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Market-implied expectations of negative rates through 2021, and bund yields plunging below -0.1%, are an accident waiting to happen, but the main story is clear as rain.
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 MPC likely will raise interest rates today, but as we explained here, it probably will revise down its medium-term inflation forecast, signalling that it is content with the further 35bp tightening currently priced-in by markets for 2018.
The PBoC announced on Saturday that it will publish a new Loan Prime Rate, from today, following a State Council announcement last Friday.
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.
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.
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.
The run of consensus-beating activity measures and the pickup in leading indicators of inflation have led markets to doubt that the MPC really will follow up August's package of stimulus measures with another Bank Rate cut this year.
Brazilian data strengthened early in Q4, supporting the case for the COPOM to slow the pace of rate cuts. We expect the SELIC policy rate to be lowered by 50bp today, to 7.0%.
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.
Brazil's GDP growth slowed to just 0.1% quarter- on-quarter in Q4, from an upwardly-revised 0.2% in Q3. This pushed the year-over-year rate up to 2.1%, from 1.4%, but this was weaker than market expectations.
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.
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.
Investors in euro-denominated corporate debt will be listening closely to Mr. Draghi this week for hints on how the ECB intends to balance QE between public and private debt next year.
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 FOMC delivered no great surprises in the statement yesterday, but the new forecasts of both interest rates and inflation were, in our view, startlingly low. The stage is now set for an eventful few months as the tightening labor market and rising inflation force markets and policymakers to ramp up their expectations for interest rates.
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.
The Bank kept interest rates unchanged at 1.50% yesterday, but downgraded its inflation forecast for 2018 to 1.6% from 1.7%
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.
The nosedive in the Markit/CIPS manufacturing PMI in April provides an early sign that GDP growth is likely to slow even further in the second quarter. The MPC, however, looks set to keep its powder dry. We continue to think that the next move in interest rates will be up, towards the end of this year.
May's consumer prices report contained few surprises. The fall in the headline rate of CPI inflation to 2.0%, from April's Easter-boosted 2.1%, matched the consensus, our forecast and the MPC's.
February's consumer price report, released tomorrow, likely will show that CPI inflation has breached the MPC's 2% target for the first time since November 2013. Indeed, we think the headline rate jumped to 2.2%, from 1.8% in January, exceeding the 2.1% rate expected by the MPC and the consensus.
Markets have responded strongly to the ECB's announcement that it will be buying corporate bonds as part of QE. Net corporate debt issuance of non-financial firms jumped €16B in March, the biggest monthly increase since January 2014. The 12-month average, however, was stable at €3.6B, and a sustained increase in net debt supply partly depends on firms' appetite for financial engineering
BanRep accelerated the pace of easing last Friday, cutting Colombia's key interest rate by a bold 50 basis points, to 5.75%. Economic activity has been under severe pressure in recent months. The economy expanded by only 1.1% year-over-year in Q1, following an already weak 1.6% in Q4.
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.
House price inflation in tier-one cities has been crushed by China's most recent monetary tightening. This is a sharp turnaround from the overheating mid-way through last year. Unlike in previous cycles, interest rates are probably more important for house prices than broad money growth.
The imminent boost to lending rates from the shut- down of the Term Funding Scheme at the end of this month is widely under-appreciated.
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.
The renewed fall in market interest rates and sterling this month indicates that markets expect the MPC to strike a dovish note at midday, when the Inflation Report is published, alongside the rate decision and minutes of this week's meeting.
The tone of today's FOMC statement likely will be different to the gloomy April missive, which began with a list of bad news: "...economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated... underutilization of labor resources was little changed. Growth in household spending declined... Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined."
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.
Corporate bonds will not be included in the ECB's monthly QE purchases until the end of Q2, but markets are already preparing. The sale of non-financial corporate debt jumped to €49.4B in March, from about €25B in February, within touching distance of the record set in Q1 last year.
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.
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.
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 rate that labour market slack is being absorbed has slowed, potentially giving the MPC breathing space to postpone the first rate rise beyond next month.
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".
Payroll growth will slow in the first few months of next year, but wages will accelerate. This might seem counter-intuitive after the ballistic December jobs number coupled with sluggish-looking hourly earnings, but the devil, as always, is in the details. On the face of it, the trend in payroll growth is accelerating at a startling pace, captured in our first chart. But we very much doubt this reflects a real shift in the underlying pace of employment growth, for two reasons. First, payroll growth in recent years has tended to accelerate in the fourth quarter, even when indicators of both labor demand and the pace of layoffs--the two sides of the payroll equation--have been flat, as in Q4.
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.
Rising mortgage rates appear to have triggered the start, perhaps, of a tightening in lending standards, even before Treasury yields spiked this month and stock prices fell.
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.
If Fed Chair Yellen's objective yesterday was to deliver studied ambiguity in her Testimony--and we believe it was--she succeeded. She offered plenty to both sides of the rate debate. For the hawks, she noted that unemployment is now "...in line with the median of FOMC participants' most recent estimates of its longer-run normal level", and that inflation is still expected to return to the 2% target, "...once oil and import prices stop falling".
The Fed today will do nothing to rates and won't materially change the language of the post-meeting statement.
Chile's inflation outlook remains benign, allowing policymakers to cut interest rates if the economic recovery falters.
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.
Chile's central bank left its main interest rate unchanged last week at 3.0%, for the ninth month in a row. But policymakers adopted a hawkish bias in the press release, signalling that rates will rise later this year.
The ECB made no major policy changes yesterday, but tweaked its communication. The key refinancing and deposit rates were kept at 0.00% and -0.4%, respectively, and the pace of QE was maintained at €30B per month.
Most investors remain convinced that the MPC will raise Bank Rate when it meets next, on May 10.
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.
Inflation pressures in Brazil are now well- contained, with the headline rate falling to a decade low in July. We think inflation is now close to bottoming out, but the current benign rate strengthens our base case forecast for a 100bp rate cut at the next policy meeting, in September.
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 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.
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.
Argentina's central bank likely will leave its main interest rate at 27.75% tomorrow at its biweekly monetary policy meeting.
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%.
We have argued consistently since oil prices first began to fall that U.S. consumers would spend most of their windfall, so real spending would accelerate even as nominal retail sales growth was dragged down by the drop in the price of gas and other imported goods. At the same time, we argued that capital spending in the oil business would collapse, and that exports would struggle in the face of the stronger dollar.
The MPC's penchant for providing interest rate guidance reached new heights last 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.
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.
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.
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%.
The Brazilian Central Bank's policy board-- Copom--voted unanimously on Wednesday to cut the Selic rate by 50bp to 6.0%.
The Brazilian Central Bank's policy board--the Copom--voted unanimously on Wednesday to keep the Selic rate on hold at 6.50%.
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.
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.
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.
Investors awaiting today's interest rate decision might be a little unnerved to learn that the MPC has a track record of surprises.
This week brings the third anniversary of the first rate hike in this cycle, on December 16, 2015.
Markets initially applauded the ECB for its bold actions, but the tune has changed recently. Negative interest rates, in particular, have been vilified for their margin destroying effect in the banking sector. Our first chart shows that the relative performance of financials in the EZ equity market has dwindled steadily in line with the plunge in yields.
Markets are becoming more sensitive to rumours about changes in ECB policy. The euro and yields jumped on Friday after a Bloomberg report that the central bank has discussed raising rates before QE ends.
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 COPOM meeting minutes, released yesterday, brought a balanced message aimed at curbing market pricing of further rate cuts, in our view.
Brazil's inflation rate remained well under control over the first half of February. We see no threats in the near term, indicating that more stimulus will be forthcoming from the BCB.
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.
A thought, ahead of Chair Yellen's Testimony tomorrow. Conventional wisdom has it that the terminal Fed funds rate in this cycle will b e much lower than in the past--the Fed thinks 3¾%, compared to 5.25% in 2007, and 6.5% in 2000--reflecting the long-lasting legacy of the crash, particularly in household balance sheets.
The bond market has become extremely pessimistic about the long-term economic outlook following Britain's vote to leave the EU. Forward rates imply that the gilt markets' expectation for official interest rates in 20 years' time has shifted down to just 2%, from 3% at the start of 2016.
Banxico cut its policy rate by 25bp to 7.75% yesterday, as was widely expected, following August's 25bp easing.
Brazil's central bank looked through the recent dip in the BRL and left interest rates at 6.50% at Wednesday's Copom meeting, in line with the consensus.
The preliminary estimate of Q3 GDP, showing quarter-on-quarter growth slowing only to 0.5% from 0.7% in Q2, has kiboshed the chance that the MPC cuts Bank Rate next Thursday.
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.
Another month, another bleak Brazilian labor market report. The seasonally adjusted unemployment rate increased marginally to 8.3% in December, up from 8.2% in November, much worse than the 5.1% recorded in December 2014.
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.
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 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.
Brazil's central bank kept the SELIC rate on hold on Wednesday at 14.25% for the eight consecutive meeting. The decision, which was widely expected, was unanimous, but the post-meeting statement was more detailed and informative than the central bank's June communiqué. We think the shift was intentional; the central bank's new board, headed by Mr. Ilan Goldfajn, is eager to strengthen the institution's credibility and transparency.
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.
Last week, the Bank of Mexico unanimously voted to leave the main rate on hold, at 7.50%, its highest level since early 2009.
Data released yesterday in Brazil helped to lay the ground for interest rate cuts over the coming months.
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".
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.
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.
India's Finance Minister Nirmala Sitharaman finally brought out the big guns on September 20, announcing significant cuts to corporate tax rates.
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.
Markets don't believe the Fed's interest rate forecasts. For the fourth quarter of this year, that's probably right; the FOMC's median projection back in March was 0.63%; that will likely be revised down this week. For the next two years, though, things are different.
Japanese data continue to come in strongly for the second quarter. The manufacturing PMI points to continued sturdy growth, despite the headline index dipping to 52.0 in June from 53.1 in May. The average for Q2 overall was 52.6, almost unchanged from Q1's 52.8, signalling that manufacturing output growth has maintained its recent rate of growth.
The unexpected rise in CPI inflation to 2.1% in July--well above the Bank of England's 1.8% forecast and the 1.9% consensus--from 2.0% in June undermines the case for expecting the MPC to cut Bank Rate, in the event that a no-deal Brexit is avoided.
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.
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 PBoC hiked its 7-day reverse repo rate by 5bp yesterday, stating that the move was a response to the latest Fed hike.
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 minutes of yesterday's MPC meeting indicate that it is not going to be panicked into cutting interest rates in the run-up to the E.U. referendum in June. The Committee voted unanimously again to keep Bank Rate at 0.5%, and dovish comments were conspicuously absent.
The theory of spontaneous combustion of the U.S. economy appears to be making something of a comeback, if our inbox and market chat is to be believed. The core idea here is that expansions die of old age, and can be helped on their way to oblivion by factors like falling corporate earnings and rising inventory. The current recovery, which began in June 2009 and is now 63 months old, already looks a bit long-in-the-tooth.
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.
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%.
Markets expect the Fed will fail to follow through on its current intention to raise rates twice more this year and three times next year. Part of this skepticism reflects recent experience.
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.
While we were away, EM growth prospects and risk appetite deteriorated significantly, due mainly to rising geopolitical risks, weaker economic prospects for DM, and, in particular, the most recent chapter of the global trade war.
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.
Banxico hiked its policy rate by 25bp to a cyclical-high of 8.0% yesterday, in line with market expectations.
The MPC will take a step forward on Thursday when it publishes an estimate of the medium term equilibrium interest rate--the rate which would anchor real GDP growth at its trend and keep inflation stable--in the Inflation Report.
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.
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.
Without tying its hands, the MPC--which voted unanimously to keep interest rates at 0.25% and to continue with the £60B of gilt purchases and £10B of corporate bond purchases authorised last month--gave a strong indication yesterday that it still expects to cut Bank Rate in November.
The Japanese unemployment rate fell again in September, to 2.3% from 2.4%. In the same vein, the job-to-applicant ratio rose to 1.64, from 1.63.
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.
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.
In the September forecasts, the median forecast of FOMC members for the long-term fed funds rate was 3.5%. Their long-term inflation forecast is 2%-- it has to be 2%, otherwise they would be forecasting permanent failure to meet their policy objectives -- implying a real rate of 1.5%. This is well below the long-run average; from 1960 through 2005, the real funds rate--the nominal rate less the rate of increase of the PCE deflator--averaged 2.4%.
A dovish speech by external MPC member Michael Saunders was the primary catalyst for a renewed fall in interest rate expectations last week.
The Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.50%.
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%.
The Fed left rates on hold yesterday, as expected, repeating its long-held core view that inflation will rise to 2% in the medium-term, requiring gradual increases in the fed funds rate.
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."
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.
The Brazilian Central Bank's policy board--the Copom--met expectations on Wednesday, voting unanimously to keep the Selic rate on hold at 6.50%.
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.
Sterling received a shot in the arm yesterday following the release of the minutes of the MPC's meeting, which revealed that three members voted to raise interest rates to 0.50%, from 0.25% currently. Markets and economists--including ourselves--had expected another 7-1 split, but Ian McCafferty and Michael Saunders switched sides and joined Kristin Forbes in seeking higher rates.
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 Brazilian central bank left its benchmark Selic interest rate on hold at 6.5% on Wednesday night and confirmed our view that policymakers will stand pat for the foreseeable future, provided the BRL remains stable and Mr. Bolsonaro is able to push forward his reform agenda.
Peru's central bank left its policy interest rate unchanged at 3.75% last week, but signalled that further easing is on the way. According to the press release accompanying the decision, policymakers noted that inflation expectations are within their target range and still falling.
Another month, another strong set of labour market data which undermine the case for the MPC to cut Bank Rate, provided a no-deal Brexit is avoided.
What should we make of the view of Fed hawks, set out with admirable clarity in the September FOMC minutes, that higher rates "might spur rather than restrain economic activity"? The core story behind this counter-intuitive proposal is the idea that zero rates send a signal to the private sector that the Fed is deeply worried about the state of the economy.
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%.
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.
The Brazilian Central Bank's policy board, COPOM, left the Selic rate at 6.50% on Wednesday, as widely expected.
At today's MPC meeting, the centre of gravity of the policy debate is likely to shift towards the merits of raising interest rates, rather than cutting them. CPI inflation rose from 0.3% in February to 0.5% in March, one tenth above the MPC's forecast in February's Inflation Report.
Speculators who have sold sterling over the last six months have been frustrated. Investors have been overwhelmingly net short sterling, but the pound has hovered between $1.20 and $1.25, as our first chart shows. Undeterred, investors increased their net short positions last week to 107K contracts-- the most since records began in 1992--from 81K a week earlier.
A PBoC rate cut is looking increasingly likely. Policy is already on the loosest setting possible without cutting rates, but the Bank has little to show for its marginal approach to easing, with M1 growth still languishing.
The Monetary Policy Committee of the Reserve Bank of India voted unanimously on Friday to cut interest rates at a fifth straight meeting, as expected.
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.
A looming rate lift-off at the Fed, chaos in Greece, and a renewed rout in commodities have given credit markets plenty to worry about this year. The Bloomberg global high yield index is just about holding on to a 0.7% gain year-to-date, but down 2.5% since the middle of May. The picture carries over to the euro area where the sell-off is worse than during the taper tantrum in 2013.
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.
Larry Summers stirred the pot yet again with an article in the FT at the weekend, arguing that because the Fed typically eases by more than 300bp to pull the economy out of recession, "the chances are very high that recession will come before there is room to cut rates enough to offset it". This follows from his view that the neutral level of real short rates has fallen so far that "the odds are the Fed will not be able to raise rates 100 basis points a year without threatening to undermine recovery".
In one line: Policymakers surprise markets by cutting rates.
In one line: On hold, but the BCRP will cut rates soon.
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.
In one line: Rates on hold; trade tensions are a key risk to start policy normalization.
The chances of a cut in official interest rates were boosted yesterday by the sharp fall in the business activity index of the Markit/CIPS report on services in February, to its weakest level since April 2013. Its decline, to just 52.8 from 55.6 in January, mirrored falls in the manufacturing and construction PMIs earlier in the week and pushed the weighted average of the three survey's main balances down to a level consistent with quarter-on-quarter GDP growth of just 0.2% in Q1.
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.
Mexico's headline inflation fell to a record low of 2.9% in May, down from 3.1% in April and below the middle of Banxico's inflation target, 2-to-4%, for the first time since May 2005. C ore inflation was unchanged at 2.3% in May; higher services prices were offset by a slowing in the rate of increase of goods prices to 2.4% from 2.7% in April, confirming that the pass-through effect from the MXN's depreciation has been very limited.
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.
The collapse in business activity and consumer confidence since the referendum has sealed the deal on policy easing from the MPC on Thursday. The Committee has cut Bank Rate by 50 basis points when the composite PMI has been near July's level in the past, as our first chart shows.
Recent economic weakness in Brazil, particularly in domestic demand, and the ongoing deterioration of confidence indicators, have strengthened the case for interest rate cuts.
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.
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 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.
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.
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.
Inflation pressures are gradually easing in Mexico, opening the door for rate cuts as early as next month. The June CPI report, released yesterday, showed that prices rose 0.1% month-to-month unadjusted in June, in line with market expectations.
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.
In one line: Rates on hold, and the statement suggests no easing in the near term.
In one line: Rates on hold as the economy falters.
In one line: A surprise hefty rate cut; policymakers respond to the subpar recovery and trade war fears.
The MPC took an unprecedented step last week to pave the way for an interest rate rise.
Ian Shepherdson, Pantheon Macroeconomics chief economist, and Vinay Pande, UBS Global Wealth Management head of trading strategies, join "Squawk on the Street" to discuss their forecast for the markets amid strong jobs data.
The PBoC doesn't publicly schedule its meetings, but in recent years has tended to make moves after Fed decisions.
In the wake of the unexpectedly weak September Empire State survey, released Monday, we are now very keen to see what today's Philadelphia Fed survey has to say.
Speculation has grown that the Bank of England will announce measures today to calm the recent strong growth in consumer credit, when it publishes its bi-annual Financial Stability Report.
Yesterday's advance CPI data in Germany and Spain suggest that inflation in the Eurozone as a whole dipped slightly in February.
The PBoC late on Wednesday announced measures to provide medium-term funding for smaller businesses.
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.
We're expecting to learn today that existing home sales rose quite sharply in July, perhaps reaching the highest level since early 2018.
he ECB governing council gathered last week under the leadership of Ms. Lagarde for the first time to lay a battle plan for the course ahead.
Brazil's domestic economic outlook has not changed much recently.
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 chances of the first phase of the Brexit saga concluding soon declined sharply last week.
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.
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.
Friday's final EZ CPI data for July confirm the advance report.
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.
In recent months we've been thinking more deeply about the themes for the next economic cycle for China, and its impact on the world.
Inflation in the Eurozone tumbled last month, increasing the pressure on Mr. Draghi to deliver another dovish message when the central bank meets on Thursday.
Chinese industrial profits growth rose to 16.7% year-on-year in May, from 14.0% in April. But this headline is highly misleading. Profits growth data are about as cyclical as they come so taking one point in the year and looking back 12 months is very arbitrary. Moreover, the data are very volatile over short periods.
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.
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.
China's official PMIs paint a picture of robust momentum going into 2018 but we find this difficult to reconcile with the other data.
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.
A sharp ARS sell-off was the key highlight while we were away over the holidays.
The BoJ has no good options, and its leeway for changes to existing policy instruments is limited.
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.
The failure of labor market participation to increase as the economy has gathered pace, pushing unemployment down from its 10.0% peak to just 3.7%in September, is one of the biggest macro mysteries in recent years.
Final PMI data in the Eurozone yesterday confirmed that manufacturing remains under pressure from global headwinds. The manufacturing PMI in the zone fell to 52.0 in September from 52.3 in August, in line with the initial estimate. A rare upside surprise in France was not enough to offset weakness in the other major economies, and the trend in private investment growth likely will stay subdued this year.
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 MPC is holding its nerve and not about to join other central banks in providing fresh stimulus.
Both the Prime Minister and Chancellor last week threatened to cut business taxes aggressively to persuade multinationals to remain in Britain in the event of hard Brexit. But these threats lack credibility, given the likely lingering weakness of the public finances by the time of the U.K.'s departure from the EU and the scale of demographic pressures set to weigh on public spending over the next decade.
China's Caixin manufacturing PMI doused hopes of turning over a January new leaf; it dropped to 49.7 in November, from 50.2 in December.
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 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.
The national accounts, released today, likely will restate that quarter-on-quarter GDP growth held steady at 0.4% in Q4.
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.
Today brings new housing market data, in the form of the weekly applications numbers from the MBA. The weekly data are seasonally adjusted but are still very volatile, especially in the spring.
Data released this week have confirmed that the Mexican economy is struggling and that the near-term outlook remains extremely challenging.
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.
Friday's inflation and labour market data in the Eurozone were dovish.
The ECB made no major policy changes yesterday.
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.
Yesterday's labour market data brought further signs that wage growth is recovering from its early 2017 dip.
Politics in Brazil has been busy in recent days, with local media reporting several items of interest.
Today's preliminary estimate of Q3 GDP is the last major economic report to be released before the MPC's meeting on November 2.
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.
Growth in households' disposable incomes has been supported in recent years by falling debt servicing costs. The proportion of households' incomes absorbed by interest payments fell to a record low of 4.5% in Q4 last year, down from 4.7% a year ago and a peak of 10% in 2008.
We're breaking protocol this week by delivering our preview for Thursday's ECB meeting in today's Monitor.
If we are right in our view that the lag between shifts in gasoline prices and the response from consumers is about six months--longer than markets seem to think--then the next few months should see spending surge.
In April last year, something odd happened in the FX market.
December's money data likely will bring further signs that the U.K. economy's growth spurt late last year was paid for with unsecured borrowing. Retail sales fell by 1.9% month-to-month in December, so we doubt that unsecured borrowing will match November's £1.7B increase, which was the biggest since March 2005.
The slide in global long-term bond yields, and flattening curves, have spooked markets this year, sparking fears among investors of an impending global economic recession.
Debt issuance by Eurozone non-financial firms is soaring, consistent with the ECB's hope that adding private debt to QE would boost supply. Our first chart shows that the three-month sum of net debt sold in the euro area jumped to a new record of €60.3B in May. A short-term decline in issuance is a good bet after the initial euphoria in firms' treasury departments.
The summer usually is a quiet time for business, but seemingly not for CFOs this year. Yesterday's money and credit figures from the Bank of England showed that borrowing by private non-financial corporations has rocketed. Net finance raised by PNFC's from all sources increased by £8.9B in July, compared to an average increase of just £2.5B in the previous 12 months.
The proportion of households' annual incomes absorbed by servicing debt has declined steadily this decade, providing a powerful boost to spending. Indeed, the proportion of annual incomes accounted for by interest payments--mainly on mortgages--edged down a record low of 4.6% in Q1, less than half the share in 2008.
The fall in the Markit/CIPS manufacturing PMI to 47.4 in August--its lowest level since July 2012--from 48.0 in July suggests that pre-Brexit stockpiling isn't countering the hit to demand from Brexit uncertainty and the global industrial slowdown.
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.
This Budget will be remembered as the moment when the Government finally threw in the towel on plans to run sustainable public finances.
The declines in headline housing starts and building permits in June don't matter; both were depressed by declines in the wildly volatile multi-family components.
Bond markets didn't panic when the ECB announced its intention further to reduce the pace of QE this year, to €30B per month from €60B in 2017.
This week's key data releases in Mexico likely will reaffirm that growth remains below trend, while inflation continues to ease.
Europeans, who usually save more of their income than Americans, have spent all the windfall from falling gas prices. Americans have not. It is tempting, therefore, to argue that perhaps Americans have come to see the error of their low-saving ways, and are now seeking to emulate the behavior of high-saving Europeans. Undeniably, the plunge in gas prices has given Americans the opportunity to save more without making hard choices.
China's activity data yesterday made pretty uncomfortable reading for policymakers.
In one line: Another hefty cut as the economy struggles, and the door is open to further stimulus.
Markets rightly interpreted yesterday's above consensus GDP report as having little impact on the outlook for monetary policy.
The latest GDP data continue to show that the economy is holding up well, despite the Brexit saga.
Recent inflation numbers across the biggest economies in LatAm have surprised to the downside, strengthening the case for further monetary easing.
Inflation in the Andes remains in check and the near term will be benign, suggesting that central banks will remain on hold over the coming months.
In one line: Adopting a dovish stance as the economy fails to gather speed.
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.
Chair Yellen broke no new ground in her Testimony yesterday, repeating her long-standing view that the tightening labor market requires the Fed to continue normalizing policy at a gradual pace.
When Park Geun-hye came to power in Korea 2013, it was to cheers of "economic democratisation". At the time, I wrote a report with a list of reforms that would be needed for Korea to "economically democratise".
The Banxico minutes from the June 20 meeting, released last Thursday, offered more detail about the outlook for policy in the near term.
Japan's producer price inflation levelled off in June and, for now, both commodity prices and currency moves in the first half imply that inflation should fall in the second half.
Brazil's April CPI data this week showed that inflation pressures remain weak, supporting the BCB's focus on the downside risks to economic activity. Wednesday's report revealed that the benchmark IPCA inflation index rose 0.1% unadjusted month-to-month in April, marginally below market expectations.
The economy looks to be in better shape following May's GDP report than widely feared.
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.
September's Markit/CIPS services survey added to the evidence indicating that GDP growth softened, rather than fell off a cliff, in the third quarter. The activity index edged down only to 52.6, from 52.9 in August.
It's probably safe to assume that Q1's 0.5% quarter-on-quarter increase in GDP will be as good as it gets this year.
In one line: The ECB is loading its bazooka, but with what?
In one line: A repeat of the key message sent in September; loose policy is here to stay.
In one line: The ECB is all in; buckle up!
Banxico's Quarterly Inflation Report--QIR--for Q2 2017, published this week, confirmed that the central bank has become more upbeat about the economic recovery and the outlook for inflation. Banxico believes that the balance of risks to inflation and growth are neutral.
Slowly but surely, it is becoming respectable to argue that central bank policy in the developed world is part of the problem of slow growth, not the solution. We have worried for some time that the signal sent by ZIRP--that the economy is in terrible shape--is more than offsetting the cash-flow gains to borrowers.
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.
The MPC was a little irked by the markets' reaction to its November meeting.
In one line: A given, following the MLF cut earlier this month
The ECB made no changes to its policy stance yesterday.
Payroll growth has slowed, no matter how you slice and dice the numbers.
External and domestic shocks in Mexico over the last two years, including the "gasolinazo", NAFTA renegotiation and the presidential election, have put the country's financial metrics under severe stress and pushed inflation to cyclical highs.
National accounts data released last week rewrote the recent history of households' saving.
In one line: The gradual recovery of the labour market continues.
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.
In one line: The slow recovery of the Brazilian labor market continues.
It says a lot about investor expectations that markets' reaction to yesterday's policy announcement by the ECB was marked by slight "disappointment," with EURUSD rallying and EZ bond yields rising.
The most eye-catching aspect of December's consumer prices report was the pick-up in core inflation to 1.9%, from 1.8% in November, above the no-change consensus.
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.
The case for the MPC to hold back from implementing more stimulus was bolstered by September's consumer prices figures.
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 key aspects of the ECB's policy stance will remain unchanged at today's meeting.
Bond yields in the Eurozone took another leg lower yesterday.
In one line: The labor market is gradually deteriorating.
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.
The MPC surprised markets, and ourselves, yesterday with the escalation of its hawkish rhetoric in the minutes of its policy meeting.
In one line: On hold, but ready to cut if the economic recovery falters.
German inflation data are more noise than signal at the moment.
The two biggest economies in the region have taken divergent paths in recent months, with the economic recovery strengthening in Brazil, but slowing sharply in Mexico.
Inflation pressures are easing rapidly in Colombia, according to October's CPI report, released on Saturday. Inflation fell to 6.5% year-over-year in October, down from 7.3% in September; the consensus expectation was 6.7%.
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.
The point when businesses and households can breathe a sigh of relief about Brexit looks set to be delayed again this week.
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.
Inflation data in Germany remain up in the air following recent revisions and restatements of the underlying indices.
The MPC chose not to rock the boat yesterday, deferring any reappraisal of the economic outlook until its next meeting in early February.
Mexican consumers' spending improved toward the end of Q2. Retail sales jumped by 1.0% month-to-month in June, pushing the year-over-year rate up to 9.4%, from an already solid 8.6% in May. Still, private spending lost some momentum in the second quarter as a whole, rising by 2.5% quarter-on-quarter, after a 3.8% jump in Q1. A modest slowdown in consumers' spending had to come eventually, following surging growth rates in the initial phases of the recovery.
Brazil's central bank conformed to expectations on Wednesday, cutting the Selic rate by 75 basis points to 12.25%, without bias. Overall, the BCB recognises that the economic signals have been mixed in recent weeks, but the Copom echoed our view that the data are pointing to a gradual stabilisation and, ultimately, a recovery in GDP growth later this year.
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."
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.
Expectations for a March rate hike have dipped since Fed Vice-Chair Clarida's CNBC interview last Friday.
The national accounts for the third quarter, released on Wednesday, are likely to show that households are saving a very small proportion of their incomes. Low unemployment, subdued inflation and the healthier condition of households' balance sheets suggests that very low saving is more sustainable than in the past. Nonetheless, the low rate underlines that household spending can't grow at a faster rate than incomes for a sustained period again.
The steady decline in mortgage rates since the financial crisis has helped to underpin strong growth in household spending. Existing borrowers have been able to refinance loans at ever-lower interest rates, while the proportion of first-time buyers' incomes absorbed by interest and capital payments has declined to a record low. As a result, the proportion of annual household incomes taken up by interest payments has fallen to 4.6%, from a peak of 10% in 2008.
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%.
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.
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%.
Brazilian inflation rate remained well under control at the start of this year, and we think the news will continue to be favorable for most of this year.
It is often argued that the average weekly earnings--AWE--figures exaggerate the severity of the squeeze on households' incomes.
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%.
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.
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.
Slack in the labour market no longer is being absorbed and wage growth still is struggling for momentum, placing little pressure on the MPC to rush the next rate rise.
The recent revival in housing market activity reflects more than just a temporary boost provided by imminent tax changes. The current momentum in market activity and lending likely will fade later this year, but we think this will have more to do with looming interest rate rises than a lull in activity caused by a shift in the timing of home purchases.
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.
This week brings home sales data for July, which we expect will be mixed. New home sales likely rose a bit, but we are pretty confident that existing home sales will be reported down, following four straight gains. We're still expecting a clear positive contribution to GDP growth from housing construction in the third quarter, but from the Fed's perspective the more immediate threat comes from the rate of increase of housing rents, rather than the pace of home sales.
