US PPI for final demand rose 0.5% mom in September, above expectation of 0.4% mom. PPI less foods, energy, and trade services increased 0.2% mom, the fourth consecutive advance. PPI goods rose 0.9% mom while PPI services rose 0.3% mom.
For the 12 months period, PPI rose 2.2% yoy, above expectation of 1.6% yoy. That’s the largest annual increase since April’s 2.3% yoy. PPI less foods, energy and trade services was up 2.8% yoy.
In an interview with The Currency, ECB Chief Economist Philip Lane offered some guarded optimism about the inflationary environment in Eurozone, despite acknowledging that the current inflation rate is a lofty 5.3%. Lane was keen to highlight a “welcome development” in the latest data, pointing to a slight easing in both goods and services inflation as potentially indicative of changing momentum.
Lane emphasized ECB’s ongoing challenge of steering inflation rate back to its 2% target. “What is a timely manner?” Lane posed, elaborating that the goal is to return to 2% “sufficiently quickly that everyone understands that the current inflation episode is time-limited.”
He underscored the importance of convincing the public that this is a “temporary inflation episode,” and that they should not alter their longer-term behavior in anticipation of persistently high inflation rates. The key objective here is to prevent inflation expectations from becoming unanchored.
Japan Tokyo CPI core (ex-food) slowed slightly from 2.5% yoy to 2.4% yoy in March, matched expectations. Headline CPI ticked up from 2.5% yoy to 2.6% yoy. CPI core-core (ex-food and energy) also slowed from 3.1% yoy to 2.9% yoy. Service price gains slowed to from 2.1% yoy to 2.0% yoy.
This constellation of data suggests softening of cost-push inflationary pressures within Tokyo, Japan’s economic nucleus, and a concurrent easing in service-sector inflation. This trend could provide BoJ a leverage for a more cautious approach on tightening, despite widespread expectations of another rate hike in the latter half of the year.
Other economic indicators for February released paint a mixed picture. Industrial production fell -0.1% mom, falling short of the anticipated 1.2% growth. In contrast, retail sales outperformed expectations, surging by 4.6% yoy against forecasted 3.0% increase. Meanwhile, unemployment rate rose from 2.4% to 2.6%, exceeding the projected steady rate of 2.4%.
US ISM Non-Manufacturing Composite dropped to 56.7 in January, down from 57.6 and missed expectation of 57.0. Business Activity Index dropped -1.5 to 59.7. New Orders dropped -5 to 57.7. Employment Index rose 1.2 to 57.8. 11 non-manufacturing industries reported growth.
ISM noted that “The non-manufacturing sector’s growth rate cooled off in January. Respondents are concerned about the impacts of the government shutdown but remain mostly optimistic about overall business conditions.”
Some quotes from respondents:
Chinese Vice Premier Lieu He said on Saturday that US and China have made “substantial progress in many fields” in trade negotiations earlier this month. And, that laid an “important foundation for the signing of a phased agreement”. He added that “China and the US can meet each other half way, based on equality and mutual respect, addressing each other’s core concerns, striving to create a good environment and achieving both sides’ common goals.”
It’s believed that teams from both sides are working towards the deadline of APEC meeting in Chile on November 16-17. Presidents from both countries could make use of the opportunity to side the phase one of the trade agreement. However, at this point, intellectual property protections, currencies and financial services are expected to be covered. But the depth of the agreement is uncertain. Some speculated that it could be “super light” for rebuilding trust first.
Fed Governor Christopher Waller told Bloomberg TV yesterday that “the unemployment rate would have to drop fairly substantially, or inflation would have to really continue at a very high rate, before we would take seriously a rate hike in 2022”. Nevertheless, “I’m not ruling it out,” he added.
The US is now in a “different phase of economic policy,” he noted. Hence, ” it’s appropriate to start thinking about pulling back on some of the stimulus.” He’d be “all in favor” to phase out MBS purchases first, as “right now the housing markets are on fire; they don’t need any other unnecessary support.”
“I think everybody anticipates that tapering could move up earlier than when they originally thought,” Waller said. “Whether that’s this year, we’ll see, but it certainly could.”
“I myself would like to see tapering over before we consider raising rates; therefore if you think you may have to raise rates in late ’22 or early ’23, you pretty much want to get tapering done by the end of next year if possible,” he said.
ECB Governing Council member Martins Kazaks said in an interview that the PEPP emergency asset purchase program would still end as scheduled in March, despite Omicron.
“At the current moment, we don’t know how the omicron variant will develop,” Kazaks said. “Unless it spills over into significant and large negative revisions to the outlook for growth, I don’t see that March — which the market has been expecting for some time and which we’ve been communicating in the past — should be changed.”
“At the moment we simply know too little about omicron,” he said. “I see it important to remain data-driven and make our decisions step by step. So react to the data, rather than preempt decisions when uncertainty is way too high.”
“If in February we see that it’s painful then of course we can change our views and that’s the issue of flexibility,” he said. “In my view, it’s possible both to restart PEPP or increase the envelope if it turns out to be necessary.”
On inflation, Kazaks said, “to exactly what level will it land in 2023-24, of course, there’s lots of uncertainty.” Nevertheless, “my baseline remains that it slides to below 2%.”
Atlanta Fed President Raphael Bostic said yesterday that he backed the plan of raising interest rate by 50bps in June and July. But a “pause” in September is also in his baseline view.
“I’m at 50 basis points as long as the economy proceeds as I think it’s going to,” Bostic said. “If inflation starts moving in a different direction than it is right now, I’d have to be open to us moving more aggressively. I do want to make it clear that nothing is off the table. As we go through the months, we will see how it plays out.”
“I have got a baseline view where for me I think a pause in September might make sense,” Bostic told reporters Monday following a speech to the Rotary Club of Atlanta. “After we get through the summer and we think about where we are in terms of policy, I think a lot of it will depend on the on-the-ground dynamics that we are starting to see. My motto is observe and adapt.”
Canadian Dollar was lifted mildly as the USMCA could finally clear its way to Congress approval before the end of the year. It’s reported that US Trade Representative Robert Lighthizer and White House senior adviser Jared Kushner are due to fly to Mexico City on Tuesday for meetings to try to pin down final details of the agreement. Canadian Deputy Prime Minister Chrystia Freeland would join the meeting there too.
US President Donald Trump said “I’m hearing very good things. I’m hearing from unions and others that it’s looking good. Kushner also acknowledged that “it looks like we’re making pretty good progress.” House Speaker Nancy Pelosi said “We’re close. We’re not quite finished yet, we’re within range.” She added that the final language could be set by Tuesday, which would bring Democrats to a “moment of truth” on whether to proceed to passage.
BoC raises overnight rate by 25bps to 4.50% as widely expected. The Bank Rate and deposit rate are also lifted to 4.75% and 4.50% respectively.
In the statement, BoC said, “If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”
That is, a pause is going to follow. But, BoC is still “prepared to increase the policy rate further if needed to return inflation to the 2% target.”
BoC also noted, that recent economic growth has been “stronger than expected” with the economy remains in “excess demand” Labor markets are “still tight”. But there is “growing evidence that restrictive monetary is slowing activity”. It expects the effects of tightening to “continue to work through the economy” while weaker foreign demand will weigh on exports.
BoC projects growth of about 1% in 2023 and 2% in 2024. Inflation is projected to fall to around 3% in the middle of 2023, and then 2% in 2024.
Chicago Fed President Austan Goolsbee discussed the upcoming May FOMC meeting, the strength of the job market, and persistent inflation in an interview. Goolsbee cautioned against reading too much into his stance on interest rates, stating, “We still got a couple of weeks before the actual meeting, so if anybody imputed some specific basis points of what I was for, that’d be inaccurate.”
Goolsbee acknowledged the strong job market as the most robust part of the economy, with “unprecedented numbers,” while noting that inflation remains a concern. He said, “Inflation — there’s been some improvement, but in a way that’s the worst part of the economy,” adding that it has been “more persistent than we wanted.”
As for the potential impact of the recent failure of two US banks on the economy, Goolsbee said it is essential to monitor the extent of the slowdown. He explained, “How much squeezing is going to be coming from the bank side I think is going to matter for whether this economy is going to slow down.” Goolsbee emphasized that the intensity of the anticipated growth slowdown in the second half of the year would depend significantly on the financial sector.
The messages regarding rollback of imposed tariffs as part of the phase one US-China trade agreement were rather confusing and conflicting. White House economic adviser Larry Kudlow told Bloomberg, “if there’s a phase one trade deal, there are going to be tariff agreements and concessions.”
However, another White House adviser Peter Navarro told Fox Business Network: “There is no agreement at this time to remove any of the existing tariffs as a condition of the phase one deal.” And China was just “negotiating in public”, trying to push this in a direction with their “propaganda press.” White House spokeswoman Stephanie Grisham just said “I cannot get ahead of the talks with China, but we are very, very optimistic that we will reach a deal soon”.
Yesterday, China Ministry of Commerce spokesman Gao Feng said “both sides have agreed to cancel additional tariffs in different phases, as both sides make progress in their negotiations.”
Australia PMI Manufacturing dropped from 55.7 to 54.5 in August, a 12-month low. PMI Services dropped from 50.9 to 49.6, a 7-month low. PMI Composite Output dropped from 51.1. to 49.8, a 7-month low.
Laura Denman, Economist at S&P Global Market Intelligence said: “A renewed contraction in Australia’s private sector economy indicates that recent interest rate hikes made by the RBA, as well as sustained inflationary pressures, have begun to take a toll on overall demand levels.
“Should new order growth remain subdued, this may help reduce demand-pull inflation factors, but survey data continue to highlight the supply issues that remain prevalent globally, which will continue to keep price levels elevated for the foreseeable.
