Fed Vice Chair Richard Clarida told Bloomberg that “rates will be at the current level, which is basically zero, until actual observed PCE inflation has reached 2%.”
“That’s ‘at least.’ We could actually keep rates at this level beyond that. But we are not even going to begin thinking about lifting off, we expect, until we actually get observed inflation … equal to 2%. Also we want our labor market indicators to be consistent with maximum employment … So that is the whites of their eyes.”
Japan’s GDP contracted -7.8% qoq in Q2, worse than expectation of -7.6% qoq. Annualized, GDP contracted -27.8%, versus expectation of -27.2%. The annualized contraction was worst since comparable data was available since 1980. It also well surpassed the -17.8% annualized decline in GDP in Q1 2009 during the global financial crisis.
Looking at some details, private consumption plunged -8.2% qoq, versus expectation of -7.1% qoq. Capital expenditure dropped -1.5% qoq, better than expectation of -4.2% qoq. External demand dropped -3.0% qoq, also slightly better than expectation of -3.2% qoq. Price index rose 1.5% yoy, below expectation of 1.9% yoy.
Economy Minister Yasutoshi Nishimura pledged “flexible, timely” action to support the economy. “We hope to do our utmost to push Japan’s economy, which likely bottomed out in April and May, back to a recovery path driven by domestic demand,” he added.
China’s ambassador to WTO, Zhang Xiangchen said that “the US is blocking selection of new Appellate Body members, taking restrictive trade measures under Section 232 and threatening to impose tariff measures of US$50 billion of goods imports from China under Section 301 of US domestic law.” And, he warned “any one of these, if left untreated, will fatally undermine the functioning of the WTO.”
The US was reported to have requested China to cut its trade surplus with it by USD 200b by 2020. Zhang criticized that “such practices clearly violate the non-discrimination principle of the GATT, therefore have long been abandoned” by the WTO.
And he pointed out the contradiction in what the US is trying to do. He said “the US is blaming the Chinese Government for state intervention on the one hand, while pressing China, by way of issuing government orders, to increase imports, restrict exports, and reduce excess capacity on the other hand.” Also, “governments can make efforts to promote trade, but cannot force companies to do business by pointing gun at their heads.”
In the minutes of October 27-28 meeting, BoJ said “yen had depreciated somewhat significantly against both the U.S. dollar and the euro, mainly due to rises in U.S. and European interest rates”. Members have discussed the impact of the yen’s depreciation.
Some members said, “the depreciation had positively affected Japan’s economy as a whole through an increase in profits from business conducted overseas and a rise in stock prices, although its effect of pushing up exports had declined.”
One member said, “the effect of the depreciation on each economic entity was uneven, depending on industry and size”. Another member noted, “while prices had increased recently, triggered mainly by the yen’s depreciation, it was unlikely at present that heightened inflationary pressure would reduce the economic welfare of Japan as a whole.”
Eurozone PPI came in at -0.5% mom, -0.8% yoy in August, worse than expectation of -0.2% mom, -0.4% yoy. Industrial producer prices dropped by -1.9% mom in the energy sector, while remaining stable for intermediate goods and capital goods, and increasing by 0.1% mom for durable consumer goods and by 0.2% mom for non-durable consumer goods. Prices in total industry excluding energy remained stable.
EU28 PPI came in at -0.4% mom, -0.3% yoy. The largest decreases in industrial producer prices were recorded in Spain (-1.4% mom), Greece (-1.3% mom), Belgium, Denmark and Lithuania (all -0.7% mom), while the highest increases were observed in Bulgaria (0.7% mom), Hungary (0.4% mom) and Slovenia (0.3% mom).
San Francisco Fed President Mary Daly told CNBC yesterday, “I see a couple of 50-basis-point hikes immediately in the next couple of meetings to get there. And then we need to look around and see what else is going on.” She estimates that neutral rate is at around 2.50%, and said , “let’s get there as quickly as we can.”
“I’m looking for both supply to recover somewhat and demand to come back down a little bit. If neither of those things cooperate, then we need to go into restrictive territory,” Daly added.
