Choppy GDP Means UK Should Avoid Q1 Recession, US PPI Gives Us Much Needed Deflation
Economic news and commentary for April 13, 2023
UK GDP
To say UK GDP has been choppy in the last year is an understatement. Today we got a look at another month of growth, and it continues to paint a mixed picture. UK GDP is estimated to have been flat (0.0% MoM) in February, after growth of 0.4% MoM in January (which was revised up from 0.3% MoM). For the three months leading up to February, GDP grew only 0.1% since it includes the weak -0.5% MoM growth in December 2022. In February, the construction sector lead the way with strong growth of 2.4% MoM after a notably weak January (-1.7% MoM). The increase was driven by a jump in repair & maintenance work of 4.5% MoM and a smaller increase in new work of 1.1% MoM. The ONS points out that favorable weather helped to boost the former as it allowed firms to get more work down. Thus, the bump might be temporary, and we might get some sort of a reversal in March.
Outside of construction, the services and production sectors both contributed negatively to overall GDP but at small magnitudes. The production sector contracted -0.2% MoM after a -0.5% MoM decline in January. Manufacturing, specifically, was unchanged as there were a mix of subsectors that gained and lost. Contributing positively were electronics and transport equipment production which were offset by declines in electrical equipment and chemical production. In the end, the production sector made a minuscule -0.03 ppt contribution to topline GDP. The services sector also contracted, down -0.1% MoM after a strong 0.7% MoM growth in January. Like production, there was a mix in the performance of subsectors with the contracting subsectors offsetting those that grew. Of note was a decline in education, down -1.7% MoM, as some teachers went on strike. Additionally, this followed growth of 2.5% MoM in January, so there was a bit of a bounce back there. Services ended up being the worst performing sector of the three, contributing -0.11 ppts to topline GDP.
There have been suggestions that the UK would fall into recession in Q1 2023, but so far, it looks like that might be avoided. A strong January has bolstered growth in the first quarter and good weather seems to have provided support for economic activity in February. Strength in these two months sets us up for disappointment in March but there is a lot of room on the downside before the whole first quarter will turn negative. Remember, December growth was -0.5% MoM, and quarterly growth through February was still up 0.1% MoM. However, early signals of March activity have been a bit disappointing. The UK Manufacturing PMI fell to 47.9 in March (down from 49.3) meaning a deeper contraction likely occurred there, and the Construction PMI’s growth of 54.6 in February was neutralized to just 50.7. The only source of growth will be the services sector which maintained a moderate expansion per last month’s PMI. There is also an improvement to come in education once teacher strikes are quelled. Once you put all the pieces together, it looks very likely that the UK’s GDP will shrink in March, but it is unclear whether or not it will be enough to make quarterly growth negative.
US PPI
After the CPI report was slightly disappointing with sticky core inflation, today’s PPI has come out and confirmed the deflation trend. Headline PPI fell -0.5% MoM in March which was a sharp downside surprise. Annual PPI growth fell -2.2 ppts to 2.7% YoY. Core PPI inflation also fell substantially, down -0.9 ppts to 3.6% which is almost half of what the rate was a year ago. Sharp goods deflation continued with processed goods prices down -1.0% MoM and unprocessed goods prices down -5.0% MoM. Both were heavily influenced by declines in energy prices, but there were also signs of prices slowing in other goods categories. In terms of commodities, food, energy, and nonfood commodities all fell in March with the general unprocessed goods index down a sharp -17.0% YoY. A year ago, this index was up 43.3% YoY.
Most importantly, we saw a strong deflationary impulse in services inflation. Services PPI fell -0.5% MoM which led to a -1.9 ppts decline in the annual pace to just 4.2% YoY. Nearly 60% of the March decline in the index for services for intermediate demand can be attributed to a -5.4% MoM decrease in prices for loan services (partial). The indexes for portfolio management, truck transportation of freight, gross rents for retail properties, arrangement of freight and cargo transportation, and fuels and lubricants retailing also moved lower. In the coming months, lower services producer prices will feed through into consumer prices. Combine that with tightening credit conditions, and April services inflation will probably start to look a bit less sticky.
Still to come…
10:30 am (EST) - EIA Natural Gas Report
4:30 pm - Fed Balance Sheet
Morning Reading List
Other Data Releases Today
Australia's employment grew 53k or 0.5% MoM, and the unemployment rate remained at 3.5%. However, the underemployment rate grew 0.4 ppts to 6.2%, and hours worked edged down -0.2% MoM.
