Headline inflation is showing signs of behaving in the European Monetary Union (EMU). In March, German inflation saw the monthly change in headline HICP fall by 0.3%, in France it fell by 0.4%, in Spain it fell by 0.4%, while in Italy it rose by 0.1%. The year-over-year increases in the HICP headline inflation rate show a 3% increase in Spain, a 2.4% increase in France, a 2.1% increase in Germany, and a 1.3% increase in Italy. Italy wins the kewpie-doll for attaining its 2% goal first! The target for inflation in the EMU is at 2%; it’s for the whole union. The large economies in the EMU are only starting to bring their respective year-over-year inflation headlines in line with the ECB target. However, the year-over-year inflation rate in the monetary union has been excessive for the last 29-months. That's a lot of overshooting.
Introducing
Robert Brusca
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Robert A. Brusca is Chief Economist of Fact and Opinion Economics, a consulting firm he founded in Manhattan. He has been an economist on Wall Street for over 25 years. He has visited central banking and large institutional clients in over 30 countries in his career as an economist. Mr. Brusca was a Divisional Research Chief at the Federal Reserve Bank of NY (Chief of the International Financial markets Division), a Fed Watcher at Irving Trust and Chief Economist at Nikko Securities International. He is widely quoted and appears in various media. Mr. Brusca holds an MA and Ph.D. in economics from Michigan State University and a BA in Economics from the University of Michigan. His research pursues his strong interests in non aligned policy economics as well as international economics. FAO Economics’ research targets investors to assist them in making better investment decisions in stocks, bonds and in a variety of international assets. The company does not manage money and has no conflicts in giving economic advice.
Publications by Robert Brusca
Europe| Apr 02 2024Germany Paves the Way…for Bad Monetary Policy?
Japan| Apr 01 2024Japan’s Tankan-Solid to Strong Even If Not As Strong As Expected
Japan's Tankan report for the first quarter registered strong readings across the board. The manufacturing assessment for large companies backed off to a +11 in the first quarter of 2024 compared to +13 in the fourth quarter of 2023. Large manufacturers log one of the weaker readings in the report with a queue percentile standing in its 53rd percentile compared to a slew of 90th percentile standings across assorted services sectors. The nonmanufacturing index rose to 34 in Q1 2024 from 32 in Q4 2023 for large companies and it has a 98.7 percentile standing – quite strong. The total industry index was unchanged at 22 in Q1 2024; it has a strong 92-percentile standing. So, what’s the issue?
The reading for large companies, particularly large manufacturing companies, tends to be the bellwether for this report. Despite widespread strength in the nonmanufacturing readings, the step back in the Q1 manufacturing assessment is a disappointment for the bellwether reading. The current assessment of Q1 at +11 came in one point above expectations while the assessment for the outlook came in one point below what had been expected- hardly earthshaking.
However, the outlook for manufacturing for the second quarter also showed improvement, moving up to a +10 reading in Q2 2024 from +8 in Q1 2024. For nonmanufacturing, the outlook held at +27 in Q2, the same as in Q1. These two sector readings combined for an all-industry outlook of +19 in Q2 compared to +17 in Q1. Viewed as percentile standings, the manufacturing outlook has a 64-percentile standing which is above its median but not strong. The nonmanufacturing outlook has a 98.7 percentile standing, quite strong and in line with the strong readings produced in the current quarter as well. The all-industry outlook has a standing in its 85th percentile, stronger only about 15% of the time.
There have been expectations for slightly strong readings from large manufacturers and so for some this is some more disappointing report than simply looking at the numbers. However, the numbers on their face are firm-to-strong and the rankings of the reported figures for the first quarter and for the outlook are solid and for the services sector they're extremely strong. The drop off for the current quarter assessment for large enterprises to +11 from +13 breaks a string of three straight improvements- still the ranking of the reading is above its median. Best of all, expectations are still improving compared to what they were a quarter ago.
