Louise Curley

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223e.jpg" align="left" border="0" height="265" width="353">
The Baltic States--Estonia, Latvia and Lithuania--have, in
recent years, pegged their currencies to the euro. Until recently, this
arrangement had proved economically satisfactory to the three nations.
However, as the deterioration in the world wide economy began to affect
these countries, the fact that their currencies were pegged to a
strengthening euro only exacerbated their problems.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223f.jpg" align="right" border="0" height="265" width="353">
The first chart shows the year over year changes in real GDP
for the three countries. Final data for the fourth quarter of 2008 for
Estonia are not yet available, but the preliminary "flash" estimate is
for a decline of 9.4% from the fourth quarter of 2007. Published data
for Latvia's fourth quarter GDP shows a year over year decline of 10.5%
while that for Lithuania's GDP is only 1.5%.
All three countries have used their foreign reserves to
maintain their pegs with the euro as can be seen in the second chart
that shows the recent declines in the foreign reserves of the three
countries. Latvia spent more than $1.5 billion of its foreign reserves,
defending its currency and was forced to apply for help from an
International Monetary Fund led group for a $9.6 billion bailout. Both
Latvia and Lithuania have cut wages of state employees Latvia by 15%
and Lithuania by 12%. Now, Estonia is considering wage cuts of 10% for
state employees except policemen and teachers. These measures have led
to riots and political unrest. Once again the permanency of currency
board systems in the face of austerity is being tested.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">BALTIC
STATES&nbsp;</th>
<th scope="col">Jan 09&nbsp;</th>
<th scope="col">Dec 08&nbsp;</th>
<th scope="col">Nov 08&nbsp;</th>
<th scope="col">Oct 08</th>
<th scope="col">Sep 08</th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">Foreign Reserves (Mil.
USD)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Lithuania</td>
<td>5683</td>
<td>6441</td>
<td>5537</td>
<td>6340</td>
<td>6505</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Latvia</td>
<td>4695</td>
<td>5248</td>
<td>4447</td>
<td>5592</td>
<td>6239</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Estonia</td>
<td>3462</td>
<td>3971</td>
<td>3646</td>
<td>4183</td>
<td>3681</td>
</tr>
<tr class="grey2">
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="grey1">
<td class="firstcol"></td>
<td>Q4 08</td>
<td>Q3 08&nbsp;</td>
<td>Q2 08&nbsp;</td>
<td>Q1 08</td>
<td></td>
</tr>
<tr class="grey4">
<td class="firstcol">Year over Year Chg in
Real GDP %</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Lithuania</td>
<td>-1.48</td>
<td>2.95</td>
<td>5.19</td>
<td>7.01</td>
<td>--</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Latvia</td>
<td>-10.50</td>
<td>-4.57</td>
<td>0.07</td>
<td>3.31</td>
<td>--</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Estonia</td>
<td>-9.4</td>
<td>-3.3</td>
<td>-1.4</td>
<td>0.4</td>
<td>--</td>
</tr>
</tbody>
</table>
</body></html>

The Baltic States--Estonia, Latvia and Lithuania--have, in recent years, pegged their currencies to the euro. Until recently, this arrangement had proved economically satisfactory to the three nations. However, as the deterioration in [...]

Can The Baltic States Hold Their Currency Pegs?

Robert Brusca

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223b.jpg" align="left" border="0" height="265" width="353">
Italy&#8217;s headline HICP inflation rate fell by 0.6% in January.
Its domestic inflation measure fell by 0.2%. Both series show that
inflation has dropped sharply. The Yr/Yr pace for the HICP, or
harmonized rate, is 1.4% down from 3.2% a year ago at this time. The
domestic rate at 1.6% is down from 3% one year ago. 
 

Our diffusion calculations (see table above) show that over
three-months and six-months inflation has been decelerating across more
sectors that it has been accelerating (a value of 50 is neutral; below
that inflation is decelerating in more sectors than it is
accelerating). The deceleration noted by the diffusion indices is
pronounced. It is not just due to a drop in energy prices. 
 
 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col">Italy HICP
and CPI details</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Mo/Mo %</td>
<td colspan="3">Saar %</td>
<td>Yr/Yr</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Jan-09</td>
<td>Dec-08</td>
<td>Nov-08</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Yr Ago</td>
</tr>
<tr class="odd">
<td class="firstcol">HICP Total</td>
<td>-0.6%</td>
<td>0.0%</td>
<td>-0.5%</td>
<td>-4.0%</td>
<td>-0.9%</td>
<td>1.4%</td>
<td>3.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Core</td>
<td>#N/A</td>
<td>0.2%</td>
<td>0.1%</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
<td>2.5%</td>
</tr>
<tr>
<td colspan="8" class="firstcol">CPI</td>
</tr>
<tr class="odd">
<td class="firstcol">All</td>
<td>-0.2%</td>
<td>-0.1%</td>
<td>-0.4%</td>
<td>-2.6%</td>
<td>-0.9%</td>
<td>1.6%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Food</td>
<td>0.0%</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.3%</td>
<td>1.6%</td>
<td>3.8%</td>
<td>4.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Alcohol</td>
<td>-0.3%</td>
<td>0.3%</td>
<td>0.3%</td>
<td>1.1%</td>
<td>3.1%</td>
<td>3.2%</td>
<td>4.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Clothing &amp; Shoes</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.5%</td>
<td>1.5%</td>
<td>1.6%</td>
<td>1.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Rent &amp;Util</td>
<td>-0.9%</td>
<td>0.2%</td>
<td>-0.3%</td>
<td>-3.7%</td>
<td>-1.1%</td>
<td>4.1%</td>
<td>4.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Housing &amp;Furniture</td>
<td>0.2%</td>
<td>0.2%</td>
<td>0.0%</td>
<td>1.5%</td>
<td>2.3%</td>
<td>2.2%</td>
<td>3.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Health Care</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.0%</td>
<td>1.3%</td>
<td>1.7%</td>
<td>0.8%</td>
<td>0.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Transport</td>
<td>-0.7%</td>
<td>-1.0%</td>
<td>-2.1%</td>
<td>-14.5%</td>
<td>-9.0%</td>
<td>-1.5%</td>
<td>5.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Communication</td>
<td>-0.4%</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>-1.8%</td>
<td>-4.0%</td>
<td>-3.2%</td>
<td>-8.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Rec &amp;Culture</td>
<td>-0.2%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.0%</td>
<td>-1.0%</td>
<td>0.6%</td>
<td>0.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Education</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.7%</td>
<td>1.9%</td>
<td>2.2%</td>
<td>2.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Restaurant &amp; Hotel</td>
<td>-0.3%</td>
<td>0.0%</td>
<td>0.2%</td>
<td>-0.3%</td>
<td>0.5%</td>
<td>1.9%</td>
<td>2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Other</td>
<td>0.2%</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>1.4%</td>
<td>2.5%</td>
<td>2.5%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Diffusion</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>16.7%</td>
<td>16.7%</td>
<td>33.3%</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Type:</td>
<td colspan="3">Diffusion: Compared to</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
<td>--</td>
</tr>
</tbody>
</table>
</body></html>

Italy’s headline HICP inflation rate fell by 0.6% in January. Its domestic inflation measure fell by 0.2%. Both series show that inflation has dropped sharply. The Yr/Yr pace for the HICP, or harmonized rate, is 1.4% down from 3.2% a [...]

Italy's Inflation Rates Show Turn of Trend

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223c.jpg" width="353">
A survey of 47 top economic forecasters released today indicates that the current U.S. recession should end in the second half of this year. The subsequent recovery would start quite slowly, compared to historic norms, then pick up steam during 2010.
The National Association for Business Economics indicated in its latest survey that positive growth in U.S. GDP would resume in 3Q of this year at a 1.0% rate. For the second half of 2009 as a whole, the average forecasted rate of growth of 1.5% is on a par with the recoveries from the moderate recessions of 1990 and 2001. However, the recovery falls well short of growth after the more severe recessions, such as those in 1960, 1974 and 1982.
Improved (2.2%) growth in personal consumption expenditures and a recovery in residential building are expected to lead the economy from recession. The gains are expected to be moderate, however, compared to sharp rebounds typical of the postwar period. Business investment is expected to continue to decline sharply in 2010.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223d.jpg" width="353">
Corporate profits also are forecasted to rise in 2010 at a 7.3% rate, which would just reverse this year&#39;s decline. Again, that rebound is quite moderate compared to prior periods.
Inflation during the forecast period is expected to remain quite tame. Growth in the core PCE chained price index is expected to amount to roughly 1.0% for the rest of this year as the recession continues and the level of excess capacity remains high. The economic recovery next year as well as this year&#39;s significant injection of liquidity (money) by the Fed is forecasted to raise prices by 2010 at a quickened rate.
The bond market is forecasted to deteriorate next year with rates on the 10-year treasury rising to an average 3.8% from 3.1% this year. The catalysts for this deterioration are economic improvement as well as a significant rise in the federal budget deficit ($1.5 trillion this year and $1.1 billion in 2010) which could give rise to &quot;crowding out&quot; and higher inflation. In the foreign exchange market, the dollar&#39;s value is expected to remain roughly stable.
The forecast figures from the National Association of Business Economists are available in Haver&#39;s SURVEYS database.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Nat&#39;l Assn. of Business Economists</th>
<th scope="col">1Q&#39;09</th>
<th scope="col">2Q &#39;09</th>
<th scope="col">3Q &#39;09</th>
<th scope="col">4Q 09</th>
<th scope="col">2008</th>
<th scope="col">2009</th>
<th scope="col">2010</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Real GDP (%)</td>
<td>-5.0</td>
<td>-1.7</td>
<td>1.0</td>
<td>2.1</td>
<td>-0.2</td>
<td>-0.9</td>
<td>3.0</td>
</tr>
<tr>
<td class="firstcol">&quot;Core&quot; PCE Chained Price Index (%)</td>
<td>0.6</td>
<td>1.0</td>
<td>1.0</td>
<td>1.2</td>
<td>1.8</td>
<td>0.9</td>
<td>1.5</td>
</tr>
</tbody>
</table>


</html>

A survey of 47 top economic forecasters released today indicates that the current U.S. recession should end in the second half of this year. The subsequent recovery would start quite slowly, compared to historic norms, then pick up [...]

Economists Forecast Moderate Rebound in Second Half

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223a.jpg" width="353">
The January National Activity Index (CFNAI) from the Chicago Federal Reserve Bank remained depressed at -3.45 after December&#39;s level of -3.65. The December figure was revised lower from the initial estimate and the latest numbers were near the series&#39; historic low. Since 1970 there has been a 75% correlation between the level of the index and the q/q change in real GDP.
The three-month moving average of the index of -3.41 was its lowest since January of 1975.
An index level at or below -0.70 typically has indicated negative U.S. economic growth. A zero value of the CFNAI indicates that the economy is expanding at its historical trend rate of growth of roughly 3%.
The complete CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_february2009.pdf">here</a> and the historical data are available in Haver&#39;s SURVEYS database.
Each of the four sub-categories of the index including employment, production, income, consumption &amp; housing made a negative contribution to the January index. Sixty two of the individual indicators in the overall series made negative contributions while twenty three made a positive contribution.
The CFNAI is a weighted average of 85 indicators of economic activity. The indicators reflect activity in the following categories: production &amp; income, the labor market, personal consumption &amp; housing, manufacturing &amp; trade sales, and inventories &amp; orders.
In a separate survey, the Chicago Fed indicated that its Midwest manufacturing index fell during December to its lowest level since late 1996. Indicators for the steel, machinery, resource and auto sectors each fell.
The Chicago Federal Reserve figures are available in Haver&#39;s SURVEYS database.
Today&#39;s Joint Statement by the Treasury, FDIC, OCC, OTS, and the Federal Reserve can be found <a href="http://www.federalreserve.gov/newsevents/press/bcreg/20090223a.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago Fed</a></th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">January &#39;08</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>-3.45</td>
<td>-3.65</td>
<td>-0.55</td>
<td>-1.77</td>
<td>-0.37</td>
<td>0.01</td>
</tr>
<tr>
<td class="firstcol">&nbsp; 3-Month Average</td>
<td>-3.41</td>
<td>-2.70</td>
<td>-0.55</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
</tbody>
</table>


</html>

The January National Activity Index (CFNAI) from the Chicago Federal Reserve Bank remained depressed at -3.45 after December's level of -3.65. The December figure was revised lower from the initial estimate and the latest numbers were [...]

Chicago Fed Index Fell Further

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223a.jpg" align="left" border="0" height="265" width="353">
The January National Activity Index (CFNAI) from the Chicago
Federal Reserve Bank remained depressed at -3.45 after December's level
of -3.65. The December figure was revised lower from the initial
estimate and the latest numbers were near the series' historic low.
Since 1970 there has been a 75% correlation between the level of the
index and the q/q change in real GDP.
The three-month moving average of the index of -3.41
was its lowest since January of 1975.
An index level at or below -0.70 typically has indicated
negative U.S. economic growth. A zero value of the CFNAI indicates that
the economy is expanding at its historical trend rate of growth of
roughly 3%.
The complete CFNAI report is available <a href="http://www.chicagofed.org/economic_research_and_data/files/cfnai_february2009.pdf">here</a>
and the historical data are available in Haver's SURVEYS
database.
Each of the four sub-categories of the index including
employment, production, income, consumption &amp; housing made a
negative contribution to the January index. Sixty two of the individual
indicators in the overall series made negative contributions while
twenty three made a positive contribution.
The CFNAI is a weighted average of 85 indicators of economic
activity. The indicators reflect activity in the following categories:
production &amp; income, the labor market, personal consumption
&amp; housing, manufacturing &amp; trade sales, and inventories
&amp; orders.
In a separate survey, the Chicago Fed indicated that its
Midwest manufacturing index fell during December to its lowest level
since late 1996. Indicators for the steel, machinery, resource and auto
sectors each fell.
The Chicago Federal Reserve figures are available in Haver's SURVEYS
database.
Today's Joint Statement by the Treasury, FDIC, OCC,
OTS, and the Federal Reserve can be found <a href="http://www.federalreserve.gov/newsevents/press/bcreg/20090223a.htm">
here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S503/@S503.HTM">Chicago
Fed</a></th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">January '08</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">CFNAI</td>
<td>-3.45</td>
<td>-3.65</td>
<td>-0.55</td>
<td>-1.77</td>
<td>-0.37</td>
<td>0.01</td>
</tr>
<tr>
<td class="firstcol">&nbsp; 3-Month Average</td>
<td>-3.41</td>
<td>-2.70</td>
<td>-0.55</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
</tbody>
</table>
 
Economists Forecast Moderate
Rebound in Second Half 
by <a href="/comment/Moeller.html">Tom
Moeller</a> February 23, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223c.jpg" align="left" border="0" height="265" width="353">
A survey of 47 top economic forecasters released today
indicates that the current U.S. recession should end in the second half
of this year. The subsequent recovery would start quite slowly,
compared to historic norms, then pick up steam during 2010.
The National Association for Business Economics indicated
in its latest survey that positive growth in U.S. GDP would resume in
3Q of this year at a 1.0% rate. For the second half of 2009 as a whole,
the average forecasted rate of growth of 1.5% is on a par with the
recoveries from the moderate recessions of 1990 and 2001. However, the
recovery falls well short of growth after the more severe recessions,
such as those in 1960, 1974 and 1982.
Improved (2.2%) growth in personal consumption expenditures
and a recovery in residential building are expected to lead the economy
from recession. The gains are expected to be moderate, however,
compared to sharp rebounds typical of the postwar period. Business
investment is expected to continue to decline sharply in 2010.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223d.jpg" align="right" border="0" height="265" width="353">
Corporate profits also are forecasted to rise in 2010 at a
7.3% rate, which would just reverse this year's decline. Again, that
rebound is quite moderate compared to prior periods.
Inflation during the forecast period is expected to remain
quite tame. Growth in the core PCE chained price index is expected to
amount to roughly 1.0% for the rest of this year as the recession
continues and the level of excess capacity remains high. The economic
recovery next year as well as this year's significant injection of
liquidity (money) by the Fed is forecasted to raise prices by 2010 at a
quickened rate.
The bond market is forecasted to deteriorate next year with
rates on the 10-year treasury rising to an average 3.8% from 3.1% this
year. The catalysts for this deterioration are economic improvement as
well as a significant rise in the federal budget deficit ($1.5 trillion
this year and $1.1 billion in 2010) which could give rise to "crowding
out" and higher inflation. In the foreign exchange market, the dollar's
value is expected to remain roughly stable.
The forecast figures from the National Association of Business
Economists are available in Haver's SURVEYS database.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">Nat'l Assn.
for Business Economics</th>
<th scope="col">1Q'09</th>
<th scope="col">2Q '09</th>
<th scope="col">3Q '09</th>
<th scope="col">4Q 09</th>
<th scope="col">2008</th>
<th scope="col">2009</th>
<th scope="col">2010</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Real GDP (%)</td>
<td>-5.0</td>
<td>-1.7</td>
<td>1.0</td>
<td>2.1</td>
<td>-0.2</td>
<td>-0.9</td>
<td>3.0</td>
</tr>
<tr>
<td class="firstcol">"Core" PCE Chained Price Index
(%)</td>
<td>0.6</td>
<td>1.0</td>
<td>1.0</td>
<td>1.2</td>
<td>1.8</td>
<td>0.9</td>
<td>1.5</td>
</tr>
</tbody>
</table>
 Can The Baltic States Hold TheirCurrency Pegs? 
by <a href="/comment/Curley.html">Louise
Curley</a> February 23, 2009



<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223e.jpg" align="left" border="0" height="265" width="353">
The Baltic States--Estonia, Latvia and Lithuania--have, in
recent years, pegged their currencies to the euro. Until recently, this
arrangement had proved economically satisfactory to the three nations.
However, as the deterioration in the world wide economy began to affect
these countries, the fact that their currencies were pegged to a
strengthening euro only exacerbated their problems.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223f.jpg" align="right" border="0" height="265" width="353">
The first chart shows the year over year changes in real GDP
for the three countries. Final data for the fourth quarter of 2008 for
Estonia are not yet available, but the preliminary "flash" estimate is
for a decline of 9.4% from the fourth quarter of 2007. Published data
for Latvia's fourth quarter GDP shows a year over year decline of 10.5%
while that for Lithuania's GDP is only 1.5%.
All three countries have used their foreign reserves to
maintain their pegs with the euro as can be seen in the second chart
that shows the recent declines in the foreign reserves of the three
countries. Latvia spent more than $1.5 billion of its foreign reserves,
defending its currency and was forced to apply for help from an
International Monetary Fund led group for a $9.6 billion bailout. Both
Latvia and Lithuania have cut wages of state employees Latvia by 15%
and Lithuania by 12%. Now, Estonia is considering wage cuts of 10% for
state employees except policemen and teachers. These measures have led
to riots and political unrest. Once again the permanency of currency
board systems in the face of austerity is being tested.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol">BALTIC
STATES&nbsp;</th>
<th scope="col">Jan 09&nbsp;</th>
<th scope="col">Dec 08&nbsp;</th>
<th scope="col">Nov 08&nbsp;</th>
<th scope="col">Oct 08</th>
<th scope="col">Sep 08</th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">Foreign Reserves (Mil.
USD)</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Lithuania</td>
<td>5683</td>
<td>6441</td>
<td>5537</td>
<td>6340</td>
<td>6505</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Latvia</td>
<td>4695</td>
<td>5248</td>
<td>4447</td>
<td>5592</td>
<td>6239</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Estonia</td>
<td>3462</td>
<td>3971</td>
<td>3646</td>
<td>4183</td>
<td>3681</td>
</tr>
<tr class="grey2">
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="grey1">
<td class="firstcol"></td>
<td>Q4 08</td>
<td>Q3 08&nbsp;</td>
<td>Q2 08&nbsp;</td>
<td>Q1 08</td>
<td></td>
</tr>
<tr class="grey4">
<td class="firstcol">Year over Year Chg in
Real GDP %</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Lithuania</td>
<td>-1.48</td>
<td>2.95</td>
<td>5.19</td>
<td>7.01</td>
<td>--</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Latvia</td>
<td>-10.50</td>
<td>-4.57</td>
<td>0.07</td>
<td>3.31</td>
<td>--</td>
</tr>
<tr class="grey3">
<td class="firstcol">&nbsp;Estonia</td>
<td>-9.4</td>
<td>-3.3</td>
<td>-1.4</td>
<td>0.4</td>
<td>--</td>
</tr>
</tbody>
</table>
 
Italy's Inflation Rates Show Turnof Trend 
by <a href="/comment/Brusca.html">Robert
Brusca</a> February 23, 2009


<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090223b.jpg" align="left" border="0" height="265" width="353">
Italy&#8217;s headline HICP inflation rate fell by 0.6% in January.
Its domestic inflation measure fell by 0.2%. Both series show that
inflation has dropped sharply. The Yr/Yr pace for the HICP, or
harmonized rate, is 1.4% down from 3.2% a year ago at this time. The
domestic rate at 1.6% is down from 3% one year ago. 
 

Our diffusion calculations (see table above) show that over
three-months and six-months inflation has been decelerating across more
sectors that it has been accelerating (a value of 50 is neutral; below
that inflation is decelerating in more sectors than it is
accelerating). The deceleration noted by the diffusion indices is
pronounced. It is not just due to a drop in energy prices. 
 
 


<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="8" scope="col">Italy HICP
and CPI details</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Mo/Mo %</td>
<td colspan="3">Saar %</td>
<td>Yr/Yr</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Jan-09</td>
<td>Dec-08</td>
<td>Nov-08</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Yr Ago</td>
</tr>
<tr class="odd">
<td class="firstcol">HICP Total</td>
<td>-0.6%</td>
<td>0.0%</td>
<td>-0.5%</td>
<td>-4.0%</td>
<td>-0.9%</td>
<td>1.4%</td>
<td>3.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Core</td>
<td>#N/A</td>
<td>0.2%</td>
<td>0.1%</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
<td>2.5%</td>
</tr>
<tr>
<td colspan="8" class="firstcol">CPI</td>
</tr>
<tr class="odd">
<td class="firstcol">All</td>
<td>-0.2%</td>
<td>-0.1%</td>
<td>-0.4%</td>
<td>-2.6%</td>
<td>-0.9%</td>
<td>1.6%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Food</td>
<td>0.0%</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.3%</td>
<td>1.6%</td>
<td>3.8%</td>
<td>4.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Alcohol</td>
<td>-0.3%</td>
<td>0.3%</td>
<td>0.3%</td>
<td>1.1%</td>
<td>3.1%</td>
<td>3.2%</td>
<td>4.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Clothing &amp; Shoes</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.5%</td>
<td>1.5%</td>
<td>1.6%</td>
<td>1.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Rent &amp;Util</td>
<td>-0.9%</td>
<td>0.2%</td>
<td>-0.3%</td>
<td>-3.7%</td>
<td>-1.1%</td>
<td>4.1%</td>
<td>4.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Housing &amp;Furniture</td>
<td>0.2%</td>
<td>0.2%</td>
<td>0.0%</td>
<td>1.5%</td>
<td>2.3%</td>
<td>2.2%</td>
<td>3.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Health Care</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.0%</td>
<td>1.3%</td>
<td>1.7%</td>
<td>0.8%</td>
<td>0.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Transport</td>
<td>-0.7%</td>
<td>-1.0%</td>
<td>-2.1%</td>
<td>-14.5%</td>
<td>-9.0%</td>
<td>-1.5%</td>
<td>5.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Communication</td>
<td>-0.4%</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>-1.8%</td>
<td>-4.0%</td>
<td>-3.2%</td>
<td>-8.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Rec &amp;Culture</td>
<td>-0.2%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.0%</td>
<td>-1.0%</td>
<td>0.6%</td>
<td>0.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Education</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.7%</td>
<td>1.9%</td>
<td>2.2%</td>
<td>2.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Restaurant &amp; Hotel</td>
<td>-0.3%</td>
<td>0.0%</td>
<td>0.2%</td>
<td>-0.3%</td>
<td>0.5%</td>
<td>1.9%</td>
<td>2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Other</td>
<td>0.2%</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>1.4%</td>
<td>2.5%</td>
<td>2.5%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Diffusion</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>16.7%</td>
<td>16.7%</td>
<td>33.3%</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Type:</td>
<td colspan="3">Diffusion: Compared to</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
<td>--</td>
</tr>
</tbody>
</table>
</body></html>

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090220e.jpg" width="353">
The latest figures from the Philadelphia Federal Reserve Bank show that the February Business Activity Index fell further to its lowest level since 1990 and that rivaled the lows of the series&#39; forty year history. The bank reported that its February Index of General Business conditions in the manufacturing sector fell to -41.3 from 24.3 last month. A reading of -25 had been expected.
During the last ten years there has been a 70% correlation between the level of the Philadelphia Fed Business Conditions Index and the three-month growth in factory sector industrial production. There has been a 64% correlation with q/q growth in real GDP.
The Philadelphia Fed constructs a diffusion index for total business activity and each of the sub-indexes. The business conditions index reflects a separate survey question.
Amongst the sub-indexes, the new orders figure led this month&#39;s weakness with a decline to near the lowest since 1980. The shipments index fell to a record low. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090220f.jpg" width="353">
The employment index fell another 6.8 points this month, and was down 17.2 points during the last two months, to a record low. Forty eight percent of respondents expected to reduce employment levels, a record, while only two percent expected to raise them. During the last ten years there has been a 79% correlation between the index level and the m/m change in manufacturing sector payrolls.
The prices paid index nudged up month-to-month to -13.7 but just thirteen percent of respondents planned to raise prices. Thirty two percent expected to lower prices. During the last ten years there has been a 72% correlation between the prices paid index and the three-month growth in the intermediate goods PPI. There has been an 80% correlation with the change in core intermediate goods prices.
The separate index of expected business conditions in six months improved to its highest level since September. The expectations index for new orders led the gain but the expectations index for employment rose just marginally from the record low reached in January.
The figures from the Philadelphia Federal Reserve can be found in Haver&#39;s SURVEYS database.
The latest Business Outlook Survey from the Federal Reserve Bank of Philadelphia can be found <a href="http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2008/bos0209.cfm">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Philadelphia Fed (%)</th>
<th scope="col">February</th>
<th scope="col">January</th>
<th scope="col">February&nbsp; &#39;08</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Activity Index</td>
<td>-41.3</td>
<td>-24.3</td>
<td>-22.6</td>
<td>-21.3</td>
<td>5.0</td>
<td>8.0</td>
</tr>
<tr>
<td class="firstcol">Prices Paid Index</td>
<td>-13.7</td>
<td>&nbsp;-27.0</td>
<td>&nbsp;49.5</td>
<td>36.4</td>
<td>26.3</td>
<td>36.7</td>
</tr>
</tbody>
</table>
</body>
</html>

The latest figures from the Philadelphia Federal Reserve Bank show that the February Business Activity Index fell further to its lowest level since 1990 and that rivaled the lows of the series' forty year history. The bank reported [...]

Philadelphia Fed Index Lowest Since 1990

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090220d.jpg" align="left" border="0" height="265" width="353">
The European PMI readings are very weak again in February. In
January there was a slight bounce in the indices for MFG as well as for
Services but in February the weakness is back in force with the indices
dropping very sharply - especially for Services. There the
month-to-month drop form this already low level is the largest decline
m/m on record. 
 

Weakness in the Euro Area is still gathering pace, which is
terrible news. 
 

Germany, today saw its 50 billion euro stimulus plan go over
its last hurdle. Italian industrial orders fell in December but by less
than expected. December UK retail sales rose unexpectedly. But in
France its survey by Insee produced its lowest reading in the history
of the survey that extends back to the mid-1970s. Europe is continuing
to be buffeted with weakness and the more topical the measure the
weaker the results seem to be. 


 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead><tr>
<th colspan="3" scope="col"> FLASH
Readings</th>
</tr>
<tr>
<th colspan="3" scope="col"> Market
PMIs for the Euro
Area
</th>
</tr>
</thead>
<tbody>
<tr class="grey4">
<td class="firstcol">&nbsp;</td>
<td> MFG</td>
<td> Services</td>
</tr>
<tr class="grey3">
<td class="firstcol">Feb-09</td>
<td> 33.63</td>
<td> 38.92</td>
</tr>
<tr class="grey3">
<td class="firstcol">Jan-09</td>
<td>34.42</td>
<td>42.16</td>
</tr>
<tr class="grey3">
<td class="firstcol">Dec-08</td>
<td>33.88</td>
<td>42.06</td>
</tr>
<tr class="grey3">
<td class="firstcol">Nov-08</td>
<td>35.58</td>
<td>42.47</td>
</tr>
<tr class="grey2">
<td></td>
<td colspan="2" class="firstcol">
Averages</td>
</tr>
<tr class="grey3">
<td class="firstcol">3-Mo</td>
<td>34.63</td>
<td>41.15</td>
</tr>
<tr class="grey3">
<td class="firstcol">6-Mo</td>
<td>39.58</td>
<td>43.64</td>
</tr>
<tr class="grey3">
<td class="firstcol">12-Mo</td>
<td>44.98</td>
<td>46.82</td>
</tr>
<tr class="grey1">
<td> </td>
<td colspan="2" class="firstcol">
127-Mo Range</td>
</tr>
<tr class="grey3">
<td class="firstcol">High</td>
<td>60.47</td>
<td>62.36</td>
</tr>
<tr class="grey3">
<td class="firstcol">Low</td>
<td>33.63</td>
<td>38.92</td>
</tr>
<tr class="grey3">
<td class="firstcol">% Range</td>
<td>0.0%</td>
<td>0.0%</td>
</tr>
</tbody>
</table>
</body></html>

The European PMI readings are very weak again in February. In January there was a slight bounce in the indices for MFG as well as for Services but in February the weakness is back in force with the indices dropping very sharply - [...]

Euro Area PMIs Continue To Drop... Very Sharply

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<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090220a.jpg" align="right" border="0" height="265" width="353">
During
February the consumer price index (CPI-U) rose for
the first month since July, according to the U.S. Bureau of Labor
Statistics. The 0.3% gain followed drops of 0.8% and 1.7% during
December and November. Due to those earlier sharp declines the
three-month rate of change remained quite weak at -8.4% (AR). The
latest increase matched Consensus expectations. A 1.7% rise in energy
prices led last month's increase in the CPI after having been down
during the previous five months. Gasoline prices reversed earlier
declines with a 6.0% (-40.4% y/y) increase to an average of $1.79 per
gallon of regular. Still moving lower last month, however, were fuel
oil prices which fell 2.7% (-19.5% y/y).&nbsp; It was their sixth
consecutive monthly drop while prices for natural gas &amp;
electricity fell 0.8% m/m (+7.2% y/y). Increases in food
&amp; beverage prices have very much tapered off from their strong
gains earlier this year.&nbsp; A 0.1% uptick followed a like gain
during December. That pulled the three month annual rate of increase
down to 1.4% after growth as high as 8.7% this summer.&nbsp;
Outright declines in meat and dairy product prices as well as much
easier growth in cereal &amp; bakery product costs account for the
moderation.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090220b.jpg" align="left" border="0" height="265" width="353">
Core prices (CPI less food and energy)
showed their strongest increase since August with a 0.2%
rise.&nbsp; However, despite the increase the year-to-year gain of
1.7% remained its weakest since mid-2004. Little or no growth in core
prices during the prior four months accounts for the moderation. Core
goods prices rose for the first time since July.&nbsp;
The 0.3% increase reversed the prior month's decline but nevertheless
left the three-month rate of change at a negative 0.9%. Prices of new
&amp; used motor vehicles increased for the first time in a year,
but the 0.2% rise left them down 3.2% during that period.&nbsp;
Lower prices of used cars paced the decline with a 9.2% twelve month
decrease.&nbsp; Apparel prices ticked up 0.3% (-0.9% y/y) while
prices for household furnishings &amp; operations ticked lower by
0.1% (+1.8% y/y).&nbsp; Appliance prices were up 2.0% y/y while
furniture prices were unchanged y/y.&nbsp; Tobacco prices again
were strong during January and they posted a 0.8% increase (+6.1% y/y).
Gains in core services prices continued moderate
with a 0.2% increase That left the three-month rate of increase at 1.6%
(AR) after growing at a 3.9% rate this past summer.&nbsp; Medical
care services prices rose 0.5% (3.0% y/y) which was their strongest
increase in twelve months.&nbsp; Education costs posted a 0.3%
increase and the year-to-year rise of 5.5% was stable with the growth
in recent years, though down from the 6.9% increase during
2004.<img src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/090220c.jpg" align="right" border="0" height="265" width="353">
Shelter prices rose 0.2% and the y/y increase fell to
1.8%. As the housing market remained deeply depressed, owners
equivalent rent of primary residence, a measure not equivalent to other
house price measures, rose 0.3% (2.2% y/y).&nbsp; Public
transportation prices fell hard for the fifth consecutive month and
were unchanged year-to-year.&nbsp; Recreation prices also were
unchanged last month and they have been flat or down during the last
there periods, +1.6% y/y. The chained CPI, which adjusts for shifts
in consumption patterns, rose 0.5%, the first increase since
July.&nbsp; Less food and energy, chained prices rose 0.2% after
two months of 0.3% decline. The consumer price data is available in
Haver's USECON database while detailed figures can
be found in the CPIDATA database. House
Prices and Bank Loan Performance from the Federal
Reserve Bank of San Francisco can be found <a href="http://www.frbsf.org/publications/economics/letter/2009/el2009-06.pdf">here</a>.
Labor Supply Responses to Changes in Wealth and Credit
also from the Federal Reserve Bank of San Francisco
is available <a href="http://www.frbsf.org/publications/economics/letter/2009/el2009-05.pdf">here</a>.&nbsp;
<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80101/@E80101.HTM">Consumer
Price Index</a> (%)</th>
<th scope="col">January</th>
<th scope="col">December</th>
<th scope="col">Y/Y&nbsp;</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
<th scope="col">2006</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Total&nbsp;</td>
<td>0.3</td>
<td>-0.8</td>
<td>-0.2</td>
<td>3.8</td>
<td>2.9</td>
<td>3.2</td>
</tr>
<tr class="even">
<td class="firstcol">Total less Food &amp; Energy</td>
<td>0.2</td>
<td>0.0</td>
<td>1.7</td>
<td>2.3</td>
<td>2.3</td>
<td>2.5</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp; Goods less Food
&amp; Energy</td>
<td>0.1</td>
<td>-0.2</td>
<td>-0.5</td>
<td>0.1</td>
<td>-0.4</td>
<td>0.2</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;&nbsp;&nbsp;
Services less Energy</td>
<td>0.2</td>
<td>0.1</td>
<td>2.5</td>
<td>3.1</td>
<td>3.4</td>
<td>3.4</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp; Energy</td>
<td>1.7</td>
<td>-9.3</td>
<td>-21.1</td>
<td>13.5</td>
<td>5.7</td>
<td>11.0</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp; Food &amp;
Beverages</td>
<td>0.1</td>
<td>0.1</td>
<td>5.2</td>
<td>5.4</td>
<td>3.9</td>
<td>2.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained
CPI: Total (NSA)</a>&nbsp;</td>
<td>0.5</td>
<td>-1.3</td>
<td>-0.5 </td>
<td>3.3</td>
<td>2.5</td>
<td>2.9 </td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;Total less Food
&amp; Energy&nbsp;</td>
<td>0.2</td>
<td>-0.3</td>
<td>1.2</td>
<td>2.0</td>
<td>2.0</td>
<td>2.2</td>
</tr>
</tbody>
</table>
</body></html>

During February the consumer price index (CPI-U) rose for the first month since July, according to the U.S. Bureau of Labor Statistics. The 0.3% gain followed drops of 0.8% and 1.7% during December and November. Due to those earlier [...]

U.S. CPI Ticked Up

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

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

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Andrew Cates

**US trade with Europe** 
Geopolitical tensions surrounding Greenland have abruptly sharpened investor sensitivity to US trade and foreign-policy risk. What might once have been dismissed as rhetorical brinkmanship has taken on greater macro-financial relevance as Donald Trump has coupled renewed interest in Greenland’s strategic importance with explicit threats of higher tariffs on European imports. The first chart below highlights that the US is materially more exposed to EU goods than the EU is to US trade, making any escalation asymmetrically more costly for the US economy. Beyond the direct inflationary impact of higher tariffs, the more immediate risk lies in confidence effects and capital flows: early signs of capital reallocation away from US assets over the past 24 hours suggest that markets could be beginning to price a broader erosion of policy predictability. In this environment, tariffs risk functioning less as a targeted trade tool and more as a systemic confidence shock—tightening financial conditions, unsettling the dollar’s safe-haven status and increasing downside risks to US growth via weaker investment and higher risk premia.

260122Z1.jpg

**Japan’s JGB yields**
That said, recent capital outflows from US assets may owe as much to developments in Japan as to geopolitical and trade-related shocks. While tariff threats and policy unpredictability have clearly unsettled sentiment, an underappreciated driver of the sell-off in US Treasuries has been the sharp repricing in the Japanese government bond market. Renewed domestic political uncertainty and intensifying concerns over Japan’s debt dynamics have triggered a rapid rise in JGB yields, prompting portfolio rebalancing by Japanese investors and reducing the relative appeal of US duration. Given Japan’s role as one of the largest foreign holders of US Treasuries, yield gyrations at home can translate quickly into capital repatriation, hedging adjustments and reduced demand for US bonds. In this sense, recent moves in US yields may reflect less a direct reaction to geopolitical risk and more a globally transmitted capital-flow shock—originating in Japan but felt most acutely in US financial markets.

260122Z2.jpg

**Inflation expectations and oil prices**
Capital-flow dynamics may have also begun to spill over into how markets are pricing US inflation risk and monetary credibility. Historically, medium-term US inflation expectations have remained closely anchored to global energy prices, as illustrated by the strong co-movement between the 5-year forward inflation rate and Brent crude prices. More recently, however, that relationship has begun to fray: inflation expectations have proven notably resilient even as oil prices have softened, suggesting that markets are increasingly pricing political and policy risk rather than cost-push fundamentals alone. Renewed tariff threats under President Trump, combined with heightened geopolitical tensions involving Greenland and transatlantic relations, risk reinforcing concerns that future inflation outcomes could be shaped as much by political intervention as by macroeconomic conditions. Any perception that the Federal Reserve may face constraints on its operational independence would compound this shift—loosening inflation anchors, raising term premia and increasing the sensitivity of capital flows to US policy credibility.

260122Z3.jpg

**UK inflation** 
UK inflation data released this week show a small upside surprise in headline CPI at year-end. Headline CPI inflation specifically rose from 3.2% y/y in November to 3.4% in December, a little more than expected. The chart below shows that the pickup was driven by persistent underlying pressures—most notably in services. While a negative drag from energy prices has largely faded, services inflation continues to account for a disproportionate share of overall price growth, probably reflecting ongoing wage pressures and limited slack in parts of the domestic economy.

260122Z4.jpg

**Wage growth in the US and Europe** 
Labour-market data from the Indeed Hiring Lab reinforce the picture of persistent services-side pressure in the UK inflation mix. As the chart shows, UK posted wage growth remains elevated relative to both the euro area and the US, even though momentum has eased from its 2023 peak. At around the mid-5% range on a three-month moving average basis, UK wage growth is still running at a pace that is difficult to reconcile with a rapid return of services inflation to target. By contrast, posted wage growth in the euro area has slowed more decisively, while the US has seen a sharper deceleration from earlier extremes.

260122Z5.jpg

**China’s property market**
Finally, the Q4 GDP figures released in China this week sit uneasily alongside continued weakness in its domestic property sector, which remains a key drag on both investment and consumption. While Q4 growth of 4.5% y/y brought full-year GDP broadly in line with the authorities’ 5% target, the chart highlights how property-market adjustment is still running deep beneath the surface. Prices of existing homes across China’s 70 cities remain in year-on-year decline, while real estate investment continues to contract sharply, underscoring the scale and persistence of the sector’s retrenchment. This helps explain why fixed asset investment has softened further and why household demand remains subdued, despite more resilient industrial output.

260122Z6.jpg

This week’s data and market moves have been framed by an abrupt escalation in geopolitical tensions surrounding Greenland, which has served as a catalyst for broader financial unease rather than a standalone shock. The episode has sharpened investor focus on US policy predictability, amplifying concerns already evident in the charts on EU–US trade exposure, where tariff threats risk feeding directly into confidence effects and capital flows. At the same time, recent turbulence in Japanese government bonds appears to have been an underappreciated driver of the sell-off in US Treasuries, highlighting how global capital reallocation—rather than geopolitics alone—has contributed to higher US yields. These forces intersect with growing questions around the durability of US monetary credibility, as inflation expectations have shown signs of decoupling from traditional oil-price anchors, raising the sensitivity of markets to any perceived constraints on the Federal Reserve. Beyond the US, UK data delivered a modest upside surprise in headline inflation, with persistent services and wage pressures reinforcing a cautious policy backdrop for the Bank of England. In China, meanwhile, Q4 GDP growth of 4.5% y/y kept full-year expansion aligned with the government’s target, but continued weakness in the property sector remains a significant drag on investment and household confidence. Taken together, the week’s developments point to a global outlook increasingly shaped by geopolitical risk, capital-flow dynamics and domestic  structural constraints, rather than by straightforward cyclical momentum alone.

Charts of the Week: Seeing Green

Sandy Batten

260122N8.jpg

260122C8.jpg

Real GDP increased 4.4% q/q saar in the third quarter of 2025 in the final estimate, up marginally from 4.3% in the first release. The Action Economics Forecast Survey expected no revision. Growth from a year ago was unrevised at 2.3% y/y. Growth of corporate profits was revised up to 4.5% q/q not annualized from 4.2% in the previous report.

The revision to GDP mostly reflected slightly stronger nonresidential fixed investment, a larger increase in exports and a smaller decrease in inventory investment. Nonresidential fixed investment increased a revised 3.2% q/q saar versus a 2.8% gain in the previous release. This reflected a smaller decline in structures, a smaller increase in equipment and a larger increase in intellectual property products than previously estimated. Residential investment was revised weaker with a 7.1% quarterly decline versus -5.1% in the previous estimate.

Upon revision, exports rose 9.6% q/q in Q3 versus 8.8% in the first estimate. Consequently, the trade deficit narrowed a little more than in the first estimate, resulting in net exports adding 1.62%-points to overall growth, 0.03%-point more previously estimated. The decline in inventory investment in Q3 was smaller than previously estimated, reducing the drag from inventories by 0.1%-point versus the previous estimate. The decline in inventories subtracted 0.12%-point in Q3 on top of a 3.44%-point subtraction in Q2.

Domestic demand growth remained solid in Q3 but was revised down 0.1%-point. Final sales to domestic purchasers grew a revised 2.8% q/q saar in Q3 versus 2.9% in the first estimate. Final sales to private domestic purchasers increased 2.9% q/q, down slightly from 3.0% previously.

260122O8.jpg

260122P8.jpg

The primary driver of overall growth continued to be personal consumption expenditures. They increased an unrevised 3.5% q/q saar in Q3, adding 2.34%-points to total GDP growth. This reflected a 3.0% increase in spending on goods versus 3.1% previously and a 3.6% gain in spending on services versus 3.7% previously. The rise in government spending was unrevised at 2.2% q/q. However, spending by the federal government was revised slightly slower to 2.7% from 2.9% while spending by state and local governments was revised up slightly to 2.0% from 1.8%.

Key measures of inflation were unrevised. Inflation as measured by the GDP price index remained at 3.8% q/q saar in Q3, but this was up markedly from 2.1% in Q2. Similarly, PCE inflation in Q3 was unrevised at 2.8% versus 2.1% in Q2. Core PCE inflation was also unrevised at 2.9% in Q3.

The GDP data can be found in Haver’s **USECON** and **USNA** databases. **USNA** contains virtually all of the Bureau of Economic Analysis detail in the national accounts. The Action Economics consensus estimates can be found in **AS1REPNA**.

260122Q8.jpg

260122S8.jpg

- Real GDP grew 4.4% q/q saar in Q3 2025, up slightly from 4.3% previously reported.
- The modest upward revision was due mostly to slightly stronger nonresidential fixed investment, a larger increase in exports and a smaller decrease in inventories.
- Growth of domestic demand remained solid in Q3 but was revised down 0.1%-point.
- GDP and PCE inflation were unrevised at 3.8% and 2.8%, respectively. Both are meaningful accelerations from Q2.

U.S. Q3 GDP Growth Revised Slightly Faster

Kathleen Stephansen, CBE

260122A2.jpg

260122B2.jpg

Initial claims for unemployment insurance edged up 1,000 to 200,000 in the week ending January 17, from 199,000 in the week ending January 10, revised from 198,000. The four-week moving average of initial claims was 201,500 in the January 17 week, down 3,750 from 205,250 in the January 10 week, revised from 205,000, and reaching the lowest level for this average since January 13, 2024, when it was 200,000.

Federal government employees initially filed 1010 (NSA) jobless insurance claims in the week ended January 10, after filing 646 (NSA) claims in the week ended January 3.

The total number of unemployment insurance beneficiaries – also known as “continuing claims” –decreased by 26,000 to 1.849 million in the week ended January 10 from 1.875 million in the week ending January 3, revised from 1.884 million. The four-week moving average was 1.871 million in the latest week, down from 1.887 million in the January 3 week, revised from 1.889 million. The insured unemployment rate remained at 1.2% in the week of January 10, unchanged from previous 6 weeks.

Federal government employees’ continuing benefits claims were 12,977 (NSA) in the week ending January 3, from 12,803 (NSA) in the week of December 27.

The insured unemployment rate varied greatly across individual states and territories. In the week ending January 3, the highest unemployment rates were in Rhode Island (3.27%), New Jersey (3.17%), Washington (2.85%), Minnesota (2.75%), Massachusetts (2.74%), Oregon (2.37%), Connecticut (2.31%), Montana (2.26%), California (2.21%), and Alaska (2.06%). The lowest rates were in Florida (0.29%), North Carolina (0.40%), and Louisiana (0.43%). Rates in other notable states include New York (2.28%), Pennsylvania (2.23%), Illinois (2.21%), and Texas (1.14%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

260122C2.jpg

260122D2.jpg

U.S. Initial Claims for Unemployment Insurance Edged Up in Latest Week

260122E.jpg

The National Bank of Belgium index for January 2026 rose to +4 from -1 in December, stronger than its November 2025 reading of +2. The survey value is exceptionally strong, lying in the top 6% of all observations back to 1991, even as the survey contains significant variations that range from strong to quite weak across its various components. What is most notable is that the index itself is extremely high-ranking; the current situation appraisal is also quite high-ranking; and, that the forecast for unemployment embedded in this survey is at a 35-year low. Considering current circumstances, against the events of the last 35 years, that's a rather remarkable finding especially considering the world situation.

**The times, they are a changin’ was Dylan 50 years early?** 
These have been remarkable times in a number of different ways with a clear transition from the circumstances of the post-war period under way. The solidarity of the NATO alliance is clearly in a situation in flux, revealed since Russia invaded Ukraine. Prior to that, the Europeans had resisted putting more money into the NATO pot as the United States had been frantically asking them while it funded most of the security umbrella. Now, in the wake of these new events, and with the changes to the global stage wrought by climate shifting, the U.S. finds Greenland to be a more important piece on the geopolitical chess board and wants to have more say there in order to protect its own flank as Arctic ice packs recede. This is after a period when NATO basically failed to engage in the front-line protections of its own doorstep that the U.S. had thought were necessary. Not surprisingly, the U.S. found that whole episode unsatisfactory and is now reluctant to give up control to NATO of what it regards as the protection of its own back door for the area around Greenland. But at last, Europe and the U.S. appear to have a deal or the makings of one, so, stay tuned. Maybe all civility is not lost.

**Geopolitical shifts meld with economic issues to change the landscape**
Geopolitical shifts are part of the problem because geopolitics and economics help shape one another. And there has been a great deal of economic turmoil as well. The U.S., after reassessing the Post War order, is bringing back to life tariffs, in order to try to get economic leverage after running 33 consecutive years of current account deficits under what people want to call a free trade system. The U.S. finds itself with a still very overvalued dollar and in a situation where its current account deficits are poised to continue to run high and perhaps get higher. Economists say tariffs are not the solution, but maybe they ARE the wake-up call that will lead to a solution? Europeans have also shifted to embracing a larger and larger government sector and ever larger fiscal deficits and more fiscal debt while absorbing migrants. This is constraining its ability to have any kind of a flexible macroeconomic policy and is a severe problem already for the U.K. and France. And these changes are wreaking havoc with what has been a very solid post-war Atlantic alliance.

**Views change**
But the changes that the U.S. has pushed on to the system from its geopolitical adventurism to its use of tariffs and other strong rhetorical comments have led economists to focus on the elevation of uncertainty in the economic system. Elevating uncertainty has an adverse impact on the economy and on growth. I mentioned this with the obvious caveat that this warning by economists seems to have been completely wrong. U.S. growth has turned out to be quite resilient and even strong. It is not the only adamant position that has proved to be wrong and malleable. Despite the reality of climate change, the view that once took carbon as the main and unequivocal climate change agent, itself is shifting. Opposition to carbon has dwindled, more as the U.S. is embracing nuclear power. Artificial intelligence is becoming a strong bet for stronger growth in the future, and this explains why there have been so many shifting views on energy since artificial intelligence requires massive amounts of energy and would make it impossible to make progress on carbon and to push ahead with the AI agenda at the same time. So, instead of delaying AI, the view on carbon had to go. So much for ‘science.’

**Why are Belgians so satisfied?**
The finding that in Belgium consumer confidence has risen sharply in this environment and fears of unemployment are the lowest they've been in 35 years is another shocking development in this pantheon of incredible and shocking changes. As the above discussion points out, a lot is changing and NATO is at odds with the U.S., its lynchpin. Yet, there is no clear increase in uncertainty in Belgium, while they maybe more in Brussels.

**The Belgian Survey: strong despite waffles**
Belgians do not read the economic situation over the next 12 months as that strong at a reading of -29 on the survey; it has weakened over the last few months, and the economic situation assessment is only at its 8.3 percentile, an extremely weak standing. Price trends are the opposite; they have eased somewhat in the recent months, but over the next 12 months the assessment still has a top 14-percentile evaluation. It is in this context that the unemployment forecast, which is the lowest in 35 years, emerges as surprising. The environment to make major household purchases over the next 12 months is only a mid-range at a 45.7 percentile standing. And people rate their financial situation over the next 12 months slightly better than at the end of last year but at only a 34.2 percentile standing. However, the appraisal of the current situation moved up sharply in January and has a 97.7 percentile standing, which is extremely strong.

260122.jpg

**Low unemployment fear spurs confidence**
The reason for consumer confidence to be strong is clear when you see how low concerns are about unemployment. But it's hard to understand why concerns about unemployment are so low with the rest of the economic metrics so varied in the survey. This is especially true with Belgium nestled in the heart of Europe and all of these concerns between the U.S. and NATO swirling around as well as a still very hot war occurring on Europe's border between Ukraine and Russia. Meanwhile, the U.S. position about this war continues to seem to back Ukraine a lot less than it should.

**Belgium is a good bellwether**
The Belgian survey is not the most important bit of economic activity. Belgium is not an extremely important country in Europe, although it's in the heart of the European Union, a member of the European Monetary Union, linked closely to Germany, and to other key European economies through trade, so that its performance likely is a good reflection of what's going on in Europe. It is not a European border country. It is in the heartland of Europe. That may explain a little bit why Belgians are not perhaps as nervous as Poles, are or Finns or the small Baltic countries, and others, with potentially more border proximity and vulnerability to the Russia-Ukraine conflict.

**Belgian optimism flies in out of the blue**
This is an observation. I think it's the kind of observation in this world economy that we find striking and unusual and will bear some further watching and some watching of other similar readings in Europe to see if there's evidence that there's some kind of new resilience that we might have missed. Economists seem hung-up broken-record style on uncertainty. Certainly, there's something here that economists have missed who have only seen these new actions by the U.S. as creating more uncertainty since we do not know what the new Greenland deal is. And uncertainty should create more adversity for growth except that it hasn't worked out that way. And it's a reminder that separating economics from geopolitics may take more than a crowbar. And also that uncertainty comes in many shapes and sizes while some may argue that there still is not a Greenland deal, what we see is a lowering of the temperature, a calming of the rhetoric and a sense that the parties have a horse trade they think they can do to resolve their differences. And while there is still uncertainty, there is also clear progress and a clear reduction in risk. Still, the times are changing.

Belgium

Belgian Consumer Confidence Up and Strong; Fear of Unemployment at 35-Year Low! Is That Possible?

Winnie Tapasanun

260121F.jpg

260121G.jpg

The Pending Home Sales Index, a forward-looking measure of home sales based on contract signings, fell 9.3% m/m to 71.8 in December following unrevised increases of 3.3% in November and 2.4% in October, according to the National Association of Realtors (NAR). December marked the first m/m fall since July and the steepest since April 2020. The year-on-year rate was -3.0% in December, the first negative y/y reading since September, compared to +2.6% in November and -5.0% in December 2024. The index had fallen 42.6% since its October 2021 high of 125.1. In 2025, the PHSI declined 0.9% after drops of 3.0% in 2024 and 16.1% in 2023.

The m/m fall in December pending home sales occurred alongside a decline in the average 30-year mortgage rate to 6.20% in December, the lowest since September 2024, down from 6.24% in November and 6.25% in October. These rates, while below a peak of 7.62% in October 2023, had remained higher than a low of 5.22% in August 2022 and more than double a record-low 2.68% in December 2020.

Pending home sales decreased m/m in December across all four major regions. The Midwest recorded the sharpest drop, with sales plunging 14.9% (-9.8% y/y) in December—the first m/m decline since September and the deepest since April 2020—after a 1.3% increase in November. Sales in the West slumped 13.3% (-5.1% y/y), the third m/m decrease in four months, following a 9.2% November rebound. Sales in the Northeast slid 11.0% (-3.6% y/y), the first m/m slide since August, after a 1.8% November rise. Sales in the South fell 4.0% (+2.0% y/y), the first m/m fall since June, after a 2.5% November gain.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

The series dates back to 2001 and are available in Haver's **PREALTOR** database. Weekly mortgage interest rates from the Mortgage Bankers Association can be found in the **WEEKLY** database.

- PHSI -9.3% m/m (-3.0% y/y) to 71.8 in Dec., lowest index level since July.
- Home sales m/m down in all four major regions, w/ the Midwest seeing the steepest drop (-14.9%).
- Home sales y/y down in the Northeast, Midwest, and West, but up in the South (+2.0%).

Economy in Brief: 2009

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