Terms of trade - which track the difference between changes in export prices minus changes in import prices - are important. When your terms of trade are rising, the chances are that manufacturers and traders are seeing their margins, and their profits, rise. And you'll see that in an improving trade balance. But when terms of trade deteriorate, margins and profits are going to get squeezed, trade balances fall. 

But look, it takes time to work through, because manufacturers and traders will fight like hell against a falling terms of trade.  They'll avoid buying inputs at these high prices and run down their inventories instead. They'll avoid passing on prices as long as they can to maintain their market position. Eventually the weakest will go out of business, and the survivors will finally be able to put up prices. That's typically the sort of dynamic at work.  

At the moment, it's probably Germany which faces one of the biggest challenges because its terms of trade are falling sharply, but the country remains fundamentally mercantalist, with net exports accounting for 35.2% of Kalecki profits in the last 12m - second only as a contributor to net investment. 

But look what's happening: in November, export prices rose 0.8% mom and 9.9% yoy - pretty good, eh? But import prices were up 3% mom and 24.7% yoy. That led to terms of trade falling 2.2% on the month, and 12.1% yoy. That's the sharpest yoy collapse in terms fo trade that modern Germany has seen, and terms of trade are now the worst we've seen since 2012. And look at some of those import prices: fertilizers 144%, aluminium 64%, iron& steel 60.2%, plastics 44.7%.  

It takes time to work through - Germany's manufacturers and traders have been  fighting it hard.  Really, it was really only in the last couple of months, and Oct in particular,  that the implications are beginning to show: In the 3m to October, the trade surplus came to Eu40.5bn, which was down 21.5% yoy; and the current account was Eu 47.2bn, which was down 28.7%. But it is very likely that Germany's trade and current account surpluses are going to shrink far more noticeably in the next couple of quarters, taking margins and profits with it. 

Sorry about that, but modern Germany really hasn't experienced this sort of terms of trade shock before, and 2022 will be the year when we find out how it copes with it. 

In economic and financial terms, the last two years have been unlike anything I've seen in my life - medically-induced economic comas, massive fiscal deficit financed by equally massive monetary creation which has distorted financial asset prices beyond anything the global economy can justify. 

At the root of all this are patterns of spending, saving and investment. And you can tell a lot about them from movements in country's current accounts. 

You've got to treat UK trade numbers with caution, because there's a persistent track record of them being revised, often quite dramatically.  We had this again today, when the current account deficit for the first half of the year was revised  from £17.4bn to £24.8bn - that's £7.4bn worse  than previously reported. 

With that caveat, the 3Q deficit was reported at £24.4bn, up £11bn on the quarter, and equivalent to 4.2% of GDP. Strip out the volatile trade in precious metals, the deficit was up £6.7bn to £21.7bn, or 3.7% of GDP. 

Where does that say about the UK's savings patterns? Well, the public sector had a deficit of £41.4bn during the quarter,  so strip that out, and that leaves the private sector making net savings of £16.9bn. That's down £29.8bn qoq, and down nearly £50bn yoy. My bet is the bulk of savings remaining are corporate profits. 

Overall, for the 12m, it means the UK is running a current account deficit of 3.3% of GDP (compared with an average since 2008 of 3.7%), with public sector borrowing of 9.1% of GDP, and a private savings surplus of 5.8% of GDP. In short, still a long way from anything approaching pre-covid 'normality'.  That delayed encounter with normality will surely have to happen sometime, in the UK and elsewhere, and maybe it will become unavoidable in 2022? 

As I've written elsewhere: governments find it pretty easy to break economies, but have little idea about how to put them back together again. 

European governments have embraced and encouraged omicron panic, and they're good at it, as two surveys today showed. Germany's GfK expected consumer confidence index for January dropped 5pts to minus 6.8, which was the weakest since June. The economic outlook fell to the weakest since April, income expectations the weakest since February, and propensity to spending weakest since January.  A pretty thorough axing of confidence, then. 

