Tue, Oct 15, 2019 @ 23:36 GMT

EU Barnier: No-deal Brexit becomes more likely but we can still avoid it

    EU chief Brexit negotiator Michel Barnier said at an event in Brussels that “over the last days a no-deal scenario has become more likely.” Though, he remained optimistic that “we can still hope to avoid it.” He urged the UK to “indicate the way forward or indicate a plan… more today than ever”. He reiterated the agreement Brexit deal was “the only way” to leave EU in an orderly way.

    Meanwhile, Barnier also said EU27 is ready for a disorderly, abrupt Brexit. But he emphasized: “Being prepared for no-deal doesn’t mean that everything will be smooth. There will be disruptions, there will be problems. Being prepared means all unforeseen disruptions could be managed by the EU”.

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    German Ifo Business Climate dropped to 99.1, lowest since Feb 2016

      German Ifo Business Climate dropped to 99.1 in January, down from 101.0 and missed expectation of 100.6. It’s also the lowest level since February 2016. Current situation gauge dropped to 104.3, down from 104.9, slightly above expectation of 104.2. Expectations gauge dropped to 99.4, down from 97.3 and missed expectation of 97.0.

      Ifo President Clemens Fuest noted “disquiet is growing among German businesses”, and “the German economy is experiencing a downturn.”

      Full release here.

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      UK confirmed arranging Brexit parliament vote on Jan 15, subject to approval

        UK Prime Minister Theresa May’s spokesman James Slack confirmed today that a vote is scheduled in the parliament on Tuesday, January 15 on the Brexit agreement. He told reporter that “Subject to parliament approving a business motion, the debate will be opened tomorrow … The prime minister said that she would close the debate next Tuesday, which is January 15, when the vote will take place,”

        Also he added that May is not trying to delay Brexit by extending Article 50 withdrawal notice. And, the idea may have been discussed by EU officials but not by British officials.

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        Atlanta Fed Bostic: Some overshoot in inflation is fine

          Altlanta Fed President Raphael Bostic said in an interview:

          • “We have seen some upward pressure” on inflation.
          • “We don’t have the ability to stop trends on a dime. Some overshoot is fine,”
          • If current trends continue, “we are going to see wages start to go up because we will truly have a scarcity of labor,”
          • “I am not sure there is a big signal” in that on inflation.
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          US steel tariff temprary exemptions to end on May 1

            The temporary exemptions on US steel and aluminum tariffs will expire tomorrow on May 1. There is little progress made on trade negotiation between the US and other countries. Commerce Secretary Wilbur Ross was quoted saying that some countries will have their exemptions extended, but not all. But there is no more information from the White House regarding the pressing issue.

            So far, only South Korea is granted permanent exemptions after revising the bilateral free trade agreements with the US. There, South Korea agreed to a quota of around 2.7 million tons of steel exports to the US. And, the quota for US car imports was doubled to 50,000, without the requirement to meet local safety standards.

            NAFTA negotiations made some progress last week after intensive work, but it’s not ready to be wrapped up before May 1 target. Talks will instead resume on May 7 after US Trade Representative Robert Lighthizer returns from his China trip. It’s believed that Canada and Mexico will have their exemptions extended but it’s only confirmed when it’s announced.

            Canadian Foreign Minister Chrystia Freeland reiterated her stance that NAFTA is a “completely separate track” from the steel tariffs. And, “there is no justification whatsoever for tariffs or quotas on Canadian steel or aluminum as a national security consideration.” Mexican Economy Minister Ildefonso Guajardo warned of retaliation and said “ambassador Lighthizer knows very clearly our position and how we have to react if any measure is imposed on Mexico.” It’s reported that Mexico already has a list of American products that it would tax in retaliation.

            German Chancellor Angela Merkel also warned of retaliation. She issued a statement after dialogue with French President Emmanuel Macron and UK Prime Minister Theresa May. Merkel said the three leaders “agreed that the U.S. ought not to take any trade measures against the European Union,” which is “resolved to defend its interests within the multilateral trade framework.”

