Risk appetite has a strong come back today on progress in US-China trade negotiations. It’s reported that China is considering to response to Trump’s request and cut auto tariffs down from 40% to 15%. Trump also tweeted that there were productive conversations with China and urged people to watch for important announcements. At the same time, the arrest of Huawei’s executive faded into background as both sides delinked it to trade negotiations.
For now, Australian Dollar is the strongest one for today, followed by New Zealand Dollar. Sterling is trying to pare back some losses but it’s still feeling heavy. The pound’s fate will depends on the result of UK Prime Minister Theresa May’s quick EU tour, in particular the meeting with European Council President Donal Tusk at 1600 GMT. Dollar is trading as the weakest one, followed by Canadian and Yen.
Technically, there is no new developments in the markets, while the pound recovers, it’s near term bearish for further decline after brief consolidations. Australian Dollar may finally make up its mind for a rebound and seems to have defended 0.7199 against Dollar. Euro is a tricky one for now as EUR/USD and EUR/JPY are staying in near term range. We’ll see if the pull back in EUR/GBP and EUR/AUD would spill over to other pairs.
In other markets, at the time of writing, FTSE is up 1.88%, CAC is up 2.12%, CAC is up 2.15%. German 10 year yield is up 0.0033 at 0.25. Italian 10 year yield is up 0.0042 at 3.101. German-Italian spread remains below 300. Earlier in Asia, Nikkei dropped -0.34%, Hong Kong HSI rose 0.07%, China Shanghai SSE rose 0.37%, Singapore Strait Times dropped -0.43%. Also, Japan 10 year JGB yield rose 0.0057 to 0.047.
Released from US, headline PPI slowed more than expected to 2.5% yoy in November. But core PPI surprised on the upside and accelerated to 2.7% yoy.
China mulls auto tariff cut from 50% to 15%
In latest news of US-China trade talk, Bloomberg reports that China is considering to bring down auto tariffs from the current 40% to 15%. And a proposal has been submitted for review by the cabinet in the coming days. Additionally, Trump also tweeted “Very productive conversations going on with China! Watch for some important announcements!”
Earlier today, the Chinese Ministry of Commerce said in a very brief statement about the phone call between Vice Premier Liu He, US Trade Representative Robert Lighthizer and Treasury Secretary Mnuchin earlier today. It noted that “both sides exchanged views on putting into effect the consensus reached by the two countries’ leaders at their meeting, and pushing forward the timetable and roadmap for the next stage of economic and trade consultations work.”
EU Juncker: No Brexit renegotiation, only determination to avoid the backstop
European Commission President Jean-Claude Juncker will meet UK Prime Minister Theresa May later today, with the latter seeking for changes in the Brexit agreement so as to pass UK parliament. Juncker said ahead of the meeting that, “The deal we achieved is the best possible. It’s the only deal possible. There is no room whatsoever for renegotiation.” Nevertheless, he added “there is room enough to give further clarifications and further interpretations without opening the withdrawal agreement”. But he reiterated that “the withdrawal agreement will not be reopened.”
Regarding the backstop, Juncker somewhat echoed what May has said before. That is, “We have a common determination to do everything to be not in a situation one day to use that backstop but we have to prepare. It’s necessary for the entire coherence of what we have agreed. It’s necessary for Britain and it’s necessary for Ireland. Ireland will never be left alone.”
UK wage growth accelerated to fastest since 2008
UK unemployment rate was unchanged at 4.1% in the three months to October, matched expectation. However, wage growth was rather impressive. Average weekly earnings including bonus rose 3.3% 3moy, above expectation of 3.0% 3moy. Average weekly earnings excluding bonus also rose 3.3% 3moy, above expectation of 3.2% 3moy. Wage growth was indeed fastest since 2008. Also claimant count rose 21.9k in November, above expectation of 13.2k.
German ZEW: Dramatic deterioration in current situation, indicative of weak Q4
German ZEW economic sentiment improved to -17.5 in December, up from -24.1, better than expectation of 025.0. However, current situation index dropped to 45.3, down from 58.2, missed expectation of 55.6. Eurozone ZEW economic sentiment improved slightly to -21.0, up from -22.0, and beat expectation of -23.2. Eurozone current situation dropped -6.1 to 12.1.
ZEW President Achim Wambach noted in the release that the rise in expectation “should not be over-interpreted”. He added that “the assessment of the economic situation has worsened dramatically for both Germany and the Eurozone” And, this is “indicative of relatively weak economic growth in the fourth quarter”. Also, uncertainties remain in terms of the “looming international trade dispute and Brexit, which have a particularly negative impact on private investment and Germany’s exports”.
