Eurozone CPI was finalized at 1.9% yoy in November, down from 2.2% yoy in October. Nevertheless, it’s still notable improvement from 1.5% yoy in November 2017. Forex CPI was finalized at 1.0% yoy.
European Union inflation was finalized at 2.0% yoy, down from 2.2% yoy. That compared to 1.8% yoy back in November 2017. Among EU member states, inflation was highest in Romania, Hungary and Estonia at 3.2%. Lowest inflation was recorded in Denmark at 0.7%.
In the latest monthly report, Germany’s Bundesbank warned that it may take more time for the auto industry to recovery from its recent “temporary” slump. It noted that “Normalization in the automotive industry may be slower than initially thought,” And, “the weak order intake from Germany and the slowdown in registration numbers could be an indication that domestic consumers are currently holding back on purchases”.
Nevertheless, export orders remained strong and other segments of the economy performed well. In Q4, Bundesbank still expected “noticeable expansion.
At the WTO Trade Policy Review of the US, the country’s ambassador Dennis Shea complained that China’s ” state-led, mercantilist approach to the economy and trade” and actions are “incompatible with the open, market-based approach” of the WTO and its members. At the same time, “he further criticized that “the WTO is not well equipped to handle the fundamental challenge posed by China”.
He elaborated and said “China pursues an array of non-market industrial policies and other unfair competitive practices aimed at promoting and supporting its domestic industries while simultaneously restricting, taking advantage of, discriminating against, or otherwise creating disadvantages for foreign companies and their goods and services.”
And, “from forced technology transfer to the creation and maintenance of severe excess industrial capacity to a heavily skewed playing field in China, the results of China’s approach are causing serious harm to the United States and many other WTO Members and their companies and workers.”
On the other hand, he hailed that the US “maintains one of the world’s most open trade regimes that is firmly based in the rule of law and that is a powerful engine for global growth”. The US continues to “seek trade liberalization and will deepen our relationships with countries who share our commitment to fair market competition and reciprocity.”
IMF Director of Asia and Pacific department Changyong Rhee indicated that US-China trade war is already having an impact on business confidence and investment in Asia. And there could be global growth forecasts downgrades in the next update in January. In particular, he said Japan and South Korea could be among the those hardest hit due to reliance on exports to China.
He noted that “Investment is much weaker than expected. My interpretation is that the confidence channel is already affecting the global economy, particularly Asian economies”. And, “we see global growth a little bit slower than we forecast in October.” He also added that “Uncertainty is so large … uncertainty means you have upside potential as well as downside risk. At this moment, we believe the downside risk is a little bit higher.”
Regarding China, Rhee said “They aren’t accelerating (stimulus) yet but taking the foot from the brake for the time being. But that doesn’t exclude the possibility that if the trade tension escalates, if growth goes down, they are ready to use stimulus.” But at the same time, IMF is concerned with China’s medium term goals including deleveraging And Rhee urged that “when they actually try to use stimulus, we hope they can use more fiscal policy rather than credit expansion.”
IMF mission chief for Japan Paul Cashin said BoJ should maintain its massive stimulus program as “the so-called side-effects are not large enough to outweigh the benefits at present:. He added “the only game in town is achieving the target” of 2% inflation. He warned that “Tightening now is not going to help you get there. They’re very much committed to reaching the target, and we think that’s the right thing to do.”
On to the planned sale tax hike, he said “we’re not against putting them in and some of the revenue can be used for (tax breaks) but only on a temporary, time-bound basis.” He emphasized “equally important is clear communication on what these measures are, when they will begin and what particular tax and subsidies will be involved … because people plan ahead and won’t wait until October to make consumption decisions.”
In Italy, leaders of the coalition government sounded optimistic that they would eventually avoid disciplinary actions by the EU over its 2019 budget. Leader of the League Matteo Salvini said, after meeting with 5-Star Movement head Luigi Di Maio and Prime Minister Giuseppe Conte, “We have found an agreement on further fiscal reductions that probably will be appreciated by the EU.”
Salvini’s spokeswoman also said that there is “total agreement between Conte, Salvini and Di Maio on the numbers and contents of the proposal to send to Brussels,” regarding 2019 budget plan. And she denied there were tensions within the coalition government and rumors that Prime Minister Giuseppe Conte had threatened to quit.
Separately, Di Maio also said the talks with the commission “will allow us to avoid an infraction procedure”.
