Tom Moeller

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Sales of existing homes improved 1.2% during February to 4.880 million (AR,
4.7% y/y), following an unrevised 4.9% January decline. Home sales remained down
5.4% from October and slightly missed consensus expectations for 4.92 million in
the Action Economics Forecast Survey. Single-family home sales gained 1.4% last
month (5.9% y/y) to 4.340 million after a 4.9% shortfall. Condo and co-op sales
remained unchanged (-3.6% y/y) at 0.540 million, the lowest level since July
2012.

The median sales price of an existing home increased 2.5% (7.5% y/y) to $202,600
from $197,600, revised from $199,600. Prices remained 8.7% lower than the June
peak. The average sales price improved 1.0% (5.0% y/y) to $248,400, down 7.3%
from the June peak. The composite index of home affordability increased 2.3% y/y
to the highest level since May 2013.

Severe winter weather likely reduced sales last month. By region, sales in
the Northeast declined 6.5% (+3.6% y/y) to 580,000, the lowest level in twelve
months. Sales in the Midwest were unchanged (+4.9% y/y) at 1.080 million, down
10.7% from the high six months ago. Sales in the South improved 1.9% (6.0% y/y)
to 2.110 million but remained slightly below their October peak. Sales in the
West gained 5.7% (2.8% y/y) to 111,000, but have moved sideways for six months.

The inventory of unsold homes slipped 0.5% y/y. The months' supply of homes
on the market remained unchanged at 4.6, down from 5.6 months in August and near
the low for the economic expansion.

The data on existing home sales, prices and affordability can be found in
Haver's USECON database. The regional price, affordability and inventory
data are available in the REALTOR database. The expectations figure is
from the Action Economics survey, reported in the AS1REPNA database.

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 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >Existing Home Sales (SAAR,
 000s)</th>
 <th scope="col" >Feb</th>
 <th scope="col" >Jan</th>
 <th scope="col" >Dec</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Total</td>
 <td >4,880</td>
 <td >4,820</td>
 <td >5,070</td>
 <td >4.7</td>
 <td >4,920</td>
 <td >5,074</td>
 <td >4,657</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >&nbsp;&nbsp; Northeast</td>
 <td >580</td>
 <td >620</td>
 <td >670</td>
 <td >3.6</td>
 <td >640</td>
 <td >658</td>
 <td >597</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp; Midwest</td>
 <td >1,080</td>
 <td >1,080</td>
 <td >1,110</td>
 <td >4.9</td>
 <td >1,131</td>
 <td >1,194</td>
 <td >1,063</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >&nbsp;&nbsp; South</td>
 <td >2,110</td>
 <td >2,070</td>
 <td >2,170</td>
 <td >6.0</td>
 <td >2,048</td>
 <td >2,032</td>
 <td >1,834</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp; West</td>
 <td >1,110</td>
 <td >1,050</td>
 <td >1,120</td>
 <td >2.8</td>
 <td >1,102</td>
 <td >1,190</td>
 <td >1,163</td>
 </tr>
 <tr class="even">
 <td class="firstcol" >Single-Family Sales</td>
 <td >4,340</td>
 <td >4,280</td>
 <td >4,500</td>
 <td >5.9</td>
 <td >4,334</td>
 <td >4,473</td>
 <td >4,125</td>
 </tr>
 <tr>
 <td class="firstcol" >Median Price Total ($, NSA)</td>
 <td >202,600</td>
 <td >197,600</td>
 <td >208,200</td>
 <td >7.5</td>
 <td >206,708</td>
 <td >195,667</td>
 <td >175,433</td>
 </tr>
 </tbody>
 </table>
 
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Sales of existing homes improved 1.2% during February to 4.880 million (AR, 4.7% y/y), following an unrevised 4.9% January decline. Home sales remained down 5.4% from October and slightly missed consensus expectations for 4.92 million [...]

U.S. Existing Home Sales Remain Under Pressure

Robert Brusca

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The U.K. economy is showing mixed evidence of a slipping industrial sector as industrial sector overall orders have dropped to a five-month low and to their first neutral reading in that span. Export orders are at their weakest over two years (26 months). With the EMU kick-starting its program of QE and the U.K.'s own program of QE having been staged a long time ago, the pound sterling's period of being undervalued (and stimulative to industry) is coming to an end.

Still, these readings for orders are not as weak as they may seem. The current reading placed in historic context finds a standing at a position that is in the 84th percentile of its data queue, hardly weak! By this relative ranking, overall orders have been stronger only 16% of the time. Export orders, however, are about as weak as they seem. Their -26 net reading has a queue standing in its 39th percentile (weaker only 39% of the time).

The dropping euro exchange rate is playing a role by pushing sterling higher and reducing the U.K.'s competitive advantage for U.K. exporters vs. EMU single-currency members. Sterling on a broad basis is now nearly back to parity after having been undervalued since early-2008.

However, looking ahead the outlook for volume has slipped only to 22 in March from 25 in February. This reading (apart from its February value, of course) is the strongest since September of last year, standing in the 88th percentile of its historic queue of values (stronger only 12% of the time). The outlook for prices has fallen month-to-month to 4 from 8 and that net value stands in the 56th percentile of its historic queue. There is no evidence of inflation being expected. But the output outlook is still quite strong. 

What we have is a U.K. economy where the outlook for output is still relatively strong. Orders on hand, have slipped, but are at about the same relative historic standing as the outlook for volume expansion. The volume outlook and orders readings are compatible in percentile standing terms. But what has slipped month-to-month and is a matter of concern is the reading for export orders; that lower 39th percentile standing should raise flags. U.K. exports are approximately 29% of GDP while imports are 32% of GDP. The U.K. is importantly plugged into the world trading system and any loss in competitiveness will impact the economy significantly.

So far it appears that the U.K. economy is prepared to run at a decently firm pace on home grown fuel (domestic demand and orders). But the slippage in foreign orders has to be a problem from the stand point of a more lasting outlook. The U.K. outlook reading in the CBI survey is only for three months ahead. We know that exchange rate changes take more time than that to filer though the economic system.

For now the CBI survey can be called mixed. But with the slippage in export orders there is reason to doubt the overall competitive state of British industry and to raise a question mark about performance in the future. For now the domestic economy has enough strength to keep forward-looking metrics in line, but there should be some skepticism about performance farther down the line.


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The U.K. economy is showing mixed evidence of a slipping industrial sector as industrial sector overall orders have dropped to a five-month low and to their first neutral reading in that span. Export orders are at their weakest over [...]

U.K. CBI Index Shows Mixed Trends

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The Chicago Federal Reserve reported that its National Activity Index (CFNAI)
for February declined to -0.11 from -0.10 in January, revised from +0.13. The
three-month moving average also turned negative. The reading of -0.08 was the
first below zero in twelve months. During the last ten years, there has been a
76% correlation between the Chicago Fed Index and the q/q change in real GDP.

