Thu, Sep 29, 2022 @ 07:15 GMT

BoE announces gilt operation to restore orderly market conditions

    BoE announced today to carry out temporary purchases of long-dated UK government bonds, to “restore orderly market conditions”. It warned that the significant repricing of UK and global financial assets “has become more significant in the past day”, particularly affecting long-dated government debt. Continuing or worsening dysfunction would be a “material risk” to financial stability.

    The purchases will be carried out on “whatever scale is necessary” to effect this outcome. However, they will be “strictly time limited” with auctions taking place from today until October 14.

    BoE also reiterated that a full assessment of the government’s mini budget will be done at its “next scheduled meeting”. BoE “will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit.”

    Full statement here.

    GBP/USD was lifted briefly after the announcement, and turned south quickly.

    Germany PMI manufacturing finalized at 58.4, false impression distorted by delivery times

      Germany PMI Manufacturing was finalized at 58.4 in September, down from August’s 62.6. Markit said output and new orders rose at slowest rate in 15 months. Input shortages continued to push up costs, leading to higher output prices. Pace of job creation slowed as growth expectations dipped to 13-month low.

      Phil Smith, Associate Economics Director at IHS Markit, said:

      “At 58.4, the latest headline PMI reading gives a false impression as to the manufacturing sector’s current performance, with the suppliers’ delivery times component continuing to distort the picture. Trends in output and new orders are weaker than the headline number suggests.

      “The unprecedented supply shortages we’ve seen in recent months have been holding back production levels for some time now, and we’re increasingly seeing this disruption feed back up the supply chain and resulting in reduced demand for intermediate goods as orders are either postponed or cancelled. As a result, overall growth in new orders dropped to a 15-month low in September.

      “At the same time, supply bottlenecks continue to drive up input costs and, in turn, put pressure on manufacturers to raise prices, which is acting as another headwind to growth. The rate of input price inflation looks like it might have peaked but is still running close to the fastest in the survey’s history, leading to near-record numbers of goods producers raising prices.

      “Manufacturers’ optimism towards the outlook is steadily ebbing away, down in September to its lowest for 13 months, with many firms concerned that supply shortages will persist into next year.”

      Full release here.

      US initial jobless claims dropped slightly to 1006k

        US initial jobless claims dropped slightly by 98k to 1006k in the week ending August 22. Four-week moving average of initial claims dropped 107k to 1068k.

        Continuing claims dropped -223k to 14535k in the week ending August 15. Four-week moving average of continuing claims dropped -604k to 15216k.

        Full release here.

        UK PMI construction rose to 61.7 in Mar, highest since 2014

          UK PMI Construction rose to 61.7 in March, up sharply from 53.3, well above expectation of 55.0. That’s the strongest reading since September 2014. Markit also said there was robust growth in all major categories of construction activity. Rise in commercial work was fastest for six-and-a-half years. Job creation also accelerated to 27-month high.

          Tim Moore, Economics Director at IHS Markit: “March data revealed a surge in UK construction output as the recovery broadened out from house building to commercial work and civil engineering… Improving confidence among clients in the commercial segment was a key driver of growth.. The increasingly optimistic UK economic outlook has created a halo effect on construction demand and the perceived viability of new projects.”

          Full release here.

          Australia Westpac consumer sentiment dropped to 104.6, still more optimists

            Australia Westpac-Melbourne Institute consumer sentiment dropped -1.5% to 104.6 in October, down from September’s 106.2. There continued to be a clear majority of optimists nationally, even at state level – NSW (103.4); Victoria (105.4); Queensland (105.3) and Western Australia (105.4).

            Westpac expects RBA to “almost certainly maintain its policy settings” at November 2 meeting. Instead, the next change is likely to be another round of tapering in February. Looking forward, Westpac expects a rate hike in Q2 of 2023, while RBA has repeated said the conditions of hike won’t be met until 2024.

            Full release here.

            Bundesbank Weidmann: Private consumption in Germany to overcome its weakness

              Yesterday, Bundesbank President Jens Weidmann talked down risks of recession in Germany, as he spoke in a business forum. He said “given excellent labor market conditions and rising incomes, I expect private consumption in Germany to overcome its weakness”. And, there were “early signs of this already as the retail sector recorded strong growth in the first quarter.”

              On ECB monetary policy, Weidmann said “the task of monetary policy is to ensure price stability… This means reacting to the weak domestic price pressures but also continuing on the path of policy normalization and not postponing unnecessarily if the inflation outlook permits it.”

              UK PMI construction rose to 54.6 in Oct, worst supply crunch may have passed

                UK PMI Construction rose to 54.6 in October, up from 52.6, slightly above expectation of 54.0. Construction recovery accelerated from September’s eight-month low. House building regained its place as the best-performing category. But severe shortages of staff and materials continued.

