Investor sentiment worldwide is positive, especially in AI-led Asia

Sectoral shift in US job openings

Meteoric rise in AI-related semiconductor exports fueling South Korea's export boom

Regional Fed surveys showing further manufacturing acceleration in August

Sharp drop in China demand for oil helping to limit impact of Middle East conflict on the price

Decades high real price of copper posing physical challenge to investment boom

Rising US long-term real yields point to strong demand for investment funding

US retail sales accelerate even as consumers remain gloomy

Retail gasoline price still well above pre-conflict level and now rising again

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

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Andrew Cates

**Growth surprises support the equity rally**
The balance of economic news has become more favourable for equities in recent weeks. Across the G10, growth data have increasingly beaten expectations, Incoming inflation data in the meantime have been surprising to the downside. And that differential (growth surprise compared with inflation surprise) has moved closely with global share prices. The relationship is intuitive: investors welcome stronger activity when it is not matched by a comparable rise in price pressure. And that helps explain why equities have remained resilient despite rising bond yields. But it is also a fragile configuration. This week's US producer- and consumer-price releases will show whether the improvement in US growth can continue without prompting a less benign reassessment of inflation and monetary policy.

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**Uncertainty recedes, but remains high**
Some of that underlying resilience in the world economy arguably reflects a modest clearing of the policy fog. Global and US measures of economic policy uncertainty have fallen sharply from the peaks reached earlier this year. But both indices remain far above their long-run norms. The retreat has coincided with stronger equity markets, though the level still matters. Firms making investment decisions face continuing uncertainty over trade rules, costs and financing conditions. The economic outlook may have improved, but it rests on a policy environment that remains unusually unsettled.

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**A world tilting towards reflation**
An AI-generated global growth-inflation map (see chart 3 below) points to an increasingly reflationary world economy. Built from OECD and national statistics, it positions each major economy by two gauges of momentum over the past six months — the change in its OECD composite leading indicator, a guide to the direction of growth, on one axis, and the change in consumer-price inflation on the other — with each bubble scaled to the size of the economy. The four quadrants that result correspond to reflation, where both are rising; stagflation, where growth fades while inflation climbs; a benign mix of firmer growth and easing prices; and a broad slowdown. The United States, India and South Korea sit in the first of these, where both growth and inflation momentum are strengthening. Japan and Mexico occupy the more benign position of improving activity and easing price pressure, while the United Kingdom, Australia and Indonesia remain in the slowdown quadrant. China is different again: growth momentum has weakened while inflation momentum has risen from an exceptionally subdued starting point. These positions describe changes over the past six months, not the level of growth or inflation. Even so, the dispersion might make a synchronised global monetary cycle less likely. Central banks are confronting quite different domestic conditions.

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**Supply pressure stirs again**
The reflationary turn also has a supply-side dimension. Global supply-chain pressure has risen again after the long normalisation that followed the disruption of 2021 and 2022. The index has historically led producer-price inflation in advanced economies by about six months, so its latest increase points to firmer price pressure in the production pipeline. This is a signal rather than a forecast: companies can absorb some higher costs in their margins, and the pass-through to consumers depends on demand. But it suggests that the goods disinflation which helped pull headline inflation lower may be losing force.

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**The Phillips curve steepens**
Renewed supply pressure matters more when domestic economies have little spare capacity. The Phillips curve, which describes the relationship between labour-market tightness and inflation, appears to have steepened since 2020 across the United States, the United Kingdom, Japan and Canada. Chart 5 below is built by regressing consumer-price inflation on the ratio of job vacancies to unemployment — a cleaner gauge of tightness than unemployment alone — while controlling for global supply-chain pressure and energy prices, and then comparing the estimated sensitivity before and since 2020. On that basis the result remains after allowing for supply-chain and energy shocks. In other words, a given increase in the ratio of job vacancies to unemployment is now associated with a larger rise in inflation than it was before the pandemic. Supply shocks still matter, but they may pass into wages and prices more readily when labour markets are tight. The final stage of disinflation could therefore prove more costly than the first.

