Sterling rises mildly after better than expected job data. Unemployment rate dropped to 4.0% in November, down from 4.1% and beat expectation of 4.1%. That’s also the lowest level since February 1975. Wage growth also shows sign of pick up. Average earnings including bonus accelerated to 3.4% 3moy, above expectation of 3.3% 3moy. Average earnings excluding bonus rose 3.3% 3moy, unchanged. Claimant count rose 20.8k in December, slightly above expectation of 20.0k.
UK Brexit Minister Stephen Barclay told BBC today that the government is working on what to ask from the EU to get the deal approved in the parliament. He noted that “the EU don’t want to be in a situation of having no deal – that would have a big impact not just on the Irish economy but other economies, the Dutch economy – so it’s in both sides’ interest to have a deal.”
Separately, German Minister for European Affairs Michael Roth expressed disappointment on UK Prime Minister Theresa May’s statement yesterday. He tweeted “Where is the plan B? Just asking for a friend…” German Justice Minister Katarina Barley also said she was “disappointed” and “that’s not the way forward”.
Australian Dollar is under some selling pressure today, as Asian stocks weaken broadly. Canadian Dollar follows as the second weakest as oil price is starting to lose momentum. On the other hand, Yen and Dollar are trading as the strongest ones so far, with prospects of more upside for the day. Sterling slightly softer after UK Prime Minister Theresa May’s uninspiring statement on Brexit overnight. The Pound will now look into job data while Euro will look at ZEW economic sentiment.
- Nikkei is down -0.66%.
- Hong Kong HSI is down -1.14%.
- China Shanghai SSE is down -0.98%
- Singapore Strait Times is down -0.42%
- Japan 10 year JGB yield is down -0.0031 at 0.002, still positive.
One development to note is the loss of upside momentum in WTI crude oil. Bearish divergence condition is seen in 4 hour MACD and RSI. WTI is also close to an important resistance at 54.61 and 38.2% retracement of 77.06 to 42.05 at 55.42. First line of defense is at 4 hour 55 EMA (now at 52.01). Sustained break should confirm reversal and send WTI through 50.59 support. USD/CAD’s rebound from 1.3180 should accelerate should the fall in oil extends.
China National Development and Reform Commission spokeswoman Meng Wei warned that the job market faces “new changes” ahead and slowdown in the economy will pressure the job markets. She also noted that some factories in the export hub of Guangdong province have shut earlier than usual ahead of Lunar new year holiday.
Meng said “from the viewpoint of ‘changes’, the external environment is complex and austere.” And, “Within the changes, there is something to worry about, and there is downward pressure on the economy. To a certain extent, the pressure will be passed onto jobs.”
Her comments came after survey-based data showed unemployment rate rose 0.1% to 4.9% in December, release yesterday.
In response to May’s statement on Brexit yesterday, CBI director general Carolyn Fairbairn said ” the government’s move to consult more widely is welcome, as is the commitment to scrap the settled status charge for EU citizens”. But she criticized that “the fundamentals have not changed” as “Parliament remains in deadlock while the slope to a cliff edge steepens.” She urged that “government should accept that no-deal in March 2019 must be off the table”.
Allie Renison, head of Europe and trade policy at the Institute of Directors also complained “the stasis continues”. She also noted that “two-thirds of our members say that leaving without a deal would be negative for their businesses and nearly 80% made clear they don’t want to see it happen.” And, “we desperately need politicians to get serious about finding a way forward.”
UK Prime Minister Theresa May’s statement on Brexit plan B yesterday was rather uninspiring. In short, she finally acknowledged the need to have in change in her approach and laid out three areas. Those include, being “more flexible, open and inclusive” in engaging the parliament, embedding the “the strongest possible protections on workers’ rights and the environment”. And finally, ensuring the “commitment to no hard border in Northern Ireland and Ireland”. They’re hardly anything new.
Meanwhile, she continued to oppose to a second referendum as that would “damage social cohesion by undermining faith in our democracy.” And she doesn’t believe there is a majority for a second referendum. On Article 50 extension, she claimed that EU would not approve it unless UK had a plan for approving a deal. And the only way to avoid a no-deal Brexit would be to revoke Article 50.
May will continue cross-party talks and provide further update next Tuesday.
SNB Vice Chairman Fritz Zurbruegg spoke at an economic forum in Landquart, Switzerland, yesterday. He noted that expansive monetary policy is still warranted for the central bank, due to heightened uncertainties, highly valued franc exchange rate, low inflationary pressure and global low interest rates.
