Risk sentiments are having an about turn after China pledges to work on a strong start in 2019. The rebound in is so far more than enough to reverse yesterday’s selloff after ugly Chinese trade data. In the background, there is optimism of a deal between US and China to resolve the trade conflicts. Trump also reiterated yesterday again that “we’re going very well with China” and “we are going to able to do a deal”.
In the currency markets, Yen is the weakest one for today so far, followed by Swiss Franc and then Dollar. New Zealand Dollar leads commodity currencies higher. But for the week, Sterling is the strongest one after yesterday’s surge. All eyes will be on the Brexit meaningful vote today, and the subsequent actions after the deal is defeated in the Commons.
At the time of writing:
Nikkei is up 0.9%
Hong Kong HSI is up 1.63%
Shanghai SSE is up 0.90%
Singapore Strait Times is up 1.31%
10 year JGB yield is down -0.0128 at 0.013, staying positive
Overnight:
DOW dropped -0.36%
S&P 500 dropped -0.53%
NASDAQ dropped -0.94%
10-year yield rose 0.009 to 2.710
30-year yield rose 0.023 to 3.060
US yield curve remains inverted between 1-year and 5-year. But it’s flattened much in the region. Also, strength is seen at the long end, with 30-year yield keeping 3% handle. Developments are so far positive.
Italian 10 year bond yield drops sharply today as, Deputy Prime Minister Matteo Salvini reiterated the pledge not to blow up public accounts ahead of budget meeting. Salvini, leader of the far right League, said in a newspaper interview that “clearly we will not do everything in one shot, not even Italians expect that from us… If we want to run the country for a long period we cannot blow up its public accounts.”
10 year Italian yield drops -0.088 to 2.943 so far today. It hit as high as 3.281 last week. The development suggests that investors concern over Italian budget is eased.
UK PMI manufacturing rose 0.1 to 55.1 in March, above expectation of 54.7. Markit noted that it signals “steady growth rate at the end of opening quarter”.
Quotes from the release:
Rob Dobson, Director at IHS Markit, which compiles the survey:
“The latest PMI survey provided further evidence that UK manufacturing has entered a softer growth phase so far this year. Although the pace of output expansion ticked higher in March, which is especially encouraging given the heavy snowfall during the month, this was offset by slower increases in new orders and employment. Average rates of increase over the opening quarter as a whole are also down noticeably from the growth spurt seen at the end of 2017. Compared to official data, the performance through quarter one is consistent with only a 0.4-0.5% gain in production volumes, a considerable slide from the fourth quarter’s 1.3% increase.
“The key question is whether growth can now be sustained, albeit at a lower level, into the coming months. On that front the news is generally positive. Manufacturers are still reporting solid inflows of new work from domestic and overseas markets. Business optimism is holding steady at an elevated level, with over 54% of companies expecting output to expand over the coming 12 months. With cost inflationary pressures also moderating to provide some respite for margins, the sector looks set to make further slow and steady progress as we head through the spring.”
Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply:
“After the mini-boom of productivity at the end of last year, the sector still held its own, delivering a steady if unremarkable performance with overall activity improving very modestly from last month.
“Purchasing activity was higher than February’s 8- month growth low but purchasers were frustrated by their suppliers who failed to deliver essential materials on time and delivery times continued to get longer. As shortages were reported the finger of suspicion was pointed at the continuing impact of inflation on raw material prices caused by the scarcity, and subsequently forcing firms to pass on these increased prices to customers at a significantly elevated rate.
“However, the biggest disappointment was the softening of new orders to a nine-month low followed by a feeble rise in job creation as the most discouraging result this year. While trade from the domestic market was still strong, and export markets also grew for the 23rd month in a row, the foundations for the sector’s continuing strength were looking a little more unstable.
“Without a significant rise in new orders, and if supply chains are still disrupted by shortages or the weather, for the next few months it’s anticipated that there will be a continued muted pace of growth. A rather apathetic prediction, but while optimism remains high and the sector continues its efforts to increase marketing activity and launch new products, everything could change.”
