Fri, Dec 06, 2019 @ 11:05 GMT

St. Louis Fed Bullard downplays rise in core CPI

    St. Louis Fed President James Bullard tried to down play recent rise in core inflation, where core CPI rose above 2% to 2.1% in March. Bullard said “year-over-year core CPI is now above 2 percent but it was also above 2 percent all during 2016, and so it’s really only come back to the level that it was in that earlier period when interest rates were much lower.” And to him, “those developments so far have been unsurprising.”

    Regarding trade tensions, Bullard said there is too much uncertainty around the tariffs to assess the impact for now. But he hoped that US and China will get a good outcome on trade.

    Regarding exchange rates, Bullard said growth growth has been surprising, in particular in Europe. Such strength wasn’t priced in and thus, led to dollar weakness.

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    EU releases proposals on WTO reforms, defend multilateral trade system

      European Commission released their comprehensive approach for the modernisation of the World Trade Organisation today.

      In presenting the ideas, Commissioner for Trade Cecilia Malmström said: “The multilateral trading system has for the past decades provided a stable, predictable and effective framework for companies across the world, helping many economies to grow rapidly. Also today, the WTO is indispensable in ensuring open, fair and rules-based trade. But despite its success, the World Trade Organisation has not been able to adapt sufficiently to the rapidly changing global economy. The world has changed, the WTO has not. It’s high time to act to make the system able to address challenges of the today’s global economy and work for everyone again. And the EU must take a lead role in that.”

      The ideas in the proposal are related to three key ares:

      • updating the rule book on international trade to capture today’s global economy
      • strengthening the monitoring role of the WTO
      • overcoming the imminent deadlock on the WTO dispute settlement system.

      EU also noted that the US and Japan are engaged in the framework of trilateral discussions. A dedicated workgroup was set up during the latest EU-China summit. And EU pledged to discuss the ideas with other WTO partners in the coming weeks.

      Here is the press release. And a 17-page document detailing the proposals.

      Earlier today, the European Union Chamber of Commerce in China released an annual position paper. The 33-page paper detailed 14 common concerns faced by European companies in China, and listed out a accumulative total of 828 recommendations.

      This is how adults work!

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      Into US session: Dollar strongest as US-China trade negotiation may drag on

        Entering into US session, Dollar is trading as the strongest one on talks that US-China trade negotiation is dragging on, and the Trump-Xi summit would be postponed to April. Swiss Franc is the second strongest, followed by Euro. Sterling is the weakest one so far as a third day of Brexit vote is awaited. The Commons will vote on seeking Article 50 extensions. Australian Dollar is following as the second weakest, weighed down by China economic data which suggests longer slowdown.

        US will release import price index, jobless claims, and new home sales. Canada will release new housing price index.

        In Europe:

        • FTSE is up 0.69%.
        • DAX is up 0.24%.
        • CAC is up 0.70%.
        • German 10-year yield is up 0.0095 at 0.075.

        Earlier in Asia:

        • Nikkei dropped -0.02%.
        • Hong Kong HSI rose 0.15%.
        • China Shanghai SSE dropped -1.20% to 2990.69, below 3000.
        • Singapore Strait Times rose 0.07%
        • Japan 10-year JGB yield rose 0.0053 to -0.04.
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        BoJ Minutes: Appropriate to persistently continue with powerful monetary easing

          In the minutes of July policy meeting, BoJ maintained that “economy was likely to continue on an “expanding trend” throughout the projection period through fiscal 2021, despite being affected by the slowdown in overseas economies. Exports were projected to “show some weakness” but would stay on a “moderate increasing trend”. The “continued relatively weak developments in prices” was largely affected by “deeply entrenched mindset and behavior based on the assumption that wages and prices would not increase easily”. Members still believed that CPI was “likely to increase gradually toward 2 percent”.

          Four risks were outlined on economic outlook: (1) developments in overseas economies; (2) the effects of the scheduled consumption tax hike; (3) firms’ and households’ medium- to long-term growth expectations; and (4) fiscal sustainability in the medium to long term. Also downside risks from overseas were “significant”: (1) the consequences of protectionist moves — including the U.S.-China trade friction — and their effects, as well as (2) developments in the Chinese economy, including the effects of the aforementioned factor and (3) the possibility that the progress in adjustments in the global cycle for IT-related goods might take longer than expected.

