US headline CPI rose 0.3% mom in April, above expectation of 0.2% mom. CPI core rose 0.6% mom, above expectation of 0.4% mom. Food index rose 0.9% mom. Energy index declined -2.8% mom.
Over the 12-month period, headline CPI slowed from 8.5% yoy to 8.3% yoy, but beat expectation of 8.1% yoy. CPI core slowed from 6.5% yoy to 6.2% yoy, also beat expectation of 6.0% yoy. Food index rose 9.4% yoy, highest since April 1981. Energy index rose 30.3% yoy.
ECB President Christine Lagarde indicated in a speech that the asset purchases could end “early” in Q3, and interest rate hikes could start “only a few weeks” after that.
“We will end net purchases under the asset purchase programme. Judging by the incoming data, my expectation is that they should be concluded early in the third quarter,” she said.
“The first rate hike, informed by the ECB’s forward guidance on the interest rates, will take place some time after the end of net asset purchases,” she reiterated.
“We have not yet precisely defined the notion of ‘some time’, but I have been very clear that this could mean a period of only a few weeks. After the first rate hike, the normalisation process will be gradual,” she added..
ECB Governing Council member Madis Müller said the central bank could already outline its interest rate expectations for the coming months at the June meeting. He added that the first step is to end asset purchases in early July, but “we could even discuss if we should end purchases a few weeks earlier.”
“The real issue is interest rate increases and we shouldn’t have much of a delay there either,” Müller added. “The recent data confirm that the monetary policy stance is not appropriate given where inflation is and given inflation expectations.”
“Even if we go by 25 basis point increments, we may get to a positive rate by the end of the year. For the time being, 25 basis points would be an appropriate increment.”
Separately, another Governing Council member Francois Villeroy de Galhau told France Inter radio today, “I think that from this summer onwards, the ECB will gradually raise its interest rates.” The Ukraine war provided a “negative shock” for the French economy. He added, “inflation is the principal concern of companies and citizens.”
Gold’s near term decline resumed overnight and broke through 1850.18 support. Near term outlook now stays bearish as long as 1909.57 resistance holds. Next target is 100% projection of 2070.06 to 1889.79 from 1998.23 at 1817.86. The whole fall from 2070.06 is seen as the third leg of the consolidation pattern from 2074.84 (2020 high). Firm break of 1817.86 could prompt more downside acceleration towards 1682.60 to finally finish the pattern.
Australia Westpac-MI consumer sentiment index dropped from 95.8 to 90.4 in May. That’s the lowest level since August 2020. The reading was also -8.4% below the average seen in 2019. The -5.6% decline was the largest since the -6.9% fall in June 2016.
Looking at some details, family finances for the next 12 months dropped from 105.1 to 93.3. Economic conditions for the next 12 months dropped from 95.9 to 90.4. Unemployment expectations rose from 99.2 to 109.6.
Westpac said two “stunning developments are clearly unnerving consumers”. Firstly, headline inflation surged above 5% for the first time since 2007. Secondly, RBA raised interest rate for the first time since 2010.
Regarding RBA policies, Westpac said “having now begun its tightening cycle the Board is almost certain to follow up the move in May with a further move in June”. It added, “the need to avoid an over-shoot later in the cycle is why, despite this disturbing tumble in Consumer Sentiment, we believe the prudent approach in June would be to lift rates by 40bps rather than the 25 bps that is currently favoured by most analysts.
Cleveland Fed President Loretta Mester told Reuters, “I would need to see monthly numbers coming down in a compelling way before I would want to conclude we could now rest” on raising interest rates.
“The risks to inflation are skewed to the upside and the cost of allowing that inflation to continue is high,” she said, an argument for the Fed “doing more upfront rather than waiting.”
“I don’t think it (inflation) will get back to 2% next year. But it will be well on its way, in the range of two and half percent but moving in the right direction,” she said. “And given where the economy is and all the factors affecting inflation that are outside of our realm, that is acceptable to me.”
Fed Governor Christopher Waller said yesterday, “It’s time to raise rates now when the economy can take it. Front-load it, get it done, and then we can judge how the economy is proceeding later, and if we have to do more, we’re going to do more.”
“The labor market is strong. The economy is doing so well,” he said. “This is the time to hit it if you think there’s going to be any kind of negative reaction, because the economy can take it.”
ECB Governing Council member Joachim Nagel said today, “as inflation in the euro area continues to run high, we need to act.” He expects the asset purchases to end in June and “will advocate a first step normalizing ECB interest rates in July.”
Nagel warned that risk of acting too late on inflation is “increasing notably”. “Delaying a monetary-policy turnaround is a risky strategy,” he said. “The more inflationary pressures spread, the greater the need for a very strong and abrupt interest rate hike.”
Cleveland Fed President Loretta Mester said, she supports 50bps rate hikes at the next couple FOMC meetings. She also expects interest rate to go above 2.5% to bring inflation down.
“We need to get monetary policy in a more neutral and then we have to evaluate how much is needed to move that inflation needle down. It’s going to be challenging… because there’s things going down on the supply and demand sides,” she said.
“It may very well be that the unemployment rate will have to move up a little bit, we may get another quarter of negative or slow growth, but that’s going to have to happen if we want to get inflation down,” she told Yahoo Finance. “I don’t think what are planning to do with monetary policy, at least in my base case, is going to push the economy into a downturn that’s sort of a sustained downturn.”
In a speech, New York Fed President John Williams said he expects the FOMC to “move expeditiously in bringing the federal funds rate back to more normal levels this year”. The ongoing pandemic and Ukraine war “bring a tremendous amount of complexity and uncertainty”. Fed will “need to be data dependent and adjust our policy actions as circumstances warrant.”.
For 2022, Williams expects core inflation to be nearly 4%, before falling to around 2.50% next year, then further decline to close to 2% long-run goal in 2024. He also expects GDP growth to be around 2% in 2022 while unemployment rate to remain around its current low level.
Germany ZEW Economic Sentiment improved from -41 to -34.3 in May, above expectation of -42.5. Germany Current Situation index, however, dropped from -30.8 to -36.5, slightly below expectation of -35.0. Eurozone Economic Sentiment rose from -43.0 to -29.5, above expectation of -41.0. Eurozone Current Situation index dropped -6.5 pts to -35.0.
ZEW President Professor Achim Wambach: “The ZEW Indicator of Economic Sentiment increased moderately this month but still remains at a relatively low level. Compared to last month, the outlook for the economic situation in Germany is thus slightly less pessimistic. The experts still assume that it will continue to deteriorate, but at a lower pace than expected before.
“The strong restrictions in China to fight against new Covid-19 infections lead to a strong reduction in the assessment of the current economic situation in China. This is a heavy weight on the future development of the German economy.
“With regard to the ECB’s monetary policy stance there is a large majority of experts expecting an increase in interest rates during the next six months. Accordingly they expect a decline of inflation rates from their very high current level.
BoJ Governor Haruhiko Kuroda said in an online seminar that the central bank has not decided on central bank digital currency (CBDC) yet. But he noted it could be an option for securing a seamless and safe infrastructure.
“CBDC is not the only way, so a national discussion is needed as to how to achieve this goal,” Kuroda said, adding, “retail level CBDC is an option.”
BoJ started the second phase of the CBDC experiments in April. The process will last for around a year.
NZD/JPY dived lower this week as risk aversion dominated the markets. It is now extending the fall from 87.33 top towards 100% projection of 87.33 to 83.28 from 84.81 at 80.76. Such decline is currently still seen as a correction only. Hence, strong support is expected from 80.76 to contain downside to bring rebound. But break of 84.81 resistance is still needed to confirm completion of the fall, otherwise, risk will stay on the downside.
Similarly, AUD/JPY is also extending the fall from 95.73 and should target 100% projection of 95.73 to 90.41 from 94.00 at 88.68. Strong support is expected from this level to complete the correction. But break of 94.00 resistance is needed to confirmation completion of the correction, or risk will stay on the downside. too.
