Eurozone exports of goods to the rest of the world rose 10.0% yoy to EUR 209.3B in September. Imports rose 21.6% yoy to EUR 202.0B. As a result, Eurozone recorded a EUR 7.3B surplus. Intra-Eurozone trade rose 16.4% yoy to EUR 191.5B.
In seasonally adjusted term, Eurozone exports dropped -0.4% mom to EUR 201.4B. Imports rose 1.5% mom to EUR 195.3%. Trade surplus narrowed to EUR 6.1B. Intra-Eurozone trade rose EUR 0.8B to EUR 182.9B.
ECB Governing Council member Martins Kazaks emphasized a cautious approach to reducing interest rates in an interview with BloombergTV. He acknowledged that while a downward adjustment in rates is anticipated, the ECB should not hasten this process, cautioning against premature actions that could potentially rekindle inflation.
Kazaks drew parallels to historical instances, particularly from the 1970s and 80s, to underline the risks associated with relaxing monetary policy too soon. “There’s the risk that inflation starts to come back and then one would need to raise rates much more,” he added.
Regarding, the timing and magnitude of easing cycles, he indicated that ECB could opt for either smaller steps initiated earlier or larger steps taken at a later stage. But Kazaks emphasized that would be “all data dependent”.
RBNZ said it is ramping support for businesses and banks by accepting corporate debt and other assets as security for loans to banks. The aim is to “pump more money into the economy through the banking system. ”
Assistance Governor Christian Hawkesby said, “by banking the banks, we are ensuring large businesses can better manage their cash flows, and lower their funding costs.”
The RBNZ will have a weekly window for retail banks to access the money, with an offer to lend around $500 million each time for up to three months.
US initial jobless claims dropped -30k to 260k in the week ending January 22, matched expectations. Four-week moving average of initial claims rose 15k to 247k.
Continuing claims rose 51k to 1675k in the week ending January 15. Four-week moving average of continuing claims dropped -11k to 1652k, lowest since August 18, 1973.
USD/CAD recovers mildly ahead of 1.3016 today, as markets await BoC and FOMC rate decisions. BoC is widely expected to keep policy rate unchanged at 1.75%. Upside surprise in GDP growth and solid inflation offered BoC much room to stand on the sideline. Additionally, the newly-elected government’s fiscal stimulus is expected to support the economy in the coming year. There is no imminent need for the central bank to act in either direction. Ongoing trade war uncertainty and global economic slowdown would be the main focuses of policy makers ahead, and that could determine whether BoC needs to do anything next year.
On the other hand, markets are generally expecting Fed to cut interest rate again by -25bps to 1.50-1.75% today. Fed fund futures are pricing in 97.8% chance for that. The main question is whether chair Jerome Powell will signal that it’s the end of the so called “mid-cycle adjustment”. Such message could also be reflected in changes in the forward guidance too. There is prospect of a Dollar rebound should Fed affirm this message.
Here are some suggested readings on Fed and BoC:
US initial jobless claims rose 2k to 207k in the week ending September 30, below expectation of 211k. Four-week moving average of initial claims dropped 2.5k to 209k.
Continuing claims dropped -1k to 1664k in the week ending September 23. Four-week moving average of continuing claims fell -5k to 1668k.
Yen trades broadly lower today following rebound in benchmark US and European yields. CAD/JPY is one of the top movers for the day. It’s possible that whole corrective pattern from 110.87 has completed with three waves down to 104.06. Break of 106.70 resistance, and sustained trading above 55 day EMA will affirm this case, and bring further rise to retest 110.33/110.87 resistance zone.
AUD/JPY also rises mildly today but stays well below 95.73 resistance. Firm break there will affirm the case that pull back from 99.32 has completed at 90.81. Rise form 90.81 should then resume and target a test on 99.32 high.
SECO downgraded Swiss GDP growth forecast to 3.2% in 2021, comparing to June forecast of 3.6%. Growth is projected to further accelerate to 3.4% in 2022. It added that “the economic recovery is set to continue as expected, though growth is initially less dynamic than forecast previously.” Nevertheless, “economic activity is likely to have exceeded pre-crisis levels during the summer.”
SECO added, “highly exposed sectors such as international tourism are likely to emerge from the crisis more hesitantly”. But, “provided that severely restrictive measures such as business lockdowns are not imposed in the coming months, the economic recovery should continue uninterrupted.”
Gold’s fall from 1916.30 resumes today by breaking through 1760.71. Further fall is now expected as long as 1794.75 resistance holds. Deeper decline should be seen back to 1676.65 support, which is close to 38.2% retracement of 1046.27 to 2074.84 at 1681.92. We’d expect strong support from there to bring rebound.
