Japan Headline Inflation Highest in over 30 Years, UK and Canada Both See Weak Retail Sales
Economic news and commentary from January 20, 2023
Japan CPI
Japan's CPI grew 0.2% MoM to 4.0% YoY in December, up from 3.8% YoY in November. It’s official. Inflation in Japan hits 4%. While this level has been long surpassed in other nations, the deflationary economy of Japan has not been here since 1991 and before that, 1981. What’s driving headline inflation? At the moment, it looks like food and energy prices remain elevated, up 7.0% YoY and 15.2% YoY respectively, with the latter experiencing a 1.9% MoM increase. As these categories remain elevated other pockets of goods inflation have cropped up including a 10.8% YoY increase in durable goods household goods prices and a 4.4% YoY increase in domestic non-durable goods prices (though this has been falling). These subcategories, though, have smaller weights than many other categories that remain on the lower side. Of note here is the housing index up only 1.2% YoY and the household services index up just 1.5% YoY, both with heavier weights. This means that Core CPI annual growth remains well below the headline figure at 1.6% YoY (up from 1.5% YoY in November).
Thus, the narrative is twofold. Inflation has become a problem in Japan but mainly in the volatile categories. In fact, the Bank of Japan could make the case that the current bout of inflation is a “healthy” development in the domestic economy since the core measure is approaching its target of 2%. This means that the Bank of Japan may have room to maintain its easy policy in 2023 especially if it evaluates inflation as “transitory” and harmful to growth.
UK Retail Sales
UK retail sales (vol) fell -1.0% MoM and -5.8% YoY in December. The decline was consistent in the value of sales which fell -1.2% MoM, but due to inflation, they were still up 3.8% YoY. The monthly drop was a majorly a result of non-food sales falling -2.1% MoM while food sales fell just -0.3% MoM. Auto fuel sales had no effect as they were unchanged in the last month of the year. The ONS makes it a point to indicate that retailers commented that holiday shoppers made their purchases earlier but that does little to distract from the fact that UK holiday sales were weak this past year. For the three months to December, sales fell -1.0% QoQ and without the help of auto sales, were down -1.2% QoQ. It goes without saying that Q4 will likely be a weak quarter of growth for the UK, and the early prospects for consumption growth in Q1 2023 are not favorable. As seen in recent CBI surveys, retailers are preparing for a downfall in demand and looking to reduce inventories and investment in their stocks of finished goods. It would not be a surprise to see a UK recession in the beginning of 2023.
Canada Retail Sales
Canadian retail sales edged down -0.1% MoM in November, but core retail sales (ex-fuel-and-gas) fell at a steeper pace of -1.1% MoM, their largest decline in 11 months. In volume terms, headline retail sales decreased -0.4% MoM. The core segment of sales was led lower by food & beverage (-1.6% MoM), supermarkets (-1.3% MoM), and building material (-3.8% MoM) sales. The building materials segment specifically saw its largest decline in seven months as the weak housing market weighed on construction. Following the increases seen in October, sales at gasoline stations were up 2.2% MoM in November. In volume terms, sales at gasoline stations increased 3.7% MoM. Given the continually evolving economic situation, Statistics Canada is providing an advance estimate of retail sales, which suggests that sales increased 0.5% in December. In general, weaker economic conditions that have come from tightening by the Bank of Canada are weighing on demand. This is a desired outcome, though, as CPI has peaked and started to fall in response to dampened spending. Central bankers in Canada will likely not have much more tightening planned as the economy continues to signal that it will grow slowly in 2023, if at all.
Germany PPI
German PPI fell -0.4% MoM to 21.6% YoY in December, down from 28.2% YoY in November. Producers enjoyed weaker energy costs at the end of 2022, but not by much. Energy PPI fell -1.0% MoM but was still up a sharp 41.9% YoY. Firms with food costs also continue to see high costs with food PPI up 23.5% YoY, a major component of the 18.1% YoY increase in non-durables. The remaining categories continue to struggle from a hangover of inflationary pressures, but at the very least, they don’t seem to be getting worse. Intermediate goods prices were up 12.3% YoY as metals and chemicals prices remain elevated. However, these were offset by a sharp decline in timber prices, down 15.6% YoY. Machinery prices linger at lofty levels, keeping capital goods prices up 7.7% YoY, and high furniture prices have a similar effect on durable consumer goods prices, up 11.9% YoY. However, diminishing demand due to the rising cost of capital in the euro area has reversed the upward momentum in these categories, especially on commodity prices which feed into these costs.
