ECB Governing Council Member Francois Villeroy de Galhau said as inflation falls short of the central bank’s target, monetary policy must be kept “active and accommodative”.
Also, “if the current slowdown becomes a real slamming of the brakes, we can do more than we are doing currently”. However, he also warned that “they can temporarily attenuate the consequences of a weaker global economy, but they cannot take care of the cause.” De Galhau referred to uncertainty created by trade tensions.
Gold failed to sustain above 1346.71 and retreated from 1348.22. But downside was contained by 1319.98 support and gold recovered. Near term bullish outlook is maintained. That is, correction from 1346.7 has completed at 1266.26 already. And rise from there is resuming whole rally from 1160.17. Break of 1348.22 will target 61.8% projection of 1160.17 to 1346.71 from 1266.26 at 1381.54. However, break of 1319.98 support, will probably extend the consolidation from 1346.71 with another decline.
Also, in the bigger picture, 1381.54 is very close to long term fibonacci resistance of 38.2% retracement of 1920.70 (2011 high) to 1046.37 (2015 low) at 1380.36. Prior strong support from 55 week EMA is taken as a rather bullish signal. That raises the chance that gold would finally overcome this fib resistance after multiple attempts over the last few years.
Australia Westpac Consumer Confidence dropped -0.6 to 100.7 in June. Westpac noted that it’s a “disappointing result” given the RBA’s rate cut on June 4. Also, the results suggests “deepening concerns about the economy have outweighed the initial boost from lower rates. ” Looking at some details, economic expectations for the next 12 months dropped -4.7 to slightly pessimistic territory at 99.3. Though, House Price Expectations Index rose notably by 22.7 to 109.7, in clear response to the rate cut.
Westpac also said “initial sentiment reaction to the June rate cut will be somewhat disappointing for the Bank”. After disappointing Q1 GDP, RBA will need to “make a further downgrade to its growth forecasts”. And “the case for further policy easing remains clear”. Westpac expects another 25bps cut in August.
AUD/JPY is staying in consolidations above 74.96 temporary low for looks vulnerable For now, further decline is expected as long as 76.39 minor resistance holds. Break of 74.96 will resume the fall form 80.71.
Trump said he’s now holding up the deal with China and he’s only interested if China goes back to “that deal” before negotiations collapsed. He said, “it’s me right now that’s holding up the deal… We had a deal with China and unless they go back to that deal I have no interest.”
While Trump might meet Chinese President Xi at G20 in Osaka later this month, expectations are generally low. White House Acting Chief of Staff Mick Mulvaney it’s an opportunity to get talks “hard-wired again.” However, he added, “I do not see the president’s meeting as a deal closer.”
US Commerce Secretary Wilbur Ross also said “At the G20, at most it will be … some sort of agreement on a path forward, but certainly it’s not going to be a definite agreement. Though he added, “Eventually, this will end in negotiation. Even shooting wars end in negotiations.”
After being pressured for most of the day, Yen is trying to make a come back as rally in US stocks lost steam. But for now, Sterling remains the strongest for today as lifted by stronger than expected wage data. Resilient Euro is following and then Dollar.
But for the greenback, tomorrow’s CPI will likely be the more important event. On the other hand, New Zealand dollar is the weakest one for now, followed by Swiss Franc and then Canadian.
DOW opened higher earlier today and hit as high as 26248.67. But just like yesterday, it’s failing to sustain momentum and turns red for now. Yesterday’s low was also breached. The strong rally from last week’s low of 24680.57 looks stretched and we’d expect a correction soon, possibly back to 55 day EMA (now at 25762).
In May, US PPI rose 0.1% mom 1.8% yoy versus expectation of 0.1% mom, 1.9% yoy. PPI core rose 0.2% mom, 2.3% yoy versus expectation of 0.2% mom, 2.3% yoy. Full release here.
USD/CHF rises mildly after the release. But there is no indication of bullish reversal yet.
