Another 25 bps Hike by the ECB, More Hawkishness on Inflation
Economic news and commentary for May 4, 2023
ECB Announcement
The ECB raised its policy rates by 25 bps. This brings the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility to 3.75%, 4.00%, and 3.25% respectively. The ECB led the announcement with a stern message, “the inflation outlook continues to be too high for too long,” which is a clear signal that its intent over the next few meetings is to focus on the inflation problem. Some changes to the plan for balance sheet drawdown are coming in the second half of 2023. The ECB will continue to reduce the APP portfolio by €15 billion a month through June, but there are no current plans to extend that procedure. The ECB will move to a period of no reinvestments into the APP portfolio in July. In terms of the PEPP portfolio, reinvestments will continue until at least the end of 2024.
There was no clear guidance on what will happen in the next meeting. However, as mentioned above, the ECB remains strongly focused on inflation and returning it to a range that the central bank is comfortable with. The most recent April flash readings from the euro area and other large European nations were clearly too hot for policymakers and laid the groundwork for hawkish messaging in today’s announcement. The following was the most forward-looking statement:
“The Governing Council’s future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.”
In summary, the ECB will keep hiking until it sees substantial progress on inflation which has stuttered despite an improvement in the energy price situation. And in a perhaps more hawkish sentiment, the ECB asserts that these rates will be in place for some time to discourage the possibility of a double dip in inflation.
Compared to its peer in the US yesterday, this monetary policy announcement is clearly at another level of hawkishness. In a way, the data-dependence stance is similar to the Fed, but the data that the ECB is dependent on is largely different than what the Fed is working with crafts two totally different policy positions for them. We should expect another 25 bps at the June meeting for sure and more tenacity in the face of inflation. If inflation does not improve by July, the ECB could move again before it starts to consider taking a break to more gradually observe the cumulative impact of rate increases so far. All of these means that a GDP contraction is likely in Q2 2023 even after avoiding it in the first quarter.
Still to come…
10:00 am (EST) - Canada Ivey PMI
10:30 am - US EIA Natural Gas Report
11:00 am - World S&P Global Manufacturing PMI
4:30 pm - US Fed Balance Sheet
9:30 pm - Australia RBA Statement on Monetary Policy
Morning Reading List
Other Data Releases Today
Australia's trade balance was up $1.1 bil to $15.3 bil in March. Exports grew 3.8% MoM, and imports grew 2.5% MoM. Consumer good imports jumped 14.1% MoM while capital good imports fell -2.5% MoM. General merchandise exports increased 4.8% MoM.
Germany's trade balance improved slightly to €16.7 bil in March with exports down -4.2% MoM and imports down -6.4% MoM. Exports to the US were down -10.9% MoM, and exports to China fell -9.3% MoM.
The S&P Global China Manufacturing PMI fell from 50.0 in March to 49.5 in April, the 1st decline in 3 months. Firms shared that the weakness was caused by soft domestic demand, export demand was stable. Input costs declined for the 1st time in 7 months.
Selected S&P Global Services PMIs in Europe for April:
The Challenger, Gray & Christmas report found job cuts down -25% MoM to 89,703 but up 176% from last year. So far this year, job cuts are up 322% from 2022 to 337,411. This is the highest total since 2020.
Euro area PPI fell -1.6% MoM in March and was up 5.9% YoY, down from 13.3% YoY in February.
Energy: 0.7% YoY (-4.8% MoM)
Intermediate Goods: 5.8% YoY
Capital Goods: 6.7% YoY
Durables: 8.2% YoY
Non-Durables: 13.4% YoY
The US trade deficit fell -9.1% MoM to -$64.2 billion with exports up 2.1% MoM and imports down -0.3% MoM. Crude oil led export growth (+$2.5 bil) while imports of capital goods (-$1.9 bil) and industrial supplies (-$1.4 bil) both fell.
Jobless claims grew 13,000 to 242,000 last week. The insured unemployment rate was down -0.1 ppts to 1.2%. Continued claims fell -38,000 to 1.80 million.
Labor productivity fell -2.7% QoQ and -0.9% YoY in Q1 2023. Output increased just 0.2% QoQ despite an increase of 3.0% QoQ in hours worked. Hourly compensation jumped 3.4% QoQ and 4.8% YoY, and unit labor costs were up 6.3% QoQ and 5.8% YoY.
Canada's trade balance improved to a surplus of $1.0 billion in March, up from a -$0.5 billion deficit in Feb. Total imports decreased -2.9% MoM to $62.6 billion, the lowest level observed since March 2022. Imports of consumer goods (-11.0% MoM) decreased the most. Total exports decreased -0.7% MoM to $63.6 billion, the lowest level since February 2022. Exports of energy products decreased -5.9% MoM.
Federal Reserve Announcement
US: A final 25bp hike from the Fed as tighter lending conditions weigh heavily (ING) - The Federal Reserve has raised interest rates by 25bp and signalled the threshold for justifying future rate increases is now higher than it was. With lending conditions rapidly tightening in the wake of recent bank stresses, we think this will mark the peak for interest rates with recessionary forces set to prompt interest rate cuts later this year.
FOMC hikes policy rate by 25 basis points, cautions on outlook (TD Bank) - Is this the end? That was the question going into today's announcement. With the Fed dropping its language on the need for more hikes, it signaled that it is moving to a meeting-by-meeting approach. This leaves its options open going forward. Don’t be surprised if Chair Powell tries to keep the door open to more rate hikes at his presser, should the recent momentum in consumer spending and the pass-through to services inflation continue.
