Thu, Feb 21, 2019 @ 13:58 GMT

WTI crude oil breaks 65 as inventories jumped 6.8m, USDCAD surges

    WTI crude oil drops sharply after larger than expected rise in US crude oil inventories, which rose 6.8m comparing to expectation of -2.6m. WTI crude oil drops to as low as 64.60 and is currently down -3.45%.

    USD/CAD rides on the fall in oil prices, as well as Dollar’s own strength and breaches 1.3170. The development affirms our view that correction from 1.3385 has completed at 1.2961. Further rise should be seen to 1.3289 resistance next.

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    Into US session: Euro weakest on Italy, Dollar mixed awaiting PCE inflation

      Entering into US session, Euro is trading as overwhelmingly the weakest one as markets respond rather negatively to Italy’s budget deficit plan. Additionally, Eurozone core CPI unexpectedly slowed in September, pointing to risk of reducing underlying price pressure. Euro is the second weakest after Swiss Franc for the week, but it will very likely over take the place should the selloff continue. On the other hand, Canadian Dollar and Australian Dollar are the strongest ones today. But that’s mainly because Dollar’s rally slowed ahead of PCE inflation data.

      Major European indices are trading all in red at the time of writing. DAX leads the way lower, down -1.35%, CAC is down -0.79% and FTSE is down -0.63%. Italian 10 year yield is trading up 03.329 at 3.221. German 10 year bund year is down -0.062 % 0.470. Suddenly, 300 yield spread is not too far away again.

      Risk appetite was strong in Asia thought. Nikkei reached as high as 24286 and breached 24129.34 resistance. But it closed at 24120.04, up 1.36%. Hong Kong HSI was up 0.26%, China Shanghai SSE up 1.06% and Singapore Strait Times was up 0.64%.

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      Richmond Fed Barkin: Economy calls for normalizing interest rates, Fed should follow through

        Richmond Fed President Tom Barkin said in a speech titled “Unlocking Our Potential” that the US economy looks “quite strong a present”. Also, underlying this growth, there is “strong consumer and business confidence”.

        Even though Fed has begun raising interest rates, “they are not yet back to normal levels”. And “it is difficult to argue that lower than normal rates are appropriate when unemployment is low and inflation is effectively at the Fed’s target.

        As the “economy calls for moving back to normal levels”, the Fed should “follow through”. Barkin also added that “given the strength of the underlying economy and the recent additional fiscal stimulus, the risk of normalization is reduced.”

        But “how high rates will ultimately need to rise depends on economic growth.” For unlocking growth potential, Barkin suggests to “target segments of the population where labor force participation is relatively low”. Another strategy is to “invest further in workforce development.”

        Full speech here.

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        Germany PMI at 41-month low, manufacturing weakness spilled over to services

          Germany PMI manufacturing dropped to 52.3 in October, down from 53.7 and missed expectation of 53.5. That’s a 29-month low.

          PMI services dropped to 53.6, down from 55.9 and missed expectation of 55.5. That’s a 5-month low. PMI composite dropped to 52.7, down from 55.0, hit a 41-month low.

          Commenting on the flash PMI data, Phil Smith, Principal Economist at IHS Markit said:

          “October’s flash PMI results made for unpleasant reading, with data showing slowdowns in rates of growth across all the main measures of business performance: output, new orders and employment. The rise in overall business activity was the weakest in almost three-and-a-half years, reflecting not only a further easing of manufacturing production growth, but also a slowdown in the previously steadfast service sector.

          “Growth in the manufacturing sector has been slowing for some time now, so it isn’t surprising to see that weakness spilling over into services given the interconnectivity between the two.

          “Notably, manufacturing order books fell into contraction at the start of the final quarter following almost four years of uninterrupted growth. The survey’s anecdotal evidence highlighted the car industry as an area of weakness, while also indicating a further pullback in orders from abroad.

          “There was also a squeeze on demand from higher selling prices during the month, with the increase in service sector charges the steepest seen in over two decades of data collection.

          “German businesses have lowered their expectations for activity in line with slower growth and a worsening global backdrop, with manufacturers in particular concerned about the outlook for output over the next 12 months.”

          Full release here.

