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358 matches for " monetary policy":
Global monetary policy divergence has returned with a vengeance. In the U.S., despite recent soft CPI data, a resolute Fed has prompted markets to reprice rates across the curve.
The Eurozone's current account surplus slipped at the start of Q2, falling to €28.4B in April from an upwardly-revised €32.8B in March.
The euro's spectacular rise against the pound has been the key story in European FX markets recently. But the trade-weighted euro, however, is up "only" 6% year-to-date, as a result of the relatively stable EURUSD.
In one line: The cautious approach continues as the economy struggles and uncertainty remains high
The government last week fired the starting gun for the contest to replace Mark Carney as Governor of the Bank of England.
In one line: On hold for now; progress on pension reform is the key.
In one line: No pushback on the July ease, but it's still a bad idea.
In one line: Another bold cut and more stimulus is likely.
At the end of last year, China's Central Economic Work Conference set out the lay of the land for 2019. Cutting through the rhetoric, we think the readout implies more expansionary fiscal policy, and a looser stance on monetary policy.
The BoJ left its policy levers unchanged at the Monetary Policy Committee meeting on Friday. At the press conference, Governor Kuroda was repeatedly asked about the status of the ¥80T annual asset purchase target and what the exit strategy would be.
Brazil's monetary policy committee, the Copom, cut the Selic rate by 25bp to 14.0% in a unanimous decision, without bias, on Wednesday. This marks the start of the first easing cycle since 2012, and it arrives after 15 months with rates held at 14.25%.
At Wednesday's BCB monetary policy meeting, led for the first time by the new president, Roberto Campos Neto, the COPOM voted unanimously to maintain the Selic rate at 6.50%, the lowest on record.
Punished by the global economic slowdown depressing commodity prices, the Mexican economy is now making a gradual comeback, thanks to the continuing strength of its main trading partner, increasing public expenditure on key infrastructure projects, and accommodative monetary policy.
With Fed officials now in pre-FOMC meeting blackout mode, this week will not bring a repeat of Friday's confusion, when the New York Fed felt obligated to issue a clarification following president William's speech on monetary policy close to the zero bound.
LatAm's economies are gradually rebounding, boosted by easier monetary policy in most countries, falling inflation, and a relatively calm external backdrop.
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]."
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".
With Russia and some other emerging economies now in full panic mode, the financial market story is sharply divided between two narratives. Either the plunge in global energy prices acts as positive catalyst by boosting real incomes and allowing most central banks to run easier monetary policy or it is a sign that risk assets are about to hit a deflationary wall.
Markets' reaction last week to the ECB's October meeting accounts--see here--shows that investors are beginning to take seriously the idea of an inflection point in Eurozone monetary policy.
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.
Colombia was the fastest growing economy in LatAm last year but it faces major challenges. The collapse of oil prices--which account for about half of exports--the COP depreciation, rising inflation and Fed's impending monetary policy normalization, are dragging down economic activity and damaging confidence.
For the record, we think the Fed should raise rates in December, given the long lags in monetary policy and the clear strength in the economy, especially the labor market, evident in the pre-hurricane data.
Policymakers in Chile left rates unchanged at their monetary policy meeting last week, maintaining their neutral bias.
The PBoC probably will start soon to run modestly easier monetary policy, but conditions have been tightening consistently for over a year, so a slowdown in economic growth likely is already locked in.
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.
Mr. Draghi was in a slightly more bullish mood yesterday, noting that the significant easing of financial conditions in recent months and improving sentiment show that monetary policy "has worked". Economic risks are tilted to the downside, according to the president, but they have also "diminished".
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.
Argentina's central bank likely will leave its main interest rate at 27.75% tomorrow at its biweekly monetary policy meeting.
The Monetary Policy Committee of the RBI ventured into the unknown yesterday, cutting its benchmark repo rate further, by an unconventional 35 basis points, to 5.40%.
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.
The Monetary Policy Committee of the Reserve Bank of India shocked most forecasters yesterday, including us, with a 4-to-2 majority voting in favour of a 25-basis point rate cut.
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.
The Monetary Policy Committee of the Reserve Bank of India lowered the benchmark repurchase rate by another 25 basis points yesterday, to 6.00%, as widely expected.
Fed Chair Powell's semi-annual Monetary Policy Testimony yesterday broke no new ground, largely repeating the message of the January 30 press conference.
The minutes of the Banxico's monetary policy meeting on February 7, when the board unanimously voted to keep the reference rate on hold at 8.25%, were consistent with the post-meeting statement.
The Monetary Policy Board of the Bank of Korea will tomorrow hold its final meeting for the year.
February's COPOM meeting minutes again signalled that Brazil's central bank will stick with its cautious approach to monetary policy.
Investors focussed last week on Chair Powell's semi-annual Monetary Policy Testimony, but he said nothing much new.
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.
A less rapid tightening of monetary policy in the U.K. than in the U.S. should ensure that gilt yields don't move in lockstep with U.S. Treasury yields over the coming years. But the outlook for monetary policy isn't the only influence on gilt yields. We expect low levels of market liquidity in the secondary market, high levels of gilt issuance and overseas concerns about the possibility of the U.K.'s exit from the E.U. to add to the upward pressure on gilt yields.
Mexico's central bank, Banxico, will hold its first monetary policy meeting of this year tomorrow. It will break with tradition, holding the meeting on Thursday at 1:00 p.m, local time, instead of the previous 9:00 a.m slot.
Brazilian inflation has been well under control in the past few months, laying the ground for a final rate cut at the monetary policy meeting on March 21.
Monetary policy loosening over the last year implies that China's M1 growth already should be picking up.
We think Japanese monetary policy easing essentially is tapped out, both theoretically and by political constraints.
We'd be surprised to see any serious shift in the tone of Fed Chair Powell's semi-annual Monetary Policy Testimony today compared to the FOMC statement and press conference just three weeks ago.
MPC member Michael Saunders, who has voted to raise interest rates at the last two MPC meetings, argued in a speech yesterday that tighter monetary policy is required now partly because it affects the economy with a long lag.
Fed Chair Yellen delivered no great surprises in her semi-annual Monetary Policy Testimony, though she certainly was clear on her attitude to the balance sheet. The Fed does not want to "...use the balance sheet as an active tool of monetary policy."
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.
Mexico's central bank continues to diverge from its regional peers, tightening monetary policy further.
The Bank of England won't set markets alight today. We expect another 9-0 vote to leave rates unchanged at 0.25%, and to continue with the £50B of gilt purchases and $10B of corporate bond purchases announced in August. This is not to say, though, that everything is plain sailing for the Monetary Policy Committee.
Some commentators have asserted that the Monetary Policy Committee won't raise interest rates until all its members agree and investors have fully priced in an increase, arguing that an earlier move would create excessive market turmoil and muddy the Committee's message. But a look back to previous turning points in the interest rate cycle suggests that the Monetary Policy Committee--MPC--hasn't paid much heed to those considerations before.
