Reserve Bank of Australia Pauses Hawkishly
Economic news and commentary for April 4, 2023
Reserve Bank of Australia Announcement
After a full year of hiking rates, the Reserve Bank of Australia (RBA) chose to pause its rate hike campaign and maintained its cash rate target at 3.6%. Just to recap, in the past year, the RBA has hiked by a total of 350 basis points including six 25 bps increases and four 50 bps increases. The cash target has not been at this level since May 2012 when it reached 3.75% (on the way down from a peak of 4.75% in 2011). The Board of the RBA chose to pause today to “provide additional time to assess the impact of the increase in interest rates to date and the economic outlook” as it looks to move to a more data-dependent stance. The assessment of inflation is that it has “peaked” and “goods price inflation is expected to moderate over the months ahead.” However, the RBA also acknowledges that there are some sticker parts of inflation like rents and utilities which are both increasing at the moment. Additionally, it assesses the labor market as tight and that there are risks of a “prices-wages spiral.”
These three areas will be important in the coming months to decide if more rate hikes are needed. And the Board did acknowledge that more tightening might be needed very clearly saying that "some further tightening may well be needed" in the closing paragraph of its announcement. There is a clear indication that maintaining a strong stance against inflation is important to the RBA and in its struggle to control inflation expectations. As a result, it would be understandable to label this move as a hawkish pause. The banking system volatility receives a brief mention along with an acknowledgment that these problems are “expected to lead to tighter financial conditions,” but there is no signal that it has impacted how the RBA plans to move in the coming months.
Still to come…
10:00 am (EST) - US Factory Orders
10:00 am - US JOLTS
Morning Reading List
Other Data Releases Today
Germany's trade balance was maintained at €16.0 billion in February as exports grew 4.0% MoM and imports grew 4.6% MoM. Imports from China jumped 6.7% MoM while imports from the US and the UK fell -8.7% MoM and -4.0% MoM.
Euro area PPI fell -0.5% MoM to 13.2% YoY in February, down from 15.1% YoY in January. Energy fell -1.6% MoM and was the main driver of falling headline PPI inflation. Ex-energy, PPI advanced just 0.2% MoM and the annual pace fell -0.9 ppts to 10.2%. Intermediate goods fell -0.2% MoM while capital, durable, and non-durable goods all grew within 0.3-0.5% MoM and mostly maintained their annual paces.
Euro area house prices fell -1.7% QoQ but were still up 2.9% YoY in Q4 2022, down from 6.6% YoY in Q3 2022. This is the largest quarterly decrease for the euro area since the fourth quarter of 2008 (-1.7% QoQ).
US ISM Manufacturing PMI
ISM Manufacturing Index Shows Sector Continues to Contract (TD Bank) - The March ISM Manufacturing Index registered 46.3, well short of expectations calling for a 48.0 print. The index fell 1.4 percentage points (pp) from February's reading of 47.7.
U.S. Manufacturing Ain't Satis-factory (BMO) - After edging up in February for the first time in six months, the ISM manufacturing PMI resumed its steep slide, falling 1.4 pts to 46.3 in March. That marks the lowest level since May 2020, with new orders down 2.7 pts to 44.3.
The ISM Manufacturing Index Declined to 46.3 in March (First Trust Portfolios) - Negative news on the US economy this morning. The US manufacturing sector fell further into contraction territory in March with the overall index hitting 46.3. That’s the lowest reading since the early months of COVID and, before that, the end of the Great Recession in 2009.
US
Monetary Policy Transmission and the Size of the Money Market Fund Industry: An Update (Liberty Street Economics, NY Fed) - The size of the money market fund (MMF) industry co-moves with the monetary policy cycle. In a post published in 2019, we showed that this co-movement is likely due to the stronger response of MMF yields to monetary policy tightening relative to bank deposit rates, combined with MMF shares and bank deposits being close substitutes from an investor’s perspective. In this post, we update the analysis and zoom in to the current monetary policy tightening by the Federal Reserve.
Researching COVID-19’s Impact on the “Great Retirement” (St Louis Fed) - The onset of the COVID-19 pandemic in March 2020 led to major disruptions in the U.S. labor market as social distancing and other public health measures triggered business closures and layoffs. But what was the pandemic’s impact on the decision to retire?
