SNB keeps rate at -0.75%, upgrade inflation forecasts

    SNB keeps sight deposit rate unchanged at -0.75% as widely expected. It reiterated that is is “willing to intervene in the foreign exchange market as necessary, in order to counter upward pressure on the Swiss franc”. The Swiss franc remains “highly valued”.

    SNB said, “the war in Ukraine has had an effect on the Swiss economy above all via the strong increase in commodity prices”, and are likely to “weigh on consumption and increase companies’ production costs”. Trade is likely to be affected by “albeit not severely given Switzerland’s limited direct economic ties to Ukraine and Russia”. Supply bottlenecks “could deteriorate further” and uncertainty could have an “adverse impact on investment activity.”. 2022 growth forecasts was revised lower to around 2.5%.

    The inflation forecast, conditioned on policy rate at -0.75%, was raised in general. But inflation is projected to peak at 2.2% in Q2 2022, then slow gradually to 0.7% in Q2 2023, then climb back to 1.1% in Q1. For the year as a whole, inflation is projected to be 2.1% in 2022 (upgraded from 1.0%), 0.9% in 2023 (up graded from 0.6%), and then 0.9% in 2024 (new).

    Full statement here.

    AmCham Shanghai: Severe impact of global supply from Wuhan Coronavirus beginning to show up

      Shanghai’s American Chamber of Commerce (AmCham) Ker Gibbs said today that the biggest problem for American businesses in China is “a lack of workers as they are subjected to travel restrictions and quarantines” due to Wuhan Coronavirus outbreak. Hence, “most factories have a severe shortage of workers, even after they are allowed to open. This is going to have a severe impact on global supply chains that is only beginning to show up.”

      109 members companies with manufacturing in Shanghai, Suzhou, Nanjing and the wider Yangtze River Delta participated in a mini survey between February 11-14. The survey found:

      • 48% of companies report their global operations are already impacted by the shutdown
      • 78% of companies do not have sufficient staff to run a full production line
      • 41% of companies say a lack of staff is their biggest challenge in the next 2-4 weeks; 30% of companies say logistics issues will be their biggest concern
      • Over the next few months, 58% of companies expect demand for their output to be lower than normal
      • 38% of companies do not have sufficient masks/other supplies to protect their staff from coronavirus infection
      • 35% of companies ranked a clearer explanation of requirements as the most important thing government officials could do to speed up factory opening approvals

      NZD retreats broadly as caution prevails ahead of RBNZ

        New Zealand Dollar weakens broadly in Asian session, as market participants are likely adjusting their positions in anticipation of the upcoming RBNZ rate decision. This cautious approach stems from a blend of profit-taking and hedging against surprises that might deviate from some market expectations. Despite a robust rally earlier in the month, spurred by rate hike speculations, the prevailing market consensus leans towards a steady rate with a side of hawkish rhetoric from RBNZ. Investors are currently scaling back, wary of any outcomes that could fall short of the hawkish forecast.

        Technically, with today’s decline, immediate focus for NZD/USD is now on 55 4H EMA (now at 0.6153). Sustained break there will argue that the rebound from 0.6037 has completed as a three-wave corrective move to 0.6217. In this case, NZD/USD could be ready to resume the fall from 0.6368 through 0.6037 to 61.8% projection of 0.6368 to 0.6037 from 0.6217 at 0.6012 next.

        Bearish divergence condition in 4H MACD argues that a short term top was already formed at 93.42 in NZD/JPY. Risk will now stay on the downside as long as 93.42 holds. Deeper fall would be seen to 55 4H EMA (now at 92.31) and below. But for now, considering the overall weakness in Yen, downside should be contained by 38.2% retracement of 89.24 to 93.42 at 91.82 to bring rebound.

        Fed’s Williams: Monetary policy in a good place, no need to tighten today

          In a Reuters interview, New York Fed President John Williams expressed confidence in the current state of monetary policy, stating that it is “in a good place.” He highlighted the positive mix of economic data, noting strong consumer spending, business investment, and GDP growth. He emphasized that the economy is “not really at a near-term risk” and remains robust, supported by a strong labor market.

          Williams indicated that he does not see any immediate need to tighten monetary policy, as current indicators do not suggest that the Fed’s actions are harming the economy or interfering with its goals. “So I don’t see any need to tighten monetary policy today,” he added.

