US personal income rose 0.5% mom, or USD 89.3B, in April, below expectation of 0.6% mom. Personal spending rose 0.9% mom, or USD 152.3B, above expectation of 0.7% mom.
Headline PCE price index slowed from 6.6% yoy to 6.3% yoy, below expectation of 6.6% yoy. Core PCE price index slowed from 5.2% yoy to 4.9% yoy, matched expectations. Energy prices rose 30.4% yoy while food prices rose 10.0% yoy.
Japan’s PMI Manufacturing dropped from 52.7 to 51.2 in September, below expectation of 52.5. PMI Services rose from 42.9 to 47.4. PMI Composite also rose from 45.5 to 47.7.
Usamah Bhatti, economist at IHS Markit said: “The pace of decline was softer than that seen in August, as the larger services sector saw a considerable easing in the rate of contraction… Input prices across the private sector rose at the fastest pace for 13 years, with businesses attributing the rise to higher raw material, freight and staff costs amid supply shortages.”
Also from Japan, CPI core (all items ex fresh food) rose from -0.2% to 0.0% yoy in August, matched expectations. Headline CPI (all items) dropped from -0.3% yoy to -0.4% yoy. CPI core-core (all items ex fresh food and energy) improved from -0.6% yoy to -0.5% yoy.
China indicated that it has agreed to continue negotiation with the US even though both sides have raised tariffs on either other imports. Chinese Foreign Ministry spokesman Geng Shuang said in a regular press briefing “my understanding is that China and the United States have agreed to continue pursuing relevant discussions.” But no detail was given on the way forward. Geng just said “as for how they are pursued, I think that hinges upon further consultations between the two sides.”
Additionally, Geng warned “we hope that the U.S. side does not misjudge the situation and not underestimate China’s determination and will to safeguard its interests.” China also typically denied any accusation of their backtracking. Geng said “you absolutely can’t put the hat on China of reversing positions and going back on one’s promises.”
Fed announced a new round of aggressive measures to support the US economy against coronavirus pandemic impacts. In particular, Fed will purchase bonds to keep borrowing costs low without specifying a limit. There will also be programs to ensure credit flows into businesses and governments.
Fed said it will buy treasuries and agency mortgage-backed securities “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy.” Last week, Fed said it would by at least USD 500B of treasuries and USD 200B of agency MBS.
Additionally, Fed will support “the flow of credit to employers, consumers and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing.”
Kansas City Fed President Esther George said yesterday, “it is clear that removing accommodation is required. How much and how aggressively accommodation should be removed is far more uncertain.”
“Given the state of the economy, with inflation at a 40-year high and the unemployment rate near record lows, moving expeditiously to a neutral stance of policy is appropriate,” she added.
“At the same time, the factors I noted earlier, including monitoring risks, the responsiveness of activity to interest rate changes, and yield curve developments will be important guides to that pace in my view.”
On the topic of yield curve inversion, George said, “An inverted curve has implications for financial stability with incentives for reach-for-yield behavior. An inverted yield curve also pressures traditional bank lending models that rely on net interest margins, or the spread between borrowing short and lending long. Community banks in particular rely on net interest margins to maintain their profitability.”
France PMI Manufacturing dropped from 49.5 to 49.0 in August, above expectation of 48.8, a 27-month low. PMI Services dropped from 53.2 to 51.0, below expectation of 53.5, a 16-month low. PMI Composite dropped from 51.7 to 49.8, an 18-month low.
Joe Hayes, Senior Economist at S&P Global Market Intelligence said: “August flash PMI data for France suggest the economy has now entered into contraction for the first time in a year-and-a-half as a sharp manufacturing downturn more than offset only a marginal increase in service sector activity…
“High inflation has squeezed purchasing power among consumers and businesses alike, although we saw further signs to suggest we have passed peak price pressures… The downward trend in the France PMI may well persist now demand for goods and services is falling.”
Dollar index finally broke the medium falling trend line resistance after yesterday’s solid rally. And focus is now on 91.01 support turned resistance. Firm break there will then be another sign of medium term reversal.
That is, the down trend from 103.82 has completed at 88.25, after hitting 50% retracement of 72.69 to 103.82, on bullish convergence condition in weekly MACD. Next hurdle will be 55 week EMA (now at 92.93). But we’d expect the rally to extend to 38.2% retracement of 103.82 to 88.25 at 94.19 at least. Ideally, is should be accompanied by a solid break of 3% in 10 year yield.
In today’s parliamentary address, BoJ Kazuo Ueda laid out the central bank’s approach to an evolving inflation scenario in Japan. Governor Ueda announced, “We expect inflation to quite clearly slow below 2%” as we move further into the current fiscal year.
Despite this imminent deceleration, BoJ is forecasting a subsequent rebound, albeit with a degree of caution. Ueda added, “Inflation is likely to rebound thereafter … though there is high uncertainty” about the future direction of inflation rates.
In response to these trends, BoJ plans to remain patient and maintain its current approach to monetary policy. Ueda affirmed the central bank’s commitment to its strategy, stating, “(We) will patiently continue monetary easing as there’s still distance to achievement of sustainable and stable 2% price hikes together with continued rises in wages.”
AUD/JPY follows other Yen crosses and accelerates higher today. The decisive break of 82.01 resistance firstly confirms resumption of rebound from 77.88. More importantly, it also affirms that correction from 85.78 has completed. Immediate focus is now on 100% projection of 77.88 to 82.01 from 78.82 at 82.95. Strong break there would indicate further upside acceleration and raise the chance that it’s indeed resuming larger up trend from 59.85. Further rise would be seen to 161.8% projection at 85.50, which is close to 85.78 high.
Also, note that AUD/JPY is being support by 55 month EMA, which is a long term bullish sign. That affirms the case that down trend from 105.42 (2013 high) has completed with three waves down to 59.85, on bullish convergence condition in monthly MACD. That is, on resumption, rise from 59.85 should power through 90.29 structural resistance, towards 105.42/107.88 resistance zone in the medium to long term. But of course, let’s see how it goes with 85.78 first.
The minutes of the March FOMC meeting revealed nothing surprising. Almost all policymakers supported a rate hike even though there were a couple of them pointed to benefits of waiting a bit longer. All policymakers expected inflation to rise in the coming months, showing receding worry on the inflation outlook. Nonetheless, the pick-up in inflation is not enough to alter the projected rate path yet. Regarding the economy, it’s a consensus view that outlook has strengthened in recent month. Meanwhile, a strong majority of the members viewed escalation in trade tension and retaliation by other countries as downside risks for the economy.
The minutes are seen as hawkish in general, but not more hawkish than expected.
After the minutes, pricing of a June hike is little changed. Fed fund futures are pointing to over 95% chance of a June hike.
Little change in USD’s performance too. It’s staying as the weakest one for the week.
While dollar index weakened notably this week, it’s still staying in range above 88.25. We’d maintain that as it’s close to medium term trend line resistance, breakout is imminent. But probably a little more time is needed for selling to gather momentum.
US PMI Manufacturing rose to 53.5 in September, up from 53.1, hitting a 20-month high. However, PMI services dropped slightly to 54.6, down form 55.0. PMI Composite also dropped slightly to 54.4, down from 54.6.
Chris Williamson, Chief Business Economist at IHS Markit, said:
“US businesses reported a solid end to the third quarter, with demand growing at a steepening rate to fuel a further recovery of output and employment.
“The survey data therefore add to signs that the economy will have enjoyed a solid rebound in the third quarter after the second quarter slump.
