Fri, Sep 30, 2022 @ 07:36 GMT

Fed Harker: Risks tilt very slightly to the downside, at most one hike this year

    Philadelphia Fed President Patrick Harker said in a speech in London that “potential risks tilt very slightly to the downside” in the US. Though he emphasized the work “slight” as he saw “outlook as positive” and economy “continues to grow” and is on pace to the the longest economic expansion in history.

    Harker added there was “continued strength” in the labor market. He’d “cautious against” getting caught up in a single data point in February’s dismal job data. Meanwhile, inflation is running around 2% target and “does not appear to be on a strong upward trajectory”. Rather inflation is “edging slightly downward”.

    Combining all, Harker stays in “wait-and-see mode”. He expects “at most, on rate hike this year, and one in 2020”. But his stance will be “guided by data”.

    Harker’s full speech here.

    Into US session: Oversold Euro recovers broadly, markets won’t forget there are US trade tensions

      Euro is making a strong come back today as market digest recent sharp losses. EUR/USD breached 1.1639 minor resistance while EUR/JPY break 126.43. Both developments suggest temporary bottoming. Though, they’re far from reversing recent down trend. And, at the time of writing, German (0.369) and Italy (2.864) yield spread are still close to 250, which suggests much nervousness in the markets.

      Though, the news that 5-Star Movement is trying to find a point of compromise for economy minister is supporting sentiments. At least, they’re working on forming a government again. And while being highly critical, 5-Star has never committed themselves to leaving Euro. The news that anti-euro League is not interested, but is pushing for election again is also sentiment supportive. Additionally, Eurozone data released today are not bad.

      Yen and Dollar, on the other hand, are trading broadly lower. Yen weaken on rebound in German, UK and US yields. Meanwhile, Dollar is weak as markets won’t forget that the US is in trade tension with many other countries/regions, even its own allies. NAFTA talk is going nowhere and there is no positive news regarding trade talk with EU. The steel tariff temporary exemption is going to expire on Friday and retaliations from Canada, Mexico and the EU are waiting on the line. Trump also made an about turn and issued a strong statement regarding China yesterday, indicating very little intention to carry on with negotiation.

      For the week, Euro remains the weakest one, followed by Sterling. New Zealand Dollar and Japanese Yen are the strongest ones.

      Into US session: Sterling recovers from GDP blip, Euro and Dollar firm too

        Entering into US session, Sterling is trading as the strongest one for today so far. Weaker than expected UK GDP triggered very brief retreat in the Pound. And Sterling quickly find its footing on Brexit optimism again. At the time of writing, Euro is the second strongest as Italian yield drops for another day. The selling climax in Italian bonds could have passed the climax for the near, possibly until credit agency rating actions. Dollar trades mildly high as consolidative price actions extend. Yen is the weakest one as sentiments stabilized and turned mixed. Kiwi is the second weakest, followed by Loonie.

        In Europe, CAC leads the way down by -0.71%, DAX is down -0.64% and FTSE is down -0.05%. Italian 10 year yield is dropping -0.0361 at 3.475. German 10 year bund yield is up 0.0049 at 0.556. German-Italian spread is no back below 300. Earlier in Asia, Nikkei rose 0.16%, Hong Kong HSI rose 0.08%, China Shanghai SSE rose 0.18%. But Singapore Strait Times dropped -1.11%. 10 year JGB yield dropped -0.0065 to 0.156, still way above BoJ’s allowed band of -0.1 to 0.1%.

        Dollar drops as Fed Powell indicates uncertainties continue weigh on outlook since June meeting

          Dollar drops notably in response to Fed chair Jerome Powell’s prepared speech for the semi annual Congressional testimony. Most importantly, Powell said since June meeting, “based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.”

          Powell, also reiterated Fed’s stance that “in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion.”

          However, just based on the prepared remarks, there is no clear nod to a July rate cut. Thus, selloff in Dollar is relatively limited so far. Powell will need to be really straightforward in the Q&A of the testimony.

          Full speech here.


          UK PM May to hold cabinet meeting on Brexit today, meet EU leaders tomorrow

            UK Prime Minister Theresa May is going to meet her cabinet today to unify a stance on Brexit negotiation, in particular the Irish backstop. Ahead of the cabinet meeting, Housing Minister James Brokenshire urged other fellow ministers to support May in “making further progress this week”. And he emphasized that “whilst making sure that it is our entire United Kingdom that leaves the European Union, the single market and the customs union because it is our UK that is just so important.”

            Speaking to the parliament yesterday, May urged EU for not letting the stand-off over backstop to derail Brexit negotiation. However, an unnamed official was quoted by Reuters complaining that May’s messages “demonstrate that finding an agreement will be even more difficult than one could have expected.”

