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Benoît Cœuré: The rise of services and the transmission of monetary policy

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One of the biggest mysteries currently facing central banks around the world is why inflation has failed to pick up more forcefully after years of extraordinary monetary stimulus.1 This is one of the most fiercely debated topics in macroeconomics, with few definitive answers.

Many explanations have been put forward, including discussions on the appropriate measure of economic slack, the role of inflation expectations and the effects of globalisation and digitalisation.2

One aspect that has received much less attention in the public discussion, however, relates to the impact of the structural transformation of our economies on inflation dynamics and monetary policy transmission.

There are many dimensions to this transformation to which central banks should remain alert, including the impact of ageing and, looking forward, climate change.3 In my remarks this evening, I will focus on another dimension. Across advanced economies, secular forces have shifted economic activity, employment and consumption expenditure away from manufactured goods and towards services.

In my remarks this evening, I will argue that these secular forces are likely to have played, and continue to play, a non-negligible role in explaining the sluggish response of inflation to economic activity and monetary policy in recent years.

I will start by presenting some stylised facts that illustrate the extent of past changes in consumption and production patterns in the euro area, the United States and Japan. I will then explain how these changes, and the shift towards services, are likely to have affected monetary policy transmission on both sides of the Atlantic.

In short, prices in the services sector change much less frequently than in other sectors and are less sensitive to exchange rates. This means that it takes longer for inflation to respond to changes in monetary policy and economic activity than it did a few decades ago.

I will also suggest that the rise of the services sector in our economies has only affected the pace of the response of inflation to shocks, but not the overall effectiveness of monetary policy. In other words, the effects of monetary policy take longer to pass through the economy but they have not become less powerful.

Finally, I will argue that policies that can help raise productivity and competition in the services sector may contribute to reduce the lags with which monetary policy is transmitted to consumer prices.

The rise of the service economy

One of the most striking trends in advanced economies over the past few decades has been the growing importance of the services sector in aggregate economic activity.

Three stylised facts document this rise.4

First, from 1970 to 2010, the share of services in total gross value added increased by more than 20 percentage points in the euro area and by about 14 and 16 percentage points in the United States and Japan respectively. You can see this on my first slide.

Second, and unsurprisingly given that many services are labour intensive, there has been an even greater increase in the percentage of the workforce employed in the services sector. You can see this on my next slide. In 2010, the services sector accounted for three-quarters of the jobs in the euro area, while in 1970 this figure was about 45%. The situation in the United States is even more stark. In 2010, the services sector accounted for nearly 85% of jobs.

And, third, over the past 40 years we have seen a significant increase in the consumption of services by households.5 You can see this on my next slide. Services in the euro area today account for more than 50% of final consumption, compared with less than 40% in 1980. In the United States, households today spend nearly 70% of their consumption expenditure on services, and in Japan, this figure is 60%.

These developments have been studied widely in the literature.6 William Baumol’s famous “cost disease” channel, for example, predicted that lower productivity growth would raise the relative price of services compared with manufacturing, which in turn would affect the sectoral allocation of consumption and labour.7

You can see this clearly on my next slide. Across advanced economies, the output price of services relative to manufacturing goods has risen steadily as productivity gains in the manufacturing sector have outpaced productivity gains in the services sector. As a result, households in advanced economies are allocating less and less of their expenditure to goods, which are getting cheaper, and are instead spending more on services, whose relative prices increase with income over time.8

Work by David Autor and others, on the other hand, has documented how technological progress and globalisation have caused profound sectoral shifts in employment in the United States.9 Their research focused mainly on the flipside of the developments in the services sector – that is, on the stark decline in manufacturing employment.

You can see this on my next slide. Since the 1970s, the manufacturing sector’s share of total jobs in the United States and the euro area has practically halved. Today, only around 15% of workers in the euro area are employed in the manufacturing sector.10 In the United States, the figure is less than 10%. The research by David Autor and others has sensitised policymakers to the challenges that global trade and automation may bring in terms of inequality and social cohesion.11

Services, inflation and the transmission of monetary policy

A question that has received much less attention in central banking circles, however, is whether and how the rise of the services sector has affected the transmission of monetary policy, and whether it has contributed to the stubbornly weak inflationary pressures that we are observing today.

There are at least two broad and complementary channels through which this may happen.

The first channel relates to a composition effect – that is, to the changing weight of services in the consumption basket. As final consumption expenditures shift, so do the weights used to calculate inflation. You can see this on my next slide. The weight of services in euro area core inflation has increased by around 10 percentage points since the launch of the single currency in 1999.12 In the United States, services today account for three-quarters of the core CPI basket.

If prices in the services sector differ in terms of level, volatility and persistence compared with other sectors, this can be expected to affect aggregate inflation dynamics.

The second channel relates to a transmission effect – that is, differences in how the economy reacts to monetary impulses from the central bank. If services and manufacturing differ with respect to their nominal and real rigidities, or feature different interest and exchange rate sensitivities, then monetary policy will be transmitted differently through the economy. To put it simply, the investment-saving (IS) curve may have a different slope depending on the weight of services in the economy.

In what follows I will argue that both the composition and transmission effects could help us improve our understanding of recent inflation dynamics across advanced economies.

The composition effect

Idiosyncratic shocks in the services sector account for a larger share of aggregate fluctuations today than they did in the past. Today, an arbitrary increase in service price inflation raises euro area core inflation by nearly 25% more than it did in the mid-1990s. On my next slide you can see that, all else being equal, euro area core inflation would have been around 15 basis points lower in 2018 were it not for the increase in the weight of services in the euro area HICP.

So, consistent with Baumol’s cost disease effect, the shift towards services, whose relative prices increase over time, has tended to lift the level of core inflation.13 This is also consistent with the limited support often found in the literature for global factors in driving domestic underlying inflation, and with evidence of a declining pass-through of exchange rate changes to final consumer prices since the 1970s and 80s.14

Put differently, those products that are most exposed to international competition, that are imported or that have a large import content have gradually become less significant drivers of aggregate inflation outcomes over time. For example, the import content of non-energy industrial goods is close to 20% in the euro area HICP, compared with just 8% for services. I will come back to this in a minute.

The transmission effect

Even more relevant for policymakers, however, is the effect of structural transformation on the persistence of inflation. This can be best illustrated when considering the impact of the second channel I mentioned before, namely the way monetary policy propagates through the economy.

To measure the effects of services deepening on the economy, Eurosystem staff have used a structural model of the euro area to compare how the changes in the structure of the euro area economy between 1970 and 2010 have affected the response of inflation and output to an easing of monetary policy.15

On my next slide you can see the results. Three observations stand out.

First, today the (simulated) immediate reaction of inflation to an easing of monetary policy is roughly 20% smaller than it was in 1970.16 You can see this by the blue dashed line being well below the red line for the first year or so.

Second, over a longer horizon, monetary policy affects inflation outcomes more strongly than previously, meaning its effects are distributed more evenly over time.

Third, the real effects of monetary policy – that is, its effects on employment and growth – have changed much less over the past few decades and are, at the margin, even slightly stronger today. You can see this on the right-hand side.

Let me now try to make sense of these three observations.

