Canada retail sales rose 0.9% mom to CAD 60.7B in April, slightly above expectation of 0.8% mom. Sales were up in 6 of 11 subsectors. Excluding gasoline stations and motor vehicle and parts dealers, sales rose 1.0% mom.
Preliminary data suggests that sales rose 1.6% mom in May.
ECB Governing Council member Olli Rehn said, “with inflation rising sharply, there has been good reason to expedite the normalization of monetary policy,”
“The impacts of Russia’s brutal war are being felt around the world, and people are having to pay higher prices for energy and food,” he said.
BoE Chief Economist Huw Pill said today, “we will do what we need to do to get inflation back to target. And at least in my view, that will require further tightening of monetary policy over the coming months.”
“When we assess inflation pressure, we need to take into account the exchange rate,” he added. “We see ourselves as steering a narrow path between persistent inflation pressure and recession.”
“Terms of trade shock means UK will be poorer, UK must decide how that reduction in income will be distributed.”
Japan Prime Minister Fumio Kishida asked opposition DDP’s Yuichiro Tamaki on monetary policy. Tamaki said the BOJ must keep current ultra-low interest rates, arguing that tightening monetary policy was “unthinkable”. Kishida said afterwards, “I agree with you on the point that Japan shouldn’t alter monetary policy.”
Kishida also said, “monetary policy affects not just currency rates, but the economy and smaller firms’ businesses. Such factors must be taken into account comprehensively.”
Separately, Finance Minister Shunichi Suzuki said, “I’m concerned about the rapid yen weakening seen recently.” He added that the government will “closely liaise” with BoJ on watching the exchange markets with “even greater sense of urgency”. “We will respond appropriately if necessary while keeping close communication with currency authorities from other countries,” Suzuki said.
RBA Governor Philip Lowe said the larger than expected 50bps hike at last meeting was driven by “additional information suggesting a further upward revision to an already high inflation forecast”.
He also emphasized, “as we chart our way back to 2 per cent to 3 per cent inflation, Australians should be prepared for more interest rate increases.”
“In the next month or so, we’ll be doing a full forecast update, but it’s going to be some years, I think, before inflation is back in the 2-3 per cent range, he added.
“I don’t see a recession on the horizon,” Lowe said. “If the last two years has taught us anything, it’s that you can’t rule anything out. But our fundamentals are strong, the position of the household sector is strong, and firms are wanting to hire people at record rates. It doesn’t feel like a precursor to a recession,” he said.
New Zealand Westpac consumer confidence dropped sharply from 92.1 to 78.7 in Q2. That’s the lowest level on record, and well below long-term average at 110.2.
Westpac said: “The pressure on household finances and sharp fall in confidence reinforces our expectations for a downturn in household spending – and economic growth more generally – over the coming months”.
“The RBNZ’s own projections show the cash rate rising to 3.9%, while financial markets have started to price in the chance that it could go as high as 4.5%…
“If there is a more abrupt slowdown in spending than the RBNZ anticipates, then it’s likely that increases in the cash rate will be more measured.”
ECB Chief Economist Philip Lane said yesterday, “we have very high inflation rates now, and clearly we could be in a world where inflation psychology is taking hold.”
In a presentation, he said that Eurozone is facing three inflation shocks: pandemic cycle, energy shock and Russia-Ukraine war. Risks to inflation outlook include catch-up adjustment in wages, re-set of long term inflation expectations, inflation psychology, downward revision in potential output, and rise in real interest rate.
He added that monetary policy normalization is “appropriate” with “clear and robust” initial steps. That is, ECB will be stopping asset purchases, raise interest rate by 25bps in July, and again in September. Though, the size of the September hike is undecided. As for further steps, they will be state-contingent (gradualism, optionality, flexibility, data-dependency)
BoE MPC member Catherine Mann explained in a speech that her for a 50bps last week. She said, ” a more robust policy move, based on both domestic conjuncture and commensurate with the global factor, reduces the risk that domestic inflation already embedded is further boosted by inflation imported via a Sterling depreciation.”
She’s open to a policy rate reversal in the medium term “when the domestic supports to demand fade and when weakness in external sources of demand bite.”
She said, “the domestic conjunctural situation is characterized by very high inflation and various supports to consumer purchasing power relative to real income”. The support factors include “two fiscal packages, strong employment, wide-spread bonuses as well as robust wage growth, strong housing values, accumulated savings, quality trade-down, and borrowing through credit cards among other schemes.”
Globally, tightening by Fed and ECB suggests depreciation pressure on Sterling that could “add to inflation particularly in the near term”.
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.
ECB Governing Council member Martins Kazaks said he would support 25bps rate hike in July and 50bps in September. He added that inflation would “need to surprise on the low side” for it not to be 50bps in September.
But he emphasized that investors should not think that 50 bps rate hikes are “the new default.”
In June economic report, Japan’s government said “industrial production appears to be pausing for picking up.” That’s a downgraded assessment from May’s “industrial production shows movements of picking up.” Exports continued to be “almost flat”.
It reiterated that “full attention should be given to the downside risks due to rising raw material prices, supply-side constraints and fluctuations in the financial and capital markets while there are concerns regarding the effects of lengthening the state of affairs of Ukraine and suppression of economic activities in China.”
Nevertheless, for the short-term, the economy is “expected to show movements of picking up, supported by the effects of the policies while all possible measures are being taken against infectious diseases, and economic and social activities proceed to normalization”.
After a meeting with Japan Prime Minister Fumio Kishida, BoJ Governor Haruhiko Kuroda said “I told the prime minister that recent rapid yen moves were undesirable”.
