It has been another relatively quiet session, as traders remain on the sidelines spooked by the sudden reversal in the growth/value trade following a sharp drop in tech stocks while keeping an eye on yields and currencies in the aftermath of the BOJ’s half-hearted attempt to steepen the JGB yield curve even as the central bank “forward guided” to years of easy policy to come as it slashed inflation expectations for FY19 (1.5% from 1.8%) and FY20 (1.6% from 1.8%). Meanwhile, the Eurozone added even more confusion after it reported that GDP unexpectedly slowed coming below expectations while inflation beat consensus, printing above 2.0% for the first time since 2012.
As a result, markets and futures are largely in the green, if only modestly so.
It all started with the BOJ, which took its time to announce just after 1pm local time that it is introducing forward guidance signaling that interest rates will stay low for an “extended period of time”, even as it tweaked Yield Curve Control parameters, which however were not adjusted in same manner as sources had previously hinted, disappointing markets and leading to a sharp drop in JGB yields.
As discussed earlier, in his best attempt to imitate Draghi, BOJ governor Kuroda left the key interest rates unchanged, saying he sees no need for additional easing for now while announcing policy tweaks, including reducing the amount of bank reserves subject to its negative interest rate and forward guidance for policy rates. The BoJ said the decision on asset purchases was unanimous and decision on YCC was made by 7-2 vote with Kataoka and Harada the dissenters, while it added it will permit upward and downward moves in 10yr yields but will buy JGBs promptly in the event of a rapid increase in yields. Furthermore, the BoJ adjusted its ETF allocation to include more TOPIX inclusion and lowered the balance of reserves for which NIRP is applied.
Kuroda also kept YCC mostly unchanged, reiterating that the BOJ will keep the 10-year yield at about zero percent even as the “tolerance band” of the 10Y around 0% would be doubled from 0.1% to 0.2%. For the market, this was not enough.
In sympathy, treasuries advanced and most European government debt nudged upward, although the JGB driven rally was faded through the European morning with respective curves off the flattest levels, in part after above consensus Eurozone CPI pressured bunds and euribors further.
Meanwhile, concerns about the ongoing tech rout kept equities under pressure, with Europe’s Stoxx 600 Index drifting lower even after BP and Credit Suisse reported positive earnings.
Futures on the S&P 500 and Nasdaq pointed to a slightly higher open before Apple’s results. Meanwhile, the euro climbed on positive inflation data from France and Germany, even as European GDP unexpectedly slowed and missed expectations.
- EU HICP Flash YY Jul 2.1% vs. Exp. 2.0% (Prev. 2.0%)
- EU CPI ex-Food, Energy, Alcohol & Tobacco Flash YY 1.1% vs. Exp. 1.0% (Prev. 0.9%)
Europe’s softer economic data was the latest to confirm that global uncertainty over the threat of a trade war is starting to weigh on sentiment and the economy; ECB President Mario Draghi last week singled out protectionism as a key risk to the region’s otherwise encouraging outlook. Europe’s GDP numbers followed data earlier showing Spain’s economy expanded 0.6 percent in the second quarter, slightly below forecasts. In France, growth also fell short of predictions.
There was more economic weakness, this time from China, whose manufacturing PMI dropped again in July, with slower credit growth this year denting demand and the imposition of the first round of U.S. tariffs taking a toll, and pressuring most commodities lower.
In FX, aside from a sharp move in the Yen as longs unwound positions, it was also relatively quiet: the Bloomberg Dollar Spot Index was little changed, set for its first monthly decline (-0.7%) since March, before the Fed starts its own 2-day policy meeting later Tuesday. The euro rose a third day as inflation accelerated further in July, despite a miss in GDP. Treasuries advanced along with euro-area bonds, while the yen weakened, after the Bank of Japan kept its 10-year yield target unchanged and introduced forward guidance to keep rates very low for an “extended period of time.”
Emerging-market shares slipped, while their currencies were steady even as Turkey’s lira extended losses.
