Carol Stone, CBE

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The FASB's new accounting rules 166 and 167 on
the use of off-balance sheet accounting for securitized debt issues
took effect at the beginning of 2010 for financial institutions with a
calendar year fiscal year. From a data user's perspective, earlier this
year, they were reflected in changes to commercial bank balance sheet
data, and last week, with the release of the Q1 Flow-of-Funds data, we
saw their impact more broadly on banks, GSEs and the special purpose
vehicles (SPVs) these rulings were intended to reform.

It has been routine practice for issuers of securitized debt to "spin"
the specific loans and the securities issues off the institutions'
balance sheets to a subsidiary set up for the express purpose, an SPV.
As FASB's notice explains, this SPV procedure is helpful for financing
a narrowly defined project without putting an entire firm at risk.
However, the original intention of the SPVs was not to distort the
institution's underlying risk profile over a protracted period, which
had in fact been happening, as investors found to their dismay during
the recent financial crisis. These new rules basically cause the
securitized debt issuers to move assets and associated securities
liabilities back to their balance sheets.

The following couple of charts show the dramatic impact of the rule
changes on the biggest items. <a href="/comment/100616k_big.png" name="modal" ><img class="large" align="left" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616k.png"></a>
First, in the mortgage sector, 1-4 family
mortgages that are held at "agency- and GSE-backed mortgage pools"
plunged from $5.27 trillion at the end of 2009 to just $983 billion on
March 31. By contrast, the direct mortgage holdings of the agencies
themselves surged from $438 billion at year-end to $4.75 trillion on
March 31.

Similarly, among ABS issuers, holdings of consumer credit -- loans and
credit card debt -- dropped from $578 billion on December 31 to $152
billion on March 31. The contrast here is at commercial banks, whose
balance sheets now show $1,163 billion in consumer credit assets, up
from $855 billion at year-end.
<a href="/comment/100616l_big.png" name="modal" ><img class="large" align="left" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616l.png"></a>
 Importantly,
these accounting changes did not affect the transactions generating the
"flows" of credit to either of these borrowing sectors. There were net
new issues of agency mortgage pool securities of $22 billion in Q1 and
net liquidations of $22 billion of consumer debt holdings of ABS
issuers. The Federal Reserve's data is defined as outstanding(t) =
outstanding(t-1) + flow(t) + discontinuity(t), and these accounting
changes are clearly "discontinuities".

These data series are contained in Haver's FFUNDS
database.&nbsp; The Financial Accounting Standards Board's press
release and descriptive material are found <a href="http://www.fasb.org/cs/ContentServer?c=FASBContent_C&amp;pagename=FASB/FASBContent_C/NewsPage&amp;cid=1176156240834">here</a>.

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The FASB's new accounting rules 166 and 167 on the use of off-balance sheet accounting for securitized debt issues took effect at the beginning of 2010 for financial institutions with a calendar year fiscal year. From a data user's [...]

New Accounting Rules Shock MBS and ABS Data

Robert Brusca

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<a href="/comment/100616j_big.png" name="modal" ><img class="large" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616j.png" align="left"></a>
The inflation picture looks worse than the inflation reality. The chart
above shows headline inflation seemingly 'soaring' off to the races
running at a 1.6% Yr/Yr pace. Notice the scale and the push is a bit
less daunting. For 3-mo headline inflation the pace is at 2% which is
the ECB's speed limit. But in reality inflation's upsurge has all been
due to a push from oil prices that has sent goods prices soaring at 9%
annual rate over three-months. Oil has since stabilized. Service sector
inflation is hovering between 1% and 1.5%. 
Moreover, core inflation in the zone is steady
and low. The core rate is at 0.9% Yr/Yr and has accelerated to 1.4%
over three months as energy prices have spurted. But there is no steady
acceleration involved nor does the Euro-economy look like it is
overheating- far from it.
The euro-area however is still growing. There is not
serious sign of an economic set-back. Yet forward-looking confidence
indicators have begun to crumble as UK consumer confidence fell by 10
points, and the Zew readings for Germany and Switzerland each have
taken a giant step backward on the weakness in their expectations
components. Still the Zew current reading for Germany continued to
advance as expectations were slashed back sharply. 
On balance it is not a situation that seems very
hospitable to inflation. Current trends do not look that daunting; the
environment is not inflation friendly. The sole inflation rating force
in the Zone is the ongoing weakness in the euro itself and for that to
become an issue the zone will have to get much stronger.


