Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070418a.jpg" width="353">
The US Treasury&#39;s monthly investment data, called &quot;Treasury International Capital&quot; data or &quot;TIC&quot;, are increasingly watched for trends in foreign investors&#39; interest in US capital markets. Data for February were released this Monday past. Net purchases of securities by foreign investors appear to have fallen to $58.1 billion from $98.8 billion in January and $93.4 billion in February 2006. The reduction in February consists of smaller net purchases of federal agency (GSE) debt and US equities than in January, modestly offset by slight increases in Treasuries and corporate bonds. US investors also bought slightly more in foreign securities in February. So in the securities markets, less foreign capital came into the US and a bit more US capital went out.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070418c.jpg" width="353">
These data contain two important lessons that caution us against making too much of one month&#39;s figures. First, they obviously move around a lot. Foreign purchases of domestic securities were $116.8 billion in January and dropped to &quot;only&quot; $77.9 billion in February. This included the largest ever monthly swing in net purchases of federal agencies, -$33.2 billion, while net purchases of corporate bonds were the fifth largest they had ever been. And even though purchases of equities diminished, they remain quite large by historical comparison. The monthly data on security purchases run back to 1977.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070418b.jpg" width="353">
At the same time, these figures do just cover security purchase and sale transactions. But there are other financial flows, of course. Since last November 16 (see our commentary for that date), the Treasury has highlighted more information on these in a new &quot;TIC Monthly Report on Cross-Border Financial Flows&quot;. This table includes &quot;other securities acquisition&quot;, which tends to run negative as periodic principal payments are made on pass-through securities; stock swaps are also in this category and can run both ways as multinational corporations alter ownership structures. Also included in the Treasury&#39;s summary table are non-security transactions: short-term custody holdings and changes in banks&#39; dollar-denominated liabilities. Both of these can be highly variable, and indeed, the latter item, Line 6 in the table below, swung from a net outflow of $22.4 billion in January to an inflow of $30.4 billion in February.
Thus, overall, the influx of capital to the US did not decrease in February, but it increased, to $94.5 billion from $79.6 billion in January and $77.5 billion a year ago. We have argued before and would repeat, that in these monthly capital flow data, the items that &quot;balance&quot; the &quot;balance of payments&quot; are in fact the transitory ones, the cash moving around the world financial system as trade flows are paid for and companies shift deposits to countries where they have upcoming expenditures. Security purchases represent entirely different kinds of business decisions and may not necessarily be tied to the trade or current account deficits. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Net Foreign Purchases fromUS Residents, Bil $</th>
<th scope="col">Feb 2007</th>
<th scope="col">Jan 2007</th>
<th scope="col">Feb 2006</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Last 12 Months</td>
<td>2006</td>
<td>2005</td>
<td>2004</td>
</tr>
<tr>
<td class="firstcol">&quot;Headline&quot;: Net Foreign Purchases&nbsp;= 1 + 2</td>
<td>58.1</td>
<td>98.8</td>
<td>93.4</td>
<td>73.6</td>
<td>74.3</td>
<td>69.9</td>
<td>63.6</td>
</tr>
<tr>
<td class="firstcol">1. Domestic Securities</td>
<td>77.9</td>
<td>116.8</td>
<td>105.0</td>
<td>95.1</td>
<td>94.8</td>
<td>84.3</td>
<td>76.4</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Treasuries</td>
<td>17.0</td>
<td>15.2</td>
<td>19.4</td>
<td>17.4</td>
<td>16.5</td>
<td>28.2</td>
<td>29.3</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Agencies</td>
<td>2.0</td>
<td>35.8</td>
<td>30.1</td>
<td>22.3</td>
<td>24.1</td>
<td>18.3</td>
<td>18.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Corporate Bonds</td>
<td>45.4</td>
<td>43.0</td>
<td>37.7</td>
<td>43.4</td>
<td>41.7</td>
<td>31.0</td>
<td>25.8</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Equities</td>
<td>13.5</td>
<td>22.8</td>
<td>17.8</td>
<td>12.0</td>
<td>12.5</td>
<td>6.8</td>
<td>2.4</td>
</tr>
<tr>
<td class="firstcol">2. Foreign Securities&nbsp;</td>
<td>-19.8</td>
<td>-17.9</td>
<td>-11.5</td>
<td>-21.5</td>
<td>-20.6</td>
<td>-14.4</td>
<td>-12.7</td>
</tr>
<tr>
<td class="firstcol">3. &quot;Other Acquisition&quot;*</td>
<td>-15.0</td>
<td>-15.1</td>
<td>-9.0</td>
<td>-13.3</td>
<td>-12.8</td>
<td>-11.7</td>
<td>-3.2</td>
</tr>
<tr>
<td class="firstcol">4. Net Foreign Acquisition (1+2+3)</td>
<td>43.2</td>
<td>83.7</td>
<td>84.4</td>
<td>60.3</td>
<td>61.5</td>
<td>58.3</td>
<td>60.4</td>
</tr>
<tr>
<td class="firstcol">5. Short-Term Liabilities</td>
<td>20.8</td>
<td>17.9</td>
<td>-10.6</td>
<td>14.1</td>
<td>11.2</td>
<td>-4.0</td>
<td>15.8</td>
</tr>
<tr>
<td class="firstcol">6. Change in Bank Liabilities</td>
<td>30.4</td>
<td>-22.0</td>
<td>3.7</td>
<td>10.8</td>
<td>13.9</td>
<td>1.4</td>
<td>5.3</td>
</tr>
<tr class="odd">
<td class="firstcol">7. Total TIC Flows**&nbsp; </td>
<td>94.5</td>
<td>79.6</td>
<td>77.5</td>
<td>85.2</td>
<td>86.6</td>
<td>55.7</td>
<td>81.6</td>
</tr>
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The US Treasury's monthly investment data, called "Treasury International Capital" data or "TIC", are increasingly watched for trends in foreign investors' interest in US capital markets. Data for February were released this Monday [...]

