Stagnation Continues in Germany's Industrial Sector
Economic news and commentary for August 7, 2023
Germany Industrial Production
The German industrial sector struggled in June as it declined -1.5% MoM and -1.7% YoY on the month after no change in May. In Q2 2023, industrial production was down -1.3% QoQ, reversing some early signs of strength shown at the beginning of the year. Two key economic sectors were the major reasons for the deterioration in production. Declines in the construction (-2.8% MoM) and auto industries (-3.5% MoM) were substantial since both have started to show signs of recovery before giving back the gains. When removing the energy and construction sectors, production was an improved 0.6% MoM in June but still down -0.3% YoY. The steep drop of 3.9% MoM in capital goods production demonstrates how tighter financial conditions are hampering firms’ ability to expand. This suggests weakness will continue especially as capital expenditures from consumer goods-oriented firms start to erode in tandem with the business sector. The consumer sector was the main offsetting force in June as the production of consumer goods grew 1.8% MoM.
The weak performance squashes any hope of an upward revision in Q2 2023 industry data and basically confirms that Germany is going into the last half of the year with an increasingly stagnant industrial base. Mixed results in manufacturing new orders will contribute to an increasingly unstable industrial base. New orders did jump significantly in June, up 7.0% MoM, but that increase was entirely caused by large-scale orders. Excluding large orders, new orders fell -2.3% MoM. It is this kind of volatility that creates uncertainty and reductions in excess capacity. If there is one positive to be taken from today’s report, it’s that there was an improvement in the energy situation. Energy-intensive production increased 1.1% MoM, the largest month-on-month increase since January 2022. However, there is still a lot of weakness that needs to be turned around, the index is down -12.2% YoY.
Still to come…
12:30 pm (EST) - US Investor Movement Index
3:00 pm - US Consumer Credit
7:00 pm - Japan Household Spending
8:30 pm - Australia Westpac Index of Consumer Sentiment
9:30 pm - Australia NAB Business Survey
Morning Reading List
Other Data Releases Today
German industrial production fell -1.5% MoM and -1.7% YoY in June. In the last 3 months, production was down -1.3%. Declines in the construction (-2.8% MoM) and auto industries (-3.5% MoM) weighed heavily on overall production.
The Halifax House Price Index fell -0.3% MoM and -2.4% YoY in July, up from -2.6% YoY in June. This was the 4th consecutive monthly decline. A typical UK home now costs £285,044 (vs peak of £293,992 last August).
Germany Industrial Production
German industrial ‘bad news show’ continues (ING) - A further drop in German industrial production in June is another illustration of the country's ongoing stagnation.
US Employment
Mixed US jobs data signals September pause (ING) - The US economy added fewer jobs than hoped in July, yet the unemployment rate fell and wage growth was stronger. A mixed outcome, which doesn't rule out further rate hikes from the Federal Reserve, but doesn't give the central bank the all clear on inflation risks either. Tighter monetary conditions will increasingly weigh on job creation though.
July Employment: No Fireworks (Wells Fargo) - A slower pace of hiring in July showed that the labor market continues to gradually cool. Nonfarm payrolls rose by 187K in July, the second straight sub-200K print, but still plenty strong enough to keep downward pressure on unemployment. Indeed, the unemployment rate edged back down to 3.5%, only a tick above the 53-year low hit earlier this year. The sideways trend in the unemployment rate for more than a year now has come despite steady gains in the labor supply. The overall labor force participation rate has held steady at 62.6% for a fifth consecutive month, which in today's environment of rapid population aging is effectively up.
Payrolls continue to slow on a trend basis in July, while the unemployment rate ticks lower (TD Bank) - Job growth on a trend basis continues to move in the right direction, with the six-month moving average having pushed steadily lower in each of the last nine months. While certainly a good sign, today's pace of hiring is still running well above what's consistent with trend growth in the labor force, let alone anything weaker that would result in any sustained upward pressure on the unemployment rate.
