Month: September 2018

After bursting higher in second quarter, when according to the first estimate of Q2 GDP, the US economy grew at an annualized 4.1% rate, a number which rose to 4.2% in the second estimate in August, moments ago the BEA reported that according to its final estimate of second quarter GDP, US growth remained unchanged at a 4.2% annualized rate, or technically 4.15% – in line with consensus and still the highest since the summer of 2016 – at a time when the Trump’s $1.5 trillion fiscal stimulus was boosting the US economy.

While overall GDP growth was unrevised from the second estimate, there were small revisions in the subcomponents, reflecting upward revisions in most categories, which were offset by a downward revision to inventory investment.

After last month’s modest drop in Personal Consumption (from 4.0% initially reported to 3.8%), in the final revision, this number remained unchanged at 3.8%, and in line with expectations.

In terms of contribution to the bottom line, the various line items were as follows:

• Personal Consumption: 2.57%, up from 2.55%
• Fixed Investment:1.10%, up from 1.07%
• Change in Private Inventories: -1.17%, down from -1.07%
• Exports: 1.12%, up from 1.10%
• Imports: 0.10%, up from 0.07%
• Government consumption: 0.43%, up from 0.41%

A big contributor to growth was nonresidential fixed investment, or spending on equipment, structures and intellectual property rose 8.7% in 2Q after rising 11.5% prior quarter

Separately, the GDP price index rose 3.0% in 2Q after rising 2.0% prior quarter, while core PCE q/q surprised modestly by rising 2.1% in 2Q after the prior report showed a 2.0% increase.

Also in today’s report, the BEA said that corporate profits rose 1.2% in prior quarter; y/y corporate profits were revised somewhat lower up 7.3% in 2Q after rising 5.9% prior quarter, and were broken down as follows:

• Financial industry profits increased 3.7% Q/q in 2Q after falling 2.1% prior quarter
• Federal Reserve bank profits down 4.7% in 2Q after falling 2.8% prior quarter
• Nonfinancial sector profits rose 4.2% Q/q in 2Q after rising 2.7% prior quarter, and a notable downward revision from the 5.1% print in the last estimate.

Finally, while the number is largely irrelevant, as it references a period nearly 4 months old, it confirms that the economy was heating up headed into the summer. The bigger question of what GDP will do this quarter will be answered in one month, however according to high frequency economic indicators and the latest FOMC projections, all signs point to a continuation of the trend, especially since the impact of Trump’s fiscal boost is expected to peak some time around now.

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After a surprise tumble in July, preliminary August Durable Goods Orders were expected to rebound aggressively and rebound they did – jumping 4.5% MoM (+2.0%exp), the biggest jump since Feb ’18.

 

However, scratch below the surface and things are not nearly as positive as the headline suggests.

Durable Goods Ex Transportation rose just 0.1% MoM in August, the weakest growth since January…

Well below the 0.4% expected jump.

However, it gets worse, as Capital Goods Orders Non-Defense, Ex Aircraft – the main proxy for business spending – tumbled 0.5%

Tow more notable aspects – car production dropped but war spending surged again…

• Bookings for motor vehicles and parts fell 1 percent; communications equipment up 0.7 percent, computers and related products down 0.8 percent.

• Defense capital-goods orders jumped 44.4 percent, most since February.

Thank goodness we are at war in so many places!!

 

 

 

 

 

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Authored by Chris Kimble via SeeItMarket.com,

After navigating an early year stock market correction, investors have seen the S&P 500 climb back to new all-time highs.

While making new highs is bullish, it’s concerning when it comes with a significant divergence.

In this case, it’s a momentum divergence.

And history has shown that while some divergences are ignored for weeks or months, there have been a couple in the past 20 years that have lead to significant declines.

Both of these momentum divergences came when the S&P 500 made a “second high”.  See chart below.

Looking at the chart below, you can see that while the S&P 500 is trying to breakout in September (and making a second high), it’s seeing a lower momentum reading.

Two notable times we saw divergence patterns and readings like this were September 2000 and October 2007. Yikes!

S&P 500 “Second” Peaks with Momentum Divergences

History doesn’t always repeat itself, but it does offer investors a thoughtful reminder of why it’s important to pay attention to risk indicators… and to always have a plan!

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A confirmation that appeared virtually guaranteed barely one week ago has been brought to the brink of an embarrassing political defeat for President Trump now that a total of five women (three using their names, two under the guise of anonymity) have accused Federal Appeals Court Judge Brett Kavanaugh, who is Trump’s pick to fill the seat of retiring Justice Anthony Kennedy, of sexual improprieties ranging from harassment to rape.

