Economy in Brief: April 2023

The ZEW survey by German financial experts continues to show widespread negative readings in April. The economic situation gets substantial negative readings for the euro area and Germany while the United States gets a small positive reading. Expectations for Germany are positive while expectations for the U.S. are negative. In all, the expectations and economic situation diffusion readings have weak rankings below their 50% mark, meaning that they are below their respective medians on data since 1992 – a 30-year stretch.

Nonetheless, the economic situation according to the ZEW experts improved between March and April in the euro area and Germany with readings changing from the negative mid-40s to the negative low-30s in diffusion terms. For the U.S., a positive reading of five in March gives way to a positive reading of 4.1 in April, a small setback. Expectations deteriorated month-to-month in Germany and in the U.S. on readings ranging from a ranking below the 30th percentile to below the 20th percentile.

Inflation expectations are deeply negative implying that inflation is strongly expected to fall from where it is now. The month-to-month numbers even became slightly more negative indicating that inflation progress is slightly more strongly expected. The ranking for the inflation metrics is well below the 5% level for the euro area, Germany, and the U.S. The expectation for inflation to decelerate is extremely strong.

Interest rate expectations for short-term rates moved up slightly in the euro area and moved down in the U.S. For the euro area, there's above-median reading with diffusion at 68.5 in April having moved up from 67.9 in March. In the U.S., the April reading moved down rather sharply to 44.7 from 55.3 as the ZEW experts are looking for below median rate changes compared to March. However, in both cases, the queue standing for interest rates is above the median, but much higher, at an 85.5 percentile queue standing for the euro area, compared with a 54-percentile standing in the U.S., where some are beginning to see the end game insight for the Federal Reserve.

Long-term interest rate expectations saw their month-to-month diffusion readings decline, in Germany from 28.4 in March to 21.8 in April; in the U.S., expectations fell from 18.6 in March to 9.2 in April. The queue standing for the German expectations are in their 28th percentile. For the U.S., the queue standing is in its 14th percentile. The outlook for long-term interest rates is clearly moderating.

Stock market expectations between March and April did not change very much. They stepped up in the euro area to a reading of 13 from 9.9, and also in Germany to 13.5 from 12.7. The United States’ expectations slid to 12.2 from 16.1. However, all of these are historically weak readings. The queue standings for the euro area are at its 7.2 percentile. For Germany, the standing is at its 6.6 percentile. The U.S., with a lower diffusion reading, has a stronger standing at its 24.7 percentile. The outlook for the stock markets remains subnormal and guarded.

The final metric is for the dollar against the euro and here while the reading for the U.S. dollar is still at a -6.6 in April, that's an improvement from -10.4 in March, with the queue standing at its 44.7 percentile, below its historic median but not by much. Exchange rate changes have not been much in the limelight recently.

Italy's headline inflation report, the HICP, showed that prices fell by 1.1% in March. The core measure for the HICP showed prices falling 0.3% in March. These changes came after a headline increase of 0.5% and a core increase of 1.2% in February.

The sequential percent changes in the HICP show that Italian headline inflation is moving lower. Prices are up 8% over 12 months, up at a 6% annual rate over 6 months and falling at a 4.6% annual rate over 3 months. In contrast, core inflation shows some but much less inflation progress. The core deceleration is much more moderate as prices are up by 6.8% over 12 months, they soften to gain 6.5% at an annual rate over 6 months and then slow to a 6.2% annual rate over at 3 months. For the most part, core inflation has a very, very, small deceleration built into it.

Domestic vs. HICP inflation Italy also reports out a domestic CPI; the domestic CPI for Italy fell by 0.5% in March, but the core CPI did not follow suit and was up by 0.4%. Italy's headline CPI report shows inflation falling sequentially parroting the HICP result. Headline inflation rises by 7.5% over 12 months, rises at a 6.7% annual rate over 6 months and then it falls at a 2.3% annual rate over 3 months. Core inflation for the domestic measure shows more of a decline than it does in the HICP measure. Italy's domestic core inflation is up by 6.3% over 12 months, up at a 6% annual rate over 6 months, and up at a 5.5% annual rate over 3 months. The difference between the 12-month and the 3-month inflation rate is just a little bit less than a percentage point at minus 0.8% comparing annual rates. It’s a modest pace of deceleration.

Inflation diffusion is not linear Diffusion calculations (performed on domestic CPI data) show that Italian inflation over 12 months is broadly higher than it was 12-months ago with inflation accelerating in 83.3% of the categories. However, over six months inflation accelerates in only 41.7% of the categories compared to their pace over 12 months. Over 3 months inflation accelerates in 62.5% of the categories compared to their inflation rate over 6 months. Therefore, while the inflation rates have stepped down from 12-months, to 6-months, to 3-months, diffusion calculations show that these trends are not uniform across categories and that over 3 months, despite the sharp decline in inflation compared to earlier metrics, there are a number of categories where inflation is still rising when compared to its pace of 6-months ago.