Inflation in Australia and Durable Goods Orders in the US Both Decline, Point to Economic Weakness
Economic news and commentary for April 26, 2023
Australia CPI
Inflation in Australia took a solid step in the right direction in Q1 2023 after an apparent peak in Q4 2022. The quarterly growth of prices was the slowest in the last five quarters, but it was still above 1%. Australia's CPI grew 1.4% QoQ and 7.0% YoY in Q1 2023 which is a deceleration from 7.8% YoY in Q4 2022. There was not much deflation to start out the year. Only two groups saw prices decline on a quarterly basis, clothing (-2.6% QoQ) and furniture (-0.5% QoQ), but many subindexes were basically stagnant. Of significance is the transport index, which includes the price of auto fuel, which increased only 0.6% QoQ, resulting in a sharp deceleration in inflation to 4.3% YoY. Alternatively, the gas and electricity index surged to the highest annual inflation on record of 26.2% YoY. Food prices continued to grow in Q1 but the annual rate of growth slowed -1.2 ppts to 8.0% YoY.
Core inflation came in at 6.6% YoY after a 1.1% QoQ increase. This is a decline from the previous reading of 7.1% YoY in Q4 2022 and is just a sliver above the 6.5% YoY seen in Q3 2022. Like headline inflation, the quarterly increase was the slowest recorded in the last six quarters and points to a significant improvement in the inflation situation in Australia. On the other hand, services inflation did accelerate in Q1, up 0.6 ppts to 6.1% YoY which means we have to wait for a peak in price pressures in this segment. It also means that the improvement in the core inflation situation was driven by disinflation in goods prices. The goods subindex grew just 1.2% QoQ, the slowest since Q3 2021, and the annual pace dropped a sharp 1.9 ppts to 7.6%. This is largely not a surprise since this trade-off between services and good inflation is a trend that is observed in other developed nations. Australia seems to be a quarter or two off the pace of US deflation and more aligned with the price trend in the euro area. The main reason is persistently high wage growth which is feeding through to firms in the services industry that have been keeping up with stronger spending in the post-pandemic world.
In terms of monetary policy, it seems that there still needs to be some confirmation that a downtrend in inflation has started. Ideally, the Reserve Bank of Australia would like to see a peak in services prices and further declines in goods prices in the new monthly data for April before it can be confident with a peak cash rate of 3.6%. This confidence could also be derived from a cooling in the Wage Price Index that is to be released in May for Q1 2023. For now, the RBA will find relief in evidence that inflation has peaked and that its rate hike campaign has done its job.
US Durable Goods Orders
Once again in March, durable orders are back on the rise mirroring the jump seen at the end of 2022. US durable goods orders increased 3.2% MoM in March, bouncing after a -1.2% MoM decline in February and a -5.0% MoM decline in January. As has been the case in previous months, the wild transportation segment has distorted the view of the demand for durables as the nondefense aircraft segment sees orders up 78.4% MoM. Stripping out the transport group sees sales up just 0.3% MoM which is a positive reading considering the economic situation. The strongest industry was electronics which saw a robust gain of 1.9% MoM, capping off a strong Q1 where all three months saw growth in orders. Just behind electronics was the electrical equipment industry where new orders were up 0.8% MoM
However, outside of these groups, the situation is far less bright. New orders for core capital goods (ex-aircraft) actually declined in March, down -0.4% MoM, and built on an even worse decline in February (-0.7% MoM). In this reading, we get a better sense of the weakness of the US economy that is gradually responding to the many rate hikes that the Federal Reserve has introduced to slow activity. Inventories for the core segment increased very slowly in each Q1 month (0.2% MoM in Jan, Feb, and Mar) and are now only up 7.6% YoY, falling from a peak of 12.6% YoY in July 2022. Durable goods manufacturers are slowing their production to respond to weaker orders and the anticipation that new orders will continue to weaken down the road. This trend of slowing year-over-year growth has been documented in the prelude of both the 2001 and 2008 recessions.
Still to come…
10:00 am (EST) - US State Street Investor Confidence Index
10:30 am - US EIA Petroleum Status Report
11:00 am - US Survey of Business Uncertainty
9:30 pm - China Industrial Profits
Morning Reading List
Other Data Releases Today
The German GfK Consumer Sentiment index is forecasted at -25.7 in May, up from -29.3 in April. This is the seventh consecutive increase in consumer sentiment. The economic expectations index jumped 10.6 pts to 14.3 in April.
Household confidence in France improved by 1 pt to 83 in April. Households saw a slight improvement in their future situation and standard of living. A sharp decline in prices is expected with the future inflation index falling -17 pts to -26.
UK labor productivity was flat in Q4 2022 compared to a year ago. Output per worker and output per job in Q4 2022 were respectively -0.2% and -0.3% lower than the same quarter a year ago.
US Advanced Indicators for March:
Trade deficit down -8.1% MoM with exports up 2.8% MoM and imports down -1.0% MoM
Wholesale inventories up 0.1% MoM (+9.3% YoY)
Retail inventories up 0.7% MoM (+8.4% YoY)
Australia CPI
Australia: March inflation falls further (ING) - The March inflation rate came in lower than expectations at 6.3%YoY. The slow-moving quarterly series also showed a big drop in 1Q23 from 4Q22, while the core measures also all undershot expectations. 3.6% is looking as if it might have been the peak for cash rates in this cycle.
US Consumer Confidence
U.S. Consumers .... Expressing Concern (BMO) - Whatever the reason, Americans continued to feel a little uneasy this month. The Conference Board's consumer confidence index fell for the third time in the past four months, most recently by a larger-than-expected 2.7 pts in April to a 9-month low of 101.3. The breakdown wasn't ideal ... all the concern was centered on expectations of what the world will bring (-5.9 pts to a 9-month low of 68.1) while the present situation was better (+2.2 pts to a 2-month high of 151.1). And interestingly, inflation expectations for the next 12 months slipped, which is what the Fed wants to see.
Present Situation Improves Even as Confidence and Expectations Fall (Wells Fargo) - Our forecast anticipates a resilient consumer eventually losing steam later this year, helping to drive the economy into a recession. This theme was on display in this latest report which shows the present situation improving even as overall confidence and expectations fall.
US New Home Sales
New Home Sales Surge in March: Plentiful Inventory and Builder Incentives Continue to Draw Homebuyers (Wells Fargo) - New home sales surged 9.6% in March to a 683K annual pace. March marked the third increase in the last four months and the highest sales pace recorded since March 2022.
A fair-weather bounce in US housing (ING) - US housing transactions and prices have surprised in the early part of the year as warmer weather lifted demand. Amid a dearth of supply, prices are being supported, but higher borrowing costs and tighter lending conditions suggest the outlook remains tough.
March New Home Sales Jump on Lower Rates and Tight Existing Home Supply (NAHB) - Lower mortgage rates and limited existing inventory helped to push new home sales up in March, even as builders continue to grapple with increased construction costs and material supply disruptions.
New Single-Family Home Sales Increased 9.6% in March (First Trust Portfolios) - New home sales continued to recover in March, signaling that activity may have hit at least a temporary bottom back in mid-2022. While sales are on an upward trend recently and are now up 25.8% from the low in July of last year, they still remain well below the pandemic highs of 2020.
Europe
Euro money market study 2022 (ECB) - The 2022 Euro money market study is a comprehensive analysis of euro money markets using a unique, transactions-based dataset. The study covers five segments of the euro money markets.
ECB preview: a 25bp compromise rate hike (ING) - With only one week to go until the next European Central Bank meeting, there is little doubt that it will continue hiking rates. The only question seems to be whether the ECB will opt for 25bp or 50bp. We think that 25bp is the most likely outcome but might revise our call after Tuesday’s Bank Lending Survey and inflation data.
The Nexus Between Price Stability, Financial Stability and Fiscal Sustainability (Part 1) (BNP Paribas) - Price stability, financial stability and fiscal sustainability are part of the necessary conditions for the balanced development of an economy in the longer run. They can be considered as pillars on which the ‘economic house’ is built.
China
China: Rebound (BNP Paribas) - In Q1 2023, Chinese economic growth stood at +2.2% quarter-on-quarter (compared to +0.6% in Q4 2022) and +4.5% year-on-year (compared to +2.9% in Q4 2022). Activity has indeed recovered rapidly since the abandonment of all the health restrictions last December. The real GDP growth rate in year-on-year terms is expected to accelerate further in Q2 2023.
Canada
Canadian Automotive Outlook: Charting a Gradual Recovery (TD Bank) - Canadian vehicle sales rose by 4.4% year-on-year (y/y) in the first quarter of 2023, with recent strength in the labour market supporting demand. Inventory improvements are expected to help Canadian sales track higher in 2023 to 1.6 million units, although sales are expected to remain below pre-pandemic levels as economic headwinds weigh on demand.
Markets
Unpacking returns on equity (Allianz) - In a context of higher inflation and financial instability on the one hand, and a just transition and deglobalization on the other, the drivers of Return on Equity (RoE) across geographies help identify risks and opportunities in equity markets.
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