Still to come…
10:00 am (EST) - US Existing Home Sales
Morning Reading List
Other Data Releases Today
German exports to non-EU nations are expected to fall -9.6% MoM in Dec, though they will still be up 6.5% YoY. Firms in Germany are starting to feel the demand crunch abroad.
US Housing Starts
Housing Starts Continued to Slide in December (Wells Fargo) - Total housing starts fell 1.4% to a 1.382 million-unit pace in December, a more mild drop than the market consensus. December's upside surprise comes off of a downward revision to November starts which indicates that starts declined by a sharper 1.8% during the month.
Housing starts and permits end 2022 on a low note (TD Bank) - 2022 ended with another somber homebuilding reading, as the slowdown in housing demand ushered in by higher rates continues to filter through the supply side. Single-family starts declined by 25% year-on-year (y/y) in December and were 9.7% below their December 2019 level. While the boom in the multifamily market last year proved to be more robust, it has begun to cool more quickly, and was down 14.9% y/y in December.
Housing Starts Declined 1.4% in December (First Trust Portfolios) - Housing starts continued to slow in December, falling for a fourth consecutive month to close out 2022, which was a historically tough year for builders due to surging mortgage rates. However, some of the details beneath the surface were better than the headline. Multi-unit construction accounted for all the weakness in December, while single-family starts rose for the first time in four months and posted the largest monthly percentage gain in more than a year.
UK Retail Sales
Lower gas prices offer rare good news for squeezed UK consumers (ING) - Persistent falls in UK retail sales are another reminder that the UK is still entering a downturn. The good news is that lower gas prices mean the Treasury can afford to do away with April's planned increase in household energy bills, a move that would lower headline inflation by 1-1.5pp through the latter half of the year.
US
Some Better Details Beneath Weak Headlines (BMO) - U.S. recession expectations leaped (or is it leapt?) up this week on the back of far weaker-than-expected reports on retail sales and industrial production. So, it is understandable that one would feel a little anxious ahead of today's round of U.S. economic data. All in, the results were not as bad as expected...
When it makes sense (not) to “fight the Fed” (DWS Group) - Last year was unusual in market participants proving quite prescient in predicting U.S. interest rates. Paradoxically, that probably makes a repeat in 2023 less likely.
The consumer engine is losing steam (EY Parthenon) - Retail sales fell sharply at the close of the holiday shopping season. The 1.1% drop in December sales came on the heels of a 1% decline in November and was the weakest retailers’ performance in a year. Consumers are becoming increasingly cautious with their spending, though the pullback was likely amplified by a pulling forward of the holiday shopping season. Adjusted for the slight decline in prices, retail sales volumes also fell 1.1%.
Macro Insights: Growth concerns starting to bite harder (Saxo Bank) - Even as inflation concerns continue to be the top concern for markets, weak US retail sales and industrial production data overnight has sparked some concerns of an economic slowdown. The strength of the labor market still provides room to argue in favor of a soft landing vs. a steep recession, and markets will becoming increasingly sensitive to payroll data going forward. Earnings will also start to take a bigger focus with major tech players starting to report next week.
Clear Signs of Slowing (Moody’s Analytics) - The Moody’s Analytics high-frequency GDP estimate for the U.S. fourth quarter slid after a pair of disappointing datapoints on industrial production and retail sales were released. The latest estimate of 3.6% annualized growth in the final quarter of 2022 is down from 4.3%. The Bureau of Economic Analysis will release its preliminary GDP estimate for the fourth quarter next week.
Europe
Euro Area Outlook: Better than Expected but Not Out of the Woods Yet (TD Bank) - An unseasonably warm start to the winter, falling energy prices, and government supports have helped offset the headwinds facing the common currency area, likely averting the worst-case scenario. The cost-of-living crunch continues, and sagging real incomes along with a rate hiking cycle that will continue well into 2023 will limit economic upsides in the coming year. Given the balance of risks, we anticipate euro area GDP to post virtually no growth in 2023 followed by a tepid bounce-back in 2024 (+0.9%).
