Tue, Oct 26, 2021 @ 05:43 GMT

Eurozone PMI manufacturing finalized at 39.4, at least some stabilization, potentially return to growth

    Eurozone PMI Manufacturing was finalized at 39.4 in May, up from April’s 33.4. Markit noted that while there was a rebound in the headline PMI, there were sharp falls in new orders and output recorded. Also, job losses mount as manufacturers remained downbeat about outlook. Among the member states, all readings stayed below 50, with Germany at 36.6, Spain at 38.3, Austria at 40.4, France at 40.6, Greece at 41.1, Italy at 45.4.

    Chris Williamson, Chief Business Economist at IHS Markit said: “The manufacturing downturn looks to have bottomed-out in April, with production falling at a markedly slower rate in May. The improvement in part merely reflects the comparison against a shockingly steep fall in April, but more encouragingly was also linked to companies restarting work as virus lockdowns were eased. The further lifting of COVID-19 restrictions in coming months should provide a further boost to manufacturers.

    “While we are still set to see unprecedented falls in industrial production and GDP in the second quarter, the survey brings hope that the goodsproducing sector may at least see some stabilisation – and even potentially a return to growth – in the third quarter. Whether growth can achieve any serious momentum remains highly uncertain, however, as demand – both domestically and in export markets – looks set to remain subdued by social distancing measures, high unemployment and falling corporate profits for some time to come.

    Full release here.

    Australia CBA PMI composite dropped to 40.7, increasing impact of coronavirus

      Australia CBA PMI Manufacturing was very steady in March, just dropped -0.1 to 50.1. PMI Services, however, tumbled sharply from 49.0 to 39.8. Hence, PMI Composite dropped from 49.0 to 40.7.

      CBA Chief Economist, Michael Blythe said: “The sharp deterioration in PMI readings during March underline the increasing impact of the coronavirus on the Australian economy. The services sector is being hit hard by the cancellation of events, general fears about social interaction and a very sharp decline in offshore demand as travel restrictions bite.

      “The manufacturing sector is faring a little better. But the leading indicators are flashing warning signs. The deterioration in supplier delivery times is accelerating, highlighting the disruption to supply chains. And the lower Aussie dollar is pushing input prices up at a rapid rate”.

      Full release here.

      Impact of PBoC FX RRR hike quickly fades, Yuan struggles to extend rebound

        The People’s Bank of China’s starts today to raise foreign exchange risk reserve ratio from 0% to 20%. It’s a move to stabilize the Yuan and curb capital outflow and was announced Friday after close. The move gives some support to Chinese and Hong Kong stock today but the impact seems to fade quickly. The Shanghai Composite index, SSE, edged higher to 2760.47 but it’s back down -0.77% at 2719.38 at the time of writing. It’s still more likely than not to revisit 2700 handle and possibly 2016 low at 2638.30.

        Hong Kong HSI hits as high as 28074.53 earlier today but quickly pares back some gain. it’s now up only 0.70% at 27870.07. The index is pressing a key fibonacci level at 27671.56. 38.2% retracement of 18268.09 (2016 low) to 33484.07 (2018 high). Whether this support could hold will very much depends on whether SSE could defend 2700. For now, it’s not optimistic.

        USD/CNH (offshore Yuan) also stabilized at around 6.84 at the time of writing. There is no follow through selling after the spike move on Friday, following PBoC’s announcement. For now, 55 H EMA is capping the upside and more decline is mildly in favor back to 6.7703 support. But a break above the EMA could prompt another selloff in the Yuan back to 6.9. That would give the Chinese government a lot of headache.

        UK GDP grew 0.3% in Q3, but production was flat only

          UK GDP grew 0.3% qoq in Q3, matched expectations. Over the year, GDP grew 1.0% yoy in Q3, slowest quarter-on-year growth since Q1 2010. The service and construction sectors provided positive contributions to GDP growth, while output in the production sector was flat in Quarter 3 2019. Private consumption, government consumption and net trade contributed positively to GDP growth, while gross capital formation (GCF) contributed negatively to growth in the quarter.

