ECB President Christine Lagarde said in an FT interview that the central bank’s pandemic measures have demonstrated “demonstrated their efficiency, their effectiveness.” For now, “we have done so much that we have quite a bit of time to assess” economic data “carefully.”
ECB will meet again next week. Lagarde’s messages suggested that the central bank will stand pat and adopt a wait-and-see attitude. ECB has nearly doubled the size of its pandemic purchase program to EUR 1.35T in June.
Eurozone PMI Manufacturing fell from 45.8 to 44.6 in May, a 36-month low. PMI Services fell from 56.2 to 55.9. PMI Composite decreased from 54.1 to 53.3.
Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank said: Eurozone GDP is likely to have grown in the second quarter thanks to the healthy state of the services sector. However, the manufacturing sector is a powerful drag on the momentum of the economy as a whole.
He added that ECB will have a “headache” with the PMI price data, as “selling prices in the services sector actually rose more than in the previous month”.
Full Eurozone PMI release here.
Also released, Germany PMI manufacturing dropped from 44.5 to 42.9 in May, a 36-month low. PMI Services rose from 56.0 to 57.8, a 21-month high. PMI Composite rose from 54.2 to 54.3, a 13-month high.
France PMI Manufacturing rose from 45.6 to 46.1. PMI Services dropped from 54.6 to 52.8. PMI Composite dropped from 52.4 to 51.4.
Dollar is overwhelmingly the weakest one today. Democrats have already won over 218 seats in House in the mid-term election to regain majority after eight years. Republicans, on the other hand, retained majority in Senate. There are talks that the gridlock in the Congress would limit Trump’s ability to push through more fiscal stimulus. Yet, there is another theory that the stocks markets were usually bullish with a split Congress. DOW futures are now pointing to higher open with triple digit gains. Major European indices are generally higher. So it seems that the latter is more true. And thus, a split Congress is unlikely the reason for Dollar’s weakness. Staying in the currency markets, Canadian Dollar is now the second weakest, followed by Japanese Yen. On the other hand, Australian Dollar is the strongest one, followed by New Zealand Dollar and then Swiss Franc.
In Europe, at the time of writing:
Earlier in Asia
The South China Morning Post in Hong Kong reported that no progress was made in deputy-level trade talks this week. And Chinese Vice Premier Liu He is set to cut short his trip to Washington. Originally planned to hold two days of meeting on Thursday and Friday, Liu might just leave on Thursday. Though, the rumor was quickly denied by the White House and the spokesman said “We are not aware of a change in the Vice Premier’s travel plans at this time”.
Separately, US Commerce Secretary Wilbur Ross said that “tariffs are finally forcing China to pay attention to our concerns”. Yet, he noted that “trade agreements historically have been very weak on enforcement”. And, “given the magnitude and the complexity of the changes we need, enforcement becomes an extremely critical component of any agreement that we make.”
ISM non-manufacturing composite rose to 61.6 in September, up from 58.5 and beat expectation of 58.3. That’s also an all-time high since inception of the composite index in 2008. Employment index jumped notably by 5.7 to 62.4. ISM also noted in the release that “17 non-manufacturing industries reported growth” and, “respondents remain positive about business conditions and the current and future economy.”
San Francisco Fed president Mary Daly said yesterday that her modal forecasts was for two to three more rate hikes over the next period. However, she also noted that “the exact timing not being certain”. She went further saying that it’s “premature” to say that a December rate hike is a “definite”. And, “we have a lot of time between now and December to see how the economy unfolds.”
Nevertheless, Daly still believed that Fed should gradually raise interest rates towards neutral. Her estimate of neutral rate is between 2.5 and 2.8%. For now, she’d “probably” pick the middle of the rate at around 2.7% as the neutral rate. She added that “gradual is helpful because it allows us to raise the rate, look around, evaluate, interpret the data and then, and only then, make another increase”. And, “the frequency and size of any increase I think is something that we want to continue to have open and not be on autopilot.” Also, she thought it’s premature to discuss whether interest rate need to go into restrictive region.
Her comments came after giving a speech titled “A Strong Economy—But We Can Aim Higher“. There she said that the current state of economy is “very good”. But “some people are getting left behind”. She said essentially all labor market indicates are “flashing bright green” and signaled the US labor market is “indeed at full employment”. The “key exception is continued low rates of labor force participation”. While monetary policy can’t directly cure the participation problem, Fed can help by “keeping the expansion going”. She also noted that there are “upside potential for US workforce participation”.
UK PMI Construction rose to 48.4 in January, up from 44.4, beat expectation of 44.9. While that still suggests contraction, it’s the best reading since May 2019. New orders were close to stabilization. There was a boost from receding political uncertainty. Business optimism also rebounded to its highest since April 2018.
