Introduction

Many of us currently need or will increasingly need a big raise just to make ends meet. Price data, especially from the US, are in the nose-bleed zone, well beyond what policy makers had prepared us for. But Federal Reserve Chair Jerome Powell, testifying on Capitol Hill in the week, remains unfazed, maintaining that pressures are in narrow sectors and will pass through the data sooner rather than later. For those having to pay bills they can't afford, this of course sounds like good news.

The Global Economy

Inflation

Big news came early in the week as consumer prices soared in June and once again well beyond Econoday's consensus range. The 12-month rate (blue line in graph) rose 4 tenths to 5.4 percent which is a 13-year high, while the ex-food ex-energy core rate (black line) rose 7 tenths to 4.5 percent for a 30-year high. Note in the graph that the core this time last year held relatively steady compared to the overall rate which dropped dramatically; this comparison of the year-ago bases underscores the core's degree of acceleration. And certainly the monthly readings for both specifically underscore the immediate degree of acceleration, both up a truly unexpected 0.9 percent in June.

Jerome Powell in his testimony during the week stressed the longer-tem view, noting that much of the pressure is tied to vehicle prices which is indeed the case, as prices for used vehicles surged a monthly 10.5 percent for the third double-digit increase of the last four months while new vehilces posted a 2.0 percent monthly gain on top of 1.6 percent in May. Yet food prices, in what is not good news for the underfed, also rose, up 2.4 percent on the month with energy up 1.5 percent which is not good for those who can afford to own a vehicle.

Price acceleration also made for bad news at the end of the week as the University of Michigan's measure of year-ahead inflation expectations shot 6 tenths higher to 4.8 percent which is an unprecendented level of overheating for this reading. All this inflation angst of course is darkening the consumer's mood, as the UoM's consumer sentiment index dropped unexpectedly and sharply, far below Econoday's consensus range. But in Powell's defense, two other readings on inflation expectations were much less extreme: year-ahead business expectations as measured by the Atlanta Fed dropped 2 tenths from May's record high to 2.8 percent while 5-year expectations at the consumer level, part of the UoM's report, rose only 1 tenth to 2.9 percent. Both of these measures in fact have been flattening out the last couple of months. That inflation is running away can't yet be confirmed!

Also confirming that inflation has not gotten out of hand is producer prices where a run of recent reports, including from India and the UK in the latest week, appear to be topping. We look here at Switzerland's combined producer and import price index which was very much on the soft side of the consensus in June. A 0.3 percent monthly gain was small enough to reduce the annual inflation rate from 3.2 percent to 2.9 percent. Even so, this was still its second highest reading since August 2018. Domestic producer prices climbed a further 0.2 percent on the month, lifting yearly PPI inflation from 1.6 percent to 1.7 percent. And although import prices were up a sharper 0.4 percent, this lowered their annual rate from 6.4 percent to 5.6 percent. Assuming bottlenecks in the supply chain can work themselves out, producers may begin to better meet demand which in turn would help cool pressures at the base of the global price chain.

Definitely not cooling are wage pressures, at least in the US where average hourly earnings shot higher in data released earlier in the month or the UK whose labour market report in the latest week showed a surge in wages. Average annual earnings growth in the three months to May was a record 7.3 percent, stronger than expected and fully 1.6 percentage points above their rate in February through April. This jump was partly attributable to bonuses but even excluding this component, growth accelerated from 5.7 percent to 6.6 percent. These data continue to be affected by compositional and base effects but the latest pick-up is consistent with survey evidence that businesses are having to boost pay rates to attract to new workers. Both the UK and US are leading the way in post-Covid reopenings, something to remember as Europe and Asia follow suit in what may pose a longer-term issue for inflation. And though the Bank of England has been keen to stress that the current upswing in inflation should only be temporary, the latest wage data do raise the risk of more prolonged acceleration; the first hike in interest rates might well be closer than seemed likely just a month ago.

