Econ Mornings (12/21/2022)
Economic news and commentary for December 21, 2022
Canada CPI
Canada's CPI grew 0.1% MoM and 6.8% YoY in November, down from 6.9% YoY in October. Annual inflation continues to fall at a gradual pace in Canada, down -0.2 ppts since August and -1.3 ppts from the peak in June. The gridlock appears to be a result of the counteracting forces between food and energy inflation with the former up 1.2% MoM and 10.3% YoY and the latter down -1.5% MoM but up 13.9% YoY. Uncertainty around these two subindexes will continue to drive a greater uncertainty surrounding the path of inflation in 2023. Core CPI is also seeing some gridlock as it has failed to move significantly below its July peak. Since May, the annual pace of core inflation has bounced around between 5.2-5.5% with the most recent November reading at 5.4% YoY. Much of this stickiness can be traced back to the shelter index which grew 0.6% MoM and 7.2% YoY. Because this component accounts for 30% of the headline figure (and even more of the core figure) its path will have a large impact on the pace at which core CPI eases. Other indexes are already showing deflationary or disinflationary trends which are offsetting the shelter gains. Durable goods prices fell -0.4% MoM to 5.3% YoY, semi-durable goods prices grew only 0.2% MoM to 3.9% YoY, and services prices grew only 0.2% MoM to 5.8% YoY. All of these segments are reacting to the tight financial conditions being applied by the Bank of Canada as consumer demand recedes. Unfortunately, the food and shelter indexes, which account for over 45% of the headline index, are spoiling the success of the BoC’s inflation fight.
Germany GfK Consumer Climate
The GfK Consumer Sentiment index is -40.1 in December, up 1.8 pts from November. Consumer sentiment in Germany continues to bounce off the lows seen earlier in 2022. Optimism seems to be returning as this month saw another solid improvement in the Economic Expectations index, up 7.6 pts to -10.3. There is still a general feeling that the German economy will slip into a recession, but that recession is gradually expected to be milder as the months pass. This is partly because inflation expectations are starting to edge lower as the surge in energy prices cools. The Consumer Sentiment index is expected to improve again in to -37.8 to start the new year.
UK CBI Distributive Trades
The UK CBI Distributive Trades Survey Retail Sales index improved to 11% in December from -19% in November. This positive reading topped expectations of a decline in the November survey. However, the forecast for January (-17%) point to the decline returning to start 2023. The Sales Volume index was more stable, only down -6 pts to -3%, suggesting that most of the increase in the Retail Sales index is a result of inflation and holiday shopping happening in the face of that inflation. Indeed, the improvement in retail sales did not improve retailers’ sentiment on the general trend of the economy. The Suppliers Orders index was -21%, an improvement from -32%, but still pointing to demand deterioration. Additionally, a majority of retailers see inventories as “too high” at the moment. A net 16% reported this in December, down from a net 22% in November. In general, it’s hard to think the strong Retail Sales index was caused by anything other than inflation. Higher prices are still rampant in the UK and are weighing heavily on consumer sentiment and thus demand. A strong holiday season will only cushion the eventual slide into a recession.
Still to come…
8:30 am (EST) - US Current Account - Deficit down -$21.6 bil (-9.1% QoQ) to $217.1 bil in Q3 2022
10:00 am - US Consumer Confidence
10:00 am - US Existing Home Sales
10:30 am - US EIA Petroleum Status Report
Morning Reading List
Housing
Home Construction Not So Holly Jolly (BMO) - U.S. housing starts fell less than expected in November but plunging permits flag a deeper downturn in the months ahead. Still, home builders continue to face a raft of headwinds including tighter financial conditions, worker shortages, and fading housing demand. In the December FOMC meeting, Chair Powell signalled that rates will likely head higher than expected next year. As such, all indications suggest the highly interest-sensitive housing market is poised to weaken further.
Housing Starts Fall Less Than Expected, But Permits Drop Sharply in November (Wells Fargo) - The broad-based drop in housing starts indicates that builders and developers are planning to significantly cut-back construction against a backdrop of higher interest rates and elevated economic uncertainty.
Housing starts and permits continue to fall in November (TD Bank) - Homebuilding activity weakened further in November as elevated supply costs, higher interest rates, and the rapid cooling of housing sales activity continued to weigh on homebuilders. Declines in the single-family market continued to outpace those in the multi-family market, however with housing affordability challenges spilling over into the rental market the multi-family sector is clearly slowing as evidenced by the sharp drop in multi-family permits in November. The slowdown in homebuilding activity looks like it is continuing in December with the NAHB housing market index declining to sit one point above its early pandemic low.
Housing Starts Declined 0.5% in November (First Trust Portfolios) - If you think Fed tightening only “destroys demand” you are missing the supply side of the equation. Housing starts continued to slow in November as relatively high mortgage rates and ongoing supply-chain issues continue to weigh on builders. Looking at the details, a gain in multi-unit construction was outweighed by a continued decline in single-family projects, which pulled the headline number into negative territory. It is clear developers have become more cautious about future demand for new single-family projects with 30-year mortgage rates near 6.5%. Instead, they are focusing on apartment buildings.
Canada
Canadian retail (Oct, Nov adv): Retail sales volumes still stagnating (CIBC) - Canadian households spent more on goods in October, although the increase in dollar terms merely covered higher prices during the month. Sales rose by 1.4% relative to the prior month, with that increase largely in line with the advance estimate and consensus projections. However, after taking account of higher prices during the month, overall retail spending was unchanged in volume terms, pointing to a continuation of the stagnant trend that has persisted throughout this year.
Sales Are Up, But Only Nominally (BMO) - Retail sales posted a solid increase in October, though the gain came from higher prices, particularly at gasoline stations. Looking ahead, a negative flash estimate for November points to continued weakness as consumers struggle with reduced purchasing power in the face of high inflation.
Japan
Japan - Kuroda's Christmas surprise (ABN AMRO) - Japan Macro: BoJ suprises with early shift of YCC framework. … feeding a further comeback of the yen.
BOJ’s surprise policy tweak – signs of an eventual end of yield curve control? (Saxo Bank) - The Bank of Japan surprised markets with a tweak to it yield curve control policy, likely setting the stage for an eventual exit in 2023. Even though the move is said to be driven by financial markets, there are clear risks of inflation surging higher. That likely prompted Governor Kuroda to claim victory and ensure a smoother policy transition to the new Governor in April. Short JGB or long yen trades could have more room to run as Yen Carry trades likely reverse.
Japan: Consumer Confidence Plunges, the Tankan Edges Higher (BNP Paribas) - Confidence amongst Japanese consumers fell sharply this autumn, reflecting the difficulties they are experiencing in the face of inflation rising to its highest level for more than thirty years (3.8% y/y in October). According to the Cabinet Office, consumer confidence has fallen back to its level from the summer of 2020, when the pandemic was in full swing. Meanwhile, the Tankan survey for the fourth quarter of 2022 surprised on the upside: the overall balance climbed from 3 to 6, whilst the forecast contained in the previous survey was for a one-point fall.
US
Flash PMI survey data signal growing impact from rate hikes on economy and inflation (S&P Global) - December saw the US economic downturn gather momentum, according to early PMI survey data, as demand for goods and services slumped at one of the steepest rates seen since the global financial crisis. Jobs growth slowed as a result, with further labour market softness signalled for the coming months. However, the slump in demand has brought about an easing of supply constraints, which has in turn led to one of the largest monthly drops in input cost inflation seen in the PMI survey history. Consumer price inflation should consequently moderate further as we head into 2023.
Some mixed signals on employment growth (MUFG) - The Bureau of Labor Statistics (BLS) released Q2 2022 employment data from the Quarterly Census of Employment and Wages (QCEW) program, and results are markedly different from the monthly payrolls derived from the Current Employment Statistics (CES) survey. In fact, national employment from QCEW showed that the US lost jobs in June 2022, which is more consistent with the contraction in real GDP than CES estimates. Differences in program structure can explain some of the discrepancies, but the CES survey may have overstated employment gains in the summer of 2022.
SCE Labor Market Survey Shows Average Reservation Wage Continues Upward Trend (Liberty Street Economics, NY Fed) - The Federal Reserve Bank of New York’s November 2022 SCE Labor Market Survey shows a rise in the average reservation wage—the lowest wage respondents would be willing to accept for a new job—to $73,667, its highest level since the series began in 2014. Respondents’ satisfaction with wage compensation, non-wage benefits, and promotion opportunities at their current job all improved in November compared to July. Regarding expectations, the average expected wage offer (conditional on receiving one) also increased and reached a new high.
How Well Does the Beige Book Reflect Economic Trends? (St Louis Fed) - The text analysis “shows that the Beige Book contains useful information for understanding economic trends—even when that information is extracted by a simple automated process,” the authors concluded. “Such a reading of the Beige Book can provide a quick signal and easily track changes over time.”
Europe
ECB: tough talk and puzzling projections (BNP Paribas) - During the press conference following the latest governing council meeting, Christine Lagarde insisted repeatedly that moving to a 50 bp rate hike versus 75 bp previously did not represent a pivot, adding that rates still have to rise significantly and at a steady pace. Consequently, the likelihood of a terminal rate higher than 3.00% has increased, which explains the jump in bond yields.
Are banks ready to weather rising interest rates? (ECB) - Overall, our analysis shows that the euro area banking sector would remain broadly resilient to a variety of interest rate shocks. That would hold also under a baseline scenario of an economic slowdown in 2023 with the risk of a shallow recession, such as the scenario included in the December 2022 Eurosystem staff macroeconomic projections.
German exports to non-EU countries are expected to have fallen -0.5% MoM in November. Though this would still be up 13.6% YoY.
China
China Economic Outlook: December 2022 (BBVA) - The Chinese economy has experienced a bumpy recovery amid a disordered relaxation of "zero Covid" policy and a housing market adjustment. We maintain our 2022 growth projection at 3.6% while lowering 2023 GDP growth to 5.0% from 5.2%.
Markets
Bonds – it can only get better, can’t it? (DWS Group) - For the first time ever the U.S. bond market is posting losses for two years in a row. This is not enough to justify our optimistic 2023 outlook but we have other reasons.
The ECB’s hawkish stance will be tested by markets and the economy [PDF Download] (Zurich Insurance) - The Fed, the ECB, the BoE and the SNB all reduced the pace of tightening last week. While guidance was hawkish, we suspect the end of the global hiking cycle is approaching given slowing growth and moderating inflation.
Inflation
Inflation Focus Q4 [PDF Download] (Zurich Insurance) - Inflation remains high but the outlook is shifting, helped by disinflationary goods prices and slowing growth. Inflation has peaked in the US, turning lower in LatAm, but remains sticky in Europe, with energy causing divergence. Central banks emphasise their focus on inflation, with tight labour markets remaining a cause for concern. Recession is expected as a growth slowdown is being engineered to contain inflation.
Australia
The market themes for 2023 and 2024 (Westpac) - Central banks are to remain resolute on inflation fight in 2023. Despite market pricing now only anticipating around a 50% chance that the cash rate will reach our target of 3.85% from the current 3.1% by May we confirm that forecast.
Middle East & North Africa
MENA region’s economic growth to slow after strong 2022 (S&P Global) - Economic activity in the Middle East and North Africa (MENA) region is expected to sharply decelerate in 2023 after strong growth in 2022. Real GDP growth is forecast to decline to around 3.5% in 2023-24 from an 18-year high of 6.1% in 2022, outpacing the broad performance of the global economy over the same period.
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