Swiss CPI rose 0.4% mom in March, above expectation of 0.3% mom. Annual rate rose to 0.8% yoy, up from 0.6% yoy in February and beat expectation of 0.7% yoy.
Swiss Federal Statistical Office (FSO) noted that “various factors contributed to the 0.4% rise compared with the previous month, such as an increase in the price of international package holidays, air transport and hotel accommodation. However, prices fell for medicines and fuel.”
Australia Performance of Services Index rose 2.9 pts to 58.7 in March. That’s the highest monthly result since June 2018. All five services sectors indicated “strong rates of recovery”. Four activity indicators – sales, new orders, stocks and deliveries – showed “robust recovery”. However, Employment index indicated “stably or mildly decreasing employment”.
Ai Group Chief Executive, Innes Willox, said: “While areas of vulnerability clearly remain, the strong lift in new orders is an encouraging sign that the services sector as a whole is well positioned to work through the winding down of fiscal stimulus in the next few months.”
UK CPI was unchanged at 6.7% yoy in September, above expectation of slowing to 6.6% yoy. CPI core (excluding energy, food, alcohol and tobacco) slowed from 6.2% yoy to 6.1% yoy, above expectation of 6.0% yoy.
CPI goods annual rate fell slightly from 6.3% to 6.2%. CPI services annual rate rose from 6.8% to 6.9%, joint highest rate (with May 2023) since March 1992.
On a monthly basis, CPI rose 0.5% mom, above expectation of 0.4% mom, quickly than prior month’s 0.3% mom.
RBA left monetary policy unchanged as widely expected. Cash rate and 3-year yield target are held at 0.10%. Parameters of the Term Funding Facility and the government bond purchase program are kept unchanged too. The central bank also keep the pledge to “maintaining highly supportive monetary conditions until its goals are achieved”. The conditions for raising cash rate is not expected to be met “until 2024 at the earliest”.
The bond purchases were “brought forward this week to assist with the smooth functioning of the market”. A cumulative AUD 74B of government bonds has been purchased under the initial AUD 100B program. A further AUD 100B will be purchases after the current program completes. And RBA is “prepared to do more if that is necessary”.
Globally, RBA noted that longer-term bond yields increased “considerably over the past month”. That “partly reflects a lift in expected inflation over the medium term to rates that are closer to central banks’ targets”. The movement in yields have been associated with volatility in other asset prices including foreign exchange rates, Australian Dollar “remains in the upper end of the range of recent years”.
Australian economic recovery is “well under way” and has been “stronger than was earlier expected”. GDP is expected to grow3.5% over both 2021 and 2022. Also GDP is expected to return to its end-2019 level “by the middle of this year”. But wage and prices pressures “subdued” and are expected to “remain so for some years”. CPI is expected to be at 1.25% over 2021 and 1.50% over 2022. CPI inflation is expected to “rise temporarily because of the reversal of some COVID-19-related price reductions.”
The markets were rocked by the “clear-cut” hawkish remarks by Fed Chair Jerome Powell overnight. In short, “he indicated that ultimate level of interests is “likely to be higher than previously anticipated”. Fed is also “prepared to increase the pace of rate hikes”. He also warned against “prematurely loosening policy. More here.
As a result, Fed fund futures are now pricing in 73% chance of a 50bps rate hike to 5.00-5.25% on March 22, comparing to just 31% a day ago.
The stock markets were sold off deeper, with DOW losing -1.72% or -574.98 pts to close at 32856.46. Technically, it isn’t the end of the world for DOW… yet, as it’s staying in familiar range despite the selloff The rejection of 55 day EMA is a bearish sign though.
So, near term focus is now back on 38.2% retracement of 28660.94 to 34712.28 at 32400.66. As long as this level holds, DOW is just in a sideway consolidation pattern.
However, sustained break there will suggest bearish reversal and at least bring deeper fall to 61.8% retracement at 30972.55.
Dollar index closed sharply higher on expectation of more aggressive Fed and risk aversion The support from 55 day EMA is a near term bullish sign. But DXY will still need to overcome 38.2% retracement of 114.77 to 100.82 at 106.14 to confirm underlying momentum.
Rejection by 106.14 will keep the rise from 100.82 as a corrective move and maintains medium term bearishness for another fall through 100.82 at a later stage. However, sustained break of 106.14 will indicate trend reversal and bring stronger rally to 109.44, and possibly above.
In its monthly report, Germany’s Bundesbank said “Germany’s economic output could have shrunk again slightly in the third quarter of 2019”. And, “the decisive factor here is the continued downturn in the export-oriented industry.”
Bundesbank doesn’t expect an outright recession. It still warned, “early indicators currently provide few signs of a sustainable recovery in exports and a stabilization of the industry.” “This raises the risk that the slowdown extends to a greater extent to more domestically oriented sectors.”
