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/061018h.jpg" width="353">
In July and August, the Euro-Zone region had its largest two-month trade deficit in the 17-plus-year history* of these combined regional data. In July, the deficit reached &#128;6.2 billion and improved just slightly in August to &#128;5.5 billion. These are tiny by US standards, but the more normal pattern in Europe is a trade surplus with the rest of the world, which just four years ago reached &#128;8.2 billion.
July&#39;s deficit suffered from a decrease in exports of 2.0%, but these rebounded in August by 3.2%. They are a quite respectable 7.4% ahead of a year ago, a pace that has been equaled or exceeded in most months since the middle of 2003, when a two-and-a-half year recession ended in Germany. Manufactured goods led the way.
Imports rose 2.2% in July and 2.4% in August. August&#39;s inflows of merchandise were 10.3% ahead of a year ago. It is easy to say &quot;oil is a major culprit&quot;, and it is, with the mineral fuel category up &#128;3.7 billion, or 13.8%. However, manufactured goods are just as significant. &quot;Other&quot; manufactured goods&quot; (excluding machinery and chemical products) are up &#128;3.4 billion, or 14.5%. The European economy has been strong, and this is reflected in its demand for imported goods.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018g.jpg" width="353">
We title this article &quot;Old News&quot;, since these data, of course, cover August. Since then, oil and gasoline prices have fallen dramatically. So we would hope that succeeding months&#39; trade reports will look more favorable for oil importers.
*In this commentary we have used Haver&#39;s EUROSTAT database, which comes from Eurostat, and also our own summary compilation, G10+. Eurostat&#39;s seasonally adjusted data run back to 1989, hence our reference to the &quot;17-year&quot; history of the series. Eurostat&#39;s adjustment methods are called &quot;TRAMO&quot; and &quot;SEATS&quot;, which take explicit account of &quot;working days&quot;. In G10, Haver has run its own seasonal adjustment using the more familiar X-12 ARIMA technique. The series adjusted this way extend back to 1980, the same as the not seasonally adjusted data. Depending on your analytical needs, either or both of these datasets may be useful for your work. 

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/FRANCE/@F07/@F07.HTM">France</a><a href="http://www.haverselect.com/dlx/FRANCE/@F07/@F07.HTM">, SA, Mil.&#128;</a></th>
<th scope="col">Aug 2006</th>
<th scope="col">July 2006</th>
<th scope="col">June 2006</th>
<th scope="col">Aug 2005</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Trade Balance</td>
<td>-5,454</td>
<td>-6,262</td>
<td>-1,324</td>
<td>-1,695</td>
<td>+1,658</td>
<td>+5,958</td>
<td>+5,797</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>114,739</td>
<td>111,138</td>
<td>113,460</td>
<td>107,329</td>
<td>103,191</td>
<td>96,068</td>
<td>88,199</td>
</tr>
<tr>
<td class="firstcol">% Change</td>
<td>3.2%</td>
<td>-2.0%</td>
<td>0.8%</td>
<td>7.4%</td>
<td>7.4%</td>
<td>8.9%</td>
<td>-2.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>120,193</td>
<td>117,361</td>
<td>114,783</td>
<td>109,004</td>
<td>101,533</td>
<td>90,110</td>
<td>82,402</td>
</tr>
<tr>
<td class="firstcol">% Change</td>
<td>2.4%</td>
<td>2.2%</td>
<td>-0.0%</td>
<td>10.3%</td>
<td>12.7%</td>
<td>9.4%</td>
<td>0.5%</td>
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In July and August, the Euro-Zone region had its largest two-month trade deficit in the 17-plus-year history* of these combined regional data. In July, the deficit reached 6.2 billion and improved just slightly in August to 5.5 [...]

Old News: Euro-Zone Trade Suffers from High Energy Costs in August, Too

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018f.jpg" width="353">
According to the Mortgage Bankers Association, the total number of mortgage applications fell 2.2% last week for the third decline in the last four weeks. Applications this month are just 0.5% higher than during September.
A 0.4% rise in purchase applications recovered just a piece of the prior week&#39;s 5.3% w/w skid and that left the level of purchase apps in early October 3.0% below the September average which rose 3.2% from August.
During the last ten years there has been a 58% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance about repeated the prior week&#39;s decline and fell 5.3%. Refis in October are 5.2% higher than the September average due to sharp increases late last month.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018e.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage rose for the third consecutive week. The seven basis point increase to 6.56% left rates at the highest in a month. The peak for 30 year financing was 7.08% late in June. The rate for 15-year financing also rose ten basis points w/w to 6.28% versus 6.20% averaged last month. The peak rate was 6.75%. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
During the last ten years there has been a (negative) 79% correlation between the level of applications for purchase and the effective interest rate on a 30-year mortgage.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.
The Federal Home Loan Bank System: The &#147;Other&#148; Housing GSE from the Federal Reserve Bank of Atlanta is available <a href="http://www.frbatlanta.org/filelegacydocs/erq306_frame.pdf"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">10/13/06</th>
<th scope="col">10/06/06</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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<td class="firstcol">Total Market Index</td>
<td>585.8</td>
<td>599.1</td>
<td>-20.6%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>384.7</td>
<td>383.7</td>
<td>-23.7%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
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<td class="firstcol">&nbsp; Refinancing</td>
<td>1,758.2</td>
<td>1,857.0</td>
<td>-16.1%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
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According to the Mortgage Bankers Association, the total number of mortgage applications fell 2.2% last week for the third decline in the last four weeks. Applications this month are just 0.5% higher than during September. A 0.4% rise [...]

Mortgage Applications Fell Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018c.jpg" width="353">
Housing starts in September rose for only the third month this year. The 5.9% increase to 1.772M units fully recovered all of the prior month&#39;s little revised 4.9% decline and easily beat Consensus expectations for a slight decline to 1.64M starts.
Starts nevertheless remained 21.8% below the peak this past January.
Single-family starts recovered 4.3% last month to 1.43M and recovered most of the prior month&#39;s 5.4% decline. Multi family starts were stronger and popped 12.7% after three consecutive months of sharp decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018d.jpg" width="353">
By region, single family housing starts rose everywhere except in the Northeast where starts fell 12.1% (-29.7% y/y). In the West single family starts inched up 0.9% m/m (-30.8% y/y) but in the South starts recovered 8.5% (-8.4% y/y). Single family starts in the Midwest also were higher by 3.9% (-33.0% y/y).
Building permits fell 6.3% to the lowest level since 2001. Permits to start singe family homes in addition fell hard by 6.0% (-32.1% y/y), also to the lowest since 2001.
How Resilient Is the Modern Economy to Energy Price Shocks? from the Federal Reserve Bank of Atlanta can be found <a href="http://www.frbatlanta.org/filelegacydocs/erq306_jeske.pdf"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a> </th>
<th scope="col">September</th>
<th scope="col">August</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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<td class="firstcol">Total</td>
<td>1,772</td>
<td>1,674</td>
<td>-17.9%</td>
<td>2,073</td>
<td>1,950</td>
<td>1,854</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,426</td>
<td>1,367</td>
<td>-20.3%</td>
<td>1,719</td>
<td>1,604</td>
<td>1,505</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>346</td>
<td>307</td>
<td>-6.0%</td>
<td>354</td>
<td>345</td>
<td>349</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,619</td>
<td>1,727</td>
<td>-27.7%</td>
<td>2,159</td>
<td>2,058</td>
<td>1,888</td>
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Housing starts in September rose for only the third month this year. The 5.9% increase to 1.772M units fully recovered all of the prior month's little revised 4.9% decline and easily beat Consensus expectations for a slight decline to [...]

