Fed Kashkari: We are moving at an appropriately aggressive pace

    Minneapolis Fed Bank President Neel Kashkari said yesterday, “We are moving very aggressively. There’s a lot of tightening in the pipeline. We are committed to restoring price stability but we also recognize given these lags there is a risk of overdoing it.”

    “We are committed to restoring price stability, but we also recognize, given these lags, there is the risk of overdoing it on the front end, and so I think we are moving at an appropriately aggressive pace,” he said.

    “The economy is sending us a lot of mixed signals right now,” Kashkari said. “We need to keep tightening policy until we see some compelling evidence that core inflation is actually having peaked and is on its way down,”

    “And then I think we need to sit there and we need to pause and wait and let the tightening work its way through the economy to see at that point, have we done enough?”

    US consumer confidence rose to 108.3, reversing consecutive declines

      US Conference Board Consumer Confidence rose from 101.4 to 108.3 in December. Present Situation Index rose from 138.3 to 147.2. Expectations Index rose from 76.7 to 82.4.

      “Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

      “The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. This shift in consumers’ preference from big-ticket items to services will continue in 2023, as will headwinds from inflation and interest rate hikes.”

      Full release here.

      GBP/USD breaks 1.2956 on no-deal Brexit concern

        Sterling’s selloff accelerates today as talk of the chance of no-deal Brexit heat up. That came after UK Trade Minister Liam Fox said over the weekend that there is no more than 60-40 chance of no-deal Brexit. Prime Minister Theresa May’s spokesman tried to tone it down and said “We continue to believe that a deal is the most likely outcome because reaching a good deal is not only in the interests of the UK, it is in the interests of the EU and its 27 members.” Nonetheless, the spokesman also said that Fox is right to said there is risk of a no-deal. Meanwhile, the government is prepared for “all eventualities.

        Technically, GBP/USD finally takes out 1.2956 low to resume the fall from 1.4376. 61.8% retracement of 1.1946 (2016 low) to 1.4376 at 1.2874 is next target.

        GBP/JPY is on course for 143.18/76 support zone.

        Though, EUR/GBP continues to range bound as Euro is itself also pressured.

        Democrats to offer a deal to end government shutdown without border wall

          The partial US government shutdown is now in its second week. Democrats, who will take control over House with 36-seat majority, plan to vote on a two-part package on Thursday, intending to break the deadlock. One part of the package include a bundle of six measures worth USD 265B for funding non homeland security agencies through September 30. The second part include funding for the Department of Homeland Security through February 8, and provide $1.3 billion for border fencing and $300 million for other border security items including technology and cameras. But there won’t be funding for the border wall that Trump demanded and shut down the government for.

          Democrat leaders Nancy Pelosi and Chuck Schumer said in a joint statement that “While President Trump drags the nation into Week Two of the Trump Shutdown and sits in the White House and tweets, without offering any plan that can pass both chambers of Congress, Democrats are taking action to lead our country out of this mess.”

          The fate of the Democrats’ package is rather uncertain in the Republican controlled Senate. spokesman for Senate Republican leader Mitch McConnell already said “It’s simple: The Senate is not going to send something to the president that he won’t sign.”

          But Trump himself hinted that he might want to make a deal.

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          US agriculture associations cry #TradeNotTariffs

            Agriculture associations in the US turned to the Congress for help after their voices have fallen on Trump’s deaf ears. The American Soybean Association (ASA), the National Corn Growers Association, National Association of Wheat Growers (NAWG), Association of Equipment Manufacturers (AEM) issued a joint appeal to the Congress with hashtag #TradeNotTariffs.

            The urged the Congress to “convince the administration to halt tariffs and go back to the negotiating table.” And, Under the hashtag #TradeNotTariffs, members of these organizations are also raising awareness on social media by sharing with the public what tariffs could mean for their livelihoods – and how severe that outlook could be.

