US personal income rose 0.3% mom, or USD 70.7B in December, below expectation of 0.5% mom. Spending dropped -0.6% mom, or USD -95.2B, matched expectations.
PCE price index accelerated slightly from 5.7% yoy to 5.8% yoy, below expectation of 6.1% yoy. Core PCE price index jumped from 4.7% yoy to 4.9% yoy, above expectation of 4.8% yoy.
Eurozone Economic Sentiment Indicator dropped from 113.8 to 112.7 in January. Industry confidence dropped from 14.6 to 13.9. Services confidence dropped from 10.9 to 9.1. Consumer confidence dropped from -8.4 to -8.5. Retail trade confidence rose from 1.1 to 3.8. Construction confidence dropped from 10.1 to 8.1. Employment Expectations Indicator dropped from 113.5 to 113.3.
EU ESI dropped from 113.0 to 111.6. EEI dropped from 113.6 to 113.1. Amongst the largest EU economies, the ESI rose in Germany (+0.8) and Spain (+0.6) while it worsened in Italy (-6.1), Poland (-4.2), France (-2.8) and the Netherlands (-1.3).
Germany GDP dropped -0.7% qoq in Q4, worse than expectation of -0.2% qoq. GDP was still -1.5% lower than pre-pandemic level in Q4, 2021. For whole of 2021, GDP grew 2.8%.
Destatis said, “after economic output grew again in the summer despite increasing supply and material bottlenecks, the recovery of the German economy was halted by the fourth corona wave and renewed tightening of corona protection measures at the end of the year.”
“Private consumption in particular decreased in the fourth quarter of 2021 compared to the previous quarter, while government consumer spending increased. Construction investments fell compared to the third quarter of 2021.”
Swiss KOF Economic Barometer rose from 107.2 to 107.8 in January, above expectation of 106.0. KOF said the “various subgroups of the barometer are developing unevenly.”
Outlook has improved for consumer spending and for financial and insurance service providers. The outlook also tends to brighten for the accommodation and food service activities. However, in the goods production sector (manufacturing and construction), indicators for almost all sub-aspects of business activity are weakening, especially for profit development, production activity and capacity utilisation.
France GDP grew 0.7% qoq in Q4, above expectation of 0.5% qoq. On average over 2021, GDP increased by 7.0% after -8.0% in 2020. GDP was 0.9% above pre-pandemic level in Q4 2019. But the average level of GDP in 2021 was still -1.6% below its average level in 2019.
Looking at some details, final domestic demand (excluding inventories) contributed to +0.5 points. In particular, the growth rate of household consumption expenditure (+0.4%) was similar to that of gross fixed capital formation (GFCF, +0.5%). Contribution of foreign trade to GDP growth was slightly negative this quarter at -0.2 points. contribution of inventory changes to GDP growth was positive this quarter (+0.4%).
Bitcoin stabilized after hitting 33000 and turned sideway. But risk is still staying heavily on the downside with 39636 support turned resistance intact. Current down trend from 68986 could extend with another falling leg, towards 29261 support, which is close to 30k psychological level too. We’d look for bottoming signal around there.
Meanwhile, on the upside, firm break of 39639 will argue that bitcoin has bottomed earlier than expected and bring rebound back towards 55 day EMA (now at 44839). Failure to defend 30k handle will indicate that the larger down trend is still in force for 100% projection of 68986 to 41908 from 52101 at 25023.
Gold is now back below 1800 handle as fall from 1853.70 extends. The development further affirms the case that rebound from 1752.32 has completed with three waves up to 1853.70. Deeper decline is expected as long as 1821.93 minor resistance holds. Current fall from 1853.70 is see as part of the pattern from 1877.05, which is a down leg inside the medium term range pattern from 1676.65. Break of 1782.48 support will add further credence to this case, and would set the stage for deeper decline through 1752.32 low to 100% projection of 1877.05 to 1752.32 from 1853.70 at 1728.97 eventually.
Silver’s development is also inline with gold. Rebound from 21.39 should have completed with three waves up to 84.69. Deeper decline is expected as long as 23.55 minor resistance holds, to 21.93 support first. Such fall from 24.69 is seen as a leg inside the medium term falling wedge pattern from 30.07. Break of 24.69 would send silver through 21.39 low, to 50% retracement of 11.67 to 30.7 at 20.87 next.
IMF said in a report that BoJ’s commitment to maintaining prolonged monetary accommodation remains “appropriate”. It expects that a “prolonged period of monetary policy accommodation, flexible fiscal policy, and inclusive growth-oriented reforms will be required to durably lift inflation expectations and inflation to the target.”
