Sat, Jul 11, 2020 @ 12:29 GMT

Eurozone GDP growth halved to 0.2% qoq, confidence deteriorated

    Eurozone GDP growth slowed notably to 0.2% qoq in Q3, down from 0.4% qoq and missed expectation of 0.4% qoq. For the year, GDP growth slowed to 1.7% yoy, down from 2.2% yoy and missed expectation of 1.9% yoy. For EU28, Q3 GDP growth slowed to 0.3% qoq, down from 0.5% qoq. For the year, EU 28 GDP growth slowed to 1.9% yoy, down from 2.1% yoy.

    Also released, Eurozone business climate dropped to 1.01, down from 1.21 and missed expectation of 1.15. Economic confidence dropped to 109.8, down from 110.9, missed expectation of 110.0. Industrial confidence dropped to 2.0, down from 4.7 and missed expectation of 3.9. Services confidence dropped to 13.6, down fro 14.7 and missed expectation of 14.0. Consumer confidence was finalized at -2.7. That is, all confidence indicators deteriorated, and worse than expected.

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    Italy GDP stalled in Q3, 0.0% versus prior 0.2%

      Italy Q3 GDP stalled, grew 0.0% qoq, slowed from prior 0.2% qoq and missed expectation of 0.2% qoq. There were positive contribution from agriculture, forestry, fishing and services. But there was decrease in industry.

      With respect to Q3 2017, GDP increased by 0.8% yoy. Carry-over annual GDP growth for 2018 stood at 1.0%.

      Full release here.

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      Swiss KOF dropped to 100.1, economy to grow with average rates in coming months

        Swiss KOF Economic Barometer dropped to 100.1 in October, down from 102.2 and missed expectation of 100.8. It sits just above long-term average of 100, and suggests that the Swiss economy is likely to “grow with average rates” in the coming months.

        KOF noted that the “decline is quite broadly visible in various indicator bundles.” But the fall in manufacturing sector is “particularly striking”. And inside the sector, “downward tendency was led by the machinery and vehicle manufacturers as well as the chemicals, pharmaceuticals and plastics industry”.

        Full release here.

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        France GDP growth accelerated to 0.4% in Q3, household consumption recovered

          French GDP rose by 0.4% qoq in Q3, accelrated from Q2’s 0.2% qoq, matched expectations.

          • GDP in volume terms accelerated slightly: +0.4% after +0.2%.
          • Household consumption expenditures recovered (+0.5% after −0.1%).
          • Total gross fixed capital formation grew almost as quickly as in the previous quarter (GFCF: +0.8% after +0.9%).
          • Overall, final domestic demand excluding inventory changes accelerated: it contributed 0.5 points to GDP growth, after 0.2 points in the previous quarter.
          • Imports slowed down in Q3 (+0.3% after +0.7%), whereas exports accelerated (+0.7% after +0.1%).
          • All in all, foreign trade balance contributed positively to GDP growth, +0.1 points, after −0.2 points in Q2.
          • Conversely, changes in inventories contributed negatively to GDP growth (−0.2 points after +0.2 points).

          Full release here.

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          Japan unemployment rate dropped to 2.3%, BoJ meeting starts

            Japan’s unemployment rate dropped for the second month by -0.1% to 2.3% in September, better than expectation of 2.4%. That’s also just 0.1% above May’s low at 2.2%. Unemployment rate has been in steady decline in recent years.

            BoJ monetary policy meeting starts today. It’s widely expected that the central bank will stand pat in the announcement tomorrow. Interest rate will be held unchanged at -0.1%. A major focus is the new economic forecasts but a majority of economists expect them to be largely unchanged.

            A major change in BoJ’s communications this year was the explicit allowance of 10 year JGB yield to move in a range of -0.1% to 0.1%. And, JGB is has already moved more than that. Hence, there is possibly unnecessary for BoJ to widen that band further.

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            DOW suffered bearish U-turn on new threat of Trump’s China tariffs, but Asia recovered

              US stocks suffered heavy selloff towards the end of the session overnight, single handedly knocked down by Trump’s trade policy. DOW rebounded in early trading to as high as 25040.58 but closed down -0.99% or -245.39 pts at 24442.92. That’s the biggest U-turn in eight months. S&P 500 hit 2706.85 before closing down -0.66% at 2641.25. NASDAQ jumped to 7296.51 and close down -1.63% or -116.92 pts at 7050.29. The U-turn in NASDAQ was the worst in three years.

