RBA SoMP reiterates no urgency for rate hike, economic projections largely unchanged

    The RBA Statement on Monetary Policy revealed nothing new give then Governor Philip Lowe had delivered an update in a speech earlier this week. In the SoMP, RBA, reiterated that “higher interest rates are likely to be appropriate at some point, if the economy continues to evolve as expected.” That is, the next move is “up not down”. But, Given the gradual nature of the improvement, however, the Board does not see a strong case to adjust the cash rate in the near term.

    RBA’s new economic forecasts appear to be largely unchanged from the May SoMP.

    • Four-quarter GDP growth is projected to be at 3.25% in Q4 2018, 3.25% in Q2 2019 (revised down from 3.50%), 3.25% in Q4 2019, 3.00% in Q2 2020 and 3.00% in Q4 2020 (new).
    • Unemployment rate is projected to be at 5.5% in Q4 2018, 5.25% in Q2 2019, 5.25% in Q4 2019, 5.25% in Q2 2020 and 5.00% in Q4 2020 (new).
    • Headline CPI is projected to be at 1.75% in Q4 2018 (revised down from 2.25%), 2.0% in Q2 2019 (revised down from 2.25%), 2.25% in Q4 2019, 2.25% in Q2 2020 and 2.25% in Q4 2020 (new).
    • Underlying inflation is projected to be at 1.75% in Q4 2018 (revised down from 2.00%), 2.00% in Q2 2019, 2.00% in Q4 2019, 2.25% in Q2 2020, 2.25% in Q2 2020 (new).

    These are the latest forecasts.

    Full RBA Statement on Monetary Policy here.

    Yen rises as Japan’s consumption-led GDP growth beat expectation

      The Japanese Yen appears to be lifted by stronger than expected GDP data today. Japan economy grew 0.5% qoq, 1.9% annualized in Q2. That’s way stronger than expectation of 0.3% qoq, 1.4% annualized. It’s also a strong rebound from prior quarter’s -0.2% qoq, -0.6% annualized contraction. Q1 was an unexpected interruption in the best run in the economy since 1980s. In Q2, GDP deflator rose 0.1% yoy, also beat expectation of -0.2% yoy fall.

      Private consumption, which accounts for 60% of the economy, grew an impressive 0.7%. The solid growth could be an indication of finally a changing “social mood” in the country. And people are more willing to spend based on the expectation that wages will eventually rise. Getting out of such “social mood” is important for Japan to beat the persistent trend of sluggish low inflation. Such development should be very welcomed by BoJ Meanwhile, Capital expenditure rose 1.3%, strongest since Q4 2016.

      Also from Japan, Domestic CGPI rose 3.1% yoy in July versus expectation of 2.9% yoy. Tertiary industry index, however, dropped -0.5% mom in June versus expectation of -0.2% mom.

      Japan EM Motegi and USTR Lighthizer had frank exchange on the conditions for further trade talks

        Japan’s Economy Minister Toshimitsu Motegi started trade talks with US Trade Representative Robert Lighthizer yesterday. After hours of meeting, Motegi said “we had a frank exchange of views and deepened mutual understanding.” He declined to reveal what were discussed and added that he would “say what I can after the first round of talks end”.

        But Motegi reiterated Japan’s position that multilateral framework is the best way to address trade issues. The country is insisting to avoid a bilateral free-trade agreement. Instead, Japan would like to pull the US back into TPP, the Trans-Pacific Partnership.

        The USTR later said that “ambassador Lighthizer and Minister Motegi had a thorough and constructive exchange of views on all bilateral trade issues.” And, “they understand each other’s conditions for further discussions and plan to move forward with additional talks.”

        Known dove Chicago Fed Evans turns hawkish, suggesting interest rates could become restrictive

          The known dove Chicago Fed President Charles Evans started to turn hawkish in his comments to reports yesterday. Evans said the the economy is “extremely strong” and it’s “really a very good period of time” for both the economy and monetary policy setting. And Fed funds rate might eventually enter into “somewhat restrictive” area as economy strengthens while inflation stays above target.

          He also noted that “inflation has moved up to 2 percent essentially”. There is “good reason to expect we will stay in that area.” Also, if inflation continues to be “on the order of 2, 2.2”, that “suggests only a modest amount of restrictiveness above our neutral rate might be called for in 2020.” And, “it would not surprise me at all if we make a judgment to move to a somewhat restrictive setting.” He cited it could be roughly 0.5% above his neutral rate of 2.75%.

          Evans also downplayed the impact of Trump’s trade policy. He said “you size up the tariffs, the increases in input costs … and you find that while it sounds like a big number … the actual effect on industry output and GDP is still measured in a few tenths”of a percentage point. And, “the magnitude still seems to be relatively small, uncertain, against a context where the economy is very strong and we have just added quite a lot of fiscal stimulus.”

          An update on EUR/JPY short

            Here is an update on our EUR/JPY short (sold at 128.60) position as noted in prior comment.

            EUR/JPY dives through 128.49 to as low as 128.19 so far, indicating resumption of fall from 131.97. We maintain the view that corrective rebound from 124.61 has completed with three waves up to 131.97. Fall from 131.97 should target 127.13 support first. And break will confirm our view and target a test on 124.61 low next.

            Based on this view, we’ll hold EUR/JPY short, and lower the stop to 129.05, slightly above 129.00 minor resistance. While 127.13 is the first target, we’re actually expecting at least a test on 124.61. And, whether the larger fall from 137.49 will extend through 124.08 key support remains to be assessed.

            Swiss government recommends to purse business ties with Iran despite US sanctions, CHF jumps

              The Swiss government announced today that they recommend business to continue to pursue ties despite US sanctions.

              Fabian Maienfisch of the State Secretariat for Economic Affairs said that “U.S. decisions on sanctions do not affect the legal situation in Switzerland with regard to Iran.” He added that “Switzerland regrets that the sanctions situation in relation to Iran is again deteriorating.”

              He added that while the government cannot dictate responses from businesses, it “recommends that companies pursue their commercial relations with Iran and inform themselves about the situation”.

              The news could be the drive behind Swiss Franc’s sudden surge in early US session. CHF is now trading as the strongest one for today.

              An update on GBP/CHF short

                An update on our GBP/CHF short position, sold at 1.2971 (prior post here). 61.8% projection of 1.3854 to 1.3049 from 1.3265 at 1.2768 first target is met. But there is no sign of bottoming yet, in spite of oversold condition. We’ll stay short but lowers the stop to 1.2820 (slightly above 1.2816 minor resistance) to lock in some profits.

                Theoretically, if the decline from 1.3854 is an impulsive move, the current 1.2768 projection level should be taken out with ease, without hesitation. That is, GBP/CHF should either power lower, or reverse from here. So, tightening the stop will give it no mercy should there be a rebound.

                Next target is 100% projection at 1.2460. Note that this projection level is close to 61.8% retracement of 1.1638 to 1.3854 at 1.2485. Hence, we’ll take all profit and exit if 1.2500 is met (slightly above 1.2460 and 1.2485).

                 

                US initial jobless claims dropped to 213k, PPI missed expectations

                  US initial jobless claims dropped -6k to 213k in the week ended August 4. The four week moving average of initial claims dropped 0.5k to 214.25k.

                  Continuing claims rose 29k to 1.755m. Four-week moving average of continuing claims rose 3k to 1.74525m.

                  Headline PPI rose 0.0% mom, 0.3% yoy in July, missed expectation of 0.3% mom, 3.4% yoy. Core PPI rose 0.1% mom, 2.7% yoy, below expectation of 0.3% mom, 2.8% yoy.

                  From Canada housing starts dropped to 206k in July, below expectation of 281k. New housing price index rose 0.1% mom in June., above expectation of 0.0% mom.

                  Into US session: Sterling recovers on Brexit rumor, Kiwi stays weakest

                    Entering into US session, Sterling pares back some losses and recovers broadly today. The recovery is believed to be triggered by rumor that the EU is considering to offer a major Brexit concession to the UK. But there is so far no detail on the deal, and it remains just a rumor. Nonetheless, it’s no too surprising for the oversold Pound to have a mild recovery. On the other hand, Dollar is trading as the second strongest one for today. But upside is capped by yesterday’s high except versus New Zealand Dollar.

