Month: August 2018

Last month saw ADP notably under-predict BLS’ payrolls data (for the third month in a row) and was expected to increase in July from +177k to +186k but smashed that expectation, printing +219k – the highest since Feb 2018 (and well above the +185k exp for Friday’s payrolls).

Medium-sized firms saw the largest increase in employment, with services adding 177k (and goods adding 42k) in July.

“The labor market is on a roll with no signs of a slowdown in sight,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Nearly every industry posted strong gains and small business hiring picked up.”

However, Mark Zandi, chief economist of Moody’s Analytics, said that while “the job market is booming, impacted by the deficit-financed tax cuts and increases in government spending,” he sees a potential problem:

“Tariffs have yet to materially impact jobs, but the multinational companies shed jobs last month, signaling the threat.”  

Finally we note that on average during President Trump’s tenure, ADP has – on average – had no bias in its reporting compared to BLS data, this is notably different from the systemic under-reporting that ADP did relative to BLS during Obama’s tenure…

 

 

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Tommy Robinson,  the founder of the English Defence League, will be freed from prison after the court of appeal ordered that he should be retried on a contempt of court charge. He has been held at Onley prison after being jailed for 13 months following convictions for breaching reporting restrictions after broadcasting footage of trial defendants on social media.

Robinson was jailed in May after he filmed people involved in a criminal trial and broadcast the footage on social media. The footage, lasting about an hour, was watched 250,000 times within hours of being posted on Facebook. The controversial activist was sentenced to 10 months in prison for contempt of court, which he admitted, and a further three months for breaching a previous suspended sentence.

Fast forward to today, when at the court of appeal on Wednesday, the lord chief justice, Lord Burnett of Maldon, upheld the conviction but said there should be a retrial for the Leeds case, the Guardian reported.

Tommy Robinson is free! pic.twitter.com/3MYzfVY7tn

— Ezra Levant 🇨🇦 (@ezralevant) August 1, 2018

Robinson, the appeal court said, would be released on bail on condition that he attended the retrial before the recorder of London at a date to be fixed.

In the ruling, the lord chief justice said the Leeds finding of contempt had been “flawed”. That court should not have proceeded immediately but waited to hear the case on a “fully informed basis”, he said.

The judgment added: “It was unclear what conduct was said to comprise a breach of that order and the appellant was sentenced on the basis of conduct which fell outside the scope of that order.”

Robinson was also ordered to stay at least 400 metres away from Leeds crown court while on bail.

Outside the Royal Courts of Justice, supporters of Robinson and anti-racism protesters chanted rival slogans at each other separated by crowd barriers and police. Members of Stand Up To Racism shouted: “Say it loud, say it clear, refugees are welcome here,” and “Nazi scum”.

Supporters of Robinson shouted back: “You’re the racists”, and “Tommy is free”.

The judges had been urged to overturn contempt of court findings against Robinson, 35, whose real name is Stephen Christopher Yaxley-Lennon. At a hearing in July, his QC, Jeremy Dein, argued that procedural “deficiencies” had given rise to “prejudice”. Dein also submitted that the sentence was “manifestly excessive” and that insufficient regard had been given to personal mitigation.

Robinson was detained outside Leeds crown court after using social media to broadcast details of a trial that was subject to blanket reporting restrictions. Jailing him, Judge Geoffrey Marson told Robinson it was a “serious aggravating feature” that he was encouraging others to share it and it had been shared widely.

He added: “Everyone understands the right to freedom of speech but there are responsibilities and obligations. I am not sure you appreciate the potential consequence of what you have done. People have to understand that if they breach court orders there will be very real consequences.”

It was the second time Robinson had breached court orders, having narrowly avoided jail in May last year over footage he filmed during the trial of four men who were later convicted of gang-raping a teenage girl.

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Shares of China’s search giant Baidu are plunging, giving up an earlier earnings-driven gain, after a report that Google is reported to be pursuing a censored search engine for the China market.

Google, which has long contemplated how to enter the Chinese market but has so far resisted selling out and complying with Beijing’s censorship demands, has demonstrated the app which would blacklist websites and search terms about human rights, democracy, religion and protests, to the Chinese government, The Intercept reported earlier. It adds that a final version could be rolled out in six to nine months.

Google originally shut down its Chinese search engine in 2010, citing government attempts to “limit free speech on the web” but that no longer appears to be a binding consideration.  More from The Verge:

Google previously offered a censored version of its search engine in China between 2006 and 2010, before pulling out of the country after facing criticism in the US. (Politicians said the company was acting as a “functionary of the Chinese government.”) In recent months, though, the company has been attempting to reintegrate itself into the Chinese commercial market. It launched an AI research lab in Beijing last December, a mobile file management app in January, and an AI-powered doodle game just last month.

According to internal documents provided to The Intercept by a whistleblower, Google has been developing the censored version of its search engine under the codename Dragonfly since the beginning of 2017. The search engine is being built as an Android mobile app, and will reportedly “blacklist sensitive queries” and filter out all websites blocked by China’s web censors (including Wikipedia and BBC News). The censorship will extend to Google’s image search, spell check, and suggested search features.

The whistleblower who spoke to The Intercept said China engages in censorship because they were “against large companies and governments collaborating in the oppression of their people.” They also suggested that “what is done in China will become a template for many other nations.”

