Evelyn Reynolds

The producer price index rose 0.7% in January, higher than the 0.4% estimate.
Excluding food and energy, core PPI increased 0.5%, compared with expectations for a 0.3% increase.
In other economic data, jobless claims edged lower to 194,000, below the estimate for 200,000. Also, the Philadelphia Fed’s manufacturing index plunged to -24.3, far beneath the -7.8 estimate.

Inflation rebounded in January at the wholesale level, as producer prices rose more than expected to start the year, the Labor Department reported Thursday.
The producer price index, a measure of what raw goods fetch on the open market, rose 0.7% for the month, the biggest increase since June. Economists surveyed by Dow Jones had been looking for a rise of 0.4% after a decline of 0.2% in December.

Excluding food and energy, the core PPI increased 0.5%, compared with expectations for a 0.3% increase. Core excluding trade services climbed 0.6%, against the estimate for a 0.2% rise.
On a 12-month basis, headline PPI increased 6%, still elevated but well off its 11.6% peak in March 2022.
Markets fell following the release, with futures tied to the Dow Jones Industrial Average down about 200 points.
While the PPI isn’t as closely followed as some other inflation metrics, it can be a leading indicator as it measures the first price producers get on the open market.
The PPI increase coincided with a 0.5% jump in the January consumer price index, which measures the prices consumers pay for goods and services. Together, the metrics show that while inflation appeared to be subsiding as 2022 came to a close, it started the year off with a pop.

Economists are attributing the January inflation increase primarily to some seasonal factors as well as payback from previous months that showed more muted price rises. An unseasonably warm winter may have played some part as well, while fuel prices, which are volatile, also jumped during the month.
A report Wednesday showed that consumer spending more than kept pace with inflation, as retail sales increased 3% for the month and were up 6.4% from a year ago.
In other economic data Thursday, the Labor Department reported that jobless claims edged lower to 194,000, a decline of 1,000 and below the Dow Jones estimate for 200,000. Also, the Philadelphia Federal Reserve’s manufacturing index for February plunged to -24.3, well below the -7.8 estimate.
Fed policymakers are focusing intently on inflation, so the January numbers are unlikely to sway them from their stance that, while progress is being made, no letup is likely.
“My expectation is that we will see a meaningful improvement in inflation this year and further improvement over the following year, with inflation reaching our 2% goal in 2025,” Cleveland Fed President Loretta Mester said in a speech Thursday morning. “But my outlook is contingent on appropriate monetary policy.”
Markets expect the Fed to increase interest rates a few more times this year, according to CME Group data, with the final, or “terminal,” rate ending around a range of 5.25%-5.5%, from its current 4.5%-4.75%.
The higher PPI reading came amid a 5% rise in energy costs but a 1% decline in food. The final demand index for goods climbed 1.2%, the biggest one-month increase since June. About one-third of that rise came from the gasoline index gaining 6.2%.
The services index rose 0.4%, pushed by a 0.6% increase in prices for final demand services less trade, transportation and warehousing. Another big factor came from a 1.4% advance in the index for hospital outpatient care.

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The European Union’s embargo on Russian oil products came into effect on Feb. 5, building on the $60 oil price cap implemented by the G-7 (Group of Seven) major economies on Dec. 5.
China, India and Turkey in particular have ramped up purchases to partially offset a fall in Russian crude exports to Europe of 400,000 barrels a day in January.
Russian net oil output was down by only 160,000 barrels a day from pre-war levels in January, with 8.2 million barrels of oil shipped to markets worldwide, according to the IEA’s oil market report.

Russia announced that it would cut oil production by 500,000 barrels per day in March after the West slapped price caps on Russian oil and oil products.
Picture Alliance | Picture Alliance | Getty Images

Bans and price caps targeting Russian oil are having the “intended effect” despite surprisingly resilient production and exports in recent months, according to Toril Bosoni from the International Energy Agency.
The European Union’s embargo on Russian oil products came into effect on Feb. 5, building on the $60 oil price cap implemented by the G-7 (Group of Seven) major economies on Dec. 5.

