Submitted by Shant Movsesian and Rajan Dhall MSTA from fxdaily.co.uk The past week was not the best for central banks, highlighted by the complete turnaround in sentiment at the BoE, where Carney and Co have now put a 25bp rate hike firmly on the table. Their rationale was that along with curbing the rise in inflation - which was to be looked through according to the previous rhetoric - the tightening of economic slack justifies an adjustment in interest rates. Their belief that the market has under-priced the rate profile over the forecast horizon was something they touched on last month, but they did more than that on Thursday, so in setting their stall last week, they have pretty much committed to a move. If they don't, it will prove disastrous for BoE confidence from here on out, and forward guidance will not longer be in their policy tool kit. Sterling will also come under intense pressure again, so we look upon these latest gains with extreme scepticism, but for now, this does not preclude the current market composition in pushing Cable towards 1.4000. Technically, near term resistance levels have been met above 1.3600, perhaps closer to 1.3650-60 or so, but beyond here, the data will have be supportive to draw in buyers at these relatively higher levels, and especially so against EUR, which has now taken out 0.8800 on the downside. Some of the euphoria over the single unit has been tamed a little, and this week highlighted this with GBP proving parity is no longer the one way ticket that some were talking up in previous weeks. EUR/USD has been largely range bound as a result, but in the aftermath of the US inflation beat last week, we saw a sharp move down to the low 1.1800's, and as we anticipated, the reference to this level in the ECB's projections has solidified the bid here, with the late Aug lows at 1.1825 kept intact. This is initial support here, but against GBP, we have a strong base at 0.8750 or so, and if this gives way, we could be looking at a move to 0.8600-0.8550 before GBP bears and EUR bulls really call 'time' All the above and we haven't mentioned Brexit yet, the next round of talks of which have been delayed in order to accommodate PM May's blueprint speech on the UK's relationship with Europe in Florence on Friday. The planned address has been billed as an 'important intervention', so this has added to the bid tone in GBP and will continue to push the Pound up into better levels ahead of this. Retail sales, PSNB and CBI industrial trends orders are all released ahead of this but will likely be of limited effect. In Europe, we get the final reading of the Aug CPI number expected to stay at 1.5%, while in Germany, the ZEW will likely confirm the positive state of the economy, and this will be backed up by the manufacturing PMIs which currently stand at an impressive 59.3, but may slip a little in Sep. * * * The stand out risk event of the week is clearly the FOMC meeting and announcement on Wednesday evening, and the focus will be on whether the Fed are ready to balance out the odds of another 25bp hike on the table for this year. We know they are more comfortable in moving having prepared the market first, although we are close to 50/50 again, but only just. The hawks will point to the pick up in inflation, which has been the primary detractor, but against this, Hurricane season has caused devastation in the south, and will perhaps urge some restraint on Yellen's part given the economic impact on the regions affected. It is still too close to call on whether they will look through this, but financial conditions have loosened - including a weaker USD. Implied rates are picking up however, but more so as a broader sell off in fixed income. 10yr Notes are still expected to hold inside 2.00-3.00%, but the Fed seem to be in no hurry to push rates back into the middle of the range with focus on balance sheet reduction - now all but priced in. Room for disappointment then, but any material weakness in the USD from here will be limited - selectively so, with central banks elsewhere having pushed their tightening bias to their extremes for now. Case in point is the BoC, where the market is pricing in yet more rate hikes over the coming year or so - with another move anticipated for this year. We would need to see a little more data to conform to this view, and on Friday, the latest inflation reading is expected to rise from 1.2% to 1.5%, but more interesting here will be the core rate (currently 0.9%) given heightened levels of growth and economic expansion seen in the year so far. The CAD looks to be finding some resistance in the lower 1.2100's vs the USD, after 1.2000 was well protected in the week before last, and this was aided by the latest jobs report showing a larger shift back from full to part time employment. Sellers are still coming in above 1.2200, but we sense the larger moves have already played out here - pre 1.3800 to current levels - and the yield curve is now looking stretched with 10yr now back above 2.0%, but more significantly with 5yr at just over 1.8% to show a small premium to Treasuries. There looks to be little momentum left to push USD/CAD back to or through 1.2000 at this stage, so the risks lie to the upside in the initial part of the week. CAD/JPY however, has been pushing higher along with the rest of the JPY pairings, and the weekly chart suggests a move on 93.00 is on the cards. From here though, it will depend on the broader risk mood, having cited the stretch in yields, and this should also limit the USD/JPY move higher, which has now taken out 111.00 but which faces further obstruction into 112.00. USD/JPY has not been the best USD barometer of late, and in the context of JPY weakening in the face of ongoing geopolitical risk and continuous warnings of valuation levels in stocks, we would look to the likes of EUR and CAD as a stronger gauge. Trade data in Japan next week, but we also have the BoJ meeting to look to, though little or no event risk on the latter as their policy stance is well ingrained into the market until inflation materially picks up. Another non event very likely. Over in Australia we get the RBA minutes on Tuesday, and we have seen in recent history that these can offer up a slightly different tone to the statement. Gov Lowe is speaking on Wednesday, and we know he is leaning towards a hike already, so it is now a matter of timing. No data to speak of, but in New Zealand we have the Q2 GDP numbers on Wednesday, with a 0.8% rise seen on the quarter after getting 0.5% in Q1. This should be enough to steady the NZD rate vs the USD in the mid 0.7200's, but as with the AUD, direction is going to be determined largely by the USD, while AUD/NZD flow on the upside has run out of steam with 1.1200 a target which was not quite achieved. Lighter positioning sees focus elsewhere, but at some stage we expect the tightening bias among the central banks in the advanced economies looking for some catch up from the RBA and RBNZ, so these 2 higher yielders may sleeping 'giants' for now. In Norway, the Norges bank also meet next week - Thursday - and having focused on the pick up in capacity utilisation, may now re-avert their attentions on inflation, which retraced sharply last week. USD/NOK has formed a base into 7.7000, so this may well see a move back through 8.000 at some stage, aligned with USD/SEK which has bottomed ahead of 7.9000 with comments from the Riksbank calling for some moderation in SEK gains in the current climate.
In its latest annual summary published at the end of June, the IIF found that total nominal global debt had risen to a new all time high of $217 trillion, or 327% of global GDP... ... largely as a result of an unprecedented increase in emerging market leverage. While the continued growth in debt in zero interest rate world is hardly surprising, what was notable is that debt within the developed world appeared to have peaked, if not declined modestly in the latest 5 year period. However, it now appears that contrary to previous speculation of potential deleveraging among EM nations, not only was this conclusion incorrect, but that developed nations had been stealthily piling on just as much debt, only largely hidden from the public eye, in the form of swaps and forwards. According to a just released analysts by the Bank of International Settlements, "FX swaps and forwards: missing global debt?" non-banks institutions outside the United States owe large sums of dollars off-balance sheet through instruments such as FX swaps and forwards. The BIS then calculates what balance sheets would look like if borrowing through such derivative instruments was recorded on-balance sheet, as functionally equivalent repo debt, and calculates that the total "is of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet dollar debt", potentially as much as $13-14 trillion. * * * The BIS then provides substantial background data on who, where and how uses FX swaps (as both a lender and borrower), as well as where this "missing debt" can be found when looking away from the balance sheet. Here are the details: Every day, trillions of dollars are borrowed and lent in various currencies. Many deals take place in the cash market, through loans and securities. But foreign exchange (FX) derivatives, mainly FX swaps, currency swaps and the closely related forwards, also create debt-like obligations. For the US dollar alone, contracts worth tens of trillions of dollars stand open and trillions change hands daily. And yet one cannot find these amounts on balance sheets. This debt is, in effect, missing. As a result, we know little about it. How much is owed, by whom and for what purpose: trade hedging, asset-liability management, market-making? What does it imply for measures of international credit like the BIS global liquidity indicators (GLIs)? Answers to these questions can inform assessments of global financing conditions and financial stability. For instance, serious strains seized the FX swap market during the Great Financial Crisis (GFC). In response, central banks had to replace lost dollar funding that financed dollar assets. This special feature frames the issues and suggests some answers. To do so, it breaks ground in combining data on the aggregate amount of outstanding derivatives contracts (from the BIS derivatives statistics) with information from the international banking statistics and from ad hoc surveys to form a view of the size, geography and use of the missing foreign currency debt. The more detailed analysis focuses on the dollar segment, given the currency's outsize role in the foreign exchange and other financial markets. The debt remains obscured from view. Accounting conventions leave it mostly off-balance sheet, as a derivative, even though it is in effect a secured loan with principal to be repaid in full at maturity. Only footnotes to the accounts report it. To be sure, the main reason to resort to derivatives such as swaps and forwards is precisely to keep it as obscure and hidden from the public eye as possible. Further complicating matters is the ongoing debate of just what happens when gross derivative notional collapses to net, and just where the liability resides. What is publicly known and disclosed largely remains in the domain of gross notionals; the BIS summarizes it as follows: The outstanding amounts of FX swaps/forwards and currency swaps stood at $58 trillion at end-December 2016 (Graph 1, left-hand panel). For perspective, this figure approaches that of world GDP ($75 trillion), exceeds that of global portfolio stocks ($44 trillion) or international bank claims ($32 trillion), and is almost triple the value of global trade ($21 trillion). The outstanding amount has quadrupled since the early 2000s but has grown unevenly (Graph 1, left-hand panel). After tripling in the five years to 2007, it fell back sharply during the GFC, even more than international bank credit. This most likely reflected a reduction in hedging needs, as both trade and asset prices collapsed. Another problem with such debt-masking derivatives is that they are largely short-term in nature, a problem which violently emerged during the Global Financial Crisis when an overnight freeze in shadow banking and other non-bank lending conduits effectively resulted in a liquidity crunch for many of the world's largest financial institutions, forcing central banks around the globe to step in and provide trillions in short-term funding. The maturity of the instruments is largely short-term (Graph 1, centre and right-hand panel). At end-2016, three quarters of positions had a maturity of less than one year and only a few percentage points exceeded five years. Turnover data show that the modal forward (a customer-facing instrument) matures between one week and one year while the modal swap (an inter-dealer instrument) within a week (BIS (2016)). The long-term share has risen since the 2000s, as capital markets have boomed. In terms of currency distribution, it's all about the US dollar, or as the BIS puts it, "the dollar reigns supreme in FX swaps and forwards. Its share is no less than 90% (Graph 2), and 96% among dealers (Table 1)." Both exceed its share in denominating global trade (about half) or in holdings of official FX reserves (two thirds). In fact, the dollar is the main currency in swaps/forwards against every currency. For instance, it predominates in forwards in the Norwegian krone, the Swedish krona and the Polish zloty, currencies that trade in the spot market more against the euro With north of $50 trillion in total notional FX derivatives, it is hardly surprising that the daily trading volumes are massive: while outstanding amounts lump FX swaps with forwards, turnover data show that FX swaps are the instrument of choice. Swaps/forwards and currency swaps amounted to over $3 trillion per day in 2016, over 60% of total FX turnover. Of that, FX swaps accounted for three quarters, forwards for 22% and currency swaps for the rest. The next question is who are the counterparties reliant on such FX exposure. According to the BIS, the counterparty breakdown of outstanding amounts provides a big-picture indication of obligors and, indirectly, uses (Table 1). Reporting dealer positions vis-à-vis customers amount to $33 trillion, or over half (57%) of the total; the rest, $25 trillion, are positions among reporting institutions themselves ("inter-dealer"). This large share is a trademark of decentralised, over-the-counter (OTC) markets. Non-dealer financial firms bulk large among customers, with a share of about 80%. A further breakdown of the client base reveals widespread usage among both non-financial, non-bank financial as well as bank entities. A quick summary of each category, as well as their principal considerations: Non-financial customers: international trade and liability hedging. Apart from speculative use, the non-financial sector employs FX forwards and currency swaps to hedge international trade and foreign currency bonds, notably those issued to cheapen funding costs. Since most international trade contracts are short-term, forwards serve as hedges. One can relate non-financial FX swaps/forwards and currency swaps, in an admittedly stylised fashion, to international trade and bond issuance, respectively. If firms use $5.1 trillion of short-term FX forwards to hedge global trade of $21 trillion, then the ratio implies that importers and exporters hedge at most three months' trade. Similarly, if firms and governments use $2.4 trillion of currency swaps to hedge $4.8 trillion of international bonds, then they hedge half or less. Non-bank financial customers: hedging assets and liabilities. Other non-bank financial firms come in two groups. The first comprises institutional investors, asset managers and hedge funds that use FX forwards to hedge their holdings and to take positions. The second includes non-bank financial firms that use currency swaps to hedge their FX bonds. A quick look at the two groups: institutional investors and asset managers use outright forwards (90% and 69%, respectively), followed by FX swaps (48% and 33%) and, to a lesser extent, currency swaps (37% and 19%). Hedge ratios vary by asset class. Those for foreign currency bonds range from 50 to 100%; those for foreign equities 20 to 60%. Heavy use of FX forwards widens maturity mismatches. The $6.6 trillion in currency swaps that non-bank financial firms have contracted stand at almost 80% of their outstanding international debt securities. Banks: FX swaps were a key part of non-US banks' total US dollar funding, amounting to an estimated $0.6 trillion, roughly 6% of the total in March 2017. The rest, about $9.4 trillion, mostly took the form of deposits from US and non-US non-banks (red and blue areas), and dollar debt securities (yellow area). Drilling down into the last category, which is of most relevance for the topic of "masking" debt exposure, the BIS writes that banking systems can be sorted into US dollar net borrowers and lenders via FX swaps (Graphs 5 and 6). As noted, net borrowers' balance sheets show more dollar assets than liabilities, offset by missing off-balance sheet dollar debt. Net borrower banks use these dollars, along with those from FX reserve managers (red lines), to fund claims on non-banks (green lines) and other banks (solid and dashed blue lines). Based on the chart above: Japanese banks had by far the largest on-balance sheet mismatch in dollar positions at end-Q1 2017 (top right-hand panel). They were net borrowers of an estimated $1 trillion via FX swaps.Borio et al (2016) argue that constraints on global banks' balance sheets, combined with increasing demand for cross-currency funding by Japanese banks, pension funds and other non-bank financial entities, led the yen/dollar basis to widen after 2014. Several large European banking systems also draw dollars from the FX swap market to fund their international dollar positions (top centre panel). Pre-GFC, German, Dutch, UK and Swiss banks, in particular, had funded their growing dollar books via interbank loans (blue lines) and FX swaps (shaded area). The meltdown in dollar-denominated structured products during the crisis caused funding markets to seize up and banks to scramble for dollars. Markets calmed only after coordinated central bank swap lines to supply dollars to non-US banks became unlimited in October 2008. Post-GFC, these European banks' aggregate dollar borrowing via FX swaps declined, along with the size of their dollar assets. In particular, German, Swiss and UK banks reduced their combined reliance on FX swaps from $580 billion in 2007 to less than $130 billion by end-Q1 2017. Australian banks (bottom left-hand panel), have relied on direct dollar interbank and bond borrowing (blue line) to fund mostly Australian dollar investments at home, and with an estimated $200 billion in FX swaps hedging the currency risk. Selected European and non-European banking systems add almost $300 billion to this total. To summarize, non-US banks' net dollar lending through the FX swap market falls short of their net borrowing, with the gap widening over time (Graph 6, right-hand panel); dollar borrowing against other major currencies, like the yen and the euro (left-hand panel), exceeds dollar lending against secondary and emerging market currencies (centre panel). * * * Now that we know the borrowers, who are the lenders to non-US banks vis FX swaps? Four candidates are: US banks, central banks, European agencies and supranational organisations, and private non-banks. All of these appear to provide some funding, with US banks and central banks together closing about half the gap. As regards the first candidate, US banks naturally lend dollars via FX swaps: $150 billion in the latest data. This figure combines positions from offices outside and inside the United States. Second, central banks lend dollars via FX swaps against either their own currency or third currencies. Against their own currency, some Asian central banks provide about $200 billion in swaps as they manage the domestic liquidity consequences of FX reserve accumulation (Graph 8, left-hand panel). They first buy dollars spot (increase their FX reserves) and then drain domestic liquidity by swapping (lending) the dollars for (against) domestic currency. On net, however, central banks' dollar supply against their own currencies is close to zero, since other central banks are actually borrowing dollars via FX swaps. They do so in order to finance their accumulation of FX reserves without incurring currency risk ("borrowed reserves"). Against foreign currencies, some central banks lend dollars via swaps in the management of their FX reserve portfolio. For instance, the Reserve Bank of Australia swaps US dollars for yen (Debelle (2017)). We estimate that such operations by reserve managers sum to at least $300 billion Third, European supranationals and agencies have opportunistically borrowed dollars to swap into euros to lower their funding costs. While their operations mostly require euros, they have done so to take advantage of the breakdown in covered interest parity. Five European supranationals and agencies together had over $400 billion in dollar debt in June 2017. These alone have provided $300 billion in swaps against the euro. Fourth, non-bank private sector entities can provide hundreds of billions of dollars. Like US banks, US-based asset managers are obvious candidates. In June 2014, the then largest US bond fund, PIMCO's Total Return Fund, reported $101 billion in currency forwards, no less than 45% of its net assets. Since the overall US holdings of foreign currency bonds were $600 billion at end-2015, a 50% hedge ratio would extrapolate to $300 billion. On the equity side, US investors' hedge ratios are thought to be 40-50% for advanced economy equities. In addition, US firms that hold cash in offshore affiliates to avoid US corporate tax on repatriated earnings could be sizeable lenders as well. * * * Putting the above together, the BIS calculates that according to its estimates of "on-balance sheet" dollar debt equivalents of non-banks outside the United State, such cash market obligations, both bank loans and bonds, totalled $10.7 trillion at end-March 2017. The BIS then calculates the corresponding additional debt borrowed through the FX derivatives markets, i.e. "off balance sheet": it finds the answer to be in a similar magnitude: "the missing debt amounts to some $13-14 trillion." Here's the calculation: First, the BIS OTC derivatives statistics report total dollar-denominated forwards and swaps outstanding vis-à-vis customers (our proxy for non-banks) of $28 trillion (in parentheses in Table 1). Second, we need to make an assumption about the direction of non-banks' positions. We could assume that the amount of dollars lent and borrowed through derivatives by customers is matched. This would require reporting dealers, as a sector, to be also balanced: data slippage aside, customers and dealers make up the whole market. If so, to obtain the total amount of non-banks' gross dollar borrowing through FX forwards, one would divide by two. This gives $14 trillion. The previous section, however, suggested that banks as a whole use the market for net dollar borrowing. If so, one could subtract that amount from the total before dividing. Even then, an upper estimate of the banks' net position would be, say, $2 trillion. This would imply (after dividing the remaining amount by two) a lower amount of non-bank dollar borrowing of $13 trillion. Finally, we need to estimate the fraction of that debt held by non-US residents. If US residents use the bulk of their derivatives for hedging purposes, the amount would be small. Why is this number important? The BIS' Claudio Borio writes that "regardless of whether the off-balance sheet debt is currency-matched or not, it has to be repaid when due and this can raise risk. To be sure, such risk is mitigated by the other currency received at maturity. Most maturing dollar forwards are probably repaid by a new swap of the currency received for the needed dollars. This new swap rolls the forward over, borrowing dollars to repay dollars." In other words, the bucket can be kicked indefinitely... unless there is a sharp discontinuity in the value of the dollar, such as what happened during the 2008 financial crisis, forcing the Fed to become a US dollar provider, both on and off balance sheet, of last resort, to avoid a collapse of the financial system which effectively has a massive, multi-trillion dollar bet on its books at any given moment. Borio confirms as much in the following paragraph: Even so, strains can arise. In particular, the short maturity of most FX swaps and forwards can create big maturity mismatches and hence generate large liquidity demands, especially during times of stress. Most spectacular was the funding squeeze suffered by many European banks during the GFC. Indeed, in response, the Swedish bank supervisor has applied liquidity requirements separately to banks' dollar and euro positions (Jönsson (2014)). But non-banks may also face similar problems when they run such mismatches, both on- and off-balance sheet. During the GFC, central banks extraordinarily extended dollar credit to non-banks in Brazil ($10 billion programme) and Russia ($50 billion). Moreover, even sound institutional investors may face difficulties. If they have trouble rolling over their hedges because of problems among dealers, they could be forced into fire sales, Going back to the core point of the article, namely the ability of financial and non-bank entities to transform trillions in dollar obligations from on to off-balance sheet debt, in the process obfuscate funding needs and risk exposure, the BIS concludes as follows: Obligations to pay dollars incurred through FX swaps/forwards and currency swaps are functionally equivalent to secured debt. In contrast to other derivatives, agents must repay the principal at maturity, not just the replacement value of the position. Moreover, they could replicate those positions through transactions in the cash and securities markets that would show up on-balance sheet. But because of accounting conventions, this debt does not appear on the balance sheet: it has gone missing. This is a major problem for the regulator of global central banks which admits that this attempt to mask exposure, "greatly complicates any assessment of the missing debt's total amount and distribution, and hence of its implications for financial stability." While the BIS concedes that much more analysis will be necessary before making definitive policy recommendations, the implicit message is that the next time a USD funding crisis strikes, in addition to the trillions in dollar exposure already known, the world will be faced with a USD shortfall potentially as great as $14 trillion. All that would be needed is a sharp repricing in the US dollar, which in turn would likely be catalyzed by another financial crisis. The result would be another central bank firedrill, in which the Fed will have to double down on its emergency global bailout last observed in the days after the Lehman failure, and which we descibed in October 2009 in "How The Federal Reserve Bailed Out The World". The only difference is that next time, the total dollar injection required will be far, far greater...
In what may have been a watershed moment in monetary policy - which awkwardly was missed by almost everyone as a result of the concurrent launch of the latest North Korean ballistic missile which immediately drowned out all other newsflow - late on Thursday, the Bank of Canada held a conference on inflation targeting and monetary policy titled "Bank of Canada Workshop “Monetary Policy Framework Issues: Toward the 2021 Inflation-Target Renewal" in which, in a stunning shift of monetary orthodoxy, BoC Senior Deputy Governor Carolyn A. Wilkins said that Canada was open to changes in the BoC mandate. WILKINS: OPEN TO LOOKING AT `SENSIBLE' ALTERNATIVES TO MANDATE Or in other words, lowering or outright abolishing the central bank's inflation target, or explicitly targeting financial conditions and asset prices. While still early in the process, the BOC may be setting a precedent, one which other DM central banks may have no choice but to follow: If the Bank of Canada is going to look at alternatives to their mandate (with an emphasis on inflation), it - as several trading desks have suggested - could become the first central bank to officially change its mandate to reflect financial conditions that are too loose in the context of the current low r-star lowflation environment. In practical terms, this would mean that instead of seeking chronically easier conditions to hit legacy inflation targets around ~2.0% while inflating ever greater asset bubbles, one or more central banks could simply say that 1.5% (or less) is sufficient for CPI and call it a day, in the process soaking up record easy financial conditions and bursting countless asset bubbles. In the context of a "new supply paradigm" in retail (where even FOMC members now blame Amazon for lack of inflation) and energy (same but with OPEC) which appears to be gaining traction within central banks, as well as frustration with distortion in asset markets, It would make much sense for the Fed to lower the inflation target to 1.5%, declare victory, and normalize policy. Why? Because as several banks noted after the BoC conference, we know that central banks world-wide are concerned about the size of their balance sheets and associated dysfunctionality in government and other bond markets, and the ever-increasing risks from the ultimate unwind as the QE programs continue to grow in a war against inflation where the victory looks increasingly Pyrrhic. Furthermore, negative rates have caused money markets to become dysfunctional and less efficient, which could be a structural issue "if the temporary was allowed to become permanent." What is shocking is that this revolutionary reversal comes just one year after mainstream monetarist dogma was that the solution to stagnant growth was to flood the world with virtually unlimited liquidity, unleashing NIRP across the entire world and even launching helicopter money, in order to protect "lowflation." One year later, central bankers appear to have made a remarkable, and still largely inexplicable U-turn. To be sure, it did not start with the Bank of Canada: last week NY Fed president Bill Dudley hinted the Fed could lower the inflation target. As a result, we are now in a situation where many central banks are looking to declare victory and walk off the field, before the unintended consequences of monetary policy kick-in for financial stability. This will lead to greater policy divergence between the likes of the BoC and BoE, Fed, ECB and the BoJ and RBA, but ultimately policies will once again reconverge as more central banks follow in the BOC's footsteps. . Then there is the issue of pervasive market froth and countless asset bubbles, which G-6 central banks are well aware of: with a US real 5y rate at 3bps, credit spreads at very tight levels relative to historic cycles, and elevated equity markets, financial conditions are very loose at a time of full employment and cyclical acceleration. Just a few days ago, Fathom Consulting said that there is now a "bubble in everything except housing." Following the BOC's trial balloon, expect similar arguments on revising central bank mandates and changing inflation targets to gather strength in coming months, and be espoused by increasingly more central bankers. It will mean the first fixed income markets will start to re-price accordingly, followed shortly by equities. Ironically, of course, if central banks finally did decide to lower the inflation target at a time of global cyclical acceleration, and the new supply paradigm proved to be an illusion (i.e. a one-off adjustment rather than a permanent factor), the consequences for fixed income would be catastrophic, with the long end being under particular threat, while risk assets would crash. Indeed, the threat of an equity crash is the only potential hurdle for central banks to go fully public with the new "mandate revision." In any case, keep an eye on what central bankers say and do in the coming weeks. As Citi summarizes, "we've had a decade of twists and QEs and negative rates and the potential accommodation removal is quicker than asset market prices are currently reflecting. Assets will wait to see the whites of the central bank rates' eyes now. That's a real twist!"
