Yuan’s decline resumes, Would China allow it to break 7 handle?

    USD/CNH’s decline resumed overnight and hit as high as 6.9446 so far. For now, the selloff in Yuan looks unstoppable as there is no end in sight in US-China trade war, which just escalated. But Reuters reported, based on unnamed source, that the PBoC won’t allow USD/CNH to break through 7 handle.

    The source was quoted saying “at present, rest assured they will certainly not let it break 7… Breaking 7 is beneficial to China because it can reduce some of the effects of tariff increases, but the impact on our renminbi confidence is negative and funds will flow out.”

    We remain doubtful on whether China will intervene this time given that they’re been generally refrained in both currency and stock markets in the past few months. Barring any government intervention, we maintain the view that, based on current momentum, USD/CNH should surge bass 6.9800 and 7.000 handle with relative ease. Next target is 61.8% projection of 6.2354 to 6.9800 from 6.6699 at 7.1306.

    BoJ Kuroda: Keeping rates low for extended period means quite a long time

      BoJ Governor Haruhiko Kuroda reiterated the central bank’s forward guidance that “there’s a good chance current low interest rates will be maintained beyond (the spring of 2020) depending on future developments”. In a speech he emphasized “when we say we will keep rates low for an extended period of time, we mean it will be maintained for quite a long time.”

      On the economy, Kuroda expects it to continue to expand moderately. Though, “if overseas growth takes longer than expected to pick up, Japanese companies – manufacturers in particular – could become cautious about spending on capital expenditure”.

      While the economy is facing some risks, Kuroda dismissed that the so called “Modern Monetary Theory” as being a “wrong idea”. He said “when a central bank monetizes debt unlimitedly, it will most certainly trigger hyper-inflation and cause huge damage to the economy.” And, “it’s a common understanding among central banks of advanced economies that they ought not monetize debt.

      Kuroda’s full speech here.

      Impact of new US tariffs controllable, China not keen to resume trade talks

        The National Development and Reform Commission of China said it’s the overall impact of the latest 25% tariff on around US 300B in Chinese goods is “controllable”. The government has implemented and will continue to carry forward measures to keep growth in a “reasonable range”. And the measures will target to stabilize areas such as consumption, investment and employment. Also, NDRC noted the government will also keep bettering its business environment and leveling the playing field, to ensure the sustainability of investments.

        Separately, Bloomberg reported that China is not very keen in resuming trade negotiations with US, quoting a mysterious blog Taoran Notes (陶然笔记). The blog is believed to be backed by the government and is one of the few voices on China’s negotiations strategy in a censored internet world in the country. The blog piece noted: “We can’t see the U.S. has any substantial sincerity in pushing forward the talks. Rather, it is expanding extreme pressure… If the U.S. ignores the will of the Chinese people, then it probably won’t get an effective response from the Chinese side,” it added.

        BusinessNZ Manufacturing PMI rose to 53.0, growth pickup still in questions

          New Zealand BusinessNZ Manufacturing PMI rose to 53.0 in April, up from 52.0. Looking at the details, production dropped -0.1 to 50.8, employment dropped -0.4 to 51.6, new orders dropped -0.3 to 52.4, finished stocks dropped to 0.8 to 51.9. On the other hand, deliveries jumped sharply by 3.6 to 56.3.

          BusinessNZ’s executive director for manufacturing Catherine Beard said that while the improvement in activity for April was welcome, the underlying trend still remains a concern. She noted “Although this indicates the sector is still in expansion mode, the unadjusted series has tended to trend down since late 2017.  If this trend continues, it will eventually have negative consequences for the main published result”.

          BNZ Senior Economist, Doug Steel said that “the headline PMI looks reasonable but some of the details have cooled off including new orders. It raises questions for those looking for a strong growth pickup later in 2019”.

          Full release here.

          Also from New Zealand, PPI input dropped -0.9% qoq in Q1. PPI output dropped -0.5% qoq.

          Brainard: Fed might adopt opportunistic reflation strategy on monetary policy

            Fed Lael Brainard said the central might adopt a so called “opportunistic reflation” strategy to lift underlying inflation to 2% and underscore its commitment to the inflation mandate. Such a strategy would accept a slight overshoot the 2% inflation target for a while, even if it’s driven by import prices.