Services and price rigidities

The key insight for understanding these three effects is the different behaviour of price-setters across economic sectors. In particular, there is a large and growing body of evidence that shows that prices in the services sector are considerably “stickier” than in all other sectors in the economy – that is, they adjust less frequently.17

Take the micro evidence presented by the Eurosystem’s Inflation Persistence Network. In the euro area, 5.6% of prices in the services sector change each month, compared with 9.2% for non-energy industrial goods and 28% for unprocessed food.18

Housing services, meanwhile, which account for a quarter of the services weight in the euro area HICP, are among the most rigid prices in the economy. Apartment rents in Germany, for example, remain unchanged for more than four years, on average.19 Ranking industries by frequency of price changes produces remarkably consistent results across economies, both within and outside the euro area.20

Estimates of sectoral Phillips curves corroborate these findings. For France, for example, estimates show that the frequency of price changes across sectors ranges from a single quarter to almost two years. In virtually all service industries, the frequency of price changes is towards the upper end of this range.21

There are at least two factors that may help explain why services prices may react more sluggishly to changes in firms’ external conditions. One is that wages account for around 40% of input costs in services, compared with 20% in the manufacturing sector.22

Just think of education, health, childcare, restaurants and so forth. Wage rigidity implies that the costs of producing most services are relatively stable over time, resulting in less need for price adjustments.

Another factor relates to competition. Evidence shows that markups in the services sector are higher, on average, than in the manufacturing sector, partly reflecting reduced exposure to foreign competition.23 Although the share of services in total global trade has increased somewhat since 1970, they still only account for around a fifth of total global exports today.24 Lower competition may allow services firms to adjust their prices less frequently.

The implication is that the rise of the services sector has measurably lowered the median frequency of price changes in the economy and, therefore, the response of inflation to changes in demand and monetary policy in the short term, as you can see on the left-hand side of my slide.

But in the medium term, as more and more firms readjust their prices as economic conditions improve, inflation will respond more forcefully. The model predicts that, after around two and a half years, the cumulative effects of monetary policy on inflation are higher today than in 1970. To sum up, services deepening implies that monetary policy takes more time to be transmitted to inflation, but its effectiveness has not diminished.

This is also true for the impact of monetary policy on growth and employment, as you can see on the right-hand side. In a nutshell, there are two opposing forces at work. On the one side, services are, on average, less interest-rate sensitive – that is, the IS curve is flatter, which in principle makes a service-based economy less responsive to monetary policy.

But because prices are now more rigid on the whole, more of the adjustment in the economy needs to happen through changes in quantities rather than prices. Rigid prices are the reason why monetary policy has real effects in the first place. This latter effect may more than offset the reduced interest rate sensitivity, leading to the picture you can see on the right-hand side.25

The rise of services as a production input

And yet, one may correctly argue that, even when taking into account the transmission effect, underlying inflation in the euro area today remains too low, given how much time has elapsed since we launched our monetary stimulus. Low inflation appears even more of a puzzle when considering the composition effect, which should cause inflation to rise over time, all else being equal.

Of course, a number of factors may currently be at play, many of which we do not yet understand properly, such as firms’ state-contingent pricing decisions.26 Structural transformation is also still ongoing. Consider Spain. The services sector’s share of total employment has increased by more than 8 percentage points, to 78% since the start of 2008 alone. The unwinding of imbalances is often the catalyst for large reallocations of economic activity across sectors, which may further delay the pass-through of policy changes.

But I would argue that part of the puzzle may also relate to structural changes within the services sector, which is itself subject to transformation. I would like to highlight two of these changes.

First, all services are not made equal. Recent research shows that some services industries, mostly those that can be delivered at distance, such as telecommunications and finance, are among the most productive and thriving industries in the economy.27 As a result, a portion of services have been found to feature a falling relative price as income rises, much like manufacturing industries.28

Indeed, on my next slide you can see that the difference between price inflation for services and non-energy goods has been steadily trending downwards over time, reducing overall inflationary pressures in the economy. In other words, the pace with which the relative price of services is increasing over time – Baumol’s cost disease channel – has gradually started to decelerate, at least in the euro area.29

The second structural change relates to the input-output structure of our economies. Services not only account for a much larger share of consumption and employment, they also make up a growing share of intermediate inputs used in the production of both services and manufacturing – a development that some have coined “servicification”.30

You can see this on my next slide for the case of the United States, where reliable long time series data are available. For the manufacturing sector, the proportion of total inputs accounted for by services increased from around 28% in 1970 to 32% in 2010. For the services sector, the increase is even more striking. Intermediate services increased their share of total inputs by 14 percentage points, to 87%, over the same period.

The implication is that sticker services prices spread much more widely through the economy via their effect on firms’ marginal costs.31 On my next slide you can see the impact on the transmission of monetary policy. Eurosystem staff have calibrated the same model I mentioned before, but this time for the US economy, also taking into account the change in the input-output structure.

Clearly, the “servicification” of the US economy has contributed to further dampening the impact of monetary policy impulses on inflation in the short term, meaning it takes even longer to see the full effects of monetary easing. Data on input-output structures for the euro area suggest that the effect is likely to be of a similar magnitude on this side of the Atlantic.32

Again, current inflation outcomes are likely driven by a host of factors. But, all else being equal, it is now easy to see that the increase in wages that we have observed over the past year or so can be expected to take longer to pass through to final consumer prices than it did in the past.

Conclusion

I will leave you with three key takeaways tonight.

The first is that the rise of services in production and consumption over the past few decades has contributed to lift core inflation across advanced economies – making current low inflation appear even more puzzling.

The second key takeaway is that services deepening has had a profound impact on the transmission of monetary policy, also in the euro area. It has lowered the median frequency of price changes in the economy, increasing the lag with which monetary policy is transmitted to consumer price inflation.

The third and final takeaway is that the service sector itself is subject to change. The rise and expansion of “modern” services that can be delivered at distance means that competition and aggregate productivity may increase over time, thereby contributing to reducing price rigidity. Completing the single market for services in Europe, and reducing barriers to trade for services, would support this process and thereby also facilitate a faster transmission of monetary policy.33

Thank you.

Agencies issue final amendments to Regulation CC regarding funds availability

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The Consumer Financial Protection Bureau and the Federal Reserve Board today jointly published amendments to Regulation CC that implement a statutory requirement to adjust for inflation the amount of funds depository institutions must make available to their customers. The amendments apply in circumstances ranging from next business day withdrawal of certain check deposits to setting the threshold amount for determining whether an account has been repeatedly withdrawn.

Dodd- Frank act

Dodd- Frank act

Regulation CC implements the Expedited Funds Availability Act of 1987 (EFA Act). The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended the EFA Act to grant the Bureau and the Board joint rulemaking authority for funds-availability schedules, disclosure policies, payment of interest, and other EFA Act provisions implemented by Regulation CC.

The Dodd-Frank Act amendments require that the EFA Act’s dollar amounts be inflation adjusted every five years by the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The first set of adjustments are detailed in the attached Federal Register notice.

To help ensure that institutions have sufficient time to implement the adjustments, the compliance date for the adjusted amounts is July 1, 2020.

The agencies are also implementing in Regulation CC the EFA Act amendments made by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which include extending coverage of the EFA Act to American Samoa, the Commonwealth of the Northern Mariana Islands, and Guam.