            French minister for European Affairs Nathalie Loiseau said that “we want a good deal and we think it is possible.” But she also said that France was preparing for a no-deal Brexit and have already made legislative proposals on the scenario. An unnamed official was quoted by Reuters saying that the government “need to prepare faster” for no-deal. And ” it is in the interests of citizens and businesses to wrap up the exit agreement as swiftly as possible.”

            May is expected to tell EU leaders her views at the summit dinner tomorrow in Brussels.

            Japan CPI core accelerated to 0.7%, BoJ minutes show concerns on overseas

              Japan national CPI (all-item) accelerated from 0.8% yoy in December, up from 0.5% yoy, beat expectation of 0.7% yoy. CPI core (ex-fresh food), rose to 0.7% yoy, up from 0.5% yoy, beat expectations. CPI core-core (ex-fresh food, energy) also rose to 0.9% yoy, up from 0.8% yoy and matched expectations. While core CPI remains well below BoJ’s 2% target, the pickup should be welcomed by the central bank.

              In the minutes of December BoJ meeting, some members expressed concerns that gloomy global outlook could underscores market expectations. A few members noted “considering the risk that overseas economies could recover only to a small extent or slow further, the outlook for exports could not be viewed optimistically.”

              Falling global demand might also hurt household income. Some noted that “Close attention should be paid to how developments in corporate profits … would affect winter bonuses.” Capital spending has shown signs of weakness, which is a “matter of concern” too.

              Fed Williams: Two rate hikes in 2019 would make sense in a really strong economy

                Speaking on CNBC, New York Fed President John Williams warned that “there are risks to that outlook that maybe the economy will slow further”. He also emphasized that Fed is “listening” and it’s “ready to re-assess and reevaluate our views and…policy stance”. And, Fed will “go into the new year with eyes wide open, willing to read the data and listen to what we are hearing, re-assess our economic outlook, and take the right policy decisions.”

                To be more specific, Williams said “Something like two rate increases would make sense in a really strong economy going forward. But we’re data dependent, we’re going to adjust our views dependent on how the outlook changes.”

                US oil inventories dropped -9.5m barrels, WTI back pressing 60

                  US commercial crude oil inventories dropped sharply by -9.5m barrels in the week ending July 5. That’s much larger decline than expectation of -1.9m barrels. At 459.0m barrels, U.S. crude oil inventories are about 4% above the five year average for this time of year.

                  WTI oil extends this week’s rebound and hits as high as 59.78 so far. It’ possibly set to retest key resistance zone of 60.03 and 61.8% retracement of 66.49 to 50.64 at 60.34. At this point, we don’t expect a firm break there yet. And consolidation pattern from 60.22 should extend with least another fall back to 56.06. In that case, downside should be contained above 54.86 support. Overall, range trading should continue.

                  Germany PMI services finalized at 56.2, set for more moderate period of growth

                    Germany PMI Services was finalized at 56.2 in September, down from August’s 60.8., lowest since May. PMI Composite was finalized at 55.5, down from August’s 60.0. Markit said business activity rose at slowest rate for four months. Rates of growth in new business and employment also eased. Average prices charged by services firms rose at near-record rate.

                    Phil Smith, Economics Associate Director at IHS Markit:

                    “Services activity grew strongly in the third quarter, but the pace of recovery is slowing and we’re set for a more moderate period of economic growth in the final months of the year. Our current forecasts are for a 3.0% quarter-on- quarter rise in GDP in Q3, followed by a 1.2% gain in Q4.

                    “The loss of momentum is partly natural as activity gets closer to pre-pandemic levels, but the drag on growth from material shortages is also becoming more noticeable, impacting services firms directly and also via a slowdown in manufacturing.

                    “With cost pressures remaining stubbornly high and demand still picking up, the rate of services output price inflation continues to run at close to the quickest in the series history stretching back almost two decades.

                    “Supply bottlenecks are no longer just a manufacturing problem, and the threat of a continued spillover to other parts of the economy, coupled with inflationary pressures, has dampened service providers’ growth expectations somewhat.”

                    Full release here.

                    Euro drops sharply as Italian populist duo could seek debt forgiveness

                      Euro drops sharply in European session with EUR/USD taking out 1.1822 support with conviction finally. EUR/JPY also dropped through 129.99 minor support and is heading back to 129.22 low. EUR/CHF’s selloff accelerates and breaks 1.8 handle. Other currencies are relatively steady against each other.

                      The main trigger of the selloff is Italy. it’s reported that the anti-establishment Five Star Movement and the anti-immigration League are discussing to seek EUR 250B write of in debt from ECB.

