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Fed’s Kashkari: Monetary policy may not be as tight as assumed

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    ActionForex.com
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    Minneapolis Fed President Neel Kashkari argued in an essay that Fed’s current monetary policy stance “may not be as tight as we would have assumed”. This would afford Fed valuable leeway to sift through incoming economic data before deciding on any reduction to the federal funds rate. More importantly, that’s “with less risk that too-tight policy is going to derail the economic recovery”.

    Kashkari pointed out a dual phenomenon observed since September: Swift decline in inflation rates alongside a “remarkably resilient” economic growth, which even accelerated in the latter half of 2023. This trend challenges the conventional expectation that tight monetary policy, aimed at curbing inflation, would necessarily result in weakened economic growth and labor market conditions, including spikes in unemployment.

    “But that is not what we have experienced in recent quarters,” Kashkari observed.

    He suggests that the decrease in inflation may be largely attributed to improvements on the supply side, which have enhanced production capabilities and helped realign supply and demand, thus mitigating inflationary pressures.

    Full essay of Fed Kashkari here.

    OECD raises global growth forecasts to 2.9% in 2024 on robust US performance

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      ActionForex.com
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      OECD’s latest Interim Economic Outlook report presents a cautiously optimistic upgrade in global growth forecasts for 2024 to 2.9% (up from November’s 2.7% forecast), a notable uplift largely attributed to stronger performance of US economy.

      “Some moderation of growth” from 2023 is expected, under the influence of tighter financial conditions affecting credit and housing markets, alongside a subdued global trade dynamics. Recent attacks on ships in the Red Sea have introduced further volatility and exert upward pressure on prices.

      Despite some moderation in growth and the ongoing adjustments to tighter financial conditions, OECD cautions that it is “too soon to be sure that underlying price pressures are fully contained.” Labor markets showing signs of equilibrium bring a positive note, yet the persistently high unit labor cost growth looms as a challenge for meeting medium-term inflation targets.

      The specter of high geopolitical tension, particularly in the Middle East, poses a “significant near-term risk to activity and inflation”, with potential disruptions in energy markets likely to have far-reaching consequences. Furthermore, persistent service price pressures could lead to inflation surprises, necessitating reevaluation of monetary policy easing expectations. On the other hand, growth could be weaker if effects of past monetary tightening are stronger than expected.

      Here are some details.

      • Global growth forecast for 2024 raised up by 0.2% to 2.9%. 2025 unchanged at 3.0%.
      • US growth forecast for 2024 raised by 0.6% to 2.1%. 2025 unchanged at 1.7%.
      • Eurozone growth forecast for 2024 lowered by -0.3% to 0.6%, 2025 down by -0.2% to 1.3%.
      • Japan’s growth forecast for 2024 unchanged at 1.0%. 2025 lowed by -0.2% to 1.0%.
      • China’s growth forecast for 2024 unchanged at 4.7%. 2025 unchanged at 4.2%.

      Full OECD Economic Outlook, Interim Report here.

      Eurozone PPI down -0.8% mom, -10.6% yoy in Dec

        By
        ActionForex.com
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        Eurozone PPI was down -0.8% mom, -10.6% yoy in December, versus expectation of -0.8% mom, -10.6% yoy. For the month, industrial producer prices decreased by -2.3% mom for energy and by -0.3% mom for intermediate goods, while prices remained stable for both capital goods and durable consumer goods, and prices increased by 0.1% mom for non-durable consumer goods. Prices in total industry excluding energy decreased by -0.1% mom.

        EU PPI was down -0.9% mom, -10.0% yoy. The largest monthly decreases in industrial producer prices were recorded in Ireland (-12.0%), the Netherlands (-1.8%) and Estonia (-1.4%), while increases were observed in Greece (+1.0%), Belgium (+0.5%), Cyprus and Luxembourg (both +0.3%) as well as in France (+0.1%).

        Full Eurozone PPI release here.

