In May, Japan’s Tokyo CPI core (excluding fresh food) increased from 1.6% yoy to 1.9% yoy, matching expectations. This rise was primarily driven by higher electricity costs. However, CPI core-core (excluding food and energy) slowed slightly from 1.8% yoy to 1.7% yoy. Private sector service inflation also decreased from 1.6% yoy to 1.4% yoy. The headline CPI saw an uptick from 1.8% yoy to 2.2% yoy.
April’s industrial production declined by -0.1% mom, falling short of the anticipated 1.5% mom rise. The Ministry of Economy, Trade, and Industry maintained its assessment that industrial production “showed weakness while fluctuating indecisively.” Among the 15 industrial sectors surveyed, seven reported lower output, while eight saw increases. Manufacturers expect output to rise by 6.9% in May before falling by -5.6% in June.
Additionally, April’s retail sales jumped by 2.4% yoy, surpassing the expected 1.9% increase. Unemployment rate remained steady at 2.6%.
According to the last ECB Survey of Professional Forecasters, the economy is projected to have a deeper contraction of -8.3% in 2020 (vs prior -5.5%). Nevertheless, stronger GDP growth is expected in 2021 (5.7% vs prior 4.3%) and 2022 (2.4% vs prior 1.7%).
HICP forecast was kept unchanged at 0.4% for 2020. But it was revised lower to 1.0% in 2021 (prior 1.2%) and 1.3% in 2022 (prior 1.4%).
Unemployment rate forecast for 2020 was revised down to 9.1% (prior 9.4%). But it was revised up to 9.3% in 2021 (prior 8.9%) and 8.5% in 2022 (prior 8.4%).
New Zealand Dollar tumbles sharply today after the country reported one coronavirus case in the community in Auckland. The development suddenly bring some uncertainty back to RBNZ rate hike tomorrow. Overnight indexed swaps show inflation probability of a hike falling below 90%, down from 100% priced in before the news. NZD could suffer rather heavy selloff if RBNZ fails to deliver the rate hike expectation that it the markets up.
The turn around in NZD is particular apparent against the also very week AUD. AUD/NZD is now back above 1.05 handle after hitting 1.0416 earlier in the day. Technically, the fall from 1.0944, as the third leg of the decline from 1.1042, is still in favor to resume sooner or later as long as 1.0597 support turned resistance holds. Break of 1.0416 will target 100% projection of 1.0402 to 1.0415 from 1.0944 at 1.0317. However, firm break of 1.0597 resistance should confirm near term reversal and target 1.0811 resistance next.
At the same time, should selling in NZD take off, NZD/USD would likely break through 0.6879 support to resume the fall from 0.7463. NZD/JPY would also break through 75.25 support to resume the decline from 80.17.
US Empire State Manufacturing General Business Conditions rose to 3.5 in December, up from 2.9, but missed expectation of 4.0. Twenty-eight percent of respondents reported that conditions had improved over the month, while 25 percent reported that conditions had worsened. Meanwhile, indexes assessing the six-month outlook suggested that optimism about future conditions improved for a second consecutive month. Expectations for six months ahead rose 10.4 to 29.8.
US Chamber of Commerce Executive Vice President Myron Brilliant welcomed the phase one US-China trade deal. He said there is “clearly a sigh of relief from both sides” with the agreement. Also, “implementation of Phase 1 will be important to building trust and certainty, building off the success of the negotiation”.
Nevertheless, he emphasized it’s important that the two sides demonstrate a commitment to moving forward on the Phase 2 negotiations”. “Significant challenges” remain regarding the core structural issues.
In the Winter interim Forecast, European commission upgraded growth projections for Eurozone in 2023 and downgraded inflation projections.
“Europe’s economy is proving resilient in the face of current challenges. We were able to narrowly avoid a recession. We are somewhat more optimistic about growth prospects and the projected decline in inflation this year,” said Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People.
“We have entered 2023 on a firmer footing than anticipated: the risks of recession and gas shortages have faded and unemployment remains at a record low,” said Paolo Gentiloni, Commissioner for Economy.
Eurozone industrial production dropped -1.0% mom in May, much worse than expectation of 0.2% mom rise. Production of non-durable consumer goods fell by -2.3%, energy by -1.9%, capital goods by -1.6% and intermediate goods by -0.2%, while production of durable consumer goods rose by 1.6%.
EU industrial production dropped -0.9% mom. Among Member States for which data are available, the largest decreases were registered in Romania (-8.5%), Greece (-4.7%) and Ireland (-4.6%). The highest increases were observed in Lithuania (+7.7%), Hungary (+3.4%) and Finland (+2.2%).
Germany Gfk consumer sentiment for November dropped to 9.6, down from 9.8, missed expectation of 9.8. Gfk noted that besides known risk factors such as the global economic downturn, trade conflicts and Brexit chaos, there are increasing reports of job losses, such as in the automotive industry and on the financial markets, for example. These events have dampened the mood of consumers again and optimism is dwindling
In particular, economic expectation indicator continued its down trend dropped -4.8 pts to -13.8. That’s the lowest level in nearly seven years since December 2012. “According to consumer estimates, the risk that Germany could slide into a recession has increased again recently. Combined with the trade conflict, the global cooling off of the economy, which will especially impact the strongly export-oriented German economy, will not leave the German economy unscathed. Consequently, several automobile manufacturers as well as their suppliers have already announced redundancies. This loss of jobs at car manufacturers will be further intensified in future by the forthcoming transition to electro-mobility. Owing to the European Central Bank’s (ECB) low-interest-rate policy, banks are experiencing increasing difficulties. As the example of Deutsche Bank shows, they are reacting with branch closures and redundancies.”
Risk aversion once again spread from US to Asian session. Nikkei closed down -1.11%, or 226.39 pts to 20166.19. That’s the lowest level since September 2017 and 20000 handle is now vulnerable. At the time of writing, China Shanghai SSE is down -1.3% at 2504. However, losses in Singapore Strait Times (-0.27%) and Hong Kong HSI (-0.03%) are relatively limited.
Overnight, DOW lost -1.99% or -464.06pts to 22859.60. S&P 500% dropped -1.58% and NASDAQ dropped -1.63%. DOW is now pressing key support level at 38.2% retracement of 15450.56 to 26951.81 at 22558.33. There is prospect of some recovery before yearly close. But it has to overcome near term resistance at around 23500 before declaring bottoming.
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On important development to note is that acceleration in flattening of US yield curve. Overnight, 5-year yield closed up 0.026 to 2.653. 10-year yield rose 0.011 to 2.789. More importantly, 30-year yield breached 3% handle to 2.957, then closed at 3.012, down -0.003. Meanwhile, yield curve remains inverted between 2-year (2.675) and 3-year (2.652).
The currency markets are generally in range today. For the week, Yen remains the strongest one on risk aversion, followed by Euro. Commodity currencies are all in deep red.
UK retail sales volume dropped -0.5% mom in May, better than expectation of -0.9% mom. Ex-fuel sales dropped -0.7% mom, better than expectation of -1.4% mom.
Over the 12-month period, retail sales dropped -4.7% yoy, versus expectation of -4.5% yoy. Ex-fuel sales dropped -5.7% yoy, versus expectation of -5.1% yoy.
ONS said: “The fall in sales volumes over the month was because of food stores, which fell by 1.6%; reduced spending in food stores seems to be linked to the impact of rising food prices and the cost of living.”
Gold surged to new 7-year high as lifted by broad based weakness in Dollar. The correction from 1703.28 has completed early than expected at 1451.16. Break of this resistance confirms up trend resumption.
Outlook will stay bullish as long as 1644.67 resistance turned support holds. Next upside target is 100% projection of 1451.16 to 1644.67 from 1567.78 at 1761.29.
In the bigger picture, the strong support from 55 week EMA displays clear medium term bullishness. A take on 1920.70 high would likely be seen next.
German expects rose 1.9% yoy to EUR 119.5B in October while imports dropped -0.6% yoy to EUR 98.0. Trade surplus came in at EUR 21.56B. On calendar and seasonally adjusted terms, exports rose 1.2% mom while imports was flat. Trade surplus widened to EUR 20.6B, beat expectation of EUR 19.0B.
According to provisional results of the Deutsche Bundesbank, the current account of the balance of payments showed a surplus of EUR 22.7B. That takes into account the balances of trade in goods including supplementary trade items (EUR 22.5B), services (EUR -4.3B), primary income (EUR 9.0B) and secondary income (EUR -4.5B).
Cleveland Fed President Loretta Mester, in an interview with WSJ, expressed a cautious stance on interest rate hikes, stating, “I am not eager to consider interest rate hikes.” Mester emphasized that Fed is in a “really good place” to study the economy before deciding on the next steps for interest rates.
Mester highlighted that it’s too early to determine whether the disinflation has stalled or if inflation is set to reverse. She noted that there are clear indications that the real side of the economy is “moderating”, which is contributing to a better balance within the economy.
