European Commission Vice President Frans Timmermans reiterated that “The United Kingdom reached an agreement with the European Union and the European Union will stick to that agreement”. And, “this is the best deal possible”.
He added, “we will hear what the new prime minister has to say when he comes to Brussels.” “A no-deal Brexit, a hard Brexit, would be a tragedy – for all sides, not just for the United Kingdom,” Timmermans said. “We are all going to suffer if that happens.”
Boris Johnson wins the six-week Conservative leadership race and is set to become the next UK Prime Minister. Johnson defeated his rival Foreign Minister Jeremy Hunt with 92153 to 46656 votes of party members. It’s seen by some as a spectacular victory of the public face of the Brexit campaign. Current Prime Minister Theresa May will leave office tomorrow after meeting Queen Elizabeth, who’s expected to formally appoint Johnson afterwards.
Brexit, due date on October 31, is the first thing for Johnson to handle. He said the three priorities are to deliver Brexit, unite the country and defeat Jeremy Corbyn. And he pledged to “get Brexit done”.
EU chief Brexit negotiator Michel Barnier said EU looks forward to “working constructively with Johnson when he takes office, to facilitate the ratification of the Withdrawal Agreement and achieve an orderly Brexit. Also, EU is ready also to rework the agreed Declaration on a new partnership in line with EUCO guidelines.
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According to the monthly economic report by Japan’s Cabinet Office, the economy is “recovering at a moderate pace,” but there was “weakness continuing mainly in exports.” Asia bound exports were particularly poor due to China’s slowdown and weaker demand for high-tech products. .
Nevertheless, the reference to weakness in “industrial production” in the June report was dropped. Instead, production of “transport goods continued to increase, while the decline in machinery production could be seen easing a little,”
Businesses show “cautiousness further” but investment is still “on the increase at a moderate pace”. Also, employment situation is “improving steadily” while private consumption is “picking up”.
Comments of BoE hawk Michael Saunders suggest that he won’t be pushing for rate hike for now. He said in a Bloomberg interview that “the economy right now is clearly not overheating — the underlying pace of growth, stripping out all of the funny effects, inventories, car shutdowns and so forth, is weak and below trend”. Thus, “the link from the forecast to my actual vote was quite loose.”
He added, the most recent “forecast of excess demand and above-target inflation didn’t at that point prompt me to vote for higher rates”. And, “what you get then is a tension, a disparity, between the forecasts and the actual policy vote.”
Regarding policy reaction to Brexit on October 31, he reiterated the central bank’s stance that response wouldn’t be automatic. “It’s hard to know how it would play out with any certainty,” he said. “I wouldn’t want to give a strong steer now as to which way policy would go.” Nevertheless, no matter what the BoE does, “monetary policy could not prevent a no-deal Brexit being painful for the economy, for businesses and for households.”
RBA Assistant Governor Kent said in the Q&A of a speech that the exchange rate transmission from interest rate cuts have been “broadly working as you would expect.” Though, the Australian Dollar exchange rate was supported by a “welcome” increase in commodity prices, as well as dovish turn in other major central banks. That came even after the central bank’s back-to-back rate cuts in June and July.
Kent emphasized that “doesn’t mean the reductions in the cash rate here have not had their effect on the exchange rate in the normal way, it’s just that there have been other forces.” And, “you could say well, absent reductions in the cash rate, the Aussie dollar might have been higher.”
On monetary policy, he said RBA is “a long way away from something like” quantitative easing. He noted elsewhere, QE was started “in the depths of the financial crisis when the credit system was quite impaired”. But “that’s not the sort of thing I think people have at the back of their minds here.” And monetary policies should be tailored to “your own economic circumstances”.
In Japan, Kyodo news reported today that Chief Cabinet Secretary Yoshihide Suga and Finance Minister Taro Aso will likely retain their posts in a cabinet reshuffle . Prime Minister Shinzo Abe said he has noted decided on the cabinet yet, after winning a solid majority in the upper house election on Sunday. The new cabinet will likely be announced in September.
Separately, Aso said after a cabinet meeting that the election gave the ruling coalition a stable political footing. Hence, he said, “I believe we won public trust for the sales tax hike”.
