Tue, Oct 15, 2019 @ 04:51 GMT

Sterling rebounds as EU may offer a UK-wide customs union

    Sterling rebounds strongly on an RTE news report that EU is going to offer the a UK-wide customs union as a way to work around the Irish backstop deadlock. And, the way to handle it is that in the Brexit Withdrawal Agreement, there will be a specific commitment to a UK wide customs arrangement. However, a formal EU-UK customs union will require a separate agreement. By offering that, EU will still insist on a backstop to be in place.

    The details of the idea are remain to be seen. And it’s uncertain whether UK Prime Minister Theresa May will accept it. Nor is it clear whether there is any technical issues overlooked. But for now Sterling is enjoying a notable rebound as seen in GBP/USD.

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    UK Bercow firms up on no repeat votes ruling, eight Brexit amendments chosen

      The prospect of another meaningful vote for UK Prime Minister Theresa May’s Brexit deal is in doubt. House of Commons speaker John Bercow firmed up his “no repeat votes” ruling today. In short, he restated his ruling that a new vote will only be allowed if there is substantial changes. Additional, he pledged to block any attempt by the government to use a procedural rule change to get round such decision.

      The prospect of another meaningful vote for UK Prime Minister Theresa May’s Brexit deal is in doubt. House of Commons speaker John Bercow firmed up his “no repeat votes” ruling today. In short, he restated his ruling that a new vote will only be allowed if there is substantial changes. Additional, he pledged to block any attempt by the government to use a procedural rule change to get round such decision.

      Meanwhile, eight amendments are chosen by Bercow to be put to indicative votes today. They include

      • Conservative John Baron’s No deal
      • Conservative Nick Boles’s Common Market 2.0
      • Conservative George Eustice’s Efta and EEA
      • Conservative Ken Clarke’s – Customs union
      • Labour’s – Customs union and alignment with single market
      • SNP Joanna Cherry’s – Revocation to avoid no deal
      • Dame Margaret Beckett’s – Confirmatory public vote
      • Marcus Fysh’s – Contingent preferential arrangements

      Here is Bercow’s statement on no repeat rules:

      “In the course of answering questions following her statement [on Monday], the prime minister accepted this constraint, saying that “I am very clear about the strictures that Mr Speaker gave when he made his statement last week and, were we to bring forward a further motion to this house, we would of course ensure that it met the requirements he made.”

      I understand that the government may be thinking of bringing meaningful vote three before the house either tomorrow or even on Friday, if the house opts to sit that day.

      Therefore, in order that there should be no misunderstanding, I wish to make clear that I do expect the government to meet the test of change. They should not seek to circumvent my ruling by means of tabling either a notwithstanding motion or a tabling motion. The table office has been instructed that no such motions will be accepted.

      I very much look forward, colleagues, to today’s debate and votes which give the house the chance to start the process of positively indicating what it wants.”

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      UK May not thinking about general election, Hunt said it’s not time for leadership contest

        UK Prime Minister Theresa May’s spokesman James Slack said today that she is not thinking about an election for the moment. The cross-party talk with Labour regarding Brexit will continue. The talks are now carried out in “smaller groups” which concentrate on “specific issues”. But there is no timetable for an agreement yet. Meanwhile, no-deal preparation would continue towards the new Brexit deadline on October 31.

        Foreign Minister Jeremy Hunt also insisted that Conservative party leader contest would only happen after Brexit Withdrawal agreement if voted through the parliament. Hunt added: “There will be a time for all those discussions about whether this shade of person or that shade of person is the right person to take over from the prime minister. But the time for that is when she has announced she’s going and there’s a formal leadership contest.”

        Hunt also said that “talks we are having with Labour are detailed and I think more constructive than people have thought. ” Also, “they are more detailed and more constructive than people had been expecting on both sides.

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        US ADP private sector employment rose 204k , little sign of slowdown

          US ADP private sector employment rose 204k in April, slightly above expectation of 200k.

          Quotes from the release:

          Ahu Yildirmaz, vice president and co-head of the ADP Research Institute-

          • “The labor market continues to maintain a steady pace of strong job growth with little sign of a slowdown
          • “However, as the labor pool tightens it will become increasingly difficult for employers to find skilled talent.
          • Job gains in the high-skilled professional and business services industry accounted for more than half of all jobs added this month.
          • The construction industry, which also relies on skilled labor, continued its six month trend of steady job gains as well.”

          Mark Zandi, chief economist of Moody’s Analytics-

          • “Despite rising trade tensions, more volatile financial markets, and poor weather, businesses are adding a robust more than 200,000 jobs per month.
          • At this pace, unemployment will soon be in the threes, which is rarified and risky territory, as the economy threatens to overheat.”

          Full release here.

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          EUR/USD dips on Draghi’s press conference, but quickly recovers

            Euro drops broadly after ECB President Mario Draghi sounds rather cautious and downbeat in the post meeting press conference. In particular, Draghi noted that “The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to the geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.” As he added that “The persistence of uncertainties, in particular relating to geopolitical factors and the threat of protectionism, is weighing on economic sentiment.”

            Later in the Q&A, Draghi said today’s ECB meeting was devoted to an “assessment” on the slowdown. And about the questions of “Where are we? Why we’re here? And how long will the slowdown last”. The meeting was not about the implications on monetary policy. And ECB policymakers were “unanimous” on acknowledging weaker momentum” and “changing of the balance of risks for growth”. The Governing Council will give itself more time to assess the risk factors, and there will be another discussion in March with new economic projections.

            EUR/USD dips to as low as 1.1306 but is now back at 1.1352. While Draghi was cautious, he didn’t bring out any “new” dovishness in the press conference.

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            DOW heading back to 23344.52 support after failing to stand above 55 day EMA

              DOW closed sharply lower overnight by -424.56 pts or -1.74%, at 24023.13. The rebound from 23344.52 is confirmed to be complete at 24585.97, after failing to sustain above 55 day EMA. While the strength of the rebound was disappointing, the overall development is in line with our view. That is, price actions from 26616.71 high are developing into a medium term correction that’s not completed yet

              Further fall would be seen back to 23344.52 ahead, as long as 24585.97 holds. While there could be some support at that level, and eventual break is expected to 38.2% retracement of 15450.56 to 26616.71 at 23351.24. That was our original target. Judging from the descending triangle shape of the pattern from 23360.29, we’re now slightly leaning to the case of deeper fall to 50% retracement at 21033.63 before completing the correction.

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              Yuan dives as trade tensions re-escalate, PBoC cut RRR for smaller banks

                At this point, it’s unsure how China will respond to renewed tariff threats by Trump at this “very last” stage of negotiations. Vice Premier Liu He is originally scheduled to travel to Washington on Wednesday to wrap up the trade deal. It’s reported that Trump’s erractic change in position shocked Chinese officials. but so far there is no decision made on whether to cancel Liu’s trip or even cancel all trade negotiations.

                At the same time the PBoC announced to lower the Reserve Requirement Ratio for small to medium banks starting next Wednesday on May 15. The move is expected to to release CNY 280B in long-term funds to the markets.

                Chinese Yuan tumbles sharply today in reaction to all the news collectively. USD/CNH (off-shore Yuan) hits as high as 6.8214 after gapping up. Technically, the development suggests that pull back from 6.9800 (2018 high) has completed at 6.6699, after hitting 38.2% retracement of 6.2354 to 6.9800 at 6.6956. It’s a bit early to say, but 7 handle in USD/CHN could be at risk again if trade tensions worsen further.

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                Yen surges, Nikkei drops as Trump mulls car tariffs on national security ground

                  Yen’s broad based rally extends today as Nikkei dives over -1% as led by selloff in car makers shares.

                  Sentiments are hurt by news that the US is considering to impose as much as 25% tariffs on import cars. Similar to steel and aluminium tariffs, national security is used as the excuse for the investigation under Section 232 of the Trade Expansion Act of 1962.

                  Commerce Secretary Wilbur Ross said in a statement that “there is evidence suggesting that, for decades, imports from abroad have eroded our domestic auto industry.” And, the department will “conduct a thorough, fair, and transparent investigation into whether such imports are weakening our internal economy and may impair the national security.”

                  In a separate statement, US President Donald Trump said: “core industries such as automobiles and automotive parts are critical to our strength as a Nation.”

                  Some see the the car tariffs as a threat to force concessions in NAFTA talks, which has been in deadlock. This could also be an act to address pressure to EU, in particular on Germany for trade talks. But Japan could be the hardest hit if the tariffs are implemented. Japan is one of the few top 10 steel importers to the US who’s not even granted a temporary exemption.

                  In 2017, US imported 8.3m vehicles, including 2.4 million from Mexico, 1.8 million from Canada, 1.7 million from Japan, 0.9m from South Korea and 0.5m from Germany.

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                  SNB: Real external value of Swiss franc still at a high level

                    SNB commented on exchange rate in its latest Quarterly Bulletin. Here are the quotes from section 5.4.

                    Swiss franc gains against US dollar

                    Since the monetary policy assessment in December 2017, the Swiss franc has gained in value against the US dollar by around 4% (cf. chart 5.4). This appreciation occurred against a backdrop of general US dollar weakness, which became more pronounced at the end of January following statements by the US Treasury Secretary about the advantages of a weak US dollar for the American economy. At times, the USD/CHF exchange rate declined to its lowest level since mid-2015. 

                    Fluctuations in Swiss franc exchange rate to euro

                    Initially, the Swiss franc depreciated somewhat against the euro. At times in mid-January, the price of the euro was CHF 1.18, the highest value since the discontinuation of the minimum exchange rate. Thereafter, however, the Swiss franc strengthened again. This appreciation occurred against a backdrop of growing market uncertainty, which was also reflected in share price performance. In mid-March, one euro cost CHF 1.17, which was practically the same level as at the time of the monetary policy assessment in December.

                    Slight increase in Swiss franc’s trade-weighted external value

                    On a nominal trade-weighted basis, the Swiss franc has increased by more than 1% since mid-December (cf. chart 5.5). This was mainly due to its marked appreciation against the US dollar.

                    Real external value of Swiss franc still at a high level

                    Since autumn 2017, the real trade-weighted exchange rate index calculated by the SNB has been at roughly the same level as before the discontinuation of the minimum exchange rate. It thereby remains above its long-term average. The same is true for the indices calculated by the Bank for International Settlements (BIS) and the International Monetary Fund (IMF) (cf. chart 5.6).

                    Full report here

                    Basically, there is no indication for a change of SNB’s stance on exchange rate. Swiss Franc remains overvalued. And it will stand ready to intervenue if needed.


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                    Oversupply Concerns Haunt Oil Market

                      Crude oil prices recovered slightly after yesterday selloff taking both benchmarks to lowest levels in two week. The front-month WTI and Brent crude oil contracts stabilized after plunging -2.97% and -3.74%, respectively, on Monday. Concerns over oversupply have put a lid to any price rally. It has been reported that Russia output rose to 10.97M bpd in March, up from 10.95M bpd a month ago. This was surprising as the oil giant has pledged, alongside several OPEC members, to cut output so as to support oil prices. The output increase has raised concerns over the compliance of the participants of the deal.

                      Moving to the Gulf, it was reported that Saudi Arabia would lower prices for all crude grades for its Asian customers. Separately, Bahrain had just announced over the weekend the discovery of a new oil field off the country’s western coast that is forecast to contain “highly significant quantities of oil and gas”. According to the country’s oil minister, Shaikh Mohamed bin Khalifa Al Khalifa, the oil and gas reserve there is at “at substantial levels, capable of supporting the long-term extraction of tight oil and deep gas”.

