Eurozone goods exports rose 14.0% yoy to EUR 247.6B in April. Goods imports rose 1.8% yoy to EUR 232.5B. Trade balance showed EUR 15.0B surplus. Intra-Eurozone trade rose 5.8% yoy to EUR 222.89B.
In seasonally adjusted term, goods exports rose 3.1% mom to EUR 245.3B. imports rose 2.3% mom to EUR 225.9B. Trade balance reported EUR 19.4B surplus, above expectation of EUR 17.0B. Intra-Eurozone trade rose 1.5% mom to EUR 217.7B.
ECB’s GDP growth projections are revised to 1.1% in 2019 (vs 1.2% in June), 1.2% in 2020 (vs 1.4%) and 1.4% in 2021 (unchanged).
Eurozone’s slowdown in growth mainly reflects “prevailing weakness of international trade in an environment of prolonged global uncertainties which are particularly affecting the euro area manufacturing sector.” But services and construction show “ongoing resilience. Risk to growth “remain tilted to the downside” due to “prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets.”
HICP inflation projections are revised down over the whole projection horizon, “reflecting lower energy prices and the weaker growth environment.” HICP projections are at 1.2% in 2019 (vs 1.3% in June), 1.0% in 2020 (vs 1.4%), 1.4% in 2021 (vs 1.6%).
BoC published a minutes-like document yesterday for the first time to improve transparency. The minutes noted, “members were in broad agreement that, going forward, it would be appropriate to pause any additional tightening to allow economic developments to unfold.”
“The bar for additional rate increases was now higher”. Also, the council “would need an accumulation of evidence to determine whether further rate increases would be required.” Yet, it was important to be clear about the “conditionality” of the pause, and the Governing Council “would be prepared to raise the policy rate further if these upside risks materialized.”
BoJ Governor Haruhiko Kuroda said at a WEF virtual meeting “”the resurgence of COVID-19 and the state of emergency declaration by the government just a few weeks ago would tend to dampen economic recovery” of Japan. “In this kind of situation, the most important policy is to … avoid unemployment and corporate failures and so forth,” he added.
The government has “already implemented huge amount of fiscal support”. At the same time, BoJ provided liquidity to the banking sector and tried to “stabilize the financial markets”. Both policies have been “fairly successful in stabilizing the markets, avoiding corporate failures, maintaining employment”.
But, “we have to overcome, contain this pandemic”, through vaccination and creation of immunity. That is the “challenge still faced by Japan”.
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The Association of Global Automakers issued a statement titled “International Automakers Are Not A National Security Threat” today in objection to Trump’s intention to impose tariffs on import cars. The group warned that “these tariffs will harm today’s U.S. auto industry, which is comprised of fourteen auto manufacturers, all of which are global and 10 of which are international automakers.” And, “each of these companies employ American workers to produce cars in the United States, and tariffs will substantially increase prices for consumers.”
Further it criticized that “there is no national security justification for taxing imports of vehicles and parts or discriminating between global companies headquartered here or in allied countries.” The group noted that “every U.S. production facility in the industry could be made available in a national emergency, and the 130,000 Americans who work directly for international automakers are no less patriotic or willing to serve their country in a time of crisis than any other American.”
Finally, it warned that “if this investigation leads to tariffs, retaliation against U.S. exports is inevitable.” And, “substantial tariffs against major US auto exports have in fact already been announced, placing American auto workers on the front lines of this trade conflict.”
Another group Alliance of Automobile Manufacturers also object to the tariff. It said in a statement that “tariffs are not the right approach” to achieve a level playing field. And, it urge reduction in trade barriers across the board and achieve “fairness” through “facilitating rather than inhibiting trade.” And, economic security of the auto industry and country would be strengthened through modernizing NAFTA and concluding a U.S.-EU Trade Pact.