Risk appetite remains generally firm in the global markets today. Asian markets closed broadly higher and strength continues in European session. Mixed economic data from Europe is generally ignored by stock investors. Sentix warned that Eurozone is on threshold of recession as Investor Confidence deteriorated in to -3.3 in June. On the other hand, UK unemployment rate stayed at 44-year low but wage growth accelerated in April.
In the currency markets, Sterling is lifted by wage growth data but Canadian Dollar is even stronger. After all, sluggishness in UK growth could eventually drags down wage growth if Brexit uncertainty is no resolved swiftly. Dollar is following as the third strongest, awaiting PPI. Yen and Swiss Franc are soft on risk appetite, but New Zealand and Australian Dollar are also weak.
In other markets, currently:
In Europe:
Earlier in Asia:
BoE Deputy Governor Ben Broadbent reiterated that Brexit is the major risk to growth in inflation outlook in a Treasury Select Committee hearing. He noted: “The outlook for both growth and inflation will depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the EU and the UK; whether the transition to them is abrupt or smooth; how households, businesses and financial markets respond; and the balance of these effects on demand, supply and the exchange rate.”
Broadbent also pointed out the May Inflation Report was conditioned to market path of Bank Rate rising only 25bps over the three-year forecast horizon. But “were the economy to develop in line with our projection, and taking as given other asset prices in the forecast, interest rates would probably have to rise by a little more than what was in the curve at the time of the forecast.”
Policymaker Michael Saunders warned “no-deal Brexit would probably have a significant adverse effect on the UK’s long term growth prospects, because of reduced openness to international trade in both goods and services, and the resultant deterioration in the attractiveness of the UK as a global business location.”
Saunders also noted “The major external risk is that the ongoing trade tensions could escalate further, with successive rounds of retaliation, hence undermining business confidence and growth on a wide scale. The UK, as a highly globalized economy, would suffer through various channels including effects on exports, investment and asset prices.”
European Commission reiterates its stance that there will be renegotiation of the Brexit deal even with a new UK Prime Minister. The Commission’s spokesman said today, “Everybody knows what is on the table. What is on the table has been approved by all member states and the election of a new prime minister will not change the parameters.”
The stance is echoed by both Germany and France. Germany’s Europe Minister Michael Roth said “I see no willingness to restart negotiations from the beginning. The candidates would do well to bear that in mind in the course of their internal party campaigns.” France’s state secretary for European affairs Amélie de Montchalin said “We consider it is up to Britain to decide how it wants to proceed. The exit agreement was not negotiated against the British; negotiators on both sides tried, painstakingly, to find the best solution for all concerned.” Also, without a “new political line” in the UK or a second referendum, Britain must expect to leave the bloc on 31 October.
ECB Governing Council member Olli Rehn said “in case of a further weakening of economic activity and a materialization of adverse contingencies, the Governing Council is determined to act and stands ready to adjust all of its instruments, as appropriate”.
To be more specific, “the Governing Council may, should economic developments so require, strengthen its forward guidance and its linkage to the achievement of the price stability objective, lower the monetary policy rates and introduce possible mitigating measures, and/or relaunch net purchases under the securities purchase program.
Eurozone Sentix Investor Confidence dropped to -3.3 in June, down from 5.3 and missed expectation of 2.5. Current Situation Index dropped from 11.0 to 6.0. Expectations index dropped from -0.3 to -12.3.
Sentix noted that “renewed escalation in the US-China trade dispute is also having a considerable impact on the Euro zone economy”. Also, it warned “the Euroland economy is once again on the threshold of recession”. Sentix also complained that “more than ever, the economic forecast becomes a short-winded Twitter analysis.”
The Overall Investor Confidence Index for Germany tumbled from 7.9 to -0.7, lowest since March 2010. Current situation Index dropped from 18.3 to 13.5. Expectations Index dropped from -2.0 to -14.0. Germany’s key industry, the automotive industry, is still “in a crisis of its own making”. And the “current government coalition’s inability to act does not contribute to stabilization.”
For US, Overall Investor Confidence Index dropped from 17.7 to 6.5, lowest since February 2016. Current Situation Index dropped from 43.3 to 31.8, lowest since October 2016. Expectations Index dropped from -5.3 to -16.0. Sentix warned that Trump could “underestimate how much he is currently threatening to shoot himself in the knee with his trade rhetoric”. The US economy is “currently experiencing a real emergency stop.”
UK unemployment rate remained unchanged at 3.8% in the three months to April. It’s the lowest reading since December 1974. Average weekly earnings, including bonus, rose 3.1% yoy, slowed from 3.3% yoy but beat expectation of 3.0% yoy. Average weekly earnings, excluding bonus, rose 3.4% yoy, accelerated from 3.3% yoy and beat expectation of 3.1% yoy.
GBP/JPY appears to be lifted mildly by the data. And the corrective from 136.55 will likely extend for a while before resuming larger decline.
The coalition meeting in Italy overnight appeared to have gone well. Prime Minister Giuseppe Conte’s office said that he will work with the two deputy Prime Ministers, League leader Matteo Salvini and 5-Star Movement head Luigi Di Maio, and Economy Minister Giovanni Tria to draw up a strategy to avoid EU’s Excessive Deficit Procedure.
Salvini said “All’s well, it was a good meeting. Our shared goal is to avoid the infringement while safeguarding economic growth, employment, as well as tax cuts.”
Di Maio said “It went well because we have set some goals: cutting taxes, approving the law on minimum wage and getting good results for Italians.”
China’s Foreign Ministry spokesman Geng Shuang refused to confirm if there will be a Trump-Xi meeting at G20 in Osaka later this month. Instead, he just reiterated that stance that “China does not want to fight a trade war, but we are not afraid of fighting a trade war”. Also, “if the United States only wants to escalate trade frictions, we will resolutely respond and fight to the end.”
Yesterday, Trump said he and Chinese President Xi are “scheduled to have a meeting” at the G20 summit in Osaka. He then threatened, “We’re expected to meet and if we do that’s fine, and if we don’t — look, from our standpoint the best deal we can have is 25% on $600 billion.”
Australian NAB Business Condition dropped again in May to 1, down from 3. Private sector continues to lose momentum. Goods distribution industries remain particularly weak, and manufacturing is not far behind. Business Confidence jumped from 0 to 7, in a post-election spike, as well as on RBA rate cut expectations. However, forward looking indicators suggest more weakness lies ahead.
Alan Oster, NAB Group Chief Economist noted “business confidence saw a sharp increase in the month following the Federal election and a confirmation from the RBA that rates would be cut in June. We think this will be a short-term spike given other forward-looking indicators saw further deterioration in the month. Forward orders declined further and in addition to being well below average are negative. Capacity utilisation has also pulled back in 2019 to date and is now a touch below average”.
“While confidence, at least at face value was a positive outcome, business conditions deteriorated further. Trading conditions and profits are particularly weak. The employment index which we are watching closely, partially reversed some of its decline last month, but is only around average”.
EUR/AUD breached 1.6262 resistance late yesterday as rise from 1.5683 is resuming. Next near term target is 61.8% projection of 1.5683 to 1.6262 from 1.6052 at 1.6410.
Trump said yesterday that he and Chinese President Xi are “scheduled to have a meeting” at the G20 summit in Osaka. He added, “We’re expected to meet and if we do that’s fine, and if we don’t — look, from our standpoint the best deal we can have is 25% on $600 billion.”
And, “if we don’t have a deal and don’t make a deal, we’ll be raising the tariffs, putting tariffs on more than — we only tax 35% to 40% of what they said then they had another 60% that’ll be taxed.”
He repeated, “China is going to make a deal because they’re going to have to make a deal”. Also, “at the same time it could be very well that we do something with respect to Huawei as part of our trade negotiation with China. China very much wants to make a deal. They want to make a deal much more than I do, but we’ll see what happens.”