            She said “suppose that an unexpected increase in core import price inflation drove overall inflation modestly above 2% for a couple of years… The Federal Reserve could use that opportunity to communicate that a mild overshooting of inflation is consistent with our goals and to align policy with that statement.”

            On the current outlook, she noted “the emerging contours of today’s new normal are defined by low sensitivity of inflation to changes in labor market slack, a low long-term neutral rate of interest, and low underlying trend inflation.”

            Her full speech here.

            Fed Kashkari: We misread faulty labor market signals, but cutting rates won’t help inflation expectations

              Minneapolis Fed President Neel Kashkari said in a speech in Santa Barbara that Fed could have misread faulty signals from the labor markets. And current situation suggests monetary policy was too tight in this recovery. Fed should be patient and allow inflation to overshoot target. Yet, he doesn’t see cutting rates offer any help. Overall, he advocates a wait-and-see with patience approach.

              Kashkari said Fed could have “misread” the labor market and feared that “if we hit maximum employment, inflation might suddenly accelerate”. Thus, “we would then have to raise rates quickly to contain it”. However, the “headline unemployment rate has been giving a faulty signal”. Considering inflation “somewhat too low” and job market “still showing capacity”, he added, “the only reasonable conclusion I can draw is that monetary policy has been too tight in this recovery”.

              On monetary, policy, Kashkari said “for our current framework to be effective and credible, we must walk the walk and actually allow inflation to climb modestly above 2 percent in order to demonstrate that we are serious about symmetry”. However, he also told reporters that “I am not sure that cutting rates would do much to inflation expectations.”

              Kashkari’s full speech here.

              US update: Stocks cheer Walmart, Dollar & yields follow, EURUSD heavy

                US stocks and treasury yields stage a strong rebound today, thanks to earnings surprises and solid economic data. In particular, investors cheered Walmart, which reported best Q1 same-store sales growth in nine-years. At the time of writing, DOW, S&P 500 and NASDAQ are all trading up more than 1%. 10-year yield is also back above 2.4 handle at 2.402.

                The positive developments in the US pull Dollar broadly higher.

                Technically, EUR/USD is set to take on 1.1173 minor support. Break will suggests that consolidation from 1.1111 has completed at 1.1263. retest of 1.1111 should be seen next.

                USD/JPY is eyeing 110.04 minor resistance. Break will indicate short term bottoming at 109.02 and bring stronger rebound back to 55 day EMA at 110.95.

                The strong rebound in S&P 500 puts it firmly back above 55 day EMA. That dampens our bearish view that rise fro 2346.58 has completed at 2954.13. We’ll see from if SPX could extend the rebound to retest 2954.13 high next. Even though we don’t expect a break there. Confidence is just average.

                EU Moscovici: 130% debt to GDP is already a lot

                  European Commissioner for Economic and Financial Affairs Pierre Moscovici warned today that “it’s in Italy’s interest to have a credible fiscal policy.” And, Eurozone finance ministers think that “130% is already a lot”, regarding Italy’s debt to GDP ratio.

                  European Commission expects Italy’s debt to growth to 133.7% of GDP this year, and peak at 135.2% in 2020. That’s already far above EU’s ceiling of 60%. However, Italy’s Deputy Prime Minister Matteo Salvini indicated this week that debt could even reach 140% of GDP if it’s necessary to boost employment.

                  Italian 10-year yield breaks above 2.8% earlier this week on concern over Italy’s budget. But it’s currently back below 2.7 handle.

                  US jobless claims dropped to 212k, housing starts, Philly Fed survey

                    US initial jobless claims dropped -16k to 212k in the week ending May 11, below expectation of 220k. Four-week moving average of initial claims rose 4.75k to 225k. Continuing claims dropped -28k to 1.66M in the week ending May 4. Four week-moving average of continuing claims rose 1.5k to 1.668M.

                    Building permits rose 0.6% mom to 1.296k annualized rate. Housing starts rose 5.7% to mom to 1.235M.

