Aussie lifted as RBA Lowe talks four developments that will help the economy

    Australian Dollar is apparently lifted by some positive comments by RBA Governor Philip Lowe in a speech. He noted that the two recent rate cuts, including today’s, will “make an important contribution to putting us on a better path and winding back spare capacity”. More importantly, he pointed out four developments that will help the economy.

    Firstly, borrowing costs for almost all borrowers are now the lowest they have ever been. It’s partly because of the RBA cuts and partly due to tighter credit spreads. Secondly, terms of trade have risen again, largely due to higher iron ore prices. And RBA expects a “solid upswing” in the resources sector. Thirdly, exchange rate has depreciated over the past couple of years. Fourthly, RBA expects stronger growth in household disposable income over the next couple of years, due to low and middle income tax offset.

    Together with the downside risks, globally and domestically, “what all this means for us here in Australia is yet to be determined.” Lowe reiterated “we will be closely monitoring how things evolve over coming months”. And, “the Board is prepared to adjust interest rates again if needed”.

    Full speech here.

    SNB Zurbruegg: Will stick to boring expansionary policy

      SNB Deputy Chairman Fritz Zurbruegg said the central bank will stick to the boring expansionary monetary policy today.

      He said, “we are boring and are sticking to our expansionary monetary stance.” He reiterated “we speak of negative interest rates and a readiness to intervene in the foreign exchange markets.” And he emphasized “we have flexibility and room to manoeuvre on both core instruments. We are absolutely convinced we can use these tools and will continue to do so.”

      Also Zurbruegg he noticed that international developments are having strongest influences on the Franc exchange rate. However, “it is not a given that we have to react to each and every development.”

      UK PMI construction dropped to 43.1, worst contraction over a decade

        UK PMI Construction dropped sharply to 43.1 in June, down from 48.6 and missed expectation of 49.2. It’s also the worst contraction since April 209. Markit noted that business activity declined for second month running. There was sharpest drop in house building for three years. And, new orders shrank as political uncertainty hits client confidence.

        Tim Moore, Associate Director at IHS Markit, which compiles the survey:

        “The latest survey reveals weakness across the board for the UK construction sector, with house building, commercial work and civil engineering activity all falling sharply in June. Delays to new projects in response to deepening political and economic uncertainty were the main reasons cited by construction companies for the fastest drop in total construction output since April 2009. While the scale of the downturn is in no way comparable that seen during the global financial crisis, the abrupt loss of momentum in 2019 has been the worst experienced across the sector for a decade.

        “Greater risk aversion has now spread to the residential building sub-sector, as concerns about the near-term demand outlook contributed to a reduction in housing activity for the first time in 17 months.

        “Construction companies reported a continued brake on commercial work from clients opting to postpone spending, with decisions on new projects often pending greater clarity about the path to Brexit. Latest data meanwhile indicated another sharp fall in civil engineering, which also reflected delayed projects and longer wait times for contract awards.

        “Worrying signals from the survey’s forward-looking indicators make it almost impossible to sugarcoat the Construction PMI data in June. In particular, new orders dropped to the largest extent for just over 10 years, while demand for construction products and materials fell at the sharpest pace since the start of 2010.

        “A continued lack of new work to replace completed projects illustrates the degree of urgency required from policymakers to help restore confidence and support the long-term health of the construction supply chain.”

        Full release here.

        Eurozone PPI -0.1% mom, 1.6% yoy in May

          Eurozone PPI came in at -0.1% mom, 1.6% yoy in May, versus expectation of 0.1% mom, 1.8% yoy. In April, PPI was at -0.3% mom, 2.6% yoy.

          Comparing by main industry grouping, PPI dropped -0.6% mom in energy sector and by -0.1% mom in intermediate goods. PPI rose 0.1% mom in capital goods and durable consumer goods, and by 0.2% in non-durable consumer goods. Prices in total industry excluding energy was flat.

          Full release here.

          German retail sales dropped -0.6% mom in May, 10-year bund yield hits new record low

            German retail sales dropped -0.6% mom in May, well below expectation of 0.5% mom. Compared with 2018, for the first fives months of the year, retail sales rose 2.8% in real terms. The weak data dampened hope that domestic demand could offset the drag from global trade on the export-led economy. Euro is steady after the release. But German 10-year bund yield is extending recent record run, hitting as low as -0.362 so far today.

            Full release here.

            USTR proposes tariffs on additional USD 4B of EU products

              Just days after agreeing to stop tariff escalation with China, US is now turning to EU. The US Trade Representative proposed tariffs on additional EU imports, as countermeasures to harm caused by EU aircraft subsidies. A “supplemental list” of 89 subheadings with approximate trade value of USD 4B was proposed. The list includes olives, Italian cheese and Scotch whiskey, etc.

              That’s additional to the USD 21B in EU imports published on April 12. A hearing will be held on the proposed additional products on August 5. But US could immediately impose increased duties on the products included in the initial list, if the WTO arbitrator issues a decision before the public comment period ends.

              Full USTR statement here.

              Trump: Trade negotiations with China essentially has already begun

                Trump said that trade negotiations with China “essentially has already begun”. And, negotiators were “speaking very much on phone they are also meeting”. He remained optimistic and said “I think we have a good chance of making a deal”.

                Though, he emphasized that China has had a “big advantage”over the US in trade for “many years”. Hence, “obviously you can’t make a 50-50 deal. It has to be a deal that is somewhat tilted to our advantage.”

                China to abolish foreign ownership in finance industry in 2020, a year earlier

                  Chinese Premier Li Keqiang pledged, in the World Economic Forum in northeastern Chinese port city of Dalian, to further open up the finance and manufacturing industry. Li said, “We will achieve the goal of abolishing ownership limits in securities, futures, life insurance for foreign investors by 2020, a year earlier than the original schedule of 2021.”

                  Additionally, manufacturing sector, including auto industry, will be opened by further by reduction in negative investment list that restricts foreign investment in some areas. Besides, the government will also reduce restrictions, in 2020, on market access in value-added telecoms services and transport sectors.

                  Li also noted “global economic risks are rising somewhat, international investment and trade growth is slowing, protectionism is rising and unstable and uncertain factors are increasing”. And, “some countries have taken measures including cutting interest rates, or sent clear signals on quantitative easing.” But he pledged China won’t resort to competitive currency devaluation but keep the exchange rate stable at a reasonable and balanced level.

                  AUD continuing recovery as RBA maintains easing bias but doesn’t turn more dovish

                    Australian Dollar recovered earlier today ahead of RBA rate decision. Some knee-jerk reactions were seen after RBA announced the highly anticipated 25 bps rate cut to 1.00%. But AUD/USD quickly found its footing as the accompanying statement revealed nothing special, and doesn’t indicate a drastic dovish turn. While RBA opens the door for more rate cut ahead, upcoming developments, including new economic projections in August, would play an important part in deciding when the next cut would be delivered.

                    The most important part of the statement is that “the Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time”. It’s self-explanatory that RBA is open to further easing.

                    Globally, RBA maintained that outlook “remains reasonable”. Domestically, RBA acknowledged the below trend 1.8% growth in Q1. But it noted that “central scenario for the Australian economy remains reasonable, with growth around trend expected.” Consumption continues to be the main domestic uncertainty”.

                    Employment growth has “continued to be strong”. But again, ” labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.” Inflation pressures “remain subdued”. But inflation is expected to pick up to “around 2 per cent in 2020 and a little higher after that”. On the positive side, RBA noted t some tentative signs that houses prices are “now stabilizing” in Sydney and Melbourne.

                    RBA cut interest rate to 1.00%, full statement

                      RBA cut interest rate by 25bps to 1.00% as widely expected.

                      Full statement below.

                      Statement by Philip Lowe, Governor: Monetary Policy Decision

                      At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent. This follows a similar reduction at the Board’s June meeting. This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.

                      The outlook for the global economy remains reasonable. However, the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.

                      Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led to expectations of easing of monetary policy by the major central banks. Long-term government bond yields have declined further and are at record lows in a number of countries, including Australia. Bank funding costs in Australia have also declined, with money-market spreads having fully reversed the increases that took place last year. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is at the low end of its narrow range of recent times.

                      Over the year to the March quarter, the Australian economy grew at a below-trend 1.8 per cent. Consumption growth has been subdued, weighed down by a protracted period of low income growth and declining housing prices. Increased investment in infrastructure is providing an offset and a pick-up in activity in the resources sector is expected, partly in response to an increase in the prices of Australia’s exports. The central scenario for the Australian economy remains reasonable, with growth around trend expected. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income is expected to support spending.

                      Employment growth has continued to be strong. Labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent. The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is still expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

                      Inflation pressures remain subdued across much of the economy. Inflation is still, however, anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be around 2 per cent in 2020 and a little higher after that.

                      Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

                      Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.

                      ISM manufacturing dropped less than expected to 51.7, employment rose to 54.7

                        Dollar stays firm after ISM Manufacturing Index showed less than expected decline in June. Most importantly, principle concerns of US-China trade and US-Mexico trade are now eased, arguing that there might be a rebound in sentiments ahead.

                        ISM Manufacturing Index dropped to 51.7 in June, down slightly from 52.1 but beat expectation of 51.0. On the negative side, New Orders dropped -2.7 to 50.0. Prices dropped sharply by -5.3 to 47.9. However, Production rose 2.8 to 54.1. Employment also rose 0.8 to 54.7.

                        Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee: “Respondents expressed concern about U.S.-China trade turbulence, potential Mexico trade actions and the global economy. Overall, sentiment this month is evenly mixed.”

                        Full release here.

                        Into US session: Dollar strongest on trade, ISM manufacturing next

                          Entering into US session, Dollar remains the strongest one for today, in reaction to US-China decision to put trade war escalation on hold. In addition Fed Vice Chair Richard Clarida sounded upbeat as he said baseline economic outlook remains positive. Markets will now enter into a crucial week to gauge the chance of a July Fed cut. Important economic will be released starting from ISM Manufacturing today.

                          Staying in the currency markets, Canadian Dollar is the second strongest one as oil prices also jump on the trade news. WTI oil is now trading around 60 handle. Euro is the third weakest after mixed data. On the positive side, Eurozone unemployment rate dropped to record low of 7.5% in May. For now, Yen and Swiss Franc are among the weakest on risk appetite. Australian Dollar ignore stocks’ rally and is the second weakest, awaiting RBA rate cut tomorrow.

                          In Europe, currently:

                          • FTSE is up 1.33%.
                          • DAX is up 1.31%.
                          • CAC is up 0.86%.
                          • German 10-year yield is down -0.0007 at -0.325.

                          Earlier in Asia:

                          • Nikkei rose 2.13%.
                          • China Shanghai SSE rose 2.22%.
                          • Hong Kong HSI was on holiday.
                          • Singapore Strait Times rose 1.52%.
                          • Japan 10-year JGB yield rose 0.153 to -0.146.

                          ECB Lane: Current policy toolkit effective, further easing case be added if required

                            ECB chief economist Philip Lane said current monetary policy package has been “effective”. And, “the effectiveness of the policy toolkit means that we can add further monetary accommodation.” He added “further easing can be provided if required to deliver our mandate.”

                            He also noted “especially when inflation deviates from its objective for an extended period, central banks ‒ including the ECB ‒ should adopt clear communication strategies that leave no doubt about their absolute commitment to meeting the inflation objective over the medium term.”

                            UK PMI manufacturing dropped to 48.0, lowest since Feb 2013

                              UK PMI Manufacturing dropped to 48.0 in June, down from 49.4 and missed expectation of 49.5. That’s also the lowest level since February 2013. Looking at some details, manufacturing production contracted at fastest pace since October 2012. New export orders dropped for the third straight month. Business optimism dropped to third lowest level on record. Employment fell for the third straight month.

                              Rob Dobson, Director at IHS Markit, which compiles the survey:

                              “The downturn in UK manufacturing deepened during June, as the impact of firms unwinding stockpiles built before the original Brexit date continued to reverberate through the sector and exacerbate weak demand. This led to solid decreases in both production and new orders, which sank the headline PMI to its lowest in almost six-and-a-half years.

                              “Demand from the domestic market weakened, while the additional constraint of slower global economic growth meant new export business fell at one of the fastest rates since late-2014.

                              “Although the consumer goods sector was able to eke out further output growth, the rate of expansion slowed sharply. Solid contractions at intermediate and investment goods producers also suggested that businesses were cutting back on both day-to-day and capital spending in increasing numbers.

                              “The stranglehold of sustained Brexit-related uncertainty and disruption also weighed heavily on business confidence and employment, as optimism ebbed to one of its lowest levels in the survey history and staff headcounts were reduced for the third straight month.

                              “There will need to be a substantial improvement in economic conditions at home and overseas, alongside reductions in both Brexit and domestic political uncertainties, if manufacturing is to see a sustained revival in the coming quarters.”

                              Full release here.

                              Eurozone unemployment rate dropped to record low, EUR/CHF steady

                                Eurozone unemployment rate dropped -0.1% to 7.5% in May, beat expectation of 7.6%. That’s also the lowest level since July 2008. EU 28 unemployment rate also dropped -0.1% to 6.3%. Among the Member States, the lowest unemployment rates in May 2019 were recorded in Czechia (2.2%), Germany (3.1%) and the Netherlands (3.3%). The highest unemployment rates were observed in Greece (18.1% in March 2019), Spain (13.6%) and Italy (9.9%).

                                Also from Eurozone, M3 money supply rose 4.8% yoy in May, above expectation of 4.6%. PMI manufacturing was finalized at 47.6 in June, revised down from 47.8. From Germany, unemployment dropped -1k in June versus expectation of 0.0%. Unemployment rate was unchanged at 5.0% in June, matched expectations.

                                Economic data from Swiss posted bigger downside surprises. Swiss PMI manufacturing dropped to 47.7 in June, down from 48.6 and missed expectation of 49.0. Retail sales dropped -1.7% yoy in May, much worse than expectation of 0.6% yoy.

                                EUR/CHF is staying in consolidation from 1.1056 today despite volatility elsewhere.

