Mon, Jul 22, 2019 @ 13:55 GMT

A look at 10- and 30-year yield after yesteday’s sharp fall

    The sharp fall in 10 year yield yesterday, down -0.021 to close at 2.936, is in line with our view that TNX has topped out in near term. And we’ll likely see more downside in near term. First line of defence is at 55 day EMA (now at 2.827). But as mentioned in the weekly report, if fall from 3.035 is correcting the five wave sequence from 2.033, then it could drop further to 2.717 support before completion. We’ll continue to see how it’s playing out given the number of important events in US this week, including FOMC, ISMs and NFP. But after all, having some consolidations before another take on key resistance of 2013 high at 3.036 is not unreasonable.

    30 year yield’s sharp fall also confirmed short term topping at 3.219 after failing 3.221 near term resistance. For now TYX would dip lower back to 55 day EMA (now at 3.062). Or it would have another take on 50% retracement of 2.651 to 3.221 at 2.936.

    Meanwhile, we’d like to point out again that while there is some downside for yields, we’re not expecting it to drag down the Dollar. Instead, they might just give no support to the greenback.

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    EU: Should be fully and permanently exempted by US steel tariffs

      Some responses from Europe regarding US extension of temporary exemptions on steel and aluminum tariffs.

      European Commission criticized that the extension prolongs market uncertainty, which is already having an impact of business decisions. It also reiterated in a statement that “the EU should be fully and permanently exempted from these measures, as they cannot be justified on the grounds of national security.”

      UK Department for International Trade spokesman welcomed the “positive decision”. And the government said in a statement that “We will continue to work closely with our EU partners and the US government to achieve a permanent exemption, ensuring our important steel and aluminum industries are safeguarded.” But, “we remain concerned about the impact of these tariffs on global trade and will continue to work with the EU on a multilateral solution to the global problem of overcapacity, as well as to manage the impact on domestic markets.”

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      RBA left cash rate unchanged at 1.50% as widely expected. Full statement.

        RBA left cash rate unchanged at 1.50% as widely expected. Full statement below

        Statement by Philip Lowe, Governor: Monetary Policy Decision

        At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

        The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected.

        Long-term bond yields have risen over the past six months, but are still low. Equity market volatility has increased from the very low levels of last year, partly because of concerns about the direction of international trade policy in the United States. Credit spreads have also widened a little, but remain low. Financial conditions generally remain expansionary. Conditions in US dollar short-term money markets have, however, tightened over the past few months, with US dollar short-term interest rates having increased for reasons other than the increase in the federal funds rate. This has flowed through to higher short-term interest rates in a few other countries, including Australia.

        The price of oil has increased recently, as have the prices of some base metals. Australia’s terms of trade are expected to decline over the next few years, but remain at a relatively high level.

        The Bank’s central forecast for the Australian economy remains for growth to pick up, to average a bit above 3 per cent in 2018 and 2019. This should see some reduction in spare capacity in the economy. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Stronger growth in exports is expected. One continuing source of uncertainty is the outlook for household consumption, although consumption growth picked up in late 2017. Household income has been growing slowly and debt levels are high.

        Employment has grown strongly over the past year, although growth has slowed over recent months. The strong growth in employment has been accompanied by a significant rise in labour force participation, particularly by women and older Australians. The unemployment rate has declined over the past year, but has been steady at around 5½ per cent for some months. The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.

        Inflation remains low. The recent inflation data were in line with the Bank’s expectations, with both CPI and underlying inflation running marginally below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.

        The Australian dollar has depreciated a little recently, but on a trade-weighted basis remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

        The housing markets in Sydney and Melbourne have slowed. Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. APRA’s supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high.

        The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

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        New Zealand FM Robertson: We will stick to Budget Responsibility Rules and deliver surplus

          New Zealand’s Finance Minister Grant Robertson emphasized is his pre-budget speech today that the center-left coalition government will stick to the “Budget Responsibility Rules”. He added that means Budget 2018 will deliver a surplus, and surpluses in subsequent years.”

          Robertson added that “”we will reduce the level of net core Crown debt to 20 per cent of GDP within five years of taking office.: And, “we owe it to future generations to be fiscally responsible, given the risks New Zealand faces in terms of natural disasters and global economic shock.”

          The budget will be announced on May 17.

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          AiG Australia performance of manufacturing: Slower but still buoyant expansion

            The Australian Industry Group Australian Performance of Manufacturing Index dropped -4.8 pts to 58.3 in April. AiG noted in the release that it indicated a “slower – but still buoyant – rate of expansion”, after reaching a record high in march. April was also the nineteenth month of expanding or stable conditions, the longest run of continuous expansion since 2005.

            Looking at the sub-indexes, sales dropped -1.4 to 62.5. Production dropped -0.1 to 62.1. new orders dropped -5 to 61.6. Employment dropped -3.9 to 56.1. Deliveries dropped sharply by -12.8 to 53.8.

            Stocks dropped -6.2 to 49.8. Exports dropped -10.9 to 48.0, first contraction since October 2017. AiG noted that “Exports weakened in the food and beverages and the petroleum, coal, chemicals and rubber products sub-sectors.”

            Full release here.

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            US extends temporary steel tariffs exemptions for EU, Mexico and Canada

              Just before the temporary exemptions on the steel and aluminum tariffs expire today, Trump announced to a 30-day extension on European Union, Mexico and Canada, allowing for further negotiation. Meanwhile, the US has reached trade agreements-in-principle with Argentina, Australia and Brazil and details with be finalized “shortly”.

              The White House said in a statement that “in all of these negotiations, the administration is focused on quotas that will restrain imports, prevent transshipment, and protect the national security.” And it added that “these agreements underscore the Trump administration’s successful strategy to reach fair outcomes with allies to protect our national security and address global challenges to the steel and aluminum industries.”

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              CAD surges with help from oil, a look at AUDCAD and EURCAD

                CAD overtakes USD’s place as the strongest major currency today as helped by rebound in oil prices.

                Just after we said here that AUDCAD’s decline seemed to be slowing, it accelerated. But after all, there is no change in the view that it’s clearly in a near term down trend. The major target is 0.9578 key support (2017 low). We’ll monitor the reaction there.

                Another one to watch is EURCAD. We pointed out here that the corrective rise from 1.5461 could be ending. Subsequent decline proved that it has indeed ended at 1.5172. EUR/CAD is now heading to 1.5461 low with solid downside momentum.

                Break of 1.5461 should be seen soon and next target is 61.8% projection of 1.6151 to 1.5461 from 1.5712 at 1.5286.

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                US personal income rose 0.4% mom, spending rose 0.4% mom, core PCE accelerated to 1.9% yoy

                  US personal income rose 0.4% mom in March, below expectation of 0.4%. Personal spending rose 0.4%, in-line with consensus. Headline PCE accelerated to 2.0% yoy in March, up from 1.7% yoy in February, matched expectations. Core PCE accelerated to 1.9% yoy, up from 1.6% yoy, also met expectations.

                  From Canada, IPPI rose 0.8% mom in March, above expectation of 0.2% mom. RMPI rose 2.1% mom, above expectation of 0.6%.

                  Also German CPI was unchanged at 1.6% yoy in April, above expectation of slowing to 1.5% yoy.

                  Dollar is steady after the release. Firm, but limited below Friday’s low except versus Sterling.

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                  EU Malmström to talk to US Ross on steel tariff exemptions

                    Regarding the US steel tariffs, EU Trade Commissioner Cecilia Malmström will speak with US Commerce Wilbur Ross today. Malmström will try to get last minute consent from the US to exempt the tariffs on EU, which temporary exemption expires tomorrow. However, it’s reported that EU officials are concerned with impossible demands from the US.

                    European Commission spokes Margaritis Schinas said in a news conference calmly that “we are patient but we are also prepared.” EU’s stance was made clear after German Chancellor spoke with French President Emmanuel Macron and UK Prime Minister Theresa May on Sunday. Merkel said Europe was “resolved to defend its interests within the multilateral trade framework”.

                    On April 16, EU has already submitted a request to WTO to determine how the US can compensate if trade flows into the EU are affected by the new tariffs. That’s request was under TWO’s Safeguard Agreements. EU also plans to join another separate WTO complaint against the US, arguing that the steel tariffs violate the most-favored nation principle, which forbid discrimination between their trading partners. In addition, it’s reported that EU could retaliate by imposing levies on EUR 2.8b of American goods. And that could start as soon as on June 21, 90 days after the US steel tariffs took effect.

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                    Into US session: USD strong, GBP weak, a look at AUDCAD

                      USD is trading as the strongest one heading into US session. But except versus GBP, USD is limited below Friday’s high against all others. It’s technical in consolidations for the moment. CHF is trading as the second strongest, followed by CAD.

                      NZD and AUD are trading as the two weakest ones. But to us, it’s GBP’s weakness that’s more worth noting. It took out Friday’s low against all others except AUD and NZD and is staying below that level. That is, GBP is extending recent decline.

                      Nonetheless, the AUD is trading below Friday’s low against CAD. And indeed, AUDCAD is also extending recent decline. AUDCAD action bias table shows that it’s still staying in near term down trend. But from the D chart, its looks like the fall is slowing. There could be some support around 0.96 support level.

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                      Fresh selling in GBP as led by EURGBP, then GBPUSD

                        Fresh selling is seen in GBP as it breaks Friday’s low against all but AUD and NZD.

                        EUR/GBP led the way higher earlier as rebound from 0.8620 resumed. 6H action bias turned upside blue earlier after stabilizing above 0.8790 resistance. H action bias is a bit slower in response to today’s rise. H action bias turning upside blue later in European session will affirm affirm underlying momentum.

                        GBP/USD 6H action bias remains all the way downside red, together with downside red D action bias. Clearly, the near term decline is in healthy state to 1.3711 support.

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                        Swiss KOF Economic Barometer rose to 105.3, “tiny” but “broadly visible” improvements

                          Swiss KOF Economic Barometer rose to 105.3 in April, up from 105.1 but missed expectation of 106.0.

                          KOF noted in the release that “although the Barometer currently does not reach the positive values seen at the turn of the year 2017/2018, the current value is clearly above long-term average.” And, “the Swiss economic outlook remains favourable.”

                          Also KOF said that even though the 0.2 pts rise was “tiny”, “it is broadly visible in the economic sectors included.” It noted that “the indicator bundles for manufacturing, accommodation and food service activities, banking, construction and consumption all showed slight increases in April.”

                          However, “an exception is the indicator set for export prospects; it deteriorated in April.”

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                          China official PMI manufacturing at 51.4, PMI non-manufacturing at 54.8 in April

                            The official China manufacturing PMI dropped 0.1 to 51.4 in April, slightly above expectation of 51.3. Non-manufacturing PMI rose 0.2 to 54.8, above expectation of 54.5.

                            In its quick China Data Response note, Capital Economics noted that “the official manufacturing PMI points to economic conditions having remained healthy in April. However, it warned of ” headwinds from the property sector and slower credit growth building.” Additionally, it’s also noted that the official PMIs have history of providing “false signals” in the past.

                            Instead, the Caixin manufacturing PMI to be released on Wednesday “tends to be better correlated with cyclical trends in the sector and will give us a better idea of how the economy has performed recently”.

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                            Updates on Fed funds futures pricings ahead of FOMC

                              Fed is widely expected to keep federal funds rate unchanged at 1.50-1.75% this week. But the tightening path will continue with another hike in June, to 1.75-2.00%. Fed fund futures are pricing in 100% chance of that. Markets will look into FOMC statement to confirm such expectations, but they actually don’t really need it.

                              The expectation for another hike in September also grew notably this week. Fed fund futures are pricing in 77.5% chance of a hike ito 2.00-2.25%. That’s up from prior month’s 57%.

                              One more in December? The markets are unsure. Expectations did grew but Fed fund futures are still pricing in less than 50% chance of one more hike to 2.25-2.50% in December.

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                              RBA to stand pat and lower GDP growth forecast this week

                                RBA is going to announce rate decision again tomorrow. And, it’s widely expected the it would keep the cash rate unchanged at 1.50%, and maintain a neutral stance. The message has been delivered repeatedly, while the next move is a hike, there is no pressing need to act in the near term.

                                The more interest part could be the new economic forecasts. Back in February, RBA projected GDP to grow 3.25% in both 2018 and 2019. And, they were above the government’s forecasts released back in December. The government projected growth to be at 3.0% in fiscal 2018/19 and fiscal 2019/20. There are some expectations for RBA to lower 2018 growth forecast this week, while the government may raise it as it delivers the May Budget.

                                Also, RBA projected underlying inflation (in February) to hit 1.75% in 2018 and 2.00% in 2019. But there is sofar no sign of any up trend in inflation yet. It’s more likely for RBA to keep inflation projections unchanged.

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                                US steel tariff temprary exemptions to end on May 1

                                  The temporary exemptions on US steel and aluminum tariffs will expire tomorrow on May 1. There is little progress made on trade negotiation between the US and other countries. Commerce Secretary Wilbur Ross was quoted saying that some countries will have their exemptions extended, but not all. But there is no more information from the White House regarding the pressing issue.

                                  So far, only South Korea is granted permanent exemptions after revising the bilateral free trade agreements with the US. There, South Korea agreed to a quota of around 2.7 million tons of steel exports to the US. And, the quota for US car imports was doubled to 50,000, without the requirement to meet local safety standards.

                                  NAFTA negotiations made some progress last week after intensive work, but it’s not ready to be wrapped up before May 1 target. Talks will instead resume on May 7 after US Trade Representative Robert Lighthizer returns from his China trip. It’s believed that Canada and Mexico will have their exemptions extended but it’s only confirmed when it’s announced.

                                  Canadian Foreign Minister Chrystia Freeland reiterated her stance that NAFTA is a “completely separate track” from the steel tariffs. And, “there is no justification whatsoever for tariffs or quotas on Canadian steel or aluminum as a national security consideration.” Mexican Economy Minister Ildefonso Guajardo warned of retaliation and said “ambassador Lighthizer knows very clearly our position and how we have to react if any measure is imposed on Mexico.” It’s reported that Mexico already has a list of American products that it would tax in retaliation.

                                  German Chancellor Angela Merkel also warned of retaliation. She issued a statement after dialogue with French President Emmanuel Macron and UK Prime Minister Theresa May. Merkel said the three leaders “agreed that the U.S. ought not to take any trade measures against the European Union,” which is “resolved to defend its interests within the multilateral trade framework.”

                                  This topic will make some headlines in the early part of the week.

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                                  US GDP grew 2.3% in Q1, beat expectations. USDJPY and USDCAD still holding in tight range

                                    USD buying is picking up again after stronger than expected data. US GDP grew 2.3% annualized in Q1. While that was a slowdown from 2.9% growth in Q4, it beat expectation of 2.0%. The figure is also realistically well that could be sustained. Price index rose 2.0%, below expectation of 2.2%. Employment cost index rose 0.8%, above expectation of 0.7%.

                                    EUR/USD is on track for 1.2 handle while USD/CHF is also heading to parity. GBP/USD is within touching distance to 1.3711 key support after post UK GDP selloff.

                                    But it should also be noted that USD/JPY and USD/CAD are somewhat stuck in very tight range despite rally attempt. 109.50 in USD/JPY and 1.2900 in USD/CAD will now be the focus in the current US session.

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                                    SNB Jordan: Premature tightening would risk unnecessarily jeopardizing the positive economic momentum

                                      SNB Chairman Thomas Jordan said today that recent surge in EUR/CHF just represents “a reduction in the significant overvaluation” of the Swiss Franc. But he maintained that “our currency nevertheless remains highly valued”. And he maintained that SNB should continue with an expansionary monetary policy with negative interest rate. In addition, “our continued willingness to intervene in the foreign exchange market as necessary”.

                                      Jordan further explained that “both instruments remain essential as the situation is still fragile. While the foreign exchange market has largely shrugged off recent equity market turbulence, circumstances in the financial markets – and thus by extension monetary conditions for the economy – could rapidly deteriorate again.”

                                      Also, he pointed out that “inflation remains low and inflationary pressure is modest despite our expansionary monetary policy. Tightening monetary conditions would be premature at this juncture, and would risk unnecessarily jeopardizing the positive economic momentum that has been established.”

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                                      ECB Mersch: Inflation to rise gradually, contingent on highly accommodative monetary policy

                                        ECB Executive Board member Yves Mersch said today that inflation will rise only gradually. He said in Sofia “overall, the underlying strength in the euro area economy continues to support our confidence that inflation will converge towards our aim over the medium term.” But he added that ” inflation convergence will likely proceed only gradually, and remains contingent on a highly accommodative monetary policy stance.”

                                        Also, Mersch added that “the transition towards policy normalization will begin once the Governing Council assesses there has been sustained adjustment in the path of inflation.”

                                        Separately, ECB Governing Council member Benoit Coeure said Eurozone growth isn’t just recovery but an expansion. He added that there is solid and broad based expansion in the region.

                                        Comments from both are strikingly similar to President Mario Draghi’s yesterday.

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                                        UK Chancellor Hammond blamed weak GDP on weather. ONS Kent-Smith said impact was limited

                                          The 0.1% qoq growth in UK in Q1 not only missed market expectations, it’s also the weakest quarterly growth figure in five years.

                                          Chancellor of the Exchequer Philip Hammond blamed the weak data on weather. He said in an email statement that “today’s data reflects some impact from the exceptional weather that we experienced last month, but our economy is strong and we have made significant progress.” He added that “our economy has grown every year since 2010 and is set to keep growing, unemployment is at a 40 year low, and wages are increasing.”

                                          On the other hand, Rob Kent-Smith, the ONS’ head of national accounts said in a statement that “our initial estimate shows the UK economy growing at its slowest pace in more than five years with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly.” And, “while the snow had some impact on the economy, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supply and online sales.”

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