ECB Minutes Show that the Focus is on Inflation While the Banking Crisis was a Small Nuisance
Economic news and commentary for April 20, 2023
ECB Minutes
The ECB released its minutes for the April ECB meeting where policy rates were increased by 50 bps. This initially was set to be a simple, routine rate hike that was in line with what members had indicated until financial stability became a concern in late March. After the collapse of SVB and the emergency merger between UBS and Credit Suisse, markets had concerns and expectations shifted. Discussions among members suggested that they acknowledged that the new tensions had become a “source of significant uncertainty for the economic outlook” and that they could lead to an “undue” tightening of credit conditions. Regardless, the ECB members reiterated that the banking sector was “resilient, with strong capital and liquidity positions” and that the ECB was “fully equipped” to address liquidity concerns if needed. This seems to be the only discussion about the new banking crisis in the context of the economic outlook. Discussion would continue on the subject of inflation.
To sum up the inflation discussion, the ECB was happy to see that falling energy prices were contributing to the easing of price pressures. However, food inflation continued to be a concern. In the context of core inflation, ECB members noted the development between energy-sensitive sectors and non-energy-sensitive sectors. They anticipated that while non-energy-sensitive sector inflation might fall more gradually, the improvement in energy inflation would help the energy-sensitive part of core inflation to develop a deflationary trend at a quicker pace. Regardless of this assessment, a large majority of members supported the 50 bps rate hike because "inflation dynamics were still too strong." Interestingly, though, some members preferred to not increase rates until "financial tensions had subsided" so that a full review of the monetary policy stance could be conducted in May. It’s unclear how many members were in favor of this, but it was clearly not enough to make it a serious policy consideration. However, it does show that financial stability can become a real obstacle to ECB rate hikes if it were to deteriorate sharply again.
Still to come…
10:00 am (EST) - EU Consumer Confidence Flash
10:00 am - US Existing Home Sales
10:00 am - US Leading Indicators
10:30 am - US EIA Natural Gas Report
4:30 pm - US Fed Balance Sheet
7:30 pm - Japan CPI
Morning Reading List
Japan's trade balance improved from -¥898.1 billion in February to -¥754.5 billion in March. Exports jumped 15.2% MoM, and imports increased 12.0% MoM. Imports from China are up 10.3% YoY as activity rebounds there.
German PPI fell -2.6% MoM but was still up 7.5% YoY in March, down from 15.8% YoY in February. Energy prices as a whole were up 6.8% YoY after declining on a month-to-month basis. Non-durable goods prices jumped 15.4% YoY thanks to rising food prices. Durable goods and capital goods inflation were still elevated at 10.0% YoY and 7.5% YoY.
France's business climate indicator edged down -1 pt to 102 in April, and the employment indicator fell -2 pts to 108. The manufacturing index fell - 3 pts to 101 and the services index fell -2 pts to 103, the lowest so far this year for both.
The euro area trade balance improved from -€30.6 billion in January to €4.6 billion in February. Exports improved 4.4% MoM while imports fell -10.0% MoM as the euro area economy weakens.
Jobless claims grew 5,000 to 245,000 last week. The insured unemployment rate grew 0.1 ppts to 1.3%. Continued claims jumped 61,000 to 1.87 million.
The Philadelphia Fed Manufacturing Survey Business Conditions index fell -8.1 pts to -31.3. New orders improved slightly, up 5.5 pts to -22.7, while shipments jumped 18.1 pts to -7.3. Prices paid crashed -15.3 pts to 8.2, and prices received turned negative, down -12.2 pts to -3.3.
France Business Climate
France: business outlook worsens (ING) - French business sentiment fell back in April, following a deterioration in the outlook for activity and demand. This does not bode well for economic growth in the coming months. For the first time, inflationary pressures are clearly moderating.
Canada Housing Starts
Canadian housing starts decline in March (TD Bank) - Canadian housing starts came in at 213.9k annualized units in March, representing an 11% drop from February's level and coming in below consensus estimates. The six-month moving average fell by 14k to 259.4k units.
