The summer market continues with a bias towards clipping coupons and staying on the beach but the drinks are hot and the mixture unpalatable for the long-term. Some foods don’t mix with the weather, like a hot stew in a world filled with humidity. Price action over the last 24-hours is similar to eating such a summer stew. The drop in oil prices yesterday brings back the doubts about global growth, troubles with higher volatility and role of US production and policy. The Trump/Putin news conference set the Republican Party into a tizzy as the President cast doubt on the 2016 election interference by Russia. The trade war worries in China remain central and CNH trades to 6.72 while housing prices in China rise despite less easy money and more government regulations. The jump underscores issues for reigning in bubbles. Overnight data from New Zealand – particularly the RBNZ lifting its CPI sectoral factor model – lifted NZD to lead G10 winners over the USD. RBA returned to talking about a hike next – though kept that as a long-term expectation – while the UK jobs report was good enough to keep the BOE August hike expectations high (over 90%). UK May won the vote on her Brexit plans but after excepting 4 amendments that may scuttle EU acceptance. Her conservative civil war continues. Italian industrial orders were also stronger making clear that politics haven’t hurt business there. Little news for the trading machines leaving carry, selling volatility and waiting it out as the alternatives to food disappointments. The alternatives to the USD and its risk correlation to equities is clearly in play again but the EUR and its stubborn holding over 1.17 maybe the one to watch today as the 1.1728 55-day is the pivot. As FOMC Powell and US industrial production are the next hurdles to eating a plain summer stew – expect rates to return as a key driver and the EUR to be the barometer.

Question for the Day: Is the IMF right that markets are underpricing tail-risks from trade? The July IMF WEO came out yesterday and kept its 3.9% 2018 and 2019 global growth forecast intact. There was no surprise there but the headlines from the report contrast the risks to the outlook mounting.  Here is the quick review from the IMF: In the United States, near-term momentum is strengthening in line with the April WEO forecast, and the US dollar has appreciated by around 5 percent in recent weeks. Growth projections have been revised down for the euro area, Japan, and the United Kingdom, reflecting negative surprises to activity in early 2018. Among emerging market and developing economies, growth prospects are also becoming more uneven, amid rising oil prices, higher yields in the United States, escalating trade tensions, and market pressures on the currencies of some economies with weaker fundamentals. Growth projections have been revised down for Argentina, Brazil, and India, while the outlook for some oil exporters has strengthened.

The warnings from the IMF seem clear and yet not priced in a summer focused on stuck politics, stuck market ranges. While the baseline forecast for global growth is roughly unchanged, the balance of risks has shifted to the downside in the near term and, as in the April 2018 WEO, remains skewed to the downside in the medium term.

What Happened?

• New Zealand 2Q CPI up 0.4% q/q, 1.5% y/y after +0.5% q/q, 1.1% y/y – less than 0.5% q/q, 1.6% y/y expected. This was in line with the RBNZ 2Q CPI estimates. Tradable CPI was up 0.3% q/q, 0.1% y/y while non-tradable rose 0.4% q/q, 2.5% y/y. The RBNZ revised its 1Q sectoral factor model CPI to 1.6% from 1.5% - puts 2Q to 1.7% - at the highest since 2Q 2011.
• RBA meeting minutes: Return to tightening bias. RBA reinstated the line that the next move in the cash rate would likely be up, rather than down, The RBA also pointed to quarter end flows as the driving force behind the recent round of tightening in funding rates, with no mention of demand for Australian securities, tighter money supply and the move in cross-currency basis swaps. The RBA said that the members continued to view the strengthening economy as likely to deliver further progress in reducing the jobless rate and returning inflation to target. And "in these circumstances, members continued to agree that the next move in the cash rate would more likely be an increase than a decrease." The RBA also said there was no strong case for a near-term adjustment in monetary policy.
• China Reuters June house prices rise 1% m/m, 5% y/y after 4.7% y/y – more than 4.7% y/y expected – fastest gains since Oct 2016. The NBS reported prices rose in 63 of 70 cities m/m up from 61 in May, while they rose in 61 of 70 y/y down from 62 in May. The NBS average rose 1.1% m/m, 5.8% y/y after 0.8% m/m, 5.4% y/y. China’s 31 tier-2 cities - which comprise sizeable provincial capitals - led the rally, with prices up 1.2 percent in June from a month ago,

