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/051222f.jpg" width="353">
The Japanese trade balance has started to improve, with favorable movements in both exports and imports since the surplus reached a low point in September. In November, the surplus was &yen;708.1 billion (seasonally adjusted), almost the same as October&#39;s &yen;698.6, but larger than &yen;584.9 in September. Over the last couple of months, exports have continued to grow, while imports have moderated along with oil prices. Even so, non-oil imports have expanded more, so that the monthly surplus is still well below the nearly &yen;1 trillion on average for all of 2004. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051222g.jpg" width="353">
 Two months ago, when we last wrote about Japan&#39;s trade, we expressed some concern over import growth and the sensitivity to oil prices which it indicated for the health of the Japanese economy generally. This time, we&#39;ve looked at these import data from a longer perspective, and we find some very interesting facts. In 1980, when petroleum prices were at then historic peaks just under $40/barrel, the value of petroleum imports into Japan was &yen;1 trillion monthly. The quantity of petroleum imports averaged 21.2 million kiloliters monthly, making the unit value of petroleum imports &yen;47,200 per kiloliter in 1980. Now, the dollar price of oil is far higher, averaging more than $56/barrel for the first 11 months of this year. But the unit value of oil imports into Japan has been only &yen;34,800! The peak month was October, with &yen;42,700 per kiloliter, still less than the 1980 average. Thus, the stronger yen and weaker dollar have made a tremendous difference for Japan in the burden of this surge in petroleum prices. Granted, the Japanese economy in general is not nearly so robust as it was in 1980 and the recent unit values are much higher than the &yen;10,600 of ten years ago. But the impact is clearly more muted. Further, Japan, as elsewhere in the world, has become less dependent on petroleum usage. In fact, based on fixed-weight GDP in 1995 prices, a kiloliter of imported petroleum in 2004 supported &yen;6.9 million of GDP (in Q2), 88% more than the 1980 average of &yen;3.7 million.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051222h.jpg" width="353"><span style="font-size:10.0pt;font-family:Verdana;mso-fareast-font-family:&quot;MS Mincho&quot;;
mso-bidi-font-family:&quot;Times New Roman&quot;;mso-ansi-language:EN-US;mso-fareast-language:
JA;mso-bidi-language:AR-SA">
 <span style="font-size:10.0pt;font-family:Verdana;mso-fareast-font-family:&quot;MS Mincho&quot;;
mso-bidi-font-family:&quot;Times New Roman&quot;;mso-ansi-language:EN-US;mso-fareast-language:
JA;mso-bidi-language:AR-SA">A technical note on these comments. In the third graph, we compare the unit value of Japanese petroleum imports to the price of West Texas Intermediate crude oil. The unit value series is not contained in Haver&#39;s JAPAN database, nor reported as such, to our knowledge.The Ministry of Finance reports the yen value of these imports, &quot;petroleum, crude and partly refined&quot;, and also the quantity in millions of kiloliters. So, using DLXVG3, we can divide these two series to obtain the unit value. If we used the result as shown, the title of the graph would be the ratio of the codes for the two data series. But we can change that to give it a nicer label: using the drop-down menu under &quot;Graph&quot;, we can click on &quot;Titles&quot; and then &quot;Main Titles&quot; to change the wording and the units as we desire. Then, if we want, we can save the modified graph in a &quot;Folder&quot; to be used later. During the New York City transit strike, I have prepared all of these graphs at home and emailed them and their specifications to Haver&#39;s office, so that they can be uploaded to this website. 

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/JAPAN/@J9/@J9.HTM">Japan:&nbsp; </a>Bil.&yen;&nbsp; SA except as noted</th>
<th scope="col">Nov 2005 </th>
<th scope="col">Oct 2005 </th>
<th scope="col">Sept 2005 </th>
<th scope="col">Nov 2004 </th>
Monthly Averages
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004 </td>
<td>2003 </td>
<td>2002 </td>
</tr>
<tr>
<td class="firstcol">Trade Balance </td>
<td>708.1 </td>
<td>698.6 </td>
<td>584.9 </td>
<td>927.8 </td>
<td>996.2 </td>
<td>844.0 </td>
<td>822.7 </td>
</tr>
<tr class="odd">
<td class="firstcol">Exports </td>
<td>5894.6 </td>
<td>5772.9 </td>
<td>5576.4 </td>
<td>5272.0 </td>
<td>5078.6 </td>
<td>4544.7 </td>
<td>4339.5 </td>
</tr>
<tr>
<td class="firstcol">&nbsp; Yr/Yr % Chg (NSA) </td>
<td>14.7 </td>
<td>8.0 </td>
<td>8.8 </td>
<td>13.4 </td>
<td>12.1 </td>
<td>4.7 </td>
<td>6.4 </td>
</tr>
<tr class="odd">
<td class="firstcol">Imports </td>
<td>5186.5 </td>
<td>5074.4 </td>
<td>4991.5 </td>
<td>4344.2 </td>
<td>4082.5 </td>
<td>3700.7 </td>
<td>3516.8 </td>
</tr>
<tr>
<td class="firstcol">&nbsp; Yr/Yr % Chg (NSA) </td>
<td>16.6 </td>
<td>17.9 </td>
<td>17.5 </td>
<td>28.1 </td>
<td>10.9 </td>
<td>5.1 </td>
<td>-0.4 </td>
</tr>
</tbody>
</table>