Rise in Housing Starts Surprising

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018a.jpg" width="353">
The consumer price index (CPI-U) fell 0.5% last month due to sharply lower energy prices. The decline outpaced expectations for a 0.3% drop and was the largest m/m decline since last November. The 0.2% rise in prices less food &amp; energy was the third in a row and was as expected.
Energy prices were led 7.2% lower in September by a 13.5% drop in gasoline and a 4.9% (+0.5% y/y) fall in fuel oil prices. Gasoline prices have since fallen another 11.3% so far in October (-16.6% y/y) to an average $2.27 per gallon. Natural gas &amp; electricity prices in September rose 1.2% (5.8% y/y).
Core goods prices fell 0.1% though apparel prices were strong and posted a 0.6% (0.9% y/y) gain after rising 0.9% in August. Appliance prices also rose a firm 0.7% (1.3% y/y) but furniture &amp; bedding prices fell 0.7% (+1.4% y/y) while other equipment &amp; furnishings prices dropped 1.9% (-6.5% y/y). New &amp; used motor vehicle prices also slipped 0.3% (-0.1% y/y) and tobacco prices fell 0.1% (+2.1% y/y). Medical care commodity prices rose 0.2% (3.8% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018b.jpg" width="353">
Core services prices rose 0.3% as shelter prices rose 0.3% (4.2% y/y). The rental equivalence measure of owners&#39; primary residences rose 0.3% (4.0% y/y) for the second month and rents rose 0.4% (3.9% y/y) for the fourth straight month. Public transportation costs fell 0.7% (+3.9% y/y), the first m/m decline since March. Education costs rose 0.2% (6.1% y/y) and medical care services prices rose 0.4% (4.4% y/y) for the second month.
Food &amp; beverage prices rose 0.4% as meat, fish &amp; poultry prices increased 0.5% (1.6% y/y) and fruit &amp; vegetable prices surged another 3.0% (7.3% y/y). Dairy prices were unchanged (-1.0% y/y).
The chained CPI, which adjusts for shifts in the mix of consumer purchases, fell 0.3% but less food &amp; energy prices rose 0.3%.
The Quantity Theory of Money from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/mt/20061101/cover.pdf"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80101/@E80101.HTM">Consumer Price Index</a> </th>
<th scope="col">September</th>
<th scope="col">August</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>
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<td class="firstcol">Total&nbsp;</td>
<td>-0.5%</td>
<td>0.2%</td>
<td>2.1%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.9%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>-0.1%</td>
<td>0.2%</td>
<td>0.5%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.3%</td>
<td>0.2%</td>
<td>3.9%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>-7.2%</td>
<td>0.3%</td>
<td>-4.5%</td>
<td>16.9%</td>
<td>10.8%</td>
<td>12.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food &amp; Beverages</td>
<td>0.4%</td>
<td>0.3%</td>
<td>2.6%</td>
<td>2.4%</td>
<td>3.4%</td>
<td>2.1%</td>
</tr>
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<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
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<tr>
<td class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a> </td>
<td>-0.3%</td>
<td>0.3%</td>
<td>2.2%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.3%</td>
<td>0.3%</td>
<td>2.7%</td>
<td>1.9%</td>
<td>1.7%</td>
<td>1.1%</td>
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The consumer price index (CPI-U) fell 0.5% last month due to sharply lower energy prices. The decline outpaced expectations for a 0.3% drop and was the largest m/m decline since last November. The 0.2% rise in prices less food & [...]

