Louise Curley

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071016e.jpg" width="353">
Contrary to expectations, the excess of pessimists over optimists among German institutional investors and analysts who participate in the ZEW survey did not increase in October but remained at 18.1%. The German financial types are still less pessimistic than they were a year ago in October 2006 when the excess of pessimists over optimists was 27.4%. Although less optimistic in October than in the peak of 88.7% in June, these financial types were still very optimistic concerning current macroeconomic conditions with optimists exceeding pessimists by 70.2%. The percent balances for expectations and for the appraisals of current conditions are shown in the first chart.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071016f.jpg" width="353">
In the survey, participants are asked to appraise the outlook for profits in some 13 industries. Profit expectations for the banking, insurance and construction industries were especially hard hit as a result of the US sub prime mortgage problem and its ramifications. Profit expectation in the banking industry went from an excess of optimists over pessimists of 21.0% in July to excesses of pessimists over optimists of 37.3% in August and 65.9% in September. Corresponding figures for the insurance industry were +23.7%, -13.2% and -30.8% and for the construction industry, 32.3%, 6.2%, -12.1%. Profit expectations in the banking and insurance industries improved slightly in October but were still in negative territory. Profit expectations in the construction industry deteriorated further in October. Profit expectations for the banking, insurance and construction industries are shown in the second chart together with profits in the telecommunication industry, the other industry for which profit expectations are negative territory. The deterioration in expectations for profits in the telecommunications industry has been going on since early 2004.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071016g.jpg" width="353">
Even among those industries whose profits expectations are brightest, there have been declines in the excess of optimists over pessimists as can be seen in the third chart that shows the profit expectations of the machinery, services, information technology and chemical industries.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">ZEW SURVEY&nbsp;</th>
<th scope="col">Oct 07</th>
<th scope="col">Sep 07&nbsp;</th>
<th scope="col">Oct 06&nbsp;</th>
<th scope="col">M/M Dif&nbsp;</th>
<th scope="col">Y/Y Dif&nbsp;</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Expectations&nbsp; Next 6 Months&nbsp; &nbsp;(% balance)</td>
<td>-18.1</td>
<td>-18.1</td>
<td>-27.4</td>
<td>0.0</td>
<td>-9.3</td>
<td>22.3</td>
<td>34.8</td>
<td>44.6</td>
</tr>
<tr class="odd">
<td class="firstcol">Current Conditions&nbsp; (% balance)</td>
<td>70.2</td>
<td>74.4</td>
<td>42.9</td>
<td>-4.2</td>
<td>27.3</td>
<td>18.3</td>
<td>-61.8</td>
<td>-67.7</td>
</tr>
<tr>
<td class="firstcol"></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol"> Profit Expectations Next 6 Months </td>
<td>Oct 07</td>
<td>Sep 07&nbsp;</td>
<td>Aug 07&nbsp;</td>
<td>Jul 07&nbsp;</td>
<td>Jun 07</td>
<td> May 07 </td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Banking (% balance)</td>
<td>-60.6</td>
<td>-65.9</td>
<td>-37.3</td>
<td>21.0</td>
<td>35.0</td>
<td>39.2</td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Insurance (% balance)</td>
<td>-24.4</td>
<td>-30.8</td>
<td>-13.2</td>
<td>23.7</td>
<td>33.8</td>
<td>39.7</td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Construction (% balance)</td>
<td>-13.5</td>
<td>-12.1</td>
<td>6.2</td>
<td>32.3</td>
<td>46.5</td>
<td>49.8</td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Telecommunications (% balance)</td>
<td>-7.8</td>
<td>-11.7</td>
<td>-12.7</td>
<td>-16.2</td>
<td>-17.5</td>
<td>-21.2</td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Machinery (% balance)</td>
<td>46.5</td>
<td>44.3</td>
<td>54.6</td>
<td>63.5</td>
<td>71.6</td>
<td>73.4</td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Information Technology (% balance)</td>
<td>30.9</td>
<td>30.4</td>
<td>31.3</td>
<td>34.0</td>
<td>37.5</td>
<td>36.4</td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Chemicals (% balance)</td>
<td>30.8</td>
<td>29.7</td>
<td>41.2</td>
<td>46.9</td>
<td>48.9</td>
<td>43.2</td>
<td></td>
<td></td>
</tr>
<tr class="odd">
<td class="firstcol">Services (% balance)</td>
<td>30.3</td>
<td>29.4</td>
<td>33.4</td>
<td>37.9</td>
<td>45.5</td>
<td>45.4</td>
<td></td>
<td></td>
</tr>
</tbody>
</table>
</body>
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Contrary to expectations, the excess of pessimists over optimists among German institutional investors and analysts who participate in the ZEW survey did not increase in October but remained at 18.1%. The German financial types are [...]

Confidence Among German Investors Holds Steady: Slight Improvement in Profit Expectations

Robert Brusca

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071016i.jpg" width="353">
The chart on the left shows why there is talk of a BOE rate cut on the horizon. Not only are UK house prices losing their upward momentum, but inflation in the core HICP (excluding unprocessed food and energy) is showing sequentially lower rates of inflation. 
Over the most recent three months, the headline HICP rate is actually negative. Over six months the rate of change in the HICP is only 0.6%. The BOE does not have an inflation range targeted but its main or headline gauge at 1.8% Yr/Yr is below its 2% mark. The core inflation rates are even lower and pointing to deceleration, sending a clear signal of inflation under control and possibly falling too rapidly. 

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
UK HICP and RPI Inflation
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">% MO/MO</td>
<td colspan="4">% saar</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Sep-07</td>
<td>Aug-07</td>
<td>Jul-07</td>
<td>3-MO</td>
<td>6-MO</td>
<td>12-MO</td>
<td>Yr Ago</td>
</tr>
<tr>
<td class="firstcol">HICP</td>
<td>0.1%</td>
<td>0.1%</td>
<td>-0.3%</td>
<td>-0.4%</td>
<td>0.6%</td>
<td>1.7%</td>
<td>2.4%</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">All Item RPI</td>
<td>0.2%</td>
<td>0.6%</td>
<td>-0.3%</td>
<td>1.8%</td>
<td>3.0%</td>
<td>4.0%</td>
<td>3.6%</td>
</tr>
<tr>
<td class="firstcol">RPIx</td>
<td>0.2%</td>
<td>0.3%</td>
<td>-0.3%</td>
<td>0.8%</td>
<td>1.9%</td>
<td>2.8%</td>
<td>3.2%</td>
</tr>
<tr>
<td class="firstcol">RPI excl Seasonally Adjusted Food</td>
<td>0.2%</td>
<td>0.5%</td>
<td>-0.2%</td>
<td>1.9%</td>
<td>2.9%</td>
<td>3.9%</td>
<td>3.6%</td>
</tr>
<tr>
<td class="firstcol">Food &amp; Beverages</td>
<td>1.2%</td>
<td>0.6%</td>
<td>-0.9%</td>
<td>4.0%</td>
<td>5.0%</td>
<td>4.2%</td>
<td>3.4%</td>
</tr>
<tr>
<td class="firstcol">Housing and HH expenditures</td>
<td>0.4%</td>
<td>1.1%</td>
<td>-0.5%</td>
<td>4.1%</td>
<td>3.7%</td>
<td>6.5%</td>
<td>6.9%</td>
</tr>
<tr>
<td class="firstcol">Clothing &amp; Footwear</td>
<td>-0.3%</td>
<td>-0.8%</td>
<td>0.1%</td>
<td>-4.2%</td>
<td>-0.2%</td>
<td>-1.0%</td>
<td>-0.7%</td>
</tr>
<tr>
<td class="firstcol">Leisure Services</td>
<td>0.4%</td>
<td>0.6%</td>
<td>-0.1%</td>
<td>3.8%</td>
<td>2.4%</td>
<td>3.4%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">Leisure Goods</td>
<td>-0.3%</td>
<td>0.3%</td>
<td>-0.1%</td>
<td>-0.4%</td>
<td>-3.9%</td>
<td>-3.2%</td>
<td>-1.5%</td>
</tr>
<tr>
<td class="firstcol">Motoring expenditures</td>
<td>-0.3%</td>
<td>-0.1%</td>
<td>-0.4%</td>
<td>-3.1%</td>
<td>3.1%</td>
<td>1.1%</td>
<td>-0.6%</td>
</tr>
<tr>
<td class="firstcol">Fares and travel costs</td>
<td>-3.6%</td>
<td>1.6%</td>
<td>0.0%</td>
<td>-8.0%</td>
<td>2.9%</td>
<td>6.0%</td>
<td>0.2%</td>
</tr>
</tbody>
</table>
</body>
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The chart on the left shows why there is talk of a BOE rate cut on the horizon. Not only are UK house prices losing their upward momentum, but inflation in the core HICP (excluding unprocessed food and energy) is showing sequentially [...]

UK Core Inflation Trends Turn Sharply Lower

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071016h.jpg" width="353">
The inflation trends for EMU-13 core inflation excluding sin (alcohol and tobacco) shows a fairly well-behaved series. The six-month rate of inflation on this basis is still diving with the recent six-month pace at about 1.5%. Three-month inflation is even lower, below 1.5% but with some upward pressure. Year-over-year, core -X-sin inflation has plateaued and is showing signs of turning lower. These trends are at odds with the headline HICP which has popped up above the 2% mark, something the ECB will not like. 
Over 12 months most of the main EMU indexes are over 2% and the two main EMU countries have headlines and core inflation rates pacing above 2% over the last 12 months. But the three-month inflation trends do NOT echo these pressures. 
While the 12-month rates get most of the headlines the shorter-term gauges give us a better sense of what is happening now at the cost of somewhat greater volatility (less reliability). All of this is subverted, however, by the recent and new spurt in energy prices. Crude oil at $88/bbl poses some additional upside risks and could wreak havoc on existing trends - even core trends. 
But what are these pressures? In the case of a product with inelastic demand like oil, the pressures are two fold. There is pressure on prices. But there is also an impact on consumer budgets, since inelastic demand that consumers cannot easily shift away form this item with its rising cost. Energy conservation is a concept that plays out over years and only prices are perceived to have risen and to have become sticky at a high point bringing about an economy wide response (demand side and supply side). And that is why oil prices, as well as being inflationary, are also deflationary. 
As consumers commit more of their limited resources to energy, they have less to devote to other types of spending. In Europe with the euro running up at the same time, there is some respite from oil prices since oil is priced in dollars and the euro&#146;s strength is keeping that cost pressure at bay. But the depressing impact of the euro mingles with whatever energy trends seep through. 
For this reason Europe does not have the same degree of inflation risk as the dollar area, but even there inflation strains are not showing through. The dominant themes seem to be &#145;things that subvert growth&#146;. And that is the thing to watch in the months ahead more than the trend of the HICP, although money and credit growth trends will also continue to keep the ECB on edge.

