Mon, Jun 24, 2019 @ 19:30 GMT

UK PMI services rose to 51.3, suggest just 0.1% GDP growth in Q1

    UK PMI services rose to 51.3 in February, up from 50.1 and beat expectation of 50.0. Markit noted “modest upturn in service sector output”. But there was “slight fall in new work” and “staffing levels drop to greatest extent for over seven years”.

    Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:

    “The latest PMI surveys indicate that the UK economy remained close to stagnation in February, despite a flurry of activity in many sectors ahead of the UK’s scheduled departure from the EU. The data suggest the economy is on course to grow by just 0.1% in the first quarter.

    “Worse may be to come when pre-Brexit preparatory activities move into reverse. Many Brexit-related headwinds and uncertainties also look set to linger in coming months even in the case of PM May’s deal going through. Global economic growth meanwhile remains sluggish, adding an increasingly gloomy backdrop to the UK’s current problems.

    “Business optimism about the year ahead has consequently sunk to the lowest ever recorded by the survey with the exceptions of the height of the global financial crisis and July 2016. Brexit concerns dominate the list of reasons cited by companies for deteriorating business performance by a wide margin.

    “Employment across services, manufacturing and construction is meanwhile now falling at a rate not exceeded for nine years as companies cut costs and await clarity on the outlook, highlighting the rising damage to the economy from intensifying uncertainty.”

    Full release here.

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    Australian NAB business conditions: Largest fall since global financial crisis

      Australia NAB Business Confidence was unchanged at 3 in December. However, Business Conditions dropped sharply by -9 pts from 11 to 2. That’s the largest monthly fall since the global financial crisis. And the deterioration was “relatively broad-based across states and industries”.

      NAB also noted that “at face value, the fall over the past 6 months suggests a significant slowing in the momentum of activity in the business sector – especially from the highs seen earlier in the year.”

      Full release here.

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      Into US session: Sterling strongest despite Brexit uncertainty, Yen dives on risk appetite

        Entering into US session, Sterling is surprisingly the strongest one today. Much stronger than expected UK manufacturing PMI might be a positive factor for the Pound. But it should noted that the improvements could mainly reflect pre-Brexit stock-building. It could indeed be a major headwind moving forward. At the time same, the House Commons will hold a second session of indicative votes on Brexit today. Debate might center around options of customs union, single market or a combination. Also, there would be debates on confirmatory referendum. Prime Minister Theresa May could decide what she’d do next after having the results from the indicative votes.

        Staying in the currency markets, Yen is the weakest one on global risk market rally. Stronger than expected manufacturing PMIs from China raised hope that the worst is over for the Chinese economy. However, such improvement is not seen elsewhere yet, including Eurozone, Japan and even Australia. The ISM manufacturing index from US to be released today needs to give more positive signs to secure investor confidence.

        In Europe, currently:

        • FTSE is up 0.71%.
        • DAX is up 1.13%.
        • CAC is up 0.76%.
        • German 10-year yield is up 0.0332 at -0.035, staying negative.

        Earlier in Asia:

        • Nikkei rose 1.43%.
        • Hong Kong HSI rose 1.76%.
        • China Shanghai SSE rose 2.58%.
        • Singapore Strait Times rose 1.17%.
        • Japan 10-year JGB yield rose 0.0113 to -0.079.
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        5-Star Movement denied threatening to oust EM Tria on budget

          In Italy, there were rumors that the 5-Star Movement, one of the anti-establishment coalition party, threatened to oust Economy Minister Giovanni Tria if he didn’t allow EUR 10B of funding in 2019 budget for its flagship campaign. But the news was denied by 5-Star Movement. The party said in a statement “that 5-Star is putting pressure on minister Tria is unfounded, as is any reference to (requesting) his possible resignation.”

          Recent comments from Tria, and leaders of both the 5-Star Movement and the League suggested that they will stick to fiscal discipline for now. That helped stabilize Italian bond markets and eased some pressure on the Euro. The more progressive measures were promised to be rolled out gradually over the next few years. Separately, Massimo Bitonci, an undersecretary at the economy ministry and a member of the League, said in a newspaper interview at the weekend that both parties would have EUR 5B each to implement their campaign promises in the 2019 budget.

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          Into US session: JPY surges against Europeans

            Yen surges broadly as markets enter into US session. The rally is particularly steep against European majors. Both EUR and GBP are troubled by weaker than expected data. The limited movement in EUR/USD and GBP/USD is just a reflection that USD is consolidating after recent gains. And USD is awaiting tomorrow’s NFP. They are not indications that EUR and GBP are not affected by the releases.

            The JPY Action Bias table show that for now, only AUD and NZD escape from JPY’s intraday pressure. For short to medium term, European majors are suffering.