            This is an immediate response to the news that White House would announce the final list of tariffs on USD 50B in Chinese goods. Chinese has announced a retaliation list several months ago that include 25% tariffs on US soybeans. ASA described the Chinese retaliation as “devastating to growers of the number one US agricultural export.” NAWG said “adding a 25 percent tariff on exports to China for US wheat is the last thing we need during some of the worst economic times in farm country.”

            NCGA warned farmers “cannot afford the immediate pain of retaliation nor the longer term erosion of long-standing market access and economic partnerships with some of our closest friends and allies.” AEM also said “we strongly oppose a trade war with China because no one ever wins in these tit-for-tat dispute”.

            Here is the full release.

            Schlegel: SNB could maintain negative interest rate long term

              Martin Schlegel, Alternate. Member of the SNB Governing Board , said that the central bank could maintain negative interest rate long term. And there is even scope to cut interest rates deeper into negative territory.

              Also, “if the SNB stopped negative rates and went to zero, this would certainly not be good for Switzerland,” he said. “Then we would have a massively strong currency and the yield curve would become inverse or more flat, which is not good for the banking system.”

              France PMI composite dropped to 30.2, GDP collapse rate approaching double digits

                France PMI Manufacturing dropped to 42.9 in March, down from 49.7, hitting a 86-month low. PMI Services plummeted to 29.0, down from 52.6, hitting series low. PMI Composite dropped to 30.2, down from 51.9, also a record low. The data suggested that French private sector activity contracted at the sharpest rate in nearly 22 years of data collection.

                Commenting on the Flash PMI data, Eliot Kerr, Economist at IHS Markit said:

                “The latest PMI data revealed dismal results for the French private sector, with coronavirus-driven shutdowns leading to widespread economic disruption. March saw a record rate of declines for services activity, while the manufacturing sector suffered to the greatest extent since the global financial crisis. Taken together, these declines suggest GDP is collapsing at an annualised rate approaching double digits.

                “Currently with the fourth highest number of confirmed infections in Europe, France has put in place wide-ranging measures to stem the further spread of COVID-19 but is also balancing these with policies to limit the associated economic impact. Over the coming months, the PMI will be a crucial indicator in assessing the development of the effects of these policies on the economy.”

                Full release here.

                ECB Lagarde: Larger than 25bps hike appropriate in Sep if MT inflation outlook persists or deteriorates

                  In a European Parliament committee hearing, ECB President Christine Lagarde reiterated the policy decision made at June meeting, including ending the asset purchase program, scheduling to raise interest rate by 25bps in July, and to raise interest rates again in September.

                  As for the September hike, “if the medium-term inflation outlook persists or deteriorates, a larger increment (than 25bps) will be appropriate.”

                  Beyond September, ECB anticipates that “a gradual but sustained path of further increases in interest rates will be appropriate”, depending on incoming data.

                  Full remarks here.

                  German Ifo Business climate dropped to 97.9, deterioration spreading to services

                    In May, Germany Ifo Business Climate dropped to 97.9, down from 99.2 and missed expectation of 99.1. Current Assessment index dropped to 100.6, down from 103.3 and missed expectation of 103.5. Expectations Index rose to 95.3, up from 95.2 and beat expectation of 95.0.

                    Ifo President Clemens Fuest said “the German economy is still lacking in momentum.” Manufacturing index dropped “slightly” but expectations rose for the first time since September 2018. However, Also, “in the services, the business climate took a substantial hit. Not since April 2013 has the indicator of current sentiment fallen as far as it did this month. Optimism with regard to the coming months also declined.”

                    Full release here.

                    BoJ Kuroda: Best to manage inflation expectations with flexible targeting framework

                      In academic conference organized by BoJ, Governor Haruhiko Kuroda expressed his openness to flexible inflation targeting. Former ECB President Jean-Claude Trichet also emphasized that medium- to long-term inflation expectations are what really matter.

