A Dash of Coldwater Economics

The US July CPI result was better than expected, with headline inflation moderating to 8.5% yoy (from 9.1% in June), mainly thanks to a 4.6% mom fall in energy costs. This was on the back of a 10.4% mom fall in Brent oil prices and a 8.5% mom fall in Nymex natural gas prices. It is not obvious this is being repeated in August: so far, on average oil prices have fallen a further 7.5% mom, but gas prices have rebounded 12.6% mom, and overall the CRB index, which fell 9.5% in July, is almost unchanged. Still, July's result is strong enough to allow us to scale back the likely inflationary trajectory in the US, with it now expected to peak at 9.1% in September, before drifting down to below 8% by end-2Q23. But two caveats. First, I'm fashioning these trajectories from the 6m deviation in 5yr seasonalized trends - but volatilities in CPI indexes during the last six months have been consistently dramatic (both above and below trend), and in some cases (UK) positively freakish. So even a 6m trend assumption isn't looking particularly stable month-on-month. Second, whilst inflationary pressures may be moderating in the US, they are only now beginning to show up in force in NE Asia. Overall, this means that my measure of global aggregate inflation continued to rise in July. . . .

I'm less concerned with the recession/no-recession arguments (hey, don't US politics just absolutely fascinate you? Me neither), than with the implications for profits and stockmarket valuations. Three observations: 1. Regardless of headline GDP, once you strip out extremely volatile inventory-flows, there's been essentially no growth in final sales of domestic product now for five quarter. There's just no momentum at all. 2. The massive fiscal stimulus has not yet completely been washed out of the Kalecki profits reckoning. I calculate profits were down 7.4% qoq and 19.4% yoy, mainly thanks to the fiscal deficit moderating. But there's worse - the profits/GDP ratio has fallen to its lowest level since 1Q16 - so there's cyclical as well as one-off structural pressure at work. 3. All of which means the S&P500 remains overvalued on my slow-model basis, which has been essentially on the money for the last 30 years. July's rally will extend that overvaluation. So the vulnerability continues, and rises.

The speed and severity with which data from the US has collapsed over the last month is extremely unusual. Why is the outbreak of inflation doing such damage so quickly. One reason is the way in which the US profits model has changed over the years, until since 2000 to the present day, 77.6% of Kalecki profits are attributable to household and government dissavings, whilst only 22.4% come from net investment and net exports. Compare that to 1960-1980, when net investment and exports accounted for 65.7% of profits, with h'hold and govt dissavings generating only 34.3%. Let's state the obvious: if your profit model depends disproportionately on h'holds and governments spending more than the earn, sooner or later, even the strongest financial balance sheet will become impaired, fragile. And it's that financial fragility which is kicking in, and kicking down, right now.

Two things today: first, a closer look at the ECB's so-called 'Transmission Protection Instrument'. Short take: it's open ended, with only decorative conditionality. The real constraint is that it mustn't inflate the ECB's balance sheet. So if it wants to do anything other than short-term fire-fighting in (say) Italy's bond market, it will have to do so by selling (say) German bonds. That'll make ECB meetings fun to watch. Second thing: today's UK public sector deficit of £22.1bn featured an astonishing £19.9bn in interest payments. That's 23% of total spending, which is 6.2SDs above the long-term average. Cui bono? Why, chancellor Rishi Sunak of course, hoping to step up to become PM on a Treasury-determined manifesto of immediate recession-inducing tax rises. That unprecedented shock of interest payments could almost have been designed to illustrate the Treasury's - sorry, Rishi's - argument. And probably was - 6.2SDs after all.

The UK is about to enter the strange and disturbing world of sustained double digit inflation. We can tell that from the underlying trends generating June's 9.4% yoy headline CPI, but also by the way the gap between input PPI (24% yoy) and output PPI (16.5% yoy), and the gap between output PPI and CPI are continuing to widen. Not until we see some evidence that the pressure to 'pass-through' factory inflation pressures has peaked can we expect headline CPI to retreat. There's no sign of that yet.

Fiscal policy is doing the heavy lifting as China seeks to re-start its economy following zero-Covid strategy lockdowns. June's monthly data suggests they're having some success in re-opening, even if this isn't obvious in the yoy results. But 2Q GDP growth of 0.4% yoy catches China's economy at its lowest ebb, and the closer you look at it, the uglier it gets. After all, this 0.4% yoy growth was generated really only by net exports and a surging fiscal deficit - strip those out and 2Q nominal domestic demand was in freefall. Which is what you'd expect when you close down the economy. Full all-singing, all-dancing illustrated & detailed version available on the Coldwater Economic sustack page.

People are queuing outside some small banks in Henan, desperate to rescue their deposits. Is this the start of another near-collapse of China's banking system. On balance, the available evidence makes that very unlikely.

We've now had more of January's foreign reserves data for Asia, and its generally shown modest falls, as you'd expect when the dollar strengthens and asset prices fall. To recap: China's reserves fell 0.9% mom, Japan's fell 1.4% S Korea's fell 0.3% (thanks to some very active switching out of bonds);and Indonesia fell 2.5% (includes some foreign debt repayment). But Singapore managed a 0.1% rise. Today we had Hong Kong, which reported reserves down 0.9% mom - ie pretty much in line with what we've seen elsewhere. But there are a couple of problems: first Jan's loss comes after a year of near stasis, with the result that reserves are now falling in yoy terms. This is only marginal, but its very rare for HK, and shows that HK has received negligible reserves inflow from global QE this time - in stark contrast to the reserves bonanza HK enjoyed in 2009/2010. The second problem is this: the HK dollar is run as a currency board: in theory, if foreign reserves fall, then the net HK$ clearing balance of the banking system, or currency in circulation, has to shrink too. In simple terms, the impact of falling foreign reserves is sharper in HK than in most Asian economies. And so, in Nov HK M0 grew only 1.7% yoy, and in Dec HK$M3 only 1.5%. And there is this third consequence: Hong Kong's continuing liquidity is increasingly being supplied by China. We have the net international breakdown of HK's banks net int'l position only up to October. But what is shows is consistent with the rising pressure: HK banks' total net assets fell by US$51bn yoy to US$327bn; but its position with China fell $41bn to a net liability of $28bn. My bet is that by January it was much deeper. Again, having a net liability position to China is very rare for HK - back in 2014 it had net assets in China of $335bn. The last time it had a net liability position was back in . . . 2008 - 2009. What this adds up to is HK's increased financial vulnerability to a) a strengthened dollar; b) any tightening in China; plus, of course, any feedback in loss of confidence. That's quite a lot of vulnerability to take into the likely environment of 2022.

There are statistics raw, and there are statistics adjusted. By and large, the more statistics are adjusted to give a 'clearer view', the more careful you've got to be about them. With that in mind, I want to share some observations on Friday's US labour survey data. On the face of it they were extremely positive: non-farm payrolls were up 467k, and Dec's payrolls were revised up to 510k from an initial 199k. Even more spectacularly, Jan's h'hold survey of employment found employment up 1.199mn, which was the sharpest monthly gain since January 2000, on the back of an extraordinary 1.393mn rise in the labour force as the labour participation rate rose 0.3pps to 62.2%, the highest since March 2020. Not only are these really dramatic gains, but they also run absolutely counter to what ADP found in its Jan survey of private employment, where payrolls fell by 310k. What's going on? The thing you need to is that the strength of Jan's labour survey results is largely the result of statistical adjustment of truly monstrous proportions. The seasonally adjusted establishment survey of non-farm payrolls rose 467k mom, but the unadjusted number show a fall - yes, a fall - of 2.824mn mom. Similarly, the household survey's reported a seasonally adjusted 1.199mn rise in employment: but strip out the seasonal adjustments, and the raw numbers show a fall of 114k in January. There are at least two different things going on here, quite apart from the 'normal' seasonal adjustment. The first is simply that the Bureau of Labor Stats has revised its seasonal adjustment process, notably taking into account the massive disruptions seen during the onset of the pandemic and subsequent recovery. This is responsible for the major upward revision in Dec's data, with the massive strength in June/July last year being quietly, and for these purposes invisibly, being revised down. This is what is behind the abnormal and anomalous seasonally adjusted strength in non-farm payrolls reported in January. The impact of this change is going to be felt throughout the year: essentially it will bias non-farm payrolls results upwards through to May, before reversing the bias downwards sharply from June through to November. You've been warned. The second concerns a big technical change in the h'hold survey - the once which produced a rise of 1.199mn in January's employment despite a non-adjusted fall of 114k. What's happening here is that Jan's survey introduced updated population estimates, with a new estimate of population from the 2020 census & later data, rather than the 2010-based data which was what was used for the Dec 2021 survey. That, and that alone, raised the estimate of the labour force in Jan by 1.53mn, raised employment by 1.47mn, and unemployment by 59k. And you'll have spotted it: if the change in census base raised employment by 1.47mn, and Jan's survey reported a rise of only 1.199mn, what it is telling is is that on same-survey basis regardless of seasonal adjustment issues, h'hold employment actually fell by 272k. To summarise: we're all going to have to take the monthly labour market surveys from the US with a very large pinch of salt for the coming year: the next few months are going to be great: after that, not so much.

