Robert Brusca

CPI Headline +0.4% +2.6% y/y. CPI-Core: +0.2% +2.3% y/y. The CPI headline is a touch better than expected. The core at 0.2% is as excepted bringing the Core year/year pace to 2.3% year/year at the boundary of Fed discomfort. It is not [...]

CPI Core Remains on the Razor’s Edge

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070515a.jpg" width="353">
CPI Headline +0.4% +2.6% y/y. 
CPI-Core: +0.2% +2.3% y/y. 
The CPI headline is a touch better than expected. The core at 0.2% is as excepted bringing the Core year/year pace to 2.3% year/year at the boundary of Fed discomfort. 
It is not a report to change monetary policy. 
Core Commodities inflation fell by 0.1% on the month while Services core inflation expanded by 0.3%. Year-on-year commodities core inflation is -0.5% while core services inflation is at a stubborn 3.5%. 
Medical care inflation popped back up to +0.4% after posting +0.1% last month. Apparel prices fell by 0.3% after a 1% drop last month and are lower by 0.4% year/year. Housing costs were steady at 0.2% for the second month in a row while owner&#146;s equivalent rent fell to +0.2% from +0.3%. 
Core CPI goods and services inflation are in declining trends with goods showing a faster pace of decline and service inflation much more stubborn. Diffusion shows that inflation is not accelerating overall. With Total and Core inflation diffusion readings at 46.4 and 42.9 respectively for month/month changes in the item by item inflation rate, we see that inflation itself is decelerating on the month in more CPI and Core categories than it is accelerating. 
However, inflation excluding energy has been stuck at a pace of 2.4% to 2.6% for three-, six- and 12-month trends. Excluding tobacco, core inflation is holding just below 2% for three months and six months. Both energy and food inflation remain nettlesome. 
This is a report to keep the Fed on guard. With the year/year trends in core services and core goods prices on the decline, the pace of service inflation is still very high&#133; An inflation rate that depends on faster dropping goods prices to offset stubborn services inflation is simply not on strong ground. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Consumer Prices: 2007 April Report
</tr>
</thead>
<tbody>
<tr class="even">
<td colspan="9">Overview: Moderation is back in play&#133;&#133;</td>
</tr>
<tr class="odd">
<td class="firstcol">Quick Summary</td>
<td>Yr/Yr</td>
<td>6-Mo a.r</td>
<td>3-Mo a.r</td>
<td>&nbsp;</td>
<td colspan="2">Year-To-Date 2007&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; 2006</td>
<td>One Mo. Diffusion</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">CPI</td>
<td>2.6%</td>
<td>4.2%</td>
<td>5.7%</td>
<td>--</td>
<td>4.8%</td>
<td>4.6%</td>
<td>46.4</td>
<td>--</td>
</tr>
<tr>
<td class="firstcol">Core CPI</td>
<td>2.4%</td>
<td>2.0%</td>
<td>1.9%</td>
<td>--</td>
<td>2.2%</td>
<td>2.8%</td>
<td>42.9</td>
<td>--</td>
</tr>
<tr class="odd">
<td class="firstcol">Commodity Category</td>
<td>Mo a.r</td>
<td> % Wgt</td>
<td colspan="5">Annualized Inflation Rate For Last:</td>
<td>Mo/Mo Not Annualized</td>
</tr>
<tr>
<td class="firstcol">By Expenditure Category</td>
<td>April 2007</td>
<td>--</td>
<td>3-Mos</td>
<td>--</td>
<td>6-Mos</td>
<td>--</td>
<td>Year</td>
<td>Apr.2007</td>
</tr>
<tr>
<td class="firstcol">All Items</td>
<td>5.1%</td>
<td>100.00</td>
<td>5.7%</td>
<td>--</td>
<td>4.2%</td>
<td>--</td>
<td>2.6%</td>
<td>0.4%</td>
</tr>
<tr class="odd">
<td colspan="9">By Economic Group</td>
</tr>
<tr>
<td class="firstcol">All: Excl Food &amp; Energy</td>
<td>2.1%</td>
<td>77.10</td>
<td>1.9%</td>
<td>--</td>
<td>2.0%</td>
<td>--</td>
<td>2.4%</td>
<td>0.2%</td>
</tr>
<tr>
<td class="firstcol">(Median Increase)</td>
<td>3.4%</td>
<td>100.00</td>
<td>3.4%</td>
<td>--</td>
<td>3.5%</td>
<td>--</td>
<td>2.9%</td>
<td>0.3%</td>
</tr>
<tr>
<td class="firstcol">Excl. Energy</td>
<td>2.6%</td>
<td>92.32</td>
<td>2.6%</td>
<td>--</td>
<td>2.4%</td>
<td>--</td>
<td>2.6%</td>
<td>0.2%</td>
</tr>
<tr>
<td class="firstcol">Commodities: Excl Food &amp; Energy</td>
<td>-1.5%</td>
<td>22.77</td>
<td>-0.5%</td>
<td>(29% of core)</td>
<td>-0.9%</td>
<td>--</td>
<td>-0.5%</td>
<td>-0.1%</td>
</tr>
<tr>
<td class="firstcol">Services: Excl Energy</td>
<td>3.6%</td>
<td>54.33</td>
<td>2.9%</td>
<td>(71% of core)</td>
<td>3.1%</td>
<td>--</td>
<td>3.5%</td>
<td>0.3%</td>
</tr>
<tr>
<td class="firstcol">Core CPI less Tobacco</td>
<td>2.2%</td>
<td>--</td>
<td>1.9%</td>
<td>--</td>
<td>1.9%</td>
<td>--</td>
<td>2.3%</td>
<td>0.2%</td>
</tr>
<tr class="odd">
<td colspan="9">Food &amp; Energy</td>
</tr>
<tr>
<td class="firstcol">Energy</td>
<td>70.9%</td>
<td>7.68</td>
<td>77.7%</td>
<td>--</td>
<td>38.0%</td>
<td>--</td>
<td>3.1%</td>
<td>4.6%</td>
</tr>
<tr>
<td class="firstcol">Food</td>
<td>5.1%</td>
<td>15.22</td>
<td>6.1%</td>
<td>--</td>
<td>4.2%</td>
<td>--</td>
<td>3.7%</td>
<td>0.4%</td>
</tr>
<tr>
<td colspan="9">Red values indicated inflation pickup from previous period in table above</td>
</tr>
</tbody>
</table>
</body>
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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514a.jpg" width="353">
Japan&#39;s current account surplus on a seasonally unadjusted basis, was at an all time high in March at 3,317 billion yen, as can be seen in the first chart. The goods component of the surplus was 1,782.0 billion yen, and the income component, 1,837.9 billion yen. The 36.6 billion yen surplus on services was more than offset by a 339.4 billion yen deficit on transfers.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514b.jpg" width="353">
The surplus on income has become more important than the surplus on goods in the last two years, reflecting Japan&#39;s growing overseas investments. The second chart compares the three month moving averages of the goods and the income surpluses. The three month moving averages are used to mitigate some of the variation in the seasonally unadjusted data.
Exports of goods have been in a rising trend since 2002, with the most dynamic area in Asia. Currently, the dynamism in exports to Asia is largely responsible for the growth in total exports as exports to the United States, Europe and Central America have been more or less trend less, as shown in the third chart. A decline in the yen has contributed in part at least, to the recent growth in exports. The nominal effective exchange rate is shown in the fourth chart. This measure of the exchange rate has been declining since January, 2005 and is now 17% below that date. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514c.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514d.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">JAPAN:&nbsp; BALANCE OF PAYMENTS &nbsp;(NSA, Billion Yen) </th>
<th scope="col">Mar 07</th>
<th scope="col">Feb 07</th>
<th scope="col">Jan&nbsp; 07</th>
<th scope="col">Mar 06</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">Current Account&nbsp;</td>
<td>3317.2</td>
<td>2407.5</td>
<td>1194.6</td>
<td>2422.3</td>
<td>984.9</td>
<td>19848.8</td>
<td>18259.1</td>
<td>18618.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods</td>
<td>1782.0</td>
<td>1118.9</td>
<td>114.0</td>
<td>1094.5</td>
<td>682.5</td>
<td>9464.3</td>
<td>10334.5</td>
<td>13902.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Income</td>
<td>1837.9</td>
<td>1462.6</td>
<td>1345.7</td>
<td>1623.8</td>
<td>214.1</td>
<td>13745.9</td>
<td>11381.6</td>
<td>9273.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Services</td>
<td>36.6</td>
<td>-70.1</td>
<td>-192.5</td>
<td>25.5</td>
<td>11.1</td>
<td>-2118.0</td>
<td>-2641.8</td>
<td>-3706.2</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Transfers </td>
<td>-339.4</td>
<td>-93.8</td>
<td>-72.8</td>
<td>-326.5</td>
<td>-12.9</td>
<td>-1243.0</td>
<td>-815.0</td>
<td>-851.0</td>
</tr>
<tr>
<td class="firstcol">Geographic Distribution of Export of Goods&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; United States</td>
<td>1539.6</td>
<td>1423.6</td>
<td>1254.2</td>
<td>1502.3</td>
<td>36.4</td>
<td>16933.6</td>
<td>14805.5</td>
<td>13730.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Europe</td>
<td>1136.1</td>
<td>1010.6</td>
<td>893.4</td>
<td>1001.8</td>
<td>134.3</td>
<td>11045.5</td>
<td>9740.4</td>
<td>9789.5</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Central and South America </td>
<td>384.4</td>
<td>288.2</td>
<td>333.3</td>
<td>319.3</td>
<td>65.0</td>
<td>3555.5</td>
<td>2760.0</td>
<td>2345.2</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Asia </td>
<td>3587.0</td>
<td>2921.3</td>
<td>2807.9</td>
<td>3259.0</td>
<td>328.0</td>
<td>37775.6</td>
<td>31795.6</td>
<td>29636.8</td>
</tr>
</tbody>
</table>
</body>
</html>

