Tue, Jul 16, 2019 @ 08:13 GMT

EU Oettinger: Italy budget not inline with EU obligations

    German magazine Der Spiegel reported that a top EU official confirmed Italy’s budget doesn’t meet EU guidelines. Günther Oettinger, European Commissioner for Budget and Human Resources Günther Oettinger, was quoted saying that “it confirmed the suspicion that the Italian budget draft for 2019 is not in line with the obligations that exist in the EU.” European Commissioner for Economic and Financial Affairs, Pierre Moscovici, is going to send a letter to Italy this week regarding the issue.

    Separately, Italy’s cabinet undersecretary for regional affairs, Stefano Buffagni, told Radio capital that if European Commission is to start an infraction process over the budget, Primer minister Giuseppe Conte is going to the EU to explain the “motivations” behind the plan. He also added that credit rating downgrade “can’t be excluded and we must be ready” even though “Italy has very solid economic fundamentals.

    S&P and Moody’s are both going to review Italy’s rating later this month.

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    US ADP grew 216k, tariffs have yet to materially impact jobs

      US ADP report showed private sector jobs grew 216k in July, above expectation of 186k. Prior month’s figure was also revised up from 177k to 181k.

      Commenting in the release, Ahu Yildirmaz, vice president and co-head of the ADP Research Institute, said “the labor market is on a roll with no signs of a slowdown in sight.” And, “nearly every industry posted strong gains and small business hiring picked up.”

      Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is booming, impacted by the deficit-financed tax cuts and increases in government spending. Tariffs have yet to materially impact jobs, but the multinational companies shed jobs last month, signaling the threat.”

      Full release here.

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      SNB kept policy rate at -0.75%, global risks more pronounced

        SNB left Sight Deposit rate unchanged at -0.75% as widely expected and changed the name to SNB policy rate . SNB will also “remain active in the foreign exchange market as necessary”. The central bank noted that expansionary monetary policy “remains necessary” against the backdrop of the current price and economic developments”. Franc’s exchange rate is “somewhat stronger” than in March and is “still highly valued”. Current markets “continues to be fragile”.

        Also signs from global economy “remain mixed”. But SNB expect global growth to “remain in line with potential”. Risks are “still to the downside” and are “more pronounced” than at March meeting. “Chief among them are political uncertainty and trade tensions, which could lead to renewed turbulence on the financial markets and a further dampening of economic sentiment.” Swiss growth “gathered momentum” at the beginning of 2019 with “positive” labor market development and “well utilized” production capacity. Momentum remains “favorable” for 1.5% growth in 2019.

        In the new economic projection, SNB raised 2019 inflation forecast to 0.6%, up from 0.3%. 2020 inflation forecast was raised to 0.7%, down from 0.6%. But for 2021, inflation forecast was lowered to 1.1%, down from 1.2%.

        Full statement here.

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        Into US session: Sterling strongest today but no follow through buying seen

          Entering into US session, Sterling is so far the strongest one today as lifted by upside surprise in UK services PMI. August BoE hike is back on the table after the current batch of May PMIs. But it’s far from being certain. As BoE MPC member Silvana Tenreyro pointed out, BoE opted to wait a little longer in May to have better assessment on the outlook. Her comments argued that August is probably time. But then, it’s totally data dependent. The MPC will still have two months of data in June and July to digest. If incoming data doesn’t feel right, BoE could decide to wait a little longer again in August after having waited that little longer.

          Technically, it should be noted that while GBP/USD rebounded it’s kept below yesterday’s high at 1.3397. GBP/JPY was a bit better as it breached yesterday’s high at 146.88 but there was no follow through buying. EUR/GBP is also held above yesterday’s low at 0.8727. So, up still now, the pound’s rise is rather forgettable.

          Another point to note is that commodity currencies are trading generally lower today, and there is some fresh selling in Canadian Dollar at the time of writing. We’ll see if that would drag down the Australian Dollar too.

