Gold’s correction from 1214.30 extended to 1189.49 earlier this week but recovered since then. It’s picking up some upside momentum today and is back above 1200. But for now we’d prefer to see a break of 1209.00 minor resistance to confirm near term bullishness.
Overall outlook is unchanged. With 1182.90 minor support intact, rebound from 1160.36 is still in progress and further rise is expected. Break of 1209 will suggest rise resumption for 55 day EMA (now at 1222.51) and above.
However, as this rebound is seen as a correction to the larger down trend from 1365.24, we’d expect strong resistance from 38.2% retracement of 1365.24 to 1160.36 at 1238.62 to limit upside to complete it.
Minutes of March 19-20 FOMC meeting released overnight solidify Fed’s patience stance. Additionally, the minutes indicated that some members are open to rate cut if incoming data and development warrant so.
It’s noted that a “majority” of participants expected that evolution of economy and risks would likely warrant leaving interest rate unchanged for the rest of year. Some of them noted current interest rate was “close to” neutral.
At the same time, participants continued to “emphasize” decisions at coming meetings would depend on their ongoing assessments of the economic outlook and how risks evolved. “Several” participants noted their view on interest rate “could shift in either direction based on incoming data and other developments.”
Richmond Federal Reserve President Thomas Barkin said in a speech that the “national economy appears great”. Unemployment rate is at 50-year lows and GDP growth is solid. Consumers also “feel confident and are spending”. However, “international economies are weaker”, with “elevated” uncertainty particularly around trade. Business investment dropped in Q2.
Hence, with muted inflation risk, Barkin said, Fed decided to make a “mid-cycle reduction” in interest rates earlier this month. That goal was to provide a “little insurance for the continued growth of the economy and strength of the labor market.”
Jerome Powell had his first ever broadcast interview as Fed chair with the Marketplace. On wages, he acknowledged that annual wage growth has moved up from “low twos” five years ago, to close to three” now. And there’s been “very gradual move up”. He noted that wages should “reflect inflation plus productivity”. A “big part” of the slow wage growth is “certainly that inflation has been low and productivity has been low”. Yet, he didn’t have the answer to the question on why employers are not paying higher wages while the labor markets appear to be very tight.
Though, he also noted that “the economy’s in a really good shape” with unemployment at 4%, the lowest in 20 years. And, people are “coming back into the labor force or not leaving it” in the past five years. Fed’s target of PCE, which is “a little bit lower than the CPI” has been below 2% for some time. But it finally hit the 2% core PCE level last month.
Regarding trade policy, Powell noted Trump’s administration “said” it’s trying to lower tariffs. And, “if it works out that way, then that’ll be a good thing for our economy.” However, “if it works our other ways” and there will be high tariffs on a lot of products for a sustained period of tie, “that could be a negative for our economy”. But it’s “hard to sit here today and say which way that’s going”.
But Powell also emphasized that when Fed doesn’t make the policy, “we don’t praise it, we don’t criticize it”. And, “part of the independence that we have is to stick to our lane, stick to our knitting, so really wouldn’t want to comment on fiscal policy really, or trade policy.”
Asian markets are staging a strong rebound today. At the time of writing, Chines Shanghai Composite is up 1.2%, Hong Kong HSI is up 1.15%, Singapore Strait Times is up 0.7%. Nikkei lags behind, though, and is up 0.14% only. Yen is sold off broadly.
A main trigger for the rebound is the shift in the policy stance of China’s central bank PBoC. The process of deleveraging could be slowed to ensure sufficient liquidity in the markets.
In the statement released after Q2 regular meeting, PBoC noted challenges and uncertainties in international developments. And it emphasized the need in “anticipation and forward-looking pre-adjustment fine-tuning” on monetary policy. While being neutral, monetary policy has to “maintain adequate liquidity, and guide the reasonable scale of monetary credit and social financing.”
Also, PBoC noted the need to use a variety of tools to “grasp the strength and rhythm of structural deleveraging”. The aims were to promote “promote stable and healthy economic development, stabilize market expectations, and guard against systemic financial risks.”
Eurozone retail PMI rose to 51.7 in May, hitting a 3-month high, indicating higher monthly sales. By country, Germany retail PMI rose to 13-month high at 55.5. France retail PMI rose to 3-month high at 50.7. Italy retail PMI stayed in contraction at 47.3.
Alex Gill, economist at IHS Markit which compiles the Eurozone Retail PMI, said:
“The latest PMI data signalled a more positive month for the eurozone retail sector, with sales returning to growth on both a monthly and annual basis. In turn, this contributed to the sharpest round of job creation in the current 31-month sequence of hiring.
“The positive trends were lop-sided when looking at country data, however. The rise in monthly sales was driven by a sharp rise in Germany, though a slight increase was also recorded in France. Meanwhile, Germany was the only country to register a rise in year-on-year sales, while Italy recorded a marked decline.”
