US Trade Representative office said yesterday that deputy level US-China trade talks will start in Washington this Thursday. That would pave the way for high-level talks in October. There is no details regarding the upcoming deputy-level talks for now.
Separately, US Chamber of Commerce Chief Executive Tom Donohue said USTR Robert Lighthizer indicated he was seeking a “real agreement” on intellectual property theft and forced technology transfer issues. Also, Donohue also said Lighthizer “did indicate that there was some movement in the direction of purchasing of agricultural products and other issues”.
Donohue also said, “I don’t think you’re going to see the tariffs going away and people feeling we’ve made a great accomplishment until we have a real agreement. “A real agreement, in my opinion, will not be buying more crops and doing the small things that would be good to set the stage for us to have more substantive conversations.”
US President Donald Trump indicated in a letter to Congress that he’s entering in to a trade deal with Japan in the “coming weeks”. There will be agreements on trade tariffs and digital trade that could allow him to make reciprocal tariff reductions by proclamation. No Congress approval would be needed.
For now, it’s unclear whether there is agreement for avoiding so-called Section 232 national security tariffs on Japanese autos. Japan’s Foreign Minister Toshimitsu Motegi said a a regular news conference that “at the finishing stage, we plan to reconfirm that 232 won’t be imposed.” Finance Minister Taro Aso also indicated the deal won’t contain any provision on currencies.
UK Prim Minister Boris Johnson’s office issued a statement after his meeting with European Commission President Jean-Claude Juncker. The statement noted “the leaders agreed that the discussions needed to intensify and that meetings would soon take place on a daily basis”.
And, “It was agreed that talks should also take place at a political level between Michel Barnier and the Brexit Secretary, and conversations would also continue between President Juncker and the Prime Minister.”
Johnson’s spokesman also reiterated that he would not request a delay to Brexit beyond October 31.
US Empire State Manufacturing Survey general business conditions index dropped to 2.0 in September, down from -4.8 and missed expectation of 4.0. 27% of respondents reported that conditions had improved over the month, but 25% said conditions had worsened. Number of employees index jumped sharply from -1.6 to 9.7, back in positive territory. The index for future business conditions fell -12 points to 13.7, suggesting that “optimism about future conditions waned”.
ECB Governing Council member Yannis Stournaras said there is strong case for incoming President Christine Lagarde to maintain policy stimulus. And, he added, “stimulus package last week was necessary because inflation remains very low. Benefits of taking action now exceed to a large extent the costs. There has been an insufficient contribution from fiscal policy.
Another Governing Council member Pablo Hernandez De Cos urged stronger progress towards fiscal union. He said in an event in Spain that “I strongly believe that a central fiscal capacity at euro area level could contribute … to macroeconomic stabilization.” Additionally, “monetary policy would not become overburdened, as it might be in the current economic juncture.”
The new WTO’s Services Trade Barometer came in at 98.4, slightly below baseline value of 100. The reading indicates that serves trade continued to face strong headwinds into second half of the year.
WTO noted that “declines in most of the Services Trade Barometer’s component indices drove the second quarter softening, as they signalled a broad loss of momentum across various services sectors.” However, despite loss of momentum this year, “services trade has generally held up better than goods trade since the latter is more directly affected by recent trade tensions.”
UK Foreign Minister Dominic Raab said today that the “contours” of a Brexit deal are now “very clear”. And, the meeting between Prime Minister Boris Johnson and EU leaders in Luxembourg is an “important milestone”. The EU summit on October 17-18 is “the place where a deal can be done.”
He added “our requirements are very clear: we want to remove the anti-democratic backstop and we want to be able to transition our future relationship to a best in class free trade agreement.” Still, if there is no agreement, Raab said the UK will leave on October 31.
Juncker reiterated on Sunday that there is no possibility of reopening the Withdrawal Agreement. And, I am not optimistic when it comes to finding alternative arrangements that will allow us to limit the Irish backstop,” he said. He added, “We do not know what the British want in detail, precisely and exactly, and we are still waiting for alternative proposals. I hope we can get it, but time is running out.”