As The Verge notes, Patrick Poon, a researcher with Amnesty International, agreed with this assessment. Poon told The Intercept that if Google launches a censored version of its search engine in China it will “set a terrible precedent” for other companies. “The biggest search engine in the world obeying the censorship in China is a victory for the Chinese government — it sends a signal that nobody will bother to challenge the censorship any more,” said Poon.

According to The Intercept, Google faces a number of substantial barriers before it can launch its new search app in China, including approval from officials in Beijing and “confidence within Google” that the app will be better than its main rival in China, Baidu.

While Google is eager to get a slice of China’s huge market of some 750 million web users, ambitions to re-launch its search engine may yet go nowhere. Reports in past years of plans to bring the Google Play mobile store to China, for example, have so far come to nothing, and Google regularly plans out projects it ultimately rejects.

Meanwhile relations between China and the US have worsened in recent weeks due to trade tariffs imposed by President Trump. The Intercept reports that despite this Google staff have been told to be ready to launch the app at short notice. The company’s search engine chief, Ben Gomes, reportedly told employees last month that they must be prepared in case “suddenly the world changes or [President Trump] decides his new best friend is Xi Jinping.”

Baidu, China’s largest search engine, fell 7% in pre-market trading in New York; as Bloomberg notes, the stock had climbed as much as 2.2% earlier after the company reported late on Tuesday Q2 revenue and profit that topped analyst estimates.

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It took less than a day for the latest trade war ceasefire with China to crash and burn.

Just hours after reports spread that Trump is considering more than doubling planned tariffs on $200 billion in Chinese imports, raising the rate from 10% to 25%, China vowed it would retaliate, and warned the U.S. against “blackmailing and pressuring” it over trade.

As reported last night, the latest US proposal – which Trump could unveil as soon as today – would increase the potential tariff rate from 10% the administration had initially put forward on July 10 for that wave of duties in a bid to pressure Beijing into making trade concessions, to 25%. At the same time, representatives of Steven Mnuchin and Chinese Vice Premier Liu He are reportedly having private conversations as they look for ways to reengage in negotiations, however as the WSJ also reported on Tuesday, these negotiations haven’t had much, if any, success. As Bloomberg notes, “while American and Chinese officials have hinted at the possibility of restarting talks in recent weeks, it’s been almost two months since they last held high-level negotiations.”

The two sides held three rounds of formal talks, beginning with a delegation to Beijing led by Mnuchin in May. After Liu visited Washington later that month, the nations released a joint statement pledging to reduce the U.S. trade deficit with China, among other things. But within days, Trump himself backed away from the deal, saying talks would “probably have to use a different structure.”

In response to the latest escalation out of the White House, China again accused the United States of bullying, and vowed to retaliate if Trump proceeds with the measures, warning that pressure tactics would fail.

“U.S. pressure and blackmail won’t have an effect. If the United States takes further escalatory steps, China will inevitably take countermeasures and we will resolutely protect our legitimate rights,” Chinese Foreign Ministry spokesman Geng Shuang told a regular news briefing.

Repeating the same futile line that has been used before on numerous occasions, when asked about communication between the two countries on the dispute, Geng said China had “always upheld using dialogue and consultations to handle trade frictions”, but that dialogue must be based on mutual respect and equality.

“Unilateral threats and pressure will only produce the opposite of the desired result,” Geng said.

Trump had said he would implement the $200 billion round as punishment for China’s retaliation against the initial tariffs aimed at forcing change in China’s joint venture, technology transfer and other trade-related policies. The president has also threatened a further round of tariffs on $300 billion of Chinese goods; we expect him to renew these threats on twitter in the coming hours.

The public comment period on the U.S. tariffs aimed at $200 billion ends Aug. 30 after public hearings Aug. 20-23, according to the U.S. Trade Representative’s office. It typically has taken several weeks after the close of public comments for the tariffs to be activated and will send a signal that the Trump administration is upping the pressure on China to make serious concessions.

Quoted by Reuters, Erin Ennis, senior vice president of the U.S.-China Business Council, said a 10 percent tariff on these products is already problematic, but more than doubling that to 25 percent would be much worse.

“Given the scope of the products covered, about half of all imports from China are facing tariffs, including consumer goods,” Ennis said. “The cost increases will be passed on to customers, so it will affect most Americans’ pocketbooks.”

Meanwhile, Bloomberg notes that in a sign the trade standoff is escalating withint Chinese politics, the Politburo signaled on Tuesday that policy makers will focus more on supporting economic growth, after the latest Chinese manufacturing surveys showed trade tensions have led to a modest slowdown in China’s growth rate.

The communique, which followed a meeting of the country’s most senior leaders led by President Xi Jinping, said the campaign to reduce leverage will continue at a measured pace while improving economic policies to make them more forward-looking, flexible and effective in the second half.

Chinese equities and the yuan extended losses Wednesday afternoon, with the Shanghai Composite closing down -1.8% at the lows of the session, as concern over possible higher U.S. tariffs overwhelmed optimism about Beijing’s pledge to support economic growth.

The yuan fell against a trade-weighted basket of currencies to a level that’s near the lowest on record, confirming that Beijing is indeed allowing further weakness. Meanwhile, the offshore Yuan tumbled to the lowest level in the past year before local banks intervened to sell dollars – the PBOC’s preferred method of direct market intervention – and prevent a resurgence in capital outflows.

In advance of the Aug. 30 public comment period deadline, the next wave of U.S. tariffs is set to kick in as soon as today with the possible imposition of duties on another $16 billion of Chinese imports. The implementation could be delayed for weeks as the administration works out the details of which products it will target. Officials in Beijing have vowed to respond with the same amount of tariffs on U.S. products.

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The latest trade war truce lasted less than a day, and after stocks jumped yesterday following an early report that Mnuchin had resumed trade talks with his Chinese counterpart, a late Tuesday report that the Trump admin is planning to increase the tariff rate on some $200BN of Chinese imports from 10% to 25% led to an immediate slide in risk assets around the globe, and this morning global stocks and futures were a sea of red despite Apple’s stellar results which helped lift the Nasdaq.

In response, China again warned the U.S. against “blackmailing and pressuring” it over trade. China’s Ministry of Foreign Affairs said it will fight back if the U.S. further increases tariffs as it now contemplated. “If the U.S. takes measures to further escalate the situation, we will surely take countermeasures to uphold our legitimate rights and interests,” spokesman Geng Shuang said at a regular press conference on Wednesday.

The return of trade war tensions initially sent the dollar higher across the board, while the Yuan tumbled, with the offshore Yuan tumbling to a one year low of 6.8642 against the dollar, before the PBOC intervened again, and the onshore Yuan reversed losses mid-afternoon after a large Chinese bank was seen selling dollars. According to Bloomberg, at least one big Chinese bank started to sell dollars aggressively around 6.83 yuan per USD, and those flows disappeared after rate went to 6.82. A large Chinese bank also sold dollars onshore earlier in the day, spurring other banks to follow.

The big overnight move, however, wasn’t in China but in Japan, where one day after the BOJ tweaked its monetary policy while leaving its YCC largely intact, bond traders tried to find the new tolerance breaking point for 10Y JGB. As a reminder, during his press conference, Kuroda yesterday said that the tolerance deviation for 10Y yields was doubled from 10bps around 0% to 20bps, and overnight Japan’s 10-year yields climbed 5.5bps, approaching 0.12%, the highest since February 2017, while 10-year futures dropped to 149.98, the lowest since July 2017.

The sharp slide, which did not prompt the BOJ to launch another fixed-rate operation and prevent further selling, lead to an emergency margin call for JGB Futures by the Japanese Securities Clearing Corp. This is what prompted the ominous announcement:

When the market moves beyond predetermined range at 1:00 pm (for 10-year JGB Futures, at the closing of morning session), or when JSCC deems it necessary, required amount of Clearing Margin is re-calculated and if the deposited amount falls short of the re-calculated amount, additional margin shall be deposited by 4:00 pm on the day.

As a result of the rout which was testing to see at what point Kuroda would respond, JGB bond yields traded in the widest daily range since 2016, before YCC was established and prompting new fears about bond market stability.

The latest Japanese bond rout spread across the globe, pushing 10Y TSY yields to session highs just under 2.98, while French 10-year yields were higher by 3.5bps and over 1bp wider vs Germany across the long-end, while 10-year OAT invoice spreads are about 2bps tighter. French bonds are among the largest beneficiaries of Japanese investor demand, and are underperforming as markets assess the next possible step from Japanese insurers that now face more attractive domestic yields, which may see demand for OAT dry up.

Elsewhere in Europe, stocks declined as for familiar reasons: a renewed ratcheting up of trade rhetoric, sinking commodities in the process. The Stocks Europe 600 Index fell, led by miners, as China vowed to retaliate if the U.S. follows through on threats to increase its import tariffs. Volkswagen was among companies reporting better-than-expected earnings, but carmakers were caught in the downdraft.

Earlier in the session, Asian stock markets were mostly higher as region got a tailwind from US where all majors finished positive on trade optimism – since denied – while earnings also remained in the spotlight with Apple beating on top and bottom lines. However, Asia-Pac bourses were far from solid ground and US equity futures also pared some of their gains after reports that the Trump administration is planning to propose an increase to 25% tariffs from 10% on USD 200bln of Chinese goods and as Caixin Manufacturing PMI added to the recent China PMI misses.

Futures for the S&P 500 and Dow Jones also edged lower, though contracts for the Nasdaq gained in the wake of strong results from Apple Inc.

The dollar climbed against most of its major peers and the offshore yuan advanced. The Bloomberg Dollar Spot Index rose 0.2%, up a second day, before the Federal Reserve’s meeting where investors were focusing on the outlook for further rate hikes. Kiwi leads declines after disappointing earnings data. The pound and euro were slightly weaker after underwhelming readings for manufacturing gauges in the U.K. and Europe.

And speaking of the dollar, a reminder that the conclusion of the FOMC meeting is today at 2pm although this one may be one of the least anticipated as no change in policy is expected and as a reminder this is a meeting that doesn’t have a press conference, nor a fresh summary of economic projections so the only focus really will be on cosmetic changes to the statement. Most economists expect a fairly uneventful statement with the only real change perhaps being an acknowledgement of some recent softness in housing market data. As a complement to June’s removal of forward guidance language, the statement could also include some language such as the phrase “for now” featured in Fed Chair Powell’s recent monetary policy testimony. Including such verbiage would have the effect of including some uncertainty into the Fed’s gradual rate hike mantra. The team take the addition of such language as another way to de-emphasize forward guidance and reiterate that their actions are data dependent.