The Chancellor probably can't believe his luck. Public borrowing has continued to fall this year at a much faster rate than anticipated by the OBR, despite the sluggish economy.
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.
It's going to be very hard for Fed Chair Powell's Jackson Hole speech today to satisfy markets, which now expect three further rate cuts by March next year.
The MPC was more hawkish than we and most investors expected yesterday. The vote to keep Bank Rate at 0.50% was split 6-3, f ollowing Andy Haldane's decision to join the existing hawks, Ian McCafferty and Michael Saunders.
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.
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.
Banxico left Mexico's benchmark interest rate at a record low of 3% on Monday, 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% over the fourth quarter, but they repeated their message that they are vigilant to any inflation pass though from MXN depreciation into prices.
The risk of higher US rates put LatAm currencies under pressure during the first half of the week, before the US FOMC meeting on Wednesday. But they recovered some ground yesterday, following the Fed's decision to leave rates on hold.
Brazil's inflation rate remained well under control over the first half of February.
The trend rate of increase in private payrolls in the months before Hurricane Katrina in 2005 was about 240K per month.
China has undoubtedly been through a credit tightening, commonly explained as the PBoC attempting to engineer a squeeze, to spur on corporate deleveraging.
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.
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.
Whatever today's report tells us about existing home sales in January, the underlying state of housing demand right now is unclear. The sales numbers lag mortgage applications by a few months, as our first chart shows, so they're usually the best place to start if you're pondering the near-term outlook for sales. But the applications data right now are suffering from two separate distortions, one pushing the numbers up and the other pushing them down. Both distortions should fade by the late spring, but in they meantime we'd hesitate to say we have a good idea what's really happening to demand.
The recent increases in single-family housing construction are consistent with the rise in new home sales, triggered by the substantial fall in mortgage rates over the past year.
Japan's jobless rate was unchanged, at 2.4% in October, as the market took a breather after September's job losses.
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.
Copom's meeting was the focal point this week in Brazil. The committee eased by 25bp for the second straight meeting, leaving the Selic rate at 13.75%, and it opened the door for larger cuts in Q1. Rates sat at 14.25% for 15 months before the first cut, in October. In this week's post-meeting statement, policymakers identified weak economic activity data, the disinflation process--actual and expectations--and progress on the fiscal front as the forces that prompted the rate cut.
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 decline in CPI inflation to 1.7% in August, from 2.1% in July, has not materially boosted the chances of the MPC cutting interest rates within the next six months.
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.
A powerful cocktail of cheap money, labour and commodities, allowed to infuse by a hiatus in the government's austerity programme, has reinvigorated the U.K. economy over the last three years. But these supports are now weakening while new headwinds are emerging. The U.K. economy is heading for a pronounced slowdown, one that is under-appreciated by most forecasters and under-priced by markets.
The Fed headlines yesterday carried no real surprises; rates were cut by 25bp, with a promise to take further action if "appropriate to sustain the expansion".
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.
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.
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.
Policymakers and macroeconomic forecasters at the ECB will be doing some soul-searching this week. GDP growth in the euro area accelerated to a punchy 2.5% year-over-year in Q3, and unemployment dipped to a cyclical low of 8.9%.
Brazil's central bank kept the Selic policy rate at 6.50% this week, as markets broadly expected.
Banxico left Mexico's benchmark interest rate at a record low of 3% last week, maintaining its neutral tone and indicating that the balance of risks has worsened for growth, while the risks for future inflation are unchanged. Policymakers acknowledged the external headwinds to the Mexican economy, but underscored that private consumption has gathered strength thanks to improving employment, low inflation, higher overseas remittances, and better credit conditions.
January's money and credit data provided another warning sign that the economy has started 2017 on a weak footing. For a start, the three-month annualised growth rate of M4, excluding intermediate other financial corporations--the Bank's preferred measure of the broad money supply-- declined to 1.8% in January, from 3.1% in December.
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.
May's money and credit data indicate, reassuringly, that the economy still is growing at a steady, albeit unspectacular, rate, despite the endless uncertainty created by Brexit.
Korea's unemployment rate fell for a second straight month in October, inching down to 3.9%, from 4.0% in September.
The People's Bank of China cut its seven-day reverse-repo rate yesterday, to 2.50% from 2.55%.
China is a collection of hugely disparate provinces and cities. Managing all these cities with one interest rate is always difficult but in this cycle it is proving to be nearly impossible.
The fall in CPI inflation to 2.6% in June, from 2.9% in May, greatly undershot expectations for an unchanged rate and it has made a vote by the MPC to keep interest rates at 0.25% in August a near certainty.
Following a challenging start to this year, Andean economic prospects are improving gradually, thanks to falling interest rates, lower inflation, relatively stable currencies and--in some cases--increased infrastructure spending.
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.
In a surprise move, Peru's central bank, BCRP, succumbed to the current weakness of the economy and cut interest rates by 25bp to 3.25% last Thursday, for the first time since August last year. The board also lowered the interest rates on lending and deposit operations between the central bank and financial institutions.
From a bird's-eye perspective, the argument for continued steady Fed rate hikes is clear.
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.
Evidence of slowing economic activity in Colombia continues to mount. Retail sales fell 2.0% year- over-rate in April, down from a revised plus 3.0% in March; and the underlying trend is falling. This year's consumption tax increase, low confidence, tight credit conditions, and rising unemployment continue to put private consumption under pressure.
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.
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.
The construction sector in the Eurozone probably stumbled in March. Advance data for the major economies suggest that output fell 1.2% month-to-month, pushing the year-over-year rate down to 1.6% from 2.4% in February.
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".
We need to take a closer look at the chance of a sustained rise in the labor participation rate, which is perhaps the single biggest risk to the idea that 2018 will be a good year for the stock market, with limited downside for Treasuries.
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.
Housing rents account for some 41% of the core CPI and 18% of the core PCE, making them hugely important determinants of the core inflation rate.
The Fed will leave rates unchanged today.
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.
Banxico left its benchmark interest rate on hold at 7.0% at last Thursday's policy meeting.
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.
Financial markets have put maximum pressure on the ECB going into today's meeting, but we doubt it will be enough to spur the governing council into action so soon after announcing additional stimulus in December. We think the central bank will keep its refi and deposit rate unchanged at 0.05% and -0.3% respectively, and maintain the pace of asset purchases at €60B a month.
Governor Kuroda commented yesterday that he doesn't think Japan needs more easing at this stage. If he means that the BoJ does not have to change policy to provide more easing then we think he is right, on two and a half counts. First, Japan is likely to receive a boost under its current framework as external rate rises exceed expectations, driving down the yen.
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.
Fed Chair Yellen said something which sounded odd, at first, in her Q&A at the Senate Banking Committee last Tuesday. It is "not clear" she argued, that the rate of growth of wages has a "direct impact on inflation".
The markets' favorite story of the moment, aside from the Fed, seems to be the idea that overstretched corporate finances are an accident waiting to happen. When the crunch comes, the unavoidable hit to the stock market and the corporate bond market will have dire consequences, limiting the Fed's scope to raise rates, regardless of what might be happening in the labor market. We don't buy this. At least, we don't buy the second part of the narrative; we have no problem with the idea the finances of the corporate sector are shaky.
Central banks in Mexico, Colombia and Chile raised interest rates last week in tandem with the Fed, underscoring the almost mystical importance of the FOMC's actions in Latin America. In Colombia and Chile, their decisions were also helped by rising inflation pressures, due mainly to pass-through effects from currency depreciation.
The minutes of this week's MPC meeting indicate that it won't waste any time to raise interest rates after MPs finally have signed off a Brexit deal.
The ECB pressed the repeat button yesterday. The central bank maintained its refinancing rate at 0.00%, and also kept the deposit and marginal lending facility rate at -0.4% and 0.25 respectively. The pace of QE was held at €60B per month, scheduled to run until the end of December, "or beyond, if necessary."
If the only things that mattered for the housing markets were the obvious factors--the strength of the labor market, and low mortgage rates--the sector would be booming. Activity is picking up, with new and existing home sales up by 23% and 9% year-over-year respectively in the three months to May, but the level of transactions volumes remains hugely depressed. At the peak, new home sales were sustained at an annualized rate of about 1½M, but May sales stood at only 546K. Adjusting for population growth, the long-run data suggests sales ought to be running at close to 1M.
February's consumer price figures give the MPC reason to doubt the case for raising interest rates again as soon as May.
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.
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.
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.
The MPC's unanimous decision to keep Bank Rate at 0.75% and the minutes of its meeting left little impression on markets, which still see a higher chance of the MPC cutting Bank Rate within the next 12 months than raising it.
Political uncertainty has surged since the ECB last met, but the central bank likely will refrain from action today. We think the ECB will keep its refi and deposit rates unchanged at 0.05% and -0.4%, respectively, and leave the monthly pace of QE unchanged at €80B.
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.
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%.
The ECB will keep its refinancing and deposit rates unchanged today, at 0.0% and -0.4% respectively. We also think the pace of QE will be held at €80B per month. Attention will turn instead to the details and implementation of the measures unveiled last month. Corporate bonds will be added to QE at the end of the second quarter, and monthly purchases of about €5-to-€10B per month are a realistic assumption.
Gasoline prices dropped sharply last month, but the 4½% seasonally adjusted fall we expect to see in the December CPI report today was rather smaller than the 9% collapse in December 2014, so the year-over-year rate of change of gas prices will rise, to -20% from -24% in November. This means headline inflation will rise too, though the extent of the increase also depends on what happens to the core rate.
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.
The ECB is unlikely to make any changes to its policy stance today. We think the central bank will keep its refinancing and deposit rates at 0.00% and -0.4%, respectively, and maintain the pace of QE at €60 per month until the end of the year. We also don't expect any substantial change in the language on forward guidance and QE.
Elections will be held on Thursday in two constituencies vacated recently by Labour MPs. Betting markets are pricing-in a 70% chance that the Conservatives will win the by-election in Copeland--even though they trailed Labour there by eight points in the general election in 2015--mainly because around 60% of Copeland's electorate voted to leave the EU last year.
CPI inflation fell to 2.3% in November--its lowest rate since March 2017--from 2.4% in October, and it remains on track to fall rapidly over the winter.
Last week's national accounts were a setback for the hawks on the MPC seeking to raise interest rates at the next meeting, on November 2.
While we were away, EM growth prospects and risk appetite deteriorated, due mainly to rising geopolitical risks and Turkey's currency crisis.
The cyclical recovery in Italy likely strengthened in the second quarter. Real GDP rose 0.3% quarter-on-quarter in Q1, and we think the e conomy repeated, or even slightly, beat this number in Q2. This would mark the strongest performance in four years, but it will take more than a business cycle upturn to solve the Italian economy's structural challenges. Government and non-financial corporate debt has risen to 220% of GDP since 2008, and non-performing loans--NPLs--have sky rocketed.
Today's labour market data look set to show that the headline, three-month average, unemployment rate held steady at just 5% in May, unchanged from April's reading.
The media and markets are waking up to the idea that the housing market has peaked in the face of higher mortgage rates and slightly--so far--tighter lending standards.
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.
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.
Prospects for further rate cuts in Brazil, due to the sluggishness of the economic recovery and low inflation, have played against the BRL in recent weeks.
Mexico's recent rebound in inflation and a more volatile financial environment, due to increasing global trade tensions, forced Banxico to keep its policy rate unchanged at 8.25% last Thursday.
Economic data released in recent weeks underscore that Brazil emerged from recession in Q1, but the recovery is fragile and further rate cuts are badly needed. The political crisis has damaged the reform agenda, and political uncertainty lingers.
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.
Mexico's central bank last week left its policy rate at 7.0%, the highest level since early 2009.
While we were out, Brazil's central bank delivered a widely-expected 75bp easing, cutting the benchmark rate to 7.5% in an unanimous vote.
The ECB will keep interest rates on hold later today, and the commitment to monthly asset purchases of €60B--of which €50B will be sovereigns--until September next year will also remain unchanged. Sovereign QE should begin formally next week, but it has already turned bond markets upside down.
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.
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.
Chile's unadjusted unemployment rate fell to 7.1% in July-to-September, from 7.3% in June-to-August, but it was up from 6.7% in September last year.
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.
We have argued consistently for some time that the next year will bring a clear acceleration in U.S. wage growth, because the unemployment rate has fallen below the Nairu and a host of business survey indicators point to clear upward wage pressures. Nominal wage growth has been constrained, in our view, by the unexpected decline in core inflation from 2012 through early 2015, which boosted real wage growth and, hence, eased the pressure from employees for bigger nominal raises.
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.
The pick-up in the Markit/CIPS services PMI to an eight-month high of 55.1 in June, from 54.0 in May, has provided another boost to expectations that the MPC will raise Bank Rate at its next meeting on August 2.
The economic recovery disappointed in Chile during most of the first half of the year, despite relatively healthy fundamentals, including low interest rates, low inflation and stable financial metrics.
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.
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.
Yesterday's minutes of the October 31 COPOM meeting, at which the Central Bank cut the Selic rate unanimously by 50bp at 5.00%, reaffirmed the committee's post-meeting communiqué, which signalled that rates will be cut by the "same magnitude" in December.
The PBoC finally moved yesterday, cutting its one-year MLF rate by 5bp to 3.25%, whilst replacing around RMB 400B of maturing loans.
Brazil's industrial sector came roaring back at the start of Q3, following a poor end to Q2. Industrial production jumped 0.8% month-to-month in July, driving the year-over-year rate higher to 2.5%, from 0.5% in June and just 0.1% on average in Q2.
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."
Yesterday's industrial production report in Brazil was sizzling. Headline output jumped 0.8% month- to-month in April--well above the 0.4% consensus-- pushing the year-over-year rate up to 8.9%, a five- year high.
The MPC's view that the economy likely will grow at an above-trend rate over the coming quarters was challenged immediately last week by the PMIs.
Consumers' spending in the Eurozone stalled at the start of Q4. Retail sales slid 1.1% month-to-month in October, pushing the year-over-year rate down to a four-year low of 0.4%, from an upwardly-revised 4.0% jump in September.
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.
November's money and credit figures showed that households increasingly turned to unsecured debt last year in order to maintain rapid growth in consumption. Unsecured borrowing, excluding student loans, rose by £1.7B in November alone, the most since March 2005. This pushed up the year- over-year growth rate of unsecured borrowing to 10.8%--again, the highest rate since 2005--from 10.6% in October.
We very much doubt that Fed Chair Powell dramatically changed his position last week because President Trump repeatedly, and publicly, berated him and the idea of further increases in interest rates.
The economy would have ground to a halt last year had households not reduced their saving rate sharply.
Investors have concluded from June's Markit/CIPS PMIs and Governor Carney's speech on Tuesday that the chance of the MPC cutting Bank Rate before the end of this year now is about 50%, rising to 55% by the time of Mr. Carney's final meeting at the end of January.
Japan's jobless rate inched up to 2.5% in January, from 2.4% in December.
The labour market in Germany tightened further at the end of last year. The headline unemployment rate--unemployment claims as a share of the labour force--fell to 5.5% in December, from 5.6% in November, driven by a 29K plunge in claims.
Brazil's manufacturing PMI edged down to a six-month low of 45.2 in December, from 46.2 in November. This marks a disappointing end to Q4, following a steady upward trend during the first half of the year, as shown in our first chart. December's new work index fell to 45.2 from 47.7 in November, driving a slowdown in production, purchases of materials, and employment. The new export orders index also deteriorated sharply in December, falling close to its lowest level since mid-2009.
The MPC would have to change tack sharply on Thursday in order to live up to the markets' expectation that there is a near-zero chance of another rate cut within the next year.
In yesterday's Monitor we set out how government will have to prepare for an increase in debt issuance both to bring debts on-balance sheet and also to issue new debt as government is obliged to run deficits while the corporate sector deleverages.
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.
We recommend that investors take yesterday's inflation data in the Eurozone with a pinch of salt. The headline rate slipped to 1.2% in April, from 1.4% in March, hit by a slide in core inflation to 0.7%, from 1.0%.
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.
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.
Colombia's BanRep stuck to the script on Thursday by leaving the policy rate on hold at 4.25%.
Private non-financial corporations' profits have held up well over the last two years, despite the net negative impact of sterling's depreciation and modest increases in Bank Rate.
The MPC's package of stimulus measures, which exceeded markets' expectations, demonstrates that it is currently placing little weight on the inflation outlook. Even so, if inflation matches our expectations and overshoots the 2% target by a bigger margin next year than the MPC currently thinks is acceptable, it will have to consider its zeal for more stimulus.
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.
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.
Households' decision to reduce their saving rate sharply was the main reason why economic growth exceeded forecasters' expectations in the aftermath of the Brexit vote.
Brazilian February industrial production data, released yesterday, were relatively positive. Output rose 0.1% month-to-month, pushing the yearover- year rate down to -0.8% from 1.4% in January. Statistical quirks were behind February's year-over-year fall, though.
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.
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.
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.
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 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.
We predict no major policy changes at the ECB today. We think the central bank will leave its main refinancing and deposit rates unchanged at 0.00% and -0.4%, respectively. We also expect the ECB will leave the pace of QE unchanged at €60 per month until December 2017, at least.
Brazil's central bank is in a very delicate situation. The economy is on the verge of another recession, but at the same time the BRL is falling, inflation expectations are rising and the inflation rate is overshooting. Fiscal policy is also tightening to restore macro stability magnifying the squeeze on growth.
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".
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.
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 German new orders data were sizzling. Factory orders jumped 3.6% month-to-month in August, pushing the year-over-year rate up to a nine-month high of 7.8%, from an upwardly-revised 5.4% in July.
Inflation in most economies in LatAm is well under control, allowing central banks to keep a dovish bias, and giving them room for further rate cuts.
China's rate corridor cut was enough to bring down the LPR
Focus on Japan's job-to-applicant ratio, not the unemployment rate
China's meagre cut is not enough. Broad slowdown in Chinese services activity continues. Japan's rate of QE is low but roughly stable.
PBoC furthers efforts to push down real economy rates, signals more to come.
China's new Loan Prime Rate amounts to a rate cut, but supply-side banking strains limit its efficacy. Chinese slowdown and pre-tax front-loading keeps Japan's trade balance in deficit.
Colombia's August inflation rate exceeded BanRep's 2-to-4% target range yet again, rising to a six-year high of 4.7%, from 4.5% in July. The signs of stabilization over the previous couple of months proved to be temporary. Core inflation has jumped above the upper bound of the inflation target too, climbing to 4.2%--the highest rate since 2009--in August from 4.0% in July, suggesting that the pass-through from the depreciating currency into consumer prices is starting to hurt. Inflation in tradables jumped in August to 5.2% from 4.7%, underscoring the hit from the COP's drop.
PBoC holding still in the wake of Fed rate cut. China's Caixin manufacturing PMI was due a bounce. Inflation in Korea will soon take another nosedive, due largely to unfavourable non-core base effects. Korea's export slump turned less bad in July. Korea's two main manufacturing surveys aren't talking to each other.
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.
The Brazilian central bank cut the benchmark Selic interest rate by 25bp, to 6.75%, on Wednesday night, as expected.
Brazil's recent data show that inflation is still falling, allowing the central bank to ease further next month, while economic activity is improving, though the rate of growth has slowed.
Mortgage applications have risen, net, over the past couple of months, despite the 70bp surge in 30-year mortgage rates since the election. Indeed, we'd argue that the increase in applications is a result of the spike in rates, because it likely scared would-be homebuyers, triggering a wave of demand from people seeking to lock-in rates, fearing further increases.
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.
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.
The MPC's interest rate cut in August, and the continued willingness of banks to lend, bolstered the housing market immediately after the referendum. But the latest indicators suggest that the market is slowing again, as the financial pressures on households' incomes intensify.
The Brazilian central bank cut its benchmark Selic interest rate by 50bp, to 7.0%, on Thursday night and confirmed our view that the end of the easing cycle is not far off.
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 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.
Today's ECB meeting will follow the same script as in July. No-one expects the central bank to make any formal changes to its policy settings. The ECB will keep its main refinancing and deposit rates at zero and -0.4%, respectively.
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.
A setback in German manufacturing orders was coming after the jump at the end of 2016, but yesterday's headline was worse than we expected. Factory orders crashed 7.4% month-to-month in January, more than reversing the 5.4% jump in December. The year-over-year rate fell to -0.8% from a revised +8.0%. The decline was the biggest since 2009, but the huge volatility in domestic capital goods orders means that the headline has to be taken with a large pinch of salt.
The ECB made no changes to its policy stance yesterday. The central bank left its refinancing and deposit rates at 0.00% and -0.4%, respectively, and maintained the pace of QE at €60B per month. The program will run until December "or beyond, if necessary."
Brazil's improving economic and political situation allowed the BCB to cut the Selic rate by 100bp to 8.25% at its Wednesday meeting, matching expectations.
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 process of refinancing existing mortgages at ever-lower interest rates has been a boon for the economy in recent years.
Mortgage lender Halifax reported yesterday that the rate of increase in house prices has picked up since the summer.
At their March meeting FOMC members' range of forecasts for the unemployment rate in the fourth quarter of this year ranged from 4.4% to 4.7%, with a median of 4.5%. But Friday's report showed that the unemployment rate hit the bottom of the forecast range in April.
A steep drop in prices for financial services in January was a key factor behind the sharp slowdown in the rate of increase of the core PCE deflator in the first quarter, relative to the core CPI.
Investors now see a 50/50 chance of the MPC cutting Bank Rate within the next nine months, following the slightly dovish minutes of the MPC's meeting, and its new forecasts.
Yesterday's data kicked off the release of Eurozone Q3 growth numbers with a robust Spanish headline. Real GDP in Spain rose 0.8% quarter-on-quarter, slowing slightly from 0.9% in Q2, and le aving the year-over-year rate unchanged at 3.1%.
The jobless rate fell back to 2.8% in June after the surprise rise to 3.1% in May. This drop takes us back to where we were in April before voluntary unemployment jumped in May.
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.
Expectations that the MPC will raise Bank Rate again soon have taken a big knock over the last two weeks.
Markets will be hyper-sensitive to U.K. data releases following the MPC's warning that it is on the verge of raising interest rates.
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.
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.
The second estimate of Q1 GDP made for grim reading. Quarter-on-quarter GDP growth was revised down to 0.2%--the joint-slowest rate since Q4 2012--from the preliminary estimate of 0.3%.
Brazil's central bank is desperately trying to get a grip on inflation. It has raised the Selic rate by 225bp, to 13.25%, in just the last six months, and real rates now stand at a hefty 5.0%. And, at last, we are seeing tentative signs that policymakers and the government, after hiking rates and adjusting regulated prices, are making some headway.
Short-term interest rates in the Eurozone continue to imply that the ECB will lower rates further this year. Two-year yields have been stuck in a very tight range around -0.5% since March, indicating that investors expect the central bank again to reduce its deposit rate from its current level of -0.4%. This is not our base case, though, and we think that investors focused on deflation and a dovish ECB will be caught out by higher inflation.
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.
The tax plan released by the administration yesterday was so thoroughly leaked that it contained no real surprises. The border adjustment tax is dead -- not that we thought it would have passed the Senate in any event -- and the centerpiece is a proposed cut in the corporate income tax rate to 15% from 35%.
The further decline in mortgage approvals in August shows that housing market activity remains very subdued. The recent fall in mortgage rates likely will prop up demand soon, but the poor outlook for households' real incomes suggests that both activity and prices will revive only modestly over the next year.
At first glance, the U.K. consumer price data show a perplexing absence of domestically generated inflation.
Mexican policymakers voted to leave the main rate on hold at 8.25% yesterday, as inflation remains high--though falling--and the economy is stuttering.
The ECB broadly conformed to markets' expectations today. The central bank maintained its key refinancing and deposit rates at 0.00% and -0.4% respectively, and delivered the consensus package on QE.
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".
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.
GDP rose by 0.3% quarter-on-quarter in Q2, according to the ONS' preliminary estimate, confirming that the economy has fundamentally slowed since the Brexit vote. The modest growth has reduced further the already-small risk that the MPC will raise interest rates at its next meeting on August 3.
A tentative revival in mortgage lending is underway, following the lull in the four months after the MPC hiked interest rates in November.
We have warned that the ECB' decision to add corporate bonds to QE would lead to unprecedented market distortions. Evidence of this is now abundantly clear. The central bank has bought €82B-worth of corporate bonds in the past 11 months, and now holds more than 6% of the market. Assuming the central bank continues its purchases until the middle of next year, it will end up owning 13%-to-14% of the whole Eurozone corporate bond market.
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 are fundamentally quite bullish on the housing market, given the 100bp drop in mortgage rates over the past six months and the continued strength of the labor market, but today's May new home sales report likely will be unexciting.
Investors think it more likely that the MPC will cut Bank Rate in the first half of next year, following Friday's release of the flash Markit/CIPS PMIs for November.
The ECB made no changes to policy yesterday, leaving its key refinancing and deposit rates unchanged, at 0.00% and -0.5%, and confirmed that it will restart QE in November at €20B per month.
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.
Data released yesterday in Mexico strengthened the case for interest rate cuts this year.
Data this week look set to emphasise that heat is returning to the housing market, again. The Financial Policy Committee--FPC--still has additional tools it could deploy to cool housing demand. But the root cause of surging house prices remains very cheap debt. Alongside the inflation risk posed by the labour market, the case for the MPC to begin to raise interest rates to prevent a widespread debt problem is becoming compelling.
We've seen some alarming estimates of the potential impact on inflation of the House Republicans' plans for corporate tax reform, with some forecasts suggesting the CPI would be pushed up as much as 5%. We think the impact will be much smaller, more like 1-to-11⁄2% at most, and it could be much less, depending on what happens to the dollar. But the timing would be terrible, given the Fed's fears over the inflation risk posed by the tightness of the labor market.
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.
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.
The ECB will leave its main refinancing and deposit rates at 0.00% and -0.4% unchanged today, and it will also maintain the pace of QE at €30B per month.
This was supposed to be the year that wage growth finally would pick up and signal clearly to the MPC that the economy needs higher interest rates.
The impasse between Greece and its creditors has roiled Eurozone bond markets, but the ECB is likely ready to restore calm, if necessary. We think a further widening of short-term interest rate spreads would especially worry the central bank, as it would represent a challenge to forward guidance. For now, spreads remain well below the average since the birth of the Eurozone, even after the latest increase.
The MPC held back last week from decisively signalling that interest rates would rise when it meets next, in May.
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.
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.
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%.
Over the next 18 months we expect to see interest rates break out further on the upside. Initially, we expect developed market growth to be resilient to that.
We think that the higher inflation outlook means that the MPC will dash hopes of unconventional stimulus on August 4 and instead will opt only to cut Bank Rate to 0.25%, from 0.50% currently. The minutes of July's MPC meeting show, however, that the MPC is mulling all the options. As a result, it is worth reviewing how a QE programme might be designed and what impact it might have on bond yields.
Data to be released this Friday should show that Japan's labour market remains tight, though the unemployment rate likely ticked back up in February, to 2.6%, after the erratic drop to 2.4% in January.
We have been asked how we can justify raising our growth forecasts but at the same time arguing that the housing market is set to weaken quite dramatically, thanks to the clear downshift in mortgage applications in recent months. Applications peaked back in June, so this is not just a story about the post-election rise in mortgage rates.
We have argued recently that the year-over-year rates of core CPI and core PCE inflation could cross over the next year, with core PCE rising more quickly for the first time since 2010.
Advance country data indicate that headline EZ inflation fell slightly in June; we think the rate dipped to 1.3% year-over-year, from 1.4% in May.
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%.
In the yesterday's Monitor, we presented an exagerated upper-bound for China's bad debt problem, at 61% of GDP. The limitations of the data meant that we double-counted a significant portion of non-financial corporate--NFC--debt with financial corporations and government.
The 0.18% increase in the core PCE deflator in December was at the lower end of the range implied by the core CPI. It left the year-over-year rate at just 1.5%.
Markets are pricing-in just a 10% chance of the MPC cutting interest rates again within the next six months, odds that look too low given the strong likelihood that the economic recovery loses more pace.
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.
We're expecting a hefty increase in private payrolls in today's August ADP employment report. ADP's number is generated by a model which incorporates macroeconomic statistics and lagged official payroll data, as well as information collected from firms which use ADP's payroll processing services.
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.
Colombia's peso has been one of the most battered currencies in LatAm this year, due mainly to the sharp fall in oil prices, the country's primary export. The COP has dropped about 23% this year against the USD. At the same time, other temporary factors, most notably the impact of El Niño on food prices, have done a great deal of inflation damage too. October's food prices increased 1.4% month-to-month, pushing the year-over-year rate up to 8.8% from an average of 6.6% in the first half of the year. Overall inflation has jumped to 5.9% in October from 3.8% in January, forcing BanRep's board to act aggressively.
Economic data released last week underscored that Brazil's economic recovery is continuing; the effect of recent bold rate cuts and improving domestic fundamentals will further support the gradual recovery of the labour market.
Yesterday's advance Eurozone Q4 GDP report conformed to expectations. Headline GDP increased 0.6% quarter-on-quarter, slowing trivially from an upwardly-revised 0.7% rise in Q3, and nudging the year-over-year rate down marginally to 2.7%.
Japan's headline jobless rate edged up to 2.8% in December, from 2.7% in November, but the increase was negligible, with the rate moving to 2.76% from 2.74%.
Inflation pressures remain under control in most LatAm economies, allowing central banks to keep interest rates on hold, despite the challenging external environment.
The stage is set for the Fed to ease by 25bp today, but to signal that further reductions in the funds rate would require a meaningful deterioration in the outlook for growth or unexpected downward pressure on inflation.
October's money data show that households and firms have regained the appetite for borrowing that they lost immediately after the referendum. But the recent rise in swap rates and the deterioration in consumers' confidence likely will cut short the revival in consumer lending, while persistent Brexit uncertainty likely will continue to subdue firms' investment intentions.
Markets see a strong possibility, though not a probability, that the BoJ will cut rates on Thursday.
The news in Brazil on inflation and politics has been relatively positive in recent weeks, allowing policymakers to keep cutting interest rates to boost the stuttering recovery.
Inflation pressures in the Eurozone are building rapidly, setting up an "interesting" ECB meeting next week. Yesterday's advance CPI report showed that inflation edged up further in February to 2.0%, from 1.8% in January. The headline rate is now in line with the ECB's target, and up sharply from the average of 0.2% last year.
Brazil's Q4 industrial production report, released Wednesday, confirmed that the recovery remained sluggish at the end of last year. December's print alone was relatively strong, though, and the cyclical correction in inventories--on the back of improving demand--lower interest rates, and the better external outlook, all suggest that the industrial economy will do much better this year.
Leading economic indicators in the Eurozone continue to send contradictory signals. Most of the headline surveys indicate that a further slowdown, and perhaps even recession, are imminent, while the money supply data suggest that GDP growth is about to re-accelerate.
