Canada GDP grew 0.3% mom in April, matched expectations. Both goods-producing (+0.9%) and services-producing (+0.1%) industries were up, as 13 of 20 industrial sectors expanded.
However, advanced information suggests that real GDP contracted -0.2% mom in May, with output down in mining, quarrying and oil and gas extraction, manufacturing and construction sectors.
ECB Chief Economist Philip Lane has asserted that falling energy prices could lead to lower core inflation due to reduced living costs and, consequently, restrained wage increases. However, he stressed the timeline and extent of this effect remain uncertain.
Speaking at a conference in Dubrovnik, Lane said, “I don’t think it’s symmetric… but when energy prices fall, core inflation does follow, because there is less pressure from an energy cost, there’s less pressure on the cost of living, therefore on nominal wage increases
“So, we do think this spectacular reversal of energy prices will feed into lower core, but the timeline for that and the scale of it is uncertain,” he added.
Lane further observed that wage growth is generally progressing at a moderate pace, with many people still bound to older contracts. “The latest deals are coming in at above 5%, but (this is in the) ballpark of what we expect,” he noted.
Despite this, he expects nominal wage growth to peak this year and suggested it would take real wages until 2025 to recover back to their 2019 level.
In an address to parliament today, BoJ Governor Kazuo Ueda highlighted the difficulties central banks face when dealing with cost-push inflation.
Ueda explained, “In general, dealing with cost-push inflation is very difficult for central banks. On the one hand, you’d like to curb inflation. On the other hand, you don’t want to tighten monetary policy knowing that cost-push inflation will cool the economy.”
The governor emphasized the importance of striking the right balance, which he said, “depends on economic developments at the time, including where inflation stood at the outset.”
Ueda also noted that cost-push inflation in Japan is likely to ease as prices of imported raw materials have probably peaked.
These comments come ahead of BoJ’s two-day policy meeting starting on Thursday, during which the central bank is widely anticipated to maintain its ultra-loose monetary policy.
Canada GDP grew 0.4% mom in February, slightly below expectation of 0.5% mom. That’s the 10th consecutive month of growth. But total economic activity was still about -2% below pre-pandemic level in February 2020. Preliminary information indicates that growth will continue in March with 0.9% mom rise in real GDP.
Looking at some details, services-producing industries were up 0.6%, while goods-producing industries contracted (-0.2%) for the first time since April. Overall, 14 of the 20 industrial sectors expanded in February.
US retail sales dropped -1.1% mom to USD 546.5B in November, below expectation of -0.2% mom. Ex-auto sales dropped -0.9% mom, below expectation of 0.2% mom rise. Ex-gasoline sales dropped -0.9% mom. Ex-auto, ex-gasoline sales dropped -0.8% mom.
New Zealand Dollar drops broadly today after RBNZ proposed to raise capital requirement for top banks of the country. Capital ratios would be increased to 16% of frisk-weighted assets. Combined the top four banks might need to raise NZD 20B over the next five years to meet the rule.
RBNZ Deputy Governor Geoff Bascand said the move would only lead to a “marginal tightening of monetary conditions”. But he added that the central could consider to loosen up monetary further is needed. Bascand said “when we set the OCR (Official Cash Rate), we set it with for a 18 month to 2 year look ahead. So let’s say we are making a decision in the third quarter of this year…we just have to feed that into our regular monetary policy decision making”. And, “if we were worried, and thinking we were undershooting inflation, undershooting maximum sustainable employment, then we would obviously look for an OCR change…that is the implication.”
US Non-farm payroll employment rose 196k in March, above expectation of 175k. Prior month’s figure was revised slightly up from 20k to 33k. Unemployment rate was unchanged at 3.8%, matched expectations. Labor force participation rate, at 63.0%, was little change on net over the past 12 months. However, average hourly earnings growth slowed to 0.1% mom, below expectation of 0.2% mom.
Canadian employment contracted -7.2k, slightly better than expectation of -10k. Unemployment rate was unchanged at 5.8%.
USD/CAD jumps notably after the release.
Germany’s DIHK Chambers of Industry and Commerce said that the country’s economy would growth 0.7% in 2020, slightly higher than 0.6% in 2019. However, it also pointed out that around 0.5% of growth is due to “statistical effects” such as the overhang from the previous year and four additional working days this year. Hence, CEO Martin Wansleben said “that is why we currently see little real growth.”
