Germany and Japan Report Weak Exports in March
Economic news and commentary for May 22, 2023
German Non-EU Exports & Japanese Machinery Orders
Despite today being a relatively quiet day for major economic data, there were a few points of note. Japanese machinery orders fell -2.8% MoM in March which led to an -8.7% QoQ decline in Q1 2023. However, the decline was caused by a -21.4% QoQ decline in foreign orders in Q1 which offset the 7.1% QoQ increase in private domestic orders. Foreign machinery orders were down -13.7% YoY, and the forecast for the next quarter has foreign orders down -22.0% YoY by the end of Q2. The data here demonstrate the difference between the Japanese economy and other developed economies. On the other side of the world, Germany’s Destatis announced that German exports to non-EU nations fell -5.7% MoM and -2.0% YoY to €56.5 billion in April as its own export market continues to suffer from weak demand from its trading partners.
There’s a common theme in these releases (surprise, I have not chosen them randomly) in that both point to a significant decline in global trade that is developing in 2023. Germany and Japan both have a relevant machinery export sector and have been affected by their developed market trading partners feeling the economic drag from interest rate hikes in those respective countries. On top of that, the pandemic has led to new trends toward protectionism which is likely to have downward pressure on exports in the mid-term. Because exports can be an important source of economic growth for major exporters, the downward trend in exports and trade, in general, will have a cooling effect on growth and, on a more positive note, inflation. From that, manufacturing sectors will also look to cut down on excess capacity which is a trend that we have already seen in manufacturing PMIs.
Still to come…
10:00 am (EST) - EU Consumer Confidence Flash
Morning Reading List
Other Data Releases Today
Euro area construction production fell -2.4% MoM and -1.5% YoY in Mar.
Building construction fell -2.4% MoM, and civil engineering fell -2.3% MoM.
Canada Retail Sales
Putting That Shopping Spree on Hold (BMO) - Retail sales fell in March, weighed by drops in both autos and gasoline. The decline was smaller in volume terms, and still results in a solid increase for the first quarter. More broadly, consumer spending looks to be losing momentum heading into Q2.
Canadian retail (Mar, Apr adv): Slight cracks starting to show (CIBC) - Although spending on services is likely to have held up better, a softening trend in retail sales volumes towards the end of Q1 is a sign that perhaps the Bank of Canada simply needs more patience, rather than more interest rate hikes, in its quest to bring inflation back down to target.
US
Measuring the Natural Rate of Interest: Past, Present, and Future (John Williams, New York Fed) - John C. Williams, President and Chief Executive Officer of NY Fed Remarks at the Thomas Laubach Research Conference, Board of Governors of the Federal Reserve System, Washington, DC. As prepared for delivery.
US debt ceiling standoff: What you need to know (S&P Global) - On May 12, the Congressional Budget Office stated that the US government will likely run out of funds during the first two weeks of June. This follows a letter from Treasury Secretary Janet Yellen to congressional leaders that the federal government could run out of funds to pay existing commitments ''potentially as early as June 1'' because of lower-than-expected tax receipts.
Employment Situation in April: State-Level Analysis (NAHB) - Nonfarm payroll employment increased in 36 states in April compared to the previous month, while 14 states and the District of Columbia lost jobs. According to the Bureau of Labor Statistics, nationwide total nonfarm payroll employment increased by 253,000 in April, following a gain of 165,000 jobs in March.
U.S. Economy: April Flowers (BMO) - This week’s data releases suggest the U.S. economy is still plodding ahead. April retail sales showed surprising strength in the ‘control’ metric used to measure personal goods spending. Barring weakness in services, real consumer spending looks to have risen for the first time in three months. Still, disappointing earnings reports from Home Depot and Target suggest all is not well in consumer land.
Recession Is Taking Its Time (Wells Fargo) - Economic data continue to suggest the U.S. economy is only gradually losing momentum. Consumers continue to spend, and industrial and housing activity are seeing some stabilization. We still view a recession is more likely than not by year-end, but there is no denying the underlying resiliency evident in the data.
LEI: Who You Gonna Believe, Me or Your Lying Eyes? (Wells Fargo) - April marks the 10th month in which the six-month average change in the Leading Economic Index has been below a key recession threshold. The warnings may land a little flat amid a run of decent labor and consumer data, but history is on the side of the LEI.
Roundup: Shipping Prices, the COVID-19 Shock Globally, and Teen Workers (St Louis Fed) - Today, we want to highlight some research recently produced by the St. Louis Fed that you may have missed. The following work was published in the Review and featured in the FRED Blog.
Europe
Service sector drives growth in Spain as divergence with manufacturing widens (S&P Global) - With Spain continuing to spearhead the wider Eurozone recovery, we take a deeper dive into the country's latest HCOB PMI data, which is compiled by S&P Global. By its own historical standards, growth in the Spanish private sector over the past three months has been marked and a stark contrast to the weakness seen in the final quarter of 2022.