          On monetary policy, most members recognized that downside risks warranted attention. And, “it was appropriate to persistently continue with the current powerful monetary easing as the momentum toward achieving 2 percent inflation was being maintained with the output gap remaining positive”.

          Full minutes here.

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          US ISM non-manufacturing dropped to 53.9, sharp fall in production

            US ISM Non-Manufacturing Composite dropped to 53.9 in November, down from 54.7, missed expectation of 54.5. Looking at some details, production dropped sharply by -5.4 to just 51.6. However, new orders rose 1.5 to 57.1. Employment also rose 1.8 to 55.5.

            ISM’s Anthony Nieves said: “The non-manufacturing sector had a slight pullback in November. The respondents hope for a resolution on tariffs and continue to be hampered by constraints in labor resources.”

            Full release here.

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            US postponed auto tariffs investigations without new timeline

              US Commerce Secretary Wilbur Ross said yesterday that the timeline for auto tariffs investigation is postponed. Ross originally said the report will be published some time in August. But he told WSJ that it’s “not clear the report will be out at the end of the month”. He went further by refusing to set a new time line. Ross said the report was delayed because of ongoing negotiations with Mexico, Canada and the European Union.

              It’s surprising to link the reports to negotiation given that the investigations are technical, fact-finding. Results of such investigations won’t be altered by the negotiations. The implementations of the actions as suggested by the investigations will be subject to negotiations. It’s typical for authoritarian governments to make a decision first and the make up so-called reports to support it’s own decision. Strange for the US to do so!

              Separately, Trump said at a campaign rally in West Virginia that he told European Commission President Jean-Claude Juncker that “it’s all about cars” during their meeting last month. And Trump added “we’re going to put a 25% tax on every car that comes into the United States from the European Union.”

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              UK CPI slowed to 1.7%, core CPI to 1.5%, GBP dips

                UK CPI slowed notably to 1.7% yoy in August, down from 2.1% yoy and missed expectation of 1.8% yoy. That’s also the lowest rate since December 2016. Core CPI also dropped to 1.5% yoy, down from 1.8% yoy and missed expectation of 1.9% yoy. RPI dropped to 2.6% yoy, down from 2.8% yoy but beat expectation of 2.4% yoy.

                PPI came in at -0.1% mom, -0.8% yoy versus expectation of -0.6% mom, -1.0% yoy. PPI output was at -0.1% mom, 1.6% yoy versus expectation of 0.1% mom, 1.7% yoy. PPI output core was at 0.2% mom, 2.0% yoy versus expectation of 0.1% mom, 1.9% yoy. House price index rose 0.7% yoy in July versus expectation of 0.8% yoy.

                GBP/USD dips notably after the release and struggles to sustain above 38.2% retracement of 1.3381 to 1.1958 at 1.2502. From intraday point of view 1.2392 minor support is first line of defense. Break will be the first indication of rejection by 1.2505 fibonacci level and turn focus to 1.2283 support for confirmation of completion of rebound from 1.1958.

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                US initial jobless claims rose 3k to 215k

                  US initial jobless claims rose 3k to 215k in the week ending May 25, slightly above expectation of 214k. Four-week moving average of initial claims dropped -3.75k to 216.75k.

                  Continuing claims dropped -26k to 1.657M in the week ending May 18. Four-week moving average of continuing claims dropped -3.5k to 1.673M.

                  Full release here.

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                  Bundesbank Weidmann: Acting beyond mandate will undermine trust in ECB

                    Bundesbank President Jens Weidmann warned today that the Eurozone is still not crisis proof. He pointed out that “certain issues like the lack of credibility of fiscal rules or the harmful sovereign-bank nexus still have to be adequately addressed.”

                    At the same time, fighting crises could force unelected ECB bankers to take political positions that’s beyond its own mandate. And, “acting beyond the mandate would also undermine people’s trust in the central bank.”

                    He added, “at the end of the day, it could become more and more difficult for the European Central Bank to focus on its promise of a stable currency.”

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                    DOW suffered bearish U-turn on new threat of Trump’s China tariffs, but Asia recovered

                      US stocks suffered heavy selloff towards the end of the session overnight, single handedly knocked down by Trump’s trade policy. DOW rebounded in early trading to as high as 25040.58 but closed down -0.99% or -245.39 pts at 24442.92. That’s the biggest U-turn in eight months. S&P 500 hit 2706.85 before closing down -0.66% at 2641.25. NASDAQ jumped to 7296.51 and close down -1.63% or -116.92 pts at 7050.29. The U-turn in NASDAQ was the worst in three years.

