US headline CPI accelerated to 2.5% yoy in October, up from 2.3% yoy and matched expectations. However, core CPI slowed to 2.1% yoy, down from 2.2% yoy and missed expectation of 2.2% yoy.
BLS noted that gasoline was responsible for “over one-third” of the headline advances. On the other hand, food index “decline slightly”. For core CPI, ex-food and energy, medical care, household furnishing, motor insurance, tobacco all increased. But communications, new vehicles and recreation all declined.
Sterling reversed some of this week’s gain as Brexit optimism has now turned into cautiousness. UK Prime Minister Theresa May will hold a Cabinet meeting shortly to secure support for her agreement with the EU. And she plan to issue Commons statement after that. EU’s chief negotiator Michel Barnier also plans to make a statement today on the status, and hopefully, he would declare “decisive progress” for a November EU summit. The could be some more volatility in the pound in the upcoming hours.
For now, New Zealand Dollar remains the strongest one for today, followed by Canadian Dollar and then US Dollar. WTI crude oil dipped to as low as 54.84 but it’s now back above 56. The recovery is giving Canadian a breath but that could be temporary. Meanwhile, Swiss Franc is trading as the weakest one, followed by Australian Dollar and then Sterling.
Economic data released today saw US CPI and core CPI stalled at 2.4% yoy and 1.9% yoy respectively. German GDP and Japan GDP contracted in Q3 and both were attributed to global trade tensions. US CPI will be the next focus.
In European markets, major indices are trading mildly softer today. At the time of writing:
Earlier in Asia
ECB Governing Council member Klaas Knot said today that “it’s quite pertinent that Italy actually complies with the rules” of EU on budget. Or, he warned that “if it doesn’t, the result is that spread will go up.”
For now, Knot saw limited contagion from rising Italian yields. He added “we’re not seeing an overall deterioration in credit conditions, we’re not seeing an overall deterioration in financial conditions”. And, “those would have to be the kind of things that we would first have to see before could contemplate changing our course of action.”
Italian 10 year yield hit as high as 3.547 earlier today and it’s now at 3.494, up 0.047.
UK Headline CPI was unchanged at 2.4% yoy in October, below expectation of 2.5% yoy. Core CPI was also unchanged at 1.9% yoy, below expectation of 2.0% yoy. RPI, too, was unchanged at 3.3% yoy, below expectation of 3.4% yoy.
ONS noted that the “large downward contributions to the change in the 12-month rate from food and non-alcoholic beverages, clothing and footwear, and some transport elements”. They were offset by “contributions from rising petrol, diesel and domestic gas prices.”
PPI input slowed to 10.0% yoy, down from 10.5% yoy, below expectation of 9.6% yoy. PPI output rose to 3.3% yoy, up from 3.1% yoy and beat expectation of 3.1% yoy. PPI output core was unchanged at 2.4% yoy, matched expectation.
Also from UK, house price index rose 3.5% yoy in September, accelerated from 3.1% yoy and beat expectation of 3.3% yoy.
Overall, Sterling shows little reaction to the release and eyes are on PM May’s Cabinet meeting on Brexit agreement.
German GDP contracted -0.2% qoq in Q3, slightly better than expectation of -0.3% qoq. That’s also the first quarter-on-quarter decline since Q1 2015. But that’s a notable reversal from 0.5% qoq growth in Q2. The Federal Statistical Office noted that the slight decline in GDP was “mainly due to the development of foreign trade” as exports were down while imports were up in the quarter. “As regards domestic demand, there were mixed signals”.
Economy Ministry said in its monthly report that “the upturn was merely disrupted during the third quarter”. And, “once these special effects have dissipated, the German economy’s upturn will continue.”
According to the new draft budget plan (DBP) submitted by Italy to the European commission, growth forecasts are held unchanged at 1.5% in 2019, 1.6% in 2020 and 1.4% in 2021. These are widely seen as overly optimistic as European Commission forecasts only 1.2% growth in 2019. The IMF projects only 1.0% growth in Italy in the same year. The budget deficit target was also held at 2.4% of GDP in 2019. Among that, Italy planned to raise its structural deficit by 0.8% of GDP. This is clearly a violation of EU’s demand to cut by -0.6%.
