June 17, 2019

Daily Observations:

Asian indices were mixed at the start of a big week for central bank policy. Treasuries edged lower after upbeat economic data at the end of last week left some doubts about a more dovish position from the Fed. Investors will be scrutinizing the Fed’s policy decision Wednesday for signals on the chances of rates cuts ahead. Meantime, Commerce Secretary Wilbur Ross reiterated that the prospect of a major trade deal is unlikely to emerge from a possible meeting between Trump and Xi Jinping later this month.

Stronger US Economic Data Reduces Rate Cut Probability:

US stores and factories reported a pickup in activity last month, suggesting the economy is humming along without an urgent need for the Fed to cut interest rates. Retailers posted a broad-based gain, with the value of overall sales rising 0.5% from April, and figures for the previous 2 months were revised higher. Manufacturing output also increased for the first time this year. Some researchers boosted forecasts for second-quarter economic growth following the reports. Less upbeat numbers for payrolls and inflation in the past week led many investors to increase bets that the Fed will lower borrowing costs in the next couple of months.

As well as the May gain, retail sales in April were revised to a 0.3% increase, according to Commerce Department figures released on Friday. Out of 13 major categories, 11 saw increases.

Sales in the “control group” subset, which some analysts view as a more reliable gauge of underlying consumer demand, climbed 0.5%, topping projections. The measure excludes more volatile items like food services and fuel stations.

In a separate report Friday, the Fed said manufacturing output rose 0.2% in May, in line with estimates in a Bloomberg survey, after falling 0.5% the month before. Total industrial production, which also includes mines and utilities, increased 0.4%.

Wilbur Ross Downplays Significant US-China Trade Deal:

Commerce Secretary Wilbur Ross downplayed the prospect of a major trade deal emerging from a possible meeting between President Donald Trump and Chinese President Xi Jinping at the Group of 20 summit in Osaka, Japan, this month.  “I think the most that will come out of the G-20 might be an agreement to actively resume talks,” Ross said in an interview Sunday with the Wall Street Journal.  Talks between China and the US broke off in early May.

Ross said the possible Trump-Xi meeting, which hasn’t been confirmed, might lay out “new ground rules for discussion and some sort of schedule for when detailed technical talks might resume.”

Australian Business Confidence Jumps:

Australian business confidence surged after Prime Minister Scott Morrison’s shock election win, while conditions again deteriorated, providing further grist to the central bank’s decision to cut interest rates.

Sentiment jumped 7 points in May from 0 the previous month, the biggest gain since the center-right government came to power almost 6 years ago, National Australia Bank Ltd.’s survey showed Tuesday. The conditions index, measuring hiring, sales and profits, slumped to 1 from 3.

Reserve Bank Governor Philip Lowe cut rates last week for the first time since he took the helm in 2016 to encourage firms to hire and invest in an economy that’s sharply decelerated in the past nine months. Confidence was bolstered by Morrison’s come-from-behind win on May 18, which was bracketed by the NAB survey that ran from the 14th-24th.

Australia’s economy expanded in the first 3 months of the year at the slowest annual pace in a decade and inflation barely registered in the period. Growth is almost entirely supported by government spending currently and the RBA is urging Morrison and his ministers to address policies that will boost productivity and living standards.

Hong Kong Protests Persist:

Hong Kong rose up in defiance a day after leader Carrie Lam suspended a contentious extradition bill, jamming the streets with hundreds of thousands of people and drawing a formal apology from the embattled chief executive.

Protesters wanted the complete withdrawal of the bill, which opponents say threatens the former British colony’s tenuous autonomy from Communist Party-ruled China. The largely peaceful crowds showed up in significantly larger numbers even after Lam announced Saturday she was suspending efforts to pass the legislation.

The organizer’s estimate was again far larger than the official count. While the Civil Human Rights Front said more than a quarter of the island’s 7.5 million residents responded to its call to march, police said some 338,000 joined the protest’s main routes during the peak. Either way, the gathering was larger than the historic march on June 9, when organizers put the number at just more than 1 million and police said 240,000.

The swollen crowds seemed strong proof that Hong Kong was in no mood for half-measures from the Beijing-backed government. Members of the crowd complained that suspension was not enough, and the protest appeared to be the biggest since Hong Kong was handed back to China in 1997.

Lam issued a formal apology Sunday night, casting new doubt about her ability to survive the uproar. The government said in a statement that she “pledged to adopt a most sincere and humble attitude to accept criticisms and make improvements in serving the public.” Already, her decision to suspend the bill was considered, compared to the harder line normally adopted by her backers in China, as extraordinary. But protesters noted that her apology did not go much further in substance, leaving open the options of fully killing the measure or her resigning.

No Fed Rate Cuts Expected this Week:

According to Bloomberg news, Fed Chairman Jerome Powell’s frequent assurance that sustaining the US economic expansion is the Fed’s “overarching’’ goal is opening the door to potentially aggressive interest-rate cuts. The timing, size and whether such moves are indeed in his plans may become clearer when Powell and his colleagues meet on Tuesday and Wednesday in Washington.

While investors are agitating for the Fed to shift, economists don’t see a move this week and are divided on whether officials will cut at all in 2019. The median estimate of Bloomberg’s most recent survey shows a quarter point reduction in December, though it was a close call.

