Sun, Nov 27, 2022 @ 16:07 GMT

German Merkel: We’ll have smart, determined and jointly agreed response to US steel tariffs

    German Chancellor Angela Merkel said today in Lisbon that European Union will give a “smart, determined and jointly agreed” response to the US is Trump decides to impose steel and aluminum tariffs on them.

    She noted “we don’t know the decision yet but if tariffs were to be imposed, then we have a clear stance within the European Union.” And she added “we are convinced that these tariffs are not in line with WTO rules.”

    The temporary exemption of US steel and aluminum tariffs will expire tomorrow. It’s widely reported that US will decide to start imposing tariffs on Mexico, Canada and the EU. And the decision would be announced today.

    Euro maintains gain as CPI rose to 1.9%, beat expectation

      Flash Eurozone CPI accelerated to 1.9% yoy in May, up from 1.2% yoy and came in well above expectation of 1.6%. Core CPI rose to 1.1% yoy, up fro 0.7% yoy and beat expectation of 1.0% yoy. Unemployment was unchanged at 8.5% in April, above expectation of 8.4%.

      Reactions in the Euro is relatively muted as the higher than expected inflation was actually expected after upside surprise in both German and French CPI reading. Nonetheless, the solid rebound in inflation in Q2 should have eased much of ECB policy makers’ worries. The data add to the case for completing the asset purchase program this year. The question is whether it would end after September. President Mario Draghi could give some hints at the June 14 press conference.

      Overall, Euro continues to ride on easing worries over Italy political turmoil and recovers today. For now, Euro is the strongest one for today, third strongest for the week just after Canadian Dollar and New Zealand Dollar.

      Also released in European session, Swiss GDP rose more than expected by 0.6% qoq in Q1. Swiss retail sales dropped -2.2% yoy in April, below expectation of -1.4% yoy. UK mortgage approvals dropped to 62k in April. UK M4 money supply rose 0.2% mom in April.

      US Ross: If there is escalation in trade tension, it’s because EU retaliate

        U.S. Commerce Secretary Wilbur Ross talked about trade war in an interview published by daily Le Figaro.

        He said “we don’t want a trade war”. But it’s “up to the European Union to decide if it wants to take retaliatory measures. The next question would be: how will the Trump react? You saw his reaction when China decided to retaliate.”

        “If there is an escalation it will be because the EU would have decided to retaliate.”

        Typical blame the others.

        Temporary exemptions to US steel tariffs to end tomorrow

          The temporary exemptions from the US steel and aluminum tariffs are set to expire tomorrow. And it’s so far uncertain what will happen next. It’s widely reported Trump will start imposing the tariffs on EU. The decisions on Mexico and Canada are less certain as NAFTA negotiations continued to drag on. But there are reports that Trump will just go ahead with the tariffs too. Announcement could be made as soon as today.

          It’s clear that EU, Canada and Mexico are prepared for retaliation. And the US announcement today could finally, formally, starts global trade wars between US and the world. The section 232 national security probe on automobile imports is also waiting on the line. The commerce department has announced to hold two days of public hearing in July for the probe.

          The US Chamber of Commerce already criticized the probe and warned that tariffs “would deal a staggering blow to the very industry it purports to protect and would threaten to ignite a global trade war.”

          ANZ business confidence: Fairly uninspiring reading

            New Zealand ANZ business confidence dropped to -27.2 in May, down from -23.4. That is, a net 27% of businesses are pessimistic about the year ahead. Views on their “own activity” also dipped from 18 to 14.

            ANZ noted in the release that “the survey made for fairly uninspiring reading this month, with all aggregate activity indicators flat to falling. The economy still has good tailwinds in the form of fiscal stimulus and the record-high terms of trade, but may be tiring nonetheless.”

             

            Meanwhile, ANZ’s composite growth indicator, a combination of business and consumer confidence, is consistent with around 2% y/y growth.

            Full release here.

            China official PMI manufacturing rose to 51.9 as part of short-term fluctuation

              The China official PMI manufacturing rose to 51.9 in May, up from 51.4, and beat expectation of 51.4. PMI non-manufacturing rose to 54.9, up from 54.8 and beat expectation of 54.8.

              In the release, contributing analyst Zhang Liqun noted that the slight increase in PMI was just “short-term fluctuation” and carries “no trend significance”. The rise in export orders showed there is no chance in the growing trend. Rise in purchase prices and ex-factory prices suggested that the decline in PPI could be coming to an end. In short, the data suggested that the economy continued to grow steadily in May.