            This topic will make some headlines in the early part of the week.

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            UK Hammond repeats usual warning on no-deal Brexit

              UK Chancellor of the Exchequer Philip Hammond repeated his usual warnings today that in case of no-deal Brexit, “there will be very significant disruption in the short term and a very significant hit to our economy in the medium to long term.” And, he pledged that “our job is deliver the British people what they believe they were promised in that referendum. To make sure we respect the decision of the referendum but do it in a way that gives them the future prosperity they were promised.”

              Hammond refused to say if he would step down in no-deal Brexit. He just said “I’m not going to speculate because a lot depends on the circumstances, what happens. The responsibility I have is to manage the economy in what is in the best interests of the British people. Now I clearly do not believe that making a choice to leave without a deal would be a responsible thing to do.”

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              Evans: Fed should embrace inflation above 2%, 50% of time

                Chicago Fed President Charles Evans said on Monday that Fed’s policy has been “successful” in achieving the maximum employment mandate. It’s “less successful” regarding the inflation objective. And to fix this, he added, “Fed must be willing to embrace inflation modestly above 2 percent 50 percent of the time.” For him, he would “communicate comfort” with core inflation at 2.5%, as long as there is “no obvious upward momentum” while the path back to 2% can be “well managed”.

                For now, Evans is still expecting that “some further rate increases may be appropriate over time”. He expects growth to be at around 1.75-2.00% this year. Still he maintained that current patient stance is appropriate given the “heightened uncertainty” including US-China trade war. He also emphasized that “if activity softens more than expected or if inflation and inflation expectations run too low, then policy may have to be left on hold – or perhaps even loosened – to provide the appropriate accommodation to obtain our objectives.”

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                German Ifo dropped to lowest since Dec 2014, economic situation remains weak

                  German Ifo Business Climate dropped to 98.5 in February, down from 99.3 and missed expectation of 98.9. That’s also the lowest level since December 2014, and the sixth decline in a row. Expectations index dropped to 93.8, down from 94.2 and missed consensus of 94.2. Current Assessment index also dropped to 103.4, down from 104.3 and missed expectation of 103.9.

                  Clemens Fuest, President of ifo Institute said “these survey results as well as other indicators point to economic growth of 0.2 percent in the first quarter. The economic situation in Germany remains weak.”

                  Full release here.

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                  A look at 10- and 30-year yield after yesteday’s sharp fall

                    The sharp fall in 10 year yield yesterday, down -0.021 to close at 2.936, is in line with our view that TNX has topped out in near term. And we’ll likely see more downside in near term. First line of defence is at 55 day EMA (now at 2.827). But as mentioned in the weekly report, if fall from 3.035 is correcting the five wave sequence from 2.033, then it could drop further to 2.717 support before completion. We’ll continue to see how it’s playing out given the number of important events in US this week, including FOMC, ISMs and NFP. But after all, having some consolidations before another take on key resistance of 2013 high at 3.036 is not unreasonable.

                    30 year yield’s sharp fall also confirmed short term topping at 3.219 after failing 3.221 near term resistance. For now TYX would dip lower back to 55 day EMA (now at 3.062). Or it would have another take on 50% retracement of 2.651 to 3.221 at 2.936.

                    Meanwhile, we’d like to point out again that while there is some downside for yields, we’re not expecting it to drag down the Dollar. Instead, they might just give no support to the greenback.

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                    Into US session: AUD strongest, USD and JPY weakest ahead of NFP

                      Entering into US session, Australian Dollar remains the strongest one for today on optimism that there would be break through in US-China relationship that would avert full-blown trade war. Swiss franc, though, overtook New Zealand’s position as the second strongest. As the financial markets are enjoying strong risk appetite, in particular in Asia, Yen is naturally the weakest one. Without support of trade war, Dollar’s selloff intensifies today. Focus will turn to non-farm payroll to be release within less than an hour.

