Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109f.jpg" width="353">
Recent data from Germany are generally positive. Exports, while still strong, declined slightly in November from 80.9 billion euros in October to 80.5 billion euros--the result perhaps of the strong euro. However, imports declined by an even greater amount from 63.6 billion euros in October to 61.2 billion euros in November with the result that the trade balance increased to !9.3 billion euros from 17.3 billion euros in October. The first chart shows German exports and imports of goods.
Industrial production in November increased 1.8% from October and was 6.1% above November, 2005. Construction, which, earlier this year, appeared to have bottomed out, was particularly strong--up 6.2% in November and 13.4% above November, 2005--due in part to the unseasonally warm weather. Production in manufacturing, however, also increased 1.5% from October and 6.2$ from November, 2005. The second chart shows German industrial production in construction and manufacturing.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109g.jpg" width="353">
In spite of the deceleration in exports in November, the value of foreign manufacturing new orders increased 2.1% in November and were 6.4% above November, 2005. Domestic new orders increased only 0.6% in November from October, but were 9.9% above November, 2005. In the third chart, showing domestic and foreign new manufacturing orders, it can be seen that domestic new orders began to strengthen back in mid 2005 and to accelerate in the second quarter of 2006.
Retail sales have been the soft spot in the German economy. In view of the increased employment, noted earlier by Carol Stone, and the increase in the Value Added Tax on January 1, 2007, expectations had been for strong retail sales in the final months of 2006. Retail sales excluding autos and related stores, however, declined 1.5% in September, 0.1% in October and 0.1% again in November. Sales including autos and related stores did not fare much better. They were, respectively, -0.8%, 0.0% and 0.7%. The fourth chart shows retail sales excluding and including autos and related stores. The widening gap between the two series in recent months suggests that the impending increase in the VAT may have had at least stimulated purchases of autos.(We have rebased the retail sales from 2003=100 to 2000=100 to facilitate comparisons with the Industrial Production and New Orders data.)<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109h.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109i.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">GERMANY&nbsp;</th>
<th scope="col">Nov 06</th>
<th scope="col">Oct 06</th>
<th scope="col">Nov 05</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y %</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports&nbsp; (Bil Euro)</td>
<td>80.46</td>
<td>80.87</td>
<td>67.33</td>
<td>-0.51</td>
<td>19.50</td>
<td>783.62</td>
<td>727.41</td>
<td>666.78</td>
</tr>
<tr>
<td class="firstcol">Imports&nbsp; (Bil Euro)</td>
<td>61.17</td>
<td>63.58</td>
<td>52.82</td>
<td>-3.79</td>
<td>13.66</td>
<td>625.87</td>
<td>572.60</td>
<td>535.83</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance on Goods &nbsp;(Bil Euro)</td>
<td>19.29</td>
<td>17.29</td>
<td>13.51</td>
<td>2.00*</td>
<td>5.78*</td>
<td>157.75</td>
<td>154.81</td>
<td>130.95</td>
</tr>
<tr>
<td class="firstcol"> Industrial Production (2000=100) </td>
<td>112.0</td>
<td>110.0</td>
<td>105.6</td>
<td>1.82</td>
<td>6.06</td>
<td>103.7</td>
<td>100.8</td>
<td>98.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>115.4</td>
<td>113.7</td>
<td>108.7</td>
<td>1.50</td>
<td>6.16</td>
<td>106.4</td>
<td>102.7</td>
<td>99.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Construction</td>
<td>87.9</td>
<td>82.3</td>
<td>72.1</td>
<td>6.20</td>
<td>13.36</td>
<td>76.7</td>
<td>80.6</td>
<td>84.9</td>
</tr>
<tr class="odd">
<td class="firstcol"> Mfg New Orders Value (2000=100)</td>
<td>128.0</td>
<td>126.3</td>
<td>118.3</td>
<td>1.35</td>
<td>8.20</td>
<td>111.7</td>
<td>105.0</td>
<td>99.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Domestic</td>
<td>115.0</td>
<td>114.3</td>
<td>104.6</td>
<td>0.61</td>
<td>9.94</td>
<td>101.4</td>
<td>98.3</td>
<td>94.6</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Foreign</td>
<td>144.2</td>
<td>141.3</td>
<td>135.5</td>
<td>2.05</td>
<td>6.42</td>
<td>124.6</td>
<td>113.5</td>
<td>104.4</td>
</tr>
<tr>
<td class="firstcol">Retail Sales excl autos, etc (2000=100)</td>
<td>103.7</td>
<td>103.8</td>
<td>103.8</td>
<td>-0.10</td>
<td>-0.10</td>
<td>103.7</td>
<td>101.4</td>
<td>100.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Retail Sales incl autos, etc (2000=100)</td>
<td>107.2</td>
<td>106.5</td>
<td>105.3</td>
<td>0.66</td>
<td>1.80</td>
<td>104.4</td>
<td>101.9</td>
<td>100.2</td>
</tr>
</tbody>
</table>
</body>
</html>

Recent data from Germany are generally positive. Exports, while still strong, declined slightly in November from 80.9 billion euros in October to 80.5 billion euros--the result perhaps of the strong euro. However, imports declined by [...]