That didn't fully show, yet, in Eurozone consumer confidence advance, which fell only 1.5pts to minus 8.3, but this was still the weakest since April 2021. 

And there's much the same coming out of the UK, where the CBI's monthly diffusion index of retail sales dropped 31pts to +8, with sales for the time of year down 37pts to minus 2.  CBI commented that there's a big difference in response before and after the govt's Dec 8 scare campaign started. Before Dec 8, over half of firms reported that sales were ‘up’ on last year, but after Dec 8 this fell to one third. 

To be clear: this isn't the impact of the omicron variant - it's the success of European governments' attempts to scare the living daylights out of their electorates about omicron.  The economic consequences will be with us for at least a couple of months, regardless of how omicron variant actually develops. 

Taiwan's monthly export orders report turns out to tell us more about what's going on in the rest of the world - particularly in China and electronics, of course - than it is to the near-term outlook for Taiwan's exports.  

With that in mind, November's orders were interesting. They rose 13.4% yoy, which doesn't sound that great, considering that for most of the last last year we've got used to rises of 30-40%. But in fact this was a strong result for two reasons: first, November 2020 was the month at which the real rush to secure supplies of Taiwan's semicons broke into the open - with the highest yoy since 2010 -  so it was a really tough base of comparison.  And second, October's orders were genuinely weak, with the monthly movt down 1.6SDs from historic seasonal trends, and Nov's result corrected that, with a bounce 1.5SDs above trend. So, that relatively modest 13.4% yoy rise masks a genuinely strong result. 

Electronics remains at the core of this: they word 17.9% yoy, and accounted for 31% of all orders. They were also up from 13.2% yoy in Oct. But headline number was helped along by basic metals +32.6% yoy, chemicals +41.1% and rubber/plastic products +22.6%, in turn helped along by high prices. 

The other really striking thing was where demand is coming from: it's China and the rest of Asia which is now driving demand, whilst the West is sagging. China & HK was up 25.3% yoy and Asean up 33.7%, but Europe fell 2% yoy, Japan nudged up just 0.7% and the US was a lacklustre 10.8%. 

New car registrations are just about the earliest monthly signal we get for European demand, and since they are big-ticket items, for consumer confidence too. We got them today, and - well - what they tell us is pretty much 'situation normal'. 

And that's despite the latest surge in covid. Timing's important, because covid numbers really took off in Germany in the last week of October, and the  daily totals really didn't peak until the end of November.  For France and Italy, the timing was about 10days later. 

You'd expect that to hit the numbers. But it's not really happened: for the EU as a whole, registrations fell 20.5% yoy, but the monthly movt was 0.5SDs above historic seasonal trends. For Eurozone, numbers were down 20.8% yoy, but the monthly was 0.2SDs above trend. For Germany, registrations fell 31.7%, but the monthly was 0.3SDs above trend. For the rest of the Eurozone, down 14.2% and 0.6SDs above trend.  

How does the UK stack up with this: Nov's registrations were up 1.7% yoy and the monthly was 0.5DSs above trend.  Same story, incidentally, shows up in today's UK retail numbers: sales volumes up 1.3% mom, with the monthly movt 0.5SDs above trend.

Suggested conclusion?  Scary covid-stories are dominating the newspages and sending govts into panic.  But Europe's populations - not so much, it seems.

Well, Bank of England has tightened, putting up s/t rates by 15bps to 25bps. 

They expect inflation to dissipate over time, as supply disruption eased, energy prices stopped rising and global demand rebalanced from goods to services. We'll see. But  let's remember, in its November meeting, BOE expected CPI to rise to 'around 5%' by spring 2022. It got there, we now know, in November itself.

The UK's inflation isn't quite as bad as the US - November's 5.1% yoy in the UK vs the US 6.8% - but the likely 12m trajectory looks worse, and the distance between where 10yr rates are now, and where inflation is likely to be in 12m time is worse. 

