Tue, Oct 26, 2021 @ 05:25 GMT

UK PMI construction dropped to 49.5, Brexit anxiety intensified

    UK PMI construction dropped to 49.5 in February, down from 50.6, missed expectation of 50.5. That’s also the first contraction in eleven months. Markit noted there was slight fall in construction output, led by commercial and civil engineering work. And, housing was the only category to register growth. And there was sharp deterioration in supplier performance.

    Tim Moore, Economics Associate Director at IHS Markit, which compiles the survey:

    “The UK construction sector moved into decline during February as Brexit anxiety intensified and clients opted to delay decision-making on building projects. Risk aversion in the commercial sub-category has exerted a downward influence on workloads throughout the year so far. This reflects softer business spending on fixed assets such as industrial units, offices and retail space. The fall in commercial work therefore hints at a further slide in domestic business investment during the first quarter, continuing the declines seen in 2018.

    “There were also reports that the more fragile housing market confidence has begun to act as a brake on residential work, which adds to signs that house building has lost momentum since the end of last year. This leaves the construction sector increasingly reliant on large-scale infrastructure projects for growth over the year ahead.

    “Construction companies pared back their purchasing activity in response to subdued demand in February, but delivery delays for inputs were among the highest seen over the past four years. Survey respondents noted that stockpiling efforts by the UK manufacturing sector had an adverse impact on transport availability and supplier capacity across the construction supply chain.

    “On a more positive note, input price inflation held close to January’s two-and-a-half year low. The slowdown in cost pressures from the peaks seen in the first half of 2018 provides a signal that the worst phase has passed for supplier price hikes related to sterling depreciation.”

    Full release here.

    NIESR expects UK GDP growth to pick up to 0.7% in Aug and 0.8% in Sep

      Despite weaker than expected 0.1% monthly GDP growth in UK, NIESR expects growth to pic up in August to 0.7%, followed by 0.8% in September. That would lead to overall 1.6% growth in Q3. It added that however, there are “notable downside risks” to a consumption led recovery, including the re-emergence of Covid-19 and the response of household and business spending to the end of the furlough scheme and the planned reduction in Universal Credit.

      “GDP growth of under 0.1 per cent in July would have been negative had it not been for the reopening of an oil field previously closed for temporary maintenance. There was also relatively good news for the arts and recreation sector, thanks to the lifting of restrictions on 19th July, but clearly the boost to GDP from reopening had slowed by the summer. The Delta variant and supply issues – some but not all of which are linked to Covid-19 – have also provided headwinds to growth in the third quarter but there remains potential for ‘catch-up’ in transport, hospitality and arts, which remained between 7 and 19 per cent below their February 2020 levels.” Rory Macqueen Principal Economist – Macroeconomic Modelling and Forecasting.

      Full release here.

      Into US session: Risk sentiments stablized, Euro resilient despite Italy

        Risk sentiments stabilized today. The sharp decline in US stocks yesterday triggered initial selling in Asia. But major Asia indices quickly found footing and reversed. Positive mood carried through to European markets. As a result, Yen and Swiss Franc turn softer, and Dollar follows. New Zealand and Australian Dollar rebound.

        Euro is so far very resilient even though the European Commission finally declared that disciplinary action is warranted against Italy. It was lifted by rumors that Italian Salvini could compromise on the budget, but it’s then quickly denied. The Pound is mixed as UK PM Theresa May is set to meet European Commission President Jean-Claude Juncker on post Brexit political relationship.

        For the week, Swiss Franc remains the strongest one, followed by Dollar and then Sterling. Australia, Canadian and New Zealand Dollar are the weakest.

        In Europe, at the time of writing:

        • FTSE is up 0.83%
        • DAX is up 0.72%
        • CAC is up 0.35%
        • German 10-year yield up 0.016 at 0.371, still way off 0.4
        • Italian 10-year yield is down -0.099 at 3.519. German-Italian spread is around 315.

        Earlier in Asia:

        • Nikkei closed down -0.35% at 21507.54, but
        • Hong Kong HSI rose 0.51% to 25971.47
        • China Shanghai SSE rose 0.21% to 2651.51
        • Singapore Strait Times rose 0.39% to 3038.65
        • Japan 10-year JGB yield dropped -0.0094 to 0.094, back below 0.1%

        US personal income dropped -4.2%, spending rose 8.2%

          US personal income dropped -4.2% mom, or USD 874.2B in May, better than expectation of -6.0% mom. Spending, on the other hand, rose 8.2% or USD 994.5B, below expectation of 9.0% mom. Headline PCE price index slowed to 0.5% yoy, down from 0.6% yoy. Core PCE price index was unchanged at 1.0% yoy.

          Full release here.

          Yen rises sharply in early European session. An update on EURJPY and GBPCHF short

            Yen surges broadly in the later part of Asian session, early European session. The selloff in Chinese stocks in the final two hours could be a factor driving risk aversion. The Shanghai SSE index closed down -1.27% at 2744.07. European indices open mixed with German DAX slightly down by -0.2% at the time of writing.

            Despite the strong rebound from 128.49, EUR/JPY was limited below 129.52 minor resistance and drops sharply. 128.49 is back into focus and break will resume whole decline from 131.97. Based on the position strategy as our weekly report, we sold EUR/JPY at 128.60 at open this week. We’ll hold on to the short position, with stop at 129.60, slightly above 129.52 minor resistance. 127.13 is the first target but we’d expect at least a test on 124.61 low if things turns out as we expected.

            Also, we’re holding on GBP/CHF short, sold at 1.2971. The development so far is in line with out expectation. We’ll lower the stop to break even at 1.2971. 61.8% projection of 1.3854 to 1.3049 from 1.3265 at 1.2768 as first target. And there is prospect of extending to 100% projection at 1.2460 in medium term.

            Australia employment dropped -30.6k, but not clear JobKeeper impact

              Australia employment dropped -30.6k in April worse than expectation of 15k rise. Full-time jobs rose 33.8k while part-time jobs dropped -64.4k. Total employment was 45.9k, or 0.4%, higher than March 2020 level. But unemployment rate dropped to 5.5%, down from 5.7%, better than expectation of 5.5%. Participation rate dropped -0.3% to 66.0%.

              “We have not seen large changes in the indicators that would suggest a clear JobKeeper impact, such as an increase in people working reduced or zero hours for economic reasons or because they were leaving their job. We also haven’t seen large net flows out of employment across many population groups,” Bjorn Jarvis, head of labour statistics at the ABS said.

              Full release here.

              BoJ Kuroda: Most important policy now is to avoid unemployment and corporate failures

                BoJ Governor Haruhiko Kuroda said at a WEF virtual meeting “”the resurgence of COVID-19 and the state of emergency declaration by the government just a few weeks ago would tend to dampen economic recovery” of Japan. “In this kind of situation, the most important policy is to … avoid unemployment and corporate failures and so forth,” he added.

                The government has “already implemented huge amount of fiscal support”. At the same time, BoJ provided liquidity to the banking sector and tried to “stabilize the financial markets”. Both policies have been “fairly successful in stabilizing the markets, avoiding corporate failures, maintaining employment”.

                But, “we have to overcome, contain this pandemic”, through vaccination and creation of immunity. That is the “challenge still faced by Japan”.

                ECB Visco : Will asset hot to adjust policy instruments in the coming weeks

                  ECB Governing Council member Ignazio Visco said the central bank “will need to adopt further expansionary measures if the euro zone economy does not pick up.” And, “in the coming weeks the ECB will continue to assess how to adjust the instruments at its disposal”. This is in-line with market expectations that ECB is ready ramp up monetary stimulus either on July 25 or later in September.

                  Being Governor of Bank of Italy too, Visco expected the Italian economy to grow just 0.1% this year, marginally below the government’s 0.2% official forecast. Though, he also expected growth to pickup to just slightly below 1% in 2020 and 2021. He urged the government to adopt “prudent” budget deficit targets for the coming years. But he also welcomed recent fall in Italian yields, after EU averted the Excessive Deficit Procedure on the country.

                  DOW surges over 3.5% on coronavirus vaccine optimism, invalidates H&S top

                    DOW gaps up on coronavirus vaccine optimism and is currently trading up more than 3.5%, or 800 pts. The development invalidates our bearish view, with head and shoulder neck line and 55 H EMA taken out decisively. Rebound from 18213.65 is likely still in progress. Further rise should be seen back to 24764.77 for the near term. Next focus is 61.8% retracement of 29568.57 to 18213.65 at 25230.99.

                    NZD/USD extends corrective fall from 0.7463, NZD/JPY following

                      New Zealand Dollar is leading other major currencies lower today. NZD/USD’s break of 0.7098 support indicates resumption of the decline from 0.7463. The firm break of 55 day EMA, and bearish divergence condition in daily MACD, suggest that 0.7463 is a medium term top. Fall from there is correcting whole up trend form 0.5469.

                      Near term outlook in NZD/USD will now stays bearish as long as 0.7268 resistance holds. We’re tentatively looking at 38.2% retracement of 0.5469 to 0.7463 at 0.6701 as target of the corrective, which is inside support zone of 0.6589/0.6797.

