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665 matches for " hike":
Mexico's central bank likely will pause its monetary tightening on Thursday, keeping the main rate at 6.5%. A hike this week would follow five consecutive increases, totalling 350bp since December 2015, when policymakers were first overwhelmed by the MXN's sell-off.
Banxico's likely will deliver the widely-anticipated rate hike this Thursday. Policymakers' recent actions suggests that investors should expect a 50bp increase, in line with TIIE pric ing and the market consensus. The balance of risks to inflation has deteriorated markedly on the back of the "gasolinazo", a sharp increase in regulated gasoline prices imposed to raise money and attract foreign investment.
The MPC signalled yesterday that it is actively considering a May rate hike, stating that rates likely will "...need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated at the time of the November Report".
The probability of a rate hike on June 14, as implied by the fed funds future, has dropped to 90%, from a peak of 99% on May 5.
In the wake of last week's national accounts release, markets judge that the probability of a Bank Rate hike at the August 2 MPC meeting has increased to about 65%, from 60% beforehand.
The MPC restated its commitment to an "ongoing tightening of monetary policy" yesterday, but provided no new guidance to suggest that the next hike is imminent.
We expect the BoK to hike this month, believing that it's necessary to curtail household debt growth now, in order to prevent a sharper economic slowdown as the Fed hiking cycle continues, China slows, and trade risks unfold.
The odds of a hike this month have increased in recent days, though the chance probably is not as high as the 82% implied by the fed funds future. The arguments against a March hike are that GDP growth seems likely to be very sluggish in Q1, following a sub-2% Q4, and that a hike this month would be seen as a political act.
The September Banxico minutes restated that the U.S. Fed's first interest rate hike is the key event awaited by Mexican policymakers. Banxico's board of governors voted unanimously on September 21st to keep the main interest rate at a record-low 3%.
Banxico hiked its policy rate by 25bp to a cyclical-high of 8.0% yesterday, in line with market expectations.
Argentina's central bank unexpectedly hiked its main interest rate, the 7-day repo rate, by 300bp to 30.25% last Friday, in an unscheduled decision.
In the wake of last week's rate increase, the fed funds future puts the chance of another rise in September at just 16%. After hikes in December, March and June, we think the Fed is trying to tell us something about their intention to keep going; this is not 2015 or 2016, when the Fed happily accepted any excuse not to do what it had said it would do.
We expect the Fed to leave rates on hold today, but the FOMC's new forecasts likely will continue to show policymakers expect two hikes this year, unchanged from the March projections. We remain of the view that September is the more likely date for the next hike, because we think sluggish June payrolls will prevent action in July.
The Fed will hike by 25 basis points today, but what really matters is what they say about the future, both in the language of the statement and in the dotplot for this year and next.
The Fed is on course to hike again in December, with 12 of the 16 FOMC forecasters expecting rates to end the year 25bp higher than the current 2-to-21⁄4%; back in June, just eight expected four or more hikes for the year.
Following this week's 25bp Fed hike, the PBoC hiked the main interest rates in its corridor by... 5bp. The move was unexpected so the RMB strengthened modestly; commentary is full of how this means the deleveraging drive is serious.
Japan's PPI data yesterday confirmed that October was a turning point for prices--due to the consumption tax hike--despite the surprising stability of CPI inflation in Tokyo for the same month.
A rate hike from the Fed this week would be a gigantic surprise, and Yellen Fed has not, so far, been in the surprise business. It would be more accurate to describe the Fed's modus operandi as one of extreme caution, and raising rates when the fed funds future puts the odds of action at close to zero just does not fit the bill.
From a bird's-eye perspective, the argument for continued steady Fed rate hikes is clear.
Japan's retail sales data--due out on Thursday-- have been badly affected by the October tax hike.
New York Fed president Dudley toed the Yellen line yesterday, arguing that the effects of "...a number of temporary, idiosyncratic factors" will fade, so "...inflation will rise and stabilize around the FOMC's 2 percent objective over the medium term.
The upturn in the new monthly measure of GDP in May, released yesterday, was strong enough--just--to suggest that the MPC likely will raise Bank Rate at its next meeting on August 2.
In yesterday's Monitor, we laid out the prime causes of China's weekend announcement, cutting the reserve requirement ratio.
The Office for National Statistics yesterday released the last major batch of output data before the preliminary estimate of Q3 GDP is published on October 25, just one week before the MPC's key meeting.
MPs look set to take a decisive step next Tuesday towards removing the risk of a calamitous no-deal Brexit at the end of March.
LatAm economies this year have faced a tough external environment of subdued commodity prices, weaker Chinese growth, the rising USD, and the impending Fed lift-off. At the domestic level, lower public spending, low confidence, and economic policy reform have clashed with above-target inflation, which has prevented central bankers from loosening monetary policy in order to mitigate the external and domestic headwinds. In these challenging circumstances, LatAm growth generally continues to disappoint, though performance is mixed.
It often is argued that the MPC will raise interest rates in November--even if the economic data are not pressuring the Committee to tighten--because markets would go into a tailspin if the MPC failed to meet their expectations.
Yesterday's labour market data brought further signs that wage growth is recovering from its early 2017 dip.
Brazil's Monetary Policy Committee--Copom--increased the Selic rate by 50bp to 13.75% on Wednesday, as widely expected. The short statement was unchanged from the previous four meetings, indicating the decision was unanimous and without bias, maintaining uncertainty about the next steps. Many Copom members, especially its President, Alexandre Tombini, have signaled that they intend to persevere in their attempt to bring the inflation rate down to 4.5% by the end of 2016.
The Bank of England will be dragged into the political arena on Thursday, when it sends the Treasury Committee its analysis of the economic impact of the Withdrawal Agreement and the Political Declaration, as well as a no-deal, no- transition outcome.
The Fed will raise rates by 25 basis points on Wednesday, but as usual after a widely-anticipated policy decision, most of our attention will be focused on what policymakers say about their actions, and how their views on the economy have changed.
Markets will be extremely sensitive to economic data in the run-up to the MPC's next meeting on August 3, following signals from several Committee members that they think the cas e for a rate rise has strengthened.
February's industrial production and construction output data leave us little choice but to revise down our forecast for quarter-on-quarter GDP growth in Q1 to 0.2%, from 0.3% previously.
The resolution of tensions in Italy and aboveconsensus U.K. PMIs for May last week persuaded investors that the MPC likely will press on and raise interest rates soon.
The Fed's decisions over the next few months hinge on the relative importance policymakers place on the apparent slowdown in payroll growth and the unambiguous acceleration in wages. We qualify our verdict on the payroll numbers because the January number was very close to our expectation, which in turn was based largely on an analysis of the seasonals, not the underlying economy.
Policymakers in Colombia last Friday took aim at inflation by hiking interest rates by 50 basis points to 7.0%. The consensus expectation was for a 25bp increase. BanRep's bold move, which came on the heels of six consecutive 25bp increases since November, took Colombia's main interest rate to its highest level since March 2009.
Japan's average year-over-year wage growth slowed sharply in May, but this mainly was a correction of the April spike.
The point when businesses and households can breathe a sigh of relief about Brexit looks set to be delayed again this week.
The Fed likely will do nothing today, both in terms of interest rates and substantive changes to the statement. We'd be very surprised to hear anything new on the Fed's plans for its balance sheet.
We're guessing Fed Chair Yellen would have preferred to have another acceleration in hourly earnings and a dip in the unemployment rate along side the hefty 211K leap in November payrolls, but no matter. At its October meeting, the Fed wanted to see "some further improvement in the labor market", and by any reasonable standard a 509K total increase in payrolls in two months fits the bill.
Our conviction that the economy continues to grow at a snail's pace increased yesterday following the release of August's Markit/CIPS services survey.
Fed Chair Yellen's speech Friday was remarkably blunt: "Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate."
Japan returned the ruling LDP coalition to power in an upper house election over the weekend.
We chose last week to ignore the payroll warning signal from the ISM non-manufacturing employment index, which rolled over in January and February, because the danger seemed to have passed. The ISM is not always a reliable indicator--the drop in the index in early 2014 was not replicated in the official data, but the plunge in early 2015 was--and usually it operates with a very short lag, just a month or two.
China's FX reserves data pointed to an about-turn in net capital flows in May, with capital leaving the country again after two months of net inflows, and a current account deficit in Q1.
With little reason to doubt that interest rates will remain at 0.50% on Thursday, focus has turned to what signal the MPC will give about future policy, via its economic forecasts and commentary.
Business surveys released over the last week have made us more confident in our call that quarter-on- quarter GDP growth will recover to about 0.4% in Q2, from Q1's weather-impacted 0.1% rate.
We don't believe that payrolls rose only 138K in May. History strongly suggests that when the May payroll survey is conducted relatively early in the month, payroll growth falls short of the prior trend.
A series of events have forced markets and analysts to re-evaluate their assumption that Bank Rate will remain on hold throughout 2017. First, the minutes of the MPC's meeting had a hawkish tilt.
The PBoC doesn't publicly schedule its meetings, but in recent years has tended to make moves after Fed decisions.
We are sticking to our call for a weak first half in Japan, despite likely upgrades to Q1 GDP on Monday.
Predictably, the Bank of England's estimate that GDP would plunge by 8% in the first year after a disorderly no-deal, no transition Brexit and that interest rates would need to rise to 5.5% to contain inflation grabbed the headlines yesterday.
At a stroke, the October payroll report returned the short-term trend in payroll growth to the range in place since 2011, pushed the unemployment rate into the lower part of the Fed's Nairu range, and lifted the year-over-year rate of growth of hourly earnings to a six-year high. The FOMC has never quantitatively defined what it means by "some further improvement in the labor market", its condition for increasing rates, but if the October report does not qualify, it's hard to know what might fit the bill. We expect a 25bp increase in December.
The MPC's hawks are framing the interest rate increase they want as a "withdrawal of part of the stimulus that the Committee had injected in August last year", arguing that monetary policy still would be "very supportive" if rates rose to 0.5%, from 0.25%.
China's CPI inflation rose to 2.1% in July, from 1.9% in June.
The pick-up in GDP growth in Q3 means that we now expect a majority of MPC members to vote to raise interest rates next week.
We now think that Banxico will keep interest rates on hold at 7.50% at its Thursday meeting, as the MXN has stabilized in recent days, despite rising geopolitical risks.
The passage of the House tax cut bill does not guarantee that the Senate will follow suit with its own bill, still less that both chambers will then be able to agree on a single bill which can then b e signed into law. As
Brazil's domestic economic outlook has not changed much recently.
The FOMC did nothing yesterday and said nothing significantly different from its June statement, as was universally expected.
Fed Chair Powell delivered no great surprises in his semi-annual Monetary Policy Testimony yesterday, but he did hint, at least, at the idea that interest rates might at some point have to rise more quickly than shown in the current dot plot: "... the FOMC believes that - for now - the best way forward is to keep gradually raising the federal funds rate [our italics]."
We expect the Fed not to raise rates today. In the eyes of the waverers who will need to change their minds in order to trigger action, the latest data-- especially wages--do not make a compelling case for immediate action, and the obvious fragility of markets strengthens the case for doing nothing today. This is a Fed which in recent years has greatly preferred to err on the side of caution. With no immediate inflation threat, the waverers and the doves will take the view that the cost of delaying the first move until October or December is small. As far as we can tell, they are the majority on the committee.
The Fed yesterday formally adopted outcome-based forward guidance, setting out the conditions under which rates will rise: "The Committee... expects it will be appropriate to maintain this target range [0-to- 0.25%] until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time."
It is looking increasingly likely that core inflation, which already has fallen to 2.1% in May, from a peak of 2.7% last year, will slip below 2% next year.
After recent interventionist moves and plans in Mexico from AMLO's incoming administration and his political party, uncertainty and soured sentiment are the name of the game.
On the face of it, Japanese GDP came thumping home in Q1, rising 0.5% quarter-on-quarter, after the 0.4% increase in Q4.
The Korean unemployment rate edged back up to 3.7% in November from October's 3.6%. Young graduates--the usual suspects--accounted for most of the rise.
Central banks in Chile and Peru kept their reference rates unchanged last week, as expected, as inflation pressures in both countries are starting to ease. But different economic outlooks are emerging. Chile's economy continues to disappoint, while Peru's is picking up. Indeed, Peru is the only country in the region with clear positive momentum.
The MPC's "Super Thursday" communications left markets a little more confident that interest rates will rise again in May, shor tly after the likely start of the Brexit transition period.
The MPC took an unprecedented step last week to pave the way for an interest rate rise.
The PBoC has let up on its open-market operations after allowing bond yields to move higher again in October.
Korea's 20-day export growth came in weaker than we anticipated earlier this week. Granted, year-over- year growth rebounded to 14.8% in May, from 8.3% in April.
Mexico's central bank, Banxico, capitulated in the face of the rapidly depreciating MXN and unexpectedly increased interest rates by 50bp to 3.75% on Wednesday, following an unscheduled meeting the day before. The decision was a unanimous, brave step, showing that policymakers are extremely worried about the FX sell-off, despite growth still running below potential.
The MPC is holding its nerve and not about to join other central banks in providing fresh stimulus.
The Fed will raise rates by 25 basis points today, 11 years and six months since the previous tightening cycle began, in June 2004. This tightening, like that one, will end in recession eventually, but this time around we expect a garden-variety business cycle downturn rather than a massive financial crash and a near-death experience for global capitalism.
The MPC likely will raise interest rates on Thursday, for the first time since July 2007, in response to the uptick in GDP growth and the upside inflation surprise in Q3.
Markets currently see a 50/50 chance that the MPC will raise Bank Rate in August and will be looking for a strong signal on Thursday that the next meeting is "in play".
Bank Governor Mark Carney reiterated in a speech yesterday that he wants to see sustained momentum in GDP growth, domestic cost pressures firm and core inflation rise further towards 2%, before raising interest rates. We doubt he will have long to wait on the last two points, given the tightness of the labour market.
Markets greatly cheered the Conservatives' landslide victory on Friday, but remained cautious on the potential for the MPC to return to the tightening cycle it started in 2017.
The PBoC hiked its 7-day reverse repo rate by 5bp yesterday, stating that the move was a response to the latest Fed hike.
