Introduction

Sky high divergence scores of 57 for China and 47 for the US put into context a week of unexpectedly strong economic data, some of which is wanted but some of which (when it comes to inflation) isn't wanted at all. No one was prepared for the prior week's acceleration in US consumer prices, at 0.9 percent on the month and 6.2 percent on the year, including no doubt Jerome Powell who has been assuring everyone all year that supply constraints will ease and that the secular trend of disinflation will reassert itself. Could it be that the inability to restrain consumer prices will cost Jerome Powell his job? That's up to President Biden who is expected to announce his Fed chair pick any day now. All this heat, whether on Powell or consumer prices, starts at the producer level where costs are literally in vertical flight across the globe, and especially in Germany.

The Global Economy

Producer prices continue to soar and again far exceeded even the grimmest expectations in October. Having already jumped a monthly 2.3 percent in September, Germany's PPI surged fully 3.8 percent at the start of the quarter. Annual PPI inflation climbed 4.2 percentage points to 18.4 percent, the highest reading in records that began in 1951. In line with the pattern seen over much of the year so far, energy (12.1 percent) dominated the overall monthly change but intermediates (0.9 percent), capital goods (0.5 percent), consumer durables (0.3 percent) and non-durables (0.5 percent) all posted fresh gains too.The annual core rate accelerated again, climbing from 8.6 percent to 9.2 percent, some 8.9 percentage points above its level at the end of last year. The October update shows that pipeline inflation pressures in German manufacturing are still building rapidly and warn that CPI inflation, already at 4.5 percent last month, could have further to go before finally peaking.

New Zealand posts its producer price report on a quarterly basis, and the latest update won't make for agreeable reading at the Reserve Bank of New Zealand. Output prices in the third quarter rose 1.8 percent after an increase of 2.6 percent in prior quarter, with year-over-year growth picking up from 4.0 percent to 6.2 percent. The increase was largely driven by acceleration in output prices in the manufacturing sector, up 9.7 percent on the year after increasing 1.4 percent previously. Prices in the primary sector also rose at a sharper pace, up 13.8 percent on the year after increasing 6.9 percent previously, as did prices in the construction sector and most parts of the services sector. Producer input prices rose 1.6 percent on the quarter after increasing 3.0 percent previously, with the year-over-year change picking up from 5.9 percent to 7.0 percent, also largely reflecting stronger prices in the manufacturing and construction sectors. Data released last month also showed stronger consumer price pressures in the third quarter, with year-over-year change accelerating from 3.3 percent to 4.9 percent, the biggest increase since 2011. After the RBNZ increased policy rates for the first time since 2014 at its most recent meeting, held last month, this report is likely to strengthen the case for another rate hike in coming months, perhaps as soon as next week's meeting.

Pass through of accelerating costs has been signaled by business surveys all year which should make the pressure underway in consumer prices less of a surprise. But economists, right now it seems, are easy to surprise. Consumer prices in the UK were significantly stronger than expected in October. A 1.1 percent monthly increase was 3 tenths beyond the consensus and sharp enough to lift the annual inflation rate from 3.1 percent to 4.2 percent, equaling its highest mark since November 2011. The rate now stands 2.1 percentage points above the Bank of England's two percent medium-term target. And it's not all just energy prices. The annual rate was dominated by housing and household services where prices rose 1.2 percent on the month compared with a 0.5 percent fall over the same period a year ago. This alone added nearly 6 tenths to the annual rate. Transport, restaurants and hotels as well as education also made sizeable and unwanted contributions. Core consumer prices rose 0.7 percent versus September, boosting the underlying inflation rate from 2.9 percent to 3.4 percent, matching its highest print since April 2011. The BoE currently expects headline inflation to peak next year at five percent and even October's acceleration leaves room before the bank's potential pain threshold is breached. However, the speed with which the rate has climbed in recent months will not sit well with most members on the Monetary Policy Committee, and the surprising strength of October's report must increase the likelihood of a rate hike at next month's meeting.

