BoJ Harada: Raising interest rates would just throw us back

    Bank of Japan board member Yutaka Harada, a known dove, said in a speech that, the “current low interest rates are partly attributable to the deflationary monetary policies pursued in the past.” “The only way out is to maintain the current accommodative monetary policy in order to achieve sustained expansion of economic activity until we see increases in prices and interest rates.”

    He also said, “banks’ low profitability is caused by the structural problem that they are accumulating more deposits than they can lend and the banking sector as a whole therefore will not be able to maintain its current size”. And, “raising interest rates would not solve the problem.”

    Instead, “raising interest rates would lead to the following: an appreciation of the yen; falling stock prices; declines in exports, investment, consumption and employment; and the reemergence of the employment ice age.” That would “just throw us back”.

    His full speech here.

    Fitch downgrades Italy rating to BBB-, significant impact of coronavirus on economy and fiscal position

      Fitch downgraded Italy’s credit rating to BBB- yesterday, down from BBB, with a stable outlook. The rating is now just a single notch above “junk level”. The agency said “the downgrade reflects the significant impact of the global Covid-19 pandemic on Italy’s economy and the sovereign’s fiscal position…. According to our baseline debt dynamics scenario, the [debt] to GDP ratio will only stabilise at this very high level over the medium term, underlining debt sustainability risks.”

      Fitch also warned “downward pressure on the rating could resume if the government does not implement a credible economic growth and fiscal strategy that enhances confidence that general government debt/GDP will be placed on a downward path over time.”

      Italian Finance Minister Roberto Gualtieri responded and said “the fundamentals of Italy’s economy and public finances are solid”.He added that Fitch’s move didn’t take into account the measures by EU. “In particular, the strategic orientation of the European Central Bank does not seem to be adequately valued.”

      Mid-US update: Dollar rises on yield and stocks, USD/JPY to take on 111.75/82 resistance zone

        Dollar is rather strong today as lifted by surging US yields as well as rally is equities. Though, it’s slightly outperformed by Swiss Franc and Canadian Dollar. For the Swiss Franc, it’s resilience could be seen as a sign that investors still have many things to worry about, in particular in the emerging markets. Canadian Dollar might be lifted by oil price as WTI is back above 69.

        Yen is apparently the weakest one as pressured by US yields and rally in US indices. Australian and New Zealand Dollar follow. Meanwhile, Sterling’s lift from Brexit optimism faded rather quickly. Rhetorics from all sides are pointing to a Brexit deal in 6-8 weeks. But the impact on the markets are just that.

        Apple and Microsoft are the main drivers of the US stock markets. DOW is up 0.54% at the time of writing. S&P 500 up 0.49% and NASDAQ up 0.69% respectively. Five year yield is up 0.037 at 2.865, 10 year yield is up 0.035 at 2.972. European indices staged a strong rebound before close. FTSE ended just down -0.08% and DAX down -0.13%. CAC has indeed closed up 0.27%.

        USD/JPY is a pair to watch for the rest of the session. 111.75/82 resistance zone is now within touching distance. Decisive break will resume the rebound from 109.76 and target 113.17. More importantly, this reaffirm our view that corrective from 113.17 has completed at 109.76 and whole rise from 104.62 is still in progress.

        Eurozone industrial production dropped -2.3% mom in Jul, EU down -1.6% mom

          Eurozone industrial production dropped -2.3% mom in July, much worse than expectation of -0.8% mom. Production of capital goods fell by -4.2%, durable consumer goods by -1.6% and intermediate goods by -0.8%, while production of energy rose by 0.4% and non-durable consumer goods by 1.2%.

          EU industrial production declined -1.6% mom. Among Member States for which data are available, the largest monthly decreases were registered in Ireland (-18.9%), Estonia (-7.4%) and Austria (-3.2%). The highest increases were observed in Lithuania (+6.5%), Sweden (+5.8%) and Malta (+4.2%).

          Full release here.

          US PPI rose 1% mom, 9.7% yoy in Jan

            US PPI for final demand rose 1.0% mom in January, above expectation of 0.6% mom. PPI for final demand services rose 0.7% mom. PPI for final demand goods rose 1.3% mom. For the 12-month period, PPI was unchanged at 9.7% yoy, above expectation of 9.2% yoy.

            Excluding foods, energy and trade services, PPI rose 0.9% mom, largest since January 2021. For the 12-monht period, PPI less foods, energy, and trade services rose 6.9% yoy.

            Full release here.

            Eurozone economic sentiment rose to 93.4 in Feb, EU rose to 93.4

              Eurozone Economic Sentiment Indicator rose from 91.5 to 93.1 in February. Industrial confidence rose from -6.1 to -3.3. Services confidence dropped from -17.7 to -17.1. Consumer confidence rose from -15.5 to -14.8. Retail trade confidence dropped from -18.5 to -19.1. Employment Expectation Index rose from 89.1 to 90.0.