Muddling Through, Supported by Super-Easy Monetary Policy
All policymaking is about trade-offs; very few government decisions confer only benefits. Someone, or more likely some group, loses. Monetary policy is no exception to the trade-off rule.
Chinese monetary policymakers can rely on several different instruments to affect market and broad liquidity, ranging from various forms of open market operations to interest rates to FX intervention. The tool kit is constantly changing as the PBoC refines its operations.
Back in the dim and increasingly distant past the semi-annual Monetary Policy Testimony--previously known as the Humphrey-Hawkins--used to be something of an event. Today's Testimony, however, is most unlikely to change anyone's opinion of the likely pace and timing of Fed action.
Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research, and Ian Shepherdson, chief economist at Pantheon Macroeconomics, sit down with "Squawk Box" to discuss what they expect of the Fed's announcement on it's monetary policy plan.
Chile's central bank kept rates unchanged last Thursday at 2.50% with a dovish bias, following an unexpected 50bp rate cut at the June meeting.
The BoJ kept all policy measures unchanged at its meeting yesterday.
The PBoC's reformed one-year Loan Prime Rate was published yesterday at 4.25%, compared with 4.31% on the previous LPR, and below the benchmark lending rate, 4.35%.
Chile's Q2 GDP report, released yesterday, confirmed that the economy gathered strength in the first half of the year, consolidating a strong recovery that started in Q3 2017.
Investors will get what they want today from the ECB: additional easing in the form of government bond purchases. The central bank is likely to announce or pre-commit to sovereign QE and corporate bond purchases in a new program that will last at least two years.
Catalonia goes to the polls today, and it will be a close call. Surveys point to a hung parliament in which neither the pro-separatists nor the unionist coalition will secure an absolute majority.
Banxico's tightening cycle has totalled 400 basis points, lifting rates to 7.0%. Since late 2015, Banxico has followed the Fed closely, but other external factors also have guided many of its decisions.
The Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.50%.
Local policy drivers have remained in the spotlight in Brazil, against a background of important recent global events.
China's trade surplus collapsed unexpectedly in April, to $13.8B, from a trivially-revised $32.4B in March.
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 sharp fall in markets' expectations for Bank Rate over the last month has partly reflected the perceived increase in the chance of a no-deal Brexit. Betting markets are pricing-in around a 30% chance of a no-deal departure before the end of this year, up from 10% shortly after the first Brexit deadline was missed.
Friday's CPI data for April provided the final piece of evidence for the significant Easter distortions in this year's data.
It was widely assumed that the MPC simply would regurgitate its key messages from August in the minutes of September's meeting, released yesterday alongside its unanimous no-change policy decision.
Argentina's economy is firing on all cylinders, thanks to improving fundamentals and a positive external backdrop.
Andean inflation remains under control, due to subpar growth, modest pressures on prices for nontradeables, and broadly stable currencies.
Data released on Friday confirmed that Colombian activity remained strong in Q4.
To imagine an unstoppable macroeconomic policy disaster and desperate improvisation, just think of Venezuela.
Retail sales increased by 1.0% month-to-month in August, exceeding our no-change forecast and spurring markets to price-in a 65% chance that the MPC will raise interest rates at its next meeting on November 2, up from 60% beforehand.
Chile's central bank left rates unchanged at 3.5% last Thursday, as expected, and maintained its neutral tone. Inflation pressures are easing, economic activity remains sluggish and global risks have increased.
We expect today's consumer price figures to show that CPI inflation remained at 1.0% in October, after jumping in September from 0.6% in August.
Deflation officially arrived in the Eurozone yesterday as a 6.3% plunge in energy prices pushed the overall rate of inflation to -0.2% year-over-year in December, down sharply from 0.3% in November.
Following Chinese retaliation against new U.S. tariffs last week, the U.S. responded last night, as promised, setting in train the process to slap tariffs on the remaining approximately $300B of imports from China.
Mexico's latest industrial production data were worse than we expected. Output rose just 0.1% month-to-month in September, pushing the year- over-year rate down to -1.3%, from a downwardly revised +0.2% in August.
The chances of the first phase of the Brexit saga concluding soon declined sharply last week.
The Fed today will do nothing to rates and won't materially change the language of the post-meeting statement.
Financial markets have gone into another tailspin over the last fortnight, triggered by rising concern about the possibility of a no-deal Brexit and President Trump's threat of further tariffs on Chinese goods.
The Brazilian Central Bank's policy board--the Copom--voted unanimously on Wednesday to keep the Selic rate on hold at 6.50%.
The process of refinancing existing mortgages at ever-lower interest rates has been a boon for the economy in recent years.
The scars from previous economic crises have not healed fully in the Eurozone, and we think the ECB will extend QE today, by six months to Q3 2017. We expect Mr. Draghi to retain his dovish bias in the opening statement, and to repeat the emphasis on downside risks, due to the weak external environment and political fears.
Signs that the government is softening its Brexit plans, in response to its substantial defeat in the Commons last week, has enabled sterling to recover most of the ground lost against the dollar and euro in the fourth quarter of last year.
The BoJ left policy unchanged yesterday, but we noted some significant additions and modifications in the statement and the press conference.
Colombia is one of the few larger economies in Latin America to have enjoyed solid, positive economic growth over the past two years. But lower commodity prices and last year's central bank tightening, to curb high inflation generated by strong growth, have started to become visible in the main economic data.
Colombia's oil industry--one of the key drivers of the country's economic growth over the last decade--has been stumbling over recent months, raising concerns about the country's growth prospects. But the recent weakness of the mining sector is in stark contrast with robust internal demand and solid domestic production.
AMLO unveiled on Saturday Mexico's budget plan for 2019, calling for a moderate increase in spending, focused mainly on social programs, without raising taxes or the country's debt.
Economic data in Brazil over the second quarter were relatively positive, and June reports released in recent weeks, coupled with leading indicators for July, are encouraging.
China's activity data yesterday made pretty uncomfortable reading for policymakers.
Peru's central bank, BCRP, left rates unchanged last week, at 3.25%, a four-year low. Above-target inflation and currency volatility prevented the Board from cutting rates.
The Eurozone inflation data have been relatively calm in the past six months. The headline rate has been stable at about 1.5%, and the core rate has fluctuated closely around 1%.
Data over the past week give a near-complete picture of how India's economy fared in the fourth quarter.
Data released yesterday confirmed that economic activity is improving in Brazil.
Yesterday's November EZ construction data offered little respite to the gloomy outlook for the Q4 GDP headline.
Economic data released on Wednesday underscored that Brazil was struggling at the end of the first quarter, strengthening our case that Q1 GDP fell 0.2% quarter-on-quarter, the first contraction since Q4 2016.
The outlook for growth in the EZ economy is currently both stable and relatively uncomplicated, at least based on the most widely-watched leading indicators.
Swap markets currently price-in RPI inflation falling to 3.0% this time next year, from 3.2% in November, before recovering to 3.8% at the start of 2020.
