[ECB] Nagel: Monetary Policy Cannot Be Eased Too Soon

Remarks of Officials

Joachim Nagel, Executive Member of the European Central Bank and President of the Bundesbank, spoke at the 32nd European Banking Conference in Frankfurt on November 18, with the following key points.

Inflationary shocks can leave "scars", meaning that the longer people live with high inflation, the more it affects their experiences. These new experiences may affect their expectations and decisions, even after inflation has fallen again.

These traumas may change the factors of the inflationary environment, which in turn may lead to higher inflationary trends and also make the inflationary environment more volatile. In such an environment, monetary policy would be more difficult to maintain price stability.

In the current situation, the ECB must demonstrate its determination to achieve price stability.

After three consecutive sharp interest rate hikes, it cannot stop there. Further decisive measures must be taken. I think it is still too early to discuss whether her restrictive territory has been reached.

In an unusual period of double-digit inflation, it may not be enough to simply normalize monetary policy. If hyperinflation is likely to become entrenched, we must be determined to raise key interest rates further and take a restrictive stance. It would be a mistake to fear a recession without taking further decisive steps.

Bond holdings should be reduced from the beginning of next year and all maturing bonds should no longer be fully reinvested.

The ECB still has a lot of work to do, and monetary policy must also be tough if it wants to address the difficult issue of inflation. It would be a mistake to ease policy measures in the early days when price pressures have eased. We must ensure that hyperinflation really ends. Therefore, monetary policy cannot be eased too soon.

As some ECB officials support a slowdown in rate hikes, Nagel's attitude remains hawkish. This is not the first time Nagel made hawkish remarks, as early as early November, Nagel urged the ECB to continue to take an aggressive stance. As it stands, there are already very clear divisions within the ECB.

Panetta, Visco, and Centeno as clear supporters of a slowdown in rate hikes.

Kazaks, Nagel, Kazmir, Muller are in favor of an aggressive rate hike.

Lagarde, Guindos, Villeroy are unclear for now.

Nagel's speech

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Cohen

Economic

For all the tumult and disruptions of the coronavirus pandemic, U.S. labor markets have come out on the other side not far from the strong conditions that prevailed before the crisis, a paper presented at a Boston Fed research conference said.

Almost all of the hit the U.S. labor market took in 2020, when COVID-19 struck, was tied to temporary layoffs which were swiftly rescinded, said the paper presented on Saturday.

Adjusted for these temporary shifts, "the labor market remained surprisingly tight throughout the crisis, despite the dramatic job losses" and by the spring of this year had recovered and returned to extremely tight conditions.

"I think if we were going to see large scale changes, we would have seen them by this point," said Lisa Kahn, an economics professor at the University of Rochester, who was one of the co-authors.

The U.S. unemployment rate rode a virtual rollercoaster in 2020. From a 3.5% reading in February of that year, it spiked to 14.7% in April of that year, before undergoing a much faster than expected recovery that has resulted in very low rates of unemployment — it stood at 3.7% last month — and very robust levels of job creation.

Fears the pandemic would cause deep and lasting damage to the economy generated a historically aggressive campaign of stimulus by the government and the Federal Reserve, as elected officials and central bankers were mindful that the weaker policy response to the Great Recession over a decade ago led to a slow recovery for the economy.

That policy response is now seen as a key driver in the massive surge of inflation following the most acute phase of the pandemic. Faced with the highest levels of inflation in forty years, the Fed is aggressively raising its short-term rate target to help lower price pressures. As part of that effort Fed officials recognize their actions could push the economy into recession and will very likely drive up the unemployment rate.

"By raising rates, we are aiming to slow the economy and bring labor demand into better balance with supply. The intent is not a significant downturn," Boston Fed leader Susan Collins said on Friday in remarks that opened the conference at her bank. Collins was optimistic there is a pathway to price stability that entails only a modest unemployment rate increase.

Lawrence Summers, a Harvard University professor and one time contender to lead the central bank, renewed his criticism of the Fed while discussing the paper on Saturday and said the idea the labor market was only temporarily upended by the pandemic is correct.

He reiterated that the Fed and the broader government erred in providing massive levels of stimulus and that is why inflation is so high now.

Given what the government did, "it is hard to imagine how that could have led to anything other than a substantially inflationary situation," Summers said.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Bond

Hedge funds have significantly increased their record bet on higher short-dated U.S. bond yields, confirming that whatever fight they had put up for an imminent Fed pivot on rates, it is well and truly over.

