US ADP private sector employment grew 208k in September, slightly above expectation of 200k. BY sector, goods-producing jobs dropped -29k. But service-providing jobs rose 237k. By company size, small establishments added 58k, medium added 90k, large added 60k. Annual pay was up 7.8% yoy.
“We are continuing to see steady job gains,” said Nela Richardson, chief economist, ADP. “While job stayers saw a pay increase, annual pay growth for job changers in September is down from August.”
Germany Federal Ministry for Economic Affairs and Energy released a monthly report today. It noted that:
The upswing of the German economy continues with pace moderated slightly. The global economic environment continues to be favorable. However, there are increased risks due to trade conflicts.
The up trends in new orders in manufacturing and industrial production have weakened recently too.
Consumer demand has recently been less dynamic. But consumer and retailers remain confident.
The high demand for labor in large parts of the economy ensures steadily rising employment. There are increase challenger for hiring. Unemployment and underemployment continue to decline.
Chinese Yuan saw a sharp uptick after PBoC announced a substantial 200 bps cut in foreign exchange reserve requirement ratio to 4% from 6%, effective September 15. According to PBoC, the move aims to “improve financial institutions’ ability to use foreign exchange funds.”
This RRR cut is set to release approximately USD 16.4B in foreign exchange, based on China’s FX deposits standing at USD 821.8B as of end-July. Market analysts also note that the FX RRR reduction could have the added effect of lowering dollar funding costs in the interbank market, thereby alleviating some of downward pressure on Yuan.
On the technical front, USD/CNH saw a drop to as low as 7.2387 following the announcement, but it has since recovered most ground. Despite the knee-jerk reaction, the broader uptrend from 6.6971 appears to remain intact. Should it break 7.3103 minor resistance, this would signal completion of the correction from 7.3491 and likely pave the way through 7.3491 for testing 7.3745 high.
However, considering bearish divergence condition in D MACD, strong resistance is likely at 61.8% projection of 6.8100 to 7.2853 from 7.1154 at 7.4091 to limit upside, to complete the five wave sequence from 6.6971.
While technical landscape seems to suggest further upside for USD/CNH, it is crucial to note that these views could be rendered academic at a moment’s notice. The Chinese authorities may implement various intervention measures any time, adding an extra layer of unpredictability to the equation.
Worries on global slowdown dominates the markets today. It started with weaker than expected Chinese data which prompted selloff in Asian stocks. Poor Eurozone PMI composite, which dropped to 49-month low, could have intensified selling. But sentiments somewhat stabilized slightly after China announced to suspend retaliatory tariffs on US autos and parts for three months. Still, European indices are in deep red.
In the currency markets, New Zealand and Australian Dollar are the weakest ones for today, breaking yesterday’s lows against most other major currencies. Sterling is the third weakest after UK Prime Minister Theresa May got nothing but vague assurances from the EU regarding Irish backstop. Yen and Dollar are the strongest ones.
For the week, Dollar is the strongest, followed by Canadian and Aussie. Sterling remains the weakest on Brexit, followed by Kiwi and then Euro.
In European markets, at the time of writing:
Earlier in Asia:
Japan 10 year JGB yield dropped -0.019 to 0.035. It’s a bit early to tell. But based on current momentum 2018 low at 0.017 is within reach. Sentiments had a big turn since October.
Australian NAB Business Confidence rose to 6 in September, up from 5 and beat expectation of 5. Business Conditions rose to 15, up from 14 and beat expectation of 9.
Alan Oster, NAB Group Chief Economist noted in the release that “business conditions appear to have stabilized after declining through the middle of 2018.” Also, “despite having eased notably from the highs earlier in the year, they remain well above average, suggesting that the business environment continues to be favorable”. And, “ongoing strength in employment is especially encouraging.”
The only concern remains around “lower forward orders”. Mining again is strongest but “retail is weak and deteriorating”. And, “retail has now lagged for some time and is unlikely to turn around anytime soon with the weaker outlook for the consumer and ongoing structural changes in the sector”. Overall, the survey points to “ongoing strength in business activity” in to latter part of 2018, but “ongoing meek price pressures”.
ECB Chief Economist Philip Lane, in a discussion with Spanish RTVE, described the disinflation progress as “very good.” He added that “the next move is to cut interesting rate”.
Nevertheless, the timing of such rate adjustments would be data-dependent. Also, “the number of rate cuts we make will depend on how much progress we make towards our target,” he added.
