Canada Freeland: With steel tariffs in place, ratification of USMCA would be very, very problematic

    Despite all the talks and rumors that the US is close to lifting steel and aluminum tariffs on Canada and Mexico, Canadian Foreign Affairs Minister Chrysita Freeland left no hints on the progress after she met US Trade representative Robert Lighthizer yesterday.

    Freeland acknowledged that there were discussions regrading the tariffs but and details were provided. Instead, she just noted “Canada believes in the new [USMCA] agreement that we reached with the United States and Mexico,” and “we very much hope it can be ratified in all of our countries, although the domestic processes are up to each country.” She emphasized, “when it comes to Canada, it is certainly the case for us that as long as the tariffs remain in place, ratification would be very, very problematic.”

    Mexico’s chief North American trade negotiator Jesús Seade said earlier this week “Very quickly we have made a tremendous progress and I’m looking to an early resolution on the basis of lifting the tariff, no quotas. We were getting close to an agreement.” Mexican Secretary of Economy Graciela Márquez Colín also said “if we get similar proposals we might go into a trilateral, but that’s just a possibility”. But Freeland said she would “leave it to the Mexicans and the Americans to comment.”

    US Treasury Secretary Steven Mnuchin told a Senate Committee yesterday that “the president has instructed us to try to figure out a solution” on steel and aluminum tariffs.” And, “this is a very important part of passing USMCA which is a very important economic agreement for two of our largest trading partners… I think that we are close to an understanding with Mexico and Canada. I’ve spoken to the finance ministers. Ambassador Lighthizer is leading the effort on this, but I can assure you it is a priority of ours.”

    Fed Barkin: No strong case for rate hike nor rate cut

      Richmond Fed President Tom Barkin said in a speech yesterday that “there’s not a strong case to push rates higher when inflation is under control”. At the same time “there’s not a strong case to move lower when growth remains healthy.” And, “it makes sense to remain patient” on monetary policy.

      He noted that there was a short term sentiment shock at the end of last year and the beginning of this year. The significant drop in business, consumer and investor confidence was only fueled by “overreacting” to international uncertainty, financial market volatility and the government shutdown.

      He added that business contacts told him the economy is “sound but not spectacular”. And, consumers are ready to resume spending once the environment settled. Though business recovery looks to be slower and they’re worried about political polarization and international markets and trade. Barkin noted “confidence—especially business confidence—is fragile.”

      On monetary policy, he emphasized: “In a volatile environment, rate moves can indicate more than stimulation or restriction. They are also taken as signals on the health of the economy. Counter-intuitively, then, rate moves can send unintended messages.”

      Full speech Sentiment and the Real Economy.

      Stocks rebound as Trump ducks auto tariffs decision, but US and German yields stay down

        A couple of US trade policy news are giving market sentiment a mild lift in early part of US session. It’s clear that the trade talks with China collapsed even though Trump denied it. Trump now appears to be backing down from his hard-line trade stance against the country’s  closest allies in Canada and EU.

        Firstly, US Treasury Secretary Steven Mnuchin confirmed himself that he’s going to China soon to continue trade negotiations. He said, “my expectation is that we will go to Beijing at some point in the near future to continue those discussions…. We’re continuing discussions. There’s still a lot of work to do.”

        Secondly, Mnuchin also indicated that US is very close to resolving steel and aluminum tariffs on Canada and Mexico. Separately, it’s reported that Trade Representative Lighthizer is scheduled to meet Canadian Foreign Minister Chrystia Freeland again. Lighthizer will bring forward a proposal to remove such national security steel and aluminum tariffs.

        Thirdly and most importantly, an unnamed source was quoted saying that Trump will delay the decision on auto tariffs by up to six months. The original decision is due this Saturday, May 18. It reported that the White House has held a series of high-level meetings on the issue in recent days. And automaker official were repeatedly told that the decision will be delayed. But White House declined to comment.

        DOW dived to as low as 25341.91 in early trading but it’s now back up 0.4%, above 25600. 10-year yield also hit as low as 2.361 but it’s back at 2.389 now. Still, 10-year yield below 2.4 is a serious sign of risk aversion.

        In Germany, DAX dropped to as low as 11862.21 earlier today but closed up 0.86% at 12904.74. German 10-year yield reached as low as -0.131 earlier today and it’s back at -0.095 at the time of writing. German yield is pressured by concerns over Italy’s budget. Postponing auto tariffs just delay the problem, not solve it. And, it certainly couldn’t solve the unrelated problem of Italy.

        Canada CPI climbed to 2.0%, matched market expectations

          In April, Canada CPI accelerated to 2.0% yoy, up from 1.9%, matched expectations. CPI core commons was unchanged at 1.8%, matched expectations. CPI core median slowed to 1.9% yoy, missed expectation of 2.0% yoy. CPI core trim slowed to 2.0% yoy, missed expectation of 2.1% yoy.

