Fri, Apr 19, 2019 @ 05:19 GMT

Asian markets jump, Yen dives as China signals shift in monetary policy stance

    Asian markets are staging a strong rebound today. At the time of writing, Chines Shanghai Composite is up 1.2%, Hong Kong HSI is up 1.15%, Singapore Strait Times is up 0.7%. Nikkei lags behind, though, and is up 0.14% only. Yen is sold off broadly.

    A main trigger for the rebound is the shift in the policy stance of China’s central bank PBoC. The process of deleveraging could be slowed to ensure sufficient liquidity in the markets.

    In the statement released after Q2 regular meeting, PBoC noted challenges and uncertainties in international developments. And it emphasized the need in “anticipation and forward-looking pre-adjustment fine-tuning” on monetary policy. While being neutral, monetary policy has to “maintain adequate liquidity, and guide the reasonable scale of monetary credit and social financing.”

    Also, PBoC noted the need to use a variety of tools to “grasp the strength and rhythm of structural deleveraging”. The aims were to promote “promote stable and healthy economic development, stabilize market expectations, and guard against systemic financial risks.”

    Full release (in simplified Chinese).

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    EU pledged to guard against all protecionist actions

      Regarding trade tension with the US, EU leaders reiterated that the US steel and aluminium tariffs “cannot be justified on the grounds of national security”. And European Council ” fully supports the rebalancing measures, potential safeguard measures to protect our own markets, and the legal proceedings at the WTO, as decided on the initiative of the Commission”. EU also pledged to “respond to all actions of a clear protectionist nature”.

      European Council also “underlines the importance of preserving and deepening the rules-based multilateral system.” And it invites the European Commission to “propose a comprehensive approach to improving, together with like-minded partners, the functioning of the WTO in crucial areas such as (i) more flexible negotiations, (ii) new rules that address current challenges, including in the field of industrial subsidies, intellectual property and forced technology transfers, (iii) reduction of trade costs, (iv) a new approach to development, (v) more effective and transparent dispute settlement, including the Appellate Body, with a view to ensuring a level playing field, and (vi) strengthening the WTO as an institution, including in its transparency and surveillance function.”

      Full EU summit conclusion here.

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      Euro surges as EU leaders agreed on migration

        Euro jumps broadly today on news that the 28 EU leaders have agreed on the conclusions of the EU summit, including migration. There were some concerns earlier as Italy threatened to block all agreement if they requests on migration were not met. German Chancellor Angela Merkel, who’s under political pressure domestically, said that “overall, after an intensive discussion on the most challenging theme for the European Union, namely migration, it is a good signal that we agreed a common text.”

        In the summit conclusion, it’s written that “the European Council reconfirms that a precondition for a functioning EU policy relies on a comprehensive approach to migration which combines more effective control of the EU’s external borders, increased external action and the internal aspects, in line with our principles and values.”

        It noted that the measures since 2015 has brought down detected illegal border crossings into EU by 95%. And European Council pledged to “continue and reinforce this policy to prevent a return to the uncontrolled flows of 2015 and to further stem illegal migration on all existing and emerging routes.”

        Regarding the “Central Mediterranean Route”, EU pledged to “stand by Italy and other frontline Member States in this respect. It will step up its support for the Sahel region, the Libyan Coastguard, coastal and Southern communities, humane reception conditions, voluntary humanitarian returns, cooperation with other countries of origin and transit, as well as voluntary resettlement. All vessels operating in the Mediterranean must respect the applicable laws and not obstruct operations of the Libyan Coastguard.”

        Full conclusion here.

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        St. Louis Fed Bullard hearing full-throated angst about trade disputes

          St. Louis Fed President James Bullard said he’s “hearing full-throated angst” regarding escalating trade disputes across his district. He added that “all aspects of the economy are affected, but agriculture is certainly” being hit.

