Bundesbank Wedimann, growth to fall well short of 1.5% potential this year

    Bundesbank President Jens Weidmann said today that German economy growth will “fall well short of the potential rate of 1.5 percent in 2019”. That’s because “there is much to suggest that the dip in growth here in Germany has persisted into the current year”.

    However, he emphasized that the prerequisites for growth remain intact, including low financing cost, expansion in employment market and rising wages. Thus, there is no reason for pessimism yet.

    Separately, it’s reported that German cabinet gave green-light for a second eight-year term for Weidmann, as the current term expires at the end of APril.

    China PMI manufacturing dropped to 50.8 while non-manufacturing improved

      China’s official NBS PMI manufacturing dropped to 50.8 in April, down from 52.0, missed expectation of 51.0. In particular, new export orders plunged sharply to 33.5. But PMI non-manufacturing improved to a three-month high of 53.2, up from 52.3, beat expectation of 52.8. The set of data suggests that China’s economy is on a double-track. Hope of a strong come back in manufacturing is dim as coronavirus pandemic is continuing elsewhere. Global recession will continue to heap on downward pressure in the sector in the coming months.

      USD/CNH drops notably today, mainly due to weakness in Dollar. Outlook is unchanged that the pair is staying in consolidation pattern from 7.1953, with rebound from 6.8452 as the second leg. Such rebound has likely completed with three waves up to 7.1649 already. Break of 7.0365 support should add credence to this case and target 6.8452/6.9040 support zone again.

      YouGov MRP predicts smaller Conservative majority, cannot rule out hung parliament

        Sterling retreats mildly as the last YouGov polls predicted that Conservative could win a much slimmer majority in Thursday’s elections, than projected two weeks ago. The possibility of a hung parliament cannot be ruled out.

        The results of the final MRP model suggested the following results:

        • Con – 339 seats / 43% vote share
        • Lab – 231 / 34%
        • SNP – 41 / 3%
        • LD – 15 / 12%
        • Plaid – 4 / 1%
        • Green – 1 / 3%
        • Brexit Party – 0 / 3%

        That is, Conservative could get a majority of only 28 seats. Back on November 28, Conservatives were projected to get 359 seats with majority of 68. Labor was predicted to win 211 seats only. Also, YouGov added that the margin of error could put the final number of Conservatives seats from 311 to 367. And, “this means that we absolutely cannot rule out the 2019 election producing a hung Parliament – nor can we rule out a larger Conservative majority.”

        Full release here.

        FOMC preview: All about dot plots and 5%

          Fed is widely expected to slow down the pace of rate hike today, and raise federal funds rate by 50bps to 4.25-4.50%. The main focus is on the new economic projections in particular the dot plots. Questions are where the terminal rate of the current cycle would be, and how long would rate stay there.

          Yesterday’s CPI report showed further evidence that inflation is cooling, rather than plateauing, and in a quicker manner than expected. Currently markets are expecting Fed to make two more 25bps rate hikes in Q1. That would eventually bring interest rate to 4.75-5.00% range, keep it below the 5% psychological level.

          Here are some previews:

          Yesterday’s post-CPI reactions in the markets were clearly indecisive. S&P 500 spiked higher to 4100.96 but that pared back much of the gains to close just 0.73% higher at 4019.65. Today’s reactions could be bearish if Fed’s dot plots indicate that interest way will peak above 5%. Break of 3906.54 support will trigger near term bearish reversal in SPX. Nevertheless, another rally through yesterday’s high should push SPX further towards 4325.58 resistance and end the year on a high note.

          Swiss KOF rose to 113.8, economy taking a V-shaped course

            Swiss KOF Economic Barometer rose to 113.8 in September, up from 110.2, beat expectation of 106. That’s the four rise in a row after a historic drop earlier this year. KOF said, “at present, the economy is taking a V-​shaped course, so that a recovery of the Swiss economy can be expected for the time being. However, a second wave of COVID-​19 cases could lead to a sharp revision of this assessment.”