Two of the four component series were negative last month, the same as during
the prior two months. The Personal Consumption &amp; Housing series was negative
0.17, its weakest reading since January of last year. The Production &amp;
Income figure of -0.07 was the fourth number below zero in the last five months.
At 0.02, the Sales, Orders and Inventories series remained weak. The Employment,
Unemployment and Hours reading declined to 0.11, its lowest level in six months.
The three-month moving average of the total deteriorated to -0.08, the first negative
reading in a year. The Fed reported that 48 of the 85 component series made
positive contributions to the total while 37 made negative contributions. This
breadth of increase was the same as during January.

The CFNAI is a weighted average of 85 indicators of national economic
activity. It is constructed to have an average value of zero and a standard
deviation of one. Since economic activity tends toward trend growth rate over
time, a positive index reading corresponds to growth above trend and a negative
index reading corresponds to growth below trend.

The Chicago Federal Reserve figures are available in Haver's SURVEYS
database.

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	<colgroup><col><col><col><col><col><col><col><col></colgroup>
	
 <thead>
 <tr>
 <th class="firstcol" scope="col" >Chicago Federal Reserve Bank</th>
 <th scope="col" >Feb</th>
 <th scope="col" >Jan</th>
 <th scope="col" >Dec</th>
 <th scope="col" >Feb '14</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >CFNAI</td>
 <td >-0.11</td>
 <td >-0.10</td>
 <td >-0.02</td>
 <td >0.59</td>
 <td >0.21</td>
 <td >0.01</td>
 <td >-0.05</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;3-Month Moving Average</td>
 <td >-0.08</td>
 <td >0.26</td>
 <td >0.35</td>
 <td >-0.12</td>
 <td >--</td>
 <td >--</td>
 <td >--</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Personal Consumption &amp;
 Housing</td>
 <td >-0.17</td>
 <td >-0.07</td>
 <td >-0.13</td>
 <td >-0.12</td>
 <td >-0.11</td>
 <td >-0.14</td>
 <td >-0.20</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Employment, Unemployment
 &amp; Hours</td>
 <td >0.11</td>
 <td >0.16</td>
 <td >0.23</td>
 <td >0.08</td>
 <td >0.18</td>
 <td >0.10</td>
 <td >0.09</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Production &amp; Income</td>
 <td >-0.07</td>
 <td >-0.20</td>
 <td >-0.22</td>
 <td >0.52</td>
 <td >0.10</td>
 <td >0.03</td>
 <td >0.06</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Sales, Orders &amp;
 Inventories</td>
 <td >0.02</td>
 <td >0.01</td>
 <td >0.10</td>
 <td >0.11</td>
 <td >0.04</td>
 <td >0.03</td>
 <td >-0.00</td>
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The Chicago Federal Reserve reported that its National Activity Index (CFNAI) for February declined to -0.11 from -0.10 in January, revised from +0.13. The three-month moving average also turned negative. The reading of -0.08 was the [...]

Chicago Fed National Activity Index Deteriorates

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<title>Empire State Factory Sector Index Slips</title>
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Recent strength in the U.S. factory sector has done little
for industrial commodity prices as growth abroad struggles. The
industrial commodity price index from the Foundation for International Business
and Economic Research (FIBER) declined this week to the lowest level since
December 2009. Overall, prices have fallen 14.3% y/y and 15.2% since
late-August.
The crude oil &amp; benzene grouping led the decline with a more than
one-third drop in prices since early last year. The price for a barrel of WTI
crude oil plunged to $43.79 yesterday (-56.2% y/y), down 59.0% from its $106.69
high in June of last year. Prices for the petro-chemical benzene have followed
the way down. Prices rallied a bit last week, but they remained 55.7% lower than
where they were in January of last year. Metals prices also have improved
of late, but they are 21.7% lower since August (-14.9% y/y). Steel scrap prices
led the way lower with a 37.5% y/y decline and they are down by nearly one-half
from the 2011 high. Copper scrap prices have been similarly weak, posting a 41.9%
decline from the 2011 high (-11.7% y/y). Aluminum prices have weakened 14.8%
since the late-November high but they remain up 6.0% y/y. In the miscellaneous
materials grouping, prices recently rallied but have trended 23.1% lower since
August 2013 (-8.6% y/y). Natural rubber prices improved with a 16.4% rise (-20.7%
y/y) since the December low. Prices for framing lumber, however, remain weak.
They're down 18.1% since early September (-13.4% y/y), reaching the lowest level
since 2013. Structural panel prices have been relatively firm, off 9.7% since
early November (+2.2% y/y). Prices remain roughly one-quarter from the April
2013 high.Textile prices have shown relative strength with
movement roughly sideways. Cotton prices have been flat since November (-30.8%
y/y) but burlap prices have risen 11.1% since October (+6.2% y/y). 
Future support for commodity prices may be on the way. The current industrial
output projection from the National Association for Business Economics calls for
3.5% growth in industrial production in 2015. During the last ten years, there
has been a 52% correlation between the three-month change in prices and the
change in industrial output.
Commodity price data can be found in Haver's DAILY, WEEKLY, USECON and
CMDTY databases.
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 <colgroup>
 <col>
 <col>
 <col>
 <col>
 <col>
 <col>
 <col>
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 </colgroup>
 <thead>
 <tr>
 <th class="firstcol" scope="col" width="1078">FIBER Industrial Materials
 Price Index (1990=100)</th>
 <th scope="col" width="157">3/19/15</th>
 <th scope="col" width="158">Y/Y %</th>
 <th scope="col" width="158">2014</th>
 <th scope="col" width="158">2013</th>
 <th scope="col" width="158">2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" width="1078">All Items</td>
 <td align="center" width="157">141.68</td>
 <td align="center" width="158">-14.3</td>
 <td align="center" width="158">163.3</td>
 <td align="center" width="158">169.0</td>
 <td align="center" width="158">166.3</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" width="1078">&nbsp;Textiles</td>
 <td align="center" width="157">74.96</td>
 <td align="center" width="158">-5.1</td>
 <td align="center" width="158">76.4</td>
 <td align="center" width="158">78.2</td>
 <td align="center" width="158">77.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1078">&nbsp;&nbsp;Cotton (cents per pound)</td>
 <td align="center" width="157">60.66</td>
 <td align="center" width="158">-30.8</td>
 <td align="center" width="158">73.4</td>
 <td align="center" width="158">79.6</td>
 <td align="center" width="158">74.4</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" width="1078">&nbsp;Metals</td>
 <td align="center" width="157">195.04</td>
 <td align="center" width="158">-14.9</td>
 <td align="center" width="158">237.5</td>
 <td align="center" width="158">236.3</td>
 <td align="center" width="158">242.7</td>
 </tr>
 <tr>
 <td class="firstcol" width="1078">&nbsp;&nbsp;Aluminum ($ per metric ton)</td>
 <td align="center" width="157">1,771.00</td>
 <td align="center" width="158">6.0</td>
 <td align="center" width="158">1,864.6</td>
 <td align="center" width="158">1,846.2</td>
 <td align="center" width="158">2,016.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1078">&nbsp;&nbsp;Copper Scrap (cents per
 pound)</td>
 <td align="center" width="157">258.14</td>
 <td align="center" width="158">-11.7</td>
 <td align="center" width="158">311.2</td>
 <td align="center" width="158">332.4</td>
 <td align="center" width="158">360.3</td>
 </tr>
 <tr>
 <td class="firstcol" width="1078">&nbsp;&nbsp;Steel Scrap ($ per ton)</td>
 <td align="center" width="157">226.67</td>
 <td align="center" width="158">-37.5</td>
 <td align="center" width="158">357.9</td>
 <td align="center" width="158">346.0</td>
 <td align="center" width="158">366.5</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" width="1078">&nbsp;Crude Oil &amp; Benzene</td>
 <td align="center" width="157">136.80</td>
 <td align="center" width="158">-36.2</td>
 <td align="center" width="158">204.7</td>
 <td align="center" width="158">207.7</td>
 <td align="center" width="158">204.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1078">&nbsp;&nbsp;Crude Oil (WTI, $ per
 Barrel)</td>
 <td align="center" width="157">43.79</td>
 <td align="center" width="158">-56.2</td>
 <td align="center" width="158">93.2</td>
 <td align="center" width="158">97.9</td>
 <td align="center" width="158">94.2</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" width="1078">&nbsp;Miscellaneous</td>
 <td align="center" width="157">186.31</td>
 <td align="center" width="158">-8.6</td>
 <td align="center" width="158">199.4</td>
 <td align="center" width="158">218.3</td>
 <td align="center" width="158">205.2</td>
 </tr>
 <tr>
 <td class="firstcol" width="1078">&nbsp;&nbsp;Framing Lumber ($ per 1000
 board ft.)</td>
 <td align="center" width="157">335</td>
 <td align="center" width="158">-13.4</td>
 <td align="center" width="158">383</td>
 <td align="center" width="158">383</td>
 <td align="center" width="158">321</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" width="1078">&nbsp;&nbsp;Natural Rubber (cents per
 pound)</td>
 <td align="center" width="157">130.07</td>
 <td align="center" width="158">-20.7</td>
 <td align="center" width="158">139.7</td>
 <td align="center" width="158">190.0</td>
 <td align="center" width="158">211.8</td>
 </tr>
 </tbody>
</table>





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The industrial commodity price index from the Foundation for International Business and Economic Research (FIBER) declined this week to the lowest level since December 2009. Overall, prices have fallen 14.3% y/y and 15.2% since late-August.

FIBER: Industrial Commodity Prices Post Broad-Based Declines

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Inflation in Canada continues weak, crawling along the bottom of the range established by the Bank of Canada. The central bank has a desired inflation in a range of 1% to 3% but also expects that inflation will drop below 1% for much of the year. Falling energy prices are the same old story here and in the short run there's nothing to do but wait it out.

We are in a period of controlled inflation. For the United States, Canada and EMU inflation rates for core and headline inflation measures are below 2% over the last five years and 10 years on a cumulative basis as well as more recently. The central bank of Canada has an inflation range making its 1% core performance more in line with the inflation facts of late. The ECB targets only headline inflation so its -0.3% pace constitutes a big miss from its target of 2%. Moreover, the ECB has been missing persistently with year-over-year headline inflation below 2% for 25 months in a row. That's two years of missing with the degree of the miss increasing. In the U.S., the Fed offers forecasts of the PCE and of the core PCE. Its guidance is in terms of the headline inflation rate, but the Fed, somewhat confusingly, will make references to both measures. But with the Fed focused on a rate of 2% and the PCE headline rising by only 0.2%, the Fed has a major shortfall to deal with. Even the core PCE is up by only 1.1% year-over-year.

While we can debate the merits of differing inflation targeting programs, in this instance the Bank of Canada seems a lot more relaxed and in step with its goals. Having a range for inflation gives it flexibility and it can decide to react to inflation inside the zone or not as well as how to deal with out-of-the-range variations. I know some will see adopting a range for inflation as `soft', but in reality it all depends on how the central bank enforces the program. 

For now the Bank of Canada is in its sweet spot but only at the edge of it. Since the energy price drop is seen as a special or temporary phenomenon, it can be given some slack. 

However, in Europe the inflation shortfall is more severe for political reasons. This is a target short fall in currency union where some members are shocked and hurt by such low inflation (think Mediterranean members) while others (think Germans) are quite willing to just let it play out. Of course, the German economy is a low inflation economy geared to perform in this climate. Greece, Spain, Portugal, Italy and the like are not so constructed. Because of the growth-inflation linkage, these members want inflation boosted and want stimulus policies adopted to help hit the price target. In the EMU, this is very much a political question with various members having differing positions and with the adoption and enforcement of austerity rules acting as another important motivating factor for some members to expect the central bank to at least hit its target instead of adding monetary squeezing to fiscal squeezing.

For the U.S., it is much less clear how all this is playing out. The U.S. central bank unlike Europe's does not have only an inflation objective. While the Fed does make guesses at growth rates for GDP, it does not target GDP but it does make forecasts for the unemployment rate that come into play a bit more in the policy discussion. On this score, the U.S. unemployment rate has dropped very sharply, and while U.S. growth is better than growth in Europe, it is still not satisfactory. Indeed, U.S. job growth has picked up much more than GDP growth and this disconnect is now part of the policy discussion. The Fed is confronted with an unemployment rate that is looking low -almost too low- by historic standards and according to what had been recent policy judgements. Yet inflation both core and headline continue to fall. The only way to describe Fed policy is to admit that it has been `moving the goal posts.' Or, if you like this analogy better, it is like the famous Three-Stooges skit where they keep drawing a line in the sand and challenging the bully to cross it. Each time he does cross it, so they draw another until they finally run away. Well, the Fed is not yet running away. But it has drawn and erased lines below which it did not think the unemployment rate would fall. The Fed is really at odds in trying to understand economic performance. One of its policy metrics is telling it to slow down on the easing and to tap the brake, while the other is telling it to go full speed ahead. 

We cannot be surprised that a central bank with two bosses winds up with contradictory orders. However, in the case of the Fed, the contradiction has been there for some time and yet the Fed has not resolved how to deal with it. For the moment, the Fed rhetoric is about how it won't tighten until it is sure inflation is on a 2% path. But inflation is still falling and the economy continues to tighten up. Still, there are NO SIGNS of economic overheating. Recent economic data have begun to back track, yet Fed rhetoric is all about how it is going to tighten. There is no mistaking what the Fed wants to do or which of its signals has become its master. Yet the other is still a constraint. There is no clear reason for the Fed to hike rates other than its growing impatience. The Fed is in fact talking about one policy objective (inflation) while reacting to a totally different policy fear. I find this schizophrenic behavior.

For now, despite what are highly similar inflation results, we are seeing very different monetary policies being implemented and considered in the near future in the U.S., Canada and the EMU. This may give us a chance eventually to decide which of these approaches works best.


