U.S. Chamber of Commerce President and CEO Thomas Donohue criticized that unilateral tarrifs on Chinese goods by Trump’s government would be destructive to the economy. He warned that the USD 30b a year tariffs on Chinese good would w”ipe out over a third of the savings American families received from the doubling of the standard deduction in tax reform.” Further, with Trump’s request of USD 60b a year tariff, “the impact would be even more devastating.”In addition, Donohue said “tariffs could lead to a destructive trade war with serious consequences for U.S. economic growth and job creation,”
UK-EU planning instensive talk on Irish border, after completing the transition deal
UK Brexit Secretary David Davis is targeting to complete the legal text of the transition deal at the two-day summit from March 22. Most of the differences would likely be bridged on the following days. But the criteria of avoiding a hard Irish border remains a key showstopper. EU proposed a fall back option in its own draft published earlier this month. That is, should there be no compromisable solution, Norther Ireland would stay in the customs union along side Republic of Ireland. But UK Prime Minister Theresa May has instantly and bluntly rejected that idea. Intensive talk is now planned between March 26 and April 18 on the issue. There is some optimism on completing the transition agreement among UK officials. But businesses in UK would definite request a deal with full clarity. Any conditions in the deal attached to the outcome of Irish border issue would dissatisfy UK businesses and markets.
RBA Debelle: Markets underpriced risks of global tightening
RBA Deputy Governor Guy Debelle:-
- “Equity prices embody a view of the future that robust growth can continue without generating a material increase in inflation.”
- “There is little priced in for the risk that this may not turn out to be true.”
- Market volatility in February, was just “a small example of what could happen following a larger and more sustained shift upwards in the rate structure.”
- He admitted before wrong in predicting higher volatility before, but added “I think there is a higher probability of being proven correct this time.”
February 25 imagery suggests North Korea testing nuclear reactors at Yongbyon
Defence & security intelligence analysts Jane’s reported that North Korea likely had preliminary testing it’s nuclear reactors at the Yongbyon research facility. That came weeks ahead of the planned meeting between North Korean Leader Kim Jong-un and South Korean President Moon Jae-in next month. There will also be a planned meeting between Kim and US President Donald Trump in May.
But it should be noted that the analysis was based on an imagery from February 25. Jane’s noted:-
- Satellite imagery suggests that preliminary testing of North Korea’s experimental light water reactor (ELWR) at Yongbyon may have begun.
- Signatures of testing in late February follow logically from numerous indicators of increased activity at the ELWR that were visible throughout 2017, although reactor criticality is only likely to occur later in 2018 or in 2019.
- The ELWR was built and optimized for electricity production, but has ‘dual-use’ potential and can be modified to produce fissile material for nuclear weapons.
BusinessNZ manufacturing PMI dropped to 53.4, NZD/JPY extending dive
New Zealand Business NZ manufacturing PMI dropped to 53.4 in February, down from 54.4.
Sub-indices:-
- Production up 0.4 to 53.9
- Employment up 3.3 to 54.8
- New orders up 5.1 to 54.8
- Deliveries up 2.9 to 52.7
- Finished stocks down -1 to 51.1
Comments from Bank of New Zealand economist Doug Steel:-
- “The generally slower PMI suggests we shouldn’t expect Q1 manufacturing GDP to be much different from the flat result recorded in yesterday’s official figures for Q4,”
- “Early livestock culling on account of adverse weather seemed to boost Q4 manufacturing activity but will have the opposite effect through early 2018 given New Year rains.”
- “It all suggests primary processing will be a drag on manufacturing activity early in 2018,”
Comments from Business NZ manufacturing executive director Catherine Beard:-
- Pace of expansion had levelled off in recent months
- “noted the sluggish start to the year with a dip in new orders being a common message.”
Sharp fall in NZD/JPY this week suggests that rebound from 75.92 has completed at 78.61. The cross was held by 55 day EMA slightly below 50% retracement of 81.55 to 75.92. For the near term, it’s going to revisit key support level around 75.65/75.92. It remains to be seen if there is enough selling to push through this key support zone. But outlook is not looking good.
DOW extending triangle pattern; EURJPY, EURGBP, USDCAD on the move
Dow trading up over 1% at the time of writing, back above 25000 handle. It looks like price actions from 25800 are forming a triangle pattern. More upside would be in favor as long as 24217.76 support holds, for retesting 26616.71 record high. 
Yen remains the strongest one today even though it’s paring some gains in the current 4 hour period. It’s followed by the resilient Sterling. Commodity currencies are generally weak.
