German PPI Still Has a Core Problem
Economic news and commentary for March 20, 2023
Germany PPI
According to preliminary data released by the Federal Statistical Office (Destatis), Germany's producer price index for industrial products rose by 15.8% YoY in February 2023. This marked a slight deceleration from January 2023's increase of 17.6% YoY. On a monthly basis, the overall index fell by -0.3% MoM, compared to a drop of -1.2% MoM in January. The main industrial group responsible for the increase in producer prices was energy, due to its high weighting percentage combined with exceptional changes. Energy prices fell by -1.4% MoM, primarily due to the decrease in the prices of natural gas. Across all customer groups, natural gas prices were down 4.2% MoM. Despite the monthly decline, the rise in energy prices was still particularly significant, with energy prices as a whole up 27.6% YoY. Outside of energy, there was a slight rise in PPI, up 0.5% MoM, with the annual pace at 10.2% YoY. Much of that rise could be attributed to rising food prices (up 23.4% YoY) and thus rising non-durable goods prices (up 0.9% MoM and 17.9% YoY). Price pressures in other categories were only slightly positive, intermediate goods prices grew just 0.1% MoM, and capital goods prices grew just 0.4% MoM. Both continue to see high single-digit annual growth.
Producers continue to benefit from lower energy inflation which is a very welcome phenomenon, but there is still mixed movement in other categories. This is largely keeping core segments and the food segment of the CPI sticky. Given the current rate of decline in energy inflation, headline PPI growth soon be lower than ex-energy PPI growth, probably sometime in Q2. However, developments in financial markets could provide some deflationary pressure on producer pricing power. Tighter lending standards would suppress new capital investment and combine with rate hikes to have a stronger tightening effect. Thus, we should expect to see some extra downward pressure on the prices of business equipment and machinery (capital goods) and large purchase items like cars and furniture (durable goods). If that trend emerges in the data, the ECB can more safely pause to observe the full effects of rate hikes.
Still to come…
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Morning Reading List
Other Data Releases Today
The euro area trade deficit was -€30.6 in Jan, mostly unchanged from a year ago.
Exports were up 11.0% YoY and imports were up 9.7% YoY. Intra-euro area trade rose to €223.8 bn, up by 11.6% YoY.
Fed
Dollar funding solutions get beefed up (ING) - Another weekend, another set of announcements from the Federal Reserve, and other key central banks. Last weekend the Fed took measures to protect deposits, and by implication solvency. They also beefed up access to liquidity for US banks. This weekend, it's about ensuring access to dollars outside of the US. Another safety net in place.
Not your older sibling's financial crisis (Nordea) - With banks in trouble, markets are looking to the 2008 Financial Crisis for clues. But, while the previous crisis was driven by a collapse in credit quality, today's banks are in trouble because they didn't believe the Fed could tighten.
Fed preview: Rate hikes continue despite the volatility (Danske Bank) - With market sentiment stabilizing, underlying inflation still elevated & systemic crisis risks now seemingly contained, we think Fed will continue hiking next week. Even if a broader crisis is averted, the tightening credit standards in regional US banks could weigh on economic growth, and inflation expectations. We still expect a 25bp hike next week and a terminal rate of 5.00-5.25% by May.
March Flashlight for the FOMC Blackout Period: The Flashlight Needs Fresh Batteries (Wells Fargo) - The FOMC downshifted its pace of policy tightening, lifting the fed funds rate by 25 bps to a range of 4.50-4.75%, at the conclusion of its last meeting on February 1. Since then, the ground under the Fed has shifted enormously.
Fed to hike 25bp should conditions allow (ING) - While the most prudent course of action may be to pause and digest the fallout from regional banking woes, the Federal Reserve is focused on inflation and will look to hike 25bp if conditions allow. With both higher borrowing costs and reduced access to credit set to weigh on growth and inflation, we continue to expect rate cuts in the second half of this year.
US
Silicon Valley: The Consequences of a Bank's Failure (Northern Trust) - Even in the best case scenario of no further contagion, recent events may cast a lingering shadow over the financial sector. Banks will guard their capital to maintain their customers’ confidence, and the fear of enhanced regulation may add to their caution. More broadly, banks cannot function without the confidence of their clients and investors. Talk of bailouts, uninsured deposits and unrealized losses can snowball into broader suspicion of the entire sector.
Shamrock Shake: Industrial Production, LEI & Consumer Sentiment (Wells Fargo) - This three-in-one report breaks down all you need to know about this morning's trio of economic indicators. Industrial production was unchanged, leading indicators still point to recession and consumer sentiment slipped. Time for something stronger than a milkshake.
Top O' the Cycle? (Wells Fargo) - In February, the headline and core CPI rose 0.4% and 0.5%, respectively. The headline PPI fell 0.1%. Retail sales declined 0.4% during February, while industrial production was flat (0.0%). Housing starts and permits jumped 9.8% and 13.8%, respectively. The Leading Economic Index dipped 0.3%. The preliminary University of Michigan Sentiment Index fell to 63.4 in March.
Top O’ the Maelstrom to Ya (BMO) - Markets are still struggling to find their equilibrium a week after regulators took control of SVB, whose woes have sparked intense liquidity concerns among regional banks. A back-and-forth week saw the focus ping-pong across continents, and a wide variety of both official and private support systems were put in place to calm the waters. The late-week news that banks tapped the Fed discount window for a record $152.9 billion in the week to March 15, and the new Bank Term Funding Program (BTFP) for another $11.9 billion, was seen as a sign of high stress, further roiling markets. The large figure also put the $30 billion in fresh deposits from 11 banks for First Republic and the SFr50 billion (US$54 billion) line for Credit Suisse into perspective.
Services Demand: The Third Leg of Resiliency (BMO) - While the financial sector is under stress from the Fed’s fierce tightening campaign, the broader economy’s muffled response to date is one reason inflation remains elevated. Recent Focus articles discussed two factors buffering the economy from tighter policy: excess savings and strong job growth [1]. But there’s a third pillar as well: the unleashing of deferred services spending. This begs the question: how much bottled-up demand exists?
Some Banks Fail, but It’s Not a Free Fall (TD Bank) - A classic run on banks rippled through the financial system, but the regional banks’ equity underperformance reflects the idiosyncratic nature of this episode.
The pain threshold (CIBC) - When central banks raise rates, there’s bound to be trouble. But when inflation is elevated, as it has been, you could say that the central bankers are out looking for trouble, as that’s what it takes to slow the economy and cool those price pressures. So as the Federal Reserve’s policy committee sits down next week, the key question for them isn’t just whether issues in the banking system represent a potential hit to economic growth, which they surely do, but whether that hit is in fact greater than what they’re looking to achieve to get back to a 2% inflation world.
Europe
Macro Digest: Implications of the UBS takeover of Credit Suisse (Saxo Bank) - The UBS takeover of Credit Suisse at the weekend is rewriting the history of corporate bonds on the huge write-off of some of Credit Suisse debt. This non-solution could stoke broadening concerns.
Bank of England set for 25bp hike barring further turmoil (ING) - Despite encouraging signs that inflationary pressures are easing, we think the Bank of England will probably opt for one final 25bp hike on Thursday if it can, though that's undoubtedly contingent on what happens in financial markets. Remember that the BoE has set a much lower bar for pausing hikes than the likes of the Fed and ECB.
Bank of England Preview - Final hike in store (Danske Bank) - We expect the Bank of England (BoE) to hike the Bank Rate by 25bp. We expect this to mark the peak in the Bank Rate of 4.25% as the BoE is set to signal a pause in the hiking cycle.
EU construction outlook: Two years of modest decline in the building sector (ING) - Material shortages are decreasing in the EU building sector but labour scarcity remains a challenge. The share of renovation is growing due to sustainability work. This makes the sector less volatile. Therefore, only a modest decline is expected in 2023.
ECB Follows Through: +50 (BMO) - The ECB is not finished, not with core CPI at a record high. We still expect more hikes... maybe not of the 50 variety, but spread out over the course of a couple of meetings and not necessarily back to back. But terminal is still at 4.00%. For now. Let’s take it on a meeting-by-meeting basis, and watch the data. (Where have I heard that before?).
ECB holds the course through stormy waters (Danske Bank) - After a long period of unusually low interest rates, some may have been concerned that when central banks hike interest rates rapidly, eventually something could break. Events unfolding in the past seven days have served as a sharp reminder that there may be a trade-off between central banks' fight against inflation and financial stability. Referring to ECB President Lagarde's press conference this week, they disagree though.
Emerging Markets
2008 vs. 2023? Emerging Markets Are Better Prepared (Wells Fargo) - Fifteen years ago—March 2008—new stresses in the global financial system were uncovered. Here we are in March 2023, and new challenges to the global banking system have revealed themselves. New exogenous shocks mean we need to assess vulnerabilities in our sectors, which in this case, are the emerging markets. According to our framework, on balance, vulnerabilities within the emerging markets have lessened since the 2008 Global Financial Crisis. Reduced imbalances can support emerging market currencies should another global banking crisis indeed materialize. While depreciation of emerging market currencies would likely still be significant, improved fundamentals can result in more contained selloffs.
Energy
Crude Oil Outlook: Is It Time to Worry? (BMO) - While it’s probably not time to push the panic button yet, the oil market is likely going to remain on shaky ground for the rest of the year. This explains why we had already revised our 2023 projection for WTI down to $85/bbl (from $90) just prior to the banking fallout. Events over the last week underscore that risks are still tilted to the downside.
Markets
Central Banks' rapid rate moves begin to cause turbulence (DWS Group) - Market confidence has been severely shaken by bank collapses in March. How much of the recent GDP growth scare will stick remains to be seen.
March Breaks (BMO) - Equity markets endured a volatile week amid ongoing trouble in the bank sector. The S&P 500 finished up 1.4%, as sharp rallies in technology and telecom services outweighed another slide in financials. Lower bond yields fueled higher-beta stocks despite trouble elsewhere. The TSX, however, was down 2% as banks and energy weighed heavier. Last week’s failures of Silvergate and Silicon Valley Bank spread to others like First Republic, but actions by the FDIC, Federal Reserve and a liquidity infusion from a group of large banks helped stem more widespread fallout.
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