S&P Global Ratings said Australia’s AAA sovereign rating is not at immediate risk from the devastating bushfires. Credit analyst Anthony Walker said, “we do not believe that these bushfires will affect credit metrics enough to trigger rating changes in the next one to two years”.
“We believe there is capacity within our current ratings on the sovereign and state governments to absorb the fiscal costs, which are relatively small compared with their budgets,” he noted.
US Treasury Secretary Steven Mnuchin told Fox News Channel that the US-China trade deal phase one is a “very, very extensive agreement”. And, “it is USD 200B of additional products across the board over the next two years, and, specifically in agriculture, USD 40B to USD 50B.”
He also emphasized that the deal “wasn’t changed in translation”. The translation process was a “technical issue”. At the day of signing, the administration “will be releasing the English version”. It’s reported that the final Chinese text was not completed yet.
China Vice Premier Liu He will lead a delegation to the US today and is set to sign the trade deal in Washington on Wednesday.
Canada employment rose 35.2k in December, above expectation of 20.0k. Unemployment rate dropped to 5.6%, down from 5.9%, beat expectation of 5.8%. In the 12 months to December, employment increased by 320k (+1.7%), the result of gains in full-time work (+283k or +1.9%).
US Non-Farm Payroll report showed 145k in December, below expectation of 160k. Notable job gains occurred in retail trade (+41k) and health care (+28k), while mining lost jobs (-8k). Unemployment rate was unchanged at 3.5%, matched expectations. Labor force participation rate was unchanged at 63.2%. Average hourly earnings rose 0.1% mom, missed expectation of 0.3% mom.
BoE policymaker Silvana Tenreyro “if uncertainty over the future trading arrangement or subdued global growth continue to weigh on demand, then my inclination is towards voting for a cut in Bank Rate in the near term.”
She added that “a key input in the decision is how uncertainty unwinds going forward, and how that impacts on demand. We will be watching very closely how firms and households respond to Brexit developments.”
“We are talking about the coming months, or I am talking about the coming months, on the possibility of further stimulus”, she said.
Non-farm payrolls report from US will be the most important even today, which could determine whether Dollar could extend the current rebound. Markets are expecting 160k jobs added in December. Unemployment rate is expected to be unchanged at 3.50%. Average hourly earnings are expected to grow 0.3% mom.
Looking at other employment data, ISM manufacturing employment dropped from 46.6 to 45.1, staying in deep contraction. But ISM services employment remained firm in expansion, down slightly from 55.5 to 55.2. The relative strength was clearly reflected in private sector jobs too. ADP jobs grew 202k, with 173k in services jobs and 29k in goods-producing jobs. Four-week moving average of initial claims rose slightly to 224k, up from 218k. Overall, services sector is the key to whether NFP would shine.
Gold should have topped out in near term at 1611.37, ahead of 61.8% projection of 1266.26 to 1557.04 from 1445.59 at 1625.29. We’re also seeing the five wave sequence from 1160.17 as being completed. Thus, it should now be in a medium term corrective pattern. Downside target of the correction is 1145.59, which is close to 38.2% retracement of 1160.17 to 1611.37 at 1439.01. But that would very much depends on today’s NFP as well as Dollar’s reaction.
Australia retail sales rose 0.9% mom in November, seasonally adjusted, above expectation of 0.4% mom. “We have seen strong growth in Black Friday sales, both in areas such as electrical goods and online sales, but also in areas such as clothing and furniture,” said Ben James, Director of Quarterly Economy Wide Surveys. “While seasonal adjustment removes regular seasonal patterns associated with Black Friday based on prior results, the strong seasonally adjusted rises in a number of sub-groups this month shows that the impact of this Black Friday exceeded that of previous years.”
AiG Performance of Services Index dropped sharply to 48.7 in December, down from 53.7. Among the three business-oriented sectors, finance & insurance reported positive results, logistics (wholesale trade, transport & storage) was stable, while business & property services contracted. Among the three consumer-oriented sectors, ‘retail trade & hospitality’ and ‘personal, recreational and other services’ reported positive conditions while ‘health, education & community services’ contracted slightly in December.
Comments from Fed officials yesterday generally suggested that interest rates are currently at the right place. There won’t be further rate cut unless outlook worsens materially.
