In a CNBC interview, ECB President Christine Lagarde said policy makers try to asses the situation “based on figures, on data, on facts”, rather than on basis of “hearsay, assumption here, price increases there.”
She noted, things have “picked up faster” for growth, inflation and employment, and it’s a “package of good news”. For prices, ECB thought “there will be a return to much more stability in the year to come because many of the causes of higher prices are temporary.”.
Japan’s PMI Manufacturing dropped from 52.7 to 51.2 in September, below expectation of 52.5. PMI Services rose from 42.9 to 47.4. PMI Composite also rose from 45.5 to 47.7.
Usamah Bhatti, economist at IHS Markit said: “The pace of decline was softer than that seen in August, as the larger services sector saw a considerable easing in the rate of contraction… Input prices across the private sector rose at the fastest pace for 13 years, with businesses attributing the rise to higher raw material, freight and staff costs amid supply shortages.”
Also from Japan, CPI core (all items ex fresh food) rose from -0.2% to 0.0% yoy in August, matched expectations. Headline CPI (all items) dropped from -0.3% yoy to -0.4% yoy. CPI core-core (all items ex fresh food and energy) improved from -0.6% yoy to -0.5% yoy.
UK Gfk consumer confidence dropped from -8 to -13 in September, with all measures down. In particular, general economic situation over the next 12 months dropped sharply from -6 to -16.
Joe Staton, Client Strategy Director GfK, comments: “On the back of concerns about rising prices for fuel and food, the growth in headline inflation, tax hikes, empty shelves and the end of the furlough scheme, September sees consumers slamming on the brakes as those already in economic hardship anticipate a potential cost of living crisis.
New Zealand goods exports dropped -0.9% yoy to NZD 4.4B in August. Goods imports rose 38.0% yoy to NZD 6.5B. Trade deficit came in at record NZD -2.1B, versus expectation of NZD 110m surplus.
Exports to top trading partners were mixed, up 12% to China and 5.9% to Japan, but down -9.1% to Australia, -11% to US and -12% to EU. Imports from all top trading partners were up, from China up 40%, from EU up 42%. from Australia up 19%, from USA up 15%, and from Japan up 83%.
“This is a larger deficit than normal because of higher values for imports, particularly vehicles, continuing the trend observed over the last few months. August is also the month when we typically see lower values for dairy exports,” international trade manager Alasdair Allen said.
Canada retail sales dropped -0.6% to CAD 55.8B in July, better than expectation of -1.2% mom fall. That’s the third decrease in four months, driven by lower sales at food and beverage stores (-3.4%) and building material and garden equipment and supplies dealers (-7.3%). Sales decreased in 5 of 11 subsectors. Based on advance estimates, sales rose 2.1% mom in August.
US initial jobless claims rose 16k to 351k in the week ending September 18, above expectation of 317k. Four-week moving average of initial claims dropped -750 to 335.75k.
Continuing claims rose 131k to 2845k. Four-week moving average of continuing claims dropped -16k to 2804k, lowest since March 21, 2020.
BoE voted unanimously to keep Bank Rate unchanged at 0.10%. However, it voted 7-2 to keep the government bond purchase target at GBP 895B. Dave Ramsden and Michael Saunders voted to lower purchase target to GBP 860B.
In the statement, it said that since August meeting, “the pace of recovery of global activity has showed signs of slowing”, “global inflationary pressures have remained strong”, and “there are some signs that cost pressures may prove more persistent”.
BoE reiterated that “some modest tightening of monetary policy over the forecast period was likely to be necessary”. Developments since August “appear to have strengthened that case”.
“The Committee will be monitoring closely the incoming evidence regarding developments in the labour market, and particularly unemployment, wider measures of slack and underlying pay pressures; the extent to which businesses pass on wage and other cost increases, as well as medium-term inflation expectations.”
UK PMI Manufacturing dropped from 60.3 to 56.3 in September, below expectation of 59.0, a 7-month low. PMI Services dropped from 55.0 to 54.6, below expectation of 55.0, a 7-month low. PMI Composite dropped from 54.8 to 54.1, also a 7-month low.
