Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309b.jpg" width="353">
Initial claims for unemployment insurance rose 8,000 to 303,000 to the highest level since early January while the prior week&#39;s level was revised up slightly. Consensus expectations had been for a decline to 290,000 claims.
During the last ten years there has been a (negative) 75% correlation between the level of initial jobless insurance claims and the m/m change in payroll employment.
The four-week moving average of initial claims increased to 293,500 (-7.4% y/y), its highest level since mid-January.
Continuing unemployment insurance claims rose 29,000 following a revised 11,000 decline the prior week. It was the first increase in four weeks.
The insured rate of unemployment was stable at 1.9% for the fourth week.
Understanding the employment measures from the CPS and CES survey from the Bureau of Labor Statistics can be found <a href="http://www.bls.gov/opub/mlr/2006/02/art2full.pdf"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">03/04/06</th>
<th scope="col">02/25/06</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">Initial Claims</td>
<td>303</td>
<td>295</td>
<td>-9.6%</td>
<td>332</td>
<td>343</td>
<td>402</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,505</td>
<td>-7.0%</td>
<td>2,663</td>
<td>2,924</td>
<td>3,532</td>
</tr>
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</table>
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Initial claims for unemployment insurance rose 8,000 to 303,000 to the highest level since early January while the prior week's level was revised up slightly. Consensus expectations had been for a decline to 290,000 claims. During the [...]

Initial Unemployment Insurance Claims Highest in Two Months

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309a.jpg" width="353">
The U.S. foreign trade deficit surged during January to $68.5B, another record, and far exceeded Consensus expectations for a deficit of $66.5B. The December deficit in goods &amp; services trade was revised slightly lower to $65.1B.
Overall imports rose 3.5% in January and the gains were quite broad, starting with a 5.6% (48.3%) spike in petroleum imports. That gain was bolstered by a 4.4% rise in crude oil prices (46.0% y/y) to an average $51.93 per bbl., the first m/m gain since September. Crude prices gave back roughly half of that increase last month and very recently fell even lower. The quantity of crude oil imports fell during January (-6.2% y/y) for the second consecutive month.
Imports of nonpetroleum products similarly were strong during January, rising 3.8% (11.2% y/y). The gain was led by a 3.8% (9.9% y/y) rise in capital goods and a 2.9% (5.6% y/y) increase in nonauto consumer goods. Imports of advanced technology products fell 8.1% (NSA, 15.2% y/y).
Total exports also were strong during January. A 2.5% increase was led by a 2.9% (16.3% y/y) gain in capital goods though exports of nonauto consumer goods fell 1.3% (+11.3% y/y). Exports of advanced technology products dropped 10.1% (NSA, +20.7% y/y) while exports of foods, feeds &amp; beverages jumped 11.2% (15.7% y/y).
With China the US trade deficit reversed most of an improvement during December and deteriorated to $17.9B ($201.6B for 2005) but y/y exports were up by more than one third. The trade deficit with Japan improved for the third straight month to $6.5B ($82.7B in 2005) though the trade deficit with the Asian NICs nearly doubled to $2.2B ($15.9B in 2005). The deficit with the European Union improved for the third consecutive month $9.7B ($122.4B in 2005) as imports fell 6.0% (+12.7% y/y).
During 2005, the total real value of US international trade (exports plus imports) rose to 27.2% of constant dollar GDP, up from 20.3% ten years earlier and was more than double the percentage during 1985.
Current account, remarks by Alan Greenspan, are available <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20050204/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EE/@EE03/@EE03.HTM">Foreign Trade</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
</tr>
</thead>
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<td class="firstcol">Trade Deficit</td>
<td>$68.5B</td>
<td>$65.1B</td>
<td>$58.3B (1/05)</td>
<td>$723.6B</td>
<td>$617.6B</td>
<td>$494.8B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Exports - Goods &amp; Services</td>
<td>2.5%</td>
<td>2.2%</td>
<td>12.0%</td>
<td>10.5%</td>
<td>12.6%</td>
<td>4.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Imports - Goods &amp; Services</td>
<td>3.5%</td>
<td>1.7%</td>
<td>14.0%</td>
<td>12.8%</td>
<td>16.6%</td>
<td>8.5%</td>
</tr>
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The U.S. foreign trade deficit surged during January to $68.5B, another record, and far exceeded Consensus expectations for a deficit of $66.5B. The December deficit in goods & services trade was revised slightly lower to $65.1B. [...]

