German Ifo Business Climate dropped to 99.1 in January, down from 101.0 and missed expectation of 100.6. It’s also the lowest level since February 2016. Current situation gauge dropped to 104.3, down from 104.9, slightly above expectation of 104.2. Expectations gauge dropped to 99.4, down from 97.3 and missed expectation of 97.0.
Ifo President Clemens Fuest noted “disquiet is growing among German businesses”, and “the German economy is experiencing a downturn.”
UK Chancellor of the Exchequer Philip Hammond repeated his usual warnings today that in case of no-deal Brexit, “there will be very significant disruption in the short term and a very significant hit to our economy in the medium to long term.” And, he pledged that “our job is deliver the British people what they believe they were promised in that referendum. To make sure we respect the decision of the referendum but do it in a way that gives them the future prosperity they were promised.”
Hammond refused to say if he would step down in no-deal Brexit. He just said “I’m not going to speculate because a lot depends on the circumstances, what happens. The responsibility I have is to manage the economy in what is in the best interests of the British people. Now I clearly do not believe that making a choice to leave without a deal would be a responsible thing to do.”
ECB Governing Council member Villeroy de Galhau said today that “We remain committed to maintaining interest rates very low, which is good for the economy:” And, “Progressively we are withdrawing monetary stimulus… but it is very progressive and depends on improvement in the economy. We’ll take the time it takes.”
Villeroy also noted that uncertainties are the main reason for the slow down in the economy. That also echoed ECB President Mario Draghi’s comment. The economic projections to be released during March ECB meeting will be watched closely. And, Villeroy hinted that there may be downgrade in GDP forecasts.
Entering European session, Yen is trading as the weakest one today, following strong risk appetite in Asia. Tech stocks led the way higher while investors shrug off conflicting comments from the US regarding trade negotiation with China. On the one hand, Commerce Secretary Wilbur Ross said the two countries are “miles and miles” away on a trade deal. But White House economic adviser Larry Kudlow said Trump is optimistic. Dollar follows as the second weakest and then Australian.
Sterling is boosted by news that Northern Ireland’s DUP has privately agreed to conditional support to Prime Minister Theresa May’s Brexit deal. But we’d doubt if the rumored condition of time limit on Irish backstop would get agreement from Brexit hardliners and the EU. Canadian Dollar, second strongest for today, follows oil price higher, as US threatens to sanction Venezuela. Euro is mixed after some knee-jerk actions follow ECB meeting yesterday.
For the week, Sterling is also the strongest one, followed by, New Zealand Dollar and then Swiss Franc. Australian Dollar is the weakest followed by Canadian and then Euro.
In other markets:
Overnight:
Both Trump’s and Democrat’s proposal to end the historical shutdown in the US were blocked in the Senate yesterday. White House spokeswoman Sarah Huckabee Sanders said afterwards that “the three-week CR would only work if there is a large down payment on the wall.” That is, Trump is offering to reopen the government temporarily for three weeks, with certain down-payment for the USD 5.7B border wall.
Senate Minority Leader Chuck Schumer said after meting Senate Majority Leader Mitch McConnell that “Senate Democrats have made clear to Leader McConnell and Republicans that they will not support funding for the wall, prorated or otherwise.” House Speaker Nancy Pelosi also criticized that Trump demand for down payment is “not a reasonable agreement”. The House Democrats plan to offer a proposal today on border security, without the wall.
Separately, CNN reported that Trump is preparing a draft to declare national emergency And more than USD 7B in potential funds is already identified for the border wall. According to CNN, in the draft, it’s said “the massive amount of aliens who unlawfully enter the United States each day is a direct threat to the safety and security of our nation and constitutes a national emergency.” And, “Now, therefore, I, Donald J. Trump, by the authority vested in me by the Constitution and the laws of the United States of America, including the National Emergencies Act (50 U.S.C 1601, et seq.), hereby declare that a national emergency exists at the southern border of the United States.”
Sterling surges broadly again on hope that UK Prime Minister Theresa May inches closer to getting enough support for an amended Brexit deal. The Sun reported that North Ireland’s DUP is having delicate deliberations with May. And it’s privately agreed that DUP will support the Brexit plan if there is a time-limit of the Irish backstop. That came on DUP’s concern that pro-Remain Tories and Labour are pushing for a significantly softer Brexit.
