Thu, Sep 19, 2019 @ 14:56 GMT

Chinese Yuan dives through 7 as China seen as weaponizing it in trade war

    Chinese Yuan dropped sharply in Asian session partly in response to trade war escalation with US. The PBoC set its daily reference rate at just a slightly weaker level than 6.9 for the first time since December. By USD/CNH (offshore Yuan) then surged to a new low at 7.111, break through the psychological level of 7 decisively. In the stock markets, Nikkei is currently down -2.30%. Hong Kong HSI down -2.89%. China Shanghai SSE down -0.81%. Singapore Strait Times down -1.83%.

    Last week, Trump announced to impose 10% tariffs on USD 300B of effectively all untaxed Chinese imports, starting September 1. China responded with hard-line rhetorics. The developments suggested a return to ti-for-tax retaliations and suspension of trade talks.

    Meanwhile, today’s free fall in Yuan argues firstly that the Chinese government is seeing no need to keep Yuan exchange rate stable. Further, it’s a sign that Beijing is weaponizing the Yuan as a tool to offset the impact of tariffs in trade war.

    Technically, USD/CNH is now eyeing 61.8% projection of 6.2359 to 6.9804 from 6.6704 at 7.1305. We don’t expect a solid break there on first attempt. However, sustained trading would pave the way to 100% projection at 7.4149. That would further pressure Asian equities and spread to global markets.

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    Dollar lower as US core CPI failed to accelerate, initial jobless claims rose

      Dollar trades generally lower in early US session after slightly lower than expected inflation reading. Headline CPI slowed from 2.7% yoy to 2.3% yoy, missed expectation of 2.4% yoy. Core CPI was unchanged at 2.2% yoy, missed expectation of 2.3% yoy.

      Initial jobless claims rose 7k to 214k in the week ended October 6, missed expectation of 205k. Four-week moving average of initial claims rose 2.5k to 209.5k. Continuing claims rose 4k to 1.66m in the week ended September 29. Four-week moving average of continuing claims dropped -10k to 1.656m, lowest since August 18, 1973.

      Also released Canada new housing price index rose 0.0% mom in August, missed expectation of 0.2% mom.

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      Sterling surges as BoE chief economist Haldane joined hawks to vote for rate hike

        Sterling surges BoE kept bank rate unchanged 0.50% with 6-3 vote. The usual suspects Ian McCafferty and Michael Saunders voted for a hike to 0.75%. And to many’s surprise, chief economist Andrew Haldane voted for a hike too. His vote carries much significance.

        On growth, BoE noted the judgement that the dip in Q1 was temporary “appears broadly on track”. It pointed to the rebound in household consumption and sentiments as evidence while “employment growth has remained solid”. Despite decline in manufacturing output in April, surveys of business activity have been stable. And overall, the data “point to growth in the second quarter in line with the Committee’s May projections.

        On inflation, BoE expects CPI to “pick up by slightly more than projected” in the near term. That reflects ” higher dollar oil prices and a weaker sterling exchange rate.” And, indicators of wage growth also picked up with labor markets remains tight. “Domestic cost pressures will continue to firm gradually, as expected.”

        On forward guidance, BoE expects to maintain the size of assets purchased at GBP 435B and use the Bank Rate as “primary instrument” for momentary policy for now. And BoE will NOT reduce the size of the assets until Bank Rate reaches around 1.50%, lowered from prior guidance of around 2.00%.

        Full statement below.

        Bank Rate Maintained at 0.50%

        Our Monetary Policy Committee has voted by a majority of 6-3 to maintain Bank Rate at 0.5%. The committee also voted unanimously to maintain the stock of corporate bond purchases and UK government bond purchases.