U.S. Trade Deficit Surged Due to Higher Imports

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309a.jpg" width="353">
The U.S. foreign trade deficit surged during January to $68.5B, another record, and far exceeded Consensus expectations for a deficit of $66.5B. The December deficit in goods &amp; services trade was revised slightly lower to $65.1B.
Overall imports rose 3.5% in January and the gains were quite broad, starting with a 5.6% (48.3%) spike in petroleum imports. That gain was bolstered by a 4.4% rise in crude oil prices (46.0% y/y) to an average $51.93 per bbl., the first m/m gain since September. Crude prices gave back roughly half of that increase last month and very recently fell even lower. The quantity of crude oil imports fell during January (-6.2% y/y) for the second consecutive month.
Imports of nonpetroleum products similarly were strong during January, rising 3.8% (11.2% y/y). The gain was led by a 3.8% (9.9% y/y) rise in capital goods and a 2.9% (5.6% y/y) increase in nonauto consumer goods. Imports of advanced technology products fell 8.1% (NSA, 15.2% y/y).
Total exports also were strong during January. A 2.5% increase was led by a 2.9% (16.3% y/y) gain in capital goods though exports of nonauto consumer goods fell 1.3% (+11.3% y/y). Exports of advanced technology products dropped 10.1% (NSA, +20.7% y/y) while exports of foods, feeds &amp; beverages jumped 11.2% (15.7% y/y).
With China the US trade deficit reversed most of an improvement during December and deteriorated to $17.9B ($201.6B for 2005) but y/y exports were up by more than one third. The trade deficit with Japan improved for the third straight month to $6.5B ($82.7B in 2005) though the trade deficit with the Asian NICs nearly doubled to $2.2B ($15.9B in 2005). The deficit with the European Union improved for the third consecutive month $9.7B ($122.4B in 2005) as imports fell 6.0% (+12.7% y/y).
During 2005, the total real value of US international trade (exports plus imports) rose to 27.2% of constant dollar GDP, up from 20.3% ten years earlier and was more than double the percentage during 1985.
Current account, remarks by Alan Greenspan, are available <a href="http://www.federalreserve.gov/boarddocs/speeches/2005/20050204/default.htm"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EE/@EE03/@EE03.HTM">Foreign Trade</a></th>
<th scope="col">Jan</th>
<th scope="col">Dec</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">Trade Deficit</td>
<td>$68.5B</td>
<td>$65.1B</td>
<td>$58.3B (1/05)</td>
<td>$723.6B</td>
<td>$617.6B</td>
<td>$494.8B</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Exports - Goods &amp; Services</td>
<td>2.5%</td>
<td>2.2%</td>
<td>12.0%</td>
<td>10.5%</td>
<td>12.6%</td>
<td>4.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Imports - Goods &amp; Services</td>
<td>3.5%</td>
<td>1.7%</td>
<td>14.0%</td>
<td>12.8%</td>
<td>16.6%</td>
<td>8.5%</td>
</tr>
</tbody>
</table>
Initial Unemployment Insurance Claims Highest in Two Months 
by <a href="/comment/Moeller.html">Tom Moeller</a> March 9, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309b.jpg" width="353">
Initial claims for unemployment insurance rose 8,000 to 303,000 to the highest level since early January while the prior week&#39;s level was revised up slightly. Consensus expectations had been for a decline to 290,000 claims.
During the last ten years there has been a (negative) 75% correlation between the level of initial jobless insurance claims and the m/m change in payroll employment.
The four-week moving average of initial claims increased to 293,500 (-7.4% y/y), its highest level since mid-January.
Continuing unemployment insurance claims rose 29,000 following a revised 11,000 decline the prior week. It was the first increase in four weeks.
The insured rate of unemployment was stable at 1.9% for the fourth week.
Understanding the employment measures from the CPS and CES survey from the Bureau of Labor Statistics can be found <a href="http://www.bls.gov/opub/mlr/2006/02/art2full.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/WEEKLY/@W5/@W507/@W507.HTM">Unemployment Insurance (000s)</a></th>
<th scope="col">03/04/06</th>
<th scope="col">02/25/06</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">Initial Claims</td>
<td>303</td>
<td>295</td>
<td>-9.6%</td>
<td>332</td>
<td>343</td>
<td>402</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,505</td>
<td>-7.0%</td>
<td>2,663</td>
<td>2,924</td>
<td>3,532</td>
</tr>
</tbody>
</table>
4Q Debt Fueled By Government Budget Deficit, 2005 By the Consumer 
by <a href="/comment/Moeller.html">Tom Moeller</a> March 9, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309f.jpg" width="353">
Growth in total credit market debt outstanding surged 11.4% (AR) last quarter. Faster growth rates often occur during 4Q but that was the quickest since 2002.
The acceleration from 3Q was due to a jump in Federal Government borrowing at a 10.1% rate (7.0% y/y) versus 6.6% in 3Q.
Growth in household sector borrowing continued strong at a 13.2% rate. That was down from the heated pace of the prior quarter but it capped off the fastest yearly rate of household sector borrowing on record by edging out the 11.5% rate of growth during 2003.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309g.jpg" width="353">
Home mortgage obligations grew at a 14.6% rate (14.1% y/y) last quarter capping the fourth consecutive year of double digit growth. Consumer credit growth slowed substantially to a 4.7% rate from 8.5% during 3Q and the 2.9% yearly rate of growth was the slowest since 1992, likely reflecting mortgage refinancings.
Household sector asset values rose at a 9.8% annual rate (8.5% y/y) during 4Q powered by a 14.0% (14.9% y/y) rise in the value of real estate holdings. Financial asset values rose 8.0% (5.6% y/y) due to an 11.2% (12.9% y/y) rise in the value of mutual fund shares but the value of corporate equities held directly fell 4.4% (-5.0% y/y).
The net worth of the US household sector in 4Q improved 2.3% (8.0% y/y) to a record $52.107 trillion. The gain, however, did not lift net worth as a percentage of income which fell slightly q/q to a still high 5.635 times income. During 2004 that ratio was 5.403 times.