Hungry for more? You won’t have long to wait as the next big monetary policy events this week include decisions from the Federal Reserve and Bank of England. After last week’s whopper of a GDP report, Markets are looking for confirmation of at least two more interest-rate hikes before the end of the year, while their British counterparts are also widely expected to increase borrowing costs, although some wonder if this may be a “one and done” affair.
WTI (-0.5%) and Brent (-0.6%) prices are ebbing lower in early European trade with oil prices set for their biggest monthly loss in 2 years. News flow remains light for the complex while Iranian President Rouhani continues to defend the nation’s “rights” to export oil. Meanwhile, spot gold (-0.2%) prices are relatively uneventful in recent trade while the DXY remains rangebound ahead of a few key risk events this week. Elsewhere, Shanghai rebar steel posted its best month in eight amid output curbs in China tightening supply.
Economic data include personal income and spending. Pfizer, P&G, Apple, and Cheesecake Factory are among companies reporting earnings.
Market Snapshot
- S&P 500 futures up 0.1% to 2,806.75
- STOXX Europe 600 down 0.1% to 390.51
- MXAP down 0.6% to 167.15
- MXAPJ down 0.2% to 541.91
- Nikkei up 0.04% to 22,553.72
- Topix down 0.8% to 1,753.29
- Hang Seng Index down 0.5% to 28,583.01
- Shanghai Composite up 0.3% to 2,876.40
- Sensex down 0.2% to 37,425.19
- Australia S&P/ASX 200 up 0.03% to 6,280.20
- Kospi up 0.08% to 2,295.26
- German 10Y yield fell 1.2 bps to 0.434%
- Euro up 0.2% to $1.1725
- Italian 10Y yield rose 19.6 bps to 2.672%
- Spanish 10Y yield fell 0.9 bps to 1.417%
- Brent futures down 0.3% to $74.78/bbl
- Gold spot down 0.2% to $1,219.15
- U.S. Dollar Index little changed 94.28
Top Overnight News
- Bank of Japan Governor Haruhiko Kuroda pushed through changes to his radical monetary stimulus program as the central bank prepares for a longer struggle to stoke inflation. While keeping unchanged its two major benchmarks — the negative interest rate and 10-year yield target — the BOJ took a number of steps to alleviate the strain on banks and the market distortions stemming from its policy
- A bumper day of euro-area economic releases showed the region’s vital signs remain good, but are slowing:
- Eurozone July CPI Estimate y/y: 2.1% vs 2.0% est (unrounded 2.149%); Core CPI 1.1% vs 1.0% est.
- While the region’s economic expansion entered a sixth year in the second quarter, growth unexpectedly slowed to just 0.3 percent, the weakest in two years
- WSJ: Trump has privately agreed to delay a potential shutdown or a fight over border wall funding until after the midterm elections, according to people familiar
- Canada’s bid to take part in senior-level NAFTA talks between the U.S. & Mexico later this week has been rejected, according to people familiar: National Post
- NYT: Trump administration is considering going around Congress and granting a $100b tax cut via tweaking capital gains calculations, according to people familiar
- Inflation accelerated further above the European Central Bank’s goal in July, though that was largely driven by stronger energy prices
- Unemployment in the euro region remained at the lowest since 2008
- Iran’s Revolutionary Guards, in unusually pointed language, called on President Hassan Rouhani to do more to prop up the rial after the currency fell to a historic low this week in anticipation of renewed U.S. sanctions.
