What’s good for the back is bad for the head.

July 8-14, 2023

Big news. Of course, this is a continuation of deflationary trends in the US industry:

Pic. 1

Annual data for June (i.e. June 2023 to June 2022), price reduction for all manufactured goods, -9.5%. Previous data (May to May) -7.1%. In other words, there is a severe deflation (on the scale of 1930-32), which in itself is the surest sign of a very serious economic downturn. In such a situation, even a drop in consumer inflation (CPI index) from 0.4 to 0.3% per month does not mean anything positive.

In fact, we have already noted that rising costs in trade and logistics can cause prices to rise even when prices in industry fall. It is possible that consumer prices are rising due to rising import prices. But the situation in the industry in any case becomes catastrophic, what to do with it is completely incomprehensible. Raising the rate will not help matters here.

Macroeconomics. Industrial production in Italy -3.7% per year – the 4th negative in a row and the 8th in the last 9 months:

Italy Industrial Production
Pic. 2

In the Eurozone, -2.2% per year is the weakest indicator since October 2020:

Euro Area Industrial Production
Pic. 3

UK industrial output -0.6% m/m – 9-month low, 2nd consecutive minus and 4th in the last 5 months:

United Kingdom Industrial Production MoM
Pic. 4

And -2.3% per year — the 20th negative in a row:

United Kingdom Industrial Production
Pic. 5

And, as a result, in May, Britain’s GDP was -0.4% per year – the 1st minus since March 2021:

United Kingdom Monthly GDP YoY
Pic. 6

Net engineering orders in Japan -7.6% per month:

Japan Machinery Orders
Pic. 7

And -8.7% per year – the worst dynamics in 2.5 years:

Japan Core Machinery Orders YoY
Pic. 8

Economic sentiment index in Germany (ZEW review) is the lowest in 7 months:

Germany ZEW Economic Sentiment Index
Pic. 9

The picture is the same in the euro area as a whole:

Euro Area ZEW Economic Sentiment Index
Pic. 10

Economic optimism in the US is the lowest in 8 months:

United States IBD/TIPP Economic Optimism Index
Pic. 11

Exports from China -12.4% per year – the worst dynamics since February 2020:

China Exports YoY
Pic. 12

Used car prices in the US -4.2% per month – the 3rd negative in a row and (excluding 2020) the worst drop since 2008:

United States Used Car Prices MoM
Pic. 13

And -10.3% per year – the 10th negative in a row:

United States Used Car Prices YoY
Pic. 14

The US mortgage rate (7.07%) is less than 0.1% from the 21-year peak 8 months ago; the interest on large loans is already a record:

United States MBA 30-Yr Mortgage Rate
Pic. 15

The balance of home prices in Britain (-46%) almost repeated the February 14-year low (-47%):

United Kingdom RICS House Price Balance
Pic. 16

China CPI -0.2% per month – 5th negative in a row:

China Inflation Rate MoM
Pic. 17

And 0.0% per year – not counting the fall of 2020, this is the bottom since 2009:

China Inflation Rate
Pic. 18

China’s PPI (industrial inflation index) -5.4% per year – the anti-records of 2015, 2009 and 1998 are already close:

China Producer Prices Change
Pic. 19

India CPI +1.0% per month – 14-month high:

India Inflation Rate MoM
Pic. 20

Argentina CPI +115.6% per year – 32-year high:

Argentina Inflation Rate
Pic. 21

Food inflation in New Zealand repeated the 36-year peak (+12.5% per year):

New Zealand Food Inflation
Pic. 22

Export prices to the USA -12.0% per year – an anti-record for almost 40 years of observations:

United States Export Prices YoY
Pic. 23

An interesting picture, in those countries that follow the inflationary scenario – the rise in prices is accelerating, and in those in which deflation begins – on the contrary.

The growth of deposits in India (+13.0% per year) is the highest in 6 years:

India Deposit Growth YoY
Pic. 24

Unemployment in Britain is the highest in 1.5 years:

United Kingdom Unemployment Rate
Pic. 25

The Central Bank of Canada raised the rate by 0.25% to a 22-year high of 5.00%. The Central Bank of New Zealand left the percentage unchanged, as did the Central Bank of South Korea.

Main conclusions. The United States is sharply reducing the money supply in circulation, both due to record budget borrowing, and due to the policy of the Fed:

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Here is a quote from Pavel Ryabov (Spydell): 

“The US budget deficit rose to $1.4 trillion for the fiscal year (October 2022 – June 2023), much higher than last year’s $0.5 trillion and the third largest fiscal impulse of all time after the pandemic frenzy of 2020 and 2021 (deficit of 2.7 and 2.2 trillion, respectively).

Such a confident start to the fiscal year was almost completely in the face of borrowing restrictions with a debt limit that was removed only at the beginning of June, but what will happen when they “go all out”?

June is seasonally strong in terms of the balance of expenses and income, i.e. usually a budget surplus, but not this year – a deficit of 228 billion vs 89 billion in June 2022, and the record was in June 2020 (deficit of 864 billion during the peak of anti-covid programs).

The budget deficit over the past 12 months amounted to $2.2 trillion vs. $1 trillion a year earlier, which was formed from annual revenues of $4.5 trillion (minus 7.3% yoy at par) and annual expenditures of 6.7 trillion (+14.4% yoy).

Adjusted for inflation in 2021 prices, the budget deficit is $2 trillion, which is about three times the historical norm (a balanced budget has a norm of $600-800 billion). The current fiscal impulse is even higher than during the 2008-2011 crisis, taking into account inflation, it was higher only during the pandemic.

Over the fiscal year, revenues decreased by 11% (minus 422 billion) almost entirely due to a reduction in personal income tax collections, while expenses increased by 10.5% (454 billion).

From October 2022 to June 2023, defense plus 50.5 billion compared to last year, medicine in total plus 99 billion, social services plus 50 billion, where stimulus benefits are minus 74 billion, and growth due to pensions and veterans’ benefits, subsidized lending began to grow by 62 billion, and the main growth is net interest expenses, which increased by 141 billion from 353 to 494 billion.

Given the structure of placements (88% in promissory notes since June 2023), the structure of the debt and the need to refinance debts in the next two years, interest expenses are guaranteed to exceed defense spending and become the main pain of the budget.”

We have included such a long quote for a very simple reason: it almost exhaustively describes the state of affairs in US monetary policy. The trick here is that this policy aimed at reducing consumer inflation is carried out in a situation of extremely high deflation in the industrial sector.

A typical example of the situation “the nose is pulled out – the tail is bogged down”: if we lower consumer inflation, the industry will collapse (already collapsing!) If we give it investments (and its consumers – money for purchases), inflation will explode upwards. And the scale of debt problems is so great that the fluctuations of these two indicators (consumer inflation – industrial recession) are growing all the time.

However, summer has come into its own, everyone wants to relax and enjoy life! Therefore, we wish you all a good weekend and an easy working week! Well, congratulations to readers from France on Bastille Day!


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