                      The “positive” telephone call between Trump and Xi was the turning point this week. And both sides appear to sound positive and “nice” after that. US and China are now preparing the meeting of the two presidents as sideline of G20 summit in Argentina on Nov 30 – Dec 1. Ahead of that, it’s also reported that Trump asked his key cabinet secretaries to draw up a potential agreement to sign during the meeting, as cease-fire in escalating trade war. Multiple agencies are believed to be involved in drafting the plan.

                      In European markets, at the time of writing:

                      • FTSE is up 0.82%
                      • DAX is up 1.60%
                      • CAC is up 1.41%
                      • German 10 year yield is up 0.032 at 0.433.
                      • Italian 10 year yield is down -0.076 at 3.304. Spread continued to narrow.

                      Earlier in Asia:

                      • Nikkei rose 2.56% to 22423.66
                      • Hong Kong HSI rose 4.21% to 26486.35
                      • China Shanghai SSE rose 2.70% to 2676.48
                      • Singapore Strait Times rose 1.81% to 3116.39.
                      • USD/CNH is now at 6.8635, comparing to the near term top made yesterday at 6.9871
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                      US initial jobless claims rose 9k to 229k, import price rose 0.6% mom

                        US initial jobless claims rose 6k to 229k in the week ending March 9, above expectation of 225k. Four-week moving average of initial claims dropped -2.5k to 223.75k.

                        Continuing claims rose 18k to 1.776M in the week ending March 2. Four-week moving average of continuing claims dropped -1k to 1.766M.

                        Import price index rose 0.6% mom in February, fasting in 9 months, well above expectation of 0.3% mom.

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                        Fed Bostic: Fed at or near objectives, supports further rate hikes

                          Atlanta Fed President Raphael Bostic sounds upbeat in his prepared speech for Knoxville Economic Forum.

                          With six month core inflation at 2%, and unemployment rate at 4.1%, he considered Fed is “at or near the sustainable employment and inflation objectives.”

                          Regarding interest rate, he said that “if the economy evolves roughly as I suspect, I will likely support further increases over the course of the year.”

                          And, “with the economy operating near its potential and inflation finally approaching the long-run target, it is appropriate, in my opinion, for monetary policy to be moving toward a more neutral stance.”

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                          German ZEW: Dramatic deterioration in current situation, indicative of weak Q4

                            German ZEW economic sentiment improved to -17.5 in December, up from -24.1, better than expectation of 025.0. However, current situation index dropped to 45.3, down from 58.2, missed expectation of 55.6. Eurozone ZEW economic sentiment improved slightly to -21.0, up from -22.0, and beat expectation of -23.2. Eurozone current situation dropped -6.1 to 12.1.

                            ZEW President Achim Wambach noted in the release that the rise in expectation “should not be over-interpreted”. He added that “the assessment of the economic situation has worsened dramatically for both Germany and the Eurozone” And, this is “indicative of relatively weak economic growth in the fourth quarter”. Also, uncertainties remain in terms of the “looming international trade dispute and Brexit, which have a particularly negative impact on private investment and Germany’s exports”.

                            Full release here.

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                            Trump: We don’t have a tariff problem, we have a Fed problem

                              US President Donald Trump complains Fed again today. He pointed to “Euro is dropping against the Dollar ‘like crazy'”. (Our comment: No, it’s just a small decline). And, that give Eurozone a “big export and manufacturing advantage”. At the same time “Fed does NOTHING!”.

                              Trump repeated his usual comment that “if the Fed would cut, we would have one of the biggest Stock Market increases in a long time.” He went further that “we don’t have a Tariff problem”, “we have a Fed problem”.

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                              Sterling rebound lost steam after UK PM May survived leadership challenge

                                Sterling softens mildly in Asia after UK Prime Minister Theresa May survived the leadership challenge. 200 Conservative MPs voted in support for May in the no-confidence vote. 117 voted against her. That’s way more than enough to secure her place as Prime Minister. But it’s still alarming than more than a third of the MPs of her party wanted her out. May herself also admitted that “a significant number of colleagues did cast a vote against me and I’ve listened to what they said”. But she added it’s time to “get on with the job of delivering Brexit for the British people”.

