US Retail Sales Broadly Weak in December, PPI Falls Again
Economic news and commentary for January 18, 2023
US Retail Sales & PPI
US retail sales fell -1.1% MoM in December after a -1.0% MoM decline in November. The last two months of the year close with significant consumer weakness despite the holiday season. Weighing heavily on sales in both months were sales at gas stations which tanked -4.6% MoM in December and -1.6% MoM in November as gas prices cooled from highs. However, the weakness did not stop there. Retail sales of furniture (-2.5% MoM), motor vehicle (-1.2% MoM), and electronics (-1.1 MoM) all saw substantial slides to end 2022. In fact, just about every category declined on the month with the exception of building materials (+0.3% MoM), food & beverages (0.0% MoM), and sporting goods (+0.1% MoM). Despite the declines, the annual pace of retail sales growth remained at 5.2% YoY. It is worth noting now that as monthly CPI declines roll in, nominal retail sales be naturally depressed by lower selling prices. However, the declines in December and November were both deeper than the drops in prices in those months. As consumer sentiment improves (as we saw in the early UMich reading), retail sales should slowly shift into a stable or slow growth trend. However, that is unlikely to materialize in the beginning of 2023. Thus, one should expect that the weakness in Q4 2022 will not end in Q1 2023 sales.
US PPI fell -0.5% MoM to 6.2% YoY in December, down from 7.3% YoY in November. Robust contractions in producers’ goods costs were evident in today’s report as the PPI of final demand goods fell -1.6% MoM. Both food and energy prices contributed to that trend, down -1.2% MoM and -7.9% MoM respectively. Ex-energy-and-food goods PPI offset that deflation, rising 0.2% MoM, meaning that this category went the entirety of 2022 without seeing an outright monthly decline. It is interesting to point out the difference in processed and unprocessed goods prices here. Processed goods PPI saw its largest decline of the year, down -2.8% MoM, primarily impacted by declines in processed energy goods. This is consistent with deflation seen in the unprocessed side earlier in the year. But that trend in unprocessed goods PPI flipped in December. Indeed, unprocessed goods for intermediate demand PPI jumped 3.4% MoM and the annual increased accelerated from 2.8% YoY to 11.7% YoY. Final services PPI rose (+0.1% MoM) but at the slowest pace since April 2022. However, looking under the hood suggests that intermediate services prices were still rising at a moderately strong pace, up 0.4% MoM, which leaves that index up over 6% YoY for the fifth month in a row.
With all this being said, firms look to be in a slightly uncomfortable spot going into the first quarter of 2023. Of course, there is the concern of services inflation which has been a problem for the last two or three months as well, but now there is also a pick-up in commodity prices that threatens to pull through to processing costs for producers. There’s no telling if an uptick would be transitory or not, but it will be a figure for the Fed to keep an eye on.
Bank of Japan Announcement
The Bank of Japan keeps its policy unchanged according to its January announcement. The Bank of Japan’s yield curve control will maintain a short-term policy rate of -0.1%, and long-term rates will be maintained at 0%. Asset purchase guidelines will remain the same. The members of the Bank of Japan assert that there are “extremely high uncertainties for Japan’s economy” which coincides with the decision to uphold easy monetary policy. In its view of 2022 and 2023 growth, it sees “risks skewed to the downside”, and on the inflation front, it sees risks “skewed to the upside”. As a result, the Bank of Japan slightly reduced its forecast for Japanese GDP growth in 2023 from a median of 1.9% to a median of 1.7%. The insistence on a sour 2023 economic outlook means that it can preserve its dovishness for another year.
UK CPI
UK CPI grew 0.4% MoM to 10.5% YoY in December, down from 10.7% YoY in November. The largest downward contribution to the change in both the CPIH and CPI annual inflation rates on the month came from the transport component which was heavily affected by the decline in motor fuels prices. The overall energy subcomponent saw a decline in the annual pace of from 55.6% YoY in November to 52.8% YoY in December. Downward contributions were also seen in clothing & footwear and recreation & culture which were offset by rising prices in restaurants & hotels and food & non-alcoholic beverages. Deflation in (non-energy) goods prevailed, though, with the ex-energy industrial goods component slowing from 6.3% YoY to 5.8% YoY. While goods prices fell, the prices of services broadly increased, up 6.8% YoY which was faster than 6.3% YoY previously. As a result, the balance of goods and services inflation led to core CPI growth stuck at 6.3% YoY. The sturdiness of the core measure here might be enough to tilt the Bank of England towards more hawkish intentions in the beginning of 2023.