In particular, he noted that uncertainties have risen recently, due to protectionism, Brexit, Italy. The Swiss Fran remains highly valued and that remains a risk. But overall, outlook for the Swiss economy remains favorable.
The comments echoed those by Chairman Thomas Jordan, who noted the need to block a surge Franc on safe-haven flow.
IMF revised down global growth forecasts and warned that “the global expansion is weakening and at a rate that is somewhat faster than expected.” Also, ” risks to more significant downward corrections are rising.”
And, “while financial markets in advanced economies appeared to be decoupled from trade tensions for much of 2018, the two have become intertwined more recently, tightening financial conditions and escalating the risks to global growth.”
In particular, IMF warned that “an escalation of trade tensions and a worsening of financial conditions are key sources of risk to the outlook.” Meanwhile, China’s slowdown could be worsened by trade tensions and trigger “abrupt sell-offs in financial and commodity markets”. “Brexit cliffhanger”, “financial risk in Italy ” and “protracted US federal government shutdown” are other risks.
To summarize, for 2019:
- Global growth is projected at 3.5%, down from prior 3.7% (October forecast).
- US growth is projected at 2.5%, unrevised.
- Eurozone growth is projected at 1.6%, down from prior 1.9%.
- Japan growth is projected at 1.1%, up from prior 0.9%
- China growth is projected at 6.2%, unrevised.
Swiss Franc’s selloff pick up momentum in a rather quiet day today. USD/CHF has broken 0.9963 resistance while EUR/CHF is pressing 1.1348. More downside is in favor in the Franc. But it’s just the second weakest one, next to New Zealand Dollar. Australia Dollar and Canadian Dollar follow even though there is no clear sign of risk aversion. WTI crude oil is also staying firm at around 54. Meanwhile, Yen is the strongest one in very tight range, followed by Euro and Sterling. Overall, the forex markets are mixed except for that weakness in Franc.
The US markets are on Martin Luther King Day holiday today. Main focus is across the Atlantic on UK Prime Minister Theresa May’s Brexit plan B. She’s due to make a statement in the parliament at 1530 GMT. Her spokesman said the Brexit will have to be changed if it’s to be approved by lawmakers. And there were talks going on to understand what exact changes are needed.
Currently in European markets:
- FTSE is up 0.13%.
- DAX is down -0.45%.
- CAC is down -0.16%.
- German 10 year yield is down -0.013 at 0.251.
Earlier in Asia:
- Nikkei rose 0.26%.
- Hong Kong HSI rose 0.39%.
- China Shanghai SSE rose 0.56%.
- Singapore Strait Times dropped -0.12%.
- Japan 10-year JGB yield dropped -0.0099 to 0.004, stayed positive.
German Foreign Minister Heiko Maas has urged the UK to come back with concrete proposal on solving the Brexit deadlock in its parliament. He tweeted that “So far, unfortunately, the British Parliament has only said what it does not want. What we need now are concrete proposals from the British. The ball is in London, there is not a lot of time left. We #Brexit will also be talking about this in Brussels today. ”
Bisher hat des britische Parlament ja leider nur gesagt, was es nicht will. Was wir jetzt brauchen sind konkrete Vorschläge der Briten. Der Ball liegt in London, viel Zeit bleibt nicht. Besonders über den #Brexit werden wir heute auch in Brüssel reden: https://t.co/4hhIMnKA1y
— Heiko Maas (@HeikoMaas) January 21, 2019
Separately, German Economy Minister Peter Altmaier said “Personally I’m optimistic that we can avoid a hard Brexit but the German government is of course prepared for all possible scenarios.”
Ireland’s European Affairs Minister Helen McEntee said today Ireland wont’ engage in bilateral negotiation with the UK on the Irish border backstop issue. She said, “What we can’t do and what we won’t do, because we have not throughout this entire process, is engage in any kind of bilateral negotiations with the DUP or any other political party in Northern Ireland or the UK. This is a negotiation between the EU and the UK.”
Asian markets trade mildly higher as the week opens. While China’s GDP slowed to lowest in 28 years in 2018, December data painted a picture of stabilization, with pick up in industrial production and retail sales. Sentiments were also supported by optimism over US-China trade negotiation. Focus will now move to UK Prime Minister Theresa May’s Brexit plan B, which she will table to the parliament today. Record US government shutdown is extending while it’s a holiday there too.
In the currency markets, Yen is trading broadly higher for now but strength is limited, in particular against Euro and Australian Dollar. Sterling is the second weakest one, continue to pare back last week’s Brexit chaos gains. But New Zealand Dollar is even weaker.
In Asian markets:
- Nikkei closed up 0.26%.
- Hong Kong HSI is up 0.35%.
- China Shanghai SSE is up 0.41%.
- Singapore Strait Times is up 0.51%.
- Japan 10-year JGB yield is down -0.0053 at 0.009, still positive.
The likelihood of a recession in Japan rose due to global economic slowdown and the indirect impact of US-China trade war, according to a Reuters poll between Jan 9-18. Yet economists were still optimistic that Japan economy will grow 0.8% in the fiscal year starting April.
28 of 38 economists said the chance of recession in fiscal 2019 has risen comparing with three months ago. 27 of 39 said Prime minister Shinzo Abe has over 80% chance to go ahead with the planned sales tax hike. For the October-December quarter when sales tax is raised, economist expected a sharp contraction of -3% in GDP. But over the fiscal year, it’s estimated to expand 0.8%, then slow to 0.6% in fiscal 2020. National core CPI is seen to rise only 0.6% in fiscal 2019, staying way off BoJ’s 2% target.
UK Prime Minister Theresa May is due to return to the parliament today to set out her Plan B on Brexit. The center of focus is her amendments regarding the Irish border backstop. May is trying to put up something that’s, at the very least, acceptable to her fellow Conservatives and Northern Ireland ally DUP. But the Guardian reported that no solutions were found so far during the conference call with the Cabinet on Sunday evening. The consensus was only to renew efforts to find acceptable changes to the backstop arrangement with the EU, without any specifics.
Trade Minister Liam Fox warned over the weekend that “failure to deliver Brexit would produce a yawning gap between parliament and the people, a schism in our political system with unknowable consequences”. And, that could trigger a “a political tsunami”. And, he added that “Parliament has not got the right to hijack the Brexit process because Parliament said to the people of this country: ‘we make a contract with you, you will make the decision and we will honour it'”.
Opposition Labour leader Jeremy Corbyn reiterated the call for May to rule out no-deal Brexit. He said in a statement that “We’re ready to talk to the government and others in parliament about a sensible alternative plan, but not while Theresa May is wasting 171,000 pounds an hour of taxpayers’ money on dangerous and unnecessary no-deal brinkmanship.” And, “If the prime minister is serious about finding a solution that can command support in parliament and bring our country together, she must listen to the majority of MPs, as well as members of her own cabinet, and take ‘no deal’ off the table.”
China GDP growth slowed to 6.4% yoy in Q4, down from 6.5% yoy and matched expectation. For the whole year of 2018, growth slowed to 6.6%, lowest in 28 years since 1990. National Bureau of Statistics head Ning Jizhe said the impacts from trade war with the US are manageable. There were signs of stabilization in the economy over the past twos months. And he added the country has confidence and the capacity to achieve reasonable growth in 2019.
Other December data released today are positive though. Retail sales grew 8.2% yoy, up from 8.1% yoy and beat expectation of 8.1% yoy. Industrial production rose 5.7% yoy, up fro 5.4% and beat expectation of 5.3% yoy. Fixed assets investment grew 5.9% yoy, unchanged from November, but missed expectation of 6.0%.
While there were signs of improvements in Decembers, it’s generally expected that the Chinese economy will face downward pressure ahead. In particular, the risks of escalation in trade war with the US remains. Chinese Vice Premier Liu He is set to visit Washington on January 30-31 for another round of trade talks. At this point, little sign of progress is seen regarding the core concerns of the US, including intellectual property theft, forced technology transfer and dominance of state-owned enterprises.
More stimulus is expected from the authority to support the economy. The PBoC has already injected CNY 560B into the economy last Wednesday. The RRR was also lowered again earlier this year to free up Monday for small companies. Yet, it’s reported that Beijing was planning to lower its growth target to 6-6.5 percent this year.
Headline CPI dropped -0.1% mom in December versus expectation of -0.3%. Annually, CPI accelerated to 2.0% yoy, up from 1.7% yoy and beat expectation of 1.8% yoy.
Core CPI readings were steady. CPI core-common was unchanged at 1.9% yoy. CPI core-median dropped from 1.9% yoy to 1.8% yoy. CPI core-trimmed was unchanged at 1.9% yoy.
European Commission spokesman Margaritis Schinas once again told a regular news briefing that there is no request for Article 50 extension from the UK yet. But he pointed out that if the UK is going to leave after July 2, Britons will need to elect their representatives to the next European Parliament.
He said, “We … as the guardian of EU treaties, suggest caution with any suggestion that the right of EU citizens to vote in the European Parliament elections, according to the rules that are applicable, could be called into question”.
And, “we have a legally composed European Parliament which requires directly elected MEPs from all member states at the latest on the first day of the new term of the new parliament, which this time is the second of July.”
European Commission publishes draft negotiating mandates with the US today. The negotiating directives cover two potential agreements with the U.S:
- A trade agreement strictly focused on the removal of tariffs on industrial goods, excluding agricultural products;
- A second agreement, on conformity assessment, that would help address the objective of removing non-tariff barriers, by making it easier for companies to prove their products meet technical requirements on both sides of the Atlantic.
EU Commissioner for Trade Cecilia Malmström said in the statement: “Today’s publication of our draft negotiating directives is part of the implementation of the July joint statement of Presidents Juncker and Trump. Ambassador Lighthizer and I have already met several times in the Executive Working Group and I have made it very clear that the EU is committed to upholding its side of the agreement reached by the two Presidents. These two proposed negotiating directives will enable the Commission to work on removing tariffs and non-tariff barriers to transatlantic trade in industrial goods, key goals of the July Joint Statement.”
In a press conference, Malmström added “We are prepared to put our vehicles tariffs on the negotiating table (..) if the U.S. agree to work together toward zero tariffs on industrial goods.” But still, EU was ready to retaliate if the U.S. imposed car import tariffs.
Sterling weakens notably after rather poor December UK retail sales data.
- Retail sales including auto fuel dropped -0.9% mom versus expectation of -0.7%.
- Retail sales excluding auto fuel dropped -1.3% mom versus expectation of -0.5% mom.
Also, for the three months to December, compared with the previous three months:
- Retail sales including auto fuel dropped -0.2%
- Retail sales excluding auto fuel dropped -0.4%
Asian stocks trade broadly higher today following the extended rally in the US. There were rumors that Treasury Secretary Steven Mnuchin is considering to roll back tariffs on Chinese imports to facilitate negotiation. But such rumor was quickly denied. Also, the US government shutdown is extending it’s record run without any end in sight. But sentiments were not affected much.
In the currency markets, trading turns rather quiet today as most major pairs and crosses are stuck in tight range. For the week, Sterling remains the strongest one. And the Pound is extending rally against Dollar, Euro and Yen. It’s unsure what Brexit will eventually be. But for now, the chance of no-deal Brexit seems slim.
Staying in the currency markets, Dollar is the second strongest for the week as lifted by rebound in treasury yields. Canadian Dollar is the third strongest, helped by resilience in oil prices. WTI crude oil is back at 52.8 and looks set to extend recent rebound from 42.05. The Loonie will also face tests from Canadian CPI today. On the other hand, Kiwi, Swiss Franc and Yen are the weakest ones for the week.
In Asia, currently:
- Nikkei is up 1.34%.
- Hong Kong HSI is up 1.10%.
- China Shanghai SSE is up 1.02%.
- Singapore Strait Times is up 0.23%.
- Japan 10-year JGB yield is up 0.0025 at 0.014
- DOW rose 0.67%.
- S&P 500 rose 0.76%.
- NASDAQ rose 0.71%.
- 10-year yield rose 0.018 to 2.749.
- But 30-year yield ended flat at 3.077.
In December, Japan all item CPI slowed to 0.3% yoy, down from 0.8% yoy and matched expectation. Core CPI, all item ex-fresh food, slowed to 0.7% yoy, down from 0.9% yoy and missed expectation of 0.8% yoy. Core-core CPI, al item ex-fresh food, energy, stayed unchanged at 0.3% yoy.
The data showed that even discounting the fall in energy prices, consumer inflation stayed week. And apparently, the recovery is not passed on to consumers. And business remained reluctant to raise prices.
The data added to the case for BoJ to cut inflation forecasts next week. Back in October, BoJ projects core CPI to hit 1.4% in fiscal 2019 and then 1.5% in fiscal 2020. Such projections would be trimmed to reflect the decline in oil as well as global slowdown.