The 20bp increase in 10-year yields over the past month doesn't live up to the hype; bondmageddon it was not.
"Is EZ fiscal stimulus on the way?" is a question that we receive a lot these days.
Last week's policy announcement by the ECB and Mr. Draghi's plea to EU politicians to deliver a fiscal boost, indicate that we're living in extraordinary economic times.
China and the U.S. are officially to restart trade talks, according to China's Ministry of Commerce, after previous negotiations stalled in June.
The industrial production trajectory in Mexico looked strong going into Q3, but Friday's report for August threatens to change that picture.
The ECB's negative interest rate policy--NIRP--has come under the spotlight following the violent selloff in Eurozone bank equities. Mr. Draghi reassured markets and the EU parliament earlier this week that new regulation, stronger capital buffers, and common recognition of non-performing loans have made Eurozone banks stronger.
Governor Kuroda has sounded increasingly dovish recently.
Colombia and Peru have been among the top performers in LatAm currency markets in recent weeks, both rising above 4% against the dollar. Higher commodity prices seem to be driving the rally as domestic factors haven't changed dramatically.
Speculation that the ECB is considering a rethink of its inflation target has intensified in the past few weeks.
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.
After a slew of media reports in recent days, we have to expect that the president will today announce that Fed governor Jerome Powell is his pick to replace Janet Yellen as Chair.
A few ECB governors has attempted to lean against dovish expectations in the past week.
Chile's activity numbers at the beginning of Q3 were mediocre, suggesting that the economy remains sluggish. The industrial production index--comprising mining, manufacturing, and utility output--fell by 1.7% year-over-year in July, reversing a 1.6% expansion in June. A disappointing 4.5% year-over-year contraction in mining activity depressed the July headline index, following a 1.4% increase in June. The moderation in output growth was due to maintenance-related shutdowns at key processing plants, and disruptions from labor strikes, especially a three-week strike by contract workers at Codelco--the state-owned mining firm--which badly hit production.
Eurozone current account data yesterday provided further evidence of stabilisation in the economy despite a headline deterioration. The adjusted current account surplus fell to €18.1B in November from a revised €19.5B in October, but the decline was mainly driven by an increase in current transfers; the core components remain solid.
Equities in the Eurozone are off to a strong start in Q2, building on their punchy 12% gain in the first quarter.
While we were on holiday, the data confirmed that inflation in Mexico is rapidly unwinding the increases posted earlier in the year; that the economy was under severe strain in late Q2 and early Q3; and that the near-term outlook has grown increasingly challenging.
If recent labor market trends continue, the four employment reports which will be released before the June FOMC meeting will show the economy creating about 1.1M jobs, pushing the unemployment rate down to 5.3%, almost at the bottom of the Fed's estimated Nairu range, 5.2-to-5.5%.
Brazil's economic data last week were appalling. The IPCA-15 price index rose 1.3% month-to-month, the fastest pace in 12 years, pushing the annual rate to 7.4% in mid-February from 6.7% in mid-January,well above the 6.5% upper bound of the BCB's target range.
The Fed will leave rates unchanged today.
Mexico's economic and financial outlook is deteriorating rapidly and hopes of a gradual recovery over the next three-to-six months are fading away after AMLO's missteps in recent months.
The solid numbers for December mean that core inflation remains on track to breach 2?-?% this year, though probably not until the summer. Over the next few months, base effects will help to hold the core rate close to the December pace.
The Brazilian Central Bank's policy board-- Copom--voted unanimously on Wednesday to cut the Selic rate by 50bp to 6.0%.
The Bank of Korea yesterday laid out its conditions for following July's rate cut with another.
A sharp ARS sell-off was the key highlight while we were away over the holidays.
Central banks in Mexico and Colombia kept their main interest rates on hold last week, due to recent volatility in the currency markets. Policymakers acknowledged the downside risks to growth, particularly from low commodity prices, but inflation fears, triggered by currency weakness, mean they will not be able to ease if growth slows.
China announced the appointment of key political and financial jobs yesterday.
Predicting which way markets would move in response to potential general election outcomes has been relatively straightforward in the past. But the usual rules of thumb will not apply when the election results filter through after polling stations close on Thursday evening.
Brazil's February industrial production numbers, labour market data, and sentiment indicators are gradually providing clarity on the underlying pace of activity growth, pointing to some red flags.
Chile's Imacec index confirmed that economic growth ended the year on a soft note, due mainly to weakness in the mining sector.
The key aspects of the ECB's policy stance will remain unchanged at today's meeting.
Don't expect a pretty picture when Korea's Q1 GDP report appears in the last week of April.
Industrial companies in the Eurozone are still struggling with low growth, but the outlook is stabilising following the near-recession late last year. The Eurozone manufacturing PMI was unchanged at 51.0 in February, trivially lower than the initial estimate of 51.1.
Recently released data in Colombia signal that the economy ended last year quite strongly.
Chile's economy is showing the first reliable signs of improvement, at last. December retail sales rose 1.9% year-over-year, up from 0.4% in November, indicating that household expenditure is starting to revive, in line with a pick-up in consumer confidence and the improving labor market.
We are all for ambitious economic targets, but the ECB's pledge to drive EZ core inflation in the Eurozone up to "below, but close to" 2% is particularly fanciful.
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.
Brazil's external accounts continue to surprise to the upside, with the current account deficit remaining close to historic lows and capital flows performing better than anticipated, mostly due to higher-than- expected FDI.
The last few years have thrown up surprise after surprise for establishment parties. Mr. Abe's Liberal Democrat Party is about as establishment as they come.
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.
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.
The main story to emerge from China's Economic Work Report is the extent of tax cuts, which on our calculations will leave a large funding hole.
Data released last week confirm that the Argentinian economy ended 2017 strongly.
Brazil's external accounts were a bright spot last year, again.
Bond yields in the Eurozone took another leg lower yesterday.
The record 1,178-point drop in the Dow will garner all the headlines today, but a sense of perspetive is in order, despite the chaos. The 113-point, or 4.1%, fall in the S&P 500 was very startling, but it merely returned the index to its early December level; it has given up the gains only of the past nine weeks.
Hard data released in Argentina over recent weeks showed that the economy was resilient in Q1 and early Q2.
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.
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.
While we were out, most of the core domestic economic data were quite strong, with the exception of the soft July home sales numbers and the Michigan consumer sentiment survey.
Yesterday's Brazilian industrial production data were downbeat.
Economic prospects in the Andes have deteriorated significantly in recent weeks, due mainly to the escalation of the trade war.
Final October PMI data today will confirm the Eurozone's recovery remains on track. We think the composite PMI rose to 54.0 from 53.6 in September, in line with the consensus and initial estimate. Data on Monday showed that manufacturing performed better than expected in October, and the composite index likely will enjoy a further boost from solid services. The PMIs currently point to a trend in GDP growth of 0.4%-to-0.5% quarter-on-quarter, the strongest performance since the last recession.