CPI Fell 0.5%, Core Rose an Expected 0.2%

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018a.jpg" width="353">
The consumer price index (CPI-U) fell 0.5% last month due to sharply lower energy prices. The decline outpaced expectations for a 0.3% drop and was the largest m/m decline since last November. The 0.2% rise in prices less food &amp; energy was the third in a row and was as expected.
Energy prices were led 7.2% lower in September by a 13.5% drop in gasoline and a 4.9% (+0.5% y/y) fall in fuel oil prices. Gasoline prices have since fallen another 11.3% so far in October (-16.6% y/y) to an average $2.27 per gallon. Natural gas &amp; electricity prices in September rose 1.2% (5.8% y/y).
Core goods prices fell 0.1% though apparel prices were strong and posted a 0.6% (0.9% y/y) gain after rising 0.9% in August. Appliance prices also rose a firm 0.7% (1.3% y/y) but furniture &amp; bedding prices fell 0.7% (+1.4% y/y) while other equipment &amp; furnishings prices dropped 1.9% (-6.5% y/y). New &amp; used motor vehicle prices also slipped 0.3% (-0.1% y/y) and tobacco prices fell 0.1% (+2.1% y/y). Medical care commodity prices rose 0.2% (3.8% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018b.jpg" width="353">
Core services prices rose 0.3% as shelter prices rose 0.3% (4.2% y/y). The rental equivalence measure of owners&#39; primary residences rose 0.3% (4.0% y/y) for the second month and rents rose 0.4% (3.9% y/y) for the fourth straight month. Public transportation costs fell 0.7% (+3.9% y/y), the first m/m decline since March. Education costs rose 0.2% (6.1% y/y) and medical care services prices rose 0.4% (4.4% y/y) for the second month.
Food &amp; beverage prices rose 0.4% as meat, fish &amp; poultry prices increased 0.5% (1.6% y/y) and fruit &amp; vegetable prices surged another 3.0% (7.3% y/y). Dairy prices were unchanged (-1.0% y/y).
The chained CPI, which adjusts for shifts in the mix of consumer purchases, fell 0.3% but less food &amp; energy prices rose 0.3%.
The Quantity Theory of Money from the Federal Reserve Bank of St. Louis can be found <a href="http://research.stlouisfed.org/publications/mt/20061101/cover.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80101/@E80101.HTM">Consumer Price Index</a> </th>
<th scope="col">September</th>
<th scope="col">August</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">Total&nbsp;</td>
<td>-0.5%</td>
<td>0.2%</td>
<td>2.1%</td>
<td>3.4%</td>
<td>2.7%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.9%</td>
<td>2.2%</td>
<td>1.8%</td>
<td>1.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Goods less Food &amp; Energy</td>
<td>-0.1%</td>
<td>0.2%</td>
<td>0.5%</td>
<td>0.5%</td>
<td>-0.9%</td>
<td>-2.0%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Services less Energy</td>
<td>0.3%</td>
<td>0.2%</td>
<td>3.9%</td>
<td>2.8%</td>
<td>2.8%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Energy</td>
<td>-7.2%</td>
<td>0.3%</td>
<td>-4.5%</td>
<td>16.9%</td>
<td>10.8%</td>
<td>12.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;Food &amp; Beverages</td>
<td>0.4%</td>
<td>0.3%</td>
<td>2.6%</td>
<td>2.4%</td>
<td>3.4%</td>
<td>2.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">&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"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E801/@E80113/@E80113.HTM">Chained CPI: Total (NSA)</a> </td>
<td>-0.3%</td>
<td>0.3%</td>
<td>2.2%</td>
<td>2.9%</td>
<td>2.5%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Total less Food &amp; Energy</td>
<td>0.3%</td>
<td>0.3%</td>
<td>2.7%</td>
<td>1.9%</td>
<td>1.7%</td>
<td>1.1%</td>
</tr>
</tbody>
</table>
Rise in Housing Starts Surprising 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018c.jpg" width="353">
Housing starts in September rose for only the third month this year. The 5.9% increase to 1.772M units fully recovered all of the prior month&#39;s little revised 4.9% decline and easily beat Consensus expectations for a slight decline to 1.64M starts.
Starts nevertheless remained 21.8% below the peak this past January.
Single-family starts recovered 4.3% last month to 1.43M and recovered most of the prior month&#39;s 5.4% decline. Multi family starts were stronger and popped 12.7% after three consecutive months of sharp decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018d.jpg" width="353">
By region, single family housing starts rose everywhere except in the Northeast where starts fell 12.1% (-29.7% y/y). In the West single family starts inched up 0.9% m/m (-30.8% y/y) but in the South starts recovered 8.5% (-8.4% y/y). Single family starts in the Midwest also were higher by 3.9% (-33.0% y/y).
Building permits fell 6.3% to the lowest level since 2001. Permits to start singe family homes in addition fell hard by 6.0% (-32.1% y/y), also to the lowest since 2001.
How Resilient Is the Modern Economy to Energy Price Shocks? from the Federal Reserve Bank of Atlanta can be found <a href="http://www.frbatlanta.org/filelegacydocs/erq306_jeske.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">

</table>
<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/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a> </th>
<th scope="col">September</th>
<th scope="col">August</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">Total</td>
<td>1,772</td>
<td>1,674</td>
<td>-17.9%</td>
<td>2,073</td>
<td>1,950</td>
<td>1,854</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,426</td>
<td>1,367</td>
<td>-20.3%</td>
<td>1,719</td>
<td>1,604</td>
<td>1,505</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>346</td>
<td>307</td>
<td>-6.0%</td>
<td>354</td>
<td>345</td>
<td>349</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>1,619</td>
<td>1,727</td>
<td>-27.7%</td>
<td>2,159</td>
<td>2,058</td>
<td>1,888</td>
</tr>
</tbody>
</table>
Mortgage Applications Fell Again 
by <a href="/comment/Moeller.html">Tom Moeller</a> October 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018f.jpg" width="353">
According to the Mortgage Bankers Association, the total number of mortgage applications fell 2.2% last week for the third decline in the last four weeks. Applications this month are just 0.5% higher than during September.
A 0.4% rise in purchase applications recovered just a piece of the prior week&#39;s 5.3% w/w skid and that left the level of purchase apps in early October 3.0% below the September average which rose 3.2% from August.
During the last ten years there has been a 58% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance about repeated the prior week&#39;s decline and fell 5.3%. Refis in October are 5.2% higher than the September average due to sharp increases late last month.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018e.jpg" width="353">
The effective interest rate on a conventional 30-year mortgage rose for the third consecutive week. The seven basis point increase to 6.56% left rates at the highest in a month. The peak for 30 year financing was 7.08% late in June. The rate for 15-year financing also rose ten basis points w/w to 6.28% versus 6.20% averaged last month. The peak rate was 6.75%. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
During the last ten years there has been a (negative) 79% correlation between the level of applications for purchase and the effective interest rate on a 30-year mortgage.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.
The Federal Home Loan Bank System: The &#147;Other&#148; Housing GSE from the Federal Reserve Bank of Atlanta is available <a href="http://www.frbatlanta.org/filelegacydocs/erq306_frame.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/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">10/13/06</th>
<th scope="col">10/06/06</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">Total Market Index</td>
<td>585.8</td>
<td>599.1</td>
<td>-20.6%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>384.7</td>
<td>383.7</td>
<td>-23.7%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,758.2</td>
<td>1,857.0</td>
<td>-16.1%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
Old News: Euro-Zone Trade Suffers from High Energy Costs in August, Too 
by <a href="/comment/Stone.html">Carol Stone</a> October 18, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018h.jpg" width="353">
In July and August, the Euro-Zone region had its largest two-month trade deficit in the 17-plus-year history* of these combined regional data. In July, the deficit reached &#128;6.2 billion and improved just slightly in August to &#128;5.5 billion. These are tiny by US standards, but the more normal pattern in Europe is a trade surplus with the rest of the world, which just four years ago reached &#128;8.2 billion.
July&#39;s deficit suffered from a decrease in exports of 2.0%, but these rebounded in August by 3.2%. They are a quite respectable 7.4% ahead of a year ago, a pace that has been equaled or exceeded in most months since the middle of 2003, when a two-and-a-half year recession ended in Germany. Manufactured goods led the way.
Imports rose 2.2% in July and 2.4% in August. August&#39;s inflows of merchandise were 10.3% ahead of a year ago. It is easy to say &quot;oil is a major culprit&quot;, and it is, with the mineral fuel category up &#128;3.7 billion, or 13.8%. However, manufactured goods are just as significant. &quot;Other&quot; manufactured goods&quot; (excluding machinery and chemical products) are up &#128;3.4 billion, or 14.5%. The European economy has been strong, and this is reflected in its demand for imported goods.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061018g.jpg" width="353">
We title this article &quot;Old News&quot;, since these data, of course, cover August. Since then, oil and gasoline prices have fallen dramatically. So we would hope that succeeding months&#39; trade reports will look more favorable for oil importers.
*In this commentary we have used Haver&#39;s EUROSTAT database, which comes from Eurostat, and also our own summary compilation, G10+. Eurostat&#39;s seasonally adjusted data run back to 1989, hence our reference to the &quot;17-year&quot; history of the series. Eurostat&#39;s adjustment methods are called &quot;TRAMO&quot; and &quot;SEATS&quot;, which take explicit account of &quot;working days&quot;. In G10, Haver has run its own seasonal adjustment using the more familiar X-12 ARIMA technique. The series adjusted this way extend back to 1980, the same as the not seasonally adjusted data. Depending on your analytical needs, either or both of these datasets may be useful for your work. 

