German Ifo Business Climate dropped to 99.1 in January, down from 101.0 and missed expectation of 100.6. It’s also the lowest level since February 2016. Current situation gauge dropped to 104.3, down from 104.9, slightly above expectation of 104.2. Expectations gauge dropped to 99.4, down from 97.3 and missed expectation of 97.0.
Ifo President Clemens Fuest noted “disquiet is growing among German businesses”, and “the German economy is experiencing a downturn.”
Atlanta Fed President Raphael Bostic said today, “there is a risk inflation is likely to be elevated for an extended period of time and we need to respond directly, clearly and aggressively.” “If things continue the way they are March would be a reasonable possibility,” he added.
Bostic also said there was no need to phase in balance sheet runoff. “I would hope we would move pretty quickly and get out of this emergency stance,” he said. “The tool is pretty well understood and the motivation is pretty well understood. It should go faster for sure.”
This is a follow up to our AUD/JPY short trade, entered at 80.25, stop at break even 80.25. Last updated in our weekly report.
AUD/JPY rebound strongly today on news that the US is trying to restart trade talk with China. And Trump intends to postpone the announcement of 25% tariffs on USD 200B in Chinese goods after that. Public hearing on the tariffs ended last week.
While the rebound is strong, our strategy is… don’t panic. Firstly, at the time of writing, both he Treasury Department and Commerce Department declined to comment. So, it could be another piece of “fake news”. Secondly, at the time of writing too, there is no follow through buying above 4 hour 55 EMA yet.
Technically, 4 hour technical doesn’t look very promising, with bullish convergence condition in 4 hour MACD. But there is no confirmed reversal yet. Hence, we’d hold on to the short position, with stop unchanged at 80.25 (break even). But the chance for us to exit slightly above 61.8% projection of 90.29 to 80.48 from 83.92 at 77.85 has increased. We’ll still not rigid exit there yet, as we’d like to give the cross a little breathing room on the news (real or fake).
And, after all, it’s trading. Sometimes you win, sometimes you lose. Even if we’re stopped out, it’s not a loss!
Eurozone CPI was finalized at 5.1% yoy in January, up from December’s 5.0% yoy. The highest contribution to the annual euro area inflation rate came from energy (+2.80%), followed by services (+0.98%), food, alcohol & tobacco (+0.77%) and non-energy industrial goods (+0.56%).
EU CPI was finalized at 5.6% yoy, up from December’s 5.3% yoy. The lowest annual rates were registered in France (3.3%), Portugal (3.4%) and Sweden (3.9%). The highest annual rates were recorded in Lithuania (12.3%), Estonia (11.0%) and Czechia (8.8%). Compared with December, annual inflation fell in eight Member States and rose in nineteen.
Japan reported a modest increase in nominal labor cash earnings in September, with 1.2% yoy rise that slightly exceeded market expectations of 1.0% yoy gain. This uptick, an improvement from the previous month’s 0.8%, may seem like a positive indicator at first glance, with base salary growth also marking an increase to 1.4% yoy from August’s 1.2% yoy.
However, not all components of earnings showed strength. Special payments, often a volatile category, continued to decline by -6.0% yoy , albeit a less severe contraction than -6.3% yoy reported in August. Meanwhile, overtime pay exhibited a marginal increase, rising 0.7% yoy, suggesting a modest uptick in extra working hours.
The nuanced picture of Japan’s wage situation becomes more concerning when adjusted for inflation. Real wages, which reflect the purchasing power of income, fell sharply by -2.4% yoy compared to the same month last year, marking the 18th consecutive month of decline. This persistent slide in real wages points to the squeeze on household income as inflation outpaces nominal wage growth.
In line with the strain on incomes, household spending dipped by -2.8% yoy , although the figure is marginally better than the anticipated -3.0% yoy fall. This marks the seventh straight month of decline, underscoring the ongoing reticence of Japanese consumers to open their wallets amid economic uncertainties.
On a more positive note, on a seasonally adjusted basis, household spending saw an unexpected increase of 0.3% mom, defying expectations of a -0.4% mom decline.
US stocks ended mixed overnight, driven primarily by disparate earnings results. DOW registered its first 9-day rally since 2017, gaining 0.47%, largely boosted by better-than-expected earnings results from pharmaceutical giant Johnson & Johnson. On the other hand, the tech-heavy NASDAQ slipped -2.05% due to disappointing results from streaming giant Netflix and electric carmaker Tesla.
