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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.
Investors in Eurozone banks continue to face uncertain times, despite the ECB's best efforts to prop up the economy and financial markets via QE. The latest hit to confidence comes from the bail-in of selected senior debt in Portugal's Banco Espirito Santo. When the troubled lender was restructured in mid-2014, the equity and junior debt were left in a "bad" bank--and were virtually wiped out--while the deposits and senior debt went into the "good" bank Novo Banco. Senior debt holders expecting to recoup their money, however, were startled earlier this month by the decision to "re-assign" five selected bonds with total face value of €2B from Novo Banco to the bad bank, in effect wiping out the investors.
The Brazilian central bank cut its benchmark Selic interest rate by 50bp to 4.50% on Wednesday night.
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.
Argentina's central bank likely will leave its main interest rate at 27.75% tomorrow at its biweekly monetary policy meeting.
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 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.
The Board of the Bank of Korea will meet again in less than a week's time for this year's penultimate meeting.
Wednesday's State Council meeting implies that the authorities are starting to take more serious coordinated fiscal measures to counter the virus threat to the labour market and to banks.
We repeatedly have highlighted Japanese banks' foreign activities as source of rising risk for Japan and the global financial system.
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.
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 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.
Economists refer to two different types of forward rate guidance by central banks: Delphic and Odyssean. The former describes a "normal" situation, in which the central bank follows a transparent rate-setting rule allowing markets to forecast what it will do, based on the flow of economic data.
The rollover in bank lending to commercial and industrial companies probably is over. On the face of it, the slowdown has been alarming, with year-over-year growth in the stock of lending slowing to just 2.6% in April, from a sustained peak of more than 10% in the early part of last year.
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.
You could be forgiven for being alarmed at the 1.5% decline in the stock of outstanding bank commercial and industrial lending in the fourth quarter, the first dip since the second quarter of 2017.
The Monetary Policy Board of the Bank of Korea yesterday left its benchmark base rate unchanged, at 1.50%.
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 Board of the Bank of Korea will tomorrow hold its final meeting for the year.
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.
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.
Brazil's macroeconomic scenario is becoming easier to navigate for the central bank. Both actual inflation and expectations are slowing rapidly, as shown in our first chart. And since the March BCB monetary policy meeting, the BRL has appreciated about 10% against the USD, while commodity prices and EM sentiment have also improved markedly.
The strengthening recovery in the euro area is proving to be a poisoned chalice for some of the region's most vulnerable banks. Earlier this month-- see our Monitor of June 8--Spain's Banco Populare was acquired by Banco Santander, and the bank's equity and junior credit holders were bailed-in as part of the deal.
The resilience of the banking system will be in focus today when the results of this year's Bank of England stress test are published alongside its Financial Stability Report.
The resilience of the U.K. financial system will be in focus this week. On Tuesday, the Bank of England's Prudential Regulation Authority, the PRA, will publish the results of stress tests of the U.K.'s seven largest banks. Concurrently, the Bank's Financial Policy Committee, the FPC, will publish its semi-annual Financial Stability Report and announce whether it will deploy any of its macroprudential tools.
The key message of the minutes of the Copom meeting, released yesterday, is that policymakers remain worried about the inflation outlook and, in particular, about uncertainties surrounding fiscal tightening. But the Committee reinforced the signal that the Selic rate is likely to remain at the current level, 14.25%, for a "sufficiently prolonged period". The economy is in a severe recession and the rebalancing process has been longer and more painful than the Central Bank anticipated.
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.
Negotiations between the Italian government and the EU on how to fix the problem of non-performing loans in the banking sector have been predictably slow. Earlier this year the government announced that it will provide a first-loss guarantee on securitised loans sold to private investors.
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.
The Bank of Japan's biannual Financial System Report was published earlier this week.
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.
This weeks' IMF's staff report on the Italian economy has increased the urgency for a compromise between the EU and Italy over the country's suffering banks. The report highlighted that financial sector reform is "critical" to the economy, and that the treatment of the significant portion of retail investors in banks' debt structure should be dealt with "appropriately."
Fears over a Eurozone banking crisis have compounded market volatility recently, and sent bank equities into a tailspin. Deutsche Bank has been the focus of the attention, probably due to its systemic importance and opaque balance sheet. DB's stock price is down a staggering 38% year-to-date, and earlier this week, the German finance minister had to assure markets that he has no worries about the bank's position.
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 Bank of England's stress tests highlighted that banks have made further progress in strengthening their balance sheets over the last year. But while banks have retreated from taking risk onto their balance sheets, others have stepped in to fill the void.
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...
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.
Chief U.K. Economist Samuel Tombs on U.K. Bank of England Interest Rates
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, discusses the outlook for China's economy as the World Bank cut its forecast for global growth. The World Bank's report included a downward revision for China to 5.9%, which would be the first sub-6% reading since 1990. Beamish speaks on "Bloomberg Surveillance."
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.
A dovish speech by external MPC member Michael Saunders was the primary catalyst for a renewed fall in interest rate expectations last week.
Yesterday's BoJ statement, outlook and press conference raised our conviction on two key aspects of the policy outlook.
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.
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.
After the disruption in repo markets last week, theories are flying as to what's going on.
The risk posed by consumer borrowing was once again the focus of the Financial Policy Committee's discussion last week.
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.
Was this an isolated occurrence, connected to the graft investigation into Chinese billionaire Xiao Jianhua, and his financial conglomerate?
We are not concerned by the very modest tightening in business lending standards reported in the Fed's quarterly survey of senior loan officers, published on Monday.
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.
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.
China was in lockdown ahead of the 70th Anniversary last week, as is typical around important political events.
Brazil is now paying the price of President Rousseff's first term, which was characterized by unaffordable expansionary policies. As a result, inflation is now trending higher, forcing the BCB to tighten at a more aggressive pace than initially intended--or expected by investors--depressing business and investment confidence.
Growth in the broad money supply slowed further in September, providing more evidence that the economy is losing momentum.
The perfect world for equities is one in which earnings and valuations are rising at the same time, but in the Eurozone it seems as if investors have to make do with one or the other.
Money supply growth in the euro area eased further towards the end of Q4.
Calling the ECB has suddenly become a lot more complicated.
This week's main economic data from Korea--the last batch before the BoK meets on the 16th--missed consensus expectations, further fuelling speculation that it will cut rates for a second time, after pausing in August.
The Fed rate hike on Wednesday is fully priced in to LatAm markets, so we expect no significant immediate reaction when the trigger is pulled. But as markets gradually come around to our view that future U.S. rate risk is to the upside, markets will come under renewed pressure.
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.
PPI inflation in Asia looks set to go from bad to worse, following June's poor numbers, which showed that the weakness in commodity prices is feeding through quicker than expected.
Turkey has all the problems you don't want to see in an emerging market when the U.S. is raising interest rates.
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.
China's money and credit data released last Friday reaffirm our impression that the tightening has gone too far.
Data released yesterday from Brazil support our view that the economic recovery continues, but progress has been slow.
The rundown of the Fed's balance sheet has proceeded in line with the plans laid out b ack in June 2017.
The border security agreement between the U.S. and Mexico has strengthened hopes that the Sino- U.S. trade war will end soon.
Interest rate expectations continued to fall sharply last week.
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.
Inflation in Mexico edged higher in the second half, but we expect both the headline and core rates to continue falling, allowing Banxico to keep interest rates on hold.
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.
As we write, markets see a 70% chance that the MPC will cut Bank Rate on January 30.
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 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.
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.
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.
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.
Expectations that the MPC will raise Bank Rate again soon have taken a big knock over the last two weeks.
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.
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.
For a central bank already fighting for every decimal in its attempt to convince markets that underlying inflation is slowly edging higher, the recent shift in HICP methodology drives home an increasingly problematic issue.
Bloomberg reported on Monday that the PBoC is drafting a package of reforms to give foreign investors greater access to the China's financial services sector. This could involve allowing foreign institutions to control their local joint ventures and raising the 25% ceiling on foreign ownership of Chinese banks.
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.
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.
Major central banks in Asia, particularly those operating in export-oriented economies, have recently been pinning their future policy moves on the prospects of a specific industry, namely semiconductors.
It's always dangerous when risk assets rally strongly into an ECB meeting, but we doubt that investors have much to fear from today's session in Frankfurt. We think the central bank will leave its main refinancing and deposit rates at 0.00% and -0.4% respectively.
The recovery in the composite PMI to 52.4 in January, from 49.3 in December, should convince a majority of MPC members to vote on Thursday to maintain Bank Rate at 0.75%.
Inflation in Brazil and Mexico is ending Q3 under control, allowing the central banks to keep easing monetary policy.
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.
Investors looking for more QE and rate cuts will be disappointed by ECB inaction today. We think the Central Bank will keep its main interest rates unchanged, and also maintain the pace of asset purchases at €60B a month. We do, however, look for a slight change in language, hinting that QE is likely to continue beyond September next year.
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.
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.
Financial markets in the Eurozone will be pushed around by global events today. The Bank of Japan kicks off the party in the early hours CET, and the spectrum of investors' expectations is wide.
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.
Mortgage approvals by the main high street banks rose to a four-month high of 39.7K in October, from 38.7K in September, according to trade body U.K. Finance.
As widely expected, the ECB held fire yesterday. The central bank left its main refi rate unchanged at zero, and also kept the pace of QE unchanged at €80B a month. The deposit and marginal lending facility rates were also left unchanged at -0.4% and 0.25% respectively. The formal end-date of QE is still Q1 2017, but the press release repeated the message that QE can continue "beyond [Q1 2017], if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim."
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.
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.
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.
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.
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.
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.
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.
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.
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.
March's public sector borrowing figures brought more signs that the economy has lost considerable momentum this year. Borrowing, on the PSNB excluding public sector banks measure, came in at £5.1B in March, up slightly from £4.3B in March 2016.
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 Monetary Policy Board of the Bank of Korea is likely to keep its benchmark base rate unchanged, at 1.25%, at its meeting this week.
The main measure of public borrowing--PSNB excluding public sector banks--came in at £2.6B in December, well below the £5.1B in December 2016 and lower than in any other December since 2000.
The Brazilian Central Bank's policy board, COPOM, left the Selic rate at 6.50% on Wednesday, as widely expected.
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.
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.
Investors have revised down their expectations for interest rates since the November Inflation Report and now only a 50% chance of a 25bp hike in Bank Rate is priced-in by the end of this year.
The 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.
The Brazilian central bank cut the benchmark Selic interest rate by 25bp, to 4.25%, on Wednesday night, as expected.
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.
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's policy board--the Copom--voted unanimously on Wednesday to keep the Selic rate on hold at 6.50%.
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.
It's probably happening a decade too late, but the EU is now moving in leaps and bounds to restructure the continent's weakest banks. Yesterday, the Monte dei Paschi saga reached an interim conclusion when the Commission agreed to allow the Italian government to take a 70% stake in the ailing lender.
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.
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.
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.
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.
Inflation in the Eurozone is on the rise but, as we explained in yesterday's Monitor it is unlikely to prompt the ECB further to reduce the pace of QE in the short run. The central bank has signalled a shift in focus towards core inflation, at a still-low 0.9% well below the 2% target. But the core rate also is a lagging indicator, and we think it will creep higher in 2017.
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.
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.
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 headline changes in yesterday's ECB policy announcement were largely as expected. The central bank left its main refinancing and deposit rates unchanged at 0.00% and -0.4% respectively, and maintained the pace of QE at €60B per month. The central bank also delivered the two expected changes to its introductory statement. The reference to "lower levels" was removed from the forward guidance on rates, signalling that the ECB does not expect that rates will be lowered anytime soon.
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.
Over the weekend, the PBoC cut the RRR for the vast majority of banks. FX reserves data released shortly after suggested that the Bank already is propping up the currency.
Yesterday's ECB policy decision was a carbon copy of the announcement in July. The central bank maintained its key refinancing rate at 0.00%, and also kept its deposit and marginal lending facility rates unchanged at -0.4% and 0.25% respectively. The ECB also kept the pace of QE unchanged at €80B per month. Finally, the central bank refrained from formally extending QE.
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.
The Brazilian central bank cut the benchmark Selic interest rate by 25bp, to 6.75%, on Wednesday night, as expected.
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."
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.
Markets are looking for the ECB to extend QE today, and we think they will get their way. We expect the central bank to prolong the program by six months, to September 2017, and to maintain the pace of monthly purchases at €80B per month.
Most investors remain convinced that the MPC will raise Bank Rate when it meets next, on May 10.
Yesterday's ECB meeting left investors with a lot of thinking to do. The central bank kept its key interest rate unchanged, but extended and tweaked its asset purchase program. QE was extended until December 2017, but the monthly pace of purchases will be reduced by €20B per month to €60B starting April next year.
Activity surveys picked up across the board in April, offering hope that the slowdown in GDP growth--to just 0.3% quarter-on-quarter in Q1-- will be just a blip. The headline indicators of surveys from the CBI, European Commission, Lloyds Bank and Markit all improved in April and all exceeded their 2004-to-2016 averages.
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.
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%.
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 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.
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.
Inflation pressures remain under control in most LatAm economies, allowing central banks to keep interest rates on hold, despite the challenging external environment.
Our ECB-story since Ms. Lagarde took the helm as president has been that the central bank will do as little as possible through 2020, at least in terms of shifting its major policy tools.
The MPC likely will vote unanimously to keep Bank Rate at 0.75% on Thursday.
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.
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.
Last week the Chinese authorities issued a series of new measures to help with bank recapitalisation, and, we think, to supplement interbank liquidity.
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."
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.
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.
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.
LatAm markets and central banks have been paying close attention to developments in the U.S. The FOMC left rates on hold on Wednesday, as expected, but underscored its core view that inflation will rise in the medium-term, requiring gradual increases in the fed funds rate.
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.
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.
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 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 Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.50%.
Colombia's central bank has found a relatively sweet spot.
July's money and credit figures provided more evidence that firms have become reluctant to invest following the Brexit vote. Lending by U.K. banks to private non-financial companies--PNFCs--rose by just 0.2% month-to-month in July, below the average 0.5% increase of the previous six months.
The Bank of Korea's two main monthly economic surveys were very perky in January.
The MPC's decision yesterday was a "dovish hold", designed to keep market interest rates at current stimulative levels and to preserve the option of cutting Bank Rate swiftly and without surprise, if the economy fails to rebound in Q1.
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 financial crisis, a squeeze in short-term dollar markets forced banks to sell assets, which were then exposed as soured.
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.
The market-implied probability that the MPC will cut Bank Rate at its meeting on January 30 jumped to 63%, from 44%, following the release of December's consumer prices report.
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.
The big difference in this round of stimulus is in the complete lack of easing on the shadow banking side.
We expect June's consumer prices report, released on Wednesday, to show that CPI inflation increased to 2.7%, from 2.4% in May, above the consensus, 2.6%, and the Bank of England's forecast, 2.5%.
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.
On the face of it, December's flash Markit/CIPS PMIs warrant the MPC cutting Bank Rate at its meeting on Thursday.
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.
Last week, the Bank of Mexico unanimously voted to leave the main rate on hold, at 7.50%, its highest level since early 2009.
