Ireland’s Europe Minister Helen McEntee said today that UK’s Article 50 extension, if sought, will need to have a purpose. She said “If they were to ask for an extension I think it would be approved … but there is no point in looking for an extension if we end up back to the same place as we are now in three months’ time”.
Austrian Foreign Minister Karin Kneissl now said “there are lots of signs that indicate a hard Brexit.” And, she added “that is my estimation”.
Eurozone PMI manufacturing was finalized at 50.5 in January, unrevised, down from December’s 51.4. It’s the six consecutive months of decline and the lowest level since November 2014. Markit noted that “output up marginally, but sharpest fall in new work recorded since April 2013”. Also, “growth sustained via reduction in backlogs and fastest accumulation of stocks in survey history”.
Among the countries, Italy PMI manufacturing hit 47.8, a 68-month low. Germany reading was also in contraction at 49.7, a 50-month low. Franc reading recovered mildly to 3-month high of 51.2. But Ireland reading hit 27-month low, Austria reading hit 29-month low and the Netherlands reading hit 28-month low.
Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“The January PMI adds to the likelihood that the manufacturing sector is in recession and will act as a drag on the economy in the first quarter.
“Some temporary factors remain evident, including an auto sector that is struggling to regain momentum after new emissions regulation and some signs of ‘yellow vest’ disturbances dampening demand in France. However, there appears to be a more deep-rooted malaise setting in, which reflects widespread concerns about the destabilising effect of political uncertainty and the damage to exports from rising trade protectionism.
“Worryingly, weaker than anticipated sales mean warehouses are filling up with unsold stock at a rate not previously recorded over the two decades of prior survey history, suggesting firms will need to cut operating capacity in coming months unless demand revives, boding ill for future production growth.
“While there is some evidence that firms are hoarding labour in the hope of sales picking up again, and business optimism did perk up from December’s six-year low, jobs growth is starting to deteriorate as increasing numbers of firms seek to cut costs and raise productivity. Any such downturn in the labour market will in turn potentially drive consumer sentiment lower, and adds further to the risk that economic growth will continue to slow in coming months.”
Entering into European session, Dollar continues to pare back post FOMC losses and is trading as the strongest for today. The boost from Fed’s dovish turn on equities was rather brief. Yen follows as the second strongest as overall market sentiments turned mixed. On the other hand, commodity currencies turned lower, as lead by Australian Dollar, after poor manufacturing data from China.
The two-day US-China trade talks ended without anything concrete, expect China’s pledge to buy 5M tons of soybeans per day. The demand on enforcement of the agreement was emphasized throughout. And China seemed to have listened. But even Trump admitted it’s not yet at the stage to set up a meeting with Chinese Xi to seal the deal yet. The next milestone will be USTR Lighthizer’s visit to Beijing after Chinese New Year. For now, Dollar and stocks will turn to today’s non-farm payroll first.
For the week, Sterling is the weakest one on Brexit uncertainty. The EU, Britons and the markets are awaiting UK’s alternative proposals on Irish backstop. Swiss Franc is the second weakest. Despite today’s pull back, commodity currencies are the strongest ones this week together with Yen.
In Asia,
Overnight,
Long term US treasury yields tumbled sharply.
China Caixin PMI manufacturing dropped to 48.3 in January, down from 49.7 and missed expectation of 49.7. That’s the lowest reading since February 2016 and points to continued softening in the health of China’s manufacturing sector. Markit also noted that underlying trend in production weakens. Export sales increase slightly, but overall new work softens. Though, a positive note is that business confidence rose to eight-month high.
Commenting on the China General Manufacturing PMI™ data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said:
“The Caixin China General Manufacturing PMI fell further to 48.3 in January, the lowest since February 2016.
“The subindex for new orders dipped further into contractionary territory, pointing to a moderate contraction in demand across the manufacturing sector. Yet the gauge for new export orders rose notably above the 50 level, the dividing line that separates contraction from expansion, reaching its highest point since March 2018, showing that companies’ export orders have obviously rebounded since the truce in the China-U.S. trade war.
“The output subindex dropped, highlighting the drag effect of softer demand on production. The employment subindex continued to rise moderately despite staying in negative territory, which could be due to the effect of government policies to stabilize the job market. The measure for stocks of finished goods fell into contractionary territory, while the subindex for stocks of purchased items dropped further, suggesting that manufacturers tended to reduce their inventories. The subindex for suppliers’ delivery times returned to negative territory, indicating that pressure on capital turnover, though less than in the months before December, still existed.
“Both gauges for input costs and output charges dropped only slightly. While companies have reduced their inventories, prices of domestic industrial products have since the start of the month recovered some of the losses seen in December. We expect that year-on-year growth in the producer price index is likely to slide closer to zero.
“On the whole, countercyclical economic policy hasn’t had a significant effect. While domestic manufacturing demand shrank, external demand turned positive and became a bright spot amid positive progress in Sino-U.S. trade talks. As companies were more willing to reduce their inventories, their output declined, indicating notable downward pressure on China’s economy. China is likely to launch more fiscal and monetary measures and speed up their implementation. Yet the stance of stabilizing leverage and strict regulation hasn’t changed, which means the weakening trend of China’s economy will continue.”
Japan PMI manufacturing was finalized at 50.3 in January, revised up from 50.0. But that’s still the lowest level in 29 months. And, new export orders decline at sharpest pace since July 2016. Also, business confidence falls for the eighth month running.
Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:
“Japan Manufacturing PMI data brought bad news for the global trade cycle at the start of 2019, with new export orders falling at the sharpest rate in two-and-a-half years. Anecdotal evidence suggested that sales of goods relating to semi-conductors had particularly suffered, which bodes ill for other Asian exporters. Meanwhile, domestic markets also showed signs of frailty as total demand declined for the first time since September 2016.
“With Abe set to levy the consumption tax this year, and Sino-US trade tensions still lurking, domestic weakness in Japan further adds to already existing challenges. Business sentiment continued to drop, with survey data registering an eighth straight month where confidence has slipped. Falling inventories and cut backs to production suggest that manufacturers are bracing for further economic difficulty.”
Also from Japan, jobless rate dropped to 2.4% in December, below expectation of 2.5%.
Trump met with Chinese Vice Premier Liu He in the oval office yesterday as the two-day top level US-China trade talks concluded. Trump said in during the meeting that “we’re not quite at that stage yet”, referring to the meeting with Chinese President Xi JinPing. He noted the representatives of both sides were “coming to a conclusion, except for certain very important points.” When he and Xi meets, “we want to have it down so that we have certain points that we can discuss and, I would say, agree to.” For now the meeting wasn’t set up yet.
Nevertheless, Trump hailed that Liu’s promise to buy five millions tons of soybeans per days. He said ” it really is a sign of good faith for China to buy that much of our soybeans and other product that they’ve just committed to us prior to the signing of the deal — is something that makes us very proud to be dealing with them.”
On the March 1 negotiation dead line, Trump said it has stayed and “we haven’t talked about extending the deadline.” But he added that “at a certain point, you’re going to have — this is a very complex, and a very large — it’s the largest transaction ever made, to be perfectly straight.” Regarding Huawei’s case Trump said “it will be discussed” at some point. And it’s “very small compared to the overall deal, but that will be discussed.”
US Trade Representative Robert Lighthizer reiterated in the meeting that ” We focused on the most important issues, which are the structural issues and the protection of U.S. intellectual property, stopping forced technology transfer, intellectual property protection, agriculture and services issues, and enforcement, enforcement, enforcement.” And, “both sides agree this agreement is worth nothing — if we can get an agreement, it’s worth nothing without enforcement.” Lighthizer will go to China shortly, after Chinese Year Year.
During the meeting, Liu also noted the need to establish three key themes, including “enforcement or implementation.”
Canada GDP contracted -0.1% mom in November, matched expectations. Looking at the details, decreases in wholesale trade, finance and insurance, manufacturing and construction more than offset gains in 13 of 20 industrial sectors. Goods-producing industries were down 0.3%, the third decline in four months, while services-producing industries were essentially unchanged.
Also from Canada, RMPI rose 3.8% mom in December versus expectation of 3.9% mom. IPPI dropped -0.7% mom versus expectation of 0.1% mom.
US initial jobless claims jumped 53k to 253k in the week ending January 26, well above expectation of 210k. That’s also the highest level since September 30, 2017. Four-week moving average of initial claims rose 5k to 220.25k.
Continuing claims rose 69k to 1.782M in the week ending January 19. It’s also the highest level since April 28, 2018. Four-week moving average of continuing claims rose 8k to 1.738M, highest since August 4, 2018.
Also from US, employment cost index rose 0.7% in Q4, below expectation of 0.8%.
Entering into US session, Dollar remains the weakest one today, after suffering broad based selloff on dovish FOMC announcement yesterday. At this point, Canadian Dollar is the second weakest while Sterling is the third weakest.