I'd expected that inflation was coming back for a second bite in January, but Eurozone's Jan CPI was far worse than even I had expected. Headline CPI up 5.1% yoy, with a monthly rise 3.3SDs above historic trends. Energy alone was up 6% mom and 28.6% yoy, but in addition, F&B was up 1.1% mom and 3.6% yoy. Energy and food - even if energy prices calm down, food inflation will stay with us, thanks to the longer-term impact of the jump in fertilizer prices. Strip energy and food out, and core CPI was up 2.3% yoy, but with a monthly movt 2.3SDs above historic seasonal trends. The big problem is that January was the month when the Eurozone base of comparison turned friendly: Jan 2021's monthly rise was no less than 4.1SDs above trend, mainly because of the sharp and encouraged rise in CO2 emission prices. So Jan 2022 ought to have offered relief. That it didn't means we've got to raise likely yoy rates for the rest of the year. The revision is sharp too, pushing the likely yoy up by around 1pp for the whole of the year. That means its now reasonable to expect 1Q CPI to average 5.3%, 2Q 5.8%, 3Q 5.9% and 4Q 5.2%. Core CPI, meanwhile, will can be expected to rise above 3% for most of the year, starting in March. Meanwhile, yesterday 10yr yields were at 0.04%. It's very hard to see how the ECB can keep the pedal to the metal when you've got this scale of inflation. Over in the US, I follow heavy truck sales as a good leading indicator - at least for recession. January's sales were extremely encouraging : not only were Jan's sales up 13.1% mom to the highest monthly total since Sept 2019, but in addition, sales numbers were revised up very sharply - by 27% no less from what was initially claimed. A rebound on this scale over the last two months removes what had been a worrying recession signal. By contrast, the 301k fall in Jan's ADP's private payrolls count looks, on the face of it, grim. But for the time being, I'm suspending judgement. Why? First, remember that in Dec we had a 776k rise. That was exceptionally strong, and the pullback in Jan still leaves jobs up 475k over the last two months - and that's a very strong number indeed, comparing with 273k averaged in this period over the last five years. Second, more than half the fall came from leisure and hospitality - down 154k, which is hardly surprising given that a) holiday season is over and b) omicron is with us.

Jan's inflation has regained some momentum, reversing the slight relief we got in Dec's results. We've now had Jan CPI flashes from both Germany and France, and they confirm it. Germany's CPI was up 4.9% yoy against a very steep base of comparison (because Jan 2021 was when German CO2 charges really escalated). The monthly rise of 0.4% mom is 2.2SDs above historic seasonal trends. Not only was energy up 20-.5% yoy, but food was also up 5%. This year, food inflation is going to feature heavily around the world, in response to the jump in fertilizer costs in 2020. France's CPI also rose 2.9% yoy, which was worse than expected, with a 0.3% mom rise which was 1.8SDs above what was expected. Like Germany: energy was up 19.7% yoy, and fresh food was up 3.6%. Tomorrow we get the Eurozone CPI flash: at the moment, consensus is expecting 4.3% yoy, but from what we know now, it will come in a bit higher than that. The second thing I want to draw your attention to is an addition I've made to my data universe. I've included the Chicago Fed's Brave-Butters-Kelley (BBK) set of coincident and leading indexes for the US for the first time. Data is something I take seriously, but it has a fundamental problem. In particular, the idea that there is an unaltered canon of measurements that make up 'the economic data' is misleading - because an economy is a thing that's changing all the time, and the things that get included as 'the data' can only ever reflect an economic structure that have already been and gone. That's the 'data problem'. One way to address that is to scan as widely as possible - it's why I look at 500 data pieces every month. The BKK indexes do pretty much the same, taking into account 500 datastreams a month just on the US. This is almost a 'big data' view on the US economy, and one I very much approve of. In Dec the BBK coincident index was 0.66 SDs above trend (good); but the leading index was 0.31 from trend (bad). Interpreting that, it suggests GDP growth was running at an annualized 4.6% in Dec. But there are warnings here too: this running growth rate was down from the 8.3% signaled in Nov and 9.1% in Oct. Worse, the leading index has been consistently negative now since April last year, and during June-August came within a whisker of minus 1 each month. The significance? Leading index readings below minus 1 tend to signal an elevated likelihood of recession ten months out: ie, between March and May this year. I think that 'biggish data' judgement is worth taking seriously.

Germany's Deficit Blowout Today's most important surprise - or shock - came from Germany, whicc reported a federal budget deficit of Eu48.bn for December. That compares with a surplus of Eu2.9bn in December last year, so it's a massive turnaround. It's not because revenues are down, it's because spending is truly spiraling: revenues were up 35.3% yoy, with a monthly movt 2.4SDs above historic seasonal trends. But spending jumped 153% yoy, with the monthly movt a trend-shattering 5.1SDs above historic seasonal trends. Germany's pandemic has had a different rhythm to the rest of the world, escaping the worst in the first half of 2020, only to be ambushed towards the end of November last year. As a result, Germany's fiscal deterioration in 2020 and most of 2021 was far less dramatic than elsewhere. But that deterioration is with us now: in 4Q, the Eu82.25bn deficit was equivalent to 8.8% of quarterly GDP, taking the deficit for calendar 2021 to 6% of GDP (vs 3.9% in 2020). What's more, it will widen further this year, not only because Germany's pandemic continues, but also because the new government has just passed a supplementary budget allowing them to spend unused loans worth Eu60bn, to be spent on investments in climate protection and digitization. Fiscal consolidation will have to wait until 2023. This means that Germany's fiscal policy will be expanding hard at a time when all its major trading partners are busy taking taking back the extraordinary fiscal expansion seen in 2020. For example, in the UK, the 2021 net public sector borrowing of £183bn is down 30.4% yoy, in the US, the federal deficit narrowed by 23% in 2021; and in Japan the 2021 fiscal deficit narrowed 38.9%, and even in China, the deficit probably narrowed by around 25.5% In addition, of course, whilst the ECB is necessarily committed to maintaining its expansionary policy with near-zero interest rates, central banks in other major economies are taking the first steps towards tightening. Frankly, I don't remember another time when Germany and by extension Europe was committed to expansionary monetary and fiscal policies whilst all other major economies were retrenching. This is the reverse of the usual dynamic. Could it be that it's enough to de-synchronize world growth patterns in 2022, with Europe actually emerging as a net source of demand for the rest of the world? If so, it's a big departure from their traditional mercantilist model. What's more, although fx movements are in my view unforecastable, this policy contradiction between Germany and the rest of the world would seem to suggest stress on the Euro. But, please bear in mind, that's not a forecast, merely an observation.

US GDP - Cyclical Position, Profits, S&P Valuations In volume terms, GDP rose an annualized 6.9%, which was stronger than the 5.7% consensus expected, and a sharp acceleration from the 2.3% annualized in 3Q. But that strength is misleading, since approximately 74% of the qoq growth recorded in 4Q came from a build-up of private inventories. There's no way of knowing how voluntary that build-up of inventories was: remember, yesterday we reported retail inventories up 4.4% in Dec after retail sales fell 1.9% - which doesn't sound voluntary to me. Strip out inventory movements, and final sales of domestic product rose only 1.8% annualized - pretty much a crawl. Within that, the star was personal consumption up 3.3%, but non-residential investment was running at just 2% and residential investment fell 0.8%. Despite the headline growth rate, this was not, then, a strong result, or one suggesting a strong cyclical impulse. What of profits? The principle behind the Kalecki profits equation is that corporate profits must be equal to net investment, minus the savings imbalances of the rest of the economy - in practice that means the government, the household sector, and interactions with other economies. In the 12m to 4Q, profits fell 0.5% qoq, and rose only 2.8% yoy. The main thing boosting profits during the pandemic was the extraordinary rise in the fiscal deficit - and the main factor now dragging it down is the continuing moderation of that fiscal deficit. That will remain true for the foreseeable future. In the meantime, profits are still a far higher proportion of GDP than previously - 30.3% in the 12m to December, vs a pre-covid long-term average of 24.6%, with a standard deviation of 2pps. The key question is whether h'hold dissaving can rise faster than the fiscal deficit narrows. I think its' unlikely: savings rates are back to pre-covid levels, and dissaving/GDP is running at 13.9% of GDP, vs a pre-covid average of 14.6%. There's not a great deal of room to raise that proportion, so I think profits will remain under pressure in the short and medium term. What do today's numbers do for S&P valuations? The Coldwater Slow Model considers that an asset is fairly valued when it maintains is value relative to the economy. In practice, I take the Kalecki profits and discount them based on l/t nominal GDP growth rates and volatilities. That model has tracked the S&P well since 1990, and continued to do so last year. On that basis, it told us the S&P 500 was approximately 10% overvalued at year-end when it was at 4766, and even if profits stabilized (which I don't think they will) then its still about 3% overvalued today. If profits continue to fall - so will that valuation. Given the sharp downturn in economic data in January, it's difficult to expect an S&P recovery any time soon.

