Wed, Aug 21, 2019 @ 22:27 GMT

US CBO expects tariffs to lower GDP growth by 0.3% by 2020

    US Congressional Budget Office projected the economy to grow 2.3% in 2019, unchanged from January forecasts. Growth is expected to gradually slow from 2020 to 2023, averaging 1.8% per year.

    The slowdown ahead would be because growth of consumer spending subsides; as growth in purchases by federal, state, and local governments ebbs; and as trade policies weigh on economic activity, particularly business investment.

    Additionally, “higher trade barriers—in particular, increases in tariffs—implemented by the United States and other countries since January 2018 are expected to make U.S. GDP about 0.3 percent smaller than it would have been otherwise by 2020.”

    CBO further explained that “Tariffs reduce domestic GDP mostly by raising domestic prices, thereby reducing the purchasing power of consumers and increasing the cost of business investment. Tariffs also affect business investment by increasing businesses’ uncertainty about future barriers to trade and thus their perceptions of risks associated with investment in the United States and abroad.”

    Full release here.

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    US oil inventory dropped -2.7m barrels, WTI range bound

      U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by -2.7m barrels in the week ending August 16, larger than expectation of -1.4m barrels. At 437.8m barrels, U.S. crude oil inventories are about 2% above the five year average for this time of year.

      WTI staying in sideway pattern from 50.64. After multiple attempts, WTI is still unable to sustain above 55 day EMA so far. Further decline remains in favor. Sustained break of 50.64 could pave the way back to 42.05 low. Nevertheless, sustained trading above the EMA will put focus back to 60.93 resistance.

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      Canadian Dollar rebounds as headline CPI rose 0.5% mom, 2.0% yoy

        Canadian Dollar rebounds notably after stronger than expected inflation data. CPI rose 0.5% mom in July versus expectation of 0.2% mom. Annually, CPI was unchanged at 2.0% yoy, above expectation of 1.7% yoy. CPI core-common rose to 1.9% yoy, up from 1.8% yoy and beat expectation of 1.8% yoy. CPI core-median slowed to 2.1% yoy, down from 2.2% yoy, matched expectations. CPI core-trim was unchanged at 2.1% yoy, above expectation of 2.0% yoy.

        Full release here.

        USD/CAD dips notably after the release. But it’s, after all, staying in consolidation from 1.3345. And, as long as 1.317 minor support holds, further rally through 1.3345 resistance is expected at a later stage.

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        Kashkari: Fed should use forward guidance now to avoid recession

          In an op-ed article published in the Financial Times, Minneapolis Fed President Neel Kashkari said Fed should use forward guidance now to stimulate the economy. He explained that “forward guidance can also provide stimulus by signalling that overnight rates will be low in the future.” That is, Fed can “influence long-term rates by giving guidance about the future path of their short-term equivalents. The firmer the Fed’s commitment, the more influence it can have.”

          Kashkari added that “forward guidance should be used now, before the federal funds rate returns to zero.” He argued that “if a central bank cuts rates to zero in response to a downturn and then announces that it plans to keep rates low, that can actually be perceived as a sign of weakness rather than strength.” Instead, “it would be better to deploy guidance now in an effort to avoid hitting zero.

          Regarding the guidance, he said “at a minimum, we should commit to not raising rates again until core inflation returns to our 2 per cent target on a sustained basis.”

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          Germany rejects UK Johnson’s call to reopen Brexit negotiation

            German lawmaker Norbert Röttgen, an ally of Chancellor Angela Merkel, who heads the German parliament’s foreign affairs committee, said UK Prime Minister Boris Johnson’s visit won’t change Germany’s stance on Brexit. He criticized that Johnson’s four-page letter to European Council was “not a serious offer”.

            Further, he said “the British prime minister starts his letter by saying he is personally committed to finding an agreement, but there is no sign in the rest of the letter that this is actually the case.” And, “if Johnson really wanted to achieve something on his visits to Paris and Berlin, he would have been well advised against writing this letter.”

            Germany’s BDI industry association said Johnson’s call to reopen Brexit negotiation was irresponsible. And German firms had no choice but to prepare for a hard Brexit on October 31. The group also backed the government on the Brexit stance. Managing Director Joachim Lang said in a statement: “German businesses support the German government and the European Commission in standing by the negotiated treaty. Brussels and London must set the right course to avoid the threat of a hard Brexit.”