According to pre-released text, UK Prime Minister Theresa May will urged parliament today not to “break faith” with the British people with another referendum. She will also warned that “Another vote which would do irreparable damage to the integrity of our politics, because it would say to millions who trusted in democracy, that our democracy does not deliver. Another vote which would likely leave us no further forward than the last”
Separately, Trade Minister said in a BBC show that “it is very clear that the EU understand what the problem is. And it’s a question now, without unpicking the whole of the withdrawal agreement, can we find a mechanism of operating the backstop in a way that actually removes those anxieties”. He added that “It will happen over Christmas, it’s not going to happen this week, it’s not going to be quick, it will happen some time in the New Year.”
Irish Foreign Minister Simon Coveney told RTE television that “If there is an entirely new proposal coming from the UK, I think undoubtedly it would need a lot more time to be considered on the EU side and that would probably involve an extension of Article 50 or pulling Article 50 for the moment.”
Markit US PMI manufacturing dropped to 53.9, down from 55.3 and missed expectation of 55.1. It’s a 13-month low. PMI services dropped to 53.4, down from 54.7 and missed expectation of 55.0. It’s a 11-month low. PMI composite dropped to 53.6, down from 54.7. It’s the lowest reading in 19-month. .
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“The flash PMIs bring signs of the US economy ending 2018 on a softer note. With business activity expanding at the slowest rate for one and a half years, the surveys indicate that the pace of economic growth has faded to 2.0% in December, albeit closer to 2.5% for the fourth quarter as a whole.
“Importantly, although growth remains relatively robust, momentum is being lost and is likely to continue to fade as we move into 2019. New order inflows hit the lowest since April of last year and expectations regarding future business growth have slipped to the lowest for two-and-a-half years.
“The surveys reveal greater caution in relation to spending amid uncertainty about the economic outlook, linked in part to growing geopolitical concerns and trade wars.”
“The weaker picture of current and future business growth has curbed appetite for hiring. Jobs growth inched down to the lowest for one and half years but remains consistent with non-farm payrolls rising in December by around 180,000.
“Price pressures have meanwhile cooled as lower oil prices feed through, yet rising tariffs remain a concern for many companies, keeping input cost inflation above the survey’s long-run average.”
Worries on global slowdown dominates the markets today. It started with weaker than expected Chinese data which prompted selloff in Asian stocks. Poor Eurozone PMI composite, which dropped to 49-month low, could have intensified selling. But sentiments somewhat stabilized slightly after China announced to suspend retaliatory tariffs on US autos and parts for three months. Still, European indices are in deep red.
In the currency markets, New Zealand and Australian Dollar are the weakest ones for today, breaking yesterday’s lows against most other major currencies. Sterling is the third weakest after UK Prime Minister Theresa May got nothing but vague assurances from the EU regarding Irish backstop. Yen and Dollar are the strongest ones.
For the week, Dollar is the strongest, followed by Canadian and Aussie. Sterling remains the weakest on Brexit, followed by Kiwi and then Euro.
In European markets, at the time of writing:
Earlier in Asia:
Japan 10 year JGB yield dropped -0.019 to 0.035. It’s a bit early to tell. But based on current momentum 2018 low at 0.017 is within reach. Sentiments had a big turn since October.
ECB Vice President Luis de Guindos defended the central bank’s decision to ended the asset purchase program this month, without any further stimulus exit said. He said that “We’re in a dark room that sometimes gets a bit darker, and when you are in a dark room you have to be very cautious and try to keep your optionality at the maximum level,”
Governing Council member Vitas Vasiliauskas warned of growing risks in 2019. He said “next year the balance of risk is more likely to turn in a negative direction but for the moment, because risks and economic data are quite mixed, yesterday’s meeting still described the risk outlook as balanced,”
Another Governing Council member Ewald Nowotny said the central bank should ends the negative deposit rate policy as son as possible. He said, “My personal view is that specifically this rate, that is this phenomenon of negative interest rates, should be reconsidered as soon as economically possible.” He added, “It is also a specificity of the ECB. The U.S. never had a negative rate.”
China Ministry of Finance announced to suspend retaliation tariffs on US autos and parts for 30 days, as a result of the meeting between Xi and Trump in Argentina.
The statement noted that important consensus was reached between the two heads of state. And in order to implement the consensus, China will suspend the additional tariffs imposed this year on 211 items for three months from January 1 to March 31, 2019.
The lists include 25% tariffs on 28 items in list 1, 25% tariffs on 116 items in list 2, and 5% tariffs on 67 items in list 3.
Eurozone PMI manufacturing dropped to 51.4 in December, down from 51.8, missed expectation of 51.9. It’s a 34-month low. PMI services dropped to 51.4, down from 53.4, missed expectation of 53.4. It’s a 49-month low. PMI composite dropped to 51.3, down from 52.7, a 49-month low.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“The Eurozone economy saw a disappointing end to 2018, with growth slowing to the weakest for four years. While some of the slowdown reflected disruptions to business and travel arising from the ‘yellow vest’ protests in France, the weaker picture also reflects growing evidence that the underlying rate of economic growth has slowed across the euro area as a whole.