EU Heavy Truck Sales In the US, heavy truck sales have proved a remarkably fine and prescient early cyclical indicator, not only being a good investment spending signal, but also being highly sensitive to broader commercial demand. But they are not closely followed in Europe. I've decided to include them in my European shocks & surprises universe. And first time out, in December, we hit something that might be cyclically useful: EU heavy truck sales rose 23.5% yoy in December, with a monthly movt which was 2.6SDs above historic seasonal trends. That looks highly positive. The details are not what I'd expect, or can easily explain. For the major economies, Germany was up 18% yoy and Italy up 15.7%, but France was up only 2.3% and Spain only 5.9%. But what really made the difference was a surge in registrations in Eastern Europe: Poland was up 69.4% yoy, Czech Republic was up 22.2% and Lithuania was up 146%. Small countries, small economies? Not really. Poland accounted for 16% of the EU's Dec heavy truck registrations, and was the third largest buyer after Germany and France. As for Czech and Lithuania, together they accounted for 7.3% of registrations. So take these Eastern Europe 3, and they accounted for just under a quarter of all the EUs heavy truck sales. I'm not sure why its happening, but such heavy capital spending certainly suggests something is stirring either in Eastern Europe, or in their near trading partners. We'll keep watching.

Germany's reported a shocking 24.2% yoy rise in its December PPI. This was far above the 19.4% consensus expected, and was generated by a 5% rise which was no less than 7.9SDs above historic seasonal trendsl 7.9SDs! Of course, at the heart of this was energy prices, which jumped 15.7% mom and 69% yoy, with natural gas up 122% yoy and electricity up 74% yoy. Now, a 15.7% mom jump in energy prices is actually quite difficult to explain, since in dollar terms Brent oil prices fell 7.6% mom in December and natural gas prices fell 23.8% mom. Elsewhere in the world, this slight relaxation in energy prices contributed to calming inflationary pressures. What's going on in Germany? Part of the answer is the continuing extraordinary rise in the price of CO2 emissions trading prices. The price of emitting a ton of CO2 in the EU rose a further 22% mom in December to Eu 79.92. So whilst in Euro terms, the price of a barrel of crude fell Eu8.2 to 73.6, the cost of the permission to use it rose by Eu5.2 to 32.3. Overall, the cost of using a barrel of crude, then, barely retreated at all in December, so Germany, among others Europeans, was denied the benefit of the falling oil price. In yoy terms and in Euro, a barrel of oil rose 35.8% yoy in December to Eu83.13; but once you include the emissions, it was up 52% to Eu115.6. The emissions cost came to 28% of the total, a new record. Things aren't going to look better in January, since already Brent crude is up 12.5% mom, and emissions prices are up another 2.1%. In this inflationary year, nothing, I think, has risen faster than the EU's emissions permit: up 155% yoy, and still rising like a rocket. Also a quick word on Taiwan's December export orders: these were up 12.1% yoy, which sounds modest, but was generated by a monthly movt 1SD above trend. So not bad. Particularly because when you look at the details, which shows that China and HK (24.5% of the total) rose only 4.5% yoy, Europe rose only 8.2%, and Japan actually fell 5.8%. Those are big big customers, and their demand growth is slowing.

Today we got the UK's inflation data for December, which found CPI up 5.4% yoy, on the back of a 0.5% mom rise which was 1.9SDs above historic seasonal trends. That 1.9SD deflection from trend is a sharp improvement from Nov's 3.8SD and Oct's 6.3SD deflections. But it's still grim enough, and means that we should expect to see inflation at just under 6% in 1Q, rising to 6.3% in 2Q, 6.7% in 3Q and 6.1% in 4Q. Currently, UK 10yr yields are running at just 1.3%, so there's a 5.4pp gap between that and where we can expect 4Q inflation to be at. That's the scale of the challenge facing Bank of England. It is the biggest gap between bond yields and likely 4Q22 inflation of any major economy: in the US the gap is 3.5pps, in Eurozone 4.8pps, and in Japan 0.3pps, whilst there are still premia available in China 1.1pp and India 1.4pp. The prospects for the rest of the developed world aren't as bad as for the UK. I construct a global CPI index using US, Eurozone, and NE Asia baskets. And the influence of NE Asia's relatively restrained inflation means that globally we've probably seen the peak of yoy CPIs in December at 4.5%, and we can expect to see this coming down very gently in the coming year, sinking to just under 4% toward the very end of 2022. That's what happens if the current 6m deflection against trends are maintained. But now central banks are on the case, surely the current deflections will be moderated? Let's think about this. There is good news. By December, the world had got the inflation message, with the result that this week, for the first time since the beginning of January last year, my shocks and surprises inflation index managed to lift itself into positive territory. Are we then 'learning to live with inflation'? If so, this could be good news. But there is a catch: in both November and December, a series of factors combined to moderate inflation. Let's start with the dollar; in Nov it gained 0.6% against the SDR basket, and followed up in December with a further 0.4% rise. A rising dollar tends to be disinflationary, not least for commodity markets. And so, oil fell 7.6% mom in Dec and after falling 3.2% in Nov; natural gas prices dropped 23.8% in Dec after falling 8.4% in Nov; and the wider CRB index fell 3.9% in Dec after falling 0.3T% in Nov. These sharp falls in commodity prices made their impact in Dec's inflation results all around the world. But this has not been sustained in January. In fact, the dollar is now falling against the SDR - an inflationary sign. And guess what? oil prices are up 11.5% on the month, natural gas prices are up 5.4% and the CRB index is up 5.9% on the month. So we should not get too excited that we're learning to live with inflation - more nasty inflation shocks could well be lurking in Jan and Feb results.

China's taxing problem Although China gave us both its full December data-release as well as its 4Q GDP results, we learned only a very limited amount. For years now, the rule governing China's monthly data is 'no drama please'. And so it was again today: industrial production up 4.3%, electricity down 2.1%, retail sales 1.7%, urban investment 4.9% ytd. These are all weak, but also all quite tightly in line with consensus. None of them featured in my shocks & surprises index for China. My momentum indicators barely flickered: my aggregate consumption momentum indicator down 0.1SD, industrial momentum up 0.2SDs, monetary conditions up 0.1SD. And it's much the same with the GDP result: the 4% yoy rise claimed for 4Q means the quarterly movement was almost exactly in line with historic patterns. Nominal growth of 8.2% yoy confirmed the quarterly growth is still sinking below trend; the more so when you ex-out the 14.2% yoy rise in trade surplus to find domestic demand up 7.9% and slowing; and when you further ex-out the fiscal deficit of 4.1% fo GDP, you get private domestic demand rising only 7.6% yoy. But none of this matters much compared to the real problem rising to confront China, and worsened again in 2021. That is simply that the government has never been able to raise enough taxes to satisfy their ambitions. This is not immediately obvious, because the central government certainly does look munificently funded. But the thing to remember is that the fiscal revenues all run up to central level, rather like what happens in the Sopranos. Below the boss, there are pyramids of levels of government, all of them kicking upwards. So provinces are less well financed than central govt, but are better off than those in the prefectures that answer to them, and so on down to county and township/village level, where things can get quite desperate. All those further down the fiscal food chain must find their own finances, and selling land development rights is, of course the most lucrative way of doing it, which is a big reason why China's real estate sector grew so wildly, and why the real estate bankruptcies really matter. What's clear from 2021's numbers is that the situation is getting worse. We have all the fiscal data until November, so have a very good idea about what going on. Revenues will have risen by about 10% in 2021, whilst nominal GDP 12.6%. This means revenues/GDP shrank to 17.6%, the lowest since 2006, and continuing a decline which has been underway continuously since the high point in 2016 of 22.4%. The real estate industry is bust for the foreseeable future, so China's provincial and local governments urgently need to find a new source of finance. As China's government works out how to cope with the Evergrande & related bankruptcies, that's the next question that will be being asked in Zhongnanhai.