However, the new draft showed fall debt as Italy planned to use funds equal to 1% of GDP from privatization. This is seen as an act to address EU’s major concern on ballooning debt. Public debt is now estimated to fall to 129.2% of GDP in 2019, then further to 127.3% in 2020, and then 126.0% in 2021. Italy’s debt stands at 130.9% this year.
The new DBP now risk triggering the Commission’s penalty process. But Italian Deputy Prime Minister Matteo Salvini warned that “they’ve got it wrong if they are even just thinking of imposing fines on the Italian people.” Economy Minister Giovanni Tria also insisted that fiscal expansion is necessary for the country.
Japan GDP contracted -0.3% qoq in Q3, matched expectation. Annualized rate showed -1.2% contraction, worse than expectation of -1.0%. GDP deflator dropped -0.3%, lowest than expectation of -0.2%. One detail to note is that exports contracted -1.8% qoq, fastest decline in over three years. It seems that the contraction in Q3 cannot be explained only by natural disasters. But the steep contraction in exports argued that US related trade tensions was also weighing on the economy of Japan. Though, it will take another quarter or two to really gauge the impact from protectionism.
Japan Economy Toshimitsu Motegi sounded confident and optimistic though. He said that “Japan’s economy is expected to recover driven mainly by domestic demand. Though he also warned that “we need to be vigilant to the impact of overseas uncertainties, financial market volatility and how trade problems affect the global economy.”
Also from Japan, tertiary industry index dropped -1.1% mom in September versus expectation of -0.4% mom. Industrial production dropped -0.4% mom versus expectation of -1.1% mom.
Italy refused to meet European Commission’s demand on revising its budget. Instead, the coalition government said that 2019 budget deficit target will be maintained at 2.4% of GDP. Growth forecast was also kept unchanged at 1.5%. The government statement noted that “we have the conviction that this is the budget needed for the country to get going again.” Nevertheless,the government pledged to beef up asset sales and monitor spending closely.
The European Commission have rejected Italy’s draft budget plan and requested re submission by November 13, yesterday. European Commission President Jean-Claude Juncker warned earlier this week that “the Italians are moving away not just from what they have promised us but also away from the minimum requirements of the stability pact.”
The US Commerce Department has submitted the draft recommendations regarding Section 232 national security tariffs on autos to the White House this week. The recommendations were discussed at a regular weekly meeting of Trump’s top trade officials yesterday. So far, no immediate action is taken by Trump.
At the same time, EU Trade Commissioner Cecilia Malmstrom will meet US Trade Representative Robert Lighthizer on Wednesday to carry on trade negotiations. Ahead of that, she said “We assume that if that (U.S. auto tariffs) were to happen, that would not be for the European Union,”. She referred to the agreement between Trump and European Commission President Jean-Claude Juncker that auto tariffs won’t apply to the EU when negotiations are still on going. Malmstrom also reiterated that the scope of the EU-US trade deal will be “limited” to industrial goods. She emphasized “be very clear, it will not include agriculture.”
Juncker said earlier this week that “we had achieved that there will not be a new trade conflict over the summer months until the end of the year, particularly with regard to car tariffs.”
The UK and EU have finally agreed on the texts of the Brexit withdrawal agreement after intensive work this week. UK Prime Minister Theresa May’s office confirmed and said “Cabinet will meet at 2:00pm tomorrow to consider the draft agreement the negotiating teams have reached in Brussels, and to decide on next steps.” And, “Cabinet ministers have been invited to read documentation ahead of that meeting”. Approval by the Cabinet will just make the deadline for holding a special EU summit by the end of November for the issue.
It’s reported that the agree will adopt a UK-wide customs backstop aimed preventing a hard Irish border. It’s so far unsure how much support May could get from her Cabinet. Boris Johnson and Jacob Rees-Mogg have already voiced objection to the draft agreement immediately. Johnson said the plan was “utterly unacceptable to anyone who believes in democracy” and he would vote against it. Rees-Mogg warned that UK would become a “vassal state” with Northern Ireland “being ruled from Dublin”. And Mogg added “It is a failure of the government’s negotiating position and a failure to deliver on Brexit”.
On the other hand, it’s reported that five senior ministers Dominic Raab, Jeremy Hunt, Sajid Javid, Michael Gove and Geoffrey Cox will back the Brexit deal.
At the time of writing, GBP/CAD is the top mover for today. But it’s very tight. Sterling is strongest for sure as boosted by Brexit optimism. The headlines flying around suggest that both UK and EU are working intensely to complete the withdrawal agreement, including the stick Irish backstop, within a day or two. That would give a green-light to hold an unscheduled EU summit to approve the deal later in November.
While there is no confirmation of any sort for the moment, at least, traders are betting on a positive outcome.
On the other hand, Canadian Dollar suffers renewed selling as oil price decline accelerates. WTI crude oil has now breached 57. The news of Saudi Arabia’s export cut earlier this week just gave oil price a temporary lift.
Take a look at GBP/CAD, the cross had two attempt to break through 1.6594 support in October but failed. This week’s rebound off 55 day EMA is a bullish development. But for now, it’s still holding in range of 1.6594/7285. So, we’d treat the current rebound as part of the consolidation pattern from 1.6594. That is, upside attempt would be limited by 38.2% retracement of 1.8415 to 1.6594 at 1.7290. Fall from 1.8415 is still expected to resume through 1.6594 low at a later stage. However, firm break of 1.7290 will invalidate out view and would at least bring further rise rise back to 61.8% retracement at 1.7719.
Sterling rebounds broadly today, except versus Kiwi, as bears refuse to commit further selling. Stronger than expected UK wage growth in September does provide some support. But more importantly, there are rumors flying around about an imminent Brexit deal with the EU. It’s reported that the “texts” are ready and they’re just waiting for the nod from UK Prime Minister Theresa May. We’ll see if both sides can really agree on something that paves the way to a November EU summit.
Australian and New Zealand Dollar are also strong on improved sentiment over optimism on US-China trade spat. China Vice Premier Liu He might travel to the US to meet with Treasury Secretary Steven Mnuchin shortly, to prepare for the meeting between Trump and Xi on November 30 at the G20 summit. Yen and Dollar are trading as the weakest ones, paring some of this week’s gain. Canadian Dollar is back under pressure as WTI crude oil resumes recent free fall and hit as low as 58.33.
In other markets, major European indices are trading higher at the time of writing:
Earlier in Asia
German ZEW Economic Sentiment improved to -24.1 in November, up from -24.7 and beat expectation of -24.2. Current Situation index, however, dropped sharply to 58.2, down from 70.1 and missed expectation of 65.0. Eurozone ZEW Economic Sentiment dropped to -22.0, down from -19.4 and missed expectation of -17.3. Eurozone Current Situation dropped sharply by -13.8 to 18.2. ZEW noted that “the outlook for the Eurozone has deteriorated even more than it has for Germany.”
ZEW President Professor Achim Wambach noted in the release  “The figures for industrial production, retail sales and foreign trade in Germany all point towards a weak development of the German economy in the third quarter. This is reflected by the fact that the assessment of the current situation has experienced a decline. The expectations of the survey participants for the coming six months do not show any improvement. This means that, at the moment, they do not expect to see a speedy recovery of the currently weak development of the economy”.
UK unemployment rate rose 0.1% to 4.1% in the three months ended September, above expectation of 4.0%. But wage growth showed clear acceleration. Average weekly earnings including bonus rose 3.0% 3moy in September, up from 2.7% and matched expectation. Weekly earnings excluding bonus rose 3.2% 3moy, up from 3.1%, beat expectation of 3.1%. Jobless claims rose 20.2k in October, higher than expectation of 4.3k. Overall set of data should be pound positive, but there is no follow through buying yet.
Comments from UK officials regarding Brexit negotiation are rather confusing today. Cabinet Office Minister David Lidington said that “we’re not quite there yet”. But he emphasized “we are almost within touching distance now. ” And, a deal in the next 24 or 48 hours is “possible but not at all definite”. He was “cautiously optimistic”.
On the other hand, Foreign Minister Jeremy Hunt said “we don’t have a solution yet”. He added “both sides draw encouragement form the fact that so much has been agreed”. And the figure 95% used was “probably accurate”. The 5% is a “difficult 5 percent though”. Hence, “we don’t know when it’s going to be possible to conclude those negotiations.”
ECB Chief Economist Peter Praet admitted in a speech that recent developments in the Eurozone “point to some slowdown in the pace of economic growth”. The slowdown reflects “a loss of momentum in global activity”. And, the retreat from strong growth of 2017 was “compounded by short term country-specific of sector-specific factors. Nevertheless, domestic demand “remained resilient” and sentiment indicators remained in “expansionary territory”. He added that the underlying strength of the economy “continues to support our confidence that the sustained convergence of inflation to our aim will proceed.” But “significant monetary policy stimulus is still needed”.
