Yesterday the markets were pretty quiet during the European and the US session as we were approaching the FED meeting. The Federal Reserve left interest rates unchanged in the 2.25-2.50% range as everyone was anticipating, so no surprise there. The attention yesterday was on the FOMC statement and the press conference that followed 30 minutes after the meeting.
One of the main comments in the FOMC statement which raised eyebrows was this: “US economy is expanding at a solid rate for early 2019.” This is down from “a strong rate” comment last December. Later on during the press conference Chairman Jerome Powell stated that Brexit, the US Government shutdown and stock market volatility were the reasons for newly “patient” policy. This was enough to send the USD tumbling because it means that the pace of rate hikes we saw in the last two years will slow down now.
Today during the European session we had a number of GDP reports being released as well as from Canada. The economy grew by 0.7% during the Q4 of 2018 in Spain, but it contracted by 0.2% in Italy which was the second quarterly consecutive decline. That means that Italy is in recession, although Italian politicians sound optimistic for this year. At least, the unemployment declined by two points which should comfort Italian politicians somewhat.
The Eurozone economy grew by 0.2% in Q4 of last year as expected, which means that the growth in Spain has balanced out the decline in Italy. The Canadian economy also turned negative again in November after the 0.1% decline we saw in September. The Canadian economy shrank by 0.1% that month. So, GDP reports show that major global economies are in trouble, which the FED pointed it out last night on their statement.
- German December Retail Sales – Retail sales were expected to decline by 0.5% in Germany for December but instead they declined by a massive 4.5%. This is a major decline and it is the fourth one in the last six months, showing that the German economy is headed for the sinkhole too.
- French and Spanish Inflation – CPI (consumer price index) inflation as expected to decline by 0.5% this month in France and so it did. This is the third month in the last five that inflation declines in France, with the other two months coming at 0.0% and 0.1%, which shows the trend. In Spain, annualized inflation declined to 1.2% in December from 1.6% in the previous month and today it was expected to tick lower again to 1.1%. But, it lost two points coming at 1.0%.
- Eurozone and Italian Unemployment Rate – The unemployment rate remained unchanged in the Eurozone at 7.9%, while in Italy it lost two points falling to 10.3% from 10.5% when expectations were for an increase to 10.6%, so it’s not all bad for Italian politicians.
- Eurozone GDP – The Italian GDP declined by 0.2% in Q4 while Q3 was revised lower from 0.0% to -0.1%. This means a recession since the economy has been contracting for two consecutive quarters. Spanish economy grew by 0.7% in Q4 of last year against 0.6% expected. The whole Eurozone economy grew by 0.2% as expected, so the Italian and Spanish GDP figures have balanced out each other it seems.
- UK’s Hunt on Brexit – UK Foreign Secretary Jeremy Hunt commented early in the morning that they don’t rule out a solution to the Irish backstop issue. The UK is not ruling out technical solutions to the border and a hard border in Ireland must be avoided. He finished saying that we don’t know if the extension to Article 50 is needed. Theresa May’s spokesman James Slack also said that the Prime Minister’s position remains unchanged to leave the EU on March 29.
- EU’s Hubner on Brexit – The EU lawmaker said a while ago that the EU can only give additional assurance on the Irish backstop in political declaration in future EU-UK ties. Additional assurances are possible if UK changes red lines and if UK moves towards permanent customs union with the EU. If no such readiness comes from the UK, no-deal Brexit could become automatic.
- Italian Politicians on GDP Report – Italy’s DI Maio of the governing Party, the Cinque Stelle (five stars), popped up quickly after the GDP report was released blaming the previous government for the failure to revive the economy. This government has been working with last government’s budget by the way, so he has a point. Later on, Prime Minister Conte said that the recession is temporary and is due to the US-China trade war.
The US Session
- Trump on China-US Trade Talks – US President Donald Trump was up and early today tweeting this: “China’s top trade negotiators are in the US meeting with our representatives. Meetings are going well with good intent and spirit on both sides. China does not want an increase in Tariffs and feels they will do much better if they make a deal. They are correct. I will be……”. He added that there will be no trade deal until he and the Chinese President Xi Jinping meet later on.
- Canadian GDP – The Canadian economy contracted by 0.1% as expected in November. This is the second contraction in three months after the one we saw in September. Although, the year-on-year GDP ticked higher though to 1.7% from 1.6% previously. Wholesale trade came at -1.1% in November against +1.0% in October, so all gains were wiped out. Manufacturing came at -0.5% against +0.7% in October with petroleum coming at -2.2% and accounting for most of the decline. Construction activity came at -0.3% in November. This is the sixth consecutive month that contraction activity declines, which means that this sector is in recession. Industrial product price came at -0.7% for November against +0.1% expected. The October number was not revised at -0.8%. So, a pretty bad report allover apart from the YoY GDP.
- US Q4 Employment Cost Index – The employment cost index has been growing in the last several months peaking at 0.8% in Q3. This index was expected to grow by 0.8% again in Q4, but it ticked lower to 0.7%.
- US Unemployment Claims – Unemployment claims have been declining constantly in the last several weeks. Although they were expected to increase to 215k today but instead the actual number came at 253k which is a considerable jump.
Trades in Sight
- The trend has been bullish for more than a week
- Fundamentals point up
- The retrace lower was complete
- The 20 SMA provided support
EUR/CHF continues to stretch the trend to the upside
EUR/CHF has been on a bullish trend for quite some time. This week in particular, the uptrend has been quite straightforward after the small pullback last week. We saw another pullback earlier during the European session but the 20 SMA (grey) held its ground on the H1 chart and the uptrend resumed after the stochastic indicator became oversold.
The market is still on yesterday’s mode, trading the hangover from the FED statement and press conference. The USD is trying to get itself together but the volatility is low, apart from GBP pairs where we are seeing some signs of life. The CAD has also made a move in the last couple of hours and we just opened a signal there, so let’s see how that goes.