          In September, GDP contracted -0.1% mom, matched expectations. Industrial production dropped -0.4% mom, -1.4% yoy, versus expectation of -0.1% mom, -1.2% yoy. Manufacturing production dropped -0.4% mom, -1.8% yoy, versus expectation of -0.2% mom, -1.3% yoy. Goods trade deficit widened to GBP -12.5B, versus expectation of GBP -10.1B.

          Italy to response to EU on budget today, Di Maio pledged to stay in Euro

            Italian Deputy Prime Minister Luigi Di Maio said the government is going to send EU a formal response on the “serious concerns” over its draft budget today. The response will provide explanations on raising budget deficit to 2.4% of GDP next year. Di Maio hoped that would provide “over a long discussion process … could lead the Commission to share the goals we have set.”

            Di Maio, leader of the 5-star movement, reiterated that there is a concern of Italy leave the Euro or the EU, based on the jump in yield spreads. But he emphasized that “there is no Plan B (to leave Europe) but only Plan A which is to change Europe.” And he pledged that “As long as I’m head of this movement and a minister of this government I’ll always guarantee that Italy remains within the euro and in Europe.”

            Nonetheless, European Commission is expected to formal reject Italy’s budget tomorrow, and ask for a resubmission. In a letter to Italy last week, EU described Italy’s draft budget as an “obvious significant deviation” of the recommendations adopted by the European Council” and “size of the deviation (a gap of around 1.5% of GDP) are unprecedented”.

            Fed Bostic: With strong economy, rate hikes to neutral appropriate

              Atlanta Fed President Raphael Bostic said is a speech that the US economy is “in a good place”, and he “struggled to come up with sufficient variations on the word ‘strong'”.  And to him strong economy means “able to withstand great force or pressure”. “Tariffs, trade restrictions, and market volatility” are the headwinds. But there are also tailwinds in “recent tax reform and fiscal stimulus”. And because of strong GDP numbers in Q2 and Q3, he’s revised up 2018 and 2019 growth projections.

              On monetary policy, he said “unless the data talk me out of it, I view a continued, gradual removal of policy accommodation as appropriate until we get to a neutral policy rate.” And he emphasized that the current Fed policy rate “has not yet reached a neutral stance” and Fed is “still providing accommodation”. The Fed has “yet to pump the brakes”.

              Bostic’s full speech A View of the Fed’s Policy Path.

              New Zealand BusinessNZ PMI: Weak spot in production

                New Zealand BusinessNZ Performance of Manufacturing Index (PMI) dropped -1.1 to 52.2 in March. That’s also the second consecutive decline in 2018 even though it still signaled expansion.

                BusinessNZ’s executive director for manufacturing Catherine Beard:

                • “On a positive note, the proportion of positive comments in March (55.1%) picked up from both February (51.4%) and January (50.7%).  Those who provided negative comments typically noted a lack of finding the right staff, reduced orders (both domestically and offshore) and general uncertainty in the market.”

                BNZ Senior Economist, Craig Ebert:

                • “The weak spot in March’s PMI was its production index.  With a seasonally adjusted outcome of 50.8 this was close to stalling. Compare this to February’s 53.7 and the exceptionally high reading of 61.0 back in November and a sense of sharp deceleration arises”.

                France PMIs: Mixed picture for the private sector

                  France PMI manufacturing dropped to 51.2 in October, down from 52.2 and missed expectation of 52.4. That’s also a 25-month low.

                  PMI services rose to 55.6, up from 54.8 and beat expectation of 54.7, and hit a 4-month high. PMI composite rose 0.3 to 54.0.

                  Commenting on the Flash PMI data, Sam Teague, Economist at IHS Markit said:

                  “October data signalled a mixed picture for the French private sector. On one hand, service sector activity growth accelerated to a four-month high thanks to stronger new business growth. On the other hand, the manufacturing sector shifted down a gear in October, as firms reported the first fall of output for over two years.

