Bundesbank Weidmann told Cabinet: As political risks increase, the government should be prepared to tackle the next crisis

    According to a report by Handelsblatt, Bundesbank head Jens Weidmann warned the German Federal Cabinet last week that that even though growth is still “intact”, political risks would “increase”. More importantly, Weidmann pointed to the slow down in momentum and the downward revision in 2018 growth forecasts from 2.5% to 2.0%. The drop in momentum, according to Weidmann, is a prove that “good economic development could not go on forever”. The risks include US protectionist trade policy, Brexit and new geopolitical conflicts.

    Weidmann urged the government to prepare for worse times. It takes some time to normalize monetary policy. And for now, ECB “could not react in the next downturn”. And because of that, fiscal policy must take on the task should there be a new crisis. But due to their high debt levels, many Eurozone countries would also have limited ability to “cushion” a down turn.

    EU Tusk and Juncker in China for talk on trade, investment and climate change

      European Council President Donald Tusk and European Commission President Jean-Claude Juncker will meet with Chines Premier Li Keqiang in Beijing today for discussions on some practical topics. Ahead of the meeting European Commission spokesman Margaritis Schinas said the meeting will focus on “trade and investment, on the commitment to combating climate change and investing in clean energy and on foreign and security issues, including the situation on the Korean peninsula”. And, the two sides will also talk on the joint commitment to the Iran nuclear deal.

      Chinese Ambassador to the EU Zhang Ming wrote in an article in the official People’s Daily, urging to deepen cooperation to address global challenges. In particular, he said both sides should “send out a positive message to safeguard multilateralism, liberalize and facilitate trade and investment.” Zhang added that “Both of them recognize the necessity to firmly resist unilateralism and trade protectionism, guard the rule-based multilateral trading system with the WTO at its core, push economic globalization in the direction of becoming more open, inclusive, balanced and beneficial to all, reform multilateral trading system with the times, and perfect global economic governance system.

      Italy agrees to take some Libya migrants as some EU countries offer help

        Italy’s far right Interior Minister Matteo Salvini said on Sunday that the country is allowing some of the asylum seekers from Libya to disembark in Sicily. Prime Minister Giuseppe Conte set letters to head of state of other EU nations asking to share responsibility on the Libya migrants. In response, Germany, France, Spain, Portugal and Malta have agreed to take 50 people each.

        “Spain will take in 50 of the people rescued yesterday in the Mediterranean. This shows our commitment to offer solutions to migration flows and solidarity with the humanitarian drama,” Spanish Prime Minister Pedro Sanchez confirmed and tweeted.

        Sterling recovers as UK-US trade deal is back on track

          Trump said in a joint press conference with UK Prime Minister Theresa May that “we agreed today that as the U.K. leaves the EU we will pursue an ambitious U.S.-U.K. trade deal.” And he added that “the United States looks forward to finalizing a great bilateral trade deal” with the UK.”

          Regarding Brexit negotiation, Trump said it’s “not an easy negotiation to be sure” and the deal UK reached “is OK with me”. He added “just make sure we can trade together.”

          Trump called the Sun story “generally fine” but some of his comments were left out. He noted “I said very good things about her” in the interview”. May is a “total professional”. Trump also said “when I saw her this morning I said, ‘I want to apologize, because I said such good things about you.”

          Sterling recovers strongly ahead of weekly close.

          Joint press conference of UK PM May and Trump

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            BoE Cunliffe: A little stodginess needed in medium term, but it’s not a stopped approach

              BoE Deputy Governor Jon Cunliffe said in a speech today that the current overshoot in inflation, headline CPI at 2.4%, is “entirely due to imported inflationary pressure.”. That has come “primarily from the post referendum depreciation in sterling plus some more recent pressure from the increase in oil prices.” But the inflationary pressure form Sterling is “already passed its peak”.

              The key question now is “how much inflation is domestic economic pressures likely to generate over the next couple of years”. Cunliffe noted that “domestic inflation pressures, while strengthening a little are not yet established at levels consistent with inflation at target”. Pay growth has established itself in the range of 2.5-3.0%. But “the latest readings do not signal strongly that pay growth will make the next step to establish itself firmly in 3% territory in line with the May forecast”.

              And there remains a case for a little ‘stodginess’ yet in the medium term. Though, he also emphasized that “such an approach is not, however, a stopped approach.”

              Full speech here.

              Into US session: Dollar stays strong, Nikkei rally to continue next week

                Entering into US Dollar remains the strongest one for today. In particular, there was fresh selling in European majors earlier today that helped lift the greenback. Yen is trading as the second strongest so but that’s only because it’s paring some of this week’s risk appetite triggered losses. As for today, New Zealand Dollar and Sterling are the weakest ones.

                For the week, Dollar is staying as the strongest one. Rebound in stocks, in particular in Asia, gave Australian Dollar some solid support. Yen is the weakest one for the week, followed by Swiss Franc and Kiwi.

                The rebound in Asian stocks could partly be attributed to China’s softening stance on the issue of trade dispute with the US. So far, the Chinese government just said it will take quantitative and qualitative counter measures against the upcoming USD section 301 tariffs on USD 200B in Chinese goods. However, the lack of detail gives market a feeling that China is backing down from the hard stance. And, instead of pushing going to tit-for-tat tariffs again, it’s trying other ways.

                Nikkei’s strong rally on Friday is clearly a sign of relieve. The development now suggests that corrective pull back from 23050.39 has completed with three waves down to 2146.294. Further rise should be seen back to retest 23050.39 resistance next week. Break there will resume whole rebound from 20347.49 to 100% projection of 20347.49 to 23050.39 from 21462.94 at 24165.84, which is close to 24129.34 high.

                China overall trade surplus shrank -24.5% in first half, surplus with US rose 13.9%

                  In USD term, China trade surplus widened to USD 41.6B in June, up from May’s USD 24.9B and beat expectation of USD 27.2B. Exports jumped 11.3% yoy to USD 216.7B while import rose 14.1% to USD 175.1B.

                  In CNY term, trade surplus widened to CNY 261.9B, up from May’s CNY 156.5B and beat expectation of CNY 187.0B. Exports rose 3.1% yoy to CNY 1377.7B while imports rose 6.0% yoy to CNY 1115.8B

                  From January to June:

                  Total trade rose 16% to USD 2205.8B. Exports rose 12.8% to USD 1172.7B. Imports rose 19.9% to USD 1033.1B. Trade surplus dropped -24.5% to USD 139.6B.

                  Total trade with EU rose 13.0% to USD 322.6B. Export to EU rose 11.7% to USD 191.8B. Imports from EU rose 15.0% to USD 130.8B. Trade surplus with EU grew 3.8% to USD 61.0B

                  Total trade with US rose 13.1% to USD 301B. Export to US rose 13.6% to USD 217.8B. Imports from US rose 11.8% to USD 84.0B. Trade surplus with US rose 13.9% to USD 133.8B.

                  Total trade with Australia rose 11..5% to USD 74.1B. Export to Australia rose 17.3% to USD 21.7B. Import from Australia rose 9.3% to USD 52.4B. Trade deficit with Australia rose 3.7% to USD -30.7B.

                  New Zealand BusinessNZ PMI dropped to 52.8 and production dipped again

                    New Zealand BusinessNZ Performance of Manufacturing Index dropped to 52.8 in June, down from 54.4. BusinessNZ’s executive director for manufacturing Catherine Beard said that the slow-down in expansion was mainly due to ongoing drops in a key sub-index.

                    “Production (51.8) experienced another decrease in expansion levels for June, which meant it was down to its lowest point since January 2017. On a positive note, the other key sub-index of New Orders (57.1) remained in healthy territory, which at least should feed through to production levels in the coming months.

                    In addition, the proportion of positive comments in June (51.7%) decreased from May (55.1%), and very similar to February (51.4%). Those who provided negative comments typically noted a general downturn and uncertainty in the market”.

                    BNZ Senior Economist, Craig Ebert said that “broadly speaking, the PMI has settled down into a trend-like pace this year, averaging 53.8 (excluding April’s spike). This is after outperformance through most of 2017, when it averaged 56.2”.

                    Full BusinessNZ Performance of Manufacturing Index release.

                    Trump said May’s Brexit plan would probably end a major trade relationship with US

                      Trump blasted UK Prime Minister Theresa May’s “business-friendly” Brexit plan, which was formally published yesterday, in The Sun newspaper interview. That came just hours ahead of their dinner at the Blenheim Palace. He criticized that “if they do a deal like that, we would be dealing with the European Union instead of dealing with the UK, so it will probably kill the deal.”

                      And he warned that the “soft” approach of May would “definitely affect trade with the United States, unfortunately in a negative way”. And, “if they do that I would say that that would probably end a major trade relationship with the United States.”

                      Trump also disclosed that he tried to interfere with the relationship between UK and EU. “I would have done it much differently,” Trump told The Sun. “I actually told Theresa May how to do it but she didn’t agree, she didn’t listen to me. . . . I think what is going on is very unfortunate.”

                      Fed Powell: Wage should reflect inflation plus productivity

                        Jerome Powell had his first ever broadcast interview as Fed chair with the Marketplace. On wages, he acknowledged that annual wage growth has moved up from “low twos” five years ago, to close to three” now. And there’s been “very gradual move up”. He noted that wages should “reflect inflation plus productivity”. A “big part” of the slow wage growth is “certainly that inflation has been low and productivity has been low”. Yet, he didn’t have the answer to the question on why employers are not paying higher wages while the labor markets appear to be very tight.

                        Though, he also noted that “the economy’s in a really good shape” with unemployment at 4%, the lowest in 20 years. And, people are “coming back into the labor force or not leaving it” in the past five years. Fed’s target of PCE, which is “a little bit lower than the CPI” has been below 2% for some time. But it finally hit the 2% core PCE level last month.

                        Regarding trade policy, Powell noted Trump’s administration “said” it’s trying to lower tariffs. And, “if it works out that way, then that’ll be a good thing for our economy.” However, “if it works our other ways” and there will be high tariffs on a lot of products for a sustained period of tie, “that could be a negative for our economy”. But it’s “hard to sit here today and say which way that’s going”.

                        But Powell also emphasized that when Fed doesn’t make the policy, “we don’t praise it, we don’t criticize it”. And, “part of the independence that we have is to stick to our lane, stick to our knitting, so really wouldn’t want to comment on fiscal policy really, or trade policy.”

                        Transcript of the full interview.

                        Philadelphia Fed Harker: No compelling reason for a fourth hike but he’s open

                          Philadelphia Fed President Patrick Harker said there is “no compelling reason right now” for having a total of four rate hikes this year, “unless we see inflation start to accelerate rapidly. But he is “open” to that. He added that “if we see inflation starting to go past 2.5%, we have to act.” But “absent that” he believed there are “lots of good reasons to hold off”.

                          In particular, he pointed out that further rate hike could push 2-year treasury yields above that of 10-year debt. And, he warned that “if there is a risk of inverting the yield curve then we should try to avoid that.”

                          EU to agree on unified, strong position against US unilateralism

                            According to a draft text seen by Reuters, EU finance ministers are going to agree on Friday a unified, strong position against US unilateralism.

                            The text noted that the EU “promotes international cooperation to modernize the WTO,” and “rejects WTO-inconsistent unilateral measures by others.”

                            It added, “in this respect, we regret the recent U.S. decisions to impose import tariffs, which leave the EU no choice but to react in an adequate, proportionate and reasonable manner in full respect of WTO rules.”

                            Italian PM Conte said no extra NATO spending

                              Italian Prime Minister Giuseppe Conte said today that “Italy inherited spending commitments to NATO, commitments that we did not change, so no increase in spending.” He added that “as far as we’re concerned, today we did not decide to offer extra contributions with respect to what was decided some time ago.”

                              That came not long after Trump, in high profile way, declared in an unscheduled press conference that “everyone has agreed to substantially up their commitment” and he was “extremely happy”.

                              Seems like by “everyone” Trump means everyone but Italy? Or either Conte or Trump lied?

                              Separately, French President Emmanuel Macron said he read Trump’s 140-character messages” but the debate in NATO “took a different tone. They were frank but there was no finger-pointing or lack of respect.”

                              When will Macron realize that only someone with integrity will deliver the messages with the same tone everywhere?

                              UK published Brexit white paper titled “The future relationship between the United Kingdom and the European Union”

                                UK finally published the long awaited Brexit White Paper titled “The future relationship between the United Kingdom and the European Union“.

                                Brexit Minister Dominic Raab said in the forward of the document that “leaving the European Union involves challenge and opportunity. We need to rise to the challenge and grasp the opportunities.” And, “this is the right approach – for both the UK and for the EU. The White Paper sets out in detail how it would work.”

                                EU chief Brexit negotiator Michel Barnier tweeted that “We will now analyze the #Brexit White Paper (with) Member States & EP, in light of #EUCO guidelines,” he tweeted, referring to the European Parliament and his own negotiating team from the European Council . He added that “EU offer = ambitious FTA + effective cooperation on wide range of issues, including a strong security partnership.” And he looked forward to negotiations with the UK next week.

                                Dollar mixed after US CPI met expectations, initial jobless claims fell

                                  Released in US session, US CPI rose 0.1% mom, 2.9% yoy in June versus expectation of 0.2% mom, 2.9% yoy. Core CPI rose 0.2% mom, 2.3% yoy, matched expectations. Data showed inflation continued to accelerate with headline CPI accelerated from 2.8% yoy in May, core CPI accelerated from 2.2% yoy.

                                  Initial jobless claims dropped -18k to 214k in the week ended July 7. Four week moving average of initial claims dropped 1.75k to 223k. That’s notably low than expectation of 230k. Continuing claims dropped -3k to 1.739m in the week ended June 30. Four-week moving average of continuing claims rose 9.5k to 1.7285m.

                                  From Canada, new housing price index rose 0.0% mom in May versus expectation of -0.1% mom.

                                  Dollar is trading mixed for today after the release, up against Euro, Yen and Swiss, but down against others.

                                  ECB accounts: Forward guidance strikes a balance between precision and flexibility

                                    Regarding the “summer of 2019″, ECB provided some clarity in the June meeting accounts released today. The accounts recapped that ” policy rates would be kept at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remained aligned with a sustained adjustment path”.

                                    The accounts noted that the wordings were seen to “strike a good balance between providing sufficiently precise guidance and maintaining adequate flexibility”. And, “the proposed state-contingent component of the forward guidance on policy rates was widely seen as underlining the gradual and data-dependent approach to policy normalisation.”

                                    Also, ” explicitly linking a first policy rate rise to inflation evolving along a sustained adjustment path was seen as consistent with the ECB’s forward-looking and medium-term-oriented monetary policy strategy and would underscore the credibility of the Governing Council’s commitment to its price stability objective.”

                                    The key take away is, ECB wants to reserve some “flexibility” which is understandable.

                                    Full accounts here.

                                    Trump said NATO members agreed to rise defense spending substantially

                                      Trump holds an unscheduled press conference after an “emergency” NATO meeting. He reiterate that the US commitment to NATO “remains very strong”. And he’s “extremely happy” that all members have agreed to raise their defense spending.

                                      Trump said in the conference that “everyone has agreed to substantially up their commitment. They’re going to up it at levels that they never thought of before.” And, “I told people that I’d be very unhappy if they didn’t up their financial commitments substantially” “I let them know that I was extremely unhappy with what was happening, and they have now substantially upped their commitment.”

                                      Answering CNN’s question on whether his insulted Germany by saying they’re a “captive” of Russia, Trump said it’s a very effective way to deal,” “it’s a very effective way of negotiating.”

                                      European stocks follow Asia Higher, China Shanghai Composite ended up 2.16%

                                        Yen continues to trade as the weakest one for today, followed by Swiss Franc. Meanwhile Dollar pares back some again as markets await US consumer inflation release later today, which could see headline CPI accelerated to 2.9% yoy.

                                        Global equities stage a strong rebound today as the impact of trade war escalation faded. Investors are getting tired of the noises from the US and China. Some attributed the chance of resuming negotiation between US and China. But we’re don’t buy into this as Trump is clear with what he’s doing. Negotiation has started and ended abruptly, showing no intention to continue. And, just as Trump is blasting NATO allies on spending again today after the latters promised to increase it. It’s clear to the objective eyes whether one is pushing for reforms or finding excuses to quit, and blame the others for his decision.

                                        Anyway, at the time of writing, DAX is up 0.35%, CAC is up 0.39% while FTSE is up 0.68%. Earlier today, Nikkei closed up 1.17%, Hong Kong HSI rose 0.60%, Singapore Strait Times rose 0.12%.

                                        More importantly, China Shanghai SSE rose 2.16% to close at 2837.66, back above 2800 handle. The development indicates certain calmness in the markets despite this week’s trade war escalation. And it affirmed the view of strong support between 2016 low at 2638.3 and 2700 psychological level. The rebound from 2691.02 is in progress and break of 2848.37 will extend it to 55 day EMA now at 2984.49. For now, we’re seeing no chance of breakthrough 3000 psychological level. But such near term development is enough to stabilize the Asian markets, which suffered most last week.

                                        European Commission cuts Eurozone growth forecasts on unfavorable external environment, upgrade inflation projections

                                          European Commission released summer 2018 Interim Economic Forecast today.

                                          On Eurozone growth:

                                          • 2018 GDP is projected to grow 2.1%, revised down from Spring forecast of 2.3%.
                                          • 2019 growth is projected to grow 2.0%, unchanged.

                                          On Eurozone inflation:

                                          • 2018 CPI is projected to be at 1.7%, revised up from 1.5%
                                          • 2019 CPI is projected to be at 1.7%, revised up from 1.6%

                                          On EU 28 growth:

                                          • 2018 GDP is projected grow 2.1%, revised down from 2.3%.
                                          • 2019 GDP is projected grow at 2.0%, unchanged.

                                          On EU 28 inflation:

                                          • 2018 CPI is projected to be at 1.9%, revised up from 1.7%
                                          • 2019 CPI is projected to be at 1.8%, unchanged

                                          On some countries

                                          • Germany GDP growth forecast at 1.9% in 2018, revised down from 2.3%.
                                          • Germany GDP growth forecast at 1.9% in 2019, revised down from 2.1%.
                                          • France GDP growth forecast at 1.7% in 2018, revised down from 2.0%.
                                          • France GDP growth forecast at 1.7% in 2019, revised down from 1.8%.
                                          • Italy GDP growth forecast at 1.3% in 2018, revised down from 1.5%.
                                          • Italy GDP growth forecast at 1.1% in 2019, revised down from 1.2%.
                                          • UK GDP growth forecast at 1.3% in 2018, revised down from 1.5%.
                                          • UK GDP growth forecast at 1.2% in 2019, unchanged

                                          Quotes from the release:

                                          Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: “European economic activity remains solid with 2.1% GDP growth forecast for the euro area and the EU28 this year. Nevertheless, the downward revision of GDP growth since May shows that an unfavourable external environment, such as growing trade tensions with the US, can dampen confidence and take a toll on economic expansion. The growing external risks are yet another reminder of the need to strengthen the resilience of our individual economies and the euro area as a whole.”

                                          Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “Growth in Europe is set to remain resilient, as monetary policies stay accommodative and unemployment continues to fall. The slight downward revision compared to the spring reflects the impact on confidence of trade tensions and policy uncertainty, as well as rising energy prices. Our forecast is for a continued expansion in 2018 and 2019, although a further escalation of protectionist measures is a clear downside risk. Trade wars produce no winners, only casualties.”

                                          Full release here: