UK Retail Sales Bounce on Discounting, US Import Prices Fall for 7th Consecutive Month
Economic news and commentary for February 17, 2023
UK Retail Sales
UK retail sales volumes grew 0.5% MoM in January after a -1.2% MoM decline in December. Despite being up on the month, sales were still down -5.1% YoY. The trend in the last three months points to a weakening in demand with sales volumes down -0.9% from the previous three months. Nevertheless, there was some recovery to start the year. Non-store or online sales grew 2.0% MoM, and fuel sales grew 1.7% MoM. The strength in these categories can be attributed to favorable pricing for consumers due to promotional sales in the former case and lower energy prices in the latter case. Sales promotions also helped non-food sales improve on the month, up 0.6% MoM. These discounts look to have been in response to the weak retail environment in December where inventories would have been built up preceding the holiday season. With households opting to purchase less, retailers were likely looking to clear out inventory builds in January in anticipation of a recession in 2023. In addition to this, inflation has slowed down which is in its own way a “discount” for consumers who have struggled with surging prices for the past 8-10 months. Both of these trends could be supporting of sales in February, but these are short-term trends that are unlikely to last more than one or two months unless inflation starts to decline at a more substantial rate. We should expect to see the three-month trend of sales contraction (-0.9% as quoted earlier) settle at a slight decline of about -0.3 to -0.5% in the coming months.
US Import and Export Prices
Trade prices have more or less returned to normal as of the start of 2023. US import prices fell -0.2% MoM to 0.8% YoY, and export prices grew 0.8% MoM to 2.3% YoY in January. This marks the seventh month in a row of fuel import price declines which has led to seven straight monthly declines in the headline import price index as well. Nonfuel import price inflation is now just 0.8% YoY, down from 7.0% YoY in January 2022. Export prices have experienced similar deflation, the headline export price index has fallen for six straight months, but agricultural prices are keeping it a bit higher. Specifically, non-agricultural export prices are up just 1.7% YoY, down from 14.6% YoY a year ago, while agricultural export prices are still up around 5.8% YoY, though that is an improvement from the 18.0% YoY a year ago. The normalization in trade pricing is definitely a good thing, and it should feed through to somewhat lower prices in the CPI report. The specific index tracking consumer goods imports did rise in December and January, but only very slightly, up 0.1% MoM and 0.2% MoM respectively. On an annual basis, consumer goods imports are up just 0.3% YoY. This is more good news for the Fed, but it’s not where the focus is. Obviously, import and export prices are sensitive to many other factors including demand abroad and supply chain conditions. These have definitely played a factor in returning trade prices back to normal, but it doesn’t necessarily mean that domestic pricing is next to normalize.
France CPI
French CPI was confirmed to have grown 0.4% MoM and 6.0% YoY in January, up from 5.9% YoY in December. The report was mostly a nonevent in that most of the components moved about as expected. Food prices rose 1.7% MoM, and energy prices rebounded 3.9% YoY after falling over the past few months. Goods prices fell, down -1.1% MoM, on a large drop in prices of clothing and footwear, down -8.5% MoM. Services prices, on the other hand, were stickier, edging up 0.1% MoM. However, in France, services inflation is less of an issue as the annual increase is only up 2.6% YoY. The inconspicuous report came with a few puzzling details though. France’s Insee quoted core inflation up 0.7% MoM to 5.6% YoY in January which is an acceleration from the 5.3% YoY it saw in December. One of the components of this core measure was manufactured products which increased 0.8% MoM, despite the index’s monthly growth having been observed at -1.1% MoM earlier. On top of that, the core CPI’s services component includes rents and services for dwellings which have been a little more reticent to decline. This services component grew 0.5% MoM to 4.2%, substantially higher than the earlier services component’s observation. It seems that there is just a lot of mixed data in these inflation reports with aggregates that are heavily impacted by the inclusion or exclusion of certain subindexes. This clouds the inflation trend further.
Still to come…
8:30 am (EST) -
Morning Reading List
Other Data Releases Today
The euro area current account balance improved to €16 bil in December, up from €13 bil in November. Imports of goods and services fell further than exports. Primary income improved.
