EU Trade Commissioner Cecilia Malmstrom said she had productive meetings with US Trade Representative Robert Lighthizer in Washington this week. She noted that both sides have agreed on a problem as “China is dumping the market, China is subsidizing their industry, this creates global distortions”.
However, there was obvious disagreement in the solution. Malmstrom complained that “the solution to these problems is not imposing tariffs on the European Union. Why is that so hard to understand?” And, she added “if you want an ally and partner, this is not the way to go about it.”
She emphasized that “we should work on common threats and common challenges and not impose tariffs on each other.” If US imposes auto tariffs to EU cars, Malmstrom pledged to, “with a very heavy heart”, retaliate against EUR 20b US imports.
On EU-US trade agreement, Malmstrom noted there is “no support” for a full comprehensive trade agreement in the EU right now. She reiterated EU’s stance that “if we start with industrial goods, which is much less complicated, and which will be beneficial from both sides, we maybe can rebuild that trust and then maybe we’ll see later” about agriculture”.
In an IMF report on UK, the organization expect growth to remain “moderate in the near term”, averaging around 1.5% in 2018 and 2019. However, it wanted that ” A more disruptive departure from the EU could lead to a significantly worse outcome, especially if it were to occur without an implementation period. “. On the other hand, “an agreement featuring fewer impediments to trade than currently expected could buoy business and consumer confidence, leading to faster growth.”.
IMF Managing Director Christine Lagarde also said, “compared with today’s smooth single market, all the likely Brexit scenarios will have costs for the economy and to a lesser extent as well for the EU.” And she warned that “The larger the impediments to trade in the new relationship, the costlier it will be. This should be fairly obvious, but it seems that sometimes it is not.”
In addition to Brexit, UK also faces a range of other economic challenges. These include “persistently lackluster productivity growth, large public debt, and the wide current account deficit.” Nonetheless, UK’s “sound macroeconomic framework, regulatory environment, and deep capital and flexible labor markets will be advantages in implementing reforms to address them.”
UK Chancellor of Exchequer Philip Hammond urged the government to listen to the “clear warnings” of the IMF of no-deal Brexit. Though, he also noted that no-deal outcome is unlikely even though it’s not impossible.
Japan criticized South Korea’s removal of the country from export whitelist today, as trade tension continued to intensify. South Korea announced to move Japan into a newly created export category, for the latter’s frequent violation of basic rules.
Japanese Industry Minister Hiroshige Seko said South Korea has failed to show how Japan had fallen short of international export control measures. He added, “from the start, it is totally unclear under what basis South Korea can say that Japan’s export control measures don’t meet the export control regime.”
On the other hand, South Korean President Moon Jae-in said today that “the Japanese government made a decision to exclude South Korea from white-listed countries, following export restrictions… It is disappointing and regrettable in light of the two countries’ shared efforts for friendship and cooperation.”
More from Chicago Fed President Charles Events. He warned that “at the moment, the risks from the downside scenarios loom larger than those from the upside ones”. And, “if activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold — or perhaps even loosened — to provide the appropriate accommodation to obtain our objectives.”
On the other hand, “if growth runs close to its potential and inflation builds momentum, then some further rate increases may be appropriate over time to ensure that the economy settles in on its long-run sustainable growth path and that inflation runs symmetrically about our 2 percent target”. He added “in this scenario, the path for rates will depend crucially on any signals of an acceleration in core inflation.”
Though, he emphasized that US economy is still in good shape. He pointed to Fed’s forecasts of 1.75-2.0% GDP growth in 2019. Evans said “the lower end of this range is actually in line with my view of the economy’s long-run growth potential. So we’re not looking at a bad number.” Though, “:the economy won’t feel like it is doing very well compared with last year’s very strong performance.”
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.
The US Senate will hold two competing votes on Thursday as effort to end the record government shut down. Trump’s plan, which includes USD 5.7B for border wall will be voted on. Also, Democrat’s proposal, to reopen government through February 8, will also be voted on. It’s seen as a concession by Senate Majority Leader Mitch McConnell who previously refused to vote on a bill that Trump would veto.
Trump includes a provisional three-year work permits for the youngsters under Deferred Action for Childhood Arrivals program as bargaining chip. But his plan is still likely to be voted down as Democrats have open rejected to compromise on the issue.
The Democrats could gain enough support from Senate Republicans rebels to vote for their proposal, which was already pass in the House. However, even so, Trump will likely veto even if the Democrat’s bill is passed in the Senate. The Democrats are way short of two-third majority to override Trump’s veto.
