Eurozone Economic Sentiment Indicator ticked up from 95.6 to 96.0 in May, matched expectations. Employment Expectations Indicator fell -0.3 pts to 101.3. EU ESI rose 0.3 pts to 0.6.5. EU EEI fell -0.4 to 101.2.
For the largest EU economies, the ESI improved significantly for France (+1.5) and the Netherlands (+1.1) and more moderately for Germany (+0.8) and Italy (+0.8), while it deteriorated markedly for Spain (-3.2) and Poland (-1.5).
BoC Governor Tiff Macklem said in a speech that “recent developments have reinforced our confidence that inflation is coming down.” The bank expects CPI to fall to around 3% in the middle of 2023, and the reach 2% target in 2024. But, “if those things don’t happen, inflation won’t come back to our 2% target, and additional monetary tightening will be required.”
Macklem noted that the tightening pause as announced in January was “conditional”. He said, “it is conditional on economic developments evolving broadly in line with the outlook published in January.”
“The transmission mechanism takes time—typically we don’t see the full effects of changes in our overnight rate for 18 to 24 months. That’s why policy needs to be forward looking,” he explained. “In other words, we shouldn’t keep raising rates until inflation is back to 2%. Instead, we need to pause rate hikes before we slow the economy and inflation too much. And that is what we are doing now.”
“If new evidence begins to accumulate that inflation is not declining in line with our forecast, we are prepared to raise our policy rate further,” he said. “But if new data are broadly in line with our forecast and inflation comes down as predicted, then we won’t need to raise rates further.”
Chicago Fed President Austan Goolsbee at an even today that inflation would “still be consistent” with the path to 2% target even if it “comes in a bit higher for a few months”.
He emphasized that rate cuts should be tied to “confidence in being on a path toward the target”, and rejected to wait until inflation actually hit 2% before beginning to cut rates.
“I think it’s worth acknowledging that if we stay this restrictive for too long, we will start having to worry about the employment side of the Fed’s mandate,” he added.
BoE dove Swati Dhingra warned in a speech that overtightening posses a more material risk now. She called for holding interest rate unchanged.
“Overtightening poses a more material risk at this point, through potential negative impacts from increased borrowing costs and reduced supply capacity going forwards,” she explained. “It risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed through energy and housing costs.”
“In my view, a prudent strategy would hold policy steady amidst growing signs external price pressures are easing, and be prepared to respond to developments in price evolution. This would avoid overtightening and return the economy sustainably to our 2% inflation target in the medium-term.”
“Overall, the evidence does not point to persistent cost-push inflation becoming embedded in wages and margins,” she said. “Even after a year and a half of above-target inflation, there is little evidence for such cost-push inflation beyond what might be expected following an unprecedented terms of trade shock.”
“Consumption remains weak and many of the tightening effects of monetary policy are yet to fully take hold,” she added.
Over the weekend, ECB Vice President Luis de Guindos said current monetary policy is “fully compatible with both inflation and real activity.” And, “de-anchoring of inflation expectations” is needed before ECB ease monetary policy again.
He told Italian newspaper Corriere della Sera that “what we need to see is a de-anchoring of inflation expectations” for more policy stimulus. However, “this has not yet happened, despite the fact that there has been a drop in market-based inflation expectations.” “If there is a further deterioration, then we will react,” de Guindos added. “But for now, our monetary policy stance is fully compatible with both inflation and real activity.”
On the impact of global trade tensions, de Guindos said “you can certainly smooth the impact with monetary policy, but you will not be able to address and fix this kind of problems with monetary policy”.
Separately, Governing Council member Ewald Nowotny said it would be “reasonable” to have “some more flexibility” on inflation target. And, he was “in favor of keeping the 2 percent target but with a corridor of 0.5 or 1 percent, up or down. A precision landing is hardly possible.”
US initial jobless claims dropped -26k to 239k in the week ending June 24, below expectation of 265k. Four-week moving average of initial claims rose 1.5k to 257.5k, highest since November 13, 2021 when it was 260k.
Continuing claims dropped -19k to 1742k in the week ending June 17. Four-week moving average of continuing claims dropped -13k to 1758k.
The White House announced that Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing to on April 30 to continue trade talks. China’s team will again be led by Vice Premier Liu He. Liu is expected to fly to Washington on May 8 for additional discussions. In the statement, it’s noted that “the subjects of next week’s discussions will cover trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases, and enforcement.”
Earlier yesterday, Larry Kudlow, Director of the White House National Economic Council, said the negotiations were making progress and he was “cautiously optimistic” on striking a deal. He hailed that “we’ve come further and deeper, broader, larger-scale than anything in the history of U.S.-China trade.”
But Kudlow also noted that “We’re not there yet”. “We’re still working on the issues, so-called structural issues, technology transfers”. Also, “ownership enforcement is absolutely crucial. Lowering barriers to buy and sell agriculture and industrial commodities. It’s all on the table.”
