US international trade deficit widened from USD -61.0B to USD -67.4B in December, smaller than expectation of USD -68.5B. Goods deficit widened by USD 7.4B to USD -90.6B. Services surplus widened to USD 1.0B to USD 23.2B.
Exports of goods and services dropped -0.9% mom to USD 250.2B. Imports of goods and services rose 1.3% mom to USD 317.6B.
A major component of the USD 2.2T coronavirus relief package approved by Congress last week is the USD 350B small business financing. Treasury Secretary Steven Mnuchin said today that the loans will be available starting on Friday, and the sign up would be “very, very easy”.
He expected that the program would cover around 50% of the private workforce. And, “if we run out of money, and this is a huge success, we will absolutely go back to Congress and ask for more money.”
Meanwhile, he said, “I expect that with all of this liquidity we’re putting into the economy to get through the next couple of months, when we reopen, we’ll be ready and the economy will surge back.”
ECB left interest rates unchanged today as widely expected. That is, main refinancing, marginal lending and deposit rates are kept at 0.00%, 0.25% and -0.40% respectively.
ECB changed the forwards guidance and said interest rates will remainat present levels “at least through the first half of 2020, longer than “the end of 2019”. ECB also announce the rates of TLTRO III opertaions.
Full release below.
Monetary Policy Decisions
At today’s meeting, which was held in Vilnius, the Governing Council of the European Central Bank (ECB) took the following monetary policy decisions:
(1) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
(2) The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
(3) Regarding the modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III), the Governing Council decided that the interest rate in each operation will be set at a level that is 10 basis points above the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III will be lower and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation plus 10 basis points.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
Japan trade balanced turned back into surplus at JPY 721.4B in June, above expectation of JPY 534.2B. Total exports rose 6.7% yoy, slightly below expectation of 7.0% yoy. But imports rose just 2.5% yoy, below expectation of 5.3% yoy.
Total exports logged a 19th straight month of growth. Rising trade tension with the US is not having much realized impact so far. Exports to China rose 11.1% yoy, to EU rose 9.3% yoy. Meanwhile, exports to US dropped -0.9% yoy.
Japan is still facing impacts from US steel and aluminum tariffs and threats on auto tariffs. The the blockbuster trade deal with EU just signed earlier this week should provide enough optimism to offset those threats.
San Francisco Fed President Mary Daly said yesterday that with a job report like Friday’s NFP and the volatility, then, “we’re on a good path but we’re a long way from home”. “And when you’re a long way from home” she added, “it’s not yet time to start thinking about, thinking about, talking about relaxing the accommodations we’ve given.”
She also noted that “bottlenecks” like shipping costs and lumber shortages would “cause inflation to pop in the next several months”. Inflation might rise above 2% level, but that’s going to be transitory in my judgment,” Daly said.
UK Prime Minister Theresa May is set to tell the Parliament that Brexit agrement is now 95% done. But she also repeated her rejection of EU’s proposal on Irish backstop.
In her prepared speech, May said “taking all of this together, 95 per cent of the Withdrawal Agreement and its protocols are now settled”, referring to what she has achieved. And, “the shape of the deal across the vast majority of the Withdrawal Agreement is now clear.”
However, on Irish border backstop, May said “As I set out last week, the original backstop proposal from the EU was one we could not accept, as it would mean creating a customs border down the Irish Sea and breaking up the integrity of the UK,” She reiterated that “I do not believe that any UK Prime Minister could ever accept this. And I certainly will not.”
So, the deadlock is still there and the deal is not finished yet. No matter how much May’s done, without that outstanding 5% completed, it’s still a no-deal Brexit.
France GDP dropped by -5.8% qoq in Q1, worse than expectation of -4.0% qoq. That;s also the largest contraction since record started in 1949. In particular, it’s bigger than the ones recorded in Q1 2009 (–1.6%) or in Q2 1968 (–5.3%).
INSEE also noted that GDP’s negative evolution in Q1 2020 is primarily linked to the shut-down of “non-essential” activities in the context of the implementation of the lockdown since mid-March.
Looking at the main components, imports dropped -5.9% qoq. Household consumption expenditure dropped -6.1% qoq. General government consumption expenditure dropped -2.4% qoq. Gross fixed capital formation dropped -11.8% qoq. Exports dropped -6.5% qoq.
Also released, consumption spending dropped -17.9% mom in March, well below expectation of -5.5% mom. It’s the largest monthly contraction since record began in 1980. Manufactured good consumption dropped sharply (–42.3% after –0.6%) and energy expenditure decreased markedly (–11.4% after –0.9%). Only food consumption increased (+7.8% after –0.1%).