        Eurozone Sentix rises to -12.9, Germany a negative economic pull

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          ActionForex.com
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          Eurozone Sentix Investor Confidence index climbed for the fourth consecutive month to -12.9, marking its highest point since April 2023. Both Current Situation Index, now at -20.0 (its peak since June 2023), and Expectations Index, reaching -5.5 (the highest since February 2022), have shown similar upward trends, indicating gradual improvement in investor sentiment across the region.

          Despite these positive trends, Sentix highlighted that the Eurozone continues to grapple with recessionary pressures. For a genuine economic turnaround, the expectation values need to shift into positive territory.

          Germany emerges as a primary concern, acting as the “negative economic pull” for Eurozone. Germany’s investor confidence dipping further from -26.1 to -27.1. Current Situation Index worsened to -39.3, but there’s a silver lining as Expectations Index improved to -14.0, reaching its highest since April 2023.

          Full Eurozone Sentix release here.

          UK PMI services finalized at 54.3, revival gained momentum

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            ActionForex.com
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            UK PMI Services was finalized at 54.3 in January, up from December’s 53.4. PMI Composite was finalized at 52.9, up from prior month’s 52.1.

            Tim Moore from S&P Global noted the service sector’s performance revival, with output growth at its fastest in eight months due to increased business and consumer spending. New orders have rebounded, driven by diminishing recession fears and more flexible financial conditions.

            Inflationary pressures eased in January, despite demand surge, with input costs rising at one of the slowest rates in three years. This slowdown is attributed to reduced energy, fuel, and raw material costs. However, service providers still face elevated wage pressures, contributing to a continued, albeit slower, rise in prices charged.

            Full UK PMI services release here.

            Eurozone PMI services finalized at 48.4, Southern strength versus Northern softness

              By
              ActionForex.com
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              Eurozone PMI Services was finalized at 48.4 in January, down slightly from December’s 48.8. PMI Composite was finalized at 47.9, up from prior month’s 47.6, a 6-month high.

              The data reveals a striking “north-south divide”, challenging conventional perceptions. Spain and Italy, with Composite PMIs of 51.5 and 50.7 respectively, outperform their northern peers, Germany (47.0) and France (44.6).

              Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted that ECB caution regarding interest rate cuts is justified by the rising price indices, reflecting increasing input and output prices in the services sector. This inflationary pressure complicates ECB’s decisions, especially in light of the latest GDP data for Q4 2023, which showed the eurozone narrowly avoiding a technical recession.

              The persistent eurozone-wide labor shortage, leading to wage increases and input price inflation, especially in the top economies, indicates a cautious approach to workforce reductions, even in weaker service sectors of Germany and France.

              Full Eurozone PMI services release here.

              Fed Powell repeats March too soon for interest rate cut

                By
                ActionForex.com
                -

                In an interview on CBS’s 60 Minutes, Fed Chair Jerome Powell emphasized the importance of ensuring inflation is convincingly on a downward trajectory toward 2% target before the central bank cut interest rates. He candidly stated, “it’s not likely that this committee will reach that level of confidence in time for the March meeting,” echoing the comments he made last week at the post-FOMC press conference.

                Highlighting the collective outlook of FOMC, Powell shared that the majority of its 19 participants anticipate a scenario where cutting federal funds rate would be appropriate within the year. However, he stressed that any such decision would “depend on the evolution of the economy.”

                Powell also underscored a forward-looking perspective, stating, “we wouldn’t wait to get to 2% to cut rates,” and acknowledging that rate cuts are “actively being considered” despite current inflation rates hovering between 2-

                Expectations for inflation’s trajectory were also addressed, with Powell predicting a decrease in the 12-month inflation figures throughout the year. He attributed this anticipated decline to the “unwinding” of “pandemic-related distortions” and the consequential impact of the Fed’s “tightening of policy.”

                Full transcript of Fed Powell’s interview here.

                China’s PMI services dips slightly to 52.7, significant challenges remain

                  By
                  ActionForex.com
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                  In January, China’s Caixin PMI Services slightly decreased to 52.7 from 52.9, aligning with expectations. PMI Composite also and a minor reduction to 52.5 from 52.6.

