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Econ Mornings (9/16/2022)

MTS Insights
MTS Insights
Economic news and commentary for September 16, 2022

Euro Area Inflation
Euro area inflation grew 0.6% MoM to 9.1% YoY in August, up from 8.9% YoY in July. Rising prices are not stopping, and this report could not be blamed on rising energy prices. The rise in energy inflation was just 0.3% MoM to 38.6% YoY (down from 39.6% YoY). Instead, rising food and non-energy goods prices drove headline inflation higher, up 1.0% MoM and 0.9% MoM. This also resulted in a moderate 0.5% MoM increase in core inflation to 4.3% YoY. This is the worst kind of inflation for the ECB to deal with since it means that more monetary tightening will be needed to ease the pressures from rising prices. To make matters worse, services inflation is rising at a consistent pace, up 0.4% MoM to 3.8% YoY in August, even if it is a bit slower than other categories. The burden of higher prices on consumers is continuing to get higher so one would expect this to feed through to lower retail spending. All of this suggests a recession is on the way in the euro area.
China Retail Sales, Industrial Production, Fixed Asset Investment & House Prices
Chinese retail sales edged down -0.1% MoM in August but were up 5.4% YoY. The improvement in the annual pace comes partly from base effects, but it is encouraging nonetheless. Most categories of spending have seen solid growth over the past year led by petroleum product sales up 17.1% YoY and auto sales up 15.9% YoY. Food and beverage incomes is up a solid 8.1% YoY with spending on daily necessities and household appliances also increasing at a solid rate, up 3.6% YoY and 3.4% YoY. The weak real estate sector was felt through building material sales down -9.1% YoY and furniture sales down -8.1% YoY. These weighed on the headline retail sales figure and make the consumption picture less rosy.
Chinese industrial production grew 0.3% MoM and 4.2% YoY in August. The slight improvement in the industrial sector saw manufacturing production up just 3.1% YoY while electricity and mining production led the way, up 13.6% YoY and 5.3% YoY respectively. For the foreseeable future, the latter two sectors are likely to be the strongest production-wise as energy crises create disruptions for manufacturers. We are also seeing some rebound in the automotive and electrical machinery manufacturing sectors, up 30.5% YoY and 14.8% YoY, as supply chain pressures there continue to ease. In the end, the slight improvement is a good sign for economic growth, but production is still below normal. The potential for COVID restrictions to reemerge is always a concern.
Chinese fixed asset investment was up 0.4% MoM and 5.8% YoY in August, slightly higher than 5.7% YoY in July. The pace of investment has slowed significantly in 2022 so despite attempts by the People’s Bank of China to inject liquidity into the system. In August, we see a slight improvement as the annual pace accelerates 0.1 ppts to 5.8%, but it’s nothing substantial. However, manufacturing investment is up a strong 10.0% YoY with strong growth in food (+17.0% YoY), chemical (+17.9% YoY), and general equipment (+16.9% YoY) manufacturing investment. Standing out from the rest, electrical machinery and equipment investment surged a strong 38.4% YoY in August which is likely a response to the crunch for semiconductors. As more capacity has been needed in that space, China has been looking to grow its market share of electrical equipment manufacturing, and the investment there reflects that.
New home sales prices in 1st tier cities edged up 0.1% MoM to 2.8% YoY in August, and existing home sales prices fell -0.3% MoM but were still up slightly at 0.8% YoY. New home sales prices in 2nd tier cities were weaker, down -0.2% MoM and -1.0% YoY with existing homes sales down -0.3% MoM and -2.8% YoY. The weakness in prices is a result of dramatically lower real estate activity. The total amount of sales of commercial housing in the period from January to August in 2022 was down -27.9% YoY. Real estate development investment is also trending lower, down -7.4% YoY in the same period, though this is a 1.0 ppts improvement from annual growth in the January to July 2022 period. The real estate sector continues to struggle in China and remains a huge drag on growth and consumer spending.
UK Retail Sales
UK retail sales (volumes) fell -1.6% MoM and -5.4% YoY in August. Retail sales (values) fell -1.7% MoM but were up 5.4% YoY. With inflation mostly stable in August, the weakness on consumption was more evident in substantial declines in both the value and volume of retail sales. All categories saw spending fall off with the worse declines in non-food and non-store spending, down -1.9% MoM and -2.6% MoM respectively. The high price of fuel has fuel sales (volume) down -9.0% from pre-pandemic levels. UK consumers appear to be struggling and that is likely to bleed through to GDP growth. However, it’s likely not going to stop the Bank of England’s tightening process as inflation is remaining persistently high.
Italy CPI & Trade
Italy CPI was up 0.8% MoM and 8.4% YoY in August, up from 7.9% YoY in July. The advance in the annual pace of headline CPI came from growth prices across the board: energy up 2.5% MoM, food up 0.9% MoM, services up 0.7% MoM, and non-energy goods up 0.6% MoM. With that, core inflation grew 0.6% MoM to 4.4% YoY. There was nowhere to find relief in Italy’s most recent inflation report. Spending on goods and services is pushing prices in categories like restaurants & hotels (+6.5% YoY) and furnishings & household equipment (+6.0% YoY) higher, and it will have to ease to see some disinflation take effect. One would expect housing, water, and energy prices up 31.5% YoY to be a roadblock to consumer spending, but it hasn’t yet. However, excess savings are waning and a recession (and potentially job losses) is on the horizon.
Italy’s trade balance was -€362 mil in Jul, up from -€3.8 bil a year ago. Exports were up 4.1% MoM, and imports were up 3.4% MoM. Like many other European countries, Italy has been forced to up its energy trade to account for shortages in gas as a result of the conflict in Ukraine. Energy exports are up 186.5% YoY, and energy imports are up 183.1% YoY. Normally, this would result in a wider trade deficit, but Italy’s strong capital goods production and exports offset the energy trade deficit especially when supply chain disruptions and a weak China have forced EU countries to boost intra-EU trade.
Still to come...
8:15 am (EST) - Canada Housing Starts - down -3% MoM to 267k
10:00 am - US Consumer Sentiment
Morning Reading List
Tougher times ahead for US industry (ING)
Firm Factory Production... For Now (BMO)
U.S. Retail Sales: No Gas (BMO)
China: August activity better but still soft (ING)
Bank of England to stick to 50bp rate hike despite the Fed and ECB doing more (ING)
ECB reserve tiering: what’s the impact on euro money markets? (ING)
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