Thu, May 28, 2020 @ 04:18 GMT

Japan Aso to watch current market move with sense of urgency

    At a regular press conference, Japanese Finance Minister Taro Aso emphasized that “currency stability is important”. He added that “we must closely watch the currency market move with a sense of urgency. Though, he didn’t give any comment of specific exchange rate levels. The comments came after Yen spiked higher yesterday in response to abrupt escalation of US-China trade war.

    Aso also noted that recent market volatility won’t change the government stance on the planned sale tax hike. The government will still proceed with October’s sale take hike from 8% to 10%, unless there is serious shocks in the economy.

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    US Ross: China must cease inappropriate activities on trade

      US Commerce Secretary Wilbur Ross said in a Fox Business Network interview that US is “not looking for victory” on trade negotiations. And, the country just want “a sensible deal that addresses the legitimate issues that we have.”

      Ross pointed out again that “there are some inappropriate activities underway by the Chinese” and warned “they must cease”. He added, “if they do, if we make some redressing of the trade imbalance, then that’s a reasonable deal for both parties.”

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      Dollar and yield rebounded as Fed Powell talked down rate cuts

        Dollar and treasury yields rebounded overnight after Fed Chair Jerome Powell talked down the chance of a rate cut after Fed kept interest rate unchanged at 2.25-2.50% as widely expected. In particular, 10-year yield hit as low as 2.455 earlier in the day but closed up 0.002 at 2.511, regained 2.5 handle. DOW closed down -0.61%, S&P 500 lost -0.75% and NASDAQ dropped -0.57%.

        In the post meeting press conference, Powell noted that “our policy stance is appropriate at the moment” and emphasized “we don’t see a strong case for moving it in either direction. Fed acknowledged that both headline and core inflation were running below targets. But Powell said that’s mostly due to transient factors. He predicted inflation to pick rise back to 2% target ahead.

        Here are some suggested readings on FOMC:

        10-year yield recovered strongly after breaching 2.463 key near term support. But still, risk will stay on the downside as long as 2.614 resistance holds. Rebound from 2.356 is likely completed after hitting 55 day EMA. Sustained break of 2.463 should resume larger down trend from 3.248.

        S&P 500 edged to historical intraday high at 2954.13 but reversed to close down -0.75% at 2923.73. SPX continued to lose upside momentum as seen in daily MACD. We maintain the view that it’s not resuming long term up trend despite breaching 2940.91 key resistance. Thus, near term reversal should be around the corner and break of 2891.90 support should at least confirm short term topping. Nevertheless, for sure, sustain trading above 2940.91 will prove our view wrong.

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        Mid-US update: Yen selloff extends as US treasury yields surge

          Yen’s selloff extends in US session as risk appetite dominate the US markets while treasury yields also surge. Sterling follows as the second weakest. On the other hand, Australian Dollar continues to lead New Zealand and Canadian Dollar higher. The news of US tariffs and China’s retaliation are generally shrugged off by investors.

          At the time of writing, DOW is trading up 0.52%, S&P 500 up 0.60% and NASDAQ up 1.02%. In Europe, German DAX gained 0.40%, CAC up 0.21% but FTSE closed slightly down by -0.08%. Despite Dollar’s sluggishness, Gold continues to trade in tight range and struggles to hold above 1200 handle.

          We’d attribute the selloff in Yen to strength in US treasury yields. In particular, rally is stronger in the long end. At the time of writing, 30-year yield is up 0.040, 10-year yield is up 0.032 and 5-year yield is up 0.022. This is certainly a development Fed officials would love to see.

          10-year yield (TNX) took out 3.016 resistance this week and momentum persists. Now, further rise is likely towards 3.115 key resistance. We’re not too convinced that this key level could be taken out. So, we’d start to look for topping signal as TNX approaches 3.115. Accompanying it, we would likely see USD/JPY having a take on 113.17 resistance.

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          UK retail sales rose 1.1%, ex-auto sales rose 1.2%

            Released from UK:

            • Retail sales include auto and fuel rose 1.1% mom, 6.7% yoy in March versus expectation of -0.4% mom, 4.6% yoy.
            • Retail sales exclude auto and fuel rose 1.2% mom, 6.2% yoy in March versus expectation of -0.3% mom, 4.0% yoy.

            Full release here.

            GBP/USD recovers mildly after the release but remains soft for 1.2960 support.

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            RBA: Significant coronavirus effect on economy the more realistic scenario

              Minutes of March 3 RBA meeting noted that “it was becoming increasingly clear that COVID-19 would cause major disruption to economic activity around the world”. The recent outbreak outside of China ” raised the prospect of a broader and more extended disruption to the global economy”.