Mostly Positive News from Germany

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109c.jpg" width="353">
 Unleaded gasoline prices at the pump fell three cents last week to an average $2.31 per gallon after a penny decline during the prior week. Nevertheless, the average price for gasoline in January is up to $2.32 from the December average of $2.31 and the November average of $2.23 per gallon.
Further relief from higher retail gasoline prices may be signaled by declines in the spot market (NY harbor) price for a gallon of regular gasoline which have totaled twenty cents over the last two days.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109d.jpg" width="353">
Warmer weather also has helped crude oil prices lower. Yesterday, the spot price for WTI crude settled at $57.83 (-8.9% y/y), down four dollars from the December average of $61.94.
Warm temperatures also have pushed natural gas prices lower to $5.53 per mmbtu but a recent forecast of colder temps raised futures to $8.57
The latest Short-Term Energy Outlook from the U.S. Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html">here</a>.
Recycling Petrodollars from the Federal Reserve Bank of New York Can be found <a href="http://www.newyorkfed.org/research/current_issues/ci12-9.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">Weekly Energy Prices</a></th>
<th scope="col">01/08/07</th>
<th scope="col">01/01/07</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">US Retail Gasoline Price, Regular</td>
<td>$2.31</td>
<td>$2.33</td>
<td>-0.9%</td>
<td>$2.57</td>
<td>$2.27</td>
<td>$1.85</td>
</tr>
</tbody>
</table>


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Unleaded gasoline prices at the pump fell three cents last week to an average $2.31 per gallon after a penny decline during the prior week. Nevertheless, the average price for gasoline in January is up to $2.32 from the December [...]

Gasoline Prices Down Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109e.jpg" width="353">
According to the International Council of Shopping Centers (ICSC)-UBS, chain store sales last week began the new year with a 0.7% rise. The gain lifted the opening level for 2007 3.0% above the December average which rose just 0.1% from November.
During the last ten years there has been a 45% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.
Going the other way, the leading indicator of chain store sales from ICSC-UBS fell for the third straight week and posted a 0.4% decline.
Mortgage Innovation and Consumer Choice from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-38.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">1/06/07</th>
<th scope="col">12/30/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>480.3</td>
<td>476.8</td>
<td>3.4%</td>
<td>3.3%</td>
<td>3.6%</td>
<td>4.7%</td>
</tr>
</tbody>
</table>


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According to the International Council of Shopping Centers (ICSC)-UBS, chain store sales last week began the new year with a 0.7% rise. The gain lifted the opening level for 2007 3.0% above the December average which rose just 0.1% [...]

Weekly Chain Store Sales Opened The New Year With A Gain

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109a.jpg" width="353">
Small business optimism fell for the second consecutive month in December. The 3.2% decline followed a 1.0% November slip and left optimism 10.4% below its peak in late 2004, according to the National Federation of Independent Business (NFIB).
During the last ten years there has been a 70% correlation between the level of the NFIB index and the two quarter change in real GDP.
Respondents expecting the economy to improve dropped sharply while the percentage of firms with job openings and those expecting higher real sales in six months fell moderately.
During the last ten years there has been a 72% correlation between the NFIB percentage and the y/y change in nonfarm payrolls.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109b.jpg" width="353">
The percent planning to raise capital expenditures also dropped sharply to a three year low.
The percentage of firms planning to raise average selling prices rose moderately but the percentage of firms actually raising prices fell to the lowest level since early 2004. During the last ten years there has been a 60% correlation between the change in the producer price index and the level of the NFIB price index.
About 24 million businesses exist in the United States. Small business creates 80% of all new jobs in America.
The Economic Outlook, yesterday&#39;s speech by Federal Reserve Board Vice Chairman Donald L. Kohn, can be found <a href="http://www.federalreserve.gov/boarddocs/speeches/2007/20070108/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S7/@S7.HTM">Nat&#39;l Federation of Independent Business</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Small Business Optimism Index (1986=100)</td>
<td>96.5</td>
<td>99.7</td>
<td>-4.9%</td>
<td>98.9</td>
<td>101.6</td>
<td>104.6</td>
</tr>
</tbody>
</table>
</body>
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Small business optimism fell for the second consecutive month in December. The 3.2% decline followed a 1.0% November slip and left optimism 10.4% below its peak in late 2004, according to the National Federation of Independent [...]