And while the credibility of all three of the named accusers has been brought into question (evidence of political bias, domestic instability and other discrediting factors have surfaced in media reports), initial accuser Dr. Christine Blasey Ford will appear on Thursday to “confront” Kavanaugh, who she says pinned her to a bed, covered her mouth and attempted to remove her clothes during a high school party in the early 1980s. Though all of the people whom Ford has said were also in attendance at the party have either said they weren’t there or that the incident that Ford is alleging never happened, Dems have continued to push for an FBI investigation. Meanwhile, GOP members of the Senate Judiciary Committee have hired Arizona sex crimes prosecutor Rachel Mitchell to handle most of the questioning. Questions for Senators will be capped at 5 minutes during the hearing, which is set to begin around 10 am ET. In order to avoid the media circus that characterized Kavanaugh’s initial hearings, the committee has moved Thursday’s hearing to the Dirksen Senate Office Building room 226, a smaller, more intimate venue.

Ahead of what’s expected to be one of the most closely watched political events of the year (a year that also includes a mid-term election), USA Today and the Hill have published primers outlining everything readers need to know about the hearing, including their best guesses about what Senators might ask, as well as what’s next for Kavanaugh’s nomination should he retain President Trump’s favor following the hearing. Notably, after a less-than-stellar performance during Kavanaugh’s interview with Fox News earlier this week, Trump has raised the possibility that he might withdraw his support, saying he’d like to “see what’s said” during Thursday’s hearing.

Who Are The Other Accusers?

Five women have now accused Kavanaugh of sexual assault.

On Wednesday, Julie Swetnick, a client of attorney Michael Avenatti, alleged in a signed affidavit hat she witnessed Kavanaugh and high school classmate Mark Judge intentionally try to make girls “inebriated and disoriented” so the two boys, and a squad of their high school friends, could “gang rape” the women at high school parties. Deborah Ramirez, who attended Yale at the same time as Kavanaugh, described an incident where Kavanaugh allegedly pulled down his pants and shoved his penis in her face. That incident, like the others, allegedly ocurred when Kavanaugh was very drunk.

Two additional accusations were made public Wednesday night after it was revealed that Kavanaugh had been questioned about anonymous allegations of assault from two women.

They have declined to come forward, but one woman claimed that she was raped on a boat by Kavanaugh, and another claims that her daughter witnessed Kavanaugh push another woman against a wall and tried to force himself on her while he was drunk. Kavanaugh was also questioned about an anonymous allegation that he raped a woman on a boat in Rhode Island back in 1985.

Credibility Test

Senators from both parties say the hearing will be a crucial test of Kavanaugh’s and Ford’s credibility.

“Juries smell truthfulness,” said a Democratic senator. “Juries look for who is the most comfortable and nine times out of 10, that’s the one telling the truth.”

Sen. Jon Tester (Mont.), a centrist Democrat who is undecided on how to vote, says he will “read body language and listen to what they’re saying and how they’re saying it” to assess the credibility of the witnesses.

What Happened During The Attack?

All four of the people whom Ford says were at the party say they have no recollection of the attack. Ford has also acknowledged crucial gaps in her memory.

Sen. Lindsey Graham, a member of the Judiciary panel, said he is looking for “more context about the allegation and more specific” information.

What Will Democrats Ask?

Several Democrats have said they will ask “very detailed questions” about Kavanaugh’s drinking habits and his sexual relationships beginning in high school. Their questions have one goal: To make Kavanaugh appear evasive. Because, as Axios explains, if Kavanaugh appears “awkward, stiff and evasive…” he’s toast.

Democrats will likely reference a book written by Kavanaugh’s high school friend, Mark Judge, entitled “Wasted: Tales of a GenX Drunk,” in which Kavanaugh is believed to be the inspiration for a character named Bart O’Kavanaugh.

“One of the more obvious things to go after is the tension between the image of Judge Kavanaugh’s choir boy or frat boy. Bluntly, you can find both in his own writings and speeches,” said committee member Sen. Christopher Coons.

Another Dem said “nobody believes” that Kavanaugh was a virgin for many years after high school.

What Will Be Outside Counsel’s Role?

Republicans plan to defer to Mitchell, who has led her county’s sex crimes unit as its head prosecutor.

“My plan for right now is to defer to our new staff member,” said committee member Sen. John Kennedy. “I reserve the right, if I have any time left, to ask questions, but I’m not planning on it.”

When Will The Senate Vote?

Grassley has scheduled a Judiciary Committee vote on Kavanaugh’s nomination for Friday, but he left open the possibility that the vote could be delayed. Meanwhile, Senate Majority Leader Mitch McConnell has promised to “plow right through” with Kavanaugh’s nomination and has hinted that he could break with precedent and schedule a floor vote on Kavanaugh without a recommendation from the committee.

* * *

Meanwhile, both Kavanaugh and Ford have published their opening testimony. Read a highlighted version of Kavanaugh’s remarks produced by the Washington Post here.

And one for Ford’s here.

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One day after President Trump unexpectedly said that he might not be friends anymore with China’s president Xi Jinping during a “wild”, unscripted news conference, during which he also said he has “evidence” of Beijing trying to interfere in U.S. congressional elections in November – a move that further raises tensions as the world’s biggest economies fight a trade war –  China denied Trump’s accusations and said that it urges the U.S. “to stop smearing and accusing China.”

Speaking in a media briefing on Thursday, Foreign Ministry spokesman Geng Shuang said that “China has all along followed the principle of non-interference and refuses to accept any groundless accusations.”

