Markets: Neutral - Thursday, September 27
The stick-shift is likely not far from the 8-track tape. Dinosaurs in the history of technology wrapped around transportation and entertainment, but they remain part of the history and culture. Describing neutral was much more straightforward when you had a clutch. Perhaps that is the lesson for the Fed Chair Powell as the removal of the “accommodative stance” phrase sent markets into a overdrive yesterday and that despite a heavy slate of economic data, more central bank decisions and pronouncements, it’s the key driver with a solid second place to the Italian Budget. Latest headlines on Italy are that the coalition parties have agreed on a deficit above 2.0% of GDP, but that Fin Min Tria is holding to a target of 1.6% of GDP under threat of resignation with meetings ongoing today. This leaves the EUR vulnerable and the USD up on the day. The issue for the USD and US bonds rests on how wide neutral rates are to the FOMC – 2-3% is the best guess after the dot plots with consensus for a December hike and 2-3 more in 2019 from the market. The overall mood for a FOMC that bought wiggle room to be slower is surprisingly negative with central bankers clearly underscoring the global uncertainty of trade first and foremost. This puts the C/A and growth of the USD against the rate differentials and path of other central banks as the key for understanding the forecasts for FX but for risk overall, its less clear as a weaker USD is also less reliable as a safe-haven. We are in neutral in trend and with the FOMC meaning a range with 92.50 against 95.50 key.
Question for the Day: Is Asia the risk for 2019? Markets maybe a bit vulnerable to rethinking the consensus views into October with Goldilocks less clear post the FOMC. The view on growth in 2019 also is a risk with many expecting a US slowdown now less sure and with more doubt about Asia next year as trade hopes wane. The FT Focus survey on Asian 2019 growth is a must read for all those in EM looking for a bottom.
The 19 largest economies across emerging Asia will expand by 5.8 per cent in 2019, according to the forecasts collated by FocusEconomics. While this is highly likely to outstrip growth anywhere else in the world, it would represent a slowdown from a projected 6 per cent growth rate this year and would be the weakest reading since 2001, when regional growth fell to 5 per cent as the tech bubble burst.
What Happened?
- RBNZ leaves OCR unchanged at 1.75%- as expected – downside risks to growth remain despite 2Q GDP. The RBNZ included "global trade tensions" in the one-page statement, which indicates its significance to the monetary policy outlook and is a downside risk. "Trade tensions remain in some major economies, increasing the risk that ongoing increases in trade barriers could undermine global growth," the RBNZ said. On the other hand, the RBNZ reiterated that robust global economic growth and a lower New Zealand dollar exchange rate is expected to support demand for New Zealand's exports.
- BOJ Kuroda: Will keep easy policy even with expanding economy. In a speech at the annual meeting of the Japan Securities Dealers Association, Kuroda also said the BOJ would maintain "its firm stance of achieving the price stability target" of 2%. Kuroda remained optimistic on Japan's economic outlook, saying, "Japan's economy is expanding moderately, with a virtuous cycle from income to spending being maintained in both the corporate and household sectors." The economy is likely to continue its moderate expansion, although the BOJ needs to pay attention to recent protectionist developments. Kuroda also noted there were no observed signs of overheating in financial conditions.
- China August industrial profits slow to 9.2% y/y at CNY519.69bn after 16.2% in July. Industrial profits for the Jan-Aug period, dragged by the plunge in August, rose by 16.2% y/y to CNY4.42 trillion, slowing down from the 17.1% y/y growth recorded in July. Out of 41 industries, 34 industries, including most mining and manufacturing, saw profits rise y/y, while 7 saw profits decline. State-owned enterprises' profits rose 26.7% y/y to CNY1.35 trillion, compared with a 30.5% increase in Jan-Jul.
- Indonesia Central Bank raised rates 25bps to 5.75%- as expected – cites C/A and global uncertainty.“The decision is consistent with ongoing efforts to lower the current account deficit within a manageable threshold while maintaining the attractiveness of the domestic financial markets, thus further strengthens Indonesia’s external resilience despite widespread global uncertainty….”
- ECB August M3 slows to 3.5% y/y after 4% - less than 3.8% expected. The M1 growth also slows to 6.4% from 6.9%. The private loans to households rise to 3.1% after 3% - as expected – while private loans to non-financials rose to 4.2% from 4.0%.
