Australia CPI slowed to 5.6% yoy in May, lowest in more than a year

    Australia monthly CPI slowed notably from 6.8% yoy to 5.6% yoy in May, below expectation of 6.1% yoy. That’s also the lowest reading in more than a year since April 2022. Excluding volatile items and travel, CPI also ticked down from 6.5% yoy to 6.4% yoy.

    The most significant contributors to the annual increase in the monthly CPI indicator in May were Housing (+8.4 per cent), Food and non-alcoholic beverages (+7.9 per cent), and Furniture, household equipment and services (+6.0 per cent). Partly offsetting the rise was a fall in Automotive fuel (-8.0 per cent).

     

    Full Australia CPI release here.

    GBP/CHF looks vulnerable after huge UK CPI miss

      Sterling weakens in general after much weaker than expected consumer inflation reading. GBP/CHF appears to be rejected by 4 hour 55 EMA with prior recovery and looks vulnerable. Immediate focus is now on 1.2769 minor support. Firm break there will resume decline from 1.2985.

      Such decline is now likely correcting whole rise from 1.1683. It could target 55 day EMA (now at 1.2540) before completion. Nevertheless, we’d expect strong support from 38.2% retracement of 1.1683 to 1.2985 at 1.2488 to bring rebound and retain near term bullishness.

      US core PCE rose to 1.6%, not enough to change Fed’s decision

        In June, personal income rose 0.4%, above expectation of 0.3%. Personal spending rose 0.3%, matched expectations. Headline PCE was unchanged at 1.4% yoy, missed expectation of 1.5% yoy. Core PCE inflation accelerated to 1.6% yoy, up from 1.5% yoy, but missed expectation of 1.7% yoy.

        The lack of materialistic acceleration in core inflation does nothing to alter FOMC policymakers’ mind regarding tomorrow’s rate decision. For now, Fed is still generally expected to cut interest rate by -0.25bps to 2.00-2.25%. The main question is whether Fed would explicitly say that it’s a one-off, or it’s a start of a policy easing cycle.

        Full release here.

        USD/JPY is steady after the release, staying a little bit soft. After temporary top was formed after failing to break through 108.99 resistance earlier this week. But for now, further rise is expected as long as 107.93 support holds. Break of 108.99 should eventually be seen.

        IMF: Shift from high-speed to high-quality growth in China key for decades to come

          IMF said in a report that China’s economy continues to “perform strongly”, with growth projected at 6.6% this year. But it also warned that the country is at a “historic juncture”. The shift from “high-speed” to “high-quality” growth will determine China’s “development path for decades to come”. Risk of “near-term abrupt adjustment” was reduced by recent strong growth momentum and “significant financial de-risking progress”. While there were accelerated rebalancing in some dimensions, “progress slowed” in many other dimensions. Also, while credit growth has slowed, “it remains excessive.

          In the latest projections, IMF projected China GDP growth to be at 6.6% in 2018, slow to 6.4% in 2019, 6.3% in 2020, 6.0% in 2021, 5.7% in 2022 and 5.5% in 2023. Current account surplus as to GDP is projected to be at 0.9% in 2019, to close to 0.8% in 2019, at 0.8% in 2020, then slow to 0.7% in 2021, 0.5% in 2022 and 0.4% in 2023.

          IMF also summarized the report in six charts.

          1. China’s strong GDP growth continues. The country now accounts for one-third of global growth. Over 800 million people have been lifted out of poverty and the country has achieved upper middle-income status. China’s per capita GDP continues to converge to that of the United States, albeit at a more moderate pace in the last few years.

          2. A focus on high-quality growth. China is at an historic juncture. After decades of high-speed growth, the government is now focusing on high-quality growth. The authorities will need to build on the existing reform agenda and take advantage of the current growth momentum to “fix the roof while the sun is shining.” Key elements are: continuing to rein in credit growth, accelerating rebalancing efforts, increasing the role of market forces, fostering openness, and modernizing policy frameworks. Even with a gradual slowdown in growth, China could become the world’s largest economy by 2030.