Federal Register notice (PDF)

BoE: Bank Rate maintained at 0.75% – June 2019

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The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 19 June 2019, the MPC voted unanimously to maintain Bank Rate at 0.75%.

The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

Monetary Policy

The MPC’s most recent economic projections, set out in the May Inflation Report, assumed a smooth adjustment to the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union and were conditioned on a path for Bank Rate that rose to around 1% by the end of the forecast period. In those projections, GDP growth was a little below potential during 2019 as a whole, reflecting subdued global growth and ongoing Brexit uncertainties. Growth then picked up above the subdued pace of potential supply growth, such that excess demand rose above 1% of potential output by the end of the forecast period. As excess demand emerged, domestic inflationary pressures firmed, such that CPI inflation picked up to above the 2% target in two years’ time and was still rising at the end of the three-year forecast period.

Since the Committee’s previous meeting, the near-term data have been broadly in line with the May Report, but downside risks to growth have increased.  Globally, trade tensions have intensified. Domestically, the perceived likelihood of a no-deal Brexit has risen. Trade concerns have contributed to volatility in global equity prices and corporate bond spreads, as well as falls in industrial metals prices. Forward interest rates in major economies have fallen materially further.  Increased Brexit uncertainties have put additional downward pressure on UK forward interest rates and led to a decline in the sterling exchange rate.

As expected, recent UK data have been volatile, in large part due to Brexit-related effects on financial markets and businesses. After growing by 0.5% in 2019 Q1, GDP is now expected to be flat in Q2. That in part reflects an unwind of the positive contribution to GDP in the first quarter from companies in the United Kingdom and the European Union building stocks significantly ahead of recent Brexit deadlines. Looking through recent volatility, underlying growth in the United Kingdom appears to have weakened slightly in the first half of the year relative to 2018 to a rate a little below its potential. The underlying pattern of relatively strong household consumption growth but weak business investment has persisted.

CPI inflation was 2.0% in May. It is likely to fall below the 2% target later this year, reflecting recent falls in energy prices. Core CPI inflation was 1.7% in May, and core services CPI inflation has remained slightly below levels consistent with meeting the inflation target in the medium term. The labour market remains tight, with recent data on employment, unemployment and regular pay in line with expectations at the time of the May Report. Growth in unit wage costs has remained at target-consistent levels.

The Committee continues to judge that, were the economy to develop broadly in line with its May Inflation Report projections that included an assumption of a smooth Brexit, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon. The MPC judges at this meeting that the existing stance of monetary policy is appropriate.

The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond. The appropriate path of monetary policy will depend on the balance of these effects on demand, supply and the exchange rate. The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction. The Committee will always act to achieve the 2% inflation target.

Dollar Little-Changed, US Bond Yields Extend Drop on Soft Inflation

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Summary: The Dollar ended little-changed against its main rivals as US Treasuries rose and yields fell. Wall Street stocks broke their steep fall and stabilised with no further bad news on the China-US trade spat. Sterling and the Euro steadied after holding around key levels of 1.2600 and 1.1100. The Dollar Index (USD/DXY) was flat at 98.167 (98.166) after hitting a two-year high a week ago at 98.37. Antipodean cousins, Aussie and Kiwi steadied at 0.6912 (0.6917) and 0.6510 (0.6513) respectively. The Dollar finished flat against the Yen at 109.60 as risk aversion eased.
US treasury prices rose pushing bond yields lower. In late New York trading the benchmark US 10-Year note yielded 2.22% from 2.27% yesterday. The DOW closed 0.2% higher at 25,180 while the S&P 500 gained 0.34% to 2,790. (2,780 yesterday).
US Q1 GDP rose a healthy 3.1% as forecast from 3.2% in the previous quarter. However, the personal consumption expenditure (PCE), which excludes volatile food and energy prices, and is the Fed’s preferred inflation measure missed expectations, rising 1.0% against 1.3%. This was the smallest increase in 4 years. Pending Home Sales were down 1.5% versus a forecast gain of 0.9%.

CNBC US 10-Year Bond Yield Chart - 31 May 2019

CNBC US 10-Year Bond Yield Chart – 31 May 2019

  • EUR/USD – The Euro fell to 1.1116 before steadying to settle back at 1.1130, little-changed from 1.1131 yesterday. With Germany, France and Switzerland out for a bank holiday (Ascension Day), European markets were subdued.
  • GBP/USD – Sterling slumped to a 5-month low at 1.2580 before steadying to climb back and settle at 1.2610. The combination of an overall stronger Dollar, Brexit uncertainty and a lack of economic data kept the British currency on the defensive.
  • USD/JPY – The Dollar traded within its recent range between 109.10 and 109.90. Continuous Japanese corporate support for Dollars at the 109.10 level kept USD/JPY steady despite the rise in risk aversion. Lower US 10-year yields have limited the Dollar’s gains to just under 110.00

On the Lookout: With a lack of fresh negative news on the trade front, it’s a case of “no news is good news” for the currency markets. Traders prefer to keep their powder dry and wait for fresh developments. The economic calendar lights up today as traders start to look at the fundamentals in the near term.
Today sees a heavy start to Asia with Japan’s Tokyo Core CPI, Unemployment Rate (May), Annual Retail Sales, and May Preliminary Industrial Production data. Japan also reports its Consumer Confidence and Housing Starts. China follows with Manufacturing and Non-Manufacturing PMI for May. Australian Private Sector Credit round-up Asia’s economic calendar.
The Euro area sees German Preliminary CPI and Retail Sales. UK Mortgage Approvals and Net Lending to Individuals reports follow. Canadian May GDP, RMPI (Raw Material Prices) kick-off North American data. The US reports on its Core PCE Price Index, Personal Spending and Income, Chicago PMI and Revised University of Michigan Consumer Sentiment and Inflation Expectations. A big Friday feast of data.

Trading Perspective: The soft US inflation report came amidst a sharp slowdown in domestic demand and adds pressure on the Fed to cut interest rates. US bond yields extended their drop and the benchmark 10-year at 2.22% is nearing September 2017 lows. US interest rates are headed lower. Without yield support, the Dollar cannot break new highs. Market positioning, already long Dollar bets against 5 major IMM currencies, may be ripe for a correction. US Inflation and spending data will be closely watched tonight.

