Wed, May 22, 2019 @ 05:57 GMT

Bundesbank: Downturn forces prevalent in Germany industry, may intensify somewhat

    Germany’s Bundesbank said in the monthly report that the rebound in Q1 was largely due to one-off factors. Underlying momentum in the economy remained weak and growth might not sustain.

    It noted that “these effects, which had largely driven growth after the turn of the year, are expected to lapse or even reverse… Moreover, downturn forces continue to be prevalent in industry, and they may even intensify somewhat.”

    In addition, automakers were facing weaker external demand. Global car sales were expected to contract further in 2019, extending the drop in 2018.

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    ECB de Cos: European financial system remains fragile and fragmented

      ECB Governing Council member Pablo Hernandez de Cos warned that the European financial system remains fragile and fragmented because of “the doom-loop between sovereigns and banks.”

      He added, “investment portfolios are not well diversified and investment opportunities are lost as these may not always be matched with savers’ funds.

      He also emphasized the need to strengthen European regulations. “As European markets become more integrated and technologically complex, this is becoming a more essential element that policy-makers need to address,” he said.

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      EU businesses saw forced technology transfer in China persisted, at double rate

        In a survey the European Union Chamber of Commerce in China, EU companies are generally sceptical on whether China will release open up market assess. European businesses continued to witness “sustained support for state-owned enterprises, higher incidences of unfair technology transfers and the strengthening of the Communist Party’s role in business.” It’s also noted that “one of the more significant shortcomings of China’s reform agenda is that certain high-level promises to improve its business environment for international companies have failed to translate into concrete action.”

        More importantly, European Chamber Vice President Charlotte Roule complained that “our members have reported that compelled technology transfers not only persist, but that they happen at double the rate of two years ago.” And,  “it is unacceptable that this practice continues in a market as mature and innovative as China,”

        Here are some highlights of the survey results:

        • Optimism on growth over the next two years dropped from 62% in 2018 to 45% in 2019.
        • 47% of respondents expect the number of regulatory obstacles to increase in the next five years, and 25% expect the number will stay the same.
        • About half of respondents expect it will take five years to see competitive neutrality realized, while a third never expect it to be realized.
        • 20% of respondents felt compelled to transfer technology as a condition for market access, nearly two thirds of which occurred over the last two years, and a quarter of which were taking place at the time the survey was being conducted.

        Full release here.


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        China: Trump had extravagant expectations for achieving unreasonable interests through extreme pressure

          China hit back on Trump’s claim that there was “very strong deal”, a “good deal” that the formed changed, leading to higher tariffs on Chinese imports. Foreign Ministry spokesman Lu Kang said: “We don’t know what this agreement is the United States is talking about. Perhaps the United States has an agreement they all along had extravagant expectations for, but it’s certainly not a so-called agreement that China agreed to.”

          Lu also criticized that the US tried to “achieve unreasonable interests through extreme pressure”. And, “from the start this wouldn’t work.”He also reiterated “China-U.S. economic and trade consultation can only follow the correct track of mutual respect, equality and mutual benefit for there to be hope of success.”

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          Trump wants an unfair deal with China, but farmers just want level playing field

            Trump revealed that he has been pushing for an unfair trade deal with China, before the negotiations collapsed. In an interview with Fox News Channel aired on Sunday, Trump said he told Xi the agreement “can’t be like a 50/50 deal”. And, ” you are so far ahead from presidents that allowed you to get away. This can’t be a 50/50 deal.”

            He further claimed: “We had a very strong deal. We had a good deal, and at the end, they changed it. And I said, that’s OK, we’re going to tariff their products”. And, “it hurts China so badly.”

            Trump also talked about his subsidy plan to farmers. He noted conversations with farmers as they said “Sir, we don’t want a subsidy. We just want a level playing field. And we also know that we’re being killed by these countries — by many of the countries, not just China.”

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            Japan reported strong 0.5% headline GDP growth, but consumer and business spendings contracted

              Japan’s economy showed surprising resilience even though there were speculations of contractions. Q1 GDP grew 0.5% qoq versus expectations -0.1% qoq. Annualized, GDP grew 2.1%. However, the details are rather weak indeed. Consumer spending dropped -0.1% qoq. Business spending also dropped -0.3% qoq. Exports also had the biggest contraction since 2015. The figures argue that Japan might be entering into a mild recession

              Economy Minister Toshimitsu Motegi, nevertheless, hailed that Japan’s economic fundamentals remain sound, supported by strong domestic demand, which is continuing up trend. Also, employment and income environments have improved while corporate profits are high.

              Though, the government will watch the impact of trade tensions carefully. Exports are already slowing, and output remains weak due to China’s economic slowdown. Some manufacturers are also delaying capital spending, leading to decline in capital expenditure.

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              USTR Lighthizer said to meet Japan Motegi on May 24, dashing to close trade deal

                It’s reported, without confirmation yet, US Trade Representative Robert Lighthizer will travel to Japan on May 24. He will meet Japanese Economy Minister Toshimitsu Motegi to resume trade negotiations. Trump declared auto-imports as threat to national security last week. And Lighthizer will have 180 days to complete the trade agreement. Otherwise, Trump might start imposing tariffs on autos and parts from Japan.

                The claim of auto imports as national security threat to US infuriated Japanese maker Toyota Motor. Toyota said in a statement that Trump’s proclamation “sends a message to Toyota that our investments are not welcomed, and the contributions from each of our employees across America are not valued.”

                Toyota added “our operations and employees contribute significantly to the American way of life, the U.S. economy and are not a national security threat”. Toyota added that “history has shown” that limiting imports is “counterproductive in creating jobs, stimulating the economy and influencing consumer buying habits.” “If import quotas are imposed, the biggest losers will be consumers who will pay more and have fewer vehicle choices.”

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                Australian Dollar rebounds on election results, upside capped by RBA and trade

                  Australian Dollar spikes higher today after the central-right coalition’s surprising victory in the elections over the weekend, securing an outright majority too. The Liberal-Party led coalition is seen by some economists as better manager of the economy. Also, returning to power, the coalition will continue with their promised tax cuts on July 1. That’s seen by some as stimulus equivalent to a 25bps rate cut, without the cut of course.

                  Nevertheless, upside in Aussie is so far limited. There are two major factors that’s clouding the outlook. Firstly, RBA Governor Philip Lowe Philip Lowe will deliver a speech on Tuesday. After surprised jump in unemployment rate in April, there are speculations that Lowe could make use of the occasion to chart out the course for rate cuts in the second half of the year. Secondly, after recent escalations in US-China trade war, there is only one way to go in tensions between the two countries. Relationships will only worsen.

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                  US, Canada and Mexico reached deal to remove steel and aluminum tariffs

                    In a joint announcement, US, Canada and Mexico said a deal was reached to remove Section 232 steel and aluminum tariffs, and related retaliatory tariffs.

                    Under the agreement, aggressive monitoring and a mechanism will be set up to “prevent surges in imports of steel and aluminum.”. US may re-impose the Section 232 tariffs if surges occur. And retaliation by Canada and Mexico would then be “limited to steel and aluminum products” only.

                    USTR full statement here.

                    With the most important hurdle cleared, the three countries could see the USMCA ratified by respective parliament rather quickly.

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                    Trump declares auto imports as national security threats, order negotiations to complete in 180 days

                      In a White House Proclamation published today, Trump declared automobile imports and certain parts “threaten to impair the national security of the United States”. And, the countries’ defense and military superiority “depend on the competitiveness of our automobile industry and the research and development that industry generates.”

                      Thus, Trump directed US Trade Representative Robert Lighthizer to start negotiation process. And, if agreements cannot be reached within 180 days, Trump will determine whether and what further actions to take.

                      In a more detailed release, it’s noted that American-owned automotive R&D and manufacturing are vital to national security. But with increased competitions from imports, American-owned producers’ share of the domestic automobile market has “contracted sharply”, declining from 67% in 1985 to 22% in 2017.

                      Meanwhile, “protected foreign markets, like EU and Japan, “impose significant barriers to automotive imports from the United States, severely disadvantaging American-owned producers and preventing them from developing alternative sources of revenue for R&D in the face of declining domestic sales. ”  American-owned producers’ share of the global automobile market fell from 36% in 1995 to just 12% in 2017

                      And, “defense purchases alone are not sufficient to support . . . R&D in key automotive technologies.” Sales revenue enables R&D expenditures that are necessary for long-term automotive technological superiority, and automotive technological superiority is essential for the national defense.

                      Thus, “domestic conditions of competition must be improved by reducing imports.  American-owned producers must be able to increase R&D expenditures to ensure technological leadership that can meet national defense requirements.”

                      Full releases:

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                      Into US session, Sterling tumbles as Brexit talks collapsed, Yen jumps on trade worries

                        Entering into US session, Sterling is clearly the weakest for today. Selloff in the Pound accelerates after Labour party formally declared collapse of Brexit talks with the government. No one knows what’s next for Brexit, and not even who’ll be leading the government after Prime Minister Theresa May’s Brexit deal is defeated again in June (highly likely). Canadian Dollar followed as the second weakest and then Australian Dollar.

                        In addition to Brexit uncertainties, sentiments are weighed down by China’s hard stance on trade negotiation with the US. No further talk is scheduled for now and China seems uninterested to resume the talks. Tensions between US and China has turned from bad to worse after Trump’s double assault on Huawei. Chinese stocks closed below 2900 handle at 2882.30 today, down -2.48%. USD/CNH resumed recent rally and hit as high as 6.9448. Major European stocks are in red. German 10-year yield is back below -0.1 at -0.0117. DOW future is down -200 pts for the moment. Yen is currently the strongest one for today.

