Wed, May 22, 2019 @ 05:30 GMT

Italy EM Tria: Gradual reduction in deficit after 2019

    Italy Economy Minister Giovanni Tria said today that the while the budget deficit will increased compared with previous forecast in 2019, “there will be a gradual reduction in the following years”. His comments echo reports that the populist government has revised their original plan after strong pressure from the EU.

    Originally, the plan was to have budget deficit target at 2.4% of GDP in the three years from 2019. But according to unnamed government sources, the plan now is to keep 2.4% in 2019, but lower to 2.2% in 2020 and then 2% in 2021.

    Prime Minister Giuseppe Conte is due to meet with key ministers today. The details could then be defined after the meeting.

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    USD/CAD to revisit yesterday’s low as Canada CPI accelerated notably in Feb

      USD/CAD dives sharply in early US session after data release.

      From US, durable goods orders rose 3.1% in February, above expectation of 1.7%.

      Ex-transport orders rose 1.2% versus expectation of 0.5%.

      However, markets response to Canada inflation data seems to be much stronger.

      From Canada, CPI rose 0.6% mom, 2.2% yoy in February, beat expectation of 0.5% mom, 2.0% yoy. Annual rate also accelerated from prior month’s 1.7% yoy.

      CPI core common accelerated to 1.9% yoy, up from 1.8% yoy. CPI core media rose to 2.1% yoy, up from 1.9% yoy. CPI core trimmed rose to 2.1% yoy, up from 1.8% yoy.

      Canada retail sales rose 0.3% versus expectation of 1.2% mom in January. Ex-transport order, though, met expectation and rose 0.9% mom.

      USD/CAD drops sharply and is set to test on yesterday’s low at 1.2828. Rejection from 55 H EMA certainly carries near term bearish implication. However, there is a key support zone ahead at 1.2802 cluster support zone (38.2% retracement of 1.2246 to 1.3124 at 1.2789). For the moment, we’d still expect strong support from there to bring rebound.

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      Italian League and 5 Star Movement softened proposal on EU fiscal rules

        The populist parties of the League and the 5-Star Movement signed an accord to form a ruling coalition. Euro’s reaction so far has been relatively muted, even though it weakened as touch.

        That’s probably because the final accord dropped the proposal to create fiscal headroom for Italy by changing the formula for calculating debt burden. Instead, it just called for a review of EU governance and fiscal rules.

        The coalition government could take office as early as next week. But there is no announcement on who would be the Prime Minister.

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        Japan Economy Minister Motegi: No trade talk with US until mid June, and we still don’t want bilateral FTA

          Japan’s Economy Minister Toshimitsu Motegi said today that trade discussion with US Trade Representative Robert Lighthizer will begin around mid-June or later.

          There was an agreement between Japan Prime Minister Shinzo Abe and US President Donald Trump on setting up a new framework focusing on bilateral trade. But Motegi reiterated today that “we’re not thinking of signing a bilateral FTA.”

          It’s believed that Japan’s priority is on TPP, the pact that it leads with 10 other nations. And Abe’s cabinet would want to pass relevant legislations through the parliament within the current session which ends on June 20. In addition, Japan has been clear that it opposes to a two way trade deal. On the other hand, Trump and Treasury Secretary Steven Mnuchin showed no respect to Japan’s preference and persistently tried to force bilateral trade agreement on Japan.

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          Fed Mester supports gradual rate hike, against a steep path

            Cleveland Fed President Loretta Mester she supports gradual rate hike “this year and next year”. At the same time, she’s “against a steep path” in tightening because “we want to give inflation time to move back to goal”. She sounds optimistic saying that “this year is shaping up to be another good year for the economy.” And for monetary policymakers, the task is to “calibrate policy to this healthy economy so that the expansion is sustained.”

            The government’s tax cut poses “some upside risk” to the forecast, and Mester expects a better read on household spending “over the next several months”. Globally, she noted that “for the first time in many years, economic activity around the world is picking up and forecasts for global growth are being revised up.” And, “this should have a positive feedback effect on the U.S. economy via exports.”

            Meanwhile, she warned that trade developments are a “risk to the forecasts”. And the uncertainty “may not be resolved quickly”. But it didn’t change her outlook for the over economy yet.

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            France PMI composite dropped to 49.3, 30-month low, first contraction in more than 2 years

              France PMI manufacturing dropped to 49.7 in December, down from 50.8, and missed expectation of 50.7. It’s the worst reading in 27 months. France PMI services dropped to 59.6, down from 55.1 and missed expectation of 54.8. It’s the lowest level in 34 months. PMI composite dropped to 49.3, down from 54.2. It’s a 30-month low and the first contraction reading in 2 1/2 years.