St. Louis Fed President James Bullard said that the current 2020 baseline outlook suggests reasonable chance of “soft landing”. While growth is expected to slow, US is not facing a “sharper than anticipated” collapse. The three rate cuts in 2019 were “a substantial move”. “Now we should wait and see what the effects are in the first half of 2020 and beyond that,”
Minneapolis Fed President Neel Kashkari said that “trade tensions with China don’t seem to be increasing, so that’s a positive.” That could “translate into more business investment”. He added that Fed’s rate cuts have “taken some of the recession risk off the table.””We think inflation is around the corner and then inflation doesn’t come because we raise rates prematurely,” he said. “Now that we’re in a pause mode I think we’re in a much better position.”
Chicago Fed President Charles Evans said “I see the fundamentals as pretty good.” “If something were to happen that caused the economy to slow down and perhaps do worse than that then that would call for some type of response on the downward fashion. But I’m not expecting that”.
Dallas Fed President Robert Kaplan said federal funds rate at 1.50-1.75% is “a roughly appropriate setting.” GDP is expected to grow about 2% to 2.25% this year, “and if anything my growth outlook has firmed a bit in the last several weeks.” He also backed the view that rates should stay at current level unless there is “material” change in the outlook.
Fed Vice Chair Richard Clarida said the US economy begins 2020 “in a good place”. PCE price inflation is “running somewhat below” the 2% target. But Fed projects that inflation will “rise gradually” back to the 2% symmetric objective. Meanwhile, there is no evidence that a strong labor market is “putting excessive cost-push pressure on price inflation”.
Over the course of 2019, FOMC shifted the monetary stance to “offset some significant global growth headwinds and global disinflationary pressures.” Such shift was “well timed” and has helped keep the outlook on track. ” As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.”
Monetary policy is “not on a preset course”, he added. “if developments emerge that, in the future, trigger a material reassessment of our outlook, we will respond accordingly.
US initial jobless claims dropped -9k to 214k in the week ending January 4, below expectation of 222k. Four-week moving average of initial claims dropped -9.5k to 224k.
Continuing claims rose 75k to 1.803m in the week ending December 28. Four-week moving average of continuing claims rose 33k to 1.745m.
Outgoing BoE Governor Mark Carney said today that over the past year, UK growth has “slowed below potential” because of “weaker external backdrop and a persistent drag from entrenched Brexit uncertainties”. However, growth is expected to pick up ahead as “supported by the reduction of Brexit-related uncertainties, an easing of fiscal policy and a modest recovery in global growth.”
However, the rebound is “not, of course, assured”. there was a debate at the MPC “over the relative merits of near term stimulus to reinforce the expected recovery in UK growth and inflation”. “If evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response.”
Eurozone unemployment rate was unchanged at 7.5% in November, matched expectations. That’s the lowest rate since July 2008. The number of persons unemployment dropped by -10k for the month, to 12.315m.
EU28 unemployment was unchanged a 6.3%, a record low since January 2000. Among the Member States, the lowest unemployment rates in November 2019 were recorded in Czechia (2.2%), Germany (3.1%) and Poland (3.2%). The highest unemployment rates were observed in Greece (16.8% in September 2019) and Spain (14.1%).
Also released in European session, Germany industrial production rose 1.1% mom in November, beat expectation of 0.7% mom. Trade surplus narrowed to EUR 18.3B, below expectation of EUR 20.9B. Swiss retail sales rose 0.0% yoy in November, below expectation of 0.5% yoy.
EU chief Brexit negotiator Michel Barnier warned that more time than 11 months is needed to complete a comprehensive agreement with UK. He said in a speech that “we simply cannot expect to agree on every single aspect of this new partnership in under one year.”
“We are ready to do our best and to do the maximum in the 11 months to secure a basic agreement with the UK, but we will need more time to agree on each and every point of this political declaration,” he added.
Chinese Ministry of Commerce spokesman Gao Feng confirmed that Vice Premier Liu He will travel to Washington next week to sign the first phase of trade agreement with US. Liu will be in US from January 13 to 15 as head of the delegation. Also, he will travel with the titles of Politburo member, vice premier and top trade negotiator.
There are no details regarding the 86-page trade deal yet. US Trade Representative Robert Lighthizer expected the document to be released after signing. One of the mostly concerned part is China’s USD 200B purchases of US goods and services. But Gao declined to comment on the amount of the purchase.