• UK June claimant count rose 7,800 after -3,000  - weaker than +2,500 expected -May claims revised from -7,700. The May ILO 3M average earnings slows to 2.5% from revised 2.6% - as expected – with the earnings ex bonus off 0.1% to 2.7% after 2.8% - also as expected. Bonuses showed the weakest growth up 0.2% y/y since Oct 2016. Vacancies rose 7,000 to 824,000 with jobs up 137,000 to 32.40mn after 146,000 in Feb-March and the unemployment rate held steady at 4.2%.  The jobless rate fell to 4.0% in the month of May, according to experimental data, from 4.2% in April.

• Italy May industrial orders up 3.6% m/m, +4.9% y/y – best since Dec 2017. Domestic orders up 2.2% m/m while foreign rose 5.5% m/m. This brings the 3M Mar-May average -1.1% q/q to Dec-Feb. The sales were up 1.7% m/m, 5.0% y/y.

Market Recap:

Equities: S&P500 futures are off 0.08% after losing 0.10% yesterday. The Stoxx Europe 600 is off 0.25% after opening near flat with focus on earnings. The MSCI Asia Pacific fell with China trade fears.  

• Japan Nikkei up 0.44% to 22,697.36
• Korea Kospi off 0.18% to 2,297.92
• Hong Kong Hang Seng off 1.25% to 28,181.68
• China Shanghai Composite off 0.55% to 2,798.62
• Australia ASX off 0.61% to 6,288.40
• India NSE50 up 0.65% to 11,008.05
• UK FTSE so far off 0.25% to 7,583
• German DAX so far off 0.20% to 12,534 
• French CAC40 so far off 0.40% to 5,387
• Italian FTSE so far flat at 21,821

Fixed Income: Little interest but carry games with Italy leading moves – periphery rally notable – Italian 10Y yields off 6.5bps to 2.507%, Spain off 1.5bps to 1.26%, Portugal off 1.5bps to 1.745% and Greece off 0.5bps to 3.81%. Core bid on equity weakness – UK Gilt 10Y yields off 0.7bps to 1.27%, German Bunds off 0.5bps to 0.355%, French OATs off 0.5bps to 0.64%.

• Germany DFA sold E2.404bn of 0% June 2020 Schatz at -0.63% with 2.5 cover - previously -0.63% with 1.0 cover – real cover before Bundesbank 1.97 vs. 0.93.
• Spain sold E2.5bn of 3M and 9M Letras at lower rates and mixed demand – E735mn of 3M Oct 2018 bills at -0.47% with 3.44 cover – previously -0.51% with 4.48 cover – and E1.765bn of 9M Apr 2019 bills at -0.387% with 3.36 cover – previously -0.389% with 2.27 cover.
• US Bonds in holding pattern waiting for FOMC Powell and data – 2Y off 0.2bps to 2.595%, 5Y up 0.2bps to 2.755%, 10Y off 0.2bps to 2.855%, 30Y flat at 2.962%.
• Japan JGBs see curve flatteners in play but 10Y steady at 0.04%. 5Y up 0.5bps to -0.105% while 40Y off 1bps to 0.79%. BOJ left its Rinban buying of 1-3Y and 3-5Y unchanged today. The offer to cover ratio of the 1-3 Year sector jumped to 5.36 from 3.67, while the offer to cover ratio of the 3-5 Year sector eased a touch to 3.61 from 3.80.
• Australian bonds lower on syndication, slight shift in RBA minutes – 3Y up 3bps to 2.09% while 10Y up 2bps to 2.66%. The AOFM syndicated new 25Y 2.75% May 2041 bond at 3.09% with A$3.6bn.
• China PBOC injects CNY90bn on the day after adding CNY70bn in 7-day and CNY30bn in 14-day reverse repos. Money Market Rates mixed with 7-day off 3bps to 2.648%, O/N up 3bps to 2.567%. MOF sold CNY150bn in 3M deposits at 3.7% - lowest rate since June 2016. 10Y bond yields off 1bps at 3.48%.

