Asia update: Sentiments supported by stabilization in China Dec data, Yen higher

    Asian markets trade mildly higher as the week opens. While China’s GDP slowed to lowest in 28 years in 2018, December data painted a picture of stabilization, with pick up in industrial production and retail sales. Sentiments were also supported by optimism over US-China trade negotiation. Focus will now move to UK Prime Minister Theresa May’s Brexit plan B, which she will table to the parliament today. Record US government shutdown is extending while it’s a holiday there too.

    In the currency markets, Yen is trading broadly higher for now but strength is limited, in particular against Euro and Australian Dollar. Sterling is the second weakest one, continue to pare back last week’s Brexit chaos gains. But New Zealand Dollar is even weaker.

    In Asian markets:

    • Nikkei closed up 0.26%.
    • Hong Kong HSI is up 0.35%.
    • China Shanghai SSE is up 0.41%.
    • Singapore Strait Times is up 0.51%.
    • Japan 10-year JGB yield is down -0.0053 at 0.009, still positive.

    Recession risks increased in Japan, but Abe still on track for sales tax hike

      The likelihood of a recession in Japan rose due to global economic slowdown and the indirect impact of US-China trade war, according to a Reuters poll between Jan 9-18. Yet economists were still optimistic that Japan economy will grow 0.8% in the fiscal year starting April.

      28 of 38 economists said the chance of recession in fiscal 2019 has risen comparing with three months ago. 27 of 39 said Prime minister Shinzo Abe has over 80% chance to go ahead with the planned sales tax hike. For the October-December quarter when sales tax is raised, economist expected a sharp contraction of -3% in GDP. But over the fiscal year, it’s estimated to expand 0.8%, then slow to 0.6% in fiscal 2020. National core CPI is seen to rise only 0.6% in fiscal 2019, staying way off BoJ’s 2% target.

      Brexit: No solution to Irish backstop yet after May’s Cabinet conference call

        UK Prime Minister Theresa May is due to return to the parliament today to set out her Plan B on Brexit. The center of focus is her amendments regarding the Irish border backstop. May is trying to put up something that’s, at the very least, acceptable to her fellow Conservatives and Northern Ireland ally DUP. But the Guardian reported that no solutions were found so far during the conference call with the Cabinet on Sunday evening. The consensus was only to renew efforts to find acceptable changes to the backstop arrangement with the EU, without any specifics.

        Trade Minister Liam Fox warned over the weekend that “failure to deliver Brexit would produce a yawning gap between parliament and the people, a schism in our political system with unknowable consequences”. And, that could trigger a “a political tsunami”. And, he added that “Parliament has not got the right to hijack the Brexit process because Parliament said to the people of this country: ‘we make a contract with you, you will make the decision and we will honour it'”.

        Opposition Labour leader Jeremy Corbyn reiterated the call for May to rule out no-deal Brexit. He said in a statement that “We’re ready to talk to the government and others in parliament about a sensible alternative plan, but not while Theresa May is wasting 171,000 pounds an hour of taxpayers’ money on dangerous and unnecessary no-deal brinkmanship.” And, “If the prime minister is serious about finding a solution that can command support in parliament and bring our country together, she must listen to the majority of MPs, as well as members of her own cabinet, and take ‘no deal’ off the table.”

        China GDP growth slowed to lowest in 28 years, but stabilization seen in December

          China GDP growth slowed to 6.4% yoy in Q4, down from 6.5% yoy and matched expectation. For the whole year of 2018, growth slowed to 6.6%, lowest in 28 years since 1990. National Bureau of Statistics head Ning Jizhe said the impacts from trade war with the US are manageable. There were signs of stabilization in the economy over the past twos months. And he added the country has confidence and the capacity to achieve reasonable growth in 2019.

          Other December data released today are positive though. Retail sales grew 8.2% yoy, up from 8.1% yoy and beat expectation of 8.1% yoy. Industrial production rose 5.7% yoy, up fro 5.4% and beat expectation of 5.3% yoy. Fixed assets investment grew 5.9% yoy, unchanged from November, but missed expectation of 6.0%.