              Selloff emerged as Bloomberg reported that Trump is going to impose additional tariffs on all Chinese imports, should the summit with Chinese President Xi Jinping fail. The two leaders plan to meet at sideline of G20 summit in Buenos Aires in November, but even this arrangement is not finalized yet. The announcement of the new tariffs could come in as early as December. The total amount of imports to be tariffs could add up to USD 257B, in addition to the USD 250B already covered by current tariffs.

              White House Press Secretary Sarah Huckabee Sanders declined talked about the specifics of the Xi-Trump meeting. She just said “You have two of the most powerful leaders in the world. I think that’s consequential no matter how you look at it and we’ll see what happens when they sit down.”

              In Asia, though, Chinese and Hong Kong stocks reversed early losses after Trump’s comment in an interview with Fox news. He said, “I think we will make a great deal with China, and it has to be great because they’ve drained our country.” At the time of writing, Hong Kong HSI is down -0.17% only, China Shanghai SSE is even up 0.72%.

              Separately, according to Gallup polling during the week ended October 28, Trump’s job approval rating dropped steeply by 4% to 40%, sharpest decline since June 24, on the controversy over his policy of separating families apprehended illegally crossing the US-Mexico border. On the other hand, his disapproval rating rose to 54%.

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              Mid-US update: Dollar rebound may not sustain as stocks strength fades

                It’s a relatively slow day in the forex markets today, in terms of both news and movements. At this point, Yen and Swiss Franc remain the weakest ones for today on stocks rebound. But at the same time, Dollar is having a rebound, has risk aversion eased and US yields strengthen too. However, as the rally in US stocks seem to be fading, it remains to be seen whether treasury yields and US Dollar could maintain the gains before daily close.

                In the US, DOW reached as high as 25040.58 earlier today but it’s now at 24745, up only 0.23%. S&P 500 is up 0.78% and NASDAQ is now flat. 10 year yield is up 0.023 at 3.340, after hitting 3.355 earlier today.

                In Europe:

                • FTSE closed up 1.25% at 7026.32
                • DAX closed up 1.20% at 11335.48
                • CAC closed up 0.44% at 4989.35
                • German 10 year yield rose 0.0221 to 0.38, capped well below 0.4
                • Italian 10 year yield dropped -0.0901 to 3.34. It’s a good sign that, at least, spread with German is below 300 for now.
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                UK Hammond: It’s double dividend if Brexit negotiation turns out right

                  UK Chancellor of Exchequer Philip Hammond raised the total funding for Brexit preparation to GBP 4B. He also emphasized that it’s a “pivotal moment” in Brexit negotiations. If things turn out right, it will be “double Brexit dividend”. Firstly, investments current on hold will come on stream. Secondly, Treasury will no longer have to hold back money for preparations.

                  On the economy, he raised growth forecasts for 2019 and 2020. For 2021 and 2022, growth projections are kept unchanged. But growth is expected to pickup again in 2023.

                  Here is a quick summary on GDP growth projections:

                  • 2019: 1.6%, up from 1.3% in the spring statement
                  • 2020: 1.4%, up from 1.3% in the spring statement
                  • 2021: 1.4%, unchanged from 1.4% in the spring statement
                  • 2022: 1.5%, unchanged from 1.5% in the spring statement
                  • 2023: 1.6% (new forecast)

                  He also noted that budget deficit has fallen to less that 1.5% this year. And it’s projected to fall further to 0.8% by 2023-24.

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                  German Merkel confirms to end party leadership

                    German Chancellor confirmed the rumor that she is not going to run for leadership of the Christian Democratic Union again in December. Also, she’s stay and carry out my duties as chancellor for the rest of the legislative period till 2021.

                    She also confirmed that her hand-picked CDU general secretary, Annegret Kramp-Karrenbauer, and conservative rival, Jens Spahn, will both run as party leader. For now, she is not taking a side but rather, she’s looking at the party leadership race “as an opening, a phase of possibilities,” “a nice process”.

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                    US headline PCE slowed to 2.0%, core PCE unchanged at 2.0%

                      In September, US personal income rose 0.2%, below expectation of 0.3%. Spending rose 0.4%, matched expectations. Headline CPI slowed to 2.0%, down from 2.2%. Core PCE was unchanged at 2.0% yoy.

                      Dollar is mildly higher after the release but remains mixed for the day. The most notable development today is the selloff in Yen and Swiss Franc as stock markets rebound.

                      Full release here.

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                      German Merkel to stop leading CDU, markets shrug

                        It’s reported that German Chancellor Angela Merkel will not run for Christian Democratic Union leadership again in the December convention. Though, she intends to serve out her term as Chancellor through 2021. Merkel is expected to hold a media conference at 1pm Berlin time.

                        Right now, there are a few possible candidates for the party leadership. Jens Spahn, Ralph Brinkhaus, and Annegret Kramp-Karrenbauer are among the possible ones.

                        Market reaction is rather muted to the news though. It’s believed that even if Merkel would be replaced as Chancellor, there won’t be much change to the coalition’s policies, which will still be dominated by CDU/CSU and the SPD.

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                        European update: Italian stocks lead others higher, but Euros stay soft

                          It’s a rather slow day in terms of news and forex volatility. Italian stocks lead Europeans higher. At the time of writing, the FTSE MIB index is up 2.42%, responding well to S&P’s rating review. S&P kept Italy’s sovereign credit rating unchanged at BBB, two notches above junk, even though outlook is negative. FTSE 100 is up 1.31%, DAX is up 1.28% and CAC is up 0.26%.

                          Italian 10 year yield is down notably by -0.0817 at 3.348 at the time of writing German 10 year bund yield is up 0.034 at 0.392, below 0.4 handle. Also, spread remains at 295, below but close to 300. Euro also gives little reaction as it’s trading down against all other major currencies but Yen and Swiss Franc. JPY and CHF are weaker on receding risk aversion natural. So, we see how weak the Euro remains. On the other hand, commodity currencies are trading generally high as the strongest.

                          Earlier in Asia, major indices closed mixed. China Shanghai SSE closed down -2.18% at 2542.17. But the closely correlated Hong Kong HSI closed up 0.28%. Nikkei lost -0.16% and Singapore Strait Times gained 0.32%. Japan 10 year yield dropped -0.0095 to 0.105, now very very close to BoJ’s allowed range of -0.1 to 0.1%.

                          US personal income and spending, PCE inflation will be featured in US session. Hopefully, the data will trigger more volatility.

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                          The week ahead: BoJ and BoE to meet, along with something important for almost every major currencies

                             

                            Two central banks will meet this week, BoJ and BoE. Both are expected to keep monetary policies unchanged. At the same time, focuses will be on new economic projections from both central banks.

                            On the data front, there are at least something important for almost every major currencies. US will release PCE, ISM and NFP. Eurozone will release GDP, CPI and unemployment rate. UK will release PMI. Swiss will release KOF and CPI; Canada will release GDP and employment. Australia will release CPI and trade balance. China will release PMIs. So, be prepared for a very busy week.

                            Here are some highlights:

                            • Monday: Japan retail sales; UK mortgage approvals, M4 money supply, CBI realized sales; US personal income and spending, PCE inflation
                            • Tuesday: Japan unemployment rate; Australia building approvals; France GDP; German CPI, unemployment; Italy GDP; Eurozone GDP; Swiss KOF economic barometer; US S&P Case-Shiller house price, consumer confidence
                            • Wednesday: New Zealand building permits; Japan industrial production, consumer confidence, housing starts, BoJ rate decision; Australia CPI; China PMIs; UK BRC shop price, Gfk consumer confidence; German retail sales; Eurozone CPI, unemployment rate; US ADP employment , employment cost index Chicago PMI; Canada GDP, IPPI and RMPI
                            • Thursday: Australia trade balance, import price; China Caxin PMI manufacturing; Swiss SECO consumer climate, CPI, manufacturing PMI; BoE rate decision and inflation report, UK PMI manufacturing; US non-farm productivity, jobless claims; ISM manufacturing, construction spending
                            • Friday: New Zealand ANZ business confidence; Australia retail sales, PPI; German import prices; Eurozone PMI manufacturing final; Swiss retail sales; UK construction PMI; Canada employment, trade balance; US non-farm payrolls, trade balance, factory orders
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                            UK Hammond: A different budget strategy needed in case of no-deal Brexit

                              UK Chancellor of the Exchequer Philip Hammond will deliver his budget speech today. He told Sky News that in case of a no-deal Brexit, “we would need to look at a different strategy and frankly we’d need to have a new budget that set out a different strategy for the future.” And the government would have to ” see how markets and businesses and consumers responded to that.” And then, “we would take appropriate fiscal measures to protect the economy, to prepare us for the future and to strike out in a new direction”.

                              Separately, he pledge to BBC that he will maintain fiscal buffers, a reserve of borrowing power against my fiscal rules, so if the economy, as a result of a no-deal Brexit or indeed because of something else that we haven’t anticipated, needs support over the coming months and years I have the capacity to provide that support.” And he emphasized “the important point is that I have got fiscal reserves that would enable me to intervene.”

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                              S&P projects 2.7% debt-to-GDP for Italy in 2019, government’s growth forecasts overly optimistic

                                Last Friday, S&P kept Italy’s sovereign debt rating unchanged at BBB, two notches above junk. However, outlook was lowered to negative from stable. Nonetheless, the result of the view was already better than Moody’s, which downgraded Italy to a notch above junk with stable outlook.

                                S&P said in the statement that “the Italian government’s economic and fiscal policy settings are weighing on the country’s economic growth prospects, a critical driver of government debt-to-GDP trajectory.” Also, “the government’s planned economic and fiscal policy settings have eroded investor confidence, as reflected by a rising yield on government debt.”

                                S&P projected Italy 2019 budget deficit at 2.7% of GDP, higher than the government’s own forecast and pledge of 2.4%. The rating agency noted that the government’s forecasts for economic growth of 1.5% in 2019 and 1.6% in 2020 were “overly optimistic”. And it projected 1.1% growth for both year, even downgraded from 1.4%, as “the demand stimulus from the government’s budgetary measures will likely be short-lived.”

                                Though, S&P also hailed that Italy “continues to be supported by its wealthy and diversified economy and its strong external position, with the economy close to becoming a net creditor in the context of its net international investment position.”

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                                US Q3 GDP grew 3.5% annualized, deceleration reflected downturn in export and non-residential fixed investment

                                  US GDP grew 3.5% annualized in Q3, slowed from Q2’s 4.2% but beat expectation of 3.2%. BEA noted in the release that “The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment that were partly offset by negative contributions from exports and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased”.

                                  Also, “The deceleration in real GDP growth in the third quarter reflected a downturn in exports and a deceleration in nonresidential fixed investment. Imports increased in the third quarter after decreasing in the second. These movements were partly offset by an upturn in private inventory investment.”

                                  Full release here.

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                                  Into US session: One-sided markets on Yen and Dollar as risk aversion intensifies

                                    Entering into US session, Yen stays in the driving seat as risk aversion intensifies in European session. While all major European indices are in deep red, we’d like to point out the free fall in German 10 year yield too. German 10 year bund yield is down -0.044 at 0.357, which is a rather serious sign of investor nervousness. It was over 0.5 just 10 days ago. Italian 10 year yield is up 0.039 at 3.529. That is, German-Italian spread is closing in 320 again.

                                    Also, note that Japanese 10 year JGB yield also suffered steep fall this week.

                                    Back to the currency markets, Dollar is trading as the second strongest for today. It’s partly supported by hawkish comments by new Fed Vice chair Richard Clarida, Trump’s new addition to Fed. Dollar will look into US Q3 GDP for strength for further rally. Commodity currencies are the weakest ones. But Euro and Sterling are actually not far away. Today’s market is rather one-sided on Yen and Dollar.

                                    A quick snapshot at the European markets:

                                    • FTSE is down -1.0%
                                    • DAX down -1.51%
                                    • CAC down -1.96%
                                    • German 10 year yield down -0.044 at 0.357
                                    • Italian 10 year yield up 0.39 at 3.529

                                    In Asia:

                                    • Nikkei dropped -0.40% to 21184.60
                                    • Singapore Strait Times dropped -1.35% to 2972.02
                                    • Hong Kong HSI dropped -1.11% to 24717.63
                                    • China Shanghai SSE dropped -0.19% to 2598.85
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                                    ECB: Professional forecasters lowered core inflation and GDP growth forecasts

                                      The latest ECB Survey of Professional Forecasters (SPF) showed unchanged projections for headline inflation for 2018, 2019 and 2020. But Core inflation, excluding food and energy forecasts were revised slightly lower. Also, expectations for real GDP growth were also revised lower.

