ADP Employment (Dec 2022), Euro Area PPI (Nov 2022), Italy CPI (Dec 2022)
Economic news and commentary for January 5, 2023
ADP Employment
The ADP National Employment Report saw 235,000 jobs added in December which means that the labor market was able to close the year on a strong note. Once again, we see the service sector carry employment gains with 213,000 jobs added including a 123,000 gain in the leisure and hospitality industry. The goods sector was weaker, adding just 22,000 jobs, but it managed to avoid a contraction as we have seen previously. This was thanks to 41,000 jobs added in construction. When looking at business size, we see that large businesses are the main entities cutting employment, likely in response to rising costs, while small- and mid-sized businesses were driven to hiring because of continued labor shortages. Small- and mid-sized businesses added 195,000 and 191,000 jobs respectively, and large businesses cut -151,000 jobs. The tightness in the labor market for smaller firms is likely the driving force behind wage inflation because labor shortages are forcing them to hire at even at hire hourly pay rates so that they can stay in business. Larger firms likely have more flexibility in their workforces, so they can choose to exercise the option to lay people off to reduce labor costs. These wage pressures are causing problems for the Fed in its quest against inflation, and this report suggests that relief must come in the new year.
Euro Area PPI
Euro area PPI fell -0.9% MoM to 27.1% YoY in November, down from 30.5% YoY in October. The decline in producer prices can be traced back to falling energy prices due to a warmer forecast for the back half of the winter and better-than-expected inventory European gas levels. On the month, energy PPI fell -2.2% MoM, building off of a -7.4% MoM drop in October. The annual pace of energy PPI growth is still significant at 55.7% YoY, but this is well below where we were just three months ago at 108.0% YoY. Broader commodities continue to add a deflationary impulse to firms’ costs with the intermediate goods PPI falling -0.4% MoM and the annual pace slowing to 15.3% YoY, down a solid -2.2 ppts. Despite some relief on the input side, the categories tracking the prices of outputs have remained more resistant to declines. Capital goods, durable goods, and non-durable goods prices all posted slight gains on the month, and only durable goods prices saw a drop in its annual pace, down -0.4 pts to 9.4% YoY. These output price components are proving to be a bit stickier, likely as a result of lingering supply chain issues from the war in Ukraine that has carried over into 2023. Help is on the way via the demand stifling rate hikes from the ECB, but as many central bankers have mentioned, these monetary factors take time to work into the system.
Italy CPI
Italy's CPI grew 0.3% MoM and 11.6% YoY in December, down from 11.8% YoY in November. Of the three major European CPI reports we have seen this week, Italy’s has been the hottest so far. Easing in energy prices has been the theme so far, and here is no different. However, the decline was smaller than what we saw in Germany and France. Energy CPI only fell -1.8% MoM, and the annual pace only fell -2.9 ppts to 64.7% YoY. Food prices were also on the rise in Italy though only slightly, up 0.2% MoM. The thing that stands out the most is the hot rise in core CPI, up a strong 0.7% MoM in December to push the annual pace higher to 5.8% YoY from 5.6% YoY in November. Both goods (ex-energy) and services were factors in the increase. Non-energy goods prices grew 0.6% MoM on a 1.0% MoM increase in durable goods prices, and services prices posted a robust 0.7% MoM increase on strong recreation (+1.4% MoM) and transport (+1.1% MoM) component moves. This isn’t all bad news. Combined with the strong Q4 GDP growth that Italy saw relative to its EU neighbors, a stickier CPI report suggests that consumer demand is holding up well and the economy has not been beat down by rate hikes. However, that will not good news for the ECB as it seeks to disarm supply chain pressures which are clearly still playing a part in the Italian inflation landscape.
Still to come…
9:45 am (EST) - S&P Global US Composite PMI
10:30 am - US EIA Natural Gas Report
11:00 am - S&P Global Global Composite PMI
11:00 am - US EIA Petroleum Status Report
4:30 pm - US Fed Balance Street
Morning Reading List
Other Data Releases Today
The US trade deficit fell -21.0% MoM to $61.5 billion in November with exports down -2.0% MoM and imports down -6.4% MoM. Consumer goods imports fell -$8.8 billion and industrial supplies imports fell -$3.7 billion.
Canada's trade balance fell from $0.13 million to -$0.04 million in November with exports down -2.3% MoM and imports down -2.1% MoM. Energy products exports fell 4.7% MoM, a 5th monthly decline. Consumer goods imports were down -5.7% MoM.
The S&P Global China Services PMI was 48.0 in December, up from a six-month low of 46.7 in November. While the sub-50.0 index reading indicated a fall in Chinese service sector activity for the fourth straight month, the rate of decline was only modest overall.
Germany's trade balance grew from €6.8 bil to €10.8 bil in November with exports down -0.3% MoM and imports down -3.3% MoM. Imports from China fell -7.8% MoM. Exports to Russia grew 12.3% MoM but were still down -52.9% YoY.
Jobless claims fell -19k to 204k last week. The insured unemployment rate was unchanged at 1.2%. Continued claims fell -24k to 1.69 million.
Job cuts fell -43% MoM to 43,651 in Dec. In 2022, 363,824 job cuts were announced, up 13% YoY from the 321,970 announced in 2021. This is the 2nd lowest annual total on record (behind 2021).
ISM Manufacturing
US jobs numbers could soon start to turn (ING) - Today’s data offers further further evidence that labour demand remains strong despite clear signs of a weakening economy. Labour data is a lagging indicator though and with CEO confidence at the lowest point since the Global Financial Crisis, we expect a more defensive stance of American companies to result in much weaker jobs numbers later in 2023.
Factory Works (BMO) - The U.S. manufacturing sector fell deeper into contractionary terrain in December as output weakened in the face of shrinking orders. Meanwhile, labour market conditions remain tight, reinforcing expectations that rates will stay at restrictive levels for some time.
ISM: Falling Prices, but at the Expense of Contraction in Factory Activity (Wells Fargo) - Manufacturing is slowing. The ISM index remained in contraction for the second consecutive month with new orders and current production lower. But it's not all bad news. Price pressure is abating, and while the labor market is slowing, it's doing so only gradually.
ISM shows U.S. manufacturing sector contracts again in December (TD Bank) - December's ISM manufacturing print confirms that businesses are continuing to respond to consumers' rotation from goods to services spending. November's personal consumption expenditure data showed that despite real personal disposable income climbing 0.3% month-on-month (m/m), goods purchases fell 0.6% m/m – in real terms. It's clear that having filled up on goods purchases over the pandemic, consumer preferences are shifting away from buying things and manufacturers are having to adjust. The pullback in demand is clearly broad based as only two of 18 industries reported growth and the production index showed declining output for the first time since May 2020.
The ISM Manufacturing Index Declined to 48.4 in December (First Trust Portfolios) - The US manufacturing sector fell further into contraction territory in December, at least in terms of sentiment, with only two of eighteen industries reporting growth. Respondent comments in December were mainly focused on worries about the pace of future activity with some customers pulling back on new orders due to worries about an economic slowdown. Notably, there were also several statements on improvements in the supply-chain issues that have plagued the manufacturing sector over the past few years.
Fed Minutes
FOMC Minutes (Dec. 13-14) — Fed as Hawkish as Ever (BMO) - The Minutes from the December 13-14 FOMC meeting showed no let up in the Fed’s hawkish resolve, despite the confab’s 50 bp rate hike that increased cumulative tightening to 425 bps. Even a pair of favourable inflation readings in October and November did little to dent their doggedness. Participants “stressed that it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path”. Even amid declining core goods prices in the latest two months, some participants noted that “firms' markups were still elevated and that a continued subdued expansion in aggregate demand would likely be needed to reduce remaining upward pressure on inflation”.
Fed minutes showed continued commitment to high policy rates through 2023 (TD Bank) - Today's release reaffirms that the Fed isn't done hiking and that member's expect rates to remain at elevated levels through this year. Even with the Fed's past actions, more progress must be made before it can confirm that inflation is on a sustainable downward trajectory. Indeed, while recent inflation prints have signaled a modest deceleration, inflation remains well above the Fed's 2% target.
US
US Monthly GDP Index for November 2022 (S&P Global) - Monthly GDP rose 0.4% in November following a 0.5% increase in October that was revised higher by 0.2 percentage point. The increase in November was more than accounted for by a sharp gain in net exports. Domestic final sales declined in November, mainly reflecting declines in residential and nonresidential fixed investment.
Europe
German exports weaken further in November (ING) - German export weakness continues. German exports (seasonally and calendar-adjusted) decreased by 0.3% month-on-month in November, from -0.6% MoM in October. On the year, exports were up by more than 13% but this is in nominal terms and not corrected for high inflation. Imports also decreased, by 3.3% month-on-month, from -2.4% MoM in October. As a result, the trade balance widened to €10.8bn. The ongoing weakness in exports in the fourth quarter suggests that recession fears are real.
January Monthly: The heat is on, thankfully (ING) - The warm weather in Europe is helping the region to get through the energy crisis, though many central bankers across the globe are still not done with rate hikes.
Outlook
New Year, New Problem (BMO) - The U.S. economy has shown surprising resilience in weathering a blizzard of rate hikes, largely for three reasons. First, the lagged effect of policy changes suggests the full force won’t be felt until the spring. In fact, the peak impact could be drawn out even longer given the very low starting point for rates, especially in real terms. Second, after two years of restrictions and health concerns, consumers have exacted revenge on travel, dining, and in-person events. Third, households have tapped a reservoir of savings to mask the sting of high inflation. An estimated drawdown of more than $700 billion in the past year is equivalent to 4% of disposable income. The remaining firepower could last another year and will go a long way to padding the economic downturn. Companies also built up a large cash buffer and are using it to spend heavily on machinery and automation as a substitute for scarce labour.
Macro & Markets: False starts (Nordea) - Uncertain growth outlook but resilient labour markets, falling headline inflation but persistent core pressures, a lot of bond supply & ECB QT, central banks aiming to do too much rather than too little. 2023 will have plenty of volatility in store.
Top 10 economic predictions for 2023 (S&P Global) - We offer our top 10 economic predictions for 2023.
The Housing Outlook for 2023 (First Trust Portfolios) - The housing sector was a huge and early beneficiary of the super-loose monetary policy of 2020-21. But, once the Fed started tightening, housing took the lead downward, as well. This isn’t a repeat of the 2006-11 housing bust, but it will drag on. Don’t expect any real recovery in housing until at least late 2023 or early 2024. Home sales and prices will continue to drag in 2023, particularly in the existing home market.
Trade
How Does Trade Impact the Way GDP Growth and Inflation Comove Across Countries? (Richmond Fed) - Seemingly small international trade linkages can lead to substantial spillovers across countries, going a long way in explaining the well-documented global comovement in GDP growth and inflation across countries. The spillovers come largely from indirect effects, with shocks in a foreign country not only propagating to the domestic economy directly but also cumulating through the trade network via other foreign countries. We develop and estimate a model incorporating these network effects, and we find that inflationary shocks in Europe have substantial effects on U.S. inflation and that U.S. monetary policy has a sizeable impact on foreign economies.
Commodities
A sea of red (ING) - The commodities complex came under further pressure yesterday. Energy, metals and agri were unable to escape the broader weakness. Rising covid infections in China are a key demand concern in the short term, while milder weather in Europe is adding further pressure to the energy complex.
A mixed week for commodity markets overshadowed by sharp decline in energy prices (S&P Global) - Our Material Price Index (MPI) decreased 2.8% in the last week of 2022, the second consecutive weekly decline. Despite the large decline, six of the ten subcomponents increased last week. The MPI is 6.1% lower than a year ago, and 30% lower than its all-time high established in early March.
Fiscal Policy
Demand-Supply Imbalance during the COVID-19 Pandemic: The Role of Fiscal Policy (St Louis Fed) - To mitigate the health and economic fallout from the COVID-19 pandemic, governments worldwide engaged in massive fiscal support programs. We show that generous fiscal support is associated with an increase in the demand for consumption goods during the pandemic, but industrial production did not adjust quickly enough to meet the sharp increase in demand. This imbalance between supply and demand across countries contributed to high inflation. Our findings suggest a sizable role for fiscal policy in affecting price stability, above and beyond what a monetary authority can do.
Monetary Policy
The Future of Money and Its Implications for Society, Central Banks, and the International Monetary System (St Louis Fed) - This new wave of financial innovations has broad implications for society, banking, and central banking: Digital platforms can ease entry for financial services providers, increase transactional efficiency, and widen access to and participation in the financial system. They could also decrease the use of cash and alter the U.S. dollar’s role as today’s vehicle currency.
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