Global stocks backed off from all time highs, and S&P futures are unchanged ahead of the much anticipated US CPI report, which is expected to break a streak of five consecutive misses, while eyeing disappointing overnight Chinese economic data which missed across the board. European stocks and Asian markets were also modestly in the red, with the relentless global rally to new daily record highs taking a breather amid some concerns China's economy is rolling over, which weighed on commodities including base metals, which in turned dragged down mining stocks. Most major currencies drifted before today's other major report: the BOE rates decision, where the central bank is expected to keep rates unchanged.
As reported last night, Chinese retail sales, industrial production and fixed-asset investment all slowed and missed last month after a lackluster July as efforts to rein in credit expansion slammed the economy. Offsetting China's weakness was the latest Australian employment report, according to which the country added 54,200 jobs in August from July, more than twice the 20,000 estimated. The jobless rate was steady at 5.6%. The Aussie dollar rallied past 80 cents to the U.S. currency on stronger-than-expected employment numbers, before paring gains on the disappointing Chinese economic data.
The sharp but brief dollar rally appears to have lost steam, with Trump denying a DACA deal was made with Democrats putting the recent euphoria over Trump's Tax Reform in question, but the currency held most of its recent gains. Not even another threat by North Korea to nuke Japan had much of an impact on the value of the greenback.
Treasuries and bunds were little changed ahead of Thursday’s U.S. CPI report. The euro advanced against the Swiss currency after the SNB signaled the franc remains “highly valued” while cutting its economic outlook; the pound stuck to a tight range as investors waited to see how the Bank of England will try to balance policy amid faltering wages and faster inflation.
Shares fell in Asia, knocking MSCI’s All-Country World index which tracks shares in 46 countries, off a record high hit on Wednesday, when Asian shares hit their highest since 2007 and Wall Street closed at all-time peaks. Asian markets are mostly lower, led by China and Hong Kong. Asia’s benchmark stock index, which has outperformed the U.S., traded just shy of its highest level since December 2007 ahead of the US CPI data report. The MSCI Asia Pacific Index fell 0.1% to 162.57, dragged by materials and telecom stocks. China’s Shanghai Composite Index closed lower after industrial output and retail reports suggested an unexpectedly slower pace of growth in the world’s second-biggest economy, while Japan stocks erased early gains. On the flip side, the Philippine benchmark rose to a record high as property and consumer-related shares gained after a report that the Senate will rein in the government’s plan to increase taxes on low-cost homes and sugary drinks. The momentum of Asia stocks wasn’t as strong as U.S. counterparts in this week’s rebound, said Margaret Yang, a market analyst at CMC Markets Singapore Pte Ltd, citing a greater year-to-date gain in the region. Investors are awaiting the U.S. inflation report that may determine whether the Federal Reserve delivers an interest-rate increase before year-end.
European shares opened lower. The STOXX 600 index dipped 0.1 percent with down 0.3 percent, following the mildly negative tone seen during Asia-Pacific trade as markets eye upcoming key risk events including the BoE rate decision and US inflation report. In terms of a sector breakdown, material names are the notable laggards amid downbeat industrial production and retail sales figures from China overnight, while energy names have been supported from the recent gains in WTI and Brent. Elsewhere, UK retail names have been dealt a helping hand after Next (+10%) upgraded their guidance, which has also provided support to some of their domestic competitors including Marks & Spencer (+4.5%). From a fixed income perspective, paper has traded in a particularly tight range throughout the session after yesterday’s digestion of supply with just Ireland stepping up to the plate today. Note, tomorrow sees notable redemptions which some have suggested could guide price action later in the session (EUR 15.5bln IT principals, EUR 13bln GE, EUR 6bln FI, EUR 8bln AT, EUR 6bln EFSF, EUR 2bln coupons).
Following Friday's PBOC margin announcement, the Yuan has been a one way train in reverse, and the onshore yuan has now dropped for a fifth day, heading for longest run of declines since early July, as China’s central bank weakens its daily fixing after overnight rise in the dollar. CNY falls 0.18% to 6.5568 per dollar as late afternoon in Shanghai, taking five-day retreat to 1.1%. Investors were seen buying the dollar to close short USD/CNY positions before end of session, triggering stop-losses that pushed CNY weaker, according to Bloomberg. Banks also cut short USD/CNY positions to avoid another overnight USD surge like Wednesday’s. Korean won weakest in Asia following the latest threat from North Korea.
