Eurozone CPI slowed to 0.7% yoy in March, down from 1.2% yoy, below expectation of 0.8% yoy. CPI core slowed to 1.0% yoy, down from 1.2% yoy, below expectation of 1.1% yoy. Looking at the main components, food, alcohol & tobacco rose 2.4% yoy, services rose 1.3% yoy, non-energy industrial goods rose 0.5% yoy. Energy dropped -4.3% yoy.
Atlanta Fed President Raphael Bostic delivered a speech titled “The Path to Economic Resilience” to the Rotary Club os Savannah yesterday. There he expressed his support further further rate hike as the economy “appears to be in a pretty good place”.
His growth outlook “hasn’t changed materially” since the start of the year and output is expected to growth at a “moderately above-trend pace this year and next”, then slow to slightly less than 2%.
Regarding inflation, Bostic said he hasn’t seen a “dramatic shift” in inflation expectation or measured retail price inflation yet. And aggregate wage growth “appears to have flattened out” over the past year to a level that’s inline with fundamentals.
Bostic is comfortable to “move policy toward a more neutral stance”, where it’s “neither accommodative nor restrictive”. While neutral rate is “something we know with precision”, he believed Fed is getting close to the “lower part of most plausible estimates of the neutral rate”. And he noted the key question is the number of hikes are required to reach neutral.
He also warned of trade policy of the US. Bostic said “I began the year with a decided upside tilt to my risk profile for growth, reflecting business optimism following the passage of tax reform. However, that optimism has almost completely faded among my contacts, replaced by concerns about trade policy and tariffs. Perceived uncertainty has risen markedly. Projects already under way are continuing, but I get the sense that the bar for new investment is currently quite high. ‘Risk off’ behavior appears to be the dominant sentiment among my contacts. In response, I’ve shifted the risks to my growth outlook to balanced.”
Germany’s ZEW Economic Sentiment soared to 9.8 in November, far surpassing the anticipated 4.9, signaling increasing optimism among financial market experts. However, Current Situation Index barely moved, nudging from -79.9 to -79.8, and falling short of expected -75.5.
Eurozone’s ZEW Economic Sentiment experienced a similar upswing, rising from 2.3 to 13.8, well ahead of the forecast of 6.1. Despite this, Current Situation Index in Eurozone showed a decline, dropping by -9.4 points to -61.8.
Achim Wambach, ZEW President, noted that while current economic conditions are still challenging, there’s growing optimism. He added, “These observations support the impression that the economic development in Germany has bottomed out.”
The increase in economic expectations is supported by a more positive view of the German industrial sector and both domestic and foreign stock markets. Additionally, “inflation and short- and long-term interest rates also appear to have reached turning points in expectations,” he added.
FOMC monetary policy decision is the major focus today, as Fed should finally make a formal announcement on QE tapering. As the September minutes indicates, the pace would be “monthly reductions in the pace of asset purchases, by US$10B in the case of Treasury securities and US$5B in the case of agency mortgage-backed securities (MBS)”. The would eventually lead to completion of entire asset purchases by mid -2022. But, a hawkish surprise – monthly reduction at a faster pace – cannot be ruled out given the inflationary pressure.
Also, September’s dot plot revealed that half of the members had anticipated a rate hike in 2022. Meanwhile, the market has priced in futures have priced in over 60% of a rate hike by June next year. But Fed Chair Jerome Powell would likely reiterate that decision on interest rate is complete separated from that of asset purchases. There wouldn’t be any new hint on the timing of rate hike until December’s dot plot.
Suggested readings on Fed
Canada employment dropped -63k, or -0.3%, in December, much worse than expectation of -32.5k, and the first contraction since April. Unemployment rate ticked up to 8.6%, from November’s 8.5%.
The accounts of ECB’s February 1-2 meeting noted, “it was generally felt that concerns of ‘overtightening’ were premature at the present high levels of inflation and in view of the likely persistence of underlying price pressures”.
The view was expressed that, “given the still substantial distance to the prospective terminal rate, there continued to be value – from a risk management perspective – in frontloading rate hikes at the present stage.”
The communication regarding March meeting, “conveyed the view that, in the absence of abrupt changes in circumstances, a further 50 basis point interest rate hike at the March meeting was consistent with a very wide range of possible scenarios for the way inflation would develop.”
