GBP drops sharply after CPI miss. Headline CPI slowed to 2.5% yoy in March versus expectation of 2.7% yoy. Core CPI dropped to 2.3% yoy versus expectation of rising to 2.5% yoy. Now, slowing consumer inflation is putting a May BoE hike in doubt.
GBP/USD’s fall from 1.4376 accelerates after the release. And focus is back on 1.4144 minor support. Break will threaten near term reversal.
It’s now less than an hour before UK CPI release. The piece of data is even more important after yesterday’s wage growth miss. To recap, headline CPI is expected to be unchanged at 2.7% yoy in March. Core CPI is expected to rise to 2.5% yoy, up from 2.4% yoy.
So far, expectations on May BoE hike are firm. According to the latest Reuters poll, all but 7 of the 76 economists surveyed expected a 25bps hike in the Bank rate to 0.75% in May. Barring any disastrous result today, BoE should still be on course for a May hike. The question is indeed on whether BoE would hike again in November.
Technically, GBP’s rally stalled this week, particular clear against EUR and JPY.
61.8% projection of 0.9305 to 0.8745 from 0.8967 at 0.8621 is so far a difficult level to break.
But from the EURGBP action bias table and D action bias chart, downside momentum remains firm. It should be just a matter of time that this 0.8621 level is taken out.
GBP/JPY also stalled after hitting 153.84.
But near term strengthen is quite apparent as seen in GBPJPY action bias table and D action bias chart.
Hence, while a CPI miss today might trigger setback in GBP, that should be temporary. On the other hand, GBP could skyrocket if we get something that beat market expectations.
Japanese Prime Minister Shinzo Abe is meeting Trump in Florida now. Facing domestic political turmoil, Abe is seeking to achieve something out of the summit. The first and foremost is the 232 steel and aluminum tariff of the US. While most other major partners, like South Korea, got exemptions, there is no progress for Japan yet. White House economic advisor Larry Kudlow said waiver on the tariffs, negotiation of new trade agreement are “all on the table”.
Abe could try to persuade Trump in rejoining the Trans-Pacific Partnership, which Japan has been leading since Trump’s withdrawal. There were signs that Trump is reconsidering. But he continued to pour cold water. Trump just tweeted today that “while Japan and South Korea would like us to go back into TPP, I don’t like the deal for the United States. Too many contingencies and no way to get out if it doesn’t work. Bilateral deals are far more efficient, profitable and better for OUR workers. Look how bad WTO is to U.S.”
The Korean Peninsula issue is another focus of the summit. Japan, as the leader and closet ally of the US in the region, has so far been bypassed regarding the issue. There could be public perception that Abe is not being consulted, or even being involved in the talks between the US and North Korea. And that would hurt Abe’s own political credibility, which is already at risk.
Regarding the summit between North Korea and the US, Trump said that “we have had talks at the highest level.” But later White house spokesman Sarah Huckabee Sanders clarified those talks were not with Trump directly. Meanwhile, give locations are being considered for the highly anticipated between Trump and North Korean leader Kim Jong-un.
Chicago Fed President Charles Evans he didn’t see an “outsized risk of a breakout in inflation”. And as long as that picture continues Fed can “increase rates gradually while monitoring any rising inflationary pressures.”
Evans was indeed referring to the risk of 70s style overheating in inflation, as central banks fell behind the curve. And Fed was forced to push up interest rates aggressively in response, which ensued a recession.
But this time, he didn’t expect inflation to pick up as quickly or as problematically as it did in the 70s. And therefore, “the federal funds rate does not need to be increased as much above its neutral setting as in the past when trend inflation needed to be taken down several notches.” And, “gradual policy increases in this context make sense—certainly as a way to limit the damage if policy ever actually becomes overly tight too soon.”
San Francisco Fed President John Williams said yesterday that inflation is going to rise to and then stay above the 2% target for “another couple of years” even though Fed continues with its tightening path. And he’s not worried because “there are global factors that are holding inflation down.”
Also, Williams was not concerned with the problem on inverted yield curve. Fed’s rate hike will push up short term rates. But at the same time, Fed is unwinding its balance sheet and that will also push up long-term rates. He added that “I personally don’t anticipate having an inverted yield curve in the next few years.” But he would see “an inversion of the yield curve as a warning sign that sentiment is that growth is going to slow markedly.”
