CPI Week Starts Quietly
Economic news and commentary for September 11, 2023
No major data releases today
Still to come…
8:30 pm (EST) - Australia Westpac Index of Consumer Sentiment
9:30 pm - Australia NAB Business Survey
Morning Reading List
Other Data Releases Today
Italian industrial production fell -0.7% MoM in July and was down -2.1% YoY. Manufacturing production declined -1.1% MoM and was down -2.0% MoM.
US
Reintroducing the New York Fed Staff Nowcast (Liberty Street Economics, NY Fed) - “Nowcasts” of GDP growth are designed to track the economy in real time by incorporating information from an array of indicators as they are released. In April 2016, the New York Fed’s Research Group launched the New York Fed Staff Nowcast, a dynamic factor model that generated estimates of current quarter GDP growth at a weekly frequency. The onset of the COVID-19 pandemic sparked widespread economic disruptions—and unprecedented fluctuations in the economic data that flow into the Staff Nowcast. This posed significant challenges to the model, leading to the suspension of publication in September 2021. Taking advantage of recent developments in time-series econometrics, we have since developed a more robust version of the Staff Nowcast model, one that better handles data volatility.
Measuring The Cost Of Healthcare (Northern Trust) - Health care is a much smaller component of the consumer price index (CPI), accounting for just 7.8% of the total. The difference in weights between the two inflation gauges exists because the CPI measures only the costs paid by households (inclusive of insurance premiums), while the PCE deflator includes costs paid on behalf of households by insurers. The two approaches produce significantly different paths of health care inflation. The CPI for health care shows considerable amplitude, while the PCE component is steadier. This is due to changing insurance coverage from providers and the selection of different coverage by consumers.
What Is the Probability of a Recession? The Message from Yield Spreads (St Louis Fed) - Congress has given the Federal Open Market Committee (FOMC) a dual mandate: to maintain stable prices and maximum sustainable employment.1 The mandate to maintain stable prices is generally thought to imply low and stable inflation, which the FOMC has specifically interpreted as a 2% annual change in the personal consumption expenditure (PCE) price index. After a recent burst of inflation to a peak of almost 7% in June 2022, PCE inflation has been declining back toward the FOMC’s 2% inflation target, while expected inflation—implied by bond prices and surveys—has remained consistent with the FOMC’s target.
The Right Balance (Sheet) for a Soft Landing? (St Louis Fed) - One reason U.S. recession calls keep getting deferred—or even nixed—is the large number of buffers supporting demand, such as excess savings, revenge spending, and, more recently, real wage gains. But an underappreciated source of resilience is the generally healthy balance sheets of households and businesses.
Higher Rates: Positive Values (Northern Trust) - The high interest rate environment has brought a lot of focus on liabilities. Borrowing costs are higher, which hinders economic activity. Major purchases like homes and vehicles become more expensive. Businesses seeking to expand will find debt financing to be more costly and difficult to procure. Indebted nations will find their fiscal balance even further strained by higher interest obligations. But the other side of the interest rate ledger has been somewhat overlooked. Households are earning significantly more on deposits; banks are raising their offered rates and are competing against each other for deposits in a way that had been unnecessary during a period of easy money.
Corporate Profits in the aftermath of COVID-19 (Federal Reserve) - This note documents the behavior of corporate profit margins during and in the aftermath of the pandemic. As the traditional measure of corporate profit margin is heavily affected by fiscal support and its withdrawal, it also proposes an alternative measure. The note also provides insights on the dynamics of profit margin at firm level.
A Sourcing Risk Index for U.S. Manufacturing Industries (Federal Reserve) - Modern manufacturing production is organized in complex global value chains (GVCs), whereby the production process of a good is split into multiple stages across many countries and sectors. By allowing producers to specialize in a narrow set of tasks according to their comparative advantage, GVCs have brought significant productivity gains. However, as highlighted by the COVID-19 pandemic and Russia's war against Ukraine, participating in GVCs also entails risks as access to foreign inputs of production can depend on developments abroad.
Hedge Fund Treasury Exposures, Repo, and Margining (Federal Reserve) - Hedge funds have become among the most active participants in U.S. Treasury (UST) markets over the past decade. As a result, the financial stability vulnerabilities associated with their leveraged Treasury market exposures, which are facilitated by low or zero haircuts on their Treasury repo borrowing, have become more prominent. In this note, we use regulatory data from the SEC Form PF as of December 2022 to document recent trends in hedge funds' Treasury exposures and repo financing, and also to examine the implications for hedge fund repo borrowing and leverage of a hypothetical 200 basis point minimum haircut on Treasury repo.
Europe
Weekly Focus - All eyes on the ECB next week (Danske Bank) - Next week, the focus turns to the ECB meeting, where we anticipate a final 25bp hike. Markets remain divided between a hike and a pause, with the implied probability of the former hovering around 35-40%. This week, the Q2 compensation of employees, which is ECB's key measure for wage growth, continued to grow at a pace of 5.6% y/y, close to Q1 rate of 5.4%.