Chris Williamson, Chief Business Economist at IHS Markit, said:
“The September PMI data will add to worries that the UK economy is heading towards a bout of ‘stagflation’, with growth continuing to trend lower while prices surge ever higher.
“While there are clear signs that demand is cooling since peaking in the second quarter, the survey also points to business activity being increasingly constrained by shortages of materials and labour, most notably in the manufacturing sector but also in some services firms. …
“Shortages are meanwhile driving up prices at unprecedented rates as firms pass on higher supplier charges and increases in staff pay…
“Business expectations for the year ahead are meanwhile down to their lowest since January, with concerns over both supply and demand amid the ongoing pandemic casting a shadow over prospects for the economy as we move into the autumn.”
Eurozone PMI Manufacturing dropped from 61.5 to 58.7 in September, below expectation of 60.4, a 7-month low. PMI Services dropped from 59.0 to 56.3, below expectation of 58.4, a 4-month low. PMI Composite dropped from 59.0 to 56.1, a 5-month low.
Chris Williamson, Chief Business Economist at IHS Markit said:
“September’s flash PMI highlights an unwelcome combination of sharply slower economic growth and steeply rising prices.
“On one hand, some cooling of growth from the two-decade highs seen earlier in the summer was to be expected. On the other hand, firms have become increasingly frustrated by supply delays, shortages and ever-higher prices for inputs. Businesses, most notably in manufacturing but also now in the service sector, are being constrained as a result, often losing sales and customers.
“Concerns over high prices, stressed supply chains and the resilience of demand in the ongoing pandemic environment has consequently eroded business confidence, with expectations for the year ahead now down to the lowest since January.
“For now, the overall rate of expansion remains solid, despite slowing, but growth looks likely to weaken further in coming months if the price and supply headwinds show no signs of abating, especially if accompanied by any rise in virus cases as we head into the autumn.”
Germany PMI Manufacturing dropped from 62.6 to 58.5 in September, below expectation of 61.3, an 8-month low. PMI Services dropped from 60.8 to 56.0, below expectation of 60.3, a 4-month low. PMI Composite dropped from 60.0 to 55.3, a 7-month low.
Phil Smith, Associate Director at IHS Markit said:
France PMI Manufacturing dropped from 57.5 to 55.2 in September, below expectation of 57.3, lowest in 8 months. PMI Services dropped slightly from 56.3 to 56.0, below expectation of 56.0, lowest in 5 months. PMI Composite dropped from 56.9 to 55.1, lowest in 5 months.
Joe Hayes, Senior Economist at IHS Markit said:
SNB kept sight deposit rate unchanged at -0.75% today. Also, it remained “remains willing to intervene in the foreign exchange market as necessary, in order to counter upward pressure on the Swiss franc.” It also reiterated that “the Swiss franc remains highly valued”.
The new conditional inflation forecast for 2021 is raised to 0.5% in 2021 (up from June’s 0.4%). For 2022, it’s raised to 0.7% (from 0.6%). For 2023, it’s kept unchanged at 0.6%. SNB said it’s “primarily due to somewhat higher prices for oil products as well as for goods affected by supply bottlenecks.”
SNB also said, in the baseline scenario, it anticipated a “continuation of the economic recovery”, assuming pandemic containment measures will not need to be tightened significantly again. GDP is expected to grow around 3% in 2021, downwardly revised, attributable to “less dynamically than expected” development of consumer-related industries. GDP is expected to return to pre-crisis level in H2. But overall production capacity will “remain underutilised for some time yet”.
Australia PMI Manufacturing rose from 52.0 to 57.3 in September, hitting a 3-month high. PMI Services also rose from 42.9 to 44.9, staying in contraction but hit a 3-month high. PMI Composite rose from 43.3 to 46.0.
Jingyi Pan, Economics Associate Director at IHS Markit, said: “The extension of COVID-19 restrictions into September continued to dampen business conditions in the Australian private sector, although the slight easing of restrictions was picked up in the latest IHS Markit Flash Australia Composite PMI, seeing the overall Composite Output Index contracting at a slower rate in September. This may also be suggesting that we are looking at early signs of a turning point.
