Bundesbank Weidmann: Acting beyond mandate will undermine trust in ECB

    Bundesbank President Jens Weidmann warned today that the Eurozone is still not crisis proof. He pointed out that “certain issues like the lack of credibility of fiscal rules or the harmful sovereign-bank nexus still have to be adequately addressed.”

    At the same time, fighting crises could force unelected ECB bankers to take political positions that’s beyond its own mandate. And, “acting beyond the mandate would also undermine people’s trust in the central bank.”

    He added, “at the end of the day, it could become more and more difficult for the European Central Bank to focus on its promise of a stable currency.”

    BoJ Kuroda: No intention of pushing 10-year yield up above 0% target

      BoJ Governor Haruhiko Kuroda told the parliament today that “it’s important now to keep the entire yield curve stably low as the economy suffers the damage from COVID-19”. Also, “the BOJ has no intention of pushing up (10-year bond yields) above its target of around 0%.”

      On monetary policy, Kuroda said “it may take time but the BOJ must achieve 2% inflation by helping expand the positive output gap, prop up inflation expectations with a commitment to expand base money until inflation stably above 2%… By stressing BOJ’s commitment to hit 2% inflation, it hopes to push up inflation expectations and lower real interest rates.

      BoJ will also include the study on whey inflation has not sufficiently picked up in the upcoming March review. “The BOJ will examine the effects and side-effects of our asset purchases in hope of making them more effective and sustainable,” Kuroda reiterated. “We’re already buying ETFs flexibly because doing so is possible even under current guidelines.”

      RBA hikes by 50bps to 0.85%, more normalization over the months ahead

        RBA raises cash rate target by 50bps to 0.85% today, larger than expectation of 40bps. Interest rate on exchange settlement balances is also lifted by 50bps to 75bps. The central bank also maintains tightening bias, as “the Board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead.”

        In the accompanying statement, RBA said inflation in Australia has “increased significantly”, and is “expected to increase further”, before declining back towards the 2-3% target range next year. The economy is “resilient” while labour market is “strong”.

        One source of uncertainty is “how household spending evolves”, given the “increasing pressure” from higher inflation, and interest rates. The central scenario is for strong household consumption growth this year, but RBA will pay close attention to various influences on consumption.

        Full statement here.

        US Treasury to raise USD 3T debts in Q2 to fund coronavirus measures

          US Treasury announced to raise near USD 3 trillion in Q2 with privately held net marketable debt to fund the measures to counter the coronavirus economic impact. The Q2 sum alone is more than five times the amount raised during the 2008 financial crisis, and more than double the borrowed in 2019.

          The Treasury said in a statement: “The increase in privately-held net marketable borrowing is primarily driven by the impact of the COVID-19 outbreak, including expenditures from new legislation to assist individuals and businesses, changes to tax receipts including the deferral of individual and business taxes from April – June until July, and an increase in the assumed end-of-June Treasury cash balance.”

          Additionally, the Treasury expects to borrow USD 677 billion in privately-held net marketable debt, assuming an end-of-September cash balance of USD 800 billion.

          BoE to stand pat and publish new forecasts, reiterate Brexit uncertainty

            It’s another BoE Super Thursday today with rate decision as well as quarterly inflation report. BoE is widely expected to keep Bank rate unchanged at 0.75%. The asset purchase target will also be held at GBP 435B. The decisions are very likely to be unanimous.

            BoE might revise down both GDP and inflation forecasts. But it should be emphasized that such forecasts are based on scenario of a smooth Brexit. Hence, reactions to any revision to the forecasts could be temporary as the biggest question of Brexit won’t be answered by these figures.

            And, as BoE noted repeatedly, “The broader economic outlook will continue to depend significantly on the nature of EU withdrawal, in particular: the form of new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond.”

            Also, “The appropriate path of monetary policy will depend on the balance of the effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”

            We’d expect BoE to reiterate such messages in today’s statement.

            Here are some previews:

            Eurozone economic sentiment dropped to 104 in Jun, EU down to 102.5

              Eurozone Economic Sentiment Indicator dropped from 105.0 to 104.0 in June. Employment Expectation Indicator dropped from 112.6 to 110.9. Economic Uncertainty Indicator rose from 23.4 to 24.8. Industry confidence rose from 6.5 to 7.4. Services confidence rose from 14.1 to 14.8. Consumer confidence dropped from -21.2 to -23.6. Retail trade confidence dropped from -4.2 to -5.1. Construction confidence dropped from 6.3 to 3.7.

              EU Economic Sentiment Indicator dropped from 104.2 to 102.5. Employment Expectation Indicator dropped from 112.2 to 110.6. Economic Uncertainty Indicator rose from 22.6 to 23.9. The ESI fell across the six largest EU economies: confidence dropped most markedly in the Netherlands (-3.6), but also in Germany (-1.9), Spain (-1.9), Poland (-1.5), France (-1.0) and Italy (-1.0).

              Full release here.

              Tentative deal reached to avert another US government shutdown, with border fencing

                A tentative deal was agreed yesterday between the Republicans and Democrats to avert another partial government shutdown this Saturday. But the agreement does not include the USD 5.7B funding for the border wall that Trump demanded.

                No detail is provided for the deal yet. But based on unnamed source, there would be USD 1.375B in funding for new fencing along the southern border of the US. That is around the same amount the Congress allocated last year.

                Also, it’s reported that only currently deployed design could be used for 90km of additional barriers, which might include steel bollard fencing.

                Canadian Dollar rises mildly after stronger than expected CPI data.

                  Headline CPI dropped -0.1% mom in December versus expectation of -0.3%. Annually, CPI accelerated to 2.0% yoy, up from 1.7% yoy and beat expectation of 1.8% yoy.

                  Core CPI readings were steady. CPI core-common was unchanged at 1.9% yoy. CPI core-median dropped from 1.9% yoy to 1.8% yoy. CPI core-trimmed was unchanged at 1.9% yoy.

                  Full release here.

                  Australia leading index improved modestly to -4.44

                    Australia Westpac Leading Index rose from -5.29 to -4.44 in June. Despite the modest improvement, the index growth rate remains in deep negative territory, “consistent with recession”. Westpac added, “overall, the component mix points to downside risks near term with the drivers behind the weak July readings on sentiment likely to impact on other, less timely, components that track real activity in coming months.”

                    Also, after yesterday’s announcement of extension to JobKeeper and JobSeeker packages, Westpac expected the government to inject around AUD 13.5B in December quarter. The stimulus was estimated to be at AUD 65B in June quarter and AUD 95B in September quarter. Thus, “the challenge for the economy…. is to adjust to such a sudden reduction in the size of government support”.

                    Full release here.

                     

                    US retail sales rose 0.7% in Aug, ex-auto sales jumped 1.8%

                      US retail sales rose 0.7% mom to USD 618.7B in August, much better than expectation of -0.7% decline. Ex-auto sales rose 1.80% mom, versus expectation of -0.1% decline. Ex-gasoline sales rose 0.8% mom. Ex-auto, ex-gasoline sales rose 2.0% mom. Total sales for the June 2021 through August 2021 period were up 16.3% from the same period a year ago

                      Full release here.

                      New Zealand exports rose 8.5% yoy in May, imports jumped 31% yoy

                        New Zealand goods exports rose NZD 461m, or 8.5% yoy, to NZD 5.9B in May. Goods imports rose NZD 1.3B, or 31% yoy, to NZD 5.4B. Trade surplus came in at NZD 469m, up from NZD 414m.

                        Imports from all top trading partners were up, including China (+9.4% yoy), EU (+28% yoy), Australia (+23% yoy), USA (+34% yoy), and Japan (+103% yoy. Exports to all top trading partners were up expect Australia, including China (+25% yoy), Australia (-13% yoy), USA (+11% yoy), EU (+22% yoy), and Japan (+3.5% yoy).

                        Full release here.

                        ECB’s Nagel: Rate cut may be tempting, but it’s not time yet

                          In the annual report from Bundesbank, ECB Governing Council member Joachim Nagel emphasized the importance of caution and patience. “Even though it may be very tempting, it is too early to cut interest rates. This is because the price outlook is not yet clear enough,” Nagel stated.

                          Furthermore, Nagel’s call for perseverance reflects an understanding of the challenges inherent in steering monetary policy towards achieving price stability. “We should not let ourselves stray away from the path we have embarked on,” he advised, emphasizing the need for consistency and resilience in ECB’s policy stance.

                           

                          Fed still sees three cuts this year, but slower easing thereafter

                            Fed left interest rate unchanged at 5.25-5.50% as widely expected. The new economic projections and dot plots are clearly more hawkish than December’s. Yet, Dollar dips initially after the announcement, perhaps because they’re not as hawkish as feared.

                            In the new median economic projections interest rate is still seen at 4.625% by the end of 2024. But federal funds are are now projection to decline slower to 3.875% by the end of 2025 (vs prior 3.625%), and then 3.125% by the end of 2026 (vs prior 2.875%). The long run federal funds rate is seen slightly higher from 2.5% to 2.6%.

                            Looking at the details of the dot plot for end of 2024, nine members see interest rate above 4.75%, and 10 below that level. That is one member has shifted the stance (the split was 8-11 in December). Also, only one member expects interest rate to be below 4.50%. That is, Fed isn’t likely to cut more than three times this year, with higher risk of cutting less.

                            Other forecasts see:-

                            GDP growth:

                            • 2024 GDP growth at 2.1% (upgraded from 1.4%).
                            • 2025 GDP growth at 2.0% (upgraded from 1.8%).
                            • 2026 GDP growth at 2.0% (upgraded from 1.9%).

                            Headline PCE:

                            • 2024 PCE inflation at 2.4% (unchanged).
                            • 2025 PCE inflation at 2.2% (raised from 2.1%).
                            • 2026 PCE inflation at 2.0% (unchanged).

                            Core PCE:

                            • 2024 core PCE inflation at 2.6% (raised from 2.4).
                            • 2025 core PCE inflation at 2.2% (unchanged).
                            • 2026 core PCE inflation at 2.0% (unchanged).

                            Full FOMC statement here.

                            Full Summary of Economic Projections here.

