On trade war with China, Trump insisted things are going well. He told reports at the White House that “China would love to make a deal with us. We had a deal and they broke the deal. I think if they had it to do again they wouldn’t have done what they did.”
On the tariffs, he said “China is subsidizing products, so the United States taxpayers are paying for very little of it.” And pointed to the little impact of tariffs on inflation.
Trump also said, “I think we’re doing very well with China.”
US trade deficit widened slightly to USD 72.1B in April, up from USD 71.9B. Looking at the details, pretty much all category of of both exports and imports contracted. Overall exports dropped -4.2% to USD 134.6B. Imports dropped -2.7% to USD 206.7B.
US initial jobless claims rose 3k to 215k in the week ending May 25, slightly above expectation of 214k. Four-week moving average of initial claims dropped -3.75k to 216.75k.
Continuing claims dropped -26k to 1.657M in the week ending May 18. Four-week moving average of continuing claims dropped -3.5k to 1.673M.
US Q1 GDP growth was revised down to 3.1% annualized, from first estimate of 3.2%, matched expectations. GDP price index was revised down to 0.8% down from 0.9% and missed expectation of 0.9%.
Looking at the details, there were positive contributions from PCE, private inventory investment, exports, state and local government spending, and non-residential fixed investment. Imports also decreased. There was negative contribution from residential fixed investment.
The acceleration in GDP growth reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending.
Selloff in risk markets halted today but trading has been rather subdued. Following general recovery in European stocks and yields, except Italy, Yen and Swiss Franc trade mildly lower. As usual, Dollar move in tandem with the two when trade war is the main theme. Canadian Dollar is the strongest one for today, following rebound in oil prices. Euro follows as second strongest so far.
The hard line rhetorics from China are getting a bit boring as they just repeated what have been said. Bloomberg reported that China has halted the goodwill soy bean purchases from US already but that’s hardly a surprise. China has been claiming that impact of trade war is manageable. But figures speak louder than words. We’ll finally see how sentiments turned with PMIs to be released in next Asian session.
In Europe, currently:
Earlier in Asia:
BoE Deputy Governor Dave Ramsden said in case of a smooth Brexit with transition, the MPC expected UK growth to pick up, leading to excess demand and building domestic inflationary pressure. In such case, further monetary tightening is appropriate. Ramsden’s GDP growth expectation was “a little more pessimistic”. However, he also saw “downside risks to productivity, while he’s also “less optimistic on investment recovery”. Thus, his overall view on monetary policy was broadly in line with the MPC.
Ramsden noted that the “biggest risk to the UK economy and UK financial stability, remains that of a Brexit outcome of no deal and no transition.” But he emphasized that “most risks to financial stability that could arise have been mitigated”, even though “a no deal, no transition Brexit could still be expected to bring significant market volatility, as well as economic instability.”
China continued its hard line rhetorics on the topic of US-China trade war. Commerce industry repeated the pledge to fight till the end if US keeps escalating tensions. And China will firmly defend its own national interests. There is no indication of more talks as China said US sincerity is in doubt.
In addition to the usual stuffs, the Commerce industry also said China is willing to meet reasonable demand for rare earths from other countries. Though, it would be unacceptable that countries using Chinese rare earths to manufacture products would turn around and suppress China.
Separately, it’s reported that China has halted soy purchases from the US already. Government data indicates China bought about 13 million metric tons of US soybeans since December. While there is no cancellation of previous orders, there is no further orders to continued the so called goodwill buying.
Australia dwelling approvals contracted by -4.7% mom in seasonally adjusted terms in April. That’s well below expectation of 0.0% mom. Regionally, the decline was driven by falls in Tasmania (19.1%), Victoria (16.1%), Western Australia (6.7%) and South Australia (3.3%). Private dwellings excluding houses fell 6.5% while private house approvals decreased 2.6%.