On monetary policy, Praet emphasized that “winding-down of net asset purchases is not tantamount to a withdrawal of monetary policy accommodation.” The “rotation” from net asset purchase towards enhanced forward guidance has “preserved the ample degree of monetary policy accommodation”. And looking ahead, the key policy rates and forward guidance will become an “anchor” for monetary policy as end of asset purchase is nearing. The communications and the rate path will be “calibrated to ensure that inflation remains on a sustained adjustment path.”
Full speech “Preserving monetary accommodation in times of normalisation“.
Australia NAB Business Confidence dropped 2pts from 6 to 4 in October. Business Conditions also dropped 2pts from 14 to 12. Alan Oster, NAB Group Chief Economist noted that “the decline in the month was driven by weakness in the employment component – though at these levels the survey still suggests ongoing employment growth at around 20k per month. At this rate we should see recent labour market gains maintained”.
Also, it’s noted in the release that “surveyed wage bill measures and the official wage price index suggest that enough spare capacity has remained in the labour market to constrain a significant pickup in wage growth”. Hence, “September quarter wage data to be released later this week will show a small rise in the pace of growth but that overall wage growth will remain low relative to history.”
The data certainly supports the “no rush” stance of RBA.
Hong Kong stocks opened the day sharply lower with HSI hitting as low as 25092.30. That followed -2.32% decline in DOW overnight. But sentiments were then lifted by US-China trade news. The HSI just had an over 500pts swing and is now at 25060.49, down just -0.1%. AUD/USD is also lifted notably after breaching 0.7182 minor support earlier today.
It’s firstly reported that US Treasury Secretary Steven Mnuchin has resumed discussed with China Vice Premier Liu He on Friday. While there was certainly no breakthrough, it’s a positive step on preparation for Xi-Trump meeting at G20 summit on November 30.
Then, another report emerged saying that Liu would visit the US shortly to carry on with the preparations. The Hong Kong SCMP newspaper said two sources, on both sides, have confirmed the development, even though there is no final schedule yet.
Latest data from BoJ showed that the central bank is holding JPY 553.6T of assets as of November 10. Among them, JPY 469.1T are Japanese government securities, accumulated through over five years of the Quantitative and Qualitative easing program.
The total assets now surpassed the countries’ GDP. Based on Q2 (April to June) data, Japan’s nominal GDP was annualized at JPY 552.8T. Q3’s data might, due on Wednesday, might come in a bit lower due to natural disasters. Nevertheless, Japan is now the first among G7 countries to own a pool of assets larger than its own GDP.
The situation drew criticism that the ultra loose monetary policy is clearly not sustainable. Some noted that BoJ would suffer losses if it would have to raise interest rate. But that’s not so much of an immediate problem. The bigger risk is that in case of real emergency, like a full blown disaster, BoJ will not be able to finance government bonds any more.
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May secured cabinet support for Brexit deal, Sterling reactions volatile yet muted
After some last minute dramas, UK Prime Minister Theresa May finally secured the backing from her Cabinet, on the Brexit draft agreement. As a more positive sign, there is no resignation of ministers so far. May said after a five-hour marathon meeting that “the collective decision of cabinet was that the government should agree the draft withdrawal agreement and the outline political declaration.” She added, “when you strip away the detail, the choice before us was clear: this deal, which delivers on the vote of the referendum, which brings back control of our money laws and borders, ends free movement, protects jobs security and our Union; or leave with no deal; or no Brexit at all.”
EU chief Brexit negotiator Michel Barnier hailed the UK for making a “decisive, crucial step” towards orderly Brexit. Referring to the draft, he said “this is a precise, detailed document… which provides legal certainty for everyone and on all the issues where we have to deal with the consequences of Brexit.” While it ” may be hard to guarantee an orderly withdrawal”, he pledged that UK will remain “our friend, our partner, and our ally.” Barnier had also passed his recommendation to EU27 leaders that “decisive progress” had been made for an extra EU summit, probably on November 25, to sign off.
EU’s statement here, with link to the withdrawal agreement.
Sterling’s reactions to the development were volatile, yet muted. There were ups and downs in GBP/USD, GBP/JPY and EUR/GBP. But they’re after all, kept in familiar range.