Economic Outlook – 19 February 2023

The Consumer Price Index sprang 0.5% in January, the most in seven months. This was roughly in line with consensus expectations. Prices in the energy segment jumped 2.0% as a decline for fuel oil (-1.2%) was more than offset by steep increases for gasoline (+2.4%) and utility gas services (+6.7%). The cost of food, meanwhile, rose 0.5%. The core CPI, which excludes food and energy, increased a consensus-matching 0.4% Prices for ex-energy services advanced 0.5% in the month as another massive gain for shelter (+0.7%) was compensated for in part by a 2.1% decline in airline fares. Motor vehicles maintenance (+1.3%) and insurance (+1.4%) continued to advance at a brisk clip, while the cost of medical care services fell 0.7%. The cost of core goods, meanwhile, edged up 0.1% MoM, hampered by a seventh consecutive decline in the used vehicles segment (-1.9%). Alternatively, notable increases were recorded for medical care commodities (+1.1%), apparel (+0.8%), tobacco/smoking products (+0.7%), and alcoholic beverages (+0.4%) Retail sales jumped 3.0%, a much bigger increase than expected by economists (+2.0%) and the fastest monthly pace in nearly two years. The prior month’s result stood unrevised at -1.1%. A big chunk of the monthly gain was due to auto sales, which recorded their steepest monthly gain (+5.9%) since March 2010, excluding the pandemic period. It should be noted, though, that this progression was not entirely due to renewed optimism among American consumers. Improved supply conditions played a role as well, which allowed customers finally to take possession of vehicles ordered months earlier. With auto sales still below pre-pandemic levels, continued easing of supply chain constraints could translate into further gains for auto dealers in coming months. However, auto sales were only part of the story in January The Producer Price Index for final demand jumped 0.7% in January after drawing back 0.2% in December. The bounce was bigger than the 0.4% increase called for by consensus. Goods prices rose 1.2% on a strong rebound in energy (+5.0%), while food prices continued to slip (-1.0%). Prices in the services category, meanwhile, swelled 0.4%. The core PPI, which excludes food and energy, increased 0.5%, which was also more than expected by analysts. YoY, the headline PPI slid from 6.5% to 6.0%, its lowest level since March 2021. Excluding food and energy, it fell from 5.8% to a 20-month low of 5.3% The NFIB Small Business Optimism Index pegged in at 90.5, up 0.5 point from December but still way below the index’s long-term average. Consensus expectations were for the index to notch in at 91.0. Six of the ten components of the index posted increases. Notably, the share of firms expecting the economy to improve increased 6 points to a net -45%. The net earnings trend posted a healthy gain of 4 points to a net -26%. Meanwhile, current job openings swelled another 4 points to 45% and firms planning to increase employment swelled from 17% to 19%. As a result, the gap between the percentage of companies with at least one position they were unable to fill and the net percentage of firms planning to increase employment remained wide The Empire State Manufacturing Index of general business conditions surged 27.1 points in February but continued to signal a deteriorating situation at -5.8. The improvement was significantly better than the -18.0 print expected by consensus. The negative print stems from the fact that new orders continued to slow down, albeit at a more moderate pace than in the prior month (from -31.1 to -7.8). This kept the unfilled orders gauge in decline (from -14.3 to -9.2), which in turn led to a decrease in delivery times (from +0.9 to -9.2). This was the sharpest negative reading for this indicator since October 2016. This slowdown led to a faster accumulation of inventories (from +4.5 to +6.4). As a result of the moderation in business activity, the number of employees tracker slid from 2.8 to -6.6 and the average employee workweek went from -10.4 to -12.1 Industrial production was unchanged in January, whereas consensus expectations were for a 0.5% increase. What’s more, the prior month’s result was revised downward from -0.7% to -1.0%. After retreating 1.8% in December and 0.8% in November, manufacturing output rebounded 1.0% in the first month of 2023, overshooting the 0.8% increase expected by consensus. The increase was fueled by both durable goods (+0.8%) and nondurable goods (+1.1%). Regarding durables, five of the major industries posted increases of at least 1%, with nonmetallic mineral products (+2.4%), machinery (+1.7%), and electrical equipment (+1.3%) performing particularly well. Auto output climbed 1.1%. Regarding non-durables, the increase was led by apparel and leather (+3.7%), textile and product mills (+2.2%), and food/beverage products (+1.7%). Utilities output retreated 9.9% after surging in December owing to colder-than-usual temperatures. Finally, production in the mining sector swelled 2.0% Homebuilder sentiment