Robert Brusca

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French business climate improved by two points in July, with the index rising to 95 from 93 in June. The standing of the index is its highest in 15 months. The reading for the recent trend improved much more sharply to -30 in July from -41 in June. The reading for the 'likely trend' switched over into positive territory, registering a plus-one reading in July after a -1 reading in June. That's the first positive reading since February of this year although still it's below the February level. 

Orders and demand improved to a -25 reading from -29 in June, making it the strongest reading since September of last year. Conversely, foreign orders and demand deteriorated, slipping back to -31 from -28 in June. Apparently the improvement in France is home-grown. The foreign orders and demand reading is the weakest the since January of this year.

Despite the widespread improvement the French metrics remain. The industry climate index sits in the 48th percentile of its high low range since February 1990. But if we position it in its rank of observations historically: its standing is still barely above the bottom third of its historic queue of values sitting at the 34.8 percentage point of its ordered queue (that is to say, that it is weaker than this only about 35% of the time). Similarly the 'recent trend' standing is in the 25th percentile of its ordered queue, the 'likely trend' is in the 34th percentile of its ordered queue. Orders and demand are in the 36 percentile of their ordered queue with foreign orders and demand much weaker in the lower 17th percentile of their ordered queue. The data for France are showing some near-term life but the readings continue to be weak in historic context. But that has to be clear from plot in the chart.

There are other signs of improvement in the euro-Zone, although none of them really help us to understand why French business confidence is improving. The Bank of Spain for example still sees recession but sees recession forces abating in the second quarter. In the UK exports are giving off the strongest reading since the recession according to a survey of UK exporters. 

However, debt to GDP ratios are still rising in the European Monetary Union as a result of austerity. Austerity has continued to drive up debt demands across the euro-Zone while the straitjacket of austerity has prevented growth from restarting thereby making debt to GDP ratios even worse (higher).

Globally a new plan announced by China to try for public works programs that will employ some of its domestic industries that are the slackest, was greeted well by markets yesterday.

On balance we welcome these signs of improved activity in the euro-Zone and in France. The improving survey in France adds to some signals from the PMI surveys of manufacturing and services improvement there that tell us also that the extent of weakness is abating. 

The July reading for services industries and for manufacturing industries each separately improved in in France. It's another encouraging signal for the French business sector. However, the household sector, where data lag by one month and are currently only available through June does not show the same sort of improvement. The index of household confidence slipped in June by one point compared to May after May fell by four points from April's level. While overall business confidence might be the highest in 15 months, compared with its level of one year ago, the household confidence index, at 78, is well below its value of 90 from one year ago. French businesses are feeling better without engendering any improved feeling of well-being on the part of households. Indeed, household rankings back to January 1990 are the weakest on record as are the statistics on living standards for the past and future 12 months. French consumers continue to evaluate their financial situation extremely poorly. The environment for spending is in at least the bottom 10 percentile of what it's been historically.

Against this background, while it is encouraging to see some improvement in the attitudes of French businesses it's unclear where that comes from or how long it can last. Apparently it isn't underpinned by improved foreign demand, judging from responses in the survey itself. Clearly it's not improved because of improved domestic spending conditions or household confidence. Since we continue to get reports of extremely difficult international trading conditions it's hard to imagine that France, given its competitiveness challenges, is doing better on the world stage of competition. And the French fiscal deficit and deficit outlooks is poor enough that it's really not possible for the French government to make any additional promises to French business to ineffectively underpin improved attitudes. While I don't doubt the results in the French business survey, I have to declare that I can't completely understand what they're based on. I feel much more comfortable understanding them with regard to how low they are in their historic standing rather than gaining any comfort from the degree to which they've improved in recent months.








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French business climate improved by two points in July, with the index rising to 95 from 93 in June. The standing of the index is its highest in 15 months. The reading for the recent trend improved much more sharply to -30 in July [...]

French Businesses Are More Upbeat - Do They Know Something?

Tom Moeller

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 Strength in the housing market continues to exhibit itself in
 rising selling prices. The U.S. House Price Index from the Federal
 Housing and Finance Agency (FHFA) rose 0.7% during May following a
 0.5% April rise. The 7.3% y/y rate of increase was double the gain
 during all of last year. During the last three months prices have
 risen at a firmer 11.2% annual rate.
 Home price appreciation was broad-based in the U.S. It continued
 to be greatest in the Pacific (15.8% y/y) and Mountain (12.7% y/y)
 states. Lesser gains were logged across the country with prices in
 the East South Central region up the least (2.7% y/y).
 The FHFA house price index is a weighted repeat sales index. It
 measures average price changes in repeat sales or refinancings on
 the same properties. It is 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 is available in
 Haver's USECON database.&nbsp;
 
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 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
	
 <thead>
 <tr>

 <th class="firstcol" >FHFA U.S. House Price Index
 Purchase Only (SA %) </th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Mar</th>
 <th scope="col" >Y/Y</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total</td>
 <td >0.7</td>
 <td >0.5</td>
 <td >1.5</td>
 <td >7.3</td>
 <td >3.5</td>
 <td >-4.1</td>
 <td >-2.9</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Pacific</td>
 <td >0.8</td>
 <td >1.8</td>
 <td >2.4</td>
 <td >15.8</td>
 <td >4.9</td>
 <td >-7.0</td>
 <td >-2.2</td>

 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Mountain</td>
 <td >-0.1</td>
 <td >1.9</td>
 <td >1.3</td>
 <td >12.7</td>
 <td >8.2</td>
 <td >-6.9</td>
 <td >-6.5</td>

 </tr>
 <tr>
 <td class="firstcol" >&nbsp; South Atlantic</td>
 <td >1.8</td>
 <td >-0.6</td>
 <td >1.3</td>
 <td >8.0</td>
 <td >4.1</td>
 <td >-5.2</td>
 <td >-4.8</td>

 </tr>
 <tr>
 <td class="firstcol" >&nbsp; West South Central</td>
 <td >0.9</td>
 <td >0.1</td>
 <td >0.3</td>
 <td >6.1</td>
 <td >4.3</td>
 <td >-1.1</td>
 <td >-0.3</td>

 </tr>
 <tr>
 <td class="firstcol" >&nbsp; East North Central</td>
 <td >0.5</td>
 <td >0.7</td>
 <td >1.8</td>
 <td >4.7</td>
 <td >2.2</td>
 <td >-3.7</td>
 <td >-3.2</td>

 </tr>
 <tr>
 <td class="firstcol" >&nbsp; West North Central</td>
 <td >-0.0</td>
 <td >0.2</td>
 <td >1.1</td>
 <td >4.4</td>
 <td >3.5</td>
 <td >-3.3</td>
 <td >-2.0</td>

 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp; New England</td>
 <td >0.8</td>
 <td >0.1</td>
 <td >1.3</td>
 <td >3.9</td>
 <td >-0.1</td>
 <td >-2.2</td>
 <td >-2.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; Middle Atlantic</td>
 <td >0.9</td>
 <td >0.4</td>
 <td >1.5</td>
 <td >3.3</td>
 <td >-0.0</td>
 <td >-3.2</td>
 <td >-1.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp; East South Central</td>
 <td >-1.5</td>
 <td >0.8</td>
 <td >1.8</td>
 <td >2.7</td>
 <td >2.6</td>
 <td >-2.6</td>
 <td >-2.8</td>
 </tr>
 </tbody>
 </table>
 
 <table class="centered" border="0" cellSpacing="0" width="100%">
 <tr>
 <td> 
 New England: Maine, New Hampshire, Vermont,
 Massachusetts, Rhode Island and Connecticut 
 Middle Atlantic: New York, New Jersey &amp;
 Pennsylvania. 
 East North Central: Michigan, Wisconsin, Illinois,
 Indiana and Ohio. 
 West North Central: North Dakota, South Dakota,
 Minnesota, Nebraska, Iowa, Kansas and Missouri. 
 South Atlantic: Delaware, Maryland, District of
 Columbia, Virginia, West Virginia, North Carolina, South
 Carolina, Georgia and Florida. 
 East South Central: Kentucky, Tennessee, Mississippi
 and Alabama. 
 West South Central: Oklahoma, Arkansas, Texas and
 Louisiana. 
 Mountain: Montana, Idaho, Wyoming, Nevada, Utah,
 Colorado, Arizona and New Mexico. 
 Pacific: Hawaii, Alaska, Washington, Oregon and
 California. 
 </td>
 </tr>
 
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Strength in the housing market continues to exhibit itself in rising selling prices. The U.S. House Price Index from the Federal Housing and Finance Agency (FHFA) rose 0.7% during May following a 0.5% April rise. The 7.3% y/y rate of [...]

FHFA Home Price Index Builds Upward Momentum

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 Existing home sales edged down 1.2% in June
 (+15.2% y/y) to 5.080 mil. units (AR), according to the National Association
 of Realtors. The May figure was revised down to 5.140 mil. from 5.180 mil.
 reported last month. Consensus expectations had been for 5.260 mil. Sales of
 existing single-family homes alone fell 1.1% to 4.500 mil. (+14.5% y/y.
 These data have a longer history than the total sales series.) Sales of
 condos and co-ops decreased 1.7% m/m to 0.580M (+20.8% y/y).
 Sales slipped across the nation by roughly equal amounts. In the
 Northeast sales fell 1.6% to .630 mil. (+16.7% y/y). Sales declined 1.6% in
 the West to 1.210 mil. (11.0 y/y while sales in the South were off 1.5% to
 2.030 mil. (+16.0 y/y). Sales in the Midwest were unchanged at 1.210 mil. (17.5%
 y/y).
 Potentially holding back sales was the diminished supply of homes on the
 market. It edged up last month to 5.1 months of sales but that remained down
 from a high of 11.9 months in July of 2010. The actual number of homes on
 the market fell 7.6% y/y last month and added to a 21.1% decline during all
 of last year and a 23.2% drop in 2011.
 The median price of an existing home jumped another 5.5% in June to $214,200
 (13.5% y/y). This was the highest price reading since June 2008. The peak
 was $230,300 in July 2006.
 Reported earlier this month, the May composite index of home price affordability dropped 6.3% (-8.3% y/y) to its lowest level since August
 2010. The decline was due to the 5.5% price increase (13.2% y/y). The
 average mortgage rate slipped m/m to 3.57% but was up from the 3.43%
 December low.&nbsp; 
 The data on existing home sales, prices and affordability can be found in Haver's USECON database. The regional price, affordability and inventory data are available in the REALTOR database. The
 expectations figure is from the Action Economics survey, reported in the AS1REPNA
 database.&nbsp;
 
 
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	<colgroup><col><col><col><col><col><col><col><col></colgroup>
	
 
 <tr>
 <td class="firstcol" >Existing Home Sales (SAAR, 000s)</td>
 <td >Jun</td>
 <td >May</td>
 <td >Apr</td>
 <td >Y/Y %</td>
 <td >2012</td>
 <td >2011</td>
 <td >2010</td>
 </tr>
 <tr>
 <td class="firstcol" >Total</td>
 <td >5,080</td>
 <td >5,140</td>
 <td >4,970</td>
 <td >15.2</td>
 <td >4,661</td>
 <td >4,278</td>
 <td >4,183</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >&nbsp;&nbsp;&nbsp;&nbsp;Northeast</td>
 <td >630</td>
 <td >640</td>
 <td >640</td>
 <td >16.7</td>
 <td >596</td>
 <td >543</td>
 <td >563</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp;&nbsp;Midwest</td>
 <td >1,210</td>
 <td >1,210</td>
 <td >1,120</td>
 <td >17.5</td>
 <td >1067</td>
 <td >918</td>
 <td >909</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >&nbsp;&nbsp;&nbsp;&nbsp;South</td>
 <td >2,030</td>
 <td >2,060</td>
 <td >2,010</td>
 <td >16.0</td>
 <td >1,833</td>
 <td >1,683</td>
 <td >1,626</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;&nbsp;&nbsp;West</td>
 <td >1,210</td>
 <td >1,230</td>
 <td >1,200</td>
 <td >11.0</td>
 <td >1,165</td>
 <td >1,133</td>
 <td >1,084</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >Single-Family Sales</td>
 <td >4,500</td>
 <td >4,500</td>
 <td >4,380</td>
 <td >14.5</td>
 <td >4,130</td>
 <td >3,793</td>
 <td >3,705</td>
 </tr>
 <tr>
 <td class="firstcol" >Median Price Total ($, NSA)</td>
 <td >214,200</td>
 <td >203,100</td>
 <td >191,800</td>
 <td >13.5</td>
 <td >175,442</td>
 <td >164,542</td>
 <td >172,442</td>
 </tr>
 
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Existing home sales edged down 1.2% in June (+15.2% y/y) to 5.080 mil. units (AR), according to the National Association of Realtors. The May figure was revised down to 5.140 mil. from 5.180 mil. reported last month. Consensus [...]

U.S. Existing Home Sales Unexpectedly Slip as Inventories Drop; Prices Improve

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On the surface Spain's prices appear to be fairly well behaved. In the recession producer prices, import prices and export prices all fell year-over-year. As recovery came, all these prices begin to expand year-over-year and generally with a good deal of vigor. That occurred until about the middle of 2012. Since then, prices in Spain have continued to ease their rate of expansion and have been posting extremely week rates of growth. Import prices ratcheted down year-over-year and export import prices both had also posted year-over-year drops and are now closer to posting flat trends.


When we dig slightly deeper into the commodity composition of price inflation we see very different things going on at the producer level, at the export level and at the import level for consumer prices, intermediate goods prices, and investment goods or capital goods prices.


We focus on 12-month price trends to simplify the comparisons. PPI prices are rising by 0.8% year-over-year. That's a small increases yet it is faster than for overall export or import prices, both of which are falling on balance over 12-months. Look at individual categories: we find consumer goods import prices are strongest, followed by producer prices and exports. Yet Spain's consumer sector does not seem very strong. Why are its import prices relatively so firm?


Intermediate goods prices are falling for all categories; their strongest result is for producer prices where the decline is only 0.5% over 12 months. For intermediate goods, the weakness grows for export prices and for import prices- the latter are down by 7.8% year-over-year. Lest you think this is being driven by commodity prices, the biggest year-over-year weakness is in imports but it's from capital goods down by 15.3% Year-over-year. By comparison capital goods export prices are down but only by 3.4% year-over-year and domestically investment goods prices are flat over 12 months.


If we look to see where Spain ranks in the Eurozone on inflation performance over the last 12 months it's back in the pack suffering a relatively higher inflation rate than most of the original European monetary union members; its producer price inflation ranks it as the seventh lowest among the original 11 EMU members who have reported figures. Spain is not doing an excellent job on inflation compared to the rest of the Zone. Its producer prices are generally holding up better than either export import prices. This is despite the fact that Spain's economy has been weak, yet the export and import universe appears to be much worse.


With weakness in global demand and rampant conditions of excess supply, it's not so surprising to find weakness in capital goods prices. In Spain's particular business cycle weakness was concentrated in the construction sector. It's not surprising to find capital goods prices are being dragged down by a tremendous oversupply and weakness in Spain's construction sector. Still globally capital goods export and import prices are even weaker than in Spain's domestic market. 


Spanish export goods generally are finding world markets weaker than the Spanish markets at home, at least judging from the performance of export prices for goods intermediate goods and capital goods and even for consumer goods.


While the trends for overall export, import and producer prices seem to more or less track together over the cycle, the various sectors are showing very wide differences in performance. And even with Spain as one of the weaker countries in the monetary union, the additional weakness in its export and import prices is not reassuring either for Spain or for the prospects for growth for the rest of EMU. 


Since 2001 export prices have risen relative to import prices for each commodity category but the rise has been greatest for intermediate goods where export prices have risen much more than import prices since 1991. 


Just today the Bundesbank has issued a warning for a slowdown in the German economy in the second half. The Bundesbank is admitting a pickup in the second quarter but attributing it largely to weather and is seeing further weakness as its view shifts to the third quarter. Germany does depend a lot on capital goods exports and we know it has cultivated Chinese markets. The weakness there may be having blowback effects on Germany and that may be another factor that's been picked up in week Spanish import prices for capital goods.


There are a lot of cross currents in Europe. This analysis of various trends in Spanish prices is a reminder to look deeper into price trends to find out what's really going on rather than to simply rely on headlines to tell the story. The headlines are not telling the story. This is especially true when you look at the headlines being made by our monetary policy makers or our fiscal policymakers or by our international policymakers at the G 20. Be very careful to look at the details because that's where you'll find the real story. The devil is truly in the details.



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On the surface Spain's prices appear to be fairly well behaved. In the recession producer prices, import prices and export prices all fell year-over-year. As recovery came, all these prices begin to expand year-over-year and generally [...]

Spain's price trends reveal global turbulence

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 The Chicago Federal Reserve indicated that its
 National Activity Index (CFNAI) again was negative last month. The rate of
 decline moderated, however,&nbsp; to -0.13 from its worst of -0.98 in
 August of last year. The three-month moving average of deterioration
 moderated slightly to -0.26, better than the low of -0.50 last August.
 During the last ten years, there has been a 79% correlation between the
 Chicago Fed Index and the q/q change in real GDP.
 Monthly changes in the index components have been mixed. The Production
 &amp; Income component showed the greatest m/m improvement with a m/m
 recovery to a minimal 0.04. That's up from last year's low of -0.49. The
 Employment, Unemployment &amp; Hours series gained minimally to 0.06. The
 Personal Consumption &amp; Housing reading deteriorated -0.19 and reversed
 four months of improvement. Sales, Inventories &amp; Inventories slipped
 to -0.04 and has been in a sideways trend since early 2011. The Chicago
 Fed reported that during June, 41 of the 85 individual indicators made
 positive contributions to the overall index while 44 made negative
 contributions.
 The CFNAI is a weighted average of 85 indicators of national economic
 activity. It is constructed to have an average value of zero and a
 standard deviation of one. Since economic activity tends toward trend
 growth rate over time, a positive index reading corresponds to growth
 above trend and a negative index reading corresponds to growth below
 trend.
 The Chicago Federal Reserve figures are available in Haver's SURVEYS
 database.&nbsp;
 
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	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="600">Chicago Federal Reserve
 Bank</th>
 <th scope="col" >Jun</th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Jun'12</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="600">CFNAI</td>
 <td >-0.13</td>
 <td >-0.29</td>
 <td >-0.37</td>
 <td >-0.47</td>
 <td >-0.08</td>
 <td >-0.08</td>
 <td >0.02</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="600">&nbsp;3-Month Moving Average</td>
 <td >-0.26</td>
 <td >-0.37</td>
 <td >-0.07</td>
 <td >-0.20</td>
 <td >--</td>
 <td >--</td>
 <td >--</td>
 </tr>
 <tr>
 <td class="firstcol" width="600">&nbsp;&nbsp;Personal Consumption
 &amp; Housing</td>
 <td >-0.19</td>
 <td >-0.15</td>
 <td >-0.18</td>
 <td >-0.27</td>
 <td >-0.22</td>
 <td >-0.30</td>
 <td >-0.30</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="600">&nbsp;&nbsp;Employment,
 Unemployment &amp; Hours</td>
 <td >0.06</td>
 <td >0.00</td>
 <td >-0.02</td>
 <td >0.01</td>
 <td >0.10</td>
 <td >0.14</td>
 <td >0.03</td>
 </tr>
 <tr>
 <td class="firstcol" width="600">&nbsp;&nbsp;Production &amp; Income</td>
 <td >0.04</td>
 <td >-0.12</td>
 <td >-0.26</td>
 <td >-0.04</td>
 <td >0.04</td>
 <td >0.05</td>
 <td >0.20</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="600">&nbsp;&nbsp;Sales, Orders &amp;
 Inventories</td>
 <td >-0.04</td>
 <td >-0.02</td>
 <td >0.10</td>
 <td >-0.13</td>
 <td >-0.01</td>
 <td >0.04</td>
 <td >0.09</td>
 </tr>
 </tbody>
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The Chicago Federal Reserve indicated that its National Activity Index (CFNAI) again was negative last month. The rate of decline moderated, however, to -0.13 from its worst of -0.98 in August of last year. The three-month moving [...]

U.S. Chicago Fed National Activity Index Remains Negative

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 Global Inflation Trends are Locked Together

 
 
 
 

 
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Local inflation trends seem to be launched on highly similar paths. Headline inflation in Canada is up by 1.2% compared to 1.8% in the US and 1.6% in the European Monetary Union. Canada's inflation of 1.2% is its highest since August 2012 when it ran a 1.3%. From November 2012 through May 2013 Canada's inflation rate has been under 1% for every month except February 2013 when it eked out 1.1%. However, it's poked up to 1.2% in June and the Bank of Canada, with a new governor, is looking to extend its record of having run excellent monetary policy.


Over the years economists have basically been taught to observe inflation as principally a monetary phenomenon which means it's principally a domestic monetary phenomenon. And, of course, no sooner do we teach everyone this sort of lesson that it no longer seems to be true. I realize that that's a bit of heresy.


Clearly global demand conditions have a lot to do with keeping inflation low on a worldwide basis at the moment. Having come through a financial crisis and, in fact, not having really having come all the way through it, we find that we are possibly still only in the eye of the storm. There is still the final leg of the extraction from the crisis to be accomplished. The crisis both revealed and created substantial worldwide debt problems. These problems, in turn, threw nations and their individual transactors into a state of disequilibrium, forcing them to deal with what they suddenly realized was a situation of excess debt. Thus the need for individuals and nations to devote more resources to paying off past debts rather than to piling on more debt and spending in excess of income has knocked spending trends off their patterns leaving many industries with excess supply. 

Excess supply drives prices lower.
In this situation, excess supply has exerted substantial pressure, downward pressure, on global prices. That's one of the reasons that we see inflation subdued globally. Countries are linked by international trading and capital flows so that price disturbances in one area also affect another area.


However, what we also see is that while there are substantial growth rate differences in the growth of the M2 money stocks in the United States, the European Monetary Union, and in Canada, their money growth rates also have broadly gone through the same sorts of transitions. 


Prior to the onset of the financial crisis money growth rates were accelerating. In EMU the growth rate of money peaked before the financial crisis; in both the US and in Canada the growth rate of money spurted and peaked during the crisis. 


In all three regions money growth rates dived during the crisis. Early on, during the workout phase, money growth was moderate and low in Canada and in EMU, accelerating only in middle-to-late 2011, while, in the US, money growth rates have been much stronger from the outset. They saw a bubble in the growth rate emerge, then growth rate settled back down below 7 1/2%. Currently growth rates in these three countries see M2 roughly between 5% and 7 1/2%.


Monetary theory warns us never to be too certain about predicting inflation. The monetary expert Milton Friedman long ago warned of how money supply had long and variable lags in its effect on the economy. However, I think in this increasingly open global economy, with increased reliance on capital flows, the rules and linkages between money supplies and prices have become even more complicated. Technology and the use of different kinds of monies for transactions also complicates the relationship between money supply and inflation overall.


When we compare national inflation rates we are comparing apples with apples. Whatever the new forces are that are interposing themselves between the money supply growth and inflation, are occurring throughout the global economy and having more or less the same effect on price developments everywhere. Central banks currently are trying to decide how much they can introduce more stimulus without risking the spillover to more inflation.


While the chart of money supply shows what's going on with money supply and we been warned about the effects of excess money growth on the price level, there is another, perhaps greater, risk than money growth. Countries have also been experimenting with policies of quantitative easing: the Federal Reserve in the United States, the Bank of England, the Bank of Japan and the National Bank of Switzerland, all have substantially ballooned the central bank balance sheets to an even greater extent than money supply begins to hint. 


There are great concerns of what happens when central banks began to unwind these policies. Although I think what that really means is that there are great concerns about what happens when economic conditions normalize and these excess reserve conditions begin to have that effect that we would construe as a normal impact on the economy requiring central banks to take countervailing actions.


Just today North Korea has asked that countries begin to think about some kind of global approach to what happens when United States actually begins its tapering activities and then eventually does what it needs to do to unwind the effects of its massive quantitative easing program. There will be international repercussions. The Fed won't be the only central bank with a balance sheet bloat to unwind. 


You'll remember that the initial impact of quantitative easing was to weaken the dollar and that led Brazil, and other BRIC countries, to scream bloody murder. In reaction, Fed Chairman Ben Bernanke urged to them to provide their own stimulus and lower their own domestic savings rates. This argument (that will never be settled!) is that the US deficit is in some sense the residual outcome of other countries running surpluses that are too large because they pursue strategies of export-led growth. In a monetary system with the dollar as the center country the US will be what economists call the 'N-minus-one' country and will soak up whatever is the residual of other countries actions. The Chinese have pushed back against this argument for a long time. However, with the financial crisis in tow, with US companies flush with funds on their balance sheet, with US banks having billions upon billions of dollars of excess reserves (which they choose not the lend), the question remains why is the US sucking and one half of one trillion dollars per year or more in capital flows? Why? 


Surely the US has plenty of capital and liquidity? It has no inability to satisfy financial needs. But, of course, the real reason the US does this is because it needs to finance its trade deficit not because it needs more capital inflows. The US does not need more 'capital', it needs more foreign currency to pay its bills or for the foreigners it increasingly owes to hold more dollars. The last thing the US needs is more capital inflows - or more foreign debt. Interest rates already are low and investors are scrambling to figure out what to do with their monies. The Fed's tilt on quantitative easing which is in fact a policy that leans heavily on the credit channel, is to scoop up most of the highly rated and safe financial assets and force the private sector to make decisions to engage in more risky lending. Foreign inflows are not a solution to the problem.


These capital flows often bring foreigners into markets that they understand less well than they should. To the extent that foreign monies are plowing into countries less for the reason of making a certain investment return than for the reason of pursuing a national macro-economic objective of pegging their exchange rate, the more likely it is that the monies invested are not invested productively.


For now problems, risks and uncertainties in the credit side of the market are constraining bank lending and risk-taking in securities markets. Banks, for their part, are lending more cautious because they are wary of changes that might come from ongoing legislation. Lawmakers are trying to solve the too big to fail problem as well as to make sure that banks are well enough capitalized so that the problems of the last financial crisis do not re-visit us.


This explains why the economic recovery is so much less than robust. We have not simply put our shoulder to the wheel to try to advance economic growth as fast as possible. We have been dealing with the problems caused by the past financial crisis and recession. In addition to dealing with those issues we have also been planning ahead, trying to reconfigure our economy and financial environment so that it is safer in the future. It's a little bit like trying to drive your car and to repair it at the same time.


This week has put the Federal Reserve in the limelight with the Federal Reserve Chairman's biannual presentation on monetary policy in front of the House and Senate financial committees. About the only thing that is clear in the wake of these testimonies is that the Fed really doesn't know what it's going to do yet. By that I don't mean that it's confused but that is still keeping its options open since there is still some dissent within the Fed about what the Fed's role should be and there is still considerable uncertainty about the economy - both domestic and global- as well as uncertainty about the US fiscal agenda that will be faced in the second half of the year.



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Local inflation trends seem to be launched on highly similar paths. Headline inflation in Canada is up by 1.2% compared to 1.8% in the US and 1.6% in the European Monetary Union. Canada's inflation of 1.2% is its highest since August [...]

As Central Banks Struggle With Policy,

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 Economic analysts suggest that GDP growth
 softened last quarter following its 1.8% rise during Q1'13. Recent
 movement in commodity prices support that conclusion. Yesterday's
 industrial commodity price index, from the Foundation for International
 Business and Economic Research (FIBER), was 163.2 and 8.2% lower than in
 mid-February.
 
 Prices in the miscellaneous group have led the decline. Prices
 for both structural panels and framing lumber have declined by roughly
 one-quarter since April. Natural rubber prices have moved down as well.
 Prices in the metals group have been only
 somewhat less weak. Aluminum prices are 17.0% below the December high and
 are off 6.0% during the last twelve months. Copper prices have fallen a
 like amount since February and are down 10.0% y/y. With a 12.0% decline
 since April, steel scrap prices (-6.4% y/y) have been weak as well.
 
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 In the textile group, prices also have
 been soft. Burlap prices are down 14.0% since March and by 7.0% y/y.
 Cotton prices have been more stable, showing little-change since April but
 a one-quarter improvement y/y. Also to the upside have been crude
 oil &amp; benzene prices. Crude oil prices have risen one-quarter
 since their November low but are still below the high of $113.93 per
 barrel in May 2011. Working the other way, prices for the petrochemical
 benzene are off 20.0% since February (-3.2% y/y). 
 
 The current industrial output forecast from the National Association
 for Business Economics calls for 3.1% growth this year but then a pickup
 to 3.5% in 2014. These growth rates suggest some future firming of
 industrial commodity prices. During the last ten years there has been a
 42% correlation between the three-month change in prices and the change in
 factory sector industrial production.
 
 Commodity price data can be found in Haver's DAILY, WEEKLY, USECON
 and CMDTY databases.
 
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	<colgroup><col><col><col><col><col><col><col><col></colgroup>
	<thead>
 <tr>
 <th class="firstcol" scope="col" >FIBER Industrial
 Materials Price Index (1990=100)</th>
 <th scope="col" >07/18/13</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >All Items</td>
 <td >163.2</td>
 <td >1.1</td>
 <td >166.4</td>
 <td >173.0</td>
 <td >157.9</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Textiles</td>
 <td >77.8</td>
 <td >2.2</td>
 <td >77.9</td>
 <td >86.1</td>
 <td >81.3</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Cotton (cents per
 pound)</td>
 <td >79.8</td>
 <td >20.7</td>
 <td >74.5</td>
 <td >132.8</td>
 <td >87.8</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Metals</td>
 <td >222.2</td>
 <td >-2.1</td>
 <td >243.0</td>
 <td >278.7</td>
 <td >240.0</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Aluminum ($ per metric
 ton)</td>
 <td >1,772.0</td>
 <td >-5.1</td>
 <td >2,019.6</td>
 <td >2,400.9</td>
 <td >2,172.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Copper Scrap (cents per
 pound)</td>
 <td >314.0</td>
 <td >-8.8</td>
 <td >360.6</td>
 <td >400.3</td>
 <td >326.8</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Steel Scrap ($ per ton)</td>
 <td >324.3</td>
 <td >-6.7</td>
 <td >366.7</td>
 <td >412.6</td>
 <td >326.5</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Crude Oil &amp; Benzene</td>
 <td >211.8</td>
 <td >5.9</td>
 <td >204.1</td>
 <td >199.3</td>
 <td >182.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Crude Oil (WTI, $ per
 Barrel)</td>
 <td >106.4</td>
 <td >18.3</td>
 <td >94.2</td>
 <td >95.0</td>
 <td >79.4</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Miscellaneous</td>
 <td >205.0</td>
 <td >0.7</td>
 <td >205.3</td>
 <td >190.6</td>
 <td >179.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Framing Lumber ($ per
 1000 board ft.)</td>
 <td >335</td>
 <td >5.0</td>
 <td >321</td>
 <td >273</td>
 <td >283</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Natural Rubber (cents
 per pound)</td>
 <td >176.0</td>
 <td >-13.1</td>
 <td >211.9</td>
 <td >262.3</td>
 <td >182.9</td>
 </tr>
 </tbody>
 </table>
 
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Economic analysts suggest that GDP growth softened last quarter following its 1.8% rise during Q1'13. Recent movement in commodity prices support that conclusion. Yesterday's industrial commodity price index, from the Foundation for [...]

FIBER: Industrial Commodity Prices Weaken This Year

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The index of Leading Economic Indicators, published by the Conference Board,
was unchanged last month (2.8% y/y). The figure followed a 0.2% May
uptick, last month reported as 0.1%. A 0.3% rise had been expected for June. A
stable 55% of the component series had a positive influence on the index. A
steeper interest rate yield curve and the leading credit index had the largest
positive influences on the total. These were offset by fewer building permits
and a lower ISM new orders index.
The index of coincident indicators gained 0.2% (1.8% y/y) for the third
straight month. Each of the component series - payroll employment, personal
income less transfers, manufacturing &amp; trade sales and industrial production
- increased.
The index of lagging economic indicators rose 0.3% (3.4% y/y) after a minimal
0.4% May rise. These increases suggest economic excesses are building. A longer
duration of unemployment and a higher consumer installment/income ratio paced
last month's increase. 
Another leading economic series is the ratio of coincident-to-lagging
indicators. It measures how the economy is performing versus its excesses. The
figure was unchanged last month (-1.5% y/y) at its lowest level of the economic
expansion.
The Conference Board figures are available in Haver's BCI database;
the components are available there, and most are also in USECON. The
forecast figures for the Consensus are in the AS1REPNA database. Visit
the Conference Board's <a href="http://www.conference-board.org/">site</a> for
coverage of leading indicator series from around the world.&nbsp;
 
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 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
 <thead>
 <tr>
 <th class="firstcol" scope="col" >Business Cycle Indicators (%)</th>
 <th scope="col" >Jun</th>
 <th scope="col" >May</th>
 <th scope="col" >Apr</th>
 <th scope="col" >Y/Y</th>
 <th scope="col" >2012</th>
 <th scope="col" >2011</th>
 <th scope="col" >2010</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Leading</td>
 <td >0.0</td>
 <td >0.2</td>
 <td >0.8</td>
 <td >2.8</td>
 <td >2.0</td>
 <td >5.1</td>
 <td >8.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Coincident</td>
 <td >0.2</td>
 <td >0.2</td>
 <td >0.2</td>
 <td >1.8</td>
 <td >2.1</td>
 <td >2.4</td>
 <td >1.2</td>
 </tr>
 <tr>
 <td class="firstcol" >Lagging</td>
 <td >0.3</td>
 <td >0.4</td>
 <td >0.2</td>
 <td >3.4</td>
 <td >3.6</td>
 <td >2.7</td>
 <td >-3.1</td>
 </tr>
 </tbody>
 </table>
 
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The index of Leading Economic Indicators, published by the Conference Board, was unchanged last month (2.8% y/y). The figure followed a 0.2% May uptick, last month reported as 0.1%. A 0.3% rise had been expected for June. A stable 55% [...]

U.S. Leading Economic Indicators Are Unchanged

PMIs showing widespread revival of global economy

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

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

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Winnie Tapasanun

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Existing home sales unexpectedly fell 2.4% m/m (+2.8% y/y) to 4.09 million units (SAAR) in June, the first m/m decline since March, following an upwardly revised 3.7% increase to 4.19 million in May (previously +3.2%; 4.17 mil.), according to the National Association of Realtors (NAR). The Action Economics Forecast Survey had expected June sales of 4.20 million units. Sales remained 36.4% below a high of 6.43 million in January 2022 and 38.0% below a peak of 6.60 million in January 2021. The June decline coincided with a rise in the average 30-year fixed mortgage rate to 6.49% in June, the highest since August 2025, after increasing to 6.44% in May, according to Freddie Mac. The sales figures are based on closings of sales contracts signed over the past couple of months.

Existing single-family home sales fell 2.4% (+3.3% y/y) to 3.73 million units in June, the first m/m fall in three months, following a 4.1% gain to 3.82 million in May, remaining 34.6% below a high of 5.70 million in January 2022. Sales of condos and co-ops decreased 2.7% (-2.7% y/y) to $360,000 in June, the lowest level since May 2025, after being unchanged m/m for the third successive month at 370,000, remaining 50.7% below a high of 730,000 in January 2022.

Regionally, June existing home sales declined m/m in all regions except the Northeast. Sales in the South dropped 3.6% (+3.8% y/y) to 1.89 million in June, a three-month low, after a 3.2% rise in May, and sales in the Midwest slid 3.0% (+2.1% y/y) to 980,000 following a 7.4% May advance; both posted the first m/m decrease in three months. Sales in the West fell 1.3% (+2.8% y/y) to 740,000, the lowest level since January, after being flat m/m at 750,000 in May. In contrast, sales in the Northeast increased 2.1% (0.0% y/y) to 480,000 after a 4.4% May gain. Notably, the South remained the dominant region, accounting for 46.2% of total U.S. existing home sales.

The median price of all existing homes (NSA) rose 2.2% (1.8% y/y) to $440,600 in June, the fifth consecutive m/m rise, on top of an upwardly revised 3.3% increase to $431,200 in May ($429,300 previously). Prices were 22.1% above a low of $360,800 in January 2023. The median price of an existing single-family home climbed 2.3% (1.8% y/y) to $446,400 in June, the fifth straight m/m increase, after a 3.4% advance to $436,400 in May. The median price of condos and co-ops, up for the sixth time in seven months, grew 0.6% (1.6% y/y) to $380,000 following a 1.0% May gain to $377,800. Regionally, overall prices rose m/m and y/y in June in the Northeast (+5.6%; +3.9% y/y), Midwest (+2.1%; +2.7% y/y), South (+1.0%; +0.9% y/y), and West (+0.8%; +0.9% y/y). All these price series were at their record highs.

Inventories of homes for sale fell m/m in June for the first time since December. The number of existing homes for sale (NSA) declined 0.6% (+1.3% y/y) to 1.56 million units following an upwardly revised 4.7% May rise to 1.57 million (the highest level since November 2019). The supply of homes on the market at the current selling rate (NSA) increased to 4.6 months in June from 4.5 months in May and April, matching the highest level since August 2025. A record low in supply of 1.6 months was in January 2022.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. Mortgage interest rates can be found in the **WEEKLY** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.

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- June sales -2.4% m/m to 4.09 mil., first drop in three mths.; +2.8% y/y, third straight y/y rise.
- Sales m/m down in the South (-3.6%), Midwest (-3.0%), and West (-1.3%); up in the Northeast (+2.1%).
- Sales y/y up in all regions except the Northeast w/ a flat reading.
- Median sales price +2.2% (+1.8% y/y) to $440,600, a record high.
- Unsold inventory -0.6% (+1.3% y/y) to 1.56 mil. units, first m/m decline since Dec.; 4.6 months' supply, highest since Aug. ’25.

U.S. Existing Home Sales Unexpectedly Fall in June from a Five-Month High

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance declined 2,000 to 215,000 in the week ending July 4, from 217,000 in the week ending June 27, revised from 215,000. The four-week average was 218,750 in the July 4 week, down from 222,500 in the week ending June 27. The Action Economics/Haver Analytics Survey looked for 218,000 claims to have been filed. 

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose by 8,000 to 1.814 million in the week ending June 27, from 1.806 million in the week ending June 20, revised from 1.814 million. The four-week moving average rose to 1.808 million in the June 27 week from 1.801 million in the June 20 week. The insured unemployment rate was unchanged at 1.2% in the week of June 27. Except for a one-week dip to 1.1% in the week of April 25, the insured unemployment rate has been at 1.2% since the week of November 29, 2025.

The insured unemployment rate varied greatly across individual states and territories. In the week ending June 20, the highest unemployment rates were in Washington (2.03%), New Jersey (2.11%), Minnesota (2.15%), and Puerto Rico (2.45%). The lowest rates were in South Dakota (0.28%), Florida (0.35%), Alabama and North Carolina (both 0.41%), Louisiana (0.42%), and Arkansas (0.49%). Rates in other notable states include California (1.88%), Pennsylvania (1.63%), Illinois (1.58%), New York (1.52%), and Texas (1.12%). 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.

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- New claims declined by 2,000 to 215,000 in the week ending July 4.
- Continuing claims rose by 8,000 to 1.814 million in the week ending June 27.
- The insured unemployment rate was unchanged at 1.2% in the week of June 27.

U.S. Initial Unemployment Claims Declined in the Week of July 4

Andrew Cates

**Growth Surprises Continue to Underpin Equity Resilience**
Global equity markets have proved remarkably resilient in recent weeks, shrugging off intermittent bouts of geopolitical and policy uncertainty to grind higher. Chart 1 below helps explain why: it tracks the relationship between global growth-versus-inflation surprises and world equity markets, and on that measure the recent run of global growth data has continued to surprise on the upside relative to inflation outturns — a combination that has historically been supportive for risk assets. Whether that resilience persists will depend on whether the growth-surprise advantage evident in the chart below can be sustained in the face of the inflationary pressures explored below.

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**PMIs Confirm a Broadly Solid Global Expansion**
This week's final composite PMI readings for June reinforced the broader impression of resilient global growth. As chart 2 below shows, most major economies posted readings comfortably in expansionary territory, with India continuing to lead the pack and the US not far behind. Even the laggards in the sample are hovering close to the expansion threshold rather than falling decisively below it, suggesting stabilisation rather than outright contraction (and with the UK a notable exception).

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**Inflation Surprises Are Creeping Back, and Bond Yields Are Taking Notice**
The US growth picture painted by Haver's surprise indices broadly echoes the message from the global PMI data. Chart 3 below shows the combined growth-and-inflation surprise index drifting higher this week, and closer inspection suggests growth is doing most of that work, with activity data continuing to outperform expectations. That is, on the face of it, good news. But it has not stopped bond markets from taking notice: short-dated Treasury yields have remained elevated in recent weeks, as stronger growth keeps alive the possibility that the Federal Reserve holds rates higher for longer or even lifts them in coming weeks.

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**Supply Chains Are Tightening** 
Latest data show that global supply chain pressures tightened by less in June than they had the month before, likely reflecting the easing of Middle East tensions through much of the period. Chart 4 below shows that pressures troughed in the middle of last year and have been building gradually since, though June's slower pace of tightening suggests that easing had started to feed through. Still, today's flare-up threatens to undo that improvement, particularly if it affects shipping routes or energy flows through the region once again.

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**Extreme Weather: An Old Supply-Side Risk Returns**
Geopolitics is not the only source of supply-side risk currently in play. Large parts of Europe have been gripped this week by another intense and prolonged heatwave, with temperatures in several major cities running well above seasonal norms. Extreme heat of this kind carries real economic costs: it depresses labour productivity, particularly in outdoor and manufacturing-adjacent sectors, strains electricity grids as air-conditioning demand spikes, and can disrupt agricultural output and river-based transport when water levels fall. Episodes like this have become more frequent in recent years, and while any single heatwave rarely shifts the macro picture on its own, the cumulative effect of more frequent and more severe weather events could start showing up in productivity and inflation data across the advanced economies. It is a reminder that the supply side of the global economy faces structural as well as cyclical challenges, and that climate-related disruption deserves a permanent place alongside geopolitics and demographics in any assessment of medium-term inflation risk.

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**AI Investment: The Other Side of the Supply Equation**
Set against these supply-side headwinds is a genuinely positive structural development: the extraordinary scale of private investment now flowing into artificial intelligence. Chart 6 below shows just how sharply that investment has grown in recent years, reaching a fresh high last year. If even a fraction of that investment translates into genuine productivity gains, it could provide a meaningful long-run offset to the energy, climate and geopolitical constraints highlighted elsewhere in this week's charts. The scale of the bet now being placed on AI is large enough that it is beginning to show up in aggregate investment and capital expenditure data across the advanced economies, and it is likely to remain one of the defining structural themes shaping the global growth outlook over the remainder of this decade.

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Global markets head into this week’s closing stages digesting a mixed set of signals. Last week's US non-farm payrolls report undershot expectations, adding to questions about the durability of the US labour market even as broader activity data have continued to hold up well. Compounding that picture, news broke today of renewed instability in the Middle East, reintroducing a geopolitical risk premium into markets just as investors had begun to look past it. Global equity markets have nonetheless remained resilient, continuing to track the broadly encouraging tone of incoming activity data (chart 1). That resilience was reinforced by a solid set of global PMIs across most major economies over the past few days (chart 2). Haver's surprise indices tell a similar story of positive growth momentum in the US, but with an important caveat: incoming inflation data have also been surprising to the upside, driven largely by higher oil prices (chart 3). These inflation risks could persist moreover, as global supply chain pressures have picked up in recent months and today's flare-up in the Middle East threatens to add further strain (chart 4). The world economy remains vulnerable to other supply-side shocks too, such as the extreme heat gripping much of Europe this week (chart 5). Still, on the other side of the ledger the enormous scale of investment now flowing into artificial intelligence could be a genuine source of supply-side potential (chart 6).

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Charts of the Week: Growth Holds Firm

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Mortgage applications dropped 2.2% w/w (-5.4% y/y) in the week ending July 3, following no change in the week ending June 26, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house edged down 0.6% w/w (-6.3% y/y) in the latest week, after rising 0.5% w/w (3.2% y/y) in the June 26 week.  Applications for loan refinancing dropped 4.1% w/w (-4.2% y/y) in the week ending July 3, after declining 0.7% w/w (+9.1% y/y) in the June 26 week.

The effective interest rate on a 30-year fixed-rate loan rose 1bp to 6.77% in the week ending July 3 from 6.76% in the week ending June 26. The rate on 15-year fixed-rate mortgages edged down 2bps to 6.17% in the July 3 week from 6.19% in the June 26 week. The 30-year Jumbo rate edged down 1bp to 6.62% in the latest week from 6.63% in the June 26 week. The rate on a 5-year ARM rose 5bps to 6.19% in the July 3 week from 6.14% in the June 26 week.

The share of applications for refinancing an existing loan declined to 40.6% of total applications in the week of July 3 from 41.4% in the June 26 week. The adjustable-rate mortgage (ARM) share of activity edged up to 7.8% in the July 3 week from 7.6% in the June 26 week.

The average size of a mortgage declined 0.4% w/w (+1.3% y/y) to $391,500 in the week ending July 3, after rising 1.1% w/w (0.4% y/y) to $393,200 in the week ending June 26. The average size of a purchase loan declined 1.0% w/w (+4.3% y/y) to $451,000 in the latest week, after rising 1.2% w/w (2.7% y/y) to $455,600 in the June 26 week. The average size of a loan to refinance a mortgage edged down 0.1% w/w (-3.9% y/y) to $304,600 in the week ending July 3, after rising 0.5% w/w (-2.8% y/y) to $304,900 in the June 26 week.

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

- Both applications for loans to purchase and applications for loan refinancing declined in the latest week.
- Interest rate on 30-year fixed-rate loans rose 1bp to 6.77%. 
- Average loan size edged down.

U.S. Mortgage Applications Retrenched in the July 3 Week

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**The Clash!**
The U.S.-Iranian clash in the Middle East resulted in a closure of the Strait of Hormuz that collapsed the economy watchers index in Japan earlier this year. However, as the war-like conditions settled down and the two sides have moved toward some kind of cease fire or a more permanent arrangement, in the wake of that comparative tranquility, the economy watchers index improved, and its future index improved more sharply. These comments applied to the data in the table and conditions up to the end of June.

**New day dawning...**
However, the data in the table are unrelated to what has happened in the past two days, when Iran took potshots at a couple of ships in the Strait, causing the U.S. to retaliate and President Trump to declare that the ceasefire has now ended. The door remains open for some kind of talks; however, the president’s recent remarks carried in the newspapers has clearly stated that the ceasefire has ended, and the U.S. intends to hit Iran and has suggested that it intends to hit it ‘hard.’ At the same time, Mr. Trump has said the door remains open to continuing talk and negotiations if both sides still want to get together; however, he admits he is not optimistic.

**Precarious times and conditions**
So, these are precarious conditions. Oil prices have already responded and moved higher. We have Japan’s economic data for June showing some revival in the current index and some sharply higher revivals over the last few months in the future index. However, when the dust clears the queue standings of the current and future indexes are revealed, they are pretty similar, with the current index at a standing of 29.6% and the future index of 31.6%. Both the current and future readings coalesce around a 30-percentile standing, marking the two segments of the survey as usually stronger about 70% of the time which marks the latest readings as relatively weak. And that is before we take the new realities of July into account.

**The current IS the future...**
There isn't too much point in talking about the two parts of the survey separately. The current and future surveys are simply not that different. This month, the lowest percentile standing in the current subindexes is housing, at an 11.5 percentile standing, followed by employment at a 17.8 percentile standing. In the future index, housing has an 11.1 percentile standing and employment has an 18.6 percentile standing; these readings are also the two lowest rankings in the future survey.

**Sequential improvement is only point-to-point**
Over three months, we can see the point-to-point changes in the current index and some improvements in all of the components except housing. In the future index, the three-month changes show point-to-point improvements in all of the components. However, both surveys show point-to-point declines over six months and broad point-to-point declines over 12 months as well. Looking at the changes based on smooth data (shown at the bottom of the table), for the three-month averages compared to six-month averages and six-month averages compared to 12-month averages, conditions show no improvement. We see no improvements in the current or future indexes over three months or six months, and no improvement in the future index in the 12-month average compared to 12-month average of 12 months ago—although 40% of the components in the current index are improved over 12 months compared to 12 months ago.

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**Summing up**
The bottom line here seems to be that the opening of the armed conflict in Iran that led to the closure of the Strait of Hormuz was a terrible blow according to the economy watchers. However, once conditions settled down, the willingness to believe that conditions were going to get better and eventually open the Strait led to improved perceptions as things appeared to be headed back toward normal. Now, war-like conditions are back into effect for a period that's more recent than the tabular data can address. It seems likely that we are going to see the indexes decline once again if this current rupture in the normalization process is unable to be repaired soon. The responses and changes in the economy watchers index illustrate a couple of things: one, being that the Strait of Hormuz is very important; two, being that the survey participants were willing to believe that the former war participants could act in a civilized manner and reopen the Strait. The question now is whether the survey participants can believe that after one normalization agreement fell apart, the next agreement is one that they can believe in. That's what we will be waiting to see.