German CPI growth was confirmed at 0.8% MoM and 7.4% YoY in March, down from 8.7% YoY in February. Core CPI was up 5.8% YoY which is slightly higher than the previous reading of 5.7% YoY. Subindex breakdown: food up 22.2% YoY (1.2% MoM), energy up 3.5% YoY (0.0% MoM), goods up 9.8% YoY, and services up 4.8% YoY.
The UK's trade balance edged down -£0.4 billion to -£19.0 billion with exports down -3.5% MoM and imports down -1.4% MoM. Exports to the EU tanked -6.2% MoM and imports from outside the EU dropped -4.5% MoM.
UK industrial production fell -0.2% MoM in February after a -0.5% MoM decline in January (revised down from -0.3% MoM previously). The decline was caused by electricity & gas down -2.2% MoM and water supply & sewerage down -1.3% MoM while manufacturing was flat at 0.0% MoM.
Italian industrial production fell -0.2% MoM and -2.3% YoY in February. Manufacturing is down -1.7% MoM with a solid increase in machinery production (3.8% YoY) offset by a decline in basic & fabricated metals production (-4.8% YoY).
Euro area industrial production jumped 1.5% MoM and 2.0% YoY in February.
Capital Goods: 2.2% MoM
Non-Durables: 1.9% MoM
Intermediate Goods: 1.1% MoM
Energy: 1.1% MoM
Durables: 0.2% MoM
Jobless claims grew 11k to 239k last week. The insured unemployment rate edged down -0.1 ppts to 1.2%. Continued claims fell -13k to 1.81 million.
Euro Area Industrial Production
Eurozone industry shows strong production growth in February (ING) - Strong industrial production figures for February boost first-quarter GDP expectations, as lower energy costs and fading supply chain problems provide a tailwind for industry. Still, with demand remaining relatively weak, we are cautious to call this the start of a fast rebound.
US CPI
March CPI: Glass Half Something (Wells Fargo) - For the inflation optimists out there, the March CPI report delivered good news with total prices rising by the smallest amount in nine months and hints that core services inflation is starting to moderate. However, for the inflation pessimists, the latest CPI report shows the recent underlying trend in price growth remains far too high, with the core CPI increasing at more than a 5% annualized pace the past three months.
Data Underpinning CPI Report Suggest U.S. Inflation Moderated Materially in March (PIMCO) - Although core U.S. inflation rose 0.4% in March, details in the Consumer Price Index (CPI) report suggest that the level of underlying inflation is moderating materially. Notably, rental inflation decelerated and there were no signs that increased wholesale prices for used vehicles were being passed on to consumers.
Reduced sequential momentum points to accelerating disinflation, despite latent core inflation stickiness (EY Parthenon) - This report leaves little doubt that the disinflationary process is well underway. Slower growth in final demand for goods and services, easing housing price inflation, and moderate wage growth should combine in the coming month and lead to faster disinflation than expected by the consensus and Fed policymakers.
U.S. CPI: Taking a Bite Out of Inflation (BMO) - The Fed will take some comfort from calmer headline inflation, especially given that declining energy costs and now flat food prices will help to reduce inflation expectations. But services inflation remains stubbornly high, largely due to the tight labour market. Another 25 bp rate hike seems likely on May 3.
US CPI (Mar): Gasoline and food reprieve, but core still too hot (CIBC) - Despite a weaker than anticipated headline number, continued pressure on core inflation will keep the Fed on its toes. The pace seen in its preferred gauge of underlying pressures, core services excluding housing, remains too hot and maintains the case for a follow up 25 bp rate hike in May.
Headline inflation eases to 5% in March, but core measure shows more staying power (TD Bank) - A year into the tightening cycle, and inflation is still showing lots of staying power. With core CPI rising 0.4% month-on-month in March, both the 3-month (annualized) and 12-month rates of change continue to run north of 5%.
Encouraging signs in US CPI, but Fed still set to hike in May (ING) - US inflation slowed to 5% from 6% YoY, but the monthly increases in non-food and energy prices continue to run hotter than desired, giving the Fed justification to hike interest rates again in May, Nonetheless, higher borrowing costs and reduced credit availability mean the risks of a hard landing are on the rise and this will get inflation down quickly.
Inflation Shows Further Signs of Cooling (NAHB) - Consumer prices in March saw the smallest year-over-year gain since May 2021 with a ninth consecutive month of a deceleration. While the shelter index (housing inflation) experienced its smallest monthly gain since November 2022, it continued to be the largest contributor to the total increase, accounting for over 60% of the increase in all items less food and energy.