                      NZD/JPY also follows lower and it’s now eyeing 76.95 support. Break there will extend the correction from 79.19 lower. Nevertheless, outlook in NZD/JPY is relatively more bullish than NZD/USD. strong support could be seen from 55 day EMA (now at 76.38) to bring rebound and keep the up trend intact. However, sustained break of the EMA will argue that it’s already in correction to whole up trend from 59.49, which could bring deeper fall to 71.66 cluster support.

                      Fed Kashkari: Worst is yet to come on job front

                        Minneapolis Fed President Neel Kashkari said on Sunday, economic recovery will likely to be “slow” and “gradual”. “The virus continues to spread. And when we look around the world, there is evidence that when countries relax their economic controls, the virus tends to flare back up again,” he said. “The longer this goes on, unfortunately, the more gradual the recovery is likely to be.”

                        A robust recovery “would require a breakthrough in vaccines, a breakthrough in widespread testing, a breakthrough in therapies to give all of us confidence that it is safe to go back.” He expected the coronavirus pandemic to go on in phases for the next year or two.

                        He also warned, “the worst is yet to come on the job front, unfortunately,” referring to the historic job data released last week. “It’s really around 23, 24% of people who are out of work today,” he added. “Congress is going to need to continue to give assistance to workers who’ve lost their jobs,” he said.

                        Low-level US-China trade talks ended with no result

                          The low-level trade talks between delegation led by US Treasury Under Secretary David Malpass and Chinese Commerce Vice Minister Wang Shouwen ended without any progress.

                          White House spokesperson Lindsay Walters said in an email statement that “we concluded two days of discussions with counterparts from China and exchanged views on how to achieve fairness, balance, and reciprocity in the economic relationship.”

                          The Chinese Ministry of Commerce said in a brief statement that both sides conducted “constructive and frank exchanges” and “will maintain contact for the next step.”

                          A fresh round of tariffs on USD 16B of goods of both sides kicked in yesterday and trade war between US and China continued.

                          GBP/USD accelerates up as 10-yr Gilt yield approaches 0.5 psychological level

                            Sterling’s rally gains strong upside momentum again today, with the support of rise in UK treasury yields. 10-year Gilt yield is currently up 0.016% at 0.48%. It’s now pressing an important psychological zone around 0.50%., which was the floor before the pandemic.

                            4 hour MACD in GBP/USD suggests that the rally in accelerating. Focus is now on 61.8% projection of 1.1409 to 1.3482 from 1.2675 at 1.3956. Decisive break there will bring further rally to 1.4376 (2018 high). But to do that, we’d probably need 10-year Gilt yield to break through 0.50% decisively. We’ll keep an eye on both developments.

                            ECB asks banks not to pay dividends till end of 2020

                              ECB announced today to extend “the end of the period in which we recommend that banks should not pay dividends or buy back shares from October 2020 until the end of the year.”

                              Andrea Enria, Chair of the Supervisory Board of the ECB, said in a blog post: “The current macroeconomic shock is of unprecedented magnitude and it is still highly uncertain how it will develop in the future, including its eventual impact on the banking sector…. the economic outlook remains contingent on too many uncertain variables, including a possible strong resurgence of infections accompanied by more stringent containment measures.”

                              “In the extraordinary circumstances created by the pandemic, all our supervisory measures and actions are and will continue to be aimed at ensuring that the banking sector can remain resilient and support the economic recovery with an adequate supply of credit.”

                              Full post here.

                              Fed Kashkari: Economy in grinding recovery without further fiscal stimulus

                                Minneapolis Fed President Neel Kashkari warned that without further stimulus, “we will end up having a much slower – what I would call a grinding – recovery”.

                                “If you can’t pay your bills, more quantitative easing is a poor substitute for extended unemployment insurance,” he added said. “Only Congress has the ability to get that direct fiscal aid to the small businesses and to the Americans who have lost their jobs and who are facing real hardship.”

                                Eurozone PMI manufacturing: Business optimism dampened by trade war, tariffs and Brexit

                                  Eurozone PMI manufacturing was finalized at 54.6 in August, unrevised. It’s -0.5 lower than July’s final reading at 55.1. Among the countries, the Netherlands scored 59.1 and hit a 2-month high. Ireland record 57.5 and hit a 7-month high. German PMI manufacturing was revised down by -0.2 to 55.9 and hit a 2-month low. France PMI manufacturing was revised down by -0.2 to 53.5 but still hit a 3 month high. Italy PMI manufacturing dropped to 50.1, down by -1.4 and hit 24-month low.