<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/FFUNDS/@F2/@F201/@F201.HTM">Flow of Funds</a>&nbsp;</th>
<th scope="col">% of Total</th>
<th scope="col">4Q 05&nbsp; (AR)</th>
<th scope="col">3Q 05 &nbsp; (AR)</th>
<th scope="col">Y/Y</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
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</thead>
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<td class="firstcol">Total Credit Market Debt Outstanding</td>
<td></td>
<td>11.4%</td>
<td>8.1%</td>
<td>8.8%</td>
<td>8.8%</td>
<td>8.4%</td>
<td>9.2%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Federal Government</td>
<td>12%</td>
<td>10.1%</td>
<td>6.6%</td>
<td>7.0%</td>
<td>7.0%</td>
<td>9.0%</td>
<td>10.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Households</td>
<td>28%</td>
<td>13.2%</td>
<td>14.3%</td>
<td>11.7%</td>
<td>11.7%</td>
<td>11.2%</td>
<td>11.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Nonfinancial Corporate Business</td>
<td>14%</td>
<td>7.0%</td>
<td>4.4%</td>
<td>5.7%</td>
<td>5.7%</td>
<td>3.6%</td>
<td>2.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Financial Sectors</td>
<td>32%</td>
<td>11.9%</td>
<td>3.4%</td>
<td>7.5%</td>
<td>7.5%</td>
<td>7.6%</td>
<td>10.1%</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Net Worth: Households &amp; Nonprofit Organizations (Trillions)</td>
<td>--</td>
<td>$52.107</td>
<td>$50.957</td>
<td>--</td>
<td>$52.107</td>
<td>$48.250</td>
<td>$44.127</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Tangible Assets</td>
<td>--</td>
<td>$25.558</td>
<td>$24.816</td>
<td>13.3%</td>
<td>$25.558</td>
<td>$22.556</td>
<td>$20.040</td>
</tr>
</tbody>
</table>
Bank of Japan To Implement "Un-Ease": A Follow-Up 
by <a href="/comment/Stone.html">Carol Stone</a> March 9, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309c.jpg" width="353">
We wrote yesterday in the midst of the monetary policy meeting of the Bank of Japan; we described the voluminous amount of reserves the BoJ has pumped into the banks. As widely expected, the Bank announced that it would reduce this level of reserves, pulling it back toward its more traditional amount. Because bank deposits are not near the levels permitted by the current volume of reserves, no immediate change in short-term interest rates is likely and the Bank indicates that the overnight call money rate should remain near zero.
However, the bank provided these reserves, a liability item on its balance sheet, by substantially increasing its assets, as evident in the first graph here. The BoJ&#39;s assets grew quite significantly during two periods of the last 10 years, late 1997-98 following the Asian currency crisis, and from the spring of 2001 through 2002. In this latter period, it bought huge quantities of government securities, particularly bonds, and it began outright buying of short-term commercial bills.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309d.jpg" width="353">
So as the Bank sheds the excess reserves &quot;over a few months&quot;, it will be interesting to see what happens to interest rates on the assets the Bank will also shed. The Bank&#39;s statement says that it will continue buying long-term government bonds, and that its &quot;un-easing&quot; [our terminology] will occur in short-term money markets. So the Bank is attempting to minimize the impact on interest rates all together. Whether they succeed remains to be seen and it likely depends on the accompanying vigor in the Japanese economy.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060309e.jpg" width="353">
Meantime, after the Bank&#39;s announcement in mid-afternoon, markets were actually encouraged, seeing this change in policy as a &quot;vote of confidence&quot; in the Japanese economy. Stock prices rose, with the Nikkei-225 up a whopping 2.6% on the day. And bond yields were little changed, in fact easing ever so slightly. Notably, in addition, even as the BoJ has added significantly to its holdings of government bonds in recent years, yields on them have not moved much. Thus, the yield curve has remained upward sloping, suggesting that investors believed the Bank&#39;s policy would eventually work, as it appears to be doing.
[The BoJ accounts and aggregate open market operations are included in Haver&#39;s JAPAN database. Daily stock market indexes and interest rates are shown in INTDAILY.] 

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Carol Stone, CBE

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308d.jpg" width="353">
The Bank of Japan&#39;s Monetary Policy Board is in the midst of a two-day meeting that began Wednesday, March 8 and will conclude Thursday, March 9. It is widely expected that the Bank will initiate a shift away from its nearly five-year-old policy of &quot;quantitative ease&quot;, in which it sets a target for the amount of reserves in the banking system, regardless of banks&#39; demands for reserves. In the parlance of US monetary policy, the Japanese central bank has pumped an enormous amount of &quot;excess reserves&quot; into the banks. This target has recently been &yen;30-35 trillion each month-end.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308e.jpg" width="353">
In the spring of 2004, this policy began, in an indirect way, to show results. The decline in the banks&#39; loans, which had become quite steep in 1998, started to moderate. Progressively smaller declines have been reported since. Finally, in data released just Wednesday morning Tokyo time, the first dramatic sign of some success appeared through a 0.2% year-on-year increase in bank loans, the first such positive year-on-year figure since September 1996, nearly nine-and-a-half years ago.
The magnitude of the easing strategy can be seen in a ratio of reserves to GDP: 5.3% in 2005, compared with just 0.6% in the mid-1990s. By contrast, in the US, banks&#39; reserves at Federal Reserve Banks have recently been a miniscule 0.4% of GDP, fairly comparable to the historic Japanese amount. More straightforward is a simple comparison of dollar amounts. US reserves at the Fed were about $44.7 billion in February, while Japan&#39;s banking system reserves were $260.1 billion, nearly 6 times as much.
Prices have finally stabilized on a year-to-year basis, as we have described here recently for Japan&#39;s core CPI, and now bank lending, which underwent a terrible wrenching owing to repeated recessions and the plunge in real estate values, has also finally turned upward, albeit by only a marginal amount. 

<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/JAPAN/@J1/@J1.HTM">JAPAN</a></th>
<th scope="col">Feb 2006</th>
<th scope="col">Jan 2006</th>
<th scope="col">Dec 2005</th>
<th scope="col">Dec 2004</th>
<th scope="col">Dec 2003</th>
<th scope="col">Dec 2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Loans at Domestic Banks Mo. Avg, Bil.&yen;</td>
<td>383,337.3</td>
<td>384,191.2</td>
<td>383,955.8</td>
<td>385,178.6</td>
<td>298,020.4</td>
<td>419,652.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Yr/Yr % Change</td>
<td>+0.2</td>
<td>0.0</td>
<td>-0.3</td>
<td>-3.1</td>
<td>-5.1</td>
<td>-4.7</td>
</tr>
<tr class="odd">
<td class="firstcol">BOJ Reserves, EOM, Bil.&yen;</td>
<td>30,240.8</td>
<td>30,574.3</td>
<td>30,093.8</td>
<td>31,466.6</td>
<td>27,797.7</td>
<td>17,695.6</td>
</tr>
</tbody>
</table>
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The Bank of Japan's Monetary Policy Board is in the midst of a two-day meeting that began Wednesday, March 8 and will conclude Thursday, March 9. It is widely expected that the Bank will initiate a shift away from its nearly five- [...]

Bank Lending "Grows" in Japan; First Time in More Than 9 Years

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308a.jpg" width="353">
During early March the total number of mortgage applications recovered barely half of the prior week&#39;s decline. The 0.7% increase followed a 1.2% drop the prior week and left March&#39;s opening level 1.8% below the February average which fell 6.3% m/m.
The effective interest rate on a conventional 30-year mortgage rose to 6.55%, the sharpest w/w increase since late January. The effective rate on a 15-year mortgage also jumped, by twelve basis points to 6.27% and reached the highest level since mid-2002. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308b.jpg" width="353">
Purchase applications fell another 0.4% w/w after a 10.2% during all of February. The early March level is down 1.9% from the February average.
Evidence of housing market weakness was contained in the recent report from the National Association of Realtors that the number of homes for sale rose 2.4% during January. The increase reversed most of a decline during the prior month and left the number of pending home sales up by more than one-third from the year earlier level.
At the current sales level the months&#39; supply of homes on the market rose to 5.3, a record high for total home sales and the supply of single family homes on the market rose to a three year high of 5.2.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308c.jpg" width="353">
During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance rose 2.6% following little change the week earlier and began March 1.2% below the February average which fell 2.0% from January.
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>.
Postal Savings in Japan and Mortgage Markets in the U.S. from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-03.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">03/03/06</th>
<th scope="col">02/24/06</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>575.6</td>
<td>571.5</td>
<td>-18.3%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>399.0</td>
<td>400.8</td>
<td>-11.7%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,614.4</td>
<td>1,573.5</td>
<td>-25.8%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
</body>
</html>

During early March the total number of mortgage applications recovered barely half of the prior week's decline. The 0.7% increase followed a 1.2% drop the prior week and left March's opening level 1.8% below the February average which [...]

