Japan PMI manufacturing dropped to 49.6, re-escalation of US-China trade frictions heightened concern

    Japan PMI manufacturing dropped to 49.6 in May, down from 50.2 and missed expectation of 50.5. The reading is also back in contraction territory. Markit noted that output and new orders decrease for fifth successive month. Businesses cast pessimistic outlook towards the coming year for the first time in six-and-a-half year.

    Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:

    “Following some tentative signs that the downturn in Japan’s manufacturing sector had softened in April, flash data for May revealed these were short-lived, as output and export orders fell at stronger rates. The re-escalation of US-China trade frictions has heightened concern among Japanese goods producers. Underlying growth weakness across much of Asia led to struggling exports, which fell at the sharpest rate in four months. Difficulties on the international front merely add to uncertainties domestically, with upcoming upper house elections in July, and the impending sales tax hike later this year. Subsequently, sentiment turned negative in May for the first time in six-and-a-half years.”

    Full release here.

    FOMC minutes show no urgency to cut interest rate

      Dollar is steady after minutes of May 1 FOMC meeting showed that Fed is in no rush to move interest rates, up or down. The minutes noted that “members observed that a patient approach…would likely remain appropriate for some time”. The tone regarding the economy was also upbeat, due to upside surprise in Q1 growth. GDP was forecast to “expand at a rate above the staff’s estimate of potential output growth in 2019 and 2020 and then slow to a pace below potential output growth in 2021”. Recent weak inflation was also viewed by many participants “as likely to be transitory.”

      However, firstly, there was increasing concerns over persistence of low inflation. “Several participants commented that if inflation did not show signs of moving up over coming quarters, there was a risk that inflation expectations could become anchored at levels below those consistent with the committee’s symmetric 2% objective.” Secondly, the meeting was held before current round of escalation in US-China trade war. It is possible that the Fed would turn more cautious over the economic outlook at the June meeting, when the members take into account the effects of recent re-escalation of US-China trade war.

      For now, comments from Fed officials are generally inline with the minutes. But as more data come in, upcoming rhetorics leading to June FOMC meeting would reveal if there would be a shift in the board.

      Suggested readings on FOMC minutes:

      Brexit crisis deepens as Leadsom resigns on second referendum

        Brexit crisis in UK deepened further after a key Cabinet Minister resigned in opposition to Prime Minister Theresa May’s inclusion of a second referendum in the new Brexit plan.

        Andrea Leadsom Leader of the House of Commons, said “I no longer believe that our approach will deliver on the referendum result”. And, “I do not believe that we will be a truly sovereign United Kingdom through the deal that is now proposed”.

        Leadsom went further and said “I have always maintained that a second referendum would be dangerously divisive and I do not support the government willingly facilitating such a concession.”

        May’s spokesman just praised Leadsom and expressed disappointment at her decision, but added: “The prime minister remains focused on delivering the Brexit people voted for.”

        There is practically no chance for May to get her Brexit deal through the Commons. The question now is who will take her place and lead Brexit after she steps down as promised. Sterling remains the weakest one for the week as markets are pricing in the chance of a pro-Brexit hardliner leading UK to a no-deal Brexit.

        WTI oil tumbles on surprised inventory build, heading to 57 fibonacci level

          WTI crude oil drops sharply today as crude inventory unexpectedly rose 4.74M barrels in the week ending May 17, versus expectation of -1.2M barrels decline. Current development suggests that recovery from 60.03 has completed at 63.90 already. And the fall from 66.49 might be ready to resume.

          Deeper decline should be seen to 60.03 first. Break will confirm this bearish case and target 100% projection of 66.49 to 60.03 from 63.90 at 57.44.

          Nevertheless, fall from 66.49 is seen as a corrective move so far. Downside should be contained by 38.2% retracement of 42.05 to 66.49 at 57.15 to bring rebound.

          Fed Williams: Interest rates in the right place with essentially nonexistent inflation pressures

            New York Fed President John Williams said the current interest rates in US are in the right place with “essentially nonexistent” inflation pressures. Additionally, some downside risks to global growth have receded. US economy is also strong and is on track to growth above potential at above 2% this year.

            The downtick of inflation is expected to reverse this year even though there is a risk that inflation gets stuck. However, Williams noted that Fed is not at a point to respond to low inflation by changing monetary policy yet. And he doesn’t expect that to be the case in the near term neither.

