Fed Harker: It will soon be time to boringly taper

    Philadelphia Fed Bank President Patrick Harker said, “I am in the camp that believes it will soon be time to begin slowly and methodically — frankly, boringly — tapering our $120 billion in monthly purchases of Treasury bills and mortgage-backed securities.”

    Harker expected the economy to grow by 6.5% this year, and moderate to 3.5% next. He also expects inflation to be around 4% this year, and then slow back to 2% in 2022. “We’re already seeing some moderation there, as prices of used cars finally stabilize,” he added.

     

    Australia Westpac leading index remains negative, indicating further slowdown

      Australia’s Westpac Leading Index rose slightly from -1.04% to -0.94% in February, but it still marks the seventh consecutive month of negative growth rate, pointing to below-trend growth over the next 3-9 months. This is in line with Westpac’s forecast that growth in the Australian economy will be only 1% in 2023.

      The slowdown reflects the lagged effects of rising interest rates, a deep shock to real wages, a bottoming out of the savings rate, and falling house prices. Westpac also expects the weakness to extend into 2024, with more negative readings likely.

      RBA indicated in its March minutes that the board intends to consider a pause at its April meeting. However, Westpac does not expect that a decision to pause in April will mark the end of the cycle. It expects new information for the May meeting to indicate the need for a further response from the board, with a final 0.25% increase in the cash rate in May marking the end of the tightening cycle.

      Full Australia leading index release here.

      China PBoC to step up credit support to the economy

        China’s PBoC Governor Yi Gang indicated the central bank will step up credit support to the economy. Yi said during a meeting with commercial banks that capital replenishment will be promoted to increase bank’s lending ability. Additionally, countercyclical adjustments will be stepped up to ensure growth in money supply and social financing.

        Markets are expecting PBoC to lower the Loan Prime Rate (LPR) tomorrow, for the third time since it’s introduced the benchmark in August. Yi urged lenders to reference the LPR to set their own lending rates.

        ISM non-manufacturing dropped to 55.5, employment and price declined

          US ISM non-manufacturing composite dropped to 55.5, down from 56.1 and missed expectation of 57.0.

          Look at the details:

          • Business Activity Index increased rose from 57.4. to 59.5.
          • New Orders Index dropped from 59.0 to 58.1.
          • Employment Index dropped from 55.9 to 53.7.
          • Prices Index dropped from 58.7 to 55.7.
          • 15 non-manufacturing industries reported growth.

          ISM noted: “The non-manufacturing sector has experienced an uptick in business activity, but in general, there has been a leveling off. Respondents are still mostly optimistic about overall business conditions, but concerns remain about employment resources.”

          Full release here.

          Italy Salvini: Let’s see if EU will fine us EUR 3B

            Italian Deputy Prime Minister Matteo Salvini said today that European Commission could impose a EUR 3B penalty on the country, for breaking EU fiscal rules. This is in line with other reports that the Commission is ready to start disciplinary steps against Italy on June 5. The actions will likely be confirmed should the Commission send a warning letter to Rome this week.

            Salvini said, “let’s see if we get this letter where they give us a fine for debt accumulated over the past and tell us to pay 3 billion euros.” He also pledged earlier, after his far-right League party triumphed in European elections on Sunday , to use “all my energies” to fight his perceived outdated and unfair European fiscal rules.

            Aussie lifted as RBA Lowe talks four developments that will help the economy

              Australian Dollar is apparently lifted by some positive comments by RBA Governor Philip Lowe in a speech. He noted that the two recent rate cuts, including today’s, will “make an important contribution to putting us on a better path and winding back spare capacity”. More importantly, he pointed out four developments that will help the economy.

              Firstly, borrowing costs for almost all borrowers are now the lowest they have ever been. It’s partly because of the RBA cuts and partly due to tighter credit spreads. Secondly, terms of trade have risen again, largely due to higher iron ore prices. And RBA expects a “solid upswing” in the resources sector. Thirdly, exchange rate has depreciated over the past couple of years. Fourthly, RBA expects stronger growth in household disposable income over the next couple of years, due to low and middle income tax offset.

              Together with the downside risks, globally and domestically, “what all this means for us here in Australia is yet to be determined.” Lowe reiterated “we will be closely monitoring how things evolve over coming months”. And, “the Board is prepared to adjust interest rates again if needed”.

              Full speech here.

              Fed Mester sees employment mandate met by end of next year

                Cleveland Fed Bank President Loretta Mester said in a panel discussion yesterday that inflation in the US is “pandemic related” only. “Fundamentally, if it’s supply-side driven, that’s not something monetary policy should be responding to,” Mester added.

                On monetary policy, she said, “our new strategy says, look, we’re not going to be moving until we have average inflation being 2% and we’re now going to be making up for past misses. I think we’ve basically met that part of the mandate.”

                “My forecast is that we’ll meet that [employment] mandate by the end of next year, if things play out as I expect,” Mester said.

                “My baseline is we’ll see inflation rates move back down as pent-up demand eases and supply-side challenges ease. But, as you know, that is taking longer than people thought and, in some cases supply chain issues are getting worse,” Mester said.

                Canada to Trump: Sending farm products to poor countries sounds easy, but it’s complicated

                  Trump indicated he’s thinking about buying US farm products and distribute to poor countries, as a way to help farmers affected by trade war with China. But such simplistic, shallow way of thinking immediately drew criticism from Canada.

                  Canadian Agriculture Minister Marie-Claude Bibeau said yesterday that “dumping products in developing countries is not the way we do things.”

                  She added, “it seems easy, but it is complicated to do it the right way”. The process will need multilateral coordination. And, “obviously, it may create some distortion in the market and this is what we want to avoid.”

                  ECB de Cos: Not appropriate to forecast rates after July hike

                    ECB Governing Council member Pablo Hernandez de Cos conveyed his anticipation of another interest rate hike. He underscored that ECB’s decisions would continue to rely on key data and inflation outlook.

                    He stated today, “If the central scenario of our forecasts published by the ECB last week materialises, we will also have to raise 25 basis points again in July.” However, “beyond that it is not appropriate to make any forecasts.”

                    De Cos highlighted the essential role of key data and inflation dynamics in shaping ECB’s decisions. He added, “we will continue to take our decisions depending on the data and, in particular, on the aggregate assessment of the inflation outlook, the dynamics of underlying inflation.”

                    Germany PMIs improve, but points to economic contraction in current quarter

                      While Germany witnessed a modest improvement in its economic indicators for September, underlying concerns persist. PMI Manufacturing saw a slight climb from 39.1 to 39.8. Similarly, PMI Services edged up from 47.3 to just below the 50 mark at 49.8. Composite PMI experienced an uptick, moving from 44.6 to 46.2.

                      Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, addressed the improvements, particularly noting, “The German services PMI stopped its slump and nudged up near 50 in September.” Nonetheless, despite this upward nudge, the service sector remains virtually unchanged following the dip seen in August.

                      Encouragingly, recent PMI data suggests a deceleration in the decline of new orders and a slowdown in the reduction of purchasing activity in manufacturing. However, a closer look into the data indicates that manufacturing production might experience a drop surpassing 2 percent compared to the preceding quarter.

                      The broader picture is not particularly optimistic. “Germany has entered once again into contraction during the current quarter.” Hamburg Commercial Bank’s latest projections anticipate a sharp GDP decline of 1 percent relative to the prior quarter.

                      Full Germany PMI release here.

                      US-China trade negotiations to restart on Tuesday, expectations are low

                        US-China trade negotiations are set to resume in Shanghai on Tuesday but expectations are rather low. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will meet China’s team again for a two day meeting. Trump indicated on Friday that China may want to drag on till after 2020 election in the US. He told reported at that White House China would probably said “let’s wait and see if one of these people who gives the United States away, let’s see if one of them could get elected.”

                        White House economic adviser Larry Kudlow also said on Friday he “wouldn’t expect any grand deal” at this week’s meeting. Instead, the team would just try to “reset the stage”. Though, he added, “we strongly expect the Chinese to follow through (on) goodwill and just helping the trade balance with large-scale purchases of US agriculture products and services.”

                        Separately, China’s state media CCTV said on Sunday, citing the National Development and Reform Commission and Ministry of Commerce, that the country has already made enquiries to US suppliers for soybeans, cotton, pork, sorghum and other agricultural products since July 19. CCTV reported “as long as the American agricultural products are reasonably priced and of good quality, it is expected that there will be new purchase.” though, it also urged that US should  “take concrete measures to implement its relevant commitments and create favorable conditions for bilateral economic and trade cooperation”.

                        ECB Villeroy: Green central bank action is not about easing

                          ECB Governing Council member Francois Villeroy de Galhau said he proposed to “decarbonizing the ECB’s balance sheet with a pragmatic, progressive and targeted approach to all corporate assets whether they be held on the central bank’s balance sheet as purchases or taken as collateral.”

                          Villeroy noted that the stagflationary nature of climate change was the reason to take it into account. It could challenge the price stability mandate by pushing up prices while weighing on the economy.

                          Though, he also noted, “the greening of central bank action is not about additional monetary policy easing but recalibrating our tools”.

                          New Zealand CPI slows to 0.5% qoq, 4.7% yoy in Q4

                            New Zealand CPI rose 0.5% qoq in Q4, down from 1.8% qoq in Q3, matched expectations. Tradeable inflation turned negative to -0.2% qoq, from 1.8% qoq. Non-tradeable inflation slowed to 1.1% qoq, down from 1.7% qoq.

                            Annually, CPI slowed from 5.6% yoy to 4.7% yoy, matched expectations. Tradeable inflation slowed from 4.7% yoy to 3.0% yoy. non-tradeable inflation also slowed from 6.3% yoy to 5.9% yoy.

                            “While this is the smallest annual rise in the CPI in over two years, it remains above the Reserve Bank of New Zealand’s target range of 1 to 3 percent,” consumers prices senior manager Nicola Growden said.

                            Full NZ CPI release here.

                            Germany Gfk consumer sentiment hit another rock bottom at -30.6

                              Germany Gfk consumer sentiment for August dropped from -27.7 to -30.6, below expectation of -28.2. That’s another record low since the start of the series in 1991. In July, economic expectations dropped from -11.7 to -18.2. Income expectations dropped from -33.5 to -45.7. Propensity to buy dropped from -13.7 to -14.5.

                              “In addition to concerns about disrupted supply chains, the war in Ukraine and soaring energy and food prices, there are now worries about sufficient gas supplies for businesses and households next winter. This is currently causing consumer sentiment to hit rock bottom,” explains Rolf BĂĽrkl, GfK consumer expert. “Especially as a tight supply of natural gas is likely to add to the pressure on energy prices and thus inflation.”

                              Full release here.

                              USTR Lighthizer blames Canada for not making essential concessions

                                US Trade Representative Robert Lighthizer complained that “Canada is not making concessions in areas where we think they’re essential”. And, there was “some distance” between the two sides on NAFTA negotiations. Lighthizer added that “We’re going to go ahead with Mexico … If Canada comes along now, that would be the best. If Canada comes along later, then that’s what will happen.”

                                Lighthizer also noted “we’re sort of running out of time,” referring to the US-imposed deadline of October 1.

                                Canadian Foreign Minister Chrystia Freeland’s spokesman Adam Austen reiterated that “Our focus is the substance, not timelines. We will continue to negotiate with a view to getting a deal that is in Canada’s national interest.”