Mortgage Applications Ticked Up But Interest Rates Jumped

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308a.jpg" width="353">
During early March the total number of mortgage applications recovered barely half of the prior week&#39;s decline. The 0.7% increase followed a 1.2% drop the prior week and left March&#39;s opening level 1.8% below the February average which fell 6.3% m/m.
The effective interest rate on a conventional 30-year mortgage rose to 6.55%, the sharpest w/w increase since late January. The effective rate on a 15-year mortgage also jumped, by twelve basis points to 6.27% and reached the highest level since mid-2002. Interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities and during the last ten years there has been a (negative) 82% correlation between purchase applications and the effective rate on a 30-Year mortgage.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308b.jpg" width="353">
Purchase applications fell another 0.4% w/w after a 10.2% during all of February. The early March level is down 1.9% from the February average.
Evidence of housing market weakness was contained in the recent report from the National Association of Realtors that the number of homes for sale rose 2.4% during January. The increase reversed most of a decline during the prior month and left the number of pending home sales up by more than one-third from the year earlier level.
At the current sales level the months&#39; supply of homes on the market rose to 5.3, a record high for total home sales and the supply of single family homes on the market rose to a three year high of 5.2.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308c.jpg" width="353">
During the last ten years there has been a 50% correlation between the y/y change in purchase applications and the change in new plus existing single family home sales.
Applications to refinance rose 2.6% following little change the week earlier and began March 1.2% below the February average which fell 2.0% from January.
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>.
Postal Savings in Japan and Mortgage Markets in the U.S. from the Federal Reserve Bank of San Francisco is available <a href="http://www.frbsf.org/publications/economics/letter/2006/el2006-03.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">03/03/06</th>
<th scope="col">02/24/06</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>575.6</td>
<td>571.5</td>
<td>-18.3%</td>
<td>708.6</td>
<td>735.1</td>
<td>1,067.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>399.0</td>
<td>400.8</td>
<td>-11.7%</td>
<td>470.9</td>
<td>454.5</td>
<td>395.1</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,614.4</td>
<td>1,573.5</td>
<td>-25.8%</td>
<td>2,092.3</td>
<td>2,366.8</td>
<td>4,981.8</td>
</tr>
</tbody>
</table>
Bank Lending "Grows" in Japan; First Time in More Than 9 Years 
by <a href="/comment/Stone.html">Carol Stone</a> March 8, 2006


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308d.jpg" width="353">
The Bank of Japan&#39;s Monetary Policy Board is in the midst of a two-day meeting that began Wednesday, March 8 and will conclude Thursday, March 9. It is widely expected that the Bank will initiate a shift away from its nearly five-year-old policy of &quot;quantitative ease&quot;, in which it sets a target for the amount of reserves in the banking system, regardless of banks&#39; demands for reserves. In the parlance of US monetary policy, the Japanese central bank has pumped an enormous amount of &quot;excess reserves&quot; into the banks. This target has recently been &yen;30-35 trillion each month-end.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060308e.jpg" width="353">
In the spring of 2004, this policy began, in an indirect way, to show results. The decline in the banks&#39; loans, which had become quite steep in 1998, started to moderate. Progressively smaller declines have been reported since. Finally, in data released just Wednesday morning Tokyo time, the first dramatic sign of some success appeared through a 0.2% year-on-year increase in bank loans, the first such positive year-on-year figure since September 1996, nearly nine-and-a-half years ago.
The magnitude of the easing strategy can be seen in a ratio of reserves to GDP: 5.3% in 2005, compared with just 0.6% in the mid-1990s. By contrast, in the US, banks&#39; reserves at Federal Reserve Banks have recently been a miniscule 0.4% of GDP, fairly comparable to the historic Japanese amount. More straightforward is a simple comparison of dollar amounts. US reserves at the Fed were about $44.7 billion in February, while Japan&#39;s banking system reserves were $260.1 billion, nearly 6 times as much.
Prices have finally stabilized on a year-to-year basis, as we have described here recently for Japan&#39;s core CPI, and now bank lending, which underwent a terrible wrenching owing to repeated recessions and the plunge in real estate values, has also finally turned upward, albeit by only a marginal amount.