For the first day in three S&P futures have pulled back modestly from record levels as some investors cautioned that gains had gone too far, too fast, European shares are mixed while Asian equities extended their longest rising streak in almost two months as continued gains in Japan and India offset the losses in Hong Kong. The dollar ended a two-day advance as TSY yields dropped in what has become a close correlation trade (see below) while oil and gold rose, perhaps in response to the ongoing plunge in bitcoin. Following yesterday's main, and largely disappointing events - the unveiling of the new iPhone(s) - European shares have faltered as a global equity rally showed signs of flagging, with Apple suppliers struggling after the new iPhone release disappointed with a later than expected shipping date. Chipmakers supplying to Apple were among the worst performers, with AMS down 3.9 percent, while Dialog Semiconductor slipped 1.7 percent and STMicro fell 1.1 percent. Traders said their shares were under pressure due to Apple’s new $999 iPhone X shipping later than expected, on November 3. The price tag could also dent demand for the device in markets such as China. “With the iPhone coming in around $1,000 it will be interesting to see how healthy demand is,” said Mike Bell, global market strategist at JP Morgan Asset Management. “If it’s relatively healthy I think it shows that there is still quite a lot of pricing power for U.S. companies and that consumers have confidence.” Bloomberg writes this morning that record stock prices are provoking concern in some corners of the market, with the number of investors seeking protection from a possible plunge jumping. Leon Cooperman, the billionaire founder of hedge fund Omega Advisors, says a correction could start “very soon.” The imminent reduction of bond purchases by central banks in coming months will put pressure on riskier assets including high-yield bonds and equities, according to Citigroup Inc. According to the latest BofA FMS report, the last month saw the largest jump in market participants "taking out protection" in 14 months. “Central banks will tread carefully and the direct impact of global tapering on the real economy will likely be modest,” Citigroup economists led by Ebrahim Rahbari wrote in a report. “But there is a material risk in our view that major asset price corrections could be triggered by this global tapering,” with U.S. high-yield corporate debt, euro-region periphery sovereign bonds, euro-area corporate bonds, global equities and emerging-market assets most at risk, they wrote. Furthermore, geopolitical concerns also remain after North Korea said it will accelerate its plans to acquire a nuclear weapon that can strike the U.S. homeland in its first response to fresh United Nations sanctions. Earlier, Treasury Secretary Steven Mnuchin warned the U.S. may impose additional sanctions on China -- potentially cutting off access to the American financial system -- if it doesn’t follow through on the new UN restrictions With all that, Europe's Stoxx 600 index headed for the first drop in six days after U.S. benchmarks and the MSCI All-Country World Index closed at all-time highs a day earlier. Miners led the decline as the price of industrial metals including copper and nickel retreated. The MSCI Asia Pacific Index advanced 0.1% with basic materials and consumer discretionary shares rising the most among industry groups. Hong Kong’s Hang Seng Index fell 0.3 percent, while the Shanghai Composite Index fluctuated before adding 0.1 percent. The Topix index rose 0.6 percent at the close in Tokyo. Australia’s S&P/ASX 200 Index was little changed and the Kospi index in Seoul finished the session 0.2 percent lower. Among Apple suppliers, Hon Hai Precision Industry Co. and Pegatron fell, weighing on the Taiex index, which was down 0.7 percent. AAC Technologies Holdings Inc. in Hong Kong also declined. Apple slid along with some of its biggest suppliers on Tuesday. Japan’s Topix climbed for a third day as investors focused on the local currency’s decline. India’s benchmark S&P BSE Sensex rose to a five-week high, led by the country’s most-valued company Reliance Industries Ltd. Hong Kong’s Hang Seng Index declined after nearing the key resistance level of 28,000. “Positive overnight leads support Asian markets to seek continued upside in the day, though we may witness more caution within the region,” Jingyi Pan, a market strategist at IG Asia Pte Ltd, wrote in an note In FX, the overnight session was dominated by a sharp reversal in the pound, with U.K. wages coming in weaker than expected underscored the dilemma facing Bank of England policy makers meeting on Thursday to review interest rates. Meanwhile the theme of inflation uptrend is intact across Europe, with CPI prints in Germany and Spain matching estimates; dollar bulls turn cautious, take some money off the table as market attention turns to U.S. CPI data on Thursday, while Canadian dollar advances as WTI crude rises for a third day; Treasuries and core euro-area bonds trade steady, with brief pressure on bund futures heading into auction supply window. In rates, the yield on 10-year Treasuries fell one basis point to 2.16 percent. Germany’s 10-year yield decreased one basis point to 0.39 percent. Britain’s 10-year yield dipped two basis points to 1.087 percent. West Texas Intermediate crude extended an advance after the International Energy Agency said global oil demand will climb this year by the most since 2015. Gold climbed 0.1 percent to $1,332.60 an ounce. Copper declined 1.6 percent to $2.99 a pound, the lowest in more than three weeks. The Bloomberg Commodity Index fell less than 0.05 percent to 84.79. Economic data include MBA mortgage applications, PPI and oil inventories. Cracker Barrel and United Natural are reporting earnings Market Snapshot S&P 500 futures down 0.1% to 2,493.00 STOXX Europe 600 down 0.3% to 380.43 MSCI Asia up 0.2% to 163.07 MSCI Asia ex Japan down 0.08% to 539.04 Nikkei up 0.5% to 19,865.82 Topix up 0.6% to 1,637.33 Hang Seng Index down 0.3% to 27,894.08 Shanghai Composite up 0.1% to 3,384.15 Sensex up 0.5% to 32,328.75 Australia S&P/ASX 200 down 0.04% to 5,744.26 Kospi down 0.2% to 2,360.18 German 10Y yield fell 1.3 bps to 0.388% Euro up 0.2% to $1.1986 Italian 10Y yield rose 5.6 bps to 1.733% Spanish 10Y yield fell 0.9 bps to 1.593% Brent futures up 0.5% to $54.56/bbl Gold spot up 0.1% to $1,333.08 U.S. Dollar Index little changed at 91.84 Top Overnight News Secretary of State Rex Tillerson is consulting U.S. allies in Europe as he seeks a way to toughen restrictions on Iran’s nuclear program a month before President Trump faces a deadline to decide whether to walk away from what he’s called “the worst deal ever” Germany’s August harmonized CPI remained unchanged at 1.8% in the final print, in line with estimates; Spain August CPI final reading matches forecast In its first official response to new United Nations sanctions, North Korea said it will accelerate its plans to acquire a nuclear weapon that can strike the U.S. homeland North Korea’s latest nuclear test may have been more than twice as powerful as first thought, according to an analysis by 38 North Merkel’s bloc gets 37% support, the lowest for 4 months, in Forsa poll Tuesday’s protests across France won’t deter the government from pushing through its plan to loosen the country’s labor law, Prime Minister Edouard Philippe said U.K. Prime Minister Theresa May is in a double bind as she tries to navigate the politics of Brexit while keeping businesses on side: even when she thinks she’s giving companies what they want, they say she’s made it worse Seadrill Ltd., the offshore driller controlled by billionaire John Fredriksen, filed for bankruptcy protection after working out a deal with almost all its senior lenders to inject $1 billion of new money into the company Nordstrom family is said to be close to selecting private equity firm Leonard Green & Partners to help fund a buyout of the company, CNBC says OPEC and its allies are discussing extending by more than three months the oil production cuts that expire in March 2018, potentially prolonging them well into the second half of next year in an effort to boost prices North Korea rejected the latest round of United Nations sanctions on the isolated state, and vowed to accelerate its plans to acquire a nuclear weapon that can strike the U.S. homeland Vikram Pandit, who ran Citigroup Inc. during the financial crisis, said developments in technology could see some 30 percent of banking jobs disappearing in the next five years Denmark faces negative rates until 2020, central bank study says Toshiba Signs Memo With Bain, Struggles to Sell Chip Unit Bain Is Said to Gather $9.4 Billion for New Fund, Topping Target UBS’s Orcel Sees Rocky 2018 For Banks’ Profit as MiFID Kicks In Oil Trades Near $48 as IEA Sees Fastest Demand Growth in 2 Years Bayer Sells $1.4 Billion of Covestro on Path to Separation Trump Premium Gone From U.S. Banks Brings Opportunities: Goldman Pandit Sees 30% of Banking Jobs Disappearing in Next Five Years Deutsche Bank Said to Pledge Cap on U.S. Use of German Deposits Asia equity markets traded mixed as the momentum from Wall St. was counterbalanced by weakness in Apple suppliers following the tech giant’s product event. ASX 200 (+0.1%) and Nikkei 225 (+0.5%) gained at the open after a trifecta of record closes for the S&P 500, DJIA and Nasdaq, with strength in commodity names and financials leading the upside in Australia. Shanghai Comp. (- 0.1%) and Hang Seng (-0.3%) were subdued with underperformance in the Hong Kong benchmark on a continued pull-back from the 28,000 level, while disappointment was also seen across the Apple supply chain after the tech giant’s product announcement. 10yr JGBs were lower as positive risk appetite prevailed in Japan, although downside was stemmed amid the BoJ's presence in the market for just below JPY 1tln of JGBs in 1yr-10yr maturity range. PBOC injected CNY 30bln via 7-day reverse repos, CNY 20bln via 14-day reverse repos and CNY 20bln via 28-day reverse repos. PBoC set CNY mid-point at 6.5382 (Prev. 6.5277) Top Asian News Record Flows to Bearish ETF Shows Taiwan Equities Skepticism RBA’s Harper Says Growth Too Slow to Justify Rate Increase Baring Private Equity Is Said to Restart Sale of SAI Assurance Coal Stocks Lead Declines by Indonesian Miners on Price Concerns Topix Index Posts Biggest Three-Day Gain Since May on Tech Rally Offshore Yuan Interbank Costs Surge as Banks Seen Hoarding Cash Banker Fees on Japan Post Deal Are Said to Top Tobacco Sale Equity markets trade mixed in Europe, as the FTSE behaves as one of the noticeable underperformers, as both the 100 and 250 struggle amid the pound’s strength yesterday. Sectors see materials underperform, with Glencore and Rio Tinto suffering despite an article from the FT noting market speculation that the two companies merger plans may be revived. The Bund auction will highlight issuance today; the market holds steady as we approach the bidding deadline. However, Portugal and Italy have seen some selling before their respective auctions. Price action has been seen in the UK, as Gilts did see a slight bid ahead of the BoE meeting Thursday, as a result of the marginal miss in the aforementioned UK jobs figures. The UK sold GBP 2.5bln 1.25% in its 2027 Gilt Auction at an average yield 1.161%, b/c 2.25 (Prev. b/c 2.56) and tail 0.2bps Germany sold EUR 2.446bln vs. Exp. EUR 3bln 0.5% 2027 Bund Auction with a b/c 1.6 (Prev. 1.27), average yield 0.39% (Prev. 0.41%) and retention of 18.5% (Prev. 19%) Top European News Merkel Is Said to Want Schaeuble to Keep His Job After Election Novo Sees Earlier China Launch for Diabetes Drug Amid Epidemic Denmark Faces Negative Rates Until 2020, Central Bank Study Says Richemont’s European Sales Disappoint as Asia Races Ahead Swatch Falls After Apple Shows LTE-Enabled Watch In currencies, a nticipation was on the 9.30 UK earnings figures, with slight misses seen in both the average earnings issues. GBP has been thenoticeable mover for the morning, cable still resides around recent highs, as all eyes now move to the BoE tomorrow. The lack of safe-haven flows has continued, with the unwinding of recent positions being the theme of the week. Despite Twitter source comments overnight reporting satellites detected new activity in alternate North Korea tunnel portal areas, suggesting preparations for future underground nuclear tests; no reversal was seen in the risk tone. USD/JPY has continued to trade above 110.00, with the figure behaving as support overnight, bulls will be looking for a break of 110.60 to go on and test 111.00, however, we could see a retest of yesterday’s levels first. UOB are evident of this, placing a long limit order with an entry at 109.80. CHF pairs will be in focus this week with the SNB on Thursday, the mentioned dampening of geopolitical fears in the market have caused some franc selling this week; as USD/CHF looks to trade though 0.9620 and break the Aug 16th downward trendline resistance. EUR/CHF now looks towards August’s high at 1.1537, the bullish attacks could be supported by tone from the SNB tomorrow. ING FX expect the SNB to fan the flames of divergence between itself and the ECB, allowing the rate spreads to widen, one thing to watch tomorrow is if the SNB drop the adverb ‘significantly’ when referring to the strength of CHF. In commodities, OPEC commentary has once again fluttered into the market, resulting in a marginal bullish push in WTI and Brent crude futures. Bullish comments from the Kuwait oil minister stating that producers should comply with output cuts, were met by comments from Venezuela stating that OPEC and Non-OPEC are not close to a deal, yet did state that all options are open for an OPEC-Led supply cut pact.DOE raised 2018 crude outlook world oil demand growth to 1.69mln bpd (Prev. 1.61mln bpd). Qatar’s energy minister Al-Sada said that it is appropriate for OPEC to look at measures beyond March and that participating countries have been successful in implementing commitments. (Newswires) Venezuela President Maduro said Opec/Non-Opec output cuts are likely to extend until March next year. US Event Calendar 7am: MBA Mortgage Applications, prior 3.3% 8:30am: PPI Final Demand MoM, est. 0.3%, prior -0.1%; PPI Ex Food and Energy MoM, est. 0.2%, prior -0.1%. PPI Ex Food, Energy, Trade YoY, prior 1.9% PPI Ex Food, Energy, Trade MoM, est. 0.1%, prior 0.0%; PPI Ex Food and Energy YoY, est. 2.1%, prior 1.8% 2pm: Monthly Budget Statement, est. $119.0b deficit, prior $107.1b deficit DB's Jim Reid concludes the overnight wrap I never thought I'd say these words but man it's good to be back at work. The last two weeks have been wonderful and brutal in equal measures. The best bit has been taking nearly 2 year old Maisie to various clubs and classes. Although if I hear the Hokey Cokey again I'll go nuts. As for the twins (James and Eddie) they are doing well. Identification is tricky apart from the fact that Eddie is smaller as unbeknown to us the cord was wrapped around him in the womb and he stopped growing towards the end of the pregnancy. However he is feeding ok now and slowly starting to put on weight. However not as much as James who treats meal times as the bond market treats QE. In fact feeding is brutal, especially at night. With one baby and a hard working, breast feeding wife I'm ashamed to say you can hide a little bit. However with premature twins there is no hiding place. They feed a minimum of 8 times a day and each feed takes around 90 minutes when you include nappy changes, pass the parcelling, the initial feed, the bottle of previously expressed milk as a top up as they are too small and weak to naturally feed for very long, the burping and comforting, then the new round of expressing fresh milk and then finally the cleaning and sterilisation of all the expressing units and bottles for next time. If this goes well at best you can get 90 minutes sleep between feeds. However more often than not they don't settle and you need to hold them in your arms until they are so asleep they don't notice that you've put them back in their cot. Sometimes the feeds blend into each other. When in their cot whenever you put them down on their backs they naturally roll on their sides to cuddle each other. It is very sweet and we have many images that will take centre stage at their weddings in years to come. All I can say is being a mum to newborns requires a dedication that is astonishing to watch. More so with twins. Although having been ordered around for the last two weeks I'm looking forward to revenge so my team had better watch out today. So what did I miss? Well in my last EMR It was Jackson Hole, (very) elevated North Korean tensions and stress about the debt ceiling that was dominating markets. As it stands the fact that we have freshly agreed UN sanctions probably puts the ball back in the North Korean's court in so far as the risk of unilateral and immediate US action has thus been reduced. Clearly if NK provokes the situation it will become a live issue again but as it stands the US is highly unlikely to make the next move. At the same time the debt ceiling has obviously been pushed out and with the devastating hurricane perhaps causing less havoc than that feared before the weekend, markets continue to take some safe haven hedges off the table. Indeed 10 year USTs and Bunds have now climbed 14bp and 11bp off their intra-day lows from Friday (+4bp and +6bp yesterday). The bond market sell off received an extra push yesterday with the UK August inflation print which surprised on the upside. Headline inflation rose 0.6% mom (vs. 0.5% expected), but the bigger surprise was core inflation which increased 0.6% mom, lifting through-year inflation to 2.7% yoy (vs. 2.5% expected) – the highest reading since December 2011. Within the details, the inflation pick up was led by clothing and footwear (+4.6% yoy) and prices for household goods (+4.2% yoy). Elsewhere, the PPI and retail price index were also higher than expected, with PPI at 0.4% mom (vs. 0.1% expected) and RPI at 0.7% mom (vs. 0.5% expected). In response, Gilts were sold off with yields up 9bp to 1.132%, Sterling rallying 0.91% versus the Greenback and the chance of a rate hike next February rising from 44% to 61% (per the Bloomberg calculator). To be fair, other sovereign bond yields were also higher, in part driven by the improving risk sentiment. Core and peripheral bond yields increased 3-7bp across the maturities, with Bunds (2Y: +3bp; 10Y: +6bp), French OATs (2Y: +3bp; 10Y: +7bp), Italian BTPs (2Y: +3bp; 10Y: +6bp) and Portuguese (2Y: +3bp; 10Y: +5bp) yields all higher Elsewhere, US bond yields were modestly higher yesterday (2Y: +2bp; 10Y: +4bps), but have rallied 1bp this morning. Although the inflation print is not going to change the BOE policy rate tomorrow, it will be interesting to see how much of a hawkish tone we get. For those who may have missed it, DB’s Mark Wall has outlined his expectations for the BOE rate decision tomorrow. The team continues to expect the BoE to remain on hold until uncertainty about the Brexit transition diminishes, as too many aspects of the policy trade-off hinge on the outcome. For more details Continuing on the inflation theme, the Swedish inflation print for August wasn’t as weak as feared at -0.2% mom (vs. -0.3% expected) yesterday and later on today, we will get the US PPI reading where our team expect a 0.2% mom print at the core level, which will likely see annual inflation rise three-tenths to 2.1% yoy. All this before the main event of the week tomorrow namely the US’s August CPI inflation reading. Can we buck a trend that has seen US inflation undershoot expectations for 5 months? Now shifting to the very long term, Austria has just sold €3.5bn of 100 year debt in the largest European century bond sale to date. I'm prepared to predict that none of us reading this will be around to see the bond mature, but it’s worth noting that Austria only became an independent republic again 62 years ago (as the second republic). Investor demand was reportedly strong, with bids reaching €11bn. The deal was priced at a yield of 2.112%, which compares favourably to other recent similar maturity bonds, including: Belgium (€0.1bn bond at 2.057%), Ireland (€0.1bn at 2.116%), Mexico (€1.5bn at 4.21%) and Argentina (US$2.75bn at 7.19%). Moving on, this morning in Asia, markets are a little mixed but generally slightly higher as we go to print, with the Nikkei (+0.47%), ASX 200 (+0.25%), Kospi (+0.16%) leading the way but with the Hang Seng -0.46% and Chinese bourses only c.0.1% higher. US equity futures are pointing to a slightly softer start. This follows US bourses strengthening to another record high last night with the S&P +0.34% and both the Dow and Nasdaq up c.+0.3%. Within the S&P, only the utilities (-1.75%) and real estate sector were in the red, likely reflecting the higher bond yields, while gains were driven by the Telco and financials space. In Europe, the Stoxx 600 rose for the fifth consecutive day (+0.52%), which the longest streak since April. Across the region, the DAX (+0.40%), CAC (+0.62%) rose but the FTSE dipped 0.17% likely due to the strength in Sterling. Indeed turning to currencies, most of the action was with Sterling after being up 0.79% versus the Euro and +0.91% versus the USD and to a one year high which slightly eases the pain of buying the new iPhone X! Elsewhere, the US dollar index was marginally higher while the Euro/USD edged up 0.12%. In commodities, WTI oil was 0.33% higher following reports that OPEC producers may extend production cuts. Precious metals were slightly higher (Gold +0.32%; Silver +0.56%) and industrial metals also rose modestly with Copper (+0.42%), Zinc (+1.16%) and Aluminium (+2.70%). Away from the markets and onto the US tax reform. The messaging continues to be a little mixed. On the one hand Treasury Secretary Mnuchin recognized that “there is no question that the stock market has an expectation we are going to get tax reform done….and we are going to create significant growth…which is what this President and administration is focused on”. Further, he has also signalled that new tax rules could be backdated to January. However, in terms of finer details, Mnuchin echoed similar comments by House Speaker Ryan in that the corporate tax rate will be lower, but unlikely to be as low as the 15% originally envisaged by President Trump. Mnuchin said “I don’t know if we’ll be able to achieve that (15%) given budget issues, but we’re going to get this down to a very competitive level”. Circling back to Brexit. Negotiators have confirmed that next week’s scheduled Brexit talks have been postponed one week to 25 September, with the aim to give both sides more time to ensure they make progress when they reconvene. The delay adds credence to prior reports that PM Theresa May was preparing to make an “important intervention / speech” on the 21st to kick start the talks. Elsewhere, Chancellor Phillip Hammond noted that the UK is seeking a transitional deal which keeps the “status quo”, where the UK keep its access to the EU single market after it departs. Notably, with the Tory Party conference also due in early October, some form of circuit breaker to the talks is likely required to meet the tight deadlines for an EU summit in October. We shall find out soon. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the July JOLTS report showed the number of job vacancies rose to a new high of 6.17m (vs. 6m expected). Elsewhere, the NFIB small business confidence index remained upbeat and was above market at 105.3 (vs. 104.8 expected). Over in France, the 2Q total payrolls was a tad lower at 0.3% qoq (vs. 0.4% expected) and Italy’s 2Q unemployment rate came in at 11.2% (vs. 11.3% expected). Looking at the day ahead, the final reading on Germany’s August inflation will be out early in the morning (0.2% mom and 1.8% yoy expected). Then the Eurozone’s July IP and 2Q employment stats are due. Elsewhere, over in the UK, the ILO unemployment rate for July (4.4% expected), claimant count rate and jobless claims change stats are due. In the US, the PPI for August (2.1% yoy for core expected), monthly budget statement and MBA mortgage applications stats are also due. Onto other events, the EU Commission President Jean-Claude Juncker will deliver the state of the union address in France.
Yesterday morning, with the US closed for holiday but with S&P futures trading modestly lower on the latest set of North Korean geopolitical fears, we asked "is this time different", referencing last week's similar setup, when futures gapped lower on Monday after the Kim regime shot a missile over Japan, only to surge into the end of the week. Well, as of this morning, it seems that traders are eager to buy the latest dip, as US futures pared yesterday's losses before markets reopen after the Labor Day holiday, as global stocks looked to put any North Korean unpleasantries into the rear view mirror and assume another happy ending: Japanese shares fell fractionally overnight, but the decline was modest as yen gains appear to have stabilized, while Asia ex Japan was higher and Europe has already moved on with bourses on the continent glowing green ahead of Thursday’s ECB meeting. In a nutshell, North Korean risks remain just below the surface as U.S. markets reopen following long weekend. U.S. equity futures continue to remain in a tight range midway between Friday close and Globex reopening gap-lower precipitated by ICBM news from Korea. European equities open higher and rally further, led by German DAX, future closes Friday upside gap. Auto sector well supported after GM reports record Aug. China vehicle deliveries. Merck KGaA (+3.5%) also outperforms after divestment reports; energy stocks lifted as crude futures push through yesterday’s high. USD trades broadly flat, AUD marginally supported by comments RBA’s Lowe on continuing current policy. USD/JPY partially unwinds overnight risk-off move lower, TRY underperforms EMFX after political warning from Merkel. German curve slightly steeper with peripheral spreads tightening; USTs remain within yesterday’s range The biggest dip buyers so far emerged in Europe, where most industry sectors in the Stoxx Europe 600 Index gained as data from China to the euro area pointed to more growth for the global economy. Confirmation that euro zone business activity remained robust last month helped the pan-European STOXX 600 to claw back most of the 0.5 percent it lost on Monday amid international condemnation of the previous day’s nuclear test Meanwhile Asian markets were somewhat less euphoric: overnight China’s Caixin/Markit services PMI rose to 52.7 in August, the highest reading in three months. The market reaction to that was muted, however, with sentiment in Asian equity markets still subdued. Chinese bourses eked out small 0.2-0.3 percent gains but Seoul and Tokyo remained red. Speaking at a summit of the world’s biggest emerging economies in China, Russian President Vladimir Putin again warned that threatening military action against North Korea could trigger “a global catastrophe”. “Russia condemns North Korea’s exercises, we consider that they are a provocation ... (But) ramping up military hysteria will lead to nothing good,” he told reporters. More on the political front, overnight South Korea’s Asia Business Daily, citing an unidentified source, reported North Korea had been observed moving a rocket that appeared to be an intercontinental ballistic missile (ICBM) possibly in preparation for a launch. As with many political risk plays over the past couple of years, market moves suggested a reluctance to price in tail risks on every possible bad outcome and more of a focus on the prosaic but upbeat global economic picture. As we showed yesterday, it has taken markets roughly 31 days on average to "fill the gap" from all post-WWII geopolitical shocks, and this time appears to be no different. Which while understandable, is in some ways is odd, because the escalation from a potential nuclear war with North Korea shows no signs of abating: President Trump agreed to support billions of dollars in new weapons sales to South Korea after North Korea’s largest nuclear test, while the US ambassador to the United Nations, Nikki Haley said America would seek the strongest possible sanctions against Kim Jong Un’s regime. Tensions escalated after Asia Business Daily reported North Korea was preparing to fire an ICBM missile. In currencies, the early risk off tone has dampened in early European trade, as CHF and JPY have both lost ground against their main counterparts. The Dollar recovered from earlier losses as investors unwound shorts built on Monday as Treasuries pared gains while bunds fall, though still trade higher from Friday on persistent haven demand amid a report that North Korea is preparing to fire an intercontinental ballistic missile before Saturday. The RBA kept rates on hold, as expected at 1.5%, with markets fairly unfazed. Immediate slight depreciation was seen in the AUD, reacting to comments from the RBA stating that a rise in AUD would lead to slower economic growth than otherwise, however, the 20-pip fall was quickly retraced. 0.8 continues to behave as resistance in AUD/USD as the August high continues to hold. Yen gains were limited. Perhaps the biggest surprise was the tumble in the onshore yuan, which after a record long rise of more than two consecutive weeks, suffered its biggest drop since Feb. 7 as the greenback erased earlier losses and the PBOC set a weaker-than-expected fixing. The CNY slid 0.29% to 6.5502 per dollar as of early morning trading. The PBOC strengthened the yuan reference rate by 0.45% to 6.5370, however this was less than the average Bloomberg survey estimate of 6.5291. In rates, treasuries erased earlier gains and bunds slipped from the open as European stocks rose and German PMIs print stronger than forecast. The yield on 10-year Treasuries fell two basis points to 2.14 percent; Germany’s 10-year yield increased one basis point to 0.37 percent; Britain’s 10-year yield gained one basis point to 1.057 percent. In commodity markets, U.S. WTI oil prices edged higher, while U.S. gasoline prices slumped to pre-Hurricane Harvey levels, as oil refineries and pipelines in the U.S. Gulf Coast slowly resumed activity, easing supply concerns. WTI crude futures ticked up 0.2% to trade at $47.38 per barrel, though global benchmark Brent prices barely budged at $52.37. The reassuring China PMI data helped copper hit a three-year high in industrial metals markets, and nickel hovered near a 14-month peak. Meanwhile, bitcoin BTC=BTSP dropped further from Saturday's all-time high of $4,979.9 to trade at $4,012. China said on Monday it was banning the practice of raising funds through launches of token-based digital currencies, known as initial coin offerings (ICOs). Economic data include July factory orders, several Fed speakers are due. Companies reporting earnings include Hewlett Packard Enterprise and HealthEquity. Bulletin Headline Summary from RanSquawk Asian equities traded with little in the way of firm direction amid upbeat Chinese data and lingering geopolitical concerns RBA kept the Cash Rate Target unchanged as expected and noted slow income growth Looking ahead, highlights include: US factory orders, Fed’s Brainard, Kashkari and Kaplan Market Snapshot S&P 500 futures down 0.2% to 2,469.75 STOXX Europe 600 up 0.4% to 375.72 MSCI Asia down 0.1% to 160.04 MSCI ASia ex Japan up 0.2% to 530.88 Nikkei down 0.6% to 19,385.81 Topix down 0.8% to 1,590.71 Hang Seng Index unchanged at 27,741.35 Shanghai Composite up 0.1% to 3,384.32 Sensex up 0.2% to 31,772.63 Australia S&P/ASX 200 up 0.07% to 5,706.23 Kospi down 0.1% to 2,326.62 German 10Y yield rose 1.0 bps to 0.376% Euro down 0.1% to $1.1882 Italian 10Y yield fell 3.9 bps to 1.746% Spanish 10Y yield rose 0.4 bps to 1.553% Brent Futures up 0.1% to $52.40/bbl Gold spot down 0.3% to $1,330.41 U.S. Dollar Index up 0.04% to 92.68 Top Overnight News There is a high chance North Korea will fire an ICBM missile before the Sept. 9 foundation day after the Pyongyang regime started moving such a weapon, Asia Business Daily reported Tuesday, citing unidentified intelligence officials. Hurricane Irma has strengthened into a Category 4 storm as it approaches the Leeward Islands; reports from the Hurricane Hunter aircraft indicate that the maximum sustained winds have increased to near 140 mph (220 km/h) with higher gusts United Technologies Corp. agreed to buy Rockwell Collins Inc.for about $23 billion, creating an aerospace behemoth that can outfit jetliners and warplanes from tip to tail Prime Minister Theresa May is to use a speech on Sept. 21 to try to force the pace of Brexit negotiations as an October showdown with her European counterparts looms, EU Parliament Brexit coordinator Verhofstadt says Nafta: latest talks are nearing conclusion without a major breakthrough or agreements on even the least-contentious topics according to people familiar European Aug. Service PMIs: Spain 56.0 vs 57.0 est; Italy 55.1 vs 55.5 est; France 54.9 vs 55.5 est; Germany 53.5 vs 53.4 est; U.K. 53.2 vs 53.5 est. RBA’s Lowe: stimulatory policy continues to be appropriate; lower rates would have increased medium-term risks; an appreciating AUD would hit tourism Merkel: will press for EU to break off accession talks with Turkey Russian Energy Minister: extension of output cut deal is an option, have already discussed with Saudi Arabia but no decision yet China Aug. Caixin Services PMI: 52.7 vs 51.5 prev. Trump and Moon Agree to Show Muscle After North Korea Nuke; Trump Confronts Accelerating Russia Probes on Multiple Fronts Putin Rejects Sanctions as Ineffective Against North Korea; Putin Says Trump’s ‘Not My Bride,’ But Still Hopes for Detente Activist Fund Takes Stake in Millicom to Push M&A, Africa Exit Latest Nafta Talks Said to Near End Without Big Breakthrough Big Win Has U.S. Investors Wanting More From European Stocks September’s Bringing Tons of Catalysts to Shatter Market Calm Cellectis Cancer Trials Suspended by U.S. FDA After Fatality U.K. Minister Bradley Receives Regulator’s Response on Fox-Sky Google, Xiaomi Revive Stalled Android One Program for India Euro Area Poised for Fastest Economic Expansion in a Decade Asia equity markets traded with a mixed tone as the region mulled over encouraging Chinese PMI data and the lingering North Korea concerns. ASX 200 and Nikkei 225 both failed to sustain an early rebound and traded in mild negative territory, with financials weighing on Australia alongside ongoing money laundering issues at CBA which is the largest constituent in the index. Shanghai Comp. and Hang Seng traded choppy and struggled to maintain the early optimism from strong Chinese Caixin Services and Composite PMI data, as geopolitical woes remained at the forefront of attention and after the PBoC refrained from open market operations for a 4th consecutive occasion. Finally, 10yr JGBs were slightly weaker despite the cautious risk tone in Japan, as today’s 10yr JGB auction results showed weaker demand with b/c lower than prior while the tail in price also widened. Chinese Caixin Composite PMI (Aug) M/M 52.4 (Prev. 51.9) Chinese Caixin Services PMI (Aug) 52.7 vs. Exp. 51.8 (Prev. 51.5) Top Asian News Xi, Modi Seek Stable Ties After Worst Border Spat Since 1962 China’s Xi Sees Risks to Global Economy, Opposes Protectionism Modi’s 10 Million Jobs Challenge May Be Biggest Re- Election Risk Man Whose Gear Found VW Fraud Says Diesel’s Death Overstated Noble Group Expects to Find Buyer for Oil Business by End-Sept Noble Group’s Shareholders Approve Gas & Power Sale in SGM Vote Recruit, Japan Post Holdings to Be Added to Nikkei 225 European equity markets opened marginally higher this morning, as investors seemingly shrug off fears of a sell-off amid North Korean led geopolitical concerns. Equity specific news has been headlined by Aveva and Schneider Electric making the deadline with their tie-up, as the British Co. jumped 25%. Fixed Income markets have seen some slow and tentative selling, as peripheral spreads marginally tighten. The 10y Italy/ Germany spread has seen support at 165bps, with further support expected at 160. The Spain/ German 10 traded to 112bps last week, however has followed the tightening nature and now trades around 105bps. Corporate issuance has been a theme of the day, with GlaxoSmithKline announce a 3-part EUR deal and Disney naming banks for its 5y Eurodollar bond The UK's DMO have opened books to sell their 5% 2065 Gilt with guidance seen at +0.5-0.75bps to UKTs. Top European News Schneider to Take Control of U.K.’s Aveva in Software Merger Angry Birds Maker Plans IPO That May Value It at $2 Billion Merkel Says Diesel Needed as Bridge Technology to Electric Cars Merkel to Press EU Leaders on Ending Accession Talks With Turkey U.K. Economy Loses Steam as Services Weaken More Than Forecast Payments Firm Nets Hit by Sudden Selloff as M&A Talks Drag On GAM Holding Is Said to Pick New London Base After Brexit U-Turn Warhammer Maker Tops U.K. Stock Gains for 2017 as Profit Surges In currencies, the risk off tone has dampened in early European trade, as CHF and JPY have both lost ground against their main counterparts. NZD outperforms, as NZD/USD looks to break out from Septembers range, with Kiwi traders set to await the GTD auction later. The RBA kept rates on hold, as expected at 1.5%, with markets fairly unfazed. Immediate slight depreciation was seen in the AUD, reacting to comments from the RBA stating that a rise in AUD would lead to slower economic growth than otherwise, however, the 20-pip fall was quickly retraced. 