Economics

Weekly — May 13, 2022

 

Weekly Economic & Financial Commentary

 
 
United States: Don't Look Down Yet
• Consumer price ination may have peaked, but the climb down from here will not be free of
obstacles. The CPI and PPI rose 0.3% and 0.5%, respectively, in April. Small business optimism
stalled during the month, as owners are concerned about their ability to continue to pass on higher
costs to consumers.
• Next week: Retail Sales (Tues), Industrial Production (Tues), Housing Starts (Wed)
International: Ination Plague Continues in Emerging Markets
• Price growth is a global problem; however, ination seems to be more of a problem across the
emerging markets. With commodity prices still high and weak local currencies, most emerging
market countries are experiencing above-target ination.
• Next week: UK CPI (Wed), Japan CPI (Thurs), South Africa Reserve Bank (Fri)
Interest Rate Watch: Will Tighter Financial Conditions Lead to a More Dovish Fed?
• In the post-FOMC meeting press conference last week, Chair Powell indicated that nancial
conditions would need to tighten to help the Fed restore price stability. The Bloomberg Financial
Conditions Index began to tighten early this year when FOMC members signaled that the
committee would become more aggressive in battling ination. This week, conditions tightened
further to the least-supportive posture in two years.
Credit Market Insights: Consumer Credit Overdelivers for a Second Month
• Consumer credit grew by a record $52.4B in March as it more than doubled consensus estimates
for the second month running. The surge was relatively well-balanced, with revolving credit—
mostly linked to credit card spending—rising $31.4B, while nonrevolving credit climbed a slightly
lower $21.4B.
Topic of the Week: Fertilizer Crunch Threatens to Drive Food Prices Higher
• Rising food prices continued to sting consumers in April as grocery prices and prices for food away
from home rose 1.0% and 0.6%, respectively. A global supply shortage of chemical fertilizers may
put further pressure on already strained food commodity markets.
Wells Fargo U.S. Economic Forecast
Actual Forecast Actual Forecast
2021 2022 2020 2021 2022 2023
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
1
Real Gross Domestic Product 6.3 6.7 2.3 6.9 -1.4 2.3 2.0 2.1 -3.4 5.7 2.4 2.0
Personal Consumption 11.4 12.0 2.0 2.5 2.7 1.5 1.6 1.8 -3.8 7.9 2.7 1.7

Consumer Price Index 2 1.9 4.8 5.3 6.7 8.0 8.1 7.8 6.8 1.2 4.7 7.6 2.9
2
"Core" Consumer Price Index 1.4 3.7 4.1 5.0 6.3 5.8 5.9 5.4 1.7 3.6 5.8 3.3

Quarter-End Interest Rates 3

Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.50 1.50 2.50 3.00 0.50 0.25 1.88 3.63
Conventional Mortgage Rate 3.17 3.02 2.88 3.11 4.42 5.40 5.50 5.50 3.12 2.95 5.21 5.18
10 Year Note 1.74 1.45 1.52 1.52 2.32 3.20 3.30 3.35 0.89 1.45 3.04 3.15
Forecast as of: May 12, 2022
1 2 3
Compound Annual Growth Rate Quarter-over-Quarter Year-over-Year Percentage Change Annual Numbers Represent Average

Source: U.S. Dept. of Commerce, U.S. Dept. of Labor, Federal Reserve Board and Wells Fargo Economics
Please see our full U.S. Economic Forecast and our updated Consumer Dashboard and Pressure Gauge.

All estimates/forecasts are as of 5/13/2022 unless otherwise stated. 5/13/2022 12:47:34 EDT. This report is available on Bloomberg WFRE
Weekly Economics