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Inflation in Canada continues weak, crawling along the bottom of the range established by the Bank of Canada. The central bank has a desired inflation in a range of 1% to 3% but also expects that inflation will drop below 1% for much [...]

Canadian Inflation; A Study in Contrast

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Recent strength in the U.S. factory sector has done little
for industrial commodity prices as growth abroad struggles. The industrial 
commodity price index from the Foundation for International Business
and Economic Research (FIBER) declined this week to the lowest level since
December 2009. Overall, prices have fallen 14.3% y/y and 15.2% since
late-August.

The crude oil &amp; benzene grouping led the decline with a more than
one-third drop in prices since early last year. The price for a barrel of WTI
crude oil plunged to $43.79 yesterday (-56.2% y/y), down 59.0% from its $106.69
high in June of last year. Prices for the petro-chemical benzene have followed
the way down. Prices rallied a bit last week, but they remained 55.7% lower than
where they were in January of last year. Metals prices also have improved
of late, but they are 21.7% lower since August (-14.9% y/y). Steel scrap prices
led the way lower with a 37.5% y/y decline and they are down by nearly one-half
from the 2011 high. Copper scrap prices have been similarly weak, posting a 41.9%
decline from the 2011 high (-11.7% y/y). Aluminum prices have weakened 14.8%
since the late-November high but they remain up 6.0% y/y. In the miscellaneous
materials grouping, prices recently rallied but have trended 23.1% lower since
August 2013 (-8.6% y/y). Natural rubber prices improved with a 16.4% rise (-20.7%
y/y) since the December low. Prices for framing lumber, however, remain weak.
They're down 18.1% since early September (-13.4% y/y), reaching the lowest level
since 2013. Structural panel prices have been relatively firm, off 9.7% since
early November (+2.2% y/y). Prices remain roughly one-quarter from the April
2013 high.Textile prices have shown relative strength with
movement roughly sideways. Cotton prices have been flat since November (-30.8%
y/y) but burlap prices have risen 11.1% since October (+6.2% y/y).

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Future support for commodity prices may be on the way. The current industrial
output projection from the National Association for Business Economics calls for
3.5% growth in industrial production in 2015. During the last ten years, there
has been a 52% correlation between the three-month change in prices and the
change in industrial output.

Commodity price data can be found in Haver's DAILY, WEEKLY, USECON and
CMDTY databases.

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<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" scope="col" >FIBER Industrial Materials
 Price Index (1990=100)</th>
 <th scope="col" >3/19/15</th>
 <th scope="col" >Y/Y %</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >All Items</td>
 <td >141.68</td>
 <td >-14.3</td>
 <td >163.3</td>
 <td >169.0</td>
 <td >166.3</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Textiles</td>
 <td >74.96</td>
 <td >-5.1</td>
 <td >76.4</td>
 <td >78.2</td>
 <td >77.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Cotton (cents per pound)</td>
 <td >60.66</td>
 <td >-30.8</td>
 <td >73.4</td>
 <td >79.6</td>
 <td >74.4</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Metals</td>
 <td >195.04</td>
 <td >-14.9</td>
 <td >237.5</td>
 <td >236.3</td>
 <td >242.7</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Aluminum ($ per metric ton)</td>
 <td >1,771.00</td>
 <td >6.0</td>
 <td >1,864.6</td>
 <td >1,846.2</td>
 <td >2,016.6</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Copper Scrap (cents per
 pound)</td>
 <td >258.14</td>
 <td >-11.7</td>
 <td >311.2</td>
 <td >332.4</td>
 <td >360.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Steel Scrap ($ per ton)</td>
 <td >226.67</td>
 <td >-37.5</td>
 <td >357.9</td>
 <td >346.0</td>
 <td >366.5</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Crude Oil &amp; Benzene</td>
 <td >136.80</td>
 <td >-36.2</td>
 <td >204.7</td>
 <td >207.7</td>
 <td >204.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Crude Oil (WTI, $ per
 Barrel)</td>
 <td >43.79</td>
 <td >-56.2</td>
 <td >93.2</td>
 <td >97.9</td>
 <td >94.2</td>
 </tr>
 <tr class="grey3">
 <td class="firstcol" >&nbsp;Miscellaneous</td>
 <td >186.31</td>
 <td >-8.6</td>
 <td >199.4</td>
 <td >218.3</td>
 <td >205.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Framing Lumber ($ per 1000
 board ft.)</td>
 <td >335</td>
 <td >-13.4</td>
 <td >383</td>
 <td >383</td>
 <td >321</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Natural Rubber (cents per
 pound)</td>
 <td >130.07</td>
 <td >-20.7</td>
 <td >139.7</td>
 <td >190.0</td>
 <td >211.8</td>
 </tr>
 </tbody>
 </table>
 
</body></html>

Recent strength in the U.S. factory sector has done little for industrial commodity prices as growth abroad struggles. The industrial commodity price index from the Foundation for International Business and Economic Research (FIBER) [...]

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The Index of Leading Economic Indicators from the Conference Board increased
0.2% (6.2% y/y) during February following an unrevised 0.2% January improvement.
A 0.2% rise had been expected in the Action Economics Forecast Survey. The
increase lowered three-month growth to 3.7% (AR), its weakest in twelve months.
Seventy percent of the component series improved m/m, down a bit from the recent
highest breadth of increase. A steeper interest rate yield curve, higher stock
prices, more building permits, improved consumer expectations for
business/economic conditions and the leading credit index led last month's index
higher. Other component series improved, but the contributions from unemployment
insurance claims, ISM new orders and the average workweek were negative.

The index of coincident indicators gained 0.2% (3.0% y/y), the same as in
January. Three-month growth, however, declined to 2.5%, its weakest since
October. Each of the four component series increased last month, including
nonfarm payroll employment, personal income less transfers, business sales and
industrial production.

The lagging indicators index increased 0.3% (3.5% y/y), the same as in
January. During the last three months, growth of 3.5% was up from 2.1% in
December, suggesting a modest buildup of economic excess. The duration of
unemployment, more C&amp;I loans outstanding and a higher consumer installment
credit/personal income ratio accounted for much of last month's increase.
The index of coincident-to-lagging indicators is a measure of how the economy
is performing versus its excesses. It slipped for the second straight month but
remained up from the cycle-low.

The Conference Board figures are available in Haver's BCI database;
the components are available there, and most are also in USECON. The
forecast figures for the Consensus are in the AS1REPNA database. Visit
the Conference Board's <a href="http://www.conference-board.org/">site</a> for
coverage of leading indicator series from around the world.

