UK CBI: Worrying falls in services volumes, profitability and employment

    According to a CBI survey for the three months to August, UK business and professional services employment dropped at the quickest pace since 2009, with balance at -32%, down from -9%. Consumer services employment was even worse on record, with balance dropping from -31% to 063%. CBI added, “next quarter, employment is set to continue to fall, but the rate of decline is set to ease slightly.”

    Ben Jones, CBI Principal Economist, said: “This quarter has shown some worrying falls in volumes, profitability and employment for the services sector. Although the pace of these declines is expected to ease, the impact of COVID-19 remains clear, with the services sector still facing challenges in terms of demand, revenues and cash flow… As we head into the autumn, the UK needs a bold plan to protect jobs as the job retention scheme draws to an end, to support the services sector.”

    Full release here.

    Sterling firm despite DUP’s concerns on Johnson’s Brexit concessions

      Sterling surged overnight on news that UK and EU are closing in on a Brexit deal in Brussels. The Pound remains firm in Asian session, awaiting further developments. It’s reported that both sides have hammered out most of the differences over the past 48 hours. UK Prime Minister Boris Johnson is said to have made several major concessions. Most notably, he now accepts that there will be customs checks between Northern Ireland and the rest of UK.

      Johnson’s move got support from fellow Conservatives. Steve Baker, chairman of the pro-Brexit European Research Group, said “I’m happy to say it was a very constructive conversation” and “I’m optimistic it is possible to reach a tolerable deal which I will be able to vote for.” Irish Prime Minister Leo Varadkar also gave a nod and said “the negotiations are moving in the right direction.”

      However, Northern Ireland’s DUP sounds very skeptical on it. Party leader Arlene Foster said “it would be fair to indicate gaps remain and further work is required.” Also, DUP needs “a deal that respects Northern Ireland’s constitutional position as per the Belfast Agreement within the U.K. and indeed respects the economic integrity of the U.K. single market.” Johnson will certainly need support from DUP before giving greenlight to such a deal.

      Eurozone CPI accelerated to 1.3%, core CPI unchanged at 1.3%

        Eurozone CPI accelerated to 1.3% yoy in December, up from 1.0% yoy, matched expectations. CPI core was unchanged at 1.3% yoy, also matched expectations. Looking at some details, food, alcohol & tobacco is expected to have the highest annual rate in December (2.0%, compared with 1.9% in November), followed by services (1.8%, compared with 1.9% in November), non-energy industrial goods (0.4%, stable compared with November) and energy (0.2%, compared with -3.2% in November).

        Full release here.

        Survation: Conservative lead over Labour rose back to 14pts

          According to the latest poll by Survation for ITV’s Good Morning Britain, the Conservative has widened their lead over Labour for the upcoming elections on Thursday. Headline voting intention for Conservative rose 2 pts to 45% while that for Labour dropped -2 pts to 31%, diving Conservative a 14pts lead, up from 9pts a week ago. Nevertheless, the lead was just back to the level on November 18, at 14 pts, when Conservative had 42% and Labour 28%.

          Brexit remains the number one issue for the vote decision for 32% of all voters, 50% current Conservative voters and 15% current Labour voters. More Labour voters are concerned with NHS as the number one issue at 26%, comparing to Conservative’s 3% and overall 14%.

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          Full release here.

          Fed’s Kashkari: Strong economy might warrant another rate hike

            Minneapolis Fed President Neel Kashkari said at an event overngiht that the strength of the economy might necessitate higher interest rates for an extended period.

            Kashkari commented, “If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off.”

            In line with last week’s updated dot plot from Fed, where 12 out of 19 members indicated a potential rate hike this year, Kashkari affirmed his position, stating, “I’m one of those folks.”

            However, Kashkari also pointed out a caveat, suggesting the possibility of rate cuts if inflation undergoes a swift decline next year. He elaborated, “Depending on what is happening in all the economic data that we look at, that then might justify backing off the federal funds rate — not to ease policy but just to stop it from getting tighter from here, and that’s something obviously we’ll have to look at.”

            Into US session: Dollar weakens further as Trump meets Putin

              Entering US session, European majors are generally strong today, led by Swiss Franc, followed by Sterling. On the other hand, both Yen and Dollar are extending last week’s selloff. The financial markets are generally quiet though.

              After some weaker than expected economic data, China SSE closed down -0.61% at 2814.04, holding safely above 2800. Hong Kong HSI was up 0.05%, Singapore Strait Times ended lower by -0.85%. Nikkei is on holiday.

              Major European indices are also trading lower. FTSE is losing -1.02% at the time of writing, DAX is down -0.15%, CAC is down -0.40%.

              Trump is meeting Putin in Helsinki now but we’re no expecting anything ground-breaking there. EU Tusk and Juncker, though, seemed to have done something positive with China earlier today. And they’ll travel to Japan tomorrow.

              For the session ahead US retail sales is a major focus. Headline sales is expected to rise 0.4% mom in June, with ex-auto sales up 0.4%. Empire State Manufacturing index is expected to drop from 25 to 20.3 in July. Business inventories are expected to rise 0.4% in May. Canada will release International Securities Transactions.

              Canada’s retail sales rises 0.7% mom in Apr, but falls -0.6% mom in May

                Canada’s retail sales rose 0.7% mom to CAD 66.8B in April, matched expectations. Sales were up in seven of nine subsectors and were led by increases at gasoline stations and fuel vendors as well as food and beverage retailers.

                Core retail sales—which exclude gasoline stations and fuel vendors and motor vehicle and parts dealers—were up 1.4%

                Advanced estimate suggests that sales fell -0.6% mom in May.

                Full Canada retail sales release here.

                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”.

                  RBA Ellis: Neutral is not a destination we necessarily reach

                    RBA Assistant Governor Luci Ellis said in a speech that “don’t think of this as a mechanistic approach of ‘we have to get back to neutral’, or above neutral” interest rate.

                    “The neutral rate is an important guide rail for thinking about the effect policy might be having. It is not necessarily a prescription for what policy should do,” he said.

                    “‘Neutral’, then, is not a destination we necessarily reach, but more a pole-star to guide us. And even then, its location is sufficiently uncertain that we are perhaps better served by paying more attention to the ground as it shifts beneath our feet than to that faraway pole-star,” he added.

                    Full speech here.

                    UK GDP grew 0.3% in Q3, but production was flat only

                      UK GDP grew 0.3% qoq in Q3, matched expectations. Over the year, GDP grew 1.0% yoy in Q3, slowest quarter-on-year growth since Q1 2010. The service and construction sectors provided positive contributions to GDP growth, while output in the production sector was flat in Quarter 3 2019. Private consumption, government consumption and net trade contributed positively to GDP growth, while gross capital formation (GCF) contributed negatively to growth in the quarter.

                      In September, GDP contracted -0.1% mom, matched expectations. Industrial production dropped -0.4% mom, -1.4% yoy, versus expectation of -0.1% mom, -1.2% yoy. Manufacturing production dropped -0.4% mom, -1.8% yoy, versus expectation of -0.2% mom, -1.3% yoy. Goods trade deficit widened to GBP -12.5B, versus expectation of GBP -10.1B.

                      RBA stands pat, upgrades GDP forecasts further

                        RBA maintained monetary policy settings as widely expected. Cash rate and 3-year yield target are held at 0.10%. Parameters of the Term Funding Facility and bond purchases are held unchanged too. It also maintained that the condition for raising the cash rate is unlikely to be reached until 2024 at the earliest.

                        At its “July meeting”, RBA will consider whether to retail April 2024 bond as the 3-year yield target, or shift to next maturity, “at its July meeting”. But the board is “not considering a change to the target of 10 basis points”. At the meeting, RBA will also consider future bond purchases after current program completes in September.

                        Central scenario for GDP growth was “revised up further”. RBA now sees 4.75% GDP growth over 2021, 3.50% over 2022. Unemployment rate is projected to decline to around 5% at the end of this year and further to 4.5% at the end of 2022.

                        But CPI data “confirmed that inflation pressures remain subdued” in most parts of the economy. Underlying inflation is expected to be 1.5% in 2021 and 2% in mid-2023, even though CPI inflation might rise temporarily to above 3% in June quarter.

                        Full statement here.

                        ECB Villeroy: PEPP the preferred crisis instrument for its very flexibility

                          ECB Governor Council member Francois Villeroy de Galhau hinted that the central bank might boost the EUR 750B Pandemic Emergency Purchase Program ahead. “It is in the name of our mandate that we will very probably need to go even further”, he said in a conference in Pari. “It is its very flexibility that should make the pandemic emergency purchase program our preferred marginal instrument for dealing with the consequences of the crisis.”

                          With the program, bone purchases could target countries with sharper rises in treasury yields. “Depending on market dynamics and liquidity conditions – and where these exhibit unwarranted gaps or there are risks of excessive volatility – certain national central banks must be able to purchase significantly more, and others significantly less, while ensuring the risks remain unshared,” Villeroy said.

                          Fed Daly favors gradual pace of monetary policy normalization

                            New San Francisco Fed President Mary Daly expressed her support to continued gradual rate hikes in her first remarks as monetary policy maker. She said the labor market is “booming” and inflation at the at 2% target. And, she explained that Fed might not want to go too slowly on rates and risking falling behind the curve. Her approach is consistent with Fed’s and she favors “a gradual pace of normalization.”

                            Daly also used the analogy that “you put a toe in the water and see how much of a ripple it makes”. And, “the FOMC just raised rates in September, and we’re now in the watching phase — what’s going on in the economy, how does it react.”

                            She also tried to talk down last week’s stock market crash. She said “a correction in the stock market where it comes down a little bit is not necessarily a worrisome thing.”

                            Bundesbank Nagel: We must resolutely raise key rates further

                              Bundesbank President Joachim Nagel said, “We must resolutely raise our key rates further and adopt a restrictive stance… We cannot stop here. Further decisive steps are necessary.”

                              “We should start reducing the size of our bond holdings at the beginning of next year by no longer fully reinvesting all maturing bonds,” Nagel added.

                              Fed’s Kugler: Labor market stable, likely near maximum employment

                                In a speech today, Fed Governor Adriana Kugler described the U.S. labor market as “stable,” noting that key indicators such as the unemployment rate, currently at 4.2%, have remained within a narrow and consistent range.

                                She highlighted that temporary layoffs have returned to pre-pandemic levels, and both job vacancies and quit rates have plateaued, indicating a moderation in labor market churn.

                                Kugler further stated that the economy is likely “close to maximum employment,” referencing model-based estimates of the natural rate of unemployment (u*) that align with the current 4.2% level.

                                Full speech of Fed’s Kugler here.

                                UK PMI construction dropped to 58.7, widespread supply shortages and constrained capacity

                                  UK PMI Construction dropped to 58.7 in July, down sharply from June’s 24-year high of 66.3. House building remained best-performing category. Supply shortages led to another rapid rise in input prices.

                                  Tim Moore, Economics Director at IHS Markit:

                                  “July data marked the first real slowdown in the construction recovery since the lockdown at the start of this year. It was unsurprising that UK construction companies were unable to maintain output growth at the 24-year high seen in June, especially with widespread supply shortages and constrained capacity to take on additional orders…

                                  “Long lead times for materials and shrinking sub-contractor availability were cited as factors holding back work on site… Another rapid increase in purchasing costs was linked to global supply and demand imbalances, but many firms also noted that local issues had amplified inflationary pressures. These included a severe lack of haulage availability, continued reports of Brexit trade frictions, and greater shortages of contractors due to exceptionally strong demand.”

                                  Full release here.

                                  China Caixin PMI services rose to 55.5, composite dropped to 54.0

                                    China Caixin PMI Services rose from 54.5 to 55.5 in July, above expectation of 54.0. That’s the highest level since April 2021. PMI Composite dropped from 55.3 to 54.0.

                                    Wang Zhe, Senior Economist at Caixin Insight Group said: “In general, the eased Covid situation and restrictions facilitated a continuous recovery in the economy. The services sector, which had been previously hit harder by the outbreaks than manufacturing, showed stronger improvement. Supply and demand continued to improve with supply stronger than demand. The labor market shrank greatly, adding to employment pressures. Business costs steadily climbed while prices charged remained stable, posing challenges for company profits. The market held on to positive sentiment, even with concerns about the outlook for Covid and the economy.”

                                    Full release here.

                                    Bristish Pound dives as Brexit comes back to spotlight, EURGBP upside breakout

                                      Entering into US session, Swiss Franc and Euro remain the strongest one for today. However, Sterling is starting to lag behind.

                                      Indeed, the Pound is suffering some heavy selling on Brexit under certainties. UK Prime Minster Theresa May is yet to unify his cabinet on the backstop plan over Irish border. Ahead of their meeting today, it’s widely reported that May is at odds with Brexit secretary David Davis, who threatened to quit.

                                      EUR/GBP is showing some strength by breaking 0.8808 resistance. H and 6H action bias have both turned upside blue. But they can be force signal in ranging consolidation markets.

                                      Hence, we’d wait for a firm break of 0.8844 resistance to confirm resumption of rise from 0.8620 to go long. Target is 0.8967 key resistance level.

                                      Eurozone CPI finalized at 0.7%, core at 1.1%

                                        Eurozone CPI was finalized at 0.7% yoy in October, core CPI at 1.1%. The highest contribution to the annual Eurozone inflation rate came from services (+0.69%), followed by food, alcohol & tobacco (+0.29%), non-energy industrial goods (+0.07%), and energy (-0.32%),.

                                        EU28 CPI was finalized at 1.1% yoy. The lowest annual rates were registered in Cyprus (-0.5%), Greece (-0.3%) and Portugal (-0.1%). The highest annual rates were recorded in Romania (3.2%), Hungary (3.0%) and Slovakia (2.9%). Compared with September, annual inflation fell in fifteen Member States, remained stable in eight and rose in five.

                                        Full release here.

                                        Australia’s retail sales dip -0.1% mom in Dec, less than expected

                                          Australia’s retail sales turnover edged down by -0.1% mom in December, a smaller decline than the expected -0.7% mom. While the contraction marks a pullback from the strong growth seen in previous months—0.7% mom in November and 0.5% in October mom—it suggests that consumer spending remains relatively resilient.

                                          According to Robert Ewing, head of business statistics at the Australian Bureau of Statistics, retail activity was supported by extended promotional events, helping to smooth spending patterns over the quarter. He noted that Cyber Monday, which fell in early December, boosted demand for discretionary items, particularly furniture, homewares, electronics, and electrical goods.

                                          Full Australia retail sales release here.