Regarding the trade spat between Trump and other countries, he said “what worries me about trade discussion beyond what’s happened is if we have continued uncertainty over trade policy what’s going to happen over the next few years.” And, the uncertainty itself can have a “negative” effect of businesses.
The strong close in US indices overnight now cleared up the near term direction. DOW closed up 213.59 pts or 0.87% at 24786.63. S&P 500 gained 28.55 pts or 1.07% to 2706.39. NASDAQ was even better, rising 124.82 pts or 1.74% to 7281.10. All three indices took out nearly flat 55 day EMA respectively.
DOW’s break of the near term trend resistance at the same time confirms that fall from 25800.35 has completed 2344.52. For the near term further rise could be see back to 25800.35 first. But then, rise from 23344.52 is still having a somewhat corrective look. It’s likely just a leg inside the whole corrective pattern from 26616.71 high. Hence, it could start to feel heavy again when it approaches 25800.35.
For S&P 500, first hurdle will be trend line resistance at 2746, and then 2081.90 resistance.
In the new World Economic Outlook released today IMF kept global growth forecast unchanged at 3.9% in 2018 and 3.9% in 2019.
For advanced economies, growth projections for 2018 were generally revised up except Japan and Canada. For 2019, projections were largely unchanged with upward revision in US, France and Spain.
China’s growth projection was kept unchanged at 6.6% in 2018 and 6.4% in 2019.
Here is the summary table.
In a blog post by Maurice Obstfeld, Economic Counsellor and Director of Research at the IMF, it’s noted that “the world economy continues to show broad-based momentum. Against that positive backdrop, the prospect of a similarly broad-based conflict over trade presents a jarring picture.”
Obstfeld said that “prospect of trade restrictions and counter-restrictions threatens to undermine confidence and derail global growth prematurely.” And, without naming who, he added that “while some governments are pursuing substantial economic reforms, trade disputes risk diverting others from the constructive steps they would need to take now to improve and secure growth prospects.”
Referring to intensification of trade tensions since US announcement of steel and aluminum tariffs, Obstfeld said “these initiatives will do little, however, to change the multilateral or overall U.S. external current account deficit, which owes primarily to a level of aggregate U.S. spending that continues to exceed total income.”
The full blog post can be found here. Global Economy: Good News for Now but Trade Tensions a Threat
US Treasury Steven Mnuchin talked to CNBC today and he mentioned President Donald Trump’s tweet regarding Russia and China currency devaluation. Mnuchin said that was a “warning shot at China and Russia about devaluation. China has devalued their currency in the past.” Mnuchin added that “they’ve used a lot of their reserves to actually support the currency. The president wants to make sure they don’t change their plans, and he’s watching it.”
Regarding the economy, Mnuchin said “we’re now at a point where we’re comfortably within our 3 percent or higher sustained economic growth”. He added that “we literally have met with hundreds of executives, small companies, big companies, and thousands of workers. We’re beginning to see the impact of the tax cuts, specifically people investing large amounts of money back into the United States.” Also, “the difference between 2.2 and 3 percent will pay for the tax cuts.”
Regarding rejoining TPP, Mnuchin just said that Trump would opt to join only when there are more favorable terms to the US. And Mnuchin is “cautiously optimistic.
Dollar is broadly higher today, entering into US session, after Mnuchin’s comments. Is it a coincidence? Or…?
In a move to increase support for small and micro businesses, the People’s Bank of China lowered Reserve Requirement Ratio for most commercial and foreign banks by 1%, effective April 26. On the same day, those banks included could use the funds released by RRR reduction to repay borrowing from the PBoC, on the basis of “borrowed first, repaid first”.
PBoC went further to explain that China’s small and micro businesses still face difficulties in financing and expensive financing. Lowering the RRR for some banks could release funding to support these businesses. The move could also increase long terming funding and lower costs of the funds. CNY 400B in funds will be released and these funds are required to be used mainly for loans to small and micro businesses
German ZEW economic sentiment dropped to 87.9 in April, down from prior 90.7 and consensus of 88.0. ZEW expectation gauge dropped to -8.2, down from 5.1, below consensus of -1. ZEW noted in the statement that “the reasons for this downturn in expectations can mainly be found in the international trade conflict with the United States and the current situation in the Syrian war. The significant decline in production, exports and retail sales in Germany in the first quarter of 2018 is also having a negative effect on the future economic development.”
