In volume term, UK retail sales dropped -0.1% mom in June, better than expectation of -0.3% mom. Ex-fuel sales rose 0.4% mom, above expectation of -0.3% mom.
Compared with the same period a year earlier, sales volume dropped -5.8% yoy, versus expectation of -5.3% yoy. Ex-fuel sales dropped -5.9% yoy, versus expectation of -6.2% yoy.
In value term, retail sales rose 1.3% mom, 14.4% yoy. Ex-fuel sales rose 1.3% mom, 12.9% yoy.
US initial jobless claims rose 13k to 861k in the week ending February 13, above expectation of 775k. Four-week moving average of initial claims dropped -3.5k to 883.3k.
Continuing claims dropped -64k to 4494k in the week ending February 6. Four-week moving average of continuing claims dropped -120k to 4632k.
Entering the US session, the biggest news today is that UK PM Theresa May’s moment of truth has finally come. There are enough requests to trigger a no-confidence vote, which will be held at 1800-2000GMT today. The results will likely come out at around 2100GMT. The Pound actually strengthens on the news. The question is, should May will the vote, would that mean the tories should unite and stay behind her Brexit deal? And, should May lose, a new leader will come in and there is definitely not enough time for Brexit renegotiation. Then, the article 50 requests is likely needed to be revoked. Brexit would be delayed or even cancelled. These cases are most likely much better than a no-deal hard Brexit.
Staying in the currency markets, Euro is trading as the second strongest one, followed by Canadian. New Zealand Dollar is the weakest one, walking its own path. Swiss Franc and, to a much lesser extend, Yen are next weakest on improved risk appetite. European stocks are trading broadly higher, including FTSE. It seems like UK investors are feeling nothing about May. Asian markets also closed broadly higher. Progress of US-China trade talk is lifting sentiments general.
At the time of writing in Europe:
Earlier in Asia:
ECB Governing Council member Bostjan Vasle has emphasized the need for further monetary tightening in the face of persistent inflation, speaking on the sidelines of the ECB Forum.
“Given the persistence of inflation, we need to keep tightening monetary policy at our next meeting,” Vasle stated.
Beyond July, the decision to further hike rates will be “data-dependent”. However, Vasle conveyed that the “burden of proof” lies in data indicating “further rate hike is not needed instead that it is needed.”
Vasle dismissed arguments that weaker growth readings might ease the ECB’s fight against inflation. He asserted, “All these suggest that growth developments are not significantly different than our most recent projections.”
The ECB official also expressed concerns over expectations that corporate profit margins might decline and absorb the impact of wage hikes, terming such a prospect as bearing significant risks.
“The labour market is strong and consumption is resilient. So firms might continue to enjoy pricing power, especially because demand is too strong to push down margins,” he said.
Germany Gfk consumer sentiment for August was unchanged at -0.3. In July, economic expectations dropped from 58.4 to 54.6. Income expectations dropped from 34.1 to 29.0. Propensity to buy rose from 13.4 to 14.8. .
Rolf Bürkl, a GfK consumer expert commented on this observation: “The phase where the decrease of COVID-19 incidence of infection has come to an end and those figures are again on the rise. In addition, the momentum for vaccination has recently slowed down considerably, despite there being sufficient quantities of the vaccine available. This is currently preventing any further significant increase as it pertains to consumer sentiment.”
Eurozone PMI Manufacturing dropped to 45.6 in September, down from 47.0 and missed expectation of 47.3. That’s the lowest level in 83 months. PMI services dropped to 52.0, down from 53.5, missed expectation of 53.3. That’s also an 8-month low. PMI Composite dropped to 50.4, down from 51.9, a 75-month low.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“The eurozone economy is close to stalling as a deepening manufacturing downturn shows further signs of spreading to the services sector.
“The survey data indicate that GDP looks set to rise by just 0.1% in the third quarter, with momentum weakening as the quarter closed.
“The goods-producing sector is going from bad to worse, suffering its steepest downturn since 2012, but a further worrying trend is the broadening-out of the malaise to the service sector, where the rate of growth has now slowed to one of the weakest since 2014.
“The details of the survey suggest the risks are tilted towards the economy contracting in coming months. Most vividly, new orders for goods and services are already falling at the fastest rate since mid-2013, suggesting firms will increasingly look to reduce output unless demand revives.
“Furthermore, hiring is being scaled back due to the order book slowdown, with jobs growth now down to the lowest since the start of 2015. A worsening labour market adds to the risk that households could trim their spending.
“The overall picture of an economy on the cusp of sliding into decline is underscored by a further deterioration in firms’ pricing power, with average prices charged for goods and services barely rising in September.
“With survey data like these, pressure will grow on the ECB to add to its recent stimulus package.”
