In April’s preliminary data, Australia’s goods exports dropped -12% mom from March’s record high of AUD 35.8B to AUD 31.4B. The contraction was driven by exports of non-rural goods (down -8% mom) and non-monetary gold (down -47% mom).
Imports dropped -5% mom to AUD 23.1B. The decrease in imports were driven by intermediate and other goods (down -6% mom), non-monetary gold (down -42% mom) and capital goods (down -7% mom).
Canadian Dollar weakens after weaker than expected retail sales data. Headline sales dropped -0.3% mom in January, below expectation of 0.4% mom. Ex-auto sales rose 0.1% mom, matched consensus.
Headline CPI accelerated to 1.5% yoy, up from 1.4% yoy and beat expectation of 1.4% yoy. CPI core-common slowed to 1.8% yoy, down from 1.9% yoy, matched expectations. CPI core-media was unchanged at 1.8% yoy. CPI core-trim was unchanged at 1.9% yoy.
Dollar soars on hawkish comments from Fed Chair Jerome Powell. He indicated that ultimate level of interests is “likely to be higher than previously anticipated”. Fed is also “prepared to increase the pace of rate hikes”. He also warned against “prematurely loosening policy.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in the prepared remarks for the semi-annual testimony to Congress.
Additionally, “if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he added.
“Our overarching focus is using our tools to bring inflation back down to our 2 percent goal and to keep longer-term inflation expectations well anchored,” Powell emphasized. “Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run.”
“The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done,” he said.
According to a report by POLITICO, European Commission sent a 11-page document to the US Commerce Department’s Bureau of Industry and Security on Friday. It warned that tariffs on European cars will be “harmful first and foremost for the US economy.” And, the impact of such tariffs on US GDP would be “in the order of 13-14 billion USD.” Additionally, the “current account balance of the US would be not affected positively.”
The document also pointed out that European carmakers contributed to production of 2.9m cars in 2017, around 26% of US production. And, production of EU-owned American car companies amounts to 16% of national production, or 1.8m vehicles. In addition to that, “EU companies based in the US export a significant part of their production, thus contributing substantially to improving the US trade balance, which is a priority of the administration.”
Also, “around 60 percent of automobiles produced in the US by companies with exclusive EU ownership are exported to third countries, including the EU. Measures harming these companies would be self-defeating and would weaken the US economy.”
Richmond Fed President Thomas Barkin said with initial slow vaccine distribution. a full return to normal “won’t be until sometime this summer at best”. Though, “I expect the second half of the year to be robust as businesses finally pull the trigger and return to the workplace and consumers with elevated savings unlock pent-up demand,” he added.
Barkin also noted, “I am encouraged to see the rise in market indicators of inflation expectations. … That is what we are trying to support”. Recent rise in bond yields was part of a “reflation trade”, as investors were pricing in future rise in prices.
BoJ Deputy Governor Shinichi Uchida voiced caution over a hasty shift in monetary policy amid current economic climate. In an interview with Nikkei, Uchida emphasized that Japan was far from needing to hastily raise interest rates.
“The risk of missing the opportunity to achieve our 2% target with a premature policy shift is bigger than that of being too late in tightening policy and allowing inflation to continue running above 2%,” Uchida explained.
Uchida noted the budding changes in Japanese companies’ behavior, which have been rooted in the country’s deflationary period. He stressed the importance of nurturing these developments with care. However, he cautioned that uncertainty remains high over inflation outlook, including impact of pricing behaviors and wage hikes by companies.
“We have not reached a point where we can foresee the 2 percent price stability target can be attained stably and sustainably,” Uchida said. He also recognized the burden placed on households due to more than 2% rise in core CPI, reinforcing the importance of supporting the economy with current monetary easing to stabilize inflation at 2%, in tandem with wage growth.
Uchida also touched on foreign exchange rates, noting the unwanted uncertainty caused by Yen’s rapid and one-sided depreciation. He highlighted the importance of stable foreign exchange rates, which should reflect economic and financial fundamentals. “The BOJ will coordinate with the government, and closely monitor developments in the foreign exchange market and their impact on the economy and prices,” he added.
BoJ announced to extend the during of the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19) by 6 months. Other than that, monetary policy was kept unchanged. Under the yield curve control framework, short term interest rate target was held at -0.1%. 10-year JGB yield target is held at around 0%, with unlimited purchase of government bonds.
