Chicago Business Barometer™ - Cooled to 56.7 in June

The Chicago Business Barometer™, produced with MNI, cooled 6.0 points to 56.7 in June. The Barometer remained in expansionary territory for a second consecutive month.

The fall was driven by declines in New Orders and Production, while rises in Supplier Deliveries, Order Backlogs and Employment provided some offset.

NEW ORDERS PARTIALLY UNWIND MAY BOUNCE

New Orders declined 11.7 points, partially unwinding the strong rise seen in May (which took the index to its highest level since January 2022). New Orders remain in expansion for a second consecutive month.

Production slowed 10.4 points, almost completely reversing May’s increase, but remains expansionary for the sixth straight month. 

SUPPLIER DELIVERIES HIGHEST SINCE JUNE 2022

Supplier Deliveries expanded 8.8 points to the highest since June 2022. Respondents noted higher lead times due to the Middle East conflict.

Order Backlogs edged up 2.4 points to the highest since December 2022, remaining above 50 for a second month.

Employment ticked up 1.3 points, back at the level seen in April but remaining in contraction for four straight months.

PRICES PAID REMAIN HIGHEST SINCE 2022

Prices Paid edged up 1.6 points to the highest level since May 2022. Respondents cited higher oil and metal prices as key drivers of rising prices.

Inventories slipped 5.1 points, in contraction after one month above the neutral 50 mark.

The survey ran ran from June 1 to June 16.

MNI: RBNZ Hike Uncertain As Recovery Gathers Pace

A rate hike at next week's Reserve Bank of New Zealand Monetary Policy Committee meeting is far from certain as policymakers weigh conflicting domestic and global pressures, though they are likely to need to begin raising rates later this year as economic recovery gathers pace, prominent economists told MNI. 

The committee will focus on where the economy sits in the cycle and the size of the output gap when it meets on Wednesday, said Michael Reddell, independent commentator and former RBNZ special adviser. While policymakers are beginning to consider when it will be appropriate to tighten policy, he expects them to wait for more inflation data and hold the Official Cash Rate at 2.25% next week. 

"I think mostly what you'll see is commentary on oil, a bit on the GDP numbers, and then really a holding action, given that the CPI is still ahead of them," Reddell said, pointing to Q2 inflation results due July 21. "The key consideration is stripping out oil and related effects and seeing where core inflation is. On an optimistic view, core inflation was already heading towards 2% and not showing signs of picking up materially."

Although markets have priced around a 74% chance of a 25 basis-point hike next week, Reddell sees December following the national election as the more likely starting point for tightening.

"If the CPI data showed core inflation had continued trending down, which is not at all implausible given what's happening in the rental market, then you can quite easily get to December," he said.

SWIFTER HIKES

Cameron Bagrie, managing director and chief economist at Bagrie Economics, argued the RBNZ should begin tightening immediately, lifting the OCR by 25bp next week and moving more quickly toward the estimated 3% neutral level.

"When you look at core inflation, it's around 2.5% to 3%, you've got an economy that's turning, and productivity growth is awful," Bagrie said. "You don't have the capacity to absorb much of a pickup in demand before you start running into capacity constraints."

Labour market conditions were already improving and New Zealand's limited supply-side capacity meant even moderate GDP growth would quickly erode spare capacity, he argued. "The phrase I'm using in New Zealand at the moment, is that we're entering a period of 'broccoli and spinach'. Not everybody likes broccoli and spinach, but it tends to be good for you. Let's just get the OCR around neutral and that's a comfortable level to have it when you've got all this uncertainty." 

Reddell, however, questioned the wisdom of moving rapidly towards neutral without a clearer estimate of where that level lies. "We don't have an up-to-date read on core inflation," he said. "If the Bank were to move next week, I wouldn't say it's a big mistake. It's just a question of whether it's urgent. I don't see it as urgent given the remaining weakness in the labour market, the rental market and residential construction."

