Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050517b.jpg" width="353">
The Producer Price Index for finished goods rose 0.6% last month and again surpassed Consensus expectations which had been for a 0.4% increase. Excluding food &amp; energy the PPI rose 0.3% in April, up sharply from the 0.1% gains during the prior two month&#39;s and also beat Consensus expectations for a 0.2% increase.
Prices for finished consumer goods less food &amp; energy rose 0.2% (2.6% y/y), up from a 0.1% increase in March. Consumer durable goods prices increased 0.3% (1.9% y/y) following two months of decline as household appliance prices rose (2.0% y/y) along with furniture prices (3.8% y/y).
Capital goods prices increased for the second month (2.8% y/y) though computer prices continued to fall (-18.7% y/y) as did prices for light trucks (-0.5% y/y).
Finished energy prices jumped for the third consecutive month. The 2.1% (15.7% y/y) increase was led by higher prices for gasoline (28.9% y/y) and fuel oil (51.1% y/y). Finished food prices ticked up 0.1% (2.5% y/y) last month.
Intermediate goods prices again were strong, posting a 0.8% advance which reflected a 3.4% (18.8% y/y) spike in energy prices but the 0.2% monthly increase in core intermediate prices was the most moderate since 2003.
Crude prices surged another 2.7% again on the strength of energy prices, up 7.2% (32.6% y/y). The 0.8% gain in core crude prices was the second month of strength and reflected a 17.1% y/y gain in copper scrap, an 8.3% y/y increase in aluminum scrap and a 4.3% y/y rise in iron &amp; steel scrap. During the last thirty years &quot;core&quot; crude prices have been a fair indicator of industrial sector activity with a 48% correlation between the six month change in core crude prices and the change in factory sector industrial production.

<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/@E8/@E802/@E80201/@E80201.HTM">Producer Price Index</a></th>
<th scope="col">April</th>
<th scope="col">March</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">Finished Goods</td>
<td>0.6%</td>
<td>0.7%</td>
<td>4.8%</td>
<td>3.6%</td>
<td>3.2%</td>
<td>-1.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.3%</td>
<td>0.1%</td>
<td>2.6%</td>
<td>1.5%</td>
<td>0.2%</td>
<td>0.1%</td>
</tr>
<tr class="odd">
<td class="firstcol">Intermediate Goods</td>
<td>0.8%</td>
<td>1.0%</td>
<td>8.2%</td>
<td>6.6%</td>
<td>4.6%</td>
<td>-1.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.2%</td>
<td>0.3%</td>
<td>6.6%</td>
<td>5.7%</td>
<td>2.0%</td>
<td>-0.5%</td>
</tr>
<tr class="odd">
<td class="firstcol">Crude Goods</td>
<td>2.7%</td>
<td>4.3%</td>
<td>11.8%</td>
<td>17.5%</td>
<td>25.1%</td>
<td>-10.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Core</td>
<td>0.8%</td>
<td>1.0%</td>
<td>8.4%</td>
<td>26.6%</td>
<td>12.4%</td>
<td>3.8%</td>
</tr>
</tbody>
</table>
Housing Starts Rebounded 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 17, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050517a.jpg" width="353">
Housing starts rebounded 11.0% in April and recovered about half of the prior month&#39;s unrevised 17.6% decline.The rise to 2.038M exceeded Consensus expectations for 1.97M starts. Figures were revised back to 2003.
Single-family starts gained back just a piece of the prior month&#39;s sharp decline with a 6.3% m/m rise. All of the rise was due to a 21.1% (11.4% y/y) increase in the South while single family starts in the Northeast dropped for the third month this year (-12.9% y/y). Single family starts in the Midwest fell 7.6% (-19.1% y/y) and starts in the West were off 4.7% but still up 1.0% y/y.
Multi family starts gained back most of the prior moth&#39;s skid with a 35.2% rise.
Building permits rose 5.3%. This first increase in three months was nearly back to the record high.

<table border="0" cellspacing="0" width="100%">

</table>
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<colgroup><col><col><col><col><col><col></colgroup>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E9/@E901/@E90101/@E90101.HTM">Housing Starts (000s, AR)</a> </th>
<th scope="col">April</th>
<th scope="col">March</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</td>
<td>2,038</td>
<td>1,836</td>
<td>3.6%</td>
<td>1,950</td>
<td>1,854</td>
<td>1,7 10</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Single-family</td>
<td>1,635</td>
<td>1,538</td>
<td>0.7%</td>
<td>1,604</td>
<td>1,505</td>
<td>1,363</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Multi-family</td>
<td>403</td>
<td>298</td>
<td>17.3%</td>
<td>345</td>
<td>349</td>
<td>347</td>
</tr>
<tr>
<td class="firstcol">Building Permits</td>
<td>2,129</td>
<td>2,021</td>
<td>2.9%</td>
<td>2,058</td>
<td>1,8 88</td>
<td>1,749</td>
</tr>
</tbody>
</table>
NAHB Housing Market Index Recovered 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 17, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050517e.jpg" width="353">
The May National Association of Home Builders&#39; (NAHB) Composite Housing Market Index recovered all of the prior month&#39;s sharp drop and rose to 70.
During the last twenty years, annual changes in the composite index had an 83% correlation with the change in new home sales. There&#39;s been an 86% correlation with the change in single family housing starts.
All of the index components improved in May though the index of expected sales in six months by just 1.3%.
Traffic of prospective home buyers rose to the highest level this year.
The NAHB index is a diffusion index based on a survey of builders. Readings above 50 signal that more builders view conditions as good than poor.
Visit the <a href="http://www.nahb.org"> National Association of Home Builders</a>.

