Thu, Jun 20, 2019 @ 17:15 GMT

All nine BoJ regions reported rosy economic assessment

    According to BoJ’s Regional Economy Report, six regions (Hokuriku, Kanto-Koshinetsu, Tokai, Kinki, Chugoku, and Kyushu-Okinawa) reported that their economy had been expanding or expanding moderately. Three regions (Hokkaido, Tohoku, and Shikoku) noted that the economy had continued to recover moderately. That’s unchanged from previous assessment in April 2018.

    BoJ Governor Haruhiko also said in the meeting of the regional branch manager that “Japan’s economy is expected to continue expanding moderately.” But ultra-loose monetary policy would be maintained until inflation hits target. Nonetheless, Yasuhiro Yamada, manager of the BOJ’s Osaka branch, warned that “Many companies in the region say (protectionism) is the number one risk. They are worried about the huge uncertainty over the trade outlook.”

    Full report here.

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    UK retail sales flat versus expectation of -0.4% mom

      UK April retail sales data came in better than expected:

      • Retail sales include auto & fuel rose 0.0% mom versus expectation of -0.4% mom.
      • Retail sales include auto & fuel rose 5.2% yoy versus expectation of 4.5% yoy.
      • Retail sales exclude auto & fuel dropped -0.2% mom versus expectation of -0.5% mom.
      • Retail sales exclude auto & fuel rose 4.9% yoy versus expectation of 4.3% yoy.

      The details, though, are not too impressive and fuel stores and non-store retailing were the only positive contributors to the quantity bought in April.

      Full release here.

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      OECD: Growth peaked, prepare for soft landing, and beware of trade war

        OECD said in a report released today that global growth has already peaked and it’s now set for a “soft landing”. And, the global economy is navigating “rough seas” with “downside risks abound”. It also noted that “policy makers will have to steer their economies carefully towards sustainable, albeit slower, GDP growth.” The organization also pointed out that “global trade and investment have been slowing on the back of increases in bilateral tariffs while many emerging market economies are experiencing capital outflows and a weakening of their currencies”. OECD also warned that ” accumulation of risks could create the conditions for a harder-than-expected landing”. And the risks include firstly, further trade tensions, secondly, tightening financial conditions and thirdly, a sharp slowdown in China.

        For 2019, global growth forecasts was revised down to 3.5% and stay there in 2020. US growth was left unchanged at 2.7% in 2019 and then slow to 2.1% in 2020. Eurozone growth was revised down to 1.8% in 2019 then slow further to 1.6% in 2020. Japan growth would accelerate to 1.0% in 2019, an upward revision, but slow to 0.7% in 2020. China’s growth is projected t slow to 6.3% in 2019, downwardly revised, and then further to 6.0% in 2020.

        OECD Secretary-General Angel Gurría warned that  “trade conflicts and political uncertainty are adding to the difficulties governments face in ensuring that economic growth remains strong, sustainable and inclusive.” And, “we urge policy-makers to help restore confidence in the international rules-based trading system and to implement reforms that boost growth and raise living standards – particularly for the most vulnerable.”

        According to OECD, trade tensions have already shaved between 0.1-0.2% from global GDP this year. If US raise tariffs on all Chinese goods to 25%, world economy growth could fall to just 3.0% in 2020, no more 3.5%. And, growth in the US could drop by -0.8% and by -0.6% in China.

        Full press release here.

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        German 10-year yield hit record low, EUR/CHF at critical juncture

          German 10-year bund yield dives sharply to new record low in the wake of Trump’s action to use tariffs to force Mexico to fix border security problem of the US. 10-year bund yield hits as low as -0.206 and is currently down -0.031 at -0.202.

          European stocks are broadly lower, with FTSE currently down -0.95%. DAX down -1.60% and CAC down -1.23%. DOW future is currently down -250 pts and is set to lose 25000 handle again at open.

          Yen and Swiss Franc surge on risk aversion naturally. A key focus is weakness in EUR/CHF, which is having its sight back on 1.1162 low. Firm break there will extend the fall from 1.2004. More importantly, it will then argue that such decline is not a correction but part of a long term down trend. And in that case, we might see EUR/CHF heading back to 1.0629 support in medium to long term.

