Tom Moeller

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<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100201g.jpg" style="width: 353px; height: 265px;" align="right">Construction
activity moved lower, again. During December construction outlays fell
1.2% after a 1.2% November shortfall that was double the initial
estimate. The latest decline was double the Consensus estimate. The
worst of the news, however, was that for the full year the 12.2%
shortfall in activity was nearly double the 2008 rate of decline and
the third consecutive yearly drop.The December decline in residential
building activity matched its November rate and pulled spending down
again by nearly one-third y/y. Moreover, the latest level was nearly
two-thirds below the 2006 high. Single-family construction activity has
shown positive growth for the last seven months; however, the monthly
gains have been steadily receding and overall activity was down
one-half for the year. That was fourth consecutive year of lower
residential building activity and it's off three-quarters from the 2006
peak. Multi-family construction activity fell nearly one-third for the
year and it is off nearly two-thirds from the 2007 peak. The source of
relative strength came from residential improvements which fell just
2.2% for 2009 and was off just one-quarter from the 2007
peak.&nbsp;&nbsp;Nonresidential building activity fell another 1.8%
during December and was off 11.2% for the year. Since the 2008 peak,
activity has fallen by 26.9%. Spending in the food &amp; beverage
industry fell by one-third for the year. Expenditures in the lodging
industry were off a similar amount. Commercial building overall fell by
two-thirds y/y while office building dropped similarly. Relatively
moderate were the declines in the education (-9.8% y/y), religious
(-10.6% y/y) and health care (-5.1% y/y) sectors.&nbsp;In the
public sector, construction rose 3.7% for the year, despite lower tax
revenues. Building activity on highways &amp; streets rose 3.3% for
the year as the focus on infrastructure rebuilding grew. Public
spending on health care facilities increased a strong 14.7% y/y but
building in the education sector rose just 1.5% for the full year.The
construction put-in-place figures are available in Haver's USECON
database.&nbsp;&nbsp;
<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100201h.jpg" style="width: 312px; height: 265px;">
<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100201i.jpg" style="width: 312px; height: 265px;">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">Construction
(%)</th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>-1.2</td>
<td>-1.2</td>
<td>1.5</td>
<td>-9.9</td>
<td>-12.2</td>
<td>-6.9</td>
<td>-1.6</td>
</tr>
<tr>
<td class="firstcol">Private</td>
<td>-1.2</td>
<td>-1.1</td>
<td>4.7</td>
<td>-14.9</td>
<td>-18.5</td>
<td>-11.1</td>
<td>-5.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Residential</td>
<td>-2.8</td>
<td>-1.4</td>
<td>11.8</td>
<td>-10.9</td>
<td>-27.8</td>
<td>-29.1</td>
<td>-19.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Nonresidential</td>
<td>0.2</td>
<td>-0.9</td>
<td>-3.6</td>
<td>-17.7</td>
<td>-10.6</td>
<td>13.2</td>
<td>23.1</td>
</tr>
<tr>
<td class="firstcol">Public</td>
<td>-1.2</td>
<td>-1.2</td>
<td>-0.9</td>
<td>1.3</td>
<td>3.7</td>
<td>5.6</td>
<td>13.1</td>
</tr>
</tbody>
</table>
</body></html>

Construction activity moved lower, again. During December construction outlays fell 1.2% after a 1.2% November shortfall that was double the initial estimate. The latest decline was double the Consensus estimate. The worst of the [...]

U.S. Pending Home Sales Improve

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<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100201d.jpg" style="width: 353px; height: 265px;" align="right">The
pace of
improvement in the U.S. factory sector picked up steam in the new year.
The National Association of Purchasing Management reported that its
January composite index showed unexpected strength, for the second
consecutive month, rising to 58.4 from 54.9 during December. The latest
figure was the highest since August 2004 and was up from the low of
32.9 reached in December '08. The latest jump exceeded Consensus
expectations for a reading of 55.2. (Any figure above the break-even
point of 50 suggests rising activity.) Last year's figures were revised
due to updated seasonal factors and the ISM data is available in
Haver's USECON database.
The latest ISM level is
consistent with roughly 4.0% growth in factory sector output. This
positive growth rate resembles recoveries from past severe recessions
but to fully mirror the strength of those recoveries the index needs to
rise to a level near or above 60.&nbsp;
The production component posted the
strongest m/m gain last month but remained lower than its 2004 high.
During the last ten years there has been an 84% correlation between the
level of the production component of the composite index and the
three-month growth in factory sector industrial production. It
is appropriate to correlate the ISM index level
with factory sector output growth because the ISM
index is a diffusion index. It measures growth by using all of the
positive changes in activity added to one half of the zero change in
activity measures.
The employment index also posted a strong
increase to 53.3 which indicated positive growth in factory sector
payrolls for three out of the last four months. It's up from a low
reading of 25.9 last February. Fifteen percent of respondents indicated
higher payrolls versus only five percent last January. Twelve percent
indicated a lower level of hiring versus 49% last January. During the
last ten years there has been a 90% correlation between the index level
and the three-month change in manufacturing payrolls.
The rise in the
inventory component to 46.5 brought it back near the October high.
Sixteen percent (NSA) of respondents indicated that they were raising
inventory levels versus 18% last January. During the strong 2005
inventory accumulation 26% of firms indicated that they were raising
inventories. Twenty-four percent of respondents indicated lower
inventories last month. The vendor performance indicator which measures
the speed of deliveries rose to 60.1. This indication of slower speeds
was its highest since 2005.
The new orders index showed a lesser m/m
increase, but it reached a new high of 65.9. The export order index
also rose to a new high and was up from its low of 35.5 in December
'08. During the last ten years there has been a 53% correlation between
the index and the q/q change in real exports of goods in the GDP
accounts.
The separate index of prices paid also rose to a new
cycle-high of 70.0. That was up from the December '08 low of 18.0.
During the last twenty years there has been a 79% correlation between
the price index and the three-month change in the PPI for intermediate
goods. Forty-four percent of respondents reported higher prices while
only 4 percent indicated lower prices.The ISM data are available in
Haver's USECON database.
Focusing
on
Bank Interest Rate Risk Exposure is Friday's speech by Fed
Vice Chairman Donald L. Kohn and it is available <a href="http://www.federalreserve.gov/newsevents/speech/kohn20100129a.htm">here</a>.
<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100201e.jpg" style="width: 312px; height: 265px;">
<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100201f.jpg" style="width: 312px; height: 265px;">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S2/@S201/@S201.HTM">ISM
Mfg</a></th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Jan. '09</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Composite Index</td>
<td>58.4</td>
<td>54.9</td>
<td>53.7</td>
<td>35.5</td>
<td>46.2</td>
<td>45.5</td>
<td>51.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; New Orders</td>
<td>65.9</td>
<td>64.8</td>
<td>61.5</td>
<td>33.2</td>
<td>51.6</td>
<td>42.1</td>
<td>54.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Employment</td>
<td>53.3</td>
<td>50.2</td>
<td>49.6</td>
<td>29.0</td>
<td>40.5</td>
<td>43.3</td>
<td>50.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Production</td>
<td>66.2</td>
<td>59.7</td>
<td>60.2</td>
<td>30.8</td>
<td>50.4</td>
<td>45.2</td>
<td>54.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Supplier Deliveries</td>
<td>60.1</td>
<td>56.8</td>
<td>55.7</td>
<td>45.9</td>
<td>51.4</td>
<td>51.6</td>
<td>51.2</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventories</td>
<td>46.5</td>
<td>43.0</td>
<td>41.4</td>
<td>38.4</td>
<td>37.1</td>
<td>45.5</td>
<td>45.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Prices Paid Index (NSA)</td>
<td>70.0</td>
<td>61.5</td>
<td>55.0</td>
<td>29.0</td>
<td>48.3</td>
<td>66.5</td>
<td>64.6</td>
</tr>
</tbody>
</table>

