US initial jobless claims dropped -2k to 190k in the week ending February 25, below expectation of 196k. The reading was also below 200k handle for the seventh straight months. Four-week moving average of initial claims rose 1750 to 193k.
Continuing claims dropped -5k to 1655k in the week ending February 18. Four-week moving average of continuing claims rose 1250 to 1672k.
The accounts of ECB’s February 1-2 meeting noted, “it was generally felt that concerns of ‘overtightening’ were premature at the present high levels of inflation and in view of the likely persistence of underlying price pressures”.
The view was expressed that, “given the still substantial distance to the prospective terminal rate, there continued to be value – from a risk management perspective – in frontloading rate hikes at the present stage.”
The communication regarding March meeting, “conveyed the view that, in the absence of abrupt changes in circumstances, a further 50 basis point interest rate hike at the March meeting was consistent with a very wide range of possible scenarios for the way inflation would develop.”
Eurozone CPI slowed from 8.6% yoy to 8.5% yoy in February, above expectation of 8.2% yoy. CPI core all items ex energy, food, alcohol and tobacco) rose from 5.3% yoy to 5.6% yoy, above expectation of 5.3% yoy.
Looking at the main components, food, alcohol & tobacco is expected to have the highest annual rate in February (15.0%, compared with 14.1% in January), followed by energy (13.7%, compared with 18.9% in January), non-energy industrial goods (6.8%, compared with 6.7% in January) and services (4.8%, compared with 4.4% in January).
ECB President Christine Lagarde told Spain TV channel Antena 3, “at this point in time, it’s possible that we continue on that path (of tightening after March)… By which amount in each and every meeting is impossible to say at this point.”
Regarding the terminal rate, Lagarde said, “the real honest answer is that it will determined by data.”
“What’s very certain is that we’ll do whatever’s needed in order to bring inflation back to 2%,” Lagarde said.
US treasury yields marched higher overnight, and look set to extend rally today. Two-year yield hit its highest level in 16 years and could soon challenge the 5% handle, while 10-year yield remains above the 4% handle in the Asian session.
It’s believed that persistent worries about inflation remaining at a higher level for an extended period are driving the moves. As a result, Fed may respond by accelerating the tightening pace again. There is growing expectation in the market that Fed will implement a 50bps rate hike on March 22, with a 30% chance of this happening compared to 24% a week ago. Moreover, there is a 55% chance that rate will peak at 5.50-5.75% in July.
Furthermore, the recent surge in European yields is considered an even stronger reason for the rally in US yields. The recovery in EUR/USD reflects this sentiment. Germany 10-year yield hitting the highest level since 2011 on similar worries about inflation and ECB policies. A peak above 4% for ECB is more likely than ever before, while a rate cut this year is all but ruled out.
From a technical perspective, as long as the support level at 3.863 holds, the rally in US 10-year yield from 3.334 is expected to continue. The current development affirms that correction from 4.333 has completed with three waves down to 3.334. A retest of 4.333 is likely to occur next. While it is still early to predict, the TNX could eventually hit the 61.8% projection of 2.525 to 4.333 from 3.334 at 4.451 before topping out.
BoJ board member Hajime Takata said said in a speech today, “now is the time where the BOJ must scrutinise whether the economy and prices can achieve a sustained, positive cycle.”
“While we need to be mindful of the impact of our massive stimulus program on market function, we’re at a stage where we need to patiently maintain monetary easing,” he said.
Atlanta Fed President Raphael Bostic said Fed should hike by 50bps to 5.00-5.25%, and hold it at that level until well into 2024. “We must determine when inflation is irrevocably moving lower,” he wrote in an essay. “We’re not there yet.”
“That’s why I think we need to raise the federal funds rate to between 5-5.25% and leave it there well into 2024. This will allow tighter policy to filter through the economy and ultimately bring aggregate supply and aggregate demand into better balance and thus lower inflation.”
“If we are going to get inflation back in the range of our target, the breadth of inflation will have to narrow considerably,” Bostic wrote. “When inflation is no longer top of mind, our mission will largely be accomplished. We are clearly not there yet. But I—and the Committee—are committed to doing all we can to ensure that we get there as soon as possible.”
Minneapolis Fed President Neel Kashkari he is “open-minded” on either a 25bps or a 50bps rate hike at the March meeting. But he also noted, “I think my colleagues agree with me that the risk of under-tightening is greater than the risk of over-tightening
Karikari also said, “what’s more important is what we signal in the dot plot… At this point I haven’t decided what my dot is, but I would lean towards continuing to push up my rate and policy path,”
“Given the data in the last month — the inflation report and strong jobs report — these are concerning data points suggesting we’re not making progress as fast as we’d like,” Kashakri said. “At same time we don’t want to overreact.”
US ISM Manufacturing PMI rose from 47.4 to 47.7 in February, below expectation of 47.9. Looking at some details, new orders rose from 42.5 to 47.0. Production dropped from 48.0 to 47.3. Employment dropped from 50.6 to 49.1. Prices jumped from 44.5 to 51.3.
ISM said: “This is the fourth month of slow contraction and continuation of a downward trend that began in June 2022…
“The past relationship between the Manufacturing PMI and the overall economy indicates that the February reading (47.7 percent) corresponds to a change of minus-0.3 percent in real gross domestic product (GDP) on an annualized basis.”
EUR/GBP rebounds strongly on a contrasting comments from Bundesbank President Joachim Nagel and BoE Governor Andrew Bailey.
In short, Nagel said “further significant interest rate steps” might be necessary for ECB after March, and a “steeper path of reduction” of balance sheet is favored in July.
On the other hand, Bailey said more interest rate hike is not inevitable and “nothing is decided” for March.
EUR/GBP’s strong rebound and break of 0.8834 resistance argues that fall from 0.8977 has completed with three waves down to 0.8753, ahead of 0.8720 structural support. The development in turn suggests that rise from 0.8545 is not over. Near term focus is back on 0.8927 resistance and firm break there will solidify the revived near term bullishness.
BoE Governor Andrew Bailey said in a speech, “I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more”.
“Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions.,” he added.
Regarding the economy, he said that data since February meeting, is that the economy is “evolving much as we expected it to”.
“Inflation has been slightly weaker, and activity and wages slightly stronger, though I would emphasise ‘slightly’ in both cases,” he said. “A further set of data will be coming in before our next monetary policy decision later this month.”
Bundesbank President Joachim Nagel said in a speech today, “the interest rate step announced (by ECB) for March will not be the last.”
“Further significant interest rate steps might even be necessary afterwards, too,” he added.
Regarding the timing of a rate cut, Nagel said, the impact of tightening has to be reflected in underlying inflation. Until that is the case, interest rate cuts are a non-starter.”
Nagel also said with the current pace of balance sheet reduction at EUR 15B a month, it will take too long to make a significant reduction. “I am therefore in favour of taking a steeper path of reduction starting in July in light of experience gained up to that point,” he said.
Regarding the economy, “although there could be a gradual pick-up in the second quarter, there is still no sign of any major improvement for now,” Nagel said. “Our experts are not expecting there to be a visible economic recovery until the second half of the year.”
UK PMI Manufacturing was finalized at 49.3 in February, up from January’s 47.0. That’s the highest level in 7 months even though it’s stuck in contraction territory. New orders fell but showed signs of stabilizing. Input cost and output price inflation eased.
Rob Dobson, Director at S&P Global Market Intelligence, said:
“UK manufacturing showed encouraging signs of resilience in February. Output rose for the first time in eight months, boosted by weaker cost inflation and reduced supply chain disruptions. Input prices increased at the slowest pace since July 2020 and supplier performance improved for the first time in three-and-a-half years. This offset some of the ongoing negative impacts from strikes, the cost of living crisis and lower order intakes.
“Manufacturers’ confidence also strengthened, with 60% of companies forecasting production will expand during the coming year. Part of the reason for renewed optimism was a near-stabilisation of new order inflows in February, with total new orders and new export business both falling only slightly and to much lesser extents than in recent months. Manufacturers benefited from growing signs of a global economic recovery and the easing of COVID restrictions by China. This process of economic revival, alongside signs of inflation peaking and reduced recession fears, should hopefully help UK manufacturers eke out further growth in the coming months.”
Eurozone PMI Manufacturing was finalized at 48.5 in February, down from January’s 48.8. Manufacturing output was finalized at 50.1, up from 48.9, a 9-month high.
Looking a some member states, readings for Italy (52.0, 10-mont high), Greece (51.7, 9-month high), Ireland (51.3, 4-month high), and Spain (50.7, 8-month high) improved. The Netherlands (48.7, 2-month low), France (47.4, 4-month low), Austria (47.1, 3-month low), and Germany (46.3, 3-month low) deteriorated.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“A marginal expansion of output reported by Eurozone manufacturers in February is welcome news in representing the first increase since last May… Unfortunately, inflows of new orders continued to fall at a marked rate, reflecting persistent weak demand… In the meantime, the combination of improved supply and sustained weak demand – as well as lower energy prices – is helping bring inflationary pressures down sharply”.
China official PMI Manufacturing rose from 50.1 to 52.6, above expectation of 50.7. That’s also the highest reading since April 2012. PMI Non-Manufacturing rose from 54.4 to 56.3, highest since March 2021. PMI Composite rose from 52.9 to 56.4.
“In February, the economic stabilisation policy measures further took effect, coupled with the epidemic’s impact receding and other favourable factors, the speed of enterprises to resume production accelerated, meaning China’s economic prosperity level continued to rebound,” said senior NBS statistician Zhao Qinghe.
Also released, Caixin PMI Manufacturing rose from 49.2 to 51.6 in February, slightly above expectation of 51.3. That the first expansion reading in 7 months, and the second-highest since May 2021. Caixin added there were renewed increases in output, new orders and employment. Suppliers’ delivery times improved at the quickest rate for eight years. Business confidence also strengthened to near two-year high.
Japan PMI Manufacturing was finalized at 47.7 in February, down from January’s 48.9. That’s also the worst reading since September 2020. S&P Global also noted that backlogs of work decreased at quickest pace for 29 months. Input prices had the slowest rise for a year-and-a-half.
Usamah Bhatti, Economist at S&P Global Market Intelligence, said: “Latest data pointed to continually deteriorating activity in the Japanese manufacturing sector midway through the first quarter of 2023. Both new orders and production levels, which make up 55% of the headline PMI figure, fell at the fastest pace since July 2020 as weak domestic demand and a global economic slowdown hindered sales and output volumes.
“Moreover, the dip is likely to be sustained in the near-term as the absence of new orders amid dampened client confidence lifted capacity pressure on manufacturers further and led to the sharpest reduction in outstanding business in nearly two-and- a-half years.”
Australia monthly CPI indicator slowed from 8.4% yoy to 7.4% yoy in January, below expectation of 8.1% yoy. CPI excluding volatile items (i.e. excludes Fruit and vegetables and Automotive fuel) slowed from 8.1% yoy to 7.2% yoy.
The most significant contributors to the annual increase in the January monthly CPI indicator were Housing (9.8%), Food and non-alcoholic beverages (8.2%) and recreation and culture (10.2%).
Australia GDP grew 0.5% qoq in Q4, below expectation of 0.8% qoq. Through the year, GDP grew 2.7% yoy. GDP Implicit price deflator (IPD) rose 1.6% qoq and 9.1% yoy. Domestic prices grew 1.4% qoq and 6.6 yoy, highest annual growth since 1990.
Katherine Keenan, ABS head of National Accounts, said, “the 0.4 per cent rise in total consumption and 1.1 per cent rise in exports were the primary contributors to GDP growth in the December quarter…
“Continued growth in household and government spending drove the rise in consumption, while increased exports of travel services and continued overseas demand for coal and mineral ores drove exports.”
BoE MPC member Catherine Mann said, “falling natural gas and electricity costs “might be good from the standpoint of making households feel more comfortable.”
But, “on the other hand, what they aren’t going to spend on energy, they’re going to spend on something else… That translates something that I do not control, which is external energy prices, into something that looks a whole lot more like what I’m supposed to control, which is domestically generated inflation.”
“A recession is a particularly dramatic way of disciplining the pricing structure of firms, but it’s not the only way,” Mann said. “I would like to see more on the supply side in order to give us a faster speed limit to work with as a central bank. It’s not like there’s an automatic relationship between recessions and bringing inflation down.”
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BoE Pill: Current momentum in economic activity may be slightly stronger than anticipated
In a speech, BoE Chief Economist Huw Pill said that “current momentum in economic activity may be slightly stronger than anticipated.”
“CPI inflation is projected to fall to below the 2% target by the end of the forecast horizon”, he said. But “there are considerable uncertainties around this outlook.”
“Upside risks arise in large part from the possibility that domestic inflationary pressures prove more persistent than anticipated, owing to so-called ‘second round effects’ in price, cost and wage setting behaviour,” he explained.
“The latest data for private sector regular pay growth – which was published after the MPC’s forecast was finalised – surprised slightly to the upside.”
Nevertheless, “some high-frequency indicators of wages have fallen quite sharply recently”.
“The MPC will continue to monitor indications of persistence in domestic inflationary pressures closely, with a focus on developments in the labour market, in wage dynamics, in services price inflation and in measures of underlying inflation and inflation expectations.”
Speaking notes and slides