          3. Credit growth has slowed but remains too fast. Despite the sharp rebound in nominal GDP and industrial profits, total nonfinancial sector debt still rose significantly faster than nominal GDP growth in 2017. While the corporate debt to GDP ratio has stabilized, government and especially household debt is rising, driven by continued strong off-budget investment spending and a rapid increase in mortgage and consumer loans. It may take determined actions over an extended period of time to address underlying vulnerabilities.

          4. China, a global digital leader. China has around 700 million internet users and 282 million digital natives (internet users less than 25 years old) eager to adopt new technology. The massive scale of the Chinese market and a supportive regulatory and supervisory environment in the early years of digitalization made China a global leader in frontier industries such as e-commerce and fintech. Digitalization will continue to reshape the Chinese economy by improving efficiency, softening—but not reversing—slowing growth as the economy matures.

          5. Rebalancing efforts should be accelerated. Increases in health, education, and social transfers—financed by taxes on income, property and carbon emissions—would support consumption, and reduce income inequality and pollution. A more comprehensive approach to structural reforms, such as increasing transfers to the regions most affected by overcapacity reduction or pollution control, could help address the tensions across rebalancing dimensions.

          6. The benefits of faster reform. In the baseline, real GDP growth is projected at 6.6 in 2018, reflecting the lagged effect of regulatory tightening and softer external demand. Risks are tilted to the downside, with tightening global financial market conditions and rising trade tensions. If the authorities move more decisively to resolve the policy tensions now and focus on higher-quality growth and a greater role for the market, near-term growth would be weaker but longer-term growth would be stronger and more sustainable. An illustrative “proactive” scenario features faster reform progress, particularly state-owned enterprises (SOE) reform and resolving zombie firms, which also accelerates rebalancing from investment to consumption. If there is a risk of a too sharp slowdown, a temporary fiscal stimulus package with resources to support rebalancing could help cushion the near-term adverse impact.

          Link to the press release.

          Link to the full Article IV consultation report

          US ADP job grew 202k, strong across companies of all sizes

            US ADP report showed 202k growth in private sector jobs in December, above expectation of 150k. Service providing sector added 173k jobs while goods-producing sector added 29k. By company size, large companies added 45k, mid-sized companies added 88k, small companies added 69k.

            “As 2019 came to a close, we saw expanded payrolls in December,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “The service providers posted the largest gain since April, driven mainly by professional and business services. Job creation was strong across companies of all sizes, led predominantly by midsized companies.”

            Full release here.

            US trade deficit widened to USD 52.5B, exports dropped -0.9%, imports dropped -1.7%

              US trade deficit widened -4.7% mom to USD 52.5B in September, slightly smaller than expectation of USD 53.0B. Exports dropped -0.9% to USD 206.0B. Imports dropped -1.7% to USD 258.4B.

              Trade deficit with China dropped USD 0.9B to USD 28.0B. Exports dropped USD 1.0B to USD 9.0B. Imports also dropped USD 1.9B to USD 37.0B. With Germany, deficit dropped USD 1.9B to USD 5.0B. With Canada, deficit rose USD 0.9B to USD 2.5B.

              Full release here.

              Bundesbank Nagel: Inflation could remain high for longer than expected

                New Bundesbank President Joachim Nagel said in his swearing in ceremony, “it’s true that high inflation rates can be attributed to special effects that expire automatically. But not entirely. I see a danger that inflation could remain high for longer than expected.”

                At the same occasion, ECB President Christine Lagarde said, “we understand that rising prices are a concern for many people, and we take that concern very seriously… The whole Governing Council is united in pursuit of this goal. At the same time, one of the key strengths of the Eurosystem is the way that it brings together different perspectives to form a consensus. Our rich quality of debate and diversity of views ensures that our decisions are robust.”

