Sun, May 24, 2020 @ 21:35 GMT

RBA cut 2020 growth forecast, Lowe warned of coronavirus risks

    RBA Governor Philip Lowe told a parliamentary economics panel that the board is “expecting progress to be made towards the inflation target and full employment”. But the progress will be “only gradual” with uncertainties. The board “has been discussing” the case of further easing. But considering the balance of pros and cons, RBA decided to keep cash rate unchanged this week.

    Lowe added, “if the unemployment rate were to be moving materially in the wrong direction and there was no further progress being made towards the inflation target, the balance of arguments would tilt towards a further easing of monetary policy.”

    Additionally, he also said it’s “still too early to tell” about the impact of China’s coronavirus outbreak. But he warned, “the impact is going to be large”. And, “given what we know at the moment”, the hit to Australian economy would be worse than SARS. He added, the outbreak could take 0.2% off the Australia’s growth. But, if the virus “persists for an extended period, the effect on economic activity is likely to be larger than currently projected,”

    In the Statement of Monetary Policy, RBA cut 2020 year-average GDP growth forecast from 2.75% to 2.25%. But 2020 year-average GDP growth forecasts was held unchanged at 3.00%. Unemployment rate forecast was lowered from 5.25% to 5.00% by December 2020, and from 5.00% to 4.75% by December 2021. Headline CPI forecasts was unchanged at 1.75% by December 2020 and 2.00% by December 2021.

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    European Update: Sterling pares gain as Brexit optimism turns into cautiousness

      Sterling reversed some of this week’s gain as Brexit optimism has now turned into cautiousness. UK Prime Minister Theresa May will hold a Cabinet meeting shortly to secure support for her agreement with the EU. And she plan to issue Commons statement after that. EU’s chief negotiator Michel Barnier also plans to make a statement today on the status, and hopefully, he would declare “decisive progress” for a November EU summit. The could be some more volatility in the pound in the upcoming hours.

      For now, New Zealand Dollar remains the strongest one for today, followed by Canadian Dollar and then US Dollar. WTI crude oil dipped to as low as 54.84 but it’s now back above 56. The recovery is giving Canadian a breath but that could be temporary. Meanwhile, Swiss Franc is trading as the weakest one, followed by Australian Dollar and then Sterling.

      Economic data released today saw US CPI and core CPI stalled at 2.4% yoy and 1.9% yoy respectively. German GDP and Japan GDP contracted in Q3 and both were attributed to global trade tensions. US CPI will be the next focus.

      In European markets, major indices are trading mildly softer today. At the time of writing:

      • FTSE is down -0.02%
      • DAX is down -0.34%
      • CAC is down -0.42%
      • German 10 year yield drops -0.018 to 0.396
      • Italian 10 year yield is up 0.043 at 3.490. German-Italian spread is now at 310. That came after Italy refused to change its 2019 deficit target in the resubmitted plan to EU.

      Earlier in Asia

      • Nikkei closed up 0.16%
      • But Hong Kong HSI dropped -0.54%
      • China Shanghai SSE dropped -0.85%
      • Singapore Strait Times dropped -0.34%
      • Japan 10 year JGB yield dropped -0.0077 to 0.108. We haven’t seen it below 0.11 for a while.
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      US-China trade talks continue after very productive working dinner

        US-China trade talks entered a full day meeting in Beijing today. Treasury Secretary Steven Mnuchin said as he left his hotel today that “we had a very productive working dinner last night, and we are looking forward to meeting today.” As in other similar occasions, there was no further elaboration. Meanwhile, Trade Representative Robert Lighthizer was quiet on the topic.

        Back in the US, White House economic adviser Larry Kudlow said the trade negotiation is “not time-dependent” but “policy- and enforcement-dependent”. And it may take “if it takes a few more weeks, or if it takes months, so be it.” On the topic of lifting imposed tariffs in case of a deal, Kudlow said “we’re not going to give up our leverage”. Nevertheless, “It doesn’t necessarily mean that all of the tariffs would be kept in place. Some of the tariffs would be kept there.