UK Prime Minister Boris Johnson will travel to Luxembourg today, to meet outgoing European Commission President Jean-Claude Juncker. Ahead of that, he wrote in the Daily Telegraph that “if we can make enough progress in the next few days, I intend to go to that crucial summit on Oct. 17, and finalize an agreement” for Brexit.
He also criticized the parliament for hampering his negotiation, by approving that law that forces him to seek another delay. He said, “Its effect is completely contrary to the UK’s interests – because it has at least given the impression to our partners that the UK is no longer either fully able or determined to leave on Oct 31.”
Separately, BusinessEurope Director General Markus Beyrer warned that “No deal is a recipe for disaster and should be definitely ruled out. A disorderly, no deal exit of the UK would be extremely harmful for all sides. It would cause massive damage for citizens and businesses in the UK and on the continent alike… The negative consequences would not be limited to the exit date but would drag on, endangering the fruitful and positive future relationship we all aim for.”
Chinese Premier Li Keqiang warned that the economy is facing “certain downward pressure” due to global slowdown and rise of protectionism. And, it’s “very difficult” for GDP to grow at 6% rate or higher. He said “for China to maintain growth of 6% or more is very difficult against the current backdrop of a complicated international situation and a relatively high base, and this rate is at the forefront of the world’s leading economies.”
A batch of August data released today showed deepened slowdown in China’s economy. Industrial production growth slowed to 4.4% yoy in August, down from 4.8% yoy and missed expectation of 5.2% yoy. That’s the slowest pace since February 2002. Retail sales growth slowed to 7.5% yoy, down from 7.6% yoy and missed expectation of 8.0% yoy. Fixed assets investments grew 5.5% ytd yoy, below expectation of 5.7% ytd yoy. Surveyed unemployment rate, though, dropped from 5.3% to 5.2%.
Oil prices surge sharply in response to drone attacks on Saudi Arabia’s oil production on Saturday. State energy producer Saudi Aramco lost about 5.7 million bps of output, which is the largest oil disruptions in history. That’s followed by 5.6m bpd loss in Iranian resolution in late 70s.
Saudi Arabia would need weeks to restore full output capacity even though some halted oil production would be restarted within days. Some noted that the attack highlighted the vulnerability of the infrastructure to attack. Also the tensions have intensified as US President Donald Trump said the US is “locked and loaded depending on verification” that Iran staged the attack.
WTI crude oil jumped to as high as 61.24 earlier today but it’s back below 60 for now. We’ll see if it can sustain above 60.93 resistance as the development unfolds.
US retail sales rose 0.4% to in August, above expectations of 0.2%. Ex-auto sales, though, rose 0.0% mom, below expectation of 0.1% mom. Import price index dropped -0.5% mom, matched expectations.
ECB Governing Council member Klass Knot blast the stimulus package announced by the central bank yesterday. He said “this broad package of measures, in particular restarting the asset purchase program, is disproportionate to the present economic conditions, and there are sound reasons to doubt its effectiveness.” He added, “there are increasing signs of scarcity of low-risk assets, distorted pricing in financial markets and excessive risk-seeking behavior in the housing markets,”
Another Governing Council member Robert Holzmann also questioned that the comprehensive package shouldn’t come before the planned policy review. He pointed to inflation target and said “It may be that 2% at the moment is out of reach and 1.5% also signifies stable prices, almost stable prices. So there is no need to … use all the power you have in order to move up to 2% if the cost is too high.”
New Zealand BusinessNZ manufacturing index rose 0.3 to 48.4 in August, indicating slightly slowing pace of contraction. However, the details are not too encouraging. The sub-index of new orders (45.6) dived further into decline, at its lowest point in over ten years since May 2009. Production (49.7) fell from expansion to decline. Employment (49.3) remains in contraction after some recovery.
BNZ Senior Economist, Doug Steel said that “disconcertingly, the PMI adds to a building case over recent times that there has been a palpable softening in demand – at least for manufactured goods”.
US President Donald Trump said yesterday that he’s open to an “interim” trade agreement with China, but insisted that he’d “rather get the whole deal done”. . He said “a lot of people are talking about, and I see a lot of analysts are saying: an interim deal, meaning we’ll do pieces of it, the easy ones first… But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider, I guess.”
