RBA Governor Philip Lowe said in a speech that the robust post-COVID recovery is “now behind us” given that inflation is high and labor market is very tight. RBA thus have withdrawn some emergency insurance and raised cash rate by 125bps over the past three meetings to 1.35%.
RBA “expects that further increase will be required over the months ahead”, to “”help establish a more sustainable balance between demand and supply in the Australian economy.
In a speech, BoE Governor Andrew Bailey said, ” 50 basis point increase will be among the choices on the table when we next meet”. But “50 basis points is not locked in, and anyone who predicts that is doing so based on their own view”.
Also, at next meeting, “it is also time for the MPC to discuss the strategy for beginning to sell the gilts held in our Asset Purchase Facility portfolio,” he added. “We will publish, alongside the Monetary Policy Report, more detail on how we will do this, to allow financial market participants to make the necessary preparations.”
Eurozone CPI was finalized at 8.6% yoy in June up from May’s 8.1% yoy. Excluding energy, food, alcohol & tobacco, CPI was finalized at 3.7% yoy, down form May’s 3.8% yoy. The highest contribution to the annual Eurozone inflation rate came from energy (+4.19%), followed by food, alcohol & tobacco (+1.88%), services (+1.42%) and non-energy industrial goods (+1.15%).
EU CPI was finalized at 9.6% yoy, up from May’s 8.8% yoy. The lowest annual rates were registered in Malta (6.1%), France (6.5%) and Finland (8.1%). The highest annual rates were recorded in Estonia (22.0%), Lithuania (20.5%) and Latvia (19.2%). Compared with May, annual inflation fell in two Member States and rose in twenty-five.
Euro jumps broadly after Reuters reported that ECB policymakers will discuss whether to raise interest rate by 50bps this Thursday, as a option to the pre-committed 25bps hike. But ECB spokesperson declined to comment so far.
Similar to EUR/USD, EUR/CAD should have formed a short term bottom at 1.2970. Further rise is expected to 1.3383 support turned resistance fist. Firm break there will target channel resistance (now at 1.3535). On the downside, below 1.3101 minor support will bring retest on 1.2970 low instead.
UK number of payrolled employees rose 31k in the month of June to a record 29.6m. Comparing with June 2021, payrolled employees rose 3.0% or 874k. Claimant count dropped -20k in the month, versus expectation of -41.2k.
Unemployment rate in the three months to May dropped was unchanged at 3.8%, matched expectations. Over the previous quarter, unemployment rate was down -0.1%, employment rate rose 0.4%, economic inactivity rate dropped -0.4%, hours worked rose 6.5m.
Average earnings including bonus rose 6.2% 3moy in may, below expectation of 6.8%. Average earnings excluding bonus rose 4.3% 3moy, matched expectations.
In a speech, RBA Deputy Governor Michelle Bullock said households are in a “fairly good position” for interest rate increases. It’s “unlikely” that there will be substantial financial stability arising from the household sector, but risks are “a little elevated”.
The household sector has “large liquidity buffers”, with “substantial equity” in housing assets. Much of the debt is held by “high-income households” while low fixed rate loans have give time for preparation for high rates. But rate hikes could impact households’ debt servicing burden and cash flow. Risk play out will also be included by future path of employment growth.
“This, along with the Board’s assessment of the outlook for inflation, will be important considerations in deciding the size and timing of future interest rate increases,” she concluded.
In the minutes of the July 5 meeting, RBA noted that members considered raising interest rates by 25bps or 50bps. The arguments for a 50bps hike were “stronger”.
“The level of interest rates was still very low for an economy with a tight labour market and facing a period of higher inflation,” the minutes noted. “Members viewed it as important that inflation expectations remained well anchored and that the period of higher inflation be temporary.”
Also, board members agreed that “further steps would need to be taken to normalise monetary conditions in Australia over the months ahead,” The “size and timing” of future hikes will be guided by “incoming data” and assessment of the outlook for “inflation and labor market”.
BoE MPC member Michael Saunders said in a speech, “my own view is that further monetary tightening is likely, and indeed, as evident from my votes at the MPC’s recent policy meetings, my preference has been to tighten relatively quickly.”