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<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/FRANCE/@F07/@F07.HTM">France</a><a href="http://www.haverselect.com/dlx/FRANCE/@F07/@F07.HTM">, SA, Mil.&#128;</a></th>
<th scope="col">Aug 2006</th>
<th scope="col">July 2006</th>
<th scope="col">June 2006</th>
<th scope="col">Aug 2005</th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Trade Balance</td>
<td>-5,454</td>
<td>-6,262</td>
<td>-1,324</td>
<td>-1,695</td>
<td>+1,658</td>
<td>+5,958</td>
<td>+5,797</td>
</tr>
<tr class="odd">
<td class="firstcol">Exports</td>
<td>114,739</td>
<td>111,138</td>
<td>113,460</td>
<td>107,329</td>
<td>103,191</td>
<td>96,068</td>
<td>88,199</td>
</tr>
<tr>
<td class="firstcol">% Change</td>
<td>3.2%</td>
<td>-2.0%</td>
<td>0.8%</td>
<td>7.4%</td>
<td>7.4%</td>
<td>8.9%</td>
<td>-2.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Imports</td>
<td>120,193</td>
<td>117,361</td>
<td>114,783</td>
<td>109,004</td>
<td>101,533</td>
<td>90,110</td>
<td>82,402</td>
</tr>
<tr>
<td class="firstcol">% Change</td>
<td>2.4%</td>
<td>2.2%</td>
<td>-0.0%</td>
<td>10.3%</td>
<td>12.7%</td>
<td>9.4%</td>
<td>0.5%</td>
</tr>
</tbody>
</table>
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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/061017g.jpg" width="353">
The ZEW measure of economic sentiment among analysts and institutional investors regarding the economic outlook six months ahead fell from -22.2%in September to -27.4% in October, that is, the pessimists outweighed the optimists by 27.4%. This is the lowest value since March 1993. In October of last year, the optimists outweighed the pessimists by 39.4%.
At the same time, among the participants in the survey, those who appraised the current situation positively outweighed those who appraised it negatively by 42.9%, the highest value since October 2000. The October value was up from 38.9% in September and from -58.0% in October of 2005. The first chart compares the views of the ZEW participants on the current situation and the outlook six months ahead.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017h.jpg" width="353">
The rapid and sustained rise in the appraisal of current conditions reflects the surprising strength of the German economy in the current year. The Economic Minister, Michael Glos, recently said that the ministry will raise its estimate of 2006 growth to 2.5% from 1.6% estimated last April. It is not surprising, therefore, that investors view the future with some caution. This is especially true given the inevitability of tax increases on January 1, 2007 that are likely to dampen consumer spending. The VAT (value added tax) is scheduled to rise from 16% to 19% and social security contributions will also increase.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017i.jpg" width="353">
The other major indicator of sentiment in Germany is the IFO measure to be released October 25th. The ZEW measure is based on a small sample--some 300 participants--and represents the opinions of the financial community. The IFO measure is based on a much broader sample--some 7000 participants--and represents the opinions of businessmen engaged in manufacturing, construction, wholesale and retail trade. In the appraisal of the current situation, the two surveys reveal similar views, although the views of the financial community tend to be more volatile than those of the industrialists and trades people. The second chart compares the appraisal of the current situation by the two institutes. The correlation between the two series is fairly high .83.
In the appraisal of the outlook, there is less agreement in the views of the two sectors, represented by a lower correlation--.67--and again, the views of the financial community tend to be more volatile than those of the industrialists and trades people.The third chart compares the views on the outlook of both groups. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/@D8/@D8.HTM">GERMANY ZEW&nbsp; (Balance of Opinion)</a></th>
<th scope="col">Oct&nbsp; 06</th>
<th scope="col">Sep 06</th>
<th scope="col">Oct 05</th>
<th scope="col">M/M Dif</th>
<th scope="col">Y/Y Dif</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Current&nbsp;Situation</td>
<td>42.9</td>
<td>38.9</td>
<td>-58.0</td>
<td>4.0</td>
<td>100.9</td>
<td>-61.8</td>
<td>-67.7</td>
<td>-92.6</td>
</tr>
<tr>
<td class="firstcol">Outlook Six Months Ahead</td>
<td>-27.4</td>
<td>-22.2</td>
<td>39.4</td>
<td>-5.2</td>
<td>-66.8</td>
<td>34.8</td>
<td>44.6</td>
<td>38.4</td>
</tr>
</tbody>
</table>
</body>
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The ZEW measure of economic sentiment among analysts and institutional investors regarding the economic outlook six months ahead fell from -22.2%in September to -27.4% in October, that is, the pessimists outweighed the optimists by [...]

The German Financial Community Is Growing More Cautious about Economic Conditions Six Month Ahead

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017f.jpg" width="353">
The National Association of Home Builders&#39; (NAHB) October Composite Housing Market Index rose to 31 from 30 in September. It was the first m/m increase since last year. Regardless, the latest level remained down by more than one half from the levels of 2005. 
During the last twenty years there has been a 75% correlation between the y/y change in the Composite Index and the change in single family housing starts. 
The improvement was led a sharp gain in the sub-index covering prospective sales in the next six months (10.8% m/m, -43.8% y/y). The sub-index for current sales was unchanged m/m (-56.8% y/y). 
Traffic of prospective home buyers rose modestly from the extremely low levels of the prior two months. 
Only the housing market indexes for the Northeast (-50.7% y/y) and the Midwest (-55.6% y/y) improved m/m. In the South the index fell (-51.3%) as it did out West (-64.8% y/y). 
The NAHB index is a diffusion index based on a survey of builders. Readings above 50 signal that more builders view conditions good than poor. 
Visit the <a href="http://www.nahb.org">National Association of Home Builders</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S4/@S4.HTM">Nat&#39;l Association of Home Builders</a> </th>
<th scope="col">October</th>
<th scope="col">September</th>
<th scope="col">Oct. &#39;05 </th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Housing Market Index</td>
<td>31</td>
<td>30</td>
<td>68</td>
<td>67</td>
<td>68</td>
<td>64</td>
</tr>
</tbody>
</table>
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The National Association of Home Builders' (NAHB) October Composite Housing Market Index rose to 31 from 30 in September. It was the first m/m increase since last year. Regardless, the latest level remained down by more than one half [...]