              EU Economic Sentiment Indicator rose 1.9 pts to 93.4. Amongst the largest EU economies, the ESI rose markedly in Poland (+4.7), Italy (+4.4), Germany (+3.0)and, to a lesser extent, in France (+0.9). By contrast, sentiment worsened strongly in Spain (-3.2) and, more mildly so, in the Netherlands (-1.3).

              Full release here.

              UK regular pay growth matches expectations at 7.8%

                UK’s annual growth in regular pay, excluding bonuses, stood in line with market expectations, clocking in at 7.8% in the three months to August. However, when accounting for bonuses, the total pay’s annual growth was slightly tepid at 8.1%, missing the market forecast of 8.3%.

                When adjusted for inflation using CPI including owner occupiers’ housing costs (CPIH) – the real terms annual growth showcased a rise of 1.3% for total pay from June to August. Similarly, the regular pay’s real terms annual growth registered a 1.1% increase.

                A sector-wise dissection revealed that finance and business services led the pack with the most robust annual regular growth rate at 9.6%. Manufacturing sector followed closely with an impressive 8.0% growth rate. This surge in the manufacturing sector’s pay growth is noteworthy, marking one of its highest annual regular growth rates since the inception of comparable records in 2001.

                Full UK average weekly earnings release here.

                Into US session: CHF strongest, AUD weakest, CAD awaits BoC

                  Entering into US session, commodity currencies are the weakest ones for today. Australian Dollar leads the decline as much weaker than expected CPI raises the chance of an RBA rate cut in second half. New Zealand Dollar follows as second as RBNZ could cut even earlier in May. Canadian Dollar is the third weakest against of BoC rate decision. BoC is widely expected to keep interest rate unchanged at 1.75% today. It’s not totally sure if BoC would drop tightening bias today. If not, there is prospect of a rebound in the loonie.

                  On the other hand, Swiss Franc is the strongest one, reversing some of recent losses. Technical resistance in EUR/CHF is a factor helping the Franc. Also, German 10-year yield drops notably today, threatening to turn negative again. Sterling is the second strongest, followed by Yen. Dollar is mixed for now. While US stocks jump sharply yesterday with S&P 500 and NASDAQ making new record closes, upside momentum isn’t too convincing today. Euro is also mixed even though Ifo business climate reversed some of March’s gains and declined to 99.2 in April.

                  In Europe, currently:

                  • FTSE is down -0.50%.
                  • DAX is up 0.64%.
                  • CAC is down -0.28%.
                  • German 10-year yield is down -0.0374 at 0.007.

                  Earlier in Asia:

                  • Nikkei dropped -0.27%.
                  • Hong Kong HSI dropped -0.53%.
                  • China Shanghai SSE rose 0.09%.
                  • Singapore Strait Times rose 0.27%.
                  • Japan 10-year JGB yield dropped -0.0052 to -0.035.

                  BoJ minutes: Basic stance to continue with current monetary easing

                    BoJ has reaffirmed its commitment to continuing with its current monetary easing policy, including yield curve control, to achieve the price stability target, according to the minutes of its meeting in January 17-18.

                    One member noted that there is “still a long way to go to achieve the price stability target”, and thus the Bank should continue with the current monetary easing to firmly support the economy.

                    To encourage firms’ efforts with regard to business transformation until sustained wage increases can be expected, the Bank needs to “curb interest rate rises across the entire yield curve” while paying attention to the functioning of bond markets, according to another member.

                    Another member added that it was “inappropriate to rush to an exit” from the current monetary policy, as overseas economies were currently heading toward slowdowns.

                    However, one member recognized that “at some point in the future”, it will be necessary to examine and assess the balance between the positive effects and side effects of the current monetary easing policy.

                    The Bank’s “basic stance on its future conduct of monetary policy” is to “continue with the current monetary easing — including the conduct of yield curve control — and thereby achieve the price stability target in a sustainable and stable manner accompanied by wage increases,” the minutes read.

                    Full minutes here.

                    US goods trade deficit widened to USD 87.6B in Aug

                      US exports of goods rose USD 1.1B to USD 149.0B in August. Imports of goods rose USD 1.9B to AUD 236.6B. Goods trade balance deficit widened to USD -87.6B, versus expectation of USD -87.0B. Wholesale inventories rose 1.2% mom to USD 731.0B. Retail inventories rose 0.1% mom to USD 603.3B.

                      Full release here.

                      Fed will hold interest rates this year according to consensus of a Reuters poll

                        According to a Reuters poll in June 7-12 period over 100 economists, consensus is that Fed will hold interest rates at current 2.25-2.50% this year. However, median from a smaller sample showed 55% of one Fed cut this year, 40% for two. The median chance of a recession in the next 12 months increased slightly by 5% to 30%. But the range from 10% to 80% is huge. For the next two years, median chance stood at 40%, with range from 10% to 90%.

                        Opinions are divided as some point out that concerns are mainly on the risks to economic outlook, rather than the outlook. And the risks and uncertainty could turn out to be a lot weaker. Fed’s decision remain data dependent and some strong numbers could push out a possible July rate cut. Meanwhile Fed could resume rate hikes next year should the risks not materialize.

                        However, the probability of a recession has risen due to trade tensions. The next round of tariffs against China is the “big, big concern”. Some expected recession in second half of 2020 and an insurance rate cut by Fed is seen as not enough in this case. Fed could be forced to start a full blown cutting cycle next year.

                        HK HSI surges with global stocks, targeting 32255 next

                          Hong Kong HSI follows global stocks higher as it’s back from lunar new year holiday. It’s up 1.8% or 543 pts at the time of writing. For the near term outlook will stay bullish as long as the lower side of the gap at 29828.61 holds. Current up trend from 21139.26 should target 161.8% projection of 21139.26 to 26782.61 from 23124.25 at 32255.19 next.

                          As for the medium term, outlook will stay bullish as long as 28259.73 support holds. Corrective pattern from 33484.07 should have completed with three waves down to 21139.26. Considering the strong up side momentum as seen in weekly MACD, current rise is likely be resuming the long term up trend. We’re tentatively putting 100% projection of 18278.80 to 33484.07 from 21139.26 at 36344.53 as next medium term target.

                          Australia retail sales rose 3.9% mom in Oct, still short of pre-delta level

                            Australia retail sales rose 4.9% mom in October, above expectation of 2.5% mom. That’s the strongest rise since Victoria’s first lockdown bounce back in November 2020, with retail turnover rising to its highest level since June 2021.

                            “Retail performance continues to be tied to state lockdowns as this month’s recovery was driven by the end of lockdowns in New South Wales, Victoria and the Australian Capital Territory,” Ben James, Director of Quarterly Economy Wide Statistics said.

                            “With lockdown ending on October 11, New South Wales sales rose 13.3 per cent returning to the levels seen in the months immediately prior to the Delta outbreak, while Victoria and the Australian Capital Territory remain below pre-Delta levels.”

                            “Although sales have bounced back strongly following the end of lockdowns, it is important to note that overall retail turnover has not yet reached the level of May 2021, the month prior to the Delta outbreak.”

                            Full release here.

                            New Zealand BuinessNZ PMI jumped to 52.6, new orders and production put manufacturing back on track

                              New Zealand BusinessNZ Performance of Manufacturing Index improved drastically to 52.6 in October, up from 48.8. It’s now back in expansion after three months of contraction from July to September. Production rose notably from 46.6 to 52.6. New Orders also jumped from 50.9 to 56.2. But Employment stayed sluggish, up from 50.1 to 50.2.

                              BusinessNZ’s executive director for manufacturing Catherine Beard said: “After a five month period of both lacklustre and negative growth, the pick-up in both new orders and production put the sector back on track.  If the remaining two months for 2019 are to keep up the momentum, it is important these key sub-indexes remain positive to finish the year on a more upbeat note.

                              However, BNZ Senior Economist, Doug Steel said that “the October PMI is hardly what you would call strong. But it is certainly much better than the previous three months where the index languished below 50 which indicated a sector going backwards”.

                               

                              Full release here.

                              Australia CPI slowed to 5.6% yoy in May, lowest in more than a year

                                Australia monthly CPI slowed notably from 6.8% yoy to 5.6% yoy in May, below expectation of 6.1% yoy. That’s also the lowest reading in more than a year since April 2022. Excluding volatile items and travel, CPI also ticked down from 6.5% yoy to 6.4% yoy.

                                The most significant contributors to the annual increase in the monthly CPI indicator in May were Housing (+8.4 per cent), Food and non-alcoholic beverages (+7.9 per cent), and Furniture, household equipment and services (+6.0 per cent). Partly offsetting the rise was a fall in Automotive fuel (-8.0 per cent).

                                 

                                Full Australia CPI release here.

                                ECB Lane: Markets expect rates to remain at elevated levels for an extended period

                                  ECB Chief Economist Philip Lane noted in a speech that “since the cut-off date for the March 2023 projections, the incoming data have been mixed.”