<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/JAPAN/@J1/@J1.HTM">JAPAN</a></th>
<th scope="col">Feb 2006</th>
<th scope="col">Jan 2006</th>
<th scope="col">Dec 2005</th>
<th scope="col">Dec 2004</th>
<th scope="col">Dec 2003</th>
<th scope="col">Dec 2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Loans at Domestic Banks Mo. Avg, Bil.&yen;</td>
<td>383,337.3</td>
<td>384,191.2</td>
<td>383,955.8</td>
<td>385,178.6</td>
<td>298,020.4</td>
<td>419,652.9</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Yr/Yr % Change</td>
<td>+0.2</td>
<td>0.0</td>
<td>-0.3</td>
<td>-3.1</td>
<td>-5.1</td>
<td>-4.7</td>
</tr>
<tr class="odd">
<td class="firstcol">BOJ Reserves, EOM, Bil.&yen;</td>
<td>30,240.8</td>
<td>30,574.3</td>
<td>30,093.8</td>
<td>31,466.6</td>
<td>27,797.7</td>
<td>17,695.6</td>
</tr>
</tbody>
</table>
</body>
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Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307d.jpg" width="353">
Foreign new orders for German manufactures rose 1.6% in January and were 16.2% above January, 2005. Even new orders from domestic sources, which were down slightly in January from December, were 5.7% above January, 2005. Year-to-year sales data were less dramatic, but still positive, with foreign sales 7.3% higher than January, 2005 and domestic sales, 0.9%. A breakdown of foreign orders between those from the Euro Zone and those from outside the Euro Zone is available from October, 2004 to date. In January, 2006, new orders from the Euro Zone declined 1.9% from December, but were 17.5% above January, 2005, Orders from countries outside the Euro Zone, rose 8.9% in January and were 15.1% above January, 2005.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307e.jpg" width="353">
Because of the volatility in the sales and new order series, we have used three month moving averages to track longer term trends. The first chart shows the trend of new orders from, and sales to, foreign sources. New foreign orders have shown a particularly strong upward trend since early 2005. Currently, new foreign orders are running ahead of sales, suggesting there is support for continued increases in sales.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307f.jpg" width="353">
The same trends are evident in the case of domestic new orders and sales, as shown in the second chart. Both domestic new orders and domestic sales, however, still lag well behind foreign new orders and sales. The third chart compares domestic and foreign sales. On a three month average basis, domestic sales in January, 2006 were barely--1.2%--higher than the January 2001 average. On the same basis, foreign sales were up 21.3% over the same period. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/GERMANY/@D6/@D6.HTM">German New Orders and Sales (2000=100)</a></th>
<th scope="col">Jan 06</th>
<th scope="col">Dec 05</th>
<th scope="col">Jan 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">Total Sales</td>
<td>112.9</td>
<td>112.9</td>
<td>109.0</td>
<td>0.00</td>
<td>3.58</td>
<td>110.1</td>
<td>105.5</td>
<td>100.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Domestic&nbsp;</td>
<td>103.3</td>
<td>103.3</td>
<td>102.4</td>
<td>0.00</td>
<td>0.88</td>
<td>101.9</td>
<td>99.3</td>
<td>97.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Foreign</td>
<td>128.4</td>
<td>128.4</td>
<td>119.7</td>
<td>0.00</td>
<td>7.29</td>
<td>123.5</td>
<td>115.6</td>
<td>106.7</td>
</tr>
<tr>
<td class="firstcol">Total New Orders</td>
<td>119.5</td>
<td>117.6</td>
<td>107.8</td>
<td>1.62</td>
<td>10.85</td>
<td>111.5</td>
<td>105.1</td>
<td>99.0</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Domestic</td>
<td>104.6</td>
<td>104.8</td>
<td>99.0</td>
<td>-0.19</td>
<td>5.66</td>
<td>101.2</td>
<td>98.3</td>
<td>94.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Foreign</td>
<td>138.2</td>
<td>133.5&nbsp;</td>
<td>118.9</td>
<td>3.52</td>
<td>16.23</td>
<td>124.4</td>
<td>113.5</td>
<td>104.3</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Euro Zone</td>
<td>136.9</td>
<td>139.5</td>
<td>116.5</td>
<td>-1.86</td>
<td>17.51</td>
<td>120.3</td>
<td>n.a.</td>
<td>n.a.</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp;&nbsp; Non Euro Zone</td>
<td>139.4</td>
<td>128.0</td>
<td>121.1</td>
<td>8.91</td>
<td>15.11</td>
<td>128.2</td>
<td>n.a.</td>
<td>n.a.</td>
</tr>
</tbody>
</table>
</body>
</html>

Foreign new orders for German manufactures rose 1.6% in January and were 16.2% above January, 2005. Even new orders from domestic sources, which were down slightly in January from December, were 5.7% above January, 2005. Year-to-year [...]

Foreign Demand for German Manufactures Continues to Boost New Orders

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/060307a.jpg" width="353">
Chain store sales added 0.2% during the opening week of March to the 1.5% surge during the prior period, according to the International Council of Shopping Centers (ICSC)-UBS survey.
The gain lifted the level of sales in early March 1.4% above the February average which rose 1.1% from January.
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 leading indicator of chain store sales rose 0.3% late in February and the average level of the leading indicator fell 1.6% during the month.
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.

<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">03/04/06</th>
<th scope="col">02/25/06</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>470.1</td>
<td>469.0</td>
<td>4.3%</td>
<td>3.6%</td>
<td>4.7%</td>
<td>2.9%</td>
</tr>
</tbody>
</table>


</html>

Chain store sales added 0.2% during the opening week of March to the 1.5% surge during the prior period, according to the International Council of Shopping Centers (ICSC)-UBS survey. The gain lifted the level of sales in early March [...]

Chain Store Sales Higher Again

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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

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

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

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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

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Sandy Batten

260702A4.jpg

260702B4.jpg

The luster fell a bit off the employment rose in June with nonfarm payrolls rising 57,000 against expectations of a 115,000 increase, according to today’s report from the Bureau of Labor Statistics. Moreover, the increases previously reported for April and May were revised down by a total of 74,000. Upon revision, payrolls increased 148,000 in April versus 179,000 previously reported and rose 129,000 in May versus 172,000 previously reported. The average increase over the past three months fell to 111,000 from 164,000 in May while the average increase over the past six months rose to 92,000 in June, its highest reading since February 2025, from 80,000 in May. Both remain on a modest uptrend and much stronger than payroll gains last year. In 2025, monthly payroll gains averaged only 10,000.

The weaker-than-expected payroll report was reinforced by a weak report from the **household survey**. While the number of unemployed fell 213,000 and the unemployment rate edged down to 4.2% from 4.3% in May, the number of employed slumped 507,000 in June, the largest monthly decline since May 2025 (with population adjustment to January 2026). The labor force plunged 720,000 with the labor force participation rate falling to 61.5%, its lowest level since March 2021.

Growth of average hourly earnings (AHE), a key variable for the Federal Reserve, was relatively well behaved in June. AHE increased 0.3% m/m, the same monthly gain as in May, in line with expectations. The y/y rate of advance edged up to 3.5% in June from 3.4% in May. Wage growth in private services-producing firms picked up in June, rising 0.4% m/m (3.4% y/y) versus 0.2% m/m (3.2% y/y) in May. Goods-producing wages increased 0.2% m/m in June after 0.3% monthly gains in both April and May with the y/y rate holding at 4.1%.