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The Japanese trade balance has started to improve, with favorable movements in both exports and imports since the surplus reached a low point in September. In November, the surplus was ¥708.1 billion (seasonally adjusted), almost the [...]

Japanese Trade Surplus Widens Modestly in November

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051222e.jpg" width="353">
Mass layoffs rose 8.7% from October. Year to year, the number of mass layoffs fell by 13.1%.
During the last ten years there has been a (negative) 87% correlation between the three month average level of layoff announcements and the y/y change in payroll employment.
The number of persons affected by mass layoffs in November rose 11.2% m/m though the number remained below last year. By industry, the number of factory sector layoff announcements rose in November but the number of affected persons fell. In finance &amp; insurance, the number of layoff announcements fell sharply and the number of affected persons dropped 21.1% (-9.4% y/y). In construction, the number of layoff announcements surged and generated a three fold m/m increase in the number of initial claims for unemployment insurance.
The Mass Layoff Statistics (MLS) program collects reports on mass layoff actions that result in workers being separated from their jobs. Monthly mass layoff numbers are from establishments which have at least 50 initial claims for unemployment insurance (UI) filed against them during a 5-week period.
How Predictable is Fed Policy? from St. Louis Federal Reserve Bank President William Poole can be found <a href="http://research.stlouisfed.org/publications/review/05/11/Poole.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">Mass Layoffs</a></th>
<th scope="col">Nov</th>
<th scope="col">Oct</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
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</thead>
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<td class="firstcol">All US Industries (# Events, SA)</td>
<td>1,183</td>
<td>1,088</td>
<td>-13.1%</td>
<td>15,900</td>
<td>19,155</td>
<td>20,472</td>
</tr>
<tr>
<td class="firstcol">Total (# Persons, SA)</td>
<td>118,098</td>
<td>106,238</td>
<td>-9.3%</td>
<td>1,588,483</td>
<td>1,936,463</td>
<td>2.256,014</td>
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Mass layoffs rose 8.7% from October. Year to year, the number of mass layoffs fell by 13.1%. During the last ten years there has been a (negative) 87% correlation between the three month average level of layoff announcements and the [...]

Mass Layoffs Rose

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051222a.jpg" width="353">
Initial claims for unemployment insurance fell 13,000 to 318,000 last week following an upwardly revised 3,000 increase the prior week. Consensus expectations had been for 325,000 claims.
The latest figure covers the survey period for December nonfarm payrolls and claims were up 13,000 (4.3%) from the November period. During the last ten year 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 fell to 324,500 (-3.5% y/y).
Continuing unemployment insurance claims rose 41,000 following a lessened 12,000 gain the prior week.
The insured rate of unemployment ticked up to 2.1% following two weeks at 2.0%. 

<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">12/17/05</th>
<th scope="col">12/10/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
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<tr>
<td class="firstcol">Initial Claims</td>
<td>318</td>
<td>331</td>
<td>-3.3%</td>
<td>343</td>
<td>402</td>
<td>404</td>
</tr>
<tr>
<td class="firstcol">Continuing Claims</td>
<td>--</td>
<td>2,638</td>
<td>-3.0%</td>
<td>2,926</td>
<td>3,531</td>
<td>3,570</td>
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Initial claims for unemployment insurance fell 13,000 to 318,000 last week following an upwardly revised 3,000 increase the prior week. Consensus expectations had been for 325,000 claims. The latest figure covers the survey period for [...]

Initial Unemployment Insurance Claims Fell

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051222c.jpg" width="353">
The Composite Index of Leading Economic Indicators from the Conference Board increased 0.5% following an upwardly revised 1.0% gain in October. It was the third increase in the last five months and beat Consensus expectations for a 0.4% rise.
The breadth of one month gain amongst the 10 components of the leading index remained firm at 70% as higher stock prices, a higher money supply, higher consumer confidence and fewer claims for unemployment insurance offset negative influences from lower capital goods orders and easier vendor performance.
The method of calculating the contribution to the index from the interest rate yield spread has been revised. A negative contribution will now occur only when the spread inverts rather than when declining as in the past. More details can be found <a href="http://www.conference-board.org/pdf_free/economics/bci/lei0705.pdf">here</a>.
The leading index is based on eight previously reported economic data series. Two series, orders for consumer goods and orders for capital goods, are estimated.
The coincident indicators rose 0.2% following an upwardly revised 0.2% October gain. During the last ten years there has been a 64% correlation between the change in the coincident indicators and real GDP.
The lagging indicators rose 0.6% for the second month of strong gain led by higher C&amp;I loans, a higher services CPI growth rate, a longer unemployment duration and higher interest rates. The ratio of coincident to lagging indicators, a measure of actual economic performance versus excess, fell for the eighth month this year to its lowest level since August 2003.
Visit the Conference Board&#39;s <a href="http://www.conference-board.org">site</a> for coverage of leading indicator series from around the world. 

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/BCI/BCI.HTM">Business Cycle Indicators</a></th>
<th scope="col">Nov</th>
<th scope="col">Oct</th>
<th scope="col">6 Month Chg., AR</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
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<td class="firstcol">Leading</td>
<td>0.5%</td>
<td>1.0%</td>
<td>2.4%</td>
<td>7.7%</td>
<td>5.1%</td>
<td>5.0%</td>
</tr>
<tr>
<td class="firstcol">Coincident</td>
<td>0.2%</td>
<td>0.2%</td>
<td>1.2%</td>
<td>2.7%</td>
<td>0.4%</td>
<td>-0.6%</td>
</tr>
<tr class="odd">
<td class="firstcol">Lagging</td>
<td>0.6%</td>
<td>0.7%</td>
<td>3.4%</td>
<td>-0.1%</td>
<td>-0.1%</td>
<td>-0.7%</td>
</tr>
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The Composite Index of Leading Economic Indicators from the Conference Board increased 0.5% following an upwardly revised 1.0% gain in October. It was the third increase in the last five months and beat Consensus expectations for a [...]

Leading Economic Indicators Up Again

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051222b.jpg" width="353">
Personal income rose an expected 0.3% last month following an upwardly revised 0.5% increase in October.
Growth in wage &amp; salary income eased to 0.2% (4.2% y/y) from the unrevised 0.6% pop in October as factory sector wages fell 0.1% (+3.3% y/y). Service sector wages rose 0.2% (4.2% y/y) following 0.5% increases in October and September while government wages increased 0.2% (3.3% y/y).
Disposable personal income rose 0.3% (4.3% y/y) following an upwardly revised 0.4% October gain. Adjusted for the 0.4% decline in prices, take home pay jumped 0.7% (1.5% y/y).
The PCE chain price index dropped 0.4% as gasoline prices fell. Less food &amp; energy, prices rose the same 0.1% as in October. Durables prices fell 0.2% (-0.9% y/y) as new auto prices were flat. Appliance prices fell 0.7% (+3.7% y/y) and audio, video &amp; computer prices dropped 1.2% (-9.9% y/y). Clothing &amp; shoes prices rose 0.2% (-1.5% y/y) while services price rose 0.3% (3.2% y/y) following two months of 0.4% increase.
The 0.3% rise in personal consumption expenditures was a bit light of expectations. Nondurables outlays fell 1.0% (8.0% y/y) though less gasoline &amp; oil, spending on nondurables jumped 1.1% (6.9% y/y) led by a 1.5% (5.8% y/y) jump in spending on clothing &amp; shoes. Spending on motor vehicles &amp; parts rose 5.4% m/m and that helped lift durables spending overall 2.7% (-0.8% y/y), helped by a 1.3% (5.9% y/y) increase in spending on furniture. Services spending increased 0.5% (6.0% y/y) for the second month and the gain was led by a 0.6% (17.5% y/y) rise in spending on electricity &amp; gas services.
Great Expectations and the End of the Depression from the Federal Reserve Bank of New York is available <a href="http://www.newyorkfed.org/research/staff_reports/sr234.pdf"> here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E7/@E711/@E71102/@E71102.HTM">Disposition of Personal Income</a></th>
<th scope="col">Nov</th>
<th scope="col">Oct</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
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<tr class="odd">
<td class="firstcol">Personal Income</td>
<td>0.3%</td>
<td>0.5%</td>
<td>5.3%</td>
<td>5.9%</td>
<td>3.2%</td>
<td>1.8%</td>
</tr>
<tr>
<td class="firstcol">Personal Consumption</td>
<td>0.3%</td>
<td>0.2%</td>
<td>5.8%</td>
<td>6.5%</td>
<td>4.9%</td>
<td>4.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">Savings Rate</td>
<td>-0.2%</td>
<td>-0.3%</td>
<td>1.3% (Nov &#39;04)</td>
<td>1.7%</td>
<td>2.1%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">PCE Chain Price Index</td>
<td>-0.4%</td>
<td>0.1%</td>
<td>2.7%</td>
<td>2.6%</td>
<td>1.9%</td>
<td>1.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Less food &amp; energy</td>
<td>0.1%</td>
<td>0.1%</td>
<td>1.8%</td>
<td>2.0%</td>
<td>1.3%</td>
<td>1.8%</td>
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</tbody>
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Personal income rose an expected 0.3% last month following an upwardly revised 0.5% increase in October. Growth in wage & salary income eased to 0.2% (4.2% y/y) from the unrevised 0.6% pop in October as factory sector wages fell 0.1% [...]