However, it should first be noted that such a time-limit is likely not enough to win over Brexit hardliners. ERG chair Jacob Rees-Mogg is clear in his demand for complete removal. More importantly, EU’s Chief Brexit negotiator Michel Barnier has blunted rejected the idea of time limit already. He said yesterday that “we have to maintain the credibility of this reassurance … it cannot be time-limited… It’s not just about Ireland.”
US Markit PMI manufacturing rose to 54.9 in January, up from 53.8 and beat expectation of 53.5. PMI services dropped to 54.2, down from 54.4 and beat expectation of 54.1. PMI Composite recovered to 54.5, up from 54.4.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“US businesses reported a solid start to 2019, with the rate of expansion running only slightly weaker than the average seen in the second half of last year.
“The resilience of the survey data suggest little impact from the government shutdown on the private sector, with very few companies reporting any material detrimental impact on their output or order books.
“Historical comparisons suggest January’s survey data are indicative of the economy growing at an annualized rate close to 2.5%. However, as the survey does not include the government sector, the impact of the shutdown may not be fully captured.
“Manufacturers reported faster rates of increase for both output and order books during the month, accompanied by ongoing robust service sector growth. Both sectors continued to rely on domestic demand, however, with service sector exports falling for a second successive month and goods exports rising only moderately, acting as a drag on overall order books.
“The jobs data from the surveys were also somewhat disappointing, with the overall rate of job creation slipping to a 20-month low. However, even this weaker January survey employment index reading is consistent with private sector payroll growth of approximately 150,000.
“Encouragingly, business sentiment about the year ahead lifted higher, suggesting companies have started the year with increased optimism, boding well for robust business growth to be sustained in coming months.”
Euro drops broadly after ECB President Mario Draghi sounds rather cautious and downbeat in the post meeting press conference. In particular, Draghi noted that “The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to the geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.” As he added that “The persistence of uncertainties, in particular relating to geopolitical factors and the threat of protectionism, is weighing on economic sentiment.”
Later in the Q&A, Draghi said today’s ECB meeting was devoted to an “assessment” on the slowdown. And about the questions of “Where are we? Why we’re here? And how long will the slowdown last”. The meeting was not about the implications on monetary policy. And ECB policymakers were “unanimous” on acknowledging weaker momentum” and “changing of the balance of risks for growth”. The Governing Council will give itself more time to assess the risk factors, and there will be another discussion in March with new economic projections.
EUR/USD dips to as low as 1.1306 but is now back at 1.1352. While Draghi was cautious, he didn’t bring out any “new” dovishness in the press conference.
US initial jobless claims dropped -13k to 199k in the week ending January 19, below expectation of 215k. That’s the lowest level since November 15, 1969. Four-week moving average of initial claims dropped -5.5k to 215k.
Continuing claims dropped -24k to 1.713M in the week ending January 12. Four-week moving average of continuing claims rose 1.25k to 1.730M.
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Draghi’s introductory statement.
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, which was also attended by the Commission Vice-President, Mr Dombrovskis.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme 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.
The incoming information has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors. The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment. At the same time, supportive financing conditions, favourable labour market dynamics and rising wage growth continue to underpin the euro area expansion and gradually rising inflation pressures. This supports our confidence in the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Significant monetary policy stimulus remains essential to support the further build-up of domestic price pressures and headline inflation developments over the medium term. This will be provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
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 third quarter of 2018, following growth of 0.4% in the previous two quarters. Incoming data have continued to be weaker than expected as a result of a slowdown in external demand compounded by some country and sector-specific factors. While the impact of some of these factors is expected to fade, the near-term growth momentum is likely to be weaker than previously anticipated. Looking ahead, the euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, lower energy prices, and the ongoing – albeit somewhat slower – expansion in global activity.
The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.
Euro area annual HICP inflation declined to 1.6% in December 2018, from 1.9% in November, reflecting mainly lower energy price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline further over the coming months. Measures of underlying inflation remain generally muted, but labour cost pressures are continuing to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
Turning to the monetary analysis, broad money (M3) growth moderated to 3.7% in November 2018, after 3.9% in October. M3 growth continues to be backed by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The annual growth rate of loans to non-financial corporations stood at 4.0% in November 2018, after 3.9% in October, while the annual growth rate of loans to households remained broadly unchanged at 3.3%. The euro area bank lending survey for the fourth quarter of 2018 suggests that overall bank lending conditions remained favourable, following an extended period of net easing, and demand for bank credit continued to rise, thereby underpinning loan growth.
