German Gfk consumer confidence dropped -0.1 to 9.6 in January. Economic expectations dropped sharply to -4.4, down from 1.7. Gfk said that ” impression among consumers that the German economy will weaken significantly has been reinforced.”. Also, “The trade conflicts between the US and China, on the one hand, and the US and the EU, on the other, continue to smolder, hanging like a sword of Damocles over Germany, a nation highly dependent on exports”.
Both AUD/JPY and NZD/JPY ride on broad based weakness in Yen and surge strongly this week. More important, both have breached key long term resistance levels.
As for AUD/JPY, there might be some initial rejection by 90.29 resistance. But near term outlook will stay bullish as long as 85.78 resistance turned support holds. Next medium term target is 61.8% projection of 59.85 to 85.78 from 78.77 at 94.79.
More importantly, AUD/JPY’s rise from 59.85 should be reversing the whole down trend from 105.42 (2013 high), which has completed in a three wave structure. Firm break of 94.79 would set the stage for 100% projection at 104.70, which is close the top of a two decade range at 105.42/107.88.
Similarly, NZD/JPY also breaks 83.90 resistance. Near term outlook will stay bullish as long as 80.17 resistance turned support holds. Next medium term target is 61.8% projection of 59.49 to 80.17 from 75.22 at 88.00.
Sustained break of 88.00 will pave the way to 100% projection at 95.90, which is also at the top of two decade range at 94.01/87.74.
Speaking today, ECB Governing Council member Fabio Panetta noted that the current macroeconomic conditions support “normalization of the monetary stance.” He added that ECB initiated this process recently and, under the “baseline scenario,” intends to continue it “gradually and smoothly.”
However, Panetta cautioned that the inflation and growth projections represent only one of many possible outcomes. He stressed that monetary policy must also manage “risks and tail scenarios,” not just baseline forecasts. The prevailing political and geopolitical risks, he said, necessitate “awareness, flexibility, and state-contingent action plans.”
Panetta’s comments come just days before French voters head to the polls for the first round of parliamentary elections. He highlighted the potential economic implications of political turnover, explaining that it inherently brings policy uncertainty. This uncertainty affects households and investors as they try to predict how new governments will handle critical economic and political decisions.
Ifo economist Timo Wollmershaeuser said in the report that the Germany economy “slumped drastically as a result of the corona pandemic” and GDP could shrink -4.2% in 2020. Unemployment rate will “skyrocket to 5.9%”. Fiscal stabilization measures will lead to a record” deficit of EUR 159B. Though, GDP could rebound next year with 5.8% growth.
Downside risks include:significantly slower weakening of the pandemic; Restarting economic activity works worse than in the base scenario or triggers another wave of infection, further measures to fight infection come into force, which shut down production longer or to a greater extent than assumed here; Faults in the financial system; Sovereign debt crisis; Realignment of global value chains and sales markets
It isn’t too clear what’s the driving force in the forex markets today, except Brexit concerns on Sterling’s weakness. Italy’s budget remains a concern as the coalition government replied to EU insisting to stick with it’s deficit target in 2019. European Commission will discuss the way to handle it in a regular meeting tomorrow. For now, Euro is trading mixed only. New Zealand Dollar and Australian Dollar are the weakest ones next to Sterling, getting no support from strong rebound in Chinese stocks.
On the other hand, US and Canadian Dollar are the strongest ones, followed by the Swiss Franc. It’s also unclear what’s driving the greenback higher. US treasury yields are trading generally lower at the time of writing. Stocks are also weak except NASDAQ. Though, Canadian Dollar could be seen as paring Friday’s steep loss with anticipation of rate hike by BoC later in the week. Swiss Franc’s strength could be explained by the sharp pull back in EUR/CHF as Euro’s rally attempt falters.
In other markets, majors European stock indices reversed after initial rally.
US durable goods orders dropped -4.5% mom to USD 272.3B in January, worse than expectation of -4.0% mom. But ex-transport orders rose 0.7% mom to 179.4B. above expectation of 0.0% mom. Ex-defense orders dropped -5.1% mom to USD 253.9B. Transportation equipment dropped -13.3% mom to USD 92.8B.
US initial jobless claims fell -1k to 209k in the week ending March 9, below expectation of 218k. Four-week moving average of initial claims fell -500 to 208k.
Continuing claims rose 17k to 1811k in the week ending March 2. Four-week moving average of continuing claims rose 2k to 1799k.
