Canada’s GDP contracted -0.2% mom in June, matched expectations. Services-producing industries was down -0.2% mom. Goods-producing industries were down -0.4% mom. 12 of 20 industrial sectors posted decreases.
Advance information indicates that real GDP was essentially unchanged in July.
Trump criticized Fed’s rate hikes again in a CNBC interview from the south lawn of the White House. He said “I think we don’t have to go as fast”. And, he was “worried about the fact that they seem to like raising interest rates, we can do other things with the money.”
On the economy, Trump said “the numbers we’re producing are record-setting,” apparently referring the lowest unemployment rate in around 40 years. And, he added “I don’t want to slow it down, even a little bit, especially when you don’t have the problem of inflation”. And, on inflation he said “you don’t see that inflation coming back. Now, at some point it will and you go up”.
Though, he also repeated that he had no discussed the concerns personally with Fed Chair Jerome Powell and he likes to “stay uninvolved”.
Entering into US session, Dollar turned weak earlier today and failed to sustain gains. On the other hand, the Japanese Yen is holding broadly firm. Australian Dollar and New Zealand Dollar turned the corner. Much focus will be on US treasury yields and some solid gain there is needed to give the greenback some support. Otherwise, recent correction will likely continue with some more downside potential in the greenback.
In other markets, Europe indices are trading generally higher, with DAX up 1.34%, CAC up 0.81% and FTSE up 0.81% at the time of writing. That follows the strong rally in Asian equities. China Shanghai Composite jumped 1.61% to 2905.56 as boosted by the governments stimulus policies. While the announce measures are just fine-tunings and are hardly anything dramatic, that’s seen as a sign of the director where the Chinese government is heading towards. That is do more to support growth.
The SSE’s rebound is set to extend to 55 day EMA (now at 2944.64) and above. But for now, we’re seeing no reason for it to regain 3000 handle.
Nikkei also rose 0.51% to close at 22510.48 and pared back much of Monday’s loss. However, the day high was seen at the open at 22555.05 and there was no follow through momentum back then. Overall strength of support from the 55 day EMA is rather weak. We’ll keep monitor this level, which will decide whether Nikkei would head for test on 21462.94 support before an upside breakout.
Selloff in US treasuries was again the major theme in the markets overnight. Both 10- and 30-year yield jumped sharply and closed at the highest level since the pandemic. Fed was clear that it’s not going to tweak its asset purchases for now, and gave a nod to the rise in yields. Investors were betting on improving outlook and the return of inflation through this year’s transitory spike.
The upside re-acceleration in 10-year yield suggests that it will likely have a take on resistance zone around 2% level, between 1.971 and 61.8% retracement of 3.248 to 0.398 at 2.159 , before forming a top. This will remain the favored case as long as TNX stays above 1.578 support.
30-year yield is ahead of 10-year yield in the development. TYX has taken out corresponding resistance zone with yesterday’s rise. That is, 2.443 resistance and 61.8% retracement of 3.455 to 0.837 at 2.455. We might further rise in TYX if it could sustain above the current this resistance zone. Though, long term channel resistance at around 3% should cap upside.
Dollar is suffering more selling pressure after weaker than expected April ISM manufacturing report. The headline index dropped to 52.8, down from 55.3 and missed expectation of 55.0. Price paid index dropped sharply to 50.0, down from 54.3 and missed expectation of 55.7. Employment index dropped to 52.4, down from 57.5. New orders tumbled to 51.7, down from 57.4.
ISM noted that:
Eurozone PPI came in at 5.4% mom, 21.9% yoy in October, well above expectation of 3.2% mom, 19.0% yoy. For the month, industrial producer prices increased by 16.8% mom in the energy sector, by 1.4% mom for intermediate goods, by 0.5% mom for durable and for non-durable consumer goods and by 0.4% mom for capital goods. Prices in total industry excluding energy increased by 0.8% mom.
EU PPI rose 5.0% mom, 21.7% yoy. The highest monthly increases in industrial producer prices were recorded in Belgium (+11.2%), Italy (+9.4%) and Romania (+8.6%), while the only decreases were observed in Estonia (-2.1%), Luxembourg (-0.3%) and Sweden (-0.2%).
Australia NAB business conditions dropped -2pts to 14 in July. Business confidence rose 1pt to 7.
Alan Oster, NAB Group Chief Economist noted in the release that the business conditions index “has now fallen considerably since April”. But business conditions remain “above average”, suggesting “favourable conditions have continued to persist through the middle of 2018”. The weakness in profitability and trading conditions was partially offset by improvement in employment.
Overall, the survey results were broadly in line with NAB’s outlook. Business sector looks “relatively healthy”. Growth in employment will reduce spare capacity gradually. And that should bring in a “rise in wage and a more general lift in inflation”. However, trends in forward indicators will be watched, which may be signaling slowdown.
Fed Vice Chair Richard Clarida maintained his view that the US economy is “in a good place in terms of lower unemployment rate and the inflation rate a little bit below our 2% objective”. Also, the baseline outlook “continues to be a positive one”. That is, the committee “sees growth at or slightly above trend, sees the unemployment rate remaining low and the inflation rate rising gradually toward 2%.”
