BoC Governor Tiff Macklem comments on weak growth and rate cut expectations

    Following BoC’s decision to keep interest rates unchanged at 4.50%, Governor Tiff Macklem addressed concerns about the country’s economic growth during a press conference. He acknowledged the weak growth projections, stating, “We are seeing inflation come down even as the economy continues to grow. That is encouraging. But yes, we do expect growth to be weak. It’s expected to be weak through the rest of the year, pick up gradually over the course of next year.”

    Regarding the potential for negative growth quarters, Macklem clarified that the central bank is forecasting “small positives,” but conceded that “you can’t rule out that there’s going to be a couple quarters of small negatives.” He emphasized that BoC is not forecasting a major contraction or significant increases in unemployment, distancing the current situation from a typical recession.

    Addressing market expectations of a rate cut, Macklem said, “based on the information we have today, the implied expectation in the market that we’re going to be cutting our policy rate later in the year, that doesn’t look today like the most likely scenario to us.” This statement suggests that the central bank may not follow the market’s anticipated course of action, given the current data available.

    ECB’s Holzmann calls for vigorous action, de Guindos cautious on core inflation

      ECB Governing Council member Robert Holzmann told German newspaper Boersen Zeitung that the persistence of inflation currently calls for further action: “The persistence of inflation currently argues for another 50 basis points (in May).” Holzmann emphasized that failing to act vigorously now would exacerbate the inflation problem and ultimately necessitate even stricter measures.

      Holzmann also noted a consensus among ECB Governing Council members: “There is a great deal of common understanding in the ECB Governing Council that we have not yet reached the end of the line when it comes to key interest rates. We must continue to act decisively and continue to raise key interest rates noticeably even beyond May.”

      In a separate occasion, ECB Vice President Luis de Guindos expressed caution regarding core inflation: “We believe core inflation provides a better signal of medium-term inflationary trends,” de Guindos said in Madrid. “Headline inflation will continue to decelerate, but on core inflation, we are not so optimistic.”

      BoC stands pat, returning inflation to 2% could prove to be more difficult

        As widely expected, BoC kept overnight rate unchanged at 4.50%, with Bank Rate and deposit rate held at 4.75% and 4.50% respectively. In the statement, the BoC mentioned that the “Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed.”

        The central bank projects weak GDP growth through the remainder of this year, with a gradual strengthening next year. BoC now expects Canada’s economy to grow by 1.4% this year and 1.3% in 2024 before picking up to 2.5% in 2025.

        The bank anticipates CPI inflation to fall quickly to around 3% in the middle of this year and then decline more gradually to the 2% target by the end of 2024. “Recent data is reinforcing Governing Council’s confidence that inflation will continue to decline in the next few months,” the statement noted.

        However, BoC also highlighted that returning inflation to 2% “could prove to be more difficult”, as inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behavior has yet to normalize.

        Full BoC statement here.

        Can gold ride on Dollar selloff to extend near term rally?

          As Dollar is sold off broadly after CPI release, a focus is now on Gold, which also jumps higher. The first hurdle is 2032.05 near term resistance. Rejection by this level, followed by break of 2006.02 support, will extend the corrective pattern from 2032.05 with another falling leg. However, firm break of 2023.05 will resume whole rally from 2022 low at 1614.60 and target 2070.06/2073.84 key resistance zone. If realized, an upside break should confirm underlying downside momentum in Dollar elsewhere.

          Meanwhile, next hurdle would be 2070.06/2073.84 key resistance zone. Sustained break there will confirm long term up trend resumption for new record highs.

          EUR/USD upside breakout, to target this year’s high

            EUR/USD has broken out to the upside following a lower-than-expected headline inflation reading in the US. While the uptick in core CPI still supports another rate hike by Fed in May, the overall data set raises hopes that the disinflation process is ongoing and perhaps even gathering momentum. This development bolsters the confidence of those betting on a Fed rate cut later this year.

            Technically, EUR/USD is expected to face resistance at 1.1032 shortly. A decisive break above this level would resume the overall uptrend from the 2022 low of 0.9534. Next target is the 61.8% retracement of 1.2348 (2021 high) to 0.9534, which stands at 1.1273.

            US CPI slowed to 5% yoy and missed expectations, core CPI ticked up to 5.6% yoy

              US CPI rose 0.1% mom in March, below expectation of 0.3% mom.  CPI core (all items less food and energy) rose 0.4% mom, matched expectations. Energy index decreased -3.5% mom while food index was unchanged.

              Over the last 12 months, CPI slowed from 6.0% yoy to 5.0% yoy, below expectation of 5.2% yoy, marked the lowest level since June 2021. CPI core (all items less food and energy) accelerated from 5.5% yoy to 5.6% yoy, matched expectations. Energy index for down -6.4% yoy while food index rose 8.5% yoy.

              Full US CPI release here.

              ECB’s Villeroy warns of entrenched inflation risk, shifts focus to long-distance race

                ECB Governing Council member Francois Villeroy de Galhau has warned of the risk of entrenched inflation yesterday, stating, “We now face the risk of entrenched inflation, which lies in the underlying or core component. In other words, inflation has become more widespread, and potentially more persistent.”

                Villeroy emphasized that the ECB’s monetary policy response to rising inflation has been strong and swift. However, he also noted a shift in focus, saying, “We at the ECB are now moving from a ‘sprint’ to a ‘long-distance race’.” He added that the inflation outlook, underlying inflation readings, and the effectiveness of policy transmission will be the key factors in upcoming decisions on potential new rate hikes.

                Fed’s Kashkari cautions against potential economic downturn and recession

                  Minneapolis Federal Reserve Bank President Neel Kashkari warned that tightening credit conditions due to banking stress and monetary policy actions could lead to an economic downturn or even a recession.

                  He said, “It could be that our monetary policy actions and the tightening of credit conditions because of this banking stress lead to an economic downturn. That might even lead to a recession.”

                  Kashkari acknowledged that bond markets seem to expect a quick drop in inflation, allowing Fed to cut rates. However, he expressed less optimism, predicting inflation to reach “the mid threes” by the end of the year, which remains above the Fed’s 2% target.

                  Regarding recent financial stress, Kashkari cautiously noted that there are hopeful signs that risks are better understood and calm is being restored, but he is not yet ready to declare all clear.

                  Fed’s Harker supports hiking rates above 5% before assessing disinflation progress

                    Philadelphia Fed Bank President Patrick Harker expressed his support for raising interest rates above 5% and then assessing the impact on inflation. He noted yesterday, “I’m in the camp of getting up above 5 and then sitting there for a while.”

                    Harker acknowledged that recent inflation readings showed a slow disinflation process, which he described as “disappointing.” Despite this, he pointed out promising signs that Fed’s rate hikes are working.

                    He stated, “If we see inflation not budging, then I think we’ll have to take more action. But at this point, I don’t see why we would just continue to go up, up, up and then go, whoops! And then go down, down, down very quickly. Let’s sit there.”

                    Harker also emphasized the commitment to bringing inflation back down to the 2% target and highlighted that the full impact of monetary policy actions could take up to 18 months to work through the economy. He said, “We will continue to look closely at available data to determine what, if any, additional actions we may need to take.”

                    Fed’s Goolsbee urges prudence and patience amid financial stress

                      Chicago Fed President Austan Goolsbee stressed the importance of a cautious approach to monetary policy during times of financial stress. He stated yesterday, “At moments like this, of financial stress, the right monetary approach calls for prudence and patience – for assessing the potential impact of financial stress on the real economy.”

                      Goolsbee highlighted the need to understand credit tightening before Fed’s next meeting in May, saying, “The foremost thing on my mind before our next meeting in May is trying to get a handle on this question about credit: is it actually credit tightening?”

                      Emphasizing the current uncertainty, Goolsbee urged caution, adding, “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.” He noted that if the response to recent banking issues leads to financial tightening, “monetary policy has to do less.”

                      Fed’s Williams suggests one more rate hike as “reasonable starting place”

                        In a Yahoo Finance interview, New York Fed President John Williams stated that one more rate hike could be a “reasonable starting place,” noting that it aligns with the median expectation of his colleagues. However, Williams emphasized the importance of data-driven decisions, saying, “We have to be driven by the data… I will say that one thing that we’re paying attention to is credit conditions but also do we really see signs of this underlying inflation coming down?”

                        Williams highlighted the challenges ahead, stating, “Some of this core services inflation excluding housing hasn’t budged yet, so we’ve got our work cut out for us to get inflation back to 2%.” He added that the central question revolves around determining what will be sufficiently restrictive on policy and whether additional measures are needed to achieve their goals, with data and outlook as the key drivers.

                        IMF: Global growth to bottom at 2.8% this year

                          The IMF released its World Economic Outlook, projecting global growth to slow from 3.4% in 2022 to 2.8% in 2023 and bottom there, and then rise to 3.0% in 2024. Global inflation is expected to decelerate from 8.7% in 2022 to 7% in 2023 and further to 4.9% in 2024.

                          Pierre-Olivier Gourinchas, Economic Counsellor and Director of Research at IMF, said in a blog post, “The global economy’s gradual recovery from both the pandemic and Russia’s invasion of Ukraine remains on track. China’s reopened economy is rebounding strongly. Supply chain disruptions are unwinding, while dislocations to energy and food markets caused by the war are receding. Simultaneously, the massive and synchronized tightening of monetary policy by most central banks should start to bear fruit, with inflation moving back towards targets.”

                          For 2023, global growth projections were reduced by 0.1% compared to January’s forecast. US growth was revised up by 0.2% to 1.6%, Eurozone growth by 0.1% to 0.8%, and UK growth by 0.3% to -0.3%. However, Japan’s growth projection was revised down sharply by 0.5% to 1.3%. Canada and China’s growth forecasts remained unchanged at 1.5% and 5.2%, respectively.

                          Regarding interest rates, the IMF believes recent increases in real interest rates are likely temporary. Once inflation is under control, advanced economies’ central banks are expected to ease monetary policy and bring real interest rates back towards pre-pandemic levels.

                          Full IMF Worl Economic Outlook here.

                          Bitcoin breaks out surpassing 30k, NASDAQ to follow?

                            Bitcoin has finally broken through its recent range to the upside, surpassing 30k level for the first time since June 2022. While some observers may attribute the rally since mid-March to safe-haven flows amid banking turmoil, it seems more likely that Bitcoin is moving in tandem with tech stocks, in anticipation of Fed nearing a pause in tightening.

                            With 100% projection of 15452 to 25242 from 19552 at 29342 now surpassed, the next target is 161.8% projection at 35392. Even if a retreat occurs, outlook will remain bullish as long as 27,808 support holds.

                            Focus now shifts to the upside momentum of the current move and the reaction to the 35392 projection target. This level is close to the 38.2% projection of 68986 to 15452 at 35901.

                            Strong upside momentum and a decisive break of the 35k/36k zone would suggest that the rise from 15452 is a of a medium-term impulsive up trend, potentially leading to further gains. Conversely, weak momentum and rejection by the 35k/36k zone would indicate that rebound from 15452 remains just a corrective move.

                            Another question arising is whether NASDAQ can follow suit and decisively break through 38.2% retracement of 16,212.22 to 10,088.82 at 12,427.95, confirming the underlying bullish momentum in tech-related sectors.

                            Eurozone Sentix Investor Confidence rose to -8.7, negative momentum weakening

                              Eurozone Sentix Investor Confidence increased from -11.1 to -8.7 in April, surpassing the expected -14.0. The Current Situation index experienced its sixth consecutive rise, moving from -9.3 to -4.3, reaching its highest level since March 2022. The Expectations index, however, remained unchanged at -13.0.

                              Sentix commented on the data, stating, “There is no doubt that the Eurozone economy has come through the winter months better than many feared in the autumn.” However, when considering the future, investors are less optimistic, citing “still considerable uncertainty about the further course of the Ukraine war, concerns about a lasting burden on the energy-intensive industrial sector, and – new – question marks about the state of the US economy.”

                              Despite these concerns, the Sentix Theme Barometer indicates that negative expectations regarding inflation and central bank policy have noticeably decreased. While not an all-clear signal, the negative momentum seems to be weakening.

                              Full Eurozone Sentix release here.

                              Eurozone retail sales down -0.8% mom in Feb, EU down -0.9% mom

                                Eurozone retail sales volume dropped -0.8% mom in February, matched expectations. Volume of retail trade decreased by -1.8% for automotive fuels, by -0.7% for non-food products and by -0.6% for food, drinks and tobacco.

                                EU retail sales declined -0.9% mom. Among Member States for which data are available, the largest monthly decreases in the total retail trade volume were registered in Slovenia (-10.5%), Hungary and Poland (both -2.0%) and Sweden (-1.6%). The highest increases were observed in Cyprus (+1.6%), Luxembourg (+0.8%) and Belgium (+0.7%).

                                Full Eurozone retail sales release here.

                                China CPI slows to 18-month low, PPI sees steepest decline since June 2022

                                  China’s CPI slowed from 1.0% yoy to 0.7% yoy in March, falling below the expected 1.0% yoy and marking the lowest level in 18 months since September 2021. Excluding food and energy, CPI increased from 0.6% to 0.7% yoy. Food prices rose by 2.4% yoy compared to a year ago, down from 2.6% yoy in February. Notably, pork prices surged by 9.6% yoy, up from a rise of 3.9% yoy in February.

                                  Dong Lijuan, an NBS statistician, attributed the easing consumer inflation in March to “continued resumption of production and life as well as sufficient market supplies.” He also mentioned that the fall in factory-gate prices was affected by a high comparison base in the previous year.

                                  Meanwhile, PPI dropped from -1.4% yoy to -2.5% yoy, matching expectations and marking the steepest decline since June 2022. Dong Lijuan, senior NBS statistician, explained that “production and life continued to recover with sufficient supplies in March.”

                                  Australian NAB business confidence improved, conditions remain resilient

                                    Australia NAB Business Confidence improved from -4 to -1 in March, while Business Conditions dropped slightly from 17 to 16. Delving into some details, trading conditions rose from 25 to 26, profitability conditions dipped from 14 to 13, and employment conditions fell from 12 to 10.

                                    NAB Chief Economist Alan Oster commented, “Business conditions have been resilient, slowly edging lower over the past few months but remaining well above their long-run average.” He added that “trading conditions are particularly elevated, indicating that businesses continue to experience strong demand, and conditions are generally strong across states and sectors.”

                                    On the topic of confidence, Oster stated, “Confidence appears to have stabilized, but it remains below average at -1 index point.” He noted that confidence was particularly poor in retail and wholesale sectors, likely due to firms being concerned about the sustainability of consumer spending.

                                    In summary, the survey suggests the Australian economy is still holding up, with some easing in inflation. However, Oster emphasized that “there is still a long way to go to bring inflation back down to the RBA’s target band and growth could be more volatile from there.”

                                    Full Australia NAB business confidence release here.

                                    Australia consumer sentiment jumped 9.4% on RBA pause

                                      Australia Westpac Melbourne Institute Consumer Sentiment Index witnessed a significant 9.4% increase in April, jumping from 78.4 in March to 85.8. This remarkable recovery can be largely attributed to RBA’s decision to pause rate hikes during its April meeting, breaking a sequence of ten consecutive meetings with cash rate increases.

                                      However, confidence remains weak, sitting -10.4% lower than April of the previous year, before the tightening cycle began. Respondents continue to exercise caution, with 34.11% still expecting the Standard Variable Rate to rise by more than 1% over the year, although this figure is down from 44.55%.

                                      Regarding the RBA’s meeting on May 2, Westpac noted that the central bank would benefit from a clean read on underlying inflation from the March quarter Inflation Report, set to be released on April 26, as well as staff’s refreshed economic forecasts. Westpac anticipates that a final 0.25% increase in the cash rate during the May Board meeting would be the best policy approach, rather than waiting for additional information and risking higher rates later in the cycle.

                                      Full Australia Westpac consumer sentiment release here.

                                      BoJ Ueda stands firm on monetary easing and negative rates

                                        In his first press conference as new Bank of Japan Governor, Kazuo Ueda stated that the central bank will maintain its massive stimulus program, echoing the stance of the previous leadership. Ueda commented, “The BOJ’s current monetary easing is a very powerful one. We need to strive, as we have done so far, to appropriately grasp economic, price, and financial developments to see whether trend inflation will stably and sustainably achieve 2%.”

                                        The governor acknowledged the side-effects of the BOJ’s negative rates, particularly on banks, but noted that banks seem to have sufficient buffers and financial intermediation is functioning. Ueda emphasized the necessity of maintaining negative rates, stating, “Given trend inflation has yet to hit 2%, it’s appropriate to maintain negative rates.”

                                        Regarding Yield Curve Control (YCC), Ueda said, “When looking at current economic, price, and financial developments, it’s appropriate to maintain YCC for now.” He added that any major changes to YCC should be determined by evaluating the economic, price, and financial trends, while also weighing the benefits and costs of the policy.

                                        Ueda noted some positive signs in inflation and wages, saying, “Trend inflation is rising somewhat. There’s also some positive signs in wages. There’s a good chance this will lead to stable, sustained achievement of higher, trend inflation.”

                                        Dollar braces for CPI release, a look at EUR/USD and DXY

                                          This week promises to be eventful for Dollar, with key data releases including CPI, PPI, retail sales, and University of Michigan Consumer Sentiment. Additionally, Fed will publish minutes from March FOMC meeting, and numerous policymakers are expected to share their views on the economy and interest rates.

                                          Specifically, headline CPI is forecasted to drop further from 6% to 5.2% in March. This marks a significant improvement from last year’s 9.1% peak in July and represents the ninth consecutive month of cooling consumer inflation. If realized, the headline CPI reading would be the lowest since June 2021’s 5.0%, nearly two years ago. Conversely, core CPI is projected to tick up from 5.5% to 5.6%, breaking the five-month downtrend since September last year.

                                          Following last week’s robust job data, traders have increased bets on a 25bps rate hike in May, with over a 60% chance. However, whether Fed opts for one, two, or no additional rate hikes may not make a significant difference. The primary focus is when Fed will start reversing course and cutting interest rates, which largely depends on how quickly core inflation falls back to a level consistent with price stability or remains stuck above the Fed’s target.

                                          Presently, fed fund futures indicate a nearly 70% chance of a cut back to 4.50-4.75% in July, far from the Fed’s own projections. According to the March dot plot, only one policymaker envisions rates ending below 5% this year.

                                          EUR/USD began losing upside momentum last week, stalling before 1.0320 resistance. It appears that a clear downside surprise in core CPI is needed to push EUR/USD past 1.0320 to resume the larger uptrend from the 2020 low at 0.9534. Conversely, breaking 1.0787 support will extend the consolidation pattern from 1.0320 with a third leg back towards 1.0515 support.

                                          In parallel, for Dollar index, intense selling pressure is required to push DXY below 100.82 low to resume the downtrend from 114.77. Breaking above 103.44 resistance will extend the consolidation pattern from 100.82 with another upleg towards 105.88 resistance.