  1. EUR/USD – The Euro continued to grind lower as the market’s bearish sentiment following the EUR parliamentary results and risk aversion from the China-US trade spat. There were no prime economic data releases yesterday due to the bank holiday in France, Germany and Switzerland. Today sees Germany’s Retail Sales and Preliminary CPI reports. Speculative short Euro bets are the biggest in 3 years. EUR/USD held just above 1.11 strong support, finishing flat at 1.1130. Immediate support remains at the 1.1100/10 level. Immediate resistance lies at 1.1160 and 1.1200. Look to buy dips. Likely range today of 1.1120-1.1170.
DAILY FX GBP USD Chart - 31 May 2019

DAILY FX GBP USD Chart – 31 May 2019

  1. GBP/USD – Sterling remains heavy despite its bounce from overnight and 5-month lows at 1.2580. GBP/USD closed at 1.2610 (1.2628 yesterday). The latest COT/CTC report saw a relatively large build in GBP shorts to -GBP 26,200 bets from -GBP 3,300. Trader’s convictions of a lower Pound are growing which makes the currency susceptible to large reversals. Today’s calendar sees the return of UK economic data. GBP/USD has immediate resistance at 1.2640 followed by 1.2680. Immediate support can be found at 1.2590 and 1.2550. Look for a range today of 1.2585-1.2685. At these levels, the Pound is a better buy.
  2. AUD/USD – The Australian Dollar was steady after weathering initial selling pressure which took it to a low of 0.68987 before steadying to 0.6912. Australian 10-year bond yields were flat and steadied at 1.53%. AUD/USD has immediate resistance at 0.6940 (overnight high 0.69367). The next resistance level can be found at 0.6980. Immediate support lies at 0.6890 and 0.68620. Look to buy dips with a likely range of 0.6900-60.
  3. USD/JPY – The Dollar rallied to close at 109.62, dead flat from yesterday’s close. USD/JPY remains constrained between 109 and 110.00 with good interests on both sides. Market positioning is short JPY bets even as shorts were trimmed in the last COT/CFTC report. With the US 10-year yield down 6 basis points to 2.22%, USD/JPY is a sell on rallies. Likely range today 109.25-109.75.

Happy Friday and trading all.

Bank of Canada maintains overnight rate target at 1 ¾ per cent

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The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank of canada Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

Recent Canadian economic data are in line with the projections in the Bank’s April Monetary Policy Report (MPR), with accumulating evidence that the slowdown in late 2018 and early 2019 is being followed by a pickup starting in the second quarter. The  Canada oil sector is beginning to recover as production increases and prices remain above recent lows. Meanwhile, housing market indicators point to a more stable national market, albeit with continued weakness in some regions.

Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary. Recent data support a pickup in both consumer spending and exports in the second quarter, and it appears that overall growth in business investment has firmed. That said, inventories rose sharply in the first quarter, which may dampen production growth in coming months.

Canadian Economy

Canadian Economy

The global economy is also evolving largely as expected since April, although the recent escalation of trade conflicts is heightening uncertainty about economic prospects. In addition, trade restrictions introduced by China are having direct effects on Canadian exports. In contrast, the removal of steel and aluminum tariffs and increasing prospects for the ratification of CUSMA will have positive implications for Canadian exports and investment.

Inflation has evolved in line with the Bank’s April projection. The Bank expects CPI inflation to remain around the 2 per cent target in the coming months. Core inflation measures all remain close to 2 per cent.

Overall, recent data have reinforced Governing Council’s view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased. In this context, the degree of accommodation being provided by the current policy interest rate remains appropriate. In taking future policy decisions, Governing Council will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment.

Information note

The next scheduled date for announcing the overnight rate target is July 10, 2019. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.

Minutes of the Monetary Policy Meeting of the Reserve Bank Board

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International Economic Conditions

Members commenced their discussion of the international economy by observing that global growth had eased in the second half of 2018 and looked to have continued at around this more moderate rate in 2019. Growth in Australia’s major trading partners was also expected to continue at around this slower pace over 2019 and 2020. Members also observed that the outlook for China continued to be a significant uncertainty for the global growth outlook, as were trade tensions, which had escalated again between the United States and China immediately prior to the meeting. Global financial conditions had become more accommodative since the turn of the year. Members noted that this could lead to stronger growth than expected, although there were still risks of events occurring that could lead to both tighter financial conditions and lower global growth.

March quarter GDP growth had been stronger than expected in the United States and the euro area, but had been quite weak in a number of trade-intensive economies in east Asia. The latest monthly data had shown that growth in Chinese industrial production, fixed asset investment and total social financing had increased, suggesting momentum had picked up in response to targeted policy easing by the Chinese authorities. Conditions in Chinese property markets had also strengthened. Members noted that economic sentiment in China had improved since the beginning of the year, partly because small to medium-sized businesses were obtaining improved access to finance and government infrastructure spending was boosting demand.

Members noted that the sharp slowing in global trade had been related to slowing growth in China. The decline in the value of Chinese imports had been broadly based across regions, although the large decline in the value of trade with the United States suggested that trade diversion as a result of new tariffs had also been a factor. Growth in China was expected to slow gradually over the forecast period to the middle of 2021. This was expected to continue to weigh on external demand for trade-intensive economies in east Asia and the euro area; recent data on export orders in east Asia had been subdued.

Members discussed various longer-term policy initiatives in China, including policies on investment abroad and modernisation of China’s manufacturing sector. China’s infrastructure investment abroad had served to support land and sea trade routes, although there had been some challenges that Chinese authorities had been addressing. Members also noted the authorities’ efforts to promote innovation, particularly in China’s technology sector, and to upgrade the Chinese manufacturing sector significantly.

For some economies, the slowing in external demand had been accompanied by lower investment and investment intentions. In some east Asian economies in particular, including South Korea, the turn in the cycle in the global electronics industry had dampened exports and investment. Members noted that firms would also be less likely to commit to long-term investments given the uncertainty around the evolution of international trade policy.

In many economies, domestically focused sectors, such as services and retail trade, had been more resilient than externally focused sectors. This was particularly the case in the advanced economies, where tight labour market conditions had supported growth in spending. Unemployment rates had remained around multi-decade lows in many advanced economies and wages growth had increased noticeably. In the United States and Japan, recent wage increases had been larger for low-wage earners than high-wage earners.

Core inflation had remained subdued in most economies and, following weaker inflation data in the United States, was below target in the three major advanced economies.

There had been some large movements in commodity prices over recent months. Iron ore prices had remained high as a result of supply disruptions in Brazil and Australia. Oil prices had also risen, which had led to higher headline consumer price inflation in most economies and was expected to flow through to higher prices for Australian liquefied natural gas exports over the following couple of quarters. As a result, the forecast for Australia’s terms of trade had been revised higher, but they were still expected to decline over the forecast period to the middle of 2021.

Domestic Economic Conditions

Members commenced their discussion of the domestic economy by noting that growth had been subdued in the second half of 2018. Indicators of household consumption suggested that growth had remained subdued in the March quarter. In addition, demand for new dwelling construction was expected to have remained weak. These factors had been the main drivers of a downward revision to the domestic growth outlook in the near term. Beyond 2019, these effects were broadly offset by upward revisions to export growth and some newly announced mining investment projects. Members noted that, overall, the Bank expected year-ended GDP growth to be 2¾ per cent over 2019 and 2020.

Growth in consumption had been weaker than expected in the second half of 2018 and retail sales data for the March quarter suggested that this weakness had continued into 2019. Members noted that, as had been the case for some time, the outlook for growth in consumption was a key uncertainty for the overall growth outlook. The risks to consumption were tilted to the downside, given the extended period of low income growth and the adjustment occurring in housing markets. The forecast for an improvement in growth in consumption depended on an increase in growth in household disposable income over the forecast period. The forecast increase in household disposable income growth was supported by employment growth, a pick-up in wages growth and lower growth in tax payments, partly because of the introduction of the low- and middle-income tax offsets announced in the Australian Government 2019-20 Budget. Members noted that there was uncertainty about the outlook for fiscal policy and how this might affect the outlook for growth in household disposable income.

