Economy in Brief: March 2024

Retail Sales and Orders- The survey on the U.K. distributive trades by the Confederation of British Industry survey (CBI) offers a mixed outlook on current performance, but one that remains decidedly weak. In March sales compared to a year ago post an improved reading of +2, compared to -7 in February and to a much weaker report for January. Orders compared to a year ago, however, deteriorated in March falling to -22 from -14 in February, but still stronger than their weak January level and above their 12-month average. Sales for the time-of-year, a concept which is essentially a seasonally adjusted gauge, moved up to zero in March from -1 in February; again, they are significantly stronger than their January reading and above their 12-month average.

Expected Sales and Orders- The March survey also provides expectations for April. April numbers are generally weak and mixed in terms of month-to-month comparisons. Expected sales measured year-over-year in April survey at a net reading of -25 compared to a -15 expectation in March. This is a sharp monthly deterioration but still an improvement from end-of-year values. It is also a weaker reading than the 12-month average. Orders year-over-year improve from March at a -24 reading, stronger than -36 in March. The expected April reading is stronger than the end of year reading but in line with the 12-month average performance for this metric. Expected sales for the time of year improve very marginally in April to -8 from -9; however, that's a significant improvement from end-of-year values and a reading that's slightly better than the 12-month average.

Metric Rankings- When we assess the retail sales and sales expectations, the results from March and for April have weaknesses. Sales compared to a year ago perform at a 40.8 percentile standing, which is quite weak. Year-over-year orders perform at a 16-percentile standing, while sales for the time-of-year have a 65.5 percentile standing. That's the observation that was flat in March; that performance is slightly better than its historic median performance. However, turning to the expectations for April sales… sales compared to a year ago have an anemic 7-percentile standing, orders compared to a year ago have a 10.5 percentile standing and sales for the time-of-year have a 33.7 percentile standing. All of these are below their historic medians. On balance, while we find some improvement in sales month-to-month - and definite improvement compared to the end of year- the comparisons over the 12-month average are not particularly favorable and the rankings of these index values are quite poor when placed in an historic context.

Wholesaling Wholesale Sales and Orders- For wholesaling in March, there's broad-based weakness with sales year-over-year, orders year-over-year and sales for the time-of-year all posting negative values compared to positive readings in February. However, the March data once again are stronger than data posted back in January and stronger compared to 12-month averages. The performance of the various measures of sales and orders provides a mixed picture over different horizons.

Wholesale Expected Sales and Orders- Expectations for April in wholesaling also turned negative for sales compared to a year ago, orders compared to a year ago, and sales for the time-of-year. All these metrics are negative compared to positive values in March although once again they're significantly stronger than their end of year values and their performance is not generally much different from their 12-month averages.

Metric Rankings in Wholesaling- Assessing wholesaling performance on a ranking format, the current performance of sales compared to a year ago has a 23.9 percentile standing, orders compared to a year ago have a 26-percentile standing, and sales for the time-of-year have a 20-percentile standing. All of these are quite weak and in the neighborhood of a lower 1/4 to 1/5 standing of their respective historic queues of data. Expectations for wholesaling in April stand in their 28th percentile; orders compared to a year ago stand in their 22.8 percentile; sales evaluated relative to the time-of-year stand in their 31.6 percentile. Once again these are weak readings- all of them below their historic medians (below a 50% standing).

In this week's letter, we delve into the recent wave of rate decisions enacted by central banks across the region. We begin by examining the Bank of Japan’s (BoJ) latest policy shifts, highlighting its significant move to terminate its negative interest rate policy. We then explore financial market responses to the BoJ’s decision, discussing possible drivers behind the subsequent weakness of the yen and declines in Japanese government bond (JGB) yields. We move next to review interest rate developments in China, where loan prime rates (LPR) were left unchanged. We then shift our focus to the economies of Australia and New Zealand, where we examine the change in messaging by the Reserve Bank of Australia (RBA) and disappointing Q4 GDP results in New Zealand. Finally, we wrap up the week’s letter with a nod to interest rate decisions in Taiwan and Indonesia.

Recent events speak to the varied stages of monetary policy implemented by central banks in the region, given respective domestic considerations. China continues to pursue an easing approach with economic stabilization looking only nascent, whereas Japan has only recently initiated policy tightening due to encouraging wage growth. Australia and New Zealand, having seemingly completed their tightening cycles, now face increasing pressures to consider easing moves given recent weak economic readings, although with inflation a persisting concern.

Policy shifts by the Bank of Japan Recent headlines have shed light on some subtle yet significant aspects of the Bank of Japan’s (BoJ) departure from its negative interest rate policy. In a notable shift, the BoJ has now set its sights on targeting the uncollateralized overnight call rate to lie between 0% and 0.1% (chart 1). This objective will be accomplished by imposing an interest rate of 0.1% on the current account balances that financial institutions maintain with the bank, starting March 21. Previously, the BoJ aimed at a rate of -0.1% on financial institutions' Policy-Rate Balances. Governor Ueda highlighted that this move signifies the bank's return to a "normal" monetary policy that focuses on short-term interest rates, aligning with practices of other central banks. Additionally, the BoJ has terminated its Yield Curve Control (YCC) policy and announced the cessation of its purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs). Furthermore, the bank intends to gradually conclude its buying of commercial paper and corporate bonds over the coming year.

The German IFO survey made some significant improvements in March compared to February. The all-sector climate reading grows to -16.1 in March from -23.5 in February. The current conditions index registered a positive 0.6 reading in March after a -1.9 rating in February. The expectations index rose to -16.4 in March from -23.0 in February.

There are some substantial changes and improvements in the month-to-month readings; however, make no mistake about it, the IFO remains very weak. The climate reading, for example, has a rank standing in March at its 19.1 percentile compared to a ranking in at the 6.5 percentile in February. The all-sector current conditions ranking moves up to 13.9 percentile in March from the 11.7 percentile in February. All-sector expectations move up to the 13.4 percentile from the 3.9 percentile in February. These are substantial and significant moves in the month-to-month rankings and for the month-to-month diffusion readings; however, the current readings are still weak. In terms of the values reported last month, the current readings aren't really going to be pointing to an economy that's substantially changed from the readings that we saw a month ago.

However, what's new and what's interesting is there is a month-to-month improvement and it's the first one of some significant value that we've seen in some time and that could mark a turning point. The change is most substantial for expectations, which is also a relatively volatile category and something to keep an eye on. But it's the fact of having an improvement after such a long period of conditions remaining weak that is both impressive and hopeful.

Looking at the various sectors in climate section, construction has the strongest ranking in its 25th percentile - a bottom quartile ranking.

Under current conditions, retail and construction have above-50 percentile standings- above their historic medians. The service sector has the weakest stand-alone ranking in its 15.6 percentile.

Expectations readings show a still-weak 0.8 percentile standing for construction, just off the all-time low made last month. The service sector, with a 15.1 percentile standing, is the strongest ranking sector in expectations.