In the October Philadelphia Fed Manufacturing Business Outlook Survey, the diffusion index for current general activity dropped to 23.8, down from 30.7, below expectation of 26.0.
Looking at some details, current shipments index was essentially unchanged at 30.0. New orders rose 15 pts to 30.8. Employment index rose from 26.3 to 30.7. The index for prices paid rose 3 pts to 70.3. Current prices received index dropped -2 to 51.1. Price indicators remained elevated.
SNB Governing Board member Andrea Maechler said the central bank is maintaining negative interest rates. And it’s ready to intervene in the forex markets.
She clarified that “our mandate is not to defend the Swiss franc, but price stability.” However, she added that”we are a small, open country, which means the exchange rate is important for our monetary conditions and is linked to prices.”
Also, “we have seen that if the franc is too strong, inflation goes negative”.
Australia PMI Manufacturing ticked up from 55.7 to 55.8 in June. PMI Services, on the other hand, dropped from 53.2 to 52.6. PMI Composite dropped from 52.9 to 52.6, a 5-month low.
Laura Denman, Economist at S&P Global Market Intelligence said:
“Expansion across Australia’s private sector economy continued in June, according to the S&P Global Flash Australia Composite PMI. The easing of COVID-19 policies and opening of international borders has encouraged growth in demand, especially overseas. Stronger demand conditions have had a positive influence on other areas of the economy, with employment levels continuing to rise at a solid rate.
“That said, firms have taken advantage of rising demand levels and passed through higher costs to their selling prices at a substantial pace. With interest rates rising to contain rapid price pressures, as well as a fading boost to economic activity post-lockdown, downside risks to the Australian economy have increased.”
Gold’s fall from 1959.16 resumed by break through 1810.07 support and hit as low as 1784.67. But a temporary bottom was formed there and gold recovered. Some sideway trading could be seen but upside should be limited well below 1875.59 resistance to bring fall resumption. Below 1784.67 will target 1764.31 next.
Overall, the corrective fall from 2075.18 is still in progress and could extend to 38.2% retracement of 1160.17 to 2075.18 at 1725.64 before completion.
Eurozone Economic Sentiment Indicator (ESI) rose 0.3 to 101.5 in December, slightly above expectation of 101.4. The stabilization in the ESI resulted from markedly higher confidence in services (+2.2 to 11.4), construction (+2.2 to 5.0) and, to a lesser extent, retail trade (+1.0 to -0.8), while confidence worsened among consumers (-0.9 to -8.1) and remained virtually unchanged in industry (-0.2 to -9.3).
Amongst the largest euro-area economies, the ESI increased significantly in Italy (+1.7) and Spain (+1.3) and edged up in Germany (+0.4), while it remained broadly unchanged in France (-0.2). By contrast, the ESI declined somewhat in the Netherlands (-0.4).
Business Climate Indicator dropped -0.04 to -0.25. With the exception of production expectations, which improved markedly, all the components of the BCI worsened.
New York Fed President John Williams acknowledged the “meaningful progress” made in balancing the economy and “bringing inflation down.” But he also emphasized that the Fed’s is far from over with the assertion. “Our work is not done” he said in a speech overnight.
Williams highlighted the need for continued restrictive stance in monetary policy “for some time”. He added, “it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis.”
Addressing the economic outlook, Williams described it as “highly uncertain” and stressed that Fed’s policy decisions will be made on a meeting-by-meeting basis. These decisions will be grounded in “the totality of the incoming data, the evolving outlook, and the balance of risks.”
Williams refrained from predicting when a rate cut might occur, stating, “I’m not making a prediction.” However, he also noted that the Fed is currently in a “good place” to assimilate incoming data and deliberate on future policy moves.
Japan PMI Manufacturing was finalized at 50.0 in December, up from November’s 49.0. Markit said output stabilized after 23 consecutive monthly falls. Also, employment rose for the first time since February.
Usamah Bhatti, Economist at IHS Markit, said:
“Japanese manufacturers signalled a broad stabilisation in operating conditions at the end of a tumultuous year, as the headline PMI registered at the 50.0 no-change threshold in December. This pushed the PMI to the highest level since April 2018 and ended a sequence of 19 straight declines – the longest in the survey history.
“The overall health of the Japanese manufacturing sector was boosted by output levels steadying following nearly two years of consistent declines. Although new orders reduced in the latest survey period, the fall was the softest recorded in the current sequence dating back to January 2019.
“Buoyed by improved operating conditions, Japanese manufacturing firms increased employment levels for the first time since February, albeit only fractionally. Nevertheless, ongoing issues of an ageing population have continued to hold back Japanese manufacturing employment, as firms report continued to report retirements.
