US initial jobless claims dropped -5k to 210k in the week ended October 13, matched expectations. Four-week moving average of initial claims rose 2k to 211.75k.
Continuing claims dropped -13k to 1.64m in the week ended October 6, lowest since August 3, 1973. Four-week moving average of continuing claims dropped -1.25k to 1.653m, lowest since August 18, 1973.
Philly Fed manufacturing index dropped 0.7 to 22.2, above expectation of 21.0
Entering into US session, Australian Dollar defy all the negative factor and it’s trading as the strongest one, followed by New Zealand Dollar. Australian job data was just a mixed bag as fall in unemployment rate was mainly due to contraction in labor force as shown indicated in drop in participation rate. Meanwhile, Chinese stocks are suffering another day of steep selloff. Strength in iron ore price is the key factor in driving the Aussie higher. According to Metal Bulletin spot price for benchmark 62% iron ore hit the highest level since March at 73.36.
Canadian Dollar is trading as the worst performing one as oil prices continue deep decline. WTI crude oil is now below 69 at 68.68 and is accelerating downwards. Sterling is the second weakest one on Brexit impasse. Dollar is mixed today but is showing some sign of strength at the time of writing. Let’s see if it can resume the post FOMC minutes rally in US session.
In European markets, at the time of writing:
Earlier today in Asia:
Germany’s DIHK Chambers of Industry and Commerce lowered 2018 growth forecasts significant from 2.2% to 1.8%. German economic growth is expected to slow further to 1.7% in 2019.
DIHK said “companies are noticeably more cautious about their business outlook, we see the biggest deterioration in business expectations in four years”. It added “given the rapid pace of change, for example in global trade policies or digitalization – and the unclear outcome of Brexit, it is becoming more difficult for companies to foresee a clear trend in their business development,”
In the survey titled “the air is getting thinner” business expectations dropped sharply to 11, down from 17. Current situation was unchanged at 25 though.
Sterling pays little attention to weaker than expected retail sales data.
ONS Head of Retail Sales Rhian Murphy said: “Retail continued to grow in the three months to September with jewellery shops and online stores seeing particularly strong sales. This was despite a stark slowdown in food sales in September, following a bumper summer.”
UK Prime Minister Theresa May said today that she had already put forward on a proposal for avoiding a hard Irish border to the EU. Meanwhile, “a further idea that has emerged – and it is an idea at this stage – is to create an option to extend the implementation period for a matter of months – and it would only be for a matter of months.” But she emphasized that “this is not expected to be used, because we are working to ensure that we have that future relationship in place by the end of December 2020.”
The extension is believed to be a proposal put forward by EU’s chief negotiator Michel Barnier. Under the proposal, both sides could commit to a free trade agreement by the end of 2021. That is, a year of extension in the transition period. And, only if the FTA failed to deliver so called “frictionless” trade would the Irish backstop come into action. Barnier believed that the extension would unlock the stalled debate on Irish border backstop while there would be enough time for the trade deal.
However, the idea of extending the implementation period would catch furious responses from Brexiteers. That would effectively mean another year of EU budget payments as well as continued free movements.
Let’s have a look at Yuan and Chinese stocks after US Treasury refrained from naming China a currency manipulator.
PBoC set the USD/CNY (onshore Yuan) rate at 6.9275 today, versus yesterday’s 6.9103. USD/CNY then edged further higher to 6.9413 and hit the highest level since December 2016.
USD/CNH (offshore Yuan) also edged higher to 6.9403 today. But for now, it’s limited below recent key resistance at 6.9586.
The Shanghai SSE suffers another day of selloff and reaches as low as 2504.63 so far. 2500 handle looks rather vulnerable.
Australia NAB business confidence dropped to 3 in Q3, down from Q2’s 7. Current business condition dropped to 13, down from 15. NAB noted that “though conditions remain well above average; confidence is now below average”. Meanwhile, “surveyed price and wage variables suggest at present inflationary pressures remain weak.”
On RBA monetary policy, NAB noted that markets are pricing in around 90% chance of a 25bps rate hike in the next 12-months. Pricing increased from 70% back in Q2. NAB’s own view is that “RBA will likely begin a gradual series of rate rises in mid-to-late 2019 but that this is highly data dependent.” NAB saw “inflationary pressures best described as meek at present.”
On exchange rate, NAB revised down its own forecasts on AUD/USD to “closer to US$0.70” as “global trade ructions continue to weigh.”
Australia unemployment dropped sharply to 5.0% in September, down from prior 5.3% and beat expectation of 5.3%. That’s the lowest level since April 2012.
However, it should also be noted that participation rate also dropped -0.2% to 65.4%. So, the drop in unemployment rate was more a reflection of decline in the size of labor force.
Employment grew 5.6k versus expectation of 15.2k. Full-time jobs rose 20.3k to 8.65m. But part time jobs dropped -14.7k to 3.98m.
UK Prime Minister Theresa May spent 15 minutes before the EU summit dinner to persuade other leaders on her Brexit plan. But she ended without any progress to break the impasse. European Parliament Antonio Tajani noted the “tone was more relaxed than in Salzburg, undoubtedly”, referring to the last summit. But he also added ” I did not perceive anything substantially new in terms of content”.
More importantly, EU leaders decided that there was no “decisive progress” for calling an unscheduled summit in November. Instead, they’re now targeting to close the deal in December. Though, one EU official was quoted saying “everyone wants to keep the volume low” even though an November summit is very unlikely.
BoJ Governor Haruhiko Kuroda offered a slightly more upbeat view on inflation today, in a quarterly meeting with regional branch managers. He said that consumer inflation was “moving around 1 percent”. That compared to the wordings of moving around 0.5 to 1 percent three months ago. On the economy, Kuroda maintained that it’s “expected to continue expanding moderately”.
On monetary policy, Kuroda reiterated that “the BOJ will make necessary policy adjustments to sustain the economy’s momentum to achieve the price target … while looking at risks that warrant attention.”
US Treasury refrained from naming China a currency manipulator in the latest “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” report.
In a statement, Treasury Secretary Seven Mnuchin said the department is “working vigorously to ensure that our trading partners dismantle unfair barriers that stand in the way of free, fair, and reciprocal trade.” And he singled out China as of “particular concern” due to the “lack of currency transparency and the recent weakness in its currency”. Mnuchin added that they will continue to “monitor and review” China’s currency practices.
The statement also noted that despite the lack of transparency, “Treasury estimates that direct intervention by the People’s Bank of China this year has been limited.” Though, it also warned that “recent depreciation of the renminbi will likely exacerbate China’s large bilateral trade surplus with the United States”. It placed ” significant importance” on ensuring China doesn’t engage in “competitive devaluation”.
A total of six major trading partners are put in the monitoring list, including China, Germany, India, Japan, Korea, and Switzerland.
The minutes of September 25-26 FOMC meeting indicated that Fed is still on track for its rate hike cycle. And based on the strength of the economy, policymakers are leaning more towards bring interest rate into mildly “restrictive” levels down the road.
The minutes said “participants generally anticipated that further gradual increases in the target range for the federal funds rate would most likely be consistent with a sustained economic expansion, strong labor market conditions and inflation near 2 percent over the medium term.”
More importantly, the minutes also revealed that “a substantial majority of participants expected that the year-end 2020 and 2021 federal funds rate would be above their estimates of the longer-run rate.” Also, “a few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level”.
However, a “couple” of FOMC members, meanwhile, argued against a restrictive policy “in the absence of clear signs of an overheating economy and rising inflation”. But such argument for now, is seen by economists as precautionary. Fed is still some way off the neutral level.
Fed raised federal funds rates by 25bps to 2.00-2.25% on unanimous vote at the September meeting.
Dollar and Yen remain the strongest one in mid-US session, after European close. However, for now, it’s uncertain whether they can sustain the gains before US close. Risk aversion is a key driver in the strengthen of them. But judging from the actions in the US markets, it’s hard to say whether the major indices will close the day up or down. DOW dropped to as low as 25479 initially but is now down just -0.14% at 25763. S&P 500 dropped top as low as 2781 but it’s now up 0.13% at 2814. Similarly, NSDAQ dropped to as low as 7563 but it’s now up 0.04% at 7468.
On the other hand, Canadian overtook Sterling’s place as the weakest one after larger than expected oil inventory increase sent WTI crude oil to 70. Selling pressing in oil and the Loonie could persist. Sterling was sold off earlier today after UK CPI miss and stays week. The Pound fate will depend on the outcome of the “moment of truth” EU summit.
In Europe:
In response to a to Der Spiegel’s report that Italy budget is not inline with EU obligations Günther Oettinger, European Commissioner for Budget and Human Resources tweeted to clarify.
In short, he rejected the call that the commission has made a decision and added that it’s only his personal opinion.
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BoE Deputy Governor Jon Cunliffe told a parliament committee, “pay growth has established itself in the 2.5-3 percent range.” However, “latest readings do not signal strongly that pay growth will make the next step to establish itself firmly in 3 percent territory in line with the May forecast”. He added that BoE may “still be underestimating supply in the labour market.
And, Cunliffe also said the MPC’s approach in monetary policy “does not incorporate a judgement on the outcome of Brexit”. And, it would be “mistaken to set policy going forward in anticipation now of any particular Brexit outcome.” The “best course” is “until there is clarity on Brexit is to react to the economy as it evolves, conditioning our forecasts on neutral assumptions about Brexit outcomes.”
Cunliffe’s questionnaire for Treasury Select Committee re-appointment hearing.
German magazine Der Spiegel reported that a top EU official confirmed Italy’s budget doesn’t meet EU guidelines. Günther Oettinger, European Commissioner for Budget and Human Resources Günther Oettinger, was quoted saying that “it confirmed the suspicion that the Italian budget draft for 2019 is not in line with the obligations that exist in the EU.” European Commissioner for Economic and Financial Affairs, Pierre Moscovici, is going to send a letter to Italy this week regarding the issue.
Separately, Italy’s cabinet undersecretary for regional affairs, Stefano Buffagni, told Radio capital that if European Commission is to start an infraction process over the budget, Primer minister Giuseppe Conte is going to the EU to explain the “motivations” behind the plan. He also added that credit rating downgrade “can’t be excluded and we must be ready” even though “Italy has very solid economic fundamentals.
S&P and Moody’s are both going to review Italy’s rating later this month.
While the forex markets have been directionless for a while, Dollar’s rally entering into US session, together with Yen, could finally bring back lives. In particular, EUR/USD breaks 1.1534 minor support which suggests completion of corrective rebound from 1.1431. We might see retest of this low soon. Ideally, we should see break of 0.9954 resistance in USD/CHF, 1.0381 minor support in GBP/USD and 0.7098 in AUD/USD to confirm the underlying strength of the greenback.
For now, Sterling is trading as the weakest one for today after weaker than expected September CPI in UK. New Zealand Dollar is the second weakest, followed by Euro.
In other markets, European markets opened higher but turned south quickly. At the time of writing:
In Asian, China Shanghai SSE initially extended recent down trend to as low as 2517.57, but staged a strong rebound in late trading.
EU Trade Commissioner Cecilia Malmstrom responded to questions on US Trade Representative’s statement on starting negotiation with Japan, EU and UK. Malmstrom said the EU “see this merely as preparations being made by the U.S. to negotiate with them and others.” And she added “we have not started negotiating yet”.
Also, Malmstrom said “we are prepared to start the scoping exercise on a limited agreement focus on industrial goods … so far the U.S. has not shown any big interest.”
Regarding UK, she said “the U.K. cannot negotiate any trade agreement as long as they are a member of the European Union.”
Sterling drops notably after September consumer inflation data came in lower than expected. Headline CPI slowed to 2.4% yoy, down from 2.7% yoy and missed expectation of 2.8% yoy. Core CPI slowed to 1.9% yoy, down from 2.1% yoy and missed expectation of 2.1% yoy.
The ONS noted that “The largest downward contribution to the change in the CPIH 12-month rate came from food and non-alcoholic beverages, where prices fell by 0.1% between August and September 2018 compared with a rise of 0.8% between the same two months a year ago. The main effects came from meat where prices fell, between August and September, this year but rose a year ago and from chocolate.”
Also released, RPI slowed to 3.3% yoy versus prior 3.5% yoy and expectation of 3.5% yoy. PPI input rose to 10.3% yoy from 9.4% yoy. PPI output rose to 3.1% yoy from 2.9% yoy. PPI output core rose to 2.4% yoy from 2.2% yoy.
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Fed Bullard: Maintaining current level of policy rate is appropriate
St. Louis Fed President James Bullard said today that the “current level of the policy rate is about right”. And, he added that “maintaining the current level of the policy rate would be an appropriate policy” for the near future.
He explained that a “modernized” version of the Taylor rule recommends a “relatively subdued policy rate path” closer to St. Louis Fed’s recommendation. On the other hand, the “unmodernized” Taylor rule calls for “rapid increase in the policy rate”. Though, he also acknowledged that Fed’s September medium projection is “between the modernized and unmodernized” versions.
Press release and Bullard’s presentation.