US CPI slowed to 1.7% yoy in August, down from 1.8% and matched expectations. Core CPI, on the other hand, accelerated to 2.4% yoy, up from 2.2% yoy and beat expectation of 2.3% yoy.
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China retaliates US steel tariffs, not the US 50b IP tariffs yet
China’s Ministry of Commerce announced measures countering US tariffs. But first thing first. The measures announced are in response to Trump’s steel and aluminum tariffs, not the USD 50b section 301 tariffs announced overnight. China also said it could take legal action regarding the steel tariffs under WTO rules. So far, it appears that China is trying to play by the book.
The MOFCOM proposed a list of 128 US imports with total value at over USD 3b in 2017. A 15% tariff will be imposed on the first group including wines, fresh fruit, dried fruit and nuts, steel pipes, modified ethanol, and ginseng. Then a 25% tariff could be imposed on the second group, including pork and recycled aluminium goods if both sides failed to reach a resolution through talks.
Here is the statement (in simplified Chinese if you’re interested).
Some analysts try to compare US tariffs on USD 50b of China import, and China tariff on USD 3b of American imports. But that is wrong. We’ll repeat here that the MOFCOM’s announcement was in response to the steel and aluminum tariff. And, depending on the data source, China was either the 10th or 11th largest steel importer to the US, contributing to less than 3%.
That is, China hasn’t showed their hands regarding yesterday’s announcement by Trump yet.
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ECB uncertain if US-China trade truce would lead to significant de-escalation of trade tensions
In the Monthly Bulletin released today, ECB warned that “signs of moderating momentum are emerging” in the global economy. And “activity is expected to decelerate in 2019 and remain steady thereafter.” And that “reflects the projected cyclical slowdown across advanced economies and in China.”
The central bank also noted that “The intensification of trade tensions between the United States and China should weigh on activity in both countries. While the global impact is still judged to be relatively limited, heightened uncertainty about future trade relations may adversely affect confidence and investment.”
ECB added that “While the temporary truce between the United States and China sent a positive signal, there remains considerable uncertainty as to whether the talks will lead to a significant de-escalation of US-China trade tensions.”
For Eurozone economy, ECB noted the slowdown in 2018 has been “driven largely by external factors, in particular the weakness in external demand.” And, “much like the strengthening of growth in 2017, the slowdown in 2018 has been driven by net exports. Trade dynamics have been normalising as global growth has fallen back towards potential levels.
Nevertheless, ECB also said “All in all, the recent slowdown in growth has not, thus far, called into question the fundamentals of the current economic expansion.”
Full ECB monthly bulletin here.
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High-level US-China trade talks to resume next week, aiming at a deal in April
It’s reported, without confirmation from named officials, that high-level US-China trade talk are going to resume week in a push to close the deal by the end of April. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin would fly to Beijing in the week of March 25 to meet Chinese Vice Premier Liu He again. The following week, Liu He is expected to fly to Washington to continue the negotiations.
At the same time, it’s reported that China is pushing back against some of the American demands on core issues. A key reason is the lack of assurance from Trump on lifting tariffs imposed. China is also said to be stepping back from the initial agreements over pharmaceutical data protection, patent linkages and refused to give ground on data-service issues. Nevertheless, some officials on both sides are seeing the “back-and-froth” as something expected in typical negotiations.
The date for signing a trade deal between the countries has been pushed back recently. While it’s still possible to happen in April, the more probable occasion would be as sideline of G20 summit in Japan in June. Meanwhile, in his typical rhetorics, Trump said at the White House yesterday that “talks with China are going very well”.
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Japan GDP rebounded with weak momentum, but avoided recession
Japan GDP grew 0.3% qoq in Q3, rebounding from Q3’s -0.6% qoq contraction. The good news is that Japan avoided a technical recession of two consecutive quarters of contraction. But growth was disappointing and missed expectation of 0.4% qoq. GDP deflator dropped -0.3% yoy, slightly better than expectation of -0.4% yoy.