Rate hikes are also the talk in Canada whose CPI has exceeded Econoday's consensus the last six reports in a row! Inflation accelerated in October, rising 0.7 percent on the month and 4.7 percent on the year. The 12-month inflation rate is the highest since February 2003, up from 4.4 percent in September. Annual measures of core inflation, however, did show some signs of stabilization. Excluding energy, prices were up 0.4 percent on the month leaving this 12-month rate unchanged at 3.3 percent. The Bank of Canada's average of three measures was stable at 2.7 percent year-over-year, above the central bank's two percent mid-range target but within the one percent to three percent operational range. Goods prices increased 1.0 percent on the month and 6.5 percent on the year, while services were up 0.4 percent and 3.2 percent. On a monthly basis, prices increased in all eight major categories, within a range of 0.2 percent for alcoholic beverages, tobacco products and recreational cannabis, to 1.4 percent for transportation, boosted by a 5.0 gain in gasoline prices. On a 12-month basis, prices were up between 1.8 percent for household operations, furnishings and equipment, and 10.1 percent for transportation, the largest increase since March 2003. Despite some stabilization for core prices, October's results could nudge the BoC into hiking rates sooner rather than later. In fact, Governor Tiff Macklem indicated this week that Canada was getting closer to raising policy rates: "For the policy interest rate, our forward guidance has been clear that we will not raise interest rates until economic slack is absorbed. We are not there yet, but we are getting closer."

One bank that's guaranteed not to raise rates in any of our lifetimes is the Bank of Japan. Here the inflation data give hope to the short-war theorists. Core consumer prices in Japan did maintain a small step upward in October but only a small one, as rising costs for utilities, fuels and processed food amid pandemic-caused supply shortages offset the dampening effect of deep mobile phone discounts. The national average core consumer price index (excluding fresh food) edged up 0.1 percent from a year earlier, matching September's rate which marked the first year-over-year gain in 18 months. Yet the underlying inflation rate – measured by the core-core CPI (excluding fresh food and energy) – was underwater again, down 0.7 percent on the year after falling 0.5 percent in September for the seventh straight sub-zero reading. This narrow measure is not receiving support from the recent pickup in energy markets. The total CPI inched up 0.1 percent in October, as expected, after rising 0.2 percent in September, which was the first year-over-year gain in 13 months. Unlike other major economies, a spike in producer prices has not filtered through to consumer inflation in Japan and isn't likely to as Japanese firms are generally cautious about raising prices for fear of losing market share or cooling off demand.

The US also posted fresh inflation data in the week, data that suggest importers and exporters are turning to air freight to get their goods back and forth. The import price index for October spiked 1.2 percent on the month, more than expected and reflecting much higher prices for fuels (up 8.6 percent) and autos and parts (up 0.7 percent). Imported energy – which is priced in US dollars – is on a particularly strong upward trend. Excluding fuels, the import price index rose 0.4 percent. The cost of incoming air freight services rose 1.9 percent in October from September. Turning to export prices, they jumped 1.5 percent on the month, also above expectations. Export prices climbed for both agricultural goods (up 1.0 percent) and nonagricultural goods (up 1.5 percent). Some of this may be due to a slightly stronger US dollar, but shortages and delays along the supply chain are also a factor. Another factor is an increase in outgoing air freight services of 1.5 percent. Year-over-year growth was 18.0 percent for exports and 10.7 percent for imports.