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The pace of improvement in the U.S. factory sector picked up steam in the new year. The National Association of Purchasing Management reported that its January composite index showed unexpected strength, for the second consecutive [...]

ISM Manufacturing Index Reaches Highest Since 2004

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<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100201a.jpg" style="width: 353px; height: 265px;" align="right">The
Commerce
Department's latest report on consumer income &amp; spending
indicated that times were never worse than in 2009. Cutbacks in
employment prompted a record 1.4% annual decline (it's never before
fallen y/y), though modest positive growth returned in the second half.
Indeed, income rose during December about as it did beginning in the
spring due to easing declines in employment, faster growth in dividend
income and rising transfer payments.&nbsp;&nbsp; Overall personal
income gained 0.4% during December after an upwardly revised
0.5% November increase. The latest figure outpaced Consensus
expectations for a 0.3% rise. Wages &amp; salaries ticked up 0.1%
after an upwardly revised 0.4% November increase but for the year wage
income fell by 3.3% due to fewer jobs and pay cuts. Wages in the
factory sector fell 0.3% and were down a hard 10.3% for the year. That
decline followed a 1.5% drop during 2008. In the service sector wages
rose a firmer 0.3% but were down an unprecedented 2.9% for the year. A
0.3% December rise in wages in the government sector and a 3.6% gain
for the full year offset a negligible portion of these private sector
declines.&nbsp; Disposable income rose a steady 0.4% during
December and for the year rose 1.5% due to tax cuts early in the year.
These cuts enabled the savings rate to rise to 4.8% which was near
where it began the year but up sharply from the 1.0% low at the
beginning of 2008.&nbsp; Due to the pickup in corporate profitability in
the second half of last year monthly dividend income began to grow.
However, earlier declines which extended back to 2007 pulled the
full-year figure down 19.2%. Offsetting some of the annual decline were
unemployment insurance payments which more than doubled for the year as
a whole. However, that growth turned negative by yearend as long-term
unemployment exhausted benefit claims.Personal spending ticked
up just 0.2% in December after an upwardly revised 0.7% November
increase. For the year spending fell an unprecedented 0.4%. Adjusted
for inflation the yearly decline mounted to 0.6% which was the second
year of negative growth. Pulling down the yearly figures were 8.8% and
13.6% declines in real spending on motor vehicles. Adding to that were
6.0% and 2.9% drops in furniture &amp; household durables as well
as less spending on clothing. Spending on services was roughly
unchanged as spending on recreation fell 1.3% while&nbsp; fewer
meals out &amp; fewer vacations lowered spending here by 2.9%.
These declines were unprecedented.The PCE chain price index
ticked up just 0.1% during December and 0.2% for the year pulled down
by the fourth year of decline in prices for furnishings &amp;
household durables. Higher gasoline prices through much of the year
failed to offset declines late in 2008 so for 2009 prices fell roughly
one-quarter from 2008. The core PCE price deflator ticked up just 0.1%
during December and the 0.2% gain for the year was a record low.&nbsp;The
personal income &amp; consumption figures are available in Haver's USECON
and USNA databases.
<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100201b.jpg" style="width: 312px; height: 265px;"><img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100201c.jpg" style="width: 312px; height: 265px;">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E711/@E71102/@E71102.HTM" style="color: black;">Disposition of Personal Income</a>
(%)&nbsp;</th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Personal Income</td>
<td>0.4</td>
<td>0.5</td>
<td>0.3</td>
<td>0.5</td>
<td>-1.4</td>
<td>2.9</td>
<td>5.6</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;
&nbsp;Disposable Personal Income</td>
<td>0.4</td>
<td>0.5</td>
<td>0.4</td>
<td>3.7</td>
<td>1.5</td>
<td>3.9</td>
<td>4.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Personal Consumption
Expenditures</td>
<td>0.2</td>
<td>0.7</td>
<td>0.6</td>
<td>4.0</td>
<td>-0.4</td>
<td>3.1</td>
<td>5.4</td>
</tr>
<tr>
<td class="firstcol">Saving Rate</td>
<td>4.8</td>
<td>4.5</td>
<td>4.6</td>
<td>4.7 (Dec.'08)</td>
<td>4.6</td>
<td>2.6</td>
<td>1.7</td>
</tr>
<tr class="odd">
<td class="firstcol">PCE Chain Price Index</td>
<td>0.1</td>
<td>0.3</td>
<td>0.3</td>
<td>2.1</td>
<td>0.2</td>
<td>3.3</td>
<td>2.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;
Less food &amp; energy</td>
<td>0.1</td>
<td>0.0</td>
<td>0.2</td>
<td>1.5</td>
<td>1.5</td>
<td>2.4</td>
<td>2.4</td>
</tr>
</tbody>
</table>


</body></html>

The Commerce Department's latest report on consumer income & spending indicated that times were never worse than in 2009. Cutbacks in employment prompted a record 1.4% annual decline (it's never before fallen y/y), though modest [...]