Japanese Economy Minister Toshimitsu Motegi said in a statement that “the economy is in gradual recovery as growth is led by private demand”. However, “China-bound exports of information-related materials have weakened as the Chinese economy slowed”. He added that the government needs to “monitor uncertainty over global economic outlook including Chinese economy as well as fluctuations in financial markets.”
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Bank of France: Q4 GDP to growth 0.4%
Bank of France manufacturing business sentiment indicator dropped to 103 in October, down from 104. The slowdown was “essentially because of a sluggish automobile sector.”
Services business sentiment indicator was unchanged at 102. Construction business sentiment indicator rose to 106, up from 105. “Construction sector activity grew significantly, for both structural and finishing works.”
Bank of France said according to the monthly index of business activity, GDP should grow 0.4% in Q4.
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Australia NAB business condition and confidence dropped
Australia NAB Business Confidence dropped to 1 in August, down from 4. Business Condition dropped to 1, down from 3. Both readings are well below long-run averages. And the outcome suggests that “momentum in the business sector continues to weaken, with both confidence and conditions well below the levels seen in 2018”. NAB added that the results are “in line with the weak outcome for the private sector in the Q2 national accounts, prompting us to review our outlook for interest rates”.
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US trading halted for 15 minutes as circuit breaker triggered
US stocks gap lower at open, with DOW down more than -1800 pts. S&P 500 also loses -7%. The massive sell-off triggered a key market circuit breaker in morning trading. Trading is halted for minutes at 13:35GMT.
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ANZ business confidence dropped to -44.3, two more RBNZ cuts expected this year
New Zealand ANZ Business Confidence dropped to -44.3 in July, down from -38.1. That’s also the worst reading sine August 2018. Among the sectors, agriculture scored worse at -78.5 while retail was best at -30.4. Activity Outlook Index dropped to 5.0, down from 8.0. Construction outlook was worst at -33.3 while services was best at 11.2.
ANZ noted: “The outlook for the economy is deteriorating. Despite generally good commodity prices and interest rates at record lows, the headwinds of a global slowdown and credit and cost constraints appear to be winning out. With the inflation outlook not consistent with the target midpoint we expect two more OCR cuts this year, helping the economy to find its feet once more.”
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A look at 10- and 30-year yield after yesteday’s sharp fall
The sharp fall in 10 year yield yesterday, down -0.021 to close at 2.936, is in line with our view that TNX has topped out in near term. And we’ll likely see more downside in near term. First line of defence is at 55 day EMA (now at 2.827). But as mentioned in the weekly report, if fall from 3.035 is correcting the five wave sequence from 2.033, then it could drop further to 2.717 support before completion. We’ll continue to see how it’s playing out given the number of important events in US this week, including FOMC, ISMs and NFP. But after all, having some consolidations before another take on key resistance of 2013 high at 3.036 is not unreasonable.
30 year yield’s sharp fall also confirmed short term topping at 3.219 after failing 3.221 near term resistance. For now TYX would dip lower back to 55 day EMA (now at 3.062). Or it would have another take on 50% retracement of 2.651 to 3.221 at 2.936.
Meanwhile, we’d like to point out again that while there is some downside for yields, we’re not expecting it to drag down the Dollar. Instead, they might just give no support to the greenback.
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Fed raised federal fund rates by 25bps to 1.5-1.75%
Fed raised federal fund rates by 25bps to 1.5-1.75%. Statement below.
New economic projections here.
FOMC Statement Mar 21, 2017
Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.
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Japan Tankan: Large manufacturing sentiments deteriorated for another quarter
The BoJ’s quarterly Tankan survey showed notable worsening in manufacturer’s sentiments in Q2.
The Larger Manufacturing Index dropped to 21, down from 24 and missed expectation of 23. It’s also a second straight quarterly decline from Q4’s 26, the first time since 2012. Large Manufacturer outlook rose to 21, up from 20.
