Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830d.jpg" width="353">
The total number of mortgage applications slipped another 0.9% last week according to the Mortgage Bankers Association. The average level of applications in August rose 2.9% from July.
Last week&#39;s decline was led by a 1.6% drop in purchase applications and applications are down 17.8% from the weekly high in January. It was sixth decline in the last seven weeks and lowered purchase apps in August 3.5% below the July average. That was the fourth consecutive m/m decline.
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 were roughly unchanged w/w and rose 13.3% in August versus July.
The effective interest rate on a conventional 30-year mortgage was about unchanged at 6.60% versus 6.58% the prior week. The peak for 30 year financing was 7.08% late in June. The rate on 15-year financing also remained unchanged at 6.32% and 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>.

<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">08/25/06</th>
<th scope="col">08/18/06</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>556.5</td>
<td>561.5</td>
<td>-23.0%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>375.9</td>
<td>382.2</td>
<td>-20.1%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,609.2</td>
<td>1,608.5</td>
<td>-26.4%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The total number of mortgage applications slipped another 0.9% last week according to the Mortgage Bankers Association. The average level of applications in August rose 2.9% from July. Last week's decline was led by a 1.6% drop in [...]

Mortgage Applications Portend Further Weakness in Housing

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830c.jpg" width="353">
The Nat&#39;l Employment Report, published by the payroll processor ADP, indicated that August private nonfarm payrolls rose 107,000. The August figure from BLS will be published this Friday.
The rise in ADP&#39;s measure of July private nonfarm payrolls of 99,000 was accompanied by a 113,000 rise in private nonfarm payrolls as published by the Bureau of Labor Statistics.
ADP has compiled the estimate from its database of individual companies&#39; payroll information. Macroeconomic Advisers, LLC, the St. Louis economic consulting firm, developed the methodology for transforming the raw data into an economic indicator.
According to ADP and Macro Advisers, the correlation between the monthly percentage change in the ADP estimate and that in the BLS data is 0.90.
The ADP National Employment Report data is maintained in Haver&#39;s USECON database; historical data go back to December 2000. The figures in this report cover only private sector jobs and exclude employment in the public sector, which grew an average of 11,333 per month over the last year.
The full ADP National Employment Report can be found <a href="http://www.investquest.com/iq/a/aud/ne/news/adp083006es.htm">here</a>, and the ADP methodology is explained <a href="http://www.adpemploymentreport.com/PDF/ADPNERMethodology.pdf">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EB/@EB25/@EB25.HTM">LAXEPA@USECON</a></th>
<th scope="col">Aug</th>
<th scope="col">July</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">Nonfarm Private Payroll Employment (Chg.)</td>
<td>107,000</td>
<td>99,000</td>
<td>1.9%</td>
<td>1.7%</td>
<td>1.3%</td>
<td>-0.4%</td>
</tr>
</tbody>
</table>
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The Nat'l Employment Report, published by the payroll processor ADP, indicated that August private nonfarm payrolls rose 107,000. The August figure from BLS will be published this Friday. The rise in ADP's measure of July private [...]

ADP Nat'l Employment Report: Growth Stable & Slower

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830a.jpg" width="353">
U.S. real GDP growth during 2Q &#39;06 was revised higher to 2.9% (AR) from the advance report of 2.5% growth. The figure about matched Consensus expectations for a 3.0% rise.
Reported for the first time, 2Q profits advanced 3.2% (20.5% y/y), far slower than the double digit increases during the prior two quarters. Profits at U.S. nonfinancial corporations grew just 0.6% (15.6% y/y), after an 11.6% surge during 1Q and financial corporate profits grew 7.8% (27.8% y/y). Earnings of overseas corporations posted a 4.0% (27.0% y/y) increase.
Growth in final sales to domestic purchasers was little revised at 1.7% (3.0% y/y) following four quarters of 3.7% growth.
Growth in business fixed investment was revised somewhat higher to a still-slowed 4.7% (7.3% y/y) rate. Spending on equipment &amp; software continued to show a decline of 1.6% (+6.8% y/y), much of it in spending on transportation equipment, but growth in structures spending ramped up to 22.1% (8.4% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830b.jpg" width="353">
The advance in real personal consumption expenditures held at a little revised 2.6% versus 3.4% during the prior four quarters. Durables spending grew 0.4% (3.6% y/y) as motor vehicles &amp; parts fell 0.8%, less than initially estimated.
The decline in residential investment was deepened to 9.8% (-1.2% y/y) and that reduced 2Q GDP growth by 0.6 percentage points.
Real spending by the federal government fell 4.3% (+2.1% y/y), a decline which subtracted 0.3 percentage points from GDP growth.
A stronger contribution from inventories added 0.6 percentage points to GDP growth, revised from 0.4 points. Meanwhile, an improved net export deficit added a little-revised 0.4 percentage points to growth as exports grew 5.1% (7.9% y/y) and imports rose 0.6% (6.2% y/y).
The rise in the GDP chain price index was unrevised at 3.3%, the fourth straight quarter at that rate, though the domestic final sales price deflator grew 4.0% (3.7% y/y). Less food &amp; energy consumer prices rose 2.8% (2.3% y/y), initially reported at 2.9%.
The minutes of the latest FOMC meeting can be found <a href="http://www.federalreserve.gov/fomc/minutes/20060808.htm"> here</a>
Income, Poverty and Health Insurance in the United States: 2005 from the U.S. Census Bureau is available <a href="http://www.census.gov/prod/2006pubs/p60-231.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chained 2000$, % AR</a></th>
<th scope="col">2Q &#39;06 (Prelim.)</th>
<th scope="col">2Q &#39;06 (Advance)</th>
<th scope="col">1Q &#39;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">GDP</td>
<td>2.9%</td>
<td>2.5%</td>
<td>5.6%</td>
<td>3.5%</td>
<td>3.2%</td>
<td>3.9%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory Effect</td>
<td>--</td>
<td>0.4%</td>
<td>-0.0%</td>
<td>0.6%</td>
<td>-0.3%</td>
<td>0.4%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>--</td>
<td>2.1%</td>
<td>5.6%</td>
<td>2.9%</td>
<td>3.5%</td>
<td>3.5%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Foreign Trade Effect</td>
<td>--</td>
<td>&nbsp;0.3%</td>
<td>-0.0%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.5%</td>
<td>-0.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>--</td>
<td>1.6%</td>
<td>5.4%</td>
<td>3.0%</td>
<td>3.6%</td>
<td>4.0%</td>
<td>2.8%</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>--</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>


</html>

U.S. real GDP growth during 2Q '06 was revised higher to 2.9% (AR) from the advance report of 2.5% growth. The figure about matched Consensus expectations for a 3.0% rise. Reported for the first time, 2Q profits advanced 3.2% (20.5% [...]

