US initial jobless claims dropped -6k to 186k in the week ending January 21, below expectation of 211k. Four-week moving average of initial claims dropped -9k to 197.5k.
Continuing claims rose 20k to 1675k in the week ending January 14. Four-week moving average of continuing claims dropped -11k to 1664k.
ECB Governing Council member Francois Villeroy de Galhau has warned of the risk of entrenched inflation yesterday, stating, “We now face the risk of entrenched inflation, which lies in the underlying or core component. In other words, inflation has become more widespread, and potentially more persistent.”
Villeroy emphasized that the ECB’s monetary policy response to rising inflation has been strong and swift. However, he also noted a shift in focus, saying, “We at the ECB are now moving from a ‘sprint’ to a ‘long-distance race’.” He added that the inflation outlook, underlying inflation readings, and the effectiveness of policy transmission will be the key factors in upcoming decisions on potential new rate hikes.
Bloomberg reported that a Chinese deputy ministerial delegation is traveling to Washington on Monday to start preparation for the meeting between Vice Premier Liu He and US Trade Representative Robert Lighthizer on January 30-31.
The delegation include Vice Commerce Minister Wang Shouwen and Vice Finance Minister Liao Min. PBoC Governor Yi Gang will join the meetings too.
UK Gfk consumer confidence was unchanged at -9 in June, below expectation of -7. Joe Staton, Client Strategy Director GfK, says: “While the shifting sands of an end to lockdown might be the closest most of us get to a summer beach holiday, consumer confidence remains stable at -9 after 16 months of a COVID-induced roller-coaster. A repetition of last month’s score doesn’t mean confidence is about to nose-dive. The upwards trajectory for the Index since the dark days at the start of the pandemic is currently still on track.”
Richmond Fed President Thomas Barkin expressed his comfort with Fed’s current approach to interest rate hikes, stating, “I’m comfortable with the trajectory we’re on now, meeting by meeting, whether you need a 25 basis point hike or not.” He acknowledged the challenges of finding the right balance, but emphasized that even if the decision isn’t perfect, it won’t be too far off.
Barkin also addressed the uncertainties surrounding the ongoing banking situation and its potential impact on consumer confidence, business investment, and the availability of credit. “There is a lot of uncertainty about what if anything this bank situation does to consumer confidence, business confidence, business investment, consumer spending, availability of credit,” he said, adding that it’s difficult to predict the future effects on demand and inflation.
Despite the uncertainties, Barkin highlighted the wide range of possible outcomes and Fed’s ability to respond accordingly. “If inflation persists, we can react by raising rates further,” he said. “If I am wrong about the pricing dynamics at play, or about credit conditions, then we can respond appropriately.”
BoJ board member Hitoshi Suzuki said “with the economy having lost momentum to achieve our price target due to the pandemic, our monetary easing will last even longer”
He noted that the benefits of the central bank’s ultra-easing monetary policy still outweighs the costs. however, “If a second and third wave of infection hits Japan, financial institutions’ credit costs could balloon to levels near those hit after collapse of Lehman Brothers” during the 2008/09 global financial crisis.
ISM manufacturing index dropped to 59.8 in September, down from 61.3 and missed expectation of 60.0. Price paid index dropped to 66.9, down from 72.1 and missed expectation of 0.8. Employment component, though rose 0.3 to 58.8.
ISM noted in the release that:
San Francisco Fed Bank President Mary Daly said “we definitely are poised for a March increase.” But she added, “after that, I want to see what the data brings us … let’s get through Omicron, let’s look at this and let’s see.”
“If the economy progresses like I see it progressing, then it is clear that it can stand on its own two feet, that we do not need to be providing the same level of extraordinary … accommodation that we provided during the pandemic and have provided for the last two years,” Daly said.
Bloomberg reported that China is going to lower levy on import passenger cars from the current 25% to 15%. That’s seen as Chinese President Xi Jinping putting his word into actions. Xi has already reiterated the initiative at the Boao Forum back in April.
As in 2017, the total sales of automobiles in China added up to 28.9m. Only 1.22m, or 4.2%, are imported. The lowering of tariff is seen as a strong boost to European vehicle makers and less so the US ones.
For domestic car makers, the levy cut to 15% is the better case scenario in the rumored range of 10-15%.