Short of saying "We're going to hike rates in two weeks' time", Dr. Yellen's view of the immediate economic and policy outlook, set out in her speech yesterday, could hardly have been clearer. Yes, she threw in the usual caveats: "...we take account of both the upside and downside risks around our projections when judging the appropriate stance of monetary policy", and saying the FOMC will have to evaluate the data due ahead of this month's meeting, but her underlying message was straightforward.
The FOMC statement did enough to keep alive the idea that rates could rise in March, but the ball is now mostly in Congress' court. If a clear plan for substantial fiscal easing has emerged by the time of the meeting on March 15, policymakers can incorporate its potential impact on growth, unemployment and inflation into their forecasts, then a rate hike will be much more likely.
With the FOMC decision now just seven days away, the forcefulness of recent Fed speakers has led many analysts to argue that only a spectacularly bad payroll report, or an external shock, can prevent a rate hike next week. External shocks are unpredictable, by definition, and we think the chance of a startlingly terrible employment report is low, though substantial sampling error does occasionally throw the numbers off-track.
The Governor's comments late last week successfully recalibrated markets, which had concluded that a May rate hike was virtually certain, despite the MPC's deliberately vague guidance.
The Bank of Korea finally pulled the trigger, raising its base rate to 1.75% at its meeting on Friday. After a year of will-they-or-won't-they, five of the Monetary Policy Board's seven members voted to add another 25 basis points to their previous hike twelve months ago.
We previewed the FOMC meeting in detail yesterday -- see here -- but to recap briefly, we expect a 25bp rate hike, with no significant changes in the statement, and a repeat of the median forecasts of three rate hikes this year.
The next nine weeks bring three jobs reports, which will determine whether the Fed hikes again in September, as we expect, and will also help shape market expectations for December and beyond.
Last week's ECB meeting--see here--made it clear that the central bank does not intend to jump the gun on rate hikes next year, even as QE is scheduled to end in Q4 2018.
LatAm investors' concerns about U.S. monetary policy expectations and the broad direction of the USD should on the back burner until the Fed hikes again, likely in September. This will leave room for country-specific drivers to take centre stage. That should support Mexico's MXN, which already has risen 14% year-to-date against the USD, erasing its losses after the US election last November.
The Japanese government's plan to smooth out the consumption cliff-edge generated by October's sales tax hike is either going too well, or consumers now are facing fundamental headwinds.
Markets still see a near-40% chance of the MPC raising Bank Rate by the end of this year--the same as at the start of this week--despite the notable absence of comments from the Committee yesterday aimed at preparing the ground for a near term hike.
Our view on the trade data last week was that U.S. tariff hikes have caused minimal damage, so far. China's tariff increases on imports to date have resulted in stockpiling, with little evidence in the CPI of any inflationary pressure.
We are revising our forecast for Fed action this year, taking out two of the four hikes we had previously expected. We now look for the Fed to hike by 25bp in September and December, so the funds rate ends the year at 0.875%. The Fed's current forecast is also 0.875%, but the fed funds future shows 0.6%.
LatAm assets have struggled in recent days as it has become clear that the Fed will hike next week. But we don't expect currencies to collapse, as domestic fundamentals are improving and the broader external outlook is relatively benign.
China's firms aren't passing on tax hikes after all. China takes full advantage of previous oil price declines. Japan's core machine orders better than expected, but that won't help Q2. Japan is heading for a spell of sustained PPI deflation in H2. Better May jobs report will help to keep any BoK rate cuts at bay.
After a busy week of data, and a holiday weekend ahead, it's worth stepping back a bit and evaluating the arguments over the timing of the next Fed hike. The first question, though, is whether the data will support action, on the Fed's own terms. The April FOMC minutes said: "Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June".
It's hard to imagine that Fed Vice-Chair Dudley would choose to say yesterday that he finds the case for a September rate hike "less compelling than it was a few weeks ago" without having had a chat beforehand with Chair Yellen. Mr. Dudley pointed out that the case "could become more compelling by the time of the meeting", depending on the data and the markets, but he also argued that developments in markets and overseas economies can "impinge" on the U.S., and that there "...still appears to be excess slack in the labor market". These ideas, especially on the labor market but also on the impact of events overseas, are not shared by the hawks, but we can't imagine Mr. Dudley disagreeing in public with Dr. Yellen. We have to assume these are her views too.
Data and events have gone against the idea of further BoK policy normalisation since the November hike.
The Fed surprised no-one by raising rates 25bp yesterday and leaving in place the median forecast for three hikes next year and two next year.
Yesterday, China finally retaliated against Mr. Trump's Friday tariff hikes, promising to increase tariffs on around $60B-worth of U.S. goods.
CPI inflation held steady at 3.0% in January, above the consensus by one tenth and thus pushing up the market-implied probability of a May rate hike to 65%, from 62% earlier this week.
We have consistently flagged the likelihood that Japan's government would boost spending after the consumption tax hike was implemented.
The PBoC has left rates unchanged, so far, in the wake of the Fed hike.
Mark Carney's assertion that "now is not yet the time to raise rates" fell on deaf ears last week. Markets are pricing-in a 20% chance that the MPC will increase Bank Rate at the next meeting on August 3, up from 10% just after the MPC's meeting on June 15, when three members voted to hike rates.
Investors will increase their focus on exchange rates as the US presidential election and the Fed's next rate hike approach. Markets are becoming concerned that a surge in the USD could trigger another spike in LatAm currency volatility, depressing the good year- to-date performance of most local market assets.
You'd be hard-pressed to read the minutes of the September FOMC meeting and draw a conclusion other than that most policymakers are very comfortable with their forecasts of one more rate hike this year, and three next year.
Banxico is one of the few central banks in LatAm to have hiked rates in 2016, and we expect it to remain relatively hawkish in the face of external risks.
With the exception of Mexico, November inflation was or below expectations in LatAm. Mexico's overshoot increases the likelihood that Banxico will hike its reference rate at the next board meeting on December 20.
Banxico raised its benchmark interest rate by another 25bp to 7.0% at last Thursday's policy meeting. This hike follows nine previous increases, totalling 375bp since December 2015, in order to put a lid on inflation expectations and actual inflation. Both have been lifted this year by the lagged effect of the MXN's weakness last year, the "gasolinazo", and the minimum wage increase in January.
Japan's CPI inflation was stable at 0.2% in October, despite the sales tax hike, thanks to a combination of offsetting measures from the government and a deepening of energy deflation.
The FOMC did mostly what was expected yesterday, though we were a bit surprised that the single rate hike previously expected for next year has been abandoned.
Last week's official data supported our forecast that GDP growth likely will slow further in Q1, suggesting that a May rate hike is not the sure bet that markets assume.
CPI inflation dropped to 2.4% in April, from 2.5% in March, undershooting the no-change consensus and prompting many commentators to argue that the chances of an August rate hike have declined further.
In the wake of the February employment report, the implied probability of a June rate hike, measured by the fed funds future, jumped to 89% from 71%. The market now shows the chance of a funds rate at 75bp by the end of the year at just over 60%. That still looks low to us, but it is a big change and we very much doubt it represents the end of the shift in expectations.
Mexican policymakers voted unanimously last Thursday to hike the main rate by 25bp to 7.75%, the highest since early 2009.
The BoK kept rates unchanged at 1.50% yesterday. We thought a hike was open to consideration, as the authorities had professed to be on a mission to reduce dependency on exports and household debt. But we remain more bearish than the BoK on the outlook for the rest of the year.
We would be very surprised if the Fed were to raise rates today. The Yellen Fed is not in the business of shocking markets, and with the fed funds future putting the odds of a hike at just 22%, action today would assuredly come as a shock, with adverse consequences for all dollar assets.
This week's MPC meeting and Inflation Report likely will support the dominant view in markets that the chances of a 2017 rate hike are remote, even though inflation will rise further above the 2% target over the coming months. Overnight index swap markets currently are pricing-in only a 20% chance of an increase in Bank Rate this year.
Markets' expectations for official interest rates have shifted up over the last fortnight, and the consensus view now is that the MPC will hike rates before the end of this year. As our first chart shows, the implied probability of interest rates breaching 0.25% in December 2017 now slightly exceeds 50%.
This week brings the third anniversary of the first rate hike in this cycle, on December 16, 2015.
Korean hard data for December, so far, leave the door ajar for the possibility that the Bank of Korea will roll back its November hike sooner than we expect.
In order to support current market pricing, the MPC will have to be more specific about the timing of the next rate hike in the minutes of next Thursday's meeting.
The Fed rate hike on Wednesday is fully priced in to LatAm markets, so we expect no significant immediate reaction when the trigger is pulled. But as markets gradually come around to our view that future U.S. rate risk is to the upside, markets will come under renewed pressure.
Recent bond market volatility has left a significant mark on Eurozone credit markets. The recent slide in the Bloomberg composite index for Eurozone corporate bonds is the biggest since the U.S. taper tantrum in 2013. The prospect of a Fed hike later this year and rising inflation expectations in the Eurozone have changed the balance of risk for fixed income markets.
With rates now certain to rise this week, the real importance of the employment picture is what it says about the timing of the next hike. To be clear, we think the Fed will raise rates again in June, and will at that meeting add another dot to the plot, making four hikes this year.
LatAm markets reacted relatively well to the Fed's rate hike on Wednesday, which was largely priced-in. The markets' cool-headed reaction bodes well for Latam central banks. But it doesn't mean that the region is risk-free, especially as Mr. Trump's inauguration day draws near.
ebruary's labour market data failed to make a resounding case for the MPC to raise interest rates in May, prompting markets to reduce the probability attached to a hike next month to 85%, from nearly 90% before the data were released.
Mexico's domestic conditions don't warrant an imminent rate hike in the near term. Headline inflation continues to fall, reaching an all-time low of 2.5% in October. It should remain below 3% in the coming months. And core prices remain wellbehaved, increasing at a modest pace, signalling very little pass-through of the MXN's depreciation. Economic activity gained some momentum in Q3-- this will be confirmed on Friday's GDP report--but demand pressures on inflation are absent and the output gap is still ample. Under these conditions, policymakers should not be in a rush to hike, but they have signalled once again that they will act immediately after the Fed.
The Andean economies have been punished with high inflation triggered by currency depreciation and El Niño. Under these circumstances, Peru's central bank, the BCRP, admitted defeat yet again in the face of these temporary inflationary effects, increasing interest rates by 25bp to 4.0% last Thursday, the third hike in five months. Inflation in Peru remains stubbornly high, climbing to 4.4% year-over-year in December from 4.2% in November, and the upside risks remain elevated.
Mexican policymakers voted last Thursday to hike the main rate by 25bp to 8.0%, the highest since early 2009.
The consequences of sterling's sharp depreciation for inflation were brought home yesterday by the news that the iPhone 7 will cost more than its predecessor. The entry-level version is priced at £60 more than its iPhone 6S equivalent. Of course, the new version is more advanced, but the fact that the dollar price held steady, at $649, demonstrates the U.K. price hike entirely is due to the adverse impact of the weaker pound.
With financial markets still turbulent and the Governor stating only two weeks ago that economic conditions do not yet justify a rate hike, the Inflation Report on Thursday will not signal imminent action. Nonetheless, higher medium-term forecasts for inflation are likely to imply that the Committee still envisions raising interest rates this year.
We would be astonished if the FOMC meeting starting today does not end with a 25bp rate hike.
The gloom which descended on the FOMC in April has lifted, mostly, and policymakers remain on track for two rate hikes this year, likely starting in September. The median fed funds forecast for the end of this year remains at 0.625%, implying a target range of 0.5-to-0.75%.
Mexico's central bank, Banxico, capitulated to the sharp MXN depreciation yesterday and increased interest rates by 50bp, for the second time this year, in a bid to support the currency. Raising rates to 4.25% was a brave step, as the economic recovery remains sluggish, thanks mostly to external headwinds. The hike demonstrates that policymakers are extremely worried about the decline in the MXN and its lagged effect on inflation.
Japan's retail sales spiked 7.1% in September, after the 4.6% jump in August, suggesting that efforts to smooth out spending around the October tax hike have fallen short.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, discusses the possibility of 4 interest rate hikes in 2017
Ian Shepherdson, chief economist at Pantheon Macroeconomics, examines the French government's move to suspend a planned fuel-tax hike that sparked three weeks of protests.
Chief U.K. Economist Ian Shepherdson on Brexit risk to a June rate hike
The Federal Reserve said Wednesday it would keep short-term interest rates near zero until at least the middle of the year. The central bank's policy committee also signaled caution about low inflation and nodded to overseas uncertainty by including new language that it would monitor international developments. Here's how economists reacted
Chief US economist Ian Shepherdson on US Consumer Spending
Chief U.S. Economist Ian Shepherdson on US Retail Sales
Chief U.S. Economist Ian Shepherdson on Bloomberg Surveillance
Chief U.K. Economist Samuel Tombs on U.K. Inflation
The BoJ held firm, for the most part, during this year's bout of central bank dovishness.
The BoJ yesterday published its semi-annual Financial System Report, which often gives insights into the longer-term thinking driving BoJ policy.
Economists refer to two different types of forward rate guidance by central banks: Delphic and Odyssean. The former describes a "normal" situation, in which the central bank follows a transparent rate-setting rule allowing markets to forecast what it will do, based on the flow of economic data.
A spell of outright CPI deflation in Japan is just around the corner. Headline inflation slipped to 0.2% in August, from 0.3% in the previous month, as the drag from the discounts backed by the government's "Go To Travel" subsidies more than outweighed the upward pressure from non-core goods.
The Chancellor can go on his Christmas vacation content that the public finances have weathered the economy's slowdown relatively well this year.
One of the possible explanations for the slowdown in payroll in growth in recent months is that the pool of labor has shrunk to the point where employers can't find the people they want to hire. That's certainly one interpretation of our first chart, which shows that the NFIB survey's measure of jobs-hard-to-fill has risen to near-record levels even as payroll growth has slowed.
The French economy has suffered from weakness in manufacturing this year, alongside the other major EZ economies.
April's consumer price figures, due on Wednesday, are set to show that CPI inflation has fallen, primarily due to the earlier timing of Easter this year than last. We
The stand-out news yesterday was the increase in the headline, three-month average, unemployment rate to 4.4% in December, from 4.3% in September.
The BoJ kept its main policy settings unchanged yesterday, in another 7-to-2 split.
On balance, our conviction that the MPC will surprise markets on May 2 by retreating from its dovish stance has risen, following last week's labour and retail sales data.
Japan's flash PMI numbers for August were a mixed bag.
Japan's headline CPI inflation is set to edge down in coming months, thanks to non-core prices.
The slowdown in the EZ economy is well publicised.
The newest cluster of Covid-19 in China has reignited concerns over a second wave. On June 11, Beijing confirmed its first infection in nearly 60 days, originating reportedly from Xinfadi market, a wholesaler which supplies about 80% of the capital's produce.
Mexico's central bank last week left its policy rate at 7.0%, the highest level since early 2009.
Now that the Fed has abandoned the idea of raising rates this year, despite 3.8% unemployment and accelerating wages, it is very exposed to the risk that the bad things it fears don't happen.
The national February inflation data are due this Friday, a couple of weeks after the Tokyo report, as usual.
CPI inflation in India jumped to 4.6% in October, from 4.0% in September, marking a 16-month high and blasting through the RBI's target.
The euro area's trade advantage with the rest of the world slipped at the start of the year.
Brace yourselves; GDP growth forecasts are being slashed left and right, as our colleagues take stock of the economic damage Covid-19 likely will inflict in the U.S. and across Europe, where outbreaks and containment measures have escalated significantly.
Japan's trade balance deteriorated sharply in May, flipping to a ¥967B deficit from the modest ¥57B surplus in April.
Argentina's economy is firing on all cylinders, thanks to improving fundamentals and a positive external backdrop.
Recent economic indicators in Brazil have undershot consensus in recent weeks, but the economy nonetheless continues to recover.
We've had pushback from readers over our take on the likelihood of a trade deal with China in the near future.
Argentina's government continues to show signs of reining in fiscal policy, with the primary budget balance improving steadily over the last year.
The BoJ kept all policy measures unchanged at its meeting yesterday.
August's consumer price figures caught everyone by surprise. CPI inflation increased to 2.7%, from 2.4% in July, greatly exceeding the consensus and the MPC's forecast, 2.4%.
Officially, China's real GDP growth was unchanged at 6.0% year-over-year in Q4; low by Chinese standards, but not overly worrying. Full-year growth was 6.1% within the 6.0-to-6.1% target down from 6.7% last year, also in keeping with the authorities' long-term poverty reduction goals.
Japan's jobless rate was unchanged, at 2.4% in October, as the market took a breather after September's job losses.
The consensus view that today's retail sales data will show volumes increased by 0.2% month-to-month in October is too sanguine.
China's official real GDP growth likely slowed to 6.0% year-over-year in Q3, from 6.2% in Q2.
The Mexican peso and spreads have recently come under severe pressure. Last week, for instance, the MXN plummeted 2% against the USD to 18.9, the weakest level since May, as our first chart shows.
Japanese GDP growth in the third quarter corrected the imbalances of the second. Domestic demand took a breather after unsustainable growth in Q2, while net exports rebounded.
Official industrial production growth in China plunged to 5.4% year-over-year in April, from 8.5% in March.
The IBC-Br index, a monthly proxy for Brazil's GDP--rose 0.5% month-to-month in November, pushing the year-over-year rate down to 2.8%, from an upwardly-revised 3.1% in October.
China's money and credit data released last Friday reaffirm our impression that the tightening has gone too far.
LatAm markets reacted well to the U.S. Fed's decision to increase the funds rate by 25bp, to 1-to-1¼%, on Wednesday. Currencies moved only slightly after the decision and asset markets were relatively stable. Yesterday, some currencies retreated marginally as investors digested the relatively hawkish message from the Fed and Chair Yellen's press conference.
Economic activity in Mexico during the past few months has been improving gradually, as external and domestic threats appear to have diminished.
Japan's tertiary index edged up 0.1% month-on-month in July, after the 0.1% decrease in June.
Today's official retail sales figures look set to show that consumers tightened their purse strings at the start of this year, following last year's spending spree. We think that retail sales volumes rose by just 1.0% month-to-month in January; that would be a poor result after December's 1.9% plunge. Surveys of retailers have been weak across the board. The reported sales balance of the CBI's Distributive Trade Survey collapsed to -8 in January, from +35 in December. The balance is notoriously volatile, but the 43-point drop is the largest since the survey began in 1983.
Japan's economic data have been very volatile in the last 18 months.
Colombian activity data released this week were relatively strong, but mostly driven by the primary sectors; consumption remains sluggish compared to previous standards.
Data on air quality in China provide some useful insights into the economic disruptions--or lack thereof--caused by the outbreak of the coronavirus from Wuhan and the government's aggressive containment measures.
The FOMC yesterday did what it had to do, and said what it had to say. The super-doves were kicked into line, with a unanimous vote, though two members' blue dots showed they think rates should not have been raised. In our view, though, Dr. Yellen's avowed intention to raise rates gradually sits uneasily with her--correct--assertion that policy remains very accommodative, bearing in mind that the unemployment rate is now at the Fed's estimate of the Nairu, while evidence of accelerating wage gains is burgeoning.
This week's labour market, inflation and retail sales data--the last before the MPC meets on May 10--will have a major bearing on the Committee's decision.
China's activity data outperformed expectations in November.
On the face of it, December's flash Markit/CIPS PMIs warrant the MPC cutting Bank Rate at its meeting on Thursday.
The BoJ is likely to be thankful next week for a relatively benign environment in which to conduct its monetary policy meeting.
January's retail sales figures look set to show that growth in consumers' spending remains stuck in low gear.
China's trade surplus jumped to a six-month high of $46.8B in December, from $37.6B in November, on the back of a strong increase in exports.
Economists are evenly split on December's consumer prices report, due on Wednesday, with half expecting CPI inflation to fall to 2.1%, from 2.3% in November, and the other half expecting a 2.2% print.
Data released yesterday showed that gross fixed investment in Mexico started Q4 on a decent note, increasing on the back of healthy purchases of imported machinery and equipment and construction spending.
February's COPOM meeting minutes again signalled that Brazil's central bank will stick with its cautious approach to monetary policy.
Falling gas prices will make themselves felt in the November CPI data today, with a likely 4% seasonally adjusted decline enough to subtract 0.2% from the month-to-month change in the headline index. But gas prices plunged by 7.2% in November last year, so in year-over-year terms gas prices will push aggregate headline inflation up. We look for the rate to rise to 0.4%, up from 0.2% in October and zero in September. The same story will play out in January and February too, by which time the headline rate should have risen to 1¼%, assuming a crude oil price of about $35 per barrel.
The RMB has risen strongly in recent months, initially with the euro and the yen, but China's currency rose on a trade-weighted basis in August.
Japan's PPI inflation was unchanged, at 3.0%, in August.
Yesterday's second EZ Q2 GDP report was slightly more upbeat than the advance estimate.
The Mortgage Lenders and Administrators Return for Q4, published on Tuesday, suggests that the fall in households' real incomes last year has not led to a deterioration in lenders' mortgage books.
Politics remain centre-stage in Brazil, despite positive news on the economic front. President Michel Temer's government continues to advance pension reform, despite the tight calendar and concerns about his political capital. But volatility is on the rise.
Japan's prime minister in-all-but-name, Yoshihide Suga, will be inheriting an economy struggling to maintain any momentum from the release of pent-up demand.
The MPC surprised markets, and ourselves, yesterday with the escalation of its hawkish rhetoric in the minutes of its policy meeting.
March's consumer prices figures, released on Wednesday, are even more important than usual, as they are the last to be published before the MPC's next meeting on May 10.
A 45bp rise in long-term interest rates--the increase between mid-August and last week's peak--ought to depress stock prices, other things equal.
China's September trade numbers show that, far from reducing the surplus with the U.S., the trade wars so far have pushed it up to a new record.
China's September imports missed expectations, but commentators and markets tend to focus on the year-over-year numbers.
Brexit talks will dominate the headlines this week, with the focal point set to be a meeting of the European Council on Wednesday, where E.U. leaders might give the green light for an extraordinary summit next month to formalise the Withdrawal Agreement.
The Monetary Policy Board of the Bank of Korea voted yesterday to lower its policy base rate to 1.25%, from 1.50%.
Last week's comments by Mr. Draghi--see here-- indicate that the ECB is increasingly confident that core inflation will continue to move slowly towards the target of "below, but close to 2%", despite elevated external risks, and marginally tighter monetary policy.
The Monetary Policy Board of the Bank of Korea yesterday left its benchmark base rate unchanged, at 1.50%.
July's consumer price figures--published on August 15th, while we are on vacation--look set to show that June's drop in CPI inflation was just a blip. We think that CPI inflation ticked up to 2.7% in July, from 2.6% in June, on track to slightly exceed 3% toward the end of this year.
Investors awaiting today's interest rate decision might be a little unnerved to learn that the MPC has a track record of surprises.
Italian bond yields have remained elevated this week, following the release of the government's detailed draft budget for 2019.
Korea's unemployment rate fell for a second straight month in October, inching down to 3.9%, from 4.0% in September.
The sustained upturn in mortgage applications since last fall ought to have driven up the pace of new home construction quite sharply. But our first chart shows that single-family building permit issuance--we use permits rather than starts, as they are much less volatile--rose only 8.3% year-over-year in the three months to May, while applications for new mortgages to finance house purchase jumped by 18.8% over the same period.
Japan's economy contracted by 0.9% quarter-on- quarter in Q1, following a downwardly-revised 1.9% plunge in the previous quarter.
The People's Bank of China cut its seven-day reverse-repo rate yesterday, to 2.50% from 2.55%.
The knee-jerk reaction of the stock market to the unexpectedly high hourly earnings growth number for January was predicated on two connected ideas.
The data in LatAm have been all over the map in recent weeks.
It's probably just a coincidence that "Super Thursday" coincides with Guy Fawkes night, when Britons launch fireworks to commemorate an attempt to blow up parliament in 1605. Nonetheless, the Monetary Policy Committee looks likely to light the touch-paper for a big rise in market interest rates and sterling, by signalling that it intends to raise Bank Rate in the Spring, about six months earlier than investors currently expect.
China's Caixin manufacturing PMI was unchanged at 51.0 in October, continuing the sideways trend this year.
Japan's Tankan survey continues to paint a picture of a contracting economy.
Sterling continued to recover last week, hitting its highest level against the dollar since October, despite a series of data releases indicating that the economy is losing momentum. Indeed, sterling was unscathed by the news on Friday that quarter-on-quarter GDP growth slowed to just 0.3% in Q1, from 0.7% in Q4.
January's money and credit data broadly support our view that the economy still lacks momentum.
Japan's Tankan survey for Q2 was unsurprisingly grim, given the devastation caused by the near- global lockdown in the first half of the quarter, and the nationwide state of emergency that enveloped April and May.
Japan's labour data threw another January curve ball this year--last year it was wages--with a change in the standards for job openings.
The spike in the May core CPI, and its likely echo in the core PCE, won't stop the Fed easing at the end of this month.
Colombia's GDP growth was a poor 1.6% year-over- year in Q4, down from 2.3% in Q3, despite the oil recovery and the COP's rebound since mid-year. GDP rose a modest 0.3% quarter-on-quarter, after a 0.8% increase in Q3.
Japan's inflation target came under heavy fire yesterday, as Finance Minister Taro Aso suggested that "things will go wrong if you focus too much on 2%."
China's investment slowdown went from worrying to frightening in October. Last week's fixed asset investment ex-rural numbers showed that year- to-date spending grew by 5.2% year-over-year in October, marking a further slowdown from 5.4% in the year to September.
October's colossal 1.9% month-to-month jump in retail sales volumes greatly exceeded the 0.5% consensus and even our own top-of-the- range 1.0% forecast.
Data on Friday confirmed that headline inflation in the Eurozone rose a bit last month, to 1.5% from 1.4% in January, but also that the core rate dipped by 0.1 percentage points, to 1.0%.
Chinese residential property prices appear to be staging a comeback, with new home prices rising 1.1% month-on-month in June, faster than the 0.8% increase in May.
Colombia's economic activity surprised to the upside in February, despite the challenging domestic environment. Private spending rose more than expected, but leading indicators suggest that household consumption will remain weak in Q2. Retail sales jumped 4.6% year-over-year in February, up from a 2.1% increase in January, and the fastest pace since August 2015.
The BoJ is likely to stay on hold this week for all its main policy settings.
Our forecast that CPI inflation will return to the 2% target by the end of 2018 sets us apart from the MPC and consensus, which expect a more modest decline, to 2.4%.
Rapidly increasing food inflation is creating all sorts of dilemmas for policymakers in Asia's giants.
China's monetary and credit data--released yesterday, two days behind schedule--suggest that monetary conditions are loosening at the margin, while credit conditions have remained stable, but easier than in the first half.
Japan's trade surplus is set to fall in coming months, as domestic demand remains robust, while recent oil price increases will be a drag, lifting imports.
Yesterday's German ZEW investor sentiment survey provided the first clear evidence of the coronavirus in the EZ survey data.
Manufacturing does not consistently lead the rest of the economy. Neither does it consistently lag. On average, turning points in the rates of growth of manufacturing output and GDP are coincident, as our first chart clearly shows. But coincidence is not causality.
The PBoC reduced its 14-day reverse repo by 5bp to 2.65% in a routine operation yesterday.
The Eurozone economy all but stalled at the start of Q4.
September's consumer price figures helped to curb expectations that the MPC might raise Bank Rate again before the March Brexit deadline.
Markets have given the BoJ a break this month, with the 10-year JGB yield rising back into the implied band around the 0% target, and the yen snapping its appreciation streak.
China's September PMIs, most of which were released over the weekend, mark out a clear downtrend in activity since late last year.
Sterling's depreciation, which began over two years ago, has inflicted pain on consumers but fostered a negligible improvement in net trade.
Peru's inflation continues to surprise to the downside, paving the way for an additional rate cut next week.
We've previously highlighted the pro-cyclical elements of the BoJ's framework, but it's worth repeating, when an economic shock comes along.