          He pointed to some suppliers using threat of new tariffs to raise prices, even though their businesses are not directly targeted. And to Bullard, “that shows you how uncertainty over trade policy can feed back” into business decision-making.”

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          Minneapolis Fed Kashkari comfortable to move interest rate to neutral

            Minneapolis Fed President Neel Kashkari said he’s “comfortable” with interest rate moving back to a “neutral rate”. That is, a level that’s “not stimulating the economy, but not also constraining the economy”. After that, Kashkari would prefer to ” just wait and see how inflation evolves.” And, Fed could the observe whether wage growth, inflation data support moving to a contractionary policy. But so far, according to Kashkari, the data “does not” support moving into contractionary policy.

            A question that Fed policymakers are facing the the lack on acceleration in inflation even though unemployment rate dropped to as low as 3.8% last month. It’s commonly believed that inflation would surge to pull unemployment rate back up to the natural rate level. Kashkari pointed out that “in a recession, economists tend to raise the natural rate of unemployment”. However, during recovery, we’re so reluctant to then lower it, and we end up being late lowering it in recovery.” Nonetheless, Kashkari said he’s not ready to believe that natural unemployment rate to be as low as 3.5% as that’s a big departure from historical data.

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            BoE Haldane: The vote for hike last week was hardly either surprising or radical

              BoE chief economist Andy Haldane said that his vote for rate hike last week was “hardly either surprising or radical”. He pointed out it was a “a full decade after monetary policy was first placed on an emergency setting”. Even with a 25bps hike in the Bank Rate to 0.75%, monetary conditions in the UK would remain ” extraordinarily accommodative by any historical metric”. And the aim for a hike was to “lower the risk of needing to tighten policy less gradually in future and cause a sharper adjustment in the economy.” He also noted he would even have voted for a hike back in May “had data on the economy held firm”.

              On the economy, he said “data on the consumer since the May MPC meeting has, virtually without exception, bounced back strongly”. And that includes “measures of retail spending, consumer confidence and consumer credit”. The underlying picture now appears to be one of “gently rising household spending”. This is being supported by highly accommodative credit conditions and “now-positive growth in inflation-adjusted wages”.

              In addition, Haldane also said that there may could still be data disappointments. But he added that “waiting for something to turn up is not a prudent strategy in life. And waiting for everything to turn up is certainly not a prudent strategy for monetary policy.”

              Overall pretty hawkish.

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              US initial jobless claims rose 9k to 227k. Q1 GDP revised down to 2.0%

                US initial jobless claims rose 9k to 227k in the week ended June 23, above expectation of 220k. Four week moving of initial claims rose 1k to 221k.

                Continuing claims dropped -21k to 1.705m in the week ended June 16. Four week moving average of continuing claims dropped -3.75k to 1.7195. This is the lowest level since December 1973.

                Full release here.

                Q1 GDP growth was finalized at 2.0%, revised own from 2.2% and missed expectation of 2.2%. GDP price index was revised up to 2.2%, from 1.9%.

                Full release here.

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                EU Malmstrom: To take provisional safeguard measures for steel industry starting mid-July

                  EU Trade Commissioner Cecilia Malmstrom said there could be provisional safeguard measures for the steel industry starting mid-July. The European Commission is still in process of investigation the measures needed after US steel and aluminum tariffs.

                  Malmstrom said “this is an investigation that will probably take until the end of the year before we can get the full picture.” But she emphasized that “we are seriously contemplating to have provisional measures in place, I would say mid-July could be some provisional measures. Exactly what form that will take is still under discussion.”

                  Separately, UK International Trade Minister Liam Fox said separately in the parliament that “we are looking to see what impact there may be from any diversion and whether we need to introduce safeguards to protect UK steel producers.” And, “the earliest time that is likely to happen would be early to mid-July. We are already seeing some movements that I think may justify that.” He added that “as soon as we have the evidence to be able to justify such a decision, we would take it.”

