US retail sales dropped -1.9% mom to USD 626.8B in December, much worse than expectation of 0.0%. Ex-auto sales dropped -2.3% mom, below expectation of 0.2% mom. Ex-gasoline sales dropped -2.0% mom. Ex-auto, ex-gasoline sales dropped -2.5% mom.
Total sales for the 12 months of 2021 were up 19.3% from 2020. Total sales for the October 2021 through December 2021 period were up 17.1% from the same period a year ago.
In a speech, ECB President Christine Lagarde said the “rapid reopening” of the economy has led to steep rises in fuel prices, gas and electricity and price hikes in durable goods and some services. These factors are “weighing on growth in the near term”. Higher energy prices are “cutting into household incomes and denting confidence”. Supply bottlenecks are leading to “shortages in the manufacturing sector.
“That is why, at our last Governing Council meeting, we recalibrated our policy measures, allowing for a step-by-step reduction in the pace of our net asset purchases,” she added.
However, Lagarde also noted, “at the same time, we concluded that monetary accommodation is still needed for inflation to settle at 2% over the medium term.”
Eurozone exports of goods rose 14.4% yoy, to EUR 225.1B in November. Imports rose 32.0% yoy to EUR 226.6B. Trade deficit came in at EUR -1.5B. Intra-Eurozone trade rose 22.1% yoy to EUR 204.3B.
On seasonally adjusted bases, extra-Eurozone exports rose 3.0% mom to EUR 213.2B. Imports rose 4.5% mom to EUR 214.5B. Trade balance turned into EUR -1.3B deficit. Intra-Eurozone trade rose from EUR 192.2B to EUR 193.9B.
UK GDP rose strongly by 0.9% mom in November, well above expectation 0.4% mom. Looking at some details, services grew 0.7%, production rose 1.0% mom, and production increased 3.5% mom.
Monthly GDP was back above pre-COVID level in February 2020, for the first time, by 0.7%. Also, if there are no other data revision, Q4 GDP should either reach or surpass its pre-coronavirus level in Q4 2019, provided monthly December GDP does not fall by more than -0.2% mom.
Also released, industrial production rose 1.0% mom, 0.1% yoy versus expectation of 0.2% mom, 0.5% yoy. Manufacturing rose 1.1% mom, 0.4% yoy, versus expectation of 0.2% mom, -0.3% yoy. Index of services rose 1.3% 3mo3m, versus expectation of 0.5%. Goods trade deficit narrowed slightly to GBP -11.3B, versus expectation of GBP -14.2B.
Fed Governor Christopher Waller told Bloomberg TV, “three hikes is still a good baseline; we will have to wait and see what inflation looks like in the second half of the year.”
If inflation continues to be high, the case will be made for four, maybe five, hikes,” he said, but added that if inflation abated — as many forecasters including him expect it will — “then you could actually pause and not even go the full three.”
“We can start to let the balance sheet run off earlier and that will take some pressure of longer-end rates and also lead to a tightening in policy,” Waller added.
In a Reuters interview, San Francisco Fed President Mary Daly said, “lifting off in March when you have an unemployment rate of 3.9%, and an inflation rate that’s north of our price stability goal of average 2% inflation, to me seems a quite reasonable thing.” But she didn’t offer her prediction on the number of rate hike needed this year.
Daly also said even with the rate hikes, “we are not bridling the economy and starting to restrain it.” Rate would remain well below the “neutral” level of 2.50%. Meanwhile, once Fed has raised rates once or twice, she said, it should start shrinking the balance sheet as a “predictable” manner.
An a CNBC interview, Philadelphia Fed President Patrick Harker said “we do need to take action on inflation. It is more persistent than we thought a while ago. I’ve been off the ‘transitory’ team for a while now”. “Three [hikes] is what I’ve penciled in, but four is not out of the question in my mind,” he said.
But Harker preferred a slower approach regarding balance sheet run-off. He thinks the Fed should wait until it raises rates “for sake of argument 100 basis points,” or four hikes, before starting the wind down the asset purchases. “I don’t want to do that all at once. I think that’s just the wrong way to go,” he said. “Let’s do them in stages.”
Chicago Fed President Charles Evans said, “I readily admit – I have to be humble about this – I did not expect the inflation rates that we’re seeing and they have lasted longer than I expected. And because they have lasted longer, I know that we need to take action more quickly than I would have guessed last year.”
“We need to be adjusting monetary policy to something close to neutral,” he said. “The committee very strongly is expecting two, three, four rate increases this year. We’ll see how it plays out.”
Richmond Fed Bank President Thomas Barkin said yesterday, “the closer that inflation comes back to target levels, the easier it will be to normalize rates at a measured pace,”
“But were inflation to remain elevated and broad-based, we would need to take on normalization more aggressively, as we have successfully done in the past,” he added.
Barkin also said labor shortage is a “long lasting phenomenon”, with “baby boomers retiring” and “immigration slowing”. Officials may need to accept that labor force participation is “stagnant”.
US PPI for final demand rose 0.2% mom in December, below expectation of 0.4% mom. Over the year, PPI accelerated to 9.7% yoy, up from 9.6% yoy, below expectation of 9.8% yoy.
PPI core rose 0.5% mom versus expectation of 0.4% mom. Over the year, PPI core accelerated to 8.3% yoy, up from 7.7% yoy, above expectation of 8.0% yoy.
US initial jobless claims rose 23k to 230k in the week ending January 8, above expectation of 213k. Four-week moving average rose 6k to 211k.
Continuing claims dropped -194k to 1559k in the week ending January 1, lowest since June 2 1973. Four-week moving averages of continuing claims dropped -77k to 1722k, lowest since March 7, 2020.
