RBA Lowe: Case for slower tightening becomes stronger as rate rises

    RBA Governor Philip Lowe reiterated in a speech that “further increases in interest rates will be required over the months ahead”. But policy is “not on a pre-sent path” due to uncertainties. Also, “all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.”

    Lowe also highlighted three sources of uncertainty to the economy. The first is the “global economic environment”, including the US, Europe and China. He said, “some slowing in the global economy will help bring inflation down, but a sharp slowing would make the job of delivering a soft landing here in Australia much harder.”

    The second source is “how inflation expectations and the inflation psychology in Australia adjust to the period of high inflation”. The third is “how households respond to higher interest rates”.

    Full speech here.

    Fed Brainard: Monetary policy will need to be restrictive for some time

      Fed Vice Chair Lael Brainard said yesterday that “monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down” to 2% target. She added Fed will need “several months of low monthly inflation readings to be confident that inflation is moving back down to 2%.”

      “Our resolve is firm,” Brainard said. “If history is any guide, it is important to avoid the risk of pulling back too soon,” and easing interest rates before inflation is under control.

      Boston Fed President Susan Collins said, “It’s really premature right now to be too specific about exactly what the right policy move will be in September… I will reiterate that we need to do more, we’ve not yet seen significant declines in prices, and that’s what we’re going to be looking for.”

      BoC hikes 75bps, rates need to rise further

        BoC raises the overnight rate target by 75bps to 3.25%. Correspondingly, the Bank Rate and deposit rate are now at 3.50% and 3.25% respectively. Hawkish bias is maintained as the Governing Council “still judges that the policy interest rate will need to rise further.”

        “As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target,” BoC added.

        BoC also noted that core inflation “continued to move up” with data indicating a “further broadening of price pressures, particularly in services”. It warned, “the longer this continues, the greater the risk that elevated inflation becomes entrenched.”

        The economy “continues to operate in excess demand and labour markets remain tight”. BoC expects the economy to “moderate in the second half of this year,  as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply.”

        Full statement here.

        US trade deficit narrowed to USD 70.6B in Jul

          US exports rose USD 0.5B to USD 259.3B in July. Imports dropped USD -9.7B to USD 329.9B. Trade deficit narrowed from USD -79.6B to USD -70.6B, versus expectation of USD -70.2B. The decrease in goods and services deficit reflected a decreased in goods deficit to USD -91.1B, and an increase of service surplus to USD 20.4B.

          Goods deficit with EU decreased USD 5.7B to USD -11.9B. Deficit with China decreased USD 3.9B to USD -33.0B. Deficit with Mexico increased USD 2.0B to USD -11.7B.

          Full release here.

          Canada exports dropped -2.8% mom in Jul, imports down -1.8% mom

            Canada merchandise exports dropped -2.8% mom to CAD 68.3B in July. That’s the first contraction in 2022, with declines observed in 6 of 11 production sectors. Total imports dropped -1.8% mom to CAD 64.2B, the first decline since January. Contractions were observed in 7 of the 11 production sections.

            Trade surplus narrowed from CAD 4.9B to CAD 4.1B, larger than expectation of CAD 3.8B.

            Full release here.

            BoE Pill: Truss’s gas plan could lower headline inflation

              BoE Chief Economist Huw Pill said plans by new Prime Minister Liz Truss on energy costs could help slowing inflation. He told the Parliament’s Treasury Committee today, “one of the things that does seem to be under consideration … is a change to the relationship between gas prices and retail gas prices in a direction that will lower headline inflation, relative to what we were forecasting,”

              Governor Andrew Bailey said, “It’s not for us to comment on what fiscal policy will be and we will wait and see what it is … but I do very much welcome the fact that there will be, as I understand it, announcements this week because I think that will help to, in a sense, frame policy and that’s important.”

              MPC member Silvana Tenreyro favors a more tentative approach on tightening. She said, “When close to the equilibrium rate, gradual rate rises allow us to react before we tighten too far into contractionary territory, as we observe the lagged impact of policy and demand on the labor market. They also do not preclude voting for more forceful rate increases in future, should adverse wage-price dynamics take hold.”

              On the other hand Catherine Mann reiterated her stance that “a more forceful set of moves in Bank Rate earlier on opens the potential for a policy hold, or even reversal, later depending on the evolution of both inflation and demand relative to supply.”

               

              BoC to hike, AUD/CAD ready for down trend resumption

                BoC rate decision is the main focus for today. Markets are expecting a 75bps rate hike to 3.25%. But that’s far from being certain. With current interest rate at 2.50% already in neutral range, there are talks that BoC could opt for a smaller hike of 50bps. Yet, there are also arguments for a larger 100bps hike today, followed by a pause. Some wildcard potential is there.

                Some previews on BoC:

                AUD/CAD is making some progress in breaking through 0.8875 minor support this week. The development suggests that corrective rebound from 0.8733 has completed at 0.9104, and larger down trend is ready to resume. Retest of 0.8733 low should be seen first. Decisive break there will confirm this bearish view and target 61.8% projection of 0.9514 to 0.8733 from 0.9104 at 0.8621. However, break of 0.8949 minor resistance, in reaction to BoC, will mix up the outlook.