US GDP Growth Revised Up, Profit Growth Slowed

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830a.jpg" width="353">
U.S. real GDP growth during 2Q &#39;06 was revised higher to 2.9% (AR) from the advance report of 2.5% growth. The figure about matched Consensus expectations for a 3.0% rise.
Reported for the first time, 2Q profits advanced 3.2% (20.5% y/y), far slower than the double digit increases during the prior two quarters. Profits at U.S. nonfinancial corporations grew just 0.6% (15.6% y/y), after an 11.6% surge during 1Q and financial corporate profits grew 7.8% (27.8% y/y). Earnings of overseas corporations posted a 4.0% (27.0% y/y) increase.
Growth in final sales to domestic purchasers was little revised at 1.7% (3.0% y/y) following four quarters of 3.7% growth.
Growth in business fixed investment was revised somewhat higher to a still-slowed 4.7% (7.3% y/y) rate. Spending on equipment &amp; software continued to show a decline of 1.6% (+6.8% y/y), much of it in spending on transportation equipment, but growth in structures spending ramped up to 22.1% (8.4% y/y).<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830b.jpg" width="353">
The advance in real personal consumption expenditures held at a little revised 2.6% versus 3.4% during the prior four quarters. Durables spending grew 0.4% (3.6% y/y) as motor vehicles &amp; parts fell 0.8%, less than initially estimated.
The decline in residential investment was deepened to 9.8% (-1.2% y/y) and that reduced 2Q GDP growth by 0.6 percentage points.
Real spending by the federal government fell 4.3% (+2.1% y/y), a decline which subtracted 0.3 percentage points from GDP growth.
A stronger contribution from inventories added 0.6 percentage points to GDP growth, revised from 0.4 points. Meanwhile, an improved net export deficit added a little-revised 0.4 percentage points to growth as exports grew 5.1% (7.9% y/y) and imports rose 0.6% (6.2% y/y).
The rise in the GDP chain price index was unrevised at 3.3%, the fourth straight quarter at that rate, though the domestic final sales price deflator grew 4.0% (3.7% y/y). Less food &amp; energy consumer prices rose 2.8% (2.3% y/y), initially reported at 2.9%.
The minutes of the latest FOMC meeting can be found <a href="http://www.federalreserve.gov/fomc/minutes/20060808.htm"> here</a>
Income, Poverty and Health Insurance in the United States: 2005 from the U.S. Census Bureau is available <a href="http://www.census.gov/prod/2006pubs/p60-231.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E701/@E701.HTM">Chained 2000$, % AR</a></th>
<th scope="col">2Q &#39;06 (Prelim.)</th>
<th scope="col">2Q &#39;06 (Advance)</th>
<th scope="col">1Q &#39;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">GDP</td>
<td>2.9%</td>
<td>2.5%</td>
<td>5.6%</td>
<td>3.5%</td>
<td>3.2%</td>
<td>3.9%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Inventory Effect</td>
<td>--</td>
<td>0.4%</td>
<td>-0.0%</td>
<td>0.6%</td>
<td>-0.3%</td>
<td>0.4%</td>
<td>0.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Final Sales</td>
<td>--</td>
<td>2.1%</td>
<td>5.6%</td>
<td>2.9%</td>
<td>3.5%</td>
<td>3.5%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Foreign Trade Effect</td>
<td>--</td>
<td>&nbsp;0.3%</td>
<td>-0.0%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.5%</td>
<td>-0.3%</td>
</tr>
<tr class="odd">
<td class="firstcol">Domestic Final Demand</td>
<td>--</td>
<td>1.6%</td>
<td>5.4%</td>
<td>3.0%</td>
<td>3.6%</td>
<td>4.0%</td>
<td>2.8%</td>
</tr>
<tr>
<td class="firstcol">Chained GDP Price Index</td>
<td>--</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.3%</td>
<td>3.0%</td>
<td>2.8%</td>
<td>2.1%</td>
</tr>
</tbody>
</table>
ADP Nat'l Employment Report: Growth Stable & Slower 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 30, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830c.jpg" width="353">
The Nat&#39;l Employment Report, published by the payroll processor ADP, indicated that August private nonfarm payrolls rose 107,000. The August figure from BLS will be published this Friday.
The rise in ADP&#39;s measure of July private nonfarm payrolls of 99,000 was accompanied by a 113,000 rise in private nonfarm payrolls as published by the Bureau of Labor Statistics.
ADP has compiled the estimate from its database of individual companies&#39; payroll information. Macroeconomic Advisers, LLC, the St. Louis economic consulting firm, developed the methodology for transforming the raw data into an economic indicator.
According to ADP and Macro Advisers, the correlation between the monthly percentage change in the ADP estimate and that in the BLS data is 0.90.
The ADP National Employment Report data is maintained in Haver&#39;s USECON database; historical data go back to December 2000. The figures in this report cover only private sector jobs and exclude employment in the public sector, which grew an average of 11,333 per month over the last year.
The full ADP National Employment Report can be found <a href="http://www.investquest.com/iq/a/aud/ne/news/adp083006es.htm">here</a>, and the ADP methodology is explained <a href="http://www.adpemploymentreport.com/PDF/ADPNERMethodology.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/USECON/@EB/@EB25/@EB25.HTM">LAXEPA@USECON</a></th>
<th scope="col">Aug</th>
<th scope="col">July</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">Nonfarm Private Payroll Employment (Chg.)</td>
<td>107,000</td>
<td>99,000</td>
<td>1.9%</td>
<td>1.7%</td>
<td>1.3%</td>
<td>-0.4%</td>
</tr>
</tbody>
</table>
Mortgage Applications Portend Further Weakness in Housing 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 30, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830d.jpg" width="353">
The total number of mortgage applications slipped another 0.9% last week according to the Mortgage Bankers Association. The average level of applications in August rose 2.9% from July.
Last week&#39;s decline was led by a 1.6% drop in purchase applications and applications are down 17.8% from the weekly high in January. It was sixth decline in the last seven weeks and lowered purchase apps in August 3.5% below the July average. That was the fourth consecutive m/m decline.
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 were roughly unchanged w/w and rose 13.3% in August versus July.
The effective interest rate on a conventional 30-year mortgage was about unchanged at 6.60% versus 6.58% the prior week. The peak for 30 year financing was 7.08% late in June. The rate on 15-year financing also remained unchanged at 6.32% and 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>.