Yesterday's October labour market data in Mexico showed that the adjusted unemployment rate rose a bit to 3.4%, from 3.3% in September.
While we were out, data released in Mexico added to our downbeat view of the economy in the near term, supporting our base case for interest rate cuts in the near future.
Headline money supply growth in the Eurozone accelerated further at the start of Q2.
Last week's second estimate of GDP reaffirmed that quarter-on-quarter growth declined to 0.1% in Q1--the lowest rate since Q4 2012--from 0.4% in Q4.
Our forecast that CPI inflation will shoot up to about 3% in the second half of 2017, from 0.6% last month, assumes that pass-through from the exchange rate to consumer goods prices will be as swift and complete as in the past. Our first chart shows that this relationship has held firm recently, with core goods prices falling at the rate implied by sterling's appreciation in 2014 and 2015.
The MPC likely will vote unanimously to keep Bank Rate at 0.75% on Thursday.
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.
Economic data released on Friday underscored our view that bolder rate cuts in Brazil are looming. The BCB's latest BCB's inflation report, released on Thursday, showed that policymakers now see conditions in place to increase the pace of easing "moderately" .
The national accounts for the fourth quarter showed that the economy relied on households slashing their saving rate to a record low in order to spend more. Now, growth in consumer spending will have to fall back in line with real incomes, which will increasingly be impaired by rising inflation.
Even Charles Dickens could not have written a more dramatic prologue to today's ECB meeting. Elevated expectations ahead of major policy events always leave room for major disappointment, but we think the central bank will deliver. Advance data yesterday indicated inflation was unchanged at 0.1% year-over-year in November, below the consensus 0.2%, and providing all the ammunition the doves need to push ahead. We expect the central bank to cut the deposit rate by 20bp to -0.4%, to increase the pace of bond purchases by €10B to €70B a month, and to extend QE to March 2017.
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 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.
Colombia's central bank--Banrep--decided last Friday to leave its benchmark interest rate at 4.5% for the third consecutive month, concerned by the slowdown in oil prices, which is affecting economic activity in the fastest growing economy in the region.
Many investors are betting that the MPC will announce a bold package of easing measures on Thursday. For a start, overnight index swap markets are pricing-in a 98% probability that the MPC will cut Bank Rate to 0.25%, and a 30% chance that interest rates will fall to, or below, zero by the end of the year.
Japan's unemployment rate edged back up to 2.5% in February after the drop in January to 2.4%.
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.
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.
Mexico's inflation has been LatAm's odd one out over the last few years. In the decade through 2014, Mexico's inflation rate was broadly in sync with those of its regional fellows, as shown in our first chart.
Wage growth will be crucial in determining how quickly the MPC raises interest rates this year. So far, it hasn't recovered meaningfully.
Today's CPI report from India should raise the pressure on the RBI to abandon its aggressive easing, which has resulted in 135 basis points worth of rate cuts since February.
Hard data for Brazil and Mexico, released last week, support the case for further interest rate cuts.
This could have been a momentous week, but now it very likely will be just another week with another Fed meeting where rates are left on hold. Our call has very little to do with the underlying state of the economy, which we think can cope with higher rates, and needs them, given the tightness of the labor market. Instead, the story is all about the perceptions--misplaced, in our view--of both the Fed and the markets.
It's hard to know what to make of the October CPI data, which recorded hefty increases in healthcare costs and used car prices but a huge drop in hotel room rates, and big decline in apparel prices, and inexplicable weakness in rents.
The fall in CPI inflation to just 1.5% in October-- its lowest rate since November 2016--from 1.7% in September, isn't a game-changer for the monetary policy outlook.
May's consumer prices figures bolster the case for the MPC to sit tight and wait until next year to raise interest rates, when the economy should have more momentum.
Korea's unemployment rate tumbled to 3.7% in February, after the leap to 4.4% in January.
Peru's central bank, the BCRP, capitulated to the sharp PEN depreciation this year--and acceleration of inflation--and unexpectedly increased interest rates by 25bp to 3.50% last Thursday, for the first time since January. This was a brave step, showing that policymakers are extremely worried about the pace of inflation, despite activity still running below potential. The BCRP argues, though, that activity will accelerate during the coming quarters, so they need now to control inflation by anchoring expectations.
The MPC surprised nobody yesterday by voting unanimously to keep Bank Rate at 0.75% and to maintain the stocks of gilt and corporate bond purchases at £435B and £10B, respectively.
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.
The ECB did its utmost not to say or do anything remotely novel today. The central bank kept its main refinancing and deposit rates unchanged at 0.00% and -0.40%, respectively, and reiterated its plan for QE next 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.
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 stand-out development in yesterday's labour market report was the drop in the he adline, three-month average, unemployment rate to just 4.0% in June--its lowest rate since February 1975--from 4.2% in May.
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%.
We expect the ECB to leave its main interest rates, and the scope and size of QE, unchanged at today's meeting. The governing council will recognize that the cyclical recovery is gathering momentum, but also note that inflation is still uncomfortably low.
The ECB will leave its main refinancing and deposit rates unchanged at 0.00% and -0.4%, respectively,
Evidence of a modest upturn in Brazilian consumers' spending continues to mount. Retail sales rose 1.0% month-to-month in April, pushing the year-over-rate up to +1.9%, from an upwardly-revised -3.2% in March.
Industrial production data yesterday confirmed downside risks to today's GDP data in the Eurozone. Output fell 0.3% month-to-month in September, pushing the year-over-year rate down to 1.7% from a revised 2.2% in August. Weakness in Germany was the main culprit, amid stronger data in the other major economies. A GDP estimate based on available data for industrial production and retail sales point to a quarterly growth rate of 0.4% quarter-on-quarter, but we think growth was rather lower, just 0.2%, due to a drag from net trade.
Banxico decided unanimously to hold its benchmark interest rate at 7.0% at last Thursday's policy meeting.
Korea's jobs report for August was a stonker, with unemployment plunging to 3.1%, from 4.0% in July, marking the lowest rate in more than five years.
The rate of deterioration in the labour market remains gradual enough for the MPC to hold back from cutting Bank Rate over the coming months.
The US employment data last week reduced further the likelihood of a June Fed rate increase. In turn, this changes the likely timing of the normalization process in some LatAm economies. Our Chief Economist, Ian Shepherdson, expects the Fed to start its normalization process in July or September; the strength of the employment data will prevent any postponement beyond the third quarter.
Brazilian inflation has been well under control in the past few months, still laying the ground for rates to remain on hold for the foreseeable future.
The core CPI inflation rate rose in April to 2.1% from 2.0%, thanks to unfavorable rounding, despite the below consensus 0.14% month-to-month print.
Korean credit markets have begun tentatively to recover after the rise in global interest rates at the end of last year.
While we were away, the advance Q2 GDP report in the Eurozone confirmed our expectations of a strong first half of the year for the economy. Real GDP rose 0.6% quarter-on-quarter, the same pace as in Q1, lifting the year-over-year rate to a cyclical high of 2.1%.
The broad strokes of yesterday's ECB meeting were in line with markets' expectations. The central bank left its main refinancing and deposit rates unchanged, at 0.00% and -0.4% respectively, and maintained the same forward guidance.
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.
In an interview with The Times yesterday, MPC member Ian McCafferty--who voted to raise interest rates in June--suggested he also might favour starting to run down the Bank's £435B s tock of gilt purchases soon.
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.
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.
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.
Peru's central bank, the BCRP, admitted defeat again in the face of the inflationary effects of the PEN's depreciation and El Niño, increasing interest rates by 25bp to 3.75% last Thursday, following its 25bp increase in September. Peru is the third LatAm economy in the last few months to raise rates in response to currency weakness, despite sluggish economic growth. The key problem for Peru is that inflation has been trending higher since early 2013 and has remained stubbornly high, above 2.8% all this year. "Temporary" factors just keep on coming.
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 ONS published provisional new weights for the main components of the CPI on Tuesday. The changes boost our forecast for the average rate of CPI inflation this year by a trivial 0.03 percentage points.
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.
The new fiscal projections in the Budget today likely will be based on implausible economic projections, which assume that wage growth will accelerate soon, lifting inflation, but that interest rates won't rise for three more years. You can coherently forecast one or the other, but not both.
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.
Two key points can be extracted from the minutes of the last BCB meeting, when policymakers increased the Selic interest rate by 50bp to 12.75%. First, the bank recognized that the balance of risks to inflation has deteriorated, due to the huge adjustment of regulated prices and the BRL's depreciation, but it specifically referred only to "this year" in the communiqué.
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.
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.
Wednesday's money data confirmed that Chinese households have continued to borrow into Q2 but at a slower rate than in 2016. The slowdown will really set in during the second half, and into 2018. Households have done a sterling job of taking over the borrowing baton from corporates, but they can't do everything.
Yesterday's labour market data significantly bolster the consensus view on the MPC that interest rates do not need to rise this year to counter the imminent burst of inflation. Granted, the headline, three-month average, unemployment rate fell to 4.7% in January--its lowest rate since August 1975--from 4.8% in December, defying the consensus forecast for no-change.
Governor Kuroda dropped further hints in speeches earlier this week that interest rates will be going up. He discussed methods of exit, in loose terms.
The Brexit-related slump in corporate confidence finally has taken its toll on hiring.
We look for yet another unanimous vote by the MPC to keep Bank Rate at 0.75% on Thursday, with no new guidance on the near-term outlook.
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.
Today's labour market figures likely will show that the Brexit vote has inflicted only minimal damage on job prospects so far. The unemployment rate likely held steady at 4.9% in the three months to September, and the risk of a renewed fall in unemployment appears to be bigger than for a rise.
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.
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.
Economic data released yesterday underscored that Brazil emerged from recession in the first quarter, but further rate cuts are needed. Indeed, the monthly economic activity index--the IBC-Br--fell 0.4% monthto- month in March, though this followed a strong 1.4% gain in February.
Last week's hard data in Colombia were upbeat, confirming that economic growth accelerated in the first half. Retail sales rose 5.9% year-over-year in May, overshooting consensus.
Increasingly, we are hearing equity strategists argue that investors should rebalance their portfolios toward EZ equities. On the surface, this looks like sound advice. Commodity prices have exited their depression, factory gate inflation pressures are rising, and global manufacturing output is picking up. These factors tell a bullish story for margins and earnings at large cap industrial and materials equities in the euro area.
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.
Markets initially objected to last week's ECB package, but the tune has since changed. The decision to focus on direct credit easing to the domestic economy, via more attractive TLTROs and corporate bond purchases--rather than by lowering rates further--is now seen by many analysts as a stroke of genius.
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.
Colombia is one of the fastest growing economy in LatAm but over the last few quarters the collapse in oil prices, the depreciating currency--fearing higher U.S. interest rates--and rising inflation, have depressed confidence and dragged down economic activity.
The Fed's action, statement, and forecasts, and Chair Yellen's press conference, made it very clear the Fed is torn between the dovish signals from the recent core inflation data, and the much more hawkish message coming from the rapid decline in the unemployment rate.
We are pushing back our forecast for the next rise in Bank Rate to May 2020, from the tail-end of this year.
China's industrial production grew at an annualised 7.2% rate by volume in Q1, according to our estimates, up from an average 5.9% rate in the six quar ters through mid-2016.
Yesterday's second Q3 GDP estimate confirmed that the EZ economy expanded by 0.2% quarter-on- quarter in Q3, the same pace as in Q2, leaving the year-over-year rate unchanged at 1.2%.
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.
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.
Central banks in Chile, Peru, and Mexico hogged the market spotlight last week. Chile left its main interest rate at 3.0% on Thursday, for the fourth consecutive meeting.
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 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.
Brazil's July economic activity index, released yesterday, showed that the economy started the second half of the year strongly. The IBC-Br index, a monthly proxy for GDP, rose 0.4% month-to-month, pushing the year-over-year rate up to 1.4%, from -0.4% in June.
Chinese M1 growth has slowed sharply in the past year from the 25% rates prevailing in the first half of last year. Growth appeared to rebound in July to 15.3% year-over-year, from 15.0% in June. But the rebound looks erratic. Instead, growth has probably slowed slightly less sharply in 2017 than the official data suggest, but the downtrend continues.
Last week's decision by the ECB to keep rates unchanged until the beginning of 2020, at least, raises one overarching question for 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.
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 ECB made no major policy changes yesterday. The central bank kept its refinancing and deposit rates unchanged at 0.00% and -0.4% respectively, and the scheduled reduction in the pace of QE to €60B per month was confirmed. The core part of the central bank's language retained its dovish bias.
Brazil's industrial sector had a relatively good start to the year. Data on Wednesday showed that production fell 0.1% month-to-month in January, less than markets expected, and the year-over-year rate rose to 1.4%, after a 0.1% drop in December.
Interest rate expectations continued to fall sharply last week.
Our base case remains a 10bp cut in the deposit rate, to -0.5%, in September.
We expect Banxico to keep interest rates on hold at 7.50% at Thursday's meeting. But policymakers likely will adopt a slightly dovish tone, as inflation has fallen faster than they were expecting in their recent forecast.
The two major central banks of Asia have chosen hugely divergent policies. The BoJ has chosen to fix interest rates, while the PBoC appears set on preventing a meaningful depreciation of the currency.
The MPC was relatively bullish on the outlook for households' spending when it signalled its view, in February's Inflation Report, that the case for raising interest rates before the end of this year had strengthened.
Brazil's economy remains mired in a renewed slowdown, and low--albeit temporarily rising-- inflation, which is allowing the BCB to keep interest rates on hold, at historic lows.
Data released yesterday reinforced our forecast of a further rate cut in Brazil next month.
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%.
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.
Data released in recent days have supported our base case for further interest rate cuts in Mexico over the coming meetings.
The pick-up in GDP in July is a re assuring sign that the economy is on course to grow at a solid rate in Q3, thereby substantially weakening the case for the MPC to cut Bank Rate before Britain's Brexit path is known.
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.
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.
Taken at face value, September's money supply data suggest that the economy is ebullient, quickly recovering from the shock referendum result. Year-over-year growth in notes and coins in circulation has accelerated to its highest rate since June 2002.
On the heels of yesterday's benign Q3 employment costs data--wages rebounded but benefit costs slowed, and a 2.9% year-over-year rate is unthreatening--today brings the first estimates of productivity growth and unit labor costs.
Strong real M1 growth suggests the cyclical recovery is in good shape. But recent economic data indicate GDP growth slowed in Q4, and survey evidence deteriorated in January. This slightly downbeat message, however, is a far cry from the horror story told by financial markets. The recent collapse in stock-to-bond returns extends the decline which began in Q2 last year, signalling the Eurozone is on the brink of recession.
The 2.4% depreciation of the yuan over the past month has not been quite as big as the 3.0% move on August 11, and it's not a big enough shift to make a material difference to aggregate U.S. export performance. Market nerves, then, seem to us to be largely a reflection of fear of what might come next. China's real effective exchange rate--the trade-weighted index adjusted for relative inflation rates--has risen relentlessly over the past decade, and to restore competitiveness to, say, its 2011 level, would require a 20%-plus devaluation.
It's very tempting to look at the upturn in the participation rate in recent months and extrapolate it into a sustained upward trend. If the trend were to rise quickly enough, it conceivably could prevent any further fall in the unemployment rate, preventing it falling below the bottom of the Fed's estimated Nairu range.
The odds of the MPC cutting interest rates again in November took another knock yesterday after further signs that the manufacturing sector is getting back on its feet quickly.
The BCB's Copom kept Brazil's Selic rate at 14.25% this week, as expected. The brief accompanying communiqué was very similar to the January statement, saying that after assessing the outlook for growth and inflation, and "the current balance of risks, considering domestic and, mainly, external uncertainties", the Copom decided to keep the Selic rate at a nine-year high, without bias.
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.
Chile's economic sector survey, released on Monday, provides further evidence that the cyclical recovery in the economy continues, albeit at a moderate pace. On the demand side, the rebound is still in place, with retail sales jumping 2.0% month-to-month in February and the underlying trend firm.
Japan's unemployment rate returned unexpectedly to its 26-year low of 2.3% in February, falling from 2.5% in January.
It's tempting to conclude from the recent decline in consumers' confidence that growth in real spending will continue to weaken over the coming quarters, from the already modest 1.8% year-over-year rate in Q3.
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 Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.00%, as expected.
Experimental figures, released earlier this week, suggest that wages have increased at a faster rate than indicated by the average weekly earnings--AWE--data.
December's money data brought clear signs that the economy's growth spurt in the second half of 2016 is about to come to an abrupt end. Growth in households' money holdings and borrowing slowed sharply in December, and the pick-up in corporate borrowing shortly after the MPC cut interest rates and announced corporate bond purchases, in August, has run out of steam already.
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.
Economy-wide confidence deteriorated in November, highlighting that Britain continues to struggle to shake off its malaise.
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.
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.
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.
Mexican industrial activity started the fourth quarter badly. Industrial production fell 0.1% month- to-month in October, pushing the year-over-year rate slightly up to -1.1% from -1.2% in September and -0.7% in Q3.
The falling unemployment rate and the threat it poses to the inflation outlook mean that the labor market numbers in the NFIB small business survey attract more attention than the other data in the report.
CPI inflation picked up to 0.5% in March, from 0.3% in February. The jump was entirely attributable to core inflation, which leapt to 1.5%--its highest rate since October 2014--from 1.2%. With core inflation on track to rise further over the next year, we continue to think that markets will be caught out by interest rate rises later this year.
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.
Financial assets of all stripes are, by most metrics, expensive as we head into year-end, but for some markets, valuations matter less than in others. The market for non-financial corporate bonds in the euro area is a case in point.
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.
Storm clouds gathered over Eurozone financial markets last week. The sell-off in equities accelerated, pushing the MSCI EU ex-UK to an 11-month low.
Chinese monetary conditions remain tight. Systemic tightening through higher interest rates last year is playing a role, but intensified and ever- more public regulatory enforcement is becoming the primary driver of tightening credit conditions for businesses.
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.
We often hear that the large gap between the slowing rising path for interest rates anticipated by the MPC and the flat profile expected by markets is justified because markets have to price-in all of the downside risks to the economic outlook posed by Brexit.
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.
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.
Core inflation probably will remain close to June's 2.3% rate for the next few months.
Brazil's central bank started the year firing on all cylinders. The Copom surprised markets on Wednesday by delivering a bold 75bp rate cut, bringing the Selic rate down to 13.0%. In October and November, the Copom eased by only 25bp, but inflation is now falling rapidly and consistently. The central bank said in its post-meeting communiqué that conditions have helped establish a "new rhythm of easing", assuming inflation expectations hold steady.
Yesterday's labour market data gave sterling a shot in the arm on t wo counts. First, the headline, three-month average, unemployment rate fell to just 4.5% in May, from 4.6% in April.
We have downgraded our 2019 and 2020 China GDP forecasts on previous occasions because monetary conditions have been surprisingly unresponsive to lower short-term rates.
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.
The MPC emphasised yesterday that its faith that interest rates need to rise further has not been shaken by recent downside data surprises.
Peru's central bank likely will cut its main interest rate by 25bp to 3.25% on Thursday. Inflation dipped in September and likely will increase only marginally in October, while economic growth was relatively sluggish at the start of Q3.
A cursory glance at July's labour market report gives no cause for alarm. The headline, three-month average, unemployment rate returned to 3.8% in July, after edging up to 3.9% in June.
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 ECB atoned for its "mistake" in December yesterday by delivering a new easing package that significantly beat markets' expectations. The central bank cut its main refi and marginal lending facility rates by 0.05 percentage points, to 0.00% and 0.25% respectively.
At least some investors clearly were expecting Fed Chair Powell yesterday to offer a degree of resistance to the idea that a rate cut at the end o f this month is a done deal.
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.
China's M2 growth stabilised in November, at 8.0% year-over-year, matching the October rate.
Mexico's economy is not accelerating, but it is holding up very well in difficult circumstances, with rising domestic political risk and stifling interest rates.
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.
Mark Carney emphasised in his Mansion House speech last month that he wants wage growth to "begin to firm" from recent "anaemic" rates before voting to raise interest rates.
Investors likely will be caught out by the extent to which gilt yields rise this year. Forward rates imply that the 10-year spot rate will rise by a mere 20bp to just 1.45% by the end of 2018. By contrast, we see scope for 10-year yields to climb to 1.60% by the end of this year.
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.
The sudden jump in the headline, three-month average, growth rate of average weekly wages to a 10-year high of 3.3% in October, from just 2.4% four months earlier, might indicate that the U.K. has reached the sharply upward-sloping part of the Phillips Curve.
January's consumer price figures, due on Tuesday, likely will show that CPI inflation held steady at December's 3.0% rate.
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.
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.
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.
The median of FOMC members' estimates of longer run nominal r-star--the rate which would maintain full employment and 2% inflation--nudged up by a tenth in September to 3.0%, implying real r-star of 1%.
Today's labour market figures look set to show that wage growth has continued to slow, fuelling speculation that interest rates are going nowhere soon. But a close examination of why wage growth has weakened suggests investors will be surprised by a robust rebound later 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.
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]."
The rate of growth of wages has been the single best guide to Fed policy for many years.
Peru's central bank kept the reference rate unchanged at 3.5% at Thursday's meeting, in line with our view and market expectations.
September's consumer price figures helped to curb expectations that the MPC might raise Bank Rate again before the March Brexit deadline.
When the MPC last met, on November 2, it attempted to persuade markets that Bank Rate would need to rise three times over the next three years to keep inflation close to the 2% target.
The minutes of March's MPC meeting were more newsworthy than we--and the markets--expected. Kristin Forbes broke ranks and voted to raise Bank Rate to 0.50%, from 0.25%.
The Monetary Policy Board of the Bank of Korea voted yesterday to lower its policy base rate to 1.25%, from 1.50%.
Headline inflation in the EZ remained elevated in September, rising by 0.1 percentage point to 2.1%, while the core rate was unchanged at 0.9% in August; both numbers are in line with the initial estimates.
On the face of it, the December core retail sales numbers were something of a damp squib. The headline numbers were lifted by an incentive-driven jump in auto sales and the rise in gas prices, but our measure of core sales--stripping out autos, gas and food--was dead flat. One soft month doesn't prove anything, and core sales rose at a 3.9% annualized rate in the fourth quarter as a whole.
Labour costs are rising so quickly that the MPC cannot justify an "insurance" cut in Bank Rate to counteract the impending damage from Brexit uncertainty in the run-up to the October deadline.
Chile's Central Bank left its main interest rate unchanged last week at 3.0%, for the seventh month in a row. The press release maintained its neutral tone, as in previous recent meetings, as the BCCh acknowledged that the economy is growing at a moderate pace, with some indicators suggesting less dynamic growth "at the margin".
The MPC's forecast in August, which predicted that inflation would overshoot its 2% target over the next two years only modestly--giving it the green light to ease policy--assumed that inflation in sectors insensitive to swings in import prices would remain low. We doubt, however, that domestically generated inflation will remain benign.
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%.
Yesterday's economic activity data from Peru signalled that the relatively firm business cycle continues. The monthly GDP index accelerated to 3.6% year-over-year in November, rising from 2.1% in October, but marginally below the 4.4% on average in Q3. Growth continued to be driven by mining output, including oil and gas, which rose 15% year-over- year. The opening of several new mines explains the upturn, and we expect the sector to remain key for the Peruvian economy this year.
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.
The back-to-back 0.3% increases in the core PPI in June and July represent the biggest two-month gain since mid-2013, so we now have to be on the alert for the August report, which will be released September 11, a week before the FOMC meeting. A third straight outsized gain--the trend before June's jump was only about 0.05% per month, and the year-over-year rate is still only 0.6%--would suggest something real is stirring in the numbers, rather than just noise.
A November interest rate rise is far from the done deal that markets still anticipate, even though CPI inflation rose to 3.0% in September from 2.9% in August.
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.
We'd be very surprised to see anything other than a 25bp rate cut from the Fed today, alongside a repeat of the key language from July, namely, that the Committee "... will act as appropriate to sustain the expansion".
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 MPC will have to issue fresh, dovish guidance in order to satisfy markets on Thursday, which now think the Committee is more likely to cut than raise Bank Rate within the next six months.
Swap rates imply that markets expect RPI inflation to settle within a 3.3% to 3.5% range over the next five years, once the boost from sterling's depreciation has faded.
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.
Money supply data today should provide further confirmation of a moderate upturn in the Eurozone credit cycle. We think broad money growth, M3, accelerated to 5.0% year-over-year in April, up from 4.6% in March.
To imagine an unstoppable macroeconomic policy disaster and desperate improvisation, just think of Venezuela.
Colombia's economy activity is deteriorating rapidly, suggesting that BanRep will have to cut interest rates on Friday. Incoming data make it clear that the economy has moved into a period of deceleration, painting a starkly different picture than a year ago.
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.
Yesterday's data were second-tier in the eyes of the markets, but not, perhaps in the eyes of the Fed. The continued surge in job openings, which reached a 14-year high in December, means that the Beveridge Curve--which links the number of job openings to the unemployment rate--shows no signs at all of returning to normal.
Banxico delivered its fifth 50bp rise of 2016 last Thursday, taking Mexico's main interest rate to 5.75%, its highest level since early 2009. Markets expected a 25bp increase, not least because the MXN has been relatively stable since Banxico's previous meeting in November.
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".
We doubt that the MPC will provide a strong signal on Thursday that interest rates need to rise again before the summer.
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.
Peru's central bank, the BCRP, kept borrowing costs at 3.25% last week, surprising the consensus forecast for a 25bp increase. This was an unexpected move because inflation risks have not abated much since the previous meeting, when policymakers lifted rates for the third straight month.
Lower Rates are a Mistake Unless the Trade War Intensifies
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.
Companies' profit margins have fared relatively well during this recovery, and on many measures, they are back to pre-crisis levels. But looking ahead, corporate profitability is set to be squeezed as labour takes a larger share of national income and the Government gets to grips with the budget deficit by increasing corporate taxation.
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.
In Mexico, Banxico left its policy rate unchanged at 7.75% last Thursday, as was widely expected.
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.
The stock market loved Fed Chair Powell's remarks on the economy yesterday, specifically, his comment that rates are now "just below" neutral.
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.
The Fed's strategic view of the economy and policy has not changed since last December, when it first said that "The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
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.
Markets are reacting to Colombia's disappointing activity figures, released Friday, by pulling forward expectations for the country's first rate cut to December. The data certainly looked weak--especially upon close examination--and we expect growth to slow further. But we think that inflation is still too high to expect rate cuts this year.
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.
Yesterday's retail sales data in Brazil surprised to the downside. Consumers are still being squeezed by high interest rates and a deteriorating labour market. Retail sales declined 0.6% month-to-month in August, leaving the year-over-year rate little changed at -5.5%.
This week economic data highlighted the severity of Brazil's economic recession and the huge challenges it will face next year to return to growth. The recession further deepened in the third quarter with the economic activity index--a monthly proxy for GDP--surprising, once again, to the downside in September. The index fell 0.5% month-to-month, pushing the year-over-year rate down to 6.2%, the steepest fall on record. The series is very volatile on a monthly basis, but the underlying trend remains grim.
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.
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.
China's interbank rates in February so far, on average, have been a little more than 20bp below the floor of the PBoC's corridor, the 2.55% seven-day reverse repo rate.
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.
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.
Yesterday's economic data in Germany cemented the story of a strong start to the year, despite the disappointing headlines. Industrial production slipped 0.4% month-to-month in March, pushing the year-over-year rate down to +1.9% from a revised +2.0% in February.
Over the sleepy August holidays, a view has gained traction in the media that the U.K. economy is showing little damage from the Brexit vote. Optimists argue that the size and composition of the 0.6% quarter-on-quarter rise in Q2 GDP, the 1.4% month-to-month jump in retail sales volumes in July, and the slight dip in the unemployment claimant count demonstrate that the recovery is in good shape.
Yesterday's aggregate economic data for the euro area showed that inflation rose slightly in August. The headline rate rose to a four-month high of 1.5% in August from 1.3% in July. The rate was lifted mainly by energy inflation, rising to 4.6% from 2.2% in July, but we think the rebound will be short-lived.
Some of the rise in the saving rate in recent months is real, but part of the increase likely reflects seasonal adjustment problems. The saving rate has risen between the fourth and first quarters in eight of the past 10 years, as our first chart shows.
For some time now we have argued that the forces which have depressed business capex--the collapse in oil prices, the strong dollar, and slower growth in China--are now fading, and will soon become neutral at worst. As these forces dissipate, the year-over-year rate of growth of capex will revert to the prior trend, about 4-to-6%. We have made this point in the context of our forecast of faster GDP growth, but it also matters if you're thinking about the likely performance of the stock market.
In the years before the crash of 2008, if you wanted to know what was likely to happen to the pace of U.S. economic growth, all you needed to know was what happened to corporate bond yields a year earlier. The correlation between movements in BBB industrial yields--not spreads--and the changes in the rate of GDP growth, lagged by a year, was remarkably strong from 1994 through 2008, as our first chart shows. Roughly, a 50 basis point increase in yields could be expected to reduce the pace of year-over-year GDP growth--the second differential, in other words--by about 1.5 percentage points.
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.
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.
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 can't afford the luxury of believing China's year-over-year growth rates. Real GDP growth was 6.8% year-over-year in Q1, matching the rate in Q4 and Q3, and hitting consensus.
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 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.
Inflation pressures in Brazil and Mexico are well under control, with the August mid-month readings falling more than expected, strengthening the case for the BCB and Banxico to cut interest rates in the near term.
Chief U.S. Economist Ian Shepherdson on U.S. interest rates
Chile's central bank cut the country's main interest rate by 25bp to 3.25% last Thursday. The easing was expected, as the board adopted a dovish bias last month, after keeping a neutral stance for most of 2016. Last week's move, coupled with the tone of the communiqué, suggests that further easing is coming, as growth continues to disappoint and inflation pressures are easing.
The Federal Reserve kept its options open on Wednesday, signaling that it would not raise short-term interest rates any earlier than June, while leaving unresolved how much longer it might be willing to wait before lifting its benchmark rate from near zero, where the central bank has held it for more than six years
BanRep surprised the markets on Friday with a 25bp interest rate cut, bringing rates to 7.50%. We expected the Colombian central bank to start easing in January, due to the uncertainties surrounding the tax reform package and the ongoing minimum wage negotiations.
The stand-out news from August's labour market report was the pick-up in the headline three-month average rate of year-over-year growth in average weekly wages, excluding bonuses, to 3.1%--its highest rate since January 2009--from 2.9% in July.
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.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, discusses the possibility of 4 interest rate hikes in 2017
Dr Ian Shepherdson, chief economist at Pantheon Macroeconomics, says that while US rates will rise by 0.25% on 14th December, the central bank needs to continue to move rates up or wages will spiral up out of control.
What to expect from the ECB as Ms. Lagarde takes the seat as new president?