              Commenting on the Flash PMI data, Eliot Kerr, Economist at IHS Markit said:

              “Having held up reasonably well throughout the initial months of Q4, latest flash data pointed to an outright contraction in France’s private sector for the first time in two-and-a-half years, following the protests which have swept through the country in recent weeks. Momentum in the manufacturing sector’s downturn gathered pace, while most notably, the service sector’s resilience came to a halt, with business activity and demand dropping.

              “Prior to the December flash results, survey data suggested that the French economy was set to record a fairly reasonable quarterly expansion in Q4. Having propped private sector growth up in recent months, contraction in the service sector presents significant downside risks to Q4 growth prospects.”

              Full release here.

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              JPY recovers ahead of BoJ, ignores mixed data

                A batch of data is released from Japan today. Tokyo CPI slowed to 0.6% yoy in April, down from 0.8% yoy and missed expected of 0.8% yoy. Industrial production rose 1.2% mom in March, well above expectation of 0.5% mom. Retail sales rose 1.0% yoy in March, below expectation of 1.5% yoy. Unemployment rate was unchanged at 2.5%.

                JPY showed little reaction to the set of mixed data and recovers broadly today.

                While JPY remains the third weakest for the week, today’s recovery can be attributed to the retreat in US yields. 10 year yield closed down -0.034 at 2.990 overnight. back below 3% handle.

                BoJ will announce rate decision today and there is no expectation of any changes. Here are some previews:

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                Eurozone PMI manufacturing finalized at 50.5, adds to likelihood of recession

                  Eurozone PMI manufacturing was finalized at 50.5 in January, unrevised, down from December’s 51.4. It’s the six consecutive months of decline and the lowest level since November 2014. Markit noted that “output up marginally, but sharpest fall in new work recorded since April 2013”. Also, “growth sustained via reduction in backlogs and fastest accumulation of stocks in survey history”.

                  Among the countries, Italy PMI manufacturing hit 47.8, a 68-month low. Germany reading was also in contraction at 49.7, a 50-month low. Franc reading recovered mildly to 3-month high of 51.2. But Ireland reading hit 27-month low, Austria reading hit 29-month low and the Netherlands reading hit 28-month low.

                  Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                  “The January PMI adds to the likelihood that the manufacturing sector is in recession and will act as a drag on the economy in the first quarter.

                  “Some temporary factors remain evident, including an auto sector that is struggling to regain momentum after new emissions regulation and some signs of ‘yellow vest’ disturbances dampening demand in France. However, there appears to be a more deep-rooted malaise setting in, which reflects widespread concerns about the destabilising effect of political uncertainty and the damage to exports from rising trade protectionism.

                  “Worryingly, weaker than anticipated sales mean warehouses are filling up with unsold stock at a rate not previously recorded over the two decades of prior survey history, suggesting firms will need to cut operating capacity in coming months unless demand revives, boding ill for future production growth.

                  “While there is some evidence that firms are hoarding labour in the hope of sales picking up again, and business optimism did perk up from December’s six-year low, jobs growth is starting to deteriorate as increasing numbers of firms seek to cut costs and raise productivity. Any such downturn in the labour market will in turn potentially drive consumer sentiment lower, and adds further to the risk that economic growth will continue to slow in coming months.”

                  Full release here.

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                  RBA Lowe: No strong case for near term adjustment in interest rate

                    RBA Governor Philip Lowe devoted a section on monetary policy is his address to Australia-Israel Chamber of Commerce (WA) today. And, he brought out four broad points.

                    1. He expects a “further pick-up” in the Australian economy, with increased investment, hiring and exports. Inflation is also expected to “gradually pick up” with wages growth too. But there are uncertainties “lying in the international arena”. Lowe warned that “a serious escalation of trade tensions would put the health of the global economy at risk and damage the Australian economy”. And, “we also have a lot riding on the Chinese authorities successfully managing the build-up of risk in their financial system.” Domestically, the level “high level of household debt remains a source of vulnerability”.

                    2. The next interest rate move will likely be “up, not down”. And that might “come as a shock to some people”.

                    3. Inflation returning to midpoint of target zone is expected to be “only gradual”. And, “it is still some time before we are likely to be at conventional estimates of full employment.

                    4. “Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy.” Lowe reiterated that other global central banks have lower policy rates than Australia “over the past decade”. So, the situations are different.

                    Here is Lowe’s full speech.

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                    Fed Kaplan: Interests rate about where they should be, tariffs have come chilling effects

                      Dallas Fed President Robert Kaplan said interests are now “about where they should be”. And Fed should “move off to the side and be patient.” He added that fed should neighing be raising interest or cutting interest rates for now. “We’ll have to see where we go from here, and I’ll keep updating my judgment based on what we see in the economy,” He said.

