Economy in Brief

The flash readings for June in the S&P Global PMI indexes show widespread weakness, but the U.S. dominates whatever month-to-month improvement there is, showing gains in the composite, manufacturing, and services month-to month. Among other June entries in the table, only the U.K. has a month-to-month gain and that's for its manufacturing sector.

This is a clear switch from May when only eight sectors showed weakness out of the 21 sector entries for these seven reporting units each reporting 3 sectors. April also showed strength with only 5 of 21 sectors showing weakness and three of those being in the U.S.

Broader trends Average data, which are calculated only on the hard data which means they're updated through May, show the three-month averages weaker than the six-month averages. Only three sectors weaken over three months; those are the service sectors for the U.S. and for Japan plus a weaker manufacturing sector in Germany. Over six months compared to 12 months, there are six weaker sectors. All three sectors in Australia are weaker; and in Japan, the composite and the manufacturing sectors are weaker; in the U.S., the services sector is weaker. However, over a year compared to the year previous, there are only 5 sectors that are stronger. The chart at the top gives you a sense of the roller coaster ride that the PMIs have been through for services and manufacturing in the European Monetary Area.

Trend shift? The manufacturing data in the chart has been on a plateau for about 5 months while the services sector in the monetary union has only just begun to turn lower in the past two months. The question is whether there is some sort of new trend in place and whether the upswing is over. It's too soon to know this, but it's not too soon to wonder about it.

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?