Fed Kaplan: We’re not out of the woods yet

    Dallas Fed President Robert Kaplan said in a WSJ interview, “there’s reason to be optimistic about the future.” But he emphasized that “we’re not out of the woods yet”. And, “reducing stimulus when the pandemic abates and more economic progress is made will help keep the recovery going

    “When we’re in the middle of a crisis, we should be aggressively using our tools, so I agree with what we’re doing now in terms of asset purchases and stance of policy generally,” Kaplan said

    ECB Lane: Recent appreciation of euro exchange rate dampens inflation outlook

      In a blog post, ECB Chief Economist Philip Lane said “recent appreciation of the euro exchange rate dampens the inflation outlook.” “Headline inflation is expected to remain persistently low over the medium term, notwithstanding a gradual pick-up over the projection horizon.”

      “Inflation remains far below the aim and there has been only partial progress in combating the negative impact of the pandemic on projected inflation dynamics,” he added. “Moreover, the outlook remains subject to high uncertainty and the balance of risks continues to be tilted to the downside.”

      Full post here.

      WTI oil jumps on double-whammy production distruptions, but upside limited

        Oil prices jumped notably today double-whammy of disruptions in two key producers, in Libya and Iraq. WTI hits as high as 59.56 but fails to extend gains so far. Also, despite the recovery, near term bearish outlook is unchanged with 60.24 minor resistance intact. That is, current decline from 65.38 is seen as a leg inside medium term sideway pattern that started back at 66.49. Deeper fall would be seen and break of 57.35 temporary low will target 50.86 key support zone. However, firm break of 60.24 will dampen this bearish view and turn focus back to 65.38 high instead.

        SNB Zurbruegg: Franc is still high, expansionary monetary policy remains appropriate

          Swiss National Bank, Vice Chairman Fritz Zurbruegg, said in a Corriere del Ticino interview that, “we believe the franc is still high.” “If we look at inflation, it is still very low and GDP is not yet at the pre-crisis levels,” he said. “That is why we are convinced that our expansionary monetary policy remains appropriate.”

          “We have to bear in mind that in a small and open country like ours, the exchange rate has a major impact on both inflation and economic growth,” he said. “For this reason, it is important to maintain the instrument of foreign exchange interventions alongside the classic interest rate instrument.”

          “Without this expansionary policy, we would have a much stronger franc, lower growth and inflation and higher unemployment,” he said. “So the average Swiss citizen is better off thanks to our policy.”

          NZ BNZ PMI ticked up to 48.9, staying in relatively tight band of contraction

            New Zealand BusinessNZ Performance of Manufacturing Index ticked up from 48.8 to 48.9 in May, staying well below long-term average activity rate of 53.0. Looking at some details, production dropped from 47.0 to 45.7. Employment rose from 47.7 to 49.5. New orders rose from 49.6 to 50.8. Finished stocks dropped from 52.5 to 51.5. Deliveries dropped from 50.7 to 46.0.

            BusinessNZ’s Director, Advocacy Catherine Beard said: “New Zealand’s manufacturing sector has remained in a relatively tight band of contraction for the last three months. While the overall activity result has crept upwards over that time.”

            BNZ Senior Economist, Craig Ebert stated that “the range of results in the sub-components is mirrored in the breadth of issues manufacturers are now highlighting in the survey. Gone is the dominance of supply-side laments, especially regarding staff. But new negatives have arisen, for all of them to (still be) outnumbering the positive issues referenced”.

            Full NZ BNZ PMI release here.

            PBoC announces RRR cut to support the real economy

              China’s central bank PBoC announced to lower reserve requirement ratio for all banks by 50bps, starting September 16. Additionally, the RRR will be lowered by further 100bps for commercial banks operating only in the provincial administrative region, to support small and micro enterprises. This additional RRR cut will be implemented by two batches on October 15 and November 15.