The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing – in particular for small and medium-sized enterprises – and credit flows across the euro area.
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 and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, the Governing Council reiterates the need for rebuilding fiscal buffers. This is particularly important in countries where government debt is high and for which full adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions. Likewise, the transparent and consistent implementation of the EU’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.
We are now at your disposal for questions.
ECB kept main refinancing rate unchanged at 0.00% as widely expected. The forward guidance is also held unchanged. That is, “key ECB interest rates to remain at their present levels at least through the summer of 2019.
Full statement below.
Monetary Policy Decisions
At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, the Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts 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.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
The European Parliament’s Brexit group issued a statement today, reiterating that the Brexit agreement must include Irish backstop solution. The group noted that the “Withdrawal Agreement is fair and cannot be re-negotiated. This applies especially to the backstop since it is the guarantee that under no circumstances will there be a hardening of the border on the island of Ireland while at the same time safeguarding the integrity of the Single Market.”
Also, “the EU remains clear, firm and united on this even if the negotiated backstop is not meant to be used. Therefore, the BSG insists that, without such an “all-weather” backstop-insurance, the European Parliament will not give its consent to the Withdrawal Agreement.”
Additionally after rejection by UK Commons, the group urged “the UK Government must work together with all political parties in the House of Commons to overcome this deadlock. It expects the UK side to come back as quickly as possible with a positive and viable proposal on the way forward.”
Separately, EU Chief Brexit negotiator Michel Barnier rejected the idea of time-limited backstop. He said “We have to maintain the credibility of this reassurance … it cannot be time-limited… It’s not just about Ireland.”
Eurozone PMI manufacturing dropped to 50.5 in January, down from 51.4, missed expectation of 51.3. That’s the lowest in 50 months. PMI services dropped to 50.8, down from 51.2, missed expectation of 51.5. That’s the lowest in 65 months. PMI composite dropped to 50.7, down from 51.1. That’s the lowest in 66 months.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“The Eurozone economy slipped closer to stall speed in January, with companies reporting the first drop in demand for over four years. The disappointing survey data indicate that GDP is rising at a quarterly rate of just 0.1%.
“Both the manufacturing and service sectors are close to stagnation, highlighting the broad-based nature of the current slowdown. Ongoing auto sector weakness, Brexit worries, trade wars and the protests in France were again widely cited as factors dampening growth, but the survey responses indicate that a deeper malaise has set in at the start of the year. Companies are concerned about a wider economic slowdown gathering momentum, with rising political and economic uncertainty increasingly affecting risk appetite and demand.
“The ‘yellow vest’ protests led to the steepest downturn in the French economy since November 2014, consistent with GDP falling in the first quarter if these levels continue in coming months. But German businesses are also reporting their toughest spell for four years, led by the manufacturing sector slipping into decline for the first time since 2014, in turn reflecting the largest drop in exports for six years.
“The survey’s output and price gauges have both now fallen into territory more associated with the ECB loosening rather than tightening policy, raising pressure on the central bank to acknowledge that downside risks to the outlook now predominate.”
Germany PMI manufacturing dropped to 49.9 in January, down from 51.5 and missed expectation of 51.5. That’s the lowest in 50 months. PMI services rose to 53.1, up from 51.8 and beat expectation of 52.2. PMI composite rose to 52.1, up from 51.6.
Commenting on the flash PMI data, Phil Smith, Principal Economist at IHS Markit said:
“The Germany PMI broke its recent run of successive falls in January thanks to a stronger increase in service sector business activity, but the growth performance signalled by the index was still one of the worst over the past four years.
“Worryingly for the outlook, the recent soft patch in demand continued into the New Year. Firms are also showing greater caution towards hiring with job creation at a 25-month low, though in a historic context these are still healthy employment figures.
“Manufacturing fell into contraction in January as the sector’s order book situation continued to worsen, showing the steepest decline in incoming new work since 2012. Weakness in the auto industry was once again widely reported, as was a slowdown in demand from China.
“Manufacturers saw some respite in the form of weaker cost pressures, as the rate of input price inflation in the sector cooled to a 27-month low, partly due to the recent correction in oil prices. Service providers, meanwhile, highlighted the impact of wage pressures which contributed to steeper increases in both their overall costs and selling prices.”
France PMI manufacturing recovered back to 51.2 in January, up from 49.7 and beat expectation of 50.0. However, PMI services dropped to 47.5, down from 49.0 and missed expectation of 50.5. That’s also the lowest level in 59 months. PMI composite dropped to 47.9, down from 48.7, hitting a 50-month low.
