Carol Stone, CBE

The US Treasury's monthly "TIC" data were reported yesterday for June. They indicate that foreign interest in US capital markets remained strong with the same magnitude of net flows into the US as occurred in May, the record period. [...]

TIC Data Show Sizable Foreign Interest in US Securities Even Through June; Hong Kong, Russia & Brazilian Investors [...]

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815k.jpg" width="353">
Every business day at about 9:30, the New York Federal Reserve Bank&#39;s trading desk announces the day&#39;s &quot;temporary open market operation&quot;. These are routine transactions in which the NY Fed buys securities from the group of &quot;primary dealers&quot; together with an agreement to sell them back at a later time, the familiar &quot;repo&quot; transaction. This is usually the next day, but can also be 3, 4, 7 or 15 days later. The effect is to add reserves to the banking system for that corresponding period, that is, to provide liquidity. If there is a surfeit of liquidity, the NY Fed may do &quot;reverse repurchase agreements&quot;, selling securities with an arrangement to buy them back, thus draining some reserves for the day or 2 or 3 during which the transaction is in force.
In the wake of the Fed&#39;s extraordinary repo operations late last week, Haver has added some series to the DAILY database, which show the amount of each day&#39;s operations and the type of collateral used. These are simple series, with only the total dollar amount in a given day&#39;s combined transactions. The objective, then, of these series is to show the amount of liquidity added or drained, and not the market conditions prompting the operations or the specifications of individual transactions beyond the securities used for collateral. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815l.jpg" width="353">
The source for this information is a &quot;user-friendly&quot; page on the New York Fed&#39;s <a href="http://www.newyorkfed.org/markets/omo/dmm/temp.cfm">website</a>. The current day&#39;s transactions are described along with a link to the previous 25 transactions and to a search facility that allows reference to periods from a single specified day to the entire history since July 7, 2000. All of the information can be exported to an Excel spreadsheet.
As we see in the first graph, the daily amounts of these reserve provisions vary widely. Most of the transactions are related to ordinary seasonal flows in the banking system. Today, for example, is August 15, the settlement date for the regular quarterly issues of new debt by the US Treasury. It is also the last day of a Federal Reserve &quot;maintenance period&quot;, the bi-weekly time span over which banks are required to &quot;meet&quot; their reserve requirement. Today&#39;s operation added $7.0 billion. Other examples relate to developments in the real economy: in December when shopping is at its highest volume of the year, so are reserve needs. In January, when business slows way down after the holidays and in the depths of winter, reserve needs decrease markedly. There is nothing unusual about Federal Reserve additions in December or draining operations in January. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815m.jpg" width="353">
The transactions on Thursday and Friday deserve special mention. On Thursday, they totaled $24 billion. This seems large if we don&#39;t follow these daily operations. But additions on Thursdays routinely run $15 billion or more and often around $20 billion. So this alone wasn&#39;t all that dramatic an intervention. Friday&#39;s operations, though, were quite distinctive. They totaled $38 billion, the largest single day&#39;s addition since the days immediately following September 11, 2001, when a number of New York dealers were briefly shut down. Also, they used mortgage-backed collateral exclusively. Demand for Treasury securities is strong in the midst of market uncertainty, so it is likely that the Fed didn&#39;t want to restrain the floating supply of those securities. But mortgages, of course, are the source of much of the present market dislocations. Our third graph here shows how unusual the volume of these repos is. At the same time, the Fed did not buy these securities outright, they only bought them to hold over the weekend. On Monday, they did a modest $2 billion operation and none on Tuesday, so those MBS returned to the markets. Even so, note that the federal funds rate remained very low on Monday and Tuesday. This indicates that normal banking system operations were providing reserves on those days, obviating the need for more Federal Reserve intervention.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Million $</th>
<th scope="col">Aug 13</th>
<th scope="col">Aug 10</th>
<th scope="col">Aug 9</th>
<th scope="col">July* </th>
<th scope="col">June*</th>
<th scope="col">May*</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>2,000</td>
<td>38,000</td>
<td>24,000</td>
<td>8,810</td>
<td>8,464</td>
<td>8,250</td>
</tr>
<tr>
<td class="firstcol">Treasury</td>
<td>700</td>
<td>0</td>
<td>8,099</td>
<td>5,710</td>
<td>4,238</td>
<td>4,073</td>
</tr>
<tr class="odd">
<td class="firstcol">Agency</td>
<td>144</td>
<td>0</td>
<td>4,971</td>
<td>1,946</td>
<td>2,379</td>
<td>3,230</td>
</tr>
<tr>
<td class="firstcol">Mortgage-Backed</td>
<td>1,156</td>
<td>38,000</td>
<td>10,930</td>
<td>1,154</td>
<td>1,847</td>
<td>947</td>
</tr>
</tbody>
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Every business day at about 9:30, the New York Federal Reserve Bank's trading desk announces the day's "temporary open market operation". These are routine transactions in which the NY Fed buys securities from the group of "primary [...]