                BIS: Policymakers need to set a solid foundation for long-term growth

                  The Bank for International Settlement said in its Annual Economic Report that “swift and forceful action from central banks and governments has limited the economic damage from the Covid-19 pandemic”. But in the coming year, “issues such as corporate insolvencies and capital and labour reallocation will come to the fore.”

                  Agustín Carstens, General Manager, said: “The whole world entered this crisis suddenly and as one, but the exit is proving to be slower and staggered. While the recovery has been faster and stronger than anyone would have imagined a year ago, we are not out of the woods yet. Policymakers need to carefully manage the risks arising from this economic and policy divergence and set a solid foundation for long-term growth.”

                  He added: “As we exit the pandemic, we see higher public debt, lower interest rates and larger central bank balance sheets. Normalising monetary and fiscal policy over the longer term will provide a necessary safety margin to cope with unexpected events such as the pandemic or future recessions. And securing a durable recovery will require addressing the more lasting consequences of the pandemic.”

                  Full release here.

                  China PMI manufacturing edged higher to 51.1, USD/CNH staying in near term decline

                    China’s official PMI Manufacturing rose to 51.1 in July, up from 50.9, slightly above expectation of 51.0. That’s the highest reading since March too. Looking at some details, production rose 0.1 to 54.0. New orders also improved by 0.3 to 51.7. New export orders rose notably by 5.8 to 48.4, but stayed in contraction. PMI Non-Manufacturing retreated mildly to 52.3, down from 54.4, but beat expectation of 51.2. Overall, the set of data suggests that recovery in on track, but it will remain a long road back to pre-pandemic levels.

                    USD/CNH drops mildly in Asian session today, following general weakness in Dollar. Prior recovery from 0.6933 was limited at 7.0298, below 7.0396 support turned resistance. The development suggests that fall from 7.1961 is still in progress. It’s seen as the third leg of the pattern from 7.1953 and break of 0.6933 would pave the way back to 6.8452 support.

                    China State Council to boost private investments, remove obstacles

                      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.”

                      Limited loss in Yuan and Chinese stocks as trade war escalation shrugged

                        The financial markets reactions to new round of US tariffs on China are so far rather muted. Nikkei is actually rising over 1% at the time of writing. Hong Kong HSI is down -0.72%, Singapore Strait Times is down -0.55%. China’s Shanghai SSE dipped to 2644.30 but recovered. It’s now trading down -0.12% only at 2648.5, still kept above 2638 key support level (2016 low).

                        In the currency markets, Dollar turns soft again after a brief lift from the trade war news. It’s trading as the weakest one together with Yen for now. Australian Dollar and New Zealand Dollar are the strongest ones.

                        USD/CNH (offshore Yuan) edged higher to 6.8930 earlier today but there is no follow through buying to push it through 6.8959 minor resistance yet.

                        Germany factor orders rose 3.7% mom in Nov, strong foreign orders

                          Germany factory orders rose 3.7% mom in November, better than expectation of 2.5% mom. Comparing with October, Largest increase in new orders (32.0%) was recorded in the manufacture of other transport equipment (aircraft, ships, trains etc.) for which extensive major orders were reported. New orders in the manufacture of motor vehicles, trailers and semi-trailers were up by 7.0%. Not including major orders, an 3.8% increase in new orders in manufacturing was recorded.

                          The strong growth in new orders was attributable to foreign orders which increased by 8.0%. New orders from the euro area rose by 13.1%. New orders from other countries amounted to 5.0% in the current month. Domestic orders went up 2.5% in November 2021 on the previous month.

                          Full release here.

                          Canada retail sales rose 0.5% mom in Dec

                            Canada retail sales rose 0.5% mom to CAD 62.1B in December. Sales increased in 7 of 11 subsectors, representing 75.1% of retail trade. Higher sales at motor vehicle and parts dealers (+3.8%) and general merchandise stores (+1.7%) led the increase. Ex-gasoline and auto sales rose 0.4% mom. In volume term, retail sales increased 1.3% mom.

