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Two months after the first take of Q1 GDP surprised to the upside, printing at 2.3%, more than the 2.0% consensus estimate, and one month after the second estimate of 2.2%, missed expectations of 2.3%, moments ago the BEA reported its third and final Q1 GDP estimate, which declined again to 2.0%, and below the estimate 2.2%.

The reason for the second consecutive decline in the GDP calculatesion was a downward revision to Personal Consumption, which declined from an annualized bottom line contribution of 0.71% in the last estimate to 0.60%; additionally there was a drip in Private Inventories, which declined from the initial reading of 0.0.13% to a negative -0.01% print, however offset by another increase in Fixed Investment from 1.05% to 1.23%. Meanwhile, net trade was also revised modestly lower, down from 0.08% in the second estimate to -0.04% currently.

There was a bit of a positive surprise for inflation watchers, as the GDP price index rose 2.2%, more than the 1.9% expected in 1Q, after rising 2.3% in the prior quarter. Meanwhile, core PCE q/q rose 2.3% in 1Q after rising 1.9% prior quarter.

The more concerning print was the ongoing drip in personal consumption, which was again revised lower from 2.75% in Q4 to just 0.60%, the lowest since Q2 2013, largely as a result of a sharp drop in spending on autos and various other durable goods.

Separately, corporate profits increased 1.8 percent at a quarterly rate in the first quarter of 2018 after decreasing 0.1% in the fourth quarter of 2017. Over the last 4 quarters, corporate profits increased 6.8 percent.

As the BEA reports, profits of domestic non-financial corporations increased 2.2% after increasing 1.5%. Profits of domestic financial corporations increased 1.5 percent after decreasing 3.0 percent.  Profits from the rest of the world increased 0.8 percent after decreasing 1.3 percent.

With the data now quite stale, and reflecting a period of time that is almost three months ago, there was virtually no change across any asset class.

What is more important for the market is that Q2 GDP is when the Trump fiscal stimulus appears to have kicked in, with most estimate now expecting prints in the 4% range, with some looking for a number over 5%.

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After Peter Strzok failed to address the concerns of Republicans by trying to explain away his anti-Trump texts as “just an intimate conversation” with his mistress (former FBI lawyer Lisa Page) during yesterday’s marathon closed-door session, President Trump chimed in this morning with a tweet claiming that Strzok had been given “poor marks” on the hearing because he “refused to answer many questions.”

The president also reaffirmed that there was “no Collusion and the Witch Hunt, headed by 14 Angry Democrats and others who are totally conflicted, is Rigged!”

Lover FBI Agent Peter Strzok was given poor marks on yesterday’s closed door testimony and, according to most reports, refused to answer many questions. There was no Collusion and the Witch Hunt, headed by 13 Angry Democrats and others who are totally conflicted, is Rigged!

— Donald J. Trump (@realDonaldTrump) June 28, 2018

The president then turned his attention to the DNC Server, asking once again why the FBI wasn’t allowed to closely examine it? The DNC never furnished an explanation, despite Wikileaks emails revealing that former spy Christopher Steele had once filed a memo claiming that 
“Russian agents within the Democratic party structure itself” were involved with the theft.

Russia continues to say they had nothing to do with Meddling in our Election! Where is the DNC Server, and why didn’t Shady James Comey and the now disgraced FBI agents take and closely examine it? Why isn’t Hillary/Russia being looked at? So many questions, so much corruption!

— Donald J. Trump (@realDonaldTrump) June 28, 2018

What’s even more suspicious is the fact that the DOJ is refusing to release intercepted material that could reveal that former Attorney General Loretta Lynch conspired to rig the Clinton investigation. This, even as Senate is trying to subpoena her.

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Fox News Chief White House Correspondent John Roberts reported early Thursday morning that the White House and the Kremlin have decided on Helsinki as the location for the Trump-Putin summit, just as President Trump had suggested yesterday.

White House and Kremlin have settled on Helsinki, Finland as the location for the @realDonaldTrump – Putin summit. Date to be announced today.

— John Roberts (@johnrobertsFox) June 28, 2018

The capital of Finland was first reported as the most likely site for the summit last week, and Finnish President Sauli Niinisto has already confirmed that Finland is prepared to host the summit. Yesterday, National Security Advisor John Bolton hammered out details during a working lunch with Russian Foreign Minister Sergei Lavrov before meeting President Putin. During their pre-summit meeting yesterday, Bolton and Putin reportedly discussed nuclear arms control, conflicts in Syria and Ukraine, the situation in North Korea and the Iran nuclear deal.