US initial jobless claims rose 45k to 770k in the week ending March 13, above expectation of 770k. Four-week moving average of initial claims dropped -16k to 746k.
Continuing claims dropped -18k to 4124k in the week ending March 6. Four-week moving average of continuing claims dropped -99k to 4225k.
US Conference Board Consumer Confidence rose to 104.2 in March, surpassing the expected 101.7, and up from February’s 103.4. The Present Situation Index dipped from 153.0 to 151.1, while the Expectations Index climbed from 70.4 to 73.0. Notably, the Expectations Index has remained below 80 for 12 of the past 13 months since February 2022, a level that often indicates an impending recession within the next year.
Ataman Ozyildirim, Senior Director of Economics at The Conference Board, said that the March gain “reflects an improved outlook for consumers under 55 years of age and for households earning $50,000 and over.” However, he also noted that consumers are “slightly less optimistic about the current landscape,” as the share of consumers stating jobs are “plentiful” declined and those saying jobs are “not so plentiful” increased.
Moreover, consumers’ expectations of inflation over the next 12 months remain elevated at 6.3%. Purchasing plans for appliances continued to soften, while automobile purchases saw a slight increase. Despite the improvement in March, consumer confidence remains below the average level of 104.5 seen in 2022, indicating cautious optimism for the future.
Japan’s labor cash earnings rose 2.8% yoy in January, falling short of market expectations of 3.2% yoy. Nominal wage growth remained positive for the 37th month.
Real wages, adjusted for inflation, fell -1.8% yoy, reversing two months of slight gains. The decline was largely driven by a sharp rise in consumer inflation.
The inflation rate used by the Ministry of Health, Labor and Welfare to calculate real wages—which includes fresh food prices but excludes rent—accelerated to 4.7% yoy, its highest level since January 2023.
Regular pay, or base salary, rose 3.1% yoy, the largest gain since 1992. This was overshadowed by a sharp -3.7% yoy decline in special payments, which consist largely of one-off bonuses.
Oil prices tumble again today on news that Saudi Arabia is eyeing OPEC+ production increase, partially reversing the group’s decision to cut supplies last month.
WSJ reports that OPEC is now in discussion of an increase of up to 500k barrels a day, for December 4 meeting. The move would come just a day before EU imposes an embargo on Russian oil, while G7 will launch a price cap.
Technically, WTI is now on track to retest 76.61 low. Decisive break there will resume larger down trend. Next target will be 61.8% projection of 124.12 to 76.61 from 94.25 at 64.88. Meanwhile, break of 82.03 minor resistance will delay the bearish case and bring recovery first.
Australia’s retail sales turnover edged down by -0.1% mom in December, a smaller decline than the expected -0.7% mom. While the contraction marks a pullback from the strong growth seen in previous months—0.7% mom in November and 0.5% in October mom—it suggests that consumer spending remains relatively resilient.
According to Robert Ewing, head of business statistics at the Australian Bureau of Statistics, retail activity was supported by extended promotional events, helping to smooth spending patterns over the quarter. He noted that Cyber Monday, which fell in early December, boosted demand for discretionary items, particularly furniture, homewares, electronics, and electrical goods.
Swiss SECO Consumer Confidence fell further from -42 to -47 in Q4, below expectation of -43. That’s the record low level since the survey began in 1972.
Looking at some details, expected economic development dropped from -53.5 to -57.2, far below long-term average of -9. Past financial situation dropped from -35.1 to -39.7, a historic low. Expected financial situation dropped sharply from -34.8 to -46.9, also a new low. Major purchases improved slightly from -43.3 to -42.4.
ECB Executive Board member Isabel Schnabel said in an interview, rising COVID-19 infections and containment measures is “likely to have a moderating effect on activity in the short run”, and it will not derail the overall recovery. Supply-side disruptions “do not diminish growth potential” but “merely shift activity over time”. Hence, her baseline is that “some growth deceleration in the short run, but then a continued strong recovery in the medium term.”
Schnabel expected ECB staff’s inflation projections to be “revised upwards for next year”. But inflation is “going to decline over the course of next year”. “It’s plausible to assume that inflation is going to drop below our target of 2% in the medium term,” she said. “however, the risks to inflation are skewed to the upside.”
She also noted the “time plan is still valid” for ending the PEPP purchases in March. “But we will have to see how this evolves until our December meeting.” She added, ” it has become clear that it’s very unlikely that a rate hike is going to happen next year. But it’s also clear that the uncertainty remains very high and this is reflected in markets.”