<table border="0" cellspacing="0" width="100%">
<colgroup></colgroup>
<thead>
<tr>
Trends in HICP
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">% mo/mo</td>
<td colspan="4">% saar</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Sep-07</td>
<td>Aug-07</td>
<td>Jul-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Yr Ago</td>
</tr>
<tr>
<td class="firstcol">EMU-13</td>
<td>0.4%</td>
<td>0.0%</td>
<td>0.1%</td>
<td>1.8%</td>
<td>2.5%</td>
<td>2.1%</td>
<td>1.7%</td>
</tr>
<tr>
<td class="firstcol">Core</td>
<td>0.2%</td>
<td>0.2%</td>
<td>0.1%</td>
<td>2.1%</td>
<td>2.0%</td>
<td>2.0%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Goods</td>
<td>1.0%</td>
<td>0.0%</td>
<td>-1.0%</td>
<td>0.1%</td>
<td>2.2%</td>
<td>1.9%</td>
<td>1.6%</td>
</tr>
<tr>
<td class="firstcol">Services</td>
<td>-0.5%</td>
<td>0.2%</td>
<td>0.8%</td>
<td>1.8%</td>
<td>2.5%</td>
<td>2.5%</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">HICP</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>0.7%</td>
<td>-0.1%</td>
<td>0.2%</td>
<td>3.1%</td>
<td>3.1%</td>
<td>2.6%</td>
<td>1.0%</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>0.1%</td>
<td>0.3%</td>
<td>0.0%</td>
<td>1.8%</td>
<td>2.7%</td>
<td>1.6%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>0.3%</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>1.5%</td>
<td>1.7%</td>
<td>1.8%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>0.4%</td>
<td>0.0%</td>
<td>0.2%</td>
<td>2.3%</td>
<td>2.8%</td>
<td>2.7%</td>
<td>2.9%</td>
</tr>
<tr class="odd">
<td class="firstcol">Core:xFE&amp;A</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Germany</td>
<td>0.3%</td>
<td>0.1%</td>
<td>0.2%</td>
<td>2.4%</td>
<td>2.6%</td>
<td>2.3%</td>
<td>0.8%</td>
</tr>
<tr>
<td class="firstcol">France</td>
<td>0.1%</td>
<td>0.3%</td>
<td>0.0%</td>
<td>2.0%</td>
<td>2.0%</td>
<td>1.6%</td>
<td>1.2%</td>
</tr>
<tr>
<td class="firstcol">Italy</td>
<td>0.4%</td>
<td>0.2%</td>
<td>0.0%</td>
<td>2.3%</td>
<td>1.8%</td>
<td>1.8%</td>
<td>2.0%</td>
</tr>
<tr>
<td class="firstcol">Spain</td>
<td>0.2%</td>
<td>0.3%</td>
<td>0.2%</td>
<td>3.0%</td>
<td>2.7%</td>
<td>2.6%</td>
<td>3.0%</td>
</tr>
</tbody>
</table>
</body>
</html>

The inflation trends for EMU-13 core inflation excluding sin (alcohol and tobacco) shows a fairly well-behaved series. The six-month rate of inflation on this basis is still diving with the recent six-month pace at about 1.5%. Three- [...]

EMU Inflation Trends a Narrow Line

Tom Moeller

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071016d.jpg" width="353">
The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales last week recovered by 1.0% after roughly no change during the prior two periods.
Despite the latest increase, the average level of store sales in October is down 0.3% from the September average. That follows a 0.8% decline in the average level of chain store sales during September versus the August average.
During the last ten years there has been a 45% correlation between the y/y change in chain store sales and the change in nonauto retail sales less gasoline.
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.
The leading indicator of chain store sales from ICSC-UBS rose 0.2% (-0.3% y/y) after a 0.9% decline during the prior week.

<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/@S2/@S2.HTM">ICSC-UBS (SA, 1977=100)</a></th>
<th scope="col">10/13/07</th>
<th scope="col">10/06/07</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr>
<td class="firstcol">Total Weekly Chain Store Sales</td>
<td>480.0</td>
<td>475.3</td>
<td>2.5%</td>
<td>3.3%</td>
<td>3.6%</td>
<td>4.7%</td>
</tr>
</tbody>
</table>


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The International Council of Shopping Centers (ICSC)-UBS reported that chain store sales last week recovered by 1.0% after roughly no change during the prior two periods. Despite the latest increase, the average level of store sales [...]

Weekly U.S. Chain Store Sales Recovered Smartly

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071016a.jpg" width="353">
Industrial production nudged up minimally last month. The 0.1% rise followed no change in August. The September gain matched Consensus expectations.
Factory output fared no better and posted no change after an unrevised 0.3% August decline.
A 0.4% decline (+1.7% y/y) in the output of consumer goods led last month&#39;s decline in output. It mostly reflected a 2.8% (+1.7% y/y) drop in the production of automotive products. Output of appliances, furniture &amp; carpeting showed no change but the 3.0% y/y decline reflected the continued weakness in the housing industry. Output of construction supplies fell 0.2% (-0.7% y/y) for the third consecutive monthly decline.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071016c.jpg" width="353">
Returning to the consumer goods sector, production of computers &amp; electronics rose 0.2% (13.8% y/y) after two consecutive monthly declines. Apparel output inched up 0.1% (-2.3% y/y) after the huge 2.0% drop during August. Chemical products output rose 0.5% (0.4% y/y).
Output of business equipment recovered all of the moderate August decline with a 0.5% (+4.1% y/y) rise. That increase was led by a 0.8% (9.0% y/y) gain in the output of information &amp; processing equipment. Production of industrial equipment also rose a moderate 0.4% (1.4% y/y) but that only recovered a piece of the prior month&#39;s 1.2% drop.<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071016b.jpg" width="353">
In the materials category, output increased 0.3% (2.1% y/y) but production of durable consumer parts fell 1.9% (-2.3% y/y). That decline was made up by 0.3% increases in the production of durable equipment parts (6.4% y/y) and other durable goods materials output (0.15 y/y) although the trends in these two sectors is very much down.
Capacity utilization was unchanged from August at 82.1%, up slightly from last year&#39;s average of 81.7%. Utilization in the factory sector fell m/m to 80.4% versus an average 80.5% last year. Capacity rose 0.1% (1.9% y/y).
The Recent Financial Turmoil and its Economic and Policy Consequences is yesterday&#39;s speech by Federal Reserve Board Chairman Ben S. Bernanke and it can be found <a href="http://www.federalreserve.gov/newsevents/speech/bernanke20071015a.htm"> here</a>.
Financial Market Frictions from the Federal Reserve Bank of Atlanta is available <a href="http://www.frbatlanta.org/filelegacydocs/erq307_DeGennaro.pdf"> here</a>.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">INDUSTRIAL PRODUCTION (SA)</th>
<th scope="col">September</th>
<th scope="col">August</th>
<th scope="col">Y/Y</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Total</td>
<td>0.1%</td>
<td>0.0%</td>
<td>2.0%</td>
<td>4.0%</td>
<td>3.2%</td>
<td>2.5%</td>
</tr>
<tr>
<td class="firstcol">Manufacturing</td>
<td>0.0%</td>
<td>-0.3%</td>
<td>1.6%</td>
<td>5.0%</td>
<td>4.0%</td>
<td>3.0%</td>
</tr>
<tr class="odd">
<td class="firstcol">Mining</td>
<td>0.2%</td>
<td>-0.6%</td>
<td>0.0%</td>
<td>2.7%</td>
<td>-1.6%</td>
<td>-0.6%</td>
</tr>
<tr>
<td class="firstcol">Utilities</td>
<td>0.0%</td>
<td>4.6%</td>
<td>6.5%</td>
<td>0.2%</td>
<td>2.0%</td>
<td>1.4%</td>
</tr>
</tbody>
</table>
</body>
</html>