Japan's current account surplus on a seasonally unadjusted basis, was at an all time high in March at 3,317 billion yen, as can be seen in the first chart. The goods component of the surplus was 1,782.0 billion yen, and the income [...]

Japan's Current Account Surplus at an All Time High

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514g.jpg" width="353">
German retail trends are hard to pin down. The German VAT tax that took effect in January of 2007 helped to bulge retail sales in December and to wither them in the following months. The three-month growth rate is particularly weak in March, but that is because its base for the calculation is the elevated December level of sales. Even so, the Yr/Yr and six-month growth rates moved sharply lower in January and have stayed in a very weak growth plane. 
March sales fell month to month. The March drop offset the sharp 1% gain in February that followed the 6.1% plunge in January. Sales declines were widespread in March. Auto sales were the contrary category with nominal sales up by a sharp 5.9% in March after rising by 7.1% in February. Autos seem to be recovering from their January plunge when sales fell by 30%. 
Next month 3-mo sales should snap back strongly as 3-mo growth rates move their base to January the weaker from the strong December level. Even so that will not rid the six month and Yr/Yr growth from their weakness. While German retail sales are holding in, they are also much weaker than they were throughout 2006. 
Officials remain upbeat on the prospects for growth in Germany. Early in the year results are mixed. Car sales alone are making a strong comeback but even they are lower by 2.7% Yr/Yr. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
German Real and Nominal Retail Sales
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Nominal</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Jan-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Year Ago</td>
</tr>
<tr>
<td class="firstcol">Retail Ex auto</td>
<td>-0.6%</td>
<td>1.4%</td>
<td>-5.7%</td>
<td>-18.2%</td>
<td>-2.0%</td>
<td>-0.2%</td>
<td>3.1%</td>
</tr>
<tr>
<td class="firstcol">Motor Vehicle and Parts</td>
<td>5.9%</td>
<td>7.1%</td>
<td>-30.2%</td>
<td>-60.7%</td>
<td>-17.8%</td>
<td>-2.7%</td>
<td>8.2%</td>
</tr>
<tr>
<td class="firstcol">Food Beverages &amp; Tobacco</td>
<td>-0.5%</td>
<td>-0.4%</td>
<td>-2.0%</td>
<td>-10.9%</td>
<td>-2.7%</td>
<td>-0.3%</td>
<td>2.8%</td>
</tr>
<tr>
<td class="firstcol">Clothing &amp; Footwear</td>
<td>-0.9%</td>
<td>5.0%</td>
<td>-6.7%</td>
<td>-11.2%</td>
<td>9.5%</td>
<td>3.9%</td>
<td>3.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Real</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Retail excl Auto</td>
<td>-0.4%</td>
<td>1.1%</td>
<td>-6.1%</td>
<td>-19.8%</td>
<td>-2.6%</td>
<td>-0.8%</td>
<td>2.8%</td>
</tr>
</tbody>
</table>
</body>
</html>

German retail trends are hard to pin down. The German VAT tax that took effect in January of 2007 helped to bulge retail sales in December and to wither them in the following months. The three-month growth rate is particularly weak in [...]

