Ifo lowered Germany growth forecast for 2021 sharply from 3.3% to 2.5%. But 2022 growth forecast was upgraded by 0.8% to 5.1%.
“The strong recovery from the coronavirus crisis, originally expected for the summer, is further postponed,” Ifo chief economist Timo Wollmershaeuser said.
“Industrial production is currently shrinking as a result of supply bottlenecks for important intermediate goods. At the same time, service providers are recovering strongly from the coronavirus crisis.”
ECB Governing Council member Madis Muller said, “given the recovery that we’re seeing in the economy, also the outlook for inflation and most importantly the extremely favorable financing conditions that we continue to have in the euro area, we should be able to end PEPP in March as it has been communicated and as it has been the original plan.” He added, “if you ask what is the most likely outcome then to me personally, this is the base case.”
Muller also argued that inflation could start stronger than ECB’s forecasts. “Looking at possible factors that could be pushing prices higher and those that could be pulling it lower, the factors pushing prices higher seem to be stronger at the moment,” he said. “It’s more likely that we will have inflation, for example, in 2023 higher than 1.5% rather than lower. The same probably applies for the 1.7% inflation forecast for 2022.”
However, “it would be a problem if there is a very sharp cliff effect at the end of the pandemic emergency purchase program,” he noted. “”part of the discussion we will have on how to phase out PEPP and what it would mean for asset purchases going forward.” A potential increase in the APP program was being discussed. But, “of course the decision will depend on market conditions next spring and the economic outlook at that point.”
In the post meeting press conference, BoJ Governor Haruhiko Kuroda said the recent slump in consumption was “in a way unexpected”. But he’s still optimistic on consumption outlook. He added that the decline was not because households lacked income, but more due to the pandemic keeping them from boosting spending. He added, “as the pandemic subsided, consumption is expected to strengthen.”
Kuroda also said he expected “external demand to remain solid” and there is no need to project a “clear slowdown” in US and China growth. He added that actual economic indicators, consumption and output were growing very steadily in the US. The woes of Evergrande is see as “purely” and individual company’s issue, and that of the real estate sector.
No change in policy is expected from FOMC today and Fed is likely not ready to announce tapering yet. Chair Jerome Powell would just reiterate that “substantial further progress” has been “met for inflation”, and there has also been “clear progress toward maximum employment”. Also, it’s appropriate to start tapering “if the economy evolved broadly as anticipated
A major focus in the median dot plot, where two rate hikes were penciled in by 20223. For 2022, there were 7 out of 18 participants anticipating one or two hikes. The overall picture could tilt towards the hawkish side if just one or two members bring forward their rate forecasts to 2022. Meanwhile, the new staff economic projections will catch some attention too.
Here are some suggested readings on Fed:
Australia Westpac-MI leading index dropped from 1.4% to -0.5% in August. Westpac said “the Leading Index has held up surprisingly well during this downturn but it seems likely that there is more weakness on the way.” For example, commodity prices and equities are likely to drag the index down further based on the developments in September.
Westpac doesn’t expect RBA to make any change to policy settings until February next year. It expects asset purchases to be fully wound back by May/August next year.
BoJ left monetary policy unchanged today. Under the yield curve control framework, short term policy interest rate is held at -0.10%. 10-year JGB yield target is kept at around 0%, without upper limit on bond purchases. The decision was made by 8-1 vote, with Goushi Kataoka dissenting as usual, pushing for strengthening easing. It also pledged to closely monitor the pandemic impact and “will not hesitate to take additional easing measures if necessary”.
Overall assessment on the economy was maintained as its has “picked up as a trend” but “remained in a severe situation” due to the pandemic home and abroad. But it noted that some exports and production have been “affected by supply-side constraints”. Weakness has been seen in some industries on business fixed investment. Employment and income “remained weak” while private consumption remained “stagnant”. Core CPI has been at around 0% and inflation expectations have been “more or less unchanged”.
US housing starts rose 3.9% mom to 1615k in August, above expectation of 1550k. Building permits rose 6.0% mom to 1728k, above expectation of 1600k. Also released, current account deficit came in at USD -190B in Q2, versus expectation of USD -187B.
OECD lowered 2021 global growth forecast slightly to 5.7%, down from May’s projection of 5.8%. 2022 global growth was revised slightly higher to 4.5%, up from 4.4%. It added, “the global economy is growing far more strongly than anticipated a year ago but the recovery remains uneven, exposing both advanced and emerging markets to a range of risks”.
It also said there is a “marked variation in the outlook for inflation”. But the inflationary pressures “should eventually fade”. “Consumer price inflation in the G20 countries is projected to peak towards the end of 2021 and slow throughout 2022. Wage growth remains broadly moderate and medium-term inflation expectations remain contained.”
Chief Economist Laurence Boone said: “Policies have been efficient in buffering the shock and ensuring a strong recovery; planning for more efficient public finances, shifted towards investment in physical and human capital is necessary and will help monetary policy to normalise smoothly once the recovery is firmly established.”
The selloff in US stocks overnight was a rather bearish development for the near term. S&P 500 gapped below 55 day EMA, and dive through medium term channel support without much hesitation. While it managed to pare back some losses to close at 4357.73, it’s capped below 4367.73 structural support.
The condition for a medium term correction is there with bearish divergence condition in daily MACD. That is, 4545.85 is possibly a medium term top, and fall from there is corrective whole rise from 3233.94 at least. For now, risk will stay on the downside as long as any recovery is capped by 55 day EMA (now at 4415.18). SPX could fall further, for the rest of the year, to 38.2% retracement of 3233.94 to 4545.45 at 4044.70 before finding a bottom.
In the minutes of the September 7 RBA meeting, it’s noted, “the outbreak of the Delta variant had delayed, but not derailed, the recovery.” The economy was “expected to bounce back as vaccination rates increase and restrictions are eased” but “there was considerable uncertainty about the timing and pace of the recovery, which was likely to be slower than experienced earlier in 2021”. In the central scenario, growth will return in Q4 and its “pre-Delta path in the second half of 2022”.
As a result of the delay in recovery and uncertainty about the future, “progress towards the Bank’s goals was likely to take longer and was less assured”. But at the same time, fiscal policy is “more appropriate” in dealing with a “temporary and sharp reduction in private sector incomes”. Hence, RBA decided to taper purchases to AUD 4B per week, but extend the period to mid February 2022.
RBA also reiterated its commitment to “maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target.” And it will not raise interest rate until 2024.
RBNZ Assistant Governor Christian Hawkesby said in a speech, “while the demand side of the economy has been more resilient than expected when COVID-19 arrived, the disruption to the supply side of the economy has also been more prolonged than anticipated.” Also, the developments combined are “likely to have reduced the level of maximum sustainable employment”.
He reiterated that in the latest Monetary Policy Statement, it’s noted RBNZ had “more confidence that employment was already at its maximum sustainable level and that pressures on capacity would feed through into more persistent inflation pressures over the medium-term”.
Thus, the “least regrets policy stance” was to “further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment.” Also, ” whether or not a monetary policy response would be required in response to future health related lockdowns would depend on whether there was a more enduring impact on inflation and employment”
ECB Executive Board member Isabel Schnabel said in a speech, “asset purchases were an “indispensable monetary policy instrument during times of market stress and economic downturns”. It also helped to “bolster confidence and shore up the economy and the inflation outlook” after calming the markets.
“As economic conditions begin to normalise and the inflation outlook improves,” she said, “there is a gradual shift in the way asset purchases benefit the economy as the portfolio rebalancing channel makes way for the signalling channel.”
“Asset purchases can increasingly serve as a powerful commitment device, reinforcing forward guidance and reducing uncertainty around the future course of monetary policy.”
She concluded, “given the remaining uncertainty regarding the pandemic and the economic and inflation outlook, our asset purchases – both under the PEPP and the APP – will remain crucial in the time to come, paving the way out of the pandemic and towards reaching our inflation target.”
CAD/JPY follows other Yen crosses lower today, with downside acceleration. Near term outlook is kept bearish by prior rejection from 55 day EMA. The fall from 91.16 is probably ready to resume through an important support zone.
The cluster support level include 84.65, 55 day EMA (now at 85.46) and 38.2% retracement of 7380 to 91.16 at 84.52. Sustained break of this level will confirm both the completion of rise from 73.80 and rejection by 91.62 key resistance. In this case, deeper fall would be seen to 61.8% retracement at 80.43.
AUD/JPY’s fall from 82.01 resumes today on general risk-off sentiments in Asian markets. For now, further decline is expected as long as 80.49 minor resistance holds. Sustained trading below 61.8% retracement of 77.88 to 82.01 at 79.45 will raise the chance that it’s indeed ready to resume whole decline from 85.78 high. Retest of 77.88 low should be seen first.
As the fall from 85.78 is now seen as a correction to up trend from 59.85, break of 77.88 would pave the way to 38.2% retracement of 59.85 to 85.78 at 75.87 next. Such development, if happens, could be a prelude in similar selloff in other Yen crosses.
Asian markets are trading in risk-off mode, as Hong Kong stocks are taking another beating while Japan and China are on holiday. Selloff in shares of the troubled Chinese giant Evergrande Group is spreading to other property stocks. The group has just announced over the weekend to start repaying its wealth management products with real estates.
At the time of writing, Hong Kong HSI is down more than -3.4% or -850 pts. As for the near term, 61.8% projection of 29394.68 to 24748.84 from 26560.03 at 23688.90 would be an important level to defend this week. Some support could be seen there to bring at least some consolidations first. However, any further downside acceleration could easy push HSI through the level to 100% projection at 21914.19. That’s a possible scenario considering the FOMC event risk this week.
ECB Governing Council member Gabriel Makhlouf said, “I believe that, at the moment, fears of excessive euro area inflation are overstated and that the current price pressures reflect transitory factors that will fade out over time.”
But he also admitted, “there is considerable uncertainty about the persistence of price pressures and we need to interpret this (inflation) data and the outputs of our models with caution.”
ECB Governing Council member Martins Kazaks said, “if Covid does not surprise on the negative side, there is some upside for the inflation outlook over the medium term.” But he added, “I am talking about decimals here.”
“There is perhaps some upside for those numbers to be revised up in the following forecasting rounds,” Kazaks said. “I agree with the current outlook, but I would say that the balance of risks for inflation are somewhat on the upside.”
“We hear some anecdotal evidence that there could be some wage pressures down the road, but we have not seen that yet in the data,” he said. “There is no reason to expect that inflation would be permanently very hot. If at some point inflation will be significantly higher than our strategy and monetary-policy mandate, then of course we will know how to react.”
Eurozone CPI was finalized at 3.0% yoy in August, up from July’s 2.2% yoy. The highest contribution to the annual euro area inflation rate came from energy (+1.44%), followed by non-energy industrial goods (+0.65%) and food, alcohol & tobacco and services (both +0.43%).
EU CPI was finalized at 3.2% yoy, up from July’s 2.5% yoy. The lowest annual rates were registered in Malta (0.4%), Greece (1.2%) and Portugal (1.3%). The highest annual rates were recorded in Estonia, Lithuania and Poland (all 5.0%). Compared with July, annual inflation remained stable in one Member State and rose in twenty-six.
UK retail sales dropped -0.9% mom in August, well below expectation of 0.5% mom rise. For the 12-month period, headline sales rose 0.0% yoy versus expectation of 2.6% yoy.
Overall sales volume were still up 0.3% in the three months to August, compared with the previous three months. It’s also 4.6% higher than their pre-pandemic levels in February 2020.
Ex-fuel sales dropped -1.2% mom, well below expectation of 0.7% mom rise too. For the 12-month period, ex-fuel sales dropped -0.9% yoy versus expectation of 2.5% yoy.
ActionForex.com was set up back in 2004 with the aim to provide insightful analysis to forex traders, serving the trading community for over a decade. Empowering the individual traders was, is, and will always be our motto going forward.
Contact us: contact@actionforex.com
© ActionForex.com © 2024 All rights reserved.
Fed stands pat, tapering may soon be warranted
Fed kept monetary policy unchanged as expected. Federal funds rate is held at 0-0.25%. The target range will be maintained “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”
The asset purchase pace is also held at at least USD 80B on treasury securities and USD 40B on MBS per month. Though, it added that “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”
Full statement here.