Thu, Dec 05, 2019 @ 17:30 GMT

PBoC Yi: Yuan fluctuation due to USD strength and external uncertainties

    China’s Central Bank, PBoC, issued a statement in its website regarding Governor Yi Gang’s response to China Securities Journal regarding recent decline in the Yuan.

    Yi acknowledged the fluctuation in the exchange rate and said the central bank is “pay closing attention”. He attributed to the decline of Chinese Yuan to strength of the US Dollar, external uncertainties and some procyclical behaviors.

    He also noted that the “managed floating exchange rate system” is based on market supply and demand. And “practice over the years has proven that this system must be effective and must be adhered to”.

    At the same time, China is committed to deepen the reform of exchange rate marketization and use sufficient policy tools to ” maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.”

    Full release in simplified Chinese.

    Suggested reading, our report Has China Given Green light to Renminbi Selloff?

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    Yuan recovers after China warns of short selling

      Chinese Yuan stages on strong rebound today, with USD/CHN breaching below 6.9 handle. Guo Shuqing, head of China’s banking and insurance regulator warned i a speech over the weekend that “shorting the yuan will inevitably suffer from a huge loss.”

      He criticized that Trump’s administration is worried about Yuan’s depreciation as that could reduce the impact of higher tariffs imposed on China. At the same time,developed countries have long asked for more currency flexibility. It was “ridiculous” that as Yuan’s exchange rate becomes more market oriented, some people in the US showed fear.

      At the moment, we’re not seeing any determination by the Chinese government to block USD/CNH breaking through the psychologically important 7 handle. There might be more verbal interventions. But the aim is seen as for slowing Yuan’s decline, rather than giving it a floor. USD/CNH’s could have formed a short term top at 6.9488. But we’d expect further rise through 6.9800 high after some brief consolidations.

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      Fed Powell: Common-sense risk-management approach served well

        Fed Chair Jerome Powell reiterated his recent messages in a speech in New York today. He noted that “nearly all job market indicators are better than a few years ago, and many are at their most favorable levels in decades.” Business-sector productivity growth also “moved up in the first three quarters of 2018.” Price stability side of Fed’s mandate is “in a good place” as “inflation by our preferred measure averaged roughly 2 percent last year” but “signs of upward pressure on inflation appear muted despite the strong labor market”.

        Powell also noted again that “over the past few months we have seen some crosscurrents and conflicting signals about the near-term outlook.” Those include slowdown in major economies, particularly China and Europe. There is elevated uncertainty around unresolved government policy issues including Brexit and trade negotiations. Financial markets conditions have tightened since last fall. Also, “some surveys of business and consumer sentiment have moved lower. Unexpectedly weak retail sales data for December also give reason for caution.”

        All in all, Fed will be “patient as we determine what future adjustments to the target range for the federal funds rate”. He also added that “common-sense risk-management approach has served the Committee well in the past.”

        Full speech here.

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        US PPI and core PPI slowed in September, missed expectations

          Both US PPI and core PPI slowed in September and missed expectations. PPI dropped came in at -0.3% mom, 1.4% yoy, versus expectation of 0.1% mom, 1.7% yoy. PPI core was at -0.3% mom, 2.0% yoy, versus expectation of 0.2% mom, 2.2% yoy.

          Full release here.

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          Germany PMI manufacturing dropped to 41.4, simply awful

            Germany PMI Manufacturing dropped to 41.4 in September, down from 43.5 and missed expectation of 44.6. That’s the lowest level in 123 months. PMI Services dropped to 52.5, down from 54.8, missed expectation of 54.3, a 9-month low. PMI Composite dropped to 49.1, down from 51.7, a 83-month low.

            Commenting on the flash PMI data, Phil Smith, Principal Economist at IHS Markit said:

            “Another month, another set of gloomy PMI figures for Germany, this time showing the headline Composite Output Index at its lowest since October 2012 and firmly in contraction territory.