U.S. Personal Income & Spending In Record Decline Last Year

U.S. Personal Income &Spending In Record Decline Last Year

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<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129h.jpg" style="width: 353px; height: 265px;" align="right">
Building on gains earlier in the month consumer sentiment for
all of January rose to its highest level since January of 2008. The
Reuters/University of Michigan Index of Consumer Sentiment for all of
January rose to 74.4 from 72.5 in December. The latest figure beat
Consensus expectations for a reading of 73.0 and it was up sharply from
the low of 55.3 in November 2008.<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129i.jpg" style="width: 353px; height: 265px;" align="right">
During the last ten years there has
been a two-thirds correlation between the level of sentiment and the
three-month change real consumer spending.
Sentiment about current economic conditions increased another
4.0% after its 13.4% jump from November. The latest was the highest
level since March of 2008. Assessments of current financial conditions
improved m/m to the highest since September of 2008. <img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129j.jpg" style="width: 353px; height: 265px;" align="right">
Buying conditions
for large household goods, including furniture, refrigerators, stoves
&amp; televisions, also moved up 3.9% to the highest level since
January 2008.
The January reading on expected economic conditions increased
sharply from mid-month. The 1.7% m/m increase pulled the index to its
highest level since September. Expectations for business conditions
during the next year improved and have more-than doubled since last
February.<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129k.jpg" style="width: 353px; height: 265px;" align="right">
Expectations for business conditions during the next five
years also improved m/m and rose sharply from the 2008 low.
Expectations for personal finances slipped m/m to the lowest since
March 2009 as expectations for family income growth remained
moderate-to-lower.
Expected price inflation during the next year rose m/m to 3.4%
and it was up from the December 2008 reading of 1.7%.Respondents' view
of government policy, which may eventually influence economic
expectations, improved following the sharp December decline. Just
fourteen percent of respondents thought that a good job was being done
by government versus 33% who thought a poor job was being done.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a ;="" href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM" style="color: white;">University of Michigan</a></th>
<th scope="col">January</th>
<th scope="col">Mid-January</th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Jan y/y</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Consumer Sentiment</td>
<td>74.4</td>
<td>72.8</td>
<td>72.5</td>
<td>67.4</td>
<td>21.6%</td>
<td>66.3</td>
<td>63.8</td>
<td>85.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Current Conditions</td>
<td>81.1</td>
<td>81.0</td>
<td>78.0</td>
<td>68.8</td>
<td>22.0</td>
<td>69.6</td>
<td>73.7</td>
<td>101.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Expectations</td>
<td>70.1</td>
<td>67.5</td>
<td>68.9</td>
<td>66.5</td>
<td>21.3</td>
<td>64.1</td>
<td>57.3</td>
<td>75.6</td>
</tr>
</tbody>
</table>
</body></html>

Building on gains earlier in the month consumer sentiment for all of January rose to its highest level since January of 2008. The Reuters/University of Michigan Index of Consumer Sentiment for all of January rose to 74.4 from 72.5 in [...]

Michigan Consumer Sentiment Highest in Two Years

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<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129f.jpg" style="width: 353px; height: 265px;" align="right">unemployment dragged
the y/y change in the Employment Cost Index down
to its lowest on record. (The series dates back to 1980). Overall the
employment cost index for private industry workers rose 1.2% for the
year which ended with a 0.4% rise during 4Q following upwardly revised
gains during the prior two quarters. The latest rise about matched
Consensus expectations.
Weaker growth in both in wages and
benefits pulled the overall index lower. Wages grew just 1.5% last year
which was exactly half the 2008 gain. By the end of 2009, however,
growth did improve modestly as the recession ended. For the year
management, professional &amp; related workers saw their wages rise
just 1.1% after a after a 3.2% gain during 2008. <img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129g.jpg" style="width: 353px; height: 265px;" align="right">
Sales &amp; office
worker wage gains also more-than-halved to 1.0%.
Total benefit costs in private sector increased just 1.2% for
the year,
a record low. In the management, professional &amp; related
businesses benefits grew just 0.7% but for production, transportation
&amp; materials handling industries growth held up and stable at
2.2% for the year. The cost of health benefits was an improved 4.4% in
the latest 12 months.
The employment cost index figures are
available in Haver's USECON database.
Myths about
Budget Deficits
from the American Enterprise Institute can be found <a href="http://www.aei.org/docLib/Myths%20About%20Budget%20Deficits.pdf">here</a>.&nbsp;
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB08/@EB08.HTM">ECI
- Private Industry Workers</a> (%)</th>
<th scope="col">4Q '09</th>
<th scope="col">3Q '09</th>
<th scope="col">2Q '09</th>
<th scope="col">4Q Y/Y</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Compensation</td>
<td>0.4</td>
<td>0.5</td>
<td>0.2</td>
<td>1.2</td>
<td>1.5</td>
<td>2.8</td>
<td>3.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wages &amp;
Salaries</td>
<td>0.5</td>
<td>0.5</td>
<td>0.2</td>
<td>1.3</td>
<td>1.5</td>
<td>3.0</td>
<td>3.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Benefit Costs</td>
<td>0.4</td>
<td>0.3</td>
<td>0.2</td>
<td>1.0</td>
<td>1.2</td>
<td>2.6</td>
<td>2.4</td>
</tr>
</tbody>
</table>

</body></html>

unemployment dragged the y/y change in the Employment Cost Index down to its lowest on record. (The series dates back to 1980). Overall the employment cost index for private industry workers rose 1.2% for the year which ended with a [...]