                    Philadelphia Fed Business Outlook diffusion index jumped to 16.6 in May, up from 8.5 and beat expectation of 9.0.

                    China hit back on treatment of Huawei and three core issues in trade negotiations with US

                      The Chinese government is apparently furious at US move to sanction its telecom giant Huawei. Tensions of the two sides is set to escalate further while there is no set timing for resuming the collapsed trade talks. While Trump might want to meet Xi to clear out the outstanding issues to seal a trade deal at the upcoming G20 summit, the two sides are actually moving farther apart.

                      Trump’s administration hit Huawei on two heavy measures yesterday. Firstly, the U.S. Commerce Department is adding Huawei and 70 affiliates to its “entity List” that bans them from buying US technologies without government approval. Secondly, Trump signed an executive order banning US companies from using telecom equipment made by companies deemed to pose a national security risk. As Commerce Secretary Wilbur Ross put, the decision was to “prevent American technology from being used by foreign-owned entities in ways that potentially undermine U.S. national security or foreign policy interests.”

                      Chinese commerce ministry spokesman Gao Feng said today “China has emphasized many times that the concept of national security should not be abused, and that it should not be used as a tool for trade protectionism… China will take all the necessary measures to resolutely safeguard the legitimate rights of Chinese firms.”

                      On trade Gao warned “the tariff hike by the United States will only bring greater difficulties to the consultations… “We urge the United States to cancel the wrong practices as early as possible, avoiding greater losses to Chinese and American companies and consumers, and causing a ‘recession-like’ impact on the world economy.”

                      Gao also also clarified the three concerns on China. Firstly, all tariffs must be removed in order to reach a deal. Secondly, additional purchase of US goods is an issue to be resolved. Thirdly, the text of the agreement must be balanced, respecting each other’s sovereignty. Gao emphasized, “to reach any agreement, China’s three core concerns must be properly resolved,”

                      Separately, Foreign ministry spokesman Lu Kang, said “negotiations and consultations, to have meaning, must be sincere… First, there must be mutual respect, equality and mutual benefit. Second, one’s word must be kept, and not be capricious.”

                      Bundesbank Weidmann: Trade wars only know losers

                        Bundesbank President Jens Weidmann warned today that trade wars would damage the global economy and are useless in reducing current account deficit. He said “some expect higher tariffs to reduce current account balances… But this hope may prove futile, our analyses suggests.”

                        Also, Trump’s new tariffs will pose risks to the US economy. And, “retaliatory tariffs of other countries are likely to further weaken the global economy and world trade. Trade wars only know losers.”

                        Domestically, he admitted that inflation is “stubbornly low”. However, if outlook allows it, there is no need to postpone monetary policy normalization.

                        ECB Visco: Eurosystem ready to use a wide of of instruments to support economy

                          ECB Governing Council member Ignazio Visco said today that the economic prospects of Eurozone are clouded by uncertainties. Italy and global economy are experiencing a difficult time too. He noted that trade, mostly fueled by US, added to global economic slowdown. And as Bank of Italy Governor, he urged the country to boost productivity to fully recovery its growth path.

                          Though, he dismissed the worries that ECB is “disarmed” should current situation deteriorates into a full-blown recession. He emphasized “central banks can rely on a wide range of instruments to support economic activity and, if necessary, the Eurosystem is ready to use them all in order to fulfill its mandate.”

                          Asian update: AUD lower on unemployment rate, Yen strong on persistently weak yields

                            US stocks staged a broad based recovery overnight on reports that Trump would delay the decision on auto tariffs, due May 18, by up to 6 months. Though, strength of recovery was relatively limited. More importantly, 10-year yield still closed down -0.0040 at 2.379, breaking 2.4 handle firmly. With 3-month yield closed at 2.404, this most crucial part of yield curve, 3-month to 10-yield, is inverted. Asian markets are mixed with mild recovery in China and Hong Kong stocks, but Nikkei is clearly down despite the auto tariff news.

