China Ministry of Finance announced to suspend retaliation tariffs on US autos and parts for 30 days, as a result of the meeting between Xi and Trump in Argentina.
The statement noted that important consensus was reached between the two heads of state. And in order to implement the consensus, China will suspend the additional tariffs imposed this year on 211 items for three months from January 1 to March 31, 2019.
The lists include 25% tariffs on 28 items in list 1, 25% tariffs on 116 items in list 2, and 5% tariffs on 67 items in list 3.
Eurozone PMI manufacturing dropped to 51.4 in December, down from 51.8, missed expectation of 51.9. It’s a 34-month low. PMI services dropped to 51.4, down from 53.4, missed expectation of 53.4. It’s a 49-month low. PMI composite dropped to 51.3, down from 52.7, a 49-month low.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“The Eurozone economy saw a disappointing end to 2018, with growth slowing to the weakest for four years. While some of the slowdown reflected disruptions to business and travel arising from the ‘yellow vest’ protests in France, the weaker picture also reflects growing evidence that the underlying rate of economic growth has slowed across the euro area as a whole.
“Companies are worried about the global economic and political climate, with trade wars and Brexit adding to increased political tensions within the euro area. The surveys also point to further signs that the struggling autos sector continued to act as a drag on the region’s economy.
“While GDP growth in the fourth quarter as a whole is indicated at almost 0.3%, the surveys point to quarterly GDP growth momentum slipping closer to 0.1% in December alone. Forward-looking indicators such as new orders and future expectations remaining subdued suggest that demand growth is stalling, adding to downside risks to the immediate outlook.
“The survey also brought signs that lower oil prices are feeding through to lower selling price inflation, though price trends remained very varied across the region. Germany continues to report the highest rates of increase, in part linked to higher wage growth.”
Germany PMI manufacturing dropped to 51.5, down from 51.8, missed expectation of 51.7. It’s a 33-month low. PMI services dropped to 52.5, down from 53.3, missed expectation of 53.5. It’s the lowest in 7 months. PMI composite dropped to 52.2, down from 52.3, a 48-month low.
Commenting on the flash PMI data, Phil Smith, Principal Economist at IHS Markit said:
“The PMI data disappointed again in December, indicating the continuation of only a modest rate of underlying growth across Germany’s private sector. Furthermore, with new orders close to stalling in December and firms reporting reduced optimism towards the outlook, there’s a lack of momentum heading into the New Year.
“It’s a stark contrast from the situation this time last year. Reports of an economy close to overheating have been supplanted by concerns about an increasingly uncertain political backdrop, trade wars and a struggling autos industry.
“The survey’s measures of output and new orders diverged further from that of employment as December saw another solid – and slightly accelerated – round of job creation across both manufacturing and services. With firms now eating into backlogs of work at a faster rate, the indication is that a renewed slowdown in hiring is increasing likely.”
France PMI manufacturing dropped to 49.7 in December, down from 50.8, and missed expectation of 50.7. It’s the worst reading in 27 months. France PMI services dropped to 59.6, down from 55.1 and missed expectation of 54.8. It’s the lowest level in 34 months. PMI composite dropped to 49.3, down from 54.2. It’s a 30-month low and the first contraction reading in 2 1/2 years.
Commenting on the Flash PMI data, Eliot Kerr, Economist at IHS Markit said:
“Having held up reasonably well throughout the initial months of Q4, latest flash data pointed to an outright contraction in France’s private sector for the first time in two-and-a-half years, following the protests which have swept through the country in recent weeks. Momentum in the manufacturing sector’s downturn gathered pace, while most notably, the service sector’s resilience came to a halt, with business activity and demand dropping.
“Prior to the December flash results, survey data suggested that the French economy was set to record a fairly reasonable quarterly expansion in Q4. Having propped private sector growth up in recent months, contraction in the service sector presents significant downside risks to Q4 growth prospects.”
Economic data released from Japan today are not bad. Based on the results of the Tankan survey, it’s unlikely for BoJ to ease monetary further. Yet, it’s not time for the central bank to start stimulus exit too.
Large manufacturing index was unchanged at 19 versus expectation of a drop to 17.
Large manufacturing outlook dropped notably by -4 to 15, missed expectation of 16.
Large non-manufacturing index rose 2pts to 24, above expectation of 21.
