At the end of the week rates markets finally calmed down and found a clearing level, as further moves higher in rates were seen limited due to equities beginning to wobble.
Does the economy care? Well, these rate moves have started to challenge central bank guidance and these challenges may well continue. Q2 growth and inflation is now forecast to be one of the strongest periods in memory and the upgraded (0.9 -> 1.5bn) US stimulus package further adding strength to the recovery. However, confidence in a persistent economic revival is really the key. Therefore, it is very unlikely we will be finding out whether the market or the Fed is on the right path till 2022.
North America
US: The all-important Jan PCE core deflator reflected strength in inflation trends +0.3% MoM (0.1% exp., 0.3% prev.) resulting in +1.5% YoY (1.4% exp., 1.5% prev.) Conf. Board measures of confidence were ignored, but mostly higher. This trend will continue hand in hand with the vaccination program and will lead to the consumer’s resurgence as the fear of the virus dissipates.
Chair Powell’s Semi-Annual Monetary Policy Report, a highlight of the economic calendar, underwhelmed, leaving observers feeling the FOMC typewriter has gotten stuck in a literary loop. Other Fed members spoke on the economy and markets without distinction and the Fed Wire system crashed, leaving the market unable to clear USD for a temporary period both adding to the sense of market dysphoria.
Canada: The Governor of Bank of Canada gave a couple of speeches referencing the “considerable period” of time needed for the recovery. This was ironically combined with comments of “signs of exuberance” relating to the housing market.
Europe
Eurozone: ECB’s president Lagarde tried to calm markets by mentioning that the ECB is focusing on long term yields. Chief economist Lane spoke on the ECB’s new “compass”, this speech had all the hallmarks of being surprisingly useful, for an economist. The new needle in the compass is financing conditions such as bank lending, GDP weighted yields and short-term market rates. He also said the PEPP was flexible and that market moves would be looked at from a perspective of whether they were warranted – ie do they match the ECB’s forecast.
French business, consumer and manufacturing confidence declined a little. Jan consumer spending decline to -4.6% MoM (-4.0% exp., 23.0% prev.). CPI was better than expected 0.0% MoM (-0.3% exp., 0.3% prev.) The German IFO survey was slightly more positive. Italian consumer, manufacturing and economic sentiment was slightly better.
Sweden: SStatistics Sweden – providing society with useful and trusted statistics – reported an unemployment rate of +9.3%. This was using a new methodology which, hopefully, is better than the one that in 2019 resulted in an overestimate of 15%. 4Q GDP was a little weaker at -0.2% QoQ (0.5% exp., 4.9% prev.) bringing the annual measure to -2.2% YoY (-2.6% exp., -2.5% prev.), a very respectable number for a COVID impacted year. Jan retail sales had a slight uptick at +3.4% MoM (2.0% exp., -4.9% prev.)
Norway: Norwegian Feb unemployment moved lower to +4.3% (4.3% exp., 4.4% prev.)
Japan
Feb Tokyo core CPI held steady at +0.2% YoY (0.2% exp., 0.2% prev.) with Jan industrial production +4.2% MoM (3.8% exp., -1.0% prev.) and retail sales MoM -0.5% (-1.2% exp., -0.8% prev.) both better than expected.
UK
Dec unemployment was steady at +5.1% (5.1% exp., 5.0% prev.) and earnings were slightly higher at +4.1% (4.0% exp., 3.6% prev.)
There were many speakers form the BoE, but little new news with inflation expectations seen as stable and higher yields simply a reflection of a stronger economy. Only Haldane looked out of step, commenting that there was a risk to complacency on inflation. Given the UK’s large debt to GDP ratio, and the consumer’s leverage to housing, one could be thinking that is exactly what is required.
Australasia
Australia: 4Q Wages were strong than expected 0.6% QoQ (0.3% exp., 0.1% prev.) which, along with a weak market, led to the RBA increasing bond purchases to defend its YCC target on the 3y point of the curve.
New Zealand: 4Q Retail sales was a little weaker -2.7% (-0.5% exp., 28.0% prev.) but with changes to usual pattern of summer holidays it is difficult to interpret the signal over the noise.
The RBNZ left policy rates unchanged at +0.25% but the policy statement revised the expected path higher, which despite Governor Orr’s reluctance to commit to higher rates added to the instability of short end rates in NZ
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