Germany’s retail sales flounder

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514e.jpg" width="353">
Industrial production in MFG in the Euro area in March rose by 0.3%. But the chart shows that a deceleration is underway. Yr/Yr growth is steady at just under 5.3%. But over the last three months output has lost momentum. 
The table shows that consumer durables and capital equipment output weakened in March after a strong February showing, slowing the 3-month rate of growth sharply for overall production. Still, growth has only dropped off to a nearly 3% pace from 5% or more previously.
Key EMU countries continue to show strength. The three-month growth rates for output in Germany are still very strong at 8%, France&#146;s 3.5% is a slight acceleration, while output has fallen off sharply in Italy declining at a 5.5% pace. In the UK three-month growth rates for output are negative for 3-mo and for 6-month horizons.
Capital equipment continues to be the leading sector. Consumer output is trailing and is showing no signs of pick up.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514f.jpg" width="353">
The ratio of capital goods output to consumer non-durables output is a directional signal for IP. Note how good the tracking is in the graph to the right. The capital goods sector is the leading sector for European economies. The R-square relationship of this ratio to overall IP growth is 0.67. That&#146;s impressive for this type of indicator. For the moment, the ratio has stopped rising. 
For the first quarter IP is still strong. MFG IP is growing at a 5.6% pace. The consumer sector is up at a 2.5% pace, intermediate goods at a 6% pace and capital goods at a 7.8% pace. But all may not continue to be so well&#133;
The President of the EU business association, Business Europe, was quoted as saying on Monday that the strong euro was not causing a slowdown in the European economy. However, also on Monday the European Parliament issued a statement saying that upward trend in the Euro&#39;s exchange rate is not sustainable for the euro area&#39;s economy. Accordingly the Parliament&#146;s draft report is to be debated in the Economic and Monetary Affairs Committee before being presented to ECB President Jean-Claude Trichet. Another interesting development was in the UK. There, Arm Holdings, the Cambridge-based designer of semiconductors, an industry whose global currency is dollars complained of an ongoing too-strong currency impact. Warren East, chief executive, estimates that the dollar has wiped &pound;1bn from the company&#146;s stock market value. He claims that the last &#145;three years&#146; have been pretty horrid, not just the recent period when the pound and euro both have surged against the dollar. He maintains that seeking a cost base in the weaker dollar is the only solution. Surely, these observations are not compatible with a continuation of the strength we have seen in EU industrial output especially for capital equipment. We will be looking at the ratio of Capital goods IP to consumer nondurable goods IP as an indicator in the months ahead as well as at general IP trends.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Euro area and UK IP and MFG
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Saar except m/m</td>
<td colspan="3">Mo/Mo</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
</tr>
<tr class="even">
<td class="firstcol">Ezone Detail</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Jan-07</td>
<td>3-Mo</td>
<td>3-Mo</td>
<td>6-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>12-mo</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>0.3%</td>
<td>0.5%</td>
<td>-0.1%</td>
<td>2.9%</td>
<td>7.1%</td>
<td>5.8%</td>
<td>2.8%</td>
<td>5.3%</td>
<td>5.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer</td>
<td>0.6%</td>
<td>0.0%</td>
<td>-0.3%</td>
<td>1.1%</td>
<td>3.0%</td>
<td>4.0%</td>
<td>2.0%</td>
<td>3.3%</td>
<td>2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Consumer Durables</td>
<td>-0.2%</td>
<td>0.6%</td>
<td>-1.5%</td>
<td>-4.2%</td>
<td>-0.1%</td>
<td>2.7%</td>
<td>-3.5%</td>
<td>3.9%</td>
<td>5.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Consumer Nondurables</td>
<td>0.7%</td>
<td>-0.1%</td>
<td>-0.2%</td>
<td>1.5%</td>
<td>3.6%</td>
<td>4.1%</td>
<td>2.3%</td>
<td>3.1%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Intermediate</td>
<td>0.5%</td>
<td>0.7%</td>
<td>-0.6%</td>
<td>2.4%</td>
<td>9.2%</td>
<td>7.0%</td>
<td>1.4%</td>
<td>6.3%</td>
<td>7.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Capital</td>
<td>0.0%</td>
<td>0.9%</td>
<td>0.3%</td>
<td>5.0%</td>
<td>8.2%</td>
<td>6.7%</td>
<td>5.5%</td>
<td>6.4%</td>
<td>7.3%</td>
</tr>
<tr>
<td class="firstcol">Memo: MFG</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Germany:</td>
<td>0.3%</td>
<td>0.8%</td>
<td>1.0%</td>
<td>8.8%</td>
<td>7.7%</td>
<td>8.0%</td>
<td>6.7%</td>
<td>8.6%</td>
<td>8.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; France: IP excl Construction</td>
<td>0.2%</td>
<td>1.2%</td>
<td>-0.5%</td>
<td>3.5%</td>
<td>7.2%</td>
<td>3.3%</td>
<td>1.6%</td>
<td>1.1%</td>
<td>2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Italy</td>
<td>0.4%</td>
<td>-0.2%</td>
<td>-1.6%</td>
<td>-5.5%</td>
<td>-0.8%</td>
<td>4.0%</td>
<td>0.2%</td>
<td>2.5%</td>
<td>2.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Spain</td>
<td>1.9%</td>
<td>-5.2%</td>
<td>9.3%</td>
<td>24.2%</td>
<td>2.3%</td>
<td>12.8%</td>
<td>-1.8%</td>
<td>3.1%</td>
<td>5.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; UK</td>
<td>0.6%</td>
<td>-0.8%</td>
<td>-0.1%</td>
<td>-1.2%</td>
<td>-3.1%</td>
<td>-0.6%</td>
<td>-1.5%</td>
<td>0.9%</td>
<td>1.1%</td>
</tr>
</tbody>
</table>
</body>
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Industrial production in MFG in the Euro area in March rose by 0.3%. But the chart shows that a deceleration is underway. Yr/Yr growth is steady at just under 5.3%. But over the last three months output has lost momentum. The table [...]