“Businesses reported a sustained increase in optimism, with a third of respondents predicting a rise in output over the coming 12 months. This is in line with the IHS Markit forecast for industrial production to grow 7.3% in 2021.”
Monetary Policy Report Press Conference Opening Statement
Good morning. Senior Deputy Governor Wilkins and I are pleased to be here to answer your questions about today’s interest rate announcement and our Monetary Policy Report (MPR). Before taking your questions, let me offer some insight into Governing Council’s deliberations.
Our discussion began with the big picture: inflation is on target and the economy is operating close to capacity. Our outlook published today is that this situation will continue. Governing Council believes that higher interest rates will be needed to keep inflation on target, and that is consistent with our actions today.
Monetary policy is, of course, always conditioned on new data, particularly when they do not align with the Bank’s projections. A few data points over the past few weeks have seemed out of step with those projections, but when all the data are taken together, the economy seems to be on track.
Given the various uncertainties we face, the Bank is particularly data dependent at this time. However, that does not mean that monetary policy will react to every data fluctuation. A better way to think of this is that it takes hundreds of data points to make a complete picture, and each new one helps the picture come into sharper focus. So, when a data point comes in differently than what the Bank or other forecasters expect, it matters to the big picture, but it is almost never decisive on its own.
As we have previously discussed, an important issue we face is to understand how the economy reacts to higher interest rates, given the high debt loads being carried by Canadian households. We are monitoring this situation closely. We have seen a moderation in credit growth and the debt-to-income ratio has begun to edge lower. At the same time, the housing market is also dealing with the revised B-20 Guideline for mortgage lending, and the data do not yet permit a sharp distinction between the impact of the guideline and the effects of higher interest rates.
Governing Council did take some comfort from an analysis of the renewal process for five-year mortgages taken out in 2014 and 2015 and up for renewal in 2019 and 2020. This analysis shows a very modest increase in debt-service ratios compared with the date of origination. Keep in mind that many households have had some income growth during these past five years, and these households may have grown accustomed to higher income levels. They may face an adjustment as their debt-service ratio rises once again, with consequences for their consumption spending. Of course, this issue is most important for highly indebted households. We also know that the jump in payments will be greatest for those who took out mortgages when interest rates were at their lowest levels, in 2015 and 2016, so the mortgage renewal process is likely to weigh on the economy more in 2020 and 2021. All that being said, Governing Council concluded that the economy should be resilient to higher interest rates, provided that labour income continues to grow.
The biggest issue on the table was trade tensions. As discussed before, uncertainty around the future of the North American Free Trade Agreement has caused some companies to delay investment spending or to move their investments to the United States. This channel was identified and captured in our projection some time ago. The recent imposition by the US government of actual tariffs on Canadian exports has made the situation more concrete. In the projections we are presenting today, we have added more negative judgment to our business investment forecast in recognition of this. We have also incorporated the effects of the US tariffs on steel and aluminum, and the various countermeasures implemented around the world. Box 2 in the MPR gives a flavour of the complex effects such actions will have on the economy. Let me summarize briefly.
A US company importing Canadian steel must now pay a 25 per cent tariff. They may instead buy steel made in the United States or in some other country. Or, if no obvious substitutes are available, they may just pay the higher price. Or, the Canadian company may offer to reduce its price in order to absorb some of the tariff’s impact. Or, it may look to other markets to sell its products. The response of companies will depend on how long they think the tariffs might be in place—for example, it appears that if NAFTA is successfully renegotiated, those tariffs would no longer be in effect. The point is, the outcome depends on individual reactions, which depend on the circumstances.
And then there are countermeasures. Canada has imposed a 25 per cent tariff on steel imported from the United States. This would seem to level the playing field, but many of the same complexities enter the analysis. All things considered, our analysis suggests that Canadian exports would fall, as would Canadian imports. Prices would rise at a time when the economy is already operating at capacity, so inflation would rise at least temporarily, but the effect could persist. Consumers would have less purchasing power, so demand would slow. Meanwhile, the potential of the economy would be eroded as companies invest less and become less competitive. So, the economy would see shocks to both demand and supply, resulting in two-sided risks to future inflation. Furthermore, the net effect on the economy might be buffered by any fiscal actions that governments might take.
Now, as we said in the MPR, these various effects are likely to be small for the measures already taken. In contrast, a large tariff on Canadian-made automobiles and parts would have a much greater effect on trade and the economy through these same channels. People are understandably concerned about this sort of escalation and want to know how monetary policy might react to it. Indeed, there was speculation that the Bank would not move interest rates today because of the possibility of further trade measures.