Not helping the inflation outlook were the week's run of strong supply and demand data, especially from China and the US. Chinese industrial production advanced 3.5 percent on the year in October, picking up from the 3.1 percent increase recorded in September. On the month, as tracked in the accompanying graph, industrial production rose 0.39 percent after increasing just 0.05 percent previously. The increase was partly driven by slightly stronger growth in the manufacturing sector, broadly in line with previously released PMI survey data. Chinese retail sales rose 4.9 percent on the year in October, picking up from the 4.4 percent increase recorded in September and well above the consensus forecast for an increase of 3.5 percent. On the month, retail sales rose 0.43 percent after advancing 0.30 percent previously. The increase was largely driven by an acceleration in sales of communications equipment and also home appliances. Sales of clothing and autos, however, remained weak. Sales growth strengthened to a similar extent in both rural and urban areas. US data mirrored China's results, with industrial production, boosted by the restart of energy production in the Gulf following Hurricane Ida, surpassing Econoday's consensus range with a 1.6 percent monthly gain measured in volumes, while retail sales came in at the very top of the consensus range at a 1.7 percent monthly gain in dollar sales, a measure that no doubt got a boost from rising prices. The key question to ask is whether the acceleration in retail sales is hinting at inflation psychology – buy now before prices go even higher.

Markets: Inflation or not, rate hikes ruled out

The week opened with Bank of Japan Governor Haruhiko Kuroda repeating to business leaders that the country's super easy monetary policy is here to stay, helping to give the Nikkei a Monday lift. European Central Bank President Christine Lagarde was also busy on Monday, stressing once again that inflation pressures are likely to ease and that raising rates would be premature, a view echoed through the week by other officials and sparking chatter that an ECB rate hike is off the table for next year. Rate hikes aren't in play yet in the US though a faster pace for policy withdrawal may be as two Fed officials, Governor Christopher Waller and Chicago President Charles Evans, both said in the week that incoming data may justify a faster pace for the tapering down of asset purchases.

Inflation concerns held down Australian shares all week despite comments from Reserve Bank of Australia Governor Philip Lowe who told business economists that the country's inflation pressures are comparatively muted and that rates, in this country too, are not going up in 2022. Covid started to come into the picture at midweek amid talk of a fourth wave underway in Europe and the prospect of tighter restrictions, raising new risks for another slowdown in the continent's recovery.

Not helping inflation concerns is the certification delay for the Nord Stream 2 pipeline, news that followed a run of overheated inflation data including Friday's producer price report from Germany. The week ended with fiscal stimulus reappearing in Japan where the government of new Prime Minister Fumio Kishido unveiled a nearly $500 billion spending package aimed at offsetting the effects of the pandemic, effects that have suddenly reappeared in force in Austria which announced a nationwide lockdown on Thursday followed by Bavaria which imposed a targeted lockdown and cancelled its Christmas markets.

The bottom line

The industrial production and retail sales results for China and the US sent Econoday's consensus divergence indexes straight up, to 57 and 47 respectively to indicate that economists have substantially underestimated the recent strength of the world's two economic superpowers. Part of these unexpected results is coming from the unexpected heat that's evident in price report after price report, a factor that's at play in other economies as well and is inflating divergence cores across the board. But other economies haven't posted the red-hot production and sales figures that China and the US have, two countries whose economic data for the most part are updated in advance of others, and in some cases substantially so. Other scores include Italy which now is in third place at 39 but whose long strength, going back to mid-summer, helps explain why Mario Draghi, former president of the European Central Bank, may be asked to stay on as prime minister. The UK and France follow at 13 and 11 with other economies that Econoday track all within the plus-10 to minus-10 corridor consistent with as-expected results.

**Contributing to this article were Jeremy Hawkins, Brian Jackson, Mace News, Max Sato, and Theresa Sheehan

Week of November 22 to November 26 (all days local)

