SNB Vice Chairman Martin Schlegel said yesterday, “we cannot rule out further interest increases at present,” even though inflation is forecast to fall back to 2.4% in 2023, and 1.8% in 2024.
“The maintenance of price stability has absolute priority for the SNB,” he added.
Meanwhile, Schlegel also expects a weak growth dynamic in the coming quarters.
UK Prime Minister Boris Johnson and Irish Prime Minister Leo Varadkar are scheduled to meet in early September. But ahead of that, Varadkar’s spokesman clearly indicated there is no prospect of renegotiating the Irish backstop in Brexit withdrawal agreement. The spokesman noted that the discussions “would give both sides an opportunity to gain a better understanding of their respective positions. As has repeatedly been made clear, the withdrawal agreement and the backstop are not up for negotiation.”
In the other hand, Johnson’s chief EU adviser, David Frost, is expected to visit Brussels again in the coming days. Previously, it’s reported that Frost has told EU of the new, central scenario of no-deal Brexit of Johnson. But that was denied by Downing Street. Johnson will also meet the European commission president, Jean-Claude Juncker, for the first time at a G7 meeting in Biarritz at the end of this month.
Canadian Dollar tumbles broadly today as dragged by risk off sentiments, as well as the fall in oil price. WTI is pressing 70 handle after OPEC+ agreed over the weekend to boost production by 400k barrels a day, reversing some of the pandemic production cuts.
EUR/CAD surges to as high as 1.5041 today as rebound from 1.4580 resumes and accelerates. Current development now suggest that whole pattern from 1.5991 has completed at 1.4580 already, on bullish convergence condition in daily MACD. Next focus is 38.2% retracement of 1.5991 to 1.4580 at 1.5119. Sustained break there will pave the way to 61.8% retracement at 1.5452 and above.
As for AUD/CAD, focus is now on 0.9394 resistance. Firm break there and sustained trading above 55 day EMA confirm short term bottoming at 0.9245. That would also argue that correction form 0.9991 has completed after drawing support from 0.9247 key support level. Stronger rise should then be seen to 38.2% retracement of 0.9991 to 0.9245 at 0.9530, and then 61.8% retracement at 0.9706.
US PMI Services was finalized at 51.4 in December, up from November’s 50.8. PMI Composite was finalized at 50.9, up from prior month’s 50.7.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:
“Some New Year cheer is provided by the PMI signalling an acceleration of growth in the vast services economy, which reported its largest rise in output for five months in December. The improvement overshadows a downturn recorded in manufacturing to indicate that the overall pace of US economic growth likely accelerated slightly at the end of the year.
“Some support to financial services in particular is coming from the recent loosening of financial conditions amid growing hopes of interest rate cuts in 2024. Growth nevertheless remains subdued by standards seen over the spring and summer, with the struggling manufacturing sector dampening demand for business-to-business services and consumers remaining far less inclined to spend on luxuries such as travel and recreation than earlier in the year.
“The more challenging demand environment has dampened firms’ pricing power, squeezing service sector selling price inflation to the lowest for over three years on average during the fourth quarter. With sticky service sector inflation being a key area of concern among Fed policymakers, the slower rate of price increase in December is welcome news.”
Fed raised federal funds rate to 2.00-2.25%, on unanimous vote. Full statement below.
Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2 to 2-1/4 percent.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Richard H. Clarida; Esther L. George; Loretta J. Mester; and Randal K. Quarles.
US initial jobless claims rose 4k to 215k in the week ending August 24, matched expectations. Four-week moving average of initial claims dropped -0.5k to 214.5k. Continuing claims rose 22k to 1.698m in the week ending August 17. Four-week moving average of continuing claims dropped 250 to 1.697m.
Advanced goods trade deficit dropped -2.5% to USD 72.3B in July, smaller than expectation of USD 74.0B. Exports of goods for July were USD 137.3B, USD 0.9B more than June exports. Imports of goods for July were USD 209.7B, USD 0.9B less than June imports. Wholesale inventories rose 0.2% mom, matched expectations.
RBA raises the cash rate target by 25bps to 3.35% as widely expected. The Board also expects that “further increases in interest rates will be needed over the months ahead”. To assess “how much” further hike is needed, close attention will be paid to “developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”
The central noted that underlying inflation at 6.9% in December was “high than expected” with “strong domestic demand “adding to the inflationary pressures in a number of areas of the economy.” Inflation is expected to decline to 4.75% this year, then to around 3% by mid-2025. Medium-term inflation expectation remain” well anchored”.
GDP growth is expected to slow to 1.50% in 2023 and 2024. Unemployment rate is projected to rise form current 3.50% to 3.75% by the end of 2023, and then 4.50% by mid-2025.
Bundesbank said in the monthly report that German economic growth remained subdued in Q1. The main reasons include weak industrial production, falling auto exports and deteriorating manufacturing sentiment. Manufacturing sector would drag down overall economic performance for the third straight quarter.
