As readers are well aware by now, at 8:30 am today we get to see the rewriting of US GDP history back to 1929 with the revisions from the BEA. It’s a big last day of July with the Fed meeting coming after the GDP release. For GDP, real growth is expected to be as low as 1.0% in Q2. Opinions vary widely on today’s GDP number with one major US investment bank’s estimate as low as 0.2%, a number of bulge bracket banks at 0.5% while there are also plenty of economists above 1.5%. It is not news to anyone that nominal GDP is very low at the moment - especially in a world of nosebleed high debts - and today could see this have a 1-handle YoY (and at best a 2-handle) - a level not even normally seen at the depths of most recessions.
The market will be looking out for this even if the FED is seemingly looking through current weakness. And speaking of the Fed and its 2:00 PM Rate Decision, as Deutsche summarizes, barring a major surprise in the GDP revisions, the Fed’s economic assessment should remain largely intact. The tone of the statement is likely to be quite similar to that of the prior meeting. There is no press conference or forecast update, so the minutes of today’s meeting will be of greater market relevance than the actual statement (minutes are scheduled for release on August 21st), because the minutes are likely to show the degree to which participants are prepared to taper QE.
In addition to GDP and the FOMC, in the US, the day starts with weekly mortgage application data and the ADP employment report. Markets are expecting +180k on the latter which will help refine payrolls estimates in advance of this Friday’s NFP. This will be followed promptly by the Chicago PMI where consensus estimates are calling for a print of 54.0 for the month of July. The FOMC decision rounds out a busy day of macro.
Full Market Recap from RanSquawk
- Stocks in Europe are seen broadly flat, as market participants sit on the sidelines ahead of the key risk events.
- Bunds edged back into positive territory, driven by month-end related flows (BarCap Euro +0.14y – above avg.), as well as supportive NCR for the week where c. EUR 13bln of gross supply is outweighed by coupons and redemptions.
- China NDRC chairman Xu said the Chinese government is to keep relatively ample liquidity in economy and will proactively expand domestic demand in H2.
- The focus will shift onto the release of the latest ADP report, advanced Q2 US GDP and the weekly DoE data.
Heading into the North American open, stocks in Europe are seen broadly flat, as market participants sit on the sidelines ahead of the key risk events which includes the FOMC decision later on today and the ECB, as well as the BoE policy decisions on Thursday. Pre-auction positioning which saw Bunds come under pressure in early trade was gradually pared, as month-end (BarCap Euro +0.14y – above avg.) related flows overshadowed the release of better than expected unemployment data, with 10/30s resuming a widening bias after markets digested the sale of a 2.5% 2044 Buxl (36.5K Sep-Bund equivalent). Although US swaps remained wider in the front end.
In terms of notable stock movers, ThyssenKrupp shares fell over 5% after the chairman of the former bidder Nucor for its Americas unit said that only Brazil's CSN left in the running. Going forward, the focus will shift onto the release of the latest ADP report, advanced Q2 US GDP and the weekly DoE data. Market participants will also await earnings from the likes of MasterCard, Comcast and CBS.
Japanese Manufacturing PMI (Jul) M/M 50.7 (Prev. 52.3); activity expanded at the slowest pace in 4 months. China NDRC chairman Xu said the Chinese government is to keep relatively ample liquidity in economy and will proactively expand domestic demand in H2.
EU & UK Headlines
Eurozone Unemployment Rate (Jun) M/M 12.1% vs. Exp. 12.2% (Prev. 12.2%, Rev. to 12.1%)
Eurozone CPI (Jul) Y/Y 1.6% vs. Exp. 1.6% (Prev. 1.6%)
German Unemployment Rate (Jul) M/M 6.8% vs. Exp. 6.8% (Prev. 6.8%)
German Unemployment Change (000's) (Jul) M/M -7K vs. Exp. 0K (Prev. -12K, Rev. to -13K)
Italian Unemployment Rate (Jun P) M/M 12.1% vs. Exp. 12.3% (Prev. 12.2%)
German Retail Sales (Jun) M/M -1.5% vs. Exp. 0.2% (Prev. 0.8%, Rev. to 0.7%)
French Consumer Spending (Jun) M/M -0.8% vs. Exp. 0.0% (Prev. 0.5%, Rev. to 0.7%)
ECB president Draghi wants ECB Council minutes disclosed. Draghi said the ECB Executive Board will present a corresponding proposal to the ECB Governing Council for discussion and decision.