U.S. Employment Cost Index Fell To Lowest On Record

Robert Brusca

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<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129e.jpg" style="border: 0px solid ; width: 353px; height: 265px; float: left;" align="left">
Tight money
isn&#8217;t funny &#8211; With the Fed&#8217;s balance sheet bloated like
glutton at a roman feast, tensions have run high on the prospects of
inflation. Like Mr Creosote in the Monty Python skit everyone is sure
that with the equivalent of just one wafer thin mint the whole mess
will explode in a frenzy of inflation forces&#8230;. Meanwhile, back at the
ranch where reality rules the roost, money supply growth rates among
the world&#8217;s key industrial country aggregates is tempered, steady or
falling. At the same time a rise in oil prices has given the appearance
of inflation. Europe in December has just reported out its fastest rise
in the CPI (HICP) in nearly one year. But Japan has posted the largest
drop in inflation in the history of its CPI series that began in 1970
(a drop 1.2% in the month).
I would hope that after the last business cycle in which oil
traded up nearly to $150/bbl and yet core inflation in the US and in
Europe remained &#8216;restrained&#8217; was a lesson to not spend so much time
looking at headline inflation. Still, headline inflation has its
advocates. They must be the same people who love to watch the action on
those bobble-headed dolls sitting on the dashboard of a car as it
travels over a bumpy road. There is not much else to commend headline
inflation-watching.
Money supply, the key driver of inflation over the long haul,
is not flashing any warning signals about inflation. It is giving no
reason to have inflation concerns alt all. Money supply growth in the
UK, in EMU and in the US has dropped its growth rate dramatically and
steadily. The drop off in money growth is ONGOING in the UK, in EMU and
in Japan whereas, in the US, money growth has bounced up off its
six-month low to see its three-month growth rate hover at the pace of
year-over-year money growth at 3.5% - hardly a barn burner.
In EMU credit growth remains restrained in terms of over
overall loan growth and in terms of credit to residents. Both of these
measures of credit are declining in real terms and the rate of
shrinkages is either large or is accelerating from one-year to
six-months to three-months. That is not a good story if you want it end
with everyone living &#8216;happily ever after.&#8217;
Money and credit are the raw material or fuel for growth.
Right now the tanks are dang near empty across the major monetary
center countries. Even China has begun a program of pulling back on
credit, but there it is after a period of excessive growth.
On balance for all the concerns about inflation all we really
have is some volatile oil price that on occasion feeds though to bash
headline inflation like cars in a long train bumping into one another
on down the line, long after the locomotive has stopped. Inflation by
the core measures remains tame. Inflation fundamentals are rock solid
as there are huge GDP-gaps around the world and an all-too ample supply
of labor. Money supply growth is tame, tempered or outright withering.
Worrying about too-liquid bank reserves while banks are bottling up
credit growth makes no sense at all. Yet I like to understand this fear
by pointing out that a large block of the economics profession forms a
school called &#8216;monetarism&#8217; and if it did not register horror at the
size of those bank reserves all those economists probably would have to
find a new &#8216;religion.&#8217; It may be in time that those reserves will be
worth worrying about. Once banks lose their fear and start lending
again, reserves may one again be a risk. But forest fires rarely start
in the wet and rainy season; that is what we have as an economic
environment right now. Inflation starting in an environment like this
is really a very small risk. Conversely, it is growth that is at risk
and it is lending that is needed to keep it going. So far that spark of
lending is lacking just about everywhere. We should not douse a spark
to warm our hands for fear of burning a forest.


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr><th scope="col" colspan="8"> Look at Global and Euro Liquidity Trends</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Saar-all</td>
<td colspan="3">Euro Measures (E13):
Money &amp; Credit</td>
<td colspan="3">G-10 Major Markets:
Money</td>
<td>Memo</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&#8364;-Supply M2</td>
<td>Credit:Resid</td>
<td>Loans</td>
<td>$US M2</td>
<td>&#163;UK M4</td>
<td>&#165;Jpn M2+Cds</td>
<td>OIL:WTI</td>
</tr>
<tr>
<td class="firstcol">3-MO</td>
<td>-0.7%</td>
<td>-0.1%</td>
<td>0.3%</td>
<td>3.5%</td>
<td>3.1%</td>
<td>1.7%</td>
<td>33.5%</td>
</tr>
<tr>
<td class="firstcol">6-MO</td>
<td>0.6%</td>
<td>0.1%</td>
<td>-0.7%</td>
<td>2.0%</td>
<td>5.7%</td>
<td>2.4%</td>
<td>15.3%</td>
</tr>
<tr>
<td class="firstcol">12-MO</td>
<td>2.0%</td>
<td>0.7%</td>
<td>-0.2%</td>
<td>3.4%</td>
<td>5.3%</td>
<td>3.1%</td>
<td>74.0%</td>
</tr>
<tr>
<td class="firstcol">2Yr</td>
<td>5.5%</td>
<td>4.1%</td>
<td>2.9%</td>
<td>6.5%</td>
<td>10.8%</td>
<td>2.4%</td>
<td>-9.5%</td>
</tr>
<tr>
<td class="firstcol">3Yr</td>
<td>7.1%</td>
<td>7.2%</td>
<td>5.6%</td>
<td>6.4%</td>
<td>11.2%</td>
<td>2.3%</td>
<td>6.3%</td>
</tr>
<tr class="odd">
<td colspan="8">Real Balances: deflated
by Own CPI. Oil deflated by US CPI</td>
</tr>
<tr>
<td class="firstcol">3-MO</td>
<td>-2.8%</td>
<td>-2.2%</td>
<td>-1.8%</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>2.6%</td>
<td>29.2%</td>
</tr>
<tr>
<td class="firstcol">6-MO</td>
<td>-0.9%</td>
<td>-1.4%</td>
<td>-2.2%</td>
<td>-0.9%</td>
<td>2.4%</td>
<td>3.7%</td>
<td>12.1%</td>
</tr>
<tr>
<td class="firstcol">12-MO</td>
<td>1.0%</td>
<td>-0.2%</td>
<td>-1.1%</td>
<td>0.6%</td>
<td>2.4%</td>
<td>4.8%</td>
<td>69.3%</td>
</tr>
<tr>
<td class="firstcol">2Yr</td>
<td>4.2%</td>
<td>2.8%</td>
<td>1.7%</td>
<td>5.1%</td>
<td>7.6%</td>
<td>3.1%</td>
<td>-10.7%</td>
</tr>
<tr>
<td class="firstcol">3Yr</td>
<td>5.2%</td>
<td>5.2%</td>
<td>3.7%</td>
<td>4.0%</td>
<td>8.2%</td>
<td>2.5%</td>
<td>4.0%</td>
</tr>
</tbody>
</table>
</body></html>

Tight money isn’t funny – With the Fed’s balance sheet bloated like glutton at a roman feast, tensions have run high on the prospects of inflation. Like Mr Creosote in the Monty Python skit everyone is sure that with the equivalent of [...]

