Australia retail sales rose 0.1% mom in May, well below expectation of 0.7% mom. Comparing to a year ago, sales rose 7.4% yoy.
Ben James, Director of Quarterly Economy Wide Surveys, said: “There were mixed results across the industries and states and territories, with COVID-19 restrictions in Victoria impacting the May result. Victoria fell 1.5 per cent as the state entered its fourth lockdown on May 28 with trade restricted for physical stores.”
UK GDP contracted -0.3% qoq in Q4, worse than expectation of -0.1% qoq. This downturn was a collective result of declines across all primary sectors: services saw a -0.2% dip qoq, production tumbled by -1.0% qoq, and construction experienced a significant -1.3% qoq fall. Following -0.1% qoq contraction in Q3, these figures confirm UK’s entry into a technical recession.
December’s GDP data offered a slight respite with a marginal -0.1% mom decrease, better than expectation of -0.2% mom. That followed 0.2% mom growth in November, and -0.5% mom contraction in October. Services fell -0.2% mom. Production grew 0.6% mom. Construction fell -0.5% mom.
Reflecting on the entire year of 2023, UK’s GDP saw a meager 0.1% growth, a stark contrast to 4.3% expansion in 2022. This marks the weakest annual performance since the 2009 financial crisis, with the exception of the pandemic-stricken year of 2020.
Full UK monthly GDP release and quarterly GDP release.
US PPI rose 0.6% mom in July, above expectation of 0.3% mom. PPI core rose 0.5% mom, also above expectation of 0.1%. Annually, PPI climbed back to -0.4% yoy, up from -0.8% yoy, above expectation of-0.6% yoy. PPI core picked up to 0.3% yoy, up from 0.1% yoy, matched expectations.
Following the pullback in US stocks overnight, Yen crosses are trading generally lower. In particular, CAD/JPY resumed the decline from 93.00 by breaking through 90.40 temporary low. Judging from the development in Yen pairs elsewhere, there is prospect of deeper decline even if such fall is still a corrective more.
For now, further decline is expected in CAD/JPY as long as 91.58 minor resistance holds. 38.2% retracement of 84.65 to 93.00 at 89.81 might provide some initial support. But firm break there will bring deeper fall to 61.8% retracement at 87.83.
Development in AUD/JPY is slightly more bearish, as 55 day EMA and 38.2% retracement of 77.88 to 86.24 at 83.04 are both taken out. Fall from 86.24 has just resumed. Deeper decline is expected as long as 84.14 resistance holds, for 61.8% retracement at 81.07 and possibly below.
Australia employment grew 12.9k in January, better than expectation of 0k. Full-time jobs dropped -17k but part-time jobs rose 30k.
Unemployment rate was unchanged at 4.2%, but participation rate rose 0.1% to 66.2%. Monthly hours worked, however, dropped -8.8% mom.
Bjorn Jarvis, head of labour statistics at the ABS, “While we again saw higher than usual numbers of people taking annual leave – even more so than last year – the 8.8 per cent fall in hours worked in January 2022 also reflected much higher than usual numbers of people on sick leave.”
“As with earlier rapid changes in the labour market during the pandemic, hours continue to be much more affected than employment. This reflects people working reduced or no hours, without necessarily losing their jobs.”
Japan’s nominal labor cash earnings increased by 2.1% yoy in April, surpassing the expected 1.7% and marking the 28th consecutive month of growth. Excluding bonuses and nonscheduled payments, average wages climbed by 2.3% yoy. However, overtime and other allowances were down by -0.6% yoy.
Despite the rise in nominal wages, real wages fell by -0.7% yoy, continuing a 25-month streak of declines, the longest on record. Nonetheless, the rate of decline was smaller than the revised -2.1% yoy drop in March, as many major companies implemented salary increases during the latest spring annual wage negotiations.
Dallas Fed President Robert Kaplan told Bloomberg News, “”As we make substantial further progress, which I think will happen sooner than people expect — sooner rather than later”.
“We’re weathering the pandemic, I think we’d be far better off, from a risk-management point of view, beginning to adjust these purchases of Treasuries and mortgage-backed securities,” he added.
“I’d rather start tapering, assuming we meet our conditions, sooner rather than later so that we have more flexibility in deciding what we want to do on rates down the road.”
“I think it’s a good thing for the Fed to emphasize that we’re vigilant and we’re committed to anchoring inflation at an average of 2% and that we’re committed to anchoring inflation expectations in a manner that’s consistent with 2% inflation,” Kaplan said. “I think just emphasizing that is probably a healthy thing.”