                        In Europe, currently:

                        • FTSE is down -0.55%, despite selloff in Sterling, which suggests FTSE is indeed rather weak.
                        • DAX is down -1.22%.
                        • CAC is down -0.76%.
                        • German 10-year yield is down -0.0265 at -0.117.

                        Earlier in Asia:

                        • Nikkei rose 0.89%.
                        • Hong Kong HSI dropped -1.16%.
                        • China Shanghai SSE dropped -2.48%.
                        • Singapore Strait Times dropped -0.77%.
                        • Japan 10-year JGB yield rose 0.0047 to -0.055.
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                        Pound extends decline as UK opposition Labour declares collapse of Brexit talks with government

                          Sterling extends recent decline after UK opposition leader Jeremy Corbyn formally announced collapse of Brexit negotiation with the government. In a letter to Prime Minister Theresa May, Corbyn said the talks had “gone as far as they can”.

                          And, “it has become clear that, while there are some areas where compromise has been possible, we have been unable to bridge important policy gaps between us…. Even more crucially, the increasing weakness and instability of your government means there cannot be confidence in securing whatever might be agreed between us.”

                          May would now bring the Brexit Withdrawal Agreement back to the Commons in the first week of June. But there is practically no chance of getting it approved. Most importantly, regardless of the outcome of the vote, May agreed hammer out her the time line to step down with 1922 Committee chairman Graham Brady.

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                          Eurozone CPI finalized at 1.7%, core CPI at 1.3%

                            Eurozone CPI was finalized at 1.7% yoy in April, up from 1.4% in March. Core CPI was finalized at 1.3% yoy. The highest contribution to the annual Eurozone inflation rate came from services (0.86%), followed by energy (0.51%), food, alcohol & tobacco (0.29%) and non-energy industrial goods (0.06%).

                            For EU28, CPI was finalized at 1.9% yoy, up from 1.6% in March. The lowest annual rates were registered in Croatia (0.8%), Denmark and Portugal (both 0.9%). The highest annual rates were recorded in Romania (4.4%) and Hungary (3.9%). Compared with March 2019, annual inflation fell in six Member States, remained stable in two and rose in nineteen.

                            Full release here.

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                            Yuan’s decline resumes, Would China allow it to break 7 handle?

                              USD/CNH’s decline resumed overnight and hit as high as 6.9446 so far. For now, the selloff in Yuan looks unstoppable as there is no end in sight in US-China trade war, which just escalated. But Reuters reported, based on unnamed source, that the PBoC won’t allow USD/CNH to break through 7 handle.

                              The source was quoted saying “at present, rest assured they will certainly not let it break 7… Breaking 7 is beneficial to China because it can reduce some of the effects of tariff increases, but the impact on our renminbi confidence is negative and funds will flow out.”

                              We remain doubtful on whether China will intervene this time given that they’re been generally refrained in both currency and stock markets in the past few months. Barring any government intervention, we maintain the view that, based on current momentum, USD/CNH should surge bass 6.9800 and 7.000 handle with relative ease. Next target is 61.8% projection of 6.2354 to 6.9800 from 6.6699 at 7.1306.

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                              BoJ Kuroda: Keeping rates low for extended period means quite a long time

                                BoJ Governor Haruhiko Kuroda reiterated the central bank’s forward guidance that “there’s a good chance current low interest rates will be maintained beyond (the spring of 2020) depending on future developments”. In a speech he emphasized “when we say we will keep rates low for an extended period of time, we mean it will be maintained for quite a long time.”

                                On the economy, Kuroda expects it to continue to expand moderately. Though, “if overseas growth takes longer than expected to pick up, Japanese companies – manufacturers in particular – could become cautious about spending on capital expenditure”.

                                While the economy is facing some risks, Kuroda dismissed that the so called “Modern Monetary Theory” as being a “wrong idea”. He said “when a central bank monetizes debt unlimitedly, it will most certainly trigger hyper-inflation and cause huge damage to the economy.” And, “it’s a common understanding among central banks of advanced economies that they ought not monetize debt.

                                Kuroda’s full speech here.

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                                Impact of new US tariffs controllable, China not keen to resume trade talks

                                  The National Development and Reform Commission of China said it’s the overall impact of the latest 25% tariff on around US 300B in Chinese goods is “controllable”. The government has implemented and will continue to carry forward measures to keep growth in a “reasonable range”. And the measures will target to stabilize areas such as consumption, investment and employment. Also, NDRC noted the government will also keep bettering its business environment and leveling the playing field, to ensure the sustainability of investments.

