Fed Governor Lisa Cook pointed out in a speech that risks associated with meeting the dual mandate goals of inflation and employment are “moving into better balance”.
She explained that prematurely easing monetary policy might “allow above-target inflation to become entrenched” and eventually require a tighter monetary stance, risking significant employment setbacks. Conversely, delaying policy easing could unnecessarily restrict economic expansion and curtail job opportunities.
Chicago Fed President Austan Goolsbee told Yahoo Finance that he aligned with the “median” projections regarding the monetary easing path forward, as anticipates three rate cuts within the year.
In this “murky period” of economic recovery as Goolsbee described, Fed has to “strike a balance of the dual mandate”. He noted that with inflation rates on a downward path, the real cost of borrowing has inadvertently risen, positioning Fed in “historically pretty restrictive territory.”
“So I think with that level of restrictiveness, you will have to start paying attention to the other side of the mandate, too, if it goes for too long,” he added.
ECB Chief Economist Philip Lane, in a podcast published today, conveyed a sense of confidence among policymakers regarding wage growth trends. Lane articulated that policymakers are “confident” that wages growth is “on track” to return to normal.
“If this assessment is confirmed, then we will start looking more closely at reversing some of the rate increases we’ve made,” he added.
Adding to the conversation, Governing Council member Fabio Panetta addressed an audience at a separate event, underscoring the feasibility of a rate cut given the current inflation trend.
“The consensus emerging – especially in recent weeks – within the ECB governing council points in this direction,” Panetta noted.
Chinese Yuan rebounded significantly in Asian session, sparked by PBoC’s unexpectedly strong daily fixing. The fixing was set at 7.0996, markedly stronger than the anticipated 7.2222 by analysts, marking the largest strengthening bias since November. Also, reports suggest that state-owned banks actively participated in selling Dollars onshore, further tightening offshore Yuan liquidity.
Economists interpret this orchestrated maneuver as a decisive message from PBoC, indicating a refusal to tolerate further weakening of Yuan. This action seems to correct what the authorities considered an overreaction by the market to last Friday’s sharp decline. The market’s speculation on Yuan depreciation appeared to be challenged by today’s fixing, aimed at recalibrating market perceptions.
From a pure technical perspective, USD/CNH’s rise from 0.7087 is seen as the second leg of the corrective pattern from 7.3679 for now, which is still in progress. FUrther rally is expected as long as 55 D EMA (now at 7.2056) holds. Next target is 100% projection of 7.0870 to 7.2318 from 7.1715 at 7.3163. But break of 7.3679 high is not envisaged.
However, these technical observations stand independent of the significant influence of PBoC’s interventions in the currency market.
BoJ’s minutes from January meeting, ahead of the landmark March decision to end negative interest rates, reveal a cautious approach towards monetary policy adjustments. Members highlighted the Japan’s economic conditions “differed significantly” to those of US and Europe when they initiated interest rate hikes a few years ago. The consensus was clear: it was “not required in Japan to conduct rapid monetary tightening” as seen in Western economies.
Further discussions underscored three primary risks to Japan’s economic activity: shifts in global economic performance and financial markets, fluctuations in commodity and grain import prices, and future growth expectations of firms and households.
Members agreed these factors could significantly influence economic outcomes and emphasized the need for vigilance towards price-setting behaviors within the economy, as well as the impact of currency and commodity price movements on domestic inflation.
Canada’s retail value fell -0.3% mom to CAD 67.0B in January, smaller than expectation of -0.4% mom decline. Sales were down in three of nine subsectors and were led by decreases at motor vehicle and parts dealers (-2.4% mom)
Core retail sales—which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers—were up 0.4% mom.
In volume terms, retail sales increased 0.2% mom.
Advance estimate suggests that sales increased 0.1% mom in February.
In a webcast today, ECB Governing Council member Joachim Nagel indicated that the chance is increasing for a first rate cut “before the summer break” in August. However, he cautioned that afterwards, ECB will maintain a data-dependent approach and policy loosening wouldn’t be on autopilot.
“I do not see that there is a kind of automatism,” he remarked. “It is data dependent and it is not a done deal that everything is going smoothly for the rest of the year or maybe for next year. So we have to be vigilant, we have to be cautious.”
The ECB official flagged several “open issues” that warrant cautions, including the volatility in energy prices and the ongoing uncertainties surrounding wage growth and profit margins. “This meeting-to-meeting approach is the best way to address the current situation,” he added.
Germany’s Ifo Business Climate Index rose to 87.8 in March, from the previous 85.7, surpassing anticipated 86.2. This uplift is mirrored in both Current Assessment Index, which advanced from 86.9 to 88.1 against expectations of 86.8. Expectations Index, which climbed from 84.1 to 87.5, outstripping the forecasted 84.7.
A closer look at sector-specific changes reveals significant variances: Manufacturing sector saw a substantial leap from -17.1 to -10.0. Services sector marked a positive turn, moving from -4.0 to 0.3. Meanwhile, the trade sector saw an improvement as its index rose from -30.8 to -22.9. However, the construction sector observed a slight decrease from -35.4 to -33.5,.
