Eurozone unemployment rose for the 5th consecutive month to 8.1% in August, matched expectations. Around 13.2m people are unemployment in Eurozone, up 251k over the month. EU Unemployment rate also rose to 7.4%. 15.6m people were unemployments, up 238k over the month.
NIESR said retail and hospitality would contribute significantly to UK growth in May. It forecasts monthly GDP growth of 1.5% in May and 0.9% in June. But it also warned that “Postponing the last step of re-opening may delay the recovery in arts and recreation by a few weeks but, if it helps avoid a third wave of infections, it could contribute to sustained recovery in the second half of the year.”
“Like March, April was a month of rapid growth in services output, as anticipated, driven by the re-opening of non-essential retail, outdoor hospitality and near-full attendance in schools. May will follow a similar pattern, as further restrictions are lifted, as will June if the final step of the roadmap goes to plan. But falls in construction and production, which were less affected by the 2021 lockdown, remind us that our focus should now be on the prospects for the economy in the second half of the year, after temporary re-opening effects have ceased to provide strong monthly increases.” Rory Macqueen Principal Economist – Macroeconomic Modelling and Forecasting.
Australian Dollar rises sharply after the hawkish twist in RBA statement. AUD/CAD’s strong break of 0.9460 resistance confirms resumption of whole rise from 0.8906. Near term outlook will now stay bullish as long as 0.9337 support holds. Sustained break of 61.8% projection of 0.8906 to 0.9460 from 0.9160 at 0.9511 will indicate further upside acceleration. Next target will be 100% projection at 0.9723.
More importantly, the current development affirms the case that medium term corrective fall from 0.9991 has completed at 0.8906. AUD/CAD could be ready to resume the whole up trend from 0.8058 (2020 low).
Minneapolis Fed President Neel Kashkari said in a Bloomberg interview, “if we see a few more jobs reports like the one we just got, then I would feel comfortable saying yeah, we are — maybe haven’t completely filled the hole that we’ve been in — but we’ve made a lot of progress, and now, then will be the time to start tapering our asset purchases.”
“I’m not convinced we were actually at maximum employment before the Covid shock hit us. So, that’s exactly why I want us to be really humble about declaring, ‘This is as good as it can get’,” he said.
He added that labor force participation and employment rates have to be “at least back to where they were before” and that’s a “reasonable thing for us to try to achieve.”
In the accounts of July monetary policy meeting, ECB noted that “members considered that the risks surrounding the euro area growth outlook could still be assessed as broadly balanced”. Though, there are uncertainties related to global factors “notably the threat of protectionism.”. Also, “risk of persistent heightened financial market volatility also continued to warrant monitoring.”
On inflation, there was “broad agreement” on chief economist Peter Praet’s assessment. Annual HICP inflation rose to 2.0% in June. And, “on the basis of current futures prices for oil, annual rates of headline inflation were likely to hover around the current level for the remainder of the year”. Muted underlying inflation “had been increasing from earlier lows”. Also, there was “increasing support” for domestic cost pressures from “ongoing strengthening in wage growth”. Beside, “members broadly shared the view that uncertainties surrounding the inflation outlook had been receding.”
Regarding communications, “members widely expressed satisfaction that the communication of the June monetary policy decisions had been well understood by financial markets.” And, the “enhanced forward guidance on the future path of policy rates had been effective in aligning market views”. That is, ECB interest rates would remain at current levels “at least through the summer of 2019”. It “struck an appropriate balance” between precision and flexibility and “was remarked that the Governing Council’s expectation was probabilistic in nature.”
WTO’s World Trade Outlook Indicator dropped to 96.3 in today’s update, down from 98.6, hitting the lowest level since March 2010 and stayed below baseline value of 100. The reading signals “below-trend trade expansion” into Q1. Weakness was driven by steep declines in export orders, international air freight, automobile production and sales, electronic components and agricultural raw materials.
WTO noted that “this sustained loss of momentum highlights the urgency of reducing trade tensions, which together with continued political risks and financial volatility could foreshadow a broader economic downturn.” And, trade growth is projected to slow to 3.7% in 2019 and could be revised lower if trade conditions continue to deteriorate. But “greater certainty and improvement in the policy environment could bring about a swift rebound in trade growth.”
RBA kept cash rate unchanged at 0.75% as widely expected. It noted in the statement that given “the long and variable lags in the transmission of monetary policy”, the central bank was on hold to monitor developments, “including in the labour market”.
Though, it reiterated that due to both global and domestic factors, ” it was reasonable to expect that an extended period of low interest rates will be required”. RBA is also “prepared to ease monetary policy further” if needed.
Full statement below.
Statement by Philip Lowe, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.
The outlook for the global economy remains reasonable. While the risks are still tilted to the downside, some of these risks have lessened recently. The US–China trade and technology disputes continue to affect international trade flows and investment as businesses scale back spending plans because of the uncertainty. At the same time, in most advanced economies unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.
