Swiss KOF Economic Barometer rose to 97.1 in July, up fro 93.8 and beat expectation of 93.3. KOF said: “Slightly more favourable signals than before are coming from manufacturing, other services, accommodation and food service activities as well as financial and insurance services. Construction is contributing slightly to the positive development. Consumer prospects are practically unchanged. On the other hand, the indicators for demand from abroad have a dampening effect.”
German Gfk consumer confidence for August dropped -0.1 to 9.7, matched expectations. Economic expectations dropped from 2.4 to -3.7. Income expectations improved from 45.5 to 50.8. Propensity to buy dropped from 53.7 to 46.3. Gfk noted that “It is apparent that the global economic slowdown, trade conflict and Brexit discussions are having an ever increasing impact on consumer confidence. Thus, economic expectations continue to decline and the propensity to buy has dropped off slightly as well.”
Economic expectation fell below its long-standing average of 0 for the first time since March 2016. It’s also the lowest reading since November 2015. Gfk said: “The trade war with the US, ongoing Brexit discussions and the global economic slowdown continue to drive fears of a recession. Employees in export-driven sectors in particular, such as the automotive industry and its suppliers, are most immediately affected by this. In addition, reports of downsizing add to employees’ fears of losing their jobs.”
French GDP grew 0.2% qoq in Q2, missed expectation of 0.3% qoq, slowed from Q1’s 0.3% qoq. Looking at the details, household consumption expenditure slowed from 0.4% qoq to 0.2% qoq. But total gross fixed capital formation jumped from 0.5% qoq to 0.9% qoq. Final domestic demand excluding inventories accelerated slightly. Imports were stable, slowed from 1.1% qoq to 0.1% qoq. Export growth was unchanged at 0.2% qoq. Foreign trade balance didn’t contribute to GDP growth, at 0.0%.
Sterling’s selloff continues today as markets are adding their bets to no deal Brexit. UK Prime Minister Boris Johnson is insisting that he could get a new Brexit deal with the EU. He said in televised comments that “we’re very confident, with goodwill on both sides, two mature political entities — the U.K. and EU — can get this done”.
And, “it’s responsible for any government to prepare for a no deal if we absolutely have to. That’s the message I’ve been getting across to our European friends. I’m very confident we’ll get there.” He also insisted that the Irish backstop is “dead” along with former PM Theresa May’s withdrawal agreement.
Johnson also emphasized that “Once we leave the EU on Oct. 31, we will have a historic opportunity to introduce new schemes to support farming – and we will make sure that farmers gets a better deal”. And, “Brexit presents enormous opportunities for our country, and it’s time we looked to the future with pride and optimism.”
At this point, there is no sign of EU shifting its position yet. That is, the negotiation for the Brexit Withdrawal Agreement was closed and won’t be re-opened. European Commission also indicated that while an orderly withdrawal is in everyone’s interest, the bloc is well-prepared for a no-deal Brexit.
Japan industrial production dropped sharply by -3.6% mom in June, much worst than expectation of -1.8% mom. That’s also the largest decline since January 2018. Shipments dropped -3.3% mom while inventories rose 0.3% mom.
A Ministry of Economy, Trade and Industry said in the press briefing that the decline was a reversal of the unexpectedly strong production in the preceding months.” He added, “we don’t believe there is a downward trend, though there isn’t an upward trend either”. Production just “fluctuates indecisively”.
Also from Japan, unemployment rate improved to 2.3% in June, down from 2.4%. Number of people in work hit record 67.5m. Ministry of Internal Affairs and Communications said “the jobless rate has been firm and moving narrowly at that level”.
BoJ left monetary policy unchanged today as widely expected. Under the yield curve control framework, short-term policy interest rate is held at -0.10%. 10-year JGB yield will be held at around zero percent with JGB purchases. Monetary base will increase at an annual pace of around JPY 80T. The decisions are made with 7-2 vote with Y. Harada and G. Kataoka dissented again.
In the outlook for economic activity and prices report, BoJ said the economy is “likely to continue on an expanding trend throughout the projection period” through fiscal 2021. Exports are projected to “show some weakness” for the time being, but are still expected to be on a “moderate increasing trend”. Domestic demand would “follow an uptrend” against the background of highly accommodative financial conditions and government spending.
Regarding inflation, all item CPI “continued to show relatively weak developments”. But “further price rises are likely”. Year-on-year rate of change in CPI is “likely to increase gradually toward 2 percent”. And both growth and CPI projections are “more or less unchanged” from previous projections.
Risks to economic activity are “skewed to the downside”, particularly regarding overseas developments. Risks to prices are also “skewed to the downside”. The momentum towards 2% inflation target is “maintained” but is “not yet sufficiently firm”.
Just ahead of FOMC rate decision on Wednesday, Trump continue to pile political pressure on Fed policymakers. In a couple of tweets, he firstly complained that “the E.U. and China will further lower interest rates and pump money into their systems, making it much easier for their manufacturers to sell product. But “in the meantime, and with very low inflation, our Fed does nothing – and probably will do very little by comparison. Too bad!”
