US durable goods orders dropped -17.2% to USD 170.0B in April, better than expectation of -18.1%. That’s still the second month of sharp decline, following -16.6% in March. Ex-transport orders dropped -7.4%. Ex-defense orders dropped -16.2%.
US initial jobless claims dropped again to 2.1m, continuing claims dropped to 21m
US initial jobless claims continued to drop, by -323k to 2123k in the week ending May 23. Four-week moving average of initial claims dropped -436k to 2608k. Continuing claims dropped -3860k to 21052k in the week ending May 16. Four-week moving average of continuing claims rose 765.25k to 22722k.
Eurozone economic sentiment rose slgihtly to 67.5, employment expectations jumped
Eurozone Economic Sentiment Indicator rose slightly to 67.5 in May, up from 64.9, but missed expectations of 70.5. Employment Expectations Indicator led the way, jumped to 70.2, up from 58.9. Industrial Confidence rose to -27.5, up from -32.5. Consumer Confidence rose to -18.8, up from -22.0. Retail Trade Confidence rose slightly to -29.7, up from -30.1. On the other hand, Services Confidence dropped to -43.6, down from -38.6. Construction Confidence dropped to -17.4, down from -16.1. Business Climate dropped to -2.43, down from -18.1.
Ifo: Germany business think they will most likely return to normal in nine months
Ifo updated their German economic forecasts and now expects GDP to shrink by -6.6% this year. A strong rebound of 10.2% GDP growth is expected in 2021. “This is based on our evaluation of the ifo survey conducted among companies in May. On average, participants consider it most likely that their own business situation will return to normal in nine months,” says Timo Wollmershaeuser, Head of Forecasts at ifo.
The forecast depends heavily on how quickly companies’ business situation returns to normal. In the best case, companies indicate that this might take an average of only five months. GDP could shrink only -3.9% this year and grow 7.4% next.
In the worst case, with an average normalization period of 16 months, economic output would shrink by -9.3% this year and grow by 9.5% next year. The recovery would then be drawn out well into 2022.
Also, the new forecast was prepared based on the assumption not that the coronavirus is defeated in the coming months, but that its spread can be contained and a second wave of infection avoided.
HSI, Yuan down as Pompeo said HK no longer warrants special treatment
Hong Kong stocks tumble notably in Asian session today while off-shore Chinese Yuan also breached to a new low. US-China tensions intensified further over the proposed national security law for Hong Kong. (More details regarding the laws here). US Secretary of State Mike Pompeo told Congress on Wednesday that Hong Kong no longer qualifies for its special status as China has undermined the city’s autonomy so fundamentally.
Pompeo said China’s plan on the national security legislation was “only the latest in a series of actions that fundamentally undermine Hong Kong’s autonomy and freedoms… No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground. He certified to the Congress that Hong Kong no longer warrants treatment under U.S. laws “in the same manner as U.S. laws were applied to Hong Kong before July 1997.” “It is now clear that China is modeling Hong Kong after itself,” he added.
Separately, US also requested an emergency UN meeting over issue. Washington’s UN mission staid in a statement, that China’s proposal will “fundamentally undermine Hong Kong’s high degree of autonomy and freedoms as guaranteed under the Sino-British Joint Declaration of 1984, which was registered with the UN as a legally binding treaty… This is a matter of urgent global concern that implicates international peace and security.” However, it said that China has “refused to allow this virtual meeting to proceed”. “This is another example of the Chinese Communist Party’s fear of transparency and international accountability for its actions,” the US statement said.
China’s ambassador to the UN Zhang Jun just tweeted “Legislation on national security for Hong Kong is purely China’s internal affairs. It has nothing to do with the mandate of the Security Council.”
Hong Kong HSI is currently down around -1.6% but it’s holding above this week’s low at 22519 so far. Technically, corrective rebound from 21139.26 should have completed at 24855.47 after rejection by 55 day EMA, and further decline is expected to retest this low. Nevertheless, break of 22519 support needs to happen first.
