Soft Italy Inflation Gives Hope that Other Countries Can Follow
Economic news and commentary for June 28, 2023
Italy CPI
Italy is one of the first major European nations to open the inflation data for the month, and it opened with a bang with its June report. Italy's CPI was unchanged on a monthly basis and up 6.4% YoY in June, down sharply from 7.6% YoY in May. As one would expect, energy played a large role in the decline with a -4.1% MoM drop, and it totally overcame the moderate upward push from food inflation, up 0.7% MoM.
Since the major deflationary pressure was in the volatile parts of CPI, core inflation remained positive. In June, core prices increased 0.4% MoM and 5.6% YoY which is an improvement on the 6.0% YoY growth in May. Goods inflation was very slow at just 0.1% MoM and no subcategory surpassed monthly growth of 0.2% MoM. Especially helpful was an 0.0% MoM print from the durable goods segment which is the largest out of the three goods subcategories. Based on these readings, it looks like goods disinflation was significant across the board and was probably helped by lower energy costs reported by firms (energy PPI down lower than -24% YoY in May). Services inflation also decelerated on the month, down to 0.4% MoM in June from 0.7% MoM in May. A sharp deceleration in transport prices (only 0.2% MoM) and a moderate softening in monthly restaurant & hotel prices (1.2% MoM, down from 1.7% MoM) were both major contributors to that sub-segment.
Overall, the June Italy CPI release is a big win for the ECB. It will want to see this win repeated in the coming inflation releases over the next week and a half. ECB leaders’ eyes will be focused on softening services prices which they have isolated as the reason for stickier-than-expected inflation so far in 2023. Lagarde has likely already concluded that a few more rate hikes are needed, but she and the rest of the ECB can be confident that they don’t have to go beyond their plans if inflation trends like this.
Still to come…
10:00 am (EST) - US State Street Investor Confidence Index
10:30 am - US EIA Petroleum Status Report
7:50 pm - Japan Retail Sales
9:30 pm - Australia Retail Sales
Morning Reading List
Other Data Releases Today
The GfK German Consumer Confidence reading is expected at -25.4 in July, down -1 pt from June. Economic expectations took a sharp turn lower in June, down 8.6 pts to 3.7. The rebound in growth in Q2 for Germany is called into question.
The growth of the M3 money supply in the euro area slowed to 1.4% YoY in May, down from 1.9% YoY in April. The growth of the M1 money supply was -6.4% YoY, down from -5.2% YoY. Growth of loans to firms slowed to 4.0% YoY from 4.6% YoY previously.
Italy's PPI fell -2.3% MoM and -4.3% YoY in May as energy prices were down -24.2% YoY. Ex-energy PPI was down -0.2% MoM but still up 2.8% YoY. Consumer goods PPI was unchanged on the month but still up 7.2% YoY.
Advanced US Economic Indicators for May:
Trade deficit down -6.1% MoM, exports down -0.6% MoM, imports down -2.7% MoM
Consumer goods imports down -7.3% MoM and -16.6% YoY
Wholesale inventories down -0.1% MoM
Retail inventories up 0.8% MoM
ECB Money Supply
Eurozone monetary transmission remains fast at work (ING) - Bank lending and money growth continue to weaken as the European Central Bank's historic hiking cycle continues to have a significant effect. While this will further dampen an already weak economy, today’s data is unlikely to sway the ECB's thinking on further rises.
Italy CPI
Italian inflation plunges in June (ING) - The energy component remains the key driver in the slowing pace of Italian inflation. The drop in the core measure is also good news, with conditions emerging for a further decline over the summer months – although potential for renewed stickiness later down the line can't be ruled out just yet.
Canada CPI
Inflation cools in May (TD Bank) - Consumer price inflation cooled to 3.4% year-on-year (y/y) in May, down from 4.4% in April – right in line with market expectations. That marks the slowest pace of inflation in nearly two years.
Canadian CPI (May): Some light relief (CIBC) - While food price increases remained strong, tamer core readings of inflation point to some light relief for Canadian consumers, and for the Bank of Canada as it decides if, or when, to raise interest rates again. Our base case remains for policymakers to pause in July, and to deliver a final 25bp rate hike in September, as price pressures still remain
elevated, but we await further data on growth this week to see how underlying demand is faring as well.
Canadian CPI (May) — Still Hungry for More (BMO) - While the softer-than-expected core prints are a bit of good news, every inflation metric remains far above the 2% inflation target. Accordingly, Bank of Canada policymakers won't breath a huge sigh of relief after this report as core inflation remains sticky and has yet to show signs of a durable slowdown. The odds of a July rate hike might be slightly lower now, but if the rest of the data hold up over the next 2 weeks, a hike still looks likely.
US New Home Sales
New Home Sales Jump in May (NAHB) - A lack of existing inventory coupled with solid consumer demand helped to boost new home sales in May to their highest level since February 2022.
New Single-Family Home Sales Increased 12.2% in May (First Trust Portfolios) - New home sales continued to recover in May, rising for a third consecutive month to hit the fastest pace in more than a year. While sales are on an upward trend recently and are now up 40.5% from the low in July of last year, they still remain well below the pandemic highs of 2020. The main issue with the US housing market has been declining affordability.
New Home Sales Soar in May: Steady Buyer Demand Bolsters New Home Market Amid Scarce Resale Inventory (Wells Fargo) - New home sales rocketed 12.2% to a 763,000 annual rate in May. May's geographically-shared jump lifted sales 20.0% above the pace one year ago, bringing them to the highest level since February 2022.
