Fed Minutes Show Unease Over Premature Cuts Only two officials highlighted the risks of keeping rates too high for too long at last month’s policy meeting

(…) “Most participants noted the risks of moving too quickly to ease the stance of policy,” said the minutes of the Jan. 30-31 meeting, released Wednesday with a customary three-week delay. Only two officials pointed to the risks “associated with maintaining an overly restrictive stance for too long.” (…)

Central-bank officials are trying to balance two risks: One is that they move too slowly to ease policy and the economy crumples under the weight of higher interest rates. The other is that they ease too much, too soon, allowing inflation to become entrenched at a level above their 2% goal.

The written account of last month’s meeting showed some officials thought recent improvements in inflation reflected one-off developments. “Nevertheless, they viewed that there had been significant progress recently on inflation returning to the committee’s longer-run goal,” the minutes said. (…)

Officials at last month’s meeting “judged that the policy rate was likely at its peak for this tightening cycle,” the minutes said. (…)

The Fed typically cuts interest rates because economic activity is slowing sharply, but in public comments, officials have turned their attention to scenarios under which they could lower rates even with solid growth. That is because as inflation declines, inflation-adjusted or “real” rates will rise if nominal rates are held steady.

Later today we get the U.S. purchasing managers survey. World Economics’ Sales Managers Survey is as good as it gets.

Source: World Economics

While on surveys, the Business Leaders Survey turned worrisome on wages and prices lately (via Rosenberg Research):

But Atlanta Fed’s Business Inflation Expectations Remain Relatively Unchanged at 2.3 Percent

Sales levels and profit margins compared to “normal times” increased, according to the Atlanta Fed’s latest Business Inflation Expectations survey.

In the real world:

Toll Brothers reported a strong orders (+40% YoY). Management indicated that demand is strong, with a marked increase in demand since mid-January.

JB Smith, an apartment developer in the D.C. area: “Leasing levels remained solid throughout the quarter despite some anticipated seasonality typical for the winter months. Across our portfolio, we increased effective rents by 7.0% upon renewal for fourth quarter lease expirations [Q3 was +4.8%] while achieving a 56.0% renewal rate.”

Canada Inflation Cools to 2.9% in January

Consumer prices rose 2.9% in January from a year earlier, following December’s gain of 3.4%, Statistics Canada reported Tuesday. That marked the lowest level since June, and undershot the 3.3% advance economists were expecting.

On a month-over-month basis, the consumer-price index was unchanged in January, after falling 0.3% the month before and compared with the 0.4% increase that was expected. (…)

The deceleration left annual inflation just inside the Bank of Canada’s 1% to 3% target range and was driven by a drop in gasoline prices compared with last year. Excluding gasoline, headline inflation slowed to 3.2% from December’s 3.5%. (…)

The Bank of Canada’s preferred measures of underlying annual inflation made progress in January, with weighted median and trimmed mean CPI rising an average 3.35% last month from a year earlier compared with 3.6% growth in December. (…)

Excluding food and energy costs, the core consumer-price index slipped 0.1% from the previous month and rose 2.7% year-over-year.

On a three-month average annualized basis, CPI-Trim declined to +3.2% in January from +3.8% in December and CPI-Median edged down to +3.3% from +3.5%. On a month-over-month annualized basis, CPI-Trim and CPI-Median decreased respectively to +1.2% (vs. +4.8% in December) and +1.7% (vs. +4.7%). For both measures, January 2024 recorded the slowest monthly inflation rate since 2020.

Eurozone downturn eases as service sector stabilises, but price pressures intensify

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, rose from 47.9 in January to 48.9 in February. Although signalling a ninth consecutive month of falling output, February’s decline was the smallest since last June. While the latest reading suggests that the eurozone’s deepest contraction since 2013 (if early pandemic months are excluded) has persisted into 2024, the rate of decline is showing signs of moderating in the first quarter.

Business conditions continued to vary markedly by sector and country across the eurozone, however, underscoring the weakness of manufacturing in particular, which has in turn hit Germany especially hard.

Manufacturing output fell across the eurozone for an eleventh consecutive month in February, the rate of decline accelerating again after the moderation seen in January to register another month of steep contraction. New orders for goods likewise fell sharply by historical standards (albeit the rate of loss cooling slightly for a fourth month running).

In contrast, service sector business activity stabilised in February after six months of continual deterioration, linked to an easing in the rate of decline of new business for a fourth straight month to signal only a marginal drop in demand.

Similarly, while export orders fell for both goods and services, a steepening rate of decline in the manufacturing sector contrasted with a moderation in export losses in the services economy.

By country, output fell especially sharply in Germany, dropping for an eighth successive month and at the fastest rate since last October. A moderating downturn in Germany’s service sector only partially offset a deepening contraction in manufacturing.

Output also contracted in France, but the decline was the smallest recorded since France’s downturn commenced back in June of last year thanks to moderating rates of deterioration for both manufacturing and services sector output.

The rest of the eurozone meanwhile collectively reported growth of output for a second month running, contrasting with the declines seen over the prior five months, enjoying the largest monthly improvement since last May. Faster service sector growth was accompanied by a near stabilisation of manufacturing output.

Employment increased for a second month running in February after two months of decline at the end of 2023. While the overall rise in payroll numbers was only modest, the latest increase was nevertheless the largest since last July. Again, sector divergences were noteworthy. A steepening rate of job losses in the manufacturing sector contrasted with net hiring reaching an eight-month high in the service sector. A marginal drop in employment in Germany was accompanied by a marginal rise in France and a nine-month high rate of job creation in the rest of the region.

Growth of average input costs across producers of goods and providers of services accelerated for a second successive month to reach the highest since last May. Although well below highs seen during the pandemic, the latest rise pushed the rate of increase further above the survey’s pre-pandemic long-run average to signal elevated cost pressures by historical standards.

Service sector input cost inflation rose to a nine-month high and prices fell in manufacturing at the slowest rate for 11 months.

Selling price inflation likewise accelerated, up for a fourth month running in February to also hit the highest since last May. Excluding the price surge seen over the two years to last May, February’s rate of inflation was the highest recorded since January 2018 and well above the survey’s pre-pandemic long-run average.

Although prices charged by manufacturers fell at a slightly increased rate, continuing the disinflationary trend seen for goods over the past ten months, prices levied for services rose at the sharpest rate for nine months, the rate of inflation having now accelerated for four straight months. Excluding the 19-month period to last May, the latest rise in service sector prices was the largest recorded since September 2000.

  

Japan: Private sector activity stagnates

• Flash Composite Output Index, February: 50.3 (January Final: 51.5)
• Flash Services Business Activity Index, February: 52.5 (January Final: 53.1)
• Flash Manufacturing Output Index, February: 45.4 (January Final: 47.7)

The headline au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index™ (PMI)® fell from 48.0 in January to 47.2 in February, signalling a ninth consecutive deterioration in operating conditions that was the most marked since August 2020. A steep reduction in new orders led to production shrinking at the fastest rate for a year. In turn, purchasing activity fell sharply while lower capacity pressures led to employment levels falling at the quickest pace since January 2021. Price pressures faced by Japanese manufacturers softened during February, as the rate of input price inflation eased to a seven-month low, which contributed to the softest rise in output charges since June 2021.

The au Jibun Bank Flash Japan Services Business Activity Index posted 52.5 in February, down from 53.1 in January. Despite easing slightly on the month, the latest expansion extended the current sequence of growth to 18 months. Moreover, the rate of growth in new business accelerated during February and was the strongest recorded since last August. Optimism with regards to future activity and indications of capacity pressures nevertheless led to a solid increase in employment that was the most marked for nine months. On prices, inflationary pressures led to a sustained albeit softer increases in both input costs and charges.