<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">08/25/06</th>
<th scope="col">08/18/06</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>556.5</td>
<td>561.5</td>
<td>-23.0%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>375.9</td>
<td>382.2</td>
<td>-20.1%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,609.2</td>
<td>1,608.5</td>
<td>-26.4%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
Summer Retail Sales Slow in Japan & Italy, Firmer in Norway & Slovenia 
by <a href="/comment/Stone.html">Carol Stone</a> August 30, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830e.jpg" width="353">
Retail sales data were reported today for four very different economies. While &quot;globalization&quot; may be bringing many aspects of the world economy closer together, these reports indicate that people&#39;s shopping behavior varies widely from place to place.
In Japan, sales were off 1.7% in July from June, and remained marginally under the year-ago volume. As seen in the graph, the best we can say for Japan&#39;s retailing sector is that it is stabilizing after a protracted period of decline. We are all pleased with the growth that is developing in Japan overall, but consumers seem not yet to be participating. Louise Curley also made this point yesterday in her discussion of the monthly survey on households&#39; living expenditures. Among the retail sales segments, there is some slight growth in food, and clothing has been flat since late 2003. Downtrends are still evident at general merchandise stores and household furnishings. Motor vehicle dealers saw lower sales in July, after a basically trendless period since early 2004.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830f.jpg" width="353">
Retail sales are also fairly slow in Italy, hovering in a narrow band the past three years. In June, total sales were up a mere 0.1% from May and 1.3% from the year before. We admit to being mildly amused that the greatest strength among Italian retailers is at supermarkets and other food stores. It&#39;s good to know Italians enjoy Italian food as much as the rest of us do. Non-food stores&#39; sales are lagging, however.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060830g.jpg" width="353">
Two smaller European countries are seeing good growth in retail sales. In Norway, they were up 0.6% in July, after falling 0.8% in June. But they are up 3.6% from July 2005 and the longer-term performance shows an annualized pace of 4.6% over the past five years. In Slovenia, the growth is stronger still: 8.7% from one year ago and a 5.6% average rate of change from five years ago. Available detail indicates that Slovenians are busy buying cars and other vehicles and fueling and servicing them; those sales ran a sizable 17% above a year ago in volume terms. Standard &quot;retail trade&quot; stores report growth from the year ago of 2%.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Indexes, 2000=100, Seas Adj</th>
<th scope="col">July 2006</th>
<th scope="col">June 2006</th>
<th scope="col">May 2006</th>
<th scope="col">Year Ago</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">Japan</td>
<td>92.1</td>
<td>93.7</td>
<td>93.8</td>
<td>92.2</td>
<td>93.0</td>
<td>91.7</td>
<td>92.5</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>--</td>
<td>108.3</td>
<td>108.2</td>
<td>107.0</td>
<td>107.3</td>
<td>106.9</td>
<td>107.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Norway</td>
<td>126.16</td>
<td>125.41</td>
<td>126.46</td>
<td>119.53</td>
<td>119.34</td>
<td>114.53</td>
<td>110.68</td>
</tr>
<tr>
<td class="firstcol">Slovenia (NSA)</td>
<td>147.4</td>
<td>149.7</td>
<td>148.6</td>
<td>135.6</td>
<td>135.2</td>
<td>123.3</td>
<td>117.4</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/060829e.jpg" width="353">
The Japanese Ministry of Internal Affairs and Communication publishes a variety of data relating to household&#39;s living expenditures as part of their report on the Family Income and Expenditure Survey. There are data on the actual expenditures for all households and for workers&#39; household. In addition to total expenditures, there are a number of spending categories.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829f.jpg" width="353"> Data are given for &quot;fundamental&quot; and &quot;selective&quot; expenditures, what we would call nondiscretionary and discretionary spending. There are indexes--seasonally adjusted and not seasonally adjusted-- of the actual expenditures based on 2005=100. . Nominal and Real Indexes on a seasonally adjusted basis are available for all households, including agricultural, forestry and fisheries households and for all households excluding those households. Similar data for workers&#39; households are also available. The data start in January 2000.
The monthly data have shown a slight downward trend over the past seven years as can be seen in the first chart that shows the year to year changes in the real and nominal indexes for workers&#39; households. If the monthly data of the real index for living expenditures for all households including agriculture, forestry and fisheries households are aggregated to a quarterly basis, the quarterly data appear to show the same general movement as that shown by household consumption in the national accounts as can be seen in the second chart. Thus the living expenditure data appear to be coincident rather than leading indicators of total household consumption.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829g.jpg" width="353">
The data can be used to reveal spending patterns. For example, fundamental expenditures tend to take up between 52-58% of total spending while selected expenditures take up between 40-48% as shown in the third chart.

<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/JAPAN/@J8/@J808/@J808.HTM">Japan</a></th>
<th scope="col">Jul&nbsp; 06</th>
<th scope="col">Jun 06</th>
<th scope="col">May 05</th>
<th scope="col">Apr 06&nbsp; &nbsp;&nbsp;</th>
<th scope="col">Mar 06 &nbsp;&nbsp;&nbsp;&nbsp;</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">Household Living Expenditures</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">All Household (000 Yen)</td>
<td>292.328</td>
<td>280.824</td>
<td>292.114</td>
<td>312.872</td>
<td>313.350</td>
<td>-0.81</td>
<td>0.38</td>
<td>-1.34</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Year/Year % Change</td>
<td>-0.83</td>
<td>-1.12</td>
<td>-1.24</td>
<td>-1.56</td>
<td>-1.87</td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol"> Workers&#39; HHs&nbsp; (000 Yen) </td>
<td>320.677</td>
<td>301.978</td>
<td>310.482</td>
<td>346.086</td>
<td>340.010</td>
<td>-0.64</td>
<td>1.55</td>
<td>-1.40</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Year/Year % Change </td>
<td>-1.46</td>
<td>-2.29</td>
<td>-2.10</td>
<td>-3.88</td>
<td>-3.77</td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">Workers&#39;&nbsp; Households&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Real (2005=100)</td>
<td>96.1</td>
<td>96.7</td>
<td>97.9</td>
<td>96.2</td>
<td>95.5</td>
<td>-0.34</td>
<td>1.61</td>
<td>-1.12</td>
</tr>
<tr>
<td class="firstcol"> &nbsp; Year/Year % Change </td>
<td>-1.74</td>
<td>-2.91</td>
<td>-2.30</td>
<td>-3.90</td>
<td>-3.34</td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol"> Nominal (2005=100) </td>
<td>96.4</td>
<td>97.0</td>
<td>99.2</td>
<td>96.3</td>
<td>95.3</td>
<td>-0.70</td>
<td>1.61</td>
<td>-1.38</td>
</tr>
<tr>
<td class="firstcol"> &nbsp; Year/Year % Change </td>
<td>-1.23</td>
<td>-2.41</td>
<td>-2.19</td>
<td>-4.08</td>
<td>-3.74</td>
<td></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
</body>
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The Japanese Ministry of Internal Affairs and Communication publishes a variety of data relating to household's living expenditures as part of their report on the Family Income and Expenditure Survey. There are data on the actual [...]