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          EU Juncker: Increasing urgency on Brexit negotiation

            European Commission President Jean-Claude Juncker in European Parliament on Brexit:-

            • “There is increasing urgency to negotiate this orderly withdrawal.”
            • “As the clock counts down, with one year to go, it is now time to translate speeches into treaties, to turn commitments into agreements.”
            • “It is obvious that we need further clarity from the UK if we are to reach an understanding on our future relationship.”
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            U of Michigan consumer sentiment rose to 100.8, second highest since 2004

              U of Michigan consumer sentiment rose to 100.8 in September, up from 96.2 and beat expectation of 96.9. That’s the second highest level since 2004.

              Surveys of Consumers chief economist, Richard Curtin: Consumer sentiment posted a robust rise in early September, reaching 100.8, the second highest level since 2004-only behind the March 2018 reading of 101.4. Importantly, the gains were widespread across all major socioeconomic subgroups. The Expectations Index reached its highest level since July 2004, largely due to more favorable prospects for jobs and income. Despite a lessening of expected gains in nominal incomes in September, inflation expectations also declined, acting to offset concerns about declining living standards. Consumers anticipated continued growth in the economy that would produce more jobs and an even lower unemployment rate during the year ahead. While consumers were somewhat more likely to anticipate that the economic expansion would continue uninterrupted over the next five years, nearly as many expected another downturn sometime in the next five years. The largest problem cited on the economic horizon involved the anticipated negative impact from tariffs. Concerns about the negative impact of tariffs on the domestic economy were spontaneously mentioned by nearly one-third of all consumers in the past three months, up from one-in-five in the prior four months.

              Full release here.

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              Into US session: Sterling suffers selloff as May arrives in Brussels, BoE and SNB yawned

                Entering into US session, Sterling suffering another round of selloff as UK Prime Minister Theresa May arrives in Brussels for the EU summit. For now, it’s uncertainty how she could get pass Commons Speaker Bercow to hold another meaningful vote for her Brexit deal, get the deal approved, and the secure short Article 50 extension within a week before March 29. Stronger than expected UK retail sales look irrelevant for traders for now. BoE and SNB rate decisions were also largely ignored.

                Staying in the currency markets, Canadian Dollar is the second weakest despite resilient strength in oil price. Euro is the third weakest, as dragged down very weak German treasury yield. 10-year bund yield is down -0.039 at 0.047, while was was at high as 0.12 just two day ago. The sharp fall in German yield also helps Dollar recover much of the post FOMC losses. New Zealand Dollar is the strongest one for today so far, followed by Yen and then Australian.

                In US:

                • DOW opens slightly lower, down -0.13%.
                • S&P 50 is down -0.13%.
                • NASDAQ is down -0.04%.

                In Europe, currently:

                • FTSE is up 0.23%.
                • DAX is down -0.92%.
                • CAC is down -0.43%.
                • German 10-year yield is down -0.037at 0.047.

                Earlier in Asia:

                • Japan was on holiday.
                • Hong Kong HSI dropped -0.85%.
                • China Shanghai SSE rose 0.35%.
                • Singapore Strait Times rose 0.19%.
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                Dallas Fed Kaplan: Growth will fall below 2% after next year

                  Dallas Fed president Robert Kaplan expect solid growth in the US this year, with falling unemployment and rising wages. According to him, unemployment rate could fall further to as low as 3.7%. However, he warned of sluggish growth ahead.

                  He noted that “because the near-term outlook for GDP growth is positive, this may lull observers into believing we are on a path to sustained improvement in the economic performance of the U.S. economy.” However, as the effect of tax cut and budget stimulus fade, also as Fed normalizes monetary policy, growth will fall below 2% after next year.

                  He added that “unless Congress and the White House initiate structural reforms that improve workforce growth, education and skill levels of our labor force, moderate the expected path of government debt growth, and adopts policies that allow us to capture the opportunities provided by globalization, we are likely to see sluggish rates of GDP growth in the medium and longer term,”

                  Also, Kaplan pointed out that business are lacking pricing power for the moment. He noted “pricing power of businesses is more limited than we’re historically accustomed to seeing at this stage in an economic expansion.” And that could limit inflation and inflation expectations.

