Chicago Fed President Charles Evans said today’s CPI data was the first “positive” reading since Fed started tightening. Yet, inflation is still “unacceptably” high”. He expects Fed to continue to raise interest rate to 3.25-3.50% by year end, and to 3.75-4.00 by the end of next year.
Evans was optimistic that the economy will “continue to grow” in H2. “”I’m not looking for the economy to turn down in a significant fashion any time soon,” he added. He expected growth to be 1.5-2.0% next year.
German Foreign Minister Heiko Maas said in a Die Zeit article that “we all want zero tariffs and zero trade barriers” between EU and UK. However, “that also means zero dumping and zero unfair competition.”
He emphasized, “Without similar standards to protect our workers, our consumers and the environment, there can be no full access to the largest single market in the world.”
Mass also urged that EU and UK must conduct the negotiations regarding post-Brexit relationship in a way that “won’t harm the European Union”.
US President Donald Trump continued his hardline stance on China with strongly worded comments. He told reporters in the White House that “Somebody had to take China on… This is something that had to be done. The only difference is I am doing it.”
Trump repeated that “China has been ripping this country off for 25 years”. He added that whether his trade policy is “good or bad short term is irrelevant”, as “I am doing this whether this is good or bad.” Instead, “long term, it’s imperative somebody does this.”
There were growing concerns that trade war with China could trigger a possible US recessions. But Trump emphasized “we’re very far from a recession”. Though, he admitted that “we really need a Fed rate cut” as there cannot be a large “disparity” between rates in the US and elsewhere in the developed world. “We have to at least keep up to an extent.”
Gold’s strong rally today should now have 1755.29 resistance taken out firmly, completing a double bottom reversal pattern (1676.54, 1677.69). The development is also the first sign that whole correction from 2075.18 has completed with three waves down to 1676.65, after hitting channel support.
Further rise is now expected back to 38.2% retracement of 2075.18 to 1676.65 at 1828.88. Sustained break there will further affirm this bullish case, and target channel resistance (now at 1886) for confirmation. Rejection by 1828.88, however, will retain bearishness for another decline. But after all, for now, near term outlook will stay cautiously bullish as long as 1723.53 support holds, in case of retreat.
Kansas City Fed President Esther George said yesterday that “the case for continuing to raise rates remains strong” and “the direction is pretty clear”.
But, “the question of how fast that has to happen is something my colleagues and I will continue to debate,” she added.
“We have done a lot, and I think we have to be very mindful that our policy decisions often operate on a lag. We have to watch carefully how that’s coming through,” she warned.
China’s official news agency Xinhua reported that the State Council decided on a host of measures to boost private investment, at a meeting yesterday. And, a number of projects should be identified for attracting private investments. Additionally, the State Council meeting called for lowering thresholds, shoring up the weak links, boosting domestic demand, promoting employment and strengthening the impetus for long-term development.
The measures will include tax and fee cutting for private businesses, VAT reforms, improvements in financing transmission mechanism, and risk compensation mechanism. In particular, obstacles in fields like healthcare and aged-care would be removed, including regulations on land use, funding support and personnel training.
Premier Li Keqiang was quoted saying that “the potential of consumption as a driver for growth need to be further unlocked. At the same time, more efforts need to be made to reduce business costs, support export, and make better use of foreign investment.”
European Commission Vice President Maros Sefcovic told the European Parliament, “deal or no deal, the (Brexit) Withdrawal Agreement must be respected.” He reiterated, “our objective is still to reach an agreement that will pave the way for a new fruitful relationship between the EU and UK. We will continue to work for such an agreement, but not at any price”.
European Council President Charles Michel also said, “time is very short and we stand ready to negotiate 24/7, on all subjects, on legal texts.” The UK has a bit of a decision to make and it’s their free and sovereign choice,” he added. “Their sovereign answer will determine the level of access to our internal market, this is just common sense.”
“The UK wants access to the single market while at the same time being able to diverge from our standards and regulations when it suits them. You can’t have your cake and eat it too,” Michel told EU lawmakers.