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                  Eurozone economic sentiment dropped sligthly by -0.2

                    Eurozone economic sentiment index (ESI) dropped a mere -0.2 to 112.3 in June, slightly above expectation of 112.1. Among the Eurozone countries, ESI rose 1.2 in Italy and 1.0 in France. however, there was a notable -1.8 decline in the Netherlands and -0.8 in Germany.

                    Eurozone industrial confidence was unchanged at 6.9, above expectation of 6.5. Services confidence was unchanged at 14.4, below expectation of 14.3. Consumer confidence was finalized at -0.5. The business climate indicator dropped -0.05 to 1.39, above expectation of 1.2.

                    EU economic sentiment index dropped -0.6 to 112.2. That’s mainly due to slight deterioration in the UK by -0.5.

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                    ECB: Rise in protectionism could be significant risks to global activity

                      In its monthly bulletin, ECB noted that “euro area economic expansion remains solid and broad-based across countries and sectors, despite recent weaker than expected data and indicators.” In the June Eurosystem macroeconomic projections, annual real GDP growth is projected to be at 2.1% in 2018, 1.9% in 2019 and 1.7% in 2020.. HICP inflation is projected to be at 1.7% in 2018, 2019 and 2020.

                      On the global scale, ECB noted, that “following a year of strong and highly synchronised growth, global momentum slowed somewhat in the early part of 2018.” While, growth is expected to rebound in near term, it warned that “the implementation of higher trade tariffs, amid ongoing discussions of further protectionist measures, represents a risk to the global economic outlook.”

                      The US steel and aluminium tariffs so far “affect only a small proportion of global trade and are expected to have only a small global macroeconomic effect”. However, “the risks of further protectionist steps have risen”. Firstly, US “threatened to increase tariffs on USD 50 billion of Chinese goods, to which China pledged to retaliate. Secondly, “the United States launched an investigation into the national security implications of automobile imports.”

                      ECB added that “expectations of an escalation in the dispute could affect investment decisions, with potential effects on global growth”. And, “risks to global activity from a widespread rise in protectionism could be significant.”

                      Full ECB monthly bulletin.

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                      German Gfk consumer sentiment unchanged at 10.7. Economic expectations tumbled on protectionist Trump

                        German Gfk consume climate for July (in June) was unchanged at 10.7, slightly above expectation of 10.6.

                        Among the components, there is notable 14.1pts drop in economic expectations from 37.4 to 23.3. GFK blamed US trade policy as the driver of the decline. It said in the statement that “the American President’s protectionist trade policy, which affects both Germany and other export-oriented countries such as China, casts further gloom over the economic forecast.” As a result, “economic experts are currently predicting that the economic dynamics of the global economy will decline.”

                        As an export nation, Germany is affected “naturally”. Gfk pointed to the study of German Institute for Economic Research (DIW) and the ifo Institute, which projected the German economy will “drop down a gear” this year. These two institutes lowered GDP forecasts by around half a percent to 1.9% and 1.8% respectively.

                        Nonetheless, income expectations improved from 54.2 to 57.6. Propensity to buy also rose from 55.9 to 56.3. The improvements offset deterioration in economic expectations.

                        Full release here.

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                        BoC Poloz sent mixed messages on July hike

                          BoC Governor Stephen Poloz’s speech yesterday caught much attention given that the central bank is due to meet again on July 11, just two weeks away. Expectations on a July hike was built up after the statement in May. But such expectations were put in doubt after a string of weaker than expected data. Escalation on trade tension with US also cloud the economic outlook. Overall, Poloz gave little hint on the chance of a July move with mixed messages with the post speech press conference.

                          On the hawkish side, Poloz said the shift in the language in May’s statement showed “increased confidence that the economy was performing as we expected, and that higher interest rates will indeed be warranted.” He also down played recent disappointing data. He said, “having the occasional data point that didn’t fit market expectations is not the sort of thing that throws that entire narrative off course. We are data dependent, not headline dependent.”