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          UK Barclay: No Brexit is the bigger risk than no-deal

            UK Brexit Minister Stephen Barclay said today that no Brexit is the bigger risks than no-deal Brexit for the UK. He said that “no deal is going to be very disruptive for the economy and I think no deal also has serious questions for the union”. However, ” no Brexit is catastrophic for our democracy. Between those very unpleasant choices, I think no Brexit is the bigger risk.”

            Germany’s Economy Minister Peter Altmaier expressed said After divisive debates & votes, today can become a turning point.” “Rejecting No-deal-Brexit by a large cross-party majority will unite millions in the UK & in Europe.”

            European Union’s Economic Commissioner Pierre Moscovici said “we have done everything we could do.” And, “it is tome now for the British to say what they want, now that they said what they don’t want.”

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            JPY strong but pared gains, EURUSD failed to break 1.2285 support again

              JPY surged broadly as boosted by risk aversion as stocks tumbled. It’s now trading as the strongest one for the week. Nonetheless, JPY is paring some gains in Asian session as the contagion to Asian markets is not that serious. For now, the selloff in the US markets seem to be mainly due to the problem between its own president and one of the business executives.

              AUD is having some buying emerged just ahead of RBA rate decision. It was also lifted slightly by AIG performance of Manufacturing index, which rose from 57.5 to 63.1 in March.

              It once looked like USD was taken up by JPY but the USD quickly lose momentum. In particular, EUR/USD tried again but failed to break through 1.2285 minor support decisively. Near term outlook of EUR/USD is starting to look rather bearish. But we’d still need to see a firm break of 1.2285 to confirm that rebound from 1.2154 has completed at 1.2475. We’ll stay patient first.

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              Dollar rally accelerates on super strong ISM manufacturing, highest since 2004

                Dollar rally accelerates on much stronger than expected manufacturing data. ISM manufacturing index rose to 61.3 in August, up from 58.1 and beat expectation of 57.8. That’s also the highest level since May 2004. Prices paid index dropped to 72.1, down from 73.2 and missed expectation of 74. Employment component improved 2 points from 56.5 to 58.5.

                ISM noted in the released that

                • Comments from the panel reflect continued expanding business strength.
                • Demand remains strong, with the New Orders Index at 60 percent or above for the 16th straight month, and the Customers’ Inventories Index remaining low.
                • The Backlog of Orders Index continued to expand, at higher levels compared to the previous month.
                • Consumption improved, with production and employment continuing to expand, at higher levels compared to July, despite shortages in labor and materials.
                • Inputs (expressed as supplier deliveries, inventories and imports) expanded strongly due to continuing supply chain inefficiencies, positive increases in inventory levels and a slight easing of imports. Lead-time extensions, steel and aluminum disruptions, supplier labor issues, and transportation difficulties continue, but at more manageable levels.
                • Export orders expanded at stable levels.
                • Prices pressure continues, but the index softened for the third straight month and remains above 70.
                • Demand is still robust, but the nation’s employment resources and supply chains continue to struggle.
                • Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations. Panelists are actively evaluating how to respond to these business changes, given the uncertainty.

                Full release here.

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                Japan manufacturers sentiment hit 7-month high, but non-manufacturing at 1.5 year low

                  Reuters Tankan manufacturers index rose to 30 in August, up from 25. However, the non-manufacturers index dropped sharply to 25, down from 34.

                  With the sharp 5 pts rise in index, manufacturer’s sentiment, hit the highest level since January. Back then it was an 11-year high of 35. The index is expected to improve further in the new few months. It highlights the robustness of the manufacturing sector despite rising global trade tension and emerging markets risks.

                  On the other hand, services sentiments tumbled sharply by -9 to the lowest level since December 2016. It’s partly due to once-off factors including abnormal whether including flood rains and heat waves. But the deterioration still indicates fragility in the sector and thus casts doubt on domestic demand. Domestic weakness could amply should there be deterioration in global trade tensions.

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                  Asian update: JGB yield turned positive, Yen regains some grounds

                    After yesterday’s rally attempt, Euro is trading as the weakest one in Asian session today, together with Swiss Franc. Both are yet to find sustainable buying.