Fed sets the stage for a pause (CIBC) - As widely expected, the Fed opted to hike by a further quarter point, but also avoided saying that they had reached a judgement that further hikes might be required, with Powell suggesting in the press conference that the committee would remain data dependent.
The Fed Hints at an End for Rate Hikes (NAHB) - The Federal Reserve’s monetary policy committee raised the federal funds target rate by 25 basis points at the conclusion of its May meeting. Although the communication from the Fed did not explicitly indicate that they are done tightening, language used in their statement signals the Fed is moving toward a more data-dependent posture, albeit one that retains a hawkish bias.
Has the Fed Paused? (First Trust Portfolios) - The Fed raised short-term interest rates by another quarter percentage point today to a range of 5.00 – 5.25%, just like most analysts and investors expected. In addition policymakers made changes to its official statement that hint that this rate hike might be the last of the cycle.
Evolving Risks Prompt One More (Likely Final) Fed Hike (PIMCO) - We believe the quarter-point policy rate hike announced at the May Federal Reserve meeting will likely be the last hike of this cycle. Fed Chair Jerome Powell sought to keep the central bank’s options open by saying that all decisions are data dependent, but the shifting balance of risks appears to favor a pause.
Research US - Fed review: A balanced end to the hiking cycle (Danske Bank) - The Fed delivered a 25bp hike as widely expected by both consensus and markets. We think this marks the end of the Fed's hiking cycle. Powell struck a very balanced tone in the press conference, not closing the door for another hike, but also emphasizing that policy is now clearly restrictive.
FOMC Review: Peak rate in sight (Nordea) - The FOMC raised the Fed Funds Rate Target by 25bp to 5-5.25%. While monetary policy is at or near sufficiently restrictive levels, the committee has a tightening bias and said that monetary policy actions will be based on a “data dependent approach”.
Fed stays hawkish but moves to data dependent mode (ABN AMRO) - Probably the last hike of the cycle -The FOMC raised the target range for the fed funds rate by 25bp to 5.00-5.25%, as widely expected. The accompanying statement saw only slight changes from the March statement, with the most important being the removal of the line “The Committee anticipates that some additional policy firming may be appropriate,” signaling that further rate rises will no longer be the default choice at coming meetings.
US
U.S. vehicle sales jumped in April with the start of the spring buying season (TD Bank) - Light vehicle sales in April rose for an eighth consecutive month relative to year-ago levels as the spring buying season kicked off with a bang. Pent-up demand remained alive and well, with sales on the month only 2.6% below April 2019 levels. Despite some modest easing in labor conditions in recent months, job and wage growth through the first quarter of the year has remained robust, partially insulating consumers from still high prices and financing costs.
ISM shows Steady-Eddie services sector in April (TD Bank) - According to the ISM Services PMI there was a slight uptick in the growth rate of the services sector in April. It was due mostly to the increase in new orders, and ongoing improvement in both capacity and supply logistics. However, some respondents are "wary of potential headwinds associated with inflation and an economic slowdown." Looking at overall activity, the slowing trend that has been ongoing since 2021 remains intact.
Services ISM Sending Mixed Signals (Wells Fargo) - It is perhaps fitting that in the last major economic release in the lead-up to this afternoon's Fed meeting, today's ISM services report offers some mixed signals on the health of the service sector, where the headline signals faster expansion even as business activity slowed to a crawl in April.
The ISM Non-Manufacturing Index Increased to 51.9 in April (First Trust Portfolios) - No sign of a recession in the services side of the US economy just yet. Today’s ISM Services report showed activity grew modestly in April, with the index rising to 51.9 from 51.2 in March and coming in a tick above the consensus
expectation, with fourteen out of eighteen major industries reporting growth.
US Dollar Credit Supply: Very low year-to-date supply for financials (ING) - USD supply was rather low in April, but we expect an increase in May. Meanwhile, financials are now running significantly behind previous years on a year-to-date basis. There could be more opportunities for reverse yankee supply, as the USD-EUR spread differential widens.
Europe
Euro Credit Supply: Expect an increase in supply in May (ING) - We expect an increase in supply levels in May in both corporates and financials, compared to April. We feel new issues will continue to be met with very strong demand.
The Czech National Bank is sounding more hawkish (ING) - The CNB kept interest rates unchanged at 7%. However, the bank stresses the risks are skewed to the upside.
Spanish tourism boom propping up a weakening economy (ING) - Sentiment indicators for Spain weakened in April, with the manufacturing PMI falling below 50. The services sector continued to grow, albeit at a slightly slower pace. We expect growth to weaken later this year as the European Central Bank's interest rate hikes gain traction.
Australia
Reserve Bank of Australia Delivers a Hawkish Surprise (Wells Fargo) - The Reserve Bank of Australia (RBA) surprised market participants at its May meeting with a 25 bps rate hike to 3.85% and signaled the potential for additional monetary tightening ahead. Given the hawkish nature of the announcement, we believe the RBA has opened the door to further rate hikes.
Real Estate
Homeownership Rate Unchanged at 66% (NAHB) - The Census Bureau’s Housing Vacancy Survey (CPS/HVS) reported the U.S. homeownership rate at 66% in the first quarter of 2023, amid persistently tight housing supply. The homeownership rate remained statistically unchanged from the fourth quarter reading (65.9%). It is 0.6 percentage points higher than the rate in the first quarter of 2022. Compared to the peak of 69.2% in 2004, the homeownership rate is 3.2 percentage points lower and remains below the 25-year average rate of 66.4%.
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