In CBS 60 Minutes, Fed Chair Jerome Powell reiterated that the central bank is not considering negative interest rates. He said, “I continue to think, and my colleagues on the Federal Open Market Committee continue to think, that negative interest rates is probably not an appropriate or useful policy for us here in the United States.”
“There’s no clear finding that it actually does support economic activity on net, and it introduces distortions into the financial system, which I think offset that,” Powell said. “There’re plenty of people who think negative interest rates are a good policy. But we don’t really think so at the Federal Reserve.” “There’s a lot more we can do. We’ve done what we can as we go. But I will say that we’re not out of ammunition by a long shot.”
On the economy, Powell said, “assuming there’s not a second wave of the coronavirus, I think you’ll see the economy recover steadily through the second half of this year”. However, “for the economy to fully recover people will have to be fully confident, and that may have to await the arrival of a vaccine,” he added.
RBNZ Assistant Governor Christian Hawkesby explained the decision of the surprised -50bps rate cut in speech today. He said “we judged that it would be better to do too much too early, than do too little too late”. The alternative approach of cutting by -25bps “risked inflation remaining stubbornly below target, with little room to lift inflation expectations later with conventional tools in the face of a downside shock.”
On the other hand, “a more decisive action now gave inflation the best chance to lift earlier, reducing the probability that unconventional tools would be needed in the response to any future adverse shock.”
Hawkesby also noted that neutral rate is currently in a “wide range centred on 3.25 percent, down from around 5 percent before the GFC”. And, “all else equal, a lower neutral rate implies that we need to set our Official Cash Rate lower to deliver the same amount of monetary stimulus to the economy.”
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 President of the Eurogroup, Mr Centeno.
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, our net purchases under the asset purchase programme (APP) will end in December 2018. At the same time, we are enhancing our forward guidance on reinvestment. Accordingly, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP 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.
While incoming information has been weaker than expected, reflecting softer external demand but also some country and sector-specific factors, the underlying strength of domestic demand continues to underpin the euro area expansion and gradually rising inflation pressures. This supports our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after the end of our net asset purchases. At the same time, uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent. Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. Our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets, continues to provide the necessary degree of monetary accommodation for the sustained convergence of inflation to our aim. 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. The latest data and survey results have been weaker than expected, reflecting a diminishing contribution from external demand and some country and sector-specific factors. While some of these factors are likely to unwind, this may suggest some slower growth momentum ahead. At the same time, domestic demand, also backed by our accommodative monetary policy stance, continues to underpin the economic expansion in the euro area. The strength of the labour market, as reflected in ongoing employment gains and rising wages, still supports private consumption. Moreover, business investment is benefiting from domestic demand, favourable financing conditions and improving balance sheets. Residential investment remains robust. In addition, the expansion in global activity is still expected to continue, supporting euro area exports, although at a slower pace.
This assessment is broadly reflected in the December 2018 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.9% in 2018, 1.7% in 2019, 1.7% in 2020 and 1.5% in 2021. Compared with the September 2018 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised slightly down in 2018 and 2019.
The risks surrounding the euro area growth outlook can still be assessed as broadly balanced. However, the balance of risks is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.
According to Eurostat’s flash estimate, euro area annual HICP inflation declined to 2.0% in November 2018, from 2.2% in October, reflecting mainly a decline in energy inflation. On the basis of current futures prices for oil, headline inflation is likely to decrease over the coming months. Measures of underlying inflation remain generally muted, but domestic cost pressures are continuing to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets, which is pushing up wage growth. 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.
This assessment is also broadly reflected in the December 2018 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.8% in 2018, 1.6% in 2019, 1.7% in 2020 and 1.8% in 2021. Compared with the September 2018 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised slightly up for 2018 and down for 2019.
Turning to the monetary analysis, broad money (M3) growth stood at 3.9% in October 2018, after 3.6% in September. Apart from some volatility in monthly flows, M3 growth continues to be supported by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
In line with the upward trend observed since the beginning of 2014, the growth of loans to the private sector continues to support the economic expansion. The annual growth rate of loans to non-financial corporations stood at 3.9% in October 2018, after 4.3% in September, while the annual growth rate of loans to households remained unchanged at 3.2%. 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.
Further information on the technical parameters of the reinvestments will be released at 15:30 CET on the ECB’s website.
Philadelphia Fed President Patrick Harker said if inflation start to “accelerate” then he’s “open to a fourth increase” in interest rate this year. But he emphasized that “I’d have to see evidence of that first”. And he noted that it’s not so much as a number around 2% but it’s acceleration or deceleration. He added that “if we’re creeping up to 2 percent and we creep up to, say, 2.25 percent, that’s a different story than [if] we’re accelerating past 2 percent. ”
Harker sees neutral rate as between 2.75% and 3.0%. And asked if Fed would end the current tightening cycle in 2019, he said “could be, yeah, it’s possible”.