          Looking ahead, Williams acknowledged that lower interest rates would be necessary as inflation approaches 2% target. He explained that once inflation is sustainably at this level, Fed would need to reduce its “restrictive influence” on the economy, and move to a “more neutral kind of position.”

          UK CPI slowed to 10.1% yoy, core CPI unchanged at 6.2% yoy

            UK CPI slowed from 10.4% yoy to 10.1% yoy in march, above expectation of 9.8% yoy. CPI all goods index slowed from 13.4% yoy to 12.8% yoy. But CPI all services was unchanged at 6.6% yoy. On a monthly basis, CPI rose 0.8% mom, above expectation of 0.5% mom. Core CPI (CPI excluding energy, food, alcohol and tobacco) was unchanged at 6.2% yoy, above expectation of 6.0% yoy.

            Also released, RPI was up 0.7% mom, 13.5% yoy, above expectation of 0.6% mom, 13.3% yoy. PPI input was at 0.2% mom, 7.6% yoy, versus expectation of -0.4% mom, 9.8% yoy. CPI output was at 0.1% mom, 8.7% yoy, versus expectation of -0.1% mom, 8.7% yoy. PPI core output was at 0.3% mom, 8/.5% yoy, versus expectation of 0.2% mom, 9.8% yoy.

            Full UK CPI release here.

            Eurozone retail sales dropped -0.3% mom, well below expectation

              Eurozone retail sales dropped -0.3% mom in May, below expectation of 0.4% mom rise. Volume of retail trade decreased by -1.3% for automotive fuel, by -0.5% for food, drinks and tobacco, and by -0.1% for non-food products

              EU28 retail sales dropped -0.4% mom. Trade volume decreased by -1.6% for automotive fuel, by -0.5% for food, drinks and tobacco, and by -0.3% for non-food products.

              Among Member States for which data are available, the largest decreases in the total retail trade volume were registered in Croatia (-4.4%), Lithuania (-3.0%) and Sweden (-2.8%). The highest increases were observed in Portugal (1.5%), Spain (1.1%) and Belgium (1.0%).

              Full release here.

              Bundesbank Weidmann: ECB should consider only purchasing climate compliant securities

                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.

                Japan PMI manufacturing finalized at 48.7, particularly buoyed by the return to growth in export orders

                  Japan PMI Manufacturing was finalized at 48.7 in October, up from September’s 47.7. Output and new orders both fell at softer rates. Export orders also increased for the first time since November 2018. Business optimism reached highest since July 2017.

                  Usamah Bhatti, Economist at IHS Markit, said: “Japanese manufacturers will be particularly buoyed by the return to growth in export orders, as demand across key overseas markets such as China picked up… The sector reported a weakening employment trend in October, however, as staff numbers fell at a faster pace compared to September… An encouraging finding in October was the sustained improvement in business optimism. Approximately 38% of Japanese manufacturers surveyed foresee an increase in output over the coming 12 months, strengthening the index to its highest reading in over three years.”

                  Full release here.

                  ECB’s Panetta: Must manage risks beyond baseline scenarios

                    Speaking today, ECB Governing Council member Fabio Panetta noted that the current macroeconomic conditions support “normalization of the monetary stance.” He added that ECB initiated this process recently and, under the “baseline scenario,” intends to continue it “gradually and smoothly.”

                    However, Panetta cautioned that the inflation and growth projections represent only one of many possible outcomes. He stressed that monetary policy must also manage “risks and tail scenarios,” not just baseline forecasts. The prevailing political and geopolitical risks, he said, necessitate “awareness, flexibility, and state-contingent action plans.”

                    Panetta’s comments come just days before French voters head to the polls for the first round of parliamentary elections. He highlighted the potential economic implications of political turnover, explaining that it inherently brings policy uncertainty. This uncertainty affects households and investors as they try to predict how new governments will handle critical economic and political decisions.

                     

                    Canada GDP contracts -0.2% mom in Jun, flat in Jul

                      Canada’s GDP contracted -0.2% mom in June, matched expectations. Services-producing industries was down -0.2% mom. Goods-producing industries were down -0.4% mom. 12 of 20 industrial sectors posted decreases.

                      Advance information indicates that real GDP was essentially unchanged in July.

                      Full Canada GDP release here.

                      Gold in stronger recovery as correction extends, but more downside expected afterwards

                        Gold’s break of 1855.40 minor resistance suggests temporary bottoming at 1817.05, after drawing support from 1819.07 support. Some consolidations could be seen, with risk of stronger recovery. But upside should be limited by 4 hour 55 EMA (now at 1888.09) to bring fall resumption.

