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Two Ps to watch in FOMC: Patience and Projections

    By
    ActionForex
    -

    Fed is widely expected to keep federal funds rate unchanged at 2.25-2.50% today. After recent rhetorics from Fed officials, markets are now looking for clues on rate cuts later in the year. As of yesterday, Fed fund futures are pricing in 85.3% of an “insurance” cut in July to 2.00-2.25%. By December meeting, markets see 83.6% chance of a total of two cuts to bring interest rates to 1.75-2.00%. However, in our view, the pricings are based on assumption of further worsening of US-China trade war. Such expectations could drastically change after Trump’s “extended meeting” with Xi at G20 next week.

    As for today’s announcement, a major focus is this sentence in the statement: “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”. Change in the statement to remove the element of “patience” will be a strong indication that Fed is ready to move. Otherwise, July could be a little too soon for the “insurance” cut.

    Additionally, we’d emphasize that the changes in the statement have to be confirmed by new economic projections. In March, 2019 median projections forecasts GDP to grow 2.1%, unemployment rate to be at 3.7%, core PCE to be at 2.0%. There have to be material downgrades in the numbers, in particular core PCE, support Fed’s cut. And of course, Fed projected interest rates to be at 2.4%, that is no change from current 2.25-2.50%, by the end of 2019. This figure has to be revised down too. After all, we believe that the high uncertainty of trade war should be disregarded in the forecasts. So, if they’re dovish, they’re really dovish.

    Fed’s March projections:

    Here are some suggested readings on FOMC:

    Asian business sentiment sank to decade low, not just uncertainty but true slowdown

      By
      ActionForex
      -

      The Thomson Reuters/INSEAD Asian Business Sentiment Index dropped sharply from 63 to 53 in Q2. Worries over US-China trade war sent sentiments down to the worst reading since Q2 of 2009. The index tracks companies’ six-month outlook. The survey interviewed 95 companies in 11 Asia-Pacific countries that together contribute about a third of GDP and are home to 45% of the world’s population. It was conducted from May 31 to June 14.

      Antonio Fatas, professor at global business school INSEAD said “it was the uncertainty about the trade war and people were worried about the future”. And, “after four quarters of low numbers that now, it’s not just uncertainty. This is a true slowdown in growth. We see activity declining — it’s not just the expectation that activity will decline.”

      Full release here.

      Japan exports shrank for sixth straight months, won’t take sides on US-China trade war

        By
        ActionForex
        -

        In Japan, trade balance recorded deficit of JPY -0.97T (non seasonally adjusted) in May, first deficit in four months. Exports dropped -7.8% yoy to JPY 5.84T, sixth consecutive month of decline. Imports dropped -1.5% to JPY 6.80T, first decline in three months. Sluggish exports are generally seen as the results of on-going, escalating US-China trade war, which remains a negative factor for the Japanese economy.

        Looking at some details (non seasonally adjusted):

        • Exports to China dropped -9.7% yoy.
        • Imports from China dropped -0.9% yoy.
        • Exports to EU dropped -7.1% yoy.
        • Imports from EU rose 8.7% yoy.
        • Exports to US rose 3.3% yoy.
        • Imports from US dropped -1.6% yoy.

        Separately, Masatsugu Asakawa, Japan’s vice finance minister for international affairs, said more substantial talks on trade policy will be held in the G20 summit in Osaka next week. But he also noted that “Japan won’t take sides on US-China trade friction, our stance is to not take steps that violate WTO rules.”

        UK Johnson stays as the far and away favorite after Tuesday votes

          By
          ActionForex
          -

          Former UK Foreign Minister Boris Johnson further solidified his place as far and away favorite to be the next Conservative Leader and Prime Minister. In the last round of leadership vote on Thursday, Johnson got 126 votes, nearly three times of runner-up, current Foreign Minister, Jeremy Hunt’s 46. Environment Secretary Michael Gove was third with 41 votes, and International Development Secretary Rory Stewart was fourth with 37, Home Secretary Sajid Javid had 33. Dominic Raab, with 30 votes, was knocked out. More votes are scheduled for Wednesday and Thursday.

