DR.CHENJIAZI ZHONG

In Brief

• U.S.: August NFIB small business confidence index up 0.1 month on month to 105.3; CPI surprises to the upside in August; inflation expectations continue to rise
• Eurozone: Earlier in the cycle, job gains are still nascent; Bank of France estimated French GDP growth of 0.5% in 3Q17; eurozone industrial production up 0.1% in July; EU posts record card registration figures
• U.K.: Inflation rate up to 2.9%
• Japan: More inflation in the pipeline
• China: Yuan has weakened as the government has relaxed currency controls; PPI ticks higher as retail, IP moderate
• Thought: Potential impact from hurricanes

On the U.S.

The latest issue of The National Federation of Independent Business (NFIB) Small Business Economic Trends came out on September 12. The headline number came in at 105.3, up 0.1 from the previous month. Five of the components increased while five declined. The lofty reading kept intact a string of historically high performance extending back to last November. Small business owners reported a seasonally-adjusted average employment change per firm of 0.18 workers per firm over the past three months, virtually unchanged from July. The net percent of owners raising average selling prices increased 1 point to a net 9%, which was the highest reading since 2014. 3% of owners reported that all their borrowing needs were not satisfied, unchanged, and historically very low. 34% reported all credit needs met and 49% explicitly said they were not interested in a loan. Including those who did not answer the question, 63% of owners have no interest in borrowing.

There is no big inflation worry for now but the U.S. CPI surprised on the upside in August, which rose 0.4% after edging up 0.1% in July. Core is still tame. U.S. consumer prices accelerated in August amid a jump in the cost of gasoline and rents. The data showed signs of firming inflation that could allow further monetary policy tightening from the Federal Reserve this year.

On Europe

Europe had the double dip. While the U.S. is later-cycle, it is tougher to make that case in the euro zone. Other statistical releases this week showed solid growth in the euro area is still on track for the third quarter. French business sentiment surveys, EA industrial production, and new car registrations made good signs.

The Bank of France maintained its forecast for French quarterly GDP growth of 0.5% in the third quarter, unchanged from the second quarter. The prediction was part of the central bank’s August business climate survey. The survey showed that the business sentiment indicator for the manufacturing industry dipped to 104 points in August from 105 points in July, although sentiment in the services industry rose to 100 points last month from 99 points in July. The business sentiment indicator for the construction industry also rose to 103 points in August from 102 in July.

Eurozone industrial production rose a little in July following a drop the month before as a jump in the production of capital and consumer goods offset a decline in energy, according to data released by Eurostat on September 13. Industrial production was up 0.1%, in line with estimates and compared to a 0.6% decline in June. The production of capital goods rose by 0.8%, durable consumer goods by 0.7% and intermediate goods by 0.5%. Meanwhile, production of non-durable consumer goods fell by 0.4% and energy by 1.2%. Compared with July 2016, industrial production in the eurozone was up 3.2%, missing expectations for a 3.4% gain. The production of durable consumer goods rose by 5.7%, intermediate goods by 4.8%, capital goods by 4.3% and energy by 1.2%, while production of non-durable consumer goods fell by 0.5%. In the EU-28 group of nations, industrial production was down by 0.3% on the month and up 3.1% on the year.

Passenger car registrations in Europe in August increased by 5.6% totaling 865,047 units. In volume terms, the figures topped those of August 2008, marking the European market’s best performance in a decade. Among the five big markets, Italy and Spain posted strongest increases with 15.8% and 13.0% rises respectively. France and Germany with 9.4% and 3.5% rises respectively also registered positive growth while demand in the UK declined 6.4%.

On the U.K.

The U.K.’s inflation rate climbed to its joint highest in more than five years in August as general commodity price appreciation, month-on-month rises in travel, apparel, and petrol. The UK CPI rose to 2.9% in August, up from 2.6% in July. The Bank of England has repeatedly said it would look through the transitory effects on inflation, and tightening monetary policy to offset hot inflation of this sort would be too costly for the economy.

On Japan

The upward trend in inflation continues in Japan. Import prices ascended 12.5% year on year and headline producer prices rose 2.9% in August. The biggest price increases were from petroleum and coal products, 12.5% y/y, iron and steel, 11.2%, and nonferrous metals, 16.8%, which is consistent with the global commodity reflation.

Meanwhile, domestic politics are looking better. Prime Minister Abe is pushing structural reforms to increase the labor force. Meanwhile, his approval rates are recovering. “Abe directed a government council on regulatory reform to devise frameworks as early as this year toward clearing Japan’s day-care waiting lists, reworking the system for wireless spectrum allocation and promoting the growth of the forestry industry. The council also will resume discussion of topics such as encouraging the hiring of overseas workers and promoting foreign tourism, issuing conclusions next summer,” Nikkei noted on September 13.

On China

The PBOC has scrapped a reserve requirement rule on trades called currency forwards, making it cheaper for investors to buy dollars while selling the yuan. The PBOC is also removing a reserve requirement on yuan deposits for foreign banks. The China yuan could weaken as local investors diversify abroad, but this is not a bad thing; the removal of emergency controls should be interpreted as a positive now.

Producers’ input and output prices rose again to 7.7% y/y and 6.5% in August. Like Japan’s PPI, energy and metals experienced the largest price increases. The strength in copper, iron ore, and China stocks indicates that there is currently no problem in China. The PBOC’s action to relax currency controls is another sign of confidence.

Potential Impact from Hurricanes

Two major hurricanes disrupted activity in the third quarter, making jobless claims rise and likely depressing payrolls in September, but rebuilding should help the data as we measure it going forward. Used car prices should rise.

The ISM Report on Business Survey found that two-thirds of responding supply managers believe input materials pricing would be at least somewhat negatively impacted over the next three months with greater than 27% expecting prices to be negatively or very negatively impacted. Relatedly, 56% of respondents believe supplier deliveries will be at least somewhat negatively impacted over the next three months with nearly 19% expecting deliveries to be negatively or very negatively impacted. Overall, 67% of respondents expect at least some negative impact to prices over the next three months with 27% of respondents expecting negative to very negative impacts. Even six months out, 56% expect at least some negative impact on prices. The manufacturing sub-sectors are more concerned than their non-manufacturing counterparts about negative price impacts three and six months out. The findings about supplier deliveries are similar, but less dramatic. Overall, 54% of respondents expect at least some negative impact to deliveries over the next three months with 19% expecting negative to very negative impacts. Six months out, a more than 36% expect at least some negative impact on prices. The manufacturing sub-sectors are notably more concerned than their non-manufacturing counterparts about slowed deliveries three and six months out.