<table cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead><tr>
<th scope="col" colspan=8>Trends in HICP</th>
</tr></thead>
<tr class="grey3">
<td>&nbsp;</td>
<td colspan=3>% mo/mo</td>
<td colspan=3>% saar</td>
<td>&nbsp;</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>May-10</td>
<td>Apr-10</td>
<td>Mar-10</td>
<td>3Mo</td>
<td>6Mo</td>
<td>12Mo</td>
<td>Yr
Ago</td>
</tr>
<tr>
<td class="firstcol">EMU</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.4%</td>
<td style="color:red;">2.0%</td>
<td style="color:red;">1.6%</td>
<td style="color:red;">1.6%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Core</td>
<td>0.2%</td>
<td>0.0%</td>
<td>0.2%</td>
<td style="color:red;">1.4%</td>
<td>0.8%</td>
<td>0.9%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Goods</td>
<td>0.1%</td>
<td>0.8%</td>
<td>1.4%</td>
<td style="color:red;">9.9%</td>
<td style="color:red;">3.3%</td>
<td style="color:red;">1.9%</td>
<td>-1.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">Services</td>
<td>0.1%</td>
<td>0.0%</td>
<td>0.2%</td>
<td>1.1%</td>
<td style="color:red;">2.0%</td>
<td>1.3%</td>
<td>2.1%</td>
</tr>
<tr class="grey2">
<td class="firstcol" colspan=8>HICP</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>0.1%</td>
<td>-0.2%</td>
<td>0.6%</td>
<td style="color:red;">1.9%</td>
<td>1.1%</td>
<td style="color:red;">1.2%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">France</td>
<td>-0.1%</td>
<td>0.1%</td>
<td>0.2%</td>
<td>0.7%</td>
<td style="color:red;">2.1%</td>
<td style="color:red;">1.9%</td>
<td>-0.3%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>-0.1%</td>
<td>0.5%</td>
<td>0.3%</td>
<td style="color:red;">2.6%</td>
<td style="color:red;">1.7% </td>
<td style="color:red;">1.6%</td>
<td>0.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">UK</td>
<td>-0.2%</td>
<td>0.5%</td>
<td>0.4%</td>
<td>2.9%</td>
<td style="color:red;">4.0%</td>
<td style="color:red;">3.4%</td>
<td>2.2%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>0.1%</td>
<td>0.0%</td>
<td>0.3%</td>
<td style="color:red;">1.7%</td>
<td>1.0%</td>
<td style="color:red;">1.8%</td>
<td>-0.9%</td>
</tr>
<tr class="grey2">
<td class="firstcol" colspan=8>Core:xFE&amp;A</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>0.4%</td>
<td>-0.5%</td>
<td>0.4%</td>
<td style="color:red;">1.1%</td>
<td>0.4%</td>
<td>0.6%</td>
<td>1.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">France</td>
<td>0.1%</td>
<td>-0.1%</td>
<td>0.0%</td>
<td>-0.1%</td>
<td style="color:red;">0.9%</td>
<td>0.8%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>-0.1%</td>
<td>0.5%</td>
<td>0.3%</td>
<td style="color:red;">2.6%</td>
<td>1.3%</td>
<td>1.5%</td>
<td>1.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">UK</td>
<td>0.1%</td>
<td>0.3%</td>
<td>0.4%</td>
<td>2.9%</td>
<td style="color:red;">3.1%</td>
<td style="color:red;">2.8%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>0.2%</td>
<td>-0.2%</td>
<td>0.1%</td>
<td style="color:red;">0.4%</td>
<td>-0.4%</td>
<td>0.3%</td>
<td>0.9%</td>
</tr>

</table>

</html>

The inflation picture looks worse than the inflation reality. The chart above shows headline inflation seemingly 'soaring' off to the races running at a 1.6% Yr/Yr pace. Notice the scale and the push is a bit less daunting. For 3-mo [...]

EMU Rate Is Tepid On The Month But Headline Rate Continues Trend Acceleration

Tom Moeller

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<a href="/comment/100616g_big.png" name="modal" ><img class="large" align="left" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616g.png"></a>Pricing pressures continued
to ease last month. Thanks to lower food &amp; energy prices, the
May producer price index fell 0.3% (+5.1% y/y) after a 0.1% April slip.
Consensus expectations had been for a 0.5% decline. Nevertheless, the
y/y gain in prices of 5.1% remained the highest since October 2008.

Finished energy prices fell 1.5% (+16.7% y/y) after a 0.8% April
decline. Not seasonally adjusted gasoline prices slipped in May (+31.2%
y/y) and home heating oil prices reversed most of their April increase
(+44.8% y/y). Finally, natural gas prices fell for the third straight
month (+0.7% y/y) but electricity prices rose (2.0%
y/y).&nbsp;&nbsp;&nbsp;
Finished food prices slipped for the second
consecutive month (+5.7% y/y) led by lower vegetable (+38.1% y/y) and
egg prices (+3.8% y/y). These declines were countered by higher beef
prices (14.5% y/y) which were strong for the fourth straight
month.&nbsp;&nbsp;&nbsp;
The
second consecutive 0.2% increase in finished producer prices less food
&amp; energy prices beat Consensus expectations for a 0.1% uptick.
Still, the 1.3% y/y increase remained the weakest since October 2006.
Finished consumer goods prices less food &amp; energy rose 0.3%,
still leaving the 1.9% y/y increase nearly half the annual gains during
the last two years. Finished durables prices rose 0.3% (0.6% y/y) while
core finished consumer nondurable goods prices rose an increased 0.4%
(2.8% y/y). Capital equipment price inflation remained tame (0.6% y/y)
versus annual gains between 1.0% and 3.0% back to 2004.

Intermediate goods prices continued firm with a 0.4% gain (8.4% y/y).
Core prices rose a diminished 0.3% but the 6.1% y/y gain was the
strongest since October 2008. The strength continued to reflect
increases in the price of steel (32.4% y/y) &amp; aluminum (16.1%
y/y).

Price pressures eased last month at the earliest stage of processing.
Crude materials prices fell 2.8% along with a 1.6% decline in core
prices. The decline was led by lower scrap copper prices and lower iron
&amp; steel scrap prices, but they have doubled y/y.
The producer price data is
available in Haver's USECON database. More detailed
data is in the PPI and in the PPIR
databases.
<a href="/comment/100616h_big.png" name="modal" ><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616h.png"></a><a href="/comment/100616i_big.png" name="modal" ><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616i.png "></a>