Colombia's GDP growth hit a relatively solid 2.8% year-over-year in Q4, up from 2.7% in Q3, helped by improving domestic fundamentals, which offset the drag from weaker terms of trade.
Brazil's central bank doubled the pace of rate increases last Wednesday, in the wake of the re-elected Rousseff government's promise to tackle the severe inflation problem.
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.
Colombia's Central Bank is about to face a short-term dilemma. The recent fall in inflation will be interrupted while economic growth, particularly private spending, will struggle to build momentum over the second half.
The FOMC has gone all-in, more or less, on the idea that the headwinds facing the economy mean that the hiking cycle is over.
Japan's retail sales values jumped 1.2% month-on-month in October, after the upwardly-revised 0.1% increase in September.
We're maintaining our estimate of Mexico's Q2 GDP growth, due today, namely a 0.2% year- over-year contraction, in line with a recent array of extremely poor data.
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.
Yesterday's BoJ statement, outlook and press conference raised our conviction on two key aspects of the policy outlook.
GDP growth in India slowed sharply in the first quarter of the year, as expected--see here--opening the door for the RBI to cut interest rates further at its policy announcement tomorrow.
Chile's economy started the third quarter decently, after taking a series of hits, including low commodity prices and the slowdown of the global economy.
Yesterday's ECB meeting was comfortably uneventful for markets.
Recent market turmoil and concerns on the outlook for global growth have re-awakened talk of stimulus. For the BoJ, this inevitably raises the question of what could possibly be done, given that policy already appears to be on the excessively loose side of loose.
The Eurozone's external surplus rebounded further over the summer.
It's hard to read the minutes of the April 30/May 1 FOMC meeting as anything other than a statement of the Fed's intent to do nothing for some time yet.
Fed Chair Yellen is a committed believer in the orthodox idea that inflation is largely a cost-push phenomenon, and that the most important cost, by far, is labor. So in order to predict what Dr. Yellen might say about the outlook for Fed policy in her Testimony today--beyond the language of the January FOMC statement--we have to take a view on her assessment of the state of the labor market.
Chile's central bank, the BCCh, held its reference rate unchanged at 2.75% on Tuesday, in line with the majority of analysts' forecasts.
The headline in yesterday's ECB Q2 bank lending survey seemed almost tailor-made for the central bank to deliver a dovish message to markets this week.
Sterling depreciated further last week as the Prime Minister's Brexit plans were tweaked by Brexiteers and given a lukewarm reception by the European Commission.
The PBoC hiked its 7-day reverse repo rate by 5bp yesterday, stating that the move was a response to the latest Fed hike.
The COPOM meeting was the centre of attention in Brazil this week. The committee cut the main rate by 25 basis points to a new historical low of 6.50%, in line with market expectations.
Public borrowing was below consensus expectations in August, fuelling speculation that the Chancellor might pare back the remaining fiscal tightening in the Autumn Budget on November 22.
Korea's trade figures for the first 20 days of November, published yesterday, gave the first real glimpse in a long time of how its exporters are truly performing.
Japanese labour cash earnings data threw analysts another curveball in July, falling 0.3% year-over-year. At the same time, June earnings are now said to have risen by 0.4%, compared with a fall of 0.4% in the initial print.
Brazil's central bank is finally decisively facing its demon, persistently high inflation. The eight-member policy board, known as Copom, decided unanimously on Wednesday to increase the Selic rate by 50bp to 12.25%, the highest level in more than three years, in line with the consensus.
Korea's preliminary Q4 GDP report was stronger than nearly all forecasters, including ourselves, expected.
November's labour market data were the last before the MPC's February meeting, when it will conduct its annual assessment of the supply side of the economy.
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.
Data released in recent days confirm the story of a struggling economy and falling inflation pressures in Mexico, strengthening our forecast of interest rate cuts over the second half of the year.
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.
November's interest rate rise, which took investors by surprise, was triggered in part by the MPC slashing its estimate of trend growth to 1.5%, from an implicit 2.0%.
After three days of jaw-dropping actions from President Trump, the position seems to be this: The U.S. will apply 15% tariffs on imported Chinese consumer goods, rather than the previously promised 10%, effective in two stages on September 1 and December 15.
The Bank of Japan's biannual Financial System Report was published earlier this week.
Data released in recent days are confirming the story of a struggling economy and falling inflation pressures in Mexico, strengthening our base case of interest rate cuts over the second half of the year.
We have tweaked our third quarter GDP forecast in the wake of the September advance international trade and inventory data; we now expect today's first estimate to show that the economy expanded at a 4.0% annualized rate.
A growing number of economists have marked down their forecasts for Chinese growth next year to below the critical 6% year-over-year rate, required to ensure that the authorities meet their implicit medium- term growth targets.
Mr. Abe yesterday called a snap general election, to be held on October 22nd; more on this in tomorrow's Monitor. For now, note that the election comes at a reasonably good stage of the economic cycle, hot on the heels of very rapid GDP growth in Q2, while the PMIs indicate that the economy remained healthy in Q3.
While we were out, Brazil's economic and political situation continued to improve, allowing the BCB to cut the Selic rate by 100bp to 9.25% at its July 26th meeting, matching expectations.
The Colombian economy--the star of the previous economic cycle in LatAm--is now slowing significantly, due mostly to strong external headwinds. Exports plunged by 40% year-over-year in January, down from -29% in December, with all of the main categories contracting in the worst performance since 1980.
The participation rate--the proportion of people either in or looking for work--has held steady over the last decade, despite the ageing of the population and the rise in student numbers.
China's 2018 property market boomlet let out more air last month.
Chair Yellen's Testimony sought clearly to tell markets that the Fed has upgraded its view on growth, and the state of the labor market. After reading the first few paragraphs, which focussed clearly on the good news, though peppered with the usual caveats, the door was open for the section on policy to signal unambiguously that the Fed is close to its first tightening.
The slowdown in households' income growth since the referendum has not pushed up mortgage default rates, so far. Employment grew by just 0.2% quarter-on-quarter in Q3 and 0.1% in Q4, well below the 0.5% average rate seen in the three years before the referendum.
The PBoC and Ministry of Finance have been locked in a relatively public debate recently over which body should shoulder the burden of stimulating the economy as growth slows and trade tensions take their toll.
Financial markets' inflation expectations have risen sharply since the spring. Our first chart shows that the two-year forward rate derived from RPI inflation swaps has picked up to 3.8%, from 3.5% at the end of April.
The Reserve Bank of India was hit by another shock resignation yesterday, with Deputy Governor Viral Acharya confirming his early departure in late July, before the next meeting in August, and well before his term was scheduled to end at the close of this year.
China's growth can be decomposed into the structural story and the mini-cycle, which is policy- driven.
Mexico's inflation nudged up to a fresh 16-year high in August, but the details of the report confirmed that underlying pressures are easing, in line with our core view.
Japanese PPI inflation rose sharply to 2.6% in July from 2.2% in June, well above the consensus for a modest rise.
Korea's labour market took an overdue breather in March after an extremely volatile start to the year.