            Separately, Boston Fed President Eric Rosengren said Fed currently assumes the US and China to eventually reach a trade agreement. However, if trade war drags on, uncertainty will weigh on the economy. He reiterated that tariffs are one of the biggest risks to the US economy.

            US Mnuchin indicates new tariffs on China probably just a month away

              US Treasury Secretary Steven Mnuchin reminded the House Financial Services Committee that new tariffs on USD 300B in Chinese imports are probably just a month or so away. He said, “there won’t be any decision probably for another 30 to 45 days.” Meanwhile, there is no plan to travel to China to resume trade negotiations yet.

              On Walmart’s claims that tariffs will push up retail prices, he said “that’s something I can assure you the president will be focused on before we make any decisions.” However, he also talked down the threat of higher prices for consumers. He said “my expectation is that a lot of this business will be moved from China to other places in the region so that there will not be a cost.”

              Canadian retail sales rose 1.1%, ex-auto sales jumped 1.7%, USD/CAD dives

                Canadian Dollar jumps notably after stronger than expected retail sales data. Headline sales rose for the second consecutive month, up 1.1% mom. to CAD 51.3B in March, above expectation of 1.00%. Ex-auto sales was even stronger, up 1.7% mom versus expectation of 0.8% mom.

                Full release here.

                USD/CAD drops through 1.3376 support after the release. But at the point, current fall is seen as part of consolidation pattern from 1.3521. Hence we’d expect strong support above 1.3274 to contain downside. Larger rise from 1.3068 is still in favor to resume later.

                Into US session: Sterling extends decline on Brexit and CPI, Swiss Franc jumps

                  Entering into US session, Swiss Franc is so far the strongest one for today, with a wave of buyers just jumping in. Meanwhile, Sterling remains the weakest one for. MPs and Sterling traders are all unhappy with UK Prime Minister Theresa May’s new Brexit plan announced yesterday. May is having her PMQ at the moment but it’s unlikely to turn the corner. Traders continue to price in risks of no-deal Brexit, after May steps down. Meanwhile, slightly weaker than expected CPI reading in UK also gives the Pound some pressure. On the other hand, mild risk aversion is giving Swiss Franc a lift.

                  Dollar is mixed as trades await minutes of May 1 FOMC meeting. There, Fed decided to keep interest rates unchanged and more importantly, chair Jerome Powell indicated there is no need to adjust monetary policy in either direction for the near term. Markets would like to dig into details of discussions that might hint on the chance of rate cuts. But based on recent comments by Fed officials, it’s likely to have some strong voices for rate cut during the meeting. Fed policymakers have been generally patient and talked down the imminent need of rate cut.

                  In Europe, currently:

                  • FTSE is down -0.13%.
                  • DAX is down -0.50%.
                  • CAC is down -0.59%.
                  • German 10-year yield is down -0.0145 at -0.074.

                  Earlier in Asia:

                  • Nikkei rose 0.05%.
                  • Hong Kong HSI rose 0.18%.
                  • China Shanghai SSE dropped -0.49%.
                  • Singapore Strait Times dropped -0.00%.
                  • Japan 10-year JGB yield dropped -0.0057 to -0.05.

                  Italy’s Istat downgrades 2019 growth forecast to 0.3%, down from 1.3%

                    Italy’s Istituo Nazionale di Statistica (Istat) EU downgrades the country’s growth forecast in 2019 significantly. It now projects GDP to grow just 0.3% in real terms. Back in November, it projected GDP to grow 1.3% in real terms. Domestic demand is expected to provide 0.3% to GDP growth (1.3% projected in November). while foreign demand and inventories will provide a null contribution.

                    Labor market assessment was downgraded t “stabilize over the forecasting period”, from “improve over the forecasting period”. Employment is expected to grow 0.1% in 2019 and unemployment will rise slightly to 10.8%, much higher than November expectation of 10.2%.

                    Full release here.

                    Separately, Deputy Prime Minister Matteo Salvini said “must get out from the cage”, as EU policy over the past decade had brought “precariousness and despair”. He criticized that budget rules limiting the deficit and debt should be removed to free up the bloc’s economies.

