU). Output fell on the month in Ireland, the Netherlands, Germany, Greece, France, and Finland, a diverse group of EMU members. At the same time, output was reported stronger in Spain, Portugal, Malta, Belgium, Italy, and Austria. The median change in September was for a decline of 0.2 percentage points; that fall follows a median change of zero in August versus an increase of 0.5% in July.

Looking over broader periods from 12-months to six-months to three-months, median output falls over 12 months by 0.5%, it falls by 2.2% over six months, and it falls by 0.5% over three months. The medians of the annual rate changes over those various periods remain consistently negative.

Over 12 months compared to 12-months ago, output is accelerating in 77.8% of the reporters. However, over six months compared to 12-months, output accelerates in only 38.5% of the reporters. Over three months compared to six-months, output accelerates in 55.6% of the reporters. While the statistics on acceleration are mixed, there seems to be more of a tendency for output to accelerate than to decelerate over these various timelines. The monthly data similarly show mixed statistics on output acceleration month-to-month for September, August, and July.

By country, output is accelerating over the three sequential broad periods in Austria and in Spain. However, sequentially, output is decelerating in Germany, the Netherlands, Malta, and Greece.