- German State September CPI reports imply national rate up 0.4% m/m, 2.3% y/y – more than 2.0% y/y expected. The preliminary HICP also likely more than expected at 0.3% m/m, 2.2% y/y
- Saxony 0.4% m/m, 2.3% y/y after 2.0% y/y – more than expected
- Bavaria 0.5% m/m, 2.5% y/y after 2.2% y/y – more than expected
- Brandenburg 0.3% m/m, 2.1% y/y after 2.1% y/y – more than expected
- Hesse up 0.5% m/m, 1.9% y/y after 1.7% y/y – as expected
- NRW rose 0.4% m/m, 2.3% y/y after 2.0% y/y – more than expected
- BW up 0.6% m/m, 2.5% y/y after 2.1% y/y – more than expected
- German October GfK Confidence Survey points to 10.6 from 10.5 – as expected. Both economic and income expectations are on the rise, whilst propensity to buy has taken a slight hit.
- Italy September consumer confidence rises to 116 from 115.3 – better than 114.9 expected. All components improved with economic (137.8 from 136.7), personal (109.3 from 108.5), current (114.1 from 112.8) and future outook (120.2 from 119.3). Inflation outlook dropped to -14.8 from -12.1. Business confidence declines to 103.7 from 103.7 even with manufacturing rising to 105.7 from 105.0 – better than the 104.5 expected. Construction fell to 136.9 from 139.3 but services rose to 105.1 from 104.7
- Eurozone September Economic Sentiment slows to 110.9 from 111.6 – weaker than 111.2 drop expected. The Business Climate slows to 1.21 from 1.22 – better than 1.19 expected. The Consumer Confidence drops to -2.9 from -1.9, Industry to 4.7 from 5.6 but Services rise to 14.6 from 14.4, construction rises to 8.3 from 6.4 and retail rose to 2.7 from 1.9.
Market Recap:
Equities: The US S&P500 futures are off 0.1% after losing 0.33% yesterday. The Stoxx Europe 600 is off 0.4% with Italy budget fears. The MSCI Asia Pacific fell 0.5% while the all-country World is off 0.2% - worst in a week.
- Japan Nikkei off 0.99% to 23,796.74
- Korea Kospi up 0.70% to 2,355.43
- Hong Kong Hang Seng off 0.36% to 27,715.67
- China Shanghai Composite off 0.54% to 2,791.78
- Australia ASX off 0.13% to 6,399.30
- India NSE50 off 0.69% to 10,977.55
- UK FTSE so far up 0.2% to 7,525
- German DAX so far off 0.3% to 12,351
- French CAC40 so far off 0.15% to 5,504
- Italian FTSE so far off 1.3% to 21,370
Fixed Income: Bid day for bonds with Italy worry beating out higher German CPI and FOMC seen as less scary despite ongoing rate hike path – UK Gilts lead the core with 10-year yields there -1.7bps to 1.575%, German Bunds off 1.5bps to 0.51%, French OATs off 1bps to 0.83%. Periphery is all about Italy still – BTPs after auction up 5bps to 2.905%, Spain off 0.7bps to 1.515%, Portugal off 1bps to 1.87% and Greece up 2bps to 4.02%.
- Italy sold E2bn of BTPs – with lower rates and lower demand– E2bn of 5Y 2.45% Oct 2023 at 2.03% with 1.42 cover – previously 2.44% with 2.12 cover – E2bns of 10Y 2.8% Dec 2028 BTP at 2.9% with 1.44 cover – previously 3.25% with 1.37 cover – and E1.25bns of 7Y Sep 2025 CCTeu at 1.77% with 1.67 cover – previously 2.31% with 2.77 cover
- US Bonds are flat waiting for more data and supply- with 2Y 2.815%, 5Y 2.945%, 10Y 3.048%, and 30Y at 3.181%.
- Japan JGBs unwind curve steepening after Rinban– 2Y off 0.3bps to -0.125%, 5Y off 1bps to -0.08%, 10Y off 0.7bps to 0.106% and 30Y off 2bps to 0.88%. BOJ left buying unchanged today – 1-3Y cover 2.71 from 2.6, 3-5Y cover 2.41 from 2.43, 10-25Y cover 2.67 from 3.16 and 25+Y 3.41 from 4.40.
