BoJ Deputy Governor Masayoshi Amamiya said in a speech that “Japan’s economy is likely to continue on an expanding trend, albeit at a moderate pace.” Currently, downside risks, “mainly regarding developments in the global economy” require the “most attention”. “Exports and production are projected to continue showing some weakness for the time being, with a pick-up in the global economy being delayed.”
But the impact of global slowdown on domestic demand “has been limited so far”, with growth in all three sectors of corporate, household and public sectors. While growth in domestic demand would “decelerate temporarily” due to global slowdown and consumption tax hike, it will remain firm in “somewhat longer-term perspective”.
Nevertheless, Amamiya reiterated BoJ’s usual message. “In a situation where downside risks to economic activity and prices, mainly regarding developments in overseas economies, are significant, the Bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost.”
Speaking at a town hall to a group of educators, Fed Chair Jerome Powell repeated the assessment that the US economy is “now in a good place”. While there were some “big events” like Brexit, “the system has been strong”. He also emphasized that the essence of his job is to “earn and deserve trust” of American people to Fed that, it’s “working on their behalf in a non-political way” to support the economy.
Looking forward, Powell said income inequality and sluggish productivity are the biggest challenges of the next decade. He noted “We want prosperity to be widely shared. We need policies to make that happen.” And, “There are policies that we need to do that everyone should be able to agree on that will change mobility, improve people’s chances and enable people to better take part in the workforce of the future.”
Separately, Fed Governor Randal Quarles warned that “right now China is a downdraft as we think about what the potential impact for that is on our economy.” Though, the U.S. outlook “is still very solid” given the labor market in particular.
Eurozone Economic Sentiment Indicator (ESI) rose 0.3 to 101.5 in December, slightly above expectation of 101.4. The stabilization in the ESI resulted from markedly higher confidence in services (+2.2 to 11.4), construction (+2.2 to 5.0) and, to a lesser extent, retail trade (+1.0 to -0.8), while confidence worsened among consumers (-0.9 to -8.1) and remained virtually unchanged in industry (-0.2 to -9.3).
Amongst the largest euro-area economies, the ESI increased significantly in Italy (+1.7) and Spain (+1.3) and edged up in Germany (+0.4), while it remained broadly unchanged in France (-0.2). By contrast, the ESI declined somewhat in the Netherlands (-0.4).
Business Climate Indicator dropped -0.04 to -0.25. With the exception of production expectations, which improved markedly, all the components of the BCI worsened.
UK Prime Minister Theresa May is set to meet opposition Labour leader Jeremy Corbyn later today to find the much needed common ground to get a Brexit deal through the parliament. But so far, it seems no one is optimistic about the meeting.
Ahead of that, May said there are areas she could agree on with Corbyn, including leaving EU with a deal, jobs and ending free movements. Minister for Wales and government whip Nigel Adams resigned on May’s decision and she is increasing the risk of the “calamity of a Corbyn government.” Brexit Minister Steven Barlcay said May is not handling a “blank check” to Corbyn and there is no precondition for the discussions with Labour.
Corbyn emphasized that anything agreed with May need to be put into law so that it is guaranteed for the parliament. pro-EU Labour lawmaker, Ben Bradshaw, warned that “it is clearly a trap designed to try to get May’s terrible deal through, which some people have fallen for, but Labour mustn’t.”
Scottish First Minister Nicola Sturgeon poured cold water and said the meeting would produce “an option that it won’t take too long for people to realize satisfies nobody, makes the country poorer and potentially could be unpicked by a new prime minister such as Boris Johnson.”
On the EU side, European Council President Donald Tusk said it was not certain how European leaders would view another request of delay from May. EU’s Economic Affairs and Tax Commissioner Pierre Moscovici said “If there is a no-deal scenario, new customs controls would have to be introduced… That does not mean we would systematically check every single… lorry… We would be controlling goods on the basis of risk analysis.”
New Zealand Dollar weakens broadly today and stays generally weak as Terms of Trade Index rose only 0.6% qoq in Q2, versus expectation of 1.1% qoq. Prior quarter’s figure was also revised down from 1.9% qoq to -2.0% qoq. Looking at the details, export prices for goods rose 2.4%, while import prices for goods rose 1.7%. Seasonally adjusted goods export volumes rose 1.1%, and goods import volumes rose 0.9%. Seasonally adjusted goods export values rose 3.0%, and goods import values rose 1.7%.
US stocks have been under tremendous pressure this week on intensified recession fears after poor ISM indices. Dollar also turned mixed after initial rally attempt. Focus will turn to non-farm payroll reports, which could be a make-or-break point for sentiments. Markets are expecting 140k job growth in the US in September. Unemployment rate is expected to be unchanged at 3.7%. Average hourly earnings is expected to grew 0.30% mom.