                      Kuroda said “If missing inflation comes from structural factors such as globalization and digitalization, central banks should continue examining how best to manage inflation expectations .. within the flexible inflation targeting framework.” He also noted the need to expand the policy tools to fight the next downturn. “While policy makers have developed a wide range of unconventional policy tools, their effectiveness and transmission mechanisms may differ depending on financial conditions and economic structure,” Kuroda said.

                      Trichet also said it’s not necessary for central banks to target exactly the same level of inflation in a set period of time. Instead, “there is a consensus among central banks that real success is to solidly anchor inflation expectations in the medium- to long-term in line with their definition of price stability.”

                      Swiss CPI rose 0.4% mom, 1.0% yoy. Import prices led

                        Swiss CPI rose 0.4% mom, 1.0% yoy in May, above expectation of 0.0% mom, 0.8% yoy.

                        Core CPI rose 0.1% mom, 0.4% yoy. Domestic products CPI rose 0.2% mom, 0.4% yoy. Imported products CPI rose 0.8% mom, 2.7% yoy.

                        Fed Rosengren prefers inflation range targeting

                          Ahead of a broad review on monetary policy framework, Boston Fed President Eric Rosengren said he’d prefer a range targeting approach on inflation. That is, Fed could be forced to accept inflation below 2% during recessions. On the other hand, Fed should commit to achieve above 2% inflation in good times. For example a range of 1.5-2.5%.

                          Rosengren echoed other platemakers’ comment that the current 2% target is “symmetric”. But in practice, people saw that figure as a “ceiling”. He added, “even though we’re only missing by a little bit it actually does matter if you miss by a little bit on a regular basis.”

                          SECO downgrades Swiss 2021 GDP forecast to 3.2%

                            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.”

                            Full release here.

                            High-level US-China trade talks to resume next week, aiming at a deal in April

                              It’s reported, without confirmation from named officials, that high-level US-China trade talk are going to resume week in a push to close the deal by the end of April. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin would fly to Beijing in the week of March 25 to meet Chinese Vice Premier Liu He again. The following week, Liu He is expected to fly to Washington to continue the negotiations.

                              At the same time, it’s reported that China is pushing back against some of the American demands on core issues. A key reason is the lack of assurance from Trump on lifting tariffs imposed. China is also said to be stepping back from the initial agreements over pharmaceutical data protection, patent linkages and refused to give ground on data-service issues. Nevertheless, some officials on both sides are seeing the “back-and-froth” as something expected in typical negotiations.

                              The date for signing a trade deal between the countries has been pushed back recently. While it’s still possible to happen in April, the more probable occasion would be as sideline of G20 summit in Japan in June. Meanwhile, in his typical rhetorics, Trump said at the White House yesterday that “talks with China are going very well”.

                              BoE’s Bailey anticipates marked decrease in October’s inflation figures

                                BoE Governor Andrew Bailey, in an interview with Belfast Telegraph, expressed that he “wasn’t surprised” by the latest inflation report released on Wednesday. This report showcased consumer prices having ascended by 6.7% compared to the previous year in September, mirroring the growth rate observed in August.

                                Bailey’s added the inflation rate was “not far off what we were expecting.” Even more reassuring was the slight dip in core inflation, a development hefound “quite encouraging.”

                                He optimistically anticipates a “noticeable drop” in the headline inflation rate with the forthcoming October data. This anticipated decline can be attributed to the significant surge in energy prices last year, which will be excluded from the annual comparison.

                                However, Bailey warned, “Pay growth as measured is still well above anything that’s consistent with the target.”

                                 

                                 

                                BoJ Ueda: Current policy a necessary, appropriate means to achieve 2% inflation

                                  At a parliamentary confirmation hearing, incoming BoJ Governor Kazuo Ueda said, “current policy is a necessary, appropriate means to achieve 2% inflation,” despite various side effects emerging from the stimulus.

                                  “Japan’s trend inflation is likely to rise gradually. But it will take some time for inflation to sustainably and stably achieve the BOJ’s 2% target,” he said.