The comments came after Bloomberg reported that Trump’s advisers are considering the idea of an interim trade agreement with China. That involve delaying or even rolling back some tariffs. In return, China has to offer commitments on intellectual property protection and agricultural product purchases.
IMF Director of Communications Gerry Rice warned yesterday that US-China trade tensions are starting to affect the world economy. He said they’re “not only a threat, but are actually beginning to weigh down the dynamism in the global economy.” And, the already imposed tariffs could “potentially reduce the level of global GDP by 0.8 per cent in 2020, with additional losses in future years”. The 0.8% figure suggested more serious impact of prior estimation of 0.5% by IMF.
World economic activity remained subdued, with trade and geopolitical tensions causing uncertainty and eroding business confidence, investment and trade, he said. Though, a global recession is not in IMF’s baseline for the moment. He added that had used words such as “very precarious”, “very fragile” and “delicate” to describe the economic outlook. And, “Let’s not get ahead of ourselves. Let’s wait and see.” IMF is scheduled to release updates on economic outlook next month.
According to a Bloomberg report, based on unnamed sources, US President Donald Trump’s advisers are considering an interim trade deal with China, that would involve delaying or even rolling back some tariffs. In return, China has to offer commitments on intellectual property protection and agricultural product purchases.
Separately, Treasury Secretary Steven Mnuchin said Trump is a “negotiator” and he’s “prepared to keep these tariffs in place. He’s prepared to raise tariffs if we need to raise tariffs”. Though, Mnuchin is “cautiously optimistic” about upcoming meetings with China’s trade team.
ECB’s GDP growth projections are revised to 1.1% in 2019 (vs 1.2% in June), 1.2% in 2020 (vs 1.4%) and 1.4% in 2021 (unchanged).
Eurozone’s slowdown in growth mainly reflects “prevailing weakness of international trade in an environment of prolonged global uncertainties which are particularly affecting the euro area manufacturing sector.” But services and construction show “ongoing resilience. Risk to growth “remain tilted to the downside” due to “prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets.”
HICP inflation projections are revised down over the whole projection horizon, “reflecting lower energy prices and the weaker growth environment.” HICP projections are at 1.2% in 2019 (vs 1.3% in June), 1.0% in 2020 (vs 1.4%), 1.4% in 2021 (vs 1.6%).
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council.
Based on our regular economic and monetary analyses, we have conducted a thorough assessment of the economic and inflation outlook, also taking into account the latest staff macroeconomic projections for the euro area. As a result, the Governing Council took the following decisions in pursuit of its price stability objective.
First, as regards the key ECB interest rates, we decided to lower the interest rate on the deposit facility by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively. We now expect the key ECB interest rates to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
Second, the Governing Council decided to restart net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. We expect them to run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates.
Third, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Fourth, we decided to change the modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III) to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy. The interest rate in each operation will now be set at the level of the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III operations will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. The maturity of the operations will be extended from two to three years.
Fifth, in order to support the bank-based transmission of monetary policy the Governing Council decided to introduce a two-tier system for reserve remuneration in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.
Separate press releases with further details of the measures taken by the Governing Council will be published this afternoon at 15:30 CET.
The Governing Council reiterated the need for a highly accommodative stance of monetary policy for a prolonged period of time and continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.
Today’s decisions were taken in response to the continued shortfall of inflation with respect to our aim. In fact, incoming information since the last Governing Council meeting indicates a more protracted weakness of the euro area economy, the persistence of prominent downside risks and muted inflationary pressures. This is reflected in the new staff projections, which show a further downgrade of the inflation outlook.
At the same time, robust employment growth and increasing wages continue to underpin the resilience of the euro area economy. With today’s comprehensive package of monetary policy decisions, we are providing substantial monetary stimulus to ensure that financial conditions remain very favourable and support the euro area expansion, the ongoing build-up of domestic price pressures and, thus, the sustained convergence of inflation to our medium-term inflation aim.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the second quarter of 2019, following a rise of 0.4% in the previous quarter. Incoming economic data and survey information continue to point to moderate but positive growth in the third quarter of this year. This slowdown in growth mainly reflects the prevailing weakness of international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector.