                      Selloff emerged as Bloomberg reported that Trump is going to impose additional tariffs on all Chinese imports, should the summit with Chinese President Xi Jinping fail. The two leaders plan to meet at sideline of G20 summit in Buenos Aires in November, but even this arrangement is not finalized yet. The announcement of the new tariffs could come in as early as December. The total amount of imports to be tariffs could add up to USD 257B, in addition to the USD 250B already covered by current tariffs.

                      White House Press Secretary Sarah Huckabee Sanders declined talked about the specifics of the Xi-Trump meeting. She just said “You have two of the most powerful leaders in the world. I think that’s consequential no matter how you look at it and we’ll see what happens when they sit down.”

                      In Asia, though, Chinese and Hong Kong stocks reversed early losses after Trump’s comment in an interview with Fox news. He said, “I think we will make a great deal with China, and it has to be great because they’ve drained our country.” At the time of writing, Hong Kong HSI is down -0.17% only, China Shanghai SSE is even up 0.72%.

                      Separately, according to Gallup polling during the week ended October 28, Trump’s job approval rating dropped steeply by 4% to 40%, sharpest decline since June 24, on the controversy over his policy of separating families apprehended illegally crossing the US-Mexico border. On the other hand, his disapproval rating rose to 54%.

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                      Sterling surges as BoE chief economist Haldane joined hawks to vote for rate hike

                        Sterling surges BoE kept bank rate unchanged 0.50% with 6-3 vote. The usual suspects Ian McCafferty and Michael Saunders voted for a hike to 0.75%. And to many’s surprise, chief economist Andrew Haldane voted for a hike too. His vote carries much significance.

                        On growth, BoE noted the judgement that the dip in Q1 was temporary “appears broadly on track”. It pointed to the rebound in household consumption and sentiments as evidence while “employment growth has remained solid”. Despite decline in manufacturing output in April, surveys of business activity have been stable. And overall, the data “point to growth in the second quarter in line with the Committee’s May projections.

                        On inflation, BoE expects CPI to “pick up by slightly more than projected” in the near term. That reflects ” higher dollar oil prices and a weaker sterling exchange rate.” And, indicators of wage growth also picked up with labor markets remains tight. “Domestic cost pressures will continue to firm gradually, as expected.”

                        On forward guidance, BoE expects to maintain the size of assets purchased at GBP 435B and use the Bank Rate as “primary instrument” for momentary policy for now. And BoE will NOT reduce the size of the assets until Bank Rate reaches around 1.50%, lowered from prior guidance of around 2.00%.

                        Full statement below.

                        Bank Rate Maintained at 0.50%

                        Our Monetary Policy Committee has voted by a majority of 6-3 to maintain Bank Rate at 0.5%. The committee also voted unanimously to maintain the stock of corporate bond purchases and UK government bond purchases.

                        Monetary Policy Summary and minutes of the Monetary Policy Committee meeting

                        The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 20 June 2018, the MPC voted by a majority of 6-3 to maintain Bank Rate at 0.5%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

                        In the MPC’s most recent projections, set out in the May Inflation Report, GDP was expected to grow by around 1¾% per year on average over the forecast, conditioned on the gently rising path of Bank Rate implied by market yields at the time. In those projections, growth continued to rotate towards net trade and business investment and away from consumption. While modest by historical standards, the projected pace of GDP growth over the forecast was nevertheless slightly faster than the diminished rate of supply growth, which averaged around 1½% per year. As a result, a small margin of excess demand was projected to emerge by early 2020, feeding through into higher rates of pay growth and domestic cost pressures. Nevertheless, CPI inflation continued to fall back gradually as the effects of sterling’s past depreciation faded, reaching the 2% target in two years.

                        A key assumption in the MPC’s May projections was that the dip in output growth in the first quarter would prove temporary, with momentum recovering in the second quarter. This judgement appears broadly on track. A number of indicators of household spending and sentiment have bounced back strongly from what appeared to be erratic weakness in Q1, in part related to the adverse weather. Employment growth has remained solid. Although manufacturing output recorded a decline in April, and this was accompanied by a fall in goods exports, surveys of business activity have been stable and, as a whole, point to growth in the second quarter in line with the Committee’s May projections.

