Germany ifo Index Points to Further Stabilization in Economic Expectations
Economic news and commentary for March 27, 2023
Germany Ifo Business Climate Index
The German Ifo Business Climate Index grew 2.2 pts to 93.3 in March. This is the 5th straight increase. This upward development was driven primarily by business expectations; companies also assessed their current business as somewhat better. Despite turbulence at some international banks, the German economy is stabilizing. The Business Expectations Index increased 1.8 pts to 91.2 which is a 15.2 pts increase from the trough set in expectations back in September 2022. The Business Situation Index has been more stable in that period and also increased in the month, up 1.5 pts to 95.4. The breakdowns by sector show that there have been strong recoveries in the manufacturing and service sectors since weakness developed in Q4 2022. The indexes for both saw significant increases of 5.1 pts (to 6.6) and 7.6 pts (to 8.9) respectively.
In manufacturing, the improvement in sentiment was noted in key industrial sectors, automotive, chemical, electrical and electronics, and machinery and equipment, which is great news for Q1 growth prospects in Germany as firms are finally beating supply chain pressures and cooling inflation. Despite the improvement in these areas, tighter financial conditions are going to be an emerging issue constraining growth for these companies, but manufacturing firms are in a better financial position to cope with these gradual changes that have been guided by the ECB than the sudden sharp inflation that proved to be debilitating in 2022. The services sector is seeing even stronger optimism as its expectations index rises to the highest value since February 2022. Firms are apparently expecting sales revenue to continue to increase despite the ECB constraining financial conditions at the sharpest rate in its history. This isn’t really a new development as there have been many reports demonstrating the service sector’s outperformance. Just add this to the evidence pile supporting the perspective that sticky services inflation will become a problem in Europe as it has in the US and the UK.
In general, it looks like the German economy has stabilized from recession worries at the turn of the year. The main sector that is weighing on the economy is the construction sector where capital investment is being constrained by the new rise in interest rates. The construction Ifo index remains at a depressed -17.9, though it is about 6 pts from its October 2022 trough. Strength in manufacturing and services should offset this weakness, however, and we could see slight or no growth in Q1 2023 after Germany ended 2022 in the red.
Still to come…
10:30 am (EST) - US Dallas Fed Manufacturing Survey
8:30 pm - Australia Retail Sales
Morning Reading List
Other Data Releases Today
The euro area M3 money supply increased 2.9% YoY in February, down from 3.5% YoY in January. The M1 money supply fell -2.7% YoY. Household loan growth was 3.2% YoY (down from 3.6% YoY), and non-financial firm loan growth was 5.7% YoY (down from 6.1% YoY).
The UK CBI Distributive Trends Survey Retail Sales Volumes index edged down from 2% in Feb to 1% in Mar and is expected to be 9% in April. The Suppliers’ Orders index increased from -25% in February to -2% in March and is expected to be 0% in April.
ECB Money Supply
Eurozone bank lending dampened by ECB’s monetary tightening (ING) - Bank lending to corporates fell again in February, while growth in household borrowing is still on a downward trend. Expect weakness in lending to continue as the effects of European Central Bank hikes work their way through the system. The risk of contraction on the back of monetary tightening in the eurozone remains significant.
Germany Ifo Business Climate Index
German Ifo continues upward trend (ING) - Another improvement in sentiment in the German economy as the Ifo index increased for the sixth month in a row in March. However, we fear that the latest financial turmoil will reach the real economy in the coming months.
US Durable Goods Orders
Durable Goods Orders Slip, Downside Risk to Q1 Equipment Spending (Wells Fargo) - Durable goods orders slipped again in February, and the trend in core capital goods orders is growing less favorable. Rapid Fed tightening, the pull back in lending standards and increased economic uncertainty are unfavorable conditions for new capital investment.
New Orders for Durable Goods Declined 1.0% in February (First Trust Portfolios) - There isn’t much to like in the February report on durable goods, where orders declined across nearly every major category, prior month activity was revised lower, and core shipments – a key input for business investment in the calculation of GDP – were unchanged.
Discordant Durable Goods (BMO) - The cumulative 475 bps of Fed rate hikes and tightening lending standards are weighing on durable goods, even before the recent banking stress that flags tighter credit. We look for overall business investment to barely rise in Q1 before turning negative in Q2.
