ECB’s Centeno: Inflation trajectory is very positive

    At the World Economic Forum in Davos, ECB Governing Council member Mario Centeno highlighted the positive direction of medium-term inflation, noting that its “trajectory is very positive right now.” He further told CNBC that “we don’t need to do more than is needed”

    On the topic of rate cuts, Centeno noted “once inflation starts going down sustainably, with an economy … that is not growing, where the challenges are huge, we need to be open to get all data on board and decide upon that.”

    Meanwhile, another ECB Governing Council member, Francois Villeroy de Galhau, speaking at a panel in Davos, cautioned against premature declarations of victory over inflation. However, he admitted that “our next move will be a cut, probably this year” evenh though he refrained from commenting on the timing.

    ECB stands pat, indicates possibility of lower rates, stands ready to act

      ECB keeps monetary policy unchanged as widely expected. Main refinancing rate is kept at 0.00%. Marginal lending facility and deposit facility rates are held at 0.25% and -0.40% respectively.

      Forward guidance is changed to reflect the possibility of lower interest rates. That is, interest rates are expected to “remain at their present or lower levels at least through the first half of 2020”.

      Also ECB “stands ready to adjust all of it instruments” if “medium-term inflation outlook continues to fall short of its aim”

      Full statement here.

      Monetary Policy Decisions

      At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term.

      The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

      The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.

      In this context, the Governing Council has tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.

      The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

      UK manufacturing PMI finalized at 52.1, inflation pressure moving to manufacturing sector

        UK PMI Manufacturing was finalized at 52.1 in July, up from June’s 50.9. Production growth was the fastest since February 2022, while input price inflation hit an 18-month high.

        Rob Dobson, Director at S&P Global Market Intelligence, noted that UK manufacturing has started the H2 on an “encouragingly solid footing.” July saw increased production and new orders, with staffing levels rising for the first time since September 2022. Confidence reached its highest level in two-and-a-half years, with 60% of companies expecting output to rise over the next 12 months.

        However, inflationary pressures are a “blot on the copybook”, with input costs rising at the highest rate in 18 months. The ongoing Red Sea crisis and related freight issues are driving up prices. Selling prices also increased at the fastest rate since mid-2023. BoE is likely to remain cautious about loosening monetary policy due to these inflationary pressures “pivoting away from services and towards manufacturing.”

        Full UK PMI manufacturing final release here.

        RBNZ Orr actively preparing a package of additional monetary policy tools

          RBNZ Governor Adrian Orr said in a speech that the early policy actions on the pandemic, including significant reduction in the Official Cash Rate, and introduction of the Large Scale Asset Purchases, “have been effective in lowering interest rates across the board, and ensuring there is plentiful liquidity in the financial system.”

          He added that RBNZ is “actively preparing a package of additional monetary policy tools to use if needed”. The tools include “negative wholesale interest rates, further quantitative easing, direct lending to banks, and ongoing forward guidance about our intentions.” While some of the tools are “unfamiliar to many New Zealanders,” he noted, “they are used widely internationally”.

          Orr’s full speech here.

          UK PMI services finalized at 62.4, composite at 62.2

            UK PMI Services was finalized at 62.4 in June, down slightly from May’s 62.9. That’s still the second-highest reading since October 2013. PMI Composite dropped to 62.2, down from 62.9. That’s also the second-highest reading since January 1998.

            Tim Moore, Economics Director at IHS Markit: “The service sector recovery remained in full swing during June as looser pandemic restrictions released pent up demand for business and consumer services. Sales growth eased slightly from May’s recent peak, but capacity constraints and staff shortages meant that many service providers struggled to keep up with new orders…

            “The latest survey data highlighted survey-record rates of input cost and prices charged inflation across the service sector, reflecting higher commodity prices, transport shortages and staff wages. Imbalanced supply and demand was the main driver, while the roll-back of pandemic discounting by some service providers amplified the latest round of price hikes.”

            Full release here.

            RBNZ surprises with rate cut, signals another reduction this year

              In an unexpected move, RBNZ lowered its Official Cash Rate by 25bps to 5.25% today, catching markets off guard. The central bank also unveiled new economic projections, which indicate the possibility of another rate cut later this year, followed by a total of 100bps in cuts throughout 2025.

              RBNZ emphasized that the “pace of further easing” will hinge on confidence that pricing behavior remains aligned with a low-inflation environment and that inflation expectations stay anchored around the 2% target.

              The minutes of the meeting reveal that “recent indicators give confidence that inflation will return sustainably to target within a reasonable time frame.” The Committee agreed that with headline CPI inflation expected to return to the target band by the September quarter and growing excess capacity supporting a continued decline in domestic inflation, there was room to “temper the extent of monetary policy restraint.”