            Also released, Credit Suisse Economic Expectations dropped to 26.2 in September, down form 45.6.

            Japan’s PPI slows to 2% yoy in Sep, trailing CPI core for the first time since 2021

              Japan PPI slowed from 3.3% yoy to 2.0% yoy in September, below expectations of 2.3%. That’s the lowest level since March 2021. Also, PPI is now below CPI core (at 3.1% yoy) for the first time since early 2021.

              Import price index was unchanged at -15.6% yoy, the sixth month of decline. Export price index rose for the first time in seven months, up 0.2% yoy, comparing to prior month’s -0.7% yoy.

              For the month, PPI fell -0.3% mom. Import price index rose 0.6% mom. Export price index rose 0.5% mom.

              Full Japan PPI release here.

              ECB to revise down growth and inflation forecasts, SNB to stay cautious

                ECB is widely expected to keep benchmark interest rate unchanged at 0.00% today. And it should stick with the plan to end the asset purchase program after December. Nevertheless, there are prospects of some dovish shifts. As indicated by recent economic data, growth momentum in the Eurozone, in particular in Germany, has slowed down quite notably. Recent slump in oil prices would also put some downward pressure in the energy led headline inflation in the bloc. ECB is generally expected to revise down 2019 growth and inflation forecasts.

                President Mario Draghi’s comments on the economy will also be watched. ECB has so far viewed the slowdown in second half as temporary. But policy makers could start to feel more uncertainty about that. In particular, the slowdown in global trade due to protectionism is starting to bite exports growth, most notably in Germany. But for now, we’re not expecting ECB to change the forward guidance of keeping interest rates at present level at least through summer of 2019. The forward guidance itself is flexible enough.

                SNB is also widely expected to keep the Sight Deposit rate unchanged at -0.75%, with 3-month Libor target range held at -1.25 to -0.25%. Some traders might look for hints of a rate hike in 2019. But it’s rather unlikely. EUR/CHF ‘s uptrend topped at 1.2004 back in April, rejected by the key 1.2 handle. Subsequent events, including Iran sanctions, Italian elections and budget, Turkish Lira crisis, trade war, stock markets rout, etc, sent the cross back to below 1.15. Meanwhile, domestically, Swiss economy also contracted -0.2% in Q3. There is little room for SNB policy makers to move away from negative interest rate.

                Some suggested readings on ECB and SNB

                Germany GDP grew 8.2% qoq in Q3, still -4.2% below pre-pandemic level

                  Germany GDP grew 8.2% qoq in Q3, above expectation of 7.3% qoq. But that’s not enough to recovery the -9.7% qoq contraction in Q2. Also, when compared with Q4 of 2019, before the pandemic, GDP was still -4.2% lower.

                  Destatis said “growth was based on higher final consumption expenditure of households, higher capital formation in machinery and equipment and a sharp increase in exports.”

                  Full release here.

                  Released too, retail sales dropped -2.2% mom in September, below expectation of -0.5% mom.

                  BoJ Kuroda: Economy growing moderately despite some weakness in exports and output

                    BoJ Governor Haruhiko Kuroda reiterated his view that the economy is “growing moderately” even though policymakers were “seeing some weakness in exports and output”. He said today in France that capital expenditure remained “very firm” and the global economy was still sustaining moderate growth despite various risks.

                    He added, “the board will debate policy this month based on this view”. But he also emphasized we will swiftly consider additional monetary easing steps if the economy loses momentum for hitting our inflation target.”

                    RBA Debelle outlines four monetary policy options ahead

                      RBA Deputy Governor Guy Debelle outlined four possible options for monetary policy over the period ahead in a speech. The first option is for buying bonds further out along the curve. RBA has focused on three-year yield as target because, unlike the US, Australian financial instruments price predominantly off the short end of the curve. Nonetheless, ‘additional bond purchases would have some effect in lowering longer-term interest rates.”

