This week's highlights
Import prices have become more interesting following the rising focus on inflation and notably after Bernanke pointed to import prices.
We have taken a look at the pass-through from import prices to core inflation. As appears from the chart below, the pass-through was relatively strong around the time of the oil crises in the 1970s and early 1980s, but otherwise the pass-through has been very poor. This is confirmed by researchers who have proven that the pass-through (the elasticity) is more than halved during the periods 1971-1989 and 1990-2004.
The question is of course whether the rising oil prices will recreate some of the pass-through from import prices to core consumer prices. We do not believe that will happen. Above all since wage indexation (wages are linked to rising prices) has more or less disappeared. Please note that since 1965 wages have only risen during two recessions; namely in 1973/75 and 1980, and in the latter case the rise was very modest. Moreover, the often relatively volatile prices on goods (including energy and food) account for a smaller share of consumer prices than in the mid-1970s when they accounted for 55% compared to 40%).
Not surprisingly, import prices have risen along with the rise in energy and food prices and the weakening of the dollar. In May, import prices rose by 17.8% y/y which is the largest rise ever (since the early 1980s). A considerable part of the price rises comes from oil prices. Disregarding energy prices, import prices rose by 6.6% in May. There are prospects of further rises in import prices in June since for instance prices on oil and natural gas increased while the trade-weighted dollar strengthened a little.
This week's other highlights
- The US: pending home sales, trade balance
- The UK: monetary-policy meeting at the BoE
- Japan: machine orders
- Sweden: consumer prices
- Norway: consumer prices
Tuesday
The US: pending home sales - June
Pending home sales are a fairly good leading indicator of housing activity for the next two months although they only cover about 20% of total pending home sales. This is due to the fact that pending home sales are based on contract signed before the transactions are closed. Home sales have fallen by 33% since the autumn of 2005, but as appears from the chart below, there has been some stabilisation in both existing home sales and pending home sales. The question is whether this stabilisation will continue; pending home sales can answer that question.
House prices have fallen since the last reading. Furthermore, consumers' disposable income has increased as their income has increased. Long-term mortgage yields, on the other hand, have begun to rise, which reduces the purchasing power of consumers.
Home sales are still kept down by the following factors: partly by the expectations of further price declines and partly by restrictions in lending practices. This may put off a rise in housing demand, thereby prolonging the pressure on housing prices.
Overall, we expect pending home sales to prove unchanged.
Japan: machine orders - May
We expect the slower development in machine orders to continue in May due to the more bleak growth picture and the pressure on corporate profits in the wake of the rising commodity prices. This is not a good sign for investment since usually machine orders are a good indication of the investment development at 6- 9 months' term.
Norway: consumer prices - June
Since the turn of the year, inflation has been markedly above Norges Bank's target, and we expect this situation to continue in the coming months. It is not only food and energy prices which lift high inflation rate, since the underlying inflationary pressure is also on the increase.
In our view, consumer prices will record a sharp rise in June, because the CPI continues to rise, and Norwegian food prices are only about to have catch up with the rise in global food prices. The rise is particularly evident in food produced in Norway, which has risen by 7% y/y since the turn of the year. Imported inflation is still negative due to the development in global prices for, e.g., electronics and clothes and to the effect of the stronger currency. We expect core inflation to rise in June because of the high capacity utilisation, the tight labour market and the higher rate of wage increases.
Sweden: consumer prices - June
Rising food and energy prices have driven Swedish consumer prices up sharply, and they are now considerably higher than the Riksbank's inflation target of 2% +/- 1 percentage point. In May, consumer prices were up by 4% y/y, while core inflation (exclusive of interest expenses and indirect taxes) rose by 2.9%. Exclusive of food and energy, however, the inflation rate is still below the target.
In our view, the inflation rate will keep high in June, because energy prices in particular continue to rise, and we have yet to see the inflation rate peak. The Riksbank is concerned that the high inflation rate will lead to so-called second-round effects in the form of higher inflation expectations and accelerating wage claims, and the Bank therefore raised interest rates again on 3 July. Moreover, the high consumer prices erode households' purchasing power and weigh heavily on consumer spending, which is vulnerable already.
Thursday
The UK: monetary-policy meeting at the Bank of England
The Bank of England is in a dilemma with inflation rising sharply while the economic growth is slowing down. We expect that the Bank of England will weigh those two elements against each other and leave interest rates unchanged at 5% where it has been since the last interest rate cut in April.
Consumer prices rose in May by 3.3% y/y and are now at the highest they have been since 1992. It is extensively food and energy that drive up the inflation rate, and exclusive of those elements, the inflation rate rose by a modest 1.5%. The Bank of England expects the inflation rate to rise to more than 4% later this year but stresses that there is good reason to believe that the high inflation rate is temporary and that there are no signs that prices and wages in general are rising.
Economic growth in the UK, on the other hand, is slowing sharply, and despite the surprising resilience of retail sales, most indicators show that we have not seen the worst yet. The BoE has repeatedly stressed that a certain slowdown in growth is necessary to reduce the inflation rate to about the target at two years' term.
Overall, we expect the Bank of England to refrain from raising interest rates to curb mounting inflation, but on the other hand, there are no prospects of interest rate cuts in coming months. We therefore expect interest rates to be left unchanged towards the turn of the year when a darker growth picture in conjunction with less ominous inflation prospects indicates that interest rate cuts may be resorted to again.
Friday
The US: trade balance - May
The trade balance has become less important since there is increasing focus on inflation. It is interesting to see whether exports are still pulling growth along and also to see the decline in exports, because these facts may affect trade partners' economic growth.
As the chart shows, the deficit has been hovering just below USD 60bn since the end of 2006. Actually, this masks an improvement of USD 10bn exclusive of oil, but oil prices have risen so fast that the improvement has largely been offset by rising oil imports. Oil accounts for about a third of the aggregate deficit, so therefore the oil price is an important parameter for developments in the deficit.
According to our model of oil imports, a rise of about 4 bn in oil imports is probable, and this is expected to increase the deficit. Adjusted for oil imports there are still prospects of continuing improvement of the trade balance. This is because American demand for import goods is falling in connection with the economic crisis. The fact that foreign demand for American export goods remains strong is reflected in the ISM export index which indicates a solid increase in demand. ISM's import index points to a fall in imports. Overall we expect a solid rise in the deficit on the balance on goods and services.
Focus will also be on imports of capital goods, since this is an indicator of corporate investment. Traditionally corporate investment falls sharply during recessions, but this has not been the case so far. The import of capital goods is still rising robustly.
The US: import prices - June See This week's highlight.
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.