Rate hikes may well define the upcoming week. The Reserve Bank of New Zealand meets on Wednesday and the Bank of Korea on Thursday, both of which are expected to lift rates by 25 basis points each. FOMC minutes on Wednesday will detail the Federal Reserve's decision at the beginning of the month to begin tapering. Expectations for Tuesday's run of November PMIs mostly call for slowing, whether for France or Germany or the UK. Expectations for the US PMIs call for steady strength. Outside of the PMI flash, US data will be concentrated on Wednesday including durable goods orders, international trade in goods (advance), new home sales, and personal income and outlays with this report's price indexes, the central price readings for the Federal Reserve, expected to accelerate noticeably including a 0.4 percent monthly rate for the PCE core which is expected to come in at 4.1 percent annually. Sentiment data will be another important feature of the week and forecasters see across the board deterioration: EC consumer confidence flash on Monday; French business climate indicator on Wednesday; and German Ifo business climate indicator on Wednesday and German GfK consumer climate on Thursday. Other data to watch will include a second strong retail sales report from Australia and quarterly strength for Swiss GDP.

Eurozone: EC Consumer Confidence Flash for November (Mon 15:00 GMT; Mon 16:00 CET; Mon 10:00 EST)

Consensus Forecast: -5.5

After falling back nearly 1 point in October to minus 4.8, consumer confidence is expected to fall back further to minus 5.5 in November.

French PMI Flashes for November (Tue 08:15 GMT; Tue 09:15 CET; Tue 03:15 EST)

Consensus Forecast, Manufacturing: 52.8

Consensus Forecast, Services: 55.6

France's PMIs have been signaling steady deceleration in monthly expansion since mid-summer, a trend that's expected to extend to November where the consensus for manufacturing is 52.8, which would compare with October's 53.6, with the services consensus at 55.9 against 56.6 last time.

German PMI Flashes for November (Tue 08:30 GMT; Tue 09:30 CET; Tue 03:30 EST)

Consensus Forecast, Manufacturing:  56.7

Consensus Forecast, Services: 51.8

The services PMI, at 52.4, broke lower in October while manufacturing, in the 60s as recently as August, slowed to 57.8. November's expectations are further slowing to 51.8 for services and to 56.7 for manufacturing.

Eurozone PMI Flashes for November (Tue 09:00 GMT; Tue 10:00 CET; Tue 04:00 EST)

Consensus Forecast, Manufacturing:  57.4

Consensus Forecast, Services: 54.0

57.4 is expected for the Eurozone's manufacturing PMI flash with 54.0 expected for services.

UK PMI Flashes for November (Tue 09:30 GMT; Tue 04:30 EST)

Consensus Forecast, Manufacturing: 57.0

Consensus Forecast, Services: 58.0

A nearly 4 point rise for services highlighted better-than-expected PMIs in October. November's expectations, at 58.0 for services and 57.0 for manufacturing, call for modest slowing.

US PMI Flashes for November (Tue 14:45 GMT; Fri 09:45 EST)

Consensus Forecast, Manufacturing:  58.6

Consensus Forecast, Services: 59.0

The services PMI accelerated strongly in October to 58.7 where it's expected to roughly hold in November at a consensus 59.0. The manufacturing PMI, which slowed from 60.7 to 58.4 in October, is expected to come in at 58.6.

Reserve Bank of New Zealand Announcement (Wed 01:00 GMT; Wed 14:00 NZDT; Tue 20:00 EST)

Consensus Forecast, Change: 25 basis points

Consensus Forecast, Level: 0.75%

As in October when it raised rates, the Reserve Bank of New Zealand, confident that economic conditions will recover quickly once public health conditions improve and with a clear bias toward tightening, is expected to issue a 25-basis-point hike that would put its official cash at 0.75 percent.

French Business Climate Indicator for November (Wed 07:45 GMT; Wed 08:45 CET; Wed 02:45 EST)

Consensus Forecast, Manufacturing: 105.0

Forecasters see the business climate indicator falling 2.0 points to 105.0 in November.

German Ifo Business Climate Indicator for November (Wed 09:00 GMT; Wed 10:00 CET; Wed 04:00 EST)

Consensus Forecast: 96.7

November's market consensus is a further decline to 96.7 for Ifo's business climate indicator which, after October's 97.7, has fallen for four reports in a row to a six-month low.