              The global development “was having a significant effect on the Australian economy, particularly in the education, transport and tourism sectors”. Uncertainty was also likely to “affect household spending and business investment in coming months.” Q1 GDP was likely to be “noticeably weaker than previously expected”.

              Board members have considered a “number of scenarios” regarding monetary policy response to coronavirus outbreak. If the outbreak would be contained in the very near future, “maximum effect” of further stimulus would be felt in the “recovery phase”. However, this scenarios was considered “very unlikely, with the more realistic scenario being that the outbreak would have a significant effect on the Australian economy.”

              RBA cut interest rate by 25bps to 0.50% at that meeting. Earlier on Monday, it indicated that there will be additional measures to be announced this coming Thursday. Markets generally expect another rate cut to bring the benchmark rate down to 0.25%.

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              Another solid non-farm payrolls report awaited

                Markets are expecting NFP report to show 188k job growth in September. Unemployment rate is expected to drop 0.1% to 3.8%. Wage growth will again be a major focus. Average hourly earnings are expected to rise 0.3% mom.

                Related pre-NFP job data were generally solid. ADP report showed 230k growth in private sector jobs, well above exceptiones. ISM manufacturing employment rose 0.3 to 58.8. ISM non-manufacturing was jumped notably by 5.7 to 62.4, which is very impressive. Initial jobless claims and continuing claims hit multi decade record lows.

                So overall, we’d expect NFP to give a set of decent to strong data. The main question is how fast wage growth has been. Meanwhile, the reaction in forex markets is not that straight forward. We’ll have to see how treasury yield and stocks respond to the data at the same time.

                Here are some other NFP previews:

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                ECB Draghi confident on inflation outlook with underlying economic strength

                  ECB left main refinancing rate unchanged at 0.00% as widely expected. Marginal lending rate and deposit rate were held at 0.25% and -0.40% respectively. It also reiterated that interest rates will “remain at their present levels at least through the summer of 2019”. ECB also sticks with the plan to end the EUR 15B per month asset purchase after December.

                  In the post meeting press conference, ECB President Mario Draghi said “incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures.” Also, “the underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding down of our net asset purchases.”

                  On inflation, Draghi noted while underlying inflation remains muted, they have been increasing from earlier lows. And underlying inflation is expected to increase further over the medium term. For now, Draghi iterated that significant amount of monetary policy stimulus is still needed to support buildup of price pressure. On growth, Draghi said risks can still be assessed as “broadly balanced”. Main prominent downside risks include trade protectionism, emerging markets and financial market volatility.

                  Overall Draghi’s press conference is composed as usual. EUR/USD recovers mildly but there is no change in it’s near term bearish outlook.

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                  Eurozone retail sales dropped -0.4% mom, PPI slowed to 2.6% yoy

                    Eurozone retail sales dropped -0.4% mom in April, slightly better than expectation of -0.5% mom. Volume of retail trade decreased by 0.4% for food, drinks and tobacco and for non-food products, while automotive fuel increased by 0.1%. EU28 retail sales dropped -0.3% mom. In EU, volume decreased by 0.4% for non-food products and by 0.2% for food, drinks and tobacco and for automotive fuel.

                    Among Member States for which data are available, the largest decreases in the total retail trade volume were registered in Germany (-2.0%), Portugal (-1.0%) and Croatia (-0.9%). The highest increases were observed in Sweden (+2.4%), Slovenia (+2.0%) and Malta (+1.7%).

                    Eurozone PPI came in at -0.3% mom, 2.6% yoy in April, below expectation of 0.2% mom, 3.1% yoy. EU 28 PPI was at -0.1% mom, 2.9% yoy.

                    The largest monthly decreases in industrial producer prices were recorded in Belgium (-1.7%), Italy (-1.5%) and Sweden (-0.8%), while the highest increases were observed in Denmark and Greece (both +1.2%), and Hungary (+0.9%).

                    Annually, the highest increases in industrial producer prices were recorded in Romania (+6.7%), Hungary (+6.5%) and Latvia (+5.6%), while there were no decreases observed.

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                    ECB Mersch: Inflation to rise gradually, contingent on highly accommodative monetary policy

                      ECB Executive Board member Yves Mersch said today that inflation will rise only gradually. He said in Sofia “overall, the underlying strength in the euro area economy continues to support our confidence that inflation will converge towards our aim over the medium term.” But he added that ” inflation convergence will likely proceed only gradually, and remains contingent on a highly accommodative monetary policy stance.”

                      Also, Mersch added that “the transition towards policy normalization will begin once the Governing Council assesses there has been sustained adjustment in the path of inflation.”

                      Separately, ECB Governing Council member Benoit Coeure said Eurozone growth isn’t just recovery but an expansion. He added that there is solid and broad based expansion in the region.

                      Comments from both are strikingly similar to President Mario Draghi’s yesterday.

