Canada CPI accelerated from 7.7% yoy to 6.8% yoy in May, above expectation of 7.5% yoy. That’s the highest reading since January 1983. The monthly rise 1.4% mom was the fastest since introduction of the series in 1992. Excluding gasoline, CPI rose 6.3% yoy, up from April’s 5.8% yoy.
CPI common rose from 3.5% yoy to 3.9% yoy, above expectation of 3.4% yoy. CPI median rose from 4.6% yoy to 4.9% yoy, above expectation of 4.7% yoy. CPI trimmed rose from 5.2% yoy to 5.4% yoy, matched expectations.
San Francisco Federal Reserve President Mary Daly said yesterday that “patience is where I’m at right now,” regarding monetary policy. She added the US economy is in “a good place”. And interest rates should be left unchanged “until the data suggests we go one way or another way.”
Though, she predicts that unemployment rate at 3.8% will eventually push wages and prices upward. And “it’s just taking a longer time than it typically does”. She noted “that’s part of what feeds into my patient strategy.”
Daly supported Decembers rate hike when the economy was growing at a faster rate. Now, she noted interest rates are at “neutral” and thus, patience is “the way to go, because you don’t want to guess that you need to do more, or guess that we need to do less, you just want to be patient and look at the data.”
RBA left monetary policy unchanged as widely expected. Cash rate is kept at 0.10%. Target for April 2024 Australian Government bond yield is also held at 0.10%. The asset purchase program will continue at AUD 4B per week until at least mid February 2022. RBA also maintained that the condition for rate hike “will not be met before 2024”.
It maintained that the set back to economy expansion by the Delta outbreak is “expected to be only temporary”. In the central scenario, the economy will be growing again in Q4, and is expected to be “back around its pre-Delta path in the second half of next year”.
On labor market, RBA said it’s business liaison and job vacancies data suggest that “many firms are seeking to hire workers ahead of the expected reopening in October and November.” Wage and price pressures remain “subdued” and disruption to global supply chains on overall inflation “remains limited”.
New Zealand GDP dropped -3.7% qoq in Q3, better than expectation of -4.3% qoq. For the year, GDP contracted -0.3% yoy, versus expectation of -1.6% yoy. Services industries dropped -2.7% qoq. Goods-producing industries dropped -7.3% qoq. Primary industries dropped -3.1% qoq.
The contraction reflects a widespread drop in economic activity due to the COVID-19 alert level restrictions and nationwide-lockdown implemented in the second half of the quarter. But the contraction in Q3 was “less pronounced” when compared with Q2 2020.
“The September 2021 quarter had fewer days in higher alert levels, and border restrictions were already in place. Also, some businesses may have adapted to and been better prepared for higher alert levels, compared with the first lockdown,” national accounts industry and production senior manager Ruvani Ratnayake said.
Japan PMI manufacturing was finalized at 49.8 in May, revised up from 49.6, down from 50.2 in April. Markit noted that domestic and external demand conditions deteriorate. Firms slow the rate of hiring amid production cutbacks. And, output expectations turn negative for first time since November 2012.
Joe Hayes, Economist at IHS Markit: “There were no signs a let-up in the recent manufacturing downturn during May, as output and new orders both slipped for fifth successive months. Weak demand from Japan’s key trade partner, China, as well as signs of an increasingly sluggish domestic economy, have impacted sales volumes…. Given the importance of capital goods to Japan’s foreign trade, it would suggest further difficulties lie ahead for Japanese exporters.
“With the upcoming sales tax hike and upper house elections in July, there lies ahead potential banana skins for Japanese firms to avoid. Re-escalated trade tensions between China and the US merely add to existing concerns for manufacturers. Subsequently, businesses cast a downbeat assessment for the year ahead for the first time in six-and-a-half years.”
Also from Japan, capital spending rose 6.1% in Q1, beat expectation of 2.6%.
Minneapolis Fed President Neel Kashkari said yesterday that it’s “appropriate” to start normalizing policy. However, he cautioned “let’s not overdo it”. “If we raise rates really aggressively, we run the risk of slamming the brakes on the economy, putting the economy into recession, which would then — we’d be crashing back down into this low inflation environment,” he warned.
Kashkari also revealed that he and his family had COVID earlier this year, and “a lot of families are experiencing what we just experienced.” He added “this will be a while” before people can be comfortably living with the coronavirus.
