China and EU agreed to oppose unilateralism and trade protectionism

    Chinese Vice Premier met with European Commission Vice President Jyrki Katainen in Beijing today. After the meeting, Liu said in a media briefing that “both sides believe that we must resolutely oppose unilateralism and trade protectionism and prevent such behavior from causing volatility and recession in the global economy.” Additionally, both sides will prepare lists of proposals for bilateral investment agreement at another China-EU summit next month.

    Katainen, on the other hand, emphasized there some areas must be addressed to take the economic, trade and investment relationship further. For example, he said “it is essential that we work together to tackle overcapacity in sectors such as steel and aluminum.” And he urged China to avoid overcapacity in other sectors too, including those targeted by the “Made in China 2025” initiative.

    German Ifo dropped to 101.8, fell markedly in trade

      German Ifo business climate dropped to 101.8 in June, down from 102.3, slightly higher than expectation of 101.7. Current assessment dropped to 105.1, down from 106.1 and missed expectation of 105.6. Expectations gauge was unchanged at 98.6, meeting consensus.

      Ifo President Clemens Fuest noted in the release that companies were less satisfied with their current business situation while business expectations remained slightly optimistic. Nonetheless, “the tailwind enjoyed by the German economy is calming down.”

      He also pointed out that the index “fell markedly in trade”. “Companies downwardly revised their very good assessments of the current business situation. Their business outlook turned slightly pessimistic for the first time since February 2015. Indicators dropped far more sharply in retailing than in wholesaling.”

      Full release here.

      BoJ: Inappropriate to adopt policy that forcibly push up demand in a short time

        In the summary of opinions at the June 14/15 BoJ monetary policy meeting, the central noted that the economy is “expanding moderately”. But it also cautioned that the effect of US “protectionist trade policy” warrant “close attention”. In addition to that, other concerns include “political situation in southern Europe and volatile
        movements in some emerging markets. Though, the latter have “limited” effects on the global economy at this point.

        Regarding inflation, BoJ noted that “upward pressure on wages has been weak despite the increased tightness in the labor market”. And, “if wages do not rise in line with inflation, this would pose a burden on people.” BoJ said “close attention should be paid to developments in labor productivity and real wages, while taking into account mainly the effects of a reduction in overtime work hours under working-style reforms.”

        On monetary policy, since there is “still a long way” to meet 2% inflation target, it is “appropriate to pursue powerful monetary easing with persistence under the current guideline”. But BoJ also noted that “the reason for the sluggishness in prices is unlikely to be merely a shortage of demand”. Therefore, “it is not appropriate to adopt a policy that would forcibly push up demand in a short period of time.

        Full summary of opinions here.

        BIS: Protectionism, snapback in yields, politics in Euro area are possible triggers of downturn

          The Bank for International Settlements warned in its annual report that escalation of protectionist measures is one possible trigger of global economic slowdown or downturn. It said that “its impact could be very significant, if such escalation was seen as threatening the open multilateral trading system.” And, there are already signs that the these measures and the “ratcheting-up of rhetoric” are “inhibiting investment”. And, trade negotiations would “become more complicated” with recent reversal US Dollar depreciation.

          Sudden “decompression” of historically low bond yields, or “snapback” in core sovereign market yields could be another trigger. And, Biassed it could take place “in response to an inflation surprise” and “the perception that central banks will have to tighten more than anticipated. In the US, “the prospective heavy issuance of government debt, combined with the gradual unwinding of central bank purchases, could add to this risk.” BIS also noted that the surprise “need not be a large one”, yet the impact could spread globally.

          General reversal in risk appetite is a third possible trigger. And, such reversal could reflect a range of factors, including disappointing profits, the drag of the contraction phase of financial cycles where these have turned, a souring of sentiment vis-à-vis EMEs, or untoward political events threatening stability in some large economies. BIS added that from this perspective, “recent events in the euro area are a source of concern.”

          Editorial of the annual report here.

          Full BIS annual report here.

          PBoC cuts RRR by 50bps to release CNY 700B in funds

            China’s central bank, PBoC, announced to lower some banks’ reserve requirement ratios by 50 bps, effective July 5. The targeted banks include large state-owned commercial banks, joint-stock commercial banks, postal savings banks, urban commercial banks, non-county rural commercial banks and foreign banks.

            PBoC also encourages the five state-owned large-scale commercial banks and 12 joint-stock commercial banks to use directional RRR cuts and funds raised from the market to implement the “debt-to-equity swap” project.

            It’s estimated that the RRR cut will release around CNY 700B in funds that could help ease credit strain for small and micro businesses.

            Yen surges and Trump escalates trade war threats to the world

              Yen and Swiss franc continue to trade as the stronger ones on risk aversion. Asian markets are mostly down, with Nikkei losing -0.4% right now. China market is an exception with Shanghai Composite up 0.17%, supported by PBoC’s cut in RRR. USD/JPY’s break of 109.54 minor support now open the way for deeper fall back to 108.10 near term support level.

              Concerns of global trade war is a factor driving stocks down. Trump stepped up his rhetoric as he is now pushing all countries to remove “artificial trade barriers and tariffs”. Or, he warned of “more than reciprocity by the USA”.

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              This was a follow up to his warning to EU on Friday that 20% tariffs could be imposed to their cars. That’s a response to EU’s retaliation to US steel and aluminum tariffs.

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              There’s an old saying “don’t listen to what people say, watch what they do”. Right now, Trump is piling up the barriers, rather than breaking them down as he claims he pushes for.

              Euro down on Trump’s 20% tariffs on cars threat

                Trump threatens EU with 20% on cars if the latter doesn’t “remove” the trade barriers to US vehicles. Both Euro and Sterling dip after the tweet.

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                US PMIs: Strong Q2 but exports back in decline

                  US PMI manufacturing dropped to 54.6 in June, down from 56.4, below expectation of 56.2. PMI services dropped to 56.5, down from 56.8, but beat expectation of 54.9. PMI composite dropped to 56.0, down from 56.6, hit a two-month low.

                  Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                  “The flash PMI surveys add to evidence that the US economy is enjoying a strong second quarter. Despite growth cooling slightly in June, the latest numbers round off the best quarter for three years, and suggest economic growth has lifted markedly higher than the 2.3% rate of expansion seen in the first quarter to well over 3%.

                  “The upturn also continues to create new jobs in encouragingly high numbers. The employment gauges from the June surveys are running at levels indicative of non-farm payrolls rising by 190,000, with hiring remaining solid in both the services and manufacturing sectors.

                  “Price pressures remain elevated, however, widely blamed on a mix of rising fuel prices and tariff-related price hikes, as well as supplier’s gaining pricing power as demand outstrips supply for many inputs.

                  “Risks are tilted to the downside for coming months. Business expectations about the year ahead have dropped to a five month low, led by the weakest degree of optimism for nearly one and a half years in manufacturing. Exports are back in decline, showing the worst performance for over two years, causing factory order book growth to slump sharply lower compared to earlier in the year.

                  “For the first time this year, factory output is growing faster than order books, suggesting production may be adjusted down in coming months. Inflows of new business into the service sector have meanwhile cooled to the weakest since January. Finally, although employment is still rising strongly, even here there are signs of weakness, with the latest rise in payrolls being the lowest for a year.”

                  Full release here.

                  Canada retail sales dropped -1.2%, ex-auto sales dropped -0.1%, core CPI moderated

                    Canadian Dollar drops sharply after very weak retail sales data. Headline sales dropped -1.2% mom in April versus expectation of 0.0% mom. Ex-auto sales dropped -0.1% mom versus expectation of 0.2% mom.

                    Inflation data is not helping neither. CPI rose 0.1% mom, 2.2% yoy in May, below expectation of 0.4% mom, 2.6% yoy. CPI core common was unchanged at 1.9% yoy. CPI core median dropped to 1.9% yoy, down from 2.1% yoy. CPI core Trim dropped to 1.9% yoy, down from 2.1% yoy.

                    USD/CAD resumes recent rally after brief retreat, and is on course for 1.3404 projection level.

                    Eurozone PMI: Services improvement offsets manufacturing, points to 0.5% GDP growth in Q2

                      Eurozone PMI manufacturing dropped to 55.0 in June, down from 55.5 and met expectation. PMI services rose to 55.0, up from 53.8 and beat expectation of 53.7. PMI composite rose to 54.8, up from 54.1 and beat expectation of 53.9. PMI composite is at a 2 month high while PMI services is at at 4-month high. However, PMI manufacturing is at an 18-month low. Overall, the data point to 0.5% GDP growth in Q2.

                      Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                      “An improved service sector performance helped offset an increasing drag from the manufacturing sector in June, lifting Eurozone growth off the 18- month low seen in May. With growth kicking higher in June, the surveys are commensurate with GDP rising 0.5% in the second quarter.

                      “Price pressures are also on the rise again, running close to seven-year highs. Increased oil and raw material prices are driving up costs, but wages are also lifting higher, in part reflecting tighter labour markets in some parts of the region. Service sector jobs are being created at the fastest rate seen over the past decade, underscoring the extent to which the job market is tightening.

                      “However, the details of the survey warn against any complacency. The June uptick could be at least in part explained by business returning to normal after an unusually high number of public holidays in May, suggesting that the underlying trend remains one of slower growth. Business expectations are running at one-and-a-half year lows, and output continues to increase at a faster rate than incoming new orders, all of which suggests that output and employment growth could weaken again in July unless demand picks up again.

                      “Manufacturing is looking especially prone to a further slowdown in coming months, with companies citing trade worries and political uncertainty as their biggest concerns. Sentiment about the year ahead in the factory sector has sunk to its lowest since 2015.

                      “While the June upturn provides some hope that the weakening of official data earlier in the year may have overstated the region’s weakness, the risks remained tilted towards a further slowdown in the second half of the year.”

                      Full release here.

                      Germany PMI composite hits 2 month high, clear divergence between manufacturing and services

                        Germany PMI manufacturing dropped to 55.9 in June, down from 56.9 and missed expectation of 56.3. PMI services rose to 53.9, up from 52.1 and beat expectation of 52.2. PMI composite rose to 54.2, up from 53.4, and hit a 2-month high.

                        Commenting on the flash PMI data, Phil Smith, Principal Economist at IHS Markit said:

                        “The headline PMI numbers for Germany make for slightly better reading in June thanks to a pick-up in the pace of expansion in the service sector, though the performance over the second quarter as a whole still looks to be one of only modest growth.

                        “The big disappoint was manufacturing, where the PMI fell further from last December’s record high to the lowest in one-and-a-half years. A worrying slide in export order growth seen since the start of the year continued into June, with the latest survey’s anecdotal evidence highlighting quieter client interest from the US and China.

                        “A clear divergence between manufacturing and services was also seen in the survey’s gauge of business confidence. Services firms are in buoyant mood towards the outlook over the next 12 months, but manufacturers see growth continuing to cool and are their least optimistic for over three years.”

                        Full release here.

                        France PMI composite rose to 2 month high, diverging trends

                          French PMI manufacturing dropped to 53.1 in June, down from 54.4 and missed expecttation of 54.0. But PMI services rose to 56.4, up from 54.3 and beat expectation of 54.3. PMI composite rose to 55.6, up from 54.2, and hit a 2 month high.

                          Commenting on the Flash PMI data, Paul Smith, Economics Director at IHS Markit said:

                          “France’s economy showed noticeably divergent trends at the end of the second quarter, with the manufacturing and service sectors heading in markedly different growth directions.

                          “Whilst the services economy strengthened on the back of increased market activity, manufacturers faced a number of headwinds including a general loss of external demand momentum, ongoing vendor delivery delays and rising price pressures, especially for metals (in part linked to higher tariffs).

                          “Although the surveys suggest that underlying economic growth is continuing at a decent clip, on balance the latest data support the current IHS call for a 0.3% rise in GDP for Q2 as a whole.”

                          Full release here.

                          No follow through buying in Sterling after strong but brief BoE rebound

                            The BoE triggered rebound in Sterling yesterday was initially rather strong, but lacked follow through buying. GBP/USD is kept well below key near term resistance at 1.3471. EUR/GBP is still hovering around mid-point of range of 0.8693/8844. Even GBP/JPY is held below 146.46 minor support. For the week, Sterling is staying in red against Dollar, Euro, Swiss and Yen. It’s just up against the risk aversion hit Canadian, Australian and New Zealand Dollar.

                            GBP action bias table also reveals no notable momentum in the Sterling pairs.

                            Yesterday’s more hawkish than expected BoE announcement just revived the chance of an August hike. That was indeed the base case as presented in the May Inflation Report. Remember that during the most Sterling bullish time earlier this year, markets were expecting a hike in May and speculating for another one in November. The BoE announce just solidify the case for a hike in the second half of the year, that is either in August or November, possibly in August. And it sort of ruled out the possibility of BoE standing pat for the rest of the year.

                            Suggested readings on BoE

                            DOW extends losing streak on trade war, 24247 support in focus

                              DOW closed down -196.10 pts or -0.8% overnight to 24461.70. Trade war fears extended the losing streak to eight days, longest in more than a year.

                              Technically, the break of near term trend line support this week, and the failure to regain 55 day EMA argues that rise from 23344.52 has completed earlier that expected at 25402.83. It couldn’t reach 25800.35/26616.71 resistance zone. Immediate focus will be on 24247.84 today and next week. Break there could accelerate the selloff to 23344.52 support.

                              Overall, there there are a few interpretations of the price actions from 26616.71 high, they all point to the case that it’s a correction that’s not completed. That is, fall from 25402.83 could be a falling leg of the whole medium term correction pattern that could break through 23344.52 low. We’d maintain our view that the correction from 26616.71 should at least extend to 38.2% retracement of 15450.56 to 26616.71 at 22351.24 before completion.

                              Oil price in range ahead of pivotal OPEC meeting

                                WTI oil price is staying in range between 63.6/66.9 as markets await the pivotal meeting in Austria. Delegations of OPEC and non-OPEC oil producing countries are meeting today in Vienna. The producers are trying to reach a consensus on easing the output cap, that is raising production, to cool oil prices.

                                Saudi Arabia’s Energy Minister Khalid Al-Falih, the defacto leader of OPEC, said yesterday that he was “optimistic” on a deal as there was a “spirit of cooperation” among the group. And they would discuss how to raise production by around 1 million barrels per day.

                                The United Arab Emirates’ minister of energy and industry, and OPEC president, Suhail Al- Mazrouei emphasized that OPEC is “not a political organization” but a “commercial organization”. Iraq’s Oil Minister Jabbar Ali al-Luaibi also said he’s “confident that we will reach some sort of agreement”.

                                However, Iran, Iraq and Venezuela are known to oppose the relaxation of production cut. Iranian Oil Minister Bijan Zanganeh said he doubted OPEC could reach a deal this week and he was feeling “very good” about the current production levels.

                                Russian Energy Minister Alexander Novak warned that “Oil demand usually grows at the steepest pace in the third quarter … We could face a deficit if we don’t take measures.” And, “this could lead to market overheating.” Russia is pushing up to 1.5 million barrels per day of output raise, OPEC and non-OPEC countries together.

                                Full program of the meeting.

                                Japan CPI Core unchanged, PMI manufacturing improved

                                  Released from Japan, all items CPI rose to 0.7% yoy in May, up from 0.6% yoy. Core CPI, less fresh food, was unchanged at 0.7% yoy. Core core CPI, less fresh food and energy even slowed to 0.3% yoy, down from 0.4% yoy. The data highlighted BoJ’s inability to lift inflation and inflation expectation even with the ultra-loose monetary policy. And the central bank is still a long way from stimulus exit.

                                  PMI manufacturing rose to 53.1 in June, up from 52.8, beat expectation of 52.6. Comments by Joe Hayes, Economist at IHS Markit:

                                  “The final PMI reading of the second quarter revealed a quickened pace of growth across the Japanese manufacturing economy.

