Japan Tankan large manufacturing index dropped to 19 in Q3, down from 21 and missed expectation of 22. Large manufacturing outlook dropped to 19, down form 21 and matched expectations.
Large non-manufacturing index dropped to 22, down from 24 and missed expectation of 22. Non-manufacturing outlook rose to 22, up from 21 and beat expectation of 20.
Large all industry capex rose 13.4%, missed expectation of 14.2%.
Japan PMI manufacturing was finalized at 52.5 in September. The key points are “output growth sustained amid solid demand pressures”, meanwhile, “input delivery times continue to lengthen sharply”, and “business confidence drops further”.
Joe Hayes, Economist at IHS Markit, noted that “growth in the Japanese manufacturing sector was sustained in September, rounding off a fairly robust quarter of expansion”. However, Q3 average at 52.4 was “notably weaker” that Q1 and Q2, “suggesting weaker momentum”. “Slowing input delivery times reportedly weighed on output capabilities”. “The degree of confidence dipped to a 22-month low, with some panellists raising concern towards the demand outlook.”
Australian Industry Group Performance of Manufacturing index rose 2.3 to 59.0 in September, indicating faster growth across the sector. It’s now in two years of “uninterrupted expansions”, the longest run since 2005. All seven activity sub-indexes expanded, that is above 50. Five activity sub-indexes accelerated with the new orders sub-index reaching a six-month high.
AiG also noted that “the manufacturing sector has confounded doubters in recent years by lifting employment and production despite the exit of passenger car assembly from Australia. Australia’s manufacturing sector is diverse and comprised of multiple sub-sectors that are continuing to adapt to their operating environment. An improving economy, along with infrastructure, mining, renewable and defence projects continue to support demand for manufacturing products in 2018.”
Also from Australia, TD Securities Inflation rose 0.3% mom in September.
Released over the weekend, China Caixin PMI manufacturing dropped to 50.0, down from 50.6. That’s the fourth straight monthly drop and an acceleration in the index’s decline. The key points are, “production rises at weakest pace for nearly a year”, “total new business broadly stagnant, as export sales decline at faster rate”, “business confidence slips to nine-month low”.
Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said in the released that “expansion across the manufacturing sector weakened in September, as exports increasingly dragged down performance and continued softening demand began to have an impact on companies’ production. In addition, the employment situation worsened further. Downward pressure on China’s economy was significant.”
Also released, the official China PMI manufacturing dropped to 50.8 in September, down from 51.3. Official PMI non-manufacturing rose to 54.9, up from 54.2.
Canadian Dollar surges broadly on news that the US and Canada have finally agreed on a deal to update NAFTA, just ahead of US imposed deadline. The legal text would be published within hours just of meet the deadline for US Congress to to complete before Mexico’s outgoing President Enrique Pena Nieto leaves office at the end of November.
According to unnamed sources, Canada will give the US access to 5% of its dairy markets, same as it granted to Europe with CETA and Pacific-Rim nations with TPP combined. In turn, the US agreed to keep the Chapter 19 dispute resolution mechanism. Also, both sides agreed to put a cap on auto exports to the US, at around 140% of current production level, free of any auto tariffs that the US might impose. Canada also agreed to a quota of steel and aluminum tariffs to the US in exchange for exemption from tariffs.
BoE Deputy Governor Dave Ramsden said the central bank is so far still adopting the assumption of smooth Brexit in its forecasts. But he also noted that a “range of outcomes for Brexit are clearly still possible”.
Pointing to the market, he said “option pricing implies that market participants are insuring to a greater degree against tail outcomes.” Also, Sterling’s depreciations suggested a “greater increase in relative weight on downside outcomes”.
Nonetheless, he played down the moves and noted that were still small relative to those we saw ahead of the referendum.”
ECB Governing Council Member Philip Lane said policymakers are “fairly sure that core (inflation) is on an upward path”, “not spectacular but steady enough”. Also, he added “the support of more jobs, more labor income driving consumption is very strong.”
He also reiterated ECB’s forward guidance that interest rates will stay at present levels at least through summer of 2019. But he also noted that “it is not committing to any particular date for lift-off, so there is a clear commitment there, which is that it’s open to revisions depending on where the data come in.”
US personal income rose 0.3% in August, below expectation of 0.4%. Spending rose 0.3%, below expectation of 0.4%. Headline PCE slowed to 2.2% yoy, down from 2.3% yoy and missed expectation of 2.3% yoy. Core PCE was unchanged at 2.0% yoy, matched expectations.
Dollar is generally firm and steady after the release, except versus Canadian.
Canadian Dollar surges after stronger than expected GDP data. GDP grew 0.2% mom in July versus expectation of 0.1% mom. The growth was “concentrated” as 12 of 20 sectors were up, led by manufacturing, wholesale trade, utilities and transportation and warehousing. Good-producing industries grew 0.3% mom while services-producing industries grew 0.2% mom. Full released here.
Also from Canada, IPPI dropped -0.5% mom in August. RMPI dropped -4.6% mom.
Entering into US session, Euro is trading as overwhelmingly the weakest one as markets respond rather negatively to Italy’s budget deficit plan. Additionally, Eurozone core CPI unexpectedly slowed in September, pointing to risk of reducing underlying price pressure. Euro is the second weakest after Swiss Franc for the week, but it will very likely over take the place should the selloff continue. On the other hand, Canadian Dollar and Australian Dollar are the strongest ones today. But that’s mainly because Dollar’s rally slowed ahead of PCE inflation data.
Major European indices are trading all in red at the time of writing. DAX leads the way lower, down -1.35%, CAC is down -0.79% and FTSE is down -0.63%. Italian 10 year yield is trading up 03.329 at 3.221. German 10 year bund year is down -0.062 % 0.470. Suddenly, 300 yield spread is not too far away again.
Risk appetite was strong in Asia thought. Nikkei reached as high as 24286 and breached 24129.34 resistance. But it closed at 24120.04, up 1.36%. Hong Kong HSI was up 0.26%, China Shanghai SSE up 1.06% and Singapore Strait Times was up 0.64%.
An update to our GBP/USD position as entered here, sold at 1.3150, stop at 1.3300. Finally, GBP/USD catches up with other dollar pairs and reaches the fall from 1.3297. The recovery from 1.3054 was in a way longer than we expected. But given that it drew support from 55 day EMA, that’s not too much of a surprise.
Overall outlook is unchanged that rise from 1.2661 is a corrective move that has completed with three waves up to 1.3297. Just ahead of 38.2% retracement of 1.4376 to 1.2661 at 1.3316. Focus is now on 1.3042 resistance turned support, which GBP/USD has breached already. Sustained trading below this 1.3042 will further affirm our bearish view and should at least target 1.2661/2784 support zone.
Meanwhile, it’s a bit early, but we’re looking at the chance of resuming whole down trend from 1.4376. Hence we haven’t decided whether we will exit the trade inside the 1.2661/2784 support zone. We’ll look at downside momentum of the current decline to make an assessment later. Ideally, the current fall is a wave 3, it should be rather powerful after taking out 1.3042. Though for now, we’d like to lower the stop to break even to guard against a strong reversal from 1.3042.
Hence to conclude, we’ll hold short (entered at 1.3150), lower the stop to breakeven at 1.3150, and wait-and-see how it plays out.
European markets respond rather negatively to Italy’s budget, which it targets deficit at 2.4% of GDP for the next three years. Italian 10 year yield is up 0.268 to 3.161 for now, back above 3.000 handle. It’s also back at the level in the beginning of the month. German 10 year bund yield losses -0.06 to 0.472, back below 0.5 handle. DAX is currently down -0.68%, CAC own -0.32%.
European Commission said today that it would assess the draft budget plan of Italy before end of November. But it’s spokesman emphasized it’s just “part of the normal European Semester process, the EU’s economic policy coordination cycle, and happens each year.” European Economics Commissioner Pierre Moscovici noted that nothing would be gained from a clash with Italy but added “we don’t have any interest either that Italy does not respect the rules and does not reduce its debt, which remains explosive.”
5-Star Movement leader Luigi Di Maio, also Deputy Prime Minister of Italy, said he was not worried by market reaction and will meet investors soon.
Eurozone headline CPI rose to 2.1% yoy in September, up from 2.0% yoy and matched expectation. However, Core CPI slowed to 0.9% yoy, down from 1.0% yoy and missed expectation of 1.1% yoy. Energy inflation remained strong, at 9.5% yoy, followed by food, alcohol & tobacco at 2.7%. The reading is likely unwelcome by ECB.
Also released, Germany unemployment rose 23k in September, unemployment rate dropped 0.1% to 5.2%.
UK Q2 GDP was finalized at 0.4% qoq, unrevised. Growth were driven by services sector, which increased by 0.6%, partly on retail sales. Household spending grew 0.4% but business investment dropped notably by -0.7%. ONS noted that “the recent narrative on UK GDP remains unchanged – the underlying trend is still one of slowing real GDP growth.” Also from UK, current account deficit widened to GBP -20.3B in Q2.
Swiss KOF Economic Barometer rose notably to 102.2 in September, up 3.3 pts from 98.9. It also beat expectation of 100.1. KOF noted the this may imply that the downward trend, which has been visible since the beginning of 2018, might have come to a halt.
The strongest positive contributions came from manufacturing sector. And among manufacturing, “positive development can be attributed mainly to the metal processing industry, followed by the machine building and the food processing as well as the textile industries and finally the chemical industry.” Meanwhile, overall improvement in manufacturing is driven by “a more optimistic assessment of employment, followed by the assessments of production and the overall business situation”.
In the summary of opinions of September 18-19 BoJ meeting, it’s noted that the “he underlying trend in Japan’s economic activity has not changed significantly”. But there were growing downside risks “stemming from trade friction between such economies as the United States and China as well as from fluctuations in financial markets.”
On inflation, the summary noted “it is gradually becoming clear that the delay in a rise in inflation is affected by not only a mere demand shortage, but also various factors such as the persistent deflationary mindset and improvement in productivity stemming from expansion in supply capacity.”
On monetary policy, the summary noted both then need to “persistently maintain highly accommodative financial conditions” and “carefully examining the positive effects and side effects” of easing. Also, there is “room” to make policy “more flexible” for “market functioning”.
A batch of economic data is also released from Japan. Tokyo CPI core accelerated to 1.0% yoy in September versus expectation of 0.9% yoy Unemployment rate dropped to 2.4% in August versus expectation of 2.5%. Retail sales rose more than expected by 2.7% yoy. However, industrial production missed and rose only 0.7% mom.
Bank of Canada Governor Stephen Poloz said in a speech that the economic models suggested the economy is “operating essentially right around capacity”. Still, “there is a great deal of uncertainty about the state of the economy and the prospects for growth and inflation.”
But at the same time, he emphasized that the central bank cannot operate monetary policy “mechanically”, but policy “becomes a matter of risk management”. And, “being uncertain about the future does not justify inaction.”
Poloz said “today, we continue to judge that higher interest rates will be warranted to achieve our inflation target.” And, “the Bank will continue to follow a gradual approach to raising interest rates, and remain dependent on incoming data and other sources of information to guide our decisions.”
His full speech on “Technological Disruption and Opportunity“. And video below.
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According to a survey by the British Chambers of Commerce, investment and recruitment would be cut in the event of ‘no deal’ Brexit. The survey found that:, 21% of businesses will cut investment, 20% will move part of all of their business to EU, 18% will cut recruitment. Also, 62% of businesses still haven’t completed a Brexit risk assessment.
Adam Marshall, Director General of BCC, warned that “our evidence is clear – failure to reach a political agreement would have real-world consequences, with significant decreases in both investment and recruitment. Larger firms and those active in international trade would suffer the most from a disorderly and sudden exit from the EU, but there will be impacts across the board.” And, he added “most concerning of all, a materially significant number of businesses are considering moving part or all of their operations to the EU in the event of ‘no deal'”.
Separately, UK Gfk consumer confidence dropped -2 to -9 in September. Joe Staton, Client Strategy Director at GfK, noted “when respondents talk about their personal finances, the scores are still positive. But for the general economy, they can only reflect on the obvious uncertainty surrounding Brexit.”
Euro wasn’t too bothered after Italian government confirmed raising budget deficit, which would put them at odds with the EU. After the highly anticipated cabinet meeting, they decided to target budget deficit at 2.4% of GDP for the next three years. That is, Economy Minister Giovanni Tria, an unaffiliated technocrat, conceded his push for lowering deficit to just 1.6% of GDP, and then 2.0% in 2019.
“There is an accord within the whole government for 2.4 percent, we are satisfied, this is a budget for change,” 5-Star Movement leader Luigi Di Maio and League leader Matteo Salvini, both Deputy Prime Ministers, said in a joint statement after meetings with Tria.
Prime Minister Giuseppe Conte said the budget goals were “considered, reasonable and courageous” and would “ensure more robust economic growth and significant social progress for our country.” He added the budget plan included “the biggest program of public investments ever carried out in Italy.”
While the 2.4% deficit target remains below EU rule of 3.0%, EU might find a lack of commitment on Italy’s side to cut its massive debt.
Euro is trading mixed for the day and the week.
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NAFTA renamed USMCA, formally announced
Canadian Foreign Affairs Minister Chrystia Freeland published a joint statement with US Trade Representative Robert Lighthizer. On reaching a trilateral trade deal together with Mexico. The new agreement is no longer called NAFTA but the United States-Mexico-Canada Agreement (USMCA).
No formal details on the agreement are released yet. But it’s reported that the deal include increased access on Canada’s dairy marke and the so called Class 7 milk system would be eliminated. The deal would encourage more auto production in the US. There is no substantial change in the chapter 19 dispute resolution mechanism. If the US impose auto tariffs, both Mexcio and Canada will be accomodated in “side letters”. But the deal doesn’t affect the current steel and alumnium tariffs imposed.
Below is the full joint statement.
Joint Statement from United States Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland
“Today, Canada and the United States reached an agreement, alongside Mexico, on a new, modernized trade agreement for the 21st Century: the United States-Mexico-Canada Agreement (USMCA). USMCA will give our workers, farmers, ranchers, and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region. It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.
“We look forward to further deepening our close economic ties when this new agreement enters into force.
“We would like to thank Mexican Economy Secretary Ildefonso Guajardo for his close collaboration over the past 13 months.”