It’s a crawl but Mario Draghi got another step closer to his around 2% inflation target if we look at the core rate. In July it ticked up by one tenth to 1.2% y/o/y, was the quickest pace of increase since May 2013 if we don’t include the timing of Easter distortion of a few months ago and was one tenth higher than forecasted. Services inflation has been the main driver of the core uptick and it was up 1.5% y/o/y, though down a tenth from June. Non energy industrial prices were up by .5% y/o/y, matching the most since February 2016. See chart on core rate. The headline increase was 1.3% as expected. With QE scheduled to end in December, we will no doubt get a plan in September for how this gets extended in terms of pace and size. Bet on further tapering, especially as core inflation continues to move further from zero.
CORE EUROZONE CPI
Another reason for the ECB to back off again from its nationalization of the region’s assets, the June unemployment rate fell one tenth to 9.1% which is the lowest rate since February 2009. For perspective, it is still above the pre recession low of 7.3% but is now well off the 2013 peak of 12.1%. The ECB is running out of excuses for their scorched earth monetary policy. Yes in part to the slowly rising core inflation rate but also because the region is proving that it can generate better economic growth without higher inflation. Central bankers seem to think falsely that higher inflation is a precursor to growth.
Lastly in Europe, June retail sales jumped 1.1% m/o/m, well above the estimate of up .2% and comes with record low unemployment.
Even with the data, the euro is taking a breather vs the US dollar which in turn is helping European stocks. European sovereign bonds are mixed around the flatline.
The state sector weighted Chinese manufacturing and services indices both moderated in July. The manufacturing index fell .3 pts to 51.4, a hair under the estimate of 51.5 and remains around the 51.5 average seen year to date. All the growth is coming from large businesses (aka, state owned enterprises) as the components measuring medium and small enterprises both dropped and are below 50. Output, new orders, backlogs and new export orders all fell m/o/m while employment was up a touch but still remains below 50. Both input and output prices charged rebounded. Business expectations looking forward did rise to a 5 month high.
The services PMI fell .4 pts to 54.5 which is smack in line with the year to date 7 month average. New orders, backlogs, and employment all fell while business activity expectations were flat. Prices rebounded too for both those incurred and charged.
Bottom line, manufacturing is still hovering around the flat line with some manufacturing purposely being taken off line, particularly in the areas that Chinese officials have acknowledged excess capacity such as in coal and steel. Also as stated above, it’s really only big companies that are seeing any growth overall as they have the best access to credit and state favors in an environment where deleveraging and credit growth is now a big focus.
As for the government’s reason for the moderation in manufacturing, they said it was “affected by high temperature and flood in some regions.” Whatever. Also of note, “almost 40% said labor costs are rising; labor cost pressure large.” With services, this index includes apartment construction and we know the back and forth this sector is having with the government trying to manage a bubble there. Stocks in China rallied notwithstanding the data misses with the Shanghai comp up .6% and H share index was up a similar amount. The yuan is up too. Also of note, copper prices continue to power ahead at multi year highs up almost 1%. It’s now up in 13 of the last 16 days. Iron ore prices are spiking by 7% to a 3 ½ month high.