Sun, Aug 25, 2019 @ 06:51 GMT

Into US session: AUD strongest, JPY second, no follow through in risk appetite

    Entering into US session, Dollar remains the weakest one today, after suffering broad based selloff on dovish FOMC announcement yesterday. At this point, Canadian Dollar is the second weakest while Sterling is the third weakest.

    Australian Dollar is the strongest one following strong rally in Asian stocks. However, it has to be noted that Yen is the second strongest one. And European markets are just mixed today. We’re a bit skeptical on overall strength in the stock markets. But let’s see how it goes in the US first. DOW future is currently down -0.1% despite Trump’s upbeat tweets on China trade talks.

    European stocks, and to a certain extent Euro, might be weighed down by Eurozone data. German retail sales had biggest monthly drop since 2007. Eurozone Q4 GDP grew at lowest pace in four years. Italy was in technical recession in H2 2018.

    In European markets, currently:

    • FTSE is up 0.55%.
    • DAX is down -0.23%.
    • CAC is up 0.10%.
    • German 10-year yield is down -0.012 at 0.179.

    Earlier in Asia:

    • Nikkei rose 1.06%.
    • Hong Kong HSI rose 1.08%.
    • China Shanghai SSE rose 0.35%.
    • Singapore Strait Times rose 0.50%.
    • Japan 10-year JGB yield dropped -0.0014 to 0.002.
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    German Foreign Minister Maas: A misconception to bet on course corrections from Trump after mid-term

      More from EU on US mid-term elections:

      German Foreign Minister Heiko Maas tweeted, “It would be a misconception to now bet on course corrections from Donald . It remains the case: The US remains our most important partner outside Europe. To maintain this partnership, we need to re-measure and realign our relationship with the US.”

      Also, “More diverse, younger, more feminine-these are the winners of the, especially among the democrats. A good part of the electorate has thus confirmed the pioneering role that the country still plays, and hopefully in the future, in favour of diversity and freedoms.”

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      China-US trade talk cancelled as Trump showed no sincerity and goodwill

        Hong Kong’s South China Morning Post reported that it’s confirmed by unnamed source, China canceled the planned visit by Vice-Premier Liu He to the US on trade. This was on the ground that, as the Foreign Ministry said on Friday, “everything the US does hasn’t given any impression of sincerity and goodwill”.

        Further, Trump said in a rally in Missouri last Friday that “we have far more bullets … We’re going to go US$200 billion and 25 per cent Chinese made goods. And we will come back with more … If they retaliate, we have a lot more to come back with. And they want to make a deal, and let’s see if we can make a deal.”

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        Eurozone CPI slowed to 1.6%, below expectation of 1.8%

          Eurozone CPI slowed to 1.6% yoy in December, down from 2.0% yoy and missed expectation of 1.8% yoy. Core CPI was unchanged at 1.0% yoy.

          PPI dropped -0.3% mom rose 4.0% yoy, versus expectation of 0.2% mom, 4.1% yoy.

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          Steeper yield curve inversion and practically no chance of March Fed hike

            The impressive pre-year-end rebound in US stocks might have caught most attention. But there are two very important developments. Firstly, bond yields took a sharp tumble. 10-year yield closed the year at 2.686, comparing 2018 high at 3.248. Also, it’s actually the lowest since January 2018.

            We’re maintaining our view that TNX is heading back to key support at 38.2% retracement of 1.336 to 3.248 at 2.517, which is close to long term channel support at around 2.49.

            And more importantly, the yield curve hasn’t be that inverted for a long time. It’s clearly inverted from 1-year (2.619) to 2-year (2.504) and then 3-year (2.462). 5-year yield at 2.511 is way below 1 year yield. 6-month yield at 2.486 isn’t too far.

            Another development to note is that markets are now pricing in just around 2.5% chance of a Fed hike in march to 2.50-2.75%.

            And there’s just around 11% chance of a rate hike in 1H.