Small Business Optimism Fell Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109a.jpg" width="353">
Small business optimism fell for the second consecutive month in December. The 3.2% decline followed a 1.0% November slip and left optimism 10.4% below its peak in late 2004, according to the National Federation of Independent Business (NFIB).
During the last ten years there has been a 70% correlation between the level of the NFIB index and the two quarter change in real GDP.
Respondents expecting the economy to improve dropped sharply while the percentage of firms with job openings and those expecting higher real sales in six months fell moderately.
During the last ten years there has been a 72% correlation between the NFIB percentage and the y/y change in nonfarm payrolls.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109b.jpg" width="353">
The percent planning to raise capital expenditures also dropped sharply to a three year low.
The percentage of firms planning to raise average selling prices rose moderately but the percentage of firms actually raising prices fell to the lowest level since early 2004. During the last ten years there has been a 60% correlation between the change in the producer price index and the level of the NFIB price index.
About 24 million businesses exist in the United States. Small business creates 80% of all new jobs in America.
The Economic Outlook, yesterday&#39;s speech by Federal Reserve Board Vice Chairman Donald L. Kohn, can be found <a href="http://www.federalreserve.gov/boarddocs/speeches/2007/20070108/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S7/@S7.HTM">Nat&#39;l Federation of Independent Business</a></th>
<th scope="col">December</th>
<th scope="col">November</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Small Business Optimism Index (1986=100)</td>
<td>96.5</td>
<td>99.7</td>
<td>-4.9%</td>
<td>98.9</td>
<td>101.6</td>
<td>104.6</td>
</tr>
</tbody>
</table>
Weekly Chain Store Sales Opened The New Year With A Gain 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 9, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109e.jpg" width="353">
According to the International Council of Shopping Centers (ICSC)-UBS, chain store sales last week began the new year with a 0.7% rise. The gain lifted the opening level for 2007 3.0% above the December average which rose just 0.1% from November.
During the last ten years there has been a 45% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
The ICSC-UBS retail chain-store sales index is constructed using the same-store sales (stores open for one year) reported by 78 stores of seven retailers: Dayton Hudson, Federated, Kmart, May, J.C. Penney, Sears and Wal-Mart.
Going the other way, the leading indicator of chain store sales from ICSC-UBS fell for the third straight week and posted a 0.4% decline.
Mortgage Innovation and Consumer Choice from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-38.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">1/06/07</th>
<th scope="col">12/30/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>480.3</td>
<td>476.8</td>
<td>3.4%</td>
<td>3.3%</td>
<td>3.6%</td>
<td>4.7%</td>
</tr>
</tbody>
</table>
Gasoline Prices Down Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> January 9, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109c.jpg" width="353">
 Unleaded gasoline prices at the pump fell three cents last week to an average $2.31 per gallon after a penny decline during the prior week. Nevertheless, the average price for gasoline in January is up to $2.32 from the December average of $2.31 and the November average of $2.23 per gallon.
Further relief from higher retail gasoline prices may be signaled by declines in the spot market (NY harbor) price for a gallon of regular gasoline which have totaled twenty cents over the last two days.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109d.jpg" width="353">
Warmer weather also has helped crude oil prices lower. Yesterday, the spot price for WTI crude settled at $57.83 (-8.9% y/y), down four dollars from the December average of $61.94.
Warm temperatures also have pushed natural gas prices lower to $5.53 per mmbtu but a recent forecast of colder temps raised futures to $8.57
The latest Short-Term Energy Outlook from the U.S. Energy Information Administration is available <a href="http://www.eia.doe.gov/emeu/steo/pub/contents.html">here</a>.
Recycling Petrodollars from the Federal Reserve Bank of New York Can be found <a href="http://www.newyorkfed.org/research/current_issues/ci12-9.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">Weekly Energy Prices</a></th>
<th scope="col">01/08/07</th>
<th scope="col">01/01/07</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">US Retail Gasoline Price, Regular</td>
<td>$2.31</td>
<td>$2.33</td>
<td>-0.9%</td>
<td>$2.57</td>
<td>$2.27</td>
<td>$1.85</td>
</tr>
</tbody>
</table>
Mostly Positive News from Germany 
by <a href="/comment/Curley.html">Louise Curley</a> January 9, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109f.jpg" width="353">
Recent data from Germany are generally positive. Exports, while still strong, declined slightly in November from 80.9 billion euros in October to 80.5 billion euros--the result perhaps of the strong euro. However, imports declined by an even greater amount from 63.6 billion euros in October to 61.2 billion euros in November with the result that the trade balance increased to !9.3 billion euros from 17.3 billion euros in October. The first chart shows German exports and imports of goods.
Industrial production in November increased 1.8% from October and was 6.1% above November, 2005. Construction, which, earlier this year, appeared to have bottomed out, was particularly strong--up 6.2% in November and 13.4% above November, 2005--due in part to the unseasonally warm weather. Production in manufacturing, however, also increased 1.5% from October and 6.2$ from November, 2005. The second chart shows German industrial production in construction and manufacturing.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109g.jpg" width="353">
In spite of the deceleration in exports in November, the value of foreign manufacturing new orders increased 2.1% in November and were 6.4% above November, 2005. Domestic new orders increased only 0.6% in November from October, but were 9.9% above November, 2005. In the third chart, showing domestic and foreign new manufacturing orders, it can be seen that domestic new orders began to strengthen back in mid 2005 and to accelerate in the second quarter of 2006.
Retail sales have been the soft spot in the German economy. In view of the increased employment, noted earlier by Carol Stone, and the increase in the Value Added Tax on January 1, 2007, expectations had been for strong retail sales in the final months of 2006. Retail sales excluding autos and related stores, however, declined 1.5% in September, 0.1% in October and 0.1% again in November. Sales including autos and related stores did not fare much better. They were, respectively, -0.8%, 0.0% and 0.7%. The fourth chart shows retail sales excluding and including autos and related stores. The widening gap between the two series in recent months suggests that the impending increase in the VAT may have had at least stimulated purchases of autos.(We have rebased the retail sales from 2003=100 to 2000=100 to facilitate comparisons with the Industrial Production and New Orders data.)<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109h.jpg" width="353"><img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070109i.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">GERMANY&nbsp;</th>
<th scope="col">Nov 06</th>
<th scope="col">Oct 06</th>
<th scope="col">Nov 05</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y %</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Exports&nbsp; (Bil Euro)</td>
<td>80.46</td>
<td>80.87</td>
<td>67.33</td>
<td>-0.51</td>
<td>19.50</td>
<td>783.62</td>
<td>727.41</td>
<td>666.78</td>
</tr>
<tr>
<td class="firstcol">Imports&nbsp; (Bil Euro)</td>
<td>61.17</td>
<td>63.58</td>
<td>52.82</td>
<td>-3.79</td>
<td>13.66</td>
<td>625.87</td>
<td>572.60</td>
<td>535.83</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance on Goods &nbsp;(Bil Euro)</td>
<td>19.29</td>
<td>17.29</td>
<td>13.51</td>
<td>2.00*</td>
<td>5.78*</td>
<td>157.75</td>
<td>154.81</td>
<td>130.95</td>
</tr>
<tr>
<td class="firstcol"> Industrial Production (2000=100) </td>
<td>112.0</td>
<td>110.0</td>
<td>105.6</td>
<td>1.82</td>
<td>6.06</td>
<td>103.7</td>
<td>100.8</td>
<td>98.4</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>115.4</td>
<td>113.7</td>
<td>108.7</td>
<td>1.50</td>
<td>6.16</td>
<td>106.4</td>
<td>102.7</td>
<td>99.5</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Construction</td>
<td>87.9</td>
<td>82.3</td>
<td>72.1</td>
<td>6.20</td>
<td>13.36</td>
<td>76.7</td>
<td>80.6</td>
<td>84.9</td>
</tr>
<tr class="odd">
<td class="firstcol"> Mfg New Orders Value (2000=100)</td>
<td>128.0</td>
<td>126.3</td>
<td>118.3</td>
<td>1.35</td>
<td>8.20</td>
<td>111.7</td>
<td>105.0</td>
<td>99.0</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Domestic</td>
<td>115.0</td>
<td>114.3</td>
<td>104.6</td>
<td>0.61</td>
<td>9.94</td>
<td>101.4</td>
<td>98.3</td>
<td>94.6</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Foreign</td>
<td>144.2</td>
<td>141.3</td>
<td>135.5</td>
<td>2.05</td>
<td>6.42</td>
<td>124.6</td>
<td>113.5</td>
<td>104.4</td>
</tr>
<tr>
<td class="firstcol">Retail Sales excl autos, etc (2000=100)</td>
<td>103.7</td>
<td>103.8</td>
<td>103.8</td>
<td>-0.10</td>
<td>-0.10</td>
<td>103.7</td>
<td>101.4</td>
<td>100.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Retail Sales incl autos, etc (2000=100)</td>
<td>107.2</td>
<td>106.5</td>
<td>105.3</td>
<td>0.66</td>
<td>1.80</td>
<td>104.4</td>
<td>101.9</td>
<td>100.2</td>
</tr>
</tbody>
</table>