U.S. Review
Don't Look Down Yet
Consumer price ination may have peaked, but the climb down from here will not be free of obstacles.
In our recently published U.S. Economic Outlook, we outlined our expectations for positive economic
growth over the next two years. Underlying demand is intact, and households and businesses are in
generally solid nancial shape. That said, ination is set to remain elevated, which paves the way for
an aggressive pace of monetary policy tightening from the Fed. Lofty prices combined with higher
borrowing costs are poised to curb activity, leading to a signicant moderation in economic growth.
Small businesses were among the rst to ring the alarm that ination would become a problem for the
broader economy. Optimism has trended down since the beginning of 2022, stalling at 93.2 in April, as
businesses continue to contend with limited supply and higher costs. Factory-gate prices showed little
signs of softening in April. The Producer Price Index (PPI) rose 0.5% over the month, pulling the annual
rate to 11.0%. Increases in the prices paid components of the ISM manufacturing and services surveys
also point to persistent cost pressures. Businesses have responded by raising selling prices, but owners
are extraordinarily concerned about their ability to continue to do so. The share of small businesses
that rose average selling prices was a near-record 70% in April, while the share expecting to raise future
prices ticked down four percentage points to 46%.

Small Business Price Changes Consumer Price Index

Net Percentage of Firms Percentage Point Contribution to Year-over-Year Change
80% 80% 9% 9%
Raising Prices: Apr @ 70.0% Core Services: Apr @ 2.9
70% Expecting to Raise Prices: Apr @ 46.0% 70% 8% Core Goods: Apr @ 2.0 8%
Food: Apr @ 1.3
60% 60% 7% Energy: Apr @ 2.1 7%
CPI (YoY): Apr @ 8.26%
50% 50% 6% 6%

40% 40% 5% 5%

30% 30% 4% 4%

20% 20% 3% 3%

10% 10% 2% 2%

0% 0% 1% 1%

-10% -10% 0% 0%

-20% -20% -1% -1%

-30% -30% -2% -2%

04 06 08 10 12 14 16 18 20 22 13 14 15 16 17 18 19 20 21 22

Source: NFIB and Wells Fargo Economics Source: U.S. Department of Labor and Wells Fargo Economics
The Consumer Price Index (CPI) rose 0.3% in April, bringing the year-over-year rate of ination down
for the rst time since August 2021. While the directional improvement is welcome, prices are still
up 8.3% over the year and inationary pressures are broad-based. Easing gasoline prices pulled down
April's headline gain, but reprieve on the energy front may be short-lived. The war in Ukraine does not
have a foreseeable resolution and U.S. oil producers are hesitant to ramp up production in a major way.
Food prices continued to climb higher as well, increasing 0.9% over the month (see Topic of the Week).
Beyond energy and food, resilient goods prices amid strengthening services ination indicate
consumer prices still have momentum. The core CPI rose a stronger-than-expected 0.6% in April. Core
goods prices advanced 0.2%, bolstered by a jump in new vehicle prices. Outside vehicles, goods prices
have slowed, but a sustainable cooldown may be further down the road due to COVID lockdowns in
China. Meanwhile, services ination is picking up steam. Core services prices rose 0.7% in April, with
notable increases in airfare (18.6%), lodging away from home (1.7%) and owners' equivalent rent
(0.5%).
Consumers are feeling the squeeze from higher prices. Sentiment tumbled six points to 59.1 in May,
the lowest since 2011. The share of consumers who feel their household nances have gotten worse
relative to a year ago increased nearly 10 percentage points to 47%. A conuence of factors beyond
higher prices, such as rising interest rates and the stock market sello, likely drove some pessimism.

2 | Economics
Weekly Economic & Financial Commentary Economics

While households have scope to dip further into savings to support spending, the slip in sentiment
underpins our expectation for consumption to pull back in the coming months. (Return to Summary)

Economics | 3
Weekly Economics

U.S. Outlook
Weekly Domestic Indicator Forecasts
Date Indicator Period Consensus Wells Fargo Prior
17-May Retail Sales (MoM) Apr 1.0% 0.6% 0.7%
17-May Industrial Production (MoM) Apr 0.4% 0.5% 0.9%
18-May Housing Starts (SAAR) Apr 1,770K 1,789K 1,793K
18-May Existing Home Sales (SAAR) Apr 5.66M 5.61M 5.77M
19-May Leading Index (MoM) Apr 0.0% 0.2% 0.3%
Forecast as of May 13, 2022