260702C4.jpg

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In the **establishment survey**, private-sector employment was also weaker than expected in June, increasing only 49,000 against an expected 115,000 increase. Moreover, April and May figures were also revised down by a total of 50,000. Government employment rose 8,000 following a 32,000 increase in May. Private goods-producing employment increased 10,000, its largest monthly gain in three months with an 11,000 gain in construction and a 3,000 rise in manufacturing jobs, the first increase in three months. In contrast, services-producing employment increased only 39,000 in June, its weakest monthly performance in four months. Private education and health services jobs posted another solid gain of 69,000, up from 45,000 in May. However, retail jobs fell 7,500, their first monthly decline in four months, and leisure and hospitality jobs slumped 61,000, their largest monthly decline since December 2020, after increasing 40,000 in May. There had been speculation in the market that the World Cup would generate additional leisure and hospitality jobs, but this obviously failed to pan out. On a brighter note, although the one-month payroll diffusion index, a measure of the breadth of job gains, slipped to 54.4 in June from 56.0 in May, it remained well above the key 50 level that indicates that more industries were adding jobs than losing them.

The length of the workweek was unchanged at 34.3 hours in June with the aggregate weekly hours index edging up 0.1% m/m, the same monthly gain as in May. The aggregate hours index rose 1.3% q/q saar in Q2, the fastest quarterly gain in four quarters, providing a solid base for Q2 real GDP growth. The goods-producing workweek was unchanged at 40.1 hours, the highest since January 2023, while the private service-producing workweek edged down to 33.2 hours from 33.3 hours in May.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's **USECON** database. Detailed figures are in the **EMPL** and **LABOR** databases. The expectations figures are in the **AS1REPNA** database.

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- U.S. nonfarm payrolls increased 57,000 in June with meaningful downward revisions to both April and May.
- The market consensus looked for a 115,000 increase.
- The unemployment rate edged down to 4.2% from 4.3%, due mostly to a large decrease in the labor force.
- Average hourly earnings rose 0.3% m/m (3.5% y/y), in line with expectations.

U.S. Payroll Employment Gains Smaller than Expected in June

Robert Brusca

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Unemployment rates in the European Monetary Union (EMU) were steady in May at 6.2%, the same level as in April, after April had fallen to 6.2% from 6.3%. The 6.2% reading is the lowest for the community since it was formed. Meanwhile, for the larger community, the EU, the unemployment rate has stabilized at 5.9%, the same as in April, again, a tick lower than it was in March. This 5.9% reading is a tick above the historic low for the European Union (EU). In both cases, the performance of these two economic conglomerations is quite excellent.

**Monthly**
The table looks at 12 of the most senior members of the monetary union, including an observation for the United Kingdom based on its claimant-count unemployment rate, presented at the bottom of the table. In May, the monetary union saw 4 of 12 members in the table with lower unemployment rates than they had in April. In April, five members had lower unemployment rates than in March. In March, seven members had lower unemployment rates than they posted in February. The progression to lower unemployment rates has slowed based on monthly data.

**Sequentially**
Looking at changes in the unemployment rates over broader sequential periods—three months, six months, and 12 months—6 out of 12 reporters have lower unemployment rates over three months; 7 have lower unemployment rates over six months; only 4 report unemployment rates that are lower over 12 months. The broader periods for comparison show changes in the unemployment rates that report more declines over the shorter and more recent periods compared to the longer/older periods. This is not the same trend leaning that we get from the last three months of data. It'll be good to watch these developments in the coming months to see if the tendency to lower unemployment rates is slowing or whether dropping unemployment is continuing in force.

**Rankings**
The ranking of unemployment rates since 1990 finds only three of these 12 monetary union members with unemployment rates above their medians. Those are Luxembourg, with a 98.2 percentile standing, Finland with an 81.9 percentile standing, and Austria with a 76.6 percentile standing. Italy, on the other hand, is reporting the lowest unemployment rate that it has seen during this period. The Greek unemployment rate has been this low or lower only about 3% of the time, while in Spain the unemployment rate has been this low or lower 11% of the time. For Portugal, the unemployment ranking figure has been weaker 13% of the time. The monetary union continues to report excellent labor market results even though economic growth has been relatively disappointing.

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**Summing up and central bankers**
In the wake of the monetary conference in the Sintra this past week, central banks featuring contributions from the European Central Bank, the Bank of England, the Federal Reserve, and the Bank of Canada, saw central bank heads talking about getting back to basics and stopping the use of some of the newer tools that had been pressed into service after the great financial crisis and during COVID. Bankers are getting back to basics to focus on short-term interest rates and say they will stop fiddling with the size of the balance sheet and to largely set aside the use of forward guidance. It will take time to determine what these changes are going to mean in terms of how policy performs and how markets will react. While there was a lot of discussion, and in some places concerns about the loss of forward guidance, what is clear is that, with forward guidance gone, there will be more volatility; however, the markets will be freer to price economic events themselves and will not be so stuck to the outlook of the central bank.  That could turn out to be a gigantic win for both markets and central bankers.

Europe

Unemployment Remains Quite Low in Europe

Andrew Cates

**Tightening Bias Intact, but Unevenly Distributed**
The July Blue Chip Financial Forecasts survey's expectations for policy rate changes over the next twelve months reveal a striking divergence across the major advanced economies, as chart 1 below makes clear. Across the board, the rate outlook is higher than it was in late February, before the US-Iran conflict escalated: the energy price shock and its inflationary consequences have left an imprint on the panel's thinking, even as oil prices have since retreated. Japan tops the list with an expected increase of around 40 basis points, reflecting the building pressure on the Bank of Japan to respond to yen weakness and still-elevated domestic inflation. Canada and the euro area also sit firmly in positive territory, with expected increases of around 30 and 20 basis points respectively. The US and the UK, by contrast, are in negative territory — the US barely so, the UK more distinctly, with the panel pencilling in modest rate reductions over the coming year. This pattern is not simply a reflection of where each economy sits in the inflation cycle. It also encodes a judgement about the current stance of monetary policy: in Japan, the euro area and Canada, policy is likely seen as insufficiently tight relative to the inflation challenge, and the conflict has reinforced that view. In the US and UK, by contrast, policy is judged to be closer to or already beyond neutral, meaning the next move is more likely to be an easing than a further tightening — even if, in the US case, that easing has been pushed well into 2027.

