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Disrupted global supply chains placing upward pressure on US goods prices

Kathleen Stephansen, CBE

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Mortgage applications jumped 10.8% w/w (10.0% y/y) in the week ending June 5, following a decline of 2.5% w/w (+11.7% y/y) in the week ending May 29, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house rose 7.3% w/w (3.5% y/y) in the latest week, after dropping 2.9% w/w (+6.3% y/y) in the May 29 week.  Applications for loan refinancing rose 15.3% w/w (20.0% y/y) in the week ending June 5, following a decline of 2.3% w/w (+20.3% y/y) in the May 29 week.

The effective interest rate on a 30-year fixed-rate loan rose 1bp to 6.78% in the week ending June 5 from 6.77% in the week ending May 29. The rate on 15-year fixed-rate mortgages rose 4bps to 6.16% in the June 5 week from 6.12% in the May 29 week. The 30-year Jumbo rate rose 6bps to 6.82% in the latest week from 6.76% in the May 29 week. The rate on a 5-year ARM rose 8bps to 6.23% in the June 5 week from 6.15% in the May 29 week.

The share of applications for refinancing an existing loan rose to 40.2% of total applications in the week of June 5 from 38.0% in the May 29 week. The adjustable-rate mortgage (ARM) share of activity edged up to 8.6% in the June 5 week from 8.5% in the May 29 week.

The average size of a mortgage loan rose 0.4% w/w (4.2% y/y) to $399,900 in the week ending June 5, following a decline of 4.8% w/w (+4.3% y/y) to $398,400 in the week ending May 29. The average size of a purchase loan rose 2.8% w/w (5.3% y/y) to $465,300 in the latest week, after declining 4.4% w/w (+3.3% y/y) to $452,800 in the May 29 week. The average size of a loan to refinance a mortgage declined 2.3% w/w (+6.7% y/y) to $302,500 in the week ending June 5, after declining 5.1% w/w (+11.4% y/y) to $309,600 in the May 29 week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Both applications for loans to purchase and applications for loan refinancing rose in the latest week.
- Interest rate on 30-year fixed-rate loans rose 1bp to 6.78%. 
- Average loan size edged up.

U.S. Mortgage Applications Jumped in the June 5 Week

Robert Brusca

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Once again, we are seeing Japan’s PPI creating a separation from the CPI. Both the CPI and PPI were trending lower before the attack on Iran. The CPI has better maintained its downtrend, but the PPI has been blasted higher. In 2021, there was also a huge spike in the PPI that the CPI did not follow immediately, although the CPI eventually responds, rising in a much more muted way.

These behaviors caution us from thinking that the CPI is going surge in step with the PPI but also warn us not to expect this gain to be ignored by the CPI. There will be a lagged response.

The PPI explosion is really strong, with the three-month annualized increase in the PPI and manufacturing prices both approaching 20%. Both measures are up at a much more muted 6% to 6.5% over 12 months, so the acceleration has been strong and sudden.

The table also shows lagged data that re-express the PPI trend to put it on the same timeline as Japan’s CPI and the U.S. and EMU PPIs. The PPI in the EMU has surged in line with the gains seen in Japan. However, in the U.S., the PPI has accelerated from a gain of 2.4% over 12 months to an annual rate rise of just 7.8% over three months.

But in Japan, the CPI and core CPI gauges have continued to temper their rises, using data through April and looking at sequential growth pressures on Japan’s CPI. It’s quite amazing!

Japan imports its oil and so would seem quite vulnerable to oil price spikes. However, because it is vulnerable, Japan takes steps to assure its supply and control its oil costs by arranging long-term contracts. That has helped to contain the impetus of surging global oil prices. Globally, oil (Brent, in dollars) is off sharply in May after turning slightly lower in April. Sequentially, Brent prices are up 44.4% over 12 months, up at a 110.2% annual rate over six months, and still up at 187.6% annualized rate over three months.

The table also shows some simple correlations with Brent prices. It demonstrates that the correlation between PPI prices of various sorts and Brent ranges from 0.4 to 0.5. But the correlation to Japan’s CPI price metrics is negative. So far, Japan’s CPI has been true to those results.

The Bank of Japan continues to struggle with its own view of the inflation risk. It is wary of damaging the economy but also concerned about allowing the door open to inflation because of its massive debt-to-GDP ratio. The BOJ is going to remain on inflation watch for some time.

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Japan

Japan’s PPI—The PPI Is Not the CPI

Winnie Tapasanun

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Existing home sales advanced 3.2% m/m (3.2% y/y) to 4.17 million units (SAAR) in May, the third m/m increase in four months and the highest level since December, following an upwardly revised 0.7% rebound to 4.04 million in April (previously +0.2%; 4.02 mil.), according to the National Association of Realtors (NAR). The Action Economics Forecast Survey had expected May sales of 4.05 million units. Sales remained 35.1% below a high of 6.43 million in January 2022 and 36.8% below a peak of 6.60 million in January 2021. The May gain coincided with a rise in the average 30-year fixed mortgage rate to 6.44% in May, the highest since August 2025, after increasing to 6.33% in April, according to Freddie Mac. The sales figures are based on closings of sales contracts signed over the past couple of months.

Existing single-family home sales rose 3.5% (3.3% y/y) to 3.80 million units in May—the third m/m rise in four months and the highest level since December—following a 0.8% gain to 3.67 million in April, while remaining 33.3% below a high of 5.70 million in January 2022. Sales of condos and co-ops were unchanged m/m (+2.8% y/y) at 370,000 for the third successive month, remaining 49.3% below a high of 730,000 in January 2022.

Regionally, May existing home sales rose m/m in almost all regions, with the West unchanged. Sales in the Midwest climbed 6.4% (2.0% y/y) to 1.00 million in May, the highest level since December 2024, following a 1.1% gain in April, and sales in the South rose 3.2% (5.9% y/y) to 1.96 million, a five-month high, after a 2.2% April rebound; both posted the third m/m increase in four months. Sales in the Northeast grew 2.2% (-8.0% y/y) to 460,000 in May after registering at 450,000 in April and March. Sales in the West were flat m/m (+5.6% y/y) at 750,000 after a 2.6% April decline. Notably, the South remained the dominant region, accounting for 47.0% of total U.S. existing home sales.

The median price of all existing homes (NSA) rose 2.8% (1.3% y/y) to $429,300 in May, the fourth consecutive m/m rise, on top of a 2.1% increase to $417,500 in April ($417,700 previously). Prices were 0.8% below a high of $432,700 in June 2025 but 19.0% above a low of $360,800 in January 2023. The median price of an existing single-family home climbed 2.9% (1.3% y/y) to $434,300 in May, the fourth straight m/m increase and the highest since June 2025, after a 2.1% rise to $421,900 in April. The median price of condos and co-ops, up for the fifth time in six months, rose 1.2% (1.7% y/y) to a record-high $378,200 following a 1.6% April gain to $373,900. Regionally, overall prices rose m/m in May in the Northeast (+7.1%; +4.2% y/y), Midwest (+2.9%; +2.8% y/y), South (+1.7%; +1.1% y/y), and West (+1.2%; -0.7% y/y).

Inventories of homes for sale rose for the fifth consecutive month in May. The number of existing homes for sale (NSA) increased 3.3% (0.6% y/y) to 1.55 million units, the highest level since July 2025, following a 7.9% April rise to 1.50 million. The supply of homes on the market at the current selling rate (NSA) held at 4.5 months in May and April, the highest since September 2025, up for 4.2 months in March. The recent high of 4.6 months was in August 2025, while a record low in supply of 1.6 months was in January 2022.

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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- May sales +3.2% m/m to higher-than-expected 4.17 mil.; +3.2% y/y, second straight y/y rise.
- Sales m/m up in the Midwest (+6.4%), South (+3.2%), and Northeast (+2.2%), flat in the West; sales y/y up in all regions except the Northeast (-8.0%).
- Median sales price +2.8% (+1.3% y/y) to $429,300, highest since June ’25.
- Unsold inventory +3.3% (+0.6% y/y) to 10-month-high 1.55 mil. units; 4.5 months' supply.


U.S. Existing Home Sales Reach a Five-Month High in May, Third M/M Gain in Four Months

Sandy Batten

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The U.S. trade deficit in goods and services (BOP basis) narrowed to $55.9 billion in April from a downwardly revised $56.6 billion March (previously -$60.3 billion), according to the U.S. Census Bureau. The Action Economics Forecast Survey looked for a deficit of $55.5 billion. The goods deficit declined to $83.7 billion in April from a downwardly revised $86.1 billion in March (previously -$88.7 billion) while the services surplus narrowed to $27.8 billion from an upwardly revised $29.5 billion in March (previously +$28.4 billion).

The real (inflation-adjusted) trade deficit in goods narrowed to $84.3 billion (2017$) in April from a downwardly revised $85.9 billion in March (previously -$90.8 billion). The April figure is in line with the Q1 average, indicating that net exports could be a net neutral for Q2 GDP growth. Net exports subtracted 1.3%-points from GDP growth in Q1 and 0.2%-point in last year’s fourth quarter.

Exports of goods and services increased 2.6% m/m (12.6% y/y) in April versus an upwardly revised 2.2% monthly gain in March (previously 2.0% m/m). Over the four months of this year, exports have risen 14.7%. Goods exports (Census basis) increased 3.8% m/m (16.0% y/y) in April, once again led by a surge in petroleum exports. They jumped 33.3% m/m in April on top of a 34.7% monthly surge in March. The April-March jumps in petroleum exports were the largest since June 2008. The $9.2 billion increase in exports of petroleum and petroleum products more than accounted for the $8.1 billion increase in total goods exports in April. However, there was also strength in other exports. Capital goods exports excluding autos jumped 6.1% m/m, their fifth monthly gain in the past six months. Nonfood consumer goods exports excluding autos rebounded in April, rising 7.9% m/m, almost completely reversing the 8.4% monthly plunge in March. By contrast, auto exports fell 2.6% m/m, the first monthly decline in three months, and food and feed exports slipped 0.3% m/m, their second monthly decline in the past three months. Services exports fell 0.4% m/m (+5.1% y/y) in April. Maintenance and repair services fell 5.0% m/m; transport declined 2.2% m/m; travel fell 1.5% m/m.

Imports of goods and services rose 2.0% m/m (9.1% y/y) in April following an unrevised 2.3% monthly gain in March. The annual comparison is distorted by an outsized fall in imports last April (particularly of nonmonetary gold) that had followed a surge in imports in March that was an attempt to front-run tariff increases. Goods imports (Census basis) increased 2.0% m/m (10.1% y/y). The rise in imports had a distinct AI flavor. It was led by a marked gain in imports of capital goods (up 5.8% m/m), which included a 6.8% increase in computer imports and a 19.1% m/m jump in semiconductor imports. The $7.0 billion increase in capital goods imports more than accounted for the $5.9 billion rise in total goods imports. Industrial supplies exports fell 1.7% m/m; auto imports declined 1.4% m/m; and imports of nonfood consumer goods ex autos slipped 0.5% m/m. Service imports rebounded in April, rising 1.6% m/m following a 1.8% monthly decline in March. Travel increased 2.2% m/m; transport jumped 4.1% m/m; insurance services rose 2.2% m/m.

By country, the goods trade deficit with China narrowed to $12.0 billion in April from $14.6 billion in March. The trade deficit with the European Union narrowed to $7.2 billion from $9.0 billion in March. The trade deficit with Japan declined to $2.8 billion in April from $4.0 billion in March.

The international trade data can be found in Haver’s **USECON** database. Detailed figures on international trade are available in the **USINT** and **USTRADE** databases. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- The deficit in goods and services narrowed to $55.9 billion in April from a downwardly revised $56.6 billion in March.
- Exports rose 2.6% m/m, led by a 33% monthly jump in petroleum exports.
- Imports increased by 2.0% m/m, led by a 5.8% m/m rise in capital goods imports.
- The goods deficit narrowed to $83.7 billion, and the services surplus narrowed to $27.8 billion.

U.S. Trade Deficit Narrowed in April

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In the wake of a mixed in somewhat complex orders report from Germany yesterday, today Germany released its industrial production report. It shows output up by 0.4% in April after several months of declines. There was a strong gain of 1.9% month-to-month in consumer goods output and another strong gain of 1.4% in intermediate goods output. However, capital goods output continues to be weak, falling 1.5% month-to-month and continuing a string of five months in a row when manufacturing output for capital goods has declined.

Sequentially, overall output is showing strengthening growth rates from 12 months to six months to three months. The tendency to strengthen is driven by intermediate goods that have the exact same pattern in play. However, capital goods are showing increasing weakness from 12 months to six months to three months, culminating in a three-month annualized growth rate of -10.5%. The growth rate in consumer goods is weaker over three months and over 12 months but isn't intact progressively over all three periods. The chart is helpful here as it shows recent weakness and a more recent rebound that still leaves year-over-year growth rates declining.

Manufacturing output shows declines over each of these three periods without a clear trend tendency for speeding up or cooling down. Real manufacturing orders are close to accelerating over this same sequence of dates, while retail sector sales in manufacturing show increases in two of the periods, with a decline over three months at the end of the sequence and without a clear trend in place.

Other German industrial indicators are showing consistent weakness and deterioration from 12 months to six months to three months. That holds for the ZEW current index, the IFO manufacturing index, the IFO expectations index for manufacturing, and the European Commission’s index of industrial activity.

As for other early-reporting European economies, we have France, Spain, Portugal, and Norway to compare. France is showing acceleration from 12 months to three months. Spain comes close to showing consistent acceleration and finishes with a massive 60% annual rate of increase over three months. Portugal fails to show consistent signs but ends with strong output growth over three months as well. Norway also fails to show a consistent pattern and has a solid 2.3% growth rate over three months. The results from France and Spain are the most impressive among these—France because it shows consistent acceleration, and Spain because it is so very strong over the last three months.

In the quarter to date (QTD)—with one month of data in hand for the second quarter—all German sectors are showing expansion except for capital goods and manufacturing overall. The indicators for Germany show weakened conditions as we step into the new quarter, except for the EU Commission index. The four European countries we chronicled earlier, all show gains in the quarter to date, with France and Spain showing the most pickup.

The final column of the table ranks year-over-year growth rates on data back to 2006. On this basis, only the German intermediate goods sector has a year-over-year growth rate that ranks above its median for the period. Real manufacturing orders are close to their median with a 49.2 percentile standing, whereas the median occurs at a ranking of 50%. For the other industrial indicators, we compare them to historic index levels, and all four of the indicators are substantially below their historic marks since 2006. Meanwhile, for the four countries in Europe, three of the four are showing industrial output results that rank above their historic medians: Spain shows a 79th percentile ranking, France has a 77th percentile ranking, and Portugal has a 53rd percentile ranking. Only Norway has a subpar (below-median) 25th percentile ranking.

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**Summing up**
As we saw with orders, the monthly industrial production data for Germany are mixed; there are mixed trends, with overall industrial production trending higher, driven by intermediate goods, even as manufacturing is showing consistent declines across 12-month, six-month, and three-month horizons. If you put stock in indicators, the indicators are all weak and deteriorating. However, if you judge Germany from its neighborhood, its neighbors are generally doing better than Germany is showing. The quarter-to-date is showing relatively strong industrial production growth for Germany and other Europe compared to where they've been historically. The narrow results for Germany are weaker than those same results considered in a broader context.

Germany

German IP Rebounds in April

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German orders, now available for April, show both domestic and foreign orders are sketching a herky-jerky path higher. The volatility is such that we can't be sure the momentum will remain higher, but for the time being, the present orders are oscillating around an upward trend. There is a particularly striking downward movement in domestic orders, with three sizeable month-to-month drops in the last four months. The drop in foreign orders, at 4.2% month-to-month, is sharp, but that follows two months of very strong gains—although they follow one month of a substantial drop. German orders are simply sketching out a very dissonant path—very hard to discern a trend.

German orders show systemic sequential declines in domestic orders, an event that is offset by systematic sequential acceleration in foreign orders. The net result of total orders is an order slowdown over six months and four months that gives way to a sharp rise over three months.

Sector sales, expressed also in real trend, show consumer durable goods sales and intermediate good sales both engaged in alternating behavior.

Early in Q2, German orders show declines overall an in domestic orders that are only partly blunted by a sizeable rise in foreign orders. Sector sales show a real gain in manufacturing, pushed ahead by consumer durables and intermediate goods, against weakness in nondurables and in capital goods. The broad ranking of annual growth rates for sales and orders show abject ranking weakness for orders and all sales, with the sole exception of orders by foreigners—that series has a ranking above its median at the 60.7 percentile mark.

To compare German industry with other key European sectors, we use the EU industrial confidence gauges. This shows Spain as the only country among Spain, Italy, Germany, and France, with an industrial sector ranking above the 50th percentile mark (above its median reading). All of the manufacturing readings have negative values in April; however, only Germany shows an advance in progression from 12 months to six months to three months.

The industrial order report for April is weak, but there are undercurrents of uptrends embedded in the report. The month’s results and trends may be better than the current month’s topical readings suggest.

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German Orders Drop, But Trend Offers Hope

Tian Yong Woon

In this week’s Letter, we take stock of the latest Blue Chip Financial Forecast (BCFF) survey results and connect them with recent regional developments across Asia. Panellists have raised their policy rate forecasts relative to the pre–Middle East conflict baseline (chart 1), as inflation concerns intensify and several Asian central banks tighten policy (chart 2). Meanwhile, stronger US jobs data have strengthened the higher-for-longer rate narrative, tempering AI-driven equity gains in the US and Asia (chart 3).

Turning to country specifics, the sharp rise in South Korean equities masks a more nuanced picture, where sustained foreign investor outflows have eventually weighed on the market and contributed to weakness in the South Korean won (chart 4). India has experienced a similar pattern, with a range of rupee supportive measures already introduced, although their effectiveness remains too early to assess (chart 5). Indonesia has likewise seen persistent foreign capital outflows alongside a weakening rupiah, with foreign participation in its government bond market declining to a worrying trickle (chart 6).

**Blue Chip Financial Forecast (BCFF) survey**
Looking at the latest Blue Chip Financial Forecast (BCFF) survey results, chart 1 shows that panellists have significantly revised upward their policy rate forecasts since the March survey (conducted at the end of February), reflecting the inflationary implications of the ongoing conflict in the Middle East and the continued closure of the Strait of Hormuz. Such revisions are understandable, as the disruption to one of the world's most important oil shipping routes has constrained global oil supply. With supply reduced while demand remains broadly unchanged, oil prices have risen sharply, feeding through to higher inflation and increasing the likelihood of further monetary policy tightening, or at the very least, a slower pace of policy easing. Among the economies covered by the survey, panellists have revised up their policy rate expectations for Australia by the largest margin, followed by the United Kingdom and the euro area.

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Sure enough, these higher policy rate expectations have largely been borne out across Asia, where inflation has accelerated alongside rising oil prices, prompting many regional central banks to tighten monetary policy in an effort to contain price pressures (chart 2). Moreover, while reports of an imminent US-Iran peace agreement and the reopening of the Strait of Hormuz have surfaced repeatedly, the reality remains quite different. Shipping traffic through the Strait continues to be severely constrained, leaving global oil supplies under significant strain and keeping upward pressure on energy prices. Looking ahead, further inflation signals will emerge from this week's inflation releases in China and India. Should inflation continue to accelerate, regional central banks are likely to face increasing pressure to tighten monetary policy further rather than maintain a more growth supportive stance.

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**Rate hike prospects and market sentiment**
Just last week, stronger-than-expected US employment data prompted investors to raise the probability of further Federal Reserve tightening, taking some of the shine off the AI-driven rally in global equities. The increased prospect of further US policy tightening, reflected in higher US dollar overnight index swap rates (chart 3), has since weighed on market sentiment and dampened risk appetite in recent days. That said, equity rallies rarely proceed uninterrupted, and interim bouts of profit taking are a natural feature of financial markets, with major news events often serving as the catalyst. The softer market sentiment has also spilled over into Asian markets, as evidenced by the pullback in South Korean equities, although country specific factors have also played an important role.

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**South Korea**
There is, however, a disconnect between the meteoric rise in South Korean equities this year and the persistent depreciation of the South Korean won (chart 4). In many economies with significant foreign investor participation in equity markets, rising stock prices are often accompanied by some degree of domestic currency appreciation. A closer look at South Korea's equity flow data, however, reveals a different story: foreign investors have been net sellers of South Korean equities, partly explaining the won's continued weakness, while domestic individuals, together with financial investment firms, have accounted for the bulk of net purchases this year. The sustained outflow of foreign capital likely reflects several factors, including a broader risk-off environment following the outbreak of the Middle East conflict and the erosion of currency-adjusted equity returns caused by won depreciation. The latter, in turn, creates a feedback loop, as currency weakness further discourages foreign inflows and reinforces downward pressure on the won.

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**India**
India has been experiencing a similar dynamic, with persistent foreign equity outflows weighing heavily on the rupee (chart 5) and prompting authorities to intervene to stabilise or support the currency. The initial catalyst for these sustained outflows arguably came from the steep US trade tariffs imposed last year amid the absence of a concrete US–India trade agreement. More recently, the flare-up in the Middle East has added to investor concerns, given India's status as a major oil importer. Higher oil prices increase the country's import bill and, in turn, its demand for foreign currency, placing additional downward pressure on the rupee. While a weaker rupee can provide some support to exports and increase the local currency value of remittances, which are an important source of income given India's large overseas workforce, it also has its drawbacks. A persistent and rapid depreciation of the currency can create broader macroeconomic challenges, particularly for a net importer such as India. In response, the authorities have introduced a range of measures aimed at attracting foreign capital and supporting the rupee, although it will take time to assess their effectiveness. These measures include exempting interest and capital gains on foreign investments in government bonds from tax and expanding the pool of government bonds eligible for unrestricted foreign investment, among others.

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**Indonesia**
Indonesia has been facing a similar dynamic, with foreign investors having substantially unwound their holdings of tradable Indonesian rupiah-denominated government securities. As a result, the foreign ownership share has fallen to below 13%, from a peak of more than 40% before the pandemic (chart 6). This sharp decline reflects both a deterioration in foreign investor sentiment and the rapid expansion in government bond issuance, underscoring the significant funding needs of the current government as it pursues its ambitious policy agenda. In the meantime, a large share of this additional bond supply has been absorbed by Bank Indonesia itself, effectively invoking the concept of seigniorage—the use of central bank money creation to help finance government spending. These persistent foreign investor outflows have also been mirrored in the weakness of the rupiah.

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Asia

Economic Letter from Asia: Risk Reversal

Michael J. Moran

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Nonfarm payrolls rose 172k in May, noticeably stronger than the expectation of 92k shown in the Action Economics survey. Moreover, results for the prior two months combined were revised higher by 93k. The gain in May does not appear to be an isolated event, as payrolls have now posted firm showings for three consecutive months (average advance of 188k). This performance represents a marked improvement from late 2025, when payrolls were showing essentially no net gain.

A good portion of the job growth in May occurred in the local government sector (55k), but the health care and leisure & hospitality sectors also were strong. The construction and manufacturing industries (highly cyclical areas) were both in the plus column. Soft spots were limited, with only the financial services sector showing notable job cuts (-22k).

The improvement in the labor market also was evident in the payroll diffusion index. This measure shows the share of industries expanding payrolls plus one-half the share holding payrolls steady; a reading of 50 separates net expansion from contraction. This index was in sub-50 territory during much of 2024–25, but it moved into 50+ territory in March and climbed a bit higher in April and May (53.8 in May).