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                  UK retail sales dropped -0.8% mom, stark slowdown in food sales in September

                    Sterling pays little attention to weaker than expected retail sales data.

                    • Retail sales including auto and fuel came in at -0.8% mom, 3.0% yoy in September versus expectation of -0.4% mom, 3.6% yoy.
                    • Retail sales excluding auto and fuel came in at -0.8% mom, 3.2% yoy in September versus expectation of -0.4% mom, 3.8% yoy.

                    ONS Head of Retail Sales Rhian Murphy said: “Retail continued to grow in the three months to September with jewellery shops and online stores seeing particularly strong sales. This was despite a stark slowdown in food sales in September, following a bumper summer.”

                    Full release here.

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                    Mid-US update: Dow rises 360 pts, EUR/USD back in range after brief spike

                      Yen and Swiss Franc are trading as the weakest ones as risk appetite return to the markets today. Dollar gets no support from the strong rebound in US equities, as treasury yields are essentially flat.

                      Meanwhile, New Zealand Dollar, Canadian Dollar and Sterling are the strongest ones.

                      Dollar was sold off in early US session as EUR/USD broke 1.1610 minor resistance. But the pair quickly lost steam and is now back in familiar range.

                      At the time of writing, DOW is trading up 1.38%, S&P 500 up 1.43% and NASDAQ up 1.84%. Five-year yield is up 0.004, 10-year yield down -0.002, 30-year yield down -0.003. While DOW’s rebound is strong, it should be reminded that it’s more likely a corrective move than not. And, it’s already close to first hurdle of 38.2% retracement of 26951 to 24845.10 at 25649.86, which is close to 55 H EMA at 25706. We’ll see whether DOW could extend the rebound through this hurdle, or get an instant rejection from it before today’s close.

                      In Europe, stock closed broadly higher on late buying.

                      • FTSE rose 0.43% to 7059.40
                      • DAX rose 1.40% to 11776.55
                      • CAC rose 1.53% to 5173.05
                      • German 10 year yield dropped -0.0102 to 0.495
                      • Italian 10 year yield also dropped -0.0928 to 3.462
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                      German ZEW dropped to -2.1, restrained economic growth for the next six months

                        German ZEW economic sentiment dropped to -2.1 in May, down from 3.1 and missed expectation of 5.0. It’s also well below long term average of 22.1. Current situation index, though, rose to 8.2, up from 5.5 and beat expectation of 6.0. Eurozone ZEW economic sentiment dropped to -1.6, down from 4.5 and missed expectation of 5.0. Current situation gauge rose 6.2 pts to 7.0.

                        ZEW noted that “The development of production and exports in Germany as well as Eurostat’s most recent flash estimate of GDP growth in the euro area in the first quarter of 2019 give rise to the hope that the German economy, too, has grown more strongly than expected in the first quarter.

                        ZEW President Achim Wambach said: “The decline in the ZEW Indicator of Economic Sentiment shows that the financial market experts continue to expect restrained economic growth in Germany for the next six months. The most recent escalation in the trade dispute between the USA and China again increases the uncertainty regarding German exports – a key factor for the growth of the gross domestic product”.

                        Full release here.

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                        From Powell’s Q&A: Yield at long end indicates neutral rates, protectionist countries have done worse

                          Fed Chair Jerome Powell’s Q&A in the Congressional Testimony was composed and balanced, while being upbeat as expected. Regarding the “hot” topic of flattening yield curve and recession, he didn’t reply directly. Instead, he acknowledged the there are a lot of discussions. But what matters is the yield at the long end as an indication of the so called neutral rate. Right now, 30 year yield is at around 2.96 after hitting as high as 3.247 earlier this year. 10 year yield is at around 2.85 after hitting as high as 3.115. So, 2.75-3.00% is probably the neutral rate to Powell, rather than 2.50-2.75%.

                          Regarding US trade policy, Powell didn’t comment directly as expected too. It should be reminded that Powell has already made his stance clear before. He doesn’t comment on policies he doesn’t make. And to guard the line of independence of Fed, he has to refrain from commenting on the administration’s policies too. Instead, he takes them as given.

