BoJ Governor Haruhiko Kuroda, said “the economy likely hit bottom around April-June and is expected to continue improving as a trend. That will help price growth turn positive and gradually accelerate toward our 2% inflation target.”
“If inflation hits our 2% target and an exit from our massive stimulus program comes into sight, there will certainly be debate on how to end our ETF buying. But it’s premature to do so at this stage,” he added.
In a Yahoo Finance interview, St. Louis Fed President James Bullard said that a 75bps rate hike is “not my base case”, and he gave a nod to the 50bps per meeting plan.
“We’ve got a good plan in place and the committee is, based on public comments anyway from my colleagues, has coalesced around a plan of 50 basis points per meeting. So I think we can proceed on that,” he said.
Bullard added that whether there would be 50bps hike at each of the upcoming meeting, to bring interest rate to 3.5% by year end, would be data-dependent. “It’s possible inflation could moderate a lot. It’s possible the real economy could take twists and turns. And so I don’t think we want to be promising today what we’re going to do in December,” he said.
Germany’s GDP shrank -2.2% qoq in Q1, slightly worse than expectation of -2.0% qoq, worst in more than a decade. Also, as Q4’s figure was revised down to -0.1% qoq, the country was already in a technical recession with two straight quarters of contraction.
The contraction is expected to accelerate in Q2, with economists forecasts a -10% decline in GDP. But Germany’s Economy Ministry sounded relatively optimistic. It said in an email statement: “The recovery began with the cautious lifting of the lockdown at the beginning of May. But this process will take a longer time due to the continuation of the corona pandemic.”
In USD term, China’s exports rose 7.2% yoy to USD 237.6B in July. Imports dropped -1.4% yoy to USD 175.3B. Trade surplus came in at USD 62.3B, widened from June’s USD 46.4B, beat expectation of USD 42.5B.
Year-to-July, overall:
Year-to-July, with EU:
Year-to July, with US
In a speech, Fed Governor Christopher Waller expressed concern over the persistently high inflation rates and emphasized the need for the continuation of tighter monetary policies.
Waller stated, “Whether you measure inflation using the CPI or the Fed’s preferred measure of personal consumption expenditures, it is still much too high and so my job is not done.”
“I interpret these data as indicating that we haven’t made much progress on our inflation goal, which leaves me at about the same place on the economic outlook that I was at the last FOMC meeting, and on the same path for monetary policy,” he added.
His outlook remains consistent with the stance from the last FOMC meeting, indicating a steadfast commitment to tightening monetary policy. He emphasized that “the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further.”
The Fed Governor also emphasized that, given the current circumstances, “monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate.”
Canadian Dollar displays broad based strength today, as the post job data rally extends. Recent economic data from Canada suggesting that underlying backdrop is improving. GDP growth will likely regain momentum ahead to make up the short falls in the Q1. For now, BoC looks the least likely among global central banks to ease monetary policy. Indeed, should global trade tensions improve, BoC could be ready for policy normalization again.
Technically, GBP/CAD’s break of 1.6093 support and today’s steep decline suggests resumption of fall from 1.7794. More importantly, the structure of the decline from 1.7794 affirms that it’s resuming that one from 1.8415 high too. A retest of 1.6594 low should be seen pretty soon. Break will target 100% projection of 1.8415 to 1.6594 from 1.7794 at 1.5973 in medium term. This will remain the favored case as long as 1.7135 near term resistance holds.
AUD/CAD’s steep decline last week also suggests rejection by falling 55 day EMA, which is a bearish signal for near term. Further fall should be seen to 0.9201 support next and break will target 0.9105 low.
Prior rejection by 55 week EMA also suggests medium term bearishness. However, over price actions don’t display clear downside impulsiveness. And AUD/CAD is relatively closely long term fibonacci level of 50% retracement from 0.7149 to 1.0784 at 0.8967. Hence, while a break of 0.9105 might be seen in medium term, 0.9 handle could contain downside.
In a conference in Indonesia, IMF Managing Director Christine Lagarde urged countries to “de-escalate” trade wars was they could hurt “innocent bystanders”. She said, “We certainly hope we don’t move in either direction of a trade war or a currency war. It will be detrimental on both accounts for all participants… and there would also be lots of innocent bystanders.”