                    UK CPI accelerated to 2.1%, but missed expectations

                      In April, UK headline CPI accelerated to 2.1% yoy, up fro 1.9% yoy but missed expectation of 2.2% yoy. Core CPI was unchanged at 1.8% yoy, also missed expectation of 1.9% yoy. RPI, however, jumped sharply to 3.0% yoy, up from 2.4% yoy and beat expectation of 2.8% yoy.

                      ONS noted that rising energy prices and air fares, which were influenced by the timing of Easter, produced the largest upward contributions to change in the rate between March and April 2019. The largest, offsetting, downward contribution came from across a range of recreational and cultural items, which included computer games and package holidays.

                      PPI input rose to 3.8% yoy, up from 3.7% yoy but missed expectation of 4.4% yoy. PPI output slowed to 2.1% yoy, down from 2.4% yoy and missed expectation of 2.3% yoy. PPI output core was unchanged at 2.2% yoy, matched expectations.

                      Also from UK, house price index rose 1.4% yoy in March, well above expectation of 1.0% yoy. Public sector net borrowing rose GBP 5.0B in April.

                      BoJ Harada: If weak economy deteriorates, should strengthen easing without delay

                        BoJ dove Yutaka Harada said today that “the economy has been weak recently, and the same can be said about prices”. Also, “there’s a risk the current sluggishness observed in prices will spill over to inflation expectations, further delaying a pick-up in inflation.” In addition, “the impact of the consumption tax hike scheduled for October this year also is a concern.”

                        Harada warned “if the economy deteriorates to the extent that achieving our price target in the long-term becomes difficult, it’s necessary to strengthen monetary easing without delay.” He also dismiss claims that the ultra-loose monetary policy hurts banks’ profits. He said “the deterioration of banks’ profitability is actually caused by a structural problem, which is that they are accumulating deposits despite a lack of borrowers.”

                        Released from Japan, trade surplus narrowed to JPY 60.4B in April. Exports dropped -2.4% yoy while imports rose 6.4% yoy. In seasonally adjusted terms, trade deficit narrowed to JPY -110.9B.Exports rose 0.6% while imports dropped -0.1%. Machine orders rose 3.8% mom in March, above expectation of 0.0% yo.

                        40% US manufacturers moving out of China on trade war, only 6% back to US

                          American Chamber of Commerce in Shanghai and China carried a joint survey on the impact of US-China tariffs. Results showed that the negative impact of tariffs is clear and hurting the competitiveness of American companies in China. 74.9% os respondents said the tariffs hikes are having a negative impact to their business. Among them, manufacturers suffered most with 81.5% for US tariffs and 85.2% for Chinese tariffs. Impacts include lower demand (52.1%), higher manufacturing costs (42.4%) and higher sales prices (38.2%).

                          Also, companies are increasingly adopting an “In China, for China” strategy (35.3%), or delaying and canceling investment decisions (33.2%). However, 40.7% are considering or have relocated manufacturing facilities outside China. For those moving, Southeast Asia (24.7%) and Mexico (10.5%) are the top destinations. Only 6% said they’re relocating back to the US.

                          On non-tariff measures, 20.1% said there were “increased inspections” in China, and “slower customs clearance (19.7%). 14.2% said there was ” slower license approvals and 14.2% said there were increased regulatory scrutiny. But 53.1% said there was no increase in non-tariff retaliatory measures by the Chinese government.

                          Press release here.

                          Fed Rosengren: No clear need to alter slightly accommodative interest rates

                            Boston Fed President Eric Rosengren said in a speech that “today, the two elements of the Fed’s mandate are sending opposing signals for monetary policy”. That is, low unemployment suggests “a bit tighter policy” while low inflation “the opposite”. But there is “no clarion call” to alter current policy in near term. He viewed current policy as “slightly accommodative” consistent with lifting inflation back to target over time. He added “the Fed can afford to wait to see if that forecast does indeed materialize.”

                            On the economy, Rosengren is relatively optimistic and he expects unemployment rate to fall further. He noted that the significant decline in equity markets in Q4 has largely recovered. Worries over Brexit and China slowdown “appear to have subsided since the beginning of the year”. Also, Q1 growth in US was “stronger than many forecasters expected”.

