Sat, Aug 24, 2019 @ 18:49 GMT

Eurozone PMIs: Dynamics little changed, indicate 0.1-0.2% GDP growth in Q3

    Eurozone PMI Manufacturing rose to 47.0 in August, up from 46.5 and beat expectation of 46.2. PMI |Services rose to 53.4, up from 53.2 and beat expectation of 53.0. PMI Composite rose to 51.8, up fro 51.5.

    Commenting on the flash PMI data, Andrew Harker, Associate Director at IHS Markit said:

    “The dynamics of the eurozone economy were little changed in August, with solid growth in services continuing to hold the wider economy’s head above water despite ongoing manufacturing decline. While the rate of overall expansion ticked up, we’re still looking at GDP only rising by between 0.1% and 0.2%, based on the PMI data for the third quarter so far.

    “The lack of a quick rebound from the recent economic slowdown has impacted firms’ confidence, with sentiment the lowest in over six years. It appears that companies are braced for a sustained period of weakness, and as a result are showing greater reluctance to take on additional staff.

    “France was a relative bright spot in August, seeing manufacturing return to growth alongside a further solid expansion of services activity. The same can’t be said for Germany, however, where new orders fell to the greatest extent in over six years and firms were pessimistic around the future path for activity. The risk remains, therefore, that the euro area’s largest economy will have fallen into technical recession in the third quarter.”

    Full release here.

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    German PMIs: Two-speed economy, threat of GDP contraction in Q3 remains

      Germany PMI Manufacturing rose slightly to 43.6 in August, up from 43.2 and beat expectation of 43.0. PMI Services dropped to 54.4, down from 54.5, but beat expectation of 54.0. It’s nevertheless a 7-month low. PMI Composite improved to 51.4, up from 50.9.

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

      “Germany remains a two-speed economy, with ongoing growth of services just about compensating for the sustained weakness in manufacturing. Although improving slightly, the survey’s output data haven’t changed enough to dispel the threat of another slight contraction in GDP in the third quarter, especially given the deterioration in the forward-looking indicators.

      “The headline services business activity index has come down a touch but remains indicative of a robust pace of output growth in that sector. However, cracks are starting to appear elsewhere in the services data, with inflows of new work barely rising in August and business confidence at its lowest for almost five years. Manufacturing expectations have also taken a turn for the worse, and are now at a record low.

      “The sustained weakness in demand continues to filter through to the jobs market. Employment growth has now almost stalled, reflecting falling capacity pressures and lower business confidence generally.”

      Full release here.

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      France PMI composite rose to 52.7, outperformance likely to continue in Q3

        France PMI Manufacturing rose to 51.0 in August, up from 49.7 and beat expectation of 49.5, back in expansionary region. PMI Services rose to 53.3, up from 52.6 and beat expectation of 52.5. It’s also a 9-month high. PMI Composite Rose to 52.7, up from 51.9.

        Commenting on the Flash PMI data, Eliot Kerr, Economist at IHS Markit said:

        “French private sector businesses posted another solid increase in output during August. Service sector expansion continued to surpass manufacturing growth, reflecting the broader trend seen across the eurozone in recent months.

        “However, in contrast to its peers, economic growth in France has remained solid and the latest set of PMI figures only add weight to the argument that this outperformance is likely to continue in the third quarter.”

        Full release here.

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        Australia PMI shift back into contraction, not immune to global risks

          In August, Australia CBA PMI Manufacturing dropped from 51.6 to 51.3. CBA PMI Services dropped from 52.3 to 49.2. PMI Output dropped from 52.1 to 49.5. The set of data signalled the first reduction in output since March, centering on the service sector. CBA noted that “currency weakness led to a faster rise in manufacturing input prices, but services costs increased at a weaker pace, as did output prices across both monitored sectors.”

          Commenting on the Commonwealth Bank Flash PMI data, CBA Chief Economist, Michael Blythe said:

          “A persistent concern is that the fallout from the US-China trade war will dent global capex and consumer spending as cautious businesses and households retreat to the sidelines. The shift back into contractionary territory in the CBA Flash PMI reading for August indicates that Australia is not immune to these global risks. The concerns about weak output readings are tempered a little by positive indications on the labour market and future business expectations.”