Cdn. Residential Construction and Credit — Adjustment Continues (BMO) - Canadian housing starts fell 11.2% to 213,900 annualized units in March. While some volatile weather likely impacted activity in recent months, it’s a good time to step back and look at the bigger, smoothed out picture for Canadian residential construction. The short story is that activity is slowing meaningfully from very elevated levels.
Japan Trade
Japan’s economic recovery is being driven by a tourism boom (ING) - Today's data release confirms that the trend of weak manufacturing against strong services continues. Service activity has risen for four consecutive months while sluggish demand for chips is dragging on exports. We believe that a continued recovery would support the Bank of Japan revising its yield curve control (YCC) policy in the coming months.
US
Beige Book — Economic Activity "Little Changed" (BMO) - The Fed’s regional report card, prepared for the May 2-3 meeting, suggests that, while activity is little changed, household spending stalled, the labour market is becoming less tight, and price pressures are easing. This will likely allow the Fed to pause following a 25 bp hike in May.
Animal Spirits Index Negative for 15 Straight Months (Wells Fargo) - The Animal Spirits Index (ASI) increased to -0.13 in March, up from -0.31 in February. Through March, the ASI has been negative for 15 straight months.
30% of Adults Work from Home at Least 2 Days a Week (NAHB) - Findings from a recent national poll* that reveal 30% of American adults typically work from home at least two days a week could offer clues to the long-term financial health and value of commercial office space in the United States. How this share evolves over time, whether it drops due to employers tightening work-from-home policies or it grows due to more employees earning the benefit not to commute five days a week, will factor into the future office market outlook across the nation.
Recession risks rise: It's a time for caution and diversification (Fidelity) - Market volatility could linger due to slower liquidity growth, inflation, and monetary policy uncertainty. Some of these dynamics have been priced into markets, particularly fixed income and non-US equities.
Housing Starts Decline Slightly in March: Multifamily Drop Offsets Single-Family Strength (Wells Fargo) - Overall housing starts dipped 0.8% to a 1.42 million-unit pace in March. The monthly decline follows a 7.3% jump in February, which was revised down from the 9.8% gain that was originally reported. The total drop in residential construction was owed to a 5.9% decline in multifamily starts.
Europe
Riksbank preview: Another big lift (Nordea) - We expect the Riksbank to hike its key policy rate by 50bp next week, indicating that further tightening is on the cards. Underlying inflation is worrying. In spite of this, the Riksbank’s rhetoric may indicate a wait-and-see approach.
Riksbank preview: A hawkish 50bp hike to support the krona (ING) - Sweden’s economic outlook remains challenging, but core inflation is too high and the Riksbank looks determined to support the krona. We expect a 50bp hike next Wednesday and a signal that rates could peak near 4%. This can help the krona, though short-term headwinds remain out of the Riksbank’s control.
China
China Update: Internet stocks present investment opportunities (Saxo Bank) - Robust GDP and retail sales figures this week serve to reinforce investor confidence in China's economic resurgence. Notably, the 10.6% surge in retail sales illuminates the reinvigoration of domestic consumption, a favorable development amidst global uncertainties. The impressive expansion in online sales, coupled with Alibaba's recent plan to restructure the conglomerate, augurs well for the potential of valuation multiple upticks in the China internet sector.
Australia
NAB Quarterly Business Survey – March 2023 (NAB) - Most businesses continued to report facing constraints on output in Q1 of 2023. Labour shortages eased only slightly, despite the strong rebound in migration, with some 87% of firms reporting availability of labour as a constraint on output (down from a peak of 91% in 2022). There was somewhat more improvement on inputs as supply chains improved, with 43% of firms reporting materials as a constraint (down from a peak of 53%).
AMW – Q1 CPI Preview – Past the peak, but still too high (NAB) - We expect Q1 CPI next Wednesday (26 April) to confirm inflation peaked in Q4 2022 and to have decelerated marginally more than what the RBA had pencilled in back in February. We see trimmed mean inflation at 1.3% q/q (6.6% y/y), one tenth softer than the RBA’s February forecast of 1.4%. For headline we see a 1.3% q/q (7.0% y/y).
