US CPI Comes in as Expected, Small Businesses Provide More Evidence of Disinflation
Economic news and commentary for March 14, 2023
US CPI
US CPI grew 0.4% MoM and 6.0% YoY in February, down from 6.4% YoY in January. This is largely in line with the consensus view and keeps the annual CPI growth at the 6% level for another month. The energy index returned to declining, down -0.6% MoM, on the largest drop in the natural gas subindex since October 2006, down -6.7% MoM. However, higher gas and electricity prices offset most of that deflation. Annual energy inflation is now below the headline level at 5.2% YoY, and well below its food counterpart which was up 9.5% YoY. However, this was down from the 10.1% YoY growth seen in January, and we should expect to see further disinflation there as the monthly pace of food price growth abates.
Core CPI grew slightly faster at 0.5% MoM meaning that the annual core inflation fell just -0.1 ppts to 5.5% YoY. This also means that the quarterly growth of CPI was around 1.3% QoQ which is an annualized quarterly rate of about 5.3% QoQ, an increase in short-term inflationary pressure from the January reading. What caused it? Services of course. The services index posted a gain of 0.6% MoM, the highest since September 2022 (tied with December 2022), and an annual gain of 7.3% YoY, a notch higher than the 7.2% YoY reported in January. The shelter index, which continues to account for 60% of the annual gain, grew another hot 0.8% MoM, pushing annual shelter inflation up 0.2 ppts to 8.1%. When removing the shelter index, core CPI was only up 0.2% MoM and 3.7% YoY, down from 4.0% YoY. This seems to be the index that many, including the members of the FOMC, are focused on. If that is the case, then there is strong evidence that the disinflation trend is continuing. In a large part, this is also a result of rapidly cooling goods inflation which was flat for the month and down to just 1.0% YoY in February. There was a large impact from the continued decline in used car prices, down -2.8% MoM and -13.6% YoY. Additionally, there were only slight increases in medical goods prices (0.1% MoM) and new vehicles (0.2% MoM).
The consensus on CPI today was that there would be some growth at the top-line indexes, namely core and headline CPI, but that underneath, the data would show more convincing signs of disinflation. This seems to be the case. The focus continues to be on the services index but without the generally disavowed shelter index. The annualized monthly pace of this crucial core CPI ex-shelter index was just 2.4% YoY which many will count as a win. However, it is important to remember that there is a lot of help from the crashing used car index. In the end, since much of the data came in as expected, the status quo remains with regard to the Fed meeting. There is little evidence to suggest that price pressures have increased to the level where a 50 bps hike would be necessary at this juncture, so Powell and Co. should opt for the unsurprising 25 bps move later this month.
US NFIB Small Business Optimism Index
The NFIB Small Business Optimism Index edged up 0.6 pts to 90.9 in February as the subcomponents showed a volatile economic picture. Both of the indexes tracking sales and earnings expectations improve, rising 5 pts and 3 pts to -9 and -23, respectively. However, the economic expectations index continued to fall further, down -2 pts to -47, as there continues to be a general sentiment that conditions are not going to improve anytime soon. The positive movement in sales and earnings expectations likely came from the fact that inflation expectations continue to deescalate. The current price changes index fell -4 pts to 38, the lowest level since April 2021, and the price plans index fell -4 pts to 25, back to the lows seen in late 2020 and early 2021. The index tracking compensation, however, remained near local highs at 46 due to the demand for employment remaining strong. The job openings index grew 2 pts to 47, just slightly off the highs it has lingered at since May 2021. The supply of labor continues to be the main issue here. NFIB reports that of those hiring or trying to hire, 90% of owners reported few or no qualified applicants for their open positions.
In general, the small business view of the economy is still largely negative as supply chain issues and labor shortages still plague owners’ plans to expand. But the good news is that price pressures are easing and are off the near-term highs reached last year. In the back of everyone’s mind, though, is wage growth which is proving to be stickier than the growth of the cost of goods. This is especially true for the services sector where employment demand is strong while the supply of labor is low. Indeed, this is causing some localized price pressures in that sector specifically. Price hikes were the most frequent in retail (64% higher, 9% lower) and finance (63% higher, 16% lower), two service industries that continue to see job growth in the nonfarm payroll reports. In the context of selling prices, there seems to be a sense that disinflation is improving sales and earnings outcomes as both those indexes improved in February. The Fed will be happy to see small businesses healthy and price pressures dropping from 2022 highs, though the persistent ravenous desire for labor will be in the back of the FOMC’s minds in their meeting this month.
Still to come…
10:00 am (EST) - US Quarterly Services Survey
10:00 pm - China Investment, Industrial Production, Retail Sales
Morning Reading List
Other Data Releases Today
The Australian Westpac Consumer Sentiment Index was unchanged at 78.5 in March. The major purchase and homebuying indexes fell -4.0% MoM and -11.1% MoM respectively with the latter at the weakest level since 1989. The ‘economic outlook, next 12 months’ index fell -2.3% MoM, the lowest since August 2020.
The Australian NAB Business Conditions index edged down from 18 in January to 17 in February. Trading conditions (at 27) and employment (at 12) were steady while profitability fell 4pts to +14. The Business Confidence index was worse off, falling -10 pts to -4. Labor cost growth continues to accelerate, up to 2.8% QoQ in February from 2.4% QoQ in January.
The UK added 98,000 jobs in February, and the unemployment rate was unchanged at 3.7% through January. The economic inactivity rate fell -0.2 ppts to 21.3% in the quarter to January, down -1.1 ppts off pre-pandemic levels. Job vacancies fell -51,000 to 1.1 mil through February.
Italian industrial production fell -0.7% MoM in January but was still up 1.4% YoY.