While the survey results for establishment of other sizes are not considered to be a bellwether in this report, for medium-sized firms the manufacturing assessment was unchanged at a +6 in Q1 2024, producing a 70-percentile standing; the manufacturing outlook for Q2 2024 for medium-sized firms held at a +5 which produced a 74.7 percentile standing. For smaller firms, the manufacturing situation was weaker. Small enterprises reported a -1 reading for manufacturing in Q1 2024 after logging a +2 reading in Q4 2023. However, this still has a 60th percentile standing for them, above their historic median. The outlook for manufacturing small firms held at zero in Q2 2024, the same as the first quarter; that reading has a 76-percentile standing. Again, that's well above its median reading (which occurs at a ranking of 50%), and while the standing is solid, it is well short of being construed as strong.
Global| Mar 28 2024U.K. GDP Said to Confirm Recession Signal
The U.K. GDP revision is said to confirm the signal of recession for the economy. I know that markets love to look at the 2 consecutive quarters of negative GDP as a rule that will define the onset of recession. However, I still prefer to view this as only ‘a rule of thumb’ and as an indicative signal not a definitive one. I have included the monthly GDP estimates for the U.K. as the accompanying chart for this discussion. What's clear from that presentation is that GDP growth has been asymptotically approaching zero; even broader charts of quarterly GDP growth show pretty much the same thing with GDP growth sliding down from strong post-COVID recovery growth rates to current growth rates that are closing in on zero. There is no doubt that the U.K. economy is in a period of weakness and under performance. And it may, in fact, be in recession or headed for one; however, at this point if it's a recession that's cropping up, it looks like a rather mild one. The two quarterly growth rates involved for Q3 and Q4 are -0.5% and -1.2% and these are at compounded annual rates. The year-over-year rate for the fourth quarter swing is from +0.2% in Q3 to -0.2% in Q4. That's not really a stark difference.
U.K. GDP revisions of quarterly rates of growth The GDP revision took Q4 GDP from a decline of 1.4% to a lesser decline of 1.2% in Q4. Private consumption switched from a decline of 0.6% to a decline of 0.2%. Public consumption rose from -1.2% to +0.3%. And there is a welter of other revelations that had impact as well, but one of the more interesting ones is that domestic demand when revised switched from +1.2% to -0.6% (Q/Q annual rate). That's when the shift begins to look a little bit more like a weaker economy of serious dimension. When domestic demand looking at annualized quarterly growth rates falls by 0.6% in Q4 after falling by 2.7% at an annual rate in Q3, that pair of negative growth rates is slightly more damaging than the pair we see for GDP.
Large trade growth rate revisions Among two of the larger quarterly revisions, exports shifted from a decline of 11% at an annual rate to a decline of 3.1% at an annual rate. Imports were shifted from a decline of 3.2% at an annual rate to a decline of 1.2% at an annual rate. Those are both relatively substantial changes in growth rates. By no stretch of the imagination is the U.K. doing well.
Some of the best news on the horizon is that the inflation picture has been getting better; it hasn't gotten better fast enough to get the Bank of England to start cutting rates yet.
Europe| Mar 27 2024EU Indexes: Germany Lags/Italy Leads
In March, the overall EU Commission index of activity in the EMU rose to 96.3 from 95.5 in February, posting its strongest value since December. March saw gains (or no change) in all five major indexes, a change from February when three of the five sector indexes fell. Also in February, 11 member countries showed declines in sentiment month-to-month compared to only 5 member countries showing declines in their March indexes. The breadth of month-to-month performance improvement in March is more impressive than where the gains have taken the various country or sector indexes compared to historic values.
Around mid-2020, Italy emerged as having the strongest reading among the four largest economies in the monetary union. Conversely, Germany, beginning around mid-2023, began to lag and has consistently been the weakest economy among the major 4 since that time.
Germany| Mar 26 2024German Consumer Winter Climate Continues -Little Sign of Warming
Game of Growth: Winter is not coming...it’s just still here German consumer climate edges higher in April. It is still the 15th weakest monthly reading in the last 24-plus years (292 months) of its survey existence. The reading ranks in the lower five-percentile (5.3 percentile) of all readings in the history of survey and is still exceptionally weak. If this is a climate reading, it is still winter in Germany.