Eurozone Sentix Investor Confidence dropped sharply to -17 in March, down from 5.2, missed expectation of -11. That’s the lowest level since April 2013. Current Situation index dropped from 4.0 to -14.3, lowest since October 2019. Expectations index plunged from 6.5 to -20.0, lowest since August 2012.
Global Overall index dropped form 8.1 to -12.0, lowest since July 2009. Current Situation index dropped from 10.5 to -8.8, lowest since November 2009. Expectations index dropped from 5.8 to -15.3, lowest since October 2011. Regional readings suggested Eurozone, Germany, Eastern Europe, Japan, Asia ex-Japan and Latin America are all in recession. Swiss, Austria, USA and global are in downturn.
Sentix said, the coronavirus is “plunging the global economy into recession”. And the data puts the current slump in an “inglorious chain”, Lehman (2008), Fukushima (2011) and the oil credit crisis (2016). It’s also putting pressure on the economy in Eurozone. The set of data “means nothing other than that investors are preparing for a long period of economic weakness.” In addition to ECB’s “wise steps”, “wisdom may require this time that fiscal policy in particular shows itself to be generous”. It warned, if no action is taken, no one should be surprised by a new ‘Lehman’ moment that would increase the chaos.
US durable goods orders dropped -1.3% mom to USD 246.2B in April, worse than expectation of 0.8% mom rise. That’s the first contraction since eleven consecutive monthly growth. Excluding transportation, new orders rose 1.0% mom, above expectation of 0.7% mom. Ex-defense orders were virtually unchanged. Transportation equipment dropped -6.7m to USD 68.9B.
UK GDP rose grew 0.3% mom in May and 0.2% in the three months to May.
Growth were drive by Services with 0.34% growth in the rolling quarter. Production dropped -0.08% while construction dropped -0.10%.
Head of National Accounts Rob Kent-Smith said in the release:
“The first of our new rolling estimates of GDP shows a mixed picture of the UK economy with modest growth driven by the services sector, partly offset by falling construction and industrial output.
“Retailing, computer programming and legal services all performed strongly in the three months to May while housebuilding and manufacturing both contracted.
Services, in particular, grew robustly in May with retailers enjoying a double boost from the warm weather and the royal wedding. Construction also saw a return to growth after a weak couple of months.”.
Also from UK:
US initial jobless claims dropped -10k to 202k in the week ending March 30, below expectation of 215k. It’s also the lowest level since December 6, 1969. Four-week moving average of initial claims dropped -4k to 213.5k.
Continuing claims dropped -38k to 1.717M in the week ending March 23. Four-week moving average of continuing claims dropped -8k to 1.743M.
Kansas City Fed President Esther George said yesterday, “I continue to see several advantages for a steady and deliberate approach to raising the policy rate.”
“Without question, monetary policy must respond decisively to high inflation to avoid embedding expectations of future inflation,” she said. “A more measured approached to rate increases may be particularly useful as policymakers judge the economy’s response to higher rates”.
“As the tightening cycle continues, now is a particularly important time to avoid unduly contributing to financial market volatility, especially as volatility stresses market liquidity with the potential to complicate balance sheet run-off plans,” George said.
“The degree of tightening necessary will only be determined by observing the dynamics of the economy and inflation and cannot be predetermined by theory or pre-pandemic benchmarks,” George said.
Commenting on yesterday’s US CPI report, which showed headline inflation surged to 9.1%, Atlanta Fed President Raphael Bostic said the “numbers suggest the trajectory is not moving in a positive way”. But, “how much I need to adapt is really the next question,” as he needed to study the “nuts and bolts” of the report.
“The top-line number is a source of concern,” Bostic said, “Everything is in play.” Asked if that included by raising rates by a full percentage point, following BoC’s surprised move, he replied, “it would mean everything.”
Japan exports rose 9.6% yoy to JPY 6332B in January. Imports surged 39.6% yoy to record JPY 8523B. Trade balance came in as JPY -2191B deficit, largest single month deficit since January 2014.
Exports to China dropped -5.4% yoy, first contraction in 19 months. Imports from China rose 23.7% yoy, highest in four months. Exports to US rose 11.5% yoy.
In seasonally adjusted term, exports rose 0.1% mom to JPY 7355B. Imports rose 4.9% mom to JPY 8287B. Trade balance was at JPY -933B deficit.
Japan’s industrial output for August surprised by remaining steady month-on-month, outpacing expectations of a -0.8% mom decline. The seasonally adjusted index of production at factories and mines held its ground at 103.8, based on 2020 base of 100. Equally, index of industrial shipments ticked up by 0.1% to 103.2. In contrast, inventory index marked a -1.7% decrease to 104.6, registering the first decline in a quadrimestrial span.
The Ministry of Economy, Trade and Industry maintained a cautious tone on the economy’s direction, indicating that industrial output “fluctuated indecisively.” However, optimism is still present; the ministry’s poll suggests that manufacturers anticipate a 5.8% uptick in production for September, followed by a 3.8% rise in October.
On the retail front, August saw a 7.0% yoy surge in retail sales, surpassing anticipated 6.4% yoy. This momentum builds upon the month’s modest growth of 0.1% mom.
The labor market remained resilient, with the unemployment rate steadfast at 2.7%. The job offers-to-applicants ratio for August persisted at 1.29, unchanged from July.
Inflationary pressures seem to be cooling down. Tokyo’s core CPI for September, excluding food, dipped more than forecasted, from 2.8% yoy to 2.5% yoy , as opposed to the predicted 2.6% yoy. Headline CPI decreased slightly from 2.9% yoy to 2.8% yoy. Additionally, core-core CPI, which excludes both food and energy, retreated from 4.0% yoy to 3.8% yoy.
UK GDP grew 0.1% mom only in February, below expectation of 0.3% mom. Services was the main contributor to growth, up 0.2% mom. But that was offset by -0.6% mom contraction in production, and -0.1% mom in construction.
Overall monthly GDP was 1.5% above its pre-coronavirus level in February 2020. Services was 2.1% above that level while construction was 1.1% above. However, production was -1.9% below.
Also published, manufacturing production came in at -0.4% mom, 3.6% yoy, versus expectation of 0.4% mom, 2.5% yoy. Industrial production came in at -0.6% mom, 1.6% yoy, versus expectation of 0.4% mom, 1.4% yoy. Goods trade deficit narrowed to GBP -20.6B, larger than expectation of GBP -16.8B.
Oil prices dip today on concern that the rapid spread of Omicron would push more countries back into restrictions, and hurt demand at least in the near future. That’s also in-line with overall risk-off sentiment in the markets.
WTI’s recovery from 62.90 was choked off after hitting 73.66 and it’s back below 69. For now, unless there will be any disastrous development, we’re seeing price actions from 85.92 high as development into a sideway consolidation pattern, in form a a three-wave flat, or a five-wave triangle. The range should be set inside 61.90/85.92.
In other words, we’re not expecting a break of 61.90 support even in case of further selloff. Break of 73.66 resistance will extend the rebound from 62.90. And even in this case, we’re not expecting a break of 85.92 high too.
US Trade Representative has formally scheduled to publish a notice regarding extension of trade truce with China. It said in the notice that it is “no longer appropriate” to raise tariffs on Chinese products due to the progress of trade negotiations. And, “the rate of additional duty for the products covered by the September 2018 action will remain at 10 percent until further notice.” The notice will be published in the Federal Register next week.
After that, Trump tweeted “I have asked China to immediately remove all Tariffs on our agricultural products (including beef, pork, etc.) based on the fact that we are moving along nicely with Trade discussions…. ….and I did not increase their second traunch of Tariffs to 25% on March 1st. This is very important for our great farmers – and me!”
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It’s uncertain what China’s response to Trump’s request would be. From China’s point of view, the logical equivalent response to Trump’s refrain from more tariffs is not to impose retaliation measures of their own. And China has already made some good-faith purchases of US soybeans since the start of trade truce. Chinese leaders could have their own rationales in rejecting Trump’s requests. The negotiation could turn down hill if China does say “no”.
And as a recap, Trump said after the summit with North Korean leader Kim Jong-un collapsed that “I am always prepared to walk,” and “I’m never afraid to walk from a deal, and I would do that with China, too, if it didn’t work out.” He walked away from a deal with Kim after traveling all the way to Vietnam. He can certainly walk away from a deal with China sitting in the Oval Office.
This could be the turning point in whole US-China trade negotiations
More Fed officials speak today. While they generally sound non-committal to a rate cut, they are all open to, if trade tensions worsen.
Dallas Fed President Robert Kaplan said it’s “early to make a judgement” on rate cut. But he noted “we’re going to be very vigilant in understanding these heightened trade tensions. See if they feed through to the economy. Most importantly, see if they persist.”
Fed Governor Lael Brainard told Yahoo Finance that “we’ll be prepared to adjust policy to sustain the expansion.” And “trade policy is definitely a downside risk to the economy. And our job is to sustain the expansion, and we’ll need to see going forward what that means for policy.”
Chicago Fed President Charles Evans told Bloomberg TV that he’s “a little nervous about the low inflation rate”. And, “that by itself could be a reason for a little more accommodation.”
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Dollar jumps on strong retail sales and jobless claims
Dollar surges broadly in early US session after generally positive economic data.
Headline retail sales rose 1.6% mom in March versus expectation of 0.8% mom. That’s also the strongest rise since September 2017. Meanwhile, 12 of 13 major retail categories increased. Ex-auto sales rose 1.2% mom versus expectation of 0.7% mom. Total sales from January through March rose 2.9% yoy.
Initial jobless claims dropped -5k to 192k in the week ending April 13, below expectation of 207k. It’s also the lowest since September 6, 1969 when it was 182k. Four week moving average of initial claims dropped -6k to 201.25k, lowest since November 1, 1969. And the series seem to be trending down again. Continuing claims dropped -64k to 1.653m. Four week moving average of continuing claims dropped 022.75k to 1.713m.
Philadelphia Fed Manufacturing Business Outlook, however, droppped to 8.5, down from 13.7 and missed expectation of 11.0.