US initial jobless claims rose 12k to 218k in the week ending December 23, above expectation of 204k. Four-week moving average of initial claims fell -250 to 212k.
Continuing claims rose 14k to 1875k in the week ending December 16. Four-week moving average of continuing claims fell -12.5k to 1865k.
China’s highly anticipated white paper on trade relationship with US was quite anti-climatic. In short, China blamed the US for starting trade conflicts. And, it criticized the US for going back on what’s agreed three times. And it hold US totally responsible for the collapse of trade negotiation.
China also reiterated pre-conditions on resuming trade negotiations. First, both sides have to respect “each other’s social system, economic system, development path and rights”. Secondly the negotiations has to be based on integrity. Thirdly, China will not step back on its principles, including sovereignty.
The implications are quite clear that China will not do anything to change its own development path along socialist market economy (or some would call that state capitalism). That is, China will not retreat from subsidizing State-Owned Enterprises. Secondly, the implementation of the agreement should be under full control of the sovereign entity. That is, for example, China will decide what new laws to pass to curb IP theft, or it will fulfil the commitment with administrative measures. China will object to US instructions on what are to be done exactly.
The overall paper, and the press conference are basically old wine in old bottles.
Trump’s hostile rhetorics against the EU seem to have draw strong reactions from the latter. European Commission President Jean-Claude Juncker points to the “ceasefire agreement” with Trump made just a month ago, and said he hoped Trump will refrain from imposing auto tariffs. However, Juncker warned that the EU won’t let others dictate its own trade policies. And, if Trump violates the deal impose auto tariffs, the EU will “also do that”.
ECB Governing Council member Olli Rehn also urged Trump to stop the “regrettable” trade war rhetoric. And he warned that US exit from the WTO could damage international order. And he hit on Trump’s ungrounded claims and said ECB is certainly not manipulating the Euro. Rehn also defended China and said the Yuan is weaker because of trade war threat.
Another ECB Governing Council member Ewald Nowotny also said “the economic policy of the United States is currently one of the substantial risks to the global economy.” And he warned that unpredictable trade and economic policy, biased rulings in U.S. courts and the dominant role of the Dollar were bad for Europe. He added that there was an increasing interest for Europe “to free oneself from a one-sided dominance.”
In a Bloomberg interview, Trump rejected EU’s offer to scrap auto tariffs on cars if US does the same. He said “it’s not good enough” and added that “Their consumer habits are to buy their cars, not to buy our cars.” He also added that EU is “almost as bad as China, just smaller.”
BoE MPC member Catherine Mann “The caps on energy prices allow the reorientation of spending to the rest of the consumption basket and thus potentially higher inflation than otherwise would be the case in all those other products… That’s something we look at carefully.”
“What’s going to happen when the caps are removed?” she asked. “Will inflation kind of bounce back? What will the energy prices be at that time? We don’t know.”
Mann was a hawk who voted for a 75bps rate hike at the December meeting. At the meeting, BoE decided to hike by 50bps in a 6-3 vote, with two members voted for no change.
Japanese Prime Minister Shinzo Abe’s ruling coalition kept a solid majority in the upper house election. He said today that “based on a stable political basis, the Abe cabinet will take more aggressive and bold economic measures than ever.”
Abe said “uncertainty remains over the global economic outlook such as trade frictions and Britain’s exit from the European Union… We’ll respond to downside risks without hesitation and take flexible and all possible steps.”
The Japanese government has designated JPY 2T in stimulus measures to offset the impact of the planned sales tax hike, from 8% to 10% in October. Abe also noted “we will underpin domestic consumption which accounts for the bulk of the economy by taking sufficient measures.”
China’s Commerce Ministry said that it has launched a complaint at the WTO against the US over tariffs. No details were released regarding the case, but MOFCOM just said the tariffs affected USD 300B of Chinese exports. It also said the latest tariff actions violated the consensus reached by presidents of both countries at G20 in Osaka.
Under WTO rules, the US will have 60 days to try to settle the dispute. Afterwards, China could WTO to adjudicate. If US is found to have broken rules, China would get approvals for trade sanctions. But even so, the process could take several years.
Germany Q2 GDP contraction was finalized by -9.7% qoq, revised up from -10.1% qoq. The single-digit decline was a pleasant surprise but it’s nevertheless still much larger that the -4.7% qoq recorded in Q1 2009 during the financial crisis. It’s also the sharpest contraction since quarterly calculations started back in 1970.