            “The economy is limping towards the final quarter of the year and, on its current trajectory, might not see any growth before the end of 2019.

            “The manufacturing numbers are simply awful. All the uncertainty around trade wars, the outlook for the car industry and Brexit are paralyzing order books, with September seeing the worst performance from the sector since the depths of the financial crisis in 2009.

            “With job creation across Germany stalling, the domestic-oriented service sector has lost one of its main pillars of growth. A first fall in services new business for over four-and-a-half years provides evidence that demand across Germany is already starting to deteriorate.”

            Full release here.

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            SNB kept policy rate at -0.75%, global risks more pronounced

              SNB left Sight Deposit rate unchanged at -0.75% as widely expected and changed the name to SNB policy rate . SNB will also “remain active in the foreign exchange market as necessary”. The central bank noted that expansionary monetary policy “remains necessary” against the backdrop of the current price and economic developments”. Franc’s exchange rate is “somewhat stronger” than in March and is “still highly valued”. Current markets “continues to be fragile”.

              Also signs from global economy “remain mixed”. But SNB expect global growth to “remain in line with potential”. Risks are “still to the downside” and are “more pronounced” than at March meeting. “Chief among them are political uncertainty and trade tensions, which could lead to renewed turbulence on the financial markets and a further dampening of economic sentiment.” Swiss growth “gathered momentum” at the beginning of 2019 with “positive” labor market development and “well utilized” production capacity. Momentum remains “favorable” for 1.5% growth in 2019.

              In the new economic projection, SNB raised 2019 inflation forecast to 0.6%, up from 0.3%. 2020 inflation forecast was raised to 0.7%, down from 0.6%. But for 2021, inflation forecast was lowered to 1.1%, down from 1.2%.

              Full statement here.

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              EU Malmstrom: US not shown any big interest in trade negotiation yet

                EU Trade Commissioner Cecilia Malmstrom responded to questions on US Trade Representative’s statement on starting negotiation with Japan, EU and UK. Malmstrom said the EU “see this merely as preparations being made by the U.S. to negotiate with them and others.” And she added “we have not started negotiating yet”.

                Also, Malmstrom said “we are prepared to start the scoping exercise on a limited agreement focus on industrial goods … so far the U.S. has not shown any big interest.”

                Regarding UK, she said “the U.K. cannot negotiate any trade agreement as long as they are a member of the European Union.”

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                Into US session: German DAX and yield down on Daimler, Euro mixed

                  German DAX tumbles today together with 10-year bund yield, in otherwise quiet markets. Mercedes-Benz maker Daimler leads the decline with 3% fall after it cuts 2019 earnings outlook on Sunday. 10-year bund yield hit as low as -0.314, not far from-0.326 record low. Investors elsewhere are on the sidelines though, waiting for Trump-Xi meeting at G20 later in the week. Gold is in consolidation below last week’s high of 1411.82. WTI oil edged higher to 58.14 but it’s losing some upside momentum. US is preparing for more sanctions against Iran but the impact is definitely much lower than a war.

                  In the forex markets, Dollar remains the weakest one for today, followed by Yen and then Sterling. There is no buying in Dollar for sustainable rebound yet. Fed Chair Jerome Powell’s speech on Tuesday might give some clues on how close Fed is to rate cut. But probably he’s doesn’t have a clue himself considering the uncertainty in trade negotiations. Also, Dollar will look into some key economic data, starting from durables and PCE inflation this week, then ISMs and NFP next. On the other hand, Australian Dollar is currently the strongest, followed by Canadian and then New Zealand. Euro is mixed after German Ifo business climate dropped to lowest since November 2014, without serious deterioration.

                  In Europe, currently:

                  • FTSE is down -0.06%.
                  • DAX is down -0.53%.
                  • CAC is down -0.13%.
                  • German 10-year bund yield is down -0.0276 at -0.31.

