Euro is knocked down by renewed concerns over Russia gas supply cut to EU countries. That came after Russia said yesterday that it would cut gas flows through the Nord Stream 1 to Germany, to just 20% of normal capacity, down from current 40%.
EUR/CHF finally resumes recent down trend through 0.9804 low. Outlook will now stay bearish as long as 0.9948 resistance holds. Next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650.
UK PMI Manufacturing was finalized at 52.8 in June, down from May’s 54.6, a two-year low. S&P Global said output growth slowed to near-stagnation pace as new orders intakes fell for the first time since January 2021. Price inflation remained elevated despite further easing.
Rob Dobson, Director at S&P Global Market Intelligence, said: “UK manufacturing output growth ground to a near standstill in June, as intakes of new work contracted for the first time since January 2021. Domestic market conditions became increasingly difficult and foreign demand fell sharply again… Business confidence took a hit as a result, dipping to its gloomiest since mid-2020…
“There were some welcome signs that supply-chain constraints and cost inflationary pressures may have passed their peaks. However, with these constraints still elevated overall and demand headwinds rising, it is likely that UK manufacturing will see the economic backdrop darken further in the second half of the year.”
Philadelphia Fed Bank President Patrick Harker expressed his support for raising interest rates above 5% and then assessing the impact on inflation. He noted yesterday, “I’m in the camp of getting up above 5 and then sitting there for a while.”
Harker acknowledged that recent inflation readings showed a slow disinflation process, which he described as “disappointing.” Despite this, he pointed out promising signs that Fed’s rate hikes are working.
He stated, “If we see inflation not budging, then I think we’ll have to take more action. But at this point, I don’t see why we would just continue to go up, up, up and then go, whoops! And then go down, down, down very quickly. Let’s sit there.”
Harker also emphasized the commitment to bringing inflation back down to the 2% target and highlighted that the full impact of monetary policy actions could take up to 18 months to work through the economy. He said, “We will continue to look closely at available data to determine what, if any, additional actions we may need to take.”
China’s industrial production rose 6.2% yoy in November, accelerated from 4.7% yoy and beat expectation of 5.0% yoy. That’s also the fastest pace in five months. Retail sales rose 8.0% yoy, up from 7.2% yoy and beat expectation of 7.6% yoy. Fixed asset investment rose 5.2% YTD yoy, matched expectations. House price rose 0.3% mom, slowest since February 2018.
National Bureau of Statistics spokesman Fu Linghui said the data showed positive changes in the month and reiterated that China can achieve its full-year economic growth target. Fu also said China and US should continue bilateral trade talks and work towards removing all existing tariffs.
Chicago Fed President Charles Evans said yesterday that inflation has to “cross over, beyond 2%, with some momentum”. He’d be “quite pleased” if Fed could get core inflation up to “2.5%” for a time.
He expects inflation to “slowly improve, reaching 2% on a persistent basis in 2023 and then moderately overshooting 2% over the following few years”. He didn’t expect unemployment to come back to 4% until 2023.
“My forecast assumes that additional federal fiscal policy actions are coming,” Evans added. “Without adequate fiscal support before too long, I am concerned that recessionary dynamics will gain more traction and lead to a slower trajectory back to maximum employment.”
In a speech on “The Labour Market and Spare Capacity” delivered today, RBA Governor Philip Lowe reaffirmed that the central bank is on track for further rate cuts again. He said that would be “unrealistic to expect that lowering interest rates by ¼ of a percentage point will materially shift the path we look to be on.” And, “the most recent data – including the GDP and labour market data – do not suggest we are making any inroads into the economy’s spare capacity.”
Therefore, “it is not unrealistic to expect a further reduction in the cash rate as the Board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target.” Though, he also emphasized that Australia should also look into other options to get closer to full employment, including fiscal policy and structural policies.
Australian Dollar is the second weakest for today so far, just next to Dollar.
Australian Treasurer Josh Frydenberg said Victoria is now “at war” after the state imposed stage four lockdown over the weekend, as coronavirus numbers stayed high. He said, “this is a real kick in the guts to Victorian businesses, which will have an impact on employment.
Frydenberg expected the overall impact of the pandemic to the economy to be larger than prior estimate of AUD 3.3B. “Obviously that 3.3 billion number was not based on stage 4 restrictions, nor was it based on restrictions being right across the state,” he said. “I will make that number available when it comes to me, but clearly this is going to hit the Victorian economy which makes up around a quarter of the national economy, and this will obviously impact on the consumer and business confidence more broadly.”