UK Prime Minister Theresa May appeared to have united her cabinet on the Brexit plan after the locked-up meeting at the Chequer last Friday. A key element of the plan is to establish a UK-EU free trade area with a common rule book for industrial goods and agricultural products. And the UK would commit by treaty to ongoing harmonization with EU rules on goods. However, on services, the UK will strike different arrangements for regulatory flexibility. And for financial services, the UK will seek arrangements that preserve the mutual benefits of integrated markets and protect financial stability. And, with the plan, the UK believed that the problem of Irish border would be avoided an a backstop plan won’t be needed. The full document is expected to be published this week.
Environment Secretary Michael Gove, on the the highest-profile Brexit campaigners, endorsed the plan. He told BBC that “One of the things about politics is that you mustn’t, you shouldn’t, make the perfect the enemy of the good. And one of the things about this compromise is that it unites the cabinet.” And he urged that “All those of us who believe that we want to execute a proper Brexit, and one that is the best deal for Britain, have an opportunity now to get behind the Prime Minister in order to negotiate that deal.”
However, the situation is complicated today as Brexit Minister David Davis resigned as he was not willing to be a “reluctant conscript” to the plan. He complained that “the general direction of policy will leave us in at best a weak negotiating position, and possibly an inescapable one.” And the so called “common rule book” with the EU will hand “control of large swathes of our economy to the EU and is certainly not returning control of our laws”. Separately, it’s reported that Steve Baker, a minister in the Brexit department has also resigned.
Sterling spiked higher earlier today and reversed on Davis’s resignation.
Fed Governor Christopher Waller advocated for Fed to “wait a little longer,” suggesting that “at least another couple more months” of economic data would be crucial before commencing any policy easing.
In a speech overnight, Waller expressed concerns regarding the recent high CPI inflation reading, describing it as potentially “a bump in the road” or a more serious indication that the significant progress made in controlling inflation over the past year could be “stalling.”
This uncertainty solidifies his viewpoint that a patient approach to policy adjustments is warranted, allowing more time to assess whether January data represents “a speed bump or a pothole”.
While Waller anticipates that it may become appropriate to begin easing monetary policy sometime within the year, he clarified that the timing and extent of policy adjustments would heavily rely on incoming economic data.
New York Fed President John Williams said yesterday that the US is now in a state of “overall strong economy”. And, “employers are now struggling to fill job openings.” He called it a “great time for businesses to set up” with internships, training programs and school partnerships.
And he’s not concerned with the rise in housing and stock prices. He pointed out that “we’re not seeing the kind of build-up in leverage in the financial system that was pretty obvious in the mid-2000s.” Also, “we’re not seeing that kind of risk-taking in the financial system right now, but we are watching very carefully.”
UK PMI Services was finalized at 49.3 in September, a marginal drop from the neutral 50.0 recorded in August. S&P Global’s analysis points to persistent declines in both business activity and new ventures, and notably, the pace of job shedding is at its quickest since January 2021. However, the silver lining lies in easing inflationary pressures, marking their lowest in over two years.
Tim Moore, Economics Director at S&P Global Market Intelligence, cited reductions in non-essential business and consumer expenditure as significant dampeners on service sector activity. “A combination of elevated borrowing costs and subdued economic conditions had led to lower new business intake,” he remarked.
Decline in export sales, particularly influenced by reduced European demand, further contributed to the sector’s woes. Service providers’ response has been cautionary, with hiring significantly scaled back given the current uncertainties.
On a positive note, Moore highlighted the diminishing inflationary pressures in the sector, observing, “headline rates of inflation will continue to moderate in the coming months, with service sector input costs rising at the slowest pace for nearly two-and-a-half years.” This, coupled with the anticipation of consistent decreases in UK consumer price inflation, could potentially revive demand, instilling a sense of optimism for the future.
FOMC rate decision is the major focus today and Fed is widely expected to keep the fed funds rates unchanged at 1.50-1.75%. Fed officials have repeatedly noted that policy is in the right place for now. There won’t be any further adjustments unless there are material changes in the economic outlook. We’d expect Fed’s statement to reflect such message again.
Attentions would, therefore, be mainly on the new economic projections, in particular, federal funds rate projections. As in September’s meeting, median rate projections were at 1.9% in 2019 and 1.9% in 2020, before rising to 2.1% in 2021 and 2.4% in 2022. Current rates are already below these levels and thus, downside revisions should naturally be seen. Fed is unlikely to revise down 2020 projections to an extent that reflects another rate cut. Thus, the main market moving part would on the how fast Fed officials expect rates to climb back in 2021 and 2022.