                                US initial jobless claims dropped to 256k

                                  US initial jobless claims dropped -5k to 256k in the week ending July 23, versus expectation of 248k. Four-week moving average of initial claims rose 6.25k to 249.25k.

                                  Continuing claims dropped -25k to 1359k in the week ending July 16. Four-week moving average of continuing claims rose 8.75k to 1362m.

                                  Full release here.

                                  UK PM May: The Brexit deal takes back control over borders, money and laws

                                    UK Prime Minister Theresa May said in the CBI annual conference that her Brexit agreement is ” a good one for the UK” as it “fulfils the wishes of the British people as expressed in the 2016 referendum”. And she emphasized the outcomes” she wanted to deliver.

                                    Those include “Control over our borders, by bringing an end to free movement, once and for all”; “Control of our money, so we can decide for ourselves how to spend it, and can do so on priorities like our NHS”; “Control of our laws, by ending the jurisdiction of the European Court of Justice in the United Kingdom and ensuring that our laws are made and enforced here in this country.”

                                    Stocks surged as Fed Powell pledged to listen, with patience

                                      US stocks surged overnight as lifted by Fed Chair Jerome Powell’s comments, strong job report and Chinese easing. DOW, S&P 500 and NASDAQ all extended post-Christmas rebound and made new weekly high before closing strong. DOW rose 3.29%, S&P 500 rose 3.43% and NASDAQ rose 4.26%. Treasury yield also staged a strong come back with 10 year yield added 0.105 to 2.659.

                                      In short, Powell pledged that Fed was “listening” to the markets after December’s volatility. And, “particularly with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.” He also added that “we are always prepared to shift the stance of policy and to shift it significantly” if needed.

                                      Separately, Cleveland Fed President Loretta Mester said in a Reuters interview that federal funds rate is close to neutral. She added, “we really need to be looking at the data and having the economy tell us, do we need to move more? Do we need to move more, faster? Can we wait?” She emphasized “We should take our time and assess … We may be where we need to be.”

                                      Into US session: Australian Dollar strongest on iron ore, shrugs China stocks selloff

                                        Entering into US session, Australian Dollar defy all the negative factor and it’s trading as the strongest one, followed by New Zealand Dollar. Australian job data was just a mixed bag as fall in unemployment rate was mainly due to contraction in labor force as shown indicated in drop in participation rate. Meanwhile, Chinese stocks are suffering another day of steep selloff. Strength in iron ore price is the key factor in driving the Aussie higher. According to Metal Bulletin spot price for benchmark 62% iron ore hit the highest level since March at 73.36.

                                        Canadian Dollar is trading as the worst performing one as oil prices continue deep decline. WTI crude oil is now below 69 at 68.68 and is accelerating downwards. Sterling is the second weakest one on Brexit impasse. Dollar is mixed today but is showing some sign of strength at the time of writing. Let’s see if it can resume the post FOMC minutes rally in US session.

                                        In European markets, at the time of writing:

                                        • FTSE is down -0.18%
                                        • DAX is down -0.18%
                                        • CAC is up 0.19%
                                        • German 10 year yield is up 0.0033 at 0.467
                                        • Italy 10 year yield up even more by 0.056 at 3.600
                                        • German-Italian spread stays above 300 alarming level

                                        Earlier today in Asia:

                                        • Nikkei dropped -0.80%
                                        • Singapore Strait Times dropped -0.05%
                                        • Hong Kong HSI dropped -0.03%
                                        • China Shanghai SSE dropped -2.94% to 2486.42, taken out 2500 handle as down trend extended

                                        US initial jobless claims rose to 719k, continuing claims at 3.8m

                                          US initial jobless claims rose 61k to 719k in the week ending March 27, above expectation of 678k. Four-week moving average of initial claims dropped -10.5k to 719k.

                                          Continuing claims dropped -46k to 3794k in the week ending March 20. Four-week moving average of continuing claims dropped -147k to 3979k.

                                          Full release here.