NAHB Housing Market Index Ticked Up

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/061017e.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales increased 0.6% last week on the heels of the prior week&#39;s 0.5% rise. The gains limited the decline in sales so far in October to 0.2% versus the September average .
The retail price for a gallon of regular unleaded gasoline fell for the tenth consecutive week. The four cent decline last week to an average $2.23 (-18.3% y/y) and was to the lowest level since December.
Last week&#39;s decline in spot market gasoline prices paused yesterday. The NY harbor price for regular unleaded gasoline rose to $1.54 per gallon versus an average $1.50 last week.
During the last ten years there has been a 47% 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.
The leading indicator of chain store sales from ICSC-UBS rose for the fifth week in the last six, by 0.1% (0.8% y/y).
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>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
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<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">10/14/06</th>
<th scope="col">10/07/06</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>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>468.1</td>
<td>465.4</td>
<td>3.9%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


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The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales increased 0.6% last week on the heels of the prior week's 0.5% rise. The gains limited the decline in sales so far in October to 0.2% versus the [...]

Lower Gasoline Prices Helped Spending at Chain Stores, Again

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

AI boosting US investment in data centers

US productivity growth has been significantly faster than in other major economies

Consumers' short-term US inflation expectations still elevated while longer-term expectations of financial markets are steady

US financial markets have gotten used to elevated policy uncertainty

FOMC now expects more rate cuts going forward than in June

China gaining ASEAN exports while US exports slump

Job openings less than the number unemployed in July for first time since 2021

Reaccelerating goods price inflation along with sticky services inflation clouds the outlook

Falling oil prices aren't pulling down inflation expectations, pointing to a boost from increased tariffs

Equity market exuberance outpacing macroeconomic data

Apart from Japan, Blue Chip forecasters expect further sizable monetary easing

US production rebounded in Q2, but demand continued to slow

US leader, Germany trailer for real GDP growth over past 3 years

Negative US inflation surprises leading G10 down

Deflation continues in China

Incoming data surprising on downside in US; positive surprises elsewhere

FOMC expects more inflation and less growth than in March

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Winnie Tapasanun

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The Empire State Manufacturing Index of General Business Conditions dropped more than expected to -3.9 in December, down from 18.7 in November and 10.7 in October, according to the Empire State Manufacturing Survey released by the Federal Reserve Bank of New York. A reading of 10.7 for December had been expected in the Action Economics Forecast Survey. The December negative reading indicated that the business activity in New York State contracted for the first time since September; it was also down from 2.1 in December 2024 and a high of 20.2 in November 2024. The percentage of respondents reporting an increase in general business conditions was 31.8% in December, down from 38.7% in November; the percentage reporting a decrease was 35.7%, up from November’s 20.0%. The latest survey was conducted between December 2 and December 9.

The headline index reflects the answer to a single question concerning the state of economic activity and is not calculated from the components. Haver Analytics calculates a composite index from the five major components, which is comparable to the ISM manufacturing index. This calculated index fell to the neutral-level 50.0 in December—the lowest level since September—down from 55.4 in November, 52.7 in October, and 51.0 in December 2024 but up from a low of 42.5 in January 2024. The index is the average of five diffusion indexes: new orders, shipments, employment, supplier deliveries and inventories with equal weights (20% each).

In the latest survey, the new orders index fell to 0.0 in December after a 12.2-point gain to 15.9 in November, signaling steady orders this month and a marked improvement from a low of -35.0 in January 2024. The shipments index decreased to -5.7 in December, the lowest level in three months, following a 2.4-point increase to 16.8 in November, but it was up from a low of -22.7 in April 2024. The unfilled orders index dropped to -14.9 in December on top of a 1.9-point decrease to -5.8 in November, indicating unfilled orders contracted for the seventh straight month and to the weakest level since January 2024; the index reached a low of -24.2 in January 2024. The inventories index fell to 4.0 in December after a 7.7-point rise to 6.7 in November, suggesting that inventories expanded for two months following three consecutive months of contraction. Meanwhile, the delivery times index fell to -5.9 in December, the lowest reading since December 2024, from 7.7 in November, with 9.9% of respondents reporting higher delivery times and 15.8% reporting lower delivery times.

On the labor front, the number of employees index advanced to 7.3 in December after a 0.4-point increase to 6.6 in November, showing employment expanded for the sixth time in seven months and at the highest level since July. The index remained above a low of -9.7 in December 2023. A higher 16.2% of respondents reported an increase in employment in December while 8.9% reported a decline. The average workweek index slipped to 3.5 in December from 7.7 in November, remaining positive for a second month after two months in negative territory.

Inflation indicators eased this month but remained elevated. The prices paid index dropped to 37.6 in December, the lowest level since January, following a 3.4-point decrease to 49.0 in November. The index was up from a low of 21.1 in December 2024 and a low of 16.7 in December 2023 but significantly down from a high of 86.4 in April 2022. A 39.6% of respondents reported higher prices paid in December while only 2.0% reported lower prices paid. The prices received index fell to 19.8 in December, the lowest reading since February, following a 3.2-point decline to 24.0 in November. The index was up from a low of 4.2 in December 2024 and a low of 3.9 in July 2023 but well below a peak of 56.1 in March 2022. A 21.8% of respondents reported higher prices received in December while 2.0% reported lower prices received.

Firms grew more optimistic about the future business outlook in the latest survey. The index for future business conditions jumped to 35.7 in December, the strongest level since January, from 19.1 in November, with an increased 52.9% of respondents expecting business conditions to improve in the next six months. Future new orders rose to 38.0 in December, the highest figure since March 2022, from 23.3 in November and shipments rose to 33.3, the highest level since November 2024, from November’s 23.3. Growth in employment eased slightly to 8.8 in December from 11.9 in November but still showed continued employment expansion. Capital spending plans remained positive for the second successive month, with the future capital expenditures index at 6.9 in December compared with 11.5 in November. Expected prices paid fell to 55.4 in December, the lowest level since January, from 62.5 in November, while expected prices received rose to 46.5, the highest reading since April 2022, from November’s 41.3.