What do the protests mean for Chile's economy?
Chief U.S. Economist Ian Shepherdson on Bloomberg Surveillance
Senior LatAm Economist Andres Abadia on Colombia
Chief US economist Ian Shepherdson on US Consumer Spending
Chief U.K. Economist Samuel Tombs on U.K. employment
Chief U.K. Economist Samuel Tombs on the U.K. CBI Industrial Trends Survey
Chief U.S. Economist Ian Shepherdson named Market Watch forecaster of the month for July
Ian Shepherdson comments after FOMC Minutes release yesterday
Chief US economist Ian Shepherdson on the latest Jobs report
Chief Eurozone Economist Claus Vistesen comments on Eurozone Consumer Confidence
Ian Shepherdson discussing the FOMC
Chief U.S. Economist Ian Shepherdson on US Retail Sales
Chief U.S. Economist Ian Shepherdson on today's Payroll report
Chief U.S. Economist Ian Shepherdson discussing the latest from the Fed
Chief U.S. Economist Ian Shepherdson on U.S. payroll gains
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.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, explains the issues he sees looming over corporate earnings. He speaks on "Bloomberg Surveillance."
Yesterday's first estimate of full-year 2016 GDP in Mexico indicates that growth gathered momentum over the second half of last year. But risks are now tilted to the downside, following the U.S. election. GDP rose 0.6% quarter-on-quarter in Q4, after a 1.0% increase in Q3. Growth was much slower in the firs t half, as shown in our char t below.
Headline inflation in the Eurozone eased at the start of the year, but leading indicators suggest that the dip will be short-lived.
April's money and credit figures suggest that GDP growth has remained sluggish in Q2. Households' broad money holdings increased by just 0.3% month-to-month in April.
Data released on Wednesday confirmed that the Brazilian economy was relatively resilient in Q1. Leading indicators suggest that it will do well in Q2 and Q3, but downside risks are rising.
We have few doubts that labor demand remained strong in January, but the chance of a repeat of December's 312K payroll gain is slim.
Yesterday's advance EZ CPI report bolstered the ECB doves' case for only marginal adjustments to the language on forward guidance at next week's meeting. Inflation in the euro area fell to 1.4% in May, from 1.9% in April, constrained by almost all the key components.
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.
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.
Brazil's recession has been severe, triggered by the downturn in the commodity cycle, which revealed the underlying structural weaknesses in the economy. This set off an acute shock in domestic demand, but it has bottomed in recent months and we now expect a gradual recovery to emerge.
Colombians have rejected the peace deal with FARC guerrillas to end 52 years of war. The referendum saw relatively poor turnout--almost two thirds of voters abstained--but delivered 50.2% votes against the deal.
We are pretty bullish about the prospects for the economy this year, but we try not to let our core view interfere with our take on the individual indicators. And our analysis suggests that the odds strongly favor a "disappointing" headline payroll number today; we have revised down our forecast to 160K from our previous 175K estimate.
Last week's official data unequivocally indicated that the Brexit vote has not had a detrimental impact on the economy yet.
Stanley Fischer said something interesting and potentially very revealing in the Q&A following his speech Tuesday afternoon at the Council on Foreign Relations. The Fed Vice-Chair argued that wage increases of 3% are "where people would like to be", meaning, presumably, that he believes sustained wage gains at this pace are consistent with the Fed's 2% medium-term inflation forecast.
A rebound in quarter-on-quarter growth in households' spending in Q2, following the slowdown to just 0.2% in Q1, looks less likely following April's money data.
British households are back to their old ways and are piling on debt again. With borrowing costs still falling, consumer confidence high and banks willing to lend, indebtedness will only increase unless the Bank of England acts.
The upward revisions to real consumers' spending in the fourth quarter, coupled with the likelihood of a hefty rebound in spending on utility energy services, means first quarter spending ought to rise at a faster pace than the 2.2% fourth quarter gain. Spending on utilities was hugely depressed in November and December by the extended spell of much warmer-than-usual weather.
Mexican manufacturing sector kicked off the year on a soft note, due mainly to the sharp drop in oil prices, and the sharp weather-induced slowdown in the U.S. Mexico's northern neighbor is its largest trading partner, by far, accounting for about 85% of total exports last year and close to 80% of total non-oil exports.
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.
The BoJ had two tasks at its meeting yesterday.
Brazil's GDP rose by 0.1% quarter-on-quarter in the third quarter, according to the report published last Friday. The slight growth was driven by investment and government spending, both growing 1.3%, while private consumption fell 0.3%, the biggest drop since late 2008.
It's tempting to conclude from the third quarter's GDP figures, which showed output rising 0.5% quarter-on-quarter, despite a record drag from net trade, that the U.K. economy is comfortably weathering sterling's appreciation. But a closer look at the data shows the net trade drag is the counterparty to some erratic inventory movements. The real net trade hit is still to come.
We're inclined to place little weight on July's E.C. Economic Sentiment Survey, which showed that consumers' confidence has picked up to its highest level since October 2016; see our first chart.
Friday's economic data added to the evidence of a Q1 rebound in EZ consumption growth.
Colombia was likely the fastest growing economy in LatAm in 2015, but it is set to slow this year as monetary and fiscal policy are tightened, and commodity prices remain under pressure during the first half of the year, at least. Economic activity was surprisingly resilient during 2015, especially during the second half, despite the COP's sell-off, high inflation, and subdued consumer confidence.
The underlying trend in payroll growth is running at about 225K-to-250K, perhaps more, and the leading indicators we follow suggest that's a reasonable starting point for our December forecast. The trend in jobless claims is extraordinarily low and stable--the week-to-week volatility is eye-catching, especially over the holidays, but unimportant--and indicators of hiring remain robust. The unusually warm weather in the eastern half of the country between the November and December survey weeks also likely will give payrolls a small nudge upwards, with construction likely the key beneficiary, as in November.
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.
A firmer picture is emerging of how Japan's economy fared in Q3, in light of the latest slew of data for August.
Normal service appears to have resumed in August, with payrolls rising by 201K, very close to the 196K average over the previous year.
Lacklustre economic data and persistent no deal Brexit risk mean that the MPC won't rock the boat at this week's meeting.
Data yesterday suggest that EZ investor sentiment is on track for a modest recovery in Q3.
Investors have been caught out by the speed of the recent rise in RPI inflation and have revised up their expectations. Even so, inflation swaps imply that markets expect RPI inflation to be 3.6% in one year's time, not much above the latest print, 3.2% in February. We still think RPI inflation will exceed markets' expectations.
Nowhere is the gap between sentiment and activity wider than in the NFIB survey of small businesses. The economic expectations component leaped by an astonishing 57 points between October and December, but the capex intentions index rose by only two points over the same period, and it has since slipped back. In February, the capex intentions index stood at 26, compared to an average of 27.3 in the three months to October.
Korea's labour market took an overdue breather in March after an extremely volatile start to the year.
The economy has remained remarkably resilient in the face of intense political uncertainty.
The U.K.'s dependence on large inflows of external finance was laid alarmingly b are last week, when "hard" Brexit talk by politicians caused overseas investors to give sterling assets a wide berth. Investors now are demanding extra compensation for holding U.K. assets, because the medium-term outlook is so uncertain.
Yesterday's CPI report in Mexico confirmed that headline inflation edged higher, to 5.0% in September from 4.9% in August, as the mid-month inflation index suggested.
German trade data yesterday added further evidence that net exports likely will wreak havoc with the Q3 GDP report this week. Exports rose 2.6% month-to-month in September, partially rebounding from a 5.2% plunge in August. But imports jumped 3.6%, further adding to the net trade drag on a quarterly basis. Our first chart shows our estimate of real net trade in Q3 as the worst since the collapse in 2008-to-09.
China's money and credit numbers for April were a mixed bag. M2 growth merely inched down, to 8.5% year-over-year, from 8.6% in March, keeping its gradual uptrend intact.
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.
We remain confident in the success of legislation designed to compel the PM to request a further extension of the U.K.'s E.U. membership on October 19, in the overwhelmingly likely scenario that an exit deal is not agreed at next week's E.U. Council meeting.
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.
Neither the 33K drop in September payrolls nor the 0.5% jump in hourly earnings tells us anything about the underlying state of the labor market.
Our base case forecast for today's July core CPI is that the remarkable and unexpected run of weak numbers, shown in our first chart, is set to come to an end, with a reversion to the prior 0.2% trend.
First things first: Payroll growth likely will be sustained at or close to November's pace.
The border security agreement between the U.S. and Mexico has strengthened hopes that the Sino- U.S. trade war will end soon.
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 has been trending down in the last two years.
The big story in financial markets at the moment is the idea that major global central banks are about to embark on a policy easing cycle.
Chancellor George Osborne has invested considerable personal capital in attaining a budget surplus by the end of this parliament, and he has passed a 'law' to ensure he and his successors achieve this goal. But the current fiscal plans, which will be reviewed in the Budget on March 16, make a series of optimistic assumptions on future tax revenues and spending savings.
The undershoot in the April core CPI wasn't a huge surprise to us; the downside risk we set out in yesterday's Monitor duly materialized, with used car prices dropping by a hefty 1.6% month-to-month, subtracting 0.05% from the core index.
Gilt yields have been remarkably stable following their decline in response to the Bank of England's Inflation Report in February. The average 60-day price volatility of gilts with outstanding maturities of greater than one year has fallen back recently to lows last seen in 2014, as our first chart shows.
Recent economic indicators in Mexico have been relatively positive.
Core PPI inflation has risen relentlessly, though not rapidly, over the past two-and-a-half years.
The French industrial sector ended last year on an upbeat note, but the underlying trend in activity is still weak. Industrial production rose 1.5% month-to-month in December, equivalent to a 0.1% fall year-over-year.
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.
Momentum in French manufacturing eased slightly in November, but the setback was modest. Industrial production dipped 0.5% month-to-month, only partially reversing the revised 1.7% jump in October.
Economic data in the euro area are still slipping and sliding.
China's PPI inflation rose again in June, to 4.7%, from 4.1% in May.
Political risks in Brazil recently have simmered alongside the modest cyclical recovery, but they are now increasing. President Michel Temer's future remains hard to predict as circumstances change by the day.
The headline April CPI, due today, will be boosted slightly by rising gasoline prices.
The stakes are raised ahead of today's ECB meeting after the central bank's pledge in January to "review and reassess" its policy stance. Since then, survey data have weakened, inflation has fallen and volatility in financial markets has increased. The ECB likely will act accordingly and deliver a boost to monetary stimulus today.
The more headline hard data we see in the Eurozone, the more we are getting the impression that 2019 is the year of stabilisation, rather than a precursor to recession.
The Office for Budget Responsibility has decided to press ahead with the publication of new fiscal forecasts on November 7, despite the government's decision to postpone the Budget until after the next election.
Yesterday's first estimate of Q1 GDP in Mexico confirmed that growth was under severe pressure at the start of the year.
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...
The ECB will be satisfied, and a bit relieved, with yesterday's economic data in the Eurozone.
Brazilian assets were hit in Q3 by global external challenges, while domestic fundamentals gradually improved.
Mexico's economy grew 1.0% quarter-on-quarter in Q3, the fastest pace since 2014, following a 0.2% contraction in Q2, according to the preliminary report published yesterday.
Yesterday's economic headlines in the Eurozone were pleasant reading.
Yesterday's Chinese PMI numbers disappointed forecasts across the board, failing to meet widespread expectations for either stability or a continued, albeit marginal, improvement in April.
Brazil's GDP growth slowed to just 0.1% quarter- on-quarter in Q4, from a downwardly-revised 0.5% in Q3.
Yesterday's advance CPI data for the major EZ economies suggest that today's report for the euro area as a whole will undershoot the consensus slightly.
The latest official data show that net migration to the U.K. hasn't fallen much, despite all the uncertainty created by the Brexit vote.
Yesterday's money supply data in the Eurozone were alarmingly poor.
The government last week fired the starting gun for the contest to replace Mark Carney as Governor of the Bank of England.
Yesterday's first estimate of Q1 GDP in Mexico confirmed that growth was resilient at the start of the year, despite the lingering hit to confidence from domestic and external threats.
China's official and Caixin manufacturing PMIs have diverged in the last couple of months.
The first round of Brazil's presidential elections will take place this Sunday, followed by a probable runoff on October 28.
For some time now, we have puzzled over the softness of small firms' capital spending intentions, as measured by the monthly NFIB survey.
It's hardly surprising that the consensus forecast for month-to-month growth in November GDP, released on Friday, is a mere 0.1%, given the flow of downbeat business surveys.
We think Japanese monetary policy easing essentially is tapped out, both theoretically and by political constraints.
The pound can't get a break. Sterling fell to just $1.24 yesterday, its lowest level against the dollar since March 2017, bar the momentary "flash crash" in January.
Brazil's interim government has been trying to put the kibosh on the vicious circle of recession, capital outflows, and political pandering that has dogged the country for so long. In his first few weeks at the helm, despite the political turmoil, Mr. Temer has started to tackle Brazil's fiscal mess, the country's biggest headache.
LatAm's growth outlook is deteriorating, despite decent domestic fundamentals and political transitions toward more market-oriented governments in some of the region's main economies.
Yesterday's CPI report in Mexico showed that inflation remains high, but we are confident that it will start to fall consistently during Q1, thanks chiefly to a favourable base effect.
Today's trade figures likely will continue to show that the benefits from sterling's depreciation are being outweighed by the costs. Exports still are barely growing, but consumers are about to endure a substantial import price shock. The monthly trade deficit has been extremely volatile over the last year, generating a series of excessively upbeat or gloomy headlines. The truth is that the deficit has been on a slightly deteriorating trend, as our first chart shows. We think the trade deficit likely narrowed to £3.8B in December, from £4.2B in November, bringing it closer to its rolling 12-month average of £3.0B.
Halifax's house price index rose by an eye catching 1.5% month-to-month in March, superficially suggesting that the housing market is reviving.
China's FX reserves were relatively stable in March, with the minimal increase driven by currency valuation effects.
Brazil's economic activity data have disappointed in recent months, firming expectations that the Q1 GDP report will show another relatively meagre expansion.
The ECB will rest on its laurels today.
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 softening in payroll growth in November appears mostly to be a story about short-term noise, rather than a sign that tariffs are hurting or that the broader economy is slowing.
At next Wednesday's Budget, the Chancellor will have the rare pleasure of announcing lower-than- anticipated near-term borrowing forecasts. But hopes that he will prevent the fiscal tightening from intensifying when the new financial year begins in April look set to be dashed, just as they were at the Autumn Statement in November.
Yesterday's final manufacturing PMIs confirmed that the headline index in the euro area rebounded further last month.
We're reasonably happy with the idea that business sentiment is stabilizing, albeit at a low level, but that does not mean that all the downside risk to economic growth is over.
With campaigning for the general election intensifying last week, it was unsurprising that October's money and credit release from the Bank of England received virtually no media or market attention.
The FOMC did nothing yesterday and said nothing significantly different from its June statement, as was universally expected.
Inflation in the Eurozone stumbled at the end of Q3.
Colombian activity data released this last week were upbeat, better than we expected, showing a significant pickup in manufacturing output and improving retail sales. Retail sales rose 3.1% year- over-year, after a modest 1.0% increase in June.
A no-deal Brexit is a remote possibility. The U.K. government and EU are closing in on a deal and Brexiteers within the Conservative party have failed, so far, to trigger a confidence vote on Mrs. May's leadership.
The key detail in Friday's barrage of economic data was the above-consensus increase in EZ inflation.
LatAm assets and currencies had a bad November, due to global trade war concerns, the USD rebound and domestic factors.
The economy slowed less than we expected in 2017.
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 economic calendar in the euro area was relatively quiet over Christmas, and broadly conformed to our expectations.
The manufacturing sector appears to have started the new year on a weaker note. The Markit/CIPS manufacturing PMI dropped to 55.3 in January--its lowest level since June--from 56.2 in December.
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.
Brazil's December industrial production and labour reports, released this week, confirmed that the recovery remained solidly on track at the end of last year.
Our view that the economy is slowing sharply appears, superficially, to be challenged by the surge in the money supply. Year-over-year growth in the value of banknotes and coins in circulation has shot up this year, to 8.3% in August, from 5.5% in December 2015.
Yesterday's detailed CPI data for August confirmed that inflation in the Eurozone stayed subdued over the summer.
February's consumer price figures, released tomorrow, likely will show that CPI inflation fell to 2.8%--one tenth below the MPC's forecast--from 3.0% in January.
Japan's adjusted trade balance flipped back to a modest surplus of ¥116B in February, after seven straight months of deficit.
In light of Mr. Draghi's Sintra speech, we take this opportunity to give an update on the BoJ's stance, ahead of the meeting on Thursday.
It is a known axiom among EZ economists that the ECB never pre-commits, but yesterday's speech by Mr. Draghi in Sintra--see here--is as close as it gets.
Peru's April supply-side monthly GDP data confirm that the economic rebound lost momentum at the start of the second quarter.
We doubt there will ever be a fail-safe leading indicator of when a recession is about to hit, but asset prices can help us to assess the risks, at least.
Following our note yesterday about upside risks to wage growth and the question of how the Fed will respond, given their sensitivity to labor cost-push inflation risk in the past, we want to address a question raised by readers.
A Reuters interview yesterday with ECB governing council member Benoît Coeuré cemented expectations that the ECB will adjust its language on forward guidance next month.
A sharp increase in unsecured borrowing has played a big role in supporting consumers' spending over the past year. The stock of unsecured credit, excluding student loans, increased by 8.2% year-over-year in September--the fastest growth since February 2006--boosting the funds available for households to spend by around 1%.
It's been a sobering couple of months in the Eurozone economy.
As the impeachment hearings gather momentum, we have been asked to provide a cut-out-and-keep guide to the possible outcomes.
Italy's economy is still bumping along the bottom, after emerging from recession in the middle of last year.
Chile's Q3 GDP report, released yesterday, confirmed that the economy gathered speed in the third quarter, but this is now in the rearview mirror.
The data in LatAm have been all over the map in recent weeks.
Last week's national accounts confirmed that the economy lost momentum abruptly in Q1, with net trade and investment failing to offset weaker growth in households' spending.
October's Markit/CIPS manufacturing survey indicates that producers are not shying away from passing on to their customers the higher costs stemming from sterling's depreciation.
Japan's Tankan survey continues to paint a picture of a contracting economy.
Data while we were away have intensified fears that the global, and by extension EZ, economy is slipping into recession.
Don't bet the farm on today's October payroll numbers, which will be hopelessly--and unpredictably-- compromised by the impact of hurricanes Florence and Michael.
In broad terms, the euro has followed the EZ economy in the past 12-to-18 months.
China's Caixin manufacturing PMI was unchanged at 51.0 in October, continuing the sideways trend this year.
Chile's economic indicators for July were unreservedly weak, confirming that the economic recovery remains sluggish. The industrial production index--comprising mining, manufacturing, and utility output--fell by 5.2% year-over-year in August, after a 1.7% contraction in July. Mining production suffered a sharp 9.3% year-over-year contraction, due mainly to an 8.3% fall in copper production, as strikes and maintenance works badly hit the industry.
Whatever you think is the underlying tr end in payroll growth, you probably should expect a modest undershoot in today's report, thanks to the persistent tendency for the first estimate of September payrolls to undershoot and then be revised higher. The good news is that the initial September error tends not to be as big as in August--the median revision from the first estimate to the third over the past six years has been 49K, compared to 66K--and it has declined recently. Over the past three years, September revisions have ranged from only 18K to 27K. Still, we can't ignore six straight years of initial undershoots.
The U.S. reached a trade agreement with Canada on Sunday, adding its northern neighbour to the pact sealed a month ago with Mexico.
Yesterday's January EZ money supply data offered support for investors betting on a further dovish shift by the ECB at next month's meeting.
Recent polls suggest that Jair Bolsonaro has comfortably beaten Fernando Haddad, to become Brazil's president.
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 recent sell-off in Treasuries has not yet reached significant proportions.
Last week's EU summit was an exercise in political pragmatism rather than the bold step forward on reforms that investors had been hoping for.
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.
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.
Mexico's election results are not available as we go to press, but we're expecting a comfortable win for the left-wing populist candidate, AMLO.
Perhaps the single strongest U.S. economic data series in recent months has been construction spending, which has risen by more than 1%, month-to-month, in four of the past five months.
Tokyo CPI inflation jumped to 1.5% in October, from 1.2% in September. That
China's authorities recognised, around the middle of this year, that activity was slowing and that monetary conditions had become overly tight.
Officially, Japanese wages have been falling year- over-year since January, marking a break from the gradual acceleration over the past 18 or so months.
The return to normal in the March payroll numbers, with a 196K headline increase, is another nail in the coffin of the "imminent recession" theory.
We keep hearing that the auto market is struggling, but that idea is not supported by the recent sales numbers.
Yesterday's economic data in the Eurozone were soft.
China's manufacturing PMI posted a surprise, albeit trivial, increase in February, to 51.6 up from 51.5 in January.
January's money and credit data broadly support our view that the economy still lacks momentum.
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.
Even an ardent Brexiteer could not deny that uncertainty about the outcome of the E.U. referendum is subduing bank lending. The Bank of England's preferred measure of bank lending--M4 lending excluding intermediate other financial corporations, or OFCs--fell by 0.1% month-to-month in April.
We anticipated that the G20 meeting at Osaka over last weekend would be a potentially important mark of thawing relations between China and the U.S., with the hotly awaited meeting between Messrs. Xi and Trump.
The NFIB survey of small businesses today will show that July hiring intentions jumped by four points to +19, the highest level since November 2006. The NFIB survey has been running since 1973, and the hiring intentions index has never been sustained above 20.
The release yesterday of the weekly Redbook chainstore sales report for the week ended Saturday August 4 means that we now have a complete picture of July sales.
China's official manufacturing PMI slipped in June, but the overall picture for Q2 is sound despite the uncertainty posed by rising trade tensions with the U.S.
The first round of trade talks between the U.S.and China kicked off in Beijing on Monday, marking the first face-to-face meeting between the two sides since Presidents Donald Trump and Xi Jinping struck a "truce" in December.
The 7.8% month-on-month plunge in Japan's core machine orders in May re-emphasises the underlying weakness that we have been worrying about, after the 5.2% jump in April.
China will have to issue a lot of government debt in the next few years. The government will need to continue migrating to its balance sheet, all the debt that should have been registered there in the first place. This will mean a rapid expansion of liabilities, but if handled correctly, the government will also gain valuable assets in the process.
Mr. Macron's victory in France answers two questions for markets, at least in the short run. Firstly, France will stay in the Eurozone, and Mr. Macron will not call a referendum on EU membership. Mr. Macron has come to power with a mandate to strengthen economic integration and co-operation between Eurozone economies.
We'd be quite surprised if the headline payroll number today turned out to be far from the consensus, 205K, or our forecast, 225K.
Brazil's industrial sector is still struggling, despite recent signs of better economic and financial conditions.
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.
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 U.K.'s balance of payments leaves little room for doubt that sterling would sink like a stone in the event of a no-deal Brexit.
Don't expect a pretty picture when Korea's Q1 GDP report appears in the last week of April.
The Manufacturing Upswing Continues; no Sign of Weakening
Last week's news that output per hour jumped by 0.9% quarter-on-quarter in Q3--the biggest rise since Q2 2011--has fanned hopes that the underlying trend finally is improving.
Sterling was the worst performing G10 currency in 2016 and most analysts anticipate further weakness in 2017. The cost of purchasing downside protection for sterling over the next year also continues to exceed upside protection, as our first chart shows.
March economic activity in Chile expanded by a solid 4.6% year-over-year, pointing to Q1 real GDP growth of 4.0%, the fastest pace since Q3 2013, up from 3.3% in Q4.
Britain's housing market appears to be going from bad to worse.
The dip in payroll growth in September was due to Hurricane Florence. We expect a clear rebound in payrolls in October; our tentative forecast is 250K.
We expect August's GDP figures, released on Wednesday, to show that month-to-month growth slowed to 0.1%, from 0.3% in July.
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 Redbook chainstore sales survey today is likely to give the superficial impression that the peak holiday shopping season got off to a robust start last week.
In one line: Easter distortions drove services inflation higher; the core goods CPI is still subdued
Japan's firms are done hiring. Tokyo inflation points to uptick in national gauge, driven by non-core effects. Japan's start to Q4 goes from bad to worse, as industrial production tanks in October. Still far too soon to call time on Korea's IP recovery, despite the October setback. Governor Lee attempts to manage 2020 expectations, as the BoK stands pat after the October cut.
This week's data confirmed Mexico's strong economic performance over the first few months of this year.
Fed Chair Powell did not specify how many bills the Fed will buy in order boost bank reserves sufficiently to remove the strain in funding markets, but we'd expect to see something of the order of $500B.
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.
News on Mr. Bolsonaro's economic plans and announcements on key names for his government this week are helping the currency and easing risks perception in Brazil.
We look for August's GDP report, released on Thursday, to show that output held steady, following July's 0.3% month-to-month jump.
The political momentum in the run-up to the election now lies with Labour.
Data released last week confirm that Brazil's recovery has continued over the second half of the year, supported by steady household consumption and rebounding capex.
Inflation pressures in Colombia cooled considerably last month. Saturday's CPI report showed that inflation fell to 3.4% year-over-year in July, its lowest level since 2014, from 4.0% in June.
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.
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.
Many observers hoped that the silver lining of a slowdown in house price growth this year would be that more first-time buyers could step onto the first rung of the housing ladder. Instead, purchasing a first home has become even harder for FTBs with modest deposits.
House prices continue to struggle for momentum, instilling caution among households. Admittedly, Halifax reported yesterday that its index jumped by 1.5% month-to-month in May.
The winter hit to payrolls is now ancient history. Private employment rose by an average of 273K per month in the second half of last year, so May's 262K has restored normal service, more or less. History strongly suggests the number will be revised up, so we are happy to argue that the data convincingly support our view that the weakness in late winter and early spring was temporary, substantially due to the severe weather.
Markets have been positively surprised by Brazil's rapid disinflation, the efforts at fiscal reform, and the prospect of growth in the economy this year. The Ibovespa index is now above its pre-crisis high and the real has approached the key level of three per USD in recent months. But the latest GDP report, released yesterday, showed that the economy struggled in Q4. Real GDP fell 0.9% quarter-on-quarter, worse than the revised 0.7% drop in Q3.
A casual glance at our char t below, which shows the number of job openings from the JOLTS report, seems to fit our story that the slowdown in payrolls in April and May--perhaps triggered by the drop in stocks in January and February--will prove temporary. Job openings dipped, but have recovered and now stand very close to their cycle high.
Odds-on, the consensus forecast for May's GDP report, released on Wednesday, will miss the mark.
Colombia was one of the fastest growing economies in LatAm in 2018, and prospects for this year have improved significantly following June's presidential election, with the market-friendly candidate, Iván Duque, winning.
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 run-up to the release of the official retail sales figures has become so congested with other indicators, following alterations by the ONS to its publication schedule, that we now have to preview the data earlier than usual.
We expect to see a 180K increase in November payrolls
Japanese firms hand out a significant portion of labour compensation through bonuses, with the largest lump awarded in December.
The housing market perhaps is where the adverse impact of Brexit uncertainty can be seen most clearly.
China is set to ease reserve requirements for banks lending to small businesses. In a statement after the State Council meeting yesterday, Premier Li Keqiang said that commercial banks would receive a cut in their RRR , from 17% currently, based on how much they lend to businesses run by individuals.
The Chancellor's Budget today looks set to prioritise retaining scope to loosen policy if the economy struggles in future, rather than reducing the near-term fiscal tightening. In November, the OBR predicted that cyclically-adjusted borrowing would fall to 0.8% of GDP in 2019/20, comfortably below the 2% limit stipulated by the Chancellor's new fiscal rules.
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.
The RMB has been on a tear, as expectations for a "Phase One" trade deal have firmed.
September PMI surveys in Mexico continued to bolster our argument for a subpar recovery in the second half of the year.
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.
Colombia and Chile faced similar broad trends through most of 2018.
Geopolitical tensions have risen sharply for Asia in the last few months, yet the RMB has appreciated sharply. China's currency appears to be playing some kind of safe haven role.
Headline inflation in Brazil remained low in October, and even breached the lower bound of the BCB's target range.
The 10.3% year-over-year decline in private new car registrations in April likely is not a sign that the trend in either vehic le sales or consumers' overall spending is taking a turn f or the worse.
Our below-consensus 125K forecast for today's February payroll number is predicated on two ideas.
The build-up to today's ECB meeting has drowned in the focus on Italy's new political situation and the rising risk of a global trade war.
China's current account dropped sharply in Q1, to a deficit of $28.2B, from a surplus of $62.3B in Q4.
Calling the ECB has suddenly become a lot more complicated.
Brazil's current account deficit is stabilizing following an substantial narrowing since early 2015, thanks to the deep recession.
In one line: Spectacular but unsustainable.
The escalation in the U.S.-Chinese trade wars has understandably pushed EZ economic data firmly into the background while we have been resting on the beach.
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.
Data released last week in Argentina reaffirm that President Macri remains in a challenging position ahead of the October 27 presidential election.
Consensus expectations for August's labour market data, released today, look well grounded.
We are fairly sanguine that government bond markets in the Eurozone will take the end of QE in their stride.
China's March money and credit data, published last Friday, showed that conditions continue to tighten, posing a threat to GDP growth this year.
China's property market looks to be turning the corner, going by the stronger-than-expected March report.
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.
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.
Tariffs are a tax on imported goods, and higher taxes depress growth, other things equal.
The headline retail sales numbers for October looked good, but the details were less comforting.
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.
Yesterday's data in the EZ provided a little more evidence on what happened in Q1.
Even if the Prime Minister fends off an emerging leadership challenge--as we write, the rebels still are short of the 48 signatures required to trigger a confidence vote--her chances of getting parliament to back the Withdrawal Agreement in its current form are slim.
China's official real GDP growth likely slowed to 6.0% year-over-year in Q3, from 6.2% in Q2.
Yesterday's final inflation data in France for September were misleadingly soft.
Evidence of accelerating economic activity in Colombia continues to mount, in stark contrast with its regional peers and DM economies.
China and the U.S. are officially to restart trade talks, according to China's Ministry of Commerce, after previous negotiations stalled in June.
Your correspondent is headed to the beach for the next couple of weeks, with publication resuming on Tuesday, September 4.
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.
Last week, the MBA's measure of the volume of applications for new mortgages to finance house purchase rose 1.7%.
The Eurozone's sovereign bond markets are dying, and this is a good thing, by and large.
Japan's economic data have been very volatile in the last 18 months.
Evidence in support of our view that the U.S. industrial slowdown is ending continues to mount, though nothing is yet definitive and the re-escalation of the trade war is a threat of uncertain magnitude to the incipient upturn.