                  Wang Zhe, Senior Economist at Caixin Insight Group, pointed out that the economy faces “significant challenges” including tepid demand, increased employment pressures, and subdued market expectations, indicating that “This status quo has yet to experience a fundamental reversal.”

                  Full China Caixin PMI services release here.

                  Japan’s PMI services finalized at 53.1, fueling overall economic growth

                    By
                    ActionForex.com
                    -

                    Japan’s PMI Services was finalized at 53.1 in January, marking a continuous expansion for the 17th month and an improvement from December’s 51.5. PMI Composite was finalized at 51.5, up from prior month’s 50.0, indicating a modest uptick in overall private sector activity for the first time since October.

                    According to Usamah Bhatti, Economist at S&P Global Market Intelligence, key observations include accelerated growth in business activity, new orders, and the first rise in exports in five months.

                    Capacity pressures intensified, with the strongest backlog increase since last June and a sharper job creation rate. Business confidence for the year ahead hit an eight-month high, reflecting robust optimism.

                    Full Japan PMI services release here.

                    US NFP rises 353k, average hourly earnings rises 0.6% mom

                      By
                      ActionForex.com
                      -

                      US Non-Farm Payroll employment rose 353k in January, significantly surpassing expectation of 178k. Prior month’s growth was also revised sharply higher from 216k to 333k. Both were well above monthly average of 255k growth in 2023.

                      Unemployment rate was unchanged at 3.7%, below expectation of 3.8%. Labor force participation rate was unchanged at 62.5%.

                      Average hourly earnings grew 0.6% mom, well above expectation of 0.3% mom. Annual hourly earnings growth also accelerated from 4.4% yoy to 4.5% yoy, above expectation of 4.1% yoy.

                      Full US NFP release here.

                      BoE’s Pill advocates patience, rate cut remains some way off

                        By
                        ActionForex.com
                        -

                        BoE Chief Economist Huw Pill articulated a cautious stance on the prospect of interest rate cuts, noting that such a move remains “some way off.” He underscored the absence of adequate evidence suggesting a trajectory towards the inflation target, which necessitates a sustained period of tight monetary policy to mitigate domestic inflationary pressures.

                        “Crucially, for me at least, we don’t have sufficient evidence yet,” Pill stated, pointing to the need for more conclusive data to consider easing rates.

                        Further elaborating his view, Pill advised against overreacting to any short-term reversion of inflation to target level in the coming months, particularly if driven by external factors. Instead, he advocated for a focused and sustained effort to address domestic inflationary pressures through maintaining a restrictive policy stance.

                        NFP to conclude eventful week, 10-year yield in focus

                          By
                          ActionForex.com
                          -

                          Today’s US Non-Farm Payroll report is poised to be the focal point, concluding a week brimming with significant market events. Expectations are set for moderation in headline job growth to 178k in January, from December’s robust 216k. Additionally, unemployment rate is anticipated to inch higher to 3.8% from 3.7%, while the pace of average hourly earnings growth is projected to decelerate to 0.3% mom.

                          Preliminary indicators such as ADP private employment figure, which registered growth of only 107k, and a slight dip in ISM manufacturing employment component to 47.1, suggest potential softness in the headline job growth. However, wage growth aspect remains a wildcard, capable of influencing market dynamics significantly.

                          A key post-NFP development to watch is in 10-year yield, which has witnessed a marked decline throughout the week. The strong downside momentum now amplifies the likelihood that the overarching downward trend from 4.997 peak is resuming.

                          A weekly close below 3.785 support would corroborate the bearish case, and steer 10-year yield to 61.8% projection of 4.997 to 3.785 from 4.198 at 3.448 this quarter, before it could find a bottom. That would also keep Dollar pressured, in particular against Yen.

                          Gold pressing 2061 resistance after strong bounce

                            By
                            ActionForex.com
                            -

                            Gold jumped notably overnight following extended decline in benchmark treasury yields, as well as broad selloff in Dollar. Technically speaking, immediate attention is now on 2061.99 resistance. Decisive break there should confirm that corrective pullback from 2088.24 has completed with three waves down to 2001.58. More importantly, rally from 1972.86 would then be ready to resume through 2088.24. This will now be the favored case as long as 2029.79 minor support holds.

                            However, in the bigger picture, Gold might not be ready to break through 2134.97 record high yet. Current bounce from 1972.86 is seen as the second leg of a medium term corrective pattern from 2134.97. Upside will likely be limited by 100% projection of 1972.86 to 2088.24 from 2001.58 at 2116.96 to start the third leg.

                            BoC’s Macklem: Inflation decline expected to be gradual and uneven

                              By
                              ActionForex.com
                              -

                              BoC Governor Tiff Macklem emphasized the anticipated “gradual and uneven” decline in inflation towards 2% target. Speaking to the House of Commons Finance Committee, he noted that the journey to achieving inflation target “will be slow,” highlighting the persistence of risks along the way.

                              The central bank’s focus has evolved from assessing the sufficiency of current restrictive monetary policy stance to “how long to maintain the current restrictive stance,” he added.

                              Macklem also pointed out that while the Bank is keen on starting to reduce interest rates to support economic growth, it remains vigilant. The decision to lower rates will be contingent on a clear trajectory towards the inflation target, ensuring premature policy easing does not derail the progress made.

                              He stated, “you do want to start lowering interest rates before you’re all the way back, but you don’t want to lower them until you’re convinced…that you’re really on a path to get there.”

                              Additionally, the Governor reiterated the Bank’s readiness to adjust rates upwards should “new developments” warrant further action to curb inflation.

                              ISM manufacturing rises to 49.1, nears expansion threshold, with rising prices and stronger orders

                                By
                                ActionForex.com
                                -

                                US manufacturing sector, as indicated by ISM Manufacturing PMI, showed signs of resilience in January 2024, slightly missing the mark of expansion. The index climbed from 47.1 to 49.1, surpassing market expectations of 47.7, yet marking the 15th consecutive month of contraction.

                                A significant highlight was the jump in new orders, which soared to 52.5, reaching its highest level since May 2022. Production also showed modest improvement, ticking up from 49.9 to 50.5. However, employment index continued its downward trajectory, recording a fourth consecutive month of contraction at 47.1, down from 47.5.

                                A notable surge was observed in the prices index, which escalated sharply from 45.2 to 52.9. This marks the highest point since April 2023, signaling increasing cost pressures within the sector.

                                Overall, the current ISM Manufacturing PMI level is historically aligned with a 1.9% annualized growth in real GDP.

                                Full US ISM manufacturing release here.

                                US initial jobless claims rises to 224k, abv exp 211k

                                  By
                                  ActionForex.com
                                  -

                                  US initial jobless claims rose 9k to 224k in the week ending January 27, above expectation of 211k. Four-week moving average of initial claims rose 5k to 208k.

                                  Continuing claims rose 70k to 1898k in the week ending January 20. Four-week moving average of continuing claims rose 7.5k to 1841k.

                                  Full US jobless claims release here.

                                  BoE stands pat, two vote for hike, one for cut

                                    By
                                    ActionForex.com
                                    -

                                    BoE left the Bank Rate unchanged at 5.25% as widely expected. However, two MPC hawks (Jonathan Haskel and Catherine Mann) voted for another 25bps to 5.50%. Meanwhile, one dove (Swati Dhingra) voted for a 25bps cut to 5.00%. That resulted in a 6-3 vote for the decision.

                                    Nevertheless, the central bank dropped tightening bias by omitting the language that "Further tightening in monetary policy would be required…." Instead, it’s now "prepared to adjust monetary policy as warranted by economic data".

                                    BoE will continue monitor a range of measures of "the underlying tightness of labour market conditions, wage growth and services price inflation."