0.8 continues to behave as resistance in AUD/USD as the August high continues to hold. In commodities, a marginal bid was seen in WTI and Crude futures, as September’s highs were broken. Elsewhere, the window for refiners in Asia to grow profits does, as opportunity is slowing in order to replace the production lost in the US amid Hurricane Harvey. OPEC news sees commentary from Iran, stating that OPEC members compliance with the agreement has improved in recent months, with the minister stating yesterday that unofficial talks were underway among the oil producing countries to extend their cuts next year. Iranian oil minister Zanagneh says that unofficial talks are underway to extend OPEC/non-OPEC production cut deal. OPEC Secretary General says OPEC will continue its ongoing efforts to ensure much needed stability in the oil market, to contribute to mitigating any disruption to current or future supply following Hurricane Harvey. Azerbaijan oil production for August stood at 734.8k bpd, according to the energy ministry. Looking at the day ahead, this morning the UK and Italy’s service and composite PMIs for August are due. Then there are final readings for the service and composite PMIs for the Eurozone, Germany and France. Elsewhere, the Eurozone’s retail sales and final readings for 2Q GDP are also due. Across the pond, factory orders for July and final readings for durable and capital goods orders will be released. Onto other events, the US congress returns from the August recess and Fed Governor Brainard, Minneapolis Fed President Kashkari and Dallas Fed President Kaplan will speak at separate functions. US Economic Data 10am: Factory Orders, est. -3.25%, prior 3.0%; Factory Orders Ex Trans, prior -0.2% 10am: Durable Goods Orders, est. 1.0%, prior -6.8%; Durables Ex Transportation, prior 0.5% 10am: Cap Goods Orders Nondef Ex Air, prior 0.4%; Cap Goods Ship Nondef Ex Air, prior 1.0% 7:30am: Fed’s Brainard Speaks on Economic Outlook and Monetary Policy 12:30pm: Fed’s Kashkari Speaks at University of Minnesota 1:10pm: Fed’s Kashkari Holds Townhall Event in Minneapolis 7pm: Fed’s Kaplan Speaks in Dallas DB's Jim Reid concludes the overnight wrap North Korea aside it was a slightly slow start to the week yesterday with the US out. In fact, when you see headlines about socialite Paris Hilton being the latest celeb to buy into crypto currencies then you know it’s been a quiet day. Away from the simple life, despite some acknowledgement that Sunday’s nuclear test by North Korea represented an escalation in terms of magnitude and show of force, the biggest reaction certainly for equities at least came at the open, before markets settled down into a bit of holding pattern for the rest of the session which is a consistent theme that we’ve seen after North Korea tensions flare up. After we went to print yesterday the news out of South Korea’s intelligence agency suggesting that North Korea might be in the process of preparing another intercontinental ballistic missile launch certainly turned a few heads though. Later on in the day we also heard from the US ambassador to the UN, Nikki Haley, who didn’t hold back by saying that Kim Jong-Un is “begging for war” and that “only the strongest sanctions will enable us to resolve this problem through diplomacy”. Haley also indicated that the US will now circle a draft of new sanctions which she has proposed a vote on in the UN Council on September 11th. Since then, late last night the White House released a statement saying that President Trump and South Korea President Moon “agreed to maximise pressure on North Korea using all means at their disposal”. Trump has also agreed for South Korea to buy “many billions of dollars’ worth of military equipment and weapons from the US”. In terms of the market reaction, the Stoxx 600 closed -0.52%, with only the energy sector finishing firmer. Across the region, the DAX fell -0.33%, FTSE 100 -0.36% and CAC -0.38%. At the other end of the risk spectrum, Gold (+0.66%) rose as high as $1,339.8/oz intraday which was the highest since September 2016, while the Yen and Swiss Franc ended the day +0.51% and +0.70% respectively. Bond markets were a smidgen firmer although again the moves were fairly modest all things considered. 10y Bunds ended 1bp lower at 0.362%, Gilts were broadly flat, but Italian BTPs and Spanish yields fell 3.6bps and 5.0bps respectively. This morning in Asia, markets are a bit more mixed with the Kospi (-0.27%), ASX 200 (-0.20%) and Nikkei (-0.67%) in the red but the Hang Seng (+0.23%) and Shanghai Comp (+0.20%) a smidgen higher. 10y Treasury yields have opened the week down over 3bps while US equity futures are about -0.32% lower. The remaining PMIs released in China this morning were broadly positive, with the services PMI at 52.7 in August (vs. 51.5 previously) and the composite PMI at 52.4 (vs. 51.9 previously). Elsewhere, the Nikkei Japan services PMI was a tad softer than last month at 51.6 (vs. 52.0 previously). So with the US back from Labour Day it also means that Congress returns from the August recess and with that, the debt ceiling debate will come back to the forefront. As we said yesterday, Treasury Secretary Steven Mnuchin noted that funding relief for Tropical Storm Harvey could be tied into lifting the debt ceiling which in theory would then lower the risks around a shutdown but at the same time this also shortens the timeline to reach an agreement. However, according to a House Republican aide overnight, the House of Representatives is expected to vote on Wednesday on a Hurricane Harvey relief bill that “will not” combine the bill with legislations seeking to raise the US debt ceiling. Elsewhere, the Republican Study Committee Caucus Chairman Walker said that “the debt ceiling should be paired with significant fiscal and structural reforms”. So we will have to wait and see. Notably, October bills are still telling a different story compared to the rest of the market so it’ll be interesting to see if there is much price action today in that part of the curve. Moving on. While there wasn’t much economic data released yesterday, we did get the latest weekly ECB CSPP holdings data. As of September 1st the ECB held €107.3bn which implies net purchases settled last week of €1.1bn. That marks an average daily run rate last week of €268m which compares to the €347m since the program started. The more interesting stat however was that the latest CSPP/PSPP ratio was 10.9% in the month of August which compares to 10.8%, 13.6%, 14.7% and 12.5% in previous months. So this shows that throughout Q2, CSPP was trimmed more than PSPP relative to pre-April flows. This could be explained by the relative liquidity drop in corporates versus govies which means the September data is well worth keeping an eye on. Turning to the limited economic data yesterday, in the UK the construction PMI for August was slightly lower than expected at 51.1 (vs. 52.0 expected), while the Sentix investor confidence index was above market at 28.2 (vs. 27.0 expected) and up from 27.7 the month prior, meaning it has now returned to just below the cycle high. Elsewhere, the Eurozone PPI for July was slightly below expectations at 0.0% mom (vs. 0.1% expected) and 2.0% yoy (vs. 2.1% expected). Before we look at the day ahead, we thought it was interesting to note that Norway’s sovereign wealth fund is proposing that its $333bn bond fund should shift away from its multi-currency benchmark index to one which only includes the Euro, Sterling and Dollar, and thus removing other G10 currencies like the Yen, Aussie Dollar as well as EM currencies, although systematic strategies should be put in place to invest in these. The justification is that “in the long term, the gains from broad international diversification are considerable for equities but moderate for bonds” and that “for an investor with 70% of his investments in an internationally diversified equity portfolio, there is little reduction in risk by also diversifying his bond investments across a large number of currencies”. Further, it notes the Japanese bond market is large but “far less liquid than those” other three currencies. The proposal will need to be approved by the government. Looking at the day ahead, this morning the UK and Italy’s service and composite PMIs for August are due. Then there are final readings for the service and composite PMIs for the Eurozone, Germany and France. Elsewhere, the Eurozone’s retail sales and final readings for 2Q GDP are also due. Across the pond, factory orders for July and final readings for durable and capital goods orders will be released. Onto other events, the US congress returns from the August recess and Fed Governor Brainard, Minneapolis Fed President Kashkari and Dallas Fed President Kaplan will speak at separate functions.
By Rajan Dhall of FXDaily.co.uk Since the last RBA Statement, we have seen some positive factors feeding into what should be another cautiously optimistic outlook on both the global and domestic economy. With much reference to the near term revival in Chinese demand for raw materials, we have seen a strong rise in industrial metals, where Copper in particular has caught the eye, but with the recent wave of construction, there may be some references to a temporary pass through affect. Australia recognises the challenging economic shift in China, and has and will continue to maintain expectations for slower growth, and therefore demand next year. Closer to home, the labour market has been healthier, and whilst most central banks are wary of slow wage growth, steady gains in jobs are expected to see some pick up eventually. On the broader theme of inflation, core rates have dipped a little, but are expected to pick, and are likely to continue with this outlook as capacity utilisation picks up. More recently, the components for Q2 have been very strong, and all point to good number on Wednesday, with over 9% growth in construction work, as well as CapEx very likely to see consensus forecasts of 0.8% rise met - if not, exceeded. Despite these positive factors, the RBA will are more than likely to remain on hold, but governor Lowe has said in recent weeks that the next move is more likely to be up, and with other central banks also reining in loose policy, the board may set out to further highlight this shift in sentiment, but with as measured communication. It will not have gone unnoticed that the EUR has taken off in anticipation of an ECB move, so given concerns over currency appreciation, we expect a balanced statement with the familiar caveats of household debt levels restraining consumption, already hampered by sluggish earnings pick. Indeed, housing credit growth has outpaced income growth, so as long as this remains the case, the RBA will err on the side of caution. Rhetoric on the AUD per se should again be confined to further appreciation from current levels generating a slower pick up in activity along with inflation, which is pretty much par for the course. The Board will also again highlight USD weakness impacting on AUD exchange rates, and this has helped support the spot rate to some degree, which looks unlikely to see any major volatility in the aftermath of the announcement - if anything, a modest skew to the upside.
With the US markets closed today, market events this week will be dominated by G10 central bank meetings, among which the ECB stands out, but also notable will be the RBA, BoC and Riksbank. Consensus does not expect policy changes yet. There is also a busy calendar for the UK (PMIs, housing, IP and trade balance) along with GDP/IP releases elsewhere. In EMs, there will be monetary policy meetings in Brazil, Poland and Malaysia. Brazil BCB is expected to cut rates by 100bp. Central bank preview: The ECB remains trapped between a strong(er) EUR and a rapidly shrinking universe of monetizable bonds; as a result Draghi will emphasize the impact of a strong EUR on inflation dynamics but will refrain from disclosing the destiny of QE after the 2018 expiry. Given the recent EUR appreciation, the ECB will prefer waiting for the September FOMC before committing on QE. Most sellside desks call for the October meeting where BofA expects a 6m QE extension at €40bn/month. The RBA is also expected to remain on hold with communication potentially getting more interesting now that forecasts and Parliamentary testimony are out of the way. On the longer term, the domestic housing market in particular to have a more significant influence on monetary policy with the balance of risks favoring rates up. For the BoC, unexpectedly strong economic growth, below neutral o/n rates and the Fed on a hiking cycle means that the Canada should follow with a hiking cycle as well. This said, low inflation and inflation expectations along with CAD appreciation do not argue for urgency. As a result while some have said the BOC's meeting is "live", most expected the central bank to remain on hold in September and hikes +25bp in October. In other data: In the US, we get durable & capital goods orders (F), trade balance, ISM non-mfg and multiple Fed speakers in the agenda. In the Eurozone, beyond the ECB, we have retail sales, industrial production and GDP. In the UK, we have PMIs, industrial production, construction output, and trade balance. In Japan, we have monetary base, PMIs, trade balance and final print of Q2 GDP. In Canada, beyond central bank rates decision, we also have labor market report. In Australia, focus is on RBA's rates meeting, while other economic releases include trade balance, retail sales, GDP, home loans and investment lending. Below is a breakdown of key events by day, courtesy of Deutsche Bank: It’s a quiet start to the week today with Eurozone PPI and the Sentix investor confidence reading the only data of note. With the US closed there is no data scheduled across the pond. Onto Tuesday, Japan and China’s (Caixin) service and composite PMIs are due early in the morning. Then we have UK and Italy’s service and composite PMI for August. There is also the final readings for service and composite PMIs for the Eurozone, Germany and France. Elsewhere, the Eurozone’s retail sales and final readings for 2Q GDP are due. In the US, there is factory orders for July and final readings for durable goods and capital goods orders. Turning to Wednesday, Germany’s factory orders for July is the only data due out. Over in the US, the ISM non-manufacturing PMI, the Fed’s Beige book, trade balance and final Markit services and composite PMI are also due. For Thursday, Germany’s industrial production for July are due along with France’s trade balance and current account balance stats. Elsewhere, house price data in the UK and Q2 GDP (final revision) for the Eurozone is due. This is all before the ECB meeting around midday. Over in the US, there is initial jobless claims, continuing claims and final readings for Q2 nonfarm productivity due. Finally, on Friday, Japan’s trade balance and current account balance along with final readings for 2Q GDP will be due in early morning. China will also release its August import / export stats. In Europe, Germany’s trade balance, current account balance and export / imports stats are due. In the UK and France, industrial production, manufacturing production and trade balance stats are also due. Over in the US, there is the final reading for wholesale inventories along with consumer credit data. Away from the data, today we’ll have the second round of negotiations for NAFTA in Mexico. On Tuesday US congress returns from the August recess to tackle issues such as the debt ceiling. Elsewhere, Fed Governor Brainard, the Minneapolis Fed President Kashkari and Dallas Fed President Kaplan will speak at separate functions. Turning to Wednesday, UK PM Theresa May will face opposition leader Jeremy Corbyn in parliament and the IMF’s managing director Lagarde will speak at a conference in Korea. President Trump will also meet House Speaker Ryan, Senate Leader McConnell and a few others to discuss the coming debt ceiling. Then onto Thursday, in the UK, Brexit Secretary Davis faces questions in the House of Commons about the state of Brexit talks. In the US, Cleveland Fed President Mester and NY Fed President Dudley are schedule to speak. Elsewhere, the IMF Managing Director Lagarde, BOJ Deputy Governor and BOK Governor will meet for a two-day conference on growth in Seoul. Finally, on Friday, the Philadelphia Fed President Harker will speak on consumer behaviour in credit. It is a quieter, holiday-shortened week in the US, where the key economic release this week is ISM non-manufacturing on Wednesday. There are several scheduled speaking engagements by Fed officials this week. Additionally, the Beige Book for the September FOMC period will be released on Wednesday. Here is a full breakdown of what to expect courtesy of Goldman: Monday, September 4 U.S. Labor Day holiday. US markets are closed, and there will be no major data releases. Tuesday, September 5 07:30 AM Fed Governor Brainard (FOMC voter) speaks: Federal Reserve Governor Lael Brainard will give a speech on the economic outlook and monetary policy at a breakfast hosted by the Economic Club of New York. There will be a live webcast of the speech, and audience Q&A is expected. 10:00 AM Factory orders, July (GS -3.3%, consensus -3.2%, last +3.0%); Durable goods orders, July final (last -6.8%); Durable goods orders ex-transportation, July final (last +0.5%); Core capital goods orders, July final (last +0.4%); Core capital goods shipments, July final (last +1.0%): We estimate factory orders declined 3.3% in July following a 3.0% increase in June – driven by a decline in commercial aircraft orders. Core measures in the July durable goods report were strong, with better-than-expected growth and upward revisions in core capital goods shipments. 12:30 PM Minneapolis Fed President Kashkari (FOMC voter) speaks: Minneapolis Fed President Neel Kashkari will participate in a moderated Q&A at an event hosted by the Carlson School of Management in Minneapolis. Audience Q&A is expected. 01:10 PM Minneapolis Fed President Kashkari (FOMC voter) speaks: Minneapolis Fed President Neel Kashkari will also give a speech at a town hall event at the University of Minneapolis. Audience Q&A is expected. 07:00 PM Dallas Fed President Kaplan (FOMC voter) speaks: Dallas Fed President Robert Kaplan will participate in a moderated discussion at an event hosted by the Dallas Business Club. Audience and media Q&A is expected. Wednesday, September 6 10:00 AM ISM non-manufacturing index, August (GS 56.0, consensus 55.5, last 53.9): Regional service sector surveys were stronger on net in August, with notable gains in the New York Fed (+12.4pt to +11.7), Richmond Fed (+10pt to +22), Philly Fed (+8.4pt to +31.8), and Dallas Fed (+4.6pt to +15.1) non-manufacturing surveys. We expect the ISM non-manufacturing index to rebound 2.1pt to 56.0 in the August report following a 3.5pt decline in July. Overall, our non-manufacturing survey tracker rose 2.2pt to 56.3 in August, suggestive of a solid pace of growth in business activity. 08:30 AM Trade balance, July (GS -$44.8bn, consensus -$44.6bn, last -$43.6bn): We estimate the trade deficit widened by $1.2bn in July. The Advance Economic Indicators report last week showed a wider goods trade deficit, and elevated export growth in recent months suggests scope for deterioration in the trade balance. 09:45 AM Markit US services PMI, August final (consensus 56.9, last 56.9) 02:00 PM Beige Book, September FOMC meeting period: The Fed’s Beige book is a summary of regional economic anecdotes from the 12 Federal Reserve districts. The July Beige Book noted that activity expanded across all districts, though the pace of growth varied. Labor markets continued to tighten, and wage pressures had risen since the prior report. In the September Beige Book, we look for additional anecdotes related to the state of consumption, price inflation, and wage growth. Thursday, September 7 08:30 AM Nonfarm productivity (qoq saar), Q2 final (GS +1.4%, consensus +1.2%, last +0.9%); Unit labor costs, Q2 final (GS +0.1%, consensus +0.4%, last +0.6%): We estimate Q2 non-farm productivity will be revised up in the second vintage by 0.5pp to +1.4%, above the 0.75% trend achieved on average during this expansion. Similarly, we expect Q2 unit labor costs – compensation per hour divided by output per hour –to be revised down by 0.5pp to 0.1% (qoq saar). 08:30 AM Initial jobless claims, week ended September 2 (GS 250k, consensus 242k, last 236k); Continuing jobless claims, week ended August 26 (consensus 1,945k, last 1,942k): We estimate initial jobless claims rose 14k to 250k in the week ended September 2, reflecting a rise in Texas filings related to Hurricane Harvey. Continuing claims – the number of persons receiving benefits through standard programs – have declined in recent weeks, following an early-summer rebound. 12:15 PM Cleveland Fed President Mester (FOMC non-voter) speaks: Cleveland Federal Reserve President Loretta Mester will give a speech on the economic outlook and monetary policy at an event jointly hosted by the Economic Club of Pittsburgh, World Affairs Council, CFA Society of Pittsburgh, and the Association for Financial Professionals. Audience and media Q&A is expected. 07:00 PM New York Fed President Dudley (FOMC voter) speaks: New York Federal Reserve President William Dudley will give a speech titled “The U.S. Economic Outlook and the Implications for Monetary Policy” at an event hosted by the Money Marketeers of New York University. Audience Q&A is expected. 07:00 PM Atlanta Fed President Bostic (FOMC non-voter) speaks: Atlanta Federal Reserve President Raphael Bostic will take part in a moderated Q&A session on his views about the U.S. economy at an event hosted by the Atlanta Fed. 08:15 PM Kansas City Fed President George (FOMC non-voter) speaks: Kansas City Federal Reserve President Esther George will give a speech on the U.S. economy and monetary policy at the Omaha Economic Forum in Omaha, Nebraska. Audience Q&A is expected. Friday, September 8 8:45 AM Philadelphia Fed President Harker (FOMC voter) speaks: Philadelphia Federal Reserve President Patrick Harker will give a speech on “Consumer Finance Issues” at the New Perspectives on Consumer Behavior in Credit and Payments Markets Conference in Philadelphia. 10:00 AM Wholesale inventories, July final (consensus +0.4%, last +0.6%) 03:00 PM Consumer credit, July (consensus +$15.0bn, last +$12.4bn) Source: BofA, ING, Goldman, DB
Submitted by Shant Movsesian and Rajan Dhall MSTA from fxdaily.co.uk After another 'interesting' non farm payrolls report, we start the week on a quiet note as the US observes the Labour Day holiday and Canada day speaks for itself. Plenty of volatility to expect thereafter though, as it is the ECB's turn to manage market expectations, which so far show little sign of moderating as EUR longs are keen to hold positioning into a much expected tapering signal. After the weaker US jobs report, which we will cover (briefly) later, we saw a well timed news report that the ECB are in no rush to make a decision next week and that plans for adjusting the APP may not be ready until December. There is no questioning the fact that the governing council want to temper the EUR rally, as they observed the 'FX overshoot' in their last meeting minutes. Since then, the spot rate has been ramped up past 1.2000 but with limited hang time above here, and the US data induced return higher was stopped short of this psychological level before the news-wires hit. Back under 1.1900, it looks to be another reluctance pullback, and one which now depends largely on the USD, as EUR proponents can only see one way for policy to go from here and do not seem to be too concerned as to where entry levels are! We have however seen some moderation in EUR/GBP, where those looking for parity will have to wait a little longer. Again, once we saw sentiment on the Pound turn in the wake of the last BoE meeting, it was one way traffic vs the EUR, but GBP resilience is developing once again - also to be covered lower down. As for US employment over August, it was a disappointing result, but much of the weakness attributed to seasonal factors were well communicated ahead of the release. So with the USD under pressure into the announcement, there was little fresh weakness to note, and USD/JPY and USD/CHF ended up on the day. This also points to exhaustion in the bearish USD flow, which also saw mid curve yields basing out, and likely waiting for liquidity to improve - usually after US Labour day - before deciding on how much further to push the USD in the interim. There are plenty of negatives one can cite for lower levels, but our focus is on value relative to time frame and these have clearly been stretched in recent weeks and months. Given the Fed's intent on sticking to the normalisation plan, balance sheet reduction is still expected to be announced later this month, but given its size, the details to date show they are merely scratching the surface, so rate hikes are what will add solid support to the USD. As of yet, the odds for another 25bps onto the Fed funds rate this year remain near the recent lows, and currently fluctuate in the 25-35% range. At this stage, and with more data to cover into year end, a move back to 50/50 is not unreasonable to believe, and this should be enough for the USD to at least correct a little more. Indeed, perhaps this what the ECB is banking on. Certainly if the market has a little more conviction towards further Fed tightening this year, spreads can be held and the aggressive bid tone in EUR/USD will be relieved to some degree. Pullbacks will find buyers again however, but depending on data levels and sentiment, the base from here could be anything from 1.1700 to 1.1450-1.1500. Ahead of the ECB meeting this week we get Q2 GDP out of Europe as a whole, with retail sales also out. In Germany, industrial production and trade stats will also be eyed, but the focus is on president Draghi's press conference on Thursday. Out of the US, there is little that can shake off the bearish bias on the greenback other than fresh news on tax reforms. On Friday, chief economic adviser Cohn tried to revive some hopes by stating a lowering of corporate taxes would generate wage growth, but the market has had its 'fill' of talk. Action required. From the data, only Wednesday's ISM non manufacturing PMIs look to offer any possible drive to the greenback, with factory orders on Tuesday of modest interest and Thursday's productivity and labour costs overshadowed by ECB focus. North of the border, the BoC are also meeting next week to deliver their take and policy response on the Canadian economy. Q2 GDP was measured at an annualised 4.5% to send the rate hawks into a frenzy, with some banks suggesting another 25bp move up this week. We saw 1.2400 taken out after the potential base in front of this suggested a little move correction in USD/CAD, but 1.2000-1.2200 is the longer term target here and the release of the growth stats gave the market little reason to wait. The BoC are likely to be little more cautious, and the majority, rather than consensus is for them to stand pat for now. Some of the more recent data argues for a wait and see approach, and Jul trade data just ahead of the rate call and Aug payrolls on Friday will either see a test of the key support zone into 1.2300 (if we are still above here by Wednesday) or back above 1.2500 for some fresh consolidation. The AUD would have also faced similar prospects for fresh upside were it not for the strong component readings (construction work and CapEx) pointing to a strong GDP number on Tuesday, but forecasts are for a 0.8% rise in Q2 vs 0.3% for Q1. This comes after we get the latest RBA rate decision, and while there is little or no expectation of a move on rates, Gov Lowe has been erring on the side of the next move being up. We know how keen the market is to jump on soundbites, so communication will need to be calculated and measured unless they want to see the spot rate back above 0.8000 again. AUD/NZD has already made good ground through 1.1000 now - above 1.1100 - but the first target at 1.1200 may be a good place to bank profits with the short term metrics looking overstretched ahead of the data and event risks in Oz. More data on Thursday just in case the markets haven't had enough, when we get the Aug AIG construction index, trade and retail sales both for Jul. Not much out of New Zealand other than the Fonterra Dairy auctions, which have offered little incentive to drive NZD trade one way or the other, but the currency has been at the bottom end of the G10 list in recent weeks, and could take a breather for now. In the UK, UK services PMI is the one to watch, and after a healthy manufacturing may have helped the Pound to stabilise, a rise here from 53.8 will also be welcome. Industrial and manufacturing for Jul as well as trade of note for Friday. Nothing fresh to look to from last week's Brexit talks as the UK-EU divide shows little sign of contracting any time soon, with not only the exit bill a point of contention but also EU citizens' rights. We thought the latter could have seen some convergence in views at the very least. Even so, the market looks to have developed some composure over the lengthy talks ahead, and as noted above, has recouped some ground against the EUR as the Cable rate has played catch up with the USD. In the background, UK and German businesses have been allied in their appeals for a swift and fair negotiation, and this would and will swing the balance of sentiment towards the UK for now. Plenty of data out in Japan, headlined by the Q2 GDP readings early Thursday, but we need to see some real traction developing here as the BoJ stick with their inflation target of 2.0% despite calls to revise this in some way. Foreign investments in Japanese stocks will be interesting given talk of attractive (relative) valuation levels. In China, trade data on Thursday is expected to see the surplus widen out again, but all eyes on the component import and export figures. Focus in Scandinavia is on the Riksbank meeting here we expect another no change call despite some of the strong data releases to date. This should see some of their overly cautious rhetoric tempered to some degree and could prompt a break out in the NOK/SEK rate, but USD/SEK looks stretched on the downside. Given the above risks to the single currency, EUR/SEK is already looking to retest the lows seen at the start of the year and this week the central bank may provide the catalyst to achieve this.