Interest rates are very low around the world and a number of central banks have eased monetary policy over recent months in response to the downside risks and subdued inflation. Expectations of further monetary easing have generally been scaled back. Financial market sentiment has continued to improve and long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is at the lower end of its range over recent times.
After a soft patch in the second half of last year, the Australian economy appears to have reached a gentle turning point. The central scenario is for growth to pick up gradually to around 3 per cent in 2021. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending. Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.
The unemployment rate has been steady at around 5¼ per cent over recent months. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth is subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
Inflation is expected to pick up, but to do so only gradually. In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021.
There are further signs of a turnaround in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased recently. In contrast, new dwelling activity is still declining and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
The easing of monetary policy this year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries. It has also boosted asset prices, which in time should lead to increased spending, including on residential construction. Lower mortgage rates are also boosting aggregate household disposable income, which, in time, will boost household spending.
Given these effects of lower interest rates and the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting while it continues to monitor developments, including in the labour market. The Board also agreed that due to both global and domestic factors, it was reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.
BoC Governor Tiff Macklem said yesterday that there’s “a bit more persistence” in inflation than policy makers previously thought. But he added, ” I think there are good reasons to believe that they are temporary,”
“Our job as a central bank is to make sure that one-off increase in prices doesn’t become ongoing inflation… What we’re really looking for is to see any signs of spreading,” he added, noting that medium- to longer-term measures of expected inflation had not risen.
He also pointed to the “frictions” in the labor market, which took longer to work through. “We’ve never reopened an economy before. And I think what we’re seeing is reopening an economy is a lot more complicated than closing one,” he said.
US Treasury Secretary Janet Yellen told said over the weekend the job market is “stalling”. “We’re in a deep hole with respect to the job market and a long way to dig out,” she added. It could take until 2025 for the US market to recovery without adequate support. But the administration’s USD 1.9T stimulus “will generate will create demand for workers.”
“As Treasury secretary, I have to worry about all of the risks to the economy,” Yellen added. “And the most important risk is that we leave workers and communities scarred by the pandemic and the economic toll that it’s taken, that we don’t do enough to address the pandemic and the public health issues, that we don’t get our kids back to school.”
St. Louis Fed President James Bullard, a known dove, told CNBC that “we should get lower here,” on interest rates. He added “The yield curve is inverted. We’ve got one of the higher rates on the whole yield curve. That is not a good place to be”.
Bullard also asked “How much risk are we facing from the fact that we’ve got a global manufacturing contraction going on and possibly more to come?”. And, “I’d like to take out more insurance against that downside risk.”
Cleveland Fed President Loretta Mester said she’s approach next month’s FOMC meeting with an open mind. She added if the economy continues where it is, I would probably say we should keep things the way they are.” Though, she is “very attuned to the downside risks to this economy and I want to make sure we’re always focused on our dual-mandate goals.”
Ifo lowered Germany growth forecast for 2021 sharply from 3.3% to 2.5%. But 2022 growth forecast was upgraded by 0.8% to 5.1%.
“The strong recovery from the coronavirus crisis, originally expected for the summer, is further postponed,” Ifo chief economist Timo Wollmershaeuser said.
“Industrial production is currently shrinking as a result of supply bottlenecks for important intermediate goods. At the same time, service providers are recovering strongly from the coronavirus crisis.”
Brent crude oil surged above 70 yesterday partly as USD depreciated. But more importantly, Trump’s decision on Syria in imminent as geopolitical tensions in the Middle East escalates.
Similar picture is seen in WTI crude oil. As seen in the continuation chart, WTI drew strong support from 55 day EMA and rebounded, closing at 65.51 yesterday. 66.66 high is now back in radar. Based on current momentum, this resistance could be taken out very soon.
More importantly, 66.66 is close to long term fibonacci resistance of 50% retracement of 107.68 to 26.05 at 66.87. A strong break of the level will pave the way to 61.8% retracement at 76.50 and above. And that might give USD/CAD another push down towards 1.2 handle.
Minutes of January 26-27 FOMC meeting noted that economic projection prepared by the staff for implied a “considerably stronger outlook for activity in 2021 relative to the December forecast”, incorporating the impact of additional fiscal support. Real GDP growth would “outpace that of potential over this period, leading to a considerable further decline in the unemployment rate”.
Also, “participants remarked that the prospect of an effective vaccine program, the recently enacted fiscal support, and the potential for additional fiscal actions had led them to judge that the medium-term outlook had improved”.
Nevertheless, “the economy remained far from the Committee’s longer-run goals and that the path ahead remained highly uncertain”. “It was likely to take some time for substantial further progress to be achieved.”
On inflation, “many participants stressed the importance of distinguishing between such one-time changes in relative prices and changes in the underlying trend for inflation,” the minutes said. Such moves “could temporarily raise measured inflation but would be unlikely to have a lasting effect.”
Here is an update on our EUR/JPY short (sold at 128.60) position as noted in prior comment.
EUR/JPY dives through 128.49 to as low as 128.19 so far, indicating resumption of fall from 131.97. We maintain the view that corrective rebound from 124.61 has completed with three waves up to 131.97. Fall from 131.97 should target 127.13 support first. And break will confirm our view and target a test on 124.61 low next.
