This week's highlights
Inflation in the US has become increasingly important since several Fed members have expressed a growing concern about inflation. Generally, the Fed members are mostly concerned about the risk that high inflation will lift long-term inflation expectations. There have only been limited signs of this.
Consumer prices rose sharply in May and inflation reached 4.2% y/y. There is absolutely a risk that inflation will rise further in June. Energy prices have increased steeply and so have food prices.
However, core consumer prices (i.e. exclusive of food and energy) rise somewhat slower - in May in line with trend growth (0.2% m/m) and we also expect this for June. Core inflation was 2.3% y/y in May and has stabilised in recent months.
Generally, we are not overly concerned about inflation. Inflation has been driven up by mainly external factors (oil, food and a weaker dollar) while the domestic inflationary pressure is more likely to fall. Thus wage increases have declined by 1 percentage point to 3.4% and productivity growth remains solid. So far, domestic demand is weak which dampens the inflationary pressure.
On Tuesday, 15 July chairman of the Fed Ben Bernanke will testify before the Senate and deliver the Fed's semi-annual report. It will be interesting to hear to which extent Bernanke and the Fed are still concerned about inflation and whether the rhetoric on the topic will be increased.
This week's other highlights
- The US: many important economic indicators, including retail sales, industrial production, building permits & housing starts and minutes from the Feed meeting.
- The euro zone: euro zone consumer prices, including core inflation, and ZEW from Germany
- Japan: monetary policy meeting at the BoJ
- The UK: consumer prices and labour market report
- China: GDP for Q2 and consumer prices
In the course of the week
China: GDP - Q2
Chinese growth has in recent years been strong and topped in 2007 at 11.9%. We expect growth to slow in 2008 and 2009 and expect growth to come out just below 10% this year. Slower growth will among other things be a result of weaker global growth, a stronger currency and the attempts by the central bank to control liquidity growth through raising banks' reserve requirements (a total of 3 percentage points in 2008 alone and 8.5 percentage points since early 2007). Growth is slowing - GDP for the first quarter showed a rise of 10.6% y/y against 11.2% in the fourth quarter.
Indicators for growth in the second quarter point most of all to a stabilisation compared to the first quarter. Most economic indicators are, however, only updated up to and including May (June data for industrial production, retail sales and investment are released around the same time as GDP), and we are thus one month short of getting a full view of the quarter. We expect growth to be slightly lower than in the first quarter.
Monday
Japan: monetary-policy meeting at the BoJ
We expect the BoJ to leave interest rates at 0.5% at which they have stood since the hike in February 2007.
The Japanese economy is slowing down. The export sector, which has maintained momentum for a long period, is about to be hit by the global slowdown in growth, and there are no indications that the domestic economy will takeover the role as growth engine. Consumer spending is under pressure due to falling real wages and lower employment growth, and the weaker export prospects adversely impact on investments, just as the companies' profits are squeezed by high commodity prices.
Even though consumer prices have risen significantly by Japanese standards (1.3% y/y in May) and now are the highest they have been for ten years, there are no signs that inflation is generally on the rise. Core inflation (exclusive of food and energy) is negative, wage growth is again close to zero after having been positive for a little while and economic growth is slowing.
On that background, we expect the BoJ to keep interest rates unchanged for the rest of the year. A hike will not be requisite until the last six months of 2009 and will not be made until the economy is back in swing or core inflation begins to show a robust positive trend.
The UK: RICS - June
In recent years, the survey from the Royal Institute of Chartered Surveyors has indicated a markedly weaker housing market. The house price index - which shows how many of the interviewed surveyors that assess house prices to rise against how many that assess prices to fall - rose slightly in May (to -92.9%), but it is still very close to the historical low from April.
