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“Significant deterioration” in September’s Economic Sentiment Index

29 September 2022

Summary: Euro-zone composite sentiment index down in September, below expectations; “significant deterioration in all sectors”; readings down in all five sectors; down in four largest euro-zone economies; German, French 10-year yields lower; index implies annual GDP growth rate of zero.

The European Commission’s Economic Sentiment Indicator (ESI) is a composite index comprising five differently weighted sectoral confidence indicators. It is heavily weighted towards confidence surveys from the business sector, with the consumer confidence sub-index only accounting for 20% of the ESI. However, it has a good relationship with euro-zone GDP, although not necessarily as a leading indicator.

The ESI posted a reading of 93.7 in September, below the consensus expectation of 96.0 as well as August’s revised reading of 97.3. The average reading since 1985 is approximately 100.

The index’s fall “was driven by a significant deterioration in confidence in all surveyed business sectors and another particularly sharp decline among consumers”, according to the report.

Longer-term German and French 10-year bond yields finished the day notably lower. By the close of business, German and French 10-year yields had both shed 6bps to 2.25% and 2.85% respectively.

Confidence deteriorated in all five sectors of the economy. On a geographical basis, the ESI declined in all four of the euro-zone’s four largest economies.

End-of-quarter ESI readings and annual euro-zone GDP growth rates are highly correlated. This latest reading corresponds to a year-to-September GDP growth rate of zero, down from August’s implied growth rate of 0.8%.

Euro-zone composite sentiment
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“Upside risk” for inflation, cash rate; August retail sales up 0.6%

28 September 2022

Summary: Retail sales up 0.6% in August, greater than expected; “upside risk” for inflation, the peak cash rate; still averaging solid pace per month despite RBA rate rises; higher retail prices likely concealing “more pronounced softening” in volumes; largest influence on month from household goods sales.

Growth figures of domestic retail sales spent most of the 2010s at levels below the post-1992 average. While economic conditions had been generally favourable, wage growth and inflation rates were low. Expenditures on goods then jumped in the early stages of 2020 as government restrictions severely altered households’ spending habits. Households mostly reverted to their usual patterns as restrictions eased in the latter part of 2020 and throughout 2021, although not for all categories.

According to the latest ABS figures, total retail sales increased by 0.6% in August on a seasonally adjusted basis. The rise was greater than the 0.4% increase which had been expected but just under half of July’s 1.3% increase. On an annual basis, retail sales increased by 19.2%, up from July’s comparable figure of 16.5%.

“The longer household spending stays solid, the bigger the upside risk for inflation and the peak cash rate,” said ANZ senior economist Adelaide Timbrell.

Commonwealth bond yields increased on the day. By the close of business, the 3-year ACGB yield had inched up 1 bp to 3.84%, the 10-year rate had gained 7bps to 4.13% while the 20-year yield finished 8bps higher at 4.29%.

In the cash futures market, expectations of higher rates softened. At the end of the day, contracts implied the cash rate would rise from the current rate of 2.31% to 2.68% in October and then increase to 3.095% in November. May 2023 contracts implied a 3.81% cash rate while August 2023 contracts implied 4.24%.

“While gains have slowed a touch since the RBA began lifting the cash rate in May, they are still averaging a solid 0.6%-0.7% pace per month,” said Westpac senior economist Matthew Hassan. “Note that higher retail prices are likely concealing a more pronounced softening in retail sales volumes.” Even so, he thought “retail volumes were still ticking over at an above-trend pace in the quarter.”

Retail sales are typically segmented into six categories (see below), with the “food” segment accounting for nearly 40% of total sales. However, the largest influence on the total during the month came from the “Household goods” segment where prices increased by 2.6% on average over the month and thus contributed 0.45 percentage points of the 0.6% increase.

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Conf. Board confidence index up again; inflation, rate rises “remain strong headwinds”

27 September 2022

Summary: Conference Board Consumer Confidence Index improves again in September; reading above consensus expectations; views of present conditions, short-term outlook both improve again; sentiment helped by strong job market, lower fuel prices; “may bode well for consumer spending” in remainder of 2022 but inflation, interest-rate rises “remain strong headwinds”.

