Canada GDP grew 0.6% mom in November, above expectation of 0.4% mom. Increases across almost all sectors contributed to the sixth consecutive monthly expansion. Real GDP was 0.2% above its pre-pandemic level in February 2020. Services-producing industries grew 0.6% mom while goods-producing industries rose 0.5% mom.
Statistic Canada also said advance information shows GDP was essentially flat in December. For Q4, GDP grew 1.6% qoq, 4.9% yoy.
Eurozone unemployment rate dropped from 7.1% to 7.0% in December, better than expectation of 7.1%. EU Unemployment rate dropped from 6.5% to 6.4%.
Eurostat estimates that 13.612m men and women in the EU, of whom 11.481m in the euro area, were unemployed in December. Compared with November, the number of persons unemployed decreased by 210k in the EU and by 185k in the euro area.
UK PMI Manufacturing was finalized at 57.3 in January, slightly down from December’s 57.9. Markit said production rose at fastest rate in six months. new order growth slowed despite mild uptick in new export businesses. Input cost and output price inflation eased.
Rob Dobson, Director at IHS Markit, said: “UK manufacturing made a solid start to 2022, showing encouraging resilience on the face of the Omicron wave, with growth of output accelerating as companies reported fewer supply delays. Causes for concern remain, however, as new orders growth slowed, exports barely rose, staff absenteeism remained high and manufacturers’ ongoing caution regarding supply chain disruptions led to the beefing up of safety stocks
“There was some positive news on the supply chains front. Although pressure on vendors remains severe, and still sufficient to stymie output growth and cause difficulty in obtaining required inputs, supplier lead times lengthened to the lowest degree since November 2020 to suggest that the current period of abnormal stress has hopefully passed its peak, despite the surge in cases linked to Omicron. This also lessened the upward pressure on prices, with input costs and output charges both rising at less elevated rates in January.”
Eurozone PMI Manufacturing was finalized at 58.7 in January, up from December’s 58.0. Markit said there were faster expansion in output and new orders. Employment growth improved to five-month high. Also, supplier performance had the least marked deterioration for a year.
Looking at some member states, Germany PMI manufacturing improved to 59.8, five month high. But Italy dropped to 11-month low at 58.3. France also dropped to 3-month low at 55.5. Overall readings were still strong with Austria at 61.5, the Netherlands at 60.1, Ireland at 59.4, Greece at 57.9 and Spain at 56.2.
Chris Williamson, Chief Business Economist at IHS Markit said: “Eurozone manufacturers appear to be weathering the Omicron storm better than prior COVID-19 waves so far, with firms reporting the largest production and order book improvements for four months in January. Prospects have also brightened, with a further easing in the number of supply chain delays playing a key role in prompting producers to revise up their expectations for growth in the coming year to the highest since last June…
“Escalating tensions surrounding Ukraine, the energy price crisis and prospect of global central bank policy tightening meanwhile create additional headwinds to the outlook, which suggest that – although the global supply crunch may be easing – demand conditions may be less supportive to manufacturers in coming months.”
RBA keeps cash rate target unchanged at 0.10% today. It’s reiterated that RBA “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”. And, it is “too early to conclude that it is sustainably within the target band”. Thus, “the Board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.
RBA also decided to stop the asset purchase program after February 10. The issue of reinvestment of the proceeds of future bond maturities will be considered at the meeting in May.
As for the economy, RBA said Omicron “has not derailed” recovery. Central forecast if for GDP to grow around 4.25% over 2022 and 2% over 2.023. Unemployment rate is projected to fall below 4% later in the year, and to be around 3.75% at the end of 2023. Underlying inflation is is expected to increase further in coming quarters to around 3.25%, and decline to around 2.75% over 2023.
Australia retail sales dropped -4.4% mom in December, much worse than expectation of -1.9% mom. That’s also the largest monthly decline since April 2020.
“Despite this month’s fall, retail turnover remains strong, up 4.8 per cent on December 2020, with strong consumer spending continuing post the Delta Outbreak,” Ben James, Director of Quarterly Economy Wide Statistics, said.