MNI INTERVIEW: RBA Set For Hawkish August Hold - Fmr Economist

The Reserve Bank of Australia is likely to leave the cash rate unchanged at its August meeting while retaining a tightening bias as policymakers weigh persistent domestic inflation against signs of slowing activity, a former RBA economist told MNI.

"The labour market is slowing, but not as much as they'd probably hoped," said Blair Chapman, senior economist at SEEK and a former RBA research economist. "When you look at non-tradables inflation, that's what they're are going to be more concerned about because they can largely look through the policy-driven volatility in tradables."

Chapman said fluctuations in fuel prices and government fuel excise policy were creating noise in headline inflation, which fell in May, but the persistence of domestic price pressures remained the key concern, noting the 0.4% increase in underlying inflation over the month. "It's the fact that non-tradables inflation has been sustainably above the target band for quite some time that I think they're going to be concerned about," he said.

At the same time, Chapman argued the RBA must balance those inflation risks against mounting pressures on the housing and construction sectors, where higher borrowing costs and falling house prices are already weighing on activity. "I think August will be a hawkish hold. They're ready to hike again if they need to, but there are now a lot of other factors putting pressure on sectors you just wouldn't want to hit too hard. Construction has faced rising costs for a while, and now falling house prices are squeezing developers' revenue as well."

The RBA has hiked the cash rate 75 basis points this year to 4.35%, unwinding 2025's easing. (See MNI RBA WATCH: Bullock Keeps Hike Prospects Alive Despite Hold) While some former staff see great risk of higher rates, markets have only priced in a 22% chance of a hike at the August meeting and 10bp of further tightening by December. (See MNI INTERVIEW: Former RBA Research Chief Warns Of Higher Rates)

LABOUR MARKET

Chapman agreed it was too early to rule out another increase, despite some banks and market economists reducing expectations of further hikes. "When you look at the core inflation numbers, they've still got to be concerned about inflation expectations."

However, recent labour market data were weaker than the headline 4.4% unemployment rate suggested. "If you take the revised April employment figure together with May, we've had virtually no employment growth over the past two months," he said. "Employment growth this year is running at around 1% or less, which is quite subdued."

Australia was experiencing a necessary period of below-trend employment growth following the post-pandemic labour market boom, with labour force participation likely to decline as demand softened. Looking ahead, Chapman said the RBA's next move would depend largely on whether underlying inflation continues to accelerate after excluding volatile fuel prices.

"If underlying inflation excluding fuel keeps accelerating, they'll be forced to think about how to slow the domestic economy," he said. "At the moment the inflation picture is much noisier than normal because of everything that's going on."

MNI INTERVIEW: Fed Hike Plausible As Early As July - George

The Federal Reserve should consider raising interest rates as early as its next meeting in July, because inflation is too far above target and showing little sign of abating, former Kansas City Fed President Esther George told MNI. 

George said that Fed Chair Kevin Warsh’s approach to communications, which shies away from the kind of forward guidance that requires several months of foreshadowing before any new action on rates, means every meeting will be live. 

“If you were really serious, that this feels too high, and you're not seeing disinflationary signs, July obviously should be on the table,” she said in an interview Monday. “We've all gotten accustomed to a lot of preparation to move and so I think it's a real question, why not July?”

Despite hopes for a resolution to the Iran war, George does not see a retreat in oil prices as enough to restart the process of U.S. disinflation. 

“What does waiting for September buy you here? I understand oil is such a salient price for our inflation expectations. But I just keep looking at inflation – ahead of this war, it was an issue. You get an easing on the oil prices, I’m not sure that’s going to be definitive in terms of a direction for lower inflation,” she said. (See MNI INTERVIEW: Fed's Next Rate Move Likely Upward-Kohn)

50 TO 100BPS

George said the Fed’s three rate cuts of late 2025 were likely premature because they were delivered before the FOMC had gotten inflation sufficiently close to its 2% target, which has been exceeded for over five years.   