                        We’re holding on to the view that fall from 1959.16 is the third leg of the corrective pattern from 2075.18. Break of 1817.05 will target 1764.31 support and below.

                        BoE Mann: Embedded inflation becomes a domestic problem

                          BoE MPC member Catherine Mann said yesterday, “we already have very rapid increase in oil prices… In the U.K., that it becomes embedded by virtue of the institution mechanism of the price cap” on domestic energy bills.

                          “That embeddedness becomes a domestic inflationary problem that we have to deal with on the monetary policy stage,” she said.

                          “You only get inflation if businesses raise their prices. That’s where it comes from. It doesn’t come from wage settlements. It comes from businesses’ capacity to raise their prices in a systematic way and sustain demand,” she said.

                          Non-farm payroll and wage growth missed expectations, unemployment rate dropped to lowest since 2000

                            US non-farm payrolls rose 164k in April, below expectation of 194k. Prior month’s figure was revised up from 103k to 135k.

                            Unemployment rate dropped to 3.9% , down from 4.1% and beat expectation of 4.0%. That’s the lowest level since the end of 2000.

                            Average hourly earnings rose 0.1% mom only, below expectation of 0.2% mom.

                            Notable buying is seen in the Japan yen after the report, with USD/JPY driving to as low as 108.65 so far. But Dollar is steady against Euro, Swiss, Sterling, Aussie and Canadian, in tight range.

                            BoE hikes 25bps to 0.50%, but four members want 50bps

                              BoE raises Bank Rate by 0.25% to 0.50% today, by a slight majority of 5-4 vote. Four hawks (Jonathan Haskel, Catherine L Mann, Dave Ramsden, Michael Saunders) voted for a more aggressive 50bps hike to 0.75%. The other five (Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, Silvana Tenreyro) won the vote.

                              Meanwhile, the MPC voted unanimously to begin to reduce stock of government bonds by ceasing to reinvest maturing assets. It also decided to start reducing stock of corporate bonds by ceasing to reinvest maturing assets and complete a bond sales program no earlier than towards the end of 2023.

                              Going forward, the extent of any further tightening in monetary policy will “depend on the medium-term prospects for inflation”. If the economy develops broadly in line with the February Report central projections, “some further modest tightening in monetary policy is likely to be appropriate in the coming months.”

                              Sterling surges sharply after the release.

                              Full statement here.

                              In the new four-quarter GDP projections:

                              • 2022 Q1 was revised down from 9.5% to 7.8%.
                              • 2023 Q1 was revised down from 2.1% to 1.8%.
                              • 2024 Q1 was revised up from 1.0% to 1.1%.
                              • 2025 Q1 was at 0.9% (new).

                              CPI inflation projections:

                              • 2022 Q1 raised from 4.6% to 5.7%.
                              • 2023 Q1 raised from 3.3% to 5.2%.
                              • 2024 Q1 unchanged at 2.1%.
                              • 2025 Q1 to slow to 1.6%.

                              Unemployment rate projections:

                              • 2022 Q1 lowered from 4.2% to 3.8%.
                              • 2023Q1 raised from 4.0% to 4.2%.
                              • 2024 Q1 raised from 4.2% to 4.6%.
                              • 2025 Q1 to rise to 5.0%.

                              Implied path for Bank Rate:

                              • 2022 Q1 lowered from 0.5% to 0.4%.
                              • 2023 Q1 raised from 1.0% to 1.3%.
                              • 2024 Q1 raised from 1.0% to 1.4%.
                              • 2025 Q1 at 1.3%.

                              Full Monetary Policy Report here.

                              RBA Lowe: Cash rate highly likely to stay at 0.25% for some years

                                RBA Governor Philip Lowe reiterated the Board’s commitment on not raising interest rate until progress is made towards full employment, with confidence that inflation could sustain in 2-3% target range. He added that “, these conditions are not likely to be met for at least three years”. Hence, it’s “highly likely” that cash rate will be at the current 0.25% level “for some years”. The 3-year yield target of 0.25% also “reinforces this message”.

                                Lowe also note again that the negative interest rates are not justified by the cost benefits. He added, “in a world that is so uncertain and fluid, I don’t think it is prudent to rule it out”. But as seen in some European countries and Japan, “negative interest rates also encourage people to save more, not spend more”. So, “negative interest rates can become contractionary”.