The VIX tumbled by nearly 3 vols, down to 13.10 last, or over 18% lower and global stocks and S&P futures rebounded sharply on Monday as tensions over an imminent conflict with Pyongyang receded after U.S. officials played down the likelihood of a nuclear conflict with North Korea, recovering from fears of a U.S.-North Korea nuclear standoff drove them to the biggest weekly losses of 2017, while the dollar too rose off four-month lows it had hit against the yen. As DB summarizes the latest events in the ongoing N.Korean crisis, this could be a pivotal week in the stand-off as last week Kim Jong-un did say that they would be ready to attack Guam by "mid-August" which if we are being literal is this week. However a lack of much news on the story over the weekend is surely a positive for now. Indeed the CIA’s director Pompeo tried to calm nerves by speaking to Fox news on Sunday, noting that “…I’ve seen no intelligence that would indicate that we’re in (the cusp of a nuclear war) today…” and would not be surprised if NK tested another missile. Further, national security adviser McMaster also said there’s no indication war will break out. Perhaps these comments were a response to Trump’s comments on Friday that “military solutions are…locked and loaded, should NK act unwisely…”. European shares bounced after falling nearly 3% last week, with the STOXX 600 up 0.7% following on from a 0.9 percent jump in MSCI's index of Asia-Pacific shares outside Japan. The Stoxx Europe 600 Index headed for its first gain in four days, tracking increases across markets including South Korea. As the chart below shows, Still, Europe may be due for a pullback: the MSCI Europe Index hasn't had a 10% correction in more than a year. Gains were led by bounces in Australia, Hong Kong and South Korea while the MSCI world index rose 0.2%. That said, as the following chart from Cantillon Consulting shows, the MSCI world index is finally testing the support of the channel established during the Trump reflation move: it either snaps or rebounds to new highs. Japan failed to partake in the region's gains however, slipping 1 percent to three-month lows despite an impressive GDP print showing robust 1.1% Q2 growth in Japan (more below), driven by worries over the potential impact of the yen's recent surge against the dollar. Japanese investors also repatriated cash held overseas, keeping the USDJPY below 110. The dollar rose 0.5 percent to 109.70 after slipping to 108.720 on Friday, its weakest since April 20. Against a basket of currencies it firmed 0.2 percent, rising off last week's 10-day lows . "As long as the geopolitics ease, we look for dollar/yen to gradually grind higher, back above the 110.00 level, along with gently rising U.S. yields," ING Bank analysts told clients. "The risk aversion has stabilized and investors have gotten used to the North Korea situation a little bit - as long as it doesn't escalate further," said Daniel Lenz, a strategist at DZ Bank in Frankfurt. That said, expectations of an all clear may be premature: North Korea's Liberation Day celebration on Tuesday to mark the end of Japanese rule could see tensions rise again, markets are relieved that the weekend had passed without more rhetoric. This may be reflect in the ongoing surge in bitcoin, which jumped for the second consecutive weekend, and hit a new all time high above $4,200 this morning. In overnight data, Japan printed the strongest GDP in over two years, after the economy was said to have grown at a 4% annualized rate in Q2, a 6th consecutive quarter of growth. Meanwhile, economic data out of China disappointed across the board as Chinese retail sales and industrial production for July missed estimates. South Korea’s won led a rebound in most Asian emerging-market currencies after several top U.S. national security officials said a nuclear war with North Korea wasn’t imminent. The MSCI Asia index ex Japan advanced for the first time in four days amid steady sovereign bonds. “With the geopolitical concerns surrounding North Korea appearing to stabilize a little, we could see the USD/Asia complex be fairly range-bound today with a slight downward bias,” said Julian Wee, a senior market strategist at National Australia Bank in Singapore. Japan’s yen weakened, after rallying the most since May last week on haven demand. Gold halted its advance amid the efforts by U.S. officials to soothe the escalating tensions on the Korean peninsula. Bloomberg Dollar Spot Index jumps 0.23%, first gain in three days In China, the yuan gave up earlier gains with the offshore exchange rate falling most in six weeks as the dollar jumps and the People’s Bank of China sets a weaker-than-expected daily reference rate. The CNY dropped 0.05%, erasing an advance of as much as 0.16%, to 6.6700 per dollar, after the PBOC strengthened the yuan reference rate 0.06% to 6.6601, weaker than Mizuho Bank’s est. of 6.6573 and Nomura’s 6.6562. In rates, 10-year TSY yields inched higher after falling on Friday to six-week lows following data showing that U.S. consumer prices rose just 0.1 percent last month, below economists' forecast of a 0.2% gain. Euro zone bond yields also rose, with investors interpreting the robust Japanese data as a sign that the global economy is indeed on the mend. While Japan is not expected to dismantle its stimulus program any time soon, analysts reckon that signs of global recovery gives euro zone and U.S. central banks a reason to start rolling back some of their asset purchases. The yield on Germany's 10-year government bond was up 4.5 bps to 0.43%, a move mirrored by most other euro zone debt. Commodities trading was mixed overnight with safe-haven gold (-0.2%) pulling back from 9-week highs amid the improved risk sentiment. Demand for copper was subdued alongside weaker iron ore prices after Chinese Industrial Production data for July missed expectations, while WTI was quiet overnight with prices unchanged during Asia trade. Crude prices seeing a modest move lower, however prices are still up significantly from last week's gains with Brent remaining above $52. Much like fixed income, gold and silver prices are bearing the brunt of a more risk on environment. Libya's top oil field is said to drop on security threats. Bulletin Headline Summary from RanSquawk Equities in the Green Brexit Whispers Once Again Begin Market Snapshot S&P 500 futures up 0.6% to 2,454.30 VIX down 2.94 to 13.10, -18.33% STOXX Europe 600 up 0.8% to 375.08 MSCI ASIA down 0.1% to 158.25 MSCIA Asia ex Japan up 0.8% to 520.33 Nikkei down 1% to 19,537.10 Topix down 1.1% to 1,599.06 Hang Seng Index up 1.4% to 27,250.23 Shanghai Composite up 0.9% to 3,237.36 Sensex up 0.9% to 31,494.28 Australia S&P/ASX 200 up 0.7% to 5,730.41 Kospi up 0.6% to 2,334.22 German 10Y yield rises 4bps to 0.42% Euro down 0.2% to 1.1803 per US$ US 10Y yield rises 2bps to 2.21 Italian 10Y yield falls 1bp to 2.02% Spanish 10Y yield fell 2bps to 1.44% Gold spot down 0.6% to $1,281.92 U.S. Dollar Index up 0.3% to 93.32 Top Overnight News Two top U.S. national security officials sought to assuage fears of imminent nuclear war with North Korea following days of heightened rhetoric by President Donald Trump, as America’s top general prepares to meet with South Korea’s leader Patrick Drahi’s Altice NV is considering asking Canada Pension Plan Investment Board and BC Partners to help fund a potential bid to buy cable broadcaster Charter Communications Inc. JPMorgan Chase & Co. is proposing to charge as little as $10,000 a year for equity research, the lowest price to emerge so far, as the Wall Street giant seeks to grab market share when a European ban on free analysis for clients is imposed Venezuela will defend itself from the “madness” of Donald Trump, its defense minister said, a day after the U.S. president said he’s considering a military option in response to the escalating political and economic crisis in the oil-producing nation The pros who make their living forecasting the economy overwhelmingly expect President Donald Trump and his fellow Republicans to push through tax cuts in time for next year’s congressional elections Rovio Entertainment Oy is planning an initial public offering as early as next month that could value the maker of the Angry Birds mobile games and movie at about $2 billion Angry Birds Maker Is Said to Plan IPO at $2 Billion Value Toshiba Chip Sale Talks Are Said to Stall On Payment Timing Cathay ‘Begging With Golden Bowl’ to Win Back Chinese Fliers Alibaba and Tencent Looking Riskier And Placing Bigger Bets Stada Appeals to Hedge Funds to Push Through Bain, Cinven Bid MGM Resorts Bets on Wealthier Masses to Catch Up in Macau Survival of Brokers’ Morning Notes in Balance as MiFID Looms China Economy Loses Momentum as Factory Output, Investment Slow China July industrial output 6.4% vs 7.1% est; retail sales 10.4% vs 10.8% est; fixed-asset investment 8.3% vs 8.6% est Japan 2Q GDP 1.0% vs 0.6% est; y/y 4.0% vs 2.5% est; business spending 2.4% vs 1.2% est; private consumption 0.9% vs 0.5% est RBA’s Kent says interest rates unlikely to rise any time soon; RBA will be cautious when time to normalize New Zealand 2Q retail sales 2.0% vs 0.7% estimate Macri candidates leading key provinces in Argentina’s primaries Asian equity markets traded mostly higher following the rebound of US stocks last Friday on Wall Street where the NASDAQ outperformed amid tech strength, while a miss on CPI dampened prospects of a December Fed hike. The improvement in risk sentiment was also supported as some geopolitical concerns abated which saw ASX 200 (+0.7%) and KOSPI (+0.6%) positive throughout the session, however Nikkei 225 (-0.8%) bucked the trend despite strong GDP numbers, as Friday's Asian session losses caught up with the index on its return from a long weekend. Elsewhere, Hang Seng (+1.2%) and Shanghai Comp (+0.4%) were positive following a firm liquidity operation by the PBoC, although gains in the mainland bourse were capped as Industrial Production and Retail Sales data added to the recent trend of disappointing Chinese data releases. Finally, 10yr JGBs traded flat as participants mulled over strong GDP numbers and losses in Japanese stocks, with demand also dampened from a lack of a Rinban announcement by the BoJ.Japanese GDP (Q2 P) Q/Q 1.0% vs. Exp. 0.6% (Prey. 0.3%). Japanese GDP Annualized (Q2 P) 4.0% vs. Exp. 2.5% (Prey. 1.0%); Chinese data reported overnight was weak across the board: Chinese Industrial Production (Jul) Y/Y 6.4% vs. Exp. 7.1% (Prey. 7.6%). Chinese Industrial Production YTD (Jul) Y/Y 6.8% vs. Exp. 6.9% (Prey. 6.9%). Chinese Retail Sales (Jul) Y/Y 10.4% vs. Exp. 10.8% (Prey. 11.0%). Chinese Retail Sales YTD (Jul) Y/Y 10.4% vs. Exp. 10.5% (Prey. 10.4%) PBoC injected CNY 110bln in 7-day reverse repos and CNY 100bln in 14-day reverse repos. PBoC set CNY mid-point at 6.6601 (Prey. 6.6642) According to the China Commerce Ministry, China is to ban some imports from North Korea based on US resolution, the ban is to include imports of Iron ore, Coal, Lead and seafood (effective Tuesday August 15th) Top Asian News Hong Kong Stock Exchange Trading Hall to Close in October: SCMP Alibaba, Tencent, Telstra Options Overprice Earnings-Day Moves Gold Giant Gains to Record as India’s Tax Shift Seen as Plus HSBC Lowers USD/SGD Forecast With MAS Seen Tightening in April Sunac Is Said to Consider Strategic Investor for Leshi: Caixin A relief rally in Europe to begin the week with much of the gains stemming from financials, while RWE is making solid gains after strong earnings results. Elsewhere, Danone are among the best performers this morning following reports that Kraft and Coke are seen as possible buyers for the company. Demand for riskier assets amid the quiet newsflow over tensions on the Korean peninsula has subsequently hampered EGBs. German curve has been bear steepening this morning, while peripheral spreads are slightly tighter. UK Chancellor Hammond and Trade Minister Fox stated that the Brexit transition period will be limited and will be intended to avert a cliff edge. The ministers also added that the transition period cannot be an alternate path for staying in the EU. Markets have been unfazed by the speech, with the indecision and uncertainty continuing to be evident in sterling. Top European News Hammond, Fox Say Transition Won’t Be Back Door to Staying in EU Pandora Shares Fall; Carnegie Says FY Guidance Is ‘Stretched’ Draghi Gets Help From Euro Zone’s Northerners Wanting More Pay London’s Big Ben Bell to Fall Silent Next Week for Four Years Merkel’s Election Rivals Roll Out the Big Guns to Narrow Gap Allianz Looks to Buy Bunds After ECB Gives Tapering Steer Brace for Pound Turbulence as Economics and Politics Collide In currencies, as newsflow covering the spat between North Korea and the US simmers down, the USD index has been trading at better levels against the Yen which has pressured major pairs. In turn, EUR tripped through 1.18 to hover near session lows. Poor data out of China damped AUD, as Chinese Industrial Production and Retail Sales missed across the board. As the data was digested, AUD/USD came off best levels, and trades around session lows, through 0.79 once again. A clear break through 0.7840 is needed to indicate any clear change of direction. Yen has seen some unwinding of the risk off positions taken throughout last week's trade, amid the growing geopolitical tensions. USD/JPY's June's low just through 109.00 saw some bids waiting, as the pair has come off best levels, with bulls likely to look to test 110.00. The pound has seen rangebound trade throughout the Asian session despite Brexit commentary emerging from the woodworks once again. Comments from UK Chancellor Hammond and Trade Minister Fox stated that the Brexit transition period will be limited and will be intended to avert a cliff edge. The ministers also added that the transition period cannot be an alternate path for staying in the EU. Markets have been unfazed by the speech, with the indecision and uncertainty continuing to be evident in sterling. In commodities, trading was mixed overnight with safe-haven gold (-0.2%) mildly pulling back from 9-week highs amid an improvement in global risk sentiment. Conversely, demand for copper was subdued alongside weaker iron ore prices after Chinese Industrial Production data for July missed expectations, while WTI quiet overnight with prices unchanged during Asia trade. Crude prices seeing a modest move lower, however prices are still up significantly from last week's gains with Brent remaining above USD 52. Much like fixed income, gold and silver prices are bearing the brunt of a more risk on environment. Libya's top oil field is said to drop on security threats. On today's calendar there is no major economic data and no Fed speakers DB's Jim Reid concludes the overnight wrap Hopefully you all had a good weekend? Mine involved picking up our new car and having to deal with epic meltdown tantrums. On Saturday we took Maisie to the swings where she couldn't stop smiling and laughing. She was so so happy. We then said it was time to go home and the response was to throw herself on the floor and roll about in pain like a diving footballer looking for a penalty, scream and shout, cry at the top of her voice and basically embarrass us. The same thing happened the following day at the first of her friends to have a second birthday party. She had a wonderful time and wouldn't stop giggling for two hours. Everybody remarked what a credit to us she was. Then when she was told we had to leave the humiliation of us as parents began. The only thing that calmed her down on both days was her new favourite TV show Peter Rabbit!! TV is becoming our saviour as bad parents......... until we turn it off and then the tantrums start again!!!! Markets were obviously in semi tantrum mode over the course of the last seven days. This time last week we suggested how it was likely we would now be in for a summer lull for a couple of weeks and that it was set to be extremely quiet. We went on to say that if anything was guaranteed to ensure that something would blow up then it was that comment. So we were half right! To be fair in July the one thing that we raised that we thought could break the summer calm was that Mr Trump might look to distract from his legislative difficulties so far and up the ante against Korea. Tensions have been bubbling for a few weeks. It was impossible to predict the timing and a big risk to position for it but it was an observable risk. However it does take two to tango and Kim Jong-un has been highly provocative of late. This could be a pivotal week in the stand-off as last week Kim Jong-un did say that they would be ready to attack Guam by "mid-August" which if we are being literal is this week. However a lack of much news on the story over the weekend is surely a positive for now. Indeed the CIA’s director Pompeo tried to calm nerves by speaking to Fox news on Sunday, noting that “…I’ve seen no intelligence that would indicate that we’re in (the cusp of a nuclear war) today…” and would not be surprised if NK tested another missile. Further, national security adviser McMaster also said there’s no indication war will break out. Perhaps these comments were a response to Trump’s comments on Friday that “military solutions are…locked and loaded, should NK act unwisely…”. On this whole episode I'm not sure what it is about Augusts. In my career, this month has often created volatility from nowhere. With people on holiday thin trading can certainly exacerbate market wobbles. Interestingly the WSJ over the weekend discussed how North Korean provocations haven't had much impact on markets in the past. They examined 80 international incidents involving their nuclear program since 1993 and their impact on financial markets. They suggested that there hasn't been much of a risk off in response to nuclear escalations. I suppose the reality is that its noise and bluster until it isn't. In the last 20 years it’s been mostly noise and then diplomacy. The worry that markets might have at the moment is that the Trump administration could be unpredictable relative to his predecessors. With his popularity low and legislative failures hurting then it’s possible to envisage a scenario where he reacts more aggressively than earlier presidents. So far the sell-off has been relatively measured it’s just that in the context of very very calm markets recently it’s still been a bit of a shock. In our list of global assets we regularly review, Silver (+4.9%) and Gold (+2.4%) were the best performers last week. Gilts (+1.1% - the longest duration govt bond market), Bunds (0.6%) and Treasuries (+0.5%) were also towards the top of the leader board and showing pretty strong weekly numbers for fixed income. In terms of equities the highlights were the Nikkei (-1.1% but closed Friday), S&P 500 (-1.4%), FTSE (-2.1%), DAX (-2.3%), FTSE-MIB (-2.7%) and the IBEX (-3.5%). Note that European Banks (-4.0%) were one of the worse performers mostly responding to the drop in yields. Diving down more specifically on this for 10 year yields we saw Bunds -8bps, Gilts, -8bps, UST -6bps, OATs -6bps, Spain flat and Italy +4bps. In credit the sell-off was fairly measured with Crossover +11bps, iTraxx Europe +3bps, Sen Fins +2bps and US CDX IG +2bps on the week. Overall these type of moves wouldn't normally merit a specific mention but in the low vol world they have shaken things up a bit. We'd also note the VIX rose 55% last week from 10.0 to 15.51 but off the week's (and year's) highs of 16.04. Thursday actually saw the highest volume day ever for VIX options. For equities so far the moves haven't been that large. In today's PDF we reproduce a table from DB's Binky Chadha looking at major geo-political events and US market sell-off. So spreading the net wider than just North Korea and also at actual events rather than aggressive rhetoric. He highlights 28 such events since the start of WWII and suggests that the average behaviour of the S&P 500 around geopolitical events is of a sharp short-lived selloff with 1) a median sell off of -5.7%, 2) 3 weeks to find a bottom, 3) Another 3 weeks to recover to prior levels and 4) Significantly higher markets 3 months (+6.5%) and 12 months (+13%) on. This morning, Asian markets were broadly higher as new escalations in the conflict is good news for now. Japan’s preliminary 2Q GDP beat expectations at 1% qoq (vs. 0.6% expected) and 4% yoy (vs. 2.5% yoy), but the Nikkei fell 0.8%, partly reflecting a catch up effect as last Friday was a holiday. Also, our Japanese economist believe the 2Q trends appears too good to be sustained, partly as major leading indicators of investment appear to have already peaked. Elsewhere, Chinese data was softer than expectations, with the July IP at 6.4% yoy (vs. 7.1%, 7.6% previous) and retail sales at 10.4% yoy (vs. 10.8%). Chinese markets have dipped a little after the news, but have continued to strengthen afterwards, with the Hang Seng up 1.2% and Chinese bourses up 0.4% to 1.7% as we type. The Kospi is up 0.7% and the Won up 0.4%. Onto Friday's US July inflation numbers, which missed for the fifth consecutive month. Headline inflation was lower than expected at 0.1 % mom (vs. 0.2%) and 1.7% yoy (vs. 1.8%), but core inflation was in line at 1.7% yoy. DB’s Luzzetti argued there were some outliers and saw some tentative signs of an improving underlying trend (medical services inflation). Even so, the team acknowledge that it is difficult to dismiss the string of recent soft inflation prints. Looking ahead, core CPI inflation is still expected to remain near recent levels in yoy terms through 2017, but on a mom basis, DB expects a rebound through year end, which if it occurs would support a Dec 17 rate hike. However that hike must be more in doubt at the moment. Elsewhere, the Dallas Fed’s Kaplan said that whilst he was a strong advocate of the two recent rate hikes, “I at this stage want to see continued evidence - or more evidence - that we’re making progress on reaching our inflation objective, …I’m willing to be patient”. According to Bloomberg’s implied probability function, the chance of a rate hike in Dec 17 has fallen from ~38% to ~26% post the CPI data and Fed speeches. Elsewhere, in an attempt to get Brexit talks back on track. The UK government plans to issue three discussion papers ahead of the next round of talks on 28th August. The papers could set out proposals for Northern Ireland and borders with Ireland, continuity on the availability of goods and confidentially & access to official documents after Brexit. Before we take a look at today’s calendar, we wrap up with other data releases from Friday. In the US, there was the aforementioned CPI stats. Over in Europe, the final July inflation readings for Germany and France was released, both had no change relative to their flash readings. For Germany, it was 0.4% mom and 1.5% yoy, and for France, it was -0.4% mom and 0.8% yoy. To the week ahead now. Today starts with the Eurozone’s industrial production (IP) stats for June. Onto Tuesday, Japan’s final reading for June IP and capacity utilisation stats as well as German’s preliminary 2Q GDP stats will be due early in the morning. Then UK’s July CPI, PPI and retail price index are due. Over in the US, there will be quite a lot of data, including: July retail sales, import / export price index for July, empire manufacturing stats, NAHB housing market index and US foreign net transactions for June. Turning to Wednesday, the Eurozone and Italy’s preliminary 2Q GDP stats are due. Then for UK, we have the July jobless claims and claimant count rate and the June ILO unemployment data. Across the pond, we get the FOMC meeting minutes along with the July housing starts and MBA mortgage applications stats. For Thursday, Japan’s July trade balance, exports/ imports data along with France’s ILO unemployment rate will be out early in the morning. Then the Eurozone’s July CPI and UK’s July retail sales are due. In the US, quite a lot of data again, including: July IP, conference board US leading index, the Philadelphia Fed business outlook survey, initial jobless claims and continuing claims stats. Finally on Friday, Germany’s PPI will be due early in the morning. Follow by the Eurozone’s June current account stats and construction output data. In the US, various University of Michigan sentiment index are also due.
Submitted by Shant Movsesian and Rajan Dhall MSTA from fxdaily.co.uk FX Week Ahead - Myopic markets hit USD on inflation 'miss' - rest of the major economies in focus ahead. Once again, sluggish inflation takes a hammer to currency and we saw the USD turn back from a tentative recovery, which many still see as corrective against some of its major counterparts. In comparative terms, we still feel the numbers out on Friday were not as bad as the pundits and markets perceived, but liquidity in the summer is not at its best at short term (reactive) flow gets the 'benefit' to some degree, with the usual suspects winning out - for now. The core rate held 1.7% - so that is 3 months in a row now, but the headline was up from 1.6% to 1.7% instead of 1.8% - small potatoes at the moment, but when looking at this as a global phenomenon, the impact was a little too one dimensional/sided, but next week will naturally tell us more. No surprise then to have seen the EUR shooting back into the mid 1.1800's again as the revival in Europe continues to draw in investors. As we have seen in the sharp upturn in EUR/CHF, dormant cash on the sidelines is now being deployed, but at a pace which may unnerve the ECB who are ever wary of seeing another taper tantrum get out of hand. Not that they have to worry about the rates market at the present time, with tensions between the US and North Korea driving money back into fixed income and safe haven in general, with the benchmark German 10yr now under 40bps again alongside the T-Notes pulling back further into the low 2.00%'s. The spread has been widening again, but the near term correlation with EUR/USD has diminished (to put it politely) and after the very brief dip under 1.1700, 1.2000 is back on the radar. In the US, retail sales on Tuesday will be the primary data driver from the USD perspective, so price action may be a little more lively through the week rather than having to sit tight until the end of week determinants, with both payrolls and CPI traditionally released on a Friday. On Wednesday however we get the FOMC minutes to dissect rhetoric on whether there is another Fed hike coming this year, alongside the now widely anticipated start of balance sheet reduction, which in itself has brought into question if another move on rates is required near term. Fed members Kashkari and Bullard think not, but their dovish stance is widely acknowledged given increased air time of late. USD/JPY is naturally struggling also, but this is largely down to the repatriation flow hitting all JPY pairs at the present time, and enough to see 109.00 relinquished - the year's low ahead of 108.00 now on the horizon. Downturns are continually bought up on dips, but the market is still significantly short JPY, and despite the clear rate differentials and BoJ yield control, sentiment is and will be overriding, and the sabre rattling between president Trump and North Korea maintains the real risk of a fallout which could take this pair down to 107.00-105.00 unless the situation de-escalates as everyone naturally hopes for. Late Friday, Russia's Lavrov suggested they have a plan to coordinate with China to defuse the situation, and stocks gave this a tentative 'thumbs up'. Plenty of data out of Japan this week, as we get Q2 GDP very early on on Monday. Industrial production and capacity utilisation out on Tuesday and the trade figures are out on Thursday. We also get industrial output data from China at the start of the week, along with retail sales and fixed asset investment, but unless we get any wild deviations from consensus, then minimal impact expected. Losses in EUR/JPY - under 129.00 - alongside those seen in some of the other EUR crosses, was perhaps a sign that we are finally due a correction in the single currency, but as we stated above, prospects look thin vs the USD, and even thinner against the GBP. Thursday's data schedule is the heaviest for Europe next week, with the latest inflation readings for EU wide July CPI to confirm 1.3% for the yearly rate; core standing at 1.1% so, let's see whether the market can put this into context. The ECB minutes later in the day can only offer the familiar lines of steady economic recovery amid damp inflation, but as we get closer to the September meeting, traders will be loath to go against the obvious narrative in play. German GDP for Q2 is on Tuesday, with the EU number on Wednesday - the former seen improving from 1.7% to 1.9% (yoy), while Eurozone growth as a whole is expected to remain unchanged at 2.1%. Inflation data out on Friday for Canada also, where consensus is looking for a pick up from 1.0% to 1.2% over July. However, this will be overshadowed by the start of the NAFTA talks which begin on Wednesday, and may produce some jitters in the CAD pairings despite the recent signals that negotiations will be cordial at the very least. Many of us still feel Mexico has more to be concerned about - I seem to remember president Trump alluded to this when we met with Canada's Trudeau! In the past week or so, we have seen the market reining on some of the recent CAD strength which really gathered pace in the aftermath of the BoC rate hike, and was bolstered by the bullish rhetoric on the economy, leading to further rate hike pricing which now looks to have been over-done. USD/CAD stopped short of the 1.2400 mark, but this was only a modest 30-35 tick extension to the 2016 lows. Had the moves had a little more give and take on the way down, we may have squeezed out levels into the mid 1.2300's. Oversold, levels have moderated as they usually do, and we have also seen Oil prices struggling past $50.0 (WTI), so we may have more to correct under the present circumstances, but over the longer term, 1.2000-1.2200 remains the target - it's just how we get there. A quick look at USD/MXN, and we note some very similar price action, with the weekly charts showing a base just under 17.5000, but the upturn stalling above 18.0000. 18.4000 is the next level up top if the NAFTA talks threaten Mexico's export profile going forward. The UK offers up the largest slate of economic stats next week, and again, inflation is on the agenda on Tuesday, but swiftly followed up by the employment report on Wednesday and then retail sales on Thursday. The combination of these three metrics guarantee a choppy week ahead for the Pound, with the market now talking of parity vs the EUR, but first target for us on the upside is 0.9170-0.9250. It has been a slow grind higher, but with the BoE clearly highlighting the concerns over the Brexit impact on economic activity ahead, the mood has changed drastically. Indeed, it is hard to see why the market was so bullish given the overall impact of a 25bp rate hike at this point, and it has again taken the 'underwriting' of central bank viewpoint to sway sentiment. Cable has dropped from the upper 1.3200's to test under 1.3000. The mid 1.2900's have held since as the USD has turned back en masse, but we expect selling to remain heavy unless the jobs report in particular shows market improvement. CPI numbers have been distorted by exchange rate weakness, and retail has been bolstered by seasonal factors (tourism), so earnings will be bigger focus among the mix of data. The low 1.2800's are the next level to watch here if we take another leg lower. The RBA minutes were a notable boost for the AUD near a month ago, despite the relatively cautious statement from the related central bank meeting at the time. Monday's release comes after a relatively neutral meeting statement seen at the start of this month, maintaining the caveats on wages and inflation, and we can see little to materially lift the AUD as currency strength is again highlighted - not as aggressively as on previous occasions, but likely enough to deter an all-out push for 0.8000 again. That said, the RBA - and RBNZ - have both acknowledged the lower USD in all this, and this alone will defer any material depreciation here for now. As with the NZD, we expect a choppy correction to the downside from here, and the Australian employment numbers will influence the path to some degree on Thursday. NZD/USD has pushed down to 0.7250 or so, with the support ahead of 0.7200 coming in a little early and reclaiming 0.7300 after the USD sales seen Friday. Retail sales in NZ released late Sunday, and we get the latest Global Dairy Auction results on Tuesday, but the latter has been a mere sideshow of late. Swedish CPI on Tuesday to note, and we will see whether the strong growth data of late is feeding into asset prices. SEK has found a strong base against its Norwegian counterpart in the 1.0300-60 area, so we may get some traction through 1.0200 next week, with the pullback in Brent dragging the NOK back. Trade figures are the only release scheduled in Norway, on Tuesday also.