          “The challenges faced by the RBA in their attempts to return inflation to the 2-3% target band are also highlighted in the survey. The lower Aussie dollar is putting upward pressure on input prices. But the competitive trading environment is limiting the flow through to output prices.”

          Full release here.

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          Japan PMIs: Plenty of promise, fears allayed for now

            Japan PMI Manufacturing rose 0.1 to 49.5 in August. PMI Services rose 1.6 to 53.4. PMI Composite rose 1.1 to 51.7.

            Joe Hayes, Economists at IHS Markit noted: “Preliminary August PMI data give plenty of promise that the solid growth trend seen in the GDP outturns so far this year could indeed stretch into the third quarter, providing a timely boost before the fourth quarter, which is likely to be adversely impacted by the consequences of sales tax hike”.

            “The driving force behind this remains the service sector, which is lifted by resilient demand within the domestic economy. Flash data showed services activity growing at the fastest rate in almost two years in August, allaying fears, at least for the time being, that strong external headwinds being felt within manufacturing could spread to other parts of the economy.”

            Full release here.

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            Japan Motegi: Gaps to be filled in US trade talks

              Japanese Economy Minister Toshimitsu Motegi met US Trade Representative Robert Lighthizer on trade in Washington yesterday. After the meeting, he noted that talks have been “narrowed down quite a bit”, discussions are “deepening”. But there are still “gaps” to be filled.

              Motegi said: “Issues that need to be sorted out in ministerial-level talks have been narrowed down quite a bit… We agreed to speed up discussions and work on the remaining issues for an early achievement of results… Discussions are undoubtedly deepening. But there are still gaps that need to be filled.”

              Discussions will continue today after working level talks between the two sides. The teams are aiming to lay the groundwork for a possible meeting between Japanese Prime Minister Shinzo Abe and US President Donald Trump, to be held on the sidelines of this weekend’s G7 summit in France.

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              FOMC minutes reaffirmed rate cut as mid-cycle adjustment

                The Minutes of July FOMC meeting showed that most members viewed the -25bps rate cut as “mid-cycle adjustment”, in response to the evolution of the economic outlook. That was in-line with Fed Chair Jerome Powell’s post meeting message that it’s not the start of a lengthy easing cycle. For any future adjustments, FOMC would “assess realized and expected economic conditions”, taking into account a wide range of information, including labor market, inflation, financial and international developments.

                For those who voted for the cut, they sought to be “better position” the policy to counter effects from weak global growth and trade policy uncertainty, “insure” from downside risks and “promote” faster return of inflation to target. For the two dissenters, they noted larger positive economic data and anticipated “continued strong labor markets and solid growth in activity”.

                Full minutes here.


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                US CBO expects tariffs to lower GDP growth by 0.3% by 2020

                  US Congressional Budget Office projected the economy to grow 2.3% in 2019, unchanged from January forecasts. Growth is expected to gradually slow from 2020 to 2023, averaging 1.8% per year.

                  The slowdown ahead would be because growth of consumer spending subsides; as growth in purchases by federal, state, and local governments ebbs; and as trade policies weigh on economic activity, particularly business investment.

                  Additionally, “higher trade barriers—in particular, increases in tariffs—implemented by the United States and other countries since January 2018 are expected to make U.S. GDP about 0.3 percent smaller than it would have been otherwise by 2020.”

                  CBO further explained that “Tariffs reduce domestic GDP mostly by raising domestic prices, thereby reducing the purchasing power of consumers and increasing the cost of business investment. Tariffs also affect business investment by increasing businesses’ uncertainty about future barriers to trade and thus their perceptions of risks associated with investment in the United States and abroad.”

                  Full release here.

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                  US oil inventory dropped -2.7m barrels, WTI range bound

                    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by -2.7m barrels in the week ending August 16, larger than expectation of -1.4m barrels. At 437.8m barrels, U.S. crude oil inventories are about 2% above the five year average for this time of year.

                    WTI staying in sideway pattern from 50.64. After multiple attempts, WTI is still unable to sustain above 55 day EMA so far. Further decline remains in favor. Sustained break of 50.64 could pave the way back to 42.05 low. Nevertheless, sustained trading above the EMA will put focus back to 60.93 resistance.