China
China's Goal: Boosting Tech, Not Growth (BMO) - A weaker-than-expected set of data released over the past couple weeks (e.g., industrial production, fixed investment and CPI) has highlighted that China’s economic recovery remains far from robust. This has led to a growing chorus of calls by Chinawatchers for authorities to provide greater fiscal and monetary stimulus. However, we would not count on such a policy prescription being implemented. It’s quite evident that boosting headline GDP growth is no longer the top priority in Beijing.
The View From China (Northern Trust) - China was first into the pandemic and the last one out. The outbreak prompted an aggressive response: lockdowns, contact tracing and forced quarantine for the sick were applied everywhere the virus appeared. China was slower than other countries to initiate vaccination, and when they did, their vaccines proved to be less effective.
China Economic Update – May 2023 (NAB) - A range of media reports in the early months of 2023 have touted an apparent rebound in China’s property sector. Recent years have been particularly challenging for the industry – facing the negative impacts of regulatory changes and COVID-19 constraints – culminating in a sharp slowing in property sales, construction activity and the collapse of several property developers.
Canada
Squeezing on the balloon (CIBC) - The hyper focus on every twitch in the CPI these days extends well beyond the handful of time series we used to look at. Now everyone seems to be peddling their own core, supercore, super-duper core measure that supposedly tells the real story. But when we’re asked which of these one should look at, we’re not being glib when we give our answer: all of them. And that has to include the so-called “headline CPI”, or what these days would be known as CPI excluding nothing.
It Ain’t Over ’til the Fat Core Slims (BMO) - Forget about rate cuts later this year—the bigger risk is that many central banks will still be hiking in the months ahead. Bond markets on-boarded that growing reality this week, driving yields aggressively higher across the curve to levels not seen since SVB collapsed 10 weeks ago. To pick but one example, two-year Treasuries rocketed 25 bps to around 4.25%, even with a partial reversal on Friday (on indications the debt ceiling talks were suddenly at an impasse).
No, Rate Hikes Are Not Causing Inflation (BMO) - Here’s a question that was submitted multiple times this week: Since higher mortgage costs and rent are driving up CPI, are rate hikes inflationary? No. What we’re seeing in the CPI right now largely relates to the mechanics of how housing costs filter into inflation, and some other fundamental factors like surging rental demand.
Mexico
Mexico | Lower oil-related income affects public revenue in the first quarter (BBVA) - Public revenue in the first quarter was MXN 117,486 million (0.4% of GDP) below budget due to lower oil-related income as international prices of a crude oil barrel went down.
Mexico's Monetary Tightening Comes To An End (Wells Fargo) - Mexico's central bank has been among the most hawkish in the world during the global tightening cycle, though with its decision to hold its Overnight Rate at 11.25% this week, we can confidently say that Mexico's rate hike cycle has come to an end. That said, Banxico signaled its policy rate will need to be maintained at its current level for an extended period, suggesting not only a hawkish hold but also suggesting rate cuts will not begin until next year.
Hong Kong
Hong Kong Struggles To Balance East And West (Northern Trust) - Hong Kong has earned some unenviable headlines in the last four years, from unrest triggered by the National Security Law to the city’s stringent COVID control measures. Bad news continues to pile on for the city, most recently in currency markets.
Real Estate
Custom Home Building Contracts (NAHB) - NAHB’s analysis of Census Data from the Quarterly Starts and Completions by Purpose and Design survey indicates custom home building gained market share during recent quarters but experienced a notable drop for construction starts at the beginning of 2023.
Existing Home Sales Move Down in April: Low Inventory and High Mortgage Rates Continue to Constrain Resales (Wells Fargo) - Existing home sales retracted 3.4% to a seasonally adjusted pace of 4.28 million in April, the second consecutive monthly drop. Higher mortgage rates in February and March likely put a dent in resale demand in April. After falling to 6.1% in late January, the average 30-year mortgage rate climbed back up to 6.7% by the first two weeks of March.
Financial Regulation
Global | Financial Regulation: Weekly Update. May 19, 2023 (BBVA) - In this publication you will find, on a weekly basis, our selection of the most relevant news regarding financial regulation.
Outlook
Commercial Real Estate Outlook (BMO) - Commercial real estate (CRE) markets will continue to diverge by segment this year. The two sectors that flourished during the pandemic—industrial and multi-family housing—have slowed but should weather the expected mild economic downturn reasonably well. Retail faces a deeper chill as consumer spending will weaken in response to high interest rates and tighter lending conditions. The office segment will struggle the most, as a soft macro climate will compound the challenge from hybrid work.
A Constructive Outlook (Northern Trust) - The global financial crisis cast a lingering shadow over residential investment. Since 2020, the rapid runup and subsequent flattening of house prices raised worries of another cycle of housing stress. But those concerns may be overdone. More construction is needed.
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