Entering into US session, while Euro’s sell and Italy catches a lot of headlines today, it’s actually not the weakest one. Selloff in Euro slows a little bit after Italian PM Conte’s FB post, pledging that Euro is indispensable. Australian Dollar is indeed the worst performing on risk aversion, following the sharp selloff in Hong Kong stocks and weakness in offshore Chinese Yuan. Sterling is the second worst as UK PM May continues get criticism on her Chequers plan from EU as well as Brexiteers. Yen is the strongest one on risk aversion, followed by Dollar and Swiss Franc.
At the time of writing, DAX is trading down -0.77% at 12244.13, recovered mildly after hitting as low as 12203.60. CAC is down -0.78% and FTSE is down -0.45%. German 10 year bund yield hit as long as 0.41 earlier today but it’s now back at 0.441, down -0.035. Italian 10 year yield is up 0.066 at 3.371, after hitting as high as 3.444.
Earlier today, Nikkei pared back almost all earlier gains and closed up just 0.10%. Singapore Strait Times lost -0.39%. Hong Kong HSI is in crisis mode, lost -2.38%. China is still on holiday but could very much face some troubles when they’re back next week. Gold is hovering around 1190 despite Dollar strength.
Eurogroup President Mario Centeno said in an interview that “it is true that there is a deceleration going on in Europe and that it may be less temporary than we think.” The slowdown surprised by both intensity and duration. And it’s related to political risks as “uncertainty grows when decisions are not taken.” Though, he remained optimistic that “forecasts point to a recovery in the second half of the year.”
Separately, Centeno expressed his concern regarding Italy’s fiscal heath in another interview. He warned that “Italy is facing some difficulties in this economic cycle”. And, “the message is relatively simple: the government has a demanding budget to execute and it needs to be executed with credibility, and we need to gather all our efforts to reverse Italy’s growth tendency.
Richmond Fed President Thomas Barkin, in an interview with Fox Business overnight, noted the positive aspects of the current economic situation, stating, the economy is “still growing” while unemployment is “still 3.9%”, and “inflation does to be settling”. “he added, “all that’s good”.
Despite these encouraging signs, Barkin emphasized that Fed’s work on bringing inflation down is far from complete. “But the job’s not done, and so you have to keep on until you get the job done, and we’ll see where we land,” he remarked.
Central to Barkin’s focus, and by extension, Fed’s, is the objective of returning inflation to the central bank’s target. “Inflation convincingly coming back to target — that’s my marker. And you can get there a lot of different ways,” Barkin elaborated.
He also expressed a desire to see a return to the pre-pandemic economic environment, where excessive price increases were not commonly used as a management strategy. “But I’m still looking to be convinced that price-setters in this economy have gotten back to where they were three or four years ago, which was an understanding that above-normal price increases just weren’t a management lever.”
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.
UK PMI construction rose from 49.2 to 52.3 in September, above expectation of 48.1. S&P Global said total industry activity rose for the first time three months. Output growth was linked to work on delayed projects. Business optimism was the lowest since July 2020 as new orders stalled.
Tim Moore, Economics Director at S&P Global Market Intelligence, said: “Forward-looking survey indicators took another turn for the worse in September, with new business volumes stalling and output growth expectations for the year ahead now the lowest since July 2020. This reflected deepening concerns across the construction sector that rising interest rates, the energy crisis and UK recession risks are all set to dampen client demand in the coming months.”
US retail sales rose 0.6% mom to USD 621.3B in June, much better than expectation of -0.6% mom decline. Ex-auto sales rose 1.3% mom, above expectation of 0.4% mom. Ex-gasoline sales rose 0.4% mom. Ex-auto, ex-gasoline sales rose 1.1% mom.
Sterling retreats mildly as the last YouGov polls predicted that Conservative could win a much slimmer majority in Thursday’s elections, than projected two weeks ago. The possibility of a hung parliament cannot be ruled out.
The results of the final MRP model suggested the following results:
That is, Conservative could get a majority of only 28 seats. Back on November 28, Conservatives were projected to get 359 seats with majority of 68. Labor was predicted to win 211 seats only. Also, YouGov added that the margin of error could put the final number of Conservatives seats from 311 to 367. And, “this means that we absolutely cannot rule out the 2019 election producing a hung Parliament – nor can we rule out a larger Conservative majority.”
EU appeared to be still working on avoiding trade war escalation with US. Earlier this week, WTO gave US the go ahead for tariffs on as much as USD 7.5B of EU imports, as retaliation for EU subsidies to Airbus. US Trade Representative quickly announced 10% on large civil aircraft and 25% on agricultural and other products, effective October 18.