                                  “Consumer inflation is likely to fall below 2% in the latter half of the next fiscal year. It takes time for the effect of monetary policy to appear on the economy. ”

                                  “It’s standard practice to act preemptively to demand-driven inflation, but not respond immediately to supply-driven inflation. Otherwise, the BOJ will be cooling demand, worsening economy and pushing down prices by tightening monetary policy.”

                                  “If trend inflation heightens significantly and sustained achievement of the BOJ’s 2% target comes into sight, the central bank must consider normalizing policy. But if trend inflation lacks strength, the bank must continue how to maintain its ultra-easy policy, while paying attention to deterioration in market function.”

                                  US personal income grew 10.5% in Apr, spending dropped -13.6

                                    US personal income grew 10.5% mom, or USD 1.97T in April, versus expectation of -7.0% mom decline. Spending, on the other hand, dropped -13.6% mom, or USD 1.89T, worse than expectation of -12.6% mom. Headline PCE price index slowed to 0.5% yoy, down from 1.3% yoy. Core PCE price index also dropped to 1.0% yoy, down from 1.7% yoy.

                                    Full release here.

                                    Fed Bullard: monetary policy needs to be more nimble in new regime

                                      St. Louis Fed President James Bullard told Reuters that current inflation, which is well over Fed’s target, is at levels which former chairs like Alan Greenspan would have “immediately tried to quash.” He called for swift action on ending the asset purchase program. “We are not being that preemptive. Our models say this will settle down, but in the meantime it will be pretty volatile,” he said, “what I want to be prepared for and get the committee prepared for is the risk that this is an unpredictable situation.”

                                      Bullard also said a new “regime” may have arrived and “monetary policy needs to be more nimble.” The global equilibrium was upset by the pandemic, and “the reverberations will continue, and you will have a lot more volatility than you are used to.”

                                      “We will have long, lingering effects as the rest of the world recovers. You have shortages and bottlenecks everywhere. You have Europe likely to grow more quickly in coming quarters,” Bullard said. “You have industries still adjusting to the post-pandemic world – many things happening, and at a pace we are not used to.”

                                      Fed to hike by 75bps? 10-year yield heading to 4%?

                                        FOMC rate decision is the major focus today. Just before last Friday, markets have well received Fed’s communication on the 50bps hike per meeting “plan”. But it’s another world now after data showed CPI inflation reaccelerated in May. Fed fund futures are pricing in near 100% change of a 75bps rate hike at this meeting. The question now is what Fed is going to deliver.

                                        The new economic projections will also be closely watched too. The stubborn inflation reading should be reflected in the new forecasts, as well as it’s impact on growth and employment. More importantly, the dot plot will again catch most attention. Back in March, only 7 of 16 FOMC member penciled in interest rate above 2% by the end of 2022. The balance would likely shift further to the hawks’ side. But by how far?

                                        Some suggested readings on FOMC:

                                        The strong rally, with acceleration in 10-year yield this week is a big surprise. 2018 high at 3.248 was taken out with ease and it’s now close to 161.8% projection of 0.398 to 1.765 from 1.343 at 3.554. Break of 3.167 resistance turned support is needed to signal short term topping, or any retreat should be relatively brief. Sustained break of 3.554 will pave the way to 200% projection at 4.077, which is close to 4% handle.

                                        Australia GDP grew 0.7% qoq in Q2 better than expectation

                                          Australia GDP grew 0.7% qoq in Q2, above expectation of 0.5% qoq. Over 2020-21, the economy grew 1.4%. Head of National Accounts at the ABS, Michael Smedes said: “Domestic demand drove growth of 0.7 per cent this quarter which saw continued growth across household spending, private investment and public sector expenditure. Lockdowns had minimal impact on domestic demand, with fewer lockdown days and the prolonged stay at home orders in NSW only commencing later in the quarter”.

                                          Full release here.