Learning from Germany’s Climate History Readings on this measure were largely positive back to 2000 when the survey began. It logged a series of negative readings (15 months of negative readings) from March 2002 through May 2003; those readings never got weaker than a reading of -3.5.
Covid brought the next set of negative readings to GfK from May 2020 to September 2021. There were 17 negative months in a row that began with the deep negative reading at -23.1 in May. It repaired to -18.6 in June, progressed to -9.4 in July and rose to a reading of just -0.2 in August 2020, before slipping back into weaker readings as weak as -12 to -15 or so. Negative readings returned in December 2021 before the Ukraine invasion which came in February 2022. GfK did not nosedive immediately, but it weakened from -6.9 in Jan-Feb to -8.5 in March 2022, and then fell to -15.7 in April. The bottom fell out as the index plunged to -26.6 in May 2022.
Since May 2022, the GfK reading has averages -30.2. On this truncated timeline, the current reading ranks as the eighth strongest. On that ground, the current reading may embody some hope. But it is still mired in deeply negative readings.
My recitation of German consumer climate history makes it clear that it’s not Covid but the invasion of Ukraine that hit Germany so hard. Of course, that was the second shoe to drop, but it has also been very damaging given German trade links to Russia and German dependence on Russian oil and its gas pipelines.
The economic and income expectations in GfK are also still weak with readings that rank lower only about 30% of the time in both cases. The propensity to buy ranks lower 20.5% of the time. These components of the GfK index are up-to-date only through March. Both economic and income expectations did improve their monthly rankings by four- to five percentage points in March. The propensity to buy was little change on the month.
As for Other Europe... Italy and France have confidence readings up-to-date through February. Italy shows some upward momentum; France does not. France’s confidence ranking is weaker than its February level about 30% of the time- like the German components. Italy is much better off with a 76.6 percentile standing. The U.K. reading on confidence is updated through March and has been relatively stable at a 32.3 percentile standing.
Italy is the outlier here showing more strength than the others although that’s not because of substantially better economic performance. I’d say Italians simply appear to be more resilient. Italian inflation has come down faster than it has elsewhere in Europe. Italian GDP declined early, in Q1 and Q2 of 2023 and has since bounced back strongly in Q3 and Q4 of 2023. But Italy’s retail spending and MFG PMI as well as its conventional industrial production index continue to show weakness and declines. Italy’s unemployment rate also continues to fall but remains well above the EMU rate at 7.2%.
United Kingdom| Mar 25 2024U.K. CBI Survey Offers Mixed Signals
Retail Sales and Orders- The survey on the U.K. distributive trades by the Confederation of British Industry survey (CBI) offers a mixed outlook on current performance, but one that remains decidedly weak. In March sales compared to a year ago post an improved reading of +2, compared to -7 in February and to a much weaker report for January. Orders compared to a year ago, however, deteriorated in March falling to -22 from -14 in February, but still stronger than their weak January level and above their 12-month average. Sales for the time-of-year, a concept which is essentially a seasonally adjusted gauge, moved up to zero in March from -1 in February; again, they are significantly stronger than their January reading and above their 12-month average.
Expected Sales and Orders- The March survey also provides expectations for April. April numbers are generally weak and mixed in terms of month-to-month comparisons. Expected sales measured year-over-year in April survey at a net reading of -25 compared to a -15 expectation in March. This is a sharp monthly deterioration but still an improvement from end-of-year values. It is also a weaker reading than the 12-month average. Orders year-over-year improve from March at a -24 reading, stronger than -36 in March. The expected April reading is stronger than the end of year reading but in line with the 12-month average performance for this metric. Expected sales for the time of year improve very marginally in April to -8 from -9; however, that's a significant improvement from end-of-year values and a reading that's slightly better than the 12-month average.
