US initial jobless claims rose 10k to 231k in the week ending December 29, above expectation of 215k. Four-week moving average of initial claims dropped -500 to 218.75k.
Continuing claims rose 32k to 1.74M in the week ending December 22. Four-week moving average of continuing claims rose 26k to 1.7035M.
US ADP report shows 271k growth in private sector jobs in December, up from 157k and beat expectation of 175k. Ahu Yildirmaz, vice president and co-head of the ADP Research Institute, said in the release that “we wrapped up 2018 with another month of significant growth in the labor market.” And, “Although there were increases in most sectors, the busy holiday season greatly impacted both trade and leisure and hospitality. Small businesses also experienced their strongest month of job growth all year.”
Mark Zandi, chief economist of Moody’s Analytics, said, “Businesses continue to add aggressively to their payrolls despite the stock market slump and the trade war. Favorable December weather also helped lift the job market. At the current pace of job growth, low unemployment will get even lower.”
Entering into US session, Yen remains the strongest one for today even though it has already pared back much of the “flash crash gains”. Risk aversion intensifies in European session and Swiss Franc is now the second strongest, followed by Euro and then Dollar. Sterling overtook Aussie’s place as the weakest one. Australian Dollar stays the second weakest after paring some of the spike losses, followed by Kiwi.
Risk aversion will likely stay, at least at the beginning of risk aversion. After Apple’s sales outlook downgrade, DOW future is now trading down over -300 pts. But 10 year yield is back at 2.65, up from premarket low at 2.626. Stocks will be facing multiple tests in job data and ISM manufacturing in US session.
In Europe, at the time of writing:
Earlier in Asia, selloff was not to serious:
Here is a quick update to our EUR/JPY short trade (sold at 127.80, stop at 127.10, target at 120.00) as last updated here. The target of 120.00 was met as EUR/JPY spiked to 118.62 during the “Currency Flash Crash” in Asian session. We’ve exited with 780 pips profit.
Admittedly, there’s luck, quite a lot of, as the downward move today is rather exaggerated. But technically, the ideal case did happen as there was downside acceleration through 124.08 key support level. The bearish case played out well and it’s just a matter of time when the mentioned 61.8% retracement of 109.03 to 137.49 at 119.90 is met. For now, we’ll hold our hands off first as there will be heavy weight non-farm payrolls to be released tomorrow. We’ll post new strategy, if there would be any good one(s), in the upcoming weekly report.
Meanwhile, there are some reflections on the trade and related ideas we’ve posted in 2018:
UK construction PMI dropped to 52.8 in December, down from 53.4 and missed expectation of 52.9 slightly. Markit noted that “business activity expands at weakest pace for three months”, “softest rise in commercial work since May 2018”, but “rebound in business optimism amid hopes of infrastructure boost in 2019”.
Tim Moore, Economics Associate Director at IHS Markit, which compiles the survey:
“UK construction firms signalled a slowdown in housing and commercial activity growth during December, which more than offset a strong performance for civil engineering at the end of 2018.
“Subdued domestic economic conditions and an intense headwind from political uncertainty resulted in the weakest upturn in commercial work for seven months.
“Strong demand among first-time buyers meant that house building was the fastest growing category of construction output during 2018. However, construction companies indicated a renewed loss of momentum in December. Residential growth remains much softer than the two-and-a-half year peak achieved last summer.
“Civil engineering was the stand-out area of construction growth in December, with activity rising at the fastest pace since May 2017. Survey respondents also noted that the strengthening infrastructure pipeline is set to become a key engine of growth in 2019, despite concerns about possible delays to the delivery of major projects.
“An expected boost from transport and energy projects underpinned a rise in business optimism to an eight-month high in December. Construction sector confidence was also helped by softer input cost inflation and signs of a turnaround in supply chain difficulties from the low point seen last August. However, levels of optimism remained subdued in relation to those recorded by the survey over much of the past six years, largely reflecting concerns that Brexit uncertainty will continue to encourage delays with decision-making, especially on commercial projects.”
UK Brexit Minister Stephen Barclay warned that “no deal will be far more likely if MPs reject the PM’s Brexit deal later this month.” And, he urged fellow MPs to “put the national interest first and vote for this deal so we can get on with delivering Brexit and building the UK’s prosperous future as an outward-looking global trading nation, outside the EU.” And he also emphasized that people “people did not vote for the disruption and uncertainty of no deal.”