Barclays prelim month-end extensions for Pan Euro agg. at +0.14yrs
Barclays prelim month-end extensions for UK at +0.04yrs
Fed watcher Hilsenrath said Lawrence Summers, a leading candidate to be the next Federal Reserve chairman, likely wouldn't beat a rapid retreat from the easy-money policies pursued by Ben Bernanke if he gets the job. Hilsenrath added that Summers's record shows doubts about QE benefits, but also little fear of it and suggests he wouldn't pull back easy money aggressively.
Barclays prelim month-end extensions for US Treasuries at +0.06yrs
Heading into the North American open, stocks in Europe are seen broadly flat, as market participants sit on the sidelines ahead of the key risk events. In terms of notable stock movers, ThyssenKrupp shares fell over 5% after the chairman of the former bidder Nucor for its Americas unit said that only Brazil's CSN left in the running. The company has been struggling to dispose of the unprofitable plant and a number of thought to be suitors including Nucor, US Steel, Mittal and Japan's Nippon have all pulled out. On the other hand, Peugeot shares surged after the company reported narrower than expected loss on cost cuts.
EUR/USD traded steady for much of the session as market participants refrained from making directional bets ahead of key risk events. GBP/USD edged lower, largely driven by the month-end related flows which supported EUR/GBP.
Looming risk events weighed on USD/JPY, although touted JP pension fund bids at 97.50 prevented the pair from posting larger losses.
National Australia Bank forecasts RBA to cut rates twice by the end of 2013 with a real possibility of further cuts in 2014.
API US Crude Oil Inventories (July 30) W/W -740K vs. Prev. -1440K
- Cushing Crude Inventory (July 30) W/W -1900K vs. Prev. -2100K
- Gasoline Inventories (July 30) W/W 1800K vs. Prev. -889K
- Distillate Inventory (July 30) W/W -497K vs. Prev. -710K
Tullow Oil raised Kenya resource estimate to 250mbbl of oil, cuts FY production range to 84-88kboepd vs. Prev. 86-90kboepd.
Rosneft said it had started shipping additional oil supplies to China, following an agreement signed last month. Rosneft agreed to double oil supplies to China to reach a total of 360 million tonnes over the next 25 years (300,000 barrels per day) in a deal worth USD 270bln.
* * *
Key news in bulletin form from Bloomberg:
- Treasuries little changed before quarterly refunding announcement and 2Q GDP (est. 1%) at 8:30am in Washington, Fed statement at 2pm.
- Fed isn’t likely to signal future tapering move, former Fed research director David Stockton said yesterday
- Richard Durbin (D-IL), the Senate’s second-ranking Democrat, said he would “have a lot of questions” if Lawrence Summers is chosen to replace Bernanke
- German unemployment dropped for a second month in June, with the number of people out of work falling by 7k to 2.93m
- Draghi says he favors releasing minutes of ECB governing council meetings, Seuddeutsche Zeitung reports; ECB board to submit proposal for discussion to bank’s council
- China’s one-year interest-rate swaps fell for a second day after the central bank signaled it may inject more cash into the financial system
- Iran may achieve the “critical capability” to process low-enriched uranium into material for a nuclear weapon without detection by international inspectors by mid-2014, according to a report by a research group
- Sovereign yields mostly lower. Asian stocks mixed, with Nikkei -1.47% as JPY falls below 98 level, Shanghai +0.2%. European equities mixed. U.S. stock index futures little changed. WTI crude, gold, copper gain
* * *
Full recap of overnight action and what to expect today via DB's Jim Reid
Today’s GDP revisions will incorporate the BEA’s inclusion of research and development spending, as well as the capital value of books, movies, records, television programs and plays. Previously, both R&D and original artistic works were not included in GDP. Broadly, economists believe that the net effect of these inclusions will be to raise the overall level of economic output by roughly 3% over the entire history of the series. While the market’s focus will be on the like-for-like rate of change in GDP, rather than the absolute level of economic output, it was interesting to read that the revisions could be the equivalent of adding output the size of Belgium to US GDP. The revisions will also likely lower federal spending as a share of GDP by half a percentage point and lower federal debt as a share of GDP by about 2 percentage points from 73% in 2012, according to the Financial Times.