                            Advance estimate suggests that retail sales rose further by 0.7% mom in January.

                            Full release here.

                            Sterling maintains gains as focus turns to BoE Super Thursday

                              Sterling is trading as the strongest one for the week and is maintain gains. Focus turns to BoE “Super Thursday”. Bank Rate is widely expected to be kept at 0.75%. Asset purchase target should be held at GBP 435B. Decisions should be made by unanimous 9-0 votes.

                              Economic development appeared to be positive in Q1, both domestically in UK and globally. But the resilience in UK GDP appeared to be boosted by pre-Brexit stockpiling. Momentum could dissipate easily in Q2, which was seen in the fall in April PMI manufacturing already. Headline CPI steadied at 1.9% yoy in March, which was within BoE’s target range. Such developments shouldn’t prompt any change in BoE’s policy. Adding to that, Brexit uncertainty is prolonged after UK was granted flexible extension until October 31.

                              The more interest things to note would be in the new economic projections in the quarterly inflation report. But for now, the figures are rather academic given that the form of Brexit is yet to be known.

                              Here are some suggested readings on BoE:

                              BoJ Kuroda: Stock markets unstable due to global risks

                                In a speech at the Meeting of Councillors of Nippon Keidanren (Japan Business Federation) in Tokyo, BoJ Governor Haruhiko Kuroda warned that “it’s necessary to bear in mind that uncertainties have recently increased with respect to developments in overseas economies.”

                                He noted that the “stock market has been somewhat unstable”. And, “the fluctuations are partly attributable to changes in perception of various risks surrounding the global economy”.

                                On monetary policy, though, Kuroda sounded rather cautious. He said “In complex times like now, what’s required is to persistently continue with the current powerful easing while weighing the benefits and costs of our policy in a balanced manner.”

                                Kuroda’s full speech here.

                                ISM manufacturing dropped to 57.7, employment dropped to 56.8

                                  US ISM manufacturing index dropped to 57.7 in October, down from 59.8 and missed expectation of 59.0. That’s the lowest level since April this year. Price paid component rose to 71.6, up from 66.9 and beat expectation of 67.5 Employment component dropped to 56.8, down from 58.8.

                                  From Timothy R. Fiore Chair ISM Manufacturing Business Survey Committee:

                                  • Comments from the panel reflect continued expanding business strength.
                                  • Demand remains moderately strong, with the New Orders Index easing to below 60 percent for the first time since April 2017, the Customers’ Inventories Index remaining low but improving, and the Backlog of Orders Index remaining steady.
                                  • Consumption softened, with production and employment continuing to expand, but at lower levels compared to September. I
                                  • Inputs — expressed as supplier deliveries (increased), inventories and imports — retained September’s levels. Continued supply chain delivery difficulties led to an increased consumption of inventory, and import expansion was stable. Lead-time extensions continue, while steel and aluminum prices are stabilizing. Supplier labor issues and transportation difficulties continue to disrupt production, but at more manageable levels.
                                  • The expansion of new export orders softened, but five of six major industries contributed, up from two in September. Prices pressure continues, with the index returning above 70 percent. Overall, the manufacturing community continues to expand, but at the lowest level since April 2018.

                                  Quotes from respondents:

                                  • “Tariffs are causing inflation: increased costs of imports, increased cost of freight and increased domestic costs from suppliers who import.” (Chemical Products)
                                  • “Protein prices continue under pressure from heavy U.S. supplies and export concerns related to trade tariffs. Higher costs related to trade tariffs are starting to be passed on to the cost of goods sold.” (Food, Beverage & Tobacco Products)
                                  • “NAFTA 2.0/USMCA does nothing to help our company, as it does not address Section 232 tariffs.” (Plastics & Rubber Products)
                                  • “Mounting pressure due to pending tariffs. Bracing for delays in material from China — a rush of orders trying to race tariff implementation is flooding shipping and customs.” (Miscellaneous Manufacturing)
                                  • “Steel tariffs continue to negatively affect our cost, even though we utilize U.S. sources for steel. Oil prices put meaningful upward pressure on cost. Continued tightness with truck drivers is expected.” (Petroleum & Coal Products)

                                  Full release here.