Tim Moore, Economics Associate Director at IHS Markit, which compiles the survey:
“The construction sector downturn lost intensity in January amid slower reductions in house building, commercial work and civil engineering activity. Measured overall, the latest dip in construction output was much shallower than in December, with survey respondents often commenting on improved willingness to spend among clients since the general election.
“Commercial work dropped at the slowest pace since the start of 2019 and was the main beneficiary of receding political uncertainty. UK construction companies also commented on signs of a turnaround in demand conditions across the residential development category during January. Civil engineering remained the weakest performing area of construction work as firms across the supply chain cited a lack of opportunities to replace completed contracts.
“Despite concerns about prospects for work on infrastructure projects, latest data revealed a strong rebound in business optimism across the construction sector as a whole in January. The degree of positivity reached its highest level since April 2018, driven by hopes that improving confidence among clients will continue to translate into new contract awards over the course of 2020.”
Canada trade deficit narrowed CAD -1.6B to CAD -1.1B in November, slightly larger than expectation of CAD -0.8B. Exports dropped -1.4% mom to CAD 48.7B. Imports also dropped -2.4% mom to CAD 49.8B.
US commercial crude oil inventories dropped -3.5m barrels in the week ending April 2, versus expectation of -2.0m. At 498.3m barrels, oil inventories are about 3% above the five year average for this time of year. Gasoline inventories rose 4.0m barrels. Distillate inventories rose 1.5m barrels. Propane/propylene inventories rose 0.3m barrels. Total commercial petroleum inventories rose 2.3m barrels.
WTI is staying in sideway pattern from 57.31 and outlook is unchanged. With 62.22 resistance intact, the correction from 67.83 could still extend lower. Break of 57.31 will target 38.2% retracement of 33.50 to 67.83 at 54.71. We’d expect strong support from there to bring rebound. On the upside, break of 62.22 will argue that the correction has completed and bring retest of 67.83. high.
Commenting on the US-China joint statement on trade, Treasury Secretary Steven Mnuchin said “we are putting the trade war on hold.” And he added, “we have agreed to put the tariffs on hold while we try to execute the framework”, referring to the agreement.
Trump’s top economic adviser Larry Kudlow said they made “a lot of progress”, even surpassed their own expectation after the Beijing meeting. But it’s not at the stage of taking the threat of tariffs on USD 150B of products yet. And, it’s “too soon to lock that (USD 200B reduction in trade deficit) in” yet. Though he emphasized that “the direction here is the key”.
Kudlow also added that Commerce Secretary Wilbur Ross will go to China and “looking into a number of areas where we’re going to have greatly significant increases,” including energy, liquefied natural gas, agriculture and manufacturing”.
New Zealand’s CPI recorded a decline in its annual inflation rate, dropping from 6.0% yoy to 5.6% yoy in Q3. This figure not only fell short of the anticipated 5.9% yoy but was also well below RBNZ’s own forecast of 6.0% yoy for the quarter. Such a deceleration would curb the likelihood of another interest rate hike in November.
A breakdown of the inflation contributors indicates that food prices played a dominant role in driving the annual inflation rate. Following closely were the costs associated with housing and household utilities, with the inflation in this sector being attributed to escalating expenses of construction and rental services.
Nicola Growden, the senior manager of consumer prices, stated, “Prices are still increasing, but are increasing at rates lower than we have seen in the previous few quarters.”
On a quarterly perspective, Q3 CPI reflected a growth of 1.8% qoq, marking an upturn from Q2’s 1.1% qoq. However, it missed the estimated rise of 1.9% qoq. An analysis of sector-wise performance shows that the transport sector experienced significant inflationary pressures. Specifically, the costs of petrol and new motor vehicles surged by 16.5% and 4.6%, respectively.
DOW finally showed some conviction in its recent rally overnight. It ended up 196.99 pts, or 0.80%, at 24739.53. More importantly the flat 55 day EMA, as well as near term falling trend line resistance, were firmly taken out. The question now is, has the consolidation pattern from 26616.71 completed as a triangle at 23531.31? Or rise from 23531.31 is just another leg in the pattern? It’s early to tell. We’ll see how powerful the current rise is to determine. But for now, firstly, break of 24585.97 resistance should be seen shortly and there is prospect of reaching 25800.35 resistance. Secondly, 23344/60 should be a solid base that will hold on another attempt.
Eurozone Sentix Investor Confidence dropped to -42.9 in April, down from -17.1. That’s the lowest level on record. Current Situation index dropped from -14.3 to -66.0, also a record low and the largest decline on record. Expectations index, however, improved from -20.0 to -15.8. Sentix said Eurozone economy is in a “deep recession”, which will “go much deeper and longer”.