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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108c.jpg" width="353">
The results of the Bank of Canada&#39;s Winter Business Outlook Survey were released today. The survey is conducted by analysts at the bank&#39;s regional offices who interviews senior management of approximately 100 firms. The regional offices tally the percent of respondents who see improvement over the next twelve months, those who see deterioration and those whose see no change.The balance of opinion is the difference between those who see improvement and those who see deterioration.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108d.jpg" width="353">
While there are bright spots in Winter Survey, the overall impression one gets is that of a slowing economy. The balance of opinion on sales improved in the current survey to 6.93% from 2.97% in the Fall Survey, but was 8.91 percentage points below the 2005 Winter Survey. Managements, in general, have tended to be less optimistic about future sales since early 2004, as can be seen in the first chart. They have, however, continued to invest in machinery and equipment and to take on employees, as seen in the second chart. However, although the Winter Survey showed an almost 5 percentage points increase in the percent balance expecting to increase investment spending to 19.80%, this level is significantly lower than the 34.65% and 26.73% shown in the first and second quarters of the year.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108e.jpg" width="353">
The balance of opinion on input and output price inflation is the difference between expectations of an acceleration and a deceleration of prices. The Fall Survey showed that managements were beginning to see a deceleration in both input and output prices. The current survey shows that the balance of opinion on input prices is -10.89% and that of output prices, -1.95%. (See the third chart)
Managements are seeing some increase in the difficulty of meeting demand, but there has been a slight decline in the balance of those who expect &quot;significant&quot; difficulty as shown in the table below.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">BANK OF CANADA OUTLOOK SURVEY&nbsp;(% Balance)</th>
<th scope="col">Q4 06</th>
<th scope="col">Q3 06</th>
<th scope="col">Q5 05</th>
<th scope="col">Q/Q Dif</th>
<th scope="col">Y/Y&nbsp;Dif&nbsp;</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">Sales&nbsp;</td>
<td>6.93</td>
<td>2.97</td>
<td>15.84</td>
<td>3.96</td>
<td>-8.91</td>
<td>4.18</td>
<td>17.43</td>
<td>17.91</td>
</tr>
<tr>
<td class="firstcol">Investment in Machinery and Equipment</td>
<td>19.80</td>
<td>14.95</td>
<td>19.00</td>
<td>4.95</td>
<td>0.80</td>
<td>24.01</td>
<td>19.20</td>
<td>16.95</td>
</tr>
<tr class="odd">
<td class="firstcol">Employment Level&nbsp;</td>
<td>39.60</td>
<td>40.59</td>
<td>49.50</td>
<td>-0.99</td>
<td>-9.90</td>
<td>39.35</td>
<td>42.75</td>
<td>33.42</td>
</tr>
<tr>
<td class="firstcol">Input Price Inflation</td>
<td>-10.89</td>
<td>-5.94</td>
<td>16.83</td>
<td>-4.95</td>
<td>-27.72</td>
<td>-3.22</td>
<td>11.39</td>
<td>-3.54</td>
</tr>
<tr class="odd">
<td class="firstcol">Output Price Inflation</td>
<td>-1.95</td>
<td>-7.92</td>
<td>2.97</td>
<td>5.94</td>
<td>-4.95</td>
<td>0.49</td>
<td>4.96</td>
<td>-3.19</td>
</tr>
<tr>
<td class="firstcol">Ability to Meet Demand</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; Some Difficulty</td>
<td>35.60</td>
<td>31.70</td>
<td>34.70</td>
<td>3.90</td>
<td>0.90</td>
<td>33.43</td>
<td>32.58</td>
<td>34.00</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Significant Difficulty</td>
<td>13.90</td>
<td>14.90</td>
<td>14.90</td>
<td>-1.00</td>
<td>-1.00</td>
<td>13.65</td>
<td>11.20</td>
<td>7.25</td>
</tr>
</tbody>
</table>
</body>
</html>