Asian equity markets traded mostly subdued after the continued tech sell-off in US where all majors declined and the Nasdaq posted its worst 3-day performance in 4 months, while disappointing Chinese PMI data and tightening concerns heading into the BoJ policy announcement added to the cautiousness. ASX 200 (+0.1%) and Nikkei 225 (-0.1%) were mixed with Australia just about kept afloat amid outperformance in telecoms and gains in commodity-related sectors, while the Japanese benchmark was weighed alongside widespread uncertainty regarding potential BoJ policy tweaks which proved to be less hawkish than some had feared as the central bank maintained its long-term yield target at 0% and provided forward guidance that rates will be maintained at very low levels for an extended period. Elsewhere, Hang Seng (-0.5%) and Shanghai Comp. (+0.3%.) were downbeat after the PBoC skipped repo operations for an 8th consecutive occasion and as participants digested Chinese Official Manufacturing and Non-Manufacturing PMI missed expectations in which the latter fell to its weakest in nearly a year. The Shanghai Comp., however, rebounded into positive territory before the close. Finally, 10yr JGBs initially began on the back-foot as yields continued to gain heading into the BoJ but then recovered after the central bank kept its long-term yield at 0.0% and although it announced more flexibility in allowing yields to move higher and lower, it also signalled to act if there is a rapid increase in yields
Top Asian News
- BOJ to Allow Flexibility in Bond Operations, Adjusts ETF Buying
- China Sovereign Bonds Head for First Monthly Decline in Six
- Coal Goes From Summer Boom to Bust on Ample Supply in China
- Mizuho Profit Rises 36%, Led by Share Sale Gains and Fee Income
European equities are trading with no firm direction (Eurostoxx 50 +0.1%) in the aftermath of a slew of pre-market earnings. Italy’s FTSE MIB outperforms its peers as Leonardo (+8.8%) lifted the index after a guidance upgrade, local banks are also supporting the Italian benchmark. Sector-wise, Energy names are fuelled amid oil giant BP (+0.8%) reporting strong numbers, while Financials are boosted by optimistic earnings from Credit Suisse (+1.2%) in-turn lifting its peers with Deutsche Bank (+2.0%), SocGen (+1.3%) Commerzbank (+0.8%), UBS (+1.0%) all higher in sympathy. Looking ahead, FTSE 100 giant Shire are to report around mid-day, while major auto-producing countries are meeting in Geneva today to discuss US Auto tariffs.
Top European News
- EDF Raises Low End of 2018 Profit Target as Earnings Climb
- Elementis Rethinks $600 Million Deal Amid Investor Revolt
- StanChart’s Surging Costs Hinder Profit Growth for CEO Winters
- Sanofi Narrows Profit Outlook as New Drugs Seen Delivering
- Lufthansa Sees Fare Gains Lifting Profit, Offsetting Fuel Costs
In FX, although the Dollar has benefited from yet another bout of Yuan weakness on fixed and free-floating grounds, ‘strong’ sell signals from end of July portfolio rebalancing models are still weighing overall. AUD/JPY Flanking the G10 spectrum into month end, with the Aud boosted by much stronger than expected Aussie building approvals overnight and forming a firmer foothold above 0.7400 vs the Usd, but possibly hampered by hefty option expiry interest between 0.7410-25. Conversely, the Jpy is underperforming after the BoJ policy meeting and more flexible or technical changes to its QE framework rather than any real hawkish shift, not to mention the addition of very dovish rate guidance. Hence, Usd/Jpy is back over 111.00 and testing 111.50+ close to 10 and 21 DMA convergence around 111.47 plus a Fib at 111.51, while Japanese exporters were reportedly on the offer from 111.30-50 for month end. Note, however, Aud/Jpy has rallied through 82.50. CAD/NZD – Also bucking the firmer overall trend and down vs their US peer, albeit not as weak as the Jpy. The Loonie has been undermined by Canada’s exclusion from high level NAFTA talks between the US and Mexico, although off worst levels approaching 1.3100 and back near the middle of a 1.3020-95 range ahead of a raft of data, including May GDP, June PPI and raw materials prices. Meanwhile, the Kiwi is still hovering above the 0.6800 handle, but not helped by a deterioration in NZ business sentiment or activity outlook.
In commodities, WTI (-0.5%) and Brent (-0.6%) prices are ebbing lower in early European trade with oil prices set for their biggest monthly loss in 2 years. News flow remains light for the complex while Iranian President Rouhani continues to defend the nation’s “rights” to export oil. Meanwhile, spot gold (-0.2%) prices are relatively uneventful in recent trade while the DXY remains rangebound ahead of a few key risk events this week. Elsewhere, Shanghai rebar steel posted its best month in eight amid output curbs in China tightening supply.
