Wed, Mar 20, 2019 @ 15:48 GMT

USTR Lighthizer to travel to China next week for trade talks

    It’s reported that US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing for the another round of trade talks next week, following the Lunar New Year break. The scope of discussions extended beyond trade balance to intellectual property theft, forced technology transfer and China’s state own enterprises. And Lighthizer has repeatedly emphasized the word “enforcement”, regarding the implementation of the agreement.

    Trump is expected to meet with Chinese President Xi Jinping to seal the deal before March 1 dead line. But for now, there is no set dates for the meeting yet. In his state of Union Address, Trump said China has target US industries for their intellectual property for years. And, he emphasized the new trade deal must end trade practices, reduce our chronic trade deficit, and protect American jobs.

    Also, Trump announced to meet North Korean leader Kim Jong Un again in Vietnam on February 27 and 28.

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    Comments from ECB de Guindos, Vasiliauskas and Nowotny

      ECB Vice President Luis de Guindos defended the central bank’s decision to ended the asset purchase program this month, without any further stimulus exit said. He said that “We’re in a dark room that sometimes gets a bit darker, and when you are in a dark room you have to be very cautious and try to keep your optionality at the maximum level,”

      Governing Council member Vitas Vasiliauskas warned of growing risks in 2019. He said “next year the balance of risk is more likely to turn in a negative direction but for the moment, because risks and economic data are quite mixed, yesterday’s meeting still described the risk outlook as balanced,”

      Another Governing Council member Ewald Nowotny said the central bank should ends the negative deposit rate policy as son as possible. He said, “My personal view is that specifically this rate, that is this phenomenon of negative interest rates, should be reconsidered as soon as economically possible.” He added, “It is also a specificity of the ECB. The U.S. never had a negative rate.”

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      Sterling rebounds as UK could stay in customs union beyond 2021

        The Telegraph reported that UK is preparing to stay in the customs union after Brexit, and beyond 2021. The news came after Prime Minister Theresa May said she’s aiming for a “future customs union” with the EU. And, her top ministers agreed this week on a last-resort plan to avoid a hard Irish border. Foreign Secretary Boris Johnson and Environment Secretary Michael Gove objected the plan but were “outgunned” by other during the meeting.

        The news gave Sterling a strong lift as it’s trading as the strongest one for today, and the second strongest next to Canadian Dollar.

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        China MOFCOM to start retaliatory tariffs on $16B US imports on Aug 23

          China Ministry of Commerce announced to start to impose 25% retaliatory tariffs on USD 16B in US goods starting August 23, “in parallel with the US. The MOFCOM condemned that the US “once again overrides international law: as a very unreasonable practice. And Chin’s countermeasures were to safeguard its own “legitimate rights and interest and global multilateral trading system”.

          Full short statement in simplified Chinese.

          This is in response to US Trade Representative’s announcement yesterday, to start to collect 25% tariffs on USD 16B of Chinese imports starting August 23. The announced lists contains 279 of the original 284 tariff lines that were proposed back on June 15.

          As a recap, this is the second tranche of tariffs as part of the Section 301 intellectual property investigations. The first tranche of 25% tariffs on USD 34B of Chinese goods already took effect on July 6. The upcoming 25% tariffs on USD 200B in Chinese goods are work in progress.

          Full statement by USTR.

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          Sterling gapped lower as Brexit talks stalled at Irish border backstop again

            Sterling gapped lower as the week started with negative Brexit news again. The backstop on Irish border remained an unresolved issue despite efforts from both sides. And furthermore, as the negotiations stalled, there will be no more scheduled talks before the EU summit on later this week.

            EU chief Brexit negotiator Michel Barnier tweeted after meeting UK Brexit secretary Dominic Raab in Brussels that “Despite intense efforts, some key issues are still open, including the backstop for IE/NI (Ireland/Northern Ireland) to avoid a hard border.”

            Brexit Ministry said that there was progress “in a number of key areas”. “However there remain a number of unresolved issues relating to the backstop. The UK is still committed to making progress at the October European Council.”

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            Markets shrug Trump’s unsubstantiated tax cut for middle class

              Trump talked about the plan to give middle class 10% tax cut yesterday. He said “we’re putting in a resolution some time in the next week and a half to two weeks [and] we’re giving a middle-income tax reduction of about 10 percent.” He insisted that the plan will go through Congress rather than executive order. And the vote will be done after mid-term election.

              But the initiative is widely criticized as unsubstantiated as Republican congressional leaders and White House officials were reported to have heard nothing about the plan. Additionally, Congress is in recess ahead of mid-term election and there is no plan to return to Washington for the matter.

              White House spokeswoman Lindsay Walters clarified yesterday that “as part of Tax Reform 2.0, the first elements of which were passed the House in September, the President would like to see an additional tax cut of 10% for middle-income families.” That effectively confirmed that the idea of 10% tax cut is something entirely new.