U.S. Payrolls: Slow Landing (BMO) - The Fed will take comfort from moderating job growth, but will continue to fret about the tight labour market. So far, the July employment and CPI reports are a wash for the Fed's September 20 decision (we expect no change in rates), placing extra pressure on the August releases to add some clarity.
US labour market continues to rebalance but likely not enough to satisfy the Fed (CIBC) - The below consensus hiring and past downward revisions suggests that the labor market is coming into better balance. Still, the drop in the unemployment rate and solid wage growth will keep the Fed on track for a
25bp hike in September.
Modest Job Gains in July (NAHB) - The past two months’ job gains indicate that the job market is cooling from its peak last year and is growing at a moderate pace. Total employment increased by 187,000 and the unemployment rate inched down to 3.5% in July. Wages grew at a 4.4% year-over-year growth rate, down 1.1 percentage points from a 5.4% gain in July 2022.
Tight US labour market not letting up, yet (RBC) - It remains a question of when, not if weaker labour demand will start to show up in the headline employment numbers. Inflation has been slowing to-date and that takes some pressure off the Fed to respond with further interest rate increases against a still-resilient macro backdrop. The combination of slower inflation before a major pick-up in the unemployment rate has raised hopes for a “soft landing” in the U.S. We continue to see that as a possible but unlikely scenario, given signs and expectations that consumer spending will slow, keeping inflation low but at the cost of slower output growth and a weaker labour market.
Nonfarm Payrolls Increased 187,000 in July (First Trust Portfolios) - Mixed data today on the job market. Some signs of softness, but strength enough in the non-headline numbers to keep the market guessing about the Fed. Nonfarm payrolls rose 187,000 in July, slightly below consensus expectations and the second consecutive month below 200,000, the first time that’s happened since the onset
of COVID.
Canada Employment
Canada's labour market sheds jobs in July (TD Bank) - Canada's labour market continues to loosen. With the population/labour force booming faster than the jobs market can keep up, the unemployment rate has risen to 5.5% from 5.0% in just three months. Over 2023, the number of unemployed people has increased in 6 of 7 months, causing the total number of unemployed to rise by 123k. This loosening follows a +10% drop in the number of job vacancies.
Canadian employment (Jul): Still not loose enough? (CIBC) - There were further signs of loosening within the Canadian labour market in July, with a slight dip in employment contributing to another uptick in the unemployment rate. However, a reacceleration in wage growth may lead the Bank of Canada to believe that labour market conditions haven't loosened enough yet to sustainably bring inflation back to its 2% target.
Canadian Jobs: Summer Fizzle (BMO) - The soft July employment report is just the latest arrow in the quiver of signs that the economy is losing momentum. Along with the recent friendly CPI result, we believe that the case for the Bank of Canada moving to the sidelines is now very strong. Looking beyond the next rate decision, we suspect that the Bank may be done raising rates, although still-firm wage and core price growth means that rates are likely to stay high for long.
A midsummer cooldown for the labor market (EY Parthenon) - The July jobs report painted the picture of a labor market that is gently cooling to a slower and more sustainable pace. Job growth surprised on the downside with a 187,000 gain while wage growth stayed elevated at 4.4%, and the unemployment rate edged lower to 3.5%. Downward revisions to prior employment gains, weaker job growth diffusion and a shorter workweek point to softer labor market momentum.
US
U.S. Economy: A Productive Landing? (BMO) - There are several reasons why productivity could be turning up. First, more companies are using new technology (notably AI) to cut costs and meet demand in the face of worker shortages. Second, with supply chains running smoother, workers are spending less time troubleshooting and waiting around for parts and materials to arrive, and more time adding value. Third, workers are quitting less than in the past two years, and the lower churn means less time is spent training to bring them up to peak efficiency.
First Glimpse Points to July Activity Remaining Firm (Wells Fargo) - Following last week's data, which brought some encouraging updates showing ongoing strong growth and easing inflation, this week continued with the first look at key July indicators, including more evidence that the labor market continues to gradually cool.