The results of the Bank of Canada's Winter Business Outlook Survey were released today. The survey is conducted by analysts at the bank's regional offices who interviews senior management of approximately 100 firms. The regional [...]

Bank of Canada Survey: A Subdued Outlook

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108a.jpg" width="353">
Factory inventories increased just 0.2% in November after a downwardly revised 0.3% October increase. These gains were down from the 0.7% average during the prior six months.
Petroleum refineries&#39; inventories did rise 0.7% but that uptick followed sharp 6.3% and 4.3% declines during the prior two months due to lower oil prices. The new development in November was that less petroleum, factory inventories grew just 0.2% (7.0% y/y), down sharply from the 0.7% average of the prior six months.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108b.jpg" width="353">
Machinery inventories fell 0.5% (+6.2% y/y) and primary metal inventories eased 0.3% (+18.9% y/y). Inventories of computers &amp; electronic products rose 0.8% (7.2% y/y) while inventories of electrical equipment rose 0.6% (11.0% y/y) and the 3-month change fell to only 1.2% (AR). Furniture inventories rose 1.0% and in a hint that the accumulation was involuntary the 3-month change rose to 10.3%, the highest in a year.
Total factory orders recovered 0.9% after the hard October plunge. Durable goods orders jumped 1.6% which was revised down slightly from the advance report. Factory orders less transportation fell 0.5% (+0.6% y/y), the third consecutive monthly decline. Much of the recently slower growth in this measure reflects petroleum where orders (which equal shipments), but non-transportation orders less oil fell 0.9% (+1.4% y/y) in November for the fourth consecutive monthly decline.
Factory shipments rose 0.1% for the second month but factory shipments less transportation &amp; petroleum slipped 0.2% (+1.4% y/y).<a href="http://research.stlouisfed.org/publications/review/05/07/Gali.pdf"> </a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED01016/@ED01016.HTM">Factory Survey</a> (NAICS)</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>0.2%</td>
<td>0.3%</td>
<td>7.1%</td>
<td>4.0%</td>
<td>6.9%</td>
<td>-7.4%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>0.9%</td>
<td>-4.5%</td>
<td>-0.8%</td>
<td>8.5%</td>
<td>7.5%</td>
<td>0.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.7%</td>
<td>7.1%</td>
<td>6.8%</td>
<td>0.2%</td>
</tr>
<tr>
<td class="firstcol">Unfilled Orders</td>
<td>1.7%</td>
<td>1.4%</td>
<td>20.4%</td>
<td>16.3%</td>
<td>4.5%</td>
<td>-1.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

Factory inventories increased just 0.2% in November after a downwardly revised 0.3% October increase. These gains were down from the 0.7% average during the prior six months. Petroleum refineries' inventories did rise 0.7% but that [...]

U.S. Factory Sector Inventory Gain Dropped Sharply

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108a.jpg" width="353">
Factory inventories increased just 0.2% in November after a downwardly revised 0.3% October increase. These gains were down from the 0.7% average during the prior six months.
Petroleum refineries&#39; inventories did rise 0.7% but that uptick followed sharp 6.3% and 4.3% declines during the prior two months due to lower oil prices. The new development in November was that less petroleum, factory inventories grew just 0.2% (7.0% y/y), down sharply from the 0.7% average of the prior six months.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108b.jpg" width="353">
Machinery inventories fell 0.5% (+6.2% y/y) and primary metal inventories eased 0.3% (+18.9% y/y). Inventories of computers &amp; electronic products rose 0.8% (7.2% y/y) while inventories of electrical equipment rose 0.6% (11.0% y/y) and the 3-month change fell to only 1.2% (AR). Furniture inventories rose 1.0% and in a hint that the accumulation was involuntary the 3-month change rose to 10.3%, the highest in a year.
Total factory orders recovered 0.9% after the hard October plunge. Durable goods orders jumped 1.6% which was revised down slightly from the advance report. Factory orders less transportation fell 0.5% (+0.6% y/y), the third consecutive monthly decline. Much of the recently slower growth in this measure reflects petroleum where orders (which equal shipments), but non-transportation orders less oil fell 0.9% (+1.4% y/y) in November for the fourth consecutive monthly decline.
Factory shipments rose 0.1% for the second month but factory shipments less transportation &amp; petroleum slipped 0.2% (+1.4% y/y).<a href="http://research.stlouisfed.org/publications/review/05/07/Gali.pdf"> </a>

