Fed Kaplan not prepared for interest rates to go above neutral

    Dallas Fed President Robert Kaplan said he’s “not prepared” for interest rates to “go above neutral”. And, he estimated that netural rate is between 2.50% and 2.75%. And that is, after four 25bps hike from the current 1.50-1.75%, fed fund rate will hit the neutral level.

    For inflation he said “I want to run around 2, and if we got a little bit above it and I thought it would be short term and not long term, I could tolerate it.” On the other hand, “if I thought it would persist I think it would affect my policy views.”

    Xi hailed Merkel’s effort in the bilateral ties

      German Chancellor Angela Merkel was welcomed by Chinese President Xi Jinping in Beijing yesterday. Xi hailed her effort in the bilateral ties since the two countries launched an all dimensional strategic partnership in 2014. Xi urged that China and Germany should set an example of “win-win cooperation”. And, “this should be the direction that bilateral ties will move to in the next stage.”

      In addition, Xi said the Chinese “welcome Germany to grasp opportunities arising from China’s new round of reform and opening up.” And, there should be expanded industrial and market cooperation. Xi added that “we would like to promote global governance and multilateralism together with Germany within the multilateral frameworks.”

      North Korea responds to Trump’s sudden and unilateral cancellation of the Kim-Trump summit

        North Korean Vice Foreign Minister Kim Kye Gwan responded to Trump’s cancellation of the June 12 summit in Singapore in a statement carried by state media.

        “We have inwardly highly appreciated President Trump for having made the bold decision, which any other U.S. presidents dared not, and made efforts for such a crucial event as the summit.”

        “We even inwardly hoped that what is called ‘Trump formula’ would help clear both sides of their worries and comply with the requirements of our side and would be a wise way of substantial effect for settling the issue.”

        “His sudden and unilateral announcement to cancel the summit is something unexpected to us and we can not but feel great regret for it.” And, North Korea remained open to dialogue with the US “regardless of ways at any time”.

        “The first meeting would not solve all, but solving even one at a time in a phased way would make the relations get better rather than making them get worse. The U.S. should ponder over it.”

        Swiss Franc unconvincingly the second strongest today, a look at EURCHF again

          Yen is trading as the strongest one for today as boosted by risk aversion and falling treasury yields. Trump’s pull out from the meeting with Kim triggered some selloff in stocks. But loss is relatively limited. On the other hand, it’s the steep decline in 10 year yield, which hit as low as 2.955 so far, that looks more serious.

          Swiss Franc follow as the second strongest one for today. However, even so, it’s held below yesterday’s high against all major currencies. Momentum is rather unconvincing. Having a look at EURCHF action bias table, while D action bias stays consistently downside red, 6H Action Bias is showing some hesitation.

          A further look at the 6H Action Bias chart, it seems that EUR/CHF started to lose downside momentum after hitting 1.1580. Though, there is no convincing evidence that the cross is reversing yet.

          Following up on our short strategy here. In the current situation, there are two choices, get out, or stay short. Considering that EUR/CHF is in deep over sold region as seen in daily RSI, we’d prefer to close short right now, with around 80 pt profit first. For those we’d like to hold on for 1.1445 target, we’d suggest to lower the stop to break even at 1.1705.

          Gold surges and regain 1300 as Kim-Trump meeting is called off

            Gold jumps sharply and is back above 1300 handle on news that Trump cancels his summit with North Korean Leader Kim Jong Un.

            1282.27 is now seen as a short term bottom. More importantly, the the long term trend line, established since De 2016 at 1122.81, was defended.

            Focus will now be back on 55 day EMA (now at 1316.59) and 1325.91 resistance zone. As long as these zone holds, further fall is still mildly in favor. And sustained break of the trend line support will be a strong indication of bearish reversal.

            Nonetheless, firm break of 1325.91 will set the stage for a test on 1366.05. And, probably the real key resistance at 1380.56.

            USDJPY heading lower after Trump cancels summit with North Korean Kim

              Stocks tumble sharply, while treasury yields dive as Trump announced to cancel the meeting with North Korean Leader Kim Jong Un in Singapore on June 12. At the time of writing, DOW is down -0.5%, at around 24770. Deeper fall could be seen but the key is whether near term support at around 24600 would hold. There is some distance to this level yet.