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

                                  “Eurozone factories reported a further solid production gain in August, but prospects dimmed further as growth of new orders hit a two-year low and worries about the outlook deepened.

                                  “The slowdown in demand compared to the surging pace of expansion seen earlier in the year is being driven primarily by export orders rising at the slowest rate for nearly two years. Some of the slowdown in exports can be attributed to the appreciation of the euro since earlier in the year, but companies are also reporting signs of demand cooling and risk aversion intensifying.

                                  “Worries about trade wars and the damaging impact of tariffs, as well as Brexit and other political worries, all contributed to a dampening of business optimism about the year ahead. Business expectations were the second-lowest since November 2015.

                                  “In this environment, it was not surprising to see job creation slip to the lowest for one and-a-half years, albeit remaining relatively robust.

                                  “One positive was a cooling of price pressures, which fed through to the smallest rise in factory selling prices for a year and could help bring consumer inflation down in coming months.”

                                  Full release here.

                                  US Ross: Tariff delays not quid pro quo with China

                                    US Commerce Secretary Wilbur Ross told CNBC that the tariff delay decision were not a trade ‘quid pro quo’ with China. He referred to the delay in 10% tariffs on some Chinese imports until December 15. Instead, it’s just because “nobody wants to take any chance of disrupting the Christmas season”.

                                    Ross added that “we’ve been doing analysis since the hearings were announced by the USTR”. And, “even though they were only announced as being imposed recently, the analytical work began well before that.”

                                    Japan PMI manufacturing finalized at 49.3, difficult to envisage any near-term improvements

                                      Japan PMI Manufacturing was finalized at 49.3 in August, revised down from 49.5, slightly down from July’s 49.3. Markit noted sluggish demand conditions persisted in August. Output continued to decline while business confidence was subdued. Also, firmed reduced output charges to stimulate sales.

                                      Commenting on the latest survey results, Joe Hayes, Economist at IHS Markit, said:

                                      “Japanese goods producers continued to signal difficult conditions during August, reflecting the broader regional tone within the APAC manufacturing economy. The headline index was among the lowest seen across the past three years.

                                      The sector was plagued by production cutbacks and flagging demand, which have been the trends so far in 2019. Softer growth across Asia, particularly in China, was reported to have dented export opportunities.

                                      “Meanwhile, the escalation of tensions with Korea merely adds extra downside risk to an already fragile environment. August data showed a ninth straight month-on-month fall in export sales, while the domestic market was similarly weak. As such, firms were wary towards the manufacturing sector outlook, cautious of the role the consumption tax hike will play, in addition to the drop-off of Olympic Games-related demand ahead of Tokyo 2020.

                                      “With external and domestic headwinds aplenty, it is difficult to envisage any near-term improvements in Japan’s manufacturing sector.”

                                      Also from Japan, capital spending rose 1.9% in Q2, above expectation of 1.9%.

                                      Japan PMI composite rose to 51.1, domestic-led economic recovery

                                        Japan PMI Manufacturing rose to 49.3 in January, up from 48.4, beat expectation of 48.7. PMI Services rose notably to 52.1, up from 49.4, back in expansion. PMI Composite also rose to 51.1, up from 48.6, turned into expansion.

                                        Joe Hayes, Economist at IHS Market, said: “Positive signs have emerged for Japan’s economy at the start of 2020, with flash PMI data pointing to a domestic-led economic recovery”. While Q4 would likely post an “ugly decline in GDP”, January PMI will “certainly allay fears” of an “impending technical recession”.

                                        Full release here.

                                        ECB accounts: Recent market developments might be based on overly optimistic expectations

                                          In the accounts of July 15-16 monetary policy meeting, ECB warned that “recent positive market developments were not fully backed by economic data”. They might be based on “overly optimistic expectations” about the Next Generation EU recovery package, and progress on vaccine development.

                                          “A highly accommodative monetary policy stance continued to be appropriate on account of the subdued medium-term outlook for price stability, characterised by inflation expectations standing near historical lows and significant economic slack. Careful monitoring was warranted while uncertainty about economic outlook remained elevated. Current monetary stance was seen as “adequate” and a “recalibration” was “not deemed necessary”

                                          Looking ahead, additional information, including more hard data releases, new staff projections and news on fiscal measures, would become available by September. That would provide “more clarity regarding the medium-term inflation outlook”. “In any case, at its September meeting the Governing Council would be in a better position to reassess the monetary policy stance and its policy tools.”

                                          Full meeting accounts here.