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          Fed maintains forecast of three hikes in 2018, expects one extra in 2019

            Fed delivered the 25bps rate hike and lifted the federal funds rate to 1.50-1.75% as widely expected. But Dollar bulls are clearly dissatisfied with the updated economic projections. The accompanying statement is nearly a carbon copy of the prior one with balanced changes. It added that “recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.” But at the same time, “economic outlook has strengthened in recent months.” The interest rate decision was made with unanimous 8-0 vote.

            Going into the projections:

            Real GDP forecast for 2018 is raised to 2.7% (up from 2.5%), for 2019 raised to 2.4% (up from 2.1%), for 2020 unchanged at 2.0%.

            • Implication is that Fed is expecting slight boost from tax cuts in 2018 and 2019. But the impact won’t be long lasting and would fade into 2020.

            Unemployment rate forecast for 2018 is lowered to 3.8% (down from 3.9%), for 2019 lowered to 3.6% (down from 3.9%), for 2020 lowered to 3.6% (down from 4.0%).

            • The employment market is expected to improve further, with the help of tax cuts and expansive fiscal policy. And the impact would sustain.

            PCE inflation forecast for 2018 unchanged at 1.9%, for 2019 unchanged at 2.0%, for 2020 raised to 2.1% (up from 2.0%)

            Core PCE inflation forecast for 2018 unchanged at 1.9%, for 2019 raised to 2.1% (up fro 2.0%), for 2020 raised to 2.1% (up from 2.0%).

            • While unemployment rate would continue to drop, GDP growth to stay solid, inflation will pressure will remain contained. Fed is seeing the current pattern to continue.

            Federal funds rate projection for 2018 unchanged at 2.1%, 2019 raised to 2.9% (up from 2.7%), 2020 raised to 3.4% (up from 3.1%).

            • This is possibly what disappointed dollar bulls most. It implies Fed will stick with the course of only three rate hike this year. There might be one more hike in 2019 to three in total, thanks to the GDP growth in both 2018 and 2019, as well as the steep improvement in labour market. And, Fed is more confident that there will be another two rate hikes in 2020.

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            Aussie steady after RBA stands pat at 1.50%, reactions muted

              Australian Dollar trades mildly firmer against dollar after RBA left cash rate unchanged at 1.50%. But it’s overall steady and mixed as reaction to RBA is rather muted. In short, RBA maintained that fall in unemployment rate will eventually lift inflation to target. But again, the central bank expected the progress to be “gradual”, implying that there is no urgency to lift interest rate any time soon.

              On the economy, the central scenario for GDP growth is to average around 3.5% in 2018 and 2019. Then it would slow to 2020 due to slower growth in export of resources. Outlook for labor market remains “positive”. Improvement in the economy should see “some further lift in wages growth” over time, gradually. CPI is expected to pick up over the next couple of years gradually to. And, the central scenario if for inflation to be at 2.25% in 2019 and a bit higher in 2020.

              Full statement below.

              Statement by Philip Lowe, Governor: Monetary Policy Decision

              At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

              The global economic expansion is continuing and unemployment rates in most advanced economies are low. There are, however, some signs of a slowdown in global trade, partly stemming from ongoing trade tensions. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased due to the earlier lift in oil prices and faster wages growth. A further pick-up in core inflation is expected given the tight labour markets and, in the United States, the sizeable fiscal stimulus.

              Financial conditions in the advanced economies remain expansionary but have tightened somewhat. Equity prices have declined and credit spreads have moved a little higher. There has also been a broad-based appreciation of the US dollar this year. In Australia, money-market interest rates have declined, after increasing earlier in the year. Standard variable mortgage rates are a little higher than a few months ago and the rates charged to new borrowers for housing are generally lower than for outstanding loans.

              The Australian economy is performing well. The central scenario is for GDP growth to average around 3½ per cent over this year and next, before slowing in 2020 due to slower growth in exports of resources. Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Growth in household income remains low, debt levels are high and some asset prices have declined. The drought has led to difficult conditions in parts of the farm sector.

              Australia’s terms of trade have increased over the past couple of years and have been stronger than earlier expected. This has helped boost national income. Most commodity prices have, however, declined recently, with oil prices falling significantly. The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis.

              The outlook for the labour market remains positive. The unemployment rate is 5 per cent, the lowest in six years. With the economy expected to continue to grow above trend, a further reduction in the unemployment rate is likely. The vacancy rate is high and there are reports of skills shortages in some areas. The stronger labour market has led to some pick-up in wages growth, which is a welcome development. The improvement in the economy should see some further lift in wages growth over time, although this is still expected to be a gradual process.