                  Earlier in Asia:

                  • Nikkei rose 0.13%.
                  • Hong Kong HSI rose 0.14%.
                  • China Shanghai SSE rose 0.21%.
                  • Singapore Strait Times dropped -0.30%.
                  • Japan 10-year JGB yield rose 0.0155 to -0.152.
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                  ECB Smets: Inflation pressures could take more time to build

                    ECB Governing Council member Jan Smets

                    • “It will take somewhat more time to get to the objective than we thought earlier,”
                    • “The level of potential output may have become higher due to structural reforms and… slack may be bigger.”
                    • “It may take more than we thought and inflation pressures could take more time to build,”
                    •  “(But) it is absolutely crucial that we meet our price stability objective and not accept a level below that; the objective is what it is and we are not there yet.”
                    • “We expect exchange rate movements to correspond to fundamentals,”
                    • “It would be too early to conclude that growth is plateauing,”
                    • “Some soft indicators have been a bit weaker but the recovery is on solid footing and we are in a clear, expansionary period.”
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                    France PMI manufacturing revised down to 52.3, slower momentum, higher costs

                      France PMI manufacturing was revised lower to 52.3, down from 53.1, in June. Markit noted slower rates of output and new business growth in France. Though, pace of job creation was resilient. Input cost inflation also reached four-month high.

                      Tim Moore, Associate Director at IHS Markit, which compiles the France Manufacturing PMI® survey, said:

                      “June data revealed that manufacturing growth continued to lose momentum in France, with overall business conditions improving at the slowest pace for almost a year-and-a-half. It seems that the source of the slowdown in production growth has shifted from capacity constraints and supply chain bottlenecks to a general soft patch for new order books. Export sales increased only marginally in June, which contributed to the weakest upturn in total new work since the autumn of 2016.

                      “Most worryingly, the latest slowdown in new business growth was accompanied by a sharp and accelerated rise in manufacturing input costs. Survey respondents widely commented on increased prices for steel and aluminium. Operating margins remained under pressure, although the rate of output price inflation picked up from the eight-month low seen in May.”

                      Full France PMI Manfacturing release.

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                      Japan CPI core hit 1% for first time since 2014, BoJ Wakatabe said “inflation expectations are not anchored”

                        Japan national CPI core accelerated to 1.0% yoy in February, up from 0.9% yoy and met expectation. That’s also the first time it hits 1% level since August 2014. The so called core-core CPI, CPI excluding fresh food and energy, rose to 0.5% yoy.

                        Newly appointed BoJ deputy governor Masazumi Wakatabe said in the parliament that the reading, especially the core-core CPI, showed that Japanese inflation expectation remain weak. He noted that “when compared to the United States or Europe, gains in Japan’s core-core CPI are insufficient.” He added that “what we can learn from this is that people still don’t believe inflation will reach 2 percent.” And, “inflation expectations are not anchored.”

                        And he pledged to “maintain the regime and stance we have in place for monetary policy to meet 2 percent inflation and to strengthen it if possible.”

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                        ECB Praet blamed easter for negative surprise in Eurozone core inflation

                          ECB chief economist Peter Praet said in Geneva today:

                          • “This negative surprise in core inflation is mainly attributable to a decrease in services inflation, which is likely to be related to developments in volatile items, also reflecting the timing of Easter this year.”
                          • “On the basis of current futures prices for oil, inflation is likely to hover around 1.5 percent in the coming months,”

                          Released last week, Eurozone CPI flash slowed to 1.2% yoy in April, down from 1.3%. Core CPI was worse, slowed to 0.7% yoy, down from 1.0% yoy.

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                          UK government said to be asking Queen to suspend parliament

                            Sterling tumbles sharply after BBC reported that Prime Minister Boris Johnson would ask the Queen to suspend parliament, in an attempt to stop blocking of no-deal Brexit. MPs are originally expected to return to work in September. But the new government want to tie it to Queen’s speech on or around October 14. Opposition MPs and Tory rebels will then be left with not enough time to pass any laws that could avert no-deal Brexit on October 31. Additionally, the UK would be in constitutional crisis as furious MPs would push for a vote to bring down the government.

                            GBP/USD’s sharp fall and break of 1.2208 minor support suggests that corrective rebound from 1.2014 has completed earlier than expected at 1.2309. Intraday bias is now back on the downside for retesting this 1.2014 low.

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                            Japan PMI manufacturing finalized at 29-month low, bad news for global trade cycle

                              Japan PMI manufacturing was finalized at 50.3 in January, revised up from 50.0. But that’s still the lowest level in 29 months. And, new export orders decline at sharpest pace since July 2016. Also, business confidence falls for the eighth month running.

                              Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:

                              “Japan Manufacturing PMI data brought bad news for the global trade cycle at the start of 2019, with new export orders falling at the sharpest rate in two-and-a-half years. Anecdotal evidence suggested that sales of goods relating to semi-conductors had particularly suffered, which bodes ill for other Asian exporters. Meanwhile, domestic markets also showed signs of frailty as total demand declined for the first time since September 2016.

                              “With Abe set to levy the consumption tax this year, and Sino-US trade tensions still lurking, domestic weakness in Japan further adds to already existing challenges. Business sentiment continued to drop, with survey data registering an eighth straight month where confidence has slipped. Falling inventories and cut backs to production suggest that manufacturers are bracing for further economic difficulty.”

                              Full release here.

                              Also from Japan, jobless rate dropped to 2.4% in December, below expectation of 2.5%.

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                              German Economy Minister Altmaier: Americans are “still” our allies

                                German Economy Minister Peter Altmaier will meet with US Commerce Secretary Wilbur Ross this week, and “anyone in Washington who is willing to talk.” US steel and aluminum tariffs is the main focus on the trip for Altmaier. He warned that “what’s dangerous about the current situation is that it threatens a spiral of one-sided measures that contradict the idea of free trade.” And, “that would counter what we’ve done for the past 60 years. Altmaier also emphasized that “Americans are still our allies” and he’d want to prevent a trade war.

                                German Finance Minister Olaf Scholz will meet US Treasurer Steven Mnuchin at G20 finance head meeting in Buenos Aires. Scholz told the press that “we must think about how we can ensure growth for the future and of course also how we can keep one of the most important resources for future wealth — the possibility to trade freely — stable.” And, that’s why it would be difficult if protectionism played a bigger role now again.”

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                                Fed Bullard: Weak data probably temporary, premature to contemplate rate cut

                                  St. Louis Fed President James Bullard said overnight that the “spate of weaker data” is “probably mostly temporary”. And, the “notion of a rebound in the second quarter is a good forecast:. Meanwhile, it’s “premature to contemplate a rate cut here”. He added “you do want to watch the data closely”, and “you won’t really know that until you get to the July time frame.” To him, that would be the next time to revisit rate cut.

                                  On yield curve inversion, Bullard said “you would have to get a wider variety of spreads to be inverted — the two-year/10-year in particular”. Also, he noted ” it would have to stay inverted and be meaningfully inverted for awhile, a matter of months or even quarters, before you would say it that it was sending a negative signal that’s in the same sense that it did historically.”

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                                  Into US session: Euro weakest on ECB rumor, Sterling lifted by retail sales

                                    Entering into US session Euro is trading as the weakest one for today. The common currency is weighed down by a Bloomberg report saying that ECB staff have begun studying a revamp of their inflation target. Lowering the “below, but close to, 2%” inflation objective  could embolden policy makers to pursue monetary stimulus for longer. On the other hand, Sterling is boosted strongly higher by much better than expected UK retail sales.

                                    Looking ahead, US data are the major focuses in the upcoming session Initial jobless claims and leading indicator will be featured. But more attention could be on Philadelphia Fed business outlook. It’s be repeated said by Fed officials that consumer spending remained strong. But businesses turned more cautious in investment, due to uncertainties on trade and global slowdown. Fed’s insurance cut, if any, is directed to this uncertainty issue.

