Page 1 of 2: Global data summary
- Available June service-sector PMIs were mixed, with a 2.3-point drop in the Euro area index of business activity (the headline index) approximately offset by a gain in Japan. PMIs in China and the UK were virtually unchanged. Against this backdrop, tomorrow’s US ISM nonmanfacturing survey, which was delayed by the Independence Day holiday, will decide the outcome of our global services PMI. We are looking for signs that the growth of service-sector activity is stabilizing into midy ear following an unexpected slowing in the first half of this year.
- In addition to the PMIs, the main focus of this week will be the June US labor market report. We are a bit above consensus in our call for that payrolls expanded 140,000 in the private-sector and 120,000 overall. Equally important will be the outcome for the workweek (a 0.1 change in the workweek is equivalent to about 300,000 jobs in terms of total hours worked). Although nominal US labor income growth is moderating from the robust pace of a few months ago, it is important not to lose sight of the even more powerful boost that lower inflation will deliver to real income. In 3Q, the US inflation rate is forecast to drop 3%-pts (saar), from 4.2%q/q, saar to 1.2%. For a plausible illustration of the interplay of these two factors, see the accompanying chart.
- This week also will bring a May update of G-3 orders and shipments of capital goods, which is our monthly proxy for global business equipment spending. These data turned very sluggish the past few months, raising concerns about an unanticipated slowdown in capex. An early glimpse at available May data suggests a solid outcome for the month. It also is notable that surveys of business capex plans generally have remained elevated.
- On the policy front, the ECB will head up a busy week of meetings. Last week’s comments from Trichet confirmed the Bank is on track for a second 25bp hike this week. We look for guidance at this week’s press conference to suggest an additional hike in 4Q11. Today, Sweden’s Riksbank tightened 25bp to 2% as anticipated. Although the Riksbank is biased toward additional tightening, for our view to be correct that the Riksbank will hike at each of the three remaining meetings this year, the global and Swedish economies need to reaccelerate during 2H11 and the central bank needs to remain sensitive to the wage round at a time when overall inflation is expected to be well over 3%. The Reserve Bank of Australia left rates on hold at 4.75%. In a close call, Stephen Walters maintains his forecast that the RBA will resume hiking at the August 11 meeting.
- Euro area retail sales fell in May for the second time in three months, raising downside risk to the 1.3%q/q, saar 2Q PCE forecast.
The first signs of a break in sequential (i.e., seasonally-adjusted monthly) inflation was visible in May. For the month, our global CPI advanced just 0.19%, which was about half the pace of the previous four months. The moderation was focused in the developed economies, and mostly reflected the sharp break in oil prices that month. The CPI accelerated in May in the emerging economies, although our top-down inflation model points to a significantly lower reading in June.
Global inflation increased on a year-ago basis in May because of a positive base effect. A look back shows that the global CPI rose just 0.08%m/m in May 2010. The base effect is even more positive for June, with the CPI having declined 0.01% in June 2010. Conditions start to turn more favorable for a peak in the %oya inflation rate in July, reflecting the larger monthly increases in the global CPI that took place beginning in July 2010. After posting very subdued, 0.06%m/m (seasonally adjusted) average gains from April to June of 2010, inflation picked up rapidly in 2H10 to a pace of 0.32% per month. The pace escalated slightly further to 0.36% per month from January through April 2011. The rapid pickup in sequential (i.e., monthly) inflation lifted the year-ago rate from 2.2% in June 2010 to a recent peak of 3.7% in May 2011.
Base effects imply that even if global headline inflation holds at its moderate May pace of 0.2%m/m over the next few months, the over-year-ago rate will rise a few more ticks from the latest reading to a peak of 3.9%oya in July. With that said, an extremely early read on June data suggests a very low monthly print this year, similar to what happened in June 2010. The seasonally-adjusted Euro area headline HICP flash ticked down in June, and available data are pointing to what could be a similar decline in the US.
Assuming monthly gains in the global CPI of 0.2%m/m is equivalent to expecting the monthly advance in the headline CPI to subside to the recent trend increase in the core (it has averaged 0.2%m/m gains in the year-to-date). This seems reasonable in a world in which commodity prices are about stable, unless there is significant, lagged pass-through from commodity prices to retail prices. In fact, we do find evidence of lags in pass-through in the prices of agricultural commodities to food prices, especially in the EM. Even so, the path is clear for smaller monthly increases in the global CPI in coming months, paving the way for a gradual descent in the year-ago rate that begins sometime during 3Q11. The smaller monthly increases in CPI will deliver an important boost to household real income growth and, we believe consumer spending. By the same token, a decline in the year-ago rate will take pressure off anxious central bankers.
In thinking about the near-term path of year-ago headline inflation, one final issue to consider is the path of core inflation. The base effects in the next few months will pose a challenge for core inflation (i.e, recent monthly gains are running above those from 3Q10). If the year-ago rate of core inflation were to continue climbing in the next few months, this could offset some or all of the relief coming to the headline rate from the stabilization in commodity prices.
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