US retail sales rose 0.3% to USD 529.6B in December, matched expectations. Total sales for the 12 months of 2019 were up 3.6% from 2018. Ex-auto sales rose 0.7% mom versus expectation of 0.5% mom. Ex-gasoline sales rose 0.1% mom. Ex-auto and gasoline sales rose 0.5% mom.
European Commission Jean-Claude Juncker said Italian Prime Minister Giuseppe Conte presented the budget to EU leaders. And Juncker hailed that Conte did that “with big talent and in a very clear way”.
Nonetheless, Juncker also said “we did not discuss the Italian draft budget in detail, that was not the meeting to doing so, but I know from the past that the Commission has always been accused of being too generous when it came to Italian budgets.”
Though, he emphasized that “we have no negative prejudice against the Italian budget”. And, “we were very kind, gentle and positive when it came to Italy. Because Italy is Italy.”
Separately, German Chancellor Angela Merkel said “everyone is determined to put a package on the table by the December summit that describes the banking union of the future and also says something about the roadmap – i.e. the way to a deposit guarantee and describes progress on the capital markets union.”
UK CPI accelerated to 0.7% yoy in March, up from 0.4% yoy , matched expectations. Core CPI also accelerated to 1.1% yoy, up from 0.9% yoy, above expectation of 1.0% yoy. “The rate of inflation increased with petrol prices rising and clothes recovering from the falls seen in February,” Office for National Statistics official Jonathan Athow said.
Also released, RPI accelerated to 1.5% yoy in March. PPI input came in at 1.3% mom, 5.9% yoy. PPI output was at 0.5% mom, 1.9% yoy. PPI output core was at 0.4% mom, 1.7% yoy.
BoE MPC member Michael Saunders said it’s “quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the 2% target”. “My hunch is that risks lie on the side of weaker growth and a longer period of excess supply than forecast,” he added.
Regarding post-Brexit outlook, he said, “risks probably lie on the side of a thinner trade deal, a less-smooth transition, or more persistent Brexit-related uncertainty. More generally, global trade policy uncertainty remains high.”
Global markets start the week in risk aversion as global outbreak of China’s Wuhan coronavirus intensified over the weekend. South Korea is suffering most with a total of 763 confirmed cases and 7 deaths. The country is put on high alert in response to the community outbreak. Total cases in Japan rose to 838, including Diamond Princess liner, with 4 deaths. Cases in Iran also surged to 43, with 8 deaths.
Cases in Italy also exploded, with 152 cases and 3 deaths. Prime Minister Giuseppe Conte told state broadcaster RAI, “I was surprised by this explosion of cases.” Health authorities also warned, “if we cannot find ‘patient zero’ then it means the virus is even more ubiquitous than we thought.”
Back in China, where the outbreak originated, according to the numbers claimed by the National Health Commission, total cases now stand at 77150, death tolls hit 2592. President Xi Jinping warned “at present, the epidemic situation is still severe and complex, and prevention and control work is in the most difficult and critical stage”. “For us, this is a crisis and is also a big test,” he added. Yet, Xi is still pushing for production restoration in some perceived low- and medium- risk provinces.
SNB kept sign deposit rate unchanged at -0.75% today. It noted that coronavirus is posing “exceptionally large challengers” for Switzerland, and the expansionary monetary policy is “more necessary than ever” for ensuring appropriate monetary conditions. The central bank is “intervening more strong” in the FX markets to stabilize the situation. Both negative interest and interventions are “necessary to reduce the attractiveness of Swiss franc investments”.
Additionally, SNB is raising the exemption threshold as of April 2020 to reduce the negative interest burden on the banking system. The threshold factors will increase from 25 to 30. It’s also examining whether a “relaxation of countercyclical buffer” would be possible.
New conditional inflation forecast is lowered primarily due to “lower oil prices, significantly weaker growth prospects and stronger Swiss franc”. Inflation is expected to be in slightly negative territory at -0.3% this year, turned slightly positive to 0.3% in 2021, then rise to 0.7% in 2022. Growth is “likely to be negative” for 2020 as a whole.
Euro is lifted by reports that ECB policymakers are split over the timing of the first rate hike in years. ECB official communications said rates will remain at current level until through the summer of 2019. But the wordings are vague and subject to interpretation.
Reuters quoted one unnamed source saying that after September 21 is the “only possible interpretation”. That is, October 24 is the earliest date.
But another unnamed source said “you cannot tie yourself for more than a year”. And instead, the wordings could be interpreted as July 25 meeting for hike if data supports.
EUR/GBP spikes higher in early European session, after clearing 0.8750. A major reason is believed to be Bundesbank’s monthly purchase for UK’s contribution to EU membership. Today’s move could be exaggerated by thinner holiday liquidity. Also EUR/GBP bearish could be finally giving up after the cross failed to sustain below 0.8686 last week. But it’s worth a watch to see if the rebound is turning into something sustainable. For now, based on current momentum, it could be heading back to 61.8% retracement of 0.8967 to 0.8666 at 0.8852 with a short term based formed.