This somewhat echoed Abe’s comment yesterday that based on a stable political basis, the Abe cabinet will take more aggressive and bold economic measures than ever.”
A Hong Kong newspaper SCMP reported today that US trade delegation will likely visit China next week, for the first face-to-face meeting since G20. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will be on the US side as expected. Vice Premier Liu He will lead the Chinese team.
According to unnamed source, the initial arrangements for the meeting would include exemptions to 110 Chinese products, including medical equipment and key electronic components, from import tariffs. on the other hand, several Chinese companies would finally start buying American agricultural products.
European Commission spokesperson Natasha Bertaud said that EU is ready to work with “any new prime minister of the United Kingdom”. Boris Johnson, who’s favorite to take over from Theresa May, has repeatedly said he’s prepared for a no-deal Brexit.
Also, the commission reiterated that it’s ready to “engage with the member states that would be most affected” by no-deal Brexit. The measures include programs for emergency support. Additionally, contingency plans include a scenario in which “the UK also fails to pay what is envisaged” under the current EU budget.
According to the latest “prospect for the UK economy”, NIESR said there is around a one-in-four chance that the country is already in a “technical recession”. The outlook beyond the October 31 Brexit date is “very murky indeed” with possibility of a “severe downturn” in case of a disorderly no-deal Brexit.
The think thank also assign a 40% chance of no-deal Brexit, versus 60% for deal/delay. Even if a no-deal Brexit is avoided, the economy is forecast to growth at around only 1% in 2019 and 2020, as “uncertainty continues to hold back investment and productivity growth remains weak”.
According to a Reuters’ poll, 39 of 40 surveyed economists surveyed over the past week expect RBA to keep interest rate unchanged at 1.00% at the August 6 meeting.
By the end of the year, 13 of 40 expect RBA to be on hold through this year. 25 expect another rate cut to 0.75% by year-end. Only two banks, Standard Chartered and Goldman Sachs, predict two cuts to 0.50%.
RBA delivered two back-to-back cuts in June and July to 1.00%. The central bank’s research indicates such rate cut would boost GDP growth by 0.25-0.40% over two years. However, inflation would be lifted by 0.1% only.
Japanese Prime Minister Shinzo Abe’s ruling coalition kept a solid majority in the upper house election. He said today that “based on a stable political basis, the Abe cabinet will take more aggressive and bold economic measures than ever.”
Abe said “uncertainty remains over the global economic outlook such as trade frictions and Britain’s exit from the European Union… We’ll respond to downside risks without hesitation and take flexible and all possible steps.”
The Japanese government has designated JPY 2T in stimulus measures to offset the impact of the planned sales tax hike, from 8% to 10% in October. Abe also noted “we will underpin domestic consumption which accounts for the bulk of the economy by taking sufficient measures.”
Trump continued his pressure on Fed, ahead on July 30-31 FOMC meeting. In his tweet, he blamed that “Because of the faulty thought process we have going for us at the Federal Reserve, we pay much higher interest rates than countries that are no match for us economically.”
Also, he praised New York Fed President John Williams’ as 100% correct that “Fed raised far too fast and too early”. Trump urged Fed to “stop with the crazy quantitative tightening”. And “This is our chance to build unparalleled wealth and success for the U.S., GROWTH, which would greatly reduce % debt. Don’t blow it!”
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Canada retail sales dropped -0.1% mom in May, much worse than expectation of 0.3% mom. Ex-auto sales dropped -0.3% mom, also much worse than expectation of 0.4% mom. Sales were down in 4 of 11 subsectors, representing 39% of retail trade. Sales also dropped in eight provinces.
USD/CAD rebounds strongly after the Canadian data disappointment. Though, upside is limited below 1.3143 resistance. There is no confirmation of short term bottoming yet and another fall remains mildly in favor.
According to a Reuters July 15-18 poll, the median forecasts of no-deal Brexit happening was 30%, up from 25% in June and 15% in May. That’s also the highest number since October 2017. Analysts perceive that Boris Johnson is likely to win the Conservative leadership race and get the job of UK Prime Minister. And his rhetoric during the campaign suggests that no-deal Brexit is more than than before.