“As such, the RBA will likely continue along its rate-hiking path, which bodes ill for the wider economy given the latest survey data highlight clear signs of underlying weakness.”
US non-farm payroll employment grew only 210k in November, well below expectation of 525k. So far this year, monthly job growth has averaged 555k. Overall employment remained down by -3.9m, or -2.6%, from its pre pandemic level in February 2020.
Unemployment rate dropped sharply by -0.4% to 4.2%, better than expectation of 4.5%. Labor force participation rate edged up to 61.8%. Average hourly earnings rose 0.3% mom, below expectation of 0.4% mom.
In October, Australia’s exports of goods and services rose 5% mom to AUD 35.72B. Imports of goods and services rose 1% mom to AUD 28.26B. Trade surplus came in at AUD 7.46B, above expectation of AUD 5.83B.
AiG Performance of Construction Index rose 2.6 pts to 55.3 in November, a second consecutive month of positive conditions, and the strongest monthly result since April 2018.
Group Head of Policy, Peter Burn, said: “The Australian construction sector grew more strongly in November with both activity and employment decisively stronger in the month. House building was the cornerstone of the lift in performance with support from commercial and engineering construction. Apartment building remains in the contractionary state it has been in for more than two years and, with question marks over population growth and falling new orders, this sector is the major dampener on the otherwise encouraging outlook for the broader construction sector.
German Foreign Minister Heiko Maas warned that Europe can “no longer completely rely on the White House”. And “to maintain our partnership with the USA we must readjust it”. The first “clear consequence” is that Europe must “align ourselves even more closely”. And he urged “Europe must not let itself be divided however sharp the verbal attacks and absurd the tweets may be.”
Maas also warned Trump, as the latter is meeting Russian President Vladimir Putin in Helsinki, that “unilateral deals at the expense of one’s own partners also harm the US in the end.”
RBA Governor Philip Lowe reiterated the Board’s commitment on not raising interest rate until progress is made towards full employment, with confidence that inflation could sustain in 2-3% target range. He added that “, these conditions are not likely to be met for at least three years”. Hence, it’s “highly likely” that cash rate will be at the current 0.25% level “for some years”. The 3-year yield target of 0.25% also “reinforces this message”.
Lowe also note again that the negative interest rates are not justified by the cost benefits. He added, “in a world that is so uncertain and fluid, I don’t think it is prudent to rule it out”. But as seen in some European countries and Japan, “negative interest rates also encourage people to save more, not spend more”. So, “negative interest rates can become contractionary”.
He also noted that Australian Dollar’s exchange rate is not overvalued even though he’ like it to be lower. Huge amount of intervention is needed to push the Aussie down and it wouldn’t be a successful strategy.
Dollar’s selloff extends in Asian session today, riding on the view of Fed’s rate cut in July is a done deal. Fed Chair Jerome Powell’s testimony to Congress was not decidedly dovish. But he did nothing that toned down market’s full pricing of July cut. Instead, he pointed to the continous uncertainties from trade tension and global slowdown. It seems now that continuation of uncertainties is already enough for an insurance rate, rather than manifested deterioration in outlook.
The tone was somewhat echoed by June FOMC minutes too. The minutes indicated that Fed’s monetary stance has moved to “risk management” with “several” of them believing a rate cut should be implemented to “cushion the effects of possible future adverse shocks”. Additionally, the minutes acknowledged that current financial conditions are “premised importantly on expectations that the Federal Reserve would ease policy in the near term to help offset the drag on economic growth stemming from uncertainties about the global outlook and other downside risks”.
Suggested readings:
Australia exports of goods rose 8% mom or AUD 2.9B to AUD 41.3B in June. Imports of goods rose 7% mom or AUD 2.1B to AUD 28.0B. Goods trade surplus widened to record AUD 13.3B, up slightly from AUD 12.5B. Exports to top five destinations rose, including China (8%), Japan (21%), South Korea (24%), Taiwan (9%), USA (7%).
Head of International Statistics at the ABS Andrew Tomadini said: “June 2021 recorded a monthly export value above $40 billion. Exports increased 8 per cent to $41.3 billion, with significant increases in metalliferous ores, coal, non-monetary gold, and gas”.
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BoJ Wakatabe: Dangers of secular stagnation and Japanification not yet passed
BoJ Deputy Governor Masazumi Wakatabe said, “the mild-inflation regime has not come to an end, and we should say that the potential dangers of secular stagnation and Japanification have not yet passed.”
“When an exogenous shock occurs, there is an adjustment from the old to a new price system. After adjustment, the rising inflation rate is likely to return to the steady-state inflation rate,” he said.
“So the important point is how this rate is affected. Of course, it is possible that cost-push factors will remain, but whether they will push up the steady-state inflation rate is uncertain,” Wakatabe said, adding that it was “well known that cost-push inflation does not last long.”