ECB Vice President Luis de Guindos said, “inflation is not going to be as transitory as forecast only some months ago. The assessment of risk for inflation is moderately tilted to the upside over the next 12 months.”
“And the reasons are quite simple. First, supply side bottlenecks are going to be there and are more persistent than we and many expected in the past,” de Guindos said. “And energy costs are going to remain quite elevated.”
Nevertheless, over the longer term, risks to inflation outlook are still balanced. Inflation are projected to fall back below ECB’s target of 2% in 2023 and 2024.
In the monthly economic bulletin, ECB said, “the global economy remains on a recovery path, although persisting supply bottlenecks, rising commodity prices and the emergence of the Omicron variant of the coronavirus (COVID-19) continue to weigh on the near-term growth prospects.”
“Supply bottlenecks are expected to start easing from the second quarter of 2022 and to fully unwind by 2023.” But “the future course of the pandemic remains the key risk affecting the baseline projections for the global economy.” Risk to growth outlook are “tilted to the downside” and balance of risks to global inflation is “more uncertain”.
Eurozone growth is “moderating” but “activity is expected to pick up again strongly in the course of this year.” Output is expected to exceed pre-pandemic level in Q1 of 2022. However, as some Eurozone countries have reintroduced tighter restrictions, “this could delay the recovery, especially in travel, tourism, hospitality and entertainment”.
Philadelphia Fed President Patrick Harker said in an FT interview, “I currently have three increases in for this year, and I’d be very open to starting in March. I’d be open to more if that’s required.”
“We don’t want to put the brakes on completely, but we do need to slow down some of the demand,” he said. “We can do something . . . by raising the fed funds rate.”
“Ultimately, what we worry about is that people start to think, ‘Well, inflation is just not going to be at 2 per cent, it’s going to be at 2.5 per cent or 3 per cent going forward’,” he said.
As for the balance sheet run-off, Harker said if could start once interest rates were “sufficiently away” from zero. “I am very much in the camp of communicating over and over how we’re going to do this and then being methodical,” he said.
Dollar index tumbled sharply overnight and dived through 55 day EMA to close at 94.91. At this point, price actions from 96.93 are seen as a correction only. Hence, we’d look for strong support at 38.2% retracement of 89.20 to 96.93 at 93.97 to contain downside. The level is also close to 55 week EMA at 93.77. That would set the base for resuming the up trend from 89.20 through 96.93 at a later stage.
However, sustained break of 93.97 will argue that rise from 89.20 has already completed at 96.93. The three wave structure in turn suggests that it’s a correction to the down trend from 102.99. Such development, together with the index back below 55 week EMA, would be rather bearish and could set up another medium term fall through 89.20 later in the year.
San Francisco Fed President Mary Daly said inflation is “uncomfortably high” in the US. And, it’s time to “start removing some of the accommodation we’ve been giving to the economy,”
“I definitely see rate increases coming, as early as March even,” she noted. But she didn’t want to predict the number of rate hikes needed for this year.
In the nomination hearing for Fed Vice Chair position, Lael Brainard said, “we are seeing the strongest rebound in growth and decline in unemployment of any recovery in the past five decades.”
“But inflation is too high, and working people around the country are concerned about how far their paychecks will go,” she added. “Our monetary policy is focused on getting inflation back down to 2% while sustaining a recovery that includes everyone. This is our most important task.”
St. Louis Fed President James Bullard said Fed “could begin increasing the policy rate as early as the March meeting in order to be in a better position to control inflation.” He added, ” it makes sense to get going sooner rather than later and so I think March would be a definite possibility.”
“We need to risk manage here. We need to be prepared for the case where inflation does not moderate as much as hoped and instead the Fed has to come in and move inflation closer to the 2% target. How much the Fed has to do and how much natural moderation there will be is very much an open question,” he said.
Separately, Bullard also told WSJ, “I actually now think we should maybe go to four hikes in 2022.”
US commercial crude oil inventories dropped -4.6m barrels in the week ending January 7. At 413.3m barrels, crude oil inventories are about -8% below the five year average for this time of year.
Gasoline inventories rose 8m barrels. Distillate rose 2.5m barrels. Propane/propylene dropped -3.4m barrels. Total commercial petroleum inventories dropped -4.5m barrels.
WTI crude oil’s rally continues in early part of US session and hits as high as 82.76 so far. Further rise is expected to 161.8% projection of 62.90 to 73.66 from 66.46 at 83.86 and possibly further to 85.92 high.
We’d maintain the view that rise form 62.90 the second leg of the consolidation pattern from 85.92 only. Hence, we’re not expecting a firm break of 85.92 yet. Instead, another fall should be seen before the consolidation completes. Break of 77.97 support will indicate rejection by 85.92 and target 73.66 resistance turned support first. However, firm break of 85.92 could pave the way to 90 handle.
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China GDP grew 4.0% yoy in Q4, weak retail sales
China GDP grew 4.0% yoy in Q4, much faster than expectation of 3.3% yoy. On a quarterly basis, GDP grew 1.6% qoq, above expectation of 1.1% qoq. For 2021 as a whole, GDP grew 8.1%, slightly above expectation of 8.1%.
In December, industrial production rose 4.3% yoy, above expectation of 3.6%. Retail sales rose 1.7% yoy, below expectation of 3.7% yoy. Fixed asset investment rose 4.9% ytd yoy, slightly above expectation of 4.8%.
The National Bureau of Statistics said, “we must be aware that the external environment is more complicated and uncertain, and the domestic economy is under the triple pressure of demand contraction, supply shock and weakening expectations.”
Also from China, steel production dropped for the first time in six years in 2021, down -3% from 1.065B tonnes to 1.03B tonnes. Birth rate dropped to a record low of 7.52 births per 1000 people in 2021, down from 2020’s 8.52 births per 1000 people.