The Bank cannot make policy on the basis of hypothetical scenarios. We felt it appropriate to set aside this risk and make policy on the basis of what has been announced. Given the multiple channels through which protectionist measures affect economies, it should be clear that monetary policy is ill-suited to counteract all of their effects. It may, of course, play a supporting role, in conjunction with other policies. But, to put it bluntly, the economy would slow, inflation would rise, and the exchange rate would depreciate, adding further to near-term price pressures in the Canadian economy. Therefore, the implications for interest rates of an escalation in trade actions would depend on the circumstances. Let me emphasize that monetary policy by itself could not undo the long-term damage to jobs and income that could result from rising protectionism.
All this being said, it is important to remember that our economy is in a good place. We are operating near capacity, companies are investing even if some are hesitating, the labour market has been strong, and, most importantly, inflation is on target. In this context, higher interest rates will be warranted to keep inflation near target. Governing Council will continue to take a gradual approach to adjusting rates, guided by incoming data.
With that, Senior Deputy Governor Wilkins and I would be happy to answer your questions.
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China’s NBS PMI Manufacturing fell from 50.8 to 50.4 in April, matched expectations. NBS PMI Non-Manufacturing fell from 53.0 to 51.2, below expectation of 52.2. PMI Composite fell from 52.7 to 51.7.
The breakdown of the manufacturing PMI reveals challenges in solidifying demand, as the new orders subindex dropped to 51.1 from 53, and the new export orders fell to 50.6 from 51.3. Conversely, the production subindex showed modest improvement, rising to 52.9 from 52.2.
Senior NBS statistician Zhao Qinghe noted, “Though economic activities continued to expand, more manufacturers are facing higher costs.” He highlighted specific industries such as automobiles and electrical machinery, where domestic and foreign market demands are reportedly strengthening.
In contrast, Caixin PMI, which focuses more on smaller, private manufacturing firms, presented a more optimistic view. Caixin Manufacturing PMI rose to 51.4 from 51.1, surpassing expectations of 51.0.
According to Wang Zhe, senior economist at Caixin Insight Group, “the manufacturing sector continued to improve, with accelerated expansion in supply and demand, sweetened by exceptional performance in overseas demand.”
Just days ahead of the Trump-Xi meeting, the US Trade Representative Robert Lighthizer issued another statement regarding China’s auto tariffs today. Is it setting the stage for Trump to claim victory on some Chinese concessions? Or, Trump said yesterday that GM’s plant closures prompted him to study auto tariffs. At the same time, is he thinking about selling more cars to China to “equalize” the imports from EU and Japan?
The statement noted, “As the President has repeatedly noted, China’s aggressive, State-directed industrial policies are causing severe harm to U.S. workers and manufacturers. We are continuing to raise these issues with China. As of yet, China has not come to the table with proposals for meaningful reform.”
“China’s policies are especially egregious with respect to automobile tariffs. Currently, China imposes a tariff of 40 percent on U.S. automobiles. This is more than double the rate of 15 percent that China imposes on its other trading partners, and approximately one and a half times higher than the 27.5 percent tariff that the United States currently applies to Chinese-produced automobiles. At the President’s direction, I will examine all available tools to equalize the tariffs applied to automobiles.”
Eurozone Sentix Investor Confidence improved from -21 to -17.5 in January, slightly below expectation of -17.0. That’s nonetheless the highest since June 2022. Current Situation Index rose from -20.0 to -19.3, highest since last August. Expectations rose from -22.0 to -15.8, highest since last February.
Sentix said: “Investors are still assuming a recession, but it is expected to be much milder. The sharp economic downturn, which was expected by the majority of investors by October 2022, is therefore off the table (for now)…a
“Overall, the economic environment remains challenging. The latest increases should not be misinterpreted as a general turnaround. The risks of recession remain.”
US markets experienced a complex development overnight due to simultaneous reactions to two events. Initially, the markets responded bullishly to the Fed’s less hawkish than expected rate hike and press conference. However, just an hour before the close, sellers jumped in, and the three major indexes closed -1.6% lower.
The selloff might be more attributed to Treasury Secretary Janet Yellen’s comments at a Senate committee. She explicitly stated, “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits.”
Yellen further elaborated, “when a bank failure is deemed to create systemic risk, which I think of as the risk of a contagious bank run…we are likely to invoke the systemic risk exception, which permits the FDIC to protect all depositors, and that would be a case-by-case determination.”