“This partly reflects my view that risks are tilted on the side of a more persistent period of excess demand and domestic inflation pressures than implied by the most recent MPR forecast (published in early May),” he said.
“Unless restrained by tighter monetary policy, the relatively high level of longer-term inflation expectations implies that domestic cost growth and firms’ pricing strategies may remain above target-consistent rates even if capacity pressures ease to more normal levels.”
Also, the cost of “not tightening promptly enough – would be relatively high at present”, and “such an outcome would increase the costs of returning inflation to target in coming years.”
“rather than focus on a precise forecast for Bank Rate over the next year, the key point is that the tightening cycle may (in my view) still have some way to go.”
New Zealand CPI rose 1.7% qoq, 7.3% yoy in Q2, above expectation of 1.5% qoq, 7.1% yoy. The annual inflation accelerated from 6.9% yoy to 7.3%, a 32-year high, after 7.6% in Q2 1990.
StatsNZ said, “the main driver for the 7.3 percent annual inflation to the June 2022 quarter was the housing and household utilities group, due to rising prices for construction and rentals for housing… Transport was also a main driver of the quarterly rise, driven by petrol and diesel.”
New Zealand BusinessNZ Performance of Services Index ticked up from 55.3 to 55.4 in June, staying above long term average of 53.6 or the survey. Activity/sales dropped from 59.4 to 56.5. But employment improved notably from 49.0 to 53.1. New orders/business rose from 62.0 to 61.7. Stocks/inventories dropped from 54.7 to 54.1. Supplier deliveries rose from 45.6 to 47.8.
BNZ Senior Economist Craig Ebert said that “the move to traffic light Orange in mid-April, along with the expedited opening of the border, is clearly providing a basis for sustained improvement in New Zealand’s services sector”.
US retail sales rose 1.0% mom to USD 680.6B in June, above expectation of 0.8% mom. Ex-auto sales rose 1.0% mom, above expectation of 0.6% mom. Ex-gasoline sales rose 0.7% mom. Ex-auto, ex-gasoline sales rose 0.7% mom. Retail trade rose 1.0% mom. Gasoline sales rose 3.6% mom. Total sales for the three months through June were up 8.1% yoy.
Eurozone exports of goods to the rest of the world rose 28.9% yoy to EUR 248.5B in May. Imports of goods rose 52.0% yoy to EUR 274.8B. Trade deficit came in at EUR -26.3B. Intra-eurozone trade rose 33.0% yoy to EUR 231.6B.
In seasonally adjusted term, exports rose 4.8% mom to EUR 241.8B. Imports rose 2.0% mom to EUR 267.8B. Trade deficit narrowed from April’s EUR -31.8B to EUR -26.0B, slightly smaller than expectation of EUR -26.3B. Intra-eurozone trade rose from EUR 217.2B to EUR 221.4B.
Gold’s down trend continued this week and breached 1700 handle overnight. Further fall is still in favor but Gold is now close to a critical support zone.
Whole pattern from 2074.84 (2020 high) is seen as a three wave consolidation pattern, with fall from 2070.06 as the third leg. Strong support is expected around 1682.60, with 38.2% retracement of 1046.27 to 2074.84 at 1681.92, to complete the pattern. Break of 1745.21 minor resistance will now be a sign of short term bottoming and bring stronger rise back to 1786.65/1878.92 resistance zone.
However, sustained break of 1682.60 will complete a double top reversal pattern (2074.84, 2070.06), and could prompt deeper decline to 61.8% retracement at 1439.18.
China GDP grew only 0.4% yoy in Q2, missing even the expectation of 1.0% yoy. For June, industrial production rose 3.9% yoy, below expectation of 4.3% yoy. Nevertheless, retail sales rose 3.1% yoy, above expectation of 0.4% yoy. Fixed asset investment rose 6.1% ytd yoy, versus expectation of 6.0%.
“Domestically, the impact of the epidemic is lingering,” NBS spokesman Fu Linghui said. “Economic growth is still much lower than its potential, as the fear of Covid outbreaks continues to hurt consumer and corporate sentiment… Even accounting for June’s strength, the data are consistent with negative year-on-year growth last quarter,” he added.