                                  “The sector has sustained a relatively solid upward trend across 2018. June data indicated continued growth in new orders, a faster rate of job creation, rising backlogs of work and increasing output prices. As such, there appears to be further legs in the manufacturing growth cycle.

                                  “That said, for the first time since August 2016, new export orders declined. With geopolitical risk aplenty, haven demand for the yen remains a downside risk to the country’s manufacturing exporters.”

                                  Full release here.

                                  Minneapolis Fed Kashkari doubts long term impact of tax cut

                                    Minneapolis Fed President Neel Kashkari expressed his doubts on the long term effect of Trump’s USD 1.5T package of corporate and individual tax cuts. In an event at African Development Center of Minnesota, he said “we know if you cut taxes on the margin that should boost economic growth in the short term.” However, “the question is when that short term is over, does it actually lead to longer-term, higher sustained economic growth? That’s unclear right now.”

                                    He also points to the information he got from businesses. Kashkari said while business leaders “are more optimistic than I had expected,” they are also saying that lower tax rates have not led them to make new investments, at least not yet. He added “I am asking businesses ‘are you actually investing more?’ And so far the answer that I’ve heard is ‘we’re waiting to see.'”

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                                    Philly Fed index dropped sharply to 19.9, initial claims stayed low at 218k

                                      Here is a summary of US data released today.

                                      Philly Fed Manufacturing index dropped sharply to 19.9 in June, down from 34.4 and missed expectation of 25. 6-month expectation dropped to 34.8, down from 38.7. From the release, it’s said that “Responses to the June Manufacturing Business Outlook Survey indicate continued expansion for the region’s manufacturing sector, although indicators for general activity and new orders fell notably from last month. The firms reported continued increases in employment, and the indexes for prices paid and received continued to reflect widespread price pressures. Looking ahead six months, the firms remain optimistic overall, but the survey’s future indicators continued to moderate.”

                                      Initial jobless claims dropped -3k to 218k in the week ended June 16, below expectation of 220k. Four-week moving average of initial claims dropped -4k to 221k. Continuing claims rose 22k to 1.723m in the week ended June 9. Four-week moving average of continuing claims dropped -4.75k to 1.7225m. This is the lowest level since December 8, 1973.

                                      House price index rose 0.1% mom in April versus expectation of 0.3% mom. Leading index rose 0.2% in May versus expectation of 0.4%.

                                      Into US session: Sterling strongest on BoE, but it’s not bullish yet

                                        Entering into US session, Sterling is now the strongest one today as boosted by hawkish BoE hold. Most importantly, heavy weight Chief Economist Andy Haldane joined known hawks Ian McCafferty and Michael Saunders to vote for a hike. Euro is now trading as the second weakest, followed by Yen and New Zealand Dollar.

                                        GBPUSD H and 6H action bias has turned neutral with the rebound, after a string of downside red bars. Still, it’s kept well below 1.3471 near term resistance. Overall outlook remains bearish though but some more consolidation could come first.

                                        Meanwhile, EUR/GBP is still clearly held in range with a neutral outlook.

                                        GBP/JPY is also neutral as the corrective pattern from 144.37 extends.

                                        Sterling surges as BoE chief economist Haldane joined hawks to vote for rate hike

                                          Sterling surges BoE kept bank rate unchanged 0.50% with 6-3 vote. The usual suspects Ian McCafferty and Michael Saunders voted for a hike to 0.75%. And to many’s surprise, chief economist Andrew Haldane voted for a hike too. His vote carries much significance.

                                          On growth, BoE noted the judgement that the dip in Q1 was temporary “appears broadly on track”. It pointed to the rebound in household consumption and sentiments as evidence while “employment growth has remained solid”. Despite decline in manufacturing output in April, surveys of business activity have been stable. And overall, the data “point to growth in the second quarter in line with the Committee’s May projections.

                                          On inflation, BoE expects CPI to “pick up by slightly more than projected” in the near term. That reflects ” higher dollar oil prices and a weaker sterling exchange rate.” And, indicators of wage growth also picked up with labor markets remains tight. “Domestic cost pressures will continue to firm gradually, as expected.”

                                          On forward guidance, BoE expects to maintain the size of assets purchased at GBP 435B and use the Bank Rate as “primary instrument” for momentary policy for now. And BoE will NOT reduce the size of the assets until Bank Rate reaches around 1.50%, lowered from prior guidance of around 2.00%.

                                          Full statement below.

                                          Bank Rate Maintained at 0.50%

                                          Our Monetary Policy Committee has voted by a majority of 6-3 to maintain Bank Rate at 0.5%. The committee also voted unanimously to maintain the stock of corporate bond purchases and UK government bond purchases.

                                          Monetary Policy Summary and minutes of the Monetary Policy Committee meeting

                                          The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 20 June 2018, the MPC voted by a majority of 6-3 to maintain Bank Rate at 0.5%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

                                          In the MPC’s most recent projections, set out in the May Inflation Report, GDP was expected to grow by around 1¾% per year on average over the forecast, conditioned on the gently rising path of Bank Rate implied by market yields at the time. In those projections, growth continued to rotate towards net trade and business investment and away from consumption. While modest by historical standards, the projected pace of GDP growth over the forecast was nevertheless slightly faster than the diminished rate of supply growth, which averaged around 1½% per year. As a result, a small margin of excess demand was projected to emerge by early 2020, feeding through into higher rates of pay growth and domestic cost pressures. Nevertheless, CPI inflation continued to fall back gradually as the effects of sterling’s past depreciation faded, reaching the 2% target in two years.

                                          A key assumption in the MPC’s May projections was that the dip in output growth in the first quarter would prove temporary, with momentum recovering in the second quarter. This judgement appears broadly on track. A number of indicators of household spending and sentiment have bounced back strongly from what appeared to be erratic weakness in Q1, in part related to the adverse weather. Employment growth has remained solid. Although manufacturing output recorded a decline in April, and this was accompanied by a fall in goods exports, surveys of business activity have been stable and, as a whole, point to growth in the second quarter in line with the Committee’s May projections.

                                          Internationally, activity data have been mixed. Indicators suggest that US growth bounced back strongly in Q2 from the softness in Q1. Euro-area growth has been weaker than expected, and downside risks have increased in some emerging markets, in part reflecting tighter financial conditions. More broadly, the prospects for global GDP growth remain strong, and while financial conditions have tightened somewhat, they continue to be accommodative.

                                          CPI inflation was 2.4% in May, unchanged from April. Inflation is expected to pick up by slightly more than projected in May in the near term, reflecting higher dollar oil prices and a weaker sterling exchange rate. Most indicators of pay growth have picked up over the past year and the labour market remains tight, suggesting that domestic cost pressures will continue to firm gradually, as expected.

                                          The Committee’s best collective judgement remains that, were the economy to develop broadly in line with the May Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a conventional horizon. For the majority of members, an increase in Bank Rate was not required at this meeting. All members agree that any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.

                                          In addition to its discussion of the immediate policy decision, the Committee reviewed its previous guidance on the level of Bank Rate at which the MPC will consider whether to start to reduce the stock of purchased assets. The MPC continues to expect to maintain the stock of purchased assets until Bank Rate reaches a level from which it can be cut materially, reflecting the Committee’s preference to use Bank Rate as the primary instrument for monetary policy. Since the previous guidance, the Committee has reduced Bank Rate from 0.5% to 0.25% in August 2016 and has noted that it could lower it further if required. Reflecting this, the MPC now intends not to reduce the stock of purchased assets until Bank Rate reaches around 1.5%, compared to the previous guidance of around 2%. Any reduction in the stock of purchased assets will be conducted at a gradual and predictable pace. Decisions on Bank Rate will take into account any impact of changes in the stock of purchased assets on overall monetary conditions, in order to achieve the inflation target. In the event that potential movements in Bank Rate are judged insufficient to achieve the inflation target, the reduction in the stock of assets could be amended or reversed.