5 Star to find someone other than Savona as economy minister

    The anti-establishment 5-Star Movement in Italy in is working hard on forming a government to solve the current political turmoil. It’s leader Luigi Di Maio met with President Sergio Mattarella today. After that, Di Maio said “let’s find someone of the same caliber as Savona, who would still remain in the government in another ministry.” And “If the League agrees … we can still form a government.”

    Di Maio is now trying to find that “point of compromise” between Mattaralla and eurosceptic League. No name is thrown out yet and it could take some time to negotiate with League. Note that League leade rMatteo Salvini is pushing for another election as the effort to form a coalition government collapsed.

    But after all, the development s calmed the markets mildly as Euro also recovered.

    Fed Brainard: It’s very hard to see the case for pause in Sep

      Fed Vice Chair Lael Brainard told CNBC today, “right now, it’s very hard to see the case for a pause… We’ve still got a lot of work to do to get inflation down to our 2% target.” Atlanta Fed President Raphael Bostic noted earlier that a pause in September might make sense to see how the economy evolves after successive rate hikes.

      “We’re certainly going to do what is necessary to bring inflation back down,” Brainard said. “That’s our No. 1 challenge right now. We are starting from a position of strength. The economy has a lot of momentum.”

      US update: AUD/CHF the top mover as risk appetite returns

        Risk appetite appears to be rather strong today. It’s reported that Trump is undecided on the congressional deal to avert another shutdown. But investors couldn’t care less and they seem optimistic that Trump will eventually find an excuse to bow down, like claiming that the 90km border fence is a first step. But anyway, S&P 500 has already broken recent high to extend rally. DOW and NASDAQ might follow soon.

        In the currency markets, Swiss Franc is the worst performing one, followed by Yen and then Dollar. Australian Dollar is the strongest one, followed by Canadian and then Euro. Sterling is mixed after little reactions to UK Prime Minister Theresa May’s Brexit statement in Commons. Kiwi is also mixed ahead of tomorrow’s RBNZ rate decision.

        AUD/CHF is currently the top mover today, up 0.69%. The recovery ahead of 0.7046 support argues that rebound from 0.6646 low might not be completed yet. Intraday bias stays neutral first. Break of 0.7262 will target 0.7376 resistance next. Though, firm break of 0.7046 should confirm near term reversal and target a retest on 0.6646 low.

        In other markets:

        • DOW is up 1.39%.
        • S&P 500 is up 1.14%.
        • NASDAQ is up 1.27%.
        • 10-year yield is up 0.025 at 2.686.
        • 30-year yield is up 0.028 at 3.027, back above 3% handle.

        In Europe:

        • FTSE rose 0.06%.
        • DAX rose 1.01%.
        • CAC rose 0.84%.
        • German 10-year yield rose 0.0102 to 0.132.

        Fed Clarida: Symmetric inflation outcomes requires asymmetric monetary policy reaction function

          Fed Vice Chair Richard Clarida explained that if monetary policy “seeks only to return inflation to 2 percent”, the policy will tend to generate inflation that averages less than 2%. That would in turn “tend to put persistent downward pressure on inflation expectations”.

          To “achieve symmetric outcomes for inflation requires an asymmetric monetary policy reactions reaction function in a low r* world with binding ELB constraints in economic downturns,” he added. Hence, FOMC will no longer refers to 2% inflation goal as “symmetric”, but “averages 2% over time”.

          He also said said forward guidance and large-scale asset purchases “have been and continue to be effective” with federal funds rate at effective lower bound. He reiterated that “we do not see negative rates as an attractive policy option”. Yield caps and targets were “not warranted” in the current environment.

          Full speech here.

          Fed Daly favors gradual pace of monetary policy normalization

            New San Francisco Fed President Mary Daly expressed her support to continued gradual rate hikes in her first remarks as monetary policy maker. She said the labor market is “booming” and inflation at the at 2% target. And, she explained that Fed might not want to go too slowly on rates and risking falling behind the curve. Her approach is consistent with Fed’s and she favors “a gradual pace of normalization.”

            Daly also used the analogy that “you put a toe in the water and see how much of a ripple it makes”. And, “the FOMC just raised rates in September, and we’re now in the watching phase — what’s going on in the economy, how does it react.”

            She also tried to talk down last week’s stock market crash. She said “a correction in the stock market where it comes down a little bit is not necessarily a worrisome thing.”