Commodities retreated as metals, heavily exposed to global trade, fell with oil. Oil prices slipped with WTI and Brent both down ~1.0% in early European trade, and hovering around their 100DMA’s of $67.84 and $74.14 respectively. This comes after Brent declined more than 6% in July and WTI fell around 7% in the same period, with both benchmarks having the largest decline in over 2 years. Yesterday also saw API inventories showing a surprise build of 5.6mln BBL’s, vs. and expected draw of 2.8mln BBL’s. Oil traders are now looking ahead to EIA data later in the day. In the metals scope, gold is holding steady ahead of the FOMC rate decision later on in the day. London copper has extended the losses that were seen in July (-5%) and is down 1% on the day as traders express worries on the US-China tariff threats. Zinc has fallen the most, currently down 2%, with nickel, lead and tin also slipping.

FOMC rate decision is due, while expected data include mortgage applications and manufacturing PMI. Ferrari, Sprint, T-Mobile US, and Tesla are among companies reporting earnings.

Market Snapshot

• S&P 500 futures down 0.1% to 2,814.25
• STOXX Europe 600 down 0.2% to 390.81
• MXAP up 0.3% to 167.48
• MXAPJ down 0.09% to 542.17
• Nikkei up 0.9% to 22,746.70
• Topix up 0.9% to 1,769.76
• Hang Seng Index down 0.9% to 28,340.74
• Shanghai Composite down 1.8% to 2,824.53
• Sensex down 0.1% to 37,558.56
• Australia S&P/ASX 200 down 0.07% to 6,275.72
• Kospi up 0.5% to 2,307.07
• German 10Y yield rose 2.4 bps to 0.467%
• Euro down 0.01% to $1.1690
• Italian 10Y yield fell 22.0 bps to 2.452%
• Spanish 10Y yield rose 2.9 bps to 1.429%
• Brent futures down 1.3% to $73.26/bbl
• Gold spot little changed at $1,223.20
• U.S. Dollar Index little changed at 94.62

Top Overnight News from Bloomberg:

• Trump administration will propose more than doubling its planned tariffs on Chinese imports, ratcheting up pressure on Beijing to return to the negotiating table, three people familiar with the internal deliberations said
• China responded on Wednesday to a report that the U.S. is trying to force officials back to the negotiating table through threats of even higher tariffs by saying that “blackmailing and pressuring” will never work.
• PBOC has started actively encouraging banks to extend more credit by taking a softer stance on loan quotas, according to people familiar
• U.K. Prime Minister Theresa May will cut her holiday short to fly to meet French President Emmanuel Macron at his holiday retreat to discuss Brexit on Friday, her office said
• U.S. and Mexico are in final stages of negotiating a deal on rules for cars sold under Nafta, one of the biggest sticking points in discussions to overhaul the North American Free Trade Agreement, according to people familiar with the talks
• Bank of Japan Governor Kuroda’s policy tweaks have either strengthened the long-running stimulus or mark a stealth “baby step” toward normalizing policy depending on who you talk to
• President Trump says at political rally in Florida that the U.S. is “doing well in North Korea,” although China “maybe is getting in our way. But we are going to figure that one out before you can even think about it”
• BNP Paribas SA became the latest European banking giant to post debt-trading results that lagged behind the largest Wall Street firms
• U.K. manufacturing growth slowed more than expected last month, casting doubt on the strength of the economy as Bank of England policy makers hold their crunch meeting.
• China’s central bank has started actively encouraging banks to boost lending, people familiar with the matter said, as it ratchets up efforts to bolster a cooling economy.

Asian equity markets were mostly higher as region got a tailwind from US where all majors finished positive on trade optimism from initial reports that US and China are to seek a restart of talks, while earnings also remained in the spotlight with Apple beating on top and bottom lines. However, Asia-Pac bourses were far from solid ground and US equity futures also pared some of their gains after reports that the Trump administration is planning to propose an increase to 25% tariffs from 10% on USD 200bln of Chinese goods and as Caixin Manufacturing PMI added to the recent China PMI misses. As such, ASX 200 (-0.1%) and Nikkei 225 (+0.9%) were mixed throughout most the session with Australia dampened by weakness in financials and energy, while Tokyo trade was driven by a weaker currency and earnings deluge. Elsewhere, Apple suppliers were varied despite the tech giant’s earnings beat as they also digested softer than expected product sales, and Chinese markets (Hang Seng -0.9%; Shanghai Comp. -1.8%) opened positive but then gains later proved to be flimsy on the conflicting trade reports and disappointing data. Finally, 10yr JGBs fell around 80 ticks to break below 150.00 as the BoJ’s more flexible approach on yields continued to reverberate in the bond market, with the 10yr yield back above 0.1% and the 5yr yield at a 6-month high. Of note, it was reported that Japan Securities Clearing Corporation stated that emergency margin calls related to JGB futures were triggered. Trump administration plans to propose a higher tariff of 25% (Prev. 10%) on USD 200bln of imports from China with an announcement possible as soon as today, according to sources.

Top Asian News

• China Tower Said to Raise $6.9 Billion in Biggest IPO in 2 Years
• Chinese Investors Flee Into Money Market Funds From Stocks
• HNA Chief’s Death Is Said to Delay Hong Kong Airlines Share Sale
• BlackRock Snaps Up Turkish Bonds Derided by Goldman Sachs

European equites are marginally lower as focus once again remains on earnings. The FTSE 100 is currently underperforming (-1.1%) on the back of softer mining names (i.e. Rio Tinto missing on expectations), as well as the retail sector sliding after Next posted uninspiring earnings. The CAC (flat) is currently outperforming off the back of ArcelorMittal posting strong earnings. The IT sector is currently in the green and following in step with the positivity seen after Apple’s earnings last night, with the FAANG stock beating on both the top and bottom line; up 3.5% pre-market. Dialog Semiconductor is leading the gains in the Stoxx 600 after strong financial results, and Volkswagen also reported positive earnings, beating on both revenue and profit expectations, but are struggling to hold on the early gains, currently down 1.8%.