Normal service appears to have resumed in August, with payrolls rising by 201K, very close to the 196K average over the previous year.
The Mexican economy's brightest spot continues to be private consumption.
The resilience and adaptability that the Chilean economy has shown over previous cycles has been tested repeatedly over the last year. Uncertainty on the political front, falling metal prices, and growing concerns about growth in China have been the key factors behind expectations of slowing GDP growth.
Mexico's inflation rate ended 2018 in line with market expectations, strengthening the case for interest rates to remain on hold in the near term.
Manufacturers in the Eurozone stood tall mid-way through Q2, despite still-subdued leading indicators.
The MPC went against the grain last month by forecasting that CPI inflation would overshoot the 2% target if it raised Bank Rate as slowly as markets anticipated.
The border security agreement between the U.S. and Mexico has strengthened hopes that the Sino- U.S. trade war will end soon.
The CBO reckons that the April budget surplus jumped to about $179B, some $72B more than in the same month last year. This looks great, but alas all the apparent improvement reflects calendar distortions on the spending side of the accounts.
In an interview with Bloomberg on Friday, PBoC Governor Yi Gang hinted at the intended policy if the trade war escalates.
We agree wholeheartedly with the consensus view that the economy would enter a recession in the event of a no-deal Brexit on October 31.
Chile's central bank left its policy rate on hold last Friday at 3.0%, in line with market expectations, amid easing inflationary pressures and a struggling economy.
Samuel Tombs has more than a decade of experience covering the U.K. economy for investors. At Pantheon, Samuel's research is rigorous, free of dogma and jargon, and unafraid to challenge consensus views. His work focuses on what matters to professional investors: The links between the real economy, monetary policy and asset prices. He has a strong track record of getting the big calls right. The Sunday Times ranked Samuel as the most accurate forecaster of the U.K. economy in both 2014 and 2018. In addition, Bloomberg consistently has ranked Samuel as one of the top three U.K. forecasters, out of pool of 35 economists, throughout 2018 and 2019. His in-depth knowledge of market-moving data and his forensic forecasting approach explain why he consistently beats the consensus. Samuel's work on Brexit goes beyond simply reporting developments and is always analytical and unbiased, enabling investors to see through the noise of the daily headlines. While his analysis points to a particular path that politicians will take, he acknowledges the inherent uncertainty and draws out the economic and financial market implications of all plausible Brexit scenarios. Samuel holds an MSc in Economics from Birkbeck College, University of London and an undergraduate degree in History and Economics from the University of Oxford. Prior to joining Pantheon in 2015, he was Senior U.K. Economist at Capital Economics. In 2011, Samuel won the Society of Business Economists' prestigious Rybczynski Prize for an article on quantitative easing in the UK. He is based in London but frequently visits our other offices. Recent key calls include: 2018 - Correctly forecast that GDP growth would slow and inflation would undershoot the MPC's initial forecast, prompting the Committee to shock investors and almost other economists by waiting until August to raise Bank Rate, rather than pressing ahead in May. 2017 - Argued that the MPC was wrong to expect CPI inflation to stay below 3% following sterling's depreciation. He also highlighted that economic indicators pointed to the Conservatives losing their outright majority in the snap general election.
The BoJ had two tasks at its meeting yesterday.
Inflation in the euro area edged higher in November, but our prediction of a rebound in the core proved to be wrong. Headline inflation increased to 1.5% in November, from 1.4% in October.
Judging from our inbox, the idea that the Fed might switch to some form of price level targeting, replacing its current 2% inflation target, is the big new idea for 2018.
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.
Recent economic weakness in Brazil, particularly in domestic demand, and the ongoing deterioration of confidence indicators, have strengthened the case for interest rate cuts.
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.
The single most startling development in the labor market data in recent months is acceleration in labor force growth. The participation rate has risen only marginally, because employment has continued to climb too, but the absolute size of the labor force is now expanding at its fastest pace in nine years, up 1.9% in the year to September.
Chile and Peru faced similar growth trends in 2018, namely, a solid first half, followed by a poor second half, particularly Q3.
The consumer in Brazil was off to a strong start to the first quarter, and we expect household spending will continue to boost GDP growth in the near term.
Japan's Q2 GDP was driven by the twin pillars of private consumption and capex.
The strength in payrolls in recent months is real. The three-month moving average increase in private payrolls now stands at 280K, despite adverse seasonal adjustments totalling 91K in the fourth quarter, compared to the same period last 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.
German inflation pressures are rising. Yesterday's final September CPI report showed that inflation rose to 0.7% year-over-year, from 0.4% in August, chiefly as a result of continued easing of deflation in energy prices.
The January core CPI numbers are consistent with our view that the U.S. faces bigger upside inflation risks than markets and the Fed believe.
The equity market this year has been a story of two halves. Hopes of a sustainable economic recovery pushed the benchmark Eurozone equity index to an 7.5% increase in the first six months of the year.
Japan's PPI inflation was unchanged, at 3.0%, in August.
Last week's decision by the ECB to keep rates unchanged until the beginning of 2020, at least, raises one overarching question for markets.
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.
We struggle to see how the pro-separatist movement in Catalonia can move forward from here.
Brexiteers have downplayed the economic consequences of a no-deal exit by arguing that a further depreciation of sterling would cushion the blow.
Markets are looking for the BCCh to remain on hold and the BCRP to ease on Thursday; we think they will be right. In Chile, the BCCh will hold rates because inflation pressures are absent and economic activity is stabilizing following temporary hits in Q1 and early Q2.
Chinese PPI inflation surprised analysts with a sharp rebound to 6.3% in August, from 5.5% in July, above the consensus, 5.7%.
Brazil's political situation is steadily improving, with the latest events proving a step in the right direction.
The key piece of evidence supporting our view that housing market activity has peaked for this cycle is the softening trend--until recently--in applications for new mortgages to finance house purchase.
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.
It's tempting to conclude that the pick-up in year over-year growth in average weekly wages, excluding bonuses, to a three-year high of 3.1% in July, from 2.8% in June, signals that employees' bargaining power has strengthened and that a sustained wage recovery now is under way.
The Chancellor warned last week that he would hold an Emergency Budget shortly after a vote to leave the E.U. to address a £30B black hole in the public finances. The £30B--some 1.6% of GDP-- is the mid-point of the Institute for Fiscal Studies' estimates of the impact of Brexit on public borrowing in 2019/20, which were based on the GDP forecasts of a range of reports.
Politics are once again encroaching on the economic story in the Eurozone. At the ECB, this week has so far been a tumultuous one.
Markets were all over the place yesterday in response to the messages from the ECB.
China's money and credit numbers were once again unspectacular in August. M2 growth edged up to 8.2% year-over-year, from 8.1% in July.
China's money and credit data released last Friday reaffirm our impression that the tightening has gone too far.
No surprises from Chile's central bank last week, after leaving rates unchanged for the third consecutive month, in the light of recent data confirming the sluggish pace of the economic recovery. In the communiqué accompanying the decision, the BCCh kept their tightening bias, signaling that rates will rise in the near term.
