Canada CPI accelerated to 2.2% in November, up from 1.9% yoy, matched expectations. Excluding gasoline, CPI rose 2.3%, unchanged from October’s reading. CPI common was unchanged at 1.9% yoy, matched expectations. CPI median rose to 2.4%, up from 2.2%, beat expectation of 2.2% yoy. CPI trimmed accelerated to 2.2% yoy, up from 2.1% yoy, matched expectations.
Outgoing ECB Executive Board Member Benoit Coeure said in farewell event today that the central bank should be more flexible with its inflation target. He said, “the ECB should clarify that it aims to deliver inflation of 2% over the medium term. And it could communicate the range of inflation outcomes that can be considered acceptable in normal times.”
A band around the target wouldn’t weaken the central bank’s resolve. He added, “research shows that central banks have a strong incentive to already respond to inflation deviations within the tolerance zone, rather than waiting until inflation has crossed the edges.”
Eurozone CPI was finalized at 1.0% yoy in November, up from October’s 0.7% yoy. Core CPI was finalized at 1.3% yoy, up from October’s 1.1%. The highest contribution came from services (+0.82%), followed by food, alcohol & tobacco (+0.37%), non-energy industrial goods (+0.10%) and energy (-0.33%).
EU28 CPI was finalized at 1.3%, core CPI at The lowest annual rates were registered in Italy, Portugal (both 0.2%) and Belgium (0.4%). The highest annual rates were recorded in Romania (3.8%), Hungary (3.4%), Slovakia (3.2%) and Czechia (3.0%).
UK CPI was unchanged at 1.5% yoy in November. Core CPI was also unchanged at 1.70%. Both matched expectations. RPI accelerated to 2.2% yoy, up from 2.1% yoy, beat expectation of 2.1% yoy.
PPI input came in at -0.3% mom, -2.7% yoy, versus expectation of -1.2% mom, -4.9% yoy. PPI output was at -0.2% mom, 0.5% yoy, versus expectation of 0.0% mom, 0.9% yoy. PPI output core was at -0.1% mom, 1.1% yoy, versus expectation of 0.1% mom, 1.5% yoy.
German Ifo Business Climate rose to 96.3 in December, up from 95.0, beat expectation of 95.5. Current Assessment Index rose to 98.8, up from 97.9, beat expectation of 98.1. Expectation Index rose to 93.8, up from 92.1, beat expectation of 93.1. “The German economy is heading into the New Year with more confidence,” Ifo President Clemens Fuest said.
Looking at some details, manufacturing improved from -5.8 to -5.0. Service rose from 17.4 to 21.3. However, trade dropped from 0.9 to 0. Construction also dropped from 20.3 to 17.9.
Thomson Reuters/INSEAD Asian Business Sentiment jumped to 71 in Q4. That was a large swing from Q3’s 58, which was close a decade low, to the highest since June last year. The change was also a noticeable shift from neutral to optimistic even though majority of firms are not yet confident enough to plan hiring.
Antonio Fatas, economics professor at INSEAD, said, “conditions, expectations and some of the uncertainty has improved over the last quarter. But I don’t see this uncertainty disappearing, I think some of these tensions are going to stay with us maybe for years or decades.”
In non-seasonally adjusted terms, Japan’s exports dropped -7.9% yoy to JPY 6.38T in November. Even though that’s a smaller than expected decline, it still marked the 12-month straight month of contraction. Exports were dragged down by cars and construction equipment to the US, as well as shipment of chemical production to China. Imports dropped -15.7% yoy to JPY 6.46T. Trade surplus dropped sharply by -88.9% yoy to JPY 0.082T.
In seasonally adjusted terms, exports dropped -0.3% mom to JPY 6.28T. Imports dropped -0.1% mom to JPY 6.35T. Trade deficit came in at JPY -0.06T.
Boston Fed President Eric Rosengren said yesterday that “the appropriate path of policy is to stay where we are.” He added, “with the recent positive economic news, and with monetary and fiscal policy already accommodative, I see no need to make the current stance of monetary policy more accommodative in the near term.” It’s appropriate to “take a patient approach to considering any policy changes, unless there is a material change in the outlook.””Hopefully this is going to be a boring year for monetary policy”. He had penciled in no change in interest rate through 2020.
On the economy, he said ” it is unlikely we will have an economic downturn in the coming year, given the generally positive financial conditions and the continued accommodative monetary and fiscal policies… Plentiful jobs and growth in income have provided improvements in confidence and bode well for holiday sales and beyond… Fortunately for the economy, many consumers seem to be in a buying mood.”
Separately, Dallas Fed President Robert Kaplan told Bloomberg that “we’re going to have weak manufacturing next year, sluggish global growth, pretty sluggish business investment, but with a strong consumer”. Still, “there would have to be some material change from that outlook” for him to back a rate change.
US building permits rose 1.4% mom to adjusted annual rate of 1.482 m in November, above expectation of 1.410m. Housing starts rose 3.2% to 1.365m, above expectation of 1.340m.
ECB Governing Council member Peter Kazimir urged further structural change in the bloc. He warned, “I am worried that we won’t be able to enjoy significant economic growth before we deal with the fact that EU is lagging behind in technology and before we complete the European Monetary Union.”
Another Governing Council member Madis Müller said the upcoming policy review should consider whether the control over inflation has diminished. And, “maybe in this case we would not need to be as aggressive with our policies. We could be more flexible and not chase that goal at any price.”
EU trade director-general Sabine Weyand acknowledged that “UK does not intend to go for an extension of the transition” and EU needs to be prepared for that. She added, “that means in the negotiations we have to look at those issues where failing to reach an agreement by 2020 would lead to another cliff-edge situation.”
Weyand also said EU is ready to start negotiations very quickly after UK leaves EU at the end of January. But she also emphasized, “the ambition for duty-free, quota-free trade under a free-trade agreement has to come accompanied by a level playing field.” European Commission is due today afternoon to brief EU27 countries on its work program for the negotiations.
UK unemployment rate was unchanged at 3.8% in the three months to October, below expectation of 3.9%. Estimated unemployment rate was 4.0% for men and 3.5% for women, the latter at a record low. An estimated 1.28m people were unemployment, 93k fewer than a year ago.
Wages growth slowed quite notably. Average earnings including bonus dropped to 3.2% 3moy, down from 3.7% and missed expectation of 3.4%. Average earnings excluding bonus dropped to 3.5% 3moy, down from 3.6%, but beat expectation of 3.4%.
Minutes of December RBA meeting suggest that the central bank is still on track to further easing next year, probably in February. Employment and wages growth would remain the main reason for doing so. It’s noted that “current rate of wages growth was not consistent with inflation being sustainably within the target range”. Also, “nor was it consistent with consumption growth returning to trend”. Furthermore, private sector wages growth has indeed “levelled out in recent quarters, following its gentle upward trend of the previous couple of years”.”
RBA members also discussed the effect of lower interest rates on confidence, including business and consumer. However, “while members recognised the negative confidence effects for some parts of the community arising from lower interest rates, they judged that the impact of these effects was unlikely to outweigh the stimulus to the economy from lower interest rates.”
Suggested readings on RBA minutes:
New Zealand ANZ Business Confidence improved to -13.2 in December, up from -26.4. It’s the best reading since October 2017. Nevertheless, confidence remained negative across all sectors, worst in agriculture (-35.1) and beat in retail (-6.5). Activity outlook also improved to 17.2, up from 12.9, best in manufacturing (23.7), worst in construction (9.5). Outlook reading was the best since April 2018.
ANZ said: “New Zealand businesses are rolling into the end of the year in much better heart than was looking likely just a few months ago, particularly manufacturers. Challenges remain, and time will tell how sustainable the lift in sentiment and activity proves to be, with headwinds for the economy still present and global risks not having gone away, for all that some geopolitical risks are now less prominent. But for now, surprisingly strong commodity prices and low interest rates are working their magic, and 2019 is ending on a much better note than it began.”
Sterling dips mildly as new development puts the prospect of no-deal Brexit back on table. The newly elected House of Commons will likely have its first vote on the Brexit Withdrawal Agreement on Friday, which will likely be passed with the Conservative’s majority. UK is set to leave the EU on January 31.
However, it’s reported that Boris Johnson will attempt to include text in the legislation that prevents the government from extending the transition period, beyond end of 2020. The move is believed to be based on the Conservative’s manifesto of not extending the implementation first. However, that would also give UK and EU only eleven months to complete the negotiation of a trade agreement, something which usually takes years.
Separately, BoE Governor Mark Carney said that “the worst-case scenario is effectively a no-deal, disorderly Brexit. The probability of that scenario has gone down because of the election result and the intention of the new government”. Nevertheless, “the scenario itself and the risks that we protect the system against has not itself changed, it’s just become less likely.”
US PMI Manufacturing dropped slightly to 52.5 in December, down from 52.6, beat expectation of 52.4. PMI Services rose to 52.2, up from 51.6, beat expectation of 51.4. PMI Composite rose to 52.2, up from 52.0, hitting a 5-month high.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit, said:
“The surveys bring welcome signs of the economy continuing to regain growth momentum as 2019 draws to a close, with the outlook also brightening to fuel hopes of a strong start to 2020. Business activity, order book and jobs growth all accelerated to five-month highs in December, buoyed by rising domestic sales and further signs of renewed life in export orders.
“December’s expansion was led by an improved performance of the vast services sector, accompanied by another month of steady manufacturing growth. Encouragingly, expectations for business activity in the year ahead lifted higher in both sectors to reach the highest since June to suggest the expansion will continue to gain momentum as we head into the New Year. Optimism reflected reduced fears over trade wars and more favorable financial conditions.
“The brighter news needs to be caveated, as the overall rate of economic expansion signalled by the surveys remains well below that seen this time last year, commensurate with GDP rising at an annualised rate of just over 1.5%. Importantly, however, the welcome signs of improvement help to ward off recession risks and should keep the Fed on hold in the coming months. The upward trajectory in the surveys support our expectations that the US economy is on course to see another year of above-potential GDP growth of approximately 2.2% in 2020.”
ECB Vice President Luis de Guindos said “the current environment is characterized by a weakening of the macroeconomic outlook and increasing uncertainty, even though the latest indicators point to a stabilization of economic activity.”
He also warned that “the lower-for-longer interest rate environment creates strains on bank profitability with implications for financial stability.” He urged Eurozone countries to considering raising counter cyclical buffers on bank. That would quickly be released in case of an eventual downturn.
US Empire State Manufacturing General Business Conditions rose to 3.5 in December, up from 2.9, but missed expectation of 4.0. Twenty-eight percent of respondents reported that conditions had improved over the month, while 25 percent reported that conditions had worsened. Meanwhile, indexes assessing the six-month outlook suggested that optimism about future conditions improved for a second consecutive month. Expectations for six months ahead rose 10.4 to 29.8.
UK PMI Manufacturing dropped to 47.4 in December, down from 48.9, missed expectation of 49.4. That’s also the lowest level in 4 months. PMI Services dropped to 49.0, down from 49.3, missed expectation of 49.6. That’s the lowest level in 9 months. PMI Composite dropped to 48.5, down from 49.3, lowest in 41 months.
Commenting on the latest survey results, Chris Williamson, Chief Business Economist at IHS Markit, said:
“December’s PMI survey data sadly lacked festive cheer, indicating that the economy contracted for the third time in the past four months. The latest decline was the second largest recorded over the past decade, and increases the likelihood that the economy contracted slightly in the fourth quarter as Brexit-related uncertainty intensified in the lead up to the general election.
“New orders fell for a fifth straight month, causing jobs to be cut for a fourth successive month as firms scaled back operating capacity in line with weakened demand.
“The principal drag on order books was falling export sales, with overseas demand for UK-produced goods and services slumping in the past two months to an extent not seen since at least 2014.
“Manufacturing production is falling at a rate exceeded only once since the height of the global financial crisis in early- 2009, but output of the vast service sector has now also fallen in each of the past two months, representing the first back-to-back declines since 2009.
“Any positive aspects of the survey came largely from the sentiment indicators, with future expectations rising to the highest since June as firms hope that the election will bring clarity on the outlook and remove some of the uncertainty that has been holding back demand.”
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Fed Evans: It’s important that we overshoot inflation
Chicago Fed President Charles Evans said yesterday that the US economy is doing “remarkably well”. And he expected “the economy to continue to growth, labor markets to continue to be strong.” He echoed comments of many other Fed officials and said monetary policy is in “a good place”. He emphasized that ” inflation would have to go above 2% by some meaningful amount for me to really think that we need something more restrictive.” And it’s “extremely important that we get inflation up to 2% …I actually think it’s important that we overshoot.”
New York Fed President John Williams said “I feel very good about how the economy’s been this year, how it’s progressed and feel very good about how it’s going to look next year.” He expected the economy to growth by about 2% in 2020, with unemployment staying close to current 3.5%. Also, he expected inflation to approach Fed’s 2% target.
Richmond Fed President Thomas Barkin “the major reason the consumer is strong is they have jobs and not only do they have jobs but real wages are up”. He said that Fed’s rate cuts this year “have helped some, but they’ve helped in the context of what’s been a very strong consumer all year long.”