Additionally, he said Fed raised interest rate “way too early and way too much” and “their quantitative tightening was another big mistake”. And, “the Fed has made all of the wrong moves. A small rate cut is not enough”.
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SNB site deposit rose by CHF 1.7B to a record CHF 581.2B last week. That’s also the biggest weekly rise since May 2017. The large jump argued that the central bank could have been intervening in the currency market last week.
ECB’s dovish policy was the trigger in the surge in Franc’s exchange rate versus Euro. At the same time, ECB is widely expected to finally announce an easing package with a rate cut in September.
For now, there is no sign that SNB would set another floor for EUR/CHF yet. And it’s believed that SNB is looking at the speed of the exchange rate move, rather than a specific figure.
UK Prime Minister Boris Johnson’s spokesman said today that John is ready for Brexit talks, only when EU is willing to change its position.
The spokesman said “the PM has been setting out to European leaders the position … that the Withdrawal Agreement with the backstop has not been able to pass parliament on the three occasions it was put in front of parliament. Therefore it needs to change”.
And, “the prime minister would be happy to sit down when that position changes. But he is making it clear to everybody he speaks to that that needs to happen.”
UK Foreign Minister Dominic Raab warned today that the “undemocratic” Irish backstop needs to be removed from the Brexit Withdrawal Agreement. He said “we want a good deal with EU partners and friends but that must involve the abolition of the undemocratic backstop.” He added, what Prime Minister Boris Johnson “has instructed and the cabinet has accepted” is a turbo-charging of no-deal Brexit preparations.”
Raab also said UK will be in a better position to negotiate a “good deal” with EU if it crashes out of the bloc before the end of October. The no-deal scenario could provide more leverage for a free trade agreement and resolve long-standing issues. He said “The prospect of reverting and getting a good deal will be easier after we have left if that is the case. The reason being we do as an independent third country and less subject to effectively the demands of the EU as we are now.”
Japan’s Cabinet Office projects the economy to grow just 0.9% in the fiscal year ending March 2020. That’s a notable downgrade from prior forecast of 1.3%. For the following year, growth is forecast to pick up to 1.2%, though.
For the current fiscal year, exports growth is forecast to slow to just 0.5%, sharply lower than January’s projection of 3.0%. That would be the weakest growth since fiscal 2012. On the other hand, robust corporate investment and private consumption should help offset some of the drag from exports.
On prices, the Cabinet office forecasts over CPI to be at 0.7% in this fiscal yet, and 0.8% next. Both figures are well below BoJ’s 2% target.
Separately, Economy Minister Toshimitsu Motegi said he would hold ministerial-level talks with US Trade Representative Robert Lighthizer on August 1-2 in Washington for trade negotiations.
The Confederation of British Industry warned in a report, published on Sunday, that neither UK nor EU are ready for no deal Brexit, as contingency planning study finds. The report criticized that while US has made many proposals “many of its plans delay negative impacts but do not remove them”. EU has “taken fewer steps to reduce the damage of no deal”. And, “very few joint actions to mitigate no deal have taken place, creating a high number of areas where continued UK-EU negotiations are inevitable”. Business efforts have been “hampered by unclear advice, tough timelines, cost and complexity”.
Josh Hardie, Deputy-Director General, said: “. Both sides are underprepared, so it’s in all our interests. It cannot be beyond the wit of the continent’s greatest negotiators to find a way through and agree a deal… It’s not just about queues at ports; the invisible impact of severing services trade overnight would harm firms across the country… Preparing for no deal is devilishly difficult. But it is right to prepare.”
US-China trade negotiations are set to resume in Shanghai on Tuesday but expectations are rather low. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will meet China’s team again for a two day meeting. Trump indicated on Friday that China may want to drag on till after 2020 election in the US. He told reported at that White House China would probably said “let’s wait and see if one of these people who gives the United States away, let’s see if one of them could get elected.”
White House economic adviser Larry Kudlow also said on Friday he “wouldn’t expect any grand deal” at this week’s meeting. Instead, the team would just try to “reset the stage”. Though, he added, “we strongly expect the Chinese to follow through (on) goodwill and just helping the trade balance with large-scale purchases of US agriculture products and services.”
Separately, China’s state media CCTV said on Sunday, citing the National Development and Reform Commission and Ministry of Commerce, that the country has already made enquiries to US suppliers for soybeans, cotton, pork, sorghum and other agricultural products since July 19. CCTV reported “as long as the American agricultural products are reasonably priced and of good quality, it is expected that there will be new purchase.” though, it also urged that US should “take concrete measures to implement its relevant commitments and create favorable conditions for bilateral economic and trade cooperation”.
US GDP grew 2.1% annualized in Q2, better than expectation of 1.8%. GDP price index rose 2.4% qoq, below expectation of 4.0% qoq.
There were contributions from GDP growth from personal consumption expenditures (PCE), federal government spending, and state and local government spending. They were partly offset by negative contributions from private inventory investment, exports, nonresidential fixed investment and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
Deceleration in growth reflected downturns in inventory investment, exports, and nonresidential fixed investment. These downturns were partly offset by accelerations in PCE and federal government spending.