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        China announces tariff reductions and measures to promote foreign investment and trade

          China’s State Council announced measures to promote foreign investment projects, lower tariffs on some commodities and speed up customs clearance processes. It should be noted that while lowering of tariffs catches most headlines, there are other measures that would be welcomed by foreign companies doing business in and with China. It’s clearly a gesture for its trade and economic partners like the EU that China is speeding reform and opening up the markets further. At the same time, China is maintaining its firms stance in against Trump’s bullying in trade war.

          On promoting “predictable and attractive” environment for foreign investments, China pledged to deepen the reform of “distribution management” and treat foreign and domestic capital equally. Secondly, China will encourage foreign re-investments by expanding the coverage of withholding tax exemptions. Thirdly, China pledged to protect vigorously protect intellectual property rights and further standardize government supervision and enforcement.

          Starting November 1, China will lower tariffs of 1585 product lines, including machinery, paper, textiles and construction materials. The reduction should reduce tax burden on enterprises and consumers by nearly CNY 60B. And, total tariff level of China will be reduced from 9.8% in 2017 to 7.5%.

          Average rate for electromechanical equipment will be lowered from 12.2% to 8.8%. Average tax rate for textiles, building materials will be cut from 11.5% to 8.4%. Average tax rate for some resource products and primary processed products such as paper products will but reduced from 6.6% to 5.4%.

          Also, starting November 1, customs clearance process will be simplified. Number of regulatory documents required for verification will be nearly halved from 86 to 48. Non-compliances charges will be standardized and announced before the end of October.

          Full State Council release (in simplified Chinese).

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          China said it won’t devaluate Yuan to stimulate exports, but how about intervention to halt Yuan’s fall?

            China Foreign Ministry spokesman Geng Shuang said in a regular press briefing today that “China does not intend to stimulate exports through the currency competitive devaluation” and added that’s China’s consistent position. He went further to emphasize that the “RMB exchange rate is mainly determined by the market supply and demand.” And for now, “China’s economic fundamentals continue to improve, providing strong support for the RMB exchange rate to remain basically stable.”

            However, Geng didn’t directly say China has not intervene in the markets. It’s suspected that a state own-bank has stepped in last Friday selling US Dollar to halt the decline of the yuan when USD/CNY (on shore yuan) breached the government’s red line of 6.8. US Treasury Steven Mnuchin said last Friday that the US will monitor if China has manipulate the Yuan exchange rate. Mnuchin has to deliver his promise and come out to warn China for not intervening in the markets again, and just let Yuan falls against Dollar, if he didn’t lie.

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            Eurozone industrial production dropped -0.9% mom in Dec

              Eurozone industrial production contracted -0.9% mom in December, much worse than expectation of -0.4% mom. Over the year, IP dropped -4.2% yoy. Looking at the industrial groupings, production of both capital goods and non-durable consumer goods fell by -1.5% and energy by -0.4%, while production of intermediate goods remained unchanged and durable consumer goods rose by 0.7%. For EU 28, industrial productions dropped -0.5% mom, -2.7% yoy.

              Full release here.

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              New Zealand CPI rose 0.6% qoq, NZD/USD extending rebound

                New Zealand CPI rose 0.6% qoq 1.7% yoy in Q2, matched expectations. The annual rate accelerated from 1.5% yoy in Q1. However, the rise in headline inflation was largely due to the 5.8% quarter increase in petrol price, which contributed 0.25% to the 0.6% qoq figure. That suggests the pick-up could be temporary only, not to mention that annual CPI remains firmly below 2% mid-point of RBNZ’s 1-3% target range.

                Stronger monetary stimulus and economic growth is required to lift inflation sustainably back to the 2% target. Yet, domestic and global headwinds remain. Thus, more OCR cuts are still expected for RBNZ. August could be the month to deliver even though it’s not totally certain yet.

                Full release here.

                NZD/USD’s choppy rebound from 0.6481 resumed this week by taking out 0.6726 resistance. Such rise is seen as part of the sideway pattern from 0.6424. It should now be heading to 78.6% retracement of 0.6969 to 0.6481 at 0.6865. But upside should be limited below 0.6969 resistance to bring near term reversal.