Canada retail sales fell -0.1% mom to CAD 66.1B in August, matched expectations. Sales were down in six of nine subsectors and were led by decreases at motor vehicle and parts dealers (-0.9%). Excluding gasoline stations, fuel, motor vehicles and parts, sales were down -0.3% mom. In volume terms, retail sales declined -0.7% mom.
Advance estimate suggests that sales were unchanged in September.
Eurozone Sentix Investor Confidence improved to -24.8 in June. That’s the second straight month of rebound, from April’s -42.9 then May’s -41.8. Current situation index rose from -73.0 to -61.5. Expectations index jumped from -3.0 to 21.8, turned positive, and hit the highest level since November 2017.
Sentix questioned: “But what do these numbers mean? Is there a “normal” upswing that will soon bring us back to a normal, good economic situation? To get a better understanding of these figures, we conducted a special survey among investors. We wanted to know how much of the economic slump caused by the Corona pandemic will be made up within a year. So where does the recovery go?!”
They then added: “The result is likely to disappoint optimists. For the eurozone, investors expect that within a year, just over 50% of the slump can be made up. This means that in a year’s time we would still be noticeably below the pre-crisis level. And this despite all the stimulus measures, the fiscal packages and monetary easing. An upswing has begun, but a real trend reversal is not yet assured.”
Minneapolis Fed President Neel Kashkari said at an event overngiht that the strength of the economy might necessitate higher interest rates for an extended period.
Kashkari commented, “If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off.”
In line with last week’s updated dot plot from Fed, where 12 out of 19 members indicated a potential rate hike this year, Kashkari affirmed his position, stating, “I’m one of those folks.”
However, Kashkari also pointed out a caveat, suggesting the possibility of rate cuts if inflation undergoes a swift decline next year. He elaborated, “Depending on what is happening in all the economic data that we look at, that then might justify backing off the federal funds rate — not to ease policy but just to stop it from getting tighter from here, and that’s something obviously we’ll have to look at.”
Germany’s DIHK Chambers of Industry and Commerce said that the country’s economy would growth 0.7% in 2020, slightly higher than 0.6% in 2019. However, it also pointed out that around 0.5% of growth is due to “statistical effects” such as the overhang from the previous year and four additional working days this year. Hence, Â CEO Martin Wansleben said “that is why we currently see little real growth.”
He added: “It is worrying: A whole host of data, particularly from industry, suggest that structural challenges, such as e-mobility, digitization, the energy turnaround and further the shortage of skilled workers, are adding to the current economic downturn. Some regions are particularly affected.”
European Council extends the sanctions on Iran over human rights violation by 1 year today, until April 2019.
The sanctions include:
RBA reiterated its rate views in the February meeting minutes but sounded more cautious regarding the downturn in housing markets. The central bank maintained that “given that further progress in reducing unemployment and lifting inflation was a reasonable expectation, members agreed that there was not a strong case for a near-term adjustment in monetary policy.”
And, the minutes echoed Governor Philip Lowe’s comments too. That is, “there were significant uncertainties around the forecasts, with scenarios where an increase in the cash rate would be appropriate at some point and other scenarios where a decrease in the cash rate would be appropriate.” Most importantly, “the probabilities around these scenarios were now more evenly balanced than they had been over the preceding year, when an eventual increase in the cash rate had appeared more likely.”
RBA tied the subdued consumption growth in Q4 to the possibility of being influenced by “lower housing prices and reduced housing market activity”. On housing, RBA admitted that “dwelling investment was also expected to decline more sharply than previously expected, consistent with the decline in residential building approvals and the fall in housing prices”.
And, “members observed that if prices were to fall much further, consumption could be weaker than forecast, which would result in lower GDP growth, higher unemployment and lower inflation than forecast.”
Political tensions between US and China are heating up just ahead of the high-level trade negotiations on Thursday and Friday. US Commerce Depart expanded the trade blacklist of Chinese companies with involvements in China’s treatment of Uyghurs in Xinjiang. The decision targets 20 Chinese public security bureaus and eight companies. High profile technology companies include g video surveillance firm Hikvision, facial recognition technology leader SenseTime Group Ltd and Megvii Technology Ltd. Additionally, US has imposed visa restrictions on Chinese government and Communist Party officials allegedly responsible for the abuse of Uyghurs. But no detail on the list of officials was released.