                      Regarding trade war escalation with China, Kaplan said “what we don’t know right now is how long these issues will persist, how far will they go, will these tariffs, that have just been put on, and counter tariffs, will they be with us for months, weeks, or longer.”

                      But he admitted that trade situation creates uncertainty, “creates uncertainty for businesses, it creates uncertainty generally — and uncertainty by and large”. And he warned ” if it goes on for an extended period of time, probably is not helpful if you are a business and trying to manage your business … it has some chilling effect on business.”

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                      ECB Rehn: Have to wait and see how long slowdown lasts

                        ECB Governing Council member Olli Rehn told German newspaper Handelsblatt that “the most recent data point to a weakening of the economy.” And, the reasons for the slowdown mainly lie abroad, including US-China trade conflicts. Though, there were also uncertainties over Brexit, yellow vest protest in France, fiscal issues in Italy and slower industrial production in Germany.

                        But Rehn also noted that ECB’s monetary policy orientation is clear and unchanged. He added, “we have said that rates will be at their current level until we have sustainably reached our monetary policy goal.” For now, wage growth had not had much impact on core inflation yet even though “at the end of last year it looked as if there would be stronger momentum in inflation.”. And, “we have to wait and see how long the period of weaker growth will last.”

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                        Japan: Large contraction in industrial production raises recession risk

                          In March, Japan industrial production dropped -0.9% mom, below expectation of 0.0% mom. For the whole of Q1, industrial production contracted -2.6% yoy. The overall contraction in industrial production in Q1 was the largest in nearly five years, since Q2 2014. The data suggested that Japanese economy could have suffered a mild recession as external demand was hurt by US-China trade war.

                          Also released, unemployment rate also rose to 2.5%, up from 2.3% and was higher than expectation of 2.4%. Nevertheless, retail sales rose 1.0% yoy, above expectation of 0.8% yoy. In April, Tokyo CPI accelerated to 1.3% yoy, up from 1.1% yoy and beat expectation of 1.1% yoy.

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                          Turkish Lira drops further despite Erdogan family’s effort to calm markets

                            Turkish Lira’s depreciation continues today despite effort by the government to calm the markets. USD/TRY breached 7.2 handle in early trading and stays firm around 7, up more than 9%.

                            Turkish Finance Minister Berat Albayrak said on Sunday that plans will be ready on Monday to ease investors concerns. The plans are prepared for banks and will particularly help small to mid-sized business most affected by the sharp depreciation in Lira. In an interview with Hurriyet newspaper, Albayrak said “from Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market.” And, “we will be taking the necessary steps with our banks and banking watchdog in a speedy manner”. No detail is leaked yet. Albayrak is President Tayyip Erdogan’s son-in-law

                            Talking about the President, Erdogan told supports in Trabzon on the Black Sea coast on Sunday that the country is not in a crisis, and the Lira’s free fall was a plot. He said “What is the reason for all this storm in a tea cup? There is no economic reason for this … This is called carrying out an operation against Turkey.”

                            Erdogan also repeated his call for citizens to buy Lira. He said, “I am specifically addressing our manufacturers: Do not rush to the banks to buy dollars. Do not take a stance saying ‘We are bankrupt, we are done, we should guarantee ourselves’. If you do that, that would be wrong. You should know that to keep this nation standing is … also the manufacturers’ duty.”

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                            FOMC forward guidance and balance sheet reduction plan watched

                              The economic calendar is rather busy today. French GDP, Swiss KOF, Eurozone confidence indicators, Germany CPI and US ADP employment will also be watched. But the major focus will be on FOMC rate decision and press conference.

                              Fed is widely expected to keep federal funds rate unchanged at 2.25-2.50%. Since December, following extreme market volatility and cautious turn in Fedspeaks, pricing of Fed’s rate path changed drastically. Fed funds futures are now only pricing in around 20% chance of a 25bps hike by the December meeting. Dollar then started weakening broadly. The greenback suffered another round selloff last week after a WSJ report suggesting that the Fed members are considering to end the balance sheet reduction plan earlier than previously expected.

                              The first focus today will be on forward guidance in the statement. Back in December, FOMC noted that “the Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”

                              But since then, Fed officials sung a chorus, saying that Fed can afford some patience before another rate move. And Fed chair Jerome Powell even indicated that Fed is flexible to move in either direction if necessary. Any change in the forward guidance that hints at a pause could give Dollar more pressure.

                              And secondly, Powell will need to indicate if there is any change in Fed’s balance sheet reduction plan.

