Global Daily – US inflation benign despite wage pressures

by: Bill Diviney , Aline Schuiling

US Macro: Inflationary pressure still remarkably subdued – US PPI inflation, both core and headline, came in weaker than expected at 0.1% mom in February (consensus: 0.2%). The details showed strength in goods (+0.4%) offset by weakness in services (0.0%). The undershoot followed a downside surprise in core CPI inflation yesterday (0.1% mom vs 0.2% ABN/consensus). This was driven principally by weakness in used cars and prescription drug prices, both of which face structural pressures (the former from oversupply, the latter from increased generics competition). With that said, core services inflation (excluding shelter and medical) also remains remarkably subdued given pressures from the tight labour market – which, as Friday’s payrolls report showed, is feeding through to stronger wage growth. We continue to think inflation will remain benign over 2019-20, and that the Fed will be comfortable keeping rates on hold. First, higher productivity growth is keeping unit labour cost growth in check, even as wage growth accelerates. Second, inflation expectations remain very well-anchored, with if anything downward pressure of late from the fall in oil prices. Finally, the still-low labour share of income suggests ample room for businesses to absorb higher labour costs, even if productivity growth falters again and unit labour cost growth rebounds. (Bill Diviney)

Euro Macro: Industry not yet out of the doldrums despite rise in output in January – Industrial production in the eurozone rose by 1.4% mom in January, which was well above the consensus and our own forecast. The rise followed two sharp monthly contractions of 2.3% in total. The details of the January report show that the sharpest rises were recorded in the production of goods that have a relatively weak link to exports and are largely driven by domestic demand, which are energy and consumer goods. In contrast, production of intermediate goods and capital goods, which tend to move closely in sync with exports and global trade, expanded only modestly. This indicates that growth in the eurozone still is being depressed by weakness in global trade and global industrial production, whereas domestic demand is more resilient. Indeed, recently published more forward looking surveys have suggested that the eurozone industrial sector is still in the doldrums. For instance the new export orders component of the eurozone manufacturing PMI, the orders-to-stock ratio in the eurozone manufacturing PMI, as well as Germany’s Ifo expectations in manufacturing all declined in February. We expect eurozone industry to remain weak over the next few months, but it should pick up in the second half of the year, when global trade is expected to improve on the back of the dovish policy shifts by global central banks, which has resulted in some easing in financial conditions. (Aline Schuiling)