Large Non-Manufacturing index rose to 24, up from 23, beat expectation of 23. Large Non-Manufacturing Outlook rose to 21, up from 20 but missed expectation of 22.
Large all industry capex rose 13.6%, beat expectation of 0.2%.
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Bundesbank: German economy regaining some lost momentum
Bundesbank said in the latest monthly report released today that the German economy is regaining some momentum currently. It noted that “the economy has likely showed better momentum in the spring than at the start of the year.” Nonetheless ” it is unlikely that the high growth rates of the past year will be repeated, manufacturing was once again the key economic driving force.”
The report noted that car production increased sharply with pharmaceutical products. But intermediates goods remained weak. Household consumption remained a cornerstone for growth. Government consumption also rebounded. Also, “activity in the booming construction sector likely increased significantly, despite capacity constraints.”
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BoC stands pat, drops no hint on rate hike, USD/CAD spikes higher
Canadian Dollar weakens notably after BoC kept overnight rate unchanged at 1.75% as widely expected. The central bank assessed that economic developments were broadly in line with the April MPR, including growth and inflation.
Also, recent slowdown in late 2018 and 2019 was “temporary” even though “global trade risks have increased”. Thus, “degree of accommodation being provided by the current policy interest rate remains appropriate.”
BoC also sounded noncommittal to any future rate move. It just noted that “Governing Council will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment”. That is, for the near term, there is still no chance of a rate hike.
USD/CAD spikes higher to 1.3546 after the release, through 1.3521 resistance. But there is no follow through buying yet. Further rise is in favor as long as 1.3429 support holds.
Full statement here:
Bank of Canada maintains overnight rate target at 1 ¾ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.
Recent Canadian economic data are in line with the projections in the Bank’s April Monetary Policy Report (MPR), with accumulating evidence that the slowdown in late 2018 and early 2019 is being followed by a pickup starting in the second quarter. The oil sector is beginning to recover as production increases and prices remain above recent lows. Meanwhile, housing market indicators point to a more stable national market, albeit with continued weakness in some regions.
Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary. Recent data support a pickup in both consumer spending and exports in the second quarter, and it appears that overall growth in business investment has firmed. That said, inventories rose sharply in the first quarter, which may dampen production growth in coming months.
The global economy is also evolving largely as expected since April, although the recent escalation of trade conflicts is heightening uncertainty about economic prospects. In addition, trade restrictions introduced by China are having direct effects on Canadian exports. In contrast, the removal of steel and aluminum tariffs and increasing prospects for the ratification of CUSMA will have positive implications for Canadian exports and investment.
Inflation has evolved in line with the Bank’s April projection. The Bank expects CPI inflation to remain around the 2 per cent target in the coming months. Core inflation measures all remain close to 2 per cent.
Overall, recent data have reinforced Governing Council’s view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased. In this context, the degree of accommodation being provided by the current policy interest rate remains appropriate. In taking future policy decisions, Governing Council will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment.
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Dollar falls as core CPI slowed more than expected, ignore strong job data
Dollar suffers renewed sell after core consumer came in lower than expected. Headline CPI rose 0.2% mom, 2.7% yoy versus expectation of 0.1% mom, 2.7% yoy. That slowed from prior month’s 0.2% mom, 2.9% yoy. Core CPI rose 0.1% mom, 2.2%, missed expectation of 0.2% mom, 2.4% yoy. Also it missed expectation of 0.2% mom, 2.4% yoy.
Job data was solid though. Initial jobless claims dropped -1k to 204k in the week ended September 8. That’s the new lowest since December 6 1969. Four-week moving average of initial claims dropped -2k to 208k, lowest since December 6, 1969. Continuing claims dropped -15k to 1.696m, lowest since December 1, 1973. Four week moving average of continuing claims dropped -8.25k to 1.71125m., lowest since November 24, 1973.
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Into US session: Dollar refusing to give up despite selloff, stocks recovering
The forex markets are rather mixed today. Dollar extended yesterday’s selloff, on free falling treasury yields and after St. Louis Fed James Bullard became the first policymaker calling for a rate cut. But the greenback is not totally giving up yet. EUR/USD is struggling around 1.1263 resistance, AUD/USD around 0.6988 resistance and USD/CAD around 1.3429 support. There is no follow through selling in Dollar yet.
Australian Dollar is currently joint strongest with Canadian. RBA cut interest rate to 1.25% and Governor Philip Lowe deliberately noted that more rate cuts are on the table. But Aussie just shrugged them off. Euro is next strongest but upside is capped by mixed economic data. Eurozone CPI slowed more than expected to 1.2% yoy in May but unemployment rate dropped to record low at 7.6% in April. Sterling is also firm even though UK PMI construction dropped back into contraction region. Swiss Franc and Yen are the weakest ones for today, as European indices are trading higher together DOW futures.
In Europe, currently:
- FTSE is up 0.25%.
- DAX is up 1.14%.
- CAC is up 0.28%.
- German 10-year yield is down -0.0121 at -0.211.
Earlier in Asia:
- Nikkei dropped -0.01%.
- Hong Kong HSI dropped -0.49%.
- China Shanghai SSE dropped -0.96%.
- Singapore Strait Times rose 0.61%.
- Japan 10-year JGB yield dropped -0.074 to -0.10.
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Philly Fed manufacturing business outlook jumped to 17
Philadelphia Fed Manufacturing Business Outlook jumped to 17.0 in January, up from revised 2.4 in December, beat expectation of 3.7. The percentage of the firms reporting increases (39 percent) was greater than the percentage reporting decreases (22 percent).
All of the survey’s broad indicators remained positive and increased from their readings in December. The survey’s future indexes indicate that respondents continue to expect growth over the next six months.
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Fed Daly: No material change to US economy due to coronavirus
San Francisco Fed President Mary Daly told CNBC that monetary policy is now in a “really good position”. Uncertainties like US-China trade tensions receded while hard Brexit was avoided. The three rate cuts last year “puts the US economy in a good place to weather these storms” like China’s coronavirus.
She added that China’s coronavirus “bears further watching and of course we are keeping a close eye, but right now I am not looking for this to do anything material to our economy.” She expected China to has a “couple of quarters perhaps of weaker growth but then bounce back once this has been resolved and then that to have a temporary impact on the US economy and go away once things have been resolved”.
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SNB kept interest rate at -0.75%, downgrades inflation forecast
SNB left “expansionary” monetary policy unchanged as widely expected. Sight deposit rate is held at -0.75%. Three-month Libor target range is also kept at -1.25% to -0.25%. The central bank maintained the pledge to “remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration.”
While Swiss Franc has depreciated slightly since December meeting, SNB said “it is still highly valued” and the currency markets situation remain “fragile”. Thus, negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential. These measures keep the attractiveness of Swiss franc investments low and reduce upward pressure on the currency.
Inflation forecast in 2019 is downgraded to 0.3%, down from December projection of 0.5%. For 2020, inflation is projected to be at 0.6%, down from 1.0%. For 2020, inflation is projected to pick up to 1.2%. The forecasts are based on keeping three-month Libor rate at -0.75% over the entire horizon. On growth, SNB expects GDP to grow by around 1.5% in 2019 as a whole.
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China to exemption tariffs on 697 lines of US imports
China’s Customs Tariff Commission of the State Council. announced today tariffs exemptions on 697 lines of US imports, as fulfilment of the US-China trade deal phase one. The products include farm and energy, such as pork, beef, soybeans, liquefied natural gas and crude oil. Dozens of types of medical equipment are also included.
Importers can apply for tariffs exemptions starting from march 2. Such exemptions would only be effective for one year, subject to an approval process. China said that these exemptions are “to support enterprises to import goods from the US based upon their business considerations.”