Manufacturing production was up 3.0% YoY while mining production was down -4.8% YoY and electricity and gas production was down -9.3% YoY.
UK Employment
Slower UK wage growth welcome news for the Bank of England (ING) - Momentum is fading in the UK wage numbers, and this will be welcome news for the Bank of England. The uncertainty surrounding the US banking sector does question whether the Bank of England will hike by 25bp next week, and remember the bar for pausing hikes appears to be much lower in the UK than at the Fed or ECB judging by recent official commentary.
Italy Industrial Production
Soft start to 2023 for Italian industrial production (ING) - The worse-than-expected January release and business confidence data suggest that a clear turnaround in manufacturing activity won't materialise in the first quarter of 2023.
US
Employment Situation in January: State-Level Analysis (NAHB) - Nonfarm payroll employment increased in 48 states and the District of Columbia in January compared to the previous month, while Wyoming and Rhode Island lost jobs. According to the Bureau of Labor Statistics, nationwide total nonfarm payroll employment increased by 504,000 in January, following a gain of 260,000 jobs in December.
Silicon Valley Bank Replays the Ugly Consequences of Disintermediation (Guggenheim) - Financial market participants, including the Federal Reserve (Fed), can be forgiven if the Silicon Valley Bank (SVB) mess is bringing back PTSD flashbacks of the Global Financial Crisis (GFC). Even the rare Sunday announcement by regulators that its depositors (and Signature Bank’s) would be made whole and have access to their cash felt eerily similar. As did the creation of another emergency facility, the Bank Term Funding Program (BTFP), which is the regulators’ attempt to provide additional liquidity and stem contagion fears.
The (first?) prominent victim of the 2022 hiking cycle (DWS Group) - Global central banks’ fight against inflation via the sharp rate-hike cycle has claimed its first prominent victims. By taking decisive action, U.S. authorities will probably have avoided a systemic crisis. Nevertheless, vigilance seems warranted in the markets for the time being.
The guessing game is on (Saxo Bank) - Equities reacted initially on a positive note to the US government bailout of uninsured deposits at the now failed banks SVB Financial and Signature bank. However, the immediate sigh of relief has been substituted by one big guessing game of what happens next. The financial system is extremely complex and nobody knows what will happen next. We go through the cross-asset moves in today's trading session and explains the current dynamics unfolding including which indicators investors should be watching.
Ignore the Crazy (First Trust Portfolios) - While many investors are focused on the financial troubles affecting Silicon Valley Bank (SVB) and whether those troubles will spread, there were two other major issues that hit the markets
last week: the Biden budget and Fed Chief Powell hinting at raising rates by a half a percentage point rather than a quarter.
Europe
ECB Cheat Sheet: Predictably unpredictable (ING) - Inflation data support ongoing hawkish rhetoric at the ECB but financial stability risk has markets substantially re-price the path for policy rates lower. The risk of miscommunication is high at this meeting; our call for one last spike in rates before the end of this cycle is now conditional. The other side of the Atlantic should keep driving EUR/USD.
UK Budget: Short-term positives to be met with medium-term caution (ING) - Wednesday’s Spring Statement from the UK Chancellor will be the third fiscal event since last September but hopefully the least dramatic. Lower gas prices are good news for the public finances, but potential revisions to the medium-term outlook offer little-to-no room for the Chancellor to shelve plans for tighter public spending this decade.
China
China Economic Update – March 2023 (NAB) - Following the abandonment of its economically constraining zero-COVID policies, China’s economy is widely expected to rebound in 2023. To that end, there was some degree of surprise that China’s government cut its official growth target in 2023 to a multi-decade low. A broad range of factors could explain this modest target – from a faster than expected recovery or a desire to re-establish credibility to a greater appreciation of longer-term challenges.
China: Restoring confidence (Nordea) - First signs indicate that China's economic growth is rebounding. However, the official growth target was set at a rather moderate 5% and the leaders’ main challenge is to rebuild business confidence. Foreign relations continue to create worries.
Inflation
Inflation Monitor for March 13 (BMO) - This week marks a full year since the Fed embarked on its aggressive tightening stance and yet, inflationary pressures remain elevated with another above-6% CPI reading expected for February. Over the past few days, however, the macro environment has dramatically shifted amid the SVB fallout. The Fed and other hawkish central banks now have tough decisions ahead: continue with more rate hikes to extinguish the inflation inferno or pause the process, at least briefly, to ensure financial stability.
Trade
Research Global: Deglobalisation – is it really happening? (Danske Bank) - In the aftermath of the pandemic and amidst rising geopolitical tensions, the future of globalisation has been called into question and the most common argument is that we are entering an era of less economic integration. We find no evidence of trade losing in importance, but rather changes in trading patterns and direction of flows. The US has become less reliant on trade thanks to the shale boom, while south-south trade led by China has definitely increased.
FX
Here’s why EUR/USD is not trading higher on the Fed re-pricing (ING) - The recent failure of two US banks, SVB and Signature, have understandably triggered a major re-appraisal of Fed tightening prospects. This has seen two-year EUR:USD swap rate differentials move to the narrowest levels since October 2021. One could expect EUR/USD to be trading substantially higher than this, but risk sentiment is likely holding it back.
Commodities
Yield tumble supports fresh demand for gold and silver (Saxo Bank) - Gold and silver trades higher for a second day as the fallout from Friday’s collapse of Silicon Valley Bank continues to reverberate around the market. Despite the US authorities stepping in with liquidity measures and a new lending program in order to reduce the risk of contagion, the across-market action so far this Monday highlights the elevated unease with bank-led equity market weakness continuing while safe-haven bonds and precious metals remain bid.
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