BoE MPC member Catherine Mann said, “what the research shows is when there is uncertainty about persistence versus transitory nature of inflation dynamics, it’s important to front-load policy.”
Mann also noted the recent depreciation in Sterling is feeding into the high inflation rate. Yet, it’s “not the point” to target exchanged rate. “The point is to have heightened awareness of the role of the currency, particularly in today’s climate of very high inflation rates,” she added.
Yuan’s decline today suggests that the near term recovery is already completed and there’s risk of more downside. The selloff came after Chinese Premier Li Keqiang held a rare high-profile meeting yesterday on measures to support the economy. That’s is seen as a sign that the government is in deep worry about the impact of the extend tough pandemic lockdowns in many majors city, including Shanghai.
USD/CNH’s pull back from 6.8372 has likely completed at 0.6477, just ahead of 38.2% retracement of 6.3057 to 6.8372 at 6.6342. Strong rebound should be seen to 6.8372 and possibly above. The key resistance, however, still lies 61.8% retracement of 7.1961 to 6.3057 at 6.8560. USD/CNH could still be rejection by this fibonacci level at the second attempt.
US stocks were shot up overnight after the surprised comments from Fed Chair Jerome Powell that interest rates are “just below” neutral. Markets took that as a sign Fed is nearing to a pause in the currency rate hike cycle.
DOW rose 617.70 pts or 2.50% to 25366.43. S&P 500 gained 61.62 pts or 2.30% to 2743.79. NASDAQ added 208.89 pts or 2.95% to 7291.59.
Treasury yields were mixed though. Five-year yield closed down -0.029 at 2.856. 10-year yield dropped -0.011 to 3.044. But 30-year yield rose 0.010 to 3.329.
The strong rally in DOW was rather decisive technically. 23997.21 structural support was defended again. And the range for medium term consolidation is likely set for now, that is, between 23997.21 and 26961.81. For the near term, 55 day EMA will likely be taken out as the current rebound extends. DOW could head to 26000/27000 region but we don’t expect expect a break of 26951.81 any time soon.
Eurozone GDP grew 0.2% qoq in Q3, slightly above expectation of 0.1% qoq, but much slower than Q2’s 0.8% qoq. EU GDP grew 0.2% qoq too, slowed from Q2’s 0.7% qoq.
Among the Member States for which data are available for the third quarter of 2022, Sweden (+0.7%) recorded the highest increase compared to the previous quarter, followed by Italy (+0.5%), Portugal and Lithuania (both +0.4%). Declines were recorded in Latvia (-1.7%) as well as in Austria and Belgium (both -0.1%). The year-on-year growth rates were positive for all countries except for Latvia (-0.4%).
France GDP grew 0.3% qoq in Q3, unchanged from Q2’s rate, and beat expectation of 0.2% qoq. Looking at some details, household consumption expenditures accelerated slightly (0.3% after 0.2%), while total gross fixed capital formation decelerated (GFCF: 0.9% after 1.2%). Overall, final domestic demand excluding inventory changes remained dynamic and grew at the same pace as the previous quarter: it contributed 0.5 points to GDP growth.
Germany Gfk Consumer Climate for November dropped to -3.1, down form -1.7, missed expectation of -2.5. Economic expectations dropped from 24.1 to 7.1. Income expectations dropped from 16.1 to 9.8. Propensity to buy edged slightly lower from 38.4 to 37.0.
“The rapid increase in infection rates is leading to a tightening of restrictions brought on by the pandemic. Fear of a second lockdown, should infections get out of control in the coming winter months, is also increasing,” explains Rolf Bürkl, GfK Consumer Expert.
“As a result, the in parts significant recovery we saw in consumer sentiment at the start of the summer has come to a standstill and is causing the consumer climate to plummet once more. An increase in propensity to save in October has also contributed to this.”
ECB President Christine Lagarde said in a blog post that policymakers think of financing conditions in a “holistic and multifaceted way”.
A “holistic” approach means taking a perspective that “covers the entire transmission chain”,. It starts from the “upstream” stage, the risk-free interest rates and sovereign yields. And it ends in the “downstream” stage, the financing conditions for companies and households seeking funding in the capital markets or via bank loans. A “multifaceted” approach allows policymakers to “study each indicator in its own right”, and ensures a sufficiently granular perspective.
