Thu, Jan 20, 2022 @ 07:41 GMT

Evans: Fed should embrace inflation above 2%, 50% of time

    Chicago Fed President Charles Evans said on Monday that Fed’s policy has been “successful” in achieving the maximum employment mandate. It’s “less successful” regarding the inflation objective. And to fix this, he added, “Fed must be willing to embrace inflation modestly above 2 percent 50 percent of the time.” For him, he would “communicate comfort” with core inflation at 2.5%, as long as there is “no obvious upward momentum” while the path back to 2% can be “well managed”.

    For now, Evans is still expecting that “some further rate increases may be appropriate over time”. He expects growth to be at around 1.75-2.00% this year. Still he maintained that current patient stance is appropriate given the “heightened uncertainty” including US-China trade war. He also emphasized that “if activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold – or perhaps even loosened – to provide the appropriate accommodation to obtain our objectives.”

    Japan Suga: Returning to TPP is in the best interest of Japan and US

      Japan Chief Cabinet Secretary Yoshihide Suga insisted over the weekend that returning to the Trans-Pacific Partnership trade agreement is in the best interests of both Japan and the US. The comments came in before meeting of Economy Minister Toshimitsu Motegi and US Trade Representative Robert Lighthizer for bilateral trade later this month. And that’s a clear indication that Japan is not interested in bilateral trade deal that the US is keen on pursuing. Suga added that “Japan is not going to do anything with any country that harms the national interest.” And, “with FTA negotiations too, we’ll handle them in that way.”

      Finance Minister Taro Aso also said that “inward-looking policies would benefit no country.” And added that “excessive current account imbalances should be resolved through multilateral, not bilateral, framework. ” Also, “the matter should be dealt with through macroeconomic policy and a structural reform by rebalancing savings and investments, instead of imposing tariffs.”

      BoJ Masai cautious on outlook for two reasons

        BoJ board member Takako Masai reiterated in a speech that the baseline scenario is for that the economy is “likely to follow an improving trend with economic activity resuming and the impact of COVID-19 waning gradually”. Still “the pace is expected to be only moderate while vigilance against COVID-19 continues”. Thereafter, as the impact subsides globally, the economy is projected to “keep improving further with overseas economies returning to a steady growth path.”.

        However, she had a cautious view on the outlook for two reasons. Firstly, growth in world trade volume had already been slowing since mid-2018, due to US-China trade friction. Japan’s export and production levels “had already been on a downtrend” prior to the pandemic. Secondly, global services sector had a growth presence in Japan’s labor market in recent years, but it’s projected to “recover at only a moderate pace”.

        Additionally,l she pointed out the risks to outlook, including (1) the impact of COVID-19 on domestic and overseas economies; (2) firms’ and households’ medium- to long-term growth expectations; and (3) developments in the financial system. Additionally, attention should be paid to US-China tensions, Brexit, geopolitical risks and global financial markets developments.

        Full speech here.

        BoE Cunliffe: A little stodginess needed in medium term, but it’s not a stopped approach

          BoE Deputy Governor Jon Cunliffe said in a speech today that the current overshoot in inflation, headline CPI at 2.4%, is “entirely due to imported inflationary pressure.”. That has come “primarily from the post referendum depreciation in sterling plus some more recent pressure from the increase in oil prices.” But the inflationary pressure form Sterling is “already passed its peak”.

          The key question now is “how much inflation is domestic economic pressures likely to generate over the next couple of years”. Cunliffe noted that “domestic inflation pressures, while strengthening a little are not yet established at levels consistent with inflation at target”. Pay growth has established itself in the range of 2.5-3.0%. But “the latest readings do not signal strongly that pay growth will make the next step to establish itself firmly in 3% territory in line with the May forecast”.

          And there remains a case for a little ‘stodginess’ yet in the medium term. Though, he also emphasized that “such an approach is not, however, a stopped approach.”

          Full speech here.

          US oil inventories dropped -5.1m barrels, WTI retreats ahead of 70 handle

            US commercial crude oil inventories dropped -5.1m barrels in the week ending May 28. At 479.3m barrels, oil inventories are about -3% below the five year average for this time of year. Gasoline inventories rose 1.5m barrels. Distillate rose 3.7m barrels. Propane/propylene rose 4.1m barrels. Total commercial petroleum inventories rose 1.9m barrels.

            WTI crude oil edged higher to 69.27 earlier today but retreated on broad based Dollar rebound. Nevertheless, prior break of 67.83 resistance should have confirmed up trend resumption. While some consolidation might be seen, downside should be contained well above 65.15 resistance to bring rise resumption. We’re tentatively put 38.2% projection of 33.80 to 67.83 from 61.51 at 74.50 as next target, as WTI rises through 70 handle.