RBA Assistant Governor Chris Kent said in a speech that Australian authorities have provided “unprecedented support, including via fiscal, monetary and prudential policies” in response to the severe impact of the coronavirus pandemic. RBA has been focused on “keeping the cost of borrowing low and helping to maintain the supply of credit”.
He described that RBA’s measures can be “thought of as representing the ‘bread and butter’ of central banking – providing liquidity to meet demand at a time of considerable need, thereby acting to stabilise crucial markets.”
The operations have “worked well” and “contributed to a noticeable improvement in market sentiment and accommodative financial conditions.” Also, in response to a question, Kent said negative rates were not an option for now and new monetary policy measures are not under consideration for the moment.
Australia NAB Business Confidence improved to -4 in September, up from -8. Business Conditions also rose to 0, up from -6. Trading conditions turned positive, from -2 to 6. Profitability condition also turned positive, from -3 to 2. Employment condition rose from -14 to -6, but stayed negative.
Alan Oster, NAB Group Chief Economist “after some volatility in the last 2 months conditions are around the level seen pre-COVID. That said, they only lie at the threshold of improving/deteriorating and are well below average. Trading conditions and profitability are back in positive territory, which likely reflects the ongoing opening of the economy and the support provided by policy makers. Employment continues to lag, however, likely reflecting the fact activity has not yet fully recovered and firms remain cautious. Confidence increased in the month, building on the gains of last month, and is now well above the trough in March. That said, it remains negative and likely fragile.”
US Treasury Secretary Steven Mnuchin warned China in a Financial Times interview on currency manipulation. He said that “as we look at trade issues, there is no question that we want to make sure China is not doing competitive devaluations.” Nonetheless, Mnuchin also acknowledged that Chinese Yuan “depreciated significantly” due to “various factors”. He added “one of those factors has to do with their own economic issues and what has gone on in the Chinese economy.”
Earlier this week, Bloomberg reported that Mnuchin faced pressure from within the White House to formally designate China as currency manipulator. The Treasury Department is expected to release its semiannual currency report later this month. And we’ll see Mnuchin’s eventual stance then.
There are clear rules for the Treasury to decide whether a country is manipulating its currency. Rules aside, as we argued in our report, China has been clearly intervening in the markets to “halt” or “slow” the sharp decline of the Yuan exchange rate. It’s clearly seen by almost everyone sensible in Asia that the Yuan and Chinese stocks are in deep trouble facing the risks of trade war escalations.
And it’s unknown why part of the US administration continued to lie about intention devaluation by China on the Yuan. Though, we wouldn’t mind the US just face the facts by naming China as currency manipulator and requests it stopping to support the Yuan exchange rate.
The German Finance Ministry said in the latest monthly report that the economy is in a “strong economic upturn” even if growth in Q1 was “a bit less dynamic” than in Q4 due to “special factors”.
Macroeconomic conditions “remain favorable” and indicators suggest the upturn will continue.
German ECB Governing Council member Joachim Nagel struck a cautious tone at a conference today, warning against locking in any specific policy path amid persistent global uncertainty.
Markets currently price in only one more rate cut by year-end. But Nagel resisted endorsing that outlook, stressing that rapidly evolving conditions make it unwise to pre-commit.
“We must keep our eyes and ears open for the risks to price stability,” he said, pointing specifically to current developments in the Middle East as a source of heightened uncertainty.
Nagel also offered a downbeat assessment of Germany’s near-term prospects, forecasting stagnation in Q2 and flagging the global trade war as a significant drag. He estimated that escalating trade tensions could shave as much as 0.75 percentage points off German growth over the medium term.
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China cuts RRR by 50bps, releasing CNY 800B in funds
China’s PBoC announced yesterday to cut the reserve requirement ratio (RRR) by 50bps to 12.5%, effective January 6. That’s the eight cuts since early 2018, for releasing more funds for lenders to support the slowing economy. The reduction is expected to release around CNY 800B (USD 115B) of long term liquidity. Also, the move would offset cash demand ahead of Lunar New Year, keeping the liquidity of the banking system stable.
Outlook seemed to have improved recently as data showed stabilization. Meanwhile, China is expected to sign the phase one trade deal with the US, likely on January 15. Yet, more support measures are still expected as growth would likely cool further in 2020.