For some investors, yesterday was a tipping point as President Trump delivered a rare criticism of the Fed, saying he hoped they would stop raising rates, complaining about USD gains and China. This sent the USD lower as many see the US Treasury intervention risk in further USD gains as possible again – something that brings back talk of a Plaza Accord. The focus on FX and rates continued overnight with China and the CNY running to 12-month lows at 6.8128 only to find intervention over 6.80 and close up 0.1% to 6.7725 on the day. The correlation of CNY to China shares is extreme and the intervention lifted the Shanghai Composite notably today. The European session opened with BTP back in focus as La Repubblica reported that League's Salvini and 5-Star Movement Maio are united against Finance Minister Tria's CDP leader nomination and have threatened to seek Tria's resignation, and also while Corriere Della Sera had an article quoting Claudio Borghi that he is convinced Italy will leave the EUR sooner or later. Like CNY, BTPs reverse when 5SM Maio in an Ansa newswires denies clashing with Tria. While the Italy political back-and-forth drove readers of news, it also delivered volatility. The question is whether this CNY or BTP movement matters just as many yesterday afternoon wondered if Trump’s USD and Rate harangue matters.  Politics don’t matter until there is contagion and then disparate things correlate to one like the USD, China trade tariffs, and Italian debt – and that is where today starts to be interesting – with the Asia junk bond market beginning to tip over tying into CNY levels and BTP pain. The ICE/BoAML Asian junk bond index represents just $138.1bn – but its trading 2% over the world average and now is over 9%.

There are some that will ignore today and find it just another summer Friday, filled with less news, less trading and less reason to bend from just being passively long risk and ignoring politics for now. Tipping points are that way, they surprise, and in FX, the markets are watching a fixed game with the USD/CNY, leaving plenty of room for other better barometers to lead – like EUR/JPY.  This maybe the one that makes it a beach day or a bad day with 130.60 key.

 Question for the Day: Is this all just about the mid-terms? The US President’s comments over the last 2 weeks have stirred many positions from their beach slumber into volatility overdrive. Some see the US President as on a constant campaign for re-election. The oil market threat of using the SPR to cap prices and the pressure put on Saudi haven’t really worked though oil is still on the lower end of its 4-week range. The correlation of voters and consumers to gasoline prices is worth considering and the role of US rates and the USD in the mess as well. Perhaps the right way to trade summer markets is to go to the local store and poll voters, forget about 2Q earnings or US bond auctions.

For further reading on this point – see this Bloomberg article. Or to be more cynical, the Trump push for tariffs and such links to his disapproval with voters and his latest concerns maybe in the outliers of rising disapproval and a sharp drop in support from the last few days.

What Happened?

• Japan June national core CPI rose 0.8% y/y after 0.7% y/y  - less than 0.9% y/y expected. The June core-core CPI rose 0.2% y/y after 0.3% y/y also less than 0.4% y/y expected. The total national CPI rose 0.7% y/y unchanged from May. The CPI was weighed down by lower mobile communications charges due to the base-year effect that will continue through July. Last August, some carriers changed the fee structures, giving discounts to low data volume users. In addition to this, a leading carrier began offering further discounts. Energy costs rose 7.3% y/y from 5.6% y/y while food ex-perishables slows to 0.7% y/y from 1.1%. Goods prices excluding volatile fresh food prices rose 1.4% on year in June, accelerating from +1.2% in May. The prices for processed food (canned food, bread, snacks, beverages, etc.), which accounts for about 15% of the total CPI, rose 1.1% on year in June after +1.0% in May.  Household durable goods were -2.9% after -3.5% y/y while electronics were -2.9% after -3.8% y/y. Accommodations rose 2.1% after -1.8% y/y while overseas tours rose 11.7% after 5.6% y/y.

• German June PPI up 0.3% m/m, 3.0% y/y after 0 0.5% m/m, 2.7% y/y – slightly more than 2.9% y/y expected. Energy rose 0.7% m/m, 6.2% y/y after 5.5% y/y. Capital goods rose 0.1% m/m, 1.3% y/y after 1.2% y/y while basic good rose 0.4% m/m, 3.2% y/y after 2.6% y/y.
• Eurozone 1Q government debt rose to E9.8trn, 86.8% of GDP from E9.7trn and 86.7% of GDP. The budget deficits rose 0.1% of GDP vs. 0.6% in 4Q. Current Account E28.4bp p E26b e

• UK June PSNB GBP4.53bn after GBP4.29bn in 2017 June – as expected – 11-year lows. The borrowing ex-financial GBP5.394bn after GBP6.239bn in June 2017.  The year-to-date borrowing fell 24.4% off GBP16.8bn from 2017. The debt/GDP ex BOE now 76.1% from 79.6% from June 2017. The drop in PSNF was helped by a readjustment of EU budget payments, which flattered the government's fiscal position by GBP0.5bn in comparison with the same month of 2017. Also following a rebound in consumer spending in recent months -- retail sales jumped by 2.1%q/q in Q2 -- value-added tax receipts surged by 4.0%y/y to GBP11.9bn in June. VAT calculations are based in part on HMRC forecasts.

Market Recap:

Equities: The US S&P500 futures are off 0.19% after losing 0.4% yesterday. The Stoxx Europe 600 is off 0.75% after opening down 0.2% - focus is on trade tariffs, FX. The MSCI Asia Pacific rallied led by China and talk of easing – bouncing from early losses – up 0.3% despite Japan losses.