<table cellspacing="0" width="100%">
<thead>

<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a>(%)</th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">May y/y</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr></thead><tbody>
<tr>
<td class="firstcol">Finished Goods</td>
<td>-0.3</td>
<td>-0.1</td>
<td>0.7</td>
<td>5.1</td>
<td>-2.5</td>
<td>6.4</td>
<td>3.9</td>
</tr>
<tr class="odd">
<td class="firstcol"> Less Food
&amp; Energy</td>
<td>0.2</td>
<td>0.2</td>
<td>0.1</td>
<td>1.3</td>
<td>2.6</td>
<td>3.4</td>
<td>2.0</td>
</tr>
<tr>
<td class="firstcol">Intermediate Goods</td>
<td>0.4</td>
<td>0.8</td>
<td>0.6</td>
<td>8.4</td>
<td>-8.4</td>
<td>10.3</td>
<td>4.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Less Food
&amp; Energy</td>
<td>0.3</td>
<td>1.1</td>
<td>0.7</td>
<td>6.1</td>
<td>-4.2</td>
<td>7.4</td>
<td>2.8</td>
</tr>
<tr>
<td class="firstcol">Crude Goods</td>
<td>-2.8</td>
<td>-1.2</td>
<td>3.2</td>
<td>21.5</td>
<td>-30.3</td>
<td>21.4</td>
<td>11.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Less Food
&amp; Energy</td>
<td>-1.6</td>
<td>4.0</td>
<td>6.0</td>
<td>41.2</td>
<td>-23.5</td>
<td>14.8</td>
<td>15.6</td>
</tr>
</tbody>
</table>
</html>

Pricing pressures continued to ease last month. Thanks to lower food & energy prices, the May producer price index fell 0.3% (+5.1% y/y) after a 0.1% April slip. Consensus expectations had been for a 0.5% decline. Nevertheless, the [...]

U.S. PPI Declines For Second Month With Lower Food & Energy Prices

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<a href="/comment/100616d_big.png" name="modal" ><img class="large" align="left" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616d.png"></a>The recovery in industrial output due to improved
final demand and inventory replenishment continued last month. Overall
production rose 1.2% after a little revised 0.7% increase during April.
It's up at an 8.1% annual rate so far this year. These gains understate
the degree of improvement following last year's recession. In the
factory sector alone output rose 0.9% during the last two months and it
has risen at a 9.5% rate so far this year.&nbsp;&nbsp;
Strength in output last month was
across-the-board amongst major industry groupings. In individual
industries, output of motor vehicles rose 5.5% last month and by more
than one-third y/y. Output of computers also posted a firm 1.4%
increase (14.3% y/y) while machinery output rose 1.9% (13.3% y/y).
Output of appliances and furniture slipped after
a strong April (+3.6% y/y). The level of production was one-third below
the 2005 peak. Apparel output rose just 0.5% last month (7.9% y/y) and
remained off by two-thirds from 1994 as production has moved out of the
country.
Capacity utilization rose further to
74.7%, its highest level since November 2008. In the factory sector
alone, utilization rose to 71.5%, the highest level since November 2008
and up from the 2009 low of 65.1%.
The industrial production data are
available in Haver's USECON database.
<a href="/comment/100616e_big.png" name="modal" ><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616e.png"></a>
<a href="/comment/100616f_big.png" name="modal" ><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616f.png"></a>

<table cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Industrial Production (SA,%)</th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">May y/y</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr></thead>
<tr class="grey2">
<td class="firstcol">Total Output</td>
<td>1.2</td>
<td>0.7</td>
<td>0.3</td>
<td>7.6</td>
<td>-9.7</td>
<td>-2.2</td>
<td>1.5</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>0.9</td>
<td>0.9</td>
<td>1.2</td>
<td>7.9</td>
<td>-11.3</td>
<td>-3.2</td>
<td>1.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer
Goods</td>
<td>1.1</td>
<td>0.0</td>
<td>0.4</td>
<td>6.3</td>
<td>-5.2</td>
<td>-2.6</td>
<td>0.9</td>
</tr>
<tr>
<td class="firstcol">Business
Equipment</td>
<td>1.3</td>
<td>1.7</td>
<td>1.1</td>
<td>10.1</td>
<td>-12.4</td>
<td>-1.1</td>
<td>2.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Construction
Supplies</td>
<td>0.7</td>
<td>3.0</td>
<td>2.4</td>
<td>3.9</td>
<td>-17.8</td>
<td>-6.3</td>
<td>-2.0</td>
</tr>
<tr>
<td class="firstcol">Materials</td>
<td>1.4</td>
<td>0.8</td>
<td>-0.1</td>
<td>9.2</td>
<td>-10.9</td>
<td>-1.9</td>
<td>2.0</td>
</tr>
<tr class="odd">
<td class="firstcol" class="firstcol">Utilities</td>
<td>4.8</td>
<td>-1.3</td>
<td>-6.2</td>
<td>4.2</td>
<td>-2.5</td>
<td>0.3</td>
<td>3.4</td>
</tr>
<tr class="grey2">
<td class="firstcol">Capacity Utilization
(%)</td>
<td>74.7</td>
<td>73.7</td>
<td>73.1</td>
<td>68.5(May '09)</td>
<td>70.1</td>
<td>77.5</td>
<td>80.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Factory Utilization</td>
<td>71.5</td>
<td>70.8</td>
<td>70.1</td>
<td>65.3</td>
<td>66.8</td>
<td>75.1</td>
<td>79.0</td>
</tr>

</table>

</html>

The recovery in industrial output due to improved final demand and inventory replenishment continued last month. Overall production rose 1.2% after a little revised 0.7% increase during April. It's up at an 8.1% annual rate so far [...]

U.S. Industrial Production Is Strong Again

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<a href="/comment/100616a_big.png" name="modal" ><img class="large" align="left" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616a.png"></a>If there was any question
that the government's program to stimulate housing was a success, it
should be laid to rest now that it's ended. May housing starts
plummeted 10% m/m to 593,000 (AR), the lowest level since December. The
April level was revised down modestly. The latest figure was well short
of Consensus expectations for 648,000 starts but despite the decline,
starts remain up 21.5% from the low in January 2009. 