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 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>
	
 <thead>
 <tr>
 <th class="firstcol" scope="col" >Business Cycle Indicators (%)</th>
 <th scope="col" >Feb</th>
 <th scope="col" >Jan</th>
 <th scope="col" >Dec</th>
 <th scope="col" >Y/Y</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >Leading</td>
 <td >0.2</td>
 <td >0.2</td>
 <td >0.4</td>
 <td >6.2</td>
 <td >5.8</td>
 <td >3.3</td>
 <td >2.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >Coincident</td>
 <td >0.2</td>
 <td >0.2</td>
 <td >0.3</td>
 <td >3.0</td>
 <td >2.5</td>
 <td >1.9</td>
 <td >2.6</td>
 </tr>
 <tr>
 <td class="firstcol" >Lagging</td>
 <td >0.3</td>
 <td >0.3</td>
 <td >0.2</td>
 <td >3.5</td>
 <td >3.8</td>
 <td >3.8</td>
 <td >3.1</td>
 </tr>
 </tbody>
 </table>
 
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The Index of Leading Economic Indicators from the Conference Board increased 0.2% (6.2% y/y) during February following an unrevised 0.2% January improvement. A 0.2% rise had been expected in the Action Economics Forecast Survey. The [...]

U.S. Leading Economic Indicators Increase but Forward Momentum Slows

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The Philadelphia Federal Reserve Bank reported that its General Factory
Sector Business Conditions Index for March declined to 5.0 from an unrevised 5.2
in February. The number remained at the lowest point since February 2014 and was
below expectations for 7.3 in the Action Economics Forecast Survey. The seasonally
adjusted figure, constructed by Haver Analytics, also deteriorated to 47.4,
the lowest figure since April 2013. It is comparable to the ISM Composite index.
During the last ten years, there has been a 71% correlation between the adjusted
Philadelphia Fed index and real GDP growth.

Weakness in the overall series was all-inclusive last month. The shipments
index declined sharply, likely due to heavy snowfall. The new orders index
slipped to its lowest level since February of last year. The employment
component slipped and remained well below last year's high. During the last ten
years, there has been an 81% correlation between the employment index level and
the m/m change in factory sector employment. The unfilled orders, inventories
&amp; delivery times indexes each fell sharply.

The prices paid index eased into negative territory for the first time since
near the end of the recession. Also, the prices received series deteriorated
sharply. A lessened 14 percent of respondents paid higher prices but a sharply
higher 17 paid less, up from last year's 1 percent low. During the last ten
years, there has been a 71% correlation between the prices paid index and
three-month growth in the intermediate goods PPI.

The separate index of expected business conditions in twelve months
stabilized after its sharp deterioration in February. Sharp declines in new
orders, shipments and employment were countered by improvement in unfilled
orders &amp; delivery times. Prices paid fell modestly.

The survey panel consists of 150 manufacturing companies in Federal Reserve
District III (consisting of southeastern PA, southern NJ and Delaware.) The
diffusion indexes represent the percentage of respondents indicating an increase
minus the percentage indicating a decrease in activity. The ISM adjusted figure,
calculated by Haver Analytics, is the average of five diffusion indexes, new
orders, production, employment, supplier deliveries and inventories with equal
weights (20% each). Each diffusion index is the sum of the percent responding
&quot;higher&quot; and one-half of the percent responding &quot;same.&quot;

The figures from the Philadelphia Federal Reserve can be found in Haver's SURVEYS
database. The Consensus expectations figure is available in AS1REPNA.

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 <table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

 <thead>
 <tr>
 <th class="firstcol" >Philadelphia Fed (%, SA)</th>
 <th scope="col" >Mar</th>
 <th scope="col" >Feb</th>
 <th scope="col" >Jan</th>
 <th scope="col" >Mar'14</th>
 <th scope="col" >2014</th>
 <th scope="col" >2013</th>
 <th scope="col" >2012</th>
 </tr>
 </thead>
 <tbody>
 <tr>
 <td class="firstcol" >ISM-Adjusted General Business Conditions</td>
 <td >47.4</td>
 <td >51.7</td>
 <td >47.8</td>
 <td >50.7</td>
 <td >53.7</td>
 <td >50.0</td>
 <td >47.8</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >General Factory Sector Business
 Conditions</td>
 <td >5.0</td>
 <td >5.2</td>
 <td >6.3</td>
 <td >10.7</td>
 <td >18.6</td>
 <td >6.4</td>
 <td >-0.2</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;New Orders</td>
 <td >3.9</td>
 <td >5.4</td>
 <td >8.5</td>
 <td >8.2</td>
 <td >15.0</td>
 <td >7.2</td>
 <td >-0.1</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Shipments</td>
 <td >-7.8</td>
 <td >8.1</td>
 <td >-6.9</td>
 <td >7.6</td>
 <td >16.4</td>
 <td >7.1</td>
 <td >-1.3</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Unfilled Orders</td>
 <td >-13.8</td>
 <td >7.3</td>
 <td >-8.6</td>
 <td >3.4</td>
 <td >3.3</td>
 <td >-3.8</td>
 <td >-6.5</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Delivery Time</td>
 <td >-13.4</td>
 <td >-4.6</td>
 <td >-11.0</td>
 <td >-2.1</td>
 <td >0.7</td>
 <td >-4.0</td>
 <td >-9.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Inventories</td>
 <td >-2.3</td>
 <td >15.2</td>
 <td >-0.7</td>
 <td >-6.6</td>
 <td >1.8</td>
 <td >-3.4</td>
 <td >-6.0</td>
 </tr>
 <tr class="odd">
 <td class="firstcol" >&nbsp;&nbsp;Number of Employees</td>
 <td >3.5</td>
 <td >3.9</td>
 <td >-2.0</td>
 <td >3.5</td>
 <td >10.6</td>
 <td >1.5</td>
 <td >0.1</td>
 </tr>
 <tr>
 <td class="firstcol" >&nbsp;&nbsp;Prices Paid</td>
 <td >-3.0</td>
 <td >4.7</td>
 <td >9.8</td>
 <td >18.3</td>
 <td >21.7</td>
 <td >16.6</td>
 <td >17.7</td>
 </tr>
 </tbody>
 </table>
 
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The Philadelphia Federal Reserve Bank reported that its General Factory Sector Business Conditions Index for March declined to 5.0 from an unrevised 5.2 in February. The number remained at the lowest point since February 2014 and was [...]

Philadelphia Fed Business Conditions Index Continues to Deteriorate

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

Recent pickup in US defense orders could help support overall growth ahead

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

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Tian Yong Woon

In this week's Letter, we explore the significant pullback in oil prices that followed the US-Iran memorandum of understanding and consider its broader economic implications. The agreement saw a fragile ceasefire ensue and a gradual resumption of shipping flows through the Strait of Hormuz (chart 1). We acknowledge that this major pullback will certainly be welcome to policymakers across the region and beyond. Previously elevated energy prices had added to the fiscal burdens of governments and sharpened the dilemma facing central banks (chart 2). That dilemma pits the need to rein in inflation against the risk of choking off economic growth. That said, while one source of inflationary pressure seems to be ebbing, another looks to be emerging on the horizon. It stems from a potential "Super El Niño" event, which meteorologists have been warning about for some time now. Asia sits at the centre of such risks, as past strong El Niño events have directly and adversely affected crop production (chart 3). The impact is not limited to potential surges in headline inflation via food supply shocks, especially in Asia. It extends directly to growth as well (chart 4), given the nontrivial share of GDP that agriculture still commands in many Asian economies (chart 5). Should price pressures simply rotate from energy to food, government subsidies may follow suit (chart 6). Central bankers, for their part, may find themselves unable to ease off the tightening pedal just yet. Some Asian economies, however, would still manage to offset such a growth shock through other engines. Electronics and semiconductors, buoyed by the current AI upcycle, offer one such cushion for the more fortunate. For others, lacking such offsets, the agricultural hit may simply have to be borne in full.

