India Raises Rates and Maintains Hawkish Posture
Economic news and commentary for February 8, 2023
Reserve Bank of India Announcement
The Reserve Bank of India increased its policy rate by 25 bps to 6.5% as it seeks to achieve the target range of 2-6% inflation. It sees further action as necessary to "keep inflation expectations anchored, break core inflation persistence and thereby strengthen medium-term growth prospects." Inflation is currently within the target RBI range, but projections for the CPI have it riding the top side of that range. CPI inflation is projected at 5.3% for the fiscal year 2023-24, with Q1 at 5.0%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.6%. On top of this, the MPC’s qualitative assessment of inflation risks sees risks from “adverse weather events” and general upward pressure on the global commodity market. Additionally, it sees risks of services prices keeping core inflation higher for longer, a concern that is shared globally. The economic strength of India’s economy has been noted in the recent PMI releases as it tops most of the rest of the world and by optimistic outlooks from Indian consumers and businesses. The RBI will note this strength as supportive of the path of restrictive monetary policy going forward.
Still to come…
10:00 am (EST) - US Wholesale Inventories
Morning Reading List
Other Data Releases Today
Italian retail sales (volume) fell -0.7% MoM in December, and retail sales (value) fell -0.2% MoM. The volume of food and non-food sales fell -0.6% MoM and -0.8% MoM respectively. The volume of sales fell -4.4% YoY.
Mortgage applications increased 7.4 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 3, 2023.
US Trade
U.S. Trade Deficit Widened to Close a Volatile Year for Trade (Wells Fargo) - The U.S. trade deficit widened in December to finish what was a volatile year for international trade flows. While 2022 marked the largest deficit on record, the U.S. trade balance narrowed over the course of the year. Trade flows will remain under pressure in 2023 amid slow global growth and a normalization in U.S. demand.
The Trade Deficit in Goods and Services Came in at $67.4 Billion in December (First Trust Portfolios) - Compared to a year ago, the monthly trade deficit is $11.5 billion smaller; after adjusting for inflation, the “real” trade deficit in goods is $11.0 billion smaller than a year ago. The “real” change is the trade indicator most important for measuring real GDP.
Canada Trade
A Real Boost to Growth (BMO) - Canada’s merchandise trade balance posted its second straight deficit in December, as lower energy prices weighed. However, real trade flows were more encouraging, and suggest that trade will add meaningfully to fourth quarter growth.
Canadian trade deficit narrowed slightly in December (CIBC) - Canada's goods trade deficit narrowed to $0.16bn in December, with a steep drop in consumer goods imports suggesting that domestic demand is softening. Exports also dropped off in 7 of the 11 product sections tracked by Statistics Canada, but the overall drop was magnified by lower oil prices.
Reserve Bank of Australia Announcement
Hawkish RBA Still Heading Higher (Wells Fargo) - In our view, growth in Australia should be sturdy enough to avoid recession, and with inflation still elevated at the highest rate in over 30 years, we do not expect the Reserve Bank of Australia (RBA) to cut rates from now through mid-2024. This is in contrast to our expectation for a U.S. recession in H2-2023 and eventual Federal Reserve easing at the beginning of 2024. Resilient Australian growth and favorable RBA monetary policy dynamics versus the Fed are the main factors that should be supportive of the Australian dollar over time.
Reserve Bank of India Announcement
India: Reserve Bank hikes and keeps tightening stance (ING) - The Reserve Bank of India (RBI) hiked a further 25bp, though rather than signalling "job done", they have maintained their tightening bias.
US
Fed still looks for disinflation despite jobs shock (ING) - Fed Chair Jerome Powell acknowledged that the strong jobs report underscores that central bankers have more work to do to ensure inflation hits target, but he chose not to ratchet up the hawkish rhetoric on the back of one data print. Other Fed officials also suggest the central view of a couple more rate hikes remain the base case for now.
Dollars and Sense: Stop, Recalibrate and Listen (TD Bank) - Financial markets have started 2023 on solid footing, with optimism that easing inflationary pressures raise the probability of a soft landing.
Central Banks, Markets and the Economy: Three Times Wrongfooted (BNP Paribas) - In the US, financial conditions have eased in recent months and weighed on the effectiveness of the Fed’s policy tightening. Jerome Powell recently gave the impression of not being too concerned, so markets rallied, and financial conditions eased further despite the hawkish message from the FOMC.
Inflation
Stumbling to new inflation fight phase (BlackRock) - Central banks are stumbling into a nuanced phase of policy tightening after major macro events last week. Lower energy and goods prices are pulling down overall inflation. Yet tight job markets should keep wage growth above levels needed for core inflation to fall to 2% targets, reflected in a 54-year low for unemployment in the U.S. We see central banks close to pausing hikes: Major economies will see mild recessions but lingering inflation.
Robotics adoption could suppress long-term inflation (Wells Fargo) - The long-term inflation forecast is one of the key components in our long-term asset class return estimates. The pandemic-induced supply and demand imbalance temporarily disrupted past trends, including highly efficient global supply chains that have supported low inflation. Yet, we believe that automation is an emergent long-term trend that may potentially reinvigorate the supply chain and, in turn, offset declining labor participation, improve labor productivity, and aim to keep inflation in check.
Manufacturing
Global economic conditions and business confidence improve as China reopens at the start of 2023 (S&P Global) - The global downturn persisted for the sixth straight month at the start of the new year though the rate of decline eased to only a marginal pace to indicate that the downturn had further eased. Weakness in demand and output underpinned the latest contraction though improvements in regions including mainland China led to better global PMI readings.
FX
FX Update: USD has reversed. JPY, AUD put up a fight (Saxo Bank) - The US dollar powered through stronger still yesterday as the market has taken its expectations of peak Fed back to the high for the cycle. Overnight, the AUD and JPY put up a fight against the greenback on a more hawkish than expected RBA and a huge beat on December wage growth in Japan, the strongest in 25 years. Fed Chair Powell is set to speak later today, but incoming data has already done his job if he emphasizes the "higher for longer" rhetoric of the recent past.
Research
Cross-country price and inflation dispersion: retail network or national border? (ECB) - (Why) do prices and inflation rates differ within the euro area? We study the relevance of a national border for grocery prices in the otherwise homogenous and highly integrated border region of Austria and Germany. Using transaction data on prices and quantities from a large household panel, we compare the prices of identical products within a narrow band along the border. We find large assortment and price differences between these two regions. Even within multinational retail chains the prices of identical products on the two sides of the border differ on average by about 21%. These price differences are not very persistent indicating little arbitrage gain from undifferentiated cross-border shopping.
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