Japan CPI core (ex-food) climbed back to -0.6% yoy in January, up from -1.0% yoy, above expectation of -0.7% yoy. All item CPI also rose to -0.6% yoy, up from -1.2% yoy. CPI core-core (ex-food and energy) turned positive to 0.1% yoy, up from -0.4% yoy.
BoJ is set to review its monetary policy tools in March, to make the massive stimulus program “more sustainable and effective”. It’s reported that the central bank could replace some numerical guidelines for ETF purchases. A source to Reuters noted that “to make the BOJ’s policy sustainable, it needs to avoid buying too much ETFs when doing so is unnecessary”.
St. Louis Federal Reserve president James Bullard repeated his call for tapering to end asset purchase by the early next year, as “we don’t need the asset purchases at this point.”
“I think a lot depends on whether inflation going to moderate in 2022 or not. I’m a little skeptical that it is. I think we’re going to get at least 2.5% inflation in 2022, maybe higher than that and there’s some risk to the upside on that,” Bullard said.
“We will be able to get to a good consensus on the committee and get to a good wind-down process. It does seem that we are coalescing around a plan,” Bullard said
Entering into US session, Sterling is the second strongest one for today, just next to New Zealand Dollar. Markets are seeing UK cross-party politicians’ move to block no-deal Brexit as positive to the Pound. In particular, the campaign is gathering momentum today as key Labour member expressed they’re highly likely to join. Meanwhile, Kiwi is the strongest one as stronger than expected CPI lowers chance of a RBNZ rate cut.
On the other hand, Yen and Dollar are weakest for today so far. Risk sentiments turned cautious in Asia on renewed worries over US-China trade talk. But White House economic advisor Larry Kudlow was quick to come out yesterday to emphasize that the high-level meeting later this month between USTR Robert Lighthizer and Chinese Vice Premier Liu He was “very, very important” and “determinative.” And, We are moving towards negotiations.” Risk sentiments in European session turned positive in Europe and US futures point to rebound.
In Europe, currently:
Earlier in Asia:
US initial jobless claims dropped -11k to 200k in the week ending May 28, slightly below expectation of 205k. Four-week moving average of initial claims dropped -500 to 206.5k.
Continuing claims dropped -34k to 1309k in the week ending May 21. That’s the lowest level since December 27, 1969, when it was 1304k. Four-week moving average of continuing claims dropped -19.5k to 1327k, lowest since January 10, 1970, when it was 1310k.
Australia retail sales rose 0.9% mom in May, above expectation of 0.4% mom. That’s the fifth consecutive monthly growth.
Ben Dorber, Director of Quarterly Economy Wide Statistics said, “There was growth across five of the six retail industries in May as spending remained resilient. Higher prices added to the growth in retail turnover in May. This was most evident in cafes, restaurants and takeaway food services and food retailing.”
Richmond Fed President Thomas Barkin said, “we’re committed to returning inflation to our 2% target and we’ll do what it takes to get there. I’d expect inflation to bounce around on the way back to our target.” He didn’t expect inflation to “come down immediately”.
“A recession is obviously a risk in the process,” Barkin said. But, “it doesn’t have to be like a 2008 recession, it doesn’t have to be calamitous. We’re out of balance today…returning to normal might actually mean products on shelves, cars on lots and restaurants fully staffed.”
BoJ Governor Haruhiko Kuroda warned today that “risks to Japan’s economy are tilted toward the downside” And BoJ policymakers “need to pay particular attention to protectionist moves such as Sino-U.S. trade friction.”
Kuroda also warned that “raising interest rates now to create policy space for future economic downturns may risk delaying achievement of our inflation target.”
Also, it’s premature to reveal the exit strategy for the ultra loose monetary policy. Kuroda said “we need to debate an exit strategy and explain it to markets but only when inflation approaches our target.”
In February, US goods exports rose 5.5% yoy to USD 167.8B. Goods imports dropped -1.9% yoy to USD 259.5B. Trade deficit widened slightly to USD -91.6B.
Whole sales inventories rose 0.2% mom to USD 920.3B. Retail inventories rose 0.8% mom to USD 747.3B.
ECB Governing Council member Olli Rehn told Reuters today that the “central scenario is not a recession,” despite the “soft patch in the economy.” Though, he reiterated the unified message that an ample degree of stimulus is still appropriate for now. Policymakers are going to wait for the new economic forecasts, to be released next week, before debating on adjusting monetary policies.
Regarding the policy framework, Rehn said the definite of price stability should be loosened. Currently ECB sees inflation target as being close to 2%, below 2%. But Rehn said “My view is that 2% is not a ceiling and inflation can deviate in both directions.”