ECB minutes show that the job is far from done (ING) - The minutes of the European Central Bank's December decision once again confirm the main messages heard during and after the meeting: the Bank is far from done with its rate hike cycle.
Quantitative tightening and debt repayment costs in the Eurozone (Allianz) - The ECB will start quantitative tightening (QT) in March, but the balance sheet reduction is likely to be limited at the planned run-off rate of government bond holdings. While the stock effect is relatively small due to capped reinvestments of amortizing assets, the flow effect will significantly impact the term premium (due to the flat term structure), and, thus, raise sovereign borrowing costs. We estimate that the current run-off rate could raise the term premium of the 10-year German Bund by about 90 bps until end-2024.
China
China growth update: More frontloaded recovery (Danske Bank) - Following the stronger-than-expected Q4 GDP data as well as indications that the covid wave has peaked even earlier than our latest estimate, we lift our GDP forecast and PMI profile once again.
Canada
An analysis of Canadian business support programs in response to the global COVID-19 pandemic (Statistics Canada) - With the emergence of COVID-19, Canadian governments at all levels adopted numerous policy initiatives to address the financial challenges businesses faced. Some of these programs were designed to provide wage subsidies, emergency credit and operating funds for businesses, which altogether represented billions of dollars in support.
Debt Ceiling
Your Guide to the Looming Debt Ceiling Showdown (Wells Fargo) - The debt ceiling has always been increased or suspended in the past, although at times there has been some collateral economic damage. Given the dynamics that are at play, we believe the probability of a protracted and potentially serious debt ceiling showdown is elevated compared to similar episodes in the past.
Debt ceiling debacle risks a self-inflicted recession (EY Parthenon) - Once Treasury hits the $31.4t debt limit, it will begin using “extraordinary measures” to prevent the US from defaulting on its obligations. These special accounting measures should provide Treasury with around $400b in additional borrowing capacity under the debt ceiling. Treasury Secretary Yellen estimates these measures should prevent the need to raise the debt ceiling until June, depending on individual and corporate income tax collections during the tax season.
Inflation
Rural Households Hit Hardest by Inflation in 2021-22 (Liberty Street Economics, NY Fed) - We present disparities in inflation rates by U.S. census region and rural status between June 2019 and the present. Notably, rural households were hit by inflation the hardest during the 2021-22 inflationary episode. This is intuitive, as rural households rely on transportation, and especially on motor fuel, to a much greater extent than urban households do. More generally, the recent rise in inflation has affected households in the South more than the national average, and households in the Northeast by less than the national average, though this difference has decreased in the last few months.
Young, Less Educated Faced Higher Inflation in 2021—But Gaps Now Closed (Liberty Street Economics, NY Fed) - we find that disparities by age and education are considerably larger than those by income and are similar in size to those by race and ethnicity, both explored in our previous post. Specifically, during the inflationary period of 2021-22, younger people and people without a college degree faced the highest inflation, with steadily widening gaps relative to the overall average between early 2021 and June 2022, followed by a rapid narrowing of the gaps and a reversal of some of them by December 2022.
Inflation Disparities by Race and Income Narrow (Liberty Street Economics, NY Fed) - we present disparities in inflation rates across racial and ethnic groups as well as across income groups between June 2019 and December 2022. We present evidence that during this period, Black, Hispanic, and middle-income households were most affected by rising inflation, experiencing steadily higher price increases relative to the overall average between early 2021 and June 2022.
Real Estate
Remodeling Market Sentiment Weakened in Fourth Quarter but Remains Positive (NAHB) - The NAHB/Westlake Royal Remodeling Market Index (RMI) for the fourth quarter of 2022 posted a reading of 66, falling 17 points from the fourth quarter of 2021.
Outlook
Cyber and business interruption top threats as economic and energy risks rise (Allianz) - It is both stability and change in the Allianz Risk Barometer 2023. Cyber incidents and Business interruption rank as the biggest company concerns for the second year in succession (both with 34% of all responses). However, it is Macroeconomic developments such as inflation, financial market volatility and a looming recession (up from #10 to #3 year-on-year), as well as the impact of the Energy crisis (a new entry at #4) which are the top risers in this year’s list of global business risks, as the economic and political consequences of the world in the aftermath of Covid-19 and the Ukraine war take hold.
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