Fed Rosengren sees yellow lights in inflation, Kashkari sees bond flashing yellow too

    Boston Fed President Eric Rosengren warned that tight labor market could push the economy towards unexpected inflation and other problems. He argued that Fed should continuing rate hikes “until monetary policy becomes mildly restrictive.”

    And he emphasized that “the further we get from full employment the further risk there is.” Also, he added “pushing the economy too hard risks inflationary concerns or financial-stability risks”. Either of these outcomes “might necessitate a more forceful monetary policy response.”

    While there are no “alarm going off” for now, he said “there are a bunch of yellow lights”. these include commercial housing estate boom that could push prices beyond what market demand could sustain.

    On the other hand, Minneapolis Fed President Neel Kashkari saw “flashing yellow” signals in the bond market, which suggested there is no need for any more rate hikes for now. He said “the bond market is saying, ‘hey we’re not so sure that the U.S. economic growth is going to be very strong in the future years,’ so that’s a nervousness for me.”

    Kashkari added yield curve is “a measure of giving us feedback as to are we running accommodative monetary policy or contractionary monetary policy, and I don’t see any reason yet that we should be moving interest rates up and tapping the brakes.”

    EU Juncker: One crisis in Greece was enough, not another in Italy

      European Commission President Jean-Claude Juncker said yesterday that “Italy is distancing itself from the budgetary targets we have jointly agreed at EU level.” He warned “one crisis was sufficient, one crisis was enough” and “after the toughest management of the Greece crisis, we have to do everything to avoid a new Greece — this time an Italy — crisis.” He added “we have to prevent Italy from being able to get a special treatment here that, if everybody were to get it, would mean the end of the euro.”

      The chairman of Eurozone finance ministers Mario Centeno said after the group’s meeting that “recent announcements by the Italian government have raised concerns over its budgetary course, concerns that need to be addressed soon.” He added “we are all bound by the euro and we need sound policies to protect it. It is up to the Italian government to show it has a sustainable and credible budgetary plan.”

      On the other hand, Italian Deputy Prime Ministers Luigi Di Maio insisted the government “will never sacrifice workers on the altar of the spread and of the crazy rules which have been imposed on us” And, “this government doesn’t butcher people, the music has changed.”

      IMF Lagarde hints at global outlook downgrade on trade disputes

        IMF Managing Director Christine Lagarde hinted today that the organization may downgrade growth outlook next week. She said, “In July, we projected 3.9 percent global growth for 2018 and 2019. The outlook has since become less bright, as you will see from our updated forecast next week.”

        Lagarde added “A key issue is that rhetoric is morphing into a new reality of actual trade barriers. This is hurting not only trade itself, but also investment and manufacturing as uncertainty continues to rise.” Though she also tried to tone down and said “we are not seeing broader financial contagion — so far — but we also know that conditions can change rapidly. If the current trade disputes were to escalate further, they could deliver a shock to a broader range of emerging and developing economies.”

        On WTO reform, she said “The immediate challenge is to strengthen the rules. This includes looking at the distortionary effects of state subsidies, preventing abuses of dominant positions and improving the enforcement of intellectual property rights.”

        Criticisms on Italy’s budget plan continue

          EU officials continue to criticize Italy’s budget plan today. Vice President of the European Commission Valdis Dombrovskis said “Our assessment so far from what is currently emerging is that this is not compatible with the Stability and Growth Pact.” Though, he also noted full and formal assessment could only be done after the budget plan is submitted in mid-October.

          French Finance Minister Bruno Le Maire emphasized “all states have to do their best to stick to commitments” referring to Italy’s budget plan. But things “have to go step by step”. After getting the budget plan formally, Le Maire said Eurozone members could could put pressure within “the political framework”. And such rules are more important now as EU was “facing a serious threat as “populist and nationalist movements are on the rise.”

          Separately, Italy newspaper La Repubblica reported that European Commission is set to reject Italy’s budget plans in November and open a procedure against the country’s public accounts in February.

          ISM manufacturing dropped to 59.8, but employment rose 0.3 to 58.8

            ISM manufacturing index dropped to 59.8 in September, down from 61.3 and missed expectation of 60.0. Price paid index dropped to 66.9, down from 72.1 and missed expectation of 0.8. Employment component, though rose 0.3 to 58.8.

            ISM noted in the release that:

            • Demand remains strong, consumption improved, inputs improved
            • But continued supply chain inefficiencies led to an increased consumption of inventory and a slight expansion of imports,
            • Export orders expanded, but four major industries are no longer contributing
            • Price pressure continues, but the index softened for the fourth straight month
            • Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations,

            Full release here.