                        Internationally, activity data have been mixed. Indicators suggest that US growth bounced back strongly in Q2 from the softness in Q1. Euro-area growth has been weaker than expected, and downside risks have increased in some emerging markets, in part reflecting tighter financial conditions. More broadly, the prospects for global GDP growth remain strong, and while financial conditions have tightened somewhat, they continue to be accommodative.

                        CPI inflation was 2.4% in May, unchanged from April. Inflation is expected to pick up by slightly more than projected in May in the near term, reflecting higher dollar oil prices and a weaker sterling exchange rate. Most indicators of pay growth have picked up over the past year and the labour market remains tight, suggesting that domestic cost pressures will continue to firm gradually, as expected.

                        The Committee’s best collective judgement remains that, were the economy to develop broadly in line with the May Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon. For the majority of members, an increase in Bank Rate was not required at this meeting. All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

                        In addition to its discussion of the immediate policy decision, the Committee reviewed its previous guidance on the level of Bank Rate at which the MPC will consider whether to start to reduce the stock of purchased assets. The MPC continues to expect to maintain the stock of purchased assets until Bank Rate reaches a level from which it can be cut materially, reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy. Since the previous guidance, the Committee has reduced Bank Rate from 0.5% to 0.25% in August 2016 and has noted that it could lower it further if required. Reflecting this, the MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches around 1.5%, compared to the previous guidance of around 2%. Any reduction in the stock of purchased assets will be conducted at a gradual and predictable pace. Decisions on Bank Rate will take into account any impact of changes in the stock of purchased assets on overall monetary conditions, in order to achieve the inflation target. In the event that potential movements in Bank Rate are judged insufficient to achieve the inflation target, the reduction in the stock of assets could be amended or reversed.

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                        ECB Mersch: Imperative for all Eurozone states to adhere to the common rules

                          ECB Executive Board member Yves Mersch said in a speech that “it is imperative for all Member States to adhere to the common rules”, without naming Italy. And he emphasized ” two principles that are at the heart of effective policy in a democratic society.” “First, liability and control must be aligned, with important decisions taken only by those who will bear their consequences.” “Second, the discharge of democratic control must lie at the level at which policy decisions are taken.

                          Separately, Chief Economic Peter Praet warned in a Handelsblatt interview published yesterday that “Italy’s current financing conditions are much too tight for a country with weak growth and low inflation.” For now, Praet didn’t see any contagion effect so far. And, ECB won’t intervene if the problems are confined only to Italy. ECB conducts monetary policy for the Eurozone as a whole.

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                          IMF Lagarde: Trade war find losers on both sides

                            IMF Managing Director Christine Lagarde on trade wars:

                            • “The macroeconomic impact would be serious, not only if the United States took action, but especially if other countries were to retaliate, notably those who would be most affected, such as Canada, Europe, and Germany in particular.”
                            • “In a so-called trade war, driven by reciprocal increases of import tariffs, nobody wins, one generally finds losers on both sides.”
                            • “There are some countries in the world that do not necessarily respect the World Trade Organization’s agreements, and which impose technology transfers. China is a case in point, but it is not the only country with such practices.”
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                            US housing starts at 1.29m, building permits at 1.35m in April

                              US housing starts dropped -3.7% to 1.29m annualized rate in April, below expectation of 1.33m. Building permits dropped -1.8% to 1.35m, marched expectations.

                              Canada manufacturing shipment rose 1.4% mom in March. above expectation of 1.0% mom.

                              Euro remains the weakest one today as weighed down by Italy concerns, followed by Sterling. Dollar is indeed the third weakest so far, as safe haven flows lifted US treasuries. 10 year yield is back below 3.06 at the time of writing, comparing to yesterday’s high at 3.094. New Zealand Dollar is the strongest one, mainly as it digests recent losses.

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                              CAD surges with help from oil, a look at AUDCAD and EURCAD

                                CAD overtakes USD’s place as the strongest major currency today as helped by rebound in oil prices.

                                Just after we said here that AUDCAD’s decline seemed to be slowing, it accelerated. But after all, there is no change in the view that it’s clearly in a near term down trend. The major target is 0.9578 key support (2017 low). We’ll monitor the reaction there.

                                Another one to watch is EURCAD. We pointed out here that the corrective rise from 1.5461 could be ending. Subsequent decline proved that it has indeed ended at 1.5172. EUR/CAD is now heading to 1.5461 low with solid downside momentum.

