China's Reopening Starts Sluggishly as CPI and PPI Disappoint
Economic news and commentary for March 9, 2023
China CPI & PPI
China's CPI surprised to the downside last night as it was reported to have fallen -0.5% MoM to an annual gain of 1.0% YoY in February, down from 2.1% YoY in January. Expectations were for the CPI inflation to be around the 2.0% YoY level as the economy grapples with the economic effects of reopening, but those expectations were clearly overconfident. One of the biggest declines was seen in food prices which had been one of the categories that had seen the most inflation in the last year. The subindex fell -2.0% MoM to 2.6% YoY. Non-food CPI inflation, which had already been pretty lower was -0.2% MoM and just 0.6% YoY. Both consumer goods and services suffered lower prices, down -0.6% MoM and -0.4% MoM respectively. It appears there just hasn’t been a pick up in spending that many envisioned in the period after China emerged from COVID restrictions. Many expected there to be some kind of reflation in travel and tourism as freedom of movement returned, but the travel index fell -6.5% MoM in February, though it was still up a healthy 3.0% YoY. A face-to-face heavy segment, home services, saw prices fall -1.7% MoM and was only up 1.9% YoY.
Chinese businesses also reported struggling prices. China’s input PPI fell -0.2% MoM to -0.5% YoY in February, down from 0.1% YoY in January. Selling prices were even worse. Though flat on the month, the annual pace of growth fell from -0.8% YoY to -1.4% YoY. Energy prices slowed slightly on the month but were still up a decent clip. Outside of that, input commodities continued to deflate for Chinese businesses. Ferrous metals prices were down -6.9% YoY, chemical prices were down -5.4% YoY, and building materials prices were down -4.9% YoY. As input prices struggled, both raw materials and production firms struggled to charge higher prices for their goods. The former industry saw prices down -1.3% YoY, and the latter saw them down -2.0% YoY. It looks like food and clothes are the only areas where selling prices are slightly better, up 2.6% YoY and 1.6% YoY, while other general consumer non-durables struggled at 0.7% YoY and consumer durables saw deflation at -0.2% YoY.
In general, it doesn’t appear that we are going to get a grand Chinese opening to start 2023. Price data suggests actual consumer and business activity is sluggish, pressing the metaphorical snooze button to delay the reopening alarm. This seems to be especially the case on the consumer side with the large disappointment below expectations. It is worth noting that a general global disinflation period will be a headwind to a Chinese reflation. For food and energy prices, this is likely to be the case since these are major imports. Both declined in the month of February. However, there is also the opposite effect of a slower Chinese reflation bolstering disinflation abroad. One of the concerns of a Chinese economy without restrictions was that renewed demand would push prices up on Chinese exports which would have ripple effects on its trading partners. This concern is probably overblown now which is good news since developed economies are seeing some hot inflation data points at the moment.
Still to come…
10:30 am (EST) - US EIA Natural Gas Report
4:30 pm - US Fed Balance Sheet
6:30 pm - Japan Household Spending
6:50 pm - Japan PPI
9:30 pm - Bank of Japan Announcement
Morning Reading List
Other Data Releases Today
Japanese Q4 2022 GDP growth was revised lower from 0.2% QoQ to 0.0% QoQ in the 2nd estimate. Private demand was downgraded to -0.6% QoQ as a result of household consumption revised -0.2 ppts lower to 0.3% QoQ.
Jobless claims fell -2,000 to 190,000 last week. The insured unemployment rate was unchanged at 1.1%. Continued claims fell -5,000 to 1.66 million.
Bank of Canada Announcement
BoC Decision: Right Down the Middle of the Plate (BMO) - The Bank of Canada held interest rates steady today at 4.5%, as universally expected, and the accompanying language was relatively even-handed as the data "have evolved broadly in line" with their views. Still, the Bank maintains a bias to tighten further, if need be.
Bank of Canada bets on disinflationary path (ING) - As widely expected, the Bank of Canada kept rates unchanged at 4.5% today. The Bank observed that restrictive monetary policy is already showing its effect on the Canadian economy, and sees a path for a return to 3% inflation by mid-2023. The option for a new hike is open, but we doubt that will be necessary, and the next move should be a cut.
Bank of Canada hits pause (TD Bank) - Today was always set to be a placeholder meeting. The BoC had clearly communicated it would hit pause its hiking cycle and let the economy absorb the impact of 425 basis points of monetary policy tightening over the last year. The only thing to analyze was how firm the BoC would be on reinforcing the possibility of further hikes should incoming data prove stronger than expected. Today's announcement shows that the BoC isn't in a rush to start hiking again.
Bank of Canada keeps its eyes on the home front (CIBC) - A no-surprise statement from the Bank of Canada relative to our expectations naturally
implies no change to our view that we're done with rate hikes on this side of the border.
US JOLTS
Work It Out with a JOLT (BMO) - U.S. job openings fell to 10.8 mln in January, from an upwardly revised 11.2 mln at the end of last year. The report included revisions going back to 2018 with a new record high of 12.0 mln posted in March 2022.
Significant Drop for Construction Job Openings (NAHB) - The count of open, unfilled jobs for the overall economy declined slightly in January, falling to 10.8 million, after an 11.2 million reading in December, which was the highest level since July. The count of total job openings should fall in 2023 as the labor market softens and unemployment rises. From an inflation perspective, ideally the count of open, unfilled positions slows to the 8 million range in the coming quarters as the Fed’s actions cool inflation.
US Trade
First Gain in Five Months for Exports, Imports Rise Even More (Wells Fargo) - Exports increased in January for the first time in five months, but a resilient domestic economy helped power an even larger gain in imports, particularly of autos and consumer goods. The result is a widening in the trade deficit, a trend we expect to reverse as consumer demand cools.