In its latest monthly report, Bundesbank issued a cautionary message about China’s current economic struggles and their potential impact on Germany. The report notes that China is grappling with “significant economic problems,” and the relationship between China and Western industrial nations has “noticeably deteriorated recently.” Such geopolitical risks, if they materialize, could have severe repercussions for the German economy.
The Bundesbank essay posits that “an economic crisis in China of the kind that has occurred in other countries in the past following a correction of excessive credit growth would probably be bearable for the German economy.” However, the impact would not be negligible, with projections indicating that Germany’s real GDP could be -0.7% lower in the first year of a potential crisis in China, and then -1% in the second year.
The report also highlights a more severe scenario: “However, an abrupt decoupling, for example as a result of a geopolitical crisis, would have a significantly greater impact on German industry in particular.” In such an event, German companies with direct involvement in China could face considerable losses in sales and profit. Industries like automotive, mechanical engineering, electronics, and electrical engineering are particularly reliant on Chinese demand.
Moreover, Bundesbank emphasizes the broader risks associated with the close economic ties between Germany and China: “the close real economic ties between Germany and China also pose considerable risks for the German financial system.”
Eurozone GDP grew 0.6% qoq in Q1, revised up from prior estimate of 0.3% qoq. EU GDP grew 0.7% qoq. Ireland (+10.8%) recorded the highest increase of GDP compared to the previous quarter, followed by Romania (+5.2%) and Latvia (+3.6%). Decreases were observed in Sweden (-0.8%), France (-0.2%) and Denmark (-0.1%).
Eurozone employment grew 0.6% qoq while EU employment grew 0.5% qoq. In the first quarter of 2022, Estonia (+3.5%), Latvia (+2.1%) and Portugal (+1.7%) recorded the highest growth of employment in persons compared with the previous quarter. Employment declined in Poland (-0.6%) and Croatia (-0.1%).
US Conference Board Consumer Confidence fell from 114.0 to 106.1 in August, well below expectation of 116.5. Present Situation Index fell from 153.0 to 144.8. Expectations Index fell from 88.0 to 80.2.
Dana Peterson, Chief Economist at The Conference Board:
“Consumer confidence fell in August 2023, erasing back-to-back increases in June and July.”
“Write-in responses showed that consumers were once again preoccupied with rising prices in general, and for groceries and gasoline in particular.
“Assessments of the present situation dipped in August on receding optimism around employment conditions
“Expectations for the next six months tumbled back near the recession threshold of 80, reflecting less confidence about future business conditions, job availability, and incomes.”
The latest OECD Interim Economic Outlook has revealed revised global growth forecasts, with an incremental uptick for 2023 followed by a slight dip in 2024. The updated predictions reflect a blend of uplifted expectations for some economies and dampened hopes for others, amidst a backdrop of inflation concerns and the repercussions of a more sluggish recovery in China.
For 2023, the global economic growth forecast now stands at 3.0%, marking a 0.3% increase from previous predictions. Conversely, projections for 2024 have seen a decrease of -0.2%, bringing the anticipated growth down to 2.7%.
Dissecting the outlook on a regional basis unveils a mixed bag of prospects:
US: A positive revision with growth estimates standing at 2.2% for 2023, up by 0.6%, and a 1.3% prediction for 2024, reflecting a 0.3% increase.
Eurozone: Here the expectations have been trimmed down with 2023 forecasts reduced by -0.3% to a mere 0.5%, and a 2024 estimate of 1.1%, down by -0.4%.
Japan: The outlook for 2023 appears brighter with a 0.5% increase to 1.8%, although the 2024 forecast has been slightly reduced by -0.1%, standing at 1.0%.
China: Forecasts have been negatively revised to 4.1% in 2023, a drop of -0.3%, and 4.6% in 2024, reflecting a decrease of -0.5%.
The OECD outlook points out considerable downside risks, emphasizing potential persistency in inflation accompanied by potential disruptions in the food and energy markets. Slowdown in China’s economy stands as a prominent concern, with ripple effects expected to diminish growth in global trading partners and possibly undercut business confidence universally.
Projections for headline inflation in G20 nations indicate a gradual decrease through 2023, moving from 7.8% in 2022 to 6.0% in 2023, and further dwindling to 4.8% in 2024. However, core inflation, primarily fueled by the services sector and relatively taut labour markets, is predicted to linger, necessitating a sustained restrictive posture in monetary policy across several countries.
As economies globally grapple with these changing dynamics, the emphasis remains on steering a cautious course, with a keen eye on inflation patterns as a decisive factor in shaping future policy directions. The evolving economic narrative dictates a necessity for many countries to maintain interest rates close to their present markers, extending well into 2024.