A few technical development to note:-
EUR/JPY’s rebound from 129.34 could have completed at 132.40, heading back to 129.34.
EUR/GBP extending the fall from 0.8976 to 0.8771 support.
USD/CAD broken 1.3000 for rally resumption to 1.3065 fibonacci level.
Mexican Guajardo : NAFTA will continue, just maybe without US
Mexican Economy Minister Ildefonso Guajardo warned today: –
- “You have to be ready to live with a NAFTA without the U.S.”
- “NAFTA at risk of ending? No. NAFTA will continue between Canada and Mexico because at the end of the day, what is important is you send a message that you believe in free trade. The U.S. is the one that will decide to be in or out.”
Canadian Prime Minister Justin Trudeau said yesterday:-
- An “eminently achievable win-win-win” result available on NAFTA
Dollar mildly higher after data. Jobless claims drop 4k to 226k
First batch of US data release:-
- Initial jobless claims Mar 9: 226k vs exp 226k vs prior 230k
- Continuing claims Mar 2: 1.88m vs exp 1.90m vs prior 1.88m
- Empire state manufacturing Mar: 22.5 vs exp 15.0 vs prior 13.1
- Philly Fed manufacturing Mar: 22.3 vs exp 23.0 vs prior 25.8
- Import price index Feb: 0.4% mom vs exp 0.2% mom vs prior 0.8% mom
Dollar strengthens mildly after the release.
SNB Jordan warns protectionism is damaging for everyone
SNB chairman Thomas Jordan warned of US protectionism in a radio interview today:-
- “The risks have not materialised yet, but if international trade doesn’t function well, that is damaging for everyone,”
- “Safe havens are sought when there are political uncertainties or big changes in the financial markets. This can be triggered by protectionism,”
Dovish SNB stands pat, lowers inflation forecasts
SNB left sight deposit rates unchanged at -0.75%, three-month Libor range at -1.25% to -0.25%, as widely expected. Inflation forecasts for 2018 and 2019 are lowered due to Swiss Franc’s appreciation to Dollar. SNB maintained that negative rate and intervention are essential
Latest forecasts:-
- 2018 inflation forecast: 0.6% (prior 0.7%)
- 2019 inflation forecast: 0.9% (prior 1.1%)
- 2020 inflation forecast: 1.9%
- 2018 GDP forecast: around 2%
Key quotes from the release:-
- Since the last monetary policy assessment in December, the Swiss franc has appreciated slightly overall on the back of the weaker US dollar.
- The Swiss franc remains highly valued.
- The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential.
- The SNB continues to expect GDP growth of around 2% for 2018 and a further gradual decrease in unemployment.
Market reactions to the release is muted as seen from EUR/CHF, USD/CHF and GBP/CHF below.
Swiss Franc mixed ahead of SNB rate decision.
The SNB meeting today would bring no change in the monetary policy. Policymakers would reiterate the pledge to intervene the currency market in defense of excessive appreciation of Swiss franc. However, the is less urgency for the central bank to act given the strength in the euro.
CHF is trading up again most currency except Sterling for the week. It’s supported by risk aversion, just like JPY. But for today, there is no follow through buying. Indeed, in the current 4 hour period, there is some selling seen ahead of SNB.
Action bias also reveal that CHF is generally neutral.
Macquarie pushed back expectation of RBA 2018 hike
More economists are paring back their expectation of an RBA hike this year. Macquarie Bank now no longer sees RBA hiking within 2018. it noted in a report that “the primary reason for pushing back our RBA call is that the Bank can err on the side of growing the economy faster for longer to erode spare capacity and have confidence that inflation is firmly moving back into the 2-3% target.” .
It referred to other advanced economies for the pattern of falling unemployment rates without wage growth. At this same time, “Australia’s unemployment rate remains at 5.5% and noticeably above ‘full employment’.” Also, “after two years of below-target inflation, and at least another one to come, there seems little danger of generating a meaningful pick-up in inflation expectations from keeping interest rates low for longer.”
Besides, “housing has settled”, and “investor activity in the housing market has subsided significantly and housing prices have broadly flattened out. There is “little danger” or “reacceleration in housing price or credit growth.” And therefore, “the source of much angst for the RBA — fast growth in housing prices in Sydney and Melbourne – has eased.”
NAB recently pushed back their RBA rate expectation too and predicted only one hike this year, not two. Westpac continued to expect no hike until 2019.
ECB Constancio: Technical factors can greatly amplify initial market movements
ECB Vice President Vitor Constancio commented on financial stability at the conference. He noted that “the sharp movements that took place in the U.S. equity market in February 2018 demonstrated how sentiment can change very quickly — and market participants should be well aware of this risk.” And, “in an environment characterized by search for yield and depressed volatility, technical factors can greatly amplify initial market movements.”