Also, BoJ will “conduct an assessment for further effective and sustainable monetary easing, with a view to supporting the economy and thereby achieving the price stability target of 2 percent”. Nevertheless, the framework of QQE with YCC has been “working well to date” and thus there is “no need to change it. The results of the review will likely be be published in March.
The central bank said Japan’s economy is “likely to follow an improving trend” with gradual waning of COVID-19 impact. But pace of improvement is expected to be “only moderate”. Year-on-year rate of core CPI is “likely to be negative for the time being”. But it’s expected to turn positive and then increase gradually.
UK Prime Minister Theresa May’s spokesman reiterated the stance that “the prime minister said the government is the servant of the people and she believes passionately that we must deliver on the result of the 2016 referendum”
And, “she added that after the vote has taken place, she would respond quickly to the result.”
In the G7 central bank chief briefing in Japan, BoJ Governor Kazuo Ueda underscored the unique inflation situation in Japan compared to other countries. While elevated inflation rates are affecting many countries, Japan’s price gains are expected to slow down to below 2%, prompting the BoJ to continue its monetary easing policies.
Ueda acknowledged the possibility of Japan falling behind the curve in addressing the risk of high inflation. However, he emphasized the importance of being more focused on the risk of inflation falling short of the 2% target. He stated, “As we guide monetary policy, it is appropriate to pay more attention to the risk of inflation undershooting 2 percent and thus moving away from the goal.”
Ueda is set to have his first policy meeting on April 27-28, where he will likely further discuss Japan’s distinct inflation trajectory and the country’s monetary policy approach.
ECB Chief Economist Philip Lane said in an interview, “if inflation rates are moving towards our target in the medium term, which is now looking more likely – instead of being well below two per cent as before the pandemic – we will adjust monetary policy”. That’s because, “we would then, for example, no longer need to make asset purchases to stabilise inflation at our target over the medium term.”
“It was different in December, when surveys still showed the expectation that we would need to maintain asset purchases until the middle of next year, but the timeline may be shorter than what people expected then,” he added.
Lane also reiterated the “sequencing” of policy normalization. That is, “our net assets purchases will first be scaled down, then ended. Then, the key policy rates will only increase above their current levels if the conditions consistent with our medium-term inflation target are met. So before we talk about potential rate decisions, we need to end net asset purchases. And we need to prepare the market for the eventual end of these purchases.
Australia AiG Performance of Services rose 1.9 pts to 47.6 in October, marking a third month in contraction. Sales rose 13.8 to 55.2. Employment rose 4.8 to 56.8. New orders dropped -1.0 to 38.8. supplier deliveries dropped -7.5 to 39.5. Finished stocks dropped -13.7 to 39.8. Capacity utilization dropped -1.7 to 74.5. Input prices rose 9.1 to 73.6. Selling prices rose 7.8 to 61.7. Average wages rose 9.1 to 68.3.
Ai Group Chief Executive, Innes Willox, said: “The Australian services sector reported mixed fortunes in October… Across the services sector, sales and employment were higher in October while new orders were discouragingly low. A more robust recovery was inhibited by lingering activity restrictions, barriers to interstate movement and the same disruptions to the supply of inputs that are being felt in other parts of the economy… Services companies reported further strong rises in input prices and wages with selling prices also rising although not by enough to prevent additional pressure on margins.”
Eurozone Sentix Investor Confidence dropped to 11.4 in October, down from 12, matched expectations. Sentix noted in the release “uncertainties about the fiscal policy stance in Italy and the automobile industry in Germany are depressing the sentiment”. Meanwhile, the US economy remains strong with “assessment of the situation rises to an all-time high and raises investors’ expectations of rising inflation rates and a restrictive central bank policy”. Sentix added the situation value at 66.5 “signal overheating”.
On Eurozone, Sentix said the economy is “recording a further slight slowdown”. That was attributable to current situation values which dropped to 33.0, lowest since April 2017. But Sentix also said the data “do not represent a fundamentally new assessment by investors” as expectation value was “hardly changed”.
Eurozone CPI slowed to 1.6% yoy in December, down from 2.0% yoy and missed expectation of 1.8% yoy. Core CPI was unchanged at 1.0% yoy.
PPI dropped -0.3% mom rose 4.0% yoy, versus expectation of 0.2% mom, 4.1% yoy.
US non-farm payroll employment grew 559k in May, below expectation of 621k. Prior month’s figure was revised slightly up from 266k to 278k. Total non-farm payroll employment is down by -7.6m, or -5.0%, from its pre-pandemic level in February 2020.