**The US-Iran conflict and oil prices**
The recent memorandum of understanding between the US and Iran, aimed at working towards a final deal, has already brought visible relief to crude oil markets (chart 1). This relief has held despite the renewed tensions that have followed the agreement, which markets seem to have largely looked past. The easing in prices should go a long way towards unwinding the inflation concerns that elevated oil prices had previously stoked. Much of the pullback reflects anticipation of the substantial supply now expected to return to global markets. Yet some shipping trackers, such as the IMF's, already point to a marked pickup in traffic through the Strait of Hormuz. Even so, those volumes still remain well below the levels seen before the conflict began in the region. 

260629T1.jpg

**Oil prices and inflation in Asia**
Should this normalisation of shipping flows through the Strait of Hormuz persist, it would support a corresponding easing in oil prices and energy inflation. That moderation in energy costs would, in turn, help bring down broader headline inflation across the economy. As chart 2 shows, energy has been a large contributor to headline inflation in recent years, though other important forces have been at play too. Such an outcome, in which restored oil supply cools energy inflation, would be a welcome development for central bankers. They face the delicate task of reining in price pressures without tightening policy so far that growth stalls or tips into contraction. That said, while one driver of price pressures now seems to be ebbing, albeit not without the risk of renewed tensions, another source of inflation is building on the horizon.

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**Risks of a “Super El Niño”**
As meteorological agencies have warned for some time, the world may be on the cusp of a Super El Niño. The probability of such an event has risen sharply in recent months. Were it to materialise, it would unleash a range of disruptions from the second half of this year, chief among them shifts in weather and climate patterns that can severely dent crop yields. Asian staples such as rice, wheat and palm oil are especially exposed, since strong El Niño events tend to bring drier conditions and reduced rainfall, in turn cutting output across affected economies in the region. Chart 3 illustrates just how tightly some crops are bound to these conditions: SOI readings correlate closely with certain economies' production, notably Thailand's rice harvest, underscoring how dependent such output remains on the weather. These supply shortfalls would then feed inflationary pressures through the food channel. So central bankers may not be able to rest entirely easy following the easing of tensions between the US and Iran, finding themselves wrestling with a fresh set of emerging inflation risks instead.

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Delving deeper, an examination of recent strong El Niño episodes against the growth of Asian economies' agricultural sectors shows that extreme weather weighs not just on food prices but on economic growth itself. As chart 4 shows, previous major El Niño episodes—notably in 2014–16 and 2023–24—were associated with weaker agricultural growth across parts of Asia, with India and Thailand appearing particularly vulnerable. This is understandable, since these episodes coincided with reduced crop production and, in turn, lower crop revenue. Should these past episodes serve as a gauge and given that the coming event is potentially the worst on record, these economies stand to suffer once more should it hit as hard as feared.

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Beyond the sensitivity of individual economies to extreme El Niño events, vulnerability also depends on the size of the agricultural sector itself. Economies where agriculture accounts for a larger share of output are naturally more exposed to weather-related disruptions. As chart 5 shows, economies such as India, Indonesia and, to a lesser extent, Vietnam carry a comparatively higher share of agriculture in their GDP, which presents a further source of risk. That said, this dimension should not be read in isolation, since the eventual impact would turn on a combination of factors: the degree of exposure, the intensity of El Niño's effect on each economy's agricultural output, and the actual weather conditions that come to pass.

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Bringing it all together, the recent de-escalation between the US and Iran and the early normalisation of flows through the Strait of Hormuz are certainly welcome news. Businesses, consumers and policymakers alike stand to benefit from the relief that lower energy prices would bring. Yet the formation of extreme El Niño conditions presents a looming inflation risk over the months ahead. It may displace energy as the dominant driver, shifting the pressure from the energy channel to the food channel. For Asia's central bankers, this could mean they are unable to ease off the tightening pedal just yet (chart 6). Food inflation may simply pick up where energy inflation leaves off, keeping price pressures elevated for longer. Regional governments, too, may have to redirect funds from energy subsidies to food subsidies should the supply shock play out. On growth, however, the picture may prove more uneven across the region than a single narrative suggests. Economies exposed to the current AI upcycle could keep leaning on those sectors for continued support. Those less exposed, by contrast, may simply have to absorb the hit to agriculture with little to offset it.

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Asia

Economic Letter from Asia: Oil Down, Emerging Risks

Winnie Tapasanun

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The U.S. international trade deficit in goods ballooned to a larger-than-expected $105.75 billion in May after narrowing to $83.01 billion in April, according to the advance estimate from the U.S. Census Bureau. The May reading marked the third widening in the goods trade deficit in four months, exceeding a $91.55 billion shortfall in May 2025. A deficit of $84.0 billion for May had been expected by the Action Economics Forecast Survey. The deficit reached a low of $61.44 billion in October 2025 (the smallest since February 2020) and a record high of $158.73 billion in March 2025. On a quarterly basis, the deficit averaged $94.38 billion so far in Q2'26 versus $81.96 billion in Q1'26.

Total goods exports fell 5.4% m/m (+14.7% y/y) to $207.67 billion in May, the first monthly fall since December and a three-month low, following a 3.8% rise to a record-high $219.52 billion in April. Exports were up 27.7% from a June 2023 low. The m/m fall in exports in May reflected declines of 9.2% (-5.0% y/y) in nonfood consumer goods excluding autos, 7.0% (+23.2% y/y) in industrial supplies & materials, 6.8% (+19.5% y/y) in other goods, and 5.0% (+14.8% y/y) in capital goods excluding autos. To the upside, exports of foods, feeds & beverages (+3.9%; +19.1% y/y) and automotive vehicles & parts (+0.5%; -3.6% y/y) rebounded m/m in May.

Total goods imports, up for the fourth consecutive month, rose 3.6% m/m (15.0% y/y) to $313.43 billion in May, after a 2.0% increase to $302.53 billion in April, marking the highest level since the March 2025 record high of $340.11 billion. Imports were up 25.0% from a March 2023 low. The m/m rise in imports in May was broad-based across all end-use categories, led by an 11.5% gain (22.0% y/y) in other goods, followed by increases of 6.3% (1.4% y/y) in automotive vehicles & parts, 5.7% (-9.1% y/y) in nonfood consumer goods excluding autos, 4.8% (11.7% y/y) in industrial supplies & materials, 4.3% (-0.2% y/y) in foods, feeds & beverages, and 0.4% (41.9% y/y) in capital goods excluding autos. 

