In a Die Zeit interview, new Bundesbank President Joachim Nagel said, “if the (inflation) picture does not change by March, I will advocate normalizing monetary policy.” “The first step is to end net bond purchases during 2022,” he said. “Then interest rates could rise this year.”
Nagel also expects inflation in Germany to rise “significantly” above 4% in 2022. He warned that the economic costs of acting too late on inflation are significantly higher than acting early.
Eurozone PMI Manufacturing dropped from 54.6 to 52.0 in June, below expectation of 53.0. That’s the lowest level in 22 months. PMI Services dropped from 56.1 to 52.8, below expectation of 55.5, a 5-month low. PMI Composite dropped from 54.8 to 51.9, lowest in 16-months.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “Eurozone economic growth is showing signs of faltering … Excluding pandemic lockdown months, June’s slowdown was the most abrupt recorded by the survey since the height of the global financial crisis in November 2008…. The slowdown means the latest data signal a rate of GDP growth of just 0.2% at the end of the second quarter, down sharply from 0.6% at the end of the first quarter, with worse likely to come in the second half of the year.”
Germany’s GDP shrank -2.2% qoq in Q1, slightly worse than expectation of -2.0% qoq, worst in more than a decade. Also, as Q4’s figure was revised down to -0.1% qoq, the country was already in a technical recession with two straight quarters of contraction.
The contraction is expected to accelerate in Q2, with economists forecasts a -10% decline in GDP. But Germany’s Economy Ministry sounded relatively optimistic. It said in an email statement: “The recovery began with the cautious lifting of the lockdown at the beginning of May. But this process will take a longer time due to the continuation of the corona pandemic.”
Eurozone unemployment rate dropped from 6.9% to 6.8% in March, matched expectations. EU unemployment rate dropped from 6.3% to 6.2%.
Eurostat estimates that 13.374m men and women in EU, of whom 11.274m in Eurozone, were unemployed. Compared with February, the number of persons unemployed decreased by -85k in EU and by -76k in Eurozone .
In a speech with business leaders, BoJ Governor Haruhiko Kuroda said that CPI is likely to “increase moderately in positive territory for the time being”, reflecting rise in energy prices. Thereafter, “it is projected to increase gradually to about 1 percent as the output gap turns positive around the middle of next year.”
He noted that economic recovery in Japan has been “somewhat slower than initially expected”. Nevertheless “the mechanism for economic recovery has been maintained.”
Real GDP is expected to recovery to pre-pandemic level in the first half of 2022. Thereafter, “as the resumption of economic activity progresses while public health is being protected, Japan’s economy is expected to follow a growth path that outpaces its potential growth rate, supported by relatively high growth in overseas economies and accommodative financial conditions.”
San Francisco Fed President Mary Daly said on Sunday that there will be “ups and downs” in the job market recovery, as “Covid is not behind us”. She admitted that “Delta has taken a toll” but remained upbeat that “it hasn’t yet derailed us”.
“It’s too soon to say it’s stalling, but certainly we’re seeing the pain of COVID and the pain of the Delta variant impact the labor market,” she said.
“I don’t have a different view than I had on it when we first started. It’s going to be hard and as goes Covid, so goes the economy,” she added.
Daly also said, “everyone is feeling the rising prices” for energy, good and basic services. “This is really hard. And it’s also really directly related to Covid. It’s related to the supply bottlenecks, to the disruptions. But I don’t see this as a long-term phenomenon.”
Australia GDP grew 0.8% qoq in Q1, above expectation of 0.6% qoq. GDP also grew 3.3% through the year. Nominal GDP rose 3.7%. The GDP implicit price deflator increased 2.9%, the fastest rate since March quarter 1988.
The terms of trade rose 5.9%, with export (+9.6%) and import prices (+3.5%) both up strongly. Strong demand for Australia’s mining and agricultural commodities amidst supply constraints in other producing nations contributed to the rise in export prices.
The domestic final demand implicit price deflator rose 1.4%. This was the strongest growth since the introduction of the Goods and Services Tax, reflecting high levels of demand and increased input costs.
Canadian Foreign Minister Chrystia Freeland formally introduced a Ways and Means motion in the House of Commons yesterday, to kick start ratification process of USMCA. She noted the lifting of US steel and aluminum tariffs on Canadian imports, as announced on May 17, has paved the way for formal approval of the new North American trade agreement.
However, Freeland also emphasized, “the entry into force of this agreement does not depend solely on Canada… Insofar as possible, we intend to move in tandem with the United States.” Prime Minister Justin Trudeau indicated last week he’s eager to ratify the deal. Freeland also said the government is “full steam ahead”. But She didn’t indicate whether the government would push to get it done before parliament goes into recess, in four weeks.
China’s GDP grew 6.0% yoy in Q4, matched market expectations. Overall growth in 2019 was at 6.1%, slowed from 2018’s 6.6%. That’s the slowest annual growth since 1990. In December, industrial production grew 6.9% yoy, above expectation of 6.2% yoy, strongest pace in nine months. Retail sales rose 8.0% yoy, above expectation of 7.9% yoy. Fixed asset investment rose 5.4% ytd yoy, above expectation of 5.2%.
The set of data suggests stabilization in the Chinese economy. Yet, there is question regarding the sustainability, not to mention the chance of a rebound. US-China trade deal phase one should provide some short-term support. But uncertainties lie in the medium to long term we core issues to be resolved with the US in phase two negotiations. At the same time, large chunk of the tariffs remains in place.
ECB Chief Economist Philip Lane noted in a speech that “since the cut-off date for the March 2023 projections, the incoming data have been mixed.”