        Monetary Policy Summary and minutes of the Monetary Policy Committee meeting

        The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 20 June 2018, the MPC voted by a majority of 6-3 to maintain Bank Rate at 0.5%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

        In the MPC’s most recent projections, set out in the May Inflation Report, GDP was expected to grow by around 1¾% per year on average over the forecast, conditioned on the gently rising path of Bank Rate implied by market yields at the time. In those projections, growth continued to rotate towards net trade and business investment and away from consumption. While modest by historical standards, the projected pace of GDP growth over the forecast was nevertheless slightly faster than the diminished rate of supply growth, which averaged around 1½% per year. As a result, a small margin of excess demand was projected to emerge by early 2020, feeding through into higher rates of pay growth and domestic cost pressures. Nevertheless, CPI inflation continued to fall back gradually as the effects of sterling’s past depreciation faded, reaching the 2% target in two years.

        A key assumption in the MPC’s May projections was that the dip in output growth in the first quarter would prove temporary, with momentum recovering in the second quarter. This judgement appears broadly on track. A number of indicators of household spending and sentiment have bounced back strongly from what appeared to be erratic weakness in Q1, in part related to the adverse weather. Employment growth has remained solid. Although manufacturing output recorded a decline in April, and this was accompanied by a fall in goods exports, surveys of business activity have been stable and, as a whole, point to growth in the second quarter in line with the Committee’s May projections.

        Internationally, activity data have been mixed. Indicators suggest that US growth bounced back strongly in Q2 from the softness in Q1. Euro-area growth has been weaker than expected, and downside risks have increased in some emerging markets, in part reflecting tighter financial conditions. More broadly, the prospects for global GDP growth remain strong, and while financial conditions have tightened somewhat, they continue to be accommodative.

        CPI inflation was 2.4% in May, unchanged from April. Inflation is expected to pick up by slightly more than projected in May in the near term, reflecting higher dollar oil prices and a weaker sterling exchange rate. Most indicators of pay growth have picked up over the past year and the labour market remains tight, suggesting that domestic cost pressures will continue to firm gradually, as expected.

        The Committee’s best collective judgement remains that, were the economy to develop broadly in line with the May Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon. For the majority of members, an increase in Bank Rate was not required at this meeting. All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

        In addition to its discussion of the immediate policy decision, the Committee reviewed its previous guidance on the level of Bank Rate at which the MPC will consider whether to start to reduce the stock of purchased assets. The MPC continues to expect to maintain the stock of purchased assets until Bank Rate reaches a level from which it can be cut materially, reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy. Since the previous guidance, the Committee has reduced Bank Rate from 0.5% to 0.25% in August 2016 and has noted that it could lower it further if required. Reflecting this, the MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches around 1.5%, compared to the previous guidance of around 2%. Any reduction in the stock of purchased assets will be conducted at a gradual and predictable pace. Decisions on Bank Rate will take into account any impact of changes in the stock of purchased assets on overall monetary conditions, in order to achieve the inflation target. In the event that potential movements in Bank Rate are judged insufficient to achieve the inflation target, the reduction in the stock of assets could be amended or reversed.

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        Into US session: Sterling recovers, but upside capped by Brexit confusions

          Entering US session, New Zealand Dollar remains the strongest one for today. Sterling regains some ground yet it’s limited generally below yesterday’s high. Traders are looking at Brexit debate and amendment voting in the Commons, with increasing confusions. New alternatives emerge including the Brady Amendments as the Malthouse Compromise. But after all, one of the keys lies in whether there would be a united consensus within the UK. And another key is whether the EU would agree to re-open negotiations.

          As for today, Swiss Franc is the weakest one followed by Yen. European stocks rise broadly on return of risk appetite while DOW futures also point to higher open. Eyes will also be on US-China trade negotiations but so far there is little news.

          In Europe, currently:

          • FTSE is up 1.34%.
          • DAX is up 0.20%.
          • CAC is up 0.97%.
          • German 10-year yield is down -0.001 at 0.207.

          Earlier in Asia:

          • Nikkei rose 0.08%.
          • Hong Kong HSI dropped -0.16%.
          • China Shanghai SSE dropped -0.10%.
          • Singapore Strait Times dropped -0.37%.
          • Japan 10-year JGB yield rose 0.005 to 0.005.
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          Swiss SECO raised 2019 growth forecasts to 1.2%, still below average

            Swiss State Secretariat for Economic Affairs expects growth to remain “below average” this year on subdued outlook and high uncertainty. But growth forecasts for 2019 was revised slightly up to 1.2%, from 1.1%. For 2020, growth projection was kept unchanged at 1.7%.

            SECO noted that “declining momentum in the international economy, the development of world trade is weak and demand for Swiss products is flattening out, slowing down the export economy.” And, “downside risks continue to predominate for the global economy”.

            It warned that with the recent tariff increases between US and China, the trade dispute has taken an “unfavourable turn”. Swiss economy would “cool off more strongly” if situation were to intensify further, particularly if EU and Germany were to be significantly affected. Meanwhile, “political uncertainty remains high in Europe”, including Brexit and Italy.

            Full release here.

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            Today’s top mover: CHF/JPY, safe haven of different nature

              The top mover report has been rather hard to write this week. Primary reaction is that the forex markets are generally in consolidation mode, indecisive. Right now CHF/JPY is the top mover but the picture could change in an hour. Nevertheless, it’s a pair that’s worth some discussion.

              We’ve pointed out in various occasions that while both CHF and JPY are safe haven currencies, there are some fundamental differences in the way they react, at least this year. Yen is more sensitive to yields, spread with US, EU etc. Plus, it’s more sensitive to Asian markets. On the other hand, Swiss Franc is more sensitive to emerging market risks.

              For example, today’s fall in USD/TRY, thanks to Powell, could be a reason for weakness in the Franc. For Yen, Nikkei closed up 0.69% today. JGB yields dropped to 0.09. But Chinese stocks closed down -1.32%. Yen’s strength is probably more due to position adjustment ahead of the main event of Trump-Xi meeting, as well as month end.

              Anyway, it does look like CHF/JPY’s corrective rise from 111.55 has completed with three waves up to 114.41. It came after hitting 100% projection of 111.55 to 113.74 from 112.19 at 114.38, as well as the near term channel resistance.

              Focus is back on 113.04 support for the near term. Firm break there will raise the chance of resuming whole decline from 118.06 through 111.55 low to 61.8% projection of 118.06 to 111.55 from 114.41 at 110.38.

              Fed Powell bowing down to dictatorship political pressure. Fed slowing or even pausing after December’s hike. There would less drain from the emerging markets. Swiss Franc will benefit more than Yen. It’s a possible scenario. Let’s see how it plays out.


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              IMF Lagarde: Fix economic imbalances with fiscal means, not trade obstacles

                IMF Managing Director Christine Lagarde on trade war:-

                • She urged politicans to “resolve trade disagreements without resort to exceptional measures”.
                • “Trade wars not only hurt global growth, but they are also unwinnable”.
                • “We know that the self-inflicted harm of import tariffs can be substantial even when trade partners do not retaliate with tariffs of their own,”
                • “We also know that protectionism is pernicious, because it puts the biggest strain on the poorest consumers who buy relatively more low-priced imports. In other words, harming trade is bad for the economy and bad for people.”
                • “The way to address global economic imbalances is not to raise new obstacles to trade. Using fiscal means to address global imbalances is critical. This includes, for example, lowering deficits in the US to bring public debt towards a sustainable path, and stronger infrastructure investment and education spending in Germany,”
                • “And importantly, those who are adversely affected by globalization and technological progress should receive more support to ensure that they can invest in their skills and transition to higher-quality jobs.”

                The IMF’s Global Prospects and Policy Challenges report:-

                • “The global expansion is gaining strength from the pick-up in international trade, and it should not be put at risk by the adoption of inward-looking policies,”
                • “The modernization of the rules-based multilateral trade system should continue, anchored in the World Trade Organization, with well-enforced rules that promote competition and a level playing field. Co-operation is also needed to tackle excess global imbalances.”
                • “The re-emergence of unilateral trade restrictions may escalate tensions and fuel global protectionism, disrupting worldwide supply chains and affecting long-term productivity.”
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                USD Suffers Selloff after FOMC and Powell, Worst against GBP and CAD

                  Dollar tumbles broadly as bulls are clearly unhappy with what Fed delivered. There are some key take aways from the announce and Jerome Powell’s press conference as Fed chair.

                  Firstly, while Fed raised GDP growth forecasts of 2018 and 2019, it kept 2020 forecast unchanged. Fed is clearly not expectation Trump’s tax cut and fiscal policies to have a long lasting effect to the economy. And even at the peak of their impact, Fed only projects 2.7% growth in real GDP in 2018. Powell also said in the press conference that on one on the committee believes that growth will get to 3% and stay there. That’s a clear vote of no confidence on what Trump claimed.

                  Secondly, Powell also said that “the relationship between slack and inflation is not so tight”. This echoes the new projections. Unemployment rate forecast is revised sharply lower to 3.6% in 2019 and stay there in 2020. But there is realistically not much impact on inflation. Fed only raised 2019 core PCE forecast by 0.1% to 2.1%, same for 2020. Powell also went further and said that “there is no sense in the data that we are on the cusp of an acceleration of inflation.”

                  Thirdly, this is possibly what disappointed dollar bulls most. Fed will stick with the course of only three rate hike this year. There might be one more hike in 2019 to three in total, thanks to the GDP growth in both 2018 and 2019, as well as the steep improvement in labour market. And, Fed is more confident that there will be another two rate hikes in 2020.

                  More on the projections here, and the full statement here.

                  Looking at the 4H heatmap, USD is clearly suffering after the FOMC release.

                  From volatility chart, it’s also rather clear that USD suffers most against CAD and GBP.

                  GBP/USD is now on track to take out 1.4144 resistance. 1.4345 will be the next stop, depending on the outcome of tomorrow’s BoE rate decision. BoE will stand pat for sure, but voting and the statement might give GBP another boost.

                  USD/CAD continues to be weighed down by positive NAFTA negotiation development. At this point, we’d still expect strong support from 1.2802 cluster (38.2% retracement of 1.2246 to 1.3124 at 1.2789) to contain downside. But let’s see.

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                  China Caixin PMI manufacturing dropped to 50, downward pressure significant

                    Released over the weekend, China Caixin PMI manufacturing dropped to 50.0, down from 50.6. That’s the fourth straight monthly drop and an acceleration in the index’s decline. The key points are, “production rises at weakest pace for nearly a year”, “total new business broadly stagnant, as export sales decline at faster rate”, “business confidence slips to nine-month low”.

                    Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said in the released that “expansion across the manufacturing sector weakened in September, as exports increasingly dragged down performance and continued softening demand began to have an impact on companies’ production. In addition, the employment situation worsened further. Downward pressure on China’s economy was significant.”

                    Full release here.

                    Also released, the official China PMI manufacturing dropped to 50.8 in September, down from 51.3. Official PMI non-manufacturing rose to 54.9, up from 54.2.

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                    EU said to be preparing retaliation tariffs on Boeing subsidies

                      There is no formal response regarding US intention to impose Section 301 tariffs as retaliation for Airbus subsides yet. But Reuters reported, based on unnamed source, EU believed US measures was “greatly exaggerated” and the amount of retaliation could only be determined by a WTO arbitrator.

                      Meanwhile, EU is preparing for possible retaliation over subsidies for Boeing. The source noted “in the parallel Boeing dispute, the determination of EU retaliation rights is also coming closer and the EU will request the WTO-appointed arbitrator to determine the EU’s retaliation rights.”

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                      New Zealad retail sales grew 0.1% qoq in Q1, big disappointment

                        New Zealand retail sales was a big disappointment to the markets. Ex-inflation retail sales volume grew merely 0.1% qoq in Q1, much lower than expectation of 1.0% qoq. That’s also a sharp slowdown from Q4’s 1.4% qoq. Besides, it’s the weakest quarter since 2015.