Source: Bloomberg Finance L.P. and Wells Fargo Economics

Retail Sales • Tuesday Retail Sales Compared to Pre-Pandemic Level

Persistent price pressures are raising concerns about if strength in Percent Change from February 2020 to March 2022
30% 30%
consumer spending can be sustained. The retail sales report next 26.9%
week will give us a rst look at how spending fared in April, and 25% 25%
contrary to previous months, the spending estimates will actually 20% 20%
likely be held back by ination. While overall ination has remained
hot, goods prices have started to cool. The overall consumer price 15% 15%

index rose more than expected, up 0.3%, in April, but goods prices 10% 10%
declined 0.3%, the rst decline in a year and a half. Since retail sales 7.6%
5% 5%
are reported in nominal dollars, the decline in prices during the
month will weigh on the overall gain in sales. We expect retail sales 0% 0%
rose 0.6% in April, but when adjusted for ination, we estimate real -5% -5%
retail sales expanded 0.9%.
-10% -10%
High-frequency data suggest consumer spending remains strong.
-15% -15%
Visits to retail locations ticked up during the month as did many
Real Sales
service-related mobility measures. Solid household nancials -20% -20%
Nominal Sales
suggest consumers can weather the ination storm in the near -25% -25%
term, but that only gets more challenging as price pressures persist Feb-20 Jun-20 Oct-20 Feb-21 Jun-21 Oct-21 Feb-22
and borrowing costs rise. We continue to expect consumers to Source: U.S. Department of Commerce, U.S. Department of Labor and
transition more and more wallet share to services spending this Wells Fargo Economics
year at the expense of goods spending, which will make the retail
sales report, which mostly covers goods consumption, a less reliable
gauge of overall spending.

Industrial Production • Tuesday Manufacturing Production vs. Core Capital Spending

Despite pain across the supply chain for over two years, the Index, 2017=100; Billions of Dollars
130 $84
industrial sector has remained quite resilient. Industrial production Manufacturing Production: Mar @ 103.4 (Left Axis)
rose 0.9% in March, despite facing new supply disruptions with Nondef. Cap. Goods Orders Ex-Air: Mar @ $80.8B (Right Axis)
120 $78
factory closures in China and the continued war in Ukraine. For
April, we expect activity continued at a decent clip of 0.5%, but
110 $72
manufacturers still faced challenges.
Our Pressure Gauge shows that while there has been some 100 $66

improvement (pick up in inventories, decline in prices) delivery

90 $60
times lengthened in April and levels across supply measures still
remain far above pre-pandemic norms. With growing concern
80 $54
over the slowing of the broader economy amid a tighter policy
environment, an overlooked positive for economic growth in our
70 $48
view is that capital spending remains intact. Demand has not
yet showed many signs of slowing as businesses still need to 60 $42
replenish depleted inventory levels and sky-high labor costs may
motivate businesses to seek labor-saving technologies. Overall 50 $36
manufacturing continues to signicantly lag growth in orders and 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22
backlogs have surged higher as a result. The need to meet order Source: Federal Reserve Board, U.S. Department of Commerce and Wells
backlog will keep production solid even if new demand falters. Fargo Economics

4 | Economics
Weekly Economic & Financial Commentary Economics

Housing Starts • Wednesday

Housing Starts
Demand for housing has ripped higher throughout the pandemic Seasonally Adjusted Annual Rate, In Millions
2.4 2.4
amid a change in preferences and an acceleration in already-
favorable demographic tailwinds. But rapid demand has been met
with an inadequate supply of homes available for sale, which has
2.0 2.0
given way to a rapid rise in home building. Housing starts were 16%
above the prior cycle peak through March. Aordability is a growing
concern with home prices up nearly 20% on a year-ago basis and
1.6 1.6
mortgage rates at a 13-year-high. We thus expect momentum in
home building began to top out in April and look for housing starts
to decline slightly to an 1.789-million-unit pace.
1.2 1.2
The National Association of Home Builders/Wells Fargo Housing
Market Index has been trending lower, falling two points in April
to 77. While home builder condence remains historically high, 0.8 0.8
the index has fallen two points in each of the past three months,
with buyer trac and expectations for future sales leading the Housing Starts: Mar @ 1.79M
index lower. Furthermore, the backlog of single-family homes that 0.4 0.4
have been authorized but have not yet been started appears to 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22
be leveling o—a precursor to a modest pullback in single-family Source: U.S. Department of Commerce and Wells Fargo Economics
starts over the course of the year. (Return to Summary)