Seasonally adjusted new capital expenditure dropped -1.7% in Q1, also way below expectation of 0.5% qoq. Buildings and structures fell -2.8% while equipment, plant and machinery fell -0.5%
Rhetorics from Chinese officials regarding trade war with US continued to be hard-line. The ruling Communist Party is clearly preparing their citizens for the “new long march” in prolonged trade war.
Chinese Vice Foreign Minister Zhang Hanhui said today “we oppose a trade war but are not afraid of a trade war.” He went further to accuse the US that “this kind of deliberately provoking trade disputes is naked economic terrorism, economic homicide, economic bullying.”
He added: “This trade clash will have a serious negative effect on global economic development and recovery… We will definitely properly deal with all external challenges, do our own thing well, develop our economy… At the same time, we have the confidence, resolve and ability to safeguard our country’s sovereignty, security, respect and security and development interests.”
Yesterday, stock markets were rocked by news that China is going to weaponize its rare earths in the trade war. The state-run China Daily newspaper said today “it would be naive to think that China does not have other countermeasures apart from rare earths to hand”. “As Chinese officials have reiterated, they have a ‘tool box’ large enough to fix any problem that may arise as trade tensions escalate, and they are ready to fight back ‘at any cost’.”
BoJ board member Makoto Sakurai said the central bank “shouldn’t recklessly seek to achieve our price target with additional easing”. Instead, the best monetary policy approach was to “patiently maintain” the current stimulus program. He acknowledged that “achievement of our price target is being delayed”. But that’s because “the relationship between monetary policy and price moves are changing and becoming more complex.”
Sakurai also said BoJ should be very mindful of the negative effects of the ultra-loose monetary policy. He added, “while financial institutions’ capital-to-asset ratios are sufficient from a regulatory standpoint, what’s important to note is that they are declining as a trend.” Hence, “the BoJ must make appropriate policy decisions by scrutinizing the merits and demerits, including the risk our policy is building up financial imbalances.”
Swiss Franc, Yen and Dollar are the stars today as risk aversion intensifies in US session. DOW hits as low as 24938.24 and is currently down more than -300 pts. 10-year yield drops to as low as 2.210 and stays week. Most importantly, all major indices drop through recent support level, suggesting the declines started back in late April have resumed and are extending.
In our views, the reactions to news that China is weaponizing its rare earths in trade war with US are exaggerated. Though, it’s clear that there is no end in sight and the relationship will only get worse. Bigger risks to market sentiments lie ahead with China PMIs release on Friday. Probably even more so, US ISMs could show deep deterioration next week, as with Market US PMIs indicated last week.
In Europe, FTSE closed down -1.15%. DAX dropped -1.57%. CAC lost -1.70%. German 10-year yield is down -0.0173 at -0.175.
EU Finance Commissioner Valdis Dombrovskis and EU Economic Commissioner Pierre Moscovici have formally sent a letter to Italian Economy Minister Giovanni Tria, requesting explanation that the country hasn’t “made sufficient progress towards compliance with the debt criterion” of EU rules.
This is the first step the so-called excessive deficit procedure, which could result in request for “non-interest bearing deposit” of up to 0.2% of gross domestic product, or around EUR 3.5B. If Italy refuses to comply with the request as Deputy Prime Minister Matteo Salvini signalled, that would lead to a further breach of EU law.
Italian 10-year yield, currently down -0.043 at 2.647, suggests that investors are more overwhelmed by broader risk aversion.
US stocks gap broadly lower today. While the decline is so far “relatively” limited, recent support levels are taken out. That is, DOW drops through, 25222.51 support and the fall from 26695.96 is resuming. Similarly, S&P 500 gaps through 2801.43 support to as low as 2778.45 so far.
Development so far is in line with our view. That is, fall from 26695.96 is the third leg of the consolidation pattern from 26951.81 historical high. Further fall should be seen in near term to 38.2% retracement of 21712.53 to 26695.96 at 24792.28. But we’re looking at at least a break of 61.8% retracement at 23616.20 before bottoming.