              Inflation remains low and stable. Over the past year, CPI inflation was 1.9 per cent and in underlying terms inflation was 1¾ per cent. Inflation is expected to pick up over the next couple of years, with the pick-up likely to be gradual. The central scenario is for inflation to be 2¼ per cent in 2019 and a bit higher in the following year.

              Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Credit conditions for some borrowers are tighter than they have been for some time, with some lenders having a reduced appetite to lend. The demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased to an annualised pace of 5–6 per cent. Mortgage rates remain low, with competition strongest for borrowers of high credit quality.

              The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

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              German Merkel hints at no joint G6+1 statement

                German Chancellor Angela Merkel warned yesterday that there will be difficult discussions at the G7 summit in Canada. She told the parliament that “it is apparent that we have a serious problem with multilateral agreements here, and so there will be contentious discussions.” She, though, pledged to go into the meeting with “goodwill”.

                But Merkel also emphasized that there “must not be a compromise for the sake of a compromise” and there was “no sense in papering over divisions.” That’s taken as a sign of risk that G7 summit could end without a joint statement first ever, as US will likely clash with all other G6 nations, at least on trade.

                Meanwhile, it’s reported that Macron has warned the US that he will not sign a joint statement out of the G7 summit if there is no progress on tariffs, Iran nuclear deal and the Paris climate accord.

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                Chinese VP Wang: Ready to work for trade solution with US

                  The US and China will hold a top-level security meeting on Friday in Washington. Secretary of State Mike Pompeo, Defense Secretary Jim Mattis, Chinese politburo member Yang Jiechi and Defense Minister Wei Fenghe will be involved in the meeting. And it’s generally seen as a sign of warming-up ahead of the meeting between Trump and Xi in the upcoming G20 summit later in the month.

                  Talking about the Trump-XI meeting, Chinese Vice President Wang Qishan said in Singapore today that “both China and the U.S. would love to see greater trade and economic cooperation.” Wang added “the Chinese side is ready to have discussions with the U.S. on issues of mutual concern and work for a solution on trade acceptable to both side.”

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                  ECB research: Significant increase in protectionism could have material impact on global trade and output

                    In article titled “Implications of rising trade tensions for the global economy“, ECB researcher Lucia Quaglietti warned of the impact of escalation of trade tensions.

                    Based on simulations carried out by ECB staff, in event of a significant increase in protectionism, “the impact on global trade and output could be material.” In particular, if US increases tariffs “markedly” on imported goods from all trading partners that “retaliate symmetrically”, the outcome for the world economy would be “clearly negative. And, “the impact could be particularly severe in the United States”

                    For other countries, those with “closest trade relations” with the US would be most negatively affected. And, “only a few open economies with little exposure to the tariff-imposing country may benefit from trade diversion effects, as they would gain competitiveness in third markets.”

                    In addition, the impact of trade tension escalation could be “felt via a number of channels. Higher import prices would lead to higher production costs and lower household purchasing power. Consumption, investment and employment will also be affected. Moreover, there will be economic uncertainty that leads to delay and consumer spending and business investment. Credit supply could be reduced with requirement for higher compensation. And there could be broad spill over to the global financial markets.

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                    China CASS Zhang: There should be a firewall between trade and finance

                      Talking about the Boao Forum, there is one interesting point to note. On Sunday, head of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences Zhang Yuyan said there is no intention of allowing trade dispute with the US to spill over to finance. Zhang emphasized that there should be a “firewall between trade problems and financial ones”. And, the chance of China selling its massive US Treasury holdings due to a trade war is “very small”.

                      Zhang added that “maybe one or two days before the actual implementation (of the tariffs), the US side will gain its reason and sense.” And, “there are many cases of compromises being reached at the last minute.”

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                      Sterling could have 6% swing depending of Brexit vote outcome

                        Sterling is one of the weakest currency this week, just next to risk aversion pressured commodity currencies. But downside in the Pound is so far limited, except versus Yen. It’s believed that odds are stacking against UK Prime Minister Theresa May winning the parliamentary vote on Brexit deal on December 11. Her performance in the first two days of the five-day parliamentary debate hasn’t been satisfactory so far.

