ECB Governing Council member Bostjan Vasle said the biggest risks for Eurozone growth is that worsening global condition could slow trade. However, the current favorable financing conditions and robust domestic demand will support Eurozone economy.
He emphasized that “it is of key importance that the instrument (TLTRO) keeps favorable conditions of financing for banks and thus supports transmission of monetary policy into banks’ credit activity”. Also ECB stand ready to use “other available measures” if needed.
Vasle also noted that persistent low inflation is a result of moderation in growth, weaker energy prices and lower wage pressures. He said “the council of governors has responded to these movements by adjusting its decrees with a purpose of ensuring the necessary accommodation line of its monetary policy also in worsened conditions.”
Separately, another Governing Council member Vitas Vasiliauskas said inflation outlook is “not bad”. And, the council still needs time to see however the economy developments in the second half of the year. Also a Governing Council member, Ewald Nowotny said there is no risk of recession, just a slowdown.
People’s Bank of China Governor Yi Gang said in a Bloomberg interview that China has “tremendous” room for adjusting its fiscal and monetary policy to counter the impact of trade war with US. And, there is no red line in Yuan’s exchange rate.
“We have plenty of room in interest rates, we have plenty of room in required reserve ratio rate, and also for the fiscal, monetary policy toolkit, I think the room for adjustment is tremendous,” Yi said. He also noted that China’s fiscal policy this year is “probably the largest and strongest fiscal reform package”. That include tax cuts and fiscal resources allocation. If situation is getting “a little bit worse”, the current fiscal package “is able to cover”. But it situations gets “tremendously worse”, they will “open the discussion”.
On Yuan exchange rate, Yi said “trade war would have a temporary depreciation pressure on renminbi”. However, he insisted “after the noise, renminbi will continue to be very stable and relatively strong compared to emerging market currencies, even compared to convertible currencies.” Meanwhile, Yi also emphasized there is no red line in the exchange rate, and no “numeric number” is more important than the others.
In a speech delivered yesterday, New York Fed President John Williams said he viewed the pre-2008 crisis era as “the world before” and the period after that as “the world after”. Inflation was a “major concerns” in the pre-2008 era. But now “inflation that’s too low is now a more pressing problem.” The experience of a slow recovery and persistently low inflation is a symptom of deeper problems afflicting advanced economies.
Two changes have taken place in “shifts in demographics and productivity growth” that fundamentally altered the economic environment. And that “translate directly into slower trend economic growth”. Also, “an abundance of savings, and a decline in demand for savings resulting from slower trend growth, together lead to lower interest rates”. Combined, they have contributed to “dramatic declines” in the longer-term neutral rate of interest, or r-star.
On the economy, he said “my baseline is a very good one” with GDP growth at above-trend 2.25% to 2.50%. Though, tailwinds from last year’s tax cuts are fading. Headwinds from trade tensions are rising. He added the yield curve inversion is a “pretty strong signal” of “perception that rates are going to be lower”. But he did’t take that as “an oracle”.
The negotiations between US and Mexico on migration and tariff issues appeared to have made some progress. But the talks would continue on Friday and probably into the weekend. It’s reported that the US is considering to delaying the 5% tariffs on all Mexican imports, which is due on Monday, June 10. But White House spokesperson Sarah Sanders reiterated Trump is still moving forward with the tariffs.
After the meeting on Thursday, US Vice President Mike Pence said Mexico had offered “more”. “There has been some movement on their part. It’s been encouraging,” he said. “The discussions are going to continue in the days ahead.” Mexican Foreign Minister Marcelo Ebrard said 6000 members of the National Guard were sent to secure its southern border with Guatemala.
IMF Managing Director Christine Lagarde said economic forecasts for US for 2019 will be raised by 0.3% to 2.6%. For 2020, growth is expected to slow to 1.9%. IMF is “seeing a lot of positives in the macroeconomic outcomes” and “there is a lot for Americans to be proud of”.
Meanwhile, IMF “full agree” with Fed’s approach in “pausing its process of raising interest rates”. That will “give policymakers time to gauge the balance of risks to both inflation and employment outcomes and to build a clearer picture of whether further adjustments in the federal funds rate are warranted.”