Canadian Dollar weakens notably after BoC kept overnight rate unchanged at 1.75% as widely expected. The central bank assessed that economic developments were broadly in line with the April MPR, including growth and inflation.
Also, recent slowdown in late 2018 and 2019 was “temporary” even though “global trade risks have increased”. Thus, “degree of accommodation being provided by the current policy interest rate remains appropriate.”
BoC also sounded noncommittal to any future rate move. It just noted that “Governing Council will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment”. That is, for the near term, there is still no chance of a rate hike.
USD/CAD spikes higher to 1.3546 after the release, through 1.3521 resistance. But there is no follow through buying yet. Further rise is in favor as long as 1.3429 support holds.
Full statement here:
Bank of Canada maintains overnight rate target at 1 ¾ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent.
Recent Canadian economic data are in line with the projections in the Bank’s April Monetary Policy Report (MPR), with accumulating evidence that the slowdown in late 2018 and early 2019 is being followed by a pickup starting in the second quarter. The oil sector is beginning to recover as production increases and prices remain above recent lows. Meanwhile, housing market indicators point to a more stable national market, albeit with continued weakness in some regions.
Continued strong job growth suggests that businesses see the weakness in the past two quarters as temporary. Recent data support a pickup in both consumer spending and exports in the second quarter, and it appears that overall growth in business investment has firmed. That said, inventories rose sharply in the first quarter, which may dampen production growth in coming months.
The global economy is also evolving largely as expected since April, although the recent escalation of trade conflicts is heightening uncertainty about economic prospects. In addition, trade restrictions introduced by China are having direct effects on Canadian exports. In contrast, the removal of steel and aluminum tariffs and increasing prospects for the ratification of CUSMA will have positive implications for Canadian exports and investment.
Inflation has evolved in line with the Bank’s April projection. The Bank expects CPI inflation to remain around the 2 per cent target in the coming months. Core inflation measures all remain close to 2 per cent.
Overall, recent data have reinforced Governing Council’s view that the slowdown in late 2018 and early 2019 was temporary, although global trade risks have increased. In this context, the degree of accommodation being provided by the current policy interest rate remains appropriate. In taking future policy decisions, Governing Council will remain data dependent and especially attentive to developments in household spending, oil markets and the global trade environment.
Entering into US session, Swiss Franc and Yen are running as the strongest ones for today. US-China trade war is again the main theme. There are reports that China is weaponizing its dominance on rare earths. Some claimed that might risk serious disruption to US industries. We’re skeptical on the impact of such move. And, the reactions from stocks are relatively mild too, considering DOW future is just down -167pts for the moment. Nevertheless, the message is reinforced. That is, China is not going to back down and rectify its own unfair practices. And the maximum pressure way of Trump is useless. Trade war is not as easy to as it seems to some people and it’s going to drag on longer.
Staying in the currency markets, for now, Dollar is following as the third strongest for the day shrugging off persistent decline in treasury yields. 10-year yield is currently down -0.0368 at 2.228, and could hit 2.2 handle pretty soon. New Zealand Dollar is the weakest one for today s far, followed by Sterling. Canadian Dollar is a the third weakest as markets await BoC rate decision. Euro is mixed while markets await European Commission’s formal warning letter to Italy for its deficit.
Some previews on BoC:
In Europe, currently:
Earlier in Asia:
ECB Governing Council member Olli Rehn told Reuters today that the “central scenario is not a recession,” despite the “soft patch in the economy.” Though, he reiterated the unified message that an ample degree of stimulus is still appropriate for now. Policymakers are going to wait for the new economic forecasts, to be released next week, before debating on adjusting monetary policies.
Regarding the policy framework, Rehn said the definite of price stability should be loosened. Currently ECB sees inflation target as being close to 2%, below 2%. But Rehn said “My view is that 2% is not a ceiling and inflation can deviate in both directions.”