            Into US session: CAD strong on USMCA, DAX and German yield too

              Entering into US session, Canadian Dollar remains the strongest one for today as boosted by the new USMCA that replaced NAFTA. If should be reminded that the Loonie’s rally took off last week after stronger than expected GDP boosted the chance of October BoC hike. Additional, WTI crude oil stays firm above 73 hand after OPEC triggered rally. All three factors are Loonie positive. Sterling and Euro follow as the second and third strongest ones. On the other hand, Yen, Kiwi and Swiss Franc are the weakest ones for now. Dollar is mixed.

              European stocks seemed to be lifted by the USMCA news too, in particular DAX. At the time of writing,DAX is up 0.58%, CAC up 0.28% and FTSE up 0.06%. German 10 year bund yield also rises 0.028, back at 0.500. However, Italian 10 yield also continues last week’s rally and is up 0.036 at 3.178. The sky is not all cleared for the Eurozone.

              Earlier today, Nikkei extended recent strong rise and closed up 0.52% at 24245.76. Singapore Strait Times reversed earlier gains and closed down -0.05% at 3255.46. Gold’s rebound lost steam quickly and is back at 1186.36.

              Today’s rally in Nikkei is in line with bullish view that the long term up trend is resuming after taking out 24129.34 resistance. Further rise should be seen to 100% projection of 20347.49 to 23050 from 22172.90 at 24875.8 next. This will be a positive factor for USD/JPY. In particular, if US treasury yields follow German yield higher today, we’ll see more strength in USD/JPY.

              UK Raab to deliver Brexit in fact, not just in name

                UK Brexit Minister Dominic Raab warned that “our willingness to compromise is not without limits” and he emphasized that “we are leaving the European Union in fact, not just in name.”

                He also said that the Chequers proposal “would deliver a historic agreement that provides a roadmap out of the EU and a final deal that will be good for the whole country.”

                Additionally, he pledged to purse a deal with the EU “delivers on the referendum, because that’s our democratic duty”. And, “if we can’t obtain a deal that secures that objective … then we will be left with no choice but to leave without a deal.”

                UK Hammond: Chequers plan offer in-the-middle, down the center solution for Brexit

                  UK Chancellor of the Exchequer Philip Hammond talked about Brexit negotiation in a BBC TV interview. He said “the mood is undoubtedly that people want to do a deal with the UK. People want to minimize the disruption of the UK’s departure from the European Union, they want to continue having a relationship with us and smooth trading partnership in the future.”

                  But he also admitted “Clearly there has been a hit to the economy through the uncertainty the Brexit process has caused. Many businesses are sitting on their hands frankly waiting to see what the outcome of this negotiation is before confirming their investment plans.”

                  He also defended Prime Minister Theresa May’s Chequers plan and said “What Chequers does is offer an in-the-middle solution, down the center, taking the best from both models, and proposing a way forward which delivers on the mandate of the British people in the referendum but also protects British jobs and British businesses,”

                  UK PMI manufacturing rose to 53.8, conditions still relatively lacklustre overall

                    UK PMI manufacturing rose to 53.8 in September, up from 53.0 and matched expectations. Keying findings showed “output and new order growth both accelerate”, “input cost and output charge inflation strengthen”.

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

                    “September saw a mild improvement in the performance of the UK manufacturing sector. Domestic market demand strengthened, while increased orders from North America and Europe helped new export business stage a modest recovery from August’s contraction. Business confidence also rose to a three month high.

                    “Despite these causes for short-term optimism, conditions in manufacturing are still relatively lacklustre overall. Based on its historical relationship with official ONS data, the latest survey is consistent with output expanding at only a moderate pace. Although total exports rose, exports of goods used as inputs by other manufacturers fell for the third straight month, ending the worst quarter for over three years for such exporters, suggesting that foreign companies may be sourcing less from UK-based component suppliers.

                    “Many UK manufacturers also noted that the backdrop of Brexit and a volatile exchange rate were making any forecasting activity increasingly difficult, with uncertainty adding to reluctance to hire. Headcounts fell at larger companies for a second successive month.

                    “On the price front, both output charges and input costs rose at faster rates in September, which may exert further upward pressure on consumer prices in future.”

                    Full release here.

                    Also from UK, mortgage approvals rose to 66k in August. M4 money supply rose 0.2% mom in August.

