US CPI rose 0.8% mom in November, above expectation of 0.7 % mom. For the 12-month period, CPI accelerated to 6.8% yoy, up from 6.2% yoy, matched expectations. That’s the highest rate since June 1982.
CPI core rose 0.5% mom, matched expectations. CPI core accelerated to 4.9% yoy, up from 4.6% yoy, matched expectations. Energy index rose 33.3% yoy. Both are highest level in at least 13 years.
In a report released yesterday, IMF noted that the 3% growth in 2017 in Canada was the highest among G7 nations in the year. But going ahead, the economic outlook is subject to “significant risks, domestic and external”.
Domestically, a key risk is sharp correction in the housing market. That could be triggered by a “sudden shift in price expectations or a faster-than-expected increase in mortgage interest rates”. And, the banking system is “heavily exposed to household and corporate debt.” Thus, if housing correction is accompanied by rise in unemployment and sharp contraction in private consumption, “risks to financial stability and growth could emerge”.
Externally, the medium term impact of US tax cuts could make Canada a “less attractive destination for investment”. Failure to reach a NAFTA agreement within a reasonable timeframe could impact investment and growth for an “extended period”. And return to WTO rules could cut GDP growth by -0.4%. Other external risks include weaker growth in key advanced economies, sharp slowdown in China, tighter global financial conditions.
Regarding monetary policy, IMF said BoC should tighten “gradually” as “inflationary pressures are building and higher interest rates will help activity and inflation converge toward more sustainable levels.” But the current balance of risks warrants “gradual policy normalization.”
Full report here.
Australia’s PMI Manufacturing has nearly reached the neutral mark in April, jumping from 47.3 to 49.9. PMI Services edged higher from 54.2 to 54.4, contributing to PMI’s Composite rise from 53.3 to 53.6, marking a 24-month high and indicating the third consecutive month of expansion.
Warren Hogan, Chief Economic Advisor at Judo Bank, said that Composite PMI has averaged 51.5 over Q1, a substantial improvement from 46.9 average in Q4 2023 and correlates with GDP growth of around 0.6% for the March quarter. Hogan suggested that if this trend persists, GDP growth could accelerate to approximately 0.8% in the following quarter.
The results also suggest a cyclical recovery, rebounding from the consumer-led slowdown experienced in 2023. This recovery appears to be more robust than anticipated by RBA, suggesting that the economy is beginning to “wander off their ‘narrow path'”. This “narrow path” scenario envisages economic activity remaining subdued to ensure inflation eases back to target by late 2025
“The RBA will likely be concerned that a pick-up in activity, before inflation returns to target, could threaten medium to long-term price stability,” Hogan added. “These results are inconsistent with interest rate reductions at any stage in the foreseeable future and raise the risk that the RBA may have to start hiking again at some stage over the back half of 2024.”
Australia CBA PMI Composite rose to 57.9, up from 52.7, highest since April 2017. PMI Services rose to 58.5, up from 53.1, highest on record since the survey began in May 2016. PMI Manufacturing rose to 53.4 in July, up from 51.2.
CBA Head of Australian Economics, Gareth Aird said: “The improvement in growth momentum in July is welcome, but concerns around COVID-19 and the potential policy responses to a lift in the number of new cases continue to weigh on activity. The fall in employment looks a little surprising given some other measures of labour demand have firmed more recently. But encouragingly the acceleration of growth in new orders suggests labour demand should improve. The lack of any inflationary pulse was once again evident. That supports our view that we will be in a low inflation environment for an extended period of time”.
RBA kept cash rate target and 3-year AGB target unchanged at 0.10%. It announced to buy an additional AUD 100B of government bonds, including states and territories, after the current program completes in mid-April. The additional purchases will be held at current rate of AUD 5B per week. On forward guidance, RBA maintained the pledge that it ” will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”. It doesn’t expect the conditions to be met “until 2024 at earliest”.
In the central scenario of economic outlook, RBA expects GDP to grow 3.5% in both 2021 and 2022. GDP will reach end-2019 level by the middle of this year. Unemployment rate will be around 6% by the end of 2021, and 5.5% by the end of 2022. CPI is projected to be at 1.25% over 2021 and 1.50% over 2022.
Bloomberg reported that Chinese officials are studying the impact of yuan depreciation on two fronts. Firstly, analysis was taken to look at using currency depreciation as a weapon in the trade war with the US. Secondly, it’s also studied how yuan depreciation could help offset any trade deal with US that curb exports.
However, one important point to note is that the source for the information is obviously unnamed. And further than that, Bloomberg just said it’s from “people familiar with the matter”. So it looks unlikely that the information is from any Chinese officials.
At the same time, it’s firstly seen by many that yuan devaluation could destabilize the China’s own markets, and that could do more harm to itself than to the US. And more important, China has been trying to portrait itself as rule follower that complies with the WTO book. It keeps blaming the US for unilateralism and protectionism and tries to to use that to draw international support. Devaluation of the Yuan will put China up against other countries too.
President Xi Jinping probably won’t mind US President Donald Trump reiterating the label that China is a currency manipulator. But he most certainly doesn’t prefer other countries to jump on that bandwagon.
So, while the news is currently in Bloomberg’s headline, its accuracy is suspectable.
UK Gfk Consumer Confidence rose to -25 in September, up from -27. German Economic Situation index over the next 12 month rose 4 pts to -38. Major Purchase index also rose 4 pts to -21. But Personal Financial Situation over the next 12 months was unchanged at 1.
Joe Staton, Client Strategy Director GfK, says: “Consumer confidence has crept forward for nearly four months in a row now, but can this fragile improvement last or is it about to come to a grinding halt?… Consumers are as jittery as stock markets right now and as the UK government puts the brakes back on – and there may be more to come – only an unbridled optimist will bet on confidence climbing further.”
US CPI dropped -0.1% mom in May, below expectation of 0.0% mom. Core CPI also dropped -0.1% mom, below expectation of 0.0% mom. Annually, headline CPI slowed to 0.1% yoy, down from 0.3% yoy, missed expectation of 0.2% yoy. Core CPI slowed to 1.2% yoy, down from 1.4% yoy, missed expectation of 1.3% yoy.
In April, Australia employment rose 28.4k, more than expectation of 15.2k. However, the growth was mainly driven by 34.7k growth in part-time jobs. Full-time employment contracted -6.3k. Unemployment rate rose to 5.2%, up from 5.1% and above expectation of 5.0%. That’s also an eight-month high. But participation rate also rose 0.2% to record high of 65.8%.
Looking at some details, in seasonally adjusted terms, the largest increase in employment was in New South Wales (up 25.1k), followed by Western Australia (up 6.4k) and Queensland (up 5.4k). The only decrease was in Victoria (down 7.6k).
The seasonally adjusted unemployment rate increased in New South Wales (up 0.2 pts to 4.5%), Victoria (up 0.2 pts to 4.9%), South Australia (up 0.2 pts to 6.1%), Western Australia (up 0.1 pts to 6.1%) and Tasmania (up 0.1 pts to 6.8%). The only decrease was observed in Queensland (down 0.2 pts to 5.9%).
AUD/USD dipped notably after the release but quickly recovered. While the set of job data isn’t stellar, it’s actually not too bad.
As the global financial market eagerly anticipates today’s pivotal ECB rate decision, the pendulum of market expectations has been swinging vigorously, making it the most uncertain ECB meeting in recent times. Initial market sentiment leaned towards a pause; however, a recent Reuters report ignited speculation about a potential rate hike.
The mentioned report suggested that ECB could revise its 2024 inflation forecast upwards, well pass the 3% mark, thereby strengthening the case for a rate increase. Consequently, odds for a 25bps hike escalated to nearly 70%, a significant rise from around 40% noted on Monday. If this materializes, we could see the main refinancing rate and deposit rate shift to 4.50% and 4.00% respectively.
Adding a layer of complexity to the anticipations is Vice President Luis de Guindos’ earlier assertion, dating back to August 31, where he said that the impending inflation forecasts are “similar to what we had in June”, steering away from the prospect of an excessive upward revision. Moreover, European Commission had marginally adjusted Eurozone inflation rate from 5.8% to 5.6% for 2023 and increased the 2024 forecast from 2.8% to 2.9%. That casts further doubts on the aggressive inflation predictions noted in the Reuters report.
The market is not just hinging on the rate verdict. A myriad of factors stand as potential catalysts in steering the financial markets post the announcement. The ECB is expected to maintain its stance of basing future verdicts on evolving data dynamics. However, there might be subtle indications given on whether interest rates have reached its peak, whether it hikes or not today.
Furthermore, growth projections are on the verge of being revised to possibly match European Commission’s grim outlook. The Commission had notably scaled down the growth forecasts for 2023 and 2024 to 0.8% and 1.3% respectively, a decrement from the previous estimates of 1.1% and 1.6%.
As for EUR/USD it’s now standing close to an important cluster support zone at 1.0634, (38.2% retracement of 0.9534 to 1.1274 at 1.0609). There is prospect of a near term bullish reversal from current level, to finish off the whole decline from 1.1274. But decisive break of 1.0944 resistance is needed to confirm this case, or risk will stay on the downside. On the other hand, sustained break of 1.0609/0634 will raise the chance of medium term term bearish trend reversal, and target 61.8% retracement at 1.0199.
China denied the news that it’s offering to cut trade surplus with US by USD 200B. Chinese foreign ministry spokesman Lu Kang said in a regular news briefing “this rumor is not true. This I can confirm to you”.
He added, “as I understand, the relevant consultations are ongoing and they are constructive,” regarding the trade talks between the US and Chinese delegates led by Vice Premier Liu He.
Separately, the Chinese Ministry of Commerce announced to end the “anti-dumping and anti-subsidy investigations of imported sorghum originating in the United States”.
The MOFCOM noted in the statement that “the imposition of anti-dumping and anti-subsidy measures on imports of sorghum originating from the United States would have a widespread impact on consumer living costs, and does not accord with the public interest.”
Philadelphia Fed President Patrick Harker told WSJ that “there’s no immediate need to move rates in either direction at this point in my view”. He noted that the economy “continues to be strong” with “very strong labor market”. If the economy was “weakening substantially”, he would support a rate cut. But “at this point, I do not see that”.
Harker acknowledged that inflation below 2% target is a concern. But he added, “it’s one that I don’t see as an imminent crisis”. Also, he believed “we can give it some time to move back up to 2%.
Additional, he didn’t se December rate hike as a “particularly bad move” as it was not significant at that point. For now he thought the “prudent path” was to “hold steady and see how the economy evolves”.
BoE Chief Economist Andy Haldane said he in a speech he expected UK inflation to be “near 4% than 3%” by the end of this year. “This increases the chances of a high inflation narrative becoming the dominant one, a central expectation rather than a risk.” Inflation expectations would then “shift upward”.
“We would experience a Minsky Moment for monetary policy, a taper tantrum without the taper,” he warned “This would leave monetary policy needing to play catch-up to re-anchor inflation expectations through materially larger and/or faster interest rate rises than are currently expected.”
Different from the Global Financial Crisis, he said “time that policy script feels stretched.”. And, “the pace of recovery is significantly faster now than then, bouncing rather than edging back.” He warned, “a slow exit risks putting central bank balance sheets on an unsustainable footing”.
Overall, Haldane said, “in my view it does, however, call for immediate thought, and action, on unwinding the QE currently being provided, given the state of the economy and central banks’ balance sheets.”
In a Bloomberg op-ed, BoE Governor Andrew Bailey said the “the current scale of central bank reserves mustn’t become a permanent feature.” Also, “elevated balance sheets could limit the room for maneuver in future emergencies”.
Hence, “when the time comes to withdraw monetary stimulus, in my opinion it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis.”
Bailey’s idea was in contrast to former BoE Governor Mark Carney’s. Carney indicated before that BoE would raise interest rate materially, before starting to lower the holding of the asset purchased.
US 10-year yield jumped notably and closed up 0.062 at 1.543. With a strong break above 55 day EMA, it’s starting to suggest that consolidation pattern from 1.765 has completed with three waves to 1.343 already. TNX has also drew solid support from 55 week EMA again, keeping medium term bullishness well in place.
The focus could quickly be on 1.693 resistance when we come back from new year holiday. Firm break there should push TNX through 1.765 resistance to resume the up trend from 0.398. If this happens, we could easily see 10-year yield back at 2% level and above.
Fresh selling seen in Euro after French data miss. French GDP growth slowed to 0.3% qoq in Q1, down from prior quarter’s 0.7% qoq and missed expectation of 0.4% qoq. Annual rate decelerated to 2.1% yoy, down from 2.6% yoy, and missed expectation of 2.3% yoy.
The title of this report ECB: Wondering Rather than Worrying summed up yesterday’s ECB press conference rather well. And with French GDP miss, dovish expectation on next week’s Eurozone GDP release could pile up. We’ll see if the coming data clear up the picture for ECB so that policymakers don’t need to wonder any more, but start to worry.
For now, EUR/USD is on course for 1.2 handle. Selling in EUR/USD also spill over to other pairs and lifted the USD. USD/CHF takes out 0.99 and would now be heading back to 1.000. GBP/USD breaks yesterday’s low at 1.3894, just ahead of UK GDP data, an hour away.
US CPI rose 0.8% mom in February, matched expectations. Over the 12-month period, CPI accelerated from 7.5% yoy to 7.9% yoy, matched expectations. The 12-month increase is the largest since January 1982.
CPI core rose 0.5% mom. For the 12-month period, CPI core accelerated from 6.0% yoy to 6.4% yoy, matched expectations. The 12-month increase was the highest since August 1982.
Energy index rose 25.6% yoy. Food index rose 7.9% yoy, highest since July 1981.
Fed Chair Jerome Powell’s post meeting press conference was generally taken well by investors. Both DOW and S&P 500 closed at new record highs, albeit slight higher ones. 10-year yield pared back some gains to close up 0.020 at 1.641. Dollar, on the other hand, weakened broadly on risk-on sentiments.
Powell said that “the stance of monetary policy we have today, we think is appropriate”. “We think our asset purchases in their current form — which is to say across the curve, $80 billion in Treasuries, $40 billion in mortgage-backed securities, on net — we think that’s the right place for our asset purchase”.
“Substantial progress” is needed before policymakers consider dialing back the asset purchases. “Until we give a signal, you can assume we’re not there yet,” he emphasized. “As we approach it, well in advance, well in advance, we will give a signal that yes, we’re on a path to possibly achieve that, to consider tapering.”
On the topic of of rising treasury yields, Powell said “if you look at various indexes of financial conditions, what you’ll see is they generally do show financial conditions overall to be highly accommodative”. He just reiterated that “I would be concerned by disorderly conditions in markets or by persistent tightening of financial conditions that threaten the achievement of our goals.”
EUR/CHF continues to press the historical level at 1.2, the SNB imposed floor which was suddenly given up in 2015 and caused panic selling. Now the cross is back at this level.
SNB Chairman Thomas said in an interview that the depreciation of the Swiss Franc is in the “right direction”. Nonetheless, the currency as a safe haven is prone to change and the situation is “fragile”. So the SNB will “remain very prudent”.
Jordan added that “there’s no need to do anything regarding monetary policy at this moment”, as “we are convinced that the current monetary policy is still necessary.”
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China preparing quick, targeted retaliations to Trump’s $60b tariffs
The WSJ reported that China is preparing to hit back at US President Donald Trump’s targeted tariffs against it. Trump is set to unveiled to list of products tomorrow, which could add up to as much as USD 60b of annual tariffs.
It’s not really news that China is preparing counter measures. But what WSJ said is that China’s tit-for-tat tariffs would target Trump’s support base. That is, they will be aimed at agricultural exports from Farm Belt states.
That raises a question on whether China views it as trade war with the US, the Republicans, or Trump himself. Trump war might be easy to win for a sized economy against smaller ones. It’s much tougher between two economies of comparable size.
Would there be a chance if the trade war is between a political party, a family, or even a person, against a sized economy?
Remember that it’s an authoritarian government in China. What they’d do very much depends on how their leader Xi Jinping views it. If Xi sees the provocation as from Trump only, rather than the whole of the US, then good luck to the latter.