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a09ba7097c26b358a17669fb0b18709745d6c384ebcae086a2a9cf738358925f;;[{"layout":"detailed","uid":28646,"publicationDate":"04 Nov 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184197.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPO7NAp4CXSymMCPeHzadDA=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - US: Payrolls and wage growth remain too strong for the Fed\u00b4s liking","titleDe":"","titleIt":"","product":"Data Comment","synopsis":"<ul class=\"ucrBullets\"><li> The US economy added a higher-than-expected 261k jobs in October, a modest easing from the upward-revised 315k gain in September. While the trend in monthly payroll gains is down, it\u00b4s only gradual, and it remains well above the level needed to absorb new entrants into the labor force, which we estimate is around 50k. Payroll gains were broad-based across industries.<\/li><li> In October there were conflicting signals between the payroll measure of employment (+261k) and the household survey measure of employment, which fell 328k. The latter tends to be volatile and is compiled from a much smaller sample than the payrolls measure; hence, we attach less weight to it. Nonetheless, it is the household measure of employment that is used to calculate the unemployment rate. The unemployment rate rose accordingly, by 0.2pp to 3.7%, with the fall in household employment more than offsetting the impact of a fall in the labor force participation rate. To be sure, an unemployment rate of 3.7% is very low, well below the FOMC\u00b4s estimate of the equilibrium rate at 4.0%, and even further below the Congressional Budget Office\u00b4s equilibrium estimate at 4.4%. <\/li><li> Average hourly earnings rose 0.4% mom in October, higher than expected, and up from a 0.3% mom pace in the prior two months. In year-on-year terms pay growth eased slightly to 4.7% from 5.0%. The 3M\/3M annualized rate also eased to 4.7%, down from 5.3% in September. Importantly, this is still far too high to be consistent with the 2% inflation target. Indeed, and assuming underlying labor productivity growth of 1-1.5%, it would require pay growth to be in the range of 3-3.5%. <\/li><li> The Fed will almost surely judge that job gains are too strong, and wage growth too high. It supports Fed Chair Jerome Powell\u00b4s assessment this week that the terminal interest rate is likely to be higher than the Fed previously anticipated. However, we still expect the Fed to step down the pace of rate hikes in December to 50bp, as the Fed has indicated, with the post-FOMC-meeting statement de-emphasizing the data-dependency of the pace of rate hikes ahead. Still, with two more CPI reports and the November employment report to come before the Fed\u00b4s next meeting on 13-14 December, the possibility of another 75bp hike remains on the table.Chart 1 shows that monthly payroll gains are slowing, but only very gradually.CHART 1: STILL ROBUST PAYROLL GAINS<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Daniel","last":"Vernazza","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=36&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=9cd2c54b797ddd33a22d9a5ea50fac10"}],"countries":[{"name":"United States","ticker":"US","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=42&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=7bc8e05d14fb73ad6fbafeda31d249b7"}],"hash":"a09ba7097c26b358a17669fb0b18709745d6c384ebcae086a2a9cf738358925f","available":"0","settings":{"layout":"detailed","size":"default","showanalysts":"2","showcompanies":"2","showcountries":"2","showcurrencies":"2","nodate":"0","notitle":"0","noproduct":"0","noflags":"0","dateformat":"d M y","nolinktitle":"0","synopsislength":"300","synopsisexpand":"1","shownav":"0","oldestedition":"","limit":"5"}},{"layout":"detailed","uid":28645,"publicationDate":"04 Nov 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184195.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPO7NAp4CXSy9IFBnctsfPQ=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Chart of the Week - Variation in terms-of-trade shocks helps to explain variation in monetary policy tightening","titleDe":"","titleIt":"","product":"Chart of the Week","synopsis":"<ul class=\"ucrBullets\"><li> Our Chart of the Week shows the change in the relative price of imports to output for selected advanced economies since the pandemic. A rise in the relative price of imports for a country ' things that a country does not produce ' makes that country worse off. It\u00b4s what us economists call a negative terms-of-trade shock. During the pandemic, expenditure-switching towards goods at a time of impaired supply substantially increased the price of non-energy goods globally, while the conflict in Ukraine has led to a surge in energy and food prices. As a result, those countries that rely more on imports of these items have seen a larger rise in the relative price of imports. Exchange rate changes also play a role, with USD appreciation weighing on US import prices and pushing-up the import prices of other countries.