However, sustained break of 1676.65 will argue that it’s in a larger scale correction. Deeper fall could then be seen to 61.8% retracement at 1439.18 in the medium term.
US University of Michigan consumer sentiment dropped to 71.0 in April, down from 89.1. Current economic conditions index dropped to 72.4, down from 103.7. Consumer expectations dropped to 70.0, down from 79.7.
The -18.1 pts plunge was the latest decline ever recorded. Combined with march’s decline, the two-month drop of -30.0 pts was 50% larger than the prior record. “The free-fall in confidence would have been worse were it not for the expectation that the infection and death rates from covid-19 would soon peak and allow the economy to restart” Surveys of Consumers chief economist, Richard Curtin said.
“Consumers need to be prepared for a longer and deeper recession rather than the now discredited message that pent-up demand will spark a quick, robust, and sustained economic recovery.”
UK Secretary of State for Business, Energy and Industrial Strategy Andrea Leadsom said the government is still pushing for digital tax despite repeated objections by the US. At the same time, it’s just one particular issues which will not stand in the way of a UK-US trade agreement.
She told Talk Radio: “The United States and the United Kingdom are committed to entering into a trade deal with each other and we have a very strong relationship that goes back centuries so some of the disagreements that we might have over particular issues don’t in any way damage the excellent and strong and deep relationship between the U.S. and the UK,”
“There are always tough negotiations and tough talk but I think where the tech tax is concerned it’s absolutely vital that these huge multinationals who are making incredible amounts of income and profit should be taxed and what we want to do is to work internationally with the rest of the world to cover with a proper regime that ensures that they’re paying their fair share.”
Markets sentiment seemed to be lifted notably by news regarding US President Donald Trump’s move to fast-track UK vaccines on the COVID-19 before election. Financial Times reported that one way is to use an “emergency authorization” in October to a vaccine being developed by AstraZeneca Plc and Oxford University. The use would be based on the results from a relatively small UK study.
White House declined to comment on the report. A Health and Human Services department spokesman said the reports on using EUA before election was “absolutely false”. The administration hoped to have a vaccine available in Q1 2021 instead. AstraZeneca also denied discussion with the government about emergency authorization.
ECB President Mario Draghi appears in the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament today. Regarding Euro’s internal dimension, Draghi said “euro has indeed provided two decades of price stability”. And, thanks to the “collective efforts of all European citizens, the euro area has emerged from” the global financial crisis, with “22 consecutive quarters of economic growth, the unemployment rate at its lowest level since October 2008, and wages and incomes on the rise.”
But Draghi also repeated last week’s cautious comments. He noted “over the past few months, incoming information has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors. The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment.” He reiterated that “significant monetary policy stimulus remains essential”, and “the Governing Council stands ready to adjust all of its instruments”.
On Euro’s external dimension, Draghi said since the global financial crisis, “the euro’s international role seems to have gradually eroded. While its importance as the currency of invoice for international trade transactions has remained broadly stable, its role in global foreign reserves and global debt markets has declined.” And he urged that “the international role of the euro is supported by the pursuit of sound economic policies in the euro area and a deeper and more complete EMU. And this requires further efforts along the path of deeper integration.”
UK PMI Construction fell to 52.2 in June, down from 54.7 in May, and below the expected 54.0. S&P Global highlighted the sharpest rise in employment in ten months, while inflationary pressures remained subdued.
Andrew Harker, Economics Director at S&P Global Market Intelligence, noted that the slowdown, particularly in housing activity, was partly due to “election uncertainty”. He suggested that trends might improve once the election period ends.
Firms remain optimistic about the year-ahead outlook and increased employment significantly. Inflation pressures stayed low, encouraging firms to expand purchasing activity. Stable supply-chain conditions also supported this positive trend..
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Good morning. I’m pleased to be here with you to discuss today’s policy announcement and the Bank of Canada’s Monetary Policy Report (MPR). I am especially pleased to have Senior Deputy Governor Carolyn Rogers here for her first press conference. She has joined the Governing Council at an important time.
Our message today is threefold.
First, the emergency monetary measures needed to support the economy through the pandemic are no longer required and they have ended.
Second, interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates.
Third, while reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation. We are committed to bringing inflation back to target.
Let me take each of these in turn.
The Bank’s response to the pandemic has been forceful. Throughout, our actions have been guided by our mandate. We have been resolute and deliberate, communicating clearly with Canadians on our extraordinary measures to support the economy and on the conditions for their exit. When we introduced emergency liquidity measures to support core funding markets, we said they would end when market functioning was restored. And they did. When we launched quantitative easing (QE), we said it would continue until the recovery was well underway. As the recovery progressed, we began tapering QE and ended it in October. Today marks the final step in exiting from emergency policies. We said exceptional forward guidance would continue until economic slack was absorbed. With the strength of the recovery through the second half of 2021, the Governing Council now judges this condition has been met. As such, we are removing our commitment to hold our policy rate at its floor of 0.25%.