Australia AiG Performance of Manufacturing Index dropped sharply by -6.4 pts to 48.4 in January. Production dropped -0.6 to 51.9. Employment dropped -4.6 to 45.4. New orders dropped -8.0 to 51.3. Supplier deliveries dropped -15.6 to 37.8. Exports dropped -9.5 to 45.1. Input prices rose 4.0 to 82.3. Selling prices dropped -3.3 to 64.8. Wages rose 1.1 to 63.5.
Innes Willox, Chief Executive of Ai Group said: “Australia’s manufacturers reported a modest contraction in performance over December and January as businesses reported further disruptions to supply chains and as staff availability emerged as a major constraint on many businesses. Cost pressures were keenly felt with input prices continuing to rise and the selling prices index indicating only a partial recovery of these costs in the market.”
Richmond Fed President Thomas Barkin said yesterday, “as I talk to participants in the economy, what I hear is they actually want us to do something now about inflation. They’d like us to get back to at least a normal interest-rate posture and not be simulating more demand on top of normal levels. So, I don’t hear much resistance to that.”
“I’d like us to be better positioned,” Barkin said. “Better positioned is somewhere closer to neutral, certainly, than we are now and I think the pace of that just depends on the pace of inflation.”
Atlanta Fed Bank President Raphael Bostic said, 50bps hike in March was “not my preferred policy action.” He added, “I had three rate increases in mind. March is looking like the right time” to get that started. From there, however, “we are not on any set progression.”
“We are going to need to be thinking very carefully about how things are going, how the economy responds to our first moves,” Bostic said. “We are not set on any particular trajectory. The data will tell us what is happening.”
San Francisco Fed Bank President Mary Daly said “we definitely are poised for a March increase.” But she added, “after that, I want to see what the data brings us … let’s get through Omicron, let’s look at this and let’s see.”
“If the economy progresses like I see it progressing, then it is clear that it can stand on its own two feet, that we do not need to be providing the same level of extraordinary … accommodation that we provided during the pandemic and have provided for the last two years,” Daly said.
Kansas City Fed President Esther George said Fed’s policy normalization approach could be more aggressive on balance sheet reduction, rather than faster rate hikes.
“What we do on the balance sheet is likely to affect the path of policy rates and vice versa,” George said during an event “For example, if we took more aggressive action on lowering, pulling down that balance sheet, it might allow for fewer interest rate increases.”
He added that raising short-term interest rate while maintaining a large balance sheet “could flatten the yield curve”, and lead to “reach-for-yield behavior from long-duration investors.”
“All in all, it could be appropriate to move earlier on the balance sheet relative to the last tightening cycle,” she said.
AUD/NZD rises sharply today as markets await RBA rate decision in the upcoming Asian session. Given the surprise drop in unemployment and strong inflation data, RBA is likely to just wrap up the QE program, rather than winding it down to end in May. That would also give the central bank some flexibility to raise interest rate to combat inflation. The question is how RBA would shape market expectation on the timing of the rate hike, or leave it to the Statement on Monetary Policy to be released later in the week. There is prospect of more upside in Aussie in crosses in RBA delivers something more hawkish than expected.
AUD/NZD’s is now extending the whole rise from 1.0278. Next target is 161.8% projection of 1.0278 to 1.0610 from 1.0314 at 1.0851. A bullish scenario is that corrective fall from 1.1042 has completed with three waves at 1.0278 and rise from 0.9992 is ready to resume. The reaction to 1.0944 resistance will reveal if it’s the case. For now, near term outlook will stay bullish as long as 1.0654 support holds, in case of retreat.
Suggested readings on RBA:
Eurozone GDP grew 0.3% qoq in Q4, slightly below expectation of 0.4% qoq. EU GDP grew 0.4% qoq. The 2021 annual growth was at 5.2% based on first estimation for both Eurozone and EU.
Among the EU Member States for which data are available, Spain (+2.0%) recorded the highest increase compared to the previous quarter, followed by Portugal (+1.6%) and Sweden (+1.4%). Declines were recorded in Austria (-2.2%), Germany (-0.7%) and in Latvia (-0.1%). The year on year growth rates were positive for all countries.
China Caixin PMI Manufacturing dropped from 50.9 to 49.1 in January. That’s the worst reading in 23 months. Also, the index slumped into negative territory for the fourth time since February 2020.
Wang Zhe, Senior Economist at Caixin Insight Group said: “From December to January, the resurgence of Covid-19 in several regions including Xi’an and Beijing forced local governments to tighten epidemic control measures, which restricted production, transportation and sales of manufactured goods. It became more evident that China’s economy is straining under the triple pressures of contracting demand, supply shocks and weakening expectations.”
Japan industrial production dropped -1.0% mom in December, worse than expectation of -0.8% mom. Manufacturers surveyed by the Ministry of Economy, Trade and Industry (METI) expected output to grow 5.2% in January and 2.2% in February.
Retail sales grew 1.4% yoy in December, below expectation of 2.7% yoy. That’s nonetheless the third straight month of increase for sales, lifted by demand for general merchandise and food and beverages.
Atlanta Fed President Raphael Bostic said in an FT interview that “every option is on the table” for every FOMC meeting. “If the data say that things have evolved in a way that a 50 basis point move is required or be appropriate, then I’m going to lean into that . . . If moving in successive meetings makes sense, I’ll be comfortable with that,” he said.
“The reduction of accommodation should translate into tighter financial markets,” Bostic said. “The developments that we’ve seen on that front are comforting in the sense that markets are still functioning the way they’re supposed to, and they are responding to conditions in ways that are rational and appropriate.” He also supports starting the runoff of the USD 9T balance sheet “as quickly as” possible without impairing market functioning.
“Our policy path is not a constriction path. It’s a less accommodative path,” he said. “If we do the three [rate hikes] that I have in mind, that’ll still leave our policy in a very accommodative space. “I don’t think there’s going to be a lot of constraint on growth as we remove these emergency actions.”
US personal income rose 0.3% mom, or USD 70.7B in December, below expectation of 0.5% mom. Spending dropped -0.6% mom, or USD -95.2B, matched expectations.
PCE price index accelerated slightly from 5.7% yoy to 5.8% yoy, below expectation of 6.1% yoy. Core PCE price index jumped from 4.7% yoy to 4.9% yoy, above expectation of 4.8% yoy.
Eurozone Economic Sentiment Indicator dropped from 113.8 to 112.7 in January. Industry confidence dropped from 14.6 to 13.9. Services confidence dropped from 10.9 to 9.1. Consumer confidence dropped from -8.4 to -8.5. Retail trade confidence rose from 1.1 to 3.8. Construction confidence dropped from 10.1 to 8.1. Employment Expectations Indicator dropped from 113.5 to 113.3.
EU ESI dropped from 113.0 to 111.6. EEI dropped from 113.6 to 113.1. Amongst the largest EU economies, the ESI rose in Germany (+0.8) and Spain (+0.6) while it worsened in Italy (-6.1), Poland (-4.2), France (-2.8) and the Netherlands (-1.3).
Germany GDP dropped -0.7% qoq in Q4, worse than expectation of -0.2% qoq. GDP was still -1.5% lower than pre-pandemic level in Q4, 2021. For whole of 2021, GDP grew 2.8%.
Destatis said, “after economic output grew again in the summer despite increasing supply and material bottlenecks, the recovery of the German economy was halted by the fourth corona wave and renewed tightening of corona protection measures at the end of the year.”
“Private consumption in particular decreased in the fourth quarter of 2021 compared to the previous quarter, while government consumer spending increased. Construction investments fell compared to the third quarter of 2021.”
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Fed Harker a little less convinced of a 50bps hike
Philadelphia Fed President Patrick Harker said he would be “supportive of a 25 basis point increase in March.” But he’s “a little less convinced of” a 50 bps hike right now. He added, “if inflation stays where it is now, and continues to start to come down, I don’t see a 50 basis point increase.”
“Right now, I think four 25 basis point increases this year is appropriate,” Harker said. “But there’s a lot of risk here,” including the risk that inflation is worse than expected, or that it eases faster than Fed officials expect.