Japan Finance Minister Taro Aso warned that the Financial Services Agency will strengthen monitoring against improper trading activity at the current time of heightened market volatility. In particular, the FSA will with with securities watchdog and stock exchanges to monitor fraudulent activities in market operations.
He also made a rare comment regarding Dollar’s strength. Aso said, “Everyone is buying dollars. That’s leading to declines in other currencies. Stocks and bond prices are both falling, which is something that has not happened before.” “It’s probably investors’ anxiety” over the coronavirus pandemic, he added.
Entering into US session, Sterling is trading as the strongest one for today, followed by Dollar then Yen. Both Australia Dollar and New Zealand Dollar are the weakest one.
Dollar will be a major focus in US session with FOMC rate decision scheduled. But we’re not expecting any surprise from Fed. The central bank is on course for two more rate hikes this year, one in September and another in December. There is no press conference today. Focus will be quickly turned to minutes to be released later on August 22. Instead, ADP employment and ISM manufacturing to be released earlier in the session could be more market moving.
Strength in 10 year JGB yield, which closed up 0.081 at 0.130, could be a factor for Yen’s strength. But considering that Aussie and Kiwi are the weakest, we’d believe that risk aversion is a larger factor. Plus, Yen is also paring back some of the post BoJ selloff only. It’s still the weakest one for the week.
Chinese stocks’ reaction to the heat up in US-China trade war is immediate. The Shanghai SSE dropped -1.80% to close at 2824.53 today. The closed below 2844.19 resistance turned support suggests that recent rebound from 2691.02 has completed at 2915.29 already, ahead of 55 day EMA. Also, the index is kept well inside medium term falling channel. Focus is back on 2753.83 support. Break there will resume the medium term fall from 3857.03 for a take on 2638.30 key support (2016 low). Considering there is no sign of backing from on Trump’s side, and EU has already agreed to join force against China’s improper practices, this 2638.30 level is very vulnerable.
Sterling’s strength could be explained by not-too-bad UK PMI manufacturing, which dropped -0.3 to 54.0. It’s a respectable number. BoE is widely expected to raise Bank Rate by 25bps to 0.75% tomorrow. Sterling’s fate will depend on whether that will be a “dovish hike”.
ECB Executive Board member Yves Mersch said, like more than 80% of global central banks, they’re working on central bank digital currencies (CBDCs). Policymakers have be ready to “embrace financial technological innovation which has the potential to transform payments and money faster, and in more disruptive ways, than ever before.”
The debate on CBDCs is “mainly analytical” for now. The timing of a policy debate will “largely depend on the preferences of households”. The lack of a concrete “business case” for a CBDC at present should and does not stop ECB from seriously exploring the optimal design of CBDC.
Eurozone PMI Manufacturing rose to 48.9 in June, up from 39.4, above expectation of 43.8. PMI Services rose to 47.3, up from 30.5, above expectation of 40.5. PMI Composite rose to 47.5, up from 31.9, hitting at 4-month high but stayed in contraction.
Chris Williamson, Chief Business Economist at IHS Markit said: “The flash eurozone PMI indicated another substantial easing of the region’s downturn in June… While second quarter GDP is still likely to have dropped at an unprecedented rate, the rise in the PMI adds to expectations that the lifting of lockdown restrictions will help bring the downturn to an end as we head into the summer… However, with the timing of a return to normal still something that can only be speculated upon, and virus-related restrictions likely to continue to hit many businesses for the rest of the year, we remain very cautious of the strength and sustainability of any economic rebound.”
New Zealand BusinessNZ Performance of Services Index rose from 54.4 to 58.6 in August. Looking at some details, activity/sales rose from 54.4 to 67.1. Employment rose from 49.3 to 50.8. New orders/business rose from 53.4 to 66.5. Stocks/inventories rose from 53.8 to 59.6. Supplier deliveries rose from 47.6 to 49.6.
BNZ Senior Economist Doug Steel said that “overall, combining August’s strong PSI with last week’s firmer PMI yields a composite index (PCI) that suggests annual GDP growth up toward 5% in Q3 2022. We currently forecast 5%+ for that period but that strength is mostly a function of the very weak base period. If the PCI is truly bouncing, the key question is for how long?”
US treasury yields surged again while stocks tumbled overnight after Fed Chair Jerome Powell failed to provide any guidance on what Fed would do regarding recent sharp rise in long-term yields. That left markets wondering how far Fed would allow the yield curve to continue to steepen.
Powell noted that the climb in yield was “something that was notable and caught my attention”. He would be “concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals”. Yet, Fed is looking at “a broad range of financial conditions,” rather than a single measure.