                                Break of 1.5461 should be seen soon and next target is 61.8% projection of 1.6151 to 1.5461 from 1.5712 at 1.5286.

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                                Eurozone PMI Composite: Economy growing at 0.6% quarterly rate, down from unsustainably rapid 0.8-0.9%

                                  Eurozone PMI Services Business Activity Index was finalized at 54.9 in March, revised down from 55.0. That compares to February reading at 56.2. Final PMI Eurozone Composite index wars revised down to 55.2, from 55.3. February’s reading was at 57.1.

                                  Quote from there lease by Chris Williamson, Chief Business Economist at IHS
                                  Markit:

                                  • “The eurozone economy came off the boil in March, though continued to run hot. Although the final PMI numbers showed the weakest rise in business activity since the start of last year, adding to signs that the growth spurt has peaked, the surveys are still indicative of the economy growing at an impressive 0.6% quarterly rate in March, down from a clearly unsustainably rapid 0.8-0.9% rate around the start of the year.
                                  • “Some pull-back from the elevated level of the PMI at the start of the year was always highly likely, and it’s important to note that the slowdown generally represents a reduction in the number of companies reporting month-on-month improvements in business activity, as opposed to a rise in the number of companies reporting a deterioration in business conditions.
                                  • “Some of the loss in growth momentum also appears to have been the result of temporary factors, such as bad weather and short-term capacity constraints, notably shortages of supplies and labour. Some reversal of these impediments should therefore hopefully help boost growth in April.
                                  • “Gauging the true extent of any slowdown is consequently difficult due to the disruptions to business from bad weather in recent months. April’s PMI data will therefore be particularly important in ascertaining true underlying growth momentum and in providing a steer on the likely timing of any ECB policy changes.”
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                                  BoE Carney’s post meeting press conference, live stream

                                    Summary on interest rates

                                    “With domestically-generated inflation building and the prospect of excess demand in the economy emerging, a modest tightening of monetary policy is now appropriate to return inflation to its 2 percent target, and to keep it there.”

                                    “Gradual tightening of monetary policy is likely to be required in order to return inflation sustainably to its target at a conventional horizon.

                                    “Structural factors that have pushed down the trend equilibrium real rate are likely to persist.

                                    “Domestic short-term factors (particularly headwinds from uncertainty and fiscal drag) will fade slowly.

                                    “R* expected to rise gradually. Policy needs to walk – not run- to stand still”.

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                                    China Caixin PMI manufacturing in first contraction since 2017, greater downward pressure ahead

                                      The Caixin China PMI manufacturing dropped to 49.7 in December, down from 50.2 and missed expectation of 50.3. That’s also the first contractionary reading since May 2017.

                                      Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group, noted in the release that “external demand remained subdued due to the trade frictions between China and the U.S., while domestic demand weakened more notably”. And, “it is looking increasingly likely that the Chinese economy may come under greater downward pressure.”

                                      Full release here.

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                                      Pound selloff resumes with EUR/GBP upside breakout

                                        Pound’s selloff resumes today and it’s for now the second weakest, just next to Canadian. The decline is rather unrelated to today’s main theme of Trump’s tariff on Mexico. Rather, Sterling is on its own downward trajectory on Brexit uncertainty. Prime Minister Theresa May will step down on June 7. Nominations will start in the week on June 10. That’s the week we’ll finally know who are the real runners.

                                        EUR/GBP breaks out of this week’s sluggish range and hits as high as 0.8866 so far. With 0.8840 resistance now firstly taken out, next stop will be 0.9101 key resistance.

                                        GBP/USD is also on track for 1.2391 low.

                                        GBP/JPY is also targeting 131.51 low even that flash crash low looks a bit far.

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                                        US Chamber of Commerce to campaign against Trump’s trade tariffs policies

                                          Reuters reported that the US Chamber of Commerce is launching a campaign today to attack Trump’s protectionist trade policy. It’s believed that state-by-state analysis would be used for the campaign and it will warn that Americans that Trump is risking a global trade war that will eventually hit their pockets.

                                          Chamber President Tom Donohue was quoted saying that “the administration is threatening to undermine the economic progress it worked so hard to achieve.” And he added that “we should seek free and fair trade, but this is just not the way to do it.”

                                          Being the largest business group in the US with 3 million members, the Chamber also have long history of being friendly with Republicans. Their stance carries some political significance.

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