Bosoni, who’s head of the oil industry and markets division at the IEA, told CNBC on Wednesday that Russian oil production and exports had held up “much better than expected” in recent months. This is because Moscow has been able to reroute much of the crude that previously went to Europe to new markets in Asia.
China, India and Turkey in particular ramped up purchases to partially offset the 400,000-barrel-per-day fall in Russian crude exports to Europe in January, according to the IEA’s oil market report published Wednesday. Some Russian oil is also still making its way to Europe through the Druzhba pipeline and Bulgaria, both of which are exempt from EU embargo.
As such, Russian net oil output fell by only 160,000 barrels a day from pre-war levels in January, with 8.2 million barrels of oil shipped to markets worldwide, the IEA said. The agency added that G-7 price caps may also be helping to bolster Russian exports to some extent, as Moscow is forced to sell its Urals oil at a lower price to those countries complying with the caps, which potentially makes it more attractive than other sources of crude.
Despite Russia’s substantial export volumes, Bosoni argued that this did not mean the sanctions had failed.

“The price cap was put in place to allow for Russian oil to continue to flow to market, but at the same time reducing Russian revenues. Even though Russian production is coming to market, we’re seeing that the revenues that Russia receives from its oil and gas have really come down,” Bosoni said.

“For instance in January, export revenues for Russia were about $13 billion, that’s down 36% from a year ago,” she said. “Russian fiscal receipts from the oil industry is down 48% in the year, so in that sense we can say that the price cap is having its intended effect.”
She also highlighted the growing discrepancy between Russian Urals crude prices and international benchmark Brent crude. The former averaged $49.48 per barrel in January, according to the Russian Finance Ministry, while Brent was trading above $85 a barrel on Thursday.
Importantly, Russia’s 2023 budget is based on a Urals price average of $70.10/bbl, so plunging fiscal revenues from oil operations year-on-year are leaving a substantial hole in public finances.
Bosoni also noted that the indications are that Moscow may not be able to reallocate the trade of oil products in the same way as it has crude exports, which is why the IEA expects exports and production to fall further in the coming months.
“We’re seeing now some reallocation of trade of the products but we haven’t seen the same shift as we saw for crude, which is why we’re expecting Russian exports to fall and production to fall,” she said.

Production cut

Russia announced last week that it would cut production by 500,000 barrels a day in March in response to the latest round of Western bans, amounting to around 5% of its latest crude output.
However, Bosoni said this was in line with the IEA’s expectations.
“This is included in our balances that still see the markets relatively well supplied through the first half of the year, so we’re not too concerned about this decline, we think there’s enough supply to meet demand for the coming months,” she said.
“The question will be when summer comes around, refinery activity picks up to meet summer driving and China rebound really takes off, this is when we can see the market tighten really through the rest of the year.”

In its report, the IEA suggested the production cut may be less about retaliation and more an attempt by Moscow to shore up pricing by curbing output rather than continuing to sell at a large discount to countries complying with the G-7 price caps.

Global oil demand

Global oil demand growth is expected to pick up in 2023 after a sharp slowdown in the second half of 2022, with China accounting for a substantial portion of the projected increase.
The IEA said a pronounced uptick in air traffic in recent weeks highlighted the central role of jet fuel deliveries in 2023 growth. Oil deliveries are expected to surge by 1.1 million barrels a day to hit 7.2 million barrels a day over the course of 2023, with total demand hitting a record 101.9 million barrels a day.
The effects of the West’s latest oil embargo and price cap will be a key factor in meeting that demand growth, the IEA report noted.
“So will Beijing’s stance on domestic refinery activity and product exports amid its reopening. New refineries in Africa and the Middle East as well as China are expected to step in to cater for the growth in refined product demand,” it said.
“If the price cap on products is half as successful as the crude cap, product markets may well weather the storm – but more crude supplies would be required to prevent renewed stock draws later in the year.”

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Retail sales rose 3% in January, easily topping the 1.9% Dow Jones estimate, the Commerce Department reported Wednesday.
The numbers are not adjusted for inflation, meaning that consumers outpaced the 0.5% inflation rate for the month.
Food service and drinking places, motor vehicle and parts dealers, and furniture stores led the sales increases.