                            China PMI manufacturing unchanged at 50.2, non-manufacturing dropped to 53.6

                              The official Chinese PMI Manufacturing was unchanged at 50.2 in December, slightly above expectation of 50.1. PMI Non-Manufacturing dropped to 53.5, down from 54.4, missed expectation of 53.6.

                              Special analyst Zhang Liqun said there was signs of stabilization but “foundation still needs to be consolidated”. Also “efforts should continue to be made to implement the various policies and measures to achieve the “six stability” and to strengthen the foundation for economic stability as soon as possible.

                              Wen Tao of Logistics Information Center noted the effect of release of market demand during the holidays. Also, there are productions of consumer goods ahead of Chinese New Year.

                              AUD/NZD rebound gains traction ahead of RBA minutes

                                AUD/NZD continues to extend its rebound from 1.0585 short-term bottom, prompting traders to further close their short positions as the previous selloff failed to push the cross through 1.0469 low. Market participants are awaiting the release of RBA minutes in the upcoming Asian session, along with Australian PMIs and New Zealand CPI data this week.

                                Expectations on New Zealand’s CPI remain divided, with some anticipating a slowdown from 7.2% yoy level. If realized, this would fall below RBNZ’s forecast of 7.3%, potentially sparking speculation of a less aggressive rate hike path. Conversely, improvements in Australia’s PMI could bolster RBA’s confidence in resuming tightening with another rate hike in May.

                                Technically, break of 1.0789 resistance now argues that fall from 1.1085 has completed at 1.0585. Rise from there could be seen as the third leg of the pattern from 1.0469. Further rally could be seen back to 1.1085 resistance next. However, on the downside, break of 1.0732 support will bring retest of 1.0585 low instead.

                                Very limited progress made after disappointing Brexit negotiations

                                  UK Brexit chief Brexit negotiator David Frost said “very limited progress” were made on the “most significant outstanding issues” with EU after completing the latest round of negotiations. He further warned that if EU persists in its “novel and unbalanced proposals on the so-called level playing field,” two sides won’t be able to reach an agreement.

                                  “We very much need a change in EU approach for the next round,” Frost added. “The U.K. will continue to work hard to find an agreement, for as long as there is a constructive process in being, and continues to believe that this is possible.”

                                  On the other hand, EU chief Brexit negotiation Michel Barnier said the third round of Brexit talks was “disappointing”. But he insisted, “We’re not going to bargain away our values for the benefit of the British economy.”

                                  Dollar falls further as Fed puts a floor on asset purchases for the coming months

                                    Dollar traders seem to be unhappy that the vast majority of Fed officials expected interest rate to stay at 0.00-0.25% range till the end of 2022. More importantly, Fed sort of kept the floor regarding asset purchases, and said, “over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace”.

                                    USD/JPY drops through 107.08 support after the release and is on track to take on 105.98 support next.

                                    USD/CAD also drops through 1.3356 temporary low to resume the fall from 1.4667, towards 100% projection of 1.4667 to 1.3855 from 1.4048 at 1.3236.

                                    New Zealand BusinessNZ PMI dropped to 58.3

                                      New Zealand BusinessNZ PMI dropped to 58.3 in April, down from 63.6. Looking at some details, production dropped form 66.5 to 64.5. Employment dropped from 53.6 to 52.7. New orders dropped from 72.3 to 60.9. Finished stocks dropped from 55.4 to 55.2. Deliveries also dropped from 63.0 to 52.4.

                                      BNZ Senior Economist, Craig Ebert stated that “firms’ commentary to April’s PMI noted improving conditions internationally, in addition to many global PMIs clearly pointing to economic activity expanding strongly in significant portions of the world right now”.

                                      Full release here.

                                      Japan Nishimura: Efforts to stimulate consumption should wait a bit more

                                        Japan Economy Minister Yasutoshi Nishimura said in the an interview that it’s “premature to consider fiscal, monetary steps aimed at stimulating consumption as Japan is still focusing on containing coronavirus pandemic.” And, ‘what’s most important now is to protect jobs and help businesses survive the pandemic.”

                                        For now, “we’re not at a stage yet where we want to stimulate consumption and encourage people to travel a lot,” he added. “Efforts to stimulate consumption should wait a bit more”. Though, he’s relatively optimistic as “we’re already reopening business,” and “so the economy will probably hit bottom from April through mid-May,”

                                        Capital injection into companies should be “an area the government can handle”. BoJ should instead “plays its part in helping financial institutions meet corporate funding strains.”

                                        Swiss KOF dropped to 107 in Dec, economy to develop positively at 2022 start

                                          Swiss KOF Economic Barometer dropped slightly from 107.5 to 107.0 in December. “The barometer remains above its long-​term average,” KOF said. “The Swiss economy should thus continue to develop positively at the beginning of 2022, if the economic activity is not impaired by the renewed spread of the virus.”

                                          “This month, the barometer is mostly influenced by indicators covering private consumption, which are slightly negative. Another slight negative contribution is sent by bundles of indicators from the finance and insurance sector. In contrast, indicators for foreign demand are contributing positively.”

                                          Full release here.