<table border="0" cellspacing="0" width="100%">
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S4/@S4.HTM">Nat&#39;l Association of Home Builders</a> </th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">May &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Composite Housing Market Index</td>
<td>70</td>
<td>67</td>
<td>69</td>
<td>68</td>
<td>64</td>
<td>61</td>
</tr>
</tbody>
</table>
Industrial Production Fell 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 17, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050517f.jpg" width="353">
Industrial production fell 0.2% in April following a downwardly revised 0.1% increase in March. Consensus expectations had been for a 0.2% gain. Lower utility output accounted for all of the decline as it fell 2.3% (0.7% y/y) for the third decline this year.
Factory sector output recovered 0.1% (3.5% y/y) of a downwardly revised 0.3% decline in March. Excluding the high tech sector where output rose 1.8% (20.3% y/y) factory output fell for the second month, down 0.1% (+2.5% y/y). During 2004 factory output less high tech rose 3.9%.
Production of electrical equipment, appliances &amp; components rose 0.2% after a downwardly revised 1.0% March increase, but the y/y gain of 2.0% was well off the 6.2% pace of 2004. Machinery output also rose a firm 1.3% but here as well the y/y growth of 6.3% is about last year&#39;s increase.
Total capacity utilization slipped to 79.2% and capacity grew 1.2% y/y. Factory sector utilization also slipped to 77.9% and capacity rose 1.3% y/y.

<table border="0" cellspacing="0" width="100%">

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<colgroup><col><col><col><col><col><col></colgroup>
<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EA/@EA.HTM">Production &amp; Capacity</a></th>
<th scope="col">April</th>
<th scope="col">March</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">Industrial Production</td>
<td>-0.2%</td>
<td>0.1%</td>
<td>3.1%</td>
<td>4.1%</td>
<td>-0.0%</td>
<td>-0.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Consumer Goods</td>
<td>-0.9%</td>
<td>-0.2%</td>
<td>1.4%</td>
<td>2.7%</td>
<td>0.3%</td>
<td>1.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Business Equipment</td>
<td>0.8%</td>
<td>-0.1%</td>
<td>8.4%</td>
<td>9.5%</td>
<td>1.2%</td>
<td>-7.9%</td>
</tr>
<tr>
<td class="firstcol">Capacity Utilization</td>
<td>79.2%</td>
<td>79.4%</td>
<td>77.7% (04/04)</td>
<td>78.1%</td>
<td>75.5%</td>
<td>75.3%</td>
</tr>
</tbody>
</table>
Weekly Chain Store Sales Fell 
by <a href="/comment/Moeller.html">Tom Moeller</a> May 17, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050517g.jpg" width="353">
Chain store sales fell a sharp 1.0% last week following the 0.7% surge which opened the month of May, according to the International Council of Shopping Centers (ICSC)-UBS survey. Sales in May nevertheless remained 0.9% above the April average which rose 0.6% from March.
During the last ten years there has been a 56% correlation between the y/y change in chain store sales and the change in non-auto retail sales less gasoline, as published by the US Census Department. Chain store sales correspond directly with roughly 14% of non-auto retail sales less gasoline.
The leading indicator of chain store sales from ICSC rose 0.4% (-0.1% y/y) in early May and reversed all of the prior week&#39;s decline.
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%">
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<thead>
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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/surveyw/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">05/14/05</th>
<th scope="col">05/07/05</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>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>456.7</td>
<td>461.4</td>
<td>3.3%</td>
<td>4.6%</td>
<td>2.9%</td>
<td>3.6%</td>
</tr>
</tbody>
</table>
Japan's Real GDP Strong in First Quarter,2005: Deflation Still a Problem 
by <a href="/comment/Curley.html">Louise Curley</a> May 17, 2005


<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050517h.jpg" width="353">
The first quarter preliminary report for Japan&#39;s Real Gross Domestic Product released today was surprisingly good. GDP increased at annual rate of 5.3%. Last year also started out with a bang--a slightly larger increase, 5.6%-- but this was followed by declines of 0.83% and 1.04% in the second and third quarters and a minimal increase of 0.06% in the fourth quarter.
The composition of this year&#39;s first quarter increase is significantly different from that of last year&#39;s (See table below) and suggests that the outlook may be more promising. Although private inventory accumulation accounted for almost one-third of the increases in both years, there were encouraging shifts from the public to the private sector in the remaining two-thirds of the increase. Household consumption accounted for 49% of the total increase in 2005, up from 27.1% in 2004, while government consumption went from 17.2% to 10.1%. Private gross fixed investment accounted for 8.2% of the increase in the first quarter of 2005 in contrast to a negative impact of 26.6% in 2004, while public gross fixed investment dropped to 5.8% from a 33.3% contribution in 2004.
These increases in the private domestic sector&#39;s contribution to growth were all the more impressive in view of negative impact of the external sector. Net exports of goods and services were a drag on growth in 2005 of almost 6% whereas they contributed 19% to growth in 2004.
While the increase in activity in the private domestic sector is encouraging, deflation remains a stubborn problem. The non seasonally adjusted chain-linked GDP deflator in the first quarter of 2005 was 1.2% below the comparable figure of a year ago. There is, however, some evidence that prices at the wholesale level are beginning to move up and may eventually lead to price rises at the consumer level. Japan&#39;s Corporate Goods Price Index released yesterday, showed a year to year increase of 3.3% in April. The index has shown increases since May of 2004, the first sustained rise since the late nineties. The attached chart shows the year-to-year changes in this index together with the year-to-year changes in the chain linked GDP deflator.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">Fourth to First Quarter Change&nbsp;</th>
<th scope="col">2005 Bil. Yen</th>
<th scope="col">2004 Bil. Yen</th>
<th scope="col">2005 %</th>
<th scope="col">2004 %</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Household Consumption</td>
<td>3416.0</td>
<td>1958.2</td>
<td>49.2</td>
<td>27.1</td>
</tr>
<tr>
<td class="firstcol">Government Consumption</td>
<td>699.9</td>
<td>1250.5</td>
<td>10.1</td>
<td>17.2</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Gross Fixed Invest.</td>
<td>51.2</td>
<td>-1.957.7</td>
<td>8.2</td>
<td>-26.6</td>
</tr>
<tr>
<td class="firstcol">Public Gross Fixed Invest.</td>
<td>404.8</td>
<td>2432.1</td>
<td>5.8</td>
<td>33.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Private Inventory Change</td>
<td>2312.0</td>
<td>2207.6</td>
<td>33.3</td>
<td>30.4</td>
</tr>
<tr>
<td class="firstcol">Public Inventory Change</td>
<td>-48.9</td>
<td>68.4</td>
<td>-0.7</td>
<td>0.9</td>
</tr>
<tr class="odd">
<td class="firstcol">Net Exports of Goods and Services</td>
<td>-412.4</td>
<td>1389.0</td>
<td>-5.9</td>
<td>19.1</td>
</tr>
<tr>
<td class="firstcol">Total of Items Listed*</td>
<td>6942.6</td>
<td>7348.1</td>
<td>100.0</td>
<td>100.0</td>
</tr>
<tr class="odd">
<td class="firstcol">Change in GDP</td>
<td>6950.2</td>
<td>7267.6</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
</tbody>
</table>
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The Producer Price Index for finished goods rose 0.6% last month and again surpassed Consensus expectations which had been for a 0.4% increase. Excluding food & energy the PPI rose 0.3% in April, up sharply from the 0.1% gains during [...]