According to the same poll, the chance of recession was 30% in the coming year and 35% over the new two years, up from June’s 25% and 30%. Also, expectation of BoE rate hike also receded and bank rate is forecast to stay at 0.75% until 2021 at the earliest. Only 27 to 76 economists expected a hike before the end of 2020, down from 36 of 69. 9 of 76 are expecting a cut be end-2020, up from 5 of 69 in June.
Jeremy Hunt and Boris Johnson are the two remaining candidates in the leadership race. Winners will be selected by a postal ballot of around 160k Conservative members. Voting will close on July 22 and new leader would be announced on July 23.
Gold finally broken out of consolidation and hit as high as 1452.94. 100% projection of 1160.17 to 1346.71 from 1266.26 at 1452.80 is breached but there is no sign of topping yet.
Near term outlook will stay bullish as long as 1414.62 minor support holds. Firm break of 1452.80 will target 161.8% projection at 1568.08. Though, break of 1414.62 will bring consolidations again.
The 1568.08. projection level is also in proximity to 61.8% retracement of 1920.70 to 1046.37 at 1586.70. Thus, strong resistance will likely be seen there to limit upside, at least on first attempt.
Japan CPI core (ex-fresh food) slowed to 0.6% yoy in June, down from 0.8% yoy and matched expectations. All items CPI was unchanged at 0.7% yoy, while CPI core-core (ex-fresh food and energy) was also unchanged at 0.5% yoy.
CPI core was the lowest reading since July 2017. No turnaround is expected in the near term. Instead, CPI core could be further dragged down by policy related factors, including mobile phone charges and education costs.
The dim inflation outlook highlights the pressure for BoJ to ramp up monetary stimulus. In particular, both Fed and ECB are expected to loosen up policy again later this week.
Fed Vice Chair Richard Clarida also reinforced New York Fed President John Williams’ dovish comments. Clarida told Fox Business Network that “you don’t need to wait until things get so bad to have a dramatic series of rate cuts.” And, “you don’t want to wait until data turns decisively if you can afford to.”
Clarida reiterated that the US economy is “in a good place”. But “we’ve had mixed data” and “disinflationary pressures, if anything, are more intense than I thought six weeks ago.” He added, “we need to make a decision based on where we think the economy may be heading and, importantly, where the risks to the economy are lined up.”
Dollar tumbled broadly as markets took New York Fed President John William’s speech as indication of aggressive rate cut in the upcoming FOMC meeting on July 31. Fed fund futures now indicate 46.2% chance of -50bps cut, comparing to 34.3% a day ago and 19.9% a week ago. Overall, markets are still pricing 100% chance of easing then.
Williams said in a speech “Living Life Near the ZLB” (Zero Lower Bound), that when interest rates are in the vicinity of the ZLB, policymakers shouldn’t “keep your powder dry”. That is, they should “move more quickly to add monetary stimulus” to “vaccinate against further ills”.
Also, he said “it’s better to take preventative measures than to wait for disaster to unfold”. And, “when you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”
Later, in an unusual step, a New York Fed spokesperson “clarified” Williams’ comments. She said, “this was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting.”
In a CNN interview, St. Louis Fed President James Bullard said trade uncertainty used to be an issue that was on the “back burner”. However, “the president moved it to the front burner”. And now, “trade uncertainty is high and I don’t see that declining anytime soon”.
Bullard added that the economy is “slowing down” and warned “what if it slows more than we think, possibly because of a trade war?”. A rate cut would “provide a bit of insurance against that”.
Nevertheless, regarding a 50bps cut, Bullard said “I don’t think we need to go that far” adding that “the critical thing here is to get inflation and inflation expectations better centered.”
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BoE Haldane: Strong case to hold rates until road becomes clearer
BoE Chief Economist Chief Haldane said today that business investment was “strikingly and significantly subdued” ahead of Brexit. And the economy stalled in the Q2. Though he added, “my personal view though is that I would be very cautious about considering a monetary policy loosening, barring some sharp economic downturn.”
Additionally, “with the economic road ahead potentially forking, the case for holding rates until the road becomes clearer is strong.”
On Brexit, Haldane warned “if a ‘no deal’ were to lead to a sharp fall in sterling and a sharp rise in inflation expectations, it is not clear the MPC could cut interest rates, as the market expects, if it was to meet its inflation mandate.”