ECB Governing Council member Madis Muller said, “I think 75 basis points should be among the options for September given that the inflation outlook has not improved.”
“Still, I’m going into the meeting with an open mind and I want to both see the new projections and hear my colleague’s arguments,” he added.
“We should not be too timid with policy moves as inflation has been too high for too long and we are still far below the neutral rate,” he said.
US Conference Board Consumer Confidence rose notably from 95.3 to 103.2 in August, above expectation of 97.6. Present Situation Index rose from 139.7 to 145.4. Expectations Index rose from 65.6 to 75.1.
“Consumer confidence increased in August after falling for three straight months,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index recorded a gain for the first time since March. The Expectations Index likewise improved from July’s 9-year low, but remains below a reading of 80, suggesting recession risks continue. Concerns about inflation continued their retreat but remained elevated.”
“Meanwhile, purchasing intentions increased after a July pullback, and vacation intentions reached an 8-month high. Looking ahead, August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term.”
Richmond Fed President Thomas Barkin said, “we’re committed to returning inflation to our 2% target and we’ll do what it takes to get there. I’d expect inflation to bounce around on the way back to our target.” He didn’t expect inflation to “come down immediately”.
“A recession is obviously a risk in the process,” Barkin said. But, “it doesn’t have to be like a 2008 recession, it doesn’t have to be calamitous. We’re out of balance today…returning to normal might actually mean products on shelves, cars on lots and restaurants fully staffed.”
ECB Governing Council member Klaas Knot said, “a swift normalization of interest rates is an essential first phase, and some front-loading should not be excluded. The broadening and deepening of our inflation problem generates the need to act forcefully.”
Knot saw upside risks to inflation, including from higher food and energy prices, a weaker euro, copious budget spending and rising expectations. He added that even if the slowdown in the economy were to materialize, “this in itself is unlikely to bring inflation back to our objective over the medium term.”
Knot said earlier last week that a rate hike of at least 50bps is needed next week.
Eurozone Economic Sentiment Indicator dropped from 98.9 to 97.6 in August, well below expectation of 102.0. Employment Expectation Indicator rose from 107.2 to 108.0. Industry confidence dropped from 3.4 to 1.2. Services confidence dropped from 10.4 to 8.7. Consumer confidence improved from -27.0 to -24.9. Retail trade confidence rose from -7.1 to -6.3.
EU Economic Sentiment Indicator dropped from 97.5 to 96.5. Amongst the largest EU economies, the ESI plummeted in the Netherlands (-4.8) and posted significant declines in Germany (-2.5), France and Poland (both -1.8), as well as Italy (-1.2). Spain stood out with a mild increase (+0.8).
Swiss KOF Economic Barometer dropped from 90.5 to 86.5 in August, below expectation of 88.6. KOF said the reading is “quite considerably below its long-term average”. Accordingly, “for the near future the outlook for the Swiss economy appears less than encouraging.”
KOF added: ” The decline is primarily due to indicators broadly associated with private consumption, but the manufacturing sector and the construction industry are emitting negative signals, too. The other indicators included in the barometer show hardly any changes.”
Minneapolis Fed President Neel Kashkari said yesterday, “By many, many measures we are at maximum employment and we are at very high inflation. So this is a completely unbalanced situation, which means to me it’s very clear: We need to tighten monetary policy to bring things into balance.”
“When inflation is 8% or 9%, we run the risk of unanchoring inflation expectations and leading to very bad outcomes that would cause us to have to be very aggressive — Volcker-esque — to then re-anchor them,” he said.
“We definitely want to avoid allowing that situation to develop. So with inflation this high, for me, I’m in the mode of we need to err on making sure we’re getting inflation down, and only relax when we see compelling evidence that inflation is well on its way back down to 2%,” he said.
ECB Chief Economist Philip Lane said in a speech that the upcoming September monetary policy meeting will be the “start of a new phase” for the central bank. This new phase consists of a ” meeting-by-meeting (MBM) approach” to setting interest rates.