                          However, Poloz also emphasized that policy makers “cannot mechanically follow the rate path provided by our models because there is simply too much uncertainty in the world.” He pointed out that ” the degree to which uncertainty about trade policy is holding back business investment” is one of the certainties. And, the impact of new lending guidelines on housing markets is another one.

                          Poloz added that “as we approach our next interest rate decision, we are working to incorporate in our projections the effects of the recently announced US steel and aluminum tariffs, along with retaliatory measures, both in Canada and globally.” Also, BoC will analyze how the new lending guidelines are affecting the housing markets. These issues will ” figure prominently in our upcoming deliberations.” This is seen as the dovish side of the messages.

                          The upcoming data, April GDP and Business Outlook Survey will be highly critical on July BoC rate decision. In our view, should they disappoint, a July hike would be ruled out. Otherwise, it could be a 50/50 for BoC policy makers.

                          Here is the speech Let Me Be Clear: From Transparency to Trust and Understanding

                          Video of the speech:

                          Video of the press conference:

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                          Boston Fed Rosengren: Don’t let the economy run above capacity

                            Boston Fed President Eric Rosengren delivered a speech titled Ethics and Economics Making Cyclical Downturns Less Severe yesterday. There he argued that Fed shouldn’t let the economy “run above capacity” and “fall far below the sustainable unemployment rate”. He noted it’s the path that will “increase the probability of a longer recession-free period”.

                            It should be noted that unemployment rate, currently at 3.8% in May, is already quite far below Fed’s longer run rate at 4.5%. But where the real natural rate is, it’s still up for debate.

                            Also, Rosengren repeated his push for inflation range target. He said “one might allow the inflation target to rise within the range during periods of low real rates, thus providing more room for the funds rate to fall during an economic downturn.”

                            Full speech here.

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                            NASDAQ could be starting a medium term correction

                              NASDAQ suffered most among major US indices on Trump’s intention to curb foreign investments in US tech industry. This week’s downside acceleration is starting to argue that it’s in a medium term correction. For the near term, outlook will stay bearish as long as 7610.67 resistance holds. Focus is on 55 day EMA (now at 7460.17). Sustained trading below this EMA will add more weight to this bearish case.

                              Looking at the bigger picture, outlook isn’t too good neither with bearish divergence condition seen in weekly MACD and RSI. Long term trend line support at around 7125 is another line of defence. Firm break there would confirm that fall from 7806.60 is correcting whole up trend from 4209.76. In that case, we’ll likely see more downside to 38.2% retracement of 4209.76 to 7806.60 at 6432.60) before forming a bottom.


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                              DOW reversed initial rebound as Kudlow spoiled the party

                                US stocks reversed early gains and closed broadly lower overnight as White House economic advisor Larry Kudlow spoiled the party. NASDAQ led the losses again, dropping -116.55 pts or -1.54 % to close at 7445.08. DOW lost -165.52 pts or -0.69% to 24117.59 while S&P 500 decline -23.43 pts or -0.86% to 2699.63.

                                The initial rebound was fueled by lessened worries on US-China trade relationship. Trump announced to use a a strengthened national security review panel — the Committee on Foreign Investment in the United States (CFIUS) to guard against threats from Chinese investments in US technology companies. That’s a blanket measure that doesn’t single out China as the target, as confirmed by Trump’s own words, and comments by Treasury Secretary Steven Mnuchin.

                                The markets generally see that as Trump backing down to a softened approach on China. But such notion was rejected by Kudlow. In an interview, Kudlow said “the idea of softer or harder is really beside the point”. And, “That’s really not the intent. We’re not driving there.” Kudlow added that “it’s not meant to be harder or softer,” and “it’s going to be very comprehensive and very effective at protecting our technological family jewels in the United States.”