              Together, the RRR cuts are expected to release around CNY 900B. They will increase resources of financial institutions for supporting the real economy. And, targeted RRR cut is an important measure to improve the “three-grade and two-optimal” policy framework for small and medium-sized banks to implement a low deposit reserve ratio.

              PBoC also said that the RRR cut will hedge against tax period in mid-September. Total liquidity of the banking system will remain basically stable. Thus, stable monetary policy orientation has not changed.

              Fed Kaplan: Economy to have substantial contraction in Q2, unemployment to jump to mid-teens

                Dallas Fed President Robert Kaplan said his forecast is for the US economy to have substantial contraction in Q2, in the 20% range on an annualized basis. Unemployment rate could rise to mid teens before falling back to 7-8% by year end.

                He added, “we are working furiously here at the Fed to have this in place and work out the details” of the new Main Street lending program. However, small and medium companies are worried about survival even with loan assistance.

                RBNZ cut to -0.75% to 0.25%, QE next if more action needed

                  In an unscheduled announcement, RBNZ lowered Official case rate by -0.75% to 0.25%, and pledges to keep it there for at least the next 12 months. Additionally, should further stimulus be required, a “Large Scale Asset Purchase Programme” of government bonds would be preferable to another OCR cut.

                  In the statement, it said that “negative economic implications of the COVID-19 virus continue to rise warranting further monetary stimulus.” The impact to the New Zealand economy “is, and will continue to be, significant”. Demand will be “constrained”, as will domestic production. Spending and investment will be “subdued for an extended period”.

                  Full statement here.

                  Japan CPI core slowed to 0.7%, core-core slowed to 0.5%

                    Japan national CPI (all items) slowed to 0.7% yoy in May, down from 0.9% yoy and matched expectations. CPI core (all items, less fresh food) slowed to 0.8% yoy in May, down from 0.9% yoy, but beat expectation of 0.7% yoy. CPI core-core (all items, less fresh food and energy) slowed to 0.5% yoy, down form 0.6% yoy, matched expectations.

                    BoJ left monetary policies unchanged yesterday. But Governor Haruhiko Kuroda pledged to ramp up stimulus “without hesitation” if the economy loses momentum. There are speculations that BoJ could act as early as in July, given that ECB and Fed have both turned more dovish this week. For the very least, BoJ could change its forward guidance and pledge to keep interest rates low longer.

                    Yen strengthens mildly today as lead by decline in USD/JPY. EUR/JPY is also a touch lower for 120.78 low. Break will resume larger decline from 127.50.

                    ECB Lane emphasizes need for timely return to 2% inflation

                      In an interview with The Currency, ECB Chief Economist Philip Lane offered some guarded optimism about the inflationary environment in Eurozone, despite acknowledging that the current inflation rate is a lofty 5.3%. Lane was keen to highlight a “welcome development” in the latest data, pointing to a slight easing in both goods and services inflation as potentially indicative of changing momentum.

                      Lane emphasized ECB’s ongoing challenge of steering inflation rate back to its 2% target. “What is a timely manner?” Lane posed, elaborating that the goal is to return to 2% “sufficiently quickly that everyone understands that the current inflation episode is time-limited.”

                      He underscored the importance of convincing the public that this is a “temporary inflation episode,” and that they should not alter their longer-term behavior in anticipation of persistently high inflation rates. The key objective here is to prevent inflation expectations from becoming unanchored.

                      Full interview of ECB Lane here.

                      RBNZ survey reveals easing inflation expectations, NZD dips

                        According to RBNZ’s latest Survey of Expectations, one-year inflation expectation fell by 38 basis points from 3.60% to 3.22%, marking its lowest point since September 2021. The survey also indicates a growing consensus, with more than half of respondents expecting that CPI inflation will fall back to RBNZ’s target range of 1-3% by the end of 2024

                        Furthermore, the survey pointed to a decrease in inflation expectations over the longer term, with two-year-ahead predictions dropping from 2.76% to 2.50%, and expectations for five and ten years ahead also seeing decline to 2.25% (from 2.43%) and 2.16% (from 2.28%), respectively.

