ECB: Nagel Sees ECB In "Very Good Position" To Respond To New Developments
At current interest rates, ECB's Nagel sees the Governing Council well positioned to react to any shocks threatening price stability, reiterating the ECB should remain data-dependent:
- "In my view, this interest rate level puts us in a very good position to respond to a wide range of developments."
- "The current price data and inflation forecasts signal that the mission has been accomplished. We in the Governing Council can be very satisfied with this. However, we cannot afford to sit back and relax. Rather, we must keep our eyes and ears open for risks to price stability."
- "Given that crucial factors can change rapidly in the current environment, we would be well advised to remain flexible. This means that it does not make sense to make any predetermined decisions – neither on a further interest rate cut nor on maintaining the status quo in monetary policy. We should continue to make decisions on a meeting-by-meeting basis depending on the data and not rush into anything."
- "I am confident that inflation will stabilize at 2 percent in the long term and that we will thus achieve our medium-term inflation target. [...] A sustained undershooting is unlikely. The underlying inflation and, above all, the increase in the cost of services are too high for that."
- "German fiscal policy is likely to dampen inflation noticeably in the short term when relief measures such as the reduction in electricity tax or grid fees come into effect. On the other hand, higher spending on defense and infrastructure could drive aggregate demand and, indirectly, consumer prices in the medium term."
Elsewhere, he remains within common themes re the economic outlook in Germany - but sees some upside vs Bundesbank's recent 2025 forecast:
- "According to our recent forecast for Germany, the economy will remain flat on average for the current year. However, this forecast did not take into account the fact that the revised growth rate for the first quarter is now twice as high as originally reported. A slight increase in overall economic performance therefore seems quite possible on an annual average."
- "Economic output is likely to stagnate in the second quarter. Exports are undoubtedly suffering from US tariff policy. In addition, industrial capacity utilization is comparatively low. Accordingly, companies have relatively little incentive to invest. Furthermore, private household consumption is currently subdued. This is because the labor market is tending to deteriorate and wages are no longer rising as strongly."
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RATINGS: Moody's Downgrades US's AAA Rating As Deficits Seen Ballooning
Moody's has downgraded the US's long-term credit rating to Aa1 trom Aaa. The move may not have been fully expected today. But it was the last holdout among they S&P and Fitch to demote the USA from the top rating, and they placed negative outlook on the US last year (now stable). Fiscal deterioration, both past and anticipated as Congress wrangles with the Republican fiscal bill, is cited as the key factor. From the release (link):
- “While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics."
- "This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns...We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration."
- "If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade. As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation."
- "We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024."
- "Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns."
US FISCAL: "Extraordinary Measures" Continue To Dwindle Amid Debt Impasse
The "extraordinary measures" available to Treasury to stave off a debt default were down to $82B as of May 14, per a Treasury Department release today.
- That compares unfavorably with a high of $335B in January when the debt limit impasse began. Combined with $562B in Treasury cash on hand, though, after April's large tax intakes, that makes for around $644B in available resources before the "x-date" is reached.
- Resources are gradually being eroded since reaching nearly $800B in mid-April.
- Per Tsy Sec Bessent's letter to Congress last week, "after reviewing receipts from the recent April tax filing season, there is a reasonable probability that the federal government's cash and extraordinary measures will be exhausted in August while Congress is scheduled to be in recess. Therefore, I respectfully urge Congress to increase or suspend the debt limit by mid-July, before its scheduled break, to protect the full faith and credit of the United States."
CANADA DATA: Sales Activity Points To Potential Marking Up Of GDP Ests
There was mixed news on the housing and wholesale/manufacturing sales fronts this week, which on net look to slightly upwardly bias Q1 GDP estimates, pending next week's retail sales reading.
Housing starts blew through expectations at 278.6k in April (226.2k expected, 214.2k prior). This came after building permits fell a worse-than-expected 4.1% M/M in March as reported Wednesday.
- Meanwhile, he Canadian Real Estate Association reported existing home says April sales unexpectedly contracted -0.1% M/M (+1.0% expected, -4.8% prior). Sales are now down 9.8% Y/Y, while prices fell 1.2% M/M (3.6% Y/Y on the price index). (Link)
- Overall, confidence appears subdued, which is likely to translate into subdued activity.
On the sales front, March data was soft but positive versus expectations and could add a slight upward drift to Q1 GDP expectations.
- Manufacturing sales were less negative than expected at -1.4% M/M (-1.9% expected/flash estimate, -0.2% prior rev up 0.4pp). The decline was led by primary metals -6.5%, an area hit by U.S. tariffs, and oil -4.2%. Overall Q1 factory sales grew +1.6% vs prior +1.1%.(Link)
- Wholesales ex-petroleum and grains rose 0.2% in March, vs the advance estimate / consensus -0.3%. Sales volumes fell 0.3%. Overall Q1 wholesales rose 2.5%, led by machinery/equipment and autos/parts.
