In his prepared remark for semi-annual testimony to Congress, Fed chair Jerome Powell acknowledged “crosscurrents and conflicting signals” in the past few months. Financial markets became “more volatile” toward year-end. Financial conditions are now “less supportive”. Also, growth slowed in some major foreign economies, “particularly China and Europe”. And there is “elevated” uncertainty in issues including Brexit and trade negotiations.
Domestically, the US is facing “important longer-run challenges”. Productivity “has been too low”. Labor force participation among “prime-age men and women” is now lower in the US than in most other advanced economies. “relatively stagnant incomes”, “lack of upward economic mobility” are also important challenges. Federal government debt is also on an “unsustainable path”.
On monetary policy, Powell reiterated that “the extent and timing of any further rate increases would depend on incoming data and the evolving outlook.” He noted that inflation pressure were “muted” in January. and the cumulative development warranted “taking a patient approach” to future policy changes. Also, Fed will evaluate the appropriate timing and approach for the end of balance sheet runoff. ahead.
ECB Governing Council member Philip Lane said earlier today that there will be only be “reasonably small adjustments” in the upcoming economic forecasts in March. And, the “downward revisions in data to mean a slower path of normalization”.
But he believed the current strategy can “cater to limited downside revisions” and the “forward guidance can accommodate revision to the projections. Currently, ECB maintained that interest rates will stay at present levels at least through Summer of 2019.
Lane is currently the only candidate to replace ECB chief economist Peter Praet from June.
UK Prime Minister Theresa May announced three additional commitments in the parliament regarding Brexit. Firstly, there will be a second meaningful vote on the withdrawal agreement by March 12. Secondly, If the government loses the meaningful vote, on March 13, there will be a vote on whether to leave without a deal. And UK will only leave EU on March 29 without a deal, with explicit consent of the House.
Then, if both the withdrawal agreement and no-deal Brexit are voted down, there will be another vote on a short, limited extension to Article 50 on March 14. If the parliament passes the motion, the government will seek to get that extension. Though, May insisted that she doesn’t not want to see Article 50 extension, and the focus is still on leaving on March 29.
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Entering into US session, Sterling remains the overwhelmingly strongest one. It started as a rumor earlier today. But it’s now widely reported that UK Prime Minister Theresa May is proposing to formally rule out a no-deal Brexit. There are many versions and one option is to have a vote on no-deal or Brexit delay for March 12 in the parliament, if the withdrawal agreement is voted down. May is due to speak soon and we’ll quickly finally within an hour.
Technically, GBP/USD broken 1.3173/3217 key resistance zone. A head and should bottom would be formed if GBP/USD can sustain above this zone. EUR/GBP also broke key support level at 0.8617/20, resuming medium term decline.
For now, Yen follows as the second strongest as global stock markets lose ground. Commodity currencies are all under pressure. Canadian Dollar is getting little help from oil prices, which is recovering from yesterday’s low. Dollar is mixed awaiting Fed chair Jerome Powell’s testimony.
BoE MPC external member Gertjan Vlieghe reiterate his view that in case of no-deal Brexit, not all paths are equally likely. He said that “in the case of a no-deal scenario I judge that an easing or an extended pause in monetary policy is more likely to be the appropriate policy response than a tightening.”
Also, BoE “will have to judge in real time how well inflation expectations remain anchored, and how households and businesses are reacting to the disruptions.” And “even if the direction and scale of monetary policy changes are unknown beforehand, monetary policy will do what it needs to do to bring inflation back to target within a horizon that is consistent with our mandate.”
In the annual report to the Treasury Select Committee, BoE Governor Mark Carney said UK growth “slowed sharply in late 2018 and appears to have remained weak in early 2019”. The slowdown reflects both “softer activity abroad” and “greater effects from Brexit uncertainties”. Brexit uncertainties is “creating a series of tensions for business, households and in financial markets”. But that will only cause “short-term volatility in the economic data” and provide “less of a signal about the medium-term outlook”.