Treasury yields are little changed. Australia’s 10-year yield up 6 bps.
Dalian iron ore futures drop.
The main event for European currency traders is likely to be the Bank of England policy meeting. While no change in rates is expected, investors will be watching whether there is any shift in the number of rate-setters voting for a rise after a jump in inflation last month. Weak wage growth and questions over what Brexit will mean for the economy suggest most policymakers will see the recent surge in inflation to well above the BoE’s target as temporary. Sterling held steady around $1.32 having risen as high as $1.3329 on Wednesday. The pound was also flat at 89.95 pence per euro.
The Swiss franc edged lower against the dollar and the euro after Switzerland's central bank said its currency was highly valued and that the situation on the foreign exchange market was still fragile.
In rates, U.S. 10Y yields edged down 0.3 basis points to 2.192 percent. Bunds hit a 3-1/2-week high just shy of 0.42% after some harsh words from Jeff Gundlach. A weaker euro, which is down 1.7 percent from 2-1/2-year highs hit against the dollar last week, could encourage the European Central Bank to bring forward plans to withdraw monetary stimulus that has crushed euro zone bond yields.
“The weaker euro has amplified the headwinds facing the bond market,” said Rainer Guntermann, a strategist at Commerzbank. “With the euro off its highs, it is easier for the ECB to taper next year.”
Oil extended gains, trading at a five-week high amid demand optimism. Copper fell to near the lowest level in a month. Brent traded above $55/bbl, highest since mid-April, after IEA on Wednesday said worldwide demand is strong. WTI near $49.50. “In general it’s a bullish picture,” says Eugen Weinberg, head of commodities research at Commerzbank. “Yet again, the International Energy Agency confirmed the view that demand recently was extremely high”
Economic data includes initial jobless claims and August inflation. Oracle and Empire are reporting earnings
Bulletin Headline Summary from RanSquawk
- GBP has been offered as we approach the BoE despite outside bets of further dissent on the MPC
- The greenback has remained subdued to the benefit of its major counterparts while AUD/USD gained ground on strong jobs
- Looking ahead, highlights include BoE, US CPI and ECB’s Weidmann
Market Snapshot
- S&P 500 futures little changed at 2,493.30
- STOXX Europe 600 down 0.1% to 380.79
- MSCI Asia down 0.05% to 162.56
- MSCI Asia ex Japan down 0.02% to 538.63
- Nikkei down 0.3% to 19,807.44
- Topix down 0.3% to 1,632.13
- Hang Seng Index down 0.4% to 27,777.20
- Shanghai Composite down 0.4% to 3,371.43
- Sensex up 0.1% to 32,228.68
- Australia S&P/ASX 200 down 0.1% to 5,738.68
- Kospi up 0.7% to 2,377.66
- German 10Y yield fell 0.2 bps to 0.399%
- Euro up 0.1% to $1.19
- Italian 10Y yield rose 1.5 bps to 1.748%
- Spanish 10Y yield rose 1.1 bps to 1.591%
- Gold spot little changed at $1,324.05
- U.S. Dollar Index down 0.2% to 92.34
Top Overnight News
- Saudis Are Said to Prep for Possible Aramco IPO Delay to 2019
- North Korea Threatens to Use Nuclear Weapon to ‘Sink’ Japan
- Apple Is Said to Discuss $3 Billion Stake in Bain Chip Bid
- China’s Economy Cools Again as Industry, Retail, Investment Slow
- Trump Blocks China-Backed Lattice Bid as Beijing Urges Fairness
- U.K. Subjects Murdoch’s Fox to Wider Probe Over Sky Takeover Bid
- Democrats Say They Have Tentative ‘Dreamers’ Deal With Trump
- Munich Re Says It May Miss Profit Target on Irma, Harvey
- Carney’s Rate Dilemma No Easier as Inflation Rears Up Again
- Hermes Warning Raises Concern Strong Euro to Erode Luxury Sales
- Australia employment surges in August, led by full-time roles
- Saudis are said to prep for possible Aramco IPO delay to ’19
- U.K. Aug. RICS house price index at 6, vs 1 in July
- AT&T opens iPhone price war with buy-one-get-one-free offer