According to Q3 ECB Survey of Professional Forecasters, average forecast for HICP inflation is 1.3% for 2019, 1.4% for 2020 and 1.5% for 2021. There were downward revisions of -0.1% for each of those years comparing with Q2 forecast. Average long-term inflation expectation was lowered from 1.8% to 1.7%.
Growth is projected to average 1.2% in 2019, 1.3% in 2020 and 1.4% in 2021. There was no change in expectation of 2019 and 2021. But 2020 figure was revised down by -0.1%. Average longer-term expectations for real GDP growth were unchanged at 1.4%.
UK Prime Minister Boris Johnson’s spokesman said Johnson spoke with French President Emmnauel Macron on Thursday night. Discussions moved on to Brexit that Johnson “will be setting out the same message which he delivered in the House of Commons”. That is, “the withdrawal agreement has been rejected three times by the House of Commons, it’s not going to pass, so that means reopening the withdrawal agreement and securing the abolition of the backstop.”
Referring to Johnson’s statements in House, Ireland’s Foreign Minister, Simon Coveney, said they are “very unhelpful” tot he Brexit process. Coveney said Johnson “seems to have made a deliberate decision to set Britain on a collision course with the European Union and with Ireland in relation to the Brexit negotiations.” And, “the approach that the British prime minister seems to now be taking is not going to be the basis of an agreement, and that’s worrying for everybody.”
Frenchs State Minister for European affairs Amelie de Montchalin said Macron will hold discussion with Johnson in the coming week and “What is still to negotiate is the future relationship… We have to create a working relationship and not get into games, gestures and provocations.”
Kyodo news reported that, as trade frictions intensified, Japan is going to remove South Korea from the white list of countries that gives the latter preferential treatment in trade. The announcement could be made as soon as on August 2, and change could take effect after 21 days.
Japan is reported to have cited “significantly undermined” trust between the two countries and “certain issues” with South Korea’s export controls and regulations. After the move, products and technology that could be diverted to military use would need to obtain approval from Ministry of Economy before exporting to South Korea.
Asked about the plan, Chief Cabinet Secretary Yoshihide Suga told a news conference that nothing had been decided on the time frame. There are currently 27 countries on Japan’s white list including the United States, Britain, Germany, Australia, New Zealand and Argentina.
China’s Assistance Commerce Minister Ren Hongbin said that US companies are keen to participate in the second China International Import Expo (CIIE), to be held on Nov. 5-10 in Shanghai. He expects the number of US participants to exceed last year’s. He added, “for the United States, even through there are some bilateral trade frictions, it cannot stop U.S. firms from attaching importance to the Chinese market and their great enthusiasm for the Chinese market.”
Vice Commerce Minister Wang Bingnan also said China will further lower import tariffs and open up its market to foreign firms. He added, “the purpose of our holding of the import expo is not simply expanding imports, but putting more emphasis on improving import structures while keeping export growth steady.”
Separately, US trade delegation, led by Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, will arrive in Shanghai next week, for the first face-to-face meeting since Trump-Xi summit in Japan.
Euro initially dives after ECB leaves door open for rate cut in the statement. But it quickly recovers as President Mario Draghi is not as dovish in the press conference. Most importantly, there was no discussion on rate cuts today. Additionally, no unanimity was achieved among policy makers regarding the next move, just “convergence” of views. The comments argue that there is a lack of urgency for any action. And, September’s decision could be live, depending on upcoming economic projections.
On the economy, Draghi said slower growth outlook “mainly reflects the ongoing weakness in international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector.”On the other hand, “activity levels in the services and construction sectors are resilient and the labor market is still improving.”
Nevertheless, risks “remain tilted to the downside, reflecting the prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism, and vulnerabilities in emerging markets.” Incoming data continue to point to “somewhat slower growth” in Q2 and Q3.
“Inflationary pressures remain muted and indicators of inflation expectations have declined.” But, over the medium term,”underlying inflation is expected to increase, supported by our monetary policy measures, the ongoing economic expansion, and stronger wage growth.”
EUR/USD could have defended 1.1107 low after brief breach to 1.1101 resistance. Stronger rebound should be seen back to 1.1193/1.1282 resistance zone.
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BoJ Kuroda: We went a step forward to additional policy easing
In the post policy meeting, BoJ Governor Haruhiko Kuroda indicated that the central bank has already taken a step forward to further monetary easing. And, the tools include cutting short-, long-term interest rates, increasing asset buying or accelerate the pace of base money expansion.
Kuroda said, “today, we went a step forward by saying we’ll take additional easing steps without hesitation if there is a risk the economy will lose momentum for hitting our price target”. And, “previously, we said only that we will consider acting if the economy loses momentum for hitting our price goal.”
Nevertheless, Kuroda also noted “I don’t think Japan has lost momentum to hit the BOJ’s price goal, or that there is an imminent risk of this happening.”. While, policymakers need to pay attention to downside risks, for now, “we expect the economy to continue expanding moderately, and that it is sustaining momentum for hitting our price goal.”