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                Eurozone PMI composite finalized at 53.3, suggests 0.2% growth in Q1

                  Eurozone PMI services was finalized at 53.3 in March, revised up from 52.7, up from February final at 52.8. PMI composite was finalized at 51.6, down from February’s 51.9. Among the member states, France PMI composite was finalized at 48.9, a 2-month low. Germany PMI composite was finalized at 51.4, a 69-month low. Italy PMI composite improved to 5.15, a 6-month high.

                  Chris Williamson, Chief Business Economist at IHS Markit said:

                  “The final eurozone PMI for March confirms the sluggish end to the first quarter, with business growth ebbing to one of the most lethargic rates seen since 2014.

                  “Only at the turn of the year, when business was hit by headwinds such as widespread ‘yellow vest’ protests in France and an auto sector struggling with new emissions regulations, has growth been slower over the past four years. The rebound from these temporary headwinds has clearly been disappointing and is already losing momentum, led by a deepening downturn in manufacturing. The goods producing sector reports that global growth worries have intensified, meaning customers continue to pull back on spending.

                  “The service sector has managed to sustain a relatively resilient rate of growth but has also lost momentum in recent months. This should come as no surprise as history tells us that robust service sector growth usually depends on a healthy manufacturing economy.

                  “At current levels, the PMI remains consistent with GDP rising by 0.2% in the first quarter, but unless manufacturing pulls out of its downturn the overall pace of economic growth will likely weaken in the second quarter as the malaise spreads to the service sector. In this respect, with forward-looking indicators from the manufacturing sector suggesting goods production will fall further in the coming months, downside risk to the outlook have intensified.”

                  Full release here.

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                  IMF lowers 2019 global growth forecast to 3.5%, risks rising

                    IMF revised down global growth forecasts and warned that “the global expansion is weakening and at a rate that is somewhat faster than expected.” Also, ” risks to more significant downward corrections are rising.”

                    And, “while financial markets in advanced economies appeared to be decoupled from trade tensions for much of 2018, the two have become intertwined more recently, tightening financial conditions and escalating the risks to global growth.”

                    In particular, IMF warned that “an escalation of trade tensions and a worsening of financial conditions are key sources of risk to the outlook.” Meanwhile, China’s slowdown could be worsened by trade tensions and trigger “abrupt sell-offs in financial and commodity markets”. “Brexit cliffhanger”, “financial risk in Italy ” and “protracted US federal government shutdown” are other risks.

                    To summarize, for 2019:

                    • Global growth is projected at 3.5%, down from prior 3.7% (October forecast).
                    • US growth is projected at 2.5%, unrevised.
                    • Eurozone growth is projected at 1.6%, down from prior 1.9%.
                    • Japan growth is projected at 1.1%, up from prior 0.9%
                    • China growth is projected at 6.2%, unrevised.

                    Full release here.

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                    Fed Kashkari: Coronavirus impacts potentially even worse than financial crisis

                      Minneapolis Fed President Neel Kashkari “how the virus progresses is really going to determine what the ultimate economic impact is”. He’s rather pessimistic, noting “it unfortunately could be devastating, like the financial crisis, or potentially even worse.”

                      Meanwhile, he told the Congress that “speed is of the essence here”. “Whatever Congress is going to do, the faster they can do it, and the more aggressively they can do it, the more people we can help.”

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                      SNB Zurbruegg: Will stick to boring expansionary policy

                        SNB Deputy Chairman Fritz Zurbruegg said the central bank will stick to the boring expansionary monetary policy today.

                        He said, “we are boring and are sticking to our expansionary monetary stance.” He reiterated “we speak of negative interest rates and a readiness to intervene in the foreign exchange markets.” And he emphasized “we have flexibility and room to manoeuvre on both core instruments. We are absolutely convinced we can use these tools and will continue to do so.”

                        Also Zurbruegg he noticed that international developments are having strongest influences on the Franc exchange rate. However, “it is not a given that we have to react to each and every development.”

