Sun, Oct 21, 2018 @ 07:56 GMT

Moody’s downgraded Italy to Baa3, with stable outlook

    Moody’s lowered Italy’s credit rating to Baa3, from Baa2, on notch above junk status. Also rating outlook was assigned as “stable”. The rating cut was generally expected and indeed, markets were calmed by the stable outlook.

    Moody’s expressed concern over the budget deficit target of 2.4% of GDP in 2019, which is three times higher than prior target of 0.8%. The shift towards an expansionary fiscal policy would make “Italy vulnerable to future domestic or externally-sourced shocks, in particular to weaker economic growth.” Also, “most of the government’s spending increases are structural in nature, implying that they will be difficult to reverse,”

    In addition, Moody’s warned that “the economic plans of the government, while supportive of growth in the near term, do not amount to a coherent program of reforms that will lift Italy’s mediocre growth performance on a sustained basis.”

    Though, with a stable outlook, “Italy still exhibits important credit strengths that balance the weakening fiscal prospects.”

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    BoE Carney on Brexit preparation: Not hoping for the best but preparing for the worst

      BoE Governor Mark Carney said the central bank “does not focus on the most likely outlook” in Brexit preparation. Instead, BoE focuses on the possible consequences of a disorderly, cliff-edge exit from the EU, however unlikely that may be.” That is, Carney added “we aren’t hoping for the best, we’re preparing for the worst in several ways.”

      On global financial regulations, Carney emphasized that “we need to tailor not taper. It is critical that the process of evaluation and adjustment does not compromise overall system resilience.”

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      Fed Kaplan: Two or more rate hikes to reach netural

        Dallas Fed President Robert Kaplan said the current monetary policy remained “modestly” accommodative. It will take two or three more rate hikes to become “neutral” which is neither accommodative nor restrictive. And he’s not decided whether Fed should continue rate hikes above neutral level.

        Referring to the economy, Kaplan said Fed is “basically meeting its dual mandate”.Ka

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        Euro recovers, Italian yeild reverses as EU Moscovici wants to reduce tensions with Italy

          That’s the power of words. Euro recovers notably while Italian yield reversed after European Economic Affairs Commissioner Pierre Moscovici said he wanted to reduce tensions with Italy, regarding the budget, through “constructive dialogue”. He emphasized that both EU shared the populist coalition government’s goal of boosting growth and cutting debt. And he also reiterated that no formal decision was made from the Commissions side yet. Yesterday, EU sent a letter warning Italy’s budget as “obvious significant deviation” of the recommendations adopted by the European Council.

          Italian 10 year yield is now at 3.581, down -0.097, after hitting as high as 3.784 earlier today.

          EUR/USD also recovered notably after defending 1.1431 support.

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          Canada CPI slowed to 2.2%, retail sales contracted, CAD dives as BoC hike in question

            Canadian Dollar dives notably after a set of much weaker than expected data.

            Headline retail sales dropped -0.1% mom in August versus expectation of 0.4% mom. Ex-auto sales dropped -0.4% mom versus expectation of -0.2% mom.

            Headline CPI dropped sharply by -0.4% mom in September versus expectation of -0.1% mom. Annually, CPI slowed to 2.2% yoy, down from 2.8% yoy and missed expectation of 2.9% yoy.

            CPI core common slowed to 1.9% yoy, down from 2.0% yoy. CPI core median slowed to 2.0% yoy, down from 2.1% yoy. CPI core trim slowed to 2.1% yoy, down from 2.2% yoy.

            The set of data, in particular the sharp fall in CPI, raises the important question of whether BoC is still going to hike next week on October 24.

            Full CPI and retail sales release.

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            German-Italian yield spread breaks 330 after EU’s warning letter to Italy

              German-Italian yield spread widens further today after EU finally confronted Italy on its budget. A letter was passed to Italian Economy Minister Givoanni Tria, detailing why the budget is an “obvious significant deviation” of the recommendations adopted by the European Council under the 2019 Stability and Growth Pact. Italy will now have until October 22 to respond to the letter. But it’s unlikely for the populist coalition to back down.

              At the time of writing, Italian 10 year yield is up 0.075 at 3.753.

              On the other hand, German 10 year yield is down -0.016 at 0.405. That is, German-Italian yield spread is now at 334!.

              Euro is just mixed for today, even though it’s the second weakest for the week after Sterling.

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              China Q3 GDP slowed to 6.5%, Shanghai SSE recovery capped by 2500

                China’s Shanghai SSE Composite dived to as low as 2449.20 in initial trading, following the steep selloff in the US. The index recovered after the China Banking and Insurance Regulatory Commission (CBRC) announced measures to encourage private equity funds to buy public traded shares. However, weaker than expected Q3 GDP data appears to cap SSE’s recovery as it fails to get hold of 2500 handle.

                Released from China, Q3 GDP growth slowed to 6.5% yoy, down from 6.7% yoy in Q2 and missed expectation of 6.6 yoy. That’s also the weakest reading since Q2 of 2009. On quarterly basis, growth slowed to 1.6% qoq, down from Q2’s 1.8% qoq. Also release, industrial production grew 5.8% yoy in September, down from 6.1% and missed expectation of 6.0% yoy. But retail sales rose 9.2% yoy, up from 9.0% yoy and beat expectation of 9.0% yoy. Fixed asset investment rose 5.4% ytd yoy, up from 5.3% ytd yoy and beat expectation of 5.3% ytd yoy.

                Statistics bureau spokesman Mao Shengyong said China is still able to reach the full-year growth target of around 6.5% in 2018 even though downward pressure increases. He added that infrastructure investment growth will stabilize and “consumption upgrade” will continue. Nonetheless, Mao also admitted that external environment will pose uncertainties on stabilizing growth.

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                EU: Italy’s budget an obvious significant deviation of Stability and Growth Pact

                  EU Commissioners Valdis Dombrovskis and Pierre Moscovici wrote a joint letter to warn Italy of its budget plan. Handing the letter directly to Italian Economy Minister Giovanni Tria, the EU started the first formal step to reject the budget which will lead to direct clash between Rome and Brussels. Italy will now have until October 22 to respond to the letter.

                  EU said in the letter that Italy’s plan is an “obvious significant deviation” of the recommendations adopted by the European Council under the 2019 Stability and Growth Pact. Also, while the Council suggested fiscal adjustment, the Italy plans fiscal expansion of close to 1% of GDP, and the “size of the deviation (a gap of around 1.5% of GDP) are unprecedented”.

                  EU also criticized that the macroeconomic forecasts under the plan has not been endorsed by the Parliamentary Budget Office. And this appears “not to respect” the rules of having forecasts produced or endorsed by an “independent body”.

                  Italian Prime Minister Giuseppe Conte said they’re ready to reply to EU’s concern and he’s not worried.

                  EU’s letter to Italy here.

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                  Fed Quarles: Right strategy is to maintain the gradual course

                    Fed Governor Randal Quarles said in a speech yesterday that monetary policy shouldn’t “drift” because of the uncertainties around many macroeconomic inputs Instead, Fed policymakers should “chart a course that is stable, gradual, and predictable; communicate it clearly; and then follow that course through the temporarily shifting and sometimes conflicting signs from the economy”. And, to him, given that “the economy has performed fundamentally as I expected”, the “right strategy is to maintain the gradual course”.

                    On the one hand, the “productive capacity” of the US might be increasing so there is no need to “accelerate our pace”. On the other hand, there there is enough doubt that “current inflation as an infallibly reliable measure of current resource constraints”. Hence, “continued gradual removal of accommodation is appropriate.”

                    Quarles’ full speech “Don’t Chase the Needles: An Optimistic Assessment of the Economic Outlook and Monetary Policy“.

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                    Mid-US update: Yen overtakes Aussie as strongest as stock selloff intensifies

                      Yen overtakes Australian Dollar as the strongest currency today as risk aversion intensifies. At the time of writing, DOW is down -1.38%, S&P 500 down -1.30%. NASDAQ is the worst and is down -1.88%. Treasury yields also reversed earlier gains. 10 year yield hit as high as 3.215 earlier today but is now back at 3.173, down -0.006. It’s clear sign of flight to safety. For now, Australian and New Zealand Dollar are the next strongest ones.

                      On the other hand, Sterling remains the worst performing, as weighed down by Brexit impasse, retail sales miss and yesterday’s CPI miss. Canadian Dollar is the second weakest as WTI crude oil stays soft, even though it’s back above 69. Euro is the third weakest on Italian Concern.

                      In European markets:

                      • FTSE closed down -0.39% at 7026.99
                      • DAX closed down -1.07% at 11589.21
                      • CAC closed down -0.55% at 5116.79.
                      • German 10 year yield drops -0.0441 to 0.420
                      • Italian 10 year yield rose 0.1334 to 3.677.
                      • That is, German-Italian spread is above 320!

                      Upcoming in Asian session, focus will be on Japan CPI and a batch of Chinese data included GDP.

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                      EU Juncker hails Italian Conte presented budget with big talent

                        European Commission Jean-Claude Juncker said Italian Prime Minister Giuseppe Conte presented the budget to EU leaders. And Juncker hailed that Conte did that “with big talent and in a very clear way”.

                        Nonetheless, Juncker also said “we did not discuss the Italian draft budget in detail, that was not the meeting to doing so, but I know from the past that the Commission has always been accused of being too generous when it came to Italian budgets.”

                        Though, he emphasized that “we have no negative prejudice against the Italian budget”. And, “we were very kind, gentle and positive when it came to Italy. Because Italy is Italy.”

                        Separately, German Chancellor Angela Merkel said “everyone is determined to put a package on the table by the December summit that describes the banking union of the future and also says something about the roadmap – i.e. the way to a deposit guarantee and describes progress on the capital markets union.”

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                        Quick view on today’s top mover: GBPAUD

                          For now, GBP/AUD is trading as the top mover for today. Sterling is weighed down by Brexit impasse, retail sales miss as well as yesterday’s CPI miss. On other hand, Australian Dollar is supported by rally in iron ore prices. Here is a quick near term view on the cross.

                          Technically, we believed that a short term top is formed at 1.8726, with mild bearish divergence condition in daily MACD. Also, it’s close to 61.8% projection of 1.6161 to 1.8507 from 1.7282 at 1.8732. Hence, there is prospect of deeper pull back.

                          For the near term, GBP/AUD should be targeting 38.2% retracement of 1.7282 to 1.8726 at 1.8174 and possibly further to 55 day EMA (now at 1.8118). But there is no clear sign of trend reversal yet. So downside might be contained there. This will be the preferred case as long as 1.8563 minor resistance holds, even in case of recovery.

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                          Fed Bullard: Maintaining current level of policy rate is appropriate

                            St. Louis Fed President James Bullard said today that the “current level of the policy rate is about right”. And, he added that “maintaining the current level of the policy rate would be an appropriate policy” for the near future.

                            He explained that a “modernized” version of the Taylor rule recommends a “relatively subdued policy rate path” closer to St. Louis Fed’s recommendation. On the other hand, the “unmodernized” Taylor rule calls for “rapid increase in the policy rate”. Though, he also acknowledged that Fed’s September medium projection is “between the modernized and unmodernized” versions.

                            Press release and Bullard’s presentation.

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                            US initial jobless claims dropped to 210k, continuing claims dropped to lowest since 1973

                              US initial jobless claims dropped -5k to 210k in the week ended October 13, matched expectations. Four-week moving average of initial claims rose 2k to 211.75k.

                              Continuing claims dropped -13k to 1.64m in the week ended October 6, lowest since August 3, 1973. Four-week moving average of continuing claims dropped -1.25k to 1.653m, lowest since August 18, 1973.

                              Philly Fed manufacturing index dropped 0.7 to 22.2, above expectation of 21.0

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                              Into US session: Australian Dollar strongest on iron ore, shrugs China stocks selloff

                                Entering into US session, Australian Dollar defy all the negative factor and it’s trading as the strongest one, followed by New Zealand Dollar. Australian job data was just a mixed bag as fall in unemployment rate was mainly due to contraction in labor force as shown indicated in drop in participation rate. Meanwhile, Chinese stocks are suffering another day of steep selloff. Strength in iron ore price is the key factor in driving the Aussie higher. According to Metal Bulletin spot price for benchmark 62% iron ore hit the highest level since March at 73.36.

                                Canadian Dollar is trading as the worst performing one as oil prices continue deep decline. WTI crude oil is now below 69 at 68.68 and is accelerating downwards. Sterling is the second weakest one on Brexit impasse. Dollar is mixed today but is showing some sign of strength at the time of writing. Let’s see if it can resume the post FOMC minutes rally in US session.

                                In European markets, at the time of writing:

                                • FTSE is down -0.18%
                                • DAX is down -0.18%
                                • CAC is up 0.19%
                                • German 10 year yield is up 0.0033 at 0.467
                                • Italy 10 year yield up even more by 0.056 at 3.600
                                • German-Italian spread stays above 300 alarming level

                                Earlier today in Asia:

                                • Nikkei dropped -0.80%
                                • Singapore Strait Times dropped -0.05%
                                • Hong Kong HSI dropped -0.03%
                                • China Shanghai SSE dropped -2.94% to 2486.42, taken out 2500 handle as down trend extended

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                                German DIHK lowered GDP forcasts, big deterioration in business expectations

                                  Germany’s DIHK Chambers of Industry and Commerce lowered 2018 growth forecasts significant from 2.2% to 1.8%. German economic growth is expected to slow further to 1.7% in 2019.

                                  DIHK said “companies are noticeably more cautious about their business outlook, we see the biggest deterioration in business expectations in four years”. It added “given the rapid pace of change, for example in global trade policies or digitalization – and the unclear outcome of Brexit, it is becoming more difficult for companies to foresee a clear trend in their business development,”

                                  In the survey titled “the air is getting thinner” business expectations dropped sharply to 11, down from 17. Current situation was unchanged at 25 though.

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                                  UK retail sales dropped -0.8% mom, stark slowdown in food sales in September

                                    Sterling pays little attention to weaker than expected retail sales data.

                                    • Retail sales including auto and fuel came in at -0.8% mom, 3.0% yoy in September versus expectation of -0.4% mom, 3.6% yoy.
                                    • Retail sales excluding auto and fuel came in at -0.8% mom, 3.2% yoy in September versus expectation of -0.4% mom, 3.8% yoy.

                                    ONS Head of Retail Sales Rhian Murphy said: “Retail continued to grow in the three months to September with jewellery shops and online stores seeing particularly strong sales. This was despite a stark slowdown in food sales in September, following a bumper summer.”

                                    Full release here.

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                                    UK PM May talked about a further idea of extending the Brexit implementation period

                                      UK Prime Minister Theresa May said today that she had already put forward on a proposal for avoiding a hard Irish border to the EU. Meanwhile, “a further idea that has emerged – and it is an idea at this stage – is to create an option to extend the implementation period for a matter of months – and it would only be for a matter of months.” But she emphasized that “this is not expected to be used, because we are working to ensure that we have that future relationship in place by the end of December 2020.”

                                      The extension is believed to be a proposal put forward by EU’s chief negotiator Michel Barnier. Under the proposal, both sides could commit to a free trade agreement by the end of 2021. That is, a year of extension in the transition period. And, only if the FTA failed to deliver so called “frictionless” trade would the Irish backstop come into action. Barnier believed that the extension would unlock the stalled debate on Irish border backstop while there would be enough time for the trade deal.

                                      However, the idea of extending the implementation period would catch furious responses from Brexiteers. That would effectively mean another year of EU budget payments as well as continued free movements.

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                                      USD/CNY hits highest since 2016, Shanghai SSE heading to 2500

                                        Let’s have a look at Yuan and Chinese stocks after US Treasury refrained from naming China a currency manipulator.

                                        PBoC set the USD/CNY (onshore Yuan) rate at 6.9275 today, versus yesterday’s 6.9103. USD/CNY then edged further higher to 6.9413 and hit the highest level since December 2016.

                                        USD/CNH (offshore Yuan) also edged higher to 6.9403 today. But for now, it’s limited below recent key resistance at 6.9586.

                                        The Shanghai SSE suffers another day of selloff and reaches as low as 2504.63 so far. 2500 handle looks rather vulnerable.

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                                        Australia NAB business confidence dropped to 3, inflationary pressures meek

                                          Australia NAB business confidence dropped to 3 in Q3, down from Q2’s 7. Current business condition dropped to 13, down from 15. NAB noted that “though conditions remain well above average; confidence is now below average”. Meanwhile, “surveyed price and wage variables suggest at present inflationary pressures remain weak.”

                                          On RBA monetary policy, NAB noted that markets are pricing in around 90% chance of a 25bps rate hike in the next 12-months. Pricing increased from 70% back in Q2. NAB’s own view is that “RBA will likely begin a gradual series of rate rises in mid-to-late 2019 but that this is highly data dependent.” NAB saw “inflationary pressures best described as meek at present.”

                                          On exchange rate, NAB revised down its own forecasts on AUD/USD to “closer to US$0.70” as “global trade ructions continue to weigh.”

                                          Full report here.

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