Colombian activity data released this week were relatively strong, but mostly driven by the primary sectors; consumption remains sluggish compared to previous standards.
Yesterday's CPI report in the Eurozone confirmed that inflation pressures remain subdued, even as GDP growth is accelerating.
We have revised up our second quarter consumption forecast to a startling 4.0% in the wake of yesterday's strong June retail sales numbers, which were accompanied by upward revisions to prior data.
May's activity data underline the gradual recovery in Colombia's economic growth, following signs of weakness at the start of the year.
The Mexican labor market has remained relatively healthy in recent months, despite many external and domestic headwinds. Formal employment has increased by 2.1% year-to-date and by 3½% in the year to July, according to the Mexican Social Security Institute.
Equity prices for U.K. retailers have performed woefully since the E.U. referendum. The FTSE All-Share Index for general retailers has underperformed the overall All-Share Index by nearly 30% since the Brexit vote.
Colombia is more vulnerable to falling oil prices than most other LatAm economies. That's why the COP has dropped by 20% since June, outpaced only by the rouble, which has problems beyond falling oil prices.
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.
In our daily Monitors we've talked about the four paths that we see for the Chinese economy over the medium-to-long term. First, China could make history and actively transition to private consumption-led growth.
At the end of last year, U.S. homebuilders were more optimistic than at any time in the previous 18 years, according to the monthly NAHB survey.
Official industrial production growth in China plunged to 5.4% year-over-year in April, from 8.5% in March.
Colombia's economy defied rising political uncertainty at the start of the year. Retail sales growth jumped to plus 6.2% year-over-year in January, up from -3.8% in December and -1.8% in Q4.
China's September imports missed expectations, but commentators and markets tend to focus on the year-over-year numbers.
Few Eurozone investors are going blindly to accept the rosy premise of last week's relief rally in equities that both a Brexit and a U.S-China trade deal are now, suddenly, and miraculously, within touching distance. But they're allowed to hope, nonetheless.
Data released yesterday from Brazil support our view that the economic recovery continues, but progress has been slow.
The New York Times called the China trade agreement reached Friday "half a deal", but that's absurdly generous.
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.
The industrial production trajectory in Mexico looked strong going into Q3, but Friday's report for August threatens to change that picture.
A bad year is threatening to become a catastrophic one for Eurozone equity investors.
We expect September's consumer prices report, released on Wednesday, to show that CPI inflation held steady at 1.7%, below the 1.8% consensus.
CPI inflation held steady at 2.4% in October, undershooting the 2.5% consensus expectation and the MPC's forecast in this month's Inflation Report.
October's 0.1% month-to-month fall in retail sales volumes was disappointing, following substantial improvements in the CBI, BRC and BDO survey measures.
LatAm assets did well in Q1, on the back of upbeat investor risk sentiment, low volatility in developed markets and a relatively benign USD.
China's main activity data for October disappointed across the board, strengthening our conviction that the PBoC probably isn't quite done with easing this year.
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.
Consumption accounts for almost 70% of GDP, and retail sales account for about 45% of consumption.
CPI inflation held steady at 3.0% in October, undershooting our forecast and the consensus by 0.1 percentage point and the MPC's forecast by 0.2pp.
Today's retail sales figures for August likely will rebut the widespread view that spendthrift consumers will prevent a sharp economic slowdown. We look for a 1% month-to-month decline in retail sales volumes in August, well below the -0.4% consensus forecast.
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.
Inflation pressures in France eased across the board at the end of last year.
The Chinese authorities have been out in force in the last few days, aiming to reassure markets and the populace that they are ready and able to support the economy, after abysmal trade data on Monday.
Brazil's consumer sluggishness in Q3 and early Q4 eased in November.
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 ramifications of continued disappointing Asian growth, particularly in China, and its impact on global manufacturing, are especially hard-felt in LatAm.
Another month, another sluggish performance in the manufacturing sector. Even a third straight big jump in auto output was unable to rescue the May numbers, and aggregate output fell by 0.2%. The trend in output has been broadly flat over the past six months or so, and we see little prospect of any sustained near-term recovery.
We expect June's consumer prices report, due on Wednesday, to show that CPI inflation fell to 1.9%, from 2.0% in May.
Inflation pressure remained relatively high in Argentina last year, due mostly to the legacy of the Kirchner era. But we think inflation will ease this year, given the lagged effects of the recession and the fiscal consolidation.
January's retail sales figures look set to show that growth in consumers' spending remains stuck in low gear.
"Is EZ fiscal stimulus on the way?" is a question that we receive a lot these days.
Equities in the Eurozone are off to a strong start in Q2, building on their punchy 12% gain in the first quarter.
The remarkable recent strength in retail sales continued into November, with total sales volumes rising by 0.2% and sales ex-motor fuels up by 0.5%. Those numbers aren't spectacular but they have to be seen in the context of October's huge 1.9% jump in sales ex-motor fuel; usually, after such a big gain we'd expect a correction the following month.
The starting gun for the "Brexit" referendum will be fired this week if E.U. leaders, who meet for a two-day summit starting Thursday, agree to the draft reform package assembled by Prime Minister and E.U. President Donald Tusk.
Having panicked at the January hourly earnings numbers, markets now seem to have decided that higher inflation might not be such a bad thing after all, and stocks rallied after both Wednesday's core CPI overshoot and yesterday's repeat performance in the PPI.
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.
The spectacular 1.3% rebound in manufacturing output last month -- the biggest jump in seven years, apart from an Easter-distorted April gain -- does not change our core view that activity in the sector is no longer accelerating.
The beleaguered EZ car sector finally enjoyed some relief at the end of Q3, though base effects were the major driver of yesterday's strong headline.
We expect August's retail sales figures, released on Thursday, to surprise modestly to the upside, supporting the MPC's view--which it will reaffirm later that day--that no fresh monetary stimulus is required any time soon.
The ongoing weakness in DM has been a feature of the global landscape over the last year.
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.
Colombia's economy remained resilient in July, thanks to strong domestic demand and relatively good external conditions for the country's top exports.
China's residential property market surprised again in August, with prices popping by 1.5% month- on-month, faster than the 1.2% rise in July, and the biggest increase since the 2016 boomlet.
The ECB's communication to markets has been clear this year. In Q1, the central bank changed its stance on the economy towards an emphasis on "downside risks to the outlook".
It is a truth universally acknowledged that the RPI is a terrible measure of inflation. The ONS describes it as "very poor" and discourages its use.
Our first impression of the proposed Brexit deal between the EU and the U.K. is that it is sufficiently opaque for both sides to claim that they have stuck to their guns, even if in reality, they have both made concessions.
PM Johnson has conceded considerable ground over the terms of Brexit for Northern Ireland in order to get a deal over the line in time for MPs to vote on it on Saturday, before the Benn Act requires him to seek an extension.
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.
Yesterday's labour market figures revealed that employment growth has picked up this year, despite the shadow cast over the medium-term economic outlook by Brexit. The 122K, or 0.4%, quarter-on-quarter rise in employment in Q1 was the biggest since Q2 2016.
Some shoes never drop. But it would be unwise to assume that the steep plunge in manufacturing output apparently signalled by the ISM manufacturing index won't happen, just because the hard data recently have been better than the survey implied.
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.
Rapidly increasing food inflation is creating all sorts of dilemmas for policymakers in Asia's giants.
Argentinians are heading to the polls on Sunday October 27 and will likely turn their backs on the current president, Mauricio Macri.
A big picture approach to the China trade war, from the perspective of Mr. Trump, is reasonably positive. The president very clearly wants to be re-elected, and he knows that his chances are better if the economy and the stock market are in good shape.
An inverted curve is a widely recognised signal that a recession is around the corner, though it's worth remembering that the lags tend to be long.
Yesterday's ECB bank lending survey suggests that credit conditions remain favourable for the EZ economy. Credit standards eased slightly for business and mortgage lending and were unchanged for consumer credit.
NAFTA-related news has been mixed over the last few weeks.
December's retail sales figures, released today, likely will show that the surge in spending in November was driven merely by people undertaking Christmas shopping earlier than in past years, due to Black Friday.
June's consumer price figures threw a last minute curve-ball at the MPC ahead of its key meeting on August 2.
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.
The RICS Residential Market Survey caught our eye last week for reporting that new sale instructions to estate agents rose in May for the first month since February 2016.
CPI inflation has been extremely stable this year, only breaking away from 0.3% in March due to the shift in the timing of Easter. June, however, should mark the beginning of a sustained upward trend in inflation, fuelled by rising prices for imports, raw materials and labour. Indeed, we think CPI inflation is on course to hit 3% in 2017, ensuring that the MPC provides additional stimulus only cautiously.
Brazil's December economic activity index, released last week, showed that the economy ended the year on a relatively soft footing.
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.
Data this week confirmed that private spending in Colombia stumbled in June. Retail sales fell 0.7% year-over-year, from an already poor -0.4% in May. The underlying trend is negative, following two consecutive declines, for the first time since late 2009. Domestic demand remains subdued as consumers are scaling back spending due to weaker real incomes, lower confidence and tighter credit and labor market conditions.
Everyone heard San Francisco Fed president Williams's suggestion Monday that central banks could raise their inflation targets in response to the sustained slow growth and lower-than-expected inflation of recent years. It's not clear, though, that markets grasped the scale of the increase he thinks might be appropriate.
Construction data released yesterday provided further evidence that the Eurozone economy had a decent start to the fourth quarter. Output rose 1.3% month-on-month in October, equivalent to a 1.4% year-over-year increase.
House prices are on course to rise only by around 2% this year, the smallest increase for five years.
Brazil is back on global investors' radar screens. Financial market metrics capture a relatively robust bullish tone, especially since the presidential election.
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.
The turmoil in Washington has begun to hit markets. We don't know how this will end, but we do know that it isn't going away quickly.
Hard data on Mexico's industrial sector for the last couple of months have highlighted major divergences across sectors.
Most central banks in LatAm have ended the year in a relatively comfortable position; their economies are improving and inflation is under control or even falling.
Inflation data are known to defy economists' forecasts, but it should in principle b e straightforward to predict the cyclical path of EZ core inflation. It is the longest lagging indicator in the economy, and leading indicators currently signal that core inflation pressures are rising.
Yesterday's final EZ CPI data for March confirmed the message from the advance report that inflation pressures eased last month.
The euro area's external surplus dipped at the start of Q4.
New home price growth in China has held up longer than we expected.
Inflation pressures in the Eurozone edged lower last month.
CPI inflation has undershot the consensus forecast six times this year, but surprised to the upside only twice.
The February activity report in Colombia showed a modest pick-up in manufacturing activity and strength in the retail sales numbers.
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.
Chinese prices largely moved in line with our expectations in September, according to yesterday's data.
Yesterday's sole economic report showed that the Eurozone's external surplus recovered ground over the summer, but we don't think the rebound will last long.
We expect August's consumer prices report, released on Wednesday, to reveal that CPI inflation dropped to 1.8% in August, from 2.1% in July, thereby undershooting the consensus, 1.9%.
From a macroeconomic perspective, the main shift in the ECB's policy stance last week was the change in forward guidance.
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.
Evidence of slowing growth in Brazil consumers' spending continues to mount.
Colombia's December activity reports confirmed that quite strong retail sales last year were less accompanied by local production, which became only a minor driver of the economic recovery, as shown in our first chart.
Take China's data dump last Friday with a pinch of salt, as Chinese New Year--CNY-- effects look to have distorted January's money and price data.
The imposition of 25% tariffs on $50B-worth of imports from China, announced Friday, had been clearly flagged in media reports over the previous couple of weeks.
Polls suggest that Ivan Duque has comfortably beat Gustavo Petro to become Colombia's president.
With plenty of evidence emerging that consumer spending and business investment are set to suffer from a collapse in confidence, attention is turning to whether other sectors of the economy are ready to step up and support growth. But the fruits from reduced fiscal contraction and stronger net trade will be small and will take a long time to emerge.
Governor Kuroda has sounded increasingly dovish recently.
Colombia has been one of LatAm's outperformers this year.
As we go to press, Mr. Draghi is set to give the opening remarks for the 2019 ECB central banking forum in Sintra, and later today, at 09:00 CET, the president delivers his introductory speech.
We expect May's consumer prices report, released on Wednesday, to show that CPI inflation fell to 2.0% in May, from 2.1% in April.
Yesterday's economic data provided further evidence that GDP growth in the EZ economy slowed in Q2.
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.
RPI inflation picked up to a six-year high of 4.1% in December, from 3.9% in November, even though CPI inflation fell to 3.0%, from 3.1%.
We became more confident last week in our call that GDP growth will hold up better than widely feared in the first half of 2019, following signs that consumers have maintained their happy-go-lucky mentality, despite the ongoing political crisis.
May's activity data underline the weakness of Colombia's economic growth. Domestic demand still is under pressure due to the lagged effect of the deterioration in the terms of trade and other temporary shocks in 2016, and the VAT increase in January this year.
The slowdown in households' real incomes has taken a swift toll on the housing market this year. Measures of house prices from Nationwide, Halifax, LSL and Rightmove essentially have flatlined since the end of 2016, following four years of rapid growth, as our first chart shows.
The long-awaited decisive upturn in wage growth still hasn't emerged. Year-over-year growth in average weekly wages, excluding bonuses, held steady at 2.6% in May.
Data released over the weekend confirm that the Peruvian economy enjoyed a strong second quarter. The economic activity index rose 6.4% year-over-year in May, well above market expectations, and up from 3.2% in Q1.
Yesterday's inflation data in Germany were old news to markets, but the details were spectacular all the same.
Recent industrial data for Mexico point to renewed upside risks for GDP growth, despite the likely headwind to consumption from high inflation and depressed confidence.
Next week is a big one for China. The five yearly Party Congress opens on Wednesday, and on Thursday, the monthly raft of activity data is published, along with Q3 GDP.
September's GDP report laid bare the economy's sluggishness.
The Mexican economy gathered strength in Q3, due mainly to the strength of the services sector, and the rebound in manufacturing, following a long period of sluggishness, helped by the solid U.S. economy and improving domestic confidence.
Our forecast for a 0.3% increase in the September core PPI, slightly above the underlying trend, is even more tentative than usual.
We struggle to see how the pro-separatist movement in Catalonia can move forward from here.
Oil prices remain sticky, poised to hover close to a four-year high for the rest of the year.
Data released yesterday support our view that the Brazilian retail sector has gathered strength in recent months, following a weak Q2, when activity was hit by the truckers' strike.
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 headline figures from yesterday's GDP report gave a bad impression. September's 0.1% month-to- month decline in GDP matched the consensus and primarily reflected mean-reversion in car production and car sales, which both picked up in August.
Central bankers globally are full of market- appeasing but conditional statements.
Judging by the headline performance metrics, EZ equity investors have little cause for worry.
Mexico's industrial production report released yesterday brought encouraging news about the state of the economy, helping relieve some doubts about its health.
Monetary policy loosening over the last year implies that China's M1 growth already should be picking up.
Mexico's industrial sector did relatively well in Q3, due mainly to the resilience of the manufacturing sector, and the rebound in construction and oil output, following a long period of sluggishness.
Yesterday marked President AMLO's first 100 days in office, with skyrocketing approval ratings and improving consumer confidence.
The Board of the Bank of Korea will meet again in less than a week's time for this year's penultimate meeting.
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.
We suspect that today's ECB meeting will be a sideshow to the political chaos in the U.K., but that doesn't change the fact that the central bank's to-do list is long.
China's October activity data showed signs of the infrastructure stimulus machine sputtering into life. Consensus expectations appear to hold out for a continuation into November, but we think the numbers will be disappointing.
Today's industrial production data will confirm that EZ manufacturing suffered a slow start to Q4. Advance country data signal a 0.2% month-to-month fall in October, slightly worse than the consensus, 0.0%.
On the face of it, the upturn in initial jobless claims since late September appears to signal a softening in the economy.
Over the last few months we have started to see hard evidence of Brazil's deceleration, and, as we have argued in previous Monitors, the slowdown is now set to become more visible. Over the coming weeks, markets will focus on whether Brazil is already in recession, its likely severity, and how the country will get out of this mess.
The odds favor--just--an end to the three-month streak of solid 0.2% increases in the core CPI with the release of today's January report.
Jim Bullard, the St. Louis Fed president, said last week that Phillips Curve effects in the U.S. are "weak", and that nominal wage growth is not a good predictor of future inflation.
The jump in core inflation in recent months is about as alarming as the sudden decline in the same period last year; that is, not very.
We expect July's consumer prices report, due on Wednesday, to reveal that CPI inflation dropped to 1.8% in July, from 2.0% in June.
The Spanish economy remains the stand-out performer in the Eurozone, but recent data suggest that growth is slowing.
Today's ECB meeting is supposed to be a slam-dunk.
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.
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.
Inflation pressures in France increased significantly at the start of the year.
Yesterday's labour market data showed that growth in households' income has slowed significantly in recent months. Firms are both hiring cautiously and restraining wage increases, due to heightened uncertainty about the economic outlook and rising raw material and non-wage labour costs. Consumers' spending, therefore, will support GDP growth to a far smaller extent this year than last.
In March, CPI rents--the weighted average of primary and owners' equivalents rents--rose by 0.35% month- to-month.
May's consumer price figures, released on Wednesday, likely will show that CPI inflation held steady at 2.4%--matching the consensus and the MPC's forecast--though the risks lie to the upside.
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.
We'd be surprised to see a repeat today of August's very modest 0.08% increase in the core CPI.
We have recently looked at China's capacity to grow its way out of the debt overhang--see here--and whether last year's deleveraging can be sustained; see here.
If sustained, sterling's recent depreciation looks set to drive CPI inflation up to about 3.5% by the end of next year.
The latest CPI data in Brazil confirm that inflationary pressures eased considerably last month. Inflation fell to 8.5% year-over-year in September, from 9.0% in August, as a result of both lower market- set and regulated inflation.
The August NFIB survey of activity and sentiment at small businesses was soft, but it could have been worse.
This week, Mexico's government unveiled its 2020 fiscal budget proposal.
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.
Today's JOLTS survey covers August, which seems like a long time ago. But the report is worth your attention nonetheless.
Friday's data force us to walk back our recession call for Germany. The seasonally adjusted trade surplus rose in September, to €19.2B from €18.7B in August, lifted by a 1.5% month-to-month jump in exports, and the previous months' numbers were revised up significantly.
The apparent thaw in the U.S.-China trade dispute is great news for LatAm, particularly for the Andean economies, which are highly dependent on commodity prices and the health of the world's two largest economies
October's consumer prices report, released on Wednesday, likely will show that CPI inflation has continued to drift further below the 2% target
After wobbling immediately after the referendum, house prices appear to be back on a rising trajectory. The Halifax measure of house prices, which is based on the lenders' mortgage offers, rose by 1.4% month-to-month in October, following a 0.3% increase in September.
Yesterday's economic reports in the Eurozone were ugly.
The undershoot in the September core CPI does not change our view that the trend in core inflation is rising, and is likely to surprise substantially to the upside over the next six-to-12 months.
Today's industrial production data in the Eurozone will extend the run of soft headlines at the start of the year.
Yesterday's detailed CPI data in Germany and France broadly confirmed the message from the advance data in the Eurozone as a whole.
It would take nothing short of a catastrophe in coming months for the ECB to alter its plan to end QE via a three-month taper between September and December.
Chair Yellen has become quite good at not giving much away at her semi-annual Monetary Policy Testimony.
The debate about the ECB's policy trajectory is bifurcated at the moment. Markets are increasingly convinced that a rapidly strengthening economy will force the central bank to make a hawkish adjustment in its stance.
Brazil's political situation is steadily improving, with the latest events proving a step in the right direction.
June's RICS Residential Market Survey brings hope that the housing market already is over the worst.
In yesterday's report we discussed the recent performance of current inflation and inflation expectations in the biggest economies in LatAm, highlighting that risks are tilted to the upside, given the recent FX sell-off and rising political and external risks.
Brazilian political risk remains high but, as we have argued in previous Monitors, it is unlikely to deter policymakers from further near-term monetary easing. The political crisis, however, does suggest that the COPOM will act cautiously, waiting until the latest storm passes before acting more aggressively, despite ongoing good news on the inflation front.
November's industrial production figures, released today, look set to surprise the consensus to the downside, underscoring our view that the economic recovery is continuing to lose momentum. Moreover, with sterling remaining uncompetitive, despite depreciating over recent weeks, and lower oil prices making extracting oil from the North Sea unprofitable, the industrial sector likely will impede the economic recovery further in 2016.
Economic growth in Brazil is not likely to improve significantly this year. Our pessimism was underscored by the November industrial production data last week, showing a contraction of 0.7%, and pushing output to its lowest level since June.
Q2's GDP figures create a terrible first impression, but a closer look suggests that the risk of a recession remains very low.
August's money and credit figures show that households' incomes remain under pressure, indicating that the recent pick-up in growth in consumers' spending likely won't last.
Chinese monetary conditions show signs of a temporary stabilisation. M2 growth picked up to 9.1% year-over-year in November from 8.8% in October, though largely as a correction for understated growth in recent months.
The overshoot in the November core PPI does not change the key story, which is that PPI inflation, headline and core, is set to fall sharply through the first half of next year, at least.
On the face of it, the latest GDP data look awful. December's 0.4% month-to-month fall in GDP closed a poor Q4, in which quar ter-on-quarter growth slowed to 0.2%, from 0.6% in Q3.
Apart from a slew of economic data--see here and here--two important things happened in Germany last week.
We will be paying special attention to the sentiment surveys for Argentina over the coming weeks.
For more than two years, the BoJ has fretted, in the outlook for economic activity and prices, that "there are items for which prices are not particularly responsive to the output gap."
Expectations are running high that the Autumn Statement on November 23 will mark the beginning of a more active role for fiscal policy in stimulating the economy. The MPC's abandonment of its former easing bias earlier this month has put the stimulus ball firmly in the new Chancellor's court.
September's labour market report suggests that wage growth won't continue to rise for much longer.
We remain confident--see here--that today's Q3 GDP report in Germany will be a shocker, but this already is priced-in by markets.
Friday's data added further colour to the September CPI data for the Eurozone.
Sterling leapt to $1.27, from $1.22 last week, amid some positive signals from all sides engaged in Brexit talks.
Last week's industrial report confirmed that the Mexican economy softened at the end of the second quarter. Industrial production was unchanged year- over-year in June, calendar-and seasonally adjusted, down marginally from +0.1% in May.
Japan's PPI inflation was unchanged, at 3.0%, in August.
Credit to the Chinese authorities for sticking it out with the marginal approach to easing for so long... at least two quarters.
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.
Chile and Peru faced similar growth trends in 2018, namely, a solid first half, followed by a poor second half, particularly Q3.
The Chancellor kept his word and made only trivial policy changes in the Spring Statement, but he hinted at higher spending plans in the Autumn Budget.
Manufacturing in the EZ was held above water by Ireland at the end of Q3.
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.
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.
The minutes of the September 19/20 FOMC meeting record that "...it was noted that the National Federation of Independent Business reported that greater optimism among small businesses had contributed to a sharp increase in the proportion of small firms planning increases in their capital expenditures."
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.
Yesterday's second estimate of Q4 Eurozone GDP confirmed the upbeat story from the advance report, despite the dip in headline growth.
The danse macabre between Greece and its creditors continued last week, increasing the risk of default and capital controls. Greek citizens don't want to leave the euro and Germany does not want a Grexit, two positions which should eventually form the basis for an agreement.
Private consumption remains resilient in Brazil and recent data suggest that growth will continue over the coming months.
On a headline level, the ECB conformed to expectations yesterday.
Yesterday's final CPI estimate in Germany confirmed that inflation fell to a 15-month low of 1.4% year-over-year in February, down from 1.6% in January.
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.
The headlines of China's main activity gauges paint a dreary picture of the start of the year, implying a slowdown.
Don't worry about the weakness of the recent retail sales numbers. The three straight 0.1% month-to- month declines tell us nothing about the underlying state of the consumer.
Today's MPC meeting and minutes are the first opportunity for Committee members to speak out in over a month, now that election "purdah" rules have lifted.
German inflation eased in May, but the underlying upward pressure on the core is increasing. Yesterday's data showed that inflation fell to 1.5% year-over-year in May, from 2.0% in April, as the boost from the late Easter reversed. Inflation in leisure and entertainment services was driven down to +0.8%, from +3.3% in April, as a result of sharply lower inflation in package holidays and airfares.
February's COPOM meeting minutes again signalled that Brazil's central bank will stick with its cautious approach to monetary policy.
The EZ Q4 GDP data narrowly avoided a downward revision in yesterday's second estimate.
Upbeat survey data, a competitive MXN, and the strong U.S. manufacturing sector indicate that Mexican industry should be rebounding.
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.
Downbeat sectoral data and weakening consumer spending numbers indicate that the Mexican economy remains in bad shape.
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.
Korea watchers appear to be hanging on Governor Lee Ju-yeol's every word, searching for any sign that he'll drop his hawkish pursuit of more sustainable household debt levels and prioritise short-term growth concerns.
In a busy week in Brazil, ongoing signals of feeble economic activity have strengthened our forecast for GDP growth of just 1.0% this year, below the 1.3% consensus forecast.
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.
The political situation in Spain remains an odd example of how complete gridlock can be a source of relative stability.
The consensus forecast for the October core CPI, which will be reported today, is 0.2%. Take the over. Nothing is certain in these data, but the risk of a 0.3% print is much higher than the chance of 0.1%.
As a general rule, faster productivity growth is always good news.
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.
In the olden days, by which we mean the 15 years or so leading up to the financial crisis, a 100bp rise in long yields would be enough to slow GDP growth by about three percentage points, other things equal, after a lag of about one year.
We agree with the consensus and the MPC that October's consumer prices report, released on Wednesday, will show that CPI inflation edged up to 2.5% in October, from 2.4% in September.
PM Abe last week asked the cabinet to put together a package of measures in a 15-month budget aimed at bolstering GDP growth through productivity enhancement, in addition to the shorter-term goal of disaster recovery.
Chile's market volatility and high political risk continue, despite government efforts to ease the crisis.
We held our breath this month.
Mexico's industrial recovery, which began in late Q4, lost momentum at the start of the second quarter.
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.
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.
We have argued for some time that market disappointment over the recent sluggishness of consumption has been misplaced. In our view, investors have placed too little weight on the impact of the severe winter, and have been too hasty in looking for the impact of the drop in gasoline sales.
Evidence that U.K. asset prices still are depressed by Brexit risk has become harder to find.
Many commentators have assumed that the new Chancellor's pledge to "reset" fiscal policy and to stop targeting a budget surplus in this parliament means that fiscal policy will support growth in economic activity next year.
Brazil's outlook is still improving at the margin, as positive economic signals mix with relatively encouraging political news.
Bond investors in the Eurozone are licking their wounds following a 40 basis point backup in 10-year yields since the end of last month. Nothing goes up in a straight line, but we doubt that inflation data will provide much comfort for bond markets in the short term.
Brazil's economic situation has improved this year, and we still expect the recovery to continue over the second half, despite recent political volatility and soft Q2 data.
Many economists describe the EZ as the sick man of the global economy, thanks to its incomplete monetary union, low productivity growth and a rapidly ageing population.
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.
Construction accounted for the entire 1.1% quarter-to- quarter expansion of the Korean economy in Q1, but the sector is now set to slow.
The Fed was more hawkish than we expected yesterday.
Chinese M2 growth was stable at 8.3% year- over-year in May, despite favorable base effects.
After the drama of the last few days, Brexit developments now are set to proceed at a slower pace.
Car registrations, French inflation, advance PMIs and a central bank meeting make up today's substantial menu for investors in the euro area.
The housing market appears to be emerging gradually from the coma induced by Brexit uncertainty at the start of the year.
The third straight 0.3% increase in the core CPI-- that hasn't happened since 1995--was ignored by the Treasury market yesterday, which appeared to be focusing its attention on the ECB.
The ECB disappointed slightly on the big headlines in yesterday's policy announcements, but it delivered shock and awe with the details
Today's labour market report likely will show that employment continued to grow briskly over the summer, but that wage gains still are lagging well behind inflation.
President Trump blinked again yesterday, delaying tariffs on some $150B-worth of Chinese consumer goods until December 15.
We are easily excitable when it comes to monetary policy and macroeconomics, but we are not expecting fireworks at today's ECB meetings.
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.
Don't write off the outlook for the construction sector purely on the basis of June's grim Markit/CIPS survey.
We continue to distrust the suggestion from the Markit/CIPS PMIs that the economy is in recession.
Argentina's Q4 GDP report, released last week, underscored the severity of the recession, due to the currency crisis and the subsequent tighter fiscal and monetary policies.
We look for a 150K increase in September payrolls, rather better than the August 130K headline number, which was flattered by a 28K increase in federal government jobs, likely due to hiring for the 2020 Census.
The IFO continues to tell a story of a German economy on the ropes.
We sympathise if readers are sceptical of our opening gambit in this Monitor.
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.
Today's FOMC meeting will be the first non-forecast meeting to be followed by a press conference.
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.
The MPC surprised markets and ourselves yesterday by the extent to which it abandoned its previous stance and is now emphasising inflation over growth risks.
The FOMC minutes confirmed that most FOMC members were not swayed by the weak-looking first quarter GDP numbers or the soft March core CPI. Both are considered likely to prove "transitory", and the underlying economic outlook is little changed from March.
This week's November mid-month inflation reports in Brazil and Mexico underscored their divergent trends. Inflation pressures are steadily falling in Brazil, but in Mexico, the pass-through from the MXN's sell- off is driving up inflation and inflation expectations.
The current momentum in house prices partly reflects a dearth of homes offered for sale by existing homeowners. This scarcity reflects a series of constraints, which we think will ease only gradually. Further punchy gains in house prices therefore look sustainable and we expect average prices to rise by about 8% next year.
The Chancellor hinted in the Autumn Statement that the fiscal consolidation might not be as severe as it appears on paper because he has built in some "fiscal headroom". By that, Mr. Hammond means that he could borrow more and still adhere to his new, self-imposed rules.
The PMIs in the Eurozone are still warning that the economy is in much worse shape than implied by remarkably stable GDP growth so far this year.
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 weaker is the economy over the next few months, the more likely it is that Mr. Trump blinks and removes some--perhaps even all--the tariffs on Chinese imports.
Inflation in the biggest economies in the region remains close to cyclical lows, allowing central banks to ease even further over the next few months.
The latest data from container ports around the country are consistent with our view that imports are still correcting after the surge late last year, triggered by the hurricanes.
Recently released data in Colombia signal that the economy ended last year quite strongly.
China's 2018 property market boomlet let out more air last month.
On the face of it, the potential for a tangible boost to GDP growth from a revival in business investment after a no-deal Brexit has been averted appears modest.
Activity data from Colombia over the past quarter have been strong. Real GDP expanded by a relatively robust 2.8% year-over-year in Q2, and is on track to post a 3.2% increase in Q3.
A downbeat French INSEE consumer sentiment report yesterday continued the run of poor survey data this week. The headline index fell to 95 in February from 97 in January, indicating downside risk f or Q1 consumers' spending. But we remain optimistic that private consumption will rebound solidly, following a 0.4% quarter-on-quarter fall in Q4.
We remain optimistic on the scope for sterling to appreciate this year, reflecting our views that a deal for a soft Brexit will be reached soon and that the MPC will resume its tightening cycle later this year.
Korean real GDP growth--to be published on Thursday--should bounce back in Q1 to 1.0% quarter-on-quarter, after the 0.2% drop in Q4.
Weakness in risk assets turned into panic yesterday with the Eurostoxx falling over 6%, taking the accumulated decline to 19% since the beginning of August, and volatility hitting a three-year high. Market crashes of this kind are usually followed by a period of violent ups and downs, and we expect volatile trading in coming weeks. Following an extended bull market in risk assets, the key question investors will be asking is whether the economic cycle is turning.
Iván Duque, the conservative candidate for the Democratic Centre Party, won the presidential election held in Colombia on Sunday.
Brazil's economy likely will bounce back during the second half of this year and into 2018, after the second quarter was marred by political risk.
The recent pick-up in mortgage approvals is another sign that households are unperturbed by the risk of a no-deal Brexit.
Broadly speaking, yesterday's headline EZ survey data recounted the same story they've told all year; namely that manufacturing is suffering amid resilience in services.
The MPC's meeting last week was notable not just for its glass half-full interpretation of the latest data, but also for its updated guidance on when it likely will begin to shrink its bloated balance sheet.
The CBI's Industrial Trends Survey, for July and Q3, supplied encouraging evidence yesterday that the manufacturing upswing still has momentum.
The ECB won't make any changes to its policy settings today.
If we had known back in June 2014 that oil prices would drop to about $30, the collapse in capital spending in the oil sector would not have been a surprise. Spending on well-drilling, which accounts for about three quarters of oil capex, has dropped in line with the fall in prices, after a short lag, as our first chart shows. We think spending on equipment has tracked the fall in oil prices, too.
Sterling has begun this year on the front foot, rising last week to its highest level against the U.S. dollar since June 2016.
Yesterday's economic data in Germany confirmed that the economy slowed in Q3, but also added to the evidence that growth will rebound in Q4. The second estimate for Q3 showed that real GDP rose 0.2% quarter-on-quarter, slowing from a 0.4% gain in Q2.
The gaps in the third quarter GDP data are still quite large, with no numbers yet for September international trade or the public sector, but we're now thinking that growth likely was less than 11⁄2%.
The downbeat tone of Markit's May manufacturing survey shouldn't come as a surprise, given the weak global backdrop and the inevitable fading of the boost to output from Brexit preparations.
Economic data in Mexico continue to come in strong.
The state of the Mexican economy is still favorable, despite the slowdown over the last few quarters. This week, the IGAE economic activity index--a monthly proxy for GDP--rose 2.0% year-over-year in July, a relatively solid pace, but down from 3.2% in June, and 2.6% in the first half. All these data suggest that economic activity failed to gather momentum at the beginning of Q3 after a disappointing first half of the year.
The second estimate of Q3 GDP last week confirmed that the Brexit vote didn't immediately drain momentum from the economic recovery. But it is extremely difficult to see how growth will remain robust next year, when high inflation will cripple consumers and the impact of the decline in investment intentions will be felt.
The Fed is in a double bind.
April payroll growth likely will be reported at close to 200K. Overall, the survey evidence points to a stronger performance, but they don't take account of weather effects, and April was a bit colder and snowier than usual. We're not expecting a big weather hit, but some impact seems a reasonable bet.
Inflation in Brazil and Mexico is ending Q3 under control, allowing the central banks to keep easing monetary policy.
January's money supply figures continued the nerve-jangling flow of data on the economy's momentum.
Argentina's economy continues to recover steadily.
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.
Europe's political leaders finally made a breakthrough this week in nominating candidates for the top jobs in the EU.
The speed of sterling's rally this month has caught us by surprise.
Data yesterday showed that Momentum in the EZ retail sector stumbled through middle of Q2.
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.
We're relatively optimistic--yes, you read that correctly--on the outlook for the U.K. economy in 2019.
S&P downgraded Chinese government debt last week to A+ from AA- yesterday, following a Moody's downgrade last May.
The May employment report was somewhat overshadowed by the furor over the president's tweet, at 7.15AM, hinting--more than hinting--that the numbers would be good.
We have spent the past few weeks shifting our story on the EZ economy from one focused on slowing growth and downside risks to a more balanced outlook. It seems that markets are starting to agree with us.
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 ECB will not make any major changes to policy today.
Thursday and Friday were busy days for LatAm economy watchers. In Brazil, the data underscored our view that the economy is on the mend, but the recent upturn remains shaky, and external risks are still high.
Mortgage approvals by the main high street banks dropped to a five-month low of 38.5K in September, from 39.2K in August, according to trade body U.K.Finance.
The president was on the warpath with the Fed again yesterday, in an interview with the Wall Street Journal.
The biggest single surprise in the second quarter GDP report was the unexpected $28B real-terms drop in inventories.
The mortgage market is continuing to hold up surprisingly well, given the calamitous political backdrop.
The Bank of Japan's biannual Financial System Report was published earlier this week.
If you're looking for points of light in the economy over the next few months, the housing market is a good place to start.
The publication yesterday of the BCB's second quarterly inflation report under the new president, Ilan Golfajn, revealed that inflation is expected to hit the official target next year, for the first time since 2009. The inflation forecast for 2017 was lowered from 4.7% to 4.4%, just below the central bank's 4.5% target.
The unexpectedly robust 128K increase in October payrolls--about 175K when the GM strikers are added back in--and the 98K aggregate upward revision to August and September change our picture of the labor market in the late summer and early fall.
Recent polls in Argentina suggest that Alberto Fernández, from the opposition platform Frente de Todos, has comfortably beaten Mauricio Macri, to become Argentina's president.
The downturn in global trade looks set to turn a corner, at least judging by the outlook for Korean exports, which are a key bellwether.
The economic and political backdrop to this week's Monetary Policy Committee meeting is significantly more benign than when it last met on September 19.
Survey data in Germany showed few signs of picking up from their depressed level at the start of Q4.
The persistence of no-deal Brexit risk has taken a toll on confidence across the economy over the last month.
The risk posed by consumer borrowing was once again the focus of the Financial Policy Committee's discussion last week.
So that happened.
In Brazil, last week's formal payroll employment report for March was decent, with employment increasing by 56K, well above the consensus expectation for a 48K gain.
Mexico's economy slowed marginally in Q4, due mainly to the challenging external environment, but the domestic economy remains relatively healthy. Real GDP rose 0.5% quarter-on-quarter in Q4, following a 0.8% solid expansion in Q3. Year-over-year growth dipped to 2.5% from 2.8%.
Wednesday's Brazilian industrial production data were worse than we expected but the details were less alarming than the headline. Output slipped 1.8% month-to-month in March, the biggest fall since August 2015, setting a low starting point for Q2.
The simultaneous weakening of the ISM manufacturing and non-manufacturing surveys in recent months is one of the more disconcerting shifts in the recent macro data.
If the plunge in the stock market last week, and especially Friday, was a entirely a reaction to the slowdown in China and its perceived impact on other emerging economies, then it was an over-reaction. Exports to China account for just 0.7% of U.S. GDP; exports to all emerging markets account for 2.1%. So, even a 25% plunge in exports to these economies-- comparable to the meltdown seen as global trade collapsed after the financial crisis--would subtract only 0.5% from U.S. growth over a full year, gross.
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.
Six developments over the summer have increased the likelihood that the government will make concessions required to preserve unfettered access to the single market after formally leaving the EU in March 2019.
Speculation that the U.K. will end up leaving the E.U. in March without a deal has dominated the headlines over the last month. Politicians on both sides of the Channel have warned that the probability of a no-deal Brexit is at least as high as 50%, even though more than 80% of the withdrawal deal already has been agreed.
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.
February's Markit/CIPS construction survey brought further evidence that the economy is being weighed down by Brexit uncertainty.
In November, existing home sales substantially overshot the pace implied by the pending home sales index.
We suspect that under the calm surface of the BoJ, a major decision is being debated.
After pricing-in the consequences of sterling's depreciation for inflation last year only slowly, markets are at risk of costly inertia again.
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.
One of the arguments we hear in favor of an endless Fed pause--in other words, the cyclical tightening is over--is that GDP growth is set to slow markedly this year, to only 2% or so.
China's National People's Congress is set to convene its annual meeting next week.
Friday's economic data in Germany suggest that households had a slow start to the year.
The ECB will deliver a carbon copy of its December meeting today, at least in terms of the main headlines.
Economic conditions are deteriorating rapidly in Chile, despite the relatively decent Imacec reading for Q3.
China is facing a nasty mix of spiking CPI inflation and ongoing PPI deflation.
Recently data from Argentina continue to signal a firming cyclical recovery. According to INDEC's EMAE economic activity index, a monthly proxy for GDP, the economy grew 4.0% year-over-year in June, up from an already-solid 3.4% in May.
The headline 250K October payroll number looked great.
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."
At the halfway mark of the fiscal year, public borrowing has been significantly lower than the OBR forecast in the March Budget.
As we write, the Commons appears to be on the verge of voting for the Withdrawal Agreement Bill--WAB--at its second reading but then voting against the government's "Programme Motion", which sets out a very tight timetable for its passage through parliament, in a bid to meet the October 31 deadline and to minimise parliamentary scrutiny.
October likely was the peak in Japanese CPI inflation, at 1.4%, up from 1.2% in September. The uptick was driven by the non-core elements, primarily food.
China's total debt stock is high for a country at its stage of development, relative to GDP, but it is sustainable for country with excess savings. China was never going to be a typical EM, where external debtors can trigger a crisis by demanding payment.
The gap between U.K. and U.S. government bond yields has continued to grow this year and is approaching a record.
The MPC won't seek to make waves on Thursday.
CPI inflation was steadfast at 1.9% in March, undershooting the consensus and our forecast for it to rise to 2.0%.
In theory, any hit to sentiment and business investment as the E.U. referendum nears could be offset by a better foreign trade performance, due to the Brexit-related depreciation of sterling. But not every cloud has a silver lining.
Support in opinion polls for both the Conservatives and Labour has been increasing steadily.
We learned last week that the U.S. no longer has a coherent dollar policy.
The advance international trade data for December were due for publication today, but the report probably won't appear.
We think of recessions usually as processes; namely, the unwinding of private sector financial imbalances.
While we were out, Brazil's data were relatively positive, showing that inflation is still falling quickly and economic activity is stabilizing. The country has made a rapid and convincing escape from high inflation over the past year.
Brazil's economic outlook is gradually improving following a challenging Q2, which was hit by political risk, putting business and consumer confidence under pressure.
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."
Core durable goods orders have not weakened as much as implied by the ISM manufacturing survey, as our first chart shows, but it is risky to assume this situation persists.
The PM now is at a fork in the road and will have to decide in the coming days whether to risk all and seek a general election, or restart the process of trying to get the Withdrawal Agreement Bill--WAB--through parliament.
Japan's monetary base growth has continued to slow, to 13.2% year-over-year in November from 14.5% in October.
This week's detailed Q3 GDP data will confirm that the euro area economy is going from strength to strength.
Today's ECB meeting will mainly be a victory lap for Mr. Draghi--it is the president's last meeting before Ms. Lagarde takes over--rather than the scene of any major new policy decisions.
In the wake of yesterday's ADP report, which showed private payrolls up 250K in December, we have revised our forecast for today's official headline number up to 240K from 210K.
Yesterday's second estimate of Q3 GDP confirmed that the U.K. economy has underperformed this year.
Consumer confidence in the Eurozone rose marginally at the start of Q4, though it is still down since the start of the year.
The path of new home sales over the past couple of years has followed the mortgage applications numbers quite closely.
The preliminary estimate of first quarter GDP likely will confirm that the economic recovery lost considerable pace in early 2016. Bedlam in financial markets in January and business fears over the E.U. referendum are partly responsible for the slowdown. The deceleration, however, also reflects tighter fiscal policy, uncompetitive exports, and the economy running into supply-side constraints.
The Prime Minister's refusal last week to reaffirm her party's 2015 election pledge not to raise income tax, National Insurance or VAT has fuelled speculation that taxes will rise if the Conservatives are re-elected on June 8. Admittedly, Mrs. May asserted that her party "believes in lower taxes", and the tax pledge s till might appear in the Conservatives' manifesto, which won't be published for a few weeks.
Yesterday's data showed that the euro area PMIs were a bit stronger than initially estimated in November.
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.
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.
India's headline GDP print for the third quarter was damning, with growth slowing further, to 4.5% year- over-year, from 5.0% in Q2.
The FTSE 100 has dropped by 7% since the end of September--leaving it on course for its worst month since May 2012--and now is 12% below its May peak.
Sterling is well below its $1.57 average of the last five years, despite rallying this month to about $1.45, from a low of $1.38 in late February. But hopes that cable will bounce back to its previous levels, after a vote to remain in the E .U., likely will be dashed.
The chances of our Brexit base case--a soft departure just before the current October 31 deadline--playing out have declined sharply over the last two weeks.
Concern over individual freedoms was the spark for Hong Kong's recent demonstrations and troubles, and protesters' demands continue to be political in nature.
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.
Argentina's overdue policy tightening, aimed at dealing with the country's severe inflation and fiscal problems, is underway. Printing of ARS at the central bank, the BCRA, to finance the budget, deficit has slowed and will be curbed further. Welfare spending, which accounts for nearly half of government spending, has been put on the chopping block.
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.
Our base case remains that the slowdown in quarter-on-quarter GDP growth to about zero in Q2 is just a blip, and that the economy will regain momentum in Q3 and sustain it well into 2020.
The week started well for Brazil's President Bolsonaro.
The flow of downbeat business surveys continued yesterday, with the release of the Markit/CIPS construction survey.
We expect to see a 160K increase in June payrolls today, though uncertainty over the extent of the rebound after June's modest 75K increase means that all payroll forecasts should be viewed with even more skepticism than usual.
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.
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.
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 retail sector is finally improving, following a grim second half last year.
The definition of "yesbutism": Noun, meaning the practice of dismissing or seeking to diminish the importance of data on the grounds that the next iteration will tell the opposite story.
British politics remains a complete mess, with many outcomes, ranging from no-deal Brexit to revoking Article 50, possible in the second half of this year.
Yesterday's EZ consumers' spending data were mixed. Retail sales in the euro area fell by 0.3% month-to-month in May, extending the slide from a revised 0.1% dip in April.
Inflation in Mexico remains relatively sticky, limiting Banxico's capacity to adopt a more dovish approach, despite the subpar economic recovery.
Amid all the trade tensions, it's easy to lose sight of the big picture for China.
The economy's resilience in the first quarter of this year, in the midst of heightened Brexit uncertainty, can be attributed partly to a boost from no-deal Brexit precautionary stockpiling.
The BRL remains under severe stress, despite renewed signals of a sustained economic recovery and strengthening expectations that the end of the monetary easing cycle is near.
The MPC will be looking for the Q1 national accounts and April's index of services data, both released on Friday, to support its view that the economy hasn't lost momentum this year.
Industrial profits growth is closely watched by the Chinese authorities, even more so now that deleveraging is a prime policy aim.
Yesterday's advance CPI data in Germany suggest that inflation fell slightly in August.
The latest E.C. survey shows the gap between firms' and households' confidence levels has remained substantial.
Political uncertainty is starting to dampen housing market activity again.
Chair Yellen's final FOMC meeting today will be something of a non-event in economic terms.
Japan's retail sales data--due out on Thursday-- have been badly affected by the October tax hike.
Yesterday's sole economic report in the EZ showed that consumer sentiment in Germany improved mid-way through the fourth quarter.
Since the Party Congress last month, China has made a number of bold moves in multiple policy fields, with a regularity that almost implies the authorities are working through a list.
House prices look set for another growth spurt, pushing the house price-to-earnings ratio--the most widely used measure of valuation sustainability--close to levels seen shortly before the late-2000s crash. But we don't place much store by the price-to-earnings ratio. Better, more reliable indicators suggest that a higher level of house prices will prove sustainable.
Yesterday's consumer confidence report in Germany was soft, in contrast to surging business sentiment data earlier in the week.
Today's preliminary estimate of Q3 GDP looks set to indicate that the Brexit vote has had little detrimental impact on the economy so far.
Japan's flash Nikkei manufacturing PMI report for November was abysmal, putting the chances of a recovery this quarter into serious doubt.
We have argued for some time that the revival in nonoil capex represents clear upside risk for GDP growth next year, but it's now time to make this our base case.
The minutes of the MPC's meeting in June indicated that several members' patience for tolerating for above-target inflation is wearing thin.
Developments over the last month have heightened our concern about the near-term outlook for households' spending.
December's money and credit figures suggest that households are in no fit state to step up and drive the economy forwards this year.
Mexico's external accounts remain solid, despite adverse global conditions over the past year. The current account decreased to USD9.5B, or 3.2% of GDP, in the first quarter, just down from 3.3% a year earlier. Shortfalls of USD10.3B in the income account and USD4.7B in goods and services--mostly the latter--were again the key driver of the overall deficit.
In yesterday's Monitor, we laid out the prime causes of China's weekend announcement, cutting the reserve requirement ratio.
Whichever way you choose to slice the numbers, consumers' spending is growing much more slowly than is implied by an array of confidence surveys.
The further depreciation of sterling yesterday, to its lowest level against the dollar and euro since March 2017 and September 2017, respectively, signified deepening pessimism among investors about the chances of a no-deal Brexit.
Economic activity in Mexico during the past few months has been relatively resilient, as external and domestic threats appear to have diminished.
Yesterday's BoJ statement, outlook and press conference raised our conviction on two key aspects of the policy outlook.
In yesterday's Monitor, we outlined how the government's plans to allow more migrants to register in cities could help counterbalance the effects of aging and put a floor under medium-term property prices.
Japanese services price inflation edged down in May as the twin upside drivers of commodity price inflation and yen weakness began to lose steam. We expect wage costs to begin edging up in the second half but this will provide only a partial counterbalance.
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.
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.
The mortgage market still is defying gravity. U.K. Finance initially reported yesterday that house purchase mortgage approvals by the main high street banks collapsed to 35.3K in February, from 39.6K in January.
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.
The main thing on investors' minds is how much more pain the global economy has to take as a result of China's slowdown.
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.
June's money and credit figures showed that the economy still doesn't have much zing, even though lending has picked up since Q1.
Yesterday's figures from trade body U.K. Finance showed that January's pick-up in mortgage approvals was just a blip.
German retail and consumer sentiment data for March have been mixed this week, but broadly support our call that growth in consumption should pick up soon.
All eyes today will be on the core PCE deflator for August, which we think probably rose by a solid 0.2%.
In the financial crisis, a squeeze in short-term dollar markets forced banks to sell assets, which were then exposed as soured.
Yesterday's November inflation reports from Germany and Spain suggest that today's data for the Eurozone as a whole will undershoot the consensus.
QE and a gradually strengthening economy will remain positive catalysts for equities in the euro area this year. But with the MSCI EU ex -UK up almost 24% in the first quarter, the best quarterly performance since Q4 1999, the question is whether the good news has already been priced in.
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.
In contrast to surveys of manufacturing activity and sentiment, the Conference Board's measure of consumer confidence rose sharply in August, hitting an 11-month high. People were more upbeat about both the current state of the economy and the outlook, with the improving job market key to their optimism. The proportion of respondent believing that jobs are "plentiful" rose to 26%, the highest level in nine years.
Further political wrangling yesterday distracted from data showing that the risk of no -deal Brexit is placing increasing strain on the economy.
Brazil's external accounts have recovered dramatically this year, and we expect a further improvement--albeit at a much slower pace--in the fourth quarter. The steep depreciation of the BRL last year, and the improving terms of trade due to the gradual recovery in commodity prices, drove the decline in the current account deficit in the first half.
Japan's retail sales values jumped 1.2% month-on-month in October, after the upwardly-revised 0.1% increase in September.
Japan's domestic demand has underperformed in the last three quarters, while exports were strong last year but weakened--due to temporary factors--in Q1.
October's money and credit report indicates that the economy had little momentum at the start of the fourth quarter.
We were happy to see upside surprises from both sides of the domestic economy yesterday, but we doubt that the August readings from both the Conference Board's consumer confidence survey and the Richmond Fed business survey can hold.
The risk of a snap general election has jumped following Theresa May's resignation and the widespread opposition within the Conservative party to the compromises she proposed last week, which might have paved the way to a soft Brexit.
Fed Chair Powell sounded a lot like Janet Yellen yesterday, at least in terms of substance.
Data and events have gone against the idea of further BoK policy normalisation since the November hike.
Money supply dynamics in the Eurozone continue to signal a solid outlook for the economy. Headline M3 growth eased marginally to 4.9% year-over-year in January, from 5.0% in December; the dip was due to slowing narrow money growth, falling to 8.4% from 8.8% the month before. The details of the M1 data, however, showed that the headline chiefly was hit by slowing growth in deposits by insurance and pension funds.
The trade war with China is not big enough or bad enough alone to push the U.S. economy into recession.
Japanese retail sales were unchanged in October month-on-month, after a 0.8% rise in September.
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.
We have witnessed a dramatic shift in just a few weeks in perceptions of Mexico as an investment destination.
Political volatility is a recurrent theme in Brazil. Six members of President Michel Temer's cabinet resigned last Friday due to allegations of conflict of interest on a construction deal. Rumours that President Temer was involved in the affair stirred up market volatility and revived political risk concerns
Mr. Draghi's speech yesterday in Portugal, at the ECB forum on Central Banking, pushed the euro and EZ government bond yields higher. The markets' hawkish interpretation was linked to the president's comment that "The threat of deflation is gone and reflationary forces are at play."
Taken at face value, the preliminary estimate of Q2 GDP suggests that the economic recovery weathered Brexit risk well. But growth received support from some unsustainable sources, and also probably was boosted by a calendar quirk. Meanwhile, with few firms or consumers expecting a vote for Brexit prior to the referendum, Q2's brisk growth tells us little about how well the economy will cope in the current climate of heightened uncertainty.
Korean real GDP growth slumped in Q2 to 0.6% quarter-on-quarter, from 1.1% in Q1, as both the main drivers--construction and exports--ran out of steam simultaneously. Construction investment grew by 1.0%, sharply slower than the 6.8% in Q1 and contributing just 0.2% to GDP growth in Q2, a turnaround from the 1.1 percentage point contribution in the first quarter.
Chinese headline industrial profits data show that growth slowed to just 4.1% year-over-year in September, from 9.2% in August.
We're revising down our forecast for quarteron-quarter GDP growth in Q3 to 0.3%, from 0.4%, in response to signs that the rebound in industrial production is shaping up to b e smaller than we had anticipated.
Inflation pressures in the Eurozone probably firmed slightly in August. Data yesterday showed that inflation in Germany and Spain rose by 0.1 percentage points to 1.8% and 1.6% year-over-year respectively, and we are also pencilling-in an increase in French inflation today, ahead of the aggregate EZ report.
February's money and credit figures supported recent labour market and retail sales data suggesting that consumers are increasingly financially strained. Households' broad money holdings increased by just 0.2% month-to-month in February, half the average pace of the previous six months.
Chinese industrial profits continue to surge, rising 27.7% year-over-year in September, up from 24.0% in August.
Figures yesterday from U.K. Finance--the new trade body that has subsumed the British Bankers' Association--showed that the mortgage market recovered over the summer.
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.
French consumer confidence and consumption have been among the main bright spots in the euro area economy so far this year.
Price action in Italian bonds went from hairy to scary yesterday as two-year yields jumped to just under 3.0%.
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.
The end of the government shutdown--for three weeks, at least-- means that the data backlog will start to clear this week.
In yesterday's Monitor, we laid out how conditions last year were conducive to Chinese deleveraging, and how the debt ratio fell for the first time since the financial crisis.
August's mortgage lending data from the trade body U.K. Finance provided more evidence that the pick-up in housing market activity in Q2 simply reflected a shift from Q1 due to the disruptive weather, rather than the emergence of a sustainable upward trend.
Downside risks to our growth forecast for Brazil and Mexico for this year have diminished this week. In Brazil, concerns over the potential impact of the meat scandal on the economy have diminished. Some key global customers, including Hong Kong, have in recent days eased restrictions on imports from Brazil, and other counties have ended their bans.
The fall in the cost of new secured credit has played a key role in reinvigorating the economy over the last couple of years. Mortgage interest payments were 3.7% lower in Q3 than in the same quarter a year previously, even though the stock of secured debt was 2% larger. As a result, the percentage of household disposable incomes taken up by mortgage interest payments fell to 4.8% in the third quarter of 2015--the lowest proportion since records began in 1987--from 5.2% a year before.
Mexico's political panorama seems to be becoming clearer, at least temporarily. This should dispel some of the uncertainty that has been hanging over the economy in recent months.
The downturn in LatAm is finally bottoming out, but the economy of the region as a whole will not return to positive year-over-year economic growth until next year. The domestic side of the region's economy is improving, at the margin, thanks mainly to the improving inflation picture, and relatively healthy labor markets.
The Caixin manufacturing PMI for January was grim, indicating that China's start to the year wasn't as benign as the official surveys suggested.
Last month, the ECB set the scene for the majority of its key policy decisions over the next 12 months.
Let's say we are right, and global yields go up this year. Somewhere in the world, imbalances will be exposed, causing financial ructions and damaging GDP growth.
Mortgage approvals by the main high street banks collapsed to 36.1K in December--the lowest level since April 2013--from 39.0K in November, according to trade body U.K. Finance.
We're braced for a hefty downside surprise in today's durable goods orders numbers, thanks to a technicality.
House purchase mortgage approvals by the main high street banks continued to recover in June, rising to a nine-month high of 40.5K, from 39.5K in May. June approvals, however, merely matched their postreferendum average, and the chances of a more substantial recovery are slim.
In our view, the chances of a no-deal Brexit on October 31 have not surged just because Boris Johnson has become Prime Minister and is gesticulating wildly at the Despatch Box.
It's not our job to pontificate on the merits, or otherwise, of the tax cut bill from a political perspective.
French consumers remained in great spirits midway through the fourth quarter. The headline INSEE consumer confidence index jumped to a 28-month high in November, from 104 in October, extending its v-shaped recovery from last year's plunge on the back of the yellow vest protests.
Data released last week confirm that Brazil's recovery has continued over the second half of the year, supported by steady household consumption and rebounding capex.
In a week of important global events, local factors remained in the spotlight in Brazil, with a more benign data flow and the central bank statement reducing the likelihood of an imminent end to the easing cycle.
The PBoC cut the reserve requirement ratio by 0.5pp for almost all banks on Sunday, effective from July 5th.
We're nudging down our estimate of Q2 GDP growth, due today, by 0.3 percentage points to 1.8%, in the wake of yesterday's array of data.
We remain negative about the medium-term growth prospects of the Mexican economy.
Markets were all over the place yesterday in response to the messages from the ECB.
Brazil's unadjusted current account surplus soared to USD2.9B in May, its highest level since 2006, from USD1.1B in May 2016.
Today's ADP employment report for December ought to show private payrolls continue to rise at a very solid pace
The latest profits data out of China were grim, as we had expected.
The Prime Minister's announcement on Sunday that the meaningful vote in parliament on her Brexit deal will be delayed from this week, until March 12, came as no surprise after a series of prior postponements.
Argentina's near-term economic outlook remains murky, as recent data has highlighted, hit by tighter financial conditions.
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.
The Tankan survey powered ahead in Q2, pulling away from Q1 and mostly beating consensus. This confirms our impression of the strength of the recovery ,just as Prime Minister Abe's Liberal Democratic Party is trounced at the polls in Tokyo. The drubbing is understandable as the main benefits of Abenomics have gone to the business sector, at the expense of the household sector.
Consumption remains an important source of economic growth in LatAm.
Japan's CPI inflation has risen sharply in recent months, driven by non-core elements. The headline faces cross-currents in coming months, but should remain high, posing problems for BoJ policy.
Mexican inflation fell sharply in the first two weeks of January, dipping by 0.2% from two weeks earlier, thanks to lower energy prices and a reduction in long-distance phone tariffs. Telecom reform explains about 15bp of the headline reduction.
Today's preliminary estimate of Q4 GDP likely will show that the Brexit vote has not caused the economy to slow yet. But growth at the end of last year appears to have relied excessively on household spending, which has been increasingly financed by debt. GDP growth likely will slow decisively in Q1 as the squeeze on households' real incomes intensifies.
The 15% fall in the FTSE 100 since its May 2018 peak undoubtedly is an unwelcome development for the economy, but past experience suggests we shouldn't rush to revise down our forecasts for GDP growth.
This year has been a story of two halves for EZ equities. The MSCI EU ex-UK jumped 11% in the first five months of 2017, but has since struggled to push higher.
In trade-weighted terms, sterling finished 2017 just 1% higher than at the start of the year, reversing little of 2016's 14% drop.
Korean GDP unexpectedly declined in Q4, for the first time since the financial crisis, falling 0.2% quarter-on-quarter after a 1.5% jump in Q3.
The alarming pace at which the Government is marching towards the Brexit cliff edge still shows no sign of instilling panic among households or firms.
Three of today's economic reports, all for December, could move the needle on fourth quarter GDP growth. Ahead of the data, we're looking for growth of 1.8%, a bit below the consensus, 2.2%, and significantly weaker than the Atlanta Fed's GDPNow model, which projects 2.8%.
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.
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.
When Fed Chair Powell said last week that the "surprise" weakness in the official retail sales numbers is "inconsistent with a significant amount of other data", we're guessing that he had in mind a couple of reports which will be updated today.
China's abysmal industrial profits data for October underscore why the chances of less- timid monetary easing are rising rapidly.
Households' willingness to save a smaller fraction of their incomes goes a long way to explaining why the U.K. economy hasn't lost too much momentum since the Brexit vote.
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.
Brazil's economic recovery faltered in the first quarter and the near-term outlook remains challenging.
Mexico's National Institute of Statistics--INEGI-- will release preliminary GDP data for Q1 on Friday. We are expecting good news, despite the tough external and domestic environment. According to the economic activity index--a monthly proxy for GDP-- growth gained further momentum in Q1, based on data up to February.
On the face of it, the 25 basis points increase in 10-year German yields this month is modest. But the sell-off has reminded levered investors that trading benchmark securities in the Eurozone is not a one-way street. When yields are close to zero, investors also use leverage to enhance returns, and this increases volatility when the market turns.
Banxico's quarterly inflation report, released last week, underscored concerns over growth as well as the weakness of the MXN and the risks p osed by the Fed's imminent tightening. Policymakers downgraded Mexico's GDP forecast for 2017 to 2.3-to-3.3% year-over-year, from 2.5-to-3.5%. Weaker-than-expected U.S. manufacturing activity is behind the downshift.
The squeeze on real wages has just ended and GfK's consumer confidence index hit a 11-month high in March.
Korean real GDP growth rebounded to 1.1% quarter-on-quarter in Q1, after GDP fell 0.2% in Q4. Growth in Q4 was hit by distortions, thanks to a long holiday in October, which normally falls in September.
Leading indicators for consumers' spending in France are sending conflicting signals. Survey data suggest that households are in a spendthrift mood. Data yesterday showed that the headline consumer sentiment index was unchanged in March at 100, the cycle high.
Yesterday's consumer sentiment data in the two major euro area economies were mixed, but they still support our view that a rebound in EZ consumption growth is underway.
We will be paying special attention today to the EC sentiment survey for Italy, where the headline index has climbed steadily so far this year. It was unchanged at an eight-year high of 106.1 in April, and even if it fell slightly in May--we expect a dip to 105.0--it still points to an upturn in economic growth.
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
The biggest single problem for the stock market is the president.
The first point to make about today's Q1 GDP growth number is that whatever the BEA publishes, you probably should add 0.9 percentage points.
The national accounts look set to show that GDP growth in the fourth quarter was even stronger than previously estimated. Earlier this month, quarter-on-quarter growth in construction output in Q4 was revised up to 1.2%, from 0.2%. As a result, construction's contribution to GDP growth will rise by 0.07 percentage points.
Monitoring bond markets in the Eurozone has been like watching paint dry this year. Yields across fixed income markets in the euro area were already low going into QE, but they have been absolutely crushed as asset purchases began in February.
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 final July PMIs indicate that the post-referendum slump in activity has been even worse than the flash estimates originally implied. The manufacturing PMI was revised down to 48.2, from the 49.1 flash reading, while the services PMI was unrevised at 47.4, its lowest level since March 2009.
Mexico's final estimate of third quarter GDP, released yesterday, confirmed that the economy is still struggling in the face of domestic and external headwinds.
We were terrified by the plunge in the ISM manufacturing export orders index in August and September, which appeared to point to a 2008-style meltdown in trade flows.
Hong Kong delivered a resounding landslide victory to pro-Democracy parties in district council elections over the weekend.
Meetings are a nice way to stress test our base case stories and gauge what questions are important for clients.
Data released yesterday confirm that Brazil's recovery has continued over the second half of the year, supported by steady capex growth and rebounding household consumption.
2019 is a year many in the construction sector would prefer to forget.
The November IFO report suggests that the headline indices are on track for a tepid recovery in Q4 as a whole, but the central message is still one of downside risks to growth
The Conservatives have continued to gain ground over the last week, with support averaging 43% across the 13 opinion polls conducted last week, up from 41% in the previous week.
The ECB kept its cool yesterday, at the headline level, amid crashing stock markets, volatile BTPs and souring economic data.
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.
Economic news in the Eurozone, and virtually everywhere else, has been mostly downbeat in the past few months, but French consumers are doing great.
Today's advance Q3 GDP report for Mexico will show that the economy performed relatively well at the start of the second half, despite external and domestic shocks.
Growth in the broad money supply slowed further in September, providing more evidence that the economy is losing momentum.
Today's October ADP measure of private payrolls likely will overshoot Friday's official number.
The Chinese Communist Party revealed the new members of its top brass yesterday, with the line-up ensuring policy continuity.
Yesterday's economic reports in the Eurozone will rekindle the debate on hard versus soft data. The final composite PMI rose to 56.7 in September, from 55.7 in August, in line with the first estimate.
The Brazilian economy managed to avert a technical recession over the first half of the year.
Inflation data later today will likely show that the Eurozone fell into deflation driven primarily by the big plunge in oil prices since 2008. The consensus expects a 0.1% decline year-over-year, but we look for the CPI to fall slightly more, by 0.2%.
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.
As things stand, we see little reason to revise down our forecasts for the U.K. economy in response to the tailspin in equity markets
Data released on Friday confirmed that Colombian activity remained strong in Q4.
Politics are once again encroaching on the economic story in the Eurozone. At the ECB, this week has so far been a tumultuous one.
Today's housing market data likely will look soft, but will probably not be representative of the underlying story, which remains quite positive.
All seven of Britain's major banks passed the Bank of England's stress test this year, in the first clean sweep since the annual test began in 2014.
As we go to press, equities in the Eurozone are having a bad day following the collapse in U.S. and Asian equities earlier.
Chair Yellen remains as committed as ever to the idea that the tightening labor market will eventually push up inflation, but the unexpectedly weak core CPI readings for the past four months have complicated the picture in the near-term.
We've had pushback from readers over our take on the likelihood of a trade deal with China in the near future.
The sell-off in equity markets and increases in volatility have put EM assets under pressure. EM equities and bonds, however, have been outperforming their U.S. and global market counterparts.
On the face of it, BoJ policy seems to be to change none of the settings and let things unfold, hoping that the trade war doesn't escalate, that China's recovery gets underway soon, and that semiconductor sales pick up in the second half.
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.
Over the past couple of weeks, the number of applications for new mortgages to finance house purchase have reached their highest level since late 2010, when activity was boosted by the impending expiration of a time-limited tax credit for homebuyers.
Abenomics has had its successes in changing the structure of Japan. Notably, large numbers of women have gone back to work and corporations have started paying dividends. These are by no means small victories. But overall, the macroeconomy is essentially the same as when Shinzo Abe became prime minister.
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.
Argentina's latest hard data suggest that activity is softening, but we don't see the start of a renewed downtrend.
We still don't have the complete picture of what happened to the EZ construction sector in Q2, but we have enough evidence to suggest that it rolled over.
China's Caixin services PMI for December surprised well to the upside, providing a glimmer of hope that the economy isn't losing steam on all fronts.
The Andean economies haven't been immune to the turmoil roiling the global economy in the past few weeks.
It doesn'tt matter if third quarter GDP growth is revised up a couple of tenths in today's third estimate of the data, in line with the consensus forecast.
All regulators face the challenge that when you regulate one part of the economy, problems appear somewhere else. For China, the game is particularly intense because liquidity created by previous debt binges continues to slosh around the financial system, with no outlet to the real economy.
Evidence that mounting concerns about Brexit have caused the economy to slow to a near-halt continued to accumulate last week.
Chile's Q2 GDP report, released on Friday, confirmed that the economy gathered momentum in recent months, following an alarmingly weak start to the year.
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.
Inflation and growth paths remain diverse across LatAm, but in the Andes, the broad picture is one of modest inflationary pressures and gradual economic recovery.
The national accounts, released on Friday, likely will restate that quarter-on-quarter GDP growth picked up to 0.4% in Q3, from 0.3% in Q2.
The details of next year's Japanese budget are not yet official and the Chinese budget remains unknown. But the main figures of the Japanese budget are available, while China's Economic Work Conference, which concluded yesterday, has set out the colour of the paint for the budget, if not the actual brush strokes.
We have been asked several times in recent days whether a pick-up in stockbuilding, as part of businesses' contingency planning for a no-deal Brexit, could cause the economy to gather some pace in the run-up to Britain's scheduled departure from the EU in March 2019.
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.
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.
Unless Boeing received a huge aircraft order on November 30, we can now be pretty sure that most of October's 4.6% leap in headline durable goods orders reversed last month. Through November 29, Boeing booked orders for 34 aircraft, compared to 85 in October. Moreover, the bulk of the orders were for relatively low value 737s, whereas the October numbers were boosted by a surge in orders for 787s, whose list price is about three times higher.
Headline money supply growth in the Eurozone has averaged 5% year-over-year since the beginning of 2015; yesterday's October data did not change that story.
Brazil's President Dilma Rousseff was removed from office on Wednesday, following an impeachment trial triggered by allegations that Ms. Rousseff used "creative" accounting techniques to disguise Brazil's growing budget deficit, ahead of her re-election in 2014. The Senate voted 61-20 to convict Ms. Rousseff; only 54 votes were needed to oust her. For Ms. Rousseff's leftist Workers' Party, her removal marks the end of 13 years in power.
The government now has a 50:50 chance of getting the Withdrawal Agreement Bill--WAB--through parliament in the coming weeks, despite Letwin's successful amendment and the extension request.
...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.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
Gilt yields have shot up over the last couple of months, despite ongoing bond purchases authorised by the MPC in August. Ten-year yields closed last week at 1.47%, in line with the average in the first half of 2016.
China last week banned unlicensed micro-lending and put a ceiling on borrowing costs for the sector, in an effort to curtail the spiralling of consumer credit.
October's retail sales figures, published last Thursday, extended the month-long run of near consistent downside data surprises.
Markets were jolted yesterday by news that the U.S. Fed is mulling ending, or at least slowing, the reinvestment of Treasuries and mortgage-backed securities later this year. Such a move would reduce liquidity in global markets that has underpinned soaring equity prices in recent years.
It has become pretty clear over the past couple of weeks that Hillary Clinton will be the next president, so it's now worth thinking about how fiscal policy will evolve over the next couple of years.
Consumer sentiment in the euro area has slipped this year, though the headline indices remain robust overall.
It would be easy to characterize the Fed as quite split at the July meeting.
Sentiment has been improving gradually in Mexico in recent weeks, reversing some of the severe deterioration immediately after the U.S. presidential election. Year-to-date, the MXN has risen 10.3% against the USD and the stock market is up by almost 8%. We think that less protectionist U.S. trade policy rhetoric than expected immediately after the election explains the turnaround.
August's retail sales figures create a misleading impression that consumers can be relied upon to pull the economy through the next six months of heightened Brexit uncertainty unscathed.
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.
The New York Fed tweeted yesterday that "Housing market fundamentals appear strong.
We're sticking to our 220K forecast for today's official payroll number, despite the slightly smaller-than- expected 179K increase in the ADP measure of private employment.
The tepid recovery in German manufacturing continued in at the start of Q4. Factory orders edged higher by 0.3% month-to-month in October, boosted by a 2.9% month-to-month increase in export orders, primarily for capital and intermediate goods in other EZ economies.
Oil prices have risen by about $20 per barrel since last fall.
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
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.
Global current account imbalances are back on the agenda. In the U.S., economic policies threaten to blow out the twin deficit, while external surpluses in the euro area and Asia are rising.
Swoons in EZ investor sentiment are not always reliable leading indicators for the economic surveys, but it is fair to say that risks for today's advance PMIs are tilted to the downside, following the dreadful Sentix and ZEW headlines earlier this month.
Premier Li Keqiang rounded out the National People's Congress with his press conference yesterday.
The Eurozone's external surplus fell further at the end of Q1, and has now fully reversed the jump at the start of the year.
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.
Incoming data confirm our view that the Chilean economy to rebound steadily in the second half of the year, with real GDP increasing 1.5% quarter-on-quarter in Q3, after a relatively modest 0.9% increase in Q2 and a meagre 0.1% in Q1.
Japan's official adjusted surplus rose in October but we think the September figure was an understatement. On our adjustment, the surplus was little unchanged at ¥360B in October.
Borrowing by local authorities from the Public Works Loan Board, used to finance capital projects-- and arguably dubious commercial property acquisitions--has surged this year.
If the only manufacturing survey you track is the Philadelphia Fed report, you could be forgiven for thinking that the sector is booming.
The year so far in EZ equities has been just as odd as in the global market as a whole.
Japanese trade remained in the doldrums in October, keeping policymakers on their toes as they repeat the refrain of "resilient" domestic demand.
The Monetary Policy Board of the Bank of Korea will tomorrow hold its final meeting for the year.
President Trump tweeted yesterday that he wants to re-introduce tariffs on steel and aluminium imports from Brazil and Argentina, after accusing these economies of intentionally devaluing their currencies, hurting the competitiveness of U.S. farmers.
Today brings more housing data, in the form of the May existing home sales numbers.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
Brazil's recovery is consolidating, with recent data flow confirming that the economy had an encouraging start to the year.
Monetary policy usually is the first line of defence whenever a recession hits.
The initial pace of the Fed's balance sheet run-off, which we expect to start in October, will be very low. At first, the balance sheet will shrink by only $10B per month, split between $6B Treasuries and $4B mortgages.
The flow of data pointing to strength in the labor market has continued this week, on the heels of last week's report of a 250K jump in October payrolls.
June's 0.5% month-to-month fall in retail sales volumes does little to change the picture of recent strength.
China's unadjusted current account surplus widened to $16.0B in the preliminary report for Q3, from $5.3B in Q2.
China announced the appointment of key political and financial jobs yesterday.
India's PMIs for October were grim, indicating minimal carry-over of energy from the third quarter rebound.
We expect April's consumer price figures, due on Wednesday, to show that CPI inflation leapt to 2.3%, from 1.9% in March, exceeding the MPC's 2.2% forecast in the latest Inflation Report.
No single measure of labor demand is always a reliable leading indicator of the official payroll numbers, which is why we track an array of private and official measures.
While financial markets remain obsessed with the Brexit saga, January's labour market data provided more evidence yesterday that the economy is coping well with the heightened uncertainty.
The euro area's trade advantage with the rest of the world slipped at the start of the year.
Local policy drivers have remained in the spotlight in Brazil, against a background of important recent global events.
Recently released data in Mexico are sending weak signals for the business outlook, and the Texcoco airport saga won't help.
The average FICO credit score for successful mortgage applicants has risen in each of the past four months.
The BoJ yesterday published its semi-annual Financial System Report, which often gives insights into the longer-term thinking driving BoJ policy.
Make no mistake, business investment has been depressed by Brexit uncertainty over the last year.
Gilts continued to rally last week, with 10-year yields dropping to their lowest since October 2016, and the gap between two-year and 10-year yields narrowing to the smallest margin since September 2008.
The EZ's current account surplus is solid as ever, despite falling slightly in February to €35.1B, from an upwardly-revised €39.0B in January.
If our inbox is any guide, a significant proportion of investors remain far from convinced that the slowdown in the economy in the first quarter is largely the consequence of the severe weather, with an additional temporary hit to capex from the rollover in the oil sector.
Argentina's government continues to show signs of reining in fiscal policy, with the primary budget balance improving steadily over the last year.
Inflation in the Eurozone eased at the start of Q3.
Upbeat PMIs, the MPC's abandonment of its easing bias and the High Court ruling that only a parliamentary vote--and not the Prime Minister--can trigger Article 50, all helped sterling to make up some lost ground last week.
We have been hearing a good deal recently about the risk that the plunge in headline inflation will feed back into the labor market, keeping the pace of wage gains lower than they would otherwise have been and, therefore, slowing the pace of Fed tightening.
EURUSD has been battered in recent months, falling just over 6% since the end of April, but almost all indicators we look at suggest that the it will weake further towards 1.10, in the second half of the year.
Last week's May CPI data in the major EZ economies all but confirmed the story for this week's advance estimate for the euro area as a whole.
Signs of a slowdown in the labour market data are conspicuously absent.
Investors have become more concerned about a no-deal Brexit.
We highlighted in previous reports that the Chinese authorities appear to be making a serious pivot from GDPism--the rigid targeting of real GDP growth-- toward environmentalism, with pollution targets now taking centre stage.
The economic data calendar for next week is so congested that we need to preview early September's GDP report, released on Monday.
Friday's CPI data for April provided the final piece of evidence for the significant Easter distortions in this year's data.
Mexico's survey data have improved significantly over the last few months, reaching levels last since before Donald Trump won the U.S. election in November. This suggest that the economy is in much better shape than feared earlier this year. Consumer confidence, for instance, has continued its recovery.
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.
At first glance, car sales appear to be staging a strong recovery, mirroring the better news on high street spending in Q2.
Japan's average year-over-year wage growth slowed sharply in May, but this mainly was a correction of the April spike.
In the wake of Wednesday's ADP report, showing a mere 27K increase in private payrolls, we cut our payroll forecast to 100K.
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.
Recent economic indicators in Brazil have undershot consensus in recent weeks, but the economy nonetheless continues to recover.
Usually, we forecast existing home sales from the pending sales index, which captures sales at the point contracts are signed.
The BoJ kept all policy measures unchanged at its meeting yesterday.
Colombia's sluggish growth and near-term economic outlook resembles that of most other LatAm economies. Domestic demand is weak, credit conditions are tight, and confidence is depressed. The medium term outlook, however, is perking up, slowly.
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%.
The big question left by the BoJ at yesterday's meeting is how, if at all, they will follow up in October.
Retail sales fell sharply in September, highlighting that consumers still are spending only cautiously amid high economic uncertainty and falling real wages.
It's hard to have much conviction in any forecast for September retail sales, as the relationship between the official data and the surveys has weakened considerably.
Chile's Q3 GDP report, released yesterday, confirmed that the economy lost momentum in the last quarter.
Monday will see 5% tariffs going into effect on Mexican exports to the U.S.--which totalled about USD360B last year--unless President Trump steps back from the brink.
Yesterday's EZ money supply data confirmed that liquidity conditions in the private sector improved in Q3, despite the dip in the headline.
We're expecting to learn this morning that productivity rose by a respectable 1.7% in the year to the fourth quarter, the best performance in nearly four years.
The current account surplus in the Eurozone is well on its way to stabilising above 3% of GDP this year. The seasonally adjusted surplus rose to €29.4B in September from a revised €18.7B in August, lifted by a higher trade surplus, thanks to rebounding German exports. The services balance was unchanged at €4.5B in September, while the primary income balance edged higher to €4.8B from €4.0B. The improving external balance has been driven mostly by a surging trade surplus with the U.S. and the U.K., as our first chart shows.
Leading indicators are giving conflicting signals regarding the outlook for core goods CPI inflation.
Yesterday's headline economic data in the euro area were solid across the board, though the details were mixed.
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 Chancellor will struggle to make his Spring Statement heard on March 13 over the noise of next week's key Brexit votes in parliament, likely spanning from March 12 to 14.
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.
Argentina's economy is firing on all cylinders, thanks to improving fundamentals and a positive external backdrop.
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.
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
The PBoC has let up on its open-market operations after allowing bond yields to move higher again in October.
In his second confirmation hearing, Governor Kuroda continued his dance with markets, dialling down the exit talk.
On the face of it, the outperformance of gilts compared to government bonds in other developed countries this year suggests that Brexit would be a boon for the gilt market. In the event of an exit, however, we think that the detrimental impact of higher gilt issuance, rising risk premia and weaker overseas demand would overwhelm the beneficial influence of stronger domestic demand for safe-haven assets, pushing gilt yields higher.
Ms Keiko Fujimori, the candidate of Peru's conservative Fuerza Popular party, seems on course to win the first round of the presidential election this Sunday, April 10. According to the latest Ipsos poll, the daughter of former President Alberto Fujimori continues to lead the race, with the support or about 34% of voters.
It would be a mistake to conclude from July's car registrations data that the market finally has turned a corner.
Sterling briefly touched $1.30 yesterday, in response to signs that a very small majority in the Commons stands ready to vote for an unamended version of the Withdrawal Agreement Bill--WAB-- on Tuesday.
The Brazilian economy enjoyed a decent Q2, with GDP rising 0.2% quarter-on-quarter, despite the disruptions caused by the truck drivers' strike, after a 0.1% decline in Q1.
Taken at face value, the retail sales data in the euro area suggest that consumers' spending hit a brick wall at the end of 2018.
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".
The slowdown in the EZ economy is well publicised.
After the strong Philly Fed survey was released last week, we argued that the regional economy likely was outperforming because of its relatively low dependence on exports, making it less vulnerable to the trade war.
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.
October's Markit/CIPS services survey suggests that the PM's new Brexit deal has had a lukewarm reception from firms.
Japan's all-industry activity index fell 0.5% month-on- month in September after a 0.2% rise in August. Construction activity continued to plummet, with the subindex dropping 2.3%, after a 2.2% fall in August.
Revisions to the first quarter productivity numbers, due today, likely will be trivial, given the minimal 0.1 percentage point downward revision to GDP growth reported last week.
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.
Public borrowing continues to falling at a very slow pace, despite the major fiscal consolidation implemented this year. Public sector net borrowing excluding public sector banks--PSNB ex.--was £10.5B in August, only 8.1% less than the £11.5B borrowed a year ago.
Chile's Imacec index confirmed that economic growth ended the year on a soft note, due mainly to weakness in the mining sector.
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.
China's official PMIs were little changed in August, with the manufacturing gauge up trivially to 51.3, from 51.2 in July and the non-manufacturing gauge up to 54.2, from 54.0.
The decision by the ECB to remove the waiver for including Greek government bonds in standard refinancing operations changes little in the short run, as the banking system in Greece still has full access to the ELA. It does put additional pressure on Syriza, though, to abandon the position that it will exit the bailout on February the 28th, effectively pushing the economy into the abyss.
November's Markit/CIPS surveys for the manufacturing, construction and services sectors suggest that GDP growth is on track to strengthen a touch in Q4.
Yesterday's public finance figures showed that the public sector, excluding public sector banks, ran a surplus of £0.2B in July, a modest improvement on borrowing of £0.4B a year ago.
Argentina's economy was improving late last year, albeit slowing at the margin, according to the latest published indicators. GDP data confirmed that the revival continued during most of Q4, with the economy growing 0.4% month-to-month in November.
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.
The presumption in markets is that the French presidential election is the last hurdle to be overcome in the EZ economy. As long as Marine Le Pen is kept out of l'Élysée, animal spirits will be released in the economy and financial markets. We concede that a Le Pen victory would result in chaos, at least in the short run. Bond spreads would widen, equities would crash and the euro would plummet. But we also suspect that such volatility would be short-lived, similar to the convulsions after Brexit.
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.
Yesterday's August PMI data in the euro area ran counter to the otherwise gloomy signals from the ZEW and Sentix investor sentiment indices.
Most LatAm currencies have been under pressure recently, with the Brazilian real and the Chilean peso breaking all-time lows versus the USD in recent weeks.
If 2017 really is the year of "reflation", somebody forgot to tell the gilt market. Among the G7 group, 10-year yields have fallen only in the U.K. during the last three months, as our first chart shows.
It would be astonishing if the May and June payroll numbers looked much like April's strong data, at least in the private sector.
Data released on Monday showed that Chile's external accounts remained under pressure at the start of the year, and trade tensions mean that it will be harder to finance the gap.
Economic growth in Chile picked up in Q1, but the recovery remains disappointingly weak, due to both global and domestic headwinds. The latest Imacec index, a proxy for GDP, rose just 2.1% year-over-year in March, slowing from a 2.8% gain in February. Assuming no revisions next month, economic activity rose 1.2% quarter-on-quarter in Q1, better than the 0.9% increase in Q4. These data points to a modest pick-up in GDP growth in Q1, to 1.8% year-over-year, from 1.3% in Q4.
The Eurozone's current account surplus remained close to record highs at the end of Q1, despite dipping slightly to €34.1B in March, from a revised €37.8B in February. A further increase in the services surplus was the key story.
In recent years only one event has made a material difference to the growth path of the U.S. economy, namely, the plunge in oil prices which began in the summer of 2014. The ensuing collapse in capital spending in the mining sector and everything connected to it, pulled GDP growth down from 2½% in both 2014 and 2015 to just 1.6% in 2016.
Friday's CPI data in the euro area confirmed our expectation that inflation jumped last month.
Data released on Friday show that the Chilean economy had a weak start to the second half of the year.
The small rise in the Markit/CIPS services PMI to 51.3 in February, from 50.1 in January, came as a relief yesterday.
Korea's business survey index rose for a second straight month in March, to 75 from 73 in February, on our adjustment.
Even the most bullish estate agent in Britain would struggle to put a positive spin on the latest housing market news. The latest levels of the official, Nationwide, and Halifax measures of house prices all are below their peaks.
The newly-revised data on capital goods orders, released on Friday, support our view that sustained strength in business capex remains a good bet for this year.
Political risks in the periphery have simmered constantly during this cyclical recovery, but they have increased recently. In Italy, the government is scrambling to find a solution to rid its ailing banking sector of bad loans. But recapitalisation via a bad bank is not possible under new EU rules.
China's PMIs show no sign of a recovery yet, but the authorities are sticking to the playbook; they've done the bulk of the stimulus and are waiting for the effects to kick in, but are recognising that they need to make some adjustments.
Back-to-back elevated weekly jobless claims numbers prove nothing, but they have grabbed our attention.
Chile's IMACEC economic activity index rose 3.9% year-over-year in January, up from 2.6% in December, and 2.9% on average in Q4, thanks to strong mining output growth and solid commercial, manufacturing and services activity.
The public finances are in better shape than October's figures suggest in isolation. Public sector net borrowing excluding public sector banks--PSNB ex.--leapt to £11.2B, from £8.9B a year earlier.
The PBoC's quarterly monetary policy report seemed relatively sanguine on the question of PPI deflation, attributing it mainly to base effects--not entirely fairly--and suggesting that inflation will soon return.
Sterling's renewed depreciation to just €1.10--just below last year's nadir--has fuelled speculation that it could reach parity against the euro within the next year.
On a trade-weighted basis, sterling has dropped by only 1.5% since the start of the month, but it is easy to envisage circumstances in which it would fall significantly further.
We still don't have the complete picture of what happened to EZ consumers' spending in Q1, but the initial details suggest that growth acceleretated slightly at the start of the year.
Existing home sales peaked last February, and the news since then has been almost unremittingly gloomy.
May's E.C. Economic Sentiment survey was a blow to hopes that the six-month stay of execution on Brexit would facilitate a recovery in confidence.
The ADP measure of private employment hugely overstated the official measure of payrolls in September, in the wake of Hurricane Irma, but then slightly understated the October number.
The White House budget proposals, which Roll Call says will be released in limited form on March 14, will include forecasts of sustained real GDP growth in a 3-to-3.5% range, according to an array of recent press reports.
The Chancellor can go on his Christmas vacation content that the public finances have weathered the economy's slowdown relatively well this year.
Yesterday's announcement that the administration plans to imposes tariffs worth about $60B per year -- thatìs 0.3% of GDP -- on an array of imports of consumer goods from China is a serious escalation.
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.
While businesses--and farmers--fret over the damage already wrought by the trade war with China and the further pain to come, consumers are remarkably happy.
News that the U.K.'s departure from the E.U. has been delayed by six months, unless MPs ratify the existing deal sooner, appears to have done little to revive confidence among businesses.
The two major central banks in Asia currently have hugely different aims, causing a policy divergence that won't survive the 2018 rise in external yields.
After a disappointing run of monthly data, the huge surplus on the main "PSNB ex ." measure of borrowing in January must have been greeted with relief at the Treasury.
Yesterday's February PMI data sent a clear message to markets.
The Eurozone's current account surplus extended its decline in May, falling to a nine-month low of €22.4B, from €29.6B in April.
Producer price inflation in the euro area almost surely peaked over the summer.
The Eurozone's total external surplus hit the skids at the start of the year. Yesterday's report showed that the seasonally adjusted current account surplus plunged to a two-year low of €24.1B in January, from a revised €30.8B in December.
At the start of the year, consensus forecasts expected Eurozone equities to outperform their global peers this year, on the back of a strengthening cyclical recovery and an increase in earnings growth. Both of these conditions have been met, and yesterday's sentiment data suggest that EZ equity investors remain constructive.
Sterling recovered to $1.23 yesterday, its highest level since late July, in response to the sharp decline in the risk of a no -deal Brexit at the end of October, triggered by MPs' actions.
The services sector in China is notoriously difficult to track, with the major aggregate statistics published only on a quarterly or even annual basis.
The monthly new home sales numbers are so volatile that just about anything can happen in any given month.
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.
Labor demand, as measured by an array of business surveys, clearly slowed from the cycle peak, recorded late last year.
LatAm's economies are gradually rebounding, boosted by easier monetary policy in most countries, falling inflation, and a relatively calm external backdrop.
Consumption and investment spending by state and local government accounts for just over 10% of the U.S. economy, making it more important than exports or consumers' spending on durable goods, and roughly equal to all business investment in equipment and intellectual property.
Yesterday's inflation data in the major euro area economies force us to mark down slightly our prediction for today's headline EZ number.
Brazil's economic performance has improved marginally in recent months, with inflation falling and economic activity and sentiment data stabilizing, or even increasing modestly. The latest regional economic activity report, for instance, showed that although overall output declined again on a sequential basis in March-to-May, three of the five regions expanded.
Yesterday's detailed Mexican GDP report confirmed that growth was resilient in Q1, despite external and domestic headwinds. GDP rose 0.7% quarter-on-quarter in Q1, in line with our expectation, but marginally above the first estimate, 0.6%.
China's capex growth faces renewed challenges this year, as PPI inflation slows.
We expect the Mexican economy to continue growing close to 2% year-over-year in 2019, driven mainly by consumption, but constrained by weak investment, due to prolonged uncertainty related to trade.
We're nudging up our forecast for today's August payroll number to 180K, in the wake of the ADP report.
Today's data likely will show that EZ households' sentiment remained close to a record high at the start of the year.
Yesterday's ZEW investor sentiment in Germany shows showed no signs that uncertainty over the U.K. referendum is taking its toll on EZ investors. The expectations index surged to 19.2 in June, from 6.4 in May, the biggest month-to-month jump since January last year, when investors were eagerly expecting the ECB's QE announcement.
We see considerable downside risk to the consensus forecast that GDP increased by 0.4% quarter-on-quarter in Q4, the same as in Q3.
The 351K net increase in payrolls reported Friday--a 261K October gain and a 90K total revision to August and September--puts the labor market back on track after the hurricanes temporarily hit the data.
So much has changed in China over the last six months that we are taking the opportunity in this Monitor to step back and gain an overview of where the economy is going in the long term.
Korean 20-day exports are volatile and often miss the mark with respect to the full-month print. But these data offer the month's first look at Asian trade, and we often find value in these early signs.
Yesterday's data don't significantly change our view that first quarter GDP growth will be reported at only about 1%, but the foreign trade and consumer confidence numbers support our contention that the underlying trend in growth is rather stronger than that.
We are not worried, at all, by the slowdown in headline payroll growth to 157K in July from an upwardly-revised 248K in June.
The knee-jerk reaction of the stock market to the unexpectedly high hourly earnings growth number for January was predicated on two connected ideas.
U.K. activity data have consistently surprised to the downside over the last month.
Brazil's mid-June inflation reading surprised to the downside, falling to 9.0% from 9.6% in May. The reading essentially confirmed that May's rebound was a pause in the downward trend rather than a resurgence of inflationary pressures. A 1.3% increase in housing prices, including services, was the main driver of mid-June's modest unadjusted 0.4% month-to-month rise in the IPCA-15.
The rise in the Markit/CIPS services PMI to a nine-month high of 51.4 in July, from 50.2 in June, isn't a game-changer, though it does provide some reassurance that the economy isn't on a downward spiral.