US Retail Sales No doubt about what's grabbing the attention today - it's US retail sales value, which fell 1.9% mom, or, if you ex-out vehicle sales, fell 2.3% mom. That's the worst since February 2021, and since these are value numbers, worse than they look, since the US was running CPI inflation at 7% yoy in December. The immediate reaction is to blame it on the resurgence of covid, but that won't wash. First, the most recent covid surge in the US kicked off around 18th December, by which time I guess most Christmas shopping decisions would already have been made. And if it was covid doing the damage, you'd expect to see restaurants deserted, and internet sales soaring. But that's not what happened: cafes & restaurant sales fell 0.8% mom only, whilst non-store sales dropped 9.5%. Conclusion? Covid ain't responsible. Inflation almost certainly is. There are two contradictory reactions to inflation: the first is 'well, I'm not paying that much for it' and the other is 'better grab it now before the price goes up again.' The US consumer is in the first state - holding back as sticker shock kicks in. Earlier this week, I talked about how confidence surveys showed the US consumer with a 'decent scepticism' about economic prospects, and worried about financial markets. The Uni of Michigan consumer sentiment survey showed the same today, with the index down a further 1.8pts, with current conditions down 1pt and outlook down 2.4pts. Not panic, but certainly worry. Nonetheless, the retail fall suggests things may be a bit tighter than that. The details of the Uni of Michigan survey describe how inflation is eroding confidence. Three quarters citing inflation as the worst problem, and 33% reporting their finances weaker than a year ago. And inflation is hurting the lower paid the most: the index fell 9.4% mom for those with incomes below $100k, but rose 5.7% for those earning more than that. I suspect there's another thing at work too: the rise in bond yields is shrinking the opportunity to raise disposable income by refinancing your house. Last week average 30yr fixed rates were running at 3.52%, compared with 3.24% at the beginning of December. Refinancing activity is down about 15% from the end of November, and this still accounts for 64% of all applications. To re-iterate: there's no more 'catch-up' spending to be done in the US; and if the US is at or near full employment, continued demand growth will be sustained only if workers shift from low productivity to higher-productivity sectors to secure non-inflationary wage growth. That's the challenge for 2022.

Fading Investment Signals Spare a moment to think about Japan's Dec machine tool orders, which were on the weak side in December. True, they rose 40.5% yoy, but the monthly movt was 1.3SDs below historic seasonal trends. The weakness was mainly foreign: export orders, which usually make up about two-thirds of orders, rose only 30.6% yoy and were 1.2SDs below trend, whilst domestic orders were still up 6.12% yoy (and were 0.7SDs below trend). What's going on? Two things are worth considering. First, this might be about China and, incidentally, the auto industry. Or maybe specifically China'[s auto industry, which is a mess. China's car sales fell 4.3% in 2018, fell 9.4% in 2019, fell 2.1% in 2020 and managed a rise of 6.6% in 2021. 2021's car sales remained 13.2% below levels seen in 2017. They're still under pressure: China's auto industry is almost alone in being unable to raise prices: although China's PPI iron & steel prices were up 21.4% yoy in Dec, auto prices managed only a 0.3% rise. So they won't be in the mood for heavy investment: in fact, auto-industry investment fell 3.2% during Jan-Nov. More broadly, the switch from internal combustion engines to electric cars means a dramatic cut in demand for machine tools by the auto industry. As electric cars take over, demand for auto-industry machine-tools will actually fall - with the tipping point probably arriving around 2026-27. If it were just Japan's machine tool orders, it would be one thing. But the investment-spending signals are deteriorating all over the world. My shocks & surprises index for capital goods sector fell into negative territory early in December, and is now the most negative since August last year. The 12m average is also just about to turn negative for the first time since September 2020, snuffing out a short-lived recovery which had in turn overturned a negative trend which had been running since mid-2018. Fading investment spending is obviously discouraging news for the global recovery cycle, and also for profits: after all, the Kaleckian profits equation gives substance to the neo-Keynesian observation that whilst household spend what they earn, the corporate sector earns what they spend . . . For Japan, net investment spending is the source for 47% of total profits.

Today I talk about US inflation and Eurozone industrial production numbers. US December inflation: headline, up 0.5% mom sa, but the real headline is that unadjusted, the index was up 7% yoy, with a monthly rise 0.9SDs above historic seasonal trends. That's actually a bit of a relief from the 1.7SD deflection in November, and the 2.1SD deflection in October. But hold the celebrations: this is is probably not yet, quite, the peak of likely yoy: that's probably coming in February, when we can expect it at around 7.1% to 7.3% yoy. Ex-out food and inflation, and core CPI rose 0.6% mom sa, and before adjustments was up 5.5% yoy, with a monthly movt also 0.9SDs above trend. Sequential inflation pressure has moved out from energy and food into the broader inflation this core index this measures. If current trends continue, its another three months before this peaks, and in the meantime we can expect to see it flirting with 6%. Its now unrealistic to expect CPI to really retreat very much on its own: if the break above trend of the last six months is continued, you can expect 1Q at 7.2%, 2Q at 6.3%, 3Q at 5.9% and 4Q at 5.4%. There's no likely scenario which would take CPI back to the 2% level which was the average of the last 10yrs. In the meantime, although bond yields have risen to the dizzying heights of 1.75%, that's still 3.7pps below what we can reasonably expect inflation to be showing in 4Q22. On to Eurozone industrial production. Around the turn of the year, you can expect index series to get rebased every so often, using new weighting of items, sectors or countries. But if the index is rebased from, say, 2015 to 2020 weightings, you get told. There was no such explanation for what happened to the Eurozone's industrial production series today. Rather, what we got from Eurostat was a completely unexplained, and sharply material, revision of an absolutely central series. For the record, it showed November's output up 2.3% mom, which was way better than one could expect from what we already knew (Germany had already reported production down 0.2% mom and France down 0.4% mom). What appears to have swung it was Ireland, where output was reported up 37.3% mom but down 30.4% yoy. Really. But the whole series was made anew - all new numbers - and this new series materially alters what we thought we knew. To give simply the latest number: the new series says output fell 1.3% mom in October, whilst the old series reported a 1.1% rise. Overall, between Nov 2020 and Oct 2021, we used to be told that output rose 0.6%; the new series tells us it actually fell by 3.4%. You can't just slip that sort of revision in without explaining what happened. So I've asked Eurostat about it, but have no answers yet.

We've had four sets of confidence indicators out of the US in the last couple of days. They tell a story of sustained main-street economic confidence contrasted with a sudden gap-down in financial market confidence. This seems to me to be eminently reasonable, given near=full employment and the prospect of monetary tightening. The NFIB small business optimism index really did nothing, rising 0.5pts to 98.9, which extends the modest recovery of the last couple of months. Expectations for the coming six months remain sharply negative despite rising 3pts to minus 35. But for me, it's the NY Fed's monthly survey which is the king of US sentiment surveys. What get's advertised is the movt in inflation expectations, and there was little to report from Dec's survey: 12m expectations were almost unchanged at 5.99% and so were 3yr expectations at 4%. House price inflation expectations rose slightly to 5.5%, and chances of moving home down slightly at 16.7% But the survey doesn't end there: it looks at the full spectrum of household attitudes and expectations: employment, chances of getting a new job, expected earning, expected spending, expected taxes; difficulty of getting credit. There's almost too much to take in. What did it tell us in Dec? I think overall, the Fed will be pleased - US households seem both basically confident but decently sceptical of their good fortune. Compared to November, expected wages were up a bit 2.97%, and h'hold income up a bit at 3.37%, but spending down a bit at 5.53% and taxes down a bit at 4.4%. Credit availability slightly less difficult than in November. Likelihood of losing a job retreated to the lowest on record, and the chances of finding a new job quickly rose to the highest since Feb 2020. And what do people think about financial markets? Well, 28% expect interest rates on savings accounts will rise this year, which is 0.7SDs below the l/t average. Meanwhile, 38.9% expect the stockmarket will rise this year, but that's 0.8SDs below the l/t average. This looks basically not encouraging. And so on to direct measurements of stockmarket confidence. Today we had the IBD/TIPP index, which tracks economic optimism among investors, sank 7.6% mom to the weakest since July 2020. That's what they say, but what are investors doing? Yesterday we had the December investor movement index, which tracks actual behaviour of Ameritrade clients. That dropped 9.6% mom in December, to the weakest since February, coming off a plateau it has enjoyed since last March last year. Ameritrade's results are similar to what we heard out of State street on 29th December, when its investor confidence index - also calculated by looking at what people are actually doing with their money - dropped no less than 25.9pts to 85.6, which was the worst since October 2020. The US fell 14 pts to 96.4, which again is a drop-off from a plateau its held since July. But the real killer came from European investors, with the index down 27.8pts to 67.6, which is lower than at any time during the pandemic.

Loads of data today, of which the most commented will be the US labour market surveys. I see loads of commentary about how the 199k rise in non-farm payrolls was a 'big miss'. I don't see it that way, and I don't fell like arguing about it much - when you're near full-employment - which I think functionally the US is now - you don't expect to see big gains. Rather, focus on the fall in unemployment rate (3.9% on the U3 score, 7.3% on the broadest U6 score) both now way below the l/t average. Instead I want to ask: How was it for you? How bad did 2021 feel from an economic point of view? Was the soaring US stockmarket enough to offset the inflation, the supply chain ruins, the on-again-off-again medically induced coma etc? If journalism is the first sketch of history, the SF Fed's Daily News Sentiment Index tells us how these proto-historians are feeling. The index scans US economic news stories from 24 daily US papers, scoring them for optimism or pessimism. The higher the score, the more upbeat the press is about the US economy. It's been tracking this score, daily, since 1980. How about 2021? If you think last year was an unprecedentedly grim year for the US, you'd be wrong: it registered as very slightly positive year, coming in at #21 out of the 40yr sample. Only averagely bad, then. Score one for the S&P. Its a good parlour game to guess when the public presses were happiest and most optimistic about the economy. The happiest years were, in this order . . . 2006, 1997, and 2005 (closely followed by 2004). The most miserable years were . . . . 1980 (inflation, Paul Volcker using interest rates to smash inflation), 2020 (covid, obviously) and 2008 (financial crisis, obviously). Which was the most optimistic decade, which the most pessimistic? Well, by some distance the best decade was the 1990s, followed by the noughties. Worst decade, it turns out, was the 1980s - which I rather enjoyed. The last decade - the 20teens were also mildly negative. There's some interesting re-writing of history going on as well. Presidents remembered fondly generally got a bad economic press: Ronald Reagan's economy was almost uninterruptedly negative according to press sentiment. But this is probably not political bias, since President Obama got very similar treatment. Meanwhile, the happy recipients of sustained optimistic press were Clinton 2 and George W Bush. Generally speaking, the US press was most upbeat between 1993 and 2006, with only a brief dip into pessimism in 2002 (by which time the recession was already well in the review mirror). So maybe we could amend the saying: Journalism may be the first draft of history, but its judgements get scrubbed and forgotten very quickly.

The most important thing we're seeing today is the uprising in Kazakhstan, which has seen riots and protests throughout this vast country, with govt buildings fired in Almaty. And now we've got Russian paratroops involved. Dozens of deaths are reported, but we don't really know, since the internet has been cut off. Where to start with Kazakhstan? It's the size of Western Europe with the population of the Netherlands. It's vast empty steppes are almost certainly teeming with every kind of commodity the world needs - including uranium and oil. It's a giant chemistry set. It is neighbour to Russia, China, Kyrgyzstan (China's Central Asian best friend), Uzbekistan. On the other shore from the Caspian Sea, it neighbours Russia (again) Iran and Azerbaijan. In other words, it's strategically the one Central Asian country that really matters. A few years ago I spent a couple of weeks in Almaty being paid to frame an obviously futile, indeed crazy, investment trust based on the Kazakhstani consumer sector. (Truth is stranger than fiction.) I left with a few thoughts: the mountains outside Almaty are dazzlingly beautiful; the Russians are in a minority; and the Kazakhs themselves the toughest scariest bunch I've ever met. Ethnically, I think they are first cousins to the Koreans, with significant Mongol and Turkish input. Among them, the resident Russians felt, with good reason, felt pretty jumpy. My driver there, though, had something to say. His highly credentialled mother used to work as chief admin to the wife of someone very very, very, senior in the government. (In today's situation, I'm naming no names.) One day, he turned to me, and just said: 'I tell you, these people are wolves'. Because of its size and its immense commodities potential, whoever is leading Kazakhstan can do pretty much whatever he likes with the economy and with the financial system - it's just one of those places that can never really go bust, such is its hidden natural wealth. And that in turn has meant it has an absolutely appalling record of corruption and bad governance at the top that has gone on for decades - with the family of former president/strongman Nazarbayef outstanding in this respect. My driver again: 'These people are wolves'. All these years ago, this was already obvious, the resentment was everywhere, and the people the toughest I've ever met. So don't be fooled into thinking what's going on is just about fuel prices. There are decades of resentments coming out now.

Distinctly mixed news from the US. Good news from the labour market front, with the ADP total of private payrolls rising 807k - that's up 5.2% yoy. The demographics are good too - small cos adding 204k, medium-sized 214k and large cos +389k. No real sign then either that large cos are pulling in their horns, or that smaller companies are finding it impossible to hire. A genuinely encouraging result, then, and one which helps offset yesterday's slightly disappointing JOLTS job openings number when openings fell 529k to 10.562mn. After all, if you've got hiring accelerating in the way ADP is reporting, you'd expect some of those openings to be getting filled. If you remember what I was talking about yesterday, there's no more 'catch-up spending' to be expected, and domestic demand will depend therefore a lot on healthy labour markets. Which is what we have got. On the other hand, the news from December's vehicle sales were truly dreadful: car sales fell 3.6% mom and fell 23.% yoy, with domestic producers down 3.8% whilst foreign makers rose 7.2%. Not much better for the light truck market - it fell 4.2% mom with domestic down 5.2% and foreign up 0.1%. But the worst news came from the heavy truck market. The US is meant to be dealing with its supply-chain issues, and you'd think that this would absolutely mandate rising heavy truck sales. Not so: Dec's heavy truck sales fell 17.1% mom and fell 1.96.% yoy, with the total number sold the lowest since June 2020. What's more, November's sales were also revised down sharply. Why does this matter? Well, collapsing sales of heavy trucks have been early signals of approaching recession in each of the last four recessions since 1980, with no false signals either. So here's hoping that the weakness in Nov and Dec were merely end-of-year jitters. Definitely one to keep watching.

Throughout the last two years, the suspension of normal economic and financial relations has resulted in wild swings in money flows to households which in turn have resulted in extreme volatility in such basics as spending and saving. The reasons are fairly obvious: lockdowns cut the opportunity for plenty of the usual spending, whilst governments' furlough payments kept income flowing into your account. In 2020 we got the collapse, and then much of 2021 was taken up watching the rebound. Catching up on that deferred spending made for spectacular year-on-year retail numbers. To take just one example, in the US, personal spending on goods and services fell 3.2% in 2020, but in the first 11 months of 2021 rebounded by 11%. And that in turn was met by supply chains only just waking up from the medically induced coma. 2022 is the year when this first wave of volatility gets dialled down, because household finances are settling back to 'normal' patterns. Again, the US illustrates the point. Back in early 2020, the personal saving rose to an astonishing 33.7% of disposable income. That came down throughout 2020 and 2021, but by November last year it was down to 6.9%, which was actually below the pre-covid long term average of 7.4%. Moral - the 'catch-up' spending has been done. Today's UK mortgage data shows something similar. In the UK, housing investment is the mainstay of personal saving efforts, so throughout the pandemic the housing economy was supported by a swathe of tax incentives and debt holidays. And so mortgage lending for new purchases rose 12.3% yoy in 2020, but has been falling since July 2021, and was down 32.7% yoy in November. But it's the change in refinancing behaviour which is revealing. This is, after all, how households take cashflow from the rising equity value of their homes. With household finances underwritten by the government during the pandemic, the value of remortgaging a record low of 22% of the value of new mortgages. But those days are over, and by November, whilst new mortgages fell 32.7% yoy, the value of remortages rose by 43.5%. The proportion of new remortgage debt to new mortgages has now risen to 37%, which is roughly back to the pre-covid l't average of 39%. Just like the US saving rate returning to normal, so the rise in UK remortaging relative to new mortgaging tells us we're back in the realm of 'normal' activity. So don't expect rebound spending in the US to have legs much longer, and ditto in UK demand markets, including housing.

Welcome back to 2022. Christmas and the New Year holidays are marked by a relative absence of important economic data, and also, of course, thin markets. Thin markets are a mixed blessing: they can thrown up anomalies, and can be unusually sensitive to people with strong views trading early and aggressively. Right now, they are throwing a number of curve balls in currency, commodity and bond markets. I put a number of currencies, commodities and bond signals through a technical filter, with the aim not of catching the first 5% of a movement, but rather giving me consistently accurate picture of the way the world is developing, These are not trading signals, more a bunch of 'reality' signals. And over the holidays, they have been flashing all over the place. Just today, the dollar is on the cusp of falling into a weakening trend, thanks to the Euro, which is on the cusp of generating a strengthening trend vs the dollar. Add to that, gold broke through to a strengthening trend (which helps explain why the C$ is also today breaking through), and natural gas re-asserted a rising trend. In bond markets the inflation risk premium on 10yr treasuries also started a rising trend. What's the moral? The key is the dollar: a weakening dollar is a generally inflationary signal, which we're seeing echoing in commodity markets and bond yields. If inflation is bad for equity markets, then so is a weakening dollar. As for over-the-holiday data, there is not much to report. Today is dominated by Markit's monthly PMIs: all you need to know about them is they bear no interesting statistical relationship to eventually surveyed reality. The one thing which really caught my eye over the holidays, though, was the collapse in State Street's Global investor confidence indexes. These are interesting, because they are not the result of asking investors 'how ya feeling?' but rather looking at what they are actually doing with their money. And in December, the global index dropped 25.9pts to the weakest since Oct 2020, led by Europe down 27.8pts to 67.6, which is weaker than at any stage during the pandemic so far. That got to be the omicron virus taking its toll. But US also fell to the weakest since June, and Asia to the weakest since July. If you like this, you can help by subscribing. Also take a look at Coldwater Economics free Substack page.