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                        Australia consumer sentiment dropped 5-yr low, spectacular drop in economic expectations

                          Australia Westpac consumer sentiment dropped -3.8% to 91.9 in March, hitting the lowest level in five years. More importantly, it’s the second lowest level since the global financial crisis. Across the five component sub-indexes, biggest fall was around expectations for the economy, The “economy, next 12 months” sub-index recorded a spectacular -12.8% drop taking it to 77.9, a five year low.

                          Westpac said, “The Reserve Bank Board next meets on April 7. Given the clear risks being faced by the Australian economy over the next few months the Board is likely to lower the cash rate by a further 0.25%.”

                          And, cash rate will hit RBA’s lower bound of 0.25%, “the next policy approach is likely to involve a form of unconventional monetary policy where indications are that the Board favours the approach of setting a rate target further out the yield curve and signalling the commitment to defend that target”.

                          Full release here.

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                          Canada PMI manufacturing dropped to lowest since Jan 2017

                            Canada PMI manufacturing dropped to 53.6 in December, down from 54.9. That’s also the lowest level since January 2017. Markit noted “softer rates of output and new order growth” and “export sales stagnate at the end of 2018”.

                            Christian Buhagiar, President and CEO at SCMA said:

                            “December data signalled a loss of momentum for manufacturers at the end of the year, with stagnating export sales and softer energy sector demand the key factors behind an overall slowdown in production growth. Survey respondents also commented that global trade tensions has led to greater risk aversion among clients. As a result, manufacturing companies have curtailed their expectations for output growth in 2019, with business optimism easing to its lowest for almost three years.

                            “Quebec was a notable outperformer in December as manufacturing conditions improved at the fastest pace for four months. Meanwhile, manufacturers in Ontario saw softer overall growth than in November, while those based in Alberta & British Columbia experienced the weakest upturn for just over two years.”

                            Full release here.

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                            Dollar rebounds despite Fed’s dovish economic projections

                              Dollar rebounds after Fed’s rate hike, in particular against Aussie Yen also strengthens together against Euro and Swiss Franc. Meanwhile, Stock pares back some initial gains. The driving force for Dollar’s rebound is to be investigated. But overall, Fed’s new projections are quite dovish. (Yet, a possible reason might be….. Fed is not stopping after today’s hike yet).

                              First and most important on longer run federal funds rate, seen as Fed’s view on neutral:

                              • Median – revised to 2.8%, down from 3.0%
                              • Central tendency – revised to 2.5-3.0%, somewhat down from 2.8-3.0%
                              • Range – unchanged at 2.5-3.5%

                              For 2019

                              • Median – revised to 2.9%, down from 3.1%
                              • Central tendency – revised to 2.6-3.1%, down from 2.9-3.4%

                              Overall, the revision argues that Fed might have one or at most two more rate hikes in 2019, rather than three as implied in September projections.

                              On growth:

                              • 2019 median growth projection was revised to 2.3%, down from 2.5%
                              • 2020 median growth projection was unchanged at 2.0%

                              On unemployment:

                              • 2019 median unemployment rate projection was unchanged at 3.5%
                              • 2020 median unemployment rate projection was revised to 3.6%, up from 3.5%

                              On core inflation:

                              • 2019 median core PCE projection was revised to 2.0%, down from 2.1%
                              • 2020 median core PCE projection was revised to 2.0%, down from 2.1%
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                              US-China tensions intensified after Senate passed HK Human Rights and Democracy Act

                                Political tensions between US and China intensified after Senate passed the “Hong Kong Human Rights and Democracy Act” that aims as backing Hongkongers’ push for autonomy that China promised in the Sino-British Joint Declaration. The Senate also unanimously passed a bill to ban export of munitions such as tear gas, pepper spray and rubber bullets to the Hong Kong police force.

                                Senator Marco Rubio of Florida, the bill’s lead sponsor, said “The United States has treated commerce and trade with Hong Kong differently than it has commercial and trade activity with the mainland of China.” He added “but what’s happened over the last few years is the steady effort on the part of Chinese authorities to erode that autonomy and those freedoms.”