Economics | 5
Weekly Economics

International Review
Ination Plague Continues in Emerging Markets
Price growth is a global problem; however, ination seems to be more of a problem across the
emerging markets. With still-high commodity prices and weak local currencies, most emerging market
countries are experiencing above-target ination. This week, data across the developing world indicate
ination has yet to peak in the emerging markets and is likely to climb further before trending lower
in the second half of this year. In the Czech Republic, April CPI ination jumped over 14% year-over-
year from closer to 12.5% a month earlier. A similar rise in ination was seen in Brazil, where the key
IPCA ination indicator climbed above 12% year-over-year. Elsewhere in Latin America, Mexico's April
ination rose 7.7% year-over-year despite persistent rate hikes. And in India, elevated energy and food
prices contributed to an above-consensus ination spike in April. Central banks in these countries have
responded with tighter monetary policy and have signaled and/or delivered further rate hikes this
week. To that point, Brazilian Central Bank (BCB) May meeting minutes released this week suggested
rate hikes are likely to continue in June, and possibly be extended into August. Reserve Bank of India
(RBI) policymakers also acknowledged that ination is a pressing issue and more aggressive action will
need to be taken.
As far as actions taken, the Central Bank of Mexico opted to raise its Overnight Rate another 50 bps
to 7.00% this week. As mentioned, inationary pressures in Mexico have been building and are unlikely
to dissipate in the very near future. Banxico board members certainly acknowledge the way ination is
trending and, in our view, turned more hawkish in their ocial monetary policy statement. The decision
to raise interest rates 50 bps was a split decision, with one member voting for a 75 bps hike, the rst
vote for 75 bps during this tightening cycle. We interpret a vote for 75 bps as relatively hawkish, and
the statement also included language signaling policymakers are ready to act more forcefully to bring
ination back to the central bank's target range. To be more precise, the last line of the statement
states: “Given the growing complexity in the environment for ination and its expectations, taking
more forceful measures to attain the ination target may be considered." In our view, Banxico board
members are leaving the door open for a more aggressive pace of tightening, possibly looking to raise
interest rates in 75 bps clips going forward. For now, we believe Mexico's Overnight Rate will reach
8.50% by the end of this year, but certainly view the May statement as containing upside risks to that
forecast. (Return to Summary)

Brazil IPCA Inflation and Interest Rates Mexico CPI Inflation vs. Policy Rate
Year-over-Year Percent Change
16% 16% 8% 8%

7% 7%

12% 12%
6% 6%

5% 5%
8% 8%
4% 4%

3% 3%
4% 4%

Headline Inflation: Apr @ 7.68%

2% 2%
Core Inflation: Apr @ 7.22%
CPI, Year-over-Year Percent Change: Apr @ 12.13%
Selic Rate: Apr @ 12.75% Policy Rate: May @ 7.00%
0% 0% 1% 1%
08 10 12 14 16 18 20 22 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22

Source: Bloomberg Finance L.P. and Wells Fargo Economics Source: Bloomberg Finance L.P., IMF and Wells Fargo Economics

6 | Economics
Weekly Economic & Financial Commentary Economics

International Outlook
Weekly International Indicator Forecasts
Date Indicator Period Consensus Wells Fargo Prior
18-May UK CPI (MoM) Apr 2.6% 2.7% 1.1%
18-May UK CPI (YoY) Apr 9.0% 9.2% 7.0%
19-May Japan National CPI (YoY) Apr 2.5% 2.6% 1.2%
19-May SARB Policy Rate Decision 19-May 4.75% 4.75% 4.25%
Forecast as of May 13, 2022