Looking at the day ahead, we’ll get the June PCE and the Q2 ECI data should be the main focus, while the July Chicago PMI and July consumer confidence data are also slated for release. Along with the Apple numbers, Procter & Gamble, Pfizer, BP and Credit Suisse earnings are also due.
US Event Calendar
- 8:30am: Personal Income, est. 0.4%, prior 0.4%; Personal Spending, est. 0.4%, prior 0.2%
- PCE Deflator MoM, est. 0.1%, prior 0.2%; PCE Deflator YoY, est. 2.3%, prior 2.3%
- PCE Core MoM, est. 0.1%, prior 0.2%; PCE Core YoY, est. 2.0%, prior 2.0%
- 8:30am: Employment Cost Index, est. 0.7%, prior 0.8%
- 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.2%, prior 0.2%; CS 20-City YoY NSA, est. 6.4%, prior 6.56%
- 9:45am: Chicago Purchasing Manager, est. 62, prior 64.1
- 10am: Conf. Board Consumer Confidence, est. 126, prior 126.4; Present Situation, prior 161.1; Expectations, prior 103.2
DB’s Craig Nicol concludes the overnight wrap
Only one place to start this morning and that’s with the BoJ, where overnight the central bank has kept its policy rates unchanged as widely expected by a majority vote of 7-2. The statement itself has included only very minor tweaks including a vague reference to allowing upward and downward movement in the 10y JGB yield, as well as the introduction of forward guidance. As expected inflation forecasts have been cut for FY19 (1.5% from 1.8%) and FY20 (1.6% from 1.8%) while the BoJ has also shifted ETF purchases from tracking the Nikkei to the Topix. A reference to reducing the size of financial institutions’ balances at the BoJ subject to negative rates was also introduced.
Governor Kuroda is due to speak at 3.30pm local time (7.30am BST) which should help clarify some of the language in the statement. The main question mark appears to centre around that addition of allowing JGB yields to move “upward and downward to some extent mainly depending on developments in economic activity and prices” but also responding “promptly” to a rapid increase in yields. The forward guidance reference refers to the BoJ’s intention to “maintain the currently extremely low levels of short and long-term interest rates for an extended period of time” so this could also be a talking point.
The early take is that the statement is probably slightly dovish however and that appears to be how markets are interpreting it with 10y and 30y JGB yields down -3.2bps and -4.7bps respectively to 0.059% and 0.775%. The Yen has whipsawed a bit but is back to little changed as we type while the Nikkei pared early losses of around -0.75% and is now up +0.24%. Other markets in Asia are flat to slightly down.
Also having their say this morning are China’s July PMIs which came in slightly softer than expected. The manufacturing PMI was the lowest since February after falling 0.3pts to 51.2 (vs. 51.3 expected) with the new orders and new export orders components both down (the latter below 50 for the second consecutive month). The bigger move was in the non-manufacturing PMI which fell a full point to 54.0 (vs. 54.9 expected), leaving the composite at 53.6 and down 0.8pts from June.
Going into the BoJ this morning markets yesterday were hardly waiting around with a decent rise in bond yields and curves bear steepening certainly the main macro story. Indeed 10y yields across Europe finished broadly +4bps to +6bps higher with Bunds in particular ending +4.2bps higher at 0.444% – the highest yield since June 13th. The 2s10s curve ended +2.8bps wider too while Treasuries, although ending off their yield highs, saw 10y yields (+1.9bps) test last week’s nine-week highs again, although they have rallied all the way back this morning.
The 2s10s curve also nudged back up to around 30bps and 2s30s up to 44bps. It wasn’t much better for US equity markets meanwhile in what was a bit of a copy and paste from Friday’s session. The NASDAQ closed down -1.39% last night for what was the third consecutive daily loss for the index of at least 1% – the first time that has happened since August 2015. The heavyweight FANG names led the way with the NYSE FANG Index (-2.83%) also notching up a third consecutive daily loss – the cumulative three-day decline of -8.95% also the biggest in three years. The market cap of that index has also lost $244bn in those three days – roughly equivalent to the GDP of Egypt. It’s worth noting that Apple results are out after the close tonight so expect the market to be fully tuned in given all the turmoil in the tech sector at the moment. The S&P 500 and DOW also closed down -0.58% and -0.57% respectively yesterday although Banks (+0.43%) did benefit from the yield move.