He added: “It is worrying: A whole host of data, particularly from industry, suggest that structural challenges, such as e-mobility, digitization, the energy turnaround and further the shortage of skilled workers, are adding to the current economic downturn. Some regions are particularly affected.”
UK Prime Minister Theresa May told the parliament yesterday that they’re not “far apart” with the EU. And she urged not to let the disagreement on Irish backstop “derail the prospects of a good deal” and leave the UK with no-deal Brexit. But at the same time, she insisted that Northern Ireland must not be treated differently from the rest of the UK.
European Council President Donald Tusk, however, warned that the remaining 27 states “must prepare the EU for a no-deal scenario, which is more likely than ever before.” And he added the Brexit negotiation has “proven to be more complicated than some may have expected.”
May will meet other EU leaders in Brussels at the summit on Wednesday and hopes to resolve a few “critical issues”. EU leaders will then listen to the recommendation by chief negotiator Michel Barnier for the way forward.
BoJ published minutes of the December 19-20 meeting today, where the 10-year JGB yield cap was raised from 0.25% to 0.50%.
“Many members noted that there was a distortion in the price formation of 10-year bonds, and that the functioning of bond markets had deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets,” the minutes said.
“Members concurred that, with regard to the conduct of yield curve control, the measure to expand the range of 10-year JGB yield fluctuations to between around plus and minus 0.5 percentage points from the target level, while significantly increasing the amount of JGB purchases, was appropriate.”
Meanwhile, government representatives requested to adjourn the meeting after the discussions. They’re probably surprised by the agreed adjustment to YCC. The meeting was adjourned from 10:51 a.m. to 11:28 a.m. before concluding at 11:54 a.m.
Eurozone retail sales rose 1.0% mom in November, much better than expectation of -0.5%. Volume of retail trade increased by 1.6% for non-food products and by 0.6% for food, drinks and tobacco, while it fell by -1.5% for automotive fuels.
EU retail sales rose 0.9% mom. Among Member States for which data are available, the highest monthly increases in the total retail trade volume were registered in Spain (+4.9%), Luxembourg (+4.0%) and Portugal (+2.8%). The largest decreases were observed in Austria (-4.1%), Latvia (-3.6%) and Croatia (-3.1%).
Fed Chair Jerome Powell warned yesterday of the “significant” downside risk in the economy, “especially in the near term” due to resurgence of coronavirus infections. “The concern is that people will lose confidence in efforts to control the pandemic and they will pull back from activities that they think might put them at risk of infection,” he said. “And there are some signs of that already.”
While the ” vaccine news is certainly good news, particularly in the medium term,” Powell said. But “with the virus now spreading as at fast rate, the next few months may be very challenging,”
Fed is “strongly committed to using all out tools” to support the economy. “When the right time comes, and I don’t think that time is yet or very soon, we will put those tools away,” he said. “The recovery is incomplete.”
BoC kept overnight rate target unchanged at effective lower bound of 0.25% as widely expected. Bank rate and deposit rate were held at 0.50% and 0.25% respectively.
Also, the forward guidance on interest rate is maintained. BoC is “committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved”. And, “this happens sometime in the middle quarters of 2022”.
BoC said recent data suggested that economy had “considerable momentum” into Q4. But, “the devastating floods in British Columbia and uncertainties arising from the Omicron variant could weigh on growth by compounding supply chain disruptions and reducing demand for some service”. BoC expected CPI inflation to remain elevated in the first half of 2022 and ease back towards 2 percent in the second half of the year.
US initial jobless claims rose 2k to 216k in the week ending December 17, below expectation of 220k. Four-week moving average of initial claims dropped -6k to 222k.
Continuing claims dropped -6k to 1672k in the week ending December 10. Four-week moving average of continuing claims rose 30k to 1657k.
US GDP grew at annual rate of 33.1% in Q3, above expectation of 32.0%. The increase in real GDP reflected increases in personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, and residential fixed investment that were partly offset by decreases in federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased
Eurozone PMI manufacturing dropped to 55.5 in May, down from 56.2, missed expectation of 56.0, hitting 15-month low.
PMI services dropped to 53.9, down from 54.7, missed expectation of 54.7, hitting, 16-month low.
PMI composite dropped to 54.1, down from 55.1, hitting 18-month low.
Comments from Chris Williamson, Chief Business Economist at IHS Markit:
“The May PMI brought yet another set of disappointing survey results, though once again a note of caution is required when interpreting the findings. While prior months have seen various factors such as extreme weather, strikes, illness and the timing of Easter dampen growth, May saw reports of business being adversely affected by an unusually high number of public holidays.
“Furthermore, despite the headline PMI dropping to an 18-month low, the survey remains at a level consistent with the eurozone economy growing at a reasonably solid rate of just over 0.4% in the second quarter.
“Job creation is also continuing to run at an encouragingly robust rate and optimism about the business outlook remains above its long-run average.
“However, it’s also becoming increasingly evident that underlying growth momentum has slowed compared to late last year, especially in relation to exports. Hiring has consequently shown signs of being reined-in. More expensive oil and rising wages are meanwhile continuing to push companies’ costs higher, but weak final demand means firms are struggling to pass these higher costs onto customers.
“Some of the fog will hopefully lift with the June PMI data, providing a clearer signal of the underlying growth momentum. Until then, however, it’s likely that the disappointing May survey results will rekindle some concerns regarding downside risks facing the euro area economy.”
In a speech overnight, Fed Vice Chair Michael Barr noted that the FOMC is “confident” that US is “on a path to 2% inflation”. However, Barr underscored the importance of seeing “continued good data” before initiating reduction in federal funds rate.
Reflecting on the latest consumer product index inflation report, he acknowledged the potential for a “bumpy” journey back to the target inflation rate, emphasizing the need for a “careful approach” in the current economic climate.
The financial markets are generally on risk on mode today as Chinese President Xi Jinping’s speech in Boao eased the fear of immediately escalation of trade tension with the US. Nikkei closed up 0.54%, HSI closed up 1.65%. At the time of writing, DAX is up 0.8%, CAC up 0.5% and FTSE up 0.55%. US futures also point to higher open.
In the forex markets, it’s typical in such risk on mode that Aussie and Kiwi are strong while Yen is weak, as seen in the D heatmap. But it also revealed that USD is getting no support from investors’ optimism. And the USD is somewhat dragging down CAD too.
The top movers table revealed pretty much the same picture. In particular, NZDJPY is the among the top 10 across time frame. Both AUDJPY and NZDUSD have their top 10 places in 4H bar overtaken by EUR pairs.
Bundesbank revised down growth projection for Germany’s GDP in 2022 and 2023, and upgraded inflation projection for 2022, 2023, and 2024.
2022 GDP growth is slashed from 4.2% to just 1.9%. 2023 growth was cut from 3.2% to 2.4%. But 2024 growth was raised from 0.9% to 1.8%.
2022 HICP inflation forecast was raised from 3.6% to 7.1%. 2023 HICP forecast was raised from 2.25% to 4.5%. 2024 HICP forecast was raised from 2.2% to 2.6%.
President Joachim Nagel said: “Inflation this year will be even stronger than it was at the beginning of the 1980s. Price pressures have even intensified again recently, which is not fully reflected in the present projections. If this development is assumed to continue, the annual average HICP rate for 2022 could be considerably above 7%”.
Euro area inflation rates won’t fall by themselves,” Nagel added. “Monetary policy is called upon to reduce inflation through resolute action.”
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Germany ZEW dropped to -61.9, outlook worsened significantly
Germany ZEW Economist Sentiment dropped further from -55.3 to -61.9 in September, worse than expectation of -60. Current Situation index dropped from -47.6 to -60.5, below expectation of -50.5.
Eurozone ZEW Economic Sentiment dropped from -54.9 to -60.7, below expectation of -58.3. Current Situation index dropped -16.9 pts to -58.9.
“The ZEW Indicator of Economic Sentiment decreased again in September. Together with the more negative assessment of the current situation, the outlook for the next six months has deteriorated further. The prospect of energy shortages in winter has made expectations even more negative for large parts of the German industry. In addition, growth in China is assessed less favourably. The latest statistical figures already show a decline in incoming orders, production, and exports,” comments ZEW President Professor Achim Wambach on current expectations.
Full release here.