Mr Abe's Liberal Democratic Party took a drubbing at the polls in Tokyo's Assembly election over the weekend. The consequences for fiscal spending probably are minimal but the vote strengthens the case for increased emphasis on the structural reform "arrow" and less focus on monetary policy.
So that happened.
We sympathise if readers are sceptical of our opening gambit in this Monitor.
Last week's final barrage of data showed that EZ headline inflation rose slightly last month, by 0.1 percentage points to 1.5%, driven mainly by increases in the unprocessed food energy components.
China's current account surplus was revised down last week to $46.2B in Q2, from $57.0B in the preliminary data, marking a dip from $49.0B in Q1.
Investors in Mexico likely will focus early this week on yesterday's gubernatorial election results in Nayarit, Coahuila and the State of Mexico. The latter is especially important, because it is viewed as a possible guide to the 2018 presidential election.
Fed Chair Powell yesterday said about as little as he could without appearing to ignore the turmoil in markets since the President announced his intention to apply tariffs to imports from Mexico: "We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective."
When the BoJ tweaked policy back in July, we think the increase in flexibility in part was to lay groundwork for the BoJ to respond to the Fed's ongoing hiking cycle.
We've always said that China's first weapon, should the trade war escalate, is to do nothing and allow the RMB to depreciate.
The jump in the Caixin services PMI in the past two months looks erratic, with holiday effects playing a role, though there could be more going on here.
The release of pent-up consumer demand in Japan has been rocky, following the end of the nationwide state of emergency in May. Retail sales values rose by 4.6% month-on-month in August, albeit following a 3.4% correction in the previous month.
Activity surveys picked up across the board in April, offering hope that the slowdown in GDP growth--to just 0.3% quarter-on-quarter in Q1-- will be just a blip. The headline indicators of surveys from the CBI, European Commission, Lloyds Bank and Markit all improved in April and all exceeded their 2004-to-2016 averages.
Japan's monetary base growth slowed to just 4.6% year-over-year in February, from 4.7% in January, well below the 17% rate needed to keep the base expanding at a pace consistent with the BoJ's JGB quantity target.
If the underlying trend in payroll growth is about 200K, then a weather-depressed 98K reading needs to be followed by a rebound of about 300K in order fully to reverse the hit. But the consensus for today's April number is only 190K, and our forecast is 225K.
Rising political risks and NAFTA-related threats have put the MXN under pressure last month, driving it down 4.9% against the USD, as shown in our first chart.
We're expecting to see November payrolls up by about 200K this morning, but our forecast takes into account the likelihood that the initial reading will be revised up. In the five years through 2014, the first estimate of November payrolls was revised up by an average of 73K by the time o f the third estimate. Our forecast for today, therefore, is consistent with our view that the underlying trend in payrolls is 250K-plus. That's the message of the very low level of jobless claims, and the strength of all surveys of hiring, with the exception of the depressed ISM manufacturing employment index. Manufacturing accounts for only 9% of payrolls, though, so this just doesn't matter.
The Bank of Japan yesterday left its -0.10% policy balance rate and ten-year yield target of "around zero" unchanged, as widely expected.
Cast your mind forward to late October 2018. The Fed is preparing to meet next week. What will the economy look like? The key number is three.
Chinese headline industrial profits data show that growth slowed to just 4.1% year-over-year in September, from 9.2% in August.
Markets see a strong possibility, though not a probability, that the BoJ will cut rates on Thursday.
October's money and credit report indicates that the economy had little momentum at the start of the fourth quarter.
China's official manufacturing PMI for May, out tomorrow, will give the first indication of the coming hit from the resumption of its tariff war with the U.S.
Japanese retail sales were unchanged in October month-on-month, after a 0.8% rise in September.
Inflation pressures remain under control in most LatAm economies, allowing central banks to keep interest rates on hold, despite the challenging external environment.
Korea's main activity data for August showed that the economy clearly wobbled in the wake of the country's second wave of Covid-19, and the social distancing measures imposed in response to it.
As we showed in yesterday's Monitor--see here--EZ governments and the ECB have thrown caution to the wind in their efforts to limit the pain from the Covid-19 crisis.
Defaults by Chinese companies have been on the rise lately. Most recently, China Energy, an oil and gas producer with $1.8B of offshore notes outstanding, missed a bond payment earlier this week. We've highlighted the likelihood of a rise in defaults this year, for three main reasons.
The widespread view, which we share, that GDP will rebound in Q2 following the disruption caused by bad weather in Q1, was supported yesterday by the E.C.'s Economic Sentiment survey.
The release of pent-up Japanese consumer demand in June was emphatic, with retail sales values jumping by 13.1% month-on-month.
Yesterday's BoJ statement, outlook and press conference raised our conviction on two key aspects of the policy outlook.
The Bank of Korea's two main monthly economic surveys were very perky in January.
Japan's June retail sales data add to the run of numbers suggesting a strong rebound in real GDP growth in Q2, after the 0.2% contraction in activity in Q1.
The latest PMIs suggest that investors have jumped the gun in pricing-in a 50% chance of the MPC raising interest rates again as soon as May.
In today's Monitor, we'll let the economy be, and focus instead on what are fast becoming the two defining political issues for the EU and its new Commission, namely migration and climate change.
The soft-looking August payroll number almost certainly will be revised up substantially, as the readings for this month have been in each of the past six years. Runs of remarkably consistent revisions--from 53K to 104K, with a median of 66K--don't happen by chance very often. A far more likely explanation is that the seasonal adjustments are flawed, having failed to keep up with changes in employment patterns since the crash. If the median revision is a good guide to what happens this year, the August number will be pushed up to 240K, in line with our estimate of the underlying trend and much more closely aligned with the message from a host of leading indicators.
Most investors remain convinced that the MPC will raise Bank Rate when it meets next, on May 10.
In Friday's Monitor we analysed the draft Japanese budget, as reported by Bloomberg. We suggested that the GDP bang-for-government-expenditure- buck is likely to be less than that implied by the authorities' forecasts.
In Mexico, Banxico left its policy rate unchanged at 7.75% last Thursday, as was widely expected.
The housing market perhaps is where the adverse impact of Brexit uncertainty can be seen most clearly.
China's FX reserves rose to $3119B in November from $3109B in October. But the increase is explained by simultaneous yen, euro and sterling strength, which raises the dollar value of assets denominated in these currencies.
The ink has hardly dried on economists' and the ECB's inflation projections for 2020, but we suspect that some forecasters are already considering ripping up the script.
Economic activity data in Chile have been soft and uneven this year, due mainly to the hit from low commodity prices and uncertainty surrounding the reform agenda, which has badly damaged consumer and investor sentiment. The latest Imacec index, a proxy for GDP, increased just 1.7% year-over-year in October, down from the 2.7% gain in September, and below the 2.2% average seen during Q3 as a whole.
Colombian inflation ended 2017 slightly above the central bank's 2-to-4% target range, after a year in which policymakers cut interest rates to boost economic growth.
Japan's current account surplus has been broadly stable in absolute terms in the last couple of years, though it has retreated as a share of GDP.
The PBoC cut the Reserve Requirement Ratio late on Friday--as signalled at last Wednesday's State Council meeting--by 0.5 percentage points, to be implemented from September 16.
The escalation of the second wave of Covid-19 in Japan in July did little to stop the recovery in labour cash earnings growth.
As it became clear that Donald Trump would beat Hillary Clinton to win the U.S. presidency, EM currencies came under severe pressure, fearing his economic and immigration policies. Some of the initial pressure is easing as markets digest the news and following Mr. Trump's conciliatory tone in his victory speech. But the proposals have been made and the MXN and other key LatAm assets likely will remain very stressed in the near term.
Labour cash earnings in Japan ostensibly started the year strongly, jumping by 1.5% year-over-year in January, much better than December's 0.2% slip.
The Banxico minutes from the June 20 meeting, released last Thursday, offered more detail about the outlook for policy in the near term.
A third wave of Covid-19 outbreaks is now underway. The first, in China, is now under control, and the rate of increase of cases in South Korea has dropped sharply. The other second wave countries, Italy and Iran, are still struggling.
China's authorities recognised, around the middle of this year, that activity was slowing and that monetary conditions had become overly tight.
Car manufacturers have been at the sharp end o f the slowdown in consumers' spending this year. In response, several brands have launched generous scrappage schemes, giving buyers a big discount when they trade in their old vehicle.
October's GDP report, released on Monday, might just manage to break through the wall of noise coming from parliament ahead of the key Brexit vote on Tuesday.
As we go to press, equities in the Eurozone are having a bad day following the collapse in U.S. and Asian equities earlier.
Chile's economic outlook is still positive, but clouds have been gradually gathering since mid-year, due mostly to the slowdown in China, low copper prices and falling consumer and business confidence.
...The Fed did nothing, surprising no-one; the labor market tightened further; the housing market tracked sideways; survey data mostly slipped a bit; and oil prices jumped nearly $4, briefly nudging above $50 for the first time since May.
According to Shadow Chancellor John McDonnell, it is "almost inevitable" that Labour will table a no-confidence motion in the government next month, shortly after MPs return from the summer recess on September 3.
The PBoC finally moved yesterday, cutting its one-year MLF rate by 5bp to 3.25%, whilst replacing around RMB 400B of maturing loans.
Always expect the unexpected in a bonus month for Japanese wages.
Inflation in the Eurozone fell significantly last month, and probably will ease further in Q1.
Evidence that mounting concerns about Brexit have caused the economy to slow to a near-halt continued to accumulate last week.
The downturn in car sales is showing no sign of abating. Data released yesterday by the Society of Motor Manufacturers and Traders showed that private registrations fell 10.1% year-over-year in October, much worse than the 6.6% average drop in the previous 12 months.
China's unadjusted current account surplus widened to $16.0B in the preliminary report for Q3, from $5.3B in Q2.
If the Fed needed further encouragement to raise rates next month, it arrived Friday in the form of solid jobs numbers, a new cycle low for the broad unemployment rate, and a new cycle high for wage growth.
Last week's heavy snowfall, which blighted the entire country, will depress GDP growth in Q1, making it harder for the MPC to read the economy.
Brazil's industrial sector was off to a soft-looking start in Q1, but the fall in January output was chiefly payback for an especially strong end to 2017.
ADP's reported 158K increase in private payrolls was very close to our model-based estimate, so it doesn't change our 220K forecast for todays official payroll number, well above the 177K consensus.
The headline hourly earnings data for May were dull, showing the year-over-year rate unchanged at 2.5%. That's up from 2.1% in the year to May 2015, but it's not an alarming rate of increase. But the Atlanta Fed's median hourly earnings data, which track the wages of individuals from year-to-year, show wages up 3.4% year-over-year, the fastest rate of increase since February 2009.
Price action in Italian bonds went from hairy to scary yesterday as two-year yields jumped to just under 3.0%.
The unemployment rate hit its post-1970 low in April 2000, at the peak of the first internet boom, when it nudged down to just 3.8%. The low in the next cycle, first reached in October 2006, was rather higher, at 4.4%.
The ECB will keep its main refinancing and deposit rates unchanged at 0.00% and -0.4% today, but we think the central bank will satisfy markets' expectations for more clarity on the QE program next year.
Korea's GDP growth in Q3 was a miss. Quarter- on-quarter growth was unchanged at 0.6%, below the consensus for a 0.8% rise.
The biggest single problem for the stock market is the president.
Outright CPI deflation likely already has taken hold in Japan. Friday's data showed inflation falling to zero percent in September, from 0.2% in the previous month.
The PBoC cut the reserve requirement ratio by 0.5pp for almost all banks on Sunday, effective from July 5th.
March's public sector borrowing figures brought more signs that the economy has lost considerable momentum this year. Borrowing, on the PSNB excluding public sector banks measure, came in at £5.1B in March, up slightly from £4.3B in March 2016.
Nothing is done until it's done, and, in the case of Sino-U.S. trade talks, even if a deal is reached, the new normal is that tensions will be bubbling in the background.
On Friday last week, the Chinese authorities suspended sales of domestic and international tours, in an effort to contain the spread of the coronavirus, which started in Wuhan.
By the close on Friday, the initial reaction in U.S. markets to the U.K. Brexit vote could be characterized as a bad day at the office, but nothing worse. Not a meltdown, not a catastrophe, no exposure of suddenly dangerous fault lines.That's not to say all danger has passed, but the first hurdle has been overcome.
Chinese monetary conditions have tightened sharply in the past year. Conditions have stabilised in recent months but Fed policy normalisation implies the increase in the money stock should slow again in 2018.
As the situation with the coronavirus develops, and we gain more information on the authorities' response, it's becoming clear that the damage to Q1 GDP is going to be nasty.
The FOMC flagged recent market developments as a source of risk to the U.S. economy yesterday, unsurprisingly, but didn't go overboard: "The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook."
The preliminary estimate of Q1 GDP looks set to show that the economy started 2017 on a weak footing. We share the consensus view that quarter-on-quarter GDP growth slowed to 0.4%, from 0.7% in Q4.
Today is a busy day in the Eurozone economic calendar, but we suspect that markets mainly will focus on the details of Italy's 2019 budget.
Japan's all-industry activity index dropped by 3.8% month-on-month in March, worse than the 0.7% slip in February.
Developments over the last month have heightened our concern about the near-term outlook for households' spending.
In recent months we have argued that housing market activity has peaked for this cycle, with rising mortgage rates depressing the flow of mortgage applications.
Japan's September PMI report showed some slippage, but overall, it suggests that GDP growth in Q3 was a little stronger than the 0.3% quarter- on-quarter rate in Q2.
Japanese policymakers will have been scouring yesterday's data for signs that the trade situation is improving.
Silly season in Japanese inflation is pretty much over.
The PBoC left its interest rate corridor, including the Medium-term Lending Facility rate, unchanged last Friday, but published the reformed Loan Prime Rate modestly lower, at 4.20% in September, down from 4.25% in August.
The Monetary Policy Committee chose to keep its options open in the minutes of this week's meeting, rather than signal as clearly as it did last year that interest rates will rise very soon.