Though, he also noted that with the Beige Book survey, “we are hearing increasing references and mentions of uncertainty about policy, and particularly uncertainty about the outlook for trade negotiations, having a potential impact on business investments”.
Clarida also noted uncertainties from trade, global growth and business investments. Also, his fellow central banks saw stronger case for policy easing relative to just two months again. He reiterated Fed’s stance that “we will certainly act as appropriate to put in place policies that sustain the economic expansion, and the strong labor market and price stability.”
ECB Governing Council member Peter Kazimir suggested today that “we could expect one more interest-rate cut this year.” He underscored his continued concern over the “significant risk of rising inflation,” driven primarily by wage growth.
Kazimir reiterated his opposition to an interest-rate adjustment at upcoming July meeting. Instead, he advocated for policymakers to wait until the next round of quarterly economic projections before making any decisions.
“It’s appropriate to wait for the September forecast,” Kazimir stated. “Those are the right moments to make the correct decisions.”
Sterling recovers notably on short covering as UK Prime Minister Theresa May is scheduled to announce her new Brexit deal at 1500GMT.
Her spokesman said that “Cabinet discussed the new deal which the government will put before parliament in order to seek to secure the UK’s exit from the European Union.
The discussions included alternative arrangements, workers’ rights, environmental protections and further assurances on protecting the integrity of the UK in the unlikely event that the backstop is required.
The prime minister said that “the withdrawal agreement bill is the vehicle that gets the UK out of the European Union and it is vital to find a way to get it over the line.”
And the prime minister will be setting out further details on the way forward in a speech this afternoon.”
In the Global Economic Prospects, the World Bank raised its global growth forecast for 2024 by 0.2% to 2.6%, which matches the pace of 2023. Growth is expected to rise slightly to 2.7% in both 2025 and 2026, but still well below the pre-pandemic average of 3.1%.
“In a sense, we see the runway for a soft landing,” said World Bank Deputy Chief Economist Ayhan Kose. “That’s the good news. What is not good news is that we may be stuck in the slow lane.”
The report includes an alternative scenario where persistent inflation in advanced economies keeps interest rates about 40 basis points higher than the baseline forecast, potentially cutting 2025 global growth to 2.4%.
For the US, the World Bank now predicts 2.5% growth in 2024, consistent with the 2023 rate and up from January’s forecast of 1.6%. Growth is expected to slow to 1.8% in both 2025 and 2026.
In the Eurozone, growth is projected to accelerate to 0.7% in 2024, unchanged from previous forecasts, and then increase to 1.4% in 2025 before slightly dipping to 1.3% in 2026.
Japan’s growth forecast for 2024 has been revised down to 0.7% from 0.9%, due to weak consumption and slowing exports, though growth is expected to improve to 1.0% in 2025 and 0.9% in 2026.
China’s growth forecast for 2024 has been upgraded to 4.8% from 4.5%, driven by increased exports. However, growth is expected to decline to 4.1% in 2025 and 4.0% in 2026, due to weak investment, low consumer confidence, and a struggling property sector.
Atlanta Fed Raphael Bostic told CNBC he has “penciled in” a rate increase in “late third, maybe early fourth” quarter of 2022. “Our experience from the pandemic has really frankly surprised to the upside,” he added “I’ve really adjusted my expectations moving forward.”
Bostic expected the supply chain disruptions to “last longer than we expected”. He said, “the labor markets are not going to get to equilibrium as quick as we hoped, but demand was also going to stay high and that combination was going to mean we’re going to have inflationary pressures.” It’s becoming “clearer and clearer” inflation pressure “is going to last into 2022.”
In the Monthly Economic Bulletin, ECB noted again that growth risks surrounding growth outlook have “moved to the downside” on “persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.” And, “ample degree of monetary accommodation” is still needed for the block.
In particular, ECB said downside risks to global activity have been increasing, and warned “further escalation of trade disputes could weigh on global growth.” It acknowledged that postponement of US-China tariffs has “sent a positive signal”. But “considerable uncertainty” remains to whether negotiations could lead to de-escalation.
For Eurozone, ECB said “incoming information has surprised to the downside”. Also, growth in Eurozone foreign trade “appears set to decline further in the fourth quarter of 2018”. And it described that “pace of euro area export growth slowed down substantially (to 0.1%) in the third quarter, whereas growth in imports eased (to 1.0%).”. Net trade “exerted a drag on economic activity with a large negative contribution to GDP growth”
Dallas Fed President Robert Kaplan said yesterday that “the best argument” for him to support rate cut is the “shape” of the yield curve, inversion. And, a “tactical” reduction of a quarter point could address the risks seen by bond investors.
He also said that inflation is likely to remain low because of the change in the economy and the link between wages and prices. He added businesses are not able to pass on higher costs to customers because of stiff competition. They have to absorb lower profits so they don’t lose market share.
Separately, San Francisco Fed President Mary Daly said she’s not leaning one way or the other on July interest rate decision. And, she will learn a lot in the next two months regarding whether rates would be lower by year end.
On the one hand, she noted it’s too early to tell if additional stimulus was needed. And she saw no clouds looming on consumer spending and labor market. On the other hand, Daly noted business felt uncertain. She saw potpourri of headwinds, including trade, mood, uncertainty, global slowdown.
Entering into US session, Australian Dollar is trading as the strongest one today, followed by Swiss Franc. On the other hand Yen is the weakest one, followed by New Zealand Dollar. Optimism on easing US-China trade tension is a generally theme today, lifting Asian and European stocks, except UK. Buying jumped in after China confirmed that they received the invitation from the US for meeting, and both side are working on the details.
Three central bank announced rate decision today. It’s Turkish central bank CBRT that stole the show. The Turkish Lira was firstly hammered down by President Tayyip Erdogan’s comments that interest rate is “tool of exploitation”. But that the CBRT delivered its promise and raised policy rate (one week repo auction rate) from 17.75% to 24%. USD/TRY hit as high as 6.5514 but the tumbled to 6.0619. It’s now down around -2.8%.
BoE kept Bank Rate unchanged at 0.75% as widely expected, by unanimous vote. ECB kept main refinancing rate unchanged at 0.00% as widely expected. Also, starting October, monthly asset purchase will be halved to EUR 15B, and end after December. ECB also said it intends to reinvest the principal payments “for an extended period of time”. Both decision triggered little reactions in the markets.
At the time of writing, FTSE is down -0.15%, DAX Up 0.59%, CAC up 0.51%. Earlier today, China SSE rose 1.15% to 2686.58 but failed to reclaim 2700. Hong Kong HSI rose 2.54%. Singapore Strait Times rose 0.23%. Nikkei added 0.96%.
US CPI and jobless claims are the next focuses.
Gold’s break of 1855.40 minor resistance suggests temporary bottoming at 1817.05, after drawing support from 1819.07 support. Some consolidations could be seen, with risk of stronger recovery. But upside should be limited by 4 hour 55 EMA (now at 1888.09) to bring fall resumption.
We’re holding on to the view that fall from 1959.16 is the third leg of the corrective pattern from 2075.18. Break of 1817.05 will target 1764.31 support and below.
Eurozone retail sales rose 0.4% mom in February, well above expectation of 0.1% mom. Though, it’s still notably lower than January’s growth of 0.9% mom. In EU 28, retail sales also rose 0.4%.
Aussie trades mildly higher after RBA kept the cash rate unchanged at 1.50% as widely expected. The statement is almost likely a carbon copy of the prior one. Nonetheless, RBA sounded more optimistic on wage growth as it said that “the rate of wage growth appears to have troughed”. Regarding the economy, Australian economy is expected to grow fast in 2018 than in 2018. Regarding inflation RBA maintained that “the central forecast is for CPI inflation to be a bit above 2 per cent in 2018.” The statement concluded by maintaining “holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
Released earlier in Australia retail sales rose 0.1% mom in January, below expectation of 0.4% mom. Current account deficit widened to AUD -14.0b in Q4.
AUD/USD mildly higher but first hurdle of near term reversal is trend line resistance at 0.78.
Japan Prime Minister Shinzo Abe said today that the government is ready to implement further stimulus measures to offset the impact from coronavirus outbreak. He noted, “we’ve already compiled a spending package to forestall various risks” in the supplementary budget.
“We’ll scrutinize the impact of the coronavirus on the global and Japanese economies. If further steps are deemed necessary, we will take action without hesitation,” he added.
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Eurozone PMI manufacturing finalized at 58.3, worsening supply chain situation
Eurozone PMI Manufacturing was finalized at 58.3 in October, slightly down from September’s 58.6. But that’s still the lowest level since February. Readings of individual states remained generally strong: Netherlands at 62.5, Ireland at 62.1, Italy at 61.1, Austria at 60.0, Greece at 58.9, Germany at 57.8. Spain at 57.4, France at 53.6.
Chris Williamson, Chief Business Economist at IHS Markit said:
“Eurozone manufacturers reported a worsening of the supply chain situation in October, which curbed production growth sharply during the month. Average delivery times for raw materials lengthened at a rate exceeded only twice in almost a quarter of a century of survey data as companies reported demand once again running ahead of supply for a wide variety of inputs and components. Production constraints at suppliers were reported alongside a growing list of logistical issues. These include a lack of shipping containers and inadequate freight capacity, port congestion, driver shortages and broader transport delays linked mainly to the pandemic.
“These shortages have led to the weakest rise in factory output since the recovery began in July of last year, and also pushed inflationary pressures to new survey highs, raising further questions about just how transitory the recent spike in inflation will be.
“Business confidence also lost some ground to hit a one-year low in October, as increasing numbers of producers grew concerned about the supply situation and the impact of rising costs and prices, adding to the indications that manufacturers face some challenging months ahead.”
Full release here.