We are pushing back our forecast for the next rise in Bank Rate to May 2020, from the tail-end of this year.
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.
Argentina's central bank held interest rates at 60% on Wednesday, as was widely expected.
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 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.
Inflation in the Andean economies ended 2019 well within central banks' objectives, despite many domestic and external challenges.
January's CPI inflation of 1.8%, up from 1.6% in December, was one-tenth lower than anticipated by the consensus, the Bank of England and ourselves. The undershoot, however, was entirely due to a pull-back in clothing inflation which is unlikely to be sustained. Price pressures across the rest of the economy have continued to intensify, suggesting that CPI inflation still is on course greatly to exceed the 2% target later this year.
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.
Peru's central bank kept the reference rate unchanged at 3.5% at Thursday's meeting, in line with our view and market expectations.
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.
We expect August's consumer price figures, released on Wednesday, to show that CPI inflation declined to 2.4%, from 2.5% in July, matching the consensus and the Bank of England's forecast.
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 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.
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".
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 Monetary Policy Board of the Bank of Korea voted yesterday to lower its policy base rate to 1.25%, from 1.50%.
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 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.
CPI inflation surprises look set to trigger larger- than-usual market reactions over the coming months, given that the MPC emphasised last month that it wants to see domestically-generated inflation rebound swiftly, after falling suddenly late last year, in order to justify keeping Bank Rate on hold.
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.
Yesterday's ECB press conference confirmed our view that Mr. Draghi is the periphery's friend, not enemy. Crucially, the central bank agreed to increase emergency liquidity assistance--ELA--to Greek banks by €900M. This is consistent tent with the agreement by the Eurogroup to give Greece €7B bridge financing, and shows the ECB is ready to act on the back of only a temporary truce between Greece and the EU. The increase in ELA is modest, and we doubt a painful restructuring of the banking system can be avoided. But with Greek bond yields falling, the available pool of collateral will go up, allowing the central bank to provide further relief in coming weeks.
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.
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.
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.
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.
Markets rightly placed little weight on October's below-consensus GDP report yesterday, and still think that the chances of the MPC cutting Bank Rate within the next six months are below 50%.
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.
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.
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.
On the face of it, the slowdown in bank loan growth to commercial and industrial companies over the past two years looks alarming. In the year to November, the stock of loans outstanding rose by 8.0%, the smallest gain since January 2014. A further decline in the year-over-year rate, taking it below the rate of growth of nominal GDP--we expect 4.7% in the first quarter--for the first time in six years, is now a fair bet. The three- and six-month annualized growth rates of C&I lending in November were just 6.2% and 4.7% respectively, and still falling.
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.
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.
Brazil's central bank has ignored, so far, the severe economic downturn and has continued its aggressive monetary tightening in order to regain credibility and curb stubbornly high inflation. In contrast, Mexico's central bank is in an enviable position, with inflation below target and under control. Its monetary policy is mainly dependent on the Fed's rate normalization.
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.
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.
The European financial sector was in the news again on Friday, propelled by further weakness in Deutsche Bank's share price. In our Monitor of September 27, we said that worries of a European "Lehman Moment" were overblown.
The government last week fired the starting gun for the contest to replace Mark Carney as Governor of the Bank of England.
The Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.00%, as expected.
The market-implied probability that the MPC will cut Bank Rate in the first half of this year leapt to 50% yesterday, from 35%, following Mark Carney's speech.
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.
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.
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.
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.
Chile's Central Bank's monetary policy meeting, scheduled for tomorrow, likely will be one of the most difficult in recent months. Economic activity remains soft, and GDP likely contracted in Q4, due to weakness in mining output and investment.
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.
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.
Investors concluded too hastily yesterday that November's GDP report boosted the chances that the MPC will cut Bank Rate at its upcoming meeting on January 30.
Car registrations, French inflation, advance PMIs and a central bank meeting make up today's substantial menu for investors in the euro area.
One of the main conclusions we drew from last week's ECB meeting was that the QE program is here to stay for a while. If the economy improves, the central bank could reduce the pace of purchases further. But we struggle to come up with a forecast for growth and inflation next year that would allow the ECB to signal that QE is coming to an end.
The Bank kept interest rates unchanged at 1.50% yesterday, but downgraded its inflation forecast for 2018 to 1.6% from 1.7%
Yesterday's minutes of the February 4-to-5 COPOM meeting, at which Brazil's central bank, the BCB, cut the benchmark Selic rate by 25bp to 4.25%, reaffirmed the committee's post-meeting communiqué.
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.
Mexico's central bank continues to diverge from its regional peers, tightening monetary policy further.
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.
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.
Central bankers globally are full of market- appeasing but conditional statements.
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.
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.
The BoJ held firm, for the most part, during this year's bout of central bank dovishness.
The ECB will not make any adjustments to its policy stance today. We think the central bank will keep its main refinancing and deposit rates unchanged at 0.0% and -0.4%, respectively, and also that will maintain the pace of QE purchases at €80B a month. The updated macroeconomic projections likely will include a modest upgrade of this year's GDP forecast to 1.5%, from its 1.4% estimate in March.
Brazil's central bank kept the Selic policy rate at 6.50% this week, as markets broadly expected.
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".
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.
The People's Bank of China cut its seven-day reverse-repo rate yesterday, to 2.50% from 2.55%.
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.
The market-implied probability that the MPC will cut Bank Rate by June fell to 34%, from 38%, after the release of January's consumer price figures, though investors still see around an 80% chance of a cut by the end of this year.
Expectations that the MPC will cut Bank Rate at its meeting on January 30 received a further shot in the arm at the end of last week, when December's retail sales figures were released.
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 ECB won't make any major changes to its policy stance today. We think the central bank will keep its main refinancing rate unchanged at 0.00%, and that it will maintain its deposit and marginal lending facility rate at -0.4% and 0.25%, respectively. The central bank also will keep the pace of QE unchanged at €80B per month until March, and at €60B hereafter until December. This is the first ECB meeting for some time in which Mr. Draghi will be able to report significantly higher inflation in the euro area.
The Brazilian Central Bank's policy board-- Copom--voted unanimously on Wednesday to cut the Selic rate by 50bp to 6.0%.
The Bank of Korea yesterday laid out its conditions for following July's rate cut with another.
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.
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 MPC is holding its nerve and not about to join other central banks in providing fresh stimulus.
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.
Chile's central bank cut the policy rate 25bp last week to 3.0%, in line with consensus, amid easing inflationary pressures. The timing of the rate cut was no surprise; in January, the BCCh cut rates for the first time in more than two years, and kept a dovish bias.
September's consumer price figures helped to curb expectations that the MPC might raise Bank Rate again before the March Brexit deadline.
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.
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.
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.
Chile's central bank, the BCCh, held its reference rate unchanged at 2.75% on Tuesday, in line with the majority of analysts' forecasts.
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.
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.
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.
Reports yesterday indicated that a deal has finally been struck between the European Commission and the Italian government to start dealing with bad loans in the banking system. The initial details suggest the government will be allowed to guarantee senior tranches on non-performing loans, supposedly making them easier to sell to private investors. In order to avoid burdening government finances as part of the sales--not allowed under the new banking union rules--the idea is to price the guarantees based on the credit risk of similar loans.
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 health of the banking system will be under the spotlight on Wednesday, when the Bank of England publishes the results of its 2016 bank stress tests and its biannual Financial Stability Report.
European Central Bank unveils major stimulus program...
Colombia's worrying inflation picture suggests the Central Bank will likely hike rates at least once more before the end of the year, attempting to anchor expectations. The October 30th BanRep minutes, in which the board surprised the market by hiking the main rate by 50bp to 5.25%--consensus was a 25bp increase--made it clear that the decision was based on fear of increased inflation risks, coupled with an improving domestic demand picture. The 50bp hike was not agreed unanimously, with dissenters arguing that the bank should adopt a more gradual approach due the high degree of uncertainty over the global economy. In addition, those favoring a 25bp hike argued that it would be better to move at a predictable pace to avoid possible market turmoil.
Rising inflation is pressuring some LatAm central banks to take a cautious stance at a time when growth is subpar, particularly in the two biggest economies of the region.
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".
European Central Bank's Bond-Buying Will Help U.S. Tourists and Investors...
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.
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.
What do the protests mean for Chile's economy?
What to expect from the ECB as Ms. Lagarde takes the seat as new president?
Chief U.K. Economist Samuel Tombs on U.K. Mortgage approvals
Chief U.K. Economist Samuel Tombs on U.K. employment
Chief Eurozone Economist Claus Vistesen on the ECB
Chief Eurozone Economist Claus Vistesen on the Eurozone Inflation
Chief Asia Economist Freya Beamish discussing Japans new stimulus package
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.
China's property market is slowly finding its feet, following a marked and consistent moderation in monthly price gains from mid-2018 to early this year.
In yesterday's Monitor, we suggested that China's monetary policy stance is now easing.
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.
The latest public finance figures continue to imply that the Chancellor will be able to change course later this year in the Autumn Budget so that fiscal policy doesn't drag on GDP growth next year.
Yesterday's money supply data gave some respite after last month's disappointing slowdown. Broad money growth--M3--rose to 5.0% year-over-year, from 4.7% in December, but the details were less encouraging. The rebound was solely due slower declines in medium-term deposits, short-term debt issuance, and repurchase agreements.
The speed of sterling's rally this month has caught us by surprise.
The Chancellor can go on his Christmas vacation content that the public finances have weathered the economy's slowdown relatively well this year.
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.
Meetings are a nice way to stress test our base case stories and gauge what questions are important for clients.
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 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.
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.
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.
When you read between the lines of its public statements on Brexit, the Government appears to be prioritising controlling immigration over maintaining unfettered access to the single market, much to the chagrin of the financial sector.
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.
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.
Brazil's inflation rate remained well under control over the first half of February.
Markets were all over the place yesterday in response to the messages from the ECB.
Korea's preliminary GDP report for Q3 will be released tomorrow.
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.
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.
China's 2018 property market boomlet let out more air last month.
Advance PMI data indicate a slow start to the first quarter for the Eurozone economy. The composite index fell to 53.5 in January from 54.3 in December, due to weakness in both services and manufacturing. The correlation between month-to-month changes in the PMI and MSCI EU ex-UK is a decent 0.4, and we can't rule out the ide a that the horrible equity market performance has dented sentiment. The sudden swoon in markets, however, has also led to fears of an imminent recession. But it would be a major overreaction to extrapolate three weeks' worth of price action in equities to the real economy.
December's public finance figures suggest that borrowing is on track to come in a bit below the forecasts set out in the Autumn Statement in November. But we caution against expecting the Chancellor to unveil a material reduction in the scale of the fiscal consolidation set to hit the economy in his Budget on 8th March.
Yesterday's PMI data were an open goal for those with a bearish outlook on the euro area economy.
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.
We find it remarkable, after the market volatility induced by the two Brexit deadlines in 2019, that investors do not foresee another bump in the road at the end of this ye ar, when the Brexit transition period is due to end.
Public borrowing has continued to fall more rapidly than anticipated in the latest official plans.
July's mortgage approvals data from the BBA brought clear evidence that households have held off making major financial commitments as a result of the Brexit vote. Following a 5% month-to-month fall in June, approvals fell a further 5.3% in July, leaving them at their lowest level since January 2015 and down 19% year-over-year.
Yesterday was a watershed moment for investors.
Brazil's inflation rate remained well under control over the first half of February.
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.
The ECB made no major policy changes yesterday.
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.
Japan's CPI inflation was unchanged, at 0.2% in February.
We expect the second estimate of Q1 GDP, released today, to restate that quarter-on-quarter growth slowed to just 0.3%, from 0.7% in Q4. The second estimate of growth rarely is different to the first.
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.
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.
Japan's headline inflation will be volatile for the rest of the year, thanks to movements in the noncore elements.
The recent pick-up in mortgage approvals is another sign that households are unperturbed by the risk of a no-deal Brexit.
Last week's news that the composite PMI collapsed to 47.7 in July--its lowest level since April 2009--from 52.4 in June is the first clear indication that the U.K. is heading for a recession.
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.
Mexican policymakers voted unanimously last Thursday to hike the main rate by 25bp to 7.75%, the highest since early 2009.
The mortgage market is continuing to hold up surprisingly well, given the calamitous political backdrop.
Sterling has appreciated sharply over the last two weeks and yesterday briefly touched its highest level against the euro since May 2017.
China's industrial profits tanked in January/ February, falling 14.0% year-to-date year-over-year, after a 1.9% drop year-over-year in December.
Wage growth will be crucial in determining how quickly the MPC raises interest rates this year. So far, it hasn't recovered meaningfully.
The latest E.C. survey shows the gap between firms' and households' confidence levels has remained substantial.
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 deadline for registering to vote in the general election passed on Tuesday, with a record 660K people registering on the final day.
MPs will be asked today to approve the PM's motion, proposed in accordance with the Fixed-term Parliaments Act--FTPA--to hold a general election on December 12.
Chinese industrial profits growth officially edged down to 25.1% year-over-year in October, from 27.7% in September. This is still very rapid but we think the official data are overstating the true rate of growth.
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.
The minutes of the MPC's meeting in June indicated that several members' patience for tolerating for above-target inflation is wearing thin.
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.
Data and events have gone against the idea of further BoK policy normalisation since the November hike.
Housebuilders were one of the biggest winners from the post-election relief rally in U.K. equity prices.
At first glance, the U.K. consumer price data show a perplexing absence of domestically generated inflation.
This is the final report before your scribe disappears into the Scottish Highlands for a few weeks, and we are leaving you with a Eurozone economy in fine form. The calendar will be relatively light in our absence and will tell us what we already know; namely that the euro area economy maintained its strong momentum in Q2.
Equity prices for companies dependent on the U.K.'s residential property market tumbled yesterday as several companies reported poor results for the first half of 2017. Most companies blamed a decline in housing transactions for falling profits.
Monetary conditions in the Eurozone continue to send a bullish message on GDP growth, and indicate an ongoing, but slow, improvement in credit growth. Broad money growth--M3--was unchanged at 4.9% year-over-year in September, after a trivial 0.1% upward revision of last month's data. The increase continues to be driven by surging narrow money rising 11.7% in September from 11.5% in August, boosted by overnight deposit growth offsetting a slight decline in currency in circulation.
Money supply growth in the Eurozone firmed last month. Broad money--M3--rose 5.0% year-overyear in August, after a tepid 4.5% rise in July.
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.
Money supply data in the EZ continue to suggest that headline GDP growth will slow soon.
Brazil's external accounts were a bright spot last year, again.
China's industrial profits data for December showed continued weakness in the sector, with no clear signs that a turnaround is in the offing.
China's Q2 real GDP growth officially slowed to 6.2% year-over-year, from 6.4% in Q1, which already matched the trough in the financial crisis.
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%.
The MPC won't seek to make waves on Thursday.
The real Boris Johnson will have to stand up this year.
The extent of shut downs within China is now reaching extreme levels, going far beyond services and threatening demand for commodities, as well as posing a severe risk to the nascent upturn in the tech cycle.
The persistence of no-deal Brexit risk has taken a toll on confidence across the economy over the last month.
