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By GEOFFREY SMITH
with ANJULI DAVIES, BEN MUNSTER and IZABELLA KAMINSKA
| SNEAK PEEK |
— Bank of Canada’s surprise rate hike sets the stage for a Commonwealth hat trick as India’s central bank meets.
— Isabel Schnabel coins the concept of a “profit-wage-price spiral” as she continues to wait for convincing evidence to pause hikes.
— Crypto’s ‘Hodl’ effect is officially modeled by BIS researchers.
| POLICY TICKER |
ECB 3.75% ⇡ — BOE 4.5% ⇡ — FED 5.35% ⇡— SNB 1.5% ⇡— BOJ -0.10% ⇣— RBA 4.10% ⇡— PBOC 3.65%⇣— CBR 7.5% ⇣ — SARB 8.25% ⇡
Good morning, everyone. Do two surprise rate hikes make a pattern? As with the Reserve Bank of Australia on Tuesday, the Bank of Canada’s move (see below) gives the impression that the Anglo-Saxon world, at least, is far from done tightening. Those moves have been an unpleasant reminder that it will take more than a couple of U.S. regional bank failures to put the inflation genie back in the bottle.
The U.S., meanwhile just posted its widest monthly trade deficit of the year, with imports holding up conspicuously well. Suddenly, the hiking pause that Fed governor Philip Jefferson hinted at last week, just as the Fed went into its quiet period ahead of June 14, seems a bit harder to deliver.
And don’t talk to the ECB’s Isabel Schnabel about pausing. We’ve summarized her remarkably wide-ranging and lucid interview with De Tijd below, but it really is worth reading in full here.
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| DRIVING THE DAY |
— Reserve Bank of India decisions, 6:30 a.m.
— Eurozone first quarter GDP revision, 11 a.m.
— Last jobless claims before FOMC, 2.30 p.m.
SURPRISE HAT TRICK: The RBI, which put its tightening cycle on pause at its last meeting, has the chance to make it a hat-trick of surprise hikes from the Commonwealth this week. In Europe, there’s a risk that eurozone GDP may be revised down to show contraction in the first quarter, after Germany confirmed its technical recession last week. And in the U.S., there’s the last and most up-to-date reality check from the labor market with jobless claims at 2:30 p.m.
The ECB, meanwhile, enjoys the last of the spring holidays as it observes Corpus Christi, the German rendering of which translates loosely as ‘happy cadaver’… make of that what you will.
| INTEREST RATES |
O CANADA! After sitting on its hands for four months, the Bank of Canada became the second CB from the Anglo-Saxon world in as many days to announce a surprise rate hike. It raised the overnight rate by 25 percentage points to 4.75 percent, saying that “underlying inflation remains stubbornly high” and adding that “overall, excess demand in the economy looks to be more persistent than anticipated.”
The move wasn’t without its critics. Oxford Economics’ Michael Davenport channeled immortal pro ice hockey player Wayne Gretzky (insert moment of silent reverence here), accusing the BoC of going to where the puck is, rather than where the puck is going to be.
Pucker up: However the move adds credence to the idea that a pause in rate hikes is not the same thing as an end to them. That makes the read-across for the U.S. bond market especially interesting in the light of Philip Jefferson’s comments last week and the upcoming Fed meeting next week.
The loonie hit a two-month high on the news, and Canadian 10-year yield jumped 15 basis points to a three-month high of 3.42 percent.
| ECONOMIC INDICATORS |
CHINESE BURN: More signs of a slowdown in the world’s second-largest economy on Wednesday as exports tumbled by a faster-than-expected 7.5 percent year-on-year in May. Economists had forecast a modest 0.4 percent increase. That was the first drop since February and sent worrying signals about the outlook for global demand. Imports also fell 4.5 percent, less dramatic than the 8 percent expected. What’s even more worrisome is that the data is dreadful compared with last year when China was still largely shut down due to Covid restrictions.
Calls for fresh stimulus grow: Economists now expect the government to provide more measures to stimulate consumer demand and prop up the real estate sector. Already it’s trying to divert money from savings to consumption, leaning on the biggest banks to lower their deposit rates for the second time in less than a year.
Philip Lowe, governor of the Reserve Bank of Australia, meanwhile, cautioned that further Chinese weakness would have implications for Australian resource exports.
COLD COMFORT: More sober data out of Germany on Wednesday. Industrial production in the eurozone’s largest economy and manufacturing powerhouse managed a meager 0.3 percent increase in April, weaker than the 0.6 percent expected and adding further data points to the recessionary message that seems to be emerging. Industrial production is still 5 percent below pre-pandemic levels despite a boost at the start of the year from lower gas prices and easing global supply chains. The energy-intensive sector remains a particular concern, with output down nearly 13 percent from a year ago.
The problem child: Germany fell into recession in the first quarter with its economy being described ever so politely by a Sentix survey as “the biggest problem child in the eurozone.” The Bundesbank expects growth to resume again in the current quarter, but April’s retail sales were weaker than expected, and manufacturing orders also disappointed. “If the economy doesn’t gain more momentum over the coming two months, the second quarter could end up with another contraction,” say ING economists.
OECD SEES SLIGHT GLOBAL GROWTH UPTICK, STUBBORN INFLATION: The Organization for Economic Cooperation and Development revised slightly upward its growth and inflation forecast for this year and next on Wednesday.
Global growth is now forecasted to reach 2.7 percent this year. That’s down from 3.2 percent global growth in 2022, but slightly up compared to 2.6 percent forecasted in March. The global economy is expected to pick up some pace in 2024 to 2.9 percent, the OECD said.