BoE Chief Economist Huw Pill said in a speech even though the voted for a 25bps hike last week, “given the inflationary pressures we currently face, I can certainly understand why colleagues on the MPC voted for a 50bp hike”.
But, “a case can be made for a measured rather than activist approach to policy decisions, with a focus on more persistent developments in the data that have lasting implications for the outlook for price stability,” he said.
“That is what I would label a ‘steady handed’ approach to monetary policy. Even if it does not provide guidance in all circumstances, I hope it can help explain why I voted for a 25bp hike – rather than something larger – last week.”
US exports of goods and services rose 3.5% mom to USD 252.6B in April. Imports dropped -3.4% mom to USD 339.7B. Trade deficit narrowed from USD 107.7B to USD 87.1B, versus expectation of USD 89.3B.
In Q1, goods and services trade deficit with China increased USD 22.9B to USD 112.7B. The deficit with Canada increased USD 9.6B to USD 19.1B. The surplus with the United Kingdom increased USD 2.5B to USD 5.8B.
Singapore government downgraded growth forecasts for the year as China’s Wuhan coronavirus outbreak is weighing on the country’s economy. For 2020, the Ministry of Trade & Industry projected growth in range of -0.5% to 1.5%, lowered from prior estimate of 0.5% to 2.5%.
Gabriel Lim, permanent secretary at the ministry, said, “as the COVID-19 situation is still evolving, there is a significant degree of uncertainty over the length and severity of the outbreak, and hence its overall impact on the Singapore economy.”
Singapore has the second highest number of coronavirus cases (75) outside China, next to Japan. Finance minister Swee Keat might launch a strong stimulus package in the budget delivered tomorrow, to offset the economic impacts.
In a speech today, Fed Michelle Bowman underscored that more action would be necessary to bring inflation under control.
She noted, “I believe that additional policy rate increases will be necessary to bring inflation down to our target over time.”
While acknowledging the influence of the current tighter monetary policy on both economic activity and inflation, she pointed out that “core inflation essentially plateau since the fall of 2022.”
She suggested Fed would need to raise interest rate to a “sufficiently restrictive stance of monetary policy to meaningfully and durably bring inflation down.”
US stocks surged broadly overnight as inflation data solidified a pause at today’s FOMC rate decision. NASDAQ extended its near term up trend to close at the highest level in 13 months. For now, near term outlook will stay bullish as long as 13089.48 support holds. Next target is 161.8% projection of 1088.82 to 12269.55 from 10982.80 at 14511.22.
DOW also made notable progress by breaking 34257.83 resistance, even though it could close above the level yet. Near term outlook will stay bullish as long as 55 D EMA (now at 33419.74) holds. Next target is 61.8% projection of 28660.94 to 34712.28 from 314289.82 at 35169.54. Sustained break there could prompt upside acceleration to retest 36952.65 record high.
ECB Governing Council member Ardo Hansson said urged not to be more specific on forward guidance yet. He said “To be any more precise than that, to lock in a date, to tie our hands would be rather risky”. Instead, “when we get closer, we can have another discussion if we need to adjust the language again, but this is not a debate we are going to have just yet.”
Separately, another Governing Council member Olli Rehn “core inflation is still rather weak in the euro zone at around 1 percent, as it has been for the last couple of years, so an accommodative monetary policy is still needed in Europe.”
Sterling jumps broadly on Brexit Party leader Nigel Farage’s comment on election. He said he didn’t want anti-Brexit parties to win the upcoming election in December. Hence, his party would not contest the 317 Conservative Party seats.
He said, “The Brexit Party will not contest the 317 seats the Conservatives won at the last election.” “But we will do is concentrate our total effort into all of the seats that are held by the Labour Party, who have completely broken their manifesto in 2017,” he said. “We will also take on the rest of the remainer parties.”
BoJ Governor Haruhiko Kuroda told the parliament today that “currency moves could have an impact on the economy and prices, so it’s crucial we take into account these factors when guiding monetary policy.”
And, if the currency moves are “having an impact on the economy and prices, and if consider it necessary to achieve our price target, we’ll consider easing policy.”
Yen dips mildly after the comments. But there is no follow through selling as what Kuroda said are pretty much known.