A couple of Fed speakers this week have described the economy as being at "full employment". Looking at the headline unemployment rate, it's easy to see why they would reach that conclusion.
German 10-year yields have been trading according to a simple rule of thumb since 2017, namely, anything around 0.6% has been a buy, and 0.2%, or below, has been a sell.
Japan's flash Jibun Bank PMIs for July showed continued improvement, but only just.
CPI inflation was steadfast at 1.9% in March, undershooting the consensus and our forecast for it to rise to 2.0%.
We can't yet know how bad the spread of the coronavirus from the Chinese city of Wuhan will be.
A shutdown of the federal government, which could happen as early as this weekend, is a political event rather than a macroeconomic shock. But if it happens--if Congress cannot agree on even a shortterm stop-gap spending measure in order to keep the lights on after the 28th--it would demonstrate yet again that the splits in the House mean that the prospects of a substantial near-term loosening of fiscal policy are now very slim.
Japan's advance PMI numbers for August suggest that the economy dodged most of the bullets fired by the second wave of Covid-19.
The president was on the warpath with the Fed again yesterday, in an interview with the Wall Street Journal.
The big difference between economic cycles in developed and emerging markets is that recessions in the former tend to be driven by the unwinding of imbalances only in the private sector, usually in the wake of a tightening of monetary policy.
The PMIs are telling an increasingly upbeat story for the EZ economy in Q4. The composite PMI in the euro area rose to an 11-month high of 54.1 in November, from 53.3 in October. The uptick was driven by strong new business growth across all private sectors, and employment also increased in response to higher work backlogs.
GDP data for Q2 are due July 26; we expect the report to show a marginal dip in growth, to a seasonally adjusted 0.8% quarter-on-quarter, from 1.0% in Q1.
The minutes of Banxico's November 9 policy meeting were released yesterday, in which the Bank left the reference rate unanimously unchanged at 7.0%.
The end of the government shutdown--for three weeks, at least-- means that the data backlog will start to clear this week.
Japan's May retail sales rebound was underwhelming at a mere 0.3% month-on-month, after a 0.1% fall in April.
The official PMIs suggest that the January survey data have escaped the worst of the hit from the virus.
The first economic report of 2020 confirmed the main story in the euro area last year; namely a recession in manufacturing.
Japan's Q2 Tankan survey wasn't all bad news, but the positives won't last long. The large manufacturers index dropped to 7 in Q2, after the decline to 12 in Q1.
The agreement between Presidents Trump and Xi at the G20 is a deferment of disaster rather than a fundamental rebuilding of the trading relationship between the U.S. and China.
The MPC made a concerted effort yesterday with its forecasts to signal that it is committed to raising Bank Rate at a faster rate than markets currently expect.
Tokyo CPI inflation jumped to 1.5% in October, from 1.2% in September. That
The picture of the economy's recent performance will be redrawn today, when the national accounts are published.
The sharp fall in China's manufacturing PMI in May makes clear that its recovery is nowhere near secured.
The forward-looking indices of China's Caixin manufacturing PMI for April attracted more attention than the headline, which was a bit of a non-event; it rose trivially 51.1, from 51.0 in March.
Japan is one of the countries most exposed to economic damage from the coronavirus.
The Caixin PMI likely remained stable or even strengthened in January. The December jump was driven by the forward-looking components, with both the new export orders and total new orders indices picking up.
Recently released data in Colombia signal that the economy ended last year quite strongly.
Yesterday's data in the French economy provided the final confirmation that growth remained sluggish in Q2, and showed that households had a slow start to the third quarter.
Japan's Q1 is coming more sharply into focus.
Colombia's Central Bank is facing a short-term test. The recent fall in inflation was interrupted in August--data due on Thursday will show another increase in September--while economic growth, particularly consumption, is struggling, at least for now.
Last week's preliminary estimate of Q1 GDP has extinguished any lingering chance that the MPC might raise interest rates at its next meeting on May 10.
Monetary policy usually is the first line of defence whenever a recession hits.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
Banxico's decisions throughout the past year have been guided by external forces, dominated by the persistent decline of the MXN against the USD and its potential impact on inflation. The MXN has fallen by almost 17% year-to-date and has dropped by an eye-watering 37% since 2014.
China's official real GDP growth slowed to 6.0% year-over-year in Q3, from 6.2% in Q2 and 6.4% in Q1. Consecutive 0.2 percentage points declines are significant in China.
The persistence of no-deal Brexit risk has taken a toll on confidence across the economy over the last month.
Today brings a ton of data, as well as an appearance by Fed Chair Powell at the Economic Club of New York, in which we assume he will address the current state of the economy and the Fed's approach to policy.
Our hopes that tax cuts and lower energy inflation would lift French household consumption in Q4 were badly dented by yesterday's consumer sentiment report.
CPI inflation last Friday gave Japanese policymakers a break from the run of bad data, jumping to 0.9% in April, from 0.5% in March.
Chinese industrial profits growth officially edged down to 25.1% year-over-year in October, from 27.7% in September. This is still very rapid but we think the official data are overstating the true rate of growth.
Mexico's inflation has started to edge higher due mainly to an unfavorable base effect and pressures on food prices. The bi-weekly headline CPI for the first half of February edged up to 2.9% year-over-year and up from 2.7% in January and the record low of 2.3% in December.
The extent of shut downs within China is now reaching extreme levels, going far beyond services and threatening demand for commodities, as well as posing a severe risk to the nascent upturn in the tech cycle.
A long period of extremely accommodative U.S. monetary policy generated sizable capital inflows and asset price appreciation in EM countries.
Retail sales values in Japan plunged by 14.4% month-on-month in October, reversing September's 7.2% spike twice over.
Tokyo CPI inflation edged down to 0.4% in May, from 0.5% in April.
Korea's business survey index rose for a second straight month in March, to 75 from 73 in February, on our adjustment.
The preliminary estimate of Q4 GDP was unambiguously strong and has forced us to modify our view of the likely timing of the next interest rate increase.
In previous Monitors, we have outlined our base case that the direct impact of tariffs on Chinese GDP will be minimal this year.
GDP growth in Korea surprised to the upside in the fourth quarter, with the economy expanding by 1.2% quarter-on-quarter, three times as fast as in Q3, and the biggest increase in nine quarters.
The recent slide in market interest rates suggests investors expect the Monetary Policy Committee--MPC--to strike a dovish note today, when the decision and minutes of this week's meeting are released and the Inflation Report is published, at 12.00 GMT.
The hard data now point to a horrendous Q3 GDP print in Germany, which almost surely will constrain the advance EZ GDP print released on October 30.
Today's March CPI ought to provide further support for the idea that the trend rate of increase in the core index is running at about 0.2% per month, an annualized rate, if sustained, of about 2.5%.
Since the protests in Hong Kong began, we've become increasingly convinced that China is backing away from a comprehensive trade deal with Mr. Trump.
The Central Bank of Argentina surprised markets on Tuesday, raising its main interest rate by 100bp to 28.75% to cap inflation expectations and push core inflation down at a faster pace.
We think Japanese monetary policy easing essentially is tapped out, both theoretically and by political constraints.
China's trade balance flipped to an unadjusted deficit of $7.1B in the first two months of the year, from a $47.2B surplus in December.
China's November money and credit data were a little less grim, with only M2 growth slipping, due to unfavourable base effects.
May's labour market figures, released on Wednesday, likely will have something for both the doves and the hawks on the MPC , who have been wrangling over whether to reverse last year's rate cut.
The MPC emphasised yesterday that its faith that interest rates need to rise further has not been shaken by recent downside data surprises.
China's October foreign trade headlines beat expectations, but the year-over-year numbers remain grim, with imports falling 6.4%, only a modest improvement from the 8.5% tumble in September.
April's GDP data give a grim firs t impression, though the details provide reassurance that the economy isn't on the cusp of a recession.
China's trade surplus bounced back strongly in May, rising to $40.1B on our adjustment, from $35.7B previously.
China's PPI inflation rose again in June, to 4.7%, from 4.1% in May.
China's trade surplus has been trending down in the last two years.
Mexico's underlying inflation pressures and financial conditions are gradually stabilizing. Eventually, this will open the door for rate cuts in order to ease the stress on the domestic economy, particularly capex.
The market-implied probability that the MPC will cut Bank Rate in the first half of this year leapt to 50% yesterday, from 35%, following Mark Carney's speech.
President Moon was elected earlier this year on a promise to rebalance the economy toward domestic demand and reduce export dependency. It's not the first time politicians have received such a mandate.
China's manufacturing PMIs have softened in Q4. Indeed, we think the indices understate the slowdown in real GDP growth in Q4, as anti-pollution curbs were implemented. More positively, though, real GDP growth should rebound in Q1 as these measures are loosened.
Economy-wide confidence deteriorated in November, highlighting that Britain continues to struggle to shake off its malaise.
The latest money and credit data highlight that the financial fortunes of firms and households have begun to differ markedly. Private non- financial corporations--PNFCs--are enjoying strong growth in their broad money holdings. The 1.2% month-to-month increase in PNFC's M4 was the largest rise since August 2016, and it lifted the year- over-year growth rate to 9.3%, from 9.0% in May.
China's monetary conditions remain tight, pointing to a substantial downtrend in GDP growth this year and next.
...The data were all over the map, with existing home sales plunging while consumer confidence rose; Chicago-area manufacturing activity plunged but national durable goods were flat; real consumption rose at a decent clip but pending home sales dipped again. Markets, by contrast, are little changed from the week before the holidays. What to make of it all?
Japan's industrial production data for May carried more evidence that the economy is getting a lift--at least temporarily--from the front-loading of activity ahead of the scheduled sales tax increase in October.
Japan's main activity data for April were massively disappointing, presaging the sharper GDP contraction we expect in Q2, compared with Q1.
Japan's GDP growth was revised up, to 0.4% quarter-on-quarter in Q3, from 0.1% in the preliminary reading.
Fed Chair Yellen today needs to strike a balance between addressing investors' concerns over the state of the stock market and the risks posed by slower growth in Asia, and the tightening domestic labor market.
The BoJ kept policy unchanged, as expected, at its meeting yesterday.
The Fed will do nothing today, but the FOMC's statement will re-affirm the intention to continue its "gradual" tightening.
The BoJ yesterday kept the policy balance rate at -0.1%, and the 10-year yield target at "around zero", in line with the consensus.
The stagnation of GDP in August, following five consecutive month-to-month gains, confirms that the economy's momentum in prior months was simply weather-related.
The BoJ kept monetary policy unchanged yesterday, as expected, with the signal coming through loud and clear: Japan's central bank will continue its aggressive easing policy until the inflation cows come home...
We are still annoyed, for want of a better word, by the May payroll numbers. Specifically, we're annoyed that we got it wrong, and we want to know why. Our initial thoughts centered on the idea that the plunge in the stock market in the first six weeks of the year hit business confidence and triggered a pause in hiring decisions, later reflected in the payroll numbers.
Japan's GDP report for the third quarter, due on Monday, is likely to show that the economy rebounded by 5.2% quarter-on-quarter, following the 7.9% collapse in Q2.
We previewed the FOMC meeting in detail in the Monitor on Monday--see here--but, to reiterate, we expect rates to rise by 25bp but that the Fed will not add a fourth dot to the projections for this year.
Mexico's industrial recovery, which began in late Q4, lost momentum at the start of the second quarter.
We will be paying special attention to the sentiment surveys for Argentina over the coming weeks.
China's GDP report for the fourth quarter, due on Friday, is likely to show that economic growth has stabilised, on the surface.
Retail sales account for some 30% of GDP--more than all business investment and government spending combined--so the monthly numbers directly capture more of the economy than any other indicator. Translating the monthly sales numbers into real GDP growth is not straightforward, though, because the sales numbers are nominal. Sales have been hugely depressed over the past year by the plunging price of gasoline and, to a lesser extent, declines in prices of imported consumer goods.
Core machine orders in Japan surprised to the upside in August, when the country's second wave of Covid-19 peaked.
Today's industrial production data in the Eurozone will extend the run of soft headlines at the start of the year.
Korea's unemployment rate tumbled to 3.7% in February, after the leap to 4.4% in January.
The Fed was more hawkish than we expected yesterday.
Industrial production in India turned around sharply in November, rising by 1.8% year-over-year, following October's 4.0% plunge and beating the consensus forecast for a trivial 0.3% uptick.
Japan's GDP likely dropped by a huge 0.9% quarter-on-quarter in Q4, after the 0.5% increase in Q3, with risks skewed firmly to the downside.
Japan's money and credit data have shown signs of life in recent months, but that's all set to change quickly, due to the disruptions caused by the outbreak of the coronavirus.
The sharp currency sell-off in Q2 and Q3, the financial crisis and tighter monetary and fiscal policies have pushed the Argentinian economy under stress since Q2.
January's consumer price figures, due on Tuesday, likely will show that CPI inflation held steady at December's 3.0% rate.
China's PPI inflation has been trending down since early 2017.
China's M2 growth stabilised in November, at 8.0% year-over-year, matching the October rate.
We've been consistent in saying that Japanese capex would roll over this year, after strength in the first three quarters was seen by the authorities and many commentators as a sign of resilience.
China concludes its annual Central Economic Work Conference today, where the economic targets and the agenda for next year are set.
November's inflation data in Mexico, showing a modest increase in the headline rate, have strengthened the case for further monetary tightening. But we stick to our long-standing view that the Board will leave rates at 7.0% on Thursday.
Central bankers globally are full of market- appeasing but conditional statements.
Our suggestion that the ECB could still raise the deposit rate later this year, by 20bp to -0.4%, has met with strong scepticism in recent conversations with readers.
Core machine orders in Japan collapsed in April, as expected, falling by 12.0% month-on-month, worse than the minor 0.4% slip in March.
Oil prices remain sticky, poised to hover close to a four-year high for the rest of the year.
Many analysts argue that the MPC inevitably will raise interest rates at its May 10 meeting because markets have fully priced-in a 25bp uplift.
We remain resolutely open-minded about the medium-term inflation outlook, on the straightforward grounds that the post-Covid economy will bear little resemblance to any previous U.S. economic experience.
One critical point emerged from last week's otherwise uneventful BoJ meeting: Governor Kuroda said that the BoJ might "adjust" rates before hitting the 2% inflation target.