The global rout resulting from tensions over the North Korean nuclear standoff continued on Friday as world stocks tumbled for the fourth day, on course for their worst week since November following a third day of escalating verbal exchanges between Trump and Kim, as European and Asian shares tumlbed, volatility spiked, and the selloff in US futures continued albeit at a more modest pace as the escalating war of words over North Korea drove investors on Friday to safe havens such as the yen, Swiss franc and gold. In addition to North Korea, attention will be closely focused on today's US CPI print, which could result in even more currency volatility, should it surprise significantly in either direction. "What has changed this time is that the scary threats and war of words between the U.S. and North Korea have intensified to the point that markets can't ignore it," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "Of course, it's all come at a time when share markets are due for a correction, so North Korea has provided a perfect trigger." All eyes remained on the sharp short squeeze in the VIX, which exploded more than 50% above 16 on Thursday from single digits the day before - the highest print since Trump's election victory - and extended gains on Friday rising nearly 5% to 16.80, after briefly topping 17, a potential "margin calling" nightmare for countless vol sellers over the past year. Thursday also saw the highest VIX volume day on record as 937K VIX futures traded across the curve. The Global Financial Stress Indicator surged positive after trading in negative territory since April. The global rout that sent the Nasdaq lower by 2% on Thursday, spread to China which saw the Shanghai Composite tumble by 1.6% to 3,208, its biggest drop this year, led by mining and resource stocks, with nearly 20 names halted limit down, after Chinese metals prices tumbled by 5%. The Chinese volatility index jumped by the most since January 2016 to its highest level in more than seven months. While there wasn't a specific catalyst for the rout, a driver for the sharp commodity selling was the announcement by the China Steel Industry Association which said the recent surge in steel futures was not due to market demand but misunderstanding by some institutions. Adding fuel to the fire was a Reuters report that the Shanghai Futures Exchange told its members it may raise margins on steel rebar contracts if market trade volume is too large. As a result, metals also led declines on the mainland CSI 300 Index: Xiamen Tungsten slides as much as 9.3%, most intraday since September; Jiangxi Copper falls as much as 8.3%; China Molybdenum slips as much as 7.7%; the Bloomberg China Steel Producers Valuation Peers Index tumbled 5.9%, with Nanjing Iron & Steel, Maanshan Iron & Steel, Angang Steel dropping at least 6.9%. "Chinese investors locked in profits on commodity shares following strong gains which had been driven by bets that capacity cuts would boost prices", said Helen Lau, Hong Kong-based analyst with Argonaut Securities. "Stock markets are in a risk-off mode due to escalating geopolitical risks, so recent outperformers would be the first to take a hit amid a selloff." In HK trading Aluminum Corp. of China tumbles as much as 7.4%, the biggest intraday drop since February 2016, while China Shenhua Energy dropped as much as 4.8%, among the worst performers on Hang Seng Index. Also hurting Chinese sentiment was the plunge in Tencent, with the Chinese tech giant dropping as much as 5% in Hong Kong, its biggest intraday decline in more than a month, following news of a Chinese probe into Tencent, Sina and Baidu for cyber-security law violations. Stocks of related tech companies were all lower with Sina down 3%, Weibo down 4.5%, and Baidu down 2.5%. Earlier in the session, the onshore Chinese yuan dropped as much as 0.43% vs USD to 6.7080, its biggest drop since Jan. 19, after the PBOC set the fixing at a weaker level than expected. As Bloomberg reported overnight, the PBOC strengthened fixing by 0.19% to 6.66420, compared with forecasts of 6.6477 from Commerzbank, 6.6552 from Mizuho Bank, 6.6559 from Scotiabank and 6.6549 from Nomura. At the same time, the offshore yuan dropped as much as 0.28% to 6.6853, most since June 26, although putting the drop in context, just one day earlier, the CNY rose to its strongest level since August 2016 on Thursday, prompting Bloomberg to call the Yuan the new "safe haven" currency. Elsewhere in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan had skidded 1.55 percent, its biggest one-day loss since mid-December, to leave it down 2.5 percent for the week. Australia’s S&P/ASX 200 Index fell 1.2 percent at the close in Sydney. The Hang Seng Index in Hong Kong tumbled 2 percent and China’s Shanghai Composite Index was down 1.6 percent. The Japanese yen rose 0.2 percent to 108.96 per dollar, the strongest in more than 15 weeks. Japanese markets are closed for the Mountain Day public holiday. South Korea's KOSPI fell 1.8 percent to an 11-1/2-week low, but its losses for the week are a relatively modest 3.2 percent; volatility on the Kospi 200 surged as much as 27 percent. "Pretty remarkable, perhaps even extraordinary, considering," said fund manager BlueBay strategist Tim Ash. The Korean won also continued to skid, down 0.45 percent to 1,147.2, falling below its 200-day moving average for the first time in a month. European markets continued sliding into risk-off mode although at a slower pace; even so Europe's where regional indices were set for the worst week of losses this year as sentiment on ongoing fears about escalation between the US and North Korea. Euro zone volatility jumped to the highest since April, when France's election was rattling the region. Weakness has been seen across the board (Eurostoxx 600 -1.0%), however mining names have notably underperforming amid Chinese metal prices slumping by some 5% overnight. The iTraxx Crossover extended its recent widening, leading sentiment as hedges are placed into the weekend. European equity markets opened lower led by mining sector, as base metals sell off heavily in Asia after a report saying the Shanghai exchange may raise margins on steel rebar contracts, which was later confirmed. DAX futures dip to approach 200-DMA, financials under pressure after HSBC warns low-vol environment could hit 2H revenues. CHF and JPY marginally outperform in G-10, EMFX weaker against USD across the board. Core fixed income extends rally and bund curve flattens further, yet UST/bund spread widens 3bps as USTs lag amid focus on U.S. CPI data which may add to the recent dollar pains should inflation come in weaker than expected. U.S. treasury yields fell to their lowest in more than six weeks ahead of inflation data expected to show a pickup in price growth, which could boost the chances of a further rate hike this year, while the Fed’s Kaplan and Kashkari are due to speak. The dollar declined against the Japanese yen for a fourth day as North Korea tensions remained elevated. The yield on 10-year Treasuries fell one basis point to 2.19 percent, the lowest in more than six weeks. Germany’s 10-year yield decreased three basis points to 0.38 percent, the lowest in more than six weeks. Oil was modestly higher even though the IEA cuts its OPEC demand estimates for this year and next year by by 400bpd after revising down its demand estimates going back to 2015, rejecting OPEC's own assessment of rising demand growth for the near future. Aside from North Korea, inflation data is where the market is most sensitive to a surprise at the moment, even if yesterday's weak US PPI doesn't suggest an imminent rise. For the US CPI today, consensus expected core CPI inflation to rise +0.2%, and should finally snap its streak of four consecutive monthly misses which could be important. As recent Fed statements have emphasized, policymakers will be monitoring near-term inflation trends closely. Hence, an in line print would provide tentative evidence that the recent downshift in core inflation may be behind us. New York Fed President William Dudley cautioned that it will “take some time” for inflation to reach the central bank’s 2 percent target, the latest official warning that price pressures remain muted. The Federal Reserve Bank Dallas President Fred Kaplan speaks this afternoon. Also today, Moody’s may publish a review of South Africa’s credit rating, two months after reducing its foreign- and local-currency assessments to one level above junk. JC Penney, Magna International and Telus are due to release results. July consumer price data is also due later. Bulletin Headline Summary From RanSquawk Geopolitical tensions continue to act as a driving force for markets amid the latest exchange between the US and NK This has seen downside in EU equities (Eurostoxx 50 -1.0%) and a FTQ in other assets Looking ahead, highlights include US CPI, Fed's Kashkari and Kaplan Market Snapshot S&P 500 futures down 0.1% to 2,434.25 STOXX Europe 600 down 1.0% to 372.26 DAX down 0.3% to 11,980 MSCI ASIA down 0.8% to 158.49 MSCI ASIA ex JAPAN down 1.5% to 515.81 Nikkei down 0.05% to 19,729.74 Topix down 0.04% to 1,617.25 Hang Seng Index down 2% to 26,883.51 Shanghai Composite down 1.6% to 3,208.54 Sensex down 1.1% to 31,193.00 Australia S&P/ASX 200 down 1.2% to 5,693.14 Kospi down 1.7% to 2,319.71 German 10Y yield fell 3.5 bps to 0.38% Euro down 0.1% to 1.1759 per US$ Brent Futures down 0.9% to $51.45/bbl US 10Y yields unchanged at 2.19% Italian 10Y yield rose 2.1 bps to 1.743% Spanish 10Y yield fell 0.6 bps to 1.452% Brent Futures down 0.4% to $51.70/bbl Gold spot up 0.1% to $1,287.31 U.S. Dollar Index up 0.04% to 93.44 Top Overnight News China Urges Restraint as Futures Slide; FOMC Voters to Speak After CPI Data; Snap Slammed Amid Facebook Pressure The escalating war of words between Trump and North Korean leader Kim Jong-Un sent Asian markets tumbling as the region braced for more provocations from his regime next week President Donald Trump stepped up his campaign of pressure on North Korea, warning the regime not to follow through with a missile test near Guam and promising massive response to any strike against the U.S. or its allies Treasury yields may climb from a six-week low if Friday’s U.S. consumer- price data merely meet expectations, as the market is on high- alert for evidence that inflation is heating up and supporting the Fed’s case for higher interest rates For all the talk that Chair Janet Yellen’s plan to shrink the Fed’s balance sheet will hurt Treasuries, U.S. mortgage bonds face a bigger test The International Energy Agency cut estimates for the amount of crude needed from OPEC this year and in 2018, after lowering its historical assessments of consumption in emerging nations including China and India All that stands between German Chancellor Angela Merkel and a fourth term is six weeks of campaigning Morgan Stanley added its voice to a growing chorus of skepticism surrounding debt valuations, with Pacific Investment Management Co. writing in a report released Wednesday that investors should pare relatively expensive assets like corporate bonds in favor of safer investments like Treasuries Credit Suisse Group AG is barring its traders from buying or selling certain Venezuelan securities and business as the political and economic crisis in the South American country intensifies Gold advanced to the highest in two months as the spike in tensions between the U.S. and North Korea fanned demand, with hedge fund billionaire Ray Dalio flagging rising risks, including “two confrontational, nationalistic, and militaristic leaders playing chicken with each other” President Donald Trump laid out a path for Senate Majority Leader Mitch McConnell to get back in his good graces: replace Obamacare, overhaul the U.S. tax code and find a way to pay for big infrastructure improvements RBA’s Lowe says next interest rate move likely up, but could be some time away; RBA prepared to intervene in A$ in ’extreme’ situations Snap, Blue Apron Fall Flat as the Incumbents Smash the Upstarts IEA Cuts Estimates for Crude Needed From OPEC This Year and Next Chinese Regulator Starts Probe Into Tencent, Weibo and Baidu Stolen 1MDB Funds Are Focus of U.S. Criminal Investigation Health Insurers Face Long Odds to Win Reprieve of Obamacare Tax U.S. Stocks Gain, Hong Kong Loses Weight in MSCI Indexes: SocGen FBI Says ISIS Used EBay to Send Cash to U.S.: WSJ Anbang Ownership Secrets Subject of U.S. Workers’ Complaint Hollywood Heads For Its Worst Summer Box Office in a Decade Asia stock markets were heavily pressured amid continued geopolitical tensions after further fighting talk between US and North Korea, which also saw US indices close negative for a 3rd consecutive day. The fresh goading came from both sides as US President Trump suggested his fire and fury comments maybe was not tough enough and warned North Korea to get its act together or it will be in trouble like few nations have ever been. This evoked a response from North Korea which vowed to mercilessly wipe out the provocateurs and stated the US will suffer a shameful defeat. As such, ASX 200 (-1.2%), KOSPI (-1.7%) Hang Seng (-2.0%) and Shanghai Comp (-1.7%) all traded with firm losses, while Nikkei 225 was shut due to public holiday. PBoC injected CNY 70bln in 7-day reverse repos and CNY 60bln in 14-day reverse repos, for a net weekly drain of CNY 30bln vs. CNY 40bln drain last week. Top Asian News War of Words Between Trump and Kim Has Asia Bracing for Conflict South Korean Banks Follow Won Lower Amid Rising Trump Rhetoric China Data Dump and Alternative Gauges Both Signal Steady Output Maker of India’s Aircraft Carrier Surges 22% on Trading Debut Biggest India Lender Slumps as Bad-Loan Surprise Hits Profit KKR Completes 26 Investments in China as of Aug. 1 Freeport Urged to Reinstate Workers to End Indonesian Strike India July Local Passenger Vehicle Sales Gain 15% Y/y to 298,997 BlackRock’s James Lenton Joins Fidelity as Trader in Hong Kong European indices are set for the worst week of losses this year as sentiment is weighed by the war of words between the US and North Korea. Weakness has been seen across the board (Eurostoxx 50 -1.0%), however mining names have notably underperforming amid Chinese metal prices slumping by some 5% overnight. EGBs supported by flight to quality with Bunds printing fresh session highs, while there had been reports of 5k lots tripping stops at 164.50. Peripherals underperform this morning, led by BTPs, subsequently the GER-ITA spread has widened to 162bps Top European News Morgan Stanley Makes ‘Multi-Year Call’ For Strong Euro on Reform Europe Miners Slump as Metals Fall on China Steel Body’s Warning Tullow Oil, Genel Energy Drop; GMP Cuts Both Stocks to Reduce Old Mutual First-Half Profit Climbs as Insurer’s Split Looms Merkel’s Bloc Holds All the Coalition Options in Latest Poll Buy BNP Paribas, Credit Suisse; Sell Barclays, Goldman Says Nordea Chairman Hints HQ Review Isn’t Limited to the Nordics In currencies, safe-haven support for the currency has continued as USD/JPY made a brief break below 109.00 overnight. Although, with the war of words showing no signs of stopping, JPY could make a push back to the April low at 108.11. So far, the pair have traded in a narrow range with investor focus for the USD shifting to the US inflation figures due out later in the session. AUD softened in Asian trade as commodities prices slipped. Crude prices fell over 0.5%, despite Saudi Arabia and Iraq's announcement to ensure that all major producers comply to the OPEC production cut, while Saudi also left the door open to deeper cuts. Additionally, Chinese iron ore prices fell some 5%, further weighed on the currency, subsequently pushing AUD to the mid 0.78. In commodities, China state run newspaper editorial comments state China will remain neutral if North Korea launches an attack on US, but if US strikes first and tries to overthrow North Korean government, China will stop them. Saudi Arabia Energy Minister Al-Falih stated the possibility for continuation of output cuts is on the table and if the size of cuts need to be adjusted, this will be examined and subject to approval by 24 countries. North Korea vows to mercilessly wipe out the provocateurs, says US will suffer a shameful defeat, according to North Korean state media. IEA raises 2017 global oil demand forecast to 1.5mln bpd vs. 1.4mln bpd, global oil supply rose by 520k, while OPEC compliance fell to 75%. Looking at the day ahead, the main focus will be its inflation stats for July, with expectations at 0.2% mom (for core) and 1.7% yoy. Onto other events, the Fed’s Kaplan and Fed’s Kashkari will also speak today. US Event calendar 8:30am: US CPI MoM, est. 0.2%, prior 0.0%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1% US CPI YoY, est. 1.8%, prior 1.6%; CPI Ex Food and Energy YoY, est. 1.7%, prior 1.7% Real Avg Weekly Earnings YoY, prior 1.09%; Real Avg Hourly Earning YoY, prior 0.8% DB's Jim Reid concludes the overnight wrap I'm hoping I'll be on this planet for as close to 36,525 days as I can get and I'm also hoping tomorrow will be the only day of that stint that I'm stupid enough to be picking up a brand new car with no miles on it. So in some ways it's exciting and in some way it’s very annoying as I vowed never to waste money on a new car. The twins have forced the issue and I'll be figuratively setting light to wads of bank notes as I roll out the forecourt. I'm driving 80 miles to Poole to collect it and I'm setting off very early as I have to get back to make sure everything is ready at home for the new arrival. The excitement is building, I'm very nervous and hopes and dreams come in abundance with such a fresh start. Yes Liverpool kick off their season at lunchtime tomorrow and I need to make sure I'm back in time to watch it. Wish me luck. The markets and more importantly the world is wishing for a bit of luck at the moment and a peaceful solution to the North Korean spat. The nuclear fallout from this week's high stakes geopolitical jaw boning couldn't completely unsettle markets on Wednesday but Thursday was a different story. We finally broke the 15 day run of sub 0.3% closes in either direction with the S&P 500 -1.45% after a day where the news we covered yesterday morning concerning North Korea's threat to attack Guam by mid-August increasingly spooked global investors as the day progressed. Mr Trump then raised the temperature another notch late in the US session last night, saying his ‘fire and fury” comment earlier in the week “wasn’t tough enough” and that “things will happen to them (NK) like they never thought possible..” and has “declined” to rule out a pre-emptive strike on NK, noting “we’ll see what happens”, all of which helped the US close at the lows for the session and shatter the recent low vol environment. Given the previous record low vol run was 10 days in 1966, if I do live to be 100 I'm statistically unlikely to witness anything like what we saw in the 15 days before yesterday. The S&P 500 had its worse day since mid-May this year when it fell 1.8%. Over at the Vix, the fear gauge broadly traded up most of the day and surged 44% higher to close at 16.04, which is actually the first day the index closed above 16 in CY2017. Across the pond, the Vstoxx was up 26% to 18.9, the highest level since April when Europe had heightened political risks in the run up to the French elections. Investors pushed safe haven assets higher again, with gold up 0.7% to a 9 week high, the Swiss franc up 0.1% (was +1.1% the day before) and JPY/USD +0.8% higher. Over in European government bonds, changes in core yields were more tempered following the ~5bp fall the day before. Bunds fell 1bp (2Y: unch; 10Y: -1bps), with Gilts down 3bps (2Y: +0.3bp; 10Y: -3bps) at the long end of the curve, while French OATs were broadly flat (2Y: unch; 10Y: -0.5bp). Peripheral bond yields were up slightly across the curve, with Italian BTPs (2Y: +1bp; 10Y: +2bps) and Portuguese yields (2Y: -0.5bp; 10Y: +2bps) not sure whether they were a flight to quality instrument or a high beta asset. Across the pond, the UST10Y fell 5bps yesterday (2Y -1bp) but is fairly flat this morning. In Asia, markets have continued to fall. The Kospi recovered a little to be 1.6% down as we type, the Won/USD dipping another 0.2%. The Hang Seng fell for the 3rd consecutive day (-1.9%), with Chinese bourses down 1.1% to 1.6%. We also got a glimpse of what China might be thinking, with the Global times (English paper under the People's Daily) writing that China should make clear that: i) it will stay neutral if the US retaliates after NK launches missile that threaten American soil, but ii) if countries try to overthrow the NK regime, China will prevent them from doing so. Moving on, if we can pull out attention away from the nuclear threat, inflation data is probably where the market is most sensitive to a surprise at the moment, even if yesterday's weak US PPI doesn't suggest an imminent rise. For the US CPI today, our economists expect core CPI inflation (+0.2% vs. +0.1%) should finally snap its streak of four consecutive monthly misses which could be important. They also remind us that as recent Fed statements have emphasized, policymakers will be monitoring near-term inflation trends closely. Hence, an in line print would provide tentative evidence that the recent downshift in core inflation may be behind us. Following on the theme of inflation, DB’s Luzzetti examined the impact of recent US dollar depreciation on the inflation outlook. Based on their own inflation models and analysis cited by Fed officials, they think that recent dollar weakness – assuming that it does not reverse – could lift year-over-year core PCE inflation by about 0.2pps by mid-2018 and 0.1pps by mid-2019. More details here. Turning to Europe, the flip-side of recent currency moves is discussed by DB’s Mark Wall who has written on how euro appreciation will be balanced against growth momentum in determining the ECB’s exit from QE. He argue that all else unchanged the euro’s appreciation since June could reduce the ECB staff core inflation forecast for 2019 from 1.7% yoy to 1.5% yoy. More details here Returning to the equity market sell-off in a little more depth, US bourses all weakened yesterday, with the S&P (-1.5%), the Dow (-0.9%) and the Nasdaq (-2.1%) sharply lower. Within the S&P, only the utilities sector was up (+0.3%) versus larger losses elsewhere (IT -2.2%; Financials -1.8%). European markets also fell across the board, the Stoxx 600 was down 1% to the lowest level since March with all sectors in the red. Across the region the FTSE 100 (-1.4%), the DAX (-1.2%), Italian FTSE MIB (-0.8%) and CAC (-0.6%) were all lower. Currencies were mixed but little changed, the USD dollar index dipped 0.2% post the lower than expected PPI data. The Euro continued to edge ahead against the USD and Sterling, up 0.1% and 0.3% respectively, while the Sterling/USD was down 0.2%. In commodities, WTI oil fell 2%, despite OPEC raising its demand forecast for oil and two of the largest OPEC producers (Saudi Arabia & Iraq) agreeing to strengthen their commitments to production cuts. Notably, Iraq's recent compliance to production targets is not exactly great (29% in July). Elsewhere, precious metals were modestly up (Gold +0.7%; Silver +1%) and aluminium continues to gain (Copper -0.3%; Aluminium +0.9%). Agricultural commodities were broadly lower, with corn, wheat and cotton all down ~4%, while soybeans, coffee and sugar were down ~3%. This follows a USDA report which suggest US farmers will produce more corn and soybeans than analyst forecasts. Away from the markets, Trump has made his disappointment with Senate majority leader McConnell well known, tweeting “can you believe that McConnell, who has screamed repeal & replace (Obamacare) for 7 years, couldn’t get it done…” and “…Mitch, get back to work…”. However, Trump was more conciliatory on special counsel Mueller, saying he “hasn’t given it any thought about firing Mueller” and that “I’m not dismissing anybody”. Elsewhere, NY Fed president Dudley cautioned that it will "take some time" for inflation to reach the Fed's 2% target, which is consistent with comments made by his colleagues earlier in the week. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the July PPI report was softer than expected. The core measure (ex-food & energy aggregate) was -0.1% mom (vs. 0.2% expected) and 1.8% yoy (vs. 2.1% expected). The PPI for healthcare services, which is closely correlated with that within the PCE deflator, rose a steady 1.4% yoy. Elsewhere, claims data were mixed, with initial jobless claims up 3k to 244k (vs. 240k expected) and continuing claims at 1,951k (vs. 1,960k expected). In Europe,France’s June industrial production (IP) was modestly lower than expectations at -1.1% mom (vs. -0.6% expected, 1.9% previous) and 2.6% yoy (vs. 3.1% expected), while manufacturing production was slightly better at -0.9% mom (vs. -1% expected) and 3.3% yoy (vs. 3.2% expected), which is just a bit weaker than Markit PMI readings had foreshadowed. Over in UK, IP for June was higher than expectations at 0.5% mom (vs. 0.1% expected) and 0.3% yoy (vs. -0.1% expected), while June manufacturing production was flat and in line, at 0% mom and 0.6% yoy. The UK’s trade deficit also unexpectedly widened in June as exports fell but imports rose. Looking at the day ahead, the final CPI figures for Germany (1.5% yoy expected), France (0.8% yoy expected) and Italy (1.2% yoy expected) will be released. Over in the US, the main focus will be its inflation stats for July, with expectations at 0.2% mom (for core) and 1.7% yoy. Onto other events, the Fed’s Kaplan and Fed’s Kashkari will also speak today.
