ECB: Impact of trade tensions escalation could heighten financial stress and lower confidence

    In a paper released today, ECB noted that last year’s increased in trade tensions and the repercussions of the tariffs implemented pose only a “modest adverse risk” to the global and euro area outlooks. Also,  impact of implemented tariffs and tariff announcements owing to uncertainty effects appears to have remained “confined to the targeted sectors” for the time being.

    However, if trade tensions were to escalate once again, “the impact would be larger”.  Model-based simulations indicate that the medium-term direct impact of an escalation could be “sizeable, compounded by heightened financial stress and a drop in confidence.” The longer-term effects would be “even more pronounced”.

    ECB also warned that “although free trade is often seen as one of the factors behind rising inequality both within and across countries, winding back globalisation is the wrong way to address these negative effects.” “A retreat from openness will only fuel more inequality, depriving people of the undisputed economic advantages that trade and integration bring.”. The paper urged that “countries should seek to resolve any trade disputes in multilateral fora”.

    Full paper “The economic implications of rising protectionism: a euro area and global perspective“.

    ECB Rehn: Essential for EU to come with with a convincing coronavirus package

      ECB Governing Council member Olli Rehn said it’s “essential” EU would come up with a “convincing package” tomorrow to “mitigate the economic effects of the crisis, especially for the weakest countries.” He warned that “the future of Europe as a political community is also at stake.” The difficulties caused by the coronavirus pandemic are “not due to any single country’s reckless management of finances,” he added. ” It is therefore necessary to support the most severely hit countries.”

      Rehn also noted that a “joint solution” is likely to be found by using EU’s “budget framework rather than through joint loans.” “Joint European solutions are also in Finland’s interest because our own economy, too, is highly dependent on the European economy’s development and recovery. Alone we can boost our domestic demand but not exports,” he added.

      As for ECB, “we will continue to monitor the situation and stand ready to adjust all of our measures, as appropriate,” he said.

      ECB’s de Guindos foresees temporary inflation rebound, December forecasts crucial for policy assessment

        In a speech today, ECB Vice President Luis de Guindos said the central bank expects “a temporary rebound” in inflation in the coming months as base-effect drops out of calculations. However, he emphasized that ECB foresees the overall disinflationary process to continue over the medium term.

        De Guindos highlighted the unpredictability surrounding energy prices due to geopolitical tensions and fiscal policy impacts, along with the potential upward pressure on food prices resulting from adverse weather events and the broader climate crisis.

        Despite a marked decrease in inflation, de Guindos warned that it is expected to remain high for an extended period, with persistent domestic price pressures. “We will therefore ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary,” he affirmed.

        Emphasizing the ECB’s data-dependent approach, de Guindos stated, “Our future decisions on policy rates will continue to be taken on a meeting-by-meeting basis.” He added that the ECB’s December meeting, armed with fresh macroeconomic projections and additional data, will be crucial for reassessing the inflation outlook and necessary policy actions.

        Full speech of ECB de Guindos here.

        ECB Kazimir: No significant growth before completing monetary union

          ECB Governing Council member Peter Kazimir urged further structural change in the bloc. He warned, “I am worried that we won’t be able to enjoy significant economic growth before we deal with the fact that EU is lagging behind in technology and before we complete the European Monetary Union.”

          Another Governing Council member Madis Müller said the upcoming policy review should consider whether the control over inflation has diminished. And, “maybe in this case we would not need to be as aggressive with our policies. We could be more flexible and not chase that goal at any price.”

          Fed Powell: 2021 going to be strong than previously though on a combination of better developments

            In an NPR radio interview, Fed Chair Jerome Powell said 2021 going to be stronger than previously thought, because of a “combination of better developments” including vaccines and fiscal stimulus.

            “As we make substantial further progress towards our goals we will gradually roll back” the asset purchase program. He emphasized, the “process will take place with the greatest transparency.” And that would only happen “when the economy is all but fully recovered.”

            On other topics, Powell said, “level of debt today is not unsustainable, no question of US being able to service its debt right now.” “Climate change is an important issue we will be dealing with for a long time with significant economic implications.”

            Full interview here.