Foreign Minister Jeremy Hunt also said “there will be some tough negotiations to follow in the years ahead but I think getting this clearer language on the backstop will help to get it through Parliament.” And, there will be “devastating social consequences” if a second EU referendum was triggered.
Trump said the decline in stock markets in December was just a “little glitch” and the US markets will be good when the trade deals kick in.
He told reporters at a Cabinet meeting that “we had a little glitch in the stock market last month.” And, “it’s going to go up once we settle trade issues, and once a couple of other things happen.” He repeated that “We need a little help from the Fed … but we’re going to be good. The trade deals are kicking in.”
Also, Trump repeated his upbeat message regarding trade talks with China and said they are “coming along very well, we’ll see what happens.”
While there is extreme volatility in the currency markets, stocks were relatively calm though. DOW again staged animpressive comeback overnight. It initially dipped to as log as 22928.59 but closed up 18.78pts or 0.08% at 23346.24. S&P 500 rose 0.13% and NASDAQ gained 0.46%. In Asia, Japan is still on holiday. China Shanghai SSE is currently flat. Hong Kong HSI is down -0.44% while Singapore Strait Times is down -0.73% only.
DOW future is currently down over -300 pts in Asia. And we’ll have to wait and see how US stocks would react to Apple’s cutting of revenue outlook later in the day. But technically, we’d like to reiterate that while DOW’s post Christmas rebound was strong and impressive, it has yet to take out and important resistance zone yet.
That is, 100% projection of 21712.53 to 22877.09 from 22267.42 at 23431.98, the projection level for the corrective rebound. Also, there is 38.2% retracement of 26951.81 to 21712.53 at 23713.93. As long as this resistance zone holds, the long term corrective fall from 26951.81 is still more likely to head to 20000 handle or not.
US treasury will be another key factor to watch ahead. 30-year yield finally closed below 3% handle at 2.982 overnight, down -0.038. 10-year yield dropped -0.025 to 2.661. More importantly, after the Apple news, 10-year yield is now down to 2.620 in Asia. It’s very close to 1-year yield at 2.616.
“Currency Crash” occupies a lot of headline in Asian session today after Yen spikes higher during the “thin” period of the markets while Aussie was squeezed lower. We’re talking about:
Many key technical levels in yen crosses were breached with AUD/JPY breaching 72.39 (2016 low) and hit lowest since 2009. While Yen crosses pared back some much of the exaggerated moves, the trends remains bearish in them despite the recoveries.
The main fundamental trigger of the crash is believed to be Apple’s cutting of its sales forecasts amid China slowdown. It’s the tech giant’s first cut in revenue outlook in almost two decades. CEO Time Cook said the company expects around USD 84B in Q4, sharply lower from prior estimate of USD 89B to USD 93B. Cook also warned that in a statement to investor that “while we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China.”
The crash in Yen crosses is described by some as “flash”. The exaggeration is seen as result of AUD/JPY liquidity vacuum as market dislocation at a short period of thin market. Aussie should at least be part of the problem as AUD/USD also breached 2016 low at 0.6826. And most apparently, even AUD/NZD spiked to as low as 1.0107 and is now back in Wednesday’s range.
As for now and today, Yen remains the strongest one, followed by Swiss Franc and then Euro. Aussie is weakest followed by Sterling and then Kiwi.
US PMI manufacturing was finalized at at 15-month low of 53.8 in December. Markit added that “new order growth eases to 15-month low” and “business confidence lowest since October 2016”.
Chris Williamson, Chief Business Economist at IHS Markit said:
“Manufacturers reported a weakened pace of expansion at the end of 2018, and grew less upbeat about prospects for 2019. Output and order books grew at the slowest rates for over a year and optimism about the outlook slumped to its gloomiest for over two years. The month rounds of a fourth quarter in which manufacturing production is indicated to have risen at only a modest annualised rate of about 1%.
“Some of the weakness is due to capacity constraints, with producers again reporting widespread difficulties in finding suitable staff and sourcing sufficient quantities of inputs. However, the survey also revealed signs of slower demand growth from customers, as well as rising concerns over the impact of tariffs. Just over two thirds of manufacturers reporting higher costs attributed the rise in prices to tariffs.
“Growth was led by strengthening demand for consumer goods, and robust growth was also reported for investment goods such as plant and machinery. But producers of intermediate goods – who supply inputs to other manufactures – reported the weakest rise in new orders for over two years, hinting at increased destocking by their customers.
