With Yellen hell-bent on tightening into Trump’s fiscal stimulus, and inflationary impulses popping up all around the world, ECB president Mario Draghi better note some serious downside looming (after leaving rates/taper unchanged) that opens the door to his un-tapering or the stagflationary pressures building everywhere willcome back to bite his precious asset prices.
As we noted earlier, with the market not expecting any changes from the ECB this morning, so far that is precisely what it got, when moments ago the ECB announced that it kept all of its rates unchanged as expected, keeping the rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility at 0.00%, 0.25% and -0.40%, respectively.
In additional language relating to non-standard measures, the ECB also said that “it will continue to make purchases under the asset purchase programme (APP) at the current monthly pace of €80 billion until the end of March 2017 and that, from April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary” and “in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.“
It also said that “the net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP” and cautioned that “if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration.”
In other words, it may move QE up or down, depending on what happens with inflation, in line with the ECB’s December announcement.
The eurozone’s annual inflation rate climbed above the 1 per cent mark for the first time since 2013 in December, underscoring the impact of climbing energy costs on consumer prices which have lagged at worryingly low levels for the last three years.
At 1.1 per cent, year-on-year inflation in December was confirmed in a second reading from Eurostat, which also showed an uptick in core inflation to 0.9 per cent.
But the inflationary performance across the 19-country bloc remains mixed – a development that could pose a headache for the European Central Bank, which targets average price growth of just below 2 per cent.
Germany, Europe’s largest economy, recorded a more than three-year high of 1.7 per cent last month while Italy remained more sluggish at 0.5 per cent.
Careful what you wish for central bankers and fiscal policy makers. Though we don’t see signs of “rollover risk” in any of the G5 or G20, it’s all about confidence and you know what Joe said about confidence:
Confidence is a very fragile thing. – Joe Montana
.The World Economic Forum reports this about Zimbabwe’s ghost of hyperinflation past,
Zimbabwe was once so gripped by hyperinflation that the central bank could no longer afford paper on which to print practically worthless trillion-dollar notes.
The government reported in July 2008 that Zimbabwe was experiencing inflation of 231 million percent (231,000,000%). However, the Libertarian think tank, the Cato Institute, believes that the real inflation rate was 89.7 sextillion percent or 89,700,000,000,000,000,000,000%.
It is interesting to note that the country is now grappling with the opposite problem.
Like Britain, Japan, the US and other nations dealing with the consequences of weak demand and cheap oil, Zimbabwe is threatened more by the prospect of falling prices. But that doesn’t mean its people are ready to trust that hyperinflation won’t happen again.
In a decision that will bring big cheer to the common man, the RBI (Reserve Bank Of India) has hiked the daily ATM withdrawal limit to Rs 4,500 per card. This would come as a huge relief to people who stand in queues for a long time and still manage to get only Rs 2,500.
In its latest notification, the RBI said, “The daily limit of withdrawal from ATMs has been increased (within the overall weekly limits specified) with effect from January 01, 2017, from the existing Rs 2500/- to Rs 4500/- per day per card. There is no change in weekly withdrawal limits.Such disbursals should predominantly be in the denomination of Rs 500.”
The current withdrawal limit per bank account per week has not been revised, a fact that is likely to disappoint people.
The Narendra Modi government’s move to demonetise old Rs 500 and Rs 1000 notes has largely been supported by the common man, though most agree that the implementation could have been better planned and executed. Long queues at banks and ATMs were a common sight in the first few days since the historic decision was announced by PM Modi on November 8. The situation has admittedly improved since then, but with increase in the daily limits, the government and banking system must work to ensure that ATMs have enough cash. But even as the central bank has eased the ATM withdrawal limit, the government is leaving no stone unturned to promote cashless transactions.
Companies are going to face a potentially peculiar situation following demonetisation, if the recently released inflation data are any indication. While a demand slowdown following the cash crunch could force producers to either cut or hold prices, their input prices are tending to go up owing to rising global commodity rates.
Latest data revealed retail inflation touched a two-year low of 3.63% in November, while wholesale price inflation eased to 3.15% from 3.39% in October. However, the Thomson Reuters/CoreCommodity CRB Commodity Index, which tracks the movement of 19 major commodities, has advanced 11.1% in the past one year and 8.6% so far in 2016.
Pronab Sen, former chairman of the National Statistical Commission, told FE: “The demand slowdown following demonetisation should put a downward pressure on prices, while the increase in input prices due to rising global commodity rates will put an upward pressure on prices. And what the net effect will be is very difficult to predict now. But companies may have to recalibrate their (pricing) decisions accordingly.”
Key global oil-producing countries’ decision to cut back on output has already driven up crude oil prices. Also, although China’s appetite for raw materials has been strained since last year, a renewed focus on manufacturing (along with services) by the US under President-elect Donald Trump has only complicated outlook of global commodity demand. “As more firms shift from the informal to the formal sector following demonetisation, “there is also a risk that tax increases are passed to consumers,” Nomura’s Sonal Varma said.
The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.
“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.
During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.
“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.
EM ended the weak on a soft note, as the hawkish Fed decision continued to have reverberations for global markets. Worst performers in EM last week were CLP (-3.3%), ZAR (-2%), and KRW (-1.5%). With little fundamental news expected this week, markets may take a more consolidative tone, especially with the holidays approaching. However, we continue to believe that the global backdrop for EM remains negative.
Several EM central banks meet, including Turkey, Hungary, Czech Republic, the Philippines, Taiwan, and Thailand. None are expected to move except Turkey, which is likely to hike rates for the second straight month in response to the weak lira. We were surprised by Colombia’s rate cut last Friday, and expect the peso to open weaker this week as a result.
Poland reports November industrial and construction output, real retail sales, and unemployment Monday. Consensus forecasts are 1.7% y/y, -18.9% y/y, 5.3% y/y, and 5.5%, respectively. Central bank minutes will be released Thursday. Recently, central bank Governor Glapinski said that the next move is likely to be hike but unlikely until 2018. CPI was flat y/y in November, the first non-negative reading since June 2014. Low base effects should see the y/y move sharply higher in 2017, and should move the timing of the first rate hike forward into 2017.
Taiwan reports November export orders Tuesday, which are expected to rise 6.0% y/y vs. 0.3% in October. The central bank meets Thursday and is expected to keep rates steady at 1.375%. The last move was a 12.5 bp cut back in June, and then left rates steady at its next quarterly meeting in September. November IP will be reported Friday, and is expected to rise 5.2% y/y vs. 3.7% in October.
Wednesday’s U.S. rate hike has caused ripples through global markets, as investors began to contemplate the impact of American monetary tightening and beefed-up fiscal spending under a President Donald Trump.
Many traders at a stock brokerage here described comments by Federal Reserve Chair Janet Yellen Wednesday as more hawkish than expected.
A 25-basis-point increase in the federal funds rate was announced at 2 p.m., following a two-day meeting of the Federal Open Market Committee. The first hike in a year, which lifted the benchmark rate to a range of 0.5% and 0.75%, was largely expected. But Yellen also revealed that the Fed was now looking at raising the rate three times in 2017, instead of the two hikes that had been indicated before.
Yellen also cautioned against guessing President-elect Donald Trump’s intentions regarding fiscal spending. “We’re operating under a cloud of uncertainty at the moment and we have time to wait and see what changes occur and factor those into our decision-making as we gain greater clarity.”
Fed watchers took this as an indication that the pace of rate hikes could hasten to more than the three estimated for 2017 as Trump’s policies are implemented.
While Yellen is still speaking, here is Goldman’s assessment of what the FOMC meant with its statement:
BOTTOM LINE: The FOMC raised the funds rate target range, as widely expected. In the accompanying projection materials, the median estimate of rate hikes for 2017 increased, and now shows three hikes for the year instead of two. The statement said that the committee aims to see only “some” further improvement in labor market conditions.
1. The FOMC announced an increase in the target rate for the federal funds rate to 0.50-0.75% from 0.25-0.50%, as widely expected. The post-meeting statement indicated that an increase was warranted due to “realized and expected labor market conditions and inflation”. The committee said that the stance of policy remained “accommodative” (rather than “moderately accommodative”, as in Chair Yellen’s recent Congressional testimony), which would help achieve “some further strengthening” in the labor market—with the “some” qualifier added to the statement at this meeting. Elsewhere the statement noted that the economy has been “expanding at a moderate pace”, and noted that inflation expectations in the bond market had increased “considerably”.
2. In the Summary of Economic Projections (SEP), participants made relatively few changes to their economic projections, but some upgraded their projections for the funds rate. The median projections for the funds rate showed three rate increases next year, up from two at the September meeting, with no changes to the number of hikes in 2018 and 2019. Longer-run projections for the funds rate also edged up, with the median rising to 3.0% from 2.9% previously. Elsewhere, the SEP showed slightly higher growth and headline inflation and lower unemployment for this year and also slightly higher growth and a lower unemployment rate for 2017. With a stable long-run unemployment rate but lower unemployment rate projections in 2017 and 2019, the higher projected pace of hikes next year may reflect the committee’s assessment that the economy is close to full employment.