We are going to print two days before the July 1 presidential election in Mexico.
Industrial profits in China dropped 3.7% year-over- year in April, after surging 13.9% in March, according to the officially reported data.
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.
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.
We had hoped that the statistical problems which have plagued the initial estimates of August payrolls in recent years had faded, but Friday's report suggests our judgement was premature.
The Prime Minister has revealed that her Plan B for Brexit is to get Eurosceptics within the Tory party on side in an attempt to show the E.U. that a deal could be done if the backstop for Northern Ireland was amended. Her plan is highly likely to fail, again.
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.
The closer we look at the Fed's new forecasts, the stranger they seem. The FOMC cut its GDP estimate for this year and now expects the economy to grow by 1.9%--the mid-point of its forecast range--in the year to the fourth quarter. Growth is then expected to pick up to 2.6% next year, before slowing a bit to 2.3% in 2017. Unemployment, however, is expected to fall much less quickly than in the recent past.
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.
The rise in Markit/CIPS services PMI to 55.0 in March, from 53.3 in February, brings some relief that GDP growth has not stalled in Q1, following manufacturing and construction surveys that signalled near-stagnation.
China's National People's Congress yesterday laid out its main goals for this year, on the first day of its annual meeting.
The economic momentum evident late last year carried into 2015, the Labor Department said Friday, with American employers adding 257,000 jobs in January as wage growth rebounded and more people joined the workforce
Yesterday's Brazilian industrial production data were downbeat.
Barclays hit the headlines yesterday with an announcement that it is bringing back no-deposit mortgages for first-time buyers and raising its maximum loan-to-income ratio for borrowers with an income of more than £50K to 5.5, from 4.4. With other lenders likely to follow suit and the supply of homes for sale still extremely low, house price inflation likely will remain brisk this year.
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.
For some economists and political analysts the surprising result of the U.K.'s EU referendum symbolises one of the biggest threats to the structure of the post-war social-liberal market economy. To this school of thought, the vote proved that the discontent of a pressured and disenfranchised working/middle class is rising, threatening to topple economies and political institutions.
Brazil's recession carried over into the beginning of Q2, but with diminishing intensity. The IBC-BR economic activity index, a monthly proxy for GDP, fell 5.0% year-over-year in April, up from a revised 6.4% contraction in March. The index's underlying trend has improved in recent months, suggesting that the economy is turning around, slowly.
Brazilian inflation is off to a good start this year, and we think more good news is coming. The January mid-month IPCA-15 index rose an unadjusted 0.3% month-to-month, a tenth less than expected. This was the smallest gain for January since 1994 and the sixth consecutive month in which the number came in below expectations.
We were happy to see the small increase in the March ISM manufacturing index yesterday, following better news from China's PMIs, but none of these reports constitute definitive evidence that the manufacturing slowdown is over.
Recent data have added to the evidence that the Colombian economy stumbled in July. Retail sales plunged 3.3% year-over-year, from an already poor and downwardly revised 0.9% decline in June. The underlying trend is negative, following two consecutive declines, and July's data were the weakest since September 2009.
Chief U.K. Economist Samuel Tombs on U.K. GDP in Q3
Data this week clearly hint at a cyclical trough in Eurozone inflation in the first quarter. The advance estimate for April shows year-over-year inflation rising slightly to zero, up from -0.1% in March.
Money and credit data released last weekend suggest that China's demand for credit remains insatiable.
Chief Eurozone Economist Claus Vistesen on the ECB
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".
August inflation surprised to the downside across most of LatAm, as food price surges proved transitory, and the lagged effect of the FX depreciations last year faded. Brazil appeared to be the exception last month, but the underlying trend in inflation is downwards.
After two big monthly gains in existing home sales, culminating in October's nine-year high of 5.60M, we expect a dip in sales in today's November report. This wouldn't be such a big deal -- data correct after big movements all the time -- were it not for the downward trend in mortgage applications.
Eurozone consumer confidence remained at its low for the year at the start of Q3.
Surveys released yesterday failed to support the MPC's view that the economy has bounced back in Q2.
The bad news on economic activity keeps coming for Brazil. The formal payroll employment report-- CAGED--for December was very weak, with 120K net jobs eliminated, compared to a 40K net destruction in December 2014, according to our seasonal adjustment. The severe downturn has translated into huge job losses. The economy eliminated 1.5 million jobs last year, compared to 152K gains in 2014. Last year's job destruction was the worst since the data series started in 1992. The payroll losses have been broad-based, but manufacturing has been hit very hard, with 606K jobs eliminated, followed by civil construction and services. Since the end of 2014, the crisis has hit one sector after another.
According to Brazil's mid-August inflation reading, which is a preview of the IPCA index, overall inflation pressures are easing. But some price stickiness remains, due to inertia and temporary shocks, despite the severity of the recession and the rapid deterioration of the labour market in recent months.
Sterling has appreciated sharply over the last two weeks and yesterday briefly touched its highest level against the euro since May 2017.
The response of U.K. producers and consumers to lower oil prices could not have been more different to those on the other side of the Atlantic. Counter-intuitively, U.K. oil production has grown strongly over the last year, while investment hasn't collapsed to the same extent as in the U.S., yet. Meanwhile, U.K. households have thrown caution to the wind and already have spent the windfall from the previous drop in oil prices, unlike their more prudent--so far--U.S. counterparts. With the costs still to come but most of the benefits already enjoyed, lower oil prices will be neutral for 2016 U.K. GDP growth, at best.
The MXN remains the best performer in LatAm year-to-date, despite some ugly periods of high volatility driven by external and domestic threats.
The preliminary April PMIs due today will provide the first economic sentiment data for Q2, and likely will point to a continuation of the cyclical recovery. We think the composite PMI was unchanged at 54.0 in April, driven by a small gain in manufacturing offset by a slight decline in services.
Last week's advance EZ GDP data for the first quarter suggest the economy shrugged off the volatility in financial markets. Eurostat's first estimate indicates that real GDP in the euro area rose 0.6% quarter-on-quarter in Q1, up from 0.3% in Q4, and above the consensus, 0.4%.
The risk of political change in Venezuela is coming to a boil, following President Maduro's plans for a new constituent assembly that has the power to rewrite the constitution and scrap the existing National Assembly.
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.
Sentiment in the French business sector ended this year on a high. The headline manufacturing index fell slightly to 112 in December, from an upwardly-revised 113 in November, but the aggregate sentiment gauge edged higher to a new cycle high of 112.
China's real GDP growth officially slowed to 6.5% year-over-year in Q3, from 6.7% in Q2.
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."
Chief U.S. Economist Ian Shepherdson on the Fed
Pantheon Macroeconomics is pleased to make available to you our Outlooks for the second half of 2017 for the US, Eurozone, UK, Asia, and Latin America. These reports present our key views, giving you a concise summary of our economic and policy expectations. If you are interested in seeing publications which you don't already receive, please request a complimentary trial
Last week, the Chinese authorities were out in force, talking up the economy and markets, and bearing measures to support private firms.
Pantheon Macroeconomics is pleased to make available to you our Outlooks for the second half of 2017 for the US, Eurozone, UK, Asia, and Latin America. These reports present our key views, giving you a concise summary of our economic and policy expectations. If you are interested in seeing publications which you don't already receive, please request a complimentary trial
Pantheon Macroeconomics is pleased to make available to you our Outlooks for the second half of 2017 for the US, Eurozone, UK, Asia, and Latin America. These reports present our key views, giving you a concise summary of our economic and policy expectations. If you are interested in seeing publications which you don't already receive, please request a complimentary trial
Chief U.K. Economist Samuel Tombs on Nationwide's June House Price Index
October's consumer price figures, released Tuesday, likely will show that CPI inflation increased to 3.1%, from 3.0% in September.
Samuel Tombs on U.K. Halifax House Price data
Chinese CPI inflation trends point to diminishing wage growth, as the services sector begins to struggle with the influx of labour displaced by the industrial productivity drive.
Yesterday's economic data in Germany were stellar, but base effects mean that the story for Q4 as a whole is less upbeat.
On the face of it, the timing of the drop in the E.C.'s measure of consumers' confidence, to its lowest level since July 2016 in April, is peculiar.
A reader sent us last week a series of five simple feedback loops, all of which ended with the Fed remaining "cautious". For example, in a scenario in which the dollar strengthens--perhaps because of stronger U.S. economic data--markets see an increased risk of a Chinese devaluation, which then pummels EM assets, making the Fed nervous about global growth risks to the domestic economy.
Brazil's headline CPI has been well above the upper limit of the BCB's target zone since January 2015. We expect this situation will continue for some time, due to the lagged effect of last year's sharp increases in regulated prices, El Niño, the BRL's sell-off in 2015, and, especially, widespread price indexation.
Chief U.K. Economist Samuel Tombs on U.K. Labour Market data for May
In one line: Unemployment nudges higher in Q3.
China's M2 growth surprised on the upside in July, rising to 8.5% year-over-year, from 8.0% in June.
Senior International Economist Andres Adabia on Mexico Inflation
Ian Shepherdson, chief economist at Pantheon Macroeconomics, speaks about how the U.S. Federal Reserve will react to the latest jobs data.
In one line: The market speaks, and the ECB listens.
There has been a "meaningful upturn" in core inflation in the U.S., Ian Shepherdson, chief economist at Pantheon Macro, said.
Mortgage applications appear to have recovered from their reported February drop, which was due mostly to a very long-standing seasonal adjustment problem
Business investment held up surprisingly well last year.
The fall in CPI inflation to 3.0% in December, from 3.1% in November, likely marks the first step in its journey back to the 2% target.
Output in EZ construction rebounded sharply in February, erasing a slip at the start of the year.
Samuel Tombs on U.K. Inflation and the BoE
Samuel Tombs discussing U.K. Inflation
Andean inflation remains under control, due to subpar growth, modest pressures on prices for nontradeables, and broadly stable currencies.
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, analyses the latest monetary policy moves from the Bank of Japan.
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.
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, discusses the Chinese economy.
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
Germany's consumer price index fell 0.3% month-over-month in January. It's the first time the inflation rate went negative since September 2009. "Deflation has arrived," Pantheon Macroeconomics' Claus Vistesen said
Senior International Economist Andres Abadia on Chile's jobless rate
In one line: Another ugly report, and Mexico's prospects have deteriorated significantly.
A casual glance at our first chart, which shows the headline and core inflation rates, might lead you to think that our fears for next year are overdone. Core inflation rose rapidly from a low of 1.6% in January 2015 to 2.3% in February this year, but since then it has bounced around a range from 2.1% to 2.3%.
Rapid growth in labour supply has enabled the U.K. economy to grow quickly over the last three years without generating excessive wage or inflation pressure. The rise in the participation rate--the proportion of those aged over 16 in or looking for work--has been critical to this revival. But the rise in the participation rate largely has reflected cyclical factors rather than a sustainable upward trend, and the downward pressure on participation from demographic factors will build over the coming years.
Demand for new cars rebounded strongly last month, following the dip in October. Registrations in the EU27 rose 13.7% year-over-year in November, up from 2.9% in October, lifted mainly by buoyant growth in the periphery. New registrations surged 25.4% and 23.4% year-over-year in Spain and Italy respectively, while growth in the core was a more modest 10%. We also see few signs of the VW emissions scandal hitting the aggregate data. VW group sales have weakened, but were still up a respectable 4.1% year-over-year. This pushed the company's market share down marginally compared to last year. But sizzling growth rates for other manufacturers indicate that consumers are simply choosing different brands.
Yesterday's Q2 GDP report in Germany was solid, but the headline disappointed slightly. GDP growth slowed to 0.6% quarter-on-quarter from an upwardly- revised 0.7% rise in Q1. The year-over-year rate, however, rose to 2.1% from a revised 2.0% in Q1.
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.
In yesterday's Monitor, we argued that if the upside risk in an array of core CPI components crystallised in January, the month-to-month gain would print at 0.3%, for the first time since August. That's exactly what happened, though we couldn't justify it as our base forecast. A combination of rebounding airline fares, apparel prices, new vehicle prices, and education costs conspired to generate a 0.31% gain, lifting the year-over-year rate back to the 2.3% cycle high, first reached in February last year.
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.
December's consumer price figures, released tomorrow, likely will reveal that CPI inflation rose to 1.4%--its highest rate since August 2014--from 1.2% in November. Inflation will take even bigger upward steps over the coming months as the anniversary of sharp falls in commodity prices is reached and retailers pass on hefty increases in import prices to consumers.
The French labour market improved much more than we expected in Q4. The headline unemployment rate plunged to 8.9%, from a downwardly-revised 9.6% in Q3.
The Chinese activity data published yesterday were much weaker than expected; growth rates fell resoundingly. Did analysts really get it wrong, or is this just another example of erratic Chinese data?
Today's wave of data will be mixed, but most of the headlines are likely to be on the soft side, so the reports are very unlikely to trigger a wave of last minute defections to the hawkish side of the FOMC. As always, though, the headlines don't necessarily capture the underlying story, and that's certainly been the case with the retail sales data this year. Plunging prices for gas and imported goods, especially audio-video items, have driven down the rate of growth of nominal retail sales, but real sales have performed much better.
The consequences of the collapse in oil prices continue to reverberate through the sector. The number of rigs in operation is still falling rapidly, but the rate of decline is slowing. According to data from Baker Hughes, Inc., an average of 23 rigs per week have ceased operation over the past four weeks, the slowest decline since December.
Consumption has been a serious weak spot in Brazil over the past year. After reaching record growth rates in 2010, it has gradually slowed to its lowest pace in more than ten years.
The gap between the official measure of the rate of growth of core retail sales and the Redbook chainstore sales numbers remains bafflingly huge, but we have no specific reason to expect it to narrow substantially with the release of the April report today.
April's consumer price figures, released on Tuesday, look set to reveal that CPI inflation jumped to 2.7%--its highest rate since September 2013--from 2.3% in March. Inflation likely will be driven up entirely by a jump in the cor e rate to 2.3%, from 1.8% in March.
The rate of growth of nominal core retail sales substantially outstripped the rate of growth of nominal personal incomes, after tax, in both the second and third quarters.
The combination of unexpectedly strong auto sales and rising gas prices should generate strong-looking headline retail sales numbers for October. We have no idea what to expect for November, with two-thirds of the month coming after the election, but the final pre- election sales report will look good.
Yesterday's industrial production report was poor, but the headline was better than we, and the market, feared. Output fell 0.5% month-to-month in August, but the July data were revised up 0.2%, pushing the year over-year rate--using the seasonally- and working day-adjusted index--higher to 1.9% from 1.4% in July. Bloomberg reported the year-over-year rate fell to 0.9% from 1.7% in July, but they used an index which is only working day-adjusted.
The headline CPI inflation rate almost certainly dipped below zero in September, barring a startling and deeply improbable surge in the core. We look for a 0.4% month-to-month headline drop, driven by an 11% plunge in gasoline prices, pushing the year-over-year rate to -0.3%. This is of no real economic significance, not least because hugely unfavorable base effects mean the year-over-year rate almost certainly will rise sharply over the next few months, reaching about 1¾% as soon as January.
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 ECB will keep its main interest rates and the pace of QE purchases unchanged today. Mr. Draghi will also reiterate the commitment to continuing QE until September next year, at least. But the press conference likely will focus on Greece, and the central bank's role in the chaos. Greek financial institutions are on the verge of collapse, partly because the ECB has been forced to cap emergency liquidity assistance--ELA--at €89B, and raise collateral haircut requirements following the announcement of the referendum.
If the Fed really believed its own rhetoric--"Inflation is expected... to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further"--it would have raised rates yesterday, given the very long lags between policy action and the response from the real economy.
We think the FOMC's announcement this afternoon will not include the phrase "considerable time", signaling that the first rate cut will come at or before the middle of next year. At the same time, the Fed's new forecasts likely will show the unemployment rate falling into the Fed's estimated Nairu range this year, rather than the spring of 2016, as implied by their September forecasts.
Over the past 18 months, the year-over-year rate of growth of manufacturing output has swung from minus 2.1% to plus 2.5%.
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.
Brazil's government announced on Monday spending cuts and new tax increases, aiming to generate a 0.7% of GDP primary surplus, and so restore market confidence and avoid further credit rating downgrades. The plan is to reduce expenditure by BRL26B next year--or 0.4% of GDP--mainly through freezing public sector salaries and slashing social projects. These measures, especially the latter, will likely meet strong resistance in Congress. The salary freeze has more of a chance of passing, but reducing or closing some Ministries is a cost-cutting exercise with an extremely high political price.
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.
The rate of growth of Brazil consumers' spending is perhaps beginning to stabilize, though at a very low pace. Core retail sales volumes were flat in Q4 after a 2.7% contraction in Q3, and sentiment data suggest this improving trend should continue, at least in the very near term.
Consumption remains a serious weak spot in Brazil's economic cycle. High inflation, rising interest rates, surging unemployment, plunging confidence, and the government's belt tightening, have trashed Brazilians' purchasing power. Retail sales surprised to the downside in April, falling 0.4% month-to-month, equivalent to a huge 3.5% contraction year-over-year, down from a revised 0.3% gain in March. The underlying trend is awful, as our first chart shows.
June's headline CPI, due this morning, will be boosted by the rebound in gasoline prices, but market focus will be on the core, in the wake of the startling, broad-based jump in the core PPI, reported Wednesday. Core PPI consumer goods prices jumped by 0.7% in June, with big incr eases in the pharmaceuticals, trucks and cigarette components, among others. The year-over-year rate of increase rose to 3.0%, up from 2.1% at the turn of the year and the biggest gain since August 2012. Then, the trend was downwards.
The rate of growth of real personal incomes is under sustained downward pressure, slowing to 2.1% year-over-year in December from 3.4% in the year to December 2015. In January, we think real income growth will dip below 2%, thanks to the spike in the headline CPI, reported Wednesday. Our first chart shows that the 0.6% increase in the index likely will translate into a 0.5% jump in the PCE deflator, generating the first month-to-month decline in real incomes since January last year.
The strong dollar is pushing down goods prices, but not very quickly. As a result, the sustained upward pressure on rents is gradually nudging core CPI inflation higher. It now stands at 1.9%, up from a low of 1.6% in January, and even relatively modest gains over the third quarter will push the rate above 2% by year-end. We can't rule out core CPI inflation ending the year at a startling 2.3%.
Bond markets in the euro area have been a calm sea recently relative to the turmoil in equities, credit and commodities. Following the initial surge in yields at the end of second quarter, 10-year benchmark rates have meandered in a tight range, recently settling towards the lower end, at 0.5%. Our outlook for the economy and inflation tells us this is to o low, even allowing for the impact of QE.
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?
Inflation pressures in France eased in February, in contrast to the story in the rest of the EZ. Yesterday's report confirmed the initial estimate that inflation fell to 1.2% year-over-year in February, from 1.3% in January. The headline was hit by a crash in the core rate to a two-year low of 0.2%, from 0.7% in January.
We don't often picks fights with Nobel prize winners and former Treasury secretaries. But right now we think that Paul Krugman and Larry Summers, leading lights of the view that the Fed should not begin to raise rates "until you see the whites of inflation's eyes", are dead wrong.
October's consumer price figures, to be released tomorrow, look set to show CPI inflation easing to -0.2%, from -0.1%, below the no-change consensus and the lowest rate since March 1960. No doubt this will spark more hyperbolic headlines about the U.K.'s descent into pernicious deflation; ignore them. October's print will almost certainly represent the nadir and we think it will take only a year for CPI inflation to return to the MPC's 2% target.
Eurozone GDP data on Friday were better than we expected, but were still soft compared to upbeat market expectations. Real GDP rose 0.3% quarter-onquarter in the third quarter, down slightly from 0.4% in Q2, and lower than the consensus forecast for another 0.4% gain. These data are not a blank check for ECB doves, but they probably are enough to push through further easing in December. This looks odd given growth in the last four quarters of an annualised 1.6%--the strongest since 2011--and probably slightly above the long-run growth rate.
Yesterday's GDP reports confirmed that growth was stable at 0.3% quarter-on-quarter in the Eurozone, leaving the year-over-year rate unchanged at 1.5%. Rebounding growth outside Germany, which has been a main driver of EZ GDP growth in this cycle, was the key story.
Selling pressure in LatAm markets after Donald Trump's election victory eased when the dollar rally paused earlier this week. Yesterday, the yield on 10- year Mexican bonds slipped from its cycle high, and rates in other major LatAm economies also dipped slightly.
The acceleration in real consumption over the past year reflects the upturn in real after-tax income growth. This, in turn, is mostly a story of falling gasoline prices, which have depressed the PCE deflator. Gross nominal incomes before tax rose 4.2% year-over-year in the three months to September, exactly matching the pace in the three months to September 2014. But real income growth, after tax, accelerated to 3.3% from 2.5% over the same period, as our first chart shows.
Brazil's industrial sector keeps losing momentum, despite interest rates at record lows and improving confidence.
The German inflation rate soared at the start of 2017, but it likely will fall in the next few months. Final February data yesterday showed that inflation rose to 2.2% in February, from 1.9% in January, consistent with the initial estimate. Since December, headline inflation in Germany, and in the EZ as a whole, has been lifted by two factors. Base effects from the 2016 crash in oil prices have pushed energy inflation higher, and a supply shock in fresh produce--due to heavy snowfall in southern Europe--has lifted food inflation.
Last week's evidence of still-strong wage growth in the EZ at the start of the year almost surely has gone unnoticed as markets focus on the prospect of rate cuts, not to mention more QE, by the ECB.
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.
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.
EZ survey data were solid in the fourth quarter, pointing to robust GDP growth, but numbers from the real economy have so far not lived up to the rosy expectations. Data yesterday showed that industrial production fell 0.7% month-to-month in November, pushing the year-over-year rate down to 1.1% from a revised 2.0% in October. Italian data today likely will force marginal revisions to the headline next month, but they are unlikely to change the big picture.
Data today likely will show that manufacturing in the Eurozone was off to a strong start to the second quarter. Advance country data suggest that industrial production jumped 1.1% month-to-month in April, pushing the year-over-year rate up to 1.9% from 0.1% in March. The rise in output was driven mainly by Germany and France, but decent month-to-month gains in Ireland, Portugal and Greece also helped.
April's impressive-looking retail sales numbers--the headline jumped 1.3%, with non-auto sales up 0.8%--were boosted by two entirely separate factors, one of which will play no p art in May and one which will offer very modest support. The key lift in April came from the very early Easter, which confounded the seasonal adjustments, as it usually does.
Data released last week in Brazil reinforced our view of a modest, final, interest rate cut this week, despite the recent strength of the USD and volatility in global markets.
Unemployment in France remains high, but the trend is turning. The mainland rate of joblessness fell to a five-year low of 8.6% in Q4, and yesterday's employment report continued the good news.
We expect today's consumer prices figures to show that CPI inflation picked up to 0.5% in May, from 0.3% in April, exceeding the 0.4% rate anticipated by both the consensus and the MPC, in last month's Inflation Report. We expect the increase to be driven by a jump in the core rate to 1.4%, from 1.2% in April.
January's CPI data contained no major surprises, even though the 1.8% headline rate undershot our forecast and the consensus by one tenth.
Korea's jobs report for January was nasty. The unemployment rate spiked to 4.4%, from 3.8% in December, marking the highest level in nine years.
Brazil's consumer recession seems never-ending. Retail sales fell 0.8% month-to-month in October, pushing the headline year-over-year rate down to -8.2% in October, from -5.7% in September. Recent financial market volatility, credit restrictions and the ongoing deterioration of the labour market continue to hurt consumers.
November's consumer prices figures, released tomorrow, look set to show that the U.K.'s spell of negative inflation has ended. CPI inflation is set to pick-up decisively over the coming months, even if oil prices continue to drift down. In fact, fuel prices likely will contribute to the pick-up in inflation from October's -0.1% rate. November's 1.5% fall in prices at the pump was smaller than the 2.3% drop in the same month last year, so the year-over-year rate will rise. Fuel's contribution to CPI inflation therefore will pick up, albeit very marginally, to -0.47pp from -0.50pp in October.
The robust July retail sales numbers, coupled with the substantial upward revisions to prior data, should finally put to bed the idea that consumers have chosen spontaneously to raise their saving rate, accelerating the pace of deleveraging seven years after the financial crash. People just don't behave like that unless interest rates are soaring and the economy is rolling over, and that's not happening.
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.
All eyes in the Eurozone will be on the second estimate of Q4 GDP today, and the report likely will confirm that growth accelerated in Q4. We think real GDP rose 0.5% quarter-on-quarter, up from a 0.3% increase in Q3, in line with the first estimate. If this forecast is correct, the year-over-year rate will be unchanged at 1.8%. Risks to the headline, however, are tilted to the downside.
Today's Eurozone data will provide further details on what happened in Q4. Advance data suggest that industrial production rose a modest 0.1% month- to-month, lifting the year-over-year rate to 4.3% in December, from 3.9% in November.
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.
January's consumer price report, released today, likely will show that CPI inflation jumped to 1.9%--its highest rate since June 2014--from 1.6% in December. Inflation will continue to take big upward steps over the coming months, as retailers pass on to consumers large increase in import prices and energy companies increase tariffs.
Collapsing energy prices continue to weigh on the headline inflation rate in the Eurozone's largest economy. Final September CPI data in Germany confirmed that inflation fell to 0.0% year-over-year from 0.2%, due to a 9.3% plunge in energy prices -- down from a 7.6% fall in August--mainly a result of a collapse in petrol price inflation. This comfortably offset an increase in food inflation to 1.1% from 0.8%, due to surging vegetable and fruit prices.
After last week's relatively light flow of data, today brings a wave of information on both the pace of economic growth and inflation. The markets' attention likely will fall first on the September retail sales numbers, which will be subject to at least three separate forces. First, the jump in auto sales reported by the manufacturers a couple of weeks ago ought to keep the headline sales numbers above water.
Brazil's consumer spending data yesterday appeared downbeat. Retail sales fell 2.1% month-to-month in December, pushing the year-over-year rate down to 4.9%, from -3.8% in November. This is a poor looking headline, but volatility is normal in these data at this time of the year, and the underlying trend is improving.
Eurozone manufacturers had an underwhelming start to Q4. Data yesterday showed that production fell 0.1% month-to-month in October, pushing the year-over-year rate down to 0.6%, from a revised 1.3% in September. Output was constrained mostly by weakness in France and a big month-to-month fall in Ireland, which offset marginal gains in Germany and Spain.
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.
Industrial production in Eurozone had a decent start to the fourth quarter. Output ex-construction rose 0.6% month-to-month in October, pushing the year-over-year rate up to 1.9% from a revised 1.3% in September. Production was lifted by gains in the major economies, and surging output in the Netherlands, Portugal and Lithuania. Across sectors, increases in production of capital and consumer goods were the main drivers, but energy output also helped, due to a cold spell lifting demand and production in France.
Wednesday's better-than-expected, but still grim, November retail sales report in Brazil does not change the miserable underlying trend. Sales volumes rose 1.5% month-to-month, much better than expected, and the biggest increase in a year. But the year-over-year rate fell to -7.8% from -5.7% in October. The details underscored our view that the month-to-month jump in sales was due mostly to temporary factors.
Retail sales data released yesterday for Brazil confirmed that weakness in private consumption remains a key challenge for the economy. Retail sales plunged 0.9% month-on-month in May, equivalent to a 4.5% fall year-over-year, the lowest rate since late 2003. On a quarterly basis, sales are headed for a 2% contraction in Q2, pointing to a -0.5% GDP contribution from consumer spending.
Based on key economic indicators, the Eurozone economy is doing splendidly, relative to its performance in recent years. Real GDP has been growing at 1.6%-to-1.7% year-over-year since the first quarter of last year, bank credit has expanded, and the unemployment rate is declining.
The PBoC has left rates unchanged, so far, in the wake of the Fed hike.
Yesterday's industrial production report was grim reading, with volatility in Greece and the Netherlands, as well as revisions, throwing off our own, and the market's, forecasts. Output fell 0.4% month-to-month in May, well below the consensus and our expectation for a 0.2% rise, pushing the year-over-year rate higher to 1.6%, from a revised 0.9% in April.
Investors kicked expectations for the first rise in official interest rates even further into the future when last month's labour market data, revealing a sharp fall in wage growth, were released. But a closer look at the official figures reveals that labour cost pressures have remained robust, cautioning against making a snap reaction if even weaker wage data are released on Wednesday.
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.
Manufacturing in the Eurozone had a slow start to the third quarter. Industrial production rose only 0.1% month-to-month in July, though the year-over-year rate was pushed up to 3.2% from a revised 2.8% in June.
Yesterday's final CPI report in Germany confirmed the initial estimate that inflation was unchanged at 0.4% year-over-year in August. Deflation in energy prices eased further, but the headline was pegged back by a small fall in the core rate to 1.2% year-over- year, from 1.3% in July.
Italy's long-term challenges--chiefly, structurally high government debt and deteriorating demographics--remain daunting, but the cyclical picture is improving steadily. Final GDP data last week revealed that growth in the first half of the year was 0.2% better than initially estimated, taking the annualised growth rate to 1.4%, the highest in five years. This is the first sign of a durable business cycle upturn since the sovereign debt crisis crashed the economy in 2012.
The ECB's key message was unchanged yesterday. The main refinancing and deposit rates were maintained at zero and -0.4%, respectively, and they are expected "to remain at their present levels at least through the summer of 2019."
Argentina's central bank held interest rates at 60% on Wednesday, as was widely expected.
Japanese real Q2 GDP growth surprised analysts, increasing sharply to a quarterly annualised rate of 4.0%, up from 1.0% in Q1 and much higher than the consensus, 2.5%. But its no coincidence that the jump in Japanese growth follows strong growth in China in Q1.
In the wake of the uptick in the March ISM manufacturing survey, we think today's official production data for the same month are likely to disappoint. Our model of the month-to-month output numbers incorporates the ISM data, but it is substantially driven by manufacturing hours worked, which fell in both February and March.
The Brazilian consumer will continue to suffer from high interest rates and a deteriorating labour market this year. But sentiment data imply that the fundamentals are stabilising, at least at the margin. The headline consumer sentiment gauge, published by the FGV, has improved significantly in the past five months, and we expect another modest increase later this month
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.
Yesterday's economic reports confirmed that the Eurozone economy had a strong start to 2017. Real GDP rose 0.5% quarter-on-quarter in Q1, similar to the pace in Q4, and consistent with the first estimate. The year-over-year rate fell marginally to 1.7%, from 1.8% in Q4, mainly due to base effects.
Our payroll model, which incorporates survey data as well as the error term from our ADP forecast, points to a hefty 225K increase in November employment. We have tweaked the forecast to the upside because of the tendency in recent years for the fourth quarter numbers to be stronger than the prior trend, as our first chart shows.
The labour market in the Eurozone continues slowly to improve. The unemployment rate fell to 1