ECB hikes 50bps, expects to raise rates further

    ECB raises the three key interest rates by 50bps today as expected. The main refinancing, marginal lending, and deposit rates are 2.50%, 2.75% and 2.00% respectively. The Governing Council expects to “raise them further” based on “substantial upward revision to the inflation outlook”.

    Also ECB noted that “keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations.” Future policy decisions will continue to be “data-dependent”, following a “meeting-by-meeting approach”.

    Reinvestment under the APP purchases will continue until the end of February 2023. The portfolio will then decline at a “measured and predictable pace” subsequently, amount to EUR 15B per month on average until Q2 2023. Reinvestment under PEPP will continue at least until the end of 2024.

    Based on new economic projections, inflation is expected to reach 8.4% in 2022, then fall to 6.3% in 2023, and then 3.4% in 2024, and 2.3% in 2025. Core inflation, excluding energy and food, is projected to be at 3.9% in 2022, 4.2% in 2023, 2.8% in 2024, and then 2.4% in 2025. The economy is projected to grow 3.4% in 2022, 0.5% in 2023, 1.9% in 2024, and then 1.8% in 2025.

    Full statement here.

    Canada retail sales dropped for the first time in three months

      Canada retail sales dropped for the first time in three months, by -0.1% mom to CAD 51.6B in September. Though, that was better than expectation of -0.3% mom fall. Excluding autos, retail sales rose 0.2% mom, above expectation of -0.1% mom.

      Retail sales were down in Alberta (-1.6%) and New Brunswick (-3.7%). In Quebec, retail sales increased 0.7%. In the census metropolitan area (CMA) of Montréal, sales were up 0.6%. Retail sales in Ontario (+0.3%) continued their upward trend, increasing for the seventh time in eight months. In the CMA of Toronto, retail sales were up 1.5%.

      Full release here.

      US Mnuchin concluded productive trade meetings with China Liu, next round in Washington

        US Treasury Secretary Steven Mnuchin said he has concluded “productive meetings” with Chinese Vice Premier Liu He in Beijing. And, the discussions will continue in Washington next week. But there is so far no details regarding any progress made. Trade Representative Robert Lighthizer is quiet as usual on the topic.

        Earlier, China Banking and Insurance Regulatory Commission said it will further open up the banking an insurance sectors. And it plans to issue 12 new measures soon. The measures include dropping the USD 10B asset requirements for foreign companies to set up a legal entity in the country. The USD 20B asset requirements for foreign banks to set up a branch will also be removed. Approval procedures for foreign banks to conduct Yuan businesses will be removed.

        RBNZ Silk warns against premature rate cut expectations

          RBNZ Assistant Governor Karen Silk advised caution against pricing in rate cuts too prematurely. In her comments, Silk stressed that RBNZ has reached a juncture where it can “take a pause and watch how this evolves,” ensuring that “you don’t overdo things.”

          However, Silk emphasized that it’s core inflation that the central bank is focused on bringing down, and this will require maintaining the current rate levels for an extended period. “We’ve said we need to hold for an extended period of time to ensure core inflation comes down; it’s core inflation that we need to get down,” she stated.

          She explained the bank’s holistic approach to assessing economic conditions, saying, “We look at economic data, but we also look at transmission,” Silk explained. “If at a wholesale level and most importantly at a retail level we start to see those things come off faster, then that’s one of the things we take into account when we think about where we set the OCR.”

          In terms of the inflationary impact of Cyclone Gabrielle, Silk indicated that its effect has been less severe than initially anticipated. RBNZ had initially projected the storm would add 0.3% to inflation in both the first and second quarters. Still, it has since revised this down to just 0.1%, citing that while the storm led to increased food costs, it didn’t inflate the prices of other goods such as used cars.

          US Treasury not naming China as currency manipulator despite lack of transparency

            US Treasury refrained from naming China a currency manipulator in the latest “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” report.

            In a statement, Treasury Secretary Seven Mnuchin said the department is “working vigorously to ensure that our trading partners dismantle unfair barriers that stand in the way of free, fair, and reciprocal trade.” And he singled out China as of “particular concern” due to the “lack of currency transparency and the recent weakness in its currency”. Mnuchin added that they will continue to “monitor and review” China’s currency practices.

            The statement also noted that despite the lack of transparency, “Treasury estimates that direct intervention by the People’s Bank of China this year has been limited.” Though, it also warned that “recent depreciation of the renminbi will likely exacerbate China’s large bilateral trade surplus with the United States”. It placed ” significant importance” on ensuring China doesn’t engage in “competitive devaluation”.

            A total of six major trading partners are put in the monitoring list, including China, Germany, India, Japan, Korea, and Switzerland.

            Full statement and report.

            ECB Wunsch inclined to do a little bit more

              In a radio interview over the weekend, Pierre Wunsch, a hawkish member of ECB Governing Council, signaled that more action may be needed to address the issue of “very persistent” inflation in Eurozone.

              “I’m inclined to say we maybe need to do a little bit more,” Wunsch stated on Belgian public radio, leaving the door open for additional monetary policy adjustments.

              Wunsch clarified that it’s too soon to talk about a complete stop in tightening. He added that he does not expect inflation to come back to ECB’s target of 2% before 2025.

              BoJ: May need to expand QQE after consumption tax hike, just like 2014

                In the Summary of Opinions at BoJ’s December 18-19 meeting, it’s noted there has been “no further increase” in the possibility that momentum toward achieving price target will be lost. Therefore, maintaining the current guidelines for market operations and asset purchases is “appropriate”.

                Nevertheless, downside risks to economic activity and prices “continue to warrant attention”, mainly regarding overseas developments. And it’s appropriate to maintain a stance of being “tilted toward monetary accommodation”. With risks “skewed to the downside” BoJ should continue to examine “whether additional monetary easing will be necessary”.

                In particular, it’s noted that BoJ expanded QQE around half a year after the previous consumption tax hike in 2014. “It may become necessary to conduct further monetary easing this time as well”.

                Full summary of opinions here.

                Ifo: 56.2% of German companies negatively affected by coronavirus

                  Ifo Institute said 56.2% of German companies are suffering from negative impacts of coronavirus epidemic. Only 2.2% of all companies reported a positive impact. Situation is worst for tour operators and travel agencies, with 96% negative affected.

                  In manufacturing, 63% reported negative impacts. 76.4% said business trips were canceled or delayed. 52.0% noted difficulties in supply of preliminary products or raw materials. Companies in the electrical, mechanical engineering, furniture and chemical industries are most affected.

                  In trade, 63% are negatively affected. 65.9% said there are delays or failure of deliveries in purchasing. 58.7% noted decline in demand.

                  UK PM May takes floor, Hammon express support

                    UK Prime Minster takes floor in the House of Commons as two of her cabinet members resigned today over her Brexit plan. May thanks former Foreign Minister Boris Johnson and Brexit Minister David Davis.

                    May emphasized that the new Brexit plan would take back control of laws and borders. At the same time, she rejected EU’s proposal and warned that “if the EU continues on this course, there is a serious risk it could lead to no deal.”

                    May also defended the plan regarding the common rulebook on goods as she said “the friction-free movement of goods is the only way to avoid a hard border between Northern Ireland and Ireland and between Northern Ireland and Great Britain.”

                    May also said the plan agreed was a new model that would accelerate negotiations over the summer, secure a new relationship in the autumn, followed by the passing of the withdrawal bill to leave the EU in March 2019.

                    The Chancellor of Exchequer Philip Hammond expressed her support to May in his tweets.

                    Now, the question is, whether the resignation of Davis and Johnson would bring down May’s government? Or actually strengthen it.

                    US consumer confidence dropped to 135.7, remains at historically strong levels

                      US Conference Board Consumer Confidence dropped to 135.7 in November, down from 137.9, missed expectation of 136.0.

                      In the release, it’s noted that

                      • “Despite a small decline in November, Consumer Confidence remains at historically strong levels.”
                      • “Consumers’ assessment of current conditions increased slightly, with job growth the main driver of improvement.
                      • Expectations, on the other hand, weakened somewhat in November, primarily due to a less optimistic view of future business conditions and personal income prospects.
                      • Overall, consumers are still quite confident that economic growth will continue at a solid pace into early 2019.
                      • However, if expectations soften further in the coming months, the pace of growth is likely to begin moderating.”

                      Full release here.

                      UK PM May to meet EU Juncker on Thursday, Irish backstop plan awaited

                        UK Prime Minister Theresa May will travel to Brussels on Thursday to meet European Commission Jean-Claude Juncker. Obviously Brexit withdrawal agreement and Irish backstop will be the purpose.

                        Ahead of that, European Commission spokesman Margaritis Schinas said “the European Union’s position is clear.” And, “we are expecting, waiting once again to hear what the prime minister has to tell us.”

                        ECB de Guindos: Wage growth increasingly broad-based, inflation to rise over medium term

                          ECB Vice President Luis de Guindos sounded confidence in his comemnts on inflation today. He sid that “wage growth has become increasingly broad-based in recent years.”

                          And, “this, together with our monetary policy measures and the ongoing economic expansion, is expected to translate into higher underlying inflation over the medium term.”

                          Bundesbank: German growth subdued in Q1 as consumption offset by weak manufacturing

                            Bundesbank said in the monthly report that German economic growth remained subdued in Q1. The main reasons include weak industrial production, falling auto exports and deteriorating manufacturing sentiment. Manufacturing sector would drag down overall economic performance for the third straight quarter.

                            On the other hand, construction and private consumption should provide support to the economy. Employment also continues to rise despite slowdown. Bundesbank added that private consumption could pickup significantly as signaled by strong increase in retail sales.

                            Full report in German.

                            RBA minutes: Not ruling out returning to larger hikes

                              Minutes of RBA’s November 1 meeting revealed that board members consider both a 25 bps or a 50bps rate hike. There were “arguments in favour of both courses of action”, but the case for 25bps was stronger.

                              “Acknowledging the uncertainty, members did not rule out returning to larger increases if the situation warranted,” the minutes noted. “Conversely, the Board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook. Interest rates are not on a pre-set path.”

                              At the meeting, RBA raised the cash rate target by 25bps to 2.85%.

                              Full minutes here.

                              German pledges principle of balanced budget

                                German Finance Minister Olaf Scholz emphasized today that the government ” can fulfill the tasks that we’re tackling without new debt”. The comments came after Reuters reported last week that the finance ministry was considering issuance of new debt. Scholz noted policies could be implemented by abolishing an income tax surcharge for most employees, etc.

                                Chancellor Angela Merkel’s spokesman Steffen Seibert also said “the chancellor has never left any doubt … that she stands by the principle of a balanced budget.” And, “we have a policy that is not being called into question that we had balanced budgets in recent years and we continue to strive for those.”

                                US durable goods orders dropped -0.2% mom in Aug, ex-transport orders up 0.2% mom

                                  US durable goods orders dropped -0.2% mom to USD 272.7B in August, slightly worse than expectation of -0.1% mom. Ex-transport orders rose 0.2% mom, below expectation of 0.3% mom. Ex-defend orders dropped sharply by-0.9% mom. Transportation equipment dropped -1.1% mom to USD 92.0B.

                                  Full release here.

                                  US initial claims dropped to 239k, slightly above expectation

                                    US initial jobless claims dropped -11k to 239k in the week ending August 12, slightly below expectation of 240k. Four-week moving average of initial claims rose 3k to 234k.

                                    Continuing claims rose 32k to 1716k in the week ending August 5. Four-week moving average of continuing claims dropped -8k to 1692k.

                                    Full US jobless claims release here.

                                    ECB’s Panetta advocates for persistence over aggressiveness in monetary policy approach

                                      ECB Executive Board member Fabio Panetta delivered a speech today, emphasizing the importance of “persistence” over “level” in executing the bank’s monetary policy given the present economic context.

                                      Panetta stated, “In the current context where policy rates are around the level necessary to deliver medium-term price stability, I will argue that monetary policy may operate not just by increasing rates but also by keeping the prevailing level of policy rates for longer. In other words, persistence matters as much as level.”

                                      The ECB official highlighted two primary approaches to the bank’s disinflationary monetary policy: the ‘level’ approach, which involves raising the policy rate beyond its current position, risking a potential need for faster and earlier cuts, and the ‘persistence’ approach, which advocates for maintaining the policy rates at their prevailing level for an extended duration.

                                      “Emphasizing persistence may be particularly valuable in the current situation,” said Panetta, “where the policy rate is around the level necessary to deliver medium-term price stability, the risk of a de-anchoring of inflation expectations is low, inflation risks are balanced, and economic activity is weak.”

                                      He warned against the pitfalls of an aggressive rate hike strategy, stating that it “might amplify the risk associated with overtightening, which could subsequently require rates to be cut hastily in a deteriorating economic environment.”

                                      By contrast, Panetta argued, the ‘persistence’ element allows for greater flexibility, granting the central bank more time to assess the effects of its past policies and fine-tune its stance as new information emerges.

                                      He added that by underlining the importance of this ‘breathing space’, stating, “This is crucial given that – as I said before – the transmission of our monetary policy may actually turn out to be stronger than our projections indicate.”

                                      Full speech of ECB Panetta here.

                                      WEF: 63% chief economists expect global recession in 2023

                                        In the Chief Economists Outlook of the World Economic Forum, 63% of survey respondents said a global recession is likely this year, with 18% saying that it’s “extremely likely”.

                                        Prospect for growth was also bleak, all respondents expecting weak growth in Europe, (68% very weak and 32% weak). 91% expect weak growth in the US (9% very weak, and 82% weak. Even for China, 48% expect weak growth (10% very weak, 38% weak).

                                        Inflation expectations saw significant variation across regions. All respondents expect high inflation in Europe (43% high, 57% very high). Also, all respondents expect high inflation in the US (76% high, 24% very high). But only 53% expect high inflation in China (48% high, 5% very high).

                                        Full release here.

                                        Fed’s Mester foresees further tightening to ensure downward trajectory of inflation

                                          Cleveland Federal Reserve President Loretta Mester emphasized the need for further tightening in monetary policy to ensure a “sustained downward trajectory” of inflation. She pointed out that “demand is still outpacing supply in both product and labor markets and inflation remains too high.”

                                          To tackle the persistent inflation, Mester suggested that monetary policy will need to “move somewhat further into restrictive territory”, with fed funds rate “moving above 5%” and “real fed funds rate staying positive for some time”. However, she also acknowledged that the tightening journey is closer to its end than the beginning, with future rate decisions being dependent on the economy’s performance.

                                          Mester expects the unemployment rate to rise to between 4.5% and 4.75% and inflation to ease to 3.75% this year. She projects that inflation will reach the central bank’s 2% target by 2025. In response to an audience question, Mester emphasized the Fed’s aim for a “soft landing” and mentioned that she expects slow growth, well below 1%, in the current economic environment.