Treasury TIC Data Show Reduced Security Purchases, but More Inflows of Other Capital

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417c.jpg" width="353">
German investors surprised the economic community with a spurt of optimism. The balance of those looking for better conditions six months ahead over those looking for worsening conditions rose to 16.5% in April from 5.8% in March. In spite of the rise, however, the balance is well below that of 62.7% in April, 2006 and also well below the long term average of 33.1%.
Investors continue to be impressed with current conditions. The balance of those seeing improvement in current conditions over those seeing deterioration rose to 76.9%, an all time high, from 69.2% in March and from 2.9% in April, 2006. The first chart shows the balances for current conditions and for the outlook since December 1981, when the series began.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417d.jpg" width="353">
Contributing, no doubt, to the increased optimism regarding current conditions among German investors has been the continued improvement in the economy in the first months of this year. The imposition of a 3 point increase in the Value Added Tax that went into effect on January 1, 2007 has apparently had a less deleterious effect on the economy than had been feared. Retail sales declined 3.9% in January, but rose 1.26% in February. The unemployment rate of registered workers declined to 9.2% in March from 9.8% in December. Industrial production was up 7.57% in February over the corresponding month of 2006 and, on the same basis, in January, 7.24%, compared with an increase of 5.88% for all of 2006 over 2005. Unemployment rates and the year over year increases in industrial production are shown in second chart shows.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417e.jpg" width="353">
As noted above, the expectations balance is well below the long term average of 33.1%. Perhaps one of the factors that may account for the subdued expectations is the strength in the Euro and what it may mean for exports. It was export demand increasing 2.10 points that offset the 1.2 point decline in domestic demand in the final quarter of the year. The third chart shows the contributions to growth of exports and domestic demand over the last five years. Perhaps one of the questions troubling investors is whether the decline in unemployment is such that it will lead to an increase in consumer demand that could offset a decline in exports. 

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/@D8/@D8.HTM">&nbsp;GERMANY ZEW INDICATOR</a></th>
<th scope="col">Apr 07</th>
<th scope="col">Mar 07</th>
<th scope="col">Apr 06</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
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<td class="firstcol">Expectations (% Balance)</td>
<td>16.5</td>
<td>5.8</td>
<td>62.7</td>
<td>10.7</td>
<td>-46.2</td>
<td>22.3</td>
<td>34.8</td>
<td>44.6</td>
</tr>
<tr>
<td class="firstcol">Current Conditions (% Balance)</td>
<td>76.9</td>
<td>69.2</td>
<td>2.9</td>
<td>7.7</td>
<td>74.0</td>
<td>18.3</td>
<td>-61.8</td>
<td>-67.7</td>
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German investors surprised the economic community with a spurt of optimism. The balance of those looking for better conditions six months ahead over those looking for worsening conditions rose to 16.5% in April from 5.8% in March. In [...]