Japanese Household's Living Expenditures

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829a.jpg" width="353">
According to the International Council of Shopping Centers (ICSC)-UBS survey, chain store sales rose a moderate 0.6% last week, the first w/w gain since July.
The increase helped the average sales level in August rise 0.4% above July, the first m/m gain in four months.
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.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829b.jpg" width="353">
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 a modest 0.1% (-2.4% y/y) in the latest week after several weeks of decline.
The retail price for a gallon of regular unleaded gasoline fell another eight cents to an average $2.85 (+9.0% y/y). The decline lowered the average this month to $2.95 versus a July average of $2.98. In spot market trading yesterday, regular unleaded gasoline prices fell sharply to $1.77 as Ernesto was downgraded to a tropical storm and moved out of the Gulf of Mexico. 
Oil prices similarly fell with the spot price of WTI crude down to $70.62 per bbl. (+5.1% y/y) and the price is lower today. Natural gas prices also fell to $6.52/mmbtu (-33.9% y/y) in spot trading. 
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>
<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">08/26/06</th>
<th scope="col">08/19/06</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>471.7</td>
<td>469.1</td>
<td>3.6%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


</html>

According to the International Council of Shopping Centers (ICSC)-UBS survey, chain store sales rose a moderate 0.6% last week, the first w/w gain since July. The increase helped the average sales level in August rise 0.4% above July, [...]

Weekly Chain Store Sales Up, Gasoline Prices Down

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829d.jpg" width="353">
The Conference Board reported that consumer confidence in August fell a sharp 6.9% to 99.6, its lowest level since November. The July level was revised up slightly but Consensus expectations had been for a more moderate decline in August confidence to 102.9.
During the last twenty years there has been a 52% correlation between the level of consumer confidence and the y/y change in real consumer spending. The correlation rose to 66% during the last ten years.
Consumers&#39; assessment of the present situation reversed all of the prior month&#39;s modest uptick and fell 8.0% (-0.3% y/y) to the lowest level (123.4) this year. The percentage of respondents who viewed business conditions as good (26.1%) fell though the percentage that viewed jobs as hard to get (21.1%) rose to its highest level this year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829c.jpg" width="353">
The index measuring consumers&#39; expectations fell 5.7% (-10.2% y/y). Expectations for better business conditions worsened to the lowest (15.9%) since October and fewer respondents expected more jobs.
Expectations for the inflation rate in twelve months jumped to 5.5%, the highest level since May.
The Conference Board&#146;s survey isconducted by a mailed questionnaire to 5,000 households and about 3,500 typically respond.
Wealth inequality is vast and growing from the Economic Policy Institute is available <a href="http://www.epi.org/content.cfm/webfeatures_snapshots_20060823"> 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/USECON/@EF/@EF14/@EF1401/@EF1401.HTM">Conference Board</a></th>
<th scope="col">August</th>
<th scope="col">July</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">Consumer Confidence</td>
<td>99.6</td>
<td>107.0</td>
<td>-5.6s%</td>
<td>100.3</td>
<td>96.1</td>
<td>79.8</td>
</tr>
</tbody>
</table>
</body>
</html>

The Conference Board reported that consumer confidence in August fell a sharp 6.9% to 99.6, its lowest level since November. The July level was revised up slightly but Consensus expectations had been for a more moderate decline in [...]

Consumer Confidence Fell Sharply

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829d.jpg" width="353">
The Conference Board reported that consumer confidence in August fell a sharp 6.9% to 99.6, its lowest level since November. The July level was revised up slightly but Consensus expectations had been for a more moderate decline in August confidence to 102.9.
During the last twenty years there has been a 52% correlation between the level of consumer confidence and the y/y change in real consumer spending. The correlation rose to 66% during the last ten years.
Consumers&#39; assessment of the present situation reversed all of the prior month&#39;s modest uptick and fell 8.0% (-0.3% y/y) to the lowest level (123.4) this year. The percentage of respondents who viewed business conditions as good (26.1%) fell though the percentage that viewed jobs as hard to get (21.1%) rose to its highest level this year.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829c.jpg" width="353">
The index measuring consumers&#39; expectations fell 5.7% (-10.2% y/y). Expectations for better business conditions worsened to the lowest (15.9%) since October and fewer respondents expected more jobs.
Expectations for the inflation rate in twelve months jumped to 5.5%, the highest level since May.
The Conference Board&#146;s survey isconducted by a mailed questionnaire to 5,000 households and about 3,500 typically respond.
Wealth inequality is vast and growing from the Economic Policy Institute is available <a href="http://www.epi.org/content.cfm/webfeatures_snapshots_20060823"> 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/USECON/@EF/@EF14/@EF1401/@EF1401.HTM">Conference Board</a></th>
<th scope="col">August</th>
<th scope="col">July</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">Consumer Confidence</td>
<td>99.6</td>
<td>107.0</td>
<td>-5.6s%</td>
<td>100.3</td>
<td>96.1</td>
<td>79.8</td>
</tr>
</tbody>
</table>
Weekly Chain Store Sales Up, Gasoline Prices Down 
by <a href="/comment/Moeller.html">Tom Moeller</a> August 29, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829a.jpg" width="353">
According to the International Council of Shopping Centers (ICSC)-UBS survey, chain store sales rose a moderate 0.6% last week, the first w/w gain since July.
The increase helped the average sales level in August rise 0.4% above July, the first m/m gain in four months.
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.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829b.jpg" width="353">
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 a modest 0.1% (-2.4% y/y) in the latest week after several weeks of decline.
The retail price for a gallon of regular unleaded gasoline fell another eight cents to an average $2.85 (+9.0% y/y). The decline lowered the average this month to $2.95 versus a July average of $2.98. In spot market trading yesterday, regular unleaded gasoline prices fell sharply to $1.77 as Ernesto was downgraded to a tropical storm and moved out of the Gulf of Mexico. 
Oil prices similarly fell with the spot price of WTI crude down to $70.62 per bbl. (+5.1% y/y) and the price is lower today. Natural gas prices also fell to $6.52/mmbtu (-33.9% y/y) in spot trading. 
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>
<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">08/26/06</th>
<th scope="col">08/19/06</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>471.7</td>
<td>469.1</td>
<td>3.6%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
 Japanese Household's Living Expenditures  
by <a href="/comment/Curley.html">Louise Curley</a> August 29, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829e.jpg" width="353">
The Japanese Ministry of Internal Affairs and Communication publishes a variety of data relating to household&#39;s living expenditures as part of their report on the Family Income and Expenditure Survey. There are data on the actual expenditures for all households and for workers&#39; household. In addition to total expenditures, there are a number of spending categories.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829f.jpg" width="353"> Data are given for &quot;fundamental&quot; and &quot;selective&quot; expenditures, what we would call nondiscretionary and discretionary spending. There are indexes--seasonally adjusted and not seasonally adjusted-- of the actual expenditures based on 2005=100. . Nominal and Real Indexes on a seasonally adjusted basis are available for all households, including agricultural, forestry and fisheries households and for all households excluding those households. Similar data for workers&#39; households are also available. The data start in January 2000.
The monthly data have shown a slight downward trend over the past seven years as can be seen in the first chart that shows the year to year changes in the real and nominal indexes for workers&#39; households. If the monthly data of the real index for living expenditures for all households including agriculture, forestry and fisheries households are aggregated to a quarterly basis, the quarterly data appear to show the same general movement as that shown by household consumption in the national accounts as can be seen in the second chart. Thus the living expenditure data appear to be coincident rather than leading indicators of total household consumption.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060829g.jpg" width="353">
The data can be used to reveal spending patterns. For example, fundamental expenditures tend to take up between 52-58% of total spending while selected expenditures take up between 40-48% as shown in the third chart.