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**The rise in yields is a real-rate story**
This backdrop helps explain the move in the bond market. The recent rise in the US 10-year Treasury yield towards 5 per cent has not been driven mainly by inflation expectations, which remain broadly stable. The Federal Reserve's DKW model instead attributes much of the increase to higher expected real short-term rates and a larger real term premium, the extra return investors demand for holding long-dated debt. Markets are repricing the real cost of capital rather than signalling a collapse in the inflation anchor. Heavy government borrowing and strong investment in defence and artificial intelligence fit that account. But the distinction offers limited comfort if renewed supply pressure and stronger demand eventually begin to lift inflation expectations as well.

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Financial markets have entered September in an awkward mood. Global equities have advanced, but long-term bond yields have risen towards multi-decade highs as the European Central Bank meets this week and the Federal Reserve and Bank of Japan prepare to follow. The common thread is a turn towards reflation: growth is firming while inflation remains stubborn. Growth surprises have improved relative to inflation surprises, supporting equities (chart 1), while policy uncertainty has retreated from its peak but remains unusually high (chart 2). Most major economies are now on the expansionary side of the growth-inflation cycle (chart 3). Yet supply-chain pressure is returning (chart 4), inflation has become more responsive to tight labour markets since 2020 (chart 5), and the rise in bond yields has been driven largely by higher real rates rather than inflation expectations (chart 6).

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Charts of the Week: The Reflationary Turn

Winnie Tapasanun

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Existing home sales fell 2.0% m/m (-1.2% y/y) to 3.98 million units (SAAR) in August, the third consecutive m/m fall and the lowest level since June 2025, after a 1.7% decrease to 4.06 million in July (unrevised), according to the National Association of Realtors (NAR). The Action Economics Forecast Survey had expected August sales of 4.00 million units. Sales remained 38.1% below a high of 6.43 million in January 2022 and 39.7% below a peak of 6.60 million in January 2021. The August decline coincided with a rise in the average 30-year fixed mortgage rate to 6.67%, the highest since July 2025, after increasing to 6.54% in July, 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 1.9% (-1.1% y/y) to 3.62 million units in August, the third successive m/m decline and the weakest reading since June 2025, following a 1.9% fall to 3.69 million in July, remaining 36.5% 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 August, the lowest level since May 2025, after registering at 370,000 from February through July, remaining 50.7% below a high of 730,000 in January 2022.

Regionally, August existing home sales declined m/m in all regions, while remaining flat in the West. Sales in the Northeast, down for the first time since March, dropped 4.0% (-2.0% y/y) to 480,000 in August, a three-month low, reversing a 2.0% increase in July. Sales in the Midwest fell 3.1% (-2.1% y/y) to 940,000, the lowest reading since April, after falling 2.0% in July and June, and sales in the South slid 1.6% (0.0% y/y) to 1.84 million, a one-year low, after a 2.6% July drop; both posted the third straight m/m decline. Sales in the West were unchanged m/m (-2.7% y/y) at 720,000 following a 1.4% July slide, marking the lowest level since July 2025. 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) fell 1.7% (+1.6% y/y) to $429,100 in August, the lowest since April, following a 1.4% decrease to $436,400 in July ($434,100 previously) and five consecutive m/m rises. Prices remained 18.9% above a low of $360,800 in January 2023. The median price of an existing single-family home slid 1.7% (+1.7% y/y) to $434,800 in August, a four-month low, after a 1.4% decline to $442,500 in July. The median price of condos and co-ops slipped 0.9% (+1.5% y/y) to $371,600, the lowest since March, on top of a 1.9% July drop to $375,000. Regionally, overall prices fell m/m in August in the South (-2.0%; +0.7% y/y), Midwest (-1.3%; +3.3% y/y), Northeast (-1.3%; +4.3% y/y), and West (-0.2%; -0.2% y/y).

Inventories of homes for sale climbed to the highest level since November 2019. The number of existing homes for sale (NSA) rose 3.2% (5.9% y/y) to 1.62 million units after holding steady m/m at 1.57 million in July. The supply of homes on the market at the current selling rate (NSA) increased to 4.9 months in August, the highest level since November 2015, from 4.6 months in July and June. 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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- August sales -2.0% m/m to 3.98 mil., third straight m/m fall; -1.2% y/y, first y/y drop since March.
- Sales m/m down in the Northeast (-4.0%), Midwest (-3.1%), and South (-1.6%); flat in the West.
- Sales y/y down in three regions; unchanged in the South.
- Median sales price -1.7% (+1.6% y/y) to $429,100, a four-month low.
- Unsold inventory +3.2% (+5.9% y/y) to 1.62 mil. units, highest level since Nov. ’19; 4.9 months' supply, highest since Nov. ’15.

U.S. Existing Home Sales Decline in August to Lowest Level Since June ’25

Sandy Batten

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The Producer Price Index for final demand increased 0.4% m/m (5.4% y/y) in August following an upwardly revised 0.1% monthly gain in July (previously unchanged), according to the Bureau of Labor Statistics (BLS). The Action Economic Forecast Survey expected a 0.4% m/m increase in August. Producer prices excluding food, energy & trade services (the new core index) rose 0.3% m/m (4.7% y/y) after rising an unrevised 0.4% m/m in July. The PPI excluding food and energy (the previous core index) increased 0.2% m/m (4.6% y/y) versus an upwardly revised 0.3% monthly gain in July (previously 0.2% m/m). A 0.3% m/m increase was expected for August.

Financial markets have placed a great deal of emphasis on today’s PPI report and tomorrow’s CPI report in forming expectations for the outcome of next week’s FOMC meeting. Today’s PPI report showed a slight pickup in inflation due mostly to a rebound in energy prices, but this was generally as expected. So, today’s report is not likely to have very much influence on expectations for next week’s FOMC meeting. The fed funds futures market is currently pricing in a 70% probability of a 25bps rate hike next week versus 64% just before the PPI report.

The index for final demand goods advanced 1.1% m/m (7.7% y/y) in August following two consecutive decreases. Over three-fourths of the broad-based monthly rise can be attributed to prices for final demand energy, which jumped 4.2% m/m after having declined in both June and July. The index for final demand goods less foods and energy increased 0.4% m/m (5.1% y/y) while the index for final demand foods increased 0.1% m/m (0.1% y/y), its first monthly gain in three months. Over a third of the August increase in the index for final demand goods can be traced to prices for diesel fuel, which jumped 24.1% m/m. Prices for gasoline, jet fuel and home heating oil also rose. In contrast, prices for residential electric power fell 0.5% m/m in August.

The index for final demand services edged up 0.1% m/m (45% y/y) in August, the third consecutive increase. The August advance can be attributed largely to a 2.3% m/m jump rise in prices for final demand transportation and warehousing services. In contrast, the index for final demand trade services fell 0.2% m/m (+4.5% y/y) in August, the third monthly decline in the past four months. Prices for final demand services less trade, transportation, and warehousing were unchanged in August from July (+3.5% y/y). Leading the August increase in the index for final demand services, prices for truck transportation of freight advanced 2.0% m/m, the first monthly increase in three months and a reflection of the surge in the price of diesel fuel in August. The indexes for airline passenger services, legal services, hospital inpatient care, and automobiles retailing also rose. In contrast, margins for fuels and lubricants retailing decreased 11.3% m/m.

Construction costs were unchanged in August from July (+5.3% y/y) following a 2.2% monthly jump in July.

Prices for intermediate demand for processed goods jumped 1.8% m/m (11.5%) in August after declines in each of the previous two months. The August rebound again was due largely to a 7.3% monthly surge in energy prices. Processed foods prices fell 0.1% m/m while prices of processed goods less foods and energy rose 0.5% m/m.

The PPI data are published by the Bureau of Labor Statistics and can be found in Haver’s **USECON** database. Further detail is contained in **PPI** and **PPIR**. The expectations figures are available in the **AS1REPNA** database.

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- The PPI increased 0.4% m/m (5.4% y/y) in August, in line with expectations, reflecting a 4.2% m/m rebound in energy prices.
- The core PPI rose 0.3% m/m (4.7% y/y).
- Final demand goods prices jumped 1.1% m/m, largely due to higher energy prices, following a 0.4% m/m decline in July.
- Final demand services prices edged up 0.1% m/m in August, the slowest monthly gain in three months.