          In a televised debate yesterday, Johnson pledged that “we must come out on the 31 Oct. because, otherwise I am afraid we face a catastrophic loss in politics”. And, “unless we do it, unless we get out on Oct. 31 I think we will all start to pay a really serious price.”

          Trump: I think we have a chance for a trade deal with China

            By
            ActionForex
            -

            Risk appetite was given a strong boost as US and China are returning to the table for trade negotiations. At the time of writing, Nikkei is up 1.74%, Hong Kong HSI is up 2.37% and China Shanghai SSE is up 1.50%. Overnight, DOW rose 1.35%, S&P 500 rose 0.97% and NASDAQ rose 1.39%. Of course, in the background, ECB’s hints on additional monetary stimulus ahead were confidence lifting too.

            The news started with Trump tweeting yesterday that he had a “very good telephone conversation” with Chinese President Xi Jinping. And Trump said both will have an “extended meeting” next week at the G20 in Osaka, Japan. The phone call was also confirmed by China’s state media.

            Later at the White House, Trump told reporters, “I think we have a chance. I know that China wants to make a deal. They don’t like the tariffs, and a lot of companies are leaving China in order to avoid the tariffs”. He added “I think the meeting might very well go well, and frankly our people are starting to deal as of tomorrow. The teams are starting to deal. So we’ll see. China would like to make a deal. We’d like to make a deal, but it has to be a good deal for everybody.”

            Chinese state media reported Xi saying “The key is to show consideration to each other’s legitimate concerns. We also hope that the United States treats Chinese companies fairly. I agree that the economic and trade teams of the two countries will maintain communication on how to resolve differences.”

            HK HSI gaps higher at open and is currently up more than 2.3%.

            Kudlow: There’s a certain joy Trump and Xi are back to discussion

              By
              ActionForex
              -

              Trump tweeted earlier today that he had a phone call Chinese President Xi Jinping. And both agreed to have an “extended meeting” next week at G20 in Japan. This news is confirmed by Chinese State media. And XI said “the key is to show consideration to each other’s legitimate concerns. We also hope that the United States treats Chinese companies fairly. I agree that the economic and trade teams of the two countries will maintain communication on how to resolve differences.”

              White House economic adviser Larry Kudlow welcomed the meeting and said “No results are guaranteed – I think people know that – but I think there’s a certain joy that they are back to a discussion.” Though, he also emphasized US “wants to continue the conversations about structural changes regarding intellectual property theft and forced technology transfers and market openings and tariffs… We’re looking for an enforceable agreement as we always have – that’s absolutely vital. So all of those general topics will be on the table.”

              Stocks given further lift as Trump will meet Xi for an extended meeting at G20

                By
                ActionForex
                -

                US stocks open higher, following German DAX, as lifted by ECB President Mario Draghi’s hint on further stimulus. Stocks was then further lifted by Trump’s tweet regarding phone conversation with Chinese President Xi Jinping. Trump said they’re going to have an “extended meeting” at G20 in Osaka, Japan, next week. And the “respective teams will begin talks prior to our meeting”. DOW is currently up more than 330 pts, or 1.3%. S&P 500 and NASDAQ are up 1.1% and 1.7% respectively. On the other hand, 10-year yield is down -0.0023 at 2.064, recovered notably from day low at 2.029.

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                Meanwhile, one important thing to note is that Fed will have less pressing need to have “insurance” rate cut if US-China trade tensions ease. On the other hand, ECB is on track for more stimulus. Thus, we might actually see further decline in EUR/USD, thanks to both Draghi and Trump. Trump might have complained that Draghi made it “unfairly easier” for Eurozone to compete against the US. It’s also that easy for him to give advantages to Eurozone too, and he did it.

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                Into US session: Euro weakest on ECB Draghi, Yen strongest on falling yields

                  By
                  ActionForex
                  -

                  Entering into US session, Euro is the weakest one for today, overshadowing Aussie and Sterling. Euro was knocked down by ECB President Mario Draghi’s comments, which suggests that more monetary stimulus is underway. Additionally, German ZEW economic sentiments also tumbles sharply from -2.1 to -21.1 in June. German 10-year yield also dropped to new record low at -0.319, down -0.075. The development also drags down US 10-year yield, now at 2.022, down -0.068.