            EURJPY 6H Action Bias chart shows clear persistent downside momentum in the cross ever since breaking 132.5 handle. It’s on course for 128.94 low.

            Similarly, GBPJPY 6H Action Bias chart also displays persistent downside momentum after taking out 151. 144.97 will be the next target after taking out 148.37 support.

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            Cottarelli accepted mandate to form an interim Italian government

              In swift arrangements, former IMF Director of the Fiscal Affairs Carlo Cottarelli accepted Italian President Sergio Mattarella’s appointment to form an interim government. That came after Giuseppe Conte abandoned the effort to form a new coalition government of the 5-Star Movement and the League, following Mattarella’s veto of eurosceptic Paolo Savona as the as economy minister.

              The Prime Minister designate Cottarelli said that “I’ll present myself to parliament with a program which – if it wins the backing of parliament – would include the approval of the 2019 budget. Then parliament would be dissolved with elections at the beginning of 2019.”

              Or, “in the absence of (parliament’s) confidence, the government would resign immediately and its main function would be the management of ordinary affairs until elections are held after the month of August,”

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              An update on AUD/USD short, lower the stop slightly

                Here an update on our AUD/USD short (entered at 0.7100) as last discussed in the weekly report. Finally, we’re seeing the weakness anticipated in the pair as it drops to as low as 0.7058 so far today. The solid break of 0.7088 minor support argues that corrective rise from 0.7040 is likely competed at 0.7159 already. And the larger fall is possibly resuming. Further decline should be seen to 0.7040 first.

                Break of 0.7040 will resume whole down trend form 0.8135 and should target a test on 0.6826 (2016 low). It’s still early to tell. But we’re looking at the possibly of resuming long term down trend from 1.1079 (2011 high). We’ll looking downside momentum of the next fall, upon breaking 0.7040, to gauge the chance.

                For now, we’ll hold on to the short position. Stop will be lowered from 0.7185 (slightly above 50% retracement of 0.7314 to 0.7040 at 0.7178) to 0.7165 (slightly above 0.7159 resistance). We’ll decide whether to exit at around 0.6826 later.

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                CAD selloff resumes as CPI and retail sales missed expectations

                  CAD’s selloff resumes after disappointing data from Canada.

                  Headline retail sales rose 0.4% mom in February, below expectation of 0.5% mom.

                  Ex-auto sales was even worse, flat mom, versus expectation of 0.5% mom rise.

                  Headline CPI rose 0.3% mom, 2.3% yoy in March, below expectation of 0.4% mom, 2.4% yoy. February’s figure was 0.6% mom, 2.2% yoy.

                  Core CPI common was unchanged at 1.9% yoy, below expectation of 2.0% yoy.

                  Core CPI median was unchanged at 2.1% yoy, below expectation of 2.2% yoy.

                  Core CPI trim slowed to 2.1% yoy, down from expectation of 2.1% yoy and missed expectation of 2.1% yoy.

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                  IMF Lagarde hints at global outlook downgrade on trade disputes

                    IMF Managing Director Christine Lagarde hinted today that the organization may downgrade growth outlook next week. She said, “In July, we projected 3.9 percent global growth for 2018 and 2019. The outlook has since become less bright, as you will see from our updated forecast next week.”

                    Lagarde added “A key issue is that rhetoric is morphing into a new reality of actual trade barriers. This is hurting not only trade itself, but also investment and manufacturing as uncertainty continues to rise.” Though she also tried to tone down and said “we are not seeing broader financial contagion — so far — but we also know that conditions can change rapidly. If the current trade disputes were to escalate further, they could deliver a shock to a broader range of emerging and developing economies.”

                    On WTO reform, she said “The immediate challenge is to strengthen the rules. This includes looking at the distortionary effects of state subsidies, preventing abuses of dominant positions and improving the enforcement of intellectual property rights.”

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                    Fresh selling in Euro as France Q1 GDP missed, rose 0.3% qoq only

                      Fresh selling seen in Euro after French data miss. French GDP growth slowed to 0.3% qoq in Q1, down from prior quarter’s 0.7% qoq and missed expectation of 0.4% qoq. Annual rate decelerated to 2.1% yoy, down from 2.6% yoy, and missed expectation of 2.3% yoy.

                      The title of this report ECB: Wondering Rather than Worrying summed up yesterday’s ECB press conference rather well. And with French GDP miss, dovish expectation on next week’s Eurozone GDP release could pile up. We’ll see if the coming data clear up the picture for ECB so that policymakers don’t need to wonder any more, but start to worry.

                      For now, EUR/USD is on course for 1.2 handle. Selling in EUR/USD also spill over to other pairs and lifted the USD. USD/CHF takes out 0.99 and would now be heading back to 1.000. GBP/USD breaks yesterday’s low at 1.3894, just ahead of UK GDP data, an hour away.