GDP growth in Japan surprised to the upside in the second quarter, although the preliminary headline arguably flattered the economy's actual performance.
Yesterday's labour market data delivered a further blow to hopes that consumers' spending will retain enough momentum for the MPC to press ahead and raise interest rates this year. The most striking development is the decline in year-over-year growth in average weekly wages to just 1.9% in December, from 2.9% in November.
September's consumer price figures likely will surprise to the downside, prompting markets to reassess their view that the MPC will almost certainly raise interest rates next month.
The MPC almost certainly will keep interest rates on hold today and likely won't give a strong steer on the outlook for policy in the minutes of its meeting, which are released at mid-day. On the whole, surveys of economic activity have been weak, indicating that GDP growth has slowed sharply in the second quarter.
The MPC chose not to rock the boat yesterday, deferring any reappraisal of the economic outlook until its next meeting in early February.
The MPC's "Super Thursday" releases suggest that the Committee won't wait long to raise interest rates after a vote to stay in the E.U., which remains the most likely outcome of June's referendum. Meanwhile, we saw nothing to support markets' view that the MPC would ease policy in the wake of a Brexit.
LatAm currencies have suffered in recent weeks. Each country has its own story, so the currency hit has been uneven, but all LatAm economies share one factor: Fear of the start of a Fed tightening cycle.
After four straight sub-consensus core CPI readings, we think the odds now favor reversion to the prior trend, 0.2%, over the next few months.
April's labour market data show that slack in the job market is no longer declining, while wage growth still isn't recovering. As a result, we no longer think that the MPC will raise Bank Rate in August and now expect the Committee to stand pat until the first half of 2019.
The MPC's meeting on Thursday looks set to be a perfunctory affair. Signs that the economy has lost momentum this year, alongside downward surprises from CPI inflation in January and wage growth in December, mean the Committee won't give the idea of hiking rates a moment's thought.
Markets' judgement that the Monetary Policy Committee--which meets today--will wait until 2017 to raise interest rates overestimates the role that the drop in oil prices and slower GDP growth will play in its decision-making. The inflation risks emanating from the increasingly tight labour market still could motivate a tightening before the summer.
The past two days have seen a slew of data that should keep the hawks in the Bank of Korea at bay during the Board's meeting at the end of this month.
Fed Chair Yellen speaks to the Economics Club of Washington, D.C., at 12.25 Eastern today, a day before she appears before the Joint Economic Committee of Congress at 10.00 Eastern. These will be her last public utterances before the FOMC meeting on December 16. Dr. Yellen won't say anything which could be interpreted as seeking to front-run the outcome of the meeting; that's not her style. But we expect her clearly to repeat that the Fed's decision will depend on whether progress has been made since October towards the Fed's twin objectives of maximum employment and 2% inflation.
FOMC pronouncements are rarely unambiguous; policymakers like to leave themselves room for maneuver. But when the statement says that "Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point" and that only "some" further improvement in labor market conditions is required to trigger action, it makes sense to look through the blizzard of caveats and objections--none of which were new--from the perma-doves.
Our argument that rates could rise as soon as March has always been contingent on two factors, namely, robust labor market data and a degree of clarity on the extent of fiscal easing likely to emerge from Congress. On the first of these issues, the latest evidence is mixed.
The FOMC did the minimum expected of it yesterday, raising rates by 25bp--with a 20bp increase in IOER--and dropping one of its dots for 2019.
Financial markets are pricing in a 20% chance that the Monetary Policy Committee will cut official interest rates during the next six months, broadly the same odds they ascribe to a rate increase. We think the probability of further easing is much slimmer than the market believes.
At the October FOMC meeting, policymakers softened their view on the threat posed by the summer's market turmoil and the slowdown in China, dropping September's stark warning that "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term." Instead, the October statement merely said that the committee is "monitoring global economic and financial developments."
At the October FOMC meeting, policymakers softened their view on the threat posed by the summer's market turmoil and the slowdown in China, dropping September's stark warning that "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term." Instead, the October statement merely said that the committee is "monitoring global economic and financial developments."
The most striking aspect of yesterday's labour market report was the pick-up in the headline three month average year-over-year growth rate of average weekly wages, to a 14-month high of 2.8% in November, from 2.6% in October. Although still low by pre-recession standards, wage growth now is close to the rate that might worry the MPC.
The April FOMC minutes don't mince words: "Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June".
Just how weak would the manufacturing sector have to be in order to persuade the Fed to hold fire this fall, assuming the labor market numbers continue to improve steadily? The question is germane in the wake of the startlingly terrible August Empire State manufacturing survey, which suggested that conditions for manufacturers in New York are deteriorating at the fastest rate since June 2009.
This week's manufacturing, construction and services PMIs for October will demonstrate how well the economy is coping with the prospect of higher interest rates.
The "Super Thursday" releases from the Monetary Policy Committee--MPC--indicate that financial market turbulence and the approaching E.U. referendum have kiboshed the chances of an interest rate rise in the first half of this year. Nonetheless, the MPC's forecasts clearly imply that it expects to raise rates much sooner than markets currently anticipate, and the Governor signalled that a rate cut isn't under active consideration.
Yesterday's FOMC statement was a bit more upbeat on growth than we expected, with Janet Yellen's final missive describing everything -- economic growth, employment, household spending, and business investment -- as "solid".
The MPC's new inflation forecasts usually take centre stage on "Super Thursday" and provide a numerical indication of how close the Committee is to raising interest rates again.
The gratifyingly strong 222K headline June payroll gain, if repeated through the second half of the year, will put unemployment below 4% by December.
Chief U.S. Economist Ian Shepherdson on the Fed
Ian Shepherdson, chief economist at Pantheon Macroeconomics, and Krishna Memani, chief investment officer at OppenheimerFunds, discuss the impact of low inflation on the Federal Reserve's rate path.
The FOMC won't raise rates today, but we expect that the announcement of the start of balance sheet reduction will not be interrupted by Harvey and Irma.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, speaks about how the U.S. Federal Reserve will react to the latest jobs data.
Ian Shepherdson, founder at Pantheon Economics, discusses rising U.S. inflation expectations and his outlook for the Federal Reserve in response to President-Elect Donald Trump's economic plan. He speaks on "Bloomberg Surveillance."
The combination of sluggish GDP growth in October and news that the Prime Minister will attempt to renegotiate the terms of the Brexit backstop, most likely pushing back the key vote in parliament until January, has extinguished any lingering chance that the MPC might be in a position to raise Bank Rate at its February meeting.
Last week's events highlighted the seriously challenging global environment for LatAm equities and currencies. Trading in Chinese shares was stopped twice early last week, after falls greater than 7% of the CSI 300 index reverberated around the world. Markets were calmer on Friday but the volatility nevertheless reminded investors that LatAm's economies are floating in rough waters and their resilience will be put to the test again this year. The Fed's policy normalization, the unwinding of the leverage in EM, the continued slowdown of the Chinese economy, low commodity prices and currency depreciation are all real threats across the continent.
Today's FOMC minutes will add flesh to the bones of the three dissents on September 21. The FOMC statement merely said that each of the three--Loretta Mester, Esther George and Eric Rosengren--preferred to raise rates by a quarter-point.
Treasury yields closed Friday a few basis points higher across the curve than the day before the surprisingly soft March payroll report. A combination of slightly less dovish-than-expected FOMC minutes, a hawkish speech from Richmond president Jeff Lacker, rising oil prices, and robust--albeit second-tier--data last week seem to have done the work.
The Bank kept interest rates unchanged at 1.50% yesterday, but downgraded its inflation forecast for 2018 to 1.6% from 1.7%
The absence of a hawkish slant to the MPC's Inflation Report or the minutes of its meeting suggest that an increase in interest rates remains a long way off.
Brazil's benchmark inflation index, the IPCA, rose 0.7% month-to-month in May, above market expectations. The stickiness of some components explains the surprise upshift; food prices in particular rose by 1.4% in May, after a 1% increase in April. Housing also rose at a faster rate than we had expected, due mainly to a 2.8% jump in the electricity component, the largest single contributor to May's headline increase.
Inflation appears no longer to be an issue for Mexican policymakers. The annual headline rate slowed to 3.0% year-over-year in February from 3.1% in January, in the middle of the central bank's target range, for the first time since May 2006.
The E.U.'s decision to grant the U.K. a Brexit extension until October 31 does not extinguish the possibility that the MPC will raise Bank Rate before the end of the year.
The case for continuing to increase Bank Rate gradually--recently reiterated by MPC members Andy Haldane and Michael Saunders-- strengthened yesterday with the release of April's labour market report, which revealed renewed momentum in wage growth.
Japan's GDP growth came roaring back in Q2, thanks to a strong rebound in private consumption, and an acceleration in business capex.
The MPC was a little irked by the markets' reaction to its November meeting.
The Fed surprised no-one yesterday, leaving rates on hold, saying nothing new about the balance sheet, and making no substantive changes to its view on the economy. The statement was tweaked slightly, making it clear that policymakers are skeptical of the reported slowdown in GDP growth to just 0.7% in Q1: "The Committee views the slowing in growth during the first quarter as likely to be transitory".
The BoJ's stealth taper last year is largely complete.
Investors have treated the upbeat message of the Markit/CIPS PMIs this week with caution and continue to think that the chance that the MPC will raise interest rates this year is remote. Overnight index swap rates currently are pricing-in just a one-in-four chance of a 25 basis point increase in Bank Rate in 2017.
Investors have stuck to their view that interest rates are just as likely to rise this year as not, despite the soft round of PMIs released this week.
The pullback in CPI inflation in June and continued slow GDP growth in Q2 mean that the MPC almost certainly will keep Bank Rate at 0.25% on Thursday.
Mexico's central bank, Banxico, last night capitulated again to the depreciation of the MXN and increased interest rates by 50bp, for the third time this year. This week's rebound in the currency was not enough to prevent action.
Markets were surprised yesterday by the absence of hawkish comments or guidance accompanying the MPC's decision to raise interest rates to 0.50%, from 0.25%.
Investors have concluded that Italy's political crisis will compel the U.K. MPC to increase interest rates even more gradually than they thought previously.
This Budget will be remembered as the moment when the Government finally threw in the towel on plans to run sustainable public finances.
The Brazilian industrial sector started this year on a very downbeat note, despite a 2% month-to-month jump in output. The underlying trend in activity is still very weak. Production fell 5.2% year-over-year.
The case for the MPC to hold back from raising interest rates in May remains strong, despite the improvement in the Markit/CIPS services survey in February.
Banxico left Mexico's benchmark interest rate at 3.75% on Thursday, maintaining its neutral tone and indicating that the balance of risks is unchanged for both inflation and growth. Policymakers remain confident that inflation will remain under control over the coming months, below 3%, but noted that they expect a brief increase above the target during Q4.
Mark Carney revealed last week that recent data had given him "greater confidence" that the weakness of Q1 GDP was almost entirely due to severe weather.
We have had something of a rethink about the likely timing of the coming cyclical downturn. Previously, we thought the economy would start to slow markedly in the middle of next year, with a mild recession--two quarters of modest declines in GDP-- beginning in the fourth quarter.
Convention dictates that we lead with yesterday's Fed meeting, but it's hard to argue that it really deserves top billing.
Last week's data supported our view that monetary policy across LatAm will continue to diverge in the short term. Brazil will have to prolong its monetary tightening cycle, while economies such as Colombia and Chile will remain on hold despite the recent slowdowns in their economic cycle.
December's meeting of the Monetary Policy Committee is likely to be a quiet affair in comparison to this month's pivotal ECB and Fed meetings. It's hard to see what news would have persuaded other members to join Ian McCafferty in voting to raise interest rates this month. The MPC might comment in the minutes to try to reverse the further fall in market interest rate expectations since its previous meeting, when it already thought they were too low. But the potency of any moderately hawkish guidance may be diluted by further strident comments from the Committee's doves.
Markets expect the MPC to shelve November's guidance--that interest rates need to rise only twice in the next three years--at today's meeting.
Mr. Draghi and his colleagues erred on the side of maximum dovishness yesterday.
Speeches by Chair Yellen and Vice-Chair Fischer give the two most important Fed officials the perfect platform today to signal to markets whether rates will rise this month.
The MPC's penchant for providing interest rate guidance reached new heights last week.
Unlike other central banks, the MPC has stuck to its message that "an ongoing tightening of monetary policy over the forecast period" likely will be required to keep inflation close to the 2% target, provided a no-deal Brexit is avoided.
The hawks clearly tried hard to persuade their more nervous colleagues to raise rates yesterday. In the end, though, they had to make do with shifting the language of the FOMC statement, which did not read like it had come after a run of weaker data.
The bad economic news in Brazil is unstoppable. The mid-month CPI index rose 1.3% month-to-month in February, as education, housing, and transport prices increased. School tuition fees jumped 6% month-to-month in February, reflecting their annual adjustment, and transport costs rose by 2% due to an increase in regulated gasoline prices.
Mexico's inflation is finally falling, giving policymakers room for manoeuvre.
The most striking feature of the Fed's new forecasts is the projected overshoot in core PCE inflation at end-2019 and end-2020, which fits our definition of "persistent".
Brazil's decision to keep interest rates at 14.25% on Wednesday was a surprise. The consensus forecast immediately before the meeting was for a 25bp increase. As recently as Tuesday, though, most forecasters expected a 50bp increase, following hawkish comments from Board members since the last meeting in November, and rising inflation expectations. But the day before the meeting, the IMF revised its forecast for 2016 GDP to -3.5%, much worse than the 1% drop it predicted in October.
When the Bernanke Fed embarked on the first of its 17 straight quarter-point tightenings, on 30 June 2004, the latest available GDP data showed that the economy expanded at a robust 3.9% annualized rate in the first quarter of the year. After being revised up to 4.5%, the latest estimate for growth in the first quarter of 2004 is just 2.3%.
The absence of hawkish undertones in the minutes of the MPC's meeting or in the Inflation Report forecasts took markets by surprise yesterday. The dominant view on the Committee remains that the economy will slow over the next couple of years, preventing wage growth from reaching a pace which would put inflation on trac k permanently to exceed the 2% target.