            It looks like investors are expecting something rather ugly ahead in 2019.

             

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            Sterling surges broadly as UK PM May delivers uninspiring statement in Commons on Brexit

              Sterling overtakes Yen as the strongest major currency for today for now. Renewed buying emerges as UK Prime Minster Theresa May delivers her uninspiring statement in the Commons.

              Technically, GBP/USD hits as high as 1.2930 so far. Rebound from 1.2391 is on track to 1.3174 resistance, which is close to 38.2% retracement of 1.4376 to 1.2391 at 1.3149.

              EUR/GBP dives to as low as 0.8875. We now consider 0.8927 support firmly broken. And EUR/GBP is on track to 61.8% retracement of 0.8655 to 0.9101 at 0.8825 and below.

              GBP/JPY, however, despite breaching 139.88 resistance to 140.05, it couldn’t sustain above this resistance yet. We’ll holding on to the expectation that upside of the rebound from 131.51 should be limited by 139.88 and bring reversal. Break of 137.35 minor support will turn bias to the downside for 131.51.

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              Australia PMIs improved, green shoots emerging

                Australia CBA PMI Manufacturing rose to 51.1 in June, up from 51.0. CBA PMI Services rose to 53.3, up from 51.5. Commonwealth Bank of Australia noted that output and new business both expanded at the steepest rates for seven months. Solid increase in outstanding workloads lead firms to raise their staffing levels for the second month in a row. Input costs jumped as sharpest pace since last November. But selling price inflation remained modest.

                Commenting on the Commonwealth Bank Flash PMI data, CBA Senior Economist, Gareth Aird said: “An encouraging result, particularly for the services sector. The uncertainty generated by the federal election has been removed which appears to have had a positive impact on business activity. The economy has been in a soft patch, but there are some green shoots emerging. The combination of monetary policy stimulus, forthcoming tax rebates and strong employment growth has contributed to the sharpest lift in the index since late last year. While the overall level of the composite index signals modest growth, we are taking some comfort from the direction the index is heading. The growth in input costs points to some margin compression. But if firms can pass on some of those costs due to a lift in demand we may see a modest rise in consumer inflation over H2 2019 and into 2020.”

                Full release here.

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                Australia CPI accelerated to 1.6% on automotive fuel prices

                  Australia CPI rose 0.6% qoq in Q2, above expectation of 0.5% qoq. Annually, headline CPI accelerated to 1.6% yoy, up from 1.3% yoy ane beat expectation of 1.5% yoy. RBA trimmed mean CPI was unchanged at 1.6% yoy versus expectation of 1.5% yoy. RBA weighted median CPI slowed to 1.2% yoy, down from 1.4% yoy, matched expectations.

                  ABS Chief Economist, Bruce Hockman said: “automotive fuel prices rose 10.2 per cent in the June quarter 2019. This rise had a significant impact on the CPI, contributing half of the 0.6 per cent rise this quarter. Automotive fuel prices returned to levels recorded in late 2018 after falling 8.7 per cent in the March quarter 2019.”

                  And, “annual growth in the CPI continues to be subdued due to falls in a number of administered prices. Through the year, utility prices have fallen 0.2 per cent and child care has fallen 7.9 per cent following the introduction of the Child Care Subsidy package in July 2018.”

                  Full release here.

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                  BoJ stands pat, lowers inflation forecasts once again

                    BoJ left monetary policy unchanged today as widely expected, by 7-2 vote again. Short term policy interest rate is held at -0.1%. On long term interest rate, BoJ will continue with asset purchases to keep 10 year JGB yield at around 0%. G. Kataoka dissented again, pushing for more monetary easing due to “heightening uncertainties regarding development in economic activity and prices”. Y. Harada dissented because “allowing the long-term yields to move upward and downward to some extent was too ambiguous”.