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                      China’s PBoC in preparation for trade war escalation

                        In an interview, China’s PBoC Governor Yi Gang said recent stock market volatility is emotion-driven and urged investors to stay calm. He referred to the -3.78% decline in the Shanghai Composite today. Yi added that resilience of the Chinese economy has increased. Additionally, as domestic demand picked up, China’s reliance on international trade has dropped from 64% in 2006 to 33% last year. That’s even lower than the world’s average of 42. Current account surplus’ contribution to GDP also dropped from 10% in 2007 to 1.3% last year. He noted that the “economic endogenous potential is huge and there are sufficient conditions and space to deal with various trade frictions.”

                        Earlier today, the PBoC injected CNY 200B liquidity into the markets through its medium-term lending facility (MLF). PBoC said the cash injection was to “make up for mid- to long-term liquidity gap in the banking system”. But it’s seen by analyst as part of the package of measures safeguard the economy, in preparation for further escalation in trade conflict with the US. In addition to that, it’s believed China would also quicken the boost in domestic demand through fiscal polices like tax cuts and spending.

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                        BCC pushes for clarify and Brexit hedge

                          According to the Quarterly Economic Survey of the British Chambers of Commerce (BCC), the UK economic conditions “remain sluggish” despite modest improvement in Q2. The survey showed that the economy is in a “holding pattern” and the annual growth this year is set to be the “lowest since the financial crisis.” It called for a push to “fix the fundamentals” to create a “Brexit hedge”. And the government should provide clarity on the “real-world questions” after Brexit to give businesses a clear path that would enable them to invest and grow.

                          Adam Marshall, Director General of the BCC also noted in the release that “amid growing international uncertainty, from escalating trade disputes to oil price rises, the UK economy continues to grow at a sluggish rate. Brexit is a key factor – but long-standing structural issues are also holding companies’ growth back.” And he emphasized again that
                          “Business needs clarity on Brexit, and a strong domestic agenda that creates a ‘Brexit hedge’ as we navigate turbulence over the next few years.”

                          Full report here.

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                          US core inflation accelerated to 2.3%, Canada GDP beat expectations

                            Inflation data released from the US are rather solid. Headline PCE accelerated to 2.3% yoy in May, up from 2.0% yoy and beat expectation of 2.0% yoy. Core PCE also jumped to 2.0% yoy, up from 1.8% yoy and beat expectation of 1.8% yoy. Personal income rose 0.4% in May, matched expectation. Personal spending, though rose 0.2%, below expectation of 0.4%.

                            The data support Fed’s projection of two more rate hike this year, in September and December.

                            Canada GDP rose 0.1% mom in April, above expectation of 0.0% mom. IPPI rose 1.0% mom in May while RMPI rose 3.8% mom.

                            BoC Governor Stephen Poloz has made himself very clear this week. Economic models suggested that there should be a rate hike soon. But models are just part of the equation for the decision. Trade tensions and impacts of higher interest rates on household are factors to consider too. To us, it’s 50/50 for BoC to hike in July.

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                            China PMI manufacturing dropped to 49.4, widening decline, increasing downward pressure

                              The official China PMI manufacturing dropped to 49.4 in May, down from 50.1 and missed expectation of 49.9. It further confirmed that March’s recovery was a false dawn and the slowdown trajectory in China is ongoing. More importantly, deterioration could quick further with the current round of US-China trade war escalation. Non-manufacturing PMI was unchanged at 54.3.

                              Analyst Zhang Liqun noted that “the decline was widening, indicating that the downward pressure on the economy has increased.” And, “foundation for economic stabilization has not yet been established.” In particular, new orders index, the export order index decreased significantly, “reflecting the lack of market demand is more prominent, especially the downward pressure on exports”.

                              Looking at some details:

                              • Production dropped -0.4 to 51.7;
                              • New order dropped -1.6 to 49.8;
                              • New Export order dropped -2.7 to 46.5;
                              • Import dropped -2.6 to 47.1;
                              • Employment dropped -0.2 to 47.0.

                              Full release here.

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                              Japan cabinet revised down fiscal 2018 growth forecast

                                Japan Cabinet Office presented new economic projections at the Council on Economic Fiscal Policy today.

                                For current fiscal 2018, the economy is projected to grow 1.5% in real term. That’s a downgrade from prior projection of 1.8%, down at the start of the year. In nominal terms, the economy is projected to grow 1.7%, sharply lower from prior forecast of 2.5%, due partly to slowdown in property investment.

                                The office forecasts the economy to grow 1.5% in the fiscal-2019, in price adjusted real terms. That’s after adjustment to the planned sales tax hike in October 2019. In nominal term, GDP is projected to grow 2.8%.

