Tue, Jun 02, 2020 @ 06:03 GMT

IMF: Japan needs reinvigorated policies for reflation, growth and sustainable debt path

    IMF said in a report that while Japanese economy continues to “grow above potential”, downside risks have increased. It urged that “reinvigorated policies are needed to reflate the economy, boost potential growth, and put public debt on a sustainable path.” And, coordinated effort should include (i) a well-specified medium-term fiscal framework; (ii) an ambitious effort toward labor, product market, and corporate reforms; and (iii) a continued accommodative monetary policy accompanied by clear forward guidance.

    On monetary policy, IMF hailed that “BoJ’s recent emphasis on making the accommodative stance more sustainable is appropriate, and complements its shift to a more patient approach to reaching the inflation target.” However, IMF suggested that “the relationship between the forward guidance on the long-term interest rate target and the inflation target could be clarified and the quantitative guidance on JGB purchases could be removed.” Also, it suggested BoJ to publish staff baseline forecasts together with underlying policy assumptions to strengthen market communications.

    On trade, IMF emphasized that “Continued advancement of multilateralism and bolder domestic policies are needed to mitigate inward spillovers, including from potential trade-war escalation.” Though, Japan’s leadership in furthering multilateralism can help mitigate the possible effects of trade-war escalation.

    Full report here.

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    ECB Rehn: Market expectations on first hike consistent with ECB statements

      ECB Governing Council member Olli Rehn said “financial market expectations concerning the timing of the first interest rate rise are consistent with the Governing Council’s statements.” That is, ECB said in forward guidance that interest rates will remain at present levels at least through summer of 2019.

      Meanwhile, he also added that “the need for extended forward guidance on monetary policy will also diminish, once inflation has reached sufficient progress towards the price stability objective.”

      Regarding a hot recent topic of Italy, Rehn said ECB’s Governing Council “primarily looks at the development of the whole euro zone, and firstly from the mid-term price stability target point of view”. And, “monetary policy will be done based on that, not looking at just one member state but the whole euro zone.”

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      Global treasury yields follow US higher, Australia lags in momentum

        Global treasury yields follow the strong rally in US today. Japan 10 year JGB yield rises 0.0214 to 0.162. Let’s remember that BoJ “allows” it to fluctuate between -0.1% and 0.1%. It’s now way above the top of the band.

        German 10 year bund yield is currently up 0.065 at 0.542, back above 0.5 handle. There was a blip earlier this week on Italian budget concerns. But it seems that the new budget deficit targets are relatively well received. There is prospect of heading towards 0.6% handle even though it’s still bit far.

        Australia 10 year yield also rises 0.067 to 2.718. But judging from the chart, momentum is relatively weaker than the others. That could explain the sluggishness of Aussie.

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        World Bank downgrades East Asia and Pacific growth forecasts

          The World Bank downgraded East Asia and Pacific growth forecast in 2018 from 6.6% to 6.3%. It also projected growth to further slow to 6.0% in 2019, down graded from 6.1%. For China, growth is projected to slow to 6.5% in 2018, unrevised. But China’s growth projection in 2019 was revised lower from 6.3% to 6.2%.

          Sudhir Shetty, World Bank chief economist for East Asia and Pacific region, noted that “the main risks to continued robust growth include an escalation in protectionism, heightened financial market turbulence, and their interaction with domestic fiscal and financial vulnerabilities”.

          And, he added, “in this context of rising risks, developing EAP economies need to utilize the full range of available macroeconomic, prudential, and structural policies to smooth external shocks and raise potential growth rates.”

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          Powell led a chorus of hawkish Fedspeaks

            Fed Chair Jerome Powell repeated his upbeat comments today. He said the US is experiencing “a remarkably positive set of economic circumstances, and we’re working hard to try to sustain the expansion and keep unemployment low and keep inflation right on target”. And, “there’s really no reason to think that this cycle can’t continue for quite some time.” On interest rates, he said they are “still accommodative” and “we’re gradually moving to a place where they’ll be neutral.” He added that “we may go past neutral. But we’re a long way from neutral at this point, probably.”