That means financial conditions are fairly loose, and would need to be tightened considerably in order to get price pressures back under control, she added. 

“When I hear businesses and I hear households’ expectations, I see examples of them changing to say we're accepting inflation, we feel can pass prices on. That tells me you're probably talking 50 to 100 basis points before you can call that policy restrictive,” said George. 

By keeping rates steady as inflation rises anew, the Fed is in fact passively easing policy, said George. “You can't say rates are near restrictive when they're hovering around the zero to half percent range on a real basis.”

George gave Warsh high marks for sticking to his philosophical priors of not offering too much guidance and pushing for reform during his first press conference. But she added that, over time, the chair will have to give more details on the FOMC’s reaction function. 

“I do think it would be helpful if in future meeting he leaned more into ‘what communication will we offer, and how will we help the public understand the Fed's reaction function or assessment of the economy that stops short of whatever you define as forward guidance,’” she said. 

REGIONAL FEDS

Despite institutional changes she generally views as positive, George was worried by media reports of the chair’s involvement in the selection process for the new Atlanta Fed President. “The Atlanta story was concerning."

Asked if she fears regional Fed presidents losing power in a way that compromises the institutional structure that helps keep the central bank independent, George said: “I always worry about that. It comes from increasing influence from the Board of Governors around those selections. It also comes from the presidents feeling very confident about the role they play.”

She thinks regional presidents for now are giving the new chair the benefit of the doubt, but would need to assert themselves if they feel constrained, she said.

“The Fed has a culture of deference to the chair, a honeymoon period to say, ‘we want to get off on the right foot here, we are open-minded about what changes you want to make,’” she said. “I think as we go forward though, I don’t expect the Fed presidents in particular to change their communication style. They have to get out in their districts.”

George added: “The presidents have to be very clear about the role they play and not lean very much toward a system view, a deference that goes too far. And the boundaries around what the center does are equally important.”

MNI INTERVIEW: Yuan In Steady Upward Trend - Sheng Songcheng

The yuan is on course to appreciate to levels as strong as 6.50 to the dollar by next year, providing a key window of opportunity for promoting the currency’s international use, a leading Chinese economist told MNI.

But, while yuan strength is being driven by strong exports and the increasing productivity of China’s economy, the appreciation is likely to be gradual given the currency’s managed float, said Sheng Songcheng, Research President of China Chief Economist Forum and senior advisor of CEIBS Lujiazui Institute of International Finance.

At current levels around 6.80 to the dollar, the yuan remains significantly undervalued in purchasing power parity terms, and this is further exacerbated by Chinese inflation rates below those of other major economies, Sheng said, speaking after German Chancellor Friedrich Merz earlier in June called for international action to realign currencies.

While economists have noted that capital controls restrict the potential for the yuan as a major reserve currency, Sheng noted that China’s low interest rates and the yuan’s strength enhance its attractiveness for international financing and investment, which could help drive its international use. Yuan appreciation should not only make the currency more attractive to hold but also make it easier for authorities to ease capital controls, he said. （See MNI INTERVIEW: Yuan Use To As Much As Double）

Holding the yuan stable against a basket of other major currencies during periods of dollar weakness should also favour a greater international role, Sheng said.

DIM SUM, PANDA

Authorities are likely to further promote issuance of offshore Dim Sum bonds by both domestic and foreign entities, and encourage overseas institutions to issue onshore Pandas, said Sheng, a former head of the PBOC’s statistics department. Russia’s issuance of RMB bonds to facilitate trade settlement with China has increased the share of yuan in its foreign exchange reserves, he noted.