The suspicion of a number of Fed watchers, though, is that the hint of a slowdown would be enough for the Fed to move, and that policy makers will acknowledge that readiness this week. One reason is that the chairman has signaled he’s concerned about how just low rates still are, meaning it may be better to act sooner and avoid a recession than wait and find the economy slumping with the Fed having limited room to act.

That perspective of Fed policy has a lot to do with Powell’s perception of risk at a time of high uncertainty and Trump’s dispute with China. The Fed’s benchmark policy rate has never been this low during a prolonged economic expansion in records going back to the 1950s. That means when the next recession occurs rates will be closer to the zero limit; in effect, US central bankers have less room to cut.

The Fed chairman described the zero boundary as “the preeminent monetary policy challenge of our time, tainting all manner of issues’’ in a speech in Chicago this month. Fed watchers read those words as a new trigger point for the central bank. It won’t take an overwhelming confirmation of weakness in data for the Fed to ease, in their view, and a sense that risks are particularly heightened might be enough to prompt a move.

Former Fed Vice-Chair Predicts Powell Ousting Upon Trump’s Re-Election:

Former Federal Reserve Vice Chairman Stanley Fischer predicted President Donald Trump won’t renominate Jerome Powell for another term as the Fed’s chairman if re-elected, undercutting the Fed’s autonomy. “That will lead to very different monetary policy, so the Fed is not fully independent of politics,” Fischer said on Sunday at a talk in Israel.

By criticizing Fed policy, Trump created “a really awkward thing” for Powell, Fischer said. He added that he’s been in a similar hotseat before, having had a tough time maintaining central bank independence when he was governor of the Bank of Israel from 2005 to 2013.

Fischer said Trump has nothing to lose from accusing the Fed of fueling a recession by raising interest rates at its December meeting: He can either claim to be correct if there’s a recession or go quiet if the prediction doesn’t pan out.

Singapore Exports Plunge:

Singapore’s non-oil domestic exports plunged by the most since February 2013, falling by 15% in May, driven by an ongoing slump in the electronics sector that’s at the worst in more than a decade. Electronic exports dropped to its lowest level since 2009, while non-electronic exports contracted by 10.8%. The decline was offset by growth of pharmaceuticals exports, which jumped by 28.5%.

For now, the good times appear to be over for electronics, with May’s 31.4% decline in sales echoing the production pain recently seen in powerhouses South Korea and Taiwan. The data could also signal a weakening Chinese economy, with overall exports there diving 23.3% from a year earlier, the fourth drop in five months, as the trade war continues to bite.

Sources: Bloomberg

FX Updates:

USD/SGD:

Spot: 1.3702

USDSGD pared Friday’s rise earlier today, but managed to stay afloat of the 1.3700 handle as traders await this week’s Fed policy review. Singapore dollar gains were capped after poorer-than-expected electronics export recorded the biggest slump in 10 years.

AUD/USD

Spot: 0.6880

AUDUSD broke below 0.6900 Friday, maintaining a week long selloff to test 1-month lows near 0.6866. US-China trade tensions and concerns of a slowing Chinese economy will continue to weigh on the Australian dollar. In addition, RB’s meeting minutes released tomorrow will be scrutinized in an effort to determine when the central banks will cut rates again. The longer-term trend continues to point to the downside.  The next support bellows lies at 0.6828.

USD/CAD:

Spot: 1.3407

USDCAD rebounded strongly Friday, maintaining its overall uptrend since Aug 2017. The upcoming week is busy, with Canada releasing manufacturing sales and consumer spending and inflation data. To the downside, a break below 1.3200 is likely to trigger a swift move lower to the 1.3069 support. The major long-term trend remains to the upside, for now, until the 1.3069 mark gets breached.

USD/CNH:

Spot: 6.9297

Since soaring earlier last month, USDCNH has since found a consolidation range between 6.9000 and 6.9500 over the past 3 weeks. China’s central bank continues to keep its daily yuan reference rate stronger than 6.9000 per dollar even as the currency trades beyond the level. The PBOC set its daily fixing 223 pips higher than market watchers expected on Monday, the largest strong bias since Bloomberg began releasing forecasts in August 2017.

USD/JPY:

Spot: 108.60

USDJPY was little changed earlier today, maintaining above the 108 support ahead of this week’s Fed and BOJ policy meetings. According to a Bloomberg report, many economists now see the BOJ expanding stimulus as its next move, with a strengthening of the yen from the Fed rate cuts seen as a key factor for triggering action.

GBP/USD:

Spot: 1.2598

GBPUSD slipped below 1.2600 last Friday after London mayor and prominent Brexiteer Boris Johnson cruised to an easy victory in the first round of the Tory leadership elections, garnering 40% of the votes. The likely ascendance of Boris Johnson as the next Tory party leader, and therefore, the next likely opponent to Labour party leader Jeremy Corbyn in a UK general election, has rekindled fears of a no deal, hard Brexit come October.

While Johnson is willing to renegotiate the EU-UK Withdrawal Agreement (something that former UK PM Theresa May was unwilling to do), he does not want to see Article 50 extended any further and therefore is prepared to leave the EU at the end of October 2019 with or without a deal.

A break below 1.2600 is likely to lead to further downside for GBPUSD, with the next support residing at the January low of 1.2441.