US exports of goods rose USD 1.9B to USD 157.2B in February. Imports of goods rose USD 0.9B to USD 263.7B. Trade deficit narrowed from USD -107.6B to USD -106.6B, still larger than expectation of USD -106.0B.
Wholesales inventories rose 2.1% mom to USD 814.7B. Retail inventories rose 1.1% mom to USD 665.6B.
SNB Board member Andrea Maechler told Swiss newspaper Bilan, “if the inflation we expect does not come down in the medium term to a range between 0% and 2%, we will not hesitate to tighten policy.”
The central bank’s response to inflation “will depend on both inflation dynamics and the economic outlook in Switzerland and abroad”, she said. “We have always said, as soon as we will be able to lift the negative interest rate, we will. We do not know however when we will be able to do so.”
When asked if SNB would follow ECB in rate hikes, she said, “our goal is to conduct a monetary policy that is appropriate for the Swiss economy to ensure price stability in the medium term.”
WTI crude oil drops below 70 handle on reports that Saudi Arabia and Russia are going to push for lifting production later in the year. The total of boost in production from OPEC and non-OPEC countries could add up to as high as 1 million barrels a day.
Saudi Arabia a Energy Minister Khalid al-Falih is quoted saying in St. Petersburg that the easing of restriction on production would be gradual, so as to avoid shocking the markets. He also added that “all options are on the table” regarding output cuts.
Meanwhile USD 80 a barrel seems to be a psychological level that the oil producing countries want to avoid.
The decision could be made as soon as during the next OPEC meeting on June 22 in Vienna.
Global markets start the week in risk aversion as global outbreak of China’s Wuhan coronavirus intensified over the weekend. South Korea is suffering most with a total of 763 confirmed cases and 7 deaths. The country is put on high alert in response to the community outbreak. Total cases in Japan rose to 838, including Diamond Princess liner, with 4 deaths. Cases in Iran also surged to 43, with 8 deaths.
Cases in Italy also exploded, with 152 cases and 3 deaths. Prime Minister Giuseppe Conte told state broadcaster RAI, “I was surprised by this explosion of cases.” Health authorities also warned, “if we cannot find ‘patient zero’ then it means the virus is even more ubiquitous than we thought.”
Back in China, where the outbreak originated, according to the numbers claimed by the National Health Commission, total cases now stand at 77150, death tolls hit 2592. President Xi Jinping warned “at present, the epidemic situation is still severe and complex, and prevention and control work is in the most difficult and critical stage”. “For us, this is a crisis and is also a big test,” he added. Yet, Xi is still pushing for production restoration in some perceived low- and medium- risk provinces.
European Commission Vice President Jyrki Katainen criticized that the “selfish” approach of Trump’s to trade is not sustainable. And he emphasized to maintain rule-base trade with WTO reforms.
Katainen said “Japan, China and the EU are willing to reform the WTO, the U.S. has not been that interested, but they are willing to cooperate: He added: “Even though the U.S. authorities may think that selfishness is better than cooperation, it is not a sustainable way of thinking. We need better, rules-based trade in the future where the international community sets the rules”.
On trade negotiation with the US, he said “there are discussions going on on several levels and … we can end up having some sort of an agreement with the U.S. on trade, but let’s not go deeper than this”. He emphasized “it is too early to say that our trade discussions are doomed to fail.”
China Caixin PMI Manufacturing dropped to 50.3 in July, down from 51.3, below expectation of 51.0. Caixin said output growth slowed amid slight drop in new orders. Staffing levels were broadly unchanged while inflationary pressures eased.
Wang Zhe, Senior Economist at Caixin Insight Group said: “China’s official second-quarter economic figures were in line with expectations, but the Caixin China manufacturing PMI in July and relevant data suggested the recovery of the economy is not yet solid. The economy is still facing huge downward pressure, and we need to ensure entrepreneurs’ confidence.”
Australia NAB Business Confidence was unchanged at -1 in Q4. Current Business Conditions, improved from 2 to 4. However, Business Conditions for the next three months dropped from 10 to 9, for the next 12 months dropped from 20 to 16.
Alan Oster, NAB Group Chief Economist: “The survey broadly fits with our overall read of the economy. A weak private sector – particularly in the consumer space and only modest inflation pressure. There also appears some risk around the outlook for the labour market and business investment. We think more policy support is needed and that this is still likely to occur in 2020, but for now the RBA appears in wait and see mode with labour market conditions still faring well”.
ECB Governing Council member Peter Kazimir said today, “I strongly believe that our rate hike at the last meeting was the last one” The focus, he outlined, now shifts to the upcoming December and March forecasts, as “only real data can persuade us that we’re at the peak.”
Kazimir addressed inflation concerns, observing that, “We see the overall inflation and also core inflation on a downward trend, though this is lasting a bit longer than we’d wanted.” He further highlighted the ripple effects of past rate hikes, pointing out that they “have an increasingly significant impact on the real economy.”