New Zealand BusinessNZ Performance of Manufacturing Index dropped from 52.9 to 49.7 in June. Production dropped from 52.6 to 47.8. Employment dropped from 52.8 to 51.2. New orders dropped fro 52.3 to 47.8. Finished stocks dropped from 52.8 to 50.0. Deliveries dropped from 55.1 to 51.7.
BusinessNZ’s Director, Advocacy Catherine Beard said that the drop in activity levels for June highlights the fact that the sector remains in struggle street to get back to long-term activity levels.
“The key sub index values of Production (47.8) and New Orders (47.8) both recorded the same level of contraction, which had a combined negative effect on the overall Index. As mentioned in previous months, a strong and consistent activity level for both these key sub index values will be the only way to push the PMI towards better results.”
In an interview by Nikkei after US CPI release, St. Louis Fed President James Bullard said rate-setters have “framed” the July FOMC meeting as “50 versus 75”. “I think 75 has a lot of virtue to it, because the long run neutral that the committee has, according to the Summary of Economic Projections, is actually about 2.5%,” he said.
“If we made this move at this meeting, that would get us all the way till the long run neutral value. And obviously we’ve got more steps to take in meetings ahead, but we can assess as we go through the rest of this year,” he added.
While Bullard has been advocating to get interest rate to 3.5% this year, rate exceeding 4% by the end of this year is “possible”. “If data came in, continued to come in, in an adverse way, for the committee, then we could consider doing more, as we go through the fall here. So, I’d say it’s a possibility.”
Fed Governor Christopher Waller said in a speech that as the base case, he supports another 75bps rate hike at the July 26-27 FOMC meeting. This level is “close to neutral”, neither stimulates nor restricts demand.
But Waller added, if upcoming retail sales and housing data “come in materially stronger than expected it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down.”
After July, Waller expects “monetary policy to be restrictive until there has been a sustained reduction in core personal consumption expenditure (PCE) inflation, which excludes food and energy.” And, “until I see a significant moderation in core prices, I support further rate hikes,” he added.
In the Summer 2022 Economic Forecast, European Commission downgraded both 2022 and 2023 Eurozone GDP growth projections. Meanwhile, HICP inflation projections were upgraded for Eurozone in both years. .
Eurozone GDP growth forecasts:
Eurozone HICP inflation forecasts:
Valdis Dombrovskis, Executive Vice-President said: “Russia’s war against Ukraine continues to cast a long shadow over Europe and our economy. We are facing challenges on multiple fronts from rising energy and food prices to a highly uncertain global outlook.”
Paolo Gentiloni, Commissioner for Economy said: “Russia’s unprovoked invasion of Ukraine continues to send shockwaves through the global economy. Moscow’s actions are disrupting energy and grain supplies, pushing up prices and weakening confidence…
“In Europe, momentum from the reopening of our economies is set to prop up annual growth in 2022, but for 2023 we have markedly revised down our forecast. Record-high inflation is now expected to peak later this year and gradually decline in 2023…
“With the course of the war and the reliability of gas supplies unknown, this forecast is subject to high uncertainty and downside risks. To navigate these troubled waters, Europe must show leadership, with three words defining our policies: solidarity, sustainability and security.”
US PPI for final demand rose 1.1% mom in July, above expectation of 0.8% mom. For the 12-month period, PPI accelerated to a record 11.6% yoy, above expectation of 10.% yoy. PPI less foods, energy, and trade services rose 0.3% mom, 6.4% yoy.
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Australia Westpac leading index dropped to 0.40%, economic slowdown ahead
Australia Westpac leading index dropped from 0.56% to 0.40% in June, indicating economic slowdown later in the year, but momentum is still above trend in the near term.
Westpac currently expects growth to slow from 4% in 2022 to 2% in 2023, but that is highly dependent on the profile of RBA’s tightening cycle.
Westpac expects RBA to opt for a fourth successive rate hike on August 2, and a third success time by 50bps. The current cycle is the first time cash rate has been lifted by 50bps or higher since 1990.
Full release here.