Terms of trade - which track the difference between changes in export prices minus changes in import prices - are important. When your terms of trade are rising, the chances are that manufacturers and traders are seeing their margins, and their profits, rise. And you'll see that in an improving trade balance. But when terms of trade deteriorate, margins and profits are going to get squeezed, trade balances fall. But look, it takes time to work through, because manufacturers and traders will fight like hell against a falling terms of trade. They'll avoid buying inputs at these high prices and run down their inventories instead. They'll avoid passing on prices as long as they can to maintain their market position. Eventually the weakest will go out of business, and the survivors will finally be able to put up prices. That's typically the sort of dynamic at work. At the moment, it's probably Germany which faces one of the biggest challenges because its terms of trade are falling sharply, but the country remains fundamentally mercantalist, with net exports accounting for 35.2% of Kalecki profits in the last 12m - second only as a contributor to net investment. But look what's happening: in November, export prices rose 0.8% mom and 9.9% yoy - pretty good, eh? But import prices were up 3% mom and 24.7% yoy. That led to terms of trade falling 2.2% on the month, and 12.1% yoy. That's the sharpest yoy collapse in terms fo trade that modern Germany has seen, and terms of trade are now the worst we've seen since 2012. And look at some of those import prices: fertilizers 144%, aluminium 64%, iron& steel 60.2%, plastics 44.7%. It takes time to work through - Germany's manufacturers and traders have been fighting it hard. Really, it was really only in the last couple of months, and Oct in particular, that the implications are beginning to show: In the 3m to October, the trade surplus came to Eu40.5bn, which was down 21.5% yoy; and the current account was Eu 47.2bn, which was down 28.7%. But it is very likely that Germany's trade and current account surpluses are going to shrink far more noticeably in the next couple of quarters, taking margins and profits with it. Sorry about that, but modern Germany really hasn't experienced this sort of terms of trade shock before, and 2022 will be the year when we find out how it copes with it.

In economic and financial terms, the last two years have been unlike anything I've seen in my life - medically-induced economic comas, massive fiscal deficit financed by equally massive monetary creation which has distorted financial asset prices beyond anything the global economy can justify. At the root of all this are patterns of spending, saving and investment. And you can tell a lot about them from movements in country's current accounts. You've got to treat UK trade numbers with caution, because there's a persistent track record of them being revised, often quite dramatically. We had this again today, when the current account deficit for the first half of the year was revised from £17.4bn to £24.8bn - that's £7.4bn worse than previously reported. With that caveat, the 3Q deficit was reported at £24.4bn, up £11bn on the quarter, and equivalent to 4.2% of GDP. Strip out the volatile trade in precious metals, the deficit was up £6.7bn to £21.7bn, or 3.7% of GDP. Where does that say about the UK's savings patterns? Well, the public sector had a deficit of £41.4bn during the quarter, so strip that out, and that leaves the private sector making net savings of £16.9bn. That's down £29.8bn qoq, and down nearly £50bn yoy. My bet is the bulk of savings remaining are corporate profits. Overall, for the 12m, it means the UK is running a current account deficit of 3.3% of GDP (compared with an average since 2008 of 3.7%), with public sector borrowing of 9.1% of GDP, and a private savings surplus of 5.8% of GDP. In short, still a long way from anything approaching pre-covid 'normality'. That delayed encounter with normality will surely have to happen sometime, in the UK and elsewhere, and maybe it will become unavoidable in 2022?

As I've written elsewhere: governments find it pretty easy to break economies, but have little idea about how to put them back together again. European governments have embraced and encouraged omicron panic, and they're good at it, as two surveys today showed. Germany's GfK expected consumer confidence index for January dropped 5pts to minus 6.8, which was the weakest since June. The economic outlook fell to the weakest since April, income expectations the weakest since February, and propensity to spending weakest since January. A pretty thorough axing of confidence, then. That didn't fully show, yet, in Eurozone consumer confidence advance, which fell only 1.5pts to minus 8.3, but this was still the weakest since April 2021. And there's much the same coming out of the UK, where the CBI's monthly diffusion index of retail sales dropped 31pts to +8, with sales for the time of year down 37pts to minus 2. CBI commented that there's a big difference in response before and after the govt's Dec 8 scare campaign started. Before Dec 8, over half of firms reported that sales were ‘up' on last year, but after Dec 8 this fell to one third. To be clear: this isn't the impact of the omicron variant - it's the success of European governments' attempts to scare the living daylights out of their electorates about omicron. The economic consequences will be with us for at least a couple of months, regardless of how omicron variant actually develops.

Taiwan's monthly export orders report turns out to tell us more about what's going on in the rest of the world - particularly in China and electronics, of course - than it is to the near-term outlook for Taiwan's exports. With that in mind, November's orders were interesting. They rose 13.4% yoy, which doesn't sound that great, considering that for most of the last last year we've got used to rises of 30-40%. But in fact this was a strong result for two reasons: first, November 2020 was the month at which the real rush to secure supplies of Taiwan's semicons broke into the open - with the highest yoy since 2010 - so it was a really tough base of comparison. And second, October's orders were genuinely weak, with the monthly movt down 1.6SDs from historic seasonal trends, and Nov's result corrected that, with a bounce 1.5SDs above trend. So, that relatively modest 13.4% yoy rise masks a genuinely strong result. Electronics remains at the core of this: they word 17.9% yoy, and accounted for 31% of all orders. They were also up from 13.2% yoy in Oct. But headline number was helped along by basic metals +32.6% yoy, chemicals +41.1% and rubber/plastic products +22.6%, in turn helped along by high prices. The other really striking thing was where demand is coming from: it's China and the rest of Asia which is now driving demand, whilst the West is sagging. China & HK was up 25.3% yoy and Asean up 33.7%, but Europe fell 2% yoy, Japan nudged up just 0.7% and the US was a lacklustre 10.8%.

New car registrations are just about the earliest monthly signal we get for European demand, and since they are big-ticket items, for consumer confidence too. We got them today, and - well - what they tell us is pretty much 'situation normal'. And that's despite the latest surge in covid. Timing's important, because covid numbers really took off in Germany in the last week of October, and the daily totals really didn't peak until the end of November. For France and Italy, the timing was about 10days later. You'd expect that to hit the numbers. But it's not really happened: for the EU as a whole, registrations fell 20.5% yoy, but the monthly movt was 0.5SDs above historic seasonal trends. For Eurozone, numbers were down 20.8% yoy, but the monthly was 0.2SDs above trend. For Germany, registrations fell 31.7%, but the monthly was 0.3SDs above trend. For the rest of the Eurozone, down 14.2% and 0.6SDs above trend. How does the UK stack up with this: Nov's registrations were up 1.7% yoy and the monthly was 0.5DSs above trend. Same story, incidentally, shows up in today's UK retail numbers: sales volumes up 1.3% mom, with the monthly movt 0.5SDs above trend. Suggested conclusion? Scary covid-stories are dominating the newspages and sending govts into panic. But Europe's populations - not so much, it seems.

Well, Bank of England has tightened, putting up s/t rates by 15bps to 25bps. They expect inflation to dissipate over time, as supply disruption eased, energy prices stopped rising and global demand rebalanced from goods to services. We'll see. But let's remember, in its November meeting, BOE expected CPI to rise to 'around 5%' by spring 2022. It got there, we now know, in November itself. The UK's inflation isn't quite as bad as the US - November's 5.1% yoy in the UK vs the US 6.8% - but the likely 12m trajectory looks worse, and the distance between where 10yr rates are now, and where inflation is likely to be in 12m time is worse. Looking at the UK's likely inflation pattern over the coming 12m: if the deflection against trend we've sen in the last 6m is maintained, we'll see inflation rising to around 6% by March, and staying there or thereabouts until September. Meanwhile, UK 10yr yields are just 0.8% - so there's a gap of about 5.4 percentage points between 3Q22 CPI and bond yields. In the US that gap is 4.3pts, and in the Eurozone 4.8points. So UK bond markets are out there on their own. The BOE needs to keep buying those bonds! But maybe things won't be that bad: after all, in yoy terms, Brent oil peaked in October up 101% yoy, since when it's fallen about 12%, and the yoy has fallen to 47%. The wider CRB index also peaked in October up 58.3% yoy, since when it is down 5.6% and the yoy has come down to 37%, and even natural gas prices are down 29% from their October peak. The problem is, even if UK inflation resumes its normal historic patterns, we'll see inflation nearer 5% than 4% for the next nine months; even if we go 1SD below trend, it' ll still be August before we dip back below 4%. In the meantime, BOE has put up rates by 15bps to 25bps. A lot will have to go right, a lot will have to prove 'transient' for that to be the end of tightening.