                          Though, he was willing to talk about trade from “principles” perspective. And to him, countries that embraced free trade and low tariffs used to have better results and higher productivity. Countries that have been more protectionist “have done worse”.

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                          Asia update: Dollar stays pressured but stock rally slows

                            Asian markets are trading generally higher today, but gains are rather limited. Nikkei is currently up 0.94%. Singapore Strait Times is up 0.48%. But Hong Kong HSI and China Shanghai SSE are up merely 0.19% and 0.11% respectively. US-China trade talks will step up a level when Chinese Vice Premier Liu He visit Washington later in the month. Fed officials, including Chair Jerome Powell, continued to emphasize patience before another rate move. But the lift on sentiments is limited.

                            Overnight, DOW extended the rebound but closed up just 0.51% at 24001.92. Nevertheless, reclaiming 24k handle is a positive development. S&P 500 rose 0.45% and NASDAQ rose 0.42%. Treasury yields continued to display strength at the long end. 30-year yield rose 0.027 to 3.051. 10-year yield rose 0.003 to 2.731. But yield curve remains inverted from 1-year (2.615) to 2-year (2.578) to 3-year (2.549) and 5-year (2.568).

                            In the currency markets, Dollar is the weakest one in Asian session today, followed by Yen and then Sterling. Commodity currencies and Euro are the strongest.

                            Over the week, the picture is pretty similar.

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                            Swiss KOF rose to 97.4, still point to rather weak growth in coming months

                              Swiss KOF Economic Barometer rose to 97.4 in March, up from 93.0 and beat expectation of 93.9. The improve is predominantly due to “positive impulses” from manufacturing, as driven by the electrical industry, followed by the metal industry, mechanical engineering and the textile industry.

                              KOF Noted in the release that “recent downward tendency has at least for the time being ended.” However, the current reading is still “markedly below its average”. Hence, Swiss economy can expect to experience rather weak growth in the coming months.

                              Full release here.

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                              Fed Bullard: Weak data probably temporary, premature to contemplate rate cut

                                St. Louis Fed President James Bullard said overnight that the “spate of weaker data” is “probably mostly temporary”. And, the “notion of a rebound in the second quarter is a good forecast:. Meanwhile, it’s “premature to contemplate a rate cut here”. He added “you do want to watch the data closely”, and “you won’t really know that until you get to the July time frame.” To him, that would be the next time to revisit rate cut.

                                On yield curve inversion, Bullard said “you would have to get a wider variety of spreads to be inverted — the two-year/10-year in particular”. Also, he noted ” it would have to stay inverted and be meaningfully inverted for awhile, a matter of months or even quarters, before you would say it that it was sending a negative signal that’s in the same sense that it did historically.”

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                                DOW surged in late hour, Nikkei and HSI follow, JPY paring recent gains

                                  Risk aversions receded much as markets, in the end, responded rather positively to news of trade talks between the US and China. For now, it seems both countries will hold fire first, and come back to the table.

                                  After struggling below 24000 handle for most of the session, DOW finally made up its mind in the last two hours and surged sharply. DOW ended the day up 669.40 pts or 2.84% at 2420.60. S&P 500 gained 70.29 pts or 2.72% to close at 2658.55. NASDAQ also rose 227.87 pts, or 3.26% to 7220.54.

                                  Still, for now, DOW is limited below 24453.14 minor resistance and thus, there is no change in the near term direction yet. It’s still more likely to revisit 23360.29 support then not.

                                  Asian markets follow with Nikkei trading up over 1.6% at the time of writing. Hong Kong HSI is up 0.9%.

                                  From D heatmap, JPY is extending this week’s fall in Asian session while Canadian Dollar is picking up some steam.

                                  The W heatmap shows JPY as the weakest one, consistent with the daily developments. But holding above last week’s low against all but GBP only. Euro and GBP are the strongest ones for the week so far.