                            In the currency markets, Australian and New Zealand Dollar are the weakest ones for today. Aussie was somewhat weighed down by unexpected rise in unemployment rate to 8-month high of 5.2%. But we’d like to emphasize that was due to rise in participation rate to record high of 65.8%. It’s healthy in a strong labor market. Canadian Dollar is the third weakest for today. On the other hand, weak treasury yields continue to support Yen as strongest, while Euro and Sterling recover.

                            For the week, Yen and Swiss Franc remain the strongest one on free fall in major global treasury yields. Dollar remains the third strongest. Sterling is the weakest one on never ending Brexit impasse. Australian and New Zealand Dollar are the next weakest.

                            In Asia, currently:

                            • Nikkei is down -0.67%.
                            • Hong Kong HSI is up 0.24%.
                            • China Shanghai SSE is up 0.28%.
                            • Singapore Strait Times is up 0.05%.
                            • Japan 10-year JGB yield is down -0.0097 at -0.061.

                            Overnight:

                            • DOW rose 0.45%.
                            • S&P 500 rose 0.58%.
                            • NASDAQ rose 1.13%.
                            • 10-year yield dropped -0.040 to 2.379.

                            Australian employment grew 28.4k driven by part-time jobs, unemployment rate rose to 5.2%

                              In April, Australia employment rose 28.4k, more than expectation of 15.2k. However, the growth was mainly driven by 34.7k growth in part-time jobs. Full-time employment contracted -6.3k. Unemployment rate rose to 5.2%, up from 5.1% and above expectation of 5.0%. That’s also an eight-month high. But participation rate also rose 0.2% to record high of 65.8%.

                              Looking at some details, in seasonally adjusted terms, the largest increase in employment was in New South Wales (up 25.1k), followed by Western Australia (up 6.4k) and Queensland (up 5.4k). The only decrease was in Victoria (down 7.6k).

                              The seasonally adjusted unemployment rate increased in New South Wales (up 0.2 pts to 4.5%), Victoria (up 0.2 pts to 4.9%), South Australia (up 0.2 pts to 6.1%), Western Australia (up 0.1 pts to 6.1%) and Tasmania (up 0.1 pts to 6.8%). The only decrease was observed in Queensland (down 0.2 pts to 5.9%).

                               

                              Full release here.

                              AUD/USD dipped notably after the release but quickly recovered. While the set of job data isn’t stellar, it’s actually not too bad.

                              BoJ Wakatabe: QQE has clearly positive impact on the economy and prices

                                BoJ Deputy Governor Masazumi Wakatabe reiterated to the parliament that the quantitative and qualitative easing program (QQE) had “clearly positive” impact of the economy and prices. And, benefits of easing is “outweighing” its costs.

                                He admitted that BoJ hasn’t put a sustained end to deflation yet while inflation remains below 2% target. But he emphasize “we’re seeing an end to a long period of time when consumer prices kept falling.”

                                On exit, he said “how an exit from easy policy affects BOJ’s balance sheet would depend on various factors such as means, the order in which it exits.”

                                Canada Freeland: With steel tariffs in place, ratification of USMCA would be very, very problematic

                                  Despite all the talks and rumors that the US is close to lifting steel and aluminum tariffs on Canada and Mexico, Canadian Foreign Affairs Minister Chrysita Freeland left no hints on the progress after she met US Trade representative Robert Lighthizer yesterday.

                                  Freeland acknowledged that there were discussions regrading the tariffs but and details were provided. Instead, she just noted “Canada believes in the new [USMCA] agreement that we reached with the United States and Mexico,” and “we very much hope it can be ratified in all of our countries, although the domestic processes are up to each country.” She emphasized, “when it comes to Canada, it is certainly the case for us that as long as the tariffs remain in place, ratification would be very, very problematic.”

                                  Mexico’s chief North American trade negotiator Jesús Seade said earlier this week “Very quickly we have made a tremendous progress and I’m looking to an early resolution on the basis of lifting the tariff, no quotas. We were getting close to an agreement.” Mexican Secretary of Economy Graciela Márquez Colín also said “if we get similar proposals we might go into a trilateral, but that’s just a possibility”. But Freeland said she would “leave it to the Mexicans and the Americans to comment.”