German Investors' Optimism Surprises but the Optimism Is Subdued

Robert Brusca

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<th scope="col" class="firstcol">&middot; The table below shows the percent changes in starts and permits on different horizons without compounding. It shows that each measure except for the large projects (5 of more) is above its three-month average in March. This finding tends to reinforce the sense that there is some stability developing in the sector. &nbsp;To be sure, all measures are down over 3 months and 12 months. Two-to-four unit projects alone are flat or up compared to six months. Firmness on the three-month horizon is mostly in the Midwest where there is a 23% bounce (annualized) and in the South where a -12% annual rate trims the -33% annual rate drop over 6 months.&nbsp;</th>
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<colgroup></colgroup>
<thead>
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March 2007
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Seas Adj Annual Rate</td>
<td colspan="2">Total</td>
<td colspan="2">One Unit</td>
<td colspan="2">2- 4 Units</td>
<td colspan="2">5 or more</td>
</tr>
<tr class="even">
<td class="firstcol">In 000&#39;s of Units</td>
<td>Starts</td>
<td>Permits</td>
<td>Starts</td>
<td>Permits</td>
<td>Starts</td>
<td>Permits</td>
<td>Starts</td>
<td>Permits</td>
</tr>
<tr class="odd">
<td class="firstcol">This Month:</td>
<td>1,518</td>
<td>1,544</td>
<td>1,218</td>
<td>1,114</td>
<td>38</td>
<td>72</td>
<td>262</td>
<td>358</td>
</tr>
<tr class="odd">
<td class="firstcol">3-month avg</td>
<td>1,474</td>
<td>1,549</td>
<td>1,177</td>
<td>1,112</td>
<td>31</td>
<td>73</td>
<td>267</td>
<td>363</td>
</tr>
<tr class="odd">
<td class="firstcol">1-month % chg</td>
<td>0.8%</td>
<td>0.8%</td>
<td>2.0%</td>
<td>1.4%</td>
<td>22.6%</td>
<td>0.0%</td>
<td>-6.8%</td>
<td>-0.8%</td>
</tr>
<tr class="odd">
<td class="firstcol">3-month % chg</td>
<td>-7.0%</td>
<td>-4.3%</td>
<td>-2.2%</td>
<td>-4.6%</td>
<td>-22.4%</td>
<td>-4.0%</td>
<td>-22.7%</td>
<td>-3.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">6-month % chg</td>
<td>-11.9%</td>
<td>-5.7%</td>
<td>-12.6%</td>
<td>-8.6%</td>
<td>31.0%</td>
<td>0.0%</td>
<td>-13.2%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">yr/yr % chg</td>
<td>-23.0%</td>
<td>-25.9%</td>
<td>-24.6%</td>
<td>-28.4%</td>
<td>5.6%</td>
<td>-13.3%</td>
<td>-18.4%</td>
<td>-19.9%</td>
</tr>
</tbody>
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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417f.jpg" width="353">
We plot the trends by region to show the common patterns. Each region shows a long down slope reflecting the lasting weakness in housing across the nation. But then most regions show some stability - or at least a hint of it. 
There is an outright bounce in the Midwest and somewhat slower erosion in the West. The South is still declining but is also slowing its pace of decline. The Northeast is unclear, having bounced in January, probably on the weather, then having started a new slide since then, but still not quite making a new low. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417g.jpg" width="353"> 
On balance, housing is still having troubles. The rise in starts this month came about only because of a DOWNWARD revision to the previous month. Had February not been revised lower the new level in March would have been a decline from February since the preliminary February reading was higher than the level of starts that now prevails in March. Even so the clearest evidence we have is that the pace of decline is slowing and that for the moment two of the three types of starts and the overall are above their 3-month average. Housing is still faltering but no longer seems to have the downward momentum. It&#146;s sort of like a horror movie seen the second time around -- no longer any surprises and you&#146;ve already seen the worst of it. But unlike the movie the second time around, you still don&#146;t know where this one is going. Not for sure.

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We plot the trends by region to show the common patterns. Each region shows a long down slope reflecting the lasting weakness in housing across the nation. But then most regions show some stability - or at least a hint of it. There is [...]