Italian Deputy Prime Minister Matteo Salvini called for a new role for ECB to “guarantee” government debt in order to keep bond yields low. Rehn bluntly responded saying it goes against the principal of modern central banking that we are forbidden to do monetary financing.”
Italy 10-year yield dropped to record low of 0.501% in early trading and remains low for the moment. Former ECB President Mario Draghi seemed to be winning confidence from a wide spectrum of political parties, as well as investors, for forming a new government.
Draghi will continue to meet with parties to get their backing. Yesterday, he reiterated that a common Euro-are budget will be one of his key priorities. He’s seen as someone who’s “pro-EU” and “pro-reform” at the same time, who could prompt a paradigm shift for the country.
In a CNBC interview, Richmond Fed President Thomas Barkin shared his thoughts on inflation, emphasizing the importance of core inflation, which is still running slightly above 5% year over year. He acknowledged recent positive news regarding energy prices but maintained that there is more work to be done to bring core inflation down to desired levels.
Although Barkin did not explicitly state his position on another rate hike at the Fed’s upcoming policy meeting in May, he emphasized the importance of closely monitoring jobs and inflation data, both of which remain relatively robust.
He said, “I’m waiting for inflation to crack … It’s moving in the right direction … but in the absence of a month or two months or three months with inflation at our target, it’s hard to make the case that we’re compellingly headed there.”
Japan’s exports rose by 1.5% yoy to JPY 8744B in June. The significant rise in exports to US by 11.7% yoy and to EU by 15.0% yoy was offset by the -11.0% yoy decline in exports to China (marking the most significant drop since January).
Rise in US-bound exports was primarily driven by shipments of cars and mining machinery. Meanwhile, dip in exports to China was attributed the decreased shipments of steel, chips, and nonferrous metal, which led to an overall double-digit decline.
Japan’s imports contracted by -12.9% yoy to JPY 8701B. The decrease in value of imports is primarily linked to drop in crude, coal, and liquefied natural gas.
As a result, Japan recorded a trade surplus of JPY 43B, the first such instance in nearly two years since July 2021.
In seasonally adjusted term, exports rose 3.3% mom to JPY 8269B. Imports rose 0.5% mom to JPY 8822B. Trade balance reported JPY -553B deficit, versus expectation of JPY -550B.
In a regular press conference, China’s Ministry of Commerce Gao Feng urged the US to remove restriction on Huawei and other Chinese companies, to clear the path for healthy and stable development of Sino-US economic and trade relations. He also urged the US to truly implement such commitments
Additionally, he noted that “trade teams from both sides, according to the consensus reached at Osaka by leaders from both countries, will restart economic and trade negotiations on the basis of equality and mutual respect”. Also, “China believes that both sides can find a way to resolve the issue if each other’s reasonable concerns are taken into consideration through a dialogue of equals, he added.
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China: Unexpected rate cut by PBOC aligns with disheartening July economic data
In an unexpected decision that took markets by surprise, PBoC announced a cut in key policy rates for the second time in a span of three months, just an hour before the release of July economic data that broadly fell short of market expectations.
PBOC lowered the rate on its one-year medium-term lending facility loans – valued at CNY 401B – to financial institutions by 15bps to 2.50% from the previous 2.65%. This significant move indicates the possibility of a reduction in China’s benchmark loan prime rate in the upcoming week.
A closer look at the economic metrics for July reveals concerns. Industrial production grew at 3.7% yoy, underperforming against the anticipated 4.3% yoy and marking a slowdown from the 4.4% yoy of the previous month. Similarly, retail sales saw increase of just 2.5% yoy, lagging behind projected 4.2% yoy and decelerating from 3.1% yoy. This rate marks the slowest growth pace in sales since the decline observed in December 2022. Furthermore, fixed asset investment growth, year-to-date year-on-year, was recorded at 3.4%, falling short of 3.8% expectation.
Urban unemployment rate witnessed a slight increase, moving from 5.2% to 5.3%. Notably, NBS did not provide the usual age breakdown of unemployment figures. The spokesperson mentioned the suspension of youth unemployment data attributing it to societal and economic changes, and highlighted an ongoing reassessment of its data collection methodology. It’s worth noting that in June, the youth unemployment rate (for ages 16-24) reached a record high of 21.3%
NBS also said in a statement, “We must intensify the role of macro policies in regulating the economy and make solid efforts to expand domestic demand, shore up confidence and prevent risks.”