Recent join assessment of the evolution of financing conditions and the inflation outlook concluded that “there was a risk that the repricing in long-term bond yields could be inconsistent with offsetting the negative pandemic shock to the projected inflation path.”
She warned, “a sizeable and persistent increase in market-based interest rates, if left unchecked, could translate into a premature tightening of financing conditions for all sectors of the economy at a time when preserving favourable financing conditions still remains necessary to underpin economic activity and safeguard medium-term price stability.”
Bundesbank chief Joachim Nagel said yesterday that, “monetary policy must react decisively in order to preserve the credibility of the inflation target. Data from a number of countries shows that frontloading or bringing interest rate increases forward, reduces the risk of a painful economic downturn.”
“In my view, a larger interest rate hike reduces the risk of inflation expectations becoming de-anchored,” Nagel said. “We should not delay further rate hikes for fear of a possible recession. Inflation rates will not return to the central bank’s inflation target on their own.”
However, Governing Council member Yannis Stournaras said yesterday that there is “no need to take very large steps” on rate hike. “Gradual normalization will be appropriate.”
“In my view, this year, we will see the peak of inflation and a steady deceleration thereafter, inflation will gradually decline in 2023 and converge towards the target in 2024,” he added.
BoJ Governor Haruhiko Kuroda reiterated that policymakers will “closely monitor the impact of COVID-19 and not hesitate to take additional easing measures as necessary”. “The BOJ hasn’t run out of policy tools. We have a lot of policy tools to counter,” he added. “We are flexible, innovative when considering measures to take.”
Regarding fiscal policy, Kuroda said, “I don’t think we need a so-called negative income tax or basic income system because we already have a fairly well-established, well-developed, medical insurance and pension system.”
San Francisco Fed President Mary Daly said in a CBS New interview, “if you’re out in the economy, you don’t feel like you’re in a recession. That’s the bottom line. The most important risk out there is inflation. And I think the job market just confirms that.”
She added that a 50bps hike in September is still “absolutely” appropriate. “And we need to be data dependent. It could. We need to leave our minds open. We have two more inflation reports coming out, another jobs report. We continue to collect all the information from the context we talk to you to see how this is working its way through the economy,” She said.
German ZEW Economic Sentiment jumped from 31.7 to 42.9 in April, well above expectation of 35.1, and marks the highest level since March 2022. But Current Situation Index improved just slightly from -80.5 to -79.2.
Eurozone ZEW Economic Sentiment also surged from 33.5 to 43.9, above expectation of 37.2. Current Situation Index climbed 6.0 pts to -48.8.
ZEW President Achim Wambach noted, “A recovering global economy is boosting expectations for Germany, with half of the respondents anticipating the country’s economy to pick up over the next six months.”
This optimism is largely driven by improved assessments of the economic situations in Germany’s major export destinations. The positive outlook is further buoyed by the expected “appreciation of the US dollar against the euro”, which could benefit Eurozone exporters by making their goods more competitive in international markets.
US initial jobless claims dropped -10k to 203k in the week ended September 1, well below expectation of 214k. Also, that’s another lowest level since 1969 scored. And it’s indeed just 1k above that 202k in the week of December 6 that year. Four-week moving average of initial claims dropped -2.75k to 209.5k, lowest since December 6 1969 too (204.5k).
Continuing claims dropped -3k to 1.707m in the week ended August 25. Four-week moving average of continuing claims dropped 013.25k to 1.7185m, lowest since December 8 1973.
Also released, US nonfarm producitivty was finalized at 2.9% in Q2, unit labor cost at -1.0%. Canada building permits dropped -0.1% mom in July.
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BoJ stands pat, notes supply side constraints
BoJ left monetary policy unchanged today. Under the yield curve control framework, short term policy interest rate is held at -0.10%. 10-year JGB yield target is kept at around 0%, without upper limit on bond purchases. The decision was made by 8-1 vote, with Goushi Kataoka dissenting as usual, pushing for strengthening easing. It also pledged to closely monitor the pandemic impact and “will not hesitate to take additional easing measures if necessary”.
Overall assessment on the economy was maintained as its has “picked up as a trend” but “remained in a severe situation” due to the pandemic home and abroad. But it noted that some exports and production have been “affected by supply-side constraints”. Weakness has been seen in some industries on business fixed investment. Employment and income “remained weak” while private consumption remained “stagnant”. Core CPI has been at around 0% and inflation expectations have been “more or less unchanged”.
Full statement here.