At a basic level, the transition from rate forward guidance to the MBM approach is in line with our monetary policy strategy, which assessed that forward guidance was primarily an appropriate response to the lower bound constraint,” he said. “As policy rates move away from the lower bound, the inherent flexibility of the MBM approach is better suited to calibrating monetary policy in a highly uncertain environment.”
Lane also explained that the MBM approach essentially has “two elements”, the terminal rate, and the speed to close the gap between prevailing interest rate and the assessed terminal rate.
Oil prices edged slightly higher today but fails to gather enough upside momentum so far. It’s supported by hopes of a production cut from OPEC+, as response to restore balance after Iran’s nuclear deal. Also, unrest in Libya’s capital at the weekend prompted concerns of disruption of supply from the country.
WTI’s first attempt at 95.91 resistance failed last week, but retreat is so far shallow. Some support is seen from 4 hour 55 EMA, which is a positive sign, and could set the base for another taken on the resistance.
Also, in the background, 86.41 low was already close enough to an important cluster support at 85.92, with 100% projection of 131.82 to 93.47 from 124.12 at 85.77. That is, the conditions are there for WTI to complete the whole corrective pattern from 131.81 high.
Break of 96.59 and sustained trading above 95.91 should confirm near term bullish reversal, and set the stage for 103.84 resistance next.
The Chinese Yuan extends recent decline and hits a new 2-year low today. This comes on the back on broad based strength in Dollar, on expectation that Fed’s interest rate will stay high for long even after the current tighten cycle finishes. On the other hand, Yuan’s weakness is also driven by weaker than expected economic data and rate cut by PBoC. China’s PMI data to be released later in the week, and US non-farm payroll, could trigger even steeper selloff in Yuan against the greenback.
USD/CNH’s up trend resumes today and hit as high as 6.9323 so far. Outlook will stay bullish as long as 6.8459 support holds. Next target is 61.8% projection of 6.3057 to 6.8372 from 6.7159 at 7.0444. A question is whether there would be intervention by the Chinese authority above the 7.0000 mark.
Australia retail sales turnover rose 1.3% mom to AUD 34.67B in July, well above expectation of 0.3% mom.
Ben Dorber, head of retail statistics at the ABS, said: “After slowing growth in recent months, the 1.3 per cent rise in July was the largest since the 1.6 per cent rise in March 2022.
“Turnover rose in five of the six retail industries in July 2022. This shows that, despite cost-of-living pressures, households are continuing to spend.”
BoJ Governor Haruhiko Kuroda said over the weekend, “somewhat miraculously, now we have 2.4% inflation. But almost wholly caused by the international commodity price hike, energy and food.”
“So we expect that by the end of this year, maybe inflation rate may approach 2 or 3%, but next year, inflation rate again decelerate toward 1.5%,” he said.
“We have no choice other than continued monetary easing until wages and prices rise in a stable and sustainable manner.”
SNB Chairman Thomas Jordan said over the weekend, “There are signs that inflation is increasingly spreading to goods and services that are not directly affected by the pandemic or the war in Ukraine.”
“In fact, it appears that in the current environment, higher prices are being passed on more quickly — and are also being more readily accepted — than was the case until just recently,” he added.
Inflation expectations “have also been moving upwards slightly” and wage growth is “gathering momentum,” Jordan said, cautioning that the “longer-term outlook for monetary policy is also subject to high uncertainty.”
“In particular, a decline in global economic integration could increase companies’ price-setting power, meaning that they would be able to push through price increases more easily,” he said.
ECB board member Isabel Schnabel said, “Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high. In this environment, central banks need to act forcefully.”
Governing Council member Martins Kazaks said, “Frontloading rate hikes is a reasonable policy choice. We should be open to discussing both 50 and 75 basis points as possible moves. From the current perspective, it should at least be 50.”
Another Governing Council member Francois Villeroy de Galhau said ECB needs to be at “neutral rate” before the end of the year, “after another significant step in September… Have no doubt that we at the ECB would if needed raise rates further beyond normalization: bringing inflation back to 2% is our responsibility; our will and our capacity to deliver on our mandate are unconditional.”