                    On the other hand, after a breather, Canadian Dollar is extending last week’s rally and is trading as the strongest one for today at this point. Dollar is helped by rebound in treasury yields. Yield curve also flattened in the “inverted” range. Yen also regains some grounds today.

                    Asian markets are mildly higher, expect in China. At this point:

                    • Nikkei is up 0.80%
                    • Hong Kong HSI is up 0.25%
                    • China Shanghai SSE is down -0.34%
                    • Singapore Strait Times is up 0.30%

                    Japan 10 year JGB yield turns positive today, up 0.021 at 0.007. It reached as low as -0.045 just last week.


                    • DOW rose 0.42% to 23531.35
                    • S&P 500 rose 0.70% to 2549.69
                    • NASDAQ rose 1.26% to 6823.47
                    • 10 year yield rose 0.23 to 2.682

                    DOW is still limited by 23713.93 fibonacci level. S&P 500 is held by equivalent level at 2537.61. Also NASDAQ is kept relatively far below equivalent level at 6932.44.

                    Yield curve is still inverted from 1-year (2.600), 2-year (2.541), 3-year (2.525) to 5 year (2.539). But they are now back above Federal funds rate target of 2.25-2.50%.

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                    Dollar rebounds despite Fed’s dovish economic projections

                      Dollar rebounds after Fed’s rate hike, in particular against Aussie Yen also strengthens together against Euro and Swiss Franc. Meanwhile, Stock pares back some initial gains. The driving force for Dollar’s rebound is to be investigated. But overall, Fed’s new projections are quite dovish. (Yet, a possible reason might be….. Fed is not stopping after today’s hike yet).

                      First and most important on longer run federal funds rate, seen as Fed’s view on neutral:

                      • Median – revised to 2.8%, down from 3.0%
                      • Central tendency – revised to 2.5-3.0%, somewhat down from 2.8-3.0%
                      • Range – unchanged at 2.5-3.5%

                      For 2019

                      • Median – revised to 2.9%, down from 3.1%
                      • Central tendency – revised to 2.6-3.1%, down from 2.9-3.4%

                      Overall, the revision argues that Fed might have one or at most two more rate hikes in 2019, rather than three as implied in September projections.

                      On growth:

                      • 2019 median growth projection was revised to 2.3%, down from 2.5%
                      • 2020 median growth projection was unchanged at 2.0%

                      On unemployment:

                      • 2019 median unemployment rate projection was unchanged at 3.5%
                      • 2020 median unemployment rate projection was revised to 3.6%, up from 3.5%

                      On core inflation:

                      • 2019 median core PCE projection was revised to 2.0%, down from 2.1%
                      • 2020 median core PCE projection was revised to 2.0%, down from 2.1%
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                      China Shanghai SSE declares victory in defending 2016 low

                        China Shanghai SSE rose 0.92% to 2806.81, closed above 2800 psychological level. The main trigger was news that MSCI is considering to significantly increase weighting of A shares in its indexes.

                        The firm break of 55 day EMA and medium term channel resistance indicates medium term bottoming at 2644.29. That is, SSE should have successfully defended 2638.30 key support (2016 low). Further rebound is now in favor in near term. Nonetheless, we’re still seeing no reason for a break through 3000 handle, which is close to 38.2% retracement of 3587.03 to 2644.29 at 3004.41.

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                        NIESR expects no BoE hike until August 2020

                          UK National Institute of Economic and Social Research (NIESR) pushed back their BoE rate expectation by a year in the new forecasts. NIESR economist Garry Young said “now we expect the first increase in Bank Rate to be next August rather than this August.”

                          NIESR also noted that Brexit related uncertainty “has led to investment plans being deferred and increased stockbuilding.” Under the main scenario of “soft Brexit”, GDP growth will continue at around 1.5% in both 2019 and 2020. Unemployment rate will stay at around 4%. CPI will remain at around 2%.

                          Regarding different Brexit scenarios, growth will be similar between staying in EU and “soft Brexit”. However, growth will be weaker is UK is to stay in the customs union, and even worse in a no-deal Brexit.

                          Press release here.

                          Prospects for the UK Economy” details.

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                          US NFP grew 263k, unemployment rate dropped to 3.6%, lowest since 1969

                            US non-farm payroll employment grew strongly by 263k in April, well above expectation of 185k. Prior month’s figure was revised slightly down from 196k to 189k. Unemployment dropped to 3.6%, down from 3.8% and beat expectation of 3.8%. That’s the lowest level since December 1969. Participation rate dropped by -0.2% to 62.8%. Average hourly earnings rose 0.2% mom, below expectation of 0.3% mom. But prior month’s figure was revised up from 0.1% mom to 0.2% mom.

                            The set of job data is rather solid. But at the time of writing. there is no apparent strength in Dollar yet.

                            Full release here.

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                            China-US trade shrank sharply in October, exports down -8.5%, imports down -12.9%

                              Trade data from China showed sharp decline in trade between the US and China in October, clearly a result of tariffs. To highlight, exports to US dropped -8.5% mom. Imports from US dropped even more by -12.9% mom. One might argue that imports from EU also dropped -12.5% mom. Admittedly, that could be a warning sign of slowdown in the Chinese economy. But over the year, imports from EU did rose 12.3% yoy.

                              In USD term, exports rose 15.6% yoy in October to USD 217.3B. Imports rose 21.4% yoy to USD 183.2B. Trade surplus widened to USD 34.0B, below expectation of USD 36.3B.

                              In CNY terms, exports rose 20.1% to CNY 1490B. Imports rose 26.3% to 1257B. Trade surplus widened to CNY 234B, above expectation of CNY 209B.

                              With EU in October:

                              • Total trade dropped -8.8% mom, rose 13.7% yoy to USD 56.7B.
                              • Exports to EU dropped -6.4% mom, up 14.6% yoy to USD 35.0B
                              • Imports from EU dropped -12.5% mom, up 12.3% yoy to USD 21.6B
                              • Trade surplus rose 5.3% mom, 18.5% yoy to USD 13.4B

                              With EU from January to October

                              • Total trade rose 12.8% yoy to USD 563.6B
                              • Exports to EU rose 11.8% yoy to USD 336.7B
                              • Imports from EU rose 14.3% yoy to USD 226.8B
                              • Trade surplus rose 7.0% yoy to USD 109.9B

                              With US in October

                              • Total trade dropped -9.4% mom, rose 9.8% yoy to USD 53.7B
                              • Exports to US dropped -8.5% mom, up 13.2% yoy to USD 42.7B
                              • Imports from US dropped -12.9% mom, down -1.8% yoy to USD 10.9B
                              • Trade surplus rose 19.4% to USD 31.8B

                              With US from January to October

                              • Total trade rose 11.8% yoy to USD 526.1B
                              • Exports to US rose 13.1% yoy to USD 392.1B
                              • Imports from US rose 8.2% yoy to USD 134.0B
                              • Total trade surplus rose 15.8% yoy to USD 258.1B
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                              EU to seek China agreement to open up market in upcoming summit

                                Reuters reported that EU is seeking China’s agreement to open up its market by summer 2019. An EU drafted six-page joint communique obtained reads China and the EU will “agree by summer 2019 on a set of priority market access barriers and requirements facing their operators.” It’s intended to be the deliverable of the EU-China summit on April 9 in Brussels. Chinese Premier Li Keqian is expected to be there, meeting European Commission President Jean-Claude Juncker and European Council President Donald Tusk.

                                While there is no other detail reported, we believed it’s released to the proposed 10 actions by the European Commission on relations with China release last week. The proposal will be discussed and endorsed at the European Council meeting this week on March 21. There, EU described China as a “cooperation partner” and “negotiating partner” as well as “systemic rival promoting alternative models of governance.” Some important actions focus on issues like subsidies and forced technology transfers, reciprocity and open up procurement opportunities in China.

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                                Japan PM Abe: G7 should play a role in free and fair global economic development

                                  Japan Prime Minister Shinzo Abe warned today that “no country benefits from retaliatory trade restrictions.” And, ahead of the G7 leaders summit on June 8-9, Abe said “my message is G7 should play a role in free and fair global economic development.”