                                He also noted that Australian Dollar’s exchange rate is not overvalued even though he’ like it to be lower. Huge amount of intervention is needed to push the Aussie down and it wouldn’t be a successful strategy.

                                RBNZ Orr: Get ahead of the curve with this week’s rate cut

                                  RBNZ Governor Adrian Orr toned down the chance of another rate cut after yesterday’s, as he addressed a parliamentary committee today. He noted that “at the moment we see in the outlook for interest rates as…balanced”. Regarding yesterday’s cut, Orr pointed out that “the reason for the cut is global economic growth has slowed.” “Growth has come off rapidly in Europe, in China, though that’s stabilized more recently, and Australia … so key trading partners.”

                                  Separately, Orr also told the Morning Report that the cut was “sensible” as our “forward projection [showed] a lower rate. And the question for the committee was “do we wait or do we move now”. Orr said “Moving now is the best choice for us as far as we consider because it means we get ahead of the curve – we aren’t chasing the economy in cycles, we’re actually getting ahead and removing the cycles.”

                                  Auto tariff report submitted, 90 days for Trump to act

                                    The US Commerce Department met the Sunday deadline and submitted its investigation report on imported cars and auto parts to the White House. The Section 232 is about national security threats from those auto imports. A Commerce Department spokesperson said it would not disclose any details of the report. Trump has 90 days to make a decision on whether to act up the recommendations, which could include some tariffs on fully assembled vehicles or on technologies and components related to electric, automated, connected and shared vehicles.

                                    German Chancellor Angela Merkel said in the Munich Security Conference that “we are proud of our cars and so we should be.” She added that “if that is viewed as a security threat to the United States, then we are shocked”. German car lobby VDA said the countries car industry has created more than 113k jobs in the US in recent years, with around 300 factories. German car companies were the largest car exporters from the US. And VDA said “all this strengthens the USA and is not a security problem.”

                                    Fed Powell: Makes Sense to start slowing, as soon as in Dec

                                      Fed Chair Jerome Powell indicated in a speech that it “makes sense” to start slowing the pace of tightening as soon as in December. But, the level of the terminal rate, and the time to stay there are now more significant than when to start slowing down.

                                      “Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt,” Powell said. “Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting,” he added.

                                      But Powell also indicated, “the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

                                      Full remarks here.

                                      Dollar mixed after FOMC minutes, no more follow through selling

                                        Dollar is mixed after FOMC minutes revealed nothing new, nothing special. The greenback was Sold off after Fed Chair Jerome Powell’s comment that interest rate is “just below” neutral. However, there was no follow through selling since then.

                                        Dollar is still trading up against Yen, Sterling and Canadian for the week. And technically, EUR/USD is in range of 1.1267/1472. USD/CHF is in range of 0.9908/1.0006. GBP/USD is in range of 1.2725/2927. Even the strong AUD/USD couldn’t get ride of 0.7314 resistance cleanly. Traders might want to wait for the result of Trump-Xi meeting before taking further commitment.

                                        The FOMC minutes for the November revealed that the members still considered a rate hike in December is appropriate. Yet, they debated on the change in forward guidance regarding the pledge on “further gradual increases” in the policy rate. Some judged that the policy rate is near to the neutral level, while some suggested stressing the importance of incoming data on monetary policy decision. The members in general were upbeat on the economic developments. Yet, they were concerned about the negative impacts of Trump’s imposition of trade tariff on the economy, as well as the “volatility in equity markets was accompanied by a rise in risk spreads on corporate debt”. More in FOMC Minutes Signals Rate Hike “Fairly Soon”, Policy Outlook Masked by Tariff and Debts.

                                        More suggested reading on FOMC.

                                        UK retail sales flat versus expectation of -0.4% mom

                                          UK April retail sales data came in better than expected:

                                          • Retail sales include auto & fuel rose 0.0% mom versus expectation of -0.4% mom.
                                          • Retail sales include auto & fuel rose 5.2% yoy versus expectation of 4.5% yoy.
                                          • Retail sales exclude auto & fuel dropped -0.2% mom versus expectation of -0.5% mom.
                                          • Retail sales exclude auto & fuel rose 4.9% yoy versus expectation of 4.3% yoy.

                                          The details, though, are not too impressive and fuel stores and non-store retailing were the only positive contributors to the quantity bought in April.

                                          Full release here.