Meanwhile, Asian markets have remained sluggish and mixed today, without any apparent signs of bearishness carried over. It may take some more time to understand the unfolding situation fully.
Technically, near term outlook in S&P 500 isn’t too bearish yet given it’s holding inside a near term channel. However, break of 3901.27 support will argue that the corrective rebound from 3808.85 has completed at 4039.49, after hitting falling trend line resistance. Deeper selloff would then follow through 3808.86 to resume whole decline from 4195.44.
In a report, IMF urged RBNZ to have “significant increases” in interest range in the near term to address inflation as a priority.
IMF said, “with the recovery well-entrenched, tight labor market conditions, and elevated inflation, it is appropriate to withdraw fiscal and monetary support as envisaged.”
Fiscal policy should “remain agile”. “While the scheduled tightening of fiscal policy is appropriate, the authorities should calibrate the fiscal stance to the evolution of the pandemic and economic conditions, providing additional, targeted support where needed.”
As for monetary policy, IMF said it should remain “data dependent, and continued, swift policy normalization will be appropriate under baseline conditions.”
“Given New Zealand’s strong cyclical position and inflationary pressures, significant increases in the Official Cash Rate in the near term are appropriate, signaling the RBNZ’s commitment to addressing inflation as a priority.”
ECB Chief Economist Philip Lane reiterated the central bank’s cautious stance on interest rate policy in a speech overnight, underscoring that rate decisions will remain “data-dependent” and determined on a “meeting-by-meeting” basis. While ECB is open to rate cuts if inflation converges to target in sustainable manner, Lane emphasized that the bank is “not pre-committing to a particular rate path.”
Lane elaborated on the factors that will guide ECB’s decisions on the “speed and scale” of rate cuts. Firstly, he noted that the effects of previous interest rate hikes are “still unfolding”, with their full impact on inflation expected to manifest gradually. While the impact on GDP peaked in 2023, the “bulk of impact on inflation is comparatively backloaded” with substantial pass-through effects yet to occur.
Additionally, the evolution of inflation expectations remains a critical consideration for the ECB’s policy calibration. Lane also pointed out the dual risks associated with the timing of policy adjustments: easing too soon or too quickly could undermine stabilization efforts, while maintaining overly restrictive rates could hinder economic recovery.
USTR Issues Tariffs on Chinese Products in Response to Unfair Trade Practices
Washington, DC – The Office of the United States Trade Representative (USTR) today released a list of products imported from China that will be subject to additional tariffs as part of the U.S. response to China’s unfair trade practices related to the forced transfer of American technology and intellectual property.
On May 29, 2018, President Trump stated that USTR shall announce by June 15 the imposition of an additional duty of 25 percent on approximately $50 billion worth of Chinese imports containing industrially significant technologies, including those related to China’s “Made in China 2025” industrial policy. Today’s action comes after an exhaustive Section 301 investigation in which USTR found that China’s acts, policies and practices related to technology transfer, intellectual property, and innovation are unreasonable and discriminatory, and burden U.S. commerce.
“We must take strong defensive actions to protect America’s leadership in technology and innovation against the unprecedented threat posed by China’s theft of our intellectual property, the forced transfer of American technology, and its cyber attacks on our computer networks,” said Ambassador Robert Lighthizer. “China’s government is aggressively working to undermine America’s high-tech industries and our economic leadership through unfair trade practices and industrial policies like ‘Made in China 2025.’ Technology and innovation are America’s greatest economic assets and President Trump rightfully recognizes that if we want our country to have a prosperous future, we must take a stand now to uphold fair trade and protect American competitiveness.”
The list of products issued today covers 1,102 separate U.S. tariff lines valued at approximately $50 billion in 2018 trade values. This list was compiled based on extensive interagency analysis and a thorough examination of comments and testimony from interested parties. It generally focuses on products from industrial sectors that contribute to or benefit from the “Made in China 2025” industrial policy, which include industries such as aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles. The list does not include goods commonly purchased by American consumers such as cellular telephones or televisions.
This list of products consists of two sets of U.S tariff lines. The first set contains 818 lines of the original 1,333 lines that were included on the proposed list published on April 6. These lines cover approximately $34 billion worth of imports from China. USTR has determined to impose an additional duty of 25 percent on these 818 product lines after having sought and received views from the public and advice from the appropriate trade advisory committees. Customs and Border Protection will begin to collect the additional duties on July 6, 2018.
The second set contains 284 proposed tariff lines identified by the interagency Section 301 Committee as benefiting from Chinese industrial policies, including the “Made in China 2025” industrial policy. These 284 lines, which cover approximately $16 billion worth of imports from China, will undergo further review in a public notice and comment process, including a public hearing. After completion of this process, USTR will issue a final determination on the products from this list that would be subject to the additional duties.