In the background, there’s a growing consensus around the first rate cut in the current cycle, with expectations leaning towards April or June as likely windows for action.
Canada’s CPI slowed from 3.4% yoy to 2.9% yoy in January, much lower than expectation of 3.3% yoy. The largest contributor to headline deceleration was lower year-over-year prices for gasoline (-4.0%). Excluding gasoline, CPI also fell from 3.5% yoy to 3.2% yoy. Food prices growth also fell from 4.7% yoy to 3.4% yoy. On a monthly basis, the CPI was unchanged, following a -0.3% mom decline in December.
Looking at the core measures, CPI median fell from 3.5% yoy to 3.3% yoy, below expectation of 3.6% yoy. CPI trimmed fell from 3.7% yoy to 3.4% yoy, below expectation of 3.6% yoy. CPI common fell from 3.9% yoy to 3.4% yoy, below expectation of 3.8% yoy.
RBA Governor Guy Debelle said in a speech that because of the coronavirus, the global economy will be “materially weaker” in Q1 and in the period ahead. For Australia, RBA has estimated the impact of education and tourism sectors. These services exports, which account for 5% of GDP, would drop at least -10% in Q1. That translates into -0.5% subtraction of GDP just from these two sources. But that, he added, “it is just too uncertain to assess the impact of the virus beyond the March quarter.”
Debelle also said, the coronavirus is “a shock to both demand and supply”. Monetary policy “does not have an effect” on the supply side. But It can work to “ensure demand is stronger than it otherwise would be”. The government’s intention to support jobs, incomes, small business and investment will “provide welcome support” to the economy. “The combined effect of fiscal and monetary policy will help us navigate a difficult period for the Australian economy.”
Cleveland Fed President Loretta Mester said she’s “comfortable with tapering some time this year”. She wanted it “completed by the middle of next year”. She added that there is “no need” for the kind of accommodation as “at the height of the crisis”.
Mester said she is watching “if one-off price increases become embedded in inflation expectations.” She is “very watchful” on the inflation side and she now thinks “it will be more prolonged”.
US non-farm payroll employment grew strongly by 263k in April, well above expectation of 185k. Prior month’s figure was revised slightly down from 196k to 189k. Unemployment dropped to 3.6%, down from 3.8% and beat expectation of 3.8%. That’s the lowest level since December 1969. Participation rate dropped by -0.2% to 62.8%. Average hourly earnings rose 0.2% mom, below expectation of 0.3% mom. But prior month’s figure was revised up from 0.1% mom to 0.2% mom.
The set of job data is rather solid. But at the time of writing. there is no apparent strength in Dollar yet.
UK retail sales, in volume term, rose 13.9% mom in June, much better than expectation of 8.5% mom. Excluding automotive fuel, sales rose 13.5% mom, also well above expectation of 7.5% mom. Total sales have now recovered back to similar levels as before the coronavirus pandemic.
A day after the meeting with Xi, Trump claimed on Sunday, in South Korea, that the US is “winning big because we have created an economy that is second to none”. And, “we’re collecting 25 percent on $250 billion, and China is paying for it, as you know, because, as you notice, our inflation hasn’t gone up.”
Trump further claimed that “China has devalued their currency in order to pay for the tariffs… And in addition to devaluing, they’ve also pumped a lot of money into their economic model… They’ve been pumping money in. We haven’t. We’ve been retracting. We’ve been raising interest rates and they’ve been lowering interest rates.”
Separately, the loosening up of Huawei ban triggered some criticism from Trump’s Republican party. South Carolina Republican Senator Lindsay Graham warned “there will be a lot of pushback if it is a major concession.”
But National Economic Council chairman Larry Kudlow tried to tone it down on Fox News Sunday. He said “all that is going to happen is Commerce will grant some additional licenses where there is a general availability” of the parts the company needs. And, companies “are selling products that are widely available from other countries … This not a general amnesty … The national security concerns will remain paramount.”
Atlanta Federal Reserve President Raphael Bostic said on CBS’s “Face the Nation” program, “Inflation is high. It is too high. And we need to do all we can to make it come down.”
He added the US need to have a “slowdown”, but “we are going to do all that we can at the Federal Reserve to avoid deep, deep pain.”
“We’re still creating lots of jobs on a monthly basis, and so I actually think that there is some ability for the economy to absorb our actions and slow in a relatively orderly way,” he said.