Large non-manufacturing outlook also rose 2pts to 24, above expectation of 20.
Large all industry capex rose 14.3% in Q4, beat expectation of 12.7%.
PMI manufacturing improved to 52.4, up from 52.2 and beat expectation of 52.3. Markit noted that “new order growth accelerates despite exports declining to sharpest extent in over two years”. However, “business confidence drops for seventh straight month to lowest since October 2016”.
Joe Hayes, Economist at IHS Markit, said in the release that “Japan’s manufacturing sector closed 2018 with a strong finish.” But the data also “bring some cautious undertones to the fore,”. In particular “Export orders declined at the fastest pace in over two years, while total demand picked up only modestly. Confidence also continued to fall, a seventh straight month in which this has now occurred.” He added “the prospects heading into 2019 ahead of the sales tax hike still appear skewed to the downside.”
The assurances that UK Prime Minister Theresa May got from the EU were rather vague and they unlikely to appease the MPs. But at the time same, it’s reported that May has been vague in her requests too. It caused some griefs from European Commission President Jean-Claude Juncker. He said at a press conference that “I do find it uncomfortable that there is an impression perhaps in the UK that it is for the EU to propose solutions”. And, “It is the UK leaving the EU. And I would have thought it was rather more up to the British Government to tell us exactly what they want.”
After yesterday’s EU summit, EU27 leaders concluded their positions on Brexit in a five point statement. Firstly, it’s “not open for renegotiation”. Secondly EU wishes to “establish as close as possible a partnership” with the UK in the future. Thirdly, the backstop is intended as an “insurance policy” to prevent hard Irish border. And EU has “firm determination to work speedily on a subsequent agreement” so that “the backstop will not need to be triggered”. Fourthly, if the backstop were triggered, “it would apply temporarily, unless and until it is superseded by a subsequent agreement that ensures that a hard border is avoided.” Fifthly, EU calls for preparedness for all possible Brexit outcome.
In the post meeting press conference, ECB President Mario Draghi said the assessment of risks was a focal point in the discussion during the meeting. And he’d summarize the discussions with “continuing confidence with increasing caution”.
ECB lowered both 2018 and 2019 growth forecast. Growth is now projected to be at 1.9% in 2018 (prior 2.0%), 1.7% in 2019 (1.8% prior), 1.7% in 2020 (unchanged) and 1.5% in 2021 (new). Draghi said that risks are “broadly balanced” but balance of risks is “moving to the downside”. He noted “persistence uncertainties” related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility”, as reasons.
On HICP inflation, it’s now projected to be at 1.8% in 2018 (1.7% prior), 1.6% in 2019 (1.7% prior), 1.7% in 2020 (unchanged), 1.8% in 2021 (new). ECB noted that headline inflation is likely to fall over the coming months “On the basis of current futures prices for oil”. Underlying inflation remains “generally muted”. Though, “domestic cost pressures are continuing to strengthen and broaden”.
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the President of the Eurogroup, Mr Centeno.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, our net purchases under the asset purchase programme (APP) will end in December 2018. At the same time, we are enhancing our forward guidance on reinvestment. Accordingly, we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
While incoming information has been weaker than expected, reflecting softer external demand but also some country and sector-specific factors, the underlying strength of domestic demand continues to underpin the euro area expansion and gradually rising inflation pressures. This supports our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after the end of our net asset purchases. At the same time, uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent. Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term. Our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets, continues to provide the necessary degree of monetary accommodation for the sustained convergence of inflation to our aim. In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.2%, quarter on quarter, in the third quarter of 2018, following growth of 0.4% in the previous two quarters. The latest data and survey results have been weaker than expected, reflecting a diminishing contribution from external demand and some country and sector-specific factors. While some of these factors are likely to unwind, this may suggest some slower growth momentum ahead. At the same time, domestic demand, also backed by our accommodative monetary policy stance, continues to underpin the economic expansion in the euro area. The strength of the labour market, as reflected in ongoing employment gains and rising wages, still supports private consumption. Moreover, business investment is benefiting from domestic demand, favourable financing conditions and improving balance sheets. Residential investment remains robust. In addition, the expansion in global activity is still expected to continue, supporting euro area exports, although at a slower pace.