          While there were signs of improvements in Decembers, it’s generally expected that the Chinese economy will face downward pressure ahead. In particular, the risks of escalation in trade war with the US remains. Chinese Vice Premier Liu He is set to visit Washington on January 30-31 for another round of trade talks. At this point, little sign of progress is seen regarding the core concerns of the US, including intellectual property theft, forced technology transfer and dominance of state-owned enterprises.

          More stimulus is expected from the authority to support the economy. The PBoC has already injected CNY 560B into the economy last Wednesday. The RRR was also lowered again earlier this year to free up Monday for small companies. Yet, it’s reported that Beijing was planning to lower its growth target to 6-6.5 percent this year.

          Canadian Dollar rises mildly after stronger than expected CPI data.

            Headline CPI dropped -0.1% mom in December versus expectation of -0.3%. Annually, CPI accelerated to 2.0% yoy, up from 1.7% yoy and beat expectation of 1.8% yoy.

            Core CPI readings were steady. CPI core-common was unchanged at 1.9% yoy. CPI core-median dropped from 1.9% yoy to 1.8% yoy. CPI core-trimmed was unchanged at 1.9% yoy.

            Full release here.

            EU: UK will still need to elect MEP if it leaves after July 2

              European Commission spokesman Margaritis Schinas once again told a regular news briefing that there is no request for Article 50 extension from the UK yet. But he pointed out that if the UK is going to leave after July 2, Britons will need to elect their representatives to the next European Parliament.

              He said, “We … as the guardian of EU treaties, suggest caution with any suggestion that the right of EU citizens to vote in the European Parliament elections, according to the rules that are applicable, could be called into question”.

              And, “we have a legally composed European Parliament which requires directly elected MEPs from all member states at the latest on the first day of the new term of the new parliament, which this time is the second of July.”

              European Commission publishes draft trade negotiating mandates with the US

                European Commission publishes draft negotiating mandates with the US today. The negotiating directives cover two potential agreements with the U.S:

                1. A trade agreement strictly focused on the removal of tariffs on industrial goods, excluding agricultural products;
                2. A second agreement, on conformity assessment, that would help address the objective of removing non-tariff barriers, by making it easier for companies to prove their products meet technical requirements on both sides of the Atlantic.

                EU Commissioner for Trade Cecilia Malmström said in the statement: “Today’s publication of our draft negotiating directives is part of the implementation of the July joint statement of Presidents Juncker and Trump. Ambassador Lighthizer and I have already met several times in the Executive Working Group and I have made it very clear that the EU is committed to upholding its side of the agreement reached by the two Presidents. These two proposed negotiating directives will enable the Commission to work on removing tariffs and non-tariff barriers to transatlantic trade in industrial goods, key goals of the July Joint Statement.”

                In a press conference, Malmström added “We are prepared to put our vehicles tariffs on the negotiating table (..) if the U.S. agree to work together toward zero tariffs on industrial goods.” But still, EU was ready to retaliate if the U.S. imposed car import tariffs.

                Full EU statement.

                Sterling dips after poor December UK retail sales

                  Sterling weakens notably after rather poor December UK retail sales data.

                  • Retail sales including auto fuel dropped -0.9% mom versus expectation of -0.7%.
                  • Retail sales excluding auto fuel dropped -1.3% mom versus expectation of -0.5% mom.

                  Also, for the three months to December, compared with the previous three months:

                  • Retail sales including auto fuel dropped -0.2%
                  • Retail sales excluding auto fuel dropped -0.4%

                  Full release here.

                  Asian update: Sterling extending rally, Yen lower as stocks rise

                    Asian stocks trade broadly higher today following the extended rally in the US. There were rumors that Treasury Secretary Steven Mnuchin is considering to roll back tariffs on Chinese imports to facilitate negotiation. But such rumor was quickly denied. Also, the US government shutdown is extending it’s record run without any end in sight. But sentiments were not affected much.

                    In the currency markets, trading turns rather quiet today as most major pairs and crosses are stuck in tight range. For the week, Sterling remains the strongest one. And the Pound is extending rally against Dollar, Euro and Yen. It’s unsure what Brexit will eventually be. But for now, the chance of no-deal Brexit seems slim.

                    Staying in the currency markets, Dollar is the second strongest for the week as lifted by rebound in treasury yields. Canadian Dollar is the third strongest, helped by resilience in oil prices. WTI crude oil is back at 52.8 and looks set to extend recent rebound from 42.05. The Loonie will also face tests from Canadian CPI today. On the other hand, Kiwi, Swiss Franc and Yen are the weakest ones for the week.