Industrial production nudged up minimally last month. The 0.1% rise followed no change in August. The September gain matched Consensus expectations. Factory output fared no better and posted no change after an unrevised 0.3% August [...]

U.S. Industrial Production Gain Minimal

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071015g.jpg" width="353">
The ups and downs in the Japanese economy continue. Today&#39;s data for August are coming in on the up side. The monthly increase in industrial production was 3.52% in August after a decline of 0.4% in July. Comparable figures for retail sales were 3.9% and -2.5% and for wholesale trade, 3.8% and 3.8%. The month to month changes in industrial production, retail and wholesale trade shown in the first chart illustrate the up and down path these series followed over the past five years.<img align="right" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071015h.jpg" width="353">
The monthly increases in industrial production and wholesale trade have been greater than the declines, with the result that these series show positive trends. The monthly increases in retail sales, on the other hand, have barely offset the decreases with the result that the retail trade data are more or less trend less. The second chart, shows the indexes of industrial production, retail and wholesale trade. (We have changed the base of the industrial production index from 2000 to 2005 to be comparable with the other series.)
The continued weakness in the consumer sector may have been a factor in the decision of the Bank of Japan to hold its benchmark interest rates at 0.5% this Monday. But probably, and more importantly, is the uncertainty caused by the continued negative adjustments taking place in the U. S. housing market as a result of its sub prime mortgage problem.

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th scope="col" class="firstcol">JAPAN&nbsp;</th>
<th scope="col">Aug 07</th>
<th scope="col">Jul 07&nbsp;</th>
<th scope="col">Aug 06&nbsp;</th>
<th scope="col">M/M Chg&nbsp;</th>
<th scope="col">Y/Y Chg&nbsp;</th>
<th scope="col">2006</th>
<th scope="col">2005</th>
<th scope="col">2004</th>
</tr>
</thead>
<tbody>
<tr class="odd">
<td class="firstcol">Industrial Production (2000=100)</td>
<td>111.9</td>
<td>108.1</td>
<td>107.2</td>
<td>3.5</td>
<td>4.4</td>
<td>106.1</td>
<td>101.6</td>
<td>100.0</td>
</tr>
<tr>
<td class="firstcol">Industrial Production (2005=100)</td>
<td>110.2</td>
<td>106.4</td>
<td>105.5</td>
<td>3.5</td>
<td>4.4</td>
<td>104.5</td>
<td>100.0</td>
<td>98.5</td>
</tr>
<tr class="odd">
<td class="firstcol">Retail Sales (2005=100) </td>
<td>101.2</td>
<td>97.4</td>
<td>100.7</td>
<td>3.9</td>
<td>0.5</td>
<td>100.2</td>
<td>100.1</td>
<td>98.9</td>
</tr>
<tr>
<td class="firstcol">Wholesale Sales (2005=100)</td>
<td>115.6</td>
<td>111.4</td>
<td>111.4</td>
<td>3.8</td>
<td>3.8</td>
<td>105.9</td>
<td>100.1</td>
<td>96.9</td>
</tr>
</tbody>
</table>
</body>
</html>

The ups and downs in the Japanese economy continue. Today's data for August are coming in on the up side. The monthly increase in industrial production was 3.52% in August after a decline of 0.4% in July. Comparable figures for retail [...]

Japanese Industrial Production and Domestic Trade up but BoJ Holds Interest Rate Steady

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<img align="left" border="0" height="265" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/071015f.jpg" width="353">
Italy&#146;s inflation has fallen for the overall measure. But the chart also shows that the CORE inflation has been on a gradually elevating trend. Both the core and headline rate accelerated slightly in terms of their Yr/Yr rates in September. Still, the core and the overall rates are nicely below the ECB&#146;s overall 2% inflation ceiling. 
In September, Italy&#146;s inflation report was turbulent. It was bifurcated, with six categories showing inflation on the month (m/m %) of 0.3% or greater. But there were also five main categories with the monthly price level actually falling by 0.2% or more. Food, alcohol and education prices were up the most in the month. The weakest prices were at restaurants and hotels, for recreation and culture and for communications. With this sort of turbulence in the market, it is a difficult time to get a read on true inflation trends in Italy. Diffusion readings show that over 3 months and 6 months inflation is accelerating in more categories that it is decelerating. Year-over-year, Italy&#146;s trends are neutral. 