                                May will go to Brussels for the two day EU summit today. But she’s only given 10 mins to tell EU leaders what she needs to get the Brexit agreement through parliament. EU’s stance is very clear that the agreement itself is not renegotiable. But they’re open to offer “assurances” regarding the Irish border backstop, and others. The results of the summit could continue to trigger volatility in the pound.

                                Despite yesterday’s rebound, Sterling remains near term bearish. 1.2811 resistance in GBP/USD 144.02 resistance in GBP/JPY and 0.8931 support in EUR/GBP need to be taken out to confirm short term bottoming. Otherwise, more selloff is still in favor in the Pound.

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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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                                  ECB Rehn: Should developments require ECB would use forward guidance, cut rates or reven relaunch QE

                                    ECB Governing Council member Olli Rehn said “in case of a further weakening of economic activity and a materialization of adverse contingencies, the Governing Council is determined to act and stands ready to adjust all of its instruments, as appropriate”.

                                    To be more specific, “the Governing Council may, should economic developments so require, strengthen its forward guidance and its linkage to the achievement of the price stability objective, lower the monetary policy rates and introduce possible mitigating measures, and/or relaunch net purchases under the securities purchase program.

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                                    Italy PMI services rose to 50.4, but not much sign of relief

                                      Italy PMI services rose to 50.4 in February, up from 49.7 and beat expectation of 49.5. Markit noted that “activity rises slightly in February”, “new orders fall for first time since February 2015”, and there was “third consecutive fall in selling prices”.

                                      Commenting on the PMI data, Amritpal Virdee, Economist at IHS Markit said:

                                      “With the Italian economy currently in a recession (its third in the past ten years), February’s Italian Services PMI data did not provide much sign of relief.

                                      “Inflows of new business contracted for the first time in four years, amid the third month of falling output charges, signalling that attempts by service providers to stimulate customer demand are not always proving effective.

                                      “Despite positive signs in the form of an increase in payroll numbers and an up-tick in optimism, the latest PMI data indicates that the private sector remains on course for a further contraction in the first quarter of 2019.”

                                      Full release here.

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                                      Fed Evans: The two rate cuts were just modest adjustment for risk management

                                        Chicago Fed President Charles Evans said “the U.S. economy continues to grow above trend … U.S. economic outlook is quite good, it still has strong fundamentals.” The two rate cuts this year were “modest adjustments” as “risk management to help make things work out better as we strive to bring in growth at about 2% over the next 18 months”.

                                        He added that “if there is an event that shocks the world economy or the U.S. economy, these modest adjustments are not going to be nearly enough”.

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                                        US PMI manufacturing dropped to 21-month low, gap opening up with services

                                          In March, US PMI manufacturing dropped to 52.5, down from 53.0 and missed expectation of 53.6. That’s the lowest level in 21 months. PMI services dropped to 54.8, down from 56.0 and missed expectation of 55.8. PMI composite dropped to 54.3, down from 55.5. That’s a 6-month low too.

                                          Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                                          “US businesses reported a softer end to the first quarter, with output growth easing to the second lowest recorded over the last year. The PMI survey data nevertheless remain encouragingly resilient, indicative of the economy growing at an annualised rate in excess of 2% in the first quarter, suggesting some potential upside to many current growth forecasts.

                                          “A gap has opened up between the manufacturing and service sectors, however, with goods-producers and exporters struggling amid a deteriorating external environment and concerns regarding the impact of trade wars. The survey is consistent with the official measure of manufacturing production falling at an increased rate in March and hence acting as a drag on the economy in the first quarter.

                                          “At the moment, the service sector appears to be holding up relatively well. But the worry is that manufacturing woes are spreading to service providers, via reduced demand for services such as transport and storage as well as deteriorating business optimism about the outlook – which fell to the lowest for nearly three years in March – and a cooling of the labour market. The survey showed hiring across both manufacturing and services hit the weakest for just under two years in March.

                                          “Price pressures have meanwhile cooled alongside the slowdown. Input prices – a key leading indicator of inflation trends – rose at the slowest rate for two years.”

                                          Full release here.

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