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Australia AiG Performance of Construction Index dropped -6.8 to 48.7 in July, recording the first contraction since September 2020. Looking at some details, activity dropped -14.4 to 40.4. Employment rose 2.5 to 60.8. New orders dropped -6.6 to 49.5. Supplier deliveries dropped -7.6 to 43.3. Input prices dropped -1.1 to 97.2. Selling prices dropped -4.0 to 81.2. Average wages rose 6.7 to 77.1.
Ai Group Head of Policy, Peter Burn, said: “With Australia’s two largest states affected by COVID-19 outbreaks and associated restrictions, the construction industry slipped into contraction in July after a robust nine-month expansion. The negative national result masked continued growth outside of NSW and Victoria and further expansions in both house building and commercial construction…
“The outlook over the next couple of months will depend heavily on the paths of the COVID-19 outbreaks and the extent of restrictions.”
Eurozone PMI Services was finalized at 55.0 in March, up from Februar’s 52.7. PMI Composite was finalized at 53.7, up from prior month’s 52.0. Both indexes were at their 10-month highs.
Looking at PMI Composite of some member states, improvements were seen in Spain (58.2, 16-month high), Italy (55.2, 16-month high), France (52.7, 10-month high), and Germany (52.6, 10-month high). Ireland dropped to 52.8, 2-month low.
Joe Hayes, Senior Economist at S&P Global Market Intelligence said eurozone economy is rebounding from the slowdown seen in late 2022, and for now, appears to be clear of a recession.
He noted that March’s economic activity increase was driven by strong growth in the service sector, but highlighted that growth varies across countries, with significant contributions from Spain and Italy. However, modest activity levels in Germany and France suggest a more conservative outlook for the eurozone’s overall economic health.
Hayes also mentioned that the case for further interest rate hikes remains strong, as inflation rates, though cooling from their peaks, continue to run high, especially in the service sector.
Canada CPI rose 0.8% mom in June, well above expectation of 0.4% mom. Annually, CPI turned positive to 0.7% yoy, up from May’s -0.4% yoy, and beat expectation of 0.3% yoy. That’s also the largest jump year-over-year CPI rate since March 2011. Prices rose in five of the eight major components on a year-over-year basis. Food and shelter prices contributed the most to the increase in the CPI. Prices for goods declined by less than the previous month on a year-over-year basis, including energy prices.
CPI common rose to 1.5% yoy, up from 1.4% yoy, above expectation of 1.4% yoy. CPI median rose was unchanged at 1.9% yoy, above expectation of 1.8% yoy. CPI trimmed accelerated to 1.8% yoy, up from 1.7% yoy, above expectation of 1.6% yoy.
FOMC rate decision is the major focus today. Just before last Friday, markets have well received Fed’s communication on the 50bps hike per meeting “plan”. But it’s another world now after data showed CPI inflation reaccelerated in May. Fed fund futures are pricing in near 100% change of a 75bps rate hike at this meeting. The question now is what Fed is going to deliver.
The new economic projections will also be closely watched too. The stubborn inflation reading should be reflected in the new forecasts, as well as it’s impact on growth and employment. More importantly, the dot plot will again catch most attention. Back in March, only 7 of 16 FOMC member penciled in interest rate above 2% by the end of 2022. The balance would likely shift further to the hawks’ side. But by how far?
Some suggested readings on FOMC:
The strong rally, with acceleration in 10-year yield this week is a big surprise. 2018 high at 3.248 was taken out with ease and it’s now close to 161.8% projection of 0.398 to 1.765 from 1.343 at 3.554. Break of 3.167 resistance turned support is needed to signal short term topping, or any retreat should be relatively brief. Sustained break of 3.554 will pave the way to 200% projection at 4.077, which is close to 4% handle.
BoC kept overnight rate unchanged at “effective lower bound” of 0.25% as widely expected. Bank rate and deposit rate are held at 0.20% and 0.25% respectively. BoC also maintained its “extraordinary forward guidance” of keep rates at current level until inflation objective is achieved Also, the quantitative easing program will continue at current pace of at least CAD 4B per week.
BoC noted globally, recent news of vaccines is “providing reassurance that the pandemic will end and more normal activities will resume”. However, “pace and breadth of the global rollout of vaccinations remain uncertain”. In the near term “new waves of infections are expected to set back recoveries in many parts of the world”.
Q3 Canadian data were consistent with expectations of a “sharp economic rebound”. However, “activity remains highly uneven across different sectors and groups of workers”. Record high cases in coronavirus in Canada are also “forcing reimposition of restrictions. That would “weigh on ” Q1 growth and ” contribute to a choppy trajectory until a vaccine is widely available”.