          US retail sales dropped -0.2%, ex-auto sales rose 0.1%, both missed expectations

            In April, US headline retail sales dropped -0.2%, missed expectation of 0.2% mom rise. Ex-auto sales rose merely 0.1% mom, much lower than expectation of 0.7% mom.

            Empires State manufacturing index rose to 17.8 in May, up from 10.1 and beat expectation 8.0.

            Into US session: EUR dives on German yield free fall, but AUD still the weakest

              Entering into US session, Yen is back as the star performer, followed by Swiss Franc. This time, weaker than expected economic data were largely shrugged off by stocks and bond investors. Instead, renewed worry over Italy’s fiscal health boosted Italian yield up. German 10-year yield, on other hand, is in free fall on safe haven flow, breaking -0.11 handle. US 10-year yield also dives through 2.38 handle at the time of writing. Both developments help lift Yen and Swiss Franc, Dollar follows as third strongest for now.

              Australian Dollar is staying as the weakest one for today, followed by New Zealand Dollar. These two are probably the only ones who care about resumption of slowdown in China. Situation could only get worse with more tariffs ahead. Euro is currently the third weakest for today. US retail sales and Canada CPI will be the next triggers for volatility.

              Technically, EUR/JPY and GBP/JPY resume recent decline by breaking through 122.48 and 141.20 temporary lows. EUR/USD will likely take on 1.1173 minor support. Break will raise the chance of down trend resumption and target 1.1111 low next.

              In Europe, currently:

              • FTSE is down -0.04%.
              • DAX is down -0.60%.
              • CAC is down -0.48%.
              • German 10-year yield is down -0.0050 at -0.117.
              • Italian 10-year yield is up 0.0345 at 2.77.

              Earlier in Asia:

              • Nikkei rose 0.58%.
              • Hong Kong HSI rose 0.52%.
              • China Shanghai SSE rose 1.91%.
              • Singapore Strait Times dropped -0.15%.
              • Japan 10-year JGB yield rose 0.001 to -0.05.

              German 10-yr yield breaks -0.1% on Italy budget concerns, EURJPY extends down trend

                German-Italian yield spread widens sharply again today on fear of expansionary budget again in Italy and renewed risk of showdown with EU. The trigger was Italian Deputy Prime Minister Matteo Salvini’s pledge yesterday, to be prepared to let budget deficit rise above EU limits if it were to boost employment.

                Italian 10-year yield is currently up 0.072 at 2.807. That compares to 2.52% low this month, and 2.344 low this year.

                German 10-year yield is currently down -0.041 at -0.108.

                EUR/JPY finally resume recent fall by taking out 122.48 temporary low.

                Eurozone GDP grew 0.4% in Q1, employment grew 0.3%

                  Eurozone GDP grew 0.4% qoq in Q1, matched expectations. EU 28 GDP grew 0.5% qoq. Over the year, Eurozone GDP rose 1.2% yoy while EU28 GDP grew 1.5% yoy.

                  Eurozone employment grew 0.3% qoq in Q1, above expectation of 0.2% qoq. EU 28 employment all grew 0.3% qoq.

                  Full release here.

                  German GDP grew 0.4% in Q1 on domestic resilience, first ray of hope but uncertainty remains

                    Germany GDP grew 0.4% qoq in Q1, matched market expectation. That was also a significant improve over Q4’s 0.0% growth. The quarter-on-quarter comparison (price-, seasonally and calendar-adjusted) shows that positive contributions mainly came from domestic demand.

                    Fixed capital formation in construction and in machinery and equipment increased considerably. Household final consumption expenditure, too, increased substantially. However, government final consumption expenditure recorded a decline. And there were mixed signals regarding foreign trade; as both exports and imports increased.

                    Economy Minister Peter Altmaier said the growth figures were a “first ray of hope” following two quarters without expansion. However, he warned that ” international trade disputes are still unresolved”. He urged , “we must do everything possible to find acceptable solutions that enable free trade”.

                    Aussie drops after wage price miss, consumer sentiment barely rose

                      Australian Dollar weakens broadly today and is trading as the worst performing one for today. The Aussie is partly dragged down by poor Chinese data. It’s own data provide no help too.

                      Wage Price Index rose only 0.5% qoq in Q1, below expectation of 0.6% qoq. ABS Chief Economist Bruce Hockman said: “Annual wages in seasonally adjusted terms grew 2.3 per cent for the third quarter in a row. The main contributors to growth over the quarter were regularly scheduled wage rises in the Health care and social assistance and Education and training industries, as was the case in the previous March quarter.”