PPI Gains Broad

Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050517d.jpg" width="353">
China&#39;s balance of trade, which had risen sharply during 2004 and into January of this year, has begun to moderate. The April balance was $7,259 million compared to $7,974 in March and the peak of $11,443 reached in January. China&#39;s balance of trade in goods is shown in the first chart. Trade balances among countries are not yet available for April. Changes from February to March are shown in the following table. During the month of March, China&#39;s balance of trade with the U. S., Japan, Korea and Taiwan improved but deteriorated with the Euro Area it deteriorated.
In spite of the rise in the balance of trade in 2004, the largest yearly balance of trade was reached back in 1998. At that time the balance was $43,476 million compared with $32,868 in 2004. The direction of trade has changed markedly since then. The table below lists the balances of trade with selected areas and countries and the changes between 1998 and 2004. By far the largest change has taken place in the China-US trade, where China&#39;s surplus in the balance of trade has increased by $59,358 million from $20,968 million in 1998 to $80,321 million in 2004. The second chart compares China&#39;s total balance of trade with that for the United States. Over this period, China also improved its surplus with Europe from $7,085 million to $33, 648 million. Offsetting the increases in surpluses with the U. S. and Europe were the increases in deficits with Asian countries and Latin America. (Note: Data for Latin America were taken from the IMFDOT data base, which has much more country detail than the China data base in EMERGEPR)<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050517c.jpg" width="353">

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/EMERGEPR/@P1/@P1.HTM">China</a> Millions of US$</th>
<th scope="col">Apr 05</th>
<th scope="col">Mar 05</th>
<th scope="col">Feb&nbsp; 05</th>
<th scope="col">M/M chg</th>
<th scope="col">2004- 1998</th>
<th scope="col">2004</th>
<th scope="col">&nbsp;2003&nbsp;&nbsp;</th>
<th scope="col">&nbsp;2002</th>
<th scope="col">&nbsp;1998</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total Trade Balance</td>
<td>7259</td>
<td>7974</td>
<td>4877</td>
<td>2097</td>
<td>-10608</td>
<td>32868</td>
<td>25558</td>
<td>30426</td>
<td>43476</td>
</tr>
<tr>
<td class="firstcol">Balance with U. S.</td>
<td></td>
<td>9228</td>
<td>8363</td>
<td>865</td>
<td>59358</td>
<td>80321</td>
<td>58627</td>
<td>42732</td>
<td>20968</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance with Europe</td>
<td>&nbsp;</td>
<td>4353</td>
<td>5485</td>
<td>-1131</td>
<td>26563</td>
<td>33648</td>
<td>18461</td>
<td>5770</td>
<td>7085</td>
</tr>
<tr>
<td class="firstcol">Balance with Japan</td>
<td>&nbsp;</td>
<td>-882</td>
<td>-1547</td>
<td>665</td>
<td>-21966</td>
<td>-20655</td>
<td>-14750</td>
<td>-5006</td>
<td>1311</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance with Korea</td>
<td>&nbsp;</td>
<td>-3081</td>
<td>-3780</td>
<td>699</td>
<td>-24941</td>
<td>-34356</td>
<td>-23056</td>
<td>-13073</td>
<td>-9415</td>
</tr>
<tr>
<td class="firstcol">Balance with Taiwan</td>
<td>&nbsp;</td>
<td>-4321</td>
<td>-4690</td>
<td>369</td>
<td>-38385</td>
<td>-51212</td>
<td>-31493</td>
<td>-22338</td>
<td>-12827</td>
</tr>
<tr class="odd">
<td class="firstcol">Balance with Latin America</td>
<td>n.a.</td>
<td>n.a.</td>
<td>n.a.</td>
<td>n.a.</td>
<td>-6879</td>
<td>-4615</td>
<td>-3218</td>
<td>928</td>
<td>2264</td>
</tr>
</tbody>
</table>
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China's balance of trade, which had risen sharply during 2004 and into January of this year, has begun to moderate. The April balance was $7,259 million compared to $7,974 in March and the peak of $11,443 reached in January. China's [...]