Regarding recent depreciation of the Chinese Yuan, Lagarde said it’s mainly driven by the strengthen of Dollar. And she noted that Yuan has not depreciated as much against a basket of currencies. She acknowledged that “we’re seeing more and more countries, China included, let their currencies fluctuate.” At the same time she also supported “the move of China toward (currency) flexibility” and urged China to go down that path.”
In a rather neutral statement, the US Trade Representative detailed the discussions with China in Beijing on January 7-9. Here are what were discussed
Cleveland Fed President Loretta Mester yesterday’s October CPI report “suggests some easing in overall and core inflation.” However, “there continue to be some upside risks to the inflation forecast.” She expects to see a “meaningful” decrease in inflationary pressures next year and after, with CPI back to 2% target by 2025.
“Given the current level of inflation, its broad-based nature, and its persistence, I believe monetary policy will need to become more restrictive and remain restrictive for a while in order to put inflation on a sustainable downward path to 2%,” she said.
“Despite the moves we have made so far, given that inflation has consistently proven to be more persistent than expected and there are significant costs of continued high inflation, I currently view the larger risks as coming from tightening too little.”
Japan’s PMI Services was finalized at 51.6 in October, down from previous month’s 53.8. PMI Composite figure similarly declined to 50.5 from September’s 52.1.
Andrew Harker of S&P Global Market Intelligence highlighted the subdued performance: “While the PMI data continue to make positive reading for the Japanese service sector, the recent trends suggest that growth is on the wane.”
He elaborates that the slowdown is notably marked by the softest increases in activity and new orders witnessed since the year’s inception, which could herald a persistent deceleration as we edge closer to the year’s end.
This softening expansion has raised concerns regarding the service sector’s capacity to buoy the broader economy, particularly as manufacturing continues to lag. Harker notes the stagnation of new orders in October, halting an eight-month stretch of growth and presenting a cautionary backdrop for the upcoming months.
Eurozone PMI Services was finalized at 12.0 in April, down from March’s 26.4. PMI Composite was finalized at 13.6, down from 29.7. Looking at some countries, Spain PMI composite was finalized at 9.2, Italy at 10.9, France at 11.1, Ireland at 17.3, Germany at 17.4. All are record lows.
Chris Williamson, Chief Business Economist at IHS Markit said: “With a large part of the region’s economy shut down while COVID-19 infections spiked higher, the economic data for April were inevitably going to be bad, but the scale of the decline is still shocking. The survey data are indicative of GDP falling at a quarterly rate of around 7.5%, far surpassing the worst decline seen in the global financial crisis. Jobs are also being lost at a rate never previously seen… While the rate of decline may ease in coming months, we do not expect to see any material signs of recovery until the second half of the year, and it is likely to be several years before the output lost due to the virus outbreak is fully regained.”
BoJ Governor Haruhiko Kuroda said in an online seminar that the central bank has not decided on central bank digital currency (CBDC) yet. But he noted it could be an option for securing a seamless and safe infrastructure.
“CBDC is not the only way, so a national discussion is needed as to how to achieve this goal,” Kuroda said, adding, “retail level CBDC is an option.”
BoJ started the second phase of the CBDC experiments in April. The process will last for around a year.
Eurozone GDP grew 2.0% qoq in Q2, well above expectation of 1.5% qoq. EU GDP grew 1.9% qoq. Among the Member States for which data are available for the second quarter 2021, Portugal (+4.9%) recorded the highest increase compared to the previous quarter, followed by Austria (+4.3%) and Latvia (+3.7%), while Lithuania (+0.4%) and Czechia (+0.6%) recorded the lowest increase. The year on year growth rates were positive for all countries.
According to minutes from May 2-3 meeting of FOMC, there’s a cloud of uncertainty over the prospect of future policy tightening. The committee’s participants “generally agreed” that the cumulative effects of monetary policy tightening and the possible impact of further tightening on the economy render the extent of future target range increases “less certain”.
The minutes report, “Participants generally expressed uncertainty about how much more policy tightening may be appropriate.” This theme of uncertainty was echoed throughout the document, with the committee members emphasizing the need to “‘retain optionality” after the meeting.
Moreover, the minutes reveal, “Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.” This implies that should economic conditions continue on their current trajectory, additional policy tightening may not be required, underscoring the tentative stance adopted by the FOMC.
