Thu, May 28, 2020 @ 04:31 GMT

BoJ Kuroda: Near term focus is to smoothen corporate financing and stabilize markets

    In the semi-annual testimony to parliament, BoJ Governor Haruhiko Kuroda warned that “Japan’s economy is in an increasingly severe state”. Outlook will “remain severe for the time being.” He pledged to “do whatever we can as a central bank, working closely with the government.”

    For the near term, focus of monetary policy is to “smoothen corporate financing and stabilize markets”. Though, there is no huge risk of sharp credit contraction as domestic financial institutions have sufficient capital buffers.

    As for the steps to ease monetary further, he said, “we’re ready to take sufficient steps judged necessary at the time”. The measures could include expanding asset purchases, increasing market operations tools or cutting interest rates further.

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    France PMIs: Private sector remained firmly in expansionary mode

      France PMI manufacturing dropped to 53.4 in April, down from 53.7 and missed expectation of 53.5. France PMI services rose to 57.4, up from 56.9, beat expectation of 56.5. PMI composite rose to 56.9, up from 56.3.

      Comments from Alex Gill, Economist at IHS Markit:

      “The French private sector remained firmly in expansionary mode according to latest flash data. Indeed, at 56.9, the headline composite output figure signalled a sharper rate of growth than in March, and one that remained well above its long-run average (53.9).

      “After having shown signs of slowing in recent months, the data will buoy hopes that the renaissance in the French economy has far from run its course. Further encouragement can be garnered from the broad-based nature of the acceleration, with sharper growth evident in both the manufacturing and services sectors, the former on the back of marked moderations in the prior two months.”

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      China industrial profits dropped -14%. Autos, oil processing, steel and chemicals dragged

        China’s industrial profits in January-February period slumped -14.0% yoy to CNY 708B. It’s the biggest contraction since 2011. National Bureau of Statistics (NBS) said the contract was mainly due to distortions caused by the timing of Lunar New Year.

        Meanwhile, there were notable declines in profits in auto, oil processing, steel and chemical industries. Ex-factory prices of Auto, oil processing, steel and chemicals dropped -0.4%, -1.3%, -2.5% and -2.3% respectively. Profits dropped CNY 37B, CNY 32B, CNY, 29B and CNY 19B respectively. Combined the contributed to -14.2% contraction in profits. Excluding them, industrial profits rose 0.2%.

        While the set of data is largely ignored by the stock markets, it’s putting some more weight to the upcoming round of trade talks. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will visit Beijing on March 28-29. Even though an eventual trade might might not help reverse the slowdown in China, at least, the drag on exports will likely be eased.

        Full NBS Statement in simplified Chinese.

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        South Korea to increase fiscal spending amid weakened job growth and economic polarization

          South Korea Finance Minister Kim Dong-yeon said today that the government is going to raise fiscal spending to counter the weakening of the job market and economic polarization. 2019 budget spending will increase far more than the original plan of 5.7%. The spending will be on supporting research and development of advance artificial intelligence, big data and hydrogen vehicles.

          Kim described that the job market is “the worst since financial crisis”. And “the government’s big challenge is how to support the job market through fiscal policies.” Additionally. “Polarization issue is very perplexing”, and “economic growth and innovation would be difficult to sustain without addressing the issue”.

          Earlier, the government cut job growth forecast to 180k this year, down from 320k prior estimate.

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          ISM manufacturing dropped less than expected to 51.7, employment rose to 54.7

            Dollar stays firm after ISM Manufacturing Index showed less than expected decline in June. Most importantly, principle concerns of US-China trade and US-Mexico trade are now eased, arguing that there might be a rebound in sentiments ahead.

            ISM Manufacturing Index dropped to 51.7 in June, down slightly from 52.1 but beat expectation of 51.0. On the negative side, New Orders dropped -2.7 to 50.0. Prices dropped sharply by -5.3 to 47.9. However, Production rose 2.8 to 54.1. Employment also rose 0.8 to 54.7.

            Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee: “Respondents expressed concern about U.S.-China trade turbulence, potential Mexico trade actions and the global economy. Overall, sentiment this month is evenly mixed.”

            Full release here.

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            AUD/JPY slaughtered again in thin panic market, still heading to 60 anyway

              AUD/JPY suffered another wild ride in thin, panic, early Asian session again today. It’s a move that resembles what happened early last year. On January 3, 2013, AUD/JPY hit as low as 70.2 (depending which chart you’re reading), but recovered strongly to close at 76.05. The fate of the cross, however, will likely be different considering the material risks the world is facing.