U.S. Producer Prices Boosted by Rebound in Energy Prices in August

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance edged down by 1,000 to 206,000 in the week ending September 5, from 207,000 in the week ending August 29, revised marginally from 206,000. The four-week average was 206,000 as well in the September 5 week, down from 207,500 in the August 29 week. Claims remain largely range-bound at historically low levels between 200,000 and 230,000. The Action Economics/Haver Analytics Survey looked for 205,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”— inched down by 1,000 to 1.774 million in the week ending August 29, from 1.775 million in the week of August 22, revised down from 1.779 million. The four-week moving average was 1.779 million in the August 29 week versus 1.781 million in the prior week. The insured unemployment rate remained unchanged at 1.2% in the week of August 29.

The insured unemployment rate varies greatly across individual states and territories. In the week ending August 22, the highest unemployment rates were in Massachusetts (2.09%), Rhode Island (2.18%), Puerto Rico (2.57%), and New Jersey (2.62%). The lowest rates were in South Dakota (0.22%), Florida (0.34%), Alabama and Louisiana (both 0.36%), North Carolina (0.38%), Arkansas (0.43%), Nebraska (0.45%), Iowa (0.46%), Kentucky (0.47%), Kansas (0.48%), Tennessee (0.47%), and North Dakota and Wyoming (both 0.49%). Rates in other notable states include Texas (1.04%), Illinois (1.47%), Pennsylvania (1.60%), New York (1.74%) and California (1.82%). 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 edged down by 1,000 to 206,000 in the week of September 5.
- Continuing claims inched down by 1,000 to 1.774 million in the week ending August 29.
- The insured unemployment rate was unchanged at 1.2% in the week of August 29.

U.S. Initial Unemployment Claims Inched Down in the Week of September 5

Robert Brusca

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On the day that the European Central Bank met and decided to raise interest rates by 25 basis points, the German inflation report for August firmed, showing that headline inflation rose 0.3% on the month, with the core rising by 0.1%. Year-over-year headline inflation in Germany is excessive at 3%. However, the core rate at only 2.3% is not that far above the ECB target for all of the monetary union, a pace of 2%. German inflation for the headline is 3.6% over six months and 3.7% over three months; however, over three months and six months, German core inflation is running at 2%, the ECB’s chosen speed for inflation for the union as a whole.

German core inflation provides a counterpoint to headline inflation. It enables a strong argument that energy price inflation has not spread throughout the monetary union. However, with the ECB raising rates, German bond yields have risen to a 17-year high and the ECB seems determined to treat energy price inflation as something important and significant that it needs to fend off.

Economic conditions still show growth in the monetary union as weak at 1.0%. Growth among the top four economies is 1.1% with growth for the rest of the union year-over-year at 0.5%. So, the ECB is raising interest rates in an environment where growth is modest-to-low and where headline inflation is surging but where core inflation is much better behaved. The pace for Germany at 2% over three months and six months is right on target; 2.3% over 12 months is slightly excessive. For the entire euro area, the core inflation rate is closer to 2.5%, which is uncomfortable but not a terrible overshoot, certainly not with energy prices having flared the way they have.

Diffusion statistics show that inflation over three months in Germany has accelerated in only 27.3% of the categories; however, inflation has accelerated in 72.7% of the categories over six months and in 63.6% of the categories over 12 months. The tempered three-month inflation rate breadth does not dominate the other two metrics; however, it provides another counterpoint to the notion that inflation from oil price increases is spreading.

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Globally, oil prices are spiking again today. At the ECB press conference, the staff outlook shows inflation remaining high and stubborn for the monetary union as a whole over the next year, and this likely is a reason for the ECB to have raised rates and possibly to be ready to raise rates again. Commentary is beginning to reset probabilities for another rate hike at a higher probability before the end of the year. Of course, a lot of that is going to depend on how oil prices evolve and on growth. In the meantime, higher interest rates are going to make fiscal policy more of a problem in the EMU. Many European member countries already have high debt-to-GDP ratios, and the inability to put a cork in the bottle holding oil prices in the Strait of Hormuz is creating clear policy problems for the global economy.

Germany

A Counterpoint to the ECB Rate Hike from German Core Inflation

Economy in Brief: November 2022

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