USTR recognizes that some U.S. companies may have an interest in importing items from China that are covered by the additional duties. Accordingly, USTR will soon provide an opportunity for the public to request the exclusion of particular products from the additional duties subject to this action. USTR will issue a notice in the Federal Register with details regarding this process within the next few weeks.
Background
President Trump announced on March 22, 2018, that USTR shall publish a proposed list of products and any intended tariff increases in order to address the acts, policies, and practices of China that are unreasonable or discriminatory and that burden or restrict U.S. commerce.
These acts, policies and practices of China include those that coerce American companies into transferring their technology and intellectual property to domestic Chinese enterprises. They bolster China’s stated intention of seizing economic dominance of certain advanced technology sectors as set forth in its industrial plans, such as “Made in China 2025.” (See USTR Section 301 Report here.)
On April 3, USTR announced a proposed list of 1,333 products that may be subject to an additional duty of 25 percent, and sought comments from interested persons and the appropriate trade advisory committees.
Interested persons filed approximately 3,200 written submissions. In addition, USTR and the Section 301 Committee convened a three-day public hearing from May 15-17, 2018, during which 121 witnesses provided testimony and responded to questions. The public submissions and a transcript of the hearing are available on www.regulations.gov in docket number USTR-2018-0005.
Click here to view a fact sheet on the Section 301 product list.
Click here to view a fact sheet on the Section 301 investigation.
In an interview with SRF, SNB Chairman Thomas Jordan stressed the critical issues of sluggish growth and the need for structural reforms. He underscored the importance of enhancing productivity to bolster economic growth across nations. Additionally, e highlighted the troubling high levels of debt and substantial deficits many countries are grappling with, which he deemed unsustainable in the long run.
Jordan emphasized that correcting these fiscal imbalances is imperative for future economic stability. He warned against the misuse of monetary policy as a tool for financing state debts, asserting that such practices could lead to dire consequences.
“It is very important that at the same time monetary policy remains geared towards price stability, rather than monetary policy being needed to finance debt, otherwise it will not end well,” Jordan cautioned.
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.
OPEC+ members announced on Sunday their agreement to extend voluntary oil output cuts of 2.2m barrels per day into Q2, aiming to stabilize the market and support oil prices. Saudi Arabia, the de facto leader of the oil cartel, committed to prolonging its substantial voluntary cut of 1m bpd through the end of June, effectively maintaining its production levels around 9m bpd. Additionally, Russia announced it would reduce its oil production and exports by an extra 471k bpd Q2.
Technically speaking, WTI’s rise from 67.79 is still seen as a corrective bounce for now. Further rally is expected as long as 78.07 support holds, to 100% projection of 67.79 to 79.15 from 71.32 at 82.68. However, strong resistance could emerge below 61.8% retracement of 95.50 to 67.79 at 84.91 to limit upside and bring reversal.
Fed is widely expected to keep monetary policy unchanged today. Despite recent resurgence in coronavirus infections and the economic impact, roll-out of more fiscal stimulus and positive vaccination progress would keep policy makers in a wait-and-see mode. Federal funds rate will be held at 0-0.25% while asset purchase will continue at current pace of USD 120B per month. Chair Jerome Powell would likely re-emphasize that Fed is in no position to even start discussing tapering of quantitative easing yet.
Here are some suggested readings:
Dollar Index is staying in range trading for now, reflecting the consolidation in most Dollar pairs. DXY is held below falling 55 day EMA, as well as 91.01 near term resistance, keeping outlook bearish. The down trend from 102.99 would more likely extend lower than not. Though, downside momentum has been clearly diminishing as seen in daily MACD. Hence, we’d expect strong support from 61.8% projection of 102.99 to 91.74 from 94.74 at 87.88 to contain downside and bring sustainable rebound, even in case of another down move.
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WTI oil closing 62.38 projection level on Texas production drop
WTI crude oil extends to as high as 62.23 so far this week The unusual cold storm and deep freeze in Texas is still hampering crude output, which would extend for days or even weeks. It’s estimated that roughly 1m bpd of production is shut.
WTI is now close to 100% projection of 47.24 to 53.92 from 51.58 at 62.38, and there is no sign of topping yet. Further rise would remain in favor as long as 59.34 support holds. Firm break of 62.38 will pave the way to 65.43 structural resistance next. We’d pay attention to loss of upside momentum as it approaches this 65.43 level. On the downside, break of 59.34 will now indicate short term topping and bring deeper pull back.