            Japan: South Korea fails to show how we fall short of export control measures

              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.”

              Fed to be a non-event, NASDAQ looks into 14k handle

                Fed will more likely stick to script today and the FOMC meeting could be a non-event. It’s clearly communicated that net asset purchases will end in March. Markets are expecting a 25bps hike in March too. Chair Jerome Powell is unlikely to say something that deviate from such expectations and rock the boat.

                The baseline remains that there will be only three hikes, and no change would be revealed until March economic projections. Powell would also remain non-committal on the timing of balance run-off. So, these two questions would remain unanswered.

                Some previews on Fed:

                Markets will probably look more into other developments like tensions surrounding Ukraine for guidance. NASDAQ’s u-turn on Monday was impressive but there was no follow through buying. For now, there is no clearly sign that the steep fall from 16212.22 is ending. The question is whether there would be slightly lengthier interim consolidations first, or the decline would resume right away.

                A close above 14k, which is close to 38.2% retracement 15319.03 to 13094.65 at 13944.36, will suggest the recovery is going to last longer, and possibly further to 61.8% retracement at 14469. However, a close below 13414.14 minor support will raise the chance that free fall is coming back.

                China retail sales unexpectedly contracted in July, USD/CNH channeling lower

                  The batch of economic data released from China is mixed. In particular, retail sales contracted -1.1% yoy in July, versus expectation of 0.3% yoy. That showed vulnerability in domestic demand. Nevertheless, industrial production rose 4.8% yoy in July, slightly above expectation of 4.7% yoy. Fixed asset investment dropped -1.6% ytd yoy in July, above expectation of -3.3% ytd yoy.

                  USD/CNH is still channeling well as fall from 7.1961 extends. This decline is seen as the third leg of the consolidation pattern from 7.1953. Hence, while fall could be seen, we’d expect strong support from 6.8452 to contain downside and bring rebound. Meanwhile, break of 6.9804 resistance will now suggests short term bottoming and turn bias back to the upside.

                  BoE Pill: We have done some, still more to do

                    BoE Chief Economist Huw Pill said at a conference that recent market turmoil in the UK led to some “de-anchoring” of inflation expectations. “What we’re most concerned about is whether this self-sustaining inflation will persist,” he said.

                    He added that officials at BoE have “more to digest” about how the government’s plan will impact the economy. They will look carefully at the budget due November 17.

                    Regarding interest rates, “we have done some, and I think there is still more to do,” Pill said. “At some point you have to think what level of rate is appropriate.”

                    Philly Fed survey dropped to 5.6, price pressure moderated

                      Philadelphia Manufacturing Business Outlook Diffusion Index dropped -6 pts to 5.6, missed expectation of 7.1. The percentage of firms reporting increases (27%) this month narrowly exceeded the percentage reporting decreases (21%). Price paid index dropped -16 pts to 16.8, suggesting price pressures moderated.

                      Philly Fed noted: “Responses to the October Manufacturing Business Outlook Survey suggest growth in manufacturing activity this month. Although they remained positive, the indicators for general activity and shipments fell from their levels in September. The firms reported an improvement in both new orders and employment this month. The survey’s future indexes indicate that respondents continue to expect growth over the next six months.”

                      Full release here.

                      IMF Srinivasan highlights uncertainty in Japan’s monetary policy and potential impacts

                        Krishna Srinivasan, director of IMF’s Asia and Pacific Department, has expressed concerns over uncertainty in Japan’s monetary policy direction amid rising inflation.

                        He stated in a press briefing, “Japanese government bond yields have increased notably since October. Changes in Japan’s monetary policy that lead to further increases in government bond yields could have global spillovers through Japanese investors, who have large investment positions in debt instruments abroad.”

                        Srinivasan also warned that portfolio rebalancing by these investors could potentially trigger a rise in global yields, “causing portfolio outflows for some countries”.

                        Regarding China, he noted that over the medium term, a slowdown in productivity and investment is expected, which would lower growth below 4 percent by 2028. This could have profound adverse implications for the rest of the region, given their strong trade linkages with China.

                        Srinivasan also highlighted the risk of the global economy fragmenting into trading blocs, saying, “If this happens, the larger exposures will be to Asian economies that currently export significantly to the US and Europe, and those that are currently part of global value chains that see them export intermediate goods to China for use in Chinese exports.”

                        Full remarks of IMF Srinivasan here.