Euro area Industrial Production Shows Some Signs of Topping

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514g.jpg" width="353">
German retail trends are hard to pin down. The German VAT tax that took effect in January of 2007 helped to bulge retail sales in December and to wither them in the following months. The three-month growth rate is particularly weak in March, but that is because its base for the calculation is the elevated December level of sales. Even so, the Yr/Yr and six-month growth rates moved sharply lower in January and have stayed in a very weak growth plane. 
March sales fell month to month. The March drop offset the sharp 1% gain in February that followed the 6.1% plunge in January. Sales declines were widespread in March. Auto sales were the contrary category with nominal sales up by a sharp 5.9% in March after rising by 7.1% in February. Autos seem to be recovering from their January plunge when sales fell by 30%. 
Next month 3-mo sales should snap back strongly as 3-mo growth rates move their base to January the weaker from the strong December level. Even so that will not rid the six month and Yr/Yr growth from their weakness. While German retail sales are holding in, they are also much weaker than they were throughout 2006. 
Officials remain upbeat on the prospects for growth in Germany. Early in the year results are mixed. Car sales alone are making a strong comeback but even they are lower by 2.7% Yr/Yr. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
German Real and Nominal Retail Sales
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Nominal</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Jan-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Year Ago</td>
</tr>
<tr>
<td class="firstcol">Retail Ex auto</td>
<td>-0.6%</td>
<td>1.4%</td>
<td>-5.7%</td>
<td>-18.2%</td>
<td>-2.0%</td>
<td>-0.2%</td>
<td>3.1%</td>
</tr>
<tr>
<td class="firstcol">Motor Vehicle and Parts</td>
<td>5.9%</td>
<td>7.1%</td>
<td>-30.2%</td>
<td>-60.7%</td>
<td>-17.8%</td>
<td>-2.7%</td>
<td>8.2%</td>
</tr>
<tr>
<td class="firstcol">Food Beverages &amp; Tobacco</td>
<td>-0.5%</td>
<td>-0.4%</td>
<td>-2.0%</td>
<td>-10.9%</td>
<td>-2.7%</td>
<td>-0.3%</td>
<td>2.8%</td>
</tr>
<tr>
<td class="firstcol">Clothing &amp; Footwear</td>
<td>-0.9%</td>
<td>5.0%</td>
<td>-6.7%</td>
<td>-11.2%</td>
<td>9.5%</td>
<td>3.9%</td>
<td>3.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Real</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Retail excl Auto</td>
<td>-0.4%</td>
<td>1.1%</td>
<td>-6.1%</td>
<td>-19.8%</td>
<td>-2.6%</td>
<td>-0.8%</td>
<td>2.8%</td>
</tr>
</tbody>
</table>
Euro area Industrial Production Shows Some Signs of Topping 
by <a href="/comment/Brusca.html">Robert Brusca</a> May 14, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514e.jpg" width="353">
Industrial production in MFG in the Euro area in March rose by 0.3%. But the chart shows that a deceleration is underway. Yr/Yr growth is steady at just under 5.3%. But over the last three months output has lost momentum. 
The table shows that consumer durables and capital equipment output weakened in March after a strong February showing, slowing the 3-month rate of growth sharply for overall production. Still, growth has only dropped off to a nearly 3% pace from 5% or more previously.
Key EMU countries continue to show strength. The three-month growth rates for output in Germany are still very strong at 8%, France&#146;s 3.5% is a slight acceleration, while output has fallen off sharply in Italy declining at a 5.5% pace. In the UK three-month growth rates for output are negative for 3-mo and for 6-month horizons.
Capital equipment continues to be the leading sector. Consumer output is trailing and is showing no signs of pick up. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514f.jpg" width="353">
The ratio of capital goods output to consumer non-durables output is a directional signal for IP. Note how good the tracking is in the graph to the right. The capital goods sector is the leading sector for European economies. The R-square relationship of this ratio to overall IP growth is 0.67. That&#146;s impressive for this type of indicator. For the moment, the ratio has stopped rising. 
For the first quarter IP is still strong. MFG IP is growing at a 5.6% pace. The consumer sector is up at a 2.5% pace, intermediate goods at a 6% pace and capital goods at a 7.8% pace. But all may not continue to be so well&#133;
The President of the EU business association, Business Europe, was quoted as saying on Monday that the strong euro was not causing a slowdown in the European economy. However, also on Monday the European Parliament issued a statement saying that upward trend in the Euro&#39;s exchange rate is not sustainable for the euro area&#39;s economy. Accordingly the Parliament&#146;s draft report is to be debated in the Economic and Monetary Affairs Committee before being presented to ECB President Jean-Claude Trichet. Another interesting development was in the UK. There, Arm Holdings, the Cambridge-based designer of semiconductors, an industry whose global currency is dollars complained of an ongoing too-strong currency impact. Warren East, chief executive, estimates that the dollar has wiped &pound;1bn from the company&#146;s stock market value. He claims that the last &#145;three years&#146; have been pretty horrid, not just the recent period when the pound and euro both have surged against the dollar. He maintains that seeking a cost base in the weaker dollar is the only solution. Surely, these observations are not compatible with a continuation of the strength we have seen in EU industrial output especially for capital equipment. We will be looking at the ratio of Capital goods IP to consumer nondurable goods IP as an indicator in the months ahead as well as at general IP trends.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Euro area and UK IP and MFG
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">Saar except m/m</td>
<td colspan="3">Mo/Mo</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Mar-07</td>
<td>Feb-07</td>
</tr>
<tr class="even">
<td class="firstcol">Ezone Detail</td>
<td>Mar-07</td>
<td>Feb-07</td>
<td>Jan-07</td>
<td>3-Mo</td>
<td>3-Mo</td>
<td>6-mo</td>
<td>6-mo</td>
<td>12-mo</td>
<td>12-mo</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; MFG</td>
<td>0.3%</td>
<td>0.5%</td>
<td>-0.1%</td>
<td>2.9%</td>
<td>7.1%</td>
<td>5.8%</td>
<td>2.8%</td>
<td>5.3%</td>
<td>5.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Consumer</td>
<td>0.6%</td>
<td>0.0%</td>
<td>-0.3%</td>
<td>1.1%</td>
<td>3.0%</td>
<td>4.0%</td>
<td>2.0%</td>
<td>3.3%</td>
<td>2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Consumer Durables</td>
<td>-0.2%</td>
<td>0.6%</td>
<td>-1.5%</td>
<td>-4.2%</td>
<td>-0.1%</td>
<td>2.7%</td>
<td>-3.5%</td>
<td>3.9%</td>
<td>5.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Consumer Nondurables</td>
<td>0.7%</td>
<td>-0.1%</td>
<td>-0.2%</td>
<td>1.5%</td>
<td>3.6%</td>
<td>4.1%</td>
<td>2.3%</td>
<td>3.1%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Intermediate</td>
<td>0.5%</td>
<td>0.7%</td>
<td>-0.6%</td>
<td>2.4%</td>
<td>9.2%</td>
<td>7.0%</td>
<td>1.4%</td>
<td>6.3%</td>
<td>7.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Capital</td>
<td>0.0%</td>
<td>0.9%</td>
<td>0.3%</td>
<td>5.0%</td>
<td>8.2%</td>
<td>6.7%</td>
<td>5.5%</td>
<td>6.4%</td>
<td>7.3%</td>
</tr>
<tr>
<td class="firstcol">Memo: MFG</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Germany:</td>
<td>0.3%</td>
<td>0.8%</td>
<td>1.0%</td>
<td>8.8%</td>
<td>7.7%</td>
<td>8.0%</td>
<td>6.7%</td>
<td>8.6%</td>
<td>8.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; France: IP excl Construction</td>
<td>0.2%</td>
<td>1.2%</td>
<td>-0.5%</td>
<td>3.5%</td>
<td>7.2%</td>
<td>3.3%</td>
<td>1.6%</td>
<td>1.1%</td>
<td>2.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Italy</td>
<td>0.4%</td>
<td>-0.2%</td>
<td>-1.6%</td>
<td>-5.5%</td>
<td>-0.8%</td>
<td>4.0%</td>
<td>0.2%</td>
<td>2.5%</td>
<td>2.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Spain</td>
<td>1.9%</td>
<td>-5.2%</td>
<td>9.3%</td>
<td>24.2%</td>
<td>2.3%</td>
<td>12.8%</td>
<td>-1.8%</td>
<td>3.1%</td>
<td>5.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; UK</td>
<td>0.6%</td>
<td>-0.8%</td>
<td>-0.1%</td>
<td>-1.2%</td>
<td>-3.1%</td>
<td>-0.6%</td>
<td>-1.5%</td>
<td>0.9%</td>
<td>1.1%</td>
</tr>
</tbody>
</table>
Japan's Current Account Surplus at an All Time High  
by <a href="/comment/Curley.html">Louise Curley</a> May 14, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514a.jpg" width="353">
Japan&#39;s current account surplus on a seasonally unadjusted basis, was at an all time high in March at 3,317 billion yen, as can be seen in the first chart. The goods component of the surplus was 1,782.0 billion yen, and the income component, 1,837.9 billion yen. The 36.6 billion yen surplus on services was more than offset by a 339.4 billion yen deficit on transfers.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514b.jpg" width="353">
The surplus on income has become more important than the surplus on goods in the last two years, reflecting Japan&#39;s growing overseas investments. The second chart compares the three month moving averages of the goods and the income surpluses. The three month moving averages are used to mitigate some of the variation in the seasonally unadjusted data.
Exports of goods have been in a rising trend since 2002, with the most dynamic area in Asia. Currently, the dynamism in exports to Asia is largely responsible for the growth in total exports as exports to the United States, Europe and Central America have been more or less trend less, as shown in the third chart. A decline in the yen has contributed in part at least, to the recent growth in exports. The nominal effective exchange rate is shown in the fourth chart. This measure of the exchange rate has been declining since January, 2005 and is now 17% below that date. <img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514c.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070514d.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">JAPAN:&nbsp; BALANCE OF PAYMENTS &nbsp;(NSA, Billion Yen) </th>
<th scope="col">Mar 07</th>
<th scope="col">Feb 07</th>
<th scope="col">Jan&nbsp; 07</th>
<th scope="col">Mar 06</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">Current Account&nbsp;</td>
<td>3317.2</td>
<td>2407.5</td>
<td>1194.6</td>
<td>2422.3</td>
<td>984.9</td>
<td>19848.8</td>
<td>18259.1</td>
<td>18618.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods</td>
<td>1782.0</td>
<td>1118.9</td>
<td>114.0</td>
<td>1094.5</td>
<td>682.5</td>
<td>9464.3</td>
<td>10334.5</td>
<td>13902.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Income</td>
<td>1837.9</td>
<td>1462.6</td>
<td>1345.7</td>
<td>1623.8</td>
<td>214.1</td>
<td>13745.9</td>
<td>11381.6</td>
<td>9273.2</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Services</td>
<td>36.6</td>
<td>-70.1</td>
<td>-192.5</td>
<td>25.5</td>
<td>11.1</td>
<td>-2118.0</td>
<td>-2641.8</td>
<td>-3706.2</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Transfers </td>
<td>-339.4</td>
<td>-93.8</td>
<td>-72.8</td>
<td>-326.5</td>
<td>-12.9</td>
<td>-1243.0</td>
<td>-815.0</td>
<td>-851.0</td>
</tr>
<tr>
<td class="firstcol">Geographic Distribution of Export of Goods&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; United States</td>
<td>1539.6</td>
<td>1423.6</td>
<td>1254.2</td>
<td>1502.3</td>
<td>36.4</td>
<td>16933.6</td>
<td>14805.5</td>
<td>13730.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Europe</td>
<td>1136.1</td>
<td>1010.6</td>
<td>893.4</td>
<td>1001.8</td>
<td>134.3</td>
<td>11045.5</td>
<td>9740.4</td>
<td>9789.5</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Central and South America </td>
<td>384.4</td>
<td>288.2</td>
<td>333.3</td>
<td>319.3</td>
<td>65.0</td>
<td>3555.5</td>
<td>2760.0</td>
<td>2345.2</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Asia </td>
<td>3587.0</td>
<td>2921.3</td>
<td>2807.9</td>
<td>3259.0</td>
<td>328.0</td>
<td>37775.6</td>
<td>31795.6</td>
<td>29636.8</td>
</tr>
</tbody>
</table>
</body>
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Germany’s Retail Sales Flounder

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/070511b.jpg" width="353">
We know this is [literally] yesterday&#39;s news, but the state of the US Government budget for April 2007 deserves comment regardless. The Treasury took in a record $383.6 billion in the month, contributing to a surplus of $177.7 billion, the second largest monthly surplus ever. This result well exceeded the year-ago figure of $118.8 billion and was considerably larger than consensus forecasts of $140 billion. The associated outlay total was $206.0 billion. The largest surplus was in April 2001, $189.8 billion, when the receipts rolled in from the peak of the tech boom.
For the fiscal year to date (since October), the deficit has been $80.8 billion, compared with $184.8 billion in the same period a year ago. Receipts are up 11.2%, while outlays have increased only 3.2%.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070511c.jpg" width="353">
Individual income taxes in April were a monthly record $226.3 billion, up 33.9% from a year ago. This increase consisted in a hefty jump in individual income taxes, with withholdings up 24.4%; this does, however, follow a restrained withholding figure for March. Year-to-date withholdings are up 10.7%. &quot;Other&quot; individual tax payments, those submitted with 2006 tax returns, came in at an eye-popping $197.8 billion, almost 31% ahead of last year. These taxes, which cover non-wage income, were $300.5 billion for the fiscal year to date, up almost 26% from the comparable year-ago period. Corporate income taxes were $46.7 billion in April, up 6.1% from April 2006; the year-to-date gain has been 15.2%, as December and March quarterly payments were both up from year-ago amounts by a substantial margin. Social insurance taxes were $95.9 billion in April, up 9.3% from April 2006 and 6.2% for the year-to-date.
As noted above, outlays were $206.0 billion, up 5.0% from a year ago. The fiscal year total so far is up just 3.2%. Defense outlays were $41.2 billion, up 3.5% from last April, with the cumulative amount for the fiscal year so far up 6.0% from the year earlier. Social security outlays were $48.8 billion in April, up 5.5%. Interest expense continues to climb, rising 21.6% in April from the year ago, and up 5.2% for the year so far. Last month here, we suggested that calendar quirks had advanced spending in several government programs forward to March and that they could slow commensurately in April. This appears to have occurred. Overall, total spending is expanding quite modestly, making it easier to keep the federal budget position under control for fiscal 2007 as a whole, even if tax receipt growth were to slow in the remaining months.

<table border="0" cellspacing="0" width="100%">
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<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E1/@E106/@E10602/@E106021.HTM">US Government Budget</a>, Bil.$</th>
<th scope="col">Apr 2007</th>
<th scope="col">Mar 2007</th>
<th scope="col">Oct 2006- &nbsp; Apr 2007</th>
<th scope="col">Oct 2005- &nbsp; Apr 2006</th>
<th scope="col">FY 2006</th>
<th scope="col">FY 2005</th>
<th scope="col">FY 2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Budget Balance</td>
<td>+177.7</td>
<td>-96.3</td>
<td>-80.8</td>
<td>-184.1</td>
<td>-248.2</td>
<td>-318.7</td>
<td>-411.1</td>
</tr>
<tr>
<td class="firstcol">Net Revenues</td>
<td>383.6</td>
<td>166.5</td>
<td>1504.6</td>
<td>1352.7</td>
<td>2,406.7</td>
<td>2,153.4</td>
<td>1,879.8</td>
</tr>
<tr class="odd">
<td class="firstcol">11.2%</td>
<td>11.2%</td>
<td>11.8%</td>
<td>14.6%</td>
<td>5.4%</td>
</tr>
<tr>
<td class="firstcol">Net Outlays</td>
<td>206.0</td>
<td>262.8</td>
<td>1585.3</td>
<td>1536.8</td>
<td>2,654.9</td>
<td>2,472.1</td>
<td>2,290.9</td>
</tr>
<tr class="odd">
<td class="firstcol">3.2%</td>
<td>5.8%</td>
<td>7.4%</td>
<td>7.9%</td>
<td>6.2%</td>
</tr>
</tbody>
</table>
</body>
</html>

We know this is [literally] yesterday's news, but the state of the US Government budget for April 2007 deserves comment regardless. The Treasury took in a record $383.6 billion in the month, contributing to a surplus of $177.7 [...]

Record Tax Collections Bring Large Monthly Budget Surplus for Federal Government

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Wolf of a headline but lamb inside... 
Of course the PPI headline is scary. But we know that it is energy with an assist from food. But if you look at the core you will see that not only this month but in general it has been pretty stable. We still think that inflation problems lurk but we do not think energy is the source of worry. 
When headline inflation swung it did tend to transmit some of those changes to the core, as the graph above shows. But the transmission effects were very muted. Headline inflation bottomed at -2.8% in January 2002 while core inflation bottomed at -0.6% in December of that same year. Headline inflation swept higher to peak at 6.8% in Sept 2005 while core inflation peaked at 2.9% and did so in July ahead of the headline. With headline inflation swinging in a range of 9.6 percentage points core inflation swung in a range of 3.5 percentage points. And those statistics refer to the most extreme monthly observations. We are still seeing some &#145;wild&#146; swings in headline inflation but they are not as long-lasting as in 2001. Thus the impact will be blunted. Core inflation is in fact falling over the past six months when the headline has been rising. We are more worried about the transmission to core inflation from labor costs since headline inflation looks much more like it is unstable month to month than it looks to be trending higher. <img align="left" border="0" height="274" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070511e.jpg" width="448"> 
Moreover, this next push up in energy prices will be small compared to the previous one. The table shows that inflation trends of all sorts are still fairly well contained. However since goods inflation has been lower than service sector inflation we need for goods inflation to be well be the 2% mark for it to be compatible with the Fed&#146;s 2% (or 2.4% in CPI terms) &#145;core&#146; maximum in terms of its unofficial comfort zone &#150; I know it sounds like something from a foot doctor.
It is striking how inflation has built over the past three months in energy and foods but how when you remove the food and energy from PPI measures inflation rates calm down immediately. Finished consumer goods inflation, the part of this report that feeds into the CPI fell by 0.1% this month. For the CPI however we have to add in the markups to take producer goods to retail, then add services and add in imports to get to the CPI itself. There is no assurance on this but since service sector wages have been decompressing and import prices for consumer goods and vehicles have been moderate, looking for a moderate CPI core is a reasonable thing to do even in the face of surging energy and rising food prices. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Key Trends In Producer Prices
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Apr-07</td>
<td colspan="4">PPI Trends By Type Of Good</td>
</tr>
<tr class="odd">
<td class="firstcol">PPI</td>
<td>1Mo:M/M</td>
<td>3-Mo:ar</td>
<td>6-Mo:ar</td>
<td>1-Yr</td>
<td>Yr-Ago</td>
</tr>
<tr>
<td class="firstcol">Total PPI</td>
<td>0.7%</td>
<td>12.8%</td>
<td>10.0%</td>
<td>3.2%</td>
<td>4.0%</td>
</tr>
<tr>
<td class="firstcol">Finished Consumer Goods</td>
<td>0.9%</td>
<td>16.6%</td>
<td>12.2%</td>
<td>3.5%</td>
<td>4.9%</td>
</tr>
<tr>
<td class="firstcol">Consumer Foods</td>
<td>0.4%</td>
<td>15.4%</td>
<td>12.7%</td>
<td>7.8%</td>
<td>-0.9%</td>
</tr>
<tr>
<td class="firstcol">Finished Consumer Goods Excl Foods</td>
<td>1.1%</td>
<td>16.8%</td>
<td>11.9%</td>
<td>2.1%</td>
<td>7.1%</td>
</tr>
<tr>
<td class="firstcol">Nondurables less Food</td>
<td>1.7%</td>
<td>25.2%</td>
<td>15.7%</td>
<td>2.8%</td>
<td>9.9%</td>
</tr>
<tr>
<td class="firstcol">Consumer Nondurable excl Food and Energy</td>
<td>-0.1%</td>
<td>3.8%</td>
<td>3.1%</td>
<td>2.2%</td>
<td>2.7%</td>
</tr>
<tr>
<td class="firstcol">Durable Goods</td>
<td>-0.2%</td>
<td>-1.2%</td>
<td>3.1%</td>
<td>0.4%</td>
<td>0.1%</td>
</tr>
<tr>
<td class="firstcol">Finished Core Consumer Goods</td>
<td>-0.1%</td>
<td>1.7%</td>
<td>3.2%</td>
<td>1.4%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">Capital Goods</td>
<td>0.1%</td>
<td>1.4%</td>
<td>3.2%</td>
<td>1.8%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Manufacturing Industries</td>
<td>0.2%</td>
<td>2.1%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">Nonmanufacturing Industries</td>
<td>0.1%</td>
<td>0.8%</td>
<td>3.3%</td>
<td>1.5%</td>
<td>1.3%</td>
</tr>
<tr>
<td class="firstcol">Core PPI</td>
<td>0.0%</td>
<td>1.5%</td>
<td>3.2%</td>
<td>1.6%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Memo: Finished Energy</td>
<td>3.4%</td>
<td>50.6%</td>
<td>30.2%</td>
<td>3.5%</td>
<td>17.7%</td>
</tr>
</tbody>
</table>
</body>
</html>

Wolf of a headline but lamb inside... Of course the PPI headline is scary. But we know that it is energy with an assist from food. But if you look at the core you will see that not only this month but in general it has been pretty [...]

PPI: Sheep in wolf’s clothing

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

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

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

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

Cost of transporting crude oil has soared to series high

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

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

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

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Andrew Cates

**US Outperformance Holds; Europe and China Continue to Disappoint**
One of the most persistent features of the global macro landscape in 2026 has been the widening divergence between growth outcomes in the United States and those in Europe and China. Citigroup’s global growth surprise indices—which measure the gap between actual economic releases and consensus expectations—capture this divergence with unusual clarity. US data have continued to surprise on the upside, supported by resilient consumer spending, a stronger-than-expected labour market and the ongoing AI-driven capital spending boom. The picture elsewhere is less encouraging. Growth surprises have turned negative across the euro area, reflecting the cumulative toll of elevated energy costs, weak industrial activity and subdued business confidence. And China's growth surprise index has also fallen sharply in recent weeks, with weaker-than-expected retail sales and fixed asset investment data for May this week reinforcing concerns that domestic demand remains fragile and that policy support is yet to gain meaningful traction.

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**The Oil Risk Premium in the UK Has Been Fading**
One of the more notable features of UK markets this year has been the close relationship between oil prices and two-year gilt yields. The link is not mechanical, but in an economy heavily exposed to imported energy, swings in oil prices can materially alter the inflation outlook and, by extension, expectations for Bank of England policy. That relationship was on display again this week. A softer-than-expected UK CPI reading for May—helped in part by easing energy price pressures—led investors to scale back expectations that inflation would remain persistently above target, pushing two-year gilt yields to their lowest level in six weeks. The question now is whether this marks the start of a more sustained easing in inflation pressures or merely a temporary reprieve. Much will depend on whether the recent decline in oil prices following the US-Iran ceasefire agreement proves durable.

260618Z2.jpg

**The AI Investment Boom Is Rewriting the Rule Book for the Chip Industry**
If the divergence in global growth surprises noted above tells a story of a world economy under strain, the semiconductor sales data tell a very different one — of a technology-driven investment cycle that is accelerating almost regardless of the broader macro environment. Global semiconductor sales have surged to record levels over the past twelve months, driven primarily by insatiable demand for the chips that underpin AI infrastructure: graphics processing units, high-bandwidth memory, and advanced logic chips. Data centre capital expenditure from the hyperscalers continues to exceed even the most optimistic forecasts from a year ago, and the investment pipeline shows no sign of moderating. The gains are concentrated in AI-adjacent products; legacy chips for consumer electronics and industrial applications remain relatively soft.

260618Z3.jpg

**Copper Holds Firm As Oil Retreats**
The commodity markets are telling two quite different stories this week, and the contrast is instructive. Oil has moved sharply lower on the US-Iran MoU news as investors trim the conflict risk premium that has been embedded in energy markets since March — a welcome development for inflation and central bank optionality alike. But the three commodities shown in this chart tell a different story. Copper, one of the most reliable proxies for global electricity infrastructure investment, remains near multi-year highs, reflecting the extraordinary volume of data centre construction, grid expansion and electrification spending flowing through the global economy. Aluminium — energy-intensive to produce and increasingly in demand for the structural components of both data centres and electric vehicles — has, until quite recently, held its ground. Lithium hydroxide, the battery-grade refining product that sits at the heart of the energy storage supply chain, has seen some cyclical softness but remains structurally underpinned by the scale of demand being projected for grid-scale storage and electric mobility over the next decade.

260618Z4.jpg

**Is Energy Availability a Binding Constraint on Growth?**
This next chart is a scatter plot that maps electricity generation per capita against GDP growth per capita across a broad sample of countries over the past five years. The positive relationship is striking. Economies with higher electricity generation per capita, including the United States, have generally delivered stronger GDP growth, while those with more constrained electricity systems have tended to lag. The obvious objection is reverse causality: richer economies generate more electricity because they have more to power. That is partly true. But the broader evidence is difficult to dismiss. The US shale revolution delivered an abundance of cheap energy that supported a sustained period of industrial outperformance relative to many advanced economies. Mainstream commentary often attributed this advantage to factors such as labour market flexibility or technological innovation, but energy costs were arguably at least as important.

260618Z5.jpg

**Corporate America Is Investing from a Position of Unusual Financial Strength**
The surge in US corporate investment—particularly in AI infrastructure, data centres and semiconductors—has inevitably drawn comparisons with the late-1990s dot-com boom. Yet the financial balance data suggest an important difference. During the dot-com era, US non-financial corporates moved into a financial deficit approaching 4% of GDP, relying heavily on external financing to fund investment. Today, despite another ambitious investment cycle, the sector remains in surplus, currently around 1.8% of GDP. Corporate America is investing aggressively, but it is still generating more cash than it is spending. The boom is being financed largely through profits rather than debt. Risks remain—not least the growing fiscal burden on the federal government—but the balance-sheet fragilities that turned previous investment booms into systemic crises appear far less pronounced. If a major constraint emerges in the years ahead, it may be energy and resources rather than leverage.