Ain’t No Sunshine When It's Gone…Money Growth

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<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129a.jpg" style="width: 312px; height: 265px;">
<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129b.jpg" style="width: 312px; height: 265px;">
The current
economic recovery picked up momentum last quarter. Constant dollar GDP
rose 5.7% (AR), more-than double the 3Q growth rate and the quickest
increase since 3Q 2003. Consensus expectations had been for a lesser
4.6% rise.&nbsp;&nbsp; The principle lift
to last quarter's growth was inventories. The 3.4 percentage point
contribution from inventory accumulation was necessitated by vigorous
decumulation dating back to 2005. It had reduced desired inventory
levels too far below demand even though sales were then declining.
Improvement in the foreign trade deficit also contributed one half of a
percentage point to growth last quarter as exports remained strong. The
18.1% rate of increase (-1.7% y/y) followed a 17.8% 3Q gain as the
lower value of the dollar continued to improve the competitiveness of
U.S. products. Real imports, conversely, rose at a lesser 10.5% rate
and remained down 7.7% versus last year. Growth in domestic final
demand moderated to 1.7% after a 2.3% 3Q rise. Nevertheless, these were
the first back-to-back quarterly increases since 2007. A 13.3% increase
(-8.7% y/y) in business investment in equipment &amp; software led
the gain after its 1.5% 3Q rise. Investment in business construction,
however, offset much of this increase with a 15.4% decline (-24.7%
y/y). Residential investment also was strong and posted its second
quarterly increase (-12.1% y/y). Personal consumption growth lagged
with a 2.0% gain (1.1% y/y) that was dragged down by a sharp quarterly
decline in spending on new autos with end of the "cash-for-clunkers"
sales campaign. Spending on furniture &amp; appliances rose for the
second straight quarter (0.1% y/y) while spending on clothing surged
q/q but remained down 0.7% y/y. Spending of services last quarter rose
moderately (0.6% y/y). Finally, quarterly spending by governments fell
slightly (+1.6% y/y), mostly due to a drop in defense spending though
it remained up 3.1% y/y. Price inflation
remained moderate. The chained GDP price index rose at a 0.6% annual
rate after a similarly small 3Q rise. Diminished price gains for all of
last year pulled the annual increase down to 1.2% which was nearly its
weakest increase since the early 1960s. The overall domestic final
sales price index was basically flat for the year despite an
accelerated 2.2% 4Q increase. The personal consumption chain price
index rose 2.7% in 4Q but increased just 0.2% for the year.· The U.S.
National Income &amp; Product Account data are available in Haver's
USECON and the USNA
databases. Focusing on Bank Interest Rate Risk Exposure
is the title of this mornings speech be Fed Vice Chairman Donald L Kohn
and it can be found&nbsp; <a href="http://www.federalreserve.gov/newsevents/speech/kohn20100129a.htm">here</a>.
<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129c.jpg" style="width: 312px; height: 265px;">
<img alt src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100129d.jpg" style="width: 312px; height: 265px;">
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chained
2005$, % AR</a></th>
<th scope="col">4Q '09</th>
<th scope="col">3Q '09</th>
<th scope="col">2Q '09</th>
<th scope="col">4Q Y/Y</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">GDP</td>
<td>5.7</td>
<td>2.2</td>
<td>-0.7</td>
<td>0.1</td>
<td>-2.4</td>
<td>0.4</td>
<td>2.1</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;Inventory
Effect</td>
<td>3.4</td>
<td>0.7</td>
<td>-1.4</td>
<td>0.0</td>
<td>-0.7</td>
<td>-0.4</td>
<td>-0.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>2.2</td>
<td>1.5</td>
<td>0.7</td>
<td>0.1</td>
<td>-1.7</td>
<td>0.8</td>
<td>2.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;Foreign
Trade Effect</td>
<td>0.5</td>
<td>-0.8</td>
<td>1.7</td>
<td>1.0</td>
<td>1.0</td>
<td>-1.2</td>
<td>0.8</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>1.7</td>
<td>2.3</td>
<td>-0.9</td>
<td>-0.9</td>
<td>-2.7</td>
<td>-0.4</td>
<td>1.7</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>0.6</td>
<td>0.4</td>
<td>-0.0</td>
<td>0.7</td>
<td>1.2</td>
<td>2.1</td>
<td>2.9</td>
</tr>
</tbody>
</table>
</body></html>

The current economic recovery picked up momentum last quarter. Constant dollar GDP rose 5.7% (AR), more-than double the 3Q growth rate and the quickest increase since 3Q 2003. Consensus expectations had been for a lesser 4.6% rise. [...]

U.S. GDP Rise Is The Quickest Since 2003

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

Cost of transporting crude oil has soared to series high

Market-based inflation expectations have not yet reflected recent surge in oil prices

Global equity markets are fearing a major economic disruption from soaring oil prices

Is recent drop in sentiment signaling softer growth ahead?

With the Iran conflict, geopolitical risk has soared to alarming levels

Soaring AI-related investment in US underpinning strong contribution of business spending to overall growth

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

Global freight costs are on the rise while supply chain pressures are contained

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

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Michael J. Moran

260428N.jpg

260428O.jpg

The Conference Board’s index of Consumer Confidence inched higher in April from an upwardly revised reading in March. The combined changes left the measure 1.1% higher than the preliminary tally in March. Despite the improvement, the index remained in the low end of the range for the current expansion. The index in April totaled 92.8, down from an average of 96.1 in 2025 and an annual cyclical high of 105.4 in 2023.

The Improvement in April reflected a pickup in the expectations component, which rose 1.7%. The current conditions component inched 0.2% lower. Overall views on current conditions slipped despite more favorable assessments of the labor market. The so-called measure of the jobs gap (share of respondents indicating that jobs are plentiful less the share saying that jobs are hard to get) rose 1.4 percentage points higher to 7.5%. The pickup reflected a drop in the share indicating that jobs are hard to get (down 1.5 percentage points to 19.8%). The share indicating that jobs are plentiful eased 0.1 percentage point to 27.3%.

Although expectations improved in April, from a long-term perspective they could be viewed as the more important factor restraining the headline measure of confidence. As shown in the left chart below, the expectations component of confidence shows considerably less volatility than the current conditions component does. The contrasting patterns suggest that individuals realize that the economy will undergo possibly sharp cyclical swings, but they expect conditions at some point to return to an underlying norm.

The current conditions index in the current cycle has indeed dropped noticeably, but it is still above the long run average (123.8 in April versus the average of approximately 108 from 1990 to 2025). The expectations component, as usual, has eased less than the current conditions component, but its shift has pushed the measure to the low end of its long-run range (72.2 in April versus an average of approximately 88).

Interestingly, concern about the labor market seems to be a factor affecting expectations. While current views on the labor market are favorable (plentiful less hard to get jobs gap of 7.5%), Individual are concerned about the future. The survey asks respondents if they expect more jobs or fewer jobs six months hence. The share indicating fewer jobs has moved well into the upper end of the historical range. Such observations in the past were typically seen only during recession (chart, below right). An unfavorable view on interest rates also seems to be playing a role in depressing the expectations component. More than 60% of respondents to the current survey expect higher interest rates 12 months from now.

The results from the Conference Board survey of consumers differ markedly from those of the University of Michigan Survey Research Center. The Michigan results show consumer sentiment at a record low, while the Conference Board index is only slightly below its long-run average. The difference most likely reflects the nature of the questions in the surveys. The Conference Board focuses on business and employment conditions, while Michigan emphasizes personal finances. The focus on finances, along with questions on inflation, probably picks up concerns about affordability.

The Consumer Confidence data are available in Haver’s **CBDB** database. The total indexes, which are indexed to 1985=100, appear in **USECON**, and market expectations are in **AS1REPNA**.

260428P.jpg

260428Q.jpg

- Expectations improved slightly in April, but are still subdued relative to norms.
- Moderately favorable view of current conditions.

Consumer Confidence: Modest Change in April

Winnie Tapasanun

260428J35.jpg

260428K35.jpg

U.S. house prices were essentially unchanged m/m in February after rises of 0.2% in January (+0.1% initially) and 0.3% in December (unrevised), according to the Federal Housing Finance Agency (FHFA) House Price Index. February marked the first flat reading since September following four consecutive m/m increases. The HPI was at 441.43 in February, up 14.8% from its August 2022 low of 384.59. The year-on-year growth rate eased to 1.7% in February—the lowest since March 2012—from 1.8% in January (+4.1% in February 2025), down from a high of 6.9% in February 2024 and well below a peak of 18.5% in February 2022.

By region, February FHFA house prices showed a mixed performance. House prices fell m/m in February (vs. January) in four of the nine census divisions. Declines were led by Mountain (-1.1% vs. +0.4%), followed by Pacific (-0.5% vs. +0.6%), West North Central (-0.4% vs. +0.3%), and Middle Atlantic (-0.1% vs. +0.3%). To the upside, house prices rose m/m in four census divisions in February (vs. January): South Atlantic (+0.6% vs. -0.2%), East South Central (+0.2% vs. +1.2%), New England (+0.2% vs. +0.6%), and West South Central (+0.2% vs. -0.3%). Meanwhile, house prices in East North Central were virtually unchanged m/m for the second successive month in February following seven straight m/m gains.

Year-on-year house prices continued to rise in February in most regions, except Mountain, Pacific, and West South Central. The y/y growth rate accelerated in February (vs. January) in only two of the nine census divisions: East South Central (+4.0% vs. +3.2%) and South Atlantic (+0.9% vs. +0.4%). Meanwhile, house price growth decelerated y/y in February (vs. January) in four regions: New England (+3.1% vs. +3.9%), West North Central (+3.1% vs. +3.6%), East North Central (+3.8% vs. +4.5%), and Middle Atlantic (+4.2% vs. +4.5%). To the downside, Mountain (-0.7% vs. 0.0%), Pacific (-0.4% vs. -0.3%), and West South Central (-0.1% vs. -0.4%) posted y/y declines in February.

The FHFA house price index is a weighted purchase-only index that measures average price changes in repeat sales of the same property. An associated quarterly index includes refinancing the same kind of properties. The indexes are based on transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included.

The FHFA data are available in Haver’s **USECON** database.

260428L35.jpg

260428M35.jpg

- February FHFA HPI 0.0% m/m; +1.7% y/y, lowest since Mar. ’12.
- House prices down m/m in four of nine census divisions, led by Mountain (-1.1%); up in four, driven by South Atlantic (+0.6%); flat in East North Central.
- House prices up y/y in six of nine regions, led by Middle Atlantic (+4.2%), but down in Mountain (-0.7%), Pacific (-0.4%), and West South Central (-0.1%).

U.S. FHFA House Prices Flat in February After Four Straight M/M Gains

260428E.jpg

Early PPI reports in the monetary union show collective pressures building over the past year, with newly emergent pressures popping up strongly in March.

The sequence of monthly inflation observations for these five early reporters in March shows that inflation pressure has not been clearly building but did jump up suddenly in March. In February, before the Iran war, the median monthly PPI gain was -0.5%. In March, that jumped to +3.9% (median month-to-month gain). Monthly pressure does not show steady gains anywhere except moderately in Germany. Finland shows deceleration in progress (!) even through—especially through—March, as its PPI in March fell by 5.3%. But the whole Finish pattern is somewhat upside down, with prices up month-to-month by 6.2% in January and 2.9% in February. It is not a trend that is easy to understand.