                                  US Treasury Secretary Steven Mnuchin told a Senate Committee yesterday that “the president has instructed us to try to figure out a solution” on steel and aluminum tariffs.” And, “this is a very important part of passing USMCA which is a very important economic agreement for two of our largest trading partners… I think that we are close to an understanding with Mexico and Canada. I’ve spoken to the finance ministers. Ambassador Lighthizer is leading the effort on this, but I can assure you it is a priority of ours.”

                                  Fed Barkin: No strong case for rate hike nor rate cut

                                    Richmond Fed President Tom Barkin said in a speech yesterday that “there’s not a strong case to push rates higher when inflation is under control”. At the same time “there’s not a strong case to move lower when growth remains healthy.” And, “it makes sense to remain patient” on monetary policy.

                                    He noted that there was a short term sentiment shock at the end of last year and the beginning of this year. The significant drop in business, consumer and investor confidence was only fueled by “overreacting” to international uncertainty, financial market volatility and the government shutdown.

                                    He added that business contacts told him the economy is “sound but not spectacular”. And, consumers are ready to resume spending once the environment settled. Though business recovery looks to be slower and they’re worried about political polarization and international markets and trade. Barkin noted “confidence—especially business confidence—is fragile.”

                                    On monetary policy, he emphasized: “In a volatile environment, rate moves can indicate more than stimulation or restriction. They are also taken as signals on the health of the economy. Counter-intuitively, then, rate moves can send unintended messages.”

                                    Full speech Sentiment and the Real Economy.

                                    Stocks rebound as Trump ducks auto tariffs decision, but US and German yields stay down

                                      A couple of US trade policy news are giving market sentiment a mild lift in early part of US session. It’s clear that the trade talks with China collapsed even though Trump denied it. Trump now appears to be backing down from his hard-line trade stance against the country’s  closest allies in Canada and EU.

                                      Firstly, US Treasury Secretary Steven Mnuchin confirmed himself that he’s going to China soon to continue trade negotiations. He said, “my expectation is that we will go to Beijing at some point in the near future to continue those discussions…. We’re continuing discussions. There’s still a lot of work to do.”

                                      Secondly, Mnuchin also indicated that US is very close to resolving steel and aluminum tariffs on Canada and Mexico. Separately, it’s reported that Trade Representative Lighthizer is scheduled to meet Canadian Foreign Minister Chrystia Freeland again. Lighthizer will bring forward a proposal to remove such national security steel and aluminum tariffs.

                                      Thirdly and most importantly, an unnamed source was quoted saying that Trump will delay the decision on auto tariffs by up to six months. The original decision is due this Saturday, May 18. It reported that the White House has held a series of high-level meetings on the issue in recent days. And automaker official were repeatedly told that the decision will be delayed. But White House declined to comment.

                                      DOW dived to as low as 25341.91 in early trading but it’s now back up 0.4%, above 25600. 10-year yield also hit as low as 2.361 but it’s back at 2.389 now. Still, 10-year yield below 2.4 is a serious sign of risk aversion.

                                      In Germany, DAX dropped to as low as 11862.21 earlier today but closed up 0.86% at 12904.74. German 10-year yield reached as low as -0.131 earlier today and it’s back at -0.095 at the time of writing. German yield is pressured by concerns over Italy’s budget. Postponing auto tariffs just delay the problem, not solve it. And, it certainly couldn’t solve the unrelated problem of Italy.

                                      Canada CPI climbed to 2.0%, matched market expectations

                                        In April, Canada CPI accelerated to 2.0% yoy, up from 1.9%, matched expectations. CPI core commons was unchanged at 1.8%, matched expectations. CPI core median slowed to 1.9% yoy, missed expectation of 2.0% yoy. CPI core trim slowed to 2.0% yoy, missed expectation of 2.1% yoy.

                                        US retail sales dropped -0.2%, ex-auto sales rose 0.1%, both missed expectations

                                          In April, US headline retail sales dropped -0.2%, missed expectation of 0.2% mom rise. Ex-auto sales rose merely 0.1% mom, much lower than expectation of 0.7% mom.

                                          Empires State manufacturing index rose to 17.8 in May, up from 10.1 and beat expectation 8.0.