UK PMI manufacturing finalized at 57.5, boost from last-minute Brexit preparations

    UK PMI Manufacturing was finalized at 57.5 in December, up from November’s 55.6. That’s also a 37-month high. Markit said there were near-record increases in input stocks and purchasing activity. However, strong demand and transport issues stretched supply chains.

    Rob Dobson, Director at IHS Markit: “The Manufacturing PMI rose to its highest level in over three years in December, mainly reflecting a boost from last-minute preparations before the end of the Brexit transition period. Customers, especially those based in the EU, brought forward purchases, boosting sales temporarily. It seems likely that this boost will reverse in the opening months of 2021, making for a weak start to the year. Note also that the December PMI data were collected prior to the border closures, which will have led to further logistics and production disruptions for many companies.”

    Full release here.

     

    BoC Macklem: Further QE adjustments will be gradual and deliberated

      BoC Governor Tiff Macklem told the House of Commons Standing Committee on Finance that “the economy is making good progress”. But “a complete recovery will still take some time” with the third wave of coronavirus a new set back. BoC remains “steadfast in our commitment to support Canadian households and businesses through the full length of the recovery”.

      With vaccinations progressing, he added, “we are expecting strong consumption-led growth in the second half of this year”. Inflation would increase over the next couple of months largely reflecting “base-year effects” and rise is gasoline prices. But inflation would only return to target as slack is absorbed in H2 of 2022.

      The reduction of weekly QE purchase from CAD 4B to CAD 3B reflects the progress made toward economic recovery. Macklem noted, “further adjustments to the pace of net purchases will be guided by our ongoing assessment of the strength and durability of the economic recovery”. Also, “further adjustments to our QE program will be gradual, and we will be deliberate in both our assessment of incoming data and the communication of our analysis.”

      Full remarks here.

      UK retail sales dropped -5.1% in March, record contraction

        In quantity term, UK retail sales dropped sharply by -5.1% mom in March, a record contraction since the series began. Ex-fuel sales dropped -3.7% mom. Over the year, total sales dropped -5.8% yoy while ex-fuel sales dropped -4.1% yoy. In the three months to March, retail sales volume dropped -1.6% 3mo3m. Sales at food stores rose in March, with slight increase in non-store retailing. But non-food stores sales, and fuels recorded steep decline.

        Full release here.

        Into US session: Euro strongest as Italian budget deal made, Dollar soft ahead of FOMC

          Entering US session, Euro is trading as the strongest one today. European Commission finally agreed with Italy on its 2019 budget, thus the so called “Excessive Deficit Procedure”. Italian 10 year yield tumble to as low as 2.778. German-Italian spread also narrowed to 253. Swiss Franc is, as a result of relief rally in European stocks too, trading as the weakest one for today. Dollar is the second weakest as markets await FOMC rate decision.

          In short, Fed is widely expected to raise federal funds rate by 25bps to 2.25-2.50% today. The question is on the rate path in 2019 after all the political pressures Fed policymakers faced. The new economic projections will provide the key guidance to market expectations. More on the projections here.

          Also, here are some suggested readings on FOMC:

          In European markets, at the time of writing:

          • FTSE is up 1.00%
          • DAX is up 0.73%
          • CAC is up 0.72%
          • German 10 year yield is down -0.004 at 0.243
          • Italian 10 year yield is down -0.169 at 2.778

          Earlier in Asia:

          • Nikkei dropped -0.60%
          • Hong Kong HSI rose 0.20%
          • China Shanghai SSE dropped -1.05%
          • Singapore Strait Times rose 0.43%
          • Japan 10 year JGB yield rose 0.0048 to 0.033

          RBA’s Bullock: Inflation increasingly domestic and lengthy to control

            RBA Governor Michele Bullock, in a speech, emphasized the changing nature of the inflation challenge facing Australia, noting its increasing shift towards being “homegrown and demand driven.” This distinction is crucial as it significantly influences the central bank’s policy response.

            Bullock differentiated between inflation driven by global supply disruptions, over which monetary policy has limited influence, and inflation stemming from domestic demand exceeding the economy’s potential. In the case of the latter, she argues, “a more substantial monetary policy tightening is the right response.”

            The Governor also highlighted three key indicators supporting the demand-driven nature of current inflation: Firstly, the broad-based nature of inflation across various sectors; secondly, the underpinning of inflation by domestic demand, particularly in services; and thirdly, the continued limited spare capacity in the economy, as evident in high rates of labor utilization.