<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/JAPAN/@J8/@J808/@J808.HTM">Japan</a></th>
<th scope="col">Jul&nbsp; 06</th>
<th scope="col">Jun 06</th>
<th scope="col">May 05</th>
<th scope="col">Apr 06&nbsp; &nbsp;&nbsp;</th>
<th scope="col">Mar 06 &nbsp;&nbsp;&nbsp;&nbsp;</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">Household Living Expenditures</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">All Household (000 Yen)</td>
<td>292.328</td>
<td>280.824</td>
<td>292.114</td>
<td>312.872</td>
<td>313.350</td>
<td>-0.81</td>
<td>0.38</td>
<td>-1.34</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Year/Year % Change</td>
<td>-0.83</td>
<td>-1.12</td>
<td>-1.24</td>
<td>-1.56</td>
<td>-1.87</td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol"> Workers&#39; HHs&nbsp; (000 Yen) </td>
<td>320.677</td>
<td>301.978</td>
<td>310.482</td>
<td>346.086</td>
<td>340.010</td>
<td>-0.64</td>
<td>1.55</td>
<td>-1.40</td>
</tr>
<tr class="odd">
<td class="firstcol"> &nbsp; Year/Year % Change </td>
<td>-1.46</td>
<td>-2.29</td>
<td>-2.10</td>
<td>-3.88</td>
<td>-3.77</td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">Workers&#39;&nbsp; Households&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Real (2005=100)</td>
<td>96.1</td>
<td>96.7</td>
<td>97.9</td>
<td>96.2</td>
<td>95.5</td>
<td>-0.34</td>
<td>1.61</td>
<td>-1.12</td>
</tr>
<tr>
<td class="firstcol"> &nbsp; Year/Year % Change </td>
<td>-1.74</td>
<td>-2.91</td>
<td>-2.30</td>
<td>-3.90</td>
<td>-3.34</td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol"> Nominal (2005=100) </td>
<td>96.4</td>
<td>97.0</td>
<td>99.2</td>
<td>96.3</td>
<td>95.3</td>
<td>-0.70</td>
<td>1.61</td>
<td>-1.38</td>
</tr>
<tr>
<td class="firstcol"> &nbsp; Year/Year % Change </td>
<td>-1.23</td>
<td>-2.41</td>
<td>-2.19</td>
<td>-4.08</td>
<td>-3.74</td>
<td></td>
<td></td>
<td></td>
</tr>
</tbody>
</table>


</html>

Surging orders for computers and electronics propelling durable goods orders

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

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

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

US is big leader in global surge in private AI investment

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

Sharply rising share of AI-related jobs

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

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

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

Cost of transporting crude oil has soared to series high

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

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

Is recent drop in sentiment signaling softer growth ahead?

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

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

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

Global freight costs are on the rise while supply chain pressures are contained

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Tian Yong Woon

In this week's Letter, we explore the significant pullback in oil prices that followed the US-Iran memorandum of understanding and consider its broader economic implications. The agreement saw a fragile ceasefire ensue and a gradual resumption of shipping flows through the Strait of Hormuz (chart 1). We acknowledge that this major pullback will certainly be welcome to policymakers across the region and beyond. Previously elevated energy prices had added to the fiscal burdens of governments and sharpened the dilemma facing central banks (chart 2). That dilemma pits the need to rein in inflation against the risk of choking off economic growth. That said, while one source of inflationary pressure seems to be ebbing, another looks to be emerging on the horizon. It stems from a potential "Super El Niño" event, which meteorologists have been warning about for some time now. Asia sits at the centre of such risks, as past strong El Niño events have directly and adversely affected crop production (chart 3). The impact is not limited to potential surges in headline inflation via food supply shocks, especially in Asia. It extends directly to growth as well (chart 4), given the nontrivial share of GDP that agriculture still commands in many Asian economies (chart 5). Should price pressures simply rotate from energy to food, government subsidies may follow suit (chart 6). Central bankers, for their part, may find themselves unable to ease off the tightening pedal just yet. Some Asian economies, however, would still manage to offset such a growth shock through other engines. Electronics and semiconductors, buoyed by the current AI upcycle, offer one such cushion for the more fortunate. For others, lacking such offsets, the agricultural hit may simply have to be borne in full.

**The US-Iran conflict and oil prices**
The recent memorandum of understanding between the US and Iran, aimed at working towards a final deal, has already brought visible relief to crude oil markets (chart 1). This relief has held despite the renewed tensions that have followed the agreement, which markets seem to have largely looked past. The easing in prices should go a long way towards unwinding the inflation concerns that elevated oil prices had previously stoked. Much of the pullback reflects anticipation of the substantial supply now expected to return to global markets. Yet some shipping trackers, such as the IMF's, already point to a marked pickup in traffic through the Strait of Hormuz. Even so, those volumes still remain well below the levels seen before the conflict began in the region. 