Eurozone ZEW economic sentiment dropped 1.9, down from 13.4, below expectation of 7.3. ” The decline in economic sentiment regarding the Eurozone is likely to be down to the same factors as in Germany, with the figures for production and retail sales in the first quarter of 2018 turning out to be surprisingly negative. Furthermore, the trade conflict with the United States, together with the uncertainties resulting from the Syrian war regarding the relationship between Russia and the US were also having a negative impact on the economic expectations for the Eurozone.”
UK unemployment rate dropped to 4.2% in February, down from 4.3% and beat expectation of 4.3%. That’s also the lowest level since 1975.
Employment also rose to a record high between December and February, adding 55k jobs.
However, average weekly earnings grew only 2.8% 3moy, unchanged from January’s reading. That’s a disappointing to markets who expected 3.0% 3moy growth.
GBPUSD clearly pares back some gains after the release.
GBPJPY continues to be held below 153.84 temporary top.
EURGBP also recovers as bounded in tight range.
GBP bulls will probably need to wait for tomorrow’s CPI before making another strike.
Revisiting GBP/CHF that we covered here last week. The strong up trend continues as seen in the action bias table.
It’s also apparent in the D action bias chart that momentum is very solid.
Now that 61.8% projection of 1.2219 to 1.3419 from 1.2861 at 1.3647 is firmly taken out, next upside target will be 100% projection at 1.4133.
The path will be subject to the job and inflation data to be released today and tomorrow. Market expect today’s data to show average weekly earnings growth accelerating from 2.8% 3moy to 3.0% 3moy. Headline CPI to be released tomorrow is expected to be unchanged at 2.7% yoy, while core CPI is expected to accelerate to 2.5% yoy.
Meeting these expectations will solidify the case for BoE to raise the Bank rate again in May. And the chance of another hike in November would increased too. Missing these expectation might trigger some rethink of the BoE expectations. That could trigger a setback in GBP/CHF’s rally. But the setback should be temporary even in that case, as BoE is still on it’s tightening path. It’s just about the pace.
Dollar selling is picking up pace in early European session.
GBP/USD leads the way higher ahead of UK job data. Hitting as high as 1.4374 so far. It’s on track for 1.4519 projection level.
EUR/USD finally makes up its mind and breaks 1.2396. Trend line resistance at 1.2429 is the first hurdle. But we’d expect an easy break there to 1.2475.
And, USD/CAD could be the next one coming. A break of 1.2544 temporary low looks around the corner.
Minutes of April RBA meeting appeared to be rather balance. RBA sounded upbeat and said over 2018, GDP growth was expected to “exceed potential. CPI inflation was expected to “increase gradually” to a little above 2% target. Also, leading indicators continued to point to “above-average growth in employment” in the period ahead.
However, RBA also warned that “the possibility of an escalation in trade restrictions represented a risk to the global outlook that needed to be monitored closely”. Additionally, “the high level of debt in China and the significant share of financial market activity in unregulated sectors continued to pose important risks to the outlook for the Chinese economy”.
Regarding exchange range, RBA reiterated that “an appreciation of the Australian dollar would be expected to result in a slower pick-up in economic activity and inflation than forecast.”
On monetary policy, RBA also reiterated that the next move “would be up, rather than down”. But still, “there was not a strong case for a near-term adjustment in monetary policy”.
Released from China, Q1 GDP grew 6.8% yoy, same as prior quarter and met expectation. Retail sales rose 10.1% yoy in March, up from prior 9.7% yoy and beat expectation of 9.7% yoy. Industrial production, however, rose 6.0% yoy, slowed from prior 7.2% yoy and missed expectation of 6.9% yoy. Fixed assets investment also slowed to 7.5% yoy, down from 7.9% yoy and missed expectation of 7.7% yoy. Overall, the set of data showed robust growth momentum.
Separately, US Treasury data showed showed that China remained the largest foreign creditor to the US, holding USD 1.18T in US bonds, bills and notes in February. Debt holding by China has indeed by USD 8.5B for the month, the largest rise in six months. But it should be noted that the data was for the period even before the 232 steel tariffs of the US, not to mention the Section 301 tariffs against China. The impact of trade tensions on Chinese interest in US debts remains to be seen.
