Soft landing narratives have remained in vogue in financial markets in recent weeks, partly due to weaker-than-expected US inflation data (see chart 1). In contrast, this week’s stronger-than-expected UK service sector CPI inflation data unsettled investors and probably played a role in the Bank of England's decision to keep interest rates unchanged (chart 2). European investors have also been unsettled by the political instability in France and its broader regional implications (chart 3). Meanwhile, property market instability continues to impact China’s economy, as evidenced by this week’s slew of economic data (chart 4). On a more positive note, Japan's latest trade data indicated healthier economic conditions, partly due to firmer export growth (chart 5). That improvement can be attributed, in part, to sustained demand for semiconductors, which also acts as a reminder that soft landing narratives have additionally been bolstered by the productivity potential of Artificial Intelligence over the past few months (chart 6).
- Single-family & multi-family starts weaken.
- Starts fall throughout the country, except the West.
- Building permits decline to four-year low.
by:Tom Moeller
|in:Economy in Brief
- USA| Jun 20 2024
U.S. Philadelphia Fed Index Falls to a Five-Month Low in June
- Despite the June drop, Current General Activity Index (1.3) remains in positive territory, suggesting expansion.
- Key subindexes remain negative: Shipments (-7.2), New Orders (-2.2), and Employment (-2.5).
- Inflation indicators suggest widespread price increases.
- Future General Activity Index (13.8) remains in positive territory, albeit w/ less widespread expectations for overall future growth.
- USA| Jun 20 2024
U.S. Current Account Deficit Unexpectedly Deepens in Q1
- Deficit on goods increases while the services surplus surges.
- Primary income surplus continues to shrink.
- Net direct & portfolio investment grow.
by:Tom Moeller
|in:Economy in Brief
- USA| Jun 20 2024
U.S. Unemployment Insurance Claims Down 5,000 in June 15 Week
- Initial claims slightly higher than expected.
- Continuing claims increase moderately.
- Insured unemployment rate still 1.2%, same since March 2023.
- Germany| Jun 20 2024
Inflation’s Downturn in Germany Slows or Stops- Are We ‘There’ Yet?
What Are Central Bankers Thinking about Inflation?
The focus on inflation and its implication for central bank policy has become a very widespread sport, especially now that inflation rates have declined substantially from their peak and have come much closer to central banks targets (2% all around). Lower inflation rates have taken some of the ‘air out of the inflation ball’ and the call-to-arms to maintain high rates. But that ball is still in-play and inflation is still excessive in most places, Germany, the EMU, the United States, the United Kingdom…just to name a few.
However, with elections on the boil in the U.K. and on the horizon in the U.S., decisions to change interest rates begin to leave the economic spectrum and enter the twilight-zone of the political world, one of very different dimensions. Or maybe we’ve reached the outer-limits…hard to tell.
The Bank of England met today and did not change rates with a 7-2 vote. But we are told three members were ‘on the fence.’ Had they shifted to a rate cut mode the vote to approve a cut would have gone 5-4 in favor. We are now told if things go as planned, an August cut is possible (likely, according to some). Many headlines about the BOE decision today note that the BOE did not cut rates even though inflation has been falling. Well, the data show roughly 2.9% headline inflation in the U.K.; core measures coalesce around 4.4% to 3.9%. These all are above target, but the financial press is not mindful of that. This is the sort of reporting that we have become used to in the U.S. as well.
Is all policy now derivative...or based on derivatives? Apparently, we have crossed some barrier and no longer live in a world where inflation levels or actual price levels matter! But changes matter. We live in derivative land! Biden supporters tout the drop of the inflation rate as do BOE-bashers. They neglect to mention that the level of inflation is still over target, and the rate of decline in inflation’s pace has slowed… or worse. No one is interested in targets anymore. In the U.S., where inflation has made prices high, people say yes, prices are high, but inflation is much lower- as though I can buy goods for the inflation rate instead of at the price level. Sheese…
What I see in progress in the U.S., the U.K., and the EMU is that policy decisions are longing to be made and looking for the right argument to justify them. This is not what should happen-this is backwards. Economics first, policy result, second. But economics has been captured by politics and the emerging view that no one ever need suffer if policy is just fine tuned correctly, as that great economist Steven Tyler wrote…’Dream on.’
Germany’s PPI dilemma So, the German case here with the PPI looks at an indicator but not the one with most skin in the game (the CPI/HICP). This is the PPI, a more volatile less comprehensive index. But we include in the table German CPI trends (CPI and CPI ex-energy) and see that inflation is above 2% and stuck sequentially. In any event, the ECB makes monetary policy for the Monetary Union and Germany is only a portion of that. But as the Union’s largest economy, what happens in Germany matters. And since Germany is not Las Vegas, what happens in Germany does not necessarily stay in Germany. The CPI is ‘stuck,’ and the PPI is accelerating.
German PPI inflation is transiting (overall and ex-energy) to higher inflation rates from 12-months to 6-months to 3-months. Will that sequence spread?
- USA| Jun 18 2024
U.S. Business Inventories & Sales Rise in April
- Inventory building led by retailers.
- Factory sales gain counters retail decline.
- Inventory/sales ratio is steady.
by:Tom Moeller
|in:Economy in Brief
- USA| Jun 18 2024
U.S. Industrial Production Rebounded in May
- IP growth rebounded 0.9% m/m in May as did manufacturing output.
- Within manufacturing, both durable and nondurable goods production rose last month.
- Mining activity rose.
- Capacity utilization rose to 78.7%.
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