              The three bills of the so called Tax Reform 2.0 was passed in the House in late September. And it’s already facing a tough batter in the Senate. It is seen as nearly impossible to add additional deficit ballooning 10% tax cut to the plan and get through either House or Senate. The claimed 10% tax cut for the middle class is seen as campaign gimmick rather than anything with substance.

              The US markets shrugged off the news with DOW closing down -0.50% at 25317.41. Consolidation from 24899.77 is in progress but fall from 26951.81 medium term should resume sooner or later.

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              Into US session: Euro turned mixed after Italy’s reply to EU, Sterling weakest

                Entering into US session, Sterling is trading as the weakest one for today so far. Brexit concerns are weighing on the Pound. UK Prime Minister Theresa May is going to tell the parliament that 95% of the withdrawal agreement is done. But she continues to reject EU’s Irish backstop proposal. The deadlock remains a deadlock. Yen is among the weakest on strong global risk appetite, following rally in Chinese stocks and sharp fall in Italian yield. On the other hand, Canadian Dollar and Dollar are trading as the strongest ones. Canadian Dollar is trying to recover from Friday’s steep losses, with expectation that BoC will raise interest rate this week.

                Euro is mixed at the time of writing. EUR/USD hit as high as 1.1550 today but reversed after Italy replied to the EU, insisting to stick to its “hard” but “necessary” budget. The sentiment is not totally reflected in Italian yield though. Italian 10 year yield is down -0.1358 at 0.3446 at the time of writing. However, we’d like to point out that German 10 year yield is now at 0.459, down -0.004. That is, German-Italian spread is still at 298, less alarming but still very alarming.

                In European markets

                • FTSE is up 0.88% at 7111.94
                • DAX is up 0.81% at 11646.49
                • CAC is up 0.49% at 5109.37.

                Earlier in Asia,

                • China Shanghai SSE rose 4.09% to 2654.88, should have confirmed medium term bottoming.
                • Hong Kong HSI rose 2.32% to 26153.15
                • Nikkei rose 0.37% to 22614.82
                • Singapore Strait Times rose 0.51% to 3078.06.
                • Japan 10 year JGB yield rose 0.0031 to 0.153
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                Fed Clarida: US expansion could become longest in in history in 2019

                  Fed Vice Chair Richard Clarida said in a speech that the US economic fundamentals are “robust”. And if the economic expansion continues in 2019 as he expected, “this will become the longest US expansion in recorded history”.

                  And, at this stage of the interest rate cycle, it will be “especially important to monitor a wide range of data” for the path of Fed’s policy interest rates. “Data dependence” should play in two distinct roles of “formulation and commination” of monetary policy.

                  He also noted that “as the economy has moved to a neighborhood consistent with the Fed’s dual-mandate objectives, risks have become more symmetric and less skewed to the downside”.

                  His full speech here.

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                  Dollar back under pressure as core PCE inflation slowed, jobless claims rose

                    Dollar is back under some mild pressure in early US session after mixed economic data. Inflation data missed expectations. Headline PCE was unchanged at 2.0% yoy in October versus consensus of 2.1%. Core PCE even slowed to 1.8% yoy, down from 2.0% yoy and missed consensus of 1.9% yoy. Though, personal income rose 0.5% while spending rose 0.6%. Both were above expectations.

                    Initial jobless claims rose 10k to 234k in the week ended November 24, above expectation of 221k. Four-week moving average of initial claims rose 4.75k to 223.25k. Continuing claims rose 50k to 1.71M in the week ended November 17. Four-week moving average of continuing claims rose 19.75k to 1.668M.

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                    ECB previews and levels to watch: EURUSD 1.2154, EURCAD 1.5608, EURCHF 1.2, EURAUD 1.6189

                      Euro recovers broadly as traders are awaiting ECB rate decision and press conference. No change in monetary policy is expected today. Main refinancing rate should stay at 0.00%, deposit facility rate at -0.40% and marginal lending facility rate at 0.25%. The EUR 30B per month asset purchase program will continue to run until end of September as planned.

                      ECB’s press conference could be watched here if you’re interested.

                      Here are some ECB preview reports:

                      EUR’s recovery is actually quite weak considering that it’s limited below yesterday’s highs, which are not far away.

                      EUR’s  own outlook is mixed too. EUR/USD, is near term bearish. But EUR/CHF, EUR/AUD and EUR/NZD are bullish. EUR/JPY and EUR/CAD and EUR/GBP are mixed from action bias table.

                      We’d prefer not to anticipate whether Euro traders will react positively, or negatively to ECB press conference. However, if the response is positive, 1.2 in EUR/CHF is the first one to look at, and 1.6189 the second.

                      If the response is negative, 1.2154 in EUR/USD is the first level to watch. And the second will be 1.5608 in EUR/CAD, yesterday’s low.

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                      German FM Scholz urged to complete EU banking union this year

                        German Finance Minister Olaf Scholz urged EU to make progress on banking union this year. He said in the Bundestag lower house of parliament that “we must take action so that we can act in a new crisis – not everything has been done.” Scholz also said Germany and France laid a foundation with an agreement in Meseberg in June. And so, “we can quickly take the last steps to make Europe stable and to equip ourselves for the next crisis”.

                        He added that ‘have the task of completing a banking union and we should fulfil the most important steps this year.” Under the current EU plan, the Single Resolution Board will be given a clearer mandate to set the level of capital buffers that banks should hold against the risk of failure. However, another pillar of the union, a common bank deposit insurance scheme, is not agreed upon yet.

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                        Finally some good UK data as retail sales rose 1.6% mom in April. Pound recovers

                          Finally, there’s some good news from the UK. Headline retail sales jumped 1.6% mom in April, much higher than expectation of 0.7%. Excluding auto and fuel, retail sales also jumped solidly by 1.3% mom, versus expectation of 0.4% mom.

                          The ONS noted that “the effects of the adverse weather on sales introduces further volatility to the monthly growth rate in April 2018.” And, “combining March and April to compare the two months with the same two months a year earlier provides a more stable picture of the year-on-year growth”.

                          Combining both March and April, sales grew 1.3% in 2018, much lower than 2.9% back in 2017. Full release here.

                          Nonetheless, Sterling is lifted immediately by the release. GBP/USD’s focus will be back on 1.3441 minor resistance.

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                          Stocks surged as Fed Powell pledged to listen, with patience

                            US stocks surged overnight as lifted by Fed Chair Jerome Powell’s comments, strong job report and Chinese easing. DOW, S&P 500 and NASDAQ all extended post-Christmas rebound and made new weekly high before closing strong. DOW rose 3.29%, S&P 500 rose 3.43% and NASDAQ rose 4.26%. Treasury yield also staged a strong come back with 10 year yield added 0.105 to 2.659.

                            In short, Powell pledged that Fed was “listening” to the markets after December’s volatility. And, “particularly with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.” He also added that “we are always prepared to shift the stance of policy and to shift it significantly” if needed.

                            Separately, Cleveland Fed President Loretta Mester said in a Reuters interview that federal funds rate is close to neutral. She added, “we really need to be looking at the data and having the economy tell us, do we need to move more? Do we need to move more, faster? Can we wait?” She emphasized “We should take our time and assess … We may be where we need to be.”

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                            UK Hammond: Collaborative approach is generally more productive than a confrontational approach

                              UK Chancellor of Exchequer Philip Hammond said today that a “collaborative approach… is generally more productive than a confrontational approach, in dealing with Germans French and Italians. And, for a better Brexit deal, Hammond said it’s important to engage the partners. He added that “finding a mutually beneficial outcome is the only way forward. That is the firm intention of my government. Theresa May, the prime minister, has said so very clearly.”

                              That was in response to a recording of Foreign Minister Boris Johnson on Brexit approach, published by Buzzfeed. Johnson said “imagine Trump doing Brexit,” “there’d be all sorts of breakdowns, all sorts of chaos. Everyone would think he’d gone mad. But actually you might get somewhere. It’s a very, very good thought.”

                              Prime Minister Theresa May’s spokesman said that May “of course” still have confidence in John. And, “the PM believes that her cabinet and her government are working hard to deliver on the will of the people and working hard to take back control of our money, laws and our borders.”

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                              Into US session: Sterling pares losses, Aussie weakest

                                Entering into US session, Sterling is trading as the strongest one for today, reversing much last last week’s losses. It’s followed by Euro and then Dollar. On the other hand, commodity currencies are generally lower, as led by Australian Dollar. There were a lot of comments on Brexit from UK and EU, but there were just nothing more than words. UK Prime Minister Theresa May’s cabinet will meet on Brexit today and the result out the there would be watched.

                                Meanwhile, new round of US-China tariffs are set to kick in today. Ahead of that, China’s State Council released a 36k white paper on its position, criticizing US “bullying” and pledged to defend it’s own interests. It doesn’t matter much on how much truth the white paper tells, as what China says is always doubtful. Most important thing is that China is not going to back down from trade war. That’s a factor weighing down Aussie and Kiwi.

                                In other markets, European stocks are generally lower today. FTSE is down -0.24% at the time of writing, DAX down -0.38%, CAC down -0.21%. China and Japan are on holiday. Hong Kong HSI closed down -1.62%, Singapore Strait Times closed up 0.05%. WTI crude oil was lifted by OPEC decision to stick with its production plan and is up 1.65% at 71.95. Gold is hovering around 1200.

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                                Dollar jumps as ISM services rose to 58.6, beat expectation

                                  ISM non-manufacturing composite rose to 58.6 in May, up from 56.8 and beat expectation of 57.4. Business activity index rose 2.2 to 61.3. New orders rose 0.5 to 60.5. Employment index rose 0.5 to 54.1.

                                  Dollar responses positive to the upside surprise. In particular USD/CAD finally takes out 1.3046 resistance to resume recent rally.

                                  ISM noted in the release that “the majority of respondents are optimistic about business conditions and the overall economy.” But “there continue to be concerns about the uncertainty surrounding tariffs, trade agreements and the impact on cost of goods sold.”

                                  Some quotes from respondents:

                                  “Material prices have been difficult to predict this year, and suppliers have struggled to hold prices for any extended period on quotes, specifically on lumber and lumber-related products. The instability has proven frustrating, but a larger problem is that we are starting to see longer lead times in many of the same areas that could start impacting timelines if they continue to get worse as we get into the main building season.” (Construction)

                                  “The trade discussions with NAFTA, Korea and the European Union will have critical impacts on our spend relating to steel products. Also, the potential of the U.S. pulling out of the Iran nuclear deal could push crude prices higher.” (Mining)

                                  “Oil price stabilization in the (US) $60 to $70 per barrel [is] having a positive impact on hiring, both contract labor and direct employees, in the oil and gas industry and supporting industries.” (Professional, Scientific & Technical Services)

                                  Full release here.

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                                  Bundesbank Wedimann, growth to fall well short of 1.5% potential this year

                                    Bundesbank President Jens Weidmann said today that German economy growth will “fall well short of the potential rate of 1.5 percent in 2019”. That’s because “there is much to suggest that the dip in growth here in Germany has persisted into the current year”.

                                    However, he emphasized that the prerequisites for growth remain intact, including low financing cost, expansion in employment market and rising wages. Thus, there is no reason for pessimism yet.

                                    Separately, it’s reported that German cabinet gave green-light for a second eight-year term for Weidmann, as the current term expires at the end of APril.

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                                    ISM manufacturing dropped to 59.8, but employment rose 0.3 to 58.8

                                      ISM manufacturing index dropped to 59.8 in September, down from 61.3 and missed expectation of 60.0. Price paid index dropped to 66.9, down from 72.1 and missed expectation of 0.8. Employment component, though rose 0.3 to 58.8.

                                      ISM noted in the release that:

                                      • Demand remains strong, consumption improved, inputs improved
                                      • But continued supply chain inefficiencies led to an increased consumption of inventory and a slight expansion of imports,
                                      • Export orders expanded, but four major industries are no longer contributing
                                      • Price pressure continues, but the index softened for the fourth straight month
                                      • Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations,

                                      Full release here.

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                                      ECB research: Significant increase in protectionism could have material impact on global trade and output

                                        In article titled “Implications of rising trade tensions for the global economy“, ECB researcher Lucia Quaglietti warned of the impact of escalation of trade tensions.

                                        Based on simulations carried out by ECB staff, in event of a significant increase in protectionism, “the impact on global trade and output could be material.” In particular, if US increases tariffs “markedly” on imported goods from all trading partners that “retaliate symmetrically”, the outcome for the world economy would be “clearly negative. And, “the impact could be particularly severe in the United States”

                                        For other countries, those with “closest trade relations” with the US would be most negatively affected. And, “only a few open economies with little exposure to the tariff-imposing country may benefit from trade diversion effects, as they would gain competitiveness in third markets.”

                                        In addition, the impact of trade tension escalation could be “felt via a number of channels. Higher import prices would lead to higher production costs and lower household purchasing power. Consumption, investment and employment will also be affected. Moreover, there will be economic uncertainty that leads to delay and consumer spending and business investment. Credit supply could be reduced with requirement for higher compensation. And there could be broad spill over to the global financial markets.

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                                        South Korea Moon revived the Kim-Trump summit. He could join to make it three-way

                                          South Korean president Moon Jae-in had a surprised meeting with North Korean leader Kim Jong-un on Saturday, regarding the summit with the US. Moon’s office said after the meeting that the leaders “exchanged views and discussed ways to implement the Panmunjom Declaration and to ensure a successful US-North Korea summit.”

                                          Moon added in a press conference that “should the North Korea-US summit succeed, I would like to see efforts to formally end the (Korean) war through a three-way summit of the South, the North and the US.” Moon also sought agreement from Kim that the summit must be held.

                                          A South Korean official said that “the discussions are just getting started, so we are still waiting to see how they come out, but depending on their outcome, the president could join President Trump and Chairman Kim in Singapore.”

                                          White House spokeswoman Sarah Sanders also said that “the White House pre-advance team for Singapore will leave as scheduled in order to prepare should the summit take place.”

                                          Also, Trump himself tweeted that the US teams is now in North Korea to discuss the meeting.

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