                    Eurozone PMI manufacturing finalized at 53.2, export-led slowdowns clearly evident in Germany, France, Italy, Spain and Austria

                      Eurozone PMI manufacturing was finalized at 53.2 in September, revised down from down from August’s 54.6. Key findings are “exports rise only slightly, weighing on growth of total orders and production”, and, “global trade concerns push confidence down to near three-year low”.

                      Among the countries, German PMI manufacturing was finalized at 25-month low at 53.7. Austria PMI manufacturing dropped to 23-month low at 55.0. Spain reading dropped to 51.4, 25-month low. Italy reading dropped to 50.0, 25-month low.

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

                      “Eurozone manufacturing shifted down yet another gear at the end of the third quarter. The sector has seen booming growth at the start of the year rapidly fade to the worst performance for two years in September as production and jobs growth have slowed in response to a stalling of export trade.

                      “The survey paints the worst trade picture for over five years, with export growth having slumped sharply from a series record high in late 2017 to near-stagnation in September.

                      “The slowdown can be linked to sluggish demand and increased risk aversion among customers, often linked to worries about trade wars and tariffs, but also ascribed to rising political uncertainty and higher prices.

                      “Forward-looking survey indicators suggest the worst is yet to come: optimism about the year ahead is close to a three-year low, inflows of new orders and input buying are the weakest for over two years and backlogs of work are dropping for the first time in over three years.

                      “Production also continues to run ahead of order book growth, which is a key sign that output and jobs growth will be reined-in further as we move into the fourth quarter unless demand revives.

                      “Export-led slowdowns are clearly evident in Germany, France, Italy, Spain and Austria, but the weakening picture is by no means universal, with the Netherlands and Ireland being notable in continuing to report strong growth of both output and exports.”

                      Full release here.

                      Also from Eurozone, unemployment rate dropped to 8.1% in August, below expectation of 8.2%.

                      NAFTA renamed USMCA, formally announced

                        Canadian Foreign Affairs Minister Chrystia Freeland published a joint statement with US Trade Representative Robert Lighthizer. On reaching a trilateral trade deal together with Mexico. The new agreement is no longer called NAFTA but the United States-Mexico-Canada Agreement (USMCA).

                        No formal details on the agreement are released yet. But it’s reported that the deal include increased access on Canada’s dairy marke and the so called Class 7 milk system would be eliminated. The deal would encourage more auto production in the US. There is no substantial change in the chapter 19 dispute resolution mechanism. If the US impose auto tariffs, both Mexcio and Canada will be accomodated in “side letters”. But the deal doesn’t affect the current steel and alumnium tariffs imposed.

                        Below is the full joint statement.

                        Joint Statement from United States Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland

                        “Today, Canada and the United States reached an agreement, alongside Mexico, on a new, modernized trade agreement for the 21st Century: the United States-Mexico-Canada Agreement (USMCA). USMCA will give our workers, farmers, ranchers, and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region. It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.

                        “We look forward to further deepening our close economic ties when this new agreement enters into force.

                        “We would like to thank Mexican Economy Secretary Ildefonso Guajardo for his close collaboration over the past 13 months.”

                        Japan Tankan large manufacturing dropped to 19 in Q3

                          Japan Tankan large manufacturing index dropped to 19 in Q3, down from 21 and missed expectation of 22. Large manufacturing outlook dropped to 19, down form 21 and matched expectations.

                          Large non-manufacturing index dropped to 22, down from 24 and missed expectation of 22. Non-manufacturing outlook rose to 22, up from 21 and beat expectation of 20.

                          Large all industry capex rose 13.4%, missed expectation of 14.2%.

                          Full release here.

                          Japan PMI manufacturing: Q3 average notably lower than Q1 & Q2

                            Japan PMI manufacturing was finalized at 52.5 in September. The key points are “output growth sustained amid solid demand pressures”, meanwhile, “input delivery times continue to lengthen sharply”, and “business confidence drops further”.

                            Joe Hayes, Economist at IHS Markit, noted that “growth in the Japanese manufacturing sector was sustained in September, rounding off a fairly robust quarter of expansion”. However, Q3 average at 52.4 was “notably weaker” that Q1 and Q2, “suggesting weaker momentum”. “Slowing input delivery times reportedly weighed on output capabilities”. “The degree of confidence dipped to a 22-month low, with some panellists raising concern towards the demand outlook.”

                            Full release here.

                            Australia manufacturing PMI rose to 59.0, two years of uninterrupted expansions

                              Australian Industry Group Performance of Manufacturing index rose 2.3 to 59.0 in September, indicating faster growth across the sector. It’s now in two years of “uninterrupted expansions”, the longest run since 2005. All seven activity sub-indexes expanded, that is above 50. Five activity sub-indexes accelerated with the new orders sub-index reaching a six-month high.

                              AiG also noted that “the manufacturing sector has confounded doubters in recent years by lifting employment and production despite the exit of passenger car assembly from Australia. Australia’s manufacturing sector is diverse and comprised of multiple sub-sectors that are continuing to adapt to their operating environment. An improving economy, along with infrastructure, mining, renewable and defence projects continue to support demand for manufacturing products in 2018.”

                              Full release here.

                              Also from Australia, TD Securities Inflation rose 0.3% mom in September.

                              China Caixin PMI manufacturing dropped to 50, downward pressure significant

                                Released over the weekend, China Caixin PMI manufacturing dropped to 50.0, down from 50.6. That’s the fourth straight monthly drop and an acceleration in the index’s decline. The key points are, “production rises at weakest pace for nearly a year”, “total new business broadly stagnant, as export sales decline at faster rate”, “business confidence slips to nine-month low”.

                                Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said in the released that “expansion across the manufacturing sector weakened in September, as exports increasingly dragged down performance and continued softening demand began to have an impact on companies’ production. In addition, the employment situation worsened further. Downward pressure on China’s economy was significant.”

                                Full release here.

                                Also released, the official China PMI manufacturing dropped to 50.8 in September, down from 51.3. Official PMI non-manufacturing rose to 54.9, up from 54.2.

                                Canadian Dollar surges as NAFTA agreed

                                  Canadian Dollar surges broadly on news that the US and Canada have finally agreed on a deal to update NAFTA, just ahead of US imposed deadline. The legal text would be published within hours just of meet the deadline for US Congress to to complete before Mexico’s outgoing President Enrique Pena Nieto leaves office at the end of November.

                                  According to unnamed sources, Canada will give the US access to 5% of its dairy markets, same as it granted to Europe with CETA and Pacific-Rim nations with TPP combined. In turn, the US agreed to keep the Chapter 19 dispute resolution mechanism. Also, both sides agreed to put a cap on auto exports to the US, at around 140% of current production level, free of any auto tariffs that the US might impose. Canada also agreed to a quota of steel and aluminum tariffs to the US in exchange for exemption from tariffs.

                                  BoE Ramsden: Range of outcomes for Brexit clearly still possible

                                    BoE Deputy Governor Dave Ramsden said the central bank is so far still adopting the assumption of smooth Brexit in its forecasts. But he also noted that a “range of outcomes for Brexit are clearly still possible”.

                                    Pointing to the market, he said “option pricing implies that market participants are insuring to a greater degree against tail outcomes.” Also, Sterling’s depreciations suggested a “greater increase in relative weight on downside outcomes”.

                                    Nonetheless, he played down the moves and noted that were still small relative to those we saw ahead of the referendum.”

                                    ECB Lane: Fairly sure core inflation on upward path

                                      ECB Governing Council Member Philip Lane said policymakers are “fairly sure that core (inflation) is on an upward path”, “not spectacular but steady enough”. Also, he added “the support of more jobs, more labor income driving consumption is very strong.”

                                      He also reiterated ECB’s forward guidance that interest rates will stay at present levels at least through summer of 2019. But he also noted that “it is not committing to any particular date for lift-off, so there is a clear commitment there, which is that it’s open to revisions depending on where the data come in.”

                                      US personal income and spending missed expectations, core PCE unchanged at 2%

                                        US personal income rose 0.3% in August, below expectation of 0.4%. Spending rose 0.3%, below expectation of 0.4%. Headline PCE slowed to 2.2% yoy, down from 2.3% yoy and missed expectation of 2.3% yoy. Core PCE was unchanged at 2.0% yoy, matched expectations.

                                        Full release here.

                                        Dollar is generally firm and steady after the release, except versus Canadian.

                                        Canadian Dollar jumps as GDP grew 0.2%, led by manufacturing

                                          Canadian Dollar surges after stronger than expected GDP data. GDP grew 0.2% mom in July versus expectation of 0.1% mom. The growth was “concentrated” as 12 of 20 sectors were up, led by manufacturing, wholesale trade, utilities and transportation and warehousing. Good-producing industries grew 0.3% mom while services-producing industries grew 0.2% mom. Full released here.

                                          Also from Canada, IPPI dropped -0.5% mom in August. RMPI dropped -4.6% mom.