260629T1.jpg

**Oil prices and inflation in Asia**
Should this normalisation of shipping flows through the Strait of Hormuz persist, it would support a corresponding easing in oil prices and energy inflation. That moderation in energy costs would, in turn, help bring down broader headline inflation across the economy. As chart 2 shows, energy has been a large contributor to headline inflation in recent years, though other important forces have been at play too. Such an outcome, in which restored oil supply cools energy inflation, would be a welcome development for central bankers. They face the delicate task of reining in price pressures without tightening policy so far that growth stalls or tips into contraction. That said, while one driver of price pressures now seems to be ebbing, albeit not without the risk of renewed tensions, another source of inflation is building on the horizon.

260629T2.jpg

**Risks of a “Super El Niño”**
As meteorological agencies have warned for some time, the world may be on the cusp of a Super El Niño. The probability of such an event has risen sharply in recent months. Were it to materialise, it would unleash a range of disruptions from the second half of this year, chief among them shifts in weather and climate patterns that can severely dent crop yields. Asian staples such as rice, wheat and palm oil are especially exposed, since strong El Niño events tend to bring drier conditions and reduced rainfall, in turn cutting output across affected economies in the region. Chart 3 illustrates just how tightly some crops are bound to these conditions: SOI readings correlate closely with certain economies' production, notably Thailand's rice harvest, underscoring how dependent such output remains on the weather. These supply shortfalls would then feed inflationary pressures through the food channel. So central bankers may not be able to rest entirely easy following the easing of tensions between the US and Iran, finding themselves wrestling with a fresh set of emerging inflation risks instead.

260629T3.jpg

Delving deeper, an examination of recent strong El Niño episodes against the growth of Asian economies' agricultural sectors shows that extreme weather weighs not just on food prices but on economic growth itself. As chart 4 shows, previous major El Niño episodes—notably in 2014–16 and 2023–24—were associated with weaker agricultural growth across parts of Asia, with India and Thailand appearing particularly vulnerable. This is understandable, since these episodes coincided with reduced crop production and, in turn, lower crop revenue. Should these past episodes serve as a gauge and given that the coming event is potentially the worst on record, these economies stand to suffer once more should it hit as hard as feared.

260629T4.jpg

Beyond the sensitivity of individual economies to extreme El Niño events, vulnerability also depends on the size of the agricultural sector itself. Economies where agriculture accounts for a larger share of output are naturally more exposed to weather-related disruptions. As chart 5 shows, economies such as India, Indonesia and, to a lesser extent, Vietnam carry a comparatively higher share of agriculture in their GDP, which presents a further source of risk. That said, this dimension should not be read in isolation, since the eventual impact would turn on a combination of factors: the degree of exposure, the intensity of El Niño's effect on each economy's agricultural output, and the actual weather conditions that come to pass.

260629T5.jpg

Bringing it all together, the recent de-escalation between the US and Iran and the early normalisation of flows through the Strait of Hormuz are certainly welcome news. Businesses, consumers and policymakers alike stand to benefit from the relief that lower energy prices would bring. Yet the formation of extreme El Niño conditions presents a looming inflation risk over the months ahead. It may displace energy as the dominant driver, shifting the pressure from the energy channel to the food channel. For Asia's central bankers, this could mean they are unable to ease off the tightening pedal just yet (chart 6). Food inflation may simply pick up where energy inflation leaves off, keeping price pressures elevated for longer. Regional governments, too, may have to redirect funds from energy subsidies to food subsidies should the supply shock play out. On growth, however, the picture may prove more uneven across the region than a single narrative suggests. Economies exposed to the current AI upcycle could keep leaning on those sectors for continued support. Those less exposed, by contrast, may simply have to absorb the hit to agriculture with little to offset it.

260629T6.jpg

Asia

Economic Letter from Asia: Oil Down, Emerging Risks

Winnie Tapasanun

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The U.S. international trade deficit in goods ballooned to a larger-than-expected $105.75 billion in May after narrowing to $83.01 billion in April, according to the advance estimate from the U.S. Census Bureau. The May reading marked the third widening in the goods trade deficit in four months, exceeding a $91.55 billion shortfall in May 2025. A deficit of $84.0 billion for May had been expected by the Action Economics Forecast Survey. The deficit reached a low of $61.44 billion in October 2025 (the smallest since February 2020) and a record high of $158.73 billion in March 2025. On a quarterly basis, the deficit averaged $94.38 billion so far in Q2'26 versus $81.96 billion in Q1'26.

Total goods exports fell 5.4% m/m (+14.7% y/y) to $207.67 billion in May, the first monthly fall since December and a three-month low, following a 3.8% rise to a record-high $219.52 billion in April. Exports were up 27.7% from a June 2023 low. The m/m fall in exports in May reflected declines of 9.2% (-5.0% y/y) in nonfood consumer goods excluding autos, 7.0% (+23.2% y/y) in industrial supplies & materials, 6.8% (+19.5% y/y) in other goods, and 5.0% (+14.8% y/y) in capital goods excluding autos. To the upside, exports of foods, feeds & beverages (+3.9%; +19.1% y/y) and automotive vehicles & parts (+0.5%; -3.6% y/y) rebounded m/m in May.

Total goods imports, up for the fourth consecutive month, rose 3.6% m/m (15.0% y/y) to $313.43 billion in May, after a 2.0% increase to $302.53 billion in April, marking the highest level since the March 2025 record high of $340.11 billion. Imports were up 25.0% from a March 2023 low. The m/m rise in imports in May was broad-based across all end-use categories, led by an 11.5% gain (22.0% y/y) in other goods, followed by increases of 6.3% (1.4% y/y) in automotive vehicles & parts, 5.7% (-9.1% y/y) in nonfood consumer goods excluding autos, 4.8% (11.7% y/y) in industrial supplies & materials, 4.3% (-0.2% y/y) in foods, feeds & beverages, and 0.4% (41.9% y/y) in capital goods excluding autos. 

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- Deficit: $105.75 bil. in May, up $22.75 bil. (+27.4%) from April’s $83.01 bil.
- Exports -5.4%, first m/m decline since Dec., led by a 9.2% drop in nonauto consumer goods exports.
- Imports +3.6%, fourth straight m/m rise to highest level since Mar. ’25, driven by an 11.5% gain in imports of other goods.