“(Kishida) did not say anything special but I told him that it was important for currencies to move stably reflecting economic fundamentals,” he added. “I’ll fully watch currency movements carefully from now on as well and will appropriately respond to them while liaising with the government.”
BoJ offered to purchase unlimited amounts of 5- and 10-year JGBs today. That’s part of the central bank’s move to cap 10-year yield at 0.25%, after doubling down on maintaining this position and the overall ultra loose policy stance last Friday. Just last week, BoJ bought JPY 10.9T yen of government bonds, the most on record according to data compiled by Bloomberg.
BoJ’s move seems to be working well finally with 10-year JGB yield now down below 0.21% handle, after breaking above 0.27% later week.
New Zealand BusinessNZ Performance of Services Index rose from 52.2 to 55.2 in May. Activity/sales rose sharply from 53.3 to 59.6. But employment dropped from 51.0 to 48.5. New orders/business rose from 55.2 to 62.0. Stocks/inventories ticked down from 55.0 to 54.6. Supplier deliveries rose from 40.5 to 45.0.
BNZ Senior Economist Doug Steel said that “while the improvement was far from universal across components, reflecting many ongoing challenges across segments of the service sector, the overall outcome was the first above average result since the outbreak of Delta in August last year.”
Fed Governor Christopher Waller said in a speech over the weekend that “if the data comes in as I expect, I will support a similar-sized move at our July meeting,” referring to the 75bps hike at the June meeting. He added, “the Fed is ‘all in’ on re-establishing price stability.”
“It should not have been a surprise that the policy rate would rise fast in 2022. Rate hikes would need to be larger and more frequent, relative to the 2015-2018 tightening pace, to get back to neutral.”
“Looking back, should the Committee have signaled a steeper rate path once the liftoff criteria had been met? Perhaps another lesson is that giving forward guidance about liftoff should also include forward guidance about the possible path of the policy rate after liftoff.”
In a statement explaining her dissent to Fed’s 75bps rate hike this week, Kansas City Fed President Esther George said, “I viewed that move as adding to policy uncertainty simultaneous with the start of balance sheet runoff.”
“The speed with which we adjust the policy rate is important,” she explained. “Policy changes affect the economy with a lag, and significant and abrupt changes can be unsettling to households and small businesses as they make necessary adjustments. It also has implications for the yield curve and traditional bank lending models, such as those prevalent among community banks.”
Minneapolis Fed President Neel Kashkari said in an article, ” I supported increasing the federal funds rate by 75 basis points at this week’s meeting, and could support another such move in July”. But he also warned to “too much more front-loading”.
“A prudent strategy might be, after the July meeting, to simply continue with 50-basis-point hikes until inflation is well on its way down to 2 percent,” he said. “Obviously, in such a scenario, the FOMC would still need to remain data-dependent and have the flexibility to account for economic developments that might arise.”
BoE Chief Economist Huw Pill told BloombergTV that in yesterday policy decision statement, ” the word ‘forcefully’ – which clearly is the word the market is focused on, you focused on, and has a meaning – it’s also important to see that that was put in the context of ‘if necessary we will act forcefully’, and so there’s a conditionality there.”
“If we do see greater evidence that the current high level of inflation is becoming embedded in pricing behavior by firms, in wage setting behavior by firms and workers, then that will be the trigger for this more aggressive action,” he added.
But he also indicated that the statement had “a certain level of flexibility because it had to encompass those different views… we were trying to emphasise is that that flexibility also applies to what the decisions are. I don’t think it’s all about August. We talked about the pace, timing and scale of future decisions.”
Eurozone CPI was finalized at 8.1% yoy in May, up from April’s 7.4% yoy. All-items excluding energy rose from 4.1% yoy to 4.6% yoy. All-item excluding energy, food, alcohol and tobacco rose from 3.5% yoy to 3.8% yoy. Energy prices accelerated from 37.5% yoy to 39.1% yoy. Food, alcohol and tobacco prices accelerated from 6.3% yoy to 7.5% yoy.
EU CPI was finalized at 8.8% yoy, up from April’s 8.1% yoy. The lowest annual rates were registered in France, Malta (both 5.8%) and Finland (7.1%). The highest annual rates were recorded in Estonia (20.1%), Lithuania (18.5%) and Latvia (16.8%). Compared with April, annual inflation fell in one Member State and rose in twenty-six.
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BoJ firm on maintaining ultra-loose monetary policy
In the minutes of April 27-28 meeting of BoJ indicated that while the board was concerned with fluctuation in Yen’s exchange rate, it remained firm on the stance to continue with ultra-loose monetary policy.
One board member noted that Japan’s economy was “still on its way to recovery”. As a “commodity importer”, the rise in commodity prices would “lead to an outflow of income from Japan and thus exert downward pressure on the economy.” Hence, it’s “necessary” to “continue with the current powerful monetary easing and thereby firmly support the economy.”
Another member noted that “the challenge of monetary policy in Japan was not to curb inflation, as in the case of the United States and Europe, but to overcome inflation that was still too low”. A different member commented that,” with the addition of Russia’s invasion of Ukraine to the existing downside risks to the economy, the situation had further changed significantly; against this backdrop, it was not appropriate for the Bank to make any big changes to its monetary policy stance.”
Regarding Yen’s depreciation, “a few members said excessive fluctuations in the foreign exchange market over a short period of time, such as those observed recently, would raise uncertainties about the future and make it more difficult for firms to formulate their business plans”.
Some member noted, “it was necessary for the Bank to clearly communicate to the public that the aim of monetary policy conduct was to fulfill its mandate of achieving price stability, rather than to control foreign exchange rates.”
Full minutes here.