The FOMC's view of the economic outlook and the likely required policy response, set out in yesterday's statement and Chair Yellen's press conference, could not be clearer.
Mexico's inflation is heading down. Wednesday's advance CPI report showed that inflation pressures are finally fading, following temporary shocks in recent months, and the end of the "gasolinazo" effect.
December's labour market report, released today, won't be a game-changer for the near-term outlook for interest rates; January data will be released before the MPC meets in March, and February data will be available at its key meeting in May.
Housing market data yesterday fostered the view that prices are vulnerable to a fall following April's increase in stamp duty--a transactions tax-- and before the E.U. referendum in June. Political uncertainty, however, has rarely had a pervasive or sustained impact on prices in the past.
The Monetary Policy Board of the Bank of Korea will tomorrow hold its final meeting for the year.
LatAm currencies have risen against the USD so far this year, easing the upward pressure on imported good prices and allowing most central banks to cut interest rates. The first direct effects of stronger currencies should be felt by firms which import high-turnover intermediate or final goods.
The MPC looks set to raise Bank Rate to 0.75% on Thursday, from 0.50%, despite below-trend GDP growth in the first half of this year and rapidly falling core CPI inflation.
We have no choice but to revise down our forecast for GDP growth in Q2, now that the threat of a no-deal Brexit likely will hang over the economy beyond March, probably for three more months.
Surveys released yesterday failed to support the MPC's view that the economy has bounced back in Q2.
This week's economic data for the Mexican economy have been encouraging, especially for Banxico, which left its main interest rate unchanged yesterday at 3.0%. Inflation remained on target for the second consecutive month in the first half of February, and the closely-watched IGAE economic activity index--a monthly proxy for GDP--continued to grow at a relatively solid pace, despite the big hit from lower oil prices.
The difficulty with the Fed's shift in strategy, to the pursuit of an average 2% inflation target "over time", is that they don't have the means in the near term to push inflation above the target, in order to offset the long period of sub-2% rates.
Fed Chair Yellen's speech in Cleveland yesterday elaborated on the key themes from last week's FOMC meeting.
Barring a gigantic shock from the Fed this week--we expect a 25bp hike--Eurozone equities will end the year with a solid return for investors, who have been overweight. Total return of the MSCI EU ex-UK should come in around 10%, which compares to a likely flat return for the MSCI World, reflecting the boost from the ECB's QE driving out performance. Our first chart shows the index has been mainly lifted by consumer sector, healthcare and IT stocks, comfortably making up for weakness in materials and energy. The year has been a story of two halves, however, and global headwinds have intensified since the summer, partly offsetting the surge in the Q1 as markets celebrated the arrival of QE and negative interest rates.
A mix of political and economic events have triggered outflows of capital from emerging markets this year. Tensions in Europe, due to the "Grexit" saga, together with China's slowdown and concerns about Fed lift-off have weighed on EM flows. In recent months, though, some of the pressure on EM currencies has eased as the markets have come to expect fewer U.S. rate hikes in the near term.
We're not expecting drama from Chair Yellen's semi-annual Monetary Policy Testimony in the Senate today. Dr. Yellen will want to keep alive the idea of a rate hike next month, but she will not signal that action is likely, given the continuing lack of clarity on the path of fiscal policy.
We have no argument with the consensus view that the language accompanying Wednesday's rate hike will be emollient. The FOMC likely will point out that the policy stance remains very accommodative, and seek to reinforce the idea that it intends to raise rates slowly. That said, recent FOMC statements have not offered any specific guidance on the pace of tightening, saying instead that the Fed "...will take a balanced approach consistent with its longer-run goals... even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
Markets are still discounting Banxico rate increases in the near term, despite the fact that Mexico's inflation is under control. Unless the MXN goes significantly above 18.7 per USD in the near term, or activity accelerates, we see little scope for rate increases until after the Fed hikes. After May's soft U.S. payrolls, and in light of the economic and financial risk posed by the U.K. referendum, we think a hike this week is unlikely.
The Fed will raise rates by 25bp today, but we expect no change in the median expectation-the dotplot-for two rate hikes both next year and in 2018. We fully appreciate that fiscal easing on the scale proposed by President-elect Trump, or indeed anything like it, very likely would propel inflation to a pace requiring much bigger increases in rates.
Investors have lowered once again their expectations for official interest rates and now do not anticipate any rate hikes this year. Markets appear to have judged that the plunge in oil prices will ensure that inflation is too low for the Monetary Policy Committee to tighten policy. Oil prices, however, are not the be-all and end-all for inflation or monetary policy, and we doubt they will distract the MPC from the continued firming of domestic price pressures this year.
We're expecting a hefty increase in February payrolls today, but even a surprise weak number likely wouldn't prevent a rate hike next week. The trends in all the private sector employment surveys are strong and improving, and jobless claims have dropped to new lows too, though we think that's probably less important than it appears.
The latest batch of FOMC speakers yesterday, together with the December minutes--participants said "the committee could afford to be patient about further policy firming"--offered nothing to challenge the idea, now firmly embedded in markets, that the next rate hike will come no sooner than June, if it comes at all.
The MPC's asserted its independence in the minutes of December's meeting, firmly stating that there is "no mechanical link between UK policy and those of other central banks". Markets have interpreted this as supporting their view that the MPC won't be rushed into raising interest rates by the Fed's actions. Investors now expect a nine-month gap between the Fed hike we anticipate next week, and the first move in the U.K.
Colombia's January inflation rate easily exceeded BanRep's 2-to-4% target range yet again, jumping to 7.5% from 6.8% in October, the fastest increase since December 2008. This is putting pressure on BanRep to continue tightening, following 150bp rate hikes, to 6.0%, since September.
In recent weeks LatAm's currencies and stock markets, together with key commodity prices, have risen as financial markets' expectations for a rate increase by the Fed this year have faded. The COP has risen 8.5% over the last month, the MXN is up 2.5%, the CLP has climbed 1.4% and the PEN has been practically stable against the USD. The minutes of the Federal Reserve's latest meeting added strength to this market's view, showing that policymakers postponed an interest rate hike as they worried about a global slowdown, particularly China, the strong USD and the impact of the drop in stock prices.
Today's rate hike will be accompanied by a new round of Fed forecasts, which will have to reflect the faster growth and lower unemployment than expected back in September.
The Fed will hike by 25 basis points today, citing the tightening labor market as the key reason to press ahead with the process of policy normalization. We think the case for adding an extra dot to the plot for both this year and next is powerful.
Back in September, after the Fed decided to hold fire in the wake of market turmoil, we expected rates to rise in December and again in March. We forecast 10-year yields would rise to 2.75% by the end of March. in the event, the Fed hiked only once, and 10-year yields ended the first quarter at just 1.77%. So, what went wrong with our forecasts?
It might seem odd to describe a meeting at which the Fed raised rates for only the third time since 2006 as a holding operation, but that just about sums up yesterday's actions. The 25bp rate hike was fully anticipated; the forecasts for growth, inflation and interest rates were barely changed from December; and the Fed still expects a total of three hikes this year.
We have not been expecting the Fed to raise rates next week, and yesterday's data made a hike even less likely. The September Philly Fed and Empire State surveys were alarmingly weak everywhere except the headline level, and the official August production data were grim.
The Andean economies were in the middle of a perfect storm in the first half of the year, suffering slow recoveries, accelerating inflation and plunging commodity prices and currencies. Under these circumstances it was no surprise that Chile and Peru last week left their main interest rates on hold, close to their lowest levels in four years. The pressure coming from their plummeting currencies, however, means their next moves likely will be rate hikes, but not this year.
The MPC is Back in "Wait and See" Mode...But Two Hikes Likely in 2019, Provided No-Deal Avoided
The further improvement in labor market conditions and the jump in core inflation means that the economic data have given the Fed all the excuse it needs to raise rates today. But the chance of a hike is very small, not least because the fed funds future puts the odds of an action today at just 4%, and the Fed has proved itself very reluctant to surprise investors-- at least, in a bad way--in the past.
We look for the Fed to increase rates today by 25bp to a range of 0.25%-to-0.50%. The FOMC will likely say that policy remains very accommodative and that rate hikes will be slow. Unfortunately, this will provide only temporary relief to LatAm. According to our Chief Economist, Ian Shepherdson, faster wage gains next year in the U.S. will disrupt the Fed's intention to move gradually. If wages accelerate as quickly as we expect, the Fed will need to raise rates more rapidly than it currently expects, which is also faster than markets anticipate. That, in turn, will put EM markets and currencies under further pressure.
The Fed's unanimous vote for a 25bp rate hike was overshadowed by the bump up in the dotplot for next year, with three hikes now expected, rather than the two anticipated in the September forecast. Chair Yellen argued the uptick in the rate forecasts was "tiny", but acknowledged that some participants moved their forecasts partly on the basis that fiscal policy is likely to be eased by the new Congress.
Last week, Banxico, the BCCh and the BCRP all left their reference rates on hold. Their currencies have remained relatively stable in recent months and inflation pressures are under control. In Mexico, Banxico has adopted a more discretionary approach, following two 50bp hikes this year.
LatAm economies are being battered by high inflation triggered by currency sell-offs and El Niño supply shocks, so rates have had to rise despite the challenging global environment. Peru's central bank, the BCRP, was forced to increase interest rates by 25bp to 4.25% last Thursday, the fourth hike in six months, as inflation is far above the central bank's 1-to-3% target range.
The account of BanRep's July meeting revealed a significant tug-of-war between the doves and hawks. The majority argued strongly that Colombia's central bank should hike the main interest rate again, by 25bp. Others judged that the benefits of further tightening did not outweigh the costs.
ate last week, China and the U.S. reached an agreement, averting the planned U.S. tariff hikes on Chinese consumer goods that were slated to be imposed on December 15.
Investors anticipate a shift up in the MPC's hawkish rhetoric today. After August's consumer price figures showed CPI inflation rising to 2.9%--0.2 percentage points above the Committee's forecast--the market implied probabilities of a rate hike by the November and February meetings jumped to 35% and 60%, respectively, from 20% and 40%.
Slower Growth This Year Is Invevitable...But That Doesn't Make Zero Hikes Inevitable Too
Growth is too slow to warrant a rate hike...domestically-generated inflation remain weak
Fed Chair Powell's semi-annual Monetary Policy Testimony today will likely re-affirm that policymakers still think "gradual" rate hikes are appropriate and that the risks to the economy remain "roughly balanced".
Growth won't accelerate until next year...but the MPC is set to hike rates in August anyway
Real wage falls are slowing the economy...Fears of rate hikes this year are overblown
A dovish tightening of Monetary Policy...QE will end this year, nut no rate hike in H1 2019
The Payroll "Slowdown" Won't Last... The Fed Will Hike This Month, and Again Later This Year
A No-Deal Brexit Remains an Unlikely Outcome...Growth will Recover in H2, Facilitating Rate Hike
China Downtrend Worse; Outlook Better..Japan's Bouncy Q4 Won't Be Repeated In Q1...Korea's Job Market Pummelled By Minimum Wage Hike
The Tightening Labor Market is all that Matters...Expect the Fed to Hike at Each Quarter-End
Trade talk and falling stocks are hurting...but the fed is still on course for four hikes this year
Fed tightening is deferred, not cancelled...Expected a December hike after robust fall data
GDP growth won't accelerate until next year...Low inflation will ease pressure to hike rates again
Winter has come as China curbs pollution...Asia will use fed hikes to tackle financial risks
The economy is struggling to rebound in Q2...an August rate hike is far from a done deal
A no-deal brexit remains an unlikely outcome...An October extension will prodive a rate hike window
Yellen's inner hawk escapes...Expect a December hike, and four more next year
The FOMC is split on everything......but a clear majority will vote to hike in December
Back to 2014/2015 for China? A Weak Q3 for Japan, After Rocket-Charged Q2...The BOK Will Kick Its Rate Hike Into the Long Grass
Rates On Hold Until After the Brexit Deadline...But Two Hikes Likely in 2019, When Capex Rebounds
Harvey and Irma will shred late q3/q4 data... ...if the fed doesn't hike in December, they will in march
Focussed on the Macro: The Fed will soon hike, despite soft manufacturing
Focussed on the Macro: The Fed will soon hike, despite soft manufacturing
Markets think a May rate hike is almost certain...but activity and inflation data point to a delay
The Fed Is On Course For Four Hikes This Year...And Another Four In 2018
A rise in inflation will support an August hike....the MPC likely will tighten at a faster rate next year
No end to the brexit paralysis in sight...but growth will remain strong enough for rate hikes
Recovery shifting to a lower gear...but price pressures will force rate hikes next year
China Takes the Trade High Road..The BOJ will Act Before Markets Expect Unemployment Upshift Rules out 2018 BOK Hike
Expectations for a March rate hike have dipped since Fed Vice-Chair Clarida's CNBC interview last Friday.
In Brazil, the minutes of the Copom's November meeting, released yesterday, are consistent with our forecast for a 50bp rate cut in January. At its last two meetings, the BCB cut the Selic rate by only 25bp, to 13.75%, amid concerns about services inflation, global uncertainty, and the Fed's likely rate hike next week.
On the face of it, markets' newfound view that the MPC's next move is more likely to be a rate cut than a hike was supported by May's Markit/CIPS PMIs.
In the midst of heightened and potentially longerlasting Brexit uncertainty, the MPC revised down its forecast for GDP growth sharply yesterday and came close to endorsing investors' view that the chances of a 25bp rate hike before the end of this year have slipped to 50:50.
The FOMC minutes showed both sides of the hike debate are digging in their heels. As the doves are a majority--rates haven't been hiked--the tone of the minutes is, well, a bit do vish. But don't let that detract from the key point that, "Most participants continued to anticipate that, based on their assessment of current economic conditions and their outlook for economic activity, the labor market, and inflation, the conditions for policy firming had been met or would likely be met by the end of the year." Confidence in this view has diminished among "some" participants, however, worried about the impact of the strong dollar, falling stock prices and weaker growth in China on U.S. net exports and inflation.
Japan's machine tool orders remain nasty. Japan's M2 growth shows first signs of looming tax hike.