Lane pointed out the ongoing divergence in sectoral performance, as services business activity experiences accelerated expansion due to strong reopening effects and increased incomes. In contrast, manufacturing output remained stagnant in the first quarter. He also indicated that the consistent improvement in business and consumer sentiment, despite remaining at low levels, appears to have reached a plateau.
Lane mentioned that market pricing and the ECB’s Survey of Monetary Analysts (SMA) foresee that the “policy rate will rise further in the near term and will remain at elevated levels for an extended period.”
He explained that once inflation stabilizes at the 2% target in the medium term, it is projected that the policy rate will settle around 2% instead of returning to ultra-low levels. This expectation is primarily driven by the re-anchoring of long-term inflation expectations at the ECB’s 2% target, indicating that market participants and monetary analysts anticipate the longer-term equilibrium real rate to hover around zero per cent.
RBA surprises the market by raising the cash rate target rate, by 25bps to 4.10. Tightening bias is maintained as “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe”.
The central bank noted that while inflation is “still too high” even though it has “passed its peak.” Also, it will be “some time yet” before inflation falls back to target range. It explained, “this further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe”.
Growth “has slowed” and labor market conditions “remain very tight” even though eased. Wages growth “has picked up” but is “still consistent with the inflation target”. The path to soft landing “remains a narrow one” and a “significant source” of uncertainty continues to be household consumption.
In non-seasonally adjusted terms, Japan’s exports dropped a massive -11.7% yoy in March while imports dropped -5.0% yoy. Trade surplus came in at just JPY 4.95B. The contraction in export was the worst since July 2016 as shipments to major destinations like China, US and EU were choked by the coronavirus pandemic. The impact will likely continue in April and onwards until global lockdown exits. In seasonally adjusted terms, exports dropped -4.1% mom while imports rose 7.2% mom. Trade balanced turned into JPY -0.19T deficit.
Separately, Reuters reported that the government is going to boost its economic rescue package by 8% to JPY 117. A major change is inclusion of JPY 100k cash payout for to every citizen, on top of JPY 300k payout to households affected by the pandemic. The government is also planning to issue extra bonds worth JPY 25.7T to fund the revised budget.
Sterling rises mildly after better than expected job data. Unemployment rate dropped to 4.0% in November, down from 4.1% and beat expectation of 4.1%. That’s also the lowest level since February 1975. Wage growth also shows sign of pick up. Average earnings including bonus accelerated to 3.4% 3moy, above expectation of 3.3% 3moy. Average earnings excluding bonus rose 3.3% 3moy, unchanged. Claimant count rose 20.8k in December, slightly above expectation of 20.0k.
US ISM Services PMI dropped from 55.9 to 55.3 in June but beat expectation of 54.5. Looking at some details, business activity/production rose 1.6 to 56.1. New orders dropped -2.0 to 55.6. Employment dropped -2.8 to 47.4. Supplier deliveries rose 0.6 to 61.9. Prices dropped -2.0 to 80.1.
ISM said: “The slight slowdown in services sector growth was due to a decline in new orders and employment…. Logistical challenges, a restricted labor pool, material shortages, inflation, the coronavirus pandemic and the war in Ukraine continue to negatively impact the services sector.”
Richmond Fed President Thomas Barkin told Fox Business yesterday that recent inflation reports have been encourage. But the median CPI is “still too high” and, “you just can’t declare victory too soon.”
“I would want to see inflation compellingly back to our target” before easing up on rate hikes, he said. Meanwhile the terminal rate will be dependent on the “path of inflation”.
European Commission President Jean-Claude Juncker in European Parliament on Brexit:-
US Conference Board Consumer Confidence rose notably from 95.3 to 103.2 in August, above expectation of 97.6. Present Situation Index rose from 139.7 to 145.4. Expectations Index rose from 65.6 to 75.1.
“Consumer confidence increased in August after falling for three straight months,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index recorded a gain for the first time since March. The Expectations Index likewise improved from July’s 9-year low, but remains below a reading of 80, suggesting recession risks continue. Concerns about inflation continued their retreat but remained elevated.”
“Meanwhile, purchasing intentions increased after a July pullback, and vacation intentions reached an 8-month high. Looking ahead, August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term.”
US durable goods orders dropped -0.9% mom, or USD -2.4B to USD 267.6B in December, worse than expectation of -0.5%. Ex-transport orders rose 0.4% mom, above expectation of 0.5% mom. Ex-defense orders rose 0.1%. Transportation equipment dropped USD -3.3B, or -3.9% mom to USD -80.1B.
ECB Chief Economist Philip Lane, speaking in Italy today, expressed optimism that wage growth will normalize by 2025, based on surveys and forward-looking indicators among companies.
“The reason why we think inflation will come down next year is that this is the last year of high wages,” Lane said. He highlighted that wage increases, which were around five or six percent last year, are now projected to be around three to four percent.
Lane also emphasized ECB’s focus on domestic inflation, explaining, “What we can mostly influence is domestic inflation because the ability of European firms to raise prices depends on monetary conditions.” He acknowledged that while domestic inflation has decreased from its peak a year ago, it remains around 4%, which continues to be a concern.
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US ADP employment grew 156k, job growth still healthy but slowing
US ADP private employment grew 156k in July, slightly above expectation of 150k. Prior month’s figure was revised up from 102k to 112k. Goods producing jobs rise 9k. Service-providing jobs rose 146k.
“While we still see strength in the labor market, it has shown signs of weakening,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “A moderation in growth is expected as the labor market tightens further.”
Mark Zandi, chief economist of Moody’s Analytics, said, “Job growth is healthy, but steadily slowing. Small businesses are suffering the brunt of the slowdown. Hampering job growth are labor shortages, layoffs at bricks-and-mortar retailers, and fallout from weaker global trade.”
Full release here.