                                  Separately, Bloomberg reported that China is not very keen in resuming trade negotiations with US, quoting a mysterious blog Taoran Notes (陶然笔记). The blog is believed to be backed by the government and is one of the few voices on China’s negotiations strategy in a censored internet world in the country. The blog piece noted: “We can’t see the U.S. has any substantial sincerity in pushing forward the talks. Rather, it is expanding extreme pressure… If the U.S. ignores the will of the Chinese people, then it probably won’t get an effective response from the Chinese side,” it added.

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                                  BusinessNZ Manufacturing PMI rose to 53.0, growth pickup still in questions

                                    New Zealand BusinessNZ Manufacturing PMI rose to 53.0 in April, up from 52.0. Looking at the details, production dropped -0.1 to 50.8, employment dropped -0.4 to 51.6, new orders dropped -0.3 to 52.4, finished stocks dropped to 0.8 to 51.9. On the other hand, deliveries jumped sharply by 3.6 to 56.3.

                                    BusinessNZ’s executive director for manufacturing Catherine Beard said that while the improvement in activity for April was welcome, the underlying trend still remains a concern. She noted “Although this indicates the sector is still in expansion mode, the unadjusted series has tended to trend down since late 2017.  If this trend continues, it will eventually have negative consequences for the main published result”.

                                    BNZ Senior Economist, Doug Steel said that “the headline PMI looks reasonable but some of the details have cooled off including new orders. It raises questions for those looking for a strong growth pickup later in 2019”.

                                    Full release here.

                                    Also from New Zealand, PPI input dropped -0.9% qoq in Q1. PPI output dropped -0.5% qoq.

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                                    Brainard: Fed might adopt opportunistic reflation strategy on monetary policy

                                      Fed Lael Brainard said the central might adopt a so called “opportunistic reflation” strategy to lift underlying inflation to 2% and underscore its commitment to the inflation mandate. Such a strategy would accept a slight overshoot the 2% inflation target for a while, even if it’s driven by import prices.

                                      She said “suppose that an unexpected increase in core import price inflation drove overall inflation modestly above 2% for a couple of years… The Federal Reserve could use that opportunity to communicate that a mild overshooting of inflation is consistent with our goals and to align policy with that statement.”

                                      On the current outlook, she noted “the emerging contours of today’s new normal are defined by low sensitivity of inflation to changes in labor market slack, a low long-term neutral rate of interest, and low underlying trend inflation.”

                                      Her full speech here.

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                                      Fed Kashkari: We misread faulty labor market signals, but cutting rates won’t help inflation expectations

                                        Minneapolis Fed President Neel Kashkari said in a speech in Santa Barbara that Fed could have misread faulty signals from the labor markets. And current situation suggests monetary policy was too tight in this recovery. Fed should be patient and allow inflation to overshoot target. Yet, he doesn’t see cutting rates offer any help. Overall, he advocates a wait-and-see with patience approach.

                                        Kashkari said Fed could have “misread” the labor market and feared that “if we hit maximum employment, inflation might suddenly accelerate”. Thus, “we would then have to raise rates quickly to contain it”. However, the “headline unemployment rate has been giving a faulty signal”. Considering inflation “somewhat too low” and job market “still showing capacity”, he added, “the only reasonable conclusion I can draw is that monetary policy has been too tight in this recovery”.

                                        On monetary, policy, Kashkari said “for our current framework to be effective and credible, we must walk the walk and actually allow inflation to climb modestly above 2 percent in order to demonstrate that we are serious about symmetry”. However, he also told reporters that “I am not sure that cutting rates would do much to inflation expectations.”

                                        Kashkari’s full speech here.

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                                        US update: Stocks cheer Walmart, Dollar & yields follow, EURUSD heavy

                                          US stocks and treasury yields stage a strong rebound today, thanks to earnings surprises and solid economic data. In particular, investors cheered Walmart, which reported best Q1 same-store sales growth in nine-years. At the time of writing, DOW, S&P 500 and NASDAQ are all trading up more than 1%. 10-year yield is also back above 2.4 handle at 2.402.

                                          The positive developments in the US pull Dollar broadly higher.

                                          Technically, EUR/USD is set to take on 1.1173 minor support. Break will suggests that consolidation from 1.1111 has completed at 1.1263. retest of 1.1111 should be seen next.

                                          USD/JPY is eyeing 110.04 minor resistance. Break will indicate short term bottoming at 109.02 and bring stronger rebound back to 55 day EMA at 110.95.

                                          The strong rebound in S&P 500 puts it firmly back above 55 day EMA. That dampens our bearish view that rise fro 2346.58 has completed at 2954.13. We’ll see from if SPX could extend the rebound to retest 2954.13 high next. Even though we don’t expect a break there. Confidence is just average.

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