Housing markets had remained weak in the preceding month. The rental vacancy rate in Sydney had increased to the highest level in around 15 years and housing prices in established markets had continued to decline. More positively, the pace of price declines had moderated and the modest recovery in auction clearance rates since the start of the year had been sustained.

Information obtained through the Bank’s liaison program continued to indicate that sales conditions for off-the-plan apartments and new detached housing had been difficult. The spike in residential building approvals in February had largely been unwound in March, confirming that underlying conditions for new dwelling activity remained weak. Data released since the previous meeting had shown that the pipeline of residential work to be done had decreased in the December quarter, but remained high. Members noted that the forecasts for dwelling investment suggested that population growth could exceed growth in the stock of housing towards the end of the forecast period, and that this possibility had been suggested by a number of the Bank’s liaison contacts.

Survey measures of business conditions had moved a little higher in March and April and had remained slightly above average, though well below the high levels that had prevailed throughout most of 2018. Forward-looking indicators of non-mining business investment had been mixed; non-residential building approvals had declined, but the pipeline of infrastructure work remained high. Non-mining business investment was expected to support growth in output over the forecast period.

Mining investment had declined in the December quarter, but was expected to increase over the forecast period, reflecting investment required to sustain current production levels and an expectation that a number of new projects would commence towards the end of the forecast period. Recent trade data suggested resource exports would contribute to output growth in the March quarter, and exports were expected to contribute to output growth throughout the forecast period. Members noted that the forecast pick-up in rural exports from 2020 depended on a return to normal weather conditions.

Public demand was expected to continue to support aggregate growth over the forecast period; a significant share of this expenditure was associated with delivering goods and services to households, such as the National Disability Insurance Scheme. Members noted that the Victorian Government had announced measures to contain growth in labour costs in an environment of expected lower stamp duty revenues.

Growth in employment in the March quarter had been strong, following similar outcomes over much of 2018. Most of the growth in employment since mid 2018 had been in full-time employment. The unemployment rate had remained around 5 per cent in March. Members observed that conditions in the labour market had signalled a significantly stronger pace of economic activity since mid 2018 than indicated by the GDP data. Leading indicators of labour demand had eased over recent months and provided a mixed picture of the near-term outlook. As a result, employment growth was expected to be similar to the growth rate of the working-age population in the near term. The unemployment rate was expected to remain around 5 per cent through most of the forecast period, before declining to around 4¾ per cent in 2021.

Members noted that the forecasts for the labour market suggested that there would be some spare capacity in the labour market throughout the forecast period, although there was uncertainty about how quickly the spare capacity would decline and how progress would feed into wage pressures. The central forecast was for wages growth to pick up gradually. In combination, the forecasts for wages growth and consumer price inflation implied that real consumer wage growth would be low but positive over the forecast period.

The inflation data in the March quarter CPI release were noticeably lower than expected. The CPI increased by 0.1 per cent (seasonally adjusted) in the quarter, while the underlying rate of inflation was ¼ per cent. In year-ended terms, headline inflation was 1.3 per cent, with the underlying rate at 1½ per cent. The earlier exchange rate depreciation and the drought-related increase in some food prices had led to relatively strong retail price inflation in the March quarter. However, these inflationary pressures had been more than offset by broad-based weakness in other CPI components, which was likely to be more persistent.

Rental inflation had remained low, driven by a marked slowing in rental inflation in Sydney; data on newly advertised rents suggested that rents had started to pick up in Perth. Developer discounts and incentives had weighed on the prices of newly built homes, particularly in Melbourne and Brisbane. A range of government policy decisions had contributed to lower inflation in administered prices in recent quarters. Market and survey-based measures of inflation expectations had declined in recent months, as had been the case in other advanced economies.

Members noted that the recent CPI data had led the Bank to reassess the disinflationary effects of the weak housing market. Combined with the lower GDP growth outlook, this had led to a downward revision to the inflation outlook, although there was also some uncertainty about the persistence of downward pressure from utilities and administered price changes and the effect of housing market weakness. The central forecast scenario was for underlying inflation of around 1¾ per cent over 2019, 2 per cent over 2020 and a little higher after that.

Financial Markets

Members commenced their discussion of financial market developments by noting that global financial conditions were accommodative and had eased significantly since the start of the year. Market expectations for the future path of monetary policy in a number of economies had declined earlier in the year, in line with guidance from major central banks that policy was likely to be more accommodative than previously expected. The expectation that policy rates would remain little changed for some time had contributed to very low levels of volatility in most financial markets.

In the United States, with inflation close to but a bit below target and the federal funds rate close to neutral, the Federal Reserve (Fed) had reiterated that it would take a patient and flexible approach to its policy decisions. While the Fed’s recent forecast update implied that one more policy rate increase was likely by the end of 2020, market pricing implied that the Fed was expected to lower its policy rate around twice over that period. At its April meeting, the European Central Bank had reiterated that it expected policy rates to remain at current levels at least through to the end of 2019. The Bank of Japan had indicated that its very stimulatory policy settings will remain in place until at least mid 2020. Market participants expected the next moves in policy rates in Canada, New Zealand and Australia to be down.

Government bond yields remained at very low levels in the advanced economies, having declined since late 2018 in line with downward revisions to growth and inflation projections, and the lowering of policy rate expectations by market participants. In Germany and Japan, long-term bond yields were around zero, close to the record lows of 2016. Members noted that Australian government bond yields had declined by more than those in other major markets over the preceding six months, following weaker-than-expected inflation data and a lower expected path for monetary policy. By contrast, Chinese government bond yields had increased over the preceding month, as signs emerged that policy stimulus there was providing support to economic activity.

Members noted that, following the brief inversion of segments of the US yield curve in March, the slope of the US yield curve had increased a little in April. While market commentators had noted that past episodes of yield curve inversion had tended to precede recessions, the decline in credit spreads and rise in equity valuations in 2019 suggested market participants did not perceive this to be a particular risk.

Members observed that financing conditions for corporations remained favourable. In the advanced economies, corporate bond yields had declined, partly because of a decline in spreads. In addition, equity prices had increased substantially since the start of 2019 to be at their highest levels in over a decade, including in Australia.

In China, growth in total social financing had been steady in recent months and a little higher than in 2018, supported by bank lending and bond issuance. Off-balance sheet financing had continued to decline, reflecting the authorities’ efforts to discourage riskier forms of financing. Members noted that the Chinese authorities had introduced additional measures to encourage banks to lend to small private sector firms, which had previously made use of off-balance sheet financing that was now less readily available. Members also noted the substantial local government bond issuance to finance infrastructure projects, which was a key part of the authorities’ stimulus measures.

In foreign exchange markets, volatility had remained low over the preceding month, including in most emerging markets. Members noted, however, that risks remained pronounced for a small number of economies with specific vulnerabilities, most notably Turkey and Argentina, where financial conditions had tightened again.

The Australian dollar had depreciated a little following the weaker-than-expected March quarter CPI release, but overall had been little changed over recent months and remained around the lower end of its narrow range of the past few years. Members noted that this reflected the offsetting influences of the rise in commodity prices and decline in Australian government bond yields relative to those in the major markets over 2019. The difference between long-term government bond yields in the United States and Australia had increased to a historically large 75 basis points.

