ECB Governing Council member Francois Villeroy de Galhau said that interest rate would probably peak in the summer, which technically ends in September. Meanwhile, a rate cut this year is out of question.
But he also emphasized there is no “automatic moves” at each meeting. the central criteria is a “shift in the inflation path”, especially underlying inflation.
He also noted that interest rate will be kept at the peak level as long as necessary to bring inflation back to 2% target.
Cleveland Fed President Loretta Mester said, “Unacceptably high and persistent inflation remains the key challenge facing the U.S. economy. Despite some moderation on the demand side of the economy and nascent signs of improvement in supply side conditions, there has been no progress on inflation.”
“Monetary policy is moving into restrictive territory and will need to be there for some time in order to put inflation on a sustained downward path to our 2 percent goal,” she said, adding “I do not anticipate any cuts in the fed funds target range next year.”
“With growth well below trend over the next couple of years, it is possible that a shock could push the U.S. economy into recession for a time,” Mester said, adding “none of this is painless,” but it is necessary, as high inflation exerts heavy costs on the economy.
St. Louis Fed President James Bullard tried to down play recent rise in core inflation, where core CPI rose above 2% to 2.1% in March. Bullard said “year-over-year core CPI is now above 2 percent but it was also above 2 percent all during 2016, and so it’s really only come back to the level that it was in that earlier period when interest rates were much lower.” And to him, “those developments so far have been unsurprising.”
Regarding trade tensions, Bullard said there is too much uncertainty around the tariffs to assess the impact for now. But he hoped that US and China will get a good outcome on trade.
Regarding exchange rates, Bullard said growth growth has been surprising, in particular in Europe. Such strength wasn’t priced in and thus, led to dollar weakness.
BoE opts to keep its Bank Rate unchanged at 5.25%. The decision, however, came after a razor-thin 5-4 vote that showed divisions within the central bank’s ranks. Notably, the influential figures – Governor Andrew Bailey, Deputies Ben Broadbent and Dave Ramsden, along with Chief Economist Huw Pill, sided with Swait Dhingra in favour of retaining the rate at its current level.
In its accompanying statement, BoE underscored the need for a vigilant approach, stating, “Monetary policy will need to be sufficiently restrictive for sufficiently long”. Furthermore, the central bank emphasized its readiness to consider more rate hikes, signaling that “Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”
Amid these cautions, Bank’s staff adjusted their growth outlook, expecting only a slight uptick in GDP for the third quarter of 2023. They also anticipate that the underlying growth for the second half of the year will likely underperform previous expectations.
On the inflation front, the bank projected a notable decline in CPI in the near future. Despite recent spikes in oil prices, the central bank expects this drop due to “lower annual energy inflation” and anticipated further reductions in food and core goods prices.
Yet, the BoE warned that the services sector could buck this trend, foreseeing that “Services price inflation, however, is projected to remain elevated in the near term, with some potential month-to-month volatility.”
Also, in a unanimous decision, the MPC agreed to reduce the stockpile of UK government bond purchases, cutting it down by GBP 100B over the coming year, bringing the total to GBP 658B.
Fitch Ratings affirmed Japan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A’ with a Stable Outlook. Fitch noted Japan’s “balance the strengths of an advanced and wealthy economy, with high governance standards and strong public institutions, against weak medium-term growth prospects and high public debt.” And, “strong external finances marked by a persistent current account surplus and large net external credit and international investment positions relative to peers.”
Fitch expected Japan GDP growth to slow to 1.3% in 2018 and 0.7% in 2019. However, “trade protectionism poses a downside risk to the outlook, exemplified by the imposition of a 25% tariff on US imports of steel and aluminium, including from Japan.” Also, “spillovers from trade tensions between the US and China are also a risk, as are tensions on the Korean peninsula.” Regarding inflation, Fitch projected headline inflation to reach only 1.2% at the end of 2018, and rise temporarily to 2.8% at the end of 2019 due to sales tax hike.
The monetary settings under BoJ’s yield curve control framework will “remain broadly unchanged for the foreseeable future”. Fitch noted recent slowdown in asset purchase has been sufficient to sustain the share of outstanding JGBs held by the central bank at around 40%-45%. And, “this level of BoJ ownership is within levels that would prevent the emergence of problems for JGB market liquidity, which the BoJ continues to monitor closely.”
ECB Governing Council member Klass Knot said he’d expects a decision in next week’s meeting that “should not be incompatible” with ending the PEPP in March. And, “that would imply a reduction in the purchase pace.”
Knot explained that “PEPP has a clearly delineated objective — repairing the damage that the coronavirus has inflicted on the inflation outlook.” And, “the stars are much better aligned than they have been for a long time for the return of inflation back to 2%.”
Though, he added, “I can understand that next week we may want to maintain some optionality, also to see how the delta variant will play out.”
US initial jobless claims dropped -2k to 243k in the week ending August 2, below expectation of 256k. Four-week moving average of initial claims rose 1.5k to 247.
Continuing claims dropped -19k to 1415k in the week ending August 13. Four-week moving average of continuing claims rose 12.5k to 1425k.
Dollar drops broadly today after some Fed officials toned down the talks of tapering the asset purchase program. In general, they believe it’s premature to even start the discussion of withdrawing stimulus.
USD/JPY’s break of 103.59 minor support suggests that it’s already rejected by falling channel resistance, after failing to sustain above 55 day EMA too. Daily MACD suggests that the down trend from 111.71 has been losing momentum for a while. But there is no end to it yet. Focus will now turn back to 102.58 support.
USD/CHF also dropped sharply after touching 0.8918 resistance. Focus is back on 0.8821 minor support. Break will also confirm rejection by the resistance and maintain near term bearishness, for extending the larger down trend through 0.8756 low.
Australia AiG Performance of Manufacturing Index dropped to 45.4 in January, down from 48.3. That’s the lowest reading since 2015 and suggested faster contraction in the sector. AiG said, “January is traditionally the slowest month for Australian manufacturing, but the start to 2020 was even slower than usual. All manufacturing sectors reported weaker conditions in January compared to December and only the food & beverage sector reported expanding conditions.”
Also from Australia, building permits dropped -0.2% mom in December, better than expectation of -3.0% mom. TD securities inflation gauge rose 0.3% mom in January.
US-China trade war is the major, if not the only, theme today. Trump “demonstrated” his threat to China by warning the latter not to retaliate with his tweets. Whether Twitter is blocked in China or not, we believe that it’s a known (including Trump) that Xi doesn’t read it. Anyway, China is said to hit back on tariffs on some USD 60B in US import, with tariffs ranging from 5-25%, effect June 1.
Global stock markets suffer steep selloff today as there is only one way to go for US and China, further escalation in trade and diplomatic tensions. In particular, DOW future is down -400pts as US stocks are set to open sharply lower. 10-year yield is currently down -0.043 at 2.425 and 3-month to 10-year yield inversion is back. China Shanghai SSE just lost -1.21% and defended 2900 handle. But Yuan selloff is accelerating with USD/CNH breaking 6.9 handle.
In the currency markets, Australian Dollar leads other commodity currencies down. Swiss Franc and Yen are the strongest ones. In particular, USD/JPY breaks 109.47 temporary low to resume recent decline. USD/CHF also breaks 55 day EMA decisively. Both are near term bearish developments.
In Europe, currently:
Earlier in Asia:
UK Prime Minister Boris Johnson will travel to Brussels for an in-person meeting with the European commission President Ursula von der Leyen, for last ditch effort in making the Brexit trade agreement. The meeting should be held in the coming days, possible on Wednesday or Thursday. A joint announcement confirmed after both leaders talked on phone yesterday.
Nevertheless, the statement maintained that “the conditions for finalizing an agreement are not there due to the remaining significant differences on three critical issues: level playing field, governance and fisheries”.
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ECB Governing Council member Pablo Hernandez de Cos said he expects the end of net asset purchases at the beginning of July, followed by a first rate hike. Then there will be “another one in September, (to get us) out of the negative territory. What next would be decided “according to the circumstances.”
“What we can do is to eliminate progressively in a very gradual manner, all the accommodation of our monetary policy (…) we will be deciding some steps in the following weeks, and this will be enough,” de Cos said.
Another governing council member Ignazio Visco emphasized, “given the uncertainty of the economic outlook, the rates will have to be raised gradually.”
Swiss GDP grew 0.2% qoq in Q3, matched expectations. Looking at some details, manufacturing contracted -0.2%. Construction dropped -2.2%. Finance and insurance dropped -2.1%. But trade expanded 2.3% while accommodation and food rose 2.8%.
By expenditure approach, private consumption grew 0.7%. Equipment and software investment rose 2.1%. Exports excluding valuables rose 7.89%. But construction investment dropped -2.0%.
Japan PMI manufacturing was finalized at 52.2 in November, revised up from 51.8. Markit noted that new orders rise at joint-weakest rate in just over two years. Also production growth moderates and business confidence drops for sixth month running.
Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:
“The fall in Japan’s manufacturing PMI tells us that October’s bounce-back was indeed a transitory jump back to normality following weather-related disruptions in September. The underlying picture remains subdued, with momentum tilting towards a slowdown. New orders rose at just a slight pace as goods producers raised concerns about the demand environment. Subdued sales performances reflected fragile conditions both domestically and abroad. According to firms, weak demand from China and parts of Europe hampered export growth.
“As such, expectations for future growth were reduced, with business confidence towards the year-ahead sliding for a sixth straight month to the lowest in two years.”
Also from Japan, capital spending rose 4.5% in Q3, much lower than expectation of 8.6%.
Canadian Dollar surges sharply in early US session after stellar retail sales data. Headline retail sales rose 2.0% mom in May versus expectation of 0.0% mom. That’s more than offset -1.2% mom contraction in April. Ex-auto sales also jumped 1.4% mom, well above expectation of 0.5% mom.
Headline CPI accelerated to 2.5% yoy in June as expected. CPI core common was unchanged at 1.9% yoy. CPI core median rose 0.1% to 2.0% yoy. CPI core trim rose 0.1% to 2.0% yoy.
Now, it really looks like BoC was correct to hike and stays hawkish.
Canada’s GDP was essentially unchanged for a third consecutive month in October, below expectation of 0.2% mom growth. Services producing industrial edged by 0.1% mom while goods-producing industries were essentially unchanged. The 20 industrial sectors evenly split between increases and decreases.
Advance information indicates that GDP rose 0.1% mom in November.
Chicago Fed President Austan Goolsbee has refrained from pre-committing to Fed’s actions in September, insisting that every meeting is crucial when navigating the transition point. “When you’re around the transition point, every meeting is a live meeting and you’re trying to figure out trends, not just reflect one month’s data,” Goolsbee said yesterday.
Goolsbee is “guardedly optimistic” about Fed’s ability to stick to what he terms the “golden path,” bringing down prices without inducing a recession. He emphasized the importance of watching how core goods and housing inflation evolve in the coming months to remain on this path.
“Those are the two components that over the next three to six months, let’s call it, if we are to succeed to stay on the golden path, we’ve got to see progress on those two parts of inflation,” he said. He added that progress on services inflation isn’t currently necessary.
He also shared his perspective on the link between wages and inflation, suggesting that wages are more of a lagging indicator rather than a predictor of inflation. According to Goolsbee, if Fed officials focus too much on wages when shaping their policy, they could risk overshooting interest rates.
Eurozone CPI was finalized at 2.0% in August, down from 2.1% in July. That was still notably higher than 1.5% back in August 2017. Core CPI was finalized at 1.0% yoy. EU CPI was finalized at 2.1%, down from July’s 2.2%.
Highest contribution to Eurozone CPI was from energy (0.87%), followed by services (0.59%), food, alcohol & tobacco (0.48%) and non-energy industrial goods (0.09%).
Australian Dollar is trading as the strongest one today on US-China trade optimism. But it’s going to face an important test from consumer inflation data tomorrow. CPI is expected to rise 0.5% qoq in Q3, down from Q2’s 0.6% qoq. RBA Governor Philip Lowe indicated earlier today that the central bank is “prepared to ease” monetary policy further if needed. Though, after three interest rate cuts this year, the central bank will likely stay on the sideline for a while, to let the impacts feed through to the economy. Inflation and employment are the key pieces of data to influence RBA’s decision next year.
Aussie will likely be given another lift in case of upside surprise in tomorrow’s data. AUD/USD is pressing 74.82 temporary top for now. Prior support from 4 hour 55 EMA affirms near term bullishness. Break of 74.82 will resume the rise from 71.73, as well as that from 69.95. Next upside target will be 100% projection of 69.95 to 74.49 from 71.73 at 76.27, which is close to 76.16 key resistance.
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Eurozone Sentix dropped to -7, worst fall in expectations than pandemic
Eurozone Sentix Investor Confidence dropped sharply from 16.6 to -7.0 in March, well below expectation of 5.1. That;s also the lowest level since November 2020. Current Situation index dropped from 19.3 to 7.8, lowest since May 2021. Expectations index dropped from 14.0 to -20.8, lowest since August 2012.
Sentix said: “The first economic indication after the Russian invasion of Ukraine has it all: The economy in Euroland collapses dramatically in the month of March! The assessment of the economic situation decreased by 11.5 points and the expectations decreased by 34.75 points, which is more than ever before in the history of sentix. Even the Corona pandemic or the banking crisis had not led to such a sharp drop in the future outlook!”
Full release here.