No policy change is expected from BoE today. But recent development suggests that policymakers would remain upbeat about the economic outlook. Upgrades in the near-term GDP growth and inflation forecasts are likely. The development to keep Bank Rate unchanged at 0.10% should be unanimous. Yet, the vote on maintaining asset purchase target at GBP 895B would be divided. Michael Saunders and Dave Ramsden could vote for an early end to the program. At the May and June meetings, the now-departed Chief Economist, Andy Haldane, was the only member dissenting to leave the size of QE purchases unchanged.
Suggested readings on BoE:
GBP/CHF continues to trade with an undertone for the near term, as recoveries were limited by 55 day EMA. At this point the choppy correction from 1.3070 is still in favor to continue. Break of 1.2498 support would target 1.2259 key resistance turned support next.
Fed’s Beige Book noted a majority of the 12 Districts observed “little to no change in economic activity”. Of the districts that reported varying trends, three experienced “modest growth”, while one district encountered a “moderate decline”.
The Beige Book also noted positive consumer activity during the holiday season. Most districts met retail expectations, with three districts exceeding them.
In terms of employment, the report presents a mixed picture. Seven districts reported “little or no net change” in employment levels, while four districts experienced “modest to moderate” job growth. Importantly, “nearly all districts” cited signs of a “cooling labor market”, signaling a potential shift or slowdown in hiring and employment growth across the country.
Price dynamics also varied among the districts. Six districts noted “slight or modest price increases”, and two reported “moderate increases”. Five districts observed that the rate of price increases had “subsided” somewhat compared to the previous period. Three other districts did not report any significant change in price pressures.
BoJ Governor Haruhiko Kuroda told the parliament, “it’s important for currency rates to move stably reflecting economic and financial fundamentals… The recent sharp, short-term fluctuations in the yen are undesirable, as it heightens uncertainty and makes it harder for companies to set business plans.”
“The economy is in the midst of a recovery and now faces headwinds from rising commodity prices,” Kuroda said. “It’s therefore important to underpin economic activity with powerful monetary easing.”
Separately, Kuroda also said in a speech, “the coronavirus pandemic is a major risk that could further hurt Japan’s economy.” As such, “it’s appropriate to maintain … the dovish bias of our guidance for the time being.”
“For inflation to heighten as a trend, Japan must see a shift from inflation caused by energy prices, to one that is driven by increasing corporate profits and wage growth,” he said.
US President Donald Trump sounded rather cautious ahead the closely watched top-level trade negotiations with China this week. He reiterated he’s shooting for a “big deal”. However, when pressed to elaborate the chances of progress, he said “Can something happen? I guess, maybe. Who knows. But I think it’s probably unlikely.”
Additionally, he urged China to find a humane a peaceful resolution to the unrest in Hong Kong. And, “If anything happened bad, I think that would be a very bad thing for the negotiation. I think politically it would be very tough.”
China’s Ministry of Commerce confirmed that Vice Premier Liu He would travel to Washington for trade talks on Thursday and Friday. Along with Liu include Commerce Minister Zhong Shan, central bank Governor Yi Gang, and the National Development and Reform Commission’s deputy head Ning Jizhe.
UK PMI Construction rose from 54.3 to 56.3 in January, above expectation of 54.3. Markit said the sector gained momentum after subdued end to 2021. Commercial activity helped to offset weaker rise in house building. Cost inflation dipped to 10-month low as supply issues eased.
Tim Moore, Director at IHS Markit said: “UK construction companies started the year on a strong footing as business activity picked up speed and new orders expanded to the greatest extent since last August… Higher energy, transport and raw material bills led to across the board increases in input prices during January, but fewer supply issues helped ease the overall rate of cost inflation to its lowest since March 2021.”
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ECB de Guindos: Determined action essential to keep inflation expectations anchored
ECB Vice-President Luis de Guindos said in a speech, “monetary policy needs to be focused on price stability and on delivering our inflation target over the medium term. Determined action is essential to keep inflation expectations anchored, which in itself contributes to delivering price stability and avoids second-round effects in inflation. The main asset that central banks have is credibility, and this asset becomes even more important in times of high uncertainty.”
On the economy, de Guindos said, “A period of heightened uncertainty is here to stay for a while, rendering decision-making more complex. Output growth is slowing down substantially and is expected to stagnate around year-end and remain low next year at less than 1%, while risks have intensified on the downside. This is set against a deteriorating inflation outlook with record-high inflation rates expected to stay elevated, well above our target, with risks primarily on the upside.”
Full speech here.