On the other hand, construction and private consumption should provide support to the economy. Employment also continues to rise despite slowdown. Bundesbank added that private consumption could pickup significantly as signaled by strong increase in retail sales.
European stocks dive while JPY rebound strongly after Trump’s Syria warning.
In his usual morning tweet, Trump wrote “Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia, because they will be coming, nice and new and “smart!” You shouldn’t be partners with a Gas Killing Animal who kills his people and enjoys it!
In the current 4H heatmap, JPY and CHF are the clear winners. GBP started to pare back recent gains after weaker than expected industrial and manufacturing production released earlier today. Commodity currencies, AUD, CAD and NZD are also pressured as risk aversion resurfaces.
WHO’s China Representative, Gauden Galea, said in an Bloomberg interview that it’s absolutely impossible to reach a conclusion at this stage that China’s containment measure on coronavirus has worked. He added, “the best sign is when one sees numbers reach a peak and then decline well beyond the incubation period. We are not in that stage yet”.
Galea also said WHO is now closely watching 10 provinces in China for signs of new infection hot spots. The provinces include Zhejiang, Guangdong and Henan. Recent decline in new cases in Hubei gives a “much needed sigh of relief”. But it’s accompanied by a rise in numbers of infections in other provinces.
Several Federal Reserve officials welcomed the US June CPI data released yesterday, which showed better-than-expected disinflation progress. This has intensified expectations that Fed would start cutting interest rates in September, with Fed fund futures indicating a 93% chance. More importantly, there is now over 90% probability of two rate cuts by the end of the year, lowering rates to 4.75-5.00%.
Chicago Fed President Austan Goolsbee described the latest inflation data as “excellent,” noting the significant deceleration in shelter inflation as “profoundly encouraging.” He added that “this is what the path to 2% looks like.”
St. Louis Fed President Alberto Musalem also saw the June CPI data as “encouraging further progress toward lower inflation.” He emphasized the need for greater confidence that inflation will converge to 2% before lowering rates. Musalem noted the importance of seeing a moderation in demand and data that shows inflation converging to 2% by mid to late next year, adding, “we’re on a good path.”
San Francisco Fed President Mary Daly highlighted the broader economic context, saying, “With the information we have received today, which includes data on employment, inflation, GDP growth, and the outlook for the economy, I see it as likely that some policy adjustments will be warranted.” However, she noted that the timing of these adjustments is still uncertain.
Cleveland Federal President Loretta Mester said, “at this juncture, the incoming data have not changed my view that we will need to bring the fed funds rate above 5% and hold it there for some time to be sufficiently restrictive to ensure that inflation is on a sustainable path back to 2%.”
“Setting aside what financial market participants expected us to do, I saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5%,” she said.
“It is welcome news to see some moderation in inflation readings since last summer, but the level of inflation matters and it is still too high,” She said. Adding that the January CPI data “showed a jump in the monthly rate of overall inflation and no improvement in underlying inflation”
Mester said “I continue to see the risks to the inflation forecast as tilted to the upside for a number of reasons.” She also said “the transition back to price stability will take some time and will not be without some pain.”
The impact of Fed policy actions “will result in growth well below trend this year and some cooling off in labor markets, with slower employment growth and an increase in the unemployment rate from its very low level.”
ECB Governing Council member Martins Kazaks pushed back on talks that the central bank would cut interest rates by the end of this year. He said he failed to see a “rationale” for that.
“It would take a deep recession with a sizeable jump in unemployment for inflation to sink and thus push for rate cuts,” the Latvian central bank governor said. “But that is not likely, given the current macro outlook.”
“It is possible for core inflation to continue trending up even as headline inflation is coming down, for instance, due to swings in energy prices,” he said. “In my view, core inflation currently is a key gauge for inflation persistence and policy decisions.”
He expects interest rate to rise “well into restrictive territory” but declined to estimate the terminal rate. “Uncertainty is too high, and we shall find it step-by-step,” he said.
Germany PMI Manufacturing rose from 39.6 to 40.7 in October, a 5-month high. PMI Services fell from 50.3 to 48.0. PMI Composite fell from 46.4 to 45.8.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:
“With the HCOB PMI indices baked into our GDP nowcast, we are calculating a -0.4 percent slip in GDP this quarter, after an estimated -0.8 percent slide the quarter before. If these nowcasts hit the mark, this would result in a -0.8 percent overall growth rate for 2023. This would make the German government’s -0.4 percent shrinkage call seem pretty rosy.
“The PMI results show that the downturn is broad based. Manufacturing output continues to fall at a steep rate and activity in the services sector, which grew last month, swung into the red again.
“Input prices in the German services sector are continuing to rise at an unusual high rate. Increased energy prices and high wage pressures are most likely at the core of this development. Firms are still managing to roll some of those inflated costs onto the customer’s tab, and October did not see much change in that. Thus, there is no reason to pull the plug on inflation concerns.”
UK PMI Manufacturing was finalized at 48.9 in November, revised up from 48.3, down from October’s 49.6. Markit noted that output, new orders and employment all declined. Stocks depleted and purchasing reduced following Brexit delay.