U.S. Goods Trade Deficit Balloons in May, Largest Since March ’25

Robert Brusca

260626E.jpg

In June, there's a slight divergence in the performance of industry climate and service sector climate, although broadly the two sectors have seen their composite indexes moving in more or less the same direction. Since 2024, the industry survey has moved up slightly after falling faster than the services gauge. The services survey has been locked in a slow trend of deterioration, largely since it reached a peak in 2021 in the wake of COVID.

The industry climate gauge has a 30.8 percentile standing, but the recent production trend, while declining, logs a more substantial 42.8 percentile standing. Contributing survey members find their own industry ‘likely trend’ much weaker, at a 21.2 percentile standing. Demand overall, however, has standings above the 50th percentile, putting overall and foreign orders & demand each above their respective medians for this period of ranking back to 2001. Inventories have a strong 81-percentile ranking. Prices are extremely strong, with 87-percentile and 86-percentile standings for respondents for their personal industry trend for prices as well as for the overarching manufacturing sector estimate of prices. Higher prices seem to be the one thing that everyone can agree on by a large margin.

260626.jpg

As for services, the service climate index improved slightly to 93.4 in June from 92.6 in May. The three-month moving average was weaker in June than in May as well; the 12-month moving average has been stuck at its current level for a number of months. The outlook in June improved slightly to a reading of -12 from -15 in May, but the outlook ranking is still a weak 26.8 percentile standing. The three-month expectations and observations of past sales trends haven't changed much in the last two months, but there has been a slight improvement for sales expectations. However, both sales metrics have low 20th percentile standings. Sales prices have deteriorated slightly in June compared to May for both the observed and the expected trends, but prices have standings above their 50th percentiles, logging above-median performance. Employment over the last three months has weakened noticeably, and expected employment is weaker by a small amount.

In terms of rankings, all of the sector rankings are below the 50th percentile on all of these observations, including the climate headline except for sales prices where both the past three-month observed trend and the expected trend have readings above their respective 50th percentiles, indicating past and expected price pressures in excess of normal.

260626 2.jpg

**Assessment**
On balance, the readings for the French industry, manufacturing sector and services are not encouraging. In addition, concerns about prices linger. The services sector, those concerns seem moderate compared to the concerns in manufacturing.

The hot war continues between Ukraine and Russia, while in the Middle East there was talk of some improvement and a potential peace deal between the United States and Iran, but every time there is some talk of a breakthrough, there appears to be a breakdown. In the most recent development, Iran has asserted its right to control traffic through the Strait of Hormuz, and it's not clear how that demand would ever be consistent with the U.S. allowing a ceasefire. It appears that Iran may have traded its irreconcilable demand for nuclear weapons for a more pragmatic and real-world argument—that it will control the traffic through the Strait of Hormuz simply because it can—and it still is doing exactly that, even after all the destruction it suffered.

Stopping Iran from controlling the Strait would take a commitment to restart the war. All this makes me personally more pessimistic. I think Iran sees the need for Trump to cut a deal and stop the war before the U.S. mid-term elections, and it is pressing that need to its advantage. Trading its nuclear ambitions for real world control of the Strait would elevate Iran’s power from being dangerous but ethereal to a real world event with constant consequences.

France

French Industry and Services Confidence Diverge in June

Andrew Cates

**Equity Momentum and Global Surprises — Still Moving Together**
One of the more telling features of global equity markets in 2026 has been the persistence of the correlation between non-US equity momentum and global growth and inflation surprise indices. Equity markets outside the United States have generally prospered when economic data have beaten consensus expectations and when inflation surprises have been negative  — a combination that has historically been associated with stronger corporate earnings and a more benign policy backdrop in economies other than the US. That correlation has held reasonably well through the turbulence of the past few months, even as the Middle East conflict introduced significant noise into both the economic data and the financial market signal. What the chart reveals this week is a picture of moderate but not alarming deterioration: global growth surprises have softened at the margin, consistent with the energy cost headwinds that have weighed on European and Asian activity, but the relationship between equity momentum and the broader data pulse remains intact. It is a signal that market participants continue to track economic fundamentals rather than purely geopolitical newsflow — a modestly reassuring sign that the underlying framework for assessing the global cycle has not broken down.

260625Z1.jpg

**The Fed Decouples: Why Oil and US Two-Year Yields Have Parted Ways**
For much of 2026, oil prices and US two-year Treasury yields moved in close alignment. The logic was straightforward: higher oil prices raised inflation expectations, which in turn pushed market participants to anticipate a more hawkish Federal Reserve, lifting short-dated yields in the process. That relationship held with notable consistency through the March escalation and the months that followed, as energy market shocks and monetary policy expectations fed off each other. What this week’s chart captures is a striking breakdown in that correlation. As oil prices have fallen on the back of the US-Iran memorandum of understanding and the associated unwinding of the geopolitical risk premium, US two-year yields have not followed them lower. The reason is last week’s Federal Reserve meeting. Under new chair Kevin Warsh, the Fed delivered a hawkish dot plot that shifted the median year-end projection to a hike, making clear that the easing cycle previously priced by some market participants is no longer the central scenario. The message is important: the deflationary impulse from lower oil prices is being offset — at least in the Fed’s framing — by persistent underlying inflation pressures and a commitment to keeping policy tight.

260625Z2.jpg

**Flash PMIs Signal Easing Supply Chain Stress and Softer Price Pressures**
June’s flash PMI surveys, released this week across the major advanced economies, provide a timely read on how the global manufacturing and services sectors are absorbing the shifting macro backdrop. Two findings stand out. First, supplier delivery times have improved (or not lengthened as much as they had in the prior two months). This finding coheres naturally with the broader narrative: lower oil prices reduce transport and energy input costs, while the resumption of Strait of Hormuz shipping flows — examined in more detail in chart 4 — is beginning to reduce the freight disruption and re-routing costs that had been building since the conflict escalated. Second, output price inflation in manufacturing has softened, suggesting that some of the pipeline pressure from earlier energy cost spikes is beginning to fade.

260625Z3.jpg

**Hormuz Traffic and Oil: A Coherent Story of Tentative Normalisation**
The recent US-Iran memorandum of understanding to work towards a final deal, though not without subsequent flare-ups, has already brought relief to markets, most visibly in crude oil prices. This should go a long way towards unwinding the inflation-related concerns that previously elevated oil prices had stoked. While the pullback has owed much to anticipation of the glut of pent-up supply expected to follow, certain trackers of shipping volume through the Strait of Hormuz, such as the IMF’s, already point to a marked pickup in traffic, even if it remains well below pre-conflict levels. Should this normalisation of shipping flows persist, it would lend continued justification to a corresponding easing in oil prices, energy-related inflation and, by extension, headline inflation — a welcome development for central banks grappling with the delicate balancing act of reining in price pressures without dampening growth too sharply.