                  Sterling is the second weakest, as markets are pricing in no-deal Brexit as Boris Johnson is taking lead in Conservative leadership race. Australian Dollar is third weakest after RBA minutes said further rate cut is more likely than not.  On the other hand, Yen is the strongest for today, as boosted by free fall in German and US yields. Dollar is third strongest, ignoring Trump’s complaint on Draghi’s comments.

                  In Europe, currently:

                  • FTSE is up 0.96%.
                  • DAX is up 1.43%.
                  • CAC is up 1.57%.
                  • German 10-year yield is down -0.0735 at -0.316.

                  Earlier in Asia:

                  • Nikkei dropped -0.72%.
                  • Hong Kong HSI rose 1.00%.
                  • China Shanghai SSE rose 0.09%.
                  • Singapore Strait Times rose 0.96%.
                  • Japan 10-year yield dropped -0.0032 to -0.129.

                  US President Trump complains ECB President Draghi’s comments on monetary stimulus

                    By
                    ActionForex
                    -

                    Trump complains ECB President Mario Draghi’s comments earlier today, while triggers broad based selloff in Euro. He tweeted “Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.”

                    There is no reaction to the tweet.

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                    Eurozone CPI finalized at 1.2%, core CPI at 0.8% in May

                      By
                      ActionForex
                      -

                      Eurozone CPI was finalized at 1.2% yoy in May, down from April’s 1.7% yoy. CPI core was finalized at 0.8% yoy, unchanged from April’s figure. EU28 CPI was finalized at 1.6% yoy in May, down from April’s 1.9% yoy.

                      The lowest annual rates were registered in Cyprus (0.2%), Portugal (0.3%) and Greece (0.6%). The highest annual rates were recorded in Romania (4.4%), Hungary (4.0%) and Latvia (3.5%). Compared with April 2019, annual inflation fell in sixteen Member States, remained stable in five and rose in six.

                      In May 2019, the highest contribution to the annual euro area inflation rate came from services (0.47%), followed by energy (0.38%), food, alcohol & tobacco (0.29%) and non-energy industrial goods (0.08%).

                      Full release here.

                      German ZEW dropped -21.1, substantially worsened German data and increased global uncertainty

                        By
                        ActionForex
                        -

                        German ZEW Economic Sentiment dropped sharply to -21.1 in June, down from -2.1 and missed expectation of -5.8. That’s also the lowest reading since November. Current Situation gauge dropped to 7.8, down from 8.2, beat expectation of 6.1. Eurozone ZEW Economic Sentiment dropped to -20.2, down from -1.6 and missed expectation of -3.6. Eurozone Current Situation gauge rose 3.3 pts to -3.7.

                        ZEW President Professor Achim Wambach said: “The sharp drop in the ZEW Indicator of Economic Sentiment coincides with an increased uncertainty regarding the future development of the global economy and substantially worsened figures for the German economy at the beginning of the second quarter. The intensification of the conflict between the USA and China, the increased risk of a military conflict in the Middle East and the higher probability of a no-deal Brexit are all casting a shade on the global economic outlook. On top of this, German industry has been reporting worse than expected figures for production, exports and retail sales for April.”

                        Full release here.

                        Ifo affirms 2019 Germany growth forecasts, downgrades 2020

                          By
                          ActionForex
                          -

                          Ifo institute maintains 2019 German growth forecast at 0.6%, but revised down 2020 growth forecasts by -0.1% to 1.7%. Private consumer pending is expected to drive the economy, rise 1.4% in 2019 and 1.3% in 2020. Investments are expected to growth 3.0% and 2.8% respectively,d riven by construction. Export is expected to grow just 1.3% in 2019 and normalizes to 3.8% in 2020.

                          Timo Wollmershaeuser, Head of ifo Economic Forecasts, said “there are increasing signs that industrial weakness is gradually spreading to the domestic economy via the labor market and deep value chains.” And, “that means the German economy will enter the coming year without any momentum.” Wollmershaeuser also warned, “economic policies that attempt to change the globalized economic order through isolation, sanctions, and threats have increased uncertainty worldwide, cooled industrial activity, and caused world trade to collapse.”