New Zealand trade balance unexpectedly show NZD -86m deficit in April, versus expectation of NZD 200m surplus. That was also the first March deficit 10 years since 2008. Goods exports rose 5.8%, or NZD 265m while imports rose 14%, or NZD 612m.
From Australia, PPI rose 0.5% qoq, 1.7% Yoy in Q1 versus expectation of 0.4% qoq, 1.2% yoy.
NZD and AUD are the weakest major currencies this week, followed by EUR.
Comparing the two, AUD/NZD is in recovery mode since early April. For now, the rise from 1.0486 is seen as a correction and could target 38.2% retracement of 1.1289 to 1.0486 at 1.0793. But we’ll start to look for topping signal around there.
SNB site deposit rose by CHF 1.7B to a record CHF 581.2B last week. That’s also the biggest weekly rise since May 2017. The large jump argued that the central bank could have been intervening in the currency market last week.
ECB’s dovish policy was the trigger in the surge in Franc’s exchange rate versus Euro. At the same time, ECB is widely expected to finally announce an easing package with a rate cut in September.
For now, there is no sign that SNB would set another floor for EUR/CHF yet. And it’s believed that SNB is looking at the speed of the exchange rate move, rather than a specific figure.
In a note titled “U.S. Corporations’ Repatriation of Offshore Profits“, Fed studied how companies used the cash holdings outside the US after the Tax Cuts and Jobs Act. Under the new act, tax disincentives on the repatriation of foreign earnings were eliminated. Fed found that US firms repatriated just over USD 300B in Q1 2018, roughly 30% of the estimated stock of offshore cash holdings. However, funds repatriated in Q1 have been associated with a dramatic increase in share buybacks only. And, evidence of an increase in investment is less clear at this stage.
After the passage of the TCJA, hare buybacks spiked dramatically for the top 15 cash holders, which accounted for roughly 80% of total offshore cash holdings.
However, there is no obvious spike in investment among the top 15 cash holders in Q1 relative to the previous quarter.
And, the top 15 cash holders were net sellers in 2018:Q1, with their total securities holdings, mostly in US fixed-income securities, falling by about 3 percent of their total assets.
Japan PMI manufacturing dropped to 49.6 in May, down from 50.2 and missed expectation of 50.5. The reading is also back in contraction territory. Markit noted that output and new orders decrease for fifth successive month. Businesses cast pessimistic outlook towards the coming year for the first time in six-and-a-half year.
Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:
“Following some tentative signs that the downturn in Japan’s manufacturing sector had softened in April, flash data for May revealed these were short-lived, as output and export orders fell at stronger rates. The re-escalation of US-China trade frictions has heightened concern among Japanese goods producers. Underlying growth weakness across much of Asia led to struggling exports, which fell at the sharpest rate in four months. Difficulties on the international front merely add to uncertainties domestically, with upcoming upper house elections in July, and the impending sales tax hike later this year. Subsequently, sentiment turned negative in May for the first time in six-and-a-half years.”
UK PMI services rose to 51.3 in February, up from 50.1 and beat expectation of 50.0. Markit noted “modest upturn in service sector output”. But there was “slight fall in new work” and “staffing levels drop to greatest extent for over seven years”.
Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:
“The latest PMI surveys indicate that the UK economy remained close to stagnation in February, despite a flurry of activity in many sectors ahead of the UK’s scheduled departure from the EU. The data suggest the economy is on course to grow by just 0.1% in the first quarter.
“Worse may be to come when pre-Brexit preparatory activities move into reverse. Many Brexit-related headwinds and uncertainties also look set to linger in coming months even in the case of PM May’s deal going through. Global economic growth meanwhile remains sluggish, adding an increasingly gloomy backdrop to the UK’s current problems.
“Business optimism about the year ahead has consequently sunk to the lowest ever recorded by the survey with the exceptions of the height of the global financial crisis and July 2016. Brexit concerns dominate the list of reasons cited by companies for deteriorating business performance by a wide margin.
“Employment across services, manufacturing and construction is meanwhile now falling at a rate not exceeded for nine years as companies cut costs and await clarity on the outlook, highlighting the rising damage to the economy from intensifying uncertainty.”
Conference Board Consumer Confidence for US rose to 134.1 in May, up from 129.2 and beat expectation of 130.0. Present Situation Index rose to 175.2, up from 169.0. Expectations Index rose to 106.6, up from 102.7.
“Consumer Confidence posted another gain in May and is now back to levels seen last Fall when the Index was hovering near 18-year highs,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The increase in the Present Situation Index was driven primarily by employment gains. Expectations regarding the short-term outlook for business conditions and employment improved, but consumers’ sentiment regarding their income prospects was mixed. Consumers expect the economy to continue growing at a solid pace in the short-term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead.”