Metric Rankings- When we assess the retail sales and sales expectations, the results from March and for April have weaknesses. Sales compared to a year ago perform at a 40.8 percentile standing, which is quite weak. Year-over-year orders perform at a 16-percentile standing, while sales for the time-of-year have a 65.5 percentile standing. That's the observation that was flat in March; that performance is slightly better than its historic median performance. However, turning to the expectations for April sales… sales compared to a year ago have an anemic 7-percentile standing, orders compared to a year ago have a 10.5 percentile standing and sales for the time-of-year have a 33.7 percentile standing. All of these are below their historic medians. On balance, while we find some improvement in sales month-to-month - and definite improvement compared to the end of year- the comparisons over the 12-month average are not particularly favorable and the rankings of these index values are quite poor when placed in an historic context.
Wholesaling Wholesale Sales and Orders- For wholesaling in March, there's broad-based weakness with sales year-over-year, orders year-over-year and sales for the time-of-year all posting negative values compared to positive readings in February. However, the March data once again are stronger than data posted back in January and stronger compared to 12-month averages. The performance of the various measures of sales and orders provides a mixed picture over different horizons.
Wholesale Expected Sales and Orders- Expectations for April in wholesaling also turned negative for sales compared to a year ago, orders compared to a year ago, and sales for the time-of-year. All these metrics are negative compared to positive values in March although once again they're significantly stronger than their end of year values and their performance is not generally much different from their 12-month averages.
Metric Rankings in Wholesaling- Assessing wholesaling performance on a ranking format, the current performance of sales compared to a year ago has a 23.9 percentile standing, orders compared to a year ago have a 26-percentile standing, and sales for the time-of-year have a 20-percentile standing. All of these are quite weak and in the neighborhood of a lower 1/4 to 1/5 standing of their respective historic queues of data. Expectations for wholesaling in April stand in their 28th percentile; orders compared to a year ago stand in their 22.8 percentile; sales evaluated relative to the time-of-year stand in their 31.6 percentile. Once again these are weak readings- all of them below their historic medians (below a 50% standing).
Germany| Mar 22 2024IFO Shows Some Sharp Monthly Improvement
The German IFO survey made some significant improvements in March compared to February. The all-sector climate reading grows to -16.1 in March from -23.5 in February. The current conditions index registered a positive 0.6 reading in March after a -1.9 rating in February. The expectations index rose to -16.4 in March from -23.0 in February.
There are some substantial changes and improvements in the month-to-month readings; however, make no mistake about it, the IFO remains very weak. The climate reading, for example, has a rank standing in March at its 19.1 percentile compared to a ranking in at the 6.5 percentile in February. The all-sector current conditions ranking moves up to 13.9 percentile in March from the 11.7 percentile in February. All-sector expectations move up to the 13.4 percentile from the 3.9 percentile in February. These are substantial and significant moves in the month-to-month rankings and for the month-to-month diffusion readings; however, the current readings are still weak. In terms of the values reported last month, the current readings aren't really going to be pointing to an economy that's substantially changed from the readings that we saw a month ago.
However, what's new and what's interesting is there is a month-to-month improvement and it's the first one of some significant value that we've seen in some time and that could mark a turning point. The change is most substantial for expectations, which is also a relatively volatile category and something to keep an eye on. But it's the fact of having an improvement after such a long period of conditions remaining weak that is both impressive and hopeful.
Looking at the various sectors in climate section, construction has the strongest ranking in its 25th percentile - a bottom quartile ranking.
Under current conditions, retail and construction have above-50 percentile standings- above their historic medians. The service sector has the weakest stand-alone ranking in its 15.6 percentile.
Expectations readings show a still-weak 0.8 percentile standing for construction, just off the all-time low made last month. The service sector, with a 15.1 percentile standing, is the strongest ranking sector in expectations.
Global| Mar 21 2024PMIs Show Weakness in March Especially in Manufacturing
The S&P composite PMIs in March show broad weakness in Europe with the European Monetary Union composite getting weaker along with its manufacturing and services components. Germany displays the same 3-sector weakness along with France. The United Kingdom shows a weaker headline as well as weakness in services month-to-month, but its manufacturing sector strengthens on a month-to-month basis.