Other employment data from the US were generally disappointing. ISM manufacturing employment dropped from 47.4 to 46.3, deeper into contraction region. ISM non-manufacturing employment also dropped from 53.1 to 50.4, indicating almost no growth. ADP showed 135k growth in private sector jobs, which was not too bad. Four-week moving average of initial jobless claims was largely unchanged, down from 216k to 213k. Conference Board consumer confidence also dropped sharply from 134.2 to 125.1.
In case of downside surprises, 10-year yield would be also be one to watch, in additional to stocks and Dollar. TNX’s recovery from 1.429 has completed early than expected 1.903, ahead 2.123 fibonacci level. Further decline is now mildly in favor as long as 55 day EMA holds. Next target is a retest on 1.429 low. Break will resume medium term down trend. If that happens, USD/JPY could be a pair under most selling pressure.
Bundesbank said in the monthly report that “the German economy should shrink slightly in the spring”, referring to Q2. That’s because “special effects that contributed to a noticeable rise in gross domestic product in the first quarter are either expiring or being reversed.”
The report added that Germany is facing headwinds from trade tensions, Brexit and slowdown in the global economy. These factors are weighing down on the export-led manufacturing sector. Nevertheless, “the buoyant forces underpinning the strong domestic-oriented sectors of the economy remain fundamentally intact”.
Overall, “the dichotomy in the economy will continue.”
Canada employment grew 53.7k in September, above expectation of 40.2k. For whole of Q3, employment rose 111k, or 0.6%, similar to 0.7% in Q2. Unemployment rate dropped to 5.5%, down from 5.7% and beat expectation of 5.7%.
The financial markets are responding positively to China President Xi Jinping’s calm but uninspiring speech at the Boao Forum for Asia today. At the time of writing, Nikkei is trading up 1%, Hong Kong HSI is up 0.9%. JPY is deeply lower at the current 4 hour bar while commodity currencies show much strength. This is a clear sign of risk appetite.
Zero-sum game thinking is outdated
Xi urged the world not to return to “Cold War” mentality. He said that “human society is facing a major choice to open or close, to go forward or backward.” And, “in today’s world, the trend of peace and cooperation is moving forward and a Cold War mentality and zero-sum game thinking are outdated.”
And, he added that “paying attention only to one’s own community without thinking of others can only lead into a wall.” XI urged that “we can only achieve win-win results by insisting on peaceful development and working together.”
Stay committed to multilateral frameworks
Regarding trade, Xi said that “China does not seek trade surplus. We have a genuine desire to increase imports and achieve greater balance of international payments under the current account.” And, “we hope developed countries will stop imposing restrictions on normal and reasonable trade of high-tech products and relax export controls on such trade with China.”
Xi also emphasized the need to “stay committed to openness, connectivity and mutual benefits, build an open global economy, and reinforce cooperation within the G-20, APEC and other multilateral frameworks”.
China to further open up
Xi also talked about the plans to further open up the massive Chinese markets to foreign investments. The measures would include “significantly” lowering import tariffs for autos, enforcing intellectual property protection, and improving investment protections for foreign companies.
Xi’s speech is the kind that we expected. He is not a leader who thrives on populism and thus there wasn’t any emotionally charged over the top words or phrases. Xi is a leader who survives on internal party politics in a politically closed country. The reiteration of commitment to multilateral relationship is consistent with the party line to accuse US of protectionism.
The pledges to open up the markets have been delivered by various Chinese leaders for two decades but actual delivery has been relatively small. And for now, these pledges remain words only. In addition, China still have the option of opening the markets to all but those who don’t commit to multilateral frameworks.
So, does Xi’s speech do something to ease the trade tension with the US? Certainly not. Does it worsen the relationship? No neither. It’s like calling “check” playing poker. The ball is still on Trump’s court.
Below is Xi’s speech with English translation voice over.
Dollar index surged sharply overnight, thanks to the selloff in EUR/USD. The case of medium term reversal continued to build up after breaking of the trend line resistance as well as 91.01 medium term support turned resistance. Focus is now on 100% projection of 88.25 to 90.93 from 89.22 at 91.90. Decisive break there will add to the case that rise from 88.25 is an impulsive move. And thus, affirm the case of medium term trend reversal. However, rejection from 91.90 could make the rise corrective. For, we’re favoring the former case.
There are a couple of events that could help unveil the development including today’s Q1 GDP, next week’s ISMs and NFP, and certainly treasury yields too.