                            On trade, he said “I am optimistically assuming that both sides in the trade negotiations will work to reach an agreement”. And, “I am also assuming that while the uncertainty is not helpful, it will be transitory, and thus have only a modest effect on the forecast for the U.S. economy overall.”

                            Rosengren’s full speech here.

                            May’s new Brexit plan received terrible responses

                              Sterling was lifted briefly by UK Prime Minister Theresa May’s “new” Brexit plan. But recovery in Pound quickly faded as the plan was terribly received by MPs across the House. In short, under the new 10-point plan, the most important part is guaranteeing a vote on whether to call a second referendum on the Brexit deal. However, the pre-condition for the vote on referendum is the passage of the Brexit deal itself in the Commons.

                              Labour leader Jeremy Corbyn was quick to reject the proposal as “largely a rehash” and pledged “we won’t back a repackaged version of the same old deal”. Former foreign minister Boris Johnson and ex Brexit minister Dominic Raab said they’d oppose the deal. Pro-Brexit Cabinet ministers including Michael Gove, Andrea Leadsom and Chris Grayling opposed the idea of a “free vote”. Northern Ireland’s Democratic Unionist Party was concerned that “fatal flaws” of the original Brexit deal remained, which could split Northern Ireland with the rest of UK.

                              Despite the desperate final gamble, there is still practically no chance for May to get her Brexit deal through Commons in the June. A fourth humiliating defeat is more likely than not.

                              Sterling recovers further on prospect of a second referendum on the Brexit deal

                                Sterling is given a lift as UK Prime Minister Theresa May outlines her “new” plan regarding Brexit. One key element is that her Brexit bill will include a requirement to hold a vote on whether or not to have a second referendum on the deal. That is, if MPs want a second referendum, they must vote for the bill. The prospect of a second referendum is apparently the thing that shoots the Pound higher.

                                Here is a summary of May’s 10-point plan:

                                “So our New Brexit Deal makes a ten-point offer to everyone in Parliament who wants to deliver the result of the referendum.

                                1. The government will seek to conclude alternative arrangements to replace the backstop by December 2020, so that it never needs to be used.
                                2. A commitment that, should the backstop come into force, the government will ensure that Great Britain will stay aligned with Northern Ireland.
                                3. The negotiating objectives and final treaties for our future relationship with the EU will have to be approved by MPs.
                                4. A new workers’ rights bill that guarantees workers’ rights will be no less favourable than in the EU.
                                5. There will be no change in the level of environmental protection when we leave the EU.
                                6. The UK will seek as close to frictionless trade in goods with the EU as possible while outside the single market and ending free movement.
                                7. We will keep up to date with EU rules for goods and agri-food products that are relevant to checks at border protecting the thousands of jobs that depend on just-in-time supply chains.
                                8. The government will bring forward a customs compromise for MPs to decide on to break the deadlock.
                                9. There will be a vote for MPs on whether the deal should be subject to a referendum.
                                10. There will be a legal duty to secure changes to the political declaration to reflect this new deal.

                                Al of these commitments will be guaranteed in law – so they will endure at least for this parliament.”

                                Sterling recovers as PM May set to announce new Brexit deal at 1500GMT

                                  Sterling recovers notably on short covering as UK Prime Minister Theresa May is scheduled to announce her new Brexit deal at 1500GMT.

                                  Her spokesman said that “Cabinet discussed the new deal which the government will put before parliament in order to seek to secure the UK’s exit from the European Union.

                                  The discussions included alternative arrangements, workers’ rights, environmental protections and further assurances on protecting the integrity of the UK in the unlikely event that the backstop is required.

                                  The prime minister said that “the withdrawal agreement bill is the vehicle that gets the UK out of the European Union and it is vital to find a way to get it over the line.”

                                  And the prime minister will be setting out further details on the way forward in a speech this afternoon.”

                                  Into US session: Currency markets ignores easing risk aversion, AUD weakest on RBA cut bets

                                    Risk markets are generally lifted by US decision to delay the sanctions of Huawei for 90 days. DOW future is currently up more than 100pts while major European indices are generally higher. China Shanghai SSE also reclaimed 2900 handle. However, it should be noted that the move was seen as for housekeeping purpose only. That is, it’s for preventing sudden disruptions on the US side. It’s by no means an end to US-China trade tension. More importantly, given the hard line rhetorics from both sides, we’re not seeing any chance of a deal in that 90 days window. Thus, current rebound in risk markets will soon prove to be temporary.

