CAD/JPY recovers mildly after better than expected Canadian job data. But it’s just staying well inside consolidation pattern from 110.17. More sideway trading could still be seen. But outlook remains bullish with 96.70 support intact. Larger up trend is expected to resume sooner or later through 100.17 short term top.
In case of upside breakout, next target will be 100% projection of 73.80 to 91.16 from 84.65 at 102.01.
Canada employment grew 73k, or 0.4% mom, in March, slightly below expectation of 78k. The growth was driven by 93k rise in full-time jobs. Services-producing jobs rose 42k while goods-producing jobs rose 31k.
Unemployment rate dropped -0.2% to 5.3%, lowest on record since 1976. Total hours worked rose 1.3% mom. Average hourly wages rose 3.4% yoy.
WTI crude oil continued to gyrate lower this week. EU has yet confirmed banning Russian coal and even if they do, it’s not expected to take effect until August. Oil embargo is not in sight. Meanwhile, oil demand in China is not looking good as coronavirus lockdowns put activity in Shanghai into a halt.
Anyway, the current fall from 118.57 in WTI crude oil is seen as a leg inside the medium term corrective pattern from 131.82. Deeper decline might be seen through 93.98 support. But strong support should be seen at around 85.92 resistance turned support to bring rebound.
On the upside, break of 106.59 resistance will bring rebound back to 118.57 resistance and possibly above. But there is no scope in break through 131.82 high for the near term. The corrective pattern will take a while to complete.
Atlanta Fed President Raphael Bostic said yesterday, “it’s time that we get off of our emergency stance — I think it’s really appropriate that we move our policy closer to a neutral position — but I think we need to do it in a measured way.”
At the same virtual conference, Chicago Fed President Charles Evans said, “I’m optimistic that we can get to neutral, look around, and find that we’re not necessarily that far from where we need to go.”
St. Louis Fed president James Bullard said in a presentation, “standard Taylor-type monetary policy rules, even if based on a minimum interpretation of the persistent component of inflation, still recommend substantial increases in the policy rate.” Also, “credible forward guidance means market interest rates have increased substantially in advance of tangible Fed action. Both are indications that Fed is “behind the curve”.
The recommended policy rate from Bullard’s simple Taylor-type policy rule calculation is 3.5%, while the current value of the policy rate is 37.5 basis points. “One concludes that the current policy rate is too low by about 300 basis points, according to this calculation,” Bullard said.
US initial jobless claims dropped -5k to 166k in the week ending April 2. Four-week moving average dropped -8k to 170k. Continuing claims rose 17k to 1523k in the week ending March 26. Four-week moving average of continuing claims dropped -25k to 1541k.
It should be noted that the methodology used to seasonally adjust the numbers were revised with this release.
The accounts of ECB’s March 9-10 meeting noted that “while the Russian invasion of Ukraine had increased uncertainty surrounding the macroeconomic outlook, related risks to the inflation outlook were seen as largely one-sided, with experience suggesting that wars tended to be inflationary”.
“While the war would likely dent economic growth in the short term, annual growth was projected to remain positive even in the severe scenario, pointing to ‘slowflation’ rather than stagflation.”
“The greater persistence of inflation increased the probability of second-round effects via strengthening wage dynamics…. a longer period of above-target inflation would lead to an increased risk of an upward unanchoring of longer-term inflation expectations.”
Thus, the Governing Council could “no longer afford to look through higher inflation, even if it was driven by an adverse supply shock.”
ECB decided at the meeting to revise the plan for APP net purchases, with the option to end after June. “Easing bias” was removed from the forward guidance. Interest rate hike would come “shorter” after ending the net purchases, depending on incoming data.
Eurozone retail sales rose 0.3% mom in February, below expectation of 0.6% mom. Volume of retail trade increased by 3.2% for automotive fuels, and by 0.8% for non-food products, while it fell by 0.5% for food, drinks and tobacco.
EU retail sales also rose 0.3% mom. Among Member States for which data are available, the highest monthly increases in the total retail trade volume were registered in Slovenia (+8.0%), the Netherlands (+4.0%) and Portugal (+2.3%). The largest decreases were observed in Belgium (-1.8%), Estonia (-1.7%), and Poland (-1.6%).
Australia AiG Performance of Services Index dropped -3.8 pts to 56.2 in March. Sales dropped sharply by -14.9 to 53.7. Employment dropped -0.3 to 54.4. But new orders rose 2.4 to 63.5. Input prices jumped 11.5 to 77.5. Selling prices also rose 4.2 to 64.5. Average wages surged 11.8 to 67.7.
Innes Willox, Chief Executive of the national employer association Ai Group, said: “Australia’s services sector continued its positive run in March although the pace of growth slowed in the face of intensifying input price pressures, difficulties in finding staff and further wage pressures.”
Bank of Japan board member Asahi Noguchi said while core consumer inflation may exceed 2% from April, it’s mainly driven by external factors rather than domestic demand. He added, “Japan is not experiencing the kind of high inflation seen in many other countries.”
“In a country still mired in a sticky deflationary mindset, it will take significant time to stably achieve our 2% inflation target and justify a withdrawal of stimulus,” he added.
In the minutes of the March 15-16 FOMC meeting, many participants said they would have preferred a 50bps hike because inflation was well above target, and risks were to the upside. However, a number of them pointed out the “greater near-term uncertainty” associated with the Russia invasion of Ukraine. Thus, a 25bps hike was taken at that meeting.
However, “many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified.
Meanwhile “all participants” agreed that balance sheet runoff should start “at a coming meeting”. ” Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant.
Philadelphia Fed President Patrick Harker “inflation is running far too high, and I am acutely concerned about this… “The bottom line is that generous fiscal policies, supply chain disruptions, and accommodative monetary policy have pushed inflation far higher…. I’m also worried that inflation expectations could become unmoored.”