                    Kiwi remains the weakest one for today after more dovish than RBNZ statement. Australian Dollar truly lacks a clear direction. It was the strongest one in Asian session as lifted by stocks rebound. But it’s now the second weakest. Euro follows as the third weakest for today as it’s rebound lost steam.

                    Over the week, New Zealand Dollar is the weakest one, followed by Sterling. Australian Dollar is the strongest one, followed by Euro.

                    In other markets, European stocks are trading generally softer today with DAX and CAC both down -0.4%. FTSE is down -0.74%. Earlier in Asia, major indices closed mixed. China Shanghai SSE closed up 1.83% at 2794.38, can’t hold on to 2800 handle. Hong Kong HSI rebounded 0.88%. But Nikkei and Singapore Strait Times are down -0.2% and -0.4% respectively.

                    WTI crude oil is extending weakness after rejection from 70 handle. It’s now back below 67 at 66.92 and looks set to dip further. The boring gold continues to engage in sideway consolidation around 1210.

                    Looking ahead, Canada will release housing starts and new housing price index. US will release PPI, jobless claims and wholesale inventories.

                    ECB monthly bulletin: Eurozone risk broadly balanced, but global downside risks intensified

                      Some highlights of ECB monthly bulletin

                      External environment:

                      • Global survey indicators continue to signal a steady growth momentum for the second quarter of 2018.
                      • At the same time downside risks to the global economy have intensified, amid actions and threats regarding trade tariff increases by the United States and possible retaliation by the affected countries.
                      • Global financial conditions remain supportive overall, but have tightened somewhat for emerging market economies.
                      • Global trade indicators recorded a loss in momentum.
                      • The outlook for economic activity in the United States remains solid, but concerns about tariffs have arisen among firms.
                      • In Japan, the economy is expected to recover from a mild contraction in the first quarter of 2018, but the outlook is surrounded by growing uncertainty.
                      • In the United Kingdom, the weakening in GDP growth over the first quarter of 2018 is considered to be temporary.
                      • In China, GDP growth moderated slightly in the second quarter of 2018 while financial markets recorded downward pressures.

                      Economic activity

                      • Although incoming data point to a loss in momentum following the very strong growth seen in 2017, the solid and broad-based growth pattern in the euro area is expected to continue.
                      • Employment growth remained robust in the first quarter of the year.
                      • Looking ahead, short-term indicators point to continued strength in the labour market in the coming quarters.
                      • Rising household incomes supported growth in private consumption.
                      • Gains in employment are expected to continue to support robust growth in private consumption.
                      • While investment growth eased in the first quarter of 2018, short-term indicators continue to point to robust growth.
                      • Investment is expected to continue to grow at a robust pace. Euro area trade growth remained moderate at the beginning of the second quarter of 2018.
                      • Overall, the latest economic indicators suggest ongoing solid growth.
                      • This easing reflects a pull-back from the high pace of growth observed last year and is related mainly to a weakening of external trade, compounded by an increase in uncertainty and some temporary and supply-side factors at both the domestic and the global level.
                      • The risks surrounding the euro area growth outlook can still be assessed as broadly balanced.

                      Prices and costs

                      • Euro area annual HICP inflation rose to 2.0% in June, up from 1.9% in May
                      • Measures of underlying inflation have remained generally muted but stand above earlier lows.
                      • Price pressures for HICP non-energy industrial goods remained robust, with signs of more upward pressure visible in the early stages of the pricing chain.
                      • Recent wage growth data points to a continued upward shift from a trough in the second quarter of 2016.
                      • Both market and survey-based measures of longer-term inflation expectations have remained broadly unchanged
                      • Residential property prices in the euro area continued to accelerate further in the first quarter of 2018.

                      Full report here.

                      China Shanghai SSE breaches 2800 as tech stocks boosted by government focus

                        Chinese stocks are enjoying a strong rally today. The Shanghai SSE breaches 2800 handle and is holding 2% gain. Tech stocks led the way higher as the government indicated strong focus in development in the sector. Yesterday, the State Council renewed the ” National Science, Technology and Education Leading Group” to “National Science and Technology Leading Group”, showing the dedication in science and technology.

                        The group is headed by Premier Li Keqiang with Vice-Premier Liu He as deputy. Fourteen high level officials from National Development and Reform Commission, the Ministry of Education, and the Ministry of Science and Technology are also part of the group.

