German Industrial Production Stutters in March, Reversing Strength in the First Two Months
Economic news and commentary for May 8, 2023
German Industrial Production
After exhibiting some strength in February, Germany’s industry turned back to weakness in March. German industrial production fell -3.4% MoM in March, driven by a sharp -4.4% MoM decline in capital goods orders. Specifically, there were large declines in production in the manufacturing of autos, (-6.5% MoM), machinery (-3.4% MoM), and construction (-4.6% MoM). Despite all of this, the year-on-year change was still positive, up 1.8% YoY, thanks to strong data at the beginning of the year. In particular, February’s gain of 2.1% MoM helped to maintain some momentum in the first three months.
However, the annual gain is a bit misleading. There are still several factors working against the German industrial sector. Supply chain pressures and energy constraints are still having an impact on the key energy-intensive segment of manufacturing where production is down -12.9% YoY. Additionally, the full effect of rate hikes is beginning to show in the data. Not only do we have weak industrial production data today, but last week, Destatis reported that there was a sharp -10.7% MoM decline in new manufacturing orders which means that new orders were down -11.0% YoY in March. This is leading to a downturn in manufacturing sales as well. The early figures of March sales point to a -2.9% MoM decline after an increase in sales in February. This new, poor data may not have been 100% encapsulated in Q1 2023 data. Thus, it would not be a surprise if that initial Q1 figure was revised down as suggested by ING in its review.
Still to come…
10:00 am (EST) - US Wholesale Inventories
12:30 pm - US Investor Movement Index
7:30 pm - Japan Household Spending
8:30 pm - Australia Index of Consumer Sentiment
Morning Reading List
Other Data Releases Today
The ECB released the latest aggregated results for its May 2023 edition of the ECB Survey of Monetary Analysts. One of the more interesting observations was that the median projection for the timing of the next rate decrease was December 2023 with some analysts projecting rate cuts as early as July 2023.
The Australian NAB Business Survey Business Conditions index was 14 in April, down from 16 in March. New order growth slowed to 1, down -2 pts, and employment remained growing moderately at 11, up 1 pt. The business confidence index was 0.
US Employment
There’s still life in the US jobs market, but challenges are mounting (ING) - Jobs growth beat expectations in April with wages jumping and unemployment hitting new lows. Yet, significant downward historical revisions still point to a softening jobs trend and with lead indicators and tightening lending conditions adding to the downside risks, we unfortunately expect unemployment to end the year higher than it is today.
Job growth surprised to the upside in April, but prior months see sizeable downward revisions (TD Bank) - Job growth accelerated in April, but there were certainly some indications in the report suggesting that the labor market is softening. Revisions to the two prior months were significantly lower, which after smoothing through the monthly noise, the three-month moving average shows the pace of hiring has continued to decelerate. Moreover, the breadth of hiring – while having ticked higher in April – remains well below year ago levels.
US Employers still paying up (CIBC) - The upside surprise in this data is in contrast to the deterioration seen in initial jobless claims, job openings, and the ISM services employment sub-index, and shows that interest rates will have to remain elevated for some time in order to cause a loosening in the labor market that is consistent with 2% inflation.
Solid Job Growth in April (NAHB) - Job gains continued in April, despite rising interest rates and a slowing economy. After a revised 165,000 job gain in March, total nonfarm payroll employment increased by 253,000 in April, and the unemployment rate declined to 3.4% from 3.5% in March. In April, on a year-over-year basis, wage growth increased slightly to 4.4% from 4.3% last month, but down compared to a 5.8% gain in April 2022.
Nonfarm Payrolls Increased 253,000 in April (First Trust Portfolios) - This is not Goldilocks. If you want to understand where the economy is right now, you need to get comfortable with ambiguity. Once again, we have a report on the labor market with solid headlines but worrisome details. Nonfarm payrolls increased 253,000 in April, beating the consensus expected 185,000. Adding to the good news, the unemployment rate ticked down to 3.4%, tying the lowest level since the early 1950s.
The Little Jobs Market That Could (Wells Fargo) - Hiring continued to chug along in April, with nonfarm payrolls once again coming in well-above expectations with an increase of 253K. While hiring in February and March were revised downward by a combined 149K, the three-month average pace of gains remains respectable at 222K.
Apparent labor market resilience complicates the Fed’s job (EY Parthenon) - The April jobs report painted a picture of a labor market that is still tight and seemingly resilient. Job growth surprised on the upside with a 253,000 gain, the unemployment rate edged down to a 54-year low of 3.4%, and wage growth accelerated to 4.4%. Importantly though, significant downward revisions to prior employment gains and weak job growth diffusion point to softening momentum that will likely be more visible in the upcoming jobs reports.
U.S. Labour Market Tightens But Losing Steam (BMO) - The Fed will bristle at the tighter labour market conditions, pickup in payrolls and work hours, and stronger wage growth (especially after that awful Q1 unit labour cost report), but it should take some comfort from the overall moderating trend in employment. Given its newfound desire to hold to the sidelines after 5 ppts of rate hikes, the onus is likely on the 'totality' of the data to spur another move in June.
Canada Employment
Canada's labour market surges again (TD Bank) - Once again, the Canadian jobs market surprises to the upside. Over the last seven months, employment has risen 412k, three times the trend pace over the 2010 to 2019 time period. This has been driven by rapid population growth, which has surged by a million people in the last year. The supply of workers has been boosted, enabling firms to put a big dent in the number of job vacancies.
Canadian employment (Apr): Still holding strong (CIBC) - The Canadian labour market remained strong in April, with employment rising by more than expected, the unemployment rate remaining near all time lows and wage inflation failing to decelerate. The still-strong wage inflation will be particularly worrisome for the Bank of Canada, as policymakers have expressed concern regarding a pass
through to services inflation which could see headline inflation failing to fall all the way back to the 2% target, suggesting that a hawkish tone will remain in upcoming communications.
Canadian Jobs/Population Boom (BMO) - The robust headline job gains are no doubt being flattered by strong underlying population growth, and all of last month's rise was of the part-time variety. Nevertheless, the key point is that there is no evidence that the labour market is softening at all, lending important support for the broader economy. If this persists through the spring, the Bank of Canada may yet be forced to rethink its rate pause, especially with the housing market showing signs of reviving. All eyes will now turn to the next inflation report (CPI, May 16), which needs to continue slowing to keep the Bank on the sidelines.
US
US | Policy rate climbs above 5%, but the Fed hints it may pause at the next meeting (BBVA) - The overall tone of the statement remained hawkish amid first-quarter developments in the real economy, but for the first time since the beginning of the tightening cycle the Fed no longer explicitly “anticipates” the need for more hikes ahead.
U.S. Job Openings Closing.... Sort Of (BMO) - No matter how you slice/dice it, the labor market is still tight. But it is getting a little less so with each passing day. And as that happens, price pressures start to ease a little too, which is what monetary policymakers want to see.
Three make-or-break crises impacting the US (ING) - There is a thread running between the three crises being felt in the US right now. The inflation crisis was borne from the pandemic, a politically toxic one. The looming debt ceiling crisis stems from politicking that is more aggravated than ever. And the third crisis is a banking one, in part brought on by a Fed reacting to the inflation crisis. Where now?
Rock Solid Labor Market Keeps the Fed in a Hard Place (Wells Fargo) - In April, employers added 253K jobs and the unemployment rate fell to 3.4%. During the same month, the ISM services index edged up to 51.9, while the ISM manufacturing index improved to 47.1. In March, the count of job openings declined to 9.6 million, while construction spending rose 0.3%. Nonfarm productivity declined 2.7% in Q1 as unit labor costs jumped 6.3%.
Inventories: The Other Stock Volatility (Northern Trust) - Private inventory growth is an important component of gross domestic product (GDP). Businesses adding to their inventories raises production levels and lifts overall GDP. Uniquely among GDP components, inventories are calculated using their second derivative, or how quickly their levels change. If inventories grow at a faster pace than they did in the prior quarter, GDP increases. Conversely, if the pace of growth is slower (even if still positive), GDP decreases.
Is The Fed Draining Deposits? (Northern Trust) - To keep a lid on the overnight rate, the Fed offers interest on deposits placed with it by banks. The theory is that banks will purchase funding from markets if they can earn a spread by reinvesting it. The interest rate on reserve balances (IORB) therefore contains the rates that banks are willing to pay for overnight borrowing. The IORB has typically been set near the top of the Fed’s targeted range.