Monetary policy

Whether rates may begin to climb is a separate issue from whether tapering is about to begin. And begin it has for a number of major central banks including the Reserve Bank of New Zealand. Though the RBNZ left its official cash rate unchanged at 0.25 percent, officials said they are ending their asset purchase program later this month. These purchases have so far amounted to around NZ$60 billion, well below the specified upper limit of NZ$100 billion. The change reflects officials' assessment that economic conditions have continued to improve both abroad and domestically from the impact of the Covid-19 pandemic. Domestic economic activity is now above pre-pandemic levels and officials note that conditions, since late year, have been "persistently stronger than anticipated". Although temporary factors are expected to push headline inflation higher in the near-term, officials also believe that more persistent upward pressures on consumer prices are likely to emerge over time due to rising domestic capacity pressures and growing labour market shortages.

Though Canada's reopening is lagging the UK and the US, the Bank of Canada has neverthless been out in front of the taper process and trimmed QE at the week's meeting. Having last been reduced by C$1 billion to C$3 billion in April, weekly asset purchases were cut by a further C$1 billion to C$2 billion. This was in line with the central bank's previously stated preference for a gradual and measured move toward ending, like the RBNZ, asset purchases altogether.  Rates were left on hold, at 0.25 percent for the benchmark overnight rate. The central bank similarly reaffirmed its forward guidance which sees the policy interest rate pegged at this lower effective bound "until enough economic slack has been absorbed to ensure that the 2 percent inflation target is sustainably achieved". This is still not expected until the second half of 2022.

Supply and demand

An anamoly playing out in the global economy is a disconnect, (one that's inflationary) between production, which is being constrained by Covid-specific bottlenecks, and demand which is being boosted by fiscal and monetary stimulus as well as the reopenings underway in the UK and US. China offers an example. Growth in industrial production is flat, rising at 0.56 percent in June and 0.53, 0.52, and 0.60 percent in prior months. Retail sales in China, by contrast, are coming in nearly 3 tenths higher, at 0.81 percent for a second month in a row. Annual rates are similiarly dissimilar: 8.3 percent for industrial production and 12.1 percent for retail sales. And May's results on the retail side would have been stronger if not for auto sales which, as part of the global theme, slowed sharply in contrast to strength in other categories including household non-durables, home appliances, communications equipment, and clothing.

This supply/demand disconnect is also playing out in Europe. Industrial production was a good deal weaker than expected in May, down a sizeable 1.0 percent on the month for the worst performance since February, this despite an easing in Covid issues. Ominously, weakness was broad-based with all of the main production sectors bar consumer durables posting fresh monthly declines. Non-durable consumer goods (minus 2.3 percent) fared the worst but capital goods (minus 1.6 percent) were not far behind. By country, the four largest economies posted setbacks: Italy (minus 1.5 percent) was especially weak but France (minus 0.3 percent), Germany (minus 0.6 percent) and Spain (minus 0.8 percent) lost ground too. By contrast, retail sales, in data released in the prior week, rebounded strongly in May, up 4.6 percent on strength in discretionary demand as purchases excluding food and auto fuel jumped 8.8 percent to more than reverse April's 6.1 percent fall. Regionally, sales surged 9.9 percent in France and were up 4.2 percent in Germany. Demand is rising but goods production is being hampered by shortages of raw materials and until this output gap begins to shrink, inflationary pressures will continue to build.

If production shortages are especially concentrated in a single industry, which they appear to be, this may simplify the solution  -- which is to specifically increase production of chips that go into cars and trucks. US production, in fact, does show a single point of concentrated trouble as vehicle production fell sharply in June. The vehicle decline, at 6.6 percent on the month, took down manufacturing output with it where volumes fell 0.1 percent. None of these results, by the way, were signaled ahead of time by any of the various business surveys where record manufacturing growth has been the repetitive and unrealized signal and where advanced signals of auto trouble have been absent. Just look at the Chicago PMI, a report traditionally used as a guage for the auto sector: this index has averaged 67.8 the last five reports going back to February in the best run in 40 years, a run that would not have predicted the slowing evident in the accompanying graph.