<\/li><li> The chart shows that Europe has faced a much larger terms-of-trade shock than the US, around five times as large. But even the huge shock faced by Europe is not as big as the shock faced by Japan. While for Canada and Norway, two major energy producers, the terms-of-trade shock has been positive for their real incomes. <\/li><li> This matters for the optimal monetary policy response because, where a country faces a large negative terms-of-trade shock, it will weigh on real incomes and, over time, this will push down on inflation. It means less monetary tightening is needed to push down on demand and return inflation sustainably to target, conditional on inflation expectations remaining well anchored. Due to so-called second-round effects (from high inflation to higher nominal wage growth), the fall in real incomes is unlikely to do all the work for central banks in terms of bringing down inflation. But, in our view, the variation in terms-of-trade shocks goes a long way to explain why, for example, the Fed said this week that the terminal interest rate will likely need to be higher, while the BoE made a strong statement that financial markets were pricing in too many rate hikes.<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Daniel","last":"Vernazza","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=36&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=9cd2c54b797ddd33a22d9a5ea50fac10"}]},{"layout":"detailed","uid":28608,"publicationDate":"27 Oct 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184148.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPO7NAp4CXSyg58rdruj3_s=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - US 3Q22 GDP: Underlying growth remains weak with the worst still to come","titleDe":"","titleIt":"","product":"Data Comment","synopsis":"<ul class=\"ucrBullets\"><li> The US economy grew 2.6% qoq at an annualized rate (0.6% non-annualized) in 3Q22, rebounding after output fell in the first quarter by 1.6% and again in the second quarter by 0.6%. It leaves output around 4% above its pre-pandemic level but little changed from the end of last year.<\/li><li> Importantly, and looking through the quarterly volatility, underlying GDP growth has slowed significantly, reflecting the tightening of monetary policy and the squeeze in real disposable incomes. One way to see this is to look at real final sales to domestic purchasers (that is, GDP excluding the effects of inventories and net trade). It rose just 0.5% qoq annualized in 3Q22 after a rise of 0.2% in 2Q22. This is well below trend growth of around 2%. As expected, by far the largest upward contribution to GDP growth in 3Q22 came from net exports, driven by a large rise in exports and a big fall in imports. Net exports tend to be volatile and the jump in 3Q22 and 2Q22 largely reflects a recovery from the outsized drop in the first quarter.<\/li><li> Personal spending rose 1.4% in 3Q22, a downshift from the 2.0% rise in 2Q22. Spending was helped by a further fall in the savings rate as households continue to run-down their stock of 'excess savings'. The rotation of personal spending away from goods and towards services continued: consumption of goods fell, led by motor vehicles and food, while spending on services rose driven by travel and financial services. Other, smaller, upward contributions came from non-residential investment (driven by investment in equipment and R&D) and a rise in government spending, which was largely driven by defense spending due to the conflict in Ukraine. There was a large downward contribution to GDP growth from residential investment, reflecting the fall in construction of single-family homes amid substantially higher mortgage rates. The only other downward contribution came from the change in inventories, which continued to rise in 3Q22 but by less than in the previous quarter (it\u00b4s the rate of change in inventories that matters for GDP growth). It was driven by retailers, who face an overhang of inventories amid weaker demand.<\/li><li> The outlook for GDP growth remains weak. The impact of the substantial cumulative tightening of monetary policy, which has already started to impact growth this year, will mostly be felt next year given the lags of monetary policy. And the ongoing squeeze in real incomes continues. Business investment is likely to soften amid the huge economic uncertainty and the rising cost of capital. Indeed, in a separate release today, capital goods orders excluding aircraft and defense fell 0.7% mom in nominal terms in September. Today\u00b4s 3Q22 GDP report is unlikely to change the thinking of the Fed. It has said that in order to step down the pace of rate hikes it will need to see: 1. GDP growth continuing to run below trend; 2. The labor market softening to bring it into better balance; and 3., 'compelling evidence' that inflation is moving down to 2%. The first of these conditions, and probably the second too, is currently being met, while the third has not. Therefore, it looks very likely that the Fed will hike interest rates by another 75bp at its meeting next week.Chart 1 shows that the US economy grew by 2.6% qoq at an annualized rate in 3Q22, rebounding after output fell in the first quarter by 1.6% and again in the second quarter by 0.6%. The outlook is weak, and we see growth stalling in 4Q22 and contracting in 1H23. The risks are skewed to the downside.CHART 1: GDP REBOUNDED IN 3Q22 BUT THE OUTLOOK IS WEAK<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Daniel","last":"Vernazza","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=36&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=9cd2c54b797ddd33a22d9a5ea50fac10"}],"countries":[{"name":"United States","ticker":"US","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=42&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=7bc8e05d14fb73ad6fbafeda31d249b7"}]},{"layout":"detailed","uid":28539,"publicationDate":"07 Oct 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184062.