                        According to a Reuters poll, economists forecast that Sterling would appreciate 3.5% if the deal is approved next week. On the other hand, rejection could trigger selloff by -2.75%. But we’d like to emphasize the eventual development if rather unimaginable. May’s defeat in the Brexit vote might not lead to no-deal Brexit, but no Brexit at all. After all, the UK has a trump card of withdrawing the Brexit request unilaterally.

                        Anyway, for now the Pound’s movement could be relatively limited as traders would refuse to commit to any position before the vote.

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                        Trump backs down on tough Chinese investment curb, revert to CFIUS

                          The markets are responding positive to news that Trump is backing away from the rumored harsh measure on curbing Chinese investments in US technology companies. Instead, his administration will revert to existing laws, with an upgrade. Trump himself told reports that “it’s not just Chinese”. Treasury Secretary Steven Mnuchin also said that “we are not singling out China, but we will protect technology transfer to China as we will to other important areas.” Mnuchin also pledged that “we will have the necessary tools to protect investments, whether it’s China or anybody else.”

                          The administration will relay on the newly strengthened Committee on Foreign Investment in the United States (CFIUS) to deal with the issue. The legislation to be used is called the Foreign Investment Risk Review Modernization Act. Trump said the upgraded CFIUS”will enhance our ability to protect the United States from new and evolving threats posed by foreign investment while also sustaining the strong, open investment environment to which our country is committed and which benefits our economy and our people.” And, “I have concluded that such legislation will provide additional tools to combat the predatory investment practices that threaten our critical technology leadership, national security, and future economic prosperity.”

                          Trump originally considered invoking executive authority to impose and much tougher crackdown on Chinese investments. And there have been conflicting messages from White House trade adviser Peter Navarro and Mnuchin. But such an idea appeared to have drawn severe complaints from US businesses and Republicans, on the potential economic fallout.

                          US stocks futures reversed initial losses and now point to flat open. In particular, NASDAQ will be an index to watch today for its tech compositions. Dollar also jumps on the news, ignoring mixed economic data.

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                          North Korea responds to Trump’s sudden and unilateral cancellation of the Kim-Trump summit

                            North Korean Vice Foreign Minister Kim Kye Gwan responded to Trump’s cancellation of the June 12 summit in Singapore in a statement carried by state media.

                            “We have inwardly highly appreciated President Trump for having made the bold decision, which any other U.S. presidents dared not, and made efforts for such a crucial event as the summit.”

                            “We even inwardly hoped that what is called ‘Trump formula’ would help clear both sides of their worries and comply with the requirements of our side and would be a wise way of substantial effect for settling the issue.”

                            “His sudden and unilateral announcement to cancel the summit is something unexpected to us and we can not but feel great regret for it.” And, North Korea remained open to dialogue with the US “regardless of ways at any time”.

                            “The first meeting would not solve all, but solving even one at a time in a phased way would make the relations get better rather than making them get worse. The U.S. should ponder over it.”

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                            Davis: May is good PM but the Brexit plan is a dangerous strategy

                              Ex-Brexit Minister David Davis told BBC Radio that PM Theresa May’s Brexit plan had a “number of weaknesses” and gives away “too much” to the EU. He called that a “dangerous strategy”. And he said he was clear after Friday’s that that he was the “odd man out”.

                              Nonetheless, Davis also said he “won’t be encouraging people” to mount a leader change in the UK and added that “I like Theresa May, i think she is a good PM”. And he didn’t expect others ministers to follow him to resign. He said “the simple truth is people can only make these decisions of conscience, decisions of principle by themselves, in their own minds,”and you can’t make the decision for somebody else and you can’t offload it on somebody else.”

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                              NAFTA talks progressed on auto content rules

                                Mexican head of the trade and NAFTA office Guillermo Malpica said yesterday that the US had “started showing more flexibility last week” on NAFTA renegotiation. And, he added that “we are getting close” to an agreement on one of the sticky point, autos rule of origin.

                                Mexican Economy Minister Ildefonso Guajardo also indicated earlier there was a shift in the focus of the debate in auto contents. He said “now what we are talking about is that a percentage of what is made in North America would be made in a high-salary zone … What does this mean? That clearly, within the component of 100 percent of an automobile made in (the NAFTA zone), a percentage, it could be about 35 to 40 percent, is made in a high-salary zone.”

                                Canadian trade negotiator Colin Bird also said in an auto industry conference in Michigan that there was progress on auto content rules. He added that “harnessing the power of trade agreements to promote higher wages is the kind of policy all three countries can get behind.”