The advance international trade data can be found in Haver's **USECON** database. The expectation figure is from the Action Economics Forecast Survey, which is in **AS1REPNA**.

- Deficit: $105.75 bil. in May, up $22.75 bil. (+27.4%) from April’s $83.01 bil.
- Exports -5.4%, first m/m decline since Dec., led by a 9.2% drop in nonauto consumer goods exports.
- Imports +3.6%, fourth straight m/m rise to highest level since Mar. ’25, driven by an 11.5% gain in imports of other goods.

U.S. Goods Trade Deficit Balloons in May, Largest Since March ’25

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In June, there's a slight divergence in the performance of industry climate and service sector climate, although broadly the two sectors have seen their composite indexes moving in more or less the same direction. Since 2024, the industry survey has moved up slightly after falling faster than the services gauge. The services survey has been locked in a slow trend of deterioration, largely since it reached a peak in 2021 in the wake of COVID.

The industry climate gauge has a 30.8 percentile standing, but the recent production trend, while declining, logs a more substantial 42.8 percentile standing. Contributing survey members find their own industry ‘likely trend’ much weaker, at a 21.2 percentile standing. Demand overall, however, has standings above the 50th percentile, putting overall and foreign orders & demand each above their respective medians for this period of ranking back to 2001. Inventories have a strong 81-percentile ranking. Prices are extremely strong, with 87-percentile and 86-percentile standings for respondents for their personal industry trend for prices as well as for the overarching manufacturing sector estimate of prices. Higher prices seem to be the one thing that everyone can agree on by a large margin.

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As for services, the service climate index improved slightly to 93.4 in June from 92.6 in May. The three-month moving average was weaker in June than in May as well; the 12-month moving average has been stuck at its current level for a number of months. The outlook in June improved slightly to a reading of -12 from -15 in May, but the outlook ranking is still a weak 26.8 percentile standing. The three-month expectations and observations of past sales trends haven't changed much in the last two months, but there has been a slight improvement for sales expectations. However, both sales metrics have low 20th percentile standings. Sales prices have deteriorated slightly in June compared to May for both the observed and the expected trends, but prices have standings above their 50th percentiles, logging above-median performance. Employment over the last three months has weakened noticeably, and expected employment is weaker by a small amount.

In terms of rankings, all of the sector rankings are below the 50th percentile on all of these observations, including the climate headline except for sales prices where both the past three-month observed trend and the expected trend have readings above their respective 50th percentiles, indicating past and expected price pressures in excess of normal.

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**Assessment**
On balance, the readings for the French industry, manufacturing sector and services are not encouraging. In addition, concerns about prices linger. The services sector, those concerns seem moderate compared to the concerns in manufacturing.

The hot war continues between Ukraine and Russia, while in the Middle East there was talk of some improvement and a potential peace deal between the United States and Iran, but every time there is some talk of a breakthrough, there appears to be a breakdown. In the most recent development, Iran has asserted its right to control traffic through the Strait of Hormuz, and it's not clear how that demand would ever be consistent with the U.S. allowing a ceasefire. It appears that Iran may have traded its irreconcilable demand for nuclear weapons for a more pragmatic and real-world argument—that it will control the traffic through the Strait of Hormuz simply because it can—and it still is doing exactly that, even after all the destruction it suffered.

Stopping Iran from controlling the Strait would take a commitment to restart the war. All this makes me personally more pessimistic. I think Iran sees the need for Trump to cut a deal and stop the war before the U.S. mid-term elections, and it is pressing that need to its advantage. Trading its nuclear ambitions for real world control of the Strait would elevate Iran’s power from being dangerous but ethereal to a real world event with constant consequences.

France

French Industry and Services Confidence Diverge in June

Andrew Cates

**Equity Momentum and Global Surprises — Still Moving Together**
One of the more telling features of global equity markets in 2026 has been the persistence of the correlation between non-US equity momentum and global growth and inflation surprise indices. Equity markets outside the United States have generally prospered when economic data have beaten consensus expectations and when inflation surprises have been negative  — a combination that has historically been associated with stronger corporate earnings and a more benign policy backdrop in economies other than the US. That correlation has held reasonably well through the turbulence of the past few months, even as the Middle East conflict introduced significant noise into both the economic data and the financial market signal. What the chart reveals this week is a picture of moderate but not alarming deterioration: global growth surprises have softened at the margin, consistent with the energy cost headwinds that have weighed on European and Asian activity, but the relationship between equity momentum and the broader data pulse remains intact. It is a signal that market participants continue to track economic fundamentals rather than purely geopolitical newsflow — a modestly reassuring sign that the underlying framework for assessing the global cycle has not broken down.

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**The Fed Decouples: Why Oil and US Two-Year Yields Have Parted Ways**
For much of 2026, oil prices and US two-year Treasury yields moved in close alignment. The logic was straightforward: higher oil prices raised inflation expectations, which in turn pushed market participants to anticipate a more hawkish Federal Reserve, lifting short-dated yields in the process. That relationship held with notable consistency through the March escalation and the months that followed, as energy market shocks and monetary policy expectations fed off each other. What this week’s chart captures is a striking breakdown in that correlation. As oil prices have fallen on the back of the US-Iran memorandum of understanding and the associated unwinding of the geopolitical risk premium, US two-year yields have not followed them lower. The reason is last week’s Federal Reserve meeting. Under new chair Kevin Warsh, the Fed delivered a hawkish dot plot that shifted the median year-end projection to a hike, making clear that the easing cycle previously priced by some market participants is no longer the central scenario. The message is important: the deflationary impulse from lower oil prices is being offset — at least in the Fed’s framing — by persistent underlying inflation pressures and a commitment to keeping policy tight.

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**Flash PMIs Signal Easing Supply Chain Stress and Softer Price Pressures**
June’s flash PMI surveys, released this week across the major advanced economies, provide a timely read on how the global manufacturing and services sectors are absorbing the shifting macro backdrop. Two findings stand out. First, supplier delivery times have improved (or not lengthened as much as they had in the prior two months). This finding coheres naturally with the broader narrative: lower oil prices reduce transport and energy input costs, while the resumption of Strait of Hormuz shipping flows — examined in more detail in chart 4 — is beginning to reduce the freight disruption and re-routing costs that had been building since the conflict escalated. Second, output price inflation in manufacturing has softened, suggesting that some of the pipeline pressure from earlier energy cost spikes is beginning to fade.

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**Hormuz Traffic and Oil: A Coherent Story of Tentative Normalisation**
The recent US-Iran memorandum of understanding to work towards a final deal, though not without subsequent flare-ups, has already brought relief to markets, most visibly in crude oil prices. This should go a long way towards unwinding the inflation-related concerns that previously elevated oil prices had stoked. While the pullback has owed much to anticipation of the glut of pent-up supply expected to follow, certain trackers of shipping volume through the Strait of Hormuz, such as the IMF’s, already point to a marked pickup in traffic, even if it remains well below pre-conflict levels. Should this normalisation of shipping flows persist, it would lend continued justification to a corresponding easing in oil prices, energy-related inflation and, by extension, headline inflation — a welcome development for central banks grappling with the delicate balancing act of reining in price pressures without dampening growth too sharply.