China's Party Congress is now less than one month away. Most commentators habitually add the words "all-important" before any reference to the event.
The PBoC doesn't publicly schedule its meetings, but in recent years has tended to make moves after Fed decisions.
The BoJ until last week had been in wait-and-see mode over China's slowdown, but they finally folded with Thursday's decision.
Brazil's external accounts were a relatively bright spot again last year.
Yesterday's money supply data in the Eurozone were solid across the board.
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.
Friday's detailed GDP data in Germany confirm that the euro area's largest economy performed strongly in the second quarter.
The strengthening EZ economy increasingly looks like the tide that lifts all boats. The Greek economy is still a laggard, but recent news hints at a brightening outlook. Last week, S&P affirmed the country's debt rating, but revised the outlook to "positive" from "stable."
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.
On Friday last week, the Chinese authorities suspended sales of domestic and international tours, in an effort to contain the spread of the coronavirus, which started in Wuhan.
In yesterday's Monitor, we laid out the prime causes of China's weekend announcement, cutting the reserve requirement ratio.
In this Monitor, befitting these uncertain times, we set out the decision tree facing Chinese policymakers.
The U.K.'s political situation is extremely fluid, so it would be risky automatically to assume that the U.K. is heading for Brexit. Although the Prime Minister has resigned, his attempt to hold out until October to begin the formal process of exiting the E.U. signals that he may be seeking to engineer a revised deal, or at least to force his successor to make the momentous decision of whether to trigger Article 50, to begin the leaving process.
Data from trade body U.K. Finance show that mortgage lending has remained unyielding in the face of heightened economic and political uncertainty.
LatAm's economies are gradually rebounding, boosted by easier monetary policy in most countries, falling inflation, and a relatively calm external backdrop.
Fed Chair Powell's semi-annual Monetary Policy Testimony yesterday broke no new ground, largely repeating the message of the January 30 press conference.
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.
After years of rapid increase, China appears finally to have stabilised its ratio of private non-financial to GDP ratio.
The squeeze on real wages has just ended and GfK's consumer confidence index hit a 11-month high in March.
Yesterday's ECB meeting was comfortably uneventful for markets.
Eurozone bond traders of a bearish persuasion are finding it difficult to make their mark ahead of Italy's parliamentary elections next weekend.
India's GDP report for the second quarter, due on Friday, is likely to show a decent rebound in growth from the first quarter.
Friday's advance Eurozone PMI reports capped a fine quarter for the survey. The composite PMI jumped to a 80-month high of 56.7 in March, from 56.1 in February, rising to a cyclical high over Q1 as a whole.
Yesterday's figures from trade body U.K. Finance showed that January's pick-up in mortgage approvals was just a blip.
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.
All eyes today will be on the core PCE deflator for August, which we think probably rose by a solid 0.2%.
Banxico cut its policy rate by 25bp to 7.75% yesterday, as was widely expected, following August's 25bp easing.
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.
Yesterday's IFO survey in Germany was a big relief for markets, in light of recent soft data. The main business climate index jumped to 109.5 in September, from 106.3 in August, the biggest month-to-month increase since 2010.
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.
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.
Yesterday's consumer confidence report in Germany was soft, in contrast to surging business sentiment data earlier in the week.
Japan's flash Nikkei manufacturing PMI report for November was abysmal, putting the chances of a recovery this quarter into serious doubt.
Political uncertainty is starting to dampen housing market activity again.
The COPOM meeting minutes, released yesterday, brought a balanced message aimed at curbing market pricing of further rate cuts, in our view.
Japan's retail sales data--due out on Thursday-- have been badly affected by the October tax hike.
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.
Developments over the last month have heightened our concern about the near-term outlook for households' spending.
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.
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.
Yesterday's Japanese activity data were grim.
Yesterday's public finance figures brought more good news for the Chancellor.
The Eurozone's current account surplus almost surely fell further in Q4.
CPI inflation rose only to 2.1% in April, from 1.9% in March, undershooting the 2.2% consensus and MPC forecasts, as well as our own 2.3% estimate.
China's Loan Prime Rate was unchanged this month, at 4.15%, with consensus once again expecting a reduction to 4.10%.
Idiosyncratic developments have driven market volatility in LatAm in recent weeks.
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.
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.
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.
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.
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.
China has undoubtedly been through a credit tightening, commonly explained as the PBoC attempting to engineer a squeeze, to spur on corporate deleveraging.
The EU Commission and Italy's government remain at loggerheads over the country's fiscal plans next year.
Forecasting BoJ policy for this year is trickier than it has been in a long time.
October's surprise jump in public borrowing is not a material setback for the Chancellor, who will stick to his new Budget plans for modest fiscal stimulus next year.
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.
Brazil economic and political outlook is still opaque, but grim, after a vast array of negative news. Impeachment of President Rousseff remains a possibility; the process of fiscal consolidation is messy and politically bloody; rumors that Finance Minister Levy might leave his post next year have intensified; and the latest data showed that the recession worsened in Q3. As a consequence, the BRL and interest rates have been under pressure and we see no clear signs that the turmoil will ease soon.
Once again, Chinese January data released so far suggest that the Phase One trade deal was the dominant factor dictating activity for the first two- thirds of the month, with the virus becoming a real consideration only in the last third.
Data on Friday showed that German producer price inflation is now in free-fall.
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.
CPI inflation was steadfast at 1.9% in March, undershooting the consensus and our forecast for it to rise to 2.0%.
In recent client meetings the first and last topic of conversation has been the market implications of the possible departure of President Trump from office.
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.
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.
At the halfway mark of the fiscal year, public borrowing has been significantly lower than the OBR forecast in the March Budget.
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.
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.
With a no-deal Brexit still a potential outcome and just over five weeks to go until the U.K. is scheduled to leave, it's about time we put some numbers on how high inflation could get in this worst-case scenario.
Politics are once again encroaching on the economic story in the Eurozone. At the ECB, this week has so far been a tumultuous one.
Two major themes emerged from the Chinese Party Congress last week, namely, further opening of the financial sector to foreigners, and the threat of a Minsky moment.
The euro area's record-high external surplus has prompted commentators to suggest that the zone has room to loosen fiscal policy to support growth, or at least relax the deficit reduction rules.
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.
We're breaking protocol this week by delivering our preview for Thursday's ECB meeting in today's Monitor.
Yesterday's German IFO survey broadly confirmed the bullish message from the PMIs earlier this week. The headline business climate index rose to 111.0 in February from a revised 109.9 in January, boosted by increases in both the current assessment and the expectations index.
The chances of the first phase of the Brexit saga concluding soon declined sharply last week.
The PBoC managed to keep interest rates well- anchored around the Chinese New Year holiday, when volatility is often elevated.
GDP growth in Korea surprised to the upside in the fourth quarter, with the economy expanding by 1.2% quarter-on-quarter, three times as fast as in Q3, and the biggest increase in nine quarters.
Further evidence that the general election has transformed business confidence emerged yesterday, in the form of January's CBI Industrial Trends survey.
The year so far in EZ equities has been just as odd as in the global market as a whole.
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.
We tend to keep a close eye on monetary policy initiatives in Japan, as the BOJ's fight to spur inflation in a rapidly ageing economy resembles the challenge faced by the ECB.
Inflation in Brazil remained subdued at the start of the second quarter, strengthening the odds for an additional interest rate cut next month, and opening the door for further stimulus in June.
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.
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.
Whether the economy enters recession will hinge more on corporate behaviour than on consumers. Household spending accounts for about two thirds of GDP, but it is a relatively stable component of demand. By contrast, business investment and inventories--which are often overlooked--are prone to wild swings.
Punished by the global economic slowdown depressing commodity prices, the Mexican economy is now making a gradual comeback, thanks to the continuing strength of its main trading partner, increasing public expenditure on key infrastructure projects, and accommodative monetary policy.
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.
Japanese trade remained in the doldrums in October, keeping policymakers on their toes as they repeat the refrain of "resilient" domestic demand.
Barring a meteor strike, the ECB will leave its main refinancing and deposit rates unchanged today, at 0.00% and -0.5% respectively.
Korea's preliminary Q4 GDP report was stronger than nearly all forecasters, including ourselves, expected.
China's real GDP growth officially slowed to 6.5% year-over-year in Q3, from 6.7% in Q2.
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.
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.
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.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
October's retail sales figures, published last Thursday, extended the month-long run of near consistent downside data surprises.
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.
We are going to print two days before the July 1 presidential election in Mexico.
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.
PPI inflation in Korea slowed sharply in October, to a five-month low of 2.2%, from 2.7% in September.
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.
The Eurozone has come under the spotlight for its growing external surplus, but domestic households have been doing the heavy lifting for GDP growth in this business cycle. During the last four quarters, consumers' spending has boosted year-over-year GDP growth by an average of 1.0 percentage points, in contrast to a 0.4pp drag from net exports.
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 flash readings of the Markit/CIPS surveys in February provide reassurance that GDP is on track to rebound in Q1, despite disruption to the global economy caused by the COVID-19 outbreak and bad weather in the U.K. this month.
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.
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.
Japan's national CPI inflation has peaked, falling to 0.7% in May from 0.9% in April.
Yesterday's partial trade data for Korea showed that the downturn in exports softened to -13.3% year-over-year in August from -13.8% in July, based on the 20-day gauge.
April's consumer price figures, due on Wednesday, are set to show that CPI inflation has fallen, primarily due to the earlier timing of Easter this year than last. We
The BoJ kept its main policy settings unchanged yesterday, in another 7-to-2 split.
GDP data for Q2 are due July 26; we expect the report to show a marginal dip in growth, to a seasonally adjusted 0.8% quarter-on-quarter, from 1.0% in Q1.
Investor sentiment data still indicate that EZ PMIs are set for a significant rebound at start of the year.
The big question left by the BoJ at yesterday's meeting is how, if at all, they will follow up in October.
Another deadline has come and gone in the negotiations between Greece and its creditors. This week's meeting between EU finance ministers revealed that the creditors have not seen enough commitments unlock the €7B Greece needs to repay in July. Mr. Tsipras has agreed to energy sector privatizations, and to increase the threshold for income tax exemption.
Speculation that the ECB is considering a rethink of its inflation target has intensified in the past few weeks.
After pricing-in the consequences of sterling's depreciation for inflation last year only slowly, markets are at risk of costly inertia again.
The Eurozone's external surplus rebounded slightly at the start of Q3.
The intensity of the pressure on households' finances was highlighted last week by December's retail sales report, which showed that volumes fell by 1.5% month-to-month, the most since June 2016.
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.
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.
It would be easy to characterize the Fed as quite split at the July meeting.
Yesterday's second estimate of Q3 GDP confirmed that the U.K. economy has underperformed this year.
Leading indicators are giving conflicting signals regarding the outlook for core goods CPI inflation.
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 his opening speech at the Party Congress, President Xi received warm applause for his comment that houses are "for living in, not for speculation".
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.
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 PBoC has let up on its open-market operations after allowing bond yields to move higher again in October.
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.
Retail sales fell sharply in September, highlighting that consumers still are spending only cautiously amid high economic uncertainty and falling real wages.
Argentina's economy is firing on all cylinders, thanks to improving fundamentals and a positive external backdrop.
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.
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.
The stakes in the Brexit saga have been raised significantly over the summer.
We suspect that under the calm surface of the BoJ, a major decision is being debated.
This week's GDP figures showed that firms invested only sparingly in 2016, but their financial fortunes have been bolstered by a recovery in profits. The gross operating surplus of all firms rose by 4.5% quarter-on-quarter in Q4, the biggest increase for 11 quarters. This pushed the share of GDP absorbed by profits up to 21.3%, just above its 60-year average of 21.2%.
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.
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 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.
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.
We can't yet know how bad the spread of the coronavirus from the Chinese city of Wuhan will be.
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.
We're expecting to learn today that existing home sales rose quite sharply in July, perhaps reaching the highest level since early 2018.
Friday's PMIs were supposed to provide the first reliable piece of evidence of the coronavirus on euro area businesses, but they didn't. Instead, they left economists dazed, confused and scrambling for a suitable narrative.
Yesterday's report on October private spending in Mexico was positive, suggesting that consumption remained relatively strong at the start of Q4. Retail sales jumped 1.6% month-to-month, following a modest 0.2% drop in September. October's rebound was the biggest gain since March this year, but note that wild swings are not unusual in these data. The headline year-over-year rate rose to 9.3%, from 8.1% in September, but survey data signal to a gradual slowdown in coming months to around 5%.
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%.
The third quarter national accounts, due to be published on Friday, likely will not alter the picture of economic resilience immediately after the referendum. The latest estimate of GDP growth often is revised in this release, but revisions have not exceeded 0.1 percentage points in either direction in the last four years, as our first chart shows.
Yesterday's detailed German GDP report raised more questions than it answered. The headline confirmed that growth accelerated to 0.4% quarteron- quarter in Q4, from 0.1% in Q3, leaving the year-over- year rate unchanged at 1.7%.
After soaring in the Spring, inflation has slipped back in the Summer. July's consumer prices report, released while we were away last week, showed that CPI inflation held steady at 2.6% in July, one -tenth below the consensus and three tenths below May's year-to-date peak.
The public finances are in better health than appeared to be the case a few months ago.
The ECB conformed to expectations today, at least on a headline level.
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.
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.
The ECB will deliver a carbon copy of its December meeting today, at least in terms of the main headlines.
China's growth can be decomposed into the structural story and the mini-cycle, which is policy- driven.
Growth in South America disappointed last year, but prospects are gradually improving on the back of rising commodity prices and the global manufacturing rebound. These factors will help to ease the region's external and fiscal vulnerabilities, particularly over the second half of the year. On the domestic front, though, the first quarter has proved challenging for some countries, hit by temporary supply factors such as a mine strikes, floods, and wildfires.
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.
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.
The Andean economies haven't been immune to the turmoil roiling the global economy in the past few weeks.
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.
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.
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 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 BoJ voted by an 8-to-1 majority yesterday to keep the policy balance rate unchanged at -0.1%, with the 10-year yield curve target also unchanged at around zero.
Consumer confidence in the Eurozone rose marginally at the start of Q4, though it is still down since the start of the 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.
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.
If the Chancellor is true to his word, Wednesday's Budget will be a pedestrian affair with few major policy changes designed to prevent the economy from slowing this year. In an article in The Sunday Times, Philip Hammond asserted that "we cannot take our foot off the pedal" in the mission to eliminate the budget deficit by the end of the next parliament.
In some sense, today's ECB meeting will be a sobering one for policymakers.
The economic data calendar for next week is so congested that we need to preview early September's GDP report, released on Monday.
The downturn in car sales is showing no sign of abating. Data released yesterday by the Society of Motor Manufacturers and Traders showed that private registrations fell 10.1% year-over-year in October, much worse than the 6.6% average drop in the previous 12 months.
One bad month proves nothing, but our first chart shows that October's auto sales numbers were awful, dropping unexpectedly to a six-month low.
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.
Japan's average year-over-year wage growth slowed sharply in May, but this mainly was a correction of the April spike.