              But 10 year yield is looking much worse. TNX opened the day at 3% and hit as long as 2.963 so far. There is some clear downside acceleration after Trump’s announcement through the White House. And the sharp fall in TNX drags USD/JPY to 109.10so far.

              Below is the tweet from the White House regarding the cancellation.


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              US initial claims rose 11k to 234k in the week ended May 19

                US initial jobless claims rose 11k to 234k in the week ended May 19, above expectation of 220k.

                Four-week moving average of initial claims rose 6.25k to 219.75k.

                Continuing claims rose 29k to 1.741m in the week ended May 12.

                Four-week moving average of continuing claims dropped 23.25k to 1.752m, hitting the lowest since 1973.

                Full release here.

                ECB accounts offer nothing more than a bit of cautiousness

                  ECB’s monetary meeting accounts offer nothing new to the markets, just a bit more cautiousness.  Thus, Euro’s reaction is rather muted.

                  Some quote from the monetary stance and policy considerations sections of the ECB monetary policy meeting accounts:

                  • The recent incoming information pointed to some moderation in activity but so far remained consistent with a solid and broad-based expansion of the euro area economy.
                  • The underlying strength of the euro area economy continued to support the Governing Council’s confidence that inflation would gradually converge to its inflation aim of below, but close to, 2% over the medium term
                  • Measures of underlying inflation remained subdued and had yet to show convincing signs of a sustained upward trend.
                  • For underlying inflation pressures to continue to build up and support the path of headline inflation over the medium term, patience, persistence and prudence with regard to monetary policy remained warranted.
                  • Despite the observed moderation in activity, confidence in the underlying strength of the euro area economy and the eventual convergence of inflation to the Governing Council’s inflation aim remained unchanged.
                  • While measures of underlying inflation continued to be subdued, some comfort was drawn from encouraging signs of a strengthening in nominal wage growth and the continued anchoring of long-term inflation expectations at levels consistent with the Governing Council’s aim.
                  • While risks surrounding the euro area growth outlook remained broadly balanced, it was acknowledged that risks related to global factors, including the threat of increased protectionism, had become more prominent and warranted monitoring with regard to their implications for the medium-term outlook for growth and prices.

                  Full release here.

                  EU Katainen: US auto tariffs probe very difficult to understand

                    European Commission Vice President Jyrki Katainen respond to the Trump’s intention to impose new tariffs on automobile imports. Katainen criticized that would be “against the WTO” and “it’s very difficult to imagine it to create any sort of threat to national security. He reiterated that “it’s very difficult to understand”.

                    But he also noted that “we have now just heard what has been said and there is a long journey to the practice … We don’t expect this to further complicate the issue. We just have to find a solution that is fair.”

                    ECB Praet: There are some clouds depsite good economic conditions

                      ECB Chief Economist Peter Praet said in in an event in Brussels today that economic conditions in Eurozone remain good. Recent data softness was partly due to temporary factors and “supply constraints” only. But he noted “there are some clouds and we should be watchful because that can go into confidence in a more fundamental way.” Those clouds include the loose fiscal policy of Italy’s new eurosceptic government, as well as international trade tensions.

                      ECB Governing Council member Vitas Vasiliauskas also noted that geopolitical factors would be analyzed before the central bank make a decision on its asset purchase program. In particular, Vasiliauskas noted the markets have already reacted to the Italian government change. And he said ECB has to take that into account.

                      Finally some good UK data as retail sales rose 1.6% mom in April. Pound recovers

                        Finally, there’s some good news from the UK. Headline retail sales jumped 1.6% mom in April, much higher than expectation of 0.7%. Excluding auto and fuel, retail sales also jumped solidly by 1.3% mom, versus expectation of 0.4% mom.

                        The ONS noted that “the effects of the adverse weather on sales introduces further volatility to the monthly growth rate in April 2018.” And, “combining March and April to compare the two months with the same two months a year earlier provides a more stable picture of the year-on-year growth”.

                        Combining both March and April, sales grew 1.3% in 2018, much lower than 2.9% back in 2017. Full release here.

                        Nonetheless, Sterling is lifted immediately by the release. GBP/USD’s focus will be back on 1.3441 minor resistance.