                  “Anecdotal evidence pointed towards a weaker automotive sector. This helped to explain another deterioration in manufacturing exports and the weakest level of business confidence among manufacturers for 28 months, which was partly linked to worries across the automotive supply chain.

                  “Nonetheless, job creation accelerated to a six-month high across the private sector, partly due to stronger inflows of new business. In spite of improved employment and output growth, capacity pressures remained elevated, particularly in the service sector.

                  “On the price front, cost pressures continued to build amid higher fuel and wage bills. The latest data did suggest a slight respite for French businesses, however, with input price inflation easing marginally from September’s eight-month high.”

                  Full release here.

                  ECB Lagarde rejects helicopter money in letter to MEP

                    In a letter to a European Parliament member, ECB President Christine Lagarde pointed out that the term “helicopter money” has been associated with a wide range of policy proposals. “In many cases, these proposals do not fully address the associated operational, accounting and legal complexities nor provide a comprehensive cost-benefit analysis of the full economic and monetary impact”

                    In another letter, she emphasized that the Treaty on the Functioning of the European Union, “prohibits” the ECB and national central banks to purchase debts directly from EU institutions and member governments. She said, “the Treaties have been understood to mean that primary market purchase of government debt, i.e. the direct financing of governments, would undermine the capability of this objective to encourage such disciplined budgetary policy”.

                    Her comments reinforced the view that ECB would continue hoover up assets on the secondary markets even if the asset purchase program approaches limits.

                    Eurozone unemployment rate unchanged at 7.5%, lowest since 2008

                      Eurozone unemployment rate was unchanged at 7.5%, above expectation of 7.4%. That’s still the lowest level since July 2008. EU28 unemployment rate was unchanged at 6.3%, lowest since January 2000.

                      Among the Member States, the lowest unemployment rates in September 2019 were recorded in Czechia (2.1%) and Germany (3.1%). The highest unemployment rates were observed in Greece (16.9% in July 2019) and Spain (14.2%).

                      Full release here.

                      Into US session: Sterling recovers on Brexit rumor, Kiwi stays weakest

                        Entering into US session, Sterling pares back some losses and recovers broadly today. The recovery is believed to be triggered by rumor that the EU is considering to offer a major Brexit concession to the UK. But there is so far no detail on the deal, and it remains just a rumor. Nonetheless, it’s no too surprising for the oversold Pound to have a mild recovery. On the other hand, Dollar is trading as the second strongest one for today. But upside is capped by yesterday’s high except versus New Zealand Dollar.

                        Kiwi remains the weakest one for today after more dovish than RBNZ statement. Australian Dollar truly lacks a clear direction. It was the strongest one in Asian session as lifted by stocks rebound. But it’s now the second weakest. Euro follows as the third weakest for today as it’s rebound lost steam.

                        Over the week, New Zealand Dollar is the weakest one, followed by Sterling. Australian Dollar is the strongest one, followed by Euro.

                        In other markets, European stocks are trading generally softer today with DAX and CAC both down -0.4%. FTSE is down -0.74%. Earlier in Asia, major indices closed mixed. China Shanghai SSE closed up 1.83% at 2794.38, can’t hold on to 2800 handle. Hong Kong HSI rebounded 0.88%. But Nikkei and Singapore Strait Times are down -0.2% and -0.4% respectively.

                        WTI crude oil is extending weakness after rejection from 70 handle. It’s now back below 67 at 66.92 and looks set to dip further. The boring gold continues to engage in sideway consolidation around 1210.

                        Looking ahead, Canada will release housing starts and new housing price index. US will release PPI, jobless claims and wholesale inventories.

                        EU Hogan hopeful of a mini trade deal with US in coming weeks

                          EU Trade Commissioner Phil Hogan said there were still difficult issues to overcome in trade negotiations with US. And, “there is a long list (of issues) on both sides that have been outstanding for many, many years. There is no scientific basis for any of these impediments.”