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**When Will the Next Move Come?**
Chart 2 below adds a timing dimension to the rate outlook, showing where the BCFF panel currently places the next policy move for the Fed, ECB, Bank of England and Bank of Japan. For the BoJ, the distribution is concentrated around the near term, with a significant share of respondents expecting action in September or October — consistent with the building pressure illustrated in chart 1 and with the BoJ’s next scheduled decision on 31 July. For the ECB, September or later than November emerge as the most likely timing for the next step. The Bank of England panel is more spread, with a meaningful share expecting action to come later. For the Fed, the dominant view places the next move firmly in the ‘later’ category, consistent with the BCFF consensus that the Fed funds rate will hold through the rest of 2026, with a first cut not expected until Q2 2027. Under chair Kevin Warsh, the June FOMC meeting delivered a hawkish dot plot that shifted some participants toward a hike before year-end, but the panel as a whole has not moved that far.

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**Headline Up, Core Contained: The Inflation Picture Across Advanced Economies**
One of the more reassuring features of the current inflation episode has been the limited pass-through from energy prices to underlying price dynamics. Across the advanced economies, headline CPI inflation has risen materially since the conflict escalated in March, driven overwhelmingly by consumer energy costs. Core inflation — stripping out food and energy — has edged higher, but only modestly, suggesting that second-round effects remain contained for now. In the United States, the pressures are arguably more alarming, with core PCE rising sharply between February and May to its highest level since October 2023. In the euro area, the focus this week has been firmly on Eurostat's June flash CPI estimate, published yesterday. Headline inflation fell back to 2.8% from a peak of 3.2% in May, as energy costs — the main driver of the surge since the conflict began — eased meaningfully. Crucially, core inflation also ticked down, and services inflation retreated as well. The June data therefore tell a broadly reassuring story: the energy shock is unwinding without leaving a lasting imprint on underlying price dynamics — precisely what the ECB will have been hoping for.

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**Consumer Price Expectations: Are Households Convinced?**
The aggregate inflation picture looks relatively contained at the macro level, but whether households are similarly reassured is a separate question. Chart 4 below draws on the European Commission's consumer survey data on price expectations — one of the more timely and widely watched indicators of inflation psychology in the euro area. The survey captures whether consumers expect prices to rise, stay the same or fall over the coming twelve months, and its relationship with actual inflation outturns has historically been close. A sustained elevation in consumer price expectations risks becoming self-fulfilling, feeding into wage demands and pricing behaviour in ways that complicate the ECB's task considerably. The June survey, however, brought an encouraging development: expectations fell steeply, suggesting that households have begun to register the reversal in energy prices and the broader easing of the inflationary impulse. That said, the absolute level of expectations remains elevated relative to the pre-conflict period, and one month's decline does not constitute a trend. Whether the June reading marks the beginning of a sustained normalisation — or proves a temporary dip before expectations re-anchor at a higher level — will be one of the key variables shaping the ECB's decision calculus in the months ahead.

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**Japan: A Weak Yen at the Worst Possible Time**
Japan occupies a particularly uncomfortable position in the current global conjuncture. The yen has depreciated to levels not seen since December 1986, with USD/JPY touching 162 this week. The move reflects the persistence of a large interest rate differential: even as the Bank of Japan has continued its gradual tightening, the Fed’s hawkish pivot under chair Kevin Warsh — with the mid-June FOMC dot plot signalling a possible hike before year-end — has reinforced the carry trade dynamics weighing on the currency. For Japan, which imports virtually all of its energy, yen weakness at a time of still-elevated global oil prices is a double burden, amplifying domestic inflation and squeezing real incomes. Verbal warnings from Japan’s Finance Ministry have had only a modest and short-lived effect on the exchange rate. The Bank of Japan’s next policy decision is on 31 July, and the pressure to act more decisively is building. The BCFF panel’s July survey revised upward its expectation for a stronger US dollar against the yen over the coming year — consistent with the fundamental picture that chart 5 below describes.

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**AI: Optimism on the Technology, Scepticism on the Price**
Returning to the BCFF survey, its special questions reveal a panel that continues to look beyond the current cyclical turbulence toward a longer-horizon structural narrative. On artificial intelligence, respondents are broadly optimistic: 45% expect a noticeable impact on US productivity and growth within one to three years, with a further 45% believing those effects are already becoming evident. That is a striking degree of conviction about a technology whose macro-level productivity impact remains, by most empirical measures, still to fully materialise. Yet the same panellists are considerably more cautious about financial markets than about the technology itself. Nearly all respondents believe that expected AI gains are already fully reflected — or even over-reflected — in current asset prices. Chart 6 below captures this tension. It is a combination — high conviction on transformative potential, high scepticism on current valuations — that has historically been associated with stretched risk premia and vulnerability to disappointment, even where the underlying technology story ultimately proves correct.

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Global financial markets have had a more settled feel this week, reflecting the continued unwinding of the geopolitical risk premium that had built up during the worst of the US-Iran conflict. Oil prices have fallen further, equity markets have been broadly supported, and incoming inflation data — notably the euro area’s June flash CPI estimate — have come in below expectations. The US holiday-shortened week ahead, with Independence Day on Friday, is likely to keep volumes thin and activity subdued. The bigger picture, however, remains one of tension between a more benign near-term inflation trajectory and central banks that may not yet be ready to stand down. In the charts below we look first at what the latest Blue Chip Financial Forecasts (BCFF) survey reveals about the expected change in and timing of policy rates across the major economies (charts 1 and 2), then at the divergence between headline and core inflation across the advanced economies (chart 3), and at what euro area consumers are more specifically expecting about inflation in the period ahead (chart 4). We turn next to Japan and the yen’s slide this week to 40-year lows (chart 5), and finally to the BCFF survey’s special questions on artificial intelligence and asset valuations (chart 6).

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Charts of the Week: Forecasters Hold Firm

Winnie Tapasanun

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The ISM U.S. manufacturing PMI fell to a lower-than-expected 53.3 in June, the first m/m fall since February, following a 1.3-point increase to 54.0 in May, according to data from the Institute for Supply Management. The June reading, above the 50 expansion-contraction threshold, indicated the U.S. manufacturing sector expanded for the sixth straight month, albeit at a slightly slower pace. A reading of 53.8 for June had been expected in the Action Economics Forecast Survey. The June manufacturing PMI, while above a contraction-level 49.0 in June 2025 and a low of 47.0 in October 2024, remained below a peak of 63.8 in March 2021.