The notable pullback in NASDAQ suggests that US stock markets could be broadly transitioning into a consolidation phase. This shift happens in anticipation of the FOMC rate decision scheduled for next week, followed by crucial employment data in the subsequent week.
From a technical perspective, NASDAQ could be bracing for a deeper correction, given that it was already close to 161.8% projection of 10088.82 to 12269.55 from 10982.80 at 14511.22. Break of 13864.06 resistance turned support would likely trigger deeper fall to 55 D EMA (now at 13306.68).
Should this scenario transpire, it should confirm a near term shift in risk sentiment, potentially providing a boost to Dollar and extending its current rebound.
Risk appetite had a brief come back in Asia earlier today, after China pledges to strive to have a good start in 2019. But sentiments turned cautious in European session, ahead of the Brexit meaningful vote in UK commons. Sterling is clearly paring some gains because of that. On the other hand, Euro is weighed down by recession worries on Germany. The country reported annual growth of 1.5% in 2018, slowest since 2013. And there is risk of technical recession in Q3 and Q4 of last year.
For now, Canadian Dollar is the strongest one for today so far, followed by Dollar. Swiss Franc is the weakest one, followed by Euro. Markets could turn more cautious ahead of the Brexit vote. There is no exact time set, but it’s believed to be somewhere between 1900-2100 GMT.
In Europe, at the time of writing:
Earlier in Asia:
Dallas Fed President Robert Kaplan said his forecast is for the US economy to have substantial contraction in Q2, in the 20% range on an annualized basis. Unemployment rate could rise to mid teens before falling back to 7-8% by year end.
He added, “we are working furiously here at the Fed to have this in place and work out the details” of the new Main Street lending program. However, small and medium companies are worried about survival even with loan assistance.
Eurozone PMI Manufacturing was finalized at 63.1 in May, up from April’s 62.9. Rises in output and new orders were slightly softer, but growth rates remained considerable. Record deterioration in vendor delivery times drove intensification of inflationary pressures.
Looking at some member states, the Netherlands (69.4), Austria (66.4), Ireland (64.1) and Italy (62.3) were at record highs. Germany dropped to 64.4, but stayed strong. France hit 248-month high at 59.4. Spain rose to 276-month high at 59.4. Greece rose to 253-month high at 58.0.
Chris Williamson, Chief Business Economist at IHS Markit said: “Eurozone manufacturing continues to grow at a rate unprecedented in almost 24 years of survey history, the PMI breaking new records for a third month in a row. Surging output growth adds to signs that the economy is rebounding strongly in the second quarter.
“However, May also saw record supply delays, which are constraining output growth and leaving firms unable to meet demand to a degree not previously witnessed by the survey.
“High sales volumes are consequently depleting warehouse stocks and backlogs of uncompleted work have soared at a record pace. While these forward-looking indicators bode well for production and employment gains to persist into coming months as firms seek to catch up with demand, the flip-side is higher prices. The combination of strong demand and deteriorating supply is pushing up prices to a degree unparalleled over the past 24 years.
“The survey data therefore indicate that the economy looks set for strong growth over the summer but will likely also see a sharp rise in inflation. However, we expect price pressures to moderate as the disruptive effects of the pandemic ease further in coming months and global supply chains improve. We should also see demand shift from goods to services as economies continue to reopen, taking some pressure off prices but helping to sustain a solid pace of economic recovery.”
European Commission released summer 2018 Interim Economic Forecast today.
On Eurozone growth:
On Eurozone inflation:
On EU 28 growth:
On EU 28 inflation:
On some countries
Quotes from the release:
Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: “European economic activity remains solid with 2.1% GDP growth forecast for the euro area and the EU28 this year. Nevertheless, the downward revision of GDP growth since May shows that an unfavourable external environment, such as growing trade tensions with the US, can dampen confidence and take a toll on economic expansion. The growing external risks are yet another reminder of the need to strengthen the resilience of our individual economies and the euro area as a whole.”
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “Growth in Europe is set to remain resilient, as monetary policies stay accommodative and unemployment continues to fall. The slight downward revision compared to the spring reflects the impact on confidence of trade tensions and policy uncertainty, as well as rising energy prices. Our forecast is for a continued expansion in 2018 and 2019, although a further escalation of protectionist measures is a clear downside risk. Trade wars produce no winners, only casualties.”
