After dipping to as low as 109.55, USD/JPY recovers on Trump’s tweet that the trade deal with China is “moving along nicely.
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For now, 109.55 is not even seen as a temporary bottom yet. We’ll have to seen how is goes to decide. The markets are reflections of the world. When the world is erratic, the markets couldn’t be calm.
ECB Executive Board member Benoit Coeure he’s not worried about slowdown and the central bank is still on course to end the asset purchase program this year.
Coeure told German newspaper Die Zeit that “at the end of last year, I said that I didn’t expect that our asset-purchase program would need to be extended again. I see no reason to change my view.” And, policymakers expect the economic expansion to continue, and are “increasingly confident that inflation will rise towards our aim of below, but close to, 2 percent.”
Regarding the upcoming new Italian government. Coeure said “it’s too early to comment on plans we don’t know.” But he emphasized that “on fiscal policy in general, the ECB’s view is well known: Europe has fiscal rules and they should be respected.”
Yen crosses continue to trade lower in European session and accelerate after weaker than expected Eurozone and UK data.
EUR/JPY broke 109.22 support and then 128.94 support without hesitation. GBP/JPY also broke 147.04 support. Both confirm near term down trend resumption.
USD/JPY also takes our near term channel which should now bring deeper corrective fall to 108.82 support.
Falling treasury yield is seen as the main factor driving the moves.
US 10 year yield reaches as low as 3.011, comparing to yesterday’s close at 3.063.
German 10 year bund yield reaches as low as 0.497, comparing to yesterday’s 0.559.
UK 10 year gilt yield dips to as low as 1.449, comparing to yesterday’s 1.523.
Chart screenshots from MarketWatch.
Pound was knocked down after another data miss. Headline CPI slowed for the third month in a row to 2.4% yoy in April, down from 2.5% yoy and missed expectation of 2.5% yoy. Core CPI also slowed to 2.1% yoy, down from 2.3% yoy and missed expectation of 2.2.% yoy.
The Office of National Statistics noted that air fares made the largest downward contribution to the change in CPI. It noted that “the timing of Easter in the middle of April 2017 contributed to air fares rising by 18.6% on the month whereas this year, Easter fell at the beginning of April before the price collection period and there was no price rise. Instead, fares fell slightly, by 0.2%, between March and April.
Poor weather was blamed for weak Q1 GDP. Timing of Easter is now blamed for CPI slowdown. But whether they’re true or now, the chance of an August BoE hike looks slimmer after the release.
Also from UK, RPI accelerated to 3.4% yoy in April, up from 3.3% yoy, met expectation. PPI input rose to 5.3% Yoy, PPI output was unchanged at 2.7% yoy, PPI output core slowed to 2.4% Yoy. House price index was unchanged at 4.2% yoy in March.
GBP/JPY responds to the release by diving through 147.04 support, confirming resumption of recent decline from 153.84. 144.97 is the next target.
GBP/USD drops to further to 1.3345 and is on course for 1.3161 fibonacci level.
EUR/GBP is stay in range, because Euro is weighed down by its own weaker than expected PMI data.
Eurozone PMI manufacturing dropped to 55.5 in May, down from 56.2, missed expectation of 56.0, hitting 15-month low.
PMI services dropped to 53.9, down from 54.7, missed expectation of 54.7, hitting, 16-month low.
PMI composite dropped to 54.1, down from 55.1, hitting 18-month low.
Comments from Chris Williamson, Chief Business Economist at IHS Markit:
“The May PMI brought yet another set of disappointing survey results, though once again a note of caution is required when interpreting the findings. While prior months have seen various factors such as extreme weather, strikes, illness and the timing of Easter dampen growth, May saw reports of business being adversely affected by an unusually high number of public holidays.
“Furthermore, despite the headline PMI dropping to an 18-month low, the survey remains at a level consistent with the eurozone economy growing at a reasonably solid rate of just over 0.4% in the second quarter.
“Job creation is also continuing to run at an encouragingly robust rate and optimism about the business outlook remains above its long-run average.