Carney added that the ” fundamentals of the UK economy are sound. The financial sector is resilient. Corporate balance sheets are strong. And the labour market is tight.” If the economic conditions evolve in line with BoE projections, which are conditioned on a smooth Brexit, “limited and gradual rate rises are likely to be needed to return inflation sustainably to target.”
Germany GfK consumer confidence for February was unchanged at 10.8. GfK noted that “mood of consumers paints a mixed picture. Income expectations remain stable. But propensity to buy lost ground again. Economic expectations continued their “steep downward spiral”. Economic expectation dropped -6.5 pts to 4.2. That’s the fifth decline in a row and the lowest reading since March 2016. Gfk said “Consumers feel that the risk of the German economy slipping into recession again has tangibly increased in recent weeks”. A technical recession was only “narrowly avoided” last year, with 0% growth in Q4.
And, “external factors are primarily responsible for the lack of momentum in the German economy.”. Gfk cited trade dispute between Europe, China and US is “causing growing uncertainty among consumers”. And, they ” worry that Germany, as a strongly export-oriented economy, would suffer negative consequences if this dispute led to trade barriers such as rising customs tariffs.” How and when Brexit will take place is far from certain and “This makes planning more difficult for companies on all sides.
BoJ Governor Haruhiko Kuroda told the parliament that China’s economy “slowed quite significantly in the latter half of last year”. And he predicts that it may “remain in the doldrums in the first half of this year.” Nevertheless, Kuroda expects Chinese even economy to “pick up thereafter, as authorities have taken fiscal and monetary stimulative action.”
Domestically, Kuroda expected that the net burden on households from this year’s scheduled sales tax hike to be smaller than previous hike in 2014. And he added that BOJ will be watching the impact of the sales tax hike on the economy. The impact could change depending on consumer sentiment, job and income conditions at that time.
Sterling jumps broadly as UK opposition Labour said they’re ready to back second referendum. Also, Prime Minister Theresa May is said to be considering delaying Brexit. Labour leader Jeremy Corbyn has been against another public vote on Brexit but finally bowed down to pressure inside his party. He formally said on Monday evening that “one way or another, we will do everything in our power to prevent no-deal and oppose a damaging Tory Brexit based on Theresa May’s overwhelmingly rejected deal,”. And, “that’s why, in line with our conference policy, we are committed to also putting forward or supporting an amendment in favor of a public vote to prevent a damaging Tory Brexit being forced on the country.”
Separately, Bloomberg reported that May will finally allow Cabinet discussion on extending Article 50 beyond March 29 on Tuesday. The Sun went further and said May would propose formally ruling out a “no-deal” Brexit scenario. May will chair a Cabinet discussion today in London morning, and that update the Parliament on discussions after noon. The government will propose motions on Brexit state-of-play by Tuesday night. The motion will be debated and voted on Wednesday.
Fed Vice Chair Richard Clarida attended a Dallas Fed event on Global Perspectives, with Dallas Fed President Robert Kaplan. There Clarida said that “the U.S. economy is in a good place right now….It’s a good situation to be in, and we really want to do whatever we can to help support and maintain the economy.”
Clarida also noted that slowdown in Asia and Europe are “definitely a relevant factor” to Fed policy. Since other central banks are still having interest rates stuck in crisis-fighting mode, “that obviously, on balance, makes the global economy more fragile.” He also tried to talk down the implication of yield curve inversion. He said “you can’t be handcuffed” to financial market signals . There are factors like global demand for US treasuries that pushes yields down at the long end.
Kaplan indicated that “you want to run maybe a little hotter, but you don’t want to go too far.” And, since “inflation is not running away from us”, Fed “might have the luxury of trying to do more to get more people into this workforce on a sustainable basis …”
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Trump indicated overnight that the US is “very, very close” to completing a trade agreement with China. And there will be a “signing summit” with Chinese President Xi Jinping soon. Trump said that “we’re going to have another summit, we’re going to have a signing summit” and “so hopefully, we can get that completed. But we’re getting very, very close.”