Source: Bloomberg Finance L.P. and Wells Fargo Economics

U.K. CPI • Wednesday

U.K. Consumer Prices
The U.K. has not been exempt from the global ination shock; in Year-over-Year Percent Change
8% 8%
fact, one could argue the U.K. has experienced some of the most
rampant ination of the major developed economies. In March,
U.K. ination reached 7% year-over-year, one of the quickest paces
6% 6%
of price growth on record. According to consensus forecasts,
inationary prices are yet to subside. In April, consensus economists
expect ination to spike above 9% year-over-year as energy and
4% 4%
food prices remain elevated amid the ongoing conict in Ukraine.
In our view, 2022 U.K. ination is on track to be 6.9% on an annual
average basis. While the Bank of England has started tightening 2% 2%
policy and recently turned more aggressive, we expect BoE
policymakers to continue lifting interest rates. However, BoE
policymakers are in a dicult position. Growth prospects are 0% 0%
dim and economic activity is slowing quickly, so much so that
policymakers are warning of a potential recession in the near future. Headline CPI: Mar @ 7.0%
Core CPI: Mar @ 5.7%
But, in the battle between supporting the economy and containing -2% -2%
ination, we ultimately believe elevated ination will matter more 00 04 08 12 16 20
and BoE rate hikes are likely to continue. Source: Bloomberg Finance L.P. and Wells Fargo Economics

Japan CPI • Thursday

Japan CPI Inflation
Japan's economy is struggling to gather any kind of momentum. In Year-over-Year Percent Change
4% 4%
fairness, this has been the case in Japan for close to a decade at this CPI: Mar @ 1.2%
point. Growth and ination dynamics are relatively uninspiring and, CPI Ex. Fresh Food: Mar @ 0.8%
in our view, unlikely to improve any time soon. Next week, ination 3% 3%
data are released for April and consensus forecasts expect headline
CPI to reach 2.5% year-over-year. While 2.5% ination is above
2% 2%
the Bank of Japan's target for ination and would appear to be a
strong print, the majority of April price growth will be a result of
base eects. After April, we would expect year-over-year ination 1% 1%
to fall well below the BoJ's target.
Ination data may not be a particular focus for markets next week; 0% 0%
however, the Japanese yen is likely to remain volatile for the time
being. Bank of Japan policymakers have pushed back on tightening
-1% -1%
monetary policy, in fact opting for a commitment to easier policy.
With the Fed raising interest rates quickly, diverging paths for
monetary have weighed on the yen. Despite next week's ination -2% -2%
data, we believe the Bank of Japan is not in a position to tighten 10 11 12 13 14 15 16 17 18 19 20 21 22
monetary policy anytime soon. In that context, the yen is likely to Source: Bloomberg Finance L.P. and Wells Fargo Economics
continue weakening going forward.

Economics | 7
Weekly Economics

South African Reserve Bank • Friday

South Africa Inflation and Interest Rate
Tighter monetary policy continues to be the trend in the emerging
7.5% 7.5%
markets and is likely to continue next week when the South African
Reserve Bank (SARB) meets. SARB has been one of the central
banks that has taken a more measured approached to monetary 6.5% 6.5%
policy. Relative to peer regional central banks, SARB policymakers
are on the less hawkish end of the spectrum. Next week, we expect
5.5% 5.5%
the gradual rate hikes to continue and look for a 50 bps rate hike.
Local ination has not spiked signicantly, which we can chalk up to
sluggish activity amid persistent COVID outbreaks. 4.5% 4.5%

A less hawkish central bank and sluggish economy, along with

external forces, have placed renewed pressure on the South African 3.5% 3.5%
rand. A more hawkish Fed that has not necessarily been matched
by the SARB has led to currency depreciation, while a risk-o tone
2.5% 2.5%
across equity markets has also contributed to downward pressure
on the currency. We expect rand depreciation to continue, although Policy Interest Rate: Mar @ 4.25%
CPI, Year-over-Year: Mar @ 5.90%
a persistent current account surplus should provide a modest 1.5% 1.5%
buer to support the currency slightly more than peer high beta 15 16 17 18 19 20 21 22
currencies. (Return to Summary) Source: Bloomberg Finance L.P. and Wells Fargo Economics