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                      Bundesbank: No fundamental change in German outlook but coronavirus a new layer of risk

                        Bundesbank said in the monthly report that for Q1, there are “no signs of a fundamental change in Germany’s economy”. Domestic demand and construction are expected to continue to support the economy as a whole. Manufacturing will remain a drag even though the contraction is starting to ease.

                        However, it warned that “with the appearance of the coronavirus in China at the beginning of 2020, a new layer of risk was added.” “A temporary decline in overall demand there could damp German export activity,” the report noted. “Moreover, some global value chains could be impaired by security measures put in place. Delivery bottlenecks in selected industries here would be one consequence.”

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                        BoE Carney talks markets’ initial take on May’s Brexit defeat

                          BoE Governor Mark Carney told the parliament that after yesterday’s vote in the Commons, the risk of a no-deal Brexit has diminished, or the process would be extended.

                          But Carney emphasized that “I’m not giving my view, I’m giving the markets’ initial take”. Also he added “I wouldn’t put much weight on these very short term-moves. The market is waiting.”

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                          Trump blasts EU, China and Fed again

                            Trump continues to blast the EU, China and even Fed (well of course not Russia, nor North Korea) with his tweets today

                            For those who’re new to the markets, the 2007-2008 global financial crisis started with the bursting of the subprime mortgage bubbles in the US. Fed cut policy rate to 0-0.25% in December 2008. And in late November that year, Fed started QE1. In 2011, Fed started QE2. And in 2012, Fed started QE3.

                            ECB cut the main policy rate to 0.25% much later in 2013 and then subsequently to 0.00% in 2016. While ECB used the Securities Markets Programme since 2010, QE is seen as formally started in 2015.

                            The current situation of US rasing interest rate is a result of the US leading the way in loosening monetary policy to counter the problem of theirs.

                            And, would Kudlow or Navarro or give him a lesson that Fed’s rate hikes are still not tightening, but policy normalization, or removal of accommodations. The US economy has been enjoying the privileges of ultra loose monetary policy and it’s time to treat it as it should be treated.

                            And if the Fed doesn’t normalize its policies during a time when the economy is doing so well, what is left for Fed is save the economy when the next crisis comes?

                            The above are some common sense indeed. But for those who choose to ignore, our response is like someone who said this week — “where do we start?”

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                            Germany’s Joint Economic Forecast Project Group raised 2018 and 2019 growth projections

                              In the twice a year published Joint Economic Forecast by leading German institutes, growth projection for 2018 and 2019 were raised to 2.2% and 2.0% respectively. Both were upwardly revised by 0.2% from Autumn report. The released warned that while German economy “continues to boom”, “the air is getting thinner”. Still, “pace of economic expansion nevertheless remains brisk:” It pointed to upturn in the world economy, favorable situation in labor market and fiscal stimulus of the new coalition government as driving forces. Inflation is projected to slow to 1.7% in 2018 then rise again to 1.9% in 2019.

                              Global growth projection was revised up by 0.3% to 3.4% in 2018. The reported noted that “tax cuts in the USA will stimulate economic activity there, which may have a knock-on effect on other countries”. However, it also warned that the dynamic in the world economy will “gradually flatten off over the forecasting period”. And that’s partly due to “a harsher trade policy climate, which will burden global investments.”.

                              The report also pointed directly to the US announcement of steel and aluminum tariffs as “another step towards greater protectionism”. It warned that “any further escalation of the trade conflict will restrict international trade in goods and significantly damage world economic growth in the mid-term.” Even “mere discussion of such measures can increase uncertainty over a country’s future trade policy and weaken economic sentiment”.

                              A summary of the report can be found here. Or more details here.

                              Members of the Joint Economic Forecast Project Group

                              Deutsches Institut für Wirtschaftsforschung e.V. [www.diw.de]

                              in co-operation with:

                              The Austrian Institute of Economic Research WIFO [www.wifo.ac.at]

                              ifo Institute – Leibniz Institute for Economic Research at the University of Munich[www.ifo.de]

                              in co-operation with:

                              Swiss Institute of Business Cycle Research (KOF), ETH Zurich [www.kof.ethz.ch]

                              Institut für Weltwirtschaft an der Universität Kiel [www.ifw-kiel.de]

                              Halle Institute for Economic Research (IWH) [www.iwh-halle.de]

                              RWI – Leibniz-Institut für Wirtschaftsforschung [www.rwi-essen.de]

                              in co-operation with:

                              Institute for Advanced Studies, Vienna [www.ihs.ac.at]

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                              US PPI dropped -1.3% mom in April, worst since 2009

                                US PPI final demand dropped -1.3% mom in April, below expectation of -0.5% mom. That’s the largest monthly decrease since December 2009. Core PPI dropped -0.3% mom, below expectation of 0.0% mom.

                                Annually, PPI dropped -1.2% yoy, dropped from 0.7% yoy, versus expectation of -0.4% yoy. That’s also the largest decline since November 2015. PPI core rose 0.6% yoy, slowed from 1.4% yoy, below expectation of 0.9% yoy.

                                Full release here.

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                                Euro mildly higher as ECB drops pledge to increase QE if necessary

                                  Euro jumps slightly after ECB kept interest rates unchanged at 0.00%. More importantly, ECB dropped the pledge to “increase” the size of QE if necessary. That is “If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration.” is omitted from from today’s statement.

                                  Below are the March 8 and January 25 statement for reference. But for now, EUR/USD is staying below 1.2443 temporary top as we await Draghi’s press conference.

                                  March 8 Statement (Today)

                                  At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

                                  Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the current monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. The Eurosystem will reinvest the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.

                                  January 25 statement

                                  At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

                                  Regarding non-standard monetary policy measures, the Governing Council confirms that the net asset purchases, at the new monthly pace of €30 billion, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme (APP) in terms of size and/or duration. The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.

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                                  Into US session: CHF & JPY strongest, AUD weakest as new tariffs on China loom

                                    Entering into US session, Swiss Franc and Yen are the strongest ones for today so far as risk aversion dominates. DOW future is pointing to another gap down in US markets. Chinese Vice Premier Liu He will try to save the trade deal in Washington as new round of tariffs loom tomorrow. The France is give an additional lift on weakness in both German yield and China Yuan. Euro, remains rather resilient though.

                                    On the other hand, Australian Dollar is the worst performing one for today, followed by Canadian and then Sterling. In particular, the lift from RBA’s standing pat earlier this week was rather brief. AUD/USD looks set to break through 0.6962 low soon, should trade war escalation materializes.

                                    In Europe, currently:

                                    • FTSE is down -0.75%.
                                    • DAX is down -1.20%.
                                    • CAC is down -1.56%.
                                    • German 10-year yield is down -0.019 at -0.061.

                                    Earlier in Asia:

                                    • Nikkei dropped -0.93%.
                                    • Hong Kong HSI dropped -2.39%.
                                    • China Shanghai SSE dropped -1.48%.
                                    • Singapore Strait Times dropped -0.43%.
                                    • Japan 10-year JGB yield rose 0.0053 to -0.046 l
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                                    CAD strong ahead of BoC, a look at EUR/CAD & CAD/JPY

                                      Canadian Dollar strengthens broadly today, partly helped by rebound in oil price. And probably more importantly, BoC is widely expected to keep interest rate unchanged at 1.75% this week. Recent data showed much resilience in the economy, offering the central bank more room to take a wait and see mode and assess the economic developments. While the upcoming statement could be similar to prior meeting, there is also room for BoC to turn more “neutral”. Suggested reading: BOC Preview – Not Following Fed’s Footstep

                                      CAD/JPY’s rise from 79.97 extended further to as high as 83.21 so far today. The strong support from 55 day EMA affirmed near term bullishness. Corrective fall from 85.23 should have completed at 79.97, just ahead of 61.8% retracement of 76.61 to 85.23 at 79.90. Near term outlook will stay bullish as long as 82.03 support holds. CAD/JPY have a test on 85.23 resistance next.

                                      EUR/CAD is also extending the medium term down trend from 1.6151 as hits as low as 1.4636 so far today. As long as 1.4862 support turned resistance holds. The cross should target medium term projection level at 100% projection of 1.6151 to 1.4759 from 1.5645 at 1.4253.

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                                      US initial jobless claims dropped to 203k, trade deficit narrowed to $47.2B

                                        US initial jobless claims dropped -10k to 203k in the week ending November 30, below expectation of 215k. Four-week moving average dropped -2k to 217.75k.

                                        Continuing claims rose 51k to 1.693m in the week ending November 23. Four-week moving average of continuing claims was unchanged at 1.681m.

                                        US trade deficit dropped -7.6% mom to USD -47.2B in October, smaller than expectation of USD -48.7B. Imports dropped -1.7% mom to USD 254.3B. Exports dropped -0.2% to USD -207.1B.

                                         

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                                        China said it won’t decouple from the development of international industries

                                          China Ministry of Industry and Information Technology (MIIT) spokesman said “we will look at the trade friction between China and the United States with an open mind and a big heart.” And, “we will not blindly emphasize ‘self-reliance’, and not decouple from the development of international industries.”

                                          Separately, Vice Foreign Minister Le Yucheng said that “as long as we respect each other and seek equal cooperation, there are no disagreements that cannot be resolved between China and the United States.” He also emphasized, “What China wants is to deliver a better life for the Chinese people. We don’t want to take anything from anyone else. There’s no such thing as China replacing anyone or threatening anyone.”

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