UK GDP Stable in November, US Import Prices Rise for the 1st Time Since June
Economic news and commentary for January 13, 2023
UK GDP
UK GDP grew 0.1% MoM in November after growth of 0.5% MoM in October. The growth was supported by a services sector that grew 0.2% MoM while the industrial sector fell -0.2% MoM. The main driver of weakness in industry was a -0.5% MoM decline in manufacturing activity. GDP was also supported by a strong 0.4% MoM increase in consumer-facing services thanks to a boost in food and beverage service activities likely caused by the FIFA World Cup. Activity in the construction sector was flat after some slight growth in the month before. Despite the strength in October and stabilization in after, GDP fell by -0.3% in the three months leading up to November. This includes a decline of -1.4% in industrial production in that period. In fact, industrial weakness has been a noticeable trend in the UK for some time as there has been a downward trend in manufacturing, since its last positive three-month on three-month growth in July 2021. In general, this does not bode well for 2023 where many expect a recession to settle in at the beginning of the year. It’s only a matter of time before tighter financial conditions affect consumption on services, which appears to be the main buffer between GDP growth and contraction, as higher mortgage payments, eroding excess savings, and a tough energy situation impacts households’ ability to spend.
US Import and Export Prices
In November, US import prices grew 0.4% MoM to 3.5% YoY, up from the previous month at 2.7% YoY, and export prices fell -2.6% MoM to 5.0% YoY. down from the previous month at 6.3% YoY. Fuel import prices increased 0.6% MoM, the first increase after five straight months of substantial declines. As a result, we see the annual increase jump back up from 10.1% YoY in November to 19.4% YoY. Other import prices grew as well, up 0.4% MoM, led by nonfuel industrial supply prices growing 1.2% MoM, the first increase since April 2022. On the export side, deflation was led by a -2.4% MoM decline in agricultural export prices, the largest decline since July. Non-agricultural exports prices also declined substantially, down -2.7% MoM, and extended its streak of deflation that started in July.
In the context of the greater inflation conversation, a slight increase in import prices suggests that some of the deflationary pressure that has been desired is falling away. It’s possible that energy prices have reached a near-term bottom for the winter as markets continue to debate the anticipated effects of weaker consumption on the energy commodity situation. The same could be said for nonfuel imports prices; though, this category has already settled around an acceptable level of inflation (nonfuel, nonfood import prices only up 1.7% YoY). Export prices are likely to continue to be weak in 2023 as major trading partners, like the euro area and China, experience sluggish economic growth or outright recessions. This does hint at the possibility of some deflation in food price on the consumer side, but the status of the war in Ukraine still has a lot to say about those forces. There shouldn’t be any cause for concern in this report for the Fed unless trading prices start to trend higher in early 2023, especially import prices.
Euro Area Industrial Production
Euro area industrial production grew 1.0% MoM and 0.9% YoY in November. Three out of the five categories saw expansion including capital goods up 1.0% MoM, intermediate goods up 0.8% MoM, and durables up 0.4% MoM. Both energy (-0.9% MoM) and non-durables (-1.3% MoM) were outed as the weak categories. The annual rates of growth are more telling. Lower prices for commodities have led to some weakness in the production of them over the past year. Intermediate goods production fell -3.3% YoY while energy production was down -10.2% YoY. There is some strength in other sectors that were significantly impacted by supply chain pressures and are now benefitting from some improvements in those conditions, capital goods up 8.8% YoY and non-durable goods up 6.3% YoY. Companies seem to be working through unfilled orders that accumulated over the past two years, but those backlogs will not last forever. In the near future, firms will see weaker order books as new orders struggle in the stagnating economy that has developed as a result of an energy crisis and a hawkish ECB. It is expected that this portion of industrial production will start slowing in Q1 and Q2 2023 as recessions set in across European economies.