This assessment is broadly reflected in the December 2018 Eurosystem staff macroeconomic projections for the euro area. These projections foresee annual real GDP increasing by 1.9% in 2018, 1.7% in 2019, 1.7% in 2020 and 1.5% in 2021. Compared with the September 2018 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised slightly down in 2018 and 2019.
The risks surrounding the euro area growth outlook can still be assessed as broadly balanced. However, the balance of risks is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.
According to Eurostat’s flash estimate, euro area annual HICP inflation declined to 2.0% in November 2018, from 2.2% in October, reflecting mainly a decline in energy inflation. On the basis of current futures prices for oil, headline inflation is likely to decrease over the coming months. Measures of underlying inflation remain generally muted, but domestic cost pressures are continuing to strengthen and broaden amid high levels of capacity utilisation and tightening labour markets, which is pushing up wage growth. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
This assessment is also broadly reflected in the December 2018 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.8% in 2018, 1.6% in 2019, 1.7% in 2020 and 1.8% in 2021. Compared with the September 2018 ECB staff macroeconomic projections, the outlook for HICP inflation has been revised slightly up for 2018 and down for 2019.
Turning to the monetary analysis, broad money (M3) growth stood at 3.9% in October 2018, after 3.6% in September. Apart from some volatility in monthly flows, M3 growth continues to be supported by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
In line with the upward trend observed since the beginning of 2014, the growth of loans to the private sector continues to support the economic expansion. The annual growth rate of loans to non-financial corporations stood at 3.9% in October 2018, after 4.3% in September, while the annual growth rate of loans to households remained unchanged at 3.2%. The pass-through of the monetary policy measures put in place since June 2014 continues to significantly support borrowing conditions for firms and households, access to financing – in particular for small and medium-sized enterprises – and credit flows across the euro area.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, the Governing Council reiterates the need for rebuilding fiscal buffers. This is particularly important in countries where government debt is high and for which full adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions. Likewise, the transparent and consistent implementation of the EU’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.
Further information on the technical parameters of the reinvestments will be released at 15:30 CET on the ECB’s website.
US initial jobless claims dropped -27k to 206k in the week ending December 8, better than expectation of 227k. Four-week moving average dropped -3.75k to 224.75k. Continuing claims rose 25k to 1.661M in the week ending December 1. Four week moving average of continuing claims dropped -2.5k to 1.66575M.
Also released, US import price index dropped -1.6% mom in November, Canada new housing price index rose 0.0% mom in October.
UK Prime Minister Theresa May survived the leadership challenge yesterday. She’s now in Brussels for the EU summit. She told reporters that “I don’t expect an immediate breakthrough, but what I do hope is that we can start to work as quickly as possible on the assurances that are necessary.” And those include both legal and political assurances on the backstop.
Also, May confirmed that she will not lead the Conservatives into 2022 election.
ECB let interest rates unchanged today as widely expected. That is, main refinancing rate, marginal lending facility and deposit facility rates are held at 0.00%, 0.25% and -0.40% respectively.
ECB maintained forward guidance that interest rates will “remain at their present levels at least through the summer of 2019”.
Also, the asset purchase program will end this month as scheduled.
Full statement below:
Monetary Policy Decisions
At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
Regarding non-standard monetary policy measures, the net purchases under the asset purchase programme (APP) will end in December 2018. At the same time, the Governing Council is enhancing its forward guidance on reinvestment. Accordingly, the Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.
Ifo slashed German economy growth forecast in the Winter report released today. 2018 growth forecast is revised down from 1.9% to 1.5%. 2019 growth forecast is revised down from 1.9% to 1.1%. For 2020, growth forecast is revised down from 1.7 to 1.6%. Ifo warned that “the weakness triggered by the automotive industry will continue until 2019. A wide range of uncertainties are also curbing the global economy, and especially Brexit, Italy and US trade policy to name but a few.”
In the report, Ifo said downside risks for global economy “grew markedly” compared to autumn. US has imposed customs duties on a “large number of imports”, followed by retaliation from China and the EU. And “it is impossible to predict the direction that the trade dispute will take”. In case of escalation, Ifo warned “global trade in goods and overall economic production can be expected to suffer a major setback.”
