Tue, Mar 19, 2019 @ 17:02 GMT

Bundesbank: German growth subdued in Q1 as consumption offset by weak manufacturing

    Bundesbank said in the monthly report that German economic growth remained subdued in Q1. The main reasons include weak industrial production, falling auto exports and deteriorating manufacturing sentiment. Manufacturing sector would drag down overall economic performance for the third straight quarter.

    On the other hand, construction and private consumption should provide support to the economy. Employment also continues to rise despite slowdown. Bundesbank added that private consumption could pickup significantly as signaled by strong increase in retail sales.

    Full report in German.

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    Japan core CPI ticked up to 0.9% yoy, core-core sluggish at 0.4% yoy

      Japan all item CPI rose 0.5% mom 1.3% yoy in August. Core CPI (ex-fresh food) rose 0.3% mom, 0.9% yoy. Core-core CPI (ex-fresh food and energy) rose 0.2% mom, 0.4% yoy. While core CPI ticked up from 0.8% yoy in July, it’s still way off BoJ’s target of 2%. More importantly, the core-core continued to show sluggishness in underlying inflation.

      Full release here.

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      Canadian Dollar surges as BoC talks down Sept CPI fall, interest rate to rise further to neutral

        Canadian Dollar jumps sharply after BoC rates overnight rate by 25bps to 1.75% as widely expected. Most importantly, BoC tries to talk down the drop in headline CPI in September. And, it maintains tightening bias to move interest rate to a neutral stance.

        In the statement, BoC noted CPI’s fall to 2.2% in September was “in large part because the summer spike in airfares was reversed”. Also, there were “other temporary factors pushing up inflation, such as past increases in gasoline prices and minimum wages, should fade in early 2019”. BoC expects inflation to remain close to 3% target through then of 2020. Additionally, it noted that “core measures of inflation all remain around 2 per cent, consistent with an economy that is operating at capacity.”

        On monetary policy, BoC said “policy interest rate will need to rise to a neutral stance to achieve the inflation target.” Nonetheless, the “pace” will depend on how the economy adjusts to higher interest rates. BoC also pledged to pay close attention to global trade policy developments and the implications on inflation outlook.

        USD/CAD’s sharp fall and break of 1.3027 minor support suggests that rebound from 1.2781 has completed at 1.3132 after rejection by near term channel resistance, on bearish divergence condition in 4 hour MACD. Further decline is expected back to 1.2916 support.

        More importantly, the development now argues that whole decline from 1.3385 might still be in progress. And break of 1.2916 will bring another low below 1.2781.

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        Into US session: Yen strongest but Sterling is catching up

          Entering into US session, Yen is trading generally higher as helped by mild risk aversion today. Sterling is also enjoying some renewed buying. EUR/GBP takes lead by extending recent fall from 0.9101. GBP/USD is also set to take on 1.2930 temporary top very soon.

          New Zealand Dollar is the weakest one for today so far, followed by Canadian and then Swiss Franc. WTI crude oil’s recovery is losing steam after hitting 52.73 earlier this week and is now back at 51.4.

          In European markets, at the time of writing:

          • FTSE is down -0.73%.
          • DAD is down -0.31%.
          • CAC is down -0.46%.
          • German 10-year yield is down -0.0026 at 0.223.

          Earlier in Asia:

          • Nikkei dropped -0.20%.
          • Hong Kong HSI dropped -0.54%.
          • China Shanghai SSE dropped -0.42%.
          • Singapore Strait Times dropped -0.45%.
          • Japan 10-year JGB yield rose 0.0044 to 0.012.
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          ECB Nowotny: It’s time for gradual normalization as inflation pressure will eventually materialize

            European Central Bank (ECB) Governing Council member Ewald Nowotny spoke in the European Money and Finance Forum (SUERF) today. .

            Regarding monetary policy, it reiterated that “it is time for a gradual normalization” as inflation pressure will eventually materialize. But he also emphasized that “this normalization requires a delicate balancing of measures as well as careful sequencing in time.” He noted that ECB is now at an “important turning point”. While the Eurozone has very strong economic expansion, it’s an unequal one.

            He stressed that the ECB framework is well equipped to cope with the evolving inflation debate. But still, exit is complex due to the large amount of stimulus in place. Nowotny also repeated all other central bankers have said over time. That is, tightening too soon would stifle recovery. Falling behind the curve would risk creating bubble in assets.

