German Inflation Cools Thanks to Sharp Energy Deflation
Economic news and commentary for March 30, 2023
Germany CPI
German inflation made another milestone today as it crossed below the 8% YoY mark for the first time in more than a year. The early estimate of prices suggests that Germany’s CPI grew 0.8% MoM and 7.4% YoY in March, down from 8.7% YoY in February. The cooling of annual inflation came through falling energy prices. After being up in the high double-digits for some time, energy price growth has now fallen to a more normal 3.5% YoY, down from the 19.1% YoY reported in February. This has brought goods inflation into the double digits as well at 9.8% YoY, down from 12.4% YoY. While we can celebrate the deflation in goods prices, a welcome sight for European consumers, food and services inflation remains sticky. Both categories saw the annual pace of inflation accelerate, up 0.5 ppts to 22.3% YoY for food and up 0.1 ppts to 4.8% YoY for services. These two sticky segments are now the main thing keeping inflation from moving toward the ECB’s target rate and have become the main focus for policymakers. Wage gains for European workers, especially in the service sector, are one of the reasons for the persistence in the price level.
Every central bank has hoped for a sharp deflationary impulse, combined with base effects, to push inflation lower throughout 2023. However, at least in Europe, it looks like the downward trend will be more gradual. Unfortunately, this heightens the risk of a double peak in inflation since segments that do fall sharply will only have a deflationary effect for a specific period of time. Energy deflation is likely to stop having major effects on the headline rate by the second half of the year, so at that point, price cooling will have to be more broad-based. There is some hope in the fact that ECB rate hikes have not been fully digested by consumers and businesses (and a few more are likely on the way). Also, the new turmoil in banking which has tamed the velocity of the money supply and constrained lending is likely to assist as well. In general, today’s report will be marked as a slight win for the ECB, but it will have to acknowledge that energy deflation is temporary. Once that normalizes, the larger downward moves in German inflation will become smaller.
EU Economic Sentiment
The EU Economic Sentiment Indicator fell -0.3 pts to 97.4 in March as the recovery from the near-term trough set in 2022 continues to stall. Additionally, the Employment Expectations Indicator saw some weakness, edging down -0.1 pts, but it remains at a strong reading of 107.6, well above its long-term average. The survey also found that consumer confidence stalled in its recovery that was ongoing for the last five months with the index tracking it dropping -0.1 pts to -20.7. This is still well below the long-term average of -11.1. Sentiment in the services sector appears to be the only positive measure in the recorded subindexes at 7.3. However, it was unchanged in March. Industry (-1.3), retail (-1.6), and construction (-2.0) all saw minor declines in the month that kept sentiment readings in negative territory.
The section of the survey tracking selling price expectations told a mixed story across segments. Selling price expectations continued to decline with the largest decay in industry and construction while services and retail saw expectations cool to a lesser extent. The ECB’s desire to keep consumer inflation expectations anchored has more-or-less been unfulfilled in 2023. Consumers’ perceptions of price developments over the past twelve months have remained stable and sit just a tad below the all-time high of December 2022. Their expectations for the next twelve months picked up marginally.
Still to come…
10:30 am (EST) - US EIA Natural Gas Report
4:30 pm - US Fed Balance Sheet
7:30 pm - Japan Unemployment Rate
7:50 pm - Japan Industrial Production & Retail Sales
9:30 pm - China CFLP Composite PMI
Morning Reading List
Other Data Releases Today
Italy's PPI fell -1.0% MoM in February but was still up 9.6% YoY. Segment breakdown: PPI (ex-energy) up 8.3% YoY (0.1% MoM), Energy up 8.1% YoY (-3.2% MoM), Consumer Goods up 10.1% YoY (0.5% MoM), Capital Goods up 7.0% YoY (0.3% MoM), and Intermediate Goods up 7.8% YoY (-0.5% MoM).
The final estimate of Q4 2022 GDP growth was 2.6%, down from 2.7% in the 2nd estimate and 2.9% in the 1st estimate. Core PCE inflation saw another upgrade to 4.4% YoY, up from the 2nd estimate of 4.3% YoY and the 1st estimate of 3.9% YoY.
Jobless claims grew 7,000 to 198,000 last week. The insured unemployment rate was unchanged at 1.2%. Continued claims increased 4,000 to 1.69 million.
US
Credit Check: Exploring Consumer Reliance on Credit (Wells Fargo) - Just as the drawdown in excess savings is becoming a less consequential driver of spending, credit is getting more expensive and apt to become harder to access in the wake of the banking crisis. This report looks at the degree to which credit has sustained consumer spending so far and how diminished access to credit could dent consumer spending.
