Markets: Flippers
If yesterday was about contagion, today is about relief. The fact that TRY isn’t at a new low has brought out buyers of the dip. The flip-flop of mood has been attributed to this calming of Turkey contagion fears. The reality is that nothing has changed and that Erdogan now wants to ban Apple Iphones as his next retaliation against the US. The headline stories of EM calm obscure the facts about China slowing. The watching Turkey not China story will unwind today as the data from China is clearly troubling – jobs which are the most important to keeping social stability are less plentiful. Investment spending is at a new low – and particularly where people need it the most – healthcare and education.
There is nothing good about the China story except that the trade tariff talk has slowed. Perhaps that is enough for the flippers to keep buying the dip. As for Europe – there was a significant economic data dump with German GDP mixed, EU GDP better and UK jobs strong but wages flat. The job to inflation connection has stalled in the developed markets and its allowed central bankers room. The question remains whether the FOMC is still the central bank of the world and its path to normalization off-putting enough to drive away more risk in September. Data for Europe today puts ECB back in ending QE mode and that helps and hurts – with Italy still mired in political budget battles and EU fights. The simple angle for trading today is that after Friday and Monday selling, today is a resting day, but the more complicated view maybe about taking advantage of a market focused on the wrong hand of EM risks. Turkey remains in a dire devaluation trend. Wake me up if 6 breaks until then today is a breather and an opportunity to hedge more risk.
Question for the Day: Will higher rates fix EM outlfows? Short answer now – its about inflation inspired by FX weakness. The Argentinian central bank hiked rates 5% to 45% to help battle against the inflation caused from the weaker ARS – which remains near 30 and off 38% on the year-to-date.This hike didn’t seem to matter much.China has another tact on its battle against the weaker CNY – it’s been changing reserve requirements on forwards – hiking cost of shorting CNY – but also keeping tighter capital controls and trying to offset the US tariff inspired slowing by more government stimulus. The CNY has gained against its basket for 2 weeks but not today – with risk that 7.00 is tested still. The Turkey response to its crisis is also different but the rate response stands out with real rates near 0% overnight despite the nominal tick ups – TRY is better today but that 5.5% gain today is a blip in the 42% losses year-to-date.Real rates maybe the better way of thinking about crisis responses with Brazil the stand out player in using them to stamp out speculation.
What Happened?
- Australian July NAB business confidence rises to 7 from 6 – better than 6 expected - but conditions 12 from 14 – weaker than 15 expected. Employment rose to 10 form 5 but profitability fell to 10 from 15. Exports were flat at 0, forward orders dipped to 1 from 3. Labor costs rose to 1.1% from 0.7% q/q while final product prices rose 0.6% from 0.4% q/q.
- China July retail sales up 0.7% m/m, 8.8% y/y after 0.7% m/m, 9% y/y – weaker than 9% y/y expected. Urban sales slow to 8.6% from 8.8% y/y while rural slow to 10.1% form 10.4%.Housing related sales slow – non-durables 11.3% from 15.8% y/y, home appliances 0.6% from 14.3% y/y, furniture 11.1% from 15% y/y and building and decoration materials 5.4% from 7.2% y/y. Oil and oil products rose to 18.4% after 16.5% while autos improve to -2% from -7% y/y. Food and grains slow to 9.5% from 13% y/y.
- China July industrial production up 0.5% m/m, 6% y/y after 0.4% m/m, 6.0% y/y – weaker than 6.3% y/y expected. Mining slowed to 1.3% from 2.7% y/y, Electricity/water slowed to 9.0% from 9.2% y/y while Manufacturing rose to 6.2% from 6.0% y/y.By products cement rose to 1.6% from 0% y/y, steel rose to 8% from 7.2% y/y but electricity slowed to 5.7% from 6.7% y/y, autos fell to -0.5% from +5.3% y/y and coal fell to -2% from +1.7% y/y. By industry, chemicals rose to 3.5% form 2.9%, electric equipment 5.7% from 3.8%, communications 13.5% from 10.9% and minerals 5.2% from 3.7%.
- China July fixed-asset investment slows to 5.5% ytd after 6% y/y – less than 6% y/y expected. Property investment rose to 10.2% and manufacturing rose to 7.3% from 6.8% y/y but education fell to 9% from 11.2%, health/social work 10.8% from 11.1% and environment fell to 4.8% from 6.3%.Power production also dropped to -11.6% after -10.3% y/y.
- China July unemployment rises to 5.1% after 4.8% - back to January highs. New added urban employment was 8.8 million in Jan-July, 250,000 more than the same period last year.