“However, it’s also becoming increasingly evident that underlying growth momentum has slowed compared to late last year, especially in relation to exports. Hiring has consequently shown signs of being reined-in. More expensive oil and rising wages are meanwhile continuing to push companies’ costs higher, but weak final demand means firms are struggling to pass these higher costs onto customers.
“Some of the fog will hopefully lift with the June PMI data, providing a clearer signal of the underlying growth momentum. Until then, however, it’s likely that the disappointing May survey results will rekindle some concerns regarding downside risks facing the euro area economy.”
Germany PMI manufacturing dropped to 56.8 in May, down from 58.1, missed expectation of 57.9. That’s the lowest in 15 months.
PMI services dropped to 52.1, down from 53.0, missed expectation of 53.1. That’s a 20-month low.
PMI composite dropped to 53.1, down from 54.6, hitting 20-month low.
Comment from Phil Smith, Principal Economist at IHS Markit:
“The flash PMI data indicate that the recent slowdown in Germany’s private sector continued into May. Business activity showed the weakest rise for over a year-and-a-half, and it was a case of slower growth across both the manufacturing and services segments of the economy.
“There was some anecdotal evidence suggesting that the timing of public holidays during the month had led to workers taking days off to bridge the holidays and weekends. However, weaker order book growth and a further waning of business confidence point to the economy carrying a lot less underlying momentum than at the end of 2017.
“Latest data meanwhile indicated an ill-timed resurgence in cost pressures faced by businesses, linked largely to rising oil prices. The recent cooling of demand has meant increased pressure on margins, with selling price inflation moving in the opposite direction to that of input costs.”
France PMI manufacturing rose to 55.1 in May, up from 53.8 and beat expectation of 53.7, hitting 3 month high.
But PMI services dropped to 54.3, down from 57.4 and missed expectation of 57.2, hitting 16- month low.
PMI composite dropped to 54.5, down from 56.9, hitting a 16 month low.
Markit noted that the data in May signalled a “renewed slowdown in French private sector output growth”.
Comments from Alex Gill, Economist at IHS Markit:
“Having showed signs of resilience in April, May saw a renewed slowdown in French private sector growth. Moreover, the headline composite output index signalled the weakest rate of expansion for almost a year-and-a-half, indicating that the French private sector’s economic revival is losing further steam in the second quarter.
“On a brighter note, the data highlighted a better month for the manufacturing sector, with rates of expansion accelerating on a number of key metrics, including output, new orders and employment.”
The Nikkei flash Japan manufacturing PMI dropped to 52.5 in May, down from 53.8 and missed expected of 54.6. In the release it’s noted that new order growth softened to 9-month low. However, input prices surged at the fastest pace since January 2014.
Also, Joe Hayes, Economist at IHS Markit, noted:
“Despite the promising upturn in April data, May’s flash release erred on the side of disappointment as the headline figure signalled the weakest expansion in manufacturing growth in nine months.
“Employment growth eased, in line with a weaker accumulation of work backlogs due to softer demand pressures. That said, new export sales expanded faster amid the recent dollar strength vs. JPY.
“However, there was further evidence that supply-side constraints may be impacting output potential, as material shortages contributed to the greatest lengthening of delivery times in seven years. Consequently, input prices soared at the fastest pace in 52 months.”
RBNZ released a 22-page bulletin article titled “Unconventional monetary policy since the Global Financial Crisis” today.
In a summary, RBNZ hailed that the “unconventional” monetary policies adopted by some major central banks were “successful in easing financial conditions”. And, there were “emerging research suggests they boosted inflation and activity.”
But in case of RBNZ, the OCR is currently at 1.75%, and it’s “not projecting a significant decrease in the OCR”. Therefore, RBNZ has “significant further room to ease monetary policy in a conventional way, and conventional monetary policy remains effective in influencing inflation and activity.”
Separately, RBNZ Assistant Governor John McDermott said in an interview that while there is “no imminent prospect” of using unconventional policy, the probability of needing them at this point in the cycle is higher than it ever was in history”. Therefore, “it would be silly of us not to be ready just in case.”
UK Chancellor of Exchequer Philip Hammond rejected the call from business leaders on customs union after Brexit. Hammond said that government shared the CBI’s desire to “minimise frictions and burdens, to avoid new barriers in Ireland and to grow British exports”.
However, he emphasized that “we do not agree that staying in the customs union is necessary to deliver them.” And he tried to persuade the business leaders that ministers were “confident we can develop a solution that will allow us to move forward while meeting your concerns”.
This was in response to CBI President Paul Drechsler’s speech in the in the group’s annual dinner. There Paul Drechsler urged US Prime minister Theresa May to “break the Brexit logjam and fast”. And he added that UK should remain in the customs union with the EU “unless and until an alternative is ready and workable”.
Yen surges broadly in Asian session while Canadian, Australian and New Zealand Dollars are the weakest one. This is the typical development with risk aversion. DOW closed down -0.72% or 178.88 pts to 24834.41 overnight. S&P 500 lost -0.31% to 2724.44. NASDAQ dropped -0.21% to 7378.46. In Asian Nikkei is trading down -1.13% at the time of writing. HK HSI is down -1.0%.
Market seemed to respond negatively to Trump’s comment that he’s “not satisfied” with the trade talks with China. And called the negotiations just a “start”. That’s rather inconsistent with Treasury Secretary Steven Mnuchin’s comment that the meeting made “very meaningful progress”. Also, it remains unclear when the planned Kim-Trump summit will happen on June 12 in Singapore. Trump just said that “whether or not it happens, you’ll be knowing pretty soon” .
But as European Council President Donald Tusk described before, the American administration has capricious assertiveness. So unpredictably is somewhat predictable.
Technically, GBP/JPY is a pair to note as 148.16 minor support is broken, which suggests completion of corrective rebound from 147.04 at 149.99. UK CPI will be a focus today and another miss would push the cross through 147.04 towards 144.97 low.
Following up on a comment here, CADJPY’s rally extended as expected and reached as high as 87.09, just inch below mentioned target of 61.8% projection of 80.52 to 85.75 from 83.88 at 87.11. We’d talked about putting the exit at slightly below 87.11 at 87.00 and it’s filled.
From Action Bias point of view, H Action has been neutral for some time, suggests a lack of impulsive momentum. The 6H Action Bias chart also doesn’t show persistent blue bars. Therefore, we’d maintain our view that while further rise cannot be ruled out, current level is an appropriate level to exit long.
As noted in a prior comment here, the rejection by 1.2 key resistance made EUR/CHF short candidate for reversal when D Action Bias started to turn downside red. Subsequent development turned out to be in line with this near term bearish view.
6H Action Bias turned neutral after the decline halted at 1.1705 and turned into consolidation. But during the three bars, D Action Bias stayed downside red, thus maintaining near term bearishness. In the meaning, W Action Bias turned neutral too, indicating loss of medium term up side momentum. So the stage is set for deeper fall.
Now, H Action Bias and 6H Action Bias both turned downside red, suggesting that the decline is ready to resume.
Sell on break of 1.1705 could be a way to ride on the decline, with stop at 1.1780. 61.8% retracement of 1.1445 to 1.2004 at 1.1659 is an easy target. But for position trading, the target will be between 1.1445 and 38.2% retracement of 1.0629 to 1.2004 at 1.1479. But of course, we’ll monitor 6H Action Bias and get out if it turns neutral, indicating another consolidation or reversal.
BoE Governor Mark Carney speaks to the Treasury Committee in the parliament for inflation report hearing today.
Regarding the dismal Q1 growth, Carney said ” it’s more likely to have been temporary and idiosyncratic factors that slowed the economy.” But the MP didn’t expect much of that “lost output” to be made up. Therefore, BoE forecast 0.4% growth in Q2 only.
Carney noted that there were arguments for and against publishing a rate path. But he pointed out that “e risk of it being interpreted as a promise, as a commitment are real, there are risks of procrastination once you put a path out there… there’s risk of pre-commitment as well”. And thus, the majority of the committee were not in favor of it.
BoE MPC member Gertjan Vlieghe had his reappointment hearing in the parliament today. Vlieghe prepared a written response to some questions from lawmakers, which could be found here.
He noted that his own forecast for growth and inflation is “consistent with a gradually rising path of interest rates”. His central projection sees the requirement of one or two 25bps hike per year over the three year forecast period. And with that, policy rate will be closer to neutral.
Regarding global trade, Vlieghe said a significant broadening of tariffs on goods, or countries could lead to a slowdown in global trade that can hut the UK economy by “several tenths of a percent of GDP or more”. Meanwhile, a global trade war would “simultaneously reduce GDP and increase inflation via higher tariffs”. And, monetary easing would “only be appropriate” in that case if inflation effect is expected to be “short-lived”. But overall, the implication is “not straightforward:”.
ECB Governing Council member, Finnish Central Bank Governor Erkki Liikanen, tells the Finnish parliament today that it takes time for underlying inflation in the Eurozone to accelerate. And that would support rise in headline inflation.
Also, he pointed out that there was an exceptional amount of uncertainty on how ECB’s unconventional monetary policy worked out. However, loose policy is still necessary to boost inflation back to 2% target.
Bloomberg reported that China is going to lower levy on import passenger cars from the current 25% to 15%. That’s seen as Chinese President Xi Jinping putting his word into actions. Xi has already reiterated the initiative at the Boao Forum back in April.
As in 2017, the total sales of automobiles in China added up to 28.9m. Only 1.22m, or 4.2%, are imported. The lowering of tariff is seen as a strong boost to European vehicle makers and less so the US ones.
For domestic car makers, the levy cut to 15% is the better case scenario in the rumored range of 10-15%.
EU trade Commissioner Cecilia Malmstrom reiterated today that the US should end the steel tariff threats to the EU. And EU’s position is clear that there would be discussion of closer trade ties only if EU is granted permanent exemptions from the steel tariffs. However, Malmstrom also noted that “they don’t think it is enough”, referring to the lack of response from the US.
Separately, German economy minister Peter Altmaier urged more work on trade deal with the US as time is running out for a deal over the steel tariffs.
The current temporary exemption for EU will expire on June 1.
Italian President Sergio Mattarella called the leaders of the lower and upper houses of the parliament for a meeting today. That came after meeting with anti-establishment 5-Star Movement and far-right League, who have agreed on a deal to form a coalition government.
5-Star leader Luigi Di Maio said after meeting with Mattarella that Giuseppe Conte, a law professor but a political novice, “will be the prime minister of a political government”. Maio hailed that Conte is “a person that can carry out the government contract” and he’s “proud” of this choice. Leader of the League Matto Salvini also confirmed the name.
For now, it’s uncertain whether Mattarella will appoint Conte as the Prime Minister, or he’d prefer a more high-profile figure.
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US May PMI points to encouragingly solid pace of economic growth of 2.5-3%
Markit US PMI manufacturing rose 0.1 to 56.6 in May, hitting 44 month high. PMI services rose 1.1 to 55.7, at 3 month high. Both were above market expectations.
PMI composite rose to 55.7, up from 54.9, at a 3 month high.
Comments from Chris Williamson, Chief Business Economist at IHS Markit:
“The flash May PMI surveys point to an encouragingly solid pace of economic growth of 2.5-3% with monthly job gains running at just over 200,000, though the interesting action is coming on the prices front.
“Input costs measured across both manufacturing and services are rising at the fastest rate for nearly five years, with the goods-producing sector seeing the steepest cost increases for seven years in recent months.
“Furthermore, supplier delivery delays, a key forward-indicator of inflationary pressures, have risen to the highest seen in the 11 year survey history. Rising demand has stretched supply chains to the extent that suppliers are increasingly able to demand higher prices. At the same time, higher oil and energy prices are pushing up firms’ costs.
“Business optimism meanwhile remains at a three-year high, with companies commonly expecting rising demand to help drive business growth, setting the scene for further strong survey results in coming months.”
Full release here.
Also from US, new home sales dropped to 662k annualized rate in April, below expectation of 678k.