Japan, on the other hand, shows the strengthening across its composite, manufacturing sector, and services sector. Japan’s composite improves in each of the three months driven by an improvement in the services sector over each of the three months. Japan is the only country in the table to also show the services sector that improves year-over-year, over six months compared to 12 months, and over three months compared to six months. Japan's services sector is quite consistently driving strong improvement and it has a strong queue standing to back that up, in the 90th percentile, the only 90th percentile standing for any sector by any country in the table.
The U.S., like Japan, shows strength over the last three months. U.S. metrics show strengthening in the composite, the manufacturing sector, and the services sector in each of the last three months. However, despite this string of increases, the three U.S. sectors: the composite, and its components manufacturing, and services all show weakening on balance over three months, six months and 12 months. Note that the monthly data are ‘flash data’ while the sequential data over three months, six months, and 12 months are based on ‘hard data’ and lag by one-month for that reason.
The queue rankings portrayed by these PMI values, show only Japan's overall composite has a ranking at its 81st percentile driven by that 91st percentile standing in its services sector. Apart from that, the strongest standings are for services in the U.K. and services in the monetary union with 57-percentile standing, a much more modest positioning. The United Kingdom composite has a 53-percentile standing and the U.S. manufacturing sector has a 51-percentile standing, barely above its historic median. All the rest of the sector standings are below their respective 50th percentiles meaning they are below their historic medians on data back to 2020.
The weakest standings in the table are for manufacturing; the German manufacturing sector has a 14-percentile standing, France has a 22-percentile standing - the same as Japan's - while the monetary union has a 24.5 percentile standing for its manufacturing sector.
United Kingdom| Mar 20 2024U.K. Inflation Drops, Keeping BOE Rate Cut Hopes Alive? I Don’t Think So...
With the Bank of England set to meet, markets are vetting the CPI report for the United Kingdom from the standpoint of what it will cause or permit the Bank of England to do next. The year-over-year inflation rate in this report has dropped causing some analysts to say it keeps the door open for a Bank of England rate cut.
But does it really?
I am not a fan of looking at short-term inflation indicators or for central banks to make policy based on what short-term inflation indicators are doing. However, central banks need to be aware of what these indicators are doing and what they're telling them about inflation. As I have mentioned many, many times, year-over-year inflation rates are well behaved, but we must be careful in vetting them. The best way to think of them is that they are the result of 12-month-to-month inflation changes over the past year. Each month the inflation rate has eleven of those same changes as the previous month. If 12-month inflation falls in the current month compared to the previous month, it means that the month-to-month inflation change in the current month is lower than the month-to-month inflation change and the oldest month that was just dropped out of the index. Is that a reason for a central bank to cut interest rates today?
The only answer to this question that stands up to scrutiny is this: it depends. And what it depends upon is the context and the trend. It depends on how broad the change in inflation is. It depends on whether that change in inflation is driven mostly by one category like changing energy prices. It depends on how economic performance has shifted recently (if at all). ‘It depends’ means there must be context for it.
In this case, the CPI-H month-to-month just rose by 0.5% in February, not exactly a very good number- a number that's going to annualize to an inflation rate of over 6%. That's not particularly good. On the other hand, the inflation rate year-over-year goes down because a year ago the CPI-H is dropping out a rise in the price index month-to-month of 0.9%. Clearly 0.5% is less than 0.9%! Viola! The year-over-year inflation rate falls. However, viewed on its own that 0.5% inflation rate is quite high. Also, the CPI-H core index that excludes food, alcohol, tobacco, and energy, rose by 0.4% in February; that's also a pretty strong increase. The headline month-to-month annualizes to 6.2% while the core annualizes to 4.9%. Neither of these strike me as performance that is good enough to accommodate a rate reduction by a central bank with a 2% target and a long legacy of overshooting its target. In fact, if we compare those annualized increases to the CPI-H over 12 months, the 12-month index increased 3.9%, the six-month increase was at an annualized rate of 3.3%, and the three-month increase in the CPI-H was at a pace of 4.9%. The one-month annualized change represents an acceleration compared to all these metrics (Yikes!). Similarly, the core for the CPI-H rises 4.8% over 12 months, rises at an annual rate of 3.7% over six months and at a 4.2% pace over three months. However, the annualized one-month increase is 4.9%, once gain stronger than all those metrics.
I'm not advocating that the central bank look at the annualized month-to-month number to make policy. However, the central bank should not ignore it either… The central bank needs to look at a sequence of these numbers and have some idea about how inflation is ‘trending’ if it's going to change policy. And since the Bank of England - like the Federal Reserve and the European Central Bank - has been over the top of its target for some time, it would seem most appropriate for the central bank to make sure that inflation rate is on the correct downward path and at a more acceptable pace before it begins cutting interest rates.
As this discussion made clear, almost all the focus on today's CPI report is based upon how it's going to fit into BOE policy and how the year-over-year rate dropping paves the way for the Bank of England to become more accommodative. However, in my view, that's not even close to right.
There is good news however... The good news is that the sequential inflation calculations for the headline and the core are not clearly accelerating and they're showing some temperance. The diffusion results from these calculations show that inflation over 12 months compared to the previous 12 months, over six months compared to 12-months, and over three months compared to six-months is demonstrating a step down across most categories persistently. That is very good news. The diffusion indexes are less than 50 (less than 50%) indicating that inflation is declining in more categories than it's increasing, period-to-period. And that's reassuring. However, diffusion calculations are executed across categories and summed-up without weighting. The actual inflation index employs weighted components, and the weighting is clearly an important part of the process. However, if we find that inflation is not broadly accelerating, that may be a sign that the inflation process is moderating and that it is also poised to put in some lower numbers in those categories that have higher weights that are presently still performing poorly.
Monthly diffusion...not so fast The monthly numbers are not as attractive as the sequential calculations for diffusion. In February, the diffusion calculation is at 54.5%; that’s up sharply from a 36.4% reading in January; January is down sharply from a 72.7% figure in December. The monthly numbers compare the month-to-month percent changes in inflation to those of the month before. Diffusion above 50 tells us that inflation is accelerating in more categories than it's decelerating. February and December show broad-based inflation acceleration while January brought respite with more deceleration than acceleration.
Diffusion calculations are important. They tell us about the breadth (not the intensity) of inflation. No central bank really makes policy based on the breadth of inflation, but it's still an important statistic to keep track of.
Global| Mar 19 2024ZEW Macro Situation and Expectations Improve for U.S. and Germany
The tectonic plates did not shift under the feet of the ZEW forecasters in March. However, there was a small improvement in the economic situation and in macroeconomic expectations for both the United States and for Germany in the March ZEW survey.
The Eco-situation: The economic situation finds an improvement in Germany to -80.5 in March from -81.7 in February. This is still a highly negative reading and only a small improvement in the U.S. The economic situation reading in the U.S. rose to 37.9 from 34.0; for the euro area the current situation assessment worsened slightly to -54.8 from -53.4. Ranking these economic situation data back to the early 1990s shows the euro area ranking is in the slower 29th percentile, the German ranking is in its lower 11th percentile, and the U.S. ranking is above its median for the period; i.e., it is above a standing at 50, with a 55.3 percentile standing in March.
Macro-expectations: Macroeconomic expectations are assessed for Germany and the U.S., both show improvements in March although the German assessment at 31.7 improves much more than the U.S. assessment as the German assessment moves up from 19.9 in February. The U.S. assessment improves to -5.7 in March from -6.1 in February, a tiny move by comparison. The ranking for German expectations is above its historic median at a 58.6 percentile reading while the U.S. reading is only at a 41.1 percentile reading, moderately below its historic median. Obviously, current U.S. circumstances are much better than circumstances in Germany; however, the ZEW experts see more improvement in Germany ahead than in the U.S.
Inflation expectations: Inflation expectations tilted to continued low or declining inflation in the euro area and in Germany while in the U.S. the tilt moved slightly away from expectations of inflation declining as much. However, these month-to-month changes are minor and the queue standings for the outright assessments rather than the change for inflation put the euro area, Germany, and the U.S. all in the lower 10 percentile of their historic ranges- highly similar rankings.
Interest rate habitat: So, with inflation remaining low with little change in prospect, with the current economic situation weak - showing only marginal changes, and with macroeconomic expectations showing essentially moderate readings for the U.S. and Germany, although stronger readings for Germany, the ZEW experts continue to see interest rates remaining low.
Short-term rates: The month-to-month change for short-term interest rate expectations in the euro area fell to -80.3 in March from -65.0 in February, a considerable downshift. In the U.S., the reading fell to -78.3 from -71.1, still expecting a downshift in rates. The standing of these expectations puts both the U.S. and the euro area short-term rate expectations in the lower 5th percentile of their historic range.
Long-term rates: Long-term rate expectations are assessed for Germany and the U.S.; both show stepped up negative readings in March compared to February. The U.S. now has the lowest queue standing in this evaluation period. While the German standing has been lower only about 2.2% of the time. Declines in long-term interest rates are widely expected in both Germany and the U.S. and this is despite an above median standing for U.S. economic situation and a significantly improved macroeconomic expectation for Germany. This month, it's not exactly clear to me how the economic situation, macro-expectations, inflation expectations, and interest rate expectations fit together. There seems to be a little bit more dissonance among these readings than there has been in the past.
Part of this probably comes from my observation of current inflation numbers that show the actual declines in inflation slowing down. Growth is still relatively strong-to-solid in the United States. These observations make it hard for me to understand both the interest rate and the inflation expectations that the ZEW experts put forth for the United States.
Tectonic shifting- One place where the tectonic plates did shift is for stock market expectations. The euro area stock market expectation fell from 21.3 in February to 1.9 in March. In Germany, the expectation fell from 17.5 to -4.0. In the U.S., it fell from 18.8 to 7.3. These expectations leave Germany and the euro area with queue standings in their lower 2 1/2 percentile, while the U.S. has a standing at its lower 18th percentile. I would find it easier to deal with degraded expectations for inflation and interest rates than to see them appear for equities as they have in this survey but here, they are. We do have evidence that the ZEW experts are beginning to change their tune and their outlook for Europe and the United States. For now, these changes and their expectations still need to be fine-tuned as the experts need to digest changing economic circumstances, perhaps a new path for inflation, a change to the outlook for central bank behavior, and potentially a different look for growth for the period ahead.
Europe| Mar 18 2024EMU Trade Surplus Grows; ports Struggle as Imports Contract
The January trade balance in the euro area surged sharply into a stronger surplus at €28.0 billion, up from €14.3 billion in December, doubling in one months’ time. The 12-month average for the trade balance is a surplus of €8.3 billion. The average over the previous three months is €19.3 billion.
A larger surplus; a smaller deficit The improvement comes about in January through two sources: one is the balance on manufacturing trade where the surplus rose to €47.75 billion from €37.8 billion in December. The average surplus over the last 12 months is €34.2 billion. The second source of improvement is the balance on nonmanufactured goods, a trade balance that is in deficit. That deficit got smaller in January at -€19.7 billion as it improved from -€23.5 billion in December. Over 12 months the average deficit on nonmanufacturing trade is -€25.9 billion. Month-to-month there's improvement on both the manufacturing and the nonmanufacturing balance of the €14 billion improvement, about €10 billion of it comes on the manufacturing side with the rest on the nonmanufacturing side. That occurs with the manufacturing surplus getting larger and the balance on nonmanufacturing goods showing a smaller deficit.
The story of trade improvement is told by clearly different trends for exports and for imports. If we divide exports and imports into manufactured and nonmanufactured goods (as we did in the description above), we do see some quite different growth rates; however, in both cases the trends work to produce an improved trade balance for the euro area.
Trade in Manufactures Manufactured goods show exports fluctuating around a slight increase or little-change, falling by 1.2% over 12 months, rising slightly over six months, then falling at a 2.1% annual rate over three- months. Compare this to manufacturing imports where imports fall 13.8% over 12 months, fall at a 20.1% annual rate over six months, and then fall at a 27% annual rate over three months. While exports are floundering and holding around the zero-growth mark, imports are clearly plunging on all horizons with the import growth rates getting weaker over more recent periods. These trends obviously lead to an improved trade performance as the trade balance moves into larger surplus on more or less unchanged manufacturing exports amid plunging manufacturing imports.
