Japan PMI manufacturing finalized at 52.3, export sales stalled for second month

    Japan PMI manufacturing was finalized at 52.3, revised up from 51.6. But the reading was still the lowest in 11 months.

    Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said:

    “Latest survey data signalled a slowdown to manufacturing sector growth at the beginning of Q3. Output growth eased and there was a noticeable softening of demand, while export sales failed to record any upswing for a second month running.

    “There was also evidence that supply-side constraints were beginning to bite harder. Employment growth slipped and was weaker than rates seen earlier in the year, meanwhile delivery times for inputs lengthened to the greatest extent in over seven years.

    “In turn, input price inflation accelerated to an 88-month high, resulting in the strongest rate of increase in selling charges for almost a decade. Although stronger output price inflationary pressures will be welcomed by policymakers, anecdotal evidence indicates the latest rise was primarily cost-push. Further weakness in total new business growth could skew the inflationary outlook to the downside.”

    Full release here.

    China Caixin PMI manufacturing dropped to 50.8, export market continued to deteriorate

      China Caixin PMI manufacturing dropped -0.2 to 50.8 in July, down from 51.0, slightly below expectation of 50.9. It’s also the lowest since November 2017. The key points in the release are slower increase in output and new orders, fastest decline in new export sales for over two years and solid rise in input costs.

      Commenting on the China General Manufacturing PMI™ data, Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group said:

      “The Caixin China General Manufacturing PMI slipped to 50.8 in July from June. The reading has not been this low since November 2017.

      “The sub-indexes for output and new orders both fell, but remained in expansionary territory, while the employment sub-index picked up despite remaining in contractionary territory. New export orders shrunk at the fastest pace since June 2016, indicating the export market continued to deteriorate.

      “The sub-indexes for output charges and input prices both dropped, but remained in expansionary territory, pointing to easing pressure on prices. The sub-index for future output edged up, reflecting that goods producers were more optimistic that production would grow over the next 12 months.

      “The sub-index for stocks of finished items contracted at a steeper rate in July, while the sub-index for stocks of purchased items started expanding again — a positive sign that companies had reduced their stocks of finished products and replenished stocks of purchases. The sub-index for suppliers’ delivery times rose, even though it failed to make it into expansionary territory, which might imply an improved capital turnover among manufacturers.

      “In general, the survey signaled a weakening manufacturing trend as a grim export market dragged on the sector’s performance. The positive drivers were the increase in stocks of purchases and easing pressure on capital turnover.”

      Full release here.

      Yuan rebounds as US, China seek to restart trade talk, but we doubt.

        Dollar is apparently lifted mildly by a Bloomberg report that US Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He are having private conversations for restarting the trade negotiations.

        It seems like a very early stage of re-engagement as there is no time-table, nor any format for the talk. But, there is only vague consensus that talks need to take place.

        While Dollar is strengthening against Yen, it dips notably against the offshore China Yuan on the news.

        On the one hand, it’s understandable for China to seek a way out of the tariffs vicious cycle given that US and EU are now aligned against it after Juncker’s visit.

        On the other hand, it should be noted that Liu He was assigned a new task last week to lead a special work group to oversee state-owned enterprise reforms. Adding another task for Liu in such a crucial time when he’s leading trade negotiation with the US is unusual. And that prompted speculations that President Xi Jinping is not satisfied with what Liu has done. And Liu could be moved away from the circle on the trade issue.

        So, the news is doubtful to us.

        Dollar regains ground after Chicago PMI and consumer confidence

          Dollar regains some ground after better than expected consumer confidence reading.

          US Conference Board consumer confidence rose to 127.4 in July, up from 127.1 and beat expectation of 126.5. Lynn Franco, Director of Economic Indicators at The Conference Board said in the release that “Consumers’ assessment of present-day conditions improved, suggesting that economic growth is still strong. However, while expectations continue to reflect optimism in the short-term economic outlook, back-to-back declines suggest consumers do not foresee growth accelerating.”

          Full release here.