UK PMI Manufacturing dropped to 48.0 in June, down from 49.4 and missed expectation of 49.5. That’s also the lowest level since February 2013. Looking at some details, manufacturing production contracted at fastest pace since October 2012. New export orders dropped for the third straight month. Business optimism dropped to third lowest level on record. Employment fell for the third straight month.
Rob Dobson, Director at IHS Markit, which compiles the survey:
“The downturn in UK manufacturing deepened during June, as the impact of firms unwinding stockpiles built before the original Brexit date continued to reverberate through the sector and exacerbate weak demand. This led to solid decreases in both production and new orders, which sank the headline PMI to its lowest in almost six-and-a-half years.
“Demand from the domestic market weakened, while the additional constraint of slower global economic growth meant new export business fell at one of the fastest rates since late-2014.
“Although the consumer goods sector was able to eke out further output growth, the rate of expansion slowed sharply. Solid contractions at intermediate and investment goods producers also suggested that businesses were cutting back on both day-to-day and capital spending in increasing numbers.
“The stranglehold of sustained Brexit-related uncertainty and disruption also weighed heavily on business confidence and employment, as optimism ebbed to one of its lowest levels in the survey history and staff headcounts were reduced for the third straight month.
“There will need to be a substantial improvement in economic conditions at home and overseas, alongside reductions in both Brexit and domestic political uncertainties, if manufacturing is to see a sustained revival in the coming quarters.”
New Zealand’s ANZ Business Confidence climbed from 30.8 to 33.2 in December. Looking into the specifics, own activity outlook improved from 26.3 to 29.3, indicating positive sentiment about future business conditions. However, investment intentions dropped from 4.5 to 2.7, suggesting some hesitancy in capital expenditures. Employment intentions rose from 5.4 to 7.0, reflecting moderately stronger inclination towards hiring.
In terms of pricing, there was a noticeable increase, with pricing intentions moving from 46.8 to 50.2. This rise implies that more businesses are planning to increase their prices, which could contribute to inflationary pressures. Similarly, cost expectations saw an upward movement from 73.9 to 76.2, indicating rising costs for businesses. On the other hand, inflation expectations showed a decline from 4.79% to 4.61%.
ANZ commented on the mixed nature of the inflation indicators, as they do not present an encouraging outlook for inflation. With more data expected before RBNZ’s February decision, this survey’s results might not be among the most favorable. While recent GDP data showed RBNZ’s measures gaining more traction than previously understood, the extent of economic downturn required to bring inflation down to the 2% target remains an unresolved question.
Australia Westpac leading index slowed from 1.68% to 1.34% in June. The index peaked at 5% back in November last year and then gradually fallen back. It’s still comfortably above zero and signals outlook for above trend growth. Still, Westpac expected -3.1% contraction in GDP in Q3 in New South Wales and -0.1% in Victoria due to renewed lockdowns.
Westpac added that RBA would be advised of significant downward revisions for Q3 growth at the meeting on August 3. It said it’s an “appropriate time” for RBA to use the “flexibility” on asset purchases. At the least it could announce to defer the tapering from AUD 5B to AUD 4B a week, which is scheduled to start in September. Further, “a decision to immediately lift purchases to $6 billion per week would certainly send the right signal that the Bank is responsive to economic developments and is prepared to use its new flexible policy tool accordingly.”
Philadelphia Fed President Patrick Harker said monetary policy is going to “stay low until we really see the economy starting to recover back to our dual mandate”. Exactly how long that is a “function of how quickly medical science and industry can put in place the tools, the testing regimes, the vaccines etc. to keep the American public safe.”
But he warned, “the worst thing we can do in my mind is rush this” and have a “significant rebound… which would just set us back”.
According to a CBI survey for the three months to August, UK business and professional services employment dropped at the quickest pace since 2009, with balance at -32%, down from -9%. Consumer services employment was even worse on record, with balance dropping from -31% to 063%. CBI added, “next quarter, employment is set to continue to fall, but the rate of decline is set to ease slightly.”
Ben Jones, CBI Principal Economist, said: “This quarter has shown some worrying falls in volumes, profitability and employment for the services sector. Although the pace of these declines is expected to ease, the impact of COVID-19 remains clear, with the services sector still facing challenges in terms of demand, revenues and cash flow… As we head into the autumn, the UK needs a bold plan to protect jobs as the job retention scheme draws to an end, to support the services sector.”