GBP trades notably higher today against USD and JPY. With 1.3982 minor support intact, choppy fall from 1.4243 is seen as a corrective pull back. Break of 1.4095 will suggests that such pull back is completed and bring stronger rebound back to 1.4243.
German Gfk consumer confidence for August dropped -0.1 to 9.7, matched expectations. Economic expectations dropped from 2.4 to -3.7. Income expectations improved from 45.5 to 50.8. Propensity to buy dropped from 53.7 to 46.3. Gfk noted that “It is apparent that the global economic slowdown, trade conflict and Brexit discussions are having an ever increasing impact on consumer confidence. Thus, economic expectations continue to decline and the propensity to buy has dropped off slightly as well.”
Economic expectation fell below its long-standing average of 0 for the first time since March 2016. It’s also the lowest reading since November 2015. Gfk said: “The trade war with the US, ongoing Brexit discussions and the global economic slowdown continue to drive fears of a recession. Employees in export-driven sectors in particular, such as the automotive industry and its suppliers, are most immediately affected by this. In addition, reports of downsizing add to employees’ fears of losing their jobs.”
Selloff in Australian Dollar accelerates on news that China’s Dalian port has banned imports of the countries’ coal. The ban came effective at the start of February already and it’s indefinite. Under the control of Dalian customers, Dalian, Bayuquan, Panjin, Dandong and Beiliang harbour will not allow Australian coal to clear through customers.
That’s part of the measures to cap overall coal imports through the above harbours to 12m tonnes this year. Coal imports from Russia and Indonesia will not be affected. It’s also reported that clearing times for Australian coal at other ports are prolonged to at least 40 days.
AUD/USD was initially lifted by stronger than expected employment data earlier today. But it started to reverse after Westpac forecasts RBA to cut interest rates twice this year in August and November. Selloff then accelerates further on the above news.
US Treasury Secretary Steven Mnuchin tweeted that this round of trade talks in Beijing has concluded. He described the talks as “constructive”. And he looks forward to meeting Chinese Vice Premier Liu He in Washington next week to continue the “important” discussions.
.@USTradeRep and I concluded constructive trade talks in Beijing. I look forward to welcoming China’s Vice Premier Liu He to continue these important discussions in Washington next week. #USEmbassyChinapic.twitter.com/ikfcDZ10IL
Brexit hardliner Jacob Rees-Mogg reiterated his backing to Prime Minister Theresa May’s deal as it’s better than no Brexit. He tweeted that “The choice seems to be Mrs May’s deal or no Brexit.” Also, Rees-Mogg explained in the Monday Moggcast podcast that “I’ve always thought that no deal is better than Mrs. May’s deal, but that Mrs. May’s deal is better than not leaving at all.” While May’s deal is “in no way a good deal, Rees-Mogg said: “against that there are the threats of a long delay, and many people in Parliament who want to frustrate the result of the referendum.”
Conservative MP Michael Fabricant echoed as that it’s the “dreadful conclusion” he came to too. And “a new PM can then negotiate a better and more distanced relationship with the EU after Brexit. (Of course this is the least worst option but the only practical way forward for now.)”
Fabricant also said: “The practical alternatives are far worse that the Withdrawal Agreement including keeping us in the Customs Union and Single Market indefinitely so no control of immigration or having to obey EU directives.”
This is the dreadful conclusion I came to too – and said so at the ERG. A new #PM can then negotiate a better and more distanced relationship with the #EU after #Brexit. (Of course this is the least worst option but the only practical way forward for now.) https://t.co/3FjfBpPAjg
. The practical alternatives are far worse that the Withdrawal Agreement including keeping us in the Customs Union and Single Market indefinitely so no control of immigration or having to obey #EU directives.
Brexit Minister Dominic Raab said in the forward of the document that “leaving the European Union involves challenge and opportunity. We need to rise to the challenge and grasp the opportunities.” And, “this is the right approach – for both the UK and for the EU. The White Paper sets out in detail how it would work.”
EU chief Brexit negotiator Michel Barnier tweeted that “We will now analyze the #Brexit White Paper (with) Member States & EP, in light of #EUCO guidelines,” he tweeted, referring to the European Parliament and his own negotiating team from the European Council . He added that “EU offer = ambitious FTA + effective cooperation on wide range of issues, including a strong security partnership.” And he looked forward to negotiations with the UK next week.
President Federation of German Industries (BDI), Dieter Kempf, warned that “in the case of the disorderly exit of the British from the EU in the current year threatens a relapse to only 0.7 percent increase in gross domestic product” in Germany. That would be 0.5% lower than current forecast of 1.2% growth for 2019.
Kempf also complained that “the extension of the time limit for the self-imposed departure of the British from the EU continues the exhausting uncertainty for our companies”. And, “there is a risk that British policymakers once again buy expensive time at the expense of the economy – without wanting to take responsibility for the bill.”
The Chinese Ministry of Commerce confirmed that Vice Premier Liu He had a phone call with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Monday. During the call, both sides exchanged opinions on trade and agreed to maintain communications. Works are believed to be carried out ahead of the meeting between Trump and Xi on the second day of the June 28-29 G20 summit in Osaka, Japan. For now, there is no indications on how the two sides could close the wide gap in their bottom lines.
Reuters reported, citing an unnamed US senior officials that “it’s really just an opportunity for the president to maintain his engagement as he has very closely with his Chinese counterpart.”. And, Trump is “quite comfortable with any outcome.” Another unnamed official said “the president has been quite clear that he needs to see structural real reform in China across a number of issues and a number of sectors, and nothing about that has changed.” And, “the fact that talks broke down in May hasn’t changed that as the ultimate goal”.
Separately, Japanese Economy Minister Toshimitsu Motegi said he’ll meet Lighthizer this week. He’d announce details including the date and location of the talks once they were set.
BoJ Governor Haruhiko Kuroda spoke to the parliament today and hailed that the government has made significant progress on fiscal reforms. And, there is “some lagbefore the steps already taken begin to affect the economy”.
But he also emphasized that there are “still some steps remaining that the government needs to take on structural reform and growth strategy.”
Intellectual property theft, forced technology transfer, market access, and market distortion by subsidies to State Owned Enterprises (SOEs) are among the core issues in US-China trade negotiations. According to a Reuters report quoting unnamed sources, the US is stepping back on its demand regarding SOEs in China.
An important tricky point regarding SOEs is that it’s tightly interwind with the Chinese government’s industrial policy. That’s deeply rooted in the fundamental nature of China’s system, a “systematic rival” to major economies in the world as seen by EU. While China is making concessions in other areas, it’s an area that the socialist country won’t concede ground. A source said that “if U.S. negotiators define success as changing the way China’s economy operates, that will never happen”.
In addition, China is expected to ramp up purchases of US goods as part of the trade deal. But who’s going to make the purchases? It’s most likely the SOEs which the government has direct control on. Thus, another sources said “the purchasing, for example, reinforces the role of the state sector because the purchasing is all being done through state enterprises.”
The National Australia Bank finally gave up on their forecast of an RBA rate hike within 2018. Their expectation on the next move is now pushed from November to May 2019. The change put them back in line with market pricing, as well as with other major bank forecasters.
RBA chief economist Alan Oster noted that the “change reflects the fact there is no sign yet of stronger wages growth and unemployment has been stuck around 5.5% for the best part of a year.” Also, he added that once the tightening cycle starts “further rate increases will be very gradual”. And after the first move in May 2019, the next move will be “not until November 2019”.
Oster also noted that the economy is still expected to strengthen and lead to falling unemployment. And that should “eventually translate into stronger wages growth and give the RBA confidence that inflation will track back to its 2.5% target”. However, there is “considerable uncertainty around the timing at which wages growth will strengthen”.
Germany’s Economy Ministry lowered 2019 growth forecast to a mere 0.5%, just half of January’s projection of 1.0% (downgraded from 1.8%). If realized, that would be slowest growth in six years. For 2020m, growth is projected to pick up to 1.5%.
Economy Minister Peter Altmaier said externally, slowing global growth, trade tensions and Brexit uncertainty are weighing on the economy. Internally, introduction of the new car emission regulations and unusually low Rhine water levels are negative factors.
The ministry also noted that global economy should regain some momentum ahead. Strong import would mean a negative contribution to growth in 2019, “purely mathematically”.
Sterling is given a lift off today’s low after Financial Times reported that the main elements of a Brexit treaty text are ready. According to EU chief Brexit negotiator Michel Barnier, the documents could be presented to the UK cabinet on Tuesday.
However, it should be noted that it’s a “known” that the “main elements” are ready. A few weeks ago, it was like 95% completed. Now it maybe 99.9%. But it’s not done until all is done. There is so far no news regarding the Irish backstop. So the piece of news is not so much news.
Also, Barnier briefed EU ministers on negotiation progress today. The post meeting statement is rather reserved. The EU statement noted:
—
The Commission’s chief Brexit negotiator, Michel Barnier, informed the EU27 ministers of the situation following negotiations with the UK over the last few weeks. Michel Barnier explained that intense negotiating efforts continue, but an agreement has not been reached yet. Some key issues remain under discussion, in particular a solution to avoid a hard border between Ireland and Northern Ireland.
“In these final stages of the negotiations, ministers showed again today that we are determined to keep the unity of the EU 27. We have reconfirmed our trust in the negotiator. And we support his efforts to continue working towards a deal.”
Gernot Blümel, Austrian Federal Minister for the EU, Art, Culture and Media
During the meeting, ministers however also recalled the need to continue the work at all levels on preparations for every possible scenario.
European Council President Donald Tusk confirmed that the extra EU summit on Brexit will be held on November 25.
He said after meeting with chief negotiator Michel Barnier “If nothing extraordinary happens, we will hold a European Council meeting in order to finalize and formalize the Brexit agreement. It will take place on Sunday, November 25th at 0900 a.m.”
White House spokeswoman Sarah Sanders issued fresh confrontation to Canada as the latter retaliation tariffs on US steel tariffs took effect. Sanders said in a media briefing that “escalating tariffs against the United States does nothing to help Canada. It only hurts American workers.” Sanders added that “we’ve been very nice to Canada for many years, and they’ve taken advantage of that – particularly advantage of our farmers.” And, “the president is working to fix the broken system, and he’s going to continue pushing for that.”
Canada officially slapped tariffs on more than USD 12B of US goods effective on July 1. A range of products were targeted including steel and aluminum, coffee, pizza, condiments, whiskers etc. Chrystia Freeland, Canada’s minister of foreign affairs said that “we will not escalate, and we will not back down.”
We’d soon enter into US session. JPY continues to trade with one of the weakest, along with NZD.
A quick glance at JPY Action Bias table, we can that EURJPY and GBPJPY are the stronger ones intraday. But both D Action Bias are neutral. CADJPY may lack momentum in H Action Bias, but 6H and D Action Bias argue it’s in a trend. That prompts us to have a deeper look.
EURJPY D action bias chart clearly shows that it’s rebounding after a prior decline halts ahead of near term support around 129 level. Current rebound, while strong, is not in clearly a trend yet. It could be part of a range consolidation pattern.
On the other hand, CADJPY D action bias chart showed it’s in a solid up move from around 80 level. The moved turned into consolidation after failing 86. The rally could indeed be resuming with last week’s breakout. So, while EURJPY is stronger today, CADJPY is a better candidate for trend trading.
Back at the regular bar chart, for now, intraday bias in CADJPY stays neutral. But break of 86.05 will confirm rise resumption. CADJPY should target 61.8% projection of 80.52 to 85.75 from 83.88 at 87.11. Though, break of 85.13 will delay the bullish case and bring more consolidation first.
Good morning. Senior Deputy Governor Wilkins and I are pleased to be here to answer your questions about today’s interest rate announcement and our Monetary Policy Report (MPR). Before taking your questions, let me offer some insight into Governing Council’s deliberations.
Our discussion began with the big picture: inflation is on target and the economy is operating close to capacity. Our outlook published today is that this situation will continue. Governing Council believes that higher interest rates will be needed to keep inflation on target, and that is consistent with our actions today.
Monetary policy is, of course, always conditioned on new data, particularly when they do not align with the Bank’s projections. A few data points over the past few weeks have seemed out of step with those projections, but when all the data are taken together, the economy seems to be on track.
Given the various uncertainties we face, the Bank is particularly data dependent at this time. However, that does not mean that monetary policy will react to every data fluctuation. A better way to think of this is that it takes hundreds of data points to make a complete picture, and each new one helps the picture come into sharper focus. So, when a data point comes in differently than what the Bank or other forecasters expect, it matters to the big picture, but it is almost never decisive on its own.
As we have previously discussed, an important issue we face is to understand how the economy reacts to higher interest rates, given the high debt loads being carried by Canadian households. We are monitoring this situation closely. We have seen a moderation in credit growth and the debt-to-income ratio has begun to edge lower. At the same time, the housing market is also dealing with the revised B-20 Guideline for mortgage lending, and the data do not yet permit a sharp distinction between the impact of the guideline and the effects of higher interest rates.
Governing Council did take some comfort from an analysis of the renewal process for five-year mortgages taken out in 2014 and 2015 and up for renewal in 2019 and 2020. This analysis shows a very modest increase in debt-service ratios compared with the date of origination. Keep in mind that many households have had some income growth during these past five years, and these households may have grown accustomed to higher income levels. They may face an adjustment as their debt-service ratio rises once again, with consequences for their consumption spending. Of course, this issue is most important for highly indebted households. We also know that the jump in payments will be greatest for those who took out mortgages when interest rates were at their lowest levels, in 2015 and 2016, so the mortgage renewal process is likely to weigh on the economy more in 2020 and 2021. All that being said, Governing Council concluded that the economy should be resilient to higher interest rates, provided that labour income continues to grow.
The biggest issue on the table was trade tensions. As discussed before, uncertainty around the future of the North American Free Trade Agreement has caused some companies to delay investment spending or to move their investments to the United States. This channel was identified and captured in our projection some time ago. The recent imposition by the US government of actual tariffs on Canadian exports has made the situation more concrete. In the projections we are presenting today, we have added more negative judgment to our business investment forecast in recognition of this. We have also incorporated the effects of the US tariffs on steel and aluminum, and the various countermeasures implemented around the world. Box 2 in the MPR gives a flavour of the complex effects such actions will have on the economy. Let me summarize briefly.
A US company importing Canadian steel must now pay a 25 per cent tariff. They may instead buy steel made in the United States or in some other country. Or, if no obvious substitutes are available, they may just pay the higher price. Or, the Canadian company may offer to reduce its price in order to absorb some of the tariff’s impact. Or, it may look to other markets to sell its products. The response of companies will depend on how long they think the tariffs might be in place—for example, it appears that if NAFTA is successfully renegotiated, those tariffs would no longer be in effect. The point is, the outcome depends on individual reactions, which depend on the circumstances.
And then there are countermeasures. Canada has imposed a 25 per cent tariff on steel imported from the United States. This would seem to level the playing field, but many of the same complexities enter the analysis. All things considered, our analysis suggests that Canadian exports would fall, as would Canadian imports. Prices would rise at a time when the economy is already operating at capacity, so inflation would rise at least temporarily, but the effect could persist. Consumers would have less purchasing power, so demand would slow. Meanwhile, the potential of the economy would be eroded as companies invest less and become less competitive. So, the economy would see shocks to both demand and supply, resulting in two-sided risks to future inflation. Furthermore, the net effect on the economy might be buffered by any fiscal actions that governments might take.
Now, as we said in the MPR, these various effects are likely to be small for the measures already taken. In contrast, a large tariff on Canadian-made automobiles and parts would have a much greater effect on trade and the economy through these same channels. People are understandably concerned about this sort of escalation and want to know how monetary policy might react to it. Indeed, there was speculation that the Bank would not move interest rates today because of the possibility of further trade measures.
The Bank cannot make policy on the basis of hypothetical scenarios. We felt it appropriate to set aside this risk and make policy on the basis of what has been announced. Given the multiple channels through which protectionist measures affect economies, it should be clear that monetary policy is ill-suited to counteract all of their effects. It may, of course, play a supporting role, in conjunction with other policies. But, to put it bluntly, the economy would slow, inflation would rise, and the exchange rate would depreciate, adding further to near-term price pressures in the Canadian economy. Therefore, the implications for interest rates of an escalation in trade actions would depend on the circumstances. Let me emphasize that monetary policy by itself could not undo the long-term damage to jobs and income that could result from rising protectionism.
All this being said, it is important to remember that our economy is in a good place. We are operating near capacity, companies are investing even if some are hesitating, the labour market has been strong, and, most importantly, inflation is on target. In this context, higher interest rates will be warranted to keep inflation near target. Governing Council will continue to take a gradual approach to adjusting rates, guided by incoming data.
With that, Senior Deputy Governor Wilkins and I would be happy to answer your questions.
Eurozone PMI manufacturing was revised up to 56.2 in April, from 56.0. Markit noted
slower rates of expansion in five of the eight nations covered, and slower increases in new work and employment offset slightly stronger gain in output
Among the countries, Germany PMI manufacturing hit a 9-month low, Italy hit 15-month low and Spain hit 7- month low. France and Ireland performed pretty well by climbing to 2 month high.
Comments from Chris Williamson, Chief Business Economist at IHS Markit:
“The manufacturing sector saw growth weaken further at the start of the second quarter, but let’s not lose sight of the fact that the overall pace of expansion remains encouragingly solid.
“Although growth has slowed markedly compared to the start of the year, December had seen the best performance in over 20 years of survey data collection, with factory activity clearly surging at an unsustainable rate. Since then, supply constraints – including raw material scarcities, supplier delivery delays and skill shortages – have constrained production. Strikes, bad weather and unusually high levels of illness have also plagued businesses.
“Some of these adverse factors are therefore likely to be reversed in coming months, as capacity is increased, supply improves and factors such as strikes and weather cause fewer problems.
“However, anecdotal evidence from the surveys also highlights how demand has been curbed by other issues such as the stronger euro and rising prices. Uncertainty has also intensified due to worries regarding trade wars and Brexit, underscoring downside risks to the outlook.
“While the current pace of growth remains solid, the trend in the surveys in coming months will provide important clues as to the degree to which underlying demand may be waning and the extent to which policymakers should be concerned about the health of the economy.”
Asian update: Sterling strong ahead of Brexit vote, Yen soft as China lifts stocks
Risk sentiments are having an about turn after China pledges to work on a strong start in 2019. The rebound in is so far more than enough to reverse yesterday’s selloff after ugly Chinese trade data. In the background, there is optimism of a deal between US and China to resolve the trade conflicts. Trump also reiterated yesterday again that “we’re going very well with China” and “we are going to able to do a deal”.
In the currency markets, Yen is the weakest one for today so far, followed by Swiss Franc and then Dollar. New Zealand Dollar leads commodity currencies higher. But for the week, Sterling is the strongest one after yesterday’s surge. All eyes will be on the Brexit meaningful vote today, and the subsequent actions after the deal is defeated in the Commons.
At the time of writing:
Overnight:
US yield curve remains inverted between 1-year and 5-year. But it’s flattened much in the region. Also, strength is seen at the long end, with 30-year yield keeping 3% handle. Developments are so far positive.