Thu, Jul 09, 2020 @ 04:26 GMT

Into US session: AUD strongest, JPY second, no follow through in risk appetite

    Entering into US session, Dollar remains the weakest one today, after suffering broad based selloff on dovish FOMC announcement yesterday. At this point, Canadian Dollar is the second weakest while Sterling is the third weakest.

    Australian Dollar is the strongest one following strong rally in Asian stocks. However, it has to be noted that Yen is the second strongest one. And European markets are just mixed today. We’re a bit skeptical on overall strength in the stock markets. But let’s see how it goes in the US first. DOW future is currently down -0.1% despite Trump’s upbeat tweets on China trade talks.

    European stocks, and to a certain extent Euro, might be weighed down by Eurozone data. German retail sales had biggest monthly drop since 2007. Eurozone Q4 GDP grew at lowest pace in four years. Italy was in technical recession in H2 2018.

    In European markets, currently:

    • FTSE is up 0.55%.
    • DAX is down -0.23%.
    • CAC is up 0.10%.
    • German 10-year yield is down -0.012 at 0.179.

    Earlier in Asia:

    • Nikkei rose 1.06%.
    • Hong Kong HSI rose 1.08%.
    • China Shanghai SSE rose 0.35%.
    • Singapore Strait Times rose 0.50%.
    • Japan 10-year JGB yield dropped -0.0014 to 0.002.
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    Trump: Working with China on a complete deal, leave nothing unresolved

      Trump sounds optimistic again in a serious of tweets regarding trade talk with China. He said the meetings in Washington are “going well with good intent on both sides”. Trump is expected to meet with China’s representatives, including Vice Premier Liu He, in the Oval Office today”.

      But he also emphasized that “no final deal will be made until my friend President Xi, and I, meet in the near future to discuss and agree on some of the long standing and more difficult points.” He noted that both sides are trying to do a “complete deal, leaving NOTHING unresolved on the table”.

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      Eurozone GDP grew 0.2% qoq in Q4, Italy contracted -0.2% qoq

        Eurozone (EA19) GDP growth came in at to 0.2% qoq in Q4, matched expectations. it’s also the same rate as in Q3. That’s also the lowest rate in four years since Q2 of 2014. Annual rate slowed to 1.2% yoy, down from Q3’s 1.6% yoy. The year-on-year rate is a five year low.

        European Union (EU28) GDP growth came in at 0.3% qoq. Annual rate slowed to 1.5% yoy, down from 1.8% yoy.

        Also released, Italy GDP contracted -0.2% qoq in Q4, worse than expectation of -0.1% qoq. Italian was in technical recession with two consecutive quarters of contraction.

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        Euro rally capped by weak German retail sales and France CPI

          Euro’s rally against Dollar and Yen is apparently capped by some weak economic data in the European session so far.

          German retail sales dropped -4.3% mom in December, way below expectation of -0.5% mom. That’s also the fastest decline in 11 years since 2007. The decline was partly due to a strong November with pre-Christmas shopping and one-off discounts. But it’s yet another warning that the growth engine of Eurozone is slowing down quickly. Also from Germany, unemployment rate was unchanged at 5.0% in January. But unemployment dropped less than expected by -2k only.

          From France, CPI dropped -0.4% mom in January. Annual rate slowed sharply from 1.6% yoy to 1.2% yoy. INSEE noted that “The fall in inflation should result from a pronounced deceleration in the prices of energy. Services prices should rise at the same pace as in December and those in manufactured products should drop barely less than in the previous month. Contrariwise, food and tobacco prices should gather pace.”

           

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          UK Hunt: Takes a few days to prepare new Irish border backstop proposal

            UK Foreign Minister Jeremy Hunt said the government is putting together the new Irish border backstop proposal for the EU. And “it is going to take a few days to do that”.

            Hunt added ” there is potential along all the different routes that have been discussed. But we need to put those together, make sure they meet the concerns the EU has expressed and then I think… we will have a proper discussion.”

            While the March 29 formal Brexit date approaching, Hunt still maintained that it’s too early to say if extension to Article 50 is needed.

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            BoJ opinions: Swift decisive actions needed should downside risks materialize

              BoJ released summary of opinions of January 22/23 monetary policy meeting today. It’s noted there that “hard data suggest that the trend in Japan’s economy has been firm”. However, “some market participants hold excessively pessimistic views.” And, risks to overseas economies have been “increasingly tilted to the downside” and there are concerns that some “may materialize”.

              BoJ also noted that recent fall in stocks prices “to a certain extent indicates the anticipation of a global decline in the real economic growth rate.” And, “this is clear from developments in exports and imports, rather than GDP, which is declining marginally.”