                Australia AiG services rose to 53.3, businesses highlight interest rate as concern

                  Australia AiG Performance of Services Index rose 1.6 pts to 53.3 in August. Looking at some details, sales rose 2.6 to 51.9. Employment rose 0.8 to 53.2. New orders rose 6.7 to 57.3. Input prices dropped -5.6 to 68.7. Selling prices dropped -2.2 to 61.2. Average waged dropped -1.3 to 67.6.

                  Innes Willox, Chief Executive of Ai Group, said: “Services remained in expansion in August, pointing to the overall resilience of the sector with sales, employment and new orders all higher than in July…. Price and wages pressures continued into August although the pace of increase in input prices eased somewhat. With service businesses highlighting interest rates as a key area of concern, the Reserve Bank’s decision yesterday to raise the cash rate by another 50 basis points to 2.35% will further fuel their fears of a fall in spending in the months ahead.”

                  Full release here.

                  Australia GDP grew 0.9% qoq in Q2, driven by household spending and exports

                    Australia GDP grew 0.9% qoq in Q2, matched expectations. Household spending rose 2.2% for the quarter, contributing 1.1% pts to GDP. Net trade contributed 1.0% pts to GDP, driven by exports which rose 5.5%, partially offset by 0.7% rise in imports. Terms of trade rose 4.6% with export and import prices up strongly.

                    Sean Crick, head of National Accounts at the ABS, said: “Rises in household spending and exports drove growth in the June quarter. This is the third consecutive quarter of economic growth, following a contraction in the September quarter 2021, which was impacted by the Delta outbreak.”

                    Full release here.

                    Japan officials concerned by one-sided move in Yen, warned of necessary action

                      As Yen tumbles further to fresh 24-year low against Dollar, Japan Finance Minister Shunichi Suzuki cautioned that “recent moves are rather rapid and one-sided . We need to be watching developments with strong interest.”

                      Chief Cabinet Secretary Hirokazu Matsuno said at a news briefing, “I’m concerned about rapid, one-sided moves in the currency market recently. If such moves continue, we will take necessary action.”

                      US ISM services ticked up to 56.9, corresponds to 2.5% annualized GDP growth

                        US ISM Services PMI rose from 56.7 to 56.9 in August, above expectation of 55.4. Business activity/production rose from 59.9 to 60.9. New orders rose from 59.9 to 61.8. Employment rose from 49.1 to 50.2. Prices dropped from 72.3 to 71.5.

                        ISM said: ” The services sector had a slight uptick in growth for the month of August due to increases in business activity, new orders and employment. Based on comments from Business Survey Committee respondents, there are some supply chain, logistics and cost improvements; however, material shortages remain a challenge. Employment improved slightly despite a restricted labor market.”

                        “The past relationship between the Services PMI and the overall economy indicates that the Services PMI for August (56.9 percent) corresponds to a 2.5-percent increase in real gross domestic product (GDP) on an annualized basis.”

                        Full release here.

                        UK PMI construction recovered to 49.2, but further weakness ahead

                          UK PMI Construction recovered from 48.9 to 49.2 in August, above expectation of 48.0. S&P Global noted that activity was down for the second month running. New orders and employment had softer rises. But supply-chain disruption and inflationary pressures eased.

                          Andrew Harker, Economics Director at S&P Global Market Intelligence, said: “The UK construction sector looks set to be in for a challenging period, according to the latest PMI data. Not only did construction activity fall for the second month running, but a range of indicators from the survey pointed to further weakness ahead.”

                          Full release here.

                          CAD/JPY upside breakout, targets 108.52, then 109.93

                            CAD/JPY breaks through 107.62 high today on broad based Yen selloff. The break of near term channel resistance also indicates upside acceleration. Further rally is expected now as long as 106.55 minor support holds. Next near term targets are 161.8% projection of 101.39 to 105.07 from 102.57 at 108.52, and then 200% projection at 109.93.

                            Current development also indicates resumption of long term up trend from 73.80 (2020 low). Next medium term target is 161.8% projection of 73.80 to 91.16 from 84.65 at 112.73.

                            RBA hikes 50bps to 2.35%, more over the months ahead

                              RBA raises cash rate target by 50bps to 2.35% as widely expected. The Board “expects to increase interest rates further over the months ahead”, but it’s “not on a pre-set path”. The size and timing of future hikes will be “guided by the income data and the Board’s assessment of the outlook for inflation and the labour market.”

                              Regarding inflation, RBA expects it to peak “later this year”. The central forecasts is for CPI to be around 7.75% over 2022, a little above 4% over 2023, and then around 3% over 2024.

                              The economy is “continuing to grow solidly” as boosted by a “record level of the terms of trade”. Labor market is “very tight” while wages growth “has picked up”.

                              It maintained that an important source of uncertainty is household spending, which is facing pressure from higher inflation and higher interest rates.

                              Full statement here.