US exports rose 8.1% to USD 223.6B in October. Imports rose 0.9% to USD 290.7B. Trade deficit narrowed to USD -67.1B, from USD -81.4B, but widened than expectation of USD -66.9B. The figure reflected a decrease in goods deficit to USD -83.9B and increased in services surplus to USD 16.8B. Year-to-date, trade deficit increased 29.7% from the same period in 2020.
Australia NAB Business Confidence dropped to -2 in December, down from 0, hitting the lowest level since mid-2013. Business Conditions rose 1pt to 3. Trading condition dropped from 6 to 5. Profitability condition dropped from 3 to 1. Employment condition was unchanged at 4.
Alan Oster, NAB Group Chief Economist: “At present there appears to be a relatively large divergence between confidence and conditions, and we will continue to watch the survey to see how this resolves. Though, if confidence and forward orders remain weak, it is likely that the early part of 2020 could see further deterioration in the growth momentum (especially in private sector demand). We think that more policy stimulus will be needed to boost the economy over 2020”.
Germany PMI manufacturing dropped to 47.6 in February, down from 49.7 and missed expectation of 49.9. That’ the lowest level in 74 months. PMI services, however, rose to 55.1, up from 53.0 and beat expectation of 52.9. PMI composite improved slightly to 52.7, up from 52.1.
Commenting on the flash PMI data, Phil Smith, Principal Economist at IHS Markit said:
“Germany’s manufacturing and service sectors remain on very different paths, according to February’s flash PMI data. While strong fundamentals in the domestic market are driving growth in services business activity, falling exports continue to weigh on the performance of the manufacturing sector. Measured overall, the data remain indicative of a very modest rate of underlying output growth.
“The manufacturing PMI fell further into contractionary territory in February to its lowest in over six years, with sustained robust job creation at factories the only positive takeaway. The strength in employment is perhaps surprising given the order book situation and lack of pressures on capacity, but goods producers are seemingly looking through the current soft patch in demand.
“In terms of the factors behind the slowdown in manufacturing order books, many of the usual suspects – the uncertainty relating to US-China trade tensions and weakness in the autos industry – were highlighted, although there were also reports of growing competitive pressures within Europe.”
European Union Budget Commissioner Guenther Oettinger reiterated the commission’s stance on Brexit negotiation. That is, ” final clarification yes, but further negotiations no”. Oettinger went further and emphasized that there won’t be a time limit for the backstop solution on Irish border. He added “that doesn’t work. We need to have clear rules for people, products and goods at the border of Ireland, Northern Ireland, Belfast and Dublin.”
Separately, it’s reported the EU is ready to provide further assurance regarding the backstop. Reuters reported after seeing a six-point document for today’s summit. The assurance would include that “The European Council underlines that the backstop does not represent a desirable outcome for the Union. The backstop is only intended as an insurance policy … It is the Union’s firm determination to work speedily on a subsequent agreement.”
And even if triggered EU would say the backstop would “apply only temporarily unless and until it is superseded by a subsequent agreement.” EU would also commit to “best endeavours” to agree on a new EU-UK deal if the backstop is triggered “so that it would only be in place for a short period and only as long as strictly necessary.”
Entering into US session, Sterling is trading as the strongest one for today, followed by Dollar then Yen. Both Australia Dollar and New Zealand Dollar are the weakest one.
Dollar will be a major focus in US session with FOMC rate decision scheduled. But we’re not expecting any surprise from Fed. The central bank is on course for two more rate hikes this year, one in September and another in December. There is no press conference today. Focus will be quickly turned to minutes to be released later on August 22. Instead, ADP employment and ISM manufacturing to be released earlier in the session could be more market moving.
More on FOMC:
- Fed to Hold Rates But Will Trump Criticism Restrain a More hawkish Message?
- Is the FOMC Overly-Optimistic?
- FOMC Preview: Fed on Holiday
- Fed Prepares for Rate Hike in September
Strength in 10 year JGB yield, which closed up 0.081 at 0.130, could be a factor for Yen’s strength. But considering that Aussie and Kiwi are the weakest, we’d believe that risk aversion is a larger factor. Plus, Yen is also paring back some of the post BoJ selloff only. It’s still the weakest one for the week.
Chinese stocks’ reaction to the heat up in US-China trade war is immediate. The Shanghai SSE dropped -1.80% to close at 2824.53 today. The closed below 2844.19 resistance turned support suggests that recent rebound from 2691.02 has completed at 2915.29 already, ahead of 55 day EMA. Also, the index is kept well inside medium term falling channel. Focus is back on 2753.83 support. Break there will resume the medium term fall from 3857.03 for a take on 2638.30 key support (2016 low). Considering there is no sign of backing from on Trump’s side, and EU has already agreed to join force against China’s improper practices, this 2638.30 level is very vulnerable.
Sterling’s strength could be explained by not-too-bad UK PMI manufacturing, which dropped -0.3 to 54.0. It’s a respectable number. BoE is widely expected to raise Bank Rate by 25bps to 0.75% tomorrow. Sterling’s fate will depend on whether that will be a “dovish hike”.
Suggested reading on BoE and UK:
- BOE Expected to Deliver Dovish Rate Hike in August
- UK NIESR urges BoE to stand ready to move in either direction should circumstances change
- Bank Of England Preview: Once A Year Hiking Cycle
EUR/CHF dives through 1.0216 support after surprised SNB rate hike. The development now argues that corrective rebound from 0.9970 has completed at 1.0513. More importantly, rejection by 1.0505 support turned resistance, as well as 55 week EMA, maintain medium term bearishness.
The development now raises the chance of down trend long term down trend resumption through 0.9970 low at a later stage. If that happens, next target is 100% projection of 1.2004 to 1.0505 to 1.1149 at 0.9650.
UK Leader of the House of Commons Andrea Leadsom confirmed to hold a vote on Brexit on Wednesday February 27. Prime Minister Theresa May will deliver a statement on Tuesday first. The vote will either be on an updated Brexit agreement, or on the other way ahead.
Leadsom said “if the government has not secured a majority in this house in favor of a withdrawal agreement and a political declaration, the government will make a statement on Tuesday Feb. 26, and table an amendable motion relating to the statement and a minister will move that motion on Wednesday Feb. 27, thereby enabling the house to vote on it and any amendments to it on that day.”
China’s Central Bank, PBoC, issued a statement in its website regarding Governor Yi Gang’s response to China Securities Journal regarding recent decline in the Yuan.
Yi acknowledged the fluctuation in the exchange rate and said the central bank is “pay closing attention”. He attributed to the decline of Chinese Yuan to strength of the US Dollar, external uncertainties and some procyclical behaviors.
He also noted that the “managed floating exchange rate system” is based on market supply and demand. And “practice over the years has proven that this system must be effective and must be adhered to”.
At the same time, China is committed to deepen the reform of exchange rate marketization and use sufficient policy tools to ” maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.”
Suggested reading, our report Has China Given Green light to Renminbi Selloff?
Minneapolis Fed President Neel Kashkari said the plan to reopen the economy in a staged approach “makes sense”. “When I looked at the president’s plan it seems consistent with the advice and the feedback that we’ve heard from health experts, that there is a way to slowly reopen the economy,” he said.
“Obviously we want to try to avoid the virus flaring back up again and giving back the gains that we’ve had, and I think a staged approach, looking over the horizon, makes sense.”
In wake of Trump’s new tariff threats, Chinese Foreign Ministry spokesman Geng Shuang said a Chinese delegation was still preparing to travel to the US for another round of trade negotiations. However, there was no indication on the date of the trip, nor whether Vice Premier Liu He will lead the team.
Geng said in a press briefing that “we are now trying to get more information on the relevant situation.” And, “what I can tell you is that the Chinese team is preparing to travel to the U.S. for trade talks.”
“What is of vital importance is that we still hope the United States can work hard with China to meet each other half way, and strive to reach a mutually beneficial, win-win agreement on the basis of mutual respect,” Geng added.
Eurozone Sentix Investor Confidence dropped to -13.7 in August, down from -5.8 and missed expectation of -7.0. That’s also the lowest level since October 2015. Current Situation Index dropped from 1.8 to -7.3, lowest sine January 2015. Expectations Index de August 2012.
Sentix warned that “the spectre of recession is going around.” It also said number of economists merely dismissed the deterioration as a “mood correction”. The current “manufacturing deterioration” is referred to as a “recession in the manufacturing sector” only, with “service sectors excluded. And it’s a “big mistake” from Sentix’s view.
For Germany, Overall Index dropped from -4.8 to -13.7, lowest since August 2009. Current Situation Index dropped from 7.0 to -5.5, lowest since March 2010. Expectations Index dropped from -16.0 to -21.5, lowest since July 2012.
Sentix said, “the former world champion exporter is feeling the effects of the backward roll of globalisation.” It also complained that the “entire political spectrum in Germany is discusses climate issues but “completely overlooks the fact that the economic climate is fading”.
China’s PBoC Governor Yi Gang tried to talk down recent Yuan depreciation despite having USD/CNH nearing the psychological important 7 level. Yi insisted that “the Yuan’s volatility is normal” and its rate is at a “reasonable and equilibrium level”. And, in spite of recent measures in stabilizing the markets, Yi also insisted that PBoC is having a “neutral” monetary policy stance. He said “So if you look at the broad money, if you look at the interest rate and you look at monetary conditions, basically you can have the conclusion that we have a prudent and neutral stance monetary policy.”
Regarding trade war, Yi said “downside risks from trade tensions are significant.” But he’s confidence that the PBoC has “plenty of monetary instruments in terms of interest rate policy, in terms of required reserve ratio.” And, PBoC has “plenty of room for adjustment, in case we need it”. Besides, he’s also confidence that China is on track to meet its growth target of 6.5% in 2018 and “maybe a little bit more”.
Yi also pledged in a statement that “China will continue to let the market play a decisive role in the formation of the RMB exchange rate”. And, we will not engage in competitive devaluation, and will not use the exchange rate as a tool to deal with trade frictions.”