“The employment index meanwhile pointed to higher workforce levels, which was a positive sign following the decline recorded in August, driven by the severe COVID-19 disruptions. That said, price pressures intensified once again for Australian private sector firms while evidence of worsening supply constraints gathered, all of which remains a focal point for the Australian economy.”
Overall response to Fed’s announcement overnight was positive, with major stock indexes closed higher. In short, Fed indicated that tapering will come “soon”. Members have also pushed forward the timing of the first rate hike. The median dot plots showed that 9 out of 18 members projected it to happen in 2022.
Suggested readings on Fed:
S&P 500 gained 0.95% to close at 4395.64. But it struggled to break through 55 day EMA (now at 4412.38). Near term risk will remain on the downside unless SPX could sustain above the EMA in the next few days. Indeed, a break of this week’s low at 4305.91 will further affirm that it’s already in correction to whole up trend from 3233.94. Deeper fall would be seen to 38.2% retracement at 4044.70 before SPX finds a bottom.
In Fed’s new median economic projections, comparing to June’s projection, the outlook in 2021 looks weaker with lower GDP growth projection, and higher unemployment rate and core PCE inflation. But a stronger bounce back is projected in 2022.
Meanwhile, the median projection now shows 1 rate hike in 2022. In the dot plot, 9 members penciled in one hike or more in 2022, versus 8 members expecting no change.
GDP growth:
Unemployment rate:
Core PCE inflation:
Federal funds rate:
Fed kept monetary policy unchanged as expected. Federal funds rate is held at 0-0.25%. The target range will be maintained “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”
The asset purchase pace is also held at at least USD 80B on treasury securities and USD 40B on MBS per month. Though, it added that “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”
Ifo lowered Germany growth forecast for 2021 sharply from 3.3% to 2.5%. But 2022 growth forecast was upgraded by 0.8% to 5.1%.
“The strong recovery from the coronavirus crisis, originally expected for the summer, is further postponed,” Ifo chief economist Timo Wollmershaeuser said.
“Industrial production is currently shrinking as a result of supply bottlenecks for important intermediate goods. At the same time, service providers are recovering strongly from the coronavirus crisis.”
ECB Governing Council member Madis Muller said, “given the recovery that we’re seeing in the economy, also the outlook for inflation and most importantly the extremely favorable financing conditions that we continue to have in the euro area, we should be able to end PEPP in March as it has been communicated and as it has been the original plan.” He added, “if you ask what is the most likely outcome then to me personally, this is the base case.”
Muller also argued that inflation could start stronger than ECB’s forecasts. “Looking at possible factors that could be pushing prices higher and those that could be pulling it lower, the factors pushing prices higher seem to be stronger at the moment,” he said. “It’s more likely that we will have inflation, for example, in 2023 higher than 1.5% rather than lower. The same probably applies for the 1.7% inflation forecast for 2022.”
However, “it would be a problem if there is a very sharp cliff effect at the end of the pandemic emergency purchase program,” he noted. “”part of the discussion we will have on how to phase out PEPP and what it would mean for asset purchases going forward.” A potential increase in the APP program was being discussed. But, “of course the decision will depend on market conditions next spring and the economic outlook at that point.”
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Germany Ifo business climate dropped to 98.8, bottleneck recession in manufacturing
Germany Ifo Business Climate dropped from 99.6 to 98.8 in September, below expectation of 100.4. That’s also the third decline in a row. Current Assessment index dropped from 101.4 to 100.4, below expectation of 100.8. Expectations index dropped form 97.5 to 97.3, below expectation of 100.0.
Looking at some more details, manufacturing dropped sharply from 24.2 to 20.0. Services rose from 17.8 to 19.1. Trade ticked lower from 9.0 to 8.9. Construction rose from 8.1 to 10.9.
Ifo said: “Companies were less satisfied with their current business. They were also more skeptical about the coming months. Problems in the procurement of raw materials and intermediate products are putting the brakes on the German economy. Manufacturing is experiencing a bottleneck recession.”
Full release here.