                    In the Outlook for Economic Activity and Prices report, BoJ noted that the economy is likely to continue to grow above potential in fiscal 2018. For fiscal 2019 and 2020, the economy is expected to continue on an “expanding trend”, partly supported by “external demand”. But growth is projected to decelerate due to a “cyclical slowdown” in business fixed investments and the scheduled sales tax hike.

                    CPI continued to show “relatively weak developments” comparing to growth and labor market. Though, BoJ maintained that “further price rises are likely to be observed widely and then medium- to long-term inflation expectations are projected to rise gradually”. Thus, CPI will gradually increase towards 2% target. On risks, BoJ said both economic and prices risks are “skewed to the downside”.

                    In the updated economic projects, fiscal 2018 growth forecast was downgraded from 1.5% to 1.4%. Growth forecasts for 2018 and 2019 were kept unchanged at 0.8%. Fiscal 2018 core CPI projection was lowered notably to 0.9%, down from 1.1%. For fiscal 2019 and 2020, ex-sales-tax-hike core CPI projections were also lowered, to 1.4% and 1.5%, down from 1.5% and 1.6% respectively.

                    Also, note that the ex-sales-tax-hike core CPI projections are notably lower than April’s forecasts, at 1.8% in fiscal 2019 and fiscal 2020 respectively.

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                    Eurozone Sentix shows signs on stabilization, Asia ex-Japan on the rise

                      Eurozone Sentix Investor Confidence improved to -2.2 in March, up from -3.7 and beat expectation of -3.1. Current Situation index dropped from 10.8 to to 6.3, lowest since September 2016 and the seventh monthly decline. Expectations Index improved to -10.3, up from -17.3. Sentix noted that the indexes are “sending signs of stablisation” and “fueling hopes that there will be no recession. However, “it is too early to give the all-clear”.

                      And, thematically “investors expect slight support from monetary policy in the coming months from a pause in the interest rate cycle. Nevertheless, the central bank policy barometer does not give the impression that a sustained easing of monetary policy is to be expected. On the one hand, a rapid comeback of the economy would also surprise the central bank and, on the other, investors expect inflationary pressures to rise again.

                      On development to now in the strong improvement in Asia ex-Japan. Overall Investor Confidence index rose 9.9 to 15.3, highest since August 2018. Current Situation index rose from 22.3 to 24.5. Expectations index rose from -1.8 to 6.5, highest since March 2018. Sentix noted that the Chinese “government’s measures to stimulate economic growth both in fiscal and monetary terms are well received by the investors surveyed by Sentix.

                      Full release here.

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                      RBA Debelle: Technology dispute could have larger impacts than tariffs

                        RBA Deputy Governor Guy Debelle said in a speech today that the direct effects of US-China tariffs “has not been all that large”. However, the larger impact has been the uncertainty generated by the dispute. The uncertainty takes “two forms”. Firstly, there was uncertainty about the “size and incidence” of tariffs. Secondly, it’s unsure how “technology dispute” will be resolved.

                        Debelle also warned that “it is plausible that the effect of the technology dispute will be larger than that of the tariffs” And, “the technology dispute raises the possibility that any business involved in the technology production chain will have to choose between East and West rather than selling into a global market.”

                        Also, he said current trade dispute would have a “large and long-lasting impact” on the “system of rules-based trade”. And, “The China–US dispute casts serious doubt on that. We can also see that manifest in the US–Europe trade issues, as well as those between South Korea and Japan.” Also, “trade is being used as the bargaining tool of choice, including for issues that don’t have much to do with trade.”

                        Debelle’s full speech here.

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                        German government: Subdued economy with first signs of labor market slowdown

                          German Federal Ministry of Economy and Energy said the economy will “remain subdued for the time being”. And data indicates continuation of “two-part development” as services support growth but manufacturing is in decline. Meanwhile, there are also two parts in manufacturing, paralyzing industry and booming construction.