The Consumer Price Index (CPI) Rose 0.1% in March (First Trust Portfolios) - Headline inflation moderated in March, coming in below consensus expectations and pushing the twelve-month comparison down a full percentage point to 5.0%. However, a look at the details of the report show inflation was more of a problem than the headline suggests.
Bank of Canada Announcement
Bank of Canada maintains pause, cautions on cyclical strength (TD Bank) - The BoC held the line in today's announcement. While it acknowledged that the economy is exhibiting cyclical strength as evidenced by strong employment gains and a bounce-back in consumer spending, it appears confident that growth is set to slow in the coming months. This slowdown, though delayed, has kept the faith that inflation will continue to decelerate, hitting 3% year-on-year this summer.
Bank of Canada sits tight, and finds that patience is a virtue (CIBC) - We'll stick to our view that the Bank of Canada will in fact "just sit there" over the balance of this year, neither following through on the implicit warning of a possible hike, nor meeting market expectations for an easing before year end.
Bank of Canada: Holding Pattern (BMO) - The BoC is comfortably on hold for the time being with inflation slowing in line with its forecast. The Bank's expectation that the economy will be in excess supply by the second half of the year opens the door a crack to potential easing later this year if inflation continues to slow, but there's still a lot of wood to chop on that front. In fact, the Governor explicitly stated in the press conference that market pricing of rate cuts later this year isn't the most likely scenario.
US FOMC Minutes
FOMC Minutes: Still Stressed About Inflation (BMO) - Barring renewed bank stress, the Fed is on track for another rate increase in May, as underlying inflation pressures remain intense. At that time, they will likely consider an extended pause to assess the impact of past rate hikes and tighter lending conditions on the economy and inflation.
Fed minutes showed the recent banking turmoil may result in a lower terminal rate (TD Bank) - March's minutes confirmed that the Fed is closing in on the end of its rate hiking cycle. The disinflationary process has been slow to take hold and the economy remains resilient under the weight of higher interest rates. However, tighter credit conditions stemming from the recent banking turmoil are likely to act as a headwind for economic activity offsetting the need for additional monetary restraint. This has been reflected in the volatility of the U.S. 2-year treasury yield, which had fallen as much as 129 basis points from its March peak, and is currently down 102 basis points.
US
Deposit Betas: Up, Up, and Away? (Liberty Street Economics, NY Fed) - Deposits make up an $18 trillion market that is simultaneously the main source of bank funding and a critical tool for households’ financial management. In a prior post, we explored how deposit pricing was changing slowly in response to higher interest rates as of 2022:Q2, as measured by a “deposit beta” capturing the pass-through of the federal funds rate to deposit rates.
Mortgage Activity Increases as Rates Fall for 5th Straight week (NAHB) - Per the Mortgage Bankers Association’s (MBA) survey through the week ending April 7th, total mortgage activity increased 5.3% from the previous week and the average 30-year fixed-rate mortgage (FRM) rate fell ten basis points to 6.30%. The FRM rate has fallen 41 basis points over the past month.
COVID-era eviction moratoriums improved financial well-being … while they lasted (Dallas Fed) - Federal and local governments imposed eviction moratoriums during the height of COVID-19 in 2020, temporarily shielding an estimated 1–2 million U.S. households from the threat of losing their homes. The U.S. Supreme Court struck down the federal moratorium in summer 2021, effectively ending protections in most local areas after nearly a year.
Europe
Spain | The new leaders of the pack (BBVA) - In 2022, Spanish GDP growth again outstripped the eurozone average. Moreover, import prices rose further, enabling the country to maintain its current account surplus and therefore reduce its reliance on external funding.
Another month of lacklustre industrial production data for Italy (ING) - February's industrial production figures confirm a soft start to 2023, notwithstanding improved supply chains and lower gas prices – which only marginally improve the picture in the very short run.
NO Inflation: May rate hike on track (Nordea) - Core inflation came in at 6.2% y/y in March, in line with Norges Bank. Given the continued high inflation and weak NOK, it is highly likely that Norges Bank will stick to their planned rate hike to 3.25% on 4th May.
Euro Area Macro Monitor - Steady course despite banking sector jitters (Danske Bank) - Despite the banking sector jitters that hit financial markets during March, economic data mostly pointed to an ongoing gradual recovery and any adverse confidence effects so far seem contained.
China
China surprises with big export jump in March (ING) - Exports rose 14.8% year-on-year in March. The consensus was for a contraction of around 7%. That is a real difference. But it seems like a general rebound could be short-lived. The jump in exports pushes up the trade balance, which will support first-quarter GDP.
