NFIB Small Business Optimism (Dec 2022), Inflation and Asia Commentary
Economic news and commentary for January 10
NFIB Small Business Optimism Index
The NFIB Small Business Optimism Index fell -2.1 pts to 89.8 in December, reversing some slight gains made in the last few months. The reversal was caused by a larger share of small businesses seeing an increasingly worse earnings trend index, up 8 ppts to 30%, and a larger share of businesses having negative economic expectations index. up 8 ppts to 51%. Inflation was still a major problem with 32% of owners reporting it as their top problem in operating their business. However, that seems to be on the downtrend as the share of small businesses raising selling costs fell -8 ppts to 43% and the share planning on raising prices in the next three months fell -10 ppts to 24%. There is little relief on the hiring front as 41% reported that job openings were hard to fill. As a result, a net 44% of small business owners reported increasing compensation. This gives credence to the Fed’s fear of wage inflation as the extreme inflation in goods prices subsides. Small businesses will be especially sensitive to labor shortages as they will be less able to increase wages to attract workers. Thus, this index will be a good barometer for the general trend of wages in the US as Federal Reserve looks to ease the growth of labor costs to prevent a wage-price spiral.
Japan Household Spending
Japan real household spending fell -1.2% YoY in November, down from 1.2% YoY in October. This is the first annual decline in consumption since May 2022. The weakness in spending was a result of goods consumption falling -1.9% YoY after being up 1.1% YoY in October. Spending on services also slowed but it was still up on an annual basis by 3.3% YoY (previously 4.9% YoY). The categories seeing the sharpest slowdowns in spending were furniture (-5.2% YoY), clothing (-9.3% YoY), and other consumption (-6.1% YoY). It’s not much of a surprise that spending has soured after a strong Q3. Real incomes in Japan have struggled to rise in 2022 which has put pressure on household finances. In November, workers’ real incomes were down -0.3% YoY, and workers’ real disposable incomes were down -0.9% YoY. This is the eighth month of negative income growth out of the 11 reported on so far in 2022. If this trend doesn’t change in 2023, Japan is in for a rough year ahead in growth terms.
France Industrial Production
French industrial production grew 2.0% MoM in November and was down just -0.1% YoY. A weak October was balanced by a strong bounce across the board to bring industrial production to parity with last year. Manufacturing output increased 2.4% MoM on a 5.3% MoM increase in machinery production and a 4.5% MoM increase in consumer durables production. Capital goods and intermediate goods production were both close behind with 2.4% MoM and 1.7% MoM increases on their own. The only category showing major weakness was construction which fell -1.2% MoM but was still up 2.2% YoY. A strong overall report like this makes a good case against the capitulation of the French and even the euro area economy in 2023. However, there are several unknowns that could create complications for the path of industrial activity in the short-term including the energy situation and the China COVID question. If these issues can be resolved favorably, there is a good chance that France and other European economies can avoid contraction in the face of tighter financial conditions.
Still to come…
10:00 am (EST) - US Wholesale Inventories
7:30 pm - Australia Retail Sales
Morning Reading List
Other Data Releases Today
Euro area house prices grew 1.0% QoQ to 6.8% YoY in Q3 2022, down from 9.2% YoY in Q2 2022.
Inflation
Inflation developments in the euro area and the United States (ECB) - Headline inflation has increased sharply in the euro area and in the United States since the start of 2021. An earlier and stronger increase had been recorded in the United States, but headline inflation has been higher in the euro area since July 2022. In November inflation in the euro area Harmonised Index of Consumer Prices (HICP) stood at 10.1%, after 10.6% in October, while inflation in the US Consumer Price Index (CPI) peaked at 9.1% in June and then moderated somewhat, standing at 7.1% in November.
Warm Winter, Cooling Costs (BMO) - Following an exceedingly challenging 2022, markets began the new year in a cautious mood, with equities mixed and long-term yields falling amid lingering concerns on the global economic outlook and some signs that underlying inflation pressures are easing. Still, the facts on the ground—the latest batch of economic data—mostly suggest that the North American economy continued to chug along at the tail end of last year.