China' Trade in Goods: Changes in Direction

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050516a.jpg" width="353">
The Empire State Index of General Business Conditions in New York&#39;s manufacturing industries went negative in May for the first month since April 2003. The decline to -11.11 followed a year of weakening versus the peak in February 2004 and April&#39;s level was revised down.
The new orders component dropped further into negative territory but the shipments index was slightly positive. The employment index fell to its lowest since September 2003 and the barely positive reading indicated little if any job growth. Like the Philadelphia Fed Index of General Business Conditions, the Empire State Business Conditions Index reflects answers to an independent survey question; it is not a weighted combination of the components.
The prices paid index slipped further to the lowest level since last February.
Expectations for business conditions in six months fell further and indicated the most pessimism since 2001. Expectations for future capital spending fell hard for the third month in the last five and the average level this year is below 2004.
The Empire State Manufacturing Survey is a monthly survey of manufacturers in New York State conducted by the Federal Reserve Bank of New York. Participants from across the state in a variety of industries respond to a questionnaire and report the change in a variety of indicators from the previous month. Respondents also state the likely direction of these same indicators six months ahead. April 2002 is the first report, although survey data date back to July 2001.
For more on the Empire State Manufacturing Survey, including methodologies and the latest report, click <a href="http://www.newyorkfed.org/research/regional_economy/empiresurvey_overview.html">here</a>.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/SURVEYS/@S5/@S511/@S511.HTM">Empire State Manufacturing Survey</a> </th>
<th scope="col">May</th>
<th scope="col">April</th>
<th scope="col">May &#39;04</th>
<th scope="col">2004</th>
<th scope="col">2003</th>
<th scope="col">2002</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">General Business Conditions (diffusion index)</td>
<td>-11.11</td>
<td>2.03</td>
<td>31.01</td>
<td>28.76</td>
<td>16.17</td>
<td>7.19</td>
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The Empire State Index of General Business Conditions in New York's manufacturing industries went negative in May for the first month since April 2003. The decline to -11.11 followed a year of weakening versus the peak in February [...]

Empire State Index Negative

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/050513e.jpg" width="353">
A recurrent theme of our reports over the last couple of months has been the continuation of low consumer price inflation despite high energy prices. This phenomenon has persisted through April in several European countries that reported their latest CPI data today.
This is especially evident in France, where the total CPI has even slowed somewhat in the face of the recent surge in energy costs. The first four months of 2005 averaged year-on-year inflation of 1.8%, compared with a five-year average of 2.0%. Food is cheaper, clothing prices are little changed and manufactured goods have declined outright. Services prices have been rising 2.7%, but this is less than their 3%+ pace in 2002.
In Finland and Sweden, which we mentioned here a month ago, the 12-month change in total CPI ticked up by 0.1% and 0.2%, respectively from their March rates. But that still leaves Finland at 1.1% and Sweden at a mere 0.3%. In Spain, total inflation was 3.5% year-on-year in April, with some signs of upward creep. But the pace excluding energy has been steady at 2.9% for the last two years.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050513f.jpg" width="353">
Perhaps we are simply short-sighted in these comments; perhaps it simply takes longer than a year for the &quot;second-round&quot; effects of sustained energy prices to filter through to other items. Or perhaps, as we noted elsewhere recently, the second-round effects will appear more as restraints to demand growth than spurs to higher inflation.

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<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/G10/G10.HTM">Yr/Yr % Changes</a> Not Seasonally Adjusted</th>
<th scope="col">Apr 2005</th>
<th scope="col">Mar 2005</th>
<th scope="col">Feb 2005</th>
December/December
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">2004</td>
<td>2003</td>
<td>2002</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>1.8</td>
<td>1.9</td>
<td>1.6</td>
<td>2.1</td>
<td>1.2</td>
<td>2.3</td>
</tr>
<tr class="odd">
<td class="firstcol">Finland</td>
<td>1.1</td>
<td>1.0</td>
<td>0.2</td>
<td>0.4</td>
<td>0.6</td>
<td>1.7</td>
</tr>
<tr>
<td class="firstcol">Sweden</td>
<td>0.3</td>
<td>0.1</td>
<td>0.7</td>
<td>0.3</td>
<td>1.3</td>
<td>2.1</td>
</tr>
<tr class="odd">
<td class="firstcol">Spain</td>
<td>3.5</td>
<td>3.4</td>
<td>3.3</td>
<td>3.2</td>
<td>2.6</td>
<td>4.5</td>
</tr>
<tr>
<td class="firstcol">US</td>
<td>--</td>
<td>3.1</td>
<td>3.0</td>
<td>3.3</td>
<td>1.9</td>
<td>2.4</td>
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A recurrent theme of our reports over the last couple of months has been the continuation of low consumer price inflation despite high energy prices. This phenomenon has persisted through April in several European countries that [...]

European Consumer Inflation Continues Moderate in the Face of Rising Energy

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050513d.jpg" width="353">
The University of Michigan&#39;s reading of consumer sentiment in May fell 2.7% from April to 85.3. The decline contrasted to Consensus expectations for stability at 88.0.
Sentiment has fallen in each of the last five months and is down 17.8% from the January &#39;04 peak. During the last ten years there has been a 75% (inverse) correlation between the level of consumer sentiment and the y/y change in real PCE, although the correlation has fallen in recent years.
Consumer expectations were depressed mostly by a sense that unemployment would rise which generated expectations that real family income would decline, helped lower by an expected acceleration in price inflation.
The reading of current economic conditions fell 1.1% for the fourth consecutive monthly drop and reflected a sharp decline in the reading of personal finances to the lowest level since December 2003.
The University of Michigan survey is not seasonally adjusted.The mid-month survey is based on telephone interviews with 250 households nationwide on personal finances and business and buying conditions. The survey is expanded to a total of 500 interviews at month end.