US consumer confidence clawed its way back to neutral over the five years after the GFC in 2008/2009 and then went from strength to strength until late 2018. Measures of consumer confidence then oscillated within a relatively narrow band at historically high levels until they plunged in early 2020. Subsequent readings then fluctuated around the long-term average until March 2021 when they reached elevated levels. However, a noticeable gap has since opened between the two most-widely followed surveys.

The latest Conference Board survey held during the first three weeks of September indicated US consumer confidence has improved for a second consecutive month. September’s Consumer Confidence Index registered 108.0 on a preliminary basis, greater than the median consensus figure of 104.5 as well as August’s final figure of 103.6.

Consumers’ views of present conditions and the near-future both improved again. The Present Situation Index increased from August’s revised figure of 145.3 to 149.6 while the Expectations Index rose from a revised figure of 75.8 to 80.3.

“Consumer confidence improved in September for the second consecutive month supported in particular by jobs, wages, and declining gas prices,” said Lynn Franco, a senior director at The Conference Board.

US long-term Treasury yields finished the day higher. By the close of business, the 10-year Treasury bond yield had gained 7bps to 3.84% and the 30-year yield had added 3bps to 3.69%. The 2-year yield finished 1bp lower at 4.27%.

In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months softened. At the close of business, November contracts implied an effective federal funds rate of 3.72%, 64bps higher than the current spot rate while December contracts implied a rate of 4.03%. September 2023 futures contracts implied 4.53%, 145bps above the spot rate.

Franco noted “rising mortgage rates and a cooling housing market” had put a dent in consumers’ intentions to buy homes but not vehicles nor household appliances.

“Looking ahead, the improvement in confidence may bode well for consumer spending in the final months of 2022 but inflation and interest-rate hikes remain strong headwinds to growth in the short term.”

The Consumer Confidence Survey is one of two widely followed monthly US consumer sentiment surveys which produce sentiment indices. The Conference Board’s index is based on perceptions of current business and employment conditions, as well as respondents’ expectations of conditions six months in the future. The other survey, conducted by the University of Michigan, is similar and it is used to produce an Index of Consumer Sentiment. That survey differs in that it does not ask respondents explicitly about their views of the labour market and it also includes some longer-term questions.

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Germany “slipping into recession”; ifo indices down again

26 September 2022

Summary: ifo business climate index down again in September, below expected figure; German companies’ business “clearly worse”, economy “slipping into recession”; current conditions index, expectations index both down again; expectations index implies euro-zone GDP contraction of 9.8% in year to December.

Following a recession in 2009/2010, the ifo Institute’s Business Climate Index largely ignored the European debt-crisis of 2010-2012, mostly posting average-to-elevated readings through to early-2020. However, the index was quick to react in the March 2020 survey, falling precipitously. Readings through much of 2021 generally fluctuated around the long-term average before dropping away this year.

According to the latest report released by ifo, German business sentiment has deteriorated even further and is only slightly better than it was in April 2020. September’s Business Climate Index recorded a reading of 84.3, lower than the consensus expectation of 86.0 as well as August’s final reading of 88.6. The average reading since January 2005 is just above 97.

Companies assessed their current business as clearly worse,” said Clemens Fuest, President of the ifo Institute. “Pessimism regarding the coming months has grown decidedly; in retail, expectations have fallen to a record low. The German economy is slipping into recession.

German firms’ views of current conditions and the outlook both deteriorated again. The current situation index fell from August’s revised figure of 97.5 to 94.5 while the expectations index eased from 80.5 to 75.2.

German and French long-term bond yields both rose noticeably on the day, dragged up by spiking British gilt yields. By the close of business, the German bund yield had gained 12bps to 2.08% and the French 10-year bond rates had added 12bps to 2.66%.

The ifo Institute’s business climate index is a composite index which combines German companies’ views of current conditions with their outlook for the next six months. It has similarities to consumer sentiment indices in the US such as the ones produced by The Conference Board and the University of Michigan.

It also displays a solid correlation with euro-zone GDP growth rates. However, the expectations index is a better predictor as it has a higher correlation when lagged by one quarter. September’s expectations index implies a 9.8% year-on-year GDP contraction to the end of December.