Looking at the UK's likely inflation pattern over the coming 12m: if the deflection against trend we've sen in the last 6m is maintained, we'll see inflation rising to around 6% by March, and staying there or thereabouts until September.  Meanwhile, UK 10yr yields are just 0.8% - so there's a gap of about 5.4 percentage points between 3Q22 CPI and bond yields.  In the US that gap is 4.3pts, and in the Eurozone 4.8points. So UK  bond markets are out there on their  own.  The BOE needs to keep buying those bonds! 

But maybe things won't be that bad: after all, in  yoy terms, Brent oil peaked in October up 101% yoy, since when it's fallen about 12%, and the yoy has fallen to 47%.  The wider CRB index also peaked in October up 58.3% yoy, since when it is down 5.6% and the yoy has come down to 37%, and even natural gas prices are down 29% from their October peak. 

The problem is, even if UK inflation resumes its normal historic patterns, we'll see inflation nearer 5% than 4% for the next nine months; even if we go 1SD below trend, it' ll still be August before we dip back below 4%. In the meantime, BOE has put up rates by 15bps to 25bps. A lot will have to go right, a lot will have to prove 'transient' for that to be the end of tightening.  

IATA's monthly compilation of air freight transport traffic came out a week late, yesterday. Still, what it told us was that by February, air freight was genuinely booming.  In terms of cargo tonne kilometers, international air freight rose 10.4% yoy. This was not just a base effect from covid, it was also up 9.6% from February 2019.  Of the largest markets, N America was up 23%yoy, Europe was up 10.5% and Asia Pacific (which had been hit less badly by covid last year) was up 8.2%.   In terms of gains over February 2019, N America was up 17.6%, Asia Paci was up 29.2% and Europe was up 22%. 

These are genuine boom numbers. Why is it happening? Well first, of course, its a reflection of surging global exports: remember, NE Asia's exports were up 33.9% yoy in February in dollar terms, and were up 32.4% from Feb 2019. But there's more: globally supplier delivery times are stretched to near-record levels, so there's a race to secure supplies and to build inventory. Typically, air cargo picks market share from marine up when there's an inventory-rush,  and that's happening now. The fact that Suez Canal got blocked for days recently means this pressure will only have built in March. 

But that's not all either.  Covid has dramatically cut the number of passenger planes in the air, which in turn means that all that belly cargo capacity has also been taken out of the equation. In fact, international air cargo capacity  - that's air freighters and belly cargo combined - was down 13.7% yoy. 

So a rush of demand is having to be met by a smaller supply capacity. The result is  . . . well, here I'm going to quote the IATA bulletin: 'the industry-wide cargo load factor reached a record high outcome for any month of February in the history of our time  series, at 57.5%. At the regional level, Asia Pacific carriers continued to report the highest load factors (69.2%), followed by European carriers (64.1%). 

Moral: airlines are going bust because of Covid, but air freighter asset turns and ROC must be booming.  

Today we got the first report of foreign reserves movements in NE Asia for March. My technical models recognized that the dollar broke out of its weakening trend and established a strengthening trend against the SDR currencies starting March 9, so it was reasonable to expect some pressure on Asia's massive fx holdings simply because of that.   In fact, in March the dollar gained 1.6% against the SDR basket (which of course includes itself as a major component). In addition, of course, US bond markets got hammered, with 10yr yields rising from 1.44% at the beginning of the month to 1.76% by month-end. Not, in other words, a great month to be tasked with preserving the value of Asia's c $6tr  foreign reserves. 

So what happened?  Well, the collective foreign reserves of China, Japan, S Korea, Taiwan & Singapore fell by $52bn, or 0.9% to $5.906tr. How did they do? It went with size - the biggest were the least able to take evasive action. So China's reserves fell 1.1% to $3.17tr; Japan's fell 0.8% mom to $1.368tr; Taiwan's fell 0.8% to $539bn; S Korea's fell 0.3% to $446.1bn, Singapore's fell 0.2% to $382bn. 