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                      ADP jobs growth at 102k, missed expectation, job market continues to throttle back

                        ADP report shows private sector employment grew 102k in June, below expectation of 140k. Though, it’s already a strong rebound from May’s 41k (revised from 27k).

                        “Job growth started to show signs of a slowdown,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “While large businesses continue to do well, small businesses are struggling as they compete with the ongoing tight labor market. The goods producing sector continues to show weakness. Among services, leisure and hospitality’s weakness could be a reflection of consumer confidence.”

                        Mark Zandi, chief economist of Moody’s Analytics, said, “The job market continues to throttle back. Job growth has slowed sharply in recent months, as businesses have turned more cautious in their hiring. Small businesses are the most nervous, especially in the construction sector and at bricks-and-mortar retailers.”

                        Full release here.

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                        US Q1 GDP growth revised down to 3.1%, price index rose 0.8%

                          US Q1 GDP growth was revised down to 3.1% annualized, from first estimate of 3.2%, matched expectations. GDP price index was revised down to 0.8% down from 0.9% and missed expectation of 0.9%.

                          Looking at the details, there were positive contributions from PCE, private inventory investment, exports, state and local government spending, and non-residential fixed investment. Imports also decreased. There was negative contribution from residential fixed investment.

                          The acceleration in GDP growth reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending.

                          Full release here.

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                          Dollar higher into US session. 0.9490 in USD/CHF watched

                            Dollar rises broadly entering into a rather busy US session. 

                            ECB will announce rate decision at 12:45 GMT. But focus is on Mario Draghi’s press conference at 13:30 GMT.

                            US will release challenger job cuts, jobless claims.

                            Canada will release housing starts, building permits, new housing price index.

                            Also BoC governor Stephen Poloz will speak.

                            And, Trump will formally sign the order for steel and aluminum tariff. Canada and Mexico are expected to get temporary exemptions.

                            Based on CHF’s broad based weakness, 0.9490 in USD/CHF will be a level to watch.

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                            Australia retail sales rose 0.8%, improvement across most industries

                              Australia retail sales rose 0.8% mom s.a. in February, much higher than expectation of 0.3% mom. ABS Director of Quarterly Economy Wide Surveys, Ben Faulkner said: “There were improved results across most industries with rises in food retailing (0.8%), department stores (3.5%), household goods retailing (1.1%) and clothing, footwear and personal accessory retailing (1.6%). Other retailing (0.0% and cafes, restaurant and takeaway services (0.0% were relatively unchanged. The rise this month follows subdued results in December 2018 (-0.4%) and January 2019 (0.1%).”

                              Among the state and territories, there were rises in Queensland (1.4%), New South Wales (0.6%), Victoria (0.8%), Western Australia (0.6%), South Australia (0.7%), the Australian Capital Territory (1.7%) and the Northern Territory (1.4%). There was a fall in Tasmania (-0.7%).

                              RBA has repeatedly noted that household consumption is a key uncertainty for overall GDP. Tightness in labor market has not much been translated into wage growth and rise is household disposable income. Wealth effect of falling house price could also be a drag. But February data does give some positive news to RBA and some room for it to wait-and-see first.

                              Full release here.

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                              German pledges principle of balanced budget

                                German Finance Minister Olaf Scholz emphasized today that the government ” can fulfill the tasks that we’re tackling without new debt”. The comments came after Reuters reported last week that the finance ministry was considering issuance of new debt. Scholz noted policies could be implemented by abolishing an income tax surcharge for most employees, etc.

                                Chancellor Angela Merkel’s spokesman Steffen Seibert also said “the chancellor has never left any doubt … that she stands by the principle of a balanced budget.” And, “we have a policy that is not being called into question that we had balanced budgets in recent years and we continue to strive for those.”

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                                Trump: Less than 50-50 to make a border security deal

                                  Trump reiterated his pledge for the border wall on Sunday and tweeted that “Does anybody really think I won’t build the WALL? Done more in first two years than any President!” He also told WSJ that another government shut down is “certainly an option”, as well as declaring national emergency.

                                  On Friday, Trump conceded to Democrat’s demand and agreed to a deal to end the partial government shutdown without the border wall. The Congress now has until February 15 for bipartisan negotiations on border-security plan. But Trump said “”I personally think it’s less than 50-50” of making a border security deal.

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                                  Eurozone unemployment rate unchanged at 7.8%, CPI slowed to 1.4%

                                    Eurozone unemployment rate was unchanged at 7.8% in February, matched expectations. It’s the lowest level since October 2008. EU28 unemployment was was also unchanged at 6.5% . It’s the record low since the start of series in January 2000.

                                    Among the member states, lowest unemployment rates in February 2019 were recorded in Czechia (1.9%), Germany (3.1%) and the Netherlands (3.4%). The highest unemployment rates were observed in Greece (18.0% in December 2018), Spain (13.9%) and Italy (10.7%).

                                    Eurozone CPI closed to 1.4% yoy in March, down from 1.5% yoy and missed expectation of 1.5% yoy. CPI core dropped to 0.8% yoy, down from 1.0% yoy and missed expectation of 1.0% yoy.

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                                    BoJ Kuroda: Global economy will recover in second half of the year

                                      BoJ Governor Haruhiko Kuroda said that global economy would recover in the second half as he arrived for the G20 finance ministers meeting in Washington yesterday. He said, “our baseline scenario is that the global economy will recover in the latter half of this year, and achieve sufficiently high growth next year.”

                                      Also, he defended rule-based multilateral trade system. Kuroda warned that “protectionism benefits neither the United States nor China.” He urged “both countries, as well as each G20 economy, must make efforts to solve problems based on the understanding that free trade under World Trade Organization rules has brought enormous benefits to the global economy.”

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                                      UK PMI services dropped to 28-month low, sharp deterioration in service sector growth

                                        UK PMI services dropped notably to 50.4, down from 52.2 and missed expectation of 52.5. That’s also the lowest reading in 28 months. Markit noted there is only marginal expansion of overall business activity. Employment growth moedrates to four-month low. And, business optimism is weakest since July 2016.

                                        Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:

                                        “A sharp deterioration in service sector growth leaves the economy flatlining in November as Brexit concerns intensified. Measured across services, manufacturing and construction, the survey results suggest that the pace of economic growth has stalled. With the exception of July 2016, when business slumped in the immediate aftermath of the EU referendum, November saw the worst performance since February 2013.

                                        “The surveys are so far consistent with 0.1% GDP growth in the fourth quarter, thanks to the expansion seen back in October, but growth momentum has since been lost and risks are clearly tilted to the downside.

                                        “A contraction of service sector business activity in November was only avoided by firms working through backorders to an extent not exceeded since 2009. As such, unless demand revives, a slide into economic decline at the turn of the year is a distinct possibility.

                                        “Both the slowdown in current business activity and the deterioration in business optimism were primarily caused by an intensification of anxieties over Brexit. Uncertainty in relation to the withdrawal agreement and the possibility of no deal was often reported to have caused companies and customers to cancel or postpone spending and investment decisions. Clarity in relation to Brexit arrangements is therefore urgently needed to help ensure the current stalling of growth does not translate into a downturn.”

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                                        US Mnuchin indicates new tariffs on China probably just a month away

                                          US Treasury Secretary Steven Mnuchin reminded the House Financial Services Committee that new tariffs on USD 300B in Chinese imports are probably just a month or so away. He said, “there won’t be any decision probably for another 30 to 45 days.” Meanwhile, there is no plan to travel to China to resume trade negotiations yet.

                                          On Walmart’s claims that tariffs will push up retail prices, he said “that’s something I can assure you the president will be focused on before we make any decisions.” However, he also talked down the threat of higher prices for consumers. He said “my expectation is that a lot of this business will be moved from China to other places in the region so that there will not be a cost.”

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