                        Stats NZ noted in the release that “retail spending in the first three months of the year was relatively flat despite rising job numbers, high migration, and record international tourism.”

                        “Of the 15 retail industries, seven had higher sales volumes in the March 2018 quarter, and eight experienced lower sales volumes.”

                        Full release here.

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                        Trump hoping for fruitful meeting with Xi, announced new aids to farmers

                          In the Oval Office, Trump expressed his optimism on US-China trade negotiation despite current escalation in trade war,  and announced new plan to aid farmed affected.

                          Trump reiterated that the negotiations were 95% done when China suddenly backtracked on its commitments. And, the US cannot let China continue to take advantage on trade. But he on further talks, he added “we’ll let you know in about three or four weeks whether of not it was successful. … But I have a feeling it’s going to be very successful”. Regarding the new round of tariffs on USD 325B in Chinese imports, Trump sounded non-committal and said he hasn’t made a decision yet.

                          He went further to once again hailed his “very good relationship” with Xi and indicate there could be a meeting soon. He said: “Maybe something will happen. We’re going to be meeting, as you know, at the G20 in Japan and that’ll be, I think, probably a very fruitful meeting.”

                          Additionally, Trump indicated the administration was planning a second round aids to farmers, at around USD 15B due to trade war. He said “we’re going to take the highest year, the biggest purchase that China has ever made with our farmers, which is about $15 billion, and do something reciprocal to our farmers so our farmers can do well.” And, “Out of the billions of dollars that we’re taking (tariffs), a small portion of that will be going to our farmers, because China will be retaliating, probably to a certain extent, against our farmers.”

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                          German-Italian spread breaks below 300, but stays close

                            EUR/USD is apparently lifted by the sharp fall in Italian yield today, the the rebound quickly fades.

                            10 year yield hit as low as 3.318 but recovers. It’s now trading at 3.437, down -1.444. It’s notably lower than last week’s high of 3.784. However, it should also be noted that German 10 year yield is now at 0.469, up 0.006. German-Italian spread 297, below 300 but still close to 300. That is, yes, concerned eased, but sentiments haven’t really turned around. The next move will depend on the response from Italy to EU and then EU’s counter response, regarding the budget.

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                            Italy to tweak budget, balance growth and public accounts

                              Italian Economy Minister Giovanni Tria said today that the coalition government is seeking to adjust its 2019 budget plan. They’d still have to support economic growth, but at the same time need to avoid disciplinary actions by European Commission. Tria said “we are attentively seeing if there is financial space to improve the balance between the need to support growth and the need to solidify the sustainability of the public accounts.”

                              Separately, Deputy Prime Minister Luigi Di Maio, leader of Five-Star Movement, said “we must talk with the EU to find a solution, but we cannot betray the promises we made, otherwise we will become like all the other (governments).”

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                              Trump: China trade deal happening fast, dangerous Huawei can be included

                                Trump sounded upbeat on US-China trade negotiation again even though, for now, there is still no more meeting scheduled. He said a the White House, “it’s happening, it’s happening fast and I think things probably are going to happen with China fast because I cannot imagine that they can be thrilled with thousands of companies leaving their shores for other places.”

                                He also said Huawei is “very dangerous” if “you look at what they’ve done from a security standpoint, from a military standpoint”. But even though it’s that dangerous Trump said “If we made a deal, I could imagine Huawei being possibly included in some form or some part of it”.

                                But separately, the Commerce Department laid out a proposal in a Federal Register notice yesterday, on punishing currency manipulating countries with tariffs. Commerce Secretary Wilbur Ross said “this change puts foreign exporters on notice that the Department of Commerce can countervail currency subsidies that harm US industries” And, “foreign nations would no longer be able to use currency policies to the disadvantage of American workers and businesses.”

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                                UK CPI unchanged at 1.9%, core at 1.8%, Sterling steady

                                  In March, UK CPI was unchanged at 1.9% yoy, below expectation of 2.0% yoy. Core CPI was also unchanged at 1.8% yoy, below expectation of 1.9% yoy. RPI slowed to 2.4% yoy, down from 2.5% yoy and miss expectation of 2.6% yoy.