                                Eurozone PMI manufacturing finalized at 47.6, remained stuck firmly in a steep downturn

                                  Eurozone PMI Manufacturing was finalized at 47.6 in June, revised down from 47.8, versus May’s 47.7. Among the member states, Germany reading was revised down to 45.0, but that was a 4-month high. Austria dropped to 55-month low at 47.5. Spain dropped to 74-month low at 47.9. Italy dropped to 3-month also at 48.4. Ireland dropped to 72-month low at 49.8. All these readings are contractionary.

                                  Expansionary reading including Netherlands at 50.7, but that’s still at 73-month low. France was revised down from 52.0 to 51.9, a high month high. Greece dropped to 19-month low at 52.4.

                                  Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                                  “Eurozone manufacturing remained stuck firmly in a steep downturn in June, continuing to contract at one of the steepest rates seen for over six years. The disappointing survey rounds off a second quarter in which the average PMI reading was the lowest since the opening months of 2013, consistent with the official measure of output falling at a quarterly rate of approximately 0.7% and acting as a major drag on GDP.

                                  “Deteriorating inflows of new work meanwhile meant manufacturers increasingly focused on keeping costs down, notably by cutting staff numbers and warehouse stocks.

                                  “The downturn is also increasingly feeding through to lower inflationary pressures, as producers and their suppliers compete on price to retain customers and generate sales. In stark contrast to the steep rise in producers’ costs and charges seen at the start of the year, raw material prices are now falling for the first time in three years and selling prices are barely rising.

                                  “The downturn is also showing no signs of any imminent end. The survey’s forward-looking indicators remained worryingly subdued in June, adding to concerns about the economy in the second half of the year.”

                                  Full release here.

                                  ECB Rehn: Stands ready to adjust all instruments to lift inflation

                                    ECB Governing Council member Olli Rehn, a potential successor to chairman Mario Draghi, said the central bank stands ready to use all its tools to lift inflation. Rehn said in a conference in Helsinki, “the Governing Council stands ready to adjust all of its instruments, as appropriate, so that inflation continues to converge towards our inflation aim in a sustained manner.”

                                    However, he also noted that “the ECB – much like other central banks – operates in a new environment where long-run trends, such as population aging, lower long-term interest rates and climate change have become key policy issues.” Those make case for a policy review that requires a deeper assessment.

                                    Fed Clarida: Baseline outlook positive, with growth at or slightly above trend

                                      Fed Vice Chair Richard Clarida maintained his view that the US economy is “in a good place in terms of lower unemployment rate and the inflation rate a little bit below our 2% objective”. Also, the baseline outlook “continues to be a positive one”. That is, the committee “sees growth at or slightly above trend, sees the unemployment rate remaining low and the inflation rate rising gradually toward 2%.”

                                      Though, he also noted that with the Beige Book survey, “we are hearing increasing references and mentions of uncertainty about policy, and particularly uncertainty about the outlook for trade negotiations, having a potential impact on business investments”.

                                      Clarida also noted uncertainties from trade, global growth and business investments. Also, his fellow central banks saw stronger case for policy easing relative to just two months again. He reiterated Fed’s stance that “we will certainly act as appropriate to put in place policies that sustain the economic expansion, and the strong labor market and price stability.”

                                      Australia AiG PMI manufacturing dropped to 49.4, lowest since Aug 2016

                                        Australia AiG Performance of Manufacturing Index dropped -3.3 pts to 49.4 (seasonally adjusted) in June, below 50-points threshold and was the lowest level since August 2016. In trend terms, PMI dropped -0.4 to 51.9. Three of the six sectors are in deep contraction including metal products, TCF paper & printing, and machinery and equipment. Though, food & beverages, building materials and chemicals are holding first.

                                        Employment data are mixed. average wage index rebounded by 4.2 points to 59.7, indicating a faster rate of wage increases (seasonally adjusted). However, employment index fell by -5.5 points to be broadly stable at 50.1.

                                        Full release here.

                                        China Caixin PMI manufacturing dropped to 49.4, second lowest since Jun 2016

                                          China Caixin PMI Manufacturing dropped to 49.4 in June, down from 50.2, and missed expectation of 50.1. It’s also the second lowest since June 2016, and below neutral 50-mark dividing expansion from contraction again. It’s noted that output and new work intakes declined for first time since January. There was renewed reduction in export sales while goods producers cutback input purchasing and payroll numbers

                                          Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said: “Overall, China’s economy came under further pressure in June. Domestic demand shrank notably, foreign demand was still underpinned by front-loading exports, and business confidence fell sharply. It’s crucial for policymakers to step up countercyclical policies. New types of infrastructure, high-tech manufacturing and consumption are likely to be the main policy focuses.”

                                          Also released over the weekend, the official China PMI Manufacturing was unchanged at 49.4 in June, below expectation of 49.5. Official PMI Non-Manufacturing dropped to 54.2, down from 54.3, matched expectations.