The End of Summer Sees the End of Disinflation in Europe
Economic news and commentary for August 31, 2023
Euro Area Inflation
As the summer comes to a close, so does the disinflation trend in Europe. Euro area annual inflation was stagnant in August at 5.3% YoY, unchanged from the July reading of 5.3% YoY. The moderate monthly gain of 0.6% MoM was the largest since April and ended a string of cooler readings earlier in the summer. The healthy pace was a result of energy prices bouncing off of near-term lows. The energy index increased 3.2% MoM on its own which reversed some of the deflationary pressure that the segment put on the headline rate. The decline of -3.3% YoY was the smallest since April and is likely to continue to get smaller. On the other hand, food inflation was much smaller on a monthly basis, 0.1% MoM, and helped to offset the gains in energy prices. With the annual rate dropping to 9.8% YoY, food price growth has fallen back into single digits for the first time in a long time. The coolness in food prices this month was thanks to a -0.6% MoM decline in unprocessed food prices. Similar trends were evident in August CPI releases from Germany, France, and Italy where each saw the annual rate of growth in food prices ease.
Core inflation is the bigger talking point from the report. It came in at 5.3% YoY in August which was a slight deceleration from July’s reading of 5.5% YoY, but it still stuck in the 5-6% range where it has been since the beginning of the year. The monthly increase of 0.3% MoM represented a consistent, moderate gain in core prices that is keeping core inflation sticky. Both goods and services annual inflations decelerated in August, but not by very much. The former’s YoY rate was 4.8% YoY, down -0.2 ppts from previously, and the latter’s YoY rate was down just -0.1 ppt to 5.5% YoY. Services inflation is also stuck in that 5-6% range but the latest readings have been towards the mid-to-high part of that range. This will do no favors for anyone who is trying to see a disinflationary trend in euro area core inflation.
This is the last major release before the September ECB meeting, so it will likely set a hawkish tone when members gather to discuss the progress on inflation in the next month. We found out that in today’s ECB minutes for the August meeting, it was decided that “A further rate hike in September would be necessary if there was no convincing evidence that the effect of the cumulative tightening was strong enough to bring underlying inflation down…” That statement suggests that there will be heavy support for another rate hike given how sticky core inflation looked in August. The only major argument against this is that the next two months feature favorable base effects (September 2022 saw 1.2% MoM inflation and October 2022 saw 1.5% MoM inflation) which will help cushion further moderate gains in prices, but that is about it. Energy prices are back on the rise, and food prices are not moving against them. Other goods and services prices are just not falling fast enough. These things point to a hike once summer ends.
Still to come…
9:45 am (EST) - US Chicago PMI
10:30 am - US EIA Natural Gas Report
4:30 pm - US Fed Balance Sheet
Morning Reading List
Other Data Releases Today
Japanese industrial production fell -2.0% MoM and -2.5% YoY in July. Shipments were also down, -2.1% MoM and -2.0% YoY. The inventory/sales ratio has ballooned 11.9% YoY as inventories have risen while shipments decline.
Japanese retail sales jumped 2.1% MoM and 6.8% YoY in July, up from 5.6% YoY in June. Wholesale sales, however, have contracted slightly, down -0.7% YoY.
Services sales have bounced from the -6.6% YoY decline in June to 2.0% YoY in July.
China's CFLP Manufacturing PMI improved 0.4 pts to 49.7 in August the highest since March. New order growth was positive for the 1st time since March at 50.2. New export orders are still contracting at 46.7.
China's CFLP Services PMI fell to the lowest value since December 2022 at 51.0.
New orders contracted at the sharpest rate since December 2022 as well at 47.5. Strong optimism is still evident but is continuing to wane.
German employment was unchanged and still up 0.7% YoY in July. The unemployment rate was unchanged at 2.9% as there has been no increase in the total number of unemployed.
French Q2 2023 GDP growth was confirmed at 0.5% QoQ and consumption growth was confirmed at 2.1% QoQ. Household real disposable income grew 0.2% QoQ in Q2 after a slight contraction in Q1. The savings rate increased to 18.8%, up 0.6 ppts.
French CPI grew 1.0% MoM and 4.8% YoY in August, up from 4.3% YoY in July.
Food: 11.1% YoY (Jul 12.7% YoY)
Energy: 6.8% YoY (-3.7% YoY)
Manufactured Goods: 3.1% YoY (3.4% YoY)
Services: 2.9% YoY (3.1% YoY)
The euro area unemployment rate was stable at 6.4%, but the total number of unemployed grew 73,000 to 10.9 million. Youth unemployment was flat at 13.8% YoY. The labor market remains tight despite sharply higher interest rates.
Italy's CPI grew 0.4% MoM and 5.5% YoY in August, down from 5.9% YoY in July.
Core CPI: 4.8% YoY (0.3% MoM)
Food: 9.8% YoY (0.2% MoM)
Energy: -0.1% YoY (1.7% MoM)
Ex-Energy Goods: 4.1% YoY (0.2% MoM)
Services: 3.6% YoY (0.3% MoM)
US job cuts jumped 217% MoM to 75,151 in August. So far this year, cuts are up 210% over last year at 557,057. This is the third-highest number of job cuts on record since 2020 (1st) and 2009 (2nd).
US personal income grew 0.2% MoM and personal consumption grew 0.8% MoM in July. The PCE price index was up 3.3% YoY (prev 3.0% YoY), and the core PCE price index was up 4.2% YoY (prev 4.1% YoY).
Jobless claims fell -4,000 to 228,000 last week. The insured unemployment rate ticked up 0.1 ppt to 1.2%. Continued claims grew 28,000 to 1.73 million.
China PMIs
China PMIs remain downbeat (ING) - A further slowdown in the service sector recovery coupled with a slight moderation in manufacturing contraction does not amount to any meaningful improvement to the overall economic backdrop.
Euro Area Inflation
Eurozone inflation stagnates ahead of ECB September meeting (ING) - Inflation in the eurozone did not fall in August, which could tip the ECB in favour of a final 25bp hike at the governing council meeting in two weeks' time. Still, overall inflation dynamics remain relatively benign, and we still expect inflation to trend much lower at the end of the year.
France CPI
French inflation back on the rise (ING) - Inflation rose again in August, after falling for three consecutive months, due to higher energy prices. Despite a rebound in household consumption of goods, French domestic demand remains very weak, and a quasi-stagnation of GDP in the second half of 2023 seems the most likely economic scenario.
US GDP
Q2 GDP Revised Modestly Lower and Profits Under Pressure (Wells Fargo) - The second estimate of Q2 GDP showed the economy expanded at a 2.1% annualized pace. While still strong, this is a slightly slower pace of growth than first estimated. Data on the income side of the economy suggest a much slower pace of expansion in H1-2023, though real GDP and GDI are diverging at an unusual rate.
US GDP (Q2 2023 — 2nd estimate): Cruising through economic headwinds (EY Parthenon) - Despite a modest downgrade to the Q2 growth performance, the US economy still grew at a solid clip. Real GDP advanced at a downwardly revised 2.1% annualized pace, 0.3 percentage points (ppts) below the initial estimate. Modest upward revisions to consumer spending, government consumption and residential investment growth were offset by notable downward revisions to business investment growth and a drag from inventory growth and net trade.
Slow Is Good (BMO) - After 525 bps of Fed rate hikes, the U.S. economy is still growing... and 2% in the most recent quarter. Interestingly, though, the U.S. consumer is still going at it ... even as job growth slows. Recall the Conference Board's survey for August, which showed a record share of respondents saying that they had plans to vacation outside of the U.S. borders in the next six months. Definitely keep an eye on wages tomorrow... in the PCE report. That is the most important brick in this wall. Meantime, policymakers are nodding and probably thinking, "things are slowing.. that is a good sign."
Q2 Real GDP Expanded by a Healthy 2.1%, While GDI Sees Modest Gain (TD Bank) - Despite the modest downward revisions, the second estimate of Q2 GDP continued to show that economic growth expanded at an above-trend pace last quarter, with all the strength concentrated within domestic demand (i.e., consumption, fixed investment, and government). The acceleration in Q2 business investment is perhaps most notable, reflecting direct and indirect forces related to federal subsidies for green technology, and the delayed post-pandemic recovery trends in the transportation sector.
Real GDP Growth in Q2 Was Revised Lower to a 2.1% Annual Rate (First Trust Portfolios) - Real GDP was revised downward for the second quarter to a 2.1% annual rate from a prior estimate of 2.4%. The lower revision to the overall number was due to the cumulative effect of a series of small downward revisions to inventories, business investment, and net exports. More important, today we also received our first look at economy-wide corporate profits for the second quarter, which declined 0.4% versus Q1, and are down 6.5% from a year ago.
US
Texas natives likeliest to ‘stick’ around, pointing to state’s economic health (Dallas Fed) - How well does each state keep its native residents? Based on a calculation measuring the share of people born in each state who still live there, Texas is the nation’s “stickiest” state. The natives aren’t leaving. Since the pandemic, shifts in population—from states like California and New York to destinations such as Texas and Florida—have been well documented. These numbers measured everyone leaving a state—whether they were born there or not.
Inflation
Food inflation finally cools in Europe after a long hot summer (ING) - Food price rises are finally subsiding in Europe. We saw the first Month-on-Month decline in almost two years in July. Many branded food manufacturers, however, are reporting lower sales as shoppers turn to more affordable goods. And a combination of high food prices and sluggish growth means those volumes won't be returning anytime soon.
Oil
Crude oil supported by tight market conditions (Saxo Bank) - Crude oil has reestablished some upside momentum after the early August correction ran out of steam before damaging the technical setup, something that is important for technical focused traders who in recent month added length in both WTI and Brent futures. In the near-term extended OPEC production cuts will help support tight market balances but the combination of rising production spare capacity and worries about the economic outlook, may in our opinion still prevent prices from having a sustained move above $90.
Real Estate
2022 Single-Family Starts by Census Division (NAHB) - According to NAHB analysis of the Survey of Construction (SOC), new single-family starts decreased in 2022. Nationally, 1,018,495 new single-family units started construction in 2022, 10% fewer than the number of units started in 2021. It marked the first decrease since 2011 but was still the second-highest count since the Great Recession.
Outlook
September Monthly: Summertime sadness (ING) - Remember that 'back to school' feeling at the end of summer? A tedious car journey home after holiday fun, knowing you'll be picking up where you left off? We're afraid we've got a very similar feeling about the global economy right now. Are we nearly there yet? Not quite.
Research
FinTech-Issued Personal Loans in the U.S. (Federal Reserve) - The financial technology advances of the past decade brought to prominence a new group of lenders active within the personal loan space—financial technology (FinTech) lenders. Although traditional lenders such as banks, thrifts, credit unions, and finance companies continue to play an important role in providing personal loans to consumers, FinTech lenders gained a notable market share. In this note, we provide an overview of the FinTech sector as it is captured in two relatively new data sources.
The FOMC versus the Staff: Do Policymakers Add Value in Their Tales? (Cleveland Fed) - Using close to 40 years of textual data from FOMC transcripts and the Federal Reserve staff's Greenbook/Tealbook, we extend Romer and Romer (2008) to test if the FOMC adds information relative to its staff forecasts not via its own quantitative forecasts but via its words. We use methods from natural language processing to extract from both types of document text-based forecasts that capture attentiveness to and sentiment about the macroeconomy. We test whether these text-based forecasts provide value-added in explaining the distribution of outcomes for GDP growth, the unemployment rate, and inflation.
Recent Developments in Hedge Funds’ Treasury Futures and Repo Positions: is the Basis Trade “Back"? (Federal Reserve) - In short, the answer is "probably", at least to some degree. This note summarizes recent developments in hedge funds' Treasury futures and repo positions derived from the Commodities Futures and Trading Commission's (CFTC's) Traders in Financial Futures data and the Office of Financial Research's ("OFR") Cleared Repo Collection. Trends in these two data sources are consistent with hedge funds increasing their positions in the Treasury cash-futures basis trade.
Marriage and Work Among Prime-Age Men (Dallas Fed) - Married men work substantially more hours than men who have never been married, even after controlling for observables. Panel data reveal that much of this gap is attributable to an increase in work in the years leading up to marriage. Two potential explanations for this increase are: (i) men hit by positive labor market shocks are more likely to marry; and (ii) the prospect of marriage increases men’s labor supply. We quantify the relative importance of these two channels using a structural life-cycle model of marriage and labor supply. Our calibration implies that marriage substantially increases male labor supply.
Examining the Beveridge Curve with a Dual Vacancy Model (St Louis Fed) - Given the Federal Reserve’s most recent decision to increase its policy rate to slow inflation, one question that arises is whether the Fed will be able to slow the economy without causing a recession and a higher unemployment rate. That idea is called “soft landing.”
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