Asia equity markets were lacklustre with a non-committal tone seen for most of the day after the cautious gains in the US and as the region also digested key data releases. ASX 200 (-0.1%) and Nikkei 225 (-0.2%) were subdued with weakness across miners and discouraging Chinese data weighing on Australia, while a softer JPY struggled to keep the Japanese index afloat. Hang Seng (-0.5%) and Shanghai Comp. (-0.2%) also lacked demand as an increased liquidity effort by the PBoC was clouded by a miss on Chinese Industrial Production and Retail Sales data. 10yr JGBs were lower despite the subdued risk-tone seen across markets, with prices weighed following a weaker 20yr JGB auction where the b/c, amount and accepted prices were all lower than the prior month. PBoC injected CNY 60bln in 7-day reverse repos, CNY 30bln in 14-day reverse repos and CNY 10bln in 28-day reverse repos. PBoC set CNY mid-point at 6.5465 (Prev. 6.5382) Chinese Industrial Production (Aug) Y/Y 6.00% vs. Exp. 6.60% (Prev. 6.40%). Chinese Retail Sales (Aug) Y/Y 10.10% vs. Exp. 10.50% (Prev. 10.40%)
Top Asia News
- ZhongAn Online Is Said to Set Terms for Up to $1.5 Billion IPO
- India’s August Wholesale Inflation Rises Most in Four Months
- Bullet Train Pact Sends Shares of India Power-Gear Maker Soaring
- Morgan Stanley Upgrades Philippine Stocks to Overweight
European equities (Eurostoxx 50 -0.3%) have largely followed on from the mildly negative tone seen during Asia-Pacific trade as markets eye upcoming key risk events including the BoE rate decision and US inflation report. In terms of a sector breakdown, material names are the notable laggards amid downbeat industrial production and retail sales figures from China overnight, while energy names have been supported from the recent gains in WTI and Brent. Elsewhere, UK retail names have been dealt a helping hand after Next (+10%) upgraded their guidance, which has also provided support to some of their domestic competitors including Marks & Spencer (+4.5%). From a fixed income perspective, paper has traded in a particularly tight range throughout the session after yesterday’s digestion of supply with just Ireland stepping up to the plate today. Note, tomorrow sees notable redemptions which some have suggested could guide price action later in the session (EUR 15.5bln IT principals, EUR 13bln GE, EUR 6bln FI, EUR 8bln AT, EUR 6bln EFSF, EUR 2bln coupons).
Top European News
- Vivendi Hit by Watchdogs on Telecom Italia, Mediaset Stakes
- Syngenta Is Said to Plan $7 Billion Bond to Refinance M&A
- Glapinski Wins Ally in Push for Stable Polish Rates Through 2018
- SNB Says Franc Drop Has Reduced ‘Significant Overvaluation’
- Macquarie Sells Its Stake in Copenhagen Airports to ATP
- Next CEO Says Favorable Weather Helped Sales in Recent Months
In currenices, as has been in the case in other markets, price action has been on the light side ahead of key risk events. A bulk of the focus in the FX space thus far has been on CHF after the SNB kept rates unchanged as expected while tweaking their rhetoric on the CHF from ‘significantly overvalued’ to ‘highly valued’, however, the SNB also stated that they will remain active in the FX markets, subsequently leading to some choppy price action in the safe-haven. Elsewhere, NZD took a tumble in early trade after the latest News1 poll for the upcoming election put the Labour party in the lead; a result which was at odds with the NewsHub poll from earlier in the week. Finally, focus for FX markets will likely centre around GBP with markets looking to see whether or not the 2.9% Y/Y inflation rate in the UK will lead to any further dissents on the MPC.
In commodities, WTI crude futures continue to hold onto yesterday’s gains after the Nigerian energy minister stated that the nation would be willing to impose an output cap for six months if they were able to hit production levels of 1.8mln bpd. Elsewhere, gold has seen little in the way of price action while copper prices were sideways overnight amid a subdued risk tone which somewhat provided the metals complex mild respite from the prior day’s selling.