“The question now turns to whether the economy’s strong performance can be sustained into the fourth quarter. Covid-19 infection rates remain a major concern and social distancing measures continue to act as a dampener on the overall pace of expansion, notably in consumer-facing services. Uncertainty regarding the presidential election has also intensified, cooling business optimism about the year ahead. Risks therefore seem tilted to the downside for the coming months, as businesses await clarity with respect to both the path of the pandemic and the election.”
ECB Governing Council member Gabriel Makhlouf said today, ECB has reached the point “act”. And, “the balance of advantage has tilted decisively towards the need for further action, albeit not necessarily at a similar pace to that of other central banks”.
“Our objective is for inflation to be at 2% over the medium term – levels are significantly above that now, and it is time for the Council to move to end net asset purchases under the asset purchase programme next month or in July,” he said.
Makhlouf added, it’s “realistic to expect that the first move in the ECB’s interest rates will happen soon after net asset purchases end and that rates are likely to be in positive territory by early next year.” But he didn’t specify when the rate hike would occurs.
“The era of negative rates is reaching its conclusion,” he said.
US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve), rose 3.1m barrels in the week ending September 27. That’s notably above expectation of 2.0m barrels. At 422.6m barrels, U.S. crude oil inventories are at the five year average for this time of year.
WTI crude drops to as low as 52.47 so far as fall from 63.04 extends. Deeper decline is expected as long as 56.63 resistance holds, to 50.43 support next. However, that would be close to 61.8% retracement of 42.05 to 66.49 at 51.38, as well as 50 psychological level. For now, we’re not expecting a break there.
Entering into US session, Euro is trading as the lowest one for today, followed by Swiss Franc, in relatively mixed markets. New Zealand Dollar is the strongest one while Australian Dollar recovers much of yesterday’s losses. But for now, pre-weekend recovery in Sterling put it into second place. But movements in the currency markets are relatively limited. Thus, the picture could have a drastic change at close.
US-China trade negotiations were the main focus of the day. Words from both sides were positive, but without much substance. China’s Xinhua news agency said the delegations discussed topics including technology transfers, intellectual property protection, non-tariff barriers, services, agriculture and the trade balance. And both countries reached consensus is principle on a number of issues. They’re working towards a memorandum of understanding on trade and economic issues.
White House spokesperson Sarah Sanders confirmed that trade talks with China will continue in Washington next week. She said “The United States looks forward to these further talks and hopes to see additional progress.” And, Â “Both sides will continue working on all outstanding issues in advance of the March 1, 2019, deadline for an increase in the 10 percent tariff on certain imported Chinese goods.”
US Trade Representative Robert Lighthizer said “we feel we have made headway on very, very important and difficult issues. We have additional work to do but we are hopeful,” Treasury Secretary Steven Mnuchin tweeted “Productive meetings with China’s Vice Premier Liu He and @USTradeRep Amb. Lighthizer”, without any elaboration.
But the development so far seems to be enough to lift sentiments slightly. DOW futures in currently up 76 pts.
In Europe:
Earlier in Asia:
ECB Governing Council member,  Dutch central bank Governor Klaas Knot talked about monetary policy as he  presented his bank’s annual report in Amsterdam today. He said:
Regarding trade relationship with the US, he said:
Eurozone confidence indciators generally deteriorated in March.
The European commission noted in the release:
Euro area developments
In March, the Economic Sentiment Indicator (ESI) decreased markedly in both the euro area (by 1.6 points to 112.6) and the EU (by 1.9 points to 112.5).1 While this is the third consecutive drop, the indicators remain at elevated levels.
The deterioration of euro-area sentiment resulted from drops in industry, services and retail trade. Confidence among consumers remained unchanged, while it increased among construction managers. The ESI weakened in all the five largest euro-area economies; significantly so in Germany (-2.4), Italy (-1.8) and Spain (-1.2) and, less so, in the Netherlands (-0.5) and France (-0.4).