                          Full report here. .

                           

                          ECB Draghi: Additional stimulus required in absence of improvement in downside risks

                            By
                            ActionForex
                            -

                            ECB President Mario Draghi emphasized in a speech that “monetary policy remains committed to its objective and does not resign itself to too-low inflation… forever or even for now.” Also, he reiterated monetary policy is “patient, persistent and prudent”.

                            He added: “Patient, because faced with repeated negative shocks we have had to extend the policy horizon. Persistent, because monetary policy will remain sufficiently accommodative to ensure the sustained convergence of inflation to our aim. And prudent, because we will pay close attention to underlying inflation dynamics and to risks and will adjust policy appropriately.”

                            Draghi also reiterated risks remains “tilted to the downside” and indicators point to “lingering softness”. And he warned, “in the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.” The options on further measures were “raised and discussed” at ECB’s last meting.

                            The measures including enhancing the forward guidance on bias and conditionality. Also, “Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools”. And, “the APP (asset purchase program) still has considerable headroom.”

                            Full speech here.

                            Euro drops notably after the comments.

                            Australia house prices dropped -3% in Q1, decline in all capital cities

                              By
                              ActionForex
                              -

                              Australia house price index dropped -3.0% qoq in Q1, much worse than expectation of -2.6%. There’s also deterioration from Q4’s -2.4% qoq. House prices also declined in all capital cities: Sydney (-3.9%), Melbourne (-3.8%), Adelaide (-0.2%) and Hobart (-0.4%), Brisbane (-1.5%), Perth (-1.1%), Canberra (-0.9%) and Darwin (-1.8%).

                              ABS Chief Economist, Bruce Hockman said: “These results are in line with soft housing market indicators, with sales transactions and auction clearance rates lower than one year ago, and days on market trending higher. A continuation of tight credit supply and reduced demand from investors and owner occupiers has contributed to weakness in property prices in all capital cities this quarter.”

                              Full release here.

                              RBA Minutes: Further rate cut is more likely than not

                                By
                                ActionForex
                                -

                                Australian Dollar falls broadly today on dovish RBA minutes as well as miss in house price data. RBA cut cash rate by -25bps to 1.25% at the June 4 meeting. The minutes noted that “members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.”

                                Policymakers acknowledged that inflation has been below 2-3% target range for three years and even deteriorated to 1.5% in Q1. Unemployment rate had not declined any further in the last six months despite ongoing job growth. It has eve edged up in the most recent two months. Thus, “a lower level of interest rates would support growth in the economy, thereby reducing unemployment and contributing to inflation rising to a level consistent with the target.”

                                Also, lower interests could support the economy through lower exchange rate, reduced borrowing rates for businesses, and lower interest payments for households. And give the extent of spare capacity in the economy and the subdued inflationary pressures, there was “a low likelihood of a decline in interest rates resulting in an unexpectedly strong pick-up in inflation.”

                                Instead, lowest interest rates would ” stimulate activity and thereby improve the resilience of the Australian economy to any future adverse shocks.”

                                Full minutes here.

                                BoJ Kuroda will certainly debate risks from trade war and China at upcoming meeting

                                  By
                                  ActionForex
                                  -

                                  Ahead of BoJ’s June 19-20 monetary policy meeting, Governor Haruhiko Kuroda warned the parliament of risks from US-China trade war and China’s economy. And he pledged that the issues will “certainly” be debated.

                                  Kuroda said, “as for recent overseas economic developments, there are strong downside risks regarding the Sino-U.S. trade friction and China’s economy.” And, “we’ll certainly debate such overseas developments” at the upcoming meeting.

                                  He also reiterated that “BOJ will guide monetary policy appropriately taking into account the impact overseas economic changes could have on Japan’s economic outlook and the momentum for achieving our inflation target”.