Italian Deputy Prime Minister Matteo Salvini called for a new role for ECB to “guarantee” government debt in order to keep bond yields low. Rehn bluntly responded saying it goes against the principal of modern central banking that we are forbidden to do monetary financing.”
ECB warned in the Financial Stability Review that “uncertainty about global economic growth prospects has contributed to bouts of high volatility in financial markets”. And, “weaker than expected growth and a possible escalation of trade tensions could trigger further falls in asset prices”.
The report noted that materialization of downside risks to economic growth could spark greater financial market volatility. Persistent downside risks to growth reinforce the need to strengthen balance sheets of highly indebted firms and governments . Bank profitability prospects are subdued given slow progress in addressing structural issues
ECB Vice President Luis de Guindos said in the statement, “if downside risks to the growth outlook were to materialize, risks to financial stability may arise. And “the growth outlook is central to all the main risks to financial stability.”
Swiss KOF Economic Barometer dropped to 94.4 in May, down from 96.2 and missed expectation of 96.2. The reading dived further below its long-term average. KOF noted “Swiss economy is developing rather sluggishly.” And, majority of sets of indicators are tending downwards.
The indicators for banking and insurance, consumption and foreign demand have developed negatively. The prospects for accommodation and food service activities and the other service providers have become gloomier. In the manufacturing sector, the outlook hardly changed compared to the previous month. For the construction sector, the outlook has improved.
France GDP grew 0.3% qoq in Q1, unrevised from first estimate. Looking at the details, Households disposable income rose 0.9%. However, household consumption expenditure just grew 0.4%. Total gross fixed capital formation slowed down a bit to 0.5%. Overall, final domestic demand excluding inventory changes kept increasing at the same pace. Imports jumped 1.4% due to fuel. Exports growth decelerated sharply to 0.4%, down from 2.0%. Foreign trade balance contributed negatively to GDP growth: -0.3%.
Canadian Dollar is trading mixed as markets await BoC rate decision. BoC is widely expected to keep policy rate unchanged at 1.75%. At last meeting in April, BoC removed chance of rate hike in the near- to medium- term. The central bank also downgraded GDP growth forecast, and lowered the range of neutral rate.
Economic data released since then showed not special deterioration. Headline CPI accelerated to 2.0% yoy but BoC’s preferred gauges of inflation – trimmed CPI, median CPI and common CPI – either eased or stayed unchanged, giving an average reading of +1.9%, down slightly from March’s +1.97%. Job market grew strongly by 106.5k. GDP contracted -0.1% mom in February but 0.3% mom rebound is expected in March. This would probably translate to an annualized growth of 0.7% qoq in 1Q19.
BoC Governor Stephen Poloz said recently that , “the natural tendency is for interest rates to still go up a bit”. Though, that depends on whether the slowdown is temporary. Though, Poloz is uncertain about the size and timing of the rate hike. Overall, we’re not expecting any drastic change with today’s announcement.
Here are some suggested readings on BoC:
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WTI oil heading back to 56.92 after brief and weak recovery
WTI crude oil drops sharply as data show less than expected decline in oil inventory. In the week ending May 24, commercial oil inventories decreased by 0.3 Mbarrels only, versus consensus of -0.9M. WTI is quickly back below 58 handle after the release.
As follow up to last post here, WTI did recover after trying to draw support from 38.2% retracement of 42.05 to 66.49 at 57.15. However, as the subsequent recovery was limited well below 60.03 support turned resistance, there is no sign of bottoming yet. Focus is immediately back on 56.92 temporary low. Break there will extend the fall from 66.49 to 161.8% projection of 66.49 to 60.03 from 63.90 at 53.44.
For now, we’re still viewing the decline from 66.49 as a corrective pull back. Hence, while’s it’s likely deeper than expected, strong support should be found at 61.8% retracement of 42.05 to 66.49 at 51.38 to complete the correction.
If it happens that way, break of 56.92 in WTI should solidify the upside momentum in USD/CAD to retest 1.3664 high.