RBA Announces Fourth Straight Quarter Point Hike, US Deficit Jumps on Weak Exports
Economic news and commentary for February 7, 2023
Reserve Bank of Australia Announcement
The Reserve Bank of Australia (RBA) has increased its cash rate target by 25 bps to 3.35%. This is the fourth quarter-point hike since October when the RBA downshifted from the four half-point hikes that were spread out from June to September. The central forecast provided in this monetary policy update is for inflation to decline to 4.75% this year and ~3% by mid-2025. However, the RBA suggests that further interest rate increases may be needed to return inflation to the target rate. The growth outlook has shifted from a strong 2022 to a weaker 1.5% expected in 2023 and 2024. This will certainly play into the Board’s decision-making as they move into an observational period. Board members are especially sensitive to the labor market which is expected to weaken slightly in 2023 as the effects of rates are pulled forward. Currently, though, the concern is that wage inflation is keeping goods and services inflation from falling substantially which would be the main driver of rate hikes in the future.
US Trade
The US deficit jumped 10.5% MoM to $67.4 billion in December, a reversal of the deficit narrowing that occurred in November. Exports fell -0.9% MoM on a substantial decline in industrial supplies and materials exports of $3.1 billion. Consumer goods also declined, though just $1.0 billion. On the other side, imports grew 1.3% MoM on a substantial increase in cell phones and household goods imports totaling $3.5 billion. Monthly trade data points to volatility in the comings and goings of the US economy, but the three-month trend in both exports and imports tells the real story. Both exports and imports have fallen in that period as the US economy stagnates. Yes, growth is supported by a stronger decrease in imports which boosts the trade component of GDP, but sluggish imports also point to weaker domestic demand from both businesses and consumers. This should feed through to weaker inventories and consumption in Q1 2023 which will put probably lead to a contraction in that period.
Germany Industrial Production
German industrial production fell -3.1% MoM and 3.9% YoY in December, ending the year with a bout of weakness. The declines in both intermediate goods and construction were deep at -5.8% MoM and -8.0% MoM while other categories like consumer goods and capital goods production were more balanced. The main constraint on industry continues to be high energy costs. Energy-intensive production declined -6.1% MoM in December and was down-19.6% YoY. In 2022 as a whole, production was -0.6% lower than in 2021 and down -5.0% from the pre-crisis year of 2019. Despite some shades of improvement in other areas of the economy, German’s industrial production has become an exceptionally weak spot. In general, there has been some support from a mild winter in lower energy prices, but the effects of tighter financial conditions has been more impactful on demand up and down the supply chain. If manufacturing PMIs have any predictive power, there should be a slight improvement in industrial production in January as the contraction appeared to have eased.
Still to come…
3:00 pm (EST) - US Consumer Credit
Morning Reading List
Other Data Releases Today
Japanese real household spending fell -1.3% YoY in December, down from -1.2% YoY in November. Goods spending fell -0.7% YoY. Services spending growth slowed to just 0.8% YoY. Disposable income growth continued to decline, now down -1.7% YoY.
Australia's trade balance fell -$1.2 billion to $12.2 billion in December. Exports fell -1.4% MoM, in particular, general merchandise exports fell -2.8% MoM. Imports grew 1.0% MoM with a 12.2% MoM surge in capital goods imports.
The Halifax House Price Index was flat in January after sharp declines in November (-2.4% MoM) and December (-1.3% MoM). The annual rate of increase is now just 1.9% YoY, down from 2.1% YoY.
France's trade balance fell to a new historical low at -€163.6 billion in December and 2022. This deficit is almost double the deficit in 2021. Import growth was 29.4% YoY and offset an 18.5% YoY increase in export growth.
In December, Canada's merchandise exports decreased -1.2% MoM, mostly on lower exports of energy products. Meanwhile, imports were down -1.3% MoM, mainly driven by lower imports of consumer goods. The trade balance was mostly unchanged.
Reserve Bank of Australia Announcement
Australia: Reserve Bank hikes and says job not done (ING) - The Reserve Bank of Australia has hiked a further 25bp taking the cash rate to 3.35% - there is no suggestion that rates are close to the peak or that they will fall any time soon.
Germany Industrial Production
Germany’s sudden halt in December is confirmed (ING) - A terrible industrial production report confirms the economy's sudden and hard halt in December.
US
US jobs: Should we change our view? (ING) - January's jobs report was far stronger than expected, so have we been too pessimistic on the US economy? On the face of it the data makes the 'soft landing' story look more plausible, but as we dig through the data there remains major areas of concern. While interest rates will rise further, we still think the Federal Reserve will switch to rate cuts by year end.
US Weekly Economic Commentary: Surprisingly strong employment in January (S&P Global) - The outlook for near-term GDP growth is still soft, but the latest data on construction, vehicle sales, and employment hint at the possibility that the US might avoid rolling over into a (mild) recession as soon as the first quarter.
The Hiring Outlook in the Fed’s Eighth District for 2023 (St Louis Fed) - Every December, the St. Louis Fed asks regional contacts a set of special questions on hiring plans as part of its quarterly survey. The most recent responses provide useful insight as to how firms across the Eighth Federal Reserve District1 are dealing with an uncertain economic environment.
Europe
Euro Area Macro Monitor: Between light and shadow (Danske Bank) - Business and consumer surveys brought more rays of light during January and most leading indicators suggest the worst of the economic downturn lies behind us for now.
A Faustian bargain: Europe’s answers to the US IRA (Allianz) - The short-term reaction to the US IRA – entitled the “Green Deal Industrial Plan” by the EU Commission – builds predominantly on allowing more national support, including tax benefits, by relaxing state aid rules further.
Broken Europe (Saxo Bank) - While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.
Bond spreads do not (yet) capture high energy efficiency at logistic real estate issuers (ABN AMRO) - Logistic real estate generally has a lower carbon footprint than retail real estate, though disclosure of energy performance (and carbon emission) is lagging at various EUR IG logistic real estate names. Although Prologis and PELF stand out in terms of energy performance, this is not (yet) visible in their bond pricing.
Rising cost of living is likely to fuel protests in Europe in 2023 (S&P Global) - The increased cost of living is likely to be one of the main drivers of protests in Europe in 2023.
China
Research China: US-China relations turn sour again (Danske Bank) - After a period of some improvement in US-China relations since the Xi-Biden meeting in November, the relationship took yet another turn for the worse following the shoot-down of a Chinese ‘spy balloon’ over the Atlantic.
China reopening will drive another strong year for commodities (Saxo Bank) - Following a dramatic and volatile 2022 with good returns, a lot of this year's commodity performance may be driven by Chinese politics.
Mexico
Banxico's Dovish Decouple is Approaching... (Wells Fargo) - While the Central Bank of Mexico could continue to move in lockstep with Fed rate hikes for the time being, we believe it will decouple from the Fed in a dovish direction before long. By March, we expect the Mexico's central bank to signal a pause in rate hikes once its policy rate reaches 11.00%, while we expect 75 bps of rate cuts from Mexico before the end of this year, an earlier easing of monetary policy than we forecast from the Fed.
Inflation
Measurement and Effects of Supply Chain Bottlenecks Using Natural Language Processing (Federal Reserve) - This study introduces a new measure, the Supply Chain Bottleneck Sentiment (SCB Sentiment) index, which differs in two ways. First, the list of words related to supply chain bottlenecks is generated through unsupervised machine learning and natural language processing.
Sticky Food Prices (Northern Trust) - Food prices have been volatile ever since the initial COVID lockdowns. It was the first category to inflate as suppliers struggled to match the demand shift away from restaurants and toward grocery stores, and as workers in food production facilities fell ill. Food broadly followed all prices up as inflation took hold in the course of 2021. In the second half of 2022, while headline inflation started to correct, food prices kept climbing.
Manufacturing
Global recession risk eases as PMI climbs to six-month high in January (S&P Global) - Global business activity fell for a sixth straight month in January, according to the S&P Global PMI surveys, based on data provided by over 30,000 companies, though the rate of decline was only marginal and the smallest seen over the past six months. As such the data helped allay concerns of near-term global recession risks.
Rates
The Longer-Term Outlook for Long-Term Rates (BMO) - In a nutshell, we expect that the landing spot for rates will be notably higher than in the decade prior to the pandemic, with Canadian rates in the 2.5%-to-3.0% zone, and the U.S. a bit higher than that. We lay out the factors behind that conclusion below, as well as some key implications for fiscal policy, housing, and financial markets.
Central Banks vs. Financial Conditions (Northern Trust) - The Federal Reserve has complained recently that the conditions under which this financing is occurring have gotten too easy. The concern is not bad credit decisions, but rather that accommodative credit terms are working at cross purposes with efforts to tame inflation. But a close look at financial conditions suggests that this concern may be misplaced.
Macro & Markets: Dissonance (Nordea) - Both stock and bond markets cheered that central banks are moving into the final stretch of rate hikes. Stronger than expected nonfarm payrolls and ISM Services today spoiled the fun and add to the dissonance.
FX
Argentina and Brazil's 'Sur'real Joint Currency Plan (Northern Trust) - Brazil and Argentina recently announced their intention to create a new common currency, to be called the sur. The plan seeks to create a new value unit that facilitates trade between the two regional heavyweights, reducing dependence on the U.S. dollar. The idea has faced criticism from all quarters, and rightly so.
Real Estate
How Mortgage Repayments Recovered since COVID-19’s Onset (St Louis Fed) - When the pandemic hit, the percentage of mortgages that were current steeply declined. “By May 2020, the percentage of current loans in the least distressed quintile had fallen significantly to 91.53%, a 4.4 percentage point decline relative to its 2019 average of 95.93%,” Sánchez and Wilkinson wrote. “At the same time, the percentage of current loans in the most distressed quintile had dropped to 84.64%, a 5.74 percentage point decline relative to its 2019 average of 90.38%.”
The Aging Housing Stock (NAHB) - The median age of owner-occupied homes is 40 years, according to the latest data from the 2021 American Community Survey[1]. The U.S. owner-occupied housing stock is aging rapidly especially after the Great Recession, as the residential construction continues to fall behind in the number of new homes built.
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