Based on this view, we’ll hold EUR/JPY short, and lower the stop to 129.05, slightly above 129.00 minor resistance. While 127.13 is the first target, we’re actually expecting at least a test on 124.61. And, whether the larger fall from 137.49 will extend through 124.08 key support remains to be assessed.
Silver tumbled along with Gold in ultra thin Asian open, and hit as low as 22.36. While it quickly rebounded, near term outlook will stay bearish as long as 25.99 resistance holds. Prior rejection by 55 day EMA also affirmed near term bearishness. Fall from 30.07 is seen as corrective whole up trend from 11.67 low.
There are various interpretations on the price actions. One way to see them is that a head and shoulder top was formed (ls: 29.84; head: 30.07; rs: 28.73). But in any case, firm break of 100% projection of 30.07 to 23.76 from 28.73 at 22.42 will pave the way to 161.8% projection at 18.52. That is close to 61.8% retracement of 11.67 to 30.07 at 18.69. That’s probably the level where Silver would complete the correction.
Entering into US session, Australian Dollar remains the strongest one for today, as boosted by better than expected Chinese data. The data further suggests stabilization of slowdown, which is an important factor for the easing global economic risks. While the optimism is not so much reflected in the stock markets, bonds are clearly responding well. German 10-year yield is is now back at 0.08 level while US 10-year yield breaches 2.6 handle.
Staying in the currency markets, Euro is the second strongest for today. German government halved 2019 growth forecast to just 0.5%. But it’s largely shrugged off. The key is, Eurozone economy as a whole will certainly be benefited if China could regain some momentum. Canadian Dollar is the third strongest, but could be dragged down by CPI release. On the other hand, New Zealand Dollar is the weakest one as poor Q1 CPI reading raises the chance of an imminent RBNZ cut at next meeting. Swiss Franc and Dollar are the next weakest. Sterling is mixed after slightly lower than expected March CPI.
In Europe, currently:
- FTSE is down -0.11%.
- DAX is up 0.32%.
- CAC is up 0.28%.
- German 10-year yield is up 0.0111 at 0.082.
Earlier in Asia:
- Nikkei rose 0.25%.
- Hong Kong HSI dropped -0.02%.
- China Shanghai SSE rose 0.29%.
- Singapore Strait Times rose 0.50%.
- Japan 10-year JGB yield rose 0.01 to -0.01.
While Swiss Franc has been under heavy selling in early part of European session, selling focus is possibly being turned the Japanese Yen. CHF/JPY is recovering after breaching 116.20 support to 116.14 briefly. While there still some way to day, focus will be back on 117.07 minor resistance. Break there will indicate successful defending of 116.20 support, and bring strong rebound back towards 118.84 high. But of course, firm break of 116.20 will indicate near term reversal and turn outlook bearish for 113.73 support. That could trigger another round of selloff in Swiss Franc.
As for Yen crosses, AUD/JPY will continue to be one of the leaders. Further rise is expected as long as 82.89 minor support holds. The up trend from 59.89 low is in progress for 61.8% projection of 59.89 to 78.46 from 73.13 at 84.60. Firm break there will pave the way to 100% projection at 91.70.
Markets are generally staying in risk-off mode today as there is no sign of de-escalation in Russia-Ukraine situation. Nikkei tumbled sharply by -616.49 pts, or -2.23%, to close at 27079.59.
Near term bearishness in Nikkei remains after rejection by 55 day EMA. The choppy decline from 30795.77 is in progress for retesting 26044.52 low. But, the major line of defense is at 38.2% retracement of 16358.9 to 30795.77 at 25280.61. We’d expect strong support from there to bring rebound.
However, the rejection by 55 week EMA is also a medium term bearish sign, which argues that the fall from 30795.77, as a correction to the up trend from 16358.19, might last longer than originally expected. Indeed, sustained break of 25280.61 could send Nikkei further to the zone between 50% retracement at 23576.98 and 61.8% retracement at 21873.34 before bottoming.
DOW gaps up on coronavirus vaccine optimism and is currently trading up more than 3.5%, or 800 pts. The development invalidates our bearish view, with head and shoulder neck line and 55 H EMA taken out decisively. Rebound from 18213.65 is likely still in progress. Further rise should be seen back to 24764.77 for the near term. Next focus is 61.8% retracement of 29568.57 to 18213.65 at 25230.99.
New Zealand merchandise terms of trade rose 3.3% in Q2, well above expectation of 0.3%. Export prices for goods rose 8.3% while import prices rose 4.8%. Export volume for goods rose 2.9% while import volumes rose 4.4%. Export values rose 9.2% and import values rose 4.6%. Services terms of trade dropped -8.5%. Services export prices fell -1.6% while import prices rose 7.7%.
Terms of trade measures New Zealand’s purchasing power for import goods, based on the prices it receives for exports. An increase in terms of trade means that New Zealand can buy more import goods for the same quantity of exports.