CPI

The rise of populism is not just a U.S. issue. Globalization and deregulation, especially with regard to the open adoption of new technology and work structures, is increasingly being called into question. As we have discussed previously, there is increasing potential that major political and economic changes will emerge from this vote. The emergence of Donald Trump and Bernie Sanders is a reflection that the populists want a change in the direction of American policy. We will be watching closely to see whether any serious changes result.

But Not There Yet...

After yesterday's slamming efforts, precious metals are well bid this morning following the USD flash crash this morning. Silver has regained yesterday's losses and gold is hitting one month highs...

A rate hike is coming. It is coming because the economy is not in crisis and zero rates are crisis rates, Bloomberg’s Richard Breslow writes. It is coming because the benefits of starting down the path to monetary policy normality are vitally important to the future health of the economy and restoring the Fed’s reaction function. The world can share the benefits and the costs. But one thing we do know, is that with all the hinting and polling and talk of trajectory, it is not priced in.

Because nothing says "sell bonds" like a dismally low inflation print. From the moment CPI printed (lower than expected), Treasury yields started to rise and accelerate higher as traders reflect on the chances of a delayed Fed rate hike... bad-enough news is bad news for bonds (for now) and stocks...

US Consumer Prices (CPI) missed expectations MoM with a mere 0.1% rise (half the expected 0.2% rise). Core CPI (ex food and energy) rose just 0.1% - its weakest growth since Dec 2014 with the biggest drivers being a 5.6% plunge in airfares - the biggest drop since 1995 and a 0.3% surge in 'owner equivalent rents' driven by lodging. Gas prices rose for the 3rd consecutive month (unequivocally good?) but new and used car prices tumbled.

PREVIEW: July 28th-29th FOMC minutes due at 1900BST/1300CDT
 

• Markets looking for clarification for a September or December lift-off after the FOMC statement did not send any overt signals

With China's currency devaluation having shifted to the backburner if only for the time being, all attention was once again on the Chinese stock market roller coaster, which did not disappoint: starting off with yesterday's dramatic 6.2% plunge, the Shanghai Composite crashed in early trading, plunging as much as 5% in early trading and bringing the two-day drop to a correction-inducing 11%, and just 51.2 points away from the July 8 low (when China unleashed the biggest ad hoc market bailout in capital markets history) . And then the cavalry came in, and virtually the entire afternoon session was one big BTFD orgy, leading to a 1.2% gain in the Shanghai Composite closing price, while Shenzhen and ChiNext closed up 2.2% and 2.7%, respectively.

"We Were Short… Now We Are Not!: The trend since mid-June is upward and today’s collapse in the Chinese stock market will serve only to make the bid for the US bond market that much stronger!" - Dennis Gartman

Just hours after the PBOC announced a modestly "revalued" fixing in the CNY, which curiously led to weaker trading in the onshore Yuan for most of the day before a forceful last minute intervention by the central bank pushed it back down to 6.39 it was the local stock market spinning plate - which had been relatively stable during the entire FX devaluation process - that China lost control over, and after 7 days of margin debt increases the Shanghai Composite plunged by 6.2% in late trade, tumbling 245 points to 3748, just 240 points above its recent trough on July 8, a closing level some 27% off its June peak.

What does China's "surprise" move to devalue the yuan mean for "broken" EM currencies? Nothing good, Morgan Stanley says. In short, the path ahead is riddled with exported deflation and decreased trade competitiveness against a backdrop of declining global growth and trade.

• Markets will be keeping a close an eye on what action/if any the PBoC take to try and keep Chinese growth prospects on course.
• Main releases this week come in the form of US and UK CPI reports and the FOMC minutes release

It was a quiet start to the week today with just the June Euro area trade balance (which rose €21.9bn vs €23.1 bn expected, up from €21.3 bn) in the European timezone and Empire manufacturing and NAHB housing market index for August this afternoon in the US. Under the radar, but perhaps the most news today, is the June TIC data which will likely confirm the ongoing liquidation of "FX Reserves" aka TSYs by "Belgium" aka China. Expect another $15-20 billion drop in Belgian Treasury holdings in the month of June.

It was a relatively quiet weekend out of China, where FX warfare has taken a back seat to evaluating the full damage from the Tianjin explosion which as we reported on Saturday has prompted the evacuation of a 3 km radius around the blast zone, and instead it was Japan that featured prominently in Sunday's headlines after its Q2 GDP tumbled by 1.6% (a number which would have been far worse had Japan used a correct deflator), and is now halfway to its fifth recession in the past 6 year, underscoring Abenomics complete success in desrtoying Japan's economy just to get a few rich people richer. Of course, economic disintegration is great news for stocks, and courtesy of the latest Yen collapse driven by the bad GDP data which has raised the likelihood of even more Japanese QE, the Nikkei closed 100 points, or 0.5% higher.