The statement also listed the bad effects of auto tariffs. There will be USD 45B in additional tax for consumers. a 25% tariffs would result in 1.5% decline in production and cause USD 195k works to lose jobs over 1-3 years or possibly longer. Job losses could surge further to 624k on retaliation by other countries. Auto sales will fall 1-2m units. It will cancel out tax reform benefits, reduce auto exports and harm other vital sectors of the economy. Besides, it will cede US leadership on future vehicle technologies.
Australia Westpac consumer sentiment dropped -3.8% to 91.9 in March, hitting the lowest level in five years. More importantly, it’s the second lowest level since the global financial crisis. Across the five component sub-indexes, biggest fall was around expectations for the economy, The “economy, next 12 months” sub-index recorded a spectacular -12.8% drop taking it to 77.9, a five year low.
Westpac said, “The Reserve Bank Board next meets on April 7. Given the clear risks being faced by the Australian economy over the next few months the Board is likely to lower the cash rate by a further 0.25%.”
And, cash rate will hit RBA’s lower bound of 0.25%, “the next policy approach is likely to involve a form of unconventional monetary policy where indications are that the Board favours the approach of setting a rate target further out the yield curve and signalling the commitment to defend that target”.
St. Louis Fed President James Bullard told Reuters that current inflation, which is well over Fed’s target, is at levels which former chairs like Alan Greenspan would have “immediately tried to quash.” He called for swift action on ending the asset purchase program. “We are not being that preemptive. Our models say this will settle down, but in the meantime it will be pretty volatile,” he said, “what I want to be prepared for and get the committee prepared for is the risk that this is an unpredictable situation.”
Bullard also said a new “regime” may have arrived and “monetary policy needs to be more nimble.” The global equilibrium was upset by the pandemic, and “the reverberations will continue, and you will have a lot more volatility than you are used to.”
“We will have long, lingering effects as the rest of the world recovers. You have shortages and bottlenecks everywhere. You have Europe likely to grow more quickly in coming quarters,” Bullard said. “You have industries still adjusting to the post-pandemic world – many things happening, and at a pace we are not used to.”
Entering into US session, Australian and New Zealand Dollar remain the weakest one for today. But it’s followed by Dollar as the third weakest. On the other hand, Sterling and Yen are the strongest ones, followed by Euro. The Pound is apparently lifted by news that news that UK is making progress on Brexit and the supposed new Irish border proposals is a “step in the right direction”. But so far no detail is leaked, and thus, the gain is limited in Sterling too. Yen is, on the hand, boosted by both risk aversion and strong rally in 10 year JGB yield.
Overall, we’d like to emphasize that USD/CHF and USD/JPY are merely in tight range and Dollar digests yesterday’s strong rally. But EUR/USD and GBP/USD strengthen today, they’re in nothing more than a corrective recovery. Over the week, Canadian and Dollar are still the two strongest ones.
Stocks markets are generally in risk aversion today. AT the time of writing, DAX is down -0.07%, which is rather resilient. But CAC is down -0.95% and FTSE is down -0.91%. In Asia, Nikkei closed down -0.56%, Hong Kong HSI down -1.73%, Singapore Strait Times down -1.1%. China is still on holiday. US futures point to slightly lower open.
Global treasury yields follow US higher today. German 10 year bund yield is currently up 0.0567 at 0.534. UK 10 year gilt yield is up 0.074 at 1.517. Also, Japan 10 year JGB yield is up 0.0178 at 0.159. US 10 year yield took out key resistance at 3.115 yesterday with strong momentum. We might see the rally continues today.
France PMI manufacturing dropped to 50.7 in November down from 51.2 and missed expectation of 51.3. That’s the lowest in 26 months. PMI services dropped to 55.0, down from 55.3 and matched expectations. PMI composite dropped to 54.0, down from 54.1.
Commenting on the Flash PMI data, Eliot Kerr, Economist at IHS Markit said:
“The latest flash results pointed to a second consecutive contraction in manufacturing production as goods producers continued to mention weak automotive sector demand. Nonetheless, overall private sector output growth remained solid as the service sector reported robust growth.
“Despite input price inflation easing, panellists continued to cite higher raw material prices, particularly for oil. With pricing power muted, margins remained under pressure.
“The latest survey responses also revealed that recent protests over fuel taxes adversely affected the economy, with some panellists blaming demonstrations for lengthened delivery times.”
US retail sales rose 0.5% mom in May, below expectation of 0.7% mom. But ex-auto sales rose 0.5% mom, above expectation of 0.4% mom. April’s headline sales was revised up from -0.2% mom to 0.3% mom. April’s ex-auto sales was also revised up from 0.1% mom to 0.5% mom.
EUR/USD breaks through 1.1251 minor support after the release. The development suggests that rebound from 1.1107 has completed at 1.1347. Intraday bias is now back on the downside for retesting 1.1107 low.
Fed Vice Chair Philip Jefferson’s speech today offered insights into the monetary policy outlook and identified key risks in the coming months. He suggested that, assuming the economy develops as anticipated, “it will likely be appropriate to begin dialing back our policy restraint later this year.”
He highlighted three principal risks that warrant close monitoring. First, consumer spending could be “more resilient” than expected, which could inadvertently halt progress on inflation. Second, the possibility of employment weakening as the factors currently bolstering economic growth begin to wane. Jefferson addressed geopolitical risks, specifically the possibility of escalating conflicts in the Middle East and their broader impact on commodity prices, such as oil, and global financial markets.
Overall, Jefferson remained “cautiously optimistic” on the progress on inflation, and emphasized the importance of considering the “totality of incoming data” in shaping Fed’s policy decisions.
The so called “Last Supper” meeting between UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen ended with no concrete progress. Both sides’ position remained “far apart” and a new deadline of this week is set for further talks.
After dinner, von der Leyen said, “we had a lively and interesting discussion on the state of play across the list of outstanding issues. We gained a clear understanding of each other’s positions. They remain far apart.” “We agreed that the teams should immediately reconvene to try to resolve these essential issues,” she added. “We will come to a decision by the end of the weekend.”
Separately, EU Financial Services Services Commissioner Mairead McGuinness said, “today we are preparing contingency plans, very specific and very narrowly focused to make sure that in the event of a ‘no deal’ that those sectors that are vulnerable, transport, aviation etc, that specific plans are put in place to maintain connectivity.”
EU deputy chief negotiator Sabine Weyand reiterated that “there will be no more negotiations on the Withdrawal Agreement”. And given just 60 days from the March 29 Brexit date, time is already tight to complete the ratification of the treaty. However, she also pointed out “where we do have margin is on the political declaration”. But she also emphasized that “we need decisions on the UK side on the direction of travel.”
Also, Weyand echoed chief negotiator Michel Barnier’s comments regarding Irish backstop. She said “a time-limit on the backstop defeats the purpose of the backstop because it means that once the backstop expires you stand there with no solution for this border.”
The UK and EU start intensive talks on the most troublesome topic in Brexit negotiation today, the Irish Border. Both sides agreed, back in December, on the principle of avoiding a hard border between Ireland and Northern Ireland. However, there are key differences on the way to fulfil this principle. And there seems to be no agreeable solution yet. The negotiation team will try to address areas like customs, food safety, animal health and regulations of goods and come up with something for next EU summit in June.
Last month, EU proposed a backstop option if there will be no solution on Irish border. And that is, Northern Ireland will remain in the customs union. But that was bluntly objected by UK Prime Minister Theresa May.
Brexit Secretary David Davis reiterated that position on Sunday. Davis said that while UK agreed to a “backstop”, it will not be the one as proposed by the EU. He remained optimistic and said it’s “overwhelmingly likely” to solve the problem in the context of a trade and customs agreement. And he added, “there are ways of dealing with this. You can’t just say ‘we haven’t done it anywhere else’ – we haven’t attempted to do it anywhere else.”