EU has already drafted retaliation plan to target US 4B of American goods, on a WTO case from 22 years ago. But European Trade Commissioner Cecilia Malmstrom said that “until the American tariffs take effect, we haven’t given up” on reaching a “negotiated solution”. Yet, she added, “we are looking at all options and we are discussing that with member states.”
In the US, Specialty Food Association warned in a statement that the new tariffs would decrease sales and adversely impact employment at 14,000 specialty food retailers and 20,000 other food retailers. Distilled Spirits Council warned that the tariffs could lead to a loss of approximately 13,000 jobs, including truckers, farmers, and bartenders and servers in the hospitality industry.
New Zealand BusinessNZ Performance of Manufacturing Index was unchanged at 48.4 in September, signaling same rate of contraction in the sector. The sub-index of new orders (50.1) recovered from its decline in August to just keep its head above water for September. Also, employment (50.0) showed no change following four consecutive monthly declines. However, the weak new order results in recent months meant production (46.2) fell to its lowest result since April 2012. In addition, deliveries of raw materials (46.4) fell to its lowest since March 2011.
BusinessNZ’s executive director for manufacturing Catherine Beard said that “Overall, while it is good to see the sector not declining further, it remains stuck in a tight band of contraction. The key to lifting it back into expansion will be a sustained boost to both new orders and production in the months ahead.” BNZ Senior Economist, Craig Ebert said that “if it’s a manufacturing recession then it’s an extremely mild one compared to what the industry went through in 2008/09”.
Japan is seeing limited impact as US ends the Iranian oil sanction waiver for the country. Trade and Industry Minister Hiroshige Seko said in a regular press conference that Japan has been lowering its reliance on Iranian oil import, which only accounts for 3%. And, there is no need to tap the national oil reserve with decision of the US.
Though, he noted, “we will closely watch international oil markets and exchange views with Japanese companies involved in crude imports and may consider taking necessary measures.”
The US decision to end the waiver will force eight countries, including China, Greece, India, Italy, Japan, South Korea, Taiwan and Turkey, to switch their oil supplies from Iran to other countries, starting May 2.
BoJ released minutes of the April 26-27 meeting today. The only surprise out of that meeting was that BoJ dropped the time frame it set for achieving the 2% inflation target. The minutes provided more details on the discussions. Many members believed that the timing of reaching the 2% inflation was “merely a projection”. At the some time, “some market participants perceived this projection as a deadline for achieving 2 percent inflation, linking changes in said timing to policy adjustments, and this view was deeply entrenched among them.”
Some members expressed that “attracting excessive attention merely to forecast figures would not be appropriate from the perspective of communication with the markets”. And, most members expressed that ” it was appropriate to cease providing a description on the projected timing of achieving the price stability target”. And that was with the aim to clarify that the timing was “not a specific deadline” for meeting inflation target. Nonetheless, one member expressed the concern that dropping the time frame could “weaken the effects of the commitment” of BoJ to hit target.
Australian Treasurer Josh Frydenberg said the effective unemployment rate is “around 13.3% right now” and ” “that is a large number of people reflecting the economic challenges that we see right now.” His number is nearly double of the official data of 7.1%.
“We have seen a big reduction in hours worked in the months since the Covid pandemic first hit in Australia,” Frydenberg further explained. “That just reflects the enormous economic challenge that we face and the impact it’s having on the unemployment rate.”
Frydenberg added that there will be a “second phase of income support” to be delivered with the fiscal and economic statement on July 23. “It will be governed by the same principles that have defined our economic measures to date, namely that our support will be targeted, it will be temporary, it will be designed based on existing systems and it will also be demand driven,”
BoJ board member Makoto Sakurai noted that prices in Japan were coming “under strong pressure” and inflation “may not accelerate much” even after prices growth turned positive. Though, it’s not something “unique to Japan”, but a “common problem” for major advanced economies.
Sakurai reiterated that BoJ’s pledge to maintain an accommodative monetary policy stance was playing a critical role in support the economy. The central bank “must underpin inflation expectations”, and “ensure they are in positive territory.
“At present, financial institutions have sufficient capital so there is no big concern over Japan’s banking system. But we need to be prepared to take swift action, with a close eye both on the economy and the banking system,” he also noted.
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BoJ Kuroda: We have no choice other than continued monetary easing
BoJ Governor Haruhiko Kuroda said over the weekend, “somewhat miraculously, now we have 2.4% inflation. But almost wholly caused by the international commodity price hike, energy and food.”
“So we expect that by the end of this year, maybe inflation rate may approach 2 or 3%, but next year, inflation rate again decelerate toward 1.5%,” he said.
“We have no choice other than continued monetary easing until wages and prices rise in a stable and sustainable manner.”