US stocks tumbled sharply overnight and risk aversion spreads to Asia. DOW closed down -799.36 pts or -3.10% at 25027.07. S&P 500 dropped -3.24% to 2700.06 and NASDAQ lost -3.80% to 7158.83. DOW has now pared much most of the gains triggered by Fed Chair Jerome Powell’s dovish turn last week, as well as the US-China trade truce.
While the fall was deep, there was no special technical development. It’s a bit disappointing that DOW couldn’t even touch 26000 with the rebound. But after all, it’s in the corrective pattern that started from 26951.81. We’d maintain that for the near term, range is set for the consolidation and 24122.23 should hold even in case of deeper fall. For the medium term the correction from 26951.81 would likely have a test on 38.2% retracement of 15450.56 (2016 low) to 26951.81 at 22558 before completion.
Some attributed the stock market decline to yield curve inversion in the US, between 3- and 5- year yield. That’s certainly hit the nerves of investors as global treasury yields, not just the US, dropped sharply.
10 year yield closed down -0.068 at 2.924, back below 3% handle. 30 year yield also dropped -0.100 to 3.178. The technical developments are turning bad. But for the near term at least, as both are close to 55 week EMAs, we’d expect limited downside potential.
Cleveland Fed President Loretta Mester expressed her support for more rate hike this year. She said in a prepared speech for University of Pittsburgh’s graduate school of business that “If the economy evolves as I anticipate, I believe further gradual increases in interest rates will be appropriate this year and next year.”
She added that “continued gradual reduction in monetary policy accommodation, given the economic outlook, will put monetary policy in a better position to address whatever risks, whether to the upside or to the downside, are ultimately realized.”
UK unemployment rate dropped to 3.9% in the three months to January, down from 4.0% and beat expectation of 4.0%. That’s also the lowest level since the period between November 1974 to January 1975. For men, unemployment rate dropped to 4.0%, lowest since 1975. For women, unemployment rate dropped to 3.8%, lowest since 1971.
Average weekly earnings including bonus rose 3.4% yoy, unchanged from December and beat expectation of 3.2% yoy. Average weekly earnings excluding bonus rose 3.4% yoy, down from December’s 3.5% and matched expectations. Also release, jobless claims rose 27.9k in February, above expectation of 13.1k.
China Caixin PMI services rose to 53.1 in September, up from 51.5 and beat expectation of 51.5. Caixin PMI composite rose 0.1 to 52.1, showing that overall business activity expanded modestly at the end of Q3. Still, the rate of activity growth remains lackluster compares to earlier in 2018.
Commenting on the China General Services PMI™ data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said:
“The Caixin China General Services Business Activity Index rebounded to 53.1 in September from 51.5 in August. New business increased at a faster rate last month than in August, pointing to some improvement in demand. However, employment in the service industry contracted abruptly and that sub-index fell to its lowest level since March 2016. Prices charged by service providers declined for the first time in 13 months, while input costs rose at their quickest pace since January, which could squeeze company profit margins. Reflecting that, the sub-index of business expectations, which gauges service companies’ confidence toward the prospects of their operations over the next 12 months, edged down in September from the previous month.
“The Caixin China Composite Output Index inched up to 52.1 last month from 52.0 in August, indicating the performance of the Chinese economy was stable for the month. However, demand remained subdued as the growth rate for new orders, although marginally higher than the previous month, lingered at a low level. The increase in output prices slowed while the gain in input prices accelerated slightly. That meant companies were still under relatively large cost pressures, which contributed to a fall in the sub-index of future output.
“What we should be wary of is that overall employment contracted in September, with the sub-index hitting its lowest level since August 2016. The deterioration in employment will test policymakers’ determination in pressing ahead with reforms.”
Dollar rally accelerates on much stronger than expected manufacturing data. ISM manufacturing index rose to 61.3 in August, up from 58.1 and beat expectation of 57.8. That’s also the highest level since May 2004. Prices paid index dropped to 72.1, down from 73.2 and missed expectation of 74. Employment component improved 2 points from 56.5 to 58.5.
ISM noted in the released that
Comments from the panel reflect continued expanding business strength.
Demand remains strong, with the New Orders Index at 60 percent or above for the 16th straight month, and the Customers’ Inventories Index remaining low.
The Backlog of Orders Index continued to expand, at higher levels compared to the previous month.
Consumption improved, with production and employment continuing to expand, at higher levels compared to July, despite shortages in labor and materials.
Inputs (expressed as supplier deliveries, inventories and imports) expanded strongly due to continuing supply chain inefficiencies, positive increases in inventory levels and a slight easing of imports. Lead-time extensions, steel and aluminum disruptions, supplier labor issues, and transportation difficulties continue, but at more manageable levels.