He later also tweeted that “China Trade Deal (and more) in advanced stages. Relationship between our two Countries is very strong. I have therefore agreed to delay U.S. tariff hikes. Let’s see what happens?” “If a deal is made with China, our great American Farmers will be treated better than they have ever been treated before!”
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Trump decided to delay new tariffs on USD 200B of Chinese imports beyond March 1. For not, there is no information on how long that would that be postponed. A spokeswoman for the U.S. Trade Representative’s Office said the agency had no announcements at this time beyond the president’s remarks.
Separately, Trump has left for a summit with North Korean leader Kim Jong-un in Vietnam. An initial one-on-one meeting is scheduled for Wednesday, followed by dinner with advisers.
European Council President Donald Tusk said in a new conference in Egypt that ” in the situation we are in, an extension would be a rational decision”, referring to Brexit. But he also noted that “Prime Minister May still believes she will be able to avoid this scenario”.
Tusk added that “for me, it’s absolutely clear that there is no majority in the House of Commons to approve a deal. We will face an alternative, chaotic Brexit, or an extension.”
And, “the less time there is until the 29th of March, the greater the likelihood of an extension. And this is an objective fact, not our plan or our objective, but an objective fact.”
Entering into US session, Australia and New Zealand Dollar are taking turns to be the strongest one today. Sentiments are generally supported after Trump postponed the March 1 trade truce deadline with China. Chinese customs data also showed that US soybeans imports nearly doubled in January from a month ago. But it should be noted that other than the strong rally in Chinese stocks, market reactions elsewhere are relatively muted. Aussie is limited well above last week’s higher against Dollar and Euro. Yen is also held in familiar range against Dollar, Euro and Sterling.
Canadian Dollar taking over Yen as the weakest one for today. WTI crude oil is down sharply, now below 56, comparing to Friday’s high at 57.83. It’s reacting negatively as Trump complains that oil prices are too high with his tweets again.
European Commission spokesman Mina Andreeva said that EU’s assumption is that UK will still leave as planned on March 29. Brexit Minister Stephen Barclay and Attorney General Geoffrey Cox will meet EU chief negotiator Michel Barnier again on Tuesday.
Andreeva also noted “good progress was being made” on the EU-UK political declaration on future ties and on “alternative arrangements” and “possible additional guarantees” on the Irish backstop. She added that both sides “agreed on the need to conclude this work in time before the European Council (of March 21)”.
WTI crude oil drops notably today after Trump’s tweet. He said “Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile!”
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With today’s sharp fall, WTI should have formed a short term top at 57.83. Focus is now immediately on 4 hour 55 EMA (now at 56.06). Sustained break there should at least bring deeper fall to trend line support (now at 54.48).
In the bigger, rise from 42.05 is seen as a corrective move. Hence, strong resistance will likely be seen around 61.8% projection of 42.05 to 55.85 from 51.49 at 60.01 to limit upside. That is is actually close to 50% retracement of 77.06 to 42.05 at 59.55. 55 week EMA (now at 59.60) is also in proximity.
The news that Trump delays the US-China trade truce deadline gives risk markets a general lift today. But performance in Chinese stock is overwhelming. The Shanghai SSE blew our expectations and closed up 5.60% at 2961.28. 38.2% retracement of 3587.03 to 2440.90 at 2883.84 was taken out with ease.
Technically speaking, it’s early to declare that China SSE is now in a long term bull market. The strong break of 55 week EMA is nevertheless a strong bullish development. Now, the corrective down trend from 5178.19 should have completed with three waves down to 2440.90, on bullish convergence condition in weekly MACD.
Current rise should extend through 3000 handle to 38.2% retracement of 5178.19 to 2440.90 at 3486.54. The reaction to resistance zone of 3486/3587 will reveal whether the SSE is really in a long term up trend.