                        UK PMI services finalized at 49.3, all PMIs suggest -0.1% GDP contraction

                          UK PMI Services was finalized at 49.3 in November, down from October’s 50.0. PMI Composite was finalized at 49.3, down from 50.0. Markit noted marginal fall in business activity. New work decreased at the fastest pace since July 2016. Input cost inflation also eased to the lowest level for over three years.

                          Tim Moore, Economics Associate Director at IHS Markit, which compiles the survey:

                          “November’s PMI surveys collectively suggest that the UK economy is staggering through the final quarter of 2019, with service sector output falling back into decline after a brief period of stabilisation.

                          “Lacklustre demand remains centred on business-to-business spending. Service providers have attributed the recent soft patch to delayed decision-making on new projects until greater clarity emerges in relation to the domestic political landscape. Sales to export markets were hard-hit in November, as signalled by the steepest fall in new work from abroad for more than five years.

                          “Service providers reported concerns that consumer appetite for big-ticket purchases has begun to falter, while those reliant on consumer footfall and discretionary spending noted the negative impact of unusually wet weather in November.

                          “Lower manufacturing production alongside an absence of growth in the service economy means that the IHS Markit/ CIPS Composite Output Index is consistent with UK GDP declining at a quarterly rate of around 0.1%.”

                          Full release here.

                          Eurozone unemployment rate dropped to 7.4% in Sep, EU down to 6.7%

                            Eurozone unemployment rate dropped to 7.4% in September, down from August’s 7.5, matched expectations. EU unemployment rate also dropped to 6.7%, down from 6.9%.

                            Eurostat estimates that 14.324 million men and women in the EU, of whom 12.079 million in the Eurozone, were unemployed in September. Compared with August, the number of unemployed decreased by 306 000 in the EU and by 255 000 in the euro area. Compared with September 2020, unemployment decreased by 2.054 million in the EU and by 1.919 million in the euro area.

                            Full release here.

                            German Ifo business climate dropped to 114.7 as threat of protectionism dampended mood in the economy

                              German Ifo business climate dropped to 114.7 in March, down from 115.4, slightly above expectation of 114.6.

                              Ifo expectation dropped to 104.4, down from 105.4, met consensus.

                              Ifo current assesment dropped to 125.9, down from 126.3, above expectation of 125.6.

                              Ifo economist Klaus Wohlrabe “the protectionism debate is leaving its mark.” And therefore, “export expectations have fallen to their lowest levels in more than a year.”

                              Ifo president Clemens Fuest also echoed that “the threat of protectionism is dampening the mood in the German economy,”

                              German Ifo business climate sinks for fourth month, economy faces uphill battle

                                Germany’s economic outlook has dimmed yet again, as indicated by the Ifo Business Climate Index which registered its fourth consecutive monthly drop. In August, the index tumbled from 87.4 to 85.7. The downward trajectory was visible across both Current Situation Index, which slid from 91.4 to 89.0, and Expectations Index, which descended from 83.6 to 82.6.

                                A sectoral breakdown of the data highlighted broad-based concerns. Manufacturing saw a decline from -13.9 to -16.6. Meanwhile, Services sector took a more significant hit, plummeting from a modest 1.0 to a concerning -4.2. Trade and Construction sectors also continued their downward spiral, recording readings of -25.5 and -29.3 respectively, from their previous standings of -23.7 and -24.6.

                                Ifo’s commentary on the data was stark. They noted, “Assessments of the current situation fell to their lowest level since August 2020.” The institution also flagged a growing pessimism among companies regarding the forthcoming months, adding, “The German economy is not out of the woods yet.”

                                Full German Ifo release here.

                                Eurozone PPI at 1.4% mom, 0.0% yoy in Jan

                                  Eurozone PPI came in at 1.4% mom, 0.0% yoy in January, versus expectation of 1.0% mom, -0.4% yoy. For the month, industrial producer prices increased by 3.5% mom in the energy sector, by 1.2% mom for intermediate goods, by 0.4% mom for capital goods and for durable consumer goods and by 0.1% mom for non-durable consumer goods. Prices in total industry excluding energy increased by 0.8% mom.

                                  EU PPI came in at 1.4% mom, 0.0% yoy. For the month, the industrial producer prices increased in all Member States for which data are available. The highest increases were recorded in Ireland (+10.0% mom), Spain (+3.4% mom) and Denmark (+3.3% mom).

                                  Full release here.

                                  Canada GDP grew 1.1% mom in Mar, but could fall -0.8% mom in Apr

                                    Canada GDP grew 1.1% mom in March, above expectation of 1.0% mom. That’s the 11th consecutive monthly increase. Total economic activity was around -1% below the pre-pandemic level in February 2020.

                                    Goods-producing industries grew 1.1% mom, while services-producing industries rose 1.1% mom. 18 of 20 industrial sectors posted increases.

                                    Based on preliminary information, GDP has declined around -0.8% mom in April, the first fall since April 2020.

                                    Full release here.

                                    US initial jobless claims dropped to 212k, below expectation of 216k

                                      US initial jobless claims dropped -6k to 212k in the week ending October 19, below expectation of 216k. Four-week moving average of initial claims dropped -0.75k to 215k. Continuing claims dropped -1k to 1.682m in the week ending October 12. Four-week moving average of continuing claims rose 6.5k to 1.677m.

                                      Full release here.

                                      NZIER revised up inflation forecast, NZD to remain elevated for coming years

                                        In NZIER’s September survey, consensus forecast for 2021/22 GDP was revised down from 5.0% to 4.5%. But 2022/23 GDP forecast for 2022/23 was revised up from 3.7% to 4.5%. The revision likely reflects the impact of the current COVID-19 outbreak. GDP is forecast to grow 2.3% in 2023/24 (revised down from 2.6%), then pick up to 2.7% in 2024/25.

                                        Inflation forecasts were revised up sharply from 2.1% to 3.5% in 2021/22, up from 1.9% to 2.0% in 2022/23. It’s unchanged at 2.2% in 2023/24 and expected to be steady at 2.2% in 2024/25. NZIER said, “Capacity pressures continue to build up across the New Zealand economy, as acute labour shortages and COVID-related supply chain disruptions drive up cost pressures further. Solid demand has made it easier for businesses to pass these costs onto customers by raising prices.”

                                        The NZD outlook is mixed with trade-weighted index revised lower in the near term. However, NZIER said, “expectations are for the currency to remain elevated over the coming years,” as RBNZ rate hike expectations improved yield attractiveness.

                                        Full release here.

                                        Will SNB, BoE, and ECB hint at upcoming rate cuts?

                                          Three major central banks – SNB, BoE and ECB – are set to announce their policy decisions. All three will keep their interest rates unchanged. This comes in the wake of Fed’s outlined plans for rate cuts in 2024 in the dot plot released overnight. Now, that raises questions about whether these central banks will follow and signal policy loosening for the next year.

                                          SNB is expected to hold its key policy rate steady at 1.75%. This decision is supported by forecasts from Swiss State Secretariat for Economic Affairs released yesterday, projecting a slowdown in inflation to 1.9% in 2024 and further to 1.1% in 2025. Economic growth in Switzerland is also expected to decelerate to 1.1% in 2024 before rebounding to 1.7% in 2025.

                                          BoE is anticipated to maintain interest rates at 5.25%. Traders have increased their bets on the BoE cutting rates following the unexpectedly sharp contraction in UK’s monthly GDP for October. The market has fully priced in 100bps easing in monetary policy for 2024, bringing borrowing costs down to 4.25%. The first rate cut is anticipated in June. Today’s voting pattern and accompanying statement from BoE will be under close scrutiny.

                                          Similarly, the ECB is expected to keep its main refinancing rate at 4.50% and deposit rate at 4.00%. The focus will likely be on new DP and inflation forecasts and their implications for the rate path in the coming year. Money markets are currently pricing in almost 150bps of rate cuts for the next year.

                                          In terms of currency performance, Swiss Franc appears to be the firmer one for the near term. As long as 0.9543 resistance holds, outlook in EUR/CHF remains bearish. Decisive break of 0.9402 support will resume larger down trend to 61.8% projection of 0.9995 to 0.9416 from 0.9683 at 0.9325.

                                          GBP/CHF’s fall from 1.1153 resumed this week, and should be on track to 100% projection of 1.1153 to 1.0978 from 1.1085 at 1.0910. Sustained break there could prompt downside acceleration to 1.0779 and below, to resume larger down trend from 1.1574.

                                          While Euro appears to be light strong then Sterling in the past few days, risk in EUR/GBP remains on the downside as long as 0.8648 resistance holds. Break of 0.8548 will likely bring deeper decline through 0.8491 to resume the medium term down trend.