The ratio between housing sales and the stock of unsold houses rose further in May - both due to a fall in housing sales and a rise in the stock - which indicates that growth in housing prices will slow further in coming months. Compared with the historically low number of mortgages, there are not many indications that the housing market will turn any time soon. Real housing prices have already fallen sharply, and according to Nationwide the annual rate of increase was -6.3% in June which is the lowest level since 1992.
Tuesday
The US: retail sales - June
Retail sales are one of the most important economic indicators this week. Retail sales account for a large part of consumer spending, and in our view consumer spending is the factor that will pull the economy into recession. It adds to the interest that so far consumers have not given in although they are under heavy fire.
Retail sales for May showed that consumers have absolutely not given up although the fire is very strong. The fire is fuelled by rising energy and food prices, falling employment (although moderately), rising unemployment, falling house prices and reluctant banks.
Nevertheless, retail sales rose solidly in May, and the data were revised up in March and April. One of the factors which may explain part of the strength in retail sales in May is the tax cuts. Tax payers received about USD 90bn of the planned tax cuts worth USD 110bn in May and June.
Another factor which may lift retail sales is the rise in petrol prices. They have increased along with the rise in oil prices, and this will lift retail sales which are measured as the volume of business. Car sales, however, fell sharply in June and this may have an adverse effect on retail sales.
Altogether, we expect a minor rise in retail sales for May, but exclusive of petrol and cars retail sales will be somewhat weaker.
The US: producer prices - June
Inflation indicators have become important as the rising energy and food prices have pushed inflation up, and several Fed governors have grown increasingly concerned about the risk of rising inflation and particularly rising inflation expectations.
Lately, producer prices have risen relatively sharply. Also, the rise in energy and food prices tends to spread to core producer prices. They have risen by 3% over the past twelve months which is the largest rise since 1991.
There have been signs of rising prices in the earlier stages of the production process. The prices of semi-finished goods and commodities (exclusive of food and energy) have risen faster than usual. It will be interesting to see if the price increases in the earlier production stages spill over into the price of finished goods. Traditionally, the spill-over effect has been relatively modest, and it has tended to hit with a bigger time lag. So the risk is not regarded as very big. The Philly Fed has a price index of corporate sales prices, and they are often a leading indicator of the development in prices of semi-finished goods. The Philly Fed's price index indicates a continued rise in prices of semi-finished goods.
The ISM price index still indicates high price increases, and energy prices (oil, natural gas and gasoline), which are often driving total producer-price inflation, increased further from May to June. Moreover, food prices have risen sharply due to the floods in parts of Ohio. This signals a solid increase in producer prices in June. In our view, core producer prices will rise somewhat less than producer prices.
The US: the Fed's semi-annual report
Twice a year, the Fed presents its semi-annual report on the monetary policy to the Senate and the House of Representatives (previously known as the Humphrey-Hawkins speech/report). The Fed presents its view of the economy and its growth projections. In this connection, it is worth noting whether there will be changed signals about concerns over inflation vs. growth, which may prompt the Fed to change interest rates. This is probably also something that will be asked about in the subsequent hearing where members of the Senate and the House of Representatives can ask questions to Ben Bernanke. Usually, Bernanke presents his assessment of the monetary policy to the Senate and the House of Representatives on two consecutive days where the only difference is the questions asked and the answers given.
Germany: ZEW - July
ZEW has for a long period signalled a significant weakening of the German economy but this has not yet happened. However, we assess that there are still a few quarters in store with weak growth in Germany, and we therefore do not expect a rise in ZEW, although we disagree about the growth level which ZEW signals.
The UK: consumer prices - June
Following a rise of 3.3% y/y in May, inflation is now at the highest it has been since 1992. It is mainly driven by rising food and energy prices and exclusive of these May inflation rose by a modest 1.5%. We expect the rising food and energy prices to have pushed inflation further up in June. However, in the longer term we expect that the inflationary pressure abates as the bleak growth picture materialises and the pressure on the resources of the economy is reduced, just as the basis effect from commodity prices will disappear.
In May inflation exceeded 3% and the BoE had to write an explanatory letter to the Chancellor of the Exchequer. The BoE estimated in its letter that inflation will rise further in the coming months due to continued rises in global food and energy prices and the weaker currency. The BoE expects inflation to exceed 4% later in the year. However, the BoE points out that there is reason to believe that the period with inflation above the target is temporary and that there are no signs of generally rising prices and wages. But there is no doubt that the BoE is concerned about the inflation prospects since inflation expectations - also for the long term - are rising.
Wednesday
The US: consumer prices - June
See This week's highlight.
The US: Industrial production - June
Industrial production is interesting, since it is traditionally highly cyclical and since it is followed by the committee responsible for deciding when the US is in recession.
Industrial production fell slightly in May after a rather sharp fall in April and was driven down by a fall in energy production. Compared with May last year, industrial production fell by 0.5%.
Generally, the manufacturing industry is in good shape with thick order books and a moderate increase in the inventory to sales ratio. The car industry and the housing-related part of the manufacturing industry are, however, in serious trouble.
We expect a decline in industrial production for June due to the following signs:
- The manufacturing industry is still cutting jobs rapidly, pointing to lower production.
- ISM manufacturing was in May 49.6, indicating largely unchanged production. ISM production rose to 51.2, indicating a small rise in production.
- New orders in the manufacturing industry have risen solidly in recent months, but part of the rise covers price rises
- The order books of manufacturing companies are very thick. They will act as a buffer against a temporary fall in the demand for industrial products.
- The inventory to sales ratio rose, and normally this means that companies reduce their production.
Capacity utilisation in the manufacturing industry fell to 77.5% which is the lowest it has been since 2004 and somewhat below the historical average. Since there are prospects of a small decline in industrial production in our opinion, capacity utilisation will decline too.
The US: NAHB - Housing Market Index - June
Home builders' gauge of sales and expectations, NAHB, is interesting, since it gives an impression of the situation in residential construction - the sector of the economy which was definitely hit the hardest.
We expect residential construction to bottom out towards the end of the year so that it no longer lowers the GDP growth rate by about a percentage point as has been the case these past two years.
According to the index, builders are downcast over the prospects for home building. The index has again fallen to 18 (as in December 2007), but otherwise it has been fairly stable. Since index 50 indicates unchanged residential construction, the current level indicates a sharp fall in residential construction.
We expect the NAHB housing market index to rise slightly. Home sales have stabilised - both with respect to existing and new home sales. However, there is still a considerable stock of homes for sale.
The US: minutes of the FOMC meeting in June
This is one of the important events during the week, although the minutes are less important due to financial turmoil. The meeting was before the turmoil picked up again.
There are signs of disagreement in the committee about the reaction to the rising energy and food prices. Several of the presidents from the district banks are very concerned about the risk of rising inflation and rising inflation expectations. Members of the Fed board, on the other hand, appear to be much less concerned. The minutes are likely to cover at least part of the discussion between the two wings, including how far away an interest-rate hike is.
Another theme will also be the committee's assessment of growth. It has become less pessimistic about growth and notably consumer spending. However, it must still be relatively concerned about the development in housing prices and the financial sector.
The euro zone: consumer prices - June
The preliminary consumer prices showed an increase of 4.0% (y/y) for June. This time also core inflation data will be released. If core consumer prices still show a moderate rate of increase, it may give the ECB some time to breathe. Rising core inflation will, on the other hand, quickly prompt the ECB to begin rattling the sabre again and indicate new interest-rate hikes. There is no doubt that the ECB will keep an eye on this indicator, including core inflation but also the trend in notably service prices.
The UK: Labour-market report - June
Currently, focus is on the development of wages due to the risk that rising inflation and rising inflation expectations will spread to wages. However, this does not seem to be the case at the moment since the development of wages remains moderate, both exclusive and inclusive of bonus. In May, wages exclusive of bonus rose by 3.9% y/y (3-month moving average), and although wage increases are at the highest level in 18 months they are still somewhat below the long-term average. Wages inclusive of bonus fell to 3.8% y/y in May
Moreover, unemployment is about to turn since the number of people which joined the queue at the Employment Service is on the rise. The number of unemployed rose in May by 9,000 people. However, the unemployment rate remains stable due to continued growth in employment. In April, the unemployment rate was 5.3%, corresponding more or less to the natural rate of unemployment (Nairu) that is compatible with stable inflation.
Sweden: minutes of monetary-policy meeting
The Riksbank decided to raise interest rates by a quarter point to 4.5% at the meeting on 3 July. The hike did not come as a surprise - but the aggressive tone in the press release and the monetary policy report came as a surprise. According to the Riksbank, it is necessary in spite of slower growth to raise interest rates a few more times in the coming twelve months to reduce inflation to around the target at two years' term. The minutes from the monetary policy meeting will reveal whether the decision was unanimous. At the previous interest-rate hike in February, Irma Rosenberg and Lars Nyberg voted to hold interest rates, and it will be interesting to see whether they also voted against the hike in July.
Thursday
The US: building permits & housing starts - June
Building permits and housing starts are among the most important economic indicators this week. Residential construction has fallen massively, as reflected by the fact that the number of building permits for single-family homes has fallen by no less than 65% since late 2005. This is the largest fall ever.
The fall in residential construction has, however, slowed. In late 2007, residential construction fell by almost 60% y/y over three months, but this is now down to 7% y/y. The housing market is boosted by rising income and the fact that builders lower prices on new homes. Home sales have shown some stabilisation. Builders are, however, still pessimistic about sales.
Builders' stock of unsold homes is still very high, indicating a fall in residential construction. The stock has fallen since mid- 2006, but mainly for homes under construction or projected. Builders' stock of completed homes did not begin to fall until the turn of the year. Hence, it is still a long way until builders' stock of unsold homes has fallen to a more acceptable level.
Therefore we expect a moderate decline in residential construction in June.
The US: Jobless claims
Jobless claims are an indicator of how many new people join the unemployment queue. The claims are used as an indicator of developments in the labour market based on the following: the more claims, the weaker employment growth.
Jobless claims are also one of the best indicators of employment, and this week there is extra focus on the data since this is the week when the data for the job report are collected.
The US: Philly Fed - July
Philly Fed is one of the regional indicators of industrial confidence which are used as a gauge of how the economy is doing at state and federal level. There is a good correlation in the longer term between Philly Fed and ISM, although Philly Fed shows wider fluctuations than ISM in the short term. The development of Philly Fed has been much weaker than that of ISM in the past six months. In addition to the overall index, focus will be on new orders, employment and the price index.
China: consumer prices - June
Inflation fell in May to 7.7% y/y from 8.5 % in April. The fall in inflation is mainly due to food prices which rose by about 20% y/y against approx. 22% in April, but exclusive of food prices inflation fell slightly to 1.7% from 1.8%.
A large part of the rise in inflation over the past twelve months can be ascribed to rising pork prices, but indications are that this trend is turning. Meat prices fell in May and pulled the annual rate of increase down to 37.8% from 47.9%. Pork prices fell throughout the full June, and this is likely to pull the annual rate of increase further down. We expect this development to lead to gradually lower inflation during the year.
But the government's increase in energy prices - 17% for petrol and diesel prices - has the opposite effect. Energy prices do not account for a very large part of the consumer price index; less than 5% while in comparison food prices account for 1/3.
Jyske Markets - FX Research http://www.jyskebank.dk/finansnyt
The analysis is based on information which Jyske Bank finds reliable, but Jyske Bank does not assume any responsibility for the correctness of the material nor for transactions made on the basis of the information or the estimates of the analysis. The estimates and recommendation of the analysis may be changed without notice.