In one line: A bold cut to help the economic recovery, more to come.
Recent data have confirmed that Colombian economic activity is still fragile, and that downside risks increased in Q1 as oil prices hav e slipped. The ISE economic activity index rose just 1.0% year-over-year in January, down from a 1.6% average gain in Q4.
Recent data have confirmed that growth in the Andean economies--Colombia, Chile and Peru--faced downward pressure in Q1, but some leading indicators and recent hard data suggest that we should expect better news ahead.
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Inflation in Mexico remains relatively sticky, limiting Banxico's capacity to adopt a more dovish approach, despite the subpar economic recovery.
In principle, predicting the interest rate policies of an inflation-targeting central bank should be simple. Our first chart shows a standard Taylor Rule rate for the Eurozone based on the ECB's inflation target of 2%, the long-run average unemployment rate and a long run "equilibrium interest rate" of 1.5%. This framework historically has been a decent guide to ECB policy.
Fed Chair Yellen said nothing very new in the core of her Monetary Policy Testimony yesterday, repeating her view that rates likely will have to rise this year but policy will remain accommodative, and that the labor market is less tight than the headline unemployment rate suggests. The upturn in wage growth remains "tentative", in her view, making the next two payroll reports before the September FOMC meeting key to whether the Fed moves then.
This week's Monetary Policy Committee meetings in Chile, Mexico and Colombia look set to dominate market events in LatAm. On Friday, we expect Mexico's Banxico to keep rates on hold at 3.75%, after its unexpected 50bp increase in mid-February. At that time, the board cited growing concerns about financial markets, Mexico's weakened currency, and the country's fiscal situation, as reasons for its move.
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.
Mr. Draghi's introductory statement before yesterday's hearing at the European Parliament repeated that the ECB will "review and possibly reconsider its monetary policy stance in March." But it didn't provide any conclusive smoking gun that further easing is a done deal.
If clarity is the first test of written English, the FOMC failed miserably yesterday. "Considerable time" is gone, but the new formulation--"the Committee judges that it can be patient in beginning to normalize the stance of monetary policy"--was not clearly defined, though the FOMC did say it is "consistent with its previous statement".
This week's key market event likely will be the Monetary Policy Committee's meeting on Thursday, rather than the Budget on Wednesday, which probably will see the Chancellor stick to his previous tough fiscal plans.
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.
Brazil's monetary authority adopted a neutral tone and kept its main rate on hold at 6.5% at its monetary policy meeting on Wednesday, surprising investors.
Chief U.S. Economist Ian Shepherdson comments on the Fed Monetary Policy Meeting in March
Chile's central bank left rates unchanged on Tuesday for the fourth consecutive month, as recent data confirmed the sluggish pace of the economic recovery and inflation edges down closer to the target range. In the statement accompanying the decision, the BCCh kept its tightening bias, saying that the normalisation of monetary policy needs to continue at a data-dependent pace, in order to achieve its 3% target.
For the record, we think the Fed should raise rates in December, given the long lags in monetary policy and the clear strength in the economy, especially the labor market, evident in the pre-hurricane data.
The consensus view on the Monetary Policy Committee, that it will take two years for CPI inflation to return to the 2% target, looks complacent. Leading indicators suggest that price pressures will return faster than both policymakers and markets expect. Interest rates are therefore likely to rise in the first half of 2016, even if the recovery loses momentum.
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.
February's consumer price figures, released tomorrow, are likely to show that CPI inflation has picked up again, perhaps to 0.5%--the highest rate since December 2014--from 0.3% in January. This will give the Monetary Policy Committee more confidence in its judgement that CPI inflation will be back at the 2% target in two years' time.
February's consumer price figures, released yesterday, put more pressure on the MPC to stick to its plans for an "ongoing" tightening of monetary policy, despite the uncertainty created by the Brexit chaos.
The global economy is heading towards a new scenario, triggered by the impending start of the monetary policy normalization process in the U.S. In some major economies, notably the Eurozone, the Fed's actions will not derail or even jeopardize the cyclical economic upturn.
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.
If clarity is the first test of written English, the FOMC failed miserably yesterday. "Considerable time" is gone, but the new formulation--"the Committee judges that it can be patient in beginning to normalize the stance of monetary policy"--was not clearly defined, though the FOMC did say it is "consistent with its previous statement".
The Monetary Policy Board of the Bank of Korea yesterday left its benchmark base rate unchanged, at 1.50%.
In yesterday's Monitor we set out the risk that accelerating wages will force the Fed to raise rates more quickly than expected, but we didn't have space to address the underlying premise of this story, namely, the idea that inflation is largely a cost-push phenomenon. From the perspective of fixed income investors, it might not seem to matter whether this is a realistic description of the inflation process, because Fed Chair Yellen believes it wholeheartedly, and her hands are on the levers of monetary policy.
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.
Inflation pressures in LatAm are moderating, and governments have been taking steps to pursue fiscal consolidation. These factors, coupled with a relatively favourable external environment, are providing policymakers with the opportunity to start relaxing monetary policy.
Gilt yields have risen sharply over the last month, even though the Monetary Policy Committee is just one-third of the way through the £60B bond purchase programme announced in August. Government bond yields in other G7 economies also have increased, but not as much as in Britain.
Investors currently think that official interest rates are more likely to fall than rise this year. Overnight index swap markets are factoring in a 30% chance of a rate cut by December, but just a 1% chance of an increase by year-end. The case for expecting looser monetary policy, however, remains unconvincing.
Mark Carney's assertion that "...some monetary policy easing will likely be required over the summer" is a clear signal that an interest rate cut is in the pipeline. But easing likely will be modest, due to the much higher outlook for inflation following sterling's precipitous decline.
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...
Economic survey data have been upbeat recently, but key Eurozone data releases yesterday suggest the ECB will be under pressure to increase monetary policy stimulus further this month. The advance inflation estimate showed that the euro area slipped back into deflation in September, as inflation fell to -0.1% year-over- year, from +0.1% in August. The fall was mainly due to a 8.9% collapse in energy prices, though, and we are very confident the relapse is temporary.
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.
Markets were on the right side of the argument with economists about the outlook for monetary policy in 2015, but we doubt history will repeat itself this year. The consensus among economists a year ago was for interest rates to rise to 0.75% from 0.5% by the end of 2015, in contrast to the markets' view that an increase was unlikely.
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.
A dovish tightening of Monetary Policy...QE will end this year, nut no rate hike in H1 2019
While we were out, monetary policy in Latin America was unchanged, except in Brazil, where the Monetary Policy Committee--Copom--this week raised the Selic rate by 50bp to 13.25%, in line with expectations. Looking ahead, we now expect no changes in policy in Brazil or elsewhere over the next few months, or at least until the Fed starts hiking rates.
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.