So, the shutdown might still extend beyond Thursday.
The official China PMI Manufacturing Index rose to 49.7 in July, up from 49.4 and beat expectation of 49.6. Looking at the details, production, new order, new export order, backlog, purchase volume, import, purchase price,, ex-factory price, employment, production and operation improved. But finished goods inventories, raw material inventory and supplier delivered dropped.
Analyst Zhang Liqun noted that: “Economic downturn is slowing down…. activities have been restored…. there are signs of recovery in production and operation activities, indicating that the effect of macroeconomic policy counter-cyclical adjustment has begun to appear.”
However, he also warned that ” downward pressure on the economy is still not to be underestimated. And, the foundation for stabilization still needs to be consolidated.
Also released, official PMI Non-Manufacturing Index dropped to 53.7, down from 54.2 and missed expectation of 54.0.
Japan PMI manufacturing was finalized at 48.9 in February, revised up from 48.5. It’s the first contractionary reading since August 2016. Demand conditions in Japan deteriorated at stronger rate while business outlook was broadly neutral having fallen for the ninth straight month.
Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:
“Sharper reductions in output and demand drove the Japanese manufacturing economy into contraction during the midway point of Q1, compounding reductions already recorded in January. Global trade frictions and weak domestic manufacturing demand pose considerable risks to Japan’s goods producers. As such, firms pared back expectations to near-neutrality. The rebound seen in the official Q4 GDP estimate does not appear to be reflective of underlying economic conditions in Japan.
“With the consumption tax hike set to come into play later this year, weak domestic demand will only heighten fears that the economy could be poised for a downturn. Focus turns towards service sector data, which will need to show signs of resilience in order to offset the manufacturing drag.”
Also from Japan, unemployment rate rose 0.1% to 2.5% in January, versus expectation of 2.4%. Tokyo CPI core was unchanged at 1.1% yoy in February, versus expectation of 1.0% yoy. Capital spending rose 5.7% in Q4 versus expectation of 4.5%.
Swiss CPI rose 0.4% mom in March, above expectation of 0.3% mom. Annual rate rose to 0.8% yoy, up from 0.6% yoy in February and beat expectation of 0.7% yoy.
Swiss Federal Statistical Office (FSO) noted that “various factors contributed to the 0.4% rise compared with the previous month, such as an increase in the price of international package holidays, air transport and hotel accommodation. However, prices fell for medicines and fuel.”
Bundesbank President, Jens Weidmann, a known ECB hawk, called for ending stimulus again today.
He painted an upbeat picture of Eurozone economic outlook and hailed that “the upswing is now everywhere on broad feet; the growth rates of the Member States are now scattering noticeably less. The unemployment rate has fallen to 8.6 percent, its lowest level since the end of 2008. The sentiment indicators continue to move at very high levels. This indicates that the favorable economic development continues for the time being.
ECB economists projected 2.4% GDP growth in 2018, 1.9% in 2019 and 1.7% in 2020. Also, They forecast inflation to be at 1.4% in 2018 and 2019, and then rise to 1.7% in 2020. And to Weidmann, that is “a level that is broadly consistent with our medium-term definition of price stability.” With this background, “it is not surprising that the financial markets have been expecting net bond purchases to end in 2018.” He also emphasized that “the end of net purchases is only the beginning of a multi-year process of monetary normalization. That’s why it’s so important to actually start soon.”
Regarding interest rates, Weidmann said that “the markets see a first rate hike around the middle of the year 2019, which is probably not entirely unrealistic.”
Leaders of both US and China trade teams held “constructive” telephone conversations yesterday, as negotiations continued. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin joined the talks. On the Chinese side, there were Vice Premier Liu He and Minister of Commerce Zhong Shan. The call was also confirmed by Chinese Commerce Minister in a brief statement today.
White House economic adviser Larry Kudlow said the talks “went well” and were constructive, but “there are no miracles here”. He added, “there was headway last winter and spring, then it stopped. Hopefully we can pick up where we left off, but I don’t know that yet.”
Kudlow also said yesterday that “President Xi is expected, we hope in return for our accommodations, to move immediately, quickly, while the talks are going on, on the agriculture (purchases).” However, it’s also reported by Hong Kong South China Morning Post that Xi had made no specific commitment regarding the purchases during the meeting with Trump at G20 in Osaka. So far, no significant increase in purchase is noted yet.