US futures are set for a sharply lower open (at least in recent market terms) following a steep decline in European stocks and a selloff in Asian shares, following yesterday's sharp escalation in the war of words between the U.S. and North Korea. In a broad risk-off move U.S. Treasuries rose, the VIX surged above 12 overnight, while German bund futures climbed to the highest level in six weeks. The Swiss franc gained 1.2 percent to 1.1320 per euro its biggest daily advance since February 2015, while the yen surged as much as 0.8% against per euro, its strongest level in three weeks while gold rose. "Trump's comments about North Korea have created nervousness and the fear is if the President really means what he said: "fire and fury"," said Naeem Aslam, chief market analyst at Think Markets in London. "The typical text book trade is that investors rush for safe havens." Gold was headed for it’s largest gain this month while the yen and Swiss franc were the biggest advancers among G-10 currencies after President Donald Trump ratcheted up his rhetoric against North Korea. Treasuries and most European government bonds climbed amid the shift to safer assets, while almost every sector of the Stoxx Europe 600 Index fell and emerging markets equities were poised for the biggest drop since June 15. The rand extended losses after South Africa’s president survived a no-confidence vote. Earlier on Tuesday, volatility from the U.S. to Japan rose after Trump said in response to a Washington Post report on North Korea’s nuclear capabilities that further threats from the country would be met with “fire and fury.” North Korea said it’s examining an operational plan for firing a ballistic missile toward Guam. The VIX jumped above the 200-DMA as equity markets continuously push lower. The financial sector lagged, while defensive healthcare sector outperforms; gold and crude were supported in tandem. The heightened geopolitical tensions between the US and North Korea dampened global risk sentiment, which snapped the DJIA's streak of record closes and saw nearly all Asia-Pac bourses in negative territory. This was after US President Trump warned North Korea the US would respond to any threats with an unprecedented level of "fire and fury", which spurred a response from North Korea that it was considering striking Guam with mid-to long-range missiles. “Trump in his reactions is something new for all of us,” Geraldine Sundstrom, portfolio manager at Pimco Europe, said in an interview on Bloomberg TV. “Given the nature of the threats, given the players are new, it makes the situation a little bit unusual,” said Sundstrom, who recommended safe haven trades and minimizing risks through duration. As a result, global assets have slumped in a "classic, risk-off reaction" as Bloomberg puts it. The MSCI EM Asia Index of shares slid the most in a month. “We’re seeing a bit of risk aversion due to concerns over North Korea,” said Dushyant Padmanabhan, a currency strategist at Nomura in Singapore. “Besides the geopolitics, the market will also be focused on the Friday’s U.S. CPI print and what clues that might give us on the path for inflation.” The Nikkei 225 (-1.3%) underperformed as exporters suffered from the flows into JPY. The Nikkei Stock Average Volatility Index soared as much as 38%, most since August 2015, with the VNKY Index closing +24% at 16.00. The Korean KOSPI (-1.1%) was also, so to say, "weighed down" by the increased threat of nuclear war. In retrospect, that the South Korean market dipped just over 1% on the prospect of a mushroom cloud, is rather impressive. Hang Seng (-0.4%) and Shanghai Comp (-0.2%) were subdued following a miss on Chinese CPI and PPI data, while ASX 200 (+0.4%) bucked the trend amid gains in the metals-related stocks and with the largest-weighted financials sector buoyed after big-4 bank CBA reported an 8th consecutive year of record profits. Demand for 10yr JGBs was spurred by a flight to quality and with the BoJ in the market for JPY 770b1n of JGBs. The curve also slightly flattened amid outperformance in the long-end. Elsewhere, the Stoxx Europe 600 Index declined 0.6 percent as of 9:54 a.m. in London, the largest drop in more than a week on a closing basis. The U.K.’s FTSE 100 Index declined 0.6 percent, the first retreat in a week. Germany’s DAX Index sank 1.2 percent in the biggest tumble in almost three weeks. Futures on the S&P 500 Index sank 0.4 percent, the largest decrease in almost five weeks. The MSCI Emerging Market Index sank 0.9 percent, the biggest dip in almost eight weeks. "Heightened geopolitical risks overnight have seen the markets flip from risk-on to risk-off and we have to wait and see how long this move runs before adding some positions," said Viraj Patel, an FX strategist at ING in London. In overnight FX trading, risk aversion dominated trading as the Swiss franc and the yen led gains among Group-of-10 currencies, while the dollar index steadied as EM currencies halted a three-day rally. The yen appreciated as much as 0.8 percent to 128.61 per euro, its strongest level in three weeks. During previous occasions of political turmoil between the U.S. and North Korea, the Japanese currency over performed, yet the Swiss franc’s sharp decline in the past two weeks made for stretched positioning versus the euro, resulting in a bigger gain. The Australian dollar and New Zealand dollar both weakened. South Korea’s won fell to a three-week low amid heightened geopolitical tensions over North Korea. CNH and CNY both rally through 6.70/USD, highest since October 2016 after another stronger PBOC fixing. Core fixed income gains sharply, curves bull flatten with heavy volume noted in USTs. VIX jumps above 200-DMA as equity markets continuously push lower. Financial sector lags, while defensive healthcare sector outperforms; gold and crude supported in tandem. Some remain skeptically optimistic: at the moment the tensions increasing around North Korea’s nuclear weapons program does remain an “exchange of rhetoric,” and under normal expectations it’s difficult to think that any “real action” will be taken from here, says Takuya Yamada, a senior money manager in Tokyo. •If something actually happens, it won’t be surprising to see the market fall 5%, 10% in no time at all. However investors are aware of the fact that if North Korea takes action it will mean self- destruction, so their premise is that this is merely “trash talking.” "We've had some competing forces play out over the past 12 hours - the U.S. dollar was stronger off economic data, but that was quickly reversed with President Trump's comments about North Korea earlier today (Wednesday)," said ANZ analyst Daniel Hynes. In rates, the yield on 10-year Treasuries decreased two basis points to 2.24 percent. Germany’s 10-year yield declined four basis points to 0.44 percent, the lowest in six weeks. Britain’s 10-year yield fell four basis points to 1.117 percent, the lowest in six weeks. France’s 10-year yield dipped three basis points to 0.73 percent. In commodities, gold gained 0.6 percent to $1,267.99 an ounce, heading for the biggest one-day increase since July 28. West Texas Intermediate crude climbed 0.4 percent to $49.36 a barrel. Looking at the day ahead, there is the preliminary 2Q nonfarm productivity (0.7% expected) and unit labour costs (1% expected) data, final June wholesale inventories (0.6% expected) as well as the MBA mortgage applications. In Asia, Japan’s PPI for July will also be out on early Thursday morning. Notable US companies reporting today include Twenty First century Fox. Market Snapshot S&P 500 futures down 0.4% to 2,463 MSCI Asia down 0.4% to 160.58 MSCI Asia ex-Japan down 0.6% to 528.93 STOXX Europe 600 down 0.8% to 379.60 Nikkei down 1.3% to 19,738.71 Topix down 1.1% to 1,617.90 Hang Seng Index down 0.4% to 27,757.09 Shanghai Composite down 0.2% to 3,275.57 Sensex down 0.5% to 31,859.44 Australia S&P/ASX 200 up 0.4% to 5,765.66 Kospi down 1.1% to 2,368.39 German 10Y yield fell 3.7 bps to 0.437% Euro down 0.2% to 1.1730 per US$ Brent Futures up 0.02% to $52.15/bbl US 10Y yield fell 2 bps to 2.24% Italian 10Y yield rose 1.1 bps to 1.714% Spanish 10Y yield fell 4.3 bps to 1.411% Brent Futures up 0.02% to $52.15/bbl Gold spot up 0.6% to $1,268.77 U.S. Dollar Index down 0.03% to 93.62 Top Overnight News President Donald Trump’s threat to hit North Korea with “fire and fury” jolted markets from New York to Seoul even as U.S. lawmakers questioned the president’s willingness to back up the heated rhetoric N. Korea can strike before any U.S. pre-emptive attack; considering firing ballistic missiles “at areas around Guam” where U.S. strategic bombers are stationed: KCNA Trump’s presidential campaign, his son Donald Trump Jr. and former campaign manager Paul Manafort have started turning over documents to the Senate Judiciary Committee as part of the panel’s expanded investigation of Russian election- meddling South African President Jacob Zuma narrowly overcame a bid by opposition parties to topple him through a no-confidence motion in parliament. The real loser may be his own party, the African National Congress Morgan Stanley beat Goldman Sachs Group Inc. to become the most profitable foreign securities firm in Japan last fiscal year after it boosted structured-product sales and managed the two biggest initial public offerings BOE Agents’ Summary of Business Conditions: some manufacturers reported that initial pass-through of weaker sterling near completion Italian June Industrial Production m/m: +1.1% vs +0.2% est. China July CPI y/y: 1.4% vs 1.5% est; PPI 5.5% vs 5.6% est. API inventories according to people familiar w/ data: Crude -7.8m; Cushing +0.3m; Gasoline +1.5m; Distillates -0.2m Disney’s Iger Sees a Future Without Netflix, Comcast or DirecTV Goldman Sells U.K. Insurer Stake to GIC, Blackstone, MassMutual Canada Mulls Nicotine Cut as New Front Opens Against Smoking British American Tobacco Is Said to Extend Debt Binge in Europe New iPhone Models Are Said to Enter Mass Production: DigiTimes U.S. FDA Is Said to Issue Form 483 to Baxter Ahmedabad Site: CNBC Fox Is Said to Have Declined to Settle Suits for $60M: NYT Novo Sees Price of Insulin in U.S Dropping Again Next Year Ford Repairs Over 50 Police Units on Carbon Monoxide Concerns In Asia, increased geopolitical tensions after a war of words between US and North Korea dampened global risk sentiment, which ensured the DJIA snapped a 9-day streak of record closes and saw nearly all Asia-Pac bourses in negative territory. This was after US President Trump warned North Korea the US would respond to any threats with an unprecedented level of fire and fury, which spurred a response from North Korea that it was considering striking Guam with mid-to long-range missiles. Nikkei 225 (-1.3%) underperformed as exporters suffered from the flows into JPY, while KOSPI (-1.1%) was also weighed on by the increased threat of nuclear war. Hang Seng (-0.4%) and Shanghai Comp (-0.2%) were subdued following a miss on Chinese CPI and PPI data, while ASX 200 (+0.4%) bucked the trend amid gains in the metals-related stocks and with the largest-weighted financials sector buoyed after big-4 bank CBA reported an 8th consecutive year of record profits. Demand for 10yr JGBs was spurred by a flight to quality and with the BoJ in the market for JPY 770b1n of JGBs. The curve also slightly flattened amid outperformance in the long-end. RBA Assistant Governor Kent states that fixed-income funding is available at favourable rates and that banks' use of wholesale debt is much lower than a few years ago. Further stating that AUD appreciation is more of a story regarding USD depreciation, adds further strength in AUD would result to slightly weaker domestic growth. South Korea Finance Minister sees limited risk impact on markets from North Korea. Chinese CPI (Jul) M/M 0.1% vs. Exp. 0.2% (Prey. - 0.2%) Chinese PPI (Jul) Y/Y 5.5% vs. Exp. 5.6% (Prey. 5.5%) Chinese CPI (Jul) Y/Y 1.4% vs. Exp. 1.5% (Prey. 1.5%) Top Asian News Morgan Stanley Tops Goldman Sachs With Biggest Profit in Japan S. Korea Official Says Tension High, But Not A Crisis: Yonhap Markets on Edge in Seoul as Trump Escalates North Korea Warnings China Remains Inflation Backstop as Mills and Smelters Close India Is Said to Tweak HPCL Share Sale Terms to Skip Open Offer Gold Imports by India Are Said to Have More Than Doubled in July Wharf Soars to Highest Since ’86 on $29 Billion Spinoff Plan Abu Dhabi’s FAB Is Said to Appoint Pant International FIG Head In European bourses, the selling persisted across virtually all markets with Trump's comments in North American trade has been the catalyst for the selling pressure seen in Global equities. US President Trump warned North Korea that a US response to any threats would be 'fire and fury the likes of which the world has never seen'. Comments followed from North Korea, with the state media stating that the US war hysteria will bring a miserable end, and also warns of operation on signs of US provocation, further saying that they are seriously mulling striking Guam. Adding to the downbeat was rather subdued inflation figures out of China. EGB yields falling to the lows amid the aforementioned escalating tensions between the US and North Korea. Peripheral bonds wider by around lbps against the German benchmark. Elsewhere, BATs have begun marketing form their multi-currency (GBP, EUR) 5 tranche after yesterday's chunky USD-denominated 8 part. Technically uncovered German Bobl auction. Top European News Brexit Will Strain BOE’s Supervisory Resources, PRA’s Woods Says Italy Industrial Production Jumps, Pointing to Faster Recovery ABN Amro Bolsters Capital as Dutch Growth Drives Profit Rise Carl Zeiss Meditec Slides as Valeant Shuts Door on Target Assets Ahold Delhaize Boosts Synergy Goal as Competition Concerns Grow Russia Readies $4 Billion Eurobond Swap in Face of Sanctions EON Plots Growth Strategy as Profit Rebounds, Debt Falls Santander Sells Control of Popular Real Estate to Blackstone In currencies, the initial mover following the exchange from the USA and North Korea was USD/JPY, breaking through August's low, however finding some bids just below this 109.80 level. USD/CHF saw similar price action, attempting to test August's low around 0.9650. Traffic was clear at these levels, becoming key support in the pair, with bids clearly stacked around 0.9650. Sterling saw some early bullish pressure this morning, as cable broke 1.30 to the upside, with GBP/USD struggling to find any real direction as Brexit concerns continue. EUR/GBP saw some selling, however, failed to attempt to test 0.90 as bids are evident ahead of this key psychological level. The geopolitical uncertainties between Australia and China did cause some suffering of AUD, as AUD/NZD fell from 1.08, further weight was put on the currency with Central bank commentary from the RBA, as Kent said AUD appreciation is more of a story regarding USD depreciation, adds further strength in AUD would result to slightly weaker domestic growth. In commodities, safe haven flow supporting precious metals with Gold prices up a modest 0.6%, while crude prices have recoup from yesterday's lows following last night's large drawdown in the API report. Saudi and Iraqi oil ministers are to hold a joint press conference on Thursday in an attempt to stabilise oil markets. US Event Calendar 7am: MBA Mortgage Applications, prior -2.8% 8:30am: Nonfarm Productivity, est. 0.7%, prior 0.0%; Unit Labor Costs, est. 1.1%, prior 2.2% 10am: Wholesale Trade Sales MoM, est. 0.0%, prior -0.5%; Wholesale Inventories MoM, est. 0.6%, prior 0.6% DB's Jim Reid concludes the overnight wrap A bit more going on in the last 12 hours with Trump inflaming already elevated tensions between the US and North Korea late in yesterday's session and this morning we have seen Chinese inflation numbers. If that’s not enough today is a special financial crisis anniversary. More on that later but first to China. China’s July PPI was up 5.5% yoy, but a tad softer than expectations of 5.6% (5.5% previous), the National Bureau of statistics noted mom producer price growth turned positive on the back of steel and non-ferrous metal price rebounds, with ~50% of the industrial sectors seeing price gains in July. CPI was up 1.4% yoy in July (vs. 1.5% expected; 1.5% previous) with food costs decline partly offsetting gains in other consumer goods. Focus remains on the extent of economic growth in 2H, as China’s policy makers had previously indicated a preference for slower growth This morning in Asia, markets are sharply lower on the back of the North Korea story rather than the above inflation numbers. The Nikkei is -1.2%, the Kospi down -0.8%, the Hang Seng -0.8% with Chinese bourses ranging from -0.2% to +0.1%. The Korean won has also dipped 0.5% against the USD. This follows another soporific session yesterday, albeit one that awoke from its slumber in the last hour of trading following defiant comments from Mr Trump concerning North Korea. As per Bloomberg, he said the country would be "met with fire and fury and, frankly, power the likes of which the world has never seen before" if it continues to threaten the US. The VIX spiked from 9.54 just after Europe went home and around 10 when the comments were reported to a peak of 11.29 with 30mins left in the session before closing at 10.96. However even with the late shake-up the S&P 500 only lost around 0.4% after the news and (closed -0.24%) extending the record closing run of sub 0.3% moves in either direction to 14 days. Remember this record covers 90 years of daily data with the previous record being 10 days without a bigger move. Trading volumes in the S&P were again very thin, with the daily value traded at 0.15% of the index market cap, which is ~45% of the historical average. Elsewhere, the Dow dipped 0.2%, with Trump’s comments helping to break a run of 8 consecutive days of fresh all-time highs. Staying with Trump, an earlier article by the Washington post suggested North Korea’s nuclear capabilities may be more advanced than prior expectations. According to US intelligence reports the state: i) can now produce small nuclear warheads that fit inside its missiles, ii) is outpacing expectations in building missiles that are capable of striking the US mainland, and that iii) the state may have up to 60 nuke warheads, this compares to ~7,000 each in US / Russia, 260 in China and 215 in the UK. These reports coupled with increased rhetoric from Pyongyang and a flat refusal to negotiate on their nuclear program may have added to Trump’s fury. Senator McCain said Trump needs to be more cautious in his statements because he may not be able to make good on the implied threats. For now, we watch and wait. Before we review the rest of the last 24 hours, from the prospective of a research analyst that has to write something about financial markets every day, 2017 and 2018 are a great source of ongoing material given the regular 10 year financial crisis anniversaries that we'll see. Today is one of those such days as we mark a decade to the day that money markets started to seize up thus requiring heavily coordinated central bank action that marked an extraordinary period of central bank activity that is still in full flow today. The announcement by BNP Paribas that they were closing three funds linked to US mortgages was the catalyst for a complete lack of trust in money markets over the coming days and weeks. Just over a month later we had the bank run on Northern Rock. As an example of the impact BNP's announcement had, 3 month dollar Libor hadn't moved all year but over the course of two days spiked 20bps. Not a great deal but on this day 10 years ago all the major central banks were forced to inject liquidity with the ECB doing so for the first time since 9/11. One of the great ironies of the period since is that returns in major global assets have been very healthy albeit with some major exceptions. Of the 38 major global assets we usually track for this purpose 27 are higher and 11 lower in dollar adjusted terms. Top of the pack is the S&P 500 (+106%) followed by US HY (+95%) and Gold (87%). Other DM fixed income markets are generally in the 35%-80% range. The Dax (+38%) leads the way in an underperforming European equity story. The Stoxx 600 is up 22% and the FTSE 100 only 12% higher in Dollar terms largely due to a 36% fall in Sterling over the period. Of the 11 assets that has seen negative dollar returns over the last 10 years the highlights are Greek equities (-82%), Stoxx Euro Banks (-54%), Portuguese equities (-42%), the CRB commodity index (-42%), Italian equities (-33%), and Oil (-32%). EM equities were up 29% but Chinese (-2%), Brazilian (-26%) and Russian (-32%) bourses were selective under-performers. So the huge intervention and general asset price inflation over the last decade hasn't been universally seen across the board. There have been clear winners and losers. Were you the one who during late afternoon on August 8th 2007 decided to switch out of their portfolio of Greek equities to buy the S&P 500 and then go on a 10 year sabbatical? If you were then I have nothing but respect, admiration and jealousy towards you. If you did the reverse trade then I suspect you might not be reading this now but you have my sympathies!! Back to the market’s performance, US bourses all softened ~0.2% overnight. Within the S&P, only the utilities sector was up (+0.3%), while the materials (-0.9%) and Telco sector dipped the most. After the bell, Disney traded ~4% down post its result on softer revenue trends and has said it will stop selling movies to Netflix. Back in Europe, markets broadly strengthened. The Stoxx 600 gained 0.2%, aided by the softer Euro and advances in the utilities sector (+0.6%). Regional indices were also slightly up, with the DAX (+0.3%), FTSE 100 (+0.1%), CAC (+0.2%) and FTSE MIB (+0.1%). Over in government bonds, yields were modestly higher across maturities, with the bunds (2Y: +2bp; 10Y: +2bps), Gilts (2Y: +2bp; 10Y: +2bps) and OATs (2Y: +2bps; 10Y: +2bps) all up ~2bp at the long end of the curve, while Italian BTPs (2Y: unch; 10Y: +1bp) ticked up a bit less. The UST 10Y has dipped overnight (2Y: -1bp; 10Y: -1bp) after yields rose 2-3bps yesterday. PPI/CPI data tomorrow and Friday will be key though for global yields. Currencies were little changed, the US dollar index gained 0.2%, while the Euro/ USD fell 0.4% and the sterling dipped 0.3%. Elsewhere, the Euro/Sterling was broadly flat. In commodities, WTI oil retreated 0.4%, with the EIA increasing its US output forecasts and OPEC noting they had fruitful talks and agreement on compliance (but likely shy of tangible takeaways the market may be hoping for). Elsewhere, precious metals were slightly up (Gold +0.5%; Silver 0.7%) and aluminium increased 5% following reports of China increasing efforts to curtail illegal or polluting capacity. Agricultural commodities were fairly mixed but little changed, with cotton (+0.8%), coffee (+0.5%), soybeans (flat), corn (-0.1%), wheat (-0.2%), and sugar (-0.6%). Away from the markets, Republicans are discussing some kind of compromise to get the tax reforms through, potentially involving a hybrid approach that include permanent tax revisions with temporary cuts for individuals and business. House Speaker Ryan is said to be more resistant to the idea, preferring for corporate tax rate cuts to be permanent. Back in April, the plan was for corporate tax rate to be cut from 35% to 15% and individual tax rates to be reduced from 7 bands to 3, with the top rate down from 39.6% to 35%. Elsewhere, the US treasury's $24bn three-year note sale drew a yield of 1.52%, with a bid-to-cover ratio of 3.13, the highest since December 2015. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the JOLTS survey reported a record 6.163m job openings in June (vs. 5.75m expected), which should partly support the state of US labour demand. Elsewhere, the July NFIB small business optimism index was higher than expectations at 105.2 (vs. 103.5 expected), the best reading since February. In Europe, June trade reports in both German and France were a bit weaker than market expectations. Germany’s June export posted a -2.8% mom (vs. 0.2% expected) and imports at -4.5% (vs. 0.2% expected). However, despite these declines, exports were still solid on an annual basis, up 5.7% yoy and imports up 6.9% yoy. French’s trade deficit also widened in June, as a 2.8% mom decline in exports dominated a 2.0% mom decline in imports. Elsewhere, Spain’s home sales rose 19.0% yoy in June. Looking at the day ahead, Bank of France’s July business sentiment indicator (103 expected) will be out early in the morning, followed by Italy’s June industrial production data (0.2% mom and 3.4% yoy expected). Over in the US, there is the preliminary 2Q nonfarm productivity (0.7% expected) and unit labour costs (1% expected) data, final June wholesale inventories (0.6% expected) as well as the MBA mortgage applications. In Asia, Japan’s PPI for July will also be out on early Thursday morning. Notable US companies reporting today include Twenty First century Fox.