                      From trend following point of view, EUR/USD is a good candidate for short as it just went through a period of consolidation. Action Bias are back in downside red across time frame.

                      From trend reversal point of view, EUR/CHF could be a candidate for short. It just took out 1.1864 support with downside acceleration. Usually, we won’t jump to call for short when weekly Action Bias is still in upside blue. But as EUR/CHF was just rejected by 1.2 key resistance, selling the cross can be considered.

                      CAD surges on BoC Business Outlook Survey, CADJPY resuming rebound

                        Canadian Dollar surges as BoC’s Business Outlook Survey painted a positive picture. In particular, business sentiments were supported by “healthy” sales prospects. Capacity and labor pressures are “evident” in most regions due to strong demand.

                        Here are highlights of the survey:

                        • Forward-looking sales indicators remain positive across most regions and sectors. Some firms expect a moderation in sales activity from high levels in the past year or a gradual slowing of the pace of the recovery in the energy sector.
                        • While firms’ expectations for US economic growth have strengthened further, some cited rising protectionism and reduced competitiveness as factors limiting the impact on their sales.
                        • Although less so than in recent surveys, intentions to increase investment continue to be widespread. Employment intentions are solidly positive, based on firms’ plans for hiring to support expected sales growth or to expand operations.
                        • Indicators of capacity pressures and labour shortages edged down but are still close to recent high levels. Remaining economic slack appears to be mostly concentrated in the energy-producing regions.
                        • Despite expectations for faster input price growth overall, on balance, firms continue to anticipate only modest acceleration in the growth of their output prices due to competitive pressures. Partly driven by rising labour costs, inflation expectations picked up but are still well within the Bank’s inflation-control range of 1 to 3 per cent.
                        • While credit conditions were unchanged for most firms, the indicator points to a slight tightening.
                        • The Business Outlook Survey indicator continues to be high, signalling positive business sentiment.

                        Full release here

                        CAD is now the second strongest for the day while JPY remains the weakest one.

                        H action bias in CADJPY turned positive again.

                        CADJPY’s retreat was contained above 83.36 support, maintaining near term bullishness. The rebound from 80.52 is likely ready to resume for 38.2% retracement of 91.56 to 80.52 at 84.73.

                        Gold downside breakout, heading to 1750

                          Gold’s selloff today finally pushes it to a downside break out. For now, near term outlook will stay bearish as long as 1879.75 minor resistance holds. Sustained trading below 1848.39 support will confirm resumption of whole decline from 2075.18. Such fall is seen as a correction to the long term up trend from 1160.17. Next medium term target will be 55 week EMA (now at 1750.89). Though, we’d expect strong support from 38.2% retracement of 1160.17 to 2075.18 at 1725.64 to contain downside. Meanwhile, break of 1879.75 resistance will dampen this bearish view and turn outlook neutral first.

                          ECB: Global recovery projected to be shallow

                            ECB said in its monthly economic bulletin that more recent information “points to a stabilisation in global growth”. In particular, survey-based data like PMI point to a “moderate recovery in manufacturing output growth and some moderation in services output growth”. Nevertheless, global recovery is projected to be “shallow”, reflecting moderation of growth in advanced economies and sluggishness in some emerging markets.

                            For Eurozone, however, ongoing weakness of international trade continues to weigh on manufacturing sector and is dampening investment growth. Survey-based data, while remaining weak overall, point to some stabilization of slowdown too.

                            Measures of underlying inflation in Eurozone “generally remained muted”. ECB added, that “market-based indicators of longer-term inflation expectations have remained at very low levels, while survey-based expectations also stand at historical lows.

                            Full ECB Monthly Bulletin here.

                            Mid-US update: Risk aversion dominates, Yen surges but bulls seem refusing to commit further

                              Yen remains the strongest one for today at the time of writing as global market rout spreads to the US. Swiss Franc trails as the second strongest.

                              On the other hand, Australian Dollar is the weakest one while Dollar is not that far away.

                              DOW is currently down -1.45 at 24949 after dropping to as low as 24768.79 earlier today. The break of 24899.77 support indicates resumption of the whole decline from 26951.81 and suggests more downside ahead. S&P 500 is down -1.98% while NASDAQ is even worse, down -2.15%.

                              Treasury yields are also in red with 10 year yield down -0.49 at 3.324.

                              However, we’d like to point out that despite the strong rally, Yen bulls seem refusing to commit yet. USD/JPY is held by 111.94 minor support for now. EUR/JPY breached 128.32 low but quickly recovered. More is needed to confirm the strength of Yen.