260625Z4.jpg

**South Korea’s Trade Data Flag a Modest Softening in Global Demand**
South Korea’s trade data serve as one of the global economy’s most useful early warning systems. As one of the world’s most open economies, with exports spanning semiconductors, petrochemicals, steel, automobiles and consumer electronics, South Korea’s monthly trade figures provide a timely and broad-based read on the state of global demand. This week’s data show a slightly softer picture than the strong prints that characterised much of the first quarter. Headline export growth has moderated at the margin, and crucially, semiconductor exports — which had been the most dynamic component of the trade data, propelled by AI-related chip demand — have also come in a touch below the exceptional run rates seen earlier in the year. This is not, in itself, alarming: some moderation from peak rates was always to be expected, and the semiconductor cycle remains structurally supported by the scale of AI infrastructure investment globally.

260625Z5.jpg

**A Super El Niño on the Horizon — The Next Inflation Risk**
With that said, while one driver of price pressures seems to be ebbing for now — albeit not without the risk of future flare-ups — another potential inflationary risk looms on the horizon. The chart illustrates the transmission mechanism. It plots Thailand’s milled rice production (left axis) against Australia’s Southern Oscillation Index (right axis), a well-established barometer of El Niño and La Niña conditions. The convention is straightforward: SOI readings persistently above +8 indicate La Niña, associated with above-average rainfall across Southeast Asia and broadly supportive crop conditions; readings persistently below -8 signal El Niño, which brings drought stress and reduced water availability across the region. The historical relationship is striking. The sharp negative SOI troughs around 2002–03, 2009–10 and most dramatically around 2015 all coincide with visible falls in Thai milled rice output. The severe El Niño of 2014–16 produced both the deepest SOI trough in the series and the sharpest single drop in rice production, to below 24,000 thousand tonnes. As meteorological authorities have been warning for some time, the world appears to be facing an imminent Super El Niño event, with the SOI already drifting back towards negative territory in recent months. Were a significant El Niño to materialise in the second half of this year, the implications for Thai rice output — and by extension for Asian food price inflation — could be substantial. Central bankers, in other words, may find themselves having to wrestle with a new inflationary impulse just as they had begun to hope the worst was behind them.

260625Z6.jpg

The mood in global financial markets this week is more settled, though “settled” should not be confused with resolved. The US-Iran memorandum of understanding, signed last week, has continued to do its work: oil prices have fallen further, Strait of Hormuz shipping traffic has picked up measurably, and the risk premium that had been embedded in energy markets since the conflict escalated in March is now visibly unwinding. That is a material development for the inflation outlook, and central bankers will be watching carefully. Yet the picture is not without its complications. Technology stocks — the most conspicuous beneficiary of the prevailing low-rate, high-growth narrative — have been subject to renewed jitters this week, as investors grow more attentive to stretched valuations and the implications of a Federal Reserve that, under new chair Kevin Warsh, is no longer signalling the easing cycle previously priced into markets. Against this backdrop, this week’s charts draw on the latest data to assess where the global economic cycle stands. Equity momentum outside the United States has tracked closely with global growth and inflation surprises, a correlation that tells us something important about how activity is being perceived (chart 1). Meanwhile, the breakdown of the previously tight relationship between oil prices and US two-year yields is arguably one of the more telling market signals of recent weeks (chart 2). June’s flash PMI surveys point to easing supply chain stress and softer output price inflation in manufacturing — a finding that chimes naturally with lower crude prices and the resumption of Hormuz flows (chart 3). The Strait of Hormuz itself deserves a closer look: traffic data and the mechanics of the oil price pullback are telling a coherent story that supports the PMI picture (chart 4). South Korea’s trade data, including semiconductors, offer a slightly softer read on global demand momentum at the margin (chart 5). And looming on the horizon, one new risk is drawing the attention of meteorological authorities: a Super El Niño event whose probability has been rising, with potentially significant implications for food commodity prices and Asian agriculture (chart 6).

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Charts of the Week: Calmer Waters, New Currents

Michael J. Moran

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The price index for personal consumption expenditures rose 0.4% in May, although the measure almost rounded up to 0.5% (0.4498%). May marked the sixth consecutive month with headline prices increasing 0.3% or more. This series of changes has pulled the year-over-year inflation rate to 4.1%, up from 2.3% just over one year ago (April 2025). Energy prices, of course, have been the most important factor behind the acceleration in inflation, and they remained an issue in May, increasing 4.0% after advances of 3.9% and 11.6% in the prior two months. Food prices have moved erratically in the past year, with jumps and lulls leaving an average monthly increase of 0.2%. The noise was evident in recent months, with food prices increasing only 0.1% in May after a jump of 0.5% in April.

Core prices also have contributed to the pickup in inflation. After averaging monthly increases of 0.24% during 2025, core prices have increased at an average rate of 0.34% so far this year. The year-over-year increase in core inflation totaled 3.4% in May, up from a recent low of 2.6% in April of last year. Both the headline and core inflation rates are uncomfortably above the Federal Reserve’s target of 2.0%.

Total personal income rose briskly in May (0.7%). A surge in farm income played an important role (up 125% month-to-month, most likely reflecting government support payments), but nominal results also were firm elsewhere (up 0.5% ex farm income). Inflation reduced the purchasing power of this income gain, but aggregate income still advanced slightly in real terms (0.2%).

Given the recent surge in energy-driven inflation, May marked only the second monthly increase in real income so far this year. Tight budgets have dampened consumer spending, but individuals have not pulled to the sidelines. Real consumption expenditures rose 0.5% (annual rate) in the first quarter, and results for April and May suggest that real PCE is on track to increase 1.5% to 2.0% in the second quarter.

Households have managed to remain moderately active in their spending by limiting their saving. The saving rate has drifted lower since early 2024 moving to 3.0% in May (chart, below right). The erosion in saving perhaps seems reckless, but some of the reduction could be a response to the strength in the equity market, where wealth gains have possibly limited the incentive to save. Also, larger-than-normal tax refunds this year because of tax cuts in the One Big Beautiful Budget Act have allowed many households to spend actively despite modest increases in real income.

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

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- Energy prices rose sharply for the third consecutive month; core prices were unsettling as well.
- A jump in nominal income translated to a modest advance in real terms, allowing consumers to remain reasonably active.

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