“Despite the political noise in the US,” direct communications between Trump and Putin are in the “best interest of our country,” Bolton said yesterday during a press conference in Moscow.

President Trump has pushed for improved relations with the Kremlin, even inviting Putin to the White House during a March phone call. Efforts to arrange the summit started to intensify in mid-June. Bolton said during yesterday’s press conference that both Trump and Putin shared a belief that their face-to-face meeting will improve relations between the two countries.

Bolton also insisted that Trump and Putin will discuss “a full range of issues”  including arms control agreements, alleged Russian meddling and the possibility of Moscow re-joining the G-8.

The two sides have also agreed on a time and date for the summit – information that will likely be released on Thursday.

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Migration, trade, Brexit and the EU budget – but mostly migration – will be the big talking points at today’s EU summit which kicks off in Brussels shortly and continues into Friday.

As DB notes, there’s a laundry list of agenda points to get through for EU leaders with the not so insignificant talking points like Brexit, migration policy, the EU budget, security and the economic and monetary union amongst the big topics. The summit will be of particular significance for Merkel given domestic political tensions of late however yesterday the CDU and Social Democrats confirmed that no headway was made on migration talks in a meeting in Berlin which will only heighten the pressure on Merkel. Notably, the CSU Party leader Seehofer did reaffirm on ARD TV that “I know of nobody in my party who either wants to endanger the government….or bring down the Chancellor”.

Meanwhile Italy PM Conte also confirmed that the EU draft on migration was dropped which should not be a great surprise given the limited headway made from Sunday’s mini summit.

In an impassioned speech on Thursday ahead of a critical EU summit, Angela Merkel said that migration could be a “make or break” issue for the European Union. It will also be a “make or break” issue for her career. The crunch point comes at a time when Europe is already dealing with a lingering debt crisis, a rise in European populism, an escalating trade war with the United States and faltering negotiations for Brexit.

She pressed the German parliament to back a tough but humane asylum and migration policy for the European Union, warning that if Germany fails to support that, migration issues could define Europe’s destiny.

With that, here is a full preview of what to expect from today’s two-day EU summit which may seal the fate of Angela Merkel, courtesy of RanSquawk.

EU Summit 28-29th June 2018 in Brussels– Arrivals scheduled at 12:30BST/06:30CDT on Thursday and  07:00BST/01:00CDT on Friday

• EU Summit is to be dominated by the migration issue
• Brexit talks at the Summit to show little development

MIGRATION ISSUE

Leaders are expected to discuss the internal and external dimensions of the migrations policy. German Chancellor Merkel has been facing a domestic battle over migration with CSU coalition partners, which want ot pursue a more hard line approach to immigration. The CSU has given Chancellor Merkel a two-week grace period (due to expire at the start of July) to strike a deal with EU partners to redistribute EU registered migrants in the bloc, to put less pressure on German borders. The subject has threatened the stability of the CDU/CSU coalition, and investors fear that without the support of the CSU, Merkel’s CDU would no longer have a parliamentary majority. While some CSU leaders have expressed scepticism that a deal can be reached with the EU, leader Seehofer has said a coalition breakup is unlikely; however, Chancellor Merkel said on Thursday the migrant policy may be a make or break for the EU. Note: The CSU/CDU fear that the far right AfD could make headway in Bavarian state elections in October if CSU/CDU pursue a soft approach with regards to immigration, and unity between the CDU/CSU will be required to stem the AfD’s rise (it has been gaining in recent polls). At the same time, the new Italian government is calling for more immigration burden-sharing; Deputy PM and far-right League leader Salvini has pushed back on immigration, turning away migrant ships, and his aggressive approach may risk conflict with the Germans, according to some analysts. A favourable outcome may be difficult to achieve after last weekend’s emergency Summit, where EU partners debated migration in a “frank and open” manner, though no concrete consequences or conclusions were agreed.

BREXIT

The agenda pencilled in only two hours of Brexit talks on Friday. The Irish border issue continues to be an obstacle that stunts any development. The European Council in an EU 27 format (excluding UK) is to review the state of play of Brexit negotiations and come to a conclusion on progress made. EU Leaders said on Tuesday that the door has been left open to the UK to change their “red line” in Brexit negotiations; according to the draft Summit conclusions. No breakthroughs are expected before the Summit, which will pile on more pressure on UK and EC negotiators. According to a UK statement, UK PM May said the UK will provide more detail on their vision for the future UK-EU relations in a  white paper after the June Summit.