Here are some suggested previews:
According to the latest data from People’s Bank of China, the country’s foreign exchange reserves dropped to a five month low in April. Reserves dropped USD 17.97B in April from USD 3.143T to USD 3.125T. In SDR terms, Foreign currency reserves rose 11.3 B from 2.162T to 2.173T.
Gold reserves was unchanged at 59.24 Million oz.
Total reserves dropped from USD 3.240T to USD 3.221T. In SDR terms, total reserves rose from 2.229T to 2.240T.
US Conference Board Consumer Confidence rose from 101.4 to 108.3 in December. Present Situation Index rose from 138.3 to 147.2. Expectations Index rose from 76.7 to 82.4.
“Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.
“The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. This shift in consumers’ preference from big-ticket items to services will continue in 2023, as will headwinds from inflation and interest rate hikes.”
ECB said it expected the purchases under the pandemic emergency purchase programme (PEPP) to be conducted at a “significantly higher pace” over the next quarter. Though, the total envelop will be left unchanged at EUR 1850B, and the program will continue until at least end of March 2022.
The Governing Council will purchase flexibly according to market conditions and with a view to “preventing a tightening of financing conditions”. The total envelop can be “recalibrated if required”, Â to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.
Main refinancing rate is kept at 0.00%. Marginal lending rate and deposit rate are held at 0.25% and -0.50% respectively. Interest are expected to “remain at their present or lower levels” until inflation outlook robustly converges to target within its horizon.
UK Gfk consumer confidence was unchanged at -9 in June, below expectation of -7. Joe Staton, Client Strategy Director GfK, says: “While the shifting sands of an end to lockdown might be the closest most of us get to a summer beach holiday, consumer confidence remains stable at -9 after 16 months of a COVID-induced roller-coaster. A repetition of last month’s score doesn’t mean confidence is about to nose-dive. The upwards trajectory for the Index since the dark days at the start of the pandemic is currently still on track.”
ECB keeps main refinancing rate unchanged at 0.00% as widely expected. Marginal lending facility rate and deposit rate are held at 0.25% and -0.50% respectively too.
Forward guidance is maintained that “The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
ECB Chief Economist Philip lane said in an interview, Q2 GDP came in “well ahead of out June projections”, reflecting an “earlier opening up”, “strength of the world economy” and “progress in vaccinations”. It’s “still early days” regarding H2, and there could be “counterbalance” like bottlenecks, moderation in world economy, and the Delta variant. Overall, he said, “we’re broadly not too far away from what we expected in June for the full year.”
The Delta variant is now “part of the mix in the US and global economies”, while Europe “may not be among the regions hardest-hit thanks to high vaccination rates and prior lockdown measures. Also, the infrastructure and system for vaccination has “eliminated uncertainty about Europe’s ability to carry out vaccinations.”
On PEPP, Lane said “we’ll have to assess at the September meeting the appropriate calibration for the final quarter of the year”. He emphasized that “single philosophy” of maintaining favorable financing conditions regarding PEPP. “If favourable financing conditions require more purchases, we’ll conduct more purchases,” he said.
New Zealand ANZ Business Confidence dropped to -53.5 in September, down from -52.3. That’s also the worst reading since April 2008. Agriculture scored weakest confidence at -75.6 while manufacturing was best at -46.2. Activity outlook also dropped to -1.8, down from -0.5. Activity outlook was worst in construction at -7.1, best at services at -0.6.
ANZ noted that RBNZ will be “disappointed that its unexpectedly large 50bp cut in the Official Cash Rate last month does not appear to have had much impact on business’ sentiment or investment and employment intentions.” And, “prolonged lack of confidence is starting to feed its way through the economy and is threatening the tight labour market.” Also, “this gradual but prolonged economic slowdown is at risk of ceasing to be about the data and starting to become about the people.
Today’s decline in NZD/JPY the release suggests the corrective recovery from 67.20 has completed at 68.26, after failing to sustain above 4 hour 55 EMA. Focus is immediately back on 67.20 and break will target a test on 66.31 low. Overall, NZD/JPY is clearly staying in near term down trend, held well by falling 55 day EMA. Next target is 61.8% projection of 73.24 to 66.31 from 69.68 at 65.39, and then 100% projection at 62.75.
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BoE Pill: A case can be made for measured rather than activist approach to policy decisions
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.”
Full speech here.