The indexes in this report are diffusion indexes and measure the percentage of respondents indicating an increase minus the percentage indicating a decrease with zero separating expansion from contraction.

The New York Fed survey data are contained in Haver’s **SURVEYS** database. The expectations series is in Haver’s **AS1REPNA** database.

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- December General Business Conditions Index down 22.6 pts. to -3.9.
- Unfilled orders (-14.9) and shipments (-5.7) negative; employment (7.3, highest since July) and inventories (4.0) positive; new orders flat (0.0).
- Prices paid at an 11-month-low 37.6 and prices received at a 10-month-low 19.8, still elevated.
- Firms optimistic: Future Business Conditions Index at an 11-month-high 35.7 and future prices paid at an 11-month-low 55.4.

U.S. Empire State Manufacturing Index Plunges in December to a Three-Month Low

Robert Brusca

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**Tankan overview:** Japan's Tankan report is an important quarterly assessment and outlook of the Japanese economy. Historically, the performance of manufacturers is considered to be the bellwether in this survey for performance of the economy. In the fourth quarter of 2025, the manufacturing index moved up to 15 from 14 in the third quarter. This compares to a value of 12 in the first quarter and a four-quarter average of 13.5. Since late-2006, the manufacturing index has averaged 5.3, marking the performance in 2025 as a substantial improvement from the long period where Japan struggled with deflation. On dated back to 2003, the manufacturing index has a standing in the queue of data in its 70.8 percentile, a reasonably firm reading. 

**Nonmanufacturers:** The index for nonmanufacturers logged a reading of 34 in the fourth quarter compared to 34 in the third quarter and a reading of 35 in the first quarter of 2025; the one-year average for nonmanufacturers is 34.3, marking that sector as little changed over the course of the year. Nonmanufacturing in the fourth quarter has an index standing at its 97.8 percentile, marking it as an extremely high standing on data back to late-2003. 

**Nonmanufacturing details:** Readings across the nonmanufacturing sector are above their respective one-year averages for all subsectors except transportation where the fourth quarter index backs down to 27 from an average of 30.5 and for restaurants & hotels that back down to a reading of 25 from an average of 39.3. The queue percentile standings for the subsectors show a good deal of strength with construction at a 98.9 percentile standing, services for businesses also at a 98.9 percentile standing, transportation - despite the back off from the average - is at a 94.4 percentile standing, and real estate and wholesaling are at 93.3 percentile standings on data back to 2003.  

**The Tankan outlook-** The survey also produces an outlook. For large manufacturers for the first quarter of 2026, the outlook metric moves up to 15 from what had been 12 for the fourth quarter of 2025. The outlook for nonmanufacturers is at 28, unchanged from the fourth quarter. The outlook for manufacturing has a queue standing in its 78.7 percentile on data back to 2003, while nonmanufacturing has a standing for the outlook reading at its 98.9 percentile marking these outlooks as quite good. 

**The BOJ is watching-** This is a survey the Bank of Japan will be looking at and assessing what policy should do and how strong the economy appears to be. On these data, the economy would appear to be firm, the outlook would appear to be solid, and if the Bank of Japan were to decide to pay more attention to inflation, the economy would seem to be in a position to absorb a rate hike without much difficulty.

**Other-sized enterprises-**
**Manufacturing:** The survey also produces results for medium-sized and small-sized firms, as well as outlooks for medium-sized and small-sized firms (that are not presented in the table). The fourth quarter assessments of performance, however, show improvements for manufacturing in both medium- and small-sized enterprises; they also show rankings of medium-sized firms in manufacturing in their 85th percentile, the same as for small sized enterprises. 

**Nonmanufacturing:** Nonmanufacturing for medium- and small-sized enterprises show improvements in the fourth quarter results and also demonstrates high rankings of those readings for those respective sectors.

**Summing up:**
On balance, it's a solid Tankan report for Japan's economy and should provide reassurance to the Bank of Japan and to the current government that the economy is on solid footing as each looks at the situation and tries to assess the best policy options. 

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Japan

Japan’s Tankan Ticks Higher for Large Manufacturers

Tian Yong Woon

This week, we assess Asia through a risk lens, given the recent flare-ups across the region. Japan–China tensions, following Japanese Prime Minister Takaichi’s recent remarks on Taiwan, have prompted some retaliatory measures from China, including travel advisories against visiting Japan. This raises the risk of a dent to Japan’s tourism income this year, given the significance of aggregate Chinese tourism expenditure (chart 1), although any such impact would come at a time when Japan is already grappling with the effects of overtourism. Beyond Japan–China relations, investors are also bracing for the Bank of Japan’s (BoJ) final scheduled policy decision of the year, where a rate hike is expected despite Takaichi’s pro-growth fiscal stance. This expectation reflects ongoing yen weakness (chart 2), alongside encouraging results from Japan’s Q3 Tankan survey, among other factors. While the anticipated hike is not, in itself, a risk, the associated increase in financing costs—coupled with the likelihood of higher government bond issuance to support growth objectives—adds to investor concerns.

Risks are also evident in China, particularly after the November data docket showed a continued deterioration in growth across multiple sectors (chart 3). While China’s 5% growth target for the year remains within reach, achieving it appears to hinge on a narrow set of growth drivers, notably trade. On this front, China has defied earlier investor concerns to record a substantial widening of its trade surplus this year, despite a worsening bilateral trade balance with the US (chart 4). However, while supportive of growth, this development risks drawing increased pushback from non-US trading partners that have been absorbing China’s excess capacity.

Elevated risks are also present elsewhere in Asia, particularly in Southeast Asia, where renewed military clashes between Thailand and Cambodia have once again pushed bilateral tensions to the fore (chart 5). Thailand additionally faces political uncertainty ahead of early elections, following Prime Minister Anutin’s dissolution of parliament last week. Lastly, we turn to semiconductor- and AI-related risks, which are especially pertinent to Asia given the dominance—and reliance—of Taiwan and South Korea in the sector. A key risk lies in the current extent of market optimism surrounding future AI-related earnings (chart 6), suggesting greater scope for disappointment than for further upside surprises.

**Japan-China tensions**
Geopolitics will likely remain front and centre in Asia heading into the new year,  with several flashpoints carrying the risk of broader regional spillovers. One such case is the recent flare-up in tensions between China and Japan, following new Japanese Prime Minister Takaichi’s parliamentary remarks on Taiwan. Since then, Chinese authorities have rolled out a series of measures — urging Chinese citizens to avoid travelling to or studying in Japan, reinstating an import ban on Japanese seafood, among others. While none of these steps are particularly substantial on their own, they underscore a rapidly deteriorating bilateral dynamic. The economic implications are not trivial. As shown in chart 1, spending by Chinese tourists has historically made up a significant share of Japan’s total inbound tourism receipts — roughly a quarter in recent quarters — with especially strong concentrations in certain regions such as Osaka. Although the absence of Mainland Chinese tourists has been keenly felt since tensions escalated, early indications suggest that increased arrivals from other countries have helped offset some of the shortfall. More recently, a series of close military encounters between China and Japan has further heightened concerns. The risk of miscalculation has grown, raising the possibility of an inadvertent escalation at a time when geopolitical sensitivities in the region are already elevated.