Also, trade dispute will lead to faster rise in inflation. And if advanced economies central banks opt for “far more restrictive measures”, this may prompt a “return to capital outflows from emerging markets.” Hard Brexit “represents another risk for the economy both in Britain and in the euro area.” Besides, high risk premium on Italian government bonds also
pose a threat to economic development in the Eurozone.
SNB Chairman Thomas Jordan warned in the post meeting press conference that “surveys indicate that trade tensions have prompted companies to reassess their investment plans and value chains.” Also, Brexit “uncertainty remains high following the postponement of the vote in the UK parliament.” He also pointed to the “tension surrounding Italy’s fiscal policy also persists”.
Jordan said “all these risks could lead to turbulence in the financial markets, jeopardize global economic growth, and also influence monetary policy.” He added that Swiss Franc remains highly valued. At the same time, FX situation is still fragile.
Italy 10 year yield drops notably today on news that the coalition government offered major concession to EU regarding its budget. Italian Prime Minister Giuseppe Conte told reports after meeting European Commission President Jean-Claude Juncker that 2019 budget deficit target from 2.4% to 2.04%.
Conte emphasized that “We are not betraying the trust of Italians and we respect the commitments made with the measures which have the most impact.” He added that “growth will be above our expectations” and the structural deficit will fall. Economy Minister Giovanni Tria will travel to Brussels today to guide the remaining parts of the budget talks with EU.
Italy 10 year yield is down -0.076 at 2.937 at the time of writing. It’s now at the lowest level since late September.
European Union Budget Commissioner Guenther Oettinger reiterated the commission’s stance on Brexit negotiation. That is, ” final clarification yes, but further negotiations no”. Oettinger went further and emphasized that there won’t be a time limit for the backstop solution on Irish border. He added “that doesn’t work. We need to have clear rules for people, products and goods at the border of Ireland, Northern Ireland, Belfast and Dublin.”
Separately, it’s reported the EU is ready to provide further assurance regarding the backstop. Reuters reported after seeing a six-point document for today’s summit. The assurance would include that “The European Council underlines that the backstop does not represent a desirable outcome for the Union. The backstop is only intended as an insurance policy … It is the Union’s firm determination to work speedily on a subsequent agreement.”
And even if triggered EU would say the backstop would “apply only temporarily unless and until it is superseded by a subsequent agreement.” EU would also commit to “best endeavours” to agree on a new EU-UK deal if the backstop is triggered “so that it would only be in place for a short period and only as long as strictly necessary.”
SNB kept sight deposit rate unchanged at -0.75% as widely expected. Three month Libor target range is held at -1.25% to -0.25% correspondingly. SNB also pledged to “remain active in the foreign exchange market as necessary”.
SNB also noted that Swiss Fran is “still highly valued, and the situation on the foreign exchange market continues to be fragile.” Negative interest rate and the willingness to intervene “remains essential”. Theses measures “keep the attractiveness of Swiss franc investments low and reduce upward pressure on the currency.
Near term inflation forecast was revised lower due to “drop in oil prices”. Medium term inflation forecast is also revised lower due to “more moderate growth prospects”.
For 2018, inflation is forecast to be at 0.9%, unchanged
For 2019, inflation is forecast to be at 0.5%, revised down from 0.8%
For 2020, inflation is forecast to be at 1.0%, revised down from 1.2%
Slow down in Q3 is seen as temporary by SNB. And it anticipates “solid growth in the coming quarters”. For the near term, world economy will continue to expand “somewhat above potential”. But “gradual slowdown is likely in the medium term”. SNB pointed out some significant risks including “political uncertainties and protectionist tendencies” For 2018, growth is projected to be at 2.5%, slightly revised down. For 2019, growth is projected to slow to 1.5%
ECB is widely expected to keep benchmark interest rate unchanged at 0.00% today. And it should stick with the plan to end the asset purchase program after December. Nevertheless, there are prospects of some dovish shifts. As indicated by recent economic data, growth momentum in the Eurozone, in particular in Germany, has slowed down quite notably. Recent slump in oil prices would also put some downward pressure in the energy led headline inflation in the bloc. ECB is generally expected to revise down 2019 growth and inflation forecasts.
President Mario Draghi’s comments on the economy will also be watched. ECB has so far viewed the slowdown in second half as temporary. But policy makers could start to feel more uncertainty about that. In particular, the slowdown in global trade due to protectionism is starting to bite exports growth, most notably in Germany. But for now, we’re not expecting ECB to change the forward guidance of keeping interest rates at present level at least through summer of 2019. The forward guidance itself is flexible enough.