The production index declined to 52.2 in June from 54.3 in May, indicating production expanded for the eighth consecutive month but at the slowest pace since December. The index was above a low of 44.8 in April 2025 but below a peak of 66.5 in March 2021. In June, 19.0% (NSA) of respondents reported higher production while 13.0% reported lower production. The new orders index slipped to 56.0 in June from 56.8 in May, signaling new orders grew for the sixth straight month following four successive months of contraction. The index remained well above a low of 41.8 in January 2023 but below a high of 67.0 in May 2021. In June, 22.3% (NSA) of respondents reported higher new orders while 13.4% reported declines. The inventories index climbed to 51.4 in June from 49.9 in May, marking the first expansion since April 2025. The index was slightly below a high of 52.7 in March 2025 but above a low of 43.8 in October 2024. Meanwhile, the supplier deliveries index fell to 57.4 in June from 60.6 in May and April, indicating slowing delivery performance for the seventh consecutive month after faster deliveries in November. In June, 18.1% (NSA) of respondents reported slower delivery speeds while 3.4% reported faster speeds.

On the labor front, the employment index improved to 49.7 in June from 48.6 in May, showing employment contracted for the 33rd straight month but at the slowest contraction pace since January 2025. The index was above a low of 44.1 in November 2025 but below a high of 56.5 in March 2022. In June, 16.2% (NSA) of respondents reported higher employment while 13.8% reported lower hiring.

On the pricing front, the prices paid index fell to a still-high 73.0 (NSA) in June, a 9.1-point drop—the largest decline since July 2022—from 82.1 in May, indicating raw materials prices rose for the 21st straight month but at the slowest rising pace since February. The index remained well above a low of 39.4 in December 2022 but below a high of 87.1 in March 2022 and a peak of 92.1 in June 2021. In June, 55.1% (NSA) of respondents reported higher prices while 9.2% reported price declines.

In other ISM series not included in the composite index, the new export orders index fell to 48.5 in June from 50.6 in May, indicating new export orders contracted for the third time in four months. The index was up from a low of 40.1 in May 2025 but down from a high of 52.4 in January 2025 and a peak of 57.1 in February 2022. The imports index edged down to 52.9 in June from 53.0 in May, suggesting imports expanded for the fifth successive month. The index was below its recent high of 54.9 in February but above a low of 39.9 in May 2025. The order backlog index decreased to 50.5 (NSA) in June from 52.2 in May, showing backlog levels grew at the slowest pace in six months. The index was below a high of 56.6 in February and a peak of 70.6 in May 2021 but well above a low of 37.5 in May 2023.

The ISM figures are based on responses from over 400 purchasing and supply executives from 18 industries, which are weighted according to each industry’s contribution to GDP. These data are diffusion indexes where a reading above 50 indicates expansion; below 50 indicates contraction. The ISM Manufacturing PMI is a composite index based on the diffusion indexes of five of the indexes (seasonally adjusted) with equal weights: New Orders, Production, Employment, Supplier Deliveries, and Inventories. The figures from the Institute for Supply Management can be found in Haver’s **USECON** database; further detail is found in the **SURVEYS** database. The expectations number is available in Haver’s **AS1REPNA** database.

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- ISM Mfg. PMI down slightly to 53.3 in June; sixth straight month above 50.
- Production (52.2) expands for the eighth consecutive mth.; new orders (56.0) for the sixth successive mth.
- Employment (49.7) contracts for the 33rd straight mth.; at the slowest contraction pace since Jan. ’25.
- Prices Index (73.0) at a four-month low, still indicating prices rising for the 21st consecutive mth.
- Exports (48.5) contract for the third time in four mths.; imports (52.9) continue to grow.

U.S. ISM Manufacturing PMI Still Expansionary in June; New Orders and Production Growing at a Slower Pace; Employment Contracting

Michael J. Moran

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The monthly report on construction activity receives scant attention in the financial press, and investors and traders in financial markets typically pay little heed. However, it is a valuable report for economists, as it provides a broad-based view of building activity, covering private residential and business construction, as well as government-related activity. The figures feed into the calculation of GDP. Unfortunately, results have been soft since early 2025.

Total construction activity rose 0.1 percent in May, marking the third consecutive increase. However, the gains have not been especially large, averaging 0.3%, and they have barely dented the string of weak readings in the preceding 17 months. The year-over-year change in May totaled -1.5%.

Private residential construction, the largest component of the total (41% share), rose 0.3% in May, adding to an average gain of 1.1% in the prior two months and leaving a year-over-year increase of 1.8% (chart, upper left). Most of the advance in the past year was the result of improvements to existing homes (up 8.1%). Construction of new multi-family units has shown little net change in the past year or so, while new single-family building has traced a mild downward trend (off 4.0% in the past year). Public construction has been flat in the past year, with both the federal government and state and local governments showing little net change (chart, upper right).

Private nonresidential construction (34% of the total) has received considerable press attention in the past few years because of explosive growth in the building of data centers. Growth has indeed been vigorous. Building started in 2020 and grew moderately at first, but this sector took off in 2022, about the time when artificial intelligence models became publicly available (chart, lower left, in levels to show the strong trend more clearly). Average annual growth for the three years ended 2025 totaled 48%.

Interestingly, despite the rapid growth in the building of data centers, the private nonresidential sector has been the weakest area of the construction report, with activity trending lower since early 2025 (chart, lower right). Some components of private nonresidential construction have held steady or improved (e.g. amusement & recreation, electric power), but three areas stand out on the soft side: general office, commercial, and manufacturing.

The construction figures can be found in Haver's **USECON** database. The expectations figure is from the Action Economics Forecast Survey in **AS1REPNA**.

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- Building activity in the US was firm in 2023 and 2024, but it has lost ground since then.
- Government-related construction and private residential building have been little changed in the past year or so.
- Private nonresidential construction has been notably weak, despite robust activity in the building of data centers.

Economy in Brief

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