260618Z6.jpg

The signing of a Memorandum of Understanding (MoU) between the United States and Iran earlier this week has offered financial markets their most significant moment of geopolitical relief since the Middle East conflict escalated in early March. Oil prices fell sharply on the news, short-dated bond yields moved lower across several major economies, and risk assets recovered ground. But relief, as investors have learnt repeatedly over the past three months, is arguably not the same as resolution. The MoU sets a framework for negotiations rather than a final settlement, and the history of US-Iran diplomacy is not one that encourages complacency. Meanwhile, the Federal Reserve — concluding its June meeting yesterday under new chair Kevin Warsh — held rates steady but delivered a distinctly hawkish dot plot that shifted the median year-end projection from a cut to a hike, a reminder that the easing cycle the market had been pricing is no longer the base case. Against this backdrop, this week's charts take stock of where the global economy presently stands — and what the underlying data, beneath the geopolitical noise, are telling us. The picture that emerges is one of divergence. The United States continues to outperform consensus growth expectations while Europe and China disappoint (chart 1). UK short-dated yields have tracked oil prices with unusual consistency this year, and today's softer-than-expected CPI print for May — arriving just as the MoU has knocked crude lower — potentially changes the policy calculus for the Bank of England (chart 2). Global semiconductor sales, meanwhile, are storming ahead regardless of the geopolitical noise, powered by AI infrastructure spending that shows no sign of fatigue (chart 3). A cross-section of commodity prices tells two stories simultaneously: the geopolitical risk premium is draining out of oil, but the metals and materials the AI economy actually needs — copper, uranium, critical minerals — are holding firm (chart 4). Meanwhile a cross-country scatter of electricity generation and GDP growth over the past five years raises a question that deserves more attention than it typically gets: is energy availability a constraint on growth, or merely a consequence of it? The evidence, we would argue, points firmly in one direction (chart 5). And finally, for all the comparisons being drawn between the current investment boom and the late 1990s, the financial balance of the US corporate sector tells a rather different story — one that matters for how any correction might unfold (chart 6).

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Charts of the Week: Between Relief and Reality

Winnie Tapasanun

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The current general activity diffusion index rebounded to a slightly stronger-than-expected 10.3 in June following a 27.1-point drop to -0.4 in May, the latest Manufacturing Business Outlook Survey (MBOS) from the Federal Reserve Bank of Philadelphia showed, indicating a return to expansion in manufacturing activity in the Third Federal Reserve District this month. A reading of 10.0 for June had been expected by the Action Economics Forecast Survey. June marked the fifth m/m increase in six months, showing a sharp improvement from -1.4 in June 2025. In June, 32.1% of firms reported increases in current general activity (up from 22.5% in May), while 21.9% reported decreases (down from 22.9%); 45.4% reported no change (down from 54.6%). Survey responses were collected from June 8 to June 15.

Haver Analytics calculates an ISM-adjusted current activity diffusion index from five key components using the methodology along the lines of the national ISM index. The index rose to 53.1 in June after a 4.8-point decline to a contraction-level 49.7 in May, indicating manufacturing activity expanded for the third time in four months; it was slightly above 51.0 in June 2025.

In the latest survey, the new orders index surged to 27.3 in June following a 34.7-point plunge to -1.7 in May, signaling new orders expanded for the sixth time in seven months. The shipments index rebounded to 14.9 this month from 4.9 in May, registering the seventh consecutive expansion. The unfilled orders index advanced to 10.5 from -2.5, indicating expansion for the first time since July 2025 and the highest level since January 2025. In contrast, the inventories index dropped to -8.5 in June from 6.6 in May, showing inventories contracted for the second time in three months and at the lowest level since July 2024. Meanwhile, the delivery times index increased to -2.6 this month from -10.4 in May (the lowest reading since March 2024).

On the labor front, the number of employees index climbed to 7.9 in June from -2.8 in May, indicating employment expanded for the first time in three months and at the highest level since January. In June, a higher 17.0% of respondents reported increases in employment, while 9.2% reported declines; 73.8% reported no change in employment levels. The average employee workweek index fell to -6.5 this month, the first negative reading and lowest since February, from 1.2 in May.

Inflation indicators were mixed in June. The prices paid index rose to 53.2 this month following an 11.4-point drop to 47.9 in May. A higher 53.5% of respondents reported increases in input prices in June, while only 0.4% reported decreases. The prices received index fell to 20.3, a four-month low, after a 7.2-point May decline to 26.3. In June, 20.3% of respondents reported increases in prices received, while 0.0% reported decreases.

The future indexes remained in positive territory, signaling continued overall growth over the next six months, with most future indicators rising. The future general activity diffusion index edged down to 50.2 in June from 53.2 in May, staying positive since February 2024. Future indexes for new orders (60.8 vs. 53.5) and shipments (60.3 vs. 45.7) increased in June (vs. May) and remained positive. Notably, the future capital expenditures index rose to 41.2 this month, the highest level since June 2021, from 30.9 in May. The following future indexes slipped in June (vs. May) but stayed in positive territory: employment (30.8 vs. 31.7), unfilled orders (17.3 vs. 19.2), and inventories (10.0 vs. 11.8). Prices continued to increase, with the future prices paid index easing to a still-elevated 63.2 in June from 70.0 in May and the future prices received index rising to 67.2, the highest level since August 2021, from 60.5.

The Manufacturing Business Outlook Survey (MBOS), conducted by the Federal Reserve Bank of Philadelphia, is a monthly survey of manufacturers in the Third Federal Reserve District. Participants indicate the direction of change in overall business activity and in the various measures of activity at their plants. The diffusion indexes in the MBOS represent the percentage of respondents indicating an increase minus the percentage indicating a decrease. The indexes range from -100 to +100 with positive values indicating an increase in activity. The series from the survey dating back to May 1968 can be found in Haver’s **SURVEYS** database. The expectations forecast figures are from the Action Economics Forecast Survey in **AS1REPNA**.

260618P12.jpg

260618Q12.jpg

- Current General Activity Index up 10.7 pts. to 10.3 in June; fifth rise in six months.
- New Orders (27.3), sixth expansion in seven mths.; Shipments (14.9), seventh straight expansion; Unfilled Orders (10.5), first expansion since July ’25.
- Employment (7.9), a five-month high after two mths. of contraction.
- Inflation indicators: Prices Paid up (53.2); Prices Received down (20.3, a four-month low).
- Future General Activity Index down to a still-expansion-level 50.2; most subindexes up and positive; future price indexes remaining above long-run avgs.

U.S. Philadelphia Fed Index Returns to Positive Territory in June

260618E.jpg

Unemployment in the European Monetary Union stayed at 6.3% in April, just a tick above its all-time low. In the more inclusive EU, the unemployment rate hovered at 6%, just two tenths of a percentage point above its all-time low. Unemployment conditions in the monetary union remain low without many signs of acceleration.

The unemployment rate in April fell in Italy, Ireland, Greece, Portugal, and the Netherlands. The unemployment rate increased month-to-month in Finland.

In March, the unemployment rate declined in Austria, Belgium, Germany, Finland, Italy, and the Netherlands. It rose month-to-month in Greece and Luxembourg.