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**Japan**
Japan–China tensions aside, investors will also be focused on the Bank of Japan’s upcoming monetary policy meeting this week, the last of the year. After Governor Ueda’s recent remarks, markets are now expecting a 25 bps rate hike. This has been especially evident in the bond market, where yields have risen sharply in recent weeks (chart 2). The move partly reflects expectations of tighter policy, but also concerns Prime Minister Takaichi’s more expansionary fiscal stance. The recently submitted supplementary budget points to increased government bond issuance, adding supply pressure, weighing on bond prices, and pushing yields higher. The rise in yields also poses a risk when combined with increased bond issuance, as this implies higher financing costs for the government. A hike this month is still expected despite the government’s loose fiscal tilt, given yen weakness and recent readings of softer inflation. However, the outlook for any additional tightening beyond December remains uncertain. With the new year approaching and annual spring wage negotiations on the horizon, the BoJ will need further confirmation on wages and inflation before moving again. Meanwhile, the ongoing Japan–China frictions, while not yet generating major economic spillovers, remain a meaningful downside risk. Any material escalation could weigh on Japan’s outlook and complicate the case for further policy tightening.

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**China**
Moving to China, the latest monthly data point to a broad-based slowdown in growth in November. Year-on-year retail sales growth slowed to its weakest pace since 2022, while year-to-date year-on-year fixed asset investment growth fell to its lowest level since the outbreak of the COVID-19 pandemic in 2020 (chart 3). Industrial production growth also eased, albeit to a lesser extent. In addition, house price declines accelerated, reversing the easing trend seen in previous months. Overall, the latest data extend the pattern of deteriorating growth observed in recent months. That said, it remains to be seen whether the November readings will ultimately cause China to miss its 5% growth target for the year, given the substantial head start accumulated over the first three quarters. Moreover, China has enjoyed a bumper year in trade, which we discuss in the next section.

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Looking more closely at China’s trade performance, it has become clear that earlier fears of a trade-driven collapse in China’s growth have not materialised. Instead, China’s overall trade surplus has continued to widen, having topped $1 trillion this year, even as its bilateral surplus with the US has fallen sharply (chart 4). This suggests that China’s surplus expansion has been driven by other trading partners, which have effectively been absorbing China’s excess capacity. The stronger-than-expected trade outturn has also been a key factor behind the upward revisions to China’s GDP outlook for the year, with growth still on track to meet the 5% target barring any major setbacks. While this dynamic is not a direct risk in itself, surging exports to these partner economies could become problematic if domestic industries in the receiving countries are unable to absorb the inflow or begin to feel crowded out. Such pressures may eventually provoke a policy response. Still, it remains uncertain whether these countries — many of them smaller economies — would adopt measures similar to those taken by the US, given the asymmetric nature of their economic relationships with China.

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**Thailand-Cambodia tensions**
Moving beyond Japan and China, region-specific tensions elsewhere in Asia also warrant attention, though their broader impact remains limited. Notably, renewed military clashes between Thailand and Cambodia have resurfaced despite an earlier peace deal brokered by Malaysia and the US. While the likelihood of these clashes escalating into a wider regional conflict is low — given their primarily border-specific nature — external pressures on both countries remain a latent risk. The previous ceasefire appeared to have been secured only after US President Trump threatened to withhold trade deals unless fighting ceased, suggesting that a similar “carrot-and-stick” approach may be used again to encourage another ceasefire, although nothing is certain. Domestically, Thailand faces additional near-term uncertainties. Prime Minister Anutin must contend with a range of issues, including preparations for early elections following his dissolution of parliament just last week, adding another layer of unpredictability (chart 5). The Thai government’s popularity has also dipped recently, partly due to criticism over its handling of floods in southern Thailand.

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**Semiconductors and AI**
Lastly, we turn to semiconductor and AI-related risks in Asia. As in markets outside the region, this year’s tech rallies are increasingly seen as overextended (chart 6), with some arguing they have entered bubble territory. Many now believe that much of the upside in future earnings has already been priced in, leaving more room for disappointment than for positive surprises. Geopolitical and competitive considerations remain important too, as highlighted by the recent US approval to sell Nvidia’s high-end (though not top-tier) H200 chips to China. However, this approval may not generate the expected enthusiasm among Chinese consumers. If the reaction mirrors that seen after the earlier approval of Nvidia’s lower-end H20 chips, China may use these openings to promote domestic chipmakers such as Huawei. This could help local firms catch up to US peers and gradually reduce reliance on imported semiconductors. Also, if US chipmaker earnings disappoint due to a lukewarm reception of the H200 chips, while local Chinese chipmakers see increased upside potential, this could translate into a divergence in equity price trajectories between the sector’s stocks in the respective markets.

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Asia

Economic Letter from Asia: Balancing Risks

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The National Association of Realtors' Fixed Rate Mortgage Housing Affordability Index (HAI) improved 0.9% (3.6% y/y) to 106.2 in October after rising 4.7% in September, revised from 3.9%, following a 2.8% increase in August. The index level was the highest since February 2023. The level of home affordability was 18.1% higher than its low of 89.9 in October 2023, but 40.7% below the peak of 179.0 in April 2020.

The rise in October affordability occurred as the average mortgage rate fell to 6.33% from 6.43% in September. The fall in mortgage rates left them above their low of 6.26% in September of last year, though below a 7.70% high in October of 2023. They remained well above a December 2020 low of 2.73%. The median price of an existing single-family home rose 0.7% (2.2% y/y) to $420,600. That price compared to the record $438,600 in June 2025. In October, the principal plus interest payment eased 0.3% (+0.2% y/y) to $2,089 per month, down 9.6% from June’s record high of $2,311, but still well above the most recent low of $984 in February 2020. Monthly mortgage payments averaged a slightly lessened 23.5% of income during October, but remained well above a low of 14.0% of income in April 2020.

The change in housing costs in October was accompanied by a 0.5% rise (3.8% y/y) in median family income to $106,478 after falling 0.3% in September. Qualifying income declined 0.3% (+0.2% y/y) to $100,272, after falling for three straight months.