USD/CNH breached 7.1953 resistance to 7.1961, but there was no follow through buying there. We’d maintain that 7.1953 should provide technical resistance to limit upside, and bring another fall to extend the consolidation pattern. However, sustained trading above 7.1953 will indicate serious deterioration in US-China tension, which could prompt rather sharp selloff in Yuan to extend medium term up trend in USD/CNH.
New Zealand ANZ Business Confidence rose to -41.8, recovery going to be a long haul
New Zealand ANZ Business Confidence improved to -41.8 in May, up from May’s prelim reading of -45.6, and April’s -66.6. All industry stayed negative, worst in Agriculture at -82.1. Activity Outlook improved to -38.7, up from May’s prelim reading of -42.0, and April’s -55.1. Retail activity was worst at -45.3. Also, with the Activity Outlook stayed well below 2008.09 lows, and would “need to rise another 17 points just to reach its lows from the 2009 recession”.
ANZ also noted, “it’s a long way back to normality” while “the recession is just starting to make itself felt”. The economy needs to “reshape to face to the new reality”, in particular, the loss of international tourists “completely for now, but likely still at a hugely significant scale for years”. “Fiscal and monetary policy are doing what they can to cushion the blow and sow the seeds of recovery, but it’s going to be a long haul.”
RBA Lowe: Economy better than baseline, negative rates extraordinarily unlikely
RBA Governor Philip Lowe said that the economy could be “better than the baseline” scenario as forecast earlier this month. RBA projected that GDP could contract by -6% this year with unemployment rise to 9%. “With the national health outcomes better than earlier feared, it is possible that the economic downturn will not be as severe as earlier thought. Much depends on how quickly confidence can be restored,” he added.
Lowe also noted that the monetary stimulus package was working as expected. If we had to do more we could purchase more government bonds. But as things stand at the moment, we don’t see the need to doing more,” he said. He also reiterated negative interest rates were “extraordinarily unlikely”.
Fed: Economic activity declines in all districts, falling sharply in most
Fed’s Beige Book economic report noted that “economic activity declined in all districts – falling sharply in most – reflecting disruptions associated with the COVID-19 pandemic.” Although many contacts expressed hope that overall activity would pick-up as businesses reopened, “the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery.”
Employment continued to “decrease in all Districts”. There were “challenges in bringing employees back to work”. Overall wage pressures were “mixed” as some firms cut wages while others implemented temporary wage increases for essential staff or to compete with unemployment insurance.
Pricing pressure varied but were “steady to down modestly on balance”. Weak demand weighed on selling prices. Several Districts also reported low commodity prices. But “supply chain disruptions and strong demand led to higher prices for some grocery items”.
Fed Williams thinking very hard about yield curve control
New York Fed President John Williams said that “maybe we are near the bottom in terms of the economic downturn”. There could be a “pretty significant” rebound in the second half of the year. Nevertheless, he still cautioned that “even if we are starting to see perhaps a stabilization there in terms of the economy and maybe a little bit of a pickup, we’re still in a very difficult situation.”
Regarding monetary policy, Williams said Fed is “thinking very hard” targeting specific yields on Treasuries. “Yield-curve control, which has now been used in a few other countries, is I think a tool that can complement -– potentially complement –- forward guidance and our other policy actions.”
“So this is something that obviously we’re thinking very hard about. We’re analyzing not only what’s happened in other countries but also how that may work in the United States.”
Gold breaches 1700 as correction from 1765 extends
Gold’s decline from 1765.25 extends lower today and breached 1700 handle. The fall is getting better in shape as the correction to whole rise from 1451.16 to 1765.25 as we viewed. Further fall should be seen to 38.2% retracement of 1451.16 to 1765.25 at 1645.26 before bottoming. On the upside, break of 1735.44 resistance is needed to indicate completion of the corrective fall. Otherwise, deeper decline will remain in favor in case of recovery.
EU unveils EUR 750B Next Generation EU recovery plan
European formally unveiled an unprecedented stimulus package to day, to “to protect lives and livelihoods, repair the Single Market, as well as to build a lasting and prosperous recovery” after coronavirus pandemic. Total financial power is boosted to EUR 1.85 trillion, with “New Generation EU” instrument of EUR 750B, as well ass targeted reinforcements to the long term budget for 2021-2027.
There are three pillars in the Next Generation EU: Support to member states with investments and reforms; Kick-starting the EU economy by incentivising private investments; Addressing the lessons of the crisis. There will be a new Recovery and Resilience Facility of EUR 560B, with grant facility of up to EUR 310B and EUR 250B in loans. A new Solvency Support instrument will help unlock EUR 300B to support companies. A new Strategic Investment Facility will built into InvestEU to generate investments of up to EUR 150B.
European Commission President Ursula von der Leyen said: “The recovery plan turns the immense challenge we face into an opportunity, not only by supporting the recovery but also by investing in our future: the European Green Deal and digitalization will boost jobs and growth, the resilience of our societies and the health of our environment. This is Europe’s moment. Our willingness to act must live up to the challenges we are all facing. With Next Generation EU we are providing an ambitious answer.”
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ECB Lagarde: Eurozone contraction likely in between medium and severe scenarios
ECB President Christine Lagarde said the “mild” coronavirus economic scenario is now “out of date”. She added, “we’ll have a better sense in a few days as we publish our numbers in early June, but it’s likely we will be in between the medium and severe scenarios.” Eurozone economy is expected to contract between -8% to -12%.
The central bank is expected to expand the Pandemic Emergence Purchase Program next week. Lagarde said with respect to the PEPP, “this concerns the size but also the composition and the duration of the program.” She also talked down the risk of a new debt crisis as debt-servicing costs are “extremely low”. “All countries around the world had to respond, and as a result of that had to increase their debt,” she said. In the current coronavirus crisis, “use of debt is not only recommended, it’s the way to go.”
SNB willing to intervene in currency markets more strongly
SNB Chairman Thomas Jordan reiterated that negative rates and forex interventions are “particularly important at the moment”, since the Swiss Franc is in demand as “safe haven”. He emphasized the need to “ensure monetary conditions remain accommodative in Switzerland.” Also, SNB is “willing to intervene in the currency markets more strongly”.
Meanwhile, he also noted that “it is crucial that lockdown restrictions are reduced whenever possible to allow economic recovery.” But he didn’t expect a rapid recovery and it’s very difficult to forecast at the moment.
Euro surges as EU proposes larger than expected EUR 750B recovery fund
Euro surges after EU Commissioner for Economy Paolo Gentiloni indicated in a tweet today that they proposing a EUR 750B recovery fund, to add to the instruments already launched. It’s separately reported that the money would be split into EUR 500B grants and EUR 250B loans.
The EUR 500B grants is in line with the Franco-German proposal. The loan part is what surprised the markets today. Also, the larger package could help lower risk of slump in peripheral states, like Italy and Spain, which are heavily affected by the coronavirus pandemic. It could also increase the chance of a more balanced, synchronized recovery in the bloc. The kick-off date for the funding is set to be January 1, 2021.
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Yuan falling towards key support with eyes on China-Hong Kong-US relations
Chinese Yuan weakens further against the Dollar today and tensions heighten over the situations in Hong Kong. The new national security law on Hong Kong is expected to be passed on May 28, by passing the city’s own legislature, by the rubber-stamp Congress of China. It’s widely seen as a move that violates the “one country, two systems” principle that jeopardize the city’s global status.
Ahead of that, US President Donald Trump indicated some “very powerful” measures in response to China’s move regarding Hong Kong. He told reporters yesterday, “we’re doing something now. I think you’ll find it very interesting. But I won’t be talking about it today… It’s something you’re going to be hearing about over the next — before the end of the week.. Very powerfully, I think.”
The measures by the Trump could involve triggering the Hong Kong Human Rights and Democracy Act, passed last year, to sanction some Chinese and Hong Kong officials, as well as businesses. More important, the US could suspending Hong Kong’s special trade status.
At the same time, protests are going on in Hong Kong today against the new national anthem bill. The Hong Kong Bar Association warned that parts of the bill “deviate from the good traditions” of Hong Kong’s common law system”. It’s seen by some legal experts that the laws looked like they’re written in Beijing, for implementing Chinese styles rules.
