RBA Lowe: Going to be some years before inflation back in target range

    RBA Governor Philip Lowe said the larger than expected 50bps hike at last meeting was driven by “additional information suggesting a further upward revision to an already high inflation forecast”.

    He also emphasized, “as we chart our way back to 2 per cent to 3 per cent inflation, Australians should be prepared for more interest rate increases.”

    “In the next month or so, we’ll be doing a full forecast update, but it’s going to be some years, I think, before inflation is back in the 2-3 per cent range, he added.

    “I don’t see a recession on the horizon,” Lowe said. “If the last two years has taught us anything, it’s that you can’t rule anything out. But our fundamentals are strong, the position of the household sector is strong, and firms are wanting to hire people at record rates. It doesn’t feel like a precursor to a recession,” he said.

    Japan’s industrial production down -0.9% mom, continues to seesaw indecisively

      Japan’s industrial production fell -0.9% mom in November, marking the first decrease in three months. This drop, however, was less severe than the expected -1.6% mom decline. A notable factor in the contraction was -2.5% mom fall in motor vehicle production. Among the 15 sectors surveyed, 11 reported decreased production, while four sectors experienced increases.

      Index of industrial shipments also dropped by -1.3% mom, aligning with overall decline in industrial production. Conversely, Index of inventories saw a marginal increase of 0.1% mom.

      The Ministry of Economy, Trade and Industry maintained its assessment of industrial output as “fluctuating indecisively.” Looking ahead, manufacturers expect a rebound in output by 6.0% mom in December, followed by -7.2% mom decrease in January 2023.

      An METI official said, “We’ll continue to monitor the impact of the global economic downturn and rising prices”.

      In separate release, retail sales data painted a more positive picture. Sales in November rose 5.3% yoy, exceeding forecast of 5.0% yoy, and marked the 21st consecutive month of expansion since March 2022. On a month-on-month basis, retail sales grew 1.0%, following 1.7% growth in October.

      Trump postpones some tariffs on China as they celebrates anniversary

        As a gesture of exchange of good will, US President Donald Trump announced yesterday to delay the next batch of tariffs on China by half a month. The imposition of additional 5 tariffs on USD 250B in Chinese imports will be postponed from October 1 to October 15.

        Trump tweeted: “At the request of the Vice Premier of China, Liu He, and due to the fact that the People’s Republic of China will be celebrating their 70th Anniversary on October 1st, we have agreed, as a gesture of good will, to move the increased Tariffs on 250 Billion Dollars worth of goods (25% to 30%), from October 1st to October 15th.”

        Earlier, China announced to exempt 16 categories of US imports from new tariffs, including some anti-cancer drugs and lubricants, as well as animal feed ingredients whey and fish meal. Trump referred to that separately and said “They made a couple of moves … that were pretty good… I think it was a gesture, okay? But it was a big move.”

        The moves by both sides are more symbolic than substantial in nature. Yet, it’s a sign that both are working towards to create an easier atmosphere for the expected face-to-face high level trade meeting in Washington next month.

        Canada retail sales dropped for the first time in three months

          Canada retail sales dropped for the first time in three months, by -0.1% mom to CAD 51.6B in September. Though, that was better than expectation of -0.3% mom fall. Excluding autos, retail sales rose 0.2% mom, above expectation of -0.1% mom.

          Retail sales were down in Alberta (-1.6%) and New Brunswick (-3.7%). In Quebec, retail sales increased 0.7%. In the census metropolitan area (CMA) of Montréal, sales were up 0.6%. Retail sales in Ontario (+0.3%) continued their upward trend, increasing for the seventh time in eight months. In the CMA of Toronto, retail sales were up 1.5%.

          Full release here.

          Asian stocks drop broadly after Canada arrests Huawei CEO, Yen Strong

            Asian markets are staying in selloff mode on global slow down concerns. Additionally, Hong Kong stocks lead decline on news of arrest of Chinese tech giant Huawei’s CFO Meng Wanzhou. The arrest is reported to be in relation to Huawei violating US sanctions by shipping US originated products to Iran and some other countries. Canada also confirmed that Meng is facing extradition to the US. The arrest also prompted concerns over Chinese retaliation on US executives.

            For now, Nikkei is down -1.84% or -404.35 pts. China Shanghai SSE is down -1.28%. Singapore Strait Times is down -1.25%. Hong Kong HSI is down -2.6% or -703 pts. The HSI’s gap down and steep decline today argues that recent recovery from 24540.63 has completed earlier than expected at 27260.43. With strong break of 55 day EMA, deeper fall would be in favor in near term back to retest 24540.63 low. More importantly, the corrective structure of the rebound retains medium term bearishness for new low at a later stage.

            In the current currency markets, Australian leads the way down again on risk aversion and smaller than expected trade surplus data. Canadian Dollar also stays pressured after yesterday’s dovish BoC statement. Yen is the strongest one, followed by Swiss Franc and then Dollar.

            Asian stocks tumble on concern of coronavirus outbreak in China

              Asian stocks tumble broadly today on concern of an outbreak of a coronavirus in China, as well as other countries in the region. China’s National Health Commission already confirmed that the virus which causes a type of pneumonia, can pass from person-to-person. That couldn’t come at the worst time as massive number of people are expected to travel within China before Lunar New Year.

              According to a report by London Imperial College’s MRC Centre for Global Infectious Disease Analysis, it’s estimated that there were already over 1700 cases in Wuhan city by January 12. Such estimate was not commented by the Chinese authorities yet. But there were already cases reported by Thailand, Japan and South Korea, involving people from from Wuhan or who recently visited the city.

              The virus is believed to be in the same family of Severe Acute Respiratory Syndrome (SARS), which killed nearly 800 people during an outbreak in 2003, starting in China and spread to Hong Kong. The World Health Organization (WHO) said yesterday that the primary source of the outbreak appeared to be an animal and some “limited human-to-human transmission” occurred between close contacts. WHO also called for an emergence committee on Wednesday to assess the situation.

              Hong Kong HSI is gaps lower today and is currently down more than -2%. Technically, a short term top is formed at 29174.92 and deeper pull back could be seen. Initial support is expected at around 55 day EMA (now at 27708). Rebound from 24899.93 could still extend higher. However, sustained break of the EMA would turn outlook bearish and HSI could head back towards 24899.93 support in that case.

              Fed’s Bostic: No rush to cut rates, eyes second half of 2024 for easing

                Atlanta Fed President Raphael Bostic emphasized a lack of urgency in cutting interest rates, projecting potential rate reductions only in the second half of 2024.

                In an event overnight, Bostic expressed his view that inflation is likely to decrease gradually over the next six months. This outlook underpins his stance that there is no immediate need to deviate from the current restrictive monetary policy.

                “For me, I’m thinking inflation is going to come down relatively slowly in the next six months, which means there’s not going to be urgency for us to pull off our restrictive stance,” he stated.

                Bostic anticipates that Fed might implement two rate cuts in the latter half of 2024. However, he clarified, “It is not like there has been an active discussion on this.”

                Highlighting the prevailing economic uncertainties, Bostic advocated for a “cautious but resolute” approach. This strategy involves a resistance to reacting hastily to individual data points and instead focuses on making sure “the trends are really trends.”

                German economy ministry: Less dynamic, but still upward trend

                  German Economy Ministry said in the April Economic Report today that the economy continues to show a “mixed picture”. Service and construction are “expanding strongly”. However, “global oriented manufacturing is still in a weak phase”.

                  The reported note that both global industrial production and world trade were on the decline at the end of 2018. And this “continued in January 2019 in industrial production. Trade had a “slightly recovery” but remained below last year’s level.

                  PMI was at lowest since June 106 while Ifo reflected a “gloomier mood”. And, “in light of the indicators and the accumulation of global risks, international organizations are predicting a less dynamic, but still upward, global trend.”

                  Also, “industrial economy is likely to remain subdued in the face of declining foreign demand and high international risks.”

                  Full report here.

                  RBA Debelle: Exchange rate plays important role of external shock absorber

                    RBA Deputy Governor Guy Debelle warned that US-China trade war poses a “significant risk” to Australia and the rest of the world. He also defended the existing rules-based global trading system. He said, “despite some flaws, that system has delivered sizeable benefits for global growth and welfare”, and “Australia has clearly been a major beneficiary of that system.”

                    Nevertheless, Debelle also noted that Australia is “less vulnerable” to external shocks now. He said “if you look at the balance sheet of the country as a whole, Australia has a net foreign currency asset position”. “Hence when the exchange rate depreciates, the value of net foreign liabilities actually declines rather than increase. To reiterate, this allows the exchange rate to play the important role of shock absorber to external shocks”, he added.

                    G7 pledges international cooperation as coronavirus cases break 130,000

                      US Treasury held a video conference with Canada, the European Commission, France, Germany, Italy, Japan and the United Kingdom. A short statement was issued noting, “The G7 is in regular contact and committed to continued international cooperation to address the global health and economic impacts of COVID-19.”

                      The coronavirus pandemic continues with total cases surged pass 130,000 level to 134,684. Death toll reached 4,973 and is set to break 5,000 soon. Italy’s cases rose to 15,113, with deaths at 1,016. Iran’s cases hit 10,075, with 429 deaths. The virus is still spreading quickly in Europe as Spain added 869 cases to 3,146. France added 595 cases to ,2876. Germany added 779 cases to 2,745. US also reported 429 new cases to 1,730.

                      China, the origin of this global pandemic, reported just 4 new cases a 1 new death. Accumulated total case hit 80,797, with 3,170 deaths.

                      Fed Chair Powell speech live stream

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                        Full speech here.

                        Japan Tankan large manufacturing dropped to 12, lowest since 2017, large fall since 2012

                          Japan Tankan large manufacturing index dropped to 12 in Q1, down from 19 and even missed expectation of 13. That’s also the lowest level since March 2017. The quarterly decline was sharpest since 2012. Large non-manufacturing index dropped to 21, down from 24 and missed expectation of 22. It’s also the lowest level since March 2017.

                          Large manufacturing outlook also dropped to 8 down from 15 and missed expectation of 13. Large non-manufacturing outlook was unchanged at 20, matched expectations. All industry capex rose 1.2% in Q1, suggesting large firms expect to increase capital expenditure by a mere 1.2% in the year that begins in April. It’s sharply lower than prior 14.3% but beat expectation of 0.8%.

                          The overall set of numbers are weak, suggesting worsening outlook and deeper slowdown in the Japanese economy. Down the road, if the trend continues, BoJ might be force to re-evaluate its own monetary policy.

                          Full release here.

                          France PMI composite rose to 2 month high, diverging trends

                            French PMI manufacturing dropped to 53.1 in June, down from 54.4 and missed expecttation of 54.0. But PMI services rose to 56.4, up from 54.3 and beat expectation of 54.3. PMI composite rose to 55.6, up from 54.2, and hit a 2 month high.

                            Commenting on the Flash PMI data, Paul Smith, Economics Director at IHS Markit said:

                            “France’s economy showed noticeably divergent trends at the end of the second quarter, with the manufacturing and service sectors heading in markedly different growth directions.

                            “Whilst the services economy strengthened on the back of increased market activity, manufacturers faced a number of headwinds including a general loss of external demand momentum, ongoing vendor delivery delays and rising price pressures, especially for metals (in part linked to higher tariffs).

                            “Although the surveys suggest that underlying economic growth is continuing at a decent clip, on balance the latest data support the current IHS call for a 0.3% rise in GDP for Q2 as a whole.”

                            Full release here.

                            Italian bond yield jumps on budget deficit target, 5-star Maio not worried

                              European markets respond rather negatively to Italy’s budget, which it targets deficit at 2.4% of GDP for the next three years. Italian 10 year yield is up 0.268 to 3.161 for now, back above 3.000 handle. It’s also back at the level in the beginning of the month. German 10 year bund yield losses -0.06 to 0.472, back below 0.5 handle. DAX is currently down -0.68%, CAC own -0.32%.

                              European Commission said today that it would assess the draft budget plan of Italy before end of November. But it’s spokesman emphasized it’s just “part of the normal European Semester process, the EU’s economic policy coordination cycle, and happens each year.” European Economics Commissioner Pierre Moscovici noted that nothing would be gained from a clash with Italy but added “we don’t have any interest either that Italy does not respect the rules and does not reduce its debt, which remains explosive.”

                              5-Star Movement leader Luigi Di Maio, also Deputy Prime Minister of Italy, said he was not worried by market reaction and will meet investors soon.

