Macro Weekly – Confirmation

by: Han de Jong

  • Eurozone output data and Asian trade data confirm stronger momentum
  • US headline inflation up, again, but not core inflation
  • Central bankers in the spotlight
171013-Macro-Weekly.pdf (82 KB)

Strong activity data

Recent data on the global business cycle confirms what I noted last week. Momentum appears to be on the rise. Industrial production in the eurozone was up 1.4% mom in August and 3.8% yoy, against 3.6% in July. The national data shows, understandably, a somewhat mixed picture. France only booked a 1.1% yoy rise, but Italy saw 5.7%. German industrial production was up 4.7%, Dutch output 3.9%. Output of the manufacturing sector was softer, only up 2.7% yoy for the eurozone, but that was the second consecutive monthly improvement, confirming that momentum has risen in recent months.

The trade data in Asia for September was impressive. I mentioned last week that Korean export growth accelerated to a whopping 35% yoy in September. That looked a little odd, but this data can be volatile and the number was helped by base effects and perhaps some other incidental factors. More recently, Taiwan published trade data for September. Their export growth is showing a similar development to Korea’s. Taiwanese exports were up 28.1% in September, against 12.7% in the month before. Base effects are bound to push this growth rate down during the next couple of months, but it is impressive all the same. China also published trade data. Their exports were up 8.1% yoy, against 5.6% in August. More important for the rest of the world, Chinese import growth accelerated from 13.5% yoy in August to 18.7% in September. This could, of course, still be incidental and temporary, but it looks very healthy to me. US retail sales were also strong in September (+1.6% mom), though this came after weakness in August (-0.1% mom). Having said that, one must bear in mind that this data is nominal and prices rose strongly in August and September, so the real data is softer than the headlines suggest.

US headline inflation accelerates, but not core

US inflation has surprised on the downside for most of the year. But in August, prices suddenly rose 0.4%, the highest monthly increase since January and the second highest monthly increase since 2013. September produced even more inflation: 0.5% mom. On a yoy basis, inflation accelerated to 2.2%, up from 1.9% in August. Does this mean that inflation is finally coming through and that my view that there are strong disinflationary forces at work in the US economy is wrong? Not really. Well, not yet, at least. Core CPI was up only 0.1% mom, while the yoy rate stabilised at 1.7%. The big gap between headline and core inflation is explained by a 4.8% mom increase in energy prices. We also need to bear in mind that the hurricanes have had an effect on prices, most likely upwards. So the US inflation picture is now somewhat difficult to read.

Central bankers in the spotlight

The inflation picture makes things more complicated for central bankers. The minutes of the latest US FOMC meeting shows that the Fed officials continue to struggle explaining what is happening with (core) inflation. Nevertheless, they have to decide what to do and it would appear they are not very uncertain of what to do in the short term. FOMC members showed unity in their support for the approach they have taken to shortening their balance sheet by reducing the amount they reinvest every month from the monies coming in from maturing paper they own. A December rate hike looks more likely than not. Only a clear drop in inflation or financial market turmoil could stop it, I think. The minutes did show, however, modest changes (downwards) to the FOMC members’ projection for official rates even concerning a December rate hike. There was also a modest lowering of the average projection of where rates will be at the end of 2018. So some FOMC members appear to take the low inflation numbers more seriously than before.

The ECB will soon announce what it will do when its current programme of asset purchases ends at the end of the year. Mario Draghi tried to press home that any tapering is not a tightening of monetary policy. He stressed that any rate hikes are still far away. The ECB president is trying to prevent a negative reaction to the announcement of tapering and, of course, to the tapering process itself. The last thing the ECB wants is to cause a sharp tightening of financial conditions either through the exchange rate or rising borrowing costs. Looking at the bond market over the last couple of days, Draghi has so far been successful.