Futures Unchanged Before Janet Yellen’s Congressional Testimony

It has been a mixed overnight session, following data out of China first showing that any hopes of ongoing PBOC tapering are dead and buried, following the June report showing money and loan creation (1.08 trillion Yuan up from 871 billion in May and above the 980 billion expected) in China soared, slamming expectations and indicating that Beijing is once again set on masking slowing growth with a surge in money creation. Should the Chinese not so secret any more money laundering channel be plugged this means local inflation may be set to surge in the coming months. More worrying was the release of a big drop in the German ZEW Survey expectations print at 27.1, down from 29.8 and below the expected 28.2. The low print has prompted several banks to warn that Europe’s growth spurt has finally ended and there may be substantial downside surprises ahead, and certainly even more cuts to the IMF “forecast” for European growth. Finally, the Portuguese situation may be out of sight, but it is certainly not out of mind as the stock of BES continues to tumble and now the contagion has finally moved over to Espirito Santo Financial Group whose shares dropped to the lowest since 1993. Keep a close eye on this “not so lonely” cockroach.

But the most importantly event of the day is certainly the first day of Janet Yellen’s Congressional testimony starting at 10am. As DB summarizes, she will be testifying on behalf of the Fed and though it’s clear that she’s more dovish than most of her colleagues there is always a chance she will be more hawkish in her testimony than she is when putting forward her own views. However in her chair role so far she has tended be dovish even when fears mount that she might be on the turn or might be representing her committee’s views. Indeed, going by the June FOMC minutes, even the more hawkish elements of the FOMC are still fairly circumspect in their desire to see rates rise. In terms of the finer details of what to expect from her testimony today, there will probably be a focus on the recent pickup in inflation indicators. On this front, Yellen has said previously that there is a lot of statistical noise in the recent inflation numbers and we would expect that message to be reiterated today. On the unemployment front, we expect Yellen to highlight again the slack in the labour market and the room for improvement available in Yellen’s dashboard of alternative labour market indicators. We can also expect some questioning on the pace and manner of the Fed’s stimulus withdrawal policies.

In sum, European shares fall, though are off intraday lows, with tech and banks sectors underperforming and basic resources, health care outperforming. The Spanish and Italian markets are the worst-performing larger bourses, the Swiss the best. 6 out of 19 Stoxx Europe 600 sectors rise; basic resources, health care outperform, tech, banks underperform. 24.7% of Stoxx 600 members gain, 74.5% decline. Eurostoxx 50 -0.7%, FTSE 100 -0.1%, CAC 40 -0.4%, DAX -0.5%, IBEX -1.3%, FTSEMIB -1.2%, SMI +0.3%. The euro is weaker against the dollar. German 10yr bond yields fall; French yields decline. Commodities decline, with Brent crude, natural gas underperforming and gold outperforming.

In Asia, it’s been another positive session with the Nikkei (+0.6%) again leading the region’s equity markets higher, while Asia-Pac credit spreads are generally around 1-2bp firmer. The Bank of Japan’s latest meeting concluded with no changes in policy and no major changes to economic forecasts. The Bank said it sees Japanese CPI remaining at 1.25% for some time but left unchanged its forecast of 2.1% CPI in FY2016. The BoJ’s GDP growth forecasts were also largely unchanged from its last set of forecasts published in April. In China, Premier Li released a statement on the central government’s website saying that he is comfortable of achieving a medium-high level of growth. The Shanghai Comp, HSCEI and KOSPI are up 0.1%, 0.3% and 0.9%% respectively. The latest RBA minutes were fairly neutral, with the central bank reiterating its preference for a period of stable rates. AUDUSD is little changed at 0.94.

We have a busy day ahead for data, central bank speakers and corporate earnings. Starting in Europe, the German ZEW survey will be released this morning. Governor Carney speaks before the House of Commons Treasury Committee on the BoE’s June financial stability report at 10am London. This will be followed by the pre-market earnings from JPM, Johnson & Johnson and GS. Yellen’s testimony at the Senate Banking Committee starts at 3pm London time, but her prepared comments are likely to be posted online shortly before the official start. The US data docket is headlined by US retail sales, business inventories and the Empire Fed manufacturing survey. On retail sales, Bloomberg consensus sits at +0.6% MoM on the headline and +0.5% MoM ex-auto and gas. The Empire Manufacturing survey is expected to moderate to 17.0 (vs 19.3 in June). Intel’s earnings are due after the NY closing bell which will provide an important update on the state of consumer and business demand for PCs.

