It’s reported that German Chancellor Angela Merkel will not run for Christian Democratic Union leadership again in the December convention. Though, she intends to serve out her term as Chancellor through 2021. Merkel is expected to hold a media conference at 1pm Berlin time.
Right now, there are a few possible candidates for the party leadership. Jens Spahn, Ralph Brinkhaus, and Annegret Kramp-Karrenbauer are among the possible ones.
Market reaction is rather muted to the news though. It’s believed that even if Merkel would be replaced as Chancellor, there won’t be much change to the coalition’s policies, which will still be dominated by CDU/CSU and the SPD.
It’s a rather slow day in terms of news and forex volatility. Italian stocks lead Europeans higher. At the time of writing, the FTSE MIB index is up 2.42%, responding well to S&P’s rating review. S&P kept Italy’s sovereign credit rating unchanged at BBB, two notches above junk, even though outlook is negative. FTSE 100 is up 1.31%, DAX is up 1.28% and CAC is up 0.26%.
Italian 10 year yield is down notably by -0.0817 at 3.348 at the time of writing German 10 year bund yield is up 0.034 at 0.392, below 0.4 handle. Also, spread remains at 295, below but close to 300. Euro also gives little reaction as it’s trading down against all other major currencies but Yen and Swiss Franc. JPY and CHF are weaker on receding risk aversion natural. So, we see how weak the Euro remains. On the other hand, commodity currencies are trading generally high as the strongest.
Earlier in Asia, major indices closed mixed. China Shanghai SSE closed down -2.18% at 2542.17. But the closely correlated Hong Kong HSI closed up 0.28%. Nikkei lost -0.16% and Singapore Strait Times gained 0.32%. Japan 10 year yield dropped -0.0095 to 0.105, now very very close to BoJ’s allowed range of -0.1 to 0.1%.
US personal income and spending, PCE inflation will be featured in US session. Hopefully, the data will trigger more volatility.
Two central banks will meet this week, BoJ and BoE. Both are expected to keep monetary policies unchanged. At the same time, focuses will be on new economic projections from both central banks.
On the data front, there are at least something important for almost every major currencies. US will release PCE, ISM and NFP. Eurozone will release GDP, CPI and unemployment rate. UK will release PMI. Swiss will release KOF and CPI; Canada will release GDP and employment. Australia will release CPI and trade balance. China will release PMIs. So, be prepared for a very busy week.
Here are some highlights:
Monday: Japan retail sales; UK mortgage approvals, M4 money supply, CBI realized sales; US personal income and spending, PCE inflation
Tuesday: Japan unemployment rate; Australia building approvals; France GDP; German CPI, unemployment; Italy GDP; Eurozone GDP; Swiss KOF economic barometer; US S&P Case-Shiller house price, consumer confidence
Wednesday: New Zealand building permits; Japan industrial production, consumer confidence, housing starts, BoJ rate decision; Australia CPI; China PMIs; UK BRC shop price, Gfk consumer confidence; German retail sales; Eurozone CPI, unemployment rate; US ADP employment , employment cost index Chicago PMI; Canada GDP, IPPI and RMPI
Thursday: Australia trade balance, import price; China Caxin PMI manufacturing; Swiss SECO consumer climate, CPI, manufacturing PMI; BoE rate decision and inflation report, UK PMI manufacturing; US non-farm productivity, jobless claims; ISM manufacturing, construction spending
Friday: New Zealand ANZ business confidence; Australia retail sales, PPI; German import prices; Eurozone PMI manufacturing final; Swiss retail sales; UK construction PMI; Canada employment, trade balance; US non-farm payrolls, trade balance, factory orders
UK Chancellor of the Exchequer Philip Hammond will deliver his budget speech today. He told Sky News that in case of a no-deal Brexit, “we would need to look at a different strategy and frankly we’d need to have a new budget that set out a different strategy for the future.” And the government would have to ” see how markets and businesses and consumers responded to that.” And then, “we would take appropriate fiscal measures to protect the economy, to prepare us for the future and to strike out in a new direction”.
Separately, he pledge to BBC that he will maintain fiscal buffers, a reserve of borrowing power against my fiscal rules, so if the economy, as a result of a no-deal Brexit or indeed because of something else that we haven’t anticipated, needs support over the coming months and years I have the capacity to provide that support.” And he emphasized “the important point is that I have got fiscal reserves that would enable me to intervene.”