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@ED/@ED01/@ED0101/@ED01016/@ED01016.HTM">Factory Survey</a> (NAICS)</th>
<th scope="col">November</th>
<th scope="col">October</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Inventories</td>
<td>0.2%</td>
<td>0.3%</td>
<td>7.1%</td>
<td>4.0%</td>
<td>6.9%</td>
<td>-7.4%</td>
</tr>
<tr>
<td class="firstcol">New Orders</td>
<td>0.9%</td>
<td>-4.5%</td>
<td>-0.8%</td>
<td>8.5%</td>
<td>7.5%</td>
<td>0.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Shipments</td>
<td>0.1%</td>
<td>0.1%</td>
<td>0.7%</td>
<td>7.1%</td>
<td>6.8%</td>
<td>0.2%</td>
</tr>
<tr>
<td class="firstcol">Unfilled Orders</td>
<td>1.7%</td>
<td>1.4%</td>
<td>20.4%</td>
<td>16.3%</td>
<td>4.5%</td>
<td>-1.0%</td>
</tr>
</tbody>
</table>
Bank of Canada Survey:  A Subdued Outlook 
by <a href="/comment/Curley.html">Louise Curley</a> January 8, 2007


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108c.jpg" width="353">
The results of the Bank of Canada&#39;s Winter Business Outlook Survey were released today. The survey is conducted by analysts at the bank&#39;s regional offices who interviews senior management of approximately 100 firms. The regional offices tally the percent of respondents who see improvement over the next twelve months, those who see deterioration and those whose see no change.The balance of opinion is the difference between those who see improvement and those who see deterioration.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108d.jpg" width="353">
While there are bright spots in Winter Survey, the overall impression one gets is that of a slowing economy. The balance of opinion on sales improved in the current survey to 6.93% from 2.97% in the Fall Survey, but was 8.91 percentage points below the 2005 Winter Survey. Managements, in general, have tended to be less optimistic about future sales since early 2004, as can be seen in the first chart. They have, however, continued to invest in machinery and equipment and to take on employees, as seen in the second chart. However, although the Winter Survey showed an almost 5 percentage points increase in the percent balance expecting to increase investment spending to 19.80%, this level is significantly lower than the 34.65% and 26.73% shown in the first and second quarters of the year.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/070108e.jpg" width="353">
The balance of opinion on input and output price inflation is the difference between expectations of an acceleration and a deceleration of prices. The Fall Survey showed that managements were beginning to see a deceleration in both input and output prices. The current survey shows that the balance of opinion on input prices is -10.89% and that of output prices, -1.95%. (See the third chart)
Managements are seeing some increase in the difficulty of meeting demand, but there has been a slight decline in the balance of those who expect &quot;significant&quot; difficulty as shown in the table below.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">BANK OF CANADA OUTLOOK SURVEY &nbsp;(% Balance)</th>
<th scope="col">Q4 06</th>
<th scope="col">Q3 06</th>
<th scope="col">Q5 05</th>
<th scope="col">Q/Q Dif</th>
<th scope="col">Y/Y&nbsp;Dif&nbsp;</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">Sales&nbsp;</td>
<td>6.93</td>
<td>2.97</td>
<td>15.84</td>
<td>3.96</td>
<td>-8.91</td>
<td>4.18</td>
<td>17.43</td>
<td>17.91</td>
</tr>
<tr>
<td class="firstcol">Investment in Machinery and Equipment</td>
<td>19.80</td>
<td>14.95</td>
<td>19.00</td>
<td>4.95</td>
<td>0.80</td>
<td>24.01</td>
<td>19.20</td>
<td>16.95</td>
</tr>
<tr class="odd">
<td class="firstcol">Employment Level&nbsp;</td>
<td>39.60</td>
<td>40.59</td>
<td>49.50</td>
<td>-0.99</td>
<td>-9.90</td>
<td>39.35</td>
<td>42.75</td>
<td>33.42</td>
</tr>
<tr>
<td class="firstcol">Input Price Inflation</td>
<td>-10.89</td>
<td>-5.94</td>
<td>16.83</td>
<td>-4.95</td>
<td>-27.72</td>
<td>-3.22</td>
<td>11.39</td>
<td>-3.54</td>
</tr>
<tr class="odd">
<td class="firstcol">Output Price Inflation</td>
<td>-1.95</td>
<td>-7.92</td>
<td>2.97</td>
<td>5.94</td>
<td>-4.95</td>
<td>0.49</td>
<td>4.96</td>
<td>-3.19</td>
</tr>
<tr>
<td class="firstcol">Ability to Meet Demand</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; Some Difficulty</td>
<td>35.60</td>
<td>31.70</td>
<td>34.70</td>
<td>3.90</td>
<td>0.90</td>
<td>33.43</td>
<td>32.58</td>
<td>34.00</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Significant Difficulty</td>
<td>13.90</td>
<td>14.90</td>
<td>14.90</td>
<td>-1.00</td>
<td>-1.00</td>
<td>13.65</td>
<td>11.20</td>
<td>7.25</td>
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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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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.

260427T2.jpg

**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.

260427T5.jpg

**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.

260427T6.jpg

Asia

Economic Letter from Asia: Not Just About the Strait

Robert Brusca

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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.

260427.jpg

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.

United Kingdom

U.K. Retail Sales: Worse Than During Covid

260424E.jpg

The onset of the war in Iran appears to have hit the German economy extremely hard as the Ifo survey shows very substantial and broad-based decline across its survey in April. The Ifo survey features readings for five sectors as well as an aggregate reading, and it surveys them for climate, current conditions, and expectations. The decline in the Ifo survey is present for all three concepts and across all five sectors, marking the weakening in April as a highly significant and extremely disturbing development. Only manufacturing in the current conditions survey escapes a month-to-month decline.