In seasonally adjusted term, Australia goods and services exports rose AUD 706M to AUD 40.89B in November. Goods and services imports dropped AUD 1020m to AUD 35.09B. Trade surplus widened by AUD 1.73B to AUD 5.80B.
Balance on Goods and Services
In its January 2020 Global Economic Prospects report, World Bank forecasts global growth to pick up by 0.1% to 2.5% as “investment and trade gradually recover from last year’s significant weakness”. Even so, that was a -0.2% downgrade from June’s projection of 2.7%. Growth in US is expected slow from 2.3% to 1.8% (revised down by -0.2%). Eurozone growth is projected to slow from 1.1% to 1.0% (revised down by -0.1%). Japan’s growth is estimated to slow from 1.1% to 0.7% (revised up from 0.3%). China’s growth is projected to slow from 6.1% to 5.9% (revised down by -0.1%).
World Bank also warned: “Downside risks to the global outlook predominate, and their materialization could slow growth substantially. These risks include a re-escalation of trade tensions and trade policy uncertainty, a sharper-than expected downturn in major economies, and financial turmoil in emerging market and developing economies. Even if the recovery in emerging and developing economy growth takes place as expected, per capita growth would remain well below long-term averages and well below levels necessary to achieve poverty alleviation goals.”
S&P 500 and NASDAQ jumped to new record highs overnight as risk of imminent US-Iran war receded after President Donald Trump indicated he’s not expectation further retaliations for now. He said in Washington that “no Americans were harmed in last night’s attack by the Iranian regime… All of our soldiers are safe and only minimal damage was sustained at our military bases”. “Iran appears to be standing down, which is a good thing for all parties concerned and a very good thing for the world,” Trump added.
S&P 500 is holding well above 3212.03 support with recent consolidations. Hence, near term bullishness is maintained. Current up trend could target 161.8% projection of 2728.81 to 3027.98 from 2855.94 at 3339.99 next. However, upside momentum is clearly diminishing as seen in daily MACD. Upside should be limited around 3339.99 to bring consolidations at least. Meanwhile, break of 3212.03 will suggest that a short term top is formed and bring pull back to 55 day EMA (now at 3140.64).
US commercial crude oil inventories rose 1.2m barrels in the week ending January 3, versus expectation of -3.4m barrels decline. At 431.1 million barrels, U.S. crude oil inventories are at the five year average for this time of year.
WTI crude oil spiked higher to 65.38 after Iran’s strikes against US led forces in Iraq. But WTI quickly pared gains after the strikes caused no American casualties, thus risking less further escalations. WTI turns further softer after oil inventory release. Focus in now back on 60.46 support.
Purely technically, we’d continue to expect strong resistance from 63.04/66.49 to limit upside to complete the rise from 50.86. Break of 60.46 should confirm short term topping and bring deeper fall to 55 day EMA (now at 58.81) first.
ECB President Christine Lagarde said in an interview that “both within the euro area and globally, the biggest threat is a downturn in trade resulting from a range of uncertainties, primarily affecting manufacturing and hampering investment. his range of uncertainties, in addition to geopolitical risks and issues relating to climate change, includes ongoing trade tensions and Brexit.”
Also, the biggest challenge surrounding Brexit is “yet to come”. That is the issue of reaching a EU-UK trade deal within the 11-month transition period. She added, “the economic and financial impact of Brexit will depend on the details of that agreement – if indeed one can be reached – during that short period of time.”
On European policy, Lagarde said there are “three elements” to the policy mix: monetary policy, fiscal policy and structural reforms. Greater cooperation between competent authorities, without infringing on the independence of their roles, would make it possible to optimise the multiplier effects of their decisions.
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BoE Vlieghe: Imminent and significant improvement in data need to justify waiting
BoE policymaker maker Gertjan Vlieghe told Financial Times on Sunday that it’s been a “close call” on whether he’d vote for a rate cut. And, “it doesn’t take much data to swing it one way or the other”. He added, “I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.”
Vlieghe noted there will be a lot of information coming in “as soon as the end of January”. “We’ll get a lot of business and some household surveys that cleanly relate to the period after the election, so that will give us an initial read as to how people are responding.”
Outgoing Governor Mark Carney said last week that BoC could cut interest rate in economic weakness persists in to 2020. Another MPC member Silvana Tenreyro also said she could be inclined to a cut a sluggishness remains. The upcoming data from UK this week will be important tests for the Pound.