                    In Asia, currently:

                    • Nikkei is up 1.34%.
                    • Hong Kong HSI is up 1.10%.
                    • China Shanghai SSE is up 1.02%.
                    • Singapore Strait Times is up 0.23%.
                    • Japan 10-year JGB yield is up 0.0025 at 0.014

                    Overnight:

                    • DOW rose 0.67%.
                    • S&P 500 rose 0.76%.
                    • NASDAQ rose 0.71%.
                    • 10-year yield rose 0.018 to 2.749.
                    • But 30-year yield ended flat at 3.077.

                    Japan core CPI slowed more than expected to 0.7% in Dec

                      In December, Japan all item CPI slowed to 0.3% yoy, down from 0.8% yoy and matched expectation. Core CPI, all item ex-fresh food, slowed to 0.7% yoy, down from 0.9% yoy and missed expectation of 0.8% yoy. Core-core CPI, al item ex-fresh food, energy, stayed unchanged at 0.3% yoy.

                      The data showed that even discounting the fall in energy prices, consumer inflation stayed week. And apparently, the recovery is not passed on to consumers. And business remained reluctant to raise prices.

                      The data added to the case for BoJ to cut inflation forecasts next week. Back in October, BoJ projects core CPI to hit 1.4% in fiscal 2019 and then 1.5% in fiscal 2020. Such projections would be trimmed to reflect the decline in oil as well as global slowdown.

                       

                      Germany and China signed pacts to deepen financial sector cooperation

                        Germany and China pledged to deepening cooperation in the finance sector and fight trade protectionism during Finance Minister Olaf Scholz’s two-day visit to Beijing. And three pacts are signed, including agreements with the China Banking and Insurance Regulatory Commission and China’s Securities Regulatory Commission.

                        Ahead of today’s meeting with Chinese Vice Premier Liu He, Scholz said “it is important that, contrary to recent trends that we can observe elsewhere, we are seeing progress in our cooperation”. And, “we have a lot of common interests in financial matters, and then we need to bring different perspectives together. I believe that is the very important task of this financial dialogue.”

                        US Treasury denies rumors that Mnuchin mulls China tariff rollback

                          WSJ reported yesterday that US Treasury Secretary Steven Mnuchin was considering the idea of lifting some of even all of extra tariffs on Chinese imports to facilitate trade negotiation with China. But a Treasury spokesman quickly denied.

                          The spokesman said “neither Secretary Mnuchin nor Ambassador Lighthizer have made any recommendations to anyone with respect to tariffs or other parts of the negotiation with China.” And, “this an ongoing process with the Chinese that is nowhere near completion.”

                          Mnuchin is widely considered a dove in the trade war with China, and he has rather good relationship with Chinese Vice Premier Liu. So we won’t be surprised if Mnuchin has considered or even brought out such idea. But he is often seen as isolated by others in the team on the issue. So, it doesn’t really mean a thing even if he did make that suggestion.

                          Liu has confirmed his scheduled to visit Washington on January 30-31. The result of the meeting with USTR Robert Lighthizer then is the real key and the whole negotiation.

                          Fed Evans: We’re at a good point for sort of pausing rate hikes

                            Chicago Fed President Charles Evans said “I’m not worried about inflation getting out of hand” and Fed is “at a good point for sort of pausing” rate hikes. Though, he “wouldn’t be surprised if at the end of the year we have a funds rate that’s a little bit higher than where we are now.” But, “that would be associated with a better economy and inflation moving up.”

                            Evans also noted risk from uncertainties including slowdown in Europe and China, trade war. On government shutdown, he warned “the longer it goes on, I think it becomes a little bit more of a challenge, and the uncertainties mean that people are going to delay making certain types of investments, and that’s not good for the outlook either.”

                            EU Barnier open to more ambitious relationship with UK

                              UK Prime Minister May is working on an alternative Brexit deal to bring back to the EU. EU chief Brexit negotiator Michel Barnier said if UK wants a “more ambitious relationship, we are open”. But he doesn’t expect anything better than the current agreement.

                              Also, he said “if there is no deal, there will be contingency measures”. But, he also emphasized “that will be very difficult and will not be done in a climate of confidence. The best guarantee is reaching an agreement.”

