Economy in Brief: September 2024

Inflation charts an uncertain path in the European Monetary Union (EMU). Early-reporting large countries are reporting weak inflation readings for their headlines in September. Three of the four largest EMU economies Germany, France, and Spain report declines in their headline HICP indexes in September. The exception, Italy, reports a headline that's unchanged month-to-month. That’s a “good news” month for headline inflation in no uncertain terms. These numbers follow an August in which two of these countries also had posted headline price declines and where one of them had posted an unchanged index month-to-month. These excellent results for August and September followed July that had been a difficult one with three of the member countries posting month-to-month increases in the headline HICP's ranging from 0.4% to 0.8% month-to-month.

We also have early reporting results on core inflation or (in the case of Germany) for inflation excluding energy for three of these reporters. Here the results are good but not excellent because the German figure shows an increase of 0.3% month-to-month, Italy logs a core index that is unchanged, while Spain logs a core that's down by 0.1%.

Headline HICP- As tantalizing as these figures are, they produce a mixed picture on sequential inflation when we look at the longer inflation picture from 12-months to six-months, to three-months. On the 12-month basis, all the headline readings for these four countries are below 2% which is the target number for the European Central Bank. However, over six months, inflation in Italy runs at a 2.8% pace, in Germany it runs at a 2.7% pace, while in France inflation accelerates but only to a 2.0% pace. Over three months, again headline inflation settles down with three of the four countries showing an annual rate of inflation over three months of a half a percent or less, but with Italy showing an annual rate at 2.6%. These are good results for the headline, with three-month inflation largely behaving and 12-month inflation, the usual preferred gauge of the central bank, below 2% across the board.

Core CPI- The problem emerges when we start to look at core inflation and we realize that a lot of this inflation progress has come because of weak oil prices. We have ex-energy or core inflation for Germany, Italy, and Spain and two of those three countries have year-over-year inflation rates on the core or ex-energy basis that are above 2%. German ex-energy inflation comes in at 2.6% over 12 months, Spanish core inflation comes at 2.4%, while Italian core inflation comes in just under the wire at 1.9%. Over six months, inflation accelerates in Italy from its 12-month pace of 1.9% to 2.4%. In Germany, ex-energy inflation ticks down to 2.4% over six months, while Spanish core inflation also ticks down to run at a 2.2% annual rate over six months. All the readings are above a 2% at an annual rate over six months. But over three months, Italy logs a pace for core inflation that's just barely excessive at 2.1%. Spanish inflation runs back up to a 2.4% annual rate over three months, the same as its year-over-year core. In Germany, ex-energy inflation jumps to 2.8% over three months, stronger than its six-month pace, or its 12-month pace.

Core inflation is still too-high- Headline inflation from the monetary union is certainly encouraging. However, looking a little bit deeper at core inflation which excludes the volatile food & energy components, we see inflation under the surface is continuing to percolate at a slightly excessive pace. The bad news is that inflation is slightly excessive on a relatively broad basis judging from these three economies. On the other hand, while it might be broadly excessive, it is not significantly excessive. Among all these inflation rates, the highest is over three months and it's Germany's ex-energy gain at 2.8%.

In this week's newsletter, we delve into key developments in Asia, focusing on China. Last week, China’s central bank (PBoC) announced a series of easing measures, including cuts to reserve requirements and interest rates (Chart 1). It also implemented targeted assistance for the struggling property sector, lowering mortgage rates and down payment requirements (Chart 2). Also, China’s Politburo pledged new support to bolster the economy, particularly for real estate, amidst disappointing economic data that have amplified concerns about meeting the 5% growth target for the year. Notably, these measures were announced just before China’s Golden Week holidays, starting this Tuesday. While initial market reactions have been positive (Chart 3), scepticism lingers due to the limited time remaining for these measures to impact growth.

Shifting to Australia, the central bank (RBA) maintained its policy settings in September, diverging from the easing trends seen in many G10 economies. This decision reflects ongoing inflation concerns (Chart 4), particularly from high services inflation (Chart 5). However, justifications for future easing remain, given weak domestic growth and increased mortgage burdens on households.

Finally, in Japan, the Bank of Japan (BoJ) maintained a dovish stance following July's financial market volatility, signalling continued patience regarding further tightening as inflation measures remain subdued for now (Chart 6). Additionally, in the political arena, the leadership change in Japan’s ruling Liberal Democratic Party (LDP) is worth monitoring, having prompted negative market reactions so far and with observers now focused on the upcoming general elections on October 27th.

China’s fresh easing measures In an effort to strengthen a struggling economy, China's central bank (PBoC) announced a series of easing measures last Friday 27th September, following Governor Pan's earlier remarks a few days before. The central bank specifically reduced the reserve requirement ratio (RRR) for banks by 50 bps and lowered the 7-day reverse repo rate by 20 bps (Chart 1). Pan also hinted in his Tuesday remarks that the RRR could be further decreased by an additional 25 to 50 bps, depending on market liquidity later in the year. Furthermore, he indicated that these measures could lead to a decline in the medium-term lending facility rate by about 30 bps and a decrease in the loan prime rate by 20 to 25 bps.

The U.K. distributive trades picture in September shows sales compared to a year ago moving into a positive reading of +4 in September after logging a -27 reading in August – a sharp turnaround. For wholesale trades, September continues to deteriorate with the September reading on sales compared to a year ago at -8, slightly weaker than the -7 reading in August. Other retail readings are also on an improving trend in September compared to August while for wholesale trades the evidence is of deterioration in September compared to August. These two key distributive trades sectors are not moving in tandem. And that phenomenon also holds for the look-ahead survey that samples expectations for October. Expected sales volumes in retailing in October compared to September have moved up to a +5 in October compared to -17 for September; for wholesaling, the October expectation for sales compared to a year ago is -6 compared with September's expectation of +6. Other expectations for October compared to September show improvements in retailing compared to further deterioration in wholesaling, further underscoring that these two sectors are experiencing very different trends. If there is incipient strength coming to retail, it has not percolated down to wholesaling yet.

Retailing The retail readings since September show improvement in sales compared to a year ago, orders compared to a year ago, and for sales evaluated for the time of year. The stock-sales ratio also moves up in September compared to August. The rankings for these September values show that sales compared to a year ago have a 44.4 percentile standing, orders compared to a year ago have a 24.6 percentile standing, and sales for the time of year have a 36.6 percentile standing. All of these are below the 50-percentile mark and therefore all reside below their historic medians. The stock-sales ratio has 66.2 percentile standing and is above its historic median. While showing monthly improvement, retail remains weak.

Expectations for October find sales compared to a year ago, orders compared to a year ago, and sales for ‘the time of year’ all improved compared to what had been expected in September. However, only sales compared to a year ago have a net positive reading. Again, the stock-sales ratio has a positive value that moves up to a reading of 20 in October from 18 in September. The rankings for these expectations are similar to the rankings for the currently reported counterparts of these indicators. Expected sales compared to a year ago have a 40-percentile standing, expected orders compared to a year ago have a 29.1 percentile standing, and expected sales for the time of year compared to a year ago have a 29.8 percentile standing. The expected stock-sales ratio has a very high 89.5 percentile standing. The readings are not strong, but they do show improvements in September and expected improvements for October and therefore they do represent some progress. However, the absolute readings for sales and expectations both are subpar.

Wholesaling Wholesaling shows deterioration in September compared to August for sales compared to a year ago, for orders compared to a year ago, and for sales for the time of year; the stock sales ratio moves up and has a positive reading. With all negative readings up and down the line, the stock-sales ratio would seem to be indicating an undesired increase in stocks relative to sales. The rankings for these measures are weaker than the counterpart rankings for retailing. And like the retailing rankings, the rankings for the stock-sales ratio was the highest.

Looking at expectations for October, again we see deterioration for all the metrics for wholesale sales compared to a year ago, for expected orders compared to a year ago, and for expected sales for the time of year. While they all deteriorate in October compared to September, they're roughly in line with or better than the surveyed numbers that had been reported for August. Once again, the stock-sales ratio is positive and moves up in October compared to September and once again the rankings for these expected readings are weaker than the retail sales counterpart expectations for the same measures.