In the October Philadelphia Fed Manufacturing Business Outlook Survey, the diffusion index for current general activity dropped to 23.8, down from 30.7, below expectation of 26.0.
Looking at some details, current shipments index was essentially unchanged at 30.0. New orders rose 15 pts to 30.8. Employment index rose from 26.3 to 30.7. The index for prices paid rose 3 pts to 70.3. Current prices received index dropped -2 to 51.1. Price indicators remained elevated.
Canada CPI rose 0.3% mom in October, matched expectations. Annually, CPI was unchanged at 1.9% yoy, match expectations too. Excluding gasoline, the CPI slowed to 2.3% yoy following three consecutive monthly increases of 2.4% yoy
New Zealand BusinessNZ Performance of Manufacturing dropped sharply to 53.4 in February, down -4.6 pts from 58.0. Looking at some details, production dropped from 59.3 to 57.3. Employment dropped from 56.1 to 49.8. New orders tumbled from 62.8 to 56.2.
“Despite the PMI remaining in expansion, the proportion of those outlining negative comments stood at 54%, compared with 46% in January. Given the second recent partial lockdown, it remains to be seen what impact this will have on the sector over the next few months,” said BusinessNZ’s executive director for manufacturing Catherine Beard.
BNZ Senior Economist, Craig Ebert said that “supply issues were to the fore from respondents’ comments to February’s PMI survey. Of those citing negative factors, supply rather than demand problems dominated, with frequent references to supply chains, shipping, freight, costs, and difficulties in finding suitable staff.”
Australia employment rose 88.7k in February, well above expectation of 31.5k. Full-time jobs grew 89.1k while part-time jobs dropped -0.5k. Unemployment rate dropped -0.5% to 5.8%, much lower than expectation of 6.3%. Participation rate rose 0.1% to 66.1%. Monthly hours worked rose 102m hours to 1.665m.
Bjorn Jarvis, head of labour statistics at the ABS, said “The strong employment growth this month saw employment rise above 13 million people, and was 4,000 people higher than March 2020.”
German ZEW Economic Sentiment jumped from 42.9 to 47.1 in May, above expectation of 44.9. Current Situation Index also rose from -79.2 to -72.3, above expectation of -75.0.
Eurozone ZEW Economic Sentiment rose from 43.9 to 47.0, above expectation of 46.1. Current Situation Index jumped by 10.2 pts to -38.6.
ZEW President Professor Achim Wambach said: ” Signs of an economic recovery are growing, bolstered by better assessments of the overall eurozone and of China as a key export market. The increased optimism is reflected in particular in the sharp rise in expectations for domestic consumption, followed by the construction and machinery sectors.”
Germany GDP grew 0.1% qoq in Q3, beat expectation of -0.1% qoq. Returning to growth suggests that the Eurozone’s largest economy had avoided a technical recession. Over the year, GDP grew 0.5% yoy, price and calendar adjusted. Economy Minister Peter Altmaier said “we do not have a technical recession, but the growth numbers are still too weak.”
US initial jobless claims dropped -10k to 204k in the week ending January 11, better than expectation of 220k. Four-week moving average of initial claims dropped -7.75k to 216.25k.
Continuing claims dropped -37k to 1.767m in the week ending January 4. Four-week moving average of continuing claims rose 10.5k to 1.756m.
ECB Chief Economist Philip Lane described disinflation process as “necessarily bumpy” at the current phase. In a speech, he pointed out that headline inflation is expected to “fluctuate around current levels in the near term,” influenced by base effects in energy sector and recent reversal of service inflation spikes caused by the early timing of Easter.
Meanwhile, Lane noting that while wage pressures are “gradually moderating,” they remain above what would be considered normal or steady-state levels. He emphasized that achieving ECB’s inflation target involves not just controlling wage growth but also managing profit margins across the economy.
Looking ahead to June Governing Council meeting, Lane indicated that ECB’s decisions would be informed by “updated staff projections” and comprehensive data on wage and profit dynamics from the early months of the year. He suggested that if these updated assessments and data provide stronger confidence that inflation is converging to ECB’s targets, it could be “appropriate to reduce the current level of monetary policy restriction.”
A wave of comments from several Fed officials overnight highlighted a consensus on the need for patience before initiating interest rate reductions. While the higher than expected inflation readings in January and February were “concerning”, they’re not seen as derailing the broader disinflation process yet. Nevertheless, the sentiment is clear: more evidence is required to confirm inflation’s downward path towards 2% target before any policy easing is initiated.
Cleveland Fed President Loretta Mester emphasized the necessity of observing “a couple more months of data” to verify if the recent inflationary trends are indeed reversing. Mester pointed out the need for “more evidence” that supports the continuation of inflation’s decline. Meanwhile, Fed is in a “policy position” to adjust policy “more swiftly and sooner” if labor markets were to “deteriorate significantly”
Minneapolis Fed President Neel Kashkari on penciled in two “rate cuts” this year back in March, predicated on inflation’s decline towards target.” Yet, if inflation is “moving sideways”, he would question “whether we needed to do those rate cuts at all.”
Chicago Fed President Austan Goolsbee said the inflation in the first two months of the year “should not knock us off the path back to target”. He views housing inflation as the “most valuable indicator” now. “If it does not come down, we will have a very difficult time getting overall inflation back to the 2% target.”
Richmond Fed President Thomas Barkin emphasized the strategic patience afforded by a “strong labor market,” suggesting that Fed has the time needed for the economic “clouds to clear” before commencing with rate adjustments.
In its monthly report, Germany’s Bundesbank said “Germany’s economic output could have shrunk again slightly in the third quarter of 2019”. And, “the decisive factor here is the continued downturn in the export-oriented industry.”
Bundesbank doesn’t expect an outright recession. It still warned, “early indicators currently provide few signs of a sustainable recovery in exports and a stabilization of the industry.” “This raises the risk that the slowdown extends to a greater extent to more domestically oriented sectors.”
The UK government is expected to publish its assessment of the impact of different Brexit outcomes today. BoE will also publish it’s own assessments on interest rates implications.
According to a report by the Daily Telegraph, the government would show that with PM Theresa May’s Brexit deal, the UK economy would be 1-2% smaller in 15 years time comparing to remaining in EU. In case of no-deal, the economy would be 7.6% smaller.
Separately, Chancellor of Exchequer Philip Hammond told BBC that “If the only consideration, the only consideration, was the economy, then the analysis shows clearly remaining in the European Union would be a better outcome for the economy, but not by much. But he also noted that “The prime minister’s deal delivers an outcome that is very close to the economic benefits of remaining in.”
European Commission Vice-President Valdis Dombrovskis warned today that “growth is slowing down and risks are mounting.” He added “trade and geopolitical tensions translate into elevated and lasting uncertainty and the possibility of a disruptive Brexit remains real.”
Chief Brexit negotiator Michel Barnier said that they’re still “waiting” for any new “legal and operational” proposals regarding Irish backstop from the UK.
ECB Vice President Luis de Guindos said in a speech that “at the moment, risks from the early withdrawal of policies are higher than the risks associated with keeping support measures in place.”
He also surged that “all stakeholders”, partly fiscal ones, “must keep complementing our accommodative monetary stance”. For a timely recovery in Europe, “we have to avoid any cliff effects from the premature scaling back of these policies”.
Looking ahead, “completing the banking union and deepening the capital markets union are the best policy tools we have at our disposal to ensure that the EU financial sector is conducive to fostering long-term growth and that it embraces all the opportunities offered by the digital transformation and the transition to green technologies.”
DOW opens sharply lower today and after initial recovery attempt, selling intensifies again. At the time of writing it’s down -500 pts, or -1.98% at 24817. Technically, the break of 24899.77 support confirms resumption of whole decline from 26951.81 high. Next target will be 61.8% projection of 26951.81 to 24899.77 from 25817.68 at 24549.51.
In the longer term picture, fall from 26951.81 is seen as corrective whole up trend fro 15450.56 (2016 low). Such correction would extend to 38.2% retracement of 15450.56 to 26951.81 at 22558.33 before completion.
Atlanta Fed President Fed Bostic said that one more rate hike this year remains his model projection, provided that the economy growths by 2.5%.
However, he emphasized “it’s important that we don’t go too fast and act in a non-prudent way that lines up inadvertently restricting the economy and weakening the economy.”
Also he noted nervousness among business has “informed my view of how we should think about it. It’s made me feel I don’t need to rush to get us into neutral, we can take our time to get to that point.”
In the annual report from Bundesbank, ECB Governing Council member Joachim Nagel emphasized the importance of caution and patience. “Even though it may be very tempting, it is too early to cut interest rates. This is because the price outlook is not yet clear enough,” Nagel stated.
Furthermore, Nagel’s call for perseverance reflects an understanding of the challenges inherent in steering monetary policy towards achieving price stability. “We should not let ourselves stray away from the path we have embarked on,” he advised, emphasizing the need for consistency and resilience in ECB’s policy stance.
Australia PMI Manufacturing rose to 59.9 in May, up from 59.7, hitting another record high since May 2016. PMI Services dropped to 58.2, down from 58.8. PMI Composite also dropped slightly to 58.1, down from 58.9.
Jingyi Pan, Economics Associate Director at IHS Markit, said: “Australia’s private sector growth eased from April’s survey record. That said, growth remained sharp to affirm the continued improvement in economic conditions following the easing of COVID-19 restrictions.
“Export orders notably continued to improve, reflecting the robust external demand despite concerns of rising COVID-19 cases in the region. In turn, this filtered through to the labour market with employment improving at the fastest pace in the survey’s five-year history.
“The outlook for activity over the coming year remained optimistic, particularly in the service sector in May. Ongoing supply-chain disruptions, however, continued to impact private sector firms, pushing up input cost inflation and thereby output prices.”
ECB Governing Council member Klaas Knot said, “My worry is still inflation, inflation, inflation… As long as the risks to our inflation outlook are so clearly tilted to the upside, I think the risk of us doing too little is clearly more pronounced than us doing too much… We should not give up too early and not cry victory too early.”
Knot also said a recession is “not a foregone conclusion”. “If you look at Germany, where actually the economy is doing better than then was feared, it’s not a foregone conclusion that we will get a recession”, he said. “We will get weaker growth, that’s for sure. But we also need weaker growth to bring inflation back to target.”
Sterling opens the week mildly lower but loss is so far very limited. The House of Commons voted on Saturday to withhold the decision on UK Prime Minister Boris Johnson’s Brexit instead. Instead, MPs forced Johnson to seek another three-month extension from EU first. While initially refused, Johnson eventually sent a delay request to EU, without signing it.
At this point, it’s generally viewed that UK is still on track for orderly Brexit, just deferred. The vote on the Withdrawal Agreement Bill could still be held on Tuesday, after Johnson makes another attempt on Monday to get Parliament to sign off on the principle of his deal. And, if Johnson wins, the extension request could be withdrawn and Brexit will happen on October 31.
The Times of London reported that EU is ready to approve a three-month flexible extensions. UK could leave EU earlier if the Parliament could ratify a deal. Or, Germany could push for a longer extension, pushing the deadline well into June 2020, if the UK government meets are serious obstacles.
The UK government activated the so-called “Operation Yellowhammer” on Sunday, entering the “final, most intensive stage” of disorderly Brexit preparation. Quoted by Bloomberg, a government official said, “with less than two weeks until 31 October, hundreds of civil servants will from today move to work on these operational matters.”
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Fed Mester: My positive baseline outlook depends on very accommodative policy
Cleveland Fed President Loretta Mester said she expected unemployment rate to fall to 4.5% or lower this year, with GDP growth in 6-7% range. She emphasized, “my positive baseline outlook depends on appropriate monetary policy, which, in my view, will need to be very accommodative for some time to support the broadening of the recovery.”
“I wouldn’t consider the increase in inflation I expect this year to be the type of sustainable increase needed to meet the forward guidance on our policy rate,” she said. “So I expect to be deliberately patient unless there is clear evidence that inflation pressures will push inflation to exceed our desired path.”
“I need to see more improvement before I would consider the conditions of our forward guidance on asset purchases as being met,” said Mester.