Australian Inflation Jumps on Highest Services Prices Since 2008
Economic news and commentary for January 25, 2023
Australia CPI
Australia’s CPI grew 1.9% QoQ and 7.8% YoY in Q4 2022, up 7.3% YoY in Q3 2022. This is the highest rate of headline inflation since 1990. The less volatile trimmed mean annual inflation, which excludes large price rises and falls, increased to 6.9% YoY which is the highest on record. The most significant price rises in the quarter were domestic holiday travel and accommodation (+13.3% QoQ), electricity (+8.6% QoQ), international holiday travel and accommodation (+7.6% QoQ) and new dwelling purchase by owner occupiers (+1.7% QoQ). With the broad increase in services prices, the general rate of services inflation reached the highest level since 2008 at 5.5% YoY. On the other hand, the annual rate of goods inflation edged down -0.1 ppts to 9.5% YoY. With Australia being one of the late openers from the pandemic, it will likely see a sticky inflationary impulse from services as tourism and accommodations return to normal. In Q3 alone, the recreation and culture subcomponent jumped 5.4% QoQ and will probably keep rising for at least another quarter. The Reserve Bank of Australia will be encouraged by the peak in goods inflation, but it will have a new problem to fight in surging services prices.
UK PPI
The UK’s input PPI fell -1.1% YoY to 16.5% YoY, and its output PPI fell -0.8% YoY to 14.7% YoY in December. The decline in energy prices at the end of 2022 helped to ease costs for producers going into the new year. Oil input prices fell -10.0% MoM but were still up 27.7% YoY, and energy product output prices fell -11.9% MoM to 31.1% YoY. However, segments with large weights remain mostly inflationary Metals inputs only fell -0.4% MoM and were still up 14.4% YoY, and home food inputs actually grew 0.5% MoM to 17.2% YoY. On the output end, costs did raise for producers of these commodities. Food outputs grew 0.8% MoM to 17.1% YoY, and machinery output edged up 0.2% MoM to 14.2% YoY. The ONS also released its quarterly services PPI measure. At the end of Q4 2022, the services PPI was up 5.2% YoY which was down from the all-time record of 6.2% YoY in Q3 2022. In general, business costs have definitely peaked and look to be on the way to falling. The decline in energy producer prices is encouraging for consumers who have faced cost of living crises instigated by high electric bills and auto fuel costs. Unfortunately, it looks as though the prices of other commodities like metals, foods, and chemicals will take a longer time to cool as supply conditions improve only gradually. The demand-side pricing factors will likely be more impactful in the decline in inflation as the UK faces growth challenges and a probable recession in 2023.
Still to come…
10:00 am (EST) - Bank of Canada Announcement
10:00 am - US State Street Investor Confidence Index
10:30 am - US EIA Petroleum Status Report
11:00 am - US Survey of Business Uncertainty
Morning Reading List
Other Data Releases Today
The German ifo Business Climate Index grew to 90.2 in January, up from 88.6 in December. The Current Situation index edged down -0.3 pts to 94.1, and the Expectations index grew 3.2 pts to 86.4. Manufacturing and trade both improved.
The Australian Westpac Leading Index was –0.97% YoY in December, largely unchanged on the –0.96% YoY read in November. Rising short-term interest rates are weighing on the Index. Confidence measures, while very low, have recently stabilised.
Australia Inflation
Australia: Inflation rise means more rate hikes for the Reserve Bank of Australia (ING) - Much of the recent inflation disappointment can be put down to one-offs, weather-related and other seasonal effects. But that still leaves inflation higher, and likely to come down slower than otherwise, suggesting that the Reserve Bank of Australia's (RBA) policy of a 25bp increase in the cash rate each meeting has longer to run before its peak.
Germany Ifo Index
German Ifo index improves again in January (ING) - Germany’s most prominent indicator has improved for the fourth month in a row, but the renewed optimism is still based on very fragile fundamentals.
PMI Review
US January's flash PMI data add to recession signals, but also point to rising cost pressures (S&P Global) - The US economy has started 2023 on a disappointingly soft note, with business activity contracting sharply again in January according to the latest business survey data from S&P Global. Although moderating compared to December, the rate at which output is declining is among the steepest seen since the global financial crisis, reflecting falling activity across both manufacturing and services.
Eurozone recession risks fade as PMI returns to growth territory in January (S&P Global) - A steadying of the eurozone economy at the start of the year adds to evidence that the region might escape recession. The S&P Global 'flash' Eurozone PMI® Composite Output Index rose for a third consecutive month in January, up from 49.3 in December to 50.2 in January.
Europe
Flows stabilise in European Investment Grade [PDF Download] (Zurich Insurance) - ECB President Christine Lagarde maintains a hawkish stance, commenting at the WEF that ‘Stay the course’ is her policy mantra. Most ECB policymakers still appear committed to a series of 50bp rate hikes over the coming months, but this could tighten financial conditions in the Eurozone too much.
European Outlook: Less Downside Now, But Caution Still Warranted (PIMCO) - Focusing on high quality and liquidity when taking risk in portfolios will be key in 2023, as pressure on monetary policy remains intense.
UK - Rates to stay higher for longer, despite falling energy prices (ABN AMRO) - A reduced shock to real incomes has led us to significantly raise our 2023-4 growth forecasts. Still, the economy remains weak, and faces major fiscal and monetary headwinds. The Bank of England is likely to significantly raise its growth projections on the easing energy crisis, and we now think interest rates will stay on the high side for somewhat longer.
No, the energy shock in Europe does not mean de-industrialization (Allianz) - The large energy-price shock still lies ahead for European corporates. In 2022, increases in corporate utility bills were contained, thanks to government interventions and the long pass-through from wholesale energy prices to retail contracts, which are for the most part not fully indexed. But we expect utility prices to accelerate in 2023 as more contracts are rolled over, with power prices set to increase by less than +40% in Germany, compared to 2021, against +90% in Italy and Spain.
Euro inflation notes: January surprises (Danske Bank) - The uncertainty surrounding the January HICP release is larger than usual, as a range of different economic and technical factors loom with the turn of the year.
The Netherlands - Resilient consumers may surprise Q4 print (ABN AMRO) - GDP expected to contract in Q4 2022 and Q1 2023, with growth to resume in second half 2023. The underlying trend in the broadening of inflation will continue well into 2023, but we expect headline inflation to decrease to an average of 4.3% in 2023.
EU trade with Russia declined strongly (Eurostat) - EU trade with Russia has been strongly affected following Russia's invasion of Ukraine, with the EU imposing import and export restrictions on several products. The effects of these measures have been particularly visible in the latest months.
US
US: Job Creation and the Unemployment Rate (BNP Paribas) - The state of the labour market occupies a central role in the analysis of the business cycle. Historically, the percentage of months over the past 12 months with nonfarm payrolls below the 200K threshold increases in the run-up to a recession. Today, this indicator stands at 0 percent. Although there have been many false signals, a significant increase in this percentage calls for vigilance, necessitating closer monitoring of other data as well to assess the risk of recession.
Fed preview: What it takes for the Fed to cut rates (Danske Bank) - The Fed appears adamant to raise Fed funds rate to 5%, but it will take a little longer than we previously expected. We now look for the Fed to hike 25bp next week followed by two more 25bp hikes in March and May to conclude the hiking cycle.
US - Goldilocks, is that really you? (ABN AMRO) - Sharply falling inflation coincided with surprisingly strong growth in Q4. This triggered comparisons to the pre-pandemic ‘goldilocks’ period, when the tight labour market was non-inflationary. While a benign, soft landing scenario has become more likely, we still think the Fed will want to see a significant weakening in the labour market before it is confident the inflation battle is won. Weak activity data towards the end of Q4 suggests we are on the cusp of such a weakening, and this will support our expectation for significant Fed rate cuts later in the year.
Employment Situation in December: State-Level Analysis (NAHB) - Nonfarm payroll employment increased in 32 states and the District of Columbia in December compared to the previous month, while 18 states lost jobs. According to the Bureau of Labor Statistics, nationwide total nonfarm payroll employment increased by 223,000 in December, following a gain of 256,000 jobs in November.
The Grass is Always Greener Somewhere South: 2022 U.S. Regional Population Trends (TD Bank) - Interstate migration was the main contributor to population changes along the East Coast in 2022. The long-standing migration trend from North-to-South strengthened relative to 2021. However, states which saw interstate outflows experienced a partial offset from international immigration, which rebounded to pre-pandemic levels in 2022.
Manufacturing
Global manufacturing PMI heading higher in H1 (Danske Bank) - We have changed our forecast for global PMI manufacturing and now look for a turn higher already in Q1 as many headwinds have eased. It suggests that a recession in H1 in the US and the euro zone is set to be mild and short. We have lifted our US GDP forecast to 0.3% for 2023 (-0.2%) and +0.9% for 2024 (0.5%).
Housing
Housing demand from newcomers even stronger than perceived (CIBC) - The narrative is well known. The Canadian government is aiming to significantly increase the number of permanent residents (PRs) in the coming years, while the number of non-permanent residents (NPRs) continues to rise fast. The focus now is increasingly on the gap between the rising number of newcomers and the ability of the country’s existing infrastructure to successfully absorb them.
Markets
Stock valuation: What is the path forward? (Wells Fargo) - Most sectors are currently priced at a valuation level typically seen at major market bottoms. The higher inflation and higher interest rate environment may limit valuation’s upside potential and be more constructive for defensive, low-valuation, and high-quality stocks and sectors.
Research
A single monetary policy for heterogeneous labour markets: the case of the euro area (ECB) - Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households
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