                                      Headline inflation is projected to be at 1.7% in 2018, 1.7% in 2019 and 1.7% in 2020, unrevised. Core inflation is projected to be at 1.1% in 2018, 1.4% in 2019 and 1.7% in 2020, revised slightly down. ECB noted “he expected pick-up in underlying inflation remained underpinned by a pick-up in annual growth in compensation per employee, which was expected to increase to 2.3% by 2020.” The convergence with between headline and core inflation is still a development that’s welcomed by the ECB.

                                      GDP growth is projected to be at 2.0% in 2018, 1.8% in 2019 and 1.6% in 2020. There were downward revision of -0.2% for 2018 and -0.1% for 2019. ECB noted “respondents typically attributed their revisions to external factors such as higher energy prices weighing on disposable income, with many also noting that they had now incorporated into their baseline forecasts at least some dampening impact on exports and investment due to increased uncertainty surrounding the outlook for world trade. ”

                                      ECB’s full report here.

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                                      NIESR on no-deal Brexit: BoE to hike to above 2.5% on surge in inflation, but sharp slowdown in growth

                                        The UK National Institute of Economic and Social Research (NIESR) said the UK economy has “recently gained momentum” with Q3 GDP growth at 0.7%. Under the main forecasts scenario, based on “soft” Brexit, 2019 growth forecasts were revised up to 1.9%, reflecting the stronger momentum. However, NIESR also warned that here is “an enormous amount of uncertainty” around the forecasts.

                                        Under a no-deal Brexit scenario which UK has to revert to trade under WTO rule, growth is projected to slow sharply down to just 0.3% in 2019. Unemployment rate will jump to 5.8% in 2020. Inflation will surge above BoE’s target range in 2019, forcing BoE to raise interest rate to above 2.5% in 2019, next year.

                                        The summary of new forecasts show, under a soft Brexit scenario, GDP to grow 1.4% in 2018, 1.9% in 2019 and than slow to 1.6% in 2020. CPI is expected to slow from 2.3% in 2018 to 1.9% in 2019 and then climb back to 2.1% in 2020. Unemployment is projected to drop from 4.1% to 4.0% in 2019 then rise back to 4.5% in 2020. BoE interest rate will rise from 0.8% to 1.3% in 2019 and then 1.8% in 2020.

                                        However, under a no-deal Brexit, GDP growth will slow sharply from 1.4% to 0.3% in 2019, and 0.3% in 2020. Inflation will surge to 3.2% in 2019 before falling back to 2.6% in 2020. Unemployment rate will jump to 5.3% in 2019 and rise further to 5.8% in 2020. BoE will have to raise interest rate much faster to 2.6% in 2019 before dropping to 2.5% in 2020.

                                        Full forecast will be published later on October 31.

                                        NIESR’s release here.

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                                        Update on AUD/USD short: Trail the stop lower

                                          Here’s an update on our AUD/USD short (entered at 0.7100, stop at 0.7165), last discussed here.

                                          Finally, AUD/USD has completed the consolidation from 0.7040 and resumed recent down trend. That came later then we expected, but nevertheless, it’s a positive development for our strategy. As noted before, we’d expect the down trend from 0.8135 to target a test on 0.6826 (2016 low). At the same time we’re also looking at the possibility of resuming long term down trend from 1.1079 (2011 high).

                                          For the latter case, it should now be time to see some downside acceleration, ideally. And to show that momentum, AUD/USD should break through 61.8% projection of 0.7314 to 0.7040 from 0.7159 at 0.6990 easily and firmly without much hesitation. If that’s the case, even though, support zone between 0.6826 and 100% projection 100% projection at 0.6885 might limit downside at first attempt, support won’t last long. However, if the break of 0.6990 is sluggish, we’d probably not even see a break of 0.6826 low.

                                          For now, we’ll hold on to the short position, lower the stop to 0.7100 (breakeven). We wont’ put a target yet and will keep on monitoring to decide the exit.

                                           

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