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<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@EF/@EF14/@EF1402/@EF1402.HTM">University of Michigan</a></th>
<th scope="col">May</th>
<th scope="col">April</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">Consumer Sentiment</td>
<td>85.3</td>
<td>87.7</td>
<td>-5.4%</td>
<td>95.2</td>
<td>87.6</td>
<td>89.6</td>
</tr>
<tr>
<td class="firstcol">&nbsp;&nbsp; Current Conditions</td>
<td>103.3</td>
<td>104.4</td>
<td>-0.3%</td>
<td>105.6</td>
<td>97.2</td>
<td>97.5</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp; Consumer Expectations</td>
<td>73.7</td>
<td>77.0</td>
<td>-9.7%</td>
<td>88.5</td>
<td>81.4</td>
<td>84.6</td>
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The University of Michigan's reading of consumer sentiment in May fell 2.7% from April to 85.3. The decline contrasted to Consensus expectations for stability at 88.0. Sentiment has fallen in each of the last five months and is down [...]

U.S. Consumer Sentiment Depressed

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050513a.jpg" width="353">
Import prices surged 0.8% last month following an upwardly revised 2.0% spike in March. Consensus expectations had been for a moderate 0.3% increase.
Petroleum prices jumped another 3.1% m/m and the March gain was revised up. While crude oil moderated and rose just 1.0%, a 9.9% jump in &quot;other&quot; petroleum product prices and a 12.4% gain gas prices lifted the fuel total. So far in May the price of Brent Crude oil has traded roughly 5% below the April average of $52.22 per barrel and yesterday touched $46.63.
Import prices other than petroleum rose 0.4% last month and again mostly reflected strength in prices of foods &amp; beverages (0.4% m/m, 8.5% y/y) and in prices for industrial supplies &amp; materials less petroleum (2.1% m/m, 11.5% y/y).
During the last ten years there has been a 66% (negative) correlation between the nominal trade-weighted exchange value of the US dollar vs. major currencies and the y/y change in non oil import prices. The correlation is a lower 47% against a broader basket of currencies and a lower 57% against the real value of the dollar. <img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050513b.jpg" width="353">
Prices for nonauto consumer goods fell 0.1% (+1.1% y/y) for the second down month and capital goods prices fell 0.1% (-0.5% y/y) for the third down month. Imported computer prices fell 1.1% (-7.1% y/y) although excluding computers capital goods prices rose a firm 0.3% (2.7% y/y).
Export prices again rose 0.6% on the strength of a 1.9% (14.0% y/y) surge in industrial materials.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
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<tr>
<th scope="col" class="firstcol"><a href="http://www.haverselect.com/dlx/USECON/@E8/@E807/@E807.HTM">Import/Export Prices (NSA)</a></th>
<th scope="col">April</th>
<th scope="col">March</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">Import - All Commodities</td>
<td>0.8%</td>
<td>2.0%</td>
<td>8.1%</td>
<td>5.6%</td>
<td>2.9%</td>
<td>-2.5%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Petroleum</td>
<td>3.1%</td>
<td>12.3%</td>
<td>43.1%</td>
<td>30.5%</td>
<td>21.0%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Non-petroleum</td>
<td>0.4%</td>
<td>0.3%</td>
<td>3.0%</td>
<td>2.6%</td>
<td>1.1%</td>
<td>-2.4%</td>
</tr>
<tr>
<td class="firstcol">Export - All Commodities</td>
<td>0.6%</td>
<td>0.6%</td>
<td>3.1%</td>
<td>3.9%</td>
<td>1.6%</td>
<td>-1.0%</td>
</tr>
</tbody>
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Import prices surged 0.8% last month following an upwardly revised 2.0% spike in March. Consensus expectations had been for a moderate 0.3% increase. Petroleum prices jumped another 3.1% m/m and the March gain was revised up. While [...]

Import Prices Surged

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/050513c.jpg" width="353">
Total business inventories rose 0.4% in March and the y/y rate of inventory accumulation continued strong at 7.9%. The ratio of inventories-to-sales fell slightly, however, and returned to the record low average of last year.
Retail inventories rose 0.3% in March and also gained 0.3% excluding autos. Inventories of furniture &amp; electronics increased 0.6% (6.2% y/y) following two months of decline and general merchandise doubled the prior month&#39;s increase with a 1.0% surge (6.6% y/y). Apparel inventories rose 0.5% (4.3% y/y).
Factory sector inventories grew 0.6% for the second month and the 8.9% increase versus last year remained the strongest since 1989.
Wholesale inventory accumulation moderated to 0.4%. During the last ten years there has been a 64% correlation between the y/y change in wholesale inventories and the change in imports of merchandise.
Overall business sales recovered 0.7% (6.7% y/y) after the 0.5% decline in February.

<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/@ED/@ED06/@ED0601/@ED0601.HTM">Business Inventories</a></th>
<th scope="col">March</th>
<th scope="col">Feb</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</td>
<td>0.4%</td>
<td>0.5%</td>
<td>7.9%</td>
<td>7.7%</td>
<td>1.4%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Retail</td>
<td>0.3%</td>
<td>0.4%</td>
<td>4.8%</td>
<td>5.7%</td>
<td>3.9%</td>
<td>5.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;&nbsp;&nbsp; Retail excl. Autos</td>
<td>0.3%</td>
<td>0.5%</td>
<td>6.5%</td>
<td>5.9%</td>
<td>2.0%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">&nbsp; Wholesale</td>
<td>0.4%</td>
<td>0.6%</td>
<td>10.8%</td>
<td>10.8%</td>
<td>2.0%</td>
<td>1.2%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp; Manufacturing</td>
<td>0.6%</td>
<td>0.6%</td>
<td>8.9%</td>
<td>7.5%</td>
<td>-1.3%</td>
<td>-1.8%</td>
</tr>
</tbody>
</table>
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Total business inventories rose 0.4% in March and the y/y rate of inventory accumulation continued strong at 7.9%. The ratio of inventories-to-sales fell slightly, however, and returned to the record low average of last year. Retail [...]

