ECB: Strat Review: Pre-emptive Action May Be Needed To Respond To Supply Shocks
The ECB's strategy review (overview here) did not bring too any large surprises. The symmetric 2% target was maintained and the ECB believes "the general lessons from recent experiences suggest that all tools should remain in the toolkit – with their use subject to a comprehensive cost-benefit analysis to ensure proportionality". There were no further details on the ECB's structural bond portfolio/longer-term refinancing operations. With excess liquidity still around E2.7trln, there doesn't appear to be too much urgency within the bank to get this ball rolling yet. Some other highlights from the overview on specific topics below:
On monetary policy responses to supply shocks
- "The potential for large deviations of inflation from target becoming entrenched and destabilising long-term inflation expectations is a key factor limiting the case for “looking-through” temporary shocks. Pre-emptive action to avert de-anchoring may be necessary because it is very costly to counteract once it has occurred"
- "Large shocks may also create non-linearities, amplifying the transmission of shocks to inflation but also improving the trade-off between inflation and output, thus weakening a key rationale for looking through temporary shocks".
- "Other channels such as hysteresis, non-linearities linked to financial frictions and household heterogeneity instead strengthen the case for looking through shocks, subject to inflation expectations being well-anchored. Some of these channels can create aggregate demand amplification to adverse supply shocks, thereby supporting the case for looking through shocks if inflation expectations are well-anchored".
On monetary policy at the effective lower bound:
- "Policy action along the forcefulness or persistence dimensions may help to address the constraint imposed by the effective lower bound (ELB) on nominal interest rates, especially if the full range of policy instruments is considered".
- "Early, forceful action on policy rates – including by means of negative interest rate policy – can provide effective stimulus. Decisive action on rates early on is also likely to be more effective than communicating rate paths far into the future, where credibility issues might dampen effectiveness".
- "There is also an inherent temporal dimension in the choice between forcefulness and persistence. Once the ELB is reached, only persistence through forward guidance remains as an option for interest rate policies. However, it is important to be clear in communication that persistence is a means of overcoming the ELB rather than a promise to keep rates permanently low".
- "Asset purchases or longer-term refinancing operations can enhance the forcefulness or persistence of the policy response, thereby mitigating ELB costs and enabling an earlier rate lift-off.
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AUSSIE 10-YEAR TECHS: (M5) Bear Cycle Remains Intact For Now
- RES 3: 96.501 - 76.4% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 2: 96.207 - 61.8% of the Mar 14 - Nov 1 ‘23 bear leg
- RES 1: 95.960 - High Apr 7
- PRICE: 95.745 @ 14:57 BST May 30
- SUP 1: 95.415/95.300 - Low May 15 / Low Jan 14
- SUP 2: 95.275 - Low Nov 14 (cont) and a key support
- SUP 3: 94.707 - 1.0% 10-dma envelope
Aussie 10-yr futures rallied well on the RBA rate decision last week, reversing a small part of recent weakness. Recent price action pressured prices through to new pullback lows last week. Next support undercuts at 95.420 (pierced), the Feb 13 low, ahead of 95.275, the Nov 14 low and a key support. Clearance of this level would strengthen a bearish condition. To the upside, a recovery of recent losses would shift attention to resistance at 96.207, a Fibonacci retracement point.
US-JAPAN: Trump To Deliver Remarks On Nippon Steel-US Steel Deal Shortly
US President Donald Trump is shortly due to deliver remarks in Pittsburgh, Pennsylvania, where he is expected to endorse Nippon Steel's takeover of US Steel. LIVESTREAM The announcement comes as the US and Japan remain far apart on a new bilateral trade deal.
- Trump said in a Truth Social message on May 23 that the planned partnership "will create at least 70,000 jobs, and add $14 Billion Dollars to the U.S. Economy," over the next 14 months.
- Semafor writes: “The US government will get a “golden share” in US Steel …, with the power to determine who sits on the board and control over production levels. It’s a dramatic provision that could lay out a roadmap for how deals get done in the Trump administration.”
- Japanese Prime Minister Shigeru Ishiba yesterday “expressed determination today to defend rules-based, free and multilateral trade systems and work on expanding the main Asia-Pacific trade group”, per AP.
- Ishiba said: “High tariffs will not bring economic prosperity. A prosperity built on sacrifices by someone or another country will not make a strong economy.”
- AP notes: “His comment comes as Japan’s chief tariff negotiator Ryosei Akazawa travels to Washington, D.C., for a fourth round of talks aiming to convince the U.S. to drop all recent tariff measures. So far Japan has not been successful in gaining U.S. concessions and is reportedly considering purchases of more U.S. farm products and defense equipment as bargaining chips.”
- Ishiba said after a call with Trump yesterday, “[we now] deeper understanding about each other,” but noted to reporters there has been no change to Japan’s position on the tariffs.
MACRO OUTLOOK: MNI US Macro Weekly: Jury’s Still Out On Q2 Downturn
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While the past week may be remembered for court decisions suspending the majority of the White House’s tariffs, it also brought further data evidence that the US economy did not fall off a cliff at the start of Q2.
- Consumer surveys (UMichigan, Conference Board) showed a downtick in consumer inflation expectations and improved sentiment, reflecting the US-China trade de-escalation on May 12.
- And while updated GDP data showed downwardly revised Q1 domestic demand, April personal consumption slowed but remained positive as underlying income growth remained solid.
- Likewise, though core durable goods orders retreated from Q1, a clear dropoff at the start of Q2 was not in full evidence. Regional Fed surveys signaled that activity stabilized in April-May, albeit at relatively weak levels, and labor market data pointed to incremental rather than sharp weakness.
- The point was underlined by the Atlanta Fed's nowcast for Q2 GDP growth which jumped to 3.84% on Friday from 2.18% in its May 27 update. Even if dramatic upgrade was due to a lower trade deficit in April as tariff front-running reversed, final domestic demand is still expected to be robust overall.
- Of course, things can change quickly: note Friday’s apparent re-escalation in US-China trade tensions and the temporary nature of the judicial tariff freeze (which in any case looks to be circumvented by the Trump administration), as well as the July “reciprocal” tariff negotiation deadline continuing to loom large.
- For the moment though, while uncertainty looks to be a constant, the data aren’t (yet) showing the degree of deterioration that had until recently been feared.
- Next week’s data highlights include key checkpoints for May, including ISM Manufacturing and Services surveys (which look likely to show some recovery versus April) and the US Employment report.
- Nonfarm payrolls growth is expected to moderate in May after a surprisingly robust 177k in April, with consensus currently around the 130k mark. The unemployment rate meanwhile is seen holding at 4.2% for what would be a third consecutive month.