China still is on track for mild CPI deflation by Q4, PPI deflation in China has bottomed out , Core machine orders in Japan tank in the wake of the state of emergency, Adverse base effects from last year's tax hike will delay Japan's exit from PPI deflation, Surprise spike in Korea's unemployment rate makes sense given the plunge in jobs created
Fed Chair Yellen yesterday reinforced the impression that the bar to Fed action in December, in terms of the next couple of employment reports, is now quite low: "If we were to move, say in December, it would be based on an expectation, which I believe is justified, [our italics] that with an improving labor market and transitory factors fading, that inflation will move up to 2%." The economy is now "performing well... Domestic spending has been growing at a solid pace" making a December hike a "live possibility." New York Fed president Bill Dudley, speaking later, said he "fully" agrees with Dr. Yellen's position, but "let's see what the data show."
The improvement in the Markit/CIPS services PMI in October was pretty limp, supporting our view here that the recovery is shifting into a lower gear. What's more, the poor productivity performance implied by the latest PMIs indicates that wage growth will fuel inflation soon. As a result, the Monetary Policy Committee--MPC--won't be able to wait long next year before raising interest rates. Indeed, we expect the minutes of this month's meeting, released today, to show that one more member of the nine-person MPC has joined Ian McCafferty in voting to hike rates.
Fiscal stimulus, partly financed by a border adjustment tax, and Fed rate hikes, were supposed to be a powerful cocktail driving a stronger dollar in 2017. But so far only the Fed has delivered--we expect another rate hike next month--while Mr. Trump has disappointed in the White House.
We see only a small risk today of the MPC raising interest rates or sending a strong signal that a hike is imminent, for the reasons we set out in our preview of the meeting. The MPC, however, also must decide today whether to wind up the Term Funding Scheme-- TFS--launched a year ago as part of its post-Brexit stimulus measures.
FOMC members in fleeces took to the airwaves en masse on Friday morning from Jackson Hole, but most said pretty much what you'd expect them to say. Arch-hawks Loretta Mester and no-quite-so-hawkish Jim Bullard strongly suggested that they think the time to raise rates is very near, while super-dove Naryana Kocherlakota said he doesn't regard a near-term hike as "appropriate". No surprises there.
• U.S. - Cutting rates by 50bp would be risky for the Fed • EUROZONE - Further ECB easing all but confirmed • U.K. - A pause at the BOE means more hikes in 2020 • LATAM - A pick-up in external demand will soon support economies in LatAm • * Our Asia economics team is on annual leave, publication will resume July 30.
Currency markets often make a mockery of consensus forecasts, and this year has been no exception. Monetary policy divergence between the U.S. and the Eurozone has widened this year; the spread between the Fed funds rate and the ECB's refi rate rose to a 10-year high after the Fed's last hike.
Japan's tertiary index remains below trend despite looming tax hike
Evidence continues to build that Korea's August unemployment plunge was a fluke. October sales tax hike in Japan opens the door for a quicker exit from PPI deflation.
Japan's December wage data suggest household in no mood to weather tax hike
China's PMIs are not yet fully picking up the coronavirus; China's non-manufacturing PMI lifted by local government spending; not yet hit by the virus; Japan's job postings still suggest the unemployment rate is unsustainably low; Japan's national inflation has less far to fall than Tokyo's; The coronavirus will delay the return of Japanese retail sales to pre-tax hike levels; Investment goods drive Japan's IP rebound in December; no real support now for consumer goods production; December probably is as good as it will get for Korean industrial production, for now
Japan's wage growth is not strong enough to support households through the tax hike
In one line: Trichet's ill-time rate hikes in 2011 are a clerical error compared with today's disaster.
In one line: Still committed to rate hikes, but not willing to pull the trigger just yet.
In one line: Resilient wage growth bolsters the case for rate hikes.
Minimal front-loading ahead of Japan's October tax hike so far.
Japanese labour data show early signs of virus hit. Japan's industrial production in a slow recovery... pre-virus. Japan's retail sales still trying to make up lost ground after the tax hike. Tokyo prices already showing signs of virus hit? Korean industrial production wobbles before virus hit.
Judgement pending on Chinese industrial production. Chinese retail sales buoyed by inflation. Chinese FAI growth stable through Q4; local government spending better managed this year. China's housing market still not reached a bottom. Japan's tertiary index plunge is more tax hike than typhoon. Japan's PMIs underline damage from tax hike.
Slowing FAI growth underscores the urgency for more PBoC easing October was painful and the slowdown in Chinese IP growth is far from over and no, households in China won't come to the economy's rescue. Japan sneaks in a tax hike; GDP data unfazed. Japan's tertiary index jars with the GDP data.
More evidence of the damage from the tax hike.
Further weakness to come for Japan's manufacturing PMI. First services hit from the coronavirus is damning. Japan's all-industry activity index suggests the 2019 tax hike was as bad as 2014. A drop in food inflation was enough to offset lagged oil pressures in Japan's January CPI. Ignore the headline; the coronavirus is now hurting Korean exports.
Japan's trade balance continues to struggle with oil gains and post-tax hike recovery. Activity index shows downside risks to Q4 GDP.
BanRep surprised everyone late Friday, moving ahead of the curve by starting a tightening cycle that had been expected to begin later in the year or in Q1. But the seven-board member succumbed in the face of persistent inflationary pressures, and voted unanimously to hike the main interest rate by 25bp to 4.75%, the first move since April 2014.
Investors have revised down their expectations for interest rates since the November Inflation Report and now only a 50% chance of a 25bp hike in Bank Rate is priced-in by the end of this year.
The Fed's insistence this week that U.S. rates will rise only twice more this year helped to ease pressures on LatAm markets this week, particularly FX. The way is now clear for some LatAm central banks to cut interest rates rapidly over the coming months, even before U.S. fiscal and trade policy becomes clear. We expect the next Fed rate hike to come in June, as the labor market continues to tighten. If we're right, the free-risk window for LatAm rate cuts is relatively short.
December's consumer prices figures, released tomorrow, look set to show CPI inflation ticked up to 0.2% from 0.1% in November, despite the renewed collapse in oil prices. The further fall in energy prices this year means that the inflation print won't reach 1% until May's figures are published in June. But Governor Carney has emphasised that core price pressures will motivate the first rate hike--a focus he likely will reiterate in a speech on Tuesday-- meaning that a May lift-off is still on the table.
This week's Fed meeting eased many LatAm investors' minds, fuelling rallies in most of the region's currencies. We think the U.S. labour market is going through a genuine soft patch but will regain momentum over the coming months, prompting policymakers to hike rates in September.
Markets responded to yesterday's disappointing GDP figures by pushing back expectations for the first rise in official interest rates even further into 2017. The first rate hike is now expected--by the overnight index swap market--in April 2017, two months later than anticipated before the GDP release. The figures certainly look weak--particularly when you scratch below the surface--and we expect growth to slow further over the coming quarters. But we don't agree they imply an even longer period of inaction on the Monetary Policy Committee.
The federal debt ceiling was re-imposed last week, with no fanfare, and no reaction in the markets. All eyes were focussed instead on the Fed's rate hike and Chair Yellen's press conference.
August's retail sales figures, released today, look set to show that growth in consumers' spending has remained subpar in Q3, casting doubt over whether the MPC will conclude that the economy can cope with a rate hike this year.
We expect the Fed to drop "patient" from its post-meeting statement today, paving the way for a rate hike in June, data permitting. And the data will permit, in our view, despite what seems to have been a long run of disappointing numbers, and the likelihood that inflation will fall further below the Fed's 2% informal target in the near-term.
Colombia's worrying inflation picture suggests the Central Bank will likely hike rates at least once more before the end of the year, attempting to anchor expectations. The October 30th BanRep minutes, in which the board surprised the market by hiking the main rate by 50bp to 5.25%--consensus was a 25bp increase--made it clear that the decision was based on fear of increased inflation risks, coupled with an improving domestic demand picture. The 50bp hike was not agreed unanimously, with dissenters arguing that the bank should adopt a more gradual approach due the high degree of uncertainty over the global economy. In addition, those favoring a 25bp hike argued that it would be better to move at a predictable pace to avoid possible market turmoil.
The Fed will do nothing and say little that's new after its meeting today. The data on economic activity have been mixed since the March meeting, when rates were hiked and the economic forecasts were upgraded, largely as a result of the fiscal stimulus.
Chile's central bank, the BCCh, admitted defeat in the face of the inflationary effects of the CLP's depreciation, increasing interest rates by 25bp to 3.25% last Thursday, the first hike since mid-2011. Chile is the third LatAm economy in a month to increase rates in response to currency weakness, despite sluggish economic growth.
To paraphrase recent correspondence: "How can you possibly believe, given the terrible run of economic data and the turmoil in the markets, that the Fed will raise rates in March/June/at all this year?" Well, to state the obvious, if markets are in anything like their current state at the time of the eight Fed meetings this year, they won't hike. That sort of sustained downward pressure and volatility would itself prevent action at the next couple of meetings, as did the turmoil last summer when the Fed met in September. And if markets were to remain in disarray for an extended period we'd expect significant feedback into the real economy, reducing--perhaps even removing--the need for further tightening.
We expect the Fed today to shift its dotplot to forecast one rate hike this year, down from two in December and three in September.
Our new Chief U.K. economist, Samuel Tombs, initiated his coverage yesterday with a sombre, non-consensus, message on the economy. Headwinds from fiscal tightening and net trade will weigh on GDP growth next year, but the BoE will likely have to look through such cyclical weakness, and hike as inflation creeps higher. An intensified drag from net trade in the U.K. will, other things equal, benefit the Eurozone. But a slowdown in U.K. GDP growth still poses a notable risk to euro area headline export growth, especially in the latter part of next year.
The June Banxico minutes restated that the U.S Fed's first interest rate increase is the main event awaited by Mexican central bank. Banxico's five member board of governors voted unanimously on June 4th to keep the overnight lending rate target at a record-low 3%, but showed again that board members are fretting over when to hike, as at previous meetings.
The Fed has given itself and markets clear guidance on the minimum requirements for a rate hike-- maximum employment, and inflation at 2% and on track "moderately" to exceed that pace "for some time"--but has offered no clues at all on the drivers of its other key policy tool, namely, the pace of asset purchases.
It would be astonishing if the Fed doesn't raise rates today, and Chair Powell is not in the astonishment business; they will hike by 25bp.
Markets currently judge that U.K. interest rates will rise about six months after the first Fed hike. But the Bank of England seldom lagged this far behind in the past. Admittedly, the slowdown in the domestic economy that we expect will require the Monetary Policy Committee to be cautious. But wage and exchange rate pressures are likely to mean six months is the maximum period the MPC can wait before following the Fed's lead.
The Chancellor used the Autumn Statement to shift the composition of the fiscal consolidation slightly away from spending cuts and towards tax hikes. But in overall macroeconomic terms, he changed little. The fiscal stance is still set to be extremely tight in 2016 and 2017, ensuring that the economic recovery will lose more momentum.
A rate hike today would be a surprise of monumental proportions, and the Yellen Fed is not in that business. What matters to markets, then, is the language the Fed uses to describe the soft-looking recent domestic economic data, the upturn in inflation, and, critically, policymakers' views of the extent of global risks.
Federal Reserve Chair Janet Yellen's testimony this week reinforced our view that the first U.S. rate hike will be in June. The transition to higher U.S. rates will require an unpleasant adjustment in asset prices in some LatAm countries.
A tentative revival in mortgage lending is underway, following the lull in the four months after the MPC hiked interest rates in November.
Today's FOMC announcement will be something of a non-event. Rates were never likely to rise immediately after December's hike, and the weakness of global equity markets means the chance of a further tightening today is zero.
The sell-off in risky assets intensified while we were away, driven by China's decision to loosen its grip on the currency, and looming rate hikes in the U.S. The Chinese move partly shows, we think, the PBoC is uncomfortable pegging to a strengthening dollar amid the unwinding investment boom and weakness in manufacturing.
One way or another, the preliminary estimate of Q1 GDP--due Friday--will have a big market impact, following Mark Carney's warning last week that a May rate hike is not a done deal.
Colombia's central bank, BanRep, increased the monetary policy rate by 25bp to 6.25% on Friday, as expected, and also announced budget cuts and a new FX strategy to try to protect the COP. These measures are similar to those taken by Banxico on Wednesday. The press release, and the tone of the conference after the decision, suggest that more hikes are coming.
The Fed deferred, but did not cancel, the start of its rate normalization last week. As a consequence, December is now the most likely meeting for the first hike. The Fed's core view of the U.S. economy remains the same, but policymakers want a bit more time to see how global developments affect the U.S. Our Chief Economist, Ian Shepherdson, expects the strength of the employment data, better Chinese numbers and calm financial markets to prevent any further postponement beyond Q4.
ECB growth bears looking for the Fed to move in order to take the sting out of the euro's recent strength were disappointed last week. The FOMC refrained from a hike, referring to the risk that slowing growth in China and emerging markets could "restrain economic activity" and put "downward pressure on inflation in the near term." In doing so, the Fed had an eye on the same global risks as the ECB, highlighting increased fears of deflation risks in China, despite a rosier domestic outlook.
Weakness across EM asset markets returned after the April FOMC minutes, released last week, suggested that a June rate hike is a real possibility. The risks posed by Brexit, however, is still a very real barrier to Fed action, with the vote coming just eight days after the FOMC meeting.
Over the past few days we have written about the difference between the Fed's tactics--signalling rate hikes and then choosing not to act in the face of weaker data--and its strategy, which is to normalize rates in the expectation that inflation will head to 2% in the medium-term.
Ian Shepherdson, founder at Pantheon Macroeconomics Ltd., discusses the Federal Reserve's rate hike pattern and how it can provide a summer surprise to markets. He speaks with Bloomberg's Mark Barton on "Bloomberg Surveillance."
Ian Shepherdson, founder at Pantheon Macroeconomics, and Jeff Saut, chief investment strategist at Raymond James, look forward to a potential Federal Reserve rate hike on December 16 and how markets and the U.S. economy may react in the year ahead.
Is the monetary easing cycle in Brazil over?
Why is the EZ current account surplus rising and net exports falling at the same time?
Article by Ian Shepherdson in The Hill
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