Kaplan expected one rate hike in 2022, without indicating his expectations for 2023.
In a note for G20 Finance Ministers and Central Bank Governors’ Meetings later in the week, IMF said that “global growth has progressed broadly in line with projections, with clear signs of divergence.”. It urged “immediate action” by G20 to “arrest the rising human and economic toll of the pandemic”.
Additionally, IMF said policy support should be “tailored to the stage of the crisis, avoiding abrupt transitions.” Monetary policy should “remain accomodative in most economies”. In particular, where “inflation expectations are anchored, ” continued monetary accommodation is warranted”.
However, in economies “furthest ahead in the recovery”, “communicated policy intentions will keep inflation expectations well-anchored and avoid adverse spillovers to weaker economies.” “Where inflationary pressures are high and expectations not firmly anchored, monetary policy should tighten.”
US Trade Representative Robert Lighthizer confirmed again on Sunday that the phase one trade deal with China is “totally done, absolutely”. He also told CBS that it’s “not just about agriculture and other purchases”. He emphasized, “the way to think about this deal, is this is a first step in trying to integrate two very different systems to the benefit of both of us.”
Though, he also admitted that “ultimately, whether this whole agreement works is going to be determined by who’s making the decisions in China, not in the United States”. “If the hardliners are making the decisions, we’re going to get one outcome. If the reformers are making the decisions, which is what we hope, then we’re going to get another outcome”, he added.
Australia NAB Business Confidence dropped to -66 in March, down from -2. That’s record low, even worse than the reading during 2008 global financial crisis and early 90s recession. Business Conditions dropped to -21, down from 0. While condition index was slightly worse than the reading at financial crisis, it sit well above the trough during 90s recessions.
NAB chief economist Alan Oster said “We expect a recession of unprecedented speed and magnitude for the Australian economy over the next three quarters. “This will see a sharp increase in unemployment.”
“Policy makers have made a huge response that we think will be unable to offset the negative prints we will see in economic data in the near term but we are optimistic these actions will support a solid recovery once the virus is contained,” Oster added.
At a parliamentary confirmation hearing, incoming BoJ Governor Kazuo Ueda said, “current policy is a necessary, appropriate means to achieve 2% inflation,” despite various side effects emerging from the stimulus.
“Japan’s trend inflation is likely to rise gradually. But it will take some time for inflation to sustainably and stably achieve the BOJ’s 2% target,” he said.
“Consumer inflation is likely to fall below 2% in the latter half of the next fiscal year. It takes time for the effect of monetary policy to appear on the economy. ”
“It’s standard practice to act preemptively to demand-driven inflation, but not respond immediately to supply-driven inflation. Otherwise, the BOJ will be cooling demand, worsening economy and pushing down prices by tightening monetary policy.”
“If trend inflation heightens significantly and sustained achievement of the BOJ’s 2% target comes into sight, the central bank must consider normalizing policy. But if trend inflation lacks strength, the bank must continue how to maintain its ultra-easy policy, while paying attention to deterioration in market function.”
Australia Westpac Consumer Sentiment rose 5.0% mom to 84.3 in January, the largest monthly gain since April 2021. It’s also the second straight month of improvement, with combined rise of 8.1%. Current Conditions index rose 2.8% mom while Expectations Index rose 6.3% mom. Unemployment Expectations also improved 8.4% mom.
Westpac said: “One likely explanation for the lift in confidence is that January was the first month since April last year that did not see an increase in the RBA cash rate. While that was because there was no RBA Board meeting in the month rather than an explicit decision by the Bank to leave rates unchanged, the break in the tightening cycle looks to have provided some relief.”
Regarding RBA rate decision, Westpac expects another 25bps hike on February. It also expects clear message from RBA that the February increase will not be the last in the tightening cycle, because of a lift in annual inflation, strong retail sales growth and ongoing tight labor market.
BoE Deputy Governor Ben Broadbent said yesterday that he hasn’t decide on his vote on the Bank rate in the upcoming meeting on August 2 yet. Markets were pricing in 80% chance of an August hike two weeks ago. But the chance dropped to around 50% after last week’s CPI miss. CPI had slowed notably from 3.0% in January to 2.4% in May, then stayed there in June. And, the impact of import inflation has faded much quicker than BoE has expected. Even if BoE does hike in August, it will be a one and done for the year.