New UK Foreign Minister Jeremy Hunt met with China’s Foreign Minister Wang Yi in Beijing today. After the meeting, Hunt said China made an offer to “to open discussions about a possible free trade deal done between Britain and China post Brexit”. And he added that “that’s something that we welcome and we said that we will explore.” Wang didn’t mention the free trade talks directly. But he said both countries had “agreed to proactively join up each others’ development strategies, and expand the scale of trade and mutual investment”.
Separately, Wang said that “the responsibility for the trade imbalance between China and the United States lies not with China.” And he cited the global role of the US Dollar, low saving rates, high level of consumption and US restrictions on high tech exports as some of the reasons for the imbalances. He also reiterated the stance that “China does not want to fight a trade war, but in the face of this aggressive attitude from the United States and violation of rights, we cannot but and must take countermeasures.”
DOW closed down -0.96%, or -268.37, overnight as weighed down by new tariff threats and poor ISM manufacturing index. US President Donald Trump blamed that “manufacturers are being held back by the strong Dollar, which is being propped up by the ridiculous policies of the Federal Reserve”.
He went on further to urge Fed to “lower rates” and “loosen”, as “there is almost no inflation”. And that would make the US “competitive with other nations, and manufacturing will SOAR!
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Chicago Fed President Charles Evans said yesterday, “I think that we’ve got a good plan in place. We could very well do 75 in September. My mind is not made up. I do know that we need to be increasing interest rates up to a substantially higher level than where they are now.”
“I think the precise path is less important than just constantly telling people, we’re on this path, this is what we’re going to do, inflation is job one, we’re going to handle this,” Evans said.
“Unemployment is 3.7% right now. I’m optimistic that we’re going to be able to navigate this and keep unemployment to about 4.5% by the time we’re done,” he said. “That would still be a pretty good outcome, although it will be costly for some.”
“I would prefer to find an appropriate spot to pause and monitor how things are going, rather than go much higher — potentially overshoot,” he said. “I wouldn’t say that I’m advocating sort of pausing at 3.5%, because I think 4 is more likely.”
US stocks staged a strong reversal overnight again. DOW initially dropped to as low as 23881.47 but closed up 0.14% t0 24423.26. The daily range was as large as 619 pts. S&P 500 dropped to 2583.23 but closed up 0.18% at 2637.72. NASDAQ was indeed the star performer, dipping to 6878.98 but closed up 0.74% at 7020.52. Tech stocks are seen as saving markets with Apple gained 0.66%, Qualcomm gained 2.23%, Facebook gained 3.22%.
Treasury yield curve continued to flatten with 5-year yield up 0.13 to 2.709. 10-year yield closed up 0.006 at 2.856. 30-year yield dropped -0.014 to 3.129. Yield curve remains inverted between 3-year (2.738) and 5-year (2.709).
In the currency markets, Sterling remains the weakest one for the week as UK Prime Minister Theresa May conceded and called off Tuesday’s Brexit parliamentary vote. Canadian Dollar is the second weakest. New Zealand Dollar, Australian Dollar and Swiss Franc are the strongest ones.
For today, Dollar turns softer, but Canadian stays weak. Aussie is staying firm for now, while Yen is trying to rally.
Eurozone Q4 GDP growth was finalized at 0.2% qoq, unrevised. Annually, GDP grew 1.1% yoy. Over the whole 2018, GDP grew 1.8%. During Q4, household final consumption expenditure rose by 0.2%. Gross fixed capital formation increased by 0.6%. Exports increased by 0.9%. Imports increased by 0.5%. Eurozone Employment growth in Q4 was finalized at 0.3% qoq, 1.3% yoy.
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Eurozone CPI slowed to 1.4%, but core edged up to 1.1%
Eurozone CPI slowed to 1.4% yoy in January, down from 1.6% yoy, matched expectation. Core CPI, rose to 1.1% yoy, up from 1.0% yoy and beat expectation of 1.0% yoy.
Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in January (2.6%), followed by food, alcohol & tobacco (1.8%), services (1.6%) and non-energy industrial goods (0.3%).
Full release here.