Housing credit growth had slowed over the preceding year, but the monthly pace of growth had stabilised over recent months. In three-month-ended annualised terms, growth in housing lending was around 4½ per cent for owner-occupiers and ½ per cent for investors. Loan approvals also appeared to have stabilised in recent months. Members noted that, although lending practices were tighter than they had been for some time, the decline in housing credit growth over the preceding year had been driven largely by weaker demand for finance, associated with the decline in housing prices.

The average interest rate charged on outstanding variable-rate housing loans had remained broadly steady. While banks had increased their standard variable reference rates since mid 2018, rates on new loans had remained materially below the average of those on outstanding loans. Members noted that banks had recently reduced the rates charged on new fixed-rate loans.

Funding costs for the major banks had declined to record lows in preceding months, as the increase in short-term money market rates in 2018 had been fully unwound and retail deposit rates had continued to edge lower. Despite the low cost of funding, bank bond issuance in 2019 so far had been a little below the average of recent years. Issuance of bonds by other corporations and of residential mortgage-backed securities had been broadly in line with the average of recent years.

The pace of growth in business lending had been maintained in recent months at rates that were above those of the preceding few years, driven by lending to large businesses. Lending to small businesses had declined over the preceding year. Interest rates on variable-rate loans to large businesses, which are linked to bank bill swap rates, had declined in the March quarter. Members observed that the rates charged on small business loans remained markedly higher than those on large business loans, with the gap between small and large business loan rates having doubled following the global financial crisis.

Financial market participants’ expectations of cash rate cuts were brought further forward following the release of the March quarter CPI. Financial market pricing implied that the cash rate was expected to be lowered by 25 basis points within the next three months and again by the end of 2019.

Considerations for Monetary Policy

In considering the stance of monetary policy, members observed that growth in Australia’s major trading partners had slowed, driven by a sharp slowing in global trade associated with slower growth in China. Members also noted, however, that targeted stimulus measures in China appeared to be having an effect and global financial conditions remained very accommodative. In a number of advanced economies, labour markets had continued to tighten and wages growth had increased, but inflationary pressures had remained subdued.

Domestically, members noted that the sustained low level of interest rates over recent years had been supporting economic activity and had contributed to a decline in the unemployment rate. However, household income growth had remained low and the March quarter inflation data indicated that the inflationary pressures in the Australian economy were lower than previously thought.

After updating the forecasts for the new information, the central forecast scenario remained for progress to be made on the Bank’s goals of reducing unemployment and returning inflation towards the midpoint of the target, but at a more gradual pace than previously expected. Under the central scenario, GDP growth had been revised lower in the near term, but was expected to pick up to be around 2¾ per cent over 2019 and 2020. The unemployment rate was expected to remain around 5 per cent over 2019 and 2020 before declining a little to 4¾ per cent in 2021. This implied that spare capacity would remain in the economy for some time. Given this, and the subdued inflationary pressures across the economy, underlying inflation was expected to be 1¾ per cent over 2019, 2 per cent over 2020 and a little higher after that.

Members noted that the central forecast scenario was based on the usual technical assumption that the cash rate followed the path implied by market pricing, which suggested interest rates were expected to be lower over the next six months. This implied that, without an easing in monetary policy over the next six months, growth and inflation outcomes would be expected to be less favourable than the central scenario.

At the same time, members also recognised that there were risks to the forecasts in both directions. The risks to the global economy remained tilted to the downside, with uncertainty remaining around the evolution of international trade policy. Domestically, the outlook for household consumption remained a key uncertainty, with the risks tilted to the downside given ongoing low income growth and the adjustment occurring in housing markets. On the upside, it was possible that the combined effects of continued accommodative financial conditions, the increase in Australia’s terms of trade, a renewed expansion in the resources sector and the expected lift in household disposable income growth would result in stronger growth in output than in the central forecast scenario.

Members discussed the outlook for the domestic labour market in some detail. As in the previous meeting, members discussed the scenario where inflation did not move any higher and unemployment trended up, recognising that in those circumstances a decrease in the cash rate would likely be appropriate. As noted at the previous meeting, members recognised that the effect on the economy of lower interest rates could be expected to be smaller than in the past, given the high level of household debt and the adjustment that was occurring in housing markets. Nevertheless, a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure.

In light of the recent run of inflation data, the Board then discussed the likelihood that the economy could sustain a stronger labour market with lower rates of unemployment than previously estimated, while achieving inflation consistent with the target. In this context, members observed that the recent international experience was that inflation had remained low despite historically low rates of unemployment. Given the international evidence and the recent Australian inflation data, members agreed that a further decline in the unemployment rate would be consistent with achieving Australia’s medium-term inflation target. Given this, members considered the scenario where there was no further improvement in the labour market in the period ahead, recognising that in those circumstances a decrease in the cash rate would likely be appropriate.

Taking into account all the available information, including the various uncertainties about the outlook, members judged that it was appropriate to hold the stance of monetary policy unchanged at this meeting, noting that holding monetary policy steady had enabled the Bank to be a source of stability and confidence over recent years. In view of the spare capacity that remained in the economy, however, members agreed that it was important to continue to pay close attention to developments in the labour market and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.

The Decision

The Board decided to leave the cash rate unchanged at 1.5 per cent.

Bank of Canada maintains overnight rate target at 1 ¾ per cent

by Leave a Comment Filed Under: Central Bank Annoucements, Central Bank News Tagged: , , , ,

The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.

Global economic growth has slowed by more than the Bank forecast in its January Monetary Policy Report (MPR). Ongoing uncertainty related to trade conflicts has undermined business sentiment and activity, contributing to a synchronous slowdown across many countries. In response, many central banks have signalled a slower pace of monetary policy normalization. Financial conditions and market sentiment have improved as a result, pushing up prices for oil and other commodities.

Global economic activity is expected to pick up during 2019 and average 3 ¼ per cent over the projection period, supported by accommodative financial conditions and as a number of temporary factors weighing on growth fade. This is roughly in line with the global economy’s potential and a modest downgrade to the Bank’s January projection.

Global Economic Activity

Global Economic Activity

In Canada, growth during the first half of 2019 is now expected to be slower than was anticipated in January. Last year’s oil price decline and ongoing transportation constraints have curbed investment and exports in the energy sector. Investment and exports outside the energy sector, meanwhile, have been negatively affected by trade policy uncertainty and the global slowdown. Weaker-than-anticipated housing and consumption also contributed to slower growth.

The Bank expects growth to pick up, starting in the second quarter of this year. Housing activity is expected to stabilize given continued population gains, the fading effects of past housing policy changes, and improved global financial conditions. Consumption will be underpinned by strong growth in employment income. Outside of the oil and gas sector, investment will be supported by high rates of capacity utilization and exports will expand with strengthening global demand.  Meanwhile, the contribution to growth from government spending has been revised down in light of Ontario’s new budget.

Overall, the Bank projects real GDP growth of 1.2 per cent in 2019 and around 2 per cent in 2020 and 2021. This forecast implies a modest widening of the output gap, which will be absorbed over the projection period.