SNB is also widely expected to keep the Sight Deposit rate unchanged at -0.75%, with 3-month Libor target range held at -1.25 to -0.25%. Some traders might look for hints of a rate hike in 2019. But it’s rather unlikely. EUR/CHF ‘s uptrend topped at 1.2004 back in April, rejected by the key 1.2 handle. Subsequent events, including Iran sanctions, Italian elections and budget, Turkish Lira crisis, trade war, stock markets rout, etc, sent the cross back to below 1.15. Meanwhile, domestically, Swiss economy also contracted -0.2% in Q3. There is little room for SNB policy makers to move away from negative interest rate.
Canadian Foreign Minister Chrystia Freeland warned the US (not China) not to politicize the arrest and extradition of Huawei top executive Meng Wanzhou. Trump said on Tuesday that he could intervene in the case if it’s good for trade negotiation with China. When asked about Trump’s comments, Freeland said “our extradition partners should not seek to politicize the extradition process or use it for ends other than the pursuit of justice and following the rule of law”.
Separately, Chinese state-owned hawkish media Global Times urged Canada to “distance itself from US hegemonism and fulfill its obligations to help maintain international order and protect human rights”. And the media also warned that “Washington is mistaken if it thinks it can take Meng hostage and ransom her for concessions in the upcoming trade talks.”
Sterling softens mildly in Asia after UK Prime Minister Theresa May survived the leadership challenge. 200 Conservative MPs voted in support for May in the no-confidence vote. 117 voted against her. That’s way more than enough to secure her place as Prime Minister. But it’s still alarming than more than a third of the MPs of her party wanted her out. May herself also admitted that “a significant number of colleagues did cast a vote against me and I’ve listened to what they said”. But she added it’s time to “get on with the job of delivering Brexit for the British people”.
May will go to Brussels for the two day EU summit today. But she’s only given 10 mins to tell EU leaders what she needs to get the Brexit agreement through parliament. EU’s stance is very clear that the agreement itself is not renegotiable. But they’re open to offer “assurances” regarding the Irish border backstop, and others. The results of the summit could continue to trigger volatility in the pound.
Despite yesterday’s rebound, Sterling remains near term bearish. 1.2811 resistance in GBP/USD 144.02 resistance in GBP/JPY and 0.8931 support in EUR/GBP need to be taken out to confirm short term bottoming. Otherwise, more selloff is still in favor in the Pound.
Sterling is without a doubt a star today. The triggering of the no-confidence of vote on UK PM Theresa May turns out to be a blessing for her, as well as the pound. More and more MPs turn out to support May as the ballot at 1800-2000 GMT approaches. And we tend to agree with Environment Secretary Michael Gove that May would win the leadership challenge “handsomely”. That will give her a strong position to go to EU summit tomorrow, to get the “assurances” she need to push the Brexit agreement through the Commons. We’ll see how it goes in a few hours, but things are looking positive.
For now, GBP/NZD is the biggest mover today, a loser this time, as NZD’s rebound also lost steam. It turns out that 61.8% retracement of 1.6684 to 2.0469 at 1.8130 is a rather tough support level to beat, opposite to what we’ve expected here. It’s a bit early to declare, but considering that daily MACD is turning up, fall from 2.0469 should have at least made a short term bottom at 1.8125.
We’d now expect stronger rebound to 1.8634. Firm break there will confirm this case and bring further rise to 38.2% retracement of 2.0469 to 1.8125 at 1.9020. Reaction from 1.9020 will reveal how deep the fall from 2.0469 would develop into.
China announced to suspend retaliatory tariffs on 211 items of US autos and parts for 3 months
China Ministry of Finance announced to suspend retaliation tariffs on US autos and parts for 30 days, as a result of the meeting between Xi and Trump in Argentina.
The statement noted that important consensus was reached between the two heads of state. And in order to implement the consensus, China will suspend the additional tariffs imposed this year on 211 items for three months from January 1 to March 31, 2019.
The lists include 25% tariffs on 28 items in list 1, 25% tariffs on 116 items in list 2, and 5% tariffs on 67 items in list 3.
Statement of the MoF in simplified Chinese.