UK retail sales volumes rose 0.5% mom in April, well above expectation of 0.0% mom. Excluding automotive fuel, sales volume rose 0.8% mom. Sales value rose 1.1% mom in the month, with ex-automotive fuel sales value up 1.7% mom.
In the three months to April, sales volumes rose 0.8% 3mo3m, the highest rates since August 2021, which was at 1.3% 3mo3m.
Australia retail sales turnover was flat at 0% mom in April, and up 4.2% yoy.
“Retail turnover has plateaued over the last six months as consumers spent less on discretionary goods in response to cost-of-living pressures and rising interest rates. Spending was again soft in April but was boosted by increased spending on winter clothing in response to cooler and wetter than average weather across the country,” Ben Dorber, ABS head of retail statistics said.
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.
BoJ Governor Kazuo Ueda stressed the importance of not prematurely tightening monetary policy to ensure that Japan can sustainably achieve its 2% inflation target. However, Ueda also suggested potential adjustments to the Yield Curve Control (YCC) if the policy’s benefits and costs shift.
As for Japan’s inflation forecast, Ueda expects consumer inflation to slow down as global fuel and raw material prices have begun to decline. Despite this projection, he did not entirely dismiss the possibility of needing to revise this outlook. “We can’t completely rule out the possibility that this projection could prove wrong,” Ueda said, adding, “If that’s the case and if we see the need to revise our forecast, we’d like to act swiftly.”
Ueda elaborated on possible modifications to the YCC policy. “If the BOJ were to modify YCC in the future, there are various ways of doing so,” he stated. One potential approach he mentioned was targeting bond yields in the five-year zone, rather than the current 10-year zone.
“But I won’t comment on whether we would definitely do so, how likely this could happen, or under what conditions the BOJ would see this option as desirable,” Ueda said.
US initial jobless claims rose 4k to 229k in the week ending May 20, below expectation of 253k. Four-week moving average of initial claims was unchanged at 232k.
Continuing claims dropped -5k to 1794k in the week ending May 13. Four-week moving average of continuing claims dropped -12k to 1800k.
ECB Vice President Luis de Guindos told lawmakers in Brussels today, “Our future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to our 2% medium-term target.” Then, interest rates will be “kept at those levels for as long as necessary,” he said.
“Within less than a year we have raised the key interest rate by 375 basis points so far, stopped net purchases of bonds, and will probably stop reinvesting via the APP program from July,” he said. “And the ECB Governing Council will continue on this monetary tightening path to overcome high inflation.”
“As the energy crisis fades, governments should roll back the related support measures promptly and in a concerted manner to avoid driving up medium-term inflationary pressures, which would call for a stronger monetary policy response,” de Guindos added.
Separately, Governing Council member, Bostjan Vasle, said “Further interest-rate increases will be needed.”
“But they’ll be smaller than they were in the past. We’re approaching the level of rates that’s restrictive enough to bring inflation back toward 2%. Fiscal — including wage policy — and monetary policies will have to be linked to a greater extent than in the past,” Vasle noted.
Germany Gfk consumer sentiment for June rose slightly from -25.8 to -24.2, above expectation of -24.5. In May, economic expectations dropped from 14.3 to 12.3. Income expectations rose from -10.7 to -8.2. Propensity to buy dropped from -13.1 to -16.1.
“Consumer sentiment is not showing a clear upward trend at present. As a result, the rise in consumer climate index has slowed again somewhat,” explains Rolf Bürkl, GfK consumer expert.
“A lower propensity to save has prevented the recovery in consumer sentiment from stagnating this month. However, it is still below the low level of spring 2020 during the first Covid-19 lockdown.”
In his address to the parliament’s finance and expenditure committee, RBNZ Governor Adrian Orr noted that the country’s interest rates are already significantly above neutral, thereby suppressing spending and investment.
“They (interest rates) are well above what we would consider neutral, are constraining spending and investment,” Orr said. He further stated, “The committee is confident monetary policy is restrictive and doing its job.”
Orr characterized yesterday’s 25bps rate hike as “an extra bit of insurance.” The RBNZ committee voted five to two in favor of raising the OCR with two dissenting votes advocating for holding. Orr was quick to downplay any notion of discord within the committee. “On the division in the committee, the voting, there is no division. It’s a committee decision,” he told the parliamentary committee.
Looking forward, Orr hinted that the RBNZ might start easing interest rates in early next year. “The committee expects the OCR to remain steady until early next year. At that point, we may be able to start easing interest rates,” he noted.
Atlanta Fed President Raphael Bostic recently made some forward-looking remarks on monetary policy in an interview with MarketPlace, stating that the likelihood of a rate cut before 2024 is low given the current inflation levels.
He noted, “My best case is that we won’t be thinking about a cut until well into 2024. And, you know, inflation is just double what our target is by just about every measure.”
“I don’t see scenarios where the economy is going to evolve in a way such that inflation gets close enough to our target where we might contemplate any kind of cut,” he added.
Fed Governor Christopher Waller said in a speech that the upcoming data over the next few months is unlikely to clearly indicate that the terminal rate has been reached.
Waller stated, “I do not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our 2 percent objective.”
He went on to say that the decision about whether to raise rates or hold off in the upcoming June meeting would be contingent on the data collected over the next three weeks.
Waller noted, “We will get additional labor market data, with some information about wages, and additional inflation numbers in the next few weeks that will continue to shape my view on where we stand relative to the FOMC’s dual mandate.”
According to minutes from May 2-3 meeting of FOMC, there’s a cloud of uncertainty over the prospect of future policy tightening. The committee’s participants “generally agreed” that the cumulative effects of monetary policy tightening and the possible impact of further tightening on the economy render the extent of future target range increases “less certain”.
The minutes report, “Participants generally expressed uncertainty about how much more policy tightening may be appropriate.” This theme of uncertainty was echoed throughout the document, with the committee members emphasizing the need to “‘retain optionality” after the meeting.
Moreover, the minutes reveal, “Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.” This implies that should economic conditions continue on their current trajectory, additional policy tightening may not be required, underscoring the tentative stance adopted by the FOMC.
In their most recent monthly report, the experts at Bundesbank forecast that Germany’s economic output will experience a modest increase in the second quarter of 2023. A confluence of factors, including easing supply bottlenecks, a substantial backlog of orders, and a decrease in energy prices, are all expected to bolster the ongoing recovery of the industrial sector.
Despite the continuing high inflation, the sharp rise in wages should prevent further declines in the real net income of private households. As a result, private consumption is predicted to remain steady, rather than falling.
Bundesbank stated, “The German economy stagnated in the first quarter of 2023 after shrinking in the previous quarter”. The bank’s experts maintain an overall slightly positive outlook for the labor market, although they note that its prospects have not brightened further in recent months.
In light of the robust labor market, high inflation, and the anticipated economic improvement, the Bundesbank predicts, “high wage agreements can also be expected in the coming months”.
Germany Ifo Business Climate dropped from 93.4 to 91.7 in may, below expectation of 93.4. This also marked the first decline in the index after six increases in a row. Current Assessment Index dropped from 95.1 to 94.8, worse than expectation of 95.2. Expectations Index, also dropped from 91.7 to 88.6, below expectation of 91.7.
By sector, manufacturing dropped sharply from 6.3 to -0.3. That’s the largest decrease since March 2022, after the start of the war in Ukraine. Services ticked down from 6.9 to 6.8. Trade tumbled from -10.7 to -19.1. Construction also dropped from -16.6 to -18.2.
Ifo said: “Sentiment in the German economy has suffered a setback….. Driving this development are the significantly more pessimistic expectations. Managers are somewhat less satisfied with their current situation. German companies are skeptical about the upcoming summer.”
UK CPI slowed from 10.1% yoy to 8.7% yoy in April, above expectation of 8.2% yoy. On a monthly basis, CPI rose by 1.2% mom, above expectation of 0.8% mom.
CPI core (excluding energy, food, alcohol and tobacco) rose from 6.2% yoy to 6.8% yoy, above expectation of 6.2% yoy. That’s the highest level since March 1992.
CPI goods annual rate eased from 12.8% yoy to 10.0% yoy, while the CPI services annual rate rose from 6.6% yoy to 6.9% yoy.
RBNZ raised OCR by 25bps to 5.50% today, reaching the projected peak interest rate. The decision was made by a 5-2 vote, with two committee members voted for no change. The central bank noted that “The OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1% to 3% annual target range, while supporting maximum sustainable employment.”
The overall announce was seen as being dovish by the markets, sending New Zealand Dollar broadly lower. NZD/USD’s break of 0.6181 support confirms resumption of the decline from 0.6383 for retesting 0.6083/0.6110 support zone.
More importantly, the development is inline with the view that corrective pattern from 0.6083 has completed with three waves up to 0.6383. That is, the decline from 0.6537 might be ready to resume too. Firm break of 0.6083 will target 100% projection of 0.6537 to 0.6083 from 0.6383 at 0.5929.
UK PMI Manufacturing dropped from 47.8 to 46.9 in May, a 5-month low. PMI Services dropped from 55.9 to 55.1. PMI Composite dropped from 54.9 to 53.9.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“The UK economy enjoyed another month of strong growth in May, with the expansion continuing to be driven by surging post-pandemic demand in the service sector, notably from consumers and for financial services, with hospitality activities buoyed further by the Coronation. The surveys are consistent with GDP rising 0.4% in the second quarter after a 0.1% rise in the first quarter…
“The UK is therefore seeing a tale of two economies, with the divergence between manufacturing and services posing difficulties for policymakers. However, it’s the far larger service sector that will typically dictate policy, meaning these survey results are nothing but hawkish in suggesting the Bank of England has more work to do to quash stubbornly high inflationary pressures in the services economy.”
Eurozone PMI Manufacturing fell from 45.8 to 44.6 in May, a 36-month low. PMI Services fell from 56.2 to 55.9. PMI Composite decreased from 54.1 to 53.3.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank said: Eurozone GDP is likely to have grown in the second quarter thanks to the healthy state of the services sector. However, the manufacturing sector is a powerful drag on the momentum of the economy as a whole.
He added that ECB will have a “headache” with the PMI price data, as “selling prices in the services sector actually rose more than in the previous month”.
Full Eurozone PMI release here.
Also released, Germany PMI manufacturing dropped from 44.5 to 42.9 in May, a 36-month low. PMI Services rose from 56.0 to 57.8, a 21-month high. PMI Composite rose from 54.2 to 54.3, a 13-month high.
France PMI Manufacturing rose from 45.6 to 46.1. PMI Services dropped from 54.6 to 52.8. PMI Composite dropped from 52.4 to 51.4.
Japan PMI Manufacturing rose from 49.5 to 50.8 in April, signalling the first improvement in operating conditions since October 2022. PMI Manufacturing Output rose from 47.9 to 51.9. PMI Services rose from 55.4 to 56.3. PMI Composite Output rose from 52.9 to 54.9.
Usamah Bhatti, Economist at S&P Global Market Intelligence, said:
“The Japanese private sector economy continued on an upward trajectory, as signalled by a further expansion in May. The rate of growth quickened from April to reach the strongest since October 2013 and the second-strongest in the survey history (since September 2007).
“Service providers continued to report strong growth momentum with a renewed record increase in business activity, while manufacturers indicated an improvement in operating conditions for the first time in seven months, with output and new orders returning to expansion territory for the first time since last June.”
Australia’s PMI Manufacturing index stayed put at 48.0 in May, marking the joint-lowest reading since May 2020. On the other hand, PMI Services fell from 53.7 to 51.8, causing Composite PMI to decrease from 53.0 to 51.2.
Warren Hogan, Chief Economic Advisor at Judo Bank, said, “The May Flash result shows a small retracement from the strong April outcome reinforcing the view that overall economic activity in Australia is holding up well as we enter the winter months.”
Despite the manufacturing sector’s continuous slowdown, Hogan emphasized that this does not signal a recession. In contrast to manufacturing, the services sector has shown recent strength, and was “far from the risk of recession:.
However, he warned of the implications of better economic conditions in terms of inflation. “The RBA is trying to engineer a soft landing to rid the economy of inflation. But if they don’t lean hard enough on monetary policy, we could see a more stubborn inflation emerge which will ultimately require a bigger lift in interest rates,” Hogan cautioned.
Highlighting the strong correlation between the pick-up in the services PMI, housing market, rising population growth, and job advertising, he concluded, “Last week’s labour market data on employment and wages have bought the RBA some time, but the Flash PMIs highlight that it is still too early to call an end to the monetary policy tightening cycle.”
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ECB Lane: Reversal of energy prices will feed into lower core
ECB Chief Economist Philip Lane has asserted that falling energy prices could lead to lower core inflation due to reduced living costs and, consequently, restrained wage increases. However, he stressed the timeline and extent of this effect remain uncertain.
Speaking at a conference in Dubrovnik, Lane said, “I don’t think it’s symmetric… but when energy prices fall, core inflation does follow, because there is less pressure from an energy cost, there’s less pressure on the cost of living, therefore on nominal wage increases
“So, we do think this spectacular reversal of energy prices will feed into lower core, but the timeline for that and the scale of it is uncertain,” he added.
Lane further observed that wage growth is generally progressing at a moderate pace, with many people still bound to older contracts. “The latest deals are coming in at above 5%, but (this is in the) ballpark of what we expect,” he noted.
Despite this, he expects nominal wage growth to peak this year and suggested it would take real wages until 2025 to recover back to their 2019 level.