Australia AiG Performance of Construction Index dropped to 42.6 in September, down from 44.6. The construction industry was on aggregate declined more sharply. Contraction continued for 13th consecutive months with industry activity and new orders falling further into negative territory.
Chinese Vice Premier Liu He is expected lead his delegation to Washington for next round of high-level trade talks with US starting this Thursday. But it’s reported that the scope of discussions have narrowed considerably recently. And China is increasingly reluctant to agree to a full trade deal as US President Donald Trump insists on.
Liu indicated that the offer to the US would not include measures that address the core issues, including intellectual property theft, forced technology transfer and subsidies on state-owned enterprises. That could be a result of interpretation of Trump’s impeachment inquiries as a sign of weakening in negotiation position.
Trump said on Friday that “We’ve had good moments with China. We’ve had bad moments with China. Right now, we’re in a very important stage in terms of possibly making a deal. But what we’re doing is we’re negotiating a very tough deal. If the deal is not going to be 100% for us, then we’re not going to make it.”
Kansas City Fed President Esther George said over the week end that “the U.S. economy is currently in a good place, with low inflation, low unemployment and an outlook for continued moderate growth.” And, “in current circumstances, concern about low inflation seems unnecessary.”
She added, it’s more “realistic to accept that there will be both temporary and persistent fluctuations around” Fed’s 2% inflation target. And, “as long as they don’t exceed a reasonable threshold — perhaps as big as 50 or even 100 basis points — they should be tolerated, depending on broader economic conditions”.
“Should incoming data point to a broadly weaker economy, adjusting policy may be appropriate to achieve the Federal Reserve’s mandates for maximum sustainable employment and stable prices,” George said. But “trying to quickly return inflation to 2 percent by adjusting interest rates could require aggressive actions that would misallocate resources and create financial imbalances.”
US Non-Farm Payroll report showed 136k job growth in September, slightly below expectation of 140k. Job growth has averaged 161,000 per month thus far in 2019, compared with an average monthly gain of 223,000 in 2018. Unemployment rate dropped to 3.5%, down from 3.7% and beat expectation of 3.7%. That’s the lowest level since December 1969. The labor force participation rate held at 63.2%. Average hourly earnings rose 0.0% mom, missed expectation of 0.3% mom.
European Council President said EU “remain open but still unconvinced” by UK Prime Minister Boris Johnson’s new Brexit proposals. And the bloc remained fully united behind Ireland.
Irish Foreign Minister Simon Coveney said “my judgment is that Boris Johnson does want a deal and that the paper that was published yesterday was an effort to move us in the direction of a deal. But…if that is the final proposal, there will be no deal”. And, “I think the prime minister’s room for maneuver is very tight, but the truth is he boxed himself into that corner.”
German government spokesperson Steffen Seibert said, “for us, it remains the case that a settlement must secure the safeguarding of the internal market, a settlement must be operable, and it must avoid a hard border between Northern Ireland and Ireland.”
German Foreign Minister Heiko Maas said today that the EU is ready to negotiate with US to settle the aircraft subsidies disputes. Yet, EU is also ready to react to new US tariffs on European goods. He said “the European Union now will have to react and, after obtaining the approval of the World Trade Organisation, probably impose punitive tariffs as well.”
Maas also tweeted, “Europe is united on this question. We remain ready to negotiate common rules for subsidies in the aviation industry. We can still prevent further damage.”
US stocks have been under tremendous pressure this week on intensified recession fears after poor ISM indices. Dollar also turned mixed after initial rally attempt. Focus will turn to non-farm payroll reports, which could be a make-or-break point for sentiments. Markets are expecting 140k job growth in the US in September. Unemployment rate is expected to be unchanged at 3.7%. Average hourly earnings is expected to grew 0.30% mom.
Other employment data from the US were generally disappointing. ISM manufacturing employment dropped from 47.4 to 46.3, deeper into contraction region. ISM non-manufacturing employment also dropped from 53.1 to 50.4, indicating almost no growth. ADP showed 135k growth in private sector jobs, which was not too bad. Four-week moving average of initial jobless claims was largely unchanged, down from 216k to 213k. Conference Board consumer confidence also dropped sharply from 134.2 to 125.1.
In case of downside surprises, 10-year yield would be also be one to watch, in additional to stocks and Dollar. TNX’s recovery from 1.429 has completed early than expected 1.903, ahead 2.123 fibonacci level. Further decline is now mildly in favor as long as 55 day EMA holds. Next target is a retest on 1.429 low. Break will resume medium term down trend. If that happens, USD/JPY could be a pair under most selling pressure.
EU appeared to be still working on avoiding trade war escalation with US. Earlier this week, WTO gave US the go ahead for tariffs on as much as USD 7.5B of EU imports, as retaliation for EU subsidies to Airbus. US Trade Representative quickly announced 10% on large civil aircraft and 25% on agricultural and other products, effective October 18.
EU has already drafted retaliation plan to target US 4B of American goods, on a WTO case from 22 years ago. But European Trade Commissioner Cecilia Malmstrom said that “until the American tariffs take effect, we haven’t given up” on reaching a “negotiated solution”. Yet, she added, “we are looking at all options and we are discussing that with member states.”
In the US, Specialty Food Association warned in a statement that the new tariffs would decrease sales and adversely impact employment at 14,000 specialty food retailers and 20,000 other food retailers. Distilled Spirits Council warned that the tariffs could lead to a loss of approximately 13,000 jobs, including truckers, farmers, and bartenders and servers in the hospitality industry.
Japanese Finance Minister Taro Aso talked down the impact of the sales tax hike, from 8% to 10%, that took effect this Tuesday. He said there was no immediate need for stimulus measures to counter in the impact. He added that corporate earnings and household incomes were solid even though US-China trade tensions warranted attention.
Economy Minister Yasutoshi Nishimura sounded a bit more cautious. He said it’s necessary to carefully watch consumption trends as there are worries the hike may weigh on consumer sentiment.
Fed Vice Chair Richard Clarida said that US consumers and economy are in a “good place,” the labor market is “very healthy”. Though, he also noted uncertainties over global slowdown, trade tensions and persistently low inflation overseas. He pledged that Fed “will act as appropriate to sustain a low unemployment rate and solid growth and stable inflation”. Yet, he emphasized that Fed is “not on a preset course” and policymakers will take the meetings “one at a time”.
Dallas Fed President Robert Kaplan said he has an “open mind” as regards to next rate move. And, “time will tell” if this year’s two rate cuts are enough to support the economy. Yet, he’s cautious that “if we wait for weakness in global growth and manufacturing and business investment to seep into other parts of the economy, if we wait see that weakness manifest itself, I think we likely have waited too long.”
Gold rebounds strongly this week as poor economic data from US raise recession worries. Buying extends after today’s ISM non-manufacturing index, which drops to three-year low.
Current development argues that corrective fall from 1557.04 has completed at 1459.08, ahead of 38.2% retracement of 1266.26 to 1557.04 at 1445.96. Break of 1535.68 resistance will add much credence to this case and target 1557.04 and above.
However, it should noted that Gold is also close to key long term fibonacci level of 61.8% retracement of 1920.70 to 1046.37 at 1586.70. Hence, upside of the next rally might be limited.
Dollar dives notably after poor services data from US. ISM Non-Manufacturing PMI dropped to 52.6 in September, down from 56.4, and missed expectation of 55.1. Looking at some details, Production dropped -6.3 to 55.2. New Orders dropped -6.6 to 53.7. Employment dropped -2.7 to 50.3. Prices, on the other hand, rose 1.8 to 60.0.
ISM said : “According to the NMI, 13 non-manufacturing industries reported growth. The non-manufacturing sector pulled back after reflecting strong growth in August. The respondents are mostly concerned about tariffs, labor resources and the direction of the economy.”
Sterling is lifted by news that Prime Minister Boris Johnson’s new Brexit proposal was well received by his fellow Conservatives. Steve Baker said the plan offered a “glimpse” of the possibility of a “tolerable” deal. John Baron also said Johnson had produced “improved proposals.” Both were committed Brexiteers whole opposed to Theresa May’s withdrawal agreement.
On the other hand, Stephen Hammond and Greg Clark also backed the new proposal. Hammond said he “warmly” welcomed the fact Johnson had put forward proposals, as well as his “constructive tone.” Both were former pro-EU former ministers, ejected from the party after voting against Johnson’s orders last month.
Together with Northern Ireland’s DUP, there is now a realistic chance of passing a modified Brexit deal in the Parliament. If that happens, the ball would be on EU’s court to accept it.
US initial jobless claims rose 4k to 219k in the week ending September 27, above expectation of 215k. Four-week moving average of initial claims was unchanged at 212.5k.
Continuing claims dropped -5k to 1.651m in the week ending September 21. Four-week moving average of continuing claims dropped -5.75k to 1.662m.