Starts of single-family homes fell 17.2% from April to 468,000, the
lowest level in twelve months. In the South, single-family starts fell
by one-quarter (+10.1% y/y) while starts in the Midwest dropped 10.9%
(+15.5% y/y). In the Northeast starts fell a lesser 1.7% (+54.1 y/y)
and were off 2.0% (+11.1 y/y) in the West.

Activity in the the multi-family sector continued to improve and starts
of apartments, condominiums &amp; town houses jumped by one-third
to 125,000, the highest level in twelve months. 

Building permits during fell 5.9% to the lowest level in one-year.
Permits to build a single-family home repeated their April decline and
fell roughly 10.0% (+3.1% y/y). Permits to build
multi-family homes increased 9.7% and were 26.0% higher than the low
last July.
The housing starts
figures can be found in Haver's USECON database.
&nbsp;
<a href="/comment/100616b_big.png" name="modal" ><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616b.png"></a>
<a href="/comment/100616c_big.png" name="modal" ><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100616c.png"></a>

<table cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Housing
Starts (000s, SAAR)</th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">March</th>
<th scope="col">May y/y</th>
<th scope="col">2009</th>
<th scope="col">2008</th>
<th scope="col">2007</th>
</tr></thead><tbody>
<tr>
<td class="firstcol">Total</td>
<td>593</td>
<td>659</td>
<td>634</td>
<td>7.8%</td>
<td>554</td>
<td>900</td>
<td>1,342</td>
</tr>
<tr class="odd">
<td class="firstcol">Single-Family</td>
<td>468</td>
<td>565</td>
<td>535</td>
<td>15.3</td>
<td>442</td>
<td>616</td>
<td>1,036</td>
</tr>
<tr>
<td class="firstcol">Multi-Family</td>
<td>125</td>
<td>94</td>
<td>99</td>
<td>-13.2</td>
<td>112</td>
<td>284</td>
<td>306</td>
</tr>
<tr class="odd">
<td class="firstcol">Building Permits</td>
<td>574</td>
<td>610</td>
<td>685</td>
<td>4.4</td>
<td>583</td>
<td>896</td>
<td>1,392</td>
</tr>
</tbody>
</table>

</html>

If there was any question that the government's program to stimulate housing was a success, it should be laid to rest now that it's ended. May housing starts plummeted 10% m/m to 593,000 (AR), the lowest level since December. The [...]

U.S. Housing Starts Decline, Erasing Year's Increase

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<a href="/comment/100615m.png" name="modal"><img class="large" align="left" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100615m.png"></a>
The seasonally adjusted and working day adjusted EMU trade balance
improved in April widening to &#128;1.39Bln surplus. Still, the trend is for
the surplus to shrink. Growth rates show that exports and imports are
building on the earlier strong rates of growth, getting successively
larger over more recent periods- even with this month's backtracking. 
Export and import categories are off across the
board this month with one exception, a monthly rise in the export value
of raw materials 
The chart above shows a pattern for the surplus
is that it is slowly deteriorating after peaking early in 2009. This is
interesting because if European growth gets weak we would expect this
pattern to reverse and to produce surpluses as growth slows and as
imports slow down as domestic demand weakens. But, we also expect
Europe to stave off surplus reduction because the euro is weak and the
increase in competitiveness should expand exports and retard imports.
The fact of the ongoing current surplus deterioration suggests that
there is a J-Curve at work. The rise in the surplus this month may hint
that we have reached the end of the J-curve effect. So, let's look at
how that works. 
The J-curve refers to the tendency for traded
goods prices to react first to the change in the exchange rate and for
trade volumes to react later. There is a timing asymmetry; in fact,
there are probably several of them. For example, with the euro's fall
in value there is not necessarily an immediate impact on export prices.
Export prices are denominated in euros based on their euro-area costs.
But export volumes eventually will respond positively to the exchange
rate drop because unchanged euro-based export prices will translate
them into much lower foreign currency prices. 
Initially nothing happens to export prices.
Secondly, the volume sold overseas eventually grows as overseas buyers
respond to lower prices expressed in their domestic currency. Thirdly,
eventually European exporters might even RAISE their euro prices to
increase their profits more immediately, and blunt the degree of
competitiveness improvement. But these latter two effects are second
and third round occurrences. The initial effect on exports and export
prices is that nothing much happens due to the exchange rate change. 
Import prices, however, are under pressure from
the very start of the currency weakening. The minute that the euro
falls, foreign prices expressed in euro currency terms are adjusted up.
For example $70/bbl oil that used to cost &#128; &nbsp;53.85 at &#128;&nbsp;1.30 will require
&#128;&nbsp;58.33 at &#128;&nbsp;1.20. So the terms of trade (PX/PM) move sharply against a
country as a first step after a currency drop. That means that the
ratio drops as import prices rise faster then export prices (...and all
other things the same, that will widen the trade deficit). But
eventually because demand elasticities (demand responsiveness) are
greater than one in absolute value, the percentage drop in import
volumes will surpass the percentage rise in import prices, bringing
about a drop in the value of imports and a rise in the trade surplus. 
And, as discussed above, eventually the drop in
foreign currency prices for exports will spur export volumes to expand
in foreign markets. Both of these effects argue for an expanded
surplus, eventually. But the immediate impact is that surplus gets
smaller because price effects take place before demand impacts play
out. The deterioration in the terms of trade is the dominant
first-round effect and that creates the J-curve, a move in the wrong
direction before a move in the right direction. Right now the
combination of the J-curve effects driving up import prices up and
stronger recovery growth sucking in imports is wining the battle
against strong exports driven by a strong overseas recovery. As a
result the surplus is shrinking. This is the first round, or the start
of the J-curve effect, It is temporary and with the euro's drop slowing
the one month rise in the trade surplus could be a hint of things to
come. 
Weaker growth in EMU could stem the ongoing rise
in imports too, but so will the eventual response to higher import
prices as the euro has fallen. One of theses effects will do it by
enhancing growth; the other by retarding it. There will be little
confusion about which effect is winning out. Either way, we expect
Europe's surplus to return for good and for this declining phase in the
surplus to prove temporary. Perhaps the rise in the monthly surplus is
the start of that process.