Steve Baker, a former junior Minister at the Department for Exiting the European Union, warned that there will be 80 or more MPs voting against Prime Minister Theresa May’s Chequers Brexit plan at the party conference. And, the part will suffer from “catastrophic split”. Instead, he urged May to go for the route of a free trade agreement with the terms laid down by European Council president Donald Tusk.
And he added, “if we come out of conference with her hoping to get Chequers through on the back of Labour votes, I think the EU negotiators would probably understand that if that were done, the Tory party would suffer the catastrophic split which thus far we have managed to avoid.”
Baker resigned earlier this year in opposition to the Chequers’ plan. The party conference will be held on September 30 to October 3.
Entering into US session, Sterling is now the weakest one for today after BoE kept interest rate unchanged but lowered both growth and inflation forecast. According to the Quarterly Inflation Report, even with the assumption of smooth Brexit, BoE projects to hike only once through Q1 2022. UK Prime Minister Theresa May’s visit to Brussel appears to be rather fruitless too. Canadian Dollar is currently the second weakest one followed by New Zealand Dollar. The latter was weighed down by weaker than expected job data released earlier today. Euro is mixed even though EU slashed 2019 growth forecast by -0.6% to 1.3% only.
At the time of writing, Yen is the strongest one on risk aversion, while Swiss Franc is the second. Both are also helped by sharp decline in German yields. Australian Dollar is the third strongest mainly thanks to weakness elsewhere. Also, Aussie is just taking a breather after yesterday’s steep selloff. Dollar remains generally firm and is set to extend gain against all but Yen, and probably Franc.
In Europe, currently:
FTSE is down -0.08%.
DAX is down -1.45%.
CAC is down -0.82%.
German 10-year yield is sharply lower by -0.0204 at 0.126.
Earlier in Asia:
Nikkei dropped -0.59%.
Japan 10-year yield closed up 0.0069 at -0.009, staying negative.
US Non-Farm Payrolls report will be the major focus for today. Markets are expected 175k job growth is March, a solid rebound from February’s terrible number of 20k. Unemployment rate is expected to be unchanged at 3.8%. Average hourly earnings growth is expected to slow to 0.2% mom.
Looking at other employment related data, the employment component of ISM manufacturing rose notably from 52.3 to 57.5. That of ISM non-manufacturing also increased from 55.2 to 55.9. However, ADP employment was rather disappointing, at 129k versus expectation of 184k. Four-week moving average of initial jobless claims dropped to 213.5k. However, Conference Board consumer confidence dropped from 131.4 to 124.1.
All in all, other data suggest that February’s disaster won’t extend into March, even though there might still be downside surprise. Meanwhile, there is prospect of upside surprise in upward revision in February’s number. Overall, the set of data is likely to be solid by uninspiring.
Reactions could now be rather tricky. Stock investors might like to see a set of numbers that’s not strong enough to push Fed for a rate hike this year. And such relief could also lift treasury yields and then Dollar. Another set of weak number will highlight the underlying vulnerability in the economy. Even though that might add to the case of a Fed cut, the worries could overwhelm and send stocks, yields and Dollar lower.
ECB press conference live stream, starting in a few minutes
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, we will continue to make net purchases under the asset purchase programme (APP) at the new monthly pace of €15 billion until the end of December 2018. We anticipate that, subject to incoming data confirming our medium-term inflation outlook, we will then end net purchases. We intend to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of our net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures. The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding-down of our net asset purchases. At the same time, uncertainties relating to protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent. Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This support will continue to be provided by the net asset purchases until the end of the year, by the sizeable stock of acquired assets and the associated reinvestments, and by our enhanced forward guidance on the key ECB interest rates. In any event, the Governing Council stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.4%, quarter on quarter, in both the first and the second quarter of 2018. Incoming information, while somewhat weaker than expected, remains overall consistent with our baseline scenario of an ongoing broad-based economic expansion, supported by domestic demand and continued improvements in the labour market. Some recent sector-specific developments are having an impact on the near-term growth profile. Our monetary policy measures continue to underpin domestic demand. Private consumption is fostered by ongoing employment growth and rising wages. At the same time, business investment is supported by solid domestic demand, favourable financing conditions and corporate profitability. Housing investment remains robust. In addition, the expansion in global activity is expected to continue supporting euro area exports, though at a slower pace.
The risks surrounding the euro area growth outlook can still be assessed as broadly balanced. At the same time, risks relating to protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent.
Euro area annual HICP inflation increased to 2.1% in September 2018, from 2.0% in August, reflecting mainly higher energy and food price inflation. On the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around the current level over the coming months. While measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Domestic cost pressures are strengthening and broadening amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to pick up towards the end of the year and to increase further over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
Turning to the monetary analysis, broad money (M3) growth stood at 3.5% in September 2018, after 3.4% in August. Apart from some volatility in monthly flows, M3 growth is increasingly supported by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The growth of loans to the private sector strengthened further, continuing the upward trend observed since the beginning of 2014. The annual growth rate of loans to non-financial corporations rose to 4.3% in September 2018, from 4.1% in August, while the annual growth rate of loans to households stood at 3.1%, unchanged from the previous month. The euro area bank lending survey for the third quarter of 2018 indicates that loan growth continues to be supported by increasing demand across all loan categories and favorable bank lending conditions for loans to enterprises and loans for house purchase.
The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing – in particular for small and medium-sized enterprises – and credit flows across the euro area.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, the broad-based expansion calls for rebuilding fiscal buffers. This is particularly important in countries where government debt is high and for which full adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions. Likewise, the transparent and consistent implementation of the EU’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council urges specific and decisive steps to complete the banking union and the capital markets union.
Dallas Fed President Robert Kaplan said he’s “not prepared” for interest rates to “go above neutral”. And, he estimated that netural rate is between 2.50% and 2.75%. And that is, after four 25bps hike from the current 1.50-1.75%, fed fund rate will hit the neutral level.
For inflation he said “I want to run around 2, and if we got a little bit above it and I thought it would be short term and not long term, I could tolerate it.” On the other hand, “if I thought it would persist I think it would affect my policy views.”
According to a Bloomberg report, US is asking China to shift some tariffs away from agricultural goods to other products. And China is in consideration.
The request came as Trump didn’t want to lift punitive tariffs on China even when a trade deal is made. Yet, Bloomberg said Trump want to “sell any eventual trade deal as a win for farmers ahead of the 2020 election”. But there was no explanation on why the agricultural industry has this special privilege over others. And there is no indications on which industries are going to take the burden, and why.
It’s also noted that the shift could make it easier for China to ramp up its purchases of US agricultural goods as part of the trade deal. But again, there is no details on whether China will cut imports from others countries, and who they will buy less from.
At this point, we’ll treat this as a speculation as no one from USTR nor MOFCOM have responded. And we don’t expect them to.
China’s trade surplus surprisingly widened in September, as trade surplus with US jumped to record high at USD 34.1B. As trade war started and escalated to another phase, exports to US continued to grow while imports from the US contracted for another month. For the year as a whole, China continued to have faster import growth with EU, than exports.
In USD terms, China’s trade surplus widened to USD 31.7B in September, well above expectation of USD 19.4B. Exports rose 14.5% yoy to USD 226.7B. Import rose 14.3% yoy to 195.0B.
For the month of September
Exports to EU rose 1.2% mom, 11.4% yoy to USD 37.4B. Imports from EU dropped -0.6% mom, rose 9.1% yoy to USD 24.7B. Trade surplus rose 9.9%, 37.7% yoy to USD 12.7B.
Exports to US rose 5.2% mom, 14.0% yoy to USD 46.7B. Imports from US dropped -5.8% mom, -2.3% yoy to USD 12.6B. Trade surplus rose 9.9% mom, 21.5% yoy to USD 34.1B.
From January to September
Exports to EU rose 11.4% yoy to USD 301.5B. Imports from EU rose 14.1% to USD 205.2B. Trade surplus rose 6.1% yoy to USD 96.3B.
Exports to US rose 12.9% yoy to 348.8B. Imports from US rose 8.3% to USD 123.0B. Trade surplus rose 15.5% to USD 225.8B.
US Commerce Secretary Wilbur Ross expressed his optimism on US-China trade negotiation in a CNBC interview. He said “there’s a very good chance that we will get a reasonable settlement that China can live with, that we can live with and that addresses all of the key issues. And to me those are immediate trade. That’s probably the easiest one to solve,”
Regarding the slowdown in China, Ross said it’s a “big problem in their context of having a very big need to create millions of millions of jobs to hold down social unrest coming out of the little villages”. And that could create a “real social problem. But he added, regarding the slowdown, he is “not happy nor guilty. We expected this would happen.” But, “what has changed is China now understands how independent they are on us.”
US delegation is having the second day of trade talks in Beijing today.
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