Second, we want to clearly signal that we expect interest rates will need to increase. A lot of factors are contributing to the uncomfortably high inflation we are experiencing today, and many of them are global and reflect the unique circumstances of the pandemic. As the pandemic fades, conditions will normalize, and inflation will come down. However, with Canadian labour markets tightening and evidence of capacity pressures increasing, the Governing Council expects higher interest rates will be needed to bring inflation back to the 2% target.
Finally, Canadians can be assured that the Bank of Canada will control inflation. Prices for many goods and services are rising quickly, and this is making it harder for Canadians to make ends meet—particularly those with low incomes. Prices for food, gasoline and housing have all risen faster than usual. We expect inflation will remain close to 5% through the first half of 2022 and then move lower. There is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before. But Canadians can be assured that we will use our monetary policy tools to control inflation.
Let me turn to the economic outlook that we’ve outlined in our MPR.
Globally, the pandemic recovery is strong but uneven and continues to be marked by supply chain disruptions. Robust demand for goods combined with these supply problems and higher energy prices have pushed up global inflation. With this rise in inflation, expectations that monetary stimulus will be reduced have been pulled forward and financial conditions have tightened from very accommodative levels.
In Canada, growth in the second half of 2021 was even stronger than we had projected, and a wide range of measures now suggest economic slack is absorbed. With the rapid spread of the Omicron variant, first-quarter growth is likely to be modest, but we expect the impact on our economy to be less severe than previous waves. We forecast annual growth in economic activity will be 4% this year and about 3½% in 2023 as consumer spending on services rebounds and business investment and exports show solid growth.
CPI inflation is currently well above our target range and core measures have edged up. Global supply chain disruptions, weather-related increases in agricultural prices and high energy prices have put upward pressure on inflation in Canada, and that is expected to continue in the months ahead. These pressures should ease in the second half of 2022, and inflation should decline relatively quickly to around 3% by year end. Further out, we expect demand will moderate and supply will increase as productivity improves. This will ease price pressures and bring inflation gradually back close to the 2% target over 2023 and 2024.
Let me now say a few words about the Governing Council’s deliberations.
Of course, we discussed the impact of Omicron. Renewed restrictions and household caution about this highly infectious variant have temporarily slowed economic activity. Once again, high-contact services sectors have been hardest hit. But with many more Canadians getting infected in this wave, worker absences have been more widespread. Our high rates of vaccination and adaptability to restrictions should limit the downside economic risks of this wave.
The Governing Council also spent considerable time assessing the overall balance of demand and supply in the economy. In October, we projected the output gap would close sometime in the middle quarters of this year. While measuring the output gap is always uncertain and pandemic-related distortions make assessing supply more complicated, a broad range of indicators clearly suggest economic slack has been absorbed more quickly than expected. Employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up. Unevenness across sectors remains, but taking all the evidence together, the Governing Council judges the economy is now operating close to its capacity.
We debated the most likely path for inflation. The resolution of global supply bottlenecks has important implications for inflation in Canada. There is some evidence that supply disruptions may have peaked, but the spread of Omicron is a new wildcard that could further disrupt global supply chains. We also considered the potential for some reversal of the large price increases for goods. This would pull inflation down more quickly than we forecast. Overall, we judged the risks around our inflation projection are reasonably balanced.
We also assessed more domestic sources of inflationary pressures. While global goods price inflation is expected to ease, the tightness in Canadian labour markets, rising house prices and evident capacity pressures suggest that if demand continues to grow faster than supply this will put upward pressure on inflation.
We noted that measures of inflation expectations are broadly in line with our own forecast, with longer-term expectations remaining well anchored on the 2% target. We agreed it is paramount to ensure that higher near-term inflation expectations don’t migrate into higher long-term expectations and become embedded in ongoing inflation.
Putting all this together, we concluded that, consistent with our forecast, a rising path for interest rates will be required to moderate spending growth and bring inflation back to target.
Of course, we discussed when to begin increasing our policy interest rate. Our approach to monetary policy throughout the pandemic has been deliberate, and we were mindful that the rapid spread of Omicron will dampen spending in the first quarter. So we decided to keep our policy rate unchanged today, remove our commitment to hold it at its floor, and signal that rates can be expected to increase going forward. As we indicated in our press release this morning, the timing and pace of those increases will be guided by the Bank’s commitment to achieving the 2% inflation target.