              From a technical point of view, outlook with remain bearish as long as 71.50 resistance holds. 100% projection of 80.71 to 69.96 from 76.54 at 65.78 will remain the focus after today’s “false break”. Sustained trading below this level will pave the way to 161.8% projection at 59.13.

              That will coincide with 100% projection of 102.83 to 72.39 from 90.29 at 59.85, as well as 60 round number. We’d expect enough support only from there to bring sustainable rebound.

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              UK Corbyn: Brexit deadlock should go back to people through election or public vote

                UK opposition Labour Party leader Jeremy Corbyn said today that Brexit could only be revolved by either a general election or a public vote.

                He said in a statement: “With the Conservatives disintegrating and unable to govern, and parliament deadlocked, this issue will have to go back to the people, whether through a general election or a public vote.

                “We will not let the continuing chaos in the Conservative Party push our country into a no deal exit from the EU. Parliament can and will prevent such a damaging outcome for jobs and industry in the UK.”

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                Japan CPI core stuck at 0.6%, two-year low

                  Japan all-item CPI slowed to 0.5% yoy in July, down from 0.7% yoy and missed expectation of 0.6% yoy. Core CPI (ex-fresh food) was unchanged at 0.6% yoy, matched expectations. Core-core CPI (ex-fresh food, energy) rose to 0.6% yoy, up from 0.5% yoy and beat expectation of 0.5% yoy.

                  The core CPI reading remained well below BoJ’s 2% target and was stuck at the lowest level since July 2017. The data clearly showed that BoJ remains well behind is its efforts to boost inflation. While Japan is in no sense in deflation for now, it’s just a matter of time when BoJ would finally admits that momentum in price is gone.

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                  No news on NAFTA as May 17 deadline looms

                    There is so far no positive news out of NAFTA negotiation yet. House Speaker Paul Ryan said today (Thursday) is the last day the Congress has to receive a notification of a deal, if it is to pass it within this year. But it’s believed that the fundamental differences regarding auto contents and sunset clause remain between the US and the other two countries, Mexico and Canada.

                    BoC Governing Council Member Schembri said yesterday that uncertainty on NAFTA is impacting firms’ investment decisions. And, capacity is being “hindered” by firms’ reluctance to take on investment in face of uncertainty. And some of which is related to NAFTA.

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                    USDJPY recovers after Trump said all is well with Iran retaliation

                      USD/JPY spikes lower after Iran’s retaliation to US. But it quickly recovered after restrained response from US President Donald Trump. He just said in a tweet that “All is well! Missiles launched from Iran at two military bases located in Iraq. Assessment of casualties & damages taking place now. So far, so good! We have the most powerful and well equipped military anywhere in the world, by far! I will be making a statement tomorrow morning.”

                      USD/JPY dived to 107.65 but quickly drew support form 38.2% retracement of 104.45 to 109.72 at 107.70 and recovered. Bias is turned neutral for now. As long as 107.65/70 holds, it is actually more likely to have another leg up to retest 109.72 resistance.

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                      Merkel and Trump in verbal exchange at NATO

                        In response to Trump’s attack on Germany as a “captive of Russia”, German Chancellor Angela Merkel recalled the days when East Germany was under USSR control. She told reporters that “I have experienced myself how a part of Germany was controlled by the Soviet Union … I am very happy that today we are united in freedom, the Federal Republic of Germany. Because of that we can say that we can make our independent policies and make independent decisions. That is very good, especially for people in eastern Germany.”

                        Merkel also added that “Germany does a lot for NATO”, it’s the “second largest provider of troops, the largest part of our military capacity is offered to NATO”. And point to the fact that until today, Germany has a “strong engagement toward Afghanistan” and in that “we also defend the interests of the United States.”

                        Trump landed his usual accusation of allies in NATO summit in Brussels today. He said “we’re protecting Germany, we’re protecting France, we’re protecting all of these countries. And then numerous of the countries go out and make a pipeline deal with Russia where they’re paying billions of dollars into the coffers of Russia … I think that’s very inappropriate.” He added, “if you look at it, Germany is a captive of Russia. They got rid of their coal plants, they got rid of their nuclear, they’re getting so much of their oil and gas from Russia. I think it is something NATO has to look at.”

                        Also, Trump said “Germany is totally controlled by Russia because they are getting 60 to 70 percent of their energy from Russia and a new pipeline”. But according to a Reuters fact check on Germany energy use, “about 20 percent of which is accounted for by oil and gas imports from Russia.”

                        In some countries, it’s typical for sometime to affirm to tell “the truth, the whole truth and nothing but the truth” when making commitment to tell the truth. Why? It’s because liars, especially those morally unfit ones, will usually tell 99% of truth. The 1% left is either hidden, twisted, or made up.

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                        BoE: Coronavirus economic shock should ultimately prove temporary

                          BoE voted unanimously to keep Bank Rate unchanged at 0.1%, as well as keeping asset purchase target at GBP 645B. The MPC will “continue to monitor the situation closely and, consistent with its remit, stands ready to respond further as necessary to guard against an unwarranted tightening in financial conditions, and support the economy.”

                          The central bank said that the “nature of the economic shock” from coronavirus pandemic is “very different from” those the central bank has previously had to respond to. The “scale and duration” will be “large and sharp but should ultimately prove temporary”. Monetary policy is now aimed at “guarding against an unwarranted tightening in financial conditions and, more broadly, supporting businesses and households through the crisis and limiting any lasting damage to the economy.”

                          Full statement here.

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                          Germany CPI slowed sharply to 1.4% in Jan, Euro shrugs

                            German CPI dropped -0.8% mom in January, matched expectation. But annual rate slowed sharply to 1.4% yoy, down from 1.7% yoy, and missed expectation of 1.6% yoy. Today’s German CPI miss should weigh on expectation for Eurozone CPI reading to be released later in the week, it’s expected to slow to 1.4% yoy.

                            Euro shrugs off the data, nevertheless. In particular, EUR/CHF’s rally is accelerating after taking out 1.1347 resistance yesterday.

                            Full release here.

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                            European update: Italian stocks lead others higher, but Euros stay soft

                              It’s a rather slow day in terms of news and forex volatility. Italian stocks lead Europeans higher. At the time of writing, the FTSE MIB index is up 2.42%, responding well to S&P’s rating review. S&P kept Italy’s sovereign credit rating unchanged at BBB, two notches above junk, even though outlook is negative. FTSE 100 is up 1.31%, DAX is up 1.28% and CAC is up 0.26%.

                              Italian 10 year yield is down notably by -0.0817 at 3.348 at the time of writing German 10 year bund yield is up 0.034 at 0.392, below 0.4 handle. Also, spread remains at 295, below but close to 300. Euro also gives little reaction as it’s trading down against all other major currencies but Yen and Swiss Franc. JPY and CHF are weaker on receding risk aversion natural. So, we see how weak the Euro remains. On the other hand, commodity currencies are trading generally high as the strongest.

                              Earlier in Asia, major indices closed mixed. China Shanghai SSE closed down -2.18% at 2542.17. But the closely correlated Hong Kong HSI closed up 0.28%. Nikkei lost -0.16% and Singapore Strait Times gained 0.32%. Japan 10 year yield dropped -0.0095 to 0.105, now very very close to BoJ’s allowed range of -0.1 to 0.1%.

                              US personal income and spending, PCE inflation will be featured in US session. Hopefully, the data will trigger more volatility.

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                              Fed Clarida: US economy begins 2020 in a good place

                                Fed Vice Chair Richard Clarida said the US economy begins 2020 “in a good place”. PCE price inflation is “running somewhat below” the 2% target. But Fed projects that inflation will “rise gradually” back to the 2% symmetric objective. Meanwhile, there is no evidence that a strong labor market is “putting excessive cost-push pressure on price inflation”.

                                Over the course of 2019, FOMC shifted the monetary stance to “offset some significant global growth headwinds and global disinflationary pressures.” Such shift was “well timed” and has helped keep the outlook on track. ” As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.”

                                Monetary policy is “not on a preset course”, he added. “if developments emerge that, in the future, trigger a material reassessment of our outlook, we will respond accordingly.

                                Clarida’s full speech here.

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                                Eurozone PMI manufacturing hit 18-month low, mounting worries on tariffs and trade wars

                                  Eurozone PMI manufacturing was finalized at 54.9, revised down from 55.0. That’s also an 18-month low. Markit noted that growth of output and new orders slowed further as upturn in new export business remains subdued. Also, supply chain pressure and rising oil prices took input cost inflation to four-month high.

