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Money & Cycles Weekly Bulletin

Commodity prices suggesting new real money squeeze

April 15, 2024 by Simon Ward

Headline inflation momentum bottoming. The six-month rate of change of global consumer prices reached a new low in March but will rebound if recent commodity price strength holds / extends (see charts).

Perspective on US core inflation. Annual core CPI inflation firmed to 3.8% in March but was 1.2% excluding shelter and motor vehicle insurance; on the European HICP definition, annual core was 1.9% versus 2.9% in the Eurozone and 4.5% (February) in the UK (see charts).

Underwhelming Chinese money / credit data. Six-month narrow money momentum has failed to build on a January recovery while “credit impulse” measures have softened; meanwhile, a resumed decline in money rates suggests that the PBoC is back on an easing tack (see charts).

Eurozone / UK credit demand still weak. Bank lending surveys signalled improved credit availability but little appetite for borrowing from firms, while UK mortgage activity is expected to cool (see charts).

Headline inflation momentum bottoming

Global six-month CPI momentum is estimated to have fallen further in March but recent commodity price rises suggest a rebound into mid-year:

Chart 1 showing G7 + E7 Consumer Prices & Commodity Prices (% 6m)

Note: UK / Canadian March data this week; Japan estimated based on Tokyo data.

An inflation rebound threatens to reverse a recent recovery in six-month real narrow money momentum (still negative in February):

Chart 2 showing G7 + E7 Narrow Money & Consumer Prices (% 6m)

US consumer sentiment held up in early April but may not fully reflect current gasoline prices:

Chart 3 showing US Consumer Sentiment (University of Michigan) & Retail Gasoline Price (cents / gallon, inverted)

The March New York Fed consumer survey reported a sharp weakening of personal labour market perceptions:

Chart 4 showing US Consumer Survey Labour Market Weakness Indicators

Perspective on US core inflation

US annual headline and core CPI inflation firmed in March and remain far above 2% (3.5% and 3.8% respectively):

Chart 5 showing US Consumer Prices (% yoy)

The overshoot is entirely attributable to shelter (rents) and motor vehicle insurance – up an annual 22% in March, with a 3.6% weight in the core basket:

Chart 6 showing US Consumer Prices (% yoy)

Annual core ex. shelter and motor vehicle insurance = 1.2%.

Six-month momentum of core ex. shelter and motor vehicle insurance has recovered but was still only 1.5% annualised last month:

Chart 7 showing US Consumer Prices (% 6m annualised)

Insurance premiums have been catching up with repair costs and are likely to slow:

Chart 8 showing US Consumer Prices - Motor Vehicle Insurance & Repair (% yoy)

Note also that the CPI insurance measure is rising much faster than the equivalent PCE price series (20.9% vs. 7.8% in the year to February).

On the European HICP definition, US annual core inflation returned to 2% in July 2023 and was 1.9% in March:

Chart 9 showing US Prices ex Food & Energy - Alternative Measures (% yoy)

The HICP (harmonised index of consumer prices) measure excludes owners’ equivalent (i.e. imputed) rent.

The US measure peaked more than a year before the Eurozone / UK, with a similar lead apparently playing out in the downswing:

Chart 10 showing HICP ex Food & Energy (% yoy)

Underwhelming Chinese money / credit data

Chinese six-month narrow money momentum eased for a second month in March, dampening hopes that a January rebound marked the start of a sustained recovery:

Chart 11 showing China Nominal GDP & True M1 (% 6m)

Credit impulse measures have also softened:

Chart 12 showing China "Credit Impulse" Change in Rolling TSF Flow as % of GDP

Annual CPI inflation fell back by more than expected following February’s New Year-related jump:

Chart 13 showing China Consumer Prices (% yoy)

A 7.5% year-on-year fall in exports in March reflected an unfavourable base effect:

Chart 14 showing China Exports & Imports ($ bn, January / February averaged, sa)

Exports picked up in January / February but consolidated in March, while imports have flatlined.

Softer data may have prompted the PBoC to shift back to an easing tack – term money rates have resumed a decline after moving sideways during March:

Chart 15 showing China Interest Rates

Japanese money growth remains stable below its pre-pandemic average, continuing to suggest a medium-term inflation undershoot:

Chart 16 showing Japan Narrow / Broad Money (% 6m annualised)

Eurozone / UK credit demand still weak

Eurozone banks expect a recovery in mortgage activity but continued weakness in corporate credit demand:

Chart 17 showing Eurozone ECB Bank Lending Survey: Credit Demand Net % Expecting Stronger Demand

Capex-related borrowing demand remains depressed, suggesting downside risk to business investment:

Chart 18 showing Eurozone Non-Residential Fixed Investment (% yoy) & ECB Bank Lending Survey, Loan Demand from Enterprises for Fixed Investment

UK corporate credit demand is also expected to stay soft, with mortgage borrowing cooling after a Q1 burst of activity:

Chart 19 showing UK BoE Credit Conditions Survey: Credit Demand Net % Expecting Stronger Demand

Banks continue to report / expect rising mortgage defaults:

Chart 20 showing UK BoE CCS: Change in Default Rate on Secured Credit to Households Net % Reporting / Expecting Increase

NS Partners Ltd.
April 15th, 2024