8 | Economics
Weekly Economic & Financial Commentary Economics

Interest Rate Watch

Will Tighter Financial Conditions Lead to a More Dovish Fed?
In the post-FOMC meeting press conference last week, Chair Powell indicated that
nancial conditions would need to tighten to help the Fed restore price stability. As Powell
put it, broader nancial conditions are the channel through which monetary policy aects
the real economy. The Bloomberg Financial Conditions Index began to tighten early this
year when FOMC members signaled that the committee would become more aggressive in
battling ination. This week, conditions tightened further to the least-supportive posture
in two years. While Treasury yields declined across most of the curve, credit spreads
widened out and equity markets continued to slide.
With the pullback this week, nancial conditions rival the levels
seen in the growth scares of early 2016 and early 2019. Following Bloomberg Financial Conditions Index
Higher Values = More Accomodative Conditions
those periods, the FOMC pressed paused on its edgling tightening 2.0 2.0
cycle for a full year, or called it quits altogether (the nal hike of the
past cycle proved to be in December 2018). The more dovish path 1.0 1.0
in each instance was an about-face from preceding guidance. For
0.0 0.0
example, at the December 2018 meeting, the median projection
of the feds fund rate pointed to 50 bps more tightening in 2019. -1.0 -1.0
Instead, the Fed ended up cutting rates by July.
-2.0 -2.0
While the Fed has backed o its tightening plans in similar periods
of rapidly tightening nancial conditions, ination today oers -3.0 -3.0
no such luxury. The pickup in the monthly rate of core ination in
this week's April CPI report underscored that reining in ination -4.0 -4.0

will not be quick or easy. Moreover, with the Fed having been slow -5.0 -5.0
to recognize the severity and persistence of the current bout of
ination, we suspect it will take more than just tighter nancial -6.0 -6.0
conditions to scare them o the hawkish path for policy laid out Financial Conditions Index: May-13 @ -0.98
over at least the next few months. Instead, the Fed will likely want -7.0 -7.0
14 15 16 17 18 19 20 21 22
to see ination begin to ease in a denitive matter, which we do
not expect to see until at least the fourth quarter. As discussed Source: Bloomberg Finance L.P. and Wells Fargo Economics
in our May Monthly Economic Outlook, we therefore look for the
FOMC to raise the fed funds rate by 50 bps in each of its next three
meetings, with further 25 bps hikes to follow. (Return to Summary)

Economics | 9
Weekly Economics

Credit Market Insights Total Level of Credit Outstanding

Consumer Credit Overdelivers for a Second Month Trillions of USD
$3.5 $1.2
Consumer credit grew by a record $52.4B in March as it more than Nonrevolving: Mar @ $3.4T (Left Axis)
doubled consensus estimates for the second month running. The Revolving: Mar @ $1.1T (Right Axis)

surge was relatively well-balanced, with revolving credit—mostly

linked to credit card spending—rising $31.4B, while nonrevolving $3.0 $1.1
credit climbed a slightly lower $21.4B. The uptick in revolving credit
marked a more than 50-year high and essentially puts the total
level of revolving consumer credit on par with where it stood pre-
pandemic (chart). $2.5 $1.0

The road to recovery for revolving credit has been a long one
compared to nonrevolving credit, which was back above its
February 2020 levels by May 2020 and has been growing ever $2.0 $0.9
since. Nonrevolving credit includes less variable payments such as
student, auto and home mortgage payments that have blossomed
due to the high demand for personal autos and homes during
the pandemic-era. But with resilient consumer spending leading $1.5 $0.8
10 12 14 16 18 20 22
revolving credit to grow at a 21.4% annual rate in Q1, even a step
back from that pace would still be impressive. Source: Federal Reserve Board and Wells Fargo Economics