Still to come…
9:15 am (EST) - US Industrial Production
10:00 am - US Business Inventories
10:00 am - Housing Market Index
2:00 pm - US Beige Book
6:50 pm - Japan Trade
7:30 pm - Australia Employment
Morning Reading List
Other Data Releases Today
Japan machinery orders fell -1.0% MoM in Nov. Manufacturing orders fell -9.3% MoM, and non-manufacturing orders fell - 3.0% MoM. Orders from abroad fell -2.0% MoM. The forecast for Q4 is still positive at 11.5% QoQ.
Italy's trade balance improved to -€0.3 bil in November with exports up 3.9% MoM and imports down -1.4% MoM. Exports to non-EU countries grew 8.3% MoM. Energy imports were up 39.8% YoY, and capital goods exports grew 26.4% YoY.
Euro area inflation was confirmed at -0.4% MoM and 9.2% YoY in December, down from 10.1% YoY in November: core inflation at 5.2% YoY, energy at 25.5% YoY, food at 13.8% YoY, ex-energy goods at 6.4% YoY, and services at 4.4% YoY.
In December, Canada’s Industrial Product Price Index (IPPI) declined -1.1% MoM and was up 7.6% YoY. The Raw Materials Price Index (RMPI) fell -3.1% MoM and increased 7.5% YoY.
UK CPI
Jump in UK services inflation provides ammunition to BoE hawks (ING) - Headline inflation has peaked but pressure from the service sector continues to build. That's likely to tip the balance for Bank of England hawks in favour of one final 50 basis point hike at the February meeting.
Canada CPI
Another welcome cooling in inflation in December (TD Bank) - December's CPI report showed that Canadian inflation continues to come off the boil, but at 6.3% remained well above the Bank of Canada's 1-3% target. As outlined in our last Quarterly Economic Forecast, we expect the cooling process to continue, but it will require consumer spending to effectively grind to a halt. Core inflation pressures are decelerating more slowly than headline, but are roughly consistent with our December forecast.
Canadian CPI (Dec): Looking through mortgage costs (CIBC) - 2022 ended with relief at the pump, which helped to cool Canadian CPI inflation. The 6.3% annual pace was down from 6.8% in the prior month and slightly below consensus expectations (6.4%). Excluding food/energy, prices rose by a seasonally adjusted 0.3% m/m in December, slightly slower than the recent 3-month average.
Canadian CPI — Some Progress, But Not There Yet (BMO) - Headline inflation was soft, as widely expected, due to seasonality and a big drop in gasoline prices. Core inflation eased ever-so-slightly, but the slow pace of improvement will bring little comfort to policymakers. Underlying price pressures remain sticky for now. While the direction of inflation is at least mildly encouraging, there's nothing in this report to keep the Bank of Canada from hiking rates another 25 bps at next week's policy meeting.
China
China's GDP Expands 2.9% in Q4, As Zero-COVID Winds Down (TD Bank) - China's fourth quarter GDP grew 2.9% compared to the fourth quarter of 2022, beating expectations for a 1.6% year-over-year (y/y) expansion. On a quarterly basis, the economy avoided contraction but registered no growth for the quarter, much softer than the 3.9% (non-annualized) pace in the third quarter.
Japan
Bank of Japan defies market speculation; keeps policy steady (ING) - In keeping its key rate and yield curve control policy unchanged at today's meeting, the Bank of Japan probably wanted to convey a message to the market; don't fight the BoJ. After the decision, the Japanese yen plunged to the 131 level while the 10Y JGB yield reached 0.38%. We think market volatility can continue for a while yet.
Inflation
Supply Chains Unsnarling, Goods Prices Falling (BMO) - Consumer core goods inflation has slowed sharply and appears poised to wade into negative waters. This reflects the lagged influence of U.S. dollar appreciation on import prices and recent stubborn inflation at the domestic producer level relenting as weakening consumer demand allows disinflation on the production input front to better filter through. And, it reflects the continued unsnarling of global and domestic supply chains as weakening demand also allows supply to better catch up.
Transitory, After All? (BMO) - The milder CPI report compelled us to scale back our calls on inflation and the Fed. We now expect the CPI rate to halve to 4.0% in 2023 from precisely 8.0% last year, half a percentage point less than previously thought. The rate should ease further to 2.5% in 2024. Importantly, the PCE deflator, the Fed’s preferred measure, could slip below 3% this fall. At 5.5% y/y in November, it is already running a full percentage point below the December CPI rate.
Are Inflation Expectations Well Anchored in Mexico? (San Francisco Fed) - Price inflation has increased sharply since early 2021 in many countries, including Mexico. If sustained, high inflation in Mexico could raise questions about the ability of its central bank to bring inflation down to its 3% inflation target. However, analyzing the difference between market prices of nominal and inflation-indexed government bonds suggests investors’ long-term inflation expectations in Mexico are close to the central bank’s inflation target and are projected to remain so in coming years
Europe
Tourism in 2022 approaches pre-pandemic levels (Eurostat) - The EU tourism industry seems to be strongly rebounding from the COVID-19 pandemic. The total number of nights spent in tourist accommodation in 2022 was close to the pre-pandemic level (2.72 billion nights in 2022 compared with 2.88 billion in 2019; -5.6%). This represents substantial increases compared with the number of nights spent in 2020 and 2021 (1.42 billion in 2020, 1.83 billion in 2021; +91.1% and +48.3% in 2022, respectively).
Euro sovereign spreads don’t reflect the 2023 supply surge (ING) - The European Central Bank (ECB) goes from a net buyer of euro sovereign bonds to a net seller in 2023. Combined with high deficits, this will result in a dramatic increase in sovereign funding needs. We take a look at how markets price this increase in funding and establish a range for sovereign spreads based on our supply forecast
Employment
Job Mobility Patterns and Lifetime Earnings Disparities among Male Workers (St Louis Fed) - Workers differ greatly in their lifetime earnings, which we define as the average real wage and salary income earned during their life between ages 25 and 55. For example, among male workers, those at the bottom of the lifetime earnings (LE) distribution earn about $15,000 per year over the life cycle, whereas this number increases to $50,000 for median workers and further increases rather steeply to nearly $400,000 for the top 2% of earners.
Fiscal Policies for Job Creation and Innovation: The Experiences of US States (San Francisco Fed) - This chapter explores how targeted fiscal policies can address these challenges and provides evidence based on the experiences of US states. Section II begins by discussing tax policy design issues.
Financial Markets
The Recent Rise in Discount Window Borrowing (Liberty Street Economics, NY Fed) - The Federal Reserve’s primary credit program—offered through its “discount window” (DW)—provides temporary short-term funding to fundamentally sound banks. Historically, loan activity has been low during normal times due to a variety of factors, including the DW’s status as a back-up source of liquidity with a relatively punitive interest rate, the stigma attached to DW borrowing from the central bank, and, since 2008, elevated levels of reserves in the banking system. However, beginning in 2022, DW borrowing under the primary credit program increased notably in comparison to past years. In this post, we examine the factors that may have contributed to this recent trend.
Here’s why US market rates should not really collapse from here (ING) - Inflation is convincingly lower and falling. And, at the very least, we’re heading into a growth recession. So, shouldn’t market yields be collapsing? They could. But, then again not necessarily. There are technical factors pushing in the other direction, ones that can in fact pressure longer-dated market yields higher, or at least mute any fall.
Real Estate
Single-Family Permits Decreased in November 2022 (NAHB) - Over the first eleven months of 2022, the total number of single-family permits issued year-to-date (YTD) nationwide reached 921,626. On a year-over-year (YoY) basis, this is 10.5% below the November 2021 level of 1,029,208.
Canadian builders break ground at a healthy pace in December (TD Bank) - Like clockwork, housing starts continue to trend at healthy levels roughly 30% above their pre-pandemic run-rate. Homebuilding is being buoyed by low inventory levels and past sales gains.
Manufacturing
Car Market Outlook 2023: Seeing is believing (ING) - We expect that global car sales will rise by approximately 4% in 2023 despite a downbeat outlook for the global economy. This is due to more consistent production volumes, the delayed demand backlog and positive growth expectations for China.
Research
The Discrepancy Between Expenditure- and Income-Side Estimates of US Output (Cleveland Fed) - The United States has two measures of economic output: gross domestic product (GDP) and gross domestic income (GDI). While these are conceptually equivalent, their initial estimates differ because these initial estimates are computed from different and incomplete data sources. I study the difference, or “statistical discrepancy,” between GDP and GDI in percent and document three features. First, its size does not materially shrink on average as more data become available. Second, the size of the initial discrepancy in absolute value does not predict the size of the discrepancy in absolute value after revisions. Third, the initial discrepancy has some predictive information about revisions to lagged GDP growth but no predictive information about revisions to lagged GDI growth.
Demographics
U.S. Population Growth Rate Rebounds in 2022 (NAHB) - According to the U.S. Census Bureau’s latest estimates, the U.S. resident population grew by 1,256,003 to a total population of 333,287,557. After a historically low growth rate of 0.16% between 2020 and 2021, the U.S. population grew at a rate of 0.38% between 2021 and 2022. The increase in the population growth rate reversed a 6-year trend of declining population growth.
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