Residential Building Worker Wage Growth Slowed (NAHB) - Average hourly earnings for residential building workers* rose at a slower pace in November. After reaching the highest rate (8%) of 2021 in October, the pace of wage growth has retreated and remained below 4% for the past five consecutive months. The recent slowdown in wage growth will ease inflation pressures.
Will High Inflation Persist? (St Louis Fed) - Uncertainty around high inflation has come to characterize 2022 for the U.S. economy, and the question of when inflation will revert to its long-run mean is top of mind for policymakers and consumers alike. The answer likely depends on whether we are still in the Great Moderation or have switched to the previous regime, as inflation persistence profiles differ between the two.
The Crux of the Inflation Problem (BMO) - In the Fed’s mind, tackling inflation ultimately boils down to cooling the labour market. In fact, apart from this one area (and, to a lesser extent, food costs), most inflation drivers are heading in the right direction.
The Hard Road to a Soft Landing: Evidence from a (Modestly) Nonlinear Structural Model (Cleveland Fed) - What drove inflation so high in 2022? Can it drop rapidly without a recession? The Phillips curve is central to the answers; its proper (nonlinear) specification reveals that the relationship is strong and frequency dependent, and inflation is very persistent. We embed this empirically successful Phillips curve – incorporating a supply-shocks variable – into a structural model. Identification is achieved using an underutilized data-dependent method. Despite imposing anchored inflation expectations and a rapid relaxation of supply-chain problems, we find that absent a recession, inflation will be more than 3 percent by the end of 2025. A simple welfare analysis supports a mild recession as preferred to an extended period of elevated inflation, under a typical loss function.
Inflation Monitor for January 9 (BMO) - Although headline inflation has peaked, a tight labour market, and the subsequent upward pressure on wages in both the U.S. and Canada, will likely keep core services inflation more persistent.
Europe
Fiscal policy implications of euro area countries’ 2023 draft budgetary plans (ECB) - On 22 November 2022 the European Commission released its opinions on the draft budgetary plans (DBPs) of euro area countries for 2023. Owing to the continued application in 2023 of the general escape clause of the Stability and Growth Pact (SGP), the assessment by the Commission followed the practice of the two previous years, focusing on the compliance of the DBPs with fiscal policy recommendations that are more qualitative than quantitative in nature.
Any drop in euro interest rates in 2023 will be temporary (ING) - We see fair value for 10Y EUR swaps around 3% for the rest of this cycle, equivalent to a 10Y Bund around 2.25-2.5%. Federal Reserve cuts and a sluggish European recovery mean a dip in EUR rates around the middle of the year, but this will prove temporary.
Monetary policy tightening and the green transition (Isabel Schnabel, ECB) - The green transition will fundamentally transform our societies. Protecting our planet requires unprecedented large-scale investments in technical innovations and renewable energies to bring our economies on a path towards net zero greenhouse gas emissions.
Eurozone: Starting the Year on an Upbeat Note (BNP Paribas) - The drop in gas prices, the decline in headline inflation and the improvement of survey data in December have created a feeling that for the Eurozone 2023 might be better than expected hitherto. The survey data bode well for the growth momentum at the turn of the year, which could create a favourable carry-over effect for GDP this year and some hope that lower inflation will mean fewer ECB rate hikes. However, caution is warranted. Inflation remains far too high and core inflation has moved higher in December. Moreover, survey data provide little or no information on the pace of growth beyond the first quarter of this year.
PMI: December Data Improve in the Euro Area (BNP Paribas) - The global manufacturing PMI edged down in December on the back of a new, significant decline in the US and for the second month in a row an increase in the euro area where the improvement is broad-based.
Asia
India Pulse Check (BMO) - India appears well-positioned to weather renewed global turbulence and its status as one of the fastest-growing economies should be preserved. We forecast real GDP growth to come in around 6.8% in the 2022/23 fiscal year (ending March 2023) and 6.0% in 23/24.