                      Westpac Consumer Sentiment rose 0.3% to 101.3 in May, up from 100.7. Westpac noted that easing bias was delivered by RBA at last week’s meeting, with growth and inflation forecasts lowered to “barely acceptable” levels. More importantly, such forecasts are based on market pricing for a full rate cut for. Westpac maintained that the tensions between strong labor market and weak GDP will be resolved over the next few months. And the case of August RBA cut would become clear.

                      AUD/USD is on track to 100% projection of 0.7295 to 0.7003 from 0.7205 at 0.6913 with today’s decline. We’ll pay attention to downside acceleration should this level be broken firmly.

                      China retail sales growth slowed to lowest since 2003, industrial production and fixed asset investment missed too

                        Despite the rebound in US stocks overnight, Asian markets are mixed. Upside of recovery was capped by poor data from China. It’s now rather apparent that the rebound in March was just temporary due to seasonal reasons. The slowdown in China is in place and could even worsen further as trade war with US drags on.

                        China industrial production growth slowed to 5.4% yoy in April, missed expectation of 6.5% yoy. That’s also sharp deterioration from 4-year high of 8.5% yoy in March. Fixed-asset investment growth slowed to 6.1% ytd yoy, down from 6.3% and missed expectation of 6.4%.

                        More seriously, retail sales growth slowed to 7.2% yoy, down from 8.7% yoy and missed expectation of 7.2% yoy. That’s also the lowest growth since May 2003. That dents hope of shifting the burden of the economy from exports to domestic demand growth. Unemployment rate, though, dropped to 5.2%.

                        UK PM May plans to bring back Brexit bill on June 3

                          UK Prime Minister Theresa May laid out her “plan” to complete the Brexit withdrawal agreement by the end of next month. Her spokesman said May is planning to put forward the bill again in the week beginning June 3. And he added “it is imperative we do so then if the UK is to leave the EU before the summer parliamentary recess.”

                          May’s Cabinet agreed to press head with talk with opposite Labour a meeting. As “Ministers involved in the negotiations set out details of the compromises which the government was prepared to consider in order to consider an agreement which would allow the UK to leave the EU with a deal as soon as possible.” And, “it was agreed that it is imperative to bring forward the Withdrawal Agreement Bill in time for it to receive royal assent by the summer parliamentary recess.”

                          However opposition Labour leader Jeremy Corbyn remained doubtful on the May’s plan. His spokesman said Corbyn raised doubts over the credibility of government commitments, following statements by Conservative MPs and cabinet ministers seeking to replace the prime minister.”

                          Stocks recovered as Mnuchin will travel to China for trade talks again soon

                            US stocks recovered mildly overnight, partly due to a technical recovery, and partly cause Trump’s administration tried to tone down trade war with China. DOW ended up 0.82% or 207.06 pts at 25532.05 but was kept well below 55 day EMA at 25690.77. S&P 500 rose 0.80% while NASDAQ rose 1.14%. Both were also capped by 55 day EMA.

                            Trump said “we’re having a squabble with” China only., and “we have a dialogue going. It will always continue.” Treasury spokesman also indicated that Steven Mnuchin will plan for another meeting with China, without details. The spokesman said: “As the secretary has indicated, the negotiations will continue. We do anticipate, as the secretary indicated yesterday, that we will plan for a meeting in China at some point soon.” However, nothing is heard from Trade Representative Robert Lighthizer yet.

                            Trump trying to drag Fed into trade war with China, but no one cares

                              Trump is trying to politicize Fed and use it as a tool in the trade war with China. He tweeted “China will be pumping money into their system and probably reducing interest rates”, to “make up” for the business they will be losing. And, if Fed ever did a “match”, “it would be game over”.

                              However, did Trump remember he said US is taking in billions of dollar from China? And the unexpected 3.2% growth was greatly helped by tariffs? Steel industry was booming after the tariffs? Productions will be moving back from China to the US? With those “winnings”, Trump still sees problem in businesses that needs Fed to do something to “make up” with? His logic is, as usual, incomprehensible.

                              But anyway, judging the lack of reaction in EUR/USD, sensible investors clearly know what the politically independent would and wouldn’t do.

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                              UK PM May: It’s imperative to bring forward Brexit deal to receive royal assent by summer recess

                                UK Prime Minister Theresa May’s spokesman said the Cabinet has agreed today to continue negotiations with Labour regarding the Brexit deal. He noted that “Ministers involved in the negotiations set out details of the compromises which the government was prepared to consider in order to consider an agreement which would allow the UK to leave the EU with a deal as soon as possible.”

                                Also, “Cabinet agreed to continue discussions with Labour to see what was possible. However it was agreed that it is imperative to bring forward the Withdrawal Agreement Bill in time for it to receive royal assent by the summer parliamentary recess.”