              The central bank also reiterated the stance to maintain current monetary easing. And more importantly, if downside risks materialize, BoJ “should be prepared to make policy responses”. It’s added that “Since achieving the price stability target has been delayed, it is not desirable to adopt a stance of not taking actions until a serious crisis occurs. Rather, a stance of taking swift, flexible, and decisive actions, including additional easing, in response to changes in the situation is desirable.”

              Full summary here.

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              China PMI manufacturing broke downtrend, but stayed contractionary

                China PMI manufacturing rose 0.1 to 49.5 in January, up from 49.4 and beat expectation of 49.3. It’s, nonetheless, the second month of contractionary reading. It’s noted in the release that the continuous decline since August last year was finally broken, showing signs of stabilization. Slight increase in export orders also suggested that sharp decline export growth since November was slowing down.

                However, decline in new orders and backlog orders reflected downward pressure on demand. Overall, “the current economy has signs of stabilization, but the foundation still needs to be consolidated. Also from China PMI non-manufacturing rose to 54.7, up from 53.8, and beat expectation of 53.9. Full release in simplified Chinese.

                Also release in Asia session, Japan industrial production dropped -0.1% mom in December versus expectation of -0.5% mom. Housing starts rose 2.1% yoy in December, matched expectation. Australia import prices rose 0.5% qoq in Q4, above expectations of 0.3% qoq. UK Gfk consumer confidence was unchanged at -14 in January.

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                Asian update: Dollar weakest on dovish Fed, DOW reclaimed 25k overnight

                  Dollar tumbled broadly overnight, while stocks surged, after dovish FOMC statement. The greenback remains the weakest on in Asian session today, followed by Sterling and then Swiss Franc. On the other hand, strong risk appetite lifts Australian and New Zealand Dollar. Technically, AUD/UD broke 0.7235 resistance yesterday to resume rebound from 0.6722 for 0.7393 key resistance. USD/CAD also broke 1.3180 support to resume fall from 1.3664. EUR/USD resumed rise from 1.1289 towards 1.1569 resistance. USD/JPY also broke 109.14 minor support which argues that rebound from 104.69 has completed at 110.00 already.

                  In short, Fed dropped the tightening bias language of “”some further gradual increases” in interest rate. Instead, Fed said it would be “patient as it determines what future adjustments”. On balance sheet reduction plan, Fed is “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments”. But no detail was revealed yet. On economic assessment Fed stay activity has been “rising at a solid rate” rather than being “strong”. Also, “market- based measures of inflation compensation have moved lower in recent months”.

                  More on FOMC:

                  In Asia:

                  • Nikkei is up 1.24%.
                  • Hong Kong HSI is up 1.21%.
                  • China Shanghai SSE is up 0.63%.
                  • Singapore Strait Times is up 0.38%.
                  • Japan 10-year JGB yield is down -0.0022 at 0.001.

                  Overnight:

                  • DOW rose 1.77% or 434.9pts to 25014.86, reclaimed 25k handle.
                  • S&P 500 rose 1.55% to 2681.05.
                  • NASDAQ rose 2.20% to 7183.08.
                  • 10-year yield dropped -0.017 to 2.695, back below 2.7.

                  DOW’s rally from 21712.53 resumed and broke 61.8% retracement of 26951.81 to 21712.53 at 24950.40. It’s on track to 78.6% retracement at 25830.60 and above.

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                  82% chance of Fed on hold through 2019, more yield curve inversion

                    Markets firmed up their pricing that fed will stand pat throughout 2019 after yesterday’s FOMC statement that adopted the “patience” language. Fed funds futures are pricing in 82.5% chance of federal funds rate staying at current 2.25-2.50% after December meeting. It compares to prior day’s 72.0%. Nevertheless, it’s not that higher than 79.3% a month ago.

                    Treasury yields responded with 30-year yield rose 0.012 to 3.053. 10-year-year yield dropped -0.017 to 2.695. 5-year yield suffered steep decline and dropped -0.044 to 2.503. 1-year yield dropped -0.008 to 2.606. Yield curve from 1-year to 5-year has indeed inverted more after FOMC.

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                    Fed drops tightening bias, stress patience, dollar dives

                      Fed left federal funds rate unchanged at 2.25-2.50% as widely expected. The most important change in the statement is that Fed dropped the language that “some further gradual increases in the target range for the federal funds rate will be consistent…”

                      Instead, Fed now said “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”.

                      That’s a rather drastic change and dollar drops broadly after the release.

                      Full statement below.

                      Federal Reserve Issues FOMC Statement

                      Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed.

                      Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

                      In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

                      Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.