In Fed’s new median economic projections, comparing to June’s projection, the outlook in 2021 looks weaker with lower GDP growth projection, and higher unemployment rate and core PCE inflation. But a stronger bounce back is projected in 2022.
Meanwhile, the median projection now shows 1 rate hike in 2022. In the dot plot, 9 members penciled in one hike or more in 2022, versus 8 members expecting no change.
GDP growth:
Unemployment rate:
Core PCE inflation:
Federal funds rate:
The 20-minute telephone call between UK Prime Minister Boris Johnson and European Commission President Jean-Claude Juncker appeared to have delivered nothing new. Johnson’s spokespersons said he released that ” UK will be leaving the EU on October 31, whatever the circumstances, and that we absolutely want to do so with a deal.” Also, Johnson was “clear, however, that unless the Withdrawal Agreement is reopened and the backstop abolished there is no prospect of that deal.”
On the other hand, Juncker’s spokesperson said he “repeated his willingness to work constructively with Prime Minister Johnson and to look at any concrete proposals he may have, as long as they are compatible with the Withdrawal Agreement.” And, Juncker underlined the EU27’s support for Ireland is steadfast and that the EU will continue to be very attentive to Ireland’s interests.” Also, EU was “fully prepared for a no-deal scenario” and “a no-deal scenario will only ever be the UK’s decision, not the EU’s.”
Separately, the opposition parties were seeking to pass a law to force a Brexit delay to prevent no-deal Brexit.
Japan’s Cabinet Office said in the monthly economic assessment that the economy “shows weakness in some components further”. Private consumption shows “weakness further recently, especially in service spending.”.
Nevertheless, other assessments were largely unchanged. Business investment is “picking up”. Exports continue to “increase moderately”. Industrial production ins “picking up” Corporate profits are “picking up as a whole”. Employment situation shows “steady movement in some components”. Consumer prices are flat.
US commercial crude oil inventories dropped -1.0m barrels in the week ending October 16, versus expectation of 0.5m barrels rise. At 488.1m barrels, oil inventories are about 10% above the five year average for this time of the year. Gasoline inventories rose 1.9m barrels. Distillate dropped -3.8m barrels. Propane/propylene dropped -1.6m barrels. Commercial petroleum dropped -7.2m barrels.
WTI edged higher to 41.62 earlier in the week but failed to extend gain. Focus is back on 40 handle and sustained break will open up the way lower. But after all, it’s seen as stuck in medium term range pattern between 34.36 and 43.50. We’re not expecting a breakout soon and the path could be choppy, meaning that any move won’t be sustained.
In the summary of opinions of BoJ’s April 27 meeting, it’s warned that a “rapid economic contraction not seen since the Great Depression in the 1930s may occur in the short run”. And, policy authorities “must act decisively to avoid a second Great Depression”. Close cooperation between fiscal and monetary policies is “essential at the time of a significant economic crisis”.
It’s also noted the assumptions that the pandemic will subside soon and “economic structure before and after that happens will not change”. However, due to “extremely high uncertainties”, it’s necessary for BoJ to factoring in the “such assumptions might not be realized”.
US treasury yields jumped sharply overnight after Fed Chair Jerome Powell announced that adoption of “average inflation targeting”. That goes beyond the “symmetric” targeting, and allows inflation to overshoot to average out at 2% over time. While there was some initial jitters after Powell noted the overshoot would be “moderate”, traders eventually made up their mind in pushing yields higher.
10-year yield rose 0.059 to close at 0.746, resuming the rebound form 0.504. The notable support from 55 day EMA is a positive development for TNX. It should now be on track to take on June’s resistance at 0.957. Technically, firm break there would confirm completion of the whole consolidation pattern from 1.266. But we do not envisage this for the near term.
Similarly, 30-year yield closed up 0.094 at 1.500. Rebound from 1.165 has resumed after drawing support form 55 day EMA. Further rise should be seen to 1.761 resistance next. Firm break there will confirm completion of the consolidation pattern from 1.940.
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BoJ tweaks YCC to allow 10-yr yield to rise to 0.50%
BoJ surprises the markets today by widening the band of 10-year JGB yield from 0.25% to 0.50% today. At the same time, short term policy rate is kept unchanged at -0.10% as expected.
Under the yield curve control framework, the central bank will still continue to purchases JGBs without an upper limit to keep 10-year yield at around 0%. But now, the bank will offer to purchase 10-year JGB yields at 0.50% every business day through fixed-rate operations, effectively allowing 10-year yield to rise towards 0.50% level.
Full statement here.