U.S. Business Inventories Rose

Cost of transporting crude oil has soared to series high

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

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

Is recent drop in sentiment signaling softer growth ahead?

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

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

AI-related outperformance of IP in Advanced Asia ex Japan

Resilient US economy pushing up Blue Chip 2026 outlook

US and China big leaders in adoption of AI models

Robust US demand for advanced technology products

China's export growth rotating away from the US

More pronounced upward revisions in countries more exposed to AI investment

Stable job openings and hiring rates point to cautious hiring

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

Accelerating positive economic surprises in the G10 are boosting the global economy

Considerably more monetary ease expected from US and UK as Japan tightens

Tighter US immigration enforcement adversely impacting labor force

Economic policy uncertainty, while still elevated, is declining

Gradual disinflation and easier monetary policies across advanced economies

Largest October layoffs since 2003, led by technology

Subdued global shipping costs not yet pointing to supply chain problems

PMIs show still-elevated but slowing US inflation

AI boosting US investment in data centers

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

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

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Michael J. Moran

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The report on payroll employment for March was impressive when viewed in isolation. Job growth was strong at 178,000, and the advance was broadly based. The construction and manufacturing sectors both posted solid gains, and the service-producing sector registered its firmest performance in more than a year. However, the gain might be viewed as a continuation of an unusual bout of random volatility. The March advance followed a notable drop in February (-133,000, revised down from -92,000), which followed an upside surprise in January (160,000, revised up from 126,000).

To be sure, statistical noise has been a factor in the past three months, but the results also represent an encouraging shift in job growth from that in the second half of last year, when employment rose only marginally in the third quarter and fell in the fourth. The net change in the past three months seems to signal that job growth is not drying up. The net advance so far this year is far from brisk, but it is clearly in the plus column and noticeably better than results in late 2025.

The unemployment rate also might be viewed as favorable, as it dipped 0.1 percentage point to 4.3%, although it was a “soft” decline. That is, employment as measured by the household survey declined 64,000, but the size of the labor force fell by a larger amount (off 396,000). Still, the jobless rate has climbed only modestly higher since the labor market started to ease in 2023, and it has inched lower in the past few months.

Unemployment has been contained despite modest hiring because layoffs also have been light. Initial claims for unemployment benefits have moved sideways in the past few years, indicating no change in the pace of layoffs. This pattern is confirmed by terminations data in the report on job openings and labor turnover (JOLTs) from the Bureau of Labor Statistics.

A supply-side shift in the labor market also has helped to contain the unemployment rate. Growth in the size of the labor force has slowed, and with fewer individuals seeking employment, those searching are more easily absorbed. Measures of the size of the labor force can be difficult to assess because there are breaks in the series every year. The Bureau of Labor Statistics adjusts the population controls used in its estimating procedure every January without revising past data to align with the new estimates. Thus, every January involves a discontinuity in the series, which will distort year-over-year changes.

However, Haver Analytics maintains a smoothed series originally developed by BLS to eliminate the breaks in the labor force data. As shown in the chart below, the smoothed series on the size of the labor force had been growing at a pace centered on 1.2% through 2022, but it has slowed irregularly since then (an observation for October is not available because of limited data collection during the government shutdown). The overall labor force is still growing, but the slower pace means fewer individuals looking for work, which most likely results in fewer being counted as unemployed.

The BLS collects data every month on both native-born and foreign-born individuals in the labor force. The breaks in these series are an issue, and Haver does not maintain smoothed series. However, the use of moving averages achieves enough smoothing to provide a sense of underlying changes. The native-born labor force has moved erratically in the past couple of years, but it has continued to advance. The foreign-born labor force, in contrast, seems to have peaked in mid-2025 and has generally declined since then.

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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- The jump of 178,000 in payroll employment in March easily exceeded the expected gain of 51,000.
- Following a net gain in January and February, the employment setting seems to have brightened slightly.
- A dip in the unemployment rate continued the recent pattern of marginal changes.

Payroll Employment: Another Surprise in March, The Third Consecutive

Robert Brusca

260403E.jpg

French manufacturing industrial production was flat in February after a January rebound; output rose by 0.2% following a 0.8% decline in December.

The components of industrial production in February showed 2.6% increase in consumer durables, a 0.4% increase in consumer nondurables, flat output from capital goods, and a 0.7% month to month decline in intermediate output.

Sequentially, French output had been growing at a slow, steady pace of 0.8% at an annual rate over both 12 months and six months, but then slipped to a 6.1% contraction at an annual rate over three months. Consumer durable goods output on this span shows consistent increases, but there are no trends to clear acceleration or deceleration. Consumer nondurables trace an accelerating path of moderate means from -1.8% over 12 months, to -0.4% over six months, and then rising at a 5.5% annual rate over three months. Capital goods output is moving in the opposite direction, growing by 3.4% over 12 months, slowing to a 0.7% annual pace over six months, and then contracting at a 9.5% annual rate over three months. Intermediate goods output is falling at 0.8% pace over 12 months, but then it switches to an expansion rate of 0.8% over six months and 0.6% and over three months. There's nothing remarkable about these patterns, except there's some acceleration, some deceleration, and a lot of mulling about at low growth rates.

As a separate item, French auto production is slipping and decelerating, falling by 7.1% at an annual rate over 12 months, falling at a 7.9% pace over six months, and then plunging at a 19.3% annual rate over three months. On these same horizons, motor vehicle registrations fall by 14.7% over 12 months; the weakness pares back to an 11.2% annual rate decline over six months, and then it steps up to a 22.1% decline at an annual rate over three months. French demand for autos is not in good shape.

In the quarter to date—now two months into the first quarter—manufacturing industrial production is falling at a 0.8% annual rate. That pace is boosted by 9.4% annual rate gain in consumer durables output but restrained by just a 0.2% annual rate increase in consumer nondurable goods. Capital goods output is falling at a 1.9% annual rate, while intermediate goods output is falling at a 1% annual rate. Also in the quarter to date, automobile production is plunging at a 24.3% annual rate, while on the demand side, motor vehicle registrations are falling at a 15% annual rate.