“We advise the United States to stop this unceasing criticism and slander of China,” Geng said. “Stop these wrong words and deeds that damage bilateral relations and the basic interests of both countries’ peoples.”

Trump’s remark was seen as a signal of further deterioration in ties, feeding fears that the two countries are heading toward a longer term confrontation that could have widespread geopolitical ramifications. And despite claiming that he has it, Trump provided no evidence at the UN Security Council meeting.

Also on Thursday, China’s defense ministry spokesman Ren Guoqiang demanded the United States “dispel obstacles” and “take a reasonable and sincere attitude” to improving military ties and stop slandering it, amid growing tensions over trade, Taiwan, the South China Sea and – most recently – Trump’s claims of China meddling in the upcoming U.S. election.

The two countries, which are already embroiled in an acrimonious trade war, have continued to butt heads over a list of sensitive issues including the disputed South China Sea and self-ruled Taiwan, armed by Washington but claimed by Beijing. On Saturday, China summoned the U.S. ambassador in Beijing and postponed joint military talks to protest Washington’s decision to sanction a Chinese military agency and its director for buying Russian fighter jets and a surface-to-air missile system.

“Arms sales undermine trust between the U.S. and Chinese militaries,” Guoqiang told reporters quoted by Bloomberg. He reiterated China’s opposition to U.S. arms sales to Taiwan, saying Xi’s government had a problem with the “nature” of the sales and not the “quantity.”

Asked about the latest round of U.S. sanctions on some $200 billion worth of Chinese goods, Ren said the U.S. should “solely be blamed for the current problems and bear the full consequences. We demand that the U.S. side take a reasonable and mature attitude and act with sincerity, taking concrete actions to improve bilateral military to military relations.”

Guoqiang told a monthly briefing that the United States should take steps to improve military relations and expressed China’s firm opposition to “provocative” U.S. air force flights over the South China Sea, after U.S. B-52s flew in the vicinity of the waterway this week. He also hinted a planned visit to the United States later this year for Defense Minister Wei Fenghe could be in doubt.

“The United States is to blame for the present problem, so the United States must immediately correct its mistakes, and withdraw the so-called sanctions to dispel obstacles that interfere in the healthy development of relations between the two militaries,” Ren said, when asked about Wei’s trip.

In its latest retaliatory response, Beijing denied a request for a U.S. warship to visit Hong Kong, although Ren said he had no further information on that. Adding fuel to the flames, China was angered this week when the United States approved the sale of spare parts for F-16 fighter planes and other military aircraft worth up to $330 million to Taiwan, which China considers a “wayward province.”

Before his UN speech, Trump tweeted that China was “placing propaganda ads” in U.S. newspapers, referring to a Chinese government-run media company’s four-page supplement in the Sunday Des Moines Register promoting the mutual benefits of U.S.-China trade. Asked about the tweet, Geng said that such advertisements by foreign media were commonplace and allowed by U.S. law.

“To say that this regular cooperation is China’s government interfering in the U.S. elections is totally far-fetched and without foundation in facts.”

* * *

China’s commerce ministry said it was “ridiculous” for the United States to think that pressure could force concessions from China, sparked by Trump’s blaming China for stealing U.S. intellectual property, limiting access to its own market and unfairly subsidizing state-owned companies.

“I want to stress that bullying and maximum pressure will not scare China and will not cause China’s economy to collapse,” ministry spokesman Gao Feng told reporters.

Gao was answering a question about comments by former White House strategist Steve Bannon, who last week told the Hong Kong-based South China Morning Post that Trump planned to make the trade war “unbearably painful” for Beijing and would not back down.

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President Trump’s grand bargain with his evangelic base – a bargain that roughly translates to votes-for-SCOTUS nominees – is in jeopardy just five weeks before a crucial mid-term vote. With a fourth and fifth (albeit anonymous) woman coming forward with a more-contemporary accusation against Trump nominee Brett Kavanaugh, the federal judge’s odds of being confirmed before lawmakers embark on their October campaigning are seemingly shrinking by the minute.

Trump during a press conference last night once again stepped up to defend his nominee, accusing Kav’s accusers of participating in an organized smear campaign “con job” to sink his nomination. But despite Trump’s steadfast rhetoric – and a growing body of evidence that would repudiate the allegations of his initial accuser, Dr. Christine Blasey Ford – rumors about his growing dissatisfaction with Kavanaugh have begun to take root.

BREAKING: @POTUS Trump criticized Kavanaugh’s @FoxNews appearance telling associates he provided too much detail on his sex life-sources. Friends of Kavanaugh urge him to show more outrage at the charges against him at Thursday’s hearing-sources https://t.co/dhsNgnPuX1

— Charles Gasparino (@CGasparino) September 26, 2018

And with doubts metastasizing (fueled in part by President Trump saying he will “see what’s said” with the hearing) about whether Kav can bring the same fortitude to bear on Thursday that was displayed by Justice Clarence Thomas during the Anita Hill controversy…

SCOOP: People close to Kavanaugh tell me he needs to fight like Clarence Thomas did to win #SCOTUS confirmation but are not sure he has the temperament to do. they continue to push him to show a measure of outrage about the charges made against him. story developing

— Charles Gasparino (@CGasparino) September 26, 2018

…Pundits are beginning to speculate about what Trump might do if backing Kavanaugh becomes too much of a political liability, or if the opposition of Maine Sen. Susan Collins or some other rogue Republican (possibly Arizona Sen. Jeff Flake), effectively sinks his nomination.