He said he expects “a series of deliberate, methodical hikes as the year continues and the data evolve.”
ECB Executive Board member Fabio Panetta said in a speech that the high inflation in Eurozone is “mostly due to global factors – including the increase in the prices of oil, gas and other commodities – over which monetary policy has little leverage.” And it “does not fundamentally result from an economy that is running above potential”.
Therefore, “asking monetary policy alone to bring down short-term inflation while inflation expectations remain well anchored would be extremely costly”. Monetary tightening would not affected imported energy and food prices, but “massively suppress domestic demand to bring down inflation”.
“And with the current levels of imported inflation, in order to hold headline inflation to 2%, we would need domestic inflation to be deeply negative. In other words, we would induce domestic deflation,” he added.
Panetta suggested that “fiscal policy can help mitigate the challenge of higher inflation by containing the effects of higher energy prices”. On the other hand, “Monetary policy will play its role, adjusting policy in line with the medium-term inflation outlook. ”
Eurozone PPI rose 1.1% mom, 3.1.4% yoy in February, below expectation of 1.3% mom, 31.6% yoy. For the month, industrial producer prices increased by 1.6% for intermediate goods, by 1.3% in the energy sector, by 0.8% for non-durable consumer goods, by 0.6% for durable consumer goods and by 0.3% for capital goods. Prices in total industry excluding energy increased by 0.9%.
EU PPI rose 1.1% mom, 31.1% yoy. The highest monthly increases in industrial producer prices were recorded in Slovakia (+13.6%), Slovenia (+5.7%) and Greece (+4.8%). Decreases were observed in Ireland (-8.1%), Finland (-0.5%), Latvia (-0.3%), and Bulgaria (-0.1%).
UK PMI Construction was unchanged at 59.1 in March, better than expectation of 57.3. The latest reading signalled the join-fastest rate of output growth since June 2021. However, business optimism dropped to 17-month low.
Tim Moore, Economics Director at S&P Global: “Escalating fuel, energy and commodity prices led to the fastest rise in costs for six months. Intense inflationary pressures appear to have unnerved some construction companies. Business optimism slipped to its lowest since October 2020 on concerns that clients will cut back spending in response to rising prices and heightened economic uncertainty.”
ECB Vice President Luis de Guindos said in a speech, “for the euro area, the financial stability impact of the war has so far been relatively contained.” And, “markets have generally been functioning well”, with “no dash for cash”.
“While both banks and non-banks have been affected – especially the few that have large direct exposures to Russia and Ukraine – the economic fallout has not had a sizeable impact on the EU banking or financial systems as a whole,” he added.
But he also noted, “the invasion of Ukraine also demonstrated how vulnerable Europe is due to its high dependency on fossil fuel imports from Russia. Speeding up the green transition is a key priority from this perspective too – not only to address the urgent environmental and climate challenges we face, but also to help increase our energy security and protect the EU economy from energy price spikes.”
US 10-year yield resumed recent up trend after hawkish comments from Fed officials, and closed up 0.144 at 2.556. It should be emphasized again that TNX is now facing multi-decade channel resistance, at around 2.6. Rejection by this channel resistance, followed by break of 2.311 support will bring deeper correction, before making the next move.
However, sustained break of the channel resistance will mark the the change of a very long term trend. Further break of 100% projection of 0.398 to 1.765 from 1.343 at 2.710 could trigger rather fierce upside acceleration through 3.248 structural resistance (2018 high).
China Caixin PMI Services dropped sharply from 50.2 to 42.0 in March, much worse than expectation of 49.9. That’s also the worst reading since February 2020. PMI Composite dropped from 50.1 to 43.9, also the worst since February 2020.
Wang Zhe, Senior Economist at Caixin Insight Group said: “At present, China is facing the most severe wave of outbreaks since the beginning of 2020. Uncertainty also increased abroad. The outcome of the war between Russia and Ukraine is uncertain, and the commodity market has convulsed. Several factors have aggravated the downward pressure on China’s economy and underscore the risk of stagflation.”
ECB Chief Economist Philip Lane said in an interview with Antenna TV, there are three concerns about the Russian invasion of Ukraine, from view point of the economy, including energy, trade and uncertainty. “The war is a major negative economic issue, but the reopening of the economy gives some momentum. So this year, for example, we should expect the tourist season to be better than last year,” he said.
Lane expected that inflation might peak by “mid-year” but that depends on the war. “Most likely, with the nature of the energy shock, prices will either level off at these high prices or will start to decline”, he added. “But the momentum of inflation will slow down, so we do think that in the second half to the year, as you say, the inflation rate will come down.”
He also emphasized, “unlike the 1970s, these are a few months of high inflation rates. It is not a decade of high inflation rates, and we do think the inflation will fall later this year. So please remember: this inflation is coming from outside, it is not coming from the European economy. This is why we do think it has this special characteristic.”
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BoJ Kuroda: Economy to continue to recover despite rising commodity prices
BoJ Governor Haruhiko Kuroda said in the quarterly branch manager meeting, “Japan’s economy has picked up as a trend, although some weakness has been seen in part, mainly due to the impact of COVID-19.”
“As downward pressure on service consumption and the impact of supply shortages diminish, a pickup in overseas demand, accommodative monetary policy, and the government’s economic stimulus will likely help the Japanese economy recover despite being affected by rising commodity prices,” he added.
Kuroda also cautioned that “extremely high uncertainties” remain over how the crisis in Ukraine will impact commodity prices and the Japanese economy. But he also indicated that commodity inflation is unlikely to trigger a change in the central bank’s ultra-loose policy, because it wouldn’t last long.