India will do better than most of its Asian peers in 2023 (ING) - Proactive policy in 2022 leaves India in a good position to benefit from easier conditions in 2023. India's lesser reliance on trade with China also provides a buffer, while a rethink on global bond market inclusion for government securities could see substantial capital inflows.
What Does China’s Reopening Mean for the World? (BMO) - China’s reopening is a clear-cut positive for growth—over time—that will support its prospects for a gradual economic recovery. However, it’s not a game-changer for activity in the rest of the world, which is probably not a bad thing given the global inflation landscape remains far from settled.
China: Timing of recovery is a big question mark (ING) - China has drastically eased its Covid-19 measures. Both domestic mobility and international traffic should increase in 2023. But the question is in which quarter? The current Covid wave could last at least a few months. By then, the US and EU will likely be in recession, hurting China's exports. We also worry about the fiscal deficit getting bigger.
From zero-Covid to all-in-Covid in China [PDF Download] (Zurich Insurance) - China’s economic developments remain turbulent. Following the government’s decision to make a U-turn in its Covid policy from a dynamic zero policy to withdrawing all Covid regulations and virus tracing, infections and mortality exploded in major cities, with hospitals under severe strain. Economic activity plunged as even non-infected consumers preferred to stay at home.
Japan: A modest recovery will continue to be supported by accommodative macro policies (ING) - We expect Japan's GDP growth to slow in 2023 but to remain above its potential rate, supported by an accommodative macro policy environment. The near-term outlook is bleak due to high inflation and weak global demand conditions.
Australia: GDP growth to remain below 2% this year (ING) - While parts of the Australian economy, in particular the labour market, remain robust, there are already clear signs that the economy is slowing, and it should slow further in 2023. That at least will provide some scope for a relaxation of monetary policy as inflation is also showing signs of peaking out.
Federal Reserve
Fed’s 2023 voting committee has a dovish tilt, but broad consensus likely to stay (Saxo Bank) - As the FOMC voting rotates, the new set of voters in 2023 will likely see a dovish tilt. Hawkish members like Bullard, Mester and George will not be voting this year, being replaced by Goolsbee, Logan and Harker. Kashkari, who is currently hawkish, will also be voting in 2023. Still, broad consensus is likely to remain on Fed policy unless economic conditions deteriorate materially and labor market starts to loosen in H2.
Bank of Canada
Keeping it real (CIBC) - In thinking about the right course for Canadian monetary policy in the wake of December job gains, it’s important to keep in mind that low inflation is not really an end unto itself. Yes, price stability increases the utility of money as a store of value, but who other than an economics nerd has ever had that at the top of their economic wish list?
Outlook
Why 2023 will be different (BlackRock) - Recession foretold in developed markets (DM), a pause in central bank rate hikes and China’s reopening help shape 2023 and reinforce our tactical views. European equities led DM stocks higher. Surprisingly weak U.S. services data spurred bets for Federal Reserve rate cuts this year, which we think are unlikely. We see the U.S. CPI slowing as spending shifts back to services from goods, but wage growth will keep core inflation higher than before the pandemic.
Markets
Out with the old, in with the same old…for now (TIAA Nuveen) - New year, but little new to celebrate yet. Financial markets started the new year pretty much where they left off in 2022, when decades-high inflation and outsized interest rate hikes took a heavy toll on global investment performance. For the first time in recent history, U.S. equities and fixed income both declined more than 10% in the same year.
Market, Stocks, and Bonds Lessons Learned from 2022 (LPL Financial) - We believe accountability and modesty are among the keys to success in this business. In striving for those qualities, LPL Research has a tradition of starting off a new year with a lessons learned commentary. We got some things wrong last year, no doubt. But those who don’t learn from their mistakes are doomed to repeat them. Here are some of our lessons learned from 2022. As you might imagine, inflation and the Federal Reserve are common themes throughout.
Cryptocurrency
Digital’s growing pains (Wells Fargo) - Digital assets had a rough 2022 with the average cryptocurrency losing 70%. The underlying innovation remains alive and well, however. Digital assets have been knocked down, but not knocked out.
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