CPI and measures of core inflation are all close to 2 per cent. CPI inflation will likely dip in the third quarter, largely because of the dynamics of gasoline prices, before returning to about 2 per cent by year end. Taking into account the effects of the new carbon pollution charge, as well as modest excess capacity, the Bank expects inflation to remain around 2 per cent through 2020 and 2021.

Given all of these developments, Governing Council judges that an accommodative policy interest rate continues to be warranted. We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive. In particular, we are monitoring developments in household spending, oil markets, and global trade policy to gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.

Information note

The next scheduled date for announcing the overnight rate target is May 29, 2019. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on July 10, 2019.

Monetary Policy Decision – Bank of Korea

by Leave a Comment Filed Under: Regulatory Annoucements Tagged: , , , ,

Based on currently available information the Board considers that the pace of global economic growth has continued to slow. Volatility in the global financial markets increased temporarily. Government bond yields in major countries have fallen considerably, in line mainly with concerns about the global economic slowdown and changes in expectations about the monetary policies of such countries, while the exchange rates of some vulnerable emerging economies have risen significantly. Looking ahead, the Board sees global economic growth and the global financial markets as likely to be affected by factors such as the degree of the spread of trade protectionism, the changes in the monetary policies of major countries, and the uncertainties concerning Brexit.

WON

WON

The Board judges that the pace of domestic economic growth has moderated somewhat as consumption growth has temporarily slowed, facilities and construction investment have continued undergoing adjustments and export growth has continued to slow. The sluggishness in employment conditions has partially lessened, with the increase in the number of persons employed having risen. Going forward the Board expects that consumption will continue to grow, while exports and facilities investment will also recover gradually toward the second half of this year, although the adjustment in construction investment will continue. GDP is forecast to grow at the mid-2% level this year, slightly below the level projected in January (2.6%).

Consumer price inflation has slowed to the mid-0% range, in consequence mainly of declines in the prices of petroleum products and agricultural, livestock and fisheries products. Core inflation (with food and energy product prices excluded from the CPI) has been at the upper-0% level, and the rate of inflation expected by the general public has been in the low- to mid-2% range. Looking ahead, it is forecast that consumer price inflation will fluctuate for some time below 1%, lower than the path projected in January, and then run at the low- to mid-1% level from the second half of this year. Core inflation will also gradually rise.

The volatility of price variables in the domestic financial markets has expanded slightly. Long-term market interest rates and stock prices have rebounded after having fallen, affected by movements in the global financial markets in line with projections of weakening growth in major countries and expectations of progress in the US-China trade negotiations. The Korean won-US dollar exchange rate has risen, in line with the strengthening of the US dollar. The rate of increase in household lending has continued to slow, while housing prices have continued their downtrend.

Looking ahead, the Board will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level over a medium-term horizon, while paying attention to financial stability. As it is expected that the domestic economy will continue to grow at a rate that does not diverge significantly from its potential level and it is forecast that inflationary pressures on the demand side will not be high, the Board will maintain its accommodative monetary policy stance. In this process it will carefully monitor developments such as conditions related to trade with major countries, any changes in the economies and monetary policies of major countries, financial and economic conditions in emerging market economies, the trend of increase in household debt, and geopolitical risks, while examining their effects on domestic growth and inflation.

Higher US Yields Boost Dollar, Euro, Pound, EM’s Retreat

by Leave a Comment Filed Under: Market News, Market News - Asia Open Tagged: , , , , , , , , , , , ,

Summary: Higher US bond yields boosted the Dollar despite a decline in Industrial Production. The benchmark US 10-year yield climbed 3 basis points to 2.59%, back to March 20 pre-FOMC levels. The Euro retreated to finish at 1.1280 (1.1302) while Sterling fell back 0.39% to 1.3051 (1.3100). Germany’s ZEW Economic Sentiment Index in March soundly beat forecasts. A solid UK Employment report failed to lift the British currency against the overall stronger Greenback. The Dollar Index (USD/DXY) rose to 97.085, up 0.15%, its highest in 4 days. Elsewhere, the Australian Dollar slumped to 0.71396 immediately following the release of the RBA minutes which traders interpreted as dovish. The Aussie Battler bounced back to close little-changed at 0.7172. A data-dump from China, the trifecta of Industrial Production, Retail Sales, Fixed Asset Investment, including Q1 GDP, will determine the fate of risk and the Aussie today. Emerging Market currencies eased. Stocks slipped at the close. The Dow was down 0.06% while the S&P 500 lost 0.03%.

Trading View - One Month US 10-year bond yield - 17 APR 2019

Trading View – One Month US 10-year bond yield – 17 APR 2019

  • AUD/USD – the Aussie closed flat at 0.7172 after testing an overnight low at 0.71396. Markets initially interpreted the RBA minutes as dovish. Policymakers were less confident in the labour and housing markets. However, the RBA did not weigh an interest rate cut.
  • EUR/USD – the Euro failed to break up through the strong resistance level of 1.1320-30 and closed at its immediate support level of 1.1280. Germany’s ZEW survey showed concerns on the region’s outlook are fading. Tomorrow’s Eurozone Trade and inflation followed by Thursday’s Euro area and Eurozone PMI’s will be closely watched.
  • GBP/USD – Sterling fell against the overall stronger Greenback to 1.3050 from 1.3100. Reports that talks between PM May and the Labour party had stalled also weighed on the Pound.
  • USD/JPY – the Dollar finished little-changed against the Yen. Higher US yields will continue to support this currency pair. Market talk of an options play with a 112.00 strike abound.

On the Lookout: It’s all about China today. Analysts are expecting the worst for the world’s second largest economy to be over with. Recent export and credit data beat expectations. China’s Q1 GDP is expected to grow at an annual 6.3% from the previous 6.4%. Improvements are forecast in China’s trifecta of Industrial Production, Retail Sales and Fixed Asset Investment. We could be in for a few surprises. Tin helmets on.
Apart from China, the Eurozone reports on its Current Account and Final Headline and Core CPI data for March. The UK follows with its Headline, Core CPI, PPI input and House Price Index. Canadian Inflation (CPI, Core CPI and Trimmed-Mean CPI) are next. US March Trade Balance rounds up today’s busy data.

Trading Perspective: Easter markets are always characterised by less liquidity which lead to break-out attempts and wider trading ranges. Often, the break-outs are temporary. Traders need to keep aware of the respective levels. Market positioning will have a greater impact in thin conditions. There may be some large options strategies lying around with expiries in the next few days. The currencies have been stuck in relatively tight ranges content to consolidate, searching for catalysts to move. There is a lot of economic data released this week, the bulk of which come today and tomorrow. Keep watch on the data.

  1. EUR/USD – The Euro slipped to its immediate support level, settling just above 1.1280. The next support level lies at 1.1250. This is a strong support level and should hold if the Euro is to continue its march higher. Immediate resistance today can be found at 1.1310 and 1.1330. Bear in mind the speculative short Euro bets are at multi-year highs. Some of those shorts will be looking to cover on any dips. Sentiment on the Single currency is still bearish which should keep the Euro between 1.1250-1.1330 for now. Prefer to buy on dips.
DAILY FX AUD USD Hourly - 17 APR 2019

DAILY FX AUD USD Hourly – 17 APR 2019

  1. AUD/USD – The Aussie had a good bounce off it’s RBA induced lows. At the end of the day, the RBA did not signal any rate cuts even if policymakers expressed less confidence on the recent labour and housing data. It’s all about China today. AUD/USD has immediate resistance at 0.7180 and 0.7210. Immediate support lies at 0.7140 and 0.7110. Speculative Aussie short bets were pared to -AUD 54,400 from the previous -AUD 55,700. Look for a likely range today of 0.7160-0.7210. Prefer to buy dips.
  2. USD/JPY – The Dollar failed to gain ground against the Yen despite the climb in the US 10-year yield. Stocks reversed to ease at the close. USD/JPY closed at 112.01 (112.04 yesterday). Overnight high traded was 112.045. Immediate resistance lies at 112.10 followed by 112.30. Immediate support can be found at 111.85 followed by 111.55. The close around 112.00 is not surprising considering reports of an Options play with the strike price at 112.00. JPY short bets are the second biggest next to the Euro. The latest COT/CFTC report (week ended April 9) saw a build-up of net JPY shorts to -JPY 71,500 bets from the previous week’s -JPY 62,700. Look to sell rallies with a likely range of 111.60-112.10 today.
  3. GBP/USD – Sterling traded to an overnight low of 1.30425 after failing to clear above 1.3100. Solid UK Employment data which saw UK Unemployment remain at 45-year low of 3.9%, and an Employment rise to 179,000 failed to lift the Pound. Sterling has immediate support at 1.3040 followed by 1.3010. Immediate resistance can be found at 1.3100 and 1.3140. Look to buy dips today with a likely range of 1.3040-1.3110.

Happy trading all.

Dollar Eases, Long Bets Start to Tire, Euro, Yen Rally

by Leave a Comment Filed Under: Market News, Market News - Asia Open Tagged: , , , , , , , , , , ,

Summary: The Dollar eased against most of its Rivals ahead of this week’s ECB policy meeting and FOMC minutes release. Traders pared their long USD bets after the Greenback failed to gain fresh ground following Friday’s mixed US Payrolls report. The Euro, most shorted currency against the Greenback, rallied to near 2-week highs before settling at 1.1260, up 0.44%. This week’s focus is on Wednesday’s ECB meeting where no policy changes are expected. The press conference which follows will be of keen interest. ECB policymakers may touch on the possibility of tiered rates amid weak growth in the Euro region and fears of a global recession. Hours later, the US Fed releases the minutes of its latest FOMC meeting following a key inflation report (CPI). All happening tomorrow!
USD/JPY slipped 0.21% to 111.50 from 111.72 yesterday. Speculative JPY short bets were the second biggest, next to the Euro. The Australian Dollar rallied to 0.7125 from 0.7107, up 0.35%. Sterling rose to 1.3067 from 1.3037 on the back of the generally weaker US Dollar. PM May tries to convince the opposition Labour party to approve her Brexit deal. May has until Friday to bring a deal to the EU for a response.
Wall Street stocks were little-changed. Treasury yields steadied. Benchmark US 10-year yield closed at 2.52% from 2.50% yesterday. No fresh concrete news on China-US trade talks emerged.
Data releases were light yesterday. Japan’s Consumer Confidence slipped to 40.5 from 41.5. Eurozone Sentix Investor Confidence Index beat forecasts. Canadian Housing Starts underwhelmed.

  • EUR/USD – The Single currency rallied off it’s 1.1200 base to an overnight and near 2-week high at 1.12744 before settling at 1.1260. Total net speculative short bets in the Euro increased to -EUR 99,200 contracts (week ended April 2) from the previous week’s -EUR 80,300. It’s a big increase in shorts, currently at multi-year highs.
Daily FX USD JPY Hourly Chart - 09 April 2019

Daily FX USD JPY Hourly Chart – 09 April 2019

  • USD/JPY – the Dollar eased after twice attempting to trade at 112.00 since Friday. USD/JPY traded to 111.74 before easing to 111.50 at the close. The Yen is the second most shorted currency against the Dollar. The 112.00 level will be difficult to break.
  • AUD/USD – The Australian Dollar benefitted from the overall weaker Greenback, trading to 0.71307 and settling at 0.7125. Many traders remain bearish on the Aussie Battler and the market is short.

On the Lookout: Data releases today are light and mostly 2nd-tier.  Australia reports on its Home Loans for March which are expected to slip 3.0% from the February’s 2.6% fall. Europe starts off with Switzerland’s Jobless rate followed by Italian Retail Sales. The US releases its NFIB Small Business Index as well as JOLTS Job Openings. Job Openings, which exclude the farming industry, are forecast to fall to 7.54 million from 7.58 million. Tomorrow’s the big day with the ECB policy meeting, US Headline and Core inflation reports and the FOMC minutes.

Trading Perspective: Expect the currencies to consolidate their gains against the US Dollar today. US bond yield rises were not matched by their Rivals. This should provide support for the Greenback. The Dollar Index (USD/DXY) closed at 97.062, down 0.32% (97.363 yesterday). The support at 97.00 should hold. Benchmark US 10-year bond yields climbed to 2.52% (2.50%). Germany’s 10-year Bund yield closed flat at 0.00%. Japan’s 10-year JGB yield fell two basis points to -0.06%. Australian 10-year yields slipped 3 basis points to 1.87%.

  1. EUR/USD – While the Euro has rallied off it’s base at 1.1200, the bounce was limited to 1.12744, near two-week highs. Market sentiment is still decidedly bearish on the Euro with many looking for 1.1000 next. While the ECB is not expected to change policy, there is talk about a tiering of rates due to the weak Euro area growth and fears of a global recession. Mario Draghi’s press conference following the ECB’s last meeting saw the Euro plummet from 1.1320 to 1.1175. While the Euro bounced to 1.1420 following the Fed’s dovish bent in its March meeting, it has since grinded lower. Short market positioning remains at an extreme. Look for consolidation with a likely range today of 1.1230-80. Look to buy dips.
  2. USD/JPY – The Dollar failed to break 112.00 against last night with the high at 111.74. Immediate resistance lies at 111.70 followed by 112.00 which is strong. The widening of the gap in the 10-year yields will support USD/JPY today. Immediate support can be found at 111.30 (overnight low 111.280). The next support level is at 111.00. Net JPY shorts had a small increase in the latest CFTC report. The Yen is still the second most shorted currency against the Dollar. Look to sell USD/JPY rallies with a likely range today of 111.25-75.
Investing.Com AUD USD Hourly Chart - 09 April 2019

Investing.Com AUD USD Hourly Chart – 09 April 2019

  1. AUD/USD – The Australian Dollar bounced from overnight lows at 0.70876 to finish at 0.7125 in New York, up 0.35%. An overall weaker Greenback supported the Battler. Emerging Market currencies were mixed. Markets are looking for a breakthrough in the China-US trade talks to lift the Aussie. Yet gains have been fleeting and limited. The main driver for the Aussie will still be the US Dollar. Speculative Aussie shorts are also at extremes. Immediate support can be found at 0.7110 and 0.7080. Immediate resistance can be found at 0.7140 and 0.7170. Look to buy dips with a likely range today of 0.7110-40.

Happy trading all.

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