                              Philadelphia Fed Manufacturing Business Outlook jumped to 17, vs expectation 10.1

                                Philadelphia Fed Manufacturing Business Outlook rose notably to 17 in January, up from 9.4 and beat expectation of 10.1.

                                Looking at the details, the general activity and new orders indicators increased from their readings last month, while the indicators for shipments and employment decreased. The firms reported growth in the underlying demand for their products and are generally optimistic about future growth and employment.

                                Full release here.

                                US initial jobless claims dropped to 213k vs expectation 218k

                                  US initial jobless claims dropped -3k to 213k in the week ending January 12, slightly below expectation of 218k. Four week moving average of initial claims dropped -1k to 220.75k.

                                  Continuing claims rose 18k to 1.737M in the week ending January 5. Four-week moving average of continuing claims rose 8k to 1.7285M.

                                  Full release here.

                                  Into US session: Yen strongest but Sterling is catching up

                                    Entering into US session, Yen is trading generally higher as helped by mild risk aversion today. Sterling is also enjoying some renewed buying. EUR/GBP takes lead by extending recent fall from 0.9101. GBP/USD is also set to take on 1.2930 temporary top very soon.

                                    New Zealand Dollar is the weakest one for today so far, followed by Canadian and then Swiss Franc. WTI crude oil’s recovery is losing steam after hitting 52.73 earlier this week and is now back at 51.4.

                                    In European markets, at the time of writing:

                                    • FTSE is down -0.73%.
                                    • DAD is down -0.31%.
                                    • CAC is down -0.46%.
                                    • German 10-year yield is down -0.0026 at 0.223.

                                    Earlier in Asia:

                                    • Nikkei dropped -0.20%.
                                    • Hong Kong HSI dropped -0.54%.
                                    • China Shanghai SSE dropped -0.42%.
                                    • Singapore Strait Times dropped -0.45%.
                                    • Japan 10-year JGB yield rose 0.0044 to 0.012.

                                    Brexit: No article 50 extension request, plan B to be voted on Jan 29

                                      UK Prime Minister Theresa May’s spokesman said to that that she has not raised the idea of extending Article 50 beyond March 29. And the spokesman also noted that “It is not something we have raised with the EU or suggested we wish to do”. On the other hand, European Commission spokesman Margaritis Schinas also said “We have not received such a request from the UK for an extension”. And, “should there be a UK request to extend, this will be decided unanimously by the 27 and of course the request will have to set out the reasons for such an extension,”

                                      May is expected to “table an amendable motion and to make a statement about the way forward” in the coming Monday. The Conservative Party’s leader in the House of Commons Andrea Leadsom told the parliament today that “A full day’s debate on the motion will take place on Tuesday 29 January, subject to the agreement of the house.”

                                      Regarding the possibility of a second referendum, opposition Labour leader Jeremy Corbyn said “If a second referendum takes place, then obviously the party will decide what role we will play in that … but I can’t really go along with the idea that it should simply be a re-run of what happened in 2016”. And, “there has to be a discussion about the options that we put forward,”

                                      Eurozone CPI finalized at 1.6% in Dec, sharply lower from 1.9% in Nov

                                        Eurozone CPI was finalized at 1.6% yoy in December 2018, sharply lower from 1.9% yoy in November. Headline CPI was just 0.2% higher than 1.4% yoy back in December 2017. Core CPI was finalized at 1.0% yoy , unchanged from prior month.

                                        The highest contribution to the annual Eurozone inflation rate came from services (+0.58 percentage points, pp), followed by energy (+0.53 pp), food, alcohol & tobacco (+0.34 pp) and non-energy industrial goods (+0.12 pp).

                                        Full release here.

                                        ECB Lautenschlaeger still expects 2019 rate hike, but data driven

                                          ECB Executive Board member Sabine Lautenschlaeger, a known hawk, said the central bank could still raise interest rate in 2019. She told Politico that “I’ll wait for the projections coming in March before I change my view”. She added “I’m data-driven in this, and I think that as we are still in the environment we projected.”

                                          Also, pointing to recent dip in inflation, she said “It was clear that with the base effects of the energy prices, the inflation rate would drop”. However, “The core inflation rate didn’t dip that much.”