Over three months, the unemployment rate in these 12-early reporting monetary union members fell in five countries: Belgium, Germany, Italy, Ireland, and the Netherlands. In contrast, unemployment rose in five countries: Portugal, Greece, France, Finland, and Austria.

Over six months, unemployment rates fell in six countries: the Netherlands, Portugal, Italy, Germany, Belgium, and Austria. This was against increases in six countries: Greece, Finland, France, Luxembourg, Spain, and Ireland.

Year over year, the degree of inflation progress is much thinner, with the unemployment rates falling in only three countries Italy, Spain, and Portugal with increases in unemployment for all the other countries in the table.

Unemployment rates continue to rank low in the monetary union, with only three monetary union countries having their unemployment rates ranked above 50%, putting them above their respective medians on data back to the year 2000. Those three countries are Luxembourg, Finland, and Austria. For the remaining countries, the rankings of their unemployment rates over this period are not even as high as their 30th percentiles. Italy, at present, is experiencing its lowest unemployment rate of the period.

Unemployment conditions in the monetary union remain solid. The past two weeks were significant for monetary policy and global economics, with the ECB raising rates, Japan raising rates, and the United States keeping rates unchanged but moving away from an easing bias in policy that had been in effect for quite a number of months. Today the Bank of England, after experiencing some significant inflation progress, decided to keep its policy on hold for another session. An agreement between the U.S. and Iran securing an opening of the Strait of Hormuz was signed, paving the way for potentially improved oil flows, lower inflation, and less uncertainty in the period ahead.

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EMU Unemployment Remains Low

Sandy Batten

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Total retail sales rose a much larger-than-expected 0.9% m/m (6.9%y/y) in May following a slightly downwardly revised 0.4% monthly gain in April (previously 0.5% m/m), according to data released by the U.S. Census Bureau. The Action Economics Forecast Survey looked for a 0.5% m/m gain. Excluding autos, other sales increased 0.8% m/m (7.5% y/y) after an unrevised 0.7% m/m increase in April. Expectations were for a 0.5% monthly rise.

Elevated retail gasoline prices continued to boost the value of gasoline sales in May. Gasoline sales increased 3.4% m/m (26.5% y/y) in May on top of a 2.8% m/m increase in April. However, both monthly increases were slower than the 14.2% monthly jump reported in March. Gasoline sales accounted for 31% of total sales in May. However, sales were solid even without gasoline sales. Total sales excluding gasoline rose 0.7% m/m in April, up from 0.2% m/m in April. Sales excluding both autos and gasoline increased 0.5% m/m in May, the same monthly gain as in April.

The control group of sales (total sales excluding food services, autos, gasoline and building materials that the BEA uses to construct PCE in the national accounts) posted another solid increase in May, rising 0.7% m/m (6.3% y/y) following an unrevised 0.5% monthly increase in April. The strong performance at the end of Q1 followed by solid gains in April and May put the April-May level of control group sales up 8.6% at an annual rate from the Q1 average, pointing to another solid contribution by consumption to overall GDP growth in Q2. Consumer spending remains surprisingly resilient notwithstanding the recent hit to disposable income from the marked increase in energy prices.

Sales generally increased across major sectors in May. Auto sales rebounded, rising 1.2% m/m in May and more than reversing the 0.9% monthly decline in April. This was the third gain in auto sales in the past four months. Furniture sales rose 1.0% m/m but sales at electronics and appliance stores slipped 0.5% m/m. Building material sales gained 1.0% m/m on top of a 1.1% monthly increase in April. Clothing sales rose 0.3% m/m. Sales at general merchandise stores gained 0.4% m/m in May. Miscellaneous sales jumped 2.3% m/m in May, their first monthly gain in three months. Sales by nonstore retailers continued their strong performance, increasing 1.5% m/m in May on top of a 1.1% monthly rise in April. Over the first five months of this year, nonstore retail sales have risen 7.2%, not annualized. By contrast, food sales were unchanged in May from April while sales at restaurants edged down 0.1% m/m in May, their first monthly decline in four months.

Retail sales data can be found in Haver’s **USECON** database. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Total sales increased 0.9% m/m in May, nearly twice expectations.
- Auto sales rebounded, rising 1.2% m/m in May, more than reversing a 0.9% monthly decline in April. 
- Gasoline sales rose 3.4% m/m in May.
- Excluding auto and gasoline sales, remaining sales increased by a solid 0.5% m/m in May, the same monthly increase as in April.
- Sales of the retail control group that is used to construct PCE rose 0.7% m/m in May and are 8.6% annualized above the Q1 average.

U.S. Retail Sales Jumped More than Expected in May

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Mortgage applications fell 3.8% w/w (+8.6% y/y) in the week ending June 12 following a 10.8% rebound in the week ending June 5, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. The latest reading was the fourth w/w fall in five weeks, lowering the index to 269.5. Applications for loans to purchase a house slid 3.4% (+3.0% y/y) in the June 12 week, down for the fourth time in five weeks, after a 7.3% rise in the previous week. Applications for loan refinancing dropped 4.5% (+17.0% y/y) in the June 12 week, the seventh w/w decline in eight weeks, following a 15.3% jump in the June 5 week.

The effective interest rate on a 30-year fixed-rate loan was unchanged at 6.78% in the week ending June 12; it was above a low of 6.24% in the February 27 week but below a peak of 8.12% in the week of October 20, 2023. The rate on 15-year fixed-rate mortgages edged up 2bps to 6.18% in the June 12 week, the highest in three weeks, from 6.16% in the previous week; it was up from a low of 5.60% in the week of September 20, 2024 but down from a high of 7.44% in the week of October 27, 2023. Meanwhile, the rate on 30-year jumbo loans declined 4bps to 6.78% in the June 12 week from 6.82% in the prior week; it was above a low of 6.25% in the February 27 week but below a high of 7.99% in the week of October 27, 2023. The rate on a 5-year ARM fell 7bps to 6.16% in the June 12 week, the first w/w decline in six weeks, from 6.23% in the previous week (the highest since the week of August 15, 2025); it was above a low of 5.38% in the February 20 week but below a high of 7.31% in the week of October 27, 2023.

The share of applications for refinancing an existing loan edged up to 40.3% of total applications in the week ending June 12—the fourth w/w increase in five weeks and the highest level since the May 15 week—after rising to 40.2% in the week ending June 5; it remained below a peak of 61.9% in the January 16 week but above a low of 34.6% in the week of May 23, 2025. The adjustable-rate mortgage (ARM) share of activity slipped to 8.5% in the June 12 week from 8.6% in the prior week; it was below a peak of 12.9% in the week of September 12, 2025 but above a low of 4.7% in the week of January 3, 2025.

The average size of a mortgage loan fell 1.5% w/w (+3.7% y/y) to $394,100 in the June 12 week, the lowest level since the April 3 week, after a 0.4% rebound to $399,900 in the June 5 week. The average size of a purchase loan dropped 1.9% (+4.0% y/y) to $456,600 in the June 12 week following a 2.8% recovery to $465,300 in the prior week. The average size of a loan to refinance a mortgage fell 0.4% (+7.0% y/y) to $301,400 in the June 12 week on top of a 2.3% decline to $302,500 in the previous week, marking the third consecutive w/w fall, the sixth decline in seven weeks, and the lowest level since the week of July 25, 2025.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Purchase applications -3.4% w/w, down for fourth time in five weeks; refinance applications -4.5% w/w, seventh fall in eight weeks.
- Effective interest rate on 30-year fixed loans unchanged at 6.78%, up from a late-February low of 6.24%.
- Average loan size down for the second time in three weeks, lowest since the April 3 week.

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