In response to US actions, Chinese Embassy in Washington said the decisions “seriously violates the basic norms governing international relations, interferes in China’s internal affairs and undermines China’s interests. China deplores and firmly opposes that”. And, “Xinjiang does not have the so-called human rights issue claimed by the US. The accusations by the US side are merely made-up pretexts for its interference”.
China Caixin PMI Manufacturing dropped to 50.3 in July, down from 51.3, below expectation of 51.0. Caixin said output growth slowed amid slight drop in new orders. Staffing levels were broadly unchanged while inflationary pressures eased.
Wang Zhe, Senior Economist at Caixin Insight Group said: “China’s official second-quarter economic figures were in line with expectations, but the Caixin China manufacturing PMI in July and relevant data suggested the recovery of the economy is not yet solid. The economy is still facing huge downward pressure, and we need to ensure entrepreneurs’ confidence.”
New Zealand ANZ Business Confidence rose to -32.0 in May, up from -37.5. But all sectors remained deeply negative, with agriculture confidence worst at -63.9. Activity Outlook also improved to 8.5, up from 7.1. Manufacturing scored best in activity at 21.5.
ANZ noted that “how quickly the economy will bounce back is a key question. If the forward indicators start to suggest that the Reserve Bank’s relatively sharp V-shaped recovery is overly optimistic, it will be game on for further OCR cuts this year.”
UK Prime Minister Boris Johnson will travel to Luxembourg today, to meet outgoing European Commission President Jean-Claude Juncker. Ahead of that, he wrote in the Daily Telegraph that “if we can make enough progress in the next few days, I intend to go to that crucial summit on Oct. 17, and finalize an agreement” for Brexit.
He also criticized the parliament for hampering his negotiation, by approving that law that forces him to seek another delay. He said, “Its effect is completely contrary to the UK’s interests – because it has at least given the impression to our partners that the UK is no longer either fully able or determined to leave on Oct 31.”
Separately, BusinessEurope Director General Markus Beyrer warned that “No deal is a recipe for disaster and should be definitely ruled out. A disorderly, no deal exit of the UK would be extremely harmful for all sides. It would cause massive damage for citizens and businesses in the UK and on the continent alike… The negative consequences would not be limited to the exit date but would drag on, endangering the fruitful and positive future relationship we all aim for.”
Trump administration announced to put tariffs on steel and aluminum imports from Canada, Mexico and the EU. That will come into effect as the temporary exemption expires at midnight. Tariffs on steel imports are 25% and that on aluminum is 10%.
Commerce Secretary Wilbur Ross criticized that NAFTA negotiations are “taking longer than we had hoped”. While talks with EU have “made some progress”, they haven’t gone far enough to warrant more relief from tariffs.
Ross added that “we look forward to continued negotiations both with Canada and Mexico on the one hand, and with the European Commission on the other hand, because there are other issues that we also need to get resolved.”
Swiss KOF Economic Barometer, a key indicator for forecasting the economy’s direction, has shown a slight improvement in November, rising from 95.1 to 96.7. This rise slightly exceeded market expectations, which were set at 96.2.
According to KOF Swiss Economic Institute, since mid-2023, the barometer has stabilized, though it remains at a level below the historical average. This stabilization indicates moderate outlook for the Swiss economy in the near future.
The increase in the KOF Barometer can primarily be attributed to positive developments in manufacturing sector and other services sector.
However, not all sectors are signaling positive trends. Indicators for hospitality industry and finance and insurance sector are showing slightly negative signals.
US initial jobless claims dropped -11k to 239k in the week ending August 12, slightly below expectation of 240k. Four-week moving average of initial claims rose 3k to 234k.
Continuing claims rose 32k to 1716k in the week ending August 5. Four-week moving average of continuing claims dropped -8k to 1692k.
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US Yellen: Higher interest rate environment is a plus for society and Fed
US Treasury Janet Yellen said in a Bloomberg interview that the USD 4T spending plan would be good even if it results in higher inflation and interest rates. “If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” she added.
“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” the former Federal Reserve chair said, adding that “we want them to go back to” a normal interest rate environment, “and if this helps a little bit to alleviate things then that’s not a bad thing — that’s a good thing.”