US retail sales rose 0.9% mom to USD 677.7B in April, below expectation of 1.1% mom. Ex-auto sales rose 0.6% mom, above expectation of 0.3% mom. Ex-gasoline sales rose 1.3% mom. Ex-auto, ex-gasoline sales rose 1.0% mom. Retail trade rose 0.7% mom.
Total sales for the three-period, February through April, were up 10.8% from the same period a year ago.
ECB Governing Council member Klaas Knot told Dutch TV program College Tour, “the first interest rate hike is now being priced in for the monetary policy meeting of 21 July.” A 25bps hike ” seems realistic to me.”
He also added that if inflation is “”broadening further or accumulating… a bigger increase must not be excluded either.”
“In that case a logical next step would amount (to) half a percentage point,” he said.
In April, UK payrolled employees rose 0.4% mom, or 131k, to 29.5m. Claimant count dropped -56.9k, versus expectation of -42.3k.
Unemployment rate dropped from 3.8% to 3.7%, versus expectation of being unchanged at 3.8%. Employment rate rose to 75.7%. Average earnings including bonus jumped 7% 3moy, versus expectation of 5.4%. Average earnings excluding bonus rose 4.2% 3moy, matched expectations.
Sterling is a major focus this week with a batch of economic data featured, starting from jobs today, to inflation and retail sales. Risks to the inflation outlook are on both sides as BoE Governor Andrew Bailey explained. Thus, the path of monetary policy, as well as the Pound’s movements, are also highly uncertain.
GBP/CAD’s decline slowed after falling to 1.5774 earlier in the month, hitting 161.8% projection of 1.7623 to 1.6636 from 1.7375 at 1.5778. More importantly, it’s now close to long term support at 1.5746 (2016 low). Further decline will remain in favor as long as 1.6197 resistance holds. Break of 1.5774 could easily push GBP/CAD through 1.5746 to resume the down trend from 2.0971 (2015 high). Such development will also raise the chance of resuming larger down trend from 2.5471 (2002 high) through 1.4831 (2010 low) in the medium term. It could be rather significant.
In the minutes of May 3 meeting, RBA revealed that three options on interest rate hikes were considered, including 15bps, 25bps and 40bps.
Raising the cash rate by 15bps was not preferred “given that policy was very stimulatory and that it was highly probable that further rate rises would be required.” And argument for 40bps “could be made given the upside risks to inflation and the current very low level of interest rates”.
But the preferred option of was 25bps, as “a move of this size would help signal that the Board was now returning to normal operating procedures after the extraordinary period of the pandemic”
At the report to the Treasury Committee, BoE Governor Andrew Bailey reiterated that most MPC members judge that “some degree of further tightening in monetary policy might still be appropriate in the coming months”.
But he also acknowledged there are “risks on both sides of that judgement”, and a “range of views among these members on the balance of risks”. “This reflects the narrow path we are navigating, given the magnitude of the risks on both sides of our inflation projections,” he added.
Reflecting risks on one side of that “narrow path”, three MPC members voted for 50bps hike in May, instead of 25bps.
Reflecting risks on the other side, there were also a “range of views about the need for, and extent of, any further tightening in policy in the coming months”. Some members judged that “the risks around activity and inflation over the policy horizon were more evenly balanced and that such guidance was not appropriate at this juncture.
In the Spring 2022 Economic Forecast, EU revised 2022 GDP growth forecast for Eurozone sharply lower, and inflation forecast sharply higher. Here are the new forecasts for Eurozone:
Valdis Dombrovskis, Executive Vice-President said: “There is no doubt that the EU economy is going through a challenging period due to Russia’s war against Ukraine… The overwhelming negative factor is the surge in energy prices, driving inflation to record highs… While growth will continue this year and next, it will be much more subdued than previously expected. Uncertainty and risks to the outlook will remain high as long as Russia’s aggression continues.”
Eurozone exports of goods rose 14.0% yoy to EUR 250.1B in March. Imports rose 35.4% yoy to EUR 266.5B. Trade deficit came in at EUR 16.4B. Intra-Eurozone trade rose 21.2% yoy to EUR 236.8B.
In seasonally adjusted terms, Eurozone exports rose 0.9% mom to EUR 225.3B. Imports rose 3.5% mom to EUR 242.8B. Trade deficit widened from EUR -11.3B to EUR -17.6B, versus expectation of EUR 2.3B surplus. Intra-Eurozone trade rose from February’s EUR 207.2B to EUR 210.3B.
ECB Governing Council member Francois Villeroy de Galhau said in a Bank of France conference, “let me stress this: we will carefully monitor developments in the effective exchange rate, as a significant driver of imported inflation”. He added, “a euro that is too weak would go against our price stability objective.”
Villeroy said a “decisive” governing council meeting would be expected in June, followed by an “active summer” on policy. “The pace of the further steps will take into account actual activity and inflation data with some optionality and gradualism,” he said. Policymakers should “at least move towards the neutral rate”, he added.
BoJ Governor Haruhiko Kuroda told the parliament today that “excess (exchange rate) volatility in a short term as seen recently is undesirable.” He pledged to keep a close watch of the impact of the currency moves on the economy and prices. He also added that exchange rate moves should be stable and reflecting economic fundamentals.
On monetary policy, “it’s important to back the economic activity with powerful monetary easing,” Kuroda reiterated. “It will take time for sustainable, stable inflation to take hold in Japan.”
China retail sales dropped -11.1% yoy in April, worse than expectation of -6.0% yoy. Industrial production dropped -2.9% yoy, versus expectation of 0.7% yoy. Fixed asset investment rose 6.8% ytd yoy, also below expectation of 7.0%.