Further measures could be considered for making monetary support “more sustainable”. On option could be to “steepen the yield curve by shifting the yield target from the 10-year to a shorter maturity”. This could help “mitigate the impact of prolonged monetary accommodation on financial institutions’ profitability”. If underlying inflation momentum remains weak, “cutting the policy rate should be the first option”.
US initial jobless claims dropped -30k to 260k in the week ending January 22, matched expectations. Four-week moving average of initial claims rose 15k to 247k.
Continuing claims rose 51k to 1675k in the week ending January 15. Four-week moving average of continuing claims dropped -11k to 1652k, lowest since August 18, 1973.
US durable goods orders dropped -0.9% mom, or USD -2.4B to USD 267.6B in December, worse than expectation of -0.5%. Ex-transport orders rose 0.4% mom, above expectation of 0.5% mom. Ex-defense orders rose 0.1%. Transportation equipment dropped USD -3.3B, or -3.9% mom to USD -80.1B.
US GDP grew at 6.9% annualized rate in Q4, faster than Q3’s 2.3%, well above expectation of 5.6%. The increase in real GDP primarily reflected increases in private inventory investment, exports, personal consumption expenditures (PCE), and nonresidential fixed investment that were partly offset by decreases in both federal and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.
For 2021 as a whole, real GDP grew 5.8% The increase in real GDP in 2021 reflected increases in all major subcomponents, led by PCE, nonresidential fixed investment, exports, residential fixed investment, and private inventory investment. Imports increased.
EUR/USD finally breaks out to the downside and falls to the lowest level since June 2020. Near term outlook is staying bearish and next target is 61.8% projection of 1.1908 to 1.1185 from 1.1482 at 1.1035.
The biggest question is indeed in the long term picture. As seen in the monthly chart, an interpretation is that price actions from 1.0339 (2017 low) are a three wave consolidation pattern that has completed at 1.2348, after double rejections by 38.2% retracement of 1.6039 to 1.0339 at 1.2516. If that’s the case, a break through 1.0339 low would be eventually be seen.
Of course, it’s still a bit early to tell if the above bearish case is true. And that is unlikely to be revealed soon, at least not by first half of the year. But it’s something that is worth noting.
Swiss trade surplus came in at CHF 3.69B in December, below expectation of CHF 5.23B. For 2021 as a whole, exports rose 15.2% to a new record high at CHF 259.5B. Imports rose 10.1% to CHF 200.8B. Trade surplus swelled to CHF 58.7B.
Also, the FOCBS said US became Switzerland’s largest buyer in 2021. Foreign trade with China rose to new high. Double-digit growth rates were observed in deliveries to Europe (+18.1%, or +21.9B) and North America (+17.0%, or +7.4B). Shipments to Asia were also up by 9.0%, or CHF 4.4B.
Germany Gfk Consumer Sentiment for February rose 0.2 pts to -6.7, better than expectation of -8.0. In January, economic expectations rose from 17.1 to 22.8. Income expectations rose from 6.9 to 16.9. Propensity to buy rose from 0.8 to 5.2.
“Despite rising incidences and inflation, consumers are once again showing some optimism at the beginning of the year. In particular, they are hoping for a slight alleviation in price trends, as in January 2022 the base effect resulting from the January 2021 reversal of the VAT cut will mitigate the inflation rate to some degree. Nevertheless, consumers price expectations remain significantly higher than in recent years.”, explains Rolf Bürkl, GfK consumer expert. “In addition, experts assume that the pandemic situation would ease in the spring, which will lead to a number of restrictions being removed.”
Gold dropped sharply overnight following broad based Dollar strength. The development now raises the chance that rebound from 1752.32 has completed with three waves up to 1853.70 Immediate focus is now on 1805.59 support. Firm break there should add more credence to this bearish case and send Gold through 1782.48 to 1752.32 support.
More importantly, rejection by medium term trend line resistance, together with the corrective structure of the rise from 1752.32 to 1853.70, suggests that medium term sideway pattern is extending with another falling leg. Break of 1782.48 support will open up the case for deeper decline to 100% projection of 1877.05 to 1752.32 from 1853.70 at 1728.97 eventually.
New Zealand CPI rose 1.4% qoq in Q4, above expectation of 1.2% yoy. Annual rate accelerated from 4.9% yoy to 5.9% yoy, above expectation of 5.6% yoy. That’s the highest level in three decades since 1990.
“New Zealand is not alone, with many other OECD countries experiencing higher inflation than in recent decades,” consumers prices senior manager Aaron Beck said. “Price increases were widespread with 10 out of 11 main groups in the CPI basket increasing in the year, with only the communications group decreasing.”
The data reinforces the case for RBNZ to raise interest rate in February. Westpac is forecasting a series of OCR hikes over the coming year with cash rat peaking at 3% in 2023. But New Zealand Dollar tumbles broadly following deep risk-off sentiment.
NZD/USD dives to as low as 0.6602 so far today as down trend continues. Next target is 61.8% projection of 0.7217 to 0.6700 from 0.6889 at 0.6569 and then 100% projection at 0.6372.
The strong break of medium term falling channel support indicates downside acceleration. Fall from 0.7463 could be a correction to up trend from 0.5467, or a impulsive down trend itself. In either case, NZD/USD would target 61.8% retracement of 0.5467 to 0.7463 at 0.6229 before making a bottom.
US stock markets tumbled sharply overnight and futures dive further in Asian session. Fed Chair Jerome Powell sounded very hawkish during the post meeting press conference. The indication that rate hikes would start in March wasn’t much of a surprise. But Powell indicated that every meeting in “live” and refused to rule out 50bps hikes. Some economists are now forecasting as many as five hikes this year.
On inflation, Powell also warned “are still to the upside in the views of most FOMC participants, and certainly in my view as well”. And, “there’s a risk that the high inflation we are seeing will be prolonged. There’s a risk that it will move even higher. So, we don’t think that’s the base case, but, you asked what the risks are, and we have to be in a position with our monetary policy to address all of the plausible outcomes,”
NASDAQ was rejected by 14k psychological level and 38.2% retracement 15319.03 to 13094.65 at 13944.36 to close flat. The development keeps near term risks heavily on the downside. Immediate focus is back on 13414.14 support. Break firm break there will argue that the free fall from 16212.22 is resuming. Next target will be 38.2% retracement of 6631.42 to 16212.22 at 12552.35.
Fed keeps federal funds rate target unchanged at 0-0.25%. It added, “with inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.” The monthly pace of net asset purchases will continued to be reduced to “bring them to an end in March”. The decision was unanimous.
Good morning. I’m pleased to be here with you to discuss today’s policy announcement and the Bank of Canada’s Monetary Policy Report (MPR). I am especially pleased to have Senior Deputy Governor Carolyn Rogers here for her first press conference. She has joined the Governing Council at an important time.
Our message today is threefold.
First, the emergency monetary measures needed to support the economy through the pandemic are no longer required and they have ended.
Second, interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates.
Third, while reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation. We are committed to bringing inflation back to target.
Let me take each of these in turn.
The Bank’s response to the pandemic has been forceful. Throughout, our actions have been guided by our mandate. We have been resolute and deliberate, communicating clearly with Canadians on our extraordinary measures to support the economy and on the conditions for their exit. When we introduced emergency liquidity measures to support core funding markets, we said they would end when market functioning was restored. And they did. When we launched quantitative easing (QE), we said it would continue until the recovery was well underway. As the recovery progressed, we began tapering QE and ended it in October. Today marks the final step in exiting from emergency policies. We said exceptional forward guidance would continue until economic slack was absorbed. With the strength of the recovery through the second half of 2021, the Governing Council now judges this condition has been met. As such, we are removing our commitment to hold our policy rate at its floor of 0.25%.
Second, we want to clearly signal that we expect interest rates will need to increase. A lot of factors are contributing to the uncomfortably high inflation we are experiencing today, and many of them are global and reflect the unique circumstances of the pandemic. As the pandemic fades, conditions will normalize, and inflation will come down. However, with Canadian labour markets tightening and evidence of capacity pressures increasing, the Governing Council expects higher interest rates will be needed to bring inflation back to the 2% target.
Finally, Canadians can be assured that the Bank of Canada will control inflation. Prices for many goods and services are rising quickly, and this is making it harder for Canadians to make ends meet—particularly those with low incomes. Prices for food, gasoline and housing have all risen faster than usual. We expect inflation will remain close to 5% through the first half of 2022 and then move lower. There is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before. But Canadians can be assured that we will use our monetary policy tools to control inflation.
Let me turn to the economic outlook that we’ve outlined in our MPR.
Globally, the pandemic recovery is strong but uneven and continues to be marked by supply chain disruptions. Robust demand for goods combined with these supply problems and higher energy prices have pushed up global inflation. With this rise in inflation, expectations that monetary stimulus will be reduced have been pulled forward and financial conditions have tightened from very accommodative levels.
In Canada, growth in the second half of 2021 was even stronger than we had projected, and a wide range of measures now suggest economic slack is absorbed. With the rapid spread of the Omicron variant, first-quarter growth is likely to be modest, but we expect the impact on our economy to be less severe than previous waves. We forecast annual growth in economic activity will be 4% this year and about 3½% in 2023 as consumer spending on services rebounds and business investment and exports show solid growth.
CPI inflation is currently well above our target range and core measures have edged up. Global supply chain disruptions, weather-related increases in agricultural prices and high energy prices have put upward pressure on inflation in Canada, and that is expected to continue in the months ahead. These pressures should ease in the second half of 2022, and inflation should decline relatively quickly to around 3% by year end. Further out, we expect demand will moderate and supply will increase as productivity improves. This will ease price pressures and bring inflation gradually back close to the 2% target over 2023 and 2024.
Let me now say a few words about the Governing Council’s deliberations.
Of course, we discussed the impact of Omicron. Renewed restrictions and household caution about this highly infectious variant have temporarily slowed economic activity. Once again, high-contact services sectors have been hardest hit. But with many more Canadians getting infected in this wave, worker absences have been more widespread. Our high rates of vaccination and adaptability to restrictions should limit the downside economic risks of this wave.
The Governing Council also spent considerable time assessing the overall balance of demand and supply in the economy. In October, we projected the output gap would close sometime in the middle quarters of this year. While measuring the output gap is always uncertain and pandemic-related distortions make assessing supply more complicated, a broad range of indicators clearly suggest economic slack has been absorbed more quickly than expected. Employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up. Unevenness across sectors remains, but taking all the evidence together, the Governing Council judges the economy is now operating close to its capacity.
We debated the most likely path for inflation. The resolution of global supply bottlenecks has important implications for inflation in Canada. There is some evidence that supply disruptions may have peaked, but the spread of Omicron is a new wildcard that could further disrupt global supply chains. We also considered the potential for some reversal of the large price increases for goods. This would pull inflation down more quickly than we forecast. Overall, we judged the risks around our inflation projection are reasonably balanced.
We also assessed more domestic sources of inflationary pressures. While global goods price inflation is expected to ease, the tightness in Canadian labour markets, rising house prices and evident capacity pressures suggest that if demand continues to grow faster than supply this will put upward pressure on inflation.
We noted that measures of inflation expectations are broadly in line with our own forecast, with longer-term expectations remaining well anchored on the 2% target. We agreed it is paramount to ensure that higher near-term inflation expectations don’t migrate into higher long-term expectations and become embedded in ongoing inflation.
Putting all this together, we concluded that, consistent with our forecast, a rising path for interest rates will be required to moderate spending growth and bring inflation back to target.
Of course, we discussed when to begin increasing our policy interest rate. Our approach to monetary policy throughout the pandemic has been deliberate, and we were mindful that the rapid spread of Omicron will dampen spending in the first quarter. So we decided to keep our policy rate unchanged today, remove our commitment to hold it at its floor, and signal that rates can be expected to increase going forward. As we indicated in our press release this morning, the timing and pace of those increases will be guided by the Bank’s commitment to achieving the 2% inflation target.
We take our communication with Canadians very seriously. For almost two years now we have told Canadians we would keep our policy rate pinned at its floor until economic slack is absorbed. With slack absorbed more quickly than expected, it is time to remove our extraordinary forward guidance. This ends our emergency policy setting and signals that interest rates will now be on a rising path. This is a significant shift in monetary policy, and we judged that it is appropriate to move forward in a deliberate series of steps.
Let me say a final word about another important monetary policy tool—our balance sheet. The Bank will keep the holdings of Government of Canada bonds on our balance sheet roughly constant at least until we begin to raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we have done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans.
With that, Senior Deputy Governor Rogers and I will be happy to take your questions.
US commercial crude oil inventories rose 2.4m barrels in the week ending January 21. At 416.2m barrels, oil inventories are about 8% below the five year average for this time of year. Gasoline inventories rose 1.3m barrels. Distillate dropped -2.8m barrels. Propane/propylene dropped -4.6m barrels. Commercial petroleum rose 4.1m barrels.
WTI crude oil resumes recent up trend today and hits as high as 88.16 so far. Next target will be 90, which is a psychological level to overall. Sustained break there would pave the way to 61.8% projection of 66.46 to 87.70 from 82.42 at 95.54. In any case, outlook will now stays bullish as long as 82.42 support holds, in case of retreat.
US PCE price index rose to 5.8% yoy, core PCE rose to 4.9% yoy
US personal income rose 0.3% mom, or USD 70.7B in December, below expectation of 0.5% mom. Spending dropped -0.6% mom, or USD -95.2B, matched expectations.
PCE price index accelerated slightly from 5.7% yoy to 5.8% yoy, below expectation of 6.1% yoy. Core PCE price index jumped from 4.7% yoy to 4.9% yoy, above expectation of 4.8% yoy.
Full release here.