Wed 11 Apr 2018


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In Portfolioticker today

read_this Hey Jarvis, how did we go today?

Today at the stock market

bull/bearStocks across the globe fell on Wednesday as U.S. President Donald Trump taunted Russia for supporting Syria’s president after a suspected chemical attack on rebels, while oil hit its highest since 2014 after Saudi Arabia said it intercepted a missile over Riyadh

  • The S&P 500 index fell 14.68 points, or 0.55%, to 2,642.19.
  • The Dow Jones Industrial Average fell 218.55 points, or 0.9%, to 24,189.45.
  • The Nasdaq Composite index rose 8.66 points, or 0.12%, to 7,102.96.
  • Advancing issues outnumbered declining ones on the NYSE by a 1.03-to-1 ratio; on Nasdaq, a 1.06-to-1 ratio favored decliners.
  • The S&P 500 posted six new 52-week highs and two new lows; the Nasdaq Composite recorded 46 new highs and 27 new lows.
  • Volume on U.S. exchanges was 6.04 billion shares, compared with the 7.29 billion-share average for the full session over the last 20 trading days.

The pan-European FTSEurofirst 300 index fellt 0.60% and MSCI’s gauge of stocks across the globe fell 0.32%.

Emerging market stocks rose 0.02%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.06% higher, while Japan’s Nikkei index fell 0.49%.

Syria

Trump warned Russia of imminent military action in Syria, declaring that missiles “will be coming” despite a warning from Russia that any U.S. missiles fired at Syria over the deadly assault on a rebel enclave near Damascus would be shot down and the launch sites targeted.More

The animosity kept investors on edge and weighed on risky assets like stocks, while the safe-haven yen rose against the U.S. dollar.

“There’s general nervousness about what might happen with any strikes and the potential escalation of tensions with Russia,” said Anwiti Bahuguna, senior portfolio manager at Columbia Threadneedle Investments in Boston.

FOMC Minutes

The U.S. Federal Reserve is worried about trade tensions with China, but minutes from the most recent Fed meeting suggest those concerns have not translated into worry about the overall economy – or a more complacent monetary policy.

“The minutes were modestly negative,” said John Carey, portfolio manager at Amundi Pioneer Asset Management in Boston. “People had been speculating that due to all the turbulence in the market because of geopolitical uncertainties that the Fed might consider pausing or slowing down the interest rate increases.”

Earnings

Investors said they are looking to earnings season to provide a sustained boost to U.S. stocks. Banks JPMorgan Chase & Co , Citigroup Inc and Wells Fargo & Co will report quarterly results on Friday.

Analysts expect quarterly profits for S&P 500 companies to rise 18.5% from a year ago, which would be the biggest gain in 7 years, according to Thomson Reuters I/B/E/S.

However …

Industrial distributor Fastenal fell 6.2% after its earnings missed expectations. The stock was the biggest decliner on the S&P, followed by industry peer WW Grainger’s 4.4% drop.Reuters and Reuters

Market indices

Market indices
^ S&P500 Index today (mouseover for 12 month view) [Chart: Google Finance]

Index Ticker Today Change 31 Dec 17 YTD
S&P 500 SPX (INX) 2,642.19 -0.56% 2,238.83 -1.18%
DJIA INDU 24,189.45 -0.90% 19,762.60 -2.15%
NASDAQ IXIC 7,069.03 -0.36% 5,383.12 +2.39%

Portfolio Indices

USD and AUD denominated indices over the past 52 weeks (Chart: Bunting)
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting

Index values

Index Currency Today Change 31 Dec 17 YTD
USD-denominated Index USD 3.169 -0.49% 2.105 +3.33%
Valuation Rate USD/AUD 0.78062 -0.11% 0.72663 -0.60%
AUD-denominated Index AUD 4.062 -0.39% 2.895 +3.93%

Portfolio stock prices

Stock Ticker Today Change 31 Dec 17 YTD
Alphabet A GOOGL $1,025.06 -1.11% $1,053.00 -2.66%
Alphabet C GOOG $1,019.97 -1.14% $1,045.65 -2.46%
Apple AAPL $172.44 -0.47% $169.23 +1.89%
Amazon AMZN $1,427.05 -0.64% $1,169.54 +22.01%
Ebay EBAY $39.83 +0.60% $37.76 +5.48%
Facebook FB $166.32 +0.77% $176.46 -5.75%
PayPal PYPL $76.50 -0.38% $73.61 +3.92%
Twitter TWTR $29.39 -0.48% $24.01 +22.40%
Visa V $119.78 -0.78% $114.02 +5.05%
VMware VMW $121.49 -0.22% $125.32 -3.06%

FX: USD/AUD

USD

DXY movements
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg

The USD fell against the JPY as escalating geopolitical concerns added to lingering worries over U.S. trade policy and domestic scandals swirling around Trump.

“It’s a risk-off kind of day. The yen typically is a flight to safetyy,” said Minh Trang, senior currency trader at Silicon Valley Bank in Santa Clara, California, referring to increased geopolitical tensions.

Bloomberg’s Dollar Spot Index (DXY) fell 0.07%, with the EUR up 0.1% to USD 1.2366.
Japan’s JPY rose 0.39% to 106.80 per USD.
Britain’s GBP was last trading at $1.4177, up 0.04 percent on the day.
The Russian RUB fell as much as 3.2% against the USD before rising 1.0% after 2 days of steep losses.
ReutersReuters

AUD

AUD movements
^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com

Oil and Gas Futures

Oil prices hit their highest in more than 3 years despite a surprise build in U.S. crude inventories as investors fretted over conflict escalation in the Middle East.

“A bearish inventory report was quickly negated on word of intercepted rockets over Riyadh, which just adds to the recent spike in geopolitical tensions,” said Anthony Headrick, energy market analyst and commodities futures broker at CHS Hedging LLC.

U.S. crude rose 1.89% to $66.75/barrel and Brent was last at $71.89/barrel, up 1.2% on the day.

Oil prices began to climb on Trump’s warning over Syria, then rallied further on a report that Saudi Arabia’s air defense forces intercepted a missile over Riyadh, the capital.Reuters

Futures prices

Prices are as at 15:47 EDT

  • NYMEX West Texas Intermediate (WTI): $66.72/barrel +1.85% Chart
  • ICE (London) Brent North Sea Crude: $71.89/barrel +1.20% Chart
  • NYMEX Natural gas futures: $2.68/MMBTU +0.72% Chart

flag_australia AU: Building Activity. Dec 2017

Press Release Extract [au_buildactivity]

Building Work Done:

  • The trend estimate of the value of total building work done rose 0.4% in the December 2017 quarter.
  • The seasonally adjusted estimate of the value of total building work done fell 0.3% to $28,036.1m in the December quarter, following a rise of 0.9% in the September 2017 quarter.

New Residential Building Work Done:

  • The trend estimate of the value of new residential building work done fell 0.8% in the December quarter. The value of work done on new houses fell 1.5%, while new other residential building was flat.
  • The seasonally adjusted estimate of the value of new residential building work done fell 3.1% to $15,649.0m. Work done on new houses fell 1.6% to $8,201.1m, while new other residential building fell 4.8% to $7,447.9m.

Non-Residential Work Done:

  • The trend estimate of the value of non-residential building work done rose 2.6% in the December quarter.
  • The seasonally adjusted estimate of the value of non-residential building work done in the quarter rose 4.0%, following a rise of 3.1% in the September 2017 quarter.

Total Dwellings:

  • The trend estimate for the total number of dwelling units commenced was flat in the December 2017 quarter following a fall of 0.2% in the September quarter.
  • The seasonally adjusted estimate for the total number of dwelling units commenced fell 5.0% to 52,641 dwellings in the December quarter following a rise of 1.8% in the September quarter.

New Private Sector Houses:

  • The trend estimate for new private sector house commencements rose 1.5% in the December quarter following a rise of 1.6% in the September quarter.
  • The seasonally adjusted estimate for new private sector house commencements rose 0.6% to 28,608 dwellings in the December quarter following a fall of 0.6% in the September quarter.

New Private Sector Other Residential Building

  • The trend estimate for new private sector other residential building commencements fell 1.9% in the December quarter following a fall of 2.0% in the September quarter.
  • The seasonally adjusted estimate for new private sector other residential building fell 12.0% to 22,784 dwellings in the December quarter following a rise of 4.6% in the September quarter.

Australian Bureau of Statistics, “8752.0 Building Activity. Dec 2017“, 11 Apr 2018 (AET) More

flag_australia AU: RBA Speech: Governor Lowe: Regional Variation in a National Economy

Extract [au_rba_speech]

For most of the past decade, a common shorthand description of the Australian economy was that it was a ‘two-speed’ economy. For some time, Western Australia and Queensland were growing very quickly on the back of investment in the resources sector, but growth in the other states was subdued. And then things turned around: growth was weak in Western Australia and Queensland, and stronger elsewhere. So it’s understandable that people have talked about a ‘two-speed’ economy.

In a country as large and diverse as Australia, it is not surprising that we experience differences like this from time to time. It is important that the Reserve Bank understands these differences and, indeed, we devote considerable resources to doing this.

But today, rather than focus only on the differences across regions, I also want to focus on the similarities.
I would like to do this from two perspectives. The first is from a cyclical perspective and the second is from a structural perspective. From the cyclical perspective, the good news is that conditions have improved across most of Australia over the past year. And from a structural perspective, over time the differences in the structure of output and employment across regions are tending to become smaller, rather than larger. So I would like to talk about this. There are, of course, still important differences across the country and I will discuss some of these as well. Finally, I will finish with some comments about the recent monetary policy decisions of the Reserve Bank Board.

The Cyclical Perspective

Over the past year, when discussing the national economy, the Reserve Bank has focused on a number of themes. I would like to highlight four of these again today

  • The first theme is the strong growth in employment. Over the past year, the number of Australians with jobs has increased by 3½ per cent, which is a very positive outcome. Labour force participation has also increased, especially by women. The unemployment rate has also fallen over the past year, although it has been steady at around 5½ per cent over the past six months.
  • The second theme is a pick-up in non-mining business investment. We had been waiting a long time for this to occur, but in 2017 the long-forecast lift in investment finally took place. Over the year, non-mining business investment increased by 12½ per cent, the largest rise in a decade, and a further increase is expected.
  • The third theme is an improvement in business conditions, as reported in surveys. These surveys are currently more positive than they have been at any time since the financial crisis. They also suggest that capacity utilisation has been increasing.
  • The fourth theme has been slow growth in wages. Wage increases around 2 per cent have become the norm in many parts of the country. This is in contrast to the 3 to 4 per cent increases that were the norm for most of the past two decades. This change is having a sobering effect on the finances of many households. It is also contributing to inflation being low. The latest data suggest that the rate of wages growth has now troughed, with a pick-up evident in the most recent quarter. A further lift is expected, but it is likely to be only gradual.

So the overall picture for the national economy is one of gradual improvement: businesses are feeling better than they have for some time and they have increased their investment and hiring. It is therefore reasonable to expect that economic growth in 2018 will be stronger than the 2.4 per cent outcome we saw last year.

This improvement in the economic climate has occurred across the country, not just in one or two areas. There are, of course, regional differences, but these four themes are evident across the country, although to varying degrees.

Over the past year, employment has risen in all states. This is a different picture than we’ve seen for some time. Here in Western Australia, there was virtually no employment growth for more than four years after the peak in mining investment. Over this period, Western Australia went from having an unemployment rate of two point something to six point something. Recently, though, the labour market here has begun to improve, with employment increasing by 2½ per cent over the past year and the unemployment rate having come off its peak. There has been strong growth in jobs in education and health, as there has been around the country.

Turning to non-mining investment, the state-level data are less timely. We do know, however, that in most states total business investment picked up through 2017, with particularly strong growth in non-residential construction. Here in Western Australia, the picture is a little different, given the ongoing unwinding of the mining investment boom. Over the past year, total business investment in Western Australia has been broadly steady, after earlier sharp declines. There has, however, been a pick-up in non-residential building approvals, which suggests that a turning point in non-mining business investment has now been reached. One area, though, that does remain weak is investment in dwellings, with the level of activity here in the west standing in contrast to the high level of dwelling investment in the eastern states.

The third theme – the pick-up in survey-based measures of business conditions – is also evident across the country. For sake of simplicity, this next graph shows business conditions for Western Australia only and the rest of Australia. The direction of change is the same, even if conditions here are not as bright as elsewhere. In all states, including in Western Australia, reported business conditions are now currently above their long-term averages.

The final of the four themes is weak wages growth. This, too, is a national story. Over the past year, the wage price index increased by around 2 per cent or less in all states. For a number of years, growth in wages in Western Australia was running considerably above that in the rest of the country, with the result that the average level of wages here rose noticeably above that in other states. In the past couple of years, this differential has narrowed, with growth in wages here below the national average. It is also worth pointing out that the most recent data show slightly stronger growth in wages in all states. This is a positive development.

So the cyclical themes that we are seeing at the national level are playing out right across the country, although to differing degrees. We are now all moving in the same direction.

The Structural Perspective

I would now like to turn to the structural perspective. The main point is that, abstracting from the cyclical dynamics, there is a longer-run trend towards more similarity, rather than more divergence, in the underlying economic structure across the country.

An important area where this can be seen is the labour market. Over time, there has been a marked reduction in the dispersion of unemployment rates across the country. In particular, the standard deviation of the unemployment rate across the 87 individual regions for which the Australian Bureau of Statistics (ABS) publishes data is markedly lower than it was at the turn of the century.

It is also worth noting that the average unemployment rate outside the capital cities is lower than the average unemployment rate in the capital cities for the first time in a long while. The gap between the participation rates for prime-aged workers in the capital cities and outside the capitals has also narrowed. So there has been a convergence of sorts.

There are a number of possible explanations for this. One is that the labour market has become more flexible, including through the movement of people. Another is that the economic shocks experienced have become less region specific.

It is hard to be definitive, but both explanations are likely to have played some role.

The improved flexibility of the Australian labour market is no doubt part of the story, and the willingness of people to move for jobs is part of this. However, the propensity of people to move interstate, or within their state, has declined over the period that the dispersion in unemployment rates has declined. For the two decades to the mid 2000s, around 2 per cent of us moved states each year. Over recent times that share has fallen to 1½ per cent.

Another important part of the story is overseas migration. This is evident in this next graph, which shows the contribution to employment growth from interstate migration, overseas migration and people already living within the state. The role that overseas migration played in the adjustment process here in Western Australia is clear. When the boom was in full swing the workforce in Western Australia was boosted significantly by workers from overseas. And then after the boom, the flow of immigrants slowed considerably. It is also clear that, over recent years, more people have been moving from Western Australia to other states than vice versa. This is in stark contrast to the boom years. The overall conclusion here is that the movement of people has helped even things out across the economy.

The other possible explanation for the reduced dispersion in unemployment rates is that many of the economic shocks we experience nowadays are less regionally concentrated – with the mining investment boom being an obvious exception! – perhaps because of less variation in the structure of regional economies.

It is difficult to test this idea rigorously, especially the nature of the shocks. But we can look at the variation across the country in the industries in which people work and the type of jobs they have. My colleagues at the RBA have done this using Census data for the more than 300 separate geographical areas in Australia. Using these data, they have constructed indices of how different the various regions are in terms of the industries that people work in and the occupations that they have. I will spare you the technical details of these calculations. My colleagues have also calculated how these indices have moved through time and they have conducted the exercise both including and excluding the regions with a heavy concentration in mining.

The main conclusion from this work is that, on average, regions are becoming more similar. Over time, the industries we are working in, and our occupations, are becoming more alike across Australia, not more different. There are, of course, still large differences across regions, but they are smaller than they once were.

One important reason for this is the increasing relative importance of service industries, and the decline in the relative importance of manufacturing. Both of these are national phenomena. Using the data from the 300-plus individual regions, it is clear that the variation across the country in the share of the workforce employed in the manufacturing industry has declined since the early 2000s. In 2016, the distribution is more tightly clustered around a lower average than it was in 2001. It is also clear from the Census data that those regions that had a relatively high share of workers employed in manufacturing in 2001 have tended to have faster growth in services employment than have other regions. So we are becoming more alike.

None of this is to say that there are not big differences across our country. There clearly are, and I will come to some of these in a moment. But, on average, the growth of the services industries has meant that the differences in industrial structures across regions have narrowed over time. I would expect that this would continue.

As I have spoken about on previous occasions, the growth of services and increasing investment in technology mean that investment in human capital is critically important to the country’s future success. This needs to be a national focus. We are making progress, but there is more to be done, with investment in human capital central to building comparative advantage. This next graph shows the distribution across regions in the share of the population with an advanced qualification, defined here as a Certificate III or higher. There has been a marked shift to the right in the distribution. By 2016, there were only a few regions in which less than half of all 25–44 year olds held an advanced qualification. This is a noticeable change from the early 2000s and suggests the lift in qualifications is broadly based across regions. If anything, the dispersion across regions has also lessened over time.

So far I have spoken about the commonalities in the cyclical and structural stories. It is important, though, to recognise that there are significant differences across regions. One illustration of this is the different average level of wage income across the country, which we can calculate from individual tax returns. There is considerable variation across the country, with some regions having average wage income more than 50 per cent above the national average. Wage income also tends to be higher in the capital cities than elsewhere. In part, this is explained by the types of jobs available in larger cities. For example, the capital cities are home to over 80 per cent of all IT, business, HR and marketing professionals, while only around 65 per cent of people live in these cities. On average, these business-service roles attract higher wages than many other occupations.

Another notable difference across regions is the level of housing prices. This reflects not just differences in average incomes, but the underlying demand and supply dynamics. This next graph shows the standard deviation in housing prices across the country, using data for around 330 separate regions. The picture is pretty clear: the dispersion in housing prices is currently larger than it has been in a very long time. This mostly reflects the big run-up in housing prices in Sydney and Melbourne at a time when price growth in the rest of the country has been subdued.

It’s clear from this graph that, in the past, this measure of variation has had a cyclical element: it increases for a while and then declines. It is understandable why this happens. When prices increase a lot in one area, relative to another, some people relocate to where prices are lower, especially if jobs are available. This certainly happened in the late 1990s/early 2000s, when there was a marked pick-up in people moving from New South Wales to Queensland following the big increase in housing prices in Sydney. It’s too early to tell whether the same type of adjustment will happen this time, but the number of people moving from New South Wales, where housing prices are highest, to Queensland (and, to a lesser extent, Victoria) has begun to pick up.

Monetary Policy

The Reserve Bank’s responsibility is to set monetary policy for Australia as a whole. We seek to do that in a way that keeps the national economy on an even keel, and inflation low and stable. No matter where one lives in Australia, we all benefit from this stability and from being part of a national economy. This is so, even if, at times, in some areas, people might wish for a different level of interest rates from that appropriate for the national economy. In setting that national rate, I can assure you we pay close attention to what is happening right across the country.

As you are aware, the Reserve Bank Board has held the cash rate steady at 1½ per cent since August 2016. This has helped support the underlying improvement in the economy that I spoke about earlier.

In thinking about the future, there are four broad points that I would like to make.

  • The first is that we expect a further pick-up in the Australian economy. Increased investment and hiring, as well as a lift in exports, should see stronger GDP growth this year and next. The better labour market should lead to a pick-up in wages growth. Inflation is also expected to gradually pick up. So, we are making progress.

    There are, though, some uncertainties around this outlook, with the main ones lying in the international arena. A serious escalation of trade tensions would put the health of the global economy at risk and damage the Australian economy. We also have a lot riding on the Chinese authorities successfully managing the build-up of risk in their financial system. Domestically, the high level of household debt remains a source of vulnerability, although the risks in this area are no longer building, following the strengthening of lending standards.

  • The second point is that it is more likely that the next move in the cash rate will be up, not down, reflecting the improvement in the economy. The last increase in the cash rate was more than seven years ago, so an increase will come as a shock to some people. But it is worth remembering that the most likely scenario in which interest rates are increasing is one in which the economy is strengthening and income growth is also picking up.
  • The third point is that the further progress in lowering unemployment and having inflation return to the midpoint of the target zone is expected to be only gradual. It is still some time before we are likely to be at conventional estimates of full employment. And, given the structural forces also at work, we expect the pick-up in wages growth and inflation to be only gradual.
  • The fourth and final point is that, because the progress is expected to be only gradual, the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy. While some other central banks are raising their policy rates, we need to keep in mind that their economic circumstances are different and that they have had lower policy rates than us over the past decade, in some cases at zero or even below. A continuation of the current stance of monetary policy in Australia will help our economy adjust and should see further progress in reducing unemployment and having inflation return to target.

Philip Lowe, Governor of the Reserve Bank of Australia, “Address to the Australia-Israel Chamber of Commerce (WA): Regional Variation in a National Economy“, 11 Apr 2018

flag_europe EU: House Price Index. Q4/2017

Press Release Extract [eu_housing]

House prices, as measured by the House Price Index, rose by 4.2% in the euro area and by 4.5% in the EU in the fourth quarter of 2017 compared with the same quarter of the previous year. These figures come from Eurostat, the statistical office of the European Union.

eu_house_prices_20180411

Compared with the third quarter of 2017, house prices rose by 0.9% in the euro area and by 0.7% in the EU in the fourth quarter of 2017.

House price developments in the EU Member States

Among the Member States for which data are available, the highest annual increases in house prices in the fourth quarter of 2017 were recorded in Ireland (+11.8%), Portugal (+10.5%) and Slovenia (+10.0%), while prices fell in Italy (-0.3%).

Compared with the previous quarter, the highest increases were recorded in Slovenia (+3.7%), Croatia (+3.2%) and Cyprus (+2.7%), while decreases were observed in Sweden (-2.8%), Denmark (-1.7%), Belgium (-0.4%) and Finland (-0.3%).

Eurostat, “House Price Index. Q4/2017“, 11 Apr 2018 More

flag_usa US: Real Earnings. Mar 2018

Press Release Extract [us_realer]

All employees

Real average hourly earnings for all employees increased 0.4 percent from February to March, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from a 0.3-percent increase in average hourly earnings combined with a 0.1-percent decrease in the Consumer Price Index for All Urban Consumers (CPI-U).

us_realer1_20180411

Real average weekly earnings increased 0.4 percent over the month due to the increase in real average hourly earnings combined with no change in the average workweek.

Real average hourly earnings increased 0.4 percent, seasonally adjusted, from March 2017 to March 2018. The increase in real average hourly earnings combined with a 0.6-percent increase in the average workweek resulted in a 0.9-percent increase in real average weekly earnings over this period.

Production and nonsupervisory employees

Real average hourly earnings for production and nonsupervisory employees increased 0.3 percent from February to March, seasonally adjusted. This result stems from a 0.2-percent increase in average hourly earnings combined with a 0.2-percent decrease in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

us_realer2_20180411

Real average weekly earnings were unchanged over the month due to the increase in real average hourly earnings being offset by a 0.3-percent decrease in average weekly hours.

From March 2017 to March 2018, real average hourly earnings were unchanged, seasonally adjusted. No change in real average hourly earnings combined with a 0.3-percent increase in the average workweek resulted in a 0.3-percent increase in real average weekly earnings over this period.

Bureau of Labor Statistics, “Real Earnings. Mar 2018“, 11 Apr 2018 (08:30) More

flag_usa US: Consumer Price Index. Mar 2018

Press Release Extract [us_cpi]

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent in March on a seasonally adjusted basis after rising 0.2 percent in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.4 percent before seasonal adjustment.

us_cpi1_20180411

us_cpi2_20180411

A decline in the gasoline index more than outweighed increases in the indexes for shelter, medical care, and food to result in the slight seasonally adjusted decline in the all items index. The energy index fell sharply due mainly to the 4.9-percent decrease in the gasoline index. The index for food rose 0.1 percent over the month, with the indexes for food at home and food away from home both increasing.

The index for all items less food and energy increased 0.2 percent in March, the same increase as in February. Along with shelter and medical care, the indexes for personal care, motor vehicle insurance, and airline fares all rose. The indexes for apparel, for communication, and for used cars and trucks all declined over the month.

The all items index rose 2.4 percent for the 12 months ending March, the largest 12-month increase since the period ending March 2017 and higher than the 1.6-percent average annual rate over the past 10 years. The index for all items less food and energy rose 2.1 percent, its largest 12-month increase since the period ending February 2017. The energy index increased 7.0 percent over the past 12 months, and the food index advanced 1.3 percent.

Food

The food index rose 0.1 percent in March after being unchanged in February. The index for food away from home increased 0.1 percent in March. The index for food at home also increased 0.1 percent as four of the six major grocery store food group indexes rose. The index for meats, poultry, fish, and eggs increased 0.8 percent in March after declining in January and February. The index for cereals and bakery products rose 0.4 percent, as did the index for nonalcoholic beverages. The index for dairy and related products also rose in March, advancing 0.3 percent after declining 0.3 percent in February.

The fruits and vegetables index declined 0.7 percent in March after falling 0.5 percent the prior month. The index for other food at home also fell for the second month in a row, declining 0.2 percent.

The index for food at home rose 0.4 percent over the last 12 months. The index for meats, poultry, fish, and eggs increased 2.1 percent over the span. Other food at home price indexes were relatively flat; all five of the remaining grocery store food groups moved less than 1 percent over the last year. The index for food away from home increased 2.5 percent over the last 12 months.

Energy

The energy index fell 2.8 percent in March after rising in 3 of the last 4 months. The gasoline index fell 4.9 percent in March after a 0.9-percent decrease in February. (Before seasonal adjustment, gasoline prices decreased 0.2 percent in March.) The index for natural gas also declined in March, falling 1.2 percent after rising 4.7 percent in February. The index for electricity was unchanged in March.

The energy index increased 7.0 percent over the past year, with all the major component indexes rising. The gasoline index increased 11.1 percent and the fuel oil index rose 20.0 percent. The electricity index increased 2.2 percent, and the index for natural gas advanced 3.4 percent.

All items less food and energy

The index for all items less food and energy increased 0.2 percent in March. The shelter index increased 0.4 percent, with the indexes for rent and owners’ equivalent rent both rising 0.3 percent. The index for lodging away from home increased 2.3 percent in March after falling in January and being unchanged in February. The medical care index rose 0.4 percent, with the hospital services index rising 0.6 percent, the physicians’ services index increasing 0.2 percent, but the index for prescription drugs declining 0.2 percent.

The personal care index increased 0.3 percent in March. The index for motor vehicle insurance continued to rise, increasing 0.3 percent. The airline fares index increased 0.6 percent, the same increase as in February. The indexes for alcoholic beverages and household furnishings and operations both increased 0.1 percent in March, while the indexes for new vehicles and for recreation were unchanged.

The apparel index fell 0.6 percent in March after rising in each of the two prior months. The index for communication declined 0.3 percent. The used cars and trucks index fell 0.3 percent in March, the same decline as in February. The indexes for education and for tobacco also declined in March.

The index for all items less food and energy rose 2.1 percent over the past 12 months, a higher figure than the 1.8-percent annual average increase over the past 10 years. The shelter index rose 3.3 percent over the last 12 months, a higher figure than the 2.2-percent average annual increase over the past decade. The index for medical care advanced 2.0 percent, a lower rate than the 2.9-percent average annual rate over the past 10 years.

Not seasonally adjusted CPI measures

The Consumer Price Index for All Urban Consumers (CPI-U) increased 2.4 percent over the last 12 months to an index level of 249.554 (1982-84=100). For the month, the index increased 0.2 percent prior to seasonal adjustment.
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.4 percent over the last 12 months to an index level of 243.463 (1982-84=100). For the month, the index increased 0.2 percent prior to seasonal adjustment.

The Chained Consumer Price Index for All Urban Consumers (C-CPI-U) increased 2.2 percent over the last 12 months. For the month, the index increased 0.2 percent on a not seasonally adjusted basis. Please note that the indexes for the past 10 to 12 months are subject to revision.

Bureau of Labor Statistics, “Consumer Price Index. Mar 2018“, 11 Apr 2018 (08:30) More

flag_usa US: Minutes of FOMC Meeting

Press Release Extract [us_fomc]

Staff Review of the Economic Situation

The information reviewed for the March 20–21 meeting indicated that labor market conditions continued to strengthen through February and suggested that real gross domestic product (GDP) was rising at a moderate pace in the first quarter. Consumer price inflation, as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE), remained below 2 percent in January. Survey-based measures of longer-run inflation expectations were little changed on balance.

Gains in total nonfarm payroll employment were strong over the two months ending in February. The labor force participation rate held steady in January and then stepped up markedly in February, with the participation rates for prime-age (defined as ages 25 to 54) women and men moving up on net. The national unemployment rate remained at 4.1 percent. Similarly, the unemployment rates for African Americans, Asians, and Hispanics were roughly flat, on balance, in recent months. The share of workers employed part time for economic reasons edged up but remained close to its pre-recession levels. The rates of private-sector job openings and quits increased slightly, on net, over the two months ending in January, and the four-week moving average of initial claims for unemployment insurance benefits continued to be low in early March. Recent readings showed that increases in labor compensation remained modest. Compensation per hour in the nonfarm business sector advanced 2¾ percent over the four quarters of last year, and average hourly earnings for all employees rose 2½ percent over the 12 months ending in February.

Total industrial production expanded, on net, in January and February, with gains in both manufacturing and mining. Automakers’ schedules indicated that assemblies of light motor vehicles would likely edge down in coming months. However, broader indicators of manufacturing production, such as the new orders indexes from national and regional manufacturing surveys, pointed to further solid increases in factory output in the near term.

Consumer expenditures appeared likely to rise at a modest pace in the first quarter following a strong gain in the preceding quarter. Real PCE edged down in January, and the components of the nominal retail sales data used by the Bureau of Economic Analysis to construct its estimate of PCE rose somewhat in February while the pace of light motor vehicle sales declined slightly. However, household spending was probably held back somewhat in February because of a delay in many federal tax refunds, and the subsequent delivery of those refunds would likely contribute to an increase in consumer spending in March. Moreover, the lower tax withholding resulting from the tax cuts enacted late last year, which was beginning to show through in consumers’ paychecks, would likely provide some impetus to spending in coming months. More broadly, recent readings on key factors that influence consumer spending—including gains in employment and real disposable personal income, along with households’ elevated net worth—continued to be supportive of solid real PCE growth in the near term. In addition, consumer sentiment in early March, as measured by the University of Michigan Surveys of Consumers, was at its highest level since 2004.

Real residential investment looked to be slowing in the first quarter after rising briskly in the fourth quarter. Starts of new single-family homes increased in January and February, although building permit issuance moved down somewhat. Starts of multifamily units jumped in January but fell back in February. Sales of both new and existing homes declined in January.

Growth in real private expenditures for business equipment and intellectual property appeared to be moderating in the first quarter after increasing at a solid pace in the preceding quarter. Nominal shipments of nondefense capital goods excluding aircraft edged down in January. However, recent forward-looking indicators of business equipment spending—such as the backlog of unfilled capital goods orders, along with upbeat readings on business sentiment from national and regional surveys—pointed to further solid gains in equipment spending in the near term. Firms’ nominal spending for nonresidential structures outside of the drilling and mining sector declined in January. In contrast, the number of crude oil and natural gas rigs in operation—an indicator of business spending for structures in the drilling and mining sector—continued to move up through mid March.

Total real government purchases seemed to be flattening out, on balance, in the first quarter after rising solidly in the fourth quarter. Nominal defense spending in January and February was consistent with a decline in real federal purchases. In contrast, real purchases by state and local governments looked to be rising, as the payrolls of these governments increased in January and February and nominal state and local construction spending advanced somewhat in January.

The change in net exports was a significant drag on real GDP growth in the fourth quarter of 2017, as imports grew rapidly. The nominal U.S. international trade deficit widened in January; exports declined, led by lower exports of capital goods and industrial supplies, while imports were about flat. The slowing of real import growth following the rapid increase in the fourth quarter suggested that the drag on real GDP growth from net exports would lessen in the first quarter.

Total U.S. consumer prices, as measured by the PCE price index, increased 1¾ percent over the 12 months ending in January. Core PCE price inflation, which excludes changes in consumer food and energy prices, was 1½ percent over that same period. The consumer price index (CPI) rose 2¼ percent over the 12 months ending in February, while core CPI inflation was 1¾ percent. Recent readings on survey-based measures of longer-run inflation expectations—including those from the Michigan survey, the Survey of Professional Forecasters, and the Desk’s Survey of Primary Dealers and Survey of Market Participants—were little changed on balance.

Foreign economic activity expanded at a moderate pace in the fourth quarter. Real GDP growth picked up in Mexico but slowed a bit in some advanced foreign economies (AFEs) and in emerging Asia. Recent indicators pointed to solid economic growth abroad in the first quarter of this year. Inflation abroad continued to be boosted by the pass-through to consumer prices of past increases in oil prices. However, excluding food and energy prices, inflation remained subdued in many foreign economies, including the euro area and Japan.

Staff Review of the Financial Situation

Financial markets were turbulent over the intermeeting period, and market volatility increased notably. On net, U.S. equity prices declined, corporate bond spreads widened, and nominal Treasury yields rose.

Broad equity price indexes decreased over the intermeeting period. Market participants pointed to a larger-than-expected increase in average hourly earnings in the January employment report as a factor triggering increased investor concerns about inflation and the associated pace of interest rate increases. Those concerns appeared to induce a substantial decline in equity prices. The decline may have been exacerbated by broader concerns about the level of stock market valuations. On February 5, the VIX—an index of option-implied volatility for one-month returns on the S&P 500 index—rose to its highest level since 2015, reportedly driven in part by the unwinding of investment strategies designed to profit from low volatility. Subsequently, equity prices recovered about half of their decline, and the VIX partially retraced its earlier increase.

Monetary policy communications over the intermeeting period—including the January FOMC statement, the minutes of the January FOMC meeting, and the Chairman’s semiannual testimony to the Congress—were generally viewed by market participants as signaling a somewhat stronger economic outlook and thus reinforced expectations for further gradual increases in the target range for the federal funds rate. The probability of the next rate hike occurring at the March FOMC meeting, as implied by quotes on federal funds futures contracts, increased to near certainty. Conditional on a March rate hike, the market-implied probability of another increase in the federal funds rate target range at the June FOMC meeting edged up to just above 70 percent. Expectations for the federal funds rate at the end of 2019 and 2020, derived from overnight index swap (OIS) quotes, moved up somewhat since late January.

On net, the nominal Treasury yield curve shifted up and flattened a bit. Monetary policy communications, higher-than-expected domestic price data, and expectations for increases in the supply of Treasury securities following the federal budget agreement in early February contributed to the increase in Treasury yields. Measures of inflation compensation derived from Treasury Inflation-Protected Securities were little changed on net. Option-implied volatility on longer-term rates rose notably following the jump in equity market volatility on February 5 but mostly retraced that increase by the end of the intermeeting period. On balance, spreads on investment and speculative-grade corporate bond yields over comparable-maturity Treasury yields widened but remained near the lower end of their historical ranges.

In short-term funding markets, increased issuance of Treasury bills lifted Treasury bill yields above comparable-maturity OIS rates for the first time in almost a decade. The rise in bill yields was a factor that pushed up money market rates and widened the spreads of certificates of deposit and term London interbank offered rates relative to OIS rates. The upward pressure on money market rates also showed up in slight increases in the effective federal funds rate and the overnight bank funding rate relative to the interest rate on excess reserves. The rise in market rates on overnight repurchase agreements relative to the offering rate on the Federal Reserve’s ON RRP facility resulted in low levels of takeup at the facility. Reductions in the size of the Federal Reserve’s balance sheet continued as scheduled without a notable effect on markets.

Despite the recent volatility in some financial markets, financing conditions for nonfinancial corporations and households remained accommodative over the intermeeting period and continued to support further expansion of economic activity. Gross issuance of investment and speculative-grade bonds was slightly lower than usual in January and February, while gross issuance of institutional leveraged loans stayed strong. The provision of bank-intermediated credit to businesses slowed further, likely reflecting weak loan demand rather than tight supply. Small business owners continued to report accommodative credit supply conditions but also weak demand for credit. Credit conditions in municipal bond markets remained accommodative.

In commercial real estate markets, loan growth at banks slowed further in January and February. Financing conditions in commercial mortgage-backed securities (CMBS) markets remained accommodative, as issuance was robust (relative to the usual seasonal slowdown) and CMBS spreads continued to be at low levels. Financing conditions in the residential mortgage market remained accommodative for most borrowers, though credit conditions stayed tight for borrowers with low credit scores or with hard-to-document incomes. Mortgage rates moved up, on net, over the period, along with the rise in other long-term rates.

Consumer credit grew at a solid pace in January following a rapid expansion in the fourth quarter. Aggregate credit card balances continued to expand steadily in January. Nonetheless, for subprime borrowers, conditions remained tight, with credit limits and balances still low by historical standards. Auto lending continued to grow at a moderate pace in recent months; although underwriting standards in the subprime segment continued to tighten, there were few signs of a significant restriction in credit supply for auto loans.

Since the January FOMC meeting, foreign equity prices moved notably lower, on net, and generally declined more in the AFEs than in the United States. Longer-term yields on sovereign debt in AFEs either decreased moderately or ended the period little changed, in contrast to the increase in U.S. Treasury yields. Weaker-than-expected economic data weighed on market-based measures of expected policy rate paths and on longer-term yields in Canada and in the euro area. Communications from the Bank of Canada also seemed to contribute to the decline in Canadian yields. In the United Kingdom, longer-term yields were little changed, on net, although the market-based path of expected policy rates moved up moderately in response to Bank of England communications. In emerging market economies (EMEs), sovereign yield spreads widened modestly, and flows into EME mutual funds were volatile over the period.

The broad nominal dollar index appreciated moderately over the period, largely reflecting an outsized depreciation of the Canadian dollar (CAD) and a massive devaluation of the Venezuelan bolivar (VEF). (The Venezuelan government devalued the official Venezuelan exchange rate by more than 99 percent against the dollar, bringing the official rate closer to its black market value.) Lower oil prices, weaker-than-expected economic data, and uncertainty over U.S. trade policy likely contributed to the weakness in the Canadian dollar. In contrast, the Japanese yen (JPY) appreciated against the dollar (USD), in part supported by safe-haven demand. Late in the intermeeting period, the British pound (GBP) was boosted by news of a preliminary agreement between U.K. and European Union authorities regarding the transition period of the Brexit process, but the pound still ended the intermeeting period modestly weaker against the dollar.

Staff Economic Outlook

The staff projection for U.S. economic activity prepared for the March FOMC meeting was somewhat stronger, on balance, than the forecast at the time of the January meeting. The near-term forecast for real GDP growth was revised down a little; the incoming spending data were a bit softer than the staff had expected, and the staff judged that the softness was not associated with residual seasonality in the data. However, the slowing in the pace of spending in the first quarter was expected to be transitory, and the medium-term projection for GDP growth was revised up modestly, largely reflecting the expected boost to GDP from the federal budget agreement enacted in February. Real GDP was projected to increase at a faster pace than potential output through 2020. The unemployment rate was projected to decline further over the next few years and to continue to run below the staff’s estimate of its longer-run natural rate over this period.

The projection for inflation over the medium term was revised up a bit, reflecting the slightly tighter resource utilization in the new forecast. The rates of both total and core PCE price inflation were projected to be faster in 2018 than in 2017. The staff projected that inflation would reach the Committee’s 2 percent objective in 2019.

The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, recent fiscal policy changes could lead to a greater expansion in economic activity over the next few years than the staff projected. On the downside, those fiscal policy changes could yield less impetus to the economy than the staff expected if the economy was already operating above its potential level and resource utilization continued to tighten, as the staff projected. Risks to the inflation projection also were seen as balanced. An upside risk was that inflation could increase more than expected in an economy that was projected to move further above its potential. Downside risks included the possibilities that longer-term inflation expectations may have edged lower or that the run of low core inflation readings last year could prove to be more persistent than the staff expected.

Participants’ Views on Current Conditions and the Economic Outlook

In conjunction with this FOMC meeting, members of the Board of Governors and Federal Reserve Bank presidents submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2018 through 2020 and over the longer run, based on their individual assessments of the appropriate path for the federal funds rate. The longer-run projections represented each participant’s assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These projections and policy assessments are described in the Summary of Economic Projections (SEP), which is an addendum to these minutes.

In their discussion of economic conditions and the outlook, meeting participants agreed that information received since the FOMC met in January indicated that economic activity had been rising at a moderate rate and that the labor market had continued to strengthen. Job gains had been strong in recent months, and the unemployment rate had stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy continued to run below 2 percent. Market-based measures of inflation compensation had increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.

Participants noted incoming data suggesting some slowing in the rate of growth of household spending and business fixed investment after strong fourth-quarter readings. However, they expected that the first-quarter softness would be transitory, pointing to a variety of factors, including delayed payment of some personal tax refunds, residual seasonality in the data, and more generally to strong economic fundamentals. Among the fundamentals that participants cited were high levels of consumer and business sentiment, supportive financial conditions, improved economic conditions abroad, and recent changes in fiscal policy. Participants generally saw the news on spending and the labor market over the past few quarters as being consistent with continued above-trend growth and a further strengthening in labor markets. Participants expected that, with further gradual increases in the federal funds rate, economic activity would expand at a solid rate during the remainder of this year and a moderate pace in the medium term, and that labor market conditions would remain strong.

Inflation on a 12-month basis was expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Several participants noted that the 12-month PCE price inflation rate would likely shift upward when the March data are released because the effects of the outsized decline in the prices of cell phone service plans in March of last year will drop out of that calculation. Near-term risks to the economic outlook appeared to be roughly balanced, but participants agreed that it would be important to continue to monitor inflation developments closely.

Many participants reported considerable optimism among the business contacts in their Districts, consistent with a firming in business expenditures. Respondents to District surveys in both the manufacturing and service sectors were generally upbeat about the economic outlook. In some Districts, reports from business contacts or evidence from surveys pointed to continuing shortages of workers in segments of the labor market. Activity in the energy sector continued to expand, with contacts suggesting that further increases were likely, provided that sufficient labor resources were forthcoming. In contrast, contacts in the agricultural sector reported that farm income continued to experience downward pressure due to low crop prices.

A number of participants reported concern among their business contacts about the possible ramifications of the recent imposition of tariffs on imported steel and aluminum. Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy. Contacts in the agricultural sector reported feeling particularly vulnerable to retaliation.

Tax changes enacted late last year and the recent federal budget agreement, taken together, were expected to provide a significant boost to output over the next few years. However, participants generally regarded the magnitude and timing of the economic effects of the fiscal policy changes as uncertain, partly because there have been few historical examples of expansionary fiscal policy being implemented when the economy was operating at a high level of resource utilization. A number of participants also suggested that uncertainty about whether all elements of the tax cuts would be made permanent, or about the implications of higher budget deficits for fiscal sustainability and real interest rates, represented sources of downside risk to the economic outlook. A few participants noted that the changes in tax policy could boost the level of potential output.

Most participants described labor market conditions as strong, noting that payroll gains had remained well above the pace regarded as consistent with absorbing new labor force entrants over time, the unemployment rate had stayed low, job openings had been high, or that initial claims for unemployment insurance benefits had been low. Many participants observed that the labor force participation rate had been higher recently than they had expected, helping to keep the unemployment rate flat over the past few months despite strong payroll gains. The firmness in the overall participation rate— relative to its demographically driven downward trend— and the rising participation rate of prime-age adults were regarded as signs of continued strengthening in labor market conditions. A few participants thought that these favorable developments could continue for a time, whereas others expressed doubts. A few participants warned against inferring too much from comparisons of the current low level of the unemployment rate with historical benchmarks, arguing that the much higher levels of education of today’s workforce—and the lower average unemployment rate of more highly educated workers than less educated workers—suggested that the U.S. economy might be able to sustain lower unemployment rates than was the case in the 1950s or 1960s.

In some Districts, reports from business contacts or evidence from surveys pointed to a pickup in wages, particularly for unskilled or entry-level workers. However, business contacts or national surveys led a few participants to conclude that some businesses facing labor shortages were changing job requirements so that they matched more closely the skills of available workers, increasing training, or offering more flexible work arrangements, rather than increasing wages in a broad-based fashion. Regarding wage growth at the national level, several participants noted a modest increase, but most still described the pace of wage gains as moderate; a few participants cited this fact as suggesting that there was room for the labor market to strengthen somewhat further.

In some Districts, surveys or business contacts reported increases in nonwage costs, particularly in the cost of materials, and in a few Districts, contacts reported passing on some of those costs in the form of higher prices. Contacts in a few Districts suggested that widely known, observable cost increases—such as those associated with rising commodity prices—would be more likely to be accepted and passed through to final goods prices than would less observable costs such as wage increases. A few participants argued that either an absence of pricing power among at least some firms—perhaps stemming from globalization and technological innovations, including ones that facilitate price comparisons—or the ability of firms to find ways to cut costs of production has been damping inflationary pressures. Many participants stated that recent readings from indicators on inflation and inflation expectations increased their confidence that inflation would rise to the Committee’s 2 percent objective in coming months and then stabilize around that level; others suggested that downside risks to inflation were subsiding. In contrast, a few participants cautioned that, despite increases in market-based measures of inflation compensation in recent months and the stabilization of some survey measures of inflation expectations, the levels of these indicators remained too low to be consistent with the Committee’s 2 percent inflation objective.

In their discussion of developments in financial markets, some participants observed that financial conditions remained accommodative despite the rise in market volatility and repricing of assets that had occurred in February. Many participants reported that their contacts had taken the previous month’s turbulence in stride, although a few participants suggested that financial developments over the intermeeting period highlighted some downside risks associated with still-high valuations for equities or from market volatility more generally. A few participants expressed concern that a lengthy period in which the economy operates beyond potential and financial conditions remain highly accommodative could, over time, pose risks to financial stability.

In their consideration of monetary policy, participants discussed the implications of recent economic and financial developments for the appropriate path of the federal funds rate. All participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months. In addition, all participants expected inflation on a 12-month basis to move up in coming months. This expectation partly reflected the arithmetic effect of the soft readings on inflation in early 2017 dropping out of the calculation; it was noted that the increase in the inflation rate arising from this source was widely expected and, by itself, would not justify a change in the projected path for the federal funds rate. Most participants commented that the stronger economic outlook and the somewhat higher inflation readings in recent months had increased the likelihood of progress toward the Committee’s 2 percent inflation objective. A few participants suggested that a modest in-flation overshoot might help push up longer-term inflation expectations and anchor them at a level consistent with the Committee’s 2 percent inflation objective. A number of participants offered their views on the potential benefits and costs associated with an economy operating well above potential for a prolonged period while inflation remained low. On the one hand, the associated tightness in the labor market might help speed the return of inflation to the Committee’s 2 percent goal and induce a further increase in labor force participation; on the other hand, an overheated economy could result in significant inflation pressures or lead to financial instability.

Based on their current assessments, almost all participants expressed the view that it would be appropriate for the Committee to raise the target range for the federal funds rate 25 basis points at this meeting. These participants agreed that, even after such an increase in the target range, the stance of monetary policy would remain accommodative, supporting strong labor market conditions and a sustained return to 2 percent inflation. A couple of participants pointed to possible benefits of postponing an increase in the target range for the federal funds rate until a subsequent meeting; these participants suggested that waiting for additional data to provide more evidence of a sustained return of the 12-month inflation rate to 2 percent might more clearly demonstrate the data dependence of the Committee’s decisions and its resolve to achieve the price-stability component of its dual mandate.

With regard to the medium-term outlook for monetary policy, all participants saw some further firming of the stance of monetary policy as likely to be warranted. Almost all participants agreed that it remained appropriate to follow a gradual approach to raising the target range for the federal funds rate. Several participants commented that this gradual approach was most likely to be conducive to maintaining strong labor market conditions and returning inflation to 2 percent on a sustained basis without resulting in conditions that would eventually require an abrupt policy tightening. A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2 percent over the medium term, implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected. Participants agreed that the longer-run normal federal funds rate was likely lower than in the past, in part because of secular forces that had put downward pressure on real interest rates. Several participants expressed the judgment that it would likely become appropriate at some point for the Committee to set the federal funds rate above its longer-run normal value for a time. Some participants suggested that, at some point, it might become necessary to revise statement language to acknowledge that, in pursuit of the Committee’s statutory mandate and consistent with the median of participants’ policy rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity. However, participants expressed a range of views on the amount of policy tightening that would likely be required over the medium term to achieve the Committee’s goals. Participants agreed that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.

Committee Policy Action

In their discussion of monetary policy for the period ahead, members judged that information received since the Committee met in January indicated that the labor market had continued to strengthen and that economic activity had been rising at a moderate rate. Job gains had been strong in recent months, and the unemployment rate had stayed low. Recent data suggested that growth rates of household spending and business fixed investment had moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy had continued to run below 2 percent. Market-based measures of inflation compensation had increased in recent months but remained low; survey-based measures of longer-term inflation expectations were little changed, on balance.

All members viewed the recent data and other developments bearing on real economic activity as suggesting that the outlook for the economy beyond the current quarter had strengthened in recent months. In addition, notwithstanding increased market volatility over the intermeeting period, financial conditions had stayed accommodative, and developments since the January meeting had indicated that fiscal policy was likely to provide greater impetus to the economy over the next few years than members had previously thought. Consequently, members expected that, with further gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace in the medium term, and labor market conditions would remain strong. Members generally continued to judge the risks to the economic outlook as remaining roughly balanced.

Most members noted that recent readings on inflation, along with the strengthening of the economic outlook, provided support for the view that inflation on a 12-month basis would likely move up in coming months and stabilize around the Committee’s 2 percent objective over the medium term. Members agreed to continue to monitor inflation developments closely.

After assessing current conditions and the outlook for economic activity, the labor market, and inflation, members voted to raise the target range for the federal funds rate to 1½ to 1¾ percent. They indicated that the stance of monetary policy remained accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

Members agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realized and expected economic conditions relative to the Committee’s objectives of maximum employment and 2 percent inflation. They reiterated that this assessment would take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Members also agreed that they would carefully monitor actual and expected developments in inflation in relation to the Committee’s symmetric inflation goal. Members expected that economic conditions would evolve in a manner that would warrant further gradual increases in the federal funds rate. They judged that raising the target range gradually would balance the risks to the outlook for inflation and unemployment and was most likely to support continued economic expansion. Members agreed that the strengthening in the economic outlook in recent months increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate. Members continued to anticipate that the federal funds rate would likely remain, for some time, below levels that were expected to prevail in the longer run. Nonetheless, they again stated that the actual path for the federal funds rate would depend on the economic outlook as informed by incoming data.

US Federal Reserve, “Minutes of the Federal Open Market Committee March 20–21, 2018“, 11 Apr 2018 Minutes

flag_japan Japan update

Currency: USD/JPY

JPY movements
^ JPY movements against the USD over the past month (mouseover for inverse) Chart: xe.com

Stockmarket: Nikkei 225

n225 movements
^ Nikkei 225 movements over the past week [Chart: Google Finance]

flag_china China update

Monthly Report on Producer Prices for the Industrial Sector. Mar 2018

Preview: Trading Economics

The producer price index in China increased by 3.1 percent from a year earlier in March of 2018, easing from a 3.7 percent advance in the prior month and missing market expectations of 3.2 percent.

cn_ppi_20180411_te

It was the lowest producer inflation since October 2016, as cost of means of production rose at a softer pace (4.1 percent from 4.8 percent in February), namely extraction (5 percent from 6.4 percent), raw materials (5.1 percent from 5.9 percent) and processing (3.7 percent from 4.2 percent). Also, consumer goods inflation eased to 0.2 percent in March from 0.3 percent in the previous month, due to a slowdown in daily use goods (0.9 percent from 1.1 percent) and clothing (0.3 percent from 0.5 percent) and a decline in consumer durable goods (-0.3 percent from -0.1 percent). Food production prices were unchanged for the third consecutive month. On a monthly basis, producer prices fell by 0.2 percent in March, following a 0.1 percent drop in February.

Producer Prices Change in China averaged 1.23 percent from 1995 until 2018, reaching an all time high of 13.47 percent in July of 1995 and a record low of -8.20 percent in July of 2009.TradingEconomics

Press Release Extract [cn_ppi]

In March 2018, Producer Price Index (PPI) for manufactured goods increased 3.1 percent year-on-year, and decreased 0.2 percent month-on-month. The purchasing price index for manufactured goods increased 3.7 percent year-on-year, and decreased 0.3 percent month-on-month. On average from January to March, the PPI increased 3.7 percent year-on-year, the purchasing price index for manufactured goods went up by 4.4 percent year-on-year.

cn_ppi1_20180411

1. Year-on-Year Changes of Prices of Different Categories

The year-on-year change of producer prices for means of production increased 4.1 percent, meaning 3.09 percentage points increase in the overall price level. Of which, producer prices for mining and quarrying industry increased 5.0 percent; that of raw materials industry increased 5.1 percent; that of manufacturing and processing industry increased 3.7 percent. Producer prices for consumer goods increased 0.2 percent year-on-year, meaning 0.04 percentage points increase in the overall price level. Of which, producer prices for foodstuff remained unchanged, that of clothing increased 0.3 percent, that of commodities went up by 0.9 percent, and that of durable consumer goods went down by 0.3 percent.

cn_ppi2_20180411

The year-on-year purchaser price indices for building materials and non-metallic went up by 11.4 percent, non-ferrous metal materials and wires went up by 6.8 percent, ferrous metal materials increased 5.3 percent, fuel and power increased 4.9 percent, agricultural and sideline products decreased 1.0 percent.

2. Month-on-Month Changes of Prices of Different Categories

The producer prices for means of production decreased 0.2 percent month-on-month, meaning 0.14 percentage points decrease in the overall price level. Of the total, producer prices for mining and quarrying industry decreased 0.8 percent, that of raw materials industry decreased 0.5 percent, that of manufacturing and processing industry remained unchanged. Producer prices for consumer goods decreased 0.2 percent month-on-month, meaning 0.04 percentage points decrease in the overall price level. Of which, producer prices for foodstuff and clothing decreased 0.2 percent, that of commodities and durable consumer goods decreased 0.1 percent.

The month-on-month purchaser price indices for wood and pulp increased 0.5 percent, ferrous metal materials went up by 0.2 percent, fuel and power, non-ferrous metal materials and wires decreased 0.8 percent

National Bureau of Statistics of China, “Monthly Report on Producer Prices for the Industrial Sector. Mar 2018“, 12 Apr 2018 More

Monthly Report on Consumer Price Index. Mar 2018

Preview: Trading Economics

China’s consumer price inflation fell to 2.1 percent year-on-year in March 2018 from a four-and-a-half-year high of 2.9 percent in the previous month and below market consensus of 2.6 percent. Cost increased at a softer pace for both food and non-food products. On a monthly basis, consumer prices declined by 1.1 percent in March, following a 1.2 percent rise in February and way above market expectations of a 0.5 percent fall. It was the first monthly drop since last June.

cn_cpi_20180411_te

Inflation Rate in China averaged 5.27 percent from 1986 until 2018, reaching an all time high of 28.40 percent in February of 1989 and a record low of -2.20 percent in April of 1999.TradingEconomics

Press Release Extract [cn_cpi]

In March 2018, the consumer price index (CPI) went up by 2.1 percent year-on-year. The prices grew by 2.1 percent in cities and 1.9 percent in rural areas. The food prices went up by 2.1 percent, and the non-food prices increased 2.1 percent. The prices of consumer goods went up by 1.6 percent and the prices of services grew by 2.8 percent. On average from January to March, the overall consumer prices were up by 2.1 percent from the same period of the previous year.

In March, the consumer prices went down by 1.1 percent month-on-month. Of which, prices went down by 1.1 percent in cities and 1.2 percent in rural areas. The food prices went down by 4.2 percent, and the non-food prices went down by 0.4 percent. The prices of consumer goods decreased 1.4 percent, and the prices of services decreased 0.7 percent.

cn_cpi1_20180611

I. Year-on-Year Changes of Prices of Different Categories

Prices of food, tobacco and liquor, went up by 2.0 percent year-on-year, affecting nearly 0.61 percentage points increase in the CPI. Of which, the prices of eggs, went up by 17.6 percent, affecting nearly 0.09 percentage points increase in the CPI; fresh vegetables, up by 8.8 percent, affecting nearly 0.22 percentage points increase in the CPI; fresh fruits, up by 7.4 percent, affecting nearly 0.13 percentage points increase in the CPI; aquatic products, up by 5.6 percent, affecting nearly 0.10 percentage point increase in the CPI; meat, down by 6.1 percent, affecting nearly 0.29 percentage points decrease in the CPI (price of pork was down by 12.0 percent, affecting nearly 0.32 percentage points decrease in the CPI).

The prices of all the other seven categories increased year-on-year. Of which, the prices of health care, residence, education, culture and recreation, increased 5.7, 2.2 and 2.2 percent respectively, household articles and services, other articles and services, increased 1.6 and 1.2 percent respectively, clothing, transportation and communication, increased 1.1 and 0.3 percent respectively.

II. Month-on-Month Changes of Prices of Different Categories

Prices of food, tobacco and liquor went down by 2.8 percent year-on-year, affecting nearly 0.85 percentage points decrease in the CPI. Of which, prices for fresh vegetables, went down by 14.8 percent, affecting nearly 0.45 percentage points decrease in the CPI; meat, down by 5.4 percent, affecting nearly 0.24 percentage points decrease in the CPI (price of pork was down by 8.4 percent, affecting nearly 0.21 percentage points decrease in the CPI); eggs, aquatic products, fresh fruits, down by 7.9, 3.2 and 2.4 percent respectively, affecting nearly 0.15 percentage points decrease in the CPI in total.

Among the prices of the other seven categories, three increased and four decreased month-on-month. Of which, the prices of clothing, residence, health care, increased 0.6, 0.2 and 0.2 percent respectively, education, culture and recreation, transportation and communication, decreased 1.6 and 1.6 percent respectively, other articles and services, household articles and services, decreased 0.5 and 0.2 percent respectively.

1. Year-on-Year Changes of Prices of Different Categories

The year-on-year change of producer prices for means of production increased 4.1 percent, meaning 3.09 percentage points increase in the overall price level. Of which, producer prices for mining and quarrying industry increased 5.0 percent; that of raw materials industry increased 5.1 percent; that of manufacturing and processing industry increased 3.7 percent. Producer prices for consumer goods increased 0.2 percent year-on-year, meaning 0.04 percentage points increase in the overall price level. Of which, producer prices for foodstuff remained unchanged, that of clothing increased 0.3 percent, that of commodities went up by 0.9 percent, and that of durable consumer goods went down by 0.3 percent.

The year-on-year purchaser price indices for building materials and non-metallic went up by 11.4 percent, non-ferrous metal materials and wires went up by 6.8 percent, ferrous metal materials increased 5.3 percent, fuel and power increased 4.9 percent, agricultural and sideline products decreased 1.0 percent.

2. Month-on-Month Changes of Prices of Different Categories

The producer prices for means of production decreased 0.2 percent month-on-month, meaning 0.14 percentage points decrease in the overall price level. Of the total, producer prices for mining and quarrying industry decreased 0.8 percent, that of raw materials industry decreased 0.5 percent, that of manufacturing and processing industry remained unchanged. Producer prices for consumer goods decreased 0.2 percent month-on-month, meaning 0.04 percentage points decrease in the overall price level. Of which, producer prices for foodstuff and clothing decreased 0.2 percent, that of commodities and durable consumer goods decreased 0.1 percent.

The month-on-month purchaser price indices for wood and pulp increased 0.5 percent, ferrous metal materials went up by 0.2 percent, fuel and power, non-ferrous metal materials and wires decreased 0.8 percent.

National Bureau of Statistics of China, “Monthly Report on Consumer Price Index. Mar 2018“, 12 Apr 2018 More

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