How the US is slowly catching up with Europe on ESG and climate policies (ING) - The US and EU are both heading toward tougher regulations on ESG disclosure and standardisation. But there is a contrast between the difficulties America is facing in establishing Environmental, Social and Governance regulations versus the progress made in Europe
Americas CIO View: Washer set to deep clean: Beware alternating rotations, drain could reopen (DWS Group) - Investors will probably remember 2023 as a year of washing out excessive pandemic fiscal/ monetary policies and inflated asset values. The U.S. Federal Reserve (Fed) hiked rates near 500bp over the past 12-months and asset values are soaking in rising capital costs and weaker earnings ahead. While asset values and inflation are well below their 2022 highs, the rinse isn’t finished. This washer now appears set to the deep clean cycle with long and alternating spinning.
Europe
ECB Consumer Expectations Survey results – February 2023 (ECB) - The CES is a monthly online survey of currently around 14,000 adult consumers (i.e. aged 18 or over) from six euro area countries: Belgium, Germany, Spain, France, Italy and the Netherlands. The main aggregate results of the CES are published on the ECB’s website every month. The results are used for policy analysis and complement other data sources used by the ECB.
NL Update - Dutch industry sees sharp decline in order backlogs (ABN AMRO) - The Nevi Netherlands Manufacturing PMI dropped from 48.7 in February to 46.4 in March, signalling a further drop in business activity. Industrial output decreased slightly. More worrying are the declines in new orders and order backlogs. If demand does not improve in the coming months, firms might reduce their output further.
Poland: Central bank preview (ING) - The National Bank of Poland meets on Wednesday and we expect the benchmark reference rate to remain unchanged at 6.75%.
Türkiye | Downside surprise in March CPI (BBVA) - Consumer prices rose by 2.3% in March, lower than our expectations (2.5%) and consensus (2.8%) while annual inflation neared 50.5%. We maintain our year end inflation forecast of 45% but acknowledge upside risks due to OPEC+ oil production cut, potential minimum wage hike in July, ongoing high inertia and robust demand.
Swedish March PMI: Further down (Nordea) - The manufacturing PMI declined to 45.7 in March. This is the lowest reading since December 2012, except for the pandemic during the spring 2020.
Latin America
Latam | Silicon Valley Bank and outlook for the region (BBVA) - How is Latin America affected by the recent difficulties facing certain banks in the US and Europe? In all honesty it is too early to tell, but any eventual impact would be indirect and would not happen via the Latin American banking system.
Canada
Bank of Canada Business Outlook Survey and Canadian Survey of Consumer Expectations (2023 Q1) (TD Bank) - The Bank of Canada Business Outlook Survey (BOS) reported a further drop in Canadian business sentiment in the first quarter of 2023. The BOS indicator, a statistical summary of survey results, was -1.1 in 2023Q1, down from +0.06 in 2022Q4.
Just What the BoC Ordered (BMO) - The Bank of Canada’s Business Outlook Survey (BOS) pointed to softer sentiment in the first quarter as the BOS indicator fell 1.16 pts to -1.10, returning to negative territory for the first time since 2020. The survey was conducted in February, ahead of the BoC’s pause and the financial volatility caused by pressures on the global banking system. However, some follow-up questions from the BoC suggest that the latter event didn’t lead to any meaningful changes to sentiment.
Let’s get real (CIBC) - As far back as Irving Fisher in the 1920s, economists recognized that there was an important distinction between “nominal interest rates”, the rates that we see discussed every day, and “real interest rates” which take inflation into account. The idea is simple enough; if inflation is higher, the actual purchasing power you get a year from now on funds deposited over the period will be lower. That real interest rate, the nominal rate minus inflation, is what will matter in your decision over whether to save your money or spend it today.
New Zealand
RBNZ Preview: A 25bp hike but peak rate of 5.50% looks hard to reach (ING) - We expect the Reserve Bank of New Zealand to hike by 25bp to 5.0% this week and to maintain a hawkish tone, which can support NZD. The slower pace of tightening is warranted by external and domestic downside risks to the economy and a lower inflation outlook. These same factors make us doubt that the 5.50% peak rate (projected by the RBNZ) will be reached.
South Korea
South Korea: Consumer inflation slowed in March, mainly due to falling fuel prices (ING) - Consumer prices slowed sharply in March and the Bank of Korea is expected to keep its policy rate at 3.5% next week.
Inflation
Inflation Monitor for April 3 (BMO) - A key measure of U.S. inflation eased in February, suggesting the Fed may be nearing the end of its aggressive tightening cycle. Meantime, the BoC's Q1 survey showed moderating inflation expectations.
Why Has Monetary Policy Tightening Not Cooled the Labor Market Enough to Quell Inflation? (Kansas City Fed) - Despite a year of rapidly rising interest rates, labor markets remain tight, likely contributing to the persistence of inflation. We create industry-specific versions of the KC Fed’s Labor Market Conditions Indicators (LMCI) to examine labor market tightness in different sectors. We find that labor markets in the services sector—which have contributed substantially to recent labor market tightness and inflation—are less sensitive to changes in interest rates, increasing the lag for monetary policy transmission.
Fiscal Policy Can Help Tame Inflation and Protect the Most Vulnerable (IMF) - High inflation can impose serious and lasting costs on the economy and people. But the distributive effects of inflation—the way it transfers money from some individuals to others—are complex. To respond effectively to the sharpest upsurge in inflation in three decades and to address the damage done to households, policymakers should have a better understanding of how inflation affects various segments of society in different places.
The Russia-Ukraine War’s Impact on Fertilizer Prices in 2022 (St Louis Fed) - After Russia invaded Ukraine in February 2022, the price of fertilizer reached record highs in the spring of that year. What were the factors that created this situation?
Energy
Oil Prices to Receive a Lift as OPEC+ Surprises With Production Cuts (TD Bank) - In a surprise move, Saudi Arabia and other OPEC+ oil producers (ex Russia) announced voluntary oil production cuts exceeding 1 million barrels per day (b/pd). These cuts – which build on the 2 million b/pd reductions implemented by the cartel last autumn – will begin in May and extend until the end of 2023.
OPEC throws remaining oil short sellers under the bus (Saxo Bank) - Ahead of Sunday’s surprise production cut announcement from OPEC+ the speculative gross short, especially in WTI had already been sharply reduced as the price spent most of the week recovering from the 10-dollar mid-month collapse. The net long increased by 42k lots with 46.7k lots of short covering offsetting 4.7k lots of long liquidation, the latter highlighting a market that was not looking for any further short-term gains.
Markets
The Week Ahead: April is historical the best month for equities, but money flows suggest clients are cautious (Saxo Bank) - April historical brings hope to markets, but clients are playing the defensive game, topping up their bond exposure in case of a recession. Across the entire industry $304 billion has flown in money market bonds over the last three weeks. This weeks economic data could be a catalyst for Q1 market darlings, such as high PE semiconductor stocks, to take a haircut. And why consumer spending stocks will be in focus.
Still Bearish (First Trust Portfolios) - If you were bullish for 2023… congratulations! The S&P 500 rose 7.0% in the first quarter and, although we still have more data to analyze before we finalize our prediction, it looks like real GDP grew at about a 2.0% annual rate in Q1. No drop in stocks, no recession. At least not yet.
Real Estate
Private Residential Construction Spending Declines in February (NAHB) - Private residential construction spending declined 0.6% in February, as spending on single-family construction decreased 1.8%. Spending declined for the ninth month in a row amid elevated mortgage interest rates. Consequently, private residential construction is 5.7% lower compared to a year ago.
Outlook
Q2 2023: The Fragmentation Game (Saxo Bank) - This Outlook looks at global fragmentation and how it will impact a variety of asset classes, geographical regions and macroeconomic topics in Q2 and beyond. Discover how it challenges the outlook for equities, creates discrepancies between forex pairs, shapes intriguing investment opportunities in different Asian regions, and how commodities and interest rates may affect and be affected by the Fragmentation Game.
Green
The eleven crucial net zero technologies (ABN AMRO) - We have defined a list of eleven key technologies to help to decarbonize the world by 2050. We explain each of the technologies and what they are used for. As technologies are continuously evolving because of limitations and challenges this list is not complete and will also change over time.
Subscribe to receive Econ Mornings every weekday at 9 am. More economic and finance content on Twitter, Reddit, and my website.