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJKZXH2GAVJvLOItpE0S9TbI=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - US: Robust payrolls keep the Fed on course for another 75bp hike ","titleDe":"","titleIt":"","product":"Data Comment","synopsis":"<ul class=\"ucrBullets\"><li> The US economy added a robust 263k jobs in September, broadly in line with expectations. Whilst it\u00b4s the smallest monthly gain in payrolls since April 2021, it\u00b4s well above the roughly 100k jobs needed each month to absorb new entrants into the labor force (assuming a stable participation rate). Payrolls are now more than half a million above their pre-pandemic level from February 2020, but still well below their pre-pandemic trend line. Most of the job gains in September were accounted for by two sectors: education and health, and leisure and hospitality. Government jobs fell by 25k, driven by local government education jobs, which may have been affected by seasonal adjustment issues around the back-to-school period.<\/li><li> The unemployment rate fell 0.2pp to 3.5%, matching the lowest level since 1968. In part the fall in unemployment was driven by a (disappointing) fall in the participation rate, although it did not fully retrace the jump in the prior month. The fall in participation was driven by women, including prime-age women, while the participation of men continued to rise. The number of people employed part-time instead of full-time for economic reasons fell back in September after rising for three consecutive months June-August. In the past, a rise in part-time workers for economic reasons has tended to lead a rise in unemployment; hence, the decline in September is another data point that suggests any softening in the labor market is so far mild.<\/li><li> Amid a still very tight labor market, average hourly earnings rose at an annualized rate of 3.8% mom in September, up from 3.4% in the prior month. In year-on-year terms, average hourly earnings eased slightly to 5.0% from 5.2%. This is clearly still too high for the Fed\u00b4s liking. The actual level of wage growth consistent with 2% inflation depends on what labor productivity is. And here there is a huge amount of uncertainty, in large part because of the pandemic, which has generated huge volatility in measured labor productivity. Since employment growth has been strong while real output has been falling in the first half of this year, measured labor productivity has plummeted about 6% annualized in 1H22. It\u00b4s unclear whether this is merely a correction after unusually strong productivity growth during the earlier stages of recovery from the pandemic (when the recovery in employment lagged that of output), or whether real GDP growth will be revised up, or, instead, whether it reflects a structural change. Looking through the quarterly volatility, labor productivity in 2Q22 was only 1.5% above its pre-pandemic level from 4Q19, or just 0.6% at an annualized rate. This is less than half the 1.5% trend productivity growth in the pre-pandemic era. Even assuming the pre-pandemic trend still holds today, then wage growth in excess of 3.5% would be too high to be consistent with the inflation target. If, instead, it turns out that trend productivity growth has been reduced because of the pandemic, then wage growth consistent with the inflation target may be no more than 2.5-3%. So why is current wage growth so high' Partly it\u00b4s because of the tight labor market, which increases workers\u00b4 wage bargaining power, and partly it\u00b4s because workers are seeking compensation for high short-term expectations of inflation. As the labor market continues to soften (and there are signs of some softening, with the pace of job gains easing and job openings and quits well off their recent highs), wage growth should ease. The good news is that longer-term measures of inflation expectations remain well anchored.<\/li><li> The Fed will almost surely view the September employment report as robust, and not the material softening that the Fed has said it needs to see in order to slow the pace of rate hikes. It will be disappointed that labor force participation has fallen back. Overall, it supports our view that the Fed will hike by another 75bp at its next meeting in November, which would be the fourth consecutive hike of this size.Chart 1 shows that nonfarm payrolls rose 263k in September after a rise of 315k in August and 537k in July. CHART 1: PAYROLL GAINS SOFTENING BUT STILL STRONG<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Daniel","last":"Vernazza","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=36&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=9cd2c54b797ddd33a22d9a5ea50fac10"}],"countries":[{"name":"United States","ticker":"US","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=42&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=7bc8e05d14fb73ad6fbafeda31d249b7"}]},{"layout":"detailed","uid":28500,"publicationDate":"28 Sep 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184012.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJKZXH2GAVJvL78LWAPe4_o0=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Economics Chartbook - Central banks\u00b4 inflation fight raises recession odds (4Q22)","titleDe":"","titleIt":"","product":"The Unicredit Economics Chartbook","synopsis":"<p><ul class=\"ucrBullets\"><li><strong>Global: <\/strong> The growth outlook is deteriorating. After likely subdued growth of 2.7% this year, we forecast global GDP rising by only 1.9% next year. The weakening reflects tighter financial conditions, surging energy bills in Europe and reduced economic momentum across the US, Europe, and China. The manufacturing sector is under pressure, the boost to services from the reopening of the economy is fading, and consumer confidence is low. Supply constraints have eased but remain elevated compared to before the pandemic. High excess savings and the tight labor market should mean any recession is mild. We expect global inflation to ease next year amid negative base effects, lower demand, a further easing of supply constraints and lower commodities prices. The risks to growth are to the downside as central banks prioritize fighting inflation.<\/li><li><strong>US: <\/strong> We forecast GDP growth of 1.5% this year and -0.1% next year (previously +0.1%), with the economy teetering on the edge of recession. The weakness is concentrated in interest-rate-sensitive sectors, notably housing and durable goods. Monthly headline inflation will likely ease sustainably to levels consistent with the 2% target from the spring, while core inflation is likely to take longer to do so. The midterm elections seem likely to result in political gridlock. We now see the Fed raising interest rates to a peak of 4.50-4.75% (previously 3.75-4.00%) by early next year, followed by a first rate cut in late 2023.<\/li><li><strong>Eurozone: <\/strong> GDP growth is likely to average 3.1% this year and come to a standstill in 2023 (0.2%). The latest survey indicators point to a recession at the turn of the year, in line with our baseline scenario. Inflation is likely to hover at around 10% for the remainder of the year, before entering a downward trajectory that would take it towards 2.5% by the end of 2023. We are raising our forecast for the peak level of the deposit rate by 25bp to 2.25%, to be reached in 1Q23. As policy rates rise towards, or above, the upper end of the neutrality range, the ECB is likely to start looking at quantitative tightening (QT) as its next policy step.<\/li><li><strong>CEE: <\/strong> We forecast GDP growth to slow from 4.3% in 2022 to 0.8% in 2023 in EU-CEE and from 5.5% in 2022 to 3.2% in 2023 in Turkey. In Russia, we expect the economy to shrink by around 5% this year and 4% in 2023. We believe that CEE can avoid an energy crisis, but not a technical recession in 4Q22-1Q23 due to high energy prices, circumspect consumers, negative credit and fiscal impulses, destocking, imports outpacing exports, low EU fund inflows and falling public investment. A gradual recovery is possible in 2H23. Inflation is likely to peak this winter in all CEE countries and to remain well above target in 2023. We expect tightening cycles to end at 13% in Hungary, 7% in Czechia and Poland, 6% in Romania and 5% in Serbia. The CBRT is likely to cut its policy rate to single digits and the CBR to 7%. FX interventions will likely continue in Czechia, Poland, Romania, Serbia and Turkey.<\/li><li><strong>UK: <\/strong> We are revising our GDP growth forecasts down slightly to 3.3% for this year (previously 3.5%), and to -0.3% for next year (previously -0.1%). The economy is likely already in recession. The energy price cap means inflation will probably peak at just under 11% in October. Large and poorly targeted fiscal easing at a time of constrained supply will likely force the BoE to hike the bank rate sharply to 4.50% (previously 2.50%).<\/li><li><strong>China: <\/strong> We are reducing our GDP growth forecast for 2022 to 2.0% from 2.4%, and for 2023 to 3.4% from 4.0%. The combination of power shortages, sporadic lockdowns and a real estate sector in disarray is weighing on economic activity. However, contained inflationary pressure, both on the producer and consumer front, is allowing the government to use its monetary and fiscal policy levers to support the economy ahead of the party congress that will likely elevate Xi Jinping to a third term as president of the country. After hitting new lows since 2008, the CNY is set to remain weak against the USD, beyond 7.20.<\/p><\/li><\/ul>","synopsisDe":"","synopsisIt":""}]


Daniel Vernazza, Ph.D.
Chief International Economist
UniCredit Bank AG, London
Moore House
120 London Wall
UK-EC2Y 5ET London
United Kingdom
+44 207 826-7805

Daniel Vernazza joined UniCredit in March 2013 as an economist. He previously worked in the economics department at Goldman Sachs and taught economics at the London School of Economics (LSE) for th...

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