                                  Lane pointed out the ongoing divergence in sectoral performance, as services business activity experiences accelerated expansion due to strong reopening effects and increased incomes. In contrast, manufacturing output remained stagnant in the first quarter. He also indicated that the consistent improvement in business and consumer sentiment, despite remaining at low levels, appears to have reached a plateau.

                                  Lane mentioned that market pricing and the ECB’s Survey of Monetary Analysts (SMA) foresee that the “policy rate will rise further in the near term and will remain at elevated levels for an extended period.”

                                  He explained that once inflation stabilizes at the 2% target in the medium term, it is projected that the policy rate will settle around 2% instead of returning to ultra-low levels. This expectation is primarily driven by the re-anchoring of long-term inflation expectations at the ECB’s 2% target, indicating that market participants and monetary analysts anticipate the longer-term equilibrium real rate to hover around zero per cent.

                                  Full speech of ECB Lane here.

                                  BoJ opinions: Important to persistently continue with extremely accommodative monetary policy

                                    In the Summary of Opinions of BoJ’s October 27-28 meeting, it’s noted that because of low inflation, it’s important to persistently continue with extremely accommodative monetary policy even when pent-up demand increases.” Also, BoJ should “persistently continue with the current monetary easing” so that “a rise in corporate profits leads to wage increases and the virtuous cycle from income to spending intensifies.”

                                    To “alleviate the effects of deterioration in the terms of trade”, it’s necessary to improve economic activity and raise inflation expectations so that “firms can smoothly pass on the rise in raw material prices to domestic selling prices.” It’s important to “improve the output gap” so that “the pass-through of price rises will be promoted..

                                    Yen’s depreciation reflected “differences in inflation rates and monetary policy stances among economies.” It’s important to consider the impact of rise in international commodity prices and Yen’s depreciation. But, it is necessary to keep in mind that their effects on each economic entity are uneven depending on industry and size.

                                    Full Summary of Opinions here.

                                    US oil inventories dropped -8m barrels, WTI steady after this week’s rebound

                                      US commercial crude oil inventories dropped -8m barrels in the week ending October 30, versus expectation of 0.3m barrels rise. At 484.4m barrels, oil inventories are about 7% above the five year average of this time of year. Gasoline inventories rose 1.5m barrels. Distillate dropped -1.6m barrels. Propane/propylene dropped -2.6m barrels. Commercial petroleum inventories dropped -14.7m barrels.

                                      WTI rebounded strongly after drawing support from 34.10/36 support zone, despite breaching to 33.50. For now near term outlook will stay neutral first. WTI needs to sustain above 55 day EMA (now at 39.28) to provide the first sign of uptrend resumption. Nevertheless, even in case of another fall, we’d continue to expect strong support from 33.50 to contain downside.

                                      UK Gove: There’s a big philosophical difference with EU on negotiations

                                        UK and EU continued to complain each other after last week’s Brexit negotiation stalemate”. UK Cabinet Officer Minister Michael Gove said there is a “big philosophical difference” between the two sides. And EU wants UK to “follow their rules even after we have left the club”. Though he remained “confident” that a “there is a deal to be done” It “just requires a degree of flexibility on the EU side which I’m sure that they will appreciate they need to show.”

                                        On the other hand, Irish Foreign Minister Simon Coveney criticized on Sunday that UK was “essentially rewriting” the commitments in the political declaration of the Brexit deal. “Until the UK changes its approach in the context of giving the EU assurance that they are not going to effectively deregulate their economy while expecting free access in the EU single market, I think we’re going to continue to be in real difficulty in these talks,” he added.

                                        Mid-US update: Sterling stays up after fake Brexit news volatility

                                          Sterling had a wild wide today. It’s firstly lifted by a Bloomberg report that Germany and UK dropped key Brexit demand, paving the way for a deal. But then, the Pound was knocked down after a German government spokesman said that the stance was not changed. After all the volatility, the Pound is trading as the second strongest one for the day so far, next to Kiwi and better than Euro. Euro is clearly supported by sharply narrowed Italian-German yield spread. Italian politician’s promise for not blowing up the public account was well taken by investors.

                                          On the other hand, Dollar is trading as the weakest one for today after yesterday’s rally attempt failed. Canadian Dollar followed as the second weakest. BoC’s standing pat was widely expected. The statement showed much confidence in policymakers and BoC is still on track for an October hike. But the Loonie is troubled by the deadlock in trade negotiation with the US. Yen got little support from risk aversion and is trading as third weakest. Rebound in German yield is a factor contributing to Yen’s sluggishness.

                                          In other markets, US stocks are rather steady. DOW is up 0.04% at the time of writing, S&P 500 down -0.37% and NASDAQ down -1.06%. That’s nothing comparing to -1.0% fall in FTSE, -1.39% in DAX and -1.54% in CAC.