<table border="0" cellspacing="0" width="100%">
<colgroup><col><col><col><col><col><col><col><col></colgroup>
<thead>
<tr>
<th colspan=8 scope="col">Italy HICP and CPI details</th>
</tr>
</thead>
<tbody>
<tr class="even">
<td class="firstcol">&nbsp;</td>
<td colspan="3">Mo/Mo %</td>
<td colspan="3">Saar %</td>
<td>Yr/Yr</td>
</tr>
<tr class="odd">
<td class="firstcol">&nbsp;</td>
<td>Sep-07</td>
<td>Aug-07</td>
<td>Jul-07</td>
<td>3-Mo</td>
<td>6-Mo</td>
<td>12-Mo</td>
<td>Yr Ago</td>
</tr>
<tr>
<td class="firstcol">HICP Total</td>
<td>0.3%</td>
<td>0.2%</td>
<td>-0.1%</td>
<td>1.5%</td>
<td>1.7%</td>
<td>1.8%</td>
<td>2.3%</td>
</tr>
<tr>
<td class="firstcol">Core</td>
<td>#N/A</td>
<td>0.2%</td>
<td>0.0%</td>
<td>#N/A</td>
<td>#N/A</td>
<td>#N/A</td>
<td>2.0%</td>
</tr>
<tr class="odd">
<td colspan="8" class="firstcol">CPI</td>
</tr>
<tr>
<td class="firstcol">All</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.2%</td>
<td>1.8%</td>
<td style="color:red;">2.3%</td>
<td>1.7%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">CPI excl Tobacco</td>
<td>0.2%</td>
<td>0.1%</td>
<td>0.3%</td>
<td>2.1%</td>
<td style="color:red;">2.3%</td>
<td>1.6%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">Food</td>
<td>0.7%</td>
<td>0.4%</td>
<td>0.4%</td>
<td style="color:red;">6.1%</td>
<td style="color:red;">4.3%</td>
<td style="color:red;">2.9%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">Alcohol</td>
<td>0.6%</td>
<td>0.6%</td>
<td>-0.7%</td>
<td>2.2%</td>
<td style="color:red;">2.5%</td>
<td>2.4%</td>
<td>5.1%</td>
</tr>
<tr>
<td class="firstcol">Clothing &amp; Shoes</td>
<td>0.3%</td>
<td>0.2%</td>
<td>0.2%</td>
<td style="color:red;">2.4%</td>
<td style="color:red;">1.7%</td>
<td style="color:red;">1.5%</td>
<td>1.3%</td>
</tr>
<tr>
<td class="firstcol">Rent &amp; Utilities</td>
<td>0.3%</td>
<td>0.2%</td>
<td>0.0%</td>
<td style="color:red;">1.9%</td>
<td>1.1%</td>
<td>1.4%</td>
<td>5.7%</td>
</tr>
<tr>
<td class="firstcol">Housing &amp; Furniture</td>
<td>0.2%</td>
<td>0.2%</td>
<td>0.2%</td>
<td>2.2%</td>
<td style="color:red;">3.5%</td>
<td style="color:red;">2.8%</td>
<td>1.5%</td>
</tr>
<tr>
<td class="firstcol">Health Care</td>
<td>-0.2%</td>
<td>0.2%</td>
<td>0.1%</td>
<td style="color:red;">0.3%</td>
<td>-0.8%</td>
<td>-0.2%</td>
<td>0.0%</td>
</tr>
<tr>
<td class="firstcol">Transport</td>
<td>-0.2%</td>
<td>-0.7%</td>
<td>0.6%</td>
<td>-1.4%</td>
<td style="color:red;">2.4%</td>
<td style="color:red;">2.0%</td>
<td>2.0%</td>
</tr>
<tr>
<td class="firstcol">Communication</td>
<td>-0.3%</td>
<td>0.0%</td>
<td>0.0%</td>
<td style="color:red;">-1.1%</td>
<td style="color:red;">-1.4%</td>
<td>-8.8%</td>
<td>-3.4%</td>
</tr>
<tr>
<td class="firstcol">Recreation &amp; Culture</td>
<td>-0.4%</td>
<td>0.3%</td>
<td>0.1%</td>
<td style="color:red;">0.0%</td>
<td>-0.5%</td>
<td>0.2%</td>
<td>1.1%</td>
</tr>
<tr>
<td class="firstcol">Education</td>
<td>0.9%</td>
<td>0.1%</td>
<td>0.2%</td>
<td style="color:red;">5.4%</td>
<td style="color:red;">4.0%</td>
<td style="color:red;">3.1%</td>
<td>2.1%</td>
</tr>
<tr>
<td class="firstcol">Restaurant &amp; Hotel</td>
<td>-0.5%</td>
<td>0.3%</td>
<td>0.3%</td>
<td>0.5%</td>
<td>2.4%</td>
<td style="color:red;">2.4%</td>
<td>2.4%</td>
</tr>
<tr>
<td class="firstcol">Other</td>
<td>0.3%</td>
<td>0.3%</td>
<td>0.2%</td>
<td>3.2%</td>
<td style="color:red;">3.3%</td>
<td>2.5%</td>
<td>2.7%</td>
</tr>
<tr class="odd">
<td class="firstcol">Diffusion</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>&nbsp;</td>
<td>58.3%</td>
<td style="color:red;">66.7%</td>
<td>50.0%</td>
<td>&nbsp;</td>
</tr>
<tr>
<td class="firstcol">Type:</td>
<td colspan="3">Diffusion: Compared to</td>
<td>6-mo</td>
<td>12-mo</td>
<td>Yr-Ago</td>
<td>--</td>
</tr>
</tbody>
</table>
</body>
</html>

Italys inflation has fallen for the overall measure. But the chart also shows that the CORE inflation has been on a gradually elevating trend. Both the core and headline rate accelerated slightly in terms of their Yr/Yr rates in [...]

Italy's Inflation: Overall Under Control With Some Underlying Erosion

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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Nonfarm payrolls increased 177,000 (1.2% y/y) during April after rising 185,000 in March, revised from 228,000, and 102,000 in February, revised from 117,000. Expectations had been for a 130,000 rise in the Action Economics Forecast Survey. The latest figure left the three-month average change at 155,000 in April, down from 232,000 in January.

Average hourly earnings rose 0.2% during April after unrevised increases of 0.3% in March and 0.2% in February. Earnings growth of 3.8% y/y was below the 5.9% high in March 2022.

The unemployment rate, measured in the household survey, held m/m at an expected 4.2% in April, and compared to 4.1% in February and 4.0% in January. It reached a low of 3.4% in April 2023. The unemployment rate, including employees working part-time for economic reasons plus all marginally-attached workers, eased to 7.8% in April from 7.9% in March.

