Philadelphia Fed President Patrick Harker told CNBC today, “I’d like to see us get to, say, above 3.4% – that was the last median in the SEP (Summary of Economic Projections) – and then maybe sit for a while.”
“But if the data says we need to keep increasing, we keep increasing. We’ve got to get inflation under control. That is Job One,” he added.
As for September meet, “whether it’s 50 or 75 I can’t say right now,” he said. But he noted that a 50bps hike is still a “substantial” one.
US GDP grew 6.4% annualized in Q1, slightly below expectation of 6.5%. BEA said: “The increase in real GDP in the first quarter reflected increases in personal consumption expenditures (PCE), nonresidential fixed investment, federal government spending, residential fixed investment, and state and local government spending that were partly offset by decreases in private inventory investment and exports. Imports, which are a subtraction in the calculation of GDP, increased.”
Canada’s GDP expanded by 0.4% mom in January, outpacing expectations of a 0.3% mom gain. Growth was broad-based, with 13 of 20 sectors contributing.
Goods-producing industries led the charge, rising 1.1% mom, the strongest monthly gain since October 2021, as all major components saw expansion. Services-producing industries posted a more modest 0.1% mom increase.
However, early estimates for February point to a flat reading, suggesting a pause in momentum. Strength in manufacturing and financial services was offset by pullbacks in real estate, oil and gas, and retail trade.
ECB Governing Council members Olli Rehn and Yannis Stournaras signaled support for a rate cut in June, provided that incoming data confirms the current trend of stabilizing inflation and moderate growth. Rehn stressed the importance of maintaining a data-dependent approach amid a backdrop of “pervasive uncertainty” stemming from geopolitical tensions and global trade conflicts.
Speaking in an interview with Kathimerini, Rehn noted that “if incoming data and macroeconomic analysis confirm the current outlook for stabilizing inflation and somewhat subdued growth, the appropriate response in June would be to continue monetary easing and lower interest rates.”
However, he cautioned against making any assumptions beyond June. “let’s stay on the path of data-driven decision-making at every meeting, especially as we find ourselves under the clouds of pervasive uncertainty due to geopolitics and trade wars,” he emphasized.
Stournaras echoed the view of a June cut, but suggested the ECB may pause thereafter to reassess. “I believe we will reduce interest rates one more time in June and then I see a pause,” he said.
Minneapolis Fed President Neel Kashkari said overnight that with the neutral policy rate near 3%, interest rates have “some room to come down gently” over the next couple of years.
Nevertheless, he noted what while headline inflation is being pushed higher by tariffs on goods, other areas like housing are experiencing disinflation, leaving overall price pressures essentially “going sideways.”
Kashkari described the current backdrop as a “tricky situation,” with inflation still too high but the labor market clearly cooling. He stressed that policymakers will need to watch developments carefully before drawing firm conclusions about the path of policy.
While acknowledging risks, Kashkari said he is not forecasting a recession. Instead, he expects the cooling in the labor market to continue in a “somewhat gentle” fashion, suggesting the Fed can gradually reduce rates without tipping the economy into contraction.
Kansas City Fed President Jeffrey Schmid highlighted in a speech overnight the decision to lower rates this year as a reflection of the “growing confidence” in inflation’s moderation.
This optimism, he explained, stems from signs that “both labor and product markets have come into better balance in recent months.”
While acknowledging this progress, Schmid cautioned, “It still remains to be seen how much further interest rates will decline or where they might eventually settle.”
Schmid also addressed concerns about the implications of large fiscal deficits on monetary policy. He emphasized that such deficits are not inherently inflationary, as long as Fed maintains its commitment to the 2% inflation target.
However, he warned that this approach could necessitate “persistently higher interest rates,” creating tensions with political authorities. He noted, “History has shown that efforts to avoid higher interest rates by accommodating deficits often result in higher inflation.”
In the latest annual report, the German Council of Economic Experts said, “a variety of bottlenecks on the supply side are disrupting global value chains and, combined with the pandemic-related restrictions that are still in place, are holding back growth.”
It forecasts Germany GDP to grow 2.7% in 2021 and 4.6% in 2022. And that subject to “significant risks” including “return of extensive measures to stop the spread of the coronavirus or persistent supply and capacity bottleneck”.
The GCEE projections an inflation rate for Germany of 3.1% in 2021 and then 2.6% in 2022. “Longer-lasting supply-side bottlenecks, higher wage settlements, and rising energy prices pose a risk, however, that what are in fact temporary drivers of prices could lead to persistently higher inflation rates,” it said.
“Fiscal policy needs to normalise following the crisis. Public finances have to be made more sustainable and crisis-resilient again,” says Volker Wieland, member of the GCEE. “The best way for monetary policy to contribute to sustainable economic growth is by maintaining price stability. A normalisation strategy should be published for this purpose.”
Cleveland Fed President Loretta Mester said in a Washington Post interview yesterday, “I don’t believe we’re in a recession… We don’t have a slowdown in labor markets, and that’s two key factors that go into calling a recession.”
“Our policy has been to raise interest rates in order to cool down the demand side of the economy…. but certainly it hasn’t slowed enough, (a), to call it a recession; and (b), to even see that moderation in demand showing through yet to a moderation and a cooling-off of price increases and inflation,” she added.
“We have more work to do because we have not seen that turn in inflation. It’s got to be a sustained several months of evidence that inflation has first peaked – we haven’t even seen that yet – and that it’s moving down,” she also noted.
UK Secretary of State for Business, Energy and Industrial Strategy Andrea Leadsom said the government is still pushing for digital tax despite repeated objections by the US. At the same time, it’s just one particular issues which will not stand in the way of a UK-US trade agreement.
She told Talk Radio: “The United States and the United Kingdom are committed to entering into a trade deal with each other and we have a very strong relationship that goes back centuries so some of the disagreements that we might have over particular issues don’t in any way damage the excellent and strong and deep relationship between the U.S. and the UK,”
“There are always tough negotiations and tough talk but I think where the tech tax is concerned it’s absolutely vital that these huge multinationals who are making incredible amounts of income and profit should be taxed and what we want to do is to work internationally with the rest of the world to cover with a proper regime that ensures that they’re paying their fair share.”
Japan’s Nikkei newspaper reported that six global central banks will meet in April, together with Bank of International Settlements on the topic of digital currencies. Central banks of the UK, Eurozone, Japan, Canada, Sweden and Switzerland said last month that they’re going to share information regarding digital currencies issuance.
For the April meeting, discussions will include ways to streamline cross-border settlement, as well as security issues. An interim report is expected in June, with a final report to be published around Autumn.
BoJ board member Takako Masai said together that “In Japan, we don’t have any plans now to issue central bank digital currencies… But we need to make an effort so we’re ready to respond, in case public demand for central bank digital currencies rise dramatically.”
New Zealand’s BusinessNZ Performance of Services Index experienced a notable dip in October, falling from 50.6 to 48.9, a level indicative of contraction in the sector. This decline also positions the index well below its long-term average of 53.5.
Activity and sales experienced a significant drop, moving from 50.9 to 47.4. There was also a downturn in employment, which decreased from 50.5 to 49.3. New orders and business fell as well,from 53.9 to 51.9. On a more positive note, stocks and inventories saw an increase, rising from 48.0 to 51.1, and supplier deliveries edged up slightly from 49.7 to 49.8.
Despite these declines, the proportion of negative comments in October decreased to 58.2%, a reduction from 61.8% in September and 63.9% in August, indicating a slight improvement in business sentiment.
BNZ Senior Economist Craig Ebert said that “combined, the PSI (48.9) and PMI (42.5) paint a picture of economic angst. This counsels caution around GDP for Q3, after it posted a surprising gain of 0.9% in Q2”.
Japan Tokyo CPI core (ex-food) slowed slightly from 2.5% yoy to 2.4% yoy in March, matched expectations. Headline CPI ticked up from 2.5% yoy to 2.6% yoy. CPI core-core (ex-food and energy) also slowed from 3.1% yoy to 2.9% yoy. Service price gains slowed to from 2.1% yoy to 2.0% yoy.
This constellation of data suggests softening of cost-push inflationary pressures within Tokyo, Japan’s economic nucleus, and a concurrent easing in service-sector inflation. This trend could provide BoJ a leverage for a more cautious approach on tightening, despite widespread expectations of another rate hike in the latter half of the year.