              Italy worries temporarily eased. DOW, S&P 500, NASDAQ gained but show mixed picture

                US stocks rebounded broadly overnight as Italy worries eased temporarily. The turning point was anti-establishment Five Star Movement leader Luigi Di Maio’s willingness to find someone other than eurosceptic Paolo Savona as economy minister. Savona was vetoed by President Sergio Mattarella who emphasized that “the adhesion to the euro is a choice of fundamental importance”. For now, Savona is seen as a sticky point. Senior Five Star lawmaker Laura Castelli was quoted saying “it’s astounding that Paolo Savona, a person of great culture and political awareness, has not yet decided to take a step back.”

                The political turmoil is far from being resolved yet. But at lease for now, the risk of another election, which could be framed by the far-right League as referendum on Euro, appears to be lower. German 10 year bund yield closed at 0.376 yesterday. Italian 10 year bond year closed at 2.903. That is, the spread was still wider than 250.

                DOW closed up 306.33pts or 1.26% at 24667.78. The structure of of the rebound from 23344.52 still look like a corrective three wave move that’s completed at 25086.49.

                S&P 500 closed up 34.15pts or 1.27% at 2724.01. The chart looks better as the dip from 2742.24 was relatively shallower.

                NASDAQ closed up 65.86, or 0.89% at 7462.45. The chart is best looking among the three as it didn’t bother with Italy much. Rise from 6805.96 has resumed too.

                So overall, the picture in US stocks were mixed. But that is expected as the markets are generally in consolidation phase. It’s natural for the major indices to be out-of-sync sometimes during a consolidation.

                 

                5 Star to find someone other than Savona as economy minister

                  The anti-establishment 5-Star Movement in Italy in is working hard on forming a government to solve the current political turmoil. It’s leader Luigi Di Maio met with President Sergio Mattarella today. After that, Di Maio said “let’s find someone of the same caliber as Savona, who would still remain in the government in another ministry.” And “If the League agrees … we can still form a government.”

                  Di Maio is now trying to find that “point of compromise” between Mattaralla and eurosceptic League. No name is thrown out yet and it could take some time to negotiate with League. Note that League leade rMatteo Salvini is pushing for another election as the effort to form a coalition government collapsed.

                  But after all, the development s calmed the markets mildly as Euro also recovered.

                  Canadian Dollar surges as hawkish BoC shows much confidence in statement

                    BoC stands pat and maintains interest rate unchanged at 1.25% as widely expected. The most important part of the statement is that “developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target.” This is more hawkish than generally expected and shows that BoC is rather confident to continue with tightening, even though the timing of the next hike is still uncertain.

                    USD/CAD dives sharply after the release and should be heading back to 1.2728 support.

                    Here is the full statement:

                    Bank of Canada maintains overnight rate target at 1¼ per cent

                    The Bank of Canada today maintained its target for the overnight rate at 1¼ per cent. The Bank Rate is correspondingly 1½ per cent and the deposit rate is 1 per cent.

                    Global economic activity remains broadly on track with the Bank’s April Monetary Policy Report (MPR) forecast. Recent data point to some upside to the outlook for the US economy. At the same time, ongoing uncertainty about trade policies is dampening global business investment and stresses are developing in some emerging market economies. Global oil prices have been higher than assumed in April, in part reflecting geopolitical developments.

                    Inflation in Canada has been close to the 2 per cent target and will likely be a bit higher in the near term than forecast in April, largely because of recent increases in gasoline prices. Core measures of inflation remain near 2 per cent, consistent with an economy operating close to potential. As usual, the Bank will look through the transitory impact of fluctuations in gasoline prices.

                    In Canada, economic data since the April MPR have, on balance, supported the Bank’s outlook for growth around 2 per cent in the first half of 2018. Activity in the first quarter appears to have been a little stronger than projected. Exports of goods were more robust than forecast, and data on imports of machinery and equipment suggest continued recovery in investment. Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates. Going forward, solid labour income growth supports the expectation that housing activity will pick up and consumption will continue to contribute importantly to growth in 2018.

                    Overall, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near target. Governing Council will take a gradual approach to policy adjustments, guided by incoming data. In particular, the Bank will continue to assess the economy’s sensitivity to interest rate movements and the evolution of economic capacity.

                    Information note

                    The next scheduled date for announcing the overnight rate target is July 11, 2018. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.