However, the March monthly gains are strong enough to drive sequential inflation higher from 12-months, to 6-months, to 3-months across all early-reporting countries. Even the German ex-energy index shows acceleration on that profile.

On a year-on-year basis, two of the early reporters have PPI inflation below 2%. Finland has 12-month PPI inflation at 2.1%, but Italy and Spain have inflation much higher, up by 3.4% over 12 months in Spain and by 5.6% in Italy.

The PPI has been very well-behaved in the last few years. Looking at 12-month changes for the year ended in March, the median change for this group in 2025 was -0.1%, compared to -4.6% in 2024.

The chart shows the PPI flared sharply in 2021 and 2022, then fell quickly into line in 2023. Clearly, the inflation tune now is being called by oil prices, the same as for that spike prices in 2022 and 2023.

The hope is that the oil price bump up will not be as long-lived, that the war will end soon, with the Strait of Hormuz reopened, and that oil prices—and other inflation pressures—will sink back to prerevision norms relatively quickly. That could happen, but so could other outcomes so markets remain wary. One problem this time is the destruction of oil facilities and the shutting of oil fields that could cause high prices to linger longer.

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**A new dynamic**
However, there is now a new dynamic with the UAE leaving OPEC. OPEC has been a vehicle to harness common behavior to control oil prices mostly to keep them higher. While undermining OPEC (UAE pumps about 13% of OPEC capacity) at a time the U.S. oil prowess has risen, this defection will make it much harder for OPEC to control prices. When countries are not bound together, the incentive is for countries to cheat on their production quota. In a cartel arrangement, when many cheat, the output reduction does not hold, and oil prices fall. A cartel arrangement allows for supply control and reduction which raises prices. But once prices are up, each member has an individual incentive to cheat—to sell more than his quota share of oil at the higher price. But that undermines the cartel. So, this move, this exit of UAE from the cartel, will create instability in the OPEC by moving more production outside the OPEC framework, beyond its control. Unless the Saudis are willing to be the ‘swing man’ and cut back their output to keep prices on target—something the Saudis have been increasingly unwilling to do—OPEC will be in less control.

EMU PPIs Show Instant Pressure

Tian Yong Woon

In this week’s Letter, we cover the latest developments and implications of the Middle East conflict for Asia, while also making space for other important themes, including artificial intelligence (AI). The Middle East conflict remains in a no deal state coming out of the weekend, though some early Monday optimism emerged in Asian markets following Iran’s reported offer to reopen the Strait of Hormuz (chart 1). Nonetheless, as the Strait closure drags on, so too do the fiscal costs of domestic fossil fuel subsidies across Asia, which have been shown to move closely with crude oil prices (chart 2). While such measures offer direct relief by cushioning household energy costs, they remain difficult to sustain over the long haul.

Over the week, we also saw a further fraying in regional monetary policy trends, with the Philippines hiking its policy rate for the first time in about two years amid inflation concerns, while Indonesia stood pat on rates (chart 3). Investor attention is likely to remain fixed on monetary policy this week, with the Bank of Japan due to decide on policy. Expectations for an April hike have faded amid the persistent Middle East conflict, though yen weakness continues to present a source of concern (chart 4). The week also brings China’s latest PMI readings (chart 5), adding to the recent run of hard data accompanying the Q1 GDP release.

Beyond the Middle East conflict, the evolution of AI continues to demand close attention. Before geopolitical tensions took centre stage, AI was the dominant market narrative — and that enthusiasm has hardly faded. If anything, recent developments suggest the story is broadening: use cases are expanding, scalability is improving, and access is widening beyond large corporates to the mass market — increasingly spilling into the realm of physical AI. It may well be this persistent wave of optimism that is helping to underpin equity valuations, even as the geopolitical backdrop darkens (chart 6).

**The Middle East conflict**
About two months in, we remain stuck in the limbo of the US-Iran conflict, which has left the Strait of Hormuz largely closed and much of the world starved of the critical oil flows needed to power the global economy. The back and forth between the US and Iran has persisted in recent weeks, with both sides again failing to reach a peace deal over the weekend, though Monday’s news of Iran offering to reopen the Strait has revived some hope in markets. In truth, commodity and market valuations do not hinge so much on a peace deal itself, but rather on the resumption of oil flows through the Strait, something that could materialise even in the absence of a formal deal, though any agreement that includes and credibly delivers such a reopening would likely be warmly received by markets. Until then, market gyrations are likely to persist, with prices fluctuating in response to each new snippet of news. And until then, the world will continue both to be starved of, while gradually adapting to, the drip feed of oil flows emerging from the Strait.

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**The fiscal costs of the Middle East conflict**
As the Middle East conflict drags on, so too does the strain on fiscal resources across parts of Asia, as the costs of energy-related subsidy programmes continue to mount. While such programmes have an immediate, direct, and tangible impact in shielding households from surging energy costs, they are far from sustainable, particularly if oil prices remain well above targeted levels or stay elevated for an extended period. As chart 2 illustrates, the costs of these explicit subsidy programmes tend to rise closely with crude oil prices, as seen in India and Indonesia. Other measures adopted elsewhere, such as drawing down oil reserves, may be less fiscally costly, but are similarly difficult to sustain indefinitely. In both respects, the clock is ticking, and the world continues to hold its breath as the conflict drags on.

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**The latest central bank responses to the conflict**
Over the past week, Asia saw two central bank decisions. The Philippines’ (BSP) opted to deliver its first rate hike in about two years, while Indonesia’s (BI) chose to stand pat on policy rates and instead committed to stepped up FX intervention (chart 3). This latest round of decisions points to a further fraying of what had been a broad regional monetary policy consensus, namely that central banks would delay additional easing while maintaining a high bar for outright tightening. Domestic considerations, however, remain paramount. In the Philippines’ case, the central bank has moved to rein in inflation, which is already showing notable signs of price pass through stemming from disruptions linked to the Strait of Hormuz. That said, BSP is not the first in the region to buck the reluctance to tighten. Singapore’s central bank had already tightened policy in mid-April, albeit through its own distinct framework, given its use of the exchange rate rather than policy rates as the primary channel for monetary policy.