            Japan’s PMI manufacturing fell to 48.6, slackening demand and lower employment

              Japan’s Manufacturing PMI further declined from 49.6 to 48.6 in September, falling short of the anticipated 49.9, marking the most pronounced contraction since February. PMI Services also receded from 54.3 to 53.3. PMI Composite, which gives a holistic view of the broader economy, tapered off from 52.6 to 51.8.

              Usamah Bhatti, an Economist at S&P Global Market Intelligence, noted that the future doesn’t seem particularly rosy, with forward-looking indicators hinting at a possible slackening of demand and activity. While service firms did experience a rise, manufacturing segment reported a sharp decline in new orders, the most pronounced in seven months.

              Another worrisome development is the reduced employment levels in the privatgesector. Bhatti stated, “As pressure on capacity eased, there was a renewed reduction in employment levels.” This trend was “the first since the start of the year and the quickest since August 2020.” He attributed this to companies not replacing those who voluntarily exited, often as a strategy “amid elevated cost burdens.”

              Full Japan PMI release here.

              BoJ Kuroda: Keeping rates low for extended period means quite a long time

                BoJ Governor Haruhiko Kuroda reiterated the central bank’s forward guidance that “there’s a good chance current low interest rates will be maintained beyond (the spring of 2020) depending on future developments”. In a speech he emphasized “when we say we will keep rates low for an extended period of time, we mean it will be maintained for quite a long time.”

                On the economy, Kuroda expects it to continue to expand moderately. Though, “if overseas growth takes longer than expected to pick up, Japanese companies – manufacturers in particular – could become cautious about spending on capital expenditure”.

                While the economy is facing some risks, Kuroda dismissed that the so called “Modern Monetary Theory” as being a “wrong idea”. He said “when a central bank monetizes debt unlimitedly, it will most certainly trigger hyper-inflation and cause huge damage to the economy.” And, “it’s a common understanding among central banks of advanced economies that they ought not monetize debt.

                Kuroda’s full speech here.

                China trade surplus widened to USD 34B in October, both import and export rose

                  From China, exports rose 15.6% yoy in October to USD 217.3B. Imports rose 21.4% yoy to USD 183.2B. Trade surplus widened to USD 34.0B, below expectation of USD 36.3B.

                  In CNY terms, exports rose 20.1% to CNY 1490B. Imports rose 26.3% to 1257B. Trade surplus widened to CNY 234B, above expectation of CNY 209B.

                   

                  Eurozone goods exports rose 12.6% yoy in Apr, imports rose 39.4% yoy

                    Eurozone goods exports rose 12.6% yoy in April to EUR 223.9B. Imports rose 39.4% yoy to EUR 256.4B. Trade deficit came in at EUR -32.4B. Intra-Eurozone trade rose 20.8% yoy to EUR 212.1B.

                    In seasonally adjusted term, exports rose 1.5% mom to EUR 229.7B. Imports rose 7.1% mom to EUR 261.4%. Trade deficit widened to EUR -31.7B, much larger than expectation of EUR -14.5B. Intra-Eurozone trade rose slightly from 211.2B to 215.1B.

                    Full release here.

                    US PPI up 0.6% mom, 1.6% yoy in Feb

                      US PPI rose 0.6% mom in February above expectation of 0.3% mom. PPI goods rose 1.2% while PPI services rose 0.3% mom. PPI ex-food, energy and trade services rose 0.4% mom.

                      For the 12-month period, PPI rose 1.6% yoy, above expectation of 1.1% yoy. That’s the highest level since September 2023. PPI ex-food, energy and trade services rose 2.8% yoy.

                      Full US PPI release here.

                      Canada’s employment falls -2.2k, unemployment rate jumps to 6.1%

                        Canada’s employment decreased -2.2k in March, much worse than expectation of 34.5k increase. Unemployment rate jumped from 5.8% to 6.1%, above expectation of 5.9%. Labor force participation rate was unchanged at 65.3%. Average hourly wages rose 5.1% yoy, up from prior month’s 5.0% yoy.

                        Full Canada employment release here.

                        Eurozone PMIs: Slowdown limited to manufacturing.

                          Eurozone PMI manufacturing dropped to 53.3 in September, down from 54.4 and missed expectation of 54.5. That’s also the lowest reading in 28 months. PMI services rose to 54.7, up from 54.5 and beat expectation of 54.5. PMI composite dropped to 54.2, down from 54.5.

