Fed Williams: Restrictive policy to continue through at least next year

    New York Fed President John Williams said yesterday, “Inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential… There is still more work to do.”

    “I do think we’re going to need to keep restrictive policy in place for some time; I would expect that to continue through at least next year,” he added.

    Nevertheless, “at some point, nominal interest rates will need to come down. Otherwise real interest rates will be going up and that would just be tightening policy further and further in terms of its effects on the economy… I do see a point, probably in 2024, that we’ll start bringing down nominal interest rates because inflation is coming down and we would want to have real interest rates appropriately positioned.”

    BoC Macklem: Higher interest rates are working to rebalance the economy

      BoC Governor Tiff Macklem said in a speech yesterday, “Higher interest rates are working to rebalance the economy. Domestic demand is slowing, and we expect growth in gross domestic product will be close to zero through to the middle of next year as the economy adjusts to higher interest rates. This will relieve domestic price pressures, and inflation will come down.”

      He reiterated the position that the central bank will be considering “whether there is a need to increase the policy rate further”. He explained, “This means that decisions to raise the rate or to pause and assess the impact of past rate increases will depend on incoming data and our judgments about the outlook for inflation.”

      Macklem also said BoC is “watching very closely to see how the economy is responding to higher interest rates”. It is looking at an job market data, how supply chains are resolving, how business are passing on costs, measures of core inflation, and inflation expectations.

      Full speech here.

      BoJ Kuroda to adopt a learning-by-doing approach on climate change

        BoJ Governor Haruhiko Kuroda said in a speech, “waiting until specific guidelines and ideas are fixed will only delay our response to the urgent global issue of climate change”. Instead, “it will be important to adopt a learning-by-doing approach: implement the crucial measures first, then make adjustments when necessary.”

        “The Bank will follow appropriately the evolving nature of climate-related issues, exchange dialogue with domestic and foreign stakeholders, including through active participation in international discussions,” he said, “and will constantly review its measures and make adjustments where needed.

        Full speech here.

        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.

          Fed Daly: Longer support to economy needed with resurgence in coronavirus

            San Francisco Fed President Mary Daly said she expects recovery to be slow and gradual, depending on the coronavirus. A V-shaped recovery is not expected. “As we get more information about how the virus will affect the economy, we will be thinking about how can we use forward guidance to telegraph to people, to signal to markets, households and businesses what our intentions are in terms of supporting the economy going forward”, she said.

            Also, with resurgence in infections, more stimulus is needed for the economy. “It’s becoming quite clear that the virus will be with us for longer and more vigorously than anyone had hoped for,” she said in an interview Tuesday. “The length of the support that the economy is going to need, before we can ever stimulate the economy, it just has to be longer.”

            North, South Korea agreed to hold summit in September

              After nearly two hours of meeting, delegations of South and North Korea announced that North Korean leader Kim Jong-Un and South Korean President Moon Jae-in will meet sometime in September. That came even though, the US has yet to obtain any concrete plan about denuclearization of the peninsula.

              Ahead of the meeting, Ri Son Gwon, chairman chairman of a North Korean committee aiming for the “peaceful reunification” of the peninsula said that the Koreas were like very close friends with an unbreakable bond. After the meeting, he also said that it’s was important to clear the obstacles preventing the relationship from moving forward. He added that “if the issues that were raised at the talks aren’t resolved, unexpected problems could emerge and the issues that are already on the schedule may face difficulties.”

              For now, not date not agenda is released yet and South Korean Unification Minister Cho Myoung-gyon would brief the press later in the day.

              Australian Dollar recovers broadly on ScoMo win, but upside limited

                Australian Dollar recovers broadly today as Treasurer Scott Morrison becomes the next Prime Minister, winning a three way race with Foreign Minister Julie Bishop and former Home Affairs Minister Peter Dutton after Malcolm Turnbull was ousted. That’s the sixth change in prime ministership in a less than a decade.

                ScoMo, as Morrison has come to be known, is seen as the most market-friendly option. In particular, as under him as Treasurer, there was substantial improvement in budget balance in Australia.

                However, the rebound is limited as the markets are probably looking through to next year’s general election already. Bigger uncertainty lies ahead as there is a good chance of a Labor win while results in a change of government and policy directions.

                US durable goods orders rose 3.4% in Jan, ex-transport orders rose 1.4%

                  US durable goods orders rose 3.4% mom to USD 256.6B in January, above expectation of 1.1% mom. That’s the ninth straight month of growth. Ex-transport orders rose to 1.4% mom, above expectation of 0.7% mom. Ex-defense orders rose 2.3% mom. Transportation rose 7.8% to USD 85.1B.

                  Full release here.

                  Eurozone PMI composite ticked up to 47.8, consistent with -0.2% GDP contraction in Q4

                    Eurozone PMI Manufacturing rose from 46.4 to 47.3 in November. PMI Services was unchanged at 48.6. PMI Composite rose from 47.3 to 47.8.