Australian Dollar is the strongest one following strong rally in Asian stocks. However, it has to be noted that Yen is the second strongest one. And European markets are just mixed today. We’re a bit skeptical on overall strength in the stock markets. But let’s see how it goes in the US first. DOW future is currently down -0.1% despite Trump’s upbeat tweets on China trade talks.
European stocks, and to a certain extent Euro, might be weighed down by Eurozone data. German retail sales had biggest monthly drop since 2007. Eurozone Q4 GDP grew at lowest pace in four years. Italy was in technical recession in H2 2018.
In European markets, currently:
Earlier in Asia:
Trump sounds optimistic again in a serious of tweets regarding trade talk with China. He said the meetings in Washington are “going well with good intent on both sides”. Trump is expected to meet with China’s representatives, including Vice Premier Liu He, in the Oval Office today”.
But he also emphasized that “no final deal will be made until my friend President Xi, and I, meet in the near future to discuss and agree on some of the long standing and more difficult points.” He noted that both sides are trying to do a “complete deal, leaving NOTHING unresolved on the table”.
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Eurozone (EA19) GDP growth came in at to 0.2% qoq in Q4, matched expectations. it’s also the same rate as in Q3. That’s also the lowest rate in four years since Q2 of 2014. Annual rate slowed to 1.2% yoy, down from Q3’s 1.6% yoy. The year-on-year rate is a five year low.
European Union (EU28) GDP growth came in at 0.3% qoq. Annual rate slowed to 1.5% yoy, down from 1.8% yoy.
Also released, Italy GDP contracted -0.2% qoq in Q4, worse than expectation of -0.1% qoq. Italian was in technical recession with two consecutive quarters of contraction.
Euro’s rally against Dollar and Yen is apparently capped by some weak economic data in the European session so far.
German retail sales dropped -4.3% mom in December, way below expectation of -0.5% mom. That’s also the fastest decline in 11 years since 2007. The decline was partly due to a strong November with pre-Christmas shopping and one-off discounts. But it’s yet another warning that the growth engine of Eurozone is slowing down quickly. Also from Germany, unemployment rate was unchanged at 5.0% in January. But unemployment dropped less than expected by -2k only.
From France, CPI dropped -0.4% mom in January. Annual rate slowed sharply from 1.6% yoy to 1.2% yoy. INSEE noted that “The fall in inflation should result from a pronounced deceleration in the prices of energy. Services prices should rise at the same pace as in December and those in manufactured products should drop barely less than in the previous month. Contrariwise, food and tobacco prices should gather pace.”
UK Foreign Minister Jeremy Hunt said the government is putting together the new Irish border backstop proposal for the EU. And “it is going to take a few days to do that”.
Hunt added ” there is potential along all the different routes that have been discussed. But we need to put those together, make sure they meet the concerns the EU has expressed and then I think… we will have a proper discussion.”
While the March 29 formal Brexit date approaching, Hunt still maintained that it’s too early to say if extension to Article 50 is needed.
BoJ released summary of opinions of January 22/23 monetary policy meeting today. It’s noted there that “hard data suggest that the trend in Japan’s economy has been firm”. However, “some market participants hold excessively pessimistic views.” And, risks to overseas economies have been “increasingly tilted to the downside” and there are concerns that some “may materialize”.
BoJ also noted that recent fall in stocks prices “to a certain extent indicates the anticipation of a global decline in the real economic growth rate.” And, “this is clear from developments in exports and imports, rather than GDP, which is declining marginally.”
The central bank also reiterated the stance to maintain current monetary easing. And more importantly, if downside risks materialize, BoJ “should be prepared to make policy responses”. It’s added that “Since achieving the price stability target has been delayed, it is not desirable to adopt a stance of not taking actions until a serious crisis occurs. Rather, a stance of taking swift, flexible, and decisive actions, including additional easing, in response to changes in the situation is desirable.”
China PMI manufacturing rose 0.1 to 49.5 in January, up from 49.4 and beat expectation of 49.3. It’s, nonetheless, the second month of contractionary reading. It’s noted in the release that the continuous decline since August last year was finally broken, showing signs of stabilization. Slight increase in export orders also suggested that sharp decline export growth since November was slowing down.
However, decline in new orders and backlog orders reflected downward pressure on demand. Overall, “the current economy has signs of stabilization, but the foundation still needs to be consolidated. Also from China PMI non-manufacturing rose to 54.7, up from 53.8, and beat expectation of 53.9. Full release in simplified Chinese.