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                    Canadian Dollar rebounds as headline CPI rose 0.5% mom, 2.0% yoy

                      Canadian Dollar rebounds notably after stronger than expected inflation data. CPI rose 0.5% mom in July versus expectation of 0.2% mom. Annually, CPI was unchanged at 2.0% yoy, above expectation of 1.7% yoy. CPI core-common rose to 1.9% yoy, up from 1.8% yoy and beat expectation of 1.8% yoy. CPI core-median slowed to 2.1% yoy, down from 2.2% yoy, matched expectations. CPI core-trim was unchanged at 2.1% yoy, above expectation of 2.0% yoy.

                      Full release here.

                      USD/CAD dips notably after the release. But it’s, after all, staying in consolidation from 1.3345. And, as long as 1.317 minor support holds, further rally through 1.3345 resistance is expected at a later stage.

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                      Kashkari: Fed should use forward guidance now to avoid recession

                        In an op-ed article published in the Financial Times, Minneapolis Fed President Neel Kashkari said Fed should use forward guidance now to stimulate the economy. He explained that “forward guidance can also provide stimulus by signalling that overnight rates will be low in the future.” That is, Fed can “influence long-term rates by giving guidance about the future path of their short-term equivalents. The firmer the Fed’s commitment, the more influence it can have.”

                        Kashkari added that “forward guidance should be used now, before the federal funds rate returns to zero.” He argued that “if a central bank cuts rates to zero in response to a downturn and then announces that it plans to keep rates low, that can actually be perceived as a sign of weakness rather than strength.” Instead, “it would be better to deploy guidance now in an effort to avoid hitting zero.

                        Regarding the guidance, he said “at a minimum, we should commit to not raising rates again until core inflation returns to our 2 per cent target on a sustained basis.”

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                        Germany rejects UK Johnson’s call to reopen Brexit negotiation

                          German lawmaker Norbert Röttgen, an ally of Chancellor Angela Merkel, who heads the German parliament’s foreign affairs committee, said UK Prime Minister Boris Johnson’s visit won’t change Germany’s stance on Brexit. He criticized that Johnson’s four-page letter to European Council was “not a serious offer”.

                          Further, he said “the British prime minister starts his letter by saying he is personally committed to finding an agreement, but there is no sign in the rest of the letter that this is actually the case.” And, “if Johnson really wanted to achieve something on his visits to Paris and Berlin, he would have been well advised against writing this letter.”

                          Germany’s BDI industry association said Johnson’s call to reopen Brexit negotiation was irresponsible. And German firms had no choice but to prepare for a hard Brexit on October 31. The group also backed the government on the Brexit stance. Managing Director Joachim Lang said in a statement: “German businesses support the German government and the European Commission in standing by the negotiated treaty. Brussels and London must set the right course to avoid the threat of a hard Brexit.”

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                          Italy President Mattarella to push for coalition of 5-Star and Democratic Party

                            Italian President Sergio Mattarella will start his process to form a new coalition government, after Prime Minister Giuseppe Conte formally resigned yesterday. Mattarella is believed to be pushing for a quick decision by the 5-Star Movement and Democratic Party on whether they can work together.

                            Mattarella will start consultations with minor groups at 1400GMT today, followed by all main parties tomorrow and a conclusion with 5-STar at 1500GMT. Failing to form a new coalition, he would have to dissolve parliament, 3-1/2 years ahead of schedule, to allow for elections in late October or early November.

                            The turmoil League party chief Matteo Salvini declared on August 8 that his alliance with the 5-Star Movement was dead and called for elections. Yet, at the end of yesterday’s parliamentary debate the League withdrew the no-confidence vote in the government that it had tabled.

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                            RBNZ Hawkesby: It would be better to do too much too early

                              RBNZ Assistant Governor Christian Hawkesby explained the decision of the surprised -50bps rate cut in speech today. He said “we judged that it would be better to do too much too early, than do too little too late”. The alternative approach of cutting by -25bps “risked inflation remaining stubbornly below target, with little room to lift inflation expectations later with conventional tools in the face of a downside shock.”

                              On the other hand, “a more decisive action now gave inflation the best chance to lift earlier, reducing the probability that unconventional tools would be needed in the response to any future adverse shock.”

                              Hawkesby also noted that neutral rate is currently in a “wide range centred on 3.25 percent, down from around 5 percent before the GFC”. And, “all else equal, a lower neutral rate implies that we need to set our Official Cash Rate lower to deliver the same amount of monetary stimulus to the economy.”