- Australian bonds rally on risk-off, RBNZ– 3Y off 3bps to 2.068%, 10Y off 4.5bps to 2.685%.
- China PBOC drains net CNY60bn after it skips open market operations. This is the 5thday of draining liquidity. Money markets were mixed with 7-day up 0.5bps to 2.696% but O/N off 10bps to 2.435% and 10Y bonds rallied with yields off 3bps to 3.62%.
Foreign Exchange: The US dollar index is up 0.3% to 94.48 with 94.64-94.21 range and focus on 93.95-94.75 breakouts. In EM USD is offered- EMEA:– ZAR up 0.1% to 14.12, RUB up 0.2% to 65.72, TRY up 1% to 6.0450; while in Asia same: TWD up 0.3% to 30.57, INR flat at 72.59 and KRW up 0.45% to 1112.75.
- EUR: 1.1715 off 0.2%.Range 1.1684-1.1757 with Italy and FOMC driving 1.1680 test with 1.18 still key and risk of 1.1550 again looming.
- JPY: 112.80 flat. Range 112.56-112.90 with EUR/JPY 132.10 – focus is on EUR not JPY with risk in equities/China trade worries still key.
- GBP: 1.3135 off 0.25%.Range 1.3108-1.3179 with EUR/GBP .8115 flat – still all about Brexit and politics.
- AUD: .7225 off 0.35%.Range .7222-.7268 with commodities and China driving – RBNZ key as well – NZD off 0.3% to .6645 with .6580 next key.
- CAD: 1.3060 up 0.3%.Range 1.3015-1.3066 with 1.3050 pivot for 1.32 test again – all about NAFTA hopes dashed with rates/oil and Poloz key.
- CHF: .9705 up 0.5%. Range .9648-.9709 with EUR/CHF 1.1370 up 0.3% - this flashes Italy isn’t a concern but SNB noise key.
- CNY: 6.8642 fixed 0.11% weaker from 6.8571, trades weaker at 6.8770 into London from 6.8740 close yesterday.
Commodities: Oil up, Gold up, Copper off 0.75% to $2.8150.
- Oil: $72.31 up 1%.Range $71.97-$72.60 with Brent $81.87 up 0.65% - all about OPEC still with $72 pivot and $70-$75 range in WTI.
- Gold: $1195.25 up 0.1%with Range $1192-$1196 despite USD up, gold bid on Italy, EM with 55-day at $1206.60 and base at $1183 key. Silver up 0.6% to $14.41 with 55-day at $14.847 next against $14 base. Platinum up 0.8% to $829.40 and Palladium up 1.35% to $1083.
Conclusions: Is the US digging in for a longer trade war? The WSJ raises a key question for market consensus about risk namely whether the summer view that trade tariffs are smoke used by Trump to win deals leading to a better 2019 global growth story – or not and that we need to prepare for a protracted cold war. Greg Ip writes. “The Chinese don’t want the technological dependence, and the U.S. doesn’t want the persistent trade deficits,” says Brad Setser, a China expert at the Council on Foreign Relations. If that's the case, tariffs might not be a temporary stop on the way to a negotiated solution. The longer tariffs remain in place, the more multinationals that want to sell to the U.S. will seek alternatives to China to source production.
Economic Calendar:
- 0830 am US weekly jobless claims 201k p 207k e
- 0830 am US 2Q final GDP 2.2%p 4.2%e / price index 3.2%p 3.2%e / Core PCE 2.2%p 2.0%e
- 0830 am US Aug wholesale inventories 0.6%p 0.2%e
- 0830 am US Aug goods trade deficit $72.2bn p $70bn e
- 0830 am US Aug durable goods orders -1.7%p +2%e / ex transport 0.2%p +0.4%e
- 1000 am US Aug pending home sales (m/m) -0.7%p +0.9%e
- 1230 pm US Dallas Fed Kaplan Speech
- 0100 pm US 7Y $31bn note sale
- 0430 pm US FOMC Powell speech
- 0545 pm Canada BOC Poloz speech
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