Market Wrap

S&P 500 futures down 0.1% to 1968.4
Stoxx 600 down 0.2% to 339.3
US 10Yr yield down 2bps to 2.53%
German 10Yr yield down 2bps to 1.19%
MSCI Asia Pacific up 0.4% to 147.2
Gold spot up 0.4% to $1311.9/oz

Bulleting headline summary from RanSquawk and Bloomberg

Treasury yields dropped in overnight trading prior to Fed Chair Yellen delivering her semi-annual monetary-policy testimony to the Senate banking committee today at 10am ET; Treasury volatility as measured by MOVE Index remains near record lows of May 2013.
GBP bid across the board and Short-Sterling curve bear steepens in reaction to the release of much higher than expected UK CPI release
The release of lower than expected German ZEW survey provided a further bid tone to Bunds, sent EUR/USD below 1.3600 level and saw EU stocks touch of session lows (Eurostoxx 50, -0.85%)
Market looks ahead to Fed’s Yellen delivering her semi-annual testimony at 1500BST/0900CDT and earnings by JP Morgan, Goldman Sachs, Intel and Yahoo
A gauge of U.S. inflation expectations climbed to a five-month high before central bank Chair Janet Yellen speaks today
U.K. inflation accelerated more than economists forecast to its fastest pace since January, fueling speculation the Bank of England could raise interest rates within months
London house prices surged the most since 2002 in May, pushing an index of values across to the U.K. to a record, the Office of National Statistics said today
German investor confidence declined for a seventh month in July as slower growth and geopolitical risks weighed on the outlook for Europe’s largest economy
Governor Kuroda signaled confidence in the Bank of Japan’s bid to drive inflation to 2% as the central bank maintained unprecedented stimulus
Australia’s central bank reiterated it expects a period of stable interest rates as the government cuts spending and the economy transitions from mining-investment led growth
Legislation to speed the deportation of Central American children arriving at the U.S.-Mexico border will be introduced by two Texas lawmakers, Representative Henry Cuellar, a Democrat, and Senator John Cornyn, a Republican
Israel has accepted Egypt’s proposal to end a week of fighting with Gaza militants and ordered its military to cease fire at 9 a.m., Prime Minister Benjamin Netanyahu’s office said in a text message
Sovereign yields mixed with Ireland, Greece and Portugal 10Y spreads all wider. Euro Stoxx Banks index rose 1.2% yesterday to 142.9; Thursday hit its lowest level (140.89) since January. Asian stocks mostly higher. European equities, U.S. stock futures drop. WTI crude, copper lower; gold rises

US Event Calendar:

8:30am: Retail Sales, m/m, June, est. 0.6% (prior 0.3%)
Retail Sales Ex Auto, m/m, June, est. 0.5% (prior 0.1%)
Retail Sales Ex Auto and Gas, June, est. 0.5% (prior 0.0%)
Retail Sales Control Group, June, est. 0.5% (prior 0.0%)
Empire Manufacturing, July, est. 17 (prior 19.28)
Import Price Index, m/m, June, est. 0.4% (prior 0.1%); Import Price Index, y/y, June, est. 1.1% (prior 0.4%)
10:00am: Business Inventories, May, est. 0.6% (prior 0.6%)
10:00am: Fed’s Yellen gives semi-annual testimony to Senate committee
No POMO

FIXED INCOME

The release of much higher than expected UK CPI, supported by clothing and footwear, food and non-alcoholic beverages, transports, resulted in an aggressive bear steepening of the Short-Sterling curve. At the same time, lower than expected German ZEW survey resulted in renewed UK/EU monetary policy divergence flows, with Bunds remaining bid and UK/GE 10y spread widening.

EQUITIES

Disappointing macroeconomic data and caution ahead of Fed’s Yellen semi-annual testimony saw stocks trade lower across the board in Europe this morning. Software AG shares in Germany slumped over 10% after the software maker cut its outlook for 2014, amid delays in major projects in the second quarter. At the same time, Banco Espirito Santo (-20%) shares also remained under pressure, falling to its lowest level since 1993 amid the uncertainty regarding the capital position of the beleaguered lender in Portugal.

GBP reversed initial weakness inspired by lower UK BRC LFL sales and surged above 1.7100 level following the release of much higher than expected inflation data. GBP also benefited from the release of lower than expected German ZEW survey, which saw EUR/GBP move to within a touching distance of its 2014 low of 0.7915.

Elsewhere, AUD is seen sharply lower across the board, with Barclays economist Davies stating that the minutes of RBA July meeting indicate the central bank could soon change its forward guidance from a “period of stability in interest rates” to something like policy settings “remain appropriate”.

COMMODITIES

Touted safe-haven related flows resulting from the cautious sentiment which was observed over in Europe this morning, together with bargain hunting following yesterday’s aggressive sell-off saw gold and silver prices edge higher this morning. Of note, global gold ETF holdings increased adding 312,734 ounces to 55,841,361 ounces after SPDR increased their holdings by 1.1%, the most since August 2011.

* * *

DB’s Jim Reid concludes the overnight recap

After a relatively quiet start to the week, we head into a Tuesday packed full of economic data, US bank earnings and Yellen’s congressional testimony. Out of those, it’s likely that the tone will be set by the semi annual Humphrey-Hawkins testimony at the Senate Banking Committee, scheduled to start at 10am local time (or 3pm London). As we wrote yesterday, she will be testifying on behalf of the Fed and though it’s clear that she’s more dovish than most of her colleagues there is always a chance she will be more hawkish in her testimony than she is when putting forward her own views. However in her chair role so far she has tended be dovish even when fears mount that she might be on the turn or might be representing her committee’s views. Indeed, going by the June FOMC minutes, even the more hawkish elements of the FOMC are still fairly circumspect in their desire to see rates rise. In terms of the finer details of what to expect from her testimony today, there will probably be a focus on the recent pickup in inflation indicators. On this front, Yellen has said previously that there is a lot of statistical noise in the recent inflation numbers and we would expect that message to be reiterated today. On the unemployment front, we expect Yellen to highlight again the slack in the labour market and the room for improvement available in Yellen’s dashboard of alternative labour market indicators. We can also expect some questioning on the pace and manner of the Fed’s stimulus withdrawal policies.

Ahead of the testimony today, the New Yorker Magazine published a fairly extensive profile of Yellen which goes into some detail as to how the Fedchair views her role in the economy. Firstly, Janet Yellen is described as an “unrepentant Keynesian”. The author quotes Yellen as saying, “You can’t think about what is happening in the economy constructively, from a policy standpoint, unless you have some theoretical paradigm in mind” and “I come from an intellectual tradition where public policy is important, it can make a positive contribution, it’s our social obligation to do this”. In addition, Yellen is quoted as saying “the financial crisis really diminished the prestige of those who think that financial markets are always efficient and work extremely well”. Yellen is also quoted as saying that “even when the headwinds have diminished to the point where the economy is finally back on track and it’s where we want it to be, it’s still going to require an unusually accommodative monetary policy”. Thirdly, the article provides some description of the Fedchair’s family background, which may potentially inform her current policy decisions. According to CNBC, both Yellen and her husband were strongly affected by their parents’ experiences with unemployment, the New Yorker said, citing papers the couple have published stating that people’s economic behaviour is not mechanically rational and that the Fed can manage the economy better than the markets (CNBC). According to CNBC, the New Yorker Magazine interviewed Yellen three times in the last few months to put together the profile – so you could argue that the Magazine had a relatively high level of access to the Fedchair. So all in all, no major surprises that Yellen is dovish but some interesting snippets on Yellen’s view of the role of public policy and perhaps how galvanised her dovish position really is.

Outside of the Fed, JPM and Goldman Sachs’ earnings before the NY opening bell today will be closely watched. This follows a better than consensus set of Citigroup Q2 results yesterday, which helped push US equity futures to intraday highs. From a macro point of view, markets welcomed the above-consensus FICC trading revenues (down 12% yoy) which was better than the 20%+ declines which some had feared. Citi also benefited from larger-than-expected net interest margins (down 3bp), loan loss reserve releases and loan growth trends. Even the $7bn mortgage settlement was taken positively, with some highlighting that it is less than the $10bn settlement that was predicted several weeks ago. Citigroup stock closed 3% higher yesterday, buoying other banking stocks (+0.66%) which together outperformed the S&P500 (+0.48%). On a YTD basis though, the S&P500 bank index is up 4.5%, underperforming the broader S&P500 by around 250bp.

In Asia, it’s been another positive session with the Nikkei (+0.78%) again leading the region’s equity markets higher, while Asia-Pac credit spreads are generally around 1-2bp firmer. The Bank of Japan’s latest meeting concluded with no changes in policy and no major changes to economic forecasts. The Bank said it sees Japanese CPI remaining at 1.25% for some time but left unchanged its forecast of 2.1% CPI in FY2016. The BoJ’s GDP growth forecasts were also largely unchanged from its last set of forecasts published in April. In China, Premier Li released a statement on the central government’s website saying that he is comfortable of achieving a medium-high level of growth. The Shanghai Comp, HSCEI and KOSPI are up 0.1%, 0.3% and 0.9%% respectively. The latest RBA minutes were fairly neutral, with the central bank reiterating its preference for a period of stable rates. AUDUSD is little changed at 0.94.

Yesterday’s market volumes were generally on the low side, which we can probably attribute to the World Cup hangover and Bastille Day in France. There were some more dovish comments from Draghi who argued that the EUR appreciation since mid-2012 has had an impact on price stability (i.e. reducing inflation) and in the present context is a “risk to the sustainability of the recovery”. The ECB President reiterated that asset purchases are within the ECB mandate and that the central bank would continue with prepatory works to revive the ABS market. Draghi also dismissed reports that he may step down as the ECB’s leader. The concerns over the Banco Espirito situation faded somewhat yesterday which allowed the iTraxx subordinated financials and senior financials indices to rally 3bp and 1.6bp respectively. The Portuguese 10yr bond rallied 5.5bp but Banco Espirito Santo’s share price fell 7.5% after the bank’s largest shareholder, Espirito Santo Financial Group sold a 5% stake in the bank to repay a EUR100m loan extended to ESFG by Nomura (Bloomberg).

via Zero Hedge http://ift.tt/1kYTIc1 Tyler Durden

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