US AUTO TARIFFS

US President Trump has threatened to apply 20% tariffs on imports of EU autos to the US if the EU did not ‘break down and remove’ its own tariffs on US autos. Reports suggest leaders will discuss a response at the Summit. The EU has previously intimated that it will apply counter-measures on US trade manoeuvres.

EU BUDGET

The French-German proposal for a Eurozone budget is not a new stand-alone budget but part of a multi-annual budget for the EU. One part of the budget is to be devoted to investment (related to structural improvement of the economy) while the second would be a macroeconomic stabilisation function. It may be worthwhile to focus on how large the budget will be. French President Macron sees the budget to be hundreds of billions of euros, while German Chancellor Merkel sees it to be in the “low double-digit” billions. ING notes that there is “still a long way to go but a small budget line in the EU’s multi-annual fiscal framework as a kind of “money for reforms” or conditional cross-border investment fund looks feasible”.

 

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Bulletin Headline summary from RanSquawk

• European equities are lower across the board (Eurostoxx 50 -0.6%) as trade tensions continue to weigh on sentiment
• DXY remains above 95.00 in European trade after an early bout of strength (now off best-levels)
• Looking ahead, highlights include German national CPI, US GDP (F), weekly jobs, EU summit, BoE’s Haldane, US 7yr note auction

US equity markets are looking to undo yesterday’s bearish reversal, with index futures higher this morning, reversing the trend from earlier markets where Asian stocks flirted with a 9 month low and Europe was mixed.

The MSCI Asia Pacific index started off the overnight session by declining for a fourth day, helping drag a gauge of developing-market stocks to the lowest level in almost a year, although at a slower pace as Chinese stocks sank deeper into a bear market, if at a more modest pace …

… helped by a modest stabilization in the recent Yuan rout. In the end, however, the Shanghai Composite Index fell 0.9%, dropping below 2800 for the first time since March 2016 and erasing an earlier gain of 0.5%, as sentiment remained subdued amid trade concerns.

Meanwhile, the Chinese yuan remained weak but the selloff was more controlled than in recent days, with the onshore yuan declining for the sixth session, its longest losing streak since June 2017, while the offshore yuan, or CNH, dropping for a record 11th day…

… rose as high as 6.64, the highest since November 2017, before reversing some losses. Property developers and airlines have been among the hardest hit by the yuan’s decline due to their large amounts of dollar debt. Like the offshore yuan, Air China has fallen for 11 straight days in Hong Kong, its longest ever losing streak. China Southern Airlines has plunged 35% in 10 days, while developer Country Garden Holdings is the worst performer on the Hang Seng Index this week.

“The news that China will crack down on property speculation in 30 cities hurt sentiment and put pressure on shares,” said Dai Ming, Shanghai-based fund manager with Hengsheng Asset Management Co. “It makes investors agitated whenever China tightens regulation over the property sector.”

The woes of real estate companies were further compounded Thursday after the government said it was starting a six-month campaign to root out violations in the housing market. That followed a tightening this week of loan approvals for redeveloping shanty-town projects and regulators urging companies to use proceeds from overseas bond sales to repay debt.

European stocks followed the decline across Asia as investors remained confused by America’s strategy toward Chinese trade and investment. Technology companies and carmakers were the biggest losers as the Stoxx Europe 600 Index dropped.

Futures on the S&P 500 pointed to a firmer open in the wake of Wednesday’s slump. West Texas Intermediate crude extended gains and China’s yuan headed for another drop. The British pound weakened, and Italian bonds slipped after a disappointing auction.

With equity markets relatively calm, it was all about the dollar, which remained above 95.00 in European trade after an early bout of strength, which has since reversed and the BBG dollar index dipped to session lows, with trade posturing remained a key focus for investor sentiment.

As a result of the stronger dollar and rising oil price, it was generally a bloodbath across EM FX, with the Indian rupee slumping to record low, while the Indonesian rupiah weakened to lowest since 2015. Kiwi slides to two-year low after dovish RBNZ statement.

Separately, the rout across the broader Emerging Markets FX space sent the MSCI EM FX index to the lowest level since November 2017.

USD strength has however somewhat abated as the session progresses with some commentators highlighting month-end rebalancing flows set to come into-play. Models suggest the USD could be sold amid equity re-balancing and thus provide some support for EURUSD which has thus far been able to maintain at 1.1500 handle. The Euro initially dipped then edged toward session highs against the dollar following Italian inflation data that modestly beat expectations, and may presage euro-zone CPI figures on Friday; the European summit is also later today. The USDJPY edged lower after gaining 0.2% Wednesday when White House adviser Larry Kudlow said the president wasn’t retreating on China and China growth was “not doing well.”