Consumers' unwavering spending and recent credit uptake has had

some whipping out their magnifying glasses to look for cracks in Consumer Credit
As a Percent of Disposable Personal Income
the foundation of household nances. After all, with real disposable 30% 30%
income taking a hit from soaring ination, the simple question is:
Why aren't people spending less? When consumer credit is taken
as a share of nominal disposable income, there appears to be little
25% 25%
reason to worry, as levels remain well below where they stood
before entering the pandemic. But like most economic indicators
today, we must account for the run-up in ination. In real terms,
consumer credit as a share of real disposable income has already 20% 20%
surpassed where it was before COVID (chart).
That said, having a higher share is not inherently a bad thing. What
matters is whether consumers can come up with the nances to 15% 15%
make sure credit extended does not turn into debt, and particularly
delinquent debt. And according to other data out from the New
Nominal Disposable Income: Mar @ 24.5%
York Federal Reserve this week, they have been able to make Real Disposable Income: Mar @ 29.7%
payments on time up to this point. The quarterly Household Debt 10% 10%
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22
& Credit report said, "Aggregate delinquency rates were unchanged
in the rst quarter of 2022 and remain very low," while noting that Source: Federal Reserve Board, U.S. Department of Commerce and Wells
2.7% of outstanding debt was in some stage of delinquency in Fargo Economics
March, almost two percentage points lower than Q4-2019. Healthy
overall balance sheets of households and bolstered rainy day funds
may be supporting nances.
With interest rates set to rise meaningfully in the months ahead,
the consequences of going o budget will increase as well. Up
to this point, consumers' rise in credit has not appeared to have
resulted in a subsequent rise in delinquencies, calming concerns
over the rise in the sheer level of borrowing. But should that
relationship change, some concerns may be validated. High ination
and the dwindling away of excess savings may weigh on and
deteriorate some households' balance sheets in the near term
despite beginning the year in a solid nancial position. (Return to
Summary)

10 | Economics
Weekly Economic & Financial Commentary Economics

Topic of the Week

Fertilizer Crunch Threatens to Drive Food Prices Higher
Rising food prices continued to sting consumers in April as grocery prices and prices for food away
from home rose 1.0% and 0.6%, respectively. Firms are also struggling with rising costs as food costs
jumped 1.5%, the fourth-straight month of increases. Global commodity markets have been shaken
by the ongoing war in Ukraine. As we detailed in a March report, markets for wheat, corn and chemical
fertilizers have especially high exposure to the conict as Russia, Ukraine and Belarus make up a
signicant share of global exports.
Although we forecast year-over-year food price growth to peak next month at 9.6%, as weather
issues in key growing regions are set to sustain ination down the road, and we expect ination to
remain elevated into next year. Weather has not been kind to global wheat markets as major exporters
have grappled with drought, oods and heatwaves. On Thursday, the U.S. Department of Agriculture
(USDA) forecast 2022 global wheat output will fall for the rst time since the 2018-19 growing
season and reach a six-year low. Even with severe droughts scorching western states in particular, the
USDA still forecasts wheat outputs to rise 5% in the U.S., a key global exporter. Overall, the USDA sees
food prices growing at least a further 5%-6% in 2022.

Crop Prices North American Fertilizer Price Index

Dollars per Bushel Dollars per Ton
$2,000 $2,000 $1,400 $1,400
Wheat: May-6 @ $1,097.00 Fertilizer: May-6 @ 1023.04
$1,800 Soybeans: May-6 @ $1,655.50 $1,800
Corn: May-06 @ $792.25 $1,200 $1,200
$1,600 $1,600

$1,400 $1,400 $1,000 $1,000

$1,200 $1,200
$800 $800
$1,000 $1,000
$600 $600
$800 $800

$600 $600 $400 $400

$400 $400
$200 $200
$200 $200

$0 $0 $0 $0
15 16 17 18 19 20 21 22 15 16 17 18 19 20 21 22

Source: U.S. Department of Commerce and Wells Fargo Economics Source: Bloomberg Finance L.P. and Wells Fargo Economics
A global supply shortage of chemical fertilizers may put further pressure on already-strained food
commodity markets. Since the start of the pandemic, prices of synthetic fertilizers have nearly tripled
as suppliers have struggled to maintain supply chains. Rising prices for natural gas, a key input in
nitrogen-based fertilizers, has been a primary driver of ination over the past two years. The loss of
exports from Russia and Belarus, two countries which together make up 40% of the world's potash
exports, has worsened these conditions. The tightening of global supply has caused China, the world's
largest phosphate producer, to restrict its own exports in order to maintain its own domestic stockpile.
The halting of exports from major fertilizer suppliers has the potential to disrupt harvests as producers
will be forced to use less fertilizer. Output, particularly in countries that must import fertilizer,
may suer as farmers are forced to limit their fertilizer usage. In Brazil, the world's largest soybean
producer, a 20% drop in fertilizer usage would result in a 14% drop in yields, according to Brazilian
industry consultancy MB Agro. Yield outlooks, particularly for staple crops, are pessimistic on a global
scale with the International Rice Research Institute calling for a 10% drop in rice yields over the next
year. Losses of this magnitude threaten to exacerbate shortages in food insecure regions as well as
drive further price growth in global markets.
Farmers are turning to alternative means to combat the shortage. Those who do have access to
fertilizer are being more strategic and precise in their usage as well as pivoting away from "high-
fertilizer" crops, including corn, toward less demanding crops such as beans. Animal manures have
made a comeback as farmers seek to ll out the shortfalls in fertilizer supply. As of this writing, manure
is about 25% cheaper than chemical fertilizers, causing demand for organic waste to skyrocket in major