                        The major responsibilities of the group include studying and reviewing national strategies, plans and major policies for sci-tech development; deliberating major national scientific tasks and projects, and coordinating major sci-tech affairs among ministries, departments and local authorities.

                        77% economists expect no BoJ stimulus exit until 2020 or later

                          According to a Reuters poll, 73% of economists surveyed expected that BoJ will not start unwinding stimulus until 2020 or later. That’s nearly double of 37% last month. Around one third said BoJ’s July announcement as a small step on crafting the exit strategy. BoJ explicitly talked about allowing 10 year JGB yield to move between -0.1% and 0.1%. 77% of economists believed that would help bond market functioning.

                          On the economy, economists projected core CPI, excluding sales tax hike impact, to rise 0.9% in the fiscal year to March 2019, same as the prior fiscal year. That’ notably lower than BoJ’s own forecasts of 1.1% in fiscal 2019 and fiscal 2019. Economists also saw Japan GDP to grow 1.1% this fiscal year and then slow to 0.8% next.

                          The poll was taken from Aug. 3 to 8.

                          Canadian Dollar recovers as Trudeau said tension with Saudi just diplomatic difference of opinion

                            Selling pressure on Canadian appears to have eased after Canadian Prime Minister Justin Trudeau tried to tone down the tension with Saudi Arabia. Trudeau referred to recent events as a matter of “diplomatic difference of opinion” only. And he emphasized that “we don’t want to have poor relations with Saudi Arabia.” Trudeau went further and hailed that Saudi Arabia is a “country that has great significance in the world, that is making progress in the area of human rights.”

                            Nonetheless, Trudeau also stood firm on Canada’s position. He noted that “Canadians have always expected our government to speak strongly, firmly, clearly and politely about the need to respect human rights at home and around the world. We will continue to do that, we will continue to stand up for Canadian values and indeed for universal values and human rights at any occasion,”

                            The tension started last Friday when Canada expressed concerns over arrests of women rights activist in Saudi Arabia. The latter responded to the criticism by freezing new trade with Canada and expelled Canadian ambassador. It’s reported yesterday by the Financial Times that Saudi central bank and state pensions ordered their overseas asset managers to sell their Canadian assets, including equities, bonds and cash holdings “no matter the cost”. Saudi Arabia’s foreign minister also said there is “nothing to mediate” with Canada.

                            USD/CAD spiked higher to 1.3119 yesterday but it’s now back pressing 1.3000.

                            NZDUSD, NZDJPY resume down trend after dovish RBNZ

                              While NZD/USD drops sharply after dovish RBNZ, the selloff is not that “disastrous” yet. Technically, the pair is facing a key cluster fibonacci level. They are, 61.8% retracement of 0.6102 (2015 low) to 0.7557 (2017 high) at 0.6658, and 100% projection of 0.7557 to 0.6779 from 0.7426 at 0.66528. Some initial support could be seen as this level.

                              But in any case, near term outlook will stay bearish as long as 0.6761 minor resistance holds. Sustained break of 0.6658 will confirm underlying bearishness and next target will be 138.2% projection at 0.6361.

                              NZD/JPY also resumed larger medium term down trend by breaking 74.07 to as low as 73.80. Near term outlook will stay bearish as long as 75.23 minor resistance holds. Focus is now on 100% projection of 83.90 to 76.08 from 81.55. Firm break there will pave the way to 138.2% projection at 70.74.

                              RBNZ condition full 25bps hike in Q4 2020, revised down GDP forecasts

                                New Zealand Dollar tumbles broadly and sharply after RBNZ announcement turned out to be more dovish than expected. The Official Cash Rate is held unchanged at 1.75%. OCR is expected to be kept low, “but for longer”, through 2019 and into 2020. RBNZ also reiterated that the next move “could be up or down”.

                                According to the new Monetary Policy Statement (MPS), RBNZ is now conditioning a full 25bps hike to 2.00% in December quarter of 2020. That’s notably later than March quarter in 2020 as in May MPS.

                                GDP growth forecasts were revised down to 2.7% in 2018 (2.8% in May MPS), 2.6% in 2019 (3.1%), 3.4% in 2020 (3.3%) and 3.2% in 2021 (3.1%).

                                CPI forecasts were kept unchanged at 1.1% in 2018, 1.6% in 2019, 1.8% in 2020, and 2.0% in 2021.

                                Full August MPS

                                RBNZ Governor Adrian Orr press conference highlights and full

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                                  RBNZ kept OCR unchanged at 1.75% as widely expeced, full statement

                                    Statement by Reserve Bank Governor Adrian Orr:

                                    Tena koutou katoa, welcome all.

                                    The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May Statement. The direction of our next OCR move could be up or down.

                                    While recent economic growth has moderated, we expect it to pick up pace over the rest of this year and be maintained through 2019.

                                    Robust global growth and a lower New Zealand dollar exchange rate will support export earnings. At home, capacity and labour constraints promote business investment, supported by low interest rates. Government spending and investment is also set to rise, while residential construction and household spending remain solid.

                                    The labour market has tightened over the past year and employment is roughly around its maximum sustainable level. We expect the unemployment rate to decline modestly from its current level.

                                    There are welcome early signs of core inflation rising. Inflation will increase towards 2 percent over the projection period as capacity pressures bite. This path may be bumpy however, with one-off price changes from global oil prices, a lower exchange rate, and announced petrol excise tax rises expected. We will look through this volatility as appropriate, and only respond to any persistent movements in inflation.

                                    Risks remain to our central forecast. The recent moderation in growth could last longer. Low business confidence can affect employment and investment decisions. Conversely, there is a chance that inflation could increase faster if cost pressures can pass through into higher prices and impact inflation expectations.

                                    We will keep the OCR at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation.

                                    Meitaki, thanks.

                                    Canadian Dollar’s dip attributed to rising tension with Saudi Arabia

                                      The earlier dip in Canadian Dollar can be attributed to escalating tension between Saudi Arabia and Canada after the latter criticized the arrest of a female activist.

                                      The Financial Times reported that Saudi central bank and state pensions ordered their overseas asset managers to sell their Canadian assets, including equities, bonds and cash holdings “no matter the cost”.

                                      Earlier this week, Saudi Arabia froze new trade and investment with Canada. Also, it expelled the Canadian ambassador.

                                      Further Saudi said it had stopped all medical treatment programs in Canada and was working on transferring all Saudi patents out of there.

                                      Saudi Arabia’s foreign minister also said there is “nothing to mediate” with Canada.

                                      Richmond Fed Barkin: Economy calls for normalizing interest rates, Fed should follow through

                                        Richmond Fed President Tom Barkin said in a speech titled “Unlocking Our Potential” that the US economy looks “quite strong a present”. Also, underlying this growth, there is “strong consumer and business confidence”.

                                        Even though Fed has begun raising interest rates, “they are not yet back to normal levels”. And “it is difficult to argue that lower than normal rates are appropriate when unemployment is low and inflation is effectively at the Fed’s target.

                                        As the “economy calls for moving back to normal levels”, the Fed should “follow through”. Barkin also added that “given the strength of the underlying economy and the recent additional fiscal stimulus, the risk of normalization is reduced.”

                                        But “how high rates will ultimately need to rise depends on economic growth.” For unlocking growth potential, Barkin suggests to “target segments of the population where labor force participation is relatively low”. Another strategy is to “invest further in workforce development.”

                                        Full speech here.

                                        China MOFCOM to start retaliatory tariffs on $16B US imports on Aug 23

                                          China Ministry of Commerce announced to start to impose 25% retaliatory tariffs on USD 16B in US goods starting August 23, “in parallel with the US. The MOFCOM condemned that the US “once again overrides international law: as a very unreasonable practice. And Chin’s countermeasures were to safeguard its own “legitimate rights and interest and global multilateral trading system”.

                                          Full short statement in simplified Chinese.

                                          This is in response to US Trade Representative’s announcement yesterday, to start to collect 25% tariffs on USD 16B of Chinese imports starting August 23. The announced lists contains 279 of the original 284 tariff lines that were proposed back on June 15.

                                          As a recap, this is the second tranche of tariffs as part of the Section 301 intellectual property investigations. The first tranche of 25% tariffs on USD 34B of Chinese goods already took effect on July 6. The upcoming 25% tariffs on USD 200B in Chinese goods are work in progress.

                                          Full statement by USTR.