            Other comments from Fed officials were generally hawkish. Chicago Fed President Charles Evans said “getting policy up to a slightly restrictive setting — 3, 3.25 percent — would be consistent with the strong economy and good inflation that we are looking at.”

            Philadelphia Fed President Patrick Harker said he preferred Fed’s rate hike schedule to avoid inverting the yield curve and “it’s just a question of timing”. He added there is no need to “rush the normalization process”. For now his forecasts are “”three this year, two next year, two year after.”

            Cleveland Fed President Loretta Mester said she supported a gradual pace of hiking. But she also noted that “if we end up having inflation move high up” or if it goes too much above target, “then we need to move policy faster.”

            Richmond Fed President Tom Barkin said “growth is solid, unemployment is low, and inflation is at target”. He didn’t touch directly on monetary policy but struck a tone of caution on flattening yield curve which “could suggest markets are losing confidence in the outlook.”

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            Italy PM Conte hailed budget respected commitments, it’s courageous and serious

              Italian Prime Minister Giuseppe Conte confirmed the budget deficits plan after meeting of ministers yesterday. The deficit targets are now 2.4% of GDP in 2019, 2.1% in 2020 and 1.8% in 2021. Conte predicted debt-to-GDP ratio to fall slightly from the current 131% to 130% in 2019, and then drop further to 126.5% by 2021.

              Conte hailed the budget as “respected commitments, it is courageous and serious”. And he added “we will show courage above all in 2019, because we believe that our country needs a budget that calls for strong growth”.

              Economy Minister Giovanni Tria said there would be additional investments of 0.2% in 2019, 0.3% in 2020, and 0.4% in 2021. And, he added “this describes the quality of the budget: we’re aiming to have public investments as principal instrument to work on growth”.

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              Mid-US update: 10-year and 30-year yields break significant resistance, DOW hit records, Dollar strong

                The strong rally in US treasury yields, followed record ISM non-manufacturing composite data, is the key development in US session today. At the time of writing. 30-year yield is up 0.80 % at 3.287, 10-yearyield up 0.075 at 3.131, 5-year yield up 0.065 at 3.009. Again, yield is stronger at the long end.

                10 year yield (TNX) break of 3.115 resistance indicates resumption of medium term up trend from 1.336 (2016 low). More importantly, we’re now seeing the chance of firm break of multi-decade trend line resistance, which will be a very bullish signal.

                30 year yield (TYX) also breaks key resistance level at 3.255/60. Medium term rise from 2.102 (2016 low) is resuming and could possibly target next key resistance at 3.976. At the same time, TYX could also be heading for a break of multi decade trend line resistance too.

                It would take some more time to confirm the underlying bullish momentum in both TNX and TYX. That’s nevertheless very significant development if realized as mentioned above.

                Of course, DOW’s record run is also worth a mention as it hit new record high at 26951.81. DOW is currently up 0.58% at 26927. S&P is up 0.38% and is not far from another record. NASDAQ lags behind but it’s still up 0.49%.

                In the currency markets, Sterling remains the strongest one for today as somehow no news is good news. At least, there is no drama from PM May’s speech at the Conservatives conference. But the pound could easily be overtaken by Dollar should it’s consolidation finish. Canadian Dollar is the third strongest one for now. Australian and New Zealand Dollar are the weakest while Yen is the third. Monetary policy divergence plays a key role in the movements.

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                ISM non-manufacturing jumped to 61.6, all time high since 2008

                  ISM non-manufacturing composite rose to 61.6 in September, up from 58.5 and beat expectation of 58.3. That’s also an all-time high since inception of the composite index in 2008. Employment index jumped notably by 5.7 to 62.4. ISM also noted in the release that “17 non-manufacturing industries reported growth” and, “respondents remain positive about business conditions and the current and future economy.”

                  Full release here.

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                  EU Moscovici: Italy’s budget revision is a good signal

                    European Commissioner Pierre Moscovici said it’s a “good signal” that Italy’s budget trajectory has been revised “because it shows that the Italian authorities are hearing the concerns and remarks from their partners and the European Commission.” However, he also warned that “If it is 2.4 percent, it’s possible that the structural deficit will not be within the bounds of the (EU) stability and growth pact”.

                    On the other hand, Italian Economy Minister Giovanni Trial said “even with a deficit goal that takes us further away from the structural adjustment requested by Europe, it doesn’t seem to me that it can be said this government is carefree on spending or that it’s going to blow apart public accounts to keep promises.”

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                    Into US session: Dollar gains as ADP job beat expectation, Aussie and Kiwi weakest

                      Entering into US session, Dollar trades notably higher after ADP employment beat expectations and showed 230k growth in September. Sterling is the strongest one so far, but is vulnerable to another selloff. Euro’s recovery has already lost steam. The news that Italy would lower budget deficit target slightly after 2019 just received mildly positive reactions by the markets. On the other hand, Australian and New Zealand Dollar are trading as the weakest ones for today, followed by Swiss Franc and Yen.

                      In other markets, DAX is on holiday today. CAC is trading up 0.67% while FTSE is up 0.60% at the time of writing. German 10 year bund yield trades up 0.031 at 0.456. Italian 10 year yield trades down -0.11 at 3.334. German-Italian spread narrows today but remains huge.

                      Earlier today, Nikkei closed down -0.66%< Hong Kong HSI down -0.13%. But Singapore Strait Times gained 0.76%. One development to note is that Japan 10 year JGB yield added another 0.0126 to close at 0.142. It’s now notably outside BoJ’s band of -0.1% to 0.1%.

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                      Fed Evans: A slightly restrictive policy could keep extremely well economy going

                        Chicago Fed President Charles Evans said the US economy is doing “extremely well”, the “fundamentals are strong, the labor market is doing terrific.” He added that “I spent quite a long time indicating that I think inflation needs to get up to 2 percent, and here we are.” Evans also noted “by setting the policy rate just a little above neutral, that will continue to keep things going for quite some time” referring to the “very well” state the economy is in.

                        Though, he also indicated that “Long-term inflation expectations are now, in my opinion, a little bit too low.” Therefore, ” we don’t have to raise the funds rate as restrictively as we may have in the past.”. And, “if the outlook continues to be as good as it is, at a slightly restrictive level and then hold there for quite some time until we begin to see signs that we need to make an adjustment.”

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                        Italy EM Tria: Gradual reduction in deficit after 2019

                          Italy Economy Minister Giovanni Tria said today that the while the budget deficit will increased compared with previous forecast in 2019, “there will be a gradual reduction in the following years”. His comments echo reports that the populist government has revised their original plan after strong pressure from the EU.

                          Originally, the plan was to have budget deficit target at 2.4% of GDP in the three years from 2019. But according to unnamed government sources, the plan now is to keep 2.4% in 2019, but lower to 2.2% in 2020 and then 2% in 2021.

                          Prime Minister Giuseppe Conte is due to meet with key ministers today. The details could then be defined after the meeting.

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                          UK PMI services dropped to 53.9, Brexit worries continue to dominate the outlook

                            UK PMI services dropped to 53.9 in September, down from 54.3 and matched expectations. The key points are “growth of business activity eases only slightly since August”, “job creation edges up to seven-month high”, “higher fuel prices lead to sharp rise in input costs”.

                            Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:

                            “The service sector continued to report solid steady business growth in September which, alongside news of sustained expansions in both manufacturing and construction, suggests the UK economy expanded by just under 0.4% in the third quarter.

                            “The data therefore add to signs that the economy has enjoyed robust growth since the rocky start to the year, when extreme weather disrupted business.