            Regarding the timeframe for bringing inflation back to the target range, Bullock suggested that while supply-side issues eased relatively quickly, reducing inflation from 8% to 5.5% within three quarters, the demand-driven component would take longer to address. She projected that it might take another two years for inflation to fall below 3%.

            Full speech of RBA Bullock here.

            NZ unemployment rate unchanged at 3.2%, high wage inflation

              New Zealand employment rose 0.1% qoq in Q1, matched expectations. However, total actual weekly hours worked dropped slightly by -0.2%. Unemployment rate was unchanged at 3.2%, slightly above expectation of 3.1%. Participation rate dropped -0.1% to 70.9%.

              Labor cost index rose 0.7% qoq, matched expectations. All sectors wage inflation rose 0.8% qoq. Annual rate jumped from 2.6% to 3.0%. “Wage inflation is at its highest level since the March 2009 quarter,” business prices delivery manager Bryan Downes said.

              Full release here.

              Gold breaches key resistance, resuming up trend?

                Gold’s rally today suggests that larger up trend is possibly resuming. Sustained trading above 1765.25 resistance will confirm and pave they way to 61.8% projection of 1451.16 to 1765.25 from 1670.66 at 1864.76. However, break of 1747.31 minor support will suggest rejection by 1765.25 resistance. In this case, consolidation pattern from 1765.25 could extend with another falling leg before completion.

                Germany Gfk consumer sentiment rose to 0.9, defying increasing inflation

                  Germany Gfk consumer sentiment for November rose to 0.9, up from 0.4, above expectation of -0.4. For October, economic expectations dropped from 48.5 to 46.6. Income expectations dropped sharply from 37.4 to 23.3. Propensity to buy rose from 13.4 to 19.4.

                  “This second increase to consumer sentiment in a row defies increasing inflation. German citizens are clearly expecting further price increases. That is why they consider to make purchases, in order to avoid even higher prices”, explains Rolf BĂĽrkl, GfK consumer expert. “If the surge in prices continues, it would put a strain on consumer sentiment and a fundamental recovery would likely be further delayed.”

                  Full release here.

                  Oil prices surge as Saudi Arabia pledges additional production cut

                    Oil prices shot up in response to an announcement from Saudi Arabia, the world’s leading exporter, to slash production by an additional 1 million barrels per day starting in July. This voluntary reduction from the Saudis comes on the heels of an agreement by OPEC and their allies, including Russia, to curtail supply into 2024.

                    Collectively referred to as OPEC+, this group accounts for approximately 40% of the world’s crude oil production. The group currently has cuts of 3.66 million barrels per day in place, which translates to about 3.6% of global demand.

                    The latest move by Saudi Arabia may take many by surprise, given that the most recent adjustments to quotas were implemented just a month ago. Consequently, the oil market is poised to tighten even further in the second half of 2023.

                    Technically speaking, however, WTI crude oil is just extending near term range trading. It’s currently struggling to break through 55 D EMA decisively. Rejection by 55 D EMA would set the stage for another fall through 64.19 low to resume the medium term down trend sooner rather than later. Even though sustained break of 55 D EMA could bring stronger rebound, 83.46 will still represent a significant medium term resistance to overcome.

                    Fed Kaplan: Two or more rate hikes to reach netural

                      Dallas Fed President Robert Kaplan said the current monetary policy remained “modestly” accommodative. It will take two or three more rate hikes to become “neutral” which is neither accommodative nor restrictive. And he’s not decided whether Fed should continue rate hikes above neutral level.

                      Referring to the economy, Kaplan said Fed is “basically meeting its dual mandate”.Ka

                      ERG Rees-Mogg’s letter to request no-confidence vote on PM May

                        Chair of the European Research Group (ERG), Jacob Rees-Mogg, released his letter to Sir Graham Brady, chair of the 1922 Committee, requesting a no confidence vote in Prime Minister Theresa May.

                        Full text of the letter:

                        A few weeks ago, in a conversation with the chief whip I expressed my concern that the prime minister, Mrs. Theresa May, was losing the confidence of Conservative members of parliament and that it would be in the interest of the party and the country if she were to stand aside. I have wanted to avoid the disagreeable nature of a formal vote of no confidence with all the ill will that this risks engendering.

                        Regrettably, the draft withdrawal agreement presented to parliament today has turned out to be worse than anticipated and fails to meet the promises given to the nation by the prime minister, either on her own account or on behalf of us all in the Conservative party manifesto.