US Durable Goods Orders for October (Wed 13:30 GMT; Wed 08:30 EST)

Consensus Forecast: Month over Month: 0.3%

Consensus Forecast: Ex-Transportation - M/M: 0.5%

Consensus Forecast: Core Capital Goods Orders - M/M: 0.6%

Durable goods orders fell back 0.3 percent in September but excluding transportation and with this weakness in vehicles, orders rose 0.4 percent. And orders for core capital goods were especially strong at a 0.8 percent gain. Forecasters see a headline gain of 0.3 percent in October with ex-transportation orders up 0.5 percent and capital goods once again leading the way at 0.6 percent.

US International Trade in Goods (Advance) for October (Wed 13:30 GMT; Wed 08:30 EST)

Consensus Forecast, Balance: -$94.6 billion

The US goods deficit (Census basis) is expected to narrow to $94.6 billion in October after deepening steeply in September, by more than $9 billion to $97.0 billion (revised from $96.3 billion).

US New Home Sales for October (Wed 15:00 GMT; Wed 10:00 EST)

Consensus Forecast, Annual Rate: 790,000

Monthly volatility aside, sales of new homes have been trending higher. Econoday's consensus for October is an annual rate of 790,000 which would compare with an 800,000 rate in September.

US Personal Income for October (Wed 03:00 GMT; Wed 10:00 EST)

Consensus Forecast, Month over Month: 0.2%

US Consumption Expenditures

Consensus Forecast, Month over Month: 1.0%

US PCE Price Index

Consensus Forecast, Month over Month: 0.6%

Consensus Forecast, Year over Year: 5.0%

US Core PCE Price Index

Consensus Forecast, Month over Month: 0.4%

Consensus Forecast, Year over Year: 4.1%

Personal income is expected to rise 0.2 percent in October with personal consumption expenditures, which rose 0.6 percent in September, expected to rise 1.0 percent. Inflation readings are expected to accelerate to monthly gains of 0.6 overall and 0.4 percent for the core (versus 0.3 and 0.2 percent respective gains in September) for annual rates of 5.0 and 4.1 percent (versus September's 4.4 and 3.6 percent).

Bank of Korea Announcement (Thu 01:00 GMT; Thu 10:00 KST; Wed 20:00 EST)

Consensus Forecast, Change: 25 basis points

Consensus Forecast, Level: 1.00%

A 25-basis-point rate hike is the expectation for the November meeting. At its October meeting the Bank of Korea kept policy steady despite citing strength in exports and investment, improvement in consumer spending and higher-than-expected inflation.

Germany: GfK Consumer Climate for December (Thu 07:00 GMT; Thu 08:00 CET; Thu 02:00 EST)

Consensus Forecast: -0.1

GfK's index for the December outlook, which in November jumped a surprising 5 tenths to 0.9, is expected to fall back a full point to minus 0.1.

Australian Retail Sales for October (Fri 00:30 GMT; Tue 11:30 AEDT; Thu 19:30 EST)

Consensus Forecast, Month over Month: 2.5%

Retail sales in Australia are expected to increase 2.5 percent on the month in October on top of a 1.3 percent rebound in September that reflected an easing in public-health restrictions.

Swiss Third-Quarter GDP (Fri 08:00 GMT; Fri 09:00 CET; Fri 03:00 EST)

Consensus Forecast, Quarter over Quarter: 2.0%

Third-quarter GDP is expected to rise a quarterly 2.0 percent versus 1.8 percent expansion in the second quarter that got a lift from a strong rebound in private consumption.

Eurozone M3 Money Supply for October (Fri 09:00 GMT; Fri 10:00 CET; Fri 04:00 EST)

Consensus Forecast, Year-over-Year: 7.4%

Broad money growth (on a 3-month basis) is expected to slow to an annual rate of 7.4 percent in October from 7.6 percent in September.