There were some speculations that Powell would hint on the possibility of an “Operation Twist” that concentrate on purchases on the longer-end. When asked about the topic, Powell just said “our current policy stance is appropriate”.
US 10-year yield rose 0.0080 to 1.550 overnight, but it’s held below last week’s high of 1.614 so far. Upside momentum in TNX remain rather firm from medium term point of view. Any “disorderly” movement could shoot TNX to 2% level rather quickly, which is close to 1.971 structural resistance and 61.8% retracement of 3.248 to 0.398 at 2.159.
US stock tumbled sharply overnight as traders added bets on another aggressive rate hike by Fed on September 21, next Wednesday. The moves came after stronger than expected consumer inflation data. DOW ended down -1276 pts, or -3.94% while S&P 500 fell -4.32%. NASDAQ suffered most by closing -5.16% lower.
Fed fund futures are now fully pricing a 75bps hike, comparing to 91% a day ago, and 73% a month ago. Indeed, there is even 35% chance of a 100bps hike.
10-year yield surged to as high as 3.458 before closing at 3.422. It’s still more likely than not for 3.483 high to exert strong resistance to limit upside. Break of 3.176 support will suggest that TNX is extending the corrective pattern from 3.483 with another falling leg. However, strong break of 3.483 will resume medium term up trend. And that could take USD/JPY through 144.98 towards 1998 high at 147.68.
BoJ surprises the markets today by widening the band of 10-year JGB yield from 0.25% to 0.50% today. At the same time, short term policy rate is kept unchanged at -0.10% as expected.
Under the yield curve control framework, the central bank will still continue to purchases JGBs without an upper limit to keep 10-year yield at around 0%. But now, the bank will offer to purchase 10-year JGB yields at 0.50% every business day through fixed-rate operations, effectively allowing 10-year yield to rise towards 0.50% level.
US Treasury Secretary Steven Mnuchin said in a Fox News Sunday interview that the US is having “very productive conversations” with China. And he’s “cautiously hopeful we can reach an agreement” to avert the tariffs on USD 50-60b announced last week. Mnuchin noted that both countries agreed on reducing the US trade deficit to China. And, they were trying “to see if we can reach an agreement as to what fair trade is for them to open up their markets, reduce their tariffs, stop forced technology transfer.”
But Mnuchin emphasized that the US is still on track to impose the Section 301 tariffs unless there is an “acceptable agreement” for Trump to sign off on. He also noted that “we’re not afraid of a trade war, but that’s not our objective.” And, “in a negotiation you have to be prepared to take action.”
Separately, the WSJ reported that Mnuchin and US Trade Representative Robert Lighthizer sent a letter to Chinese Vice Premier Liu He last week, detailing the list of specific request for China. And the list is reported to include reduction of Chinese tariffs on US vehicles, purchases of semiconductor products and larger access to China’s financial markets.
Australia’s coronavirus deaths surpassed 1000 over the weekend, as New South Wales reported four deaths, with a new daily record of 1290 infections. As lockdown continues, Premier Gladys Berejiklian emphasized in the updated that “when we get to 70 per cent double dose, the freedoms we are expecting will be [for] those of [us who] are fully vaccinated.” Victoria also announced on Sunday that lockdown, the sixth one, would be extended.
Separately, New Zealand announced to extend level 4 restrictions in Auckland today, for at least another two weeks. Nevertheless, alert level for other parts of the country is lowered. Prime Minister Jacinda Ardern said it’s too soon to say whether the outbreak had peaked. But Director-general of health Dr Ashley Bloomfield noted the encouraging sign that the “R number” was already one.
AUD/NZD is still in a near term down trend even though downside momentum is diminishing, as seen in daily MACD. As long as 1.0538 resistance holds, current fall from 1.0944, as the third leg of the pattern from 1.1042, could still extend to 100% projection of 1.1042 to 1.0415 from 1.0944 at 1.0317.
Australia’s PMI Manufacturing recorded a mild uptick in July, rising from 48.2 to 49.6, marking a 5-month high, but still falling short of the expansionary threshold of 50. Concurrently, PMI Services took a downward turn from 50.3 to 48.0, hitting a 7-month low. Consequently, Composite PMI, a measure of combined sectors, dipped from 50.1 to 48.3, which is also a 7-month low.
Warren Hogan, Chief Economic Advisor at Judo Bank, attributed the soft July figures predominantly to a dip in business activity in the services sector, which had previously been on a recovery path in 2023. But the “Australian economy remains on the ‘narrow path’ for a soft landing.”