                          He pointed out, “clearly there are regulations in respect of food safety and those issues, pathogen treatments, that we will not be in a position to change. Equally we are not asking Congress to change their regulations in some of the asks we are making of the United States.”

                          Though, he’s still hopeful of reaching a mini trade deal with the US in the coming weeks. EU is still aiming to see industrial tariffs reduction as an outcome.

                          Trump and Xi seek alliances in G20 sidelines

                            At sideline of G20 today, in Japan, Chinese President Xi Jinping said in a BRICS meeting that protectionist measures taken by some developed countries are “destroying global trade order”. He added “this also impacts common interests of our countries, overshadows the peace and stability world-wide.” Xi called for BRICS to This also impacts common interests of our countries, overshadows the peace and stability world-wide,”

                            Trump met Japan Prime Minister Shinzo Abe and Indian Prime Minister Narendra Modi. Trump said he expects to announce “very big” trade deals with both Japan and India. Modi noted that four issues were discussed including Iran, 5G communications networks, bilateral relations and defense relations.

                            At a news conference, European Commission President Jean-Claude Juncker warned the “difficult” US-China trade relations are “contributing to the slowdown of the global economy”. He’d draw both US and Chinese attention to the “harmful impact this controversial matter is creating.”

                            Trump and Xi are scheduled to meet at 0230 GMT on Saturday. For now, it’s believed that some form of agreement is already in place to halt recent escalation in US-China trade war. But nothing is done until it’s done. A Trump-Kim style negotiation breakdown cannot be totally ruled out or now.

                            Fed expects inflation to stay below target through 2022, despite upward revisions

                              In the new economic projections, Fed projected a much shallower contraction in 2020 but revised down 2021 and 2022 growth. Unemployment rate forecasts were also revised lower through the horizon. Core PCE inflation projections were revised up but would stay below Fed’s 2% target through 2022. Logically, with or even without the new average inflation targeting, federal funds rate are expected to stay at current level through 2022.

                              Here are the median forecasts:

                              GDP:

                              • 2020 contraction revised up to -3.7% (from June’s -6.5%).
                              • 2021 growth at 4.0% (down from 5.0%).
                              • 2020 growth at 3.0% (down from 3.5%).

                              Unemployment rate:

                              • 2020 at 7.6% (revised down from 9.3).
                              • 2021 at 5.5% (down from 6.5%).
                              • 2022 at 4.6% (down from 5.5%).

                              Core PCE inflation:

                              • 2020 at 1.5% (revised up from 1.0%).
                              • 2021 at 1.7% (up form 1.5%).
                              • 2022 at 1.9% (up from 1.7%).

                              China GDP grew 6.8% in Q1, Added USD 8.5B US debt holdings in Feb

                                Released from China, Q1 GDP grew 6.8% yoy, same as prior quarter and met expectation. Retail sales rose 10.1% yoy in March, up from prior 9.7% yoy and beat expectation of 9.7% yoy. Industrial production, however, rose 6.0% yoy, slowed from prior 7.2% yoy and missed expectation of 6.9% yoy. Fixed assets investment also slowed to 7.5% yoy, down from 7.9% yoy and missed expectation of 7.7% yoy. Overall, the set of data showed robust growth momentum.

                                Separately, US Treasury data showed showed that China remained the largest foreign creditor to the US, holding USD 1.18T in US bonds, bills and notes in February. Debt holding by China has indeed by USD 8.5B for the month, the largest rise in six months. But it should be noted that the data was for the period even before the 232 steel tariffs of the US, not to mention the Section 301 tariffs against China. The impact of trade tensions on Chinese interest in US debts remains to be seen.

                                Meanwhile, Japan came as second largest foreign holder of US debts, dropped slightly from USD 1.07T to USD 1.06T.