US Durable Goods New Orders
New Orders For Durable Goods Rose 1.7% in May (First Trust Portfolios) - New orders for durable goods rose 1.7% in May (+1.9% including revisions to prior months), easily beating the consensus expected decline of 0.9%. Orders excluding transportation rose 0.6% in May (+0.3% including revisions), versus a consensus expectation of no change. Orders are up 5.4% from a year ago, while orders excluding transportation are down 0.3%.
Sustained Orders Pick-Up Points to Upside for Q2 Equipment Spending (Wells Fargo) - We may not be out of the woods yet, but back-to-back gains in core capital goods orders and a third straight monthly increase in orders for durable goods more broadly points to a potential bottoming out in spending and upside for second quarter equipment spending.
US
Turning Up the Volume on U.S. Soft Landing Chatter (BMO) - Delayed (not a bad thing, until it is) U.S. recession chatter has gained more followers over the past few weeks. Rumblings began with strong retail sales results for April, then became louder with solid real PCE results for the same month, then really let loose with the—albeit mixed—May jobs report.
Augmented Intelligence (Northern Trust) - ChatGPT and its cousins have the potential to be uplifting and disruptive, all at once.
Not Just “Stimulus” Checks: The Marginal Propensity to Repay Debt (Liberty Street Economics, NY Fed) - Households frequently use stimulus checks to pay down existing debt. In this post, we discuss the empirical evidence on this marginal propensity to repay debt (MPRD), and we present new findings using the Survey of Consumer Expectations. We find that households with low net wealth-to-income ratios were more prone to use transfers from the CARES Act of March 2020 to pay down debt. We then show that standard models of consumption-saving behavior can be made consistent with these empirical findings if borrowers’ interest rates rise with debt. Our model suggests that fiscal policy may face a trade-off between increasing aggregate consumption today and assisting those with the largest debt balances.
A 17-Month High in Consumer Confidence as Recession Fears Fade (Wells Fargo) - Consumer confidence rose to its highest level in 17 months in June amid a brighter take on the current situation and a less dire assessment of the future. The majority of consumers (69.3%) still say a recession is coming, but that is a marked decline from 73.2% in May.
Economic impulses impacting the health care and life sciences sectors (EY Parthenon) - The US economy has started the year on a soft note. Reassuringly, high-frequency data doesn’t point to a retrenchment in private sector activity but, instead, confirms that a generalized slowdown is underway. Still, with activity approaching stall speed, the economy will grow increasingly susceptible to headwinds, including the banking sector stress and the debt ceiling debacle.
Hold on Tight: Can Labor Hoarding Insulate the Economy from Recession? (Wells Fargo) - Labor hoarding has been bandied about as a key way in which the FOMC may tame inflation without extensive damage to the broad economy. If the severity of recent worker shortages make firms more reluctant to layoff workers for a given drop in output, then the recessionary spiral by which falling investment/spending and job losses feed on each other may be short-circuited.
Australia
Australia: May inflation drop should be enough to keep policy rates unchanged in July (ING) - If the June Reserve Bank of Australia (RBA) rate decision was a finely balanced one, pushed over the edge by a spike in April's inflation to 6.8% YoY, then by the same logic, the plunge in inflation in May should result in a "hold" decision in July.
Turkey
Turkey's election: What Erdogan's victory means (S&P Global) - Voters in Turkey went to the polls in May to choose their president. Incumbent President Erdogan won a close contest 52% to 48%, extending his two-decade long administration for at least another five years.
Outlook
International Economic Outlook: Mid Year Outlook 2023 (Wells Fargo) - Our global GDP growth forecast for 2023, of 2.7%, is essentially unchanged from our most recent estimate published in early June. A stable global growth forecast is in contrast to the upward revisions we have made through most of this year. We have lowered our 2023 GDP growth forecast for certain individual economies, including for China (to 5.7%), India (to 6.0%) and the Eurozone (to 0.4%), although these downward revisions are offset by our view for a later, and less severe, U.S. recession.
Global Monthly - When will inflation get back to 2%? (ABN AMRO) - Central banks are well on their way to restoring price stability, with inflation rates roughly halving from their peaks over the past year. Inflation is likely to be back near 2% over the coming year or so. However, we think the next stage of disinflation will not be as pain-free as the initial stage, and the normalisation in services inflation is likely to be slower and bumpier than the disinflation so far. A fall in services inflation will likely also require weaker labour markets and a rise in unemployment.
Global transport and logistics outlook: normalisation in a different world (ING) - The pandemic extremes are gradually fading in transport and logistics, but normalisation comes with after-shocks and sanctions are shaking up trade routes. So what does the year ahead have in store for shipping, container shipping and aviation?
Europe’s industry outlook: we’re still riding the energy and pandemic shockwaves (ING) - Industrial production growth in Europe has more or less stagnated since late 2020 as the speedy recovery that followed the first round of lockdowns came to a halt. At the same time, the sector is in an incredible state of flux; structural changes around energy and trade are providing substantial challenges for businesses.
Research
The Transmission of Global Risk (Federal Reserve) - Turmoil in the banking sector in the U.S. and Europe in early 2023 brought jitters to financial markets and increased concerns about a global risk-off event. Risk-off episodes—periods of increased global risk aversion—are characterized by sharp increases in credit spreads, high volatility in equity markets, and appreciation of reserve currencies.
How Long Do Rising Temperatures Affect Economic Growth? (San Francisco Fed) - How might rising temperatures around the world affect the growth rate of GDP per person? Examining data across countries over the past half-century shows that a change in temperature affects GDP growth, but only temporarily. Combining estimates from past data with a simple growth model can help project the impacts of future higher temperatures on GDP per person by country. These projections suggest that total global losses in output per person could be substantial, though smaller than if a given change in temperature had a permanent effect on GDP growth.
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