Following the publication of Korea's preliminary Q4 GDP report last month--see here--we said the consensus-beating print would be susceptible to downgrades, unless the economy had a miraculous end to 2018
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
Chile's near-term economic outlook is still negative, but clouds have been gradually dispersing since late Q4, due mostly to better news on the global trade front, China's improving economic prospects, and rising copper prices.
Hopes that GDP growth will strengthen following the general election, which has eliminated near- term threats of a no-deal Brexit and a business- hostile Labour government, were bolstered yesterday by the release of December's Markit/ CIPS services survey.
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.
China's unadjusted current account surplus widened to $16.0B in the preliminary report for Q3, from $5.3B in Q2.
Make no mistake, business investment has been depressed by Brexit uncertainty over the last year.
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.
German manufacturing data are all over the place at the moment. Earlier this week, data showed that new orders jumped toward the end of 2016, but yesterday's industrial production report was a shocker. Output plunged 3.0% month-to-month in December, pushing the year-over-year rate down to -0.7% from a revised +2.3% in November.
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 $10 increase in the price of Brent crude oil over the last three months to $68 is an unhelpful, but manageable, drag on the U.K. economy's growth prospects this year.
Business investment held up surprisingly well last year.
The ink has hardly dried on economists' and the ECB's inflation projections for 2020, but we suspect that some forecasters are already considering ripping up the script.
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.
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%.
Net trade has been a major drag on the economy's growth rate in recent quarters, and February's trade figures, released today, are likely to signal another dismal performance in the first quarter.
China's authorities recognised, around the middle of this year, that activity was slowing and that monetary conditions had become overly tight.
The point when businesses and households can breathe a sigh of relief about Brexit looks set to be delayed again this week.
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.
Friday's GDP report should show that the economy narrowly avoided contracting in Q2.
Nobody knows the damage China's virus- containment efforts will have on GDP, and we probably never will, for sure, given the opacity of the statistics.
The rally in U.K. equities immediately after the general election has done little to reverse the prolonged period of underperformance relative to overseas markets since the E.U. referendum in June 2016.
Brazil's industrial sector is on the mend, but some of the key sub-sectors are struggling.
We have consistently flagged the likelihood that Japan's government would boost spending after the consumption tax hike was implemented.
For sterling traders, no election news is good news.
Korea's trade data for January provided the first real glimpse of the potential hit to international flows from the disruptions caused by the outbreak of the coronavirus.
The post-election run of upbeat business surveys was extended yesterday, with the release of the final Markit/CIPS services PMI for January.
Productivity likely rose by 1.7% last year, the best performance since 2010.
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've always said that China's first weapon, should the trade war escalate, is to do nothing and allow the RMB to depreciate.
Support in opinion polls for both the Conservatives and Labour has been increasing steadily.
China is facing a nasty mix of spiking CPI inflation and ongoing PPI deflation.
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.
When the BoJ tweaked policy back in July, we think the increase in flexibility in part was to lay groundwork for the BoJ to respond to the Fed's ongoing hiking cycle.
Readers have asked us about the availability of flow-of-funds data in the Eurozone similar to the detailed U.S. reports. The ECB's sector accounts come close and cover a lot of ground, but are also released with a lag. We can't cover all sectors in one Monitor, but the investment data for non-financial firms, excluding construction, suggest that investment growth slowed last year.
The Nikkei services PMI for Japan partly rebounded in January, to 51.6, after it fell sharply to 51.0 in December.
November's monetary indicators provide an upbeat rebuttal to the swathe of downbeat business surveys. Year-over-year growth in the MPC's preferred measure of broad money--M4 excluding intermediate other financial corporations--rose to a 19-month high of 4.0% in November, from 3.5% in October.
The PBoC finally moved yesterday, cutting its one-year MLF rate by 5bp to 3.25%, whilst replacing around RMB 400B of maturing loans.
October's Markit/CIPS services survey suggests that the PM's new Brexit deal has had a lukewarm reception from firms.
Political risks have been making an unwelcome comeback in the Eurozone in the past month. In Germany, last month's parliamentary elections--see here--has left Mrs. Merkel with a tricky coalition- building exercise.
A growing number of economists have marked down their forecasts for Chinese growth next year to below the critical 6% year-over-year rate, required to ensure that the authorities meet their implicit medium- term growth targets.
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.
It would be a mistake to conclude from July's car registrations data that the market finally has turned a corner.
The small rise in the Markit/CIPS services PMI to 51.3 in February, from 50.1 in January, came as a relief yesterday.
The recent deal between Greece and the EU shows that the appetite for a repeat of last year's chaos is low. But investors' attention has turned to whether Portugal is waiting in the wings to reignite the sovereign debt crisis. Complacency is dangerous, but economic data suggest that a Portuguese shock to the Eurozone economy and financial markets is unlikely this year.
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.
Yesterday's economic data point to a sea of calm in the Eurozone economy. The composite PMI was unchanged at 53.1 in June, a slight upward revision from the initial estimate, 52.8. The index suggests real GDP growth was stable at 1.5%-to-1.6% year-overyear in Q2, though the quarter-on-quarter rate likely slowed markedly, following the jump in Q1.
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.
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.
The key aspects of the ECB's policy stance will remain unchanged at today's meeting.
Yesterday's Nikkei services PMI report completed Japan's set of surveys for the fourth quarter of 2018.
Odds-on, the consensus forecast for May's GDP report, released on Wednesday, will miss the mark.
Slowing FAI growth underscores the urgency for more PBoC easing October was painful and the slowdown in Chinese IP growth is far from over and no, households in China won't come to the economy's rescue. Japan sneaks in a tax hike; GDP data unfazed. Japan's tertiary index jars with the GDP data.
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.
Don't expect the BoK to follow the BoJ's unorthodoxy in the foreseeable future. The upward correction in Korean unemployment has much more room to run.
Japan's GDP plunge: damning across the board, though with some modest potential for upward revision. China's rate cut was mainly a housekeeping move. China's housing market starts to feel the pinch from the virus.
BoJ focuses on the positives, keeping the door open to increasing flexibility.
Steady Q4 GDP growth in China masks respectable q/q rebound. Signs of recovery in China's industrial complex, but for how long? China's households continue to struggle. China's FAI growth shows rebuilding confidence around the Phase One deal. Japan's November tertiary index suggests October plunge was more tax than typhoon. January sees the first of many BoK "holds" this year.
August plunge in Korean unemployment is unsustainable, but should effectively rule out another BoK cut.
Expect Chinese PPI deflation in the second half. China's CPI inflation faces non-core cross currents; services inflation still slowing. Unemployment in Korea held steady in June; the BoK will be chuffed about improving job growth. PPI deflation in Japan will persist until the end of the year.
Chile's inflation outlook remains benign, allowing policymakers to cut interest rates if the economic recovery falters.
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.
German manufacturing rebounded somewhat mid-way through Q3.
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.
BoJ signals a package is coming in October. Waning construction tarnishes July's all-industry activity report. No PBoC move, for now, but it's coming.
Both China and U.S. look for good will on opposite side and find none; political and economic constraints will soon kick in. BoJ QE remains neutralised by negative yields
China's manufacturing PMI was poised for major disappointment... the trade war impact is clear. Don't be fooled by the relative stability of China's non-manufacturing PMI. Japan's March unemployment uptick was early; April was payback. Japan's CPI inflation has peaked. Japan's industrial production ticks up after extreme weakness; don't hold your breath for the recovery. Japan's consumers in poor shape, but maybe it's not that bad. The upswing in Korean industrial production likely to take a breather this month. The BoK holds firm, despite rising calls for a rate cut.
BoJ snubs the doves. Japan's unemployment rate downtick was minimal. The weak external backdrop dominates Japan's pre-tax front-loading industrial activity.
BoJ remains in an alternate reality in order to avoid a rate cut, underlining its concerns over damage to the financial sector. Chances of a serious PBoC blunder are rising. No "Phase 1" sentiment lift for Chinese manufacturers. A sharp fall in China's official services gauge was due. This probably is as good as it'll get for Japanese industrial production. Korean industrial production remains volatile, but the trend is decisively up.
Non-core base effects push Korean CPI inflation to a 14-month high in January. Monetary base data show BoJ back-peddling against virus.
China's trade surplus falls unexpectedly in April, thanks partly to a bump in imports. Japan's services PMI falls despite holiday boost. The BoJ remains in a holding pattern. Korea's current account surplus rose in March, but its overall downtrend remains intact.
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 rate cut still on the tame side but more is coming, China's Caixin manufacturing PMI yet to see virus damage, China's profits better than the headline suggests going into the coronavirus hit, Early signs of coronavirus damage in Korea's trade data, Surge in Korea's manufacturing PMI comes to a stop in January
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.
PBoC furthers efforts to push down real economy rates, signals more to come.
October monetary base growth uptick attributable to shifts on the liabilities side; tapering continues.
The BoJ keeps it promises vague. Japan's April is turning out quite nicely. PPI inflation in Korea slipped in May, and is heading for deflation in Q3.
Further weakness to come for Japan's manufacturing PMI. First services hit from the coronavirus is damning. Japan's all-industry activity index suggests the 2019 tax hike was as bad as 2014. A drop in food inflation was enough to offset lagged oil pressures in Japan's January CPI. Ignore the headline; the coronavirus is now hurting Korean exports.
The BoJ's growth upgrade for fiscal 2020 is on the ambitious side, to say the least. Lunar New Year noise hit Korea's 20-day export print for January. Korea completes its exit from a brief and shallow spell of PPI deflation.
Friday's industrial production data capped another dreadful week for German manufacturing. Output fell 1.1% month-to-month in September, pushing the year-over-year rate lower to 0.2%, from a revised 2.9% in August. The 0.6% upward revision of the previous month's data makes the data slightly less awful than the headline, but the details showed weakness across all core sectors. The underlying trend in production is stable at about 1.2% year-over-year, but downbeat new orders suggest it will weaken in the fourth quarter.
We're among a small minority of economists forecasting that GDP rose by 0.1% month-to-month in March.
Recent economic indicators in Mexico have been mixed, distorted by temporary factors, including the effect of the natural disasters in late Q3. Private consumption has lost some momentum, hit by the lagged effect of high interest rates and inflation, as well as the earthquakes.
The RMB has been on a tear, as expectations for a "Phase One" trade deal have firmed.
Mortgage lender Halifax reported yesterday that the rate of increase in house prices has picked up since the summer.
The Fed today will do nothing to rates and won't materially change the language of the post-meeting statement.
In Mexico, Banxico left its policy rate unchanged at 7.75% last Thursday, as was widely expected.
National accounts data released last week rewrote the recent history of households' saving.
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.
Early results suggest that Mr. Macron has comfortably beat Marine Le Pen to become French president, defying a leak of emails and other documents from his En Marche campaign over the weekend. The final results won't be published until Monday morning, but the initial estimate indicates that Mr. Macron will edge Ms. Le Pen by 65.1% to 34.9%.
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.
The ECB will keep all its policy parameters unchanged today. The refi and deposit rates will be maintained at 0.00% and -0.4%, respectively, and the pace of QE will stay at €60B per month, running until the end of the year.
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 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.
Mr. Draghi and his colleagues erred on the side of maximum dovishness yesterday.
Japan's average monthly labour earnings growth tumbled to 0.9% year-over-year in August, from 1.6% in July. This is not a disaster.
The process of refinancing existing mortgages at ever-lower interest rates has been a boon for the economy in recent years.
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.
Productivity statistics released yesterday continued to paint a bleak picture. Output per worker rose by a mere 0.1% year-over-year in Q3, despite jumping by 0.6% quarter-on-quarter.
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.
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 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.
Andean inflation remains under control, due to subpar growth, modest pressures on prices for nontradeables, and broadly stable currencies.
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".
German industrial production data were presented by Bloomberg News as signs that the recovery is "gathering momentum", but it is slightly premature to make that call. Narrow money growth is currently sending a strong signal of higher GDP growth this year in the euro area, but the message from the manufacturing sector is still one of stabilisation rather than acceleration.
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.
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.
China's trade numbers for July surprised to the upside, with both exports and imports faring better than consensus forecasts in year-over-year terms.
Financial markets have gone into another tailspin over the last fortnight, triggered by rising concern about the possibility of a no-deal Brexit and President Trump's threat of further tariffs on Chinese goods.
The hard data in Germany took a turn for the worse at the start of Q4. The outlook for consumers' spending was dented by the October plunge in retail sales--see here-- and on Friday, the misery spilled over into manufacturing.
Economic conditions are deteriorating rapidly in Chile, despite the relatively decent Imacec reading for Q3.
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.
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.
U.K. manufacturers are benefiting from rapid growth in the Eurozone, but increasingly they are being held back by weak domestic demand.
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.
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 Brazilian economy managed to avert a technical recession over the first half of the year.
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.
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%.
Most of the time, sterling broadly tracks a path implied by the difference between markets' expectations for interest rates in the U.K. and overseas. During the financial crisis, however, sterling fell much further than interest rate differentials implied, as our first chart shows.
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.
Rumours of Greece stepping back from the brink and accepting its creditors' demands, have taunted markets this week. But the response from the EU, so far, is that talks will not resume before this weekend's referendum. Our base case is a "yes" to the question of whether Greece should accept the proposal from the EU and IMF.
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.
Modern Money Theory has come up at two consecutive BoJ press conferences.
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.
Japan is one of the countries most exposed to economic damage from the coronavirus.
Yesterday's economic reports in the euro area were mixed.
Today's data likely will show that inflation in the Eurozone rebounded in November.
China's official manufacturing PMI for May, out tomorrow, will give the first indication of the coming hit from the resumption of its tariff war with the U.S.
Further political wrangling yesterday distracted from data showing that the risk of no -deal Brexit is placing increasing strain on the economy.
Japan's retail sales values jumped 1.2% month-on-month in October, after the upwardly-revised 0.1% increase in September.
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.
We have witnessed a dramatic shift in just a few weeks in perceptions of Mexico as an investment destination.
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.
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.
Chile's economy is showing the first reliable signs of improvement, at last. December retail sales rose 1.9% year-over-year, up from 0.4% in November, indicating that household expenditure is starting to revive, in line with a pick-up in consumer confidence and the improving labor market.
Chancellor Javid told the Financial Times earlier this month that he wants to lift the rate of GDP growth to between 2.7% and 2.8%, the average rate in the 50 years following the Second World War.
Recently released data in Colombia signal that the economy ended last year quite strongly.
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 alarming pace at which the Government is marching towards the Brexit cliff edge still shows no sign of instilling panic among households or firms.
Don't write off the outlook for the construction sector purely on the basis of June's grim Markit/CIPS survey.
Last week's balance of payments showed that the U.K. has made significant progress in reducing its reliance on overseas finance.
Money supply growth in the Eurozone quickened last month, by 0.3 percentage points to 3.9% year- over-year, but the details were less upbeat.
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.
The estimate of services output for the first month of the current quarter usually gets lost among the deluge of national accounts and balance of payments data released for the previous quarter.
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.
Don't expect a pretty picture when Korea's Q1 GDP report appears in the last week of April.
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.
Brazil's current account deficit rose to USD6.9B in April, from USD5.8B in March. The deficit totaled USD100.2B, or 4.5% of GDP on a 12-month rolling basis, marginally better than 4.6% in March; the underlying trend is flat. The services and income accounts improved slightly compared to April last year.