                               

                              Yuan hit fresh 2-yr low, shrugging PBoC actions

                                The People’s Bank of China announced yesterday to cut the foreign exchange reserve requirement ratio (RRR) to 6% from 8% beginning September 15. That is, the amount of foreign-exchange deposits banks need to set aside as reserves will be lowered, freeing up funds to buy Yuan.

                                The move, together with a string of stronger-than expected exchange rate fixings, are seen as a strong signal on PBoC’s stance to at least slow Yuan’s depreciation. That came when Yuan hit fresh two-year low and with USD/CNH approaching psychological important 7 handle.

                                But USD/CNH’s rally (Yuan’s depreciation) is continuing. There is no sign of topping in USD/CNH as long as 6.8877 support holds, technically. It’s still on track to 61.8% projection of 6.3057 to 6.8372 from 6.7159 at 7.0444.

                                BoE Mann: Fast and forceful monetary tightening superior to gradualist approach

                                  In a speech, BoE MPC member Catherine Mann said, “inflation today does not simply depend on past inflation but depends as well on markets, firms, and household’s expectations, and crucially, how these expectations react to each other, are formed over time, and interact with our and others’ policy choices. ”

                                  “In this more complex and arguably more realistic and relevant version of the inflation model, a fast and forceful monetary tightening, potentially followed by a hold or reversal, is superior to the gradualist approach.”

                                  “This policy strategy would reduce the risks of a more extended and costly tightening cycle later that depends primarily on shrinking aggregate demand.”

                                  Full speech here.

                                  Eurozone retail sales volume rose 0.3% mom in Jul, EU up 0.3% mom

                                    Eurozone retail sales volume rose 0.3% mom in July, below expectation of 0.6% mom. volume of retail trade increased by 0.4% for automotive fuels and by 0.1% for food, drinks and tobacco, while it decreased by -0.4% for non-food products.

                                    EUR retail sales volume rose 0.3% mom. Among Member States for which data are available, the highest monthly increases in the total retail trade volume were registered in Germany (+1.9%), the Netherlands (+1.7%), Luxembourg and Poland (both +1.5%). The largest decreases were observed in Austria (-1.8%), Finland (-1.7%) and Spain (-1.0%).

                                    Full release here.

                                    Eurozone Sentix investor confidence dropped further to -31.8, a significant recessionary trend already set in

                                      Eurozone Sentix Investor Confidence dropped further from -25.2 to -31.8 in September, below expectation of -27.5. That’s also the lowest level since May 2020. Current Situation Index dropped from -16.3 to -26.5, lowest since February 2021. Expectations index dropped from -33.8 to -37.0, lowest since December 2008.

                                      Sentix said: “It is very likely that a significant recessionary trend has already set in… In historical retrospect, it is clear that the extent of the current economic dislocation exceeds the collapse of tech stocks (2003), the euro crisis (2012) and even the collapse in the course of the Corona lockdowns (2020).”

                                      “Although the collapse in 2020 was even sharper, the monetary policy response in the form of trillion-dollar money-printing programmes by central banks quickly led to a turnaround in economic expectations. There are no signs of this at present. Worse still, a look at the sentix thematic indices shows that investors cannot expect any help from either inflation or the central banks.”

                                      Full release here.

                                      UK PMI services finalized at 50.9 in Aug, composite at 49.6

                                        UK PMI Services was finalized at 50.9 in August, down from July’s 52.6. PMI Composite was finalized at 49.6, down from prior month’s 51.2, the first contraction reading in 18 months.

                                        Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

                                        “UK private sector business activity fell for the first time in a year-and-a-half in August as an increasingly severe downturn in manufacturing was accompanied by a near-stalling of the vast services sector…

                                        “Although the survey data are currently consistent with the economy contracting at a modest quarterly rate of 0.1%, deteriorating trends in order books suggest the incoming prime minister will be dealing with an economy that is facing a heightened risk of recession, a deteriorating labour market and persistent elevated price pressures linked to the soaring cost of energy.”

                                        Full release here.

                                        Eurozone PMI composite finalized at 49.8, economy undergoing its weakest spell for nine years

                                          Eurozone PMI Services was finalized at 49.8 in August, down from July’s 51.2, a 17-month low. PMI Composite was finalized at 48.9, down from prior month’s 49.9, a 18-month low.

                                          Looking at some member states, Ireland PMI Composite dropped to 51.0 (18-month low). Spain dropped to 50.5 (7-month low). France dropped to 50.4 (17-month low). Italy recovered to 49.6, (2-month high). Germany dropped to 46.9 (27-month low).

                                          Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

                                          “A second month of deteriorating business conditions in the euro area adds to the likelihood of GDP contracting in the third quarter…. The deterioration is also becoming more broad-based, with services now joining manufacturing in reporting falling output..”

                                          “Although the overall rate of decline remains only modest, commensurate with GDP falling at a quarterly rate of just 0.1%, the latest data point to the economy undergoing its weakest spell for nine years, excluding the downturns seen during the height of the pandemic.”

                                          Full release here.