                                  Separately, Abe said that ahead of the Kim-Trump summit in Singapore on June 12, he will meet Trump to “coordinate in order to advance progress on the nuclear issue, missiles and – most importantly – the abductees issue.” A sticky point is that upon declaring peace in the Korean peninsula, UK could eventually have to reduce military forces in South Korea. And Japan’s constitution, diplomatic policies and national security policies all will have to be totally reviewed for the completely new situation.

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                                  BoE Carney: House price could fall 25-35% on no-deal Brexit

                                    BoE Governor Mark Carney gave some “chilling” warnings in Prime Minister Theresa May’s cabinet meeting on no-deal Brexit preparation yesterday. There he compared a disorderly effort to 2008 financial prices. And more importantly, BoE wouldn’t be able to avert the crisis by cutting interest rates. Inflation and unemployment are expected to surge according to Carney’s expectation. And, in the worst case scenario, house price could fall be 25-35% over three years. On the other hand, Carney noted that if a deal is struck based on May’s Chequers plan, the economy could overshoot current forecasts as it’s an outcome that’s better than BoE assumed.

                                    However, it should be noted that Carney has been constantly accused by Brexiteers as being part of the “Remain” camp, together with Chancellor of Exchequer Philip Hammond. And, both have been inaccurate in prediction Brexit economic consequences. Leader of the Brexit camp European Research Group Jacob Rees-Mogg called Carney “the high priest of Project Fear” last month.

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                                    US CPI slowed to 1.9%, core unchanged at 2.2%, Dollar steady

                                      US headline CPI slowed to 1.9% yoy in December, down from 2.2% and matched expectations. Core CPI was unchanged at 2.2% yoy, matched expectations too. Full release here.

                                      Dollar release the weakest one for today and the week as Fed officials emphasized “patience” before the next rate move. In particular, as Fed Chair Jerome Powell said yesterday, “especially with inflation low and under control, we have the ability to be patient and watch patiently and carefully as we”. Today’s CPI readings don’t express any objection to Powell’s line of logic.

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                                      UK PM May: No-deal Brexit is not the end of the world

                                        UK Prime Minister Theresa May cited endorsed remarks by Roberto Azevêdo, the director general of the World Trade Organization regarding no-deal Brexit. May said, a no-deal situation “will not be a walk in the park, but it wouldn’t be the end of the world”. May added that “what the government is doing is putting in place the preparation such that if we are in that situation, we can make a success of it, just as we can make a success of a good deal.”

                                        Chancellor of Exchequer Philip Hammond warned last week that a no-deal Brexit would costs UK GBP 80B in extra borrowing and inhibit long term growth. But May tried to talk that down and said the figures dated back to January and “they were a work in progress at that particular time.” Regarding the time frame of Brexit negotiation, May said “we are all working to the October deadline” because “from our point of view there is some legislation we have to get through parliament”.

                                        Separately, German Foreign Minister Heiko Maas said “Regrettably, a hard Brexit is not off the table.” French Prime Minister Edouard Philippe also “tasked ministers to prepare contingency measures that would be necessary … to mitigate the difficulties linked with this unprecedented challenge”.

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                                        Eurozone Sentix investor confidence improved on Asia upswings, Germany cannot keep up

                                          Eurozone Sentix Investor Confidence rose to -0.3 in April, up from -2.2 and beat expectation of -2.0. That’s already the highest figure since November 2018. Expectations Index rose for the third month in a row to -4.3, highest since May 2018. However, Current situation index dropped for the eighth month to 3.8, lowest since February 2015.

                                          Sentix noted that “signs in China are increasingly pointing to an upswing”. And, should there be an additional settlement in US-China trade negotiations, European economy could also see a turn around. Also, since both US and China are still in the upswing, “positive feedback to Europe is not expected to be absent in the coming months”

                                          However, Germany’s Overall Index dropped to 2.1, lowest since August 2012. Current Situation index dropped to 10.5, sixth decline in a row and lowest since April 2010. Expectations index rose for the third month 10 -6.0, highest since March 2018. Germany is now “one of the regions with the weakest economic momentum”. “Collapse” of situation values is “worrying”. Sentix added that “it would be positive if Germany did not rely on China and the USA alone, but sought to make its own contributions to economic stabilization.

                                          Full release here.


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