Atlanta Fed President Raphael Bostic said consumers are “staying pretty rock solid” and labour market maybe a “bit beyond full employment. And currently monetary is already “accommodative”. He could have dissented the latest rate cut if had a vote on monetary policy.
Bostic added that “I do think that the economy today is on solid footing and is likely to remain so. I am fairly comfortable standing pat with policy and strongly favor weighing the incoming data, both macro and micro, over the coming months before deciding on any further adjustments.”
Negative impacts from the prolonged trade war with China remained modest. “Many businesses that we’ve talked to basically said we’re not going to pass that on, so we have not seen consumers face the tariffs,” he said. “When we do, that will be a new phase of the tariff war.”
European Commission President Ursula von der Leyen talked about future relationship with UK after Brexit. She said “We aim at zero tariff, zero quotas and zero dumping, and this is very important for us.”
She also warned that “we are addressing the challenge that the time is very short, we have 11 months to negotiate a broad field”. “And it’s not only about trade, but we are also speaking about education, transport, fisheries, many, many other fields are in the portfolio to be negotiated.”
In the update to World Economic Outlook, IMF lowered 2020 global growth forecast by -0.l% to 3.3%, and 2021 by -0.2% to 3.4%. Still, they represent pickup form 2019’s 2.9% growth. IMF also noted that the downward revision “primarily reflects negative surprises to economic activity in a few emerging market economies, notably India”.
Meanwhile, market sentiment has been “boosted by “tentative signs that manufacturing activity and global trade are bottoming out, a broad-based shift toward accommodative monetary policy, intermittent favorable news on US-China trade negotiations, and diminished fears of a no-deal Brexit”. However, “few signs of turning points are yet visible in global macroeconomic data.”
Here are some highlights:
World output: 2020 at 3.3% (revised down by -0.1%), 2021 at 3.4% (revised down by -0.2%).
Advanced economies: 2020 at 1.6% (-0.1%), 2021 at 1.6% (unchanged).
US: 2020 at 2.0% (-0.1%), 2021 at 1.7% (unchanged).
Eurozone: 2020 at 1.3% (-0.1%), 2021 at 1.4% (unchanged).
Germany: 2020 at 1.1% (-0.1%), 2021 at 1.4% (unchanged).
Japan: 2020 at 0.7% (+0.2%), 2021 at 0.5% (unchanged).
UK: 2020 at 1.4% (unchanged), 2021 at 1.5% (unchanged).
Canada: 2020 at 1.8% (unchanged), 2021 at 1.8% (unchanged).
China: 2020 at 6.0% (+0.2%), 2021 at 5.8% (-0.1%).
India: 2020 at 5.8% (-1.2%), 2021 at 6.5% (-0.9%).
Canada GDP grew 0.2% mom in January, a below expectation of 0.4% mom. But that’s still the eight month of increase in a row. Goods-producing industries grew 0.8% mom. Services-producing industries rose 0.0% mom. Overall, 9 of 20 industrial sectors increased in January.
Statistics Canada said advance information indicates an approximate 0.8% expansion in real GDP in February. Notable increases were observed in the manufacturing sector as well as in mining, quarrying, and oil and gas extraction, accommodation and food services, and construction.
UK average weekly earnings including bonus grew 3.4% 3moy in December, unchanged from prior month and missed expectation of 3.5% 3moy. Weekly earnings excluding bonus rose 3.4% 3moy, up from 3.3% 3moy and matched expectations. Unemployment rate was unchanged at 4.0% staying at the lowest since 1970s. Also released, jobless claims rose 14.2k in January, above expectation of 12.3k. Claimant count rate was unchanged at 2.8%.
According to a CBI survey for the three months to August, UK business and professional services employment dropped at the quickest pace since 2009, with balance at -32%, down from -9%. Consumer services employment was even worse on record, with balance dropping from -31% to 063%. CBI added, “next quarter, employment is set to continue to fall, but the rate of decline is set to ease slightly.”
Ben Jones, CBI Principal Economist, said: “This quarter has shown some worrying falls in volumes, profitability and employment for the services sector. Although the pace of these declines is expected to ease, the impact of COVID-19 remains clear, with the services sector still facing challenges in terms of demand, revenues and cash flow… As we head into the autumn, the UK needs a bold plan to protect jobs as the job retention scheme draws to an end, to support the services sector.”
ECB President Christine Lagarde said in a Nikkei interview, “we are determined to tame inflation, to bring it back to our 2% medium-term target in a timely manner.” She acknowledged that “we have made a sizable adjustment already. But we still have more ground to cover”.
Highlighting the importance of data, Lagarde said, “Our reaction function will be anchored in the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, and this will dictate our decisions going forward.”