Broadbent’s comment came after a speech on “The history and future of QE“. There he reiterated that the “framework” for unwinding QE was set out for some time in the November 2015 Inflation Report. That is, BoE would begin to start shrinking the balance sheet “only once the official Bank Rate had risen some way”. And that’s because “conventional policy is more flexible, better suited to responding to short-term economic fluctuations”.
At the initial guidance, Broadbent noted that the meaning of “well underway” means Bank Rate at “around 2%”. But in the June Monetary Policy Summary this year, the estimated threshold was lowered to “around 1.5%”. He also noted that “we don’t know exactly when that will be”. But, “the framework is designed to ensure that, should inflationary pressures weaken after that date, the first response would be to cut interest rates.” And,
“in principle, those disinflationary influences might include the process of QE unwind itself.”
Cleveland Fed President Loretta Mester told CNBC today, “if conditions were exactly the way they were today going into that meeting (in July) — if the meeting were today — I would be advocating for 75 because I haven’t seen the kind of numbers on the inflation side that I need to see in order to think that we can go back to a 50 increase.”
“I think getting interest rates up to that 3-3.5%, it’s really important that we do that, and do it expeditiously and do it consistently as we go forward, so it’s after that point where I think there is more uncertainty about how far we’ll need to go in order to rein in inflation,” she said.
“At the Fed, we’re on a path now to bring our interest rates up to a more normal level and then probably a little bit higher into restrictive territory, so that we can get those inflation rates down so that we can sustain a good economy going forward,” she said. “Job one for us now is to get inflation rates under control, and I think right now that’s coloring how consumers are feeling about the economy and where it’s going.”
Bundesbank President Jens Weidmann urged a Financial Times article that the Eurosystem should consider “only purchasing securities or accepting them as collateral for monetary policy purposes if their issuers meet certain climate-related reporting obligations”.
Additionally, central banks should only use credit ratings from agencies that that appropriately include climate-related financial risks.
Weidmman also said governments should do their part on climate, by raising taxes on carbon, or using “cap and trade” schemes. It is not the task of the Eurosystem to penalize or promote certain industries, Weidmann added.
EUR/CAD’s rise from 1.2867 accelerates upwards after smaller than expected rate hike by BoC. For now, further rally is expected as long as 1.3405 support holds even in case of retreat. Next target is 55 week EMA (now at 1.3753). Sustained break there will argue that stronger rise is underway, even as a corrective move. EUR/CAD would then target 38.2% retracement of 1.5991 to 1.2867 at 1.4060.
The Sunday Times reported that BoE Governor Andrew Bailey has sent a letter to bankers telling them “negative rates were one of the potential tools under active review”. It’s one of the options if more stimulus was needed to lift inflation back to 2% target. And it would be a “significant operational undertaking for firms” as a year could be needed to alter computer systems and update contracts.
Additionally, it’s said that Bailey emphasized “every tool they have is on the table” at a meeting with bankers at the end of June.
US initial jobless claims dropped slightly by 98k to 1006k in the week ending August 22. Four-week moving average of initial claims dropped 107k to 1068k.
Continuing claims dropped -223k to 14535k in the week ending August 15. Four-week moving average of continuing claims dropped -604k to 15216k.
Germany GDP stagnated in Q4 and grew 0.0% qoq. But that was enough to narrow escape a technical recession following -0.2% contraction in Q3. Over the year, GDP grew 0.9% yoy in Q4. For the whole year of 2018, GDP grew 1.5% calendar adjusted.
Looking at the details, positive contributions mainly came from domestic demand. Development of foreign trade did not make a positive contribution to growth in the fourth quarter. According to provisional calculations, exports and imports of goods and services increased nearly at the same rate in the quarter-on-quarter comparison.
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Japan Motegi: Trade deal in August just Trump’s hopes, two sides still narrowing the gap
Japan Economy Minister Toshimitsu Motegi said today that Trump’s comment regarding a trade deal in August just reflects his own hope for quick progress in the negotiations. For now, the two sides are still working on “narrowing the gap”.
Motegi told reporters, “When you look at the exact wording of his comments, you can see that the president was voicing his hopes of swift progress in talks toward something that is mutually beneficial.” He also reiterated the differences between US and Japan, and no timetable had yet be set for more meetings. He noted, “we’ve agreed that we’ll strive to narrow the gap, including through possibly holding working-level talks.”
Trump said on Monday, after meeting Japanese Prime Minister Shinzo Abe in Japan, that he expected the two countries to be “announcing some things, probably in August, that will be very good for both countries” on trade.