“A shift to inventory reduction was highlighted by purchasing activity in the manufacturing sector rising at the weakest rate for one and a half years in December, providing further evidence that companies have become increasingly cautious about spending amid rising uncertainty about the outlook.”
Canada PMI manufacturing dropped to 53.6 in December, down from 54.9. That’s also the lowest level since January 2017. Markit noted “softer rates of output and new order growth” and “export sales stagnate at the end of 2018”.
Christian Buhagiar, President and CEO at SCMA said:
“December data signalled a loss of momentum for manufacturers at the end of the year, with stagnating export sales and softer energy sector demand the key factors behind an overall slowdown in production growth. Survey respondents also commented that global trade tensions has led to greater risk aversion among clients. As a result, manufacturing companies have curtailed their expectations for output growth in 2019, with business optimism easing to its lowest for almost three years.
“Quebec was a notable outperformer in December as manufacturing conditions improved at the fastest pace for four months. Meanwhile, manufacturers in Ontario saw softer overall growth than in November, while those based in Alberta & British Columbia experienced the weakest upturn for just over two years.”
Latest comments from the White House suggest there is still no end in sight for the partial government shutdown. Press Secretary Sarah Sanders said “The Pelosi plan is a non-starter because it does not fund our homeland security or keep American families safe from human trafficking, drugs, and crime.” But she also emphasized that Trump remains committed to “an agreement that both reopens the government and keeps Americans safe.”
It’s reported that right after taking control of the House, Democrat will vote on a two-part package on Thursday, intending to end the shutdown. The first part is a bill to fund the Department of Homeland Security through February 8, plus USD 3B for border “fencing” and USD 300M for technical and equipment for border security. The second part will fund the unfunded federal agencies through September 30. But no funding for the Trump demanded border wall would be provided in the package.
Entering into US session, risk aversion seems to have eased a little bit in European markets, with major indices pared back much of earlier losses. But Yen remains overwhelmingly the strongest one, thanks to falling European yields. Canadian Dollar follows as the second strongest as WTI crude oil manages to stay in tight range above 45, for now. Dollar is the third strongest.
Meanwhile, Sterling is the worst performing one despite stronger than expected PMI manufacturing. The Pound is reversing the unexpected strong gains on Monday. Australian Dollar follows as second weakest. Euro and Swiss franc trail.
In Europe:
Earlier in Asia:
UK PMI manufacturing rose to 54.2 in December, up from 53.1 and beat expectation of 52.6. It’s also the highest level in six months. Markit also noted that “new order and new export order inflows strengthen”, and “stocks of purchases and finished goods rise sharply”.
Rob Dobson, Director at IHS Markit, which compiles the survey:
“December saw the UK PMI rise to a six-month high, following short-term boosts to inventory holdings and inflows of new business as companies stepped up their preparations for a potentially disruptive Brexit.
“Stocks of purchases and finished goods both rose at near survey-record rates, while stock-piling by customers at home and abroad took new orders growth to a ten-month high. Any positive impact on the PMI is likely to be short-lived, however, as any gains in the near-term are reversed later in 2019 when safety stocks are eroded or become obsolete.
“The trend in production volumes remained lacklustre despite the safety stock-building, with the latest survey consistent with a mild decrease in the official measure of manufacturing output over the final quarter. Uncertainties regarding Brexit disruption on supply chains and the exchange rate are also weighing on business confidence. Although manufacturers forecast growth over the coming year, confidence remains at a low ebb. Manufacturing will therefore be entering 2019 on a less than ideal footing with Brexit uncertainty having intensified considerably.”
Eurozone PMI manufacturing was finalized at 51.4 in December, unrevised. It’s down from November’s 51.8 and hit the lowest since February 2016. Markit also noted that “fall in new work signalled for third month running” and “confidence about the future hits fresh six-year low”. Among the countries, Germany hit 33-month low at 51.5. Spain hit 28-month low at 51.5. France hit 27-month low at 49.7, in contraction. Italy, despite recovering to 2-month high at 49.2, remained in contraction.
Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“A disappointing December rounds off a year in which a manufacturing boom faded away to near stagnation.
“The weakness of the recent survey data in fact raises the possibility that the goods producing sector could even act as a drag on the overall economy in the fourth quarter, representing a marked contrast to the growth surge seen this time last year. The last three months of 2018 saw manufacturers report the worst quarterly performance in terms of production since the second quarter of 2013.