U.S. Housing Starts Hit a Plateau

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<th scope="col" class="firstcol">&middot; Industrial production fell by 0.2% in March as utilities output pulled back but manufacturing output advanced by a strong 0.7% led by a gain of 0.9% in durable goods output. March saw a decline in consumer goods output, materials production was flat and there was a rise of 0.8% in business equipment output. &middot; But for the quarter as a whole and on trend, industrial production is a story of firming consumer output offset by plunging demand for equipment on the part of business with materials output vacillating about unchanged. Manufacturing output rose by 1.5% in Q1 given the strong productivity there that was not enough to create job growth in the sector. &middot; Looking at the just completed quarter we find industrial production is higher for most measures. So the National ISM report is correct to be above 50. There is a great deal of regional disparity according to various regional manufacturing surveys. We see that in the variety of conditions across industry groups there is a great deal of variation as well. Consumer durables output in the quarter rose at a 0.1% pace as auto output fell. Consumer nondurable output rose by a robust 6% pace with energy output up at a 12% pace. Business equipment output fell in the quarter but computer and office equipment production rose by 34.3%. Materials output was mixed, up by 0.5% in the quarter but up by 1.9% for durable goods and off by 1.7% for nonenergy nondurable goods. Overall auto production fell by 0.1% in Q1 but truck production expanded at a 52% annual rate. &nbsp; </th>
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<colgroup></colgroup>
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<tr>
Industrial Production
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Monthly Percent Changes</td>
<td colspan="3">At Annual Rates of Change</td>
<td>SAAR</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Month-to-month Percent Change</td>
<td>3-Month</td>
<td>6-Month</td>
<td>Year/Year</td>
<td>07-Q1</td>
</tr>
<tr class="odd">
<td class="firstcol">Industrial Output</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Jan-07</td>
<td>%Change</td>
<td>%Change</td>
<td>%Change</td>
<td>Pct Change</td>
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<tr>
<td class="firstcol">All Prod &amp; Materials</td>
<td>-0.2%</td>
<td>0.8%</td>
<td>-0.4%</td>
<td>1.1%</td>
<td>0.5%</td>
<td>2.3%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">All Products</td>
<td>-0.3%</td>
<td>1.0%</td>
<td>-0.4%</td>
<td>1.1%</td>
<td>1.2%</td>
<td>2.5%</td>
<td>2.0%</td>
</tr>
<tr>
<td class="firstcol">Final Products</td>
<td>-0.3%</td>
<td>1.2%</td>
<td>-0.5%</td>
<td>1.4%</td>
<td>2.3%</td>
<td>3.4%</td>
<td>3.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Manufacturing only</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">MFG - NAICS</td>
<td>0.7%</td>
<td>0.1%</td>
<td>-0.6%</td>
<td>0.7%</td>
<td>0.5%</td>
<td>2.7%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MFG - Durables</td>
<td>0.8%</td>
<td>0.2%</td>
<td>-1.1%</td>
<td>-0.3%</td>
<td>0.7%</td>
<td>3.5%</td>
<td>0.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; MFG - Nondurables</td>
<td>0.5%</td>
<td>0.0%</td>
<td>0.0%</td>
<td>1.9%</td>
<td>0.2%</td>
<td>1.9%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Consumer Goods</td>
<td>-0.6%</td>
<td>1.7%</td>
<td>0.0%</td>
<td>4.1%</td>
<td>2.4%</td>
<td>2.1%</td>
<td>4.5%</td>
</tr>
<tr>
<td class="firstcol">Durables</td>
<td>0.6%</td>
<td>1.7%</td>
<td>-2.9%</td>
<td>-2.6%</td>
<td>0.2%</td>
<td>-1.2%</td>
<td>0.1%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Automotive Production</td>
<td>0.4%</td>
<td>3.7%</td>
<td>-5.4%</td>
<td>-6.0%</td>
<td>1.4%</td>
<td>-3.1%</td>
<td>-0.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excl Automotive Production</td>
<td>0.7%</td>
<td>0.0%</td>
<td>-0.6%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>0.6%</td>
<td>0.6%</td>
</tr>
<tr>
<td class="firstcol">Nondurables</td>
<td>-1.0%</td>
<td>1.6%</td>
<td>1.0%</td>
<td>6.3%</td>
<td>3.1%</td>
<td>3.2%</td>
<td>6.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Nonenergy</td>
<td>0.6%</td>
<td>0.5%</td>
<td>-0.1%</td>
<td>4.0%</td>
<td>4.8%</td>
<td>3.9%</td>
<td>4.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumption Energy</td>
<td>-6.1%</td>
<td>5.4%</td>
<td>4.5%</td>
<td>13.5%</td>
<td>-2.2%</td>
<td>0.7%</td>
<td>12.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Business Equip.</td>
<td>0.8%</td>
<td>0.3%</td>
<td>-2.2%</td>
<td>-4.5%</td>
<td>3.3%</td>
<td>7.4%</td>
<td>-0.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Transportation</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>-1.4%</td>
<td>-5.2%</td>
<td>6.0%</td>
<td>7.6%</td>
<td>0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Computer &amp; Office Equipment</td>
<td>3.5%</td>
<td>3.3%</td>
<td>2.4%</td>
<td>38.2%</td>
<td>30.6%</td>
<td>28.3%</td>
<td>34.4%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Excl Technology &amp; Transportation</td>
<td>0.8%</td>
<td>-0.2%</td>
<td>-2.2%</td>
<td>-6.4%</td>
<td>2.3%</td>
<td>6.7%</td>
<td>-2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Materials</td>
<td>0.0%</td>
<td>0.5%</td>
<td>-0.4%</td>
<td>0.7%</td>
<td>-0.5%</td>
<td>2.1%</td>
<td>0.5%</td>
</tr>
<tr>
<td class="firstcol">Durables</td>
<td>1.0%</td>
<td>-0.2%</td>
<td>0.1%</td>
<td>3.5%</td>
<td>-0.2%</td>
<td>3.6%</td>
<td>1.9%</td>
</tr>
<tr>
<td class="firstcol">Nondurables excl energy</td>
<td>0.6%</td>
<td>0.1%</td>
<td>-1.2%</td>
<td>-2.3%</td>
<td>-1.7%</td>
<td>0.3%</td>
<td>-1.7%</td>
</tr>
<tr>
<td class="firstcol">Energy</td>
<td>-2.2%</td>
<td>2.3%</td>
<td>-0.1%</td>
<td>-0.4%</td>
<td>0.2%</td>
<td>1.6%</td>
<td>0.7%</td>
</tr>
</tbody>
</table>
 



<img align="left" height="331" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/0704172.gif" v:shapes="_x0000_i1026" width="533">
The chart on the left shows the trends for output by main manufacturing sector. As consumer output has steadied and strengthened, the business sector has been unraveling. This is an unpleasant picture and has been quite unexpected. We still do not know what is holding business back. 

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The chart on the left shows the trends for output by main manufacturing sector. As consumer output has steadied and strengthened, the business sector has been unraveling. This is an unpleasant picture and has been quite unexpected. We [...]

U.S. IP is Up But Still is a Mixed Up Sector

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417a.jpg" width="353">
The 0.1% increase in the CPI in March (annual rate of 0.7%) is just what the CPI needed after back to back monthly increases of 0.23% but, after two such bad reports, this good one can only take the edge off bad trends; it can&#146;t by itself make CPI trends good. For the month, inflation was not widespread; our monthly diffusion counter was at 42.9 for the headline and 42.9 for the core. Both signal that month-to-month inflation fell in more CPI categories than it rose. But both core and headline inflation now show an accelerating three-month pace compared to six months ago.
In the guts of this month&#146;s report we find core goods prices were weak as in the PPI, falling at a 0.9% annual rate in the month. But services prices were moderate too, cutting their pace of increase to a pace of +1.4%. Still over three months core goods prices are rising by 0.4% and core services are at 2.9%. (the service sector is 71% of the core). So while the inflation game is still a tug of war between goods deflation and services inflation, both sectors say inflation pressures eased in the month. Services inflation has seen sequentially lower from 1-year to 6-months and from 6-months to 3-months.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070417b.jpg" width="353">
While still high, core service sector inflation trends are cooling across horizons. However, look at the graph and realize how much this has to do with just this last month&#146;s result. Inflation had started another minor uptrend. So while the chart looks benign, the result is still quite reversible. 
Core goods prices are showing persisting declines in year/year and six-month rates of change. However, at the three-month horizon goods prices have reversed to show some inflation. So the anti-inflation trend is no longer as uniformly solid as it was.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Consumer Prices: 2007 March Report Overview: Moderation is Back in Play&#133;&#133;
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">5COLSPAN</td>
<td colspan="2">Year-To-Date</td>
<td>1- Mo</td>
<td>--</td>
</tr>
<tr class="even">
<td class="firstcol">Quick Summary</td>
<td>Yr/Yr</td>
<td>6-Mo AR</td>
<td>3-Mo AR</td>
<td>--</td>
<td>2007</td>
<td>2006</td>
<td>Diffusion</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">CPI</td>
<td>2.8%</td>
<td>2.4%</td>
<td>4.7%</td>
<td>--</td>
<td>4.7%</td>
<td>3.7%</td>
<td>42.9</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Core CPI</td>
<td>2.5%</td>
<td>1.9%</td>
<td>2.3%</td>
<td>--</td>
<td>2.3%</td>
<td>2.6%</td>
<td>42.9</td>
<td>--</td>
</tr>
<tr>
<td colspan="9">Commodity Category</td>
</tr>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td>Mo Annualized Rate</td>
<td colspan="6">Annualized Inflation Rate For Last</td>
<td>Mo/Mo Not Annualized</td>
</tr>
<tr class="even">
<td class="firstcol">By Expenditure Category</td>
<td>Mar 2007</td>
<td>% Weight</td>
<td>3-Mo</td>
<td>--</td>
<td>6-Mo</td>
<td>--</td>
<td>Year</td>
<td>Mar 2007</td>
</tr>
<tr class="odd">
<td class="firstcol">All Items</td>
<td>7.5%</td>
<td>100.00</td>
<td>4.7%</td>
<td>--</td>
<td>2.4%</td>
<td>--</td>
<td>2.8%</td>
<td>0.6%</td>
</tr>
<tr>
<td colspan="9">By Economic Group</td>
</tr>
<tr class="odd">
<td class="firstcol">All: Excl Food &amp; Energy</td>
<td>0.7%</td>
<td>77.10</td>
<td>2.3%</td>
<td>--</td>
<td>1.9%</td>
<td>--</td>
<td>2.5%</td>
<td>0.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">(Median Increase)</td>
<td>3.1%</td>
<td>100.00</td>
<td>4.4%</td>
<td>--</td>
<td>2.8%</td>
<td>--</td>
<td>2.7%</td>
<td>0.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Excl. Energy</td>
<td>1.1%</td>
<td>92.32</td>
<td>2.9%</td>
<td>--</td>
<td>2.2%</td>
<td>--</td>
<td>2.6%</td>
<td>0.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Commodities Excl Food &amp; Energy</td>
<td>-0.9%</td>
<td>22.77</td>
<td>0.4%</td>
<td>(29% of core)</td>
<td>-1.1%</td>
<td>--</td>
<td>-0.3%</td>
<td>-0.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Services Excl Energy</td>
<td>1.4%</td>
<td>54.33</td>
<td>2.9%</td>
<td>(71% of core)</td>
<td>3.1%</td>
<td>--</td>
<td>3.6%</td>
<td>0.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Core CPI less Tobacco</td>
<td>0.7%</td>
<td>--</td>
<td>2.1%</td>
<td>--</td>
<td>1.8%</td>
<td>--</td>
<td>2.4%</td>
<td>0.1%</td>
</tr>
<tr>
<td colspan="9">Food &amp; Energy</td>
</tr>
<tr class="odd">
<td class="firstcol">Energy</td>
<td>216.3%</td>
<td>7.68</td>
<td>30.9%</td>
<td>--</td>
<td>1.7%</td>
<td>--</td>
<td>6.9%</td>
<td>10.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Food</td>
<td>3.4%</td>
<td>15.22</td>
<td>7.3%</td>
<td>--</td>
<td>3.9%</td>
<td>--</td>
<td>3.3%</td>
<td>0.3%</td>
</tr>
</tbody>
</table>
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The 0.1% increase in the CPI in March (annual rate of 0.7%) is just what the CPI needed after back to back monthly increases of 0.23% but, after two such bad reports, this good one can only take the edge off bad trends; it cant by [...]

U.S. CPI Gives Markets a Breath of Pretty Fresh Air

The 0.1% increase in the CPI in March (annual rate of 0.7%) is just what the CPI needed after back-to-back monthly increases of 0.3% and 0.2%, but after two such bad reports, this good one can only take the edge off bad trends; it [...]

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070416d.jpg" width="353">
The results of the Quarterly Survey undertaken by the Regional offices of the Bank of Canada were released today. The Survey is based on the opinions of senior management of 100 firms across Canada. The Bank cautions that while the method of selection ensures a good cross section of opinion, the statistical reliability of the survey is limited, given its small size. Given that caveat some of the results are listed below.
The difference between those senior managers who believe sales will improve and those who believe they will decline increased in the latest survey to 14.00% in the latest Survey, from 6.93% in the Winter Survey and 2.97% in the Spring Survey of 2006. Nevertheless, the conviction that sales will continue to improve appears to be lessening as trend in the balance of opinion on future sales has been down since the end of 2003. In spite of declining trend in the balance of opinion on the future of sales, there is a rising trend in balance of those managers expecting employment to increase and those expecting it to decline. In the latest Survey, there were 45% more managers who expected employment to increase than those who expected employment to decline. The contrast between the trends in Sales and Employment outlooks are shown in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070416e.jpg" width="353">
The increased balance of those managers experiencing significant difficulty in meeting demand is consistent with the rising trend in balance of those expecting to increase expenditures on plant and equipment, as shown in the second chart.
The percentage of the managers who expect inflation to be within the 1-3% range that the Bank of Canada considers its control range increased to 88% from 86.1% in the last survey and 78.2% in the Spring Survey of 2006. The third chart shows the percentage of respondents who expected inflation to be under 1% or above 3% and those who expected it to be between 1 and 3%.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070416c.jpg" width="353">

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">BUSINESS OUTLOOK SURVEY, BY THE REGIONAL OFFICES OF THE BANK OF CANADA&nbsp; (Percent Balances)</th>
<th scope="col">Mar 07</th>
<th scope="col">Feb 07</th>
<th scope="col">Mar 06</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</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">Future Sales Outlook</td>
<td>14.00</td>
<td>6.93</td>
<td>2.97</td>
<td>7.07</td>
<td>11.03</td>
<td>7.18</td>
<td>17.43</td>
<td>17.91</td>
</tr>
<tr>
<td class="firstcol">Future Employment Level</td>
<td>45.00</td>
<td>39.60</td>
<td>42.57</td>
<td>5.40</td>
<td>2.73</td>
<td>39.35</td>
<td>42.75</td>
<td>33.42</td>
</tr>
<tr class="odd">
<td class="firstcol">Investment in Plant and Equipment</td>
<td>29.00</td>
<td>19.80</td>
<td>34.65</td>
<td>9.20</td>
<td>-5.65</td>
<td>24.01</td>
<td>19.20</td>
<td>16.95</td>
</tr>
<tr>
<td class="firstcol">Significant Difficulty in Meeting Demand (%)</td>
<td>18.00</td>
<td>13.90</td>
<td>11.90</td>
<td>4.10</td>
<td>6.10</td>
<td>13.65</td>
<td>11.20</td>
<td>7.25</td>
</tr>
<tr class="odd">
<td class="firstcol"> Inflation Expectations (%)* </td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Under 1% or Over 3%</td>
<td>11.0</td>
<td>11.9</td>
<td>19.8</td>
<td>-0.9</td>
<td>-8.8</td>
<td>18.32</td>
<td>14.37</td>
<td>10.75</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Between 1% and 3%.</td>
<td>88.0</td>
<td>86.1</td>
<td>78.2</td>
<td>1.1</td>
<td>9.8</td>
<td>79.72</td>
<td>81.15</td>
<td>85.25</td>
</tr>
</tbody>
</table>
</body>
</html>

The results of the Quarterly Survey undertaken by the Regional offices of the Bank of Canada were released today. The Survey is based on the opinions of senior management of 100 firms across Canada. The Bank cautions that while the [...]

Senior Canadian Managers Positive on Outlook for Production and Inflation

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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Michael J. Moran

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The Conference Board’s index of Consumer Confidence inched higher in April from an upwardly revised reading in March. The combined changes left the measure 1.1% higher than the preliminary tally in March. Despite the improvement, the index remained in the low end of the range for the current expansion. The index in April totaled 92.8, down from an average of 96.1 in 2025 and an annual cyclical high of 105.4 in 2023.

The Improvement in April reflected a pickup in the expectations component, which rose 1.7%. The current conditions component inched 0.2% lower. Overall views on current conditions slipped despite more favorable assessments of the labor market. The so-called measure of the jobs gap (share of respondents indicating that jobs are plentiful less the share saying that jobs are hard to get) rose 1.4 percentage points higher to 7.5%. The pickup reflected a drop in the share indicating that jobs are hard to get (down 1.5 percentage points to 19.8%). The share indicating that jobs are plentiful eased 0.1 percentage point to 27.3%.

Although expectations improved in April, from a long-term perspective they could be viewed as the more important factor restraining the headline measure of confidence. As shown in the left chart below, the expectations component of confidence shows considerably less volatility than the current conditions component does. The contrasting patterns suggest that individuals realize that the economy will undergo possibly sharp cyclical swings, but they expect conditions at some point to return to an underlying norm.

The current conditions index in the current cycle has indeed dropped noticeably, but it is still above the long run average (123.8 in April versus the average of approximately 108 from 1990 to 2025). The expectations component, as usual, has eased less than the current conditions component, but its shift has pushed the measure to the low end of its long-run range (72.2 in April versus an average of approximately 88).

Interestingly, concern about the labor market seems to be a factor affecting expectations. While current views on the labor market are favorable (plentiful less hard to get jobs gap of 7.5%), Individual are concerned about the future. The survey asks respondents if they expect more jobs or fewer jobs six months hence. The share indicating fewer jobs has moved well into the upper end of the historical range. Such observations in the past were typically seen only during recession (chart, below right). An unfavorable view on interest rates also seems to be playing a role in depressing the expectations component. More than 60% of respondents to the current survey expect higher interest rates 12 months from now.

The results from the Conference Board survey of consumers differ markedly from those of the University of Michigan Survey Research Center. The Michigan results show consumer sentiment at a record low, while the Conference Board index is only slightly below its long-run average. The difference most likely reflects the nature of the questions in the surveys. The Conference Board focuses on business and employment conditions, while Michigan emphasizes personal finances. The focus on finances, along with questions on inflation, probably picks up concerns about affordability.

The Consumer Confidence data are available in Haver’s **CBDB** database. The total indexes, which are indexed to 1985=100, appear in **USECON**, and market expectations are in **AS1REPNA**.

260428P.jpg

260428Q.jpg

- Expectations improved slightly in April, but are still subdued relative to norms.
- Moderately favorable view of current conditions.

Consumer Confidence: Modest Change in April

Winnie Tapasanun

260428J35.jpg

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U.S. house prices were essentially unchanged m/m in February after rises of 0.2% in January (+0.1% initially) and 0.3% in December (unrevised), according to the Federal Housing Finance Agency (FHFA) House Price Index. February marked the first flat reading since September following four consecutive m/m increases. The HPI was at 441.43 in February, up 14.8% from its August 2022 low of 384.59. The year-on-year growth rate eased to 1.7% in February—the lowest since March 2012—from 1.8% in January (+4.1% in February 2025), down from a high of 6.9% in February 2024 and well below a peak of 18.5% in February 2022.

By region, February FHFA house prices showed a mixed performance. House prices fell m/m in February (vs. January) in four of the nine census divisions. Declines were led by Mountain (-1.1% vs. +0.4%), followed by Pacific (-0.5% vs. +0.6%), West North Central (-0.4% vs. +0.3%), and Middle Atlantic (-0.1% vs. +0.3%). To the upside, house prices rose m/m in four census divisions in February (vs. January): South Atlantic (+0.6% vs. -0.2%), East South Central (+0.2% vs. +1.2%), New England (+0.2% vs. +0.6%), and West South Central (+0.2% vs. -0.3%). Meanwhile, house prices in East North Central were virtually unchanged m/m for the second successive month in February following seven straight m/m gains.

Year-on-year house prices continued to rise in February in most regions, except Mountain, Pacific, and West South Central. The y/y growth rate accelerated in February (vs. January) in only two of the nine census divisions: East South Central (+4.0% vs. +3.2%) and South Atlantic (+0.9% vs. +0.4%). Meanwhile, house price growth decelerated y/y in February (vs. January) in four regions: New England (+3.1% vs. +3.9%), West North Central (+3.1% vs. +3.6%), East North Central (+3.8% vs. +4.5%), and Middle Atlantic (+4.2% vs. +4.5%). To the downside, Mountain (-0.7% vs. 0.0%), Pacific (-0.4% vs. -0.3%), and West South Central (-0.1% vs. -0.4%) posted y/y declines in February.

The FHFA house price index is a weighted purchase-only index that measures average price changes in repeat sales of the same property. An associated quarterly index includes refinancing the same kind of properties. The indexes are based on transactions involving conforming conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included.

The FHFA data are available in Haver’s **USECON** database.

260428L35.jpg

260428M35.jpg

- February FHFA HPI 0.0% m/m; +1.7% y/y, lowest since Mar. ’12.
- House prices down m/m in four of nine census divisions, led by Mountain (-1.1%); up in four, driven by South Atlantic (+0.6%); flat in East North Central.
- House prices up y/y in six of nine regions, led by Middle Atlantic (+4.2%), but down in Mountain (-0.7%), Pacific (-0.4%), and West South Central (-0.1%).

U.S. FHFA House Prices Flat in February After Four Straight M/M Gains

260428E.jpg

Early PPI reports in the monetary union show collective pressures building over the past year, with newly emergent pressures popping up strongly in March.

The sequence of monthly inflation observations for these five early reporters in March shows that inflation pressure has not been clearly building but did jump up suddenly in March. In February, before the Iran war, the median monthly PPI gain was -0.5%. In March, that jumped to +3.9% (median month-to-month gain). Monthly pressure does not show steady gains anywhere except moderately in Germany. Finland shows deceleration in progress (!) even through—especially through—March, as its PPI in March fell by 5.3%. But the whole Finish pattern is somewhat upside down, with prices up month-to-month by 6.2% in January and 2.9% in February. It is not a trend that is easy to understand.

However, the March monthly gains are strong enough to drive sequential inflation higher from 12-months, to 6-months, to 3-months across all early-reporting countries. Even the German ex-energy index shows acceleration on that profile.

On a year-on-year basis, two of the early reporters have PPI inflation below 2%. Finland has 12-month PPI inflation at 2.1%, but Italy and Spain have inflation much higher, up by 3.4% over 12 months in Spain and by 5.6% in Italy.

The PPI has been very well-behaved in the last few years. Looking at 12-month changes for the year ended in March, the median change for this group in 2025 was -0.1%, compared to -4.6% in 2024.

The chart shows the PPI flared sharply in 2021 and 2022, then fell quickly into line in 2023. Clearly, the inflation tune now is being called by oil prices, the same as for that spike prices in 2022 and 2023.

The hope is that the oil price bump up will not be as long-lived, that the war will end soon, with the Strait of Hormuz reopened, and that oil prices—and other inflation pressures—will sink back to prerevision norms relatively quickly. That could happen, but so could other outcomes so markets remain wary. One problem this time is the destruction of oil facilities and the shutting of oil fields that could cause high prices to linger longer.

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**A new dynamic**
However, there is now a new dynamic with the UAE leaving OPEC. OPEC has been a vehicle to harness common behavior to control oil prices mostly to keep them higher. While undermining OPEC (UAE pumps about 13% of OPEC capacity) at a time the U.S. oil prowess has risen, this defection will make it much harder for OPEC to control prices. When countries are not bound together, the incentive is for countries to cheat on their production quota. In a cartel arrangement, when many cheat, the output reduction does not hold, and oil prices fall. A cartel arrangement allows for supply control and reduction which raises prices. But once prices are up, each member has an individual incentive to cheat—to sell more than his quota share of oil at the higher price. But that undermines the cartel. So, this move, this exit of UAE from the cartel, will create instability in the OPEC by moving more production outside the OPEC framework, beyond its control. Unless the Saudis are willing to be the ‘swing man’ and cut back their output to keep prices on target—something the Saudis have been increasingly unwilling to do—OPEC will be in less control.

EMU PPIs Show Instant Pressure

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.

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**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.

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**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.

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**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.

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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.

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**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.

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Asia

Economic Letter from Asia: Not Just About the Strait

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**The Distributive Trades Survey**

The U.K. Distributive Trades Survey for April 2026 and the look-ahead expectation readings for May paint an extremely soured outlook for the U.K. economy.

**Retail ranking**: Surveys for retail sales compared to a year ago, orders compared to a year ago, and sales evaluated for the time of year all have rankings near zero, which is the worst result on this timeline. This zero distinction applies to retail sales compared to a year ago. The best ranking is 11.6%; that is for sales evaluated for the time of year. Orders compared to a year ago have a 4.2 percentile standing. The stock-to-sales ratio—which is a completely different concept—shows that the inventory-to-sales ratio has a 29.9 percentile standing.

**Retail diffusion**: The raw April diffusion readings (up minus down diffusion) show that sales compared to a year ago slipped to a reading of -68 in April from -52 in March. Orders fell to -46 in April from -26 in March. Sales evaluated for the time of year fell to -32 April from -23 in March. All three measures weakened, and all three weakened decisively, resulting in extremely weak rankings. All of the rankings are executed on data back to 2002.

**Expectations for retailing**: The expectations readings for May show slippage again across all three metrics: expected sales compared to a year ago, expected orders compared to a year ago, and expected sales for the time of year. Expected sales compared to a year ago fell to -60 in May from -49 in April. Orders compared to a year ago declined to -45 in May from -30 in April, and sales for the time of year slipped to -43 from -19. In May, these readings have rankings in a 0.4 percentile standing for sales compared to a year ago, a 1.8 percentile standing for sales evaluated relative to the time of year, and a 4.6 percentile standing for orders compared to a year ago. These two panels on current and expected retail sales volumes are just simply terrible: weak monthly, weak in ranking terms, and showing slipping momentum.

The distributor trade series also provides data on the wholesale sector. While the wholesale sector is not quite as beat up as the retail sector, it's still extremely weak. There is no cause for any kind of hope that things are getting better based on wholesaling trends.

**Wholesaling**: The wholesale survey for sales compared to a year ago edged lower to -32 in April from -31 in March. Orders compared to a year ago remained at a reading of -41 in April. Sales evaluated for the time of year improved to a reading of -20 in April from -39 in March—a significant step up, but still very weak. The percentile standings for these three categories show sales compared to a year ago at the 8.8 percentile, orders compared to a year ago at the 5.6 percentile, and sales evaluated for the time of year at the 14.8 percentile.

**Wholesale Expectations**: The look-ahead observations, which provide expectations for wholesaling in May, show a similar constellation of readings, with sales compared to a year ago falling to -37 in May from -27 in April and orders compared to a year ago falling to -42 from -38, while sales evaluated for the time of year improved to  16 from  37. That category for wholesale sales improved both in April in real time and in May for expectations; however, it continues to have a very weak percentile standing, at the 17.9 percentile in May, while sales for a year ago have a 6.7 percentile standing and orders for a year ago have a 6.0 percentile standing.

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While some of the global PMI data have improved, these survey data for the U.K. are particularly dour. The war in Ukraine drags on, and there's a new conflict in Iran that has shut the Strait of Hormuz, creating energy problems for much of Europe. More broadly, supply chains have been harmed. In addition, the U.K. is undergoing a bout of political instability, as its Prime Minister is under pressure and a good deal of political uncertainty is being worsened by deteriorating economic performance.

Both the U.K. and the European Monetary Union had been showing some progress on inflation until the Iran war hit. Now, as the oil prices are up so sharply, headline inflation is going to be worse everywhere and there will probably be a bit more attention directed to the core inflation rate. However, the U.K. has had inflation too hot for a while, and it has failed to settle down. At its last meeting, the Bank of England’s Monetary Policy Committee warned that if the war was still ongoing at the next meeting, there would be a risk of a rate hike. So, it would seem that a rate hike is going to be in play unless the economy falls off a cliff first, which, based on the distributive trades data, is also something that could happen. The U.K. economy appears to be on very unsound footing, and what happens next is just about anybody's guess.

Economy in Brief

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