                                  Sterling falls broadly ahead of next UK Conservative leadership voting

                                    By
                                    ActionForex
                                    -

                                    Sterling drops broadly this week breaking out near term support against Dollar and Yen. The next round of UK Conservative leadership voting will be held today. For now, despite the lack of public appearances, face of the Brexit campaign Boris Johnson appears to be unstoppable. Jeremy Hunt and Michael Gove are believed to have secured enough votes for the next round. Meanwhile, Sajid Javid, Rory Stewart and Dominic Raab are still battling for support. Those staying in the race after current around will compete in a BBC debate later in the evening. That would likely be Johnson’s first TV appearance since the race started. Pound is also weighed down by news that Chancellor of Exchequer Philip Hammond is “prepared to resign” over Prime Minister Theresa May’s legacy spending plans.

                                    Let’s have a quick review on Sterling pairs. GBP/USD broke 1.2559 support to resume the fall from 1.3381. It’s now on track to retest 1.2391 low.

                                    GBP/JPY also resumed recent fall from 148.87 and is targeting a test on 131.51 low.

                                    EUR/GBP is reaccelerating, as seen in daily MACD. It’s targeting 0.9101 key resistance.

                                    GBP/CHF also resumed the fall from 1.3399 and is now targeting 1.2297 low.

                                    EU: China tops the list of trade and investment barriers

                                      By
                                      ActionForex
                                      -

                                      In a report released today, European Commission said, in 2018, China had the highest stock of recorded barriers, with 37 obstacles hindering EU export and investment opportunities. Russia was a close second with 34 barriers in place. India (25), Indonesia (25) and US (23) followed. On new barriers, Algeria and India topped with five new measures. US and China followed with four new measures each.

                                      Commissioner for Trade Cecilia Malmström said: “In the complex context we have today with a growing number of trade tensions and protectionist measures, the EU must keep defending the interests of its companies in the global markets. Making sure that the existing rules are respected is of utmost importance. Thanks to our successful interventions, 123 barriers hindering EU exports opportunities have been removed since I took office in late 2014. Working on specific problems reported by our companies we manage to deliver economic benefits equivalent in value to those brought by the EU’s trade agreements. Those efforts certainly must continue.”

                                      Full report here.

                                      US Empire State Manufacturing dropped to -8.6, largest decline on record

                                        By
                                        ActionForex
                                        -

                                        US Empire State Manufacturing index dropped by a record -26 pts to -8.6 in June. That’s much worse than expectation of 11. It’s also the first negative reading in more than two years. Looking at some details, new orders receded, while shipments increased modestly. Unfilled orders fell, and delivery times and inventories moved slightly lower. Labor market indicators pointed to small declines in employment and hours worked.

                                        Index for future business conditions dropped -5 pts to 25.7. capital expenditure index dropped -11 pts to 10.5, pointing to slower growth in capital spending. Firms expected solid increases in employment but no change in the average workweek in the months ahead.

                                        Full release here.

                                        Into US session: Euro higher in crosses in quiet markets

                                          By
                                          ActionForex
                                          -

                                          Entering into US session, the forex markets are a bit mixed for the moment as more important events, like FOMC meeting, lie in the week again. Euro is lifted mildly by record wage growth in Q1. Though, New Zealand Dollar is the strongest one for now. At the same time, Australian Dollar is the weakest for today so far, followed by Yen. Data from US and Canada are unlikely to trigger much reactions.

                                          Nevertheless, Euro crosses are worth a watch in the rest of the day. In particular, EUR/AUD’s strong rally in early US session suggests that recent rise might be extending after very brief consolidation since Thursday. 1.6363 temporary top is the level to watch. Also, EUR/GBP could also extend recent rally through last week’s high at 0.8932.

                                          In Europe, currently:

                                          • FTSE is down -0.16%.
                                          • DAX is down -0.03%.
                                          • CAC is up 0.22%.
                                          • German 10-year yield is up 0.0121 at -0.239.

                                          Earlier in Asia:

                                          • Nikkei rose 0.03%.
                                          • Hong Kong HSI rose 0.40%.
                                          • China Shanghai SSE rose 0.20%.
                                          • Singapore Strait Times dropped -0.45%.
                                          • Japan 10-year JGB yield dropped -0.029 to -0.127.
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