Daily Fed Open Market Operations: The Pattern of Fed Liquidity Provision

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815i.jpg" width="353">
The index of manufacturing activity in New York State for August slipped from its improve level of July &amp; June. The Index of General Business Conditions fell 1.4 points after a 0.7 point rise in July. The figures are reported by the Federal Reserve Bank of New York.
Since the series&#39; inception in 2001 there has been a 75% correlation between the index level and the three month change in U.S. factory sector industrial production.
The index for new orders fell hard as did the index for employment. The shipments index was negative for the second consecutive month.
Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815j.jpg" width="353">
Pricing pressure also fell considerably with the prices paid index and the prices received index falling into negative territory. Since 2001 there has been an 88% correlation between the index of prices paid and the three month change in the core intermediate materials PPI.
The Empire State index of expected business conditions in six months improved to its best level in two years, mostly due to improved expected delivery times.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html">here</a>. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">August</th>
<th scope="col">July</th>
<th scope="col">Aug. &#39;06 </th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>25.06</td>
<td>26.46</td>
<td>14.11</td>
<td>20.33</td>
<td>15.62</td>
<td>28.70</td>
</tr>
</tbody>
</table>


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The index of manufacturing activity in New York State for August slipped from its improve level of July & June. The Index of General Business Conditions fell 1.4 points after a 0.7 point rise in July. The figures are reported by the [...]

U.S. Empire State Index Slipped This Month

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815d.jpg" width="353">
Industrial production rose an expected 0.3% following an upwardly revised gain of 0.6% during June.
Factory output surged another 0.6%, bringing the three month change in output to 1.2%, its best gain in about one year.
Consumer goods output grew 0.4% (2.4% y/y) after the upwardly revised 1.0% June jump. Higher output of automotive products, up 2.4% (8.7% y/y), accounted for much of the gain. Production of computers &amp; electronics fell 0.1% (+16.4 y/y) while output of furniture &amp; appliances fell 1.2% (-4.0% y/y). Production of apparel also fell by 1.4% (-4.0% y/y.
Production of business equipment rose 0.9% (3.8% y/y). Output of industrial &amp; other equipment rose 1.0% (1.4% y/y) and information processing &amp; related equipment output increased 0.7% (7.9% y/y) for the second consecutive month.
Capacity utilization rose to 81.9%from 81.8% in June as capacity rose 0.1% (2.1% y/y).
How Accurate Are Real-Time Estimates of Output Trends and Gaps? from the Federal Reserve Bank of Richmond can be found <a href="http://www.richmondfed.org/publications/economic_research/economic_quarterly/pdfs/spring2007/watson.pdf">here</a>.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815e.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070815f.jpg" width="353"> 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">INDUSTRIAL PRODUCTION (SA)</th>
<th scope="col">July </th>
<th scope="col">June</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>0.3%</td>
<td>0.6%</td>
<td>1.4%</td>
<td>4.0%</td>
<td>3.2%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>0.6%</td>
<td>0.6%</td>
<td>2.0%</td>
<td>4.7%</td>
<td>3.9%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Mining</td>
<td>0.7%</td>
<td>0.4%</td>
<td>0.4%</td>
<td>2.7%</td>
<td>-1.6%</td>
<td>-0.6%</td>
</tr>
<tr>
<td class="firstcol">Utilities</td>
<td>-2.1%</td>
<td>0.2%</td>
<td>-2.7%</td>
<td>0.2%</td>
<td>2.0%</td>
<td>1.4%</td>
</tr>
</tbody>
</table>
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Industrial production rose an expected 0.3% following an upwardly revised gain of 0.6% during June. Factory output surged another 0.6%, bringing the three month change in output to 1.2%, its best gain in about one year. Consumer goods [...]

U.S. Industrial Production Up Expected 0.3%

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070814l.jpg" width="353">
According to Flash Estimates, growth in the Euro Area slowed more than expected in the second quarter to a rate of 0.3% from 0.7% in the first quarter.Consensus estimates suggested a rate of 0.5%. While details of the composition of GDP will not be available until September 3rd, other data suggest that the consumer held up well, but that growth in the manufacturing sector decelerated, as a result, in part, of the rise in the euro. The volume of retail sales increased 0.16% in the second quarter after a 0.05% decline in the first quarter. Manufacturing sales, however, rose only 1.29% in the second quarter after a 2.12% increase in the first quarter.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070814m.jpg" width="353">
The European Commission projects a range of economic growth for three quarters ahead within which actual growth is expected to fall. As can be seen in the first chart which shows the actual growth and the range of estimates, the actual for the second quarter fell below the lower limit for the first time since the second quarter of 2003. Moreover, the range is widening, suggesting that the Commission is more uncertain about the future.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070814n.jpg" width="353">
Among the Euro Area countries, German GDP fell from 0.5% in the first quarter to 0.3% in the second. For France, comparable figures were also 0.5% and 0.3%. Greece experienced a sharp decline from 3.2% in the first quarter to -0.8% in the second. For the 27 members of the European Union growth in the second quarter was 0.5%. Among the members outside the Euro Area that showed higher rates of growth were the UK at 0.8%, Sweden at 1.0% and Slovakia at 2.4%. Percent changes in GDP for the Euro Area and the European Union are shown in the second chart.
Growth in the Euro Area in the second quarter is now below that of the UK and the US, but is above that of Japan, as can be seen in the third chart.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;ESTIMATES OF REAL GDP CHANGE</th>
<th scope="col">Q1 08</th>
<th scope="col">Q4 07&nbsp;</th>
<th scope="col">Q3 07&nbsp;</th>
<th scope="col">Q2 07</th>
<th scope="col">Q1 07&nbsp;</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">EURO AREA: Actual Q/Q %</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>0.3</td>
<td>0.7</td>
</tr>
<tr>
<td class="firstcol">Forecast Range: High</td>
<td>0.9</td>
<td>0.8</td>
<td>0.8</td>
<td>0.8</td>
<td>0.8</td>
</tr>
<tr>
<td class="firstcol">Forecast Range: Low</td>
<td>0.2</td>
<td>0.2</td>
<td>0.3</td>
<td>0.4</td>
<td>0.4</td>
</tr>
<tr>
<td class="firstcol"> EUROPEAN UNION: Actual Q/Q%&nbsp;</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>0.5</td>
<td>0.7</td>
</tr>
<tr class="odd">
<td class="firstcol">UNITED KINGDOM:&nbsp; Actual Q/Q%</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>0.8</td>
<td>0.7</td>
</tr>
<tr class="odd">
<td class="firstcol">JAPAN:&nbsp; Actual Q/Q%</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>0.1</td>
<td>0.8</td>
</tr>
<tr>
<td class="firstcol">UNITED STATES&nbsp;</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>0.8</td>
<td>0.2</td>
</tr>
<tr>
<td class="firstcol">SWEDEN</td>
<td>--</td>
<td>---</td>
<td>--</td>
<td>0.7</td>
<td>1.0</td>
</tr>
<tr>
<td class="firstcol">GREECE</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>-0.8</td>
<td>3.2</td>
</tr>
<tr>
<td class="firstcol"> SLOVAKIA </td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>2.4</td>
<td>2.4</td>
</tr>
</tbody>
</table>
</body>
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According to Flash Estimates, growth in the Euro Area slowed more than expected in the second quarter to a rate of 0.3% from 0.7% in the first quarter.Consensus estimates suggested a rate of 0.5%. While details of the composition of [...]

European GDP Growth Slows More Than Expected

Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070814k.jpg" width="353">
3-month inflation shifts much lower.
French inflation trends show France&#146;s contribution to the Euro area&#146;s inflation trends are middle of the road. France is still not in great shape but it is not one of the problem countries on the inflation side. And France has seen its GDP slow unexpectedly in the second quarter. The French stock market remains one of the very weakest in Europe. We are for the first time getting some consistent signs of slowing from Europe. It&#146;s too soon to say if they will last or not.
The trouble for the ECB is going to be sorting out the disparate trends. It will have to deal with its previous hint that it was set to hike rates and compare it to actual current needs. Financial markets events work to put the ECB on hold. And then there is the GDP picture which was not as strong in Q2 as had been expected across the Euro area. The moderation of inflation trends feeds a third development into this mix that also comes out on the side of pushing the ECB to stay its hand. 
This by the way is not a isolated position for the ECB. Japan&#146;s central bank is in a similar fix for all the same reasons. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
 France HICP and CPI details
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">M/M %</td>
<td colspan="3">SAAR %</td>
<td>Year/Year</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td> Jul-07</td>
<td> Jun-07</td>
<td> May-07</td>
<td>3-Mo</td>
<td> 6-Mo</td>
<td> 12-Mo</td>
<td> Yr Ago</td>
</tr>
<tr>
<td class="firstcol"> HICP Total</td>
<td>0.0%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.0%</td>
<td>2.1%</td>
<td>1.2%</td>
<td>2.2%</td>
</tr>
<tr>
<td class="firstcol">Core</td>
<td>#N/A</td>
<td>0.1%</td>
<td>0.1%</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
<td>1.5%</td>
</tr>
<tr>
<td colspan="8">&nbsp;</td>
</tr>
<tr>
<td class="firstcol"> CPI: All Items</td>
<td>0.1%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>1.7%</td>
<td> 1.8%</td>
<td>1.1%</td>
<td>2.0%</td>
</tr>
<tr>
<td class="firstcol">CPI ex Food &amp; Energy</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.1%</td>
<td>1.2%</td>
<td>1.3%</td>
<td>1.4%</td>
</tr>
<tr>
<td class="firstcol">Food</td>
<td>-0.2%</td>
<td>0.5%</td>
<td>0.1%</td>
<td> 1.9%</td>
<td>0.4%</td>
<td>0.8%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">Alcohol</td>
<td>0.3%</td>
<td>0.4%</td>
<td>0.4%</td>
<td> 4.5%</td>
<td> 3.4%</td>
<td> 0.6%</td>
<td>0.2%</td>
</tr>
<tr>
<td class="firstcol">Clothing &amp; Shoes</td>
<td>-0.7%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>-1.4%</td>
<td> 1.2%</td>
<td> 0.2%</td>
<td>0.2%</td>
</tr>
<tr>
<td class="firstcol">Rent &amp; Utilities</td>
<td>0.2%</td>
<td>0.5%</td>
<td>0.0%</td>
<td>2.7%</td>
<td> 3.4%</td>
<td>2.4%</td>
<td>4.8%</td>
</tr>
<tr>
<td class="firstcol">Health Care</td>
<td>0.4%</td>
<td>0.0%</td>
<td>-0.1%</td>
<td> 1.1%</td>
<td>0.3%</td>
<td> 0.4%</td>
<td>-0.2%</td>
</tr>
<tr>
<td class="firstcol">Transport</td>
<td>0.2%</td>
<td>0.4%</td>
<td>0.7%</td>
<td>5.0%</td>
<td> 6.1%</td>
<td>1.5%</td>
<td>4.0%</td>
</tr>
<tr>
<td class="firstcol">Communication</td>
<td>0.0%</td>
<td>-0.1%</td>
<td>0.1%</td>
<td> -0.1%</td>
<td>-3.8%</td>
<td> -0.6%</td>
<td>-6.2%</td>
</tr>
<tr>
<td class="firstcol">Recreation &amp; Culture</td>
<td>-0.2%</td>
<td>0.1%</td>
<td>-0.3%</td>
<td>-2.0%</td>
<td> -0.9%</td>
<td>-1.6%</td>
<td>-0.9%</td>
</tr>
<tr>
<td class="firstcol">Education</td>
<td>0.2%</td>
<td>0.2%</td>
<td>0.2%</td>
<td> 2.9%</td>
<td> 2.7%</td>
<td>2.4%</td>
<td>2.8%</td>
</tr>
<tr>
<td class="firstcol">Restaurant &amp; Hotel</td>
<td>0.5%</td>
<td>0.3%</td>
<td>0.2%</td>
<td> 4.4%</td>
<td> 3.7%</td>
<td> 2.9%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">Other</td>
<td>0.0%</td>
<td>0.1%</td>
<td>0.3%</td>
<td>1.7%</td>
<td>1.8%</td>
<td>2.0%</td>
<td>3.2%</td>
</tr>
<tr>
<td colspan="8">&nbsp;</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Diffusion</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>54.5%</td>
<td> 63.6%</td>
<td>45.5%</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol"></td>
<td>3COLSPAN</td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
</body>
</html>

3-month inflation shifts much lower. French inflation trends show Frances contribution to the Euro areas inflation trends are middle of the road. France is still not in great shape but it is not one of the problem countries on the [...]

French Long-term HICP Trend Moves Lower

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070814j.jpg" width="353">
Inflation is slowing on a broad front in the UK in July - a quite unexpected development. Year/year, the Harmonized Index of Consumer Prices (HICP) is now below the 2% ceiling rate and suddenly that BOE inflation letter explaining why inflation had drifted above 3% seems oh so distant. The Retail Price Index (RPI) is still high but the Retail Price Index ex Mortgage Interest Payments (RPIX) tells the tale of sharply lower inflation too. Food costs are sharply lower. So are clothing and footwear, where price fell over three months.
This could be somewhat of a catalytic month for the BOE as well as for the ECB. Not only are we in the midst of financial turmoil at a time that the ECB had pointed strongly to a rate hike, but GDP growth has slowed. Now inflation, the reason for hiking rates is sharply lower, at least in the UK but also in France. Are things changing all that much or is this coincidence? Do you believe in Coincidence?

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
UK HICP and RPI Inflation
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">M/M % Change</td>
<td colspan="4">% SAAR</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Jul-07</td>
<td>Jun-07</td>
<td>May-07</td>
<td>3-MO</td>
<td>6-MO</td>
<td>12-MO</td>
<td>Yr Ago</td>
</tr>
<tr class="odd">
<td class="firstcol">HICP</td>
<td>-0.3%</td>
<td>0.3%</td>
<td>0.1%</td>
<td>0.4%</td>
<td>1.5%</td>
<td>1.9%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">RPI: All Items</td>
<td>-0.3%</td>
<td>0.6%</td>
<td>0.3%</td>
<td>2.4%</td>
<td>3.5%</td>
<td>3.8%</td>
<td>3.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">RPIX (ex mortgage interest)</td>
<td>-0.3%</td>
<td>0.5%</td>
<td>0.2%</td>
<td>1.4%</td>
<td>2.3%</td>
<td>2.7%</td>
<td>3.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">RPI ex seasonal food</td>
<td>-0.2%</td>
<td>0.6%</td>
<td>0.3%</td>
<td>2.5%</td>
<td>3.5%</td>
<td>3.9%</td>
<td>3.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Food &amp; Beverages</td>
<td>-0.9%</td>
<td>0.9%</td>
<td>0.2%</td>
<td>0.7%</td>
<td>3.7%</td>
<td>3.2%</td>
<td>2.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Housing &amp; HH Expenditures</td>
<td>-0.5%</td>
<td>1.0%</td>
<td>0.3%</td>
<td>3.1%</td>
<td>4.3%</td>
<td>6.8%</td>
<td>5.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Clothing &amp; Footwear</td>
<td>0.1%</td>
<td>0.1%</td>
<td>-0.4%</td>
<td>-0.8%</td>
<td>2.8%</td>
<td>0.1%</td>
<td>-1.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Leisure Services</td>
<td>-0.1%</td>
<td>0.3%</td>
<td>0.2%</td>
<td>1.9%</td>
<td>1.3%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Leisure Goods</td>
<td>-0.1%</td>
<td>-1.4%</td>
<td>0.1%</td>
<td>-5.6%</td>
<td>-4.8%</td>
<td>-3.0%</td>
<td>-2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Motoring Expenditures</td>
<td>-0.4%</td>
<td>0.7%</td>
<td>1.0%</td>
<td>5.2%</td>
<td>3.9%</td>
<td>-0.3%</td>
<td>3.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Fares and Travel Costs</td>
<td>0.0%</td>
<td>0.9%</td>
<td>3.1%</td>
<td>17.3%</td>
<td>10.9%</td>
<td>8.6%</td>
<td>0.0%</td>
</tr>
</tbody>
</table>
</body>
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Inflation is slowing on a broad front in the UK in July - a quite unexpected development. Year/year, the Harmonized Index of Consumer Prices (HICP) is now below the 2% ceiling rate and suddenly that BOE inflation letter explaining why [...]

UK Inflation Turns Sharply Lower

Sharply rising share of AI-related jobs

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

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

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

Cost of transporting crude oil has soared to series high

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

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

Is recent drop in sentiment signaling softer growth ahead?

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

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

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

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

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Andrew Cates

**Front-End Yields Reflect Policy Reassessment**
Against a backdrop of key central bank meetings either having just taken place or imminent, short-dated government bond yields have moved decisively higher across most major economies since the escalation of the Middle East conflict, with the sharpest increase seen in the UK. The rise in 2-year yields reflects a repricing of near-term monetary policy expectations, as markets respond to the inflationary implications of higher energy prices and the growing likelihood that central banks will delay easing cycles. Moves have been most pronounced in economies where inflation is expected to be more persistent—most notably the UK—while increases have been more modest in the US and particularly Japan, where policy normalisation remains gradual. In effect, the front end of the curve is signalling a shift away from the “rate cuts soon” narrative that prevailed earlier in the year toward a more cautious, higher-for-longer policy outlook.

260430Z1.jpg

**US Recession Risks Remain Contained—For Now**
Despite the recent deterioration in the macro backdrop, real-time recession risk indicators for the US remain relatively subdued. This is notable given the combination of softer growth momentum, higher bond yields and heightened geopolitical risk. The nowcast—derived from a blend of high-frequency activity data and financial stress measures—has historically tended to move sharply when conditions turn, rather than drift higher gradually. That asymmetry is important in the current environment. While recession risks are not yet flashing red, past cycles suggest they can reprice abruptly, and arguably at present if energy-driven inflation were to feed much more forcefully into financial conditions or begin to weigh more materially on demand.

260430Z2.jpg

**Consumer Confidence Diverges: Europe and UK Slide, US Stabilises**
Consumer confidence has weakened across the major economies, but the deterioration has been more pronounced in the euro area and the UK than in the US. While sentiment in the US has recently edged up, it remains at relatively subdued levels. By contrast, confidence in Europe and the UK has fallen more sharply, reflecting greater exposure to higher energy costs and a more direct squeeze on real household incomes. This divergence is consistent with broader macro trends, suggesting that demand in Europe may prove more sensitive to the current shock, with weaker sentiment feeding more quickly into consumption.

260430Z3.jpg

**Euro area Credit Conditions Turn More Restrictive**
The latest ECB lending survey points to a clear tightening in credit conditions across the euro area, with banks raising lending standards for both firms and households while loan demand weakens. This combination—more restrictive supply alongside softer demand—is typically associated with a cooling in activity, particularly in interest-sensitive sectors. Recent evidence suggests that higher perceived risks, rising funding costs and geopolitical uncertainty are all weighing on banks’ willingness to lend, while weaker confidence and reduced investment appetite are dampening borrowing needs. The result is a tightening in financial conditions that is likely to amplify the broader slowdown already evident in survey data, reinforcing the more fragile growth dynamics now emerging across the region.

260430Z4.jpg

**An Intensifying AI Boom with Supply-Side Undercurrents**
Against the backdrop of surging AI-related investment, semiconductor prices are not just high—they are rising at an increasingly rapid pace. This chart shows a clear acceleration in both prices and export values, pointing to an intensifying boom in global chip demand. While this is in part a reflection of strong, structural demand, supply-side factors may also be playing a growing role. Although the Middle East is not a direct source of key chip-making minerals, it is central to the energy and petrochemical inputs that underpin semiconductor production. Ongoing geopolitical tensions are therefore likely feeding into higher costs and renewed frictions across supply chains. The combination of accelerating demand and tightening supply conditions suggests that semiconductor inflation could prove more persistent—and more globally consequential—than currently assumed.

260430Z5.jpg

**Labour Markets Reflect the AI Acceleration**
Our final chart this week highlights the extent to which the current AI boom is now feeding through into labour markets. This high-frequency indicator—based on the share of job listings containing AI-related keywords—shows a sharp and sustained increase since the widespread adoption of generative AI tools in late 2022. What began as a more traditional build-out in machine learning roles has evolved into a broader and more intense wave of hiring tied to generative AI capabilities, with demand accelerating markedly across multiple economies. The scale and persistence of this trend point to a structural shift rather than a cyclical upswing, reinforcing the view that AI is becoming an increasingly important driver of investment, productivity expectations and, potentially, broader macroeconomic dynamics.

260430Z6.jpg

Against a backdrop of persistent geopolitical tensions, firmer energy prices and a busy week of central bank meetings—including the Fed, ECB, BoE and BoJ—financial markets have remained notably resilient, even as the macro narrative has softened at the margin. The message from this week’s charts is one of growing tension beneath that surface calm. Front-end bond yields have moved higher, signalling a shift toward a more cautious, “higher-for-longer” policy outlook (chart 1). At the same time, real-time recession indicators for the United States suggest risks remain contained for now (chart 2). Consumer confidence data paint a more uneven picture, with sharper declines in the euro area and UK than in the US, highlighting regional vulnerabilities to the current energy shock (chart 3). The ECB’s latest bank lending survey reinforces this, pointing to tighter credit conditions and weaker demand—factors that are likely to weigh further on European growth (chart 4). By contrast, developments in the semiconductor sector underline a different dynamic: an intensifying global boom, with accelerating price pressures reflecting both strong AI-driven demand and emerging supply-side constraints linked indirectly to energy and logistics disruptions (chart 5). Finally, labour market data confirm that the AI surge is not merely a market narrative but a tangible structural shift, with hiring for AI-related roles accelerating across economies (chart 6). Taken together, these signals point to a more complex macro environment—one in which resilient markets coexist with softening growth, more persistent inflation risks and increasingly delicate policy trade-offs.

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Charts of the Week: Tension Beneath the Surface

Michael J. Moran

260430N.jpg

260430O.jpg

Real GDP grew at an annual rate of 2.0% in the first quarter of 2026, almost identical to the expected advance of 2.1%. The latest change was comfortably within the range of recent observations and close to the economy’s potential rate of growth. The year-over-year change totaled 2.7%, but that shift reflected what might be viewed as a special factor (robust growth in the second and third quarters that offset a trade-tariff-induced drop in 2025-Q1 GDP).

Business fixed investment was the star of the show in the first quarter, registering growth of 10.4%. Outlays for information processing equipment and software were especially strong, while outlays for industrial equipment and Research & Development contributed positively as well. Outlays for structures remained decidedly soft, dropping for the ninth consecutive quarter. Building of data centers have been vigorous, but softness in offices and manufacturing facilities has dwarfed the strength in this new area.

Federal spending surged 9.4% in Q1, but the rise reflected the reopening of most federal agencies after their closure during much of the fourth quarter. Excluding this noise, support from the federal government has been softening. Nondefense outlays peaked in the fourth quarter of 2024, and they were 6.9% shy of that total in the first quarter. Defense spending also peaked in 2024-Q4 and has eased 2.4% since then. Defense spending most likely will grow in coming quarters because of the efforts in the Middle East. Orders for defense goods have already started to rise.

Consumer spending rose 1.5% in the first quarter, a bit shy of the 2.1% pace over the four quarters of last year and less than half the rates in 2023 and 2024. Consumer spending showed signs of softening in late 2025 and January of this year, but activity picked up in February and March. Firm tax refunds might have provided a boost to household spending in the latest months. Some of the tax cuts from the One Big Beautiful Bill were applied retroactively to 2025, but withholding schedules were not adjusted last year. Thus, many households are receiving larger-than-normal tax refunds.

International trade acted as a drag on economic growth in Q1, with net exports subtracting 1.3 percentage points from the GDP increase. Exports did well in the first quarter with growth of 12.9%, but imports were even stronger with a jump of 21.4%. The real trade deficit of $1.1 trillion was noticeably smaller than the shortfall of $1.4 trillion in 2025-Q1 when importers were rushing to get goods into the US before the imposition of tariffs. Still, the trade shortfall was sizeable and its effect on growth noticeable.

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

260430P.jpg

260430Q.jpg

- Robust business investment led the advance; moderate support from consumers.
- Government spending jumped with the reopening of most federal agencies.
- The trade sector remained volatile, making a sizeable negative contribution in Q1.

Q1 GDP: Weathering the Challenges; Trend-Like Growth

Sandy Batten

260430A.jpg

260430B.jpg

This monthly report contains a wealth of information concerning the state of the consumer. The anticipation ahead of today’s report centered on how much the surge in energy prices since the escalation of the US-Iran conflict in early March would push up overall PCE inflation. Prices of energy goods and services jumped 11.6% m/m not annualized in March. This was the largest monthly increase since September 2005. As a result, the headline PCE price index increased 0.7% m/m (3.5% y/y versus 2.8% y/y in February), the largest monthly gain since July 2022 but in line with expectations of the Action Economics Forecast Survey.

The core index (that is, excluding food and energy prices) rose by a more modest 0.3% m/m in March, down from a 0.4% monthly increase in February and in line with expectations. However, the yearly rate rose further to 3.2% y/y in March from 3.0% in February, well above and moving away from the Fed’s 2% target. The FOMC left its fed funds rate target unchanged at yesterday’s meeting, but some committee members dissented, opposing the implied easing bias contained in the statement. Chair Powell, in his press conference, noted that a number of members have become more concerned over the inflation outlook and the possible need for a Fed response.

Nominal personal income posted a solid 0.6% m/m (3.7% y/y) increase in March following an upwardly revised unchanged reading in February (previously -0.1% m/m). The March increase was twice the 0.3% monthly gain expected by the Action Economics Forecast Survey. However, after adjusting for inflation, real personal income slipped 0.1% m/m in March on top of a 0.4% m/m decline in February.

Employee compensation continued to be a major driver of personal income in March. It rose 0.4% m/m (4.1% y/y) in March after a 0.2% monthly increase in February. In March, proprietors’ income jumped 2.8%. This outsized increase reflected payments to farmers from the federal government’s Farmer Bridge Assistance Program. Rental income rose a solid 0.7% m/m, the same gain as in February. Income from financial assets increased 0.4% m/m following a 0.9% m/m decline in February. Personal current transfer payments edged up 0.1% m/m versus a 0.3% m/m decline in February.

Nominal consumption expenditures jumped 0.9% m/m (5.7% y/y) in March following an upwardly revised 0.6% monthly gain in February (previously +0.5% m/m). Spending on goods rose 2.0% m/m (4.5% y/y) while spending on services increased 0.4% m/m (6.3% y/y). As for overall inflation, the surge in energy prices also accounted for a large portion of the March gain in nominal spending. After adjusting for overall inflation, real PCE rose a more modest 0.2% m/m following an upwardly revised 0.3% m/m increase in February (previously +0.1% m/m). Still, the solid gains in February and March provide a strong starting point for Q2. The March level is 1.5% at an annual rate above the Q1 average. For all of Q1, real PCE rose 1.6% q/q saar.

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

260430C.jpg

260430D.jpg

- The PCE price index jumped 0.7%, reflecting an 11.6% m/m surge in energy prices.
- The core index was up 0.3%, in line with expectations but still well above the Fed’s target.
- Personal income increased 0.6% m/m, led by a 0.4% m/m rise in compensation.
- Personal consumption jumped 0.9% m/m with a slight upward revision to February.
- However, much of the March gain in nominal consumption also reflected the jump in energy prices.
- Real consumption rose by a more modest 0.2% m/m.

Surging Energy Prices Push Up PCE Prices and Consumption in March

Kathleen Stephansen, CBE

260430A2.jpg

260430B2.jpg

Initial claims for unemployment insurance dropped by 26,000 to 189,000 in the week ending April 25, from 215,000 in the week ending April 18, revised from 214,000. The four-week average declined by 3,500 to 207,500 in the week ending April 25, from 211,000 the April 18 week, revised from 210,750. The Action Economics/Haver Analytics Survey looked for 214,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—dropped by 23,000 to 1.785 million in the week ending April 18, from 1.808 million in the week ending April 11, revised from 1.821 million. The four-week moving average declined to 1.797 million in the latest week from 1.809 million in the April 11 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 11, the highest unemployment rates were in New Jersey (2.51%), Washington (2.25%), Massachusetts (2.21%), Rhode Island (2.10%), and California (2.06%). The lowest rates were in Florida (0.31%), Louisiana (0.32%), Arkansas, North Carolina and Mississippi (all 0.35%), Alabama (0.36%), South Dakota (0.41%) and Tennessee (0.43%). Rates in other notable states include New York (1.96%), Illinois (1.77%), Pennsylvania (1.40%), 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.

260430C2.jpg

260430D2.jpg

- New claims dropped by 26,000 to 189,000.
- Continuing claims declined by 23,000 to 1.785 million.
- The insured unemployment rate remained at 1.2%.

U.S. Initial Unemployment Claims dropped in the Week of April 25

260430E.jpg

**Unemployment rates are stable near all-time lows for EMU**
Unemployment rates in the European Monetary Union (EMU) continued to hover at the lowest level. The EMU all-time low unemployment rate is 6.2%, and that’s the number reported for March. There have been five of these 6.2% unemployment rates monthly in the history of the monetary union.