Commenting on the Flash PMI data, Eliot Kerr, Economist at IHS Markit said:
“Private sector firms in France reported a further contraction in output during the opening month of 2019. The latest decline was the fastest for over four years, even quicker than the fall in protest-hit December. The strong service sector that had supported a weak manufacturing sector in the second half 2018 declined at a faster rate in January. Meanwhile, manufacturers recovered to register broadly-unchanged production.
“Despite the continuation of ‘gilets jaunes’ protests, it is unclear whether the latest weak performance was caused by the resulting disruption, or whether the anticipated global economic slowdown for 2019 is already beginning to take hold.
“Although firms reported higher confidence in January, other forward looking indicators such as new orders fell at the fastest pace for over four years. This suggests further weak performance for France in the coming months.”
Commodity currencies are trading broadly lower today even though Asian markets show no sign of risk aversion. Australian Dollar turns lower after solid but un-encouraging job data. New Zealand Dollar is paring yesterday’s CPI triggered gains. Canadian Dollar is follow oil prices low as WTI is back at 52.3 after brief recovery.
For now, European majors are the strongest ones today, led by Swiss Franc. Euro will look into PMIs, ECB rate decision and press conference.
For the week, Sterling is the strongest one on receding chance of no-deal Brexit. Kiwi is the second strongest on lower chance of RBNZ rate cut after solid CPI. Australian and Canadian Dollar are the weakest, followed by Dollar.
In Asia:
Overnight:
ECB rate decision and press conference is a main focus for today. No change is expected in monetary policy. And the main refinancing rate will be held at 0.00%.
As recent economic data pointed to further weakness in the Eurozone economy, ECB president Mario Draghi might turn a bit more cautious or even dovish in the press conference.
Market has already pushed back their expectations on the first rate hike to mid-2020. But, ECB is still unlikely to make any change to the forward guidance. That is, ECB will reiterate that interest rates will stay at present level at least through summer of 2019. ECB probably would wait for more incoming data before making such a change.
Here are some suggested previews on ECB:
Japan PMI manufacturing dropped to 50.0 in December, down from 52.6. That also marked the end of the longest expansionary run for over a decade. In particular, exports decline at strongest pace in two-and-a-half years. And, production scaled back for first time since July 2016, while confidence lowest in over six years.
Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:
“Preliminary PMI data for January bodes ill for Japan’s manufacturing sector, indicating the end of a near two-and-a-half-year growth run as the index dropped to 50.0. The underlying picture will raise concern given renewed reductions were seen in new orders and output. Further signs that the downturn in the global trade cycle could yet worsen were also signalled, with new export orders falling at the sharpest rate since July 2016. The widely-anticipated rebound in Q4 should not distract from the bigger picture. Domestic economic weakness compounded with slowing global growth coincided with the lowest level of business confidence for over six years.”
Australia job market grew 21.6k in December, above expectation of 18.1k. Full-time jobs, however, dropped -3k. Part-time jobs rose 24.6k. Unemployment rate dropped -0.1% to 5.0%, better than expectation of 5.0%. That equals the lowest level in more than 6 years, as touched back in September and October. However, participation rate dropped by -0.1% to 65.6%.
While the set of data was solid, it isn’t too encouraging and paints no sign of tightening in the Australian job market. AUD/USD dips through 0.7116 minor support, which suggests completion of rebound form flash crash low at 0.6722. Further downside would be seen in the pair.
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Northern Ireland DUP: Trap of the Irish backstop is the problem
After rumors that Northern Ireland DUP has privately given conditional agreement to UK Prime Minister Theresa May’s Brexit deal, its deputy leader Nigel Dodds echoed that support. Dodds said “We want to reach a consensus which respects the constitutional and economic integrity of the United Kingdom and which also works for our neighbours in the Republic of Ireland”. And, “the trap of the backstop is the problem,” he added. “There are ways forward which do not require this backstop and we need to see a willingness to explore such options.”
Meanwhile EU and Ireland are stepping up preparations for no-deal Brexit. European Commission spokesman Margaritis Schinas confirmed that Commission President Jean-Claude Juncker and Irish Prime Minister Leo Varadkar had spoken yesterday. And, they had “looked forward to continuing close cooperation … including on intensifying no deal contingency action in the coming weeks”.