Germany's CPI Report Dampens Optimism on Inflation
Economic news and commentary for June 29, 2023
Germany CPI
After an encouraging report from Italy, Germany's Consumer Price Index report has cast a shadow over the economic mood. In June, the CPI in Germany grew by 0.3% MoM and 6.4% YoY, marking an increase from the 6.1% YoY recorded in May. Interestingly, this headline inflation rate aligns with Italy's rate, despite Italy experiencing a substantial deceleration. The key difference lies in energy inflation, as Germany saw an increase of 3.0% YoY compared to the previous figure of 2.6% YoY, while Italy faced energy deflation in June. The positive aspect is that food inflation in Germany is on a downward trajectory, with four consecutive months of deceleration. In June, food inflation stood at 13.7% YoY, down from 14.9% YoY in the previous period, and a significant drop from the 22.3% YoY recorded at the end of the first quarter of 2023.
However, core CPI inflation in Germany has ramped up to 5.8% YoY from 5.4% YoY, indicating little progress on core inflation since the first quarter. The concerning aspect is the negative progression in services inflation, as the annual rate of consumer services prices climbed back above 5% to 5.3% YoY. This figure is higher than the 4.8% YoY recorded at the end of Q1. Destatis, the Federal Statistical Office of Germany, attributes this anomaly to a base effect resulting from the availability of the 9-euro ticket from June through August 2022.
The report challenges the notion that the European Central Bank (ECB) has successfully addressed persistent inflation in the Eurozone. The reversal in services inflation suggests that wage growth has likely not declined significantly in Q2, indicating that labor market tightness remains unchanged. If Italy's CPI report from yesterday argued against three more rate hikes, Germany's CPI report today provides an argument for at least 75 basis points of tightening. The contrasting trends in these two major Eurozone economies highlight the complexities and challenges faced by the ECB in managing inflationary pressures.
Still to come…
10:00 am (EST) - US Pending Home Sales Index
10:30 am - US EIA Natural Gas Report
4:30 pm - US Fed Balance Sheet
7:30 pm - Japan Unemployment Rate
7:50 pm - Japan Industrial Production
9:30 pm - China CFLP Composite PMI
Morning Reading List
Other Data Released Today
Japanese retail sales increased 1.3% MoM and 5.7% YoY in May, up from 5.1% YoY in April. Services spending is falling quickly. Up just 2.0% YoY in May, down from 15.4% YoY in March. Lowest spending since September 2022.
The net flow of sterling money (known as M4ex) decreased to -£4.6 bil in May, compared to £6.8 bil in April. This was mainly driven by the decrease in the net flow of households’ holdings of money (-£4.6 bil).
The EU Economic Sentiment Indicator fell -1.1 pts to 94.0 in June. The Employment Expectations Indicator edged up 0.4 pts to 104.3. Consumer confidence continues to improve, up 1.1 pts to -17.2, the highest level since early 2022.
US
US | Markets have come round to the view that the Fed will not cut rates this year (BBVA) - Earlier this month, FOMC members voted unanimously for a skip rather than a longer pause with recent indicators suggesting that economic activity has continued to expand at a modest pace.
The Fifth District Labor Market: Normalization or the Beginning of a Slowdown? (Richmond Fed) - Reports from employers in the Fifth Federal Reserve District have been similarly strong, but with signs of slowing in hiring. At the very least, our surveys of manufacturers and service providers indicate cooling in what has been a red hot labor market.
Right place, right time: Supply chain outlook for third quarter 2023 (S&P Global) - Supply chains are almost back to normal in terms of activity, inventories and seasonality. Yet, there are plenty of uncertainties in both the government policy and physical risk heading into the second half of 2023 as firms start to implement long-term supply chain restructuring plans.
A wind of economic optimism (EY Parthenon) - It’s not just the summer vibes; the US economy is genuinely displaying signs of resilience. This is leading many to rightly question whether the long-forecast recession is truly inevitable, or whether a soft landing of the economy – where inflation falls to a sustainable 2% pace without a recession – is possible. Economic data has been tilted to the upside recently, and even sectors that are generally considered more interest-rate sensitive have outperformed relative to expectations.
“Give Me Some Credit!”: Using Alternative Data to Expand Credit Access (Kansas City Fed) - Fintechs, credit bureaus, and financial institutions are collecting alternative data to develop new scoring models that supplement traditional credit reports. Studies, providers, and pilot programs suggest that these alternative data can improve credit reporting and thereby expand access to fair credit. However, use of alternative data is still low due to both uncertainty about the benefits relative to the cost and consumer concerns about use and privacy.