Ifo President Clemens Fuest encapsulated the sentiment by stating, “The German economy glimpses light on the horizon,” highlighting a renewed sense of optimism among businesses.
In February 2024, UK’s retail sales volumes remained unchanged month-over-month, a performance that’s better than expectation of -0.3% mom decline. Meanwhile, sales value slightly dipped by a -0.1% mom.
A broader examination reveals -0.4% decline in sales volumes over the three months leading up to February, compared to the preceding three-month period. Additionally, a year-over-year comparison with the three months to February 2023 shows -1.0% decrease.
Japan’s CPI core (ex-fresh food) rises from 2.0% yoy to 2.8% yoy in February, matched expectations. This increase marks the first acceleration in four months and maintains the index above BoJ’s 2% target for the 23rd consecutive month.
The uptick in the core CPI was primarily due to a less pronounced decline in energy prices, reflecting diminishing impact of government subsidies introduced to mitigate energy costs. Specifically, energy prices saw a decrease of -1.7% yoy, a significant moderation from -12.1% yoy drop recorded in January.
The overall headline CPI also showed an uptick, accelerating from 2.2% yoy to 2.8%yoy. However, when examining CPI core-core, which excludes both food and energy, there was a slight slowdown from 3.5% yoy to 3.2% yoy.
In February, New Zealand’s goods exports leaped by 16% yoy to NZD 5.9B. This surge contrasts with a more modest 3.3% yoy increase in goods imports, totaling NZD 6.1B. Consequently, monthly trade deficit narrowed significantly to NZD -218m, far exceeding market expectations of a shortfall of NZD -825m.
Exports to China, New Zealand’s largest trading partner, increased by 10% yoy, contributing an additional NZD 154m. US saw a remarkable 52% yoy jump in exports, adding NZD 305m, while EU and Australia also recorded increases in New Zealand exports by 7.9% yoy and 5.9% yoy, respectively. However, trade with Japan contracted, with exports declining by -10% yoy.
On the import front, China and South Korea marked significant increases of 7.1% yoy and 42% yoy, respectively, indicating robust demand for goods from these economies. Conversely, imports from US and EU saw downturns, declining by 20% yoy and 7% yoy.
US PMI Manufacturing rose from 52.2 to 52.5 in March, a 21-month high. PMI Services fell from 52.3 to 51.7. PMI Composite also fell from 52.5 to 52.2.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“Further expansions of both manufacturing and service sector output in March helped close off the US economy’s strongest quarter since the second quarter of last year. The survey data point to another quarter of robust GDP growth accompanied by sustained hiring as companies continue to report new order growth.
“The brightest news came from the manufacturing sector, where production is now growing at the fastest rate since May 2022. Production gains are linked to improving demand for goods both at home and abroad, driving a further upturn in business confidence in the outlook.
“Service providers meanwhile reported a slower pace of expansion than factories, with the rate of increase also moderating slightly compared to February, linked in part to ongoing cost of living pressures. However, service providers have also become increasingly optimistic about the outlook, with confidence striking a 22-month high in March to suggest the broad-based economic expansion seen in March will persist into the summer.
“A steepening rise in costs, combined with strengthened pricing power amid the recent upturn in demand, meant inflationary pressures gathered pace again in March. Costs have increased on the back of further wage growth and rising fuel prices, pushing overall selling price inflation for goods and services up to its highest for nearly a year. The steep jump in prices from the recent low seen in January hints at unwelcome upward pressure on consumer prices in the coming months.”
BoE maintained the Bank Rate at 5.25% as widely expected. The decision was made by an 8-1 vote, with Swati Dhingra singularly advocating for a reduction again. Notably, previous hawks Jonathan Haskel and Catherine Mann adjusted their positions, refraining from advocating for hikes this round.
BoE noted that February’s CPI inflation rate of 3.4% was marginally lower than forecasted in the the latest Monetary Policy Report. Despite a decline in services consumer price inflation, it remains significantly high. Nevertheless, most measures of short-term inflation expectations are on a downtrend.
With the government’s decision to freeze fuel duty, CPI is projected to dip slightly below 2% mark in the second quarter. However, a slight uptick is anticipated in the latter half of the year.
UK PMI Manufacturing rose from 47.5 to 49.9 in March, above expectation of 47.9, a 20-month high. PMI Services fell slightly from 53.8 to 53.4, below expectation of 53.8. PMI Composite ticked down from 53.0 to 52.9.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, interprets the data as evidence of UK’s recovery from the recession in the latter half of 2023. The aggregate business activity for Q1 suggests 0.25% GDP growth, marking the best quarter since mid-last year
Despite the optimistic growth indicators, inflation remains a pressing issue, particularly in the services sector, where “stubbornly sticky” inflation pressures continue. Moreover, the manufacturing sector saw “renewed inflation”.
