Sat, Apr 21, 2018 @ 23:08 GMT

Chicago Fed Evans discussed overheating and monetary policy

    Chicago Fed President Charles Evans delivered a speech at the University of Wisconsin today. There he laid down “three possibilities concerning low inflation and low unemployment and their implications for monetary policy”.

    The first one being the “overheating story” and said that the “risks are not particularly high”. Evans pointed out that the so called “Phillips curve” is much “flatter” than it was. And, adding to that “inflation expectations low and well anchored, and a lack of fuel from strong wage growth”, there is no “outsized risk of a breakout in inflation”.

    The second scenario is that “inflation is low because the sustainable rate of unemployment is actually much lower than the FOMC’s 4-1/2 percent estimate”. Therefore, “unemployment rate really isn’t putting any pressure on labor markets.” In this case, “the risks of overheating would be lower, and perhaps interest rate adjustments could be smaller.”

    In the third scenario, “unemployment running below its natural rate, u*, without rising inflation is due to labor market inefficiencies that are outside the purview of monetary policy.” He added that
    “let’s consider the possibility that unemployment remains low and some structural problem keeps wages and prices from rising to attract workers. Is this really a problem that monetary policy is suited to address? I think the answer is no.”

    Finally, Evans also noted that Fed is facing “low inflation trends and low inflation expectations”. And, ” some cyclical upturn in inflation is actually welcome because it should help solidify expectations symmetrically around our 2 percent objective. This is necessary for achieving our inflation target on a sustainable basis.”

    His full speech Overheating and Monetary Policy: How Does Low Inflation Affect the Policy Narrative?

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    CAD selloff resumes as CPI and retail sales missed expectations

      CAD’s selloff resumes after disappointing data from Canada.

      Headline retail sales rose 0.4% mom in February, below expectation of 0.5% mom.

      Ex-auto sales was even worse, flat mom, versus expectation of 0.5% mom rise.

      Headline CPI rose 0.3% mom, 2.3% yoy in March, below expectation of 0.4% mom, 2.4% yoy. February’s figure was 0.6% mom, 2.2% yoy.

      Core CPI common was unchanged at 1.9% yoy, below expectation of 2.0% yoy.

      Core CPI median was unchanged at 2.1% yoy, below expectation of 2.2% yoy.

      Core CPI trim slowed to 2.1% yoy, down from expectation of 2.1% yoy and missed expectation of 2.1% yoy.

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      Good progress on NAFTA talks but no timeline yet

        Canadian Foreign Minister Chrystia Freeland U.S. Trade Representative Robert Lighthizer and Mexican Economy Minister Ildefonso Guajardo started intensive NAFTA talks in Washington yesterday.

        Freeland sounded upbeat as she said there were “good progress” made on the “rules of origin in our conversations with the U.S., with Mexico, and in our trilateral conversation.” But she declined to comment on whether there would be a deal within the next three weeks, as the US is pushing for.

        Freeland just noted that “our commitment is to get a really good win-win-win outcome as quickly as possible and…we’ll work as long as it takes to get a great deal”.

        The talks will continue today.

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        GBP accelerating down as BoE Carney helped traders made up their mind

          GBP had been rather resilient after triple misses of wage growth, CPI and retails sales. But selling finally picked up after comments from BoE governor Mark Carney yesterday. And GBP is now trading as the second weakest one for the week, just next to NZD.

          The key takeaway from Carney’s comment is that he tried to tone down the chance of a May hike. He said “we have had some mixed data … We’ll sit down calmly and look at it all in the round.” He added that “there will be some differences of view but it is a view we will take in early May, conscious that there are other meetings over the course of this year.”

          Carney noted that Brexit uncertainty had prevented a “surge in investment” And, “unfortunately that means in the short term that the speed limit (of the British economy) is not increasing. Productivity is not increasing, which will limit the rate at which people’s wages can pick up.”

          Near term action bias in GBP is starting to turn bearish.

          In particular, GBP/USD is in strong downside action bias in both H and 6H charts.

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          US shot up by yield, but EUR resilience held dollar index in range

            USD surged broadly overnight as boosted by the strong rally in treasury yields. But still, it’s just trading as the second strongest major currency this week, following EUR. And because of that, the dollar index is still bounded in recently established range, held below 55 day EMA.

            Taking a look at 10 year yield, TNX’s strong rise yesterday now suggests that the pull back from Feb’s high at 2.943 has completed and the medium term up trend is resuming. Focus will be on this 2.943 resistance today, if not taken out, early next week. A firm break there should likely push TNX through 2013 high at 2.036. That will be an important signal of reversal of the multi decade down trend.

            For dollar index, we maintained our view that a breakout is imminent as it’s close to medium term falling trend line. If the break out is accompanied by surge in treasury yield, then favor will be on the case of an upside breakout for bullish reversal. And in that case, we would likely see EUR/USD dropping through 1.22 handle. Let’s see how it’s going to play out.

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            China ambassador to US Cui: Let’s have a more positive and cooperative mindset

              Chinese Ambassador to the US Cui Tiankai said in an article in the official Xinhua news agency that “forty years of diplomatic ties and cooperation have served the interests of both countries quite well.” And, “in addition to all the bilateral benefits we have gained from this relationship, we have also seen its positive impact on the broader region of the Asia-Pacific and the world.”

              He urged that “if we have a more positive and cooperative mindset, we could see clearly the emerging trends in the world, seize new opportunities, and turn challenges into opportunities.” And he emphasized that China is “against any trade war” and believes “any dispute should be worked out through dialogue and consultation.” But Cui also warned that if US insists on a trade war, China will retaliate.

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              Cleveland Fed Mester: Further gradual tightening is appropriate this year

                Cleveland Fed President Loretta Mester expressed her support for more rate hike this year. She said in a prepared speech for University of Pittsburgh’s graduate school of business that “If the economy evolves as I anticipate, I believe further gradual increases in interest rates will be appropriate this year and next year.”

                She added that “continued gradual reduction in monetary policy accommodation, given the economic outlook, will put monetary policy in a better position to address whatever risks, whether to the upside or to the downside, are ultimately realized.”

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                SNB Jordan: No need to change monetary policy even though EUR/CHF is back at 1.2

                  EUR/CHF continues to press the historical level at 1.2, the SNB imposed floor which was suddenly given up in 2015 and caused panic selling. Now the cross is back at this level.

                  SNB Chairman Thomas said in an interview that the depreciation of the Swiss Franc is in the “right direction”. Nonetheless, the currency as a safe haven is prone to change and the situation is “fragile”. So the SNB will “remain very prudent”.

                  Jordan added that “there’s no need to do anything regarding monetary policy at this moment”, as “we are convinced that the current monetary policy is still necessary.”

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                  Japan core inflation slowed in March, BoJ Kuroda warned on protectionism

                    Japan national CPI core slipped back to 0.9% yoy in March, down from February’s 1.0% yoy, meeting market expectations. It will take a few more months to see if it’s only a blip or a change in trend. Core inflation had an impressive up this year but momentum has been slowing. It’s already looking a be challenging for inflation to meet BoJ’s own media projection of 1.4% in the current fiscal year. And BoJ might need to delay the timing for hitting 2% target again, if the slowdown in inflation persists.

                    Separately, BoJ Governor Haruhiko Kuroda stepped up his warning on protectionism, as he arrived at the G20 summit of finance ministers and central bankers. He said there will be “quite comprehensive” debate on trade during the meeting. And he emphasized that “many countries share the view they benefit greatly from free trade, so I don’t think protectionism will spread and lead to a decline in global growth. But the risk is there.” He added that “protectionism isn’t having a huge impact on Japan’s economy yet. But the risk is right in front of us, so we need to carefully watch how developments unfold.”

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                    USD lifted as 10 year yield breaks 2.9, heading to 2018 high at 2.943

                      Dollar receives some solid buying as the rally in 10 year yield picks up steam to above 2.9 handle.

                      That’s a wake up call to traders that TNX could now be taking on 2.943 high, which is a key near term resistance. Break of which will finally resume the larger up trend, through 3.0 handle, 20 2013 high and 3.036. The correlation of Dollar and yield has somewhat broken down in recent months. But a break above 3% could be the turning point to realign the correlation.

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                      Philadelphia business outlook: General activity, new orders, shipments, and employment all indicated continued expansion

                        Philadelphia business outlook diffusion index rose from 22.3 to 23.2 in April, beating expectation of 21.2. There were nearly 37% of manufacturers reported increases in overall activity during the month, while 14% reported decreases. Philadelphia Fed noted in the release that the responses ” suggest continued growth for the region’s manufacturing sector. The indexes for general activity, new orders, shipments, and employment all indicated continued expansion this month.” And, “looking ahead six months, the firms continued to be optimistic about the outlook for manufacturing activity.”

                        Full release here

                        Also from US, jobless claims dropped 1k to 232k in the week ended April 21, slightly above expectation of 230k. Four week moving average rose 1.25k to 231.25k. Continuing claims dropped 15k to 1.86m in the week ended April 14.

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                        GBP, CAD recovering; NZD, USD, JPY Pressured

                          Heading into US session, GBP and CAD recovered some of the losses this week. In particular, GBP is rather immuned from the retail sales miss as that’s primarily due to bad weather. CAD, on the other hand is lifted mildly by oil prices. NZD is trading as the weakest one for today as CPI slowed to 1.1% in Q1, close to RBNZ’s target band. Governor Adrian Orr’s comments that “very benign inflation going forward without doubt” also weigh down the NZD. JPY and USD follow as the second and third weakest for the day.

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                          Germany’s Joint Economic Forecast Project Group raised 2018 and 2019 growth projections

                            In the twice a year published Joint Economic Forecast by leading German institutes, growth projection for 2018 and 2019 were raised to 2.2% and 2.0% respectively. Both were upwardly revised by 0.2% from Autumn report. The released warned that while German economy “continues to boom”, “the air is getting thinner”. Still, “pace of economic expansion nevertheless remains brisk:” It pointed to upturn in the world economy, favorable situation in labor market and fiscal stimulus of the new coalition government as driving forces. Inflation is projected to slow to 1.7% in 2018 then rise again to 1.9% in 2019.

                            Global growth projection was revised up by 0.3% to 3.4% in 2018. The reported noted that “tax cuts in the USA will stimulate economic activity there, which may have a knock-on effect on other countries”. However, it also warned that the dynamic in the world economy will “gradually flatten off over the forecasting period”. And that’s partly due to “a harsher trade policy climate, which will burden global investments.”.

                            The report also pointed directly to the US announcement of steel and aluminum tariffs as “another step towards greater protectionism”. It warned that “any further escalation of the trade conflict will restrict international trade in goods and significantly damage world economic growth in the mid-term.” Even “mere discussion of such measures can increase uncertainty over a country’s future trade policy and weaken economic sentiment”.

                            A summary of the report can be found here. Or more details here.

                            Members of the Joint Economic Forecast Project Group

                            Deutsches Institut für Wirtschaftsforschung e.V. []

                            in co-operation with:

                            The Austrian Institute of Economic Research WIFO []

                            ifo Institute – Leibniz Institute for Economic Research at the University of Munich[]

                            in co-operation with:

                            Swiss Institute of Business Cycle Research (KOF), ETH Zurich []

                            Institut für Weltwirtschaft an der Universität Kiel []

                            Halle Institute for Economic Research (IWH) []

                            RWI – Leibniz-Institut für Wirtschaftsforschung []

                            in co-operation with:

                            Institute for Advanced Studies, Vienna []

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                            Another day, another miss. UK retail sales dropped -1.2% in March

                              Another day, another data miss in the UK.

                              Retail sales including auto and fuel dropped -1.2% mom in March, well below expectation of -0.6%. Annual rate rose 1.1% yoy, below expectation of 1.9% yoy.

                              Retail sales excluding auto and fuel dropped -0.5%, below expectation of -0.4%. Annual rate rose 1.1% yoy, below expectation of 1.4% yoy.

                              Main points from ONS:

                              • In the three months to March 2018 (Quarter 1), the quantity bought in retail sales fell by 0.5% when compared with Quarter 4 (Oct to Dec) 2017, with declines in all sectors except for department stores and non-store retailing.
                              • The month-on-month growth rate fell by 1.2% due to a large fall of 7.4% from petrol sales; a likely consequence of adverse weather conditions, which impacted travel.
                              • Department stores were the only sector to show positive growth in March at 0.8%, with feedback from retailers suggesting that online offers for Mothering Sunday and Easter boosted internet sales more than usual during the adverse weather.
                              • The quantity bought in supermarket stores declined in March, while specialist food stores saw strong growth; possibly due to the easier access to these stores during snow.
                              • Online sales accounted for 17.4% of all retailing, seasonally adjusted in March 2018, compared with 15.9% in March 2017; the strongest growth on the same month a year earlier came from department stores at 33%.

                              Statistician’s comment

                              Commenting on today’s official retail figures, Rhian Murphy, ONS Senior Statistician said:

                              • “Retail sales fell in the first quarter due to a large decline in March with petrol sales seeing a significant slump as a result of the poor weather keeping many shoppers indoors. However, the snow actually helped boost online spending with department stores in particular seeing growth in their web sales.
                              • “Various shops also reported increased spending on gifts in the run-up to Easter and Mother’s Day, which also helped boost online sales.”

                              GBP dips initially after the release, for so far, there is no follow through selling yet.

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                              RBNZ Orr: Very benign inflation going forward without doubt

                                New Zealand CPI slowed notably to 1.1% yoy in Q1, down from prior quarter’s 1.6%, meeting expectation. RBNZ Governor Adrian Orr said in Radio New Zealand interview that he expected “very benign inflation going forward without doubt, as we’ve forecast”.

                                He added that “what really matters is the confidence and expectation and belief that we are aiming for that midpoint of 2 percent all of the time.” And he pledged that “we are doggedly determined to aim for two percent, but the accuracy around…that is very limited.”

                                Overall, with CPI now close to bottom of RBNZ’s target band, there is little pressure for the central bank to raise interest rates.

                                Today’s upside acceleration in AUD/NZD further affirm the case that it’s bottomed in short term at 1.0486. This is supported by bullish convergence condition in daily MACD. Further rise is now likely in near term back to 55 day EMA (now at 1.0683). But the real test will be at 38.2% retracement of 1.1289 to 1.0486 at 1.0793.

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                                Australia NAB business condition rose to highest since 2007

                                  Australia quarterly NAB business confidence was unchanged at 7 in Q1. Quarterly business conditions rose from 15 to 17.

                                  Highlights from the release:

                                  • Business conditions (an average of trading conditions/sales, profitability and employment) increased by 2pts to +17, its highest level since 2007, although the monthly survey indicates conditions, while still strong, eased late in the quarter.
                                  • Business confidence was unchanged at +7 and it has been relatively stable since 2016 Q3, staying within a range of 6 to 8 pts, a little above its historical average of +5.
                                  • Overall, leading indicators continue to look positive, although there was some easing in expectations for the next three months.
                                  • Labour indicators point to a tightening labour market. While there is no upwards move yet in wage growth the conditions are in place for this to occur.

                                  FINANCIAL MARKET EXPECTATIONS

                                  • On average, businesses are pricing in around an 80% probability of a 25bp rate hike in the next 12-months. NAB Economics’ view is that the RBA will want clear evidence that wages growth and inflation are moving higher before removing some policy accommodation, and we don’t expect sufficient evidence of this until late 2018 (with the first hike expected in November), with the risk that it occurs later.
                                  • Exchange rate expectations in the Survey (6-months-ahead) rose to almost US$0.78, which is around the average level at the time the Survey was taken.

                                  Full release here.

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                                  AUD stays firm as employment data miss is not a disaster

                                    AUD is not too bothered by the weaker than expected headline job data from Australia. 4.9k jobs were added in March, below expectation of 20.3k. Full time jobs dropped by 19.9k to 8.51m while part time jobs rose 24.8k to 3.9m. Total employment was at 12.484m.

                                    Prior month’s figure was revised down from 17.5k to -6.3k. February now had the first monthly drop in employment since September 2016. The record streak of consecutive monthly job growth has shorted to 16 months.

                                    Seasonally adjusted unemployment rate was unchanged at 5.5%, after downward revision in February’s figure from 5.6% to 5.5%. However, labor force participation rate rose to 65.7%, sitting at a record high in since the series began back in 1978.

                                    The figures just showed that growth in the Australian labor market is slowing after a very strong period since late 2016. .

                                    AUD quickly regained some strength after initial dip as markets realized that the data is not a disaster.

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                                    AUD’s unconvincing strength ahead of Australia employment data

                                      After a rather long day with UK CPI and BoC as main events, GBP and CAD are set to end as the weakest ones. CAD is performing worst, as followed by GBP. GBP is indeed quite resilient from our point of view. For the time being, GBP/USD is still holding above 1.4144, GBPJPY above 151.15 and EUR/GBP below 0.8379. There is no avalanche selloff. On the other hand, EUR and AUD are being the strongest ones.

                                      Taking a look at AUD action bias table, it’s rather neutral against USD, EUR and JPY. GBPAUD shows downside action bias in H and 6H, neutral D and upside W. H and 6H movements look counter trend and that’s why D is neutral.

                                      Similarly, AUDCAD show upside action bias in H and 6H, neutral D and downside W. The H and 6H movements are counter trend.

                                      These counter trend movements are ok for quick intraday or swing pattern trades. But until they’re prove to be reversals, for position trading, they’re rather forgettable.

                                      And, bear in mind that Australian employment data is upcoming in Asian session. Probably by then, AUD will show its true color.

                                      — What is trade is as important as how to trade.


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                                      CAD selloff resumes as BoC Poloz offered nothing special, a look at EURCAD and CADJPY

                                        CAD’s selloff resumes after BoC governor Stephen Poloz’s press conference offered nothing special.

                                        EUR/CAD’s rebound today indicates short term bottoming at 1.5461, on bullish convergence condition in 4 hour MACD. Further rise would be seen to 38.2% retracement of 1.6151 to 1.5461 at 1.5725 first.

                                        Currently, the decline from 1.6151 is seen as a corrective move, as it’s held well above 1.5257 key cluster support. Hence, break of 1.5725 will target 61.8% retracement at 1.5887 and above.

                                        CAD/JPY’s pull back also suggest that short term topping at 85.75. And deeper retreat could be seen.

                                        However, note that CAD/JPY drew strong support from 80.55 and rebounded. The fall from 91.56 is likely completed at 80.52. For now, we’d stay bullish as long as 83.52 minor support holds. And, we’d expect another rise through 85.75 to 91.56 high later.

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                                        CAD dips as BoC signals it’s not ready for rate hike yet

                                          CAD trades notably lower after BoC rate announcement. Overnight rate target was kept at 1.25% as widely expected. The key takeaway from the statement is that the “higher interest rates will be warranted over time”, but “some monetary policy accommodation” will be needed. “Governing Council will remain cautious in considering future policy adjustments”, as “guided by incoming data”. And the “economy’s sensitivity to interest rates, the evolution of economic capacity” and “dynamics of both wage growth and inflation” will be watched. Basically, these were the elements mentioned in the last paragraph of March statement, just juggled into different place.

                                          Here is the full statement.

                                          In short, BoC is making itself quite clear that it’s not ready to have another rate hike yet.

                                          USD/CAD’s rebound and break of 1.2622 minor resistance suggests that a short term bottom was formed at 1.2526. More consolidation would be seen, with risk of stronger recovery. But still, decline from 1.2942 is expected to resume at a later stage.

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