China needs to increase the supply of high‑quality RMB assets, including regular issuance of RMB treasuries and central bank bills offshore, to deepen yuan pools and improve the offshore yield curve, Sheng said. Instruments such as RMB bond repos and derivatives should be expanded to provide liquidity and risk‑hedging tools, he added. (See MNI INTERVIEW2: HK Bond Market Should Be Open To China Buyers)

It would be advisable for the PBOC to continue increasing the proportion of gold in its own reserves, Sheng said. While it should maintain a certain proportion in dollars, part of these could be transferred to big state-owned banks or state-owned companies, to flag the central bank’s stance on promoting exchange rate flexibility, he said.

MNI INTERVIEW2: Chinese Economist Suggests QE To Boost Demand

China should consider quantitative easing to pay for a real-estate market bailout and to boost consumption, a leading economist told MNI.

The property slump has cost China about 3 percentage points of growth per year over the past three years, said Zhu Tian, Vice President of CEIBS, a higher education institution jointly founded by the Chinese government and the European Union in 1994.

Zhu suggested the central government issue CNY8 trillion in treasury bonds, with half the proceeds used to provide each Chinese citizen with about CNY3,000 in consumption vouchers, which he said could boost GDP growth by more than 1.5 percentage points. The remaining CNY4 trillion should be used to support the property sector, including by purchasing existing housing inventory to help stabilise housing prices and curb their decline. (See MNI INTERVIEW: China Property Bailout Would Take 10% Of GDP)

The treasury bonds could be bought by the People’s Bank of China in the secondary market through lenders, he said, noting that the central bank had little room to boost the economy by other means given low inflation and banks’ already-compressed interest margins.

Other senior policy advisors have previously suggested that China could employ QE to support demand, including former PBOC monetary policy committee Yu Yongding, though the authorities have so far shown little sign of taking their advice. (See MNI INTERVIEW: PBOC Can Use QE Strategically If Necessary - Yu)

Zhu also warned of slowing Chinese outbound direct investment to Europe as China tightens scrutiny of investment in key sectors. 

MNI INTERVIEW: New Restrictions To Hit China Investment In EU

Chinese outbound direct investment (ODI) in Europe is set to slow from its current double-digit growth as China tightens scrutiny of offshroe investment in key sectors, a leading economist told MNI.

The sharp increase in Chinese ODI in Europe over the past two years has been driven by weak domestic demand in China, and as the country’s exporters look for ways to circumvent high U.S. tariffs, said Zhu Tian, Vice President of CEIBS, a higher education institution jointly founded by the Chinese government and the European Union in 1994. But new regulation issued by State Council on outbound investment, set to take effect in July, imposes strict rules on the outbound transfer of technology, data, and resources alongside investment, he noted, adding that this will particularly affect high-end manufacturing.

The new Chinese restrictions come as the EU debates possible tough trade action to restrict subsidised Chinese imports, though Zhu said that a full-blown trade war is unlikely given the scale of trade and industrial linkages. (See MNI: EU Action On China Would Cut Off Key Supplies - Advisor）

China should take the EU's concerns seriously, said Zhu, adding Beijing should consider fully opening up some areas in which it has competitive advantages, for example dropping tariffs on imports of electric vehicles to zero to ease bilateral frictions and enhance mutual trust. Foreign enterprises could also be given equal opportunities to compete for government procurement contracts, outside areas involving national security, he said.

Chinese outbound direct investment in Europe, including the EU and the UK, totaled EUR16.8 billion in 2025, jumping 67% year-on-year and the highest since 2018, according to Rhodium Group. Investment in the new energy vehicle and battery sectors reached a record high of EUR8.9 billion, and Europe has become the region with the highest Chinese investment among advanced economies. (See MNI INTERVIEW: UK FDI To China To Buck Wider Slowdown)

China’s ODI to GDP is likely to peak at about 2% over the longer run, given concerns that excessive outflows could hurt the domestic economy, said Zhu, also an economics professor at CEIBS where his EMBA course attracts many entrepreneurs. China’s flow of ODI as a share of GDP was 0.92% in 2024, down from an earlier peak of 1.89% in 2016, according to Organisation for Economic Co-operation and Development data.