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US: Beige Book: weaker activity but elevated/increasing price pressures

Thu, Jul 24 2008, 07:27 GMT
by KBC Market Research Desk

KBC Bank

The latest Beige Book’s assessment (summarized by the Kansas Fed) of eco activity was modestly weaker than the previous Book six weeks ago. The Book said that the pace of eco activity slowed somewhat since the previous report whereas in the previous Book described economic activity as remaining generally weak. Five districts noted a weakening in their economies, whereas Chicago spoke about a sluggish economy and Kansas noted a moderation in growth. St-Louis said activity was stable and San Francisco reported little to no growth. On the other hand, Cleveland and Minneapolis reported slight increases in activity, while Dallas saw growth as steady and moderate. Compared to the previous report, the weakening in commercial real estate activity needs to be highlighted, as is a further tightening of credit conditions and a deterioration in loan quality. The tax rebates had some impact on consumer spending but not much. On prices, the Book said that all districts characterized overall price pressures as elevated or increasing, whereas wage pressures were generally limited, as labour demand was soft. So the Book fully confirmed the catch-22 position of the Fed with softening growth and rising price pressures.

EMU: Weak industrial orders confirm cool-down

Euro zone industrial orders fell 3.5% M/M and 4.4% Y/Y in May, which is far below the expectations (-1.3% M/M and 2.1% Y/Y) and the better-than-expected figures in April (2.0% M/M and 12.3% Y/Y). The details show that all components were deteriorating. These very weak data show that growth is cooling down and the advancement of the euro dampens demand.

French consumer spending came out at -0.4%M/M and 1.0% Y/Y in June, slightly exceeding expectations (-0.6% M/M), after rebounding in May (1.7% M/M and 2.8% Y/Y). Looking at the details, only household equipment increased (0.8% M/M from - 0.3% M/M), while the car component fell the most (-3.8% M/M from 5.6% M/M). This figure confirms that last month’s rebound was only a correction and consumer spending is expected to stay weak, as higher food and energy prices undermines disposable income needed for other purchases. However, the report doesn’t suggest either that consumer spending is falling off the cliff.

Other: BoE Besley votes for a rate hike!!

In the UK, the Minutes of the July policy meeting revealed an 7-1-1 vote in favour of unchanged rates. As he cited earlier this week, David Blanchflower voted again for a 25 basis points rate cut. Tim Besley unexpectedly voted for a rate hike by 25 basis points and agued it was needed to keep medium-term inflation expectations anchored and ensure the Committee’s credibility in the light of the current and prospective increase in CPI inflation. But the MPC majority had a different view and argued that an increase in Bank rate in the current circumstances, when confidence was low and the financial sector fragile, could impart a downward momentum to the economy that risked a significant undershoot of inflation in the medium term. Another argument was that a rate change would be better communicated alongside the Bank’s August inflation report. This could raise expectations for a rate hike in August, but we don’t expect a rate change soon.

The CBI Industrial Trends survey fell more than expected in July. The total order books balance was -8 this month after 1 in June, while a reading of -5 was expected. Domestic price expectations jumped to 34 from 28 last month; the highest level since January 1990 showing that inflationary pressures are increasing. The CBI quarterly survey slumped to -40 from -23 in the previous quarter, bringing business optimism at its weakest since October 2001.

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Published on  Thu, Jul 24 2008, 07:33 GMT

Archive

• US: Durable orders rise the third month in a row
  Published On Thu, Aug 28 2008, 07:36 GMT
• US: First signs of stabilization in the housing market
  Published On Wed, Aug 27 2008, 07:23 GMT
• US: Existing home sales rebound, but inventories are rising
  Published On Tue, Aug 26 2008, 07:25 GMT
• US: Q2 GDP at 1.9% slightly weaker than expected
  Published On Fri, Aug 1 2008, 08:16 GMT
• US: ADP employment report beats all expectations
  Published On Thu, Jul 31 2008, 07:44 GMT

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