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                      EU Juncker: No Brexit renegotiation, Ireland’s border our border and joint priority

                        EU continued to pour cold water on UK’s intention to reopen Brexit negotiation. European Commission President Jean-Claude Juncker told the European Parliament that “the Withdrawal Agreement remains the best and only deal possible.” He added that “The debates and votes in the House of Commons yesterday will not change that. The Withdrawal Agreement will not be renegotiated.”

                        Juncker also emphasized “Ireland’s border is EU’s border and is our joint priority,” and “Yesterday’s vote has further increased the risk of a disorderly Brexit.” Though, he remained optimistic that “there can and will be agreement with UK.”

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                        Into US session: AUD and CAD strongest, but upside capped below near term resistance

                          Entering into US session, Australian Dollar remains the strongest one for today following stronger than expected CPI reading. Canadian Dollar follows closely with help from rebound in oil price. However, AUD/USD is still held below 0.7235 resistance. USD/CAD is kept above 1.3180 support. Thus, both pairs are still bounded in near term consolidations.

                          Instead, Dollar catches bids against both Yen and Swiss Franc after stronger than expected ADP job data. USD/CHF is already pressing 0.9990 resistance, with help from strong rally in EUR/CHF. USD/JPY is also heading back to 110.00. We might see upside breakout in these two pairs later in the session. But the greenback’s fate will depend on FOMC statement and press conference, as well as any news on US-China trade negotiations.

                          Meanwhile, Sterling is mildly higher today as Brexit uncertainties continue. The Pound is the weakest for the week following yesterday’s Brexit development. While UK Prime Minister Theresa May is seeking re-negotiation on Irish backstop, EU shows no sign of backing down from the stance of not reopening negotiation.

                          In European markets:

                          • FTSE is up 1.67%.
                          • DAX is down -0.29%.
                          • CAC is up 0.75%.
                          • German 10-year yield is down -0.0123 at 0.191, back below 0.2 handle.

                          Earlier in Asia:

                          • Nikkei closed down -0.52%.
                          • Hong Kong HSI rose 0.40%.
                          • China Shanghai SSE dropped -0.72%.
                          • Singapore Strait Times dropped -0.42%.
                          • Japan 10-year JGB yield dropped -0.0014 to 0.003.
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                          US ADP employment grew 213k, job market weathered government shutdown well

                            US ADP report shows 213k job growth in private sector in January, well above expectation of 170K. Prior month’s figure was revised down slightly from 271k to 263k.

                            “The labor market has continued its pattern of strong growth with little sign of a slowdown in sight,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “We saw significant growth in nearly all industries, with manufacturing adding the most jobs in more than four years. Midsized businesses continue to lead job creation, however the share of jobs was spread a bit more evenly across all company sizes this month.”

                            Mark Zandi, chief economist of Moody’s Analytics, said, “The job market weathered the government shutdown well. Despite the severe disruptions, businesses continued to add aggressively to their payrolls. As long as businesses hire strongly the economic expansion will continue on.”

                            Full release here.

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                            Germany CPI slowed sharply to 1.4% in Jan, Euro shrugs

                              German CPI dropped -0.8% mom in January, matched expectation. But annual rate slowed sharply to 1.4% yoy, down from 1.7% yoy, and missed expectation of 1.6% yoy. Today’s German CPI miss should weigh on expectation for Eurozone CPI reading to be released later in the week, it’s expected to slow to 1.4% yoy.

                              Euro shrugs off the data, nevertheless. In particular, EUR/CHF’s rally is accelerating after taking out 1.1347 resistance yesterday.

                              Full release here.

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                              Irish Conveny urges UK May to hold her previous words on Irish backstop

                                Irish Foreign Minister Simon Conveny said today that the so called alternative arrangements for Irish backstop that UK is now seeking are options around time limits, exit clauses and technology. But he dismissed such options as “we have been through all of these things.”

                                He added “we have tested them and we have found that they do not stand up to scrutiny, and now we have a British prime minister advocating again for the same things that were tested.”

                                Conveny then complained that “What we are being asked to do here is to compromise on a solution that works and to replace it with wishful thinking. That’s what’s being asked of the Irish government and we won’t do it.”

                                In addition, he emphasized UK Prime Minister Theresa May has “outlined repeatedly that the backstop is not only desirable but necessary to reassure people in Northern Ireland so surely the responsible thing for the Irish government to do is to hold the British government to its word.”

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                                Swiss KOF dropped to 95.0, negative developments in manufacturing and services

                                  Swiss KOF Economic Barometer dropped for he fourth time in a row to 95.0 in January, below expectation of 98.1. It’s now 5pts below its long term average.

                                  KOF noted that “The downward tendency that emerged at the end of last year continues. The economic outlook for Switzerland continues to dampen at the beginning of 2019”. And, “this renewed decline is especially attributable to negative developments within the manufacturing industry and the service industry. In addition, export prospects cloud over.”

                                  Full release here.

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                                  German Gfk consumer sentiment rose to 10.8

                                    Germany Gfk consumer confidence rose 0.4 to 10.8 in February, above expectation of 10.3. Gfk noted that rising income prospects and an increasing propensity to buy mean that the consumer climate is improving once more. This is further reinforced by a decrease in propensity to save in January.

                                    Rolf Bürkl, GfK Consumer Expert, explains, “For the whole of 2019, GfK is predicting real growth in private consumer spending in Germany of 1.5 percent. The key pillars for the consumer economy will above all be the expected positive trend on the labor market coupled with positive income expectations. However, this is based on there being no significant growth in German consumers’ uncertainty about the economy. For example, if there were an escalation in the trade dispute, putting further strain on export prospects, this would be a bad sign for the export nation of Germany. If this were to again increase workers’ fears of job losses, it would have an adverse impact on the consumer climate, jeopardizing the forecast.”

                                    Full release here.

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                                    France GDP rose 0.3%, matched expectations

                                      French GDP rose 0.3% qoq in Q4 2018, same pace as prior quarter and matched expectation. Looking at the details, household consumption expenditures decelerated (0.0% after +0.4%), likewise total gross fixed capital formation slowed down (GFCF: +0.2% after +1.0%). Overall, final domestic demand excluding inventory changes decelerated: it contributed 0.1 points to GDP growth, after 0.5 points in the previous quarter.

                                      Imports bounced back in Q4 (+1.6% after −0.7%) and exports accelerated significantly (+2.4% after +0.2%). All in all, foreign trade balance contributed positively to GDP growth again: +0.2 points, after +0.3 points in Q3. Conversely, changes in inventories contributed negatively to GDP growth (−0.1 points after −0.5 points).

                                      Full release here.

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                                      Asian update: Sterling found footing after selloff, Aussie rises on CPI

                                        Sterling suffered broad based selloff overnight as the UK parliament put Brexit back into uncertainty. But losses are so far limited as the Pound quickly stabilized. In short, the Parliament passed the proposal to ask Prime Minister Theresa May to go back to Brussels to renegotiate the Irish backstop into alternative arrangements. But EU has reinstated the stance that it won’t reopen negotiations.

                                        In the currency markets, Australian Dollar is the strongest one in Asian markets today, after slightly stronger than expected Q4 CPI reading. New Zealand Dollar follows as the second. Swiss Franc is currently the weakest one , followed by Dollar and then Yen. The economic calendar is rather busy today. French GDP, Swiss KOF, Eurozone confidence indicators, Germany CPI and US ADP employment will also be watched. But the major focus will be on FOMC rate decision and press conference.

                                        In Asia:

                                        • Nikkei is currently down -0.26%.
                                        • Hong Kong HSI is up 0.29%.
                                        • China Shanghai SSE is up 0.09%.
                                        • Singapore Strait Times is down -0.11%.
                                        • Japan 10-year JGB yield is up 0.0003 at 0.004.

                                        Overnight:

                                        • DOW rose 0.21%.
                                        • S&P 500 dropped -0.15%.
                                        • NASDAQ dropped -0.81%.
                                        • 10-year yield dropped -0.032 to 2.712.
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                                        FOMC forward guidance and balance sheet reduction plan watched

                                          The economic calendar is rather busy today. French GDP, Swiss KOF, Eurozone confidence indicators, Germany CPI and US ADP employment will also be watched. But the major focus will be on FOMC rate decision and press conference.

                                          Fed is widely expected to keep federal funds rate unchanged at 2.25-2.50%. Since December, following extreme market volatility and cautious turn in Fedspeaks, pricing of Fed’s rate path changed drastically. Fed funds futures are now only pricing in around 20% chance of a 25bps hike by the December meeting. Dollar then started weakening broadly. The greenback suffered another round selloff last week after a WSJ report suggesting that the Fed members are considering to end the balance sheet reduction plan earlier than previously expected.

                                          The first focus today will be on forward guidance in the statement. Back in December, FOMC noted that “the Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term.”

                                          But since then, Fed officials sung a chorus, saying that Fed can afford some patience before another rate move. And Fed chair Jerome Powell even indicated that Fed is flexible to move in either direction if necessary. Any change in the forward guidance that hints at a pause could give Dollar more pressure.

                                          And secondly, Powell will need to indicate if there is any change in Fed’s balance sheet reduction plan.

                                          Here are some previews on FOMC:

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