            ECB Holzmann: We may be able to normalize monetary policy sooner than most expect

              ECB Governing Council member Robert Holzmann, Bank of Austria head, said in an Eurofi Magazine article, “there is the possibility that we may be able to normalize monetary policy sooner than most financial market experts expect.” He pointed to upward price pressures which could turn into inflation expectations.

              Holzmann added, “this does not mean that we will withdraw accommodation prematurely, but rather that accommodation will be needed for a shorter period than what markets expect.”

              Fed hikes by 25bps to 2.25-2.50% by unaimous vote, full statement

                Fed raised federal funds rate by 25bps to 2.25-2.50% as widely expected. The decision was made by unanimous vote.

                Full statement below.

                Federal Reserve Issues FOMC Statement

                Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

                Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

                In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.

                In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

                Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Loretta J. Mester; and Randal K. Quarles.

                Eurozone PMI manufacturing finalized at 45.9, stuck in its steepest decline for seven years

                  Eurozone PMI manufacturing was finalized at 45.9 in October, up from September’s 45.7. Markit noted sustained weakness in output, new orders and purchasing. Also, job shedding accelerated to the sharpest since start of 2013. Looking at some member states, Germany reading recovered 42.1 but stayed well below 50. Spain dropped to 78-month-of 46.8. Italy dropped to 7-month low of 47.7. France recovered to 50.7.

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

                  “Eurozone manufacturing remained stuck in its steepest decline for seven years in October, meaning the goods producing sector is on course to act as a severe drag on GDP again in the fourth quarter. The survey data are consistent with industrial production falling at a quarterly rate in excess of 1%.

                  “Geopolitical concerns, ranging from Brexit to US trade policy, continue to create uncertainty, further dampening demand both at home and in export markets.

                  “The focus of manufacturers remains on cost cutting, reducing inventories and investment spending while also lowering payroll numbers at an increased rate. The steeper pace of job losses is especially worrying, as it magnifies the risk of the downturn spilling over into the household sector.

                  “Producer prices, meanwhile, fell at a rate little changed on September’s three-and-a-half year record as weak demand prompted companies to offer discounts, which is likely to feed through to lower inflation in the coming months.

                  “The severity of the downturn, alongside poor trends in employment and prices is especially disappointing given the ECB’s recent stimulus measures, underscoring how new ECB head Christine Lagarde is taking over the reins at a particularly difficult juncture for the eurozone economy.”

                  Full release here.

                  EU Brexit debriefing delayed for second time

                    On Brexit agreement, European Council President Donald Tusk said, “it is still undergoing changes and the basic foundations of this agreement are ready and theoretically we could accept a deal tomorrow.” And, “yesterday evening I was ready to bet on it…today again certain doubts have appeared from the British side.” Nevertheless, “theoretically in seven to eight hours everything should be clear.”

                    Meanwhile, EU’s debriefing on Brexit negotiations is said to be delayed for a second time to 1700GMT today.

                    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.”

                      Japan Nishimura: Meeting with USTR Lighthizer not prelude to bilateral FTA

                        Japanese Deputy Chief Cabinet Secretary Yasutoshi Nishimura emphasized today that the meeting between Economy Minister Toshimitsu Motegi and US Trade Representative Robert Lighthizer next week is not a prelude to a bilateral free trade agreement.

                        Nishimura reiterated the government’s stance that “Japan does not desire an FTA and these talks are not at all preliminary discussions on an FTA.” Though he noted that “We will be looking for the best path for both the United States and Japan.”

                        In additional he also ruled out setting a quantitative limit on auto exports to the US. He said “whether it’s exports or imports, we will not set numerical targets.” And, “the fundamental thing is to maintain free and fair trade.”

                        Regarding the threat of auto tariffs from Trump, Nishimura said “raising tariffs on autos would have a big impact on the world economy and would be a big minus for the American economy, so we want to talk firmly so that does not happen.”

                        Japan has been very clear on their intention to bring the US back to the multilateral Trans-Pacific Partnership pact which Trump quitted as one of the first things he did after taking office.

                        St. Louis Fed Bullard hearing full-throated angst about trade disputes

                          St. Louis Fed President James Bullard said he’s “hearing full-throated angst” regarding escalating trade disputes across his district. He added that “all aspects of the economy are affected, but agriculture is certainly” being hit.

                          He pointed to some suppliers using threat of new tariffs to raise prices, even though their businesses are not directly targeted. And to Bullard, “that shows you how uncertainty over trade policy can feed back” into business decision-making.”

                          BoE Ramsden: Significant headroom to do more QE

                            Deputy Governor Dave Ramsden said in a the Times interview that the BoE ” still got significant headroom to do more QE if we saw a much weaker recovery”. The pace of QE could accelerate is there are signs of market “dysfunction.