Fed Vice Chair Richard Clarida said “the current economic expansion almost certainly will become the longest on record”. But ” incoming data have revealed signs that U.S. economic growth is slowing somewhat from 2018’s robust pace”. Also, “prospects for foreign economic growth have been marked down, and important international risks, such as Brexit, remain.” On inflation, core PCE, a “better gauge of underlying inflation pressures”, has been muted. And, “some indicators of longer-term inflation expectations remain at the low end of a range” of price-stability.
Clarida reiterated that federal funds rate is now “in the broad range of estimates of neutral”. The baseline economic projections see growth in 2019 “running somewhat above” trend and core PCE inflation remains near 2%. Thus, Fed “can be patient as we assess what adjustments, if any, will be appropriate to the stance of monetary policy.
As the informal EU summit in Austria continues today, there are more comments regarding the Brexit deal that UK Prime Minister Theresa May is selling. There are still notable different in the issue of Irish border. EU chief negotiator Michel Barnier will brief the leaders of the 27 nations today and a unified position should be reached afterwards. For now, comments from EU officials suggested that they’re working towards deal, rather than away from it.
Irish Prime Minister Leo Varadkar met with May this morning. He said afterwards that “Ireland is a country that obviously wants to avoid a no deal scenario, we want to avoid a no deal Brexit, (but) we are preparing for that. Also, “we need to double our efforts over the next couple of weeks to make sure that we have a deal.”
Varadkar added that a “political border” does exist between Ireland and Northern Ireland. And “what we want to avoid is any new barriers to the movement of goods, any new barriers to trade, any new barriers to the movement of people”.
French President Emmanuel Macron said “we have very clear principles regarding the integrity of the single market and regarding precisely the Irish border. It was precise in March and it was endorsed by the 27 members. So, we have to find collectively and we need a UK proposal precisely preserving this backstop in the framework of a withdrawal agreement.”
Belgian Prime Minister Charles Michel said “it is necessary to make all the steps because the proposals are not enough in order to have an agreement.”
Luxembourg Prime Minister Xavier Bettel said “I fully believe that we will be able to find an agreement” and “It’s a compromise from both sides, it’s not on one side.”
Austrian Chancellor Sebastian Kurz said “both sides are aware that they will only reach a solution if they move towards each other.”
Eurozone industrial production rose 12.4% mom in May, below expectation of 12.4% mom. That’s also insufficient to recovery April’s -18.2% mom decline. Looking at some details, production of durable consumer goods rose by 54.2% mom, capital goods by 25.4% mom, intermediate goods by 10.0% mom, non-durable consumer goods by 2.8% mom and energy by 2.3% mom.
EU industrial production rose 11.4% mom in May, versus April’s -18.2% mom decline. The highest increases were registered in Italy (+42.1%), France (+20.0%) and Slovakia (+19.6%). The largest decreases were observed in Ireland (-9.8%), Croatia (-3.5%) and Finland (-1.3%).
Canadian Dollar trades notably lower after weaker than expected data.
Headline retail sales rose 0.6% mom in March, above expectation of 0.4% mom. However, ex-auto sales was a big miss, contracted -0.2% mom versus consensus of 0.5% mom growth.
Headline CPI slowed to 2.2% yoy in April, down from 2.3% yoy, and missed expectation of 2.3% yoy. CPI core common was unchanged at 1.9% yoy. CPI core median was unchanged at 2.1%. CPI core trim rose to 2.1% yoy.
US stocks tumbled sharply overnight, together with bond yields as markets saw Fed’s dovish turn as being not dovish enough. Dollar also rebounded. At least, Fed isn’t pausing yet after yesterday’s rate hike. In particular, Fed maintained in the statement that “some further gradual increases” in federal funds rate will be consistent with sustaining the expansion and keeping inflation near target. Fed Chair Jerome Powell, while admitting that global growth is “softening”, also said “policy does not need to be accommodative” as the US economy continues to perform well.
After initial recovery, DOW resumed recent decline and hit as low as 23162.64 before closing at 23323.66, down -1.49%. S&P 500 dropped -1.54% while NASDAQ dropped -2.17%. As long as 24057.34 resistance holds, the medium term corrective fall from 26951.81 will extend to 38.2% of 15450.56 (2016 low) to 26951.81 (2018 high) at 22558.33 before completion.