                                    CPI is projected to fall temporarily to 2% in Q2 2024, before rising again in Q3 and Q4. BoE sees CPI to be at to be at 2.8% in Q1 2025 (up from prior 2.5%), then 2.3% in Q1 2026 ( up from 1.9%), then 1.9% in Q1 2027 (new).

                                    Four-quarter GDP growth is seen at 0.5% in Q1 2025 (up from 0.0%), the 0.8% in Q1 2026 (up from 0.6%), and 1.5% in Q1 2027 (new).

                                    These are conditioned on a lowered market-implied path for Bank Rate that declines from 5.1% in Q1 2024 (prior 5.3%), then falls to 3.9% in Q1 2025 (down from 5.0%), and then 3.3% in Q1 2026 (down from 4.4%), and 3.2% in Q1 2027 (new).

                                    Full BoE statement here.

                                    Eurozone CPI down to 2.8%, core falls to 3.3%, both above expectations

                                      By
                                      ActionForex.com
                                      -

                                      Eurozone CPI slowed from 2.9% yoy to 2.8% yoy in January, above expectation of 2.7% yoy. CPI core (excluding energy, food, alcohol & tobacco) slowed from 3.4% yoy to 3.3% yoy, above expectation of 3.2% yoy.

                                      Looking at the main components, food, alcohol & tobacco is expected to have the highest annual rate in January (5.7%, compared with 6.1% in December), followed by services (4.0%, stable compared with December), non-energy industrial goods (2.0%, compared with 2.5% in December) and energy (-6.3%, compared with -6.7% in December).

                                      Full Eurozone CPI release here.

                                      UK PMI manufacturing finalized at 47.0, challenged by cost pressures and supply disruptions

                                        By
                                        ActionForex.com
                                        -

                                        UK PMI Manufacturing was finalized at 47.0 in January, up from December’s 46.2. This modest improvement, however, did not signal an end to the sector’s downturn, with continued contractions observed across key areas.

                                        Rob Dobson, Director at S&P Global Market Intelligence, highlighted the pervasive nature of the contraction, noting declines in output, new orders, and employment across various manufacturing sub-industries. He pointed out that manufacturers are adopting a cost-cautious approach, focusing on cutting back on purchasing and stock holdings to improve efficiency, maintain cash flow, and protect margins in these challenging times.

                                        The industry faces compounded difficulties due to the ongoing “Red Sea crisis”, which is exacerbating supply chain disruptions. The rerouting of inputs from the Asia-Pacific region is leading to increased costs and longer supplier lead times, intensifying the strain on production schedules and amplifying inflationary pressures. This situation is particularly problematic as manufacturers grapple with weak domestic and international demand.

                                        Full UK PMI manufacturing release here.

                                        Eurozone’s manufacturing PMI finalized at 46.6, persistent contraction with glimmers of hope in the south

                                          By
                                          ActionForex.com
                                          -

                                          Eurozone PMI Manufacturing was finalized at a 10-month high of 46.6 in January, up from December’s 44.4. Despite this, caution is advised as the index still hovers below the critical expansion threshold. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, highlights that although there’s been a consistent rise over the past three months, including in forward-looking indicators like new orders, the majority of the sub-indices, including the headline index, remain in the contraction zone.

                                          This rebound in manufacturing is particularly evident in the “southern economies”, with Greece leading at a 21-month high of 54.7 and both Spain (49.2) and Italy (48.5) showing encouraging trends. However, among the largest Eurozone economies, Germany, despite an 11-month high, remains in contraction at 45.5, and France’s economic situation continues to be concerning, at 43.2.

                                          The upward trend in sub-indicators such as stock of purchases, backlogs of work, and output, along with a growing optimism for higher output in the coming year, offers a glimmer of hope. This gradual recovery in the manufacturing sector, spearheaded by the southern economies, may serve as a crucial catalyst to pull the larger Eurozone economies out of the recessionary environment.

                                          Full Eurozone PMI Manufacturing release here.

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