With the traditional post-payrolls market lull setting in, and most trading desks taking a week or two off, it will be a relatively quiet week with attention turning to inflation data with releases in the US, China, Norway & Switzerland, a key factor as central banks consider if/when to tighten in the near future. The US print will gain most attention: a strong number will validate the Fed's balance sheet unwind intentions and a potential December rate hike. The major US release for the week comes on Friday in the form of July’s CPI. As RanSquawk notes, analysts expect the headline to come in at 1.8% YY from 1.6% last time out, while the core reading is expected to rise by 1.8% YY from 1.7% last time out. The core metric has missed expectations over the last four releases. HSBC opines that “One major reason why core inflation has softened this year has been a slowdown in the pace of increase in rents.” At its most recent decision the Federal Reserve noted that it is “monitoring inflation developments closely” while it is of the belief that “inflation will remain somewhat below 2% in near term, but stabilise around 2% in medium-term.” This is of course against a back drop of limited wage growth. It is also worth noting that North American liquidity will be lower on Monday owing to a Canadian national holiday. Other releases of note during the week: Monday US Fed Labour Market Conditions Index (Jul) Tuesday US JOLTS Job Openings (Jun) Wednesday US Nonfarm Productivity (Q2) US Unit Labour Costs (Q2) US Wholesale Inventories (Jun) Thursday US PPI (Jul). There will be some July China macro data released, starting with FX reserves on Monday. Chinese trade data for July is due on Tuesday, with analysts expecting the surplus to widen to USD 46.08bln from USD 42.77bln last time out. HSBC believe that “exports growth likely remained strong in July supported by still resilient external demand.” The latest Caixin manufacturing PMI gives credence to this view, as it pointed to new export orders expanding at a faster pace. On the import front HSBC expect that “import growth remained strong, supported by the broad-based nature of the economic recovery.” In EM, there are monetary policy meetings in Mexico, Peru and the Philippines. Other releases of note during the week: Monday Chinese FX Reserves (Jul) Tuesday Japanese Current Account (Jun) Australian NAB Business Survey (Jul) Wednesday Australian Housing Finance Data (Jun) Thursday Australian Melbourne Institute Inflation Expectations (Jul) During the week: Chinese New Yuan Loans & Money Supply Data (Jul) US inflation, Fedspeak & China data After a robust NFP report, focus this week turns to US inflation prints. We expect core CPI to accelerate to a 0.2% m/m clip in July, ending a four-month streak of subdued prints. We also hear from several Fed speakers, including NY Fed President Dudley. July macro data from China will also be released over the next two weeks, starting with Monday's FX reserves data. Our economists expect the July reading of activity growth to moderate from June's strong levels. CPI likely stayed flat, while PPI may continue to ease on base effects. Meanwhile, headline new credit data have likely declined, but M2 growth may rebound modestly. The week ahead in Emerging Markets There are monetary policy meetings in Mexico, Peru and the Philippines. Sovereign rating review in South Africa In other data In the US, inflation will be the main focus, but we also have non-farm productivity and unit labor costs, the monthly budget statement and several Fed speakers. In the Eurozone, a very quiet week ahead with no key data releases. We have final CPI and industrial & manufacturing production for Germany, France, Italy and Spain. In the UK, we get industrial & manufacturing production, construction output and trade balance. In Japan, we get the current account and trade balance, money supply, machine orders and PPI. In Australia, RBA Governor Lowe is due to appear before the parliamentary economic committee and we hear a speech by Assistant Governor (Financial Markets) Kent. On the data front, we receive both consumer and business sentiment and housing finance approvals. In New Zealand, focus will be on the RBNZ, though we also get the manufacturing PMI and RBNZ Governor Wheeler will also appear before Parliament Select Committee. A detailed breakdown of the main weekly events courtesy of DB's Jim Reid Monday starts with Germany’s industrial production figures for June in early morning, followed by UK’s July Halifax house price index and then US’s consumer credit stats for July. On Tuesday, Japan’s balance of payments and trade balance figures for June will be out in early morning. Then Germany’s June trade balance, current account, export and import stats are due. France will also report its June trade balance and current account figures. Over in the US, there is the NFIB small business optimism index for July. Turning to Wednesday, China’s CPI and PPI for July will be out in early morning. Later on, Italy’s June industrial production figures and Bank of France’s business sentiment indicator are also due. Over in the US, there is the 2Q nonfarm productivity and unit labour costs data, June wholesale inventories as well as the MBA mortgage applications. For Thursday, the June industrial production and manufacturing production figures for UK and France will be out. Further, June trade balance stats for UK and Italy are also due. Over in the US, we have the July PPI data, the monthly budget statement as well as the initial jobless claims and continuing claims figures. On Friday, the final CPI figures for Germany, France and Italy will be released. Over in the US, CPI stats for July are also due. Onto other events, today starts with speeches from the Fed’s Bullard and the Fed’s Kashkari, followed by the OPEC/Non-OPEC joint technical committee meeting in Abu Dhabi. Then on Thursday, the Fed’s Dudley will speak. Onto Friday, the Fed’s Kaplan and Fed’s Kashkari will also speak. Finally we'll still have earnings season continuing on both sides of the Atlantic but we're now past the peak. * * * Finally, here is a table from BofA and guidance from Goldman with a breakdown of the key US events together with consensus estimtes The key economic release this week is the CPI report on Friday. There are several scheduled speaking engagements by Fed officials this week. Monday, August 7 11:45 AM St. Louis Fed President Bullard (FOMC non-voter) speaks: St. Louis Fed President James Bullard will give a speech on the U.S. economy and monetary policy at the America’s Cotton Marketing Cooperatives’ annual conference in Nashville, Tennessee. Audience and media Q&A is expected. 01:25 PM Minneapolis Fed President Kashkari (FOMC voter) speaks: Minneapolis Fed President Neel Kashkari will participate in a moderated audience Q&A session at an event hosted by the Sioux Falls Rotary Club in South Dakota. 03:00 PM Consumer credit, June (consensus +$15.25bn, last +$18.41bn) Tuesday, August 8 10:00 AM JOLTS job openings, June (consensus 5,700k, last 5,666k) Wednesday, August 9 08:30 AM Nonfarm productivity (qoq saar), Q2 preliminary (GS +0.6%, consensus +0.7%, last flat); Unit labor costs, Q2 preliminary (GS +1.1%, consensus +1.0%, last +2.2%): We estimate non-farm productivity increased 0.6% in Q2 (qoq ar), modestly below the 0.75% average achieved during this expansion. We expect unit labor costs – compensation per hour divided by output per hour – to increase 1.1% (qoq saar). 10:00 AM Wholesale inventories, June final (consensus +0.6%, last +0.6%) 11:00 AM Cleveland Fed President Mester (FOMC non-voter) speaks: Cleveland Federal Reserve President Loretta Mester will give the keynote speech at the Community Bankers Association of Ohio’s Annual Convention in Cincinnati, Ohio. 01:00 PM Chicago Fed President Evans (FOMC voter) speaks: Chicago Fed President Charles Evans will discuss current economic conditions and monetary policy in a closed group interview with representatives of the press in Chicago. 01:30 PM San Francisco Fed President Williams (FOMC non-voter) speaks: San Francisco Fed President John Williams will give a speech titled "Monetary Policy's Role in Fostering Sustainable Growth" in Las Vegas, Nevada. Audience and media Q&A is expected. Thursday, August 10 08:30 AM PPI final demand, July (GS flat, consensus +0.1%, last +0.1%); PPI ex-food and energy, July (GS +0.1%, consensus +0.2%, last +0.1%); PPI ex-food, energy, and trade, July (GS +0.2%, consensus +0.2%, last +0.2%): We estimate that headline PPI was flat in July, reflecting a modest rise in core producer prices offset by a decline in gasoline margins and energy prices. We estimate PPI ex-food, energy, and trade services rose by 0.2%. In the June report, PPI exceeded expectations as higher-than-expected food and core prices excluding trade services more than offset a retracement in the volatile trade services category. 08:30 AM Initial jobless claims, week ended August 5 (GS 245k, consensus 240k, last 240k); Continuing jobless claims, week ended July 29 (consensus 1,960k, last 1,968k): We estimate initial jobless claims rebounded 5k to 245k in the week ended August 5. Initial claims can be particularly volatile around this time of year due to annual auto plant shutdowns, and we expect a rebound in these factory closures to boost claims for this week. Additionally, we expect a rebound from depressed levels of jobless claims in California. Continuing claims – the number of persons receiving benefits through standard programs – have trended up recently after falling sharply in the first four months of the year. 10:00 AM New York Fed President Dudley (FOMC voter) speaks: New York Fed President William Dudley will give opening remarks at an “Economic Press Briefing on Wage Inequality in the Region” held at the Federal Reserve Bank of New York. Audience and media Q&A is expected. 02:00 PM Monthly budget statement, July (consensus -$55.5bn, last -$90.2bn) Friday, August 11 08:30 AM CPI (mom), July (GS +0.20%, consensus +0.2%, last flat); Core CPI (mom), July (GS +0.21%, consensus +0.2%, last +0.1%); CPI (yoy), July (GS +1.8%, consensus +1.8%, last +1.6%); Core CPI (yoy), July (GS +1.8%, consensus +1.7%, last +1.7%): We expect a 0.21% increase in July core CPI (mom sa), which would be its fastest pace since January and would produce a one tenth increase in the year-over-year rate (to +1.8%). Our forecast reflects a boost from the second California tobacco tax increase of the year – a roughly US$2 per pack increase effective July 1 – as well as stabilization in used car prices, and mean reversion in airfares, apparel, and lodging following recent weakness. We also expect a reprieve from cell phone plan disinflation in the communication category, as a price hike for some T-Mobile plans is likely to offset new discounts offered by a few smaller pre-paid carriers. We also expect an above-trend increase in education prices, reflecting firming college tuition inflation indicated by press reports and university budget summaries. We estimate a 0.2% rise in headline CPI, reflecting rising food prices but a modest decline in energy prices. This would be consistent with the year-over-year rate rising two-tenths to 1.8%. 09:40 Dallas Fed President Kaplan (FOMC voter) speaks: Dallas Federal Reserve President Robert Kaplan will take part in a moderated Q&A session at the sixth annual CPE day hosted by the University of Texas at Arlington’s Accounting Department. Audience and media Q&A is expected. 11:30 AM Minneapolis Fed President Kashkari (FOMC voter) speaks: inneapolis Federal Reserve President Neel Kashkari will participate in a moderated audience Q&A session at the Independent Community Bankers of Minnesota’s annual convention in Bloomington, Minnesota. Source: BofA, DB, Goldman
Submitted by Rajan Dhall from fxdaily.co.uk We got some encouraging signs from the latest US payrolls report on Friday, with the earnings component edging up to 0.3% on the month, to lift the year on year rate to 2.5%. Even so, this is one month's set of data, and is unlikely to convince USD bears that the rate path espoused by the Fed is still firmly 'on track', and in the wake of the numbers, the odds of another 25bp hike by end of year remain close to 50/50. It does however mean that the one way traffic can ease off a little, so whatever your thoughts on the economy further down the line, we can expect to see a little more ebb and flow in the price action for the majors, with the USD index surviving a test on the key support levels into 92.00. On the data releases next week, we get a little more on the jobs market as Monday offers up the CB employment trends index, along with Fed Labour Market conditions. JOLTS on Tuesday is also one to watch out for, but non farm productivity on Wednesday could add a little more insight on wage growth if this improves. Fed chair Yellen (amongst others) often cites the tight correlation between productivity and wages, so we have been keeping an eye on this on. Even so, the algos are more likely to react to the top tier numbers, and on Friday, the Jul inflation stats, with consensus looking for the headline year on year rate to pick up a few notches from the 1.6% print for Jun. The core rate is expected to hold 1.7%. Underlining the turnaround in the greenback was the sharp reversal in EUR/USD, failing to reclaim the 1.1900 level and eventually getting dragged back under 1.1800 to test the low 1.1700's late Friday. At these levels, buyers stepped in ahead of the 1.1710-15 'breakout point' which suggests to some that we are about to establish a new trading range. This may be a little premature and simplistic, and we would not rule out a deeper retracement - as we expect to see elsewhere to varying degrees - but we can assume 1.2000 will be a tough ask at this stage unless we get fresh European data to turn the tide again. EU wide, we get the latest Sentix Investor Confidence Index for Aug. Judging by the rampage seen in EUR/CHF, one would expect this to remain strong given the dormant cash sitting in safe, fee paying accounts looks to be flowing (in part) into Europe, with a number of asset classes offering value at depressed levels. The cross rate looks a little spent above the 1.1500 mark, but as yet, we see little reason for a marked turnaround as sentiment on Europe holds strong. More specifically, German and Italian trade and industrial production figure stand out next week, especially with the impressive rise seen in industrial orders noted out of Italy. If we do get a stronger correction in the EUR, key levels initially stand out at circa 1.1500 in EUR/USD, and 1.1250-1.1300 for EUR/CHF. Both levels leave more than enough room to maintain the uptrend, but after last week's numbers, the spot rate looks a little more vulnerable under the circumstances. Against this, EUR/GBP has finally made a push through the resistance 0.9000 mark, but this was all down to the BoE announcements last week. There was a strong inclination that the MPC may have been erring on the side of preparing the market for a hike inside H2 of this year, but the vote split returned on 6-2 for unchanged with the outgoing (gone) Kirsten Forbes, and Andy Haldane remained on the cautious side despite some of his comments alluding to a switch over to Messrs McCafferty and Saunders who continue to advocate a move now. Whilst the current UK data is resilient in the face of what lies ahead, governor Carney expressed the ongoing concern over the potential impact of the 'negotiated terms' for leaving the EU - something which in itself seems to have attracted lesser attention despite both sides citing little or no progress in the talks so far. One thing is for sure, and that is with so much uncertainty in the air, pushing GBP any higher from current levels is not going to be easy. Longer term valuation levels argue buying on the downside nearer 1.2500, caution dictates selling at the higher extremes. For Cable, we assume a 'range shift' from 1.2000-1.3000 to 1.2500-1.3500, and going into the BoE call on Wednesday, sellers were clearly in evidence south of 1.3300. We would not have expected any hawkish bias to have led to led to any material rate hike pricing further down the line, though since the meeting, deputy governor Broadbent believes the market is understating rate hikes, but this looks to be based on the 2-3 year forecast horizon and with a high degree of risk variables to factor in. EUR/GBP resistance higher up now lies in the 0.9200-0.9250 area, but we expect a slow grind up to these levels unless Brexit headlines - so far quiet- start hitting the wires again. Data next week focus on the manufacturing and construction sectors, as we get the output stats for Jun on Thursday as well as the trade balance - currently an improved £11.86mln deficit. Sticking to the continent, and Thursday, we also get the latest Norwegian inflation stats followed by industrial production in Sweden. Swedish data has been very strong of late - indeed year on year industrial production as of May stood at 8.0%, with orders up at 7.6%, and after the strong 4.0% rise in GDP reported last week, more of the same is expected. Still no outright differentiation to note however, as firmer Oil prices support the NOK and keep NOK/SEK tight in the mid 1.0200's for now. Oil prices have also proved supportive for the CAD at these levels, but clearly the interest cycle is now driving sentiment, with the BoC 25bp hike followed up by expectations of more to come based in central bank rhetoric backing up the data. Headwinds that lie ahead include the impact of the rise in implied rates on the housing market, with recent entrants likely to be stretched given the prices they have had to pay. Early signs that in some areas prices are heading lower - or moderating at least - and this alone could prompt the BoC to take a slightly softer line after such a sharp change in sentiment. It also won't be long before the NAFTA talks are thrust into the headlines, and while the net effect of the tri-party accord has been beneficial to the US and Canada in equal measure over the years, the unnerving factor may impact sentiment at various points in the negotiations. Mexico is naturally more concerned. For now, we look to have a base set ahead of 1.2400, with the upturn pushing into the upper 1.2600's. The Canadian jobs release was also a healthy one, and continuing the positive theme set out in preceding reports, but we also saw the trade deficit widen out by considerably more than expected, and along with the spot overstretch seen in the tight time frame achieved, the correction here may well have the legs for 1.2750-1.2800, but it will be a choppy ride from here. Nb, Canada off on Monday; Civic day. Onto the traditional risk currencies and pairings, JPY exchange rates have been relatively well contained amid the geopolitical concerns which dominate. We will see how USD/JPY and the rest of the pack respond to the sanctions imposed on North Korea, but on recent evidence, we expect very little if at all. USD/JPY in particular has been very orderly of late, and we hit strong demand into 110.00 last week while 112.00 higher up looks to be the first major resistance point if the usual risk-on mood in FX picks up again. EUR/JPY looks heavy on moves through 131.00 at present, and AUD/JPY and NZD/JPY have both backed off better levels in recent weeks, but we should get as much, if not more price action in AUD/USD and NZD/USD in the week ahead. On the economic front, plenty of second tier data out of Japan including machinery orders, but none of this really matters with respect to currency and rates, where the inflation rate is way off target and underpins the current BoJ policy stance for some time to come. In China, trade data in the middle of the week will be of greater interest rather than inflation, while we also get levels on FX reserves at the start of the week. NZ is where we have the only central bank action to look to, and the market will be looking out for notes on whether the RBNZ are duly concerned over USD exchange rate levels. Against the AUD, we remain at historically higher levels as we struggle to push back above 1.0700, but having pierced 0.7500 vs the USD, we should least get the cautionary warnings on the negative impact on growth should we push higher still. We have since dipped (very) briefly under 0.7400, so expect the rhetoric to be calm and advisory for now, as was the tone adopted by the RBA in their statement last week. The RBNZ are also set to keep rates unchanged, especially in the wake of the weaker than expected jobs data for Q2. AUD continues to hold comfortably above its respective breakout point at 0.7850 or so, but we did see the USD side of the equation testing 0.7900, and there are clear comparisons here (in price action) to that of EUR/USD into 1.1710-15 as noted above. On the Australian data schedule, the AIG construction index offers some early input in Q3 growth, with lending data out on Tuesday. RBA assistant governor Kent speaks on Tuesday, governor Lowe on Thursday.
It took stocks only a few minute to "price in" the latest political shock out of Washington, and as of this morning Emini futures no longer care that Mueller has a grand jury, trading 0.08% in the green with European stocks and Asian shares all little changed as investors await the looming July jobs report, which is expected to show a slowdown in hiring from 222K to 180K but will have little impact on either the Fed's thinking or the market. Stocks, gold and most metals headed for a fourth week of gains on Friday, as fresh political woes for U.S. President Donald Trump and the prospect of a trade war with China kept the dollar depressed ahead of payrolls. The Bloomberg Dollar spot index inched lower for a third day, hovering near the weakest in 15 months, while cable rose to $1.3154, the euro hit a fresh two-and-a-half year high against the dollar and oil retreated. Global stocks were just barely in the green this morning with the MSCI All-Country World Index rising less than 0.05%. In key overnight macro moves, the Aussie dollar gained against the greenback despite RBA warnings about currency’s strength, while the USD/JPY fell as much as 0.2% to 109.85, the weakest since June 15, before paring decline to 110.03. In Asia, Japan’s Topix index slid 0.2% and Australia’s S&P/ASX 200 Index lost 0.3%. South Korea’s Kospi was up 0.5 percent after sliding 1.7 percent on Thursday. Japan's Nikkei ended the week little changed, dropping 0.4 percent on Friday as a stronger yen weighed. Wall Street was expected to start marginally higher, having seen the Dow index break through 22,000 points this week. Hong Kong’s Hang Seng Index was little changed, while the Shanghai Composite Index swung between gains and losses. European markets got off to an underwhelming start, with Britain's FTSE 100, Germany's DAX and France's CAC 40 all lower. The FTSE was on course for its best week in two months, boosted by the latest tumble in the pound. The Stoxx 600 traded sideways as Swiss Re AG’s profit drop weighed on insurers. The rising Euro, which ING now expects to rise as high as 1.20 in the next 4 weeks, has capped Stoxx gains in recent months, on concerns it will pressure exporter earnings. The U.K.’s FTSE 100 Index gained less than 0.05 percent to the highest in more than a week. Germany’s DAX Index jumped 0.1 percent. The dollar index, which has just recorded its worst run of monthly losses since early 2011, was 0.1 percent lower at 92.766 on the day and about 0.6 percent during a week in which it fell to a 15-month low of 92.548. "We think things are overdone in terms of negative sentiment around the dollar," said PineBridge Investments fund manager Hani Redha, quoted by Reuters. "Overall we think global growth is going to be quite solid but we think the leadership is going to change back towards the U.S.," he added, saying Trump was also likely to get at least some fiscal stimulus measures through in the coming months. As SocGen's Kit Juckes writes this morning, the US Treasury market is heading towards today's non-farm payroll data with 10s at 2.23%, in the bottom half of their 2.12-2.42 range. The RBA sees lower inflation thanks to the AUD's rise to date and a threat to growth from further appreciation, Japanese wages fell and even smoothed show the same lack of wage growth as we see everywhere, despite a tightening labour market. Just taking those three bits of information I get a now-familiar snapshot of the world. Anchored US rates and yields will make sure that capital goes on flowing out of dollars and into anything that's perceived as more interesting. Other central banks will grumble (at the very least) about the weaker dollar trend and in Japan, the need to reboot inflation expectations remains as clear as ever, the difficulty of doing so likewise, and the danger that anchored US yields drag USD/JPY down and is pretty clear too. Previewing today's payrolls report, the SocGen strategist writes that with consensus forecasts of +180k in NFP an 2.4% in average hourly earnings, "the BOJ, RBA and the ECB for that matter, will be hoping for an upside surprise. An NFP surprise would provide some relief, a huge upside surprise in wage growth would really help them a lot. That doesn't make it likely, sadly." WTI fell below $49, extending its weekly loss with the Baker Hughes rig count due later. "It was very natural on the technical side that we should see consolidation around the 200 day moving average," Torbjorn Kjus, chief oil economist at DNB Bank, told Bloomberg. Brent is trading below 200-day MA Friday after moving above that level last week and settling above the marker for past 2 sessions; WTI also below Friday In rates, Europe's 10-year benchmark government bond yield and U.S. equivalents were pinned near one-month lows of 0.45 and 2.23% respectively amid the U.S. political uncertainty. U.S. yields have been falling for most of 2017 as the President's travails have cooled expectations for growth and inflation. 10-year gilt yield +1bps to 1.16% after Bank of England kept rates on hold Thursday. In commodities, West Texas Intermediate crude dipped 0.8 percent to $48.66 a barrel, the lowest in a week. Gold was steady at $1,269 an ounce and set to score and modestly weekly rise, which will be its fourth in a row. Copper advanced 0.2 percent to $2.88 a pound. Market Snapshot S&P 500 futures up 0.05% to 2,473 STOXX Europe 600 down 0.05% to 378.75 MSCI Asia up 0.01% to 160.92 MSCI Asia ex Japan up 0.2% to 529.07 Nikkei down 0.4% to 19,952.33 Topix down 0.2% to 1,631.45 Hang Seng Index up 0.1% to 27,562.68 Shanghai Composite down 0.3% to 3,262.08 Sensex down 0.04% to 32,225.85 Australia S&P/ASX 200 down 0.3% to 5,720.58 Kospi up 0.4% to 2,395.45 EUR/USD: +0.1% to 1.1880 USD/JPY: steady at 110.09 GBP/USD: +0.1% at 1.3154 German 10Y yield rose 0.3 bps to 0.456% US 10-year yield +1bp to 2.23% Italian 10Y yield fell 2.6 bps to 1.697% Spanish 10Y yield rose 1.6 bps to 1.468% Brent Futures down 0.8% to $51.62/bbl Gold spot up 0.06% to $1,269.40 U.S. Dollar Index down 0.1% to 92.75 Top Overnight News Payrolls May Show Stable Economy; Grand Jury Issues Russia Subpoenas; HNA Says It’s Not Raising Funds in N.Y. Toyota and Mazda to sell stakes to each other, worth about 50b yen each Special counsel Robert Mueller is using a federal grand jury in Washington to help collect information as he probes Russia’s meddling in the 2016 election and possible collusion by Trump campaign associates Pearson Plc made good on a pledge to cut costs, slashing 3,000 jobs and cutting its interim dividend to preserve cash as it works on a turnaround of its struggling education business Allianz SE and Canada Pension Plan Investment Board have agreed to buy a 20 percent stake in Spain’s Gas Natural SDG SA’s gas distribution business for 1.5 billion euros ($1.8 billion) The world’s biggest pension fund posted its fourth-straight quarterly gain, as global stocks rose and a decline in the yen against both the dollar and the euro helped boost the value of its overseas investments Teva Pharmaceutical Industries Ltd.’s warning to investors that it may breach debt covenants if cash flow weakens triggered its biggest bond selloff on record “Passive investing is in danger of devouring capitalism,” billionaire Paul Singer wrote in his firm’s second-quarter letter dated July 27 BOE Is Said to Find Error Behind Spike in U.K. Mortgage Arrears Rosneft Aids Venezuela’s State Oil Producer With Prepayment Icahn-Backed Change in Biofuel Rule Is Said to Near EPA Rebuff McDonald’s Japan July Sales Helped by Desserts, Hawaiian Burgers Teva Debt Sells Off After Warning May Breach Covenants Asian equity markets traded mixed, with the region indecisive ahead of key risk NFP data and after a lacklustre close in US where energy underperformed and the Russian probe seemed to have stepped up a notch. This saw early losses in ASX 200 (-0.2%) and Nikkei 225 (-0.3%), with financials the underperformer in Australia after big 4 bank CBA was accused of breaches to anti-money laundering and counter¬terrorism regulations. Shanghai Comp (+0.2%) and Hang Seng (+0.1%) were slightly positive after the PBoC upped its daily liquidity operations, although upside was capped as this still amounted to a net weekly liquidity drain. RBA Statement on Monetary Policy states recent AUD rise had modest effect on GDP and inflation forecast. Says: Holding policy steady consistent with growth and inflation target. Recent increase in AUD has modest dampening effect on economy. Further strength in AUD would reduce economic growth and inflation. RBA maintains inflation forecast for 2017 and 2018 at between 1.5%-2.5% for both, 2019 forecast kept at 2.0%-3.0%. Lowers GDP forecast for 2017 to 2.0%-3.0% from 2.5%-3.5%, 2018 forecast maintained at 2.75%-3.75%, while 2019 forecast was increased to 3.0%-4.0%. Top Asian News China Hedge Fund Says Most ‘Violent’ Deleveraging Phase Over China Millionaires in Jeans Spur Wealth Manager Push Abroad Abe’s New Cabinet Shows Continuity in Japanese Economic Policy Summit Announces $1 Billion LNG-to-Power Project in Bangladesh Indonesia Sees Room to Ease If Inflation, Forex Rate Manageable JT to Buy Karyadibya Mahardhika for $1b Enterprise Value China Bulls’ Resolve Tested as Stocks Struggle to Pass Key Level Indonesia Says Google Agrees to Monitor Negative YouTube Content Hong Kong Stock Rally Buoyed by Bullish Profit Projections The majority of EU bourses have come off worst levels, and now trade in marginal green territory. The biggest movers throughout the European morning have been UK Home Building names, with an overnight article from "PropertyWeek" circulating, which states that the Government is reviewing its 'Help to Buy' Scheme. Taylor Wimpey (TW LN) and Perisimmon (PSN LN) shares were both down over 5% for the session, as the former generated 45% of its sales from the Scheme. Later reports from a UK government spokesperson stated that it is incorrect to infer that the government are set to cancel the help to buy scheme, did see many of the loses retraced. NFP Friday trade has been evident in fixed income. markets today, with the 1 Oy bund holding its slim range. Underperformance has been seen in peripherals, with delays relaying slight profit taking in BTPs and Bonos. Corporate issuance once again came into fruition today, with Verizon printing AUD 2.2bn "kangaroo" bond, with BAT mandating banks for a multi-currency and multi-tranch bond deal. Top European News BOE Says Companies Need Clarity as Brexit Crimps Investment German Factory Orders Jump in Sign of Robust Economic Growth Allianz Buys LV= Unit in Deal Valued at as Much as $1.3 Billion RBS’s Investment Bank Drives Second-Quarter Profit Beat Constellium Is Said to Weigh Options After Takeover Interest Swiss Re Drops as Earnings Succumb to Market-Pricing Pressure U.K. Housebuilders Fall After Reports of ’Help to Buy’ Review BOE Is Said to Find Error Behind Spike in U.K. Mortgage Arrears Rosneft Aids Venezuela’s State Oil Producer With Prepayment In currencies, GBP has seen the majority of volatility this morning as EUR/GBP and GBP/USD both briefly broke out of the post EU trading range. Elsewhere, overnight volatility was seen in AUD, following the release of the RBA's statement of Monetary Policy, with no fears of an overvalued currency, AUD/USD begun to gain some bullish pressure, we have continued to see buying following the bounce of August's low, with bulls now looking to retest 0.80. USD & CAD will both await their jobs reports due at 13.30BST. However, it is worth noting the greenback did once again see concerning news as political tensions continue with US Special Counsel Mueller empanelling a Washington Grand Jury in Russia probe. In commodities, Asian oil demand has been seen to shift back to the Middle East and Russia in Q4 following the recent rise in Brent. Elsewhere, OPEC has delivered a record high adherence to its oil cut in 2017, struggles do remain with Iraq and the UAE yet to show how they can meet their targets. Trade yesterday saw the USD 50.00/bbl level hold once again and the rejection has leaked into trade today, with WTI now trading around USD 48.80. Precious metals all trade in marginal positive territory, likely abiding to the risk tone following the recent acceleration in the US Russian probe. Looking at the day ahead, Friday is relatively quiet day for data in both Asia and Europe with only German factory orders data for June due and Italy’s retail sales for June. The US will be in greater focus as the July nonfarm payrolls number is due (180k expected) along with other labor market data. Alongside that, we will also get the trade balance reading for June. Onto other events, the Baker Hughes US rig count will also be out. Notable US companies reporting include: Cigna, Berkshire Hathaway and CBOE. Notable European companies reporting include: Allianz, Swiss Re and Erste Group. US Event Calendar 8:30am: Change in Nonfarm Payrolls, est. 180,000, prior 222,000; Change in Private Payrolls, est. 180,000, prior 187,000 Change in Manufact. Payrolls, est. 5,000, prior 1,000 Unemployment Rate, est. 4.3%, prior 4.4% Average Hourly Earnings MoM, est. 0.3%, prior 0.2%; Average Hourly Earnings YoY, est. 2.4%, prior 2.5% Labor Force Participation Rate, prior 62.8% Underemployment Rate, prior 8.6% 8:30am: Trade Balance, est. $44.5b deficit, prior $46.5b deficit DB's Jim Reid concludes the overnight wrap Hello Payrolls Friday. On a day we pore over how many people have been employed and how much they've been paid in the US, I'm still trying to come to terms with the €222 million buy out clause activated for the transfer of Brazilian Neymar from Barcelona to PSG. This is broadly equivalent to the annual GDP of the equatorial Marshall Islands (population over 53k) which is around the 190th biggest nation in the world. If you include his wages over a 5 year contract you can nearly double this and you get close to the annual GDP of Tonga - home to over 100k people. The Marshall Islands aren't a hot bed of economic activity although I did note that their income tax rates are 8% and 12% and corporation tax is at 3%. Anyone coming with me to set up a company? Although make sure you can afford your current buy-out first though. Back to US jobs and consensus expectations are for a 180k gain (222k previous) today. Our US economists project a more optimistic figure of 200k for headline and private payrolls, which they expect to be sufficient to lower the unemployment rate a tenth to 4.3%. However, they note that the July ADP survey and the employment subcomponents of the manufacturing and non-manufacturing ISMs add some downside risks to their forecast as their payrolls model (which uses the first reported values of ADP and the ISM composite employment reading) projects private payroll gains of around 165k. Counterbalancing this risk however is the fact that private payrolls have recently fallen short of the levels implied by ADP and the ISMs, and payrolls (including revisions) have accelerated in the past following similar misses. On other detail aspects of the report, they expect that hours worked should remain steady at 34.5 along with a 0.3% gain in average hourly earnings (AHEs), which would lower the YoY growth rate of the series to 2.4% (with a risk of rounding up and remaining at 2.5%). However, as long as there is no material surprise in either direction, they do not expect this month's AHEs to meaningfully impact policymakers' intermediate-term inflation expectations. Finally, the team notes that even if July payrolls fall below their forecast, Amazon's hiring spree this month could result in an upside surprise in next month’s (August) data, which will likely factor more prominently into the Fed's decision process going into the September 20 meeting. So another report where the market will look for any life in inflation and a reason for bonds to sell-off. This report comes on the back of a sizeable bond rally yesterday which seemed to be kickstarted by a relatively downbeat outlook from Mr Carney on a day the BoE cut their growth and wages forecast. Before we review this it's worth highlighting that the Wall Street Journal reported 30 minutes before the US close that Special Counsel Robert Mueller was said to have impaneled a grand jury in the ongoing Russia probe. It led to a small spike lower in risk (see below) into the close and it's another cloud for the Trump presidency to contend with. Back to the BoE. As widely expected, the Bank left rates steady at 0.25% with the number of dissent votes declining from three to two, due to Kristin Forbes’ departure. The Bank reiterated future policy may need to be tightened slightly more than the current market yield curve implies (the first hike is priced in 2H18), but DB’s Mark Wall notes that Governor Carney made no attempt during the press conference to re-price dovish market expectations for this year. In Carney’s opinion, the UK was still experiencing exceptional circumstances ‘and would do so for some time’, with Brexit-related risks to the forefront. The bank has also cut its economic growth projections to 1.7% in 2017 (vs. 1.9% previous) and 1.6% in 2018 (vs. 1.7% previous). Looking ahead, with two new members on the MPC as of the September meeting, our team think it will be difficult for the hawks to gain a majority on the MPC without the support of the Governor. So our team continues to expect the BoE to NOT tighten monetary policy until Brexit related uncertainty has been sufficiently reduced. Post the BOE release, Gilt yields dropped ~5bps in 10 mins of trading and continued to fall to close 9bps lower for the day. The more dovish rates outlook and cautious comments from Carney had a similar impact across most government bond markets with Gilts (2Y: -6bp; 10Y: -9bps), USTs (2Y: -2bps; 10Y: -5bps) and German bunds (2Y: +1bp; 10Y: -3bps) yields mostly notably lower. Elsewhere changes were a bit more modest with Italian BTPs (2Y: unch; 10Y: -2bps) and OATs (2Y: +1; 10Y: -3bp). Turning to currencies there was a fair bit of intraday activity for Sterling after the meeting. It traded as high as 1.1202 in the morning session against the Euro, but then fell to as low as 1.1052 in the hours after the BoE announcement, before closing at 1.1069 for the day (-0.7% for the day). Sterling/USD also had similar intraday trends, before closing down -0.6% for the day. For other currencies, the USD dollar index dipped 0.2%, partly due to the softer ISM non-manufacturing data and the Euro/USD edged 0.1% higher. In commodities, WTI oil fell 1.3% as investors weighed up reports of rising US production against a decline in crude stockpiles. Elsewhere, precious metals were slightly up (Gold +0.1%, Silver +0.2%), copper was flat, but aluminium fell 0.8%. Onto equities, the S&P also had its share of intraday action. The index was trading in a tight range for most of the day, but then fell ~0.3% post the Mueller news and closed -0.2% down for the day. The VIX also responded, rising ~+5.5% around that time to 10.5 but closed a bit lower at 10.44. Elsewhere, the Dow edged up ~+0.1%, breaking another fresh all-time high for the 7th consecutive day. Within the S&P, modest gains in the industrials and utilities sectors were more than offset by losses in energy (-1.3%) and materials (-0.7%). European markets broadly strengthened, the Stoxx 600 edged up 0.1%, the FTSE 100 up 0.9% (helped by the fx move) and the CAC (+0.5%), but the DAX fell 0.2%, impacted by Siemens (-3%). Away from the markets, as noted earlier, the WSJ has reported that Special Counsel Mueller has impaneled a grand jury as part of his probe into Russia’s interference in the US election and possible ties with President Trump’s campaign. A grand jury suggests that the probe has gone beyond investigating what might have happened, to potentially charging people with crimes. Mueller’s office has declined to comment. However, a special counsel to the president (Ty Cobb) added later that he wasn’t aware that Mueller was using a grand jury, but also acknowledged that “…grand jury matters are typically secret…". Elsewhere, US senators have introduced two bipartisan bills aimed at protecting Mueller on concerns that Mr Trump may look to dismiss him. We shall no doubt see more news flow on this in the coming weeks. This morning in Asia, markets are mixed but little changed. The Nikkei is -0.4%, the Kospi recovering slightly (+0.2%) after yesterday’s -1.7% fall, with the Hang Seng flat and China slightly higher on balance. Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, data was in line to slightly soft. The ISM nonmanufacturing composite for July was below expectations at 53.9 (vs. 56.9 expected; 57.4 previous), which is the lowest level since a similar downward spike in August last year. Digging into the details, new orders index fell 5.4pt to 55.1 and the employment index fell 2.2pt to 53.6. However, even after factoring in the employment indices from the twin ISM reports together, DB’s economist believes the employment indicators are still consistent with decent payrolls growth (~200k per month). Elsewhere, factory orders for June was in line at 3%, initial jobless claims for July was slightly lower than expectations at 240k (vs. 243k) and continuing claims was at 1,968k (vs. 1,958k expected). The final durable goods order stat for June was reported higher at 6.4% (vs. 0% expected). Onto Europe and the June Eurozone retail sales were higher than expectations at 0.5% mom (vs. 0% expected) and 3.1% yoy (vs. 2.5% expected), while UK’s Markit services and composite PMI were also a tad higher than expectations at 53.8 (vs. 53.6) and 54.1 (vs. 53.8) respectively. Elsewhere, the final July services and composite PMI for the Eurozone (-0.1pt vs flash composite), France (-0.1pt) and Germany (-0.4pt) were also released and was slightly lower than the flash PMIs. Looking at the day ahead, Friday is relatively quiet day for data in both Asia and Europe with only German factory orders data for June due (0.5% mom, 4.4% yoy expected) and Italy’s retail sales for June (0.1% mom expected). The US will be in greater focus as the July nonfarm payrolls number is due (180k expected, DB 200k) along with other labour market data. Alongside that, we will also get the trade balance reading for June. Onto other events, the Baker Hughes US rig count will also be out. Notable US companies reporting include: Cigna, Berkshire Hathaway and CBOE. Notable European companies reporting include: Allianz, Swiss Re and Erste Group.