The Trade Deficit in Goods and Services Came in at $68.3 Billion in January (First Trust Portfolios) - In January, the trade deficit in goods and services hit $68.3 billion as exports expanded faster than imports. However, we prefer to focus on the total volume of trade, imports plus exports, as it represents the extent of business and consumer interactions across the US border. This measure expanded significantly by $18.1 billion in January, increasing by 7.6% compared to a year ago.
Euro Area GDP
Stagnating eurozone GDP is worse than it seems (ING) - GDP growth in the eurozone was revised down from 0.1% to 0% in the fourth quarter. Poor household consumption and investment data show that underlying developments are weaker than expected, adding concern about eurozone economic performance.
US
Powell turns hawkish: The calm before the storm? (Saxo Bank) - The keyword for our team after the Powell speech is 'recession by design' as the Fed has clearly moved closer to panic mode indicating a willingness to push the policy rate higher than previously thought and for longer. The outlook on inflation seems more uncertain and the policy rate trajectory is now leaning towards a new policy mistake where the Fed maybe gets too aggressive in their panic to lower inflation creating a recession.
Fed Chair Powell — Semiannual Monetary Policy Report to the Congress (EY Parthenon) - In his Semiannual Monetary Policy Report to the Congress, Fed Chair Jerome Powell offered a relatively hawkish tone. He reiterated the Fed’s resolve to sustainably bring down inflation while acknowledging the process would be bumpy.
US may be nearing recession (Fidelity) - Recession risks are rising in the US despite real wage growth and a tight jobs market. Rising recessionary risks and the uncertain path of monetary policy raise the odds of continued ups and downs in the US stock market.
Fed's Beige Book: “Economic Activity Increased Slightly” (BMO) - The anecdotes from the Fed’s regional report card, prepared for the March 21-22 meeting, echoed Chair Powell’s comments to Congress: “the U.S. economy has been remarkably resilient to higher rates”. The Fed chief opened the door to a 50-bp hike, but he stressed that it will depend on incoming data. All attention now turns to Friday’s jobs report and Tuesday’s CPI data.
Party of One: How Single Women Stack Up in the U.S. Economy (Wells Fargo) - Single women are providing an outsized lift to the labor force. The number of never-married women in the labor force has grown three times faster than the broader labor pool over the past decade. The rapid increase stems from never-married women's growing ranks, but also larger gains in labor force participation compared to other groups, including never-married men.
Is the Era of Overdraft Fees Over? (St Louis Fed) - Overdraft fees are a significant source of revenue for U.S. banks. However, banks’ overdraft and nonsufficient funds fee revenue has fallen sharply since peaking in 2019.
Europe
ECB preview: 50bp next week but how far will the ECB still go? (ING) - A 50bp rate hike next week looks like a done deal. The more heated debate at the European Central Bank will be about the path for monetary policy beyond the March meeting.
Demand and supply factors in CPI inflation, UK: 2021 to 2022 (ONS) - Insights into the effects of the re-opening of economies and supply bottlenecks on Consumer Prices Index (CPI) inflation in 2021 and 2022.
Canada
Corporate Canada: Getting Ready for a Stress Test (TD Bank) - The finances of Canadian corporations have improved dramatically over the last three years, as strong economic growth and high commodity prices provided a boost to profits and cash reserves. With the economy set to weaken over 2023, corporate resilience will be tested, though improved balance sheets will act as a significant buffer.
Canadian trade (Jan): A surprise surplus (CIBC) - Canadian trade continues to benefit from solid global demand for agricultural products and other resources, as well as an easing in supply chain disruptions in areas such as autos. The surge in export volumes during January was likely also helped by a rebound following weather-related disruptions in December, which will support January GDP but likely means that a cool down will be seen in the months following.
Another High-Side Surprise for January (BMO) - Canada's merchandise trade account recorded a $1.9 bln surplus in January, wider than the $1.2 bln surplus (revised up from -$160 mln on higher exports, especially for natural gas) posted in December. Thanks to the magic of revisions, this is the country’s tenth surplus in the past twelve months.
Turkey
Turkey 2023 Presidential Election Scenario Analysis (Wells Fargo) - Local political developments can play a tremendous role in the direction of economic and financial market trends in emerging markets. Arguably, Turkey is the best example of how local politics can influence economic prosperity as well as local financial markets.
Real Estate
Mortgage Activity Increases Despite Mortgage Rate Volatility (NAHB) - Per the Mortgage Bankers Association’s (MBA) survey through the week ending March 3rd, total mortgage activity increased 7.4% from the previous week and the average 30-year fixed-rate mortgage (FRM) rate rose eight basis points to 6.79%. The FRM rate has risen 61 basis points over the past month.
Commodities
Commodities Stalemate (BMO) - After starting the year with cautious optimism, commodity markets could be in for a tougher period in the months ahead as the path for monetary policy once again ratchets higher. Meantime, supply chain pressures—a key price support over the last year—have begun to dissipate across much of the world, partly reflecting cooling demand.
Research
Not Cashing In on Cashing Out: An Analysis of Low Cash-Out Refinance Rates (Philadelphia Fed) - Lowering a borrower’s interest rate is one of the most effective ways to reduce a borrower’s debt burden. Mortgage refinancing offers a chance to shift debt balances from high-interest loans into a low-interest mortgage through “cashing out” some of the home’s equity.
The Evolution of Job Applications and Job-Finding Rates since the 1980s (St Louis Fed) - The advent of the information and communications technology revolution in the 1980s introduced significant improvements in search technologies, changing the way unemployed workers look for jobs. Previously, workers had to go door-to-door to look for a job, but they can now easily access information on a job's requirements, offered wages and benefits, and work environment through online job-search platforms.
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