Economy in Brief: September 2023

Price trends in the early reporting European Monetary Union countries show a mixed bag of results for the PPI. In August, we have six countries listed in the table of which five are monetary union members. Only two show PPI declines in August. Germany shows a decline of 0.1% and Denmark, a member of the economic union, not of the monetary union, shows a decline of 1.1%. In August, the consumer price index core HICP gains 0.3%, building on a 0.5% gain from July. The early inflation data from the monetary union suggest that the pace of the inflation decline is shifting and slowing.

Tail wind becomes head wind- Some of this pressure undoubtedly stems from Brent oil prices that rose by 6.1% in August and by 6.3% in July, both are month-to-month gains. Brent oil prices are up at a 56.8% annual rate over three months and a 3.5% annual rate over six months, compared to dropping by 12.7% year-over-year. Energy prices are no longer a tailwind for falling inflation in the monetary union.

Hints on core inflation- While the consumer price core measure shows increases in each of the last two months, for Germany at least, the ex-energy PPI gauge shows a 0.3% decline in August and a 0.4% decline in July. The German PPI excluding energy is showing a faster deceleration as it rises 1.4% year-over-year, falls at a 2.3% annual rate over six months and then falls at a 3.3% annual rate over three months.

Oil impacts the PPI and CPI- Inflation trends are somewhat confused and complicated, which is not surprising after having seen such a burst of inflation and then an unwinding of oil prices. Now, as oil prices begin to firm and rise, we're going to see an upside to headline inflation; it's unclear exactly how core inflation is going to navigate in this environment. We would expect core producer price inflation to be somewhat more sensitive to price pressures from oil and consumer prices to be less sensitive to energy pressures. But when we look at some, admittedly limited, core readings, what we're seeing in August for Germany are core prices ex energy continuing to fall while the HICP for the EMU, excluding tobacco food & energy, is rising, and slightly accelerating over three months compared to six-months.

Inflation trends- Central banks tend to focus on year-over-year inflation rates and for the monetary union we're looking at PPI prices that are declining sharply over this group of countries although for Germany the core ex-energy is up by 1.4% and, of course, the ECB is looking at consumer prices union-wide. There we see the core is up at a 5.3% annual rate, decelerating only to a 4.8% annual rate over six months and then ticking back up to a 4.9% annual rate over three months. Oil prices are wreaking havoc with these trends. Producer prices generate massive declines in inflation over 12 months and over six months; then, there are scattered results over three months as oil prices begin to turn and as the lags apparently work through different countries at different speeds. Over three months PPI prices are falling at a double-digit rate (or at least nearly so) in Germany, Denmark, and Ireland. Over three months producer prices are rising at a 3.3% annual rate in Finland, at a 6.3% annual rate in Spain, and at a 7.7% annual rate in Portugal.

IFO survey remains quite weak: The IFO survey of the German economy in September continues to generate extremely weak readings. The all-sector climate reading in September edges slightly stronger to -20.2 from -20.4 in August. At that level, the all-sector climate index ranks in the bottom 7.8% of all observations on data back to December 1991. Ranking the al-sector metric from February 2022, when Russia invaded Ukraine, the ranking is in the lower 5% of all readings since then. Climate is unambiguously weak. And it has essentially no momentum or negative momentum.

Climate readings are weak The climate readings in September for manufacturing, construction, wholesaling, retailing, and services are little-changed. There's a small improvement in construction month-to-month, a small improvement in wholesaling, and a very small improvement in manufacturing. The other metrics worsened slightly. The strongest queue standing among any of the sectors for climate in September is for construction at a 29.6 percentile standing, followed by retailing at a 25.4 percentile standing; the weakest reading is for manufacturing at a 5.6 percentile standing and services at a 6.3 percentile standing.

Current readings are weak Current conditions in September generate a positive reading of 2.0, but that slips from 2.7 in August. The September reading has a 13.8 percentile standing on data from December 1991 and it is the weakest reading since Ukraine was invaded by Russia in February 2022. Current conditions in September improved slightly in manufacturing, while deteriorating, and all other sectors. The services sector posts a net positive reading at +9.2 in September, but that's weaker than the +12.2 reading in August. Queue standings for the sectors show the strongest reading is for construction at the 54th percentile and at retailing at about its 54th percentile as well; the weakest current reading is from services with a 14.7 percentile standing, with manufacturing and wholesaling having standings in their 30th percentiles, respectively. Of the five sectors, three of them have the weakest readings since Ukraine was invaded by Russia; manufacturing is an exception with a bottom 5 percentile standing and retailing with a bottom 10 percentile standing. Despite being ‘exceptions’ these all are very weak readings.

Expectations have abysmally weak rankings Expectations show rankings that show weaker rankings than their current rankings for every sector up and down the line with the all-sector ranking at the 6.2 percentile mark; and no sector has a reading higher than a 7.1 percentile standing. However, month-to-month there are some hints of improvement with the all-sector index improving to -26.2 in September from -26.6 in August. Wholesaling, retailing, and services all make small improvements month-to-month as manufacturing and construction show essentially unchanged or weaker readings month-to-month. One difference in the expectations column is that the ranked standings since the invasion occurred are stronger than for the current readings, although this doesn't amount to much because the global rankings are still even weaker. But compared to values over the period since the invasion occurred, the ranking for wholesaling in September has a 50th percentile standing and retailing has a 65th percentile standing. The all-sector index has a 30-percentile standing with the weakest reading from manufacturing at a 15-percentile standing. Nonetheless, it's hard to characterize any of this as good news. It’s just not vying for a ranking as the worst news.

Investor sentiment has come under pressure following some messaging from the Fed last week to suggest that US interest rates could likely stay higher for longer. As expected, however, Asia’s central banks have held their policy rates steady over the past few days. Additionally, the Bank of Japan (BoJ) left its Yield Curve Control (YCC) parameters unchanged. Meanwhile, in China, banks retained 1-year and 5-year loan prime rates (LPRs) at 3.45% and 4.2%, respectively.

The S&P flash PMIs for the composite manufacturing and services sectors for the September readings show a stronger Germany, leading to a stronger reading in the European Monetary Union in the composite. Meanwhile, France, the United Kingdom, Japan, and the United States, all report weaker composite readings for September.

Composites are broadly weaker- Germany’s strengthening is in the composite as well as for manufacturing and services separately. This helps to push the services sector in the EMU to a stronger reading although the EMU manufacturing reading is weaker month-to-month. France shows weaker readings in the composite as well as for both manufacturing and services. Japan follows suit on that score. The U.S. and the U.K. each report a weaker composite driven by a weaker service sector that dominates a somewhat stronger manufacturing sector in both the U.S and in the U.K.

Only two composites show net expansion underway- Only the U.S. and Japan have composite PMI readings above 50 in September, indicating expansion. And the only sector readings with PMI values above 50 are for services in the U.S. and in Japan, as well.

Sequential trends- The sequential readings from 12-months to 6-months to 3-months show weakening for the composite and for both sectors in the EMU, in Germany, in France, in the United Kingdom, and in Japan. The exception is the U.S. that is stronger on balance over 3 months for the composite and for the services sector. Comparing the 6-month PMI averages to the 12-month averages, conditions are broadly stronger across sectors and the composites. The exception is France that weakens on all three metrics. The U.S. and Japan strengthen on all three metrics, while the U.K. Germany, and the EMU strengthen on their services measures which dominate the composite, making it stronger over 6 months compared to 12 months. Comparing the 12-month readings to 12-months ago, everything is weaker except for services and the composite in Japan.

Evaluation of PMI levels- The queue percentile standings rarely change much month-to-month and across these metrics we continue to see queue standings well below their neutral, 50% mark, generally below the 20% mark for most countries, across most sectors, with the sole exception being Japan that has the service sector reading at its 81st percentile; that helps the composite to a 75.5 percentile standing. However, despite month-to-month changes and broader trends in the sequential numbers, it's clear that the PMI values being posted are extremely weak.

Net 3-month changes- The final column of the table shows the net changes over 3 months; over three months these are overpoweringly weak. They're negative numbers for all the countries and all the sectors with the sole exception of manufacturing in the United States. The last 3 months have been weak.

On balance: The bottom line for the S&P flash numbers for September is that weak conditions continue to prevail and to dominate. There is some rebound in Germany that helps the European Monetary Union to post an uneven rebound, but the levels of activity indicated by the composite, the manufacturing sector and the services sector continue to be extremely weak.