Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060628a.jpg" width="353">
The total number of mortgage applications fell a sharp 6.7% last week after a slight decline the prior week. The drop pulled the average number of applications 1.8% in June below the May average and applications were 32.0% below the year ago level.
Applications to refinance cratered 7.5% last week, the fourth w/w drop this month. Refis in June were 3.2% below the May average and 46.4% below the year earlier level.
Purchase applications also fell sharply from the previous week. The 6.2% drop lowered the June average 1.3% below May and 18.5% below the year ago level.
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.
The effective interest rate on a conventional 30-year mortgage rose another twelve basis points to 7.08%, the highest level since April 2002. The rate on 15-year financing also surged ten basis points to 6.75%. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060628b.jpg" width="353">
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 Price of Residential Land in Large U.S. Citiesfrom the Federal Reserve Board is available <a href="http://www.federalreserve.gov/pubs/feds/2006/200625/200625pap.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/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">06/23/06</th>
<th scope="col">06/16/06</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>529.6</td>
<td>567.6</td>
<td>-32.0%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>389.0</td>
<td>414.8</td>
<td>-18.5%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,356.0</td>
<td>1,466.1</td>
<td>-46.4%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
</body>
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The total number of mortgage applications fell a sharp 6.7% last week after a slight decline the prior week. The drop pulled the average number of applications 1.8% in June below the May average and applications were 32.0% below the [...]