German PPI fell -1.0% MoM to 17.8% YoY in January, down from 21.6% YoY in December: energy prices grew 32.9% YoY (-5.0% MoM), non-durable consumer goods prices grew 17.9% YoY, durable consumer goods prices grew 10.8% YoY, intermediate goods grew 10.0% YoY, and capital goods prices grew 7.0% YoY.
The number of bankruptcy declarations among EU businesses increased substantially in the fourth quarter of 2022 (+26.8% compared with the previous quarter) and reached the highest levels since the start of the data collection in 2015.
US Housing Starts
Housing starts fall, permits rise slightly to start 2023 (TD Bank) - After declining for most of 2022, homebuilding activity continued to slow to start 2023. Construction in the multi-family market remains hot relative to pre-pandemic levels but has been letting out steam lately as the rental market cools. In contrast, the single-family market has slowed more quickly as elevated mortgage rates continue to weigh on buyer demand. U.S. Treasury yields have been rising in response to the continued hawkishness of the Fed, which has also been dragging mortgage rates higher. With investors now less convinced the Fed will begin cutting rates later this year, yields are likely to push higher over the near-term.
U.S. Housing Starts Unable to Heat Up (BMO) - Although milder temps kept most of the economy from softening in January, that wasn’t the case for U.S. housing starts, which fell more than expected. Home builders continue to face a raft of headwinds including worker shortages and fading housing demand. And, with rates likely to stay high for some time, homebuilders are not out of the woods… yet.
Housing Starts Deteriorate Further in January (Wells Fargo) - Total housing starts dropped 4.5% to a 1.309 million-unit annual pace in January. January's drop was the fifth straight monthly decline in housing starts, the longest streak since 2009.
Housing Starts Declined 4.5% in January (First Trust Portfolios) - Housing starts continued to slow in January, falling for a fifth consecutive month as builders continue to grapple with lower demand due to the surge in mortgage rates since late 2021. Notably, the drop in starts in January occurred in spite of unusually mild winter weather that is usually a temporary spur to breaking ground on new homes.
US PPI
The Producer Price Index (PPI) Rose 0.7% in January (First Trust Portfolios) - The Producer Price Index (PPI) rose 0.7% in January, coming in well above the consensus expected +0.4%. Producer prices are up 6.0% versus a year ago.
Building Materials Prices Increase in January Reversing Four-Month Trend (NAHB) - After four consecutive declines, the producer price index (PPI) for inputs to residential construction less energy (i.e. building materials) rose 0.9% in January 2023 (not seasonally adjusted) according to the latest PPI report.
UK Retail Sales
UK retail sales bounce on January discounting (ING) - January's increase in retail sales wasn't enough to reverse a steep fall around Christmas, and the big picture is that sales have been on a downward trend. Signs of discounting in January will be welcome news for the Bank of England.
Europe
Securing semiconductor supplies in the EU (S&P Global) - The European Parliament is starting negotiations with the European Commission and the Council of the EU member states on the final version of the European Chips Act. The legislative package focuses on expanding the European Union (EU)'s semiconductor production. Long-term policy goals include doubling the EU's share from 10% of world output to 20% by 2030.
EUR rates: pricing out cuts (Nordea) - Markets price more Fed and ECB rate hikes and fewer rate cuts on the other side of peak policy rate, prompting risk-off in rate space. Risk of higher outright rates and curve flattening ahead. Front-end payers and inflation forwards have performed.
Canada
High, Low, or About Right? An Update On Canadian Consumer and Business Insolvencies (TD Bank) - After declining during the pandemic, the number of Canadians experiencing financial troubles and filing for insolvency is on the rise. The negative dynamics may seem at odds with the red-hot labour market, but this trend in personal insolvencies reflects a normalization from the ultra-low levels of the pandemic. In both absolute and per capita terms personal insolvencies remain well-below their 2019 levels.
Mexico
Mexico | Fed: rates higher for longer (BBVA) - Currently, the big question in international financial markets is how much more the United States Federal Reserve (the Fed) will have to raise the monetary policy rate and when it will be able to start a cycle of cuts.
Markets
The equity conundrum: It is all about a recession or not (Saxo Bank) - Economists and consensus were looking for an incoming recession back in the fourth quarter of last year with even big investors such as Warren Buffett holding tight despite global equities down 20%. Instead the economy has rebounded releasing animal spirits and a rally in growth stocks. Recently equities have absorbed higher bond yields suggesting that the interest rate sensitivity has mostly disappeared. The path from here will be dictated by whether the economy can continue to rebound or recession fears come back.
The risk of being a security rather than a commodity (Saxo Bank) - Following the collapse of crypto exchange FTX in November 2022, the call for crypto regulation is louder than ever, but the question that remains yet to be answered is in what manner the industry should be regulated. In the US, the SEC calls for jurisdiction over the market by classifying most cryptocurrencies as securities, whereas the market broadly calls for the classification as commodities, as the regulation would then be less strict. Next to Ripple, everyone’s focus is on Ethereum.
Markets hardly impressed by the Ukraine war (DWS Group) - The start of the war a year ago caused markets to plummet, as did expectations. Recently, these were mostly exceeded in Europe. How long can the markets thrive on this?
Real Estate
Credit for Builders Tightens as Rates Climb (NAHB) - During the fourth quarter of 2022, credit continued to become less available and generally more costly on loans for Acquisition, Development & Construction (AD&C) according to NAHB’s Survey on AD&C Financing.
Recent Trends in Fifth District Housing Market Indicators (Richmond Fed) - There is evidence that the tight housing markets of the past few years are starting to loosen, with increased supply and falling prices. However, many Americans still struggle to buy a home. Between the fall of 2020 and the summer of 2022, home price growth accelerated in the United States and in all Fifth District states after being relatively steady for a decade.
Commodities
Commodity prices slide amid weak mainland China demand (S&P Global) - The Material Price Index (MPI) by S&P Global Market Intelligence fell 1.7% last week. The decrease was broad with seven of the ten subcomponents down. The MPI sits 19% lower year on year (y/y). Prices, however, remain far higher (43%) than the pre-pandemic levels of the fourth quarter 2019.
Outlook
Economic Update and Interest Rate and Exchange Rate Forecast (CIBC) - An update on CIBC’s forecasts for economic data in the US and Canada.
Don't Count Your Chickens (Northern Trust) - The Northern Trust Economics team shares its outlook for U.S. growth, employment, interest rates and inflation.
More room at the inn? Rethinking Canada’s medium-term upside (CIBC) - With monetary policy on high alert, the upside for the economy will be dictated by how much room there is for real GDP to advance while still getting inflation sustainably back to 2%. In that regard, we’ve been doing some rethinking on that question for Canada, and finding reasons to be more optimistic. Simply put, while Canada faces a stall in growth later this year as a result of past interest rate hikes, several factors suggest that there’s more elbow room for non-inflationary growth than we previously estimated.
What Is “Outlook-at-Risk?” (Liberty Street Economics, NY Fed) - The Federal Open Market Committee (FOMC) has increased the target range for the federal funds rate by 4.50 percentage points since March 16, 2022. In tightening the stance of monetary policy, the FOMC balances the risk of inflation remaining persistently high if the economy continues to run “hot” against the risk of unemployment rising as the economy cools. In this post, we review a quantitative approach to measuring the evolution of risks to real GDP growth, the unemployment rate, and inflation that is inspired by our previous work on “Vulnerable Growth.” We find that, in February, downside risks to real GDP growth and upside risks to unemployment moderated slightly, and upside risks to inflation continued to decline.
Debt
Younger Borrowers Are Struggling with Credit Card and Auto Loan Payments (Liberty Street Economics, NY Fed) - Total debt balances grew by $394 billion in the fourth quarter of 2022, the largest nominal quarterly increase in twenty years, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. Mortgage balances, the largest form of household debt, drove the increase with a gain of $254 billion, while credit card balances saw a $61 billion increase—the largest observed in the history of our data, which goes back to 1999. All told, the increase in credit card balances between December of 2021 and December of 2022 was $130 billion, also the largest annual growth in balances. Delinquency transitions in the fourth quarter ticked up as well, for credit cards, auto loans, and mortgages. These are increases in delinquency transition rates that appear relatively small, perhaps a return to pre-pandemic norms, but our closer look here reveals some worsening of delinquency rates among certain groups. In this analysis as well as in the Quarterly Report we use our Consumer Credit Panel (CCP), which is based on anonymized credit reports from Equifax.
Tax
The Unfinished Business of International Business Tax Reform (IMF) - Most countries in the world agreed on a major tax reform in 2021. Now it’s time to follow through with implementation.
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