US treasury yields tumbled sharply, specially at the long end. 10-year yield dropped -0.047 to 2.778. 30-year yield dropped -0.064 to 3.015, and it’s now risking 3% handle. More importantly, yield curve flattened further and it’s now inverted from 1-year (2.648) to 5-year (2.622).
Dollar is so far mixed for the week, up versus commodity currencies by down against others.
US initial jobless claims dropped -261k to 6,606k in the week ending April 4. Four-week moving average of initial claims rose 1,599k to 4,266k.
Continuing claims rose 4,396k to 7,455k in the week ending March 289, highest on record. Four-week moving average of continuing claims rose 1,439k to 3,500k.
Ahead of the Xi-Trump meeting in Japan on Saturday, Chinese reiterated their hard-line stance. Ministry of Commerce spokesman Gao Feng warned that “China’s core concerns must be addressed properly” in trade negotiations. He added, “we hope the U.S. side could drop its wrong practices, and we can solve the problems through equal dialogue and cooperation.” Gao also urged US to ” cancel immediately sanctions on Chinese companies including Huawei to push for the healthy and stable development in Sino-U.S. ties”.
Separately, Foreign Ministry spokesman Geng Shuang said “the Chinese people are not afraid of pressure and never buy this kind of strategy,” referring to Trump’s tariff threats. And, he warned “starting a trade war and adding tariffs harms itself and others.”
On the other hand, WSJ reported that Xi will insist on lifting Huawei ban as part of a set of terms before China would come back to the table. Xi could also request US to lift all punitive tariffs and drop efforts to get China to buy even more US exports than Xi said it would back in December.
BoE policy maker Catherine Mann said in an online event, “there’s still a lot of information to come in, especially with regard to omicron, so it is premature to even talk about timing (of rate hike), much less how much.”
“It’s a particular question mark here as to whether or not that (Omicron) is going to reduce consumer confidence and leave us again in a situation of somewhat of a slacker demand for spending than we might have thought going forward,” she noted.
ECB Governing Council member Mario Centeno advocates to start cutting interest rates “sooner and more gradually”, as there are a lot of evidence that inflation is falling sustainably towards 2% target. He also argued that ECB doesn’t need to wait for May wage data before acting.
“We can react later and more strongly, or sooner and more gradually. I am completely in favour of gradualism scenarios, because we have to give economic agents time to adapt to our decisions,” he said in a Reuters interview.
This perspective underscores his preference for a steady, sustainable reduction in interest rates, proposing 25 basis-point steps as “a good metric”.
Centeno’s stance also diverges from some ECB policymakers who propose waiting for Q1 wage data in May, to assess the potential second round effects on inflation. He argues that ECB’s decisions should not be exclusively hinged on wage data. “Data-dependent is not wage-data dependent…we don’t need to wait for May wage data to get an idea about the inflation trajectory,” Centeno remarked.
ActionForex.com was set up back in 2004 with the aim to provide insightful analysis to forex traders, serving the trading community for over a decade. Empowering the individual traders was, is, and will always be our motto going forward.
Contact us: contact@actionforex.com
© ActionForex.com © 2024 All rights reserved.
S&P 500 and DOW not looking bad despite pull back, NASDAQ vulnerable though
While US stocks suffered steep selloff overnight, the outlook isn’t generally that bad yet. S&P 500 is still holding well inside rising channel, and above 55 day EMA. The trend defining support of 3694.12 is indeed still a bit far away. So, outlook is staying bullish, in a way that rise from 3233.94 is still not under threat yet, not to mention the up trend from 2191.86. Though, bearish divergence condition in daily MACD is a warning.
NASDAQ is looking a little bit more vulnerable as it has already tested corresponding trend defining support of 12985.05. Firm break there will open up the case of deeper pull back towards 12074.06 resistance turned support. That could be an early warning of deeper correction in other indices.
But at the same time, let’s not forget that DOW just made a new record high earlier this week. It’s holding well above 55 day EMA, as well as 29837.30 support. The bearish divergence condition in daily MACD is not enough to indicate major topping yet. So overall, it’s still early to declare the arrival of medium-term scale correction in US stocks. Let’s wait and see.