Rob Dobson, Director at IHS Markit, which compiles the survey:
“November saw UK manufacturers squeezed between a rock and hard place, as the uncertainty created by a further delay to Brexit was accompanied by growing paralysis ahead of the forthcoming general election. Downturns in output and new orders continued amid a renewed contraction in exports. The pace of job losses also hit a seven-year high as firms sought to reduce overheads in the face of falling sales. Destocking at manufacturers and their clients following the latest Brexit delay was a major contributor to the weakness experienced by the sector. Inflationary pressures meanwhile showed signs of moderating further, with input costs falling slightly for the first time since March 2016.
“Signs of a two-speed economy persisted, with intensifying business uncertainty leading to a further steep drop in demand for machinery and equipment as firms cut back on investment, but rising demand for consumer goods suggests that households continue to provide some support to the economy.
“Manufacturers across all sectors will be hoping that the New Year brings clarity on the political, trade and economic fronts, providing a more certain foundation to plan and rebuild as the next decade begins.”
Germany Gfk consumer sentiment for September dropped from -30.9 to -36.5, Worse than expectation of -31.5. In August, economic expectations improved from -18.2 to -17.6. Income expectations ticked up from -45.7 to -45.3. Propensity to buy dropped from -14.5 to -15.7. Propensity to save rose 17.6 pts to 3.5.
“The sharp increase in the propensity to save this month means that the consumer sentiment is continuing its steep descent. It has once again hit a new record low,” explains Rolf Bürkl, GfK consumer expert.
“The fear of significantly higher energy costs in the coming months is forcing many households to take precautions and put money aside for future energy bills. This is further dampening the consumer sentiment, as in return there are fewer financial resources available for consumption elsewhere.”
UK Prime Minister Theresa May’s office said UK Prime Minister Theresa May and European Commission Jean-Claude Juncker held phone conversation at Sunday night. But talks remained “deadlocked” and thus, there is no plan for May to travel to Brussels again today. Cabinet minister Andrea Leadsom, urged fellow Tories to support May’s deal. And, that would mean “that we can move on” while leaving open the possibility to “potentially amend how we do this.”
Some Conservative MPs are reported to ask May to pull the Brexit meaningful vote on Tuesday, because it’s rather meaningless to hold a vote that will certainly be defeated. But there were also talks that May is planning to push for a vote on a “hypothetical” deal on Tuesday. It could be with a certain Irish backstop arrangement with Attorney General Geoffrey Cox’ input. Then EU could be forced to concede should there be a Commons majority.
Ifo institute warned that the coronavirus pandemic could cost Germany’s economy between EUR 255B and EUR 729B. President Clemens Fuest said such costs would “exceed everything known in Germany from economic crises or natural disasters in recent decades. ” And, “depending on the scenario, the economy shrinks by 7.2 to 20.6 percent points”.
“If the economy comes to a standstill for two months, depending on the scenario, costs come to between 255 and 495 billion euros. Economic output then shrinks by 7.2 to 11.2 percentage points a year, “says Fuest.
In the best scenario, it is assumed that economic output will decline to 59.6 percent for two months, recover to 79.8 percent in the third month and finally reach 100 percent in the fourth month.
“With three months of partial closure, the costs already reach 354 to 729 billion euros, which is a 10.0 to 20.6 percentage point loss in growth,” says Fuest.
ECB Executive Board member Fabio Panetta said today that “The conditions that we see today do not justify reducing the pace of purchases, and a discussion about phasing out the PEPP is still clearly premature.”
“In fact, we are now seeing a further undesirable increase in yields after the rise we observed earlier in the year,” he added
Also, “we are far from the point where we can see self-sustained growth,” Panetta said. “A premature withdrawal of policy support would risk suffocating the recovery.”
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ECB Accounts: Support from sustained pace of net PEPP purchases deemed essential
In the accounts of ECB’s September 8-9 meeting, Governing Council members concurred with the assessment that “an accommodative monetary policy stance remained”. Also, “policy support from a sustained pace of net purchases under the PEPP, along with the other instruments and the recalibrated forward guidance, was deemed essential”.
Financing conditions had “had remained favourable or had loosened further” since June, and was “visible across a broad spectrum of indicators”. Inflation outlook had a “significant improvement over the course of the year”. However, the near-term increase in inflation was “largely driven by temporary factors that would fade in the medium term and not call for policy tightening.”
Regarding the reduction in PEPP purchase pace in Q4, on the one hand, it was argued that “a symmetric application of the PEPP framework would call for a more substantial reduction in the pace of purchases”. On the other hand, “reference was made to the recent repricing in nominal bond yields, which called for a prudent reduction in the pace of purchases”.
Also, it’s noted that “markets were already expecting an end to net asset purchases under the PEPP by March 2022”, but such expectation was “not showing a significant impact on financing conditions”.
Overall, all members agreed to “moderately scale down the pace of purchases under the PEPP”.
Full accounts here.