                                The passage of the bill drew strong objections by China. In a statement, the foreign ministry said Vice Foreign Minister Ma Zhaoxu summoned William Klein, the U.S. embassy’s minister counselor for political affairs. Ma told Klein the situation in Hong Kong was part of China’s internal affairs and demanded that the U.S. stop its meddling.

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                                Swiss Franc rebounds on SNB’s less dovish than expected hold

                                  Swiss Franc notably after SNB left policy rate unchanged at -0.75%. The central bank reiterated the commitment to “intervene in the foreign exchange market as necessary, while taking the overall currency situation into consideration”. The so-called exemption threshold for negative interest rates was raised from 20 times of minimum reserve to 25 times. The overall announcement is seen as much less dovish than expected.

                                  Both GDP and CPI forecasts were lowered. GDP growth is expected to reach 0.5-1% this year, down from 1.5% projected in June. CPI is revised lower to 0.4% for this year, down from 0.6% previously. Inflation is expected to ease further to 0.2% in 2020 (previous: 0.7%) before recovering to 0.6% in 2021 (previous 1.1%).

                                  More in SNB Raises Exemption Threshold for Negative Rate; CHF Rises on No Rate Cut, SNB’s statement

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                                  UK PM May focused on getting parliament vote on Brexit, not plan B

                                    On her way to G20 summit in Argentina, UK Prime Minister Theresa May said she’s focusing on the Brexit vote in the Parliament rather than a plan B. She said, “The focus of myself and the government is on the vote that is taking place on Dec. 11. We will be explaining to members of parliament why we believe that this is a good deal for the UK.”

                                    And, she added “I ask every member of parliament to think about delivering on the Brexit vote and doing it in a way that is in the national interest and doing it in a way that is in the interests of their constituents because it protects jobs and livelihoods.” Also, “We haven’t had the vote yet. Let’s focus on the deal that we have negotiated with the European Union.”

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                                    Gold in second leg of medium term consolidation with current rebound

                                      Gold’s break of 55 day EMA now suggests that fall from 1703.28 has completed at 1451.16. Notable support was seen from 55 week EMA and above 1445.59 structural level. Nevertheless, such decline is just seen as the third leg of a medium term corrective pattern, to the whole rise from 1160.17. Therefore, while further rebound could be seen, upside should be limited by 1703.28 high. Another falling leg is expected at a later stage, to complete a three-wave corrective pattern.

                                      The eventual depth of the correction would very much depend on the strength of the current second leg rebound. We’d keep open the case for a take of 1365.26 cluster support (61.8% retracement of 1160.17 to 1703.28 at 1367.63) before completing the correction.

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                                      Bostic: Fed should be patient and wait for greater clarity on economic outlook

                                        Atlanta Fed President Raphael Bostic said Fed should be patient on the next interest rate move until there is greater clarity on the economic outlook. He noted that business executives are “starting to examine their own business strategies and initiatives in anticipation of slowing economic conditions either through deleveraging or holding off on expansionary plans”. And, the financial markets showed that there was “heightened uncertainty and concern” among investors.

                                        Bostic said “The appropriate response is to be patient in adjusting the stance of policy and to wait for greater clarity about the direction of the economy and the risks to the outlook”. And, “All the available evidence at the moment points to caution regarding firms’ approach to expansion. As long as that caution exists I suspect it will act as a natural governor” on growth.

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                                        ECB Draghi: No convincing signs of rebound on growth in near future

                                          ECB President Mario Draghi told the European Parliament economic affairs committee that there is no sign of a rebound in the economy yet. He said “recent data and forward-looking indicators – such as new export orders in manufacturing – do not show convincing signs of a rebound in growth in the near future and the balance of risks to the growth outlook remains tilted to the downside.” He also warned “the longer the weakness in manufacturing persists, the greater the risks that other sectors of the economy will be affected by the slowdown.”

                                          Separately, Governing Council member Klaas Knot told Dutch parliament’s finance committee that parts of ECB’s recent stimulus were “disproportionate”. And, he was “not in agreement with the new programme in its entirety.” Additionally, he questioned savers’ response if commercial banks were to impose negative interest rates. “We don’t know what would happen because that’s never happened before,” Knot. “If they were to pull their savings, that could cause a bank run.”

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