US | Markets price in an imminent end of the hiking cycle (BBVA) - There are initial signs that banking turmoil achieved what Fed’s hawkish rhetoric couldn’t: tighter credit financial conditions. As Powell said, “it doesn't all have to come from rate hikes, it can come from tighter credit conditions.”
Europe
Never waste a good crisis – a profit-price spiral in Germany (ING) - With the largest strikes in Germany in more than three decades this week, fears of a wage-price spiral have gained momentum once again. However, last year’s data show clear signs of a profit-price spiral already spreading in the economy.
Spain: core inflation down for the first time in 23 months (ING) - Spain's CPI fell strongly in March after a slight uptick in February. Core inflation also fell in March for the first time since April 2021.
Sweden retail sales: From bad to worse (Nordea) - Retail sales fell sharply in February, bringing the total sales volume below pre-pandemic levels.
China
China’s consumer and technology sector in strong momentum (Saxo Bank) - In today's equity note we highlight our China consumer & technology basket which is now the second best performing theme basket over the past year. Risk sentiment has naturally shifted higher as the Chinese government lifted its Covid restrictions and today the entire sector got another boost as Alibaba revealed a new plan to split into six separate businesses to unlock value. While we remain long-term cautious on Chinese equity returns there is no doubt Chinese consumer and technology stocks look increasingly like a tactical bullish play.
Australia
NAB Monetary Policy Update – 30 March 2023 (NAB) - We continue to expect the RBA to raise the cash rate by 25bps in April, though we now see the resulting 3.85% rate as the peak (previously 4.1%). Further out, we continue to see rate cuts in H1 2024 bringing the cash rate back to 3.1% as the economy slows and unemployment rises.
Canada
Canadians Keep On Spending in February (TD Bank) - TD's latest debit and credit card spending data shows that consumers kept their purse strings open in February. Following a sizeable jump in December and January, spending continued to rise in February, albeit at a more moderate pace.
Real Estate
Property Tax Revenues See Largest Increase Since 2009 (NAHB) - NAHB analysis of the Census Bureau’s quarterly state and local tax data shows that $286 billion in taxes were paid by property owners in the fourth quarter of 2022 (not seasonally adjusted).[1] State and local governments collected $714 billion in property taxes in 2022, $46 billion more than 2021. The 6.9% annual increase is the largest since property tax receipts climbed 9.3% in 2009.
Commodities
Gold rallied, oil plunged on bank troubles (Fidelity) - Since Silicon Valley Bank was taken over by regulators on March 10, gold prices are up more than 6% and oil prices are down roughly 8%. What's at play here? Here's a closer look at what's happening in the commodity markets amid the recent global banking turmoil.
Outlook
Everything everywhere all at once (Allianz) - Negative confidence effects from the near-death experience in the US banking sector and the unresolved energy situation in Europe will shape the rest of the year. We maintain our call for a sizable recession in the US at the end of the year due to a slowdown in housing, manufacturing and construction, while economic momentum stalls in the Eurozone as fiscal stimulus is gradually pared back.
Banking on the Banking System (Northern Trust) - The initial months of the new year delivered positive surprises for the global economy. Major advanced economies looked on track on avoid a downturn, inflation moved past its peak and labor markets remained resilient. However, recent stress in the banking sector in the U.S. and Europe has shaken confidence.
Markets
Solving the Core Fixed-Income Conundrum (Guggenheim) - In the 2023 edition of The Core Conundrum, Guggenheim’s investment team discusses why investors may find better value in fixed-income sectors that are underrepresented in the Bloomberg U.S. Aggregate Bond Index (the Agg), such as structured credit, below investment-grade corporate credit, floating-rate bonds, and municipal bonds.
Research
The Effect of Local Economic Shocks on Local and National Elections (Cleveland Fed) - We study the reaction of voters to shifts in local economic conditions. Using the departure from the gold standard of US trading partners in 1931 and the US in 1933, we exploit heterogeneity in export destinations, creating local differences in expenditure-switching in US counties by isolating the aggregate effects of the monetary shocks using time fixed effects. We find significant changes in local voting behavior in response to both shocks, one originating abroad, and another domestically. The response to both shocks have similar magnitude. We argue that voters punished and rewarded incumbents regardless of the shocks’ origin, implying strong feedback from economic conditions to electoral outcomes.
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