          Chicago PMI rose to 65.5 in July, up from 64.1 and beat expectation of 61.8. Jamie Satchi, Economist at MNI Indicators said in the release that “the MNI Chicago Business Barometer started the third quarter in bullish form, with business activity supported by robust demand and output. Both, like the headline index, registered 6-month highs and the majority of firms expect demand to increase further over Q3.” However, “input prices continue to be a thorn in the side of businesses, however, with the Prices Paid indicator at the highest in a decade and continuing to signal pipeline inflation.”

          Full release here.

          USD/CAD falls after Canada GDP, US PCE inflation

            USD/CAD dips notably in early US session the first round of data release.

            Canada GDP rose 0.5% mom, 2.6% in May, stronger than expectation of 0.3% mom, 2.3% yoy. IPPI rose 0.5% versus expectation 0.2% mom. RMPI rose 0.5% mom versus expectation of 2.7% mom. Canadian Dollar dropped deeply earlier today on reports that it’s rejected from US-Mexico NAFTA meeting later on Thursday. But stronger than expected GDP is putting it back in control against Dollar.

            US personal income rose 0.4% in June, spending rose 0.4%, both met expectation. However, headline PCE was unchanged at 2.2% yoy, below expectation of 2.3% yoy. PCE core was unchanged at 1.9% yoy, below expectation of 2.0% yoy. Employment cost index rose 0.6% in Q2, below expectation of 0.7%.

            Into US session: Euro strongest on CPI, Yen Weakest on BoJ

              Entering into US session, Euro is trading as the strongest one for today, followed by Sterling. On the other hand, Yen is the weakest, followed by Kiwi.

              Euro’s strength can be attributed to the unexpected acceleration both headline and core inflation in July. CPI rose 2.1% yoy, up from 2.0% yoy and beat expectation of 2.0% yoy. Core CPI rose 1.1% yoy, up from 0.9% yoy and beat expectation of 1.0% yoy. This is more than enough to offset the impact of slower than expected GDP growth of 0.3% qoq in Q2 was ignored.

              ECB is clear with its path for stopping the asset purchase program. And it’s clear with the forward guidance of keeping interest rates unchanged through summer of 2019. The language, though, is intentionally kept ambiguous as ECB wanted to strike the balance between precision and flexibility. While a month of inflation data won’t trigger ECB to pull ahead the first hike, it certainly reduces the chance of delaying it.

              Yen, on the other hand, was pressured by the dovish message of BoJ. No matter how the yield curve control framework is tweaked, BoJ Governor Haruhiko Kuroda is rather concrete in his press conference. He pointed to market speculations that BoJ could have an earlier than expected stimulus exit. And the changes target to “dispel such speculation”. Also, Kuroda conceded that BoJ won’t be able to meet the 2% inflation target within the forecast time frame. 10 year JGB yield was also sent down to 0.048, less than half of day high at 0.115.

              More on BoJ:

              In other markets, Asian stocks were mixed, with Nikkei reversing earlier losses to close up 0.04%. China Shanghai SSE closed up 0.26%. Singapore Strait Times closed up 0.38%. But Hong Kong HSI closed down -0.52%. Nikkei has managed to stay above nearly flat 55 day EMA with the current retreat. Near term outlook is maintained bullish for extending the rise from 20347.49 at a later stage.

              European stocks are mixed so far, with FTSE up 0.58%, DAX down -0.04% and CAC up 0.08%. WTI crude oil is back below 70 but there is no serious selloff. Gold edges lower but is still having one hand on 1220 handle.

               

              Eurozone CPI accelerated to 2.1%, Core CPI up to 1.1%. But GDP growth slowed to 0.3%

                Euro stays firm after some mixed economic data.

                Eurozone all-item CPI accelerated to 2.1% in July, up from 2.1% yoy and beat expectation of 2.0% yoy. Core CPI also accelerated to 1.1%, up from 0.9% yoy and beat expectation of 1.0% yoy.

                Unemployment rate, dropped to 8.3%, down from 8.4% and met expectation.

                On the other hand, GDP growth closed to 0.3% qoq in Q2, down from 0.4% qoq and missed expectation of 0.4% qoq. Annual growth slowed to 2.1% yoy, down from 2.5% yoy and missed expectation of 2.2% yoy.

                Also from Eurozone Germany retail sales rose 1.2% mom in June, above expectation of 1.0% mom. Unemployment dropped -6k in July, below expectation of -10k.