                                Australia NAB business confidence jumped to 13, but condition tumbled to 5

                                  Australia NAB Business Confidence jumped sharply from -6 to 13 in September. Strong improvement was seen in New South Wales (up 52 pts to 27) and Victoria (up 16 pts to 5). Business Conditions, however, dropped from 14 to 5. Trading condition dropped from 20 to 10. Profitability condition dropped from 15 to 2. Employment confidence dropped from 9 to 1.

                                  NAB said, “Interpreting this month’s results really depends if you are an optimist or a pessimist. Businesses are really looking forward to reopening, and confidence increased markedly on the back of NSW and Victoria’s reopening roadmaps. The rise in confidence suggests they see the roadmaps that have been announced as sufficient to allow activity to really rebound in the coming months.”

                                  “Still, confidence is more about hope for the future than what is happening in the present. On that front, conditions really deteriorated which shows that lockdowns are taking a toll, despite the resilience the economy has shown through this period.”

                                  Full release here.

                                  Ifo: Eurozone economy to contract slightly by -0.4% in Q1, then recovers from Q2 onwards

                                    Germany’s Ifo institute said short term perspectives for Eurozone economy are “highly uncertain”. On the one hand, “the start of the vaccination campaigns gives some reason for optimism”. But on the other hand, “from the beginning of March onwards the pandemic situation has started to worsen almost everywhere with a reappraisal of the containment measures in some countries.”

                                    Overall, Ifo expected that these negatives will have “only a transitory effect of the economy”. Eurozone GDP is expected to contract slightly by -0.4% qoq in Q1, then to recover from Q2 onwards, by 1.5% qoq, and then 2.2% qoq in Q3.

                                    Full report here.

                                    Italian President Mattarella called meeting of political leaders after getting Prime Minster nomination

                                      Italian President Sergio Mattarella called the leaders of the lower and upper houses of the parliament for a meeting today. That came after meeting with anti-establishment 5-Star Movement and far-right League, who have agreed on a deal to form a coalition government.

                                      5-Star leader Luigi Di Maio said after meeting with Mattarella that Giuseppe Conte, a law professor but a political novice, “will be the prime minister of a political government”. Maio hailed that Conte is “a person that can carry out the government contract” and he’s “proud” of this choice. Leader of the League Matto Salvini also confirmed the name.

                                      For now, it’s uncertain whether Mattarella will appoint Conte as the Prime Minister, or he’d prefer a more high-profile figure.

                                      Tusk: EU to decide on Brexit extension in the coming days

                                        European Commission President Jean-Claude Juncker complained that “in truth it has pained me to spend so much of this mandate dealing with Brexit when I have thought of nothing less than how this union could better do for its citizens – waste of time and waste of energy,”

                                        He added, “we need now to watch events in Westminster very closely, but it’s not possible, not imaginable that this parliament would ratify the agreement before Westminster has ratified the agreement. First London, then Brussels and Strasbourg”.

                                        European Council President Donald Tusk said today that he was already discussion UK’s Brexit extension request with E27 leaders. And decision would be made “in the coming days”. He added that “a no-deal Brexit will never be our decision.”

                                        ECB Panetta: PEPP to be used in full unless there are significant upside surprises

                                          ECB Executive Board member Fabio Panetta warned in an interview that it’s “too soon to declare victory” on coronavirus pandemic. Recent economic data “certainly indicate that we’re making progress”, he said.

                                          “But we need to view these improvements with caution, because they are an effect of the rebound that was to be expected after the earlier disastrous fall in economic activity and reflect the large-scale intervention of economic policies.” “Moreover, they don’t diverge from our forecasts. So they don’t give us sufficient grounds for satisfaction.”

                                          He added that “economic activity is still well below pre-crisis levels”. Based on ECB’s projections “we won’t see a return to those levels before the end of 2022”. Outlook is also uncertain for the economy and jobs while growth is uneven.

                                          Regarding monetary policy, Panetta expects to use the resources available under the PEPP “in full” unless there are “significant upside surprises”. “The programme is working well, and I don’t see any economic reasons to change our decisions or actions.”

                                          Full interview here.