US PPI rose 0.3% mom in January above expectation of 0.1% mom. PPI goods declined -0.2% mom while PPI services rose 0.6% mom. PPI less foods, energy, and trade services rose 0.6% mom, the largest advance since January 2023.
For the 12-month period, PPI slowed from 1.0% yoy to 0.9% yoy, above expectation of 0.7% yoy. PPI less foods, energy, and trade services was unchanged at 2.6% yoy.
In a speech today, ECB Executive Board member Isabel Schnabel noted the role of “persistently low, and recently even negative, productivity growth” in exacerbating the inflationary pressures from the current strong growth in nominal wages.
She pointed out that this scenario increases the likelihood of firms passing higher wage costs onto consumers, thus “delaying inflation returning to our 2% target.”
With the backdrop of a prolonged period of high inflation, Schnabel argued for the necessity of maintaining restrictive monetary policy stance until there is clear confidence that inflation will sustainably return to ECB’s medium-term objective.
She warned against premature policy adjustments, suggesting that to avoid a “stop-and-go policy” reminiscent of the 1970s, a cautious approach is essential.
“We must be cautious not to adjust our policy stance prematurely,” she said.
UK retail sales volume rose 3.4% mom in January, well above expectation of 1.5% mom. That was the largest monthly rise since April 2021, reversing the deep decline of -3.3% mom in December.
Sales volumes in all subsectors except clothing stores increased over the month, with food stores such as supermarkets contributing most to the increase.
Sales value rose 3.9% mom, largest rise since January 2021. Sales volume rose 0.7%
New Zealand BusinessNZ Performance of Manufacturing Index rose from 43.4 to 47.3 in January, hitting the highest level since June last year. Despite this uptick, it’s important to note that the manufacturing sector remained in contraction for eleven straight months.
BusinessNZ’s Director of Advocacy, Catherine Beard noted that while there are signs of improvement, “the sector is still someway off returning to expansion.”
Looking at some details, production rose from 40.5 to 42.1. Employment rose from 47.0 to 51.3. New orders rose from 44.0 to 47.7. Finished stocks rose from 45.9 to 47.3. Deliveries rose from 43.7 to 49.3.
However, the persistence of negative sentiment among businesses cannot be overlooked. The proportion of negative comments in January rose to 63.2%, up from 61% in December and 58.7% in November, reflecting concerns over seasonal factors such as holiday disruptions and a sustained lack of demand or orders.
In a forum today, RBNZ Governor Adrian Orr indicated that the central bank’s primary challenge lies in firmly anchoring inflation expectations around the 2% target, a goal that remains elusive despite significant progress.
This “tail end” of the inflation fight, as Orr describes, requires meticulous attention to both “capacity pressures” within the economy and the public’s “inflation expectation”s.
“We’ve got more work to do to have inflation expectations truly anchored at that 2% level, he added.
“We observe headline but we are targeting in a large sense core inflation,” Orr stated, emphasizing the importance of these metrics in shaping the central bank’s policy decisions.
Atlanta Fed President Raphael Bostic noted there has been “substantial and gratifying progress” in reducing inflation’s pace, but he warns against premature celebrations.
While inflation is expected to continue to decline, it would be “more slowly than the pace implied by where the markets signal monetary policy should be,” Bostic said in a speech overnight.
With a “strong labor market and macroeconomy,” Bostic highlighted the opportunity to deliberate policy shifts “without oppressive urgency”.
In an interview, ECB Governing Council member Edward Scicluna pointed to March economic projections as a crucial factor that could justify a shift in policy, opening the door for rate cuts. “March could be it,” he suggested, “We’ll see how many think that there’s no need to wait for June.”
Acknowledging the “bumpy” path toward achieving ECB’s disinflation objectives, Scicluna emphasized the clear trend of declining inflation. “You should see the writing on the wall and admit objectively that the trend is going down,” he stated.
Despite the possibility of justifying a hold on rate cuts due to various concerns, including geopolitical tensions, Scicluna argued for a more direct approach: “You have to make a judgment; you don’t find these excuses.”
“Let’s face reality — of course, risks are flying all around us,” he said. “But when you get a comprehensive look at things, prices are falling.”
“At a time when demand is falling, I believe you can let off the pedal a bit,” Scicluna said.
BoE MPC Catherine Mann commented overnight on the -0.3% quarterly contraction in GDP for Q4 2023. She characterized this period as a “soft patch,” adding that the downturn was anticipated and aligned with her expectations.
Rather than dwelling on past performance, Mann is directing her attention to forward-looking indicators, such as business surveys and PMIs, along with BoE’s Decision Maker Panel. “Those are all looking good,” she said.