Fortunately for Trump, the president does have another viable alternative who would have a strong chance of being swiftly confirmed. And what’s worse for Trump’s political opponents, this candidate would seemingly check all the boxes allowing her to appeal to Republicans and resist smear attempts by Democrats. That’s because not only is this candidate extremely conservative, they are also a woman.

As FT US political columnist Janan Ganesh writes in a column published Thursday, Trump’s runner-up for the SCOTUS nod – federal judge Amy Coney Barrett – may not have as extensive a history of court ruling (something that was heavily weighed by the Federalist Society members who ultimately selected Kavanaugh), but she boasts more populist bona fides that would likely resonate more fully with Trump’s base.

Amy Coney Barrett is a southerner who attended a mid-western law school. Of her seven children, two are Haitian adoptees. The current Senate thought her fit as a circuit judge just 11 months ago. She does not have much judicial experience but then her opponents do not have much of a “paper trail” to scrutinise. What Democrats know – or infer – is that such a fervent Catholic would menace Roe v Wade, which forbade states from prohibiting abortion, and Obergefell v Hodges, which secured same-sex marriage throughout the US. She is no liberal’s idea of a Supreme Court justice. Nor mine. Nor, I wager, Mr Trump’s. But the political reptile in him must see that no judge would be trickier for Democrats to oppose and electrify his own voters quite as much.

While Kav is a product of elite East Coast institutions (Georgetown Prep, Yale the George W Bush Administration), Barrett is a southerner who attended a midwestern law school, and her strong religious convictions would likely establish her as a menace to Roe v. Wade and Obergefell v. Hodges (the ruling that legalized Gay Marriage throughout the US). Indeed, while abandoning Kav and switching to Barrett risks turning the midterms into a referendum on her nomination, selecting the right’s first female SCOTUS contender since 1981 would transform the Kavanaugh scandal into a pyrric defeat for the president.

To be sure, there are other risks:

There are risks. Unless she were confirmed in a rush, the midterms would become, in part, a referendum on Ms Coney Barrett. Even if the Republicans retain control of the Senate, which is less certain than it was, the freethinking likes of Susan Collins might vote against her. A second defeated nominee would constitute not just a farce but the end of Mr Trump’s judges-for-votes bargain with evangelicals. He might curse the Federalist Society and other conservative judicial candidate-vetters, but the reputational damage would be his.

But he may have no good options. As soon as Ms Ford came forward, he was choosing between lesser and greater evils.

Still, given the uproar over Kavanaugh’s nomination and the risks of Trump alienating women so soon before a mid-term vote (though, to be sure, he still won a greater share of white women voters during the 2016 campaign), making a late-game switch to Barrett is looking like an increasingly more plausible alternative.

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European stock markets and the euro tumbled on Thursday after an early morning report that Italy’s long-awaited budget was facing a delay added to a groggy post-FOMC global mood after the third U.S. interest rate rise of the year.

Italian bonds and stocks fell along with the euro as the Italian budget process, and its looming midnight deadline, were thrown into turmoil after League leader Matteo Salvini decided to support a last minute push by Luigi Di Maio of the Five Star Movement for extra spending in the form of a 2.4% budget deficit next year, while Finance Minister Giovanni Tria is fighting to keep the shortfall below 2%, and is reportedly ready to resign.

The nation’s benchmark stock index tumbled as much as 2%, the most in more than a month…

… and the nation’s two-year yield jumped as much as 20 basis points to 0.97 percent, after Corriere della Sera reported on Thursday morning that the meeting on the 2019 budget may be postponed owing to “the new complications” in reaching agreement on the deficit with the League said to join the Five Star Movement in seeking a 2.4% deficit target for 2019.

Italy’s populist deputy prime ministers, Luigi Di Maio and Matteo Salvini, have been pitted against Finance Minister Giovanni Tria over how far public finances in the country can be stretched to meet election pledges made by Di Maio’s Five Star Movement and Salvini’s League parties. The two demand a budget deficit of 2.4% meanwhile Italy’s technocratic Finance Minister Giovanni Tria – who has been seeking to hold the deficit to 1.6% of GDP – is said to be ready to resign and is sticking to his deficit target.

“If Tria is no longer part of the project, we’ll find another finance minister,” Riccardo Molinari, head of League lawmakers in the lower house of parliament, tells RAI television according to newswire Ansa.

According to the latest news, a full cabinet budget meeting will take place at 8 p.m. local time, while a top government pre-meeting is scheduled for 4 p.m. local time, although this may change. Speaking from Tunis, Salvini says that it worth pushing the deficit beyond 2 percent to deliver for voters. “Italians’ right to work and happiness is much more important that numbers,” he said.