On trade, however, Lagarde emphasized “it will be essential that the U.S. and its trading partners work constructively together to better address distortions in the trading system”. And, “it is especially important that the trade tensions between the U.S. and its trading partners including China and Mexico… are quickly resolved through a comprehensive agreement that results in a stronger and more integrated international trading system.”
After repeating his threat to China for tariffs on the currently untaxed USD 300B in imports, Trump said he’s make a decision over the next few weeks.
Trump is in France for a ceremony for the 75th anniversary of D-Day with France President Emmanuel Macron. He said “I will make that decision I would say over the next few weeks, probably right after the G20”.
And, “One way or another I’ll make that decision after the G20. I’ll be meeting with President Xi and we will see what happens.”
Dallas Fed President Robert Kaplan reiterated his stance today that it’s premature to cut interest rates due to trade tensions. He noted “it would make sense to let this situation breathe a little bit”. And, “some of these decisions can change. We may see a new announcement and new decisions in the next four or five weeks. He added, “I am concerned…But it is too soon to make a judgment about whether there is any action that would be appropriate.”
He also said that trade with Mexico was “overwhelmingly” in US interest. He warned “if you put sand in the gears of that relationship it is going to bite and affect businesses,” Kaplan said.
ECB President Mario Draghi didn’t sound too dovish in the post meeting press conference, nor were the new economic projections. he noted that “most recent information indicates that global headwinds continue to weigh on the euro area outlook”. And, “the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets, is leaving its mark on economic sentiment.”
However, “further employment gains and increasing wages continue to underpin the resilience of the euro area economy and gradually rising inflation.” And, ECB is “determined to act in case of adverse contingencies and also stands ready to adjust all of its instruments, as appropriate”.
In the June 2019 Eurosystem staff macroeconomic projections for Eurozone, growth is projected to be at 1.2% in 2019 (revised up by 0.1%), 1.4% in 2020 (down by -0.2%) and 1.4% in 2021 (down by -0.1%). HICP is projected to be at 1.3% in 2019 (revised up by 0.1%), 1.4% in 2020 (revised down by -0.1%) and 1.6% in 2021 (unchanged).
Draghi noted that risks to growth outlook remain “tilted to the downside”.
EUR/USD dipped initially after the release in reaction to the change in forward guidance. But it’s then quickly rebounded and breaks yesterday’s high at 1.1304 on not-that-dovish Draghi.
US initial jobless claims was unchanged at 218k in the week ending June 1, slightly above expectation of 215k. Four-week moving average of initial claims dropped -2.5k to 215k. Continuing claims rose 20k to 1.682m in the week ending May 25. Four-week moving average of continuing claims dropped -1k to 1.673m.
Trade deficit dropped -2.1% to USD -50.8B, slightly larger than expectation of USD -50.5B. Exports dropped -2.2% to USD 206.8B. Imports dropped -2.2% to USD 257.6B.
With China, in April, deficit increased USD 2.1B to USD 29.4B. Exports decreased USD 1.8B to USD 8.5B and imports increased USD 0.3B to USD 37.9B. In Q1 after revisions, deficit decreased USD 22.9B to USD 80.8B. Exports increased USD 4.9B to USD 41.4B and imports decreased USD 18.0B to USD 122.2B.
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. I would like to thank Chairman of the Board Vasiliauskas for his kind hospitality and express our special gratitude to his staff for the excellent organisation of today’s meeting of the Governing Council. We will now report on the outcome of our meeting.
Based on our regular economic and monetary analyses, we have conducted a thorough assessment of the economic and inflation outlook, also taking into account the latest staff macroeconomic projections for the euro area. As a result, the Governing Council took the following decisions in the pursuit of its price stability objective.
First, we decided to keep the key ECB interest rates unchanged. We now expect them to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Second, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Third, regarding the modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III), we decided that the interest rate in each operation will be set at a level that is 10 basis points above the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation plus 10 basis points.
A press release with further details of the terms of TLTRO III will be published at 15:30 CET today.
The Governing Council also assessed that, at this point in time, the positive contribution of negative interest rates to the accommodative monetary policy stance and to the sustained convergence of inflation is not undermined by possible side effects on bank-based intermediation. However, we will continue to monitor carefully the bank-based transmission channel of monetary policy and the case for mitigating measures.
Today’s monetary policy decisions were taken to provide the monetary accommodation necessary for inflation to remain on a sustained path towards levels that are below, but close to, 2% over the medium term. Despite the somewhat better than expected data for the first quarter, the most recent information indicates that global headwinds continue to weigh on the euro area outlook. The prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets, is leaving its mark on economic sentiment.
At the same time, further employment gains and increasing wages continue to underpin the resilience of the euro area economy and gradually rising inflation. Today’s policy measures ensure that financial conditions will remain very favourable, supporting the euro area expansion, the ongoing build-up of domestic price pressures and, thus, headline inflation developments over the medium term. Looking ahead, the Governing Council is determined to act in case of adverse contingencies and also stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP rose by 0.4%, quarter on quarter, in the first quarter of 2019, following an increase of 0.2% in the fourth quarter of 2018. However, incoming economic data and survey information point to somewhat weaker growth in the second and third quarters of this year. This reflects the ongoing weakness in international trade in an environment of prolonged global uncertainties, which are weighing, in particular, on the euro area manufacturing sector. At the same time, the euro area services and construction sectors are showing resilience and the labour market is continuing to improve. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, the mildly expansionary euro area fiscal stance, further employment gains and rising wages, and the ongoing – albeit somewhat slower – growth in global activity.
This assessment is broadly reflected in the June 2019 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.2% in 2019, 1.4% in 2020 and 1.4% in 2021. Compared with the March 2019 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised up by 0.1 percentage points for 2019 and has been revised down by 0.2 percentage points for 2020 and by 0.1 percentage points for 2021.
The risks surrounding the euro area growth outlook remain tilted to the downside, on account of the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.2% in May 2019, after 1.7% in April, reflecting mainly lower energy and services price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months, before rising again towards the end of year. Looking through the recent volatility due to temporary factors, measures of underlying inflation remain generally muted, but labour cost pressures continue to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and stronger wage growth.
This assessment is also broadly reflected in the June 2019 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.3% in 2019, 1.4% in 2020 and 1.6% in 2021. Compared with the March 2019 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised up by 0.1 percentage points for 2019 and revised down by 0.1 percentage points for 2020.
Turning to the monetary analysis, broad money (M3) growth stood at 4.7% in April 2019, after 4.6% in March. Sustained rates of broad money growth reflect ongoing bank credit creation for the private sector and low opportunity costs of holding M3. The narrow monetary aggregate M1 continues to be the main contributor to broad money growth on the components side.
The annual growth rate of loans to non-financial corporations increased to 3.9% in April 2019, from 3.6% in March. Beyond short-term volatility, the annual growth rate of loans to non-financial corporations has moderated somewhat in recent months from its peak in September 2018, reflecting the typical lagged reaction to the slowdown in economic growth observed over the course of 2018. The annual growth rate of loans to households stood at 3.4% in April, compared with 3.3% in March, continuing its gradual improvement.
The monetary policy measures taken today, including TLTRO III, will help to safeguard favourable bank lending conditions and will continue to support access to financing, in particular for small and medium-sized enterprises.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. The 2019 country-specific recommendations should serve as the relevant signpost. Regarding fiscal policies, the mildly expansionary euro area fiscal stance is providing support to economic activity. At the same time, countries where government debt is high need to continue rebuilding fiscal buffers. All countries should reinforce their efforts to achieve a more growth-friendly composition of public finances. Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.
ECB left interest rates unchanged today as widely expected. That is, main refinancing, marginal lending and deposit rates are kept at 0.00%, 0.25% and -0.40% respectively.
ECB changed the forwards guidance and said interest rates will remainat present levels “at least through the first half of 2020, longer than “the end of 2019”. ECB also announce the rates of TLTRO III opertaions.
Full release below.
Monetary Policy Decisions
At today’s meeting, which was held in Vilnius, the Governing Council of the European Central Bank (ECB) took the following monetary policy decisions:
(1) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
(2) The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
(3) Regarding the modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III), the Governing Council decided that the interest rate in each operation will be set at a level that is 10 basis points above the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III will be lower and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation plus 10 basis points.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
Eurozone Q1 GDP growth was finalized at 0.4% qoq, unrevised. Over the year, Eurozone GDP grew 1.2% yoy. EU28 growth was finalized at 0.5% qoq, 1.5% yoy.
Among Member States for which data are available for the first quarter of 2019, Croatia (1.8%) recorded the highest growth compared with the previous quarter, followed by Hungary and Poland (both 1.5%). A decrease was observed in Latvia (-0.1%).
Quarterly, on the components, household final consumption expenditure rose by 0.5% in both the euro area and the EU28. Gross fixed capital formation increased by 1.1% in the euro area and by 1.3% in the EU28. Exports increased by 0.6% in the euro area and by 0.5% in the EU28. Imports increased by 0.4% in the euro area and 1.2% in the EU28.
European Commission Vice President Valdis Dombrovskis said that Italy will need a “substantial deficit correction in 2019 and 2020”. He told La Repubblica daily a day after the Commission opened the way to so called “Excessive Deficit Procedure” on Italy. Dombrovskis also warned the coalition government’s planned tax cut reform could be very expensive and risks further deteriorating Italy’s public finances.
Economics Commissioner Pierre Moscovici told the European affairs commission of the lower house of France’s parliament, “it’s up to Italy to bear the burden of proof that it’s reducing its deficits and debt.” He reiterated that “my door is open to talk, to listen and to take note.”
Italy’s Deputy Prime Minister Luigi Di Maio insisted “there should not be a budget correction.” The coalition will start negotiations with EU to avoid disciplinary proceedings over its rising debt. However, Di Maio emphasized that such negotiations should be led by politicians, not “bureaucrats”.
Trump reiterated his threat to further escalate trade war with China again as the told reporters today. He said “Our talks with China, a lot of interesting things are happening. We’ll see what happens… I could go up another at least $300 billion and I’ll do that at the right time. But he added that “China wants to make a deal” and “Mexico wants to make a deal badly.”
On the other hand, China’s Commerce Ministry blamed Trump’s use of “ultimate pressure” has caused serious setbacks to trade negotiations. The ball is in the US court as future direction of talks would depend on Washington. MOFCOM also said China will have to adopt the necessary countermeasures if the United States decides to unilaterally escalate trade tensions.
ECB rate decision is the main focus for today. The central bank is widely expected to keep benchmark interest rate at 0.00%. Marginal lending facility rate and the deposit facility rate will be held at 0.25% and -0.40% respectively. The forward guidance that interest rates will “remain at their present levels at least through the end of 2019” would likely be untouched too.
Eurozone economy has been slowing down since late last year and the recovery has been very weak. That’s very much reflected in manufacturing PMI which was stuck at 47.7 in May. Deterioration was spreading over to services with PMI held at just 52.9. The survey data indicate a mere 0.2% GDP growth in Q2. Headline CPI also slowed notably to 1.2% yoy in May, well below ECB’s 2% target.
The weak growth and inflation outlook will likely be reflected in the new economic projections to be released today. The question is whether ECB President Mario Draghi will shift to a more dovish tones in the press conference. Also, there’s a chance Draghi could even signal some openness to further easing. Indeed, there are speculations that ECB could cut the deposit rate further into negative territory next year. ECB would also release details of the TLTRO III.
Australia trade surplus came in smaller than expected at AUD 4.87B in April. Exports rose 2.5% mom, 17.2% yoy to AUD 40.42B. Imports rose 2.8% mom, 5.4% yoy to AUD 35.55B.
Looking at the details of exports, non-rural goods rose AUD 691m (3%), non-monetary gold rose AUD 272m (20%) and net exports of goods under merchanting rose AUD 8m (73%). Rural goods fell AUD 67m (2%). Services credits rose AUD 65m (1%).
For imports, intermediate and other merchandise goods rose AUD 423m (4%), capital goods rose AUD 308m (5%) and consumption goods rose AUD 298m (3%). Non-monetary gold fell AUD 40m (9%). Services debits fell AUD 5m.