Still to come…
10:00 am (EST) - US Consumer Sentiment
Morning Reading List
Other Data Releases Today
An initial estimate of German growth in 2022 suggests that GDP increased 1.9% YoY. GDP was 0.7% higher in 2022 than in 2019, the year before the Covid-19 crisis began.
The UK trade balance fell -£1.6 bil to -£21.0 bil in November. Exports grew 0.7% MoM and were outpaced by import growth of 1.8% MoM. Imports from the EU grew 4.7% MoM and non-EU imports grew 2.2% MoM. Fuel imports fell as energy prices fell.
The euro area trade balance was -€11.7 bil with exports up 17.2% YoY and imports up 20.2% YoY. Trade within the euro area is up 16.8% YoY. YTD energy imports grew 124.2% YoY. Imports from the US grew 56.8% YoY.
French CPI was confirmed to have declined -0.1% MoM to 5.9% YoY in December, down from 6.2% YoY in November.
Core Inflation: 5.3% YoY
Food: 5.9% YoY
Energy: 15.1% YoY (-3.6% MoM)
Goods: 4.6% YoY
Services: 2.9% YoY
Italy's industrial production fell -0.3% MoM and -3.7% YoY. Manufacturing production is down -2.2% YoY with machinery (2.4% YoY) and transport equipment (7.3% YoY) production offset by metals (-8.5% YoY) and food (-3.9% YoY) production.
Inflation
Inflation continues to ease in December, auguring for a slower pace of rate hikes (TD Bank) - Another encouraging reading on CPI to round out 2022. Despite the core measure showing a modest acceleration last month, the three-month annualized change eased to 3.1% – marking the sixth consecutive month of deceleration.
US inflation points to 25 basis point Fed moves from now on (ING) - US inflation shows price pressures are easing, yet in an environment of a strong jobs market, the Federal Reserve will be wary of calling the top in interest rates. A 25bp hike in February is likely with a further 25bp in March. Inflation will slow even more meaningfully in 2Q though, with the prospects for 2H rate cuts looking strong as recession bites hard.
US inflation: Extending the good news (CIBC) - December was a step in the right direction on the inflation front for policymakers, as key core service categories outside of shelter showed relatively modest price pressures. Total prices fell by 0.1%, on a drop in gasoline prices, while excluding food and energy, core prices rose by 0.3% as expected.
U.S. CPI: 25 or 5 to 0 (BMO) - The report will be welcomed news at the Fed, as two out of three of Powell's key inflation categories (core goods, shelter, and core services ex-shelter) are now moving in the right direction: down. And it's only a matter of time before the shelter component rolls over. Three months of relatively lighter core inflation figures is starting to form a trend... one that could spur the Fed to slow the pace of tightening further on February 1.
Falling US inflation paves way for 25bp Fed hike (ABN AMRO) - December inflation was in line with expectations, with the headline CPI falling -0.1% m/m, and the core CPI rising 0.3% m/m. This took annual headline and core inflation down to 6.5% and 5.7% y/y respectively - the lowest readings in over a year.
Inflation Release Adds to Good News for the Fed…and Bonds (Guggenheim Partners) - The December Consumer Price Index (CPI) numbers are the latest in a string of encouraging data that show a meaningful cooldown in price pressures in the economy. These developments support our view that the Federal Reserve (Fed) will be able to step down the size of rate increases to 25 basis points at the Feb. 1 FOMC meeting and wind down its hiking cycle by the second quarter. This better inflation and Fed environment suggests that the most worrisome scenarios for credit markets are dissipating and gives a positive sign for those looking to invest in fixed income, particularly high-grade credit.
December CPI: Three's a Trend (Wells Fargo) - Inflation continued to ease in December. The headline CPI fell 0.1% in the month, and December marked the third consecutive increase in the core index of 0.3% or less. A major decline in gasoline prices helped keep headline inflation in check, but the signs of slower inflation extended beyond prices at the pump.
Good News: Inflation Continues its Cooling Trend (NAHB) - Consumer prices in December saw the largest month-over-month decrease since April 2020. While still elevated, inflation experienced the third month below an 8% annual growth rate since February 2022. Moreover, this was the sixth consecutive month of a deceleration.
Markets Signal Smaller Rate Hike in Feb on Negative CPI Reading (HilltopSecurities) - The inflation trend is clearly lower, and most expect the annual headline increase to decline significantly over the next several months. However, China’s emergence from a broad lockdown promises to increase global energy demand which will likely nudge pump prices higher in the first quarter. The core rate is likely to be a bit more stubborn. In addition to those sticky shelter costs, wage pressures continue to rise.
Disinflationary currents (EY Parthenon) - Disinflation is gaining momentum as we enter 2023, giving the “all clear” for the Fed to ease off the rapid pace of monetary policy tightening. Headline Consumer Price Index (CPI) inflation cooled 0.6 percentage points (ppt) to 6.5% year over year (y/y) in December — now 2.6ppt below its June peak — while core inflation fell 0.3ppt to 5.7% — its lowest since the 6.6% peak in September.
Central banks welcome easing wage inflation (Danske Bank) - Inflation drivers continue to paint a mixed picture but inflation is likely to head lower through 2023 in US and the euro area. Price pressures from food and freight rates have clearly eased while metal prices have recovered lately. Energy and electricity prices have declined sharply amid warmer weather in Europe.
GDP
Warnings over Britain’s ‘long’ and ‘deep’ recession are exaggerated (ING) - Despite a better-than-expected November GDP figure, UK growth prospects look challenging. A recession is likely through the first half of 2023, but predictions that Britain’s downturn will eclipse the rest of the developed world look exaggerated.
German economy still defies recession (ING) - The German economy grew by 1.9% in 2022. This implies a stagnating, not contracting, economy in the fourth quarter. Will the widely-predicted recession simply fail to materialise? We remain doubtful. Avoiding the worst does not suggest the economy is doing well. The economy has just returned to its pre-pandemic level.
Federal Reserve
Employment and Inflation Go the Fed’s Way (Moody’s Analytics) - December’s CPI print is the only one between now and the rate-setting Federal Open Market Committee’s next meeting that ends in early February. Futures markets and our latest baseline expect a 25-basis point increase to the fed funds rate target range to be announced then.
Rates
The Many Interest Rates in 2022 (St Louis Fed) - During the first two months of the COVID-19 pandemic, there was a brief inversion of the real yield curve. For most of 2020 and 2021, however, the real long-term rate was between 1% and 2% higher than the real short-term rate–the same as with the nominal rates. In 2022, we again see the compression between the short rate and the long rate, as the short rate narrows the gap with the long rate, particularly in October and November. In December 2022, we finally see the real yield curve invert. That is, the real short rate is higher than the real long rate, albeit by a small amount.
The tug of war will continue (Nordea) - Markets expects the Fed to start lowering rates already this summer as inflation will be lower. The Fed is worried that tight labour markets will still keep prices too high. We do not see the disagreement being resolved anytime soon.
China
China’s export contraction means more infrastructure spending to support recovery (ING) - China's exports and imports continued to contract in December. This signals weak external demand which could hamper the economic recovery. The government could spend more on infrastructure to fill the gap and ensure the economy recovers after reopening.
France
Pension reform in France: Bonjour tristesse (Allianz) - The current reform proposal in France has been met with considerable anger, seen as the end of savoir vivre. But the truth is that the reform barely goes far enough. The proposed increase of the statutory early retirement age to 64 years from 62 does not address long-term deteriorating demographic and funding prospects: There will still be 60 persons in retirement (aged 64 and older) per every 100 people at working age (between 20 and 63 years) in 2050. Today, the ratio is 49.2%.
Markets
Cyclical Outlook Key Takeaways: Strained Markets, Strong Bonds (PIMCO) - High quality fixed income investments can help center portfolios while offering attractive yield potential amid a likely recession in 2023.
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