50 bps Hikes for Both the ECB and the Bank of England
Economic news and commentary for February 2, 2023
ECB Announcement
The ECB raises its three key interest rates by 50 bps in February and "expects to raise them further" according to its announcement released earlier today. This includes "another 50 bps" in March then the Governing Council will continue to “evaluate the subsequent path of its monetary policy.” Though this move was expected, it is somewhat surprising to see such a hawkish ECB since its positioning over the last few years has been the stark opposite. But this change isn’t for nothing, instead, it has a tough inflation fight ahead of it which is why it also decided to reduce the size of its asset purchase program (APP). The ECB outlined the details of its APP portfolio reduction plan for the next three months. Specifically, the APP portfolio will be drawn down by €15 billion per month on average from March to June 2023 then the pace of reduction will be reconsidered. Just like the Fed, the ECB is clearly communicating the message that the job is not done yet. However, the task is more difficult in Europe. Inflation has started to recede but recent country-specific releases (Spanish and Italian CPIs) have suggested there might be more stickiness than desired despite growth having already slowed to near 0%. With a recession expected in Europe this year, it will be difficult to toe the line on policy, especially if headline inflation tanks in the first two months of the year. “Data dependence” certainly does give the ECB the right to pause after the 50 bps it guided for March, but for now, it seems that hawkishness is the message.
Bank of England Announcement
The Bank of England (BoE) increased its policy Bank Rate by 50 bps to 4% by a vote of 7-2 in its February meeting as it continues to seek to resolve the cost of living crisis in the UK. The Monetary Policy Committee (MPC) admits in its press release that it has been surprised by the persistence of inflation, saying that "UK domestic inflationary pressures have been firmer than expected” and pointing out that wage growth and services prices have been the causes of the upside surprise. Regardless, it still sees a sharp drop in inflation in 2023 towards the 4% level. Accompanied by that is a more optimistic outlook for growth than what was put out in November. In particular, GDP growth in Q1 2023 is expected to be around -0.3% QoQ, up from -0.6% QoQ in the November projections, and GDP growth in Q1 2024 is expected to be around -0.7% QoQ, much higher than the previous forecast of -2.0% QoQ. These upward revisions are part of the BoE’s acknowledgment that the labor market is proving to be stronger than expected. Though with the effects of rate hikes eventually materializing, the unemployment rate is set to eventually rise, to “around 5.25% in the medium term.’ In the end, there is no assertion that further hikes are coming. Instead, the MPC has moved into an observational period where it will “continue to monitor closely indications of persistent inflationary pressures” and “adjust Bank Rate as necessary.”
US Productivity and Costs
US labor productivity grew 3.0% QoQ in Q4 2022 but was still down -1.5% YoY. The increase was due to a surge in output of 3.5% QoQ while hours worked grew just 0.5% QoQ. The focus of this report will be on unit labor costs which is derived from total labor productivity, up 3.0% QoQ, and the corresponding increase in hourly compensation, up 4.1% QoQ. The difference is at a 1.1% QoQ annualized rate increase in unit labor costs which is a significant slowdown from previous quarters (Q3 at 2.0% QoQ, Q2 at 6.7% QoQ). It is worth noting that the pace of hourly compensation growth did see an acceleration, from 3.4% QoQ in Q3 to 4.1% QoQ, but an increase in productivity offset the gains. Nevertheless, the output of the business sector is set to decline in the coming months as the economy slows in response to interest rates. It will be important to see a decline in the pace of hourly compensation growth to keep unit labor costs growth from expanding, but if labor shortages remain, this may be more of a hope than anything.
Still to come…
10:00 am (EST) - US Factory Orders
10:30 am - US EIA Natural Gas Report
4:30 pm - US Fed Balance Sheet
Morning Reading List
Other Data Releases Today
Germany's trade balance was €10.0 billion in December, down from €10.9 billion in November. Exports fell -6.3% MoM, and imports fell 6.1% MoM. The decline in trade was most likely due to a major cooling in prices across all trading partners.
The euro area composite cost-of-borrowing indicator for new loans to corporations jumped 30 bps to 3.41% and for new loans to households for home purchase rose 5 bps to 2.94%.
US firms announced 103k job cuts in January, up 136% MoM from 44k in December. This is the highest number of cuts announced in January since 2009 when 242k jobs were cut. Tech announced the most cuts at 42k or 41% of all January cuts.
Jobless claims fell -3k to 183k last week. The insured unemployment rate was unchanged at 1.1%. Continued claims fell -11k to 1.66 million.
Federal Reserve Announcement
FOMC Review: Staying With The Game Plan (Nordea) - The FOMC raised the Fed funds target range by 25bp to 4.50-4.75% and acknowledged some progress in the battle against inflation, but signalled that further increases are needed to bring inflation back to 2%. A rate in the range 5.00-5.25% is in sight.
