The dollar headed for its worst weekly loss since February following slowing inflation data out of the US and amid bets that other major central banks will start to normalize monetary policies, helping global stocks extend their lead as the MSCI All-Country World Index gained 0.3%.

The bout of dollar weakness helped the MSCI Asia Pacific index extend its rebound from the worst run of losses in 16 years, while stocks in Europe gained along with S&P500 futures as renewed prospects for U.S.-China trade talks and a desperate rate hike action by Turkey (which again prompted Erdogan's angry rebuke) to support its currency, fostered a positive mood.

In Europe, the Stoxx 600 Index increased 0.2% to the highest in more than a week; Germany’s DAX Index jumped 0.4% also to a one week high, and leading the way in European equities, driven by Infineon, which benefited from broad-based IT sector strength after yesterday’s outperformance in the US. The SMI was the laggard and weighed on by Roche’s announcement of a “moderate” sales growth in 2019.

Asia's cheer was limited, however, as China shares again underperformed after overnight's Chinese economic data dump showed that fixed-asset investment fell dropped to 5.3%, missing expectations and hitting a new record low, even as retail sales surprised modestly to the upside.

The yuan stayed lower as the PBOC added net 150 billion of repo liquidity; the Shanghai Composite closed down 0.2%, and just off the lowest print since the bursting of the 2014/2015 stock bubble.

Offsetting China's weakness, markets in Japan, South Korea, and Hong Kong climbed as Asian equities ended the week on a high after enduring the longest daily losing streak since 2002.

Emerging-market stocks and currencies extended a rally following Turkey’s larger-than-expected rate increase, the kiwi outperformed on a manufacturing uptick, the yen reversed early weakness after Abe’s policy exit comment, saying QE can't last forever; India’s rupee gained from recent record low prints while India's 10-year yield falls five basis points to 8.08% on slower inflation.

In G-10 FX, the euro rose to its strongest level versus the dollar in more than two weeks amid improving risk appetite and dollar weakness after soft U.S. inflation data on Thursday, and after the ECB said it expects to phase out new bond purchases by the end of the year. The Bloomberg Dollar Spot Index headed for its worst weekly performance since mid-February as the U.S. curve flattened and euro-area stocks rose.

"The rally in the euro post the ECB meeting and the easing of trade tensions are weakening the dollar," said David Forrester, FX strategist at Credit Agricole CIB in Hong Kong. "The soft U.S. CPI overnight is also holding the dollar back"

Elsewhere, the krona led losses among G-10 peers as Swedish inflation missed estimates, while emerging-market currencies extended their recent advance. The British pound headed for a six-week high and gilts fell after Bank of England Governor Mark Carney told lawmakers that a no-deal Brexit would see interest rates rise rather than fall.

10-year Treasuries dropped, with the yield rising above 2.98%.

One day after central bank "Super Thursday", the Russian Central Bank also surprised markets when it hiked its key rate Sep 7.50% vs. Exp. 7.25% (Prev. 7.25%). The bank said they will consider the necessity of further rate hikes taking into account inflation and economic dynamics against the forecast. They added the increase of key rates will help maintain real interest rates on deposits in the positive territory, which will support the attractiveness of savings and the balanced growth in consumption.

Investors will be happy to close the busy week on a positive note, following numerous, often conflicting reports, including cooling U.S. inflation to central-bank meetings in Europe, the U.K., and Turkey. And while the Russian central bank unexpectedly hiked rates moments ago to 7.50% with most expecting an unchanged 7.25% print, all eyes will be on American retail sales.

Speaking to Bloomberg, Robert Shiller said that while U.S. equities are now “highly priced,” they could still go “a lot higher,” and adding that "the U.S. is just doing great right now in terms of the strength of the economy and the stock market,” with Trump’s tax cuts and deregulation moves helping stoke sentiment. Of course, sooner or later the hangover from the sugar high will come...

In geopolitical news, North Korea said US sanctions over cyber-attack is a smear campaign against North Korea and that the US is misleading as if North Korea were behind the Sony hack, while it warned that sanctions could impact implementation of US agreement.