                          The ministry also noted “the first signs of the economic slowdown are evident in the labor market: employment continues to grow, but the lower momentum is solidifying. Unemployment increased in May, not just because of special factors.”

                          Full release here.

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                          BoJ Suzuki: Absolutely no need to ramp up monetary easing

                            BoJ board member Hitoshi Suzuki said today that there is “absolutely no need” to ramp up monetary easing. He added, “if the momentum for hitting the price target is lost, the BOJ will consider taking appropriate action. But many board members, including myself, believe the momentum is sustained.”

                            Nevertheless, Suzuki noted it’s the current massive stimulus program is still needed. He said “there’s a risk inflation won’t accelerate much for a prolonged period, as companies remain cautious of raising wages and households are sensitive to price rises.

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                            Japan PMI manufacturing finalized at 29-month low, bad news for global trade cycle

                              Japan PMI manufacturing was finalized at 50.3 in January, revised up from 50.0. But that’s still the lowest level in 29 months. And, new export orders decline at sharpest pace since July 2016. Also, business confidence falls for the eighth month running.

                              Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:

                              “Japan Manufacturing PMI data brought bad news for the global trade cycle at the start of 2019, with new export orders falling at the sharpest rate in two-and-a-half years. Anecdotal evidence suggested that sales of goods relating to semi-conductors had particularly suffered, which bodes ill for other Asian exporters. Meanwhile, domestic markets also showed signs of frailty as total demand declined for the first time since September 2016.

                              “With Abe set to levy the consumption tax this year, and Sino-US trade tensions still lurking, domestic weakness in Japan further adds to already existing challenges. Business sentiment continued to drop, with survey data registering an eighth straight month where confidence has slipped. Falling inventories and cut backs to production suggest that manufacturers are bracing for further economic difficulty.”

                              Full release here.

                              Also from Japan, jobless rate dropped to 2.4% in December, below expectation of 2.5%.

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                              Swiss SECO revised up growth and inflation forecasts, warned of escalation to trade war

                                In this Swiss State Secretariat for Economic Affairs report published today, the government painted a brighter picture of the economy. Growth forecasts for 2018 and 2019 were both revised up. Also, 2018 inflation forecast was revised notably higher. The report titled Economy continues dynamic recovery noted that “the economy to continue its dynamic recovery and anticipates strong GDP growth of 2.4% in 2018. The buoyant international economy is supporting foreign trade, while a favourable investment climate is stimulating domestic demand.”

                                Here are the latest projections

                                • 2018 GDP forecast at 2.4%, revised UP from prior forecast at 2.3%.
                                • 2019 GDP forecast at 2.0%, revised UP from prior forecast at 1.9%.
                                • 2018 CPI forecast at 0.6%, revised notably up from prior forecast at 0.3%
                                • 2019 CPI forecast at 0.7%, unchanged from prior forecast at 0.7%

                                The tone of the report was very upbeat as it said “Switzerland’s economy has not looked this healthy since the minimum euro exchange rate was discontinued in early 2015. The upturn gathered increasing momentum and became more broad-based in the second half of 2017.”

                                Also, “the healthy global economy is boosting international demand for Swiss products and therefore driving foreign trade.” And, “the Expert Group predicts that foreign trade will provide a significant boost to growth in 2018 especially but also in 2019.” Regarding the job market, the reported noted that unemployment has been in ” gradual decline since mid-2016, while employment also stepped up in the second half of 2017.”

                                Regarding economic risks, SECO saw short-term positive and negative risks are “balanced”. Upturn in global economy could help depreciate the Swiss Franc further and “give the Swiss economy a further boost”. But warned that “protectionist measures recently announced in the US pose negative risks for the global economy.” And, “any escalation to a trade war between the major economic zones would have a considerable dampening effect in the medium-term.”

                                Besides, the report pointed to recent Italian election as “a certain political uncertainty remains on the international stage.” Unclear Brexit terms and uncertainties in Switzerland’s relationship with the EU are other risks mentioned. Domestically, there is risk of sharp correction in construction sector.