                            “Brexit worries continue to dominate the outlook, however, keeping business optimism firmly anchored at levels which would normally be indicative of an imminent slowdown. Clarity on Brexit arrangements is therefore needed as soon as possible to help sustain growth.

                            “In a month during which oil prices spiked higher, it was no surprise to see cost pressures intensify, meaning consumer price inflation will have likely continued to run at a pace above the Bank of England’s 2% target in September, and will likely remain closer to 3% than 2% in coming months.

                            “The steady economic expansion and intensification of cost pressures will add to views that the next move in interest rates will be another hike. However, with Brexit uncertainty intensifying in recent weeks, any rise seems unlikely prior to the scheduled March 29th exit from the EU.”

                            Full release here.

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                            Eurozone PMI services finalized at 54.7, points to 0.5% Q3 GDP growth

                              Eurozone PMI services was finalized at 54.7 in September, unrevised, up from August’s 54.4. PMI composite was finalized at 54.1, down from August’s 54.4.

                              Among the countries, German PMI services hit 2-month low at 55.0. France PMI services dropped to 21-month low at 54.0. Spain PMI services dropped to 58-month low t 52.5. But Italy PMI services improved slightly to 2-month high at 52.4.

                              Chris Williamson, Chief Business Economist at IHS Markit said:

                              “Context is everything: although running close to a two-year low, the disappointing September PMI remains at a relatively elevated level and signals solid growth. Comparisons with official data indicate that the survey data are equivalent to GDP rising by almost 0.5% in the third quarter.

                              “Note that the PMI data also indicate that we can expect the official growth estimates for the first half of the year to eventually be revised higher.

                              “However, the fourth quarter is unlikely to see such robust growth, as recent months have seen a clear loss of momentum in terms of both output and new order gains.

                              “The most worrying signs come from exports. Trade flows have more or less stalled, which represents a marked contrast to the record rate of export growth seen at the end of last year. While service sector growth remained resilient in September, it would be unusual for this to be sustained in the absence of improved manufacturing growth.

                              “Similarly, while employment gains remained historically high, a steady erosion in the rate of order book growth so far this year suggest the appetite to hire will soon wane without any notable upturn in new order inflows.

                              “With business confidence about the outlook running at one of the lowest seen over the past two years, companies are clearly not expecting any such imminent turn-around in demand.”

                              Full release here.

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                              Euro recovers as Italy may tame their budget deficit target after 2019

                                Euro recovers broadly today on news that the detailed version of Italy’s budget is not as bad as it’s initially reported. 5-Star Movement leader Luigi Di Maio has made himself clear that the coalition government is “not not turning back from the 2.4 percent target” referring top budget deficit in terms of GDP. However, it’s reported the coalition has tweaked to plan to cut percentage down the road.

                                The final version could be budget deficit at 2.4% of GDP in 2019, then 2.2% in 2020 and 2.0% in 2021. That would be, at least gesturally, better than the reported plan of 2.4% through the next three years. Though, firstly, whether the eurosceptic coalition would do it is in question. And, whether EU would accept it is another question.

                                Di Maio has indicated that some details on the so-called Economic and Financial Document would be defined on Wednesday morning. So we’d expect volatility in Euro to continue.

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                                Fed Powell: Remarkably positive economic outlook to continue

                                  Fed Chair Jerome Powell said in a speech yesterday there’s a “remarkably positive outlook” in the economy. And the forecasts are “not too good to be true”. The US is now in favorable condition with unemployment rate at near 20-year low at 3.9%. And Inflation is running near Fed’s target of 2%. A wide range of data and prices also supports a positive view while these favorable conditions are forecast to continue.

                                  Powell added that the ” historically rare pairing of steady, low inflation and very low unemployment is testament to the fact that we remain in extraordinary times”. And, Fed’s policy of “gradual interest rate normalization” showed the effort to balance the risks to extend the expansion, maintain maximum employment, low and stable inflation.

                                  Full speech here.