Last Friday, S&P kept Italy’s sovereign debt rating unchanged at BBB, two notches above junk. However, outlook was lowered to negative from stable. Nonetheless, the result of the view was already better than Moody’s, which downgraded Italy to a notch above junk with stable outlook.
S&P said in the statement that “the Italian government’s economic and fiscal policy settings are weighing on the country’s economic growth prospects, a critical driver of government debt-to-GDP trajectory.” Also, “the government’s planned economic and fiscal policy settings have eroded investor confidence, as reflected by a rising yield on government debt.”
S&P projected Italy 2019 budget deficit at 2.7% of GDP, higher than the government’s own forecast and pledge of 2.4%. The rating agency noted that the government’s forecasts for economic growth of 1.5% in 2019 and 1.6% in 2020 were “overly optimistic”. And it projected 1.1% growth for both year, even downgraded from 1.4%, as “the demand stimulus from the government’s budgetary measures will likely be short-lived.”
Though, S&P also hailed that Italy “continues to be supported by its wealthy and diversified economy and its strong external position, with the economy close to becoming a net creditor in the context of its net international investment position.”
US GDP grew 3.5% annualized in Q3, slowed from Q2’s 4.2% but beat expectation of 3.2%. BEA noted in the release that “The increase in real GDP in the third quarter reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, state and local government spending, federal government spending, and nonresidential fixed investment that were partly offset by negative contributions from exports and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased”.
Also, “The deceleration in real GDP growth in the third quarter reflected a downturn in exports and a deceleration in nonresidential fixed investment. Imports increased in the third quarter after decreasing in the second. These movements were partly offset by an upturn in private inventory investment.”
Entering into US session, Yen stays in the driving seat as risk aversion intensifies in European session. While all major European indices are in deep red, we’d like to point out the free fall in German 10 year yield too. German 10 year bund yield is down -0.044 at 0.357, which is a rather serious sign of investor nervousness. It was over 0.5 just 10 days ago. Italian 10 year yield is up 0.039 at 3.529. That is, German-Italian spread is closing in 320 again.
Also, note that Japanese 10 year JGB yield also suffered steep fall this week.
Back to the currency markets, Dollar is trading as the second strongest for today. It’s partly supported by hawkish comments by new Fed Vice chair Richard Clarida, Trump’s new addition to Fed. Dollar will look into US Q3 GDP for strength for further rally. Commodity currencies are the weakest ones. But Euro and Sterling are actually not far away. Today’s market is rather one-sided on Yen and Dollar.
The latest ECB Survey of Professional Forecasters (SPF) showed unchanged projections for headline inflation for 2018, 2019 and 2020. But Core inflation, excluding food and energy forecasts were revised slightly lower. Also, expectations for real GDP growth were also revised lower.
Headline inflation is projected to be at 1.7% in 2018, 1.7% in 2019 and 1.7% in 2020, unrevised. Core inflation is projected to be at 1.1% in 2018, 1.4% in 2019 and 1.7% in 2020, revised slightly down. ECB noted “he expected pick-up in underlying inflation remained underpinned by a pick-up in annual growth in compensation per employee, which was expected to increase to 2.3% by 2020.” The convergence with between headline and core inflation is still a development that’s welcomed by the ECB.
GDP growth is projected to be at 2.0% in 2018, 1.8% in 2019 and 1.6% in 2020. There were downward revision of -0.2% for 2018 and -0.1% for 2019. ECB noted “respondents typically attributed their revisions to external factors such as higher energy prices weighing on disposable income, with many also noting that they had now incorporated into their baseline forecasts at least some dampening impact on exports and investment due to increased uncertainty surrounding the outlook for world trade. ”
The UK National Institute of Economic and Social Research (NIESR) said the UK economy has “recently gained momentum” with Q3 GDP growth at 0.7%. Under the main forecasts scenario, based on “soft” Brexit, 2019 growth forecasts were revised up to 1.9%, reflecting the stronger momentum. However, NIESR also warned that here is “an enormous amount of uncertainty” around the forecasts.
Under a no-deal Brexit scenario which UK has to revert to trade under WTO rule, growth is projected to slow sharply down to just 0.3% in 2019. Unemployment rate will jump to 5.8% in 2020. Inflation will surge above BoE’s target range in 2019, forcing BoE to raise interest rate to above 2.5% in 2019, next year.
The summary of new forecasts show, under a soft Brexit scenario, GDP to grow 1.4% in 2018, 1.9% in 2019 and than slow to 1.6% in 2020. CPI is expected to slow from 2.3% in 2018 to 1.9% in 2019 and then climb back to 2.1% in 2020. Unemployment is projected to drop from 4.1% to 4.0% in 2019 then rise back to 4.5% in 2020. BoE interest rate will rise from 0.8% to 1.3% in 2019 and then 1.8% in 2020.
However, under a no-deal Brexit, GDP growth will slow sharply from 1.4% to 0.3% in 2019, and 0.3% in 2020. Inflation will surge to 3.2% in 2019 before falling back to 2.6% in 2020. Unemployment rate will jump to 5.3% in 2019 and rise further to 5.8% in 2020. BoE will have to raise interest rate much faster to 2.6% in 2019 before dropping to 2.5% in 2020.
Full forecast will be published later on October 31.
Here’s an update on our AUD/USD short (entered at 0.7100, stop at 0.7165), last discussed here.
Finally, AUD/USD has completed the consolidation from 0.7040 and resumed recent down trend. That came later then we expected, but nevertheless, it’s a positive development for our strategy. As noted before, we’d expect the down trend from 0.8135 to target a test on 0.6826 (2016 low). At the same time we’re also looking at the possibility of resuming long term down trend from 1.1079 (2011 high).
For the latter case, it should now be time to see some downside acceleration, ideally. And to show that momentum, AUD/USD should break through 61.8% projection of 0.7314 to 0.7040 from 0.7159 at 0.6990 easily and firmly without much hesitation. If that’s the case, even though, support zone between 0.6826 and 100% projection 100% projection at 0.6885 might limit downside at first attempt, support won’t last long. However, if the break of 0.6990 is sluggish, we’d probably not even see a break of 0.6826 low.
For now, we’ll hold on to the short position, lower the stop to 0.7100 (breakeven). We wont’ put a target yet and will keep on monitoring to decide the exit.
Chinese Yuan’s selloff picks up some momentum today. USD/CNH (offshore) break 6.9586 yesterday, as well as a near term channel resistance. The upside acceleration suggests that Yuan selling might intensify for the near term.
Now, it looks like a break of 6.9875 high in USD/CNH (2017) low is inevitable. That is, Yuan will hit the lowest level in a decade. The question now is whether there will be intervention of some sort to keep USD/CNH below 7.000 handle.
Reactions in the stock markets are muted though. At the time of writing, the Shanghai SSE is down just -0.46% at 2591. Hong Kong HSI is also down -1.09% only as recent down trend extends steadily.
Fed Vice Chair Richard Clarida, Trump latest addition to the Federal Reserve Board, delivered his first public speech yesterday. And he backs further rate hike by Fed. He said, “if the data come in as I expect, I believe that some further gradual adjustment in the federal funds rate will be appropriate.”
Clarida also noted that “even after our September decision (a 25bps hike), I believe U.S. monetary policy remains accommodative.” He pointed out that ‘the funds rate is just now–for the first time in a decade–above the Fed’s inflation objective”. However, “inflation-adjusted real funds rate remains below the range of estimates for the longer-run neutral real rate, often referred to as r*.”
Additionally, he also noted that “if strong growth and robust employment gains were to continue into 2019 and be accompanied by a material rise in actual and expected inflation, that circumstance would indicate to me that additional policy normalization might well be required beyond what I currently expect.”
In a speech delivered yesterday, Cleveland Fed President Loretta Mester talked down recent market slump again. And as a known hawk, she continues to support further gradually remove of monetary policy accommodation ahead.
She said that “while a deeper and more persistent drop in equity markets could dash confidence and lead to a significant pullback in risk-taking and spending, we are far from this scenario.” And, “similar to the swings in the market we saw earlier this year, the movements of late do not seem to be signaling that investors are becoming overly pessimistic.”
On labor market, she noted that “we are beyond maximum employment”. Much of the explanation of “moderate wage growth”, lies with ” low levels of inflation and productivity growth over this expansion”. And, “I wouldn’t expect to see a strong acceleration in wages unless we see a strong pickup in productivity growth.” Meanwhile, she also emphasized that “maintaining stable inflation expectations will be the key to maintaining inflation at target.
Chinese Premier Li Keqiang invited Japanese Prime Minister Shinzo Abe to build a “more mature, steady and progressive” relationship together. Abe is in a three day visit to China, the first the Prime Minister did in seven years.
Li said, “the China-Japan relationship has gone through wind and rain in the past four decades, yet peace, friendship and cooperation have always been the mainstream.” And he added “we need adhere to the general direction of peace, friendship and cooperation and conform to the trend of the times, so as to jointly build a more mature, steady and progressive China-Japan ties.”
Li also urged “both sides would work hard to promote regional peace, safeguard multilateralism and free trade, and become the axis of stability, growth and momentum for not just Asia but the world,”
Abe said when he arrived in Beijing yesterday that “Today, Japan and China are playing an essential role in economic growth not only in Asia but in the world,” And, “as problems that cannot be resolved by one country alone have risen, the time has come for Japan and China to jointly contribute to world peace and prosperity.”
Today, China and Japan signed a broad range of agreements covering cooperations in areas from finance and trade to innovation and securities listings. In particular, the currency swap arrangement dropped back in 2013 will be revived.
GBP/AUD is the biggest mover today. At the time of writing, it’s down -128 pips or -0.70%.
As we expected here, the fall from 1.8726 did extend lower and met 38.2% retracement of 1.7282 to 1.8726 at 1.8174. But out of our expectation, the decline is much more powerful than anticipated and 55 day EMA is taken out without much hesitation.
For now, further decline is expected as long as 1.8284 minor resistance holds. Deeper fall should be seen to 61.8% retracement at 1.7863. Though, break of 1.8284 will suggest short term bottoming and bring stronger rebound.
In the bigger picture, there is no clear sign of trend reversal in GBP/AUD yet, except bearish divergence condition in daily MACD, and the fact that it just missed 61.8% projection of 1.6161 to 1.8507 from 1.7282 at 1.8732. That is, we can’t tell whether the corrective up trend from 2016 low at 1.5626 has completed yet. So, we’ll look for bottoming signal again below 1.7863 fibonacci level.
Risk aversion recedes quick notably in US session. DOW is currently trading above more than 350 pts and that helps major European indices closed higher too. As we noted here, DOW’s rebound is not too much a surprise based on technical consideration. But for the near term, the question it whether is can sustain.
In the currency markets, Australian and New Zealand Dollar are trading as the strongest one for now, followed by the US Dollar. Sterling is doing it’s own thing, basically react to no event today, and extends recent selloff. Following Sterling, Swiss Franc is the second weakest. Based on recent pattern, Franc’s decline can be attributed to the rally in Turkish Lira, suggesting easing pressure on emerging markets. Yen is the third weakest, partly on market sentiments stabilization. Also, 10 year JGB yield closed sharply lower again today 0.114. It was above 0.15 just a few days ago.
Euro is mixed for the moment. But it does extend recent decline against Dollar. ECB stands pat today as widely expected. President Mario Draghi also delivered a composed, yet uninspiring press conference. Euro is just resuming what it has been doing after the event. Here are some suggested reading on ECB:
DOW rebounds rather strongly in early session, up more than 200 pts. It’s not unexpected as DOW hit 61.8% projection of 26951.81 to 24899.77 from 25817.68 at 24549.51 yesterday. It’s also trying to draw support from 55 week EMA (now at 24565).
We’ll have to see whether such rebound can gather sustainable momentum. But for now, with the index staying well below 55H EMA (now at 25252), more decline is expected. Break of 24533.19 will target 100% projection at 23765.64 next.
A break of 55H EMA will indicate short term bottoming and bring stronger rebound, possibly through 25817.68 resistance. But that doesn’t change the outlook in the bigger context.
That is, fall from 26951.81 is seen as correcting whole up trend from 15450.56. Further decline is expected to 38.2% retracement at 22558.33 before completion. It’s just a matter of going straight to this fibonacci level, or have an interim rebound first.
ECB left main refinancing rate unchanged at 0.00% as widely expected. Marginal lending rate and deposit rate were held at 0.25% and -0.40% respectively. It also reiterated that interest rates will “remain at their present levels at least through the summer of 2019”. ECB also sticks with the plan to end the EUR 15B per month asset purchase after December.
In the post meeting press conference, ECB President Mario Draghi said “incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures.” Also, “the underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding down of our net asset purchases.”
On inflation, Draghi noted while underlying inflation remains muted, they have been increasing from earlier lows. And underlying inflation is expected to increase further over the medium term. For now, Draghi iterated that significant amount of monetary policy stimulus is still needed to support buildup of price pressure. On growth, Draghi said risks can still be assessed as “broadly balanced”. Main prominent downside risks include trade protectionism, emerging markets and financial market volatility.
Overall Draghi’s press conference is composed as usual. EUR/USD recovers mildly but there is no change in it’s near term bearish outlook.
US initial jobless claims rose 5k to 215k in the week ended October 20, above expectation of 208K. Four-week moving average of initial claims was unchanged at 211.75k. Continuing claims dropped -5k to 1.636m in the week ended October 13, lowest since August 4, 1973. Four-week moving average of continuing claims dropped -6.75k to 1.6465m, lowest since August 11, 1973.
Also from the US, trade deficit widened to USD -76.0B in September. Headline durable goods orders rose 0.8% September, above expectation of -1.1%. But ex-transport orders rose 0.1%, below expectation of 0.3%. Wholesale inventories rose 0.3% mom in September.
Dollar has little reaction to the batch of data overall.
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 Commission Vice-President, Mr Dombrovskis.
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, we will continue to make net purchases under the asset purchase programme (APP) at the new monthly pace of €15 billion until the end of December 2018. We anticipate that, subject to incoming data confirming our medium-term inflation outlook, we will then end net purchases. We intend to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of our net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Incoming information, while somewhat weaker than expected, remains overall consistent with an ongoing broad-based expansion of the euro area economy and gradually rising inflation pressures. The underlying strength of the economy continues to support our confidence that the sustained convergence of inflation to our aim will proceed and will be maintained even after a gradual winding-down of our net asset purchases. At the same time, uncertainties relating to 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. This support will continue to be provided by the net asset purchases until the end of the year, by the sizeable stock of acquired assets and the associated reinvestments, and by our enhanced forward guidance on the key ECB interest rates. 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 0.4%, quarter on quarter, in both the first and the second quarter of 2018. Incoming information, while somewhat weaker than expected, remains overall consistent with our baseline scenario of an ongoing broad-based economic expansion, supported by domestic demand and continued improvements in the labour market. Some recent sector-specific developments are having an impact on the near-term growth profile. Our monetary policy measures continue to underpin domestic demand. Private consumption is fostered by ongoing employment growth and rising wages. At the same time, business investment is supported by solid domestic demand, favourable financing conditions and corporate profitability. Housing investment remains robust. In addition, the expansion in global activity is expected to continue supporting euro area exports, though at a slower pace.
The risks surrounding the euro area growth outlook can still be assessed as broadly balanced. At the same time, risks relating to protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent.
Euro area annual HICP inflation increased to 2.1% in September 2018, from 2.0% in August, reflecting mainly higher energy and food price inflation. On the basis of current futures prices for oil, annual rates of headline inflation are likely to hover around the current level over the coming months. While measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Domestic cost pressures are strengthening and broadening amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to pick up towards the end of the year and to increase further over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
Turning to the monetary analysis, broad money (M3) growth stood at 3.5% in September 2018, after 3.4% in August. Apart from some volatility in monthly flows, M3 growth is increasingly supported by bank credit creation. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The growth of loans to the private sector strengthened further, continuing the upward trend observed since the beginning of 2014. The annual growth rate of loans to non-financial corporations rose to 4.3% in September 2018, from 4.1% in August, while the annual growth rate of loans to households stood at 3.1%, unchanged from the previous month. The euro area bank lending survey for the third quarter of 2018 indicates that loan growth continues to be supported by increasing demand across all loan categories and favorable bank lending conditions for loans to enterprises and loans for house purchase.
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 broad-based expansion calls 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 urges specific and decisive steps to complete the banking union and the capital markets union.
German Merkel to stop leading CDU, markets shrug
It’s reported that German Chancellor Angela Merkel will not run for Christian Democratic Union leadership again in the December convention. Though, she intends to serve out her term as Chancellor through 2021. Merkel is expected to hold a media conference at 1pm Berlin time.
Right now, there are a few possible candidates for the party leadership. Jens Spahn, Ralph Brinkhaus, and Annegret Kramp-Karrenbauer are among the possible ones.
Market reaction is rather muted to the news though. It’s believed that even if Merkel would be replaced as Chancellor, there won’t be much change to the coalition’s policies, which will still be dominated by CDU/CSU and the SPD.