Industrial profits in China dropped 3.7% year-over- year in April, after surging 13.9% in March, according to the officially reported data.
The national accounts, released today, likely will restate that quarter-on-quarter GDP growth held steady at 0.4% in Q4.
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.
Banxico yesterday left its policy rate unchanged at 3%, the highest level in a decade.
A long period of extremely accommodative U.S. monetary policy generated sizable capital inflows and asset price appreciation in EM countries.
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.
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 political momentum in the run-up to the election now lies with Labour.
Korean trade ended the year strongly, salvaging what was shaping up as a dull fourth quarter for the economy.
CPI inflation looks set to remain below the 2% target this year, driven by sterling's recent appreciation and lower energy prices.
The data in LatAm were all over the map while we were out.
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.
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.
We have focussed on the role of the trade war in depressing U.S. stock prices in recent months, arguing that the concomitant uncertainty, disruptions to supply chains, increases in input costs and, more recently, the drop in Chinese demand for U.S. imports, are the key factor driving investors to the exits.
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.
December's money and credit data support the MPC's decision last week to hold back from providing the economy with more stimulus.
China's manufacturing PMIs put in a better performance in November, with the official gauge ticking up to 50.2 in November, from 49.3 in October, and the Caixin measure little changed, at 51.8, up from 51.7.
Yesterday's final manufacturing PMIs confirmed that the headline index in the euro area rebounded further last month.
Both the E.U. and the U.K. government have been keen to emphasise, since the Withdrawal Agreement was provisionally signed off, that March 29 is a hard deadline for Brexit.
Friday's inflation and labour market data in the Eurozone were dovish.
Chile's stronger-than-expected industrial production report for December, and less-ugly-than- feared retail sales numbers, confirmed that the hit from the Q4 social unrest on economic activity is disappearing.
Markets see a strong possibility, though not a probability, that the BoJ will cut rates on Thursday.
Chinese industrial profits continue to surge, rising 27.7% year-over-year in September, up from 24.0% in August.
China's Caixin manufacturing PMI edged down to 50.6 in August, from July's 50.8. This clashed with the increase in the official PMI, though the moves in both indexes were modest.
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.
Inflation pressures in the Eurozone edged higher last month, reversing weakness at the start of the year.
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.
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.
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.
The BoJ has no good options, and its leeway for changes to existing policy instruments is limited.
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.
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.
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.
We continue to distrust the suggestion from the Markit/CIPS PMIs that the economy is in recession.
Japan's real GDP seems unlikely to have risen in Q3, and could even have edge down quarter-on- quarter, after the 0.7% leap in Q2.
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.
We've previously highlighted the pro-cyclical elements of the BoJ's framework, but it's worth repeating, when an economic shock comes along.
The slowdown in quarter-on-quarter growth in households' real spending to 0.4% in Q1--just half 2016's average rate--was driven entirely by a 0.1% fall in purchases of goods. Households' spending on services, by contrast, continued to grow briskly. Indeed, the 0.8% quarter-on-quarter rise in households' real spending on services exceeded 2016's average 0.5% rate.
Brazil's external position continue to improve, but we are sticking to our view that further significant gains are unlikely in the second half, given the stronger BRL. For now, though, we still see some momentum, with the unadjusted trade surplus increasing to USD7.2B in June, up from USD4.0B a year earlier. Exports surged 24% year-over-year but imports rose only 3%.
Korea's economic data for June largely were poor, and are likely to make more BoK board members anxious ,ahead of their meeting on July 18.
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.
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.
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.
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.
Yesterday's final PMI data added to the evidence that the EZ economy was firing on all cylinders at the end of last year. The composite PMI in the euro area rose to an 11-year high of 58.5 in December, from 57.5 in November, in line with the initial estimate.
Colombia's BanRep stuck to the script on Thursday by leaving the policy rate on hold at 4.25%.
The Budget on March 11 will be the first time that the new government's ambition and bluster collide with reality.
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.
Yesterday's advance CPI report in the Eurozone showed that inflation pressures are rising rapidly. Inflation rose to 1.1% year-over-year in December, from 0.6% in November. Surging energy inflation was the key driver, and this component likely will continue to rise in the next few months. Core inflation, however, stayed subdued, rising only slightly to 0.9%, from 0.8% in November.
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 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.
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%.
Our Chief Eurozone Economist, Claus Vistesen, is covering the Italian situation in detail in his daily Monitor but it's worth summarizing the key points for U.S. investors here.
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.
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.
The latest Markit/CIPS manufacturing survey has dashed hopes that sterling's depreciation and the pickup in global trade will facilitate strong growth in U.K. production this year. The PMI dropped to 54.2 in March, from 54.6 in February.
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.
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.
Brazil's external accounts remain solid, despite the recent modest deterioration.
June's money and credit figures showed that the economy still doesn't have much zing, even though lending has picked up since Q1.
This Budget will be remembered as the moment when the Government finally threw in the towel on plans to run sustainable public finances.
Chinese headline industrial profits data show that growth slowed to just 4.1% year-over-year in September, from 9.2% in August.
Today will be an incredibly busy day for EZ investors with no fewer than eight major economic reports. Overall, we think the data will tell a story of a stable business cycle upturn and rising inflation. Markets will focus on advance Q4 GDP data in France and in the euro area as a whole. Our mo dels, and survey data, indicate that the EZ economy strengthened at the end of 2016, and we expect the headline data to beat the consensus.
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.
December's money and credit figures suggest that households are in no fit state to step up and drive the economy forwards this year.
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.
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.
We're relatively optimistic--yes, you read that correctly--on the outlook for the U.K. economy in 2019.
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.
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.
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.
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.
January's money supply figures continued the nerve-jangling flow of data on the economy's momentum.
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.
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.
The PBoC yesterday cut its 7-day and 14-day reverse repo rate by 10bp, to 2.40% and 2.55% respectively, while injecting RMB 1.2T through open market operations.
January's Markit/CIPS manufacturing survey suggests that the outcome of the general election has brought manufacturers some momentary relief.
The manufacturing indexes for January showed a small improvement for the biggest economies in LatAm: Brazil and Mexico. In Brazil, the PMI manufacturing index increased marginally to 50.7 in December from 50.2 in November, thanks to stronger output and new orders components, which rose together for the first time in ten months.
A cluster of surveys suggest that the manufacturing sector finished 2016 with a flourish, after a dismal performance for most of the year. But momentum will drain away from the sector's recovery in 2017, as higher oil prices make low value-added work unprofitable again and resurgent inflation causes domestic consumer demand to crumble.
German inflation surged in December, pointing to an upside surprise in today's advance EZ report. The headline inflation rate rose to a three-year high of 1.7% year-over-year in December, from 0.8% in November. This was the biggest increase in the year- over-year rate since 1993.
Surveys released yesterday failed to support the MPC's view that the economy has bounced back in Q2.
We had expected the batch of Chinese data released at the end of last week to disappoint.
In recent weeks LatAm's currencies and stock markets, together with key commodity prices, have risen as financial markets' expectations for a rate increase by the Fed this year have faded. The COP has risen 8.5% over the last month, the MXN is up 2.5%, the CLP has climbed 1.4% and the PEN has been practically stable against the USD. The minutes of the Federal Reserve's latest meeting added strength to this market's view, showing that policymakers postponed an interest rate hike as they worried about a global slowdown, particularly China, the strong USD and the impact of the drop in stock prices.
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.
China's money and credit numbers were once again unspectacular in August. M2 growth edged up to 8.2% year-over-year, from 8.1% in July.
Today's ECB meeting is supposed to be a slam-dunk.
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.
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.
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.
Last week, the Chinese authorities were out in force, talking up the economy and markets, and bearing measures to support private firms.
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.
The EZ government bond market has been in a holding pattern for most of 2017. The euro area 10- year yield--German and French benchmark--is little changed from a year ago, though it is at the lower end of its range.
A sluggish GDP headline, a further increase in inflation, and poor German manufacturing data were the primary euro area highlights in our absence.
Next week is so crammed full of data releases that we need to preview November's consumer price data early, in the eye of the storm of the general election.
We've been consistent in saying that Japanese capex would roll over this year, after strength in the first three quarters was seen by the authorities and many commentators as a sign of resilience.
The ECB and Ms. Lagarde played it safe yesterday.
GDP growth in Japan surprised to the upside in the second quarter, although the preliminary headline arguably flattered the economy's actual performance.
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.
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.
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.
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.
On the face of it, small business have taken quite a hit over the past few months. The headline index from the NFIB survey of small businesses has dropped to a nine-month low of 95.2 in March from 100.4 in December. As a result, the gap between the NFIB and the ISM manufacturing indexes, which had been narrowing, has widened again.
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.
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.
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.
The U.S. Commerce Department on Tuesday released a list of Chinese imports, with an annual value of $200B, on which it is threatening to impose a 10% tariff, after a two-month consultation period.
It's hard to know what will stop the correction in the stock market, but we're pretty sure that robust economic data--growth, prices and/or wages--over the next few weeks would make things worse.
Today's Q4 GDP report in the Eurozone likely will show that growth slowed again at the end of last year. We think GDP growth dipped to 0.2% quarter-on-quarter in Q4, down from 0.3% in Q3, and risks to our forecast are firmly tilted to the downside. The initial release does not contain details, but we think a slowdown in consumers' spending and a drag from net exports were the main drivers of the softening.
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.
China's M2 growth stabilised in November, at 8.0% year-over-year, matching the October rate.
In previous Monitors--see here--we've suggested that, thanks to the coronavirus, China simply will lose some of the spending that would have gone on during the holiday this year.
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.
Yesterday's accounts from the June ECB meeting broadly confirmed markets' expectations of further easing between now and the end of the year.
Brazilian inflation has been well under control in the past few months, laying the ground for a final rate cut at the monetary policy meeting on March 21.
Monetary policy loosening over the last year implies that China's M1 growth already should be picking up.
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.
Emmanuel Macron's victory in France has lifted investors' hopes that the good times in the Eurozone economy and equity markets are here to stay. On the face of it, we share markets' optimism. Mr. Macron and his opposite number in Germany--our base case is that Ms. Merkel will remain Chancellor--will form a strong pro-EU axis in the core of the Eurozone.
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.
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.
China's Q2 official GDP growth, to be released on Monday, likely slowed to 6.2% year-over-year, from 6.4% in Q1.
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.
China faces three possible macro outcomes over the next few years. First, the economy could pull off an active transition to consumer-led growth. Second, it could gradually slide into Japan-style growth and inflation, with government debt spiralling up. Third, it could face a full blown debt crisis, where the authorities lose control and China drags the global economy down too
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.
Our argument that rates could rise as soon as March has always been contingent on two factors, namely, robust labor market data and a degree of clarity on the extent of fiscal easing likely to emerge from Congress. On the first of these issues, the latest evidence is mixed.
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.
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.
More evidence indicating that the recovery in global industrial activity is underway and gaining momentum- has poured in. In particular, trade data from China, one of LatAm's biggest trading partners, was stronger than the market expected last month. Both commodity import and export volumes increased sharply in January, and this suggests better economic conditions for China's key trading partners.
The EZ calendar has been extremely busy in the first few weeks of the year, making it virtually impossible to see the forest for the trees.
We've already raised a red flag for today's second Q4 GDP estimate in the Eurozone, but for good measure, we repeat the argument here.
It was no surprise that Banxico cut its policy rate by 25bp to 7.00% yesterday, following similar moves in August, September, November and December.
Investors in the euro area have mostly been focused on downside risks this year, and the spectre of Turkey spinning out of control has done little to change that.
Data released earlier this week show that Japan's current account surplus continued its downtrend in October, falling to ¥1,404B, on our seasonal adjustment, from ¥1,494B in September.
After the drama of the last few days, Brexit developments now are set to proceed at a slower pace.
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.
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.
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.
Korea's unemployment rate tumbled to 3.7% in February, after the leap to 4.4% in January.
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.
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.
The benchmark MSCI EU ex-UK equity index was down a startling 17% year-over-year at the end of February. A disappointing policy package from the ECB in December initially put Eurozone equities on the back foot, and the awful start to the year for global risk assets has since piled on the misery.
After the first round of voting by Tory MPs, Boris Johnson remains the clear favourite to be the next Prime Minister.
Chinese M2 growth was stable at 8.3% year- over-year in May, despite favorable base effects.
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 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.
China's M2 growth surprised on the upside in July, rising to 8.5% year-over-year, from 8.0% in June.
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%.
We held our breath this month.
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.
Last week's decision by the ECB to keep rates unchanged until the beginning of 2020, at least, raises one overarching question for markets.
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.
It is by now a familiar story that the Eurozone has become a supplier of liquidity to the global economy in the wake of the sovereign debt crisis.
Yesterday's economic data in Brazil suggest that retailers suffered in the second quarter, hit by the effect of the truckers' strike, but private consumption remains somewhat resilient.
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.
Japan's tertiary index fell further in December,by 0.3% month-on-month, after the downwardly- revised 0.4% drop in November.
December's consumer prices report looks set to show that CPI inflation was stable at 1.5%--in line with the consensus--though the risks are skewed to the downside.
Chile's market volatility and high political risk continue, despite government efforts to ease the crisis.
Banxico decided unanimously to hold its benchmark interest rate at 7.0% at last Thursday's policy meeting.
Economic growth in Mexico will remain relatively modest over the second half of the year, and the outlook for 2017 remains cloudy, for now. The core fundamentals suggest that growth will increase, but we think that depressed mining output and fiscal tightening might limit the pace of the upturn.
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.
Japan's Q2 GDP was driven by the twin pillars of private consumption and capex.
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 M2 growth slowed to 8.2% year-over-year in August, from 8.5% in July
Overall, the Chinese October data paint a picture of continued weakness in trade, with PPI inflation still high but the rate of increase finally slowing.
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.
The ECB disappointed slightly on the big headlines in yesterday's policy announcements, but it delivered shock and awe with the details
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 U.K. general election is the main event in today's European calendar, but the first official ECB meeting and press conference under the leadership of Ms. Lagarde also deserves attention.
Chinese PPI inflation was unchanged at 5.5% in July; it had been expected to rise modestly. Officially, inflation peaked at 7.8% in February, but we think this peak was artificially high, thanks to seasonal effects. The slowing in PPI inflation since the peak appears to suggest that monthly price gains have slowed sharply. We find little evidence to support this.
Surveys released over the last week have suggested that the housing market might be past the worst.
The early Q4 hard data in Germany recovered a bit of ground yesterday.
Recent inflation and activity data in Mexico were dovish.
The ECB will rest on its laurels today.
Brazil's economic activity data have disappointed in recent months, firming expectations that the Q1 GDP report will show another relatively meagre expansion.
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.
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.
Brazilian inflation hit its lowest rate in almost seven years in March, while Mexico's rate is the highest since July 2009. Yet we expect Mexico to tighten policy only modestly in the near term, while Brazil will ease rapidly.
The German manufacturing sector is showing signs of stabilisation with industrial production rising 0.2% month-on-month in October, equivalent to 0.8% year-over- year. This is consistent with a decent retracement in production this quarter, but growth is still only barely above zero.