Markets: Inflation, BoE shock-talk, and Covid

The big jump in US consumer prices pulled stocks lower on Tuesday, also drove up US Treasury yields and made for a soft 30-year bond auction that afternoon. Pulling down Wednesday's markets was the Reserve Bank of New Zealand's move to end QE, setting up 0.4 and 0.5 percent losses for the NZX on Wednesday and Thursday. And Thursday saw the worst of it during the week, hit by bluntly hawkish comments from Bank of England officials. Forward guidance set at the last meeting “no longer rules out tightening,” said external MPC member Michael Saunders, who added that conditions on tightening “have now been met.” Deputy BoE Governor Dave Ramsden threw in his own punch suggesting a policy shift may come relatively quickly. “I can envisage those conditions for considering tightening being met somewhat sooner than I had previously expected.” Covid hit the markets on Friday, especially news that cases in the European Union jumped 64 percent in the week.

The bottom line

Global indicators are generally beating expectations though the breakdown is mixed. China, despite a run of mostly as-expected June data, is leading the way now at plus 31 as May's disappointing data ran off the index's equation. The Eurozone and Canada are tied in second place at a very respectable 21 with the US right behind at 17. Now the disappointments. Switzerland, reflecting the topping in the producer and import price index, is at minus 21 to indicate that forecasters are over-estimating this country's results. The same is true for the UK and Germany, both at minus 19, with Italy a little less so at minus 11. France is at minus 1, right near the zero line that indicates economists are squarely hitting their forecasts.

**Contributing to this article were Jeremy Hawkins in London, Brian Jackson in Sydney, and Mace News in New York

Week of July 19 to July 23 (all days local)

A light week is expected, one that will include two major central bank announcements and July's run of PMI flashes. Neither China's loan prime rate on Tuesday nor the policy tools of the European Central Bank on Thursday are expected to see any changes. Inflation data will be limited to Japan's CPI on Tuesday, where only fractional pressure is the call, and the German PPI, also on Tuesday were mixed but still elevated results are expected. Consumer data will be highlighted by the Eurozone's consumer confidence flash where improvement is expected, and by Canadian retail sales on Friday where improvement is not expected. Business data will include Japanese merchandise trade data on Wednesday and the French business climate indicator on Thursday. US data will include weekly jobless claims on Thursday, preceded on Tuesday by housing starts and permits, and followed on Friday by a PMI update that is expected to show substantial strength especially for services on the reopening of the US economy. Very solid readings in the high 50s to mid-to-low 60s are expected for the run of European PMIs, likewise all released Friday.

China Loan Prime Rate (Tuesday, Release Time Not Set)

Consensus Change: 0 basis points

Consensus Level: 3.85%

The People's Bank of China is not expected to change its one-year loan prime rate at 3.85 percent.

Japanese Consumer Price Index for June (Mon 23:30 GMT; Tue 08:30 JST; Mon 19:30 EDT)

Consensus Forecast, Year over Year: 0%

Consensus Forecast Ex-Food, Year over Year: 0.2%

Forecasters don't see much pressure appearing in June, calling for a 1 tenth gain to zero for the overall annual rate and a 1 tenth gain for the ex-food rate to plus 0.2 percent.

German PPI for June (Tue 6:00 GMT; Tue 08:00 CEST; Tue 02:00 EDT)

Consensus Forecast, Month over Month: 0.9%

Consensus Forecast, Year over Year: 8.0%

May's 1.5 percent monthly surge was more than double expectations while the 7.2 percent annual rate was the most elevated in 13 years. Forecasters for June are calling for a 0.9 percent monthly gain and an 8.0 annual rate.

US Housing Starts for June (Tue 12:30 GMT; Tue 08:30 EDT)

Consensus Forecast, Annual Rate: 1.590 million

US Building Permits

Consensus Forecast: 1.700 million

Sharp gains are the call. A 1.590 million annual is expected for June starts versus May's 1.572 million rate; permits are seen at 1.700 million versus 1.683 million (revised from 1.681 million).