Australia NAB business confidence dropped from 16 to 10 in April. Business conditions rose from 15 to 20. Looking at some details, trading conditions rose from 23 to 27. Profitability conditions rose from 12 to 22. Employment conditions were unchanged at 10.
NAB Group Chief Economist Alan Oster said: “Price growth eased somewhat in the April survey after hitting record rates in March, but remained high when looking at the history of the survey, supporting our expectation that inflation will remain elevated in Q2 and likely Q3.
“Still, the strong business conditions including trading conditions and profitability show that the economy is faring quite well and so far, demand is holding up in the face of higher inflation.”
BoJ Executive Director Shinichi Uchida told the parliament today, “Japan’s economy is still in the midst of recovering from the pandemic’s impact. It is recently under pressure from rising commodity prices… It’s therefore important for the BOJ to continue supporting economic activity with powerful monetary easing.” He also said BoJ has no plan to adjust the 50bps band allowed for 10-year JGB yield to fluctuate around 0%.
Separately, Finance Minister Shunichi Suzuki said after a cabinet meeting, “stability is important and rapid moves as seen recently are undesirable,” referring to Yen’s exchange rate. But he emphasized that any actions would follow the practice agreed with G7 partners.
BoE MPC member Michael Saunders said in a speech, “I put considerable weight on risks that, unless checked by monetary policy, domestic capacity and inflation pressures would probably be greater and more persistent than the central forecast.”
“As a result, my preference has been to move relatively quickly to a more neutral monetary policy stance,” he added.
“The strength of external costs is eroding real incomes and is likely to cap real spending,” he explained. “But, by creating a long period of above-target inflation, these external cost increases also may exacerbate the rise in inflation expectations and hence, with the tight labour market, could make it harder to ensure domestic inflation pressures return to a target-consistent pace.”
Atlanta Fed President Raphael Bostic told Bloomberg today that last week’s 50bps rate hike was “already a pretty aggressive move”. He added, “I don’t think we need to be moving even more aggressively.”
“I think we can stay at this pace and this cadence and really see how the markets evolve … We are going to move a couple times, maybe two, maybe three times, see how the economy responds, see if inflation continues to move closer to our 2% target, then we can take a pause and see how things are going,” he said.
Minneapolis Fed President Neel Kashkari said in a CNBC interview, “I’m confident we are going to get inflation back down to our 2% target, but I am not yet confident on how much of that burden we’re gonna have to carry versus getting help from the supply side.”
He added that “virtually all of that news is in the wrong direction,” pointing to Ukraine war and lockdowns in China.
He also emphasized that Fed is focused on its dual mandate, price stability and full employment. If data comes in different from expectations, Fed will change its policy approach.
The selloff in Chinese Yuan accelerates again today as the Chinese government tightened up city-wide lockdown in Shanghai again. The decision came after President Xi Jinping’s pledge last week to double down on the “battle” against the coronavirus.
USD/CNH (offshore Yuan) hits as high as 6.7763 so far today, highest level since late 2020. Technically, Current rise is at least in the same degree as the down trend from 7.1961 (2020 high). Further rise is expected as long as 6.6111 support holds. Next target is 61.8% retracement of 7.1961 to 6.3057 at 6.8560.
Also, released from China earlier today, exports rose 3.9% yoy in April, above expectation of 3.2% yoy. Imports dropped -2.0% yoy, versus expectation of -3.0% yoy. Trade surplus widened from USD 47.4B to USD 51.1B, basically in-line with expectations.
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Fed Bostic: We are going to get our policy rate certainly to a neutral space
Atlanta Fed President Raphael Bostic said yesterday, “we are going to get our policy rate certainly to a neutral space where we are no longer providing accommodation. If inflation stays at high levels or levels that are too high — by too high, it’s really not moving back towards our 2% target — then I am going to be supporting moving more.”
“We moved our policy rate 25 basis points and the 30 year (mortgage) moved 2 percentage points. That is tremendous responsiveness,” Bostic also noted. “The moves that we have seen in rates and in yields are a sign that the markets still believe the Fed has credibility. They have said what we are going to do and they have priced in us doing them … That is an important dimension in the marketplace.”