We take our communication with Canadians very seriously. For almost two years now we have told Canadians we would keep our policy rate pinned at its floor until economic slack is absorbed. With slack absorbed more quickly than expected, it is time to remove our extraordinary forward guidance. This ends our emergency policy setting and signals that interest rates will now be on a rising path. This is a significant shift in monetary policy, and we judged that it is appropriate to move forward in a deliberate series of steps.
Let me say a final word about another important monetary policy tool—our balance sheet. The Bank will keep the holdings of Government of Canada bonds on our balance sheet roughly constant at least until we begin to raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we have done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans.
With that, Senior Deputy Governor Rogers and I will be happy to take your questions.
BoE policymaker Jonathan Haskel said in a speech, “in the immediate term, the risk of a pre emptive monetary tightening curtailing the recovery continues to outweigh the risk of a temporary period of above target inflation. For the foreseeable future, in my view, tight policy isn’t the right policy.”
He also noted “two headwinds” over the coming months, the “highly transmissible Delta variant” and a “tightening of the fiscal stance”. “Against this backdrop, risk management considerations lean against a pre emptive tightening of monetary policy until we can be more sure the economy is recovering in a manner consistent with the sustained achievement of the inflation target,” he said.
Christine Lagarde, President of ECB, acknowledged the persistence of robust price pressures in her recent speech. She pointed out that both headline and core inflation continue to face “upside pressures… from the pass-through of past energy cost increases and supply bottlenecks.”
Speaking on the current state of underlying inflation, Lagarde said, “The latest available data suggest that indicators of underlying inflationary pressures remain high and, although some are showing signs of moderation, there is no clear evidence that underlying inflation has peaked.”
Lagarde also highlighted the intensifying wage pressures, noting that “wage pressures have strengthened further as employees recoup some of the purchasing power they have lost as a result of high inflation.”
Lagarde also drew attention to the forceful impact of the central bank’s rate hikes on financial conditions. “Our rate hikes are being transmitted forcefully to financing conditions for firms and households, as can be seen in rising lending rates and falling lending volumes,” she stated.
Notably, she mentioned that “the full effects of our monetary policy measures are starting to materialise,” adding that future ECB decisions are geared towards ensuring a “timely return of inflation to our 2% medium-term target.” She asserted, “Our future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive… and will be kept at those levels for as long as necessary.”
China official PMI Manufacturing rose from 47.0 to 50.1 in December, slightly below expectation of 50.2. PMI Non-Manufacturing jumped from 41.6 to 54.4, above expectation of 51.0. Both indexes were also back in expansion region.
Senior NBS statistician Zhao Qinghe noted that economic activity returned to expansion amid an improvement in the business operation climate and the situation.
“Meanwhile, many companies in the manufacturing and services sectors still reported a lack of market demand is the major concern for their businesses. The foundation of economic recovery still needs to be further consolidated,” he added.
German ECB Governing Council member Joachim Nagel emphasized emphasized that ECB should avoid being on “autopilot” when determining the timing of interest rate cuts.
Speaking at the London School of Economics, he stressed that as ECB approaches the neutral rate, a “gradual approach” becomes more appropriate. Given the current uncertainty, he argued, “there is no reason to act hastily.”
Nagel remains confident that inflation will return to 2% target by mid-year, saying, “We are not at our target, but I’m really very convinced that we will come to our target by the midst of this year.” He also dismissed concerns of an inflation undershoot.
Bundesbank staff estimates place the neutral interest rate within a range of 1.8% to 2.5%, slightly below ECB’s current deposit rate of 2.75%.
However, Nagel warned against relying too heavily on neutral rate estimates, calling it “risky” to base monetary policy decisions on uncertain theoretical benchmarks. Instead, he emphasized that the ECB relies on a variety of financial, real-economic, and other indicators to guide its policy stance.
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UK PMI composite falls to 51, raises pressure on BoE to turn dovish
UK business activity weakened sharply in September, with the flash composite PMI dropping from 53.5 to 51.0, a 4-month low. Manufacturing fell further into contraction from 47.0 to 46.2. Services slipped from 54.2 to 51.9, pointing to a broad loss of momentum across sectors.
S&P Global’s Chris Williamson described the report as a “litany of worrying news,” citing slumping overseas trade, worsening confidence, and steep job losses. The survey signalled around 50,000 job cuts over the past three months, underscoring that the economy is “almost stalling.”
The only bright spot was softer price pressures, with firms reporting one of the smallest increases in goods and services prices since the pandemic. For the BoE, the combination of weakening growth, easing inflation, and rising unemployment may shift the debate back toward a “more dovish stance” in the months ahead.
Full UK PMI flash release here.