IMF Managing Director Christine Lagarde said the global economy is not under threat of recession due to US tariffs actions on other countries. She told Reuters yesterday, “Decelerating growth, but growth nonetheless — 3.3 percent at the end of this year, and certainly a strong U.S. economy. We do not see at the moment, in our baseline, a recession.”
However, still, “one more tariff here, one more threat there, one more negotiation that has not yet started, add to a global uncertainty which is not conducive to additional growth,” she added.
The high-level meeting between US and Mexico on migration ended with insufficient progress. Trump tweeted that “Progress is being made, but not nearly enough!” He threatened again “If no agreement is reached, Tariffs at the 5% level will begin on Monday, with monthly increases as per schedule. The higher the Tariffs go, the higher the number of companies that will move back to the USA!”
Vice President Mike Pence, who chaired the meeting including Secretary of State Michael Pompeo and Mexican Foreign Minister Marcelo Ebrard, also echoed Trump’s comments. He tweeted “Progress was made but as @POTUS said “not nearly enough.” @SecPompe, @DHSMcAleenan, & I made clear: Mexico must do more to address the urgent crisis at our Southern Border.”
Ebrard said after the meeting that there was no discussions on tariffs. “The dialogue was focused on migration flows and what Mexico is doing or is proposing to the United States, our concern about the Central American situation.” He noted “what the US government is looking for are measures in the short-term and medium-term”. Instead, Mexico is promoting long term fix involving a development deal for Central America which would eventually slow migration.
Meeting will continue on Thursday and if no agreement is made, US will starting imposing 5% tariffs on all Mexican imports on June 10. That rate would “gradually” go up to 25% on October 1.
Fitch cut Mexico’s rating from BBB+ to BBB and cited that “growth continues to underperform, and downside risks are magnified by threats by U.S. President Trump.” Moody’s downgraded Mexico’s outlook from stable to negative and noted “further evidence that medium-term growth is in decline, whether as a result of policies that actively undermine growth or because of continued policy unpredictability, would put downward pressure.”
USD/MXN has a rough ride but is generally kept inside this week’s range.
In a blog post titled “How to Help, Not Hinder Global Growth”, IMF Managing Director Christine Lagarde “most recent economic data indicate that global growth may be stabilizing”. She noted “while first-quarter economic activity disappointed in parts of emerging Asia and Latin America, growth was stronger than expected in the United States, the euro area, and Japan. ”
The most important “stumbling block” is trade tensions. Lagarde said “there is strong evidence that the United States, China, and the world economy are the losers from the current trade tensions”. Overall, US-China-tariffs could reduce global GDP by 0.5% in 2020, or USD 455B. And she warned that “these are self-inflicted wounds that must be avoided”.
WTI crude oil drops sharply as US commercial crude oil inventories surprisingly rose 6.8M barrels in the week ending May 31. That’s way above expectation of -1.7M barrels decline. Now at 483.3M barrels, US crude oil inventories are about 6% above five year average for this time of the year.
WTI’s fall from 66.49 resumes and hits as low as 51.25. It’s now pressing 61.8% retracement of 42.05 to 66.49 at 51.38. Further decline will now remain in favor as long as 54.61 minor resistance holds. Sustained break of 51.38 could pave the way to retest 42.05 low.
ECB Vasle: TLTRO keeps favorable financing conditions and supports transmission of monetary policy
ECB Governing Council member Bostjan Vasle said the biggest risks for Eurozone growth is that worsening global condition could slow trade. However, the current favorable financing conditions and robust domestic demand will support Eurozone economy.
He emphasized that “it is of key importance that the instrument (TLTRO) keeps favorable conditions of financing for banks and thus supports transmission of monetary policy into banks’ credit activity”. Also ECB stand ready to use “other available measures” if needed.
Vasle also noted that persistent low inflation is a result of moderation in growth, weaker energy prices and lower wage pressures. He said “the council of governors has responded to these movements by adjusting its decrees with a purpose of ensuring the necessary accommodation line of its monetary policy also in worsened conditions.”
Separately, another Governing Council member Vitas Vasiliauskas said inflation outlook is “not bad”. And, the council still needs time to see however the economy developments in the second half of the year. Also a Governing Council member, Ewald Nowotny said there is no risk of recession, just a slowdown.