Meanwhile, Japan came as second largest foreign holder of US debts, dropped slightly from USD 1.07T to USD 1.06T.
USD trades broadly lower today. And some attributes the weakness to Trump’s tweet on Russia and China devaluation.
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Originally, we prefer not to cover some random morning comments like that. But it’s getting a bit annoying to see reports on this flying around, making it a big news.
It’s not, at least for now.
Just take a look at the D heatmap. Yes USD is in red against all others. But it’s only in deep red against EUR and GBP. Meaning that it’s staying in Friday’s range except versus EUR and GBP.
And take a look at this, EUR/USD. It can’t find enough buying through 1.2396 resistance yet.
How about USD/JPY? It’s well above 106.64 support and even holding above a near term trend line.
So, USD weak? Yes. But not that weak to make it an everywhere headline. Looking at the above D heatmap, it’s GBP’s strength that’s worth a mention. Even if USD dives further during the rest of the session, it’s likely because of some other reason.
And some people said that Trump needs to stay away from his tweets. We’ll say it’s the media and people who need to stay away from these random nonsense.
New York Fed President William Dudley said that three or four rate hike is a “reasonable expectation” for 2018. And, “as long as inflation is relatively low, the Fed is going to be gradual.” However, “if inflation were to go above 2 percent by an appreciable margin”, “the gradual path might have to be altered.”
Nonetheless, for now, “the market understands that more than four is quite unlikely, because that would no longer be a gradual path of monetary policy tightening.” He added that ” the market sort of sees three as possible and four as possible, but five or six seems to be quite unlikely.”
Regarding trade war with China, Dudley said the US has “legitimate issues” with China over trade. However, “if trade barriers go up, it’s bad for the U.S. economy. You’re going to have more inflation, less growth, lower productivity, just bad, bad outcomes.”
Dallas Fed president Robert Kaplan expect solid growth in the US this year, with falling unemployment and rising wages. According to him, unemployment rate could fall further to as low as 3.7%. However, he warned of sluggish growth ahead.
He noted that “because the near-term outlook for GDP growth is positive, this may lull observers into believing we are on a path to sustained improvement in the economic performance of the U.S. economy.” However, as the effect of tax cut and budget stimulus fade, also as Fed normalizes monetary policy, growth will fall below 2% after next year.
He added that “unless Congress and the White House initiate structural reforms that improve workforce growth, education and skill levels of our labor force, moderate the expected path of government debt growth, and adopts policies that allow us to capture the opportunities provided by globalization, we are likely to see sluggish rates of GDP growth in the medium and longer term,”
Also, Kaplan pointed out that business are lacking pricing power for the moment. He noted “pricing power of businesses is more limited than we’re historically accustomed to seeing at this stage in an economic expansion.” And that could limit inflation and inflation expectations.
Dollar stays weak in early US session after mixed data.
Headline retail sales rose 0.6% mom in March, above expectation of 0.5%. Ex-auto sales rose 0.2% mom, in-line with consensus.
Empire State Manufacturing index, however, tumbled sharply to 15.8 in April, down from 22.5 and missed expectation of 18.6. In particular, the index for future business conditions dived -26 pts to 18.3, hitting the lowest level in more than two years. That’s a sharp contrast to the reading back in February, at 44.1, which was a several year high.
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UK Hammond cheers CPI, BoE May hike back on table
After initial post CPI selloff, GBP stabilizes a bit. But it’s still trading as the weakest major currency for today.
Chancellor of Exchequer Philip Hammond surely welcomed the data as he tweeted:
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But the data is certainly not that welcomed by BoE hawks like Ian McCafferty and Michael Saunders. They comments will be closely watched to see if they back down from their hawkish stance.
It should be noted that BoE’s February projections were based on market pricing that Bank Rate will rise to 0.7% by 2018 year end. And by 2019 Q1, CPI inflation would drop to 2.3%. Inflation is now already in a clear down trend, diving from 3% in January to 2.5% in March. With Bank Rate staying unchanged at 0.50%. There is much room for BoE to wait through at least another quarter to see how things play out.
November rate decision is now closer to certain, “no”. And May hike is back on the table.