                                  PPI input dropped -0.2% mom, rose 3.7% yoy, below expectation of 0.3% mom, 3.9% yoy. PPI output rose 0.3% mom, 2.4% yoy, versus expectation of 0.2% mom, 2.1% yoy. PPI output core rose 0.02% mom, 2.2% yoy versus expectation o f0.1% mom, 2.2% yoy..

                                  House price index rose 0.6% yoy in February, well below expectation of 1.3% yoy.

                                  EUR/GBP rises mildly today mainly due to Euro’s strength. Sterling’s reaction to the data set elsewhere is muted.

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                                  BCC downgrades UK growth forecasts on Brexit and global slowdown

                                    The British Chambers of Commerce (BCC) has downgraded UK growth forecast on “weaker outlook for business investment and trade amid continued Brexit uncertainty and slower expected global economic growth”. For 2019, growth forecast was downgraded from 1.3% to 1.2%. For 2020, growth forecasts was downgraded from 1.5% to 1.3%. in 2021, growth is projected to pick up slightly to 1.4%.

                                    Also, BCC noted that business investment is projected to contract by -1.0% in 2019. And that would be the weakest outturn in a decade since the financial crisis in 2009. BCC blamed that “ongoing uncertainty over the UK’s future relationship with the EU is expected to continue to weigh on investment intentions.” And, “diversion of resources to prepare for no deal and the high upfront cost of doing business in the UK is also projected to limit the extent to which investment activity will bounce back over the near term.”

                                    Full release here.

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                                    U of Michigan consumer sentiment rose to 100.8, second highest since 2004

                                      U of Michigan consumer sentiment rose to 100.8 in September, up from 96.2 and beat expectation of 96.9. That’s the second highest level since 2004.

                                      Surveys of Consumers chief economist, Richard Curtin: Consumer sentiment posted a robust rise in early September, reaching 100.8, the second highest level since 2004-only behind the March 2018 reading of 101.4. Importantly, the gains were widespread across all major socioeconomic subgroups. The Expectations Index reached its highest level since July 2004, largely due to more favorable prospects for jobs and income. Despite a lessening of expected gains in nominal incomes in September, inflation expectations also declined, acting to offset concerns about declining living standards. Consumers anticipated continued growth in the economy that would produce more jobs and an even lower unemployment rate during the year ahead. While consumers were somewhat more likely to anticipate that the economic expansion would continue uninterrupted over the next five years, nearly as many expected another downturn sometime in the next five years. The largest problem cited on the economic horizon involved the anticipated negative impact from tariffs. Concerns about the negative impact of tariffs on the domestic economy were spontaneously mentioned by nearly one-third of all consumers in the past three months, up from one-in-five in the prior four months.

                                      Full release here.

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                                      German Ifo rose to 99.6, resilient economy except manufacturing

                                        Germany Ifo Business Climate improved to 99.6 in March, up from 98.7 and beat expectation of 98.5. That’s also the first increase following six declines in a row. Current Assessment rose 0.2 to 103.8, beat expectation of 102.9. Expectations gauge also rose to 95.6, versus consensus of 94.0.

                                        Looking at the details, manufacturing dropped from 9.1 to 6.6, seventh decline in a row. But services rose from 21.3 to 26.0. Trade rose from 4.9 to 8.2. Construction rose from 18.0 to 20.3.

                                        Ifo President Clemens Fuest noted “sentiment among German business leaders has improved somewhat”. And “companies are somewhat more satisfied with their current business situation, and they are decidedly more optimistic regarding business in the coming six months.” He added “the German economy is showing resilience.”

                                        Ifo economist Klaus Wohlrabe said, “Brexit uncertainty is particularly hitting the industrial sector. The other sectors don’t appear to be affected” .

                                        Full release here.

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                                        UK PM May gives statement in parliament on Brexit, live stream

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