Boston Fed President Susan Collins said, “I anticipate the need for further rate increases, likely to just above 5%, and then holding rates at that level for some time.”
But she also added, “more measured rate adjustments in the current phase will better enable us to address the competing risks monetary policy now faces – the risk that our actions may be insufficient to restore price stability, versus the risk that our actions may cause unnecessary losses in real activity and employment.”
US initial jobless claims dropped -15k to 190k in the week ending January 14, better than expectation of 212k. Four-week moving average of initial claims decreased 6.5k to 206k.
Continuing claims rose 17k to 1647k in the week ending January 7. Four-week moving average of continuing claims declined 5.5k to 1673k.
BoE Governor Andrew Bailey said two months of decline in headline inflation is “the beginning of a sign that a corner has been turned.” He said: “What we think is the most likely outcome is that it will fall quite rapidly this year, probably starting in the late spring and that has a lot to do with energy pricing.
On the outlook for the base rate, he said: “We don’t target a particular peak”. Market curve was out of line back in November, because of UK risk premium in there following the events of September and October
“If you go back to the height of that period, the peak of what the market thought we were going to get to was over 6%, but the time we did our forecast in November it was 5.2%, it is now down to 4.5%. Now I am not endorsing 4.5%, but what you may have noticed in December is that we did not include the comment that we made in November about the market being in our view rather out of line,” he said.
In the accounts of ECB’s December meeting, it’s noted that a “large number” of members “initially” expressed preference for a 75bps hike. But some of them expressed their willingness to agree on a 50bps if the majority were to support Chief Economist Philip Lane’s proposal.
That is, to rate interest rates by 50bps and to communicate that interest rates would “still have to rise significantly at a steady pace to reach levels that were sufficiently restrictive”. Meanwhile, 50bps hikes was “judged to constitute an appropriate pace”.
Also, “a less frontloaded but steadier approach to bringing interest rates to restrictive levels could be seen as consistent with the more persistent nature of the inflation process and continued elevated uncertainty…
Nevertheless, some member still held the view that “the proposed adjustment of the monetary policy stance was insufficient – even taking into account the combination of a 50 basis point interest rate hike with the announcement of a reduction in APP reinvestments.”
ECB President Christine Lagarde said in Davos today, “Inflation by all accounts, whichever way you look at it, is way too high.”
“There is determination at the ECB to bring (inflation) back in a timely manner and we should stay the course until we have been in restrictive territory for long enough to bring it down,” Lagarde added.
“The job market in Europe has never been as vibrant as it is now. The unemployment number is at rock bottom compared with what we’ve had in the last 20 years. And the participation rate which matters as well, is also very, very high level and that is pretty much homogeneous throughout the euro area,” she said.
“The news has been much more positive over the past few weeks,” she said. “It will not be a brilliant year (in 2023), but a lot better than feared”.
ECB Governing Council member Klaas Knot told CNBC today, “Our president has already announced that most of the ground that we have to cover we will cover at a constant pace of multiple 50 basis-point hikes”
“So we will continue that at a steady pace. Based on the information that we have available today, that predicates another 50-basis-point rate hike at our next meeting, and possibly at the one after that, and possibly thereafter, but everything will also be determined by the review of data. So don’t assume that it’s a one-shot 50; it’s more than that,” he added.
Referring to recent market speculations that ECB will slow down rate hikes in March, Knot said, “The sort of market developments that I’ve seen over the last two weeks or so, are not entirely welcome… I don’t think that they are compatible, actually, with a timely return of inflation towards 2%.”
“Core inflation shows no signs of abating,” Knot said. “I would first need to see different dynamics in core inflation before I could start thinking about a more equal balance of risk.”
Australia employment declined -14.6k in December, much worse than expectation of 21.2k growth. Full-time jobs rose 17.6k while part-time jobs fell -32.2k. Unemployment rate was unchanged at 3.5%. Participation rate dropped -0.2% to 66.6%. Monthly hours worked dropped -0.5%.
Lauren Ford, head of labour statistics at the ABS, said: “The falls in employment and hours worked in December followed strong growth through 2022, with an annual employment growth rate of 3.4 per cent and hours worked increasing by 3.2 per cent.
“The strong employment growth through 2022, along with high participation and low unemployment, continues to reflect a tight labour market.
“In December, we saw the number of people working reduced hours due to illness increasing by 86,000 to 606,000, which is over 50 per cent higher than we would usually see at this time of the year.”
In December, Japan exports rose 11.5% yoy to JPY 8787B, marking the slowest growth rate in 2022. Exports to China fell -6.2% yoy in value and down -24% yoy in volume. Imports rose 20.6% yoy to JPY 10236B, led by oil, coal and liquefied natural gas.
Trade deficit came to JPY -1.45T, extending the run of deficits to 17 months. For the whole of 2022, trade balance came in at JPY -19.97T deficit, the second straight annual shortfall, and the largest since 1979.
In seasonally adjusted term, exports dropped -3.5% mom to JPY 8352B. Imports dropped -3.4% mom to JPY 10076B. Trade deficit narrowed slightly to JPY -1.72T, larger than expectation of JPY -1.63T.
Dallas Fed President Lorie Logan said it’s a “good idea to slow down” in “today’s complex economic and financial environment”.
“That’s why I supported the decision last month to reduce the pace of rate increases. And the same considerations suggest slowing the pace further at the upcoming meeting,” she added.
“A slower pace is just a way to ensure we make the best possible decisions,” she said. “We can and, if necessary, should adjust our overall policy strategy to keep financial conditions restrictive even as the pace slows.”
She added that Fed should not “lock in” on a terminal rate. “My own view is that we will likely need to continue gradually raising the fed funds rate until we see convincing evidence that inflation is on track to return to our 2 percent target in a sustainable and timely way,” she said.
“The most important risk I see is that if we tighten too little, the economy will remain overheated, and we will fail to keep inflation in check,” Logan said.
Philadelphia Fed President Patrick Harker said yesterday, “I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed.” “Hikes of 25 basis points will be appropriate going forward,” he said. And, “let’s get above 5% and sit there for a while”.
While risks to inflation remain on the upside, he noted, “we are starting to see inflation come down across a spectrum of goods.” He expects core inflation to decline to 3.5% this year, and 2.5% next, then get back to target in 2025. He also said the economy should grow 1% this year, without falling into recession.
Cleveland Fed President Loretta Mester, said in an AP interview, “We’re beginning to see the kind of actions that we need to see… Good signs that things are moving in the right direction … That’s important input into how we’re thinking about where policy needs to go.”
“We’re starting to see our policy actions do what they’re intended to do,” she said. “But I do believe we have to continue raising … and then hold for a while so that we get back to price stability in a timely way.”
“We’re not at 5% yet, we’re not above 5%, which I think is going to be needed given where my projections are for the economy,” she said. “I just think we need to keep going, and we’ll discuss at the meeting how much to do.”
St. Louis Fed President James Bullard said in an online WSJ interview, “we’re almost into a zone that we could call restrictive – we’re not quite there yet.”
Fed will wants to make sure that inflation will fall back to 2% target. “We don’t want to waiver on that,” he said.
“Policy has to stay on the tighter side during 2023” as the disinflationary process unfolds, he added.
He still sees rates at 5.25-5.50% range at the end of the year.
US PPI for final demand declined -0.5% mom in December, below expectation of -0.1% mom. For the 12-month period, PPI slowed form 7.3% yoy to 6.2% yoy, below expectation of 6.8% yoy. For the 12-month period, PPI slowed form 7.3% yoy to 6.2% yoy, below expectation of 6.8% yoy.
For the month, Goods prices fell -1.6% mom while services rose 0.1% mom. PPI less foods, energy, and trade services rose 0.1% mom.