However, Mann voiced ongoing concerns regarding the persistence of services price inflation in the UK, which she believes is more tenacious than in other advanced economies.
She added that decline in goods price inflation alone would not suffice to sustainably anchor consumer price inflation to the Bank’s 2% target.
US retail sales fell -0.8% mom to USD 700.3B in January, well below expectation of -0.2% mom. Ex-auto sale fell -0.6% mom to USD 567.9B, much worse than expectation of 0.1% mom rise. Ex-gasoline sales fell -0.8% mom to USD 647.9B. Ex-auto, gasoline sales fell -0.5% mom to USD 515.5B.
In the three months to January, sales were up 3.1% from the same period a year ago.
According to European Commission’s Winter 2024 Economic Forecast, Eurozone’s GDP growth for 2024 was revised notably downwards to 0.8% from Autumn’s estimate of 1.2%, reflecting a more subdued outlook than previously anticipated. For 2025, GDP growth forecast as slightly downgraded to 1.5% from 1.6%.
Inflation is expected to decelerate more rapidly in 2024, with HICP forecasted at 2.7%, down from prior 3.2%. Meanwhile, inflation forecast for 2025 remains unchanged at 2.2%.
Vice-President Valdis Dombrovskis highlighted that despite the challenges faced in 2023, “rebound should speed up gradually this year and into 2025”. Inflation will continue its “broad-based decline” and bolstered consumer demand through real wage growth and a robust labour market.
Commissioner for Economy Paolo Gentiloni acknowledged the “more modest” economic rebound this year. But growth is set to “firm” and inflation to decline to close to ECB’s 2% target in 2025.
In a European Parliament committee hearing, ECB President Christine Lagarde highlighted that the “ongoing disinflation process” is expected to continue “gradually further down over 2024,” attributing this trend to the diminishing effects of past upward shocks and the impact of tighter financing conditions on inflation.
Lagarde noted a “gradual decline” in core inflation, which excludes energy and food prices, while also pointing out the “signs of persistence” in services inflation.
Significantly, Lagarde identified wage growth as a crucial factor, stating it is becoming an “increasingly important driver of inflation dynamics.” ECB’s wage tracker signals sustained wage pressures, although there’s “some levelling off” observed in the latest quarter of 2023. The direction of wage pressures in 2024 largely depends on “ongoing or upcoming negotiation rounds” affecting a broad segment of the workforce.
Furthermore, Lagarde observed that the influence of unit profits on domestic price pressures is on the decline, suggesting that wage increments are being partly accommodated through “profit margins.”
UK GDP contracted -0.3% qoq in Q4, worse than expectation of -0.1% qoq. This downturn was a collective result of declines across all primary sectors: services saw a -0.2% dip qoq, production tumbled by -1.0% qoq, and construction experienced a significant -1.3% qoq fall. Following -0.1% qoq contraction in Q3, these figures confirm UK’s entry into a technical recession.
December’s GDP data offered a slight respite with a marginal -0.1% mom decrease, better than expectation of -0.2% mom. That followed 0.2% mom growth in November, and -0.5% mom contraction in October. Services fell -0.2% mom. Production grew 0.6% mom. Construction fell -0.5% mom.
Reflecting on the entire year of 2023, UK’s GDP saw a meager 0.1% growth, a stark contrast to 4.3% expansion in 2022. This marks the weakest annual performance since the 2009 financial crisis, with the exception of the pandemic-stricken year of 2020.
Full UK monthly GDP release and quarterly GDP release.
Japan’s economy has entered a technical recession as GDP unexpectedly contracted by -0.1% qoq in Q4, much worse than expectation of 0.3% qoq growth. That also marked a continuation from -0.8% contraction seen in Q3. On annualized basis, the downturn was -0.4%, a stark contrast to the anticipated 1.4% growth and following -3.3% contraction in the previous quarter.
The contraction is attributed primarily to decline in private consumption, which accounts for over half of the Japanese economy, falling by -0.2% qoq. Capital expenditure, another significant driver of private-sector growth, also decreased by -0.1% qoq. However, external demand, as indicated by the net exports, provided a slight buffer, contributing 0.2 percentage points to GDP, with exports growing by 2.6% qoq.
Economy Minister Yoshitaka Shindo emphasized the importance of solid wage growth to support consumer spending, which he noted is currently “lacking momentum” amidst rising prices. He also pointed out that BoJ considers a broad range of data, including consumption patterns and risks to the economy, when formulating monetary policy.