Trade in Nonmanufactures Turning to nonmanufacturing trade on the export side, we see exports growing and accelerating over the different horizons, from 4.4% over 12 months, to a gain at a 33% annual rate over six months, to an increase at a 53% annual rate over three months. Nonmanufacturing imports, on the other hand, show persistent declines, however, amid withering weakness. Nonmanufacturing imports fall by 23.9% over 12 months; that's reduced to a decline of only 0.3% at an annual rate over six months, although it rebounds to a decline of 12.2% annualized over three months. Nonmanufacturing imports are declining on all horizons as the tendency for decline diminishes over more recent periods; however, this effect is being swamped by exports where the exports of nonmanufacturing goods are growing and are growing more strongly over shorter periods.
The two largest EMU Nations Looking at the two largest economies in the European Monetary Union, we see German exports growing over 12 months, six months, and three months and growing stronger over those horizons. The same trend is true of French exports which grow on all horizons and grow stronger as well. German imports contract over all horizons and French imports contract over all horizons. We see reinforcing trends in both Germany and in France behind the overall Monetary Union trends.
The U.K. The U.K., a European economy that's not a member of the monetary union or the European Community, shows exports and imports both declining over 12 months and over six months, with both trade flows improving over three months and with exports being slightly stronger over three months.
Other EMU Exports Export trends for Finland, Portugal, and Belgium - all of them monetary union members - show different patterns. For Belgium, exports decline on all horizons and are weaker over three months than over 12 months. For Portugal, exports decline over 12 months but gain pace and rise over six months and over three months. In Finland, there are double-digit declines in exports over 12 months and six months, and roughly unchanged performance over three months.
Japan| Mar 15 2024METI Service Sector Reading Advances as Japan’s Readings Turn Mixed
A cacophony of trends and readings for Japan Japan's surveys for January show broad weakening despite an improvement in the METI service sector reading that rose for the second month in a row. Readings are varied, but they oscillate in a range of moderation to weakness. There is scant evidence of any strength across sectors in these various surveys using different methods of assessment and over various sectors or industries.
The Teikoku construction index improved month-to-month in January. The economy watchers index showed an improvement in employment and in its future index. For the economy watchers survey, those are three improvements in a row for employment and for the futures index. However, there's more weakening going on in January than there is strengthening.
The METI sector indexes showed industry weakening to a 97.6 reading in January from 105.5 in December. The Teikoku indexes show weakening month-to-month in services, wholesaling, retailing, and manufacturing, while in December, retailing, wholesaling, and services had improved monthly. In the economy watchers index, there was weakness in the headline and the retail sector; eating & drinking establishments and services sector readings also eased in January but all four of those surveys came after improvements in December- the economy watchers index itself had increased in each of the two previous months.
The emerging picture for Japan, therefore, is one with mixed performance across the surveys. We can also evaluate these statistics by looking at the growth rankings; for example, the year-over-year ranking of growth rates for indexes or for diffusion levels. The economy watcher diffusion indexes’ growth rates are above historic medians, except for the retail sector, which has a 44-percentile ranking. However, the rankings are not very robust with the highest being the future index with the 65-percentile ranking. The economy watchers index itself has only a 51.7 percentile growth ranking. The ranking on the levels of economy watchers diffusion indexes are higher in the 70th to 80th percentile range except for employment, whose diffusion level standing is below its historic median at its 48.3 percentile.
The Teikoku indexes also are diffusion indexes. We evaluate them on their year-over-year growth first; manufacturing and wholesaling both have growth rankings below their historic medians. The other components have rankings in their mid to low 60th percentiles. If we rank these diffusion indexes on their levels, the manufacturing index has only a 39.5 percentile standing; the rest of the sectors have standings that are in their 60th percentile decile-the exception is construction which is at its 55.8 percentile.
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