While we were out, Brazil's Monetary Policy Committee--Copom-- increased the Selic rate by 50bp to 14.25% on July 29th. The short statement indicated that the decision was unanimous and without bias. But it also signaled that the Copom is ready to end the tightening cycle if the data and, especially, the BRL, permit.
Brazil's central bank has ignored, so far, the severe economic downturn and has continued its aggressive monetary tightening in order to regain credibility and curb stubbornly high inflation. In contrast, Mexico's central bank is in an enviable position, with inflation below target and under control. Its monetary policy is mainly dependent on the Fed's rate normalization.
Chair Yellen has become quite good at not giving much away at her semi-annual Monetary Policy Testimony.
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.
The Monetary Policy Committee likely will not follow up August's stimulus measures with another rate cut at its meeting on Thursday. The partial revival in surveys of activity and confidence have weakened the case for immediate action.
Chile's Central Bank's monetary policy meeting, scheduled for tomorrow, likely will be one of the most difficult in recent months. Economic activity remains soft, and GDP likely contracted in Q4, due to weakness in mining output and investment.
Markets rightly interpreted yesterday's above consensus GDP report as having little impact on the outlook for monetary policy.
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.
Consumer price figures for March, released on Tuesday, likely will show that CPI inflation has taken another step up, probably to 0.4% from 0.3% in February. This should jettison lingering fears that the U.K. is mired in deflation and bolster the Monetary Policy Committee's conviction that inflation will hit the 2% target within the next two years.
Back in April 2012, Janet Yellen--then Fed Vice-Chair--spoke in detail about the labor market and monetary policy. The key point of her labor market analysis was that it was impossible to know for sure how much of the increase in unemployment--at the time, the headline rate was 8.2%--was structural, and how much was cyclical.
Banxico's monetary policy meeting on Thursday was the first to be attended by the two new deputy governors, Jonathan Heath and Gerardo Esquivel, economists appointed by AMLO.
We are easily excitable when it comes to monetary policy and macroeconomics, but we are not expecting fireworks at today's ECB meetings.
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.
Recent economic weakness in Brazil, particularly in the labor market, has strengthened our view that the central bank is close to the end of its painful, but necessary, tightening cycle. We expect the BCB to increase its policy rate by 50bp to 14.25% at next week's monetary policy meeting, and then leave the rate on hold for the foreseeable future.
The monetary policy committee--Copom--of the BCB kept Brazil's main interest rate on hold at 14.25% at its Wednesday meeting. After seven consecutive increases since October 2014, totaling 325bp, policymakers brought the tightening cycle to an end. They are alarmed at the depth of the recession, even though inflation remains too high and public finances are collapsing.
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 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.
Mexico's central bank left its main interest rate unchanged last week, citing the need for cautious monetary policy as the economy has lost some momentum during the first months of the year, despite the risk of inflation pass-though effects from the weaker MXN.
Perhaps the biggest single reason for the Fed's reluctance, so far, to move away from monetary policy designed to cope with catastrophe is that no-one knows for sure how much of the damage has been repaired, and how close the economy is to normalizing.
BoJ Governor Kuroda has piqued interest with his recent comments on the "reversal rate", the rate at which easy monetary policy becomes counterproductive, due to the negative impact on financial intermediation.
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.
Mixed comments last week by members of the governing council raised doubts over the ECB's resolve to add further stimulus next month. But the message from senior figures and Mr. Draghi remains that the Central Bank intends to "re-assess" its monetary policy tools in December. Our main reading of last month's meeting is that Mr. Draghi effectively pre-committed to further easing. This raises downside risks in the event of no action, but the President normally doesn't disappoint the market in these instances.
The minutes from Banxico's August 11 monetary policy meeting--in which Board members unanimously voted to keep rates on hold at 4.25%--confirmed that the bank's policy guidance remains broadly neutral. Subdued economic activity, favourable inflation and gradual fiscal consolidation explain policymakers' position.
The latest PMIs have added to the weight of evidence that the economic recovery has lost momentum this year. The prevailing view in markets, however, that the Monetary Policy Committee is more likely to cut--rather than raise--interest rates this year continues to look misplaced because inflation pressure is building.
Markets have interpreted the Monetary Policy Committee's "Super Thursday" releases as an endorsement of their view that interest rates will remain on hold for another year. We think the Committee's communications were more nuanced and believe the door is still open to an interest rate rise in the second quarter of next year.
Tomorrow, Mexico's INEGI will release its inflation report for the second half of May, which is of key importance for Banxico's monetary policy. The Bank, in particular governor Agustin Carstens, has said on many occasions that it will watch external conditions and their impact on consumer prices closely. We expect inflation to edge down to 2.9% year-over-year in May, thanks to a 0.1% increase in the second half.
Evidence that households are not benefiting much from the Monetary Policy Committee's easing measures mounted yesterday, after the release of August data on advertised borrowing rates. Our first chart shows the drop in swap rates and average quoted mortgage rates since the end of last year.
The price of Brent oil has fallen sharply to $40 per barrel from about $50 just a month ago, and speculation is mounting that it could plunge to $20 soon. But CPI inflation should still pick up over coming months, provided oil prices remain above $30. And the absence of "second-round" effects of lower oil prices this year should reassure the Monetary Policy Committee that lower oil prices won't bear down on inflation over the medium-term.
The Monetary Policy Committee continues to assert that it can leave interest rates at rock-bottom levels, even though the unemployment rate has returned to its pre-recession level, because it understates the extent of slack in the labour market. If that hypothesis were correct, however, the relationship between the unemployment rate and wage growth would have weakened. But this clearly has not happened, as our first chart shows.
Household sentiment in Mexico continues to improve, consistent with tailwinds from low inflation, accommodative monetary policy, and the improving labor market. The consumers confidence index rose to 94.7 in June from 92.0 in May, with four of the five components improving, especially big-ticket purchasing expectations and expectations for the economy.
The recent less-bad growth and inflation data in Brazil are encouraging news and are setting the stage for easing in October. The minutes of the Copom's August 31 monetary policy meeting, released yesterday, were less hawkish than in previous months, indicating that policymakers are gauging the possibility of cutting rates.
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.
This week's uproar over the ECB's purchases of Italian debt in May--or lack thereof--shows that monetary policy in the euro is never far removed from the political sphere.
The Monetary Policy Committee of the Reserve Bank of India voted yesterday to cut the benchmark repo rate by a further 25 basis points, to 5.75%, a nine-year low.
A long period of extremely accommodative U.S. monetary policy generated sizable capital inflows and asset price appreciation in EM countries.
Mexico's data over the last few weeks have confirmed our view that private consumption remains the key driver of the current economic cycle. Solid economic fundamentals, thanks to stimulative monetary policy and structural reforms, have supported the domestic economy in recent quarters. Falling inflation has also been a key driver, slowing to 2.5% by mid-September, a record low, from an average of 4% during 2014.
The minutes of the May 2/3 FOMC meeting today should add some color to policymakers' blunt assertion that "The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term."
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.
Data released this week in Brazil, coupled with the message from President Bolsonaro at the World Economic Forum, vowing to meet the country's fiscal targets and reduce distortions, support our benign inflation view and monetary policy forecasts for this year.
The Monetary Policy Board of the Bank of Korea yesterday left its benchmark base rate unchanged, at 1.75%, at its first meeting of the year.
The ECB sent a strong signal yesterday that it is ready to fight deflation with a full range of unconventional monetary policy tools. Asset purchases, including sovereigns, to the tune of €60B per month will begin in March, and will run until end-September 2016, but Mr. Draghi noted that purchases could continue if the ECB is not satisfied with the trajectory of inflation.
The publication yesterday of the first BCB quarterly inflation report under the new president, Ilan Golfajn, revealed his initial views on inflation, the currency, and monetary policy. Overall, Mr. Golfajn has taken a hawkish approach. We think Brazil's first rate cut will come no earlier than Q4, likely at the final meeting of the year, providing the government continues the fiscal consolidation process and inflation keeps falling.
Soon after last week's vote to keep Bank Rate at 0.50%, the MPC's doves were quick to assert that monetary easing is still imminent. A speech by Andy Haldane, published on July 15, called for "... a package of mutually complementary monetary policy easing measures" that should be "delivered promptly and muscularly". Meanwhile, Gertjan Vlieghe, who was alone in voting for a rate cut in July, wrote in The Financial Times last week that he also favours "a package of additional measures" in August.
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.
We tend to keep a close eye on monetary policy initiatives in Japan, as the BOJ's fight to spur inflation in a rapidly ageing economy resembles the challenge faced by the ECB.
Fed Chair Yellen set out a robust and detailed defense of the orthodox approach to monetary policy in her speech in Amherst, MA, yesterday afternoon. Her core argument could have come straight from the textbook: As the labor market tightens, cost pressures will build. Monetary policy operates with a "substantial" lag, so waiting too long is dangerous; the "...prudent strategy is to begin tightening in a timely fashion and at a gradual pace".
Sterling will be under the spotlight again today when four members of the Monetary Policy Committee, including Governor Mark Carney, answer questions from the Treasury Select Committee about the recent Inflation Report.
Multiple factors have shaken LatAm financial markets this week. China's market turmoil, commodity price oscillations, currency volatility, and political mayhem in every corner of the region, have all conspired against markets. But market chaos has also driven some central banks to rethink their monetary policy plans. For EM, in particular for LatAm, the stance of the Federal Reserve is key, given the region's close ties to the U.S., and the dollar.
Brazil's macroeconomic scenario is becoming easier to navigate for the central bank. Both actual inflation and expectations are slowing rapidly, as shown in our first chart. And since the March BCB monetary policy meeting, the BRL has appreciated about 10% against the USD, while commodity prices and EM sentiment have also improved markedly.
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%.
In yesterday's Monitor, we suggested that China's monetary policy stance is now easing.
Global economic growth continues to fall short of expectations, and the call for aggressive fiscal stimulus is growing in many countries. This is partly a function of the realisation that monetary policy has been stretched to a breaking point. But it is also because of record low interest rates, which offer governments a golden and cheap opportunity to kickstart the economy. One of the main arguments for stronger fiscal stimulus is based on classic Keynesian macroeconomic theory.
Household sentiment in France continues to improve, consistent with tailwinds from low energy prices and accommodative monetary policy. INSEE's measure of consumer confidence rose to 94 in April, up from 93 in March, the highest since November 2010.
This week is, potentially, hugely important in determining the Fed's near-term view of the real state of the labor market and its approach to monetary policy over the next few months. The key event is the release of the fourth quarter employment cost index, which could make a material difference to perceptions of the degree of wage pressure.
The uncertainty over the new U.S. administration's economic policies new is clouding the outlook for the Eurozone economy. The combination of loose fiscal policy and tight monetary policy in the U.S. should be positive for the euro area economy, in theory. It points to accelerating U.S. growth--at least in the near term--wider interest rate differentials and a stronger dollar. In a " traditional" global macroeconomic model, this policy mix would lead to a wider U.S. trade deficit, boosting Eurozone exports.
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.
Eurozone investors continue to look to the ECB as the main reason to justify a constructive stance on the equity market. Last week, the central bank all but promised additional easing in March, but the soothing words by Mr. Draghi have, so far, given only a limited lift to equities. Easy monetary policy has partly been offset by external risks, in the form of fears over slow growth in China, and the risk of low oil prices sparking a wave of corporate defaults. But uncertainty over earnings is another story we frequently hear from disappointed equity investors. We continue to think that QE and ZIRP offer powerful support for equity valuations in the Eurozone, but weak earnings are a key missing link in the story.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, and Conrad Dequadros, senior economist at RDQ Economics, discuss rising real yields and Federal Reserve monetary policy.
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, analyses the latest monetary policy moves from the Bank of Japan.
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, analyses the latest monetary policy moves from the Bank of Japan.
Andres Abadia authors our Latin American service. Andres is a native of Colombia and has many years' experience covering the global economy, with a particular focus on Latin America. In 2017, he won the Thomson Reuters Starmine Top Forecaster Award for Latam FX. Andres's research covers Brazil, Mexico, Argentina, Chile, Colombia, Peru and Venezuela, focusing on economic, political and financial developments. The countries of Latin America differ substantially in terms of structure, business cycle and politics, and Andres' researchhighlights the impact of these differences on currencies, interest rates and equity markets. He believes that most LatAm economies are heavily influenced by cyclical forces in the U.S. and China, as well as domestic policy shocks and local politics. He keeps a close eye on both external and domestic developments to forecast their effects on LatAm economies, monetary policy, and financial markets. Before starting to work at Pantheon Macroeconomics in 2013, Dr. Abadia was the Head of Research for Arcalia/Bancaja (now Bankia) in Madrid, and formerly Chief Economist for the same institution. Previously, he worked at Ahorro Coporacion Financiera, as an Economist. Andres earned a PhD in Applied Economics, and a Masters Degree in Economics and International Business Administration from Universidad Autónoma de Madrid, and a BSc in Economics from the Universidad Externado de Colombia.
Claus Vistesen has several years' experience in the independent macro research space, as a freelancer, consultant and, latterly, as Head of Research of Variant Perception, Inc. He holds Master's degrees in economics and finance from the Copenhagen Business School and the University of Hull.
Samuel Tombs discussing the U.K. Monetary Policy
Two fiscal deadlines are on the near-horizon.
The Chancellor is likely to announce plans for additional public sector asset sales in today's Autumn Statement, to help arrest the unanticipated rise in the debt-to-GDP ratio this year. But privatisations rarely improve the underlying health of the public finances, partly because assets seldom are sold for their full value. And the Chancellor is running out of viable assets to privatise; the low-hanging, juiciest fruits have already been plucked.
Andres Abadia on Chile GDP
Chief Latam Economist Andres Abadia on Argentina
Why is the EZ current account surplus rising and net exports falling at the same time?
Monthly publication telling the economic story of each region in roughly 40 charts
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