                    Dollar gets no support as ADP employment missed expectation

                      Dollar remains generally weak in early US session and receives no special support from a batch of mixed data.

                      ADP report showed private sector jobs grew 178k in May, below expectation of 190k. Prior month’s figure was also revised down from 204k to 163k. Q1 GDP growth was revised down from 2.3% to 2.2% qoq. GDP price index was revised down from 2.0% to 1.9%. Wholesale inventories rose 0.0% versus expectation of 0.5% in April. Trade deficit narrowed slightly to USD -68.2B, from USD -68.3B.

                      From Canada, IPPI rose 0.5% mom in April while RMPI rose 0.7% mom. Current account deficit widened to CAD -19.5B in Q1. Focus will turn to BoC rate decision.

                      German CPI accelerated to 2.2%, unemployment rate hit record low

                        Data from Eurozone are generally positive today. German CPI accelerated to 0.5% mom, 2.2% yoy in May, up from 0.0% mom, 1.6% yoy, and beat expectation of 0.3% mom, 1.9% yoy. Retail sales rose much more than expected by 2.3% mom in April versus consensus of 0.5% mom. Import price index rose 0.6%, below expectation of 0.7% mom.

                        German unemployment dropped -11k in May. Unemployment rate dropped to 5.2%, hitting the lowest level on record since reunification in 1990. Labour Office head Detlef Scheele said in a statement that “unemployment and underemployment have decreased again, employment within the scope of the social security system keeps rising and labour demand is still high.” And, “the upward trend on the labour market is continuing, albeit at a slower pace than in the winter months.”

                        Eurozone business climate rose to 1.45 in May, up from 1.39 and beat expectation of 1.30. Economic confidence dropped to 112.5, down from 112.7 but beat expectation of 112.0. Industrial confidence dropped to 16.8, down from 7.3 but met expectation. Services confidence dropped to 14.3, down from 14.7 but met expectation. Consumer confidence was finalized at 0.2.

                        French GDP was the main disappointment as it’s revised down to 0.2% qoq in Q1, down from 0.3% qoq. But that’s considered the “past” already.

                        For Q2, the set German data are rather robust and should ease much concerns of ECB policy makers, in particular the CPI figure.

                        Into US session: Oversold Euro recovers broadly, markets won’t forget there are US trade tensions

                          Euro is making a strong come back today as market digest recent sharp losses. EUR/USD breached 1.1639 minor resistance while EUR/JPY break 126.43. Both developments suggest temporary bottoming. Though, they’re far from reversing recent down trend. And, at the time of writing, German (0.369) and Italy (2.864) yield spread are still close to 250, which suggests much nervousness in the markets.

                          Though, the news that 5-Star Movement is trying to find a point of compromise for economy minister is supporting sentiments. At least, they’re working on forming a government again. And while being highly critical, 5-Star has never committed themselves to leaving Euro. The news that anti-euro League is not interested, but is pushing for election again is also sentiment supportive. Additionally, Eurozone data released today are not bad.

                          Yen and Dollar, on the other hand, are trading broadly lower. Yen weaken on rebound in German, UK and US yields. Meanwhile, Dollar is weak as markets won’t forget that the US is in trade tension with many other countries/regions, even its own allies. NAFTA talk is going nowhere and there is no positive news regarding trade talk with EU. The steel tariff temporary exemption is going to expire on Friday and retaliations from Canada, Mexico and the EU are waiting on the line. Trump also made an about turn and issued a strong statement regarding China yesterday, indicating very little intention to carry on with negotiation.

                          For the week, Euro remains the weakest one, followed by Sterling. New Zealand Dollar and Japanese Yen are the strongest ones.

                          5-Star is finding a point of compromise for economy minister

                            Reuters reported that a source close to the anti-establishment 5-Star Movement that it’s trying to find “a point of compromise on another name” as economy minister. The rejection by President Sergio Mattarella on anti-euro Paolo Savona as economy minister triggered this week’s political turmoil. If 5-Star can find someone acceptable by pro-Euro Mattarella, with far-right League or not, there is a possibly of finally forming a government. And it should be recalled that Five Star leader Luigi Di Maio said they never sought to leave the Euro via facebook comments.

                            Prime Minister-designate Carlo Cottarelli is currently the technocrat that’s supposed to lead the government until a new election. He also said that “new possibilities have emerged for the birth of a political government.” And, “these circumstances, also considering the market tensions, have caused me to wait for further developments.”