EU developments
The marginally stronger decrease of the headline indicator for the EU (-1.9) was mainly due to the marked deterioration of sentiment in the largest non-euro area EU economies, the UK (-4.2), and Poland (-2.0). In line with the euro area, confidence deteriorated strongly in industry, services, and retail trade, while it increased slightly in the construction sector and remained unchanged among consumers. The fall in EU confidence in the financial services sector was slightly less pronounced than in the euro area.
By contrast to the euro area, EU managers’ employment expectations improved in retail trade, while they remained broadly stable in services. Price expectations differed from the euro area mainly in retail trade, where they decreased markedly.
The US Trade Representative Robert Lighthizer issued a statement notifying the Congress on the intentions of negotiation three separate trade agreements with Japan, the EU and the UK. Three separate letters were also sent to the Congress covering the relationships. He repeated in the letters that the aim aim in negotiations is to “address both tariff and non-tariff barriers to achieve fairer and more balanced trade”. And the USTR are “committed to concluding these negotiations with timely and substantive results for US consumers, businesses, farmers, ranchers and workers”.
On Japan, Lighthizer criticized that exporters in automobiles, agriculture and services have been “challenged by multiple tariff and non-tariff barriers for decades”. And that lead to “chronic US trade imbalances with Japan”, at USD 68.9B in 2017. Also, Japan “is an important but still too often underperforming market for U.S. exporters of goods,”
On EU, Lighthizer said the economic relationship is the “largest and most complex” in the world. He also said exporters faced “multiple tariff and non-tariff barriers for decade” without naming the sectors like with Japan.
With the UK, Lighthizer said there is “broad and deep trade and investment relationship”. UK cannot negotiate the trade agreements yet until after Brexit, a Trade and Investment Working Group was already launched to provide the ground work for an FTA.
USTR statement here. Letters to Congress on Japan, EU and UK.
Japan Chief Cabinet Secretary Yoshihide Suga said “It will not be an easy negotiation … But we would like to proceed with talks in line with our stance that we will push where necessary and defend our position where necessary, in a way that protects our national interests.”
In a relatively brief statement, the Chinese Ministry of Commerce said the trade talks with the US this week were extensive and laid down the foundation for resolving trade friction between the countries.
The MOFCOM statement said “The two sides actively implemented the important consensus of the two heads of state and conducted extensive, in-depth and meticulous exchanges on trade issues and structural issues of common concern, which enhanced mutual understanding and laid the foundation for resolving mutual concerns. Both parties agreed to continue to maintain close contact.”
Yen clearly weakens broadly today with stabilizing market sentiments. Fear of trade war seems to fade mildly on report that the US and China are now in dialogue. At the time of writing, FTSE is trading up 0.3%, DAX up 0.5% and CAC up 0.3%. US futures also point to triple digit gain at open, as markets digest Friday’s steep loss.
Euro and Sterling both showing extra strength entering into US session. Both EUR/USD and GBP/USD surges through last week’s high.
Meanwhile, for now, both NZD/JPY and GBP/JPY are having more than 1% gain for today.
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US PMI composite fell to 50.4, near stagnation
US PMI Manufacturing fell form 49.0 to 47.0 in August. PMI Services fell from 52.3 to 51.0. PMI Composite fell from 52.0 to 50.4.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“A near-stalling of business activity in August raises doubts over the strength of US economic growth in the third quarter. The survey shows that the service sector-led acceleration of growth in the second quarter has faded, accompanied by a further fall in factory output.
“Companies report that demand is looking increasingly lethargic in the face of high prices and rising interest rates. A resultant fall in new orders received by firms in August could tip output into contraction in September as firms adjust operating capacity in line with the deteriorating demand environment. Hiring could likewise soon turn into job shedding in the coming months after a near-stagnation of employment in August.
“Rising wage pressures as well as increased energy prices have meanwhile pushed input cost inflation higher, which will raise concerns over the stickiness of consumer price inflation in the months ahead. One upside is that weak demand is starting to limit pricing power, which should help keep a lid on inflation around the 3% mark.”
Full US PMI release here.