India and Germany Inflation Reports Show Deflation
Economic news and commentary for August 14, 2023
No major data releases today.
Both India and Germany confirm deflationary trends in the former’s CPI and Wholesale Price Index and the latter’s wholesale prices report. However, in India, there was a strong surge in food prices due to supply disruptions caused by bad weather conditions. The Consumer Food Price Index jumped 6.7% MoM and 11.5% YoY in July (previously 4.6% YoY) and the Food Index of the Wholesale Price Index grew 7.1% MoM and 7.6% YoY (previously -1.2% YoY). The Reserve Bank of India acknowledged this volatility in its August Monetary Policy Statement.
Still to come…
7:50 pm (EST) - Japan GDP
9:30 pm - Australia Wage Price Index
10:00 pm - China Fixed Asset Investment
10:00 pm - China Industrial Production
10:00 pm - China Retail Sales
Morning Reading List
Other Data Releases Today
India's Wholesale Price Index grew 2.0% MoM but was down -1.4% YoY in July, up from -4.1% YoY in June.
Food: 7.8% YoY (7.1% MoM)
Fuel & Power: -12.79% YoY (-0.48% MoM)
Manufactured Products: -2.5% YoY (-0.3% MoM)
India's inflation grew 2.9% MoM to 7.4% YoY in July, up from 4.9% YoY in June.
Food: 11.5% YoY (6.7% MoM)
Fuel & Light: 3.7% YoY
Household Goods & Services: 5.2% YoY
Housing: 4.5% YoY
Clothing: 5.6% YoY
German wholesale prices fell -0.2% MoM and -2.8% YoY in July, up from -2.9% YoY in June. Mineral oil product wholesale prices were down the most at -20.8% YoY. Metals (-18.3% YoY) and chemicals (-16.5% YoY) are both down as well.
US PPI
The Producer Price Index (PPI) Rose 0.3% in July (First Trust Portfolios) - Producer prices rose 0.3% in July, and continue to show the inflationary battle taking place between a weakened goods sector and a service sector where prices keep forging ahead. As you can see from the nearby chart, the year-ago comparison for producer prices, now up 0.8%, has fallen considerably since the 11.7% peak in March 2022.
Price Growth of Key Building Materials Moderates Further (NAHB) - According to the latest Producer Price Index report, the price level of inputs to residential construction less energy (i.e., building materials) edged up 0.2% in July (not seasonally adjusted). Building materials price growth has slowed considerably in 2023 with an average monthly increase of 0.2%–down from 0.7% in 2022 and 1.5% in 2021. Not since prior to the COVID-19 pandemic has the average been lower (0.0% in 2019).
US Consumer Sentiment
Sentiment Steady as Inflation Expectations Cool (Wells Fargo) - Consumer sentiment did not move materially in August. Consumers see prices broadly heading lower even as they expect interest rates to continue to rise. One factor that could disrupt the expectations around prices would be if the recent surge in gas prices does not reverse course.
US
Sticky inflation and earnings next week (Saxo Bank) - While yesterday's inflation did little to move markets as the headline and core inflation in the US for July came in as expected. However, looking at the stickier parts of the inflation report including the services CPI excluding energy are still underscoring that inflation is not under control.
More room for Fed flexibility as US inflation fears recede (ING) - Thursday's CPI report offered hope that inflation is moving in the right direction, while PPI suggested pipeline price pressures remain modest. The University of Michigan sentiment index indicates households are less fearful of inflation so the past two days of data offer reasons for optimism that the Fed doesn't need to hike interest rates further.
U.S. Household Finances in Good Shape, But... (BMO) - Slowing credit growth and some fraying in household finances suggest the Fed may want to think twice about the risk of overtightening policy.
The Great Remote Work Debate (Northern Trust) - COVID-19 completely transformed the way we work. During the early phase of the pandemic, firms and workers were forced to remain distant from one another. A hybrid model then emerged as public health normalized. Remote work has evolved from a survival tool to a normal part of the professional experience. But in many locations, the balance of time spent at home and in the office is still in flux.
Inflation Continues to Ease (Wells Fargo) - Price pressures in the U.S. economy continue to subside. During July, both the headline and core Consumer Price Index (CPI) rose 0.2%. On a year-over-year basis, the core CPI was up 4.7% in July. Recent signs have been more encouraging, with core CPI running at a 3.1% three-month annualized pace. Furthermore, July's Producer Price Index (PPI) and NFIB Small Business Optimism Index also suggest that underlying inflation is dissipating.
Macro & Markets: Soft landing dreams (Nordea) - With fading recession risks investors have increased the odds of a soft landing. Disinflation is likely to continue in the coming months, but with economic momentum, benign disinflation can quickly turn into malign inflation.
Stagflation: the revival of Treasury Inflation-Protected Securities (TIPS) (Saxo Bank) - As inflation remains elevated and the economy stagnates, Treasury Inflation-Protected Securities (TIPS) provide a hedge against stagflation. We remain cautious, favoring quality and short duration. At the same time, we believe long-term rates are poised to rise further, with 10-year yields likely to test their November's high at 4.31%. Overall, we continue to favor steepeners.
Dog Days of Cycle (BMO) - Prospects of a soft-ish landing were handed some reinforcement by the mild U.S. CPI for July, as it showed that core inflation is indeed cooling even as the jobless rate stays low at 3.5%. Still, the debate remains open amid a somewhat heavier PPI, rising oil prices, a renewed back-up in bond yields, and a struggling Chinese economy.
Putting Young People To Work (Northern Trust) - In country after country, labor markets are struggling to put young people to work. The International Labor Organization (ILO) reports a global youth (age 15-24) employment-population ratio (EPR) of 34.5% in 2022, 0.7 percentage points below its 2019 level. While lower employment among people with less skills or still in school is not surprising, the gap can be disconcerting.
Industrial Policy Is Back (Northern Trust) - Governments around the world are presently leading the way in promoting energy transition, creating more secure supply chains, and supporting the application of artificial intelligence. As an example, legislation passed in the United States during the past two years offers incentives to broaden the market for electric vehicles, produce energy from alternative sources and improve broadband access across the country. This week’s executive order prohibiting U.S. firms from investing in Chinese providers of advanced computing is the latest step in the battle for primacy in that space.
Europe
Europe | European banking holds its ground (BBVA) - At the end of July, the European Banking Authority (EBA) published the results of its stress test on European banks. The aim of these tests is to assess the resilience of the institutions in the event of a severe recession scenario.
China
The China Syndrome (CIBC) - The 1979 Jane Fonda flick, “The China Syndrome”, depicted a fictional meltdown of a nuclear reactor, not the recent
meltdown of China’s economic recovery. A host of indicators have confirmed that the Middle Kingdom’s post-lockdown spurt has given way to little if any momentum. How worried should commodities markets be, particularly those that feasted on Chinese demand gains in prior decades?
Turkey
Türkiye | Strong acceleration in 2Q (BBVA) - Industrial production (IP) increased by 1.6% m/m in seasonal and calendar adjusted series, resulting in the 2.3% q/q acceleration of activity in 2Q (vs. 0.5% q/q in 1Q). We expect GDP growth to be 4.5% in 2023 thanks to the strong growth pattern in 1H23, especially considering the soft landing scenario.
Argentina
Argentina Primary Election Scenario Analysis (Wells Fargo) - Argentina will host primary elections (PASO) this weekend, with the outcome offering a potential sea change for the country's economic prospects. In Argentina, voting in the PASO election is mandatory. Compulsory voting allows financial markets to get clear insight and visibility into the direction of policy ahead of official presidential and legislative elections in October. If ever an economy need a sea change, it is Argentina.
Inflation
Food Inflation: A Tough Nut Finally Cracking? (BMO) - It’s not too early for cautious optimism on food inflation, as consumer demand has normalized and farmers, processors, and grocers are facing far less cost pressure than before. Progress could still be thwarted by geopolitics or bad weather, but most economic factors are finally pointing in the right direction.
Monetary Policy
Central banks opt for cautious tone as growth falters (Danske Bank) - As many Europeans continue to enjoy their summer breaks, their mood can be lifted by expectations that peak rates loom in the horizon. In July, the ECB hiked the deposit rate to 3.75%, as expected, but at the press conference, President Lagarde opted for a clearly dovish tone. Service sector, the prime engine for economic growth in Europe this year, has started to lose steam, and the ECB is clearly more concerned about growth than before.
Commodities
Crude Oil Outlook: The Bulls Are Back in Town (BMO) - The price of crude oil has some solid wind in its sails, but it still has many challenges ahead. As a result, we remain comfortable with our current WTI projections of $78 for the whole of 2023 (or $81 in H2) and $80 in 2024, but acknowledge that the balance of risks has tilted more to the upside.
WASDE update: Unfavourable weather impacts US crop (ING) - The USDA’s August WASDE report provided few surprises. The lowering of US corn and soybean yields was largely expected, so did little to provide support to the market. However, if looking for something moderately constructive, it would have been US soybean ending stocks coming in below market expectations.
Real Estate
Real Estate Helped Drive Wealth Gains during the Pandemic (St Louis Fed) - How did the performance of different assets (what households own) influence racial wealth outcomes during the COVID-19 pandemic? Despite recent wealth gains during the pandemic, the average Black family owned about 24 cents for every $1 of white family wealth as of the first quarter of 2023. Similarly, the average Hispanic family owned about 23 cents for every $1.
Market
Super Core (BMO) - Equity markets were mixed this week alongside more evidence that inflation is coming further down the mountain. The S&P 500 slipped 0.3%, with technology and banks trailing as energy and health care led the pack. The index has faded in recent weeks, but is just running into the 50-day moving average and remains well above the 200-day mark.
Outlook
U.S. Economic Outlook: August 2023: Will the Fed Be Able to Stick the "Soft Landing"? (Wells Fargo) - Despite 525 bps of Fed rate hikes since March 2022, the U.S. economy remains remarkably resilient, growing at an annualized rate of 2.4% in the second quarter of 2023. In addition, inflation has receded in recent months, although it remains above the Fed's target of 2%. These developments raise the probability that the Federal Reserve will be able to bring inflation back to its target rate of 2% on a sustainable basis without a meaningful decline in employment, a so-called "soft landing."
Looking for a way to take advantage of higher interest rates? I recommend SoFi’s high-yield savings account which has a yield of 4.5% (subject to change) and includes FDIC deposit insurance for both its checking and savings accounts just like a traditional bank. Use my referral link to get a sign-up bonus and start earning that rate today. (This is also a great way to support me since I get a bonus too!)
Subscribe to receive Econ Mornings every weekday at 9 am. More economic and finance content on Twitter, Reddit, and my website. You can also see my feed on the PiQSuite platform as a partnered feed.