                                For the current fiscal 2018, overall CPI is projected to be at 1.1%, unchanged from prior estimate. Overall price CPI is forecast to rise 1.5% in fiscal 2019. With adjustment on the sales tax hike, overall CPI is projected to slow to 1.0%.

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                                US initial jobless claims jumped to 253k, highest since Sep 2017

                                  US initial jobless claims jumped 53k to 253k in the week ending January 26, well above expectation of 210k. That’s also the highest level since September 30, 2017. Four-week moving average of initial claims rose 5k to 220.25k.

                                  Continuing claims rose 69k to 1.782M in the week ending January 19. It’s also the highest level since April 28, 2018. Four-week moving average of continuing claims rose 8k to 1.738M, highest since August 4, 2018.

                                  Full release here.

                                  Also from US, employment cost index rose 0.7% in Q4, below expectation of 0.8%.

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                                  Germany CPI slowed sharply to 1.4% in Jan, Euro shrugs

                                    German CPI dropped -0.8% mom in January, matched expectation. But annual rate slowed sharply to 1.4% yoy, down from 1.7% yoy, and missed expectation of 1.6% yoy. Today’s German CPI miss should weigh on expectation for Eurozone CPI reading to be released later in the week, it’s expected to slow to 1.4% yoy.

                                    Euro shrugs off the data, nevertheless. In particular, EUR/CHF’s rally is accelerating after taking out 1.1347 resistance yesterday.

                                    Full release here.

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                                    France PMI indicates softening in private sector growth again

                                      France PMI manufacturing dropped to sharply to 53.6 in March, down from 55.9 and missed expectation of 55.6.

                                      France PMI services dropped to 56.8, down from 57.4 and missed expectation of 57.0.

                                      Markit titled the release as “Private sector growth softens again, but remains marked“.

                                      Quote from the release by Alex Gill, Economist at IHS Markit:

                                      “Growth slowed in the French private sector economy during March, with the headline composite output figure down for the second successive month. At 56.2, however, the rate of expansion remained elevated by historical levels, while the Q1 average of 57.7 is consistent with a robust GDP number.

                                      “Strong client demand in both domestic and foreign markets continues to support output and employment. Meanwhile, a further robust degree of business confidence combined with a sharp and accelerated accumulation of outstanding business suggests further growth in the coming months.”

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                                      Trump didn’t anticipate much from this week’s US-China trade talk

                                        On trade dispute with China, Trump said he had “no time frame” for ending it. While the Chinese delegation is arriving the US soon, Trump said he did not “anticipate much” from the discussions.

                                        He emphasized that the resolution will “take time” because “China’s done too well for too long, and they’ve become spoiled. They dealt with people that, frankly, didn’t know what they were doing, to allow us to get into this position.”

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                                        US ISM manufacturing rose to 60.2 despite trade war threat

                                          US ISM manufacturing index rose to 60.2 in June, up from 58.7 and beat expectation of 57.9. Prices paid component dropped to 76.8, down from 79.5 and missed expectation of 78.2. Employment component dropped to 56.0, down from 56.3.

                                          Some quotes from the respondents:

                                          • “U.S. tariff policy and lack of predictability, along with [the] threat of trade wars, [is a] causing general business instability and [is] drag on growth for investments.” (Electrical Equipment, Appliances & Components)
                                          • “We export to more than 100 countries. We are preparing to shift some customer responsibilities among manufacturing plants and business units due to trade issues (for example, we’ll shift production for China market from the U.S. to our Canadian plant to avoid higher tariffs). Within our company, there is a sense of uncertainty due to potential trade wars.” (Food, Beverage & Tobacco Products)
                                          • “The Section 232 steel tariffs are now impacting domestic steel prices and capacity. Base steel prices have already increased 20 percent since March.” (Fabricated Metal Products)
                                          • “The economy and product demand still continue to be strong. Having trouble finding people [to fill] blue collar positions. Lead times for parts and materials are moving out, and we are seeing commodity cost pressures increases with the threat of tariffs. Additionally, suppliers are asking for more price increases.” (Machinery)
                                          • “The uncertainty of U.S. tariffs and the Canada/Mexico/E.U. retaliatory tariffs continues to cloud strategic planning efforts. Contingency planning (for tariffs) is consuming large amounts of manpower that could be used for more productive projects. The tariffs are improving margins in our raw material businesses; however, our businesses which are further up the supply chain are seeing significant inflation.” (Miscellaneous Manufacturing)
                                          • “The steel tariffs continue to drive uncertainty. Projects and services using steel have limited days that prices are good for. Trucking is tight, requiring advanced planning and increasing costs.” (Paper Products)

                                          Full ISM manufacturing index release here.

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