Meanwhile, Di Maio, who leads the biggest party in the coalition, said there’s no point being in government if you can’t deliver on your policy pledges, Ansa newswire reports.

As a result of the latest Italian turmoil, the yield on 10-year bonds increased 10 basis points to 2.96%, the highest level since Sept. 17. The yield spread over German bunds climbed 10 basis points to 243 basis points.

Following the initial selloff, Italian Deputy Minister Luigi Di Maio confirmed that a cabinet meeting over budget targets was still planned for later, dismissing the Corriere newspaper which said it could be delayed, but it couldn’t soothe the markets, especially after conflicting reports that the economy ministry was forced to deny its chief Giovanni Tria, an academic who doesn’t belong to any one party, had threatened to resign.

“It is very fluid and it is changing by the minute it seems,” State Street Global Advisers’ head of EMEA macro strategy Tim Graf said. “Even if things get resolved positively today, Italy is not a situation that is going to go away,” he added, pointing to the still growing popularity of the country’s fractious anti-establishment coalition government.

The return of Italian budget turmoil weighed on the rest of Europe too. Europe’s STOXX 600 index was down 0.5% while the euro skidded all the way down past $1.17.

European banking stocks dropped as much as 1.5%, making it the worst-performing sector within the Stoxx Europe 600. Italian banks lead the decline with UBI -3.3%, Intesa Sanpaolo -3%, Banco BPM -3% and Unicredit -2.9% the worst-performing stocks. The headline risk has threatened the Stoxx 600 Banks Index’s recent recovery as it is getting closer to its dominating 2018-downtrend again after leaving the bearish area just six trading days ago.

Earlier Asian markets showed a guarded response to Fed’s forward guidance with the Hang Seng index reversing gains after Hong Kong banks raised lending rates first time in over a decade. Japan’s Topix index lost 0.8%, while the Shanghai Composite slips 0.4%.

The return of the Italian drama gave the dollar a boost after it had only managed a lazy gain overnight after the Federal Reserve hiked U.S. interest rates by another 25 basis points to a range of 2 percent to 2.25 percent. The dollar index rose above 94.5, while the Bloomberg Dollar Spot Index rose to the highest level in more than a week as Italian politics weighed on the euro, which managed to pare some losses on finding support from strong German regional inflation data. The greenback advanced versus all Group-of-10 peers except the yen amid stronger Treasuries and with stock markets in defensive mode. Emerging-market currencies lingered near a three-week high as commodities consolidated recent gains.

The Australian dollar seen as a barometer of global investor risk appetite and Chinese demand for goods, fell 0.4 percent to $0.7226, its lowest since Sept. 19 and not far off its 2-1/2 year lows of $0.7085 hit earlier this month. The Canadian loonie fell after Trump slams Canada trade negotiations, kiwi weakens as RBNZ keeps door open for rate cut. KRW leads Asian emerging-currency gains after BOK chief calls for less monetary easing.  The Yuan strengthened against the dollar as PBOC drained 60 billion of liquidity and refrained from following Fed hike.

Treasury 10-year yield hovers near 3.05%; Aussie curve bull-flattens in line with U.S. move.

 

 

Market Snapshot

• S&P 500 futures little changed at 2,910.75
• STOXX Europe 600 down 0.4% to 383.65
• MXAP down 0.4% to 165.14
• MXAPJ down 0.09% to 525.77
• Nikkei down 1% to 23,796.74
• Topix down 1.2% to 1,800.11
• Hang Seng Index down 0.4% to 27,715.67
• Shanghai Composite down 0.5% to 2,791.78
• Sensex down 0.5% to 36,376.61
• Australia S&P/ASX 200 down 0.2% to 6,181.22
• Kospi up 0.7% to 2,355.43
• Brent futures up 0.6% to $81.80/bbl
• Gold spot up 0.2% to $1,196.40
• U.S. Dollar Index up 0.3% to 94.51
• German 10Y yield fell 2.3 bps to 0.503%
• Euro down 0.2% to $1.1714
• Italian 10Y yield fell 1.8 bps to 2.499%
• Spanish 10Y yield rose 0.7 bps to 1.53%

Top Overnight News from Bloomberg

• Italy’s government is due to decide on targets for the 2019 budget deficit, debt level and growth by midnight Thursday, but negotiations have been hit by a last-minute demand for extra spending by the coalition’s two deputy prime ministers
• Fed Chair Jerome Powell praised the value of gradual rate increases, which have allowed the Fed to watch their policy moves play out, after the central bank raised rates by 25bps. In their statement, Fed officials dropped a reference to “accommodative” policy
• U.S. President Donald Trump announced he has reached an agreement with Japan Prime Minister Shinzo Abe to open trade talks. The two countries have agreed that sanctions on auto exports won’t be applied while the talks take place, Abe said
• Trump said he and Chinese President Xi Jinping might not be friends anymore after he accused Beijing of trying to interfere in U.S. congressional elections in November
• New Zealand’s central bank held interest rates at a record low and signaled it’s prepared to cut them if the economy fails to gather pace
• The European Union has started exploring what emergency measures it may need to take without the U.K.’s cooperation in the case of a “no deal” Brexit, according to people familiar with a meeting between the bloc’s 27 remaining governments
• French President Emmanuel Macron said he’d welcome Britain back should its voters decide in a second referendum to stay in the European Union
• Euro-area economic confidence slid for a ninth month, the longest streak of declines since 2011, as protectionism and political uncertainty cast a cloud over the outlook

Asian stocks were indecisive following a lacklustre lead from Wall St. where the major bourses ended the day with losses after a mixed-perceived FOMC. ASX 200 (Unch) was subdued by a pullback in commodity names, while Nikkei 225 (-0.5%) swung between gains and losses at the whim of a choppy currency. Shanghai Comp (-0.4%) and Hang Seng (-0.4%) also flip-flopped with the region somewhat cautious as it digested the FOMC and a lock-step hike by the HKMA, while the PBoC skipped open market operations again for a net daily drain of CNY 60bln. Finally, 10yr JGBs tracked US Treasuries higher with prices also supported amid the BoJ’s Rinban announcement for JPY 880bln in JGBs across the curve before hitting resistance at 150.20.

Top Asian News

• HSBC Raises Hong Kong Lending Rate for First Time in 12 Years
• Bank Indonesia Hikes Rates for Fifth Time to Curb Currency Rout
• India’s RBI Announces Measures to Ease Bank Liquidity Shortage
• Philippines Delivers Another 50 Basis-Point Rate Hike

European equities have been driven by mixed reports from Italy this morning ahead of their upcoming budget. This led equities to start the day in the red on suggestions of possible resignation of the Italian Finance Minister, and/or a delay to today’s presentation.  Some reprieve was offered by a rejection of these reports, but most major bourses are still in the red, with the FTSE MIB leading the losses. The FTSE is bucking the trend as a result of the softer GBP. Italian banks have been hit the hardest by the budget dispute reports from Italy, as the rise in Italian yields has pushed Unicredit (-3%), Banco BPM (-2.8%) and Intesa Sanpaolo (-2.7%) close to the foot of the Stoxx 600. These stocks are languishing in the red alongside Indivior (-10%), who is leading the losses in the Stoxx 600, after a guidance cut in late European trade yesterday

Top European News

• Euro-Area Economic Confidence Slides as Global Risks Increase
• Germany Feels the Trade-War Heat as Economic Outlook Slashed
• AMS Drops After UBS Cuts PT on Outlook for 3D Sensing in Android
• Mediobanca Says Bollore Group Is Leaving Shareholder Pact

In currencies, EUR was not the biggest G10 lose in the FOMC aftermath vs a broadly firm USD (DXY back above 94.500 and up to 94.645 at best), but struggling to maintain 1.1700+ status amidst more Italian fiscal bickering in Rome between Economy Minister Tria and the more anti-austerity factions of the coalition Government. The single currency has derived some underlying support from firmer than expected German state CPI reports implying an upside skew to the national print, while hefty option expiry interest at 1.1700-05 (1.35 bn) may also be keeping the headline pair afloat. GBP/AUD/CHF/CAD/NZD – The major underperformers against the Greenback, partly on Fed policy guidance reaffirming a final and 4th 25 bp hike this year, followed by 3 more in 2019 and another the year after, but also on other factors. Cable is teetering above 1.3100 as Brexit uncertainty persists, while Aud/Usd is slipping from the 0.7250 level that has been pivotal amidst the ongoing US-China trade rift. The Franc is only just holding circa 0.9700 and around 1.1350 vs the Eur, conscious that the SNB will be watching out for any Roman repercussions and ready to intervene if the Chf strengthens excessively on safe-haven grounds. Elsewhere, the Loonie has lost much of its crude traction following latest NAFTA news that suggests little prospect of a deal anytime soon, with Usd/Cad up over 1.3050 ahead of Canadian average weekly earnings data and a speech from BoC’s Poloz later tonight, while the Kiwi only got a fleeting boost from a relatively upbeat RNBZ assessment of the economy and core inflation as the OCR outlook remained neutral. Hence, Nzd/Usd has reverted to its 0.6650 axis and veering south. JPY – Holding up much better than the rest in contrast to recent sessions, even though BoJ Governor Kuroda has maintained a dovish stance with powerful easing still appropriate, and it appears that technical impulses may be impacting after the latest rejection of 113.00+ levels. The headline pair retreated towards 112.50 before finding some underlying bids ahead of a 112.35 Fib and a decent expiry between 112.50-40 (1.1 bn), while Eur/Jpy topped out in advance of 133.00 and a quadruple top just above the big figure.

In commodities, the oil market is still in positive territory, with Brent trading around the USD 82/bbl area. Some pressure was offered to the fossil fuel, however, by source reports from Saudi Arabia saying that they are set to increase production by 200-300k BPD to make up for lost Iranian supply for the next 2 months. In the metals scope, gold is in the green and trading within a thin range after the yellow metal hit 2 week lows in the previous session. Chinese steel rebar has fallen by over 1%, hitting a two week low, with aluminium also slipping to a month long low as demand continues to dry up for the construction materials ahead of the week-long Chinese holiday.

Looking at the day ahead, we get the third and final Q2 GDP (+4.2% qoq saar expected) and core PCE (+2.0% qoq saar expected) revisions, August advance goods trade balance, August wholesale inventories, preliminary August durable and capital goods orders, weekly initial jobless claims, August pending home sales and September Kansas City Fed manufacturing survey. It’s a busy day ahead for central bank speak too. Over at the BoE we’re due to hear separately from Haldane and Carney, while at the ECB we’ve got Draghi, Lane and Praet all due to speak. At the Fed Kaplan is due to speak at a minority banking forum this evening followed by Powell when he is due to make brief remarks on the US economy at a senate event. This may well all play second fiddle to Italy though depending on what happens with their budget. The 10y BTP auction just prior to this should be an interesting event to watch also to gauge appetite.

US Event Calendar

• 8:30am: Advance Goods Trade Balance, est. $70.6b deficit, prior $72.2b deficit, revised $72.0b deficit
• 8:30am: Wholesale Inventories MoM, est. 0.3%, prior 0.6%; Retail Inventories MoM, prior 0.4%, revised 0.5%
• 8:30am: GDP Annualized QoQ, est. 4.2%, prior 4.2%; Personal Consumption, est. 3.8%, prior 3.8%
• 8:30am: Core PCE QoQ, est. 2.0%, prior 2.0%
• 8:30am: Durable Goods Orders, est. 2.0%, prior -1.7%; Durables Ex Transportation, est. 0.4%, prior 0.1%
• 8:30am: Cap Goods Orders Nondef Ex Air, est. 0.35%, prior 1.6%; Cap Goods Ship Nondef Ex Air, est. 0.5%, prior 1.0%
• 8:30am: Initial Jobless Claims, est. 210,000, prior 201,000; Continuing Claims, est. 1.68m, prior 1.65m
• 9:45am: Bloomberg Consumer Comfort, prior 60.2
• 10am: Pending Home Sales MoM, est. -0.5%, prior -0.7%; Pending Home Sales NSA YoY, est. -1.0%, prior -0.5%
• 11am: Kansas City Fed Manf. Activity, est. 16.5, prior 14

DB’s Jim Reid concludes the overnight wrap

Today is all about the long awaited Italian budget and to a lesser extent German inflation but last night was all about the Fed. We’ll get to the Fed in a second but the latest on the Italian budget may come out just after we go to print as it often does. Before that here’s what we know at the moment on another day of conflicting headlines. Finance Minister Tria did say that the budget will include citizens’ income measures which likely pushes it above his desired 1.6%. Perhaps more notable was the comment from EU Commissioner Moscovici before that. Quoted in la Stampa, Moscovici said that Italy’s deficit must stay below 2%. So that would imply some breathing room for Tria above his 1.6% target and therefore potentially defuse the various political pressures. Just as Europe was going home though on-line editions of the main local newspapers (Corriere, Repubblica, Messaggero) reported that the M5S and the NL have actually already agreed on a 2.4% deficit, some 0.8% above Tria’s target and 0.4% above where the EU seem just about willing to tolerate. There’s been no subsequent headlines overnight but they’ve tended to come out just as we go to print so we may see a fresh round shortly. Are yesterday’s developments posturing ahead of a negotiated compromise later today? We shall hopefully see this afternoon when things all come to a head. The press has reported that the cabinet is due to meet this afternoon, with a press release with the new fiscal targets and growth projections likely to be released by this evening. Tria and President Conte may hold a press conference to present the plan as well. Yesterday, 10 year BTPs again outperformed (-1.9bps) but were comfortably off the lows for the day as a few nerves set in late in the session. Still, they remain 37.7bps off their August peaks.

Back to the Fed and as expected the FOMC raised short-term interest rates by 25 basis points and dropped the reference to monetary policy being “accommodative”. The dot plot showed firmer expectations by committee members for another rate hike in December, with 12 of 16 dots agreeing with our expectations for another hike. The committee also nudged up their median forecast for the long-run fed funds rate to 3% from 2.9%. Chair Powell also discussed tariffs, the counter-cyclical capital buffer, and another potential tweak to the IOER rate to ensure that fed funds continues to trade in its target band, but mostly avoided saying anything new and left the door open for future decisions.

At the margin, these changes could be seen as either dovish or hawkish. Dovish, because by removing the reference to “accommodative,” policymakers are implicitly suggesting that we are closer to neutral and therefore closer to the eventual end of the tightening cycle. Hawkish, because the dots moved up slightly and Chair Powell said that the neutral interest rate may be being underestimated. Net-net, the decision and subsequent press conference confirmed our expectations and did not spark much volatility in markets even if yields fell afterwards indicating the market saw it more dovishly. DB’s Peter Hooper last night confirmed that the meeting reaffirmed his view for a hike in December and then a roughly quarterly pace of rate hikes through 2019.

Fed funds futures were also marginally lower, with the implied-rate by end-2019 around 2 basis points lower. The market continues to undershoot the Fed’s median dot, with around 1.8 hikes currently priced in for 2019. The dollar vacillated after the decision and during the press conference, but ultimately closed +0.06% stronger. Yields rallied, with the 10-year Treasury yield down 4.8bps (4.2bps after the rate hike) and the 2s10s curve 2.4bps flatter. Equities shed intraday gains to close lower, with the S&P 500, DOW, and NADAQ closing -0.33%, -0.40%, and -0.21%, respectively. Interest-rate sensitive sectors led declines, with banks shedding -1.52%.

Asia has largely followed the lead from those post-FOMC declines on Wall Street last night. The Nikkei (-0.61%), Hang Seng (-0.45%), Shanghai Comp (-0.39%) and ASX (-0.05%) are all lower with only the KOSPI (+0.36%) currently holding onto gains (albeit reopening following a holiday). Futures in the US are broadly flat while Asia FX is having a stronger overnight session with the likes of the South Korean Won (+0.42%) and Taiwanese Dollar (+0.37%) advancing.

News yesterday that China was to reduce import tariffs on some products starting from November hasn’t seen much follow through in markets while the other news overnight has come from the sidelines of the UN meeting where President Trump and Japan PM Abe have reached an agreement to open bilateral trade talks. On the flip side of that Trump confirmed last night that he had rejected a one-on-one meeting with Canada PM Trudeau at the UN meeting due to dissatisfaction over trade negotiations – which clearly won’t help Canada’s NAFTA hopes.

Prior to the Fed yesterday, markets elsewhere spent much of the session treading water. The bond sell-off finally abated with  Bunds ending yesterday 1.7bps lower at 0.524% with yields elsewhere in Europe generally down a similar amount. Treasuries were also very modestly stronger going into the Fed before rallying further as noted above.

As for equity markets yesterday in Europe, the STOXX 600 settled for a +0.30% gain and the DAX a +0.09% gain. The FTSE MIB (-0.10%) actually spent the whole session in the red despite BTPs having a decent day. Comments from President Trump at the UN Security Council briefing saying that “we found that China has been attempting to interfere in our upcoming 2018 election” did little to impact markets despite the headlines looking like a reasonable ratchet up in pressure on China considering it was at a UN meeting. Elsewhere, the euro (-0.24%) – although paring heavier losses – struggled for much of the session. A  spokesman for German Chancellor Angela Merkel said that the Chancellor is not considering a confidence vote despite the defeat of her caucus leader candidate. It is however a situation clearly worth watching closely now with a potential confidence vote now being talked about a lot more in the wake of that setback.

Brexit headlines also got some more attention yesterday. Media outlets reported that the EU is intensifying work on its “no-deal” plans while simultaneously pushing back against Prime Minister May’s Chequers proposal, as they consider it to deviate too much from EU single market rules. Adding another layer of complexity was opposition leader Jeremy Corbyn, who reportedly told May that any Brexit deal must also keep the UK in the EU’s customs union.

After markets closed yesterday, Argentina and the IMF announced adjustments to the ongoing bailout program. The size of the credit line will increase from $50bn to $57bn over the next 3 years, with more front-loading of disbursements. Another $19bn will be available before end-2019, more than doubling the previously-available firepower. The authorities will allow the currency to float more, though the central bank reserves the right to intervene in response to “extreme overshooting.” They will also target monetary aggregates instead of interest rates, and it will be interesting to see how the market responds to the new regime when the Peso opens for trading at 2pm BST.

Elsewhere, the economic data that was out yesterday prior to the Fed did little to move the dial. In the US, August new home sales printed at a stronger than expected +3.5% mom (vs. +0.5% expected). In Europe, the UK’s CBI retail reported sales data for September – while down from August – still came in at a better than expected +23 (vs. +19 expected). In France, consumer confidence for September fell slightly to 94 from 97.

Finally to the day ahead, which is a busy one for data releases. This morning in Europe we’ve got the October consumer confidence print in Germany followed by the August M3 money supply reading for the euro area. September confidence indicators for the euro area follow and then in the early afternoon we get the flash September CPI reading for Germany. A +0.1% mom reading is expected which should hold the annual reading at +1.9% yoy. In the US, we then get the third and final Q2 GDP (+4.2% qoq saar expected) and core PCE (+2.0% qoq saar expected) revisions, August advance goods trade balance, August wholesale inventories, preliminary August durable and capital goods orders, weekly initial jobless claims, August pending home sales and September Kansas City Fed manufacturing survey. It’s a busy day ahead for central bank speak too. Over at the BoE we’re due to hear separately from Haldane and Carney, while at the ECB we’ve got Draghi, Lane and Praet all due to speak. At the Fed Kaplan is due to speak at a minority banking forum this evening followed by Powell when he is due to make brief remarks on the US economy at a senate event. This may well all play second fiddle to Italy though depending on what happens with their budget. The 10y BTP auction just prior to this should be an interesting event to watch also to gauge appetite.

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