                Yen drops further as BoJ Kuroda dispels speculation of early stimulus exit

                  Yen apparently suffers another round of selling after BoJ Governor Haruhiko Kuroda’s post meeting press conference. A key to note is that under the strengthened framework, BoJ will now allow yields to move between -0.1% and +0.1%. And Kuroda emphasized that “we do not intend this change to lead to a rise in interest rate levels.” He added that the 0.2% range will “improve functions in the government bond market, which had been deteriorating” and “help make our easy-policy more sustainable”.

                  “On forward guidance, Kuroda said it’s for strengthening the “commitment to achieve our 2 percent inflation target”. And, “we’ve adopted this to ensure market trust in our policy as we will be maintaining our massive stimulus longer than initially expected.” Kuroda pointed to “some speculation” that BoJ will seek an “early exit”. And he hoped this can “dispel such speculation”.

                  He also admitted that it takes “longer than expected” for inflation to pick up. Hence, “achievement of our target will be beyond our (three-year) forecast timeframe”. And he also emphasized that “Under our yield curve control (YCC), real interest rates will fall even if nominal rates are steady as long as inflation expectations heighten.” But there is no need for additional easing for now.

                  10 year JGB yield drops to as low as 0.054, after hitting 0.115 earlier today.

                  BoJ: Growth to slow in 2019/20, inflation expectations lagging behind

                    In the latest Outlook for Economic Activity and Prices, BoJ said the economy is “likely to continue growing at a pace above its potential in fiscal 2018”. For fiscal 2019 through fiscal 2020, the expanding trend is expected to continue, “partly supported by external demand”, but pace will “decelerate” due to “cyclical slowdown in business fixed investment” and the impact of planned sales tax hike.

                    Year-on-year ex-food CPI stayed positive but continued to show “relatively weak developments”. And, rise in medium- to long-term inflation expectations has been “lagging behind”. BoJ noted that’s because “the mindset and behavior based on the assumption that wages and prices will not increase easily have been deeply entrenched”. But inflation is still expected to increase gradually towards 2% target, “although it will take more time than expected”.

                    For fiscal 2018, risks are generally balanced. But risks are skewed to the downside for fiscal 2019.

                    Yen falls broadly as BoJ strengthens the framework for continuous powerful easing

                      Yen is sold off sharply after BoJ announced the “Strengthening the Framework for Continuous Powerful Monetary Easing”.

                      10 year JGB yields hit as high as 0.115 earlier today but breaches below 0.07 after BoJ release.

                      On Yield Curve Control framework BoJ voted 7-2 on the following decision. Firstly, short term interest rate target is held unchanged at -0.1%. Secondly, 10 year JGB yield target is maintained at around 0%. But, “yields may move upward and downward to some extent mainly depending on developments in economic activity and prices”. The annual pace of monetary expansion is kept at around JPY 80T. BoJ also noted that “in case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately”.

                      Y Harada and G Kataoka dissented the above decision. Harada said allowing long term yields to move upward and downward was to some extent “too ambiguous”. Kataoka continued his push to broaden the target to JGB of 10-years and longer.

                      BoJ also added forward guidance on interest rate. It said “the Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.”

                      Full release here.

                      Reversal in NASDAQ and S&P 500 coming after steep selloff

                        The steep selloff in US stocks in the past two days is significantly raising the chance of near term reversal. NASDAQ closed down -107.42 pts or -1.39% over night to 7630.00. It’s down -3.82% from record intraday high as 7933.31. Bearish divergence condition in daily MACD shows notable loss in upside momentum. It’s now in a tentative support zone with 55 day EMA at 7623.45, and 38.2% retracement of 6926.97 to 7933.31 at 7548.88. While some support could be seen here, the strength of subsequent recovery will reveal whether the index is heading further down.

                        It’s a bit early to confirm. But we’d like to point out the bearish divergence condition in weekly MACD and RSI too. A firm break of the above mentioned 7548.88 fibonacci level will raise the chance of medium term correction. And fall from 7933.31 could extend to 38.2% retracement of 4209.76 to 7933.31 at 6510.91 before completion.

                        S&P 500 also closed down -16.22 pts or -0.58% to 2802.60 overnight. It’s starting to lose some upside momentum approaching 2827.87 resistance. We’d maintain the view that choppy rise from 2532.69 is a corrective move. And it’s likely the second leg of the medium term corrective pattern from 2872.87. Hence even in case of another rise, upside should be limited by 2827.87 to bring near term reversal. Break of 2795.14 support will be the first sign of such reversal . And firm break of channel support (now at 2751) should confirm.

                        Looking at the longer time frame, when the corrective pattern from 2872.87 extends, it should target 38.2% retracement of 1810.10 to 2872.87 at 2466.89 before completion.

                        New Zealand ANZ business confidence dropped to 10 year low, economy feels increasingly late in the cycle

                          New Zealand ANZ business confidence index dropped to -45 in July, down -5 pts. That’s the lowest level since May 2008. Own activity index dropped -5 pts to 4, lowest since May 2009. Sub-indicators were weak across the board, and retail is the least
                          confident sector.

                          ANZ noted in the release that “this economy feels increasingly late in the cycle”. While fiscal stimulus and strong terms of trade will support growth, “sustained low business confidence increases the risk that firms will delay investment and hiring decisions”. “The Road ahead is looking less assured, and risks of a stall have increased.

                          Full release here.

                          Also from down under, New Zealand building permits dropped -7.6% mom in June. Australia building approvals rose 6.4% mom in June.

                          China PMI manufacturing dropped to 51.2, short term downward pressure emerged

                            The official China PMI manufacturing dropped -0.3 to 51.2 in July, below expectation of 51.3. Official PMI services dropped -1.0 to 54.0, missed expectation of 55.0. Analyst Zhang Liqun noted in the release that despite the slight decline in the PMI index, “steady growth of the economy remained unchanged”. However, “short term downward pressure has emerged”.

                            Looking at the details, eight of the sub-indices declined in the month. They include production, new order, purchase volume, import, purchase price, ex-factory price, suppliers delivery, production and operation expectation, New export orders, was unchanged but in contraction region at 49.8. The data set is seen by some as the first sign of impact from increasing trade tension with the US.

                            Full release here in simplified Chinese.

                            CAD dives as Canada rejected from US-Mexico NAFTA talks

                              Canadian Dollar drops sharply on a report by the National Post that it’s rejected from the senior level NAFTA talks between the US and Mexico, which will be held later this week. Quoting unnamed source, the report noted that the request by Canadian Foreign Affairs Minister Chrystia Freeland to join the meeting was ignore or spurned outright by US Trade Representative Robert Lighthizer. And Lighthizer is planning not to involve Canada unless the latter make some major concessions.

                              Separately, it’s reported that the US and Mexico will hold ministerial-level NAFTA trade talks on Thursday in Washington. According to a Mexican source quoted by Reuters, there will be “technical meetings probably until Wednesday and a ministerial meeting on Thursday.”

                              USD/CAD rebounds strongly on the news, just ahead of near term channel support. While 1.3092 minor resistance is breached, there is no follow through buying yet. Focus is now on this resistance level.

                              Into US session: Yen soft aft traders prepare for BoJ disappointment, Swiss Franc strong

                                The forex market came into live in European session with Euro and Swiss Franc surging broadly. On the other hand, Yen is soft despite resilience in JGB yield and mild risk aversion. 10 year JGB yield closed up 0.021 at 0.103.

                                Nikkei closed down -0.74%, Hong Kong HSI down -0.25%, China Shanghai SSE down -0.16%, Singapore Strait Times down -0.54%. In Europe, FTSE is flow. But DAX and CAC are down more than -0.1% at the time of writing.

                                An explanation for Yen’s softness is that traders could be preparing for disappointment from BoJ tomorrow.

                                Meanwhile, current development now put 0.9900 in USD/CHF into focus. Break there will resume the fall from 1.0067 and target 0.9856 support next.

                                EUR/GBP also staged a strong rebound and could be heading back to 0.8957 high.

                                Swiss KOF dropped to 101.1, still slightly above long term average of 100

                                  Swiss KOF Economic Barometer dropped -0.2 to 101.1 in July, below expectation of 101.5. The reading still sit slightly above the long-term average of 100, indicating a slightly above-average economic development in Switzerland in the coming months.

                                  KOF noted in the release that “negative indicators for manufacturing, the export industry and the accommodation and food service activities sector were mainly responsible for the slight decrease.” On the other hand, “positive signals come from the banking and the construction sectors.”.

                                  UK Foreign Minister Hunt said China offered talks on post Brexit FTA

                                    New UK Foreign Minister Jeremy Hunt met with China’s Foreign Minister Wang Yi in Beijing today. After the meeting, Hunt said China made an offer to “to open discussions about a possible free trade deal done between Britain and China post Brexit”. And he added that “that’s something that we welcome and we said that we will explore.” Wang didn’t mention the free trade talks directly. But he said both countries had “agreed to proactively join up each others’ development strategies, and expand the scale of trade and mutual investment”.

                                    Separately, Wang said that “the responsibility for the trade imbalance between China and the United States lies not with China.” And he cited the global role of the US Dollar, low saving rates, high level of consumption and US restrictions on high tech exports as some of the reasons for the imbalances. He also reiterated the stance that “China does not want to fight a trade war, but in the face of this aggressive attitude from the United States and violation of rights, we cannot but and must take countermeasures.”

                                    BoE Carney: We can choose between low road of protectionism or high road of trade liberalization

                                      BoE Governor Mark Carney said in a Bloomberg interview that the world could choose between a “low road of protectionism focused on bilateral goods-trade balances” and a “high road of liberalization of global trade in services.” But he warned that the “low road will cost jobs, growth, and stability”. Meanwhile, the “high road can support a more inclusive and resilient globalization.” Carney said that the trade actions taken by Trump as of June had small impacts. But “a larger increase in tariffs would have a substantial impact”.

                                      Domestically, Carney said that it’s “more likely than not” that the equilibrium interest rates have risen. But “any given jurisdiction has to take into account its own domestic forces, whether there are headwinds from fiscal policy, headwinds from uncertainty, headwinds from trade discussions or other factors.”

                                      He also played down the chance of other EU countries replicating London’s success as a global financial center. He said, “in some circles in Europe there is a greater predisposition to ring-fence financial activities,” and “that could lead to a very large but effectively local financial center in Europe, as opposed to a global financial center, which I believe London will continue to be.”

                                      G20 Agriculture Ministers pledged WTO reform, criticized protectionism

                                        After G20 Meeting of Agriculture Ministers in Argentina, the growth issued a statement on Saturday to pledge on reform and criticism protectionism. In the statement, it said that “recognizing the important role of the WTO, we agree to continue the reform process of agricultural trade rules within the given mandate.” Also, “we are concerned about the increasing use of protectionist non-tariff measures, inconsistently with WTO rules.” The group also pledged to “refrain from adopting unnecessary obstacles to international trade”

                                        US Agriculture Secretary Sonny Perdue said on the sideline of the meeting that Trump’s USD 12B in aids are “not going to make farmers whole”.  German Agriculture Minister Julia Kloeckner said farmers “don’t need aid, (they) need trade.” Kloeckner also emphasized that “we don’t want unilateral protectionist measures.” She also warned that “we all know what happens if a single person or country doesn’t adhere to WTO rules, trying to get a benefit for themselves through protectionism,” and “this will usually lead to retaliatory tariffs.”

                                        Support for German Merkel’s CDU/CSU dropped to 12-year low

                                          Support for German Chancellor Angela Merkel’s CDU/CSU has fallen to a 12-year low according to a latest poll. The survey was conducted by public opinion research institute Emnid, published in the Bild am Sonntag newspaper. It’s done between July 19 and 25 with 2001 German citizens.

                                          Results showed supported for Christian Democratic Union (CDU) and its Bavarian sister party Christian Social Union (CSU) dropped -1% to 29%, lowest since 2006. That compares with 33 percent in the September election. Support for Social Democratic Party (SPD) dropped -1% to 18%. The support for far-right Alternative for Germany (AfD) was unchanged at 15%. Support for Greens rose 2% to 12%.

                                          The results also indicate that CSU risks losing its absolute majority in Bavaria in a regional election in October.