                        That the Conservative and Unionist party is proposing a protocol which would create a different regulatory environment for an integral part of our country stands in contradistinction to our long-held principles. It is in opposition to the prime minister’s clear statements that this was something that no prime minister would ever do and raises questions in relation to Scotland that are open to exploitation by the Scottish National Party.

                        The 2017 election manifesto said that the United Kingdom would leave the customs union. It did not qualify this statement by saying that we could stay in it via a backstop while annex 2, Article 3 explicitly says that we would have no authority to set our own tariffs. It is also harder to leave this backstop than it is to leave the EU, there is no provision equivalent to article 50 of the Lisbon treaty.

                        The prime minister also promised an implementation period which was the reason for paying ÂŁ39bn. As was made clear by a House of Lords report in March 2017 there is no legal obligation to pay anything. This has now become an extended period of negotiation which is a different matter.

                        The situation as regards the European court of justice appears to have wandered from the clear statement that we are taking back control of our laws. Article 174 makes this clear as does article 89 in conjunction with article 4.

                        It is of considerable importance that politicians stick to their commitments or do not make such commitments in the first place. Regrettably, this is not the situation, therefore, in accordance with the relevant rules and procedures of the Conservative party and the 1922 committee this is a formal letter of no confidence in the leader of the party, the Rt. Hon. Theresa May.

                        I am copying this letter to the prime minister and the chief whip and although I understand that it is possible for the correspondence to remain confidential I shall be making it public.

                        RBA’s Bullock highlights sticky services inflation, housing and job market

                          RBA Governor Michele Bullock voiced concerns over stickiness in services inflation, rising house prices and tight labor market at an Australian Financial Security Authority event.

                          “We’re seeing a slowdown in consumption,” Bullock said, pointing out a decline in per capita consumption. This can be attributed to the central bank’s policy measures, as indicated by her remark, “monetary policy is starting to bite.” She elaborated that businesses were starting to find it hard to pass on cost increases as demand begins to taper.

                          However, the stickiness of inflation remains a significant concern. Bullock highlighted a stubborn rise in services inflation, which encompasses various sectors, from restaurants to hairdressers. “That inflation is running at a bit over 4 per cent,” she noted, acknowledging it exceeds RBA’s target and mirrors inflationary trends observed globally.

                          Additionally, housing prices are on the rise again, coupled with a tight employment market, contributing to inflationary pressures. These economic elements, combined with external factors such as the Israel-Gaza conflict escalating fuel costs, suggest that inflation might remain a persistent issue.

                          Swiss KOF dropped to 96.5, gloomy economic prospects at beginning of the year

                            Swiss KOF Economic Barometer dropped to 96.5 in January, down from 104.1, missed expectation of 101.5, and back below long-term average of 100. KOF said, “after reaching an interim pandemic high in September, COVID-​19 is now weighing more heavily on the economy again. The pandemic is causing gloomy economic prospects at the beginning of the year.”

                            “Responsible for the decline are in particular the indicator bundles for accommodation and food service activities as well as other services,” KOF added. “But the outlook for manufacturing, financial and insurance services and private consumer demand is also less favourable than before. The outlook for construction is stable and foreign demand could provide a stronger impulse.”

                            Full release here.

                            US initial jobless claims dropped again to 2.1m, continuing claims dropped to 21m

                              US initial jobless claims continued to drop, by -323k to 2123k in the week ending May 23. Four-week moving average of initial claims dropped -436k to 2608k. Continuing claims dropped -3860k to 21052k in the week ending May 16. Four-week moving average of continuing claims rose 765.25k to 22722k.

                              Full release here.

                              EU Moscovici at G20: We must absolutely avoid trade wars

                                European Economics Commissioner Pierre Moscovici he’s “cautiously optimistic” that there could be an agreement on the language on trade out of G20 meeting. And he hoped that the G20 communique will show that “how that protectionism is not the solution and we must absolutely avoid that.” He warned that “the first risk is the risk of inward looking policies and protectionism.”

                                Regarding US requests to omit the term “multilateral” from there statement, Moscovici blasted that “avoiding multilateralism in a multilateral organization makes no sense.” He further added that “a trade war would be stupid. There would be damage on both sides of the Atlantic.” Moscovici also reiterated that EU is prepared for counter-measures to US if it’s not exempted from the steel and aluminum tariffs. Moscovici noted “but we think the best is to avoid a scale up” because “we must absolutely avoid trade wars.”