The Fed opts for a 25bp rate rise, with at least one more hike to come (ING) - The Federal Reserve raised its policy rate range 25bp to 4.5-4.75% and indicated it isn’t finished yet. With the economy losing momentum, the jobs market showing tentative signs of cooling and inflation on a downward path, we expect one final 25bp hike in March. Recessionary forces will then make the case for rate cuts later in the year.
Research US - Fed review: Powell sees a higher chance of a soft landing (Danske Bank) - Fed hiked rates by 25bp as widely expected. Powell saw probability of soft landing increasing, as inflation has eased without the economy slowing markedly. The persistently tight labour and the turnaround in global manufacturing cycle leave Fed little room to turn more dovish. We still expect 2x25bp hikes in the March and May meetings.
US | Fed slows to 25bp hike and recognizes that “the disinflationary process has started” (BBVA) - As expected, the Fed kicked off the year by downshifting again its tightening pace with a 25bp hike, pushing the fed funds rate into a 4.50-4.75% target range, its highest level since late 2007 when the Fed made the first rate cut amid the outbreak of the global financial crisis.
Fed Seeks to Balance Competing Risks (PIMCO) - At its first meeting of 2023, the U.S. Federal Reserve (Fed) faced competing priorities: how to acknowledge the progress made on inflation – and signal that rate hikes won’t go on forever – while still maintaining a sufficiently restrictive stance of monetary policy as measured across a broad range of assets.
Further Downshift for the Fed (NAHB) - Further downshifting its pace of tightening of monetary policy, the Federal Reserve’s monetary policy committee raised the federal funds target rate by 25 basis points, increasing that target to an upper bound of 4.75%. This marked a smaller increase after four previous 75 basis point hikes and a decelerated 50 basis point increase last December. While not the end of tight monetary policy, the end of tightening is in sight, with a final 25 basis point increase expected in March.
Slowing, Not Stopping (First Trust Portfolios) - The Fed downshifted to a smaller rate hike to start 2023, but the job is far from done. As expected, the Fed raised rates by 25 basis points (bp) today, slowing from the 50bp hike in December, and the 75bp hikes at the four meetings before that. However, the Fed continued to reiterate that ongoing tightening is warranted and repeated the view that the risk to doing too little is greater than the risk of doing too much.
FOMC Policy Announcement — Fed Bending to Ending (BMO) - As expected, the FOMC raised policy rates by 25 bps today, lifting the target range for the fed funds rate to 4½%-to-4¾%. This is the highest level in 15 years and caps the largest cumulative rate hike (450 bps) since the Fed began targeting fed funds in the 1980s. Reining in the tightening tempo from 50 bps in December and a quartet of 75 bp actions before then, the big question is: How many more 25 bp moves should we be expecting before an eventual pause?
FOMC Announcement (CIBC) - While that was, if anything, a hawkish statement, Powell muddied the waters so much in his press conference that yields ended up lower. That's despite the fact that the market was already pricing in rate cuts in the back half of the year, and Powell expressed his personal view that he did not see that happening.
FOMC hikes policy rate by 25 basis points, signals more to come (TD Bank) - The Fed has once again slowed the pace of rate hikes as it attempts to digest the evolution of incoming economic data. With sentiment measures falling and consumer spending starting to slow, momentum points to economic weakness in the months ahead. At the same time, inflation has continued to improve. Given the current pace, core PCE inflation is likely to trend below 3% by the second half of this year.
FOMC Raises Target a Quarter-Point, Believes There’s More Work to be Done (HilltopSecurities) - Any debates over how fast to raise rates have now been replaced by a debate about how far to raise rates, which will eventually be supplanted by debate over how long to keep rates at their peak.
Inflation Has Eased Somewhat, but There is Still Work to be Done (MTS Insights) - The Federal Reserve increased the target range of the Fed funds rate by 25 basis points to 4.5-4.75% in what many believe will be the second to last rate hike of this hiking cycle. This size was pretty much priced in by markets, and recent economic data had done little to sway the opinions of investors and Fed officials alike.
FX Daily: A more relaxed Fed powers the rally (ING) - The dollar has broken to new lows for the year after a relaxed-sounding Fed Chair Powell said there were the first clear signs of disinflation. He also failed to push back too aggressively on lower bond yields. Attention turns to Europe, with rate meetings in the eurozone, the UK, and the Czech Republic. Expect European FX to remain bid and the dollar offered.
ISM Manufacturing
ISM shows U.S. manufacturing sector contracted for a third month in a row (TD Bank) - Further manufacturing weakness came as no surprise as the momentum from slowing consumer goods demand continues to feed through to producers. The combination of changing preferences and higher financing costs have weighed on new orders as they have now contracted in six of the past seven months.