The July Flash report raised some concerns regarding inflation. Despite the slowdown in activity, price indicators trended higher, particularly within the services sector. These inflationary signals remain elevated, pointing to a potential inflation rate of around 4-5%, substantially exceeding RBA’s target of 2% to 3%.
Hogan noted that the disinflationary trend evident throughout 2022 “appears to have ceased”. As such, July figures will provide critical insights into whether Australia’s inflation aligns with the declining trends seen in other countries recently, or if the nation is “set to experience a more sticky inflation trend in 2023/24.”
DOW opens with triple digital gains and is trading above 25000 handle. This represents prior resistance at 24995.24, and 50% retracement of 25800.35 to 24217.47 at 25008.91. Rebounds from 2418.47 has resumed and should now target 61.8% retracement at 25195.68 and above.
But, for the moment, rise from 24217.47 doesn’t have impulsive look. So, it will likely start to feel heavy above 25195.69. In FX, after wage growth disappointment, Dollar is in red for today except versus Yen and Euro. Aussie and Kiwi are the strongest ones, followed by Sterling and then CAD.
US PPI for final demand fell -0.3% mom in May, below expectation of -0.1% mom rise. PPI goods fell -1.6% mom while PPI services rose 0.2% mom. PPI less foods, energy, and trade services was flat mom.
For the 12 months ended in May, PPI slowed from 3.1% yoy to 2.8% yoy, below expectation of 2.9% yoy. PPI for less foods, energy, and trade services slowed from 3.3% yoy to 2.8% yoy.
Japan unemployment rate rose to 3.0% in August, up from 2.9%, matched expectations. That the highest level since 3.1% in May 2017. Jobs-to-applicants ratio fell to 1.04, down from 1.08, hitting the lowest level since January 2014.
The unemployment remained relatively low by global standard. Yet, there are concerns of further slowdown in recovery in the job markets, and unemployment rate could rise further. While worsening conditions call for more government support, Finance Minister Taro Aso insisted that he’s not considering a third extra budget at present, as funds in the second package wasn’t used up yet.
UK CPI accelerated to 2.1% yoy in July, up from 2.0% yoy and beat expectation of 1.9% yoy. Core CPI also rose to 1.9% yoy, up from 1.8% yoy and beat expectation of 1.8% yoy. Also from UK, RPI slowed to 2.8% yoy, down from 2.9% yoy, matched expectations.
PPI input rose 0.9% mom, 1.3% yoy, above expectation of 0.6% mom, 0.3% yoy. PPI output rose 0.3% mom, 1.8% yoy, above expectation of 0.1% mom, 1.7% yoy. PPI output core rose 0.4% mom, 2.0% yoy, above expectation of 0.1% mom, 1.7% yoy. House price index rose 0.9% yoy in June, down from 1.2% yoy, missed expectation of 1.0% yoy.
Oil price is having the worst loss since Gulf War in 1991, on fear of price war after OPEC+ talks ended in dramatic failure. It’s reported that Saudi Arabia wanted to slash production to offset the steep decrease in demand due to coronavirus pandemic. But Russia rejected the idea, arguing that cheap crude will help wipe out competition from US shale.
As the talks collapsed, it’s reported that Saudi Arabia plans to boost output next month to well above 10 million barrels a day, or even to 12 million barrels. That’s seen as an act of a full price war between OPEC and Russia, to force the latter to go back to the negotiation table.
WTI crude oil hits as low as 27.50 today, breaching 2016 low of 27.69. At this point, we’re not expecting sustainable trading below 27.69 yet, unless the situation worsen dramatically. There is prospect of a rebound should Russia comes back to negotiation. But any rebound attempt will likely be capped below prior resistance at 42.05.
According to health officials in China’s Hubei province, coronavirus death tolls surged by a record 242 on February 12, bringing total deaths in the province to 1310. A massive 14840 new confirmed cases were also reported in Hubei alone, dwarfing the 2015 cases reported for February 11 throughout whole of China. The surge in numbers were said to be due to new counting methods. Excluding cases confirmed using the new methods, the number of new cases rose by only 1,508 in the province.
The new reporting system created much confusions and raised questions on transparency again. Meanwhile, at the time of writing, there is no update from the National Health Commission on country-wide numbers of the Wuhan coronavirus yet, which is very unusual.
Separately, Jiang Chaoliang, Chinese Communist Party’s Hubei provincial secretary, is relieved of duty by the central committee. Shanghai Mayor Ying Yong is appointed as replacement.
Good morning. I’m pleased to be here with you to discuss today’s policy announcement and the Bank of Canada’s Monetary Policy Report (MPR). I am especially pleased to have Senior Deputy Governor Carolyn Rogers here for her first press conference. She has joined the Governing Council at an important time.