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**The week ahead**
Looking to the week ahead, a major central bank decision looms in Japan. Market expectations for the Bank of Japan to deliver a rate hike at its April meeting have ebbed amid the persistence of the Middle East conflict, to which Japan remains particularly vulnerable given its reliance on oil imports flowing through the Strait of Hormuz. At the same time, inflation in Japan has yet to become a major concern, with recent readings having picked up but not yet entering troubling territory. One potential source of concern, however, lies with the Japanese yen, which has remained on a weakening trend since early last year (chart 4). That depreciation has been one of the key arguments underpinning calls for further rate hikes.

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The week also brings China’s latest PMIs into focus. March saw a divergence between China’s official PMI readings, which improved, and the unofficial readings from RatingDog, which instead pulled back. Nonetheless, both official and unofficial gauges remained in expansionary territory (chart 5), with investors now watching closely to see whether that resilience can be sustained amid ongoing stresses from the Middle East, or whether offsetting drivers can continue to keep Chinese business sentiment and prospects buoyant.

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**Beyond the strait**
Moving beyond the Middle East conflict, a whole host of developments continue to unfold globally, many of which have in fact helped offset some of the pessimism wrought by the Strait’s chokehold. One such development is artificial intelligence (AI), which had dominated headlines before the outbreak of the conflict and continues to advance at breakneck pace. AI capabilities are still rapidly evolving, while practical applications, such as physical AI embodied in humanoid robots, are beginning to show broader and stronger use cases. Production of such robots is also becoming increasingly scalable and within reach not just for industrial complexes and healthcare, but for the mass market as well. It is perhaps growing optimism around these prospects that has helped keep equity valuations buoyant, even in the face of the festering conflict in the Middle East. Moreover, while concerns over AI-driven job displacement persist, new opportunities are emerging as well, particularly for AI adopters, with a growing share of job postings in Western economies increasingly referencing AI-related skills, as shown in chart 6.

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Asia

Economic Letter from Asia: Not Just About the Strait

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**The Distributive Trades Survey**

The U.K. Distributive Trades Survey for April 2026 and the look-ahead expectation readings for May paint an extremely soured outlook for the U.K. economy.

**Retail ranking**: Surveys for retail sales compared to a year ago, orders compared to a year ago, and sales evaluated for the time of year all have rankings near zero, which is the worst result on this timeline. This zero distinction applies to retail sales compared to a year ago. The best ranking is 11.6%; that is for sales evaluated for the time of year. Orders compared to a year ago have a 4.2 percentile standing. The stock-to-sales ratio—which is a completely different concept—shows that the inventory-to-sales ratio has a 29.9 percentile standing.

**Retail diffusion**: The raw April diffusion readings (up minus down diffusion) show that sales compared to a year ago slipped to a reading of -68 in April from -52 in March. Orders fell to -46 in April from -26 in March. Sales evaluated for the time of year fell to -32 April from -23 in March. All three measures weakened, and all three weakened decisively, resulting in extremely weak rankings. All of the rankings are executed on data back to 2002.

**Expectations for retailing**: The expectations readings for May show slippage again across all three metrics: expected sales compared to a year ago, expected orders compared to a year ago, and expected sales for the time of year. Expected sales compared to a year ago fell to -60 in May from -49 in April. Orders compared to a year ago declined to -45 in May from -30 in April, and sales for the time of year slipped to -43 from -19. In May, these readings have rankings in a 0.4 percentile standing for sales compared to a year ago, a 1.8 percentile standing for sales evaluated relative to the time of year, and a 4.6 percentile standing for orders compared to a year ago. These two panels on current and expected retail sales volumes are just simply terrible: weak monthly, weak in ranking terms, and showing slipping momentum.

The distributor trade series also provides data on the wholesale sector. While the wholesale sector is not quite as beat up as the retail sector, it's still extremely weak. There is no cause for any kind of hope that things are getting better based on wholesaling trends.

**Wholesaling**: The wholesale survey for sales compared to a year ago edged lower to -32 in April from -31 in March. Orders compared to a year ago remained at a reading of -41 in April. Sales evaluated for the time of year improved to a reading of -20 in April from -39 in March—a significant step up, but still very weak. The percentile standings for these three categories show sales compared to a year ago at the 8.8 percentile, orders compared to a year ago at the 5.6 percentile, and sales evaluated for the time of year at the 14.8 percentile.

**Wholesale Expectations**: The look-ahead observations, which provide expectations for wholesaling in May, show a similar constellation of readings, with sales compared to a year ago falling to -37 in May from -27 in April and orders compared to a year ago falling to -42 from -38, while sales evaluated for the time of year improved to  16 from  37. That category for wholesale sales improved both in April in real time and in May for expectations; however, it continues to have a very weak percentile standing, at the 17.9 percentile in May, while sales for a year ago have a 6.7 percentile standing and orders for a year ago have a 6.0 percentile standing.

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While some of the global PMI data have improved, these survey data for the U.K. are particularly dour. The war in Ukraine drags on, and there's a new conflict in Iran that has shut the Strait of Hormuz, creating energy problems for much of Europe. More broadly, supply chains have been harmed. In addition, the U.K. is undergoing a bout of political instability, as its Prime Minister is under pressure and a good deal of political uncertainty is being worsened by deteriorating economic performance.

Both the U.K. and the European Monetary Union had been showing some progress on inflation until the Iran war hit. Now, as the oil prices are up so sharply, headline inflation is going to be worse everywhere and there will probably be a bit more attention directed to the core inflation rate. However, the U.K. has had inflation too hot for a while, and it has failed to settle down. At its last meeting, the Bank of England’s Monetary Policy Committee warned that if the war was still ongoing at the next meeting, there would be a risk of a rate hike. So, it would seem that a rate hike is going to be in play unless the economy falls off a cliff first, which, based on the distributive trades data, is also something that could happen. The U.K. economy appears to be on very unsound footing, and what happens next is just about anybody's guess.

Economy in Brief: 2010

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