                        In terms of interest rates, survey participants anticipate OCR to average at 5.46% by the end of March, with projected decrease to 4.74% by the end of the year. The OCR currently stands at 5.50%.

                        The publication of the survey’s results led to a discernible decline in the NZD, as market participants began to reevaluate the likelihood of another RBNZ rate hikes.

                        Technically, with 0.6172 resistance intact, recovery from 0.6037 is seen as a correction to the fall from 0.6368 only. Break of 0.6078 minor support will argue that this decline is ready to resume through 0.6037.

                        Full RBNZ Survey of Expectations (Business) here.

                        Dollar index targeting 91.90 projection level, building up trend reversal

                          Dollar index surged sharply overnight, thanks to the selloff in EUR/USD. The case of medium term reversal continued to build up after breaking of the trend line resistance as well as 91.01 medium term support turned resistance. Focus is now on 100% projection of 88.25 to 90.93 from 89.22 at 91.90. Decisive break there will add to the case that rise from 88.25 is an impulsive move. And thus, affirm the case of medium term trend reversal. However, rejection from 91.90 could make the rise corrective. For, we’re favoring the former case.

                          There are a couple of events that could help unveil the development including today’s Q1 GDP, next week’s ISMs and NFP, and certainly treasury yields too.

                          US Empire State manufacturing dropped to -9.1 in Oct

                            US Empire State Manufacturing index dropped sharply from 1.5 to -9.1 in October. 23% of respondents reported that conditions had improved while 32% said worsened. After falling significantly over the prior three months, the prices paid index rose nine points to 48.6. The prices received index held steady at 22.9.

                            Index for future conditions dropped from 8.2 to -1.8. indicating that firms do not expect conditions to improve over the next six months.

                            Full release here.

                            WTI crude oil losses upside momentum ahead of 43.5 near term resistance

                              WTI crude oil surges to as high as 42.98 this week as boosted by coronavirus vaccine optimism. Though, it’s starting to lose momentum ahead of 43.50. At this point, we’re not expecting a firm break of 43.50 to resume the medium term rebound yet. At least, that’s not expected until will have a firmer schedule for vaccine deliveries. Break of 39.35 minor support will likely start another falling leg to extend the consolidation pattern from 43.50.

                              However, decisive break to 43.50 should have 55 week EMA firmly taken out. That would add to medium term bullishness for a take on 50.64 resistance turned support, which is close to 50 psychological level.

                              BoC Rogers: We need a period of lower growth to balance things out

                                BoC Senior Deputy Governor Carolyn Rogers said yesterday, “our primary focus will be to judge how monetary policy is working to slow demand, how fast supply challenges are resolved, and most importantly, how both inflation and inflation expectations respond.”

                                “Because we are in a period of excess demand, we need a period of lower growth to balance things out and bring demand back in line with supply,” Rogers said.

                                “By front-loading interest rates now, we’re trying to avoid the need for even higher rates down the road and a more pronounced slowing of the economy,” she said.

                                EU Juncker and UK May to take stock of Brexit play tomorrow

                                  European Commission Spokesman Margaritis Schinas, said President Jean-Claude Juncker will meet UK Prime Minister Theresa May in Brussels tomorrow to “take stock of the latest state of play on Brexit”.

                                  He reiterated EU’s position that “The EU 27 will not reopen the withdrawal agreement. We cannot accept a time limit to the backstop or unilateral exit clause.”

                                  BoC hikes 25bps, inflation concerns increased

                                    BoC surprises the markets by raising the overnight rate by 25bps to 4.75% today. Correspondingly, the Bank Rate now sits at 5.00%, and deposit rate at 4.75%.

                                    In the accompany statement, BoC noted that the “accumulation of evidence” reflected that monetary policy was “not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target”.

                                    The Governing Council will “continue to assess the dynamics of core inflation and the outlook for CPI inflation”, in particular the “evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour”.