Mortgage Applications Fell Hard, Rates Above 7%

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060628a.jpg" width="353">
The total number of mortgage applications fell a sharp 6.7% last week after a slight decline the prior week. The drop pulled the average number of applications 1.8% in June below the May average and applications were 32.0% below the year ago level.
Applications to refinance cratered 7.5% last week, the fourth w/w drop this month. Refis in June were 3.2% below the May average and 46.4% below the year earlier level.
Purchase applications also fell sharply from the previous week. The 6.2% drop lowered the June average 1.3% below May and 18.5% below the year ago level.
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.
The effective interest rate on a conventional 30-year mortgage rose another twelve basis points to 7.08%, the highest level since April 2002. The rate on 15-year financing also surged ten basis points to 6.75%. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060628b.jpg" width="353">
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 Price of Residential Land in Large U.S. Citiesfrom the Federal Reserve Board is available <a href="http://www.federalreserve.gov/pubs/feds/2006/200625/200625pap.pdf"> 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/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">06/23/06</th>
<th scope="col">06/16/06</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>529.6</td>
<td>567.6</td>
<td>-32.0%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>389.0</td>
<td>414.8</td>
<td>-18.5%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,356.0</td>
<td>1,466.1</td>
<td>-46.4%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
Wider Current Account Deficit in Lithuania; Slight Improvement in Bosnia & Herzegovina 
by <a href="/comment/Stone.html">Carol Stone</a> June 28, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060628c.jpg" width="353">
Balance of payments reports for two emerging European economies show a mixed picture for Q1 2006. In Lithuania, the current account has widened markedly over the last year, in rough parallel with gaping trade accounts. By contrast, Bosnia and Herzegovina are seeing a steadier trend in both current account and trade balances, although these not-seasonally adjusted figures are fairly erratic from quarter to quarter.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060628d.jpg" width="353">
In Lithuania, imports surged in the spring of last year and continued rising through the summer. Until 2003, the usual seasonal pattern saw them ease in the summer quarter after their spring bounce. We presume the latest move is energy related. Fortunately, exports have been stronger in the last year than has been typical, but still not so vigorous as imports. Also fortunate have been larger surpluses on services and transfer receipts which have helped offset the larger trade deficit. On the financial accounts side of the balance of payments ledger, &quot;other investment&quot;, generally bank loans, has increased and even Lithuania&#39;s capital account has shown a persistent and non-trivial surplus. However, some financing has also come from a decrease in foreign exchange reserves, not likely a comfortable position for the central bank.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060628e.jpg" width="353">
In Bosnia, the rise in imports has been much more temperate. Indeed, in Q1, imports were actually very slightly smaller than in Q1 2005. Combined with a firm uptrend in exports, the goods balance has deteriorated only modestly, rather than losing major ground as in some other countries. Financing for the goods deficit has come from a sustained inflow of current transfers (see graph) and from inflows of direct investment and &quot;other&quot; investment. Interestingly, Bosnia &amp; Herzegovina has virtually no portfolio investment. There has been a moderate run-off of foreign exchange reserves.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060628f.jpg" width="353">
Both of these countries peg their currencies to the euro. Lithuania is a member of the EU-25, the segment added in 2004 that retain their own local currency, here the litas, which is 3.4528 to the euro. Bosnia has linked its currency, the Convertible Marka, to the euro since the inception of the euro in 1999. Monthly data for it are maintained by the Central Bank of Bosnia &amp; Herzegovina from 2002. All of these data are contained in Haver&#39;s EMERGECW database and some data for Lithuania are also in EUROSTAT.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">&nbsp;</th>
<th scope="col">Q1 2006</th>
<th scope="col">Q4 2005</th>
<th scope="col">Q1 2005</th>
Quarterly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2005</td>
<td>2004</td>
<td>2003</td>
</tr>
<tr>
<td class="firstcol">Lithuania: Mil Litai, SA</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Current Account</td>
<td>-2035.7</td>
<td>-1308.4</td>
<td>-1013.1</td>
<td>-1234.5</td>
<td>-1202.5</td>
<td>-963.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Trade Balance</td>
<td>-2529.1</td>
<td>-2202.6</td>
<td>-1569.0</td>
<td>-1982.0</td>
<td>-1657.7</td>
<td>-1285.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Financial Account Balance</td>
<td>1650.5</td>
<td>907.9</td>
<td>340.1</td>
<td>931.4</td>
<td>878.1</td>
<td>789.6</td>
</tr>
<tr>
<td class="firstcol">Bosnia: Mil. Convertible Marka, NSA</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr class="odd">
<td class="firstcol">Current Account</td>
<td>-221.5</td>
<td>-1154.4</td>
<td>-424.3</td>
<td>-829.0</td>
<td>-702.5</td>
<td>-705.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Trade Balance</td>
<td>-1089.4</td>
<td>-2387.2</td>
<td>-1400.1</td>
<td>-1958.3</td>
<td>-1798.2</td>
<td>-1795.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Financial Account Balance</td>
<td>44.8</td>
<td>688.8</td>
<td>234.1</td>
<td>412.8</td>
<td>276.1</td>
<td>371.5</td>
</tr>
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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/060627e.jpg" width="353">
Germany, Italy and the Netherlands reported increased business confidence today. We noted yesterday that confidence in Belgium had also increased. France is the only Euro Zone country that, so far, has seen a decline in business confidence.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627f.jpg" width="353">
The German IFO measure of business confidence rose 1.0% from 105.7 to 106.8 (2000=100) in June, the highest level since February, 1991. In terms of the diffusion index the excess of optimists over pessimists rose 2.3 percentage points from 10.4% in May to 12.7% in June. In the Netherlands, where business confidence is measured by the excess of optimists over pessimists, the percent balance rose 3.1 percentage points from 3.3% to 6.4%. The first chart compares the percent balances indicators for Germany and the Netherlands. Business confidence in Italy, which has been lower than that in Germany, rose by almost 2% in June from May to reach 98.9 (2000=100), the highest level since December, 2000. The second chart compares the indexes of business confidence in Germany and Italy.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627g.jpg" width="353">
Italy and the Netherlands also reported on consumer confidence. The Italian consumer lost some confidence as the indicator of consumer confidence fell 0.7% from 107.1 (2000=100) in May to 106.8 in June. The Dutch consumer, on the contrary, became more optimistic in June as the optimists exceeded the pessimist by 5% in contrast to May when the pessimists exceeded the optimists by 4%. The third chart compares consumer confidence in Italy and in the Netherlands.
The rise in business confidence in these countries has occurred in spite of strength in the euro, continued high oil prices and the likelihood of a rise in the European Central Bank&#39;s main lending interest rate. It may be that the biggest threat to confidence is the possibility of greater than expected increases in ECB&#39;s lending rate. The rate is currently 2.75%, having risen by from the low 2% in three increments of 25 basis points in December of last year and in March and June of this year. In the past week six council members of the ECB have hinted that the bank may accelerate interest rate increases to combat inflationary pressures. And just today, in its Annual Report the Bank of International Settlements (BIS) called on central bankers to raise interest rates to combat these same global inflationary pressures. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Confidence Measures</th>
<th scope="col">Jun&nbsp; 06</th>
<th scope="col">May 06</th>
<th scope="col">Jun 05</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y %</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Germany&nbsp;Business Confidence</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Index (2000=100)</td>
<td>106.8</td>
<td>105.7</td>
<td>93.3</td>
<td>1.04</td>
<td>14.47</td>
<td>95.5</td>
<td>95.5</td>
<td>91.8</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; % Balance</td>
<td>12.7</td>
<td>10.4</td>
<td>-14.1</td>
<td>2.3*</td>
<td>24.5*</td>
<td>-9.7</td>
<td>-9.9</td>
<td>-17.2</td>
</tr>
<tr>
<td class="firstcol">Italy Business&nbsp;&nbsp;&nbsp; Confidence (2000=100)</td>
<td>98.9</td>
<td>92.0</td>
<td>84.8</td>
<td>1.96</td>
<td>16.62</td>
<td>87.5</td>
<td>89.5</td>
<td>87.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Italy Consumer Confidence (2000=100)</td>
<td>106.8</td>
<td>107.6</td>
<td>102.9</td>
<td>-0.74</td>
<td>3.79</td>
<td>104.2</td>
<td>101.4</td>
<td>106.1</td>
</tr>
<tr>
<td class="firstcol">Netherlands Business Confidence (% Balance&nbsp;</td>
<td>6.4</td>
<td>3.3</td>
<td>-1.7</td>
<td>3.1*</td>
<td>8.1*</td>
<td>0.6</td>
<td>-0.1</td>
<td>-5.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Netherlands Consumer Confidence (% Balance)&nbsp;</td>
<td>5</td>
<td>-4</td>
<td>-26</td>
<td>9*</td>
<td>31*</td>
<td>-22</td>
<td>-25</td>
<td>-35</td>
</tr>
</tbody>
</table>
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Germany, Italy and the Netherlands reported increased business confidence today. We noted yesterday that confidence in Belgium had also increased. France is the only Euro Zone country that, so far, has seen a decline in business [...]