US retail sales declined -1.1% mom to USD 677.1B in December, worse than expectation of -0.8% mom. Ex-auto sales dropped -1.1% mom to USD 552.7B, versus expectation of -0.5% mom. Ex-gasoline sales fell -0.8% mom to USD 617.6B. Ex-auto and gasoline sales contracted -0.7% mom to USD 493.1B.
Total sales for the 12 months of 2022 were up 9.2% from 2021. For the October through December period, sales were up 6.7% from the same period a years ago.
Eurozone CPI was finalized at 9.2% yoy in December, down from November’s 10.1% yoy. CPI core (ex energy, food, alcohol & tobacco) was finalized at 5.2% yoy, up from prior month’s 5.0% yoy. The highest contribution came from food, alcohol & tobacco (+2.88%), followed by energy (+2.79%), services (+1.83%) and non-energy industrial goods (+1.70%).
EU CPI was finalized at 10.4% yoy, down from prior month’s 11.1% yoy. The lowest annual rates were registered in Spain (5.5%), Luxembourg (6.2%) and France (6.7%). The highest annual rates were recorded in Hungary (25.0%), Latvia (20.7%) and Lithuania (20.0%). Compared with November, annual inflation fell in twenty-two Member States, remained stable in two and rose in three.
ECB Governing Council member Francois Villeroy de Galhau said “we will have good news on headline inflation because energy prices are going down,”
But on interest rates, he said President Christine Lagarde’s earlier 50bps guidance is “still valid”. He added that it’s too early to speculate on the size of March rate hike.
Also, Villeroy emphasized, “we must stay the course in battle against inflation”, adding, he “cannot say where the terminal rate will be but should be there by the summer.”
At the post meeting press conference, BoJ Governor Haruhiko Kuroda said, “We don’t need to further expand the band around our yield target…. It’s been not long since we decided on our measures in December. It will likely take some more time for the measures to start having an effect in fixing market function. With our flexible market operations, however, we expect market function to improve ahead… YCC is, therefore, likely to be sustainable.”
“Uncertainty regarding Japan’s economy is very high. It’s necessary to support the economy with our stimulus policy, to ensure companies can raise wages. By maintaining ultra-easy policy, we will strive to achieve our price target stably and sustainably accompanied by wage hikes,” he noted.
“Unlike in the past, we expect wages to rise quite a bit, when listening to comments from the business and labour union executives,” Kuroda said. “The pace of wage hikes is accelerating. But this is something we haven’t seen in the past… So we’re not 100% sure (whether) wages will indeed rise.”
UK CPI rose 0.4% mom in December, matched expectations. In the 12 months, CPI slowed from 10.7% yoy to 10.5% yoy slightly below expectation of 10.6% yoy. CPI core was unchanged at 6.3% yoy, below expectation of 6.6% yoy. RPI rose 0.6% mom, 13.4% yoy, below expectation of 1.0% mom, 13.9% yoy.
ONS said: “The largest downward contribution to the change in both the CPIH and CPI annual inflation rates between November and December 2022 came from transport (particularly motor fuels), clothing and footwear, and recreation and culture, with rising prices in restaurants and hotels, and food and non-alcoholic beverages making the largest partially offsetting upward contributions.”
BoJ kept the yield curve control unchanged today, disappointing some who bet for a tweak. Short term policy interest rate is held at -0.10%. The central will continue to purchase JGBs, without setting an upper limit, to keep 10-year yield at around 0%. The range 10-year JGB yield allowed to fluctuate is also kept at around plus and minus 0.50%. The decision was made by unanimous vote.
In the Outlook for Economic Activity and Prices:
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Fed Brainard: Policy will need to be sufficiently restrictive for some time
Fed Vice Chair Lael Brainard said in a speech yesterday, “even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis.”
“The FOMC moved policy into restrictive territory at a rapid pace and subsequently downshifted the pace of increases in the target range at its most recent meeting,” She noted. “This will enable us to assess more data as we move the policy rate closer to a sufficiently restrictive level, taking into account the risks around our dual-mandate goals.
Full speech here.