Unemployment rate dropped to 5.8%, down from 6.1%, slightly below expectation of 5.9%. Number of unemployed persons fell by -496k to 9.3m. The unemployment measures are still well above pre-pandemic levels of 3.5% and 5.7m, in February 2020. Labor force participation rate was little changed at 61.6%, and remained in range of 61% to 61.7% since June 2020.
Wage growth was strong, as average hourly earnings rose 0.5% mom, versus expectation of 0.2% mom.
In an OECD survey report, Deputy Secretary-General Ludger Schuknecht, warned that “China is at a crossroads, facing serious domestic and external challenges to maintaining its strong position over the long-term.”. He urged that “policy should seek to ensure a better functioning economy that delivers stable and inclusive growth for all.”
OECD said China should aim to “further lower import tariffs and dismantle non-tariff barriers and barriers on the entry and conduct of foreign firms, in particular requirements to form joint ventures or transfer technology.” Also, “ongoing fiscal stimulus should avoid directing credit to state-owned enterprises and local governments”
Additionally, there are :wide scope to improve efficiency across the economy, notably by reducing the internal barriers that hinder product market competition and labour mobility.”. And measures include “stronger protection of intellectual property rights; gradual removal of implicit guarantees to state-owned enterprises, allowing them to default; and reduction of state ownership in commercially-oriented, non-strategic sectors.”
Atlanta Fed President Raphael Bostic said yesterday that the US economy is “still quite strong”. It’s in a situation “where it can stand on its own”. Thus, Fed can pull back some emergency support “without jeopardizing employment.”
Bostic also noted that the new sanctions on Russia provided some uncertainty. And, “that kind of uncertainty is a downward risk to economic output” that will be factored into how he thinks about monetary policy.
Australia’s inflation data for Q4 show notable easing in price pressures. CPI rose by 0.6% qoq, a considerable slowdown from the previous quarter’s 1.2% qoq and below expectation 0.8% qoq. This marks the smallest quarterly increase since Q1 2021. On an annual basis, CPI decelerated from 5.4% yoy to 4.1% yoy, coming in lower than the forecasted 4.3% yoy.
RBA’s trimmed mean CPI, which is a measure of core inflation, also reflected this trend. It increased by 0.8% qoq and 4.2% yoy, down from 1.2% qoq and 5.2% yoy respectively in the previous quarter. These figures were below the expected 0.9% qoq and 4.3% yoy. Notably, this represents the fourth consecutive quarter of declining annual trimmed mean inflation, falling from a peak of 6.8% in Q4 2022.
Additionally, monthly CPI showed a sharp slowdown from 4.3% yoy to 3.4% yoy, undershooting expectation of 3.7% yoy.
Entering into US session, Australian Dollar remains the strongest one for today, followed by New Zealand Dollar. The Aussie was boosted by RBA statement earlier today. In short, while RBA downgraded growth and inflation forecast for 2019, it remained confident that inflation will gradually return to target. This is consistent with the rhetoric that next move is a hike rather than a cut. Dollar is the third strongest one as it’s trying to rebound again.
On the other hand, Swiss Franc is the weakest one for today as European stocks rise. . In particular, USD/CHF has taken out 0.9994 resistance to resume rise from 0.9716 already. EUR/CHF also broke 1.1429 to resume rise from 1.1181. Sterling is the weakest one for today so far. Markets shrug off UK PM May’s plan to visit EU Juncker on Thursday. Euro follows as the third weakest. Both Euro and Sterling are also weighed down by weak PMI data.
In Europe:
Earlier in Asia:
US initial jobless claims fell -10k to 230k in the week ending August 19, better than expectation of 241k. Four-week moving average of initial claims rose 2k to 238k.
Continuing claims dropped -9k to 1702k in the week ending August 12. Four-week moving average of continuing claims rose 6k to 1697k.
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Fed Williams: Moderate inflation overshoot, is a guard rail, about proportionality
New York Fed President John Williams said allowing “moderate” inflation overshoot “isn’t a number”. But it’s a “guard rail” against expectations that very persistently high inflation would be tolerated. And, “it’s also about proportionality”. “There’s flexibility, and there’s some discretion around that,” he added. “It is specific to the circumstances, and I would also say it is specific to where the economy is.”
Williams also reiterated that the economic outlook is “highly uncertain”. Fiscal policy actions can be very helpful in the short-run. As some parts of the economy have not recovered nearly as much, “target fiscal support would be helpful”.