US Treasury held a video conference with Canada, the European Commission, France, Germany, Italy, Japan and the United Kingdom. A short statement was issued noting, “The G7 is in regular contact and committed to continued international cooperation to address the global health and economic impacts of COVID-19.”
The coronavirus pandemic continues with total cases surged pass 130,000 level to 134,684. Death toll reached 4,973 and is set to break 5,000 soon. Italy’s cases rose to 15,113, with deaths at 1,016. Iran’s cases hit 10,075, with 429 deaths. The virus is still spreading quickly in Europe as Spain added 869 cases to 3,146. France added 595 cases to ,2876. Germany added 779 cases to 2,745. US also reported 429 new cases to 1,730.
China, the origin of this global pandemic, reported just 4 new cases a 1 new death. Accumulated total case hit 80,797, with 3,170 deaths.
As ECB gears up for its seventh consecutive interest rate hike in a row today, market participants are divided on the size of the increase. While the majority expect a 25bps hike, which would bring the main refinancing rate to 3.75% and the deposit rate to 3.25%, a 50bps move cannot be totally ruled out.
The size of the hike carries significant implications for the market. A 50bps increase would suggest that the tightening cycle could extend beyond June, even if it slows down then. However, a 25bps hike would create more ambiguity for July meeting. Ultimately, the path forward will still heavily depend on the next round of economic projections, only available at June meeting.
Suggested readings on ECB:
EUR/CHF’s recovery from 0.9774 has been underwhelming, stalling at 0.9878 before reversing course. It seems that price actions from 0.9995 are forming a triangle consolidation pattern. While a break below 0.9774 cannot be ruled out, any downside should be limited. Conversely, breaking 0.9878 resistance would indicate that the rise from 0.9704 is set to resume through 0.9995. Let’s see how it plays out.
Sterling was boosted yesterday by the news that the UK and EU agreed on the draft declaration on future relationship after Brexit. The document is now subject to endorsement by EU leaders on the special summit this Sunday. Here are some highlights from the introduction section:
US initial jobless claims jumped 3341k to 6648k in the week ending March 28, making another historical high. Four-week moving average of initial claims rose 1608k to 2612k.
Continuing claims rose 1.245m to 3.029m in the week ending March 21. That’s the highest level since July 6, 2013. Four-week moving average of continuing claims rose 327k to 2.054m, highest since January 2017.
US markets experienced a complex development overnight due to simultaneous reactions to two events. Initially, the markets responded bullishly to the Fed’s less hawkish than expected rate hike and press conference. However, just an hour before the close, sellers jumped in, and the three major indexes closed -1.6% lower.
The selloff might be more attributed to Treasury Secretary Janet Yellen’s comments at a Senate committee. She explicitly stated, “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits.”
Yellen further elaborated, “when a bank failure is deemed to create systemic risk, which I think of as the risk of a contagious bank run…we are likely to invoke the systemic risk exception, which permits the FDIC to protect all depositors, and that would be a case-by-case determination.”
Meanwhile, Asian markets have remained sluggish and mixed today, without any apparent signs of bearishness carried over. It may take some more time to understand the unfolding situation fully.
Technically, near term outlook in S&P 500 isn’t too bearish yet given it’s holding inside a near term channel. However, break of 3901.27 support will argue that the corrective rebound from 3808.85 has completed at 4039.49, after hitting falling trend line resistance. Deeper selloff would then follow through 3808.86 to resume whole decline from 4195.44.
In its Financial System Review Summary, BoC said since the onset of the coronavirus pandemic, it has established a range of facilities and purchase programs to address the problems with market function and confidence. These measures are “showing signs of succeeding”. It noted that:
Governor Stephen Poloz said: “Our goal in the short-term is to help Canadian households and businesses bridge the crisis period. Our longer-term goal is to provide a strong foundation for a recovery in jobs and growth.”
He added, “We entered this global health crisis with a strong economy and resilient financial system. This will support the recovery. But we know that debt levels are going to rise, so the right combination of economic policies will be important too.”
SNB board member Andrea Maechler said that the central bank is “not anywhere close to” normalization as “expansionary monetary policy is absolutely needed”. She added that “the negative rate of minus -0.75% and interventions are needed to relieve pressure on the franc as needed.”
The bank still see inflation “staying below 1%”, labor utilization “below what it can be”, and Franc “continues to be highly valued”, she said.
US initial jobless claims rose 2k to 373k in the week ending July 3, above expectation of 355k. Four-week moving average of initial claims dropped -250 to 394.5k, lowest since March 14, 2020.
Continuing claims dropped -145k to 3339k in the week ending June 26, lowest since March 21, 2020. Four-week moving average of continuing claims dropped -44.5k to 3441k, lowest since March 21, 2020.
China’s Caixin PMI Services rose to 44.4 in April, up from March’s 43.0. PMI Composite rose to 47.6, up from 46.7. Both stayed in contraction region.