We can't quibble with the consensus that GDP likely rose by 0.2% month-to-month in December, reversing only two-thirds of November's drop.
Business investment has held up better than most economists--ourselves included--expected after the Brexit vote.
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.
We think Japanese monetary policy easing essentially is tapped out, both theoretically and by political constraints.
Our base case remains a 10bp cut in the deposit rate, to -0.5%, in September.
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.
Japan's wage growth surprised us with a jump to 2.0% year-over-year in December, up from 1.5% in November.
Inflation data in Brazil, Mexico and Chile last week reinforced our view that interest rates will remain on hold, or be cut, over the coming meetings. The recent fall in oil prices, and the weakness of domestic demand, will offset recent volatility caused by the FX sell-off, driven mostly by the coronavirus story.
Friday's industrial production data in the core EZ economies, for December, were startlingly poor. In Germany, industrial production plunged by 3.5% month-to-month, comfortably reversing the revised 1.2% rise in November.
Survey data have been signalling a stronger German economy in the last few months, and hard data are beginning to confirm this story. Data yesterday showed that industrial production rose 0.4% month-to-month in November, pushing the year-over-year rate up to 2.2%, from an upwardly-revised 1.6% in October. The headline was boosted mainly by a 1.5% month-to-month jump in construction and a 0.9% rise in intermediate goods production.
The U.K.'s still-large current account deficit makes us nervous that sterling will need to depreciate further over the medium-term and would collapse if Brexit talks fail, causing international investors to take flight.
The first round of Brazil's presidential elections will take place this Sunday, followed by a probable runoff on October 28.
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.
The BoJ had two tasks at its meeting yesterday.
Wednesday's first estimate of full-year 2018 GDP in Mexico indicates that growth lost momentum in Q4.
Recent economic weakness in Brazil, particularly in domestic demand, and the ongoing deterioration of confidence indicators, have strengthened the case for interest rate cuts.
Japan's unemployment rate returned unexpectedly to its 26-year low of 2.3% in February, falling from 2.5% in January.
Final Italian Q4 GDP data on Friday confirmed that the economy stumbled at the year-end. Real GDP rose 0.1% quarter-on-quarter in Q4, slowing from 0.2% in Q3, in line with the initial es timate. But the details were better than the headline. Inventories shaved off a hefty 0.4 percentage points, reversing boosts in Q3 and Q2, so final demand rose a robust 0.5%. Consumption added 0.2pp, while public spending contributed 0.1pp.
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.
Economic theory tells us that government spending should be counter-cyclical, but recent experience in the Eurozone tells a slightly different story. The contribution to GDP growth from government spending rose during the boom from 2004 to 2007, and remained expansionary as the economy fell off the cliff in 2008. As the economy slowed again following the initial recovery, the sovereign debt crisis hit, driving a severe pro-cyclical fiscal hit to the economy.
Yesterday's EZ producer price data showed that deflationary pressures in the manufacturing sector are fading. The headline PPI index fell 0.2% month- to-month in August, pushing the year-over-year up to -2.1%, from a revised -2.6% July.
The Eurozone's TARGET2 system is a clearing mechanism for the real-time settling of large payments between European financial intermediaries. It's an important piece of financial architecture, ensuring the smooth flow of transactions. But we struggle to see these flows containing much information for the economy.
Chinese data still are in the midst of Lunar New Year-related noise, so take February's PMIs with a pinch of salt, even though they ostensibly are adjusted for seasonal effects.
The BoJ kept policy unchanged, as expected, at its meeting yesterday.
The latest national accounts show that the economy is holding up much better in the face of heightened Brexit uncertainty than previously thought.
Economic survey data have been upbeat recently, but key Eurozone data releases yesterday suggest the ECB will be under pressure to increase monetary policy stimulus further this month. The advance inflation estimate showed that the euro area slipped back into deflation in September, as inflation fell to -0.1% year-over- year, from +0.1% in August. The fall was mainly due to a 8.9% collapse in energy prices, though, and we are very confident the relapse is temporary.
The MPC's new inflation forecasts usually take centre stage on "Super Thursday" and provide a numerical indication of how close the Committee is to raising interest rates again.
The 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.
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.
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.
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 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 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.
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.
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.
Yesterday's economic reports in the Eurozone were ugly.
The latest GDP data continue to show that the economy is holding up well, despite the Brexit saga.
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
The MPC emphasised yesterday that its faith that interest rates need to rise further has not been shaken by recent downside data surprises.
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 Easter effect depressed services inflation more than markets expected in April, but the main downside surprise was the tepid rebound in non-energy goods inflation.
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.
Japan's official seasonally adjusted current account surplus rose to ¥2.27T in August from ¥2.03T in July. But we don't trust the seasonals, and our adjustment model shows the surplus fell slightly, to ¥1.91T in August. A further small decline likely is coming in Q4.
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.
February's industrial production and construction output data leave us little choice but to revise down our forecast for quarter-on-quarter GDP growth in Q1 to 0.2%, from 0.3% previously.
The PBoC will find itself between a rock and a hard place in the coming months, as CPI inflation creeps further up towards its 3% target but PPI deflation deepens.
Q2's GDP figures create a terrible first impression, but a closer look suggests that the risk of a recession remains very low.
China concludes its annual Central Economic Work Conference today, where the economic targets and the agenda for next year are set.
Two years ago markets believed that the institutional setup of the Eurozone would be a straitjacket on the ECB, preventing QE. Aggressive policy actions since then have proven this hypothesis wrong. But inflation remains low and sentiment data weakened ominously in the first quarter.
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.
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.
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.
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.
The economy looks to be in better shape following May's GDP report than widely feared.
Lacklustre economic data and persistent no deal Brexit risk mean that the MPC won't rock the boat at this week's meeting.
Inflation is falling quickly in Colombia, despite the VAT increase in Q1, so we expect more BanRep rate cuts over the next few months. Consumer prices rose 0.5% month-to-month unadjusted in March, pushing the inflation rate down to 4.7% year-over-year, from 5.2% in February. This is the lowest rate in almost two years, thanks to a favourable base effect and fading pressures from food prices.
The economy has remained remarkably resilient in the face of intense political uncertainty.
Korea's labour market took an overdue breather in March after an extremely volatile start to the year.
Japan's labour cash earnings rose by 1.5% year-over- year in July, a strong result in the Japanese context, if it hadn't been preceded by the 3.6% leap in June.
Japan's August balance of payments data, released yesterday, offer the first overview of financial flows since the BoJ "tweaks" at the end of July.
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.
Gloom and uncertainty are spreading across the global economy as we head into the final stretch of the year.
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.
The ECB made no changes to its policy stance yesterday.
Manufacturing in France remained on the front foot at the start of Q4.
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.
Wage growth in Japan accelerated to a six-month high in December, inching up to 1.8% year-over-year, from November's 1.7%.
The German trade surplus increased slightly in May, following weakness in the beginning of spring. The seasonally adjusted surplus rose to €20.3B in May, from €19.7B in April; it was lifted by a 1.4% month-to-month jump in exports, which offset a 1.2% rise imports.
Yesterday's Sentix investor sentiment survey provided the first glimpse of conditions on the ground in the EZ economy in the wake of the coronavirus scare.
German net exports were treading water at the start of the fourth quarter. The seasonally adjusted trade surplus slipped to €17.4B in October, from a revised €17.7B in September, constrained by a 1.3% month-to-month rise in imports, which offset a 0.7% increase in exports.
China's November money and credit data were a little less grim, with only M2 growth slipping, due to unfavourable base effects.
The MPC was a little irked by the markets' reaction to its November meeting.
The recent FX depreciation and falling oil prices are driving the dynamics of inflation across the Andean economies.
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.
Markets rightly interpreted yesterday's above consensus GDP report as having little impact on the outlook for monetary policy.
A slew of Asian price numbers are due this Friday, and they will all likely show that price gains softened further in January.
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.
June's consumer price figures threw a last minute curve-ball at the MPC ahead of its key meeting on August 2.
June's retail sales figures provided a timely reminder that consumers aren't being haunted by the warnings of the damage that a no -deal Brexit would entail.
The headline employment numbers masked an otherwise sub-par December labour market report.
India's industrial production data last week are the last set of key economic indicators for the fourth quarter, before next week's Q4 GDP report.
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.
Inflation pressures in the Eurozone nudged higher last month. Friday's final CPI report showed that inflation rose to 0.6% year-over-year in November, from 0.5% in October, in line with the initial estimate. The food, alcohol and tobacco component was the key driver of the increase.
Yesterday's final CPI report confirmed that inflation in the euro area increased slightly last month. The headline rate rose to 1.5%, from 1.4% in October, lifted by a 1.7 percentage point increase in energy inflation to 4.9%.
The BoJ left its policy levers unchanged at the Monetary Policy Committee meeting on Friday. At the press conference, Governor Kuroda was repeatedly asked about the status of the ¥80T annual asset purchase target and what the exit strategy would be.
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.
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.
Mexican policymakers voted last Thursday to hike the main rate by 25bp to 8.0%, the highest since early 2009.
Retail sales fell back to earth in September, indicating that the pick-up in spending over the summer largely was a weather-related blip.
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.
Japan's adjusted trade balance flipped back to a modest surplus of ¥116B in February, after seven straight months of deficit.
Friday's data confirmed that inflation in the Eurozone slipped to a 14-month low of 1.1%, from 1.3% in January, 0.1 percentage points below the first estimate.
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.
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.
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.
The PBoC reduced its 14-day reverse repo by 5bp to 2.65% in a routine operation yesterday.
CPI inflation held steady at 1.5% in November, marking the fourth consecutive below-target print, though it was a tenth above both the MPC's forecast and the consensus.
The half-way point of the quarter is not, alas, the half-way point of the data flow for the quarter.
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.
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.
Rapidly increasing food inflation is creating all sorts of dilemmas for policymakers in Asia's giants.
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.
Japan's inflation target came under heavy fire yesterday, as Finance Minister Taro Aso suggested that "things will go wrong if you focus too much on 2%."
Governor Kuroda has sounded increasingly dovish recently.
Japanese policymakers have a wary eye on the weakness in industrial production and exports.
Colombia was the fastest growing economy in LatAm last year but it faces major challenges. The collapse of oil prices--which account for about half of exports--the COP depreciation, rising inflation and Fed's impending monetary policy normalization, are dragging down economic activity and damaging confidence.
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.
Money and credit data released last weekend suggest that China's demand for credit remains insatiable.
The MPC took an unprecedented step last week to pave the way for an interest rate rise.
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.
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.
Our colleagues have been telling some unpleasant stories recently.
Inflation pressures in LatAm are moderating, and governments have been taking steps to pursue fiscal consolidation. These factors, coupled with a relatively favourable external environment, are providing policymakers with the opportunity to start relaxing monetary policy.
Yesterday's final CPI report in the Eurozone confirmed that headline inflation was unchanged at 1.5% in September.
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.
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.
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.
Investors awaiting today's interest rate decision might be a little unnerved to learn that the MPC has a track record of surprises.
The PBoC late on Wednesday announced measures to provide medium-term funding for smaller businesses.
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.
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.
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 run of weak retail sales figures continued yesterday, with the release of November's official data.
The INSEE business sentiment data in France continue to tell a story of a robust economy.
The BoJ yesterday published its semi-annual Financial System Report, which often gives insights into the longer-term thinking driving BoJ policy.
The PBoC announced on Saturday that it will publish a new Loan Prime Rate, from today, following a State Council announcement last Friday.
Investors have become more concerned about a no-deal Brexit.
Signs of a slowdown in the labour market data are conspicuously absent.
Argentina's inflation ended 2019 badly, and it is still too early to bet on a protracted downtrend, even after the renewed economic slowdown.
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.
The global economy is heading towards a new scenario, triggered by the impending start of the monetary policy normalization process in the U.S. In some major economies, notably the Eurozone, the Fed's actions will not derail or even jeopardize the cyclical economic upturn.
We would be astonished if the FOMC meeting starting today does not end with a 25bp rate hike.
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.
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.
June's 0.5% month-to-month fall in retail sales volumes does little to change the picture of recent strength.
Officially, China's real GDP growth was unchanged at 6.0% year-over-year in Q4; low by Chinese standards, but not overly worrying. Full-year growth was 6.1% within the 6.0-to-6.1% target down from 6.7% last year, also in keeping with the authorities' long-term poverty reduction goals.
Friday's detailed euro area CPI report for December confirmed that inflation pushed higher at the end of last year. Headline inflation increased to 1.3% year-over- year, from 1.0% in November, lifted primarily by higher energy inflation, rising by 3.4pp, to +0.2%. Inflation in food, alcohol and tobacco also rose, albeit marginally, to 2.1%, from 2.0% in November.
The ECB conformed to expectations today. The main refi rate was left unchanged at 0.00%, and the deposit and marginal lending facility rates also were unchanged, at -0.4% and 0.25% respectively. Similarly, the ECB stuck with the changes to QE made in December. Purchases of €80B per month will continue until March, after which the pace will be reduced to €60B per month and continue until December.
A few ECB governors has attempted to lean against dovish expectations in the past week.
The Japanese government's plan to smooth out the consumption cliff-edge generated by October's sales tax hike is either going too well, or consumers now are facing fundamental headwinds.
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.
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.
January's money and credit data broadly support our view that the economy still lacks momentum.
Eurozone inflation pressures snapped back in April. Friday's advance report showed that headline inflation rose to 1.9% year-over-year, from 1.5% in March, lifted by a jump in the cor e rate to 1.2% from 0.7% the month before.
A sharp ARS sell-off was the key highlight while we were away over the holidays.
The 2010s were the first decade since reliable records begin--in the 1700s--in which a recession was completely avoided
LatAm assets and currencies had a bad November, due to global trade war concerns, the USD rebound and domestic factors.
Opinion polls suggest that the Italian population will reject Prime Minister Matteo Renzi's constitutional reform on Sunday. Undecided voters could still swing it in favour of Mr. Renzi, but the "No" votes have led the "Yes" votes by a steady margin of about 52% to 48% since October.
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.
We expect the BoK to hike this month, believing that it's necessary to curtail household debt growth now, in order to prevent a sharper economic slowdown as the Fed hiking cycle continues, China slows, and trade risks unfold.
The March money and credit figures provide more evidence that the economy's weak start to the year won't be just a blip.
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.
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.
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.
The MPC's "Super Thursday" communications left markets a little more confident that interest rates will rise again in May, shor tly after the likely start of the Brexit transition period.
The MPC 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.
In broad terms, the euro has followed the EZ economy in the past 12-to-18 months.
GDP growth currently is subdued by historical standards, but at least it is not debt-fuelled.
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%.
Polls suggest that Ivan Duque has comfortably beat Gustavo Petro to become Colombia's president.
Barring a disaster, the four-year cyclical upturn in the euro area will continue in the coming quarters. Inflation is a lagging indicator and therefore should rise, and investors should be adjusting their mindset to higher interest rates. But the reality today looks very different. Final inflation data confirmed that the Eurozone inflation slipped to -0.2% year-over-year in February, from 0.2% in January.
Equities in the Eurozone are off to a strong start in Q2, building on their punchy 12% gain in the first quarter.
July's retail sales figures--the first official data for Q3--provided a reassuring signal that consumers can be counted on to drive the economy as the Brexit deadline nears.
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.
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.
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.
The industrial production trajectory in Mexico looked strong going into Q3, but Friday's report for August threatens to change that picture.
China's September imports missed expectations, but commentators and markets tend to focus on the year-over-year numbers.
The New York Times called the China trade agreement reached Friday "half a deal", but that's absurdly generous.
A bad year is threatening to become a catastrophic one for Eurozone equity investors.
It has been clear for some months now that China's housing market is refusing to quit, and July's data showed the phoenix rising strongly from the ashes.
ate last week, China and the U.S. reached an agreement, averting the planned U.S. tariff hikes on Chinese consumer goods that were slated to be imposed on December 15.
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.
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.
Japanese M2 growth slowed sharply in December, to 3.6% year-over-year, from 4.0% in November, with M3 growth weakening similarly. It is tempting to ask if the BoJ's stealth taper finally is damaging broad money growth.
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.
Inflation in the Eurozone jumped in December, and will surge further in Q1 as base effects from last year's crash in oil prices push energy inflation higher. Higher inflation in the U.S. and surging Chinese factory gate prices indicate that this isn't just a Eurozone story.
The BoJ is likely to be thankful next week for a relatively benign environment in which to conduct its monetary policy meeting.
Markets greatly cheered the Conservatives' landslide victory on Friday, but remained cautious on the potential for the MPC to return to the tightening cycle it started in 2017.
The new Argentinian president, Alberto Fernández, will have to make a quick start on the titanic task of cleaning up the economic and social mess left by his predecessor, Mauricio Macri.
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.
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.
Yesterday's second batch of Q3 GDP data in the euro area provided further evidence of a strong and stable cyclical upturn in the economy.
Yesterday's data showed that growth in the EZ slowed in the second quarter.
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.
The MPC chose not to rock the boat yesterday, deferring any reappraisal of the economic outlook until its next meeting in early February.
Eurozone investors should by now be accustomed to direct intervention in private financial markets by policymakers.
Japan's PPI inflation was unchanged, at 3.0%, in August.
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."
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.
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.
Sterling leapt to $1.27, from $1.22 last week, amid some positive signals from all sides engaged in Brexit talks.
Members of the Monetary Policy Committee have signalled that January's flash Markit/CIPS composite PMI, released on Friday 24, will have a major bearing on their policy decision the following week.
China's import growth in dollar terms slowed sharply to 4.5% year-over-year in December from 17.7% in November, significantly below the consensus forecast.
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 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.
The slowdown in households' income growth since the referendum has not pushed up mortgage default rates, so far. Employment grew by just 0.2% quarter-on-quarter in Q3 and 0.1% in Q4, well below the 0.5% average rate seen in the three years before the referendum.
The 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 PBoC has left rates unchanged, so far, in the wake of the Fed hike.
On a headline level, the ECB conformed to expectations yesterday.
Markets' reaction last week to the ECB's October meeting accounts--see here--shows that investors are beginning to take seriously the idea of an inflection point in Eurozone monetary policy.
Industrial data released this week showed that the Mexican economy stumbled during the second quarter. Private consumption, however, continues to rise, albeit at a more modest pace than in recent months. The ANTAD same store sales survey rose 5.3% year-over-year in June, up from 2.8% in May, but this is misleading.
China announced the appointment of key political and financial jobs yesterday.
Swap markets currently price-in RPI inflation falling to 3.0% this time next year, from 3.2% in November, before recovering to 3.8% at the start of 2020.
The 20bp increase in 10-year yields over the past month doesn't live up to the hype; bondmageddon it was not.
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.
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.
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.
The case for the MPC to hold back from implementing more stimulus was bolstered by September's consumer prices figures.
We expect June's consumer prices report, due on Wednesday, to show that CPI inflation fell to 1.9%, from 2.0% in May.
The Eurozone's sovereign bond markets are dying, and this is a good thing, by and large.
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.
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.
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.
Banxico will meet tomorrow, and we expect Mexican policymakers to cut the main interest rate by 25bp, to 7.25%.
We've continuously warned that Japan's national accounts weren't sitting easily with the underlying signals from survey data, and monetary conditions, through last year.
At the end of last year, after October's Party Congress, the Chinese authorities came out with significant new directives and regulations on an almost weekly basis.
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 idea that the ECB will use its forthcoming strategic policy review to include a measure of real estate prices in its inflation target has been consistently brought up by readers in recent meetings.
Inflation pressures in the Eurozone edged lower last month.
The labour market remains healthy enough to persuade the MPC to keep its powder dry over the coming months.
The BoJ is likely to stay on hold this week for all its main policy settings.
The new Argentinian president has started to clean up the mess left by his predecessor, Cristina Fernandez de Kirchner. President Mauricio Macri lifted capital controls, and let the ARS float freely yesterday. The peso tumbled about 30%, getting close to 14 ARS per USD, where it had been trading in the black market. The government also announced that it is on track to receive about USD 12-to-15B, to build up the battered foreign reserves, and to contain any overshooting. This money will come through many channels, for example, grain producers have announced that they will sell about USD400M a day over the coming weeks.
China's money data, out last week, bode ill for real GDP growth in the second half. June M2 growth dipped to 9.4% year-over-year from 9.6% in May and 10.5% in April.
October's retail sales figures confirm that consumers have adopted a more cautious mindset since the summer, when retail sales increased at a faster rate than incomes.
Japan's tertiary index edged up 0.1% month-on-month in July, after the 0.1% decrease in June.
To avoid rocking the 2020 boat, the Phase One trade deal needed to be sufficiently vague, so that neither side, and particularly Mr. Trump, would have much cause to kick up a fuss around missed targets.
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.
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.
The Brexit-related slump in corporate confidence finally has taken its toll on hiring.
China's official real GDP growth likely slowed to 6.0% year-over-year in Q3, from 6.2% in Q2.
Consumers' spending has staged an impressive recovery in the Eurozone, and remains the key driver of accelerating GDP growth. Outside Germany, however, households have struggled, and are still faced with tight credit conditions.
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.
Official industrial production growth in China plunged to 5.4% year-over-year in April, from 8.5% in March.
China's activity data outperformed expectations in November.
China's March money and credit data, published last Friday, showed that conditions continue to tighten, posing a threat to GDP growth this year.
Over the past 30 years China's role in LatAm and the global economy has increased sharply. Its share of world trade has surged, and its exports have gained significant market share in LatAm.
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.
The consensus forecast for a 0.6% month-to month rise in retail sales volumes in December--data released today--is far too timid.
Friday' second Q4 GDP estimate revealed that the EZ economy barely grew at the end of 2019. The report confirmed that GDP rose by 0.1% quarter-on-quarter in Q4, slowing from a 0.3% rise in Q3, but the headline only narrowly avoided downward revision to zero, at just 0.058%
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.
Data on air quality in China provide some useful insights into the economic disruptions--or lack thereof--caused by the outbreak of the coronavirus from Wuhan and the government's aggressive containment measures.
This week brings the third anniversary of the first rate hike in this cycle, on December 16, 2015.
The U.S. household sector carries substantial gross debts, even after the sustained deleveraging since the crash of 2008. The gross debt-to-income ratio stood at 105.3% in the second quarter of this year, down from the 135% peak in late 2007 but still well above the 88% average recorded in the 1990s, which was not a decade of restraint on the part of consumers.
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.
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.
Chile and Peru faced similar growth trends in 2018, namely, a solid first half, followed by a poor second half, particularly Q3.
The economic calendar in the euro area was relatively quiet over Christmas, and broadly conformed to our expectations.
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 Colombian economy--the star of the previous economic cycle in LatAm--is now slowing significantly, due mostly to strong external headwinds. Exports plunged by 40% year-over-year in January, down from -29% in December, with all of the main categories contracting in the worst performance since 1980.
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.
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 rapid fall in CPI inflation over the last two months challenges the MPC's view that sterling's 2016 depreciation will keep inflation above the 2% target for the next three years, and greatly undermines the case for another interest rate increase in May.
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.
Recent inflation numbers across LatAm have surprised, in both directions. On the upside, Brazil's IPCA index rose 0.2% month-to-month in September, above the market consensus forecast of 0.1%.
While we were out, Brazil's economic and political situation continued to improve, allowing the BCB to cut the Selic rate by 100bp to 9.25% at its July 26th meeting, matching expectations.
Three of the big LatAm economies-- Brazil, Colombia and Chile--released October inflation last week; the data are still showing the pass-through effects of currency depreciation during the first half of the year into prices, though, at different degrees. LatAm currencies have been hit by the weakness in commodity prices and negative sentiment towards EM generally.
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.
EM risk sentiment remains grim as the Trump administration dispenses protectionist trade measures. LatAm's biggest economies, Brazil and Mexico, have been hit the hardest, with their currencies falling 3.3% and 2.2% respectively in the last week, the most in the EM world.
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.
China's FX reserves continued to climb in December, reaching $3.140T, up from $3.119T in November, with currency valuation effects negligible.
Investors have been used to central bank policy as a source of low volatility in recent years, but the last six months' events have changed that. Uncertainty over the timing of Fed policy changes this year, an ECB facing political obstacles to fight deflation, and last week's dramatic decision by the SNB to scrap the euro peg have significantly contributed to rising discomfort for markets since the middle of last year.
We doubt that this week will see the MPC joining the list of other major central banks that have abandoned plans to raise interest rates this year.
The June Banxico minutes restated that the U.S Fed's first interest rate increase is the main event awaited by Mexican central bank. Banxico's five member board of governors voted unanimously on June 4th to keep the overnight lending rate target at a record-low 3%, but showed again that board members are fretting over when to hike, as at previous meetings.
The ECB moved ahead of the curve this month with its QE program of €60B per month, starting in March. But still-abysmal inflation data will prompt journalists to ask Mr. Draghi, at the next ECB meeting, about the conditions under which the central bank plans to do more.
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.
Brazil's central bank again matched expectations on Wednesday, cutting the Selic rate by 100 basis points to 10.25%, without bias. The COPOM s aid that a "moderate reduction of the pace of monetary easing" would be "adequate".
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.
Mexico's central bank, Banxico, last night capitulated again, reacting to the depreciation of the MXN by increasing interest rates by 50bp--for the fourth time this year--to 5.25%.
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.
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.
With Russia and some other emerging economies now in full panic mode, the financial market story is sharply divided between two narratives. Either the plunge in global energy prices acts as positive catalyst by boosting real incomes and allowing most central banks to run easier monetary policy or it is a sign that risk assets are about to hit a deflationary wall.
Comments by Mr. Draghi in Washington last week point to a high bar for an adjustment to the QE program. The ECB president noted that while asset purchases and negative interest rates have driven a notable improvement in confidence and asset prices, the real key to the central bank's policies' success is a lasting boost to investment, consumption and inflation.
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.
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.
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.
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.
Commodity prices have started the year under further downward pressure. This is yet more negative news for LatAm, as most of the countries have failed to diversify, instead relying on oil or copper for a large share of exports and, critically, tax revenue. Venezuela is the biggest loser in the region from the oil hit, and, together with the worsening political and economic crisis, it has pushed the country even closer to the verge of collapse, threatening its debt payments. Venezuela's central bank last week released economic data for the first time since 2014, showing that inflation spiralled to 141% and that the economy shrank 4.5% in the first nine months of last year.
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.
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.
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.
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."
For countries with developed non-banking funding channels, narrow money isn't necessarily a good predictor of GDP growth.
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.
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".
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.
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.
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.
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.
We don't expect any major policy announcements at today's ECB meeting. We think the central bank will keep its main refinancing rate unchanged at 0.0%, and we expect the deposit and marginal lending facility rates to remain at -0.4% and 0.25%, respectively.
Mr. Draghi's speech to the European Banking Congress on Friday--see here--was a timely reminder to markets that the ECB is in no hurry to make any changes to its policy setting.
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.
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.
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 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.
EZ bond markets were stung earlier this week by a Bloomberg story suggesting that the ECB, in principle, has agreed on a QE exit strategy which involves "tapering" purchases by €10B per month. The story also specified, though, that the central bank has not discussed when tapering will begin.
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.
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.
We don't know how Europe will look on Monday. If European officials are to be believed, Greece will either have agreed to bail-out terms to keep it inside the Eurozone, or it will be on its way out. "Deadlines" have come and gone for Greece, but this time really is different, because the banks are bust without further support from the ECB, and that will not be forthcoming without a bail-out deal.
Yesterday's CPI report in Mexico showed that inflation pressures are rising consistently. Headline inflation rose to 3.4% year-over-year in December, from 3.3% in November, above the mid-point of the central bank's 2-to-4% target range. Surging goods inflation and higher services prices--especially seasonal increases for package holidays and airline fares--were mainly to blame.
Chief Eurozone Economist Claus Vistesen on Latvia
Pantheon Macroeconomics Founder and Chief Economist Ian Shepherdson discusses his outlook for the economy, equities and European banks. He speaks on "Bloomberg Surveillance."
Chief U.K. Economist Samuel Tombs on U.K. Inflation
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
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
Chia faces a u-shaped recovery..Japan's domestic demand strentgh is fragile...The bank of Korea is likely to pause, for now...Expect a respectable Q2 GDP rebound in India
November's money and credit figures brought welcome news that the recovery in bank lending is strengthening. This revival should continue, now that banks have completed most of the work required to improve their capital positions. But we doubt lending will recover quickly enough to prevent the economic recovery slowing in 2016, as the downward pressure on growth from the fiscal squeeze and the strong pound builds.
The MPC talks up raising bank rate soon...but weak wage growth likely will mean it hesitates
The last few weeks' action in Eurozone financial markets has shown investors that the QE trade is not a one-way street. Higher short-rates could force the ECB to take preventive measures, but we don't think the central bank will be worried about rising long rates unless they shoot much higher.
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 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.
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.
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.
February's COPOM meeting minutes again signalled that Brazil's central bank will stick with its cautious approach to monetary policy.
Mexico's central bank last week left its policy rate at 7.0%, the highest level since early 2009.
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.
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.
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.
Pedro Kuczynski, the centre-right candidate of the Peruvians for Change party, won the presidential election held in June 5th. Mr. Kuczynski, a former finance minister and World Bank economist, defeated Ms. Keiko Fujimori, the candidate of the conservative Fuerza Popular party, and the daughter of jailed former leader Alberto Fujimori. Mr. Kuczynski's margin of victory over Ms. Fujimori was fewer than 43K votes, or just 0.2%.
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.
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.
Friday's weekly report on the assets and liabilities of U.S. commercial banks will complete the picture or March and, hence, the first quarter. It won't be pretty. With most of the March data already released, a month-to-month decline in lending to commercial and industrial companies of about 0.7% is a done deal. That would be the biggest drop since May 2010, and it would complete a 1% annualized fall for the first quarter, the worst performance since Q3 2010. The year-over-year rate of growth slowed to just 5.0% in Q1, from 8.0% in the fourth quarter and 10.3% in the first quarter of last year.
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 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.
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.
It's hard for a central bank presiding over an ageing economy to achieve a core inflation target of close to 2%. In yesterday's Monitor, we showed that German core inflation has averaged a modest 1.3% in this business cycle, despite solid GDP growth. The picture isn't much better for the ECB if we look at France.
