US ISM Services PMI rose slightly from 61.7 to 61.9 in September, above expectation of 59.8. Looking at some details, business activity/production rose 2.2 to 62.3. New orders rose 0.3 to 63.5. Employment dropped -0.7 to 53.0. Prices rose 2.1 to 77.5.
ISM said: “The past relationship between the Services PMI® and the overall economy indicates that the Services PMI® for September (61.9 percent) corresponds to a 4.5-percent increase in real gross domestic product (GDP) on an annualized basis.”
In July, Japan experienced slowdown in growth of labor cash earnings, recording increase of 1.3% yoy, a figure notably below expectation of 2.4% yoy. This decline comes in the wake of a 2.3% yoy surge in June and a 2.9% yoy hike in May.
Drilling down into the details, while the base annual salary grew 1.6% yoy, outpacing June’s 1.3% yoy rise, overtime pay experienced a reduced uplift of 0.5% yoy, a significant deceleration from the 1.9% yoy in June.
One of the more concerning revelations is the continued drop in real wages, which adjusted for inflation, decreased by -2.5% yoy, a deepening from June’s -1.6% yoy decline. This marks the 16th consecutive month of falling real wages, spotlighting inability of salaries to keep pace with escalating prices, thereby exacerbating the financial strain on households.
Corroborating this trend is separate data published earlier this week which highlighted a pronounced drop in household spending in July, plummeting -5.0% yoy, marking its most substantial decline in close to two and a half years.
Kiel Institute for the World Economy significantly downgraded its growth expectations for German economy, projecting a mere 0.1% increase in 2024, a sharp downward revision from its previous forecast of 0.9%. Slight improvement is anticipated in 2025, with growth expected to accelerate to 1.2%. On the inflation front, decline to 2.3% is projected for this year, down from 5.9% in 2023, with further reduction anticipated to 1.7% in 2025. Unemployment rate is expected to marginally decrease from 5.8% in 2024 to 5.6% in 2025.
Moritz Schularick, President of the Kiel Institute, pointed to a “whole range of factors” currently dampening sentiment and economic performance in Germany. These include global economic slowdown impacting exports, ECB’s restrictive monetary policy expected to extend into the next year, and German government’s austerity measures, which Schularick believes are being implemented at an inopportune time, fostering additional pessimism.
Stefan Kooths, Head of Economic Research at the Kiel Institute, added that despite gradual recovery expected over the year, the overall economic dynamism in Germany remains subdued. He underscored the emergence of signs indicating that structural issues are mainly to blame for the economic slowdown, with private investment falling short, partly due to the significant uncertainty provoked by current economic policies.
New Zealand BusinessNZ Performance of Services Index rose from 52.2 to 55.2 in May. Activity/sales rose sharply from 53.3 to 59.6. But employment dropped from 51.0 to 48.5. New orders/business rose from 55.2 to 62.0. Stocks/inventories ticked down from 55.0 to 54.6. Supplier deliveries rose from 40.5 to 45.0.
BNZ Senior Economist Doug Steel said that “while the improvement was far from universal across components, reflecting many ongoing challenges across segments of the service sector, the overall outcome was the first above average result since the outbreak of Delta in August last year.”
US durable goods orders dropped -14.4% mom in March, to USD 213.2B, worse than expectation of -12.0% mom. Ex-transport orders dropped -0.2%, better than expectation of -6.1%. Excluding defense, new orders decreased 15.8%. Transportation equipment, down two of the last three months, led the decrease, USD 35.6B or 41.0% to USD 51.2B.
BoE Governor Andrew Bailey there was “a risk of more bottlenecks in the economy, especially in demand for labour which could fuel expectations of higher inflation.”
And, “once you start to get an increase in inflation of this sort we want to stop it becoming generalized in the economy.”
“That’s why we would, and will, have to act on interest rates if we see that evidence becoming clear,” he said.
China’s CPI slowed significantly from 0.7% yoy to 0.1% yoy in March, coming in below expectation of 0.4% yoy. Core CPI, which strips out food and energy prices, also decelerated from 1.2% yoy to 0.6% yoy. This shift was largely influenced by a notable -2.7% decrease in food prices, while non-food prices edged up rose 0.7%. Month-on-month, CPI declined -1.0% mom.
NBS attributed this March dip in CPI to a “seasonal decline in consumer demand following the holidays and the overall sufficient market supply.”
In parallel, PPI, a measure of factory-gate prices, edged down further to -2.8% yoy from February’s -2.7% yoy, aligning with market expectations. This continuation of downward trend for the 18th consecutive month emphasizes persistent deflationary pressures within the manufacturing sector. On a month-on-month basis, PPI contracted by -0.1%.
UK PMI services rose to 54.0 in May, up from April’s 52.8, above expectation of 52.9.
Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey:
“The improvement in service sector activity adds to evidence that the economy is on course to rebound in the second quarter but, like the earlier manufacturing and construction surveys, raises questions about the outlook. So far, the three PMI surveys indicate that GDP looks set to rise by 0.3-0.4% in the second quarter.
“However, disappointing inflows of new work suggest that growth could wane in coming months as Brexit-related uncertainty continues to weigh on spending decisions and dampen business confidence. Measured across all major parts of the economy, new orders growth in the second quarter so far is running at the weakest since the third quarter of 2016.
“Meanwhile, costs are being pushed higher by rising oil prices and wages, although subdued demand means firms are struggling to pass these higher costs onto customers. Average selling prices for goods and services showed the smallest rise for 11 months in May.
“The signs of economic growth rebounding in the second quarter will likely up the odds of the Bank of England hiking interest rates again in coming months, likely August, but with the forward looking indicators suggesting that the economy could relapse, a rate rise is by no means assured.”
Full release here.
Cleveland Fed President Loretta Mester said she expected unemployment rate to fall to 4.5% or lower this year, with GDP growth in 6-7% range. She emphasized, “my positive baseline outlook depends on appropriate monetary policy, which, in my view, will need to be very accommodative for some time to support the broadening of the recovery.”
“I wouldn’t consider the increase in inflation I expect this year to be the type of sustainable increase needed to meet the forward guidance on our policy rate,” she said. “So I expect to be deliberately patient unless there is clear evidence that inflation pressures will push inflation to exceed our desired path.”
“I need to see more improvement before I would consider the conditions of our forward guidance on asset purchases as being met,” said Mester.
Entering US session, Sterling is trading as the weakest one today and selling has indeed intensified. Canadian Dollar follows Sterling as the second weakest for today. Japanese Yen surges broadly in early European and is trading as the strongest one for today so far. Euro pares back some gains today but it’s still the strongest one for the week.
Now, it seems a no-deal Brexit is an acceptable fact. It started last week when BoE Governor Mark Carney said risk of no-deal Brexit is “uncomfortably high”. Then Trade Minister Liam Fox assigned a 60-40 chance of it. Scotland’s First Minister Nicola Sturgeon also jumps in, blasting Prime Minister Theresa May’s handling of Brexit negotiation. Sturgeon said that “with every day that passes, the prospect of a no deal Brexit or a Brexit with very, very little information about the future relationship seems to become more and more likely.” She added that “both of those outcomes would be completely unacceptable, absolutely disastrous for our economy, so I hope she (Theresa May) can reassure me that neither of those things are going to happen.” “But if she can’t, then I hope she will outline her plan B, because we cannot simply take a step off that Brexit cliff-edge next March without knowing what comes next.”
In the minutes of December 19/20 BoJ monetary policy meeting, most members shared that “although it would take time to achieve the 2 percent price stability target, it was appropriate to persistently continue with the powerful easing under the current guideline for market operations as the momentum toward achieving 2 percent inflation was being maintained”.
Regarding Japan’s economic outlook, members “concurred that it was likely to continue its moderate expansion”. And they “shared the recognition that domestic demand was likely to follow an uptrend”. However, one member warned that “exports, including those to China, had been weak as a whole”. Another member pointed to “increasing number of firms held cautious views, mainly against the background of the prolonged US-China trade friction”.
On prices, members shared the recognition that “CPI continued to show relatively weak developments compared to the economic expansion and the labor market tightening”. But most agreed that CPI was “likely to increase gradually toward 2 percent”.
RBNZ Governor Adrian Orr told a parliamentary committee, “our core inflation is too high and that suggests at some point monetary policy was too loose for a period.”
“I have already apologized for the current level of inflation. I have already said that the Reserve Bank was party to that,” he added.
However, “the worst mistake we could be having would be fighting deflation, unnecessary unemployment and economic collapse,” he said. “We have ended up with the better problem — but it is a problem — which is inflation, core inflation of 4-6% that we need to put back in the bottle.”
Silver’s rebound from 22.21 extended higher overnight and the development should confirm short term bottoming there. A bullish scenario for Silver is that consolidation from 26.12 has completed with three waves to 22.21, after defending 61.8% retracement of 19.88 to 26.12 at 22.26 twice.
Sustained trading above 55 D EMA (now at 23.50) will bolster the bullish case for silver and bring stronger rise back to trend line resistance (now at 24.92). However, rejection by 55 D EMA will argue that current recovery is merely some short-covering profit taking, and send Silver through 22.09 support at a later stage to extend the fall from 26.12.
At the same time, Gold is still trying to defend 38.2% retracement of 1614.60 to 2062.95 at 1891.68. A stronger bounce in Silver could be accompanied by similar rebound in Gold back towards 55 D EMA (now at 1933.55). However, if the bearish case in Silver plays out, Gold would likely clear 1891.68 fibonacci support accelerate down to 100% projection of 2062.95 to 1892.76 from 1987.22 at 1817.03.
BoE maintained the Bank Rate at 5.25% as widely expected. The decision was made by an 8-1 vote, with Swati Dhingra singularly advocating for a reduction again. Notably, previous hawks Jonathan Haskel and Catherine Mann adjusted their positions, refraining from advocating for hikes this round.
BoE noted that February’s CPI inflation rate of 3.4% was marginally lower than forecasted in the the latest Monetary Policy Report. Despite a decline in services consumer price inflation, it remains significantly high. Nevertheless, most measures of short-term inflation expectations are on a downtrend.
With the government’s decision to freeze fuel duty, CPI is projected to dip slightly below 2% mark in the second quarter. However, a slight uptick is anticipated in the latter half of the year.
In response to a to Der Spiegel’s report that Italy budget is not inline with EU obligations Günther Oettinger, European Commissioner for Budget and Human Resources tweeted to clarify.
In short, he rejected the call that the commission has made a decision and added that it’s only his personal opinion.
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DOW once again failed to hold on to initial gains and closed down -218.45 pts, or -0.91%, at 23664.64 overnight. S&P 500 dropped -0.70% but NASDAQ managed to close up 0.51%. Renewed US-China tension remains a factor limiting risk appetite. US President Donald Trump’s administration is weighing actions against China over its early cover-up and other handling of the coronavirus outbreak. The pandemic has eventually turned into, as Trump described, an attack that’s “worse than Pearl Harbor”, and “worse than the World Trade Center”.
Trump said he’s “watching closely” whether China is meeting its commitment on the trade deal phase one. “I’ll be able to report in about a week or two as to – not only with the farmers, but with many other industries also,” he added. “They understand they have a deal and hopefully they’re going to get with the deal and we’ll see. They may. They may not. We’re going to find out.” He’s threatened to pull out from the deal and go back to tariffs.
DOW’s struggle to sustain above 55 hour EMA, as well as persistent bearish divergence condition in hourly MACD are both seen as sign of topping. Indeed, it’s also possibly forming a near term head and shoulder top (ls: 24264, h: 24764, rs: 21469). Immediate focus is now on 23361.16 support before the weekly close. Break there should indicate completion of the pattern. Further break of 22941.88 support, probably next week, should confirm near term bearish reversal for a test on 18213.65 low.
South Korean President Moon Jae-in and Trump formally signed a new bilateral trade agreement yesterday, as sideline of a UN summit in New York. Under the agreement, South Korea will exempt up to 50,000 US cars from safety requirements, doubling the current amount. It also agreed on improvements in customs procedures and amendments in drug pricing policies. The 25% US tariffs against South Korean Trucks are extended from 2021 to 2041. On the other hand, the US exempt a certain amount of South Korean steel from the tariffs announced back in Mach, equivalent to 70% of the country’s import.
On the other hand, the meeting between Japanese Economy Minister Toshimitsu Motegi and US Trade Representative Robert Lighthizer was postponed from Monday to Tuesday due to scheduling issue. Japanese Chief Cabinet Secretary Yoshihide Suga said the talks “will focus on further expanding trade and investment between Japan and the U.S. to bring benefits to both nations”.
Japanese Prime Minister Shinzo Abe had a dinner with Trump on Sunday and he said they had a “very constructive discussion on trade and investment”. Before the dinner Trump continued with his bullying tactic and tweeted “We have done much to help Japan, would like to see more of a reciprocal relationship. It will all work out!”
While Dollar is consolidating ahead of Jackson Hole Symposium, Australian Dollar is taking up some buying, in particular against Europeans. The Aussie is apparently given a lift after China unveiled new stimulus package of RMB 300B (around USD 44B). The news also lifted Hong Kong HSI up 3.63 today. On the other hand, Euro and Sterling are feeling heavy as concern over further weaponization of natural gas supply by Russia.
GBP/AUD’s down trends resumes today by breaking through 1.7022 low. While the rebound from 1.7022 was strong, it was limited well below 1.7649 resistance, as well as 55 day EMA. Near term bearishness is clearly maintained.
For now, outlook will stay bearish as long as 1.7430 resistance holds, even in case of another strong recovery. Next target is 61.8% projection of 1.9218 to 1.7171 from 1.7649 at 1.6384.
EUR/AUD is also trying to break through 1.4318 low. Sustained trading below there will confirm resumption of larger down trend. Next target is 1.3624 (2017 low). Outlook will stay bearish as long as 1.4712 resistance holds, in case of recovery.
New Zealand Dollar drops notably today after weaker than expected job data. Employment contracted -0.2% qoq in Q1, below expectation of 0.5% qoq growth. Unemployment rate dropped to 4.2%, down from 4.3% and matched expectations. But labor force participation rate dropped -0.5% to 70.4%. Labor cost index rose 0.3% qoq, below expectation of 0.5% qoq.
Today’s data shouldn’t change RBNZ’s view that New Zealand is current staying at maximum sustainable employment. The reduced momentum in job growth and sluggish wage would provide little support to the already low inflation reading. Weak CPI is a key factor around the case of RBNZ rate cut in near term, probably in May, but the meeting remains live.
While NZD/USD dipped notably today, it’s staying in range above 0.6580 temporary low. More sideway trading remains in favor. But upside should be limited by 0.6718 resistance. Break of 0.6580 will target 0.6551 support next.
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Non-farm Payrolls rose 213k, beat expectations. But unemployment rate and wage growth miss
Dollar trades notably lower in early US session despite stronger than expected headline NFP number. Non-farm payroll report showed 213k growth in June, above expectation of 190k. Prior month’s figure was revised up from 223k to 244k. Unemployment rate rose to 4.0%, up from 3.8%. But that’s mainly thanks to rise in participation rate from 62.7% to 62.9%. Wage growth was a miss though as average hourly earnings rose 0.2% mom versus expectation of 0.3% mom. Also from the US, trade deficit narrowed slightly to USD -43.1B in May.
From Canada, the employment market rose 31.8k in June, above expectation of 24.0k. Unemployment rate rose to 6.0%, up from 5.8%. Also, that’s due to rise in participation rate from 65.3% to 65.5%. Trade deficit widened to CAD -2.8B in May.