as per the National Association of Home Builders Market Index rose 7 points in February to 42, a level that remains well below pre-pandemic levels. NAHB data also signaled a slight improvement in prospective buyer traffic, with the corresponding gauge shooting up from 23 to 29. Housing starts retreated from 1,371K in December (initially estimated at 1,382K) to 1,309K in January, below the median economist forecast of 1,350K units. Both the single-family (-38K to 841K) and the multi-family segments (-24K to 468K) contributed to the decline The economic data this week bucked those trends and pushed market-based rate expectations closer in line to the view that the Federal Reserve would hike its main borrowing rate higher still and hold it there through year-end. Retail sales and manufacturing production both surprised to the upside in January, and inflation posted its biggest monthly increase since October. Residential construction did slow for a fifth straight month, but even in this sector hit hard by rising rates, there was a modest uptick in permits pulled for future construction US President Joe Biden announced the appointment of Fed Vice Chair Lael Brainard as the director of the National Economic Council. Recently appointed Federal Reserve Bank of Chicago President Austan Goolsbee has been mentioned as a likely replacement for Brainard. Goolsbee previously served as chair of the White House Council of Economic Advisers under President Barack Obama The US Congressional Budget Office says that if Congress does not extend the nation’s debt limit, the US could default some time between July and September. The CBO forecasts a fiscal year 2023 budget deficit of $1.4 trillion and expects the government to amass an additional $19 trillion in debt in the coming 10 years if there is no shift in spending patterns The major indexes ended mixed as investors weighed some healthy growth and profit signals against worries that inflation trends might be taking an unfavorable turn. Fears that the Federal Reserve would need to raise short-term interest rates more than previously expected caused U.S. Treasury yields to increase and fostered a rise in the U.S. dollar, taking an especially large toll on oil prices and energy stocks In terms of data release, existing and new home sales will be out on Tuesday and Friday respectively. The run-up in mortgage rates in 2022 eroded affordability and significantly depressed demand for housing. Nearly every housing market indicator weakened over the year as a result. To close out 2022, new home sales registered a 26.6% year-over-year decline and existing home sales similarly posted a 34% annual drop. The downward trajectory of mortgage rates in the last few months of the year has sparked hope for a turnaround. New home sales registered three consecutive monthly increases in October, November and December. Existing home sales also declined at a less-than-expected rate in December, falling only 1.5% compared to November’s 7.9% drop. Pending home sales, reflecting signed real estate contracts, also rose 2.5% in December, the first monthly improvements since May Personal income and spending prints are out on Friday. Despite the Fed’s historically rapid tightening cycle, a tight jobs market combined with inflation that is now easing is providing a tailwind for consumers. This combination supported real income gains during the last six months of 2022, providing a more sustainable source of purchasing power beyond pandemic savings to sustain spending. Continuing that trend, the blowout net employment gain in January and spike in hours worked—afforded by relatively fewer seasonal separations and unseasonably warm weather—likely provided a solid boost to personal income over the month. Cost-of-living adjustments to social security also take place in January and have put more money in the pockets of consumers  

UK Retail sales data for January has been released, sales were up 0.5% MoM, -5.1% YoY. Non-food stores sales volumes rose by 0.6% in January, following a fall of 2.5% in December with what growth there was supported by sales promotions. Despite this pickup, sales volumes were 2.9% below their pre-pandemic levels. Food sales volumes fell by 0.5% in January 2023 following a fall of 0.7% in December due to customers buying less because of the increased cost of living and food prices. While at least a portion of these rises was due to increased amount spent (0.6%) and the increase in quantity bought was slightly lower (0.5%), there was clearly an actual increase not due to inflation Overall consumers continue to be hit by: higher energy costs; tax rises (while there is scope for the Chancellor to reduce taxes in his budget in a few weeks, every indication is that he will be focused on business taxation, not personal); higher interest rates; and higher inflation (which is finally falling and is set to do so for the rest of the year). All this is a long way from being all well and good, and these circumstances do explain why consumer confidence remains in the doldrums, and retail sales have reflected this UK Inflation for January has come out at -0.6% MoM, 10.1% YoY. CPIH rose by 8.8% y-o-y, down from 9.2% in Dec 2022. The largest upward contributions to CPIH rate came the cyclicals, energy and food. The core rate of inflation (i.e., without cyclicals), is now 5.8% YoY. This is the number that is going to be watched particularly carefully by the Bank of England’s Monetary Policy Committee in deciding if it needs to raise interest rates any further. While these numbers remove some of the pressure, there is also scope for further deliberations as there will be a further month of inflation data on March 22 (and a Government Budget on March 15) before the next interest rate decision on March 23 Inflation forecasts across the board have, for some time, been that with the base effect coming into play over the course of the next few months, inflation is set to plunge. This is simply a mathematical effect of incorporating the surge in energy prices experienced in the wake of the Russian invasion of the Ukraine in February 2022 into YoY data. While this remains the case, the caveat must be that energy prices remain extremely susceptible to sudden surges as the Ukrainian crisis is far from resolved. The biggest concern has to be core inflation, particularly wages, which saw a surge in yesterday’s data and in data areas such as restaurants, where finding staff has been difficult, inflation has been notably more prevalent

Eurozone employment rose to a record high in the final quarter of last year, which could exacerbate ECB policymakers’ worries about second-round effects on inflation. Employment rose by 0.4% to 165.07 million, the most since early 2021 and more than double the consensus forecast. On a YOY basis, employment grew 1.5% after rising 1.8% in the third quarter Industrial production in the eurozone fell in December by 1.1% sequentially, which was more than expected. Energy-intensive industries posted the sharpest falls in output. The euro area recorded a deficit of EUR 314.7 billion in 2022, compared with a surplus of EUR 116.4 billion the year before, as sharp increases in energy prices caused the value of imports to exceed the value of exports The European Commission upgraded its eurozone GDP forecast to 0.9% in 2023, avoiding the recession that it had earlier forecast. The commission posits that inflation peaked in October at 10.6% and that it will subside to 5.6% this year and 2.5% next year. The European Commission also said that while the risks to the outlook are now more balanced, demand may prove more robust if declining wholesale gas prices feed through to consumer prices and consumption proves resilient European Central Bank President Christine Lagarde said the central bank intends to raise rates by 50 basis points in March and will evaluate the future path of policy thereafter. Price pressures remain strong, she said. Executive board member Isabel Schnabel agreed, saying investors risk underestimating the persistence of inflation and markets are too optimistic in their pricing of a 3.5% terminal policy rate Shares in Europe rebounded as better-than-expected corporate results helped markets shrug off fears about additional interest rate hikes. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.40% higher. France’s CAC 40, which reached a record level earlier in the week, climbed 3.06%. Italy’s FTSE MIB Index advanced 1.77%, and Germany’s DAX Index added 1.14%. The UK’s FTSE 100 gained 1.55%, hitting an all-time high 

The People’s Bank of China (PBOC) injected a further CNY 199 billion into China’s fiscal system via its one-year medium-term lending facility. The move was largely anticipated by investors, as the bank strives to meet the sharp rebound in economic activity after the government abruptly removed all pandemic-related restrictions in December. The PBOC issued a statement pledging to offer precise measures to strengthen financial support for key areas and weak links in the economy, including steady loan growth, targeted housing credit policies to individual cities, and providing financial services to meet housing demand Prices for new homes in China remained roughly steady in January, breaking a 16-month slide, as demand received a boost from the government lifting of its zero-COVID regime. In recent months, Chinese authorities have rolled out a slew of support measures for the struggling sector as it focuses on restoring economic growth in China. Economists now predict that the government will announce additional policies during or after the highly anticipated annual Parliament meeting, which starts in early March Chinese equities fell for a third consecutive week as concerns over escalating geopolitical tensions with the U.S. hampered prospects of faster economic growth. The Shanghai Stock Exchange Index pulled back 1.12%, and the blue-chip CSI 300 eased 1.75%. In Hong Kong, the benchmark Hang Seng Index retreated 2.22%, according to Reuters
 Sources: T. Rowe Price, MFS Investments, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets