BoJ Governor Haruhiko Kuroda told the parliament he expected wages to rise “quite significantly”, thanks to improvement in the economy and a tightening job market.
Nevertheless, he reiterated that “BoJ must maintain the ultra-easy policy to support the economy and create an environment for firms to hike wages.”
US initial jobless claims dropped -3k to 183k in the week ending January 28, below expectation of 196. Four-week moving average of initial claims dropped -6k to 192k.
Continuing claims dropped -11k to 1655k in the week ending January 21. Four-week moving average of continuing claims dropped -11k to 1652k.
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At the post meeting press conference, BoE Governor Andrew Bailey said, “since the November monetary policy report we’ve seen the first signs that inflation has turned the corner.”
“We have done a lot on rates already. The full effect of that is still to come through. But it’s too soon to declare victory just yet, inflationary pressures are still there,” he warned.
On BoE’s language, he said, “In the previous language we had a presumption that if the economy evolved as the forecast suggests – that’s in November – then we expect there to be further rates increase. We also had that word ‘forceful’ in there.
“And we have changed both of those points. And I think that reflects the fact that we’ve now got a combination of what I would call – we have we have seen a turning of the corner, but it’s very early days and the risks are very large and it’s really that that I think shapes where we where we go from here.”
ECB raises main refinancing rate by 50bps to 3.00% as widely expected. The marginal lending facility and deposit facility rates are raised by the same amount to 3.25% and 2.50% respectively.
In accompanying statement, ECB said it will “stay the course” with today’s hike. Also, it said the “Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March.” Then, it will “evaluate the subsequent path of its monetary policy”.
“Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations,” ECBB added.
Also, the APP portfolio will “decline by €15 billion per month on average from the beginning of March until the end of June 2023”. PEPP principal payments from maturing securities will by reinvested until the end of 2024.
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Sterling dives broadly after BoE rate decision. CPI is now projected to fall back to below 2% target in the medium term, based on conditioned forecasts with interst rate peaking at 4.50% in mid-2023. That is, with Bank Rate at 4.00% after today’s 50bps hike, BoE is now close to the end of the tightening cycle.
GBP/CHF ‘s fall from 1.1433 accelerates lower after the announcement. At this point, such decline is still viewed as the fifith leg of the triangle pattern from 1.1574, Hence, while breach of 1.1094 couldn’t be ruled out, strong support should be seen at 1.1045 cluster (38.2% retracement of 1.0183 to 1.1574 at 1.1043) to contain downside and bring rebound.
However, decisive break of 1.1043/5 will argue that priace actions from 1.1574 are indeed a triple top reversal pattern. Deeper decline would then be seen to 61.8% retracement at 1.0714 and below.
BoE raises Bank Rate by 50bps to 4.00% as widely expected. The decision was made by 7-2 votes. Swati Dhingra and Silvana Tenreyro voted for no change again, as in December. Known hawk Catherine Mann consented this time.
In the accompanying statement, BoE noted that “domestic inflationary pressures have been firmer than expected”. Still the bank expects that rate hike since December 2021 to have an “increasing impact on the economy in the coming quarters”.
In the new economic forecasts, annual CPI inflation is expected fall from current 10.5% to around 4% towards the end of the year. Also, conditioned on interest at around 4.50% in mid 2023 and falls back to 3.25% in three years time, CPI will decline to below 2% target in the medium term.
Also, the economy is expected to have a “much shallower” recession than prior expected. Calender -year GFP growth is expected to be at -0.50% in 2023 and -0.25% in 2024 only.
Two central banks will announce rate decisions today, BoE and then ECB. Currently, the base case is for BoE to hike to bps today to 4.00%, and then another 25bps hike in March, then a pause. Any deviation from that path could trigger much volatility in the Pound. Attention will be on the decision itself, the voting, as well as the new economic projections.
As for ECB, a 50bps hike to 3.00% is widely expect. President Christine Lagarde has been clear that the central bank has to “stay the course”. While some policymakers have already indicated the preference for another 50bps in March, that would very much depend on the new economic projections to be released then. So, no matter how firm Lagarde sounds today, there is room for adjustment before the March meeting.
Here are some suggested readings on ECB and BoE:
EUR/GBP break through 0.8896 resistance to resume the rise from 0.8545, ahead of the announcements of the two central banks. Further rally is now expected to 61.8% projection of 0.8545 to 0.8896 from 0.8720 at 0.8937. Reaction from there is crucial in determining the underlying momentum. Sustained break should prompt upside acceleration to 100% projection at 0.9071. Rejection by this level will turn near term bias neutral first.
NASDAQ closed strongly up by 2.00% overnight to close at 11816.31. Fed’s 25bps rate hike was well received by investors, with Chair Jerome Powell admitting that “we can now say for the first time that the disinflationary process has started.”
Suggested readings on FOMC:
NASDAQ’s break of 11571.64 resistance completes a double bottom pattern (10088.82, 10207.47). Near term outlook will stay bullish as long as 55 day EMA (now at 11043.84) holds. Next target is 38.2% retracement of 16212.22 to 10088.82 at 12427.95.
It’s still a bit early to tell if NASDAQ is in correction to the down trend from 16212.22, or in bullish reversal. Key level lies in 13181.08 cluster resistance, 50% retracement at 13150.52. Reactions from there will reveal which case it is.
US stocks staged a reversal while EUR/USD broke out to the upside on Fed Chair Jerome Powell’s post meeting press conference.
Powell did note that “Inflation is not over, and neither is the Fed’s battle against it.” However, he also mentioned, “we can now say for the first time that the disinflationary process has started.”
“It is a good thing that the disinflation that we have seen so far has not come at the expense of the labor market,” he also said.
Without any drastic surprises, Fed seems on track to pause tightening with two more 25bps rate hike.
EUR/USD breaks 1.0928 resistance decisively to resume the up trend from 0.9534. Near term outlook will remain bullish as long as 1.0800 support holds, in case of retreat. Next target is 61.8% projection of 0.9630 to 1.0733 from 1.0482 at 1.1164. The real test will lie in resistance zone between 1.0482 and 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273. Attention should be paid to topping signal inside this 1.1164/1273 resistance zone.
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Fed raises federal funds rate by 25bps to 4.50-4.75% as widely expected by unanimous vote.
Tightening bias is maintained as “the Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time”.
Regarding the economy, FOMC said, “Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated.”
US ISM Manufacturing PMI dropped further from 48.4 to 47.4 in January, below expectation of 48.7. Looking at some details, new orders dropped from 45.1 to 42.5. Production dropped from 48.6 to 48.0. Employment dropped from 50.8 to 50.6. Prices rose from 5.1 to 39.4.
ISM said: “The U.S. manufacturing sector again contracted, with the Manufacturing PMI® at its lowest level since the coronavirus pandemic recovery began. With Business Survey Committee panelists reporting softening new order rates over the previous nine months, the January composite index reading reflects companies slowing outputs to better match demand in the first half of 2023 and prepare for growth in the second half of the year.”
“The past relationship between the Manufacturing PMI® and the overall economy indicates that the Manufacturing PMI® for January (47.4 percent) corresponds to a -0.5-percent change in real gross domestic product (GDP) on an annualized basis.”
US ADP private employment grew 106k in January, below expectation of 168k. By sector, goods-producing jobs dropped -3k. Service-providing jobs rose 109k. BY establishment size, small companies cut -75k jobs, but medium companies added 64k and large added 128k. Pay growth for job stayers was held at 7.3% yoy for the second month, with most industries little changed.
Nela Richardson Chief Economist, ADP said: “In January, we saw the impact of weather-related disruptions on employment during our reference week. Hiring was stronger during other weeks of the month, in line with the strength we saw late last year.”
Eurozone CPI slowed sharply from 9.2% yoy to 8.5% yoy in January, well below expectation of 9.0% yoy. CPI core (all items less energy, food, alcohol & tobacco) was unchanged at 5.2% yoy, above expectations of 5.1% yoy.
Looking at the main components, energy is expected to have the highest annual rate in January (17.2%, compared with 25.5% in December), followed by food, alcohol & tobacco (14.1%, compared with 13.8% in December), non-energy industrial goods (6.9%, compared with 6.4% in December) and services (4.2%, compared with 4.4% in December).
UK PMI Manufacturing was finalized at 47.0 in January, up from December’s 31-month low of 45.3. S&P Global noted that output and new orders fell across all three product categories. Input price inflation eased to 27-month low.
Rob Dobson, Director at S&P Global Market Intelligence, said:“There were some shoots of positivity developing, however. Rates of contraction are generally lower than before the turn of the year, a possible sign that we may be past the worst of the downturn in industry.
“Cost inflation also eased further, while supply chain delays were the least pronounced for three years. Manufacturers’ confidence is also reviving from recent lows, hitting a nine-month high, though the mood continued to be darkened by concerns about inflation and the possibility of recession.”
Eurozone PMI Manufacturing was finalized at 48.8 in January, up from December’s 47.8, also a 5-month high. Manufacturing Output index was finalized at 48.9, up from December’s 47.8, a 7-month high.
Readings in all member states improved, including France at 50.5 (5-month high), Italy at 50.4 (7-month high), Ireland at 50.1 (3-month high), the Netherlands at 49.6 (5-month high), Greece at 49.2 (4-month high), Austria at 48.4 (4-month high), Spain at 48.4 (4-month high), and Germany at 47.3 (4-month high).
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “Although euro area manufacturers continued to report falling output and deteriorating order books in January, sustaining the sector’s downturn for an eighth successive month, the picture is considerably brighter than the lows seen back in last October heading into the winter. Not only has the rate of output decline moderated now for three consecutive months, but business optimism about the year ahead has also surged higher over the past three months.”
Fed is widely expected to continue to slow down its tightening pace today, and raise interest rate by 25bps to 4.50-4.75%. The accompanying statement should clearly indicate that the work is not done yet on fighting inflation. Such message should be echoed by Fed Chair Jerome Powell in the post-meeting press conference.
Fed fund futures are now pricing in another 25bps rate hike to 4.75-5.00% in March. But the main questions are, firstly, whether rate will peak above or below 5% level, and secondly, for how long it will stay there. No concrete answer would be provided at least until new economic projections to be published in March.
Here are some suggested readings on FOMC:
Overall risk sentiment has been resilient going into FOMC announcement. For now, further rise is in favor in S&P 500 as long as 55 day EMA (now at 3934.97) holds. Decisive break of 41.00.51 resistance will confirm resumption of whole rebound from 3491.58 low. Further break of 61.8% projection of 3491.58 to 4100.51 from 3764.49 could prompt upside acceleration to 100% projection of 3491.58 to 4100.51 from 3764.49 at 4373.42, even as a bear market rally. If that happens, risk-on sentiment would continue to cap any rebound attempt of Dollar.
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China PMI composite rose to 51.1, services a boom and manufacturing a drag
China Caixin PMI Services rose from 48.0 to 52.9 in January, first expansionary reading in five months. PMI Composite rose from 48.3 to 51.1, the first upturn in total business activity since August 2022.
Wang Zhe, Senior Economist at Caixin Insight Group said: “Services activity experienced a boom, as both supply and demand expanded, whereas the manufacturing sector became a drag. Employment remained relatively sluggish, with the manufacturing sector logging a larger contraction. Prices stayed stable. Optimism among businesses improved significantly.”
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