USD/CAD drops notably after dovish BoC rate hike. There is additional boost and WTI crude oil spikes higher after larger than expected fall in US crude oil inventory (-12.6m vs -4.1m exp). But still, it’s unable to break through 1.3067 key support level yet.
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.
The Financial Times reported that EU is floating around a compromised Irish border backstop proposal to solve the ongoing Brexit negotiation impasse. The proposal was briefed to EU ambassadors earlier on Wednesday.
Under the proposal, EU would lay out the full terms of a “bare-bones” whole-UK customs union in the withdrawal agreement. It would apply a common external tariff on imports from outside the EU and rules of original. Meanwhile, under the backstop, Northern Ireland would remain in a deep customs union with the EU, applying all “customs code” and following EU’s regulations for goods and agri-food products. The stop-gap measures would remain in place until concluding the permanent UK-EU trade deal.
UK Prime Minister Theresa May is expected to tell the EU whether UK is open to the compromise next week. And that would be a key factor to determine if a November Brexit summit is to be held.
Pound was knocked down after another data miss. Headline CPI slowed for the third month in a row to 2.4% yoy in April, down from 2.5% yoy and missed expectation of 2.5% yoy. Core CPI also slowed to 2.1% yoy, down from 2.3% yoy and missed expectation of 2.2.% yoy.
The Office of National Statistics noted that air fares made the largest downward contribution to the change in CPI. It noted that “the timing of Easter in the middle of April 2017 contributed to air fares rising by 18.6% on the month whereas this year, Easter fell at the beginning of April before the price collection period and there was no price rise. Instead, fares fell slightly, by 0.2%, between March and April.
Poor weather was blamed for weak Q1 GDP. Timing of Easter is now blamed for CPI slowdown. But whether they’re true or now, the chance of an August BoE hike looks slimmer after the release.
Also from UK, RPI accelerated to 3.4% yoy in April, up from 3.3% yoy, met expectation. PPI input rose to 5.3% Yoy, PPI output was unchanged at 2.7% yoy, PPI output core slowed to 2.4% Yoy. House price index was unchanged at 4.2% yoy in March.
GBP/JPY responds to the release by diving through 147.04 support, confirming resumption of recent decline from 153.84. 144.97 is the next target.
GBP/USD drops to further to 1.3345 and is on course for 1.3161 fibonacci level.
EUR/GBP is stay in range, because Euro is weighed down by its own weaker than expected PMI data.
US ADP private employment grew strongly by 275k in April, well above expectation of 181k. Looking at the details, jobs in goods-producing sector rose 52k. Jobs in service-providing sector rose 223k.
“April posted an uptick in growth after the first quarter appeared to signal a moderation following a strong 2018,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “The bulk of the overall growth is with service providers, adding the strongest gain in more than two years.”
Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is holding firm, as businesses work hard to fill open positions. The economic soft patch at the start of the year has not materially impacted hiring. April’s job gains overstate the economy’s strength, but they make the case that expansion continues on.”
Chinese Premier Li Keqiang pledged, in the World Economic Forum in northeastern Chinese port city of Dalian, to further open up the finance and manufacturing industry. Li said, “We will achieve the goal of abolishing ownership limits in securities, futures, life insurance for foreign investors by 2020, a year earlier than the original schedule of 2021.”
Additionally, manufacturing sector, including auto industry, will be opened by further by reduction in negative investment list that restricts foreign investment in some areas. Besides, the government will also reduce restrictions, in 2020, on market access in value-added telecoms services and transport sectors.
Li also noted “global economic risks are rising somewhat, international investment and trade growth is slowing, protectionism is rising and unstable and uncertain factors are increasing”. And, “some countries have taken measures including cutting interest rates, or sent clear signals on quantitative easing.” But he pledged China won’t resort to competitive currency devaluation but keep the exchange rate stable at a reasonable and balanced level.
It’s reported that North Korea is ready to discuss denuclearization with the US, and thus, increasing the chance of meeting between it’s leader Kim Jong-un and US president Donald Trump in May. Financial Times quoted and unnamed National Security Council spokesperson saying that “I confirm that the United States and North Korea have been holding talks in preparation for a summit, and that North Korea has confirmed its willingness to talk about denuclearization.” Reuters also quoted an unnamed official saying “the U.S. has confirmed that Kim Jong Un is willing to discuss the denuclearization of the Korean Peninsula.”
Separately, China’s Ministry of Commerce announced it’s banned exports to North Korea with potential dual use in weapons of mass destruction. Details on 32 materials banned were released by the MOFCOM, including technologies and forms of equipment, including particle accelerators and centrifuges.
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