                                DOW’s rejection by 55 H EMA is clearly as sign of near term bearishness. It looked like trades had indeed made use of yesterday’s rebound to sell, rather than revering their position. There won’t be any bottoming as long as 24569.02 minor resistance holds.

                                Meanwhile, the close below 24247.84 support affirmed our bearish view on DOW. That is, rise from 23344.52 has completed at 25402.83 already. Deeper fall should be seen back to 23444.52. There is prospect of dropping beyond this support as the decline from 25402.83 could be the third leg of the corrective pattern fro 26616.71 high.

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                                RBNZ ketp OCR unchanged at 1.75%, can move up or down after considerable period

                                  RBNZ kept the Official Cash Rate unchanged at 1.75% at widely expected.It reiterated to “ensure the OCR is at an expansionary level for a considerable period.” Bias is neutral as it’s “well positioned to manage change in either direction – up or down – as necessary.”

                                  NZD/USD stays pressured after the release, partly also due to Dollar strength. NZD/USD is preassure 0.6779 key support level and there is no sign of bottoming so far.

                                  Full statement below.

                                  Statement by Reserve Bank Governor Adrian Orr:

                                  Tena koutou katoa, welcome all.

                                  The Official Cash Rate (OCR) will remain at 1.75 percent for now. However, we are well positioned to manage change in either direction – up or down – as necessary.

                                  Our outlook for the New Zealand economy, as detailed in the May Monetary Policy Statement, remains intact. Employment is around its sustainable level and consumer price inflation remains below the 2 percent mid-point of our target, necessitating continued supportive monetary policy for some time to come.

                                  Global economic growth is expected to support demand for our products and services. Global inflationary pressure is also expected to be higher but remain modest. This outlook has been tempered slightly by trade tensions in some major economies. Ongoing volatility in some emerging market economies continues.

                                  Domestically, ongoing spending and investment, by both households and government, is expected to support growth. However, the recent weaker GDP outturn implies marginally more spare capacity in the economy than we anticipated. The Government’s projected spending impulse is also slightly lower and later than anticipated.

                                  CPI inflation is likely to increase in the near term due to higher fuel prices. Beyond that, inflation is expected to gradually rise to our 2 percent annual target, resulting from capacity pressures.

                                  The best contribution we can make to maximising sustainable employment, and maintaining low and stable inflation, is to ensure the OCR is at an expansionary level for a considerable period.

                                  Meitaki, thanks.

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                                  Two auto groups blast Trump’s auto tariffs

                                    The Association of Global Automakers issued a statement titled “International Automakers Are Not A National Security Threat” today in objection to Trump’s intention to impose tariffs on import cars. The group warned that “these tariffs will harm today’s U.S. auto industry, which is comprised of fourteen auto manufacturers, all of which are global and 10 of which are international automakers.” And, “each of these companies employ American workers to produce cars in the United States, and tariffs will substantially increase prices for consumers.”

                                    Further it criticized that “there is no national security justification for taxing imports of vehicles and parts or discriminating between global companies headquartered here or in allied countries.” The group noted that “every U.S. production facility in the industry could be made available in a national emergency, and the 130,000 Americans who work directly for international automakers are no less patriotic or willing to serve their country in a time of crisis than any other American.”

                                    Finally, it warned that “if this investigation leads to tariffs, retaliation against U.S. exports is inevitable.” And, “substantial tariffs against major US auto exports have in fact already been announced, placing American auto workers on the front lines of this trade conflict.”

                                    Full statement here.

                                    Another group Alliance of Automobile Manufacturers also object to the tariff. It said in a statement that “tariffs are not the right approach” to achieve a level playing field. And, it urge reduction in trade barriers across the board and achieve “fairness” through “facilitating rather than inhibiting trade.” And, economic security of the auto industry and country would be strengthened through modernizing NAFTA and concluding a U.S.-EU Trade Pact.