Canadian Dollar displays broad based strength today, as the post job data rally extends. Recent economic data from Canada suggesting that underlying backdrop is improving. GDP growth will likely regain momentum ahead to make up the short falls in the Q1. For now, BoC looks the least likely among global central banks to ease monetary policy. Indeed, should global trade tensions improve, BoC could be ready for policy normalization again.
Technically, GBP/CAD’s break of 1.6093 support and today’s steep decline suggests resumption of fall from 1.7794. More importantly, the structure of the decline from 1.7794 affirms that it’s resuming that one from 1.8415 high too. A retest of 1.6594 low should be seen pretty soon. Break will target 100% projection of 1.8415 to 1.6594 from 1.7794 at 1.5973 in medium term. This will remain the favored case as long as 1.7135 near term resistance holds.
AUD/CAD’s steep decline last week also suggests rejection by falling 55 day EMA, which is a bearish signal for near term. Further fall should be seen to 0.9201 support next and break will target 0.9105 low.
Prior rejection by 55 week EMA also suggests medium term bearishness. However, over price actions don’t display clear downside impulsiveness. And AUD/CAD is relatively closely long term fibonacci level of 50% retracement from 0.7149 to 1.0784 at 0.8967. Hence, while a break of 0.9105 might be seen in medium term, 0.9 handle could contain downside.
Italian Deputy Prime Minister Matteo Salvini, leader of the League, expressed his confidence on an agreement with EU over the country’s excessive deficit. He comments came ahead of a coalition meeting with another deputy prime minister, Luigi Di Maio of the 5-Star Movement, and Prime Minister Giuseppe Conte.
Salvini said “The last thing we want to do is pick up a fight with Europe … The only thing I’m not ready to compromise on is the need to reduce Italy’s unemployment rate”. And, “I believe it is also in Europe’s interest to have an Italy that runs and not an Italy that strolls, so I’m convinced that among sensible people an accord can be found.”
In a CNBC Squawk Box telephone interview, Trump romanticized tariffs as a “beautiful thing” that countries with money should use. He said “People haven’t used tariffs, but tariffs are a beautiful thing when you are the piggy bank, when you have all the money. Everyone is trying to get our money”. He also touted boasted that “If we didn’t have tariffs we wouldn’t have made a deal with Mexico” on migration problem of the US.
He’s also confidence that the China trade deal is going to work out “Because of tariffs. Because right now China is getting absolutely decimated by countries that are leaving China, going to other countries, including our own.” China is “going to make a deal because they’re going to have to make a deal, ” Trump added.
Yet, he praised China’s system as “the head of the Fed in China is President Xi” and “He can do whatever he wants. They devalue.” They loosen”. He added, “They devalue their currency. They have for years. It’s put them at a tremendous advantage”. On the other hand, “we don’t have that advantage because we have a Fed that doesn’t lower interest rates.”
Trump said the Fed “certainly didn’t listen to me because they made a big mistake. They raised interest rates far too fast,” and he went on to chide them for hiking “the day before a bond issue goes out so we have to pay more money.” He certainly believed in a system that central banks work for the countries leader, instead of independently.
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ECB Draghi: CEE economies disproportionately affected by global trade headwinds
ECB President Mario Draghi said in a speech that “general slowdown is being felt in all economies in the region. The so called “central and eastern European (CEE) economies” model has become “vulnerable to shocks to international trade and financial conditions”.
He added that “global trade has faced headwinds in recent years as trade-restrictive measures have outpaced liberalizing measures.” CEE economies have been “disproportionately affected” by this for two reasons. Firstly, trade in CEE economies is “especially responsive cyclical developments”, with “trade elasticity” higher than the rest of EU. Secondly, they have “increasingly specialised in certain industries: which made the “more exposed to industry-specific shocks.”
Full speech here.