Factories Falter Further (BMO) - U.S. manufacturing production continues to rapidly lose steam, falling deeper into contractionary terrain. Meanwhile, labour market conditions remain tight, bolstering expectations that rates will stay restrictive for some time.
ISM: Third Straight Month of Contraction in Manufacturing (Wells Fargo) - Today's ISM report is a pitch-perfect match for the mood music leading up to today's Federal Reserve meeting. The ISM index fell for a fifth straight month; the past three below 50. Yet even as orders dry up and production contracts, some parts of manufacturing still thrive.
JOLTS
Suspect December JOLTS (Wells Fargo) - December's sharp rise in job openings in December looks at odds with other data signaling labor demand has rolled over. Openings jumped by 572K to 11.0 million, the highest level since July. However, the increase was narrowly concentrated in industries where deteriorating demand may be giving employers cold feet about filling open positions, or seasonal factors were particularly flattering. A slightly worse mix of separations, with quits edging down and layoffs ticking up, suggests the labor market continues to gradually cool.
Uptick for Construction Job Openings in December (NAHB) - The count of open, unfilled jobs for the overall economy increased in December, rising to 11 million, the highest level since July. This was a surprise rise, as noted by many analysts, particularly given a growing chorus of corporate hiring freezes and job cuts. For now, the December data appears to be more noise than signal, although certainly that conclusion could reverse given data for January.
US slowdown continues, which will hit jobs (ING) - Financial markets continue to price interest rate cuts later this year despite the Federal Reserve’s pushback. The labour market looks to be key in determining who will be correct, with Friday’s jobs report a critical piece of the jigsaw. A slowdown is coming and like the market, we expect the Fed to reverse course.
Euro Area Inflation
Euro-area flash inflation: Delayed (Nordea) - Euro-area flash inflation dropped in January, but the number was put together without the actual German numbers and we would not put as much value to this release as usually.
Europe
EUR rates: What goes up... may stay high (Nordea) - Market pricing is very different from December going into the ECB meeting. Risks now look skewed to the downside in the near term with 125bp priced for the next three ECB meetings. Further out is different with rate cuts still priced quite early.
Spanish tourism rebounded last year but still lagged pre-Covid levels (ING) - Spanish tourism experienced a solid recovery last year although the number of visitors was still only 86% of pre-Covid levels. A further recovery will support Spanish growth in 2023.
Spain | Positive start to the year for employment (BBVA) - Social Security affiliation fell in January due to negative seasonality (215,000) and unemployment increased (70,700). Excluding this factor, it is estimated that the number of affiliated workers increased by 47,000 and the number of unemployed by 6,000, while temporary employment fell (53.2%).
Dutch industry goes from top gear into reverse (ING) - High prices and stagnating demand are causing a turnaround in the Dutch industry. After two years of strong growth, increasing headwinds lead to a moderate correction in output in 2023. However, developments differ strongly between industrial subsectors.
Australia
Confidence down with constraints remaining tight (NAB) - Business confidence fell considerably in Q4 as concerns about global and domestic economic growth mounted. Still, business conditions remained strong, albeit easing from the highs seen in Q3. The easing in conditions was evident across industries and states, but all remained in positive territory.
Inflation
Falling energy prices mark the start of a New Lunar Year for commodity markets (S&P Global) - Our Material Price Index (MPI) fell 2% last week. Only three of the ten subcomponents fell, but most increases were marginal. The MPI sits 13% lower year on year (y/y). Prices, however, remain far higher (45%) than the pre-pandemic levels of the fourth quarter 2019.
South Korea: Consumer inflation accelerated again in January (ING) - Due to a cold snap, utility bills and fresh food prices rose more than expected in January. This could strengthen the Bank of Korea's tightening stance. But we still think that the BoK will stay put at its February meeting and monitor price changes in the coming months.
Commodities
Coffee and sugar surge see softs on top in January (Saxo Bank) - While copper and gold, stole much of the attention last month, a late surge in coffee and sugar helped drive the BCOM Softs Index to an 8.6% gain, driven by weather related supply worries and excessive speculative short positioning being forced to take cover
Outlook
Latin America Faces Slowing Growth and High Inflation Amid Social Tensions (IMF) - Restoring macro stability and boosting growth will require carefully-crafted policies that will help mitigate discontent.
Real Estate
Unaffordable Prices Are Back on Top as Most Common Reason Buyers Can’t Make Purchase (NAHB) - An earlier post revealed that 65% of buyers who were actively engaged in the process of finding a home in the fourth quarter of 2022 have spent 3+ months searching for a home without success. The inability to find an affordable home (45%) is the most common reason buyers looking for 3+ months can’t make a purchase.
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