Unemployment rates in March saw declines in five of the 12 early reporting countries: the Netherlands, Italy, Finland, Belgium, and Austria. Over the last three months, there were net declines in the unemployment rates in four countries, while year-over-year once again four countries—though a different four—showed declines in the unemployment rate.

Unemployment rates, evaluated relative to their historic standings, have a median rank standing in their 33.6 percentile. That is the median unemployment rank among these 12 countries; it shows that the unemployment rate is in the lower one-third of its historic rank. Among the 12 early reporting countries, only three failed to have unemployment rate rankings below their 30th percentile; those three are Austria with a 71.3 percentile ranking, Finland with an 80th percentile ranking, and Luxembourg with a 98.8 percentile ranking. So, there are three countries among these 12 that have relatively high unemployment rates compared to their histories, whereas the rest of the reporters have unemployment rates below their respective 30th percentiles.

260430.jpg

**Good, but not great, labor markets**
Clearly, the labor situation is in good hands; however, at the same time, inflation runs over the top of the ECB target, and with war in the Middle East and flurrying oil prices, inflation is going to climb higher. The ECB, like the Federal Reserve, finds itself in the awkward position of not wanting to raise rates because the economy is generating growth; on the other hand, growth seems somewhat fragile. The unemployment rate is low, and inflation has been overshooting, so the central bank is in a difficult position.

**Are central banks awakening from their slumber?**
Despite the good news on the unemployment front, central banks have been wary not to raise interest rates to fend off inflation. Inflation can really be described as having been moved around by financial crises and shocks going back to the great financial crisis. That shock, coupled with the losses that it created, left a legacy of inflation discipline for a very long run, basically, right into the COVID-created recession. COVID weakened economies globally as they were shut down by government policies and then inflation spurted as result of stimulative monetary action and fiscal excess. After that experience, central banks kept stimulative policies on the books and tried to coax growth out of a wounded economy and maintain low unemployment rates, while tolerating inflation that was excessive relative to their targets, but that did not accelerate and did decline slowly—at least for a while. As a result, there's now a legacy of overshooting inflation and more question marks about central banks and their backbone than central bankers want to admit as inflation rises, and as they continue to watch and postpone acting.

**ECB met and declared watchful waiting—not policy action**
At the recent meeting, the ECB policy statement admitted that “Longer-term inflation expectations remain well anchored, although inflation expectations over shorter horizons have moved up significantly.” They are following the model used in the U.S. to contend that long-term inflation expectations are still firmly anchored while they are only slipping away for the short term—a year ahead or so. However, to its credit, the ECB does refer to expectations having moved up significantly in the near term. This is something policy must be wary of, and it also must be wary that long-term expectations may have been damaged as well.

In her press conference, Christine Lagarde noted that the forward guidance from the ECB has several different elements: “There are sort of three anchors of what our reaction function is. So first of all, to remind you: target is 2% medium term, number one. Number two: symmetry. We discussed that today and we reaffirmed it. Number three: our reaction will depend on the type of deviation from target that we observe. Is it large and sustainable?”

"The increase in energy prices will keep inflation well above 2% in the near term. ⁠As the period of high energy prices extends, the likely impact on broader inflation through indirect and second-round effects intensifies. We will therefore closely monitor the size and persistence of the energy price surge, and how it feeds through to price and wage setting, inflation expectations and overall economic dynamics." (Source [here](https://www.reuters.com/business/finance/lagarde-comments-ecb-press-conference-2026-04-30/)).

**The road they kick the can down is getting narrower**
So, we are in store for more watchful waiting. Central bankers can feel that the flexibility is closing in on them. There's been a long period in which post financial crisis and post-COVID events helped to keep inflation under control, but now we're getting into a situation where it may be harder to keep control of inflation, especially since central bank credibility has been eroded by a long period of target misses. Two wars are in progress, and fiscal excess is the order of the day. So why not wait longer?

**No eager-beaver rate hikers**
No central bank seems eager to undertake this new challenge; however, they seem to be circling around the policy change and preparing to do something they haven't done in a long time, which would be to raise interest rates. Last time, in the wake of COVID, the central banks raised interest rates they waited too long to hike them, calling the situation of inflation temporary or transitory. Once again, the central banks see the oil price shock as something that is temporary; however, it's also severe, and while it's temporary, it could turn out to be ‘temporary’ but fairly long-lasting, making it harder to ignore or for a central bank that plans to ‘look through.’

**Some act, some talk, some just look...**
As I noted in the [report on money supplies](https://www.haver.com/articles/globally-money-supplies-accelerate-no-problemo) yesterday, the current practice of trying to look through this supply shock is creating an overshoot of money supply as we have money supply accelerations brewing in the U.S., the U.K., and the European Monetary Union. However, one of the rules from the 1970s was to not accommodate an oil price shock. Unfortunately, the practice of ‘looking through’ a supply shock—which means holding interest rates steady—is at the same time encouraging acceleration in the money supply, which looks accommodative to me. I don't see any evidence that central bankers have recognized the contradiction implied by these policies; it's something we should keep an eye on.

Economy in Brief

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