USD/CNH’s breaks 7.1649 resistance today and hits as high as 7.1759 so far. While further rise cannot be ruled out, technically, we’d still expect strong resistance from 7.1953 high to limit upside. Break of 7.0963 support should indicate short term topping, and bring deeper fall to extend the consolidation pattern from 7.1953. However, sustained break of 7.1953 would firstly resume medium term up trend. More importantly, that would be a strong signal of further deterioration in US-China tensions.
ECB Schnabel ready to expand any tools if further stimulus is needed
Markets are expecting ECB to expand its Pandemic Emergency Purchase Program next week. ECB Executive Board member Isabel Schnabel said, “one number . . . of particular interest is the evolution of the medium-term inflation outlook. If we see that the situation has deteriorated, and if we judge that further stimulus is needed then the ECB will be ready to expand any of its tools in order to achieve its price stability objective.”
In the same interview by Financial Times, she added the board is “not adjusting our monetary policy in any way in response” German constitutional court’s ruling against its QE program. “We have to avoid a situation in which one national central bank cannot participate in our asset purchase programmes,” she added. “I’m sure there is going to be communication between the Bundesbank and the German parliament and the German government, and one will have to find a solution”.
“Germany is one of the countries that has benefited a lot from the euro and therefore it shouldn’t be the country that is most critical about it,” she criticized. “Many of the narratives that are very popular in Germany cannot be maintained because they simply do not match the facts.”
RBNZ Orr: Banking system has significant capital and liquidity buffers
RBNZ Governor Adrian Orr said that the “significant capital and liquidity buffers” built up in the banking system before the coronavirus pandemic “buffers can now be used to support their customers’ long-term economic future”. Stress tests suggest that banks “banks can continue to lend and prosper through a broad range of adverse scenarios.”
Deputy Governor Geoff Bascand also said the Bank and the Government have been working with in number of initiatives to support the flow of lending and functioning of the financial system. “Our actions have included making bank funding plentiful and cheap, facilitating the deferral of loan payments, and ensuring cash was readily accessible nationwide,” he added.
Poloz: BoC has tools to deliver further monetary stimulus if needed
Outgoing BoC Governor Stephen Poloz said that to bring inflation back to target, “it is necessary to stabilize the economy and then return economic output and employment to their potential”. He also told the Senate’s finance committee, “If further monetary stimulus is required to meet our inflation targets, the bank has tools available to deliver that stimulus”. But negative rates would only be needed in extreme conditions.
It’s Poloz’s last public appearance as Governor before retiring next week. Former Senior Deputy Governor and Dean of the Rotman School of Management Tiff Macklem will take up the job then.
ECB: Coronavirus impact increased Eurozone financial stability vulnerabilities
ECB warned today in a release that “even as infection rates fall in many countries, the impact on the economy and markets has unearthed and increased existing vulnerabilities for euro area financial stability.”
“The pandemic has caused one of the sharpest economic contractions in recent history, but wide-ranging policy measures have averted a financial meltdown”, ECB Vice-President Luis de Guindos said. “However, the repercussions of the pandemic on bank profitability prospects and medium-term public finances will need to be addressed so that our financial system can continue to support the economic recovery”, he added.
Separately, Chief Economist Philip Lane said “even a lot of recovery in recent months would still leave the euro area economy in an expected range.” “The euro area economy is probably growing a little bit” only. Also, the “whole point” of the flexibility of the Pandemic Emergency Purchase Programme is that “you can deviate from the capital key”.
US Q1 GDP contraction revised down to -5.0% annualized
According to second estimate, US GDP contracted -5.0% annualized in Q1, worse than first estimate of-4.8% annualized. A downward revision to private inventory investment was partly offset by upward revisions to personal consumption expenditures (PCE) and nonresidential fixed investment. PCE price index was unrevised at 1.3% yoy. PCE core price index was revised down to 1.6% yoy, down from 1.8% yoy.
Full release here.