Australia NAB business confidence dropped to 3, house prices dropped -1.5% qoq
Australia NAB business confidence dropped to 3 in November, down from 5. Business conditions dropped to 11, down from 13. Alan Oster, NAB Group Chief Economist noted that “the downtrend in conditions has continued in November” and, “this trend suggests that the business sector has lost some momentum since late 2017 and early 2018.” He added “confidence is now below average, suggesting that businesses themselves think momentum will slow further”.
On falling house prices, though, Oster noted “businesses do not yet suggest they are having a material impact.” And, “falling house prices in themselves may have a ‘wealth effect’ on households but given the prior large run up the impact of the declines to date is unclear”.
Also from Australia, house price index dropped for the third quarter by -1.5% qoq in Q3, matched expectation. Over the year, house priced dropped -1.9% yoy. Among the capital cities, Sydney’s house prices dropped -1.9% qoq, -4.4% yoy. Melbourne’s dropped -2.6% qoq, -1.5% yoy. However, gains was recorded in Hobart (1.3% qoq, 13.0% yoy), Adelaide (0.6% qoq, 2.0% yoy) and Brisbane (0.6% qoq, 1.7% yoy).
Released from Japan, BSI large manufacturing index dropped to 5.5 in Q4, M2 rose 2.3% yoy in November. Machine tools orders dropped -16.8% yoy in November.
USD/JPY Mid-Day Outlook
Daily Pivots: (S1) 112.58; (P) 112.98; (R1) 113.71; More..
Intraday bias in USD/JPY is mildly on the upside for 114.03 resistance. Break there should resume the rebound from 111.37 and target 114.54 key resistance next. On the downside, break of 112.23 will extend the consolidation from 114.54 with deeper fall. But after all, downside should be contained by 38.2% retracement of 104.62 to 114.54 at 110.75 to bring rebound. Larger rise from 104.62 is expected to resume later.
In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.76 support holds. However, decisive break of 109.76 will dampen this bullish view and turns outlook mixed again.
Economic Indicators Update
| GMT | Ccy | Events | Actual | Forecast | Previous | Revised |
|---|---|---|---|---|---|---|
| 23:50 | JPY | Japan Money Stock M2+CD Y/Y Nov | 2.30% | 2.60% | 2.70% | |
| 23:50 | JPY | BSI Large Manufacturing Q/Q Q4 | 5.5 | 6.5 | ||
| 00:30 | AUD | NAB Business Confidence Nov | 3 | 4 | 5 | |
| 00:30 | AUD | NAB Business Conditions Nov | 11 | 12 | 13 | |
| 00:30 | AUD | House Price Index Q/Q Q3 | -1.50% | -1.50% | -0.70% | |
| 00:30 | AUD | House Price Index Y/Y Q3 | -1.90% | -0.60% | ||
| 06:00 | JPY | Machine Tool Orders Y/Y Nov P | -16.80% | -0.70% | ||
| 09:30 | GBP | Jobless Claims Change Nov | 21.9K | 13.2K | 20.2K | |
| 09:30 | GBP | Claimant Count Rate Nov | 2.80% | 2.70% | ||
| 09:30 | GBP | Average Weekly Earnings 3M/Y Oct | 3.30% | 3.00% | 3.00% | 3.10% |
| 09:30 | GBP | Weekly Earnings ex Bonus 3M/Y Oct | 3.30% | 3.20% | 3.20% | |
| 09:30 | GBP | ILO Unemployment Rate 3Mths Oct | 4.10% | 4.10% | 4.10% | |
| 10:00 | EUR | German ZEW Economic Sentiment Dec | -17.5 | -25 | -24.1 | |
| 10:00 | EUR | German ZEW Current Situation Dec | 45.3 | 55.6 | 58.2 | |
| 10:00 | EUR | Eurozone ZEW Economic Sentiment Dec | -21 | -23.2 | -22 | |
| 13:30 | USD | PPI M/M Nov | 0.10% | 0.10% | 0.60% | |
| 13:30 | USD | PPI Y/Y Nov | 2.50% | 2.60% | 2.90% | |
| 13:30 | USD | PPI Core M/M Nov | 0.30% | 0.20% | 0.50% | |
| 13:30 | USD | PPI Core Y/Y Nov | 2.70% | 2.50% | 2.60% |
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