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            Italy President Mattarella to push for coalition of 5-Star and Democratic Party

              Italian President Sergio Mattarella will start his process to form a new coalition government, after Prime Minister Giuseppe Conte formally resigned yesterday. Mattarella is believed to be pushing for a quick decision by the 5-Star Movement and Democratic Party on whether they can work together.

              Mattarella will start consultations with minor groups at 1400GMT today, followed by all main parties tomorrow and a conclusion with 5-STar at 1500GMT. Failing to form a new coalition, he would have to dissolve parliament, 3-1/2 years ahead of schedule, to allow for elections in late October or early November.

              The turmoil League party chief Matteo Salvini declared on August 8 that his alliance with the 5-Star Movement was dead and called for elections. Yet, at the end of yesterday’s parliamentary debate the League withdrew the no-confidence vote in the government that it had tabled.

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              RBNZ Hawkesby: It would be better to do too much too early

                RBNZ Assistant Governor Christian Hawkesby explained the decision of the surprised -50bps rate cut in speech today. He said “we judged that it would be better to do too much too early, than do too little too late”. The alternative approach of cutting by -25bps “risked inflation remaining stubbornly below target, with little room to lift inflation expectations later with conventional tools in the face of a downside shock.”

                On the other hand, “a more decisive action now gave inflation the best chance to lift earlier, reducing the probability that unconventional tools would be needed in the response to any future adverse shock.”

                Hawkesby also noted that neutral rate is currently in a “wide range centred on 3.25 percent, down from around 5 percent before the GFC”. And, “all else equal, a lower neutral rate implies that we need to set our Official Cash Rate lower to deliver the same amount of monetary stimulus to the economy.”

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                RBA Lowe worried about “time for Team West to muscle up against China” idea

                  RBA Philip Lowe was reported saying in a private business event this week that trade war between US and China was the single biggest threat to the global economy. According to The Sydney Morning Herald and The Age, Lowe said “I do not have a clear idea of what strategy the US has. (Some in the US) say that it is time for Team West to muscle up against China and that is very worrying.”

                  In August RBA minutes released yesterday, it’s noted that “uncertainty around trade policy had already had a negative effect on investment in many economies”. And, Board “members observed that the escalation of the trade and technology disputes had increased the downside risks to the global growth outlook, although the central forecast was still for reasonable growth.”

                  Australian Prime Minister Scott Morrison, on the other hand, was rather calm on the situation. He said yesterday that “we’re going to have to get used to this for a while, this level of tension.” And, “we’ve just got to accommodate that, we’ve got to absorb it, we’ve got to see the opportunities in it, of which there are many.”

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                  Trump will take China on whether it’s good or bad short term

                    US President Donald Trump continued his hardline stance on China with strongly worded comments. He told reporters in the White House that “Somebody had to take China on… This is something that had to be done. The only difference is I am doing it.”

                    Trump repeated that “China has been ripping this country off for 25 years”. He added that whether his trade policy is “good or bad short term is irrelevant”, as “I am doing this whether this is good or bad.” Instead, “long term, it’s imperative somebody does this.”

                    There were growing concerns that trade war with China could trigger a possible US recessions. But Trump emphasized “we’re very far from a recession”. Though, he admitted that “we really need a Fed rate cut” as there cannot be a large “disparity” between rates in the US and elsewhere in the developed world. “We have to at least keep up to an extent.”

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                    Fed Daly: Last rate cut an appropriate recalibration of policy for headwinds, not impending downturn

                      In a post, San Francisco Fed Mary Daly said the US is not headed towards a recessions right not. She saw “solid domestic momentum that points to a continued economic expansion:. Also, “the labor market is strong, consumer confidence is high, and consumer spending is healthy.”

                      But “considerable headwinds”, including global slowdown and trade uncertainties, contributed to fear that a “downturn is right around the corner”. Hence, she’s closely look at whether “fear of recession becomes a self-fulfilling prophecy”.

                      Daly added that recent rate cut was “appropriate recalibration” of policy in response to the headwinds. And, her support was “not because I see an impending downturn on the horizon.”

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                      Italian PM Conte announce resignation, accused League leader Salvini

                        Italian Prime Minister Giuseppe Conte told the parliament that he would hand in his resignation to President Sergio Mattarella later today. Mattarella will then decide whether to put together a new coalition or dissolve the parliament and call early elections.