“Companies are worried about the global economic and political climate, with trade wars and Brexit adding to increased political tensions within the euro area. The surveys also point to further signs that the struggling autos sector continued to act as a drag on the region’s economy.
“While GDP growth in the fourth quarter as a whole is indicated at almost 0.3%, the surveys point to quarterly GDP growth momentum slipping closer to 0.1% in December alone. Forward-looking indicators such as new orders and future expectations remaining subdued suggest that demand growth is stalling, adding to downside risks to the immediate outlook.
“The survey also brought signs that lower oil prices are feeding through to lower selling price inflation, though price trends remained very varied across the region. Germany continues to report the highest rates of increase, in part linked to higher wage growth.”
Germany PMI manufacturing dropped to 51.5, down from 51.8, missed expectation of 51.7. It’s a 33-month low. PMI services dropped to 52.5, down from 53.3, missed expectation of 53.5. It’s the lowest in 7 months. PMI composite dropped to 52.2, down from 52.3, a 48-month low.
Commenting on the flash PMI data, Phil Smith, Principal Economist at IHS Markit said:
“The PMI data disappointed again in December, indicating the continuation of only a modest rate of underlying growth across Germany’s private sector. Furthermore, with new orders close to stalling in December and firms reporting reduced optimism towards the outlook, there’s a lack of momentum heading into the New Year.
“It’s a stark contrast from the situation this time last year. Reports of an economy close to overheating have been supplanted by concerns about an increasingly uncertain political backdrop, trade wars and a struggling autos industry.
“The survey’s measures of output and new orders diverged further from that of employment as December saw another solid – and slightly accelerated – round of job creation across both manufacturing and services. With firms now eating into backlogs of work at a faster rate, the indication is that a renewed slowdown in hiring is increasing likely.”
France PMI manufacturing dropped to 49.7 in December, down from 50.8, and missed expectation of 50.7. It’s the worst reading in 27 months. France PMI services dropped to 59.6, down from 55.1 and missed expectation of 54.8. It’s the lowest level in 34 months. PMI composite dropped to 49.3, down from 54.2. It’s a 30-month low and the first contraction reading in 2 1/2 years.
Commenting on the Flash PMI data, Eliot Kerr, Economist at IHS Markit said:
“Having held up reasonably well throughout the initial months of Q4, latest flash data pointed to an outright contraction in France’s private sector for the first time in two-and-a-half years, following the protests which have swept through the country in recent weeks. Momentum in the manufacturing sector’s downturn gathered pace, while most notably, the service sector’s resilience came to a halt, with business activity and demand dropping.
“Prior to the December flash results, survey data suggested that the French economy was set to record a fairly reasonable quarterly expansion in Q4. Having propped private sector growth up in recent months, contraction in the service sector presents significant downside risks to Q4 growth prospects.”
Economic data released from Japan today are not bad. Based on the results of the Tankan survey, it’s unlikely for BoJ to ease monetary further. Yet, it’s not time for the central bank to start stimulus exit too.
PMI manufacturing improved to 52.4, up from 52.2 and beat expectation of 52.3. Markit noted that “new order growth accelerates despite exports declining to sharpest extent in over two years”. However, “business confidence drops for seventh straight month to lowest since October 2016”.
Joe Hayes, Economist at IHS Markit, said in the release that “Japan’s manufacturing sector closed 2018 with a strong finish.” But the data also “bring some cautious undertones to the fore,”. In particular “Export orders declined at the fastest pace in over two years, while total demand picked up only modestly. Confidence also continued to fall, a seventh straight month in which this has now occurred.” He added “the prospects heading into 2019 ahead of the sales tax hike still appear skewed to the downside.”
The assurances that UK Prime Minister Theresa May got from the EU were rather vague and they unlikely to appease the MPs. But at the time same, it’s reported that May has been vague in her requests too. It caused some griefs from European Commission President Jean-Claude Juncker. He said at a press conference that “I do find it uncomfortable that there is an impression perhaps in the UK that it is for the EU to propose solutions”. And, “It is the UK leaving the EU. And I would have thought it was rather more up to the British Government to tell us exactly what they want.”
After yesterday’s EU summit, EU27 leaders concluded their positions on Brexit in a five point statement. Firstly, it’s “not open for renegotiation”. Secondly EU wishes to “establish as close as possible a partnership” with the UK in the future. Thirdly, the backstop is intended as an “insurance policy” to prevent hard Irish border. And EU has “firm determination to work speedily on a subsequent agreement” so that “the backstop will not need to be triggered”. Fourthly, if the backstop were triggered, “it would apply temporarily, unless and until it is superseded by a subsequent agreement that ensures that a hard border is avoided.” Fifthly, EU calls for preparedness for all possible Brexit outcome.