            On the topic of trade war, Nowotny warned of the “negative effects for all involved”. And, “the direct effects might be on the exchange rate side but this is difficult to see or to forecast because today we have so many linkages, we have long production chains… It might have negative effects on financial stability, but effects on monetary policy are not very clear.”

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            Sterling performing well, GBP/CHF with solid upside bias

              Sterling doing rather well today with GBP/CHF, GBP/NZD and GBP/AUD topping the daily top mover table. These three pairs are also the top 10 movers in the 4 hour and monthly period.

              Upside momentum in GBP/CHF is quite clear as seen in 6H action bias chart.

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              Fed hikes federal funds rate to 1.75-2.00%, full statement

                FOMC raised federal funds rate to 1.75-2.00% as widely expected. Statement below.

                Federal Reserve Issues FOMC Statement

                Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

                Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

                In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

                In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

                Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.

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                RBA projects slower rise in inflation and fall in unemployment

                  Australian Dollar suffers another round of selloff today after RBA revealed rather dovish economic forecasts in the Statement on Monetary Policy. In the summary part, Governor Philip Lowe’s “balanced” turn was echoed.

                  The first scenario is “further progress in reducing unemployment and bringing inflation into the target range can reasonably be expected.” In this case, higher interest rate “would become appropriate at some point”. However, in other scenarios, “If there were then to be a sustained increase in unemployment and a lack of progress in returning inflation to target, it might instead be appropriate to lower the cash rate.”

                  RBA now judges ” the probabilities of these two sets of scenarios have shifted to be more evenly balanced than previously.”

                  In the new economic projections:

                  • 2019 year-end growth was revised to 3%, down from 3.25%.
                  • 2020 year-end growth was revised to 2.75%, down from 3%.
                  • June 2020 unemployment rate was revised to 5%, up from 4.75%.
                  • That is, unemployment rate will fall at a slower pace.
                  • 2019 year-end CPI was revised to 1.75%, down from 2.25%.
                  • 2020 year-end CPI was unchanged at 2.25%.
                  • That is, CPI will rise at a slower pace.

                  Full SOMP here.

                  SOMP Summary.

                  Economic projections.

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                  S&P projects 2.7% debt-to-GDP for Italy in 2019, government’s growth forecasts overly optimistic

                    Last Friday, S&P kept Italy’s sovereign debt rating unchanged at BBB, two notches above junk. However, outlook was lowered to negative from stable. Nonetheless, the result of the view was already better than Moody’s, which downgraded Italy to a notch above junk with stable outlook.

                    S&P said in the statement that “the Italian government’s economic and fiscal policy settings are weighing on the country’s economic growth prospects, a critical driver of government debt-to-GDP trajectory.” Also, “the government’s planned economic and fiscal policy settings have eroded investor confidence, as reflected by a rising yield on government debt.”

                    S&P projected Italy 2019 budget deficit at 2.7% of GDP, higher than the government’s own forecast and pledge of 2.4%. The rating agency noted that the government’s forecasts for economic growth of 1.5% in 2019 and 1.6% in 2020 were “overly optimistic”. And it projected 1.1% growth for both year, even downgraded from 1.4%, as “the demand stimulus from the government’s budgetary measures will likely be short-lived.”

                    Though, S&P also hailed that Italy “continues to be supported by its wealthy and diversified economy and its strong external position, with the economy close to becoming a net creditor in the context of its net international investment position.”

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                    ECB uncertain if US-China trade truce would lead to significant de-escalation of trade tensions

                      In the Monthly Bulletin released today, ECB warned that “signs of moderating momentum are emerging” in the global economy. And “activity is expected to decelerate in 2019 and remain steady thereafter.” And that “reflects the projected cyclical slowdown across advanced economies and in China.”

                      The central bank also noted that “The intensification of trade tensions between the United States and China should weigh on activity in both countries. While the global impact is still judged to be relatively limited, heightened uncertainty about future trade relations may adversely affect confidence and investment.”

                      ECB added that “While the temporary truce between the United States and China sent a positive signal, there remains considerable uncertainty as to whether the talks will lead to a significant de-escalation of US-China trade tensions.”

                      For Eurozone economy, ECB noted the slowdown in 2018 has been “driven largely by external factors, in particular the weakness in external demand.” And, “much like the strengthening of growth in 2017, the slowdown in 2018 has been driven by net exports. Trade dynamics have been normalising as global growth has fallen back towards potential levels.

                      Nevertheless, ECB also said “All in all, the recent slowdown in growth has not, thus far, called into question the fundamentals of the current economic expansion.”

                      Full ECB monthly bulletin here.

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                      Fed Kaplan supports hikes to neutral level then asset yield curve and other factors

                        Dallas Fed President Robert Kaplan said in an essay released yesterday that he estimation of the neutral real interest rate is in a “broad range around 0.50-0.75 percent”. And translated to nominal rate, that’s “roughly 2.50-2.75 percent”. That is, with fed funds rate at 1.75-2.00%, it would take approximately “three or four” more 25bps rate hike to reach the neutral level.

                        On monetary policy, he believed that Fed should “gradually” raise Fed funds rate until this neutral level. And for now, he would be “inclined to step back and assess the outlook for the economy and look at a range of other factors”. Those factors include “levels and shape of the Treasury yield curve”, before further action.

                        There’s clearly divergence in the emphasis of the views of Fed policy markets. Chicago Fed President Charles Evans said two weeks ago that fed fund rates might eventually enter into “somewhat restrictive” area, at roughly 0.50% above 2.75% neutral rate. Kaplan didn’t show objection to this idea but he emphasized to pause and look before acting.

                        On the other hand, Atlanta Fed President Raphael Bostic pledged earlier this week that he won’t vote for anything that knowingly inverts yield curve. But Kaplan said he supports raising rate to neutral before looking at the yield curve.

                        Full essay Where We Stand: Assessment of Economic Conditions and Implications for Monetary Policy.

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                        Into US session: Yen strongest against and stock extends selloff

                          Entering into US session, Yen is trading as the strongest one for today on risk aversion. It over takes Dollar’s position as the strongest major currencies again. But this time Swiss Franc doesn’t follow. Instead Sterling is steady as the third strongest one after CPI came in meeting expectations. Canadian Dollar is the weakest one.

                          European indices are trading deep red at the time of writing. FTSE is down -1.13%, DAX down -0.94%, CAC down -1.15%. That followed broad based weakness in Asia earlier today. Nikkei closed down -0.68%, Hong Kong HSI down -1.55%, China Shanghai SSE down -2.08%, Singapore Strait times down -0.27%.

                          But this time, Turkish crisis is not the one to blame. Turkey’s clashes with the US has turned into trade war. The country doubled tariffs on some US imports including alcohol, cars and tobacco, in response to US doubling of steel and aluminum tariffs. However, Lira is extending this week’s rebound with USD/TRY hitting as low as 5.9180.

                          Instead, risk aversion is partly due to poor earnings report of Tencent. Also, copper and zinc prices fell to the lowest level in more than a year. And, probably more importantly, the Chinese Yuan is extending recent steep down trend. USD/CNH (offshore Yuan), surges to as high as 6.9324.

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                          France PMI manufacturing dropped to 26-month low, service sector robust

                            France PMI manufacturing dropped to 50.7 in November down from 51.2 and missed expectation of 51.3. That’s the lowest in 26 months. PMI services dropped to 55.0, down from 55.3 and matched expectations. PMI composite dropped to 54.0, down from 54.1.

                            Commenting on the Flash PMI data, Eliot Kerr, Economist at IHS Markit said:

                            “The latest flash results pointed to a second consecutive contraction in manufacturing production as goods producers continued to mention weak automotive sector demand. Nonetheless, overall private sector output growth remained solid as the service sector reported robust growth.

                            “Despite input price inflation easing, panellists continued to cite higher raw material prices, particularly for oil. With pricing power muted, margins remained under pressure.

                            “The latest survey responses also revealed that recent protests over fuel taxes adversely affected the economy, with some panellists blaming demonstrations for lengthened delivery times.”

                            Full release here.

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                            USTR Lighthizer: A breakthrough in NAFTA talks in the next several days

                              US Trade Representative Robert Lighthizer said yesterday that he’s “hopeful” that there will be a “breakthrough” in NAFTA talks with Mexico in the “next several days”. But he didn’t offer any details. It’s reported that the two sides have largely agreed on the new rules regarding auto trade. And Lighthizer appeared to be willing to ease on the request of sunset clause in exchange for some concessions from Mexico.

                              On the other hand, Mexican Economy Minister Ildefonso Guajardo urged that “everybody has got to show some flexibility. And he added that “we have everything on the table, there are no preconditions and we’ll see at the end how the whole thing falls into place.” Also, Guajardo said the sunset clause will be among the “very last times” to be dealt with.

                              While there appears to be some progresses, it should be noted that Canada is not involved in the bilateral talks between the US and Mexico. And is unsure how Canada would be reengaged.

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                              ECB Villeroy: We remain committed to low interest rates

                                ECB Governing Council member Villeroy de Galhau said today that “We remain committed to maintaining interest rates very low, which is good for the economy:” And, “Progressively we are withdrawing monetary stimulus… but it is very progressive and depends on improvement in the economy. We’ll take the time it takes.”

                                Villeroy also noted that uncertainties are the main reason for the slow down in the economy. That also echoed ECB President Mario Draghi’s comment. The economic projections to be released during March ECB meeting will be watched closely. And, Villeroy hinted that there may be downgrade in GDP forecasts.

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                                Into European session: Yen strongest as markets turn cautious, Europeans soft

                                  Yen buying emerges in early European session as markets turn cautious again. Rally in Asian stocks lost steam in the afternoon with China Shanghai SSE turning red. But for now, Canadian Dollar and New Zealand Dollar are both firm for now. WTI crude oil breached 56 handle on recovery and lifted the Loonie overnight. But the recovery is so far rather weak with corrective look. We might seen more downside in oil price ahead, which drags down Canadian again. On the other hand, European majors are generally the weakest ones today.

                                  For the week, Sterling remains overwhelmingly the strongest one. While there is no sign of having an approvable Brexit deal yet, no-deal scenario is a big step further away. It will now take explicit consent in the Commons, by a vote on March 13, to trigger no-deal Brexit. Otherwise, it’s more likely that Article 50 will be extended for a short, limited time. Australian Dollar follows as second strongest for the week but it’s rather vulnerable. Canadian is the weakest on fall in oil prices after Trump tweeted it down.

                                  In Asia:

                                  • Nikkei closed up 0.50%.
                                  • Hong Kong HSI is up 0.10%.
                                  • Shanghai SSE is down -0.01%.
                                  • Singapore Strait Times is flat.
                                  • Japan 10-year JGB yield is up 0.0043 at -0.021.


                                  • DOW dropped -0.13%.
                                  • S&P 500 dropped -0.08%.
                                  • NASDAQ dropped -0.7%.
                                  • 10-year yield dropped -0.037 to 2.636.
                                  • 30-year yield dropped -0.028 to 3.006. 3% handle looks vulnerable again.
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                                  UK Hammond: The governor will not vote for no-deal Brexit

                                    More from Chancellor of the Exchequer Philip Hammond. He told BBC radio that “The government is very clear where the will of parliament is on this. Parliament will vote not to leave the European Union without a deal,” and he had “a high degree of confidence about that.”

                                    At the same time, he also warned that voting against Prime Minister Theresa May’s deal, the UK “will then be in unknown territory where a consensus will have to be forged across the House of Commons and that will inevitably mean compromises being made.”

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                                    EU Tusk: Unity needed facing capricious assertiveness of the American administration

                                      European Union Council President Donald Tusk urged unity in EU in his remarks ahead of the EU-Western Balkans summit.

                                      Tusk said a “united European front” is needed after US withdrawal from the Iran nuclear deal. The deal is “good for European and global security” and should be maintained. And officials should also “protect European companies from negative consequences of the US decision.”

                                      Regarding EU-US trade frictions, Tusk emphasized unity as “our greatest strength” and urged Europeans to “stick to our guns”. That is, a permanent exemption from the steel tariffs “if we are to discuss possible trade liberalisation with the US.”

                                      Tusk also named a new phenomenon of “capricious assertiveness of the American administration.” He pointed to latest decisions of Trump and noted “with friends like that who needs enemies.” And thanks to Trump,” Europeans have “got rid of all illusions”. And, ” if you need a helping hand, you will find one at the end of your arm. ”

                                      Full speech here

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                                      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

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                                        Euro mildly lower as inflation slowed, unemployment rate unchanged

                                          Euro dips mildly against Dollar and Yen after weaker than expected inflation reading. But it’s so far steady against others.

                                          Eurozone headline CPI dropped to 2.0% yoy in November, down from 2.2% yoy and missed expectation of 2.0% yoy. CPI core slowed to 1.0% yoy, down from 1.1% yoy and missed expectation of 1.1% yoy.

                                          Also Eurozone unemployment rate was unchanged at 8.1% in October, missed expectation of 8.0%. Highest unemployment rates were seen in Greece at 18.9% in August, and Spain at 14.8%.

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