Shedding light on the broader economic repercussions, he mentioned that “Financing conditions are tightening and are weakening demand for investments, in production and affecting overall economic growth.” With this context, Kazimir emphasized the urgency to manage inflation effectively and swiftly.
On the topic of ECB’s PPEP reinvestments, Kazimir treaded cautiously, suggesting the bank was “ready for debate” but reiterated the importance of maintaining balance. The topic of altering the balance sheet’s reduction pace will be broached only when the Council is confident further rate hikes won’t be necessary.
US goods exports rose USD 4.9B to USD 172.7B in March. Goods imports dropped USD -2.5B to 257.3B. Trade deficit came in at USD -84.6B, smaller than expectation of USD -89.8B.
Wholesale inventories rose 0.1% mom to USD 919.9B. Retail inventories rose 0.7% mom to USD 773.4B.
US non-farm payrolls report will be a major focus for today. Markets are expecting NFP to show another -8m job less in May. Unemployment rate is expected to jump further up from 14.7% to 19.6%. Other employment data were not too promising. ADP report showed -2.76m contraction in private sector jobs. ISM manufacturing employment improved to 31.8 while non-manufacturing employment rose to 32.1. But both were deep in contraction region. Four-week moving average of initial jobless claims also stayed huge at 2.28m.
Dollar index suffered another round of steep decline this week. Selling accelerated further after ECB announced to expand the PEPP yesterday. Technically, the strong break of 55 week EMA in DXY further affirm the case that whole rise form 88.2 (2018 low) has already completed at 102.99, ahead of 103.82 high (2016 high). Next defend zone is between 94.65 support and long term trend line at around 95.5. We’d look for support from there to bring a near term recovery.
In his address to the annual trust association’s meeting, BoJ Governor Kazuo Ueda highlighted the central bank’s commitment to maintaining accommodative monetary policy. According to Ueda, BoJ “will patiently maintain an easy monetary policy to stably and sustainably achieve the 2% price target accompanied by wage growth.”
Governor Ueda provided a cautiously optimistic outlook for Japan’s economy, describing it as “picking up” and likely to “recover moderately.” In terms of inflation, he reiterated the expectation of slowdown in Japan’s consumer inflation towards the middle of the current fiscal year.
Ueda also offered reassurances about the stability of Japan’s financial system, noting it was “stable as a whole.” Despite recent failures of several US banks, Ueda claimed the impact on Japan’s financial system was limited.
Eurozone PMI Manufacturing was finalized at 58.6 in September, down from August’s 61.4. That was the largest drop in the headline index since April 2020 as supply-side constraints impacted goods producers. Acute inflationary pressures persisted as supplier deliver time continued to lengthen considerably.
Chris Williamson, Chief Business Economist at IHS Markit said: “While Eurozone manufacturing expanded at a robust pace in September, growth has weakened markedly as producers report a growing toll from supply chain headwinds… The supply situation should start to improve now that COVID-19 cases are falling and vaccination rates are improving in many countries, notably in several key Asian economies from which many components are sourced, but it will inevitably be a slow process which could see the theme of supply issues and rising prices run well into 2022.”
Minneapolis Fed President Neel Kashkari reiterated his view that the US is not full employment yet and there is room for growth. He said “here is still slack in the labor market, and until we see wages growth really pick up I’m going to believe that there are still more Americans out there”.
Thus, “I’m very focused on wages as the best indicator overall of how tight is the labor force.”
ECB Executive Board Member Benoit Coeure said in a newspaper interview that policymakers expected “growth to return in the second half of the year”. He told German daily Frankfurter Allgemeine Zeitung “there are no grounds for overly gloomy thoughts”. However, he admitted for now “it is very uncertain how long and how strong the downturn will be.”
On monetary policy, Coeure sees no argument for tiered deposit rate. He urged banks to focus on their own costs, rather than blaming ECB’s negative rate for lower profits. Meanwhile, currently, markets are pricing in no rate cut until at least 2021. Coeure warned “we are not tied to such market expectations; they are an important input, but we are not led by them.” He added market pricing are merely reflecting “an assessment of the downside risks which is different to that of the Governing Council”.
UK PMI construction was unchanged at 52.5 in May, above expectation of 52.0.
Sam Teague, Economist at IHS Markit and author of the IHS Markit/CIPS Construction PMI®:
“The May PMI data signalled an unchanged pace of activity growth across the UK’s construction sector since April’s somewhat underwhelming rebound, yet nevertheless indicating a recovery in the second quarter after the contraction seen at the start of the year.
“However, activity in May was once again buoyed by some firms still catching up from disruptions caused by the unusually poor weather conditions in March, and a renewed drop in new work hinted that the recovery could prove short-lived.
“Inflows of new business slipped back into decline, signalling the resumption of the downward trend in demand seen during the opening quarter. Companies frequently noted that Brexit uncertainty and fragile business confidence led clients to delay building decisions in May.
“With new order books deteriorating and cost pressures picking back up, it’s not surprising to see construction firms taking a dimmer view of prospects and pulling-back on hiring, all of which makes for a shaky-looking outlook.”
The IMF released its World Economic Outlook, projecting global growth to slow from 3.4% in 2022 to 2.8% in 2023 and bottom there, and then rise to 3.0% in 2024. Global inflation is expected to decelerate from 8.7% in 2022 to 7% in 2023 and further to 4.9% in 2024.
Pierre-Olivier Gourinchas, Economic Counsellor and Director of Research at IMF, said in a blog post, “The global economy’s gradual recovery from both the pandemic and Russia’s invasion of Ukraine remains on track. China’s reopened economy is rebounding strongly. Supply chain disruptions are unwinding, while dislocations to energy and food markets caused by the war are receding. Simultaneously, the massive and synchronized tightening of monetary policy by most central banks should start to bear fruit, with inflation moving back towards targets.”
For 2023, global growth projections were reduced by 0.1% compared to January’s forecast. US growth was revised up by 0.2% to 1.6%, Eurozone growth by 0.1% to 0.8%, and UK growth by 0.3% to -0.3%. However, Japan’s growth projection was revised down sharply by 0.5% to 1.3%. Canada and China’s growth forecasts remained unchanged at 1.5% and 5.2%, respectively.
Regarding interest rates, the IMF believes recent increases in real interest rates are likely temporary. Once inflation is under control, advanced economies’ central banks are expected to ease monetary policy and bring real interest rates back towards pre-pandemic levels.
Germany Ifo Business Climate fell from 91.5 to 88.5 in June, below expectation of 91.2. Current Assessment Index dropped form 94.8 to 93.7, slightly above expectation of 93.5. Expectations Index tumbled further from 88.3 to 83.6, below expectation of 88.0.
By sector, manufacturing fell sharply from -0.1 to -6.6, lowest since November. Services dropped from 6.8 to 2.7. Trade edged down from -19.1 to -20.2. Construction decreased from -18.5 to -20.1.
Ifo said: “Sentiment in the German economy has clouded over considerably… Above all, the weakness in the manufacturing sector is steering the German economy into turbulent waters.”
Minneapolis Fed President Neel Kashkari explained in an article the reasons for his dissent to the latest FOMC statement. He said, “I would have preferred the Committee make a stronger commitment to not raising rates until we were certain to have achieved our dual mandate objectives.”
His own proposed language was: “The Committee expects to maintain this target range until core inflation has reached 2 percent on a sustained basis.” “By eliminating both the direct reference to our assessment of maximum employment and any forecast of inflation climbing, this proposed language guards against the risk of underestimating slack in the labor market. ” he added.
Separately, Atlanta Fed President Raphael Bostic said he’s comfortable with inflation above 2% but wold look at more at the “trajectory than level”. If inflation went up to 2.3% but appeared stable, “that would be fine”. On the other hand, Â “if we were at 2.2 and the next quarter at 2.4 and then at 2.6 that trajectory would give me concern”.
China GDP grew 4.9% yoy in Q3, below expectation of 5.2% yoy. On a quarterly basis, GDP grew only 0.2% qoq, slowed from Q2’s 1.2% qoq, and missed expectation of 0.5% qoq. In September, retail sales rose 4.4% yoy, above expectation of 3.3% yoy. Industrial production rose 3.1% yoy, below expectation of 4.5% yoy. Fixed asset investment rose 7.3% ytd yoy, below expectation of 7.9%.
“The overall national economy maintained the recovery momentum in the first three quarters … however, we must note that the current uncertainties in the international environment are mounting and the domestic economic recovery is still unstable and uneven,” said NBS spokesman Fu Linghui.
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China to announce retaliation measures to US at 0830GMT
Upcoming at 16:30 Beijing time, 0830 GMT, China’s commerce and finance ministries will hold a press briefing regarding the US Section 301 tariffs. It believed that retaliatory measure will be announced during the briefing. China has pledged to take counter measures at the same intensity and proportionality. But no detail is leaked so far. The worst for the market is that China’s response will prompt counter retaliation by the US. That could lead to escalating tariffs that drastically reduce the trade activities between the two countries.
China’s envoy to the WTO, Zhang Xiangchen criticized that the tariffs on USD 50b of China import to the US is “an intentional and gross violation of the WTO’s fundamental principles of non-discrimination and bound tariffs.” And he urged other WTO members to “join with China in firmly resisting U.S. protectionism”.
Reactions to US announce of the product list of Section 301 tariffs were initially muted. Japan Nikkei has indeed closed up 0.13%. But fear in the stock markets start to build up with Hong Kong HSI suffering sharp fall in the afternoon, and is trading down -1.44%.