                                However, another sticky point of the sunset clause is not cleared yet. Bird also warned that “any one country being able to hold the agreement hostage every five years does not provide the certainty” for businesses.

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                                PBoC Yi: Yuan volatility is normal, rate at reasonable and equilibrium level

                                  China’s PBoC Governor Yi Gang tried to talk down recent Yuan depreciation despite having USD/CNH nearing the psychological important 7 level. Yi insisted that “the Yuan’s volatility is normal” and its rate is at a “reasonable and equilibrium level”. And, in spite of recent measures in stabilizing the markets, Yi also insisted that PBoC is having a “neutral” monetary policy stance. He said “So if you look at the broad money, if you look at the interest rate and you look at monetary conditions, basically you can have the conclusion that we have a prudent and neutral stance monetary policy.”

                                  Regarding trade war, Yi said “downside risks from trade tensions are significant.” But he’s confidence that the PBoC has “plenty of monetary instruments in terms of interest rate policy, in terms of required reserve ratio.” And, PBoC has “plenty of room for adjustment, in case we need it”. Besides, he’s also confidence that China is on track to meet its growth target of 6.5% in 2018 and “maybe a little bit more”.

                                  Yi also pledged in a statement that “China will continue to let the market play a decisive role in the formation of the RMB exchange rate”. And, we will not engage in competitive devaluation, and will not use the exchange rate as a tool to deal with trade frictions.”

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                                  US Senate to hold competing votes to end government shutdown

                                    The US Senate will hold two competing votes on Thursday as effort to end the record government shut down. Trump’s plan, which includes USD 5.7B for border wall will be voted on. Also, Democrat’s proposal, to reopen government through February 8, will also be voted on. It’s seen as a concession by Senate Majority Leader Mitch McConnell who previously refused to vote on a bill that Trump would veto.

                                    Trump includes a provisional three-year work permits for the youngsters under Deferred Action for Childhood Arrivals program as bargaining chip. But his plan is still likely to be voted down as Democrats have open rejected to compromise on the issue.

                                    The Democrats could gain enough support from Senate Republicans rebels to vote for their proposal, which was already pass in the House. However, even so, Trump will likely veto even if the Democrat’s bill is passed in the Senate. The Democrats are way short of two-third majority to override Trump’s veto.

                                    So, the shutdown might still extend beyond Thursday.

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                                    BoJ Kuroda: Risks tilted toward the downside

                                      BoJ Governor Haruhiko Kuroda warned today that “risks to Japan’s economy are tilted toward the downside” And BoJ policymakers “need to pay particular attention to protectionist moves such as Sino-U.S. trade friction.”

                                      Kuroda also warned that “raising interest rates now to create policy space for future economic downturns may risk delaying achievement of our inflation target.”

                                      Also, it’s premature to reveal the exit strategy for the ultra loose monetary policy. Kuroda said “we need to debate an exit strategy and explain it to markets but only when inflation approaches our target.”

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                                      Italy’s Salvini pleased with the EU immigration deal

                                        Italy’s Interior Minister Matteo Salvini, a known anti immigrant leader of the League, said he’s pleased with EU’s agreement on immigration.

                                        He said today that “I’m satisfied and proud of our government’s results in Brussels.” And, “finally Europe has been forced to discuss an Italian proposal… (and) finally Italy is no longer isolated and has returned to being a protagonist.”

                                        European markets are also generally happy with the news. At the time of writing, DAX and CAC are trading up around 1.4%. FTSE is up 0.8%.

                                        Euro continues to trade as the strongest one today, followed by Sterling.

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                                        Abe to tell Trump Japanese carmakers made huge contributions to the US economy

                                          Japan Prime Minister Shinzo Abe was asked in the parliament today about Trump intention to impose tariffs on car imports using national security as excuse. Abe said he would seek to convince Trump that Japan carmakers are important in boosting the US economy.

                                          He noted that Japan automakes have “created jobs and made huge contributions to the US economy.” And he added that the number of cars Japanese automakers produce in the US is double the number it exports to the country.

                                          And he emphasized that “as a country that prioritizes a rule-based, multilateral trade system, Japan believes that any steps taken on trade must be in line with World Trade Organization rules.”

                                          Separately, he added that “Japan has explained to the United States its stance that TPP is the best format for both countries. We will continue to talk with the United States based on this view.”

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