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**South Korea’s Trade Data Flag a Modest Softening in Global Demand**
South Korea’s trade data serve as one of the global economy’s most useful early warning systems. As one of the world’s most open economies, with exports spanning semiconductors, petrochemicals, steel, automobiles and consumer electronics, South Korea’s monthly trade figures provide a timely and broad-based read on the state of global demand. This week’s data show a slightly softer picture than the strong prints that characterised much of the first quarter. Headline export growth has moderated at the margin, and crucially, semiconductor exports — which had been the most dynamic component of the trade data, propelled by AI-related chip demand — have also come in a touch below the exceptional run rates seen earlier in the year. This is not, in itself, alarming: some moderation from peak rates was always to be expected, and the semiconductor cycle remains structurally supported by the scale of AI infrastructure investment globally.

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**A Super El Niño on the Horizon — The Next Inflation Risk**
With that said, while one driver of price pressures seems to be ebbing for now — albeit not without the risk of future flare-ups — another potential inflationary risk looms on the horizon. The chart illustrates the transmission mechanism. It plots Thailand’s milled rice production (left axis) against Australia’s Southern Oscillation Index (right axis), a well-established barometer of El Niño and La Niña conditions. The convention is straightforward: SOI readings persistently above +8 indicate La Niña, associated with above-average rainfall across Southeast Asia and broadly supportive crop conditions; readings persistently below -8 signal El Niño, which brings drought stress and reduced water availability across the region. The historical relationship is striking. The sharp negative SOI troughs around 2002–03, 2009–10 and most dramatically around 2015 all coincide with visible falls in Thai milled rice output. The severe El Niño of 2014–16 produced both the deepest SOI trough in the series and the sharpest single drop in rice production, to below 24,000 thousand tonnes. As meteorological authorities have been warning for some time, the world appears to be facing an imminent Super El Niño event, with the SOI already drifting back towards negative territory in recent months. Were a significant El Niño to materialise in the second half of this year, the implications for Thai rice output — and by extension for Asian food price inflation — could be substantial. Central bankers, in other words, may find themselves having to wrestle with a new inflationary impulse just as they had begun to hope the worst was behind them.

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The mood in global financial markets this week is more settled, though “settled” should not be confused with resolved. The US-Iran memorandum of understanding, signed last week, has continued to do its work: oil prices have fallen further, Strait of Hormuz shipping traffic has picked up measurably, and the risk premium that had been embedded in energy markets since the conflict escalated in March is now visibly unwinding. That is a material development for the inflation outlook, and central bankers will be watching carefully. Yet the picture is not without its complications. Technology stocks — the most conspicuous beneficiary of the prevailing low-rate, high-growth narrative — have been subject to renewed jitters this week, as investors grow more attentive to stretched valuations and the implications of a Federal Reserve that, under new chair Kevin Warsh, is no longer signalling the easing cycle previously priced into markets. Against this backdrop, this week’s charts draw on the latest data to assess where the global economic cycle stands. Equity momentum outside the United States has tracked closely with global growth and inflation surprises, a correlation that tells us something important about how activity is being perceived (chart 1). Meanwhile, the breakdown of the previously tight relationship between oil prices and US two-year yields is arguably one of the more telling market signals of recent weeks (chart 2). June’s flash PMI surveys point to easing supply chain stress and softer output price inflation in manufacturing — a finding that chimes naturally with lower crude prices and the resumption of Hormuz flows (chart 3). The Strait of Hormuz itself deserves a closer look: traffic data and the mechanics of the oil price pullback are telling a coherent story that supports the PMI picture (chart 4). South Korea’s trade data, including semiconductors, offer a slightly softer read on global demand momentum at the margin (chart 5). And looming on the horizon, one new risk is drawing the attention of meteorological authorities: a Super El Niño event whose probability has been rising, with potentially significant implications for food commodity prices and Asian agriculture (chart 6).

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Charts of the Week: Calmer Waters, New Currents

Michael J. Moran

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The price index for personal consumption expenditures rose 0.4% in May, although the measure almost rounded up to 0.5% (0.4498%). May marked the sixth consecutive month with headline prices increasing 0.3% or more. This series of changes has pulled the year-over-year inflation rate to 4.1%, up from 2.3% just over one year ago (April 2025). Energy prices, of course, have been the most important factor behind the acceleration in inflation, and they remained an issue in May, increasing 4.0% after advances of 3.9% and 11.6% in the prior two months. Food prices have moved erratically in the past year, with jumps and lulls leaving an average monthly increase of 0.2%. The noise was evident in recent months, with food prices increasing only 0.1% in May after a jump of 0.5% in April.

Core prices also have contributed to the pickup in inflation. After averaging monthly increases of 0.24% during 2025, core prices have increased at an average rate of 0.34% so far this year. The year-over-year increase in core inflation totaled 3.4% in May, up from a recent low of 2.6% in April of last year. Both the headline and core inflation rates are uncomfortably above the Federal Reserve’s target of 2.0%.

Total personal income rose briskly in May (0.7%). A surge in farm income played an important role (up 125% month-to-month, most likely reflecting government support payments), but nominal results also were firm elsewhere (up 0.5% ex farm income). Inflation reduced the purchasing power of this income gain, but aggregate income still advanced slightly in real terms (0.2%).

Given the recent surge in energy-driven inflation, May marked only the second monthly increase in real income so far this year. Tight budgets have dampened consumer spending, but individuals have not pulled to the sidelines. Real consumption expenditures rose 0.5% (annual rate) in the first quarter, and results for April and May suggest that real PCE is on track to increase 1.5% to 2.0% in the second quarter.

Households have managed to remain moderately active in their spending by limiting their saving. The saving rate has drifted lower since early 2024 moving to 3.0% in May (chart, below right). The erosion in saving perhaps seems reckless, but some of the reduction could be a response to the strength in the equity market, where wealth gains have possibly limited the incentive to save. Also, larger-than-normal tax refunds this year because of tax cuts in the One Big Beautiful Budget Act have allowed many households to spend actively despite modest increases in real income.

The personal income and consumption figures are available in Haver’s **USECON** database with detail in the **USNA** database. The Action Economics forecasts are in **AS1REPNA**.

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- Energy prices rose sharply for the third consecutive month; core prices were unsettling as well.
- A jump in nominal income translated to a modest advance in real terms, allowing consumers to remain reasonably active.

Economy in Brief: 2015

Jump to:

U.S. Existing Home Sales Remain Under Pressure

U.K. CBI Index Shows Mixed Trends

Chicago Fed National Activity Index Deteriorates

FIBER: Industrial Commodity Prices Post Broad-Based Declines

Canadian Inflation; A Study in Contrast

FIBER: Industrial Commodity Prices Post Broad-Based Declines

U.S. Leading Economic Indicators Increase but Forward Momentum Slows

Philadelphia Fed Business Conditions Index Continues to Deteriorate