Futures Levitate To Fresh Record Highs On Just Right Mix Of Bad News

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With the FOMC Minutes in the books, the only remaining major event for the week is the Jackson Hole conference, where Yellen is now expected to talk back any Hawkish aftertaste left from the Minutes, and which starts today but no speeches are due until tomorrow. And while the Minutes were generally seen as hawkish, stocks continue to levitate, blissfully oblivious what tighter monetary conditions would mean to an asset bubble, which according to many, is now the biggest in history. And speaking of equities, US futures climbed to a fresh record high overnight on just the right mix of bad news.

Depending on who you ask, the overnight levitation (clearly on virtually no volume) in S&P futures to new record highs took place on either good news, namely a supposedly strong German PMI and a looming ‘de-escalatory’ meeting between Putin and Poroshenko, which would mean that the global economy is recovering which is bullish, or on bad news, namely China PMI missing and sliding, as well as Eurozone Mfg PMI which dropped from 51.8 and at 50.8, was below the 51.3 expected, Services PMI also missing expectations of 53.7, and declining from 54.2 to 53.5, leading to a 1 point drop in the Composite PMi from 53.8 to 52.8, which would mean that the global economy is stalling and more liquidity stimulus from central banks will be needed, which is also bullish. Bottom line: nobody knows what continues to push futures relentlessly higher (hint: moral hazard and endless stock buybacks), but whatever the news is, it's good for stocks.

Regarding that Ukraine de-escalation, don't tell that to local bonds, which continue to drop as the civil war death toll rises, and government seeks faster aid. The yield on the USD note maturing 2017 has risen 8 bps to 9.9%, after Ukraine yday asked to merge 3rd, 4th tranches of IMF loan. The obligatory spin: request to expedite IMF aid is positive as reduces liquidity risks, Bank of America analyst Vadim Khramov writes in e- mailed report today. Alternatively, it also means that the government may be about to run out of money.

A few notes on the latest European PMI from Goldman: The Euro area Composite Flash PMI contracted in August from 53.8 to 52.8, below our and consensus expectations, which pointed to a smaller contraction (Cons: 53.4, GS: 53.5). The decline was driven by weaker data in both the manufacturing and services components across the Euro area. The sizeable gap between the French and German composite PMIs narrowed 1.4pt on the back of an easing in the German PMI and an improvement in the French PMI.

  1. The Manufacturing PMI eased 0.9pt to 50.8. The services PMI declined slightly less (by 0.6pt) to reach a level of 53.5. The consensus expectation was for a smaller decline in both these components of the PMI.
  2. The breakdown was weak overall. The order-to-stocks ratio in the manufacturing survey eased 1.2pt on the back of stable stocks and weaker new orders. The forward-looking components in the Services PMI (where the headline figure is not aggregated up from the subcomponents) posted weak signals with 'Business Expectations' falling 3.2pt and 'Incoming New Business' improving marginally by 0.