                      The second option is foreign exchange intervention but it’s not clear if this would be effective as the Australian dollar “broadly aligned with its fundamentals.” Recent movements in AUD exchange rate partly reflects “the depreciation of the US Dollar”, the “high price of iron ore”, and “relatively better growth outcomes”. A lower exchange rate would “definitely be beneficial” for the economy and “we are continuing to watch developments” in the forex markets.

                      The third option is to lower current structure of rates without going negative. The fourth option is negative rates but the “empirical evidence on negative rates is mixed”.

                      Full speech here.

                      China returned to trade surplus, but exports plunged -13.3% this year

                        In March, in USD term, China’s exports dropped -6.6% yoy to USD 185.2B. Imports dropped -0.9% yoy to USD 165.3B. Trade surplus came in at USD 19.9B. From January to March accumulative, exports dropped -13.3% ytd/y to USD 478.2B. Imports dropped -2.9% ytd/y to 465.0B. Trade surplus came in at just USD 13.2B.

                        Also year-to-March, exports to EU dropped -16% ytd/y to USD 70.5B. Imports from EU dropped -7% ytd/y to USD 55.2B. Exports to US dropped -25.2% ytd/y to 68.3B. Imports from US dropped -3.7% ytd/y to USD 27.5B.

                        DOW to hit 30k soon as coronavirus fears subsides

                          S&P 500 and NASDAQ closed at records overnight amid upbeat economic data and easing coronavirus fears. DOW is also close to hitting a new record soon. Near term bullish is maintained with 38.2% retracement of 25743.46 to 29373.62 at 27986.89 defended. Break of 29373.62 will target 61.8% projection of 25474.46 to 29373.63 from 28169.53 at 30412.96 next.

                          ADB slashes China’s growth forecast to 2.3% in 2020, but rebound expected next year

                            The Asian Development Bank slashed China’s growth forecast to just 2.3% in 2020 on coronavirus pandemic. Though, it expects a strong bounce back of 7.3% in 2021. ADP noted warned that a new round of domestic infection of further global spread could “increasingly dampen investor sentiment, consumer spending, credit sustainability, and overall economic activity”. Revival of trade conflict with the US is another risk.

                            For Asia, growth in 2020 will slow to 2.2%, down from 2019’s 5.2%, then bounces back to 6.2% in 2021. Excluding Taiwan, Hong Kong, South Korea and Singapore, developing Asia is forecasts to grow 2.4% in 2020, then rebounds to 6.7% in 2021.

                            Australia PMI manufacturing dropped to 57.4, PMI services dropped to 55.1

                              Australia PMI manufacturing dropped from 59.2 to 57.4 in December. PMI Services dropped from 55.7 to 55.1. PMI Composite dropped from 55.7 to 54.9.

                              Jingyi Pan, Economics Associate Director at IHS Markit, said: “The Australian economy maintained growth at a strong rate in December… Supply issues meanwhile persisted, with lead times continuing to lengthen and reports of shortages persisting. This led to a surge in price pressures for private sector firms and affected business confidence… The climb in employment levels was also a positive sign with private sector firms across both the manufacturing and service sectors hiring at faster rates in December.”

                              Full release here.

                              Eurozone exports rose 24.0% yoy in Aug, imports rose 53.6% yoy

                                Eurozone exports of goods rose 24.0% yoy to EUR 231.1B in August. Imports rose 53.6% yoy to EUR 282.1B. Trade deficit came in at EUR -50.9B. Intra-Eurozone trade rose 34.8% yoy to EUR 210.5B.

                                In seasonally adjusted term, exports rose 3.5% mom to EUR 245.5B. Imports rose 5.5% mom to EUR 292.8B. Trade deficit widened from EUR -40.5B to EUR -47.3B, much larger than expectation of EUR -40.0B. Intra-Eurozone trade rose from EUR 230.9B to EUR 239.2B.

                                Full release here.