“Worryingly, current production levels were achieved only by firms eating into backlogs of orders received in prior months and a dearth of new orders means capacity will be cut back in coming months unless demand revives. December saw a third consecutive monthly drop in new orders.
“More encouragingly, some of the recent weakness could prove temporary, being the result of protests in France and the auto sector struggling to adjust to new emissions regulations. However, the undercurrent of weak demand and growing risk aversion evident across the surveys suggests that any rebound could prove modest at best, with Brexit representing a particularly worrying unknown for the outlook.”
Following the selloff in Asian stock markets, major European indices open broadly lower and suffer heavy selling. Right now, FTSE is down -1.93%, DAX is down -1.45% and CAC is down -2.55%.
In particular, we’d like to point out that German 10 year bund yield tumbles sharply. It’s current down -0.055 at 0.188. It actually hit as low as 0.181 in initial trading, breach the one day spike low at 0.186 back in May 2018. And it hit the lowest level since April 2017.
In the currency markets, Yen remains the strongest one and is accelerating for now. Canadian Dollar and Dollar are the next. Australian Dollar is the weakest followed by Sterling and then Euro.
Here’s an update on our EUR/JPY short trade (sold at 127.80, stop at 127.70) as last updated here. EUR/JPY’s decline resumed after recovery was limited at 127.09 and reached as low as 125.16 so far. Near term development stays bearish with the prior recovery limited by falling 4 hour 55 EMA.
From the daily chart point of view, daily MACD stays negative and is trending down, indicating continuing downside momentum. So, overall, the bearishness remains in EUR/JPY and it should be targeting 124.08/89 key support zone.
Ideally, we should see further downside accelerate through 124.08. That should confirm that fall from 137.49 is itself a medium term down trend rather than a correction. And in that case, the cross should target 61.8% retracement of 109.03 to 137.49 at 119.90 and possibly below.
However, loss of momentum ahead would probably keep 124.08 intact to bring rebound. The momentum of the current down move will be closely watched.
We’ll hold short and lower the stop to 127.10, slightly above 127.09 resistance. Target is put at 120.00 first, slightly above 119.90 fibonacci level. But we’ll see the reaction from 124.08 to decide whether to exit earlier.
The Caixin China PMI manufacturing dropped to 49.7 in December, down from 50.2 and missed expectation of 50.3. That’s also the first contractionary reading since May 2017.
Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group, noted in the release that “external demand remained subdued due to the trade frictions between China and the U.S., while domestic demand weakened more notably”. And, “it is looking increasingly likely that the Chinese economy may come under greater downward pressure.”
The partial US government shutdown is now in its second week. Democrats, who will take control over House with 36-seat majority, plan to vote on a two-part package on Thursday, intending to break the deadlock. One part of the package include a bundle of six measures worth USD 265B for funding non homeland security agencies through September 30. The second part include funding for the Department of Homeland Security through February 8, and provide $1.3 billion for border fencing and $300 million for other border security items including technology and cameras. But there won’t be funding for the border wall that Trump demanded and shut down the government for.
Democrat leaders Nancy Pelosi and Chuck Schumer said in a joint statement that “While President Trump drags the nation into Week Two of the Trump Shutdown and sits in the White House and tweets, without offering any plan that can pass both chambers of Congress, Democrats are taking action to lead our country out of this mess.”
The fate of the Democrats’ package is rather uncertain in the Republican controlled Senate. spokesman for Senate Republican leader Mitch McConnell already said “It’s simple: The Senate is not going to send something to the president that he won’t sign.”
But Trump himself hinted that he might want to make a deal.
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Fed Kaplan: My base case is no action on interest rate in 2019 at all
Dallas Fed President Robert Kaplan said in a Bloomberg interview that he favored pausing the rate hike cycle until the uncertainties are cleared. He pointed to concerns over global growth, weakness in interest-sensitive industries and tighter financial conditions and warned “there’s three big issues that I see reflected in the markets that are consistent with what I’m seeing in the economy and discussions with contacts.”
He added that “I think those three issues — I’m sure — are affecting the markets, but they’re also affecting my thinking about monetary policy. It’s going to take some time so see the depth and breadth of those three issues.”
Thus he said, “my own view is we should not take any further action on interest rates until these issues are resolved, for better, for worse.” And, “I would be an advocate of taking no action and — for example — in the first couple of quarters this year, if you asked me my base case, my base case would be take no action at all.”