ECB Praet: Foreward guidance have to be further specified and calibrated
ECB Chief Economist Peter Praet echoed on monetary policy and said it’s too soon to declare “mission accomplished” regarding inflation. Meanwhile, “with the passage of time, the indication that policy rates will remain at their present levels well past the end of net asset purchases will gradually cease to provide sufficient guidance”. He added that “our forward guidance on the path of our policy rates will have to be further specified and calibrated.”
ECB Draghi emphasized predictability in monetary policy adjustments
ECB President Mario Draghi emphasized in a conference in Frankfurt yesterday that any monetary policy adjustments must be “predictable” and carried out “at a measured pace”. For now, he said ECB “still need to see further evidence that inflation dynamics are moving in the right direction”. Therefore, “monetary policy will remain patient, persistent and prudent.” Draghi also added that “sharp repricing” in the financial markets must be carefully monitored.
Regarding the steel and aluminum tariffs of the US, Draghi expected the initial impact to be small. However, he warned that “there are potential second-round effects that could have much more serious consequences.” And, risks include “retaliation across other goods and an escalation of trade tensions, and the potential for negative confidence effects which would weigh on business investment in particular.”
Asian markets down on conerns of US-China trade war, Dollar down
Asian markets are broadly lower on concerns of full-blown trade war between US and China. At the time of writing:
- Nikkei down -0.7%
- HK HSI down -1.3%
- China SSE down -0.5%
- AU all ordinaries down -0.57%
- KOSPI down -0.51%
Another globalist Rex Tillerson is now gone, just short after Gary Cohn. There are reports that Trump is considering a USD 60b taiff package for China.
Dollar is trading under broad based selling today.
BoJ Kuroda – Same message, long way from hitting inflation target
BoJ Governor Haruhiko Kuroda repeated his rhetorics that Japan is still long way from meeting the 2% inflation target. Therefore, it’s too early to talk about stimulus exit. But he assured the parliament that the central bank has the tools to smoothly exit from the ultra-loose monetary policy when needed. Kuroda added that “by combining various tools, it’s possible to shrink the BoJ’s balance sheet at an appropriate pace while keeping markets stable.” Meanwhile, he also hailed that while keeping long term yield low with the policy, BoJ also managed to maintain markets’ trust in JGBs. He noted “If market trust over Japan’s debt is eroded, it will be difficult for us to keep interest rates low with our yield curve control policy.”
Release earlier, minutes of BoJ January meeting showed that some board members were concerned with the impact of the loose monetary policy, especially on banks. The minutes showed “some members said it was important to continue to monitor and assess the positive impacts and side-effects of the current monetary easing policy, including its effects on Japan’s banking system.” Some member suggested to raised the yield target as economy improves. But another member (obviously Goushi Kataoka), called for ramping up the stimulus.
Asian session data wrap up: China posted solid Feb data
Asian session data wrap up:-
New Zealand
- Current account Q4: NZD -2.77b vs exp -2.45b vs prior -4.83b
Australia
- Westpac consumer confidence Mar: 0.2% vs prior -2.3%
Japan
- Machine orders Jan: 8.2% mom vs exp 5.2% mom vs prior -9.3% mom
China
- Retail sales Feb: 9.7% yoy vs exp 10.0% yoy vs prior 9.4% yoy
- Industrial production Feb: 7.2% yoy vs exp 6.3% yoy vs prior 6.2% yoy
- Fixed assets investment Feb: 7.9% yoy vs exp 7.0% yoy vs prior 7.2% yoy
Upcoming
- German CPI
- Eurozone industrial production
- Eurozone employment
- US retail sales
- US PPI
- US business inventories
BoC Poloz: Canadian labour force could expand by another half million
BoC Governor Stephen Poloz:-
- There are utapped potential in the economy, including workforce by youth, women, indigenous peoples, Canadians with disabilities and recent immigrants to Canada
- It is not much of a stretch to imagine that Canada’s labour force could expand by another half a million workers,”
- If the economy builds more supply than usual, that will put downside risk on inflation; if less, that will create upside risk to inflation, and it is our job to balance those risks,”
- “We cannot know in advance how far the capacity-building process can go, but we have an obligation to allow it to occur.”
Full speech Today’s Labour Market and the Future of Work
IMF Lagarde: Fix economic imbalances with fiscal means, not trade obstacles
IMF Managing Director Christine Lagarde on trade war:-
The IMF’s Global Prospects and Policy Challenges report:-