**The Ifo sequences**: The **climate** reading fell both overall and across each of the five sectors. **Current conditions** declined for the overall and for four of the five sectors, with manufacturing the sole exception. **Expectations** declined for the overall and for all sectors. Several of the sector declines were for a very substantial magnitude, especially when compared to historic changes in these indexes.

**Monthly changes in readings—severe broad deterioration**
The month-to-month change in the climate reading has weakened more month-to-month 19% of the time. That overall result, however, is boosted by manufacturing where the monthly change has been weaker 35% of the time (on data back to 2011). However, all other sectors have seen climate weaker m/m only 2.3% to 6.3% of the time! The current situation readings weakened, with the headline weakening more m/m 11% of the time. This was boosted by manufacturing, the only sector that improved on the month; its ranking on change was in its 85th percentile—quite good and truly stand-alone good news. The other current changes by sector ranged from construction being weaker 1.7% of the time, to retailing that has been weaker about 30% of the time in terms of m/m changes. Expectation changes were uniformly terrible, with the headline drop weaker only 6.3% of the time and sector change month-to-month weaker between 9% and 1.7% of the time. The monthly weakening was uniform and substantial. I document it with these calculations, but you can also see it on the chart above.

**Climate**: The bottom line is that the all-sector index for climate fell to -20.3 in April from -18 in March, placing it at a 10.5 percentile standing on data since 1993. The sector ranking is the highest for construction with a 42.2 percentile standing and the weakness for services at a 1.1 percentile standing—weaker than the table reading nearly 99% of the time. In terms of percentile standing levels or monthly changes, conditions are closing in on grim.

**Current conditions**: Current conditions saw the all-sector index slip to -5.3 in April from -2.4 in March. The headline ranking stands at a 9.8 percentile mark, making it—like the climate reading—weaker than its current reading only about 10% of the time. The strongest reading under current conditions is for construction which has a 60.6 percentile standing; it is the only ranking in the table above its historic median. Manufacturing, the only sector in the survey that improved month-to-month, has a 22.5 percentile standing, while services record the weakest percentile standing under current conditions, at an 8.4 percentile standing.

**Expectations:** The all-sector index for expectations fell to -25.3 in April from -19.9 in March, placing it at a 6.3 percentile standing. The percentile standings across sectors range from a high of 9.5% for manufacturing to a low of 1.5% for retailing. Up until earlier this year, the Ifo was showing signs of improvement; however, all of that has simply collapsed in the last month. Weakness is across economic concepts and sectors, as documented above. For reference, the table also gives a separate set of rankings on where the various indexes stand since the invasion of Ukraine, since that was another marked event that drove the index, that had been improving after Covid, down to lower levels.  Ranked even on this reduced scale looking at conditions only since the invasion of Ukraine, when conditions have generally been weaker, the current rankings across the Ifo survey remained extremely weak. This is a very disturbing survey for the German economy.

260424.jpg

Germany

German Ifo Plunges Everywhere

Andrew Cates

**Energy shock lifts inflation, trims growth**
The IMF’s latest WEO revisions for 2026 broadly reflect the classic stagflationary impact of the recent Middle East energy shock, with growth downgraded and inflation revised higher across most major economies. Higher energy prices act as a tax on real incomes while simultaneously pushing up costs. That said, the picture is not uniform: a number of economies—notably the US, China and India—have seen growth upgrades, reflecting stronger-than-expected momentum so far in 2026. By contrast, the UK stands out at the stagflationary extreme, combining one of the largest growth downgrades with a relatively strong inflation uplift—consistent with its weaker underlying momentum, greater energy sensitivity and more persistent domestic inflation dynamics. More broadly, while the global revisions remain modest—pointing to resilience in activity—the message is that disinflation is no longer a smooth glide back to target but increasingly contingent on energy prices and geopolitical developments.

260423Z1.jpg

**Markets largely shrug off rising economic pessimism**
Notwithstanding a more downbeat assessment from economists—including the IMF’s stagflationary tilt to the outlook—there has been remarkably little follow-through into financial markets. Measures of systemic stress in both the US and UK remain low by historical standards, suggesting that investors are, for now, largely looking through the Middle East conflict. There are several possible explanations: corporate profits remain resilient, the AI-driven investment narrative continues to dominate market thinking, and markets may be assuming that any energy shock will be temporary and contained. In effect, investors appear to be pricing a benign baseline in which geopolitical risks do not materially disrupt growth, inflation expectations or policy. The UK is a partial exception, with a somewhat more visible uptick in stress, which aligns more closely with the IMF’s more challenging growth-inflation trade-off and the economy’s greater sensitivity to energy prices.

260423Z2.jpg

**Volatility falls despite deteriorating growth surprises**
Market optimism is also increasingly at odds with the incoming data flow. Typically, equity volatility declines when growth surprises are positive and inflation surprises are benign. However, the recent pattern has broken that relationship. Growth surprises across the G10 have turned increasingly negative (our series is inverted in the chart below), yet volatility has continued to fall. In other words, markets are becoming less sensitive to weakening macro data, continuing to price a benign outlook even as the data deteriorate. This divergence reinforces the broader theme: investors are, for now, looking through both geopolitical risks and softer economic momentum, placing greater weight on resilience in earnings, the AI-driven narrative and the assumption that policy will remain supportive.