              The new economic projections suggest that OCR could drop further to 4.9% by Q4 2024, 3.8% by the end of 2025, and eventually reach 3.0% by mid-2027. Annual CPI inflation is forecasted to hover between 2.2% and 2.4% before settling at 2.0% by Q2 2026.

              Full RBNZ statement here.

              Full RBNZ MPS here.

              Japan PMI manufacturing finalized at 49.8, potential banana skins lie ahead

                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%.

                RBNZ Hawkesby: It would be better to do too much too early

                  RBNZ Assistant Governor Christian Hawkesby explained the decision of the surprised -50bps rate cut in speech today. He said “we judged that it would be better to do too much too early, than do too little too late”. The alternative approach of cutting by -25bps “risked inflation remaining stubbornly below target, with little room to lift inflation expectations later with conventional tools in the face of a downside shock.”

                  On the other hand, “a more decisive action now gave inflation the best chance to lift earlier, reducing the probability that unconventional tools would be needed in the response to any future adverse shock.”

                  Hawkesby also noted that neutral rate is currently in a “wide range centred on 3.25 percent, down from around 5 percent before the GFC”. And, “all else equal, a lower neutral rate implies that we need to set our Official Cash Rate lower to deliver the same amount of monetary stimulus to the economy.”

                  China said to seek some tariffs removals in exchange for farm purchases

                    US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will speak with Chinese Vice Premier Liu He today by phone. Two sides are believed to be working on the text for Phase One of US-China trade agreement, for signing at the APEC summit in Chile on November 16-17.

                    It’s reported that China will ask US to drop the plan to impose tariffs on USD 156B of Chinese goods on December 15. Additionally, Beijing could ask US to remove the tranche of tariffs imposed on September 1, on USD 125B of Chinese imports, too. That is, China is seeking to get back to tariffs on just the original USD 250B in goods.

                    In exchange China would buy at least USD 20B of American farm products in the first year, as part of the phase one deal. That would bring purchases back to the level in 2017, before trade war began. In the second year of a final deal, purchases could rise further to USD 40B-50B, when all punitive tariffs are removed.

                    Japan CPI core rose to -0.6% yoy in Jan, CPI core-core turned positive to 0.1% yoy

                      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”.

                      ECB de Guindos: Signs of global stabilization, but lots of uncertainties from coronavirus

                        ECB Vice President Luis de Guindos expected inflation to hover at current low levels over the six months. He also “started to see some signs of stabilization on a global level”. Risks are also less tilted to the downside. However, he still sees “a lot of uncertainties” surrounding China’s coronavirus outbreak.

                        He also urged that “completing the banking union is pivotal” for the performance of the Eurozone. Fiscal must play a role as side effects of monetary policy are becoming more tangible.

                        Fed’s Barkin: We’ve got some time to be patient

                          Richmond Fed President Thomas Barkin highlighted the strength of the labor market and the encouraging trend of decreasing inflation in a Bloomberg TV interview. The cautious yet optimistic outlook grants Fed a period of watchful waiting before starting interest rate cuts.

                          “It’s a very strong labor market still, and so gratified to see inflation coming down, hoping it continues to come down,” Barkin remarked.

                          Barkin further indicated willingness to adopt a patient approach in the coming months. “I think we’ve got some time to be patient,” he stated. Fed will get “a few more months” of inflation data and he desires “to see that trend continue and broaden”.

                          Fed Evans: Going to take us until the middle of next year to complete tapering

                            Chicago Fed President Charles Evans said in a virtual conference, “we learned back in 2013 that tapering these asset purchases was preferable for financial market functioning; that if we did a sudden stop on our purchases that wasn’t well received. It’s going to take us until the middle of next year to complete that”.

                            “It’s going to take us until the middle of next year to complete that; we are going to be mindful of inflation; we’re going to be looking to see how much additional accommodation is boosting inflation; if indeed that is the case, we’ll be thinking about when the right time to start raising rates will be,” he added.

                            AUD/CAD turns into consolidation ahead of 0.9870 projection target

                              AUD/CAD trades mildly softer today, partly because the Canadian Dollar is lifted by oil prices. More importantly, buying lost momentum, as seen in 4 hour MACD, just ahead of 38.2% projection of 0.8066 to 0.9696 from 0.9247 at 0.9870. A short term top is possibly in place at 0.9857.

                              Some consolidations would likely follow first. Considering that USD/CAD is on the verge of breaking through 1.2688 low, there is prospect of a deeper pull back in AUD/CAD too. Though, downside should be contained by 0.9617 resistance turned support to bring rally resumption. Break of 0.9870 will target 61.8% projection at 1.0254.