Japan PMI Manufacturing was finalized at 48.9 in December, down from November’s 49.0. That’s the lowest level since October 2020. S&P Global noted there were strong reductions in output volumes and order books. Input buying was cut at strongest rate since September 2020. Supply pressures were the least widespread since February 2021.
Laura Den man, Economist at S&P Global Market Intelligence, said: “December PMI data saw the Japanese manufacturing sector slip further into contraction territory in the final month of 2022. The downturn was largely centred around the current demand environment which is weak both internationally and domestically….
“At the same time, forward looking indicators are increasingly painting a gloomier picture for Japan’s manufacturing sector in the future. Companies have cut back input buying sharply, and business sentiment waned to a seven-month low.”
BoJ Deputy Governor Masayoshi Amamiya said the current “powerful easing” is exerting an “intended effect” on the economy. Private consumption was gradually picking up, and likely to continue recovery. However, he expected corporate finance to remain under stress as “economic improvement to be moderate”.
“The BOJ will closely watch the impact of COVID-19 for the time being and take additional easing steps without hesitation as needed,” he added. “Will extend the duration of COVID-response measures beyond March deadline as needed, with an eye on pandemic impact on economy.”
DOW opens sharply higher today and extends gains to new record high at 30525.56 (so far). 38.2% projection of 18213.65 to 29199.35 from 26143.77 at 30340.30 is a strong sign of solid underlying buying. If DOW could close above this level today, we’re likely see some more upside acceleration in the near term. Next major target is 61.8% projection at 32932.93.
US House of Representatives passed four measures on Tuesday, on unanimous voice vote, taking a hardline stance on China. In particular, three of the legislations were in support for Hong Kong following over four months of protests. China’s Foreign Ministry immediately responded by accusing the US of “sinister intentions” and warned of retaliation should the acts were passed in the Senate too.
The measures include the Hong Kong Human Rights and Democracy Act that requires the US secretary os state to certify Hong Kong’s autonomy status every year. The Protect Hong Kong Act bans commercial exports of military and crowd-control items to Hong Kong Government. A third measures is a non-binding resolution, condemning China’s interference” in Hong Kong’s affairs and support the city’s right to protest. The fourth measure was another non-binding resolution commending Canada for its actions related to a US request to extradite Meng Wanzhou, CFO of telecom giant Huawei.
China’s Foreign Ministry warned in a brief statement, “if the relevant bill is finally passed into law, not only will it hurt Chinese interests and China-US relations, but also seriously damage US interests. Regarding the wrong decision of the US, the Chinese side will have to enact effective countermeasures, firmly safeguard Chinese sovereignty, security and development interests”.
Fed Governor Christopher Waller emphasized in a speech today that “several more months” of favorable inflation data are necessary before he would consider supporting interest rate cuts.
While the latest CPI data was a “reassuring signal” indicating that inflation is not accelerating, Waller noted that the progress shown was “small.”
Waller highlighted that current data on spending and labor market suggest that monetary policy is at an “appropriate setting” to exert downward pressure on inflation.
However, “in the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy,” he said.
UK GDP grew 1.0% mom in June, matched expectations. That’s the fifth consecutive month of growth, GDP remained -2.2% below it’s pre-pandemic level in February 2020. Services was the main contributor, growing 1.5% mom. Production, on the other hand, dropped -0.7% mom while contraction also dropped -1.3% mom.
For Q2 as a whole, GDP grew 4.8% qoq, still -4.4% below the pre-pandemic level in Q4, 2019. ONS said, “there were increases in nearly all main components of expenditure apart from “trade”, with the largest contribution from household consumption”.
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BoJ stands pat, continue to closely monitor impacts of pandemic
BoJ kept monetary policy unchanged today as widely expected. Under the yield curve control framework, short-term policy interest rate is held at -0.1%. 10-year JGB yield target is kept at around 0%. The central bank will continue to purchase ETFs and J-REITS with upper limits of about JPY 12T and JPY 180B respectively. CP and Corporate bonds purchases will continue with upper limit of JPY 20Y until the end of September 2021.
BOJ also pledged to continue with QQE with Yield Curve Control “as long as it is necessary” and “continue expanding the monetary base” until core CPI exceeds 2% target in a “stable manner”. It will also “closely monitor” of the impact of COVID-19 and “will not hesitate to take additional easing measures if necessary”.
Full statement here.