Economics | 11
Weekly Economics

agricultural states. Such a shift is not without precedent as farmers have pivoted toward livestock
waste to grow their crops as recently as 2008 and 2012 when high fossil fuel costs drove up fertilizer
prices. As fertilizer prices continue to climb, farmers will need to act nimbly in order to preserve as
much of next year's yield as possible. (Return to Summary)

Market Data • Mid-Day Friday

U.S. Interest Rates Foreign Interest Rates
Friday 1 Week 1 Year Friday 1 Week 1 Year
5/13/2022 Ago Ago 5/13/2022 Ago Ago
SOFR 0.79 0.79 0.01 3-Month Euro LIBOR -0.58 -0.59 -0.57
3-Month LIBOR 1.41 1.37 0.15 3-Month Sterling LIBOR 1.24 1.26 0.08
3-Month T-Bill 0.96 0.81 0.01 3-Month Canada Banker's Acceptance 1.95 1.88 0.43
1-Year Treasury 1.92 2.03 0.01 3-Month Yen LIBOR -0.02 -0.02 -0.09
2-Year Treasury 2.58 2.73 0.15 2-Year German 0.10 0.32 -0.66
5-Year Treasury 2.86 3.08 0.83 2-Year U.K. 1.24 1.51 0.10
10-Year Treasury 2.89 3.13 1.66 2-Year Canadian 2.65 2.72 0.33
30-Year Treasury 3.05 3.23 2.40 2-Year Japanese -0.05 -0.04 -0.12
Bond Buyer Index 3.37 3.27 2.28 10-Year German 0.94 1.13 -0.12
10-Year U.K. 1.73 2.00 0.90
Foreign Exchange Rates 10-Year Canadian 2.93 3.13 1.57
Friday 1 Week 1 Year 10-Year Japanese 0.25 0.24 0.09
5/13/2022 Ago Ago
Euro ($/€) 1.041 1.055 1.208 Commodity Prices
British Pound ($/₤) 1.223 1.235 1.405 Friday 1 Week 1 Year
British Pound (₤/€) 0.851 0.855 0.860 5/13/2022 Ago Ago
Japanese Yen (¥/$) 129.240 130.560 109.470 WTI Crude ($/Barrel) 110.01 109.77 63.82
Canadian Dollar (C$/$) 1.294 1.288 1.216 Brent Crude ($/Barrel) 111.00 112.39 67.05
Swiss Franc (CHF/$) 1.001 0.989 0.906 Gold ($/Ounce) 1810.03 1883.81 1826.72
Australian Dollar (US$/A$) 0.691 0.708 0.773 Hot-Rolled Steel ($/S.Ton) 1195.00 1240.00 1580.00
Mexican Peso (MXN/$) 20.143 20.127 19.937 Copper (¢/Pound) 412.40 426.40 469.70
Chinese Yuan (CNY/$) 6.789 6.667 6.452 Soybeans ($/Bushel) 16.44 16.40 16.80
Indian Rupee (INR/$) 77.445 76.930 73.426 Natural Gas ($/MMBTU) 7.55 8.04 2.97
Brazilian Real (BRL/$) 5.086 5.079 5.310 Nickel ($/Metric Ton) 27,725 30,014 17,765
U.S. Dollar Index 104.473 103.660 90.752 CRB Spot Inds. 652.61 679.06 588.20
Source: Bloomberg Finance L.P. and Wells Fargo Economics

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