Sales at retailers rose far more than expected in January as consumers persevered despite rising inflation pressures.
Advance retail sales for the month increased 3%, compared with expectations for a rise of 1.9%, the Commerce Department reported Wednesday. Excluding autos, sales rose 2.3%, according to the report, which is not adjusted for inflation. The ex-autos estimate was for a gain of 0.9%.

Food services and drinking places surged 7.2% to lead all major categories. Motor vehicle and parts dealers increased 5.9%,while furniture and home furnishing stores saw a rise of 4.4%.
Even with a 2.4% increase in gas prices, receipts at service stations were flat. Online retailers saw an rise of 1.3%, while electronics and appliances stores increased 3.5%.
No categories saw a decline, following a December in which sales fell 1.1%.
On a year-over-year basis, retail sales increased 6.4%, which was exactly in line with the consumer price index move reported Tuesday.
Markets moved lower after the news, with major indexes slightly lower in morning trade.

Other economic news Wednesday showed that industrial production was flat in January, compared to the estimate for a 0.4% gain, according to Fed data.
While manufacturing input rose 1% and mining production increased 2%, utilities declined 9.9%, likely owing to an unseasonably warm beginning to the year. Also, capacity utilization declined 0.1 percentage point to 78.3%, below the 79% estimate.
“The monthly reports on industrial production, retail sales, and jobs were generally better than expected and point to a pickup in economic activity in early 2023 after a soft patch in late 2022. The Fed will read recent activity reports as supporting plans for additional interest rate increases in the first half of this year,” said Bill Adams, chief economist for Comerica Bank.
Inflation as gauged by the consumer price index accelerated by 0.5% in the first month of the year, the Labor Department announced Tuesday. The sales report indicates that even with elevated inflation pressures, consumers continued to spend.
The data comes as the Federal Reserve is grappling with rising prices that appear to be abating, but are still well ahead of the central bank’s 2% annual target.

Several Fed officials spoke Tuesday, each indicating that while they see some progress being made, there is still more work to do.
“I am confident that the gears of monetary policy will continue to move in a way that will bring inflation down to 2%. We will stay the course until our job is done,” New York Fed President John Williams said.
Markets currently expect the Fed to approve quarter percentage point interest rate hikes at each of its next two meetings, then pause to assess the impact that the monetary policy moves have had on inflation, the labor market and broader economic growth.
Consumer spending makes up about two-thirds of all economic activity in the U.S. Fed rate increases are aimed at reducing demand as supply tries to catch up and to hit rate-sensitive sectors such as housing, which saw a boom during the Covid pandemic.
There’s evidence that the increases are having an impact, though inflation remains persistent and could be aggravated by the economic reopening in China and rebounding growth across Europe.

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Industrial production and retail sales in December fell to their worst year-on-year contractions since the onset of the Covid-19 pandemic in early 2020.
According to the World Bank, the International Monetary Fund and the OECD, Russian GDP dropped by at least 2.2% in a best-case scenario in 2022 and by up to 3.9%.
And is widely expected to contract again in 2023.

Men wearing military uniform walk along Red Square in front of St. Basil’s Cathedral in central Moscow on February 13, 2023.
Alexander Nemenov | Afp | Getty Images

The coming months will be critical in figuring out how Russia’s economy is holding up in the face of a new suite of sanctions, and for how long it can continue pouring money into its military assault on Ukraine.
Russia’s budget deficit hit a record 1.8 trillion Russian rubles ($24.4 million) in January, with spending growing by 58% from the previous year while revenues fell by more than a third. 