Other economic indicators for February released paint a mixed picture. Industrial production fell -0.1% mom, falling short of the anticipated 1.2% growth. In contrast, retail sales outperformed expectations, surging by 4.6% yoy against forecasted 3.0% increase. Meanwhile, unemployment rate rose from 2.4% to 2.6%, exceeding the projected steady rate of 2.4%.
Canada’s retail sales fell -0.1% mom to CAD 66.7B in February, worse than expectation of 0.1% mom rise. Sales were down in five of nine subsectors and were led by decreases at gasoline stations and fuel vendors (-2.2% mom).
Core retail sales, which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers, were unchanged for the month.
Advance estimate indicates that retail sales was unchanged in March.
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Monetary Policy Report Press Conference Opening Statement
Entering into US session, Yen remains the weakest one for today as risk appetite extends from Asian markets to Europe and then US. Swiss Franc is following as the second weakest and then Dollar.
Australian Dollar led commodity currencies higher for now even though, upside is relatively limited. Euro is firm despite weak German Ifo Business Climate. Meanwhile, Sterling turned mixed, losing some momentum, feeling resistance from key levels against Dollar and Euro.
For the week, Sterling remains the strongest one, followed by Kiwi and then Dollar. Aussie and Canadian are the weakest ones.
In Europe, currently:
Earlier in Asia:
France PMI Manufacturing dropped from 59.0 to 58.1, below expectation of 58.3. PMI Services dropped from 57.8 to 57.0, below expectation of 59.0. PMI Composite dropped from 57.4 to 56.8.
Joe Hayes, Senior Economist at IHS Markit said: “It’s perhaps slightly disappointing to see the headline composite output figure dip slightly in July, but as the French economy normalises to a state of looser lockdown restrictions, it is not so much of a surprise. Regardless, the PMI pointed to another strong month-on-month rate of output growth, with service providers outperforming their manufacturing counterparts once again.”
Angela Merkel secured her fourth term as Chancellor of Germany. Members of the Social Democrats voted for the coalition deal with Merkels’ CDU/CSU. Months of political uncertainty has now ended. The SPD’s vote results were overwhelming, with 66% supporting, and only 34% rejecting.
Boston Fed President Susan Collins said yesterday, “we will need to do some additional rate increases and exactly what the right amount is really needs to be dependent on a holistic review of the information that we receive.”
“It will be important to hold there for some time because it takes a while for the effects of tighter financial conditions to work through the economy,” she added.
“We’ve seen some early signs that wage and price pressures might be slowing,” she said. “But we’ve also seen some evidence that high inflation” remains, particularly in some areas of services.
UK Q2 GDP growth was finalized at 5.5% qoq, revised up from 4.8% qoq. GDP remained -3.3% below the pre-pandemic level at Q4 2019.
In output terms, the largest contributors to this increase were from wholesale and retail trade, accommodation and food service activities, education and human health, and social work activities.
There were increases in all main components of expenditure, with the largest contribution from household consumption.
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ECB Draghi: Policy has neutral effect of bank profitability, lower-income households are main beneficiaries
ECB President Mario Draghi sent separate letters to four Members of the European Parliaments today, explaining the impact of the central bank’s monetary policy. There Draghi noted the “overall effect” of ECB’s monetary policy on bank profitability has so far been “broadly neutral”. The negative impact on banks’ net interest margins has been offset by an improvement in the economic outlook that has led to an “increase in the total volume of loans” and, moreover,” improved credit quality”, which has reduced provisioning costs. Though, he also pledged to carefully monitor the overall effects of negative interest rates.
Draghi also said lending to non-financial corporations (NFCs) “recovered significantly” since the ECB introduced its non-standard monetary policy measures. And overall, the non-standard measures “have contributed to a more uniform transmission of monetary policy to bank lending rates across euro area countries and firm sizes.”
Moreover, taking into account both financial and macroeconomic effects, ECB research finds that “lower-income households have been among the main beneficiaries of the ECB’s non-standard monetary policy measures, through their positive impact on growth and employment creation.”