China Economic Update – April 2023 (NAB) - China’s international borders effectively reopened in early January, when Beijing removed quarantine requirements for international visitors and allowed Chinese residents to leave the country in significant numbers for the first time since the start of the COVID-19 pandemic. While overseas travel is now permitted, the increase in outbound departures has been modest so far. A range of constraints mean that a full return of the Chinese tourist to international markets may take some time.
Australia
NAB Economics Monthly Data Insights – March 2023 (NAB) - Our monthly transaction data suggests spending turned a corner in March with total spending declining, after holding up through more than a year of high inflation and rising interest rates.
Australian housing market update: April 2023 (NAB) - After a six-month period where the downwards trend in housing values consistently lost steam, CoreLogic’s national Home Value Index posted the first month-on-month rise since April 2022, up 0.6% in March. Dwelling values were higher across the four largest capital cities and most of the broad ‘rest-of-state’ regions, led by a 1.4% gain in Sydney.
PMIs
Global inflation pressures moderate but remain elevated thanks to higher service sector prices (S&P Global) - Global inflationary pressures continued to moderate in March, though remained elevated by historical standards. Stubbornly elevated inflation rates remain largely driven by labour and raw material costs, albeit with pressures from both having moderated considerably over the past year.
Global economic growth accelerates further in March amid service sector revival (S&P Global) - Global business activity accelerated further in March, reaching a nine-month high, according to the S&P Global PMI surveys based on data provided by over 30,000 companies. While India once again recorded the fastest expansion, all other major economies bar the UK and Australia, reported improved performances.
Monthly PMI Bulletin: April 2023 (S&P Global) - Global business activity growth accelerated at the end of the first quarter of 2023, allaying concerns of imminent recession in the global economy. A common thread running through the majority of the national PMI surveys was the extent to which growth was driven by the service sector. By contrast, manufacturing output barely rose for a second month running.
Fiscal Policy
Fiscal Policy Can Promote Economic Stability and Address Risks to Public Finances (IMF) - Three years since the outbreak of the pandemic, fiscal policy has moved a long way toward normalization. Governments have withdrawn exceptional fiscal support, and public debt and deficits are falling from record levels. That’s happening amid high inflation, rising borrowing costs, a weaker growth outlook, and elevated financial risks. Debt sustainability is a cause for concern in many countries.
Energy
COT: OPEC cuts triggered biggest buying spree since 2016 (Saxo Bank) - Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to Tuesday, April 4. A week that saw a continued and broad recovery in risk appetite as the dollar softened and yields dropped. The Bloomberg Commodity Index meanwhile jumped 2.1% with broad gains being led by energy where the surprise OPEC+ production cut triggered the biggest buying spree of WTI and Brent crude oil futures since December 2016.
What’s Behind OPEC+’s Latest Cut? (BMO) - This may not be the end of further OPEC+ intervention if the recovery in global oil demand unexpectedly stalls. Although we do not necessarily believe the cartel wants to see WTI suddenly surge above $100, as this could further fuel global inflation pressures, it seems quite apparent that it would like to get it back to around $90. This explains why we remain comfortable with our average forecast of US$85/bbl this year.
FX
USD/JPY: Bracing for the second half US recession (ING) - FX markets currently price a 30% chance that USD/JPY trades at 120 at, or even before, the end of the year. 120 is our year-end forecast and is premised on the US going into recession and the Fed cutting rates by 100 basis points later this year.
Does Corporate Hedging of Foreign Exchange Risk Affect Real Economic Activity? (Liberty Street Economics, NY Fed) - Foreign exchange derivatives (FXD) are a key tool for firms to hedge FX risk and are particularly important for exporting or importing firms in emerging markets. This is because FX volatility can be quite high—up to 120 percent per annum for some emerging market currencies during stress episodes—yet the vast majority of international trades, almost 90 percent, are invoiced in U.S. dollars (USD) or euros (EUR). When such hedging instruments are in short supply, what happens to firms’ real economic activities?
Cryptocurrency
Bitcoin touches $30,000 for the first time since June 2022 (Saxo Bank) - The crypto market has been on a rally this year, as Bitcoin trades at $30,000 for the first time since June 2022, up by over 80% year-to-date. We mainly view the surge in the light of three factors, namely that the market sees the macro environment is about to be better for risky assets, recent banking turmoil, and unsustainably low price levels due to last year’s contagion. We are particularly watching the macro environment from here.
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