                                Into US session: Yen is shallow retreat as sentiments stablized

                                  Entering into US session, market sentiments are generally stabilized today. While Asian stocks ended lower, major European indices are trading higher while DOW futures point to mild recovery. China confirmed that they’re still in negotiation with the US on trade. Trump also said again that a deal is close. Investors are temporarily holding their nerve, awaiting new developments. Nevertheless, further decline in German 10-year yield today is a sign of cautiousness. Gold is also holding firm at around 1300.

                                  Reactions to economic data are rather muted today. UK unemployment dropped to fresh 44-year low of 3.8% in March. Eurozone industrial production contracted -0.3% in March. German ZEW economic sentiment deteriorated to -2.1 in May. But these data triggered little movements in the markets. Euro is relatively firm while Sterling is weak.

                                  In the currency markets, currently, Yen is the softest one for today, followed by Sterling and the Swiss Franc. Though, the retreat in Yen is rather shallow today and more upside is in favor. Rally could resume very soon. New Zealand Dollar is the strongest one, followed by Canadian and then Dollar.

                                  In Europe, currently:

                                  • FTSE is up 0.97%.
                                  • DAX is up 0.54%.
                                  • CAC is up 1.17%.
                                  • German 10-year yield is down -0.0079 at -0.075.

                                  Earlier in Asia:

                                  • Nikkei dropped -0.59%.
                                  • Hong Kong HSI dropped -1.50%.
                                  • China Shanghai SSE dropped -0.69%.
                                  • Singapore Strait Times dropped -0.33%.
                                  • Japan 10-year JGB yield dropped -0.0061 to -0.052.

                                  Trump: Have to make up the tremendous ground since ridiculous one sided formation of the WTO

                                    Trump fired a series of tweets boasting his own tariff policies again. He noted there is now a “big a growing” steel industry after the 25% tariffs. He also blamed that there were “tremendous ground”  lost to China  since the “ridiculous one sided formation of the WTO”. He also claimed that it’s time for the farmers as “one of the biggest beneficiaries of what is happening now.” The country will make up for the differences if China doesn’t continue to buy from them.

                                    Kind of boring and hardly constructive.

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                                    Fed Williams: Decline decline in r* means limited policy space in future downturns

                                      In prepared remarks, New York Fed President John Williams said the global shifts in demographics and productivity have two important implications for the economy and monetary policy. Firstly, “slower population and productivity growth translate directly into slower trend economic growth”. Secondly, “these trends have contributed to dramatic declines in the longer-term normal or ‘neutral’ real rate of interest, or r-star.”

                                      And, the global decline in r-star will continue to pose “significant challenges” for monetary policy. There will be “limited policy space” for rate cuts in future downturns. Hence, “recoveries will be slow and inflation below target”. Also, the limitation in the ability of central banks to offset downturns results in an “adverse feedback loop”. That is “expectations of low future inflation drag down current inflation and further reduce available policy space”.

                                      Separately, Williams told Bloomberg TV that “as tariffs get larger, assuming that happens, the effects will be bigger, boosting inflation in the next year and probably having negative effects on growth.” “We could probably get a couple tenths or two tenths on the inflation rate over the next year based on what has already been announced. If there (is) further escalation in terms of tariffs, those effects would get even larger”, he added.

                                      China agreed to continue trade negotiation with US, but warned of underestimating its determination

                                        China indicated that it has agreed to continue negotiation with the US even though both sides have raised tariffs on either other imports. Chinese Foreign Ministry spokesman Geng Shuang said in a regular press briefing “my understanding is that China and the United States have agreed to continue pursuing relevant discussions.” But no detail was given on the way forward. Geng just said “as for how they are pursued, I think that hinges upon further consultations between the two sides.”

                                        Additionally, Geng warned “we hope that the U.S. side does not misjudge the situation and not underestimate China’s determination and will to safeguard its interests.” China also typically denied any accusation of their backtracking. Geng said “you absolutely can’t put the hat on China of reversing positions and going back on one’s promises.”

                                        German ZEW dropped to -2.1, restrained economic growth for the next six months

                                          German ZEW economic sentiment dropped to -2.1 in May, down from 3.1 and missed expectation of 5.0. It’s also well below long term average of 22.1. Current situation index, though, rose to 8.2, up from 5.5 and beat expectation of 6.0. Eurozone ZEW economic sentiment dropped to -1.6, down from 4.5 and missed expectation of 5.0. Current situation gauge rose 6.2 pts to 7.0.

                                          ZEW noted that “The development of production and exports in Germany as well as Eurostat’s most recent flash estimate of GDP growth in the euro area in the first quarter of 2019 give rise to the hope that the German economy, too, has grown more strongly than expected in the first quarter.

                                          ZEW President Achim Wambach said: “The decline in the ZEW Indicator of Economic Sentiment shows that the financial market experts continue to expect restrained economic growth in Germany for the next six months. The most recent escalation in the trade dispute between the USA and China again increases the uncertainty regarding German exports – a key factor for the growth of the gross domestic product”.

                                          Full release here.