                              Asian update: Dollar and Sterling soft, risk markets directionless

                                Dollar is trading generally softer as it’s entering into an important week. There are a number of high profile events ahead, including US-China trade talk, FOMC rate decision and non-farm payrolls, as well as US government re-opening. But for today so far, Sterling is even softer as markets turns a bit cautious ahead of tomorrow’s Brexit debate in the commons. New Zealand Dollar is so far the strongest, followed by Yen and Australian Dollar. With such a picture, it’s easy to see the lack of direction in the risk markets.

                                In Asian markets:

                                • Nikkei closed down -0.60% at 20649.
                                • Hong Kong HSI is down -0.09%.
                                • China Shanghai SSE is down -0.18%.
                                • Singapore Strait Times is up 0.06%.
                                • Japan 10 year JGB yield is down -0.0022 at -0.002, turned negative

                                Eurozone industrial production rose 1.5% mom in Jul, EU up 1.4% mom

                                  Eurozone industrial production rose 1.5% mom in July, above expectation of 0.5% mom. For the month, production of non-durable consumer goods rose by 3.5%, capital goods by 2.7%, durable consumer goods by 0.6% and intermediate goods by 0.4%, while production of energy fell by 0.6%.

                                  EU industrial production rose 1.4% mom. Among Member States for which data are available, the highest monthly increases were registered in Ireland (+7.8%), Belgium (+5.0%) and Portugal (+3.5%). The largest decreases were observed in Lithuania (-2.0%), Slovenia (-1.8%) and Croatia (-1.6%).

                                  Full release here.

                                  UK retail sales picture bleak on Brexit uncertainty

                                    UK BRC like-for-like sales dropped -1.6% yoy in June, below expectation of -1.5% yoy. Total sales dropped -1.3% yoy. The data were worst in record for June since 1995. Helen Dickinson, Chief Executive of BRC, noted, “overall, the picture is bleak: rising real wages have failed to translate into higher spending as ongoing Brexit uncertainty led consumers to put off non-essential purchases.”

                                    She added: “Businesses and the public desperately need clarity on Britain’s future relationship with the EU. The continued risk of a No Deal Brexit is harming consumer confidence and forcing retailers to spend hundreds of millions of pounds putting in place mitigations – this represents time and resources that would be better spent improving customer experience and prices. It is vital that the next Prime Minister can find a solution that avoids a No Deal Brexit on 31st October, just before the busy Black Friday and Christmas periods.”

                                    Full release here.

                                    Australia Westpac leading index back at pre-pandemic average

                                      Australia Westpac Leading Index rose to -0.48% in September, up from -2.28%. While still negative, the index is now well above the low seen in H1, when it tumbled to well below -5% due to coronavirus shock. The index is now in line with the average recorded over the 12 months prior to the pandemic.

                                      On RBA rate decision on November 3, Westpac continues to expect cut in both cash rate and three year yield target from 0.25% to 0.10%. RBA is expected to introduce an open ended commitment to buy government and semi-government bonds out along the maturity spectrum to 10 years.

                                      Full release here.

                                      Eurozone exports rose 31.9% yoy in May, imports rose 35.2% yoy

                                        In May, Eurozone exports rose 31.9% yoy to EUR 188.2B. Imports rose 35.2% yoy to EUR 180.7B. As a result Eurozone recorded a EUR 7.5B surplus in trade in goods. Intra-Eurozone trade rose 45.4% yoy to EUR 181.5B.

                                        In seasonally adjusted terms Eurozone exports dropped -1.5% mom to EUR 195.1B. imports rose 07% mom to EUR 185.8B. Trade surplus narrowed to EUR 9.4B. Intra-Eurozone trade rose to EUR 183.7B.

                                        Full release here.

                                        RBA minutes: Focus ahead would be government bond purchase program

                                          Minutes of the November 3 RBA meeting noted that the board is “prepared to do more if necessary”, after delivering a package of additional stimulus. Though, “focus over the period ahead will be the government bond purchase program”.

                                          Under the current program to purchase longer-dated bonds, RBA would buy nominal bonds issued by the Australian Government and by the states and territories, with an expected 80/20 split. Purchases would be done through secondary market, but not directly from the government. Also, RBA “remained prepared to purchase bonds in whatever quantity is required to achieve the 3-year yield target.”

                                          As for interest rate, with cash rate target at 0.10% and exchange settlement rate at 0%, they would have been “lowered as far as it made sense to do so in the current environment”. There is “little to be gained from short-term interest rates moving into negative territory”. Negative policy rate is seen as “extraordinarily unlikely”.

                                          Full minutes here.