The unemployment rate was reported as steady at 4.3%, but a more precise calculation shows a slight improvement (4.296% versus 4.337% in April). Moreover, the dip was meaningful, as it was driven by employment growth as measured by the household survey (149k) that exceeded the increase in the size of the labor force (83k). The broad unemployment rate (the so-called U-6 measure) fell 0.1 percentage point to 8.1%. Both additional components of the broad unemployment rate contributed to the improvement (the number of individuals working part time involuntarily and the number of individuals who would like a job but are not actively searching).

Average hourly earnings rose 0.3% in May, a touch firmer than readings of 0.2% in the prior two months. Although earnings posted a solid advance in May, the increase was lighter than the 0.4% gain in May of last year, and thus the year-over-year change eased to 3.4% from 3.6% in April. Year-over-year changes in average hourly earnings had been larger than those in the consumer price index, indicating that many workers were registering gains in purchasing power. However, with the pickup in inflation, individuals fell behind in April, and the CPI for May (to be published on June 10) could show additional slippage in purchasing power.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- Nonfarm payrolls post their third consecutive firm advance.
- Unemployment showed marginal improvement.

May Employment Report: Revival in the Labor Market

Andrew Cates

**Growth Forecasts Drift Lower — But AI Keeps the Story Complicated**
The three-month change in consensus GDP growth forecasts for 2026, drawn from the latest Blue Chip survey, tells a story of broadly deteriorating expectations with one conspicuous exception. The Middle East conflict and the associated surge in energy prices have left their mark across most major economies. The euro area, the UK and the United States have all seen meaningful downward revisions to their 2026 growth outlooks over the past three months, as higher energy costs squeeze household real incomes and dampen business investment intentions. Energy-importing economies in Europe are particularly exposed, and the Blue Chip panel’s international section confirms that growth expectations across much of the continent remain subdued, highlighting persistent regional differences in economic performance. Japan, Australia, India and several emerging markets have seen modest negative revisions for similar reasons. The lone outlier is Taiwan, whose bar extends well above the rest — a direct reflection of the extraordinary momentum in the semiconductor and AI supply chain. Taiwan’s 2026 growth forecast has been revised up by around 3.2 percentage points over the past three months, a revision of a magnitude rarely seen in this survey for any economy.

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**The More Worrying Signal: 2027 Inflation Forecasts Are Drifting Up Too**
If the GDP revision chart tells a story about the near-term growth impact of the energy shock, this second Blue Chip chart carries a more troubling message for central banks. It shows how consensus forecasts for CPI inflation in 2027 — not 2026, but the year after — have evolved since January. The pattern is striking. Across all four major economies, 2027 inflation expectations have been revised upward since March and now sit at or above the 2% threshold that most central banks treat as their definition of price stability. The US forecast has moved back up to 2.5%; the UK has surged from just above 2% to 2.5%; Japan and the euro area have also drifted higher. Near-term inflation revisions driven by an oil price shock are one thing — central banks can typically look through transitory supply-side disturbances if domestic dynamics remain anchored. But upward revisions to the 2027 outlook are harder to dismiss. They suggest that forecasters are no longer confident the current energy shock will be fully absorbed without leaving a persistent mark on the inflation trajectory — and explain why not a single Blue Chip panellist now expects central banks to simply look through energy-driven inflation.


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**The Fed’s Dilemma: A Benign Labour Cost Story Beneath Hot Headlines**
This week's US inflation data showed headline CPI jumping sharply in May, driven by higher energy costs. But arguably the more telling number was core inflation, which edged only slightly higher in year-on-year terms — a signal that the price shock remains, for now, predominantly supply-side in character rather than one rooted in domestic demand or wage dynamics. That distinction matters, and it is reinforced by the unit labour cost data, which — though backward-looking, with the latest figures pertaining to Q1 2026 — tell a reassuring story. Labour costs are typically the most persistent component of domestic inflation — energy prices can spike and retreat, but once wage growth becomes embedded, it tends to stay. The fact that unit labour cost growth remained subdued through the first quarter, even as headline CPI was climbing, suggests that domestic wage-price dynamics had not yet taken hold. Whether that remains true as the energy shock feeds through is the key question.