Canada
Will higher rates break the consumer’s back? (CIBC) - Milton Friedman famously stated that monetary policy works with a long and variable lag. What determines the length and variability of that lag is of course the speed and magnitude of the change in monetary policy as well as the level of economic readiness to absorb that change. Not surprisingly, the ultrarate sensitive housing market has been the most visible victim of the meteoric ascent in the cost of borrowing. But so far, the consumer has been surprising on the upside. While a slowing in spending is unavoidable, we suggest that the consumer has enough juice left to complicate the downward trajectory in inflation, and therefore prevent a rate cut in the second half of 2023.
Energy
Diesel cracks under pressure while crude eyes price gap (Saxo Bank) - The positive price impact of the April 2 surprise OPEC+ production cut continues to fade with incoming data showing some emerging demand weakness, especially for diesel, and following a rapid build-up in speculative longs in the week that followed, the market is now drifting lower, thereby raising the risk of traders attempting to sell Brent and WTI crude oil lower in order to close the gaps that were left when prices opened sharply higher on April 3.
Banking
Monitoring Banks’ Exposure to Nonbanks: The Network of Interconnections Matters (Liberty Street Economics, NY Fed) - The first post in this series discussed the potential exposure of banks to the open-end funds sector, by virtue of commonalities in asset holdings that expose banks to balance sheet losses in the event of an asset fire sale by these funds. In this post, we summarize the findings reported in a recent paper of ours, in which we expand the analysis to consider a broad cross section of non-bank financial institution (NBFI) segments.
Enhancing Monitoring of NBFI Exposure: The Case of Open-End Funds (Liberty Street Economics, NY Fed) - Non-bank financial institutions (NBFIs) have grown steadily over the last two decades, becoming important providers of financial intermediation services. As NBFIs naturally interact with banking institutions in many markets and provide a wide range of services, banks may develop significant direct exposures stemming from these counterparty relationships.
Outlook
World Economic Outlook Shows Economies Facing High Uncertainty (IMF) - Our latest World Economic Outlook forecasts that growth will slow from 3.4 percent last year to 2.8 percent this year. Growth is then expected to accelerate to 3 percent next year. Risks to the outlook are heavily skewed to the downside, with heightened chances of a hard landing. In a plausible alternative scenario with further financial sector stress, global growth would decelerate to about 2.5 percent in 2023.
World Bank and IMF 2023 Spring Meetings Takeaways (Wells Fargo) - Wells Fargo International Economics attended and participated in the 2023 Spring Meetings of the World Bank and International Monetary Fund to discuss global economic trends and themes. In this report, we summarize our key takeaways and highlight themes we discussed over the course of the week. These conversations focused on the health of the global economy, the direction of monetary policy as well as the possibility of additional sovereign debt defaults across the developing and emerging markets.
World trade to see big shifts and weaker growth in 2023 (ING) - World trade has been falling, but we still expect growth to return this year. We do notice large shifts in world trade as advanced economies – especially the US – are diversifying input sourcing. With extreme pandemic effects fading, supply chain problems are unlikely to return at the scale seen in recent years.
CIBC interest rate forecast (CIBC) - CIBC updates its forecasts for Canadian and US interest rates and foreign exchange rates in April.
Research
Monetary Policy with Racial Inequality (Minneapolis Fed) - I develop a heterogeneous-agent New-Keynesian model featuring racial inequality in income and wealth, and studies interactions between racial inequality and monetary policy. Black and Hispanic workers gain more from accommodative monetary policy than White workers mainly due to higher labor market risks. Their gains are larger also because of a larger proportion of them are hand-to-mouth, while wealthy White workers gain more from asset price appreciation. Monetary and fiscal policies are substitutes in providing insurance against cyclical labor market risks. Racial minorities gain even more from an accommodative monetary policy in the absence of income-dependent fiscal transfers.
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