That backdrop for US equities came despite global growth proxy Caterpillar reporting better than expected results yesterday. As a reminder it was back in Q1 that management spooked markets with that “high water mark” comment during the Q1 earnings call which had markets questioning whether or not we’d seen the peak. However yesterday the company talked about “continued strength in many of our end markets” and also “strong demand” for orders well into 2019. Indeed a deeper look at their results showed that revenues were up across all geographic regions as well as the big three business segments. The company also added that it will be offsetting up to $200m in tariff costs in the second half of this year through raising prices and cutting costs.
In other news, while bonds were well offered yesterday the inflation data in Europe didn’t particularly move the dial. Germany’s flash July CPI reading printed in line at +0.4% mom, helping to keep the annual rate unchanged at +2.1% yoy. Spain however was a little bit on the softer side with the -1.2% mom reading one-tenth below expectations. As a reminder this afternoon we’ll get the June PCE and Q2 employment cost index prints in the US. Consensus for the core PCE reading is +0.1% mom while the ECI is expected to come in at +0.7% qoq. Our US economists also expect a relatively soft +0.1% mom core PCE reading which could push the annual rate down one-tenth to +1.9% yoy. However, our colleagues make the point that these forecasts should be taken with a grain of salt given the BEA’s benchmark revisions. Recent quarters’ core inflation data were revised upwards, with Q1’s year-on-year rate increasing by about 15bps to
1.75%, potentially signifying a firmer inflation trend.
As for the other data yesterday. In the US, the July Dallas Fed index was above expectations at 32.3 (vs. 31.0 expected) while the prices paid and prices received indices both moderated from last month’s 7-year high. Elsewhere the June pending homes print rose for the first time in three months to an above market print of +0.9% mom (vs. +0.1% expected), but the lack of available homes for sale still contributed to an annual fall of -4.0% yoy on an unadjusted basis. Meanwhile the Euro area’s July economic confidence (112.1 vs. 112.0 expected) and business climate index (1.29 vs. 1.35 expected) were broadly in line, while the final reading for consumer confidence was confirmed at -0.6 and unchanged from June. Back in the UK, June mortgage approvals edged up to a 5-month high of 65.6k (vs. 65.5k expected) while the June consumer credit was also above market at £1.6bn (vs. £1.4bn expected). So fairly solid credit data in the UK.
Aside from that, the only other point to note were some fairly hardline comments from US Commerce Secretary Ross. He noted that it makes more sense to take an “aggressive stance” with China while the US economy is doing well, in part because “there’s more ability for the economy to absorb whatever short-term problems may come”. He used the analogy of going into a diet, where “it’s no fun in the beginning…maybe a bit painful…but at the end of the day, you’re kind of happy with the end result”. In contrast China’s Foreign Minister Wang Yi noted yesterday that “China’s door of dialogue and negotiations remains open, but any dialogue must be based on equality and mutual respect”. Elsewhere on NAFTA, Mr Ross noted that “our most close-to-completion negotiations are with NAFTA, particularly with Mexico” and “there’s a pretty good chance that we could be on a pretty rapid track with the Mexican talks”. That helped the Mexican Peso rally +0.49% versus the dollar yesterday meaning it is now up over +11% since mid-June.
Looking at the day ahead, attention will turn to the aforementioned BoJ press conference which kicks off after we go to print. Datawise, we’ll get the preliminary July CPI prints for France, Italy and the Euro area this morning along with the advance Q2 GDP release for the Euro area. In the US, as noted above June PCE and the Q2 ECI data should be the main focus, while the July Chicago PMI and July consumer confidence data are also slated for release. Along with the Apple numbers, Procter & Gamble, Pfizer, BP and Credit Suisse earnings are also due.
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