BoE is widely expected to keep monetary policy unchanged today, with Bank Rate held at 0.10% and asset purchase target at GBP 895B. The overall tone on recovery should be upbeat given strong economy data flow. Yet, uncertainty remains high, in spite of high vaccination rate, regarding the third wave of the coronavirus pandemic that delayed restrictions easing. Headline inflation came in above BoE’s target in May. But the MPC would continue to view the movements as temporary and transitory.
Overall, BoE would wait until August meeting to decide on tapering. By then, new economic projections would be released with the Monetary Policy Report. Also, the situation regarding infections and reopening should be way clearer.
Sterling is currently the slightly better performer among European majors. There is prospect of further rally if BoE delivers some hawkish votings. In particular, GBP/CHF’s rebound from 1.2579 resumed by breaking 1.2817 resistance this week. The development also argues that correction from 1.3070 has completed after struggling around 55 day EMA.
Further rise is now in favor as long as 1.2749 minor support holds. Sustained trading above 61.8% retracement of 1.3070 to 1.2579 at 1.2882 will pave the way to retest 1.3070 high, and possibly resume whole up trend from 1.1107.
New Zealand Dollar stays firm after RBNZ left OCR unchanged at 1.75% as widely expected. In the accompanying statement, RBNZ maintained the intention to keep OCR unchanged “through 2019 and into 2020”.
The language that the “the direction of our next OCR move could be up or down” was removed. Instead, RBNZ said “there are both upside and downside risks to our growth and inflation projections. As always, the timing and direction of any future OCR move remains data dependent.”. That at first glance looked like the central bank is moving away from the possibility of a cut. However, Governor Adrian Orr made it clear in the press conference that “it would be pointless to remove that option”, regarding a cut.
Orr also talked down the pick-up in GDP growth in the June quarter as “partly due to temporary factors”. Instead, he pointed to businesses surveys which “suggest growth will be soft in the near term”. While employment is “around its “maximum sustainable level”, core inflation remains below 2% target mid-point, “necessitating continued supportive monetary policy”.
Below are the press conference video and full statement.
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The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and into 2020.
There are both upside and downside risks to our growth and inflation projections. As always, the timing and direction of any future OCR move remains data dependent.
The pick-up in GDP growth in the June quarter was partly due to temporary factors, and business surveys continue to suggest growth will be soft in the near term. Employment is around its maximum sustainable level. However, core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.
GDP growth is expected to pick up over 2019. Monetary stimulus and population growth underpin household spending and business investment. Government spending on infrastructure and housing also supports domestic demand. The level of the New Zealand dollar exchange rate will support export earnings.
As capacity pressures build, core consumer price inflation is expected to rise to around the mid-point of our target range at 2 percent.
Downside risks to the growth outlook remain. Weak business sentiment could weigh on growth for longer. Trade tensions remain in some major economies, raising the risk that trade barriers increase and undermine global growth.
Upside risks to the inflation outlook also exist. Higher fuel prices are boosting near-term headline inflation. We will look through this volatility as appropriate. Our projection assumes firms have limited pass through of higher costs into generalised consumer prices, and that longer-term inflation expectations remain anchored at our target.
We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.
Entering into US session, Yen and Swiss Franc are trading as the strongest ones for today on risk aversion. Trump’s comments in Bloomberg interview regarding the EU is as bad as China revived the concerns over trade war across the Atlantic, including auto tariffs. The comments attracted strong responses from the EU as they realized Trump is not someone who keep promises. Anyway, Dollar follows as the third strongest, as it strengthens every time as trade tensions escalate. Australian and New Zealand Dollar are the weakest ones for today. Canadian Dollar as the third weakest even though it could make a turn around. Focuses are on the final hours of US-Canada trade negotiations.
Euro is mixed today as on the one hand it’s pressured by renewed tariff threats. Also, Eurozone CPI unexpectedly slowed back to 2.0% yoy August, reaffirming ECB’s stance that it won’t raise interest rates any time soon. On the other hand, Turkish Lira recovers mildly after the government raised tax on foreign currency savings, while scrapped taxes on local deposits.
In other markets, major European indices are all down today. FTSE is losing -0.4%, DAX falls -0.81% while CAC drops -1.14% at the time of writing. In Asian, Nikkei closed down -0.02%, Hong Kong HSI dropped -0.98%, China Shanghai SSE lost -0.46% and Singapore Strait Times declined -0.38%.
Entering into US session, Euro is overwhelmingly the weakest one today after shockingly poor German PMI manufacturing, which dropped to 71-month low at 44.7. Australian Dollar follows closely as second on risk aversion while Canadian is the third weakest.
For the same reasons, Yen is the strongest one for today. Sterling is the second strongest after EU granted UK more weeks to get the Brexit deal through the parliament, until April 12. Dollar is the third weakest.
Development in the bond markets are particularly worth nothing. Firstly, German 10-year bund yield hit at low as -0.01, turned negative for the first time since 2016. Secondly, the most accurate indicator of recession in US, yield curve between 3-month and 10-year, inverts. US 10-year yield is down -0.064 at 2.469 now. 3-month yield is at 2.474.
Eurozone Sentix Investor Confidence improved to -2.7 in December, up from -10.0, much better than expectation of -11.9. That’s also the highest level since February. Current situation rose from -32.3 to -30.3, highest since March. Expectation index jumped from 15.3 to 29.3, highest since April, 2015.
Sentix noted: “The Corona crisis year 2020 will end with a bang, which will set several exclamation marks for the global economy. In our December results, we have a series of all-time highs (!) in the expectation components of various world economic regions. Hopes for an early use of vaccines are fuelling the fantasy that the economy in 2021 will recover more clearly than previously expected from the consensus.”
Germany’s overall index rose from 1.3 to 6.9, highest since May 2019. Current situation rose slightly from -17.5 to -17.3, highest since March. Expectations rose from 22.0 to 34.3, an all time high.
US overall index rose from 4.8 to 9.1, highest since February. Current situation dropped from -10.5 to -11.8. Expectations rose from 21.3 to 32.3, an all time high.
Japan overall index rose from 6.1 to 14.5, highest since October 2018. Current situation rose from -8.3 to -2.3, highest since Feb. Expectations rose from 31.5 to 32.8, an all time high.
Sarah Breeden, the incoming Deputy Governor for BoE, shared her economic forecast during a parliamentary Treasury Committee approval hearing today. She is slated to replace Jon Cunliffe as come November.
Breeden conveyed her anticipation for the inflation rate to be near the 2% target within a span of two years, an outlook that is based on the premises outlined in BoE’s August forecast.
Despite the somewhat optimistic perspective on inflation, Breeden aired her expectation of “relatively flat GDP in the UK over the next couple of year”.
The expectation for a subdued GDP is rooted in the “impact of past increases in Bank Rate increasingly push down on demand, and supply remains very weak.”
Breeden concurred with the MPC’s perspective that inflation risks pertaining to the August forecasts are “skewed to the upside”. She acknowledged that “second-round effects via price and wage setting are stronger than had previously been expected.” When it comes to growth and unemployment, Breeden sees a pathway filled with “balanced risks”, which could swing in either direction.
New Zealand’s good exports rose 2.2% yoy, or NZD 107m, to NZD 5.1B in June. Goods imports rose 0.2% yoy, or NZD 11m, to NZD 4.6B. Monthly trade surplus narrowed to NZD 426m, down from may’s NZD 1286m, slightly below expectation of NZD 450m.
Over June quarter, goods exports dropped -5.8% yoy, or NZD 904m, to NZD 14.7B. Goods imports dropped -16% yoy, or NZD 2.5B, to NZD 13.2B. Quarterly trade balance was a surplus of NZD 1.4B, first quarterly surplus since Q1 2014.
NZD/JPY breached 71.66 resistance to 71.67 yesterday, but reversed from there, following broad based risk off mood. Focus is now back on 69.82 support. Break there will confirm rejection by 71.66 resistance. Fall from 71.67 would then be seen as the third leg of the corrective pattern from 71.66. Deeper decline would then be seen to 68.19 support and below.
Japan’s Tokyo CPI core rises in May, industrial production weakens in Apr
In May, Japan’s Tokyo CPI core (excluding fresh food) increased from 1.6% yoy to 1.9% yoy, matching expectations. This rise was primarily driven by higher electricity costs. However, CPI core-core (excluding food and energy) slowed slightly from 1.8% yoy to 1.7% yoy. Private sector service inflation also decreased from 1.6% yoy to 1.4% yoy. The headline CPI saw an uptick from 1.8% yoy to 2.2% yoy.
April’s industrial production declined by -0.1% mom, falling short of the anticipated 1.5% mom rise. The Ministry of Economy, Trade, and Industry maintained its assessment that industrial production “showed weakness while fluctuating indecisively.” Among the 15 industrial sectors surveyed, seven reported lower output, while eight saw increases. Manufacturers expect output to rise by 6.9% in May before falling by -5.6% in June.
Additionally, April’s retail sales jumped by 2.4% yoy, surpassing the expected 1.9% increase. Unemployment rate remained steady at 2.6%.