Japan Finance Minister Taro Aso urged G20 members to renew their commitment against protectionism. He noted in openings of G20 deputy financial leaders meeting that “dissatisfaction with economic inequality is growing. There is a serious risk that we will revert to a closed and fragmented world.”
And he warned that “Protectionism and unfair trade practices lead to instability and perverse economic outcomes. We must renew our commitment to international cooperation and openness.”
Canada manufacturing sales dropped -0.8% mom to CAD 71.8b in June, slightly worse than expectation of -0.7% mom. Sales were lower in 8 of 21 industries.
The decline was led by the petroleum and coal product (-7.8%), wood product (-7.2%) and aerospace product and parts (-16.8%) industries. Meanwhile, sales of motor vehicles (+13.8%) and chemical products (+6.0%) increased the most.
BoC Senior Deputy Governor Carolyn Wilkins reiterated the central bank’s view that ” the slowdown in late 2018 and early 2019 was temporary.” However, “global trade risks have increased”. Thus, the current accommodation provided by BoC remains “appropriate”. And upcoming rate decisions will remain data dependent, with attention to “household spending, oil markets and the global trade environment.”
She described trade war as the “wild card” on global and domestic outlook. “How costly are trade wars for the global economy? In April, we said tariffs over the past two years and trade policy uncertainty would chop 0.4 per cent from global GDP by the end of 2021—that’s about US$350 billion. While this can only be a rough estimate, we know it matters more for trade-dependent economies like Canada’s.”
Wilkins noted the positive development that US has dropped steel and aluminum tariffs recently, increasing chance of ratification of USMCA. But “other developments are discouraging”, with US and China escalated their dispute and Canada “caught in the crossfire”. She also noted the “potential for more friction between the United States and European Union.”
She warned “if the disputes were to worsen and become long lasting, the outlook would be quite different. Not only would we see weaker economic demand, but the supply side of the economy would also take a hit as companies deal with disruptions to their supply chains. Obviously, this remains a major preoccupation for us.”
BoE Chief Economist Andy Haldane said, “the vaccine announcements of the past few weeks offer hope at the end of the tunnel”. However, “even with a vaccine, it’s clear this crisis will lead to some lasting scars, particularly on the poorest and the most disadvantaged.”
Haldane added that around two-thirds of pandemic economic loss had been recouped so far. “It’s now reasonable and realistic to speak of next year as turning a leaf for us economically,” he said.”
November’s inflation data in Japan’s capital Tokyo shows a notable slowdown. CPI core, which excludes fresh food, dropped from 2.7% yoy to 2.3% yoy, falling slightly below the expected 2.4%. This decline brings the reading further towards BoJ target of 2%.
Headline CPI also experienced a decrease, falling back to 2.6% yoy. This reduction comes after an unexpected rise from 2.8% yoy in September to 3.2% yoy in October.
Furthermore, CPI core-core, which excludes both food and energy, showed some progress. It declined from 3.8% yoy to 3.6% yoy, a reduction from its peak of 4.0% seen in July and August. However, the still relatively high CPI core-core reading indicates that underlying inflationary pressures remain persistent within the economy, despite the overall slowdown.
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UK CBI: Don’t diverge from EU rules after Brexit
The Confederation of British Industry published a report showing that UK business overwhelming prefer to stay with EU rules after Brexit. Carolyn Fairbairn, CBI Director-General, said the report comes from “heart of British business” and it provides “unparalleled evidence to inform good decisions that will protect jobs, investment and living standards across the UK.” She urged “major acceleration” in the partnership between businesses and the government to deal with Brexit issues.
She warned that “it’s vitally important that negotiators understand the complexity of rules and the effects that even the smallest of changes can have. Deviation from rules in one sector will have a knock-on effect on businesses in others, and divergence from rules in one part of a production process will have consequences for market access throughout entire supply chains.”
Fairbairn added that “it’s hard to overstate the importance of the decisions that will be taken over the next six months. Put simply, for the majority of businesses, diverging from EU rules and regulations will make them less globally competitive, and so should only be done where the evidence is clear that the benefits outweigh the costs.”
CBI devised three principles for further Brexit negotiations:
Here is the 114-paged reported titled “Smooth operations: An A-Z of the EU rules that matter for the economy“.