Our message today is threefold.
First, the emergency monetary measures needed to support the economy through the pandemic are no longer required and they have ended.
Second, interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates.
Third, while reopening our economy after repeated waves of the COVID-19 pandemic is complicated, Canadians can be confident that the Bank of Canada will control inflation. We are committed to bringing inflation back to target.
Let me take each of these in turn.
The Bank’s response to the pandemic has been forceful. Throughout, our actions have been guided by our mandate. We have been resolute and deliberate, communicating clearly with Canadians on our extraordinary measures to support the economy and on the conditions for their exit. When we introduced emergency liquidity measures to support core funding markets, we said they would end when market functioning was restored. And they did. When we launched quantitative easing (QE), we said it would continue until the recovery was well underway. As the recovery progressed, we began tapering QE and ended it in October. Today marks the final step in exiting from emergency policies. We said exceptional forward guidance would continue until economic slack was absorbed. With the strength of the recovery through the second half of 2021, the Governing Council now judges this condition has been met. As such, we are removing our commitment to hold our policy rate at its floor of 0.25%.
Second, we want to clearly signal that we expect interest rates will need to increase. A lot of factors are contributing to the uncomfortably high inflation we are experiencing today, and many of them are global and reflect the unique circumstances of the pandemic. As the pandemic fades, conditions will normalize, and inflation will come down. However, with Canadian labour markets tightening and evidence of capacity pressures increasing, the Governing Council expects higher interest rates will be needed to bring inflation back to the 2% target.
Finally, Canadians can be assured that the Bank of Canada will control inflation. Prices for many goods and services are rising quickly, and this is making it harder for Canadians to make ends meet—particularly those with low incomes. Prices for food, gasoline and housing have all risen faster than usual. We expect inflation will remain close to 5% through the first half of 2022 and then move lower. There is some uncertainty about how quickly inflation will come down because we’ve never experienced a pandemic like this before. But Canadians can be assured that we will use our monetary policy tools to control inflation.
Let me turn to the economic outlook that we’ve outlined in our MPR.
Globally, the pandemic recovery is strong but uneven and continues to be marked by supply chain disruptions. Robust demand for goods combined with these supply problems and higher energy prices have pushed up global inflation. With this rise in inflation, expectations that monetary stimulus will be reduced have been pulled forward and financial conditions have tightened from very accommodative levels.
In Canada, growth in the second half of 2021 was even stronger than we had projected, and a wide range of measures now suggest economic slack is absorbed. With the rapid spread of the Omicron variant, first-quarter growth is likely to be modest, but we expect the impact on our economy to be less severe than previous waves. We forecast annual growth in economic activity will be 4% this year and about 3½% in 2023 as consumer spending on services rebounds and business investment and exports show solid growth.
CPI inflation is currently well above our target range and core measures have edged up. Global supply chain disruptions, weather-related increases in agricultural prices and high energy prices have put upward pressure on inflation in Canada, and that is expected to continue in the months ahead. These pressures should ease in the second half of 2022, and inflation should decline relatively quickly to around 3% by year end. Further out, we expect demand will moderate and supply will increase as productivity improves. This will ease price pressures and bring inflation gradually back close to the 2% target over 2023 and 2024.
Let me now say a few words about the Governing Council’s deliberations.
Of course, we discussed the impact of Omicron. Renewed restrictions and household caution about this highly infectious variant have temporarily slowed economic activity. Once again, high-contact services sectors have been hardest hit. But with many more Canadians getting infected in this wave, worker absences have been more widespread. Our high rates of vaccination and adaptability to restrictions should limit the downside economic risks of this wave.
The Governing Council also spent considerable time assessing the overall balance of demand and supply in the economy. In October, we projected the output gap would close sometime in the middle quarters of this year. While measuring the output gap is always uncertain and pandemic-related distortions make assessing supply more complicated, a broad range of indicators clearly suggest economic slack has been absorbed more quickly than expected. Employment is above pre-pandemic levels, businesses are having a hard time filling job openings, and wage increases are picking up. Unevenness across sectors remains, but taking all the evidence together, the Governing Council judges the economy is now operating close to its capacity.
We debated the most likely path for inflation. The resolution of global supply bottlenecks has important implications for inflation in Canada. There is some evidence that supply disruptions may have peaked, but the spread of Omicron is a new wildcard that could further disrupt global supply chains. We also considered the potential for some reversal of the large price increases for goods. This would pull inflation down more quickly than we forecast. Overall, we judged the risks around our inflation projection are reasonably balanced.