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**Supply Chain Stress Returns — and Threatens the PPI Pipeline**
The benign unit labour cost picture is partially offset, however, by a less comfortable development in global supply chains. The New York Fed’s Global Supply Chain Pressure Index has risen sharply in recent months, reversing much of the normalisation achieved since the post-pandemic peak in 2021. The driver is familiar: Middle East instability has disrupted shipping routes, extended delivery times and raised logistics costs across manufacturing supply chains globally. Supply chain pressures feed into producer price inflation with a lag of roughly three to six months, and the PPI pipeline is already showing the effects — US PPI rose 6.0% year-on-year in April, and manufacturing PMI surveys show input cost pressures building across multiple major economies.

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**Energy: The Master Variable**
As we have noted in previous editions of this publication, real energy prices have risen persistently since the early 2000s — a development that may explain more of the trend slowdown in global growth and productivity than is widely appreciated. The chart illustrates that elevated real energy costs are not a new phenomenon: they predate the current Middle East crisis by two decades and were well entrenched long before the US–Iran escalation began in March. What the conflict has done is bring a slow-moving structural story back into sharp focus. For central banks, the implication is an uncomfortable one. Managing inflation whose roots lie in long-run energy supply constraints is a fundamentally different challenge from managing a demand-driven price cycle — and one that conventional monetary policy tools are poorly equipped to address alone. That is not an argument for policy inaction, but it is a reminder that durable price stability is likely to require, among other things, a sustained expansion in the supply of affordable and reliable energy.

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**China’s Exports to the US: A Quiet Normalisation**
Our final chart offers a more encouraging note. This week’s China trade data showed a meaningful improvement in Chinese export growth to the United States, consistent with a partial normalisation of bilateral trade flows that has been evident since the spring tariff truce. Chinese exports to the US had contracted sharply in 2025 as tariff escalation disrupted supply chains. The recovery now underway matters for two reasons. First, it provides a partial deflationary offset: a resumption of Chinese goods exports tends to exert downward pressure on global goods prices, which matters when services and energy inflation are already elevated. Second, it suggests that despite the geopolitical noise, commercial logic continues to reassert itself. Against that backdrop it has been of note that the renminbi remains the strongest-performing major Asian currency year-to-date, a signal that confidence in the trade normalisation story retains some foundation. Whether this continues will depend on whether the current phase of diplomatic pragmatism holds.

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Global financial markets have been unsettled in recent days. Last week’s  stronger-than-expected US employment report wrong-footed investors positioned for a more accommodative Federal Reserve, triggering a sharp reassessment of rate expectations and a notable sell-off in technology stocks — a sector that had been among the primary beneficiaries of the prevailing low-rate narrative. Persistent instability in the Middle East, in the meantime, has continued to keep energy markets on edge, with Brent crude remaining elevated and supply disruption risks showing little sign of abating. Against this backdrop, this week's charts draw on the latest Blue Chip Economic Indicators survey to assess where the global growth and inflation outlook now stands. The headline finding is sobering: GDP growth forecasts have been revised lower across most major economies over the past three months, with the energy shock doing real damage to the outlook in Europe— even as Taiwan's AI-driven semiconductor boom delivers the largest upward forecast revision of any economy in the survey (charts 1 and 2). Inflation expectations tell an equally uncomfortable story, with consensus forecasts for CPI in 2027 now sitting above most central banks' 2% target — a sign that the current shock may be leaving a more persistent scar than policymakers would like. Beneath the headline noise, however, recent US unit labour cost data offer a modestly reassuring signal (chart 3), even as renewed supply chain stress threatens the PPI pipeline (chart 4). We also revisit a structural energy argument made in previous editions of our Charts of the Week document (chart 5), before closing with China's trade data, where a normalisation in export flows to the United States has been quetly unfolding (chart 6).

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Charts of the Week: Inflation at the Crossroads

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