While the overall inflation rate is expected to decline in the coming months, March’s PMI data point to “elevated underlying price pressures,” possibly influencing BoE to exercise caution. Williamson, suggests that a decisive shift towards lower interest rates should only occur once there is clear evidence of moderating wage growth.
Eurozone PMI Manufacturing from 46.5 to 45.7 in March, below expectation of 47.0. PMI services, on the other hand rose from 50.2 to 51.5, above expectation of 50.5 a 9-month high. PMI Composite ticked up from 49.2 to 49.9, also a 9-month high.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, highlighted the “clear weakness” in manufacturing, attributing it largely to Germany’s industrial performance. On a brighter note, the further expansion in the services PMI is considered a “positive development.”
From a monetary policy perspective, ECB may find some solace in the report’s implications on inflationary pressures. Notably, the services sector, which is typically sensitive to wage dynamics, has not seen a further escalation in price pressures.
However, these developments, as de la Rubia notes, are “not enough” to alter the ECB’s tentative plan to commence rate cuts in June, rather than an earlier move in April.
Also released, France PMI Manufacturing fell from 47.1 to 45.8. PMI Services fell from 48.4 to 47.8. PMI Composite fell from 48.1 to 47.7.
Germany PMI Manufacturing fell from 42.5 to 41.6. PMI Services rose from 48.3 to 49.8. PMI Composite rose from 46.3 to 47.4.
In a surprising move, SNB announced a -25bps cut in its policy rate, bringing it down to 1.50%. This decision also introduced a tiered system for the remuneration of banks’ sight deposits held at SNB. Deposits up to a specified threshold will earn interest at the policy rate, while those exceeding this limit will attract only 1.0% higher rate. Furthermore, SNB affirmed its readiness to intervene in the foreign exchange market if deemed necessary.
The rationale behind the rate cut, as outlined by the SNB, is the “effective” management of inflation over the past two and a half years, which has allowed inflation rates to settle below the 2% mark for several months. This achievement aligns with the SNB’s definition of price stability and sets the stage for a conducive economic environment in the foreseeable future.
The new conditional inflation forecasts are revised sharply lower even with a lower policy rate. SNB project a modest increase in inflation from 1.2% in Q1 to 1.5% in Q2 of this year, followed by a decline to 1.2% in Q1 2025, and a further decrease to 1.1% in the second half of 2026.
Addressing the parliament today, BoJ Governor Kazuo Ueda articulated the rationale behind this week’s exit from the long-standing negative interest rate policy and the subsequent rate hike. This move marks a significant shift for Japan’s monetary policy, which had been entrenched in a negative interest rate environment for eight years.
Ueda pointed out, “We could have waited until inflation is completely at 2% for a long period of time. But if we did so, it’s unclear whether inflation would have stayed at 2%. We might have seen a sharp increase in upside price risks,” highlighting the preemptive nature of the BoJ’s action.
The decision was influenced by recent trends in service prices and substantial wage increases resulting from annual wage negotiations, indicating a strengthening cycle of wage growth and inflation in Japan.
Despite this historical step, Ueda underscored that Japan’s inflation expectations for the medium and long term are “still in the process of accelerating towards 2%”. He assured that BoJ remains committed to supporting the economy and prices “by maintaining accommodative monetary conditions for the time being”.
He also hinted at future adjustments, stating, “As we exit our massive stimulus program, we will gradually shrink the size of our balance sheet and at some point reduce the size of our government bond buying.”
Japan’s PMI Manufacturing saw a modest increase from 47.2 to 48.2 in March, while PMI Services surged to from 52.9 to 54.9, its highest level since last May. Composite PMI, which combines both sectors, also climbed from 50.6 to 52.3, reaching its peak since last August.
Usamah Bhatti, Economist at S&P Global Market Intelligence, underscored the private sector’s regained momentum at the end of Q1. The expansion was predominantly driven by service providers, while manufacturers experienced a continued, though less severe, contraction.
Alongside this economic revival, Japan is facing a “renewed intensification of price pressures,” with the rate of input price inflation hitting a five-month high. This uptick was particularly pronounced among service providers, although manufacturers also reported “stubbornly high input prices”. Many firms opted to pass these increased costs onto customers, leading to the highest output charge inflation since last August.
Australia employment grew strongly by 116.5k in February, well above expectation of 40.2k. Full-time jobs rose 78.2k while part-time jobs rose 38.3k.
Unemployment rate fell sharply from 4.1% to 3.7%, below expectation of 4.0%. Participation rate rose 0.1% to 66.7%. Monthly hours worked also rose 2.8% mom.
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Fed’s Bostic eyes single rate cut in 2024, credits robust economy
Atlanta Fed President Raphael Bostic reiterated his anticipation just one interest-rate reduction within this year. Also, the first cut could happen later than previously envisioned, as Fed can “afford to be patient” as long as the economy holds up.
Bostic’s noted that as long as the economic indicators—such as GDP growth, employment rates, and business activity—remain robust, “I’m not in a hurry to get inflation down to 2%.”
“If it continues on a trajectory, I’m happy with that,” he added.