Euro Area Construction Production Confirms a Downtrend in 2023
Economic news and commentary for February 20, 2023
Euro Area Construction Production
Euro area construction production fell -2.5% MoM and -1.3% MoM in December. The move confirms a downtrend in construction in Europe that had been getting softer through most of 2022. Civil engineering production fell the most, down -4.0% MoM, and building construction fell -2.3% MoM. By country, Germany saw the steepest drop in construction activity, down -8.0% MoM and -8.2% MoM in December which is certainly a revealing detail about the German economy. The easing in production was predicted by the S&P Global Eurozone Construction PMI which found a steep decline in construction activity in December at 42.6. This was the 8th straight month of construction contraction.
However, there are some signs that the sector’s sentiment has bottomed. The January PMI improved to 46.1 which is the softest decline since June 2022, and in general, the inflation of building costs that has been so restrictive for construction firms continues to ease. The PPI for intermediate goods in the euro area fell in the last two months of 2022, down -0.4% MoM in November and -0.5% MoM in December, and the annual growth of that index is down -3.7 ppts to 13.8% in that two-month time period. The main force pushing back on a recovery in construction is higher interest rates. The ECB has not finished its tightening cycle and is ready to notch up the hawkishness if economic data keeps surprising to the upside. For that reason, the construction sector’s recovery will be a more gradual one. It would not be surprising to see a low-to-mid single-digit decline in construction production in 2023.
Still to come…
10:00 am (EST) - EU Consumer Confidence Flash
7:30 pm - Reserve Bank of Australia Minutes
Morning Reading List
Other Data Releases Today
At the end of January, the ONS found that 94% of adults in the UK reported a higher cost of living than a year ago, and 69% reported a higher cost of living than a month ago.
US
Do Not Go Quietly Into That Good Night (Wells Fargo) - Resilience was on full display in this week's economic indicators and market-based rate expectations moved closer in line to the forecast we have maintained for months: that the Federal Reserve will guide its main borrowing rate higher still to 5.25% and hold it there through year-end.
U.S. Debt: Going From Bad To Worse (Northern Trust) - This week, the U.S. Congressional Budget Office (CBO) updated its ten-year Budget and Economic Outlook. The figures are sobering. The federal government’s ratio of debt to gross domestic product (GDP) will rise from 97% in 2022 to 118% in 2033. While the outlook for tax revenues as a share of GDP is steady, higher interest rates and greater mandatory outlays will push the government deeper into a hole. Extending these trends another two decades, current policies will put the U.S. on track to reach debt equal to 195% of GDP in 2053.
Higher for longer (Nordea) - With the disinflation process stalling and the labour market remaining tight, the latest signs of economic strength make it more likely that the Fed will need to lift interest rates even higher than anticipated.
Fifty Shades of 50 bps (BMO) - The crucial U.S. economic releases of this week spoke with one voice—higher for longer. Hopes for a fast melt in inflation were dashed by hot core readings in both the CPI and PPI. Thoughts of a meaningful economic cooldown were banished by a fierce snapback in January retail sales. Dreams of an imminent end to Fed rate hikes were washed away by hawkish Fedspeak.
No Equivocation Here: LEI Points to Recession (Wells Fargo) - Reasonable minds can disagree about whether the economy is headed for recession or a soft landing, especially after a recent run of strong data. The Leading Index is not waffling however. The 10th-straight decline in January is still consistent with recession.
Time to throw in the towel? (CIBC) - Nobody can accuse bond market players of stubbornly sticking to their views. Only a couple of weeks ago, investors were ignoring what members of the US Fed were telling them, and for reasons we couldn’t fathom, pricing in a series of rate cuts in the back half of the year. Reports on January payrolls and retail sales, and upward revisions to the seasonally-adjusted track for core CPI in Q4 of last year, threw all of that out the window.
Can Surplus Savings Save the Expansion? (BMO) - his week, we zero in on the largest component of this liquidity: excess household savings. Due to this buffer, many analysts, including ourselves, think the U.S. and Canadian economies will avoid a hard landing, despite more than four percentage points of policy rate hikes in under a year. However, the unequal distribution of savings will also impact the economy, lenders, and retailers.
Europe
One year since Russia’s invasion – Europe faces three changes as it settles into new reality (Danske Bank) - In our view, the war has brought along three important changes. First, it has fundamentally changed the way we perceive security and peace in Europe. Second, it has forced changes in our economic model, and third, it has changed the priorities of businesses and policymakers who prepare for the future.
Latin America
Dallas Fed, Latin American central banks explore financial stability risks (Dallas Fed) - The COVID-19 pandemic, recent monetary tightening and a strengthening U.S. dollar have renewed attention to international financial stability risks. These themes were explored during a recent conference organized by the Federal Reserve Bank of Dallas and the Center for Latin American Monetary Studies (CEMLA) and held at CEMLA’s headquarters in Mexico City.
Trade
Ballooning U.S.-China Tensions (Northern Trust) - The escalating U.S.-China competition will likely be the most important theme of the coming decades for global trade. We hope the current frictions won’t develop into a cold war, in which the two sides end up only trading charges and not goods.
Inflation
Restoring price stability (Lorie Logan, Dallas Fed) - A speech by the President of the Dallas Fed on the Fed’s goal of restoring price stability in the United States.
Markets price in high rates for longer (Danske Bank) - While the recovering macro indicators point towards lower recession risks in the near term, they also raise the risk of underlying price pressures being protracted.
Forecasting CPI Shelter under Falling Market-Rent Growth (Boston Fed) - Shelter (housing) costs constitute a large component of price indexes, including 42 percent of the widely followed core Consumer Price Index (CPI). The shelter prices measured in the CPI capture new and existing renters and tend to lag market rents. This lag explains how in recent months the shelter-price index (CPI shelter) has accelerated while market rents have pulled back. We construct an error-correction model using data at the metropolitan statistical area level to forecast how CPI shelter will evolve.
Manufacturing
Driving Change (Northern Trust) - Slowly but steadily, production friction has eased. Auto output is not yet back to pre-pandemic norms, but inventories have improved. An increased flow of new vehicles has also helped take the pressure off used car prices, and rising interest rates have taken some of the starch out of demand for both. Once a source of hyperinflation, the auto sector is now a leading contributor to disinflation.
Commodities
The Commodities Feed: Hawkishness weighs on the complex (ING) - The commodity complex has come under pressure in recent days, with more hawkish talk from some US Fed officials. Recent data from the US suggests the Fed may have to hike by more than expected.
Real Estate
Global | Post-COVID housing prices (BBVA) - The COVID pandemic coincided with a surge in housing prices in several countries, especially some of the richest, despite the fact that at the same time there was an exceptional slump in economic activity that would normally have led to a sharp decline in prices.
Market Share of All-Cash New Home Sales Hits 32-Year High (NAHB) - NAHB analysis of the most recent Quarterly Sales by Price and Financing published by the U.S. Census Bureau reveals that cash purchases made 11.2% of new home sales in the fourth quarter of 2022—the largest share since 1990. The share of cash purchases has climbed each of the past four quarters and six of the last seven.
Markets
The market is underestimating geopolitical risks (Saxo Bank) - Bubble stocks are up more than 20% this year in a sign of the comeback of reckless gambling behaviour by retail investors. This has been across massive speculation in zero-days-to-expiry options, ridiculous moves in AI-related stocks, and cryptocurrencies. It is all based on a blind spot towards the accelerating geopolitical risks and a naive hope of inflation coming back to the old past. The Munich Security Conference over the weekend has highlighted the growing geopolitical risks and this week is about appreciating these risks. In today's equity note we once again highlight our defence basket which has by far been the best performing basket over the past year.
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