                        German Merkel welcomed in her visit to China

                          German Chancellor Angela Merkel is having a fruitful visit to China. Chinese Premier Li Keqiang said, in joint appearance with Merkel, that “China’s door is open” and welcome German vehicle makes to invest there. Li also pledged that “if they come across any problems during their investment, especially when it comes to legal protections, I can clearly tell you that China is striding forward to being a country with rule of law.”Li also said China has always supported a unified and prosperous Europe and that China and Germany uphold free trade.

                          Besides, Li also noted “the euro is an important choice in our foreign currency reserves, and so we are continuing to buy European debt.” And, “even when certain European countries had sovereign debt crises, China kept the broader picture in mind.”

                          In addition, Merkel also secured the support from China on the current Iran nuclear deal, despite US withdrawal.

                          North Korea warns US of nuclear-to-nuclear showdown

                            Right now, whether the scheduled meeting between North Korean leader Kim Jong-un and Trump on June 12 in Singapore remains uncertain. North Korean Vice Foreign Minister Choe Son-Hui issued a strong statement today in response to US Vice President Mike Pence’s recent comments. Choe slammed Pence’s unbridled and impudent remarks” that threatens if “if Kim Jong-un doesn’t make a deal”, North Korea could end up like Libya.

                            Choe added that “we will neither beg the US for dialogue nor take the trouble to persuade them if they do not want to sit together with us.” And she warned, “whether the US will meet us at a meeting room or encounter us at nuclear-to-nuclear showdown is entirely dependent upon the decision … of the US.”

                            She went further and said “we can also make the US taste an appalling tragedy it has neither experienced nor even imagined up to now.” And, “as a person involved in the US affairs, I cannot suppress my surprise at such ignorant and stupid remarks gushing out from the mouth of the US vice-president,”

                            Earlier on Wednesday, Trump said “it could very well happen. Whatever it is, we’ll know next week about Singapore. And if we go, I think it will be a great thing for North Korea.”

                            Revisiting Japan April trade data as US threats car tariffs

                              In response to Trump’s probe on auto tariffs, Japanese Chief Cabinet Secretary Suga noted that Japan is closely monitoring the situation and emphasized that any trade steps should be in accordance with WTO rules. Trade Minister Seko said the potential auto tariffs are regrettable and warned that the would cause confusion in the global economy.

                              As a recap on recent Japanese trade statistics, the Finance Ministry reported JPY 626B surplus in April, up 30.9% from a year ago. Exports jumped 7.8% to JPY 6.8T, up fro the 17th straight months. Import rose 5.9% JPY 6.2T.

                              Japan’s trade surplus with the US rose 4.7% to JPY 616B as export rose 4.3% and import rose 3.9%.

                              Transport equipment is a major contributor to the export to US, and overall export growth in April. Total transport equipment contributed to 39.4% of exports to the US and grew 5.3% to JPY 507B. Motor vehicles was a large part, at 30.2% of total exports to the US, grew 10.0% to JPY 389B.

                              Japan is one of the few top 10 steel importers to the US who’s not even granted a temporary exemption on steel tariffs. Though, iron and steel products exports to the US rose 13.7% in April to JPY 18.2B.

                              All details can be found here.

                              Yen surges, Nikkei drops as Trump mulls car tariffs on national security ground

                                Yen’s broad based rally extends today as Nikkei dives over -1% as led by selloff in car makers shares.

                                Sentiments are hurt by news that the US is considering to impose as much as 25% tariffs on import cars. Similar to steel and aluminium tariffs, national security is used as the excuse for the investigation under Section 232 of the Trade Expansion Act of 1962.

                                Commerce Secretary Wilbur Ross said in a statement that “there is evidence suggesting that, for decades, imports from abroad have eroded our domestic auto industry.” And, the department will “conduct a thorough, fair, and transparent investigation into whether such imports are weakening our internal economy and may impair the national security.”

                                In a separate statement, US President Donald Trump said: “core industries such as automobiles and automotive parts are critical to our strength as a Nation.”

                                Some see the the car tariffs as a threat to force concessions in NAFTA talks, which has been in deadlock. This could also be an act to address pressure to EU, in particular on Germany for trade talks. But Japan could be the hardest hit if the tariffs are implemented. Japan is one of the few top 10 steel importers to the US who’s not even granted a temporary exemption.

                                In 2017, US imported 8.3m vehicles, including 2.4 million from Mexico, 1.8 million from Canada, 1.7 million from Japan, 0.9m from South Korea and 0.5m from Germany.

                                Yen stays strongest, Euro weakest in a volatile day

                                  As an early sum-up of the day, Yen remains the strongest one, followed by Dollar. Euro and Sterling were taking turns to be the weakest. For now, Euro is the worst performer.

                                  But it’s really hard to judge who’s worst. As both the Action Bias tables are beautifully red. (Well yes, EUR/GBP W action bias in red actually means Euro is weaker). Both will face more challenges ahead, with ECB meeting accounts and UK retail sales scheduled for tomorrow.

                                  Looking ahead in the session, there are two technical levels to note. One is 55 day EMA (24552) in DOW. Even though it’s still quite far away from the current level, a close below will have important near term bearish implication. Another one is 3.00 in 10 year yield.

                                  US May PMI points to encouragingly solid pace of economic growth of 2.5-3%

                                    Markit US PMI manufacturing rose 0.1 to 56.6 in May, hitting 44 month high. PMI services rose 1.1 to 55.7, at 3 month high. Both were above market expectations.

                                    PMI composite rose to 55.7, up from 54.9, at a 3 month high.

                                    Comments from Chris Williamson, Chief Business Economist at IHS Markit:

                                    “The flash May PMI surveys point to an encouragingly solid pace of economic growth of 2.5-3% with monthly job gains running at just over 200,000, though the interesting action is coming on the prices front.

                                    “Input costs measured across both manufacturing and services are rising at the fastest rate for nearly five years, with the goods-producing sector seeing the steepest cost increases for seven years in recent months.

                                    “Furthermore, supplier delivery delays, a key forward-indicator of inflationary pressures, have risen to the highest seen in the 11 year survey history. Rising demand has stretched supply chains to the extent that suppliers are increasingly able to demand higher prices. At the same time, higher oil and energy prices are pushing up firms’ costs.

                                    “Business optimism meanwhile remains at a three-year high, with companies commonly expecting rising demand to help drive business growth, setting the scene for further strong survey results in coming months.”

                                    Full release here.

                                    Also from US, new home sales dropped to 662k annualized rate in April, below expectation of 678k.

                                    USDJPY recovers as Trump said China trade deal moving along nicely

                                      After dipping to as low as 109.55, USD/JPY recovers on Trump’s tweet that the trade deal with China is “moving along nicely.


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                                      For now, 109.55 is not even seen as a temporary bottom yet. We’ll have to seen how is goes to decide. The markets are reflections of the world. When the world is erratic, the markets couldn’t be calm.

                                      ECB Coeure: Asset purchase will end this year

                                        ECB Executive Board member Benoit Coeure he’s not worried about slowdown and the central bank is still on course to end the asset purchase program this year.

                                        Coeure told German newspaper Die Zeit that “at the end of last year, I said that I didn’t expect that our asset-purchase program would need to be extended again. I see no reason to change my view.” And, policymakers expect the economic expansion to continue, and are “increasingly confident that inflation will rise towards our aim of below, but close to, 2 percent.”

                                        Regarding the upcoming new Italian government. Coeure said “it’s too early to comment on plans we don’t know.” But he emphasized that “on fiscal policy in general, the ECB’s view is well known: Europe has fiscal rules and they should be respected.”

                                        Yen crosses in downside acceleration as US, German and UK treasury yields tumble

                                          Yen crosses continue to trade lower in European session and accelerate after weaker than expected Eurozone and UK data.

                                          EUR/JPY broke 109.22 support and then 128.94 support without hesitation. GBP/JPY also broke 147.04 support. Both confirm near term down trend resumption.

                                          USD/JPY also takes our near term channel which should now bring deeper corrective fall to 108.82 support.

                                          Falling treasury yield is seen as the main factor driving the moves.

                                          US 10 year yield reaches as low as 3.011, comparing to yesterday’s close at 3.063.

                                          German 10 year bund yield reaches as low as 0.497, comparing to yesterday’s 0.559.

                                          UK 10 year gilt yield dips to as low as 1.449, comparing to yesterday’s 1.523.

                                          Chart screenshots from MarketWatch.