Elsewhere:

• Italian Deputy Finance Minister Castelli states that the nation’s citizen’s income will commence on Jan 1st, 2019 and will be a minimum of EUR 7880mln.
• Mexico NAFTA negotiator Smith Ramos said it is ideal to keep NAFTA trilateral, but they remain prepared to proceed with a bilateral deal with US.
• Former Trump campaign manager Manafort was reported to have agreed a plea deal with Special Counsel Mueller although reports noted it was unclear if he is agreeing to cooperate with prosecutors or is conceding to a guilty plea, while sources later stated that a Manafort plea deal with Special Counsel Mueller is close but not there yet.
• Turkish President Erdogan said they have faced a "heinous" attack against Turkey after US statements, the rise in TRY above 7 was an economic assassination attempt. He added that in 15 years the inflation target of the central bank was

never correct and that we will see the results of central bank independence after the rate hike

The oil market is languishing around yesterday’s lows after the previous sessions losses of over 2%. Brent and WTI are both set for gains of over 1.5% this week, as weather reports remain in focus, with Hurricane Florence set to make landfall in North Carolina today. In the metals scope, gold is currently benefitting from a softer USD and is currently up 0.5% on the day. LME copper has remained stable around two-week highs as traders remain wary of trade talks, after US President Trump said the US “are under no pressure to make a deal with China, they are under pressure to make a deal with us” in Thursday’s session.

Market Snapshot

• S&P 500 futures up 0.2% to 2,909.75
• STOXX Europe 600 up 0.2% to 377.10
• German 10Y yield rose 0.7 bps to 0.43%
• Euro up 0.2% to $1.1709
• Brent Futures up 0.3% to $78.39/bbl
• Italian 10Y yield unchanged at 2.589%
• Spanish 10Y yield rose 0.7 bps to 1.476%
• MXAP up 1.2% to 162.17
• MXAPJ up 1.2% to 520.16
• Nikkei up 1.2% to 23,094.67
• Topix up 1.1% to 1,728.61
• Hang Seng Index up 1% to 27,286.41
• Shanghai Composite down 0.2% to 2,681.64
• Sensex up 0.8% to 38,015.35
• Australia S&P/ASX 200 up 0.6% to 6,165.33
• Kospi up 1.4% to 2,318.25
• Gold spot up 0.4% to $1,206.63
• U.S. Dollar Index down 0.1% to 94.46

Top Overnight News

• Hurricane Florence is swirling closer to the U.S. East Coast, battering the Carolinas with water and wind and threatening to unleash widespread destruction. The North Carolina coast was subject to life-threatening storm surge and heavy rain at around 4 a.m. local time
• BOE Governor Mark Carney gave a stark warning of the dangers of a no-deal Brexit that could see mortgage rates raised even as economic output and house prices tumble. At a meeting with the U.K. Cabinet, he said crashing out without an agreement could lead to a fall in the pound and higher tariffs, pushing inflation higher, people familiar with the matter said
• Italian Finance Minister Giovanni Tria’s political future is shaky; he’s being squeezed between investor demands to uphold EU rules and the extravagant spending plans of his fractious coalition, as budget time approaches.
• Turkish President Recep Tayyip Erdogan resumed his criticism of the nation’s central bank a day after it announced the biggest rate hike of his rule. “It’s currently my phase of patience, but there is a limit to this patience,” Erdogan said on Friday
• China’se economic momentum weakened in August, with a slowdown in investment overshadowing solid retail sales and industrial production data
• Turkish companies and households bought up to $2b of foreign currency following Thursday’s central bank decision, according to Istanbul-based currency traders who declined to be named
• From a Swiss perspective it would certainly be ideal if other jurisdictions would normalize monetary policy, Swiss National Bank President Thomas Jordan said
• U.S. President Donald Trump swaggered ahead of a possible new round of tariffs talks with China, boasting he has the upper hand in the burgeoning trade war and feels “no pressure” to resolve the feud
• A date has not yet been set for the next round of U.S.-Japan trade talks, but Japan is aiming for late September, Economic Revitalization Minister Toshimitsu Motegi said
• Bank of Japan’s newly introduced forward guidance was drafted with overseas investors in mind, reflecting an effort to avoid any sharp reaction in the yen and stocks, according to people familiar with discussions at the central bank

Asian equity markets traded mostly higher as the region took impetus from the US where the S&P 500 notched a 4th consecutive gain and the Nasdaq outperformed as tech rebounded with a vengeance. ASX 200 (+0.6%) and Nikkei 225 (+0.9%) were higher in which miners led the broad gains in Australia, while Japanese exporters benefitted from a weaker currency which lifted the benchmark index to above the 23,000 level. Elsewhere, Hang Seng (+0.8%) and Shanghai Comp. (-0.1%) were both initially positive after continued liquidity efforts by the PBoC, although sentiment in the mainland eventually waned as amid weakness in Shenzhen and as participants digested mixed data in which Industrial Production printed in-line with expectations and Retail Sales beat, while Fixed Assets Investments growth declined to a fresh multi-year low. In addition, recent Trump comments also spurred some apprehension after he commented the US are under no pressure to make a deal with China and that it is China which is pressured to reach an agreement. Finally, 10yr JGBs are uneventful with demand for safe-havens dampened by the positive risk appetite in Japan, but with downside also capped amid the BoJ’s presence in the market for JPY 700bln of maturities in the short-end to belly.

Top Asian News

• Philippine Finance Chief Spurns Calls for Early Rate Hike
• China’s Choices Narrowed by Debt as Trump Threatens Economy
• Hong Kong Highly Likely to Issue Typhoon Signal 8 Sunday
• He Was at Trump Tower. He Says He’s No Spy. Now He’s Suing
• Glencore Returns to Japan Coal Talks Scuppered by High Prices

European equities have started the day on the front foot. The DAX is leading the way in the equities space, driven by  Infineon, who are benefitting from broad-based IT sector strength after yesterday’s outperformance in the US. The SMI is currently the laggard and weighed on by Roche’s announcement of a “moderate” sales growth in 2019. UK homebuilders are struggling after comments from BoE’s Carney stating that UK home prices could fall by over 35% if there is a “no-deal” Brexit. Investec announced the demerger of their asset management business, and are currently leading the gains in the Stoxx 600.

Top European News

• Hong Kong Tycoon Li Is Said to Weigh U.K. Infrastructure IPO
• Investec Spins Off Asset-Management Unit as Founders Depart
• Buy Amer as Market Overly Pessimistic on M&A: Everbright SHK
• Miners Rebound From Bear Market Levels on Trade-Talks Optimism

In currencies, it was another downturn in the index and for the Greenback overall, partly on a further reflection post-benign US CPI, but also or perhaps mainly due to relative strength in rival currencies. The DXY remains below 94.500 and not far from recent lows, with more data on the horizon via retail sales, ip and business inventories before preliminary Michigan sentiment for September. G10 - All majors are ahead vs the Usd, bar the Loonie that continues to trade around the 1.3000 handle awaiting more NAFTA news. The Kiwi has overtaken its Aussie peer with some independent impetus overnight from firmer NZ manufacturing PMI growth to extend gains towards 0.6600, while Aud/Usd continues to look heavy above 0.7200. Elsewhere, Cable and Eur/Usd appear more comfortable on 1.3100 and 1.1700 handles respectively, amidst largely positive Brexit vibes at the UK-EU level if not on the domestic front, with the former eyeing 1.3150 and latter filling a chunk of bids/stops at 1.1715 before fading ahead of the 1.1734 August peak and strong chart resistance at 1.1750. Usd/Jpy continues to trade against the broad trend, but has retreated from 112.00+ highs to sub-111.88 Fib levels again, as 112.15 technical resistance held firm. EM - Try back in focus with another attempt to probe post-CBRT peaks around 6.0000 vs the Usd thwarted by more rhetoric from Turkish President Erdogan aimed at the US again, but also reiterating his stern opposition to higher rates. The Lira duly weakened in response, as has become an all too familiar pattern, but is off worst levels with some tangible support from data showing a narrower than forecast current account deficit. Elsewhere, the Rub is hedging bets around 68.4700 vs the Usd ahead of the CBR policy decision that is widely expected to be a ‘hawkish hold’.

In commodities, the oil market is languishing around yesterday’s lows after the previous sessions losses of over 2%,. Brent and WTI are both set for gains of over 1.5% this week, as weather reports remain in focus, with Hurricane Florence set to make landfall in North Carolina today. In the metals scope, gold is currently benefitting from a softer USD and is currently up 0.5% on the day. LME copper has remained stable around two week highs as traders remain wary of trade talks, after US President Trump said the US “are under no pressure to make a deal with China, they are under pressure to make a deal with us” in Thursday’s session.

Looking at the day ahead, the main highlight is probably the August retail sales report which is expected to show a +0.5% mom ex auto and gas print and +0.4% control group reading. Also due is the August import price index reading, August industrial production, July business inventories and finally a first look at the September University of Michigan consumer sentiment print. Away from that, the BoE’s Carney is due to speak again today, this time in Dublin at 11am BST while the ECB’s Nowotny also speaks this morning on a panel in Vienna. In the afternoon the Fed’s Evans (2pm BST) and Rosengren (3pm BST) are scheduled to make remarks.

US Event Calendar

• 8:30am: Retail Sales Advance MoM, est. 0.4%, prior 0.5%; Retail Sales Ex Auto MoM, est. 0.5%, prior 0.6%
• 8:30am: Import Price Index MoM, est. -0.2%, prior 0.0%; Export Price Index MoM, est. 0.0%, prior -0.5%
• 9:15am: Industrial Production MoM, est. 0.3%, prior 0.1%; Capacity Utilization, est. 78.2%, prior 78.1%
• 10am: Business Inventories, est. 0.55%, prior 0.1%
• 10am: U. of Mich. Sentiment, est. 96.6, prior 96.2; Current Conditions, prior 110.3; Expectations, prior 87.1

DB's Jim Reid concludes the overnight wrap

Ten years ago tomorrow will be the anniversary of the Lehman default and I think that the biggest proof that we’re still in the long shadow of the GFC is the fact that around 25% of the global economy still operates under negative policy rates.

So it was apt in this anniversary week that yesterday saw an ECB that continued to flag that rates will be on hold in negative territory through next summer at least. Their policy meeting was pretty much as expected. Further details below but in reading Mark Wall’s review last night ( link ) what struck me from his analysis is that the recent revival in wage inflation in Europe is looking sustained. Although good news, if this continues life gets a bit more complicated for the ECB if an internal crisis hits (e.g. Italy) because they may not have the cover of ultralow inflation to intervene as aggressively as they have done in the past. Anyway, a story for another day, especially as US CPI disappointed yesterday.

Before that the biggest story of an eventful day was the larger than expected rate hike out of Turkey which saw the Lira trade in an 8.52% intraday range (closed +4.32%) which was pretty impressive as the range throughout the whole of September prior to yesterday was ‘only’ 6.69%. The 625bp hike in the one week repo rate to 24% completely smashed the consensus expectation for 21% and in fact was also higher than forecasts predicted by 21 of the 22 surveyed in Bloomberg. The overnight and late liquidity window lending rate were also hiked by 625bps to 25.5% and 27% respectively which meant the Bank kept the symmetric corridor framework while the CBT also announced the Bank’s decision to start funding banks again from the one-week repo rate, as opposed to overnight lending facilities, which therefore means the effective rate will reach 24%. For our Turkey Chief Economist, Kubilay Ozturk, yesterday’s move was in his view a strong signal about the authorities’ determination to address the ongoing currency and confidence crisis before it turns into something costlier. The path for macro stabilization has kicked off but with plenty of potential headwinds still ahead and an economy that is deteriorating sharply due to these actions.

However, for yesterday this was seen as overwhelmingly positive, especially after President Erdogan’s comments earlier in the session caused the Lira to depreciate as much as -3.20%. Erdogan instituted a decree that will force most Turkish entities to stop using foreign currencies to lend or borrow. The measure could de-incentivize dollarization over the medium term, but since it was paired with market unfriendly-comments, e.g. repetition of Erdogan’s assertion that higher interest rates cause inflation, the market took it negatively. After its steep depreciation, the Lira then rallied after the rate hikes to close 7.55% off the intraday lows.

The second big surprise of the day came with the August CPI report in the US where, at an unrounded +0.0818% mom, the core reading came in with decent daylight under the +0.20% consensus. As a result, the annual rate dipped two-tenths to +2.2% yoy and back to levels last seen in May. The details revealed that a big drop in apparel inflation – the largest since the 1940s – was a big contributor to the soft print while medical services inflation also fell by the second most since 1975. As a result, the 3-month and 6-month annualized readings are now down to +1.96% and +1.88% respectively. Our economist believe one-offs can explain some of the softness but not all of it. One to watch going forward.

Markets generally liked the news flow yesterday with the S&P 500 closing +0.53% while the NASDAQ and DOW climbed +0.75% and +0.57% respectively. Apple (+2.42%) rose after its refreshed product launch and I’m still undecided as to whether I’m going to join the online queue at 8.01am this morning!! Elsewhere the VIX (-0.77pts) closed back under 13 for the first time since last month. The Dollar index closed down a reasonably modest -0.30% while 10y Treasury yields finished 0.9bps higher at 2.972% after trading as low as 2.943% post-CPI. In Europe equity markets underperformed (Stoxx600 -0.15%) and Italy  lagged (-0.56%) while bonds finished broadly flat to a couple basis points higher. EM FX did rally to the tune of +0.60% helped by that move in TRY (+4.32%).

This morning in Asia markets are for the most part feeding off that positive tone on Wall Street last night. The Nikkei (+0.95%), Hang Seng (+0.81%), Kospi (+1.23%) and ASX (+0.64%) are all firmer although bourses in China are more flat to slightly down. That follows the latest August activity indicators in China which were slightly mixed. Retail sales printed at a slightly better than expected +9.0% yoy (vs. +8.8% expected), industrial production was in line at +6.1% yoy although fixed asset investment did miss (+5.3% yoy vs. +5.6% expected).

Staying with China, Reuters has reported that China will not “surrender” to the US demands on trade talks according to a state paper released today. This follows President Trump’s tweet yesterday (more on that shortly) so it appears that China are digging their heels in somewhat.

Back to the ECB. It wasn’t really a huge game changer especially in light of the surprises above. We got confirmation that QE will be phased out in the final quarter of this year albeit still “subject to incoming data”. So keeping some optionality. Rates guidance was also left unchanged while the main takeaway from Draghi was the acknowledgment of risks from emerging markets, financial market volatility and the trade war. Italy was addressed but only insofar as “waiting for the facts” while, as expected, the council made modest downward revisions to growth and core inflation – although interestingly there was mention of wages picking up (see Mark Wall’s piece). Even the emerging market risk was caveated with the mention that the spillover hasn’t been substantial. Nothing particularly ground-breaking then.

The award for the least exciting event of the day yesterday meanwhile went to the BoE. As expected there was no change in policy following a unanimous 9-0 vote to keep rates on hold. The Bank was more hawkish on growth for this year (Q3 to +0.5% qoq from +0.4%) while comments around consumer spending were upbeat. However, this was balanced by obvious signs of caution on the committee related to Brexit and also mentions of a deteriorating global environment. So fairly unexciting. Sterling finished +0.49% but was unchanged through much of the BoE with the rally coming post the US CPI report.

Staying with the UK, yesterday we got confirmation that the UK had pledged to provide the relevant info needed to solve the Irish border impasse. EU negotiators had asked for data on the volume of goods that flow from Northern Island to the UK, and they will apparently seek a solution to the issue that does not result in a hard border within the UK. Not groundbreaking news, but a potential signal that the two sides are making progress toward a November deal.

In terms of other news to highlight, the US is working on new Russia sanctions as a response to the nerve-agent attack in the UK earlier this year. The ruble, despite some support from higher oil prices, has depreciated 15.55% this year, the fifth worst performance among major emerging market currencies, partially due to geopolitical pressures.

Back to economic data, nothing was as significant as the CPI print. Still, last week’s US initial jobless claims were at 204,000, down marginally to a fresh 35+ year low. The US Treasury’s August budget deficit printed slightly wider than expected at -$214.1. This year’s cumulative budget deficit is now the widest since 2011, and the evolving fiscal situation will be one to watch. On the Fedspeak front, Atlanta Fed President Bostic broadly confirmed his existing views. He supports gradual rate hikes moving forward and views the risks to the outlook as balanced. Finally, in a tweet, President Trump hinted that the next round of tariffs on imports from China could come soon, saying that “we will soon be taking in Billions in Tariffs”. The S&P 500 did fall -0.17% on the tweet (though it later more than retraced the move) and the offshore Yuan depreciated 0.29%  immediately following the tweet. The Yuan eventually retraced a bit to close 0.10% weaker.

As for the day ahead, well it might be comparatively less packed compared to Thursday but there’s still some potentially interesting data releases to watch. This morning in Europe we’ll get the July trade balance for the euro area while in the US this afternoon the main highlight is probably the August retail sales report which is expected to show a +0.5% mom ex auto and gas print and +0.4% control group reading. Also due is the August import price index reading, August industrial
production, July business inventories and finally a first look at the September University of Michigan consumer sentiment print. Away from that, the BoE’s Carney is due to speak again today, this time in Dublin at 11am BST while the ECB’s Nowotny also speaks this morning on a panel in Vienna. In the afternoon the Fed’s Evans (2pm BST) and Rosengren (3pm BST) are scheduled to make remarks.