                                    The currency markets are responding rather well to the news. Yen and Swiss Franc are just mixed, without any clear sign of receding risk aversion. As for today, Australian Dollar is the weakest one after RBA governor Philip Lowe indicated that they will think about cutting interest rates at June meeting. New Zealand Dollar, follows as second weakest. On the other hand, Canadian Dollar is the strongest one for now, followed by Sterling.

                                    In Europe, currently:

                                    • FTSE is up 0.60%.
                                    • DAX is up 0.98%.
                                    • CAC is up 0.52%.
                                    • German 10-year yield is up strongly by 0.0197 at -0.064.

                                    Earlier in Asia:

                                    • Nikkei dropped -0.14%.
                                    • Hong Kong HSI dropped -0.47%.
                                    • China Shanghai SSE rose 1.23% to 2905.97.
                                    • Singapore Strait Times dropped -0.69%.
                                    • Japan 10-year JGB yield rose 0.0027 to -0.045.

                                    OECD lowers global growth forecast on trade tension, but upgrades US

                                      OECD lowered global growth forecast to 3.2% in 2019, down from March projection of 3.3%. Chief Economist Laurence Boone warned that “the fragile global economy is being destabilized by trade tensions.” And, growth is stabilizing but the economy is weak and there are very serious risks on the horizon. Governments need to work harder together to ensure a return to stronger and more sustainable growth.”

                                      On US-China trade war, OECD warned that an intensification of trade restrictions would have significant costs. The new tariffs and measures announced this month could reduce GDP growth in US and China by 0.2-0.3% on average by 2021 and 2022. Under the scenarios of additional 25% tariffs on essentially all remaining bilateral trade between US and China, “the short term costs are considerably higher and broader”. Global trade could be reduced by 1% by 2021. US GDP could dropped by 0.6% while China GDP could drooped by 0.8%.

                                      However, it should also be noted that GDP growth projection was revised up by 0.2% to 2.8% in 2019 and by 0.1% to 2.3% in 2020. OECD said “in the absence of further shocks, the economy is on track to continue its solid expansion and grow
                                      somewhat faster than the rest of the OECD on average”.

                                      Summary of new growth projections :

                                      • 2019 global at 3.2%, down from 3.3% (March forecast)
                                      • 2020 global at 3.4%, unchanged
                                      • 2019 US at 2.8%, up from 2.6%
                                      • 2020 US at 2.3% up from 2.2%.
                                      • 2019 Eurozone at 1.2%, up from 1.0%
                                      • 2020 Eurozone at 1.4% up from 1.2%
                                      • 2019 Japan at 0.7%, down from 0.8%
                                      • 2020 Japan at 0.6%, down from 0.7%
                                      • 2019 UK at 1.2%, up fro 0.8%
                                      • 2020 UK at 1.0%, up from 0.9%
                                      • 2019 China at 6.2%, unchanged
                                      • 2020 China at 6.2%, unchanged

                                      Full report here.

                                      ECB de Guindos: Slower growth momentum increases tail risks

                                        ECB Vice President Luis de Guindos urged Eurozone banks to build extra capital buffers to mitigate the risk of unexpected shocks. He said “the slower growth momentum we are seeing increases the risk of tail events, in other words, shocks that are unlikely to occur, but would have a significant impact on the financial system and the economy if they did.”

                                        “The continued build-up of buffers could therefore be justified, especially in those countries where the long upturn may have led to an underestimation of credit risk or where private indebtedness is particularly high or rising.”

                                        UK CBI: Investment down, stockpiling up, threat of a no-deal ever present, viable Brexit deal desperately need

                                          UK CBI trends total orders dropped to -10 in May, down from -5 and missed expectation of -5. 23% of manufacturers reported total orders books above normal. 32% said they were below normal. The -10 balance was the worst since October 2016, but stayed broadly in line with long-run average of -13.

                                          Anna Leach, CBI Deputy Chief Economist, said: “With investment down, stockpiling up, and the threat of a no-deal ever present, we desperately need parliament to thrash out a viable deal in the national interest. Where the cross-party talks failed, Parliament must succeed, or continued economic paralysis will see us hurtle ever closer to disaster.”

                                          Full release here.