Lending conditions in the EZ economy continued to improve in Q1, according to the ECB's bank lending survey. Business and consumer credit supply conditions eased, but mortgage lending became more difficult to come by as standards tightened sharply in Germany, France, and the Netherlands. Demand for new loans also rose, but the increase was due entirely to gains in the mortgage and consumer credit components.
The dovish message from the ECB going into today's final meeting of the year has intensified. Mr. Draghi's comments last month, at the European Banking Congress in Frankfurt, point to an increased worry on low core inflation.
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 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.
On all accounts, the ECB announced a significant addition to its stimulus program yesterday. The central bank cut the deposit rate by 0.1%, to -0.3%, and extended the duration of QE until March 2017. The ECB also increased the scope of eligible assets to include regional and local government debt; decided to re-invest principal bond payments; and affirmed its commitment to long-term refinancing operations in the financial sector for as long as necessary. The measures were not agreed upon unanimously, but the majority was, according to Mr. Draghi, "very large".
Mr. Draghi struck a dovish tone yesterday, despite the new ECB staff projections upgrading the inflation forecast this year to an average of 0.3%, up from the zero predicted in March. The president reiterated that the central bank's expectation of a gradual improvement in inflation and real GDP growth is conditional on the full implementation of QE.
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.
The ECB left its key interest rates unchanged yesterday, and maintained the pace of QE at €60B a month, but increased the issue limit to 33% from 25%. The updated staff projections revealed a downward adjustment of the central bank's inflation and growth forecasts across all horizons up to 2017. These forecasts were accompanied by a very dovish introductory statement, noting disappointment with the pace of the cyclical recovery, and emphasizing renewed downside risks to the economy and the inflation outlook.
Mexico's central bank left its main interest rate unchanged last week, citing the need for cautious monetary policy as the economy has lost some momentum during the first months of the year, despite the risk of inflation pass-though effects from the weaker MXN.
The minutes from Banxico's August 11 monetary policy meeting--in which Board members unanimously voted to keep rates on hold at 4.25%--confirmed that the bank's policy guidance remains broadly neutral. Subdued economic activity, favourable inflation and gradual fiscal consolidation explain policymakers' position.
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.
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.
In yesterday's Monitor, we laid out the macroeconomic case for moderately higher inflation in the second half of the year. But subdued market based inflation expectations indicate that the ECB will retain its dovish bias for now. The central bank's preferred measure, 5-year/5-year forward inflation expectations, have only increased modestly in response to QE, and have even declined recently on the back of higher market volatility.
Mixed comments last week by members of the governing council raised doubts over the ECB's resolve to add further stimulus next month. But the message from senior figures and Mr. Draghi remains that the Central Bank intends to "re-assess" its monetary policy tools in December. Our main reading of last month's meeting is that Mr. Draghi effectively pre-committed to further easing. This raises downside risks in the event of no action, but the President normally doesn't disappoint the market in these instances.
While we were enjoying a rare sunny bank holiday in the U.K., data showed that Eurozone money supply growth slowed at the start of Q3. Broad money growth--M3--fell to a 10-month low of 4.5% year-over- year in July, from 5.0% in August.
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.
The MXN came under pressure last week as news broke that Banxico Governor Agustin Carstens plans to resign next year. Mr. Carstens has led the bank since 2010; during his term, Banxico cut interest rates to record low levels and managed to keep inflation under control.
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.
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.
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.
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.
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.
In one line: No case for cutting Bank Rate based on the outlook for inflation.
Japan's CPI inflation has troughed; Japan's budget forecasts for next year are on the rosy side; China's LPR stability reflects precarious banking sector; Korea should make a complete exit from PPI deflation this month
We planned to write today about the rebound in housing market activity over the past few months, arguing that it is about to run out of steam in the face of the recent flat trend in mortgage applications. The Mortgage Bankers Associations' purchase applications index rocketed in the spring, but then moved in a narrow range from mid-April through late September. Then, out of the blue, the MBA reported a 27% leap in applications in the week ended October 2, taking the index to its highest level in more than five years.
Tomorrow, Mexico's INEGI will release its inflation report for the second half of May, which is of key importance for Banxico's monetary policy. The Bank, in particular governor Agustin Carstens, has said on many occasions that it will watch external conditions and their impact on consumer prices closely. We expect inflation to edge down to 2.9% year-over-year in May, thanks to a 0.1% increase in the second half.
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.
The ECB held fire yesterday. The central bank kept its main refinancing rate unchanged at 0.0%, and also maintained the deposit and marginal lending facility rates at -0.4% and 0.25% respectively.
EZ investors hoping for a quiet session yesterday due to the U.K. bank holiday were left disappointed.
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.
One of the main reasons we expect the Reserve Bank of India to roll back at least one of this year's rate cuts before the end of the year is the likely further rise in food inflation.
Divergence between central banks and the reach for yield will remain dominant themes for Eurozone fixed income markets next year, but a lot has already been priced in.
Eurozone September CPI data this week will show that inflation pressures remain weak, appearing to support the ECB's focus on downside risks. We think Eurozone inflation--data released Wednesday-- rose slightly to 0.2% year-over-year in September from 0.1% in August, as core inflation edged higher, offsetting weak energy prices. Looking ahead, structural inflation pressures will keep inflation well below the central bank's 2% target for a considerable period.
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.
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%.
Robust demand in the ECB's final TLTRO auction was the main story in EZ financial markets yesterday. Euro area banks--474 in total-- took up €233.5B in the March TLTRO, well above the consensus forecast €110B. To us, this strong demand is a sign that EZ banks are taking advantage of the TLTROs' incredibly generous conditions.
On the face of it, the trend in public borrowing deteriorated sharply late last year. In the three months to December, borrowing on the main "PSNB ex ." measure, which excludes banks owned by the public sector, was a trivial £0.3B, or 1.6%, lower than in the same months of 2017.
Progress in reducing the budget deficit has ground to a virtual halt, despite the ongoing fiscal consolidation. Public sector net borrowing excluding public sector banks--PSNB ex.--was £10.6B in September, exceeding the £9.3B borrowed in the same month last year.
Markets are trading like Emmanuel Macron has already moved into the Élysée Palace. Eurozone equities soared at the open yesterday, lead by the French banks, 10-year yields in France plunged, and the euro jumped. This makes sense given the signal from the polls. They were correct in their prediction of Mr. Macron's victory on Sunday, and they have been consistently forecasting that he will comfortably beat Mrs. Le Pen in the runoff.
The PBoC cut the reserve requirement ratio by 0.5pp for almost all banks on Sunday, effective from July 5th.
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.
In recent weeks Brazilian central bank officials have reinforced their message that they will continue fighting inflation with "determination and perseverance". CPI inflation is failing to subside, at least at the headline level, where the latest readings are very disappointing, and expectations have remained stubbornly high. And the BRL has fallen 13% year-to-date, posing further inflation threats ahead. All these factors mean that the BCB will increase its main interest rate yet again in July.
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.
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 ECB held fire yesterday and kept its main refinancing and deposit rates unchanged at 0.0% and -0.4%, respectively. The central bank also left the pace of monthly asset purchases unchanged at €80B. The introductory statement overall confirmed the central bank's dovish stance.
Investors will get what they want today from the ECB: additional easing in the form of government bond purchases. The central bank is likely to announce or pre-commit to sovereign QE and corporate bond purchases in a new program that will last at least two years.
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.
Recent economic weakness in Brazil, particularly in the labor market, has strengthened our view that the central bank is close to the end of its painful, but necessary, tightening cycle. We expect the BCB to increase its policy rate by 50bp to 14.25% at next week's monetary policy meeting, and then leave the rate on hold for the foreseeable future.
Yesterday's ECB meeting provided no immediate relief to nervous investors. The central bank kept its main interest rates unchanged, and maintained the pace of QE purchases at €60B per month. Mr. Draghi compensated for the lack of action, however, by hinting heavily at further easing at its next meeting. The president emphasized that the ECB's policies will be "reviewed and reconsidered" in light of the March update to the staff projections. Mr. Draghi also admitted that inflation has been "weaker than expected" since the last meeting, and that downside risks have increased further. The central bank does not pre-commit, but we think it is a good bet that the ECB will do more in March.
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.
Mr. Draghi gave one of his most dovish performances to date yesterday. The central bank kept its main interest rates and the pace of QE unchanged, but reiterated that risks to growth and inflation are tilted to the downside. The president noted further that the existing policies will be "reexamined" in December in light of updated staff projections. It is difficult to see how the downbeat assessment on the economy will change materially from now until December, indicating that further stimulus is likely.
The Eurozone is on the brink of its first exit this week after the ECB refused to offer incremental emergency liquidity to Greek banks, forcing the start of bank holiday through July 7--two days after next weekend's referendum--and beginning today. We have no doubt that if the banks were to open, they would soon be bust; bank runs have a habit of accelerating beyond the point of no return very quickly.
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.
The ECB's statement following the panic on Friday was brief and offered few details. The central bank said that it is closely monitoring markets, and that it is ready to provide additional liquidity in both euros and foreign currency, if needed. It also said that it is in close coordination with other central banks.
Guo Shuqing, head of the newly formed China Banking and Insurance Regulatory Commission, has been named as Party Secretary for the PBoC.
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.
Yesterday's ECB meeting painted a picture of a central bank in wait-and-see mode. The main refinancing and deposit rates were kept at 0.00% and -0.4% respectively, and the marginal lending facility rate also was unchanged at 0.25%.
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.
The ECB conformed to our expectations yesterday. The central bank left its main interest rate unchanged, and reiterated its expectation that QE will be wound down via a three-month taper in Q4.
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.
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.
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.
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.
Mr. Draghi used his introductory statement at the ECON--EU Economic and Monetary Affairs Committee-- hearing last week to assure investors that the central bank is vigilant to downside risks. The president noted the governing council "would not hesitate to act" if it deems growth and inflation to be undershooting expectations. Market volatility has increased the ECB's worries, but economic data continue to tell a story of a firm business cycle upturn.
Eurozone investors continue to look to the ECB as the main reason to justify a constructive stance on the equity market. Last week, the central bank all but promised additional easing in March, but the soothing words by Mr. Draghi have, so far, given only a limited lift to equities. Easy monetary policy has partly been offset by external risks, in the form of fears over slow growth in China, and the risk of low oil prices sparking a wave of corporate defaults. But uncertainty over earnings is another story we frequently hear from disappointed equity investors. We continue to think that QE and ZIRP offer powerful support for equity valuations in the Eurozone, but weak earnings are a key missing link in the story.
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.
Samuel Tombs has more than a decade of experience covering the U.K. economy for investors. At Pantheon, Samuel's research is rigorous, free of dogma and jargon, and unafraid to challenge consensus views. His work focuses on what matters to professional investors: The links between the real economy, monetary policy and asset prices. He has a strong track record of getting the big calls right. The Sunday Times ranked Samuel as the most accurate forecaster of the U.K. economy in both 2014 and 2018. In addition, Bloomberg consistently has ranked Samuel as one of the top three U.K. forecasters, out of pool of 35 economists, throughout 2018 and 2019. His in-depth knowledge of market-moving data and his forensic forecasting approach explain why he consistently beats the consensus. Samuel's work on Brexit goes beyond simply reporting developments and is always analytical and unbiased, enabling investors to see through the noise of the daily headlines. While his analysis points to a particular path that politicians will take, he acknowledges the inherent uncertainty and draws out the economic and financial market implications of all plausible Brexit scenarios. Samuel holds an MSc in Economics from Birkbeck College, University of London and an undergraduate degree in History and Economics from the University of Oxford. Prior to joining Pantheon in 2015, he was Senior U.K. Economist at Capital Economics. In 2011, Samuel won the Society of Business Economists' prestigious Rybczynski Prize for an article on quantitative easing in the UK. He is based in London but frequently visits our other offices. Recent key calls include: 2018 - Correctly forecast that GDP growth would slow and inflation would undershoot the MPC's initial forecast, prompting the Committee to shock investors and almost other economists by waiting until August to raise Bank Rate, rather than pressing ahead in May. 2017 - Argued that the MPC was wrong to expect CPI inflation to stay below 3% following sterling's depreciation. He also highlighted that economic indicators pointed to the Conservatives losing their outright majority in the snap general election.
Ian Shepherdson's mission is to present complex economic ideas in a clear, understandable and actionable manner to financial market professionals. He has worked in and around financial markets for more than 20 years, developing a strong sense for what is important to investors, traders, salespeople and risk managers.
Early results project that Andrés Manuel López Obrador--AMLO--will become the new Mexican president with 53.4% of the votes, against Ricardo Anaya's 22.6%, and José Antonio Meade's 15.7%. AMLO has declared victory and thanked his opponents, who recognized his triumph.
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, analyses the latest monetary policy moves from the Bank of Japan.
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.
Freya Beamish, chief Asia economist at Pantheon Macroeconomics, analyses the latest monetary policy moves from the Bank of Japan.
Ian Shepherdson, Pantheon Macroeconomics, provides insight to the European Central Bank's path and whether to expect Mario Draghi to announce additional stimulus.
The Chancellor is likely to announce plans for additional public sector asset sales in today's Autumn Statement, to help arrest the unanticipated rise in the debt-to-GDP ratio this year. But privatisations rarely improve the underlying health of the public finances, partly because assets seldom are sold for their full value. And the Chancellor is running out of viable assets to privatise; the low-hanging, juiciest fruits have already been plucked.
Two fiscal deadlines are on the near-horizon.
Senior LatAm Economist Andres Abadia on Colombia
Miguel Chanco on India Inflation
Chief U.K. Economist Samuel Tombs on U.K. Inflation
Chief U.K. Economist Samuel Tombs on Pay Growth and Unemployment
Samuel Tombs discussing the U.K. Monetary Policy
The U.S. housing market stumbled into 2015 as a leading indicator of home sales dipped in December
Chief U.K. Economist Samuel Tombs on U.K. Manufacturing
Chief Eurozone Economist Claus Vistesen on Eurozone GDP
Samuel Tombs discussing U.K. Inflation
Chief U.K. Economist Samuel Tombs on U.K. Mortgage Approvals
Ian Shepherdson on the U.K
Chief Eurozone Economist Claus Vistesen comments on ECB speech changes
Chief U.K. Economist Samuel Tombs on U.K. Mortgage approvals
Andres Abadia on Chile GDP
Ian Shepherdson discussing the FOMC
Claus Vistesen on the Greek election results impact on the Eurozone
US home prices rose in November from October but the underlying trend continued to point to a slowdown in price gains, according to the S&P/Case-Shiller index released Tuesday
Chief U.K. Economist Samuel Tombs on U.K. Inflation
Pantheon Macroeconomics' Chief Economist Dr. Ian Shepherdson provides unbiased, independent economic intelligence to financial market professionals.
Freya Beamish produces the Asia service at Pantheon. She has several years of experience in covering the global economy, with a particular focus on China, Japan and Korea. Previously, she worked at Lombard Street Research (now TS Lombard), where she delivered research on Asia and the Global economy for over five years, latterly as the manager of the Macroeconomics group.
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