She emphasized ECB’s focus on headline inflation as the critical measure to ensure price stability. “That’s our thermometer, that’s what we are committed to doing,” she stated.
However, Lagarde also pointed to the relevance of additional inflation measures. “Core” inflation is one such measure, but others exist, such as those that exclude more volatile items or focus more on domestic inflation pressures.
She explained, “It’s to arrive at the ‘heart’ of inflation, the most persistent element in those price indexes that can help us understand where headline inflation is likely to settle in the medium term.”
Lagarde cautioned that significant upside risks to inflation outlook still exist, and the path of inflation remains uncertain. Therefore, she stressed the need for the ECB to be “extremely attentive to those potential risks.”
Notable rally is seen in oil markets as the week commences, with WTI crude oil marching towards 80 handle. This rise is largely driven by escalating tensions in the Middle East. Over the past weekend, a drone strike in Jordan, which has been linked to Iran, resulted in death of three US troops and injuries to as many as 34. Adding to regional instability, ongoing aggressive maritime attacks by Yemen’s Houthi rebels in the Red Sea continue to disrupt traffic and heighten geopolitical tensions.
Technically, WTI is now pressing an important near term cluster resistance at 38.2% retracement of 95.50 to 67.79 at 78.37, and 100% projection of 67.79 to 76.02 from 70.46 at 78.69. Sustained break of this level will solidify the case that fall from 95.50 has completed at 67.79.
In this bullish scenario, rise from 67.79 is at least a correction to fall from 95.50, with prospect of being the third leg of the pattern from 63.67 low. In either case, next target will be 161.8% projection at 83.77.
Nevertheless, rejection by 78.37/69, followed by 75.93 will argue that rebound from 67.79 has completed already, and keep near term outlook neutral at best.
Eurozone CPI slowed to 1.4% yoy in January, down from 1.6% yoy, matched expectation. Core CPI, rose to 1.1% yoy, up from 1.0% yoy and beat expectation of 1.0% yoy.
Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in January (2.6%), followed by food, alcohol & tobacco (1.8%), services (1.6%) and non-energy industrial goods (0.3%).
Jonathan Haskel, External Member of BoE MPC, said in a speech that UK investment has been very weak in the last couple of years. Brexit uncertainty is weighing on business sentiment.
Also, he noted that “Brexit is a process not an event”. And he warned that “that process has the possibility of creating more cliff-edges; the length of the transitional/implementation period, for example”.
“Since the very nature of investment is that it needs payback over a period of time there is a risk that prolonged uncertainty around the Brexit process might continue to weigh down on investment.”
US CPI rose 0.4% mom in September, above expectation of 0.3% mom. CPI core rose 0.2% mom, matched expectations. For the 12-month period, CPI ticked up to 5.4% yoy, above expectation of 5.3% yoy. It’s back at the highest level since January 1991. CPI core was unchanged at 4.0% yoy, matched expectations.
On the back of broad based strength in Dollar, Gold’s decline continues today and breaks 1190 handle to as low as 1188.42 so far. The down trend from 1365.24 is on track for 1172.06 fibonacci level. Daily RSI may indicate Gold is in oversold condition again. But based on current acceleration, RSI indeed suggests solid downside momentum. 1172.06 could be taken out without much hesitation and the next real hurdle is probably 1122.81 support. And in any case, near term outlook will remain bearish as long as 1217.20 resistance holds.
In the bigger picture, currently decline from 1365.24 is viewed as part of the long term sideway pattern from 1046.54 (2015 low). Sustained break of 61.8% retracement of 1046.64 to 1375.15 at 1172.06 will pave the way to 1046.54/1122.81 support zone. At this point, we’re not expecting a break there to resume long term down trend yet. Hence, we’ll look for bottoming signal below 1122.81.
Fed Powell: Negative rates probably inappropriate, not useful for US
In CBS 60 Minutes, Fed Chair Jerome Powell reiterated that the central bank is not considering negative interest rates. He said, “I continue to think, and my colleagues on the Federal Open Market Committee continue to think, that negative interest rates is probably not an appropriate or useful policy for us here in the United States.”
“There’s no clear finding that it actually does support economic activity on net, and it introduces distortions into the financial system, which I think offset that,” Powell said. “There’re plenty of people who think negative interest rates are a good policy. But we don’t really think so at the Federal Reserve.” “There’s a lot more we can do. We’ve done what we can as we go. But I will say that we’re not out of ammunition by a long shot.”
On the economy, Powell said, “assuming there’s not a second wave of the coronavirus, I think you’ll see the economy recover steadily through the second half of this year”. However, “for the economy to fully recover people will have to be fully confident, and that may have to await the arrival of a vaccine,” he added.
Full transcript of the program here.