Zhengsheng Zhong, Chairman and Chief Economist at CEBM Group said, “domestic services activity remained under notable pressure amid the coronavirus pandemic”. New export orders shrank at a steeper rate in April than in February, “indicating that the March rebound in exports was not sustainable”. “The second shockwave for China’s economy brought about by shrinking overseas demand should not be underestimated in the second quarter”
Also from China, in April, in USD terms, exports rose 3.5% yoy while imports dropped -14.2% yoy. Trade surplus widened to USD 45.3B.
German PMI manufacturing rose to 57.3 in July, up from 55.9, way above expectation of 55.7. PMI services dropped to 54.4, down from 54.5 and missed expectation of 54.5. PMI composite rose to 55.2, up from 54.8, and hit a 5- month high.
Commenting on the flash PMI data, Trevor Balchin, Economics Director at IHS Markit said:
“Private sector output growth in Germany continued to regain momentum in July, having previously sank to a 20-month low in May. The manufacturing sector was the source of stronger growth in the latest month, after services had driven the expansion in June.
“Private sector employment continued to expand at a historically sharp rate in July, with the pace unchanged from June’s five-month high. Manufacturers added staff at a faster pace than service providers for the seventeenth consecutive month.
“Data on new business were less positive than the trends for total activity and jobs, however. This mainly reflected new orders in manufacturing not rising as fast as output, resulting in the slowest rise in backlogs in the sector for two years.
“The latest survey also signalled greater inflationary pressures in July, with both input and output prices rising more steeply. Manufacturers widely reported higher steel prices, and supply shortages from China in general. Meanwhile, service providers hiked their own charges at the second-fastest rate on record.”
Following BoC’s decision to keep interest rates unchanged at 4.50%, Governor Tiff Macklem addressed concerns about the country’s economic growth during a press conference. He acknowledged the weak growth projections, stating, “We are seeing inflation come down even as the economy continues to grow. That is encouraging. But yes, we do expect growth to be weak. It’s expected to be weak through the rest of the year, pick up gradually over the course of next year.”
Regarding the potential for negative growth quarters, Macklem clarified that the central bank is forecasting “small positives,” but conceded that “you can’t rule out that there’s going to be a couple quarters of small negatives.” He emphasized that BoC is not forecasting a major contraction or significant increases in unemployment, distancing the current situation from a typical recession.
Addressing market expectations of a rate cut, Macklem said, “based on the information we have today, the implied expectation in the market that we’re going to be cutting our policy rate later in the year, that doesn’t look today like the most likely scenario to us.” This statement suggests that the central bank may not follow the market’s anticipated course of action, given the current data available.
Reuters reported that EU is seeking China’s agreement to open up its market by summer 2019. An EU drafted six-page joint communique obtained reads China and the EU will “agree by summer 2019 on a set of priority market access barriers and requirements facing their operators.” It’s intended to be the deliverable of the EU-China summit on April 9 in Brussels. Chinese Premier Li Keqian is expected to be there, meeting European Commission President Jean-Claude Juncker and European Council President Donald Tusk.
While there is no other detail reported, we believed it’s released to the proposed 10 actions by the European Commission on relations with China release last week. The proposal will be discussed and endorsed at the European Council meeting this week on March 21. There, EU described China as a “cooperation partner” and “negotiating partner” as well as “systemic rival promoting alternative models of governance.” Some important actions focus on issues like subsidies and forced technology transfers, reciprocity and open up procurement opportunities in China.
ECB President Christine Lagarde said the “mild” coronavirus economic scenario is now “out of date”. She added, “we’ll have a better sense in a few days as we publish our numbers in early June, but it’s likely we will be in between the medium and severe scenarios.” Eurozone economy is expected to contract between -8% to -12%.
The central bank is expected to expand the Pandemic Emergence Purchase Program next week. Lagarde said with respect to the PEPP, “this concerns the size but also the composition and the duration of the program.” She also talked down the risk of a new debt crisis as debt-servicing costs are “extremely low”. “All countries around the world had to respond, and as a result of that had to increase their debt,” she said. In the current coronavirus crisis, “use of debt is not only recommended, it’s the way to go.”
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Australia trade surplus shrank to 4.6B in Jul as exports fell
Australia export of goods and services dropped -4% mom to AUD 34.5B in July. Imports rose 7% mom to AUD 29.9B. Trade surplus shrank to AUD 4.6B, down from AUD 8.2B, missed expectation of AUD 5.0B.
AiG Performance of Construction index dropped -4.8 pts to 37.9 in August. Ai Group Head of Policy, Peter Burn, said: “The sharp fall in activity in Victoria was a major factor in the downturn while border restrictions in other states have hampered builders and constructors who are reliant on interstate supplies and the availability of tradies from across borders.”