French manufacturing data are somewhat confusing. The chart shows that the industrial production trend has been showing consistent increases over 12 months, but it has recently been pulling back relatively sharply. On the other hand, the manufacturing PMI for France has been consistently negative going back to mid-2022 and only in early 2026 has the manufacturing PMI been posting some values above the 50% mark, indicating that output was starting to actually expand. In March, the PMI reading for manufacturing has slipped back by the thinnest margin below the 50% mark.

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Of course, events in the Middle East make everything more speculative, with the war effectively closing the Strait of Hormuz and no certainty about how or when that is going to be sorted out. In the meantime, the potential threat of ongoing oil price pressures has put both the ECB and the Bank of England in a position to be more wary with policy, and they warned markets about the potential for rate hikes as soon as their next meetings are engaged. That also raises questions about the outlook for growth. But we continue to track and chronicle trends in the data. It's also quite clear that we could have events that will play out that could completely undermine these trends before they get a chance to run to conclusion. It's an important time to be wary and watch all developments—a lot is in play.

France

French IP Waffles

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance declined by 9,000 to 202,000 in the week ending March 28, from 211,000 in the week ending March 21, revised from 210,000. The four-week average declined 3,000 to 207,750 in the week ending March 28, from 210,750 the March 21 week, revised from 210,500. The Forecast Survey looked for 212,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose by 25,000 to 1.841 million in the week ending March 21, from 1.816 million in the week ending March 14. The four-week moving average declined to 1.839 million in the latest week from 1.846 million in the March 14 week. This is the lowest level for this average since September 28, 2024 when it was 1.834 million. The insured unemployment rate remained at 1.2% in the week of March 21. It has remained at that level since the week of November 29, 2025.

The insured unemployment rate varied greatly across individual states and territories. In the week ending March 14, the highest unemployment rates were in Rhode Island (2.83%), New Jersey (2.73%), Massachusetts (2.66%), Washington (2.39%), Minnesota (2.31%), California (2.17%), and New York (2.01%). The lowest rates were in Florida (0.31%), Louisiana (0.32%), Arkansas (0.36%), Alabama (0.38%), and North Carolina (0.40%). Rates in other notable states include Illinois (1.99%), Connecticut (1.82%), Pennsylvania (1.72%), and Texas (1.07%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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- New claims declined by 9,000 to 202,000.
- Continuing claims rose by 25,000 to 1.841 million.
- The insured unemployment rate remained at 1.2%.

U.S. Initial Unemployment Claims Edged Down in the Week of March 28

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The S&P manufacturing PMIs for March showed improvements in 44.4% of the 18 reporters. The median reading for the month was at 50.9, indicating that expanding output was the median reading through the period. The median change showed a small step back of 0.1 diffusion points month-to-month.

Sequentially, looking at average yearly activity compared to a year ago, six months compared to 12 months, and three months compared to six months, we see progress in train. For three months compared to six months, the proportion of reporters showing improvement is 72.2%. For these reporters, over six months compared to 12 months, there is a 61.1% improvement proportion, while for 12 months compared to 12 months ago, there is only a 27.8% improvement.

The median reading over three months on average is 50.7, while the median reading over six months is 50.0 and the median reading over 12 months is 49.4. These readings show a very slow but steady improvement in manufacturing over this horizon.

In addition, we calculate the queue percentile standings for each reporter—that is, the level of the current diffusion index compared to all of the observations back to January 2022, expressing the final number as the percentile standing for the current month in that queue. On that basis, the median percentile standing for this group of reporters is 76.5%. It tells us that the median standing is in the top 25 percentile of all the readings since January 2022 to date. That's a reasonably good result. For the euro area, the queue percentile standing is at the 89.8 percentile, while for Germany it's at its 91.8 percentile. For the Monetary Union and for Germany, the current numbers are some of the best we've seen during this period. However, that doesn't mean that they're necessarily stellar readings.

**PMI diffusion vs. PMI rank standings**
German diffusion in manufacturing is 52.2 in March; for the EMU it is 51.6. Germany posts the fourth-highest PMI rank standing and the fifth highest raw standing in March. The highest standing among all reporters is 52.6 from South Korea. This is a period in which no country was posting very strong manufacturing results. In fact, the United States, with a manufacturing PMI rank standing of 79.6, has a diffusion reading in March just a tick below Germany’s whose queue standing at 91.8 seems miles ahead of the U.S.—but it isn’t. Remember that the queue standings are about relative positioning.

Looking at the details, we see that below-median rank readings were logged by Mexico, Russia, India, Brazil, Indonesia, and Turkey. The Asian markets and developing economies seem to have a harder time working up to the standards achieved by other countries.

We also have averages by certain groups of countries. For example, the U.S., the U.K., the Monetary Union, Canada, and Japan—an expanded G10 groping—had an average reading of 51.3 in March, and for that group of countries, the improvements have been steady from 12 months to six months to three months. For the BRIC countries in March, the average standing was 50.4, and for that group there has been a very slight ongoing erosion. For the Asian group, on average, the March reading is 51.2, and there has been a progression to stronger readings from 49.9 over 12 months to 50.5 over six months and to 50.8 over three months.

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On balance, manufacturing was quite uneven in March; however, there's a progression of improvement that is still in place. But with rising oil prices, war in Iran, and lots of knock-on effects to supply trains, it's likely that these readings are going to fall on harder times in the months ahead—unless the Iran war can be wrapped up in very, very, short order. According to the Baltic Dry index, there hasn't been much reduction in global shipping of dry goods. That index excludes oil and other wet goods shipments that clearly have been impeded. However, giving it more time, we may see that the dry index begins to show some difficulties.