In terms of the latest state-of-play, trade uncertainties remain in focus after White House economic adviser Kudlow rejected the perception that Trump was softening his stance on China. Markets continued to weigh counter-measures from China with CNY devaluation increasingly becoming part of the narrative in the spat between the two nations with China also announcing adjustments of tariffs on some imports from other Asia-Pac nations.

In overnight central bank news, the RBNZ maintained the Official Cash Rate at 1.75% as unanimously expected, while it reiterated that it expects to keep rates at current expansionary level for considerable period and that the next direction is equally balanced between up and down. RBNZ added that global economic growth is likely to underpin demand for New Zealand products and services, but also stated that recent weaker GDP implies marginally more spare capacity in economy than anticipated and that CPI remains below target. Furthermore, the RBNZ later announced from 2019 onwards rate decisions will be announced after 1400 local time on a Wednesday and implemented the following day.

Ahead of today’s EU summit, German Interior Minister Seehofer said the CSU party is not seeking a break-up of the coalition government nor oust Chancellor Merkel, while there were also comments from German Finance Minister Scholz said he does not rule out possibility coalition can reach solution to migration issue. German Chancellor Merkel said on migration, “we are not where we want to be yet”; adding “we won’t be able to reach a common migration agreement at the June Summit”. She went on to say Germany must consider coalition of the willing on migrant policy if an agreement is not reached by the 28 EU members and the migrant policy may make or break the EU.

In geopolitics, South Korean and US Defence Chiefs agree UN Sanctions against North Korea will be in place until North Korea takes solid, irreversible measures towards denuclearisation.

10-year Treasury yields remained immune to any risk on sentiment, with the yield barely rising 1bp to 2.83%. The yield curve flattened in U.S. on Wednesday as Treasuries rallied following Kudlow’s comments.

West Texas Intermediate crude extended gains and China’s yuan headed for another drop. The British pound weakened, and Italian bonds slipped after a disappointing auction

Expected data include jobless claims and GDP. Accenture, McCormick, Shaw Communications, Walgreens Boots and Nike are among those reporting earnings.

Top Overnight News from Bloomberg

• The European Central Bank warned in its Economic Bulletin that global growth — already forecast to slow as many advanced economies approach capacity constraints — might take an additional hit from recent threats to trade
• Chancellor Angela Merkel said German-French proposals for the euro area won’t lead to a “debt union” and rejected unilateral measures to curb migration as she headed to a summit with other European Union leaders
• China is slowing approvals for offshore bonds and considering whether to ban short-dated issuance in dollars, according to people familiar with the matter, moves that would reduce financing options for the developers that have led record sales of such debt
• China’s expansion looks to have slowed further this month, underscoring the fragility of its economy as the next wave of tariffs in the trade dispute with the U.S. approaches
• The Indian rupee slumped to an all-time low as a resurgence in crude prices and the emerging-market selloff took a toll on the currency of the world’s third-biggest oil consumer
• United Co. Rusal is doing everything it can to avoid punitive U.S. restrictions due for full enforcement in October, according to the Russian aluminum giant’s acting Chief Executive Officer Evgeny Nikitin
• Treasury Secretary Steven Mnuchin won a battle inside the Trump administration over trade policy this week after a series of setbacks as he tries to ease economic tensions with China
• Russia’s Finance Ministry is on track for its biggest bond-issuance miss in 3 years as investors demand a premium to hold the nation’s debt after the toughest U.S. sanctions to date and a selloff in emerging markets
• U.K. Treasury said it was won over by Jonathan Haskel’s expertise in productivity and innovation when choosing the only man among the five candidates to join the Bank of England’s Monetary Policy Committee
• Hungarian forint tumbled to a record against the euro as the central bank maintained a dovish monetary policy seen as out of line with the rest of Europe

Market Snapshot

• S&P 500 futures little changed at 2,706.25
• STOXX Europe 600 down 0.2% to 379.38
• MXAP down 0.4% to 164.48
• MXAPJ down 0.6% to 530.47
• Nikkei down 0.01% to 22,270.39
• Topix down 0.3% to 1,727.00
• Hang Seng Index up 0.5% to 28,497.32
• Shanghai Composite down 0.9% to 2,786.90
• Sensex down 0.4% to 35,085.11
• Australia S&P/ASX 200 up 0.3% to 6,215.39
• Kospi down 1.2% to 2,314.24
• German 10Y yield fell 0.3 bps to 0.318%
• Euro down 0.1% to $1.1539
• Italian 10Y yield fell 7.8 bps to 2.541%
• Spanish 10Y yield unchanged at 1.356%
• Brent futures up 0.1% to $77.73/bbl
• Gold spot down 0.2% to $1,249.37
• U.S. Dollar Index little changed at 95.33

Asia equity markets traded somewhat indecisive following the headwinds from Wall St where all major indices wiped out intraday gains, as trade uncertainties remained in focus after White House economic adviser Kudlow rejected the perception that Trump was softening his stance on China. ASX 200 (+0.2%) and Nikkei 225 (Unch) were mixed with Australia kept afloat by commodity names as the energy sector outperformed on further gains in crude and with Santos underpinned after the board approved a new dividend policy which targets paying 10%-30% of free cash flow, while a firmer currency and disappointing Retail Sales data weighed on sentiment in Tokyo. Hang Seng (+0.4%) and Shanghai Comp. (+0.2%) were choppy on the trade uncertainties and following another net liquidity drain by the PBoC, although Chinese stocks later recovered amid pre-emptive measures in the face of a looming trade war including a further devaluation of the currency and adjustments of tariffs on some imports from other Asia-Pac nations.  Finally, 10yr JGBs traded flat amid the indecisive risk tone and amid weaker demand at today’s 2yr auction later, in which accepted prices also declined from prior.

Top Asian News

• Vietnam Forces Facebook and Google to Pick Privacy or Growth
• Rupee Hits Record Low as India Pays for Insatiable Oil Demand
• China Turmoil Batters Last Emerging-Market Haven as Rout Deepens
• China Digs In on Trade as Tariffs Near, Economy Deepens Slowdown

European equities are lower across the board (Eurostoxx 50 -0.6%) in recent trade with all major bourses in the red as trade tensions continue to weigh on sentiment. Consumer staples outperform while IT names lag behind (Europe’s tech sector -1.7%) amid NEC Director Kudlow rejecting the notion that US President Trump has softened his stance in regards to China on foreign investment, adding that the approach is aimed at “protecting our technological family jewels”. In terms of stocks specifics, Shire (+2.1%) shares are higher after Takeda shareholders rejected a proposal which opposed a deal with Shire.

Top European News

• ECB Publishes Methodology for New Euro Short-Term Interest Rate
• Takeda’s Shareholder Vote Signals Support for Shire Takeover
• BP to Buy U.K.’s Largest Electric Vehicle Charging Company
• Merkel Says Stronger Europe Is in Germany’s National Interest

In FX, the DXY remains above 95.00 in European trade after an early bout of strength (now off best-levels) with trade posturing remaining a key focus for investor sentiment. In terms of the latest state-of-play, trade uncertainties remain in focus after White House economic adviser Kudlow rejected the perception that Trump was softening his stance on China. Markets continue to weigh countermeasures from China with CNY devaluation increasingly becoming part of the narrative in the spat between the two nations with China also announcing adjustments of tariffs on some imports from other Asia-Pac nations. GBP has managed to recoup some of it’s initial losses against the USD (albeit still on a 1.3000 handle) after taking out stops to the downside at 1.3100 early doors in Europe before then running into support around 7-month lows at 1.3068. From a fundamental perspective, BoE’s Cunliffe did little to reveal his voting intentions at the August QIR and instead focused on household debt with a more medium-term focus. Narrative for the GBP could now shift towards Brexit ahead of the EU leaders summit; albeit expectations for any progress are particularly low with PM May set to get a slap on the wrist from her peers. USD/CAD is continuing to return to pre-Poloz levels amid USD softening after the BoC head took time to note the uncertainties facing the Canadian economy which saw pricing for a rate hike decline to beneath 50%. Large option expiries could come into play for CAD with 1.3bln in USD/CAD at 1.3345-50.

Commodities are mixed with choppy trade in gold (unch) after initially hitting 6-month lows as the yellow metal tracks the change in the dollar. WTI (+0.3%) and Brent (+0.1%) are back in positive territory, printing fresh highs for the day at USD 72.87/bbl and USD 77.93/bbl respectively. During the week, API and EIA crude inventories printed the largest drawdown since September 2016 with oil stocks dropping by nearly 10mln barrels. Traders will be mindful of halted oil exports in Libya following the country’s Eastern NOC’s instructions. Meanwhile, India’s oil ministry requested that refiners prepare for a ‘drastic reduction or zero’ imports from Iran from November, (according to sources) following US President Trump asking allies to quit importing Iranian oil. Libya’s Eastern NOC have instructed companies in the East of the nation to halt oil exports. Tankers attempting to enter East Libyan ports will be deemed illegal, a tanker due at Libya’s Zueitina port is said to have been turned away. (Newswires)

Looking at the day ahead, the big focus will likely be the EU Summit in Brussels where leaders are due to discuss migration policy, the EU budget, Brexit, security and reforming the economic and monetary union. In the US the third and final reading for Q1 GDP and Core PCE is due, as well as the June Kansas City Fed manufacturing activity index and latest weekly initial jobless claims data. The Fed’s Bullard and Bostic and the BOE’s Haldane and Bailey are due to speak. The Fed will also release part two of its annual bank stress test results.

US Event Calendar

• 8:30am: Initial Jobless Claims, est. 220,000, prior 218,000; Continuing Claims, est. 1.72m, prior 1.72m
• 8:30am: GDP Annualized QoQ, est. 2.2%, prior 2.2%;
  • Personal Consumption, est. 1.0%, prior 1.0%
  • Core PCE QoQ, prior 2.3%
• 9:45am: Bloomberg Consumer Comfort, prior 56.5
• 11am: Kansas City Fed Manf. Activity, est. 26, prior 29

DB’s Jim Reid concludes the overnight wrap

The flip-flopping (mostly flopping) of trade related headlines is enough to be driving markets crazy at the moment with sentiment swinging from more positive early on yesterday to negative by the close. By the end of play the S&P 500 ended -0.86% and was down -1.69% from intraday highs, while the Dow closed -0.68% and Nasdaq -1.54%. Within the S&P, financials (-1.26%) continued a run of now 13 consecutive losing days – the longest streak on record and  are now off -12.6% since the late January highs and -5.9% down from c3 weeks ago. The Energy sector was a bright spot (+1.34%) once again with Oil more than doing its part after WTI and Brent rose +3.16% and +1.72%, respectively, following supply outages in Libya and data which showed the biggest fall in US stockpiles since 2016. WTI hit YTD intraday highs yesterday in trading above $73.

In bonds, US 10y yields fell 5.1bps to 2.826% – the lowest since late May, while Bunds (-2bp) and Gilts (-5.8bp) also firmed amidst the risk off tone. The relentless flattening of the Treasury curve did continue however with 2s10s down another 2.2bps and to a new fresh post 2007 low of 32.1bps. Before the late US selloff, Europe indices were actually quick to wipe out early losses with the Stoxx 600 (+0.72%) and DAX (+0.93%) finishing higher on the back of a solid rally in European energy stocks (+2.63%).

With Oil back to the highest since December 2014 (+22% in YTD 2018) and bond yields generally heading towards the lower end of their recent ranges we’re set up for interesting European inflation numbers over the next two days. Certainly something to watch. Also watch for headlines from the important EU summit over the next couple of days. There a fuller preview below.

This morning in Asia, markets are trading mixed but have improved from a weaker opening with the Hang Seng (+0.58%) and Shanghai Comp. (+0.19%) rebounding while the Nikkei (-0.09%) and Kospi (-0.82%) are both down as
we type. The Chinese Yuan is weakening further (-0.1%) while the Yen is up marginally. Meanwhile after a 14 hour marathon session, the budget committee of the German Parliament has approved a €344bn budget plan for 2018 that will boost spending by 4% yoy without incurring any new debt. The budget will boost investments by €2.8bn to €39.8bn with additional funding for jobs in police / security forces. As for data, Japan’s May retail sales fell the most in c2 years and was below market at -1.7% mom (vs. -0.8%), which has led to annual growth of 0.6% yoy.

Back to yesterday and to detail the Trump trade turnaround seen. Initially markets were stronger following the news that President Trump intends to use the CFIUS as opposed to emergency law for passing legislation concerning the violation of intellectual property rights on US companies – the latest development in this seemingly never-ending  story. Significantly, this is seen as a softening stance of sorts for the President and one which puts him more in line with Treasury Secretary Steven Mnuchin. The Treasury Secretary also added yesterday that moves to strengthen  CFIUS “is not intended to target China” and that it was “unfortunate” that the market got mixed messages. Late in the European afternoon though Trump’s top economic advisor Larry Kudlow told Fox Business News that Trump is not softening his stance on China and that China’s reaction to trade demands from the US has not been satisfactory.

So as we look ahead to today, expect trade to be one of or if not, the big talking point at today’s EU summit which kicks off in Brussels and continues into Friday. There’s a laundry list of agenda points to get through for EU leaders with the not so insignificant talking points like Brexit, migration policy, the EU budget, security and the economic and monetary union amongst the big topics. The summit will be of particular significance for Merkel given domestic political tensions of late however yesterday the CDU and Social Democrats confirmed that no headway was made on migration talks in a meeting in Berlin which will only heighten the pressure on Merkel. Notably, the CSU Party leader Seehofer did reaffirm on ARD TV that “I know of nobody in my party who either wants to endanger the government….or bring down the Chancellor”. Meanwhile Italy PM Conte also confirmed that the EU draft on migration was dropped which should not be a great surprise given the limited headway made from Sunday’s mini summit.

As discussed above, it’s worth also keeping an eye on some of the regional flash European CPI reports today. Data for Italy will be out this morning with the consensus at +0.2% mom for June. Germany will be out later this afternoon with +0.2% mom also expected however base effects are expected to push the annual rate down to +2.1%.

Staying with data, US Q2 GDP prospects were given a boost yesterday after the May advance goods trade balance revealed a smaller than expected deficit of $64.8bn (vs. $69.0bn expected). That also compares to $67.3bn in April  and it means that the trade balance has now narrowed for three consecutive months to a 9 month high. The durable and capital goods orders data was a little more disappointing (durable ex transport -0.3% vs. +0.5% expected, core capex orders -0.1% mom vs. +0.3% expected) but upward revisions to prior months made that more of a wash. Pending home sales (-0.5% mom vs. +0.5% expected) were notably softer however. It’s worth noting that our US economists are forecasting Q2 GDP growth of 3.8%.

In Europe, the Euro area’s May M3 money supply was stronger than expected at 4% yoy (vs. 3.8%). After adjusting for sales and securitizations, growth in household loans was steady at 2.9% yoy for a sixth consecutive month but growth in non-financial corporate loans increased to a new cyclical high of 3.6% yoy. Meanwhile, France’s June consumer confidence index fell 2pt mom to a 21- month low of 97 (vs. 100 expected) while Italy’s overall June economic sentiment index rose 0.8pts to a three-month high of 105.4. Over in the UK, the June Nationwide house price index slowed less than expected with annual growth at 2% yoy (vs. 1.7% expected; 2.4% previous). Elsewhere, the CBI’s distributive trades survey indicated that retailers were continuing to see better conditions in Q2, with a net 32% of retailers reporting annual sales growth in June – the best result since last September.

Looking at the day ahead, the big focus will likely be the EU Summit in Brussels where leaders are due to discuss migration policy, the EU budget, Brexit, security and reforming the economic and monetary union. Datawise, it is looking like a busy day for inflation releases in Europe with preliminary June CPI reports due in Spain, Italy and Germany (2.1% yoy expected). We’ll also get June confidence indicators for the Euro area and the ECB’s economic bulletin, while in the US the third and final reading for Q1 GDP and Core PCE is due, as well as the June Kansas City Fed manufacturing activity index and latest weekly initial jobless claims data. The Fed’s Bullard and Bostic and the BOE’s Haldane and Bailey are due to speak. The Fed will also release part two of its annual bank stress test results.

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Authored by Pepe Escobar via The Asia Times,

Erdogan has lost his parliamentary majority and must now establish a coalition with the far-right Nationalist Action Party; given the latter is anti-Western, the road ahead points in only one direction: Eurasian integration

To the utter despair of stoic defenders of “Western values,” Europe is now condemned to suffer two populist autocracies on its eastern borders: Putin’s Russia and Erdogan’s Turkey.

For the EU’s political leaders, the only accepted narrative is blanket, hysterical condemnation of “illiberal democracies” distorted by personal rule, xenophobia and suppression of free speech. And that also applies to the strongmen in Hungary, Austria, Serbia, Slovakia and the Czech Republic.

These EU leaders and the institutions that support them – political parties, academia, mainstream media – simply can’t understand how and why their bubble does not reflect what voters really think and feel.

Instead, we have irrelevant intellectuals mourning the erosion of the lofty Western mission civilisatrice (civilizing mission), investing in a philosophical maelstrom of historical and even biblical references to catalog their angst.

They are terrified by so many Darth Vaders – from Putin and Erdogan to Xi and Khamenei. Instead of understanding the new remix to Arnold Toynbee’s original intuition – History is again on the move – they wallow in the mire of The West against The Rest.

They cannot possibly understand the mighty process of Eurasia reconfiguration. And that includes not being able to understand why Recep Tayipp Erdogan is so popular in Turkey.

Sultan and CEO

Profiting from a large turnout of up to 85% and fresh from obtaining 52.5% of the popular vote – thus preventing a run-off – Erdogan is now ready to rule Turkey as a fascinating mix of Sultan and CEO.

Under Turkey’s new presidential arrangement – an Erdogan brainchild – a prime minister is no more, a job Erdogan himself held for three terms before he was elected as president for the first time in 2014.

Erdogan may be able to rule the executive and the judiciary, but that’s far from a given in the legislature.

With 42.5% of the votes and holding 295 seats, Erdogan’s AKP, for the first time in 16 years, lost its parliamentary majority and must now establish a coalition with the far-right Nationalist Action Party (MHP).

The doomsday interpretation spells out a toxic alliance between intolerant political Islam and fascistic extreme-right – both, of course, hardcore nationalist. Reality though is slightly more nuanced.

Considering that the MHP is even more anti-Western than the AKP, the roadmap ahead, geopolitically, may point to only one direction: Eurasian integration. After all, Turkey’s perennially plagued EU accession process is bound to go nowhere; for Brussels, Erdogan is little else than an unwelcomed, illiberal, faux democrat.

In parallel, Erdogan’s neo-Ottomanism has been given a reality check with the failure of his – and former Prime Minister Davutoglu’s – Syria strategy.

The Kurdish obsession though won’t go away, especially after the success of operations ‘Euphrates Shield’ and ‘Olive Branch’ against the US-backed YPG – which Erdogan brands as an extension of the dreaded PKK. Ankara now holds the previously Kurdish-dominated Afrin, and now, under a US-Turkey deal, the YPG must also leave Manbij. Even after giving up on “Assad must go”, Ankara for all practical purposes will keep a foothold in Syria, and is invested in the Astana peace process alongside Russia and Iran.

Take it to the bridge

Turkish politics used to be a yo-yo between the center-right and the center-left, but always with the secular military as puppet masters. The religious right was always contained – as the military were terrified of its popular appeal across Anatolia.

When the AKP started its political winning streak in 2002, they were frankly pro-Europe (there was no subsequent reciprocity). The AKP also courted the Kurds, who in their absolute, rural, majority were religiously conservative. The AKP and Erdogan even allied themselves with the Gulenists. But once they solidified their electoral hold, the going got much tougher.

The turning point may have been the repression of the Gezi Park movement in 2013. And then, in 2015, the pro-Kurdish – and left-wing – Democratic Peoples’ Party (HDP) started to emerge and capture votes from the AKP. Erdogan’s response was to fashion a strategy of mingling the Democratic Peoples’ Party with the PKK – as in “terrorists,” which is absurd.

Party leaders were routinely thrown in jail. For these latest elections, HDP leader Selahattin Demirtaş actually campaigned from jail, warning: “What we are going through nowadays is only the trailer of the one-man regime. The actual scary part is yet to begin.” Even facing myriad constraints, the HDP managed to get a significant 11.7% of the vote, or 67 seats.

“One-man regime” was actually solidified a good two years ago, after Gulenists in the military ended up launching the (failed) military coup. Erdogan and the AKP leadership are convinced the Gulenists received crucial help from NATO. The subsequent purge was devastating – hitting tens of thousands of people. Anybody, anywhere, from academia to journalism, criticizing Erdogan or the ongoing dirty war in eastern Anatolia, was silenced.

Turkish historian Cam Erimtan stresses how Erdogan defended the necessity of anticipated elections by invoking “historic developments in Iraq and Syria” that have made it “paramount for Turkey to overcome uncertainty.”

Erimtan characterizes the so-called “People’s Alliance” of the AKP with the MHP as the “Turkish-Islamic Synthesis” of the 21st century, pointing how “the AKP base is large and fully convinced of the fact that the current systemic change is on the right track and that the return of Islam to Turkish public life was long overdue.”

So, “illiberal” or otherwise, the fact is a majority of Turkish voters prefer Erdogan. The European dream may be over – for good. Relations with NATO are fractious. Neo-Ottomanism is a minefield. So Eurasian integration seems the sensible way to go.

Relations with Iran are stable. Energy and military relations with Russia are paramount. Turkey can invest in economic projection across Central Asia. Russia and China are luring it into joining the Shanghai Cooperation Organization (SCO). Erdogan may finally be able to position Turkey as the essential bridge between the New Silk Roads, or Belt and Road Initiative (BRI) and the West.

That’s a much better deal than trying to join a club that doesn’t want you as a member. “Illiberal democracy”? Who cares?

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