Looking at the day ahead, in the UK, we have the BOE rate decision, the asset purchase target as well as retail sales data for August. Over in the US, the August inflation along with the initial jobless claims and continuing claims are also due. Onto other events, there is the BOE and Swiss national bank official interest rate decision. The ECB governing council member Jens Weidmann will also speak in Frankfurt
US Event Calendar
- 8:30am: Initial Jobless Claims, est. 300,000, prior 298,000; Continuing Claims, est. 1.97m, prior 1.94m
- 8:30am: US CPI MoM, est. 0.3%, prior 0.1%; CPI Ex Food and Energy MoM, est. 0.2%, prior 0.1%
- US CPI YoY, est. 1.8%, prior 1.7%; US CPI Ex Food and Energy YoY, est. 1.6%, prior 1.7%
- 8:30am: Real Avg Weekly Earnings YoY, prior 1.08%; Real Avg Hourly Earning YoY, prior 0.7%
- 9:45am: Bloomberg Consumer Comfort, prior 52.6
DB's Jim Reid concludes the overnight wrap
The two main strands of conversations I had on returning to the office yesterday was a) how tired I looked and b) whether I was buying the new iPhone X. Without even knowing what features it has Apple had me at "new i.....". Actually someone asked me if I was buying the new iPhone 8 instead and I was actually a little offended. I'm still dreading the day they get into cars. Regular readers will be aware how much I hate spending money on cars. However there would be a real risk of personal bankruptcy if and when the iCar comes out and updates itself every year.
Anyway before we preview an important day headlined by US CPI and the BoE meeting, straight to Chinathis morning where the latest monthly main data dump is out. August industrial production and retail sales were softer than expected. The IP was up 6% yoy (vs. 6.6% expected) - the slowest pace this year, and retail sales grew 10.1% yoy (vs. 10.5% expected) while fixed assets expanded 7.8% (vs. 8.2% expected). Asian markets generally weakened on the numbers after a firmer start to the session without being much changed overall. The Nikkei (-0.19%), Hang Seng (-0.42%) and Shanghai Comp (-0.17%) are all lower while the Kospi (+0.25%) is slightly higher.
Once the market has moved on from the Chinese data the main event today is US CPI with the market and DB at +0.3% mom for headline and +0.2% for core. Remember we have had 5 consecutive downside misses on the core. We also saw a miss on PPI yesterday (more later). Even an in line MoM core figure would result in the YoY rate slipping one tenth to 1.6% and to the lowest since Jan 2014. Our US economist Brett Ryan thinks CPI won’t bottom out until Q1 2018 but highlights that inflation tends to lag GDP growth by 5 or 6 quarters so any current weakness may reflect weak growth around the end of 2015/beginning 2016. In today's PDF we've cropped their chart showing the tight relationship (with the lag) between the two over the last couple of decades. This is fine but inflation needs to start beating soon to suggest that the normal relationship between growth and inflation is still there and we're not in a near perpetually low inflation world with today's current policy choices. As an aside we still think inflation will edge up over time due to weaker demographics meaning a lower future supply of labour relative to the past and also due to policy slowly being more directed to fiscal over monetary largely due to populism and the fact that monetary policy alone has almost been fully exhausted. This week's removal of the 1% pay cap for certain UK public sector workers is a small sign of the direction of travel. We acknowledge that this argument has no baring on the short-term inflation outlook but I think we'll look back on 2016-17 as the secular trough in inflation.
As for the BoE consensus is of course for no change in policy but the devil is in the detail and the committee have a few signalling headaches given this week's higher than expected inflation numbers. DB's Oliver Harvey thinks the risks are that the MPC sounds increasingly uncomfortable about a sleepy market attitude towards interest rates. He thinks they are unlikely to be thrilled about the market reaction after the August 3rd inflation report when the broad GBP TWI fell 3% in the three weeks after (although recovered half of that since). He thinks the BoE are increasingly sceptical about benefits of a falling currency from a growth perspective, notwithstanding the impact on inflation persistence. Overall DB continue to expect the BoE to remain on hold until uncertainty about the Brexit transition diminishes. Too many aspects of the policy trade-off hinge on the outcome. There are justified concerns about the profile of future spare capacity and inflation, but protestations about these may cut little ice with the market absent a clear acceleration in wage growth or resolution of political uncertainty.
Moving on, the US tax reforms appears to gaining momentum although we have heard this before. On Fox news, Director of US office of management and business Mulvaney said the target release date for a framework of the tax plans will be on September 25th, while House Speaker Ryan also confirmed party leaders would release a Republican only “template” on tax in the last week of September. Elsewhere, the President has tweeted that “the approval process for the biggest Tax Cut & Tax Reform package…will soon begin”. For now, details are still sketchy, on the one hand Trump has reaffirmed his commitment to cut the corporate tax rate to 15% and said the tax change will benefit the middle class, not the wealthy. However, both the Treasury Secretary Mnuchin and Ryan noted the corporate tax rate is open to compromise, potentially towards c20% instead. Hopefully we will get some clarity soon.
Onto the market performance yesterday. US equities nudged up to another fresh record high, with the S&P up +0.08% (+11.5% YTD), the Dow (+0.18%) and the Nasdaq (+0.09%). Within the S&P, gains were led by the energy sector (+1.24%) while yield sensitive sectors such as real estate and utilities (-0.53%) fell slightly. European markets were also generally slightly higher, with gains also led by the energy sector. Across the region, the DAX (+0.23%) and CAC (+0.16%) rose slightly while the FTSE 100 dipped -0.28%.
Over in sovereign bonds, core European yields were mixed but little changed across the maturity spectrum, with Bunds (2Y: +1bp; 10Y: unch) and Gilts (2Y: +1bp; 10Y: +1bp) up a little in yield, but French OATs (2Y: +1bp; 10Y: -1bp) a little more mixed. Notably, peripherals such as Spain and Portugaloutperformed with 10y yields down c3bp. Over in the US, yields were slightly higher (2Y: +1bp; 10Y: +2bp).
Turning to currency markets, the US dollar index gained 0.69%, partly reflecting the increased momentum on tax reforms. Conversely, the Euro and Sterling fell 0.69% and 0.54% respectively versus the Greenback. In commodities, WTI oil rose 2.22% to a five week high, following an IEA forecast for global crude demand to be 1.7% higher in 2017 given stronger than expected consumption in Europe and US. Precious metals fell modestly (Gold -0.65%; Silver -0.74%) along with Copper (-0.66%). Elsewhere, LME Nickel dropped 5.25% overnight, but is still up c29% since June.
Away from the markets, in the EC President Juncker’s State of Union speech, he touched on a few topics, which included calling for a tighter EU integration where he proposed a series of overhauls such as the creation of i) an EU finance and economy minister, ii) a single president for the European Commission and Council, iii) an EU monetary fund and iv) an EU cybersecurity agency . On the EU economy, he noted it was growing as now the “wind is back in Europe’s sails” and the migration crisis had been brought under control. On Brexit, he noted that it would be “a very sad and tragic moment in our history…we will always regret this…but I think you (UK) will regret it as well”.
Staying in Europe, the ECB’s executive board member and Chief economist Peter Paret noted “the baseline scenario for inflation going forward remains crucially contingent on very easy financing conditions, which to a large extent, depend on the current accommodative policy stance.”
Finally, for those of you interested in the upcoming roll of the iTraxx and CDX indices, our team have published the report “CDS Index Roll: Europe & US, September 2017” which describes the index changes and estimates their impact on index spreads. It should be in your inbox, please contact [email protected] if not.
Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the core August PPI (ex-food and energy) was slightly below market at 0.1% mom (vs. 0.2% expected), although the base effect has helped the annual rate to nudge up to 2.0% yoy (vs. 1.8% previous; 2.1% expected). Notably, the healthcare series within the PPI, which is relevant to healthcare as measured in the core PCE deflator – fell 0.1% mom in August (the largest mom decline since October 2015). Elsewhere, the August federal budget data showed a slightly smaller deficit at -$107.7bln (vs. -$119bln expected) and MBA’s new mortgage applications index rose last week, with the four week average up 5% yoy.
In the UK, the July ILO unemployment rate fell to 4.3% (vs. 4.4% expected), which is the lowest level since 1976. However, growth in average weekly earnings was soft and lower than expected at 2.1% yoy (vs. 2.3%). Elsewhere, the claimant count rate was 2.3%, steady on a mom basis and the jobless claims change came in at -2.8k, which is similar to revised figure for the prior month. Over in Germany, the final reading on August inflation was unchanged at 0.2% mom and 1.8% yoy. Elsewhere, the Eurozone’s July IP was broadly in line at 0.1% mom and 3.2% yoy (vs. 3.3% expected), while employment across the euro area rose 0.4% qoq in Q2, leaving through-year growth steady at a solid 1.6% yoy.
Looking at the day ahead, in the UK, we have the BOE rate decision, the asset purchase target as well as retail sales data for August. In France and Italy, the final readings on the August inflation are due. Over in the US, the August inflation along with the initial jobless claims and continuing claims are also due. Onto other events, there is the BOE and Swiss national bank official interest rate decision. The ECB governing council member Jens Weidmann will also speak in Frankfurt