U.S. Personal Income rose As Expected

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051221e.jpg" width="353">
The UK Office of National Statistics today released data on institutional investors&#39; activity in financial markets during Q3 2005. The table below gives an overview of this widely monitored information, generally known as the &quot;MQ5&quot; data. Today&#39;s report is the &quot;First Release&quot;; all the MQ5 figures are available, but the full, official release will come January 6, 2006. These data were added several months ago to Haver&#39;s &quot;UK&quot; database, in the Financial Data menu under &quot;MQ5&quot;, listed at the bottom.These investors include insurance companies, pension funds, investment trusts and unit trusts, four key capital market participants.As evident just in the summary table below, the amount of detail offered is considerable, and also includes some balance sheet information and figures on asset acquisitions and liquidations as well.
One aspect of the data for the first three quarters of 2005 is that these investments so far this year look to be running below the pace of the last several years. However, we also see considerable movement among various asset categories and the accompanying graph illustrates that there is considerable volatility from quarter to quarter. So it may be that Q4 would see a more sizable flow, as happened last year. In the graph, it is seen that a four-quarter moving average of this total has been fairly steady since late 2003. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051221f.jpg" width="353">
Another facet of these data is the perhaps unexpected trend of net liquidation of UK company shares. This has occurred every single quarter beginning with Q2 of 2003, more than two years ago. UK equity prices continue to rise, though, indicating that other investors are taking up the slack. Further, these institutions continue as net purchasers of other UK company securities and of foreign company securities. These developments, rather than showing some disaffection with British business, may instead serve as more evidence of the fluidity of world capital markets and the ease and ability of investors to shift their holdings.
Finally, over the last two quarters, the largest entry in our table is &quot;Other&quot;. This includes, as noted in the footnote, loans, mortgages, land (plus property and ground rents) and several other security types, some denominated in foreign currency. More concretely, these include overseas loans and mortgages, direct investment interests and balances of overseas branches. All of these items, as in the prior interpretation of flows among various corporate securities, point to the increasing globalization of capital markets. These firms&#39; portfolio and direct investments abroad are increasing, and moreover, they are putting incremental funds in new and different categories, both domestic and foreign, not simply government bonds, in which their flows remain quite modest. 