US
(Credit) Crunch Time for the Economy? (BMO) - The banking sector stress in the past two weeks has clearly ratcheted up the risks for the broader economic outlook. At a minimum, it will reinforce the ultra-aggressive central bank tightening of the past year. Quantifying the impact in these early days is next to impossible given that: a) no one can say for certain whether the squall will soon blow over or intensify; and b) the transmission of financial system strains to the economy is imprecise.
Nonresidential construction spending is likely not as weak as it seems (Federal Reserve) - Unlike any other major component of GDP, private investment in nonresidential structures excluding drilling and mining (henceforth "NRS") has steadily declined since the start of 2020.
The Dark Side of the Boom (BMO) - Markets are on the backfoot again amid ongoing contagion concerns from the rapidly morphing banking sector stresses. The focus returned to Europe on Friday, with the big German banks coming under the spotlight of sellers. While broader equities are struggling to find direction, bond yields are having no such doubts as they drive relentlessly lower. In little more than the short span of just two weeks, two-year Treasury yields have cascaded down by almost 150 bps.
US Banks: The good and the bad (ING) - Emergency Fed support for banks is at Great Financial Crisis proportions on some measures. Deposit flight from smaller banks remains a worry to boot. It should not be, but is. That said, there is wider evidence pointing to no material rise in angst at a regional level in the past week. It's early days, and things can still turn sour. But a silver lining it is.
Federal Reserve Hikes the Fed Funds Rate by 25 bps (Wells Fargo) - The FOMC hiked the federal funds rate by 25 bps on Wednesday amid continued strength in the labor market and elevated inflation. However, the Committee noted that recent financial system stresses have created considerable uncertainty in the economic outlook and, by extension, the monetary policy outlook.
The Fed Faces Its Trilemma (Northern Trust) - The fallout from SVB will make the Fed's job more difficult.
Real Wage Growth at the Individual Level in 2022 (St Louis Fed) - With consumer price index (CPI) inflation reaching almost 9% and average nominal wage growth soaring to 6.4% during 2022, many households experienced both rising wages and a rising cost of living, which was documented in “Nominal Wage Growth at the Individual Level in 2022,” our first blog post in this two-part series. The difference between these two values determines real wage growth, which has been consistently positive over the last decade but dipped into negative values in early 2021 and throughout 2022.
Europe
The Consequences of Credit Suisse (Northern Trust) - In the aftermath of the collapse of Silicon Valley Bank (SVB), Credit Suisse (CS) swiftly became a point of concern last week. A resolution has been put into place, but the situation could reverberate in the coming weeks and months.
Eurozone flash PMI signals faster than expected growth in March (S&P Global) - Eurozone economic growth accelerated to a ten-month high in March according to the latest flash PMI survey data, adding to signs that the economy is reviving after falling into decline late last year. Inflationary pressures have meanwhile continued to moderate, with input prices even falling sharply in manufacturing. Jobs growth has also accelerated and business confidence in the outlook has remained resilient despite concerns stemming from recent banking sector stress and higher borrowing costs.
European banks are under pressure as funding costs soar (Saxo Bank) - In today's equity today we focus again on European banks which are down 5% led by Deutsche Bank as CDS prices have getting repriced higher and AT1 bond yields sit at 12% far exceeding the return on equity. This means that the AT1 capital market is at this point not a viable funding source for banks and thus common equity must be raised over time which will be dilutive for shareholders. The banking crisis is far from over and the impact on credit conditions and the economy will likely be felt over the next six months.
UK economic resilience in March signalled by flash PMI (S&P Global) - With the flash PMI surveys signalling a second month of rising output in March, the UK economy looks to have returned to growth in the first quarter. The surveys are broadly consistent with GDP growing at only a modest quarterly rate of 0.2%, but this represents a welcome expansion compared to the lack of growth seen in the second half of last year.
Canada
Retail Sales Kick Off 2023 on a High Note (TD Bank) - Retail sales rose by 1.4% month-on-month (m/m) in January, well ahead of Statistics Canada's advanced estimate for 0.7% gain. Adjusting for the impact of inflation – which eased on the month – the volume of sales was up 1.5%. However, December's print was revised lower from 0.5% gain to essentially flat performance.
A Sunny January, but Clouds on the Horizon (BMO) - Retail sales jumped in January, supported by strength in autos and higher gas prices. However, negative flash estimates for February suggest the momentum faded quickly.
Canadian retail (Jan, Feb adv): An impressive start to the year (CIBC) - Retail sales in volume terms posted a healthy gain in January, and while advance estimates for February, including for manufacturing and wholesale sales, suggest at least some payback, this morning's data indicate slightly stronger GDP growth in the first quarter than previously expected.
What to Watch to Assess the Impact on Canada (BMO) - We’re going to be watching the data closely for any signs that the banking stress is impacting the macro backdrop in Canada. The Bank of Canada will be doing the same, which suggests it will keep policy rates comfortably on hold through at least April assuming a deeper crisis is avoided.
Inflation
Commodities down amid market turmoil (S&P Global) - The Material Price Index (MPI) by S&P Global Market Intelligence decreased 0.1% last week, re-establishing downward momentum after two consecutive increases. The fall was broad with seven of the ten subcomponents declining. The MPI sits 29.4% lower year on year (y/y) which was the all-time peak. Prices, however, remain far higher (40%) than the pre-pandemic levels of the fourth quarter 2019.
Monetary Policy
Not Yet Time to Batten Down the Hatches (BMO) - If it wasn’t for the current banking turmoil, I shudder to think how many rate hikes markets would be pricing in... globally. Let’s summarize the decisions made after the SVB news ripped through social media at top speed.
Central banks hold steady course despite banking jitters (Danske Bank) - After ECB remained in tightening mode last week, also the Federal Reserve chose to
hold a steady course this week and hiked policy rates by 25bp. That said, both the
statement and Fed chair Powell's comments were tilted to the dovish side.
From inflation to financial stability… and back again? (Nordea) - With banking sector stress, markets consider fewer rate hikes will be necessary. Not because inflation is gone, but because tighter lending standards will do some or all of the job. If banking stress recedes, more rate hikes may be needed after all.
Energy
Oil price developments and Russian oil flows since the EU embargo and G7 price cap (ECB) - New sanctions on Russia’s oil exports have come into effect in recent months, including EU bans on seaborne oil imports from Russia and price caps on Russian oil in response to Russia’s continuing war of aggression in Ukraine.
Debt
Assessing the debt market fallout from banking sector instability (S&P Global) - The regulatory intervention of Silicon Valley Bank stopped corporate and financial sector issuance altogether for four working days. However, the market reopened on March 17 with a sub-investment grade deal, when Norway's PGS AGA sold a USD450 million USD450 million senior secured junk bond. Pricing was set at a 13.5% coupon, with a 98% issue price. PGS is an Oslo-listed (and based) marine geophysical company primarily providing seismic and reservoir services to the oil and gas sector.
Outlook
International Economic Outlook: March 2023 (Wells Fargo) - The outlook for global activity continues to improve. We now forecast global GDP growth of 2.2% for this year (up from 2.0% a month ago), implying that we no longer forecast the global economy to slip into recession in 2023. Among the countries and regions we have revised our 2023 GDP growth outlook higher over the past month are the U.S. (to 1.0%), China (to 5.5%), and the Eurozone (to 0.3%).
GDP growth in sub-Saharan Africa likely to slow in 2023 (S&P Global) - Inflation is expected to remain elevated longer in Sub-Saharan Africa than in other regions. In line with the global trend, central banks of major African economies including South Africa, Nigeria, Ghana, and Kenya tightened their monetary policies in 2022, leading to higher interest rates. Interest rates are, nonetheless, expected to decline in Angola, Ghana, Mozambique, and Uganda during the second half of 2023.
Inflation data in focus post the Fed FOMC meeting (S&P Global) - After the Fed meeting and March flash PMI releases, a series of economic data takes over as the highlights to watch amid increasing financial market stress. This includes the US core PCE data, eurozone inflation and early PMI figures out of some APAC economies. A number of central bankers will also be making appearances across the week, including Fed members, and their comments are expected to be closely watched for further insights into how financial stability could detract from the inflation focus.
Research
Gender Gaps in the Labor Market Widen Every Summer (Federal Reserve) - Gender gaps in labor market activity are pervasive, longstanding, and a regular subject of policy debates. Relative to men, women tend to work fewer hours per week, more conventional hours, and fewer years over the course of their lives. These differences in the intensity and timing of work contribute to gender disparities in promotions and pay.3 But despite decades of research on this topic, little attention has been paid to the timing of work throughout the year.
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