Atlanta Fed President Raphael Bostic said there is “room to run” with Fed’s rate hikes. as long as the economy is “running fine” and there is no sign of contraction. He expects the economy growth between 2.2-2.5% this year. But inflation is expected to rise above 2% target.
Bostic is still aiming at lifting Federal funds rate to neutral. And a slow approach is a good path for Fed. He’s currently seeing one rate hike this year and one in 2020.
Bank of England, UK’s Financial Conduct Authority and US Commodity Futures Trading Commission announced measures today to ensure Brexit, in whatever form “will not create regulatory uncertainty regarding derivatives market activity between the UK and US”. Measures include continued supervisory co-operation, extension of existing CFTC relief to EU firms to UK after Brexit. Also, US trading venues, firms and CCPs will be able to continue providing services in the UK.
In a joint statement, BoE Governor Mark Carney said “As host of the world’s largest and most sophisticated derivative markets, the US and UK have special responsibilities to keep their markets resilient, efficient and open.
“The measures we are announcing today will do that. Market participants can be confident that the clearing and trading of derivatives between the UK and US will maintain the high standards of today when the UK leaves the EU”.
Carney also warned that “The biggest issue from a financial stability perspective, from a market integrity perspective, from a continuity perspective, is a no-deal scenario by the end of March.”
Entering into European session, Australian and New Zealand Dollar are the strongest ones for today so far. Market sentiments are generally lifted by the “substance progress” in US-China trade talks. And, Trump announced to delay the March 1 trade truce deadline. He’s also planning a summit with Xi at Mar-a-Lago to seal the deal.
The strongest reactions are seen in Chinese stocks with Shanghai SSE hitting the highest level since June 2018. 3000 handle is now within touching distance.
Canadian Dollar is the weakest one for now but it’s merely paring some of last week’s strong gains. It’s followed by Dollar and then Yen. Sterling is also mildly firmer after UK delays another Brexit meaningful vote from Wednesday to March 12, just 17 days ahead of the formal Brexit date.
The economic calendar is rather light today. Focus will be on BoE Governor Mark Carney’s speech, as well as comments from Fed Vice Chair Richard Clarida.
Koichi Hamada, an advisor to Japanese Prime Minister Shinzo Abe said the BoJ could abandon the 2% inflation target. He told Reuters that “prices don’t need to rise much. From the perspective of people’s livelihood, what’s more desirable is for prices to fall, not rise.”
And, the inflation target is only “a tool for achieving full employment”. Hamada added “it can be abandoned. It isn’t absolutely crucial”, and the “appropriate target level of inflation can be decided by the central bank”.
On current monetary policy, Hamada said “the world economy faces substantial turbulence, the BOJ can wait”. There is no need for loosen up policy too as “Demand is exceeding supply now. As long as this trend continues, we don’t need to worry too much.”
Fed Powell: There were crosscurrents and conflicting signals in the past few months
In his prepared remark for semi-annual testimony to Congress, Fed chair Jerome Powell acknowledged “crosscurrents and conflicting signals” in the past few months. Financial markets became “more volatile” toward year-end. Financial conditions are now “less supportive”. Also, growth slowed in some major foreign economies, “particularly China and Europe”. And there is “elevated” uncertainty in issues including Brexit and trade negotiations.
Domestically, the US is facing “important longer-run challenges”. Productivity “has been too low”. Labor force participation among “prime-age men and women” is now lower in the US than in most other advanced economies. “relatively stagnant incomes”, “lack of upward economic mobility” are also important challenges. Federal government debt is also on an “unsustainable path”.
On monetary policy, Powell reiterated that “the extent and timing of any further rate increases would depend on incoming data and the evolving outlook.” He noted that inflation pressure were “muted” in January. and the cumulative development warranted “taking a patient approach” to future policy changes. Also, Fed will evaluate the appropriate timing and approach for the end of balance sheet runoff. ahead.
Full remarks here.