The Restrained Recovery of State and Local Government Payrolls from the Pandemic Recession (Federal Reserve) - On the eve of the outbreak of the COVID-19 pandemic, state and local government (S&L) employment in the U.S. stood at 20 million. In the first three months of the pandemic, S&L payrolls plunged 1.5 million as social distancing reduced the need for many government services, such as in-person schooling, and S&L governments feared sharp revenue declines. By Spring 2021, however, S&L governments found themselves in their strongest budget position in 50 years, as the federal government provided historic levels of aid and S&L tax revenues proved resilient.
Sticking the (Soft) Landing (BMO) - We’ve been wavering for a while on whether to shift to the soft-landing camp, but no longer. The broad strength shown in the Q2 GDP release convinced us that the U.S. economy is more durable than expected.
US monthly GDP index for June 2023 (S&P Global) - Monthly US GDP rose 0.5% in June on the heels of a 0.6% increase in May. The increase in June reflected positive contributions from domestic final sales and net exports; nonfarm inventory investment was little changed in June.
Fifth District State Business Cycles (Richmond Fed) - To model national and state business cycles, this post first explores fluctuations of payroll employment around its long-run trend, comparing the correlation of the state-level employment fluctuations to the national series. Second, it explores how a popular rule of thumb recession indicator, the Sahm Recession Rule, performs when applied to state-level data compared to national data during the past four economic downturns. Third, this analysis not only provides us with insight into states' historical relationships with the U.S. business cycle, but it also reveals how they might fare in future economic downturns.
Supply Chain Disruptions and Inventory Dynamics (St Louis Fed) - In the aftermath of the COVID-19 pandemic, global economic activity was severely impacted by supply chain disruptions. Producers of intermediate inputs could not keep up with demand for their goods, either because of the direct impact of COVID-19 or because of the sluggish adjustment of supply. As a result, the operations of firms that relied on such intermediate inputs were significantly affected. For instance, shortages of semiconductors, a critical input in the production of automobiles, led to an unprecedented persistent decline of car production in the U.S. and other countries.
Financial Flows to the United States in 2022: Was There Fragmentation? (Federal Reserve) - Events of the last five years, such as the U.S.-China trade war, the COVID-19 pandemic, and—most recently—Russia's invasion of Ukraine, have raised concerns in the popular press and among policymakers that the international economic and financial system is at risk of becoming significantly fragmented (Aiyar et al., 2023; Ip, 2023; Shin, 2023). Most recently, attention has shifted to the possibility of fragmentation along geopolitical lines, where countries primarily trade with and invest in other countries with which they share close diplomatic and political ties (International Monetary Fund, 2023a,b). For the U.S., these fragmentation fears often focus on concerns about the willingness of investors in emerging market economies (EMEs) to hold U.S. assets (and U.S. dollar-denominated assets more broadly).
Europe
ECB cuts now seen in March (ABN AMRO) - We expect the ECB to cut its policy rates for the first time in March of next year, changing our call for a first reduction which was previously December of this year. This largely reflects the resilience in services inflation and the labour market up until now.
Bank of England nears rate peak (ABN AMRO) - The Bank of England raised its policy rate by 25bp to 5.25% today – a downshift from the 50bp move in June, and in line with our and consensus expectations. Indeed, while the accompanying statement left the door open to further tightening, it also added the line that the MPC would “ensure that Bank Rate was sufficiently restrictive for sufficiently long to return inflation to the 2% target.”
Spain | The 2021 settlement under the common system of autonomous communities financing (BBVA) - This Working Paper analyzes the settlement payment for 2021 under the common system of autonomous communities financing, recently published by the Ministry of Finance.
Canada
Still living the high life? (CIBC) - In normal times, the rich differ in that their consumer spending is much less tied to just how much money they made in a
given year, as they can draw on their wealth to smooth out their consumption patterns. The average Canadian can’t chase a Great Gatsby lifestyle. But in the past two years, many have been able to tap into an atypically large pool of savings,
accumulated in the first half of the pandemic when travel, movies, and restaurants were shunned and spending therefore trailed incomes.