                              Trump signed tariff proclamation but backed down from no exemption position

                                Trump finally signed the proclamations of 25% steel and 10% aluminum tariff yesterday. The new tariffs will take effect in 15 days. He said in the White House, surrounded by steel and aluminum workers, that “we have to protect and build our steel and aluminum industries, while at the same time showing great flexibility and cooperation toward those that are really friends of ours,”

                                But he backed down from his original position of no exemption. As Canada and Mexico are exempted, pending NAFTA negotiations outcome. And he opened the door for reduction in tariffs for countries that “treat us fairly”.

                                Trump added “I’ll have a right to go up or down, depending on the country, and I’ll have a right to drop out countries or add countries.” And, “we just want fairness. Because we have not been treated fairly by other countries.”

                                US initial jobless claims rises to 205k, below exp 220k

                                  US initial jobless claims rises 2k to 205k in the week ending December 16, below expectation of 220k. Four-week moving average of initial claims fell -1.5k to 212k.

                                  Continuing claims fell -1k to 1865k in the week ending December 9. Four-week moving average of continuing claims rose 6k to 1878k, highest since December 11, 2021.

                                  Full US jobless claims release here.

                                  Fed to announce tapering, some previews

                                    FOMC monetary policy decision is the major focus today, as Fed should finally make a formal announcement on QE tapering. As the September minutes indicates, the pace would be “monthly reductions in the pace of asset purchases, by US$10B in the case of Treasury securities and US$5B in the case of agency mortgage-backed securities (MBS)”. The would eventually lead to completion of entire asset purchases by mid -2022. But, a hawkish surprise – monthly reduction at a faster pace – cannot be ruled out given the inflationary pressure.

                                    Also, September’s dot plot revealed that half of the members had anticipated a rate hike in 2022. Meanwhile, the market has priced in futures have priced in over 60% of a rate hike by June next year. But Fed Chair Jerome Powell would likely reiterate that decision on interest rate is complete separated from that of asset purchases. There wouldn’t be any new hint on the timing of rate hike until December’s dot plot.

                                    Suggested readings on Fed

                                    UK PMI composite rose to 28.9, looks set to see a frustratingly slow recovery

                                      UK PMI Manufacturing rose to 40.6 in May, up from 32.6, above expectation of 33.5. PMI Services rose to 27.8, up from 13.4, above expectation of 22.1 too. PMI Composite rose to 28.9, up from 13.8.

                                      Chris Williamson, Chief Business Economist at IHS Markit, said: “The UK economy remains firmly locked in an unprecedented downturn, with business activity and employment continuing to slump at alarming rates in May. Although the pace of decline has eased since April’s record collapse, May saw the second largest monthly falls in output and jobs seen over the survey’s 22-year history, the rates of decline continuing to far exceed anything seen previously.

                                      “The UK looks set to see a frustratingly slow recovery, given the likely slower pace of opening up the economy relative to other countries which have seen fewer COVID-19 cases. Virus related restrictions, widespread job insecurity and weak demand will be exacerbated by growing business uncertainty regarding Brexit. We are consequently expecting GDP to fall by almost 12% in 2020. While the quarterly rate of decline looks likely to peak at around 20% in the second quarter, the recovery will be measured in years not months.”

                                      UK retail sales rose 5.4% mom in Mar, ex-fuel sales up 4.9% mom

                                        UK retail sales rose 5.4% mom in March, well above expectation of 1.50%. Ex-fuel sales rose 4.9% mom, above expectation of 1.3% mom. Over the year, headline sales rose 7.2% yoy, ex-fuel sales rose 7.9% yoy. The strongest growth was in clothing stores, other non-food stores and automotive fuel retailers of 17.5%, 13.4% and 11.1% respectively.

                                        Full release here.

                                        BoE’s Pill advocates patience, rate cut remains some way off

                                          BoE Chief Economist Huw Pill articulated a cautious stance on the prospect of interest rate cuts, noting that such a move remains “some way off.” He underscored the absence of adequate evidence suggesting a trajectory towards the inflation target, which necessitates a sustained period of tight monetary policy to mitigate domestic inflationary pressures.

                                          “Crucially, for me at least, we don’t have sufficient evidence yet,” Pill stated, pointing to the need for more conclusive data to consider easing rates.

                                          Further elaborating his view, Pill advised against overreacting to any short-term reversion of inflation to target level in the coming months, particularly if driven by external factors. Instead, he advocated for a focused and sustained effort to address domestic inflationary pressures through maintaining a restrictive policy stance.