Immigration and U.S. Labor Market Tightness: Is There a Link? (St Louis Fed) - As of April 2023, the job vacancy rate was 6.1%, which means that 6 out of every 100 jobs in the U.S. were unfilled. The vacancy rate is a key measure of labor market tightness, and it remains substantially elevated relative to its pre-pandemic level. In 2019, it averaged around 4.5%.
Europe
Spanish inflation falls below 2% for the first time in two years (ING) - Spain's inflation outlook improved further in June. Headline inflation fell below 2% for the first time since March 2021. However, inflation is expected to pick up in the second half of the year due to several factors, including higher oil prices and the fading of favourable base effects.
The irony of the financial system’s largest ‘known unknown’ (ING) - Regulation helped Non-Bank Financial Institutions surpass banks in size. They are an increasingly important competitor, source of funding and client to banks. But their vulnerability and lack of transparency create the largest "known unknown" risk for the banking sector. Regulation will take time. Meanwhile, central banks may be forced to help out.
Canada
Insights on inflation in Canada (CIBC) - In 2022, the annual growth in the Consumer Price Index (CPI) rose to a 40-year high of 6.8%. While year-over-year growth in the CPI has subsided since then, it remains higher than what has been experienced in Canada on average over the past four decades. This increase in the CPI—which captures the cost of a fixed basket of goods and services relevant to Canadian consumers—reflects inflationary pressures occurring broadly across the economy.
Trade Makes Canadian Inflation Go Round (TD Bank) - The structural shift to bring global production closer to home will have a long-lasting effect on Canadian inflation. While global trade acted as a disinflationary force for many years, its influence has waned following the Global Financial Crisis. U.S.-China trade tensions, the pandemic, and Russia’s war in Ukraine have accelerated this trend.
Turkey
Cold Turkey (Wells Fargo) - Recent cabinet appointments introduced the possibility of Turkish economic and monetary policy shifting in a more orthodox direction; however, actions speak louder than words, and the latest interest rate decision and forward guidance from the Simsek-Erkan duo has left markets uninspired. A modest rate hike and forward guidance for gradual policy adjustments has introduced the possibility that Simsek and Erkan may not operate as fully independent central bankers.
Real Estate
Supply-Chain Issues Lengthened Single-Family Build Times in 2022 (NAHB) - The 2022 Survey of Construction (SOC) from the Census Bureau shows that the average completion time of a single-family house is around 9.6 months, including a little over a month from authorization to start and another 8.3 months to finish the construction.
Single-Family Building Focused around Baby Boomers: Multifamily is Millennial Focused (NAHB) - NAHB analysis of county level permit data and demographic data indicates that single-family home building in the first quarter of 2023 is occurring mostly in counties where baby boomers make up a majority of the population.
FX
De-dollarization? No so fast… (Allianz) - Recent efforts by some emerging market (EM) countries to diversify their currency reserves away from the US dollar have raised questions about the beginning of the end of USD dominance. However, the dynamics affecting the US dollar’s role as reserve currency are far more intricate than official statistics suggest and any material decline in the role of the US dollar in global finance will take much longer than current headline news on de-dollarization insinuate.
Commodities
Gold faces challenges amidst the backdrop of rising real yields (Saxo Bank) - Gold continues to struggle, and by now the drift lower from the early May record high has seen it reach the lowest level in more than three months. Driven by US economic data strength supporting the hawkish stance laid out by the FOMC at their June meeting. Hikes that support the markets current belief the FOMC will be succesful bringing inflation under control, a situation that is driving inflation adjusted yields higher, thereby reducing the appeal of non-interest paying gold.
Grain rally curbed on weather outlook and speculative retreat (Saxo Bank) - The grain market rallies this past month are showing signs of pausing as weather developments in some key growing are turning less hostile with rain finally beginning to ease yet elevated concerns about this year's production outlook. In addition, we are seeing reduced pressure from speculators, who following a three-week period of aggressive buying have managed to turn positions around to reflect the current outlook.
Outlook
Global Economic Outlook: Hawk-Eyed (Northern Trust) - Despite widespread pessimism on prospects for major economies, growth has remained resilient. That is the good news; the downside is that inflation has also remained strong in spite of tightening monetary settings. Private sector balance sheets remain healthy. Tight labor markets on both sides of the Atlantic are fueling wage gains and underpinning spending.
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