Understanding the Recent Behavior of Inflation (St Louis Fed) - For the last two years, inflation has been high, well above the Federal Reserve’s 2% annual target. High inflation has been persistent and widespread—the result of both supply and demand factors associated with the COVID-19 pandemic, including the fiscal and monetary policies that were implemented in response.1 This post is the first in a two-part series that will analyze the behavior of inflation and the impact of fiscal and monetary policies during this episode, and provide a plausible outlook for the near future.
Europe
European housing – home, (un)sweet home? (Allianz) - The rapid tightening of financing conditions increasingly weighs on the housing market. Credit demand has weakened, and consumer confidence is low. There has also been a shift to variable-rate mortgages, suggesting that borrowers expect an improvement in financing conditions and do not want to lock in high rates. However, this also reflects continued interest-rate uncertainty as fixed-rate borrowing is becoming much more expensive.
Dissection of European Inflation (Northern Trust) - Inflation readings from the United States have raised hopes that the worst is over and further relief for American households is in the pipeline. For consumers across the Atlantic, however, getting a respite from the high cost of living might take a little longer. After peaking at 10.6% year over year last October, annual inflation in the 20-member euro currency union decelerated to 7.0% in April. However, a look beneath this encouraging headline figure shows a long journey ahead to bring inflation under better control.
Macro & Markets: Into the final stretch (Nordea) - G10 central banks are moving into the final stretch of the hiking cycle. Markets are now most preoccupied of when the cuts will come. In the FX sphere, the NOK could finally see some relief after a horrible 2023.
Europe | ECB mirroring the Fed (BBVA) - There was some suspense ahead of last Thursday’s meeting of the European Central Bank (ECB) as to the size of the rate hike (between 25 and 50 basis points), with the ECB ultimately choosing the lesser of two evils.
Disappointing German March macro data increase risk of technical recession (ING) - Today's industrial production figures are the final data release for a disappointing March, and have increased the risk that the German economy ended up in a winter recession after all.
Monitoring Turkey: Focus on elections (ING) - As double elections on 14 May approach, the macro outlook will depend on whether the current policy mix, thus preference for low interest rates, continues, or if there will be a focus shift to disinflation with a significantly tighter monetary stance and easing of regulations.
South America
Brazil’s inflation falls and there may be room for easing monetary policy this year (S&P Global) - Annual inflation in Brazil reached 4.7% in March, the lowest since January 2021, as the impact of external shocks continues to vanish. While still above the Central Bank of Brazil (Banco Central do Brasil: BCB)'s target of 3.25%, inflation is now within the current 1.5% tolerance band.
Colombia | Food inflation led to decrease in total inflation: 12.8% in April (BBVA) - In April, monthly inflation was 0.78% and annual inflation was 12.82%, below the expectations of market analysts (who, according to the Banco de la República survey, expected a variation of 0.87%).
Canada
Can you solve the neutral rate challenge? (CIBC) - Today’s labour market data put the kibosh on any near-term rate cuts in the US and Canada. Indeed, another rate hike in Canada is still an open risk, although we see enough of a deceleration in inflation to give the Bank of Canada license to wait and see.
Commodities
Gold nears all-time high on likely Fed pause (ING) - Gold is trading near an all-time high amid a decline in US bond yields and the dollar following indications from the US Federal Reserve that it might pause its rate hiking cycle. And the precious metal's momentum remains to the upside.
Widespread drop in materials prices amid sluggish manufacturing demand (S&P Global) - The Material Price Index (MPI) by S&P Global Market Intelligence decreased 3.1% last week, the fourth consecutive weekly decline. The decrease was widespread with nine of the ten subcomponents falling. The story of 2023 so far has been one of falling commodity prices with the MPI decreasing in 12 out of the last 16 weeks. The index also sits 32% below its year ago level which was near the all-time peak.
Banking
Banking risk monthly outlook: May 2023 (S&P Global) - The first quarter data for lending to micro and small enterprises (MSEs) is due to be released at the end of April. Due to a broader push by the authorities to boost credit growth in the sector and prolong the economic growth, the loan disbursements by banks to MSEs will likely remain similar to the 23.6% recorded for end-2022 in both the first and the second quarter of 2023. More such loans likely disbursed by larger banks owing to their stronger liquidity positions.
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