                          Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                          “A near stagnation of exports contributed to one of the worst months for the Eurozone economy for almost two years. Trade wars, Brexit, waning global demand (notably in the auto industry), growing risk aversion, destocking and rising political uncertainty both within the Eurozone and further afield all fuelled the slowdown in business activity.

                          “Thankfully, the slowdown was limited to manufacturing. A buoyant service sector, boosted in part by domestic demand being supported by strong job gains, means the survey data are running at a level indicative of the economy growing by a solid 0.5% in the third quarter.

                          “However, with new orders and backlogs of work rising at much reduced rates compared to earlier in the year, export growth evaporating and future expectations remaining close to two-year lows, the risks to future growth appear tilted to the downside.”

                          Full release here.

                          US initial jobless claims dropped to 326k, below expectations

                            US initial jobless claims dropped -38k to 326k in the week ending October 2, below expectation of 349k. Four-week moving average of initial claims rose 3.5k to 344k.

                            Continuing claims dropped -97k to 2714k in the week ending September 25, lowest since March 14, 2020. Four-week moving average of continuing claims dropped -34.5k to 2765k, lowest since March 21, 2020.

                            Full release here.

                            Into US session: Sterling higher ahead of Brexit vote, Yen soft as yields rebound

                              Entering into US sessions, Sterling is the strongest one for today as it recovered ahead of near term support level against both Dollar and Yen. Some might attribute the U-turn in Pound to speculations that PM May could finally get the Brexit Withdrawal Agreement through the Commons today. There is ground for such expectation as more and more Conservatives who voted against the deal in MV2 have now turned, including Dominic Raab and Boris Johnson. However, without support from Northern Ireland’s DUP, the chance of getting through is still slim. Sterling’s rebound is likely more about lightening up positions ahead of this crucial vote and the weekend.

                              Staying in the currency markets, it’s rather quiet elsewhere. New Zealand Dollar is second strongest, paring some of this week’s steep losses. Australian and Canadian Dollar follow. Yen is weakest one for today, followed by Swiss Franc. Risk aversion eased with rally in European and Asian stocks. German yield is also recovering, which US 10-year yield is regaining 2.4 handle.

                              A bunch of data is released in European session but they received little attention. UK Q4 GDP was finalized at 0.2% qoq, unrevised. Total business investment dropped -0.9% qoq, revised up from -1.4% qoq. Current account deficit narrowed to GBP -23.7B. M4 money supply rose 0.3% mom in February. Mortgage approvals dropped to 64k in February.

                              Germany unemployment dropped -7k in March, versus expectation of -10k. Unemployment rate dropped 0.1% to 4.9%, matched expectations. Retail sales rose 0.9% mom in February, way better than expectation of -0.9% mom. Import price index rose 0.3% mom, below expectation of 0.5% mom. Swiss KOF leading indicator improved to 97.4 in March, up from 93.0.

                              In Europe, currently:

                              • FTSE is up 0.31%.
                              • DAX is up 0.88%.
                              • CAC is up 0.80%.
                              • German 10-year yield is up 0.0176 at -0.049.

                              Earlier in Asia:

                              • Nikkei rose 0.82%.
                              • Hong Kong HSI rose 0.96%.
                              • China Shanghai SSE rose 3.20%.
                              • Singapore Strait Times rose 0.29%.
                              • Japan 10-year yield rose 0.0034 to -0.09.

                              BoC’s Vincent cautions on new business pricing behavior and persistent inflation

                                BoC’s non-executive Deputy Governor, Nicolas Vincent, provided a closer look into the challenges Canada faces concerning inflationary pressures, specifically highlighting the direct correlation between businesses’ price setting patterns and the persistent nature of inflation.

                                Vincent noted in a speech, despite some progress, “the downward path of inflation over the past year has been slower than anticipated. Inflation has proven to be stickier than many expected.”

                                Explaining the backdrop, Vincent highlighted that firms, during their recovery phase post-pandemic, faced “a rapid increase in their costs as well as high demand for their products and services”. This spurred an amplified response from firms in terms of pricing – adjusting their prices more frequently and in larger increments than was the norm. ”

                                He accentuated the potential implications of these new pricing strategies, stating they are “intimately linked to the stronger-than-expected inflation we’ve seen.”