In the **establishment survey**, private-sector employment rose 167,000 (1.2% y/y) after a 170,000 March increase. Factory sector jobs edged 1,000 lower (-0.7% y/y) following a 3,000 gain. Construction sector employment increased 11,000 (1.7% y/y), after rising 7,000 in March.

Private service-producing sector employment increased 156,000 (1.4% y/y) in April after improving 161,000 in March. Increases varied greatly amongst service sector categories. Private education & health sector employment rose 70,000 (3.4% y/y) last month following a 74,000 March increase. Leisure & hospitality employment rose 24,000 (1.3% y/y) after a 38,000 gain. Trade, transportation & utilities rose 32,000 (0.9% y/y) in April following a 25,000 March increase. Professional & business services employment rose 17,000 (-0.1% y/y) following a 3,000 rise while temporary help employment rose 3,600 (-3.9% y/y) following a 2,700 decline. Financial activities employment improved 14,000 (1.2% y/y) after a 6,000 gain. The number of information sector jobs held steady (-0.4% y/y) last month after falling 2,000 in March.

Government sector payrolls rose 10,000 (1.3% y/y) last month after increasing 15,000 in March. The number of local government jobs increased 13,000 (1.4% y/y) following a 17,000 gain. State government employment rose 6,000 (1.8% y/y) following a 2,000 March increase but federal government payrolls fell 9,000 (-0.3% y/y), the third consecutive monthly decline.

Private-sector average hourly earnings rose 0.2% (3.8% y/y) in April after increasing 0.3% in March. Earnings in the goods-producing sector eased 0.1% (+4.0% y/y) following a 0.6% gain. Earnings in construction rose 0.3% (3.6% y/y), after a 0.2% rise but factory sector earnings declined 0.3% (+4.3% y/y) after surging 0.8% in March. In the private services-sector, earnings rose 0.2% (3.7% y/y) in April for the third straight month. Information sector pay increased 1.0% (5.2% y/y) last month after easing 0.1%, and financial activities earnings rose 0.5% (4.3% y/y) for the second straight month. Trade, transportation & utilities sector pay increased 0.4% (3.4% y/y) after 0.6%. Professional & business sector earnings increased 0.1% (4.4% y/y) after 0.2% in March. Leisure & hospitality earnings held steady (+3.8% y/y) following a 0.6% March increase.

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The length of the average workweek held steady at 34.3 hours in April. The workweek in the goods-producing sector eased to 39.8 hours from 40.0 hours. The construction sector average workweek eased to 39.0 hours from 39.3 hours while the factory sector workweek moved lower to 40.0 hours from 40.2. The average workweek in the private service sector held at 33.2 hours. Professional & business service hours fell to 36.3 hours from 36.4 while trade, transportation & utilities hours improved to 34.3 from 34.0 hours. Private education hours rose slightly to 32.8, but leisure & hospitality held steady at 25.5 hours.

In the **household survey**, the unemployment rate held at 4.2% in April as employment rose 436,000 and the size of the labor force increased 518,000. The labor force participation rate edged up to 62.6% last month from 62.5% in March. It remained below the high of 63.3% early in 2020. The rate for teenagers declined to 36.9%. For workers aged 20-24, the rate held steady at 72.1%, up from 71.8% six months earlier. For workers aged 25-54 the rate rose to 83.6%, a five-month high. For individuals 55 and over, the rate improved to 38.4% in April.

The employment/population ratio for all workers in April rose to 60.0%. It remained below the peak reading of 61.1% in February, 2020 just prior to the pandemic.

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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- Job growth spreads across most sectors.
- Earnings growth trend decelerates.
- Jobless rate holds steady.

U.S. Job Growth Is Firm in April but March Gain Is Lessened

Winnie Tapasanun

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Total factory orders rose a slightly less-than-expected 4.3% m/m in March after rises of 0.5% in February and 1.8% in January, data from the U.S. Census Bureau showed. A 4.5% m/m March increase had been expected in the Action Economics Forecast Survey. The March reading was the third successive monthly rise and the largest since July 2024. The year-on-year rate accelerated to 6.0% in March, the highest since November 2022, from 2.3% in February. Notably, orders for nondefense aircraft & parts soared 139.0% in March following a 7.4% drop in February and a 92.9% surge in January. Factory orders excluding defense rose 4.8% (5.9% y/y), the largest of three straight m/m/ rises, after a 0.4% February increase. Factory orders excluding the transportation sector fell 0.2% (+1.1% y/y), the first m/m fall since August, after rising 0.3% in February, January and December.

Durable goods orders jumped 9.2% (11.9% y/y) in March, the third consecutive m/m gain and the biggest since July 2024, on top of a 0.8% increase in February (matching +9.2% m/m in the advance report on April 24). The March jump reflected m/m orders increases of 27.1% (the largest m/m surge since July 2024; 31.2% y/y) in transportation equipment, 1.1% (4.9% y/y) in primary metals, 0.5% (-0.4% y/y) in furniture & related products, 0.1% (2.5% y/y) in fabricated metal products, and 0.1% (0.9% y/y) in machinery. To the downside, durable goods orders for computers & electronic products (-1.3%; +2.7% y/y) and electrical equipment, appliances & components (-1.0%; +4.2% y/y) declined m/m in March.

Nondurable goods orders, which equal nondurable goods shipments, fell 0.3% (+0.4% y/y) in March, the first m/m fall since September, after a 0.1% uptick in February. The March fall reflected m/m drops of 2.4% (-9.3% y/y) in petroleum & coal products and 0.9% (-1.2% y/y) in apparel. To the upside, the following nondurable goods shipments rose m/m in March: leather & allied products (1.5%; 8.6% y/y), beverage & tobacco products (0.7%; 5.8% y/y), paper products (0.6%; 2.3% y/y), printing (0.3%; 3.8% y/y), textile mills (0.3%; 0.8% y/y), chemical products (0.2%; 5.4% y/y), plastics & rubber products (0.2%; 0.4% y/y), food products (0.1%; 1.8% y/y), and textile products (0.1%; 2.1% y/y).

Total shipments slipped 0.1% (+2.0% y/y) in March, the first m/m easing since October, after a 0.7% increase in February. Excluding transportation, shipments were virtually unchanged m/m (+1.1% y/y) in March following six straight m/m gains. Shipments of durable goods industries inched up 0.1% (3.8% y/y) in March, the smallest of four consecutive m/m increases, after a 1.3% advance in February. This reflected m/m durable goods shipments rises of 1.2% (5.6% y/y) in primary metals, 0.9% (0.1% y/y) in furniture & related products, 0.8% (-0.2% y/y) in nonmetallic mineral products, 0.4% (0.0% y/y) in machinery, 0.3% (1.8% y/y) in fabricated metal products, 0.2% (4.5% y/y) in computers & electronic products, 0.2% (-2.1% y/y) in wood products, and 0.1% (3.0% y/y) in electrical equipment, appliances & components. In contrast, durable goods shipments for transportation equipment (-0.5%; +7.3% y/y) and miscellaneous durable goods (-0.1%; +2.9% y/y) fell m/m in March following three successive m/m increases.

Unfilled orders rose 2.0% (2.3% y/y) in March, up for the eighth month in nine, after a 0.1% uptick in February. Excluding transportation, unfilled orders dipped 0.1% (+0.7% y/y) in March, the first m/m easing since May 2024, after holding steady in February. Backlogs of durable goods rose 2.0% (2.3% y/y) in March, reflecting m/m rises of 3.1% (3.1% y/y) in transportation equipment and 0.2% (2.4% y/y) in electrical equipment, appliances & components.

Inventories edged up 0.1% (0.9% y/y) in March, the fifth straight m/m increase, after rising at the same pace in the prior two months. Excluding transportation, inventories were up 0.1% (0.5% y/y) in March, the fifth consecutive m/m rise. Durable goods inventories ticked up 0.1% (1.0% y/y) in March after holding steady in February and January; nondurable goods inventories edged up 0.1% (0.8% y/y), the fifth successive m/m increase.

The factory sector data are available in Haver’s **USECON** database. The Action Economics Forecast Survey is in the **AS1REPNA** database.

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- March manufacturers’ new orders +4.3% m/m; +6.0% y/y, highest since Nov. ’22.
- Durable goods orders (+9.2%) jump m/m, while nondurable goods orders (-0.3%) and shipments (-0.1%) decline m/m.
- Transportation equipt. orders +27.1% m/m, w/ a 139.0% m/m surge in nondefense aircraft & parts orders.
- Unfilled orders +2.0%, the eighth m/m rise in nine months.
- Inventories +0.1%, the fifth consecutive m/m increase.

U.S. Factory Orders Increase for the Third Straight Month in March

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The global manufacturing data showed broad weakening in April as conditions weakened across more than half of the contributing early reporters in the S&P survey of manufacturing. Of the 18 early reporting countries, more than half of them showed deceleration over six months and 12 months. Over three months, only 8 of 18 showed deterioration and that's about as good as it got in this report. In the current month, month-to-month changes showed more than half of the survey contributors showing weaker results than the month before. In the S&P framework, manufacturing improved month-to-month for the U.S.; however, looking at sequential averages for the U.S., U.K., European monetary union, Canada, and Japan, we see a steady weakening and results over 12 months, over six months versus 12 months, and for three months versus 6 months. The highly developed countries are not doing particularly well.

Asian economies are also showing slight deterioration but doing a little better than the developed countries in general.

Only five of the 18 reporting countries have queue percentile standings in their data back to January 2021 that are above their medians. Readings at or above the 50% mark are at or above the median standing. Canada is showing the weakest manufacturing result on record over this span, in terms of its queue percentile standing which is at 0 in the current month.

I showed the graphic for the Baltic dry goods index in this report rather than statistics on the manufacturing PMI data because the Baltic data, which reflect shipping volume for dry goods - that is excluding things like oil - is weak but it's only in the neighborhood where it's been for some time. There has been a great deal of talk about how tariffs may have impacted trade flows, expected trade flows, shipping, shipping rates, and the like. However, according to the Baltic dry goods index, there isn't much evidence that this is occurring right now and affecting the current data. That may still lie ahead but for now it's not baked in the cake.

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Globally Manufacturing Weakens

Andrew Cates

**China-US shipping activity** 
The economic fallout from escalating US-China trade tensions is becoming increasingly visible in the data. A clear example is the chart below, which highlights a sharp drop in vessel arrivals at the ports of Los Angeles and Long Beach, along with a notable decline in ships waiting offshore. These trends point to a tangible weakening in bilateral trade flows, as the effects of tit-for-tat tariffs imposed by both countries begin to bite. Given the outsized role the US and China play in global commerce, this slowdown is likely to reverberate through global supply chains, weighing on trade volumes, dampening demand, and curbing economic growth worldwide.

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**GDP growth in Q1**
Data this week showed that the US economy contracted, albeit modestly, in Q1 even as the euro area recorded a modest expansion—an unusual divergence. The contraction in US GDP can be largely attributed to a sharp increase in imports, as firms rushed to front-load purchases ahead of anticipated tariff hikes. In addition, domestic demand was subdued, with weaker contributions from both consumer spending and government consumption. This decoupling between the US and euro area economies is particularly striking given the current global focus on the US dollar. While the euro area has shown unexpected signs of resilience, the US downturn raises important questions about its underlying momentum, especially as trade dynamics and policy uncertainty continue to cloud the outlook.

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**The US dollar versus yield differentials**
Chart 3 below illustrates a sharp breakdown in the correlation between the US-Germany 10-year yield differential and the EUR/USD exchange rate. Historically, the dollar has moved closely with interest rate spreads, as yield-seeking capital flowed into US assets. But since early 2025—and more acutely following the April tariff actions—the dollar has weakened markedly even as the yield spread has narrowed only modestly. This decoupling underscores a critical shift: capital markets are reacting not just to monetary policy, but to rising trade and geopolitical uncertainty. In other words, the exchange rate is now being driven as much by risk sentiment as by interest rate arbitrage.

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**The US economy’s structural outperformance and the dollar**
A second dynamic, captured in the next chart, reveals a tight correlation between the US real effective exchange rate and the potential GDP growth differential between the US and euro area over the past 50-60 years. This raises the question: has dollar strength (until recently) merely been a reflection of US growth leadership—or are capital inflows themselves helping to sustain this growth outperformance? In effect, the tail may be wagging the dog. Global investors have long allocated capital to the US, attracted by its macroeconomic resilience, technological leadership, and deep, liquid financial markets. The danger now is that the US trade war may disrupt this equilibrium. A sharp or sustained reduction in capital inflows could undermine growth, weaken the dollar, and trigger broader financial instability. Moreover, reversing this dynamic is not straightforward—barring a credible structural resurgence in European (or Asian) growth, the global investment landscape remains tilted toward the US.

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**US competitiveness versus Europe, China and Japan** 
The next chart below examines relative unit labour costs across major economies since 2011. The US and China have seen a broadly similar trajectory, with steady increases in relative cost structures, while the euro area has remained flat and Japan has seen dramatic improvement. This suggests that, from a cost competitiveness standpoint, the US is not uniquely disadvantaged vis-à-vis China. However, as we discuss further below, this parallel erosion of cost competitiveness is occurring at much higher nominal wage levels in the US, which blunts its ability to regain export share through tariff-related shifts alone. The trade war strategy—absent a corresponding improvement in productivity or structural reforms—risks imposing costs without delivering material competitiveness gains.

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**Average wages in selected developed and developing economies**
This point is reinforced by the final chart, which shows estimates for average monthly wages across countries in 2024. US labour remains much more expensive than in peer or emerging economies. So even if China’s costs rise in tandem with the US, the global supply chain has ample alternatives. 'China plus one' strategies are accelerating, and the US remains structurally misaligned with low-cost production hubs. Tariffs aimed at reshoring supply chains are unlikely to deliver sustained gains unless accompanied by deep supply-side reforms, and risk further disincentivizing foreign direct investment if global firms perceive US trade policy as erratic or punitive.

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Financial markets found a measure of calm this week, buoyed by some subtle shifts in tone from US policymakers. A softening in the administration’s rhetoric around trade tariffs coupled with a less confrontational stance toward Federal Reserve Chair Jerome Powell, helped ease tensions that had roiled markets earlier in the month. Equities rebounded modestly, and volatility indicators edged lower, reflecting cautious optimism that the worst of the policy shocks may be behind us. But beneath the surface, significant downside risks persist. New shipping data point to a pronounced slowdown in US-China trade flows (chart 1), suggesting the damage from recent tariff escalations is already rippling through global supply chains. Meanwhile, incoming data for the US revealed an unexpected contraction in the economy in Q1 and further signs of weakness in the labour market (chart 2). The US dollar, in the meantime, while long supported by superior growth and yield differentials, has begun to decouple from traditional drivers (charts 3 and 4) suggesting growing pressure on capital flows. At the same time, structural imbalances are drawing renewed scrutiny: unit labour cost comparisons show the US steadily losing competitiveness (chart 5), while nominal wage disparities remain stark versus China and other Asian economies, further complicating any effort to restore trade balance without broader reforms (chart 6). In short, while markets may be drawing temporary comfort from a pause in tariff brinkmanship, the deeper economic and financial vulnerabilities exposed this month remain unresolved—and increasingly central to the global macro narrative.

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Charts of the Week: Tariff Truce, Tenuous Trust

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U.S. light vehicle sales dropped 2.9% (+6.5% y/y) to 17.31 million units (SAAR) in April after surging 10.8% to 17.82 million units in March. The retreat in April vehicle sales accompanied a 1.7% y/y rise in real disposable income through March, which compared to 2.0% growth last year.

Sales declines were broad-based last month. Light truck sales fell 1.3% (+9.9% y/y) during April to 14.34 million units (SAAR), after rising 12.4% in March. Purchases of domestically-made light trucks declined 1.2% (+11.9% y/y) to 11.02 million units, after jumping 12.5% in March. Sales of imported light trucks fell 1.8% (+4.4% y/y) to 3.32 million units, following an 11.6% March surge.

Trucks’ record 82.8% share of the light vehicle market last month compared to 81.5% in March and 80.3% in April of last year. The share averaged 80.3% during all of 2024 versus 53.3% ten years earlier.

Auto sales also declined last month, down 9.5% (-7.5%) to 2.97 million units (SAAR) following a 3.5% March rise. The decline reversed all of the increase over the prior two months. Purchases of domestically-produced cars fell 9.8% (-4.3% y/y) last month to 2.22 million units, after rising 3.8% in March. Sales of imported autos declined 9.6% (-15.7% y/y) to 0.75 million units, following a 2.5% March increase.

Imports' 23.5% share of the U.S. light vehicle market was little changed from 23.6% in March and compared to a May 2023 low of 22.9% and a high of 26.3% in November of 2023. Imports' share of the passenger car market held steady at 25.3% last month and compared to 27.7% in April of last year. It reached a high of 38.7% in September 2021. Imports' share of the light truck market eased to 23.2% last month after falling to 23.3% in March.

U.S. vehicle sales figures can be found in Haver's **USECON** database. Additional detail by manufacturer is in the I**NDUSTRY** database.

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- Light truck sales pull back, while auto sales tumble.
- Both domestic and imported sales decline.
- Imports' market share slips further.

Economy in Brief: October 2007

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Confidence Among German Investors Holds Steady: Slight Improvement in Profit Expectations

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Weekly U.S. Chain Store Sales Recovered Smartly

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Italy's Inflation: Overall Under Control With Some Underlying Erosion