Industrial production and retail sales in December fell to their worst year-on-year contractions since the onset of the Covid-19 pandemic in early 2020, with retail sales dropping by 10.5% year-on-year while industrial production shrank by 4.3%, compared to a 1.8% contraction in November. 
Russia has yet to report its GDP growth figures for December, which are expected to be incorporated into full-year 2022 data slated for this Friday.
According to the World Bank, the International Monetary Fund and the OECD, Russian GDP dropped by at least 2.2% in a best-case scenario in 2022 and by up to 3.9%, and is widely expected to contract again in 2023.
However, both the Russian finance ministry and the central bank maintain that all of this is within their models. 
Several unique circumstances and accounting technicalities go some way to explaining the scale of the January deficit figure, according to Chris Weafer, CEO of Moscow-based Macro Advisory.

The big drop in tax revenue was mostly accounted for by changes in the tax regime that kicked in at the beginning of January, the finance ministry claimed. Companies previously paid taxes twice per month, but now make one consolidated payment on the 28th of each month. 

The finance ministry suggested most of the January tax payments had not yet been accounted for by Jan. 31 and will instead feed into the February and March figures.
Weafer also highlighted a change in the Russian oil tax maneuver that came into force in January and is expected to iron out in the coming months, while the nature of Russian public spending allocation means it is heavily concentrated at the end of the year, widening the fiscal deficit.
Christopher Granville, managing director of global political research at TS Lombard, noted two further factors distorting the most recent deficit figures.
Firstly, this was the first print since the sanctioning states’ embargo on Russian crude imports went into force on Dec. 5.
“Before that date, Europe had been loading up with Urals crude, then straight to zero, so the Russian seaborne export trade had to be re-routed overnight,” Granville told CNBC. 
“Obviously a lot of preparations for that re-routing had been made (Russia buying up tankers, getting more access to the ‘shadow’ or ‘dark’ fleet etc), but the transition was bound to be bumpy.”

The actual Urals price dived as a result, averaging just $46.8 per barrel during the period from mid-December to mid-January, according to the Russian finance ministry. This was the tax base for much of January’s oil and gas-related federal budget revenues, which also suffered from the fading of a revenue windfall in the fourth quarter from a hike to the natural gas royalty tax.
The finance ministry also flagged massive advance payments for state procurement in January, which totaled five times those of January 2022.
“Although they don’t say what this is, the answer is perfectly obvious: pre-payment to the military industrial complex for weapons production for the war,” Granville said.
How long can the reserves last?
For the month of January as a whole, the average Urals price edged back up to $50 a barrel, and both Granville and Weafer said it would be important to gauge the impact on Urals price and Russian exports as the full impact of the latest round of sanctions becomes clearer.
Sanctioning countries extended bans to bar vessels from carrying Russian-originated petroleum products from Feb. 5, and the International Energy Agency expects Russian exports to plummet as it struggles to find alternative trading partners.
The export price for Russian crude is seen as a central determinant for how quickly Russia’s National Wealth Fund will be drawn down, most notably its key reserve buffer of 310 billion Chinese yuan ($45.5 billion), as of Jan. 1.
Russia has ramped up its sales of Chinese yuan as energy revenues have declined, and plans to sell a further 160.2 billion rubles’ worth of foreign currency between Feb. 7 and Mar. 6, almost three times its FX sales from the previous month.
However, Russia still has plenty in the tank, and Granville said the Kremlin would stop depleting its yuan reserves well before they were fully exhausted, instead resorting to other expedients.

“A flavour of this is the idea floated by MinFin to benchmark oil taxation on Brent rather than Urals (i.e. a material hike in the tax burden on the Russian oil industry, which would then be expected to offset the blow by investing in logistics to narrow the deficit to Brent) or the proposal from First Deputy Prime Minister Andrey Belousov that major companies flush with 2022 profits should make a ‘voluntary contribution’ to the federal budget (mooted scale: Rb200-250bn),” Granville said.
Several reports last year suggested Moscow could invest in another wave of yuan and other “friendly” currency reserves if oil and gas revenues allow. Yet given the current fiscal situation, it may be unable to replenish its FX reserves for some time, according to Agathe Demarais, global forecasting director at the Economist Intelligence Unit.
“Statistics are state secrets these days in Russia especially regarding the reserves of the sovereign wealth funds — it’s very, very hard to know when this is going to happen, but everything that we’re seeing from the fiscal stance is that things are not going very well, and so it is clear that Russia must draw down from its reserves,” she told CNBC.
“Also, it has plans to issue debt, but this can only be done domestically so it’s like a closed circuit — Russian banks buying debt from the Russian state, etcetera etcetera. That’s not exactly the most efficient way to finance itself, and obviously if something falls down then the whole system falls down.”
Early rounds of sanctions following the invasion of Ukraine set out to ostracize Russia from the global financial system and freeze assets held in Western currencies, while barring investment into the country.
Sanctions not about ‘collapse’ of Russian economy
The unique makeup of the Russian economy — in particular the substantial portion of GDP that is generated by state-owned enterprises — is a key reason why Russian domestic life and the war effort appear, at least at face value, to be relatively unaffected by sanctions, according to Weafer.
“What that means is that, in times of difficulty, the state is able to put money into the state sectors, create stability and subsidies and keep those industries and services going,” he said. 
“That provides a stabilizing factor for the economy, but equally, of course, in good times or in recovery times, that acts as an anchor.”

In the private sector, Weafer noted, there is far greater volatility, as evidenced by a recent plunge in activity in the Russian auto manufacturing sector. 
However, he suggested that the government’s ability to subsidize key industries in the state sector has kept unemployment low, while parallel trading markets through countries such as India and Turkey have meant the lifestyles of Russian citizens have not been substantially impacted as yet.
“I think it’s increasingly dependent on how much money the government has to spend. If it has enough money to spend providing social supports and key industry supports, that situation can last for a very, very long time,” Weafer said.
“On the other hand, if the budget comes under strain and we know that the government can’t borrow money, that they’re going to have to start making cuts and making choices between military expenditure, key industry supports, social supports, and that’s what situation may change, but right now, they have enough money for the military, for key industry supports, for job subsidies and for social programs.”
As such, he suggested that there is little pressure on the Kremlin from the domestic economy or the population to change course in Ukraine for the time being.
Diminished technology access
Demarais, author of a book on the global impact of U.S. sanctions, reiterated that the most significant long-term damage will come from Russia’s receding access to technology and expertise, in turn causing a gradual attrition of its main economic cash cow — the energy sector.
The aim of the sanctions onslaught, she explained, was not a much-touted “collapse of the Russian economy” or regime change, but the slow and gradual attrition of Russia’s ability to wage war in Ukraine from a financial and technological perspective.
“The technology gap, those sectors of the economy that rely on accessing Western technology in particular, or Western expertise, in many areas are definitely going to degrade and the gap between them and the rest of the world is going to widen,” Weafer said.
The Russian government has begun a program of localization and import substitution alongside companies in so-called friendly countries, with a view to eventually creating a new technological infrastructure over the next several years.
“Even the optimists say that’s probably the end of the decade before that can be done, it’s not a quick fix,” Weafer explained.
“I think even government ministers are saying by the time you put everything in place with training and education, facilities etc., it’s a minimum five-year program and it’s probably more like seven or eight years before you can start to deliver engagement, if you get it right.”
A spokesperson for the Russian finance ministry was not immediately available for comment when contacted by CNBC.

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Inflation rose in January by 0.5% following a 0.1% increase in December, according to the consumer price index report released Tuesday.
The CPI was up 6.4% from the same period in 2022. Both numbers were higher than expected.
Across-the-board increases in shelter, food and energy boosted the index after inflation had shown signs of receding in recent months.
“Super core” services inflation, which is key for the Fed and excludes food, energy and shelter, rose 0.2% for the month and was 4% higher than a year ago.

Inflation turned higher to start 2023, as rising shelter, gas and fuel prices took their toll on consumers, the Labor Department reported Tuesday.
The consumer price index, which measures a broad basket of common goods and services, rose 0.5% in January, which translated to an annual gain of 6.4%. Economists surveyed by Dow Jones had been looking for respective increases of 0.4% and 6.2%.

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Excluding volatile food and energy, the core CPI increased 0.4% monthly and 5.6% from a year ago, against respective estimates of 0.3% and 5.5%.

Markets were volatile following the release, with the Dow Jones Industrial Average down about 200 points at the open and heading lower.
Rising shelter costs accounted for about half the monthly increase, the Bureau of Labor Statistics said in the report. The component accounts for more than one-third of the index and rose 0.7% on the month and was up 7.9% from a year ago. The CPI had risen 0.1% in December.
Energy also was a significant contributor, up 2% and 8.7%, respectively, while food costs rose 0.5% and 10.1%, respectively.
Rising prices meant a loss in real pay for workers. Average hourly earnings fell 0.2% for the month and were down 1.8% from a year ago, according to a separate BLS report that adjusts wages for inflation.

While price increases had been abating in recent months, January’s data shows inflation is still a force in a U.S. economy in danger of slipping into recession this year.
That has come despite Federal Reserve efforts to quell the problem. The central bank has hiked its benchmark interest rate eight times since March 2022 as inflation rose to its highest level in 41 years last summer.

“Inflation is easing but the path to lower inflation will not likely be smooth,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed will not make decisions based on just one report but clearly the risks are rising that inflation will not cool fast enough for the Fed’s liking.”
In recent days, Fed Chairman Jerome Powell has talked about “disinflationary” forces at play, but January’s numbers show the central bank probably still has work to do.
There was some good news in the report. Medical care services fell 0.7%, airline fares were down 2.1% and used vehicle prices dropped 1.9%, according to seasonally adjusted prices. Egg prices, however, rose 8.5% and are up a stunning 70.1% over the past year.

Evaluating ‘super-core’ inflation

The rise in housing prices is keeping a floor under inflation, though those numbers are widely expected to decelerate later in the year.
That’s why some Fed officials, including Powell, say they are looking more closely at core services inflation minus shelter prices — “super-core” — in determining the course of policy. That number rose 0.2% in January and was up 4% from a year ago.
Markets expect the Fed over its next two meetings in March and May to raise its overnight borrowing rate another half a percentage point from its current target range of 4.5%-4.75%. That would give policymakers time to watch for the broader economic impacts of the monetary policy tightening before deciding how to proceed. Should inflation not fall back, that could mean more rate hikes.
Dallas Fed President Lorie Logan on Tuesday cautioned that the central bank may need to push rates higher than expected, particularly if super-core remains anchored in the 4%-5% range.
“We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions,” she said during a speech in Prairie View, Texas.
Logan, a voting member this year on the rate-setting Federal Open Market Committee, added that she is concerned about higher commodity inflation as China reopens from its Covid lockdowns, and sees the surprisingly strong labor market as another risk.
“When inflation repeatedly comes in higher than the forecasts, as it did last year, or when the jobs report comes in with hundreds of thousands more jobs than anyone expected, as happened a couple weeks ago, it is hard to have confidence in any outlook,” she said.

Recession possibility

The next big data point will be retail sales, which hits Wednesday morning at 8:30 a.m. ET. Economists surveyed by Dow Jones expect the figure, which is not adjusted for inflation, will show that sales rose 1.9% in January from the prior month.
“The strength of core inflation suggests that the Fed has a lot more work to do to bring inflation back to 2%,” said Maria Vassalou, co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management. “If retail sales also show strength tomorrow, the Fed may have to increase their funds rate target to 5.5% in order to tame inflation.”
There’s widespread belief that the economy could tip into at least a shallow recession later this year or early in 2023. However, the latest tracking data from the Atlanta Fed puts expected GDP growth at 2.2% for the first quarter, following a relatively strong finish for 2022.
A New York Fed barometer which uses the spread between 3-month and 10-year Treasury yields to estimate the probability of a recession puts the chances at 57.1% over the next 12 months, the highest level since the early 1980s.
January’s CPI report will take some time to analyze, as the BLS changed its methodology in how it reports the index. Some components, such as shelter, were given higher weightings, while others, such as food and energy now have slightly less influence.
The Fed also changed how it computes an important component called owners’ equivalent rent, a measure of how much property owners could get if they rented. The BLS is now placing a bit more emphasis on the pricing of stand-alone rentals rather than apartments.

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