We also assessed more domestic sources of inflationary pressures. While global goods price inflation is expected to ease, the tightness in Canadian labour markets, rising house prices and evident capacity pressures suggest that if demand continues to grow faster than supply this will put upward pressure on inflation.
We noted that measures of inflation expectations are broadly in line with our own forecast, with longer-term expectations remaining well anchored on the 2% target. We agreed it is paramount to ensure that higher near-term inflation expectations don’t migrate into higher long-term expectations and become embedded in ongoing inflation.
Putting all this together, we concluded that, consistent with our forecast, a rising path for interest rates will be required to moderate spending growth and bring inflation back to target.
Of course, we discussed when to begin increasing our policy interest rate. Our approach to monetary policy throughout the pandemic has been deliberate, and we were mindful that the rapid spread of Omicron will dampen spending in the first quarter. So we decided to keep our policy rate unchanged today, remove our commitment to hold it at its floor, and signal that rates can be expected to increase going forward. As we indicated in our press release this morning, the timing and pace of those increases will be guided by the Bank’s commitment to achieving the 2% inflation target.
We take our communication with Canadians very seriously. For almost two years now we have told Canadians we would keep our policy rate pinned at its floor until economic slack is absorbed. With slack absorbed more quickly than expected, it is time to remove our extraordinary forward guidance. This ends our emergency policy setting and signals that interest rates will now be on a rising path. This is a significant shift in monetary policy, and we judged that it is appropriate to move forward in a deliberate series of steps.
Let me say a final word about another important monetary policy tool—our balance sheet. The Bank will keep the holdings of Government of Canada bonds on our balance sheet roughly constant at least until we begin to raise the policy interest rate. At that time, we will consider exiting the reinvestment phase and reducing the size of our balance sheet by allowing maturing Government of Canada bonds to roll off. As we have done in the past, before implementing changes to our balance sheet management, we will provide more information on our plans.
With that, Senior Deputy Governor Rogers and I will be happy to take your questions.
Dollar surges broadly in the first half of US session. EUR/USD, GBP/USD and AUD/USD all resumes recent fall after brief consolidations. Dollar is trading in red against Canadian and New Zealand Dollar. But we can disregard Kiwi as it’s just merely digesting recent loss.
The key is whether USD/CAD has completed the rebound from 1.2961. With 1.3035 minor support intact, we’re staying bullish in the pair and expect another rise through 1.3170 to 1.3289 resistance.
Besides, USD/JPY remains an interesting pair to watch. We’re treading the fall from 113.17 as a corrective. That is, we’re bullish in the pair. A break of 111.17 resistance will affirm our view and bring a test on 112.14 resistance. That would also indicate that Dollar is finally taking the control back from Yen.
The fast acceleration in US yield was a major shocker to the markets overnight. Fed officials are generally unconcerned with recent rally. They even sounded upbeat about the development in the bond markets. But some analysts pointed to the poor demand in the “awful” bond auctions overnight. Now that 10-year yield is back above 1.5%, we might be looking at next level around 2%, if the the rally persists.
Kansas City Fed President Esther George said, “much of this increase likely reflects growing optimism in the strength of the recovery and could be viewed as an encouraging sign of increasing growth expectations.”
Atlanta Fed President Raphael Bostic said, “yields have definitely moved at the longer end, but right now I am not worried about that. We will keep an eye out. … I am not expecting that we will need to respond at this point in terms of our policy.”
St. Louis Fed President James Bullard said, “I think the rise in yields is probably a good sign so far because it does reflect better outlook for U.S. economic growth and inflation expectations which are closer to the committee’s inflation target,”
However, some analysts noted that the sharp rally in yield was a result of the “tepid”, awful”, and “brutal” debt auction. The USD 62B of 7-year notes auction showed poor demand, with bid-to-cover ratio of 2.04, the lowest on record.
10-year yield closed up 0.129 at 1.518 overnight. 1.429 support turned resistance was taken out already and the rally is still in acceleration mode. We might now be looking at the next level at 1.971 resistance, 55 month EMA at 1.997, or even 61.8% retracement of 3.248 to 0.398 at 2.159.
Japan to strengthen monitoring of fraudulent market activities
Japan Finance Minister Taro Aso warned that the Financial Services Agency will strengthen monitoring against improper trading activity at the current time of heightened market volatility. In particular, the FSA will with with securities watchdog and stock exchanges to monitor fraudulent activities in market operations.
He also made a rare comment regarding Dollar’s strength. Aso said, “Everyone is buying dollars. That’s leading to declines in other currencies. Stocks and bond prices are both falling, which is something that has not happened before.” “It’s probably investors’ anxiety” over the coronavirus pandemic, he added.