Housing affordability improved m/m in most of the country in October. The index in the Midwest, the country’s most affordable region, rose 1.5% (0.9% y/y) to 134.4. In the South, the index increased 0.7% (5.4% y/y) to 112.1, while the affordability index in the Northeast strengthened 1.1% (-1.4% y/y) to 93.7. Declining, however, was the affordability index in the West, where homes are the least affordable. The index eased 0.3% (+5.3% y/y) to 75.2 in October.

The Housing Affordability Index (HAI) equals 100 when a median-income borrower qualifies for an 80% mortgage on a median-priced existing single-family home. The HAI had exceeded 100 in each month since July 1990. It reached an all-time high of 213.3 in January 2013.

Data on Housing Affordability can be found in Haver’s **REALTOR** database. Median home sales prices are also available in **USECON**. Higher frequency interest rate data are found in **SURVEYS**, **WEEKLY**, and **DAILY**.

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- Mortgage rates continue to decline.
- Median income strengthens.
- Affordability improves in most of country.

U.S. Housing Affordability Edges Higher in October

Andrew Cates

**The Blue Chip Consensus**
Before turning to the risks that could unsettle the global outlook in 2026, it’s worth noting the backdrop against which those risks are emerging. The first chart shows that forecasters have, if anything, become more optimistic in recent months, raising their 2026 GDP projections across many major economies. The upgrades are most visible in Asia’s tech-focused economies, where the semiconductor and AI upturn is lifting expectations, but the US has also benefited from stronger-than-expected momentum and fading concerns that tariffs would deliver a major growth hit. In short, the starting point for the global outlook has improved—making the downside scenarios explored in the next few charts all the more important to test.

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**Policy divergence**
The second chart highlights one of the central risks to the 2026 outlook: monetary-policy calibration. Even as growth expectations have firmed, forecasters remain convinced that the major central banks still have a little further to go in their easing cycles. For both the Fed and the Bank of England, respondents expect additional rate cuts in early 2026, albeit with growing uncertainty about the exact timing and pace. The broader message is that the heavy lifting on disinflation is now largely done, and what remains are finer calibration risks—where cutting too slowly risks choking momentum, while cutting too aggressively risks undoing progress on inflation. The ECB outlook is far more fragmented. A large share of forecasters sees the next step as a cut—though not necessarily soon—but a meaningful minority lean toward a possible hike. At the opposite pole is the Bank of Japan. Unlike its peers, the BoJ is still expected to tighten policy, reflecting Japan’s firmer growth foundation and a more durable inflation process. This creates a notable US–Japan policy divergence, which has already influenced currency and bond-market behaviour and could become a larger global shock-transmission channel in 2026.

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**Financial market stress**
The third chart highlights another source of downside risk: the widening gap between financial-market calm and real-economy anxiety. The US VIX has spent most of the past year hovering near multi-decade lows, consistent with rich valuations, abundant liquidity and a broadly optimistic macro narrative. Yet measured global economic policy uncertainty remains unusually elevated, reflecting geopolitical fragmentation, shifting trade regimes, and highly uncertain fiscal trajectories. This disconnect matters. Periods in which markets price near-perfection while the policy environment deteriorates have often been precursors to sharp repricing episodes. With valuations stretched and volatility compressed, it would not take much—a policy misstep, a geopolitical shock, or a rapid shift in rate expectations—to trigger a correction big enough to destabilise confidence in 2026.

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**AI expectations**
Against that backdrop, our next chart highlights a more subtle but no less important vulnerability: expectations around AI-driven growth. While AI has undoubtedly been a powerful tailwind for market sentiment—and arguably a key reason why forecasters have nudged up 2026 growth projections—our survey suggests that most respondents believe financial markets are overestimating the likely economic gains. Only around a third think current expectations are broadly accurate; almost nobody believes markets are underestimating AI’s impact. This imbalance matters. When valuations are rich and optimism is heavily front-loaded, any disappointment in AI adoption, productivity gains or investment payoffs could unwind a meaningful chunk of the recent market strength. In other words, the same force lifting the outlook today could become a meaningful downside catalyst in 2026 if reality fails to keep pace with expectation.

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**Trade disruption** 
A further downside risk comes from the latent fragilities in global trade and logistics. The Baltic Dry Index has climbed sharply in recent months, hinting at firmer shipping demand and rising transport costs, even as the Global Supply Chain Pressure Index has edged lower. That combination is telling: headline congestion may not yet be building, but underlying pressures—tight vessel availability, shifting trade routes, selective port bottlenecks and stronger goods flows—are quietly re-accumulating beneath the surface. None of this resembles the acute disruptions of 2021–22, but the risk is that a seemingly contained system can tighten very quickly. For a global economy that remains vulnerable to cost shocks and production delays, any renewed squeeze in trade logistics would add another meaningful downside risk as we look toward 2026.

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**Geopolitical shocks** 
Geopolitical risk has eased from the extremes seen during the early stages of the Israel–Gaza conflict, but the broader backdrop remains far from settled. The global Geopolitical Risk Index is still running well above its pre-pandemic norm, and volatility is now being driven less by any single flashpoint and more by a crowded field of simmering risks. These range from an unstable Russia–Ukraine stalemate and intensifying U.S.–China strategic rivalry to ongoing tensions across the Taiwan Strait, a fragile security environment in the South China Sea, periodic flare-ups in the Caucasus and Sahel, and rising political strain ahead of multiple major elections in 2026. Venezuela’s increasing instability—both domestically and in relation to its border dispute with Guyana—adds another potential source of disruption, particularly for energy markets. While none of these risks is dominating headlines at present, history shows that geopolitical shocks rarely give advance warning. A sudden escalation in any of these theatres could easily unsettle trade flows, energy prices or investor sentiment—another meaningful downside risk as we approach 2026.

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As 2025 draws to a close, the global economy enters 2026 with a surprisingly resilient backdrop: equity markets are still trading near cycle highs, volatility is subdued, and consensus forecasts have been drifting upward in recent months—helped by a robust US economy, firmer momentum across Asia, and optimism that AI-related investment will continue to lift the medium-term outlook (chart 1). Against this relatively constructive starting point, we focus this week on the key downside risks that could challenge the consensus narrative next year: the possibility of monetary-policy miscalibration (chart 2); the gap between elevated policy uncertainty and unusually calm financial markets (chart 3); the risk that financial markets may be overestimating the gains from AI (chart 4); renewed strain in global trade (chart 5); and geopolitical tensions (chart 6). These risks do not dominate the baseline outlook, but they help frame the vulnerabilities that could matter if global conditions deteriorate. Next week, we will turn to the upside risks—the forces that could allow the world economy to outperform again in 2026.

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Economy in Brief

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