At the same time, the services and construction sectors show ongoing resilience and the euro area expansion is also supported by favourable financing conditions, further employment gains and rising wages, the mildly expansionary euro area fiscal stance and the ongoing – albeit somewhat slower – growth in global activity.
This assessment is broadly reflected in the September 2019 ECB staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.1% in 2019, 1.2% in 2020 and 1.4% in 2021. Compared with the June 2019 staff macroeconomic projections, the outlook for real GDP growth has been revised down for 2019 and 2020.
The risks surrounding the euro area growth outlook remain tilted to the downside. These risks mainly pertain to the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.0% in August 2019, unchanged from July. Lower energy inflation was offset by higher food inflation, while the rate of HICP inflation excluding food and energy was unchanged. On the basis of current futures prices for oil, headline inflation is likely to decline before rising again towards the end of the year. Measures of underlying inflation remained generally muted and indicators of inflation expectations stand at low levels. While labour cost pressures strengthened and broadened amid high levels of capacity utilisation and tightening labour markets, their pass-through to inflation is taking longer than previously anticipated. Over the medium term underlying inflation is expected to increase, supported by our monetary policy measures, the ongoing economic expansion and robust wage growth.
This assessment is also broadly reflected in the September 2019 ECB staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.2% in 2019, 1.0% in 2020 and 1.5% in 2021. Compared with the June 2019 staff macroeconomic projections, the outlook for HICP inflation has been revised down over the whole projection horizon, reflecting lower energy prices and the weaker growth environment.
Turning to the monetary analysis, broad money (M3) growth increased to 5.2% in July 2019, after 4.5% in June. Sustained rates of broad money growth reflect ongoing bank credit creation for the private sector and low opportunity costs of holding M3. The narrow monetary aggregate M1 continues to be the main contributor to broad money growth on the components side.
The annual growth rate of loans to non-financial corporations remained unchanged at 3.9% in July 2019. The annual growth rate of overall loans to non-financial corporations continues to be solid, although short-term loans – which are more sensitive to the cycle – show signs of weakness. The annual growth rate of loans to households stood at 3.4% in July, after 3.3% in June, continuing its gradual improvement. Overall, loan growth is still benefiting from historically low bank lending rates.
The monetary policy measures we have taken today, including the more accommodative terms of the new series of TLTROs, will help to safeguard favourable bank lending conditions and will continue to support access to financing, in particular for small and medium-sized enterprises.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential, supporting aggregate demand at the current juncture and reducing vulnerabilities. The implementation of structural policies in euro area countries needs to be substantially stepped up to boost euro area productivity and growth potential, reduce structural unemployment and increase resilience. The 2019 country-specific recommendations should serve as the relevant signpost.
Regarding fiscal policies, the mildly expansionary euro area fiscal stance is currently providing some support to economic activity. In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner. In countries where public debt is high, governments need to pursue prudent policies that will create the conditions for automatic stabilisers to operate freely. All countries should reinforce their efforts to achieve a more growth-friendly composition of public finances.
Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.
US CPI slowed to 1.7% yoy in August, down from 1.8% and matched expectations. Core CPI, on the other hand, accelerated to 2.4% yoy, up from 2.2% yoy and beat expectation of 2.3% yoy.
US initial jobless claims dropped -15k to 204k in the week ending September 7, better than expectation of 217k. Four-week moving average dropped -4.25k to 212.5k. Continuing claims dropped -4k to 1.67m in the week ending August 31. Four-week moving average dropped -14.5k to 1.680m.
US-China to start deputy level trade talks this Thursday
US Trade Representative office said yesterday that deputy level US-China trade talks will start in Washington this Thursday. That would pave the way for high-level talks in October. There is no details regarding the upcoming deputy-level talks for now.
Separately, US Chamber of Commerce Chief Executive Tom Donohue said USTR Robert Lighthizer indicated he was seeking a “real agreement” on intellectual property theft and forced technology transfer issues. Also, Donohue also said Lighthizer “did indicate that there was some movement in the direction of purchasing of agricultural products and other issues”.
Donohue also said, “I don’t think you’re going to see the tariffs going away and people feeling we’ve made a great accomplishment until we have a real agreement. “A real agreement, in my opinion, will not be buying more crops and doing the small things that would be good to set the stage for us to have more substantive conversations.”