                            On the other hand, League leader Matteo Salvini poured cold water on the notion and urged another election. He said, “the earlier we vote the better because it’s the best way to get out of this quagmire and confusion.”

                            The development is another factor that’s calming the Euro today.

                            Euro recovers on oversold condition, German-Italian spread narrows

                              Euro is attempting a recovery today but that’s mainly technical on oversold condition.

                              Italian 10 year yield dips to 2.946 earlier today but is back above 3.000 handle. It’s possibly trying to settle at around 3% before another move.

                              German 10 year bund yields hit as high as 0.338 and is now back at 0.322. It breached 0.2 handle earlier this week during bund buying climax.

                              Technically, 1.1639 in EUR/USD and 126.43 in EUR/JPY should be watched. Temporary bottoms are considered to be formed in both pairs until these minor resistance levels are breached. Otherwise, further decline is more likely than not.

                               

                              China warns to take resolute and forceful measures if Trump insists on being arbitrary and reckless

                                Chinese Foreign Ministry spokeswoman Hua Chunying responded to he strong US statement released yesterday. She said “We urge the United States to keep its promise, and meet China halfway in the spirit of the joint statement.”

                                In addition, Hua warned to take “resolute and forceful” measures to protect its interests if Trump insists on being “arbitrary and reckless” She added that “when it comes to international relations, every time a country does an about face and contradicts itself, it’s another blow to, and a squandering of, its reputation,”

                                OECD projects G20 2018 growth to be 4.0%

                                  In the latest economic outlook report released today, OECD projects 2018-19 global growth to be at around 3.8% while G20 growth would be 4.0%. It noted in the release that “the global economy is experiencing stronger growth, driven by a rebound in trade, higher investment and buoyant job creation, and supported by very accommodative monetary policy and fiscal easing.”

                                  However, OECD also warned of “significant risks posed by trade tensions, financial market vulnerabilities and rising oil prices loom large”. And it urged that “more needs to be done to secure a strong and resilient medium-term improvement in living standards.”

                                  OECD Secretary-General Angel Gurria said that “the economic expansion is set to continue for the coming two years, and the short-term growth outlook is more favourable than it has been for many years.” However, “the current recovery is still being supported by very accommodative monetary policy, and increasingly by fiscal easing”. Hence, “strong, self-sustaining growth has not yet been attained.”

                                  Below is a summary of OECD projections.

                                  Full release here and OECD presentation here.

                                  DIHK slashed 2018 German growth forecast to 2.2%

                                    The Germany’s Chambers of Industry and Commerce (DIHK) lowered 2018 growth forecast for the country to 2.2%, sharply down from prior estimate of 2.7%.

                                    It noted in a report that “companies are looking to their future business with a little less optimism than before… scepticism is growing with regard to international business.”

                                    Swiss KOF dropped to 100, back at long term average

                                      Swiss KOF economic barometer dropped to 100 in May, down from 103.3 and missed expectation of 104.7.

                                      KOF noted that the Barometer is back at its “long-term average after over two years of above average values”. And that “indicates a normalization of economic development”.

                                      The decline was “mainly driven by the negative development of the indicators for manufacturing and the construction sector.”

                                      Full release here.

                                      IMF welcome China’s decisive policy shift to high quality growth

                                        IMF released a statement on the preliminary findings after Article IV mission to China. There IMF noted that China’s growth is expected to weaken only slightly to 6.6% in 2018. Growth would moderate gradually to around 5.5% by 2023.

                                        IMF staff welcome the government’s strategy to “more decisively shift the policy focus from high-speed to high-quality growth”.

                                        The goal would be “greatly helped by accelerating reforms in many areas, including de-emphasizing growth target, further reining in credit growth, boosting consumption, allowing market forces a more decisive role, deepening opening up and modernizing policy frameworks.”

                                        Full release here.

                                        Fed fund futures now pricing in only 40% chance of two hikes by September

                                          With the global financial market rout continuing, the markets are fast to pare back pricing of Fed hikes. We’ve pointed that out in out latest weekly report already. And the situation worsen quickly this week.

                                          Fed fund futures are now pricing in less than 80% chance of a June hike to 1.75-2.00%. And it was 100% just a week ago.

                                          For another hike to 2.00-2.25% in September, fed fund futures are pricing in only 40% chance. And it was over 80% a week ago.

                                          Now, it seems a total of four hikes this year is out of the question. And even a total of three is in doubt.