Foreign Exchange: USD index is off 0.1% to 94.46 – still watching 93.71 base as lack of upside momentum drags with 95.53 100-week capping rallies.  In Asia EM FX, KRW leads USD weakness– KRW 1124 up 0.45%. TWD up 0.2% to 30.516, INR up 0.15% to 68.44. In EMEA, USD mostly bid with RUB off 0.3% to 62.531, ZAR off 0.5% to 13.274, TRY up 0.2% to 4.8380.

• EUR:  1.1720 up 0.1%. Range 1.1702-1.1745 – stuck in consolidation with data and rates driving 1.1680-1.1750 key.
• JPY: 112.50 up 0.2%. Range 112.23-112.57 with EUR/JPY 131.85 up 0.3%. Holding pattern with 112-113.
• GBP: 1.3225 off 0.1%. Range 1.321-1.3269 with EUR/GBP .8860 up 0.15%. Brexit politics vs. BOE hike risks. 1.3050-1.3350 holding.
• AUD: .7410 off 0.15%. Range .7402-.7438 watching metals and not tracking RBA talk, crosses key, with NZD up 0.6% to .6815 – RBNZ CPI shift driving.
• CAD: 1.3145 flat. Range 1.3111-1.3154 – oil ignored, so its about rates and 1.3080-1.3200 again.
• CHF: .9945 off 0.25%. Range .9927-.9974 with EUR/CHF 1.1650 off 0.2%. Mixed with 1.1720 capping cross and 1.00 $.
• CNY: 6.6821 fixed 0.09% weaker from 6.6758, opens 6.6870 down from 6.6838 yesterday close, trades to 6.6760 up 0.25% into London, now flat at 6.6845. CNH up 0.1% to 6.6960 in London now off 0.1% to 6.7080.

Commodities: Oil up, Gold up, Copper off 0.15% to $2.7935.

• Oil: $68.17 up 0.15%. Range $67.66-$68.42. After losing 4% yesterday, oil consolidates - WTI watching $66.70 yesterday lows then 100-day at $65.93 as support against $68.09 July 12 lows and 55-day at $68.42. Brent $72.07 up 0.3% - watching $71.12 April 20 lows and $70 bull channel base against 72.07$73.05  and $74.55.
• Gold: $1242 up 0.1%. Range $1241-$1243. USD and fear not driving so $1235-$1255 holding. Silver flat at $15.78, Platinum flat at $823.40 and Palladium off 0.5% to $916.20.

Conclusions: What can FOMC Powell do to surprise the market? The FOMC reaction function to economic data has been less clear as gradualism in the process of getting back to normal dominated the Yellen Fed. This time, the push in policy is about accommodation and the balance of risks whether trade fears and global disorder matter more than growth and inflation. The US retail sales yesterday lifted 2Q GDP outlooks and puts the market back to expecting more from the FOMC while today’s industrial production will be important, its Powell’s testimony and his forward guidance that maybe the risk for trading today.

Economic Calendar: US IP, Powell.

• 0830 am Canada May Manufacturing shipments (m/m) -1.3%p 0.6%e
• 0915 am US June industrial production (m/m) -0.1%p 0.5%e
• 1000 am US FOMC Powell Congress testimony
• 1000 am US July NAHB housing market index 68p 69e
• 0400 pm US May TIC total flows $138.7b p $52.3b e / long term $93.9b p $35b e
• 0430 pm US weekly API crude oil inventories -6.796mb p -3mb e