Eurozone economic lethargy to continue (ABN AMRO) - Economic data published this week have clearly illustrated that the eurozone economy is being hit by the unprecedented sharp interest rate hikes by the ECB since the middle of 2022, and the cooling of the global economy. We expect the weakness in the eurozone economy to continue for a while, with GDP probably contracting moderately or remaining close to stagnant during H2 2023 and H1 2024.
Got a Euro Coin? (BMO) - Oh, to be a fly on the wall in Frankfurt when the ECB debates on monetary policy. It would be interesting at any given time, but particularly so ahead of the September 14 announcement. It will be a tough decision, for all parties.
Sweden: Decent growth in July (Nordea) - GDP, production in the business sector as well as household consumption rose in July.
Spain | Reform and economic growth (BBVA) - Over the last decade, Spain has shown signs of a divergence in its GDP per capita with respect to the European Union. In these circumstances, it is not surprising that the Recovery, Transformation and Resilience Plan (PRTR) and European funds have generated expectations of a reversal of this trend.
Turkey’s current account deficit widens in July (ING) - Despite Turkey's large current account deficit, official reserves increased in July on the back of strong net errors and omissions inflows and a surplus in the financing account.
China
Spillovers From China’s Malaise (Northern Trust) - With China’s rise as an industrial powerhouse, developments there have broad global consequences. But I would propose an alternative cliché: when China’s economy feels the heat, the world sweats. After four decades of robust performance, China’s economic growth is slowing and the soft patch is unlikely to be transitory. As we wrote, the Chinese economy faces a series of challenges that will be difficult to manage.
Inflation
Will oil energize inflation again? (CIBC) - Declining energy prices were a major factor in quelling Canadian and US headline inflation in the past year, but in the
case of oil and gasoline, we’ve reached a turning point. Already, its downward pull on 12-month inflation rates has started to diminish, a key reason why the headline inflation rate ticked higher in Canada in July. US EIA data shows that American gasoline prices in early September were now marginally above year-ago levels. And this past week, crude prices got a lift as Saudi and Russian production cuts were extended to the end of the year.
Oil and Trouble, on the Double (BMO) - The inflation beast has not been fully tamed yet, and that reality weighed on financial markets in the first week back from a summer slumber. Bond yields pushed higher again after a bit of late-August relief: 10-year Treasuries tested 4.3% midweek, before relaxing somewhat. Still-high yields weighed on equities, with the S&P 500 slipping after a soggy August. The main source of underlying inflation angst has been a relentless rise in oil, with WTI moving above $87 and Brent driving above $90 for the first time this year.
Macro & Markets: What if we are too optimistic? (Nordea) - In recent months, growth has surprised to the upside and inflation has surprised to the downside. This has increased the odds of a soft landing, but there are still a number of things that could go wrong.
Restoring Price Stability Requires Careful Calibration (Lorie Logan, Dallas Fed) - Dallas Fed President Lorie Logan delivered these remarks before the Dallas Business Club at Southern Methodist University.
Manufacturing
Is global manufacturing bottoming out? (ABN AMRO) - Global manufacturing PMI picks up for the first time since February. Global export sub-index remains clearly in 'contraction territory'. Sharp acceleration in global manufacturing not likely at the moment. Subindices for input and output prices have risen somewhat in recent months.
Deforestation rules' impact on supply chains (S&P Global) - The European Union Deforestation Regulation (EUDR) introduces wide-ranging supply chain reporting requirements for commodities and their downstream supply chains. The EUDR covers €40.9 billion of commodity imports to the EU and €85.0 billion of derived products. Companies have three broad ways to deal with EUDR: improve sourcing visibility; raise prices; reorient supply chains. All three are risky and can be expensive.
Real Estate
Decline for AD&C Loan Volume in the Second Quarter (NAHB) - The volume of total outstanding acquisition, development and construction (AD&C) loans posted a decline during the second quarter of 2023 as interest rates continue to rise and financial conditions tighten. The volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined by 2.8% during the second quarter. The volume of loans declined by $2.9 billion for the quarter.
New office buildings rise on Texas skyline despite difficult market (Dallas Fed) - Despite persistent remote work arrangements and high vacancies in existing office buildings, construction cranes erecting new office space continue to dot Texas skylines. In fact, new office projects are increasing in Texas. So why aren’t developers slowing down? Office space isn’t all the same, and the incentives to finish new projects can be very different from the drivers of the market as a whole.
FX
Macro and FX: King Dollar, pressures on China, and will ECB hike? (Saxo Bank) - In today's macro and FX-focused podcase, recorded last Friday, we discuss the ongoing strength of USD which is a function of relative weakness in Europe and China, and to what extent the US inflation report on Wednesday will impact the USD trade.
Markets
Bonds & bold: Time to take on negative convexity and play it cool (Nordea) - The market is slowing down. That is good news for investments with negative convexity, but raises the question of the optimal strategy for rebalancing the duration hedge. High spreads on US MBS and a weaker DKK could dampen interest in Danish bonds.
Energy Fuelling Rate Worries (BMO) - It was a challenging week for global stocks, though the major indices in North America and Europe appeared to get some footing on Friday. Continued strength in oil prices has been one driver of the recent weakness, as it has fanned inflation concerns at a time when many major central banks hoped to be at or near the end of their rate-hiking campaigns.
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