It also said, “the corona virus is keeping the global economy in a stranglehold: without exception, all regions of the world are in a deep recession. Never before has the assessment of the current situation collapsed so sharply in all regions of the world within one month”.
Germany Investor Confidence dropped from -16.9 to -36.0, lowest since 2209. Germany Current Situation dropped from -13.3 to -59.3, lowest since 2009. Germany Expectations improved from -20.5 to -9.0. US Investor Confidence dropped from 0.2 to -39.1, lowest since 2009. US Current Situation dropped from 17.8 to -59.0, lowest since 2009. US Expectations dropped from -16.0 to -16.5, lowest since October 2019.
Canada employment rose 39.8k in May, above expectation of 28.5k. Full time work rose 135k while part time jobs dropped -96k. Services producing jobs rose 81k while goods-producing jobs dropped -41.
Unemployment rate dropped form 5.2% to 5.1%, below expectation of 5.2%. That’s a new record low. Total hours worked rose 5.1% yoy. Average hourly wages rose 3.9% yoy.
China Caixin Manufacturing PMI rose slightly to 51.8 in November, up from 51.7 and beat expectation of 51.4. Markit noted there were solid increases in output and new business. Employment was broadly stable while inflationary pressures remained weak.
Commenting on the China General Manufacturing PMI™ data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said:
“China’s manufacturing sector continued to recover in November, with both domestic and overseas demand rising and the employment subindex returning to expansionary territory for the second time this year.
“However, business confidence remained subdued, as concerns about policies and market conditions persisted, and their willingness to replenish stocks remained limited. This is a major constraint on economic recovery, which requires continuous policy support. Currently, manufacturing investment may be lingering near a recent bottom. A low inventory level has lasted for a long time. If trade negotiations between China and the U.S. can progress in the next phase and business confidence can be repaired effectively, manufacturing production and investment is likely to see a solid improvement.”
Released over the weekend, the official PMI Manufacturing rose to 50.2 in November, up from 49.3 and beat expectation of 49.5. PMI Non-Manufacturing rose to 54.4, up from 52.8 and beat expectation of 53.1.
France PMI Manufacturing dropped to 49.1 in November, down from October’s 51.3, missed expectation of 50.1. PMI Services dropped to 38.0, down from 46.5, matched expectations. PMI Composite dropped to 39.9, down from 47.5. All are 6-month lows.
Eliot Kerr, Economist at IHS Markit said: “With the renewed tightening of restrictions in France at the end of October, a sharp decline in private sector activity during November was almost inevitable. However, it is somewhat positive to see that the latest contraction in activity was substantially slower than during the previous lockdown. These results suggest that some French businesses have been able to adapt their operations to the new conditions and are subsequently less susceptible to sharp downturns in activity when tighter restrictions are imposed.
US conference board consumer confidence jumped to 133.4 in August, up from 127.9 and beat expectation of 127.0. That’s also the highest reading since October 2000.
Lynn Franco, Director of Economic Indicators at The Conference Board said “Consumers’ assessment of current business and labor market conditions improved further. Expectations, which had declined in June and July, bounced back in August and continue to suggest solid economic growth for the remainder of 2018. Overall, these historically high confidence levels should continue to support healthy consumer spending in the near-term.”
Japan’s nominal pay growth rose by 1.5% yoy, surpassing the expected 1.0% yoy increase. This marked the fastest rate of increase since June. Regular or base salaries contributed to this increase with a 1.4% yoy rise. However, overtime pay slightly decreased by -0.1% yoy. Special payments, a variable component of wages, saw a significant jump of 7.5% yoy.
However, the positive trend in nominal pay was offset by the continued decline in inflation-adjusted real wages, which fell for the 19th consecutive month, dropping by -2.3% yoy. A labor ministry official commented, “Price increases have outpaced wage growth.” This situation is exacerbated by the consumer inflation rate, which includes fresh food prices but excludes owner’s equivalent rent, re-accelerating to 3.9% after a brief two-month slowdown.
Alongside wage trends, household spending in Japan also experienced a downturn, decreasing by -2.5% yoy in October. This decline, while still significant, was less severe than the anticipated 3.0% yoy drop. The continued decrease in household spending, which has now extended to eight consecutive months, reflects ongoing challenges in the domestic consumption sector.
UK CPI slowed from 10.1% yoy to 8.7% yoy in April, above expectation of 8.2% yoy. On a monthly basis, CPI rose by 1.2% mom, above expectation of 0.8% mom.
CPI core (excluding energy, food, alcohol and tobacco) rose from 6.2% yoy to 6.8% yoy, above expectation of 6.2% yoy. That’s the highest level since March 1992.
CPI goods annual rate eased from 12.8% yoy to 10.0% yoy, while the CPI services annual rate rose from 6.6% yoy to 6.9% yoy.
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