Business Confidence in Europe Still Strong in Spite of Euro Strength, High Oil Prices and Rising Interest Rates

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627a.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales fell 0.4% last week after having been unchanged the prior period.
Sales in June are 0.2% below the May average which fell 0.4% from April. 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 fell 0.3% (-2.0% y/y) during the latest period after three consecutive weeks of increase.
Parsing Recent Inflation Data from the Federal Reserve Bank of Dallas can be found <a href="http://dallasfed.org/eyi/usecon/archived/0606inflation.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">06/24/06</th>
<th scope="col">06/17/06</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>471.6</td>
<td>473.6</td>
<td>4.1%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


</html>

The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales fell 0.4% last week after having been unchanged the prior period. Sales in June are 0.2% below the May average which fell 0.4% from April. During [...]

Chain Store Sales Fell

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627c.jpg" width="353">
Consumer confidence as reported by the Conference Board improved 1.0% in June to 105.7. The rise recovered a piece of the 4.6% May decline that was revised slightly shallower. It contrasted to Consensus expectations for a further decline to 103.5 and compared to a 4.2% rise in the University of Michigan&#39;s June Index of Consumer Sentiment.
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 fell for a second month and posted a 1.0% decline (+9.9% y/y). The percentage of respondents who viewed business conditions as good (26.8%) fell for a second month and the percentage that viewed jobs as hard to get (19.9%) reversed the prior month&#39;s rise.
The index of consumers&#39; expectations rose a modest 2.9% (-9.1% y/y) and recovered just part of the May decline. Expectations for business conditions in six months improved slightly as did expectations that the number of jobs would rise. Expectations for the inflation rate in twelve months slipped to 5.1% from 5.6% expected in May.
The Conference Board&#146;s survey isconducted by a mailed questionnaire to 5,000 households and about 3,500 typically respond.

<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">June</th>
<th scope="col">May</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>105.7</td>
<td>104.7</td>
<td>-0.5%</td>
<td>100.3</td>
<td>96.1</td>
<td>79.8</td>
</tr>
</tbody>
</table>
</body>
</html>

Consumer confidence as reported by the Conference Board improved 1.0% in June to 105.7. The rise recovered a piece of the 4.6% May decline that was revised slightly shallower. It contrasted to Consensus expectations for a further [...]

Consumer Confidence Improved A Bit

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627b.jpg" width="353">
 Total existing home sales fell 1.2% during May to 6.670M following a little revised 2.2% decline during April. Consensus expectations had been for sales of 6.62M and the figures were reported by the National Association of Realtors.
Sales of single-family homes fell 1.5%, down for the fourth month this year. The data cover sales closed in the latest and previous months and contrast to the new home sales (up in May) data which count sales at the signing of a contract.
In May sales of existing single family homes were down 8.1% versus the peak last June and for the first five months of this year were off 4.0% from the 2005 average.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627d.jpg" width="353">
Sales were weakest last month in the Northeast which posted a 4.8% drop (-5.9% y/y) and in the Midwest where they fell 4.3% (-5.6% y/y). In the South (-2.8% y/y) and in the West (-14.1% y/y), May sales were unchanged from the prior month.
The median price of an existing single-family home rose 3.2% (6.4% y/y). The price figures are not seasonally adjusted.
The inventory of unsold existing homes rose 5.5% and was up 41.0% from one year earlier. The supply of unsold single family homes was up 36.3% y/y and the supply of condos &amp; coops for sale was up 73.0%.
The latest release from the National Association of Realtors is available <a href="http://www.realtor.org/research.nsf/pages/EHSPage?OpenDocument">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/@E9/@E905/@E90501/@E90501.HTM">Existing Home Sales (000, AR)</a></th>
<th scope="col">May</th>
<th scope="col">April</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 Home Sales</td>
<td>&nbsp;6,670</td>
<td>6,750</td>
<td>-6.6%</td>
<td>7,064</td>
<td>6,722</td>
<td>6,176</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single Family Home Sales</td>
<td>5,820</td>
<td>5,910</td>
<td>-6.6%</td>
<td>6,170</td>
<td>5,912</td>
<td>5,443</td>
</tr>
<tr class="odd">
<td class="firstcol">Single Family Median Home Price (000) </td>
<td>$229.7 </td>
<td>$222.6 </td>
<td>6.4% </td>
<td>$206.3</td>
<td>$182.8 </td>
<td>$169.1 </td>
</tr>
</tbody>
</table>


</html>

Total existing home sales fell 1.2% during May to 6.670M following a little revised 2.2% decline during April. Consensus expectations had been for sales of 6.62M and the figures were reported by the National Association of Realtors. [...]

U.S. Existing Home Sales Decline As Expected

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627b.jpg" width="353">
 Total existing home sales fell 1.2% during May to 6.670M following a little revised 2.2% decline during April. Consensus expectations had been for sales of 6.62M and the figures were reported by the National Association of Realtors.
Sales of single-family homes fell 1.5%, down for the fourth month this year. The data cover sales closed in the latest and previous months and contrast to the new home sales (up in May) data which count sales at the signing of a contract.
In May sales of existing single family homes were down 8.1% versus the peak last June and for the first five months of this year were off 4.0% from the 2005 average.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627d.jpg" width="353">
Sales were weakest last month in the Northeast which posted a 4.8% drop (-5.9% y/y) and in the Midwest where they fell 4.3% (-5.6% y/y). In the South (-2.8% y/y) and in the West (-14.1% y/y), May sales were unchanged from the prior month.
The median price of an existing single-family home rose 3.2% (6.4% y/y). The price figures are not seasonally adjusted.
The inventory of unsold existing homes rose 5.5% and was up 41.0% from one year earlier. The supply of unsold single family homes was up 36.3% y/y and the supply of condos &amp; coops for sale was up 73.0%.
The latest release from the National Association of Realtors is available <a href="http://www.realtor.org/research.nsf/pages/EHSPage?OpenDocument">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/@E9/@E905/@E90501/@E90501.HTM">Existing Home Sales (000, AR)</a></th>
<th scope="col">May</th>
<th scope="col">April</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 Home Sales</td>
<td>&nbsp;6,670</td>
<td>6,750</td>
<td>-6.6%</td>
<td>7,064</td>
<td>6,722</td>
<td>6,176</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single Family Home Sales</td>
<td>5,820</td>
<td>5,910</td>
<td>-6.6%</td>
<td>6,170</td>
<td>5,912</td>
<td>5,443</td>
</tr>
<tr class="odd">
<td class="firstcol">Single Family Median Home Price (000) </td>
<td>$229.7 </td>
<td>$222.6 </td>
<td>6.4% </td>
<td>$206.3</td>
<td>$182.8 </td>
<td>$169.1 </td>
</tr>
</tbody>
</table>
Consumer Confidence Improved A Bit 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 27, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627c.jpg" width="353">
Consumer confidence as reported by the Conference Board improved 1.0% in June to 105.7. The rise recovered a piece of the 4.6% May decline that was revised slightly shallower. It contrasted to Consensus expectations for a further decline to 103.5 and compared to a 4.2% rise in the University of Michigan&#39;s June Index of Consumer Sentiment.
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 fell for a second month and posted a 1.0% decline (+9.9% y/y). The percentage of respondents who viewed business conditions as good (26.8%) fell for a second month and the percentage that viewed jobs as hard to get (19.9%) reversed the prior month&#39;s rise.
The index of consumers&#39; expectations rose a modest 2.9% (-9.1% y/y) and recovered just part of the May decline. Expectations for business conditions in six months improved slightly as did expectations that the number of jobs would rise. Expectations for the inflation rate in twelve months slipped to 5.1% from 5.6% expected in May.
The Conference Board&#146;s survey isconducted by a mailed questionnaire to 5,000 households and about 3,500 typically respond.

<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">June</th>
<th scope="col">May</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>105.7</td>
<td>104.7</td>
<td>-0.5%</td>
<td>100.3</td>
<td>96.1</td>
<td>79.8</td>
</tr>
</tbody>
</table>
Chain Store Sales Fell 
by <a href="/comment/Moeller.html">Tom Moeller</a> June 27, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627a.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales fell 0.4% last week after having been unchanged the prior period.
Sales in June are 0.2% below the May average which fell 0.4% from April. 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 fell 0.3% (-2.0% y/y) during the latest period after three consecutive weeks of increase.
Parsing Recent Inflation Data from the Federal Reserve Bank of Dallas can be found <a href="http://dallasfed.org/eyi/usecon/archived/0606inflation.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">06/24/06</th>
<th scope="col">06/17/06</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>471.6</td>
<td>473.6</td>
<td>4.1%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>
 Business Confidence in Europe Still Strong in Spite of Euro Strength, High Oil Prices and Rising Interest Rates 
by <a href="/comment/Curley.html">Louise Curley</a> June 27, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627e.jpg" width="353">
Germany, Italy and the Netherlands reported increased business confidence today. We noted yesterday that confidence in Belgium had also increased. France is the only Euro Zone country that, so far, has seen a decline in business confidence.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627f.jpg" width="353">
The German IFO measure of business confidence rose 1.0% from 105.7 to 106.8 (2000=100) in June, the highest level since February, 1991. In terms of the diffusion index the excess of optimists over pessimists rose 2.3 percentage points from 10.4% in May to 12.7% in June. In the Netherlands, where business confidence is measured by the excess of optimists over pessimists, the percent balance rose 3.1 percentage points from 3.3% to 6.4%. The first chart compares the percent balances indicators for Germany and the Netherlands. Business confidence in Italy, which has been lower than that in Germany, rose by almost 2% in June from May to reach 98.9 (2000=100), the highest level since December, 2000. The second chart compares the indexes of business confidence in Germany and Italy.<img align="left" border="0" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060627g.jpg">
Italy and the Netherlands also reported on consumer confidence. The Italian consumer lost some confidence as the indicator of consumer confidence fell 0.7% from 107.1 (2000=100) in May to 106.8 in June. The Dutch consumer, on the contrary, became more optimistic in June as the optimists exceeded the pessimist by 5% in contrast to May when the pessimists exceeded the optimists by 4%. The third chart compares consumer confidence in Italy and in the Netherlands.
The rise in business confidence in these countries has occurred in spite of strength in the euro, continued high oil prices and the likelihood of a rise in the European Central Bank&#39;s main lending interest rate. It may be that the biggest threat to confidence is the possibility of greater than expected increases in ECB&#39;s lending rate. The rate is currently 2.75%, having risen by from the low 2% in three increments of 25 basis points in December of last year and in March and June of this year. In the past week six council members of the ECB have hinted that the bank may accelerate interest rate increases to combat inflationary pressures. And just today, in its Annual Report the Bank of International Settlements (BIS) called on central bankers to raise interest rates to combat these same global inflationary pressures. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Confidence Measures</th>
<th scope="col">Jun&nbsp; 06</th>
<th scope="col">May 06</th>
<th scope="col">Jun 05</th>
<th scope="col">M/M %</th>
<th scope="col">Y/Y %</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Germany&nbsp;Business Confidence</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp; Index (2000=100)</td>
<td>106.8</td>
<td>105.7</td>
<td>93.3</td>
<td>1.04</td>
<td>14.47</td>
<td>95.5</td>
<td>95.5</td>
<td>91.8</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; % Balance</td>
<td>12.7</td>
<td>10.4</td>
<td>-14.1</td>
<td>2.3*</td>
<td>24.5*</td>
<td>-9.7</td>
<td>-9.9</td>
<td>-17.2</td>
</tr>
<tr>
<td class="firstcol">Italy Business&nbsp;&nbsp;&nbsp; Confidence (2000=100)</td>
<td>98.9</td>
<td>92.0</td>
<td>84.8</td>
<td>1.96</td>
<td>16.62</td>
<td>87.5</td>
<td>89.5</td>
<td>87.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Italy Consumer Confidence (2000=100)</td>
<td>106.8</td>
<td>107.6</td>
<td>102.9</td>
<td>-0.74</td>
<td>3.79</td>
<td>104.2</td>
<td>101.4</td>
<td>106.1</td>
</tr>
<tr>
<td class="firstcol">Netherlands Business Confidence (% Balance&nbsp;</td>
<td>6.4</td>
<td>3.3</td>
<td>-1.7</td>
<td>3.1*</td>
<td>8.1*</td>
<td>0.6</td>
<td>-0.1</td>
<td>-5.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Netherlands Consumer Confidence (% Balance)&nbsp;</td>
<td>5</td>
<td>-4</td>
<td>-26</td>
<td>9*</td>
<td>31*</td>
<td>-22</td>
<td>-25</td>
<td>-35</td>
</tr>
</tbody>
</table>


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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060626c.jpg" width="353">
European measures of confidence for June are beginning to appear. Last Friday Belgium reported a surprisingly large increase in business confidence. The National Bank of Belgium&#39;s overall gross synthetic indicator of business confidence rose 8.1 point from May to June and reached 10.2%, the highest value on record since the series began in January, 1980. The Bank also calculates a smoothed series, excluding outliers, that reflects the underlying trend of confidence. The smoothed series is only available after a delay of three to four months. Both the current indicator and the smoothed series are shown in the first chart. The continued rise in the current indicator suggests that the underlying trend in consumer confidence is still positive.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060626d.jpg" width="353">
Consumers in Belgium are less confident than the business community. While they have shown a small increase in confidence recently, it has been more a case of a decline in the excess of pessimists over optimists.In June, the consumer indicator of confidence was -2% compared with -6% in May and -11% in June, 2005. Chart 2 compares the Belgian consumer and business confidence indicators.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060626e.jpg" width="353">
In contrast to Belgium, business confidence in France has been slipping since April when a recent peak of 109 was reached. Confidence measured 107 in June, down almost 1% from 108 in May, but up 7% since June, 2005. Chart 3 compares the measures of business confidence in France and Belgium. While the levels of confidence are not comparable, the trends in the two series can be compared. Until recently business confidence in France has tended to follow the same ups and downs as business confidence in Belgium. Since April, the trends have diverged. (The Belgian series is expressed as a percent balance between optimists and pessimists while the French series has been constructed so that it has an average of 100 and a standard deviation of 10.)

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Measures of Confidence</th>
<th scope="col">Jun&nbsp; 06</th>
<th scope="col">May 06</th>
<th scope="col">Jun 05</th>
<th scope="col">M/M</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Belgium&nbsp;</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr>
<td class="firstcol">&nbsp;Business Confidence (%)</td>
<td>&nbsp;10.1</td>
<td>2.0</td>
<td>-10.7</td>
<td>8.1</td>
<td>20.8</td>
<td>-7.5.</td>
<td>-2.3</td>
<td>-12.9</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Consumer Confidence(%)</td>
<td>-2</td>
<td>-6</td>
<td>-11</td>
<td>4</td>
<td>9</td>
<td>-8</td>
<td>4</td>
<td>-11</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;Business Confidence (Average=100)</td>
<td>107</td>
<td>108</td>
<td>100</td>
<td>-0.93</td>
<td>7.00</td>
<td>101</td>
<td>104</td>
<td>95</td>
</tr>
</tbody>
</table>
</body>
</html>

European measures of confidence for June are beginning to appear. Last Friday Belgium reported a surprisingly large increase in business confidence. The National Bank of Belgium's overall gross synthetic indicator of business [...]

ĀBusiness Confidence Strengthens in BelgiumĀ But Weakens in FranceĀĀ

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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Total job openings edged up 0.1% m/m (+3.9% y/y) to 7.594 million in May from a downwardly revised 7.585 million in April (previously 7.618 million), according to the Job Openings and Labor Turnover Survey. Even with only a small rise, the level of openings in May was the highest since May 2024. Accordingly, the job openings rate (the ratio of openings to nonfarm employment plus openings) was unchanged at 4.6% in May. The April and May readings for the job openings rate were the highest since November 2024. In May, the number of unemployed fell while the number of openings edged up. Consequently, the number of openings rose further above the number of unemployed for the second consecutive month, another sign that previously observed softening in labor market conditions may be reversing.

Private sector openings were essentially unchanged in May from April, edging up 2,000 (+4.3% y/y) with the private job openings rate unchanged at 4.8%. The sluggishness in private openings in May was due entirely to a 119,000 decline in private education and health care openings. However, this followed a total increase of 298,000 in March and April. Openings increased in all other major sectors, led by a 95,000 increase in openings in leisure and hospitality. Openings were up 32,000 in construction, 33,000 in manufacturing, and 37,000 in trade and transportation. Total government openings rose 7,000 in May after an upwardly revised 63,000 jump in April (previously +47,000).

Total hiring slipped 0.9% m/m (-3.0% y/y) to 5.170 million in May from an upwardly revised 5.215 million in April (previously 5.116 million). This was the third monthly decline in hiring in the past four months. The hiring rate was unchanged in May at 3.3%. Private sector hiring fell 1.6% m/m (-3.5% y/y) in May, also the third monthly decline in the past four months. The weakness in hiring in May was concentrated in trade and transportation (-56,000) and in construction (-24,000). Manufacturing posted a small decline while professional and business services, and private education and health care posted small increases. Leisure and hospitality hiring rose 15,000, the second monthly increase in the past three months. Total government hiring increased 32,000 in May.

Total separations increased 1.3% (-3.5% y/y) to 5.101 million in May from an upwardly revised 5.038 million in April (previously 4.978 million). Both quits (+22,000) and layoffs (+41,000) increased in May with no change in other separations. The separation rate in May was unchanged at 3.2%. Private separations also rose 1.3% m/m (+62,000, -2.9% y/y) in May. Private quits increased 37,000, private layoffs rose 27,000, while other private separations declined 2,000. The rise in private layoffs was concentrated in construction (+47,000), trade and transportation (+52,000), and private education and healthcare (+52,000). Layoffs declined 18,000 in manufacturing, fell 37,000 in professional and business services, and decreased 50,000 in leisure and hospitality. Even with the rise in private quits in May, they have been trending down in 2026, implying that workers are feeling less comfortable with their employment prospects and hence are choosing to remain in their current jobs.

On the whole, employers remain cautious in hiring. Furthermore, workers are sufficiently unsure of their alternative employment prospects that they are refraining from leaving their current position. Still, openings have gradually risen since the end of last year after having gradually fallen throughout 202 and once again exceed the number of unemployed.

The Job Openings and Labor Turnover Survey (JOLTS) data are available in Haver’s **USECON** database.

- Openings edged up 9,000 but to the highest level since May 2024.
- However, hiring fell 45,000 for the third monthly decline in the past four months.
- Separations rose 63,000 with increases in both quits and layoffs.

U.S. JOLTS: Openings and Hiring Little Changed in May

Robert Brusca

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Headline indexes for the European Monetary Union improved in June to a reading of 95.0 from 93.7 in May. The index had been stronger at 96.4 in March; however, it fell to 93.3 in April, recovered slightly to 93.7 in May, and has now reached 95.0. While still below its March high, the index has made progress in the wake of the outbreak of war-like conditions and the closure of the Strait of Hormuz.

**Sector performance**
The industrial reading for the sector, at -8, has a 36.3 percentile standing, which better than the headline index for the Monetary Union with a 25.4 percentile standing. The EMU-wide sector index, consumer confidence, improved to a net diffusion reading of -17.7 in June from -19 in May, but that still leaves it with a very weak 8.1 percentile standing, the lowest among sector readings. Retailing improved to a net diffusion reading of -10 in June from -11 in May and posted a 38.1 percentile standing. The construction sector deteriorated, falling back to -5 from -4 in May; it has been undergoing steady degradation since at least March, but it still has a 68.4 percentile standing. It is the only sector with a percentile standing above 50, placing it above its historic median. The services sector had a net diffusion reading of +3, identical to its May reading and has a 24-percentile standing.

**Sector index ranking**
The sector readings clearly show that the monetary union is exhibiting a number of sectors with subpar growth; beyond ‘subpar,’ many are quite weak. The exception is—and has been for some time—the construction sector, which continues to perform above average and post an above-median metric. It is, perhaps surprising that we often think of consumer confidence as being relatively forward-looking, but in this schematic, consumer confidence is the weakest of the sectors; in fact, like statistics from the U.S., we find the same prevailing situation with consumer readings exceptionally weak. These weak consumer readings coexist with much stronger retailing readings and stronger industrial readings, although both of those are below their historic medians in Europe. This report is a sort of gut check for what consumer confidence means; it may not be as important as we used to think it was. Although the business cycle at this juncture seems to be concentrated more on the supply side and on recovery in the business community, that effect compounded by the influence of AI is much stronger in the U.S. than in Europe.

**Country detail – Large economies**
The country detail shows 16 of 20 early reporting countries with only one of the top four countries showing a decline month-to-month, and that's France. France recorded a 0.2% decline in June, while Germany posted a 1.9% increase, Italy gained 1.3%, and Spain rose 0.7%. Spain had the lone small decrease in May, while in April all of the large countries showed significant monthly declines in their overall indexes in the wake of the onset of the war with Iran.

**Smaller economies in EMU**
Apart from the Big Four economies, 12 other EMU members report in June; of those, 5 showed month-to-month declines in their country level indexes. This was up from three showing declines in May, although it was a vast improvement from April, when all of the country indexes turned negative and generated substantial month-to-month declines, except for Slovakia and Lithuania.

**Big Four economy rankings**
Among the Big Four economies, the strongest ranking reading in June is Spain at a 52.3 percentile standing, followed by Italy at a 41.6 percentile standing, France at a 22.7 percentile standing, and Germany at an 18.7 percentile standing.

**Other economy rankings**
Among the other 12 countries, the percentile standing readings range from a high of 76.1% for Greece to a low of 9.3% for Austria. Five of 12 of the smaller EMU members have percentile standings of 50% or greater, putting them above their historic medians, while the other 7 have rankings that range from a high of 44.6% in Portugal to a low of 9.3% in Austria.

**Summing up**
Conditions in the monetary union have improved over the last two months after a substantial stumble in the wake of the war in the Middle East with Iran and the closure of the Strait of Hormuz. However, the rebound in the European recovery is in gear; it is slow and measured. Conditions are still weak on balance.

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Europe

EU Indexes Show European Improvement in June

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. 

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**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.

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**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.

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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.

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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.

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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.

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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

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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.

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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.

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**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.

Economy in Brief

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Mortgage Applications Fell Hard, Rates Above 7%

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