                Tim Moore, Director at IHS Markit said:

                “UK construction companies achieved a faster expansion of output volumes in October, despite headwinds from severe supply constraints and escalating costs…. “However, the volatile price and supply environment added to business uncertainty and continued to impede contract negotiations… There were widespread reports that shortages of materials and staff had disrupted work on site, while rising fuel and energy prices added to pressure on costs.

                “Nonetheless, the worst phase of the supply crunch may have passed, as the number of construction firms citing supplier delays fell to 54% in October, down from 63% in September. Similarly, reports of rising purchasing costs continued to recede from the record highs seen this summer.”

                Full release here.

                ECB Knot: There is very good reason to expect robust recovery in H2

                  ECB Governing Council member, Dutch central bank chief Klaas Knot, said “there is very good reason to expect a robust recovery in the second half of the year.” And, “if the economy develops according to our baseline, we will see better inflation and growth from the second half onwards.”

                  “In that case, it would be equally clear to me that from the third quarter onwards we can begin to gradually phase out pandemic emergency purchases and end them as foreseen in March 2022,” he added.

                  Knot was also comfortable with higher nominal rates, if they are “entirely due to higher inflation expectations”. “To the extent that higher nominal yields are driven by better inflation and growth prospects, to me that’s entirely benign.”


                  Fed Rosengren: Premature to focus on tapering

                    Boston Fed President Eric Rosengren said on Wednesday that “significant slack remains in the economy”. “Substantial improvement” is needed to Fed to begin tapering. “It is quite possible that we’ll see those conditions as we get to the latter half of the year,” he said.

                    “But right now what we have is one really strong employment report, one quarterly strong GDP report,” Rosengren added. “And so I think it’s premature right now to focus on the tapering.” He emphasized, “the Fed has no desire to surprise markets.”

                    Separately, Vice Chair Richard Clarida told CNBC, “we’re still a long way from our goals, and in our new framework, we want to see actual progress and not just forecast progress.” Asked about when the Fed should start talking about tapering, he said, “we don’t think so right now.”

                    RBA stands pat, no rate hike expected until 2024 earliest

                      RBA left monetary policy unchanged as widely expected. Cash rate target and 3-year AGB yield target are both kept at 0.10%. Parameters of asset purchases are kept unchanged too. It maintained the pledge to keep “highly supportive monetary conditions” to support return to full employment and inflation consistent with target. Also, the conditions for rate hike are unlikely to be matched “until 2024 at the earliest.

                      The central bank said economic recovery is “stronger than earlier expected and is forecast to continue”. The central scenario is for GDP to grow 4.75% this year and 3.50% next. Progress in reducing unemployment “has been faster than expected”. Further decline is unemployment rate to 5% by year end is expected. Inflation and wage pressures are “subdued”.

                      At the July meeting, RBA will consider whether to move the target bond for the 3-year yield target to November 2024 bond. It will also decide then whether to extend the government bond purchase program after September.

                      Full statement here.

                      NASDAQ closed lower after comments from Fed hawks

                        US stocks closed lower overnight as traders turned cautious, watching the development in Afghanistan and upcoming speech of Fed chair Jerome Powell at the Jackson Hole Symposium. A few Fed officials expressed their support for tapering asset purchases, somewhat talking down the impact of the spread of Delta. Yet, we’d note that those are known hawks already. Doves might come out today telling another story while Powell would likely sound non-committal. The overall Jackson Hole event would likely leave the market with nothing new on the net.

                        NASDAQ apparently faced some resistance from 61.8% projection of 10822.57 to 14175.11 from 13002.53 at 15074.39, and 15k psychological level. While it’s now in a retreat, there is no sign of reversal, at least before covering the gap made at weekly open. Nevertheless, it might still take some time to build the base to power through 15k at a later stage.

                        Fed Bullard: It’s too early to talk taper here

                          St. Louis Fed President James Bullard told CNBC, “I think it’s too early to talk taper here”. And, “we’re going to let the chair open that discussion when he thinks it’s appropriate.”

                          “We’re not quite out of the pandemic yet,” he added. “Once we get out of the pandemic, then I think it will be time to look at whether monetary policy can change.”

                          “I don’t think you really want to change policy while you’re still in the pandemic tunnel. Even though you can sort of see the end of the tunnel, we’re not there yet, and we’ve got to push hard till we get all the way to the end,” he said.

                          US Philly Fed manufacturing dropped to 23.8, price indicators remained elevated

                            In the October Philadelphia Fed Manufacturing Business Outlook Survey, the diffusion index for current general activity dropped to 23.8, down from 30.7, below expectation of 26.0.

                            Looking at some details, current shipments index was essentially unchanged at 30.0. New orders rose 15 pts to 30.8. Employment index rose from 26.3 to 30.7. The index for prices paid rose 3 pts to 70.3. Current prices received index dropped -2 to 51.1. Price indicators remained elevated.

                            Full release here.

                            New Zealand BusinessNZ manufacturing dropped to 40.1, economic pain being felt

                              New Zealand BusinessNZ manufacturing index dropped to 40.1 in August, down from 62.6, back in contraction. Looking at some more details, production tumbled from 63.9 to 27.7. Employment dropped from 57.9 to 54.5. New orders dropped from 63.7 to 44.4. Finished stocks dropped from 56.8 to 46.1 Deliveries dropped from 56.3 to 33.6.

                              BNZ Senior Economist, Doug Steel stated that “while many anticipate a bounce in activity as the country progresses down alert levels (all going well on the Covid front), today’s PMI clearly demonstrates the economic pain being felt.  This should not be underestimated, even if there is hope for the future. GDP and manufacturing output are expected to fall heavily in Q3.  It is something of a reality check in the afterglow of yesterday’s very strong Q2 GDP outcome.”

                              Full release here.

                              Kashkari: Fed should use forward guidance now to avoid recession

                                In an op-ed article published in the Financial Times, Minneapolis Fed President Neel Kashkari said Fed should use forward guidance now to stimulate the economy. He explained that “forward guidance can also provide stimulus by signalling that overnight rates will be low in the future.” That is, Fed can “influence long-term rates by giving guidance about the future path of their short-term equivalents. The firmer the Fed’s commitment, the more influence it can have.”

                                Kashkari added that “forward guidance should be used now, before the federal funds rate returns to zero.” He argued that “if a central bank cuts rates to zero in response to a downturn and then announces that it plans to keep rates low, that can actually be perceived as a sign of weakness rather than strength.” Instead, “it would be better to deploy guidance now in an effort to avoid hitting zero.

                                Regarding the guidance, he said “at a minimum, we should commit to not raising rates again until core inflation returns to our 2 per cent target on a sustained basis.”

                                New Zealand BusinessNZ manufacturing rose to 62.6, second highest on record

                                  New Zealand BusinessNZ Performance of Manufacturing Index rose from 60.9 to 62.6 in July. That’s the second highest reading after March’s 63.6. Looking at some details, production rose from 64.4 to 66.0.. Employment rose from 56.7 to 58.3, a new record. New orders rose from 63.6 to 65.0. Finished stocks dropped from 57.4 to 56.9. Deliveries rose from 55.2 to 57.9.

                                  However, the position of negative comments (51.4%) still remained higher than positive ones (48.6%). Increased domestic and overseas orders was the common factor for positive comments. In contrast, tight labor market, supply chain issues and raw material costs were the negatives.

                                  BNZ Senior Economist, Craig Ebert stated that “while New Zealand’s PMI is doing exceptionally well, we are also conscious of the headwinds happening for global manufacturing.  This is on account of the resurgence of COVID19 in its delta strain.”

                                  Full release here.

                                  UK retail sales jumped 9.2% mom in Apr on re-opening

                                    UK retail sales grew sharply by 9.2% mom in April, well above expectation of 4.0% mom. Ex-fuel sales jumped 9.0% om, also above expectation of 4.0% mom. The strong growth reflected effect of easing of coronavirus restrictions, including the re-opening of all non-essential retail from 12 April in England and Wales and from 26 April in Scotland.

                                    Full release here.

                                    German Altmaier expects coronavirus to hit supply chains in coming weeks

                                      German Economy Minister Peter Altmaier said, “in some sectors, such as tourism, the exhibition and public events industry as well as in the hotel and restaurant trade, we are seeing a massive impact” from the coronavirus outbreak.

                                      He added, ‘we’re expecting supply chains to be impacted, especially in the industrial sector, and this will become visible in its full extent only in the coming weeks.”

                                      Canada manufacturing sales dropped -1.5% mom in July

                                        Canada manufacturing sales dropped -1.5% mom to CAD 59.6b in July, worse than expectation of -1.0% mom. Sales were down in 12 of 21 industries, led by the wood product (-21.8%), aerospace product and parts (-19.0%), miscellaneous (-12.1%) and petroleum and coal product (-2.3%) industries.

                                        The declines were partially offset by higher sales in the motor vehicles (+13.5%), primary metal (+3.9%) and motor vehicle parts (+7.6%) industries.

                                        Full release here.

                                        Fed Bullard: We have a good plan with 50bps per meeting

                                          St. Louis Fed President James Bullard reiterated yesterday, “I think we have a good plan for now. This 50 basis point per meeting increase is twice the normal pace that the committee has used in recent years which shows that there’s a lot of unanimity around expeditiously moving to neutral in this high-inflation environment that we’re in.”

                                          Bullard also repeated that he wants to get rates to 3.5% by the end of the year. Then some of the rate hikes could be reversed late next year or in 2024. He pointed to the pre-pandemic rates, with Fed rates at 1.55%, 10-year yield at 1.86% and mortgage rates well below 4%. “This may provide a practical benchmark for where the constellation of rates may settle once inflation comes under control in the U.S.,” he said.