                            Ramsden is “confident” that there wouldn’t be more quarterly GDP contractions ahead. But “a key outcome is what happens to the labour market. Some companies are going to go under. Some jobs are going to be lost.”

                            Fed Kaplan cautious and concerned about short term downside risks

                              Dallas Fed President Robert Kaplan said he’s “cautious and concerned” about the short term downside risks in the economy due to resurgence of coronavirus spread. He warned that “the next two quarters are going to be very challenging, very difficult.” In particular, household income and spending will drop off “at some point” without additional fiscal stimulus.

                              Nevertheless, he’s optimistic that growth will rebound with the arrival of vaccines. Business contacts have indicated that they’re gearing up fro a strong H2 in 2021.

                              US consumer confidence dropped to 113.8 in Aug, lowest since Feb

                                US Conference Board Consumer Confidence dropped from 125.1 to 113.8 in August, missed expectation of 123.3. Present Situation Index dropped from 157.2 to 147.3. Expectations Index dropped from 103.8 to 91.4.

                                “Consumer confidence retreated in August to its lowest level since February 2021 (95.2),” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board.

                                “Concerns about the Delta variant—and, to a lesser degree, rising gas and food prices—resulted in a less favorable view of current economic conditions and short-term growth prospects. Spending intentions for homes, autos, and major appliances all cooled somewhat; however, the percentage of consumers intending to take a vacation in the next six months continued to climb. While the resurgence of COVID-19 and inflation concerns have dampened confidence, it is too soon to conclude this decline will result in consumers significantly curtailing their spending in the months ahead.”

                                Full release here.

                                Fed Bowman: National economic backdrop looks very favorable

                                  Fed Governor Michelle Bowman said in a speech that the current monetary policy setting “should help support the economic expansion”. Her outlook is for “continued growth at a moderate pace” with unemployment rate “remaining low”. She also saw inflation “gradually rising to the Committee’s 2 percent objective.

                                  On the whole, she added that “the national economic backdrop looks very favorable”.

                                  Canada GDP grew 0.8% mom in Sep, still -5% below pre-pandemic level

                                    Canada GDP grew 0.8% mom in September, slightly below expectation of 0.9% mom. That’s, nonetheless, still the fifth consecutive monthly increase. Overall total economic activity was also still -5% below February’s pre-pandemic level. Both goods-producing (0.7%) and services-producing (0.8%) industries were up as 16 of 20 industrial sectors posted increases in September.

                                    Looking ahead, preliminary information indicates just around 0.2% increase in real GDP for October.

                                    Full release here.

                                    Fed Powell: H2 going to be very strong but risks are still out there

                                      In the CBS’ 60 Minutes aired on Sunday, Fed Chair Jerome Powell said “we feel like we’re at a place where the economy’s about to start growing much more quickly and job creation coming in much more quickly”. He added that the growth in H2 is “going to be very strong”.

                                      “There really are risks out there,” he added. “And the principal one just is that we will reopen too quickly, people will too quickly return to their old practices, and we’ll see another spike in cases.” But even in that case, any spike in cases wouldn’t be as disastrous as prior ones, thanks to vaccinations. The economy will still “move ahead more quickly to the extent we keep the spread of COVID under control.”

                                      The time to for the administration to reduce the budget deficit is “when the economy is strong and we’re fully recovered and people are working and taxes are rolling in,” he said. “The time to do that is not now.”

                                      USD/JPY heading back to 110 as WTI oil hits 71, 10 year yield hit 3%

                                        Oil price continues to surge on US withdrawal of Iran deal, WTI hit as high as 71.17 so far before retreat slightly to 70.9. US 10 year yield also follows and is back above 3% now.

                                        In the currency markets, today’s trend continue with USD and CAD trading as the strongest ones. Meanwhile, JPY is trading as the weakest one. The is in line with the development of surging oil and yield.

                                        Dollar is trading above last week’s high except versus JPY and GBP. Note that Yen’s strength last week was due to falling yields in US and, more so in Europe. Rebound in US yield could now put 110.02 resistance in USD/JPY back into focus.

                                        Action Bias of USD/JPY is looking promising. H row is all upside blue with the current rebound. D action also turned from neutral to upside blue already.

                                        Nonetheless, we’d stay cautious in the pair first, at least until either 110.02 is taken out, or when 6H action bias also turns upside blue.

                                        BoE announces liquidity with BIS to ease any potential future strains

                                          BoE announced to enter into a liquidity facility with the Bank for International Settlements to “ensure the provision of Sterling liquidity during any future periods of market stress”.

                                          “Together with the swap lines the BoE has with a number of central banks, this new facility will provide a further liquidity backstop in Sterling to help ease any potential future strains in funding markets,” BoE said.