Australia’s job market showed further signs of cooling in January, as the latest employment data reveals a modest increase of just 0.5k jobs, significantly below expectation of 20.7k growth. Looking at the details, full-time employment saw an uptick of 11.1k, counterbalanced by reduction in part-time job by -10.6k.
Unemployment rate unexpectedly rose from 3.9% to 4.1%, above expectation of 4.0%. That also marked the first occasion in two years since January 2022 that the rate has breached the 4% threshold. Participation rate held steady at 66.8%, but a notable decrease in monthly hours worked by -2.5% mom paints a picture of a slackening labor market.
In today’s Senate Estimates appearance, RBA Governor Michele Bullock underscored the “persistent” nature of inflationary pressures within the Australian economy.
She pointed out the crucial distinction between demand growth rates and overall demand levels, emphasizing “growth rates are slowing, but aggregate demand is still above aggregate supply, and that’s what’s generating inflationary pressures.”
Bullock remained optimistic about RBA’s ability to manage inflation effectively without jeopardizing employment growth. “We think we’re in a good position to get inflation down in a reasonable amount of time while still keeping employment growing,” she noted.
In a speech overnight, Fed Vice Chair Michael Barr noted that the FOMC is “confident” that US is “on a path to 2% inflation”. However, Barr underscored the importance of seeing “continued good data” before initiating reduction in federal funds rate.
Reflecting on the latest consumer product index inflation report, he acknowledged the potential for a “bumpy” journey back to the target inflation rate, emphasizing the need for a “careful approach” in the current economic climate.
During an appearance the House of Lords Economics Affairs Committee, BoE Governor Andrew Bailey highlighted that UK’s inflation rates have fluctuated, slightly overshooting last month and slightly undershooting this month. The development balanced out to “pretty much leaves us where we were”.
He noted the inflation trend were “obviously encouraging” potential worse outcomes. However, he emphasized that services inflation is at levels that are “not compatible with a 2% sustained inflation target”. Meanwhile, pay growth reduction was “just not quite as far as we thought.”
Bailey’s observations come after the latest CPI data remained steady at 4% in January, with core CPI also unchanged at 5.1%. Bailey’s comment suggested that this week’s data s unlikely to prompt immediate policy shifts.
Chicago Fed President Austan Goolsbee at an even today that inflation would “still be consistent” with the path to 2% target even if it “comes in a bit higher for a few months”.
He emphasized that rate cuts should be tied to “confidence in being on a path toward the target”, and rejected to wait until inflation actually hit 2% before beginning to cut rates.
“I think it’s worth acknowledging that if we stay this restrictive for too long, we will start having to worry about the employment side of the Fed’s mandate,” he added.
ECB Vice President Luis de Guindos acknowledged in a speech that inflation is moving “on the right track” towards target. But he also pointed out several factors that could derail progress.
De Guindos highlighted “wage pressures” as a crucial factor yet to show signs of easing, alongside the potential for “profit margins” to remain robust. Furthermore, he pointed to “heightened geopolitical tensions,” especially in the Middle East, as a risk that could lead to increased energy prices and disrupt global trade, complicating the inflation outlook.
“While we are heading in the right direction, we must not get ahead of ourselves,” he said, indicating that it would take “some more time” to gather necessary data to confirm that inflation is on a stable path towards 2% target.
The coming months are expected to provide crucial insights into underlying inflation drivers, with forthcoming data on wage settlements and firms’ pricing behaviors, along with new economic projections in March, set to inform ECB’s future policy decisions.
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NZ BNZ services rises to 52.1, springs back to growth
New Zealand’s BusinessNZ Performance of Services Index rose from 48.8 to 52.1 in January, marking its highest peak since May 2023. This rebound places the sector back into expansion, albeit slightly below long-term average of 53.4.
Components of the PSI showed notable improvements: activity/sales surged to 53.0 from 47.2, employment edged up to 48.1 from 47.2, new orders/business increased to 51.8 from 50.8, and stocks/inventories rose to 53.5 from 51.7. However, a decrease in supplier deliveries to 48.7 from 50.3 hints at logistical challenges.
Reflecting on the sector’s performance, BusinessNZ’s chief executive, Kirk Hope, remarked on the “seesaw” trend between expansion and contraction observed in recent months. He highlighted that the sector’s sustained recovery hinges on “continued momentum” in business activity and new orders, coupled with alleviation in “cost of living” pressures.
BNZ Senior Economist Doug Steel provided an optimistic outlook, suggesting that the combined PMI and PSI activity indicator hints that “annual GDP growth will soon turn positive.” Yet Steel cautioned that further progress is essential to mitigate growing spare capacity within the economy.
Full NZ BNZ PSI release here.