                                    The statement also listed the bad effects of auto tariffs. There will be USD 45B in additional tax for consumers. a 25% tariffs would result in 1.5% decline in production and cause USD 195k works to lose jobs over 1-3 years or possibly longer. Job losses could surge further to 624k on retaliation by other countries. Auto sales will fall 1-2m units. It will cancel out tax reform benefits, reduce auto exports and harm other vital sectors of the economy. Besides, it will cede US leadership on future vehicle technologies.

                                    Full statement here.

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                                    Trump backs down on tough Chinese investment curb, revert to CFIUS

                                      The markets are responding positive to news that Trump is backing away from the rumored harsh measure on curbing Chinese investments in US technology companies. Instead, his administration will revert to existing laws, with an upgrade. Trump himself told reports that “it’s not just Chinese”. Treasury Secretary Steven Mnuchin also said that “we are not singling out China, but we will protect technology transfer to China as we will to other important areas.” Mnuchin also pledged that “we will have the necessary tools to protect investments, whether it’s China or anybody else.”

                                      The administration will relay on the newly strengthened Committee on Foreign Investment in the United States (CFIUS) to deal with the issue. The legislation to be used is called the Foreign Investment Risk Review Modernization Act. Trump said the upgraded CFIUS”will enhance our ability to protect the United States from new and evolving threats posed by foreign investment while also sustaining the strong, open investment environment to which our country is committed and which benefits our economy and our people.” And, “I have concluded that such legislation will provide additional tools to combat the predatory investment practices that threaten our critical technology leadership, national security, and future economic prosperity.”

                                      Trump originally considered invoking executive authority to impose and much tougher crackdown on Chinese investments. And there have been conflicting messages from White House trade adviser Peter Navarro and Mnuchin. But such an idea appeared to have drawn severe complaints from US businesses and Republicans, on the potential economic fallout.

                                      US stocks futures reversed initial losses and now point to flat open. In particular, NASDAQ will be an index to watch today for its tech compositions. Dollar also jumps on the news, ignoring mixed economic data.

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                                      UK Hammond to China: We’re a firm supporter of trade liberalization and your long-term trusted partner

                                        UK Chancellor of Exchequer Philip Hammond wrote in an article in China’s financial magazine Caixin, saying the the globalized UK is China’s long term partner. Hammond is visiting Beijing this week and he pledges to “convey a message to the outside world – as a firm supporter of trade liberalization and a free market, the United Kingdom is China’s long-term trusted partner.”

                                        Also, he wrote “Britain is committed to promoting free and open trade, and as Britain and its European cooperation partners form a new relationship, we will deepen our relations with other regions around the world.” And, there was “enormous development space” with cooperation with Chinese financial services businesses. Hammond also hailed that UK is an “ideal cooperation partner” to the Belt and Road initiative, and they would likely to ” grasp the unlimited opportunities” and “take a lead in its financing work.”

                                        This is Hammond’s article in simplified Chinese (gated). We’ve yet to find the English version.

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                                        BoE Carney warns of financial stability risks originating beyond the UK shores

                                          The Bank of England published the latest Financial Stability Report today. In the opening remarks of the press conference, BoE Governor Mark Carney warned that “events of the past few months are a reminder that many of the most important risks to financial stability in the United Kingdom originate beyond our shores.”

                                          The risks include “recent tightening in global financial conditions” that could be a “‘precursor to a much more substantial snapback in world interest rates”. There could be “more challenging bank, corporate and sovereign funding conditions.”

                                          Besides, “Rising protectionist sentiment could sap some of the current strength of the global economy and reduce the size of sustainable external imbalances.”

                                          In addition, “the complete set of mitigants to the risks of a cliff-edge Brexit also rely on the efforts of EU authorities”. Lastly, “cyber risks to UK financial services could originate from anywhere on the planet.”

                                          Here is Carney’s remarks.

                                          Here is the report.

                                          Below is the press conference.

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