                                    The central bank also noted that the economy was “stronger than expected” in Q1, and ” excess demand in the economy looks to be more persistent than anticipated.”

                                    Good price inflation “increased” while services price inflation “remained elevated”. It continues to expect CPI inflation to east to around 3% in the summer.

                                    However, “with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.”

                                    Full BoC statement here.

                                    German GDP stalled in Q4, mixed signals in domestic demand

                                      Germany GDP was flat in Q4, below expectation of 0.1% qoq. For the year of 2019, the economy grew 0.6%, both price and seasonally adjusted.

                                      Statistisches Bundesamt said there were “mixed signals” regarding domestic demand. Both final consumption expenditure of both households and government “slowed down markedly” after a strong Q3. On the other hand, trends “diverged” for fixed capital formation. Foreign trade slowed down the economy, with exports slightly down on the quarter while import increased.

                                      Full release here.

                                      ECB President Mario Draghi press conference live stream

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                                        Draghi’s introductory statement.

                                        Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis.

                                        Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

                                        Regarding non-standard monetary policy measures, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

                                        The 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. At the same time, supportive financing conditions, favourable labour market dynamics and rising wage growth continue to underpin the euro area expansion and gradually rising inflation pressures. This supports our confidence in the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Significant monetary policy stimulus remains essential to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This will be provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.

                                        Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters. Incoming data have continued to be weaker than expected as a result of a slowdown in external demand compounded by some country and sector-specific factors. While the impact of some of these factors is expected to fade, the near-term growth momentum is likely to be weaker than previously anticipated. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, lower energy prices, and the ongoing – albeit somewhat slower – expansion in global activity.

                                        The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.

                                        Euro area annual HICP inflation declined to 1.6% in December 2018, from 1.9% in November, reflecting mainly lower energy price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline further over the coming months. Measures of underlying inflation remain generally muted, but labour cost pressures are continuing to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.

                                        Turning to the monetary analysis, broad money (M3) growth moderated to 3.7% in November 2018, after 3.9% in October. M3 growth continues to be backed by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.

                                        The annual growth rate of loans to non-financial corporations stood at 4.0% in November 2018, after 3.9% in October, while the annual growth rate of loans to households remained broadly unchanged at 3.3%. The euro area bank lending survey for the fourth quarter of 2018 suggests that overall bank lending conditions remained favourable, following an extended period of net easing, and demand for bank credit continued to rise, thereby underpinning loan growth.

                                        The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing – in particular for small and medium-sized enterprises – and credit flows across the euro area.

                                        To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

                                        In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, the Governing Council reiterates the need for rebuilding fiscal buffers. This is particularly important in countries where government debt is high and for which full adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions. Likewise, the transparent and consistent implementation of the EU’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.

                                        We are now at your disposal for questions.

                                        BoE survey shows business inflation expectations cool

                                          BoE’s Decision Maker Panel survey for September indicating an anticipated ease in output price inflation, slowly easing CPI inflation expectation, and subtle nuances in wage growth predictions

                                          A notable takeaway from the survey is the anticipated decline in output price inflation over the next year. Businesses foresee their year-ahead own-price inflation at 4.8%, a slight moderation from the 5.0% noted in the preceding three months to August. This decline hints at an expectation of easing price pressures, offering a counter-narrative to prevalent inflation concerns.

                                          On the consumer front, one-year ahead CPI inflation expectations inched higher to 4.9% in September from 4.8% in August. However, a broader perspective reveals a decline, with the three-month moving average dipping by 0.3 percentage points to 5%. Looking further ahead, three-year CPI inflation expectations held steady at 3.2% in September, unaltered from August.

                                          In the realm of wages, the anticipated year-ahead wage growth was static at 5.1% on a three-month moving average basis. September’s single-month reading did register a slight uptick to 5.2%, a 0.2 percentage point increment from August. However, these expectations are notably subdued compared to realised wage growth.

                                          Full BoE DMP release here.