                                  Among the countries, the Netherlands stayed strong at 60.1 even hitting 6-month low. Ireland hit 5-month high at 56.6. Italy rebounded and hit 2-month high at 53.3. France deteriorated to 16-month low at 52.5.

                                  Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                                  “Eurozone manufacturing reported its weakest expansion for one-and-a-half years in June, with risks clearly tilted towards output growth waning further in coming months.

                                  “Production growth has weakened markedly since the end of last year, and new order inflows have slowed even more. Manufacturers may therefore need to rein-in their production further to adjust to the recent downturn in order book growth unless demand revives.

                                  “The biggest concern is the extent to which export order book growth has cooled since the start of the year, and could soon go into decline. The survey reveals mounting worries from companies relating to the impact of tariffs and trade wars, suggesting firms are bracing themselves for the potential for further export losses. Not surprisingly, business expectations for future production deteriorated in June to the lowest November 2015.

                                  “At the same time there are signs that political uncertainty is also dampening business spirits, most evidently in Italy, which was consequently the second-worst performer of all countries surveyed in June ahead of France.”

                                  Full Eurozone PMI Manufacturing release.

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                                  Fitch affirmed Japan’s A rating, expects growth to lose steam after robust Q1

                                    Fitch Ratings has affirmed Japan’s Long-Term Foreign Currency Issuer Default Rating (IDR) at ‘A’ with a stable outlook. In the statement, Fitch noted that the ratings ” balance the strengths of an advanced and wealthy economy, with high governance standards and strong public institutions, against weak medium-term growth prospects and high public debt.”

                                    The rating agency projects GDP growth of 0.8% in 2019 despite an unexpectedly robust 2.1% in Q1. And, GDP growth is expected to lose steam through early 2020 from “weakening exports and industrial production.” Japan and other countries in the region are reeling from the effects of the “global trade downturn” associated with the escalation in the US-China trade dispute. And, a further escalation of global trade tensions could pose a “significant risk” to the outlook for Japan. Also, “recent imposition of export restrictions on Korea has increased geopolitical tensions”.

                                    Full releases here.

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                                    ECB Visco : Will asset hot to adjust policy instruments in the coming weeks

                                      ECB Governing Council member Ignazio Visco said the central bank “will need to adopt further expansionary measures if the euro zone economy does not pick up.” And, “in the coming weeks the ECB will continue to assess how to adjust the instruments at its disposal”. This is in-line with market expectations that ECB is ready ramp up monetary stimulus either on July 25 or later in September.

                                      Being Governor of Bank of Italy too, Visco expected the Italian economy to grow just 0.1% this year, marginally below the government’s 0.2% official forecast. Though, he also expected growth to pickup to just slightly below 1% in 2020 and 2021. He urged the government to adopt “prudent” budget deficit targets for the coming years. But he also welcomed recent fall in Italian yields, after EU averted the Excessive Deficit Procedure on the country.

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                                      UK Hammond: No specific benefits in the current Brexit deal, just much worse with no-deal

                                        Chancellor of the Exchequer Philip Hammond said yesterday “I firmly believe that my job is to look after the welfare and interests of the British people and I conclude that it would not be in their interests to leave without a deal”. “We are very determined that we need a deal. We need a deal that allows us to continue to cooperate and to have a smooth and orderly exit and we’ll make sure that we do.”

                                        He urged that “What we and many other British businesses need most urgently, is for politicians from all sides to come together and pass a pragmatic agreement that allows an orderly Brexit”. Though, he added that “We don’t see any specific benefits in the current deal. It’s just a lot less bad than a ‘no deal'”.

                                        But as five-day debate over UK Prime Minister Theresa May’s Brexit deal began in the parliament yesterday, there is apparently no breakthrough. Hammond said there is currently no “plan B” to break the deadlock.

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                                        China to put words into action by lowering passenger car levy

                                          Bloomberg reported that China is going to lower levy on import passenger cars from the current 25% to 15%. That’s seen as Chinese President Xi Jinping putting his word into actions. Xi has already reiterated the initiative at the Boao Forum back in April.

                                          As in 2017, the total sales of automobiles in China added up to 28.9m. Only 1.22m, or 4.2%, are imported. The lowering of tariff is seen as a strong boost to European vehicle makers and less so the US ones.

                                          For domestic car makers, the levy cut to 15% is the better case scenario in the rumored range of 10-15%.

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