                    Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

                    “A further fall in business activity in November adds to the chances of the eurozone economy slipping into recession. So far, the data for the fourth quarter are consistent with GDP contracting at a quarterly rate of just over 0.2%.

                    “However, the November PMI data also bring some tentative good news. In particular, the overall rate of decline has eased compared to October. Most encouragingly, supply constraints are showing signs of easing, with supplier performance even improving in the region’s manufacturing heartland of Germany. Warm weather has also allayed some of the fears over energy shortages in the winter months.

                    “Price pressures, the recent surge of which has prompted further policy tightening from the ECB, are also now showing signs of cooling, most noticeably in the manufacturing sector. Not only should this help contain the cost of living crisis to some extent, but the brighter inflation outlook should take some pressure off the need for further aggressive policy tightening.

                    “However, it’s clear that manufacturing remains in a worryingly severe downturn, and service sector activity is also still under intense pressure, both largely as a result of the cost of living crisis and recent tightening of financial conditions. A recession therefore looks likely, though the latest data provide hope that the scale of the downturn may not be as severe as previously feared.”

                    Full release here.

                    BoE Tenreyro: Self-defeating to try to respond to short-lived effects on inflation

                      BoE MPC member Silvana Tenreyro said, “part of increasing inflation we have seen so far is arithmetic base effects compared to a low level of prices last year.” And that in part has seen “driven by global prices in energy and other commodities which push up on inflation”. And, “these effects in general tend to be short-lived.

                      Additionally, there were “temporary supply disruptions caused by the various imbalances in the global economy as it recovers from Covid”, with some countries still in lockdown. Demand was also boosted “far more by fiscal stimulus in some countries than others”, like the US.

                      “So typically, for short-lived effects on inflation, such as the big rises in the prices of semiconductors or energy prices, it would be self-defeating to try to respond to their direct effects,” she said. “By the time interest rates were having a major effect on inflation the effects of energy prices would already be dropping out of the inflation calculation. If some effects were to prove more persistent it would be important to balance the risks from a period of above target inflation with the cost of weaker demand.”

                      Eurozone PMI composite finalized at 49.8, economy undergoing its weakest spell for nine years

                        Eurozone PMI Services was finalized at 49.8 in August, down from July’s 51.2, a 17-month low. PMI Composite was finalized at 48.9, down from prior month’s 49.9, a 18-month low.

                        Looking at some member states, Ireland PMI Composite dropped to 51.0 (18-month low). Spain dropped to 50.5 (7-month low). France dropped to 50.4 (17-month low). Italy recovered to 49.6, (2-month high). Germany dropped to 46.9 (27-month low).

                        Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

                        “A second month of deteriorating business conditions in the euro area adds to the likelihood of GDP contracting in the third quarter…. The deterioration is also becoming more broad-based, with services now joining manufacturing in reporting falling output..”

                        “Although the overall rate of decline remains only modest, commensurate with GDP falling at a quarterly rate of just 0.1%, the latest data point to the economy undergoing its weakest spell for nine years, excluding the downturns seen during the height of the pandemic.”

                        Full release here.

                        US ADP jobs grew only 67k, goods producers still struggled

                          US ADP report showed 67k job growth in private sector only, well below expectation of 138k. Looking at some details, small businesses added 11k jobs. Medium businesses added 29k. Large businesses added 27k. By sector, goods-producing jobs contacted -18k. Service-providing jobs rose 85k.

                          “In November, the labor market showed signs of slowing,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “The goods producers still struggled; whereas, the service providers remained in positive territory driven by healthcare and professional services. Job creation slowed across all company sizes; however, the pattern remained largely the same, as small companies continued to face more pressure than their larger competitors.”

                          Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is losing its shine. Manufacturers, commodity producers, and retailers are shedding jobs. Job openings are declining and if job growth slows any further unemployment will increase.”

                          Full release here.

                          Japan PMI manufacturing finalized at 48.9, worst quarterly performance since 2016

                            Japan PMI manufacturing was finalized at 49.2 in March, up[ from February’s 48.9, signalling slowdown continues. Markets noted that demand remains sluggish, pulling output lower. Firms push resources to clearing backlogs due to lack of new work. And business confidence remains among lowest on record.

                            Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:

                            “The final manufacturing PMI print of Q1 for Japan points to the worst quarterly performance in the sector since Q2 2016. The likelihood of the negative trend in output being stymied any time soon appears slim, with demand for goods from both domestic and international sources waning further. Firms cut production at the fastest rate in almost three years and showed reluctance to replace out-going staff, with employment growth at the lowest since late-2016.

                            “The economic backdrop for the manufacturing sector in Japan remains fiercely challenging. Asian goods producers face headwinds from slowing growth in Europe and China, while global trade risks are yet to be mitigated by a breakthrough in US-Sino relations.

                            “For the Japanese economy to keep its head above water, the service sector will need to pick up any manufacturing slack, which will hinge on domestic demand pressures sustaining the strength that supported the growth rebound at the end of 2018.”

                            Full release here.

                            Australia lost -40.9k jobs, but unemployment rate dropped to 3.4%

                              Australia employment contracted -40.9k in July, much worse than expectation of 25.0k growth. Full time jobs decreased by 86.9k while part time jobs rose 46k.

                              Unemployment rate dropped from 3.5% to 3.4%. Participation rate dropped notably from 66.8% to 55.4%. Monthly hours worked in all jobs dropped -16m hours, or -0.8% mom.

                              “The fall in unemployment in July reflects an increasingly tight labour market, including high job vacancies and ongoing labour shortages, resulting in the lowest unemployment rate since August 1974,” Bjorn Jarvis, head of labour statistics at the ABS, said.

                              Full release here.

                              China tells US to stop being a school bully as new tariffs kicked in

                                New 15% tariffs on more than USD 125B in Chinese imports took effect over the weekend, while the levies on the rest of USD 300B are still on track for December 15. China also started retaliation on the USD 75B in American goods. At the same time, US President Donald Trump indicated on Sunday that talks are still planned for September. He noted, “we are talking to China, the meetings in September, that hasn’t changed.”

                                On the other hand, Chinese state media repeated its hard line messages. The official Xinhua news agency warned “the United States should learn how to behave like a responsible global power and stop acting as a ‘school bully’.” The People’s Daily also emphasized “China’s booming economy has made China a fertile ground for investment that foreign companies cannot ignore.”

                                US initial jobless claims dropped to 232k

                                  US initial jobless claims dropped -5k to 232k in the week ending August 27, below expectation of 250k. Four-week moving average of initial claims dropped -4k to 241.5k.

                                  Continuing claims rose 26k to 1438k in the week ending August 20. Four-week moving average of continuing claims rose 4.5k to 1428.5k.

                                  Full release here.

                                  Australia PMI composite edged up to 50.8, at risk of heading into contraction territory

                                    Australia PMI Manufacturing ticked up from 53.8 to 53.9 in September. PI Services also rose slightly from 50.2 to 50.4. PMI Composite Output rose from 50.2 to 50.8.

                                    Laura Denman, Economist at S&P Global Market Intelligence said: “September data indicated that the recent interest rate hikes made by the RBA have begun to have the desired effect in terms of prices…. At the same time, the private sector has remained in expansion territory with the pace of growth even accelerating very slightly…

                                    “On the negative side, the full effects of recent interest rate hikes will be lagged… Should the RBA continue to increase the base rate further, the private sector economy may be at risk of heading into contraction territory in the future as disposable incomes across the nation tighten and overall demand conditions remain subdued.”

                                     

                                    Full release here.

                                    Canada manufacturing sales dropped -0.7%, down in 11 of 21 industries

                                      Canada manufacturing sales dropped -0.7% mom in December, much worse than expectation of 0.8% mom. Sales were down in 11 of 21 industries, representing 42.6% of the manufacturing sector. The largest declines were in the motor vehicle assembly and aerospace product and parts industries. However, these decreases were partly offset by higher sales in the primary metal industry.

                                      Full release here.

                                      Asian update: Commodity currencies lower despite steady market sentiments

                                        Commodity currencies are trading broadly lower today even though Asian markets show no sign of risk aversion. Australian Dollar turns lower after solid but un-encouraging job data. New Zealand Dollar is paring yesterday’s CPI triggered gains. Canadian Dollar is follow oil prices low as WTI is back at 52.3 after brief recovery.

                                        For now, European majors are the strongest ones today, led by Swiss Franc. Euro will look into PMIs, ECB rate decision and press conference.

                                        For the week, Sterling is the strongest one on receding chance of no-deal Brexit. Kiwi is the second strongest on lower chance of RBNZ rate cut after solid CPI. Australian and Canadian Dollar are the weakest, followed by Dollar.

                                        In Asia:

                                        • Nikkei is currently down -0.14%.
                                        • Hong Kong HSI is up 0.16%.
                                        • China Shanghai SSE is up 0.40%.
                                        • Singapore Strati Times is up 0.42%.
                                        • Japan 10-year JGB yield is up 0.0009 at 0.006.

                                        Overnight:

                                        • DOW rose 0.70%.
                                        • S&P 500 rose 0.22%
                                        • NASDQ rose 0.08%.
                                        • 10-year yield rose 0.025 to 2.744.

                                        Germany PMIs: Slowdown centered on services, manufacturing relatively positive

                                          Germany PMI Manufacturing rose to 53.0 in August, up from 51.0, above expectation of 52.5. That’s also the highest level in 23 months. PMI Services dropped sharply back to 50.8, down from 55.6, missed expectation of 55.6. PMI Composite eased back to 53.7, down from 55.3.

                                          Phil Smith, Associate Director at IHS Markit said: “The slowdown was centred on the service sector, where growth was close to stalling amid renewed travel restrictions and a sustained decline in overall employment that continues to undermine domestic demand. Manufacturing was a relative positive, at least in terms of trends in output and new orders, which grew at the fastest rates for two-and-a-half years. However, the further cutbacks to factory work force numbers are a reminder that there is still ground to make up and businesses remain under pressure to cut costs.”

                                          Full release here.