                                  RBNZ Hawkesby sees less stimulus required, NZD/JPY extends rally

                                    RBNZ Assistant Governor Christian Hawkesby said today that there is no change in forward guidance that OCR will stay at 0.25% until March 2021. Though, “less stimulus is required than we thought in August”, even though a “substantial amount” is still needed. Negative rates is a policy tool for the central bank is needed. But Hawkesby added that it’s less likely if banks use the cheap loans from the new FLP program.

                                    New Zealand Dollar surges this week as markets see less urgency for negative rates due to improvement in outlook. ANZ still expects a cut to negative in August 2021, but it’s now “become a bit of a toss up”.

                                    NZD/JPY’s rally from 59.49 resumes this week with strong break of 71.97 resistance The solid support from 55 week EMA is a sign of medium term bullishness. Focus is now on 73.53 structural resistance. Decisive break there should reaffirm this. NZD/JPY, be it starting an up trend or just correcting the long the down trend, should then target 61.8% retracement of 94.01 to 59.49 at 80.82.

                                    CAD/JPY ready for down trend resumption as Canada CPI looms

                                      Today, Canada’s consumer inflation data takes center stage as markets anticipate a slowdown in headline inflation from 5.9% yoy to 5.4% yoy in February. If this decrease materializes, it would mark the lowest inflation reading in over a year. BoC’s preferred core inflation metrics, the trimmed and median CPI, are also projected to decelerate from 5.1% yoy to 4.8% yoy and from 5.0% yoy to 4.8% yoy, respectively.

                                      BoC became the first major central bank to pause its tightening cycle last Wednesday, following eight consecutive rate hikes totaling 425 basis points. Market participants are still expecting one more rate increase this year, but these odds could dwindle if inflation continues to decline.

                                      CAD/JPY is closely watching the 94.61 support level after a recent drop. A decisive break below this threshold would rekindle the broader downtrend from the 110.87 high and aim for a 61.8% projection of 110.87 to 94.61 from 100.85 at 90.80. However, if the cross breaks above 97.53 resistance, it could delay the bearish scenario and extend the corrective pattern from 94.61 with another upswing.

                                      Fed’s Cook to wait for clearer inflation convergence before rate cuts

                                        In a speech overnight, Fed Governor Lisa Cook articulated her stance on waiting for more definitive signs of inflation moving towards 2% target before considering any policy rate reductions.

                                        “I would like to have greater confidence that inflation is converging to 2% before beginning to cut the policy rate,” she said.

                                        Further, Cook shared an optimistic view on the inflation outlook, suggesting that a forecast showing 12-month PCE inflation moving towards target over time remains a “reasonable” baseline scenario.

                                        However, Cook also advocated for a measured and data-driven approach to policy decisions. “We should continue to move carefully as we receive more data,” she advised, stressing the importance of maintaining the current level of policy restriction to achieve “sustainable” price stability.

                                        Full speech of Fed’s Cook here.

                                        Fed Bostic supports another 75bps rate hike in Jul

                                          Atlanta Fed president Raphael Bostic said yesterday, “the data that came in the last several months really pointed to a need for us to get closer to that neutral stance faster,”

                                          “I’m confident that the economy will be able to withstand this next move. I would support a 75 basis point” rate hike at the July FOMC meeting, he added.

                                          Beyond July, the decisions will depend on incoming economic data. “If demand comes down much faster than we expected or supply comes back, I will be comfortable pulling off” further rate increases, Bostic said.

                                          Separately, St. Louis Federal Reserve president James Bullard said, “now we have lots of inflation, but the question is, can we get back to 2% without disrupting the economy? I think we can.”