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/UK/@U1/@U1.HTM">UK: Net Investment by Institutional Investors </a>(Millions of Pounds Sterling)</th>
<th scope="col">Q3 2005 </th>
<th scope="col">Q2 2005 </th>
<th scope="col">Q1 2005 </th>
Quarterly Average 
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004 </td>
<td>2003 </td>
<td>2002 </td>
</tr>
<tr>
<td class="firstcol">Total Identified Assets </td>
<td>10.7</td>
<td>10.1</td>
<td>11.8</td>
<td>15.2</td>
<td>14.0</td>
<td>12.4</td>
</tr>
<tr class="odd">
<td class="firstcol">Short-Term Assets </td>
<td>1.0</td>
<td>7.3</td>
<td>1.2</td>
<td>3.1</td>
<td>0.2</td>
<td>-1.8</td>
</tr>
<tr>
<td class="firstcol">British Govt Sterling Securities </td>
<td>3.7</td>
<td>-5.1</td>
<td>4.4</td>
<td>4.2</td>
<td>5.0</td>
<td>1.5</td>
</tr>
<tr class="odd">
<td class="firstcol">UK Company Shares </td>
<td>-3.7</td>
<td>-5.1</td>
<td>-2.9</td>
<td>-5.2</td>
<td>-1.3</td>
<td>-3.1</td>
</tr>
<tr>
<td class="firstcol">Other UK Company Securities </td>
<td>0.2</td>
<td>0.7</td>
<td>3.7</td>
<td>5.1</td>
<td>6.4</td>
<td>6.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Overseas Company Shares </td>
<td>3.9</td>
<td>5.0</td>
<td>-0.7</td>
<td>3.6</td>
<td>0.9</td>
<td>5.5</td>
</tr>
<tr>
<td class="firstcol">Other Overseas Company Securities </td>
<td>-1.4</td>
<td>1.3</td>
<td>1.7</td>
<td>2.4</td>
<td>1.7</td>
<td>1.7</td>
</tr>
<tr class="odd">
<td class="firstcol">Overseas Govt Securities </td>
<td>-0.4</td>
<td>0.4</td>
<td>0.6</td>
<td>-1.0</td>
<td>-0.9</td>
<td>-0.3</td>
</tr>
<tr>
<td class="firstcol">All Other Assets* </td>
<td>7.4</td>
<td>5.6</td>
<td>3.7</td>
<td>3.1</td>
<td>2.0</td>
<td>1.2</td>
</tr>
</tbody>
</table>
</body>
</html>

The UK Office of National Statistics today released data on institutional investors' activity in financial markets during Q3 2005. The table below gives an overview of this widely monitored information, generally known as the "MQ5" [...]

UK Institutional Investors Diversify Holdings Through Q3; More Interest Abroad Is Evident

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051221b.jpg" width="353">
The Mortgage Bankers Association reported that the total number of mortgage applications dropped again last week by 4.0% following a 5.7% decline the week prior. The decline was to the lowest level in nearly a year and dropped December 3.3% below November.
Purchase applications were notably weak. A 5.2% decline followed the prior week&#39;s 3.5% drop and was to the lowest level since late October. The December average of purchase applications fell to just a 0.5% gain versus November.
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<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/051221c.jpg" width="353">
Applications to refinance fell 1.6% on top of the prior week&#39;s 9.7% slide and lowered the December average 9.6% below November.
The effective interest rate on a conventional 30-year mortgage fell again to 6.45% from 6.53% the prior week. Rates averaged 6.52% in November and averaged 5.81% in June. The effective rate on a 15-year mortgage also fell to 6.07%. The interest rates on 15 and 30 year mortgages are closely correlated (&gt;90%) with the rate on 10 year Treasury securities.
The Mortgage Bankers Association surveys between 20 to 35 of the top lenders in the U.S. housing industry to derive its refinance, purchase and market indexes. The weekly survey accounts for more than 40% of all applications processed each week by mortgage lenders. Visit the Mortgage Bankers Association site <a href="http://www.mbaa.org">here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYW/@S5/@S5.HTM">MBA Mortgage Applications (3/16/90=100)</a></th>
<th scope="col">12/16/05</th>
<th scope="col">12/09/05</th>
<th scope="col">Y/Y</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Market Index</td>
<td>594.6</td>
<td>619.3</td>
<td>-13.7%</td>
<td>735.1</td>
<td>1,067.9</td>
<td>799.7</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Purchase</td>
<td>453.1</td>
<td>477.9</td>
<td>-3.8%</td>
<td>454.5</td>
<td>395.1</td>
<td>354.7</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Refinancing</td>
<td>1,418.1</td>
<td>1,441.8</td>
<td>-27.6%</td>
<td>2,366.8</td>
<td>4,981.8</td>
<td>3,388.0</td>
</tr>
</tbody>
</table>
</body>
</html>

The Mortgage Bankers Association reported that the total number of mortgage applications dropped again last week by 4.0% following a 5.7% decline the week prior. The decline was to the lowest level in nearly a year and dropped [...]

Mortgage Applications Down Again

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

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

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Sandy Batten

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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%.

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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.

260702Z2.jpg

**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.

260702Z3.jpg

**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).

<iframe data-testid="embed-iframe" style="border-radius:12px" src="https://open.spotify.com/embed/episode/6WAWvuhdCIiVMfa7lArFBI?utm_source=generator&si=a00a7c7e625c4035" width="100%" height="152" frameBorder="0" allowfullscreen="" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture" loading="lazy"></iframe>

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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