• Japan Nikkei off 0.29% to 22,697.88
• Korea Kospi up 0.30% to 2,289.19
• Hong Kong Hang Seng up 0.76% to 28,224.48
• China Shanghai Composite up 2.04% to 2,829.15
• Australia ASX up 0.35% to 6,377.40
• India NSE50 up 0.48% to 11,010.20
• UK FTSE so far off 0.35% to 7,656
• German DAX so far off 0.85% to 12,574
• French CAC40 so far off 1% to 5,363
• Italian FTSE so far  off 0.95% to 21,674

Fixed Income: Risk jitters and BTPs dominated the EU morning trading with politics in Italy driving along with Trump tariff and FX as noisemakers. Core bonds are tracking US – UK Gilt 10-year yields up 0.5bps to 1.19%, German Bunds flat at 0.33%, French OATs up 1bps to 0.63% while periphery suffers with Italy up 6.5bps to 2.565%, Spain flat at 1.275%, Portugal flat at 1.74% and Greece up 1bps to 3.83%.

• US Bonds are lower with curve steeper – with focus on FOMC vs Trump along with equities – 2Y up 0.4bps to 2.595%, 5Y up 0.9bps to 2.742%, 10Y up 1.1bps to 2.849% and 30Y up 1.1bps to 2.969%.
• Japan JGBs see curve steeper with focus on equities, new supply – 10Y off 0.5bps to 0.035% while 40Y up 0.5bps to 0.805% - with focus on next week’s 40Y sale. The MOF sold Y398.9bn of 1-5Y JGBs in a liquidity auction with cover 3.91 up from 3.65.
• Australian bonds rally with focus on China, AUD drop and CPI next week – 3Y bond yields off 3bps to 2.09% and 10Y off 4bps to 2.62%.
• China PBOC skips open market operations net adds CNY540bn on the week. Money market rates fell with 7-day off 1bps to 2.626% and O/N off 6bps to 2.324%. 10Y bond yields rose 9bps to 3.51%.

Foreign Exchange: The US dollar index is flat at 95.16 with focus stuck on 94.90 against 95.53. In Asian EM FX, USD mixed with focus on CNY, KRW off 0.05% to 1134 with 1132 now pivot. TWD off 0.25% to 30.716. INR up 0.3% to 68.835. In EMEA, TRY flat at 4.8020, RUB up 0.2% to 63.471, ZAR up 0.3% to 13.499.

• EUR: 1.1650 flat. Range 1.1626-1.1674 with focus on USD not EU or ECB – BTP story not enough to return 1.16 so 1.1720 risk.
• JPY: 112.40 flat. Range 112.21-112.62 with EUR/JPY 130.95 flat. Watching CNY more than USD with 112.80 pivot and EUR/JPY 130 key.
• GBP: 1.3040 up 0.2%. Range 1.2995-1.3043 with EUR/GBP .8935 off 0.1%.  UK May speech in Northern Ireland important today, 1.30 pivot for 1.2880 or 1.3120 again.
• AUD: .7365 up 0.1%. Range .7318-.7384 with NZD .6760 up 0.2%. All about China more than rates or even metals - .7250-.7450 watch.
• CAD: 1.3245 off 0.15%. Range 1.3233-1.3290 with 1.3180-1.33 back in consolidation – oil and trade and crosses driving. CPI key today for BOC watch.
• CHF: .9980 off 0.10%. Range .9979-1.0001 with EUR/CHF 1.1630 flat. Nothing to see here – move along?  BTP pain didn’t reflect so maybe 1.00 tent.
• CNY: 6.7671 fixed 0.90% weaker from 6.7066, drives CNY to 3.8128 just after open but selling from China banks at 3.81 sends currency back lower, now up 0.1% to 6.7725.  CNH traded to 6.8367 and pulls back to 6.7950 flat on day.

Commodities: Oil mixed, Gold up, Copper up 0.45% to $2.7475

• Oil: $69.55 up 0.15%. Range $69.39-$70.45. Focus is on $68.79 the July 19 highs as pivot then $70.60 the July 13 highs as resistance with $66.12 100-day as base. Brent off 0.15% to $72.45. Watching USD, China trade story with Saudi export/US rig count back stories.
• Gold: $1224.40 up 0.1%. Range $1215-$1226 - Stuck with $1236.60 and $1204.60 as boundaries with $1220 the pivot as focus is on USD/rates/risk moods. Silver up 0.35% to $15.37, Platinum up 1.35% to $818.15, Palladium up 1.4% to $884.75.

Conclusions: Are markets going to tread water? The bulls will point to 2800 holding in the S&P500, in the ongoing 2Q earnings gains, in the steady growth in the US and low inflation. The bears will be pointing to the rest of the world volatility – particularly China – and to metals diving with car tariffs the background reason. But the one signal that many old-time macro traders don’t get is the drop in Copper, namely, the disconnect of US shares to Dr. Copper’s predictive powers. The ability for July to hold its rally into next week and prove the seasonal trend rests on the suspension of paying attention to such correlations and staying away from reading any news.

Economic Calendar:

• 0830 am Canada June CPI (m/m, y/y) 0.1%, 2.2%p 0.3%, 2.5%e / core -0.1%, 1.3%p 0.3%, 1.4%e
• 0830 am Canada retail sales (m/m) -1.2%p 0%e / ex autos -0.1%p 0.5%e