                                He cautioned, “if recent pricing behaviour settles into a new normal, it could complicate our return to low, stable, and predictable inflation.”

                                Full speech of BoC Vincent here.

                                Fed George: Interest rate to be in neighborhood of 2% by Aug

                                  Kansas City Fed President Esther George said, “I expect that further rate increases could put the federal funds rate in the neighborhood of 2% by August, a significant pace of change in policy settings”. Then, “evidence that inflation is clearly decelerating will inform judgments about further tightening.”

                                  “The inflation we are now experiencing is obviously both too high and too broad to dismiss. The central bank’s job is to prevent persistent imbalances from feeding into inflation and unmooring inflation expectations,” she said. “By influencing interest rates, the Federal Reserve primarily affects the demand side of the imbalance. The evolution of its efforts alongside other factors will affect the course of monetary policy, requiring continuous and careful monitoring.”

                                  Trump claims winning, Kudlow talks down loosening of Huawei ban

                                    A day after the meeting with Xi, Trump claimed on Sunday, in South Korea, that the US is “winning big because we have created an economy that is second to none”. And, “we’re collecting 25 percent on $250 billion, and China is paying for it, as you know, because, as you notice, our inflation hasn’t gone up.”

                                    Trump further claimed that “China has devalued their currency in order to pay for the tariffs… And in addition to devaluing, they’ve also pumped a lot of money into their economic model… They’ve been pumping money in. We haven’t. We’ve been retracting. We’ve been raising interest rates and they’ve been lowering interest rates.”

                                    Separately, the loosening up of Huawei ban triggered some criticism from Trump’s Republican party. South Carolina Republican Senator Lindsay Graham warned “there will be a lot of pushback if it is a major concession.”

                                    But National Economic Council chairman Larry Kudlow tried to tone it down on Fox News Sunday. He said “all that is going to happen is Commerce will grant some additional licenses where there is a general availability” of the parts the company needs. And, companies “are selling products that are widely available from other countries … This not a general amnesty … The national security concerns will remain paramount.”

                                    ECB Lagarde: Stay the course is my mantra for monetary-policy purposes

                                      ECB President Christine Lagarde said, “We have to also stay that course of resilience that we observed in 2022. Stay the course is my mantra for monetary-policy purposes.”

                                      “I hope that in 2023 fiscal policy will not work in a counter-cyclical way to monetary policy,” she said. “We don’t need to be pushed to do more than is necessary.”

                                      Lagarde also noted that China’s reopening “will have inflationary pressure on many of us, simply because the level of energy that was consumed by China last year was certainly less than what they will consume this year, the amount of LNG that [they] will be buying from the rest of the world will be higher than what we have seen and there is not so much spare capacity in terms of oil and gas.”

                                      “So there will be constraints, there will be more inflationary pressure coming out of that added demand,” she added.

                                      UK PMI construction dropped to 58.2, moving towards a more subdued recovery phase

                                        UK PMI Construction dropped from 59.1 to 58.2 in April, above expectation of 58.0. S&P Global said new work had the weakest rise since December 2021. Total construction output expanded at slower pace. Growth projections eased to lowest since September 2020.

                                        Tim Moore, Economics Director at S&P Global said: “The construction sector is moving towards a more subdued recovery phase as sharply rising energy and raw material costs hit client budgets. House building saw the greatest loss of momentum in April, with the latest expansion in activity the weakest since September 2021. Commercial and civil engineering work were the most resilient segments, supported by COVID-19 recovery spending and major infrastructure projects respectively.”

                                        Full release here.

                                        Japan PM Abe: G7 should play a role in free and fair global economic development

                                          Japan Prime Minister Shinzo Abe warned today that “no country benefits from retaliatory trade restrictions.” And, ahead of the G7 leaders summit on June 8-9, Abe said “my message is G7 should play a role in free and fair global economic development.”

                                          Separately, Abe said that ahead of the Kim-Trump summit in Singapore on June 12, he will meet Trump to “coordinate in order to advance progress on the nuclear issue, missiles and – most importantly – the abductees issue.” A sticky point is that upon declaring peace in the Korean peninsula, UK could eventually have to reduce military forces in South Korea. And Japan’s constitution, diplomatic policies and national security policies all will have to be totally reviewed for the completely new situation.