<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th colspan=7 scope="col">Euro-Area
Trade trends for goods</th>
</tr></thead>

<td>&nbsp;</td>
m/m%
% Saar
<td>&nbsp;</td>


<td>&nbsp;</td>
Apr-10
Mar-10
3M
6M
12M
12M
Ago

<tr>
<td class="firstcol">Balance*</td>
<td>&#128;&nbsp;1,397 </td>
<td>&#128;&nbsp;(26)</td>
<td>&#128;&nbsp;(1,435)</td>
<td>&#128;&nbsp;1,870 </td>
<td>&#128;&nbsp;(3,931)</td>
<td>&#128;&nbsp;219
</td>
</tr>
<tr class="even">
<td class="firstcol" colspan=7>Exports</td>
</tr>
<tr>
<td class="firstcol">All
Exp</td>
<td style="color:red;">-2.4%</td>
<td>9.8%</td>
<td>51.2%</td>
<td>27.2%</td>
<td>17.4%</td>
<td style="color:red;">-24.3%</td>
</tr>
<tr>
<td class="firstcol">Food
and Drinks</td>
<td style="color:red;">-2.9%</td>
<td>6.2%</td>
<td>22.4%</td>
<td>19.2%</td>
<td>7.9%</td>
<td style="color:red;">-10.0%</td>
</tr>
<tr>
<td class="firstcol">Raw
materials</td>
<td>0.8%</td>
<td>6.5%</td>
<td>54.5%</td>
<td>39.3%</td>
<td>31.6%</td>
<td style="color:red;">-25.3%</td>
</tr>
<tr>
<td class="firstcol">Other</td>
<td style="color:red;">-2.4%</td>
<td>10.1%</td>
<td>53.6%</td>
<td>27.6%</td>
<td>17.8%</td>
<td style="color:red;">-25.3%</td>
</tr>
<tr>
<td class="firstcol">
MFG</td>
<td style="color:red;">-4.8%</td>
<td>12.1%</td>
<td>43.9%</td>
<td>21.2%</td>
<td>14.8%</td>
<td style="color:red;">-23.4%</td>
</tr>
<tr class="even">
<td class="firstcol" colspan=7>IMPORTS</td>
</tr>
<tr>
<td class="firstcol">All IMP</td>
<td style="color:red;">-3.5%</td>
<td>12.2%</td>
<td>49.0%</td>
<td>32.7%</td>
<td>17.3%</td>
<td style="color:red;">-25.1%</td>
</tr>
<tr>
<td class="firstcol">Food
and Drinks</td>
<td style="color:red;">-2.4%</td>
<td>5.5%</td>
<td style="color:red;">-4.4%</td>
<td>11.0%</td>
<td style="color:red;">-1.8%</td>
<td style="color:red;">-4.9%</td>
</tr>
<tr>
<td class="firstcol">Raw
materials</td>
<td style="color:red;">-5.0%</td>
<td>22.9%</td>
<td>96.7%</td>
<td>68.8%</td>
<td>40.0%</td>
<td style="color:red;">-37.9%</td>
</tr>
<tr>
<td class="firstcol">Other</td>
<td style="color:red;">-3.5%</td>
<td>12.1%</td>
<td>51.5%</td>
<td>32.7%</td>
<td>17.8%</td>
<td style="color:red;">-25.7%</td>
</tr>
<tr>
<td class="firstcol">
MFG</td>
<td style="color:red;">-5.1%</td>
<td>12.6%</td>
<td>31.9%</td>
<td>28.4%</td>
<td>14.1%</td>
<td style="color:red;">-21.0%</td>
</tr>
<tr class="grey1">
<td class="firstcol" colspan=7>*Eur
mlns; mo or period average (SA, WDA)</td>
</tr>



</html>

The seasonally adjusted and working day adjusted EMU trade balance improved in April widening to 1.39Bln surplus. Still, the trend is for the surplus to shrink. Growth rates show that exports and imports are building on the earlier [...]

EMU Exports And Imports Hit A One-Month Backtrack But Is The Surplus Really On A Sustained Declining Trend?

Louise Curley

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<a href="/comment/100615l.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/100615l.png"></a>

While
German analysts and institutional investors who participate in the ZEW
Survey have become less negative about current conditions, they have
become much more concerned about the economic outlook six months
ahead.&nbsp; The percentage excess of those looking for improvement
over those looking for deterioration dropped to 28.7% in June from 45.8
% in May.&nbsp; The June value is close to the long term average of
27.4%, as seen in the first chart.&nbsp; The sovereign debt crisis
in the Euro Area and the plans to improve government imbalances through
stringent budgetary measures have, no doubt, been responsible for much
of the sharp change in sentiment.
Increases in industrial production and exports and
declines in the unemployment rate have resulted in a less negative
appraisal of current condition.&nbsp; The pessimists among the
German financial community exceeded the optimists by 7.9% in June, down
from an excess of pessimist of 21.6% in May.&nbsp; German financial
types tend to be pessimistic about current conditions.&nbsp; Over
the entire period from December 1991 to the present, the average
appraisal of current conditions is minus 32.4%, as seen in the second
chart.
Last month, the participants in the survey were
optimistic about the outlook for profits.&nbsp; The balance of
people between those expecting increases in profits and those expecting
decreases in profits rose for the Automotive, Chemical/Pharmaceutical,
Steel, Machinery, Consumption/Trade, Construction, Utilities, Service,
Telecommunication and Information Technology industries.&nbsp; Only
Banking and Insurance industries were expected to do poorly.&nbsp;
This month the balances between the people expecting increases in
profits and those expecting decreases in profits have changed
dramatically.
Only in the&nbsp; Automotive,
Chemical/Pharmaceutical and Machinery industries have the balances of
opinion increased.&nbsp;&nbsp; In all other cases, expectations
are for a deceleration in profit growth, and in the case of the
consumption/trade industry, the participants expect a decline in
profits, as can be seen in the table
below.&nbsp;&nbsp;&nbsp;


<table widt="100% cellspacing="0">
<colgroup><col><col><col><col><col><col><col><col><col></colgroup><thead>
<tr>
<th scope="col">&nbsp;</th>
<th scope="col">Jun 10</th>
<th scope="col">May 10</th>
<th scope="col">Apr 10&nbsp;</th>
<th scope="col">Mar 10</th>
<th scope="col">Feb 10</th>
<th scope="col">Jan 10</th>
<th scope="col">Dec 09</th>
<th scope="col">Nov 09&nbsp;</th>
</tr></thead>
<tr>
<td class="firstcol">Macroeconomic Expectation 6 mo
Ahead (%Bal)</td>
<td>28.7</td>
<td>45.8</td>
<td>53.0</td>
<td>44.5</td>
<td>45.1</td>
<td>47.2</td>
<td>50.4</td>
<td>51.1</td>
</tr>
<tr>
<td class="firstcol">Current Economic
Conditions (%Bal)</td>
<td>-7.9</td>
<td>-21.6</td>
<td>-39.2</td>
<td>-51.9</td>
<td>-54.8</td>
<td>-56.6</td>
<td>-60.6</td>
<td>-65.6</td>
</tr>
<tr class="even">
<td colspan=9 class="firstcol">Responding Increase - Decrease in
Profits&nbsp; (%Bal)</td>

</tr>
<tr>
<td class="firstcol">Banking</td>
<td>5.6</td>
<td>18.2</td>
<td>28.2</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr class="grey1">
<td class="firstcol">Insurance</td>
<td>4.9</td>
<td>13.7</td>
<td>15.8</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Automotive</td>
<td>32.9</td>
<td>29.1</td>
<td>3.1</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr class="grey1">
<td class="firstcol">Chemical/Pharmaceutical</td>
<td>59.4</td>
<td>56.4</td>
<td>48.2</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Steel</td>
<td>43.7</td>
<td>46.7</td>
<td>37.2</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr class="grey1">
<td class="firstcol">Electronics</td>
<td>48.0</td>
<td>48.5</td>
<td>41.2</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Machinery</td>
<td>63.4</td>
<td>61.2</td>
<td>52.1</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr class="grey1">
<td class="firstcol">Consumption/Trade</td>
<td>-9.1</td>
<td>0.4</td>
<td>-2.3</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Construction</td>
<td>0.4</td>
<td>11.0</td>
<td>10.4</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr class="grey1">
<td class="firstcol">Utilities</td>
<td>0.8</td>
<td>21.5</td>
<td>20.5</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Service</td>
<td>19.6</td>
<td>29.4</td>
<td>30.6</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr class="grey1">
<td class="firstcol">Telecommunications</td>
<td>6.2</td>
<td>10.8</td>
<td>7.8</td>
<td colspan=5>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Information Technology</td>
<td>38.9</td>
<td>46.0</td>
<td>45.3</td>
<td colspan=5>&nbsp;</td>
</tr>

</table>

</html>

While German analysts and institutional investors who participate in the ZEW Survey have become less negative about current conditions, they have become much more concerned about the economic outlook six months ahead. The percentage [...]

Confidence Among German Investors And Analysts Down Sharply

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

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

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

Cost of transporting crude oil has soared to series high

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

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

Is recent drop in sentiment signaling softer growth ahead?

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

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

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

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

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

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

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Tian Yong Woon

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

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

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

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

260427T1.jpg

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

260427T2.jpg

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

260427T3.jpg

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

260427T4.jpg

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

260427T5.jpg

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

260427T6.jpg

Asia

Economic Letter from Asia: Not Just About the Strait

260424E.jpg

The onset of the war in Iran appears to have hit the German economy extremely hard as the Ifo survey shows very substantial and broad-based decline across its survey in April. The Ifo survey features readings for five sectors as well as an aggregate reading, and it surveys them for climate, current conditions, and expectations. The decline in the Ifo survey is present for all three concepts and across all five sectors, marking the weakening in April as a highly significant and extremely disturbing development. Only manufacturing in the current conditions survey escapes a month-to-month decline.

**The Ifo sequences**: The **climate** reading fell both overall and across each of the five sectors. **Current conditions** declined for the overall and for four of the five sectors, with manufacturing the sole exception. **Expectations** declined for the overall and for all sectors. Several of the sector declines were for a very substantial magnitude, especially when compared to historic changes in these indexes.

**Monthly changes in readings—severe broad deterioration**
The month-to-month change in the climate reading has weakened more month-to-month 19% of the time. That overall result, however, is boosted by manufacturing where the monthly change has been weaker 35% of the time (on data back to 2011). However, all other sectors have seen climate weaker m/m only 2.3% to 6.3% of the time! The current situation readings weakened, with the headline weakening more m/m 11% of the time. This was boosted by manufacturing, the only sector that improved on the month; its ranking on change was in its 85th percentile—quite good and truly stand-alone good news. The other current changes by sector ranged from construction being weaker 1.7% of the time, to retailing that has been weaker about 30% of the time in terms of m/m changes. Expectation changes were uniformly terrible, with the headline drop weaker only 6.3% of the time and sector change month-to-month weaker between 9% and 1.7% of the time. The monthly weakening was uniform and substantial. I document it with these calculations, but you can also see it on the chart above.

**Climate**: The bottom line is that the all-sector index for climate fell to -20.3 in April from -18 in March, placing it at a 10.5 percentile standing on data since 1993. The sector ranking is the highest for construction with a 42.2 percentile standing and the weakness for services at a 1.1 percentile standing—weaker than the table reading nearly 99% of the time. In terms of percentile standing levels or monthly changes, conditions are closing in on grim.

**Current conditions**: Current conditions saw the all-sector index slip to -5.3 in April from -2.4 in March. The headline ranking stands at a 9.8 percentile mark, making it—like the climate reading—weaker than its current reading only about 10% of the time. The strongest reading under current conditions is for construction which has a 60.6 percentile standing; it is the only ranking in the table above its historic median. Manufacturing, the only sector in the survey that improved month-to-month, has a 22.5 percentile standing, while services record the weakest percentile standing under current conditions, at an 8.4 percentile standing.

**Expectations:** The all-sector index for expectations fell to -25.3 in April from -19.9 in March, placing it at a 6.3 percentile standing. The percentile standings across sectors range from a high of 9.5% for manufacturing to a low of 1.5% for retailing. Up until earlier this year, the Ifo was showing signs of improvement; however, all of that has simply collapsed in the last month. Weakness is across economic concepts and sectors, as documented above. For reference, the table also gives a separate set of rankings on where the various indexes stand since the invasion of Ukraine, since that was another marked event that drove the index, that had been improving after Covid, down to lower levels.  Ranked even on this reduced scale looking at conditions only since the invasion of Ukraine, when conditions have generally been weaker, the current rankings across the Ifo survey remained extremely weak. This is a very disturbing survey for the German economy.

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Germany

German Ifo Plunges Everywhere

Andrew Cates

**Energy shock lifts inflation, trims growth**
The IMF’s latest WEO revisions for 2026 broadly reflect the classic stagflationary impact of the recent Middle East energy shock, with growth downgraded and inflation revised higher across most major economies. Higher energy prices act as a tax on real incomes while simultaneously pushing up costs. That said, the picture is not uniform: a number of economies—notably the US, China and India—have seen growth upgrades, reflecting stronger-than-expected momentum so far in 2026. By contrast, the UK stands out at the stagflationary extreme, combining one of the largest growth downgrades with a relatively strong inflation uplift—consistent with its weaker underlying momentum, greater energy sensitivity and more persistent domestic inflation dynamics. More broadly, while the global revisions remain modest—pointing to resilience in activity—the message is that disinflation is no longer a smooth glide back to target but increasingly contingent on energy prices and geopolitical developments.

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**Markets largely shrug off rising economic pessimism**
Notwithstanding a more downbeat assessment from economists—including the IMF’s stagflationary tilt to the outlook—there has been remarkably little follow-through into financial markets. Measures of systemic stress in both the US and UK remain low by historical standards, suggesting that investors are, for now, largely looking through the Middle East conflict. There are several possible explanations: corporate profits remain resilient, the AI-driven investment narrative continues to dominate market thinking, and markets may be assuming that any energy shock will be temporary and contained. In effect, investors appear to be pricing a benign baseline in which geopolitical risks do not materially disrupt growth, inflation expectations or policy. The UK is a partial exception, with a somewhat more visible uptick in stress, which aligns more closely with the IMF’s more challenging growth-inflation trade-off and the economy’s greater sensitivity to energy prices.

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**Volatility falls despite deteriorating growth surprises**
Market optimism is also increasingly at odds with the incoming data flow. Typically, equity volatility declines when growth surprises are positive and inflation surprises are benign. However, the recent pattern has broken that relationship. Growth surprises across the G10 have turned increasingly negative (our series is inverted in the chart below), yet volatility has continued to fall. In other words, markets are becoming less sensitive to weakening macro data, continuing to price a benign outlook even as the data deteriorate. This divergence reinforces the broader theme: investors are, for now, looking through both geopolitical risks and softer economic momentum, placing greater weight on resilience in earnings, the AI-driven narrative and the assumption that policy will remain supportive.

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**Inflation Nowcasts Have Jumped**
Incoming data suggest that headline inflation has moved higher in recent weeks, broadly in line with expectations given the rise in energy prices following the Middle East shock. Nowcasts for CPI across the major economies show a clear rebound in March and April from the lows seen at the start of 2026, with the move occurring in a relatively synchronised fashion. This reinforces the view that the recent pickup in inflation is being driven primarily by a common external factor—energy.

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**Energy shock not yet feeding into underlying inflation**
However, the detailed breakdown of March inflation outcomes suggests that this remains, for now, a largely headline-driven phenomenon. While headline CPI prints were firm across most economies, core inflation—stripping out energy and food—was more subdued and in some cases weaker. This indicates that there has been very limited pass-through from higher energy prices into broader goods and services inflation at this early stage. In other words, the shock is still being absorbed rather than propagated. That distinction is critical for policy and markets alike: as long as second-round effects remain contained, central banks may be able to look through the near-term rise in inflation, even as headline rates move higher.

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**Inflation Expectations Rising as Growth Sentiment Falters**
It remains early days, and much will hinge on how inflation expectations evolve from here. The latest ZEW survey for Germany already conveys the hallmarks of a classic stagflationary shock, with macroeconomic expectations weakening even as inflation expectations have ratcheted sharply higher. This shift is important: while the recent rise in headline inflation has so far shown limited pass-through into core, a sustained increase in expectations would raise the risk of second-round effects and make the inflation process more persistent. In that sense, the ZEW data highlight the key fault line in the current environment—whether the energy-driven shock remains contained, or begins to embed itself more broadly through expectations and pricing behaviour.