Governing Council member Olli Rehn said, “The reality is that we have excessively high inflation globally, also in Europe — that’s why it’s action time. The next step will be a significant move in September, depending on the incoming data and the inflation outlook.”
US personal income rose 0.2% mom, or USD 47.0B in July, below expectation of 0.6% mom. Spending rose 0.1% mom or USD 23.7B, also below expectation of 0.4% mom.
From the preceding month, PCE price index dropped -0.1% mom. prices for goods dropped -0.4% mom while prices for services rose 0.1% mom. Food prices rose 1.3% mom. Energy prices decreased -4.8% mom. PCE core, excluding food and energy, rose 0.1% mom.
Over the year, PCE price index rose 6.3% yoy, slowed from 6.8% yoy. Prices for goods rose 9.5% yoy while prices for services rose 4.6% yoy. Food prices rose 11.9% yoy. Energy prices rose 34.4% yoy. PCE core, excluding food and energy, rose 4.6% yoy, slowed from 4.8% yoy.
RBNZ Governor Adrian Orr told Bloomberg TV earlier today, “We know we have to slow the economy. We knew we had to be 3% plus (on interest rates) to begin that slowing journey and now we’re in a much more comfortable position.”
“We think there’ll be least another couple of rate hikes, but then we hope to be in a position where we can be data driven,” he added.
As about the risks of recession, Orr said, “Our core view is no, that we won’t see technical recession. There’s quite a reasonable bounce back in economic activity.”
“Our outlook is for almost flat real consumption so for us to see retail sales come off like that, it’s not a surprise,” Orr said. “It’s a good signal that that monetary policy is biting and we’re doing our work.”
“Consumers will be taking a significant part of the brunt of the slowdown because, we’re an open trading economy. Our monetary policy mostly bites on domestic spending.” But, while “slower growth is a necessary position. It doesn’t have to be negative growth.”
Germany Gfk consumer sentiment for September dropped from -30.9 to -36.5, Worse than expectation of -31.5. In August, economic expectations improved from -18.2 to -17.6. Income expectations ticked up from -45.7 to -45.3. Propensity to buy dropped from -14.5 to -15.7. Propensity to save rose 17.6 pts to 3.5.
“The sharp increase in the propensity to save this month means that the consumer sentiment is continuing its steep descent. It has once again hit a new record low,” explains Rolf Bürkl, GfK consumer expert.
“The fear of significantly higher energy costs in the coming months is forcing many households to take precautions and put money aside for future energy bills. This is further dampening the consumer sentiment, as in return there are fewer financial resources available for consumption elsewhere.”
St. Louis Fed President James Bullard reiterated he would like interest rate to be raised from current 2.25-2.50% to 3.75-4.00% by the end of the year. He added that “front-loading” these rate hikes could “show you are serious about inflation fighting.”
“A baseline would probably be that inflation will be more persistent than many on Wall Street expect, and that’s going to be higher for longer and that’s a risk that is underpriced in markets today,” Bullard added.
Kansas City Fed President Esther George told CNBC it’s “too soon to say” regarding September’s rate hike, “because we have some important data that’s coming up.”
“I don’t think we know yet where [the terminal rate for interest rates] may have to settle out, but it will be higher than it is today for sure,” she said.
“We still have high inflation. We saw some easing in the July numbers, but I think it remains broad-based, so there is more work to be done,” George said.
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Fed Bostic: We can dial back from 75bps if inflation is clearly slowing
In a blog post, Atlanta Fed President Raphael Bostic said, “I don’t think we are done tightening”. As inflation remains “too high”, Fed’s policy stance ” will need to move into restrictive territory if inflation is to come down expeditiously.”
However, he added, “incoming data—if they clearly show that inflation has begun slowing—might give us reason to dial back from the hikes of 75 basis points that the Committee implemented in recent meetings. We will have to see how those data come in.”
Full blog post here.