- German 2Q preliminary GDP 0.5% q/q, 2.0% y/y after 0.4% q/q, 2.1% y/y – mixed to forecasts of 0.4% q/q, 2.1% y/y. The non-seasonally adjusted GDP up 2.3% y/y. Also notable 1Q GDP revised from 0.3% q/q, 2.1% y/y for workday adjustments.
- German July final HICP 0.4% m/m, 2.1% y/y after 0.1% m/m, 2.1% y/y – unrevised as expected. The national CPI 0.3% m/m, 2.0% y/y from 2.1% y/y.
- India July WPI eases to 5.09% y/y from 4-year highs at 5.77% y/y – lower than 5.2% expected. On a sequential basis, the expenses on primary articles, which constitute 22.62% of the WPI’s total weightage, inched up by 1.73%, from an increase of 5.30%n June. Similarly, the prices of food articles dipped. The category has a weightage of 15.26% in the WPI index and it fell -2.16% after +1.8%.
- French July final HICP -0.1% m/m, 2.6% y/y after 0% m/m, 2.3% y/y – as expected. The national CPI -0.1% m/m, 2.3% y/y from 2.0% y/y.
- Spanish July final HICP -1.2% m/m, 2.3% y/y after 0.2% m/m, 2.3% y/y – as expected. The national CPI -0.7% m/m, 2.2% y/y after 2.3% y/y with core -0.8% m/m, +0.9% y/y after 1.0% y/y.
- UK July claimant count 6,200 after revised 9,000 – as expected – June revised from 7,800.The 3M to June ILO unemployment drops to 4% after 4.2% - better than 4.2% expected – but the 3M to June Average Total Earnings 2.4% from 2.5% - weaker than 2.5% expected – blamed on bonuses -6.6% m/m - as ex-bonus regular earnings 2.7% unchanged. The total April-June employment rose 42,000 to 32.39mn after 137,000 with employment to population 75.6% from 75.1% in June 2017. Unemployment fell 65,000 to 1.36mn but inactive rose 77,000 to 8.73mn with rate up 0.2% to 21.2%.
- German August ZEW economic sentiment -13.7 from -24.7 – better than -20 expected. The current conditions rise to 72.6 from 72.4 – also better than 72 expected. The EU Sentiment improves to -11.1 from -18.7 – also better than -15.6 expected. “The recent agreement in the trade dispute between the EU and the United States has led to a considerable rise in expectations for Germany and also, to a lesser degree, for the Eurozone. However, the economic outlook for Germany is now significantly less favorable than it was six months ago,” comments ZEW President Professor Achim Wambach.
- Eurozone 2Q preliminary GDP 0.4% q/q, 2.2%y/y after 0.4% q/q, 2.5% y/y – better than 0.3% q/q, 2.1% y/y expected.
- Eurozone June industrial production -0.7% m/m, 2.5% y/y after +1.4% m/m, 2.6% y/y – weaker than -0.4% m/m expected – May revised higher from +1.3% m/m, 2.4% y/y. Capital goods -2.9%, Non-durable consumer goods -0.6%, intermediate -0.5% and durable consumer goods -0.4% - only energy rose 0.5% m/m.
Market Recap:
Equities: US S&P500 futures are up 0.3% after losing 0.4% yesterday. The Stoxx Europe 600 is up 0.25% giving back its early gains with Italy focus. The MSCI Asia Pacific bounced with Japan but moderated with China worries.
- Japan Nikkei up 2.28% to 22,356.08
- Korea Kospi up 0.47% to 2,258.91
- Hong Kong Hang Seng off 0.66% to 27,752.93
- China Shanghai Composite off 0.17% to 2,781.16
- Australia ASX up 0.71% to 6,386.20
- India NSE50 up 0.70% to 11,435.10
- UK FTSE so far off 0.1% to 7,634
- German DAX so far up 0.2% to 12,382
- French CAC40 so far up 0.1% to 5,418
- Italian FTSE so far -0.1% to 20,944
Fixed Income: Early relief rally – particularly in the periphery with 2Y Italy dropping 13bps at the open – all that fades with better economic data ZEW, GDP leading to ECB QE ending expectations going up. UK focused on Brexit still with UK Times article driving. US experiences further bear curve flattening with risk mood driving.
- Spain sold E4.566bn of 6M and 12M bills – E335mn of Feb 2019 Letra at -0.419% with 10.1 cover and E4.23bn of Aug 2019 Letra at -0.362% with 1.7 cover.
- US Bonds bear curve flattening – 2Y up 1.6bps to 2.63%, 3Y up 1.6bps to 2.71%, 5Y up 1.5bps to 2.77%, 10Y up 1.4bps to 2.895%, 30Y up 0.8bps to 3.055%.
- Japan JGB stuck in tight ranges – 10Y flat at 0.099%.
- Australian bonds see steepeners despite China data – 3Y off 0.5bps to 2.01% while 10Y up 1bps to 2.585%. AOFM sold A$150mn of 10Y Nov 2027 Linkers CAIN414 at 0.7099% with 4.38 cover – previously 0.8533% with 4.20 cover.
- China PBOC skips open market operations again, leaves liquidity neutral. Money market rates rose with O/N up 21bps to 2.314% and 7-day up 14.5bps to 2.588%. The 10-year bond yields fell 3bps to 3.55%.
Foreign Exchange: The US dollar index is off 0.1% to 96.28 with 96.52 yesterday’s highs key against 95.70 base. Relief in Turkey helped EM – but some pain remains – ARS off 2.4% to 29.93, BRL off 0.5% to 3.88340. In Asia: TWD up 0.15% to 30.79, INR up 0.05% to 69.89 and KRW up 0.5% to 1128. In EMEA: TRY up 5% to 6.53, RUB up 1.4% to 66.51 and ZAR up 1.85% to 14.14
- EUR: 1.1395 off 0.1%. Range 1.1380-1.1429 with focus on Turkey and Italy and 1.1420-50 resistance for 1.1250 tests.
- JPY: 110.85 off 0.15%. Range 110.59-111.15 with EUR/JPY 126.35 flat. Focus is on equities, US trade talks, Abe leadership extending and technical of 110.30-50 USD base holding.
- GBP: 1.2765 flat. Range 1.2755-1.2827 with EUR/GBP .8925 off 0.1%. Brexit remains key with jobs better but wages flat – 1.2850 resistance for 1.2550 again.
- AUD: .7260 off 0.15%. Range .7253-.7283 stuck in bear zone with .7250 holding and focus on metals, China, risk mood – NZD up 0.25% to .6595 with .6606 highs so far and risk for .67 again.
- CAD: 1.3090 off 0.3%. Range 1.3078-1.3137 with oil and better risk mood helping – focus is on data and NAFTA with 1.3050 pivot.
- CHF: .9910 off 0.25%. Range .9902-.9945 with EUR/CHF 1.295 off 0.3% - back to Italy fears and rest of world with .9880 back in play.
- CNY: 6.8695 fixed 0.1% weaker from 6.8629, trades weaker to 6.8905 from 6.8767 closing yesterday.
Commodities: Oil up, Gold up, Copper off 1% to 2.7425 – watching Chile mine strike talks.
- Oil: $67.98 up 1.15%. Range $67.35-$68.01. All about crude stocks with bounce today resting on EIA/API later. WTI watching 200-day at $63.07 as big base with $65.71 yesterday’s low and $69.95 highs key. Brent$73.49 up 1.2% - watching $71.04 yesterday lows then $70.80 channel support against $74.90.
- Gold: $1194.80 up 0.1%. Range $1191-$1195. Losing further safe-haven status - $1191.8 yesterday’s low then $1180.6 Jan 2017 lows. Upside limited unless $1216 breaks out from last week. Silver $14.04 up 0.3% - watching $14.79 next – Platinum up 0.15% to $804.45 and Palladium off 0.2% to $892.50.
Conclusions: Even Better? The ability for the US to ignore the rest of the world’s turmoil continues with the latest US NFIB July small business optimism index up 0.7 to 107.9 – the second highest on record – beating 106.7 forecasts.The July 2018 report also set new records in terms of owners reporting job creation plans and those with job openings. A seasonally-adjusted net 23 percent are planning to create new jobs, up three points from June. Thirty-seven percent of all owners reported job openings they could not fill in the current period, a one-point increase from June.
“Small business owners are leading this economy and expressing optimism rivaling the highest levels in history," said NFIB President and CEO Juanita D. Duggan. "Expansion continues to be a priority for small businesses who show no signs of slowing as they anticipate more sales and better business conditions." A net eight percent of all owners (seasonally adjusted) reported higher nominal sales in the past three months compared to the prior three months. July is the eighth consecutive strong month of reported sales gains after years of low or negative numbers. A net 35 percent of owners expect better business conditions, ticking up two points from June.
Economic Calendar:
- 0830 am US July import prices (m/m) -0.4%p 0%e (y/y) 4.3%p 4.6%e / exports 5.3%p 4.2%e
- 0430 pm US weekly API oil inventory -6mb p +0.1mb e
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