Chicago Fed President Charles Evans said “the U.S. economy continues to grow above trend … U.S. economic outlook is quite good, it still has strong fundamentals.” The two rate cuts this year were “modest adjustments” as “risk management to help make things work out better as we strive to bring in growth at about 2% over the next 18 months”.
He added that “if there is an event that shocks the world economy or the U.S. economy, these modest adjustments are not going to be nearly enough”.
ECB Vice President Luis de Guindos urged that Eurozone shouldn’t for Japan’s footstep that led to persistently low inflation. He said “we have learned from the experience in Japan that it is possible to get caught in a vicious cycle of declining inflation expectations, falling inflation and a binding lower bound on nominal interest rates from which it is difficult to escape.”
Finnish central bank chief Olli Rehn also urged to “take care to avoid the sort of harmful equilibrium that arises from prolonged low inflation and zero interest rates, as this would significantly constrain the capacity for monetary policy to balance the economic cycle.” And, “this would bring about a lengthy shortfall in economic growth with respect to its potential and hinder efforts to boost employment.”
At the same even in Madrid, de Guindos also warned that markets could be under pricing risks of no-deal Brexit. He said “We have not gauged so far the impact that Brexit is having (…) I think we are really underestimating the impact of the present uncertainty and that’s why I have fears, concerns that the impact of a disorderly Brexit would be much higher than the one that they (markets) are discounting now.”
Eurozone retail sales rose 0.3% mom, matched expectations. The volume of retail trade increased by 0.4% mom for non-food products and by 0.1% mom for automotive fuels, while food, drinks and tobacco remained unchanged.
EU28 retail sales rose 0.2% mom. Among Member States for which data are available, the highest increases in the total retail trade volume were registered in Portugal (1.1% mom), Estonia (1.0% mom) and Finland (0.8% mom). The largest decreases were observed in Austria, Slovakia (both -1.3% mom) and Croatia (-1.1% mom).
Eurozone PPI came in at -0.5% mom, -0.8% yoy in August, worse than expectation of -0.2% mom, -0.4% yoy. Industrial producer prices dropped by -1.9% mom in the energy sector, while remaining stable for intermediate goods and capital goods, and increasing by 0.1% mom for durable consumer goods and by 0.2% mom for non-durable consumer goods. Prices in total industry excluding energy remained stable.
EU28 PPI came in at -0.4% mom, -0.3% yoy. The largest decreases in industrial producer prices were recorded in Spain (-1.4% mom), Greece (-1.3% mom), Belgium, Denmark and Lithuania (all -0.7% mom), while the highest increases were observed in Bulgaria (0.7% mom), Hungary (0.4% mom) and Slovenia (0.3% mom).
UK PMI Services dropped to 49.5 in September, down from 50.6 and missed expectation of 50.3. All Sector PMI Output dropped to 48.8, down from 49.7, worst reading since July 2016. it’s also the first back-to-back contraction since 2012. Markit noted that new and outstanding business both declined. There was fastest rate of job shedding since August 2000, and weakest expectations for activity since July 2016.
Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:
“A trio of grim reports on the economy means that the vast service sector has now joined manufacturing and construction in decline. Only the collapse in confidence immediately following the 2016 referendum has seen a steeper overall deterioration in the economy during the past decade, but September’s decline is all the more ominous, being the result of an insidious weakening of demand over the past year rather than a sudden shock.
“At current levels the surveys point to GDP falling by 0.1% in the third quarter which, coming on the heels of a decline in the second quarter, would mean the UK is facing a heightened risk of recession.
“Brexit-related concerns dominated the September survey responses, linked by companies to falling sales, cancelled and postponed projects, a lack of investment and job losses. “While the early summer had seen resilient jobs growth, the surveys indicate that employment is now falling at the fastest rate since December 2009.
“The increasingly dire readings push the surveys further into territory that would normally be associated with policy stimulus from the Bank of England, suggesting a greater likelihood that the next move in interest rates will be a cut.”
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German factory orders dropped -0.6% mom, led by domestic orders
German factory orders dropped -0.6% mom in August, worse than expectation of -0.4% mom. Over the year, factory orders dropped -2.1% yoy. Domestic orders decreased by -2.6% mom and foreign orders increased by 0.9% mom. New orders from the euro area were up 1.5% mom, new orders from other countries rose 0.4% mom.
Manufacturers of intermediate goods saw new orders increase by 1.1% mom. The manufacturers of capital goods showed decreases of -1.6% mom. For consumer goods, a decrease in new orders of -0.9% mom was recorded.
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