Day after day... another sabre rattled somewhere in the world, another policy-reform hype-destroying debacle in Washington, or another slump in 'hard' economic reality data... and another record high for stocks. Former fund manager Richard Breslow says 'get used to it' - at last until the autumn, when the central bankers return... "AI bots don't care." As he discusses below, it's not the economy, stupid; it's the trading bots... Via Bloomberg, I guess that until the G-3 central banks get back to business in the autumn, we’re just going to have to remember to compartmentalize. The world’s a scary place. Just read page one above the fold and try not to despair. Not to mention the fact that some of the really unsettling issues don’t even get presented with such prominence. But look at the global economy, watch asset markets trade and there isn’t a whole lot of bad news driving things. Like modern life in general, we go for instant gratification. And we’ll worry about the other stuff another day and time. Besides aren’t central banks there to kick that can as far down the road as possible? Especially if things get really bad. There’s been a twist replacing the old Maynard Keynes line about markets staying irrational longer than you can remain solvent. We’ve come to hope and expect that payment for current excesses can be put off longer than our careers will last. Does Alan Greenspan’s warning yesterday about bond bubbles and stagflation resonate on some level? It does. On the other hand, ignoring his warning, and those analogous, is the only sensible thing to do. Factoring it into your artificial intelligence equations has been a sure money loser. You need to resolutely separate information that will be profitable now from news that’s going to matter to future generations. Everyone else is. Make sure you turn off the lights before you leave. Just as a bonus hint: When people start to figure stagflation warnings into their calculus, you’ll see it first in Treasury yields and only secondarily in corporates, both IG and HY. So if it ever happens, don’t be fooled by an initial compression in spreads. It just reflects the liquidity dynamics of the two markets. Needless to say, 10-year Treasuries are at 2.3%. Wait until reinvestment stops. Meanwhile, China is more than surviving despite the constant warnings. Japan’s growth is picking up. Europe’s doing all right. Even the likes of Argentina are putting up numbers like yesterday’s strong industrial production release. Did you see this morning’s U.K. or Russian PMIs? There are green shoots all over the place. Results this earnings season from corporates is a story of the good times rolling. Today’s RBA statement couldn’t find much of anything negative to say other than to push back on currency strength. All that was taken to mean that the economy was strong but no rush to tighten. Translation: party on. And if you need any explication of why algos buy dips, check out the Shanghai Composite over the last two months. Crushing regulation indeed. Breslow concludes perfectly... Trading bots only care about finding what’s working and mining it. They figure what we humans do in our spare time is our own business
Welcome to August: you may be surprised to learn that S&P 500 futures are once again levitating, higher by 0.3%, and tracking European and Asian markets. Asian equities traded higher across the board after China's Caixin Manufacturing PMI beat expectations and printed its highest since March, refuting the decline in the official PMI data reported a day earlier, while firmer commodity prices boost both sentiment and commodity stocks across Asia and Europe. Notably, with DJIA futures higher by over 100 points this morning, the Dow Jones is set to open above 22,000, a new all time high. World stocks are on their longest streak of monthly gains in more than a decade, with the MSCI All-Country index rising again on Tuesday, up 0.3%, amid further signs that the global economy remains solid, while the beaten-down dollar edged up slightly from 14-month lows. The dollar again failed to stage a rebound after Monday’s drop, as investors were transfixed by the chaotic developments in Washington, pushing the greenback lower overnight and sending it down for the fifth consecutive month. "I think the short dollar trade is still the broad consensus trade in the financial markets,," said Esther Maria Reichelt, an FX analyst at Commerzbank in Frankfurt. "But we are approaching important levels against other currencies, such as 1.20 on the euro, which may prompt some concerns from other central banks." Softening U.S. inflation and incessant political turmoil has hit prospects of another Federal Reserve rate hike in coming months and sent the dollar down 10 percent from its January peaks. The dollar's decline, low inflation and stable global growth has stoked appetite for stocks, with the MSCI extending its run after the index logged its longest streak of monthly gains since 2003-04 in July. "Data and market behaviour are consistent with our global reflation theme," strategists at Morgan Stanley, led by Hans Redeker, said in a note, pointing to strong Chinese factory data, corporate earnings and surging South Korean exports. "The combination of USD weakness with decent, but not too strong, US economic growth works in favour of risk appetite, pushing financial conditions globally, and especially in the US, higher." In Europe, the Stoxx Europe 600 gained 0.6%, hitting session’s high after data showing euro-area July manufacturing kept in line with the flash reading (PMI 56.6 vs flash reading 56.8). European manufacturing sentiment pointed to "broad-based economic growth" as national surveys signaled economic expansion across the region, with Austria, the Netherlands and Germany being the best performers. French manufacturing accelerated to one of the fastest rates in six years. The Stoxx Europe 600 Index was poised to end its losing streak, heading for the first gain in four days after companies including BP reported, beating estimates, and was the biggest contributor to the advance. Crude itself also rose, as traders awaited the latest government inventory data. Recent commodity strength continued to feed into Asian equities, which were also bolstered by earnings in Japan, South Korean export numbers and Chinese manufacturing data. The U.K.’s FTSE 100 Index advanced 0.8 percent, the largest gain in a week. Germany’s DAX Index advanced 0.4 percent, the biggest gain in a week. In Asia, the MSCI Asia-Pacific Index rose to the highest since 2007 as equity indexes from Tokyo to Sydney advanced. Japan’s Topix index added 0.6 percent. Banks rallied after Sumitomo Mitsui Financial Group Inc. reported a 31 percent increase in net income for the June quarter. Australia’s S&P/ASX 200 Index closed 0.9 percent higher, while South Korea’s Kospi index ended up 0.8 percent. The Hang Seng Index in Hong Kong rose 0.8 percent, while the Shanghai Composite Index climbed 0.6 percent. As expected, the surge in the overnight Hong Kong dollar interbank proved fleeting, as the rate tumbled 43 bps to 0.28286% after climbing to a more than eight-year high of 0.71407% on Monday, according to Bloomberg citing the latest fixing published on the Treasury Markets Association website. The one-week HKD Hibor dropped 2 bps to 0.28836%, after rising to 0.30643% on Monday, highest since July. For European equity markets, continued improvement in euro-area economy has fueled rally in euro and raised concerns over potential impact on corporate earnings, with the 1.20 area in the EURUSD often cited as a hard stop beyond which profitability will be materially impacted. European government bonds also edged higher as PMI data highlight ECB’s conundrum of robust growth without price pressure. Meanwhile, as reported earlier, the Reserve Bank of Australia held the benchmark at 1.5% while warning that a rising currency is expected to subdue inflation and weigh on the outlook for growth and employment. The Aussie fluctuated, but has since sunk to session lows, below 0.80. In commodities, oil prices made further gains as falling U.S. inventories eased some concerns about oversupply. Futures on Brent crude LCOc1 and U.S. crude oil CLc1 rose 0.2 percent and held comfortably above $50 a barrel for the first time since May. In rates, Britain’s 10-year yield declined one basis point to 1.223 percent. Germany’s 10-year yield fell two basis points to 0.52 percent, the lowest in more than a week. ISM manufacturing and construction spending are among key data points later on Tuesday, while Apple, Pfizer, Emerson Electric are due to report earnings, together with a number of other companies. Crude oil trades above $50/bbl. Bulletin Headline Summary from RanSquawk European equities trade higher in a move predominantly led by the energy sector with indices also supported by domestic earnings FX markets continue to be guided by USD-softness as political upheaval in Washington grips summer trading conditions Looking ahead, highlights include US PCE, ISM Mfg. and APIs Market Snapshot S&P 500 futures up 0.3% to 2,474.75 STOXX Europe 600 up 0.6% to 379.92 MSCI Asia Pacific up 0.6% to 161.32 MSCI Asia Pacific ex-Japan up 0.4% to 531.46 Nikkei up 0.3% to 19,985.79 Topix up 0.6% to 1,628.50 Hang Seng Index up 0.8% to 27,540.23 Shanghai Composite up 0.6% to 3,292.64 Sensex up 0.09% to 32,542.84 Australia S&P/ASX 200 up 0.9% to 5,772.37 Kospi up 0.8% to 2,422.96 German 10Y yield fell 0.8 bps to 0.535% Euro down 0.2% to 1.1818 per US$ Brent Futures up 0.3% to $52.85/bbl Italian 10Y yield fell 2.8 bps to 1.801% Spanish 10Y yield fell 1.1 bps to 1.489% Gold spot down 0.02% to $1,269.17 U.S. Dollar Index up 0.05% to 92.91 Top Overnight News Venezuela’s most high-profile opposition figures were seized from their homes by security forces, according to people close to them, in what appeared to be a crackdown on officials challenging the government of President Nicolas Maduro The euro- area economy expanded apace in the second quarter, a sign the bloc’s upswing is becoming increasingly robust and self- sustaining. While a Purchasing Managers’ Index pointed to broad- based growth, price pressures showed further signs of easing in July U.K. manufacturing growth accelerated for the first time in three months in July, bolstered by the strongest jump in export orders in seven years Trump personally dictated son’s statement on Russia meeting: Wash. Post U.S. detected unusual levels of North Korean submarine activity: CNN Pence Says U.S. Backs Georgia in NATO Against Russian Objections No Bubble in Stocks But Look Out When Bonds Pop, Greenspan Says Banks May Be Hit With $50 Billion Capital Needs After Brexit Japan PM Abe to reshuffle cabinet on August 3: Suga China July Caixin manufacturing PMI 51.1 vs 50.4 estimate It’s time for China to increase yuan flexibility: Sec. Journal BP Says It’s Breaking Even After Debt Soared to a Record Ferrari Said to Plot ‘Utility Vehicle’ in Plan to Double Profit Tesla Batteries May Back Up Wind Farm Off Massachusetts Coast Scripps Affirmed by Moody’s on Acquisition by Discovery Lexicon to Opt-In for Co-Promotion of Sotagliflozin With Sanofi Brighthouse Financial to Replace AutoNation in S&P 500 New Anthem Data Breach Affected More Than 18,000 Enrollees: CNBC Asian equities traded higher across the board as Chinese data took focus once again after Caixin Manufacturing PMI beat expectations and printed its highest since March. ASX 200 (+0.9%) was led higher by commodity-related stocks after iron ore extended on yesterday's over 7% gains and WTI settled above USD 50/bbl for the first time since May. Nikkei 225 (+0.3%) was kept afloat after the prior session's JPY weakness, while Shanghai Comp (+0.6%) and Hang Seng (+0.8%) conformed to the positive tone after the aforementioned Chinese PMI data coupled with the PBoC's CNY 170b1n injection into the interbank market. Finally, lOy JGBs were flat with a lack of demand seen amid broad positive risk sentiment and following the uninspiring 10yr JGB auction in which the results were mixed and relatively similar to the prior month.Chinese Caixin Manufacturing PMI (Jul) 51.1 vs. Exp. 50.4 (Prey. 50.4). Top Asian News India Manufacturing PMI Hits 8-Year Low on Sales Tax Disruption Caixin China July Manufacturing PMI 51.1; Est. 50.4 Iron Ore Investors Zero In on 2018 as China Futures Roll Over Singapore’s Chevron House Owner Seeks More Than S$700M in Sale MUFG Profit Jumps 53% on Trading Income, Gains From Share Sales Macau Casinos’ July Gains Cap Year of Recovery as VIPs Flock Honda Sees New Accord, Weaker Yen Easing U.S. Pressure European bourses are firmer this morning led by the energy sector. BP shares higher by over 2% after reporting earnings were ahead of analyst estimates. Crude prices higher with WTI crude futures making a firm break above USD 50.00/bbl. German curve was initially bull flattening this morning, providing modest concession for the Schatz ahead of today's EUR 4bln Jun'19 tap with little reaction seen in German paper after a relatively well-digested Schatz auction. Gilts ebbed lower slightly following better than expected UK Mfg. PMI data with paper also unreactive to this morning's Gilt auction which saw a healthy uptake by the market. Top European News German Labor Market Strengthens as Robust Economy Fuels Hiring Female CEOs Hold Key to Returns for $42 Billion Stock Manager France July Manufacturing PMI 54.9 vs Flash Reading 55.4 BOE Rate Excitement Fizzles as Increase Appears Further Away U.K. Manufacturing Grows as Export Orders Climb to Near Record Euro-Area Economy Steams Ahead as ECB Awaits Inflation to Follow In currencies, the Greenback continued to suffer yesterday amid the political uncertainty in the USA. President Trump removed Scaramucci from his White House Communications Director post just ten days after the appointment. This news was followed by reports stating that US Senate Finance Committee Chairman Hatch said that senators are too divided to keep working on healthcare overhaul legislation now. The difficulties in the States have led to all its major currencies pairs gaining against the US dollar, as the DXY now trades through 93.00, looking close and close toward the 92.00 support level. USD/JPY saw a bounce on the physiological 110.00 level, however remains to look bearish, with a test of June's low at 108.80 possible. GBP: Brexit fears have once again resurfaced; with UK Chancellor Hammond yesterday stating futurerelationship with European Union remains under discussion, Brexit will not be postponed or delayed. GBP/USD has gained however, amid the aforementioned falling dollar, continuing to print 2017 highs, now through 1.32. With a weakening greenback, GBP/USD bulls could see this opportunity to attack 1.35. AUD: The highlight of the Asian session was the RBA interest rate decision, where as expected, the RBA kept their cash rate on hold at 1.50%. Despite a spike lower on the decision, we did see a bounce in AUD/N ZD,largely likely to the minimal concern of the higher AUD. The statement stated that a higher AUD is weighing on price pressures and would slow economy. However, the tone of the RBA was slightly more optimistic than many anticipated, stating that growth is expected to pick up, alongside the previously mentioned lack of fears toward the AUD. In commodities, WTI crude futures breached the psychological USD 50/bbl level. Europe's largest refinery (Pernis) reported further issues with a leak during maintenance work yesterday. Potential supply disruptions in Nigeria, as Niger Delta leaders threaten to dump peace talks. Gold fell 0.1 percent to $1,267.59 an ounce, the largest fall in a week. Iron ore advanced 3.4 percent to 574 yuan per metric ton, the highest in more than four months. Looking at the day ahead, we will see the June personal income (+0.4% mom expected) and spending data (+0.1% mom expected), followed by the ISM manufacturing PMI for July (56.5 expected; 57.8 previous). Onto other events, the trade ministers from the BRICS countries will meet in Shanghai. Notable US companies reporting include: Apple, Pfizer, CME, Assurant and Illumina. US Event Calendar 8:30am: Personal Income, est. 0.4%, prior 0.4%; Personal Spending, est. 0.1%, prior 0.1% Real Personal Spending, est. 0.1%, prior 0.1% PCE Deflator MoM, est. 0.0%, prior -0.1%; PCE Deflator YoY, est. 1.3%, prior 1.4% PCE Core MoM, est. 0.1%, prior 0.1%; PCE Core YoY, est. 1.4%, prior 1.4% 9:45am: Markit US Manufacturing PMI, est. 53.2, prior 53.2 10am: ISM Manufacturing, est. 56.5, prior 57.8; ISM Prices Paid, est. 55.8, prior 55; ISM New Orders, prior 63.5; ISM Employment, prior 57.2 10am: Construction Spending MoM, est. 0.4%, prior 0.0% Wards Total Vehicle Sales, est. 16.8m, prior 16.4m Wards Domestic Vehicle Sales, est. 13.1m, prior 12.8m DB's Jim Reid concludes the overnight wrap As is the norm, the first day of the month also brings the global PMIs and ISM manufacturing data. Europe's flash numbers 9 days ago were a touch on the weaker side after many months of beats so it'll be interesting to see the final numbers for the core and the first glance at the peripherals. This morning, China’s Caixin manufacturing PMI for July was slightly above expectation at 51.1 (vs. 50.4 expected, 50.4 previous). Asian markets are stronger as we type. The Nikkei is up 0.2%, the Kospi +1.0%, the Hang Seng (+0.7%) and the three Chinese bourses up between 0.1% to 0.6%. Staying with China It's fair to say that consensus expects China’s economic growth to slow slightly in 2H, which is DB’s base case too. However, our China economists now see the risk to the H2 growth outlook shifting to the upside, in part driven by high frequency data that suggests land supply and auctions remained hot in July. With the land market this strong, the fiscal revenue in H2 will strengthen and support infrastructure spending. As July put the shutters down for the final time, global equity markets were broadly flat to slightly lower yesterday. US equities fluctuated between gains and losses but dipped down again into the close (S&P500 -0.1%), with financials (+0.6%) and telecoms (+0.4%) leading the way while materials (-0.8%) and information technology (-0.5%) dragged it lower. The Dow again bucked the trend (+0.3%) to close at a record for the 4th day in a row. Over in Europe the STOXX 600 (-0.1%) traded slightly lower on the day, while regional markets were mixed with the DAX (-0.4%) and CAC (-0.7%) lower while the FTSE MIB (+0.3%) and FTSE 100 (+0.1%) posted some gains. Overnight, our European strategists did a stock take of earnings downgrades over the past month, noting that European EPS have been revised down by -0.6%, more than any other major region. Over in government bond markets, we saw German Bunds and US treasuries largely unchanged, except for Bund yields at the very long end (20Y -1bps; 30Y: -2bps). Gilt yields were higher across nearly all maturities in a somewhat parallel shift of the curve (2Y +3bp; 10Y +2bp). 10 year peripheral yields were 3-4bps lower. Turning to FX markets, we saw the US dollar index drop further yesterday by -0.4% while the Euro and Sterling gained by +0.7% and +0.5% respectively against the Greenback. In commodity markets the energy segment saw oil prices spike back up into positive territory by the close (+0.8%) with WTI trading above $50 for the first time since May. Iron ore was up 7%, with China's July steel industry purchasing managers' index showing the highest reading in 15 months. Away from the markets, White House communications director Scaramucci has left the role after 10 days in the job. The cause of his departure is unclear, whether it was at the hands of Mr Trump or the new Chief of Staff John Kelly, who also started on the same day. Press secretary Sanders noted that Scaramucci left in “mutual agreement” with Kelly. It's certainly not been a great couple of weeks for the administration. Taking a look now at some of the data out yesterday. In Europe we got German retail sales data that unexpectedly saw momentum pick up on the month (+1.1% mom vs. +0.2% mom expected; +0.5% previous). We also got UK consumer credit data where net consumer credit supplied in June was in line with expectations at GBP 1.5bn although there were signs of credit growth slowing as mortgage approvals ticked down to 64.7k (vs. 65.0k expected; 65.2k previous) and unsecured borrowing rose at its slowest rate in over a year (10% YoY). Thereafter we got some aggregate Eurozone data in the form of the June unemployment rate that came in just below expectations (9.1% vs. 9.2% expected) and the July CPI estimate that was in line with expectations (+1.3% YoY), but the core CPI was a tad above expectations at 1.2% yoy (vs. 1.1% expected; 1.1% previous). Over in the US the data was a bit mixed as we saw the Chicago PMI reading for July dip further than expected to 58.9 (vs. 60 expected; 65.7 previous) while the Dallas Fed manufacturing activity reading for July unexpectedly increased to 16.8 (vs. 13 expected; 15 previous) and pending home sales data for June beat expectations at 1.5% mom (vs. 1.0% expected;-0.8% previous). The ECB are clearly enjoying the breather that holiday season offers as CSPP purchases last week implied a lowly average daily run rate of €157mn (slightly higher than last week) against the average of €357mn since the program started . The CSPP/PSPP ratio was 8.1%, up from 6% a week earlier but still significantly below the long-run average. It’s becoming clearer that recent large scale corporate purchases were likely a front loading exercise ahead of the summer lull. Overall CSPP has almost certainty been tapered less than PSPP but the summer months may restore the balance a little between the two as the ECB probably believe that government bonds are going to be easier to purchase in thin markets than corporates. Turning now to the day ahead. In Europe we will see July data for the UK Nationwide House Price index (-0.1% mom expected; +1.1% previous). Following that we get at the final revisions to the manufacturing PMIs for France, Germany and the Eurozone along with a first look at the data for the UK and periphery. We will also get the advance estimate for Q2 Eurozone GDP (+2.1% YoY expected; +1.9% YoY previous). Across the pond we will see the June personal income (+0.4% mom expected) and spending data (+0.1% mom expected), followed by the ISM manufacturing PMI for July (56.5 expected; 57.8 previous). Onto other events, the trade ministers from the BRICS countries will meet in Shanghai. Notable US companies reporting include: Apple, Pfizer, CME, Assurant and Illumina.
The AUDUSD has faded overnight gains and was trading near session lows after the RBA kepts its interest rate at 1.5% as expected and previewed last night, however in an echo of last week's comments from Lowe, the central bank flagged that a stronger AUD was expected to contribute to subdued price pressures and was weighing on the outlook for output and employment and would result in a slower pick-up in economic activity and inflation than currently forecast. The kneejerk reaction after the statement was for AUDUSD to gap lower, followed by a prompt rebound as traders digested the perceived ongoing weakness of the US dollar and the generally upbeat tone of the statement. It has since drifted lower, however, with the pair back under 0.80 as the dovish warnings prevailed coupled with several banks pushing back their expected first date of the first RBA rate hike (see below). Overall, there were three noteworthy changes in the Governor's Statement as flagged by SocGen. Most relevant was a new paragraph addressing the appreciation of the exchange rate and its (undesirable) consequences. Secondly, the labour market is no longer characterised as mixed and described in positive terms. And lastly, the tightening of credit conditions and higher rates for housing investors are acknowledged as having taken place, rather than as something that could happen. The change in tone on the exchange rate, combined with our constructive view on the AUD, was sufficient to change SocGen's forecast for RBA policy, and as a result the bank is pushing the date of the first expected rate hike out by six months from February 2018 to August 2018. Some more details from the French bank: RBA unhappy about the stronger exchange rate For many months, the RBA Governor's Statement limited itself to a simple sentence as regards the Australian dollar's exchange rate: “An appreciating exchange rate would complicate this adjustment” - the adjustment being economic transition following the mining investment boom. However, today's statement went much further, and marked a clear change of tone and shift in concern. It is worth repeating the paragraph in full: “The Australian dollar has appreciated recently, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.” Hence, the RBA is making it quite clear that the exchange rate has again become an important consideration in deciding the policy stance. The RBA is also hinting that a strong exchange rate implies either a looser policy stance or maintaining the current accommodative stance for longer. In other words, while not directly attempting to talk the currency down, the RBA is clearly establishing a quite direct link between the exchange rate and monetary policy, thus attempting to influence interest rate expectations and thereby the exchange rate. Consistent with this, the comment on commodity prices was also changed notably from “The rise in commodity prices over the past year has boosted Australia's national income” in July, to “Commodity prices have generally risen recently, although Australia's terms of trade are still expected to decline over the period ahead”. As mentioned above, this rather radical change in tone is, in our view, sufficiently significant to make us change our view about the course of monetary policy in Australia, and push out our forecast on the timing of first rate hike by six months from February 2018 to August 2018. RBA even more upbeat about the global economy The language around the state of the global economy was upgraded a bit further. Conditions are judged to be “continuing to improve” and growth in the key economy for Australia, China, is seen to have “picked up a little”, rather than growth just being supported. Also, the RBA writes that “labour markets have tightened further”, dropping the qualifier “in many countries”. Forecasts for Australian economy largely unchanged and optimistic “The Bank's forecasts for the Australian economy are largely unchanged” is how the RBA described the discussion of the latest quarterly forecast round which will be published in Fridays Statement on Monetary Policy (SoMP). This was no surprise. Although GDP growth in 1Q was a bit weaker than predicted in the May forecasting round, momentum in 2Q appears to be a bit stronger than expected, so the near-term outlook should be roughly identical. And given that underlying inflation was right in line with the forecast, the near-term inflation forecast should be largely the same as well. That said, the about-5% increase in the trade-weighted exchange rate assumption underlying the forecast imparts a downward bias to both the growth and inflation forecasts. That said, a subtle change in the description of the growth outlook suggests an upward adjustment. According to today's statement, “Over the next couple of years, the central forecast is for the economy to grow at an annual rate of around 3 per cent”, whereas in May that sentence was “Growth is expected to increase gradually over the next couple of years to a little above 3 per cent”. This could just reflect the fact that the forecast is rolled out one quarter (and a big growth-boosting base effect in 3Q), but it is a notable change. The fan charts and forecast ranges in the SoMP will tell us more. The view on investment prospects in the non-mining sector also sounds more upbeat, and residential construction is also “forecast to be maintained for some time, before slowing”. Labour market assessment clearly upgraded After four months of strong employment growth and some modest declines in the unemployment rate, the labour market is no longer being characterized as “mixed”, but in more positive terms. However, the view that “wage growth remains low and this is likely to continue for a while yet” was maintained, and hence this does not appear to stand in the way of a loose policy for another year. Housing market concerns apparently less acute For some time, the RBA's key concerns have been a weak labour market and a hot housing market raising financial stability concerns. This has not gone away, given that “Growth in housing debt has been outpacing the slow growth in household incomes”. However, despite some evidence that house prices are reaccelerating, the RBA states that “there are some signs that these conditions [of briskly rising housing prices] are starting to ease”. Moreover, the fact that higher interest rates for housing investors and some tightening of credit conditions are now a reality rather than a prospect, also suggests reduced concerns.