German Inflation and Australian Wage Growth Both Accelerate and Intensify Inflation Concerns
Economic news and commentary for February 22, 2023
Germany CPI
German CPI growth was confirmed at 1.0% MoM and 8.7% YoY in January, up from 8.1% YoY in December. This confirmation fills in the details of the earlier provisional report that was delayed to a rebasing of the data from 2015 to 2020. The rebasing resulted in some revisions to 2020 data. Notably, headline inflation rates that were over 10% in September, October, and November last year were revised lower to 8.6% YoY, 8.8% YoY, and 8.8% YoY, respectively. Also, we see that the December annual inflation figure was also revised down, from 8.6% YoY which was reported last month to 8.1% YoY in this report.
This means that January annual inflation at 8.7% YoY is a significant step higher than the December number. The beefy 1.0% MoM increase in CPI was driven by an 8.3% MoM increase in energy prices as natural gas and heating prices experienced a resurgence because of the expiration of relief in household energy prices. Food prices also saw a sizeable increase of 1.6% MoM, but the annual pace cooled -0.2 ppts to 20.2% YoY. Gains in food prices continue to be broad-based. The issue of accelerating inflation extends to the core segments as core CPI grew 5.6% YoY in January, up from 5.2% YoY in December. In particular, there was a strong increase in services inflation, up to 4.5% YoY from 3.9% YoY previously, while goods inflation experienced a deceleration, 12.7% YoY in January from 13.9% YoY in December. This trend accentuates the worry of the ECB. Sticky services prices are holding up the decline in inflation despite goods prices falling. However, in Germany, goods prices aren’t falling all that much with that subindex still seeing elevated inflation in areas like non-durable consumer goods (17.0% YoY) and vehicles (8.4% YoY). We should look for the ECB to position themselves more hawkishly after this report.
Australia Wage Price Index
Australia's Wage Price Index grew 0.8% QoQ and 3.3% YoY in Q4 2022, up from 3.2% YoY in Q3 2022. The acceleration in wage growth was slightly larger in the private sector where it was up 0.9% QoQ and 3.6% YoY, topping the previous quarter's increase of 3.4% YoY. The 0.8% QoQ increase matches the second hottest quarterly increase (behind Q3 2022’s increase of 1.1% QoQ) since March 2014 and confirms that wage inflation still running hot in Australia. The annualized rate of growth for the three-month moving average of the quarterly increase in the Wage Price Index is around 3.6% YoY which means that if the current pace continues, wage inflation still has room to accelerate. This was one of the data points that members of the Reserve Bank of Australia discussed according to the recently released February minutes. The Q3 number had already surprised to the upside, and “a strong outcome” was expected in the Q4 number. The strength in wages has led the members to forecast 4.25% YoY wage growth by the end of 2023. With the expectation that wage inflation could keep the cost of living boosted, the RBA is likely to remain hawkish in 2023 and continue to raise rates.
Still to come…
10:00 am (EST) - US State Street Investor Confidence Index
2:00 pm - US FOMC Minutes
Morning Reading List
The French business climate indicator grew 1 pt to 103 in Feb. Manufacturing, services, and retail sectors all improved by 1 pt while construction fell -2 pts. The employment climate indicator edged down -1 pt to 110.
Germany's ifo Business Climate Index grew 1 pt to 91.1. The Business Situation index fell -0.2 pts to 93.9, and the Business Expectations index increased 2.1 pts to 88.5. The manufacturing subindex was the highest since May 2022.
Italy's CPI growth in January was revised down to 0.1% MoM and 10.0% YoY from the 1st estimate of 0.2% MoM and 10.1% YoY (December: 11.6% YoY). Goods inflation was revised down from -0.1% MoM to -0.2% MoM on a downgrade in energy prices (from -3.8% YoY to -4.2% YoY).
Canada CPI & Retail Sales
Canadian CPI: Slower Times at Inflation High (BMO) - Canadian consumer prices rose 0.5% in January (or +0.3% in s.a. terms), below expectations and mild enough to cut the annual inflation rate to 5.9% from 6.3% the prior month. This is the lowest yearly inflation reading since last February, and the lowest among major industrialized economies (aside from Japan).
Inflation continues to cool in January (TD Bank) - January's CPI report showed that inflation continues to cool in Canada. Headline and core measures are falling on a year-on-year basis and should decline even further over the coming months as the base effect of last year's first half price surge washes out of the data.
Canadian CPI (Jan): Signs of a cooler core (CIBC) - Alongside some healthy readings for retail sales in December/January, the deceleration in CPI adds to evidence that the Bank of Canada doesn't need to engineer a recession to get inflation under control.
Canadian retail (Dec, Jan adv): A healthy advance (CIBC) - Retail sales in volume terms posted a healthy gain in December, and while the advance estimate for January suggests a less impressive number to start the New Year, this data supports our expectations for modest consumption growth in the first quarter.
Retail Sales End 2022 on a High Note (TD Bank) - Retailers had a pretty busy December with consumers keeping their purse strings open during the holidays. Some of the resilience in the headline was due to strong auto sales, as improved auto production helped to clear the backlog of orders. Consumer also got some reprieve from financial headwinds at the end of the year, marked by a sizeable drop in gasoline prices.
US Existing Home Sales
Existing Home Sales Fall Further at the Start of 2023, but pace of Decline Softens (TD Bank) - Existing home sales fell 0.7% month-on-month (m/m) to 4.0 million units (annualized) in January – undershooting market expectations for an increase of 2.0%. Activity was down 37% compared to the year-ago level.
U.S. Existing Home Sales Slide .... Again (BMO) - That slower demand from all of those rate hikes (all 450 bps) are having an impact, clearly.... on housing. The one sector that is feeling the pain. But things should ease up a little as the Fed cools it on the tightening path .... assuming it does.
Existing Home Sales Continue to Fall in January (NAHB) - As elevated mortgage rates and tight inventory continue to weaken housing demand, the volume of existing home sales declined for a twelfth consecutive month as of January, according to the National Association of Realtors (NAR). This is the longest run of declines since 1999.
Australia Wages
AMW: Could higher wages push the RBA even further? (NAB) - Yesterday’s Minutes make clear the RBA’s priority is inflation. While the Board is seeking to return inflation to target while keeping the economy on an ‘even keel’ it will do what is necessary to return inflation to target. The wages backdrop is a key risk.
German Ifo
German Ifo improves but those recession fears haven’t gone away (ING) - More sentiment improvement in Germany as the Ifo index increased once again in February. However, the second monthly drop in the current assessment component shows that recession risk in the first quarter is still real.
France Business Climate
French business climate signals economic resilience in February (ING) - In France, the business climate improved slightly in February and paints a picture of a resilient and fairly solid French economy. This data suggests that GDP should remain in positive territory in the first quarter.
Flash PMIs
Global recession fears subside as flash PMI data signal revival of economic growth in February (S&P Global) - Provisional PMI survey data for February indicate encouraging resilience of the major developed economies of the world, with reviving output growth in the US and Europe allaying fears of near-term recessions.
Eurozone PMIs send mixed signals (ABN AMRO) - PMIs rise on stronger services sector – The eurozone composite PMI increased to 52.3 in February, up from 50.3 in January. The rise was mainly due to higher activity in the services sector, with the Services PMI increasing to 53.0, up from 50.8.
Economy stabilizes but inflation heats up: top five charts from February's US flash PMI data (S&P Global) - Business activity in the US picked up in February according to the latest business survey data from S&P Global, but price pressures also showed signs of remaining stubbornly elevated.
Mexico
Mexico | The resilience of external demand drives manufacturing in 1Q23 (BBVA) - The BBVA Manufacturing Multidimensional Indicator grew 4.1% in January (YoY), bringing the average year-on-year variation of the last three months to 3.5%, 1.2 pp below the quarterly average observed at the end of 2022.
Inflation
The “five Ds” of structurally higher inflation (Allianz) - Over the last decades, and especially since the global financial crisis (GFC), structural factors have caused a secular decline of inflation. Globalization, digitalization and aging populations in advanced economies have been strong disinflationary forces.
Evaluating Monetary Policy with Inflation Bands and Horizons (San Francisco Fed) - Inflation targeting has become the dominant way countries approach setting monetary policy goals. However, central banks differ in how they conduct that policy and how they evaluate their success in meeting a stated inflation goal. A new assessment method combines a percentage range around a target, known as an inflation tolerance band, with central banks stating how long it will take for high or low inflation to return to that range, known as a time horizon. Comparing previously projected horizons with realized horizons can be used to evaluate policy success.
Inflation Monitor for February 21 (BMO) - Canadian inflation proved to be milder than expected in January, continuing its cooling trend. On the flip side, expectations for a quick slowdown in U.S. inflation were thwarted by high-side surprises in both the CPI and PPI reports.
Real Estate
Additional Declines for New Home Size (NAHB) - An expected impact of the pandemic was a need for more residential space, as people use homes for more purposes including work. During the housing boom after covid, this led to a rise for new single-family home size. However, as the housing market weakens on lower affordability conditions, this trend has reversed.
Outlook
Global Economic Outlook February 2023 (EY Parthenon) - Global economic activity has slowed, but the slowdown is neither homogeneous across sectors and regions nor simultaneous. Near-term risks are skewed to the upside, with Europe having avoided a near-term cost-of-living crisis thanks to mild winter temperatures, China having suddenly pivoted away from its zero-COVID-19 policy, and the US economy displaying employment and consumer spending resilience at the start of the year.
US Weekly Economic Commentary: Stronger for longer? (S&P Global) - Downward revisions to retail sales, the results of the latest Quarterly Services Survey, and other data encouraged us to lower our estimate of fourth quarter GDP growth by 0.5 percentage point to a still solid and above-trend 2.5%.
The Forward View – Global: February 2023 (NAB) - Global inflation data showed the slowing trend in consumer price growth continued in December. That said, while it appears that global price growth may now be past its peaks, inflation in the US, UK and France remained stable in January and, more generally, inflation remains well above targets set by global central banks. This means that there is scope for further policy rate hikes in coming months.
Policy Priorities for the G20: One Earth, One Family, One Future (IMF) - Policymakers urged to support vulnerable people and economies, protect the planet, and harness digital progress for all.
Monetary Mayhem Clouds Crystal Ball (First Trust Portfolios) - You can’t read or watch financial news these days without a heavy dose of speculation about what the Fed is going to do with short-term interest rates, when it’s going to do it, and how long it’s going to do it for.
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