                                EU Juncker: No third chance, no further interpretations or assurance, this deal or no Brexit

                                  After giving UK Prime Minister Theresa May the needed “meaningful clarifications and legal guarantees” on Irish backstop, European Commission President Jean-Claude Juncker warned in a joint press conference that “there will be no third chance”.

                                  He said “it is in this cooperative spirit today that Theresa May and I agreed on a joint legally binding instrument relating to Withdrawal Agreement. The instrument provides meaningful clarifications and legal guarantees on the nature of the backstop.”

                                  But he warned that “there will be no third chance, there will be no further interpretations of the interpretations, no further assurances of the re-assurances – if the meaningful vote tomorrow fails.” “The choice is clear: it is this deal, or Brexit may not happen at all. Let’s bring the UK’s withdrawal to an orderly end. We owe it to history,” Juncker added.

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                                  EU Barnier open to more ambitious relationship with UK

                                    UK Prime Minister May is working on an alternative Brexit deal to bring back to the EU. EU chief Brexit negotiator Michel Barnier said if UK wants a “more ambitious relationship, we are open”. But he doesn’t expect anything better than the current agreement.

                                    Also, he said “if there is no deal, there will be contingency measures”. But, he also emphasized “that will be very difficult and will not be done in a climate of confidence. The best guarantee is reaching an agreement.”

                                    BoE revised down 2020 GDP contraction to -11%, but sees strong rebound afterwards

                                      In the Monetary Policy Report, BoE lowered the four-quarter GDP forecasts for 2020 Q4 to -11%, down from -5.4%. Stronger rebound was expected afterwards. Four-quarter GDP growth is revised to 11% (up from 6.2%) in 2021 Q4 and 3.1% (up fro 2.3%) in 2022 Q4.

                                      CPI inflation for 2020 Q4 was revised up to 0.6% (from 0.3%). 2021 Q4 inflation was revised up to 2.1%, from 1.8%. 2022 Q4 inflation was revised down slightly to 2.0% (from 2.1%).

                                      Unemployment rate is notably lower for 2020 Q4 at 6.3% (revised down from 7.5%). Though, It’s projected to rise to 6.7% in 2021 Q4 (revised up from 5.0%), then fall back to 4.9% in 2022 Q4 (revised up from 4.5%).

                                      Full MPR here.

                                      Into US session: Sterling strongest on BoE, but it’s not bullish yet

                                        Entering into US session, Sterling is now the strongest one today as boosted by hawkish BoE hold. Most importantly, heavy weight Chief Economist Andy Haldane joined known hawks Ian McCafferty and Michael Saunders to vote for a hike. Euro is now trading as the second weakest, followed by Yen and New Zealand Dollar.

                                        GBPUSD H and 6H action bias has turned neutral with the rebound, after a string of downside red bars. Still, it’s kept well below 1.3471 near term resistance. Overall outlook remains bearish though but some more consolidation could come first.

                                        Meanwhile, EUR/GBP is still clearly held in range with a neutral outlook.

                                        GBP/JPY is also neutral as the corrective pattern from 144.37 extends.

                                        German Gfk consumer confidence dropped to 9.7, economic expectations turned negative

                                          German Gfk consumer confidence for August dropped -0.1 to 9.7, matched expectations. Economic expectations dropped from 2.4 to -3.7. Income expectations improved from 45.5 to 50.8. Propensity to buy dropped from 53.7 to 46.3. Gfk noted that “It is apparent that the global economic slowdown, trade conflict and Brexit discussions are having an ever increasing impact on consumer confidence. Thus, economic expectations continue to decline and the propensity to buy has dropped off slightly as well.”

                                          Economic expectation fell below its long-standing average of 0 for the first time since March 2016. It’s also the lowest reading since November 2015. Gfk said: “The trade war with the US, ongoing Brexit discussions and the global economic slowdown continue to drive fears of a recession. Employees in export-driven sectors in particular, such as the automotive industry and its suppliers, are most immediately affected by this. In addition, reports of downsizing add to employees’ fears of losing their jobs.”

                                          Full release here.