Eurozone PMI Services was finalized at 53.5 in August, revised up from 53.4, slightly up from July’s 53.2. PMI Composite was finalized at 51.9, up from July’s 51.5. Among the member states, Italy PMI Composite dropped to 2month low at 50.3. German PMI Composite rose to 2-month high of 51.7. France PMI Composite rose to 9-month high of 52.9.
Chris Williamson, Chief Business Economist at IHS Markit said:
“The eurozone remained mired in a fragile state of weak and unbalanced growth in August,
“Although up on July, the latest reading indicates that GDP will rise by just 0.2% in the third quarter, assuming no substantial change in September. Official data available so far for the quarter suggest growth could be even weaker.
“The picture remains very mixed both by sector and country, highlighting how downside risks persist. A fierce manufacturing downturn, fuelled by deteriorating exports and most intensely felt in Germany, continues to be offset by resilient growth in the service sector, in turn propped up to a large extent by solid consumer spending in domestic markets.
“The big question is how long this divergence can persist before the weakness of the manufacturing sector spreads to services and households. With jobs growth waning to the slowest since early-2016 a deteriorating labour market looks set to be a key transmission mechanism by which the trade-led downturn infects the wider economy. A sharp drop in business optimism about the coming year in the service sector, down to the joint-lowest for six years, suggests that companies are already braced for tougher times ahead.
“We therefore expect to see renewed stimulus from the ECB in September as the central bank seeks to revive demand and stem the spreading malaise.”
Canada GDP contracted -0.3% mom in May, matched expectations. Total economic activity remained approximately -2% below prepandemic level in February 2020. Overall, 12 of 20 industrial sectors contracted, with services-producing down -0.2% and goods-producing down -0.4%. Preliminary information indices that GDP would grow 0.7% in June, and 0.6% in Q2.
US personal income rose 0.3% in July, spending rose 0.4%, both matched expectations. Headline PCE accelerated to 2.3% yoy, up from 2.2% yoy and beat expectation of 2.2%. PCE core also accelerated to 2.0% yoy, up from 1.9% yoy and matched expectation of 2.0% yoy. Core inflation now formally meet Fed’s target.
Initial jobless claims rose 3k to 213k in the week ended August 25, below expectation of 214k. Four-week moving average dropped -1.5k to 212.25k. That’s the lowest level since December 13, 1969. Continuing claims dropped -20k to 1.708m in the week ended August 18. Four-week moving average of continuing claims dropped -4.5k to 1.73125m.
Canada data was slightly less impressive. GDP rose 0.0% mom in June versus expectation of 0.2% mom. For Q2, GDP grew 2.9% annualized, slightly below expectation of 3.0%. Exports was the main driver to Q2’s growth, up 2.9%. Consumer spending growth also rose 0.6%. However, there was deceleration in business investments, contraction in inventories and imports. The set of data doesn’t add any additional reason for BoC to hike in September instead of October.
USD/CAD recovers strongly after the release with focus now back on 1.2981 minor resistance Break will bring stronger rebound.
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.
In Asia:
Trump accused China for currency manipulation today, and with the same tweet, he also urged Fed to “listen” He said “China dropped the price of their currency to an almost a historic low. It’s called ‘currency manipulation.’ Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!” But it’s unsure what “historic low” he referred to.
On the other hand, China dismissed Trump’s claim that the country didn’t buy US agricultural products. A National Development and Reform Commission (NDRC) was reported saying that such accusation was “groundless”. The official noted China bought 130,000 tonnes of soybeans, 120,000 tonnes of sorghum, 60,000 tonnes of wheat, 40,000 tonnes of pork and products, and 25,000 tonnes of cotton from the United States between July 19 and August 2.
Also, the NDRC official also said China purchased 75,000 tonnes of hay, 5,700 tonnes of dairy products, 4,500 tonnes of processed fruits, and 400 tonnes of fresh fruits from the United States during the same period.
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Swiss KOF Economic Barometer rose notably to 102.2 in September, up 3.3 pts from 98.9. It also beat expectation of 100.1. KOF noted the this may imply that the downward trend, which has been visible since the beginning of 2018, might have come to a halt.
The strongest positive contributions came from manufacturing sector. And among manufacturing, “positive development can be attributed mainly to the metal processing industry, followed by the machine building and the food processing as well as the textile industries and finally the chemical industry.” Meanwhile, overall improvement in manufacturing is driven by “a more optimistic assessment of employment, followed by the assessments of production and the overall business situation”.