                                    In Europe, currently:

                                    • FTSE is down -0.40%.
                                    • DAX is down -0.51%.
                                    • CAC is up 0.12%.
                                    • German 10-year yield is down -0.022 at -0.310.

                                    Earlier in Asia:

                                    • Nikkei dropped -1.97%.
                                    • Hong Kong HSI dropped -0.46%.
                                    • China Shanghai SSE dropped -1.04%.
                                    • Singapore Strait Times dropped -0.11%.
                                    • Japan 10-year JGB yield dropped -0.011 to -0.136.
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                                    Eurozone PMI manufacturing: Deepest downturn for almost six years

                                      Eurozone PMI manufacturing is finalized at 49.3 in Febuary, up from initial estimate of 49.2, but down from January’s 50.5. That’s also the first contraction reading since June 2013. Markit ntoed there were concurrent declines in output and new orders. Also, price pressures continued to soften. Among the countries, Germany PMI manufacturing was finalized at 74-month low at 47.6, Italy at 69-month low at 57.5, Spain at 63-month low at 49.9. Though, France recovered to 3-month high at 51.5.

                                      Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                                      “Euro area manufacturing is in its deepest downturn for almost six years, with forward-looking indicators suggesting risks are tilted further to the downside as we move into spring.

                                      “Most worrying is the downward trend in new orders. Orders are falling at a faster rate than output to a degree not seen for seven years, meaning production is likely to be pared back further in coming months unless demand revives. The new orders to inventory ratio has also fallen to its lowest since 2012, with many companies reporting excess warehouse stocks.

                                      “Spare capacity is consequently developing, which means companies are likely to take a more cautious approach to hiring and investment, and instead focus on cost control.

                                      “The weakening demand environment has meanwhile been accompanied by a marked easing of inflationary pressures to the lowest since late- 2016. Cost inflation has eased, but companies also report a lack of pricing power.

                                      “The downturn is being led by Germany and Italy, but Spain has also now fallen into contraction and only modest expansions are being seen in France, Austria and the Netherlands.

                                      “In addition to widespread trade war worries, often linked to US tariffs, and concerns regarding the outlook for the global economy, companies report that heightened political uncertainty, including Brexit, is hitting demand and driving increased risk aversion.”

                                      Full release here.

                                      Also released, Germany retail sales rose 3.3% mom in January, above expectation of 1.9% yoy. Unemployment dropped -21k in February while unemployment rate was unchanged at 5.0%. From Swiss, retail sales dropped -0.4% yoy in January versus expectation of 0.4% yoy. Swiss PMI manufacturing rose to 55.4, up from 54.3 and beat expectation of 55.4.

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                                      UK retail sles rose 0.4% mom, 4.0% yoy. Ex-auo sales rose 0.2% mom, 4.0% yoy

                                        UK retail sales including auto and fuel rose 0.4% mom, 4.0% yoy in February, much better than expectation of -0.4% mom, 3.3% yoy. Retail sales excluding auto and fuel rose 0.2% mom, 4.0% yoy, also much better than expectation of -0.4% mom, 3.5% yoy.

                                        Reactions from Sterling is muted as focuses are on BoE rate decision and EU summit in Brussels.

                                        Full release here.

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                                        UK to hold election on Dec 13, Brexit uncertainty remains

                                          UK Prime Minister Boris Johnson finally won his bid for early election yesterday by 438-20 votes in the Commons. The bill will now be passed to the House of Lords. LibDems and SNP abstained as their motion for elections on December 9 was rejected. Election will be held on December 12 and early results should be know on the next day. While the chance of no-deal Brexit has further diminished, it’s still unknown if UK will finally leave the EU on the next Brexit deadline on January 31. After the elections, Johnson might have majority to push through the deal, or Labour could take over the government and then renegotiate the deal before another referendum. Or, no party would win conclusively and Brexit deadlock would continue.

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