The “increasingly grim and complex international environment and greater shock of [the] Covid-19 pandemic at home obviously exceeded expectation, new downward pressure on the economy continued to grow.” The NBS said in a statement. But it added, “with progress in Covid controls and policies to stabilize the economy taking effect, the economy is likely to recover gradually.”
Yuan’s decline has somewhat slowed a little last week. USD/CNH is now close to 61.8% retracement of 7.1961 to 6.3057 at 6.8560. Considering bearish divergence condition in 4 hour MACD, USD/CNH could be about to top for the near term. Break of 6.730 support will confirm the turn into a corrective phase in the uptrend.
New Zealand BNZ Performance of Services Index ticked down from 51.5 to 51.4 in April. Looking at some details, activity/sales dropped from 53.5 to 52.7. Employment rose from 49.2 to 51.2. New orders/business dropped from 59.0 to 53.6. Stocks/inventories rose from 52.8 to 54.8. Supplier deliveries dropped from 40.5 to 40.1.
BNZ Senior Economist Doug Steel said that “for large parts of the service sector that have been through the ringer over recent times, we suspect any result above breakeven would be welcomed. But, on the other hand, April’s result also looks somewhat disappointing in the context of easing COVID restrictions (from Red to Orange) halfway through the month.”
Gold’s decline resumes after brief support from 100% projection of 2070.06 to 1889.79 from 1998.23 at 1817.86. It’s now taking on 1800 handle and there is no clear sign of bottoming yet. Further fall is expected as long as 1858.57 resistance holds. Next target is 161.8% projection at 1706.55.
Also, the whole fall from 2070.06 is seen as the third leg of the consolidation pattern from 2074.84 (2020 high). It would eventually target 1682.60 support to complete the pattern.
ECB Governing Council member Mario Centeno said normalization of monetary policy was “necessary and desirable”. But such normalization must be done gradually. He urged not to “over-react” to inflation rising across Europe or risk penalizing economic growth.
“Although inflation remains high in 2022, there are no structural reasons why it should not converge towards the medium-term objective as imbalances are gradually resolved and uncertainty dissipated,” Centeno said. “There are currently no structuring signs of de-anchoring inflation,” even though the balance of risks around inflation is skewed upward” after Russia’s invasion of Ukraine.
Second-order effects of wage pressures was “an additional risk which needs close and continued monitoring”, he added.
BoJ Governor Haruhiko Kuroda told the parliament, “it’s important for currency rates to move stably reflecting economic and financial fundamentals… The recent sharp, short-term fluctuations in the yen are undesirable, as it heightens uncertainty and makes it harder for companies to set business plans.”
“The economy is in the midst of a recovery and now faces headwinds from rising commodity prices,” Kuroda said. “It’s therefore important to underpin economic activity with powerful monetary easing.”
Separately, Kuroda also said in a speech, “the coronavirus pandemic is a major risk that could further hurt Japan’s economy.” As such, “it’s appropriate to maintain … the dovish bias of our guidance for the time being.”
“For inflation to heighten as a trend, Japan must see a shift from inflation caused by energy prices, to one that is driven by increasing corporate profits and wage growth,” he said.
Eurozone industrial production dropped -1.8% mom in March, slightly worse than expectation of -1.7% mom. Production of capital goods fell by -2.7%, non-durable consumer goods by -2.3%, intermediate goods by -2.0% and energy by -1.7%, while production of durable consumer goods rose by 0.8%.
EU industrial production dropped -1.2% mom. Among Member States for which data are available, the largest monthly decreases were registered in Slovakia (-5.3%), Germany (-5.0%) and Luxembourg (-3.9%). The highest increases were observed in Lithuania (+11.3%), Estonia (+5.1%), Bulgaria and Greece (both +5.0%).
Fed Chair Jerome Powell said in an interview that “what we were actively considering, and this is just a factual recitation of what happened at the meeting, was a 50-basis point increase… if the economy performs about as expected, that it would be appropriate for there to be additional 50-basis point increases at the next two meetings”.
Powell also said that a “soft landing”, getting back to 2% inflation while keeping the labor market strong, is “quite challenging to accomplish that right now”. Unemployment is “very, very low”, the labor market’s “extremely tight”, and inflation is “very high”.
“What we can control is demand, we can’t really affect supply with our policies. And supply is a big part of the story, here. But more than that, there are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so. So the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control,” he explained.
San Francisco Federal Reserve President Mary Daly said yesterday she’d like to Would like to see continued tightening of financial conditions to help bring down inflation. Yet, 75bps rate hike is “not a primary consideration”.
“Going up in 50-basis-point increments to me makes quite a bit of sense and there’s no reason right now that I see in the economy to pause on doing that in the next couple of meetings,” she added.
BoC Deputy Governor Toni Gravelle said yesterday, “our policy rate, at 1%, is too stimulative, especially when inflation is running significantly above the top of our control range. We need our policy rate to be at more neutral levels.”
“Simply put, with demand running ahead of the economy’s capacity, we need higher interest rates to cool domestic inflation. And as we’ve said before, the economy can handle it,” he said.
Still he noted that outlook remained unusually uncertain and therefore it’s not easy to hike by 75bps in one go.
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Fed Bullard: We have a good plan for now
St. Louis Fed president James Bullard reiterated that “we have a good plan for now”, in raising interest rate by 50bps at the next couple of meetings. He hoped that could bring inflation down with “the least amount of disruption we can get.”
Bullard also said growth in range of 2.5-3.0% is ” “fast compared to the long run potential rate of growth” of the economy, which may be just below 2%. Also, “labor markets are super strong…Household consumption is expected to hold through this year.”.
People “want to put the pandemic behind them and they have lots of plans about spending,” Bullard added.