Headline inflation, which was projected to decline in G20 countries from 9.1 percent last year to 5.9 percent this year and 4.5 percent the next, has been raised to 6.1 and 4.7 respectively, despite the falling energy prices, due to a rapid rise of food and service prices.
Best and worst: China is expected to experience the sharpest shift in growth in all G20 economies this year, to 5.4 percent this year and 5.1 percent next year, due to the reopening of its economy and cessation of zero covid policies. In Europe, Ireland is topping the growth chart, at 4.4 percent this year and 3.7 percent next. Estonia is expected to contract this year by 1.3 percent, before rebounding to 3.2 percent growth in 2024. Germany, Hungary, and Finland are all expected to flatline at 0 percent. Russia, previously forecasted to shrink by 2.5 percent this year as a result of international sanctions, is faring better than expected and is now expected to shrink by a smaller 1.5 percent this year.
| SPEAKER’S CORNER |
PANDEMIC PROFITEERING: ECB executive board member Isabel Schnabel tackled the thorny topic of ‘greedflation’ in an interview with Belgian daily De Tijd, published Wednesday. For those who don’t know, that’s the idea that companies have used inflation as an excuse to widen profit margins.
But the phenomenon may have been fleeting. Schnabel acknowledged that both wages and corporate profits had been important drivers of domestic inflation, but those companies that had increased profit margins had done so largely due to specific pandemic conditions. It happened “after the reopening of the economy strong demand outpaced constrained supply in a number of sectors,” she said, which “gave firms higher pricing power.”
Coining a spiral: Schnabel warned such conditions do risk creating something she called a “profit-wage-price spiral”. This, as opposed to a simple wage-price spiral (where rising wages and prices chase each other higher) presumably sees profits, prices and wages all chase each other. At newsletter preparation time (about 4ish CET time), Google-searching the term delivered only one result. Schnabel’s interview with De Tijd. But hey, maybe it will become a thing.
Rate outlook: Schnabel returned to her familiar theme of wanting “convincing evidence that inflation returns to our 2 percent target in a sustained and timely manner,” before considering a stop to rate hikes. “We are not at that point yet,” she added, with a swipe at eurozone fiscal policies that she said weren’t being properly targeted.
DEBT IS DIRTY: ECB Veep Luis de Guindos, meanwhile, urged technocrats at a meeting in Brussels to speed up capital market union because Europe will need deep and integrated capital markets, as well as plentiful access to equity finance to protect it from climate change, but also to drive green innovation. “ECB research suggests that an economy’s carbon footprint shrinks faster when a higher proportion of its funding comes from equity rather than debt financing,” he said.
Frictiontech needed? de Guindos’ speech had, however, started by lamenting how the widespread use of online banking and the rapid dissemination of news via social media had driven financial stability this year. And how, as a result, “this ever-faster digital world” (brought about by Silicon Valley equity financing, no?) now needed banks, supervisors, central banks and legislators to review tools for safeguarding liquidity conditions and financial stability.
| PAPERS, PLEASE |
THE VELOCITY OF CRYPTO: Researchers at the Bank for International Settlements have come up with a crypto multiplier theory, which assesses the sensitivity of a cryptocurrency’s market capitalization to aggregate inflows and outflows of investors’ funds. The less transacted a cryptocurrency is, the greater the market capitalization.“The analysis explains why announcements by large investors, celebrity endorsements or financial crises can result in substantial price movements,” they noted.
Call it the Hodl effect? What the research implies is that rather than being exclusively deflationary because of limited money creation, the value of crypto versus other currencies is ultimately a function of how well it is circulated. High velocity, thus is bad for bitcoin. This is evidenced by what happens to crypto prices when large speculative positions are liquidated. “The crypto multiplier predicts that winding down a large speculative position is likely to have a significant price impact unless the position is absorbed by other speculators,” the researchers concluded.
| QUOTED |
“Banks are broadly preparing for restructuring and some difficulties going ahead…but the level of capital and liquidity of banks is strong. They should be able to handle the strain” U.S. Treasury Secretary Janet Yellen told CNBC on Wednesday.
“How many seemingly serious people said that we would end up like Turkey?… I want to infect you with optimism because we have achieved 13 percent inflation and I hope that by September inflation will go down to a single-digit level,” Adam Glapiński, president of the National Bank of Poland told a press conference on Wednesday.
“Over recent months, a higher share of Australians have had a job than ever before, and youth unemployment has been the lowest it has been in decades. There are very tangible economic and social benefits to this. Our ambition is to return inflation to target while holding onto as many of these benefits as possible,” Philip Lowe, governor of the Reserve Bank of Australia, told a bank conference on Wednesday.
| WHAT WE’RE READING |
— UBS delays its Q2 results to August 31 (Reuters)
— Newly merged UBS-Credit Suisse entity doesn’t have to fully secure its balance sheet until the end of 2029 (finews.com)
— RBI may pause again with markets watching for stance shift (Bloomberg)
— OECD chief economist calls for governments to cut fiscal support (Financial Times)
— Turkish lira slumps as new economic team starts ‘intentional devaluation’ (Financial Times)
THANKS TO: Ben Munster, Anjuli Davies and Izabella Kaminska
| WHAT’S ON |
(Editor’s note: this is intended as a selective list, giving precedence to European events)
— Reserve Bank of India rate decisions, 6:30 a.m.
— Hungary May CPI, 08:30 a.m.
— Eurozone 1Q GDP revisions, 11 a.m.
— U.S. jobless claims
All times CET, unless otherwise noted.