260423Z3.jpg

**Inflation Nowcasts Have Jumped**
Incoming data suggest that headline inflation has moved higher in recent weeks, broadly in line with expectations given the rise in energy prices following the Middle East shock. Nowcasts for CPI across the major economies show a clear rebound in March and April from the lows seen at the start of 2026, with the move occurring in a relatively synchronised fashion. This reinforces the view that the recent pickup in inflation is being driven primarily by a common external factor—energy.

260423Z4.jpg

**Energy shock not yet feeding into underlying inflation**
However, the detailed breakdown of March inflation outcomes suggests that this remains, for now, a largely headline-driven phenomenon. While headline CPI prints were firm across most economies, core inflation—stripping out energy and food—was more subdued and in some cases weaker. This indicates that there has been very limited pass-through from higher energy prices into broader goods and services inflation at this early stage. In other words, the shock is still being absorbed rather than propagated. That distinction is critical for policy and markets alike: as long as second-round effects remain contained, central banks may be able to look through the near-term rise in inflation, even as headline rates move higher.

260423Z5.jpg

**Inflation Expectations Rising as Growth Sentiment Falters**
It remains early days, and much will hinge on how inflation expectations evolve from here. The latest ZEW survey for Germany already conveys the hallmarks of a classic stagflationary shock, with macroeconomic expectations weakening even as inflation expectations have ratcheted sharply higher. This shift is important: while the recent rise in headline inflation has so far shown limited pass-through into core, a sustained increase in expectations would raise the risk of second-round effects and make the inflation process more persistent. In that sense, the ZEW data highlight the key fault line in the current environment—whether the energy-driven shock remains contained, or begins to embed itself more broadly through expectations and pricing behaviour.

260423Z6.jpg

Financial markets have remained notably calm in recent weeks despite rising geopolitical tensions in the Middle East, a more downbeat macroeconomic narrative and elevated uncertainty. Measures of financial stress and volatility remain low, and equity markets continue to look through both the conflict and softer data. That resilience sits alongside a more nuanced macro backdrop. The IMF’s latest WEO revisions point to a classic stagflationary energy shock—growth downgraded and inflation revised higher—although the global impact remains modest and uneven, with some economies still benefiting from stronger momentum (chart 1). At the same time, market pricing appears increasingly detached from the data flow, with volatility declining even as growth surprises have turned more negative relative to inflation (charts 2 and 3). Incoming inflation data reinforce the idea of a largely headline-driven shock, with nowcasts rising in line with higher energy prices but only limited pass-through into core inflation so far (charts 4 and 5). However, it remains early days. Survey evidence, such as the latest ZEW release, suggests that inflation expectations may already be responding in a more concerning way, with a marked rise alongside weakening growth sentiment (chart 6). Taken together, the key question for markets is whether this remains a contained, energy-driven shock that can be looked through—or whether it begins to embed more persistently via expectations, forcing a reassessment of the currently benign outlook.

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Charts of the Week: Risks Build, Markets Shrug

Sandy Batten

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260423G8.jpg

The National Activity Index published by the Federal Reserve Bank of Chicago (CFNAI) slipped to -0.20 in March from an upwardly revised +0.03 in February (previously (-0.11). This is the lowest monthly reading since last November. Smoothing out the monthly volatility, the index's three-month moving average (CFNAI-MA3) declined to -0.03 in March from an upwardly revised +0.03 in February (previously -0.01).

This index is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the FRB Chicago indicates that readings on the 3-month average of -0.70 or below are consistent with the economy being in a recession. Therefore, even though the March reading on the 3-month average was negative, it indicates that the US economy is still growing, just slightly slower than trend, and is well away from recessionary conditions. The 3-month average would be much deeper in negative territory if the economy was at risk of contracting.

The National Activity Index is a composite of 85 economic indicators, grouped into four major categories: production and income; employment, unemployment, and hours worked; personal consumption and housing; sales, orders, and inventories. Three of the four broad categories of indicators used to construct the index decreased from February, and three categories made negative contributions in March. Production-related indicators contributed –0.20 to the CFNAI in March, down from +0.13 in February. The sales, orders, and inventories category's contribution to the CFNAI was –0.01 in March, down from +0.05 in February. Employment-related indicators contributed +0.02 to the CFNAI in March, up from –0.15 in February. The personal consumption and housing category's contribution to the CFNAI was –0.01 in March, down from a neutral value in February.

The CFNAI Diffusion Index, which measures the breadth of the change in the component series and is also a three-month moving average, increased to –0.04 in March from –0.08 in February. This is the highest reading since February 2025. A reading of zero indicates that all of the indicators are growing at their long-term average. If all of the underlying indicators in a given month are below their long-run averages, the diffusion index will equal -1. If all of the indicators are above their long-run averages, it will equal +1. Thirty-four of the 85 individual indicators made positive contributions to the CFNAI in March, while 51 made negative contributions. Forty-three indicators improved from February to March, while 40 indicators deteriorated and two were unchanged. Of the indicators that improved, 16 made negative contributions.

These figures are available in Haver's **SURVEYS** database.

- The monthly reading fell to -0.20 in March from an upwardly revised +0.03 in February.
- The three-month average slipped from +0.03 to -0.03.
- Despite the slip in March, the index points to near-trend economic growth and is well above recession territory.

Economy in Brief

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Bank of Canada Survey: A Subdued Outlook

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