Global Manufacturing PMIs Stall—Will It Get Worse?

Andrew Cates

**Global shipping costs**
The Baltic Dirty Tanker Index has surged to multi-year highs, reflecting a sharp tightening in global oil shipping markets. The primary driver is the escalation in Middle East tensions, particularly the effective disruption to flows through the Strait of Hormuz—a critical artery for roughly a fifth of global oil trade. Heightened security risks, including missile and drone attacks on vessels and port infrastructure, have forced rerouting, increased insurance premia and reduced effective tanker supply. At the same time, longer voyage distances—especially for Gulf exports diverted around the Cape—are tying up capacity and amplifying rate pressures. The result is a classic squeeze: constrained supply of available ships meeting elevated demand for transport, pushing freight costs sharply higher.

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**Supply Chain Bottlenecks**
Flash PMI data point to a renewed build-up of supply chain pressures across the major economies. Supplier delivery times—where readings below 50 indicate slower deliveries—have deteriorated in both the US and UK, with the latter showing a particularly sharp decline. The euro area, while more stable, is also drifting in the same direction. This broad-based softening suggests that the disruptions visible in energy and shipping markets are now feeding into the real economy. Longer delivery times are typically an early indicator of tightening supply conditions, rising input costs and, ultimately, renewed pipeline inflation pressures. While not yet at the extremes seen during the pandemic, the direction of travel is clear: supply chains are becoming less efficient just as geopolitical risks intensify.

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**Policy Uncertainty Versus Market Volatility**
A striking divergence is emerging between policy uncertainty and financial market volatility. The US Economic Policy Uncertainty Index has risen sharply, reflecting the intensifying geopolitical backdrop, trade disruptions and an increasingly complex policy environment. By contrast, the VIX—while off its lows—remains relatively contained by historical standards. This gap suggests that financial markets may be underpricing the scale and persistence of current risks. Either uncertainty begins to recede, or market volatility has further to rise. For now, the message is clear: policymakers are operating in a far more uncertain world than markets appear to be discounting.

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**Oil Prices and Monetary Policy** 
The sharp rise in oil prices is once again feeding directly into short-term interest rate expectations, with a strong positive correlation evident between WTI and US 2-year Treasury yields. As energy prices surge, markets are reassessing the near-term inflation outlook and the likely policy response, pushing yields higher. This reflects a familiar dynamic: energy shocks tighten financial conditions not just directly, but via expectations of more restrictive monetary policy. That said, there are important caveats. Medium-term market-based inflation expectations remain relatively well contained, suggesting credibility in central banks’ ability to anchor inflation over time. Moreover, recent communication from Fed Chair Powell indicates that the Federal Reserve is in no immediate hurry to raise rates, pointing instead to a more cautious, data-dependent approach in the face of heightened uncertainty.

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**Loose Labour Markets**
Wage growth across the US, UK and euro area continues to moderate, pointing to a gradual loosening in labour market conditions. The sharp post-pandemic surge in wage pressures—particularly pronounced in the US—has clearly faded, with all three regions now on a downward trajectory. This matters in the current context: while the oil shock is pushing headline inflation higher and complicating the near-term outlook, easing wage dynamics reduce the risk of persistent second-round effects. In turn, this lessens the urgency for central banks to respond aggressively with tighter policy. The result is a more nuanced policy backdrop—one where energy-driven inflation pressures are rising, but underlying domestic cost pressures are moving in the opposite direction.

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**Headline Inflation in Advanced Economies**
Despite the recent energy shock, broader inflation dynamics across advanced economies remain relatively well behaved. The euro area HICP flash estimate rose from 1.9% in February to 2.5% in March, driven largely by higher energy prices. However, core inflation edged down to 2.3% from 2.4%, suggesting that pass-through into underlying price pressures remains limited for now. More generally, inflation across many advanced economies continues to hover close to central bank targets—a marked contrast to the peaks seen in 2022. While higher oil prices will almost certainly continue to lift headline inflation in the near term, and the risk is clearly tilted toward further upside, the broader picture for now remains one of relatively contained underlying pressures. This suggests the current shock is more likely to complicate the disinflation process—potentially slowing or interrupting it—rather than decisively reversing it, though the balance of risks has become less favourable.

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Amid tentative signs of de-escalation from the US administration over the past 48 hours—including suggestions that the conflict with Iran could conclude relatively quickly—financial markets have begun to retrace some of last week’s sharp repricing of Middle East risk. Oil prices have come off their highs, while equities and bonds have rallied as risk premia ease. That said, the earlier phase of the week saw a decisive adjustment: oil surged, front-end yields moved higher, and uncertainty rose as investors grappled with the implications of disrupted energy flows. Even now, the overall adjustment has been uneven—volatility has picked up, but not to levels typically associated with sustained geopolitical stress—raising questions about how fully markets are internalising both the risks and the rapidly shifting outlook. Our charts this week capture these cross-currents. Tanker rates have spiked as shipping routes are disrupted and capacity tightens (chart 1), while PMI delivery times point to early signs of supply chain strain feeding into the real economy (chart 2). At the same time, the divergence between elevated policy uncertainty and relatively contained market volatility suggests there could have been a degree of complacency (chart 3). The rise in oil prices is already feeding into higher short-term yields, though this is being tempered by cooling labour markets, anchored inflation expectations and more cautious central bank signalling (charts 4 and 5). Meanwhile, euro area flash CPI has picked up, but core inflation remains relatively benign, suggesting underlying price pressures are still contained for now (chart 6).

Economy in Brief

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PPI Gains Broad

China' Trade in Goods: Changes in Direction

Empire State Index Negative

Empire State Index Negative

European Consumer Inflation Continues Moderate in the Face of Rising Energy

U.S. Consumer Sentiment Depressed

Import Prices Surged

U.S. Business Inventories Rose