                              Here are some previews on FOMC:

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                              Germany’s Joint Economic Forecast Project Group raised 2018 and 2019 growth projections

                                In the twice a year published Joint Economic Forecast by leading German institutes, growth projection for 2018 and 2019 were raised to 2.2% and 2.0% respectively. Both were upwardly revised by 0.2% from Autumn report. The released warned that while German economy “continues to boom”, “the air is getting thinner”. Still, “pace of economic expansion nevertheless remains brisk:” It pointed to upturn in the world economy, favorable situation in labor market and fiscal stimulus of the new coalition government as driving forces. Inflation is projected to slow to 1.7% in 2018 then rise again to 1.9% in 2019.

                                Global growth projection was revised up by 0.3% to 3.4% in 2018. The reported noted that “tax cuts in the USA will stimulate economic activity there, which may have a knock-on effect on other countries”. However, it also warned that the dynamic in the world economy will “gradually flatten off over the forecasting period”. And that’s partly due to “a harsher trade policy climate, which will burden global investments.”.

                                The report also pointed directly to the US announcement of steel and aluminum tariffs as “another step towards greater protectionism”. It warned that “any further escalation of the trade conflict will restrict international trade in goods and significantly damage world economic growth in the mid-term.” Even “mere discussion of such measures can increase uncertainty over a country’s future trade policy and weaken economic sentiment”.

                                A summary of the report can be found here. Or more details here.

                                Members of the Joint Economic Forecast Project Group

                                Deutsches Institut für Wirtschaftsforschung e.V. [www.diw.de]

                                in co-operation with:

                                The Austrian Institute of Economic Research WIFO [www.wifo.ac.at]

                                ifo Institute – Leibniz Institute for Economic Research at the University of Munich[www.ifo.de]

                                in co-operation with:

                                Swiss Institute of Business Cycle Research (KOF), ETH Zurich [www.kof.ethz.ch]

                                Institut für Weltwirtschaft an der Universität Kiel [www.ifw-kiel.de]

                                Halle Institute for Economic Research (IWH) [www.iwh-halle.de]

                                RWI – Leibniz-Institut für Wirtschaftsforschung [www.rwi-essen.de]

                                in co-operation with:

                                Institute for Advanced Studies, Vienna [www.ihs.ac.at]

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                                Canadian PM Trudeau: High chance of win-win-win deal of NAFTA

                                  Canadian Prime Minister Justin Trudeau also expressed his optimism regarding NAFT renegotiation. He told reports that “we have a high chance of reaching a win-win-win deal for Canada, the United States and Mexico.”

                                  And, “with the pressures of the elections in Mexico, and the U.S. elections, if we could announce something at the Summit of the Americas, that would be great.”

                                  That is the April 13-14 summit of regional leaders of the Americans in Peru. And it’s rumored that there will be at least a symbolic NAFTA agreement reached for announcement during the summit.

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                                  Dollar drops further on retail sales miss, Empire state manufacturing index improved

                                    Dollar weakens notably against European majors in early US session after mixed economic data releases. Headline retail sales rose 0.1% in September versus expectation of 0.7% rise. Ex-auto sales even contracted -0.1% versus expectation of 0.5% rise.

                                    On the other hand, Empire state manufacturing index rose to 21.1, up from 19.0 and beat expectation of 20.4.

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                                    Low level Chinese official warned US blackmail won’t have an effect

                                      In response to news that Trump is considering to slap 25% tariffs on USD 200B in Chinese imports, China Foreign Ministry spokesman Geng Shuang warned that “US pressure and blackmail won’t have an effect.” And Geng added “China will inevitably take countermeasures and we will resolutely protect our legitimate rights.”

                                      It’s kind of boring rhetoric. And firstly, it’s said in a regular press briefing. Secondly, it’s by a low level official only. There’s no need to get too excited until we see exactly how China is going to retaliate.

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                                      Rising US treasury yields support Dollar

                                        Dollar’s strength in a relatively mixed markets today can be partly attributed to surging US yields.

                                        Five year yield is up 0.031 at 2.859. 2.887/2.941 resistance is within touching distance for FVX

                                        10 year yield is also up 0.029 at 2.966. 3.115 high is a bit far for TNX. But 3.000 now looks touchable.

                                        30 year yield is also up 0.023 at 3.111.

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                                        EU considering unscheduled summit in November to handle Brexit

                                          UK Brexit Minister Dominic Raab is meeting with EU chief Brexit negotiator Michel Barnier in Brussels today. Reuters reported that the EU is definitely having a real push for concluding the negotiation by October 18-19 EU summit. But it’s not optimistic base on current progress. In particular, there is no concrete proposal, from EU’s point of view, that would work on the Irish border issue.

                                          The next scheduled summit on December 13-14 is seen as too late by EU. That would leave too little time for ratification of an agreement before formal Brexit in March 2019. Also, that’s too hard for businesses to start implementing contingency plans. Hence, an idea of a interim, unscheduled summit in November to handle the issue is floating around. It’s seen as the last moment for the negotiations.

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