                                  Also, note that EUR/JPY is held well below 132.40 resistance. GBP/JPY also stays below 150.92 resistance. Current rebound in JPY is more seen as a corrective move. The picture suggests that intraday or swings traders could ride on improved sentiments to sell JPY for quick profits. But for position traders, it could be an opportunity to buy JPY once the rebound loses steam.

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                                  February 25 imagery suggests North Korea testing nuclear reactors at Yongbyon

                                    Defence & security intelligence analysts Jane’s reported that North Korea likely had preliminary testing it’s nuclear reactors at the Yongbyon research facility. That came weeks ahead of the planned meeting between North Korean Leader Kim Jong-un and South Korean President Moon Jae-in next month. There will also be a planned meeting between Kim and US President Donald Trump in May.

                                    But it should be noted that the analysis was based on an imagery from February 25. Jane’s noted:-

                                    • Satellite imagery suggests that preliminary testing of North Korea’s experimental light water reactor (ELWR) at Yongbyon may have begun.
                                    • Signatures of testing in late February follow logically from numerous indicators of increased activity at the ELWR that were visible throughout 2017, although reactor criticality is only likely to occur later in 2018 or in 2019.
                                    • The ELWR was built and optimized for electricity production, but has ‘dual-use’ potential and can be modified to produce fissile material for nuclear weapons.


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                                    China SSE composite in medium term correction after strong two-day rebound

                                      China’s Shanghai SSE Composite closed sharply higher by 4.09% today to 2654.88. The two day rebound after hitting 2449.19 on climax selling suggests medium term bottoming. And, this year’s down trend from 3587.03 has likely completed a five wave sequence to 2449.19.

                                      That is, the index is now in medium consolidation phase that could last a few months. 2700 psychological level will be the hurdle to overcome. It’s close to 2691.02 support turned resistance and 55 day EMA at 2721.67. Firm break of this level will pave the way to 38.2% retracement of 3587.03 to 2449.19 at 2883.84. We’d expect strong resistance from there to limit upside. If everything turns out as expected, the long term down trend should resume some time next year after consolidation completes.

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                                      Japan PMI manufacturing dropped to 51.8, underlying trend skewed to the downside

                                        Japan PMI manufacturing dropped to 51.8 in November, down from 52.9 and missed expectation of 53.0. That’s also a two-year low.

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

                                        “October’s six-month peak seems to have been just a transitory month-to-month rebound following September’s weather-hit dip. The November PMI dropped to a two-year low as the rate of output growth weakened and new orders for goods declined for the first time since September 2016.

                                        “The underlying trend appears to be skewed to the downside. Indeed, the fall in new orders is a worrying development as easing global growth momentum coupled with a weak domestic backdrop could spell further demand woes for Q4. In fact, survey data suggests that manufacturers have already begun to pare back expectations, as confidence fell for a sixth consecutive month.”

                                        Full release here.

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                                        Into US session: Markets shrug new tariffs, await US CPI and Canada jobs

                                          Entering into US session, the forex markets are generally staying in very tight range. Risk aversion somewhat receded today even though Trump maintained his hard line on trade negotiations with China. He indicated there is no rush for a deal now that the new rounds of tariffs took effect today. And the US an even use newly collected tariffs to buy their own agricultural products to send to poor countries for humanitarian aids. Let’s see if he will deliver what he claims.

                                          For now, Dollar is the weakest one for today, followed by Yen and then Canadian. Euro is the strongest one, followed by Swiss franc and then Kiwi. The Pound gets no support from solid 0.5% Q1 GDP growth in UK. Dollar and Loonie will look into US CPI and Canadian job data for the next move.

                                          In Europe, currently:

                                          • FTSE is up 0.39%.
                                          • DAX is up 0.80%.
                                          • CAC is up 0.50%.
                                          • German 10-year yield s up 0.008 at -0.039, staying negative.

                                          Earlier in Asia:

                                          • Nikkei dropped -0.27%.
                                          • Hong Kong HSI rose 0.84%.
                                          • China Shanghai SSE rose 0.31%.
                                          • Singapore Strait Times rose 0.12%.
                                          • Japan 10-year JGB yield rose 0.0019 to -0.044.
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