Eyes on Canada after U.S. Downgrade (BMO) - We wouldn’t go so far as to say everything is rosy in Canada from a fiscal perspective, especially when the desire to spend and run deficits meets a sharply higher interest rate environment. But, on a relative basis, the U.S. is setting a pretty low comparison bar to step over.
Love of Labour is Lost (BMO) - There is mounting evidence that the extreme tightness of the Canadian job market is easing and, if inflation cooperates, suggests that the case for the Bank of Canada moving to the sidelines is now very strong. That said, firm and persistent wage growth, which is working with a lag, suggests the Bank will still lean on the economy with these high rates for a prolonged period.
Brazil
Brazil: A Guiding Light (BMO) - Give credit where credit is due. Brazil, along with some of its Latam neighbours (Chile, Colombia and Mexico), did not waste time, acting decisively when they saw early signs of inflation beginning to take root and ultimately creating space to start shifting to easier policy before many of their Western counterparts.
Chile and Brazil Cut Rates (Too?) Quickly (Wells Fargo) - Policymakers at the Central Bank of Chile and Brazilian Central Bank cut interest rates more aggressively than financial markets expected at their latest meetings, meaning downside risks to our Chilean peso and Brazilian real forecasts are materializing. In the coming weeks, we will update our currency forecasts; however, we are using this publication to flag the likelihood of more short-term currency depreciation in Chile and Brazil than we currently expect, as well as the possibility of a slower pace of longer-term appreciation against the U.S. dollar.
FX
Global | Resilience of currencies against the dollar (BBVA) - So far this year, despite the most aggressive interest rate hike cycle in history by the Federal Reserve (Fed), emerging currencies (with some exceptions) and the euro have strengthened significantly.
Markets
Another rewarding month for equity markets, but still some risks on the horizon (DWS Group) - For most investors, July proved another good month. That was driven in part by several lower-than-expected inflation readings; the most remarkable being the real down-side surprise in U.S. consumer prices, with good news pretty much across the board.[1] All else equal, that would make a soft-landing scenario for the U.S. economy more likely. Keep in mind, however, that monthly inflation numbers are notoriously volatile, that the overall level of inflation in the U.S. and elsewhere remains too high for comfort, and that wages, notably in Europe, still have plenty of catching up to do. For now, we stick to our view that central banks will mostly prefer to err on the hawkish side.
Unlocking Innovation with Small Caps (Goldman Sachs) - Slower economic growth, higher rates, and narrow market breadth have been key impediments to the current equity rally. Even so, markets continue to assign premiums to a handful of firms that are durably growing their sales and net income, have defensive operations, and utilize superior technology.
Cold Feet (BMO) - It was a wild week for financial markets, in a period that, back in the day, was considered to be uneventful and quiet as market participants retreated to summer homes in the Hamptons (not me) to enjoy the last month of summer.
Bonds Away (BMO) - There is no summer lull for financial markets in 2023, and certainly not for bonds. Even with a significant relief rally on Friday, the dominant story for this week, and arguably for the past three months, has been the relentless grind higher in long-term yields. To pick but one example, the 30-year Treasury has leapt above 4.2%, up 40 bps from levels just a few short weeks ago, and 125 bps north of last summer.
The Rating Game (BMO) - Equity markets slumped this week alongside a sharp selloff in the bond market through Thursday, and some mixed economic data. The S&P 500 was down 2.3%, with weakness in rate-sensitives and technology, while all other sectors but energy were in the red. Meantime, the TSX was down 1.4%, with all but energy also posting declines.
Green
Global boiling: Heatwave may have cost 0.6pp of GDP (Allianz) - An initial ‘back of the envelope’ calculation suggests that the recent heatwave across the United States, Southern Europe, and China may have cost 0.6pp of GDP in 2023. The cost ranges from 0.1pp for France to 1.3pp of GDP for China. One day of extreme heat (above 32 degrees) is equivalent to half a day of strike.
Global | GDP and global warming (BBVA) - The earth's temperature records of recent years far exceed the historical baseline averages. It is beyond all doubt that the main reason for the upward trend in global temperatures is the highest level of concentration of carbon in the atmosphere caused by economic activity.
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