                              In Europe:

                              • FTSE closed down -1.24% at 6955.21, broke 7000 psychological level
                              • DAX closed down -2.17% at 11274.28
                              • CAC closed down -1.69% at 4967.689, below 5000 psychological level.
                              • Italian 10 year yield jumped 0.10003 to 3.58 after EU rejection of Italian budget
                              • German 10 year yield is down -0.0407 at 0.411. German-Italian spread is back above 310.

                              Gold heading to 1172 after disappointing rebound

                                Gold’s strong break of 1236.66 today confirms resumption of whole decline from 1365.24, after a rather disappointing decline. It also confirms that medium term rise from 1122.81 has completed at 1365.24. And more importantly, it also affirm the view that price actions from 1046.54 low are corrective in nature, as was limited by 38.2% retracement of 1920.94 to 1046.54 at 1380.56.

                                For the near term to medium term further fall is now in favor to 61.8% retracement of 1045.54 to 1375.15 at 1172.69. There is also risk of revisiting 1046.54 low, depending on downside momentum. Such development will be an indication of underlying dollar strength.

                                Japan PMI composite dropped to 47.0, Q1 recovery hope dashed

                                  Japan PMI Manufacturing dropped to 47.6 in February, down from 48.8. PMI services dropped to sharply to 46.7, down from 51.0, dipped into contraction. PMI Composite also dropped to 47.0, down from 50.1, now in contraction too.

                                  Joe Hayes, Economist at IHS Markit, said: “latest PMI data dash any hopes of a first quarter recovery in Japan and significantly raise the prospect of a technical recession”. February’s data “stack the odds heavily against Q1 growth, despite Abe’s best efforts to stimulate the economy after the sales tax hike”.

                                  Full release here.


                                  Gold breaking down, heading back to 1676 support

                                    Gold drops notably in early US session and it’s now heading back to 1700 handle. Current development argues that corrective recovery from 1676.65 has completed at 1755.29, ahead of 1764.31 support turned resistance. It’s also held well below falling 55 day EMA, keeping near term outlook bearish. Corrective fall from 2075.18 is likely still in progress.

                                    Break of 1676.65 will extend such correction to 50% retracement of 1160.17 to 2075.18 at 1617.67. We’ll look for bottoming signals again there.

                                    Gold to break 1200 finally, head towards 1172 fibonacci level

                                      Gold finally breaks out of consolidation today and reaches as low as 1201.24 so far. The down trend from 1365.24 has resumed. Near term outlook will now stay bearish as long as 1217.31 resistance holds. Next target is 1172.07 fibonacci level. On the upside, though, break of 1217.31 will indicate short term bottoming. And rebound could be seen back to 55 day EMA (now at 1247.14 before staging another decline.

                                      Currently decline from 1365.24 is viewed as part of the long term sideway pattern from 1046.54 (2015 low). Sustained break of 61.8% retracement of 1045.65 to 1375.15 will pave the way to 1046.54/1122/81 support zone. At this point, we’re not expecting a break there to resume long term down trend yet. Hence, we’ll look for bottoming signal below 1122.81.

                                      UK government Brexit scenario analysis, from -10.7% GDP contraction to -0.1% in 15 years.

                                        The UK Government released a series of five papers on Brexit today. The most anticipated in the one on long term economic analysis of Brexit. In short, according the government, in 15 years by 2034 after Brexit:

                                        • GDP could contract as much as -10.7% in case of no-deal Brexit with zero net inflow of EEA workers
                                        • GDP would contract just -1.4% if it’s modelled after EEA-type (European Economic Area) of deal, that is, Norway kind of deal.
                                        • Under Prime Minister Theresa’s Plan, GDP would contract only -0.6% if there is no change in migration arrangement. Or, in the best case scenario, GDP could just contract -0.1%.

                                        The EU Exit: Long-term economic analysis report here. And, all five papers here.

                                        In the parliament, Prime Minister Theresa May hailed her own plan and said “What the analysis shows, it does show that this deal that we have negotiated is the best deal for our jobs and our economy which delivers on the results of the referendum.”

                                        WTI crude oil resumes recent free fall

                                          WTI crude oil’s recent free fall resumes today by taking out 54.84 low and reaches as low as 53.65 so far. Near term outlook will now stay bearish as long as 58.04 resistance holds even in case of recovery.

                                          Fall from 77.06 is at least correcting the up trend from 27.69 to 77.06. Based on current momentum, it could indeed be an impulsive move rather than a corrective move. In either case, deeper decline should be seen to 61.8% retracement of 27.69 to 77.06 at 46.54 in medium term.

                                          Also, a net effect in the currency markets is a drag on the Canadian Dollar.