Tue, May 26, 2020 @ 17:13 GMT

Mid-US update: Dow rises 360 pts, EUR/USD back in range after brief spike

    Yen and Swiss Franc are trading as the weakest ones as risk appetite return to the markets today. Dollar gets no support from the strong rebound in US equities, as treasury yields are essentially flat.

    Meanwhile, New Zealand Dollar, Canadian Dollar and Sterling are the strongest ones.

    Dollar was sold off in early US session as EUR/USD broke 1.1610 minor resistance. But the pair quickly lost steam and is now back in familiar range.

    At the time of writing, DOW is trading up 1.38%, S&P 500 up 1.43% and NASDAQ up 1.84%. Five-year yield is up 0.004, 10-year yield down -0.002, 30-year yield down -0.003. While DOW’s rebound is strong, it should be reminded that it’s more likely a corrective move than not. And, it’s already close to first hurdle of 38.2% retracement of 26951 to 24845.10 at 25649.86, which is close to 55 H EMA at 25706. We’ll see whether DOW could extend the rebound through this hurdle, or get an instant rejection from it before today’s close.

    In Europe, stock closed broadly higher on late buying.

    • FTSE rose 0.43% to 7059.40
    • DAX rose 1.40% to 11776.55
    • CAC rose 1.53% to 5173.05
    • German 10 year yield dropped -0.0102 to 0.495
    • Italian 10 year yield also dropped -0.0928 to 3.462
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    BoE Bank Rate projections show more confidence on 2019 rate hike

      In the updated economic projections in the Inflation Report, BoE lowered 2019 Q4 four-quarter GDP forecasts from 1.8% to 1.7%. For 2020, four-quarter GDP forecast was kept unchanged at 1.7%. On CPI inflation, BoE lowered CPI forecast for 2019 Q4 to 2.1% from 2.2%. However, for 2020 Q4, inflation forecast was raised to 2.1% from 2.0%. Bank Rate forecasts for 2019 Q4 was raised from 0.9% to 1.0%. For 2020, Bank Rate forecasts was also raised from 1.1% to 1.2%.

      In short, the economic outlook was actually largely unchanged. Nonetheless, BoE is now more certain on a rate hike in 2019, and probably another one in 2020. Indeed, from the conditioning path that BoE used, the next rate hike is pulled ahead from Q1 2020 to Q4 2019. And, another rate could even but seen in between Q3 2020 and Q1 2021.

      Full Inflation Report here.

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      Kuroda: BoJ seeking to create positive economy cycle, not just rise in inflation

        Speaking to the parliament, BoJ Governor Haruhiko Kuroda said the central bank isn’t seeking to push up inflation alone. Instead, it’s aiming at creating to situation where wage and employment conditions improve with corporate profits too. That is, creating a “positive economy cycle”.

        Meanwhile, Kuroda added the 2% inflation target helps in long-run currency stability. But for now, inflation is likely hover around 1% since wages growth is not fast enough yet.

        Separately, Finance Minister Taro Aso also told the parliament that pushing up inflation alone “won’t do any good” without improvement in people’s livelihoods.

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        Into US session: JPY surges against Europeans

          Yen surges broadly as markets enter into US session. The rally is particularly steep against European majors. Both EUR and GBP are troubled by weaker than expected data. The limited movement in EUR/USD and GBP/USD is just a reflection that USD is consolidating after recent gains. And USD is awaiting tomorrow’s NFP. They are not indications that EUR and GBP are not affected by the releases.

          The JPY Action Bias table show that for now, only AUD and NZD escape from JPY’s intraday pressure. For short to medium term, European majors are suffering.

          EURJPY 6H Action Bias chart shows clear persistent downside momentum in the cross ever since breaking 132.5 handle. It’s on course for 128.94 low.

          Similarly, GBPJPY 6H Action Bias chart also displays persistent downside momentum after taking out 151. 144.97 will be the next target after taking out 148.37 support.

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          Fed Powell: Market expectations on monetary policy reasonably aligned with policymakers’

            Fed chair Jerome Powell devliered a speech on “Monetary Policy Influences on Global Financial Conditions and International Capital Flows” in a conference in Zurich today. Powell said that “Fed policy normalization has proceeded without disruption to financial markets, and market participants’ expectations for policy seem reasonably well aligned with policymakers’ expectation.” And because that “markets should not be surprised by our actions”. And, even though there could be spillovers of Fed’s actions to other economies, the role of Fed’s monetary policy is “often exaggerated”.

            Regarding emerging market economies, Powell said that Fed and other advanced economies “played a relatively limited role” in the surge capital flow to these markets in recent years. Hence, “there is good reason to think the normalization of monetary policies in advanced economies should continue to prove manageable for” emerging economies.”

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            ECB Draghi: Fiscal and monetary policy together would lead to faster return to price stability

              Outgoing ECB President Mario Draghi called for euroarea-wide fiscal stimulus aimed at boosting investment. He said yesterday in Athens “fiscal policy playing a more supportive role alongside monetary policy would lead to a faster return to price stability and therefore fewer side effects.”

              And, “fiscal policy becomes more powerful when monetary policy is close to the effective lower bound, as the multipliers are higher.” “Supportive fiscal policy can complement monetary policy in cutting through the obstacles that are weighing on demand — which is the case in the euro area today”.

              He added, “if fiscal and structural policies also play their role in parallel — and more so than we see today — the side effects of monetary policy will be less, and the return to higher rates of interest will be faster.”

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              Italian PM Conte to submit new budget with lower deficit target, within hours

                Avvenire daily newspaper reported that Italian Prime Minister Giuseppe Conte said he will submit a new 2019 Draft Budget Plan to EU in the next few hours. There is no detail about the new plan yet. But Conte said new proposal could reasonably include a deficit lower than previously forecast. That is, it would be lower than the deficit target of 2.4% of GDP 2019.

                European Commission for for Economic and Financial Affairs Pierre Moscovici said the Commission is waiting for concrete and credible moves from Italy on the budget. He noted that talks were now proceeding at an intense pace, but emphasized that the Commission was “waiting for more details”.

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                Australia GDP grew 0.5% in Q4, remains below long run average

                  Australia GDP grew 0.5% qoq in Q4, above expectation of 0.4% qoq, but slowed from Q3’s 0.6% qoq. Through the year, the economy grew 2.2%. Household consumption and inventories are the main contributor to growth, followed by imports and government consumptions. Public capital formation and exports provided no contributed while private capital formation was a drag. Chief Economist for the ABS, Bruce Hockman, said: “The economy has continued to grow and picked up through the year, however the rate of growth remains below the long run average.”

                  GDP growth rates, Chain volume measures, quarterly change

                  Full release here.

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                  Japan cabinet office lowered growth and inflation forecast, but consumption offers a bright spot

                    Japan Cabinet Office lowered fiscal 2018 and 2019 growth forecast notably in the new economic projections. The move was due to impact from natural disaster as well as increasing downside risks from US-China trade war. Inflation forecasts was also revised lower. Though, private consumption is expected to pick up down the road, providing a bright spot.

                    For fiscal 2018, which ends in March, growth is now expected to grow 0.9%, sharply lower from prior projection of 1.5%. For fiscal 2019, growth is projected to be at 1.3%, also down from prior projection of 1.5%.

                    On inflation, core CPI is projected to rise 1.0% in fiscal 2018, revised down from prior forecast of 1.1%. For fiscal 2019, core CPI is expected to climb slightly to 1.1%, also revised down from prior estimate of 1.5%.

                    In other projections, capital expenditure is forecast to rise 3.6% in fiscal 2018, then slow to 2.7% in fiscal 2019. Private consumption is expected to rise 0.7% in fiscal 2018 and accelerate to 1.2% in fiscal 2019.

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                    Into European session: Aussie weakest after GDP miss. Dollar, Yen and Swiss firm

                      Entering into European session, Australian Dollar is the weakest one for today, followed by New Zealand Dollar. The Aussie is weighed down by much weaker than expected Q4 GDP growth, at 0.2% qoq. Australian Treasurer Josh Frydenberg attributed the slowdown to drought. RBA Governor Philip Lowe also maintained upbeat view on the outlook. But today’s data further affirm market expectations that the next move is a cut, and could happen as soon as in August.

                      Sterling is the third weakest as there was no UK Attorney General Geoffrey Cox’s trip to Brussels produced no breakthrough on Irish backstop. Yen, Dollar and Swiss are the strongest ones. Looking ahead, the European session is relatively empty today. BoE Cunliffe’s speech may catch some attention. Focus will mainly be on BoC rate decision and US ADP employment.

                      In Asia:

                      • Nikkei closed down -0.60%.
                      • Hong Kong HSI is up 0.19%.
                      • China Shanghai SSE is up 0.33%.
                      • Singapore Strait Times is up 0.01%.
                      • Japan 10-year JGB yield is down -0.0134 at -0.005, turned negative again.


                      • DOW dropped -0.05%.
                      • S&P 500 dropped -0.11%.
                      • NASDAQ dropped -0.02%.
                      • 10-year yield closed flat at 2.722.
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                      UK PM May got Brexit Customs Bill narrowly passed after conceding to Brexiteers

                        UK Prime Minister Theresa May narrowly avoided defeat yesterday on the Brexit Customs Bill in the Commons after conceding to four amendments of the Brexiteers. But the slim margin in vote showed once again the deep divisions between pro-EU Tories and Brexiteers that could heavily undermine May’s position in upcoming negotiations.