Following the GDP report, the focus will then turn to the FOMC. Barring a major surprise in the GDP revisions, the Fed’s economic assessment should remain largely intact. If there are any surprises, we could see a formal update to the exit strategy principles originally laid out in the June 2011 meeting. Recent media reports have also suggested that the Fed could tinker with its current rate guidance. Outside of that, the tone of the statement is likely to be quite similar to that of the prior meeting. There is no press conference or forecast update, so the minutes of today’s meeting will be of greater market relevance than the actual statement (minutes are scheduled for release on August 21st), because the minutes are likely to show the degree to which participants are prepared to taper QE.
While we’re on the subject of the Fed, the WSJ’s Hilsenrath weighed into the discussion over the future Fed leadership in an article overnight. While recent media reports have quoted Summers as saying that "there is less efficacy from quantitative easing than is supposed", the article said that a close reading of Larry Summers’ columns and speeches indicate Summer’s more nuanced view on QE. The article quotes Summers as saying that "if QE won't have a large effect on demand, it will not have a large effect on inflation either. So this is not a compelling argument against QE”. Mr. Summers's public statements also suggest he would support the Fed's public commitment, first made in December, to keep short-term interest rates low until the unemployment rate drops to 6.5% or lower. Nine months before that public declaration by the Fed, Mr Summers had advocated such a stance according to the WSJ.
As we wait for today’s events, Asian stocks are trading higher led Chinese equities and helped by the small bounce in risk into the US close yesterday (S&P500 closed 0.4% above the session lows, +0.04% on the day). The Hang Seng (+25%) and Shanghai Composite (+0.6%) are both higher this morning helped by comments from China’s Politburo meeting yesterday, chaired by President Xi Jinping, which suggested that Beijing remains committed to and is confident of meeting its annual growth target. Comments from the meeting also suggested continued focus on economic reforms while maintaining current monetary policy settings. The Politburo singled out the property market, saying that steady development and greater urbanisation is needed. In a stark contrast to recent official commentary there was no mention of “downward pressures” facing the economy (South China Morning Post). The stocks of Chinese property developers are trading stronger today as are those of industrials and mining stocks.
The Nikkei is down 0.9% on the busiest day of the earnings season of the quarter. In the fixed income space, Asian credit spreads are trading around 5-6bp wider with lifting of hedges across a number of EM sovereigns such as Indonesia (+10bp) and Philippines (+5bp). There has also been continued selling of the Australian dollar (-0.3%), which reached a low of 90.1c against the USD in Asian trading.
Turning to the day ahead, we have a packed day of data as well as the FOMC. Starting with Europe, we get the retail sales reports for Germany, France and Spain. Euroarea employment reports are also scheduled for today. In the US, the day starts with weekly mortgage application data and the ADP employment report. Markets are expecting +180k on the latter which will help refine payrolls estimates in advance of this Friday’s NFP. Shortly after that at 1:30pm London time, the BEA releases their GDP number and annual revisions. This will be followed promptly by the Chicago PMI where consensus estimates are calling for a print of 54.0 for the month of July. The FOMC decision rounds out a busy day of macro. We should also mention that the verdict of Silvio Berlusconi’s appeals against a tax-fraud conviction may come as early as today, according to a Bloomberg article.