The negotiations between US and Mexico on migration and tariff issues appeared to have made some progress. But the talks would continue on Friday and probably into the weekend. It’s reported that the US is considering to delaying the 5% tariffs on all Mexican imports, which is due on Monday, June 10. But White House spokesperson Sarah Sanders reiterated Trump is still moving forward with the tariffs.
After the meeting on Thursday, US Vice President Mike Pence said Mexico had offered “more”. “There has been some movement on their part. It’s been encouraging,” he said. “The discussions are going to continue in the days ahead.” Mexican Foreign Minister Marcelo Ebrard said 6000 members of the National Guard were sent to secure its southern border with Guatemala.
10-year yield gaps up today and hits as high as 3.356 so far, as the rout in bonds and stocks continue. TNX’s power through 3.248 resistance (2018 high) is a surprise, and significant. It’s finally breaking the lower-highs lower-lows pattern that started back in 1981.
For now further rally is expected as long as 2.994 support holds. Next target is 161.8% projection of 0.398 to 1.765 from 1.343 at 3.554. Overbought condition (in yields, and oversold in bonds) should limited upside there and bring a pull back. That, ideally, should come as the inflation situation stabilize and improve. However, sustained break of 3.554 would be another big warning on the economic outlook ahead.
German Foreign Minister Heiko Maas said today that the EU is ready to negotiate with US to settle the aircraft subsidies disputes. Yet, EU is also ready to react to new US tariffs on European goods. He said “the European Union now will have to react and, after obtaining the approval of the World Trade Organisation, probably impose punitive tariffs as well.”
Maas also tweeted, “Europe is united on this question. We remain ready to negotiate common rules for subsidies in the aviation industry. We can still prevent further damage.”
Germany Q4 GDP growth was finalized at 0.3% qoq, revised up from 0.1% qoq. Over the year, on price-adjusted term, GDP dropped -2.7% yoy. In Price and calendar-adjusted terms, GDP dropped -3.7% yoy.
Destatis said, “in the fourth quarter, however, the recovery process slowed due to the second coronavirus wave and another lockdown imposed at the end of the year.”
ECB Governing Council, Joachim Nagel, Bundesbank head, posed a crucial question in his speech in Frankfurt, “Have we reached the plateau” on interest rates? He answered by stating that it “cannot yet be clearly predicted”. He continued, elaborating that “the forecasts still only show a slow decline toward the target level of 2%.”
Nagel’s comments hinted at the continuous monitoring of economic indicators, suggesting that while borrowing costs are expected to “remain at a sufficiently high level for a sufficiently long time,” the exact interpretation hinges on the incoming data.
Addressing concerns about Germany’s economic health, he remarked that characterizing Germany as the ‘sick man’ “seems exaggerated.” He attributed the present sluggish growth to specific influences such as the global economic deceleration, Russia’s conflict with Ukraine, and reduced public expenditure. Offering a silver lining, Nagel projected, “Once we get past the worst of these special factors, the weak growth should also ease. We expect the economy to grow again in 2024.”
On the other hand, Latvia’s central bank chief, Martins Kazaks, highlighted the structural nature of recent oil price hikes. He pointed out, “The recent oil price increase in my view is not a temporary or transitory, it’s very much a structural issue.” Such dynamics, according to Kazaks, present heightened inflation risks. Regarding the anticipated rate cuts, he expressed skepticism about their timing, asserting, “I think expecting rate cuts mid next year is somewhat too early.”
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US GDP exceeds expectations with 4.9% growth in Q3
US economy delivered a strong performance in Q3, with GDP growth registering at an annualized rate of 4.9%, surpassing the anticipated 4.3% and showing a marked improvement from the 2.1% seen in Q2.
This robust growth in real GDP was driven by a series of factors. Notably, there were marked increases in areas such as consumer spending, private inventory investment, exports, both state and local government spending, federal government spending, and residential fixed investment.
However, these gains were somewhat tempered by a decline in nonresidential fixed investment. Additionally, it’s essential to note that imports, which act as a deduction in GDP calculation, saw an increase during this period.
Full US GDP release here.