Also release in Asia session, Japan industrial production dropped -0.1% mom in December versus expectation of -0.5% mom. Housing starts rose 2.1% yoy in December, matched expectation. Australia import prices rose 0.5% qoq in Q4, above expectations of 0.3% qoq. UK Gfk consumer confidence was unchanged at -14 in January.
Dollar tumbled broadly overnight, while stocks surged, after dovish FOMC statement. The greenback remains the weakest on in Asian session today, followed by Sterling and then Swiss Franc. On the other hand, strong risk appetite lifts Australian and New Zealand Dollar. Technically, AUD/UD broke 0.7235 resistance yesterday to resume rebound from 0.6722 for 0.7393 key resistance. USD/CAD also broke 1.3180 support to resume fall from 1.3664. EUR/USD resumed rise from 1.1289 towards 1.1569 resistance. USD/JPY also broke 109.14 minor support which argues that rebound from 104.69 has completed at 110.00 already.
In short, Fed dropped the tightening bias language of “”some further gradual increases” in interest rate. Instead, Fed said it would be “patient as it determines what future adjustments”. On balance sheet reduction plan, Fed is “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments”. But no detail was revealed yet. On economic assessment Fed stay activity has been “rising at a solid rate” rather than being “strong”. Also, “market- based measures of inflation compensation have moved lower in recent months”.
More on FOMC:
In Asia:
Overnight:
DOW’s rally from 21712.53 resumed and broke 61.8% retracement of 26951.81 to 21712.53 at 24950.40. It’s on track to 78.6% retracement at 25830.60 and above.
Markets firmed up their pricing that fed will stand pat throughout 2019 after yesterday’s FOMC statement that adopted the “patience” language. Fed funds futures are pricing in 82.5% chance of federal funds rate staying at current 2.25-2.50% after December meeting. It compares to prior day’s 72.0%. Nevertheless, it’s not that higher than 79.3% a month ago.
Treasury yields responded with 30-year yield rose 0.012 to 3.053. 10-year-year yield dropped -0.017 to 2.695. 5-year yield suffered steep decline and dropped -0.044 to 2.503. 1-year yield dropped -0.008 to 2.606. Yield curve from 1-year to 5-year has indeed inverted more after FOMC.
Fed left federal funds rate unchanged at 2.25-2.50% as widely expected. The most important change in the statement is that Fed dropped the language that “some further gradual increases in the target range for the federal funds rate will be consistent…”
Instead, Fed now said “the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate”.
That’s a rather drastic change and dollar drops broadly after the release.
Full statement below.
Federal Reserve Issues FOMC Statement
Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.
EU continued to pour cold water on UK’s intention to reopen Brexit negotiation. European Commission President Jean-Claude Juncker told the European Parliament that “the Withdrawal Agreement remains the best and only deal possible.” He added that “The debates and votes in the House of Commons yesterday will not change that. The Withdrawal Agreement will not be renegotiated.”
Juncker also emphasized “Ireland’s border is EU’s border and is our joint priority,” and “Yesterday’s vote has further increased the risk of a disorderly Brexit.” Though, he remained optimistic that “there can and will be agreement with UK.”
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UK PMI manufacturing dropped to 52.8, stocks up on Brexit preparations
UK PMI manufacturing dropped to 52.8 in January, down from 54.2 and missed expectation of 53.5. That’s also a 3-month low. Markit noted that “stocks of purchases rise at survey-record rate”. And, “employment falls for only the second time in past 30 months”.
Rob Dobson, Director at IHS Markit, which compiles the survey:
“The start of 2019 saw UK manufacturers continue their preparations for Brexit. Stocks of inputs increased at the sharpest pace in the 27-year history, as buying activity was stepped up to mitigate against potential supply-chain disruptions in coming months. There were also signs that inventories of finished goods were being bolstered to ensure warehouses are well stocked to meet ongoing contractual obligations.
“Despite the temporary boost provided by clients’ prepurchases and efforts to build-up stocks, the underlying trends in output and new orders remained lacklustre at best. Growth of new order inflows slowed sharply, and new export orders were near-stagnant, contributing to the weakest trend in output since the month following the EU referendum (July 2016). Based on its historical relationship against official data, the January survey is consistent with a further solid contraction of production volumes, meaning manufacturing will likely act as a drag on the economy in the first quarter.
“January also saw manufacturing jobs being cut for only the second time since mid-2016 as confidence about the outlook slipped to a 30-month low, often reflecting ongoing concerns about Brexit and signs of a European economic slowdown. With neither of these headwinds likely to abate in the near-term, there is a clear risk of manufacturing sliding into recession.”
Full release here.