                                On the other hand, US Treasury Secretary Steven Mnuchin emphasized in an email statement that “The trip to the G-20 will focus on advancing the Trump administration’s global economic agenda to level the playing field for U.S. companies and workers.”

                                ECB Kazaks: The size of PEPP package is not an absolute truth

                                  ECB Governing Council member Martins Kazaks said that “flexibility is at the very core of PEPP”, referring to the central bank’s Pandemic Emergency Purchase Program. “If financial conditions remain favorable, in June we can decide to buy less.”

                                  He added that there is not reason to believe that PEPP program will extend beyond the March 2022. ECB might even complete the program without using up the entire envelop of EUR 1.85T, depending on economic developments. “The size of the package is not an absolute truth,” he said. “If the economy performs nicely, it’s quite likely that we will not need to spend everything.”

                                  Still,he emphasized that it’s “premature” to talk about stimulus exit due to high uncertainty. “If the inflation outlook remains like the current forecast when PEPP ends, I think we would certainly discuss increasing APP,” Kazaks said.” Monetary policy will remain very accommodative. If necessary we can also devise new instruments.”

                                  China’s export rose 21.1% yoy in Nov, imports rose 4.5%, trade surplus at USD 75.4B

                                    In November, in USD term, China’s export rose 21.1% yoy to USD 268.1B. Imports rose 4.5% yoy to USD 192.7B. Trade surplus came in at USD 75.4B, up from October’s USD 58.4B, above expectation of USD 53.8B. Year-to-date, exports rose only 2.5% yoy while imports dropped -1.6% yoy. Year-to-date trade surplus was at USD 460B.

                                    • Year-to-date, total trade with EU rose 3.5% yoy to USD 581B. Exports rose 5.7% yoy to USD 351B. Imports rose 0.2% yoy to USD 231B. Trade surplus was at USD 120B.
                                    • Year-to-date, total trade with US rose 5.8% yoy to USD 524B. Exports rose 5.7% yoy to USD 406B. Imports rose 6.1% yoy to USD 118B. Trade surplus was at USD 288B
                                    • Year-to-date, total trade with Australia dropped -0.9% to USD 153B. Exports rose 9.4% yoy to USD 48B. Imports dropped -4.9% yoy to USD 105B. Trade deficits was at USD -57B.

                                    WH Kudlow has guarded optimism on China trade talks

                                      In a CBS interview aired on Sunday, White House economic adviser Larry Kudlow said trade negotiations with China got “closer and closer”. He hailed that “we made good headway last week when Vice Premier Liu He was here.” And talks will continue this week with “a lot of teleconferencing”. He also added “a lot of very difficult topics for the first time are on the table and being resolved”. He has “guarded optimism, may- maybe more than guarded optimism so we’re- we’re gaining on it.”

                                      Kudlow also said “great progress” was made on intellectual property theft. And “good progress” was made on “the forced transfer of technology, on the ownership.” But there are still “issues outstanding” including “enforcement related issues”.

                                      But he emphasized: “In each and every place, (A) they’ve acknowledged their problems. That was a very big hurdle. And (B) what wasn’t on the table is on the table, and (C) we’re getting closer and closer.”

                                      ECB Lane: Convergence of inflation towards target partly reversed

                                        In a presentation to the Brookings institution in Washington, ECB chief economist Philip Lane said:

                                        • The euro area is facing a more extended slowdown than previously expected
                                        • The convergence of inflation towards the inflation aim has recently slowed and partly reversed
                                        • The ECB’s monetary policy measures remain effective in fostering a reacceleration of growth and, thereby, inflation convergence
                                        • A highly accommodative stance of monetary policy will be necessary for a prolonged period of time
                                        • The more fiscal policy contributes to boosting long-term growth potential and providing cyclical stabilisation, the quicker will be the effects of monetary policy interventions on the economy and inflation

                                        Full presentation here.

                                        US Perdue to Japan: We’re aware of your July election, but Trump expects you to treat us a premier customers in trade

                                          On trade negotiation with Japan, US Secretary of Agriculture Sonny Perdue warned that “we cannot continue to kick this trade can down the road forever.” While a quick deal might be difficult, he said Trump is is really looking forward to a deal sooner rather than later”.

                                          Meanwhile, Perdue also said they’re “very much aware of the elections of the upper body”, in July in Japan. But he added, Trump is “expecting again Japan would treat us as their premier customer as we are.”