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                                RBNZ Spencer hailed macroprudential policy

                                  RBNZ Governor Grant Spencer hailed the success of macroprudential tools in a speech to finance industry professional today. The policy infrastructure including the LVRs (loan to value restrictions). helped limit the risks of surge hour prices. It also helped keep interest low to boost inflation. And, after adopting the policy for five years, Spencer suggested a review would be run with the Treasury to consider ways to expand it. He also suggested to introduce a new committee on macroprudential policy alongside the monetary policy committee.

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                                  Selling her serious and workable Brexit proposal, UK PM May got cold responses from EU leaders

                                    At the dinner in the first day of the EU summit in Salzburg, Austria, UK Prime Minister Theresa May was given the stage to sell her Chequers Brexit proposal. It’s reported that she said theses were “serious and workable proposals” and hoped that the EU will “respond in kind”. She emphasized the Irish border problem could be solved by the type of “frictionless trade” envisaged in the Chequers plan. But the Commission’s proposal is “not credible.

                                    But there were little responses from the leaders of the other 27 EU nations. They are expected to discuss the issues among themselves over lunch on Thursday today, so as to give a united stance for chief negotiator Michel Barnier to conclude a final in two months.

                                    After the dinner, Lithuanian President Dalia Grybauskaite said “At this stage, it’s a standstill. There is no progress.” Slovak Prime Minister Peter Pellegrini said, “On the border issue, there has been no progress.” An unnamed diplomat said “She spoke. There was no reaction.”

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                                    SNB Zurbruegg: Expansive monetary policy still warranted

                                      SNB Vice Chairman Fritz Zurbruegg spoke at an economic forum in Landquart, Switzerland, yesterday. He noted that expansive monetary policy is still warranted for the central bank, due to heightened uncertainties, highly valued franc exchange rate, low inflationary pressure and global low interest rates.

                                      In particular, he noted that uncertainties have risen recently, due to protectionism, Brexit, Italy. The Swiss Fran remains highly valued and that remains a risk. But overall, outlook for the Swiss economy remains favorable.

                                      The comments echoed those by Chairman Thomas Jordan, who noted the need to block a surge Franc on safe-haven flow.

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                                      US Empire State Manufacturing index dropped to 3.7

                                        US Empire State Manufacturing index dropped to 3.7 in March, down from 8.8 and missed expectation of 10. It’s also the third consecutive month of sub-10 reading, suggesting “growth has remained quite a bit slower so far this year than it was for most of 2018.

                                        Looking at some details, new orders index dropped -5pts to 3.0, indicating orders grew at a slower pace. Shipments dropped -3 pts to 7.7, indicating modest shipments growth. Employment index rose to 13.8. But average work week turned negative for the firs time since 2016, at -3.4.

                                        Full release here.

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                                        Sterling drops sharply after Brexit Minister Raab resigns in protest to PM May’s deal

                                          Sterling tumbles sharply as UK Brexit Secretary Dominic Raab resigns today, just after Prime Minister Theresa May seemed to have got Cabinet support on her Brexit plan. Raab complained that “Above all, I cannot reconcile the terms of the proposed deal with the promises we made to the country in our manifesto at the last election.”

                                          Raab also warned in his resignation letter “no democratic nation has ever signed up to be bound by such an extensive regime, imposed externally without any democratic control over the laws to be applied, nor the ability to decide to exit the arrangement.” And he emphasized that “this is, at its heart, a matter of public trust,” and “I cannot support the proposed deal.”

                                          May’s government is now in deeper turmoil. as the future of the Brexit plan is bring into huge uncertainty.

                                          Adding to that, October retail sales data were rather poor. Including auto and fuel, sales dropped -0.5% mom in October versus expectation of 0.2% mom. Excluding auto and fuel, sales dropped -0.4% mom versus expectation of 0.2% mom.

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