Top European News

• U.K. Manufacturing Growth Ebbs as New Orders, Output Slow
• Euro- Area Factories Put on the Brakes in July Amid Trade Qualms
• Mediobanca CEO Eyes Acquisitions After Wealth Unit Lifts Profit
• Kosovo Rejects Serbian Idea of Partition Along Ethnic Lines

In FX, the DXY index and Greenback overall has rebounded further from Tuesday’s lows, the former back above 94.500 within a range up to 94.700 at best and the Buck up vs all G10 peers, plus many EMs again following yet another higher Usd/Cny setting by the PBoC (ongoing reaction to or precaution against US-China trade war risk). Ahead, several potentially key US data points ahead of the FOMC and NFP on Friday, but no real expectations of any major policy guidance changes from the Fed. NZD/AUD – The Kiwi is underperforming again and only just keeping tabs with big figure levels vs its US and antipodean rivals at 0.6800 and 1.0900 respectively in wake of disappointing NZ data overnight (unemployment rate weaker than forecast and bigger miss on wages). However, the Aud is also on the backfoot amidst heightened US tariff threats vs China and the aforementioned Yuan depreciation, with Aud/Usd retreating towards 0.7400 after yesterday’s post-Aussie building approvals boost. JPY – Extending post-BoJ losses vs the Usd to 112.00+, but not quite testing Fib support around 112.18 and wary of huge option expiry hedging for tomorrow and Friday at the big figure strike (3.6 bn in total). CAD – The Loonie has retreated from sub-1.3000 highs vs its US counterpart on the back of upbeat Canadian data, with weak oil prices and ongoing NAFTA neglect niggling ahead of the manufacturing PMI. EM – The Rand is recovering after a slide beyond 13.3750 vs the Usd in wake of ANC action to alter SA’s constitution on land appropriation excluding financial compensation.

As for the day ahead, the main focus should be the FOMC meeting outcome this evening. In terms of data releases, we’ll get the remaining July manufacturing PMIs in Europe while in the US the July ADP employment change reading, final July manufacturing PMI, June construction spending, July ISM manufacturing and July total vehicle sales data are all due. Away from that, Tesla and Metlife will be reporting Q2 earnings. As noted earlier, the US Treasury will also unveil its latest borrowing plans

US Event Calendar

• 7am: MBA Mortgage Applications, prior -0.2%
• 8:15am: ADP Employment Change, est. 186,000, prior 177,000
• 9:45am: Markit US Manufacturing PMI, est. 55.5, prior 55.5
• 10am: Construction Spending MoM, est. 0.3%, prior 0.4%
• 10am: ISM Manufacturing, est. 59.3, prior 60.2
• 2pm: FOMC Rate Decision
• Wards Total Vehicle Sales, est. 17.1m, prior 17.4m

DB’s Craig Nicol concludes the overnight wrap

Welcome to August and with that only nine days until the football season officially kicks off again here in the UK. As it’s the first day of a new month we’ve got our usual monthly performance review at the end of today’s EMR and the usual charts and table in the PDF. July wasn’t quite the slow summer lull in markets that we’re used to expecting but all-in-all it was still a fairly decent month for most asset classes. In fact the S&P 500 had its strongest month since January.

The first day of August also brings with it the second of three central bank meetings this week. The conclusion of the FOMC meeting is tonight although of the three meetings, the Fed might be the least anticipated of the lot which isn’t something we would normally say. No change in policy is expected and as a reminder this is a meeting that doesn’t have a press conference, nor a fresh summary of economic projections so the only focus really will be on cosmetic changes to the statement. Our US economists expect a fairly uneventful statement with the only real change perhaps being an acknowledgement of some recent softness in housing market data. As a complement to June’s removal of forward guidance language, the statement could also include some language such as the phrase “for now” featured in Fed Chair Powell’s recent monetary policy testimony. Our colleagues believe that including such verbiage would have the effect of including some uncertainty into the Fed’s gradual rate hike mantra. The team take the addition of such language as another way to deemphasise forward guidance and reiterate that their actions are data dependent.

Also out today will be the US Treasury’s latest borrowing plans which should keep the Treasury market preoccupied. DB’s Steven Zeng expects $1bn to be added to each of the nominal coupon and FRN auction sizes, resulting in an additional $21bn of new issuance for the August-October Period. So worth keeping an eye on that announcement also.

Going into today, markets had no shortage of headlines to feed off yesterday. The early focus was the BoJ, which as DB’s Alan Ruskin described was a ‘Houdini like’ dovish spin (we’ll come back to that shortly), while the European session included a surprisingly soft Q2 GDP reading but stronger than expected July CPI print. We also had a raft of data releases  in the US including inflation data which was largely steady, while risk assets fed off the news that China and the US were supposedly working to restart trade talks. By the end of play the S&P 500 had closed up +0.49% to snap a three-day losing run with industrials leading the charge, while the NASDAQ and DOW also closed +0.55% and +0.43% respectively. In Europe the Stoxx 600 had earlier finished +0.18% while bond yields generally were slightly lower (Treasuries -1.3bps and Bunds -0.2bps), with curves back to flattening.

Late last night the focus swiftly turned to Apple’s Q3 earnings which came in above market while it also guided to Q4 revenue that was above consensus expectations. Shares were up +4.1% in extended trading which has helped NASDAQ futures to post a small gain. Markets in Asia are being held back however with China bourses in the red (Shanghai Comp -0.32%) following a new Bloomberg report that the Trump administration is considering to now raise the 10% tariff on $200bn worth of Chinese imports to 25%. It’s amazing how these stories can seemingly swing from one extreme to the other. China’s Xinhau news agency has also reported that China’s Politburo signalled yesterday that policy makers are to focus more on supporting economic growth in light of risks from deleveraging and the trade situation. Perhaps having the least impact on markets this morning is China’s Caixin PMI which printed at 50.8 (vs. 50.9 expected) and down 0.2pts from June. While we’re with China it’s worth noting that our China economists have revised their CNY forecasts for the end of this year and next to 6.95 and 7.40 respectively, from 6.80 and 7.20 previously.

Coming back to the BoJ, as noted earlier DB’s Alan Ruskin summed up yesterday’s policy decision nicely by calling it ‘Houdini like’ insofar as it was a brilliant execution of what amounts to a dovish spin on what was ultimately a mild tightening in policy. Indeed you couldn’t really have asked for a much better way to start the very slow process of withdrawing the safety net with JGB yields rallying 4-8bps at the 10-30y parts of the curve despite the upper bound for the 10y being doubled to 20bps (it’s worth noting that JGBs have given a lot of that back this morning however with the 10y back to 0.10%). As our economists in Japan noted in their report yesterday, Governor Kuroda highlighted in his press conference that the adjustments were aimed at repairing the damage to market functioning and at increasing the sustainability of policy, rather than the side effects. The team believe that a comprehensive review of the side effects could however still be possible in the future. Ultimately our economists believe that there are still three necessary conditions for a change in the JGB yield target. The first is stable core CPI, the second a comprehensive assessment of yield curve control and the third a government declaration to end deflation. The team see little evidence to suggest that the first condition won’t be met before 2020, and hence reiterate that current policy will be in place until then. In the near term the most interesting dynamic in markets in our view will be how far the market pushes that new upper bound for 10y JGB yields and where the BoJ decides to step in.

Back to some of those other stories in markets yesterday. The trade update that we mentioned at the top concerned a Bloomberg report which hit the wires in the early afternoon. It suggested that the US and China were willing and trying to kick off talks again with the view to avert a trade war. The story went on to say that representatives of US Treasury Secretary Mnuchin and Chinese Vice Premier Liu He were having private conversations however it’s worth noting that in recent weeks it’s been US Trade Representative Lighthizer, rather than Mnuchin, who has been the much more hard-lined and aggressive spokesman on the trade conflict with China, and the general feeling is that it is Lighthizer who has the better access to Trump on trade issues. So perhaps worth taking with a pinch of salt, especially given the new developments overnight which appear to completely contradict this initial story.

As for the raft of data releases yesterday, in the US the June core PCE reading came in in-line with expectations at +0.1% mom, with the annual rate now down at +1.9% yoy. The Q2 ECI was however a shade softer than expected at +0.6% qoq (vs. +0.7% expected) albeit not enough to take the Fed off the gradual hike path. Also out yesterday was a bumper July Chicago PMI (65.5 vs. 62.0 expected) with the index up 1.3pts from June, while the July consumer confidence reading also came in at a better than expected 127.4 (vs. 126.0 expected) and up from June. However the arguably more important expectations gauge did slip 2.3pts to 101.7, putting it at the lowest level since December last year.

In Europe it was all about the Q2 GDP and July CPI prints yesterday. The former came in at a surprisingly below market +0.3% qoq (vs. +0.4% expected) although it’s worth noting that the extra decimal place does take it to +0.35% qoq so it was a very marginal miss. Our economists do however still expect H2 growth to be stronger than H1 with recent survey level data still upbeat. There was better news in the July CPI data however with the core reading nudging up two-tenths and a bit more than expected to +1.1% yoy (vs. +1.0% expected), matching the YTD high made back in May.

Finally, as for the day ahead, the main focus should be the FOMC meeting outcome this evening. In terms of data releases, we’ll get the remaining July manufacturing PMIs in Europe while in the US the July ADP employment change reading, final July manufacturing PMI, June construction spending, July ISM manufacturing and July total vehicle sales data are all due. Away from that, Tesla and Metlife will be reporting Q2 earnings. As noted earlier, the US Treasury will also unveil its latest borrowing plans.

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Authored by Raul Ilargi Meijer via The Automatic Earth blog,

Why did Britain vote Yes in the Brexit vote Cameron called? To a large degree to protest policies he himself imposed. For many it’s still a mystery ‘mechanism’, but not for all. People like Steve Bannon understand it very well. That is, austerity and mass migration make voters turn to the political right. Even if they are initiated by the right.

When Britain’s Tories under David Cameron and George Osborne began ripping apart much of the country’s institutions and infrastructure, they knew that their austerity measures would only make their party stronger.

The incompetence of Theresa May and her ministers on Brexit will lead to an almighty backlash, and soon, but then Boris Johnson or Jacob Rees-Mogg, far to the right of May, will take over. Labour under Corbyn doesn’t stand a chance. The same pattern repeats itself everywhere, and nobody knows how to stop it. How could they if and when they don’t understand it?

For the right, this is a ‘can’t lose’, and they’re not done. That’s why Steve Bannon is touring Europe. It’s easy pickings: a rightwing government that imposes austerity measures will be rewarded for it with more voters. If it also lets in large numbers of migrants, even more votes. Can’t lose. The migration streams in Europe are supported by the right, because they know that subsequently opposing them will keep them in power.

Under political systems as we once knew them, you’d expect people to turn left instead of right, but there is no left left to vote for. What’s left of what was once left, has become an indistinguishable part of a big shapeless blob in the center -or even center-right- of our political systems. Or perhaps we should say: the systems as we once knew them. And it’s indeed just what’s left of the left, which in most cases is very little. In many countries, the UK, Netherlands, Germany, France, Italy, formerly left parties have been all but extinguished, former ‘glory’ brought to its knees.

Spain is an exception, but leftwing PM Pablo Sanchez seems to have landed his job primarily by playing a better game of chess -or poker- than his opponents when he forced then-PM Mariano Rajoy out. But just wait till you see what happens when refugees and migrants begin flooding into Spain, instead of Greece and Italy, for real. That development has already started. Italy closed its borders, Spain opened them. It will lead to a rightwing government in Madrid, too.

This is not about opinion. it’s simply what happens.

When there is no left to turn to to halt austerity, let alone temper migration numbers, people will turn to the only alternative available to them. Right. The same right that is more than ready to magnify the problems, whether it’s migration or increasing levels of poverty. They win either way.

In Germany, the leftwing SDP hardly exists anymore. Center-right Angela Merkel, Queen of Europe, opened the doors of the nation and whaddaya know, parties to her right started growing. If I can insert one bit of opinion here, I’d say letting one million migrants into your country in one year is asking for trouble. Migration must always take place in moderation, especially when the difference in wealth between an existing population and new arrivals is very large. It’s different in Turkey or Lebanon, where wealth disparities are much smaller.

And those countries are already largely Muslim, whereas allowing many people into your country who have completely different religions and worldviews is a whole different game. Canada does this -relatively- well: new arrivals are Canadian first, and Muslim or Syrian after. European countries have never mastered that model; that’s why they have ghetto’s and assorted other problems. Migration and assimilation must be two sides of the same coin, or you have not immigration but an invasion.

The right can do what it wants and still win and get bigger, while privatizing everything in sight and robbing the public of all they once owed. And then that same public will vote for them again. It’s neoliberal and neocon and there’s nobody left to explain, let alone fight it. And if there were, there’s a formidable propaganda machine waiting in the wings, and they’ve been at it for a while now. The -formerly- left has no such machine. The best they can do is blame Russia. But they themselves are to blame, not Moscow.

So the people vote against their own best interests, and it’s not even very hard to get them to do that anymore. All you need to do is deprive them of all other options. Once the left wing becomes part of the center, whether it’s in the US or any of many European countries, rien ne va plus. The die has been cast.

The left must turn against neoliberalism, but it has no economists to explain the reason why, and no leaders who understand economics. So they have become neoliberalists themselves. They’re all stuck in the austerity model, and nobody gets how damaging it is to take a meat cleaver to an already suffering economy. The people of Greece can explain that one.

Economies function -or not- because of money flowing through them. You can cut away some of the fat in lean times, but you can’t cut away the arteries. Austerity is deadly to an economy, but the irony is that it makes people vote for those who first, initiate it, and second, promote more austerity.

I don’t want to insert any political opinions, but I do think that for a society, and an economy, to properly function there needs to be a balance, between left and right, between rich and poor, between owners and workers. We’re far away from any such balance wherever I look. And as I’ve said before, that’s why we have Trump.

To reveal what has so far remained hidden: everything done under the guise of ‘left’ that was merely more neoliberalism. To allow people who don’t agree with him to form an opinion and an identity, something they thought was not necessary under neoliberals like Obama or Tony Blair or Merkel. I don’t see any of that happening though, and that means many more years of Trump and other rightwing dominance.

If the answer to austerity is to vote for more austerity, what will be the answer to collapsing stock- and housing markets? I have an idea. And it doesn’t include Jeremy Corbyn. Or Bernie Sanders.

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According to the Russian Ministry of Defence (MoD), Russian jets, including Su-34 fighters, Su-30SM, Su-24, Su-34 and Su-25 attack aircraft, participated in a series of military exercises in the Caspian Sea along with the Russian Navy Caspian Flotilla about a week ago.

In total, about ten naval ships of the Caspian fleet and about 50 aircraft were involved in the war drills.

Days later, a video surfaced on social media showing a successful air-launch of a Kh-31 (Russian: Х-31; AS-17 ‘Krypton’) supersonic missile by a Su-34 fighter.

Russian Su-34 fighter jet launches Kh-31 hypersonic missile during Caspian Sea drills pic.twitter.com/XuSE1ZKE49

— Ruptly (@Ruptly) July 31, 2018

The Kh-31 is a supersonic air-to-surface anti-ship missile, which can reach speeds of Mach 3.5 (2,685 mph), making it remarkably hard for Western military vessels to protect against it.

The missile uses the target’s radio emission source and, depending on the model, can strike ships within a range of 15-110 kilometers (for the basic model Kh-31A) or 7.5-160 kilometers (for the Kh-31AD).

The 2-minute video shows a behind the scenes start to finish view of what it takes to air-launch the supersonic missile. The video begins with Russian military support staff instructing the Su-34 of a mock enemy ship that needs to be eliminated. About 25 seconds in, the fighter launches the missile. At the 42 second mark, the Kh-31 traveling at 3.5 Mach is seen slamming into the vessel, causing debris to fly into the air as the ship sinks.

Southern Military District (SMD) press officer Vadim Astafiev said the Russian Navy used a decommissioned vessel from the Caspian Flotilla for the exercise. The SMD is one of the five military districts of the Russian Armed Forces, with its jurisdiction primarily within the North Caucasus region of the country, and Russian bases in South Caucasian post-Soviet states.

One must ask: Why is Russia launching supersonic missiles in the Caspian Sea?… Well, Moscow is strengthening its naval deterrence against the US political elite who have been instrumental in disrupting the economic integration of Eurasia. In other words, Washington has been trying to ruin the One Belt One Road comprehensive strategy of Russia and China, as it now seems, Russia has had enough.

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Authored by Andreas Andrianopoulos via The Strategic Culture Foundation,

What happened in Attica, close to Athens, is without precedent. An ordinary fire, like the ones that occur in this area almost every other summer, met up with a terrible, sudden wind that turned it into real galloping inferno. The tragic result was 87 dead Greek citizens and more than 20 still missing. Huge questions loom on the horizon and only very limited answers are forthcoming. Are some of the lessons from this tragedy related to the wider geopolitical and political-economic questions?

Public-sector clientelism is leading to disastrous inefficiency

Why do tragedies like these occur in social environments with firmly entrenched clientelist political systems and in political entities that operate on the periphery of major, bureaucratic, modern empires? Sweden saw huge uncontrolled fires this summer. However, there was no loss of life or major disasters that befell the urban centers. In Portugal last year — and very recently in Greece  —  scores of people died, mainly due to the inability of the state machinery to efficiently deal with the problem. The major difference between these examples is the quality of the civil service. In Greece and Portugal there is no real ethics in the public administration, which frequently fails to meet any vigorous efficiency test .

In public bureaucracies that sprout favoritism the way trees grow branches, it is very difficult to design long-term plans to handle critical and life-threatening situations. Likewise, the political system lacks the prerequisites to draw upon informed societies that are trained to be cooperative and disciplined when there is a need for coordination. When clientelism dictates and forms the essence of the political culture, this culminates in fractured societies that are infected with spreading islands of lawlessness and limited possibilities for administrative coherence.

In Greece in particular, the deep-rooted mentality of state favoritism produces whole sectors of uncoordinated urbanization, with no respect for the environment, chaotic borough formation, and a coastline that has been brutally violated by hasty real-estate developmental schemes. In such a social context, thorough planning becomes almost impossible and the idea of applying administrative guidelines to deal with a crisis sounds like a joke. It is essentially the political system itself that invites disasters and not any sort of physical deluge that begets them.

The need for market solutions

Clientelism and heavy state intervention in the running of the economy and society are the basic causes of inefficiency and, henceforth, administrative chaos. It appears that the process of rational choice is the fatal enemy of the dominant mentality in such systems of government. This is represented by any model that relies on the market to deal with questions of economic policy and societal organization. A bloated public sector that is encouraged by the political authorities to constantly expand, irrespective of its ability to deliver on its promises, becomes the major problem. Instead of being the solution to emerging issues, the state actually becomes the cause of most troubles and difficulties.

Henceforth, without clear objectives or cost-benefit solutions, the state is unable to provide reliable outcomes or to cope with situations, especially emergencies. In the case of Greece in particular, the fire-fighting service had been financially starved, while its personnel had been recruiting new staff based on specific social criteria! In other words, firefighters entrusted with saving people from emergency situations were hired on the basis of their physical inability to deal with normal life situations, i.e., the physically handicapped, mentally unfit, generally unhealthy, or recruits who were simply from disadvantaged social backgrounds.

Relying on a market mentality means that choices are made based on measurable results, well structured plans to deal with crises, and thoroughly tested options. When none of these requirements are met, it is more than certain that achievements will be negligible and the consequences disastrous. Hence one must assume that societies that do not rely on rational-choice procedures and which pursue policies of heavy state intervention and patron-client favoritism are not likely to see successful results. This essentially means that societies built on capitalist principles pursue measurable results that further the welfare of their citizens.

Geopolitical repercussions

There is also a geopolitical angle to these observations. If a country cannot keep up with globally established administrative and financial trends, it will end up facing dead-end situations and find itself being marginalized. With the exception of its reliance on heavy state taxation, the EU always pursues policies of open social frontiers and market economics. Countries that deviate from this logic find themselves gradually lost in a political wilderness. They constantly creep along on the fringes of events and absent themselves from all contemporary processes. By acting as the exception instead of the rule, they will rapidly find themselves marginalized. They will become a stark anomaly and thus be excluded from every movement going forward. They will become the pariahs of the international system. Geopolitical events will pass them by, and they will be looked upon as the “black holes” of the international order.

Domestic events and major financial and/or economic choices cannot be limited any longer to national or regional occurrences. Notwithstanding the importance of events within a country, opting for heavy state intervention may lead a country into the international wilderness. What’s more, its international standing may also be impaired, contributing to the nation’s overall marginalization.

In Greece we witnessed this repulsive, internally-generated tragedy in all its horrifying glory. Unfortunately we may soon see more far-reaching consequences…

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