                        One amendment prevents UK from collecting taxes on behalf of the EU unless the rests of the EU does the same for the UK. It’s passed by 305 to 302 with 14 Tories rebelled. Another amendment ensures the UK is out of EU’s VAT regime and was passed by 303 to 300, with 11 Tories rebelled.

                        Debates will continue today with the Trade Bill going to the Commons. The bill allows the UK government to build new trade relationships with other countries after Brexit. Some pro-EU MPs who support staying in the EU customs union are pushing for some changes in wordings.

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                        WTI crude oil resumes down trend, heading to 46.54 fibonacci level

                          WTI crude oil’s down trend from 77.06 resumed this week and drops to as low as 48.09 so far today. Such decline is seen as at least correcting the long term rise from 27.69 (2016 low). Thus, further fall should be seen to 61.8% retracement of 27.69 to 77.06 (2018 high) at 46.54.

                          We’d look at the reaction from 46.54, as well as the structure of the subsequent rebound to decide whether fall from 77.06 is an impulsive or corrective move. But in any case, break of 54.61 resistance is needed to be the first sign of near term reversal. Otherwise, outlook will remain bearish even in case of strong recovery.

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                          Canada Trudeau announced retaliation on CAD16.6b of US imports.

                            Canadian Prime Minister Justin Trudeau criticized Trump’s steel and aluminum tariffs as “totally unacceptable” and announced retaliatory tariffs on CAD 16.6b in US imports.  A 15-day consultation period immediately began the tariffs will come into effect on July 1. There are two list of goods, one list that will be subject to a 25% tariff; a second list that will be subject to a 10% tariff. The details of the goods can be found here.

                            Trudeau emphasized that “Americans remain our partners, our allies and our friends” and “the American people are not the target” of the retaliation measures. He pledged to  continue to make arguments based on logic and common sense” and hoped that “eventually they will prevail against an administration that doesn’t always align itself around those principles.”

                            Foreign Minister Chrystia Freeland, also said that the unilateral trade restrictions by the US are “in violation of NAFTA and WTO trade rules”. And Canada will launch dispute settlement proceedings under  NAFTA Chapter 20 and WTO Dispute Settlement. Freeland also pledged to “closely collaborate with like-minded WTO members, including the European Union” to challenge the “illegal and counterproductive US measures at the WTO. Statement can be found here.

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                            Trump rejected non-existent meeting request of Trudeau, launched fresh personal attacks

                              Trump “claimed” he rejected one-on-one meeting with Canadian Prime Minister Justin Trudeau on trade. Additionally, Trump launched fresh personal attacks on both Trudeau and the Canadian team. In response, Trudeau shouldered it and pledged to continue work for a good deal for Canada, but be prepared to walk away.

                              Trump said he turned out the meeting request because “his tariffs are too high, and he doesn’t seem to want to move”, referring to Trudeau apparently. Trump repeated his threat and said “forget about it and frankly we’re just thinking about just taxing cars coming in from Canada”. He stepped up further and said “that’s the motherlode, that’s the big one.”

                              Additionally, Trump added that “We’re very unhappy with the negotiations and the negotiating style of Canada. We don’t like their representative very much. That’s another personal attack on apparently on Canadian Foreign Minister Chrystia Freeland.

                              Trudeau spokeswoman Chantal Gagnon said: “No meeting was requested. We don’t have any comment beyond that.” Trudeau himself reiterated “we will keep working as long as it takes to get to the right deal for Canada.” He also emphasized Canada would need to feel confident “about the path forward as we move forward – if we do – on a NAFTA 2.0.”

                              It’s now clearly more likely then not the Canada-US NAFTA negotiation will slip the US imposed deadline of October 1. It’s reported that the US could publish the text of the agreement with Mexico on Thursday or Friday and move on with the process, without Canada.

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                              Fed to stand pat, release new projections, may announce end to balance sheet runoff

                                Fed is widely expected to keep interest rate unchanged at 2.25-2.50% today. Also the central bank is expected to reiterated that it’s in no hurry to make another move. The language that “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” should be maintained .

                                There will be two major focuses for the announcement as well as press conference. Firstly, Fed’s is known to be preparing for ending the balance sheet roll-off this year. The balance sheet surged from less than USD 1T in 2008 to hit a peak of USD 4.5T as a result of the quantitative easing program. It then started to be reduced by USD 50B per month since early last year. The detailed plan might be revealed today with specifics on when and how the runoff would end.

                                Fed will also publish first set of new economic projections after it shifted to a “patient” stance. Forecasts on GDP, unemployment rate and inflation are important as usual. But a crucial part is projection on federal funds rate. Back in December, the median forecast was for interest rate to rise to 2.9% in 2019, with central tendency at 2.6-3.1%. For 2020, media rate was at 3.1%. The longer run neutral rate was projected to be at 2.8%, with central tendency at 2.5-3.0%. Today’s projections will hopefully answer questions like: Is there one or two expected rate hikes this year? Are some members expecting a rate cut? Where the neutral rate is? Will rate hike continue down the road to surpass neutral?

                                Here are Fed’s December projections.

                                Below are some suggested readings on FOMC:

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                                US personal income rose 0.5%, spending rose 0.3%, core PCE at 1.6%

                                  In April, US personal income rose 0.5% or USD 92.8B, above expectation of 0.3%. Spending rose 0.3% or USD 42.7B, above above expectation of 0.2%. Headline PCE rose to 1.5% yoy, up from 1.4% and matched expectations. Core PCE inflation rose to 1.6% yoy, up from 1.5% yoy and matched expectations.

                                  Little reaction is seen in Dollar after the release. The question remains on whether inflation will “persistently” miss 2% target that eventually force a Fed cut. For now, there is no clear evidence for that yet. The greenback might need to look at ISMs and NFP next week for more inspirations.

                                  Full release here.

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                                  German ZEW dropped sharply to 8.7, fear of negative effects of China’s coronavirus

                                    German ZEW Economic Sentiment dropped sharply to 8.7 in February, down from 26.7, missed expectation of 20.4. German Current Situation index dropped to -15.7, down from -9.5, missed expectation of -10.0. Eurozone ZEW Economic Sentiment dropped to 10.4, down form 25.6, missed expectation of 21.3. Eurozone Current Situation dropped -0.4 to -10.3.

                                    ZEW President Achim Wambach said: “The feared negative effects of the Coronavirus epidemic in China on world trade have been causing a considerable decline of the ZEW Indicator of Economic Sentiment for Germany. Expectations regarding the development of the export-intensive sectors of the economy have dropped particularly sharply. Besides, the end of 2019 and the beginning of 2020 saw a worse-than-expected development of the German economy. Both the downward revision of the assessment of the economic situation and the downturn in expectations show clearly that economic development is rather fragile at the moment.”

                                    Full release here.

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                                    ECB Knot: Market expectations and ECB policy actions converged into a “sweet spot”

                                      ECB Governing Council member,  Dutch central bank Governor Klaas Knot talked about monetary policy as he  presented his bank’s annual report in Amsterdam today. He said:

                                      • “The top priority is to normalize monetary policy and strengthen the economic and monetary union,”
                                      • “This is now a widely-shared realization, certainly also in the financial markets.”
                                      • “If you look at the market expectations of our policy action, I would say they have more or less converged at what I call a sweet spot,”
                                      • “There is a fair degree of consensus around these expectations.”
                                      • “I would say the likelihood of us erring on the side of being too cautious is a bit larger than for us being too bold,”
                                      • “All in all, undoing these unorthodox, unconventional instruments could easily last for most of a decade.”

                                      Regarding trade relationship with the US, he said:

                                      • “The question is if Europe will come with countermeasures which could make us slip into a trade war,”
                                      • “But don’t be mistaken, if the U.S. were to implement trade restrictions on say steel, it will be the American consumer paying the price.”
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                                      Masayoshi Amamiya: Benefits of BoJ monetary stimulus outweighs side effects

                                        Masayoshi Amamiya, another BoJ deputy nominee said in confirmation hearing at lowe house:

                                        • Japan’s banking system remains stable now
                                        • But the environment surrounding financial institutions is becoming more severe
                                        • Benefits of monetary stimulus outweighs side effects
                                        • Hitting 2% inflation target was more difficult than expected.
                                        • But inflation momentum is on the way
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                                        Full text of Kim and Trump comprehensive document

                                          Here are some of the texts:

                                          “President Trump committed to provide security guarantees to the DPRK, and Chairman Kim Jong Un reaffirmed his firm and unwavering commitment to complete denuclearization of the Korean Peninsula.”

                                          1. The United States and the DPRK commit to establish new US-DPRK relations in accordance with the desire of the peoples of the two countries for peace and prosperity.

                                          2. The United States and the DPRK will join their efforts to build a lasting and stable peace regime on the Korean Peninsula.

                                          3. Reaffirming the April 27, 2018 Panmunjom Declaration, the DPRK commits to work toward complete denuclearization of the Korean Peninsula.

                                          4. The United States and the DPRK commit to recovering POW/MIA remains, including the immediate repatriation of those already identified.

                                          The United States and the DPRK commit to hold follow-on negotiations, led by the US Secretary of State, Mike Pompeo, and a relevant high-level DPRK official, at the earliest possible date, to implement the outcomes of the US-DPRK summit.

                                          President Donald J Trump of the United States of America & Chairman Kim Jong Un of the State Affairs Commission of the Democratic People’s Republic of Korea have committed to cooperate for the development of new US-DPRK relations and for the promotion of peace, prosperity, and security of the Korean Peninsula and of the world.

                                          Full text:

                                          The signing:

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