Japanese Merchandise Trade for June (Tue 23:50 GMT; Wed 08:50 JST; Tue 19:50 EDT)

Consensus Forecast: +-¥456.0  billion

Consensus Forecast, Imports Y/Y: 28.4%

Consensus Forecast, Exports Y/Y: 46.0%

Forecasters see Japan's merchandise trade balance coming in at a ¥456.0 billion surplus in June following a deeper-than-expected deficit of ¥187.1 billion in May.

French Business Climate Indicator for July (Thu 06:45 GMT; Thu 08:45 CEST; Thu 02:45 EDT)

Consensus Forecast, Manufacturing: 108

It was the first time in seven months that manufacturing sentiment, at 107 in June, was flat and 2 points short of the consensus. July's expectation is 108.

European Central Bank Announcement (Thu 11:45 GMT; Thu 13:45 CEST; Thu 07:45 EDT)

Consensus Forecast, Change: 0 basis points

Consensus Forecast, Level: 0.0%

The European Central Bank has been perhaps the most dovish of any central bank. No change in rates and no change in asset purchases (neither the APP nor the PEPP) but changes to forward guidance are expected in order to accommodate the central bank's new more flexible inflation target.

US Initial Jobless Claims for the July 17 week (Thu 12:30 GMT; Thu 08:30 EDT)

Consensus Forecast: 350,000

Jobless claims for the July 17 week are expected to continue to come down, to 350,000 versus 360,000 in the July 10 week.

Eurozone: EC Consumer Confidence Flash for July (Thu 14:00 GMT; Thu 16:00 CEST; Thu 10:00 EDT)

Consensus Forecast: -2.7

Consumer confidence has improved the past five straight months, falling nearly 2 points in June to minus 3.3. July's consensus is further improvement to minus 2.7.

UK Retail Sales for June (Fri 06:00 GMT; Fri 07:00 BST; Fri 02:00 EDT)

Consensus Forecast, Month over Month: 0.5%

After beating expectations sharply in March and April, retail sales came in well below expectations in May at a 1.4 percent monthly decline. The consensus for June is a 0.5 percent monthly increase.

French PMI Flashes for July (Fri 07:15 GMT; Fri 09:15 CEST; Fri 03:15 EDT)

Consensus Forecast, Manufacturing: 57.9

Consensus Forecast, Services: 59.0

Forecasters see the manufacturing PMI, which has held in the high 50s the last four months, coming in at 57.9. Services, which jumped into the mid-to-high 50s in May, are seen rising further to 59.0.

German PMI Flashes for July (Fri 07:30 GMT; Fri 09:30 CEST; Fri 03:30 EDT)

Consensus Forecast, Manufacturing: 64.4

Consensus Forecast, Services: 59.5

Services accelerated sharply in May and especially in June where a nearly 5-point gain lifted the index into the mid-to-high 50s. Manufacturing has been holding in the mid-60s since March. Expectations for July are 59.5 for services and 64.4 for manufacturing.

UK PMI Flashes for July (Fri 08:30 GMT; Fri 09:30 BST; Fri 04:30 EDT)

Consensus Forecast, Manufacturing: 62.6

Consensus Forecast, Services: 59.5

Services momentum eased slightly in June but remained very strong and over 60 for a third straight month with the expectation for July, however, at 59.5. Manufacturing momentum also eased slightly in June though growth for this sample has been even stronger, in the mid-to-low the 60s in both May and June. July's expectations are 62.6.

Canadian Retail Sales for May (Fri 12:30 GMT; Fri 08:30 EDT)

Consensus Forecast, Month over Month: -3.0%

Retail sales in April, hit by Covid restrictions, fell an unexpectedly deep 5.7 percent in April with no rebound expected for May, at a monthly decline of 3.0 percent.

US PMI Flashes for July (Fri 13:45 GMT; Fri 09:45 EDT)

Consensus Forecast, Manufacturing:  62.1

Consensus Forecast, Services: 64.6

Growth rates in June's PMIs, in the mid-to-low 60s, were very strong and less overheated than May. July's expectations are 64.6 for services and 62.1 for manufacturing.