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                                  Fed Kaplan not advocating a pause after interest rate hits neutral

                                    Dallas Fed President Robert Kaplan said he’s based case is for Fed hike once more this year and twice next year. And he added that “mathematically there’s at least a couple more increases” to get to his neutral rate of 2.50-2.75%. He also noted that he “not advocating a pause” from there. But rather, he’ll “make that judgment as we go; I haven’t decided yet.”

                                    Additionally he reiterated his view that GDP will grow 3% this year and slow to 2.5% next as impact of fiscal stimulus fades. Also, he warned that the tailwind from debt-funded stimulus could turn into a headwind in the out years.

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                                    Mid-US Update: DOW hits record, Gold back above 1200, German-Italian spread breaks 300

                                      The forex markets are relatively dull in the first half of US session, comparing to other markets. DOW extends recent up trend and hit another record high at 26793.35. Based on current momentum, more lies ahead. At the time of writing, DOW is up 0.52%, S&P 500 and NASDAQ lags behind, up only 0.19% and 0.15% respectively. Treasury yield are soft today with 10 year yield down -0.026 for the moment.

                                      Fortune of European stocks is the opposite. FTSE closed down -0.28%, DAX down -0.42%, CAC down even deeper by -0.71%. German 10 year bund year dropped -0.0516 to 0.424. Italy 10 year yield rose 0.1369 to 3.442. That is, German-Italian yield spread is at 3.018, larger than 300 finally.

                                      Gold stages a strong rebound and is now back above 1200 handle. Current development suggests that prior dip to 1180.86 was just part of a near term correction pattern. Focus is immediately back to 1214.30 resistance. And break will resume the medium term rebound from 1160.36.

                                      In the forex markets, Yen remains the strongest one for today, followed by Canadian Dollar. Sterling and Australian Dollar are the weakest ones. Strength in Gold is in a way pressuring Dollar and we might seen some more downside in the greenback before the US session ends.

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                                      Into US session: Aussie and Sterling weakest, not Euro

                                        Entering into US session, while Euro’s sell and Italy catches a lot of headlines today, it’s actually not the weakest one. Selloff in Euro slows a little bit after Italian PM Conte’s FB post, pledging that Euro is indispensable. Australian Dollar is indeed the worst performing on risk aversion, following the sharp selloff in Hong Kong stocks and weakness in offshore Chinese Yuan. Sterling is the second worst as UK PM May continues get criticism on her Chequers plan from EU as well as Brexiteers. Yen is the strongest one on risk aversion, followed by Dollar and Swiss Franc.

                                        At the time of writing, DAX is trading down -0.77% at 12244.13, recovered mildly after hitting as low as 12203.60. CAC is down -0.78% and FTSE is down -0.45%. German 10 year bund yield hit as long as 0.41 earlier today but it’s now back at 0.441, down -0.035. Italian 10 year yield is up 0.066 at 3.371, after hitting as high as 3.444.

                                        Earlier today, Nikkei pared back almost all earlier gains and closed up just 0.10%. Singapore Strait Times lost -0.39%. Hong Kong HSI is in crisis mode, lost -2.38%. China is still on holiday but could very much face some troubles when they’re back next week. Gold is hovering around 1190 despite Dollar strength.

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                                        Sterling pressured as Brexit rebels gather at alternative conference against May’s Chequers plan

                                          Sterling is pressured on report that while UK Prime Minister Theresa May is trying to unite her party at the Conservatives annual conference, Brexit rebels are gathering a few streets away on an “alternative Brexit Advance Coalition Conference”. May’s Chequer’s plan was brutally criticized by the Brexiteers as “failing to deliver the referendum mandate”. And the rebels threatened to vote down the deal even if May could agree to one with the EU. In the meeting, it’s reported that 96% of those attended opposed to the Chequer’s plan.

                                          Perhaps words from Andrea Jenkyns, a former parliamentary private secretary, best described the situation. “Our party members don’t want it, the public doesn’t want it, the opposition aren’t going to vote for it, the EU doesn’t want it, so we must chuck Chequers,” she said.

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