Market sentiments are once again lifted by upbeat news regarding US-China trade negotiations, as China said they’ve agreed with the US on a plan to reverse the tariffs imposed.
China Ministry of Commerce spokesman Gao Feng said, at a regular press briefing, “in the past two weeks, top negotiators had serious, constructive discussions and agreed to remove the additional tariffs in phases as progress is made on the agreement,” spokesman Gao Feng said Thursday..
“If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement.”
Minutes of RBA’s February 7 meeting revealed that both the options of 25bps and 50bps hike were considered. But the case for a 25bps hike was stronger, with “the monthly meetings provided the Board with frequent opportunities to assess how these uncertainties were being resolved and to adjust policy if needed”.
The minutes also noted, “members agreed that further increases in interest rates are likely to be needed over the months ahead to ensure that inflation returns to target and that the current period of high inflation is only temporary.”
Canada GDP grew 0.1% mom in December, matched expectations, following 0.8% mom rise in November. That’s the eighth consecutive monthly increase. Still total economic activity was about -3% below February’s pre-pandemic level. Goods-producing industries were up 0.6% mom while services-producing industries edged down -0.1% mom. 12 of 20 industrial sectors grew in the month.
At the same time, advanced information indicates an approximate 0.5% mom increase in real GDP in January. The wholesale trade, manufacturing and construction sectors led the increase while retail trade declined.
Cryptocurrencies stumbled overnight with Bitcoin crashing to the lowest level since June, eyeing 2022 low. The moves came on news that Binance offered to FTX’s non-US operations to fix “liquidity crunch”.
Technically, current downside moment, and the break of September’s low at 18144 suggests that Bitcoin is ready for down trend resumption. For now, further decline is expected as long as 19272 resistance holds.
Bitcoin is ready to taken on 61.8% projection of 25198 to 18144 from 21460 at 17100 first. Firm break there could prompt downside acceleration to 100% projection at 14406.
UK PMI Manufacturing was finalized at 32.6 in April, down from March’s 47.8. Markit said that “manufacturing production, new orders and employment all contracted at the fastest rates in the 28-year survey history”. Also, the coronavirus pandemic “hit overseas demand, leading to a series-record drop in new export business.”
Rob Dobson, Director at IHS Markit: “The outstanding question remains how long the current restrictions will need to remain in place, and which sectors can start to safely reopen. The pressure is mounting, as the longer the global economy remains in lockdown the greater the cost to industry will grow, and the greater the likelihood that more jobs will be cut.”
Australia retail sales rose 0.2% mom in September, below expectation of 0.4% mom. Ben James, Director of Quarterly Economy Wide Surveys, said there was “mix of results at the industry level”.
Rises were seen in other retailing (0.8%), cafes, restaurants and takeaway services (0.6%), and food retailing (0.1%). These rises were slightly offset by a fall in clothing, footwear and personal accessory retailing (-0.5%) and department stores (-0.2%). Household goods (0.0%) was relatively unchanged.
Overall the report suggested weak consumer spending through Q3 and there was little lift from tax refunds. Some greater fiscal stimulus would be needed to boost wage growth and spending. And without that, another RBA cut early next year would be likely and necessary.
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China insists core concerns must be resolved before trade agreement with US
China continues to talk down expectations of upcoming Xi-Trump summit at G20 in Osaka next week. Chinese commerce ministry spokesman Gao Feng said “the heads of the two trade teams will communicate, according to instructions passed down from the two presidents.” And, “we hope (the United States) will create the necessary conditions and atmosphere for solving problems through dialogue as equals.”
But most importantly, Gao insisted that “China’s principles and basic stance on Sino-U.S. economic and trade consultations have always been clear and consistent, and China’s core concerns must be properly resolved.” He was clearly referring to disagreement on the three matters of principle that led to the collapse of trade negotiation earlier this year.
To recap, the three main differences include removal of all additional tariffs with the agreement. The among of additional Chinese purchases of US goods have to be realistic. And text of the agreement must be balanced without intrusion of sovereignty. It’s believed that the third one, regarding removal of texts that force China to implement the agreement in domestic laws, is the most crucial red line.