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Financial markets have remained notably calm in recent weeks despite rising geopolitical tensions in the Middle East, a more downbeat macroeconomic narrative and elevated uncertainty. Measures of financial stress and volatility remain low, and equity markets continue to look through both the conflict and softer data. That resilience sits alongside a more nuanced macro backdrop. The IMF’s latest WEO revisions point to a classic stagflationary energy shock—growth downgraded and inflation revised higher—although the global impact remains modest and uneven, with some economies still benefiting from stronger momentum (chart 1). At the same time, market pricing appears increasingly detached from the data flow, with volatility declining even as growth surprises have turned more negative relative to inflation (charts 2 and 3). Incoming inflation data reinforce the idea of a largely headline-driven shock, with nowcasts rising in line with higher energy prices but only limited pass-through into core inflation so far (charts 4 and 5). However, it remains early days. Survey evidence, such as the latest ZEW release, suggests that inflation expectations may already be responding in a more concerning way, with a marked rise alongside weakening growth sentiment (chart 6). Taken together, the key question for markets is whether this remains a contained, energy-driven shock that can be looked through—or whether it begins to embed more persistently via expectations, forcing a reassessment of the currently benign outlook.

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Charts of the Week: Risks Build, Markets Shrug

Sandy Batten

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The National Activity Index published by the Federal Reserve Bank of Chicago (CFNAI) slipped to -0.20 in March from an upwardly revised +0.03 in February (previously (-0.11). This is the lowest monthly reading since last November. Smoothing out the monthly volatility, the index's three-month moving average (CFNAI-MA3) declined to -0.03 in March from an upwardly revised +0.03 in February (previously -0.01).

This index is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the FRB Chicago indicates that readings on the 3-month average of -0.70 or below are consistent with the economy being in a recession. Therefore, even though the March reading on the 3-month average was negative, it indicates that the US economy is still growing, just slightly slower than trend, and is well away from recessionary conditions. The 3-month average would be much deeper in negative territory if the economy was at risk of contracting.

The National Activity Index is a composite of 85 economic indicators, grouped into four major categories: production and income; employment, unemployment, and hours worked; personal consumption and housing; sales, orders, and inventories. Three of the four broad categories of indicators used to construct the index decreased from February, and three categories made negative contributions in March. Production-related indicators contributed –0.20 to the CFNAI in March, down from +0.13 in February. The sales, orders, and inventories category's contribution to the CFNAI was –0.01 in March, down from +0.05 in February. Employment-related indicators contributed +0.02 to the CFNAI in March, up from –0.15 in February. The personal consumption and housing category's contribution to the CFNAI was –0.01 in March, down from a neutral value in February.

The CFNAI Diffusion Index, which measures the breadth of the change in the component series and is also a three-month moving average, increased to –0.04 in March from –0.08 in February. This is the highest reading since February 2025. A reading of zero indicates that all of the indicators are growing at their long-term average. If all of the underlying indicators in a given month are below their long-run averages, the diffusion index will equal -1. If all of the indicators are above their long-run averages, it will equal +1. Thirty-four of the 85 individual indicators made positive contributions to the CFNAI in March, while 51 made negative contributions. Forty-three indicators improved from February to March, while 40 indicators deteriorated and two were unchanged. Of the indicators that improved, 16 made negative contributions.

These figures are available in Haver's **SURVEYS** database.

- The monthly reading fell to -0.20 in March from an upwardly revised +0.03 in February.
- The three-month average slipped from +0.03 to -0.03.
- Despite the slip in March, the index points to near-trend economic growth and is well above recession territory.

Chicago Fed National Activity Index Slipped in March

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance rose by 6,000 to 214,000 in the week ending April 18, from 208,000 in the week ending April 11, revised from 207,000. The four-week average rose 750 to 210,750 in the week ending April 18, from 210,000 the April 11 week, revised from 209,750. The Action Economics/Haver Analytics Survey looked for 210,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose by 12,000 to 1.821 million in the week ending April 11, from 1.809 million in the week ending April 4. The four-week moving average rose to 1.812 million in the latest week from 1.811 million in the March 28 week. The insured unemployment rate remained at 1.2% in the week of April 11. It has remained at that level since the week of November 29, 2025.

The insured unemployment rate varied greatly across individual states and territories. In the week ending April 4, the highest unemployment rates were in New Jersey (2.51%), Massachusetts (2.37%), Rhode Island (2.31%), Washington (2.25%), Minnesota (2.11%), and California (2.02%). The lowest rates were in Florida (0.30%), Louisiana (0.31%), Arkansas (0.35%), Alabama (0.36%), North Carolina (0.39%), Tennessee (0.46%), South Dakota (0.47%), Kansas and Virginia (both 0.49%). Rates in other notable states include New York (1.92%), Illinois (1.82%), Pennsylvania (1.52%), and Texas (1.04%). 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 rose by 6,000 to 214,000.
- Continuing claims rose by 12,000 to 1.821 million.
- The insured unemployment rate remained at 1.2%.


Economy in Brief

Jump to:

New Accounting Rules Shock MBS and ABS Data

EMU Rate Is Tepid On The Month But Headline Rate Continues Trend Acceleration

U.S. PPI Declines For Second Month With Lower Food & Energy Prices

U.S. Industrial Production Is Strong Again

U.S. Housing Starts Decline, Erasing Year's Increase

U.S. Housing Starts Decline, Erasing Year's Increase

EMU Exports And Imports Hit A One-Month Backtrack But Is The Surplus Really On A Sustained Declining Trend?

Confidence Among German Investors And Analysts Down Sharply