IATA's monthly compilation of air freight transport traffic came out a week late, yesterday. Still, what it told us was that by February, air freight was genuinely booming. In terms of cargo tonne kilometers, international air freight rose 10.4% yoy. This was not just a base effect from covid, it was also up 9.6% from February 2019. Of the largest markets, N America was up 23%yoy, Europe was up 10.5% and Asia Pacific (which had been hit less badly by covid last year) was up 8.2%. In terms of gains over February 2019, N America was up 17.6%, Asia Paci was up 29.2% and Europe was up 22%. These are genuine boom numbers. Why is it happening? Well first, of course, its a reflection of surging global exports: remember, NE Asia's exports were up 33.9% yoy in February in dollar terms, and were up 32.4% from Feb 2019. But there's more: globally supplier delivery times are stretched to near-record levels, so there's a race to secure supplies and to build inventory. Typically, air cargo picks market share from marine up when there's an inventory-rush, and that's happening now. The fact that Suez Canal got blocked for days recently means this pressure will only have built in March. But that's not all either. Covid has dramatically cut the number of passenger planes in the air, which in turn means that all that belly cargo capacity has also been taken out of the equation. In fact, international air cargo capacity - that's air freighters and belly cargo combined - was down 13.7% yoy. So a rush of demand is having to be met by a smaller supply capacity. The result is . . . well, here I'm going to quote the IATA bulletin: 'the industry-wide cargo load factor reached a record high outcome for any month of February in the history of our time series, at 57.5%. At the regional level, Asia Pacific carriers continued to report the highest load factors (69.2%), followed by European carriers (64.1%). Moral: airlines are going bust because of Covid, but air freighter asset turns and ROC must be booming.

Today we got the first report of foreign reserves movements in NE Asia for March. My technical models recognized that the dollar broke out of its weakening trend and established a strengthening trend against the SDR currencies starting March 9, so it was reasonable to expect some pressure on Asia's massive fx holdings simply because of that. In fact, in March the dollar gained 1.6% against the SDR basket (which of course includes itself as a major component). In addition, of course, US bond markets got hammered, with 10yr yields rising from 1.44% at the beginning of the month to 1.76% by month-end. Not, in other words, a great month to be tasked with preserving the value of Asia's c $6tr foreign reserves. So what happened? Well, the collective foreign reserves of China, Japan, S Korea, Taiwan & Singapore fell by $52bn, or 0.9% to $5.906tr. How did they do? It went with size - the biggest were the least able to take evasive action. So China's reserves fell 1.1% to $3.17tr; Japan's fell 0.8% mom to $1.368tr; Taiwan's fell 0.8% to $539bn; S Korea's fell 0.3% to $446.1bn, Singapore's fell 0.2% to $382bn. A couple of things to say: this fall will have a small tightening effect on Asia's money markets, and will slightly depress - nothing too dramatic, however, and I don't think this is the most significant thing about today's results. Two other things are more important. First, when you look at the data, its clear that Japan has really bought the 'inflation's back' story. Overall reserves fell $10.9bn, but within that securities holdings fell $19.6bn, but deposits rose $6.8bn. In other words, they didn't just lose money on bonds, they sold reasonably aggressively on the way down. But there's more: they also started buying gold: in dollar terms gold holdings rose $3.1bn, or by 7.3% during a month when the gold price fell 5.2%. In other words, they actually raised their holdings of physical gold, up 2.6mn troy oz, or by 10.6% on the month. I don't know when the last time Japan's reserves managers bought gold, but it certainly has been any time in the last three years. Selling bonds and buying gold - Japan believes in inflation. Second, Taiwan is interesting: the central bank blamed its 0.8% mom fall not only on the dollar's strength, but also on 'large capital outflows'. But that's not right: foreigners net holdings of Taiwan deposits and securities fell only $1.1bn (vs a fall of 4.3bn in foreign reserves), or by 0.2%. In other words, those capital outflows were responsible for only a quarter of the fall in reserves. And, note, those holdings now could to $670bn, which is 124% of Taiwan's 539bn of foreign reserves.

Today I'm looking at the series of Eurozone confidence indicators released today, which give the strongest signals we've seen for just over a year. The growth-tracking economic sentiment index rose 7.6pts to 101, the best since February last year - this index amalgamates confidence indicators for industry, for services, and for consumers undertaken by all Eurozone member countries. That's a huge footprint, so it's no surprise that it has a good track record at, yes, tracking changes in economic growth. In fact, I think it's one of the most useful single-monthly data-points for the Eurozone that we have. So I take it seriously. The problem is that this quite dramatic vote of confidence almost certainly reflects attitudes before it because obvious that the Eurozone was being hit by a third wave of covid, which was going to lead to new and hardened lock-downs, without the expectation of early release. Because of the survey's huge footprint, these results are almost certainly out of date. Some of this is obvious. For example, France's consumer confidence index for March, which forms one input into these indexes, were reported today up 3pts to 94. That was better than expected, but then we learn that the data was collected between February 24th and March 20th. Like yesterdays sharply positive Markit PMIs for the Eurozone - which were all far stronger than expected - the timing matters. Those PMIs also relied on the surveys undertaken between March 12 and March 23rd. But if you look at the coronavirus data you can see the rise in the 7 day average of covid cases arriving only beyond doubt rather recently - I'd say around 18th March for France and 20th March for Germany. That terrible news arrived too late to filter through to these surveys. So I take two things from them. First, unless there's a health miracle in the next couple of weeks, the confidence recorded in today's surveys will be reversed and dashed in April's survey. But second: these surveys show what would have happened - what would have been the instinctive dramatic surge in confidence if, in fact, the end of the pandemic really was in sight for the Eurozone, so they are a a harbinger of what to expect in countries where the pandemic is already beaten back, and also in due course what we can expect eventually in the Eurozone. Just not now, unfortunately.

Today's bulletin is really a short addendum to last Friday's rather longish piece about what's going wrong in the EU's Emissions Trading Scheme. I noted then that this evolved into a bankers ramp, in which the only rational expectation is for prices to continue to rise. Which they continue to do, threatening to cramp EU growth whilst at the same time as pushing up prices - the classic ingredients for stagflation. This piece looks at the historic relationship between movements in Europe's economic growth and the CO2 price. Between 2009 and end-2017 these moved predictably in sync (98% confidence). Using that same model today, CO2 price have risen to between 12 and 14 times what one would expect to be justified by the underlying economic conditions. The dislocation, this unacknowleged and damaging tax on EU production and consumption will only rise.

Today episode is about the EU's emissions trading scheme. This is the sort of mess you thought you didn't need to know about. But now the way it has pushed up the price of CO2 for EU companies by approximately 150% yoy means you do need to know about it, because the jolt in Co2 pricing will simultaneously push up Eurozone inflation, and retard its recovery. In short, its the sort of mess which needs watching. To understand what's happening now, we need to know the history of the project. The details will probably bog us down, but the fundamental story is much the same as you find almost every time you get governments target a crucial economic input and end up trying to fix prices by using a 'stabilization fund'. You can be pretty certain that whatever it achieves, 'stabilization' will be elusive in the long run. The history is long and messy, but the result is this: by committing to a visible long-term tightening of supply at without actually knowing how, if at all, CO2 emissions really can be cut to near-zero in the medium term, the EU's scheme has created the sort of market dynamic which will be familiar to those who've looked at Bitcoin's supply-side fundamentals. Far from stabilizing the market, they have created a classic 'bankers ramp'. The market has cottoned on, and the price is absolutely soaring, from an average of Eu7.60 per ton during 2012 to 2018, to Eu 42.3 a ton earlier this week. What does this mean? Well, a barrel of crude is estimated in use to produce 317kg of CO2. With the ETS price at Eu42.3 a ton, that adds about Eu13.5 to the EU effective price of a barrel of oil. At current exchange rates, that comes to an extra $16 a barrel. Currently Brent crude is selling at US$69.4 a barrel, which is bad enough, but add on the ETS price and the price is up to $85.4 in the EU. In yoy terms, these calculations tell us the effective price is up 137% yoy. There seems no good reason to believe that the EU CO2 price will top out anywhere neare Eu42.3 a ton, or top out any time soon. In short, its a broad-based tax rise on EU industry which will be past on to the consumer at just the time when its not needed. Worse, there's no knowing how high this tax will rise, nor who, if anyone can stop it.

There are a number of prices I check daily, and run simple technicals to identify trends. These include all the major currencies and some minor ones, commodity signals, major crypto values and US bond market signals. The metrics I use are actually quite simple, but easier to explain with a worksheet going than not. But the signals have a pretty good track-record, if you view their purpose as correctly naming trends, rather than catching the first or last few percentage points of a move. What they signalled last week is that the dollar has established a strengthening trend against the SDR - no surprises there - but that the key currency mover which pushed it over the edge was China's Rmb, which broke from the strengthening trend we'd picked up in July last year when it was over 7 to the dollar (it was 6.50 when we called it) and established a weakening trend. This raises important issues, which I raise in today's edition. But the crucial thing to notice is that that it has happened: one way or another, this is a regime-change moment.

This episode looks at the UK's trade data for January, to take a first measure of the impact of the new UK-EU trade barriers which went up in January. This is hazardous, since the UK's monthly trade numbers are about as unreliable a series as I know of. That's simply because they so often get major revisions on a scale which you just don't see in other countries. You can take two view on this. Either it suggests unique incompetence, or, just as plausibly, a uniquely scrupulous approach to getting it right, even if it takes far longer than can be achieved in the six weeks it takes to produce the first estimate. But the upshot is dramatic: the revisions to monthly exports and imports data can come to literally to tens of billions, so we cannot, we must not, take January's numbers at face value. And of course, there are other complicating issues just now: the impact of renewed lockdown, the aggravated frictions on the EU borders, and also the probably big inventory swings built up in the months before January's new EU borders kicked in. Still, exports of goods and services fell 11.2% mom, and fell 26.5% yoy. Goods fell 18.3% mom and services fell 0.9%. And it's all to do with the EU trade: exports to EU fell 40.5% mom, with Eurozone down 38.5% and non-Eurozone down 53.6%. But exports to the rest of the world actually rose 3.6% mom. That's fairly unambiguous: in January 2020 the EU accounted for 44% of UK's goods exports, but this was down to 36% in January 2021. For all the reasons I've mentioned, its impossible to draw long-term conclusions from today's data. All we can say is that one month on, trade volumes with the EU collapsed in a way they didn't with the rest of the world. Whether this is the start of a longer-term re-structuring of UK trade will only be visible much later in the year.

Confused about the US labour market numbers? You should be. Every Thursday I track the US jobless insurance claims - initial claims and continuing claims. Historically these have been pretty useful. But these are strange days for the indicator. Take this week's numbers: initial jobless claims fell 42k to just 712k, and continuing claims fell 193k to 4.144mn. That sounds pretty good. But look down at the bottom of the report and you'll find a quite different set of numbers. The total number of people claiming benefits jumped 2.087mn on the week to reach a staggering 20.116mn. This time last year it was 2.137mn. And whilst the total number of claimants fell fairly consistently until the end of October, they've since stabilized, and since January they've been quietly and gently rising. What's did the damage this week is Pandemic Unemployment Assistance, which jumped 1.058mn on the week to 8.387m, and Pandemic Emergency Unemployment Compensation rose 986k on the week to 5.455mn. Since the Pandemic Unemployment Assistance and Pandemic Emergency Unemployment Compensation numbers are more than three times as many as those formally claiming unemployment benefit, we need to know what's happening. Which is what today's edition looks at.

Today I'm turning the spotlight on the surge in sales of heavy trucks in the US in October - up 8.3% mom to 38.95k. Just as the slump of late last year once again heralded trouble to come, now the recovery in sales suggests robust economic growth ahead. The 6m deflection above trend is now up to 0.7SDs, which is the highest since the recovery of 2010!

A slightly strange one today, looking at recent movements in Bank of Japan's ETF buying and the Bundesbank's Target 2 lending to the ECB to help explain the fundamental overvaluation of the TOPIX and DAX respectively.

Spoiled for choice, but I return today to Japan's machinery industry. Yesterday's Japanese wholesale and retail sales numbers posed a real question. Retail sales of machinery were up 17.2% yoy; wholesale sales of the same were up 36.8% yoy, with industrial equipt up 82.1% and electrical equipt up 26.1%. Is this a signal of a major upturn in capital goods demand, or are Japan's machinery makes simply stuffing the distribution channels? It's an important question, given that Japan is one of the world's biggest capital goods suppliers. Today we had September's industrial production numbers, which showed output up 4% mom sa and down 9% yoy, but with a monthly movt which was 2.4SDs above historic seasonal trends. Within that, production machinery was up 11.1% mom, shipments were up 11.8% , inventories up 1.5% and the inventory/shipment ratio down 11%. That inventory/shipment ratio was the lowest since February, but also still 19% higher than last year's average. So although September showed dramatic progress, it was from a poor starting position. Still, on the face of it, it isn't channel stuffing which is driving production, or wholesale sales for that matter. It's demand.

Three stories to chase up today: First, the 33.1% annualized rise in US 3Q GDP - this is what full-throated and unconstrained fiscal and monetary stimulus can do; Second, the unexpectedly sanguine results of the Eurozone's confidence and sentiment indexes for October. The survey period ended on Oct 22nd, so these surveys may just have missed, or disbelieved, news of the new European lockdowns; Third, there's the divergence in Japan between retail sales (down 4% yoy) and wholesale sales (+14.9%). In both, the star performers are capital goods: so are producers simply stuffing the channels, or is there a genuine capital goods resurgence around the corner?

Towards the end of the month, not only do we get a whole raft of hard economic data, we also get a bunch of confidence indicators, tracking consumers, business and investors. On a global scale, my global confidence shocks & surprises is still slightly positive, but has been in very steep decline since late September. That global signal, however, isn't really showing up how regional confidence indicators are now moving in different directions. We got a significant foretaste today, from State Street's global investor confidence index, which tracks risk appetite by what investors are actually buying The global signal fell 3.8pts to 80.1, which was the weakest since May. There are distinctly opposite trends coming from Asia and Europe. Asia's confidence rose 7.2pts to 91.7, which is just very slightly higher than 2019's average; but Europe's dropped 17.4pts to 92.8, which is weaker even than the lowest points of the initial lockdown,m and in fact the weakest since August 2019. The US indicator, too, showed a modest 2pt decline in risk appetite to 76.8, which remains higher than pandemic levels, and quite significantly higher than the 2019 average of 71.9. The recovery of confidence in Asia was confirmed by S Korea's Oct consumer confidence index, which rose 12.2pts to 91.6, which was the best since March, and was almost a return to pre-Covid normality. The details suggest a powerful return of optimism: readings of current economic conditions were up 16pts to 58, and economic expectations rose 17pts to 83. France's Oct onsumer confidence dipped only 1pt to 94, but that's pretty grim: even at the worst of the initial coronvairus wave,m the index only sank to 92. And when you look at the details, the index is being supported by improved reviews of the last 12 months, whilst expectations were falling quite hard. Many more confidence reports coming over the next two days.

Today we had the first glimpse of Markit's October PMIs for Japan, Germany, France, UK and US, with prelimninary reading for both manufacturing and services sectors. As always with the Markit's PMIs, its a struggle to drag anything of genuine substance out of them, but maybe there is some genuine information hiding in the broad sweep of the conclusions. Anyway, averaging the movements in all these economies, there was a very slight acceleration in manufacturing expansion in October vs September, with the average rising to 52.7 from 52.4 in September. But the divergence between countries widened a bit, with the standard deviation rising to 3.7pts from 3.4. The main reason for both those features is an acceleration in Germany, where the PMI rose 1.6pts to 58, with the output index up at 64.9, the best since Feb 2011! Elsewhere, there's no change in pattern: Japan is still contracting but we've got mild expansions elsewhere. For services, there's a slight slowdown with the average falling 0.3pts to 50.9 - a much more fractional expansion than manufacturers are having. Once again, there is a greater divergence between economies, and once again, it's Germany that's responsible. It's services PMI fell 1.7pts to 48.9, the weakest since June. Germany fared unusually well in the first wave of Covid, but seems to be sharing the same panic as the rest of Europe this time round. The other thing that stands out is there's a clear split between on the one hand Japan and continental Europe, which are all showing service sector contraction, and the US and UK, where servies are not only expanding, but actually accelerated slightly in October.

I took some time out from this podcast for a couple of reasons: for a week there, it seemed like the economic data wasn't really telling me anything new that I hadn't already talked about. But when China releases its 3Q GDP and a bunch of data for September, it would be surprising if there's nothing there to be seen. And there is. To cut a long story short, no matter which was you cut and analyse the data, they all tell us the same story - that far from a 'dead-cat bounce' after Covid, China's recovery continues to make progress, with an underlying sequential acceleration which has dimmed only very slightly over the last three months. What's more, it looks like the recovery is genuinely being driven by a recovery in private, nominal, domestic demand, rather than merely a product of fiscal stimulus.