A couple of things to say: this fall will have a small tightening effect on Asia's money markets, and will slightly depress  - nothing too dramatic, however, and I don't think this is the most significant thing about today's results. Two other things are more important.

First, when you look at the data, its clear that Japan has really bought the 'inflation's back' story.  Overall reserves fell $10.9bn, but within that securities holdings fell $19.6bn, but deposits rose $6.8bn.  In other words, they didn't just lose money on bonds, they sold reasonably aggressively on the way down.  But there's more: they also started buying gold: in dollar terms gold holdings rose $3.1bn, or by 7.3% during a month when the gold price fell 5.2%. In other words, they actually raised their holdings of physical gold, up 2.6mn troy oz, or by 10.6% on the month.  I don't know when the last time Japan's reserves managers bought gold, but it certainly has been any time in the last three years.  Selling bonds and buying gold - Japan believes in inflation. 

Second, Taiwan is interesting: the central bank blamed its 0.8% mom fall not only on the dollar's strength, but also on 'large capital outflows'.  But that's not right: foreigners net holdings of Taiwan deposits and securities fell only $1.1bn  (vs a fall of 4.3bn in foreign reserves), or by 0.2%.  In other words, those capital outflows were responsible for only a quarter of the fall in reserves.  And, note, those holdings now could to $670bn, which is 124% of Taiwan's 539bn of foreign reserves. 

Today I'm looking at the series of Eurozone confidence indicators released today, which give the strongest signals we've seen for just over a year. The growth-tracking economic sentiment index  rose 7.6pts to 101, the best since February last year - this index amalgamates confidence indicators for industry, for services, and for consumers undertaken by all Eurozone member countries. That's a huge footprint, so it's no surprise that it has a good track record at, yes, tracking changes in economic growth.  In fact, I think it's one of the most useful single-monthly data-points for the Eurozone that we have.  So I take it seriously. 

The problem is that this quite dramatic vote of confidence almost certainly reflects attitudes before it because obvious that the Eurozone was being hit by a third wave of covid, which was going to lead to new and hardened lock-downs, without the expectation of early release.  Because of the survey's huge footprint, these results are almost certainly out of date.  Some of this is obvious. For example, France's consumer confidence index for March, which forms one input into these indexes, were reported today up 3pts to 94. That was better than expected, but then we learn that the data was collected between February 24th and March 20th.

Like yesterdays sharply positive Markit PMIs for the Eurozone - which were all far stronger than expected - the timing matters. Those PMIs also relied on the surveys undertaken between March 12 and March 23rd.  

But if you look at the coronavirus data you can see the rise in the 7 day average of covid cases arriving only beyond doubt rather recently - I'd say around 18th March for France and 20th March for Germany.  That terrible news arrived too late to filter through to these surveys. 

So I take two things from them. First, unless there's a health miracle in the next couple of weeks, the confidence recorded in today's surveys will be reversed and dashed in April's survey. But second:  these surveys show what would have happened - what would have been  the instinctive dramatic surge in confidence if, in fact, the end of the pandemic really was in sight for the Eurozone, so they are a  a harbinger of what to expect in countries where the pandemic is already beaten back, and also in due course what we can expect eventually in the Eurozone. Just not now, unfortunately. 

Today's bulletin is really a short addendum to last Friday's rather longish piece about what's going wrong in the EU's Emissions Trading Scheme.  I noted then that this evolved into a bankers ramp, in which the only rational expectation is for prices to continue to rise. Which they continue to do, threatening to cramp EU growth whilst at the same time as pushing up prices - the classic ingredients for stagflation. 

This piece looks at the historic relationship between movements in Europe's economic growth and the CO2 price. Between 2009 and end-2017 these moved predictably in sync (98% confidence).  Using that same model today, CO2 price have risen to between 12 and 14 times what one would expect to be justified by the underlying economic conditions.  The dislocation, this unacknowleged and damaging tax on EU production and consumption will only rise.