Funds' historic short position in two-year Treasuries futures coincides with the recent ramping up in anti-inflation rhetoric from Fed policymakers, including those of a more dovish inclination, such as San Francisco Fed President Mary Daly.

Financial markets are giving up hope that the Fed will take its foot off the rate-hike pedal any time soon. Hedge funds, going by Commodity Futures Trading Commission positioning data, have thrown in the towel completely.

The latest CFTC report shows that speculators increased their net short position in two-year Treasuries futures in the week to Nov. 15 by more than 100,000 contracts to a fresh record net short position of almost 590,000 contracts.

The pace of the move has really accelerated lately - the total net short has almost doubled in just six weeks and has swollen by almost 240,000 contracts this month, putting November on course to be the second most bearish month since these contracts were launched in 1990.

A short position is essentially a wager that an asset's price will fall, and a long position is a bet it will rise. In bonds and rates, yields fall when prices rise, and move up when prices fall.

Hedge funds take positions in short-dated U.S. rates and bonds futures for hedging purposes, so the CFTC data is not reflective of purely directional bets. But it is a pretty good guide.

Treasury yields have fallen in the last couple of weeks - the 2-year yield tumbled around 50 basis points from a 15-year high of 4.80% - as the latest readings of inflation have come in well below expectations.

But short-dated yields have held up much more than long-dated ones. Fed officials have made clear they will not get complacent, the implied terminal rate for next year is back above 5%, and yield curves are inverting across the maturity spectrum.

The 2s/10s curve is its most inverted since 2000, and the last time six-month T-bills yielded this much more than 30-year bonds was 40 years ago.

History shows that an inverted 2s/10s yield curve - when two-year borrowing costs are higher than 10-year rates - almost always precedes recession. Funds' record short position in two-year Treasuries futures suggests that's exactly what speculators are positioning for again.

Source: Reuters

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Alex

Central Bank

China kept its benchmark lending rates unchanged for the third straight month on Monday, as a weaker yuan and persistent capital outflows continued to limit Beijing's ability to ease monetary conditions to support the economy.

But sluggish credit demand and a darkening growth outlook have prompted some traders and market analysts to predict a marginal reduction to the mortgage reference rate as early as next month to prop up the broader economy.

As expected, the one-year loan prime rate (LPR) was kept at 3.65%, while the five-year LPR was unchanged at 4.30%.

In a Reuters poll of 22 market watchers conducted last week, all respondents predicted no change to the one-year LPR. However, five participants expected a reduction to the five-year LPR.

The steady LPR fixings came after the People's Bank of China (PBOC) partially rolled over maturing medium-term policy loans last week and kept the interest rate unchanged for a third straight month, suggesting policymakers remained wary of stoking further yuan weakness by easing monetary conditions.

The medium-term rate, called the medium-term lending facility, serves as a guide to coming changes in the LPR.

Meanwhile, widening policy divergence with other major economies, particularly the United States, could worsen fund flows. The latest official data showed that overseas investors had sold their holdings of China's onshore bonds for a ninth straight month in October, the longest streak of outflows on record.

The yuan has lost more than 10% against the dollar so far this year and looks set for the biggest annual drop since 1994.

However, some traders and market analysts expect a reduction to the mortgage reference to help the embattled property sector.

"We think there's probability to lower the 5-year LPR in December due to the downturn in the property market," said Xing Zhaopeng, senior China strategist at ANZ.

Marco Sun, chief financial market analyst at MUFG Bank (China), also said there was a chance the 5-year LPR would be lowered by 10 to 15 basis points in the next few months.

The authorities have recently extended more support to property developers.

The LPR, which banks normally charge their best clients, is set by 18 designated commercial banks that submit proposed rates to the PBOC every month.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. China last cut both LPRs in August to boost the economy.

Source: Reuters

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FastBull Featured

Daily News

[Quick Facts]

1. EU warns Britain of lack of progress in resolving Brexit issue.

2. U.S. Rep. Jeffries announced his candidacy for House Democratic Leader.

3. U.S. home sales fell for the ninth consecutive month in October.

4. G7 group plans to announce the Russian oil price cap level this Wednesday.

5. Zelensky rejected a "short ceasefire" with Russia.

6. Iran will continue its "peaceful" nuclear program.

7. Russia and Ukraine accuse each other of a "terrorist attack" on the sprawling Zaporizhzhia power plant.

[News Details]

1. EU warns Britain of lack of progress in resolving Brexit issue.

The European Commission told member states earlier this week that relations between the EU and London have improved with Sunac's arrival at Downing Street. But that hasn't translated into concrete changes in the U.K.'s position, particularly on the so-called Northern Ireland deal, which is part of the U.K.'s Brexit agreement to keep Northern Ireland in the EU customs area to avoid a hard border on the island of Ireland. EU countries including Germany, France and Ireland regretted the lack of progress in the negotiations and called for urgent action on London's part, people familiar with the matter said. EU ministers are scheduled to review developments in the EU-UK relationship on Friday.

2. U.S. Rep. Jeffries announced his candidacy for House Democratic Leader.

On November 18, local time, U.S. Rep. Hakeem Jeffries announced his candidacy for House Democratic leadership, according to The Washington Post. If selected by House Democrats, Jeffries would become the first African-American lawmaker to lead a political party in the U.S. Congress. U.S. House Speaker Nancy Pelosi announced on 17 November that she will not run for the Democratic leadership position. House Democrats will hold their next congressional leadership election the week of Nov. 28.

3. U.S. home sales fell for the ninth consecutive month in October.

U.S. home sales fell for the ninth consecutive month in October as rising interest rates and soaring inflation kept buyers on the sidelines. Pending home sales fell 5.9 percent from September to October, according to the National Association of Realtors. That was the slowest pace since December 2011, except for the plunge at the start of the new crown epidemic. October data showed seasonally adjusted home sales totaled 4.43 million units. This represents a 28.4% year-over-year decline. Even as sales slowed, supply continued to remain low. the median sales price of existing homes in October was $379,100, up 6.6% from a year earlier. However, home price gains are contracting as the seasonal decline in home prices seems to be much more severe than usual at this time of year.

4. G7 group plans to announce the Russian oil price cap level this Wednesday.

Previous news generally pointed to possible crude oil price caps between $40 and $60 per barrel starting from Dec. 5, basically equal to the cost of oil production in Russia before the outbreak of the Russia-Ukraine conflict, but several sources familiar with the matter said it could be higher than that.

5. Zelensky rejected a "short ceasefire" with Russia.

Ukrainian President Zelensky ruled out the idea of a "short ceasefire" with Russia, AFP reported on Nov. 19. Zelensky said on November 18 that a "short ceasefire" would only make things worse. In a video message broadcast at the International Security Forum in Halifax, Canada, he said, "Russia is now seeking a short ceasefire as a temporary move to restore its strength. One could see it as the end of the war, but such a respite would only make the situation worse." He said, "A fully real, lasting and acceptable peace can only come from the total destruction of Russian aggression."

6. Iran will continue its "peaceful" nuclear program.

Iranian Foreign Ministry spokesman Kanaani said on Nov. 20 local time that the recent anti-Iranian resolutions proposed by the United States and three European countries at the International Atomic Energy Agency Board of Governors meeting were politically motivated to pressure Iran. Kanaani stressed that Iran will never succumb to pressure and will continue its "peaceful" nuclear program in accordance with national needs and in compliance with its rights and obligations under international treaties.

7. Russia and Ukraine accuse each other of a "terrorist attack" on the sprawling Zaporizhzhia power plant.

Ukrainian media reported on November 20 that the Ukrainian State Nuclear Power Company (NSNC) released a news release on the same day saying that the Russian military shelled the site of the Zaporizhzhya nuclear power plant (ZNPP) that morning, recording at least 12 attacks on the plant's infrastructure at the Zaporizhzhya nuclear power plant, which has caused damage to a number of infrastructures at the station. Earlier in the day, TASS news agency quoted the adviser to Rosenergoatom's CEO, Renat Karchaa, as saying that the U.S. military continues to shell the Zaporizhzhia nuclear power plant and that 15 shells have landed in the area of the plant. Renat Karchaa said the target of the shelling was the special building No. 2 where fresh spent nuclear fuel is stored at the Zaporizhzhia nuclear power plant.

[Today's Focus]

UTC+8 17:05 Speech by Bank of England Deputy Governor Cunliffe

UTC+8 19:30 Speech by ECB Governing Council Member Vasle

UTC+8 20:00 ECB Governing Council Member Holzmann speaks

UTC+8 00:30 Speech by ECB Governing Council member Centeno

UTC+8 01:30 Speech by ECB Executive Board Member Nagel

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Jan Aldrin Laruscain

Traders' Opinions

GBPUSD to strike 1.16800s!

GBPUSD ended the week in green following strong fundamental drivers supporting in favor of the Pound as UK consumer index increases—which contributed greatly to UK Retail Sales. However, these data releases weren’t enough to fuel the monthly resistance break as the US also released positive data on Existing home sales; giving the bullish climb a sour undertone.

Moving into the charts, it is evident that price is currently facing a hurdle in the monthly timeframe. It is likely that price will have trouble penetrating to the 1.20 psychological barrier.

Weekly Outlook for the Two Major Currencies_1

In the weekly timeframe, price is currently held back by a resistance level—however, this should pose no threat as the market structure has indicated willingness to pursue an upward trend through the break of the recent pivot high as marked in the chart.

Weekly Outlook for the Two Major Currencies_2

Going to our weekly forecast, the team expects price to print a lower low/pivot low along 1.13500s to 1.12800s before proceeding to break the the weekly resistance. The break of the weekly resistance is heavily reliant to fundamental catalyst which would provide price a momentum upwards.

Weekly Outlook for the Two Major Currencies_3

The analyst team is expecting price to however between 1.12800s to1.16400s this week.

EURUSD flags a possible pullback to 1.0200s

As the ECB continues to catch up on interest rate hikes, the Euro seems to be picking up the pace after being drowned by the Dollar to the .93 levels. Quantitative tightening seem to have peaked the interests of the ECB as they continue to be flooded with geopolitical tensions affecting trade and energy distribution.

In light of this, supporting the current fundamental view on EU, price is looking to retest an 8 year strong former support turned resistance.

Weekly Outlook for the Two Major Currencies_4

Narrowing down to the weekly chart, price has managed to break through 2 weekly pivot highs through just one candle—though this is a good indication that price is strongly bullish, this indicate that a pullback likely due. This further supported by the fact that the recent weekly candle closed as a doji.

Weekly Outlook for the Two Major Currencies_5

For the team’s weekly forecast, we are flagging a possible pullback to the 1.0200s to the 1.0050s before price continues to smash through and rejoin the range within the monthly key level. We should expect EURUSD to range between 1.0050s to the 1.04800s in the near term.

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Thomas

Commodity

Oil prices hovered near two-month lows on Monday as supply fears receded while concerns over China's fuel demand and rising interest rates weighed on prices.

Brent crude futures for January had slipped 28 cents, or 0.3%, to $87.34 a barrel by 0103 GMT after settling at their lowest since Sept. 27.

U.S. West Texas Intermediate (WTI) crude futures for December were at $80 a barrel, down 8 cents, ahead of the contract's expiry later on Monday. The more active January contract CLc2 fell 21 cents to $79.90 a barrel.

Both benchmarks closed Friday at their lowest since Sept. 27, extending losses for a second week, with Brent down 9% and WTI 10% lower.

The front-month Brent crude futures spread narrowed sharply last week while WTI flipped into a contango, reflecting dwindling supply concerns.

Tight crude supplies in Europe have eased as refiners have piled up stocks ahead of the Dec. 5 European Union embargo on Russian crude, putting pressure on physical crude markets across Europe, Africa and the United States.

The EU's energy policy chief told Reuters the EU expected to have its regulations completed in time for the introduction of a G7 plan to cap the price of Russian crude on Dec. 5.

RBC Capital analyst Mike Tran said the weak December WTI contract expiration indicated paper market selling rather than true physical market softness.

"Tight global inventories do not support the traditional surplus of barrels rationale for contango," he said in a note.

While North Sea and West African spot market indicators are far from strong, they are also not suggesting signs of distress, he added.

Diesel markets remained tight, with Europe and the United States competing for barrels. While China nearly doubled its diesel exports in October from a year earlier to 1.06 million tonnes, the volume was well below September's 1.73 million tonnes.

Demand in the world's top crude importer remains bogged down by COVID-19 restrictions while expectations of further interest rate rises elsewhere have elevated the greenback, making dollar-denominated commodities more expensive for investors.