In the post meeting press conference, ECB President Mario Draghi said the assessment of risks was a focal point in the discussion during the meeting. And he’d summarize the discussions with “continuing confidence with increasing caution”.
ECB lowered both 2018 and 2019 growth forecast. Growth is now projected to be at 1.9% in 2018 (prior 2.0%), 1.7% in 2019 (1.8% prior), 1.7% in 2020 (unchanged) and 1.5% in 2021 (new). Draghi said that risks are “broadly balanced” but balance of risks is “moving to the downside”. He noted “persistence uncertainties” related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility”, as reasons.
On HICP inflation, it’s now projected to be at 1.8% in 2018 (1.7% prior), 1.6% in 2019 (1.7% prior), 1.7% in 2020 (unchanged), 1.8% in 2021 (new). ECB noted that headline inflation is likely to fall over the coming months “On the basis of current futures prices for oil”. Underlying inflation remains “generally muted”. Though, “domestic cost pressures are continuing to strengthen and broaden”.
Full introductory statement and press conference live stream here.
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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 President of the Eurogroup, Mr Centeno.
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, our net purchases under the asset purchase programme (APP) will end in December 2018. At the same time, we are enhancing our forward guidance on reinvestment. Accordingly, 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.
While incoming information has been weaker than expected, reflecting softer external demand but also some country and sector-specific factors, the underlying strength of domestic demand continues to underpin the euro area expansion and gradually rising inflation pressures. This supports our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after the end of our net asset purchases. At the same time, uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent. Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. Our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets, continues to provide the necessary degree of monetary accommodation for the sustained convergence of inflation to our aim. 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. The latest data and survey results have been weaker than expected, reflecting a diminishing contribution from external demand and some country and sector-specific factors. While some of these factors are likely to unwind, this may suggest some slower growth momentum ahead. At the same time, domestic demand, also backed by our accommodative monetary policy stance, continues to underpin the economic expansion in the euro area. The strength of the labour market, as reflected in ongoing employment gains and rising wages, still supports private consumption. Moreover, business investment is benefiting from domestic demand, favourable financing conditions and improving balance sheets. Residential investment remains robust. In addition, the expansion in global activity is still expected to continue, supporting euro area exports, although at a slower pace.
This assessment is broadly reflected in the December 2018 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.9% in 2018, 1.7% in 2019, 1.7% in 2020 and 1.5% in 2021. Compared with the September 2018 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised slightly down in 2018 and 2019.
The risks surrounding the euro area growth outlook can still be assessed as broadly balanced. However, the balance of risks is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.
According to Eurostat’s flash estimate, euro area annual HICP inflation declined to 2.0% in November 2018, from 2.2% in October, reflecting mainly a decline in energy inflation. On the basis of current futures prices for oil, headline inflation is likely to decrease over the coming months. Measures of underlying inflation remain generally muted, but domestic cost pressures are continuing to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets, which is pushing up wage growth. 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.
This assessment is also broadly reflected in the December 2018 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.8% in 2018, 1.6% in 2019, 1.7% in 2020 and 1.8% in 2021. Compared with the September 2018 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised slightly up for 2018 and down for 2019.
Turning to the monetary analysis, broad money (M3) growth stood at 3.9% in October 2018, after 3.6% in September. Apart from some volatility in monthly flows, M3 growth continues to be supported by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
In line with the upward trend observed since the beginning of 2014, the growth of loans to the private sector continues to support the economic expansion. The annual growth rate of loans to non-financial corporations stood at 3.9% in October 2018, after 4.3% in September, while the annual growth rate of loans to households remained unchanged at 3.2%. 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.
Further information on the technical parameters of the reinvestments will be released at 15:30 CET on the ECB’s website.
We are now at your disposal for questions.
US initial jobless claims dropped -27k to 206k in the week ending December 8, better than expectation of 227k. Four-week moving average dropped -3.75k to 224.75k. Continuing claims rose 25k to 1.661M in the week ending December 1. Four week moving average of continuing claims dropped -2.5k to 1.66575M.
Also released, US import price index dropped -1.6% mom in November, Canada new housing price index rose 0.0% mom in October.
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Into US session: European comeback but upside limited
Entering into US session, Dollar is notably the weakest one for today, followed by Australian Dollar and then Canadian Dollar. On the other hand, Swiss Franc is trading as the strongest one, followed by Euro, and then Sterling. European majors are trying to have a come back. Still, note that most major pairs are bounded inside Friday’s range. Today’s rebound in European majors are seen as corrective for now.
In European markets, at the time of writing:
Earlier in Asia: