US Kudlow: Talks continue to go on with China

    White House Economic Adviser Larry Kudlow said the US is “still talking with China on a number of issues” and the talks will “continue to go on .

    Kudlow reiterated that the US wants “lower barriers across the board”. That is, “zero tariffs, zero non-tariff barriers, zero subsidies, stop the IP theft, stop the technology transfer, allow Americans to own their own companies.”

    But he expressed the frustration that “those have been our asks for many months and so far those asks have not been satisfied.”

    Dollar surges as NFP added 201k, wage grew 0.4%, Canadian pressured after terrible job data

      Dollar surges in after another set of strong non-farm payroll report. The headline number showed 201k growth in August, comparing to expectation of 194k. Prior month’s figure was revised down from 157k to 147k though. Unemployment rate was unchanged at 3.9%. The bigger surprise, and Dollar driving one, is average hourly earnings which showed 0.4% mom growth, above expectation of 0.3% mom.

      Canadian job data is very disappointing. The employment market contracted by -51.6k in August, nearly undoing all the 54.1k growth in July. That’s also was below expectation of 5.1k growth. Unemployment rate also rose to 6.0%, up from 5.8% and higher than expectation of 5.9%.

      Reaction in USD/CAD is immediate.

      Into US session: Sterling surges as the strongest, CAD and USD follow ahead of job data

        Entering into US session, Sterling just shoots up sharply in the last hour and is now trading as the strongest one for the day. There is no apparent trigger or Brexit headline flowing through. Some pointed to a transcript of EU chief negotiator Michel Barnier at the UK House of Commons, where he mentioned that EU is “open to discussing other backstops” regarding the Irish order, as a trigger. But we’d say, if that document is the cause of the rally, then it’s more likely that Barnier said “no-deal scenario is not our scenario; it is not my scenario.”

        But anyway, GBP/USD is now set to take on 1.3042 resistance with today’s strong rally. Meanwhile, EUR/GBP’s break of 0.8937 support and the near term channel is an indication of bearish reversal.

        Canadian Dollar is following as the second strongest, as it was boosted after BoC Senior Deputy Governor Carolyn Wilkins yesterday suggested that BoC is still on course for further rate hikes despite uncertainty of NAFTA negotiations.

        Dollar is the third strongest for the day. Markets await US and Canada employment data.

        For now, Australian Dollar and New Zealand Dollar are the weakest ones, joined by Euro thanks to EUR/GBP selloff.

        In other markets, major European indices are in red today, with FTSE down -0.9% at the time of writing, DAX down -0.21% and CAC down -0.18%. Asian markets ended mixed, with Nikkei down -0.8% and Singapore Strait Times down -0.42%. But China Shanghai SSE reversed earlier losses and ended up 0.40%. Hong Kong HSI just lost -0.01%. That’s a reason why Yen pared back some of the earlier gains.

        China FX reserve dropped $8.2B in Aug, no large scale direction intervention yet

          China’s foreign currency holding dropped slightly by USD 8.2B to USD 3.110T in August, down from USD 3.118T. But that’s still lower than market expectation of USD 3.115T. Nonetheless the data showed that China’s capital control measures worked reasonable well so far and thus, there was no imminent need to large scale direct intervention.

          Back in August, China restarted a reserve requirement on foreign exchange forward trading. Also, a counter-cyclical factor in daily pricing of Yuan was reinstated.

          USD/CNH (off-shore Yuan) surged sharply since March low at 6.2359 to as high as 6.9586 as trade tension with US escalated.

          An update of AUD/JPY short, lower stop to breakeven

            Here is an update on our AUD/JPY short (sold at 80.25), as entered here.

            The cross finally resumes recent down trend today by breaking 79.51 to as low as 79.05 so far. 79.16/22 cluster is already breached (61.8% projection of 83.92 to 79.69 from 81.78 at 79.16, 61.8% retracement of 72.39 to 90.29 at 79.22). But as noted before, we’d expect this cluster to be taken out with relative ease on current down side momentum, as seen in daily MACD.

            The real test lies in 77.55/85 (61.8% projection of 90.29 to 80.48 from 83.92 at 77.85, 100% projection of 83.92 to 79.69 from 81.78 at 77.55). A way to trade this is to take profit at 78.00, slightly above this cluster. But we’d prefer not to rigidly do that but assess the downside momentum further.

            We’re indeed looking at the prospect of deeper fall towards 72.39 low, as the rejection from falling 55 week EMA was rather bearish in medium term. The whole up trend from 72.39 (2016 low) should have completed at 90.29 (2017 high). Sustained break of 61.8% retracement of 72.39 to 90.29 at 79.22, which we anticipate, could pave the way to retest 72.39 low.

            So now, we’ll hold AUD/JPY short (sold at 80.25). Stop is lowered to breakeven at 80.25, to give it a little breathing room, yet guard against a strong rebound from 79.16/22 in case we’re wrong. We won’t put a target yet, but will assess downside momentum of the current decline.

             

            Boston Fed Rosengren: More policy buffers needed to mitigate future shocks

              Boston Fed President Eric Rosengren warned in a paper, to be presented at a conference this week end, that the current policy buffers , “may not be sufficient to offset future shocks, reducing the capacity available to policymakers to insulate the economy from future adverse shocks”. And he urged “more attention should be given to establishing appropriate policy buffers to mitigate future shocks.”

              And, Fed should either build a “larger monetary policy buffer” or be ready to use unconventional tools more aggressively. He added that “these tools have proven to be politically controversial, making their aggressive deployment, or even their deployment at all, less certain in response to a future economic downturn.”

              Chicago Fed Evans reiterated interest rate could go beyond neutral

                Chicago Fed published yesterday a speech of its President Charles Evans titled “Back to the Future of Monetary Policy“, originally intended to be delivered to a conference earlier this week in Argentina.

                There Evans reiterated his stance that Fed the current economic outlook “entail moving policy first toward a neutral setting and then likely a bit beyond neutral”. That was for helping the transition of the economy onto a “long-run sustainable growth path with inflation at our symmetric 2 percent target.”

                He added that “we may need to tighten somewhat further if currently unexpected tailwinds emerge that push the economy well beyond sustainable growth and employment levels, potentially leading to unacceptably high inflation beyond our symmetric objective.” For example, “forward momentum imparted by earlier monetary accommodation” might be underestimated. And, there could be “greater-than-expected fiscal impetus from the recent tax cuts and spending increase”.

                On the other hand, “the emergence of currently unexpected headwinds could dictate a shallower policy path.” For example, trade uncertainties could generate “adverse effects on business sentiment and spending”. And, ” firming in inflation expectations could stall out before expectations are clearly centered about 2 percent”.

                Full speech here.

                USDJPY dipped as Japan could be Trump’s next trade target

                  USD/JPY weakened notably over night and took out 110.68 minor support. Risk aversion could be a factor with NASDAQ losing -0.91% to close at 7922.73, and broke 7933.31 near term resistance turned support. US treasury yield also softened with 10 year yield closed down -0.79 at 2.879. Another factor behind the move could be reports that Trump is target Japan next on his trade policy.

                  The news started with WSJ’s James Freeman, which Trump called after the former praised his tax and regulatory reforms on Fox News. Freeman wrote that “the President sees a problem and even if he wraps up negotiations with our friends in North America and Europe, the trade uncertainty won’t necessarily end.” And, “seems that he is still bothered by the terms of U.S. trade with Japan.” Freeman also noted that Trump “described his good relations with the Japanese leadership but then added: ‘Of course that will end as soon as I tell them how much they have to pay.'”

                  We’d like to emphasize that we’re skeptical about the news. What is the purpose of a President calling a writer of the fake news media to leak some information? It doesn’t make much sense to us.

                  BoC Wilkins: Trade developments have both downside and upside risks, gradual rate hike still appropriate

                    BoC Senior Deputy Governor Carolyn Wilkins delivered “An Update on Canada’s Economic Resilience” yesterday. The most important part of the speech is that Wilkins said “Our practice is to not incorporate scenarios that have yet to occur, even though they may be the subject of ongoing discussions” And, risks of trade tensions “are not just on the downside”, but “there is some significant upside as well.” She emphasized that trade developments can result in “complex trade-offs for monetary policy.” And, after considering all factors, “the bottom line is that Governing Council agreed that the gradual approach we have been following is still appropriate.”

                    In short, Wilkins suggested that BoC is still on course for further rate hikes despite uncertainty of NAFTA negotiations. And that gave a nod to market expectation of an October hike. Canadian Dollar was lifted by her speech.

                    In the speech, she noted that most recent data indicates growth to “average near potential” over the new few years. Q2’s strong rebound in GDP, 2.9% annualized, supported the central bank’s July rate hike. She added that quarterly profile of GDP growth will be “volatile” for the rest of 2018, but to “still average around 2%”. Even though temporary factors that pushed up exports in Q2 will unwind in Q3, the factors “do not point to weaker underlying momentum”.

                    On inflation, she noted that wages were rising “less quickly” than expected in an economy that’s “near capacity”. And this is “still the case”. July’s headline inflation data “surprised” on the upside at 3% because of “temporary factors” but not “pressure from excess demand”. Instead, core measures remained at around 2% “supporting our assessment that the inflation increase will be temporary.”

                    On trade tensions, Wilkins said they’re “among several factors keeping them from investing in new capacity”. BoC estimated that “combination of reduced confidence and trade measures already taken will shave about two-thirds of 1 per cent from GDP in Canada by 2020”. Canada’s countermeasures on trade will “temporarily boost inflation by about 0.1 percentage point until the third quarter of 2019.” She also emphasized that trade developments can result in “complex trade-offs for monetary policy”. On the one hand, protectionist measures can be costly in terms of growth and incomes. On the other hand, protectionist measures create risks to the upside for inflation, especially when the economy is operating near full capacity.

                    Full speech here.

                    US-Canada NAFTA negotiations continue to drag on

                      NAFTA negotiation between US and Canada continued to drag on with no concrete results after yesterday’s meeting. Canadian Foreign Minister Chrystia Freeland just repeated her words that “we are making good progress,” discussions were “constructive and productive” with “goodwill on both sides.” But the key issues were unresolved and expectation is low for a deal to be made this week.

                      The Chapter 19 dispute resolution mechanism remained a sticky point. Canadian Prime Minister Justin Trudeau insisted on having the mechanism as Trump is a president “who doesn’t always follow the rules as they’re laid out.” Another deadlock is diary quota which Canada might concede some ground, but based on condition that others issues are satisfactorily resolved. The third issue is the cultural exemptions to protect Canadian media company, which Trudeau said they’re important to Canada’s national sovereignty and identity.

                      Mid-US Update: Canadian Dollar in steep selloff, Yen and Swiss Franc strong

                        Canadian Dollar suffers heavy selling in first half of US session. There is no apparent trigger for the selloff, yet it’s apparent that it’s pessimism on trade talk with the US. Euro follows as the second weakest while Dollar is the third. These three are on the weaker side the whole day.

                        On the other hand, Yen and Swiss Franc are the strongest ones, with help from risk aversion.

                        So far, weakness in DOW and S&P 500 is limited. But NASDAQ does suffer heavy selling. With 7933.31 resistance turned support taken out, NASDAQ is now likely heading back to 55 day EMA at 7810.

                        Major European indices also ended all in red today. FTSE was down -0.87%, DAX down -0.71% and CAC down -0.31%. WTI crude oil follows other commodities lower and is back at 67.2. It still cannot get a firm grip of 70 handle. Gold hit as high as 1207 earlier today but it’s back below 1200. Gold is not ready to resume the rebound from 1160 yet.

                        ISM non-manufacturing rose to 58.5, strong rebound after July cool-off

                          ISM non-manufacturing composite rose to 58.5 in August, up from 55.7 and beat expectation of 56.9. Business Activity Index rose 4.2 to 50.7. New orders jumped 3.4 to 60.4. Employment index rose 0.6 to 56.7.

                          ISM noted in the release that “there was a strong rebound for the non-manufacturing sector in August after growth ‘cooled off’ in July. Logistics, tariffs and employment resources continue to have an impact on many of the respective industries. Overall, the respondents remain positive about business conditions and the economy.”

                          Full release here.

                          US initial jobless claims dropped to 203k, another lowest since 1969

                            US initial jobless claims dropped -10k to 203k in the week ended September 1, well below expectation of 214k. Also, that’s another lowest level since 1969 scored. And it’s indeed just 1k above that 202k in the week of December 6 that year. Four-week moving average of initial claims dropped -2.75k to 209.5k, lowest since December 6 1969 too (204.5k).

                            Continuing claims dropped -3k to 1.707m in the week ended August 25. Four-week moving average of continuing claims dropped 013.25k to 1.7185m, lowest since December 8 1973.

                            Full release here.

                            Also released, US nonfarm producitivty was finalized at 2.9% in Q2, unit labor cost at -1.0%. Canada building permits dropped -0.1% mom in July.

                            US ADP employment missed expectation, but job markets remains incredibly dynamic

                              ADP report showed 163k growth in private sector jobs in August, below expectation of 188k. Ahu Yildirmaz, vice president and co-head of the ADP Research Institute said in the relesaed that “although we saw a small slowdown in job growth the market remains incredibly dynamic”. And, “midsized businesses continue to be the engine of growth, adding nearly 70 percent of all jobs this month, and remain resiliant in the current economic climate.”

                              Also, Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is hot. Employers are aggressively competing to hold onto their existing workers and to find new ones. Small businesses are struggling the most in this competition, as they increasingly can’t fill open positions.”

                              Full release here.

                              Into US session: USD, CAD, EUR on the weak side as FX ranges. Singapore STI quite bearish

                                The forex markets are rather steady today, with most major pairs bounded in yesterday’s range. US Dollar, Canadian Dollar and Euro are on the weaker side. On the other hand, Swiss Franc and Yen are the stronger ones, followed by Sterling. Economic data took a back seat again this week overall. Today’s ISM services and ADP employment are unlikely to trigger persistent moves in the markets, given there will be non-farm payroll tomorrow. There are some central banker speaks scheduled ahead, including Fed Williams, SNB Zurbrugg and BoC Wilkins, and they may catch some attention.

                                Elsewhere, major European stocks somewhat stabilized from yesterday’s steep selloff. FTSE is down -0.17% at the time of writing. DAX and CAC are up 0.12% and 0.26% respectively. Asian markets continued to be the bigger suffering in current concerns over emerging market crisis. Nikkei was down -0.41%, Hong Kong HSI was down -0.99%. China Shanghai SSE was down -0.47% at 2691.59, below 2700 handle. Singapore Strait Times dropped -0.27%. Gold rides on Dollar’s weakness and is back at 1205. Focus is on 1209 minor resistance for indicating resumption of rise fro 1160.36.

                                We hailed Singapore Strait Times as rather resilient a few weeks ago. But after our “blessing” the index turned south and never looked back. The technical development is rather bearish. STI was rejected both by 55 week and 55 day EMA. The index should now be correcting whole up trend from 2528.43 (2016 low) to 3641.64 (2018 high). Deeper fall should be seen to 61.8% projection of 3641.64 to 3176.26 from 3347.98 at 3060.37. There is project of hitting 61.8% retracement of 2528.43 to 3641.64 before completing the correction.

                                Swiss government raised growth forecast after stronger than expected Q2 GDP

                                  Swiss GDP grew faster than expected by 0.7% qoq in Q2, versus expectation of 0.5% qoq. The government also raised growth forecast for this year.

                                  A government economist Ronald Indergand said that “for the year as a whole we could be looking at a growth rate much nearer to the 3 percent rate than 2 percent, which would be above the long-term average.”

                                  In the prior forecast, the government projected Swiss GDP to grow 2.4% in 2018, comparing to 1.6% in 2017.

                                  Gold rebounds with 1209 minor resistance in focus

                                    Gold’s correction from 1214.30 extended to 1189.49 earlier this week but recovered since then. It’s picking up some upside momentum today and is back above 1200. But for now we’d prefer to see a break of 1209.00 minor resistance to confirm near term bullishness.

                                    Overall outlook is unchanged. With 1182.90 minor support intact, rebound from 1160.36 is still in progress and further rise is expected. Break of 1209 will suggest rise resumption for 55 day EMA (now at 1222.51) and above.

                                    However, as this rebound is seen as a correction to the larger down trend from 1365.24, we’d expect strong resistance from 38.2% retracement of 1365.24 to 1160.36 at 1238.62 to limit upside to complete it.

                                     

                                    Next phase of US-China trade war ready, as public comments end today

                                      It’s still a bit early, but the next phase of US-China trade war is approaching. The public comment period for the 25% tariffs on USD 200B in Chinese imports will end today. Trump could be ready to start imposition of such tariffs any time. And ahead of that Trump said yesterday that “right now we just can’t make that deal” with China. And, “in the meantime, we’re taking in billions of dollars of taxes coming in from China, with the potential of billions and billions of dollars more taxes coming in.”

                                      On the other hand, Chinese Commerce Ministry Spokesman Gao Feng said in a regular press conference that “if the United States, regardless of opposition, adopts any new tariff measures, China will be forced to roll out necessary retaliatory measures.” Both sides have already slapped tit-for-tat tariffs on $US50 billion of each other’s goods. That came after US steel and aluminium tariffs and China’s own retaliation. For the upcoming ones, China already announced counter measures of tariffs on USD 60B of US goods ranging from liquefied natural gas to certain types of aircraft.

                                      US-Canada trade talk resumed, making good progress

                                        Canadian Foreign Affairs Minister Chrystia Freeland returned to the table with US Trade Representative Robert Lighthizer yesterday. She said the talks were constructive and they’re “making good progress”. She added that “we continue to get a deeper and deeper understanding of the concerns on both sides.” But Freeland declined to comment on how close the two sides were. The negotiation is still work in progress as Freeland’s team have sent the US “a number of issues to work on and they will report back to us in the morning (Thursday), and we will then continue our negotiations.”

                                        Trump continued his bluff as he told reporters that if the talk doesn’t work out, “that’s going to be fine for the country, for our country.” However, “It won’t be fine for Canada”. He also reiterated that the US has a “very strong position” in the negotiation. At the same time, Canada and other countries “have been taking advantage of the United States for many years.”

                                        Canadian Prime Minister Justin Trudeau reiterated his firm stance on the Chapter 19 dispute resolution mechanism, that was seen as a “red line” Trump. Trudeau emphasized that “We need to keep the Chapter 19 dispute resolution because that ensures that the rules are actually followed. And we know we have a president who doesn’t always follow the rules as they’re laid out.”

                                        BoJ Kataoka criticizes move to allow wider JGB yield band

                                          BoJ board member Goushi Kataoka criticized the central bank’s recent move to allow 10 year JGB yield to fluctuate in a larger range of -0.1% to 0.1%. He said in a speech that “there’s no need to allow long-term interest rates to move in a wider range at a time when the BOJ is cutting its inflation forecasts.” He added that “allowing long-term rates to rise at a time inflation and inflation expectations aren’t heightening much could delay achievement of the BOJ’s price target.” Also, Kataoka warned “global trade frictions are intensifying and there’s no room for complacency”.

                                          Kataoka is a known dove who dissented the decision to keep policy unchanged in every meeting since joining the board in 2017. Instead, he persistently pushed for more aggressive easing, targeting to keep JGB yields at 0% beyond 10 year maturity.