Export orders expanded at stable levels.
Prices pressure continues, but the index softened for the third straight month and remains above 70.
Demand is still robust, but the nation’s employment resources and supply chains continue to struggle.
Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations. Panelists are actively evaluating how to respond to these business changes, given the uncertainty.
UK Brexit Minister Stephen Barclay warned today that no-deal Brexit is underpriced. He also told EU chief Brexit negotiator Michel Barnier that the current withdrawal agreement would not be approved by the UK parliament without any change.
Barclay said “I think a no deal is underpriced. It is still this government’s intention and both leadership candidates’ intention to seek a deal and I think it is the will of many members of parliament for there to be a deal”. However, “the question then will be is there a deal that is palatable to parliament and if not will parliament vote to revoke or will we leave with no deal?”
Regarding his conversation with Barnier, Barclay clarified “What I said was the House had rejected it three times … that the European election results in my view had further hardened attitudes across the House and that the text unchanged, I did not envisage going through the House.”
Atlanta Fed President Raphael Bostic said there is “room to run” with Fed’s rate hikes. as long as the economy is “running fine” and there is no sign of contraction. He expects the economy growth between 2.2-2.5% this year. But inflation is expected to rise above 2% target.
Bostic is still aiming at lifting Federal funds rate to neutral. And a slow approach is a good path for Fed. He’s currently seeing one rate hike this year and one in 2020.
Mario Draghi, President of the ECB,
Luis de Guindos, Vice-President of the ECB,
Frankfurt am Main, 13 September 2018
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, we will continue to make net purchases under the asset purchase programme (APP) at the current monthly pace of €30 billion until the end of this month. After September 2018, we will reduce the monthly pace of the net asset purchases to €15 billion until the end of December 2018 and we anticipate that, subject to incoming data confirming our medium-term inflation outlook, we will then end net purchases. We intend to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of our net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
The incoming information, including our new September 2018 staff projections, broadly confirms our previous assessment of an ongoing broad-based expansion of the euro area economy and gradually rising inflation. The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding-down of our net asset purchases. At the same time, uncertainties relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently. Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This support will continue to be provided by the net asset purchases until the end of the year, by the sizeable stock of acquired assets and the associated reinvestments, and by our enhanced forward guidance on the key ECB interest rates. In any event, the Governing Council stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.4%, quarter on quarter, in the second quarter of 2018, following growth at the same rate in the previous quarter. Despite some moderation following the strong growth performance in 2017, the latest economic indicators and survey results overall confirm ongoing broad-based growth of the euro area economy. Our monetary policy measures continue to underpin domestic demand. Private consumption is supported by ongoing employment gains, which, in turn, partly reflect past labour market reforms, and by rising wages. Business investment is fostered by the favourable financing conditions, rising corporate profitability and solid demand. Housing investment remains robust. In addition, the expansion in global activity is expected to continue, supporting euro area exports.
This assessment is broadly reflected in the September 2018 ECB staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 2.0% in 2018, 1.8% in 2019 and 1.7% in 2020. Compared with the June 2018 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised down slightly for 2018 and 2019, mainly due to a somewhat weaker contribution from foreign demand.
The risks surrounding the euro area growth outlook can still be assessed as broadly balanced. At the same time, risks relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 2.0% in August 2018, down from 2.1% in July. On the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around the current level for the remainder of the year. While measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Domestic cost pressures are strengthening and broadening amid high levels of capacity utilisation and tightening labour markets, which is pushing up wage growth. Uncertainty around the inflation outlook is receding. Looking ahead, underlying inflation is expected to pick up towards the end of the year and thereafter to increase gradually over the medium term, supported by our monetary policy measures, the continuing economic expansion and rising wage growth.
This assessment is also broadly reflected in the September 2018 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.7% in 2018, 2019 and 2020, which is unchanged from the June 2018 Eurosystem staff macroeconomic projections.
Turning to the monetary analysis, broad money (M3) growth declined to 4.0% in July 2018, from 4.5% in June. Apart from some volatility in monthly flows, M3 growth is increasingly supported by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The recovery in the growth of loans to the private sector observed since the beginning of 2014 is proceeding. The annual growth rate of loans to non-financial corporations stood at 4.1% in July 2018, while the annual growth rate of loans to households stood at 3.0%, both unchanged from June.
The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing – in particular for small and medium-sized enterprises – and credit flows across the euro area.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, the broad-based expansion calls for rebuilding fiscal buffers. This is particularly important in countries where government debt is high and for which full adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions. Likewise, the transparent and consistent implementation of the EU’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council urges specific and decisive steps to complete the banking union and the capital markets union.
ActionForex.com was set up back in 2004 with the aim to provide insight analysis to forex traders, serving the trading community over a decade. Empowering the individual traders was, is, and will always be our motto going forward.