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Consumer sentiment hits new post-GFC low in euro-zone

22 September 2022

Summary: Euro-zone households more pessimistic in September; consumer confidence Index down 3.8 points; well below long-term average, lower bound of “normal” readings; euro-zone bond yields higher.

EU consumer confidence plunged during the GFC and again in 2011/12 during the European debt crisis. After bouncing back through 2013 and 2014, it fell back significantly in late 2018 but only to a level which corresponds to significant optimism among households. Following the plunge which took place in April 2020, a recovery began a month later, with household confidence returning to above-average levels in March 2021. However, recent readings have been extremely low by historical standards.

Consumer confidence deteriorated in September according to the latest survey conducted by the European Commission. Its Consumer Confidence Indicator recorded a reading of -28.8, below the generally expected figure of -24.6 as well as August’s revised figure of -25.0. This latest reading is well below the long-term average of -11.6 as well as outside the lower end of the range in which “normal” readings usually occur.

Euro-zone households more pessimistic in September; consumer confidence Index down 3.8 points; well below long-term average, lower bound of “normal” readings; euro-zone bond yields higher.

Sovereign bond yields rose strongly in major euro-zone bond markets on the day. By the end of it, the German 10-year bund yield had gained 9bps to 1.96% while the French 10-year OAT yield finished 13bps higher at 2.54%.

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Sixth month of consecutive falls for US leading index in August

21 September 2022

Summary: Conference Board leading index down 0.3% in August, lower than expected; index now down for six consecutive months; manufacturing sector work hours down, activity to “continue slowing more broadly throughout the US economy”; latest reading implies 1.8% US GDP growth to November.

The Conference Board Leading Economic Index (LEI) is a composite index composed of ten sub-indices which are thought to be sensitive to changes in the US economy. The Conference Board describes it as an index which attempts to signal growth peaks and troughs; turning points in the index have historically occurred prior to changes in aggregate economic activity. Readings from March and April of 2020 signalled “a deep US recession” while subsequent readings indicated the US economy would recover rapidly. More recent readings have trended lower, implying implied lower US GDP growth rates.

The latest reading of the LEI indicates it decreased by 0.3% in August. The result was lower than the 0.1% fall which had been generally expected but above July’s revised figure of -0.5%.

“The US LEI declined for a sixth consecutive month, potentially signalling a recession,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board.

Conference Board leading index down 0.3% in August, lower than expected; index now down for six consecutive months; manufacturing sector work hours down, activity to “continue slowing more broadly throughout the US economy”; latest reading implies 1.8% US GDP growth to November.

Short-term US Treasury bond yields jumped on the day, while longer-term yields moved inconsistently. By the close of business, the 2-year Treasury yield had gained 17bps to 4.10%, the 10-year yield had inched up 1bp to 3.54% while the 30-year yield finished 5bps lower at 3.49%.

In terms of US Fed policy, expectations of a higher federal funds range over the next 12 months softened. November contracts implied an effective federal funds rate of 3.74%, 66bps higher than the current spot rate. December contracts implied a rate of 4.06% while September 2023 futures contracts implied an effective federal funds rate of 4.475%, 140bps above the spot rate.

Ozyildirim pointed to a fall in the US manufacturing sector’s average number of work hours per week in four of the last six months as a taste of things to come. “Economic activity will continue slowing more broadly throughout the US economy and is likely to contract. A major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures.”

Regression analysis suggests the latest reading implies a 1.8% year-on-year growth rate in November, down from October’s figure of 2.3%.

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“A material loss in momentum”; Westpac-MI leading index negative in August

21 September 2022

Summary:Leading index growth rate down in August; first negative reading since early 2022, “material loss in momentum”; reading implies annual GDP growth of around 2.35%; flatter yield curve, lower commodity prices drives index fall since March.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth in the short-term. After reaching a peak in early 2018, the index trended lower through 2018 and 2019 before plunging to recessionary levels in the second quarter of 2020. Subsequent readings spiked towards the end of 2020 but then trended lower through 2021 and 2022.

The August reading of the six month annualised growth rate of the indicator registered -0.38%, down from July’s figure of 0.49% after it was revised from 0.63%.