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                              RBA Lowe worried about “time for Team West to muscle up against China” idea

                                RBA Philip Lowe was reported saying in a private business event this week that trade war between US and China was the single biggest threat to the global economy. According to The Sydney Morning Herald and The Age, Lowe said “I do not have a clear idea of what strategy the US has. (Some in the US) say that it is time for Team West to muscle up against China and that is very worrying.”

                                In August RBA minutes released yesterday, it’s noted that “uncertainty around trade policy had already had a negative effect on investment in many economies”. And, Board “members observed that the escalation of the trade and technology disputes had increased the downside risks to the global growth outlook, although the central forecast was still for reasonable growth.”

                                Australian Prime Minister Scott Morrison, on the other hand, was rather calm on the situation. He said yesterday that “we’re going to have to get used to this for a while, this level of tension.” And, “we’ve just got to accommodate that, we’ve got to absorb it, we’ve got to see the opportunities in it, of which there are many.”

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                                Trump will take China on whether it’s good or bad short term

                                  US President Donald Trump continued his hardline stance on China with strongly worded comments. He told reporters in the White House that “Somebody had to take China on… This is something that had to be done. The only difference is I am doing it.”

                                  Trump repeated that “China has been ripping this country off for 25 years”. He added that whether his trade policy is “good or bad short term is irrelevant”, as “I am doing this whether this is good or bad.” Instead, “long term, it’s imperative somebody does this.”

                                  There were growing concerns that trade war with China could trigger a possible US recessions. But Trump emphasized “we’re very far from a recession”. Though, he admitted that “we really need a Fed rate cut” as there cannot be a large “disparity” between rates in the US and elsewhere in the developed world. “We have to at least keep up to an extent.”

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                                  Fed Daly: Last rate cut an appropriate recalibration of policy for headwinds, not impending downturn

                                    In a post, San Francisco Fed Mary Daly said the US is not headed towards a recessions right not. She saw “solid domestic momentum that points to a continued economic expansion:. Also, “the labor market is strong, consumer confidence is high, and consumer spending is healthy.”

                                    But “considerable headwinds”, including global slowdown and trade uncertainties, contributed to fear that a “downturn is right around the corner”. Hence, she’s closely look at whether “fear of recession becomes a self-fulfilling prophecy”.

                                    Daly added that recent rate cut was “appropriate recalibration” of policy in response to the headwinds. And, her support was “not because I see an impending downturn on the horizon.”

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                                    Italian PM Conte announce resignation, accused League leader Salvini

                                      Italian Prime Minister Giuseppe Conte told the parliament that he would hand in his resignation to President Sergio Mattarella later today. Mattarella will then decide whether to put together a new coalition or dissolve the parliament and call early elections.

                                      Conte also accused League leader Matteo Salvini for dragging down the coalition. He said Salvini has shown “he is following his own interests and those of his party”. He also said Salvini’s decisions “pose serious risks for the country”.

                                      Salvini has demanded early elections, 3-1/2 years ahead of schedule, confident his surging popularity will sweep him into power as prime minister and push the coalition partner 5-Star Movement into opposition.

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                                      US Pompeo: Trump unambiguous about Huawei, no mixed message

                                        US Secretary of State Mike Pompeo emphasized that President Donald Trump has been “unambiguous” regarding Huawei. And, “I don’t think there’s a mixed message at all”. Pompeo emphasized that “the threat of having Chinese telecoms systems inside of American networks or inside of networks around the world presents an enormous risk, a national security risk.”

                                        The comments came after Commerce Department extended a 90-day reprieve that permits Huawei to buy components from American companies to supply existing customers. Yet, Trump indicated over the weekend that “We’re actually open not to doing business with them”, referring to Huawei.

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                                        EU: UK Johnson’s letter does not provide realistic alternatives to Irish backstop

                                          In response to UK Prime Minister Boris Johnson’s letter, European Council President Donald Tusk reiterated that the backstop is an “insurance” to avoid a hard Irish border” until an alternative is found. . And, “those against the backstop and not proposing realistic alternatives in fact support reestablishing a border. Even if they do not admit it.”

                                          European Commission spokesperson Natasha Bertaud also said Johnson’s letter “does not provide a legal operational solution to prevent the return of a hard border on the island of Ireland”. She reiterated that the backstop is the “only means identified so far by both parties to honor this commitment” of avoiding hard Irish border.

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