                        Conte also accused League leader Matteo Salvini for dragging down the coalition. He said Salvini has shown “he is following his own interests and those of his party”. He also said Salvini’s decisions “pose serious risks for the country”.

                        Salvini has demanded early elections, 3-1/2 years ahead of schedule, confident his surging popularity will sweep him into power as prime minister and push the coalition partner 5-Star Movement into opposition.

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                        US Pompeo: Trump unambiguous about Huawei, no mixed message

                          US Secretary of State Mike Pompeo emphasized that President Donald Trump has been “unambiguous” regarding Huawei. And, “I don’t think there’s a mixed message at all”. Pompeo emphasized that “the threat of having Chinese telecoms systems inside of American networks or inside of networks around the world presents an enormous risk, a national security risk.”

                          The comments came after Commerce Department extended a 90-day reprieve that permits Huawei to buy components from American companies to supply existing customers. Yet, Trump indicated over the weekend that “We’re actually open not to doing business with them”, referring to Huawei.

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                          EU: UK Johnson’s letter does not provide realistic alternatives to Irish backstop

                            In response to UK Prime Minister Boris Johnson’s letter, European Council President Donald Tusk reiterated that the backstop is an “insurance” to avoid a hard Irish border” until an alternative is found. . And, “those against the backstop and not proposing realistic alternatives in fact support reestablishing a border. Even if they do not admit it.”

                            European Commission spokesperson Natasha Bertaud also said Johnson’s letter “does not provide a legal operational solution to prevent the return of a hard border on the island of Ireland”. She reiterated that the backstop is the “only means identified so far by both parties to honor this commitment” of avoiding hard Irish border.

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                            UK CBI: Manufacturing output stabilized, but remains on receiving end of double whammy

                              UK CBI monthly Industrial Trends Survey indicated that manufacturing output stabilized August. 15% of manufacturers reported total order books to be above normal, and 28% said they were below normal, giving a balance of -13% (from -34% in July). This month’s figure is line with the long-run average (-13%).

                              Anna Leach, CBI Deputy Chief Economist, said: “Despite signs of stabilisation in the data this month, UK manufactures remain on the receiving end of a double whammy: the slowdown in the global economy and Brexit uncertainty. Trade tensions between nations such as China and the US only exacerbate the demand uncertainty facing UK manufacturers.

                              “As we get closer to October, it’s crucial that the new Prime Minister secures a Brexit deal ahead of that deadline and gets on with pressing domestic priorities, from improving our infrastructure to fixing the apprenticeship levy.”

                              Full release here.

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                              UK Johnson urges EU Tusk to replace Irish backstop with alternative arrangements

                                Prime Minister Boris Johnson reiterated in a letter to European Council President Donald Tusk that the Irish backstop was unacceptable. He said, “it presents the whole of the UK with the choice of remaining in a customs union and aligned with those rules, or of seeing Northern Ireland gradually detached from the UK economy across a very broad range of areas”. And, “both of those outcomes are unacceptable to the British government.”

                                Instead, Johnson said both the UK and EU have already agreed that “alternative arrangements” can be part of the solution. And he said: “I propose that the backstop should be replaced with a commitment to put in place such arrangements as far as possible before the end of the transition period, as part of the future relationship. I also recognise that there will need to be a degree of confidence about what would happen if these arrangements were not all fully in place at the end of that period. We are ready to look constructively and flexibly at what commitments might help, consistent of course with the principles set out in this letter.”

                                Full letter here.

                                Separately, UK Conservative Party co-chairman James Cleverly said UK will be leaving EU on October 31. He noted, “the recognition of that will help the EU negotiators understand what they need to do.” He also emphasized “the decision as to whether we leave with or without a deal is largely now in the hands of European Union negotiators”. And he urged EU to show some flexibility over Irish backstop.


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                                German PPI rose 0.1% mom, 1.1% yoy in July

                                  German PPI rose 0.1% mom, 1.1% yoy in July, above expectation of 0.0% mom, 1.0% yoy. The greatest impact on the growth of the overall index compared to July 2018 had the development of electricity prices. These were up 8.4% (+2.2% compared to June 2019). Prices of non-durable consumer goods increased by 1.7% compared to July 2018 (-0.2% on June 2019). Food prices were up 2.2%. Prices of capital goods increased by 1.5%, prices of durable consumer goods were up 1.3%. Prices of intermediate goods decreased by 0.7% compared to July 2018 (-0.4% on June 2019).

                                  Full release here.

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                                  RBA minutes indicates easing bias, but will hold in Sept meeting first

                                    In the minutes of August 6 RBA policy meeting, the central bank noted that “an extended period of low interest rates” would be required. And after two back-to-back rate cuts in June and July, it’s “appropriate to assess developments in the global and domestic economies before considering further change to the setting of monetary policy”. And members would “consider a further easing of monetary policy” if needed. The minutes are in-line with expectations that RBA would stand pat in September, before taking more actions later in the year.

                                    Globally, RBA noted that “escalation of the trade and technology disputes had increased the downside risks to the global growth outlook”. And, “uncertainty around trade policy had already had a negative effect on investment in many economies.”  Low inflation provided central banks with “scope to ease” further.

                                    Domestically, growth in Australia had been “lower than expected” in the first half but its expected to “strengthen gradually” to 2.75% over 2020, and then around 3% over 2021. Developments supporting the outlook include lower interest rates, higher household income growth, exchange rate depreciation, positive resources sector investment, some stabilization of housing market, and ongoing high levels of infrastructure investment. Risks are tilted to the downside in the near term, but more balanced later in the forecast period.

                                    Full RBA minutes here.

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                                    PBoC Liu said there is room for RRR and rate cut, as new LPR starts

                                      Under the revamped Loan Prime Rate mechanism, China’s PBoC lowered the new one year LPR by -6 basis points to 4.25%, down from 4.31%, today. It’s currently -10 basis points lower than then existing benchmark one-year lending rate. The new five-year LPR was set at 4.85%, below five-year benchmark lending rate of 4.90%.

                                      It’s the first day of operation of the new LPR, kicking off the rate reform to lower corporate borrowing costs. But the tiny reduction would only have marginal impact of economic activity. And PBOC would need to take other steps to boost lending.

                                      PBoC Vice Governor Liu Guoqiang said the country still needs time to observe effects of LPR reform but it will not scrap benchmark lending rate for the time being. He added that there is room for cuts in both reserve requirement ratio and lending rate.

                                      Liu added that there is urgency for interest rate reform due to trade war with the US, industrial transformation, rate cuts from global central banks. But China is not experience deflation for now, and markets rates are at basically reasonable level.

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                                      US Commerce Department extends Huawei reprieve for another 90 days

                                        US Commerce Secretary Wilbur Ross said that China’s tech giant Huawei will be granted another 90 days delay to the implementation of penalty. He told Fox Business Network that “It is another 90 days for the U.S. telecom companies. Some of the rural companies are dependent on Huawei. So we’re giving them a little more time to wean themselves off. But no specific licenses are being granted for anything.” The next deadline is roughly November 19.

                                        Ross also said that 46 more Huawei subsidiaries were added to the Entity list. And, “we now have more than 100 subsidiaries on the Entity List,” he said, explaining that “adding more entities makes it more difficult for Huawei to get around the sanctions.”

                                        US President Donald Trump indicated he’s not ready to do business with China’s tech giant Huawei yet. He said “at this moment it looks much more like we’re not going to do business… because it is a national security threat and I really believe that the media has covered it a little bit differently than that.”

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                                        UK Johnson to discuss foreign policy, security and Brexit with German Merkel and French Macron

                                          UK Prime Minister Boris Johnson is set to visit French President Emmanuel Macron and German Chancellor Angela Merkel this week. His spokesperson said that “Ahead of the G7, the prime minister believes it is important to speak to the leaders of France and Germany to deliver the message that he has been setting out through the phonecalls he’s had with leaders and face to face.”

                                          And, she added, “it is likely they will discuss other issues: foreign policy issues, security issues and so on, but clearly Brexit will form a key part of both bilateral meetings.” However, she also reiterated that there will be no formal negotiations on Brexit until the EU dropped the Irish backstop in the withdrawal agreement.

                                          On the other hand, European Commission spokesperson Natasha Bertaud warned that no-deal Brexit will “obviously cause significant disruption both for citizens and for businesses and this will have a serious negative economic impact:. And, “that would be proportionally much greater in the United Kingdom than it would be in the EU 27 states.” She also repeated President Jean-Claude Juncker’s comment that “it is the British who will unfortunately be the biggest losers”. if it came to a no-deal Brexit.

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