“This is the first negative print since the start of the year and the weakest since the delta lockdown hit in 2021,” said Westpac Chief Economist Bill Evans. “The Leading Index is pointing to a material loss in momentum to a below-trend pace.”

Index figures represent rates relative to “trend” GDP growth, which is generally thought to be around 2.75% per annum in Australia. The index is said to lead GDP by “three to nine months into the future” but the highest correlation between the index and actual GDP figures occurs with a three-month lead. The current reading thus represents an annual GDP growth rate of around 2.35% in the middle of the December quarter.

Leading index growth rate down in August; first negative reading since early 2022, “material loss in momentum”; reading implies annual GDP growth of around 2.35%; flatter yield curve, lower commodity prices drives index fall since March.

Long-term domestic Treasury bond yields moved a few basis points higher on the day. By the close of business, 10-year and 20-year ACGB yields had both added 3bps to 3.70% and 3.94% respectively. The 3-year yield finished unchanged at 3.45%.

In the cash futures market, expectations of higher rates remained largely unchanged overall. At the end of the day, contracts implied the cash rate would rise from the current rate of 2.31% to 2.685% in October and then increase to 3.07% in November. May 2023 contracts implied a 3.885% cash rate while August 2023 contracts implied 3.795%.

Evans noted the index’s fall since March had been driven by “a sharp narrowing of the yield gap” or, in other words, a flatter yield curve. Lower commodity prices in Aussie dollar terms also played a significant role while lower working hours and slower growth of US industrial output played lesser roles in the index’s fall.

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US retail spending up in August, “not falling in any significant way”

15 September 2022

Summary: US retail sales up 0.3% in August, more than expected; July figure revised down; spending “not falling in any significant way”; US short-term Treasury bond yields up, rate rise expectations harden; rises in eight of thirteen retail categories; “motor vehicles/parts dealers” segment largest single influence on month’s result.

US retail sales had been trending up since late 2015 but, commencing in late 2018, a series of weak or negative monthly results led to a drop-off in the annual growth rate below 2.0%. Growth rates then increased in trend terms through 2019 and into early 2020 until pandemic restrictions sent it into negative territory. A “v-shaped” recovery then took place which was followed by some short-term spikes as federal stimulus payments hit US households in the first and second quarters of 2021.

According to the latest “advance” numbers released by the US Census Bureau, total retail sales increased by 0.3% in August. The rise was above the flat result which had been generally expected and it contrasted with July’s -0.4% after it was revised down from 0.0%. However, on an annual basis, the growth rate still slowed from July’s revised figure of 10.1% to 9.1%.

“Overall, the data don’t send a clear message but make it clear that consumer spending is not falling in any significant way,” said ANZ Head of Australian Economics.

Short-term US Treasury bond yields moved higher on the day while longer-term yields remained steady or fell. By the close of business, the 2-year Treasury yield had gained 5bps to 3.82%, the 10-year yield had returned to its starting point at 3.44% while the 30-year yield finished 2bps lower at 3.50%.

In terms of US Fed policy, expectations of a steeper path for the federal funds rate over the next 12 months hardened. At the close of business, October contracts implied an effective federal funds rate of 3.14%, 81bps higher than the current spot rate. November contracts implied 3.775% while October 2023 futures contracts implied an effective federal funds rate of 4.20%, nearly 190bps above the spot rate.

Eight of the thirteen categories recorded higher sales over the month. The “Motor vehicle & parts dealers” segment provided the largest single influence on the overall result, rising by 2.8% for the month. Fuel Station sales also had a significant influence on the month’s result but in the opposite direction, falling by 4.2%.

The non-store segment includes vending machine sales, door-to-door sales and mail-order sales but nowadays this segment has become dominated by online sales. It now accounts for just under 16% of all US retail sales and it is the second-largest segment after vehicles and parts.

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US industrial output sags in August, reverses July gain

15 September 2022

Summary: US industrial output down 0.2% in August, below market expectations; up 3.7% over past 12 months; capacity utilisation rate down 0.2ppts to 80.0%, just below long-term average.

The Federal Reserve’s industrial production (IP) index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component. US production collapsed through March and April of 2020 before recovering the ground lost over the fifteen months to July 2021.

According to the Federal Reserve, US industrial production contracted by 0.2% on a seasonally adjusted basis in August. The result contrasted with the 0.2% increase which had been generally expected as well as July’s 0.5% increase after it was revised down from 0.6%. On an annual basis the growth rate slowed from July’s revised figure of 3.8% to 3.7%.

US industrial output down 0.2% in August, below market expectations; up 3.7% over past 12 months; capacity utilisation rate down 0.2ppts to 80.0%, just below long-term average

Short-term US Treasury bond yields moved higher on the day while longer-term yields remained steady or fell. By the close of business, the 2-year Treasury yield had gained 5bps to 3.82%, the 10-year yield had returned to its starting point at 3.44% while the 30-year yield finished 2bps lower at 3.50%.

In terms of US Fed policy, expectations of a steeper path for the federal funds rate over the next 12 months hardened. At the close of business, October contracts implied an effective federal funds rate of 3.14%, 81bps higher than the current spot rate. November contracts implied 3.775% while October 2023 futures contracts implied an effective federal funds rate of 4.20%, nearly 190bps above the spot rate.

The same report includes US capacity utilisation figures which are generally accepted as an indicator of future investment expenditure and/or inflationary pressures. Capacity usage had hit a high for the last business cycle in early 2019 before it began a downtrend which ended with April 2020’s multi-decade low of 64.2%. August’s reading declined from July’s revised figure of 80.2% to 80.0%, just below of the long-term average of 80.1%.

While the US utilisation rate’s correlation with the US jobless rate is solid, it is not as high as the comparable correlation in Australia.

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US core PPI figures surprise in August

14 September 2022

Summary: US producer price index (PPI) down 0.1% in August, less than expected figure; annual rate slows to 8.7%; “core” PPI up 0.4%; underlying PPI data does not allay fears of further Fed hikes; short-term US Treasury yields jump, rate-rise expectations firm.

Around the end of 2018, the annual inflation rate of the US producer price index (PPI) began a downtrend which continued through 2019. Months in which producer prices increased suggested the trend may have been coming to an end, only for it to continue, culminating in a plunge in April 2020. Figures returned to “normal” towards the end of that year but annual rates over the past eighteen months have been well above the long-term average.

The latest figures published by the Bureau of Labor Statistics indicate producer prices declined by 0.1% after seasonal adjustments in August. The fall was less than the flat result which had been generally expected but above July’s -0.4% after revisions. On a 12-month basis, the rate of producer price inflation after seasonal adjustments slowed from 9.8% in July to 8.7%.

Producer prices excluding foods and energy, or “core” PPI, rose by 0.4% after seasonal adjustments. The increase was slightly higher than the 0.3% rise which had been generally expected as well as July’s 0.3% rise. The annual rate slowed from July’s revised figure of 7.7% to 7.3%.

“All up, the underlying PPI data did nothing to allay fears that the Fed will need to hike considerably further if it is to meet its inflation mandate,” ANZ economist John Bromhead. “Service prices tend to be sticky in that they take a number of months to change and that suggests the task facing the FOMC is more difficult given price resilience.”

US producer price index (PPI) down 0.5% in July, less than expected figure; annual rate slows to 9.7%; “core” PPI up 0.2%; fuel accounts for 80% of decline; longer-term US Treasury yields considerably higher, rate-rise expectations firm.

US Treasury bond yields increased on the day, especially so at the short end of the curve. By the close of business, the 2-year Treasury yield had gained 24bps to 3.779%, the 10-year yield had added 12bps to 3.44% while the 30-year yield finished 4bps higher at 3.42%.

In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months firmed. At the close of business, October contracts implied an effective federal funds rate of 3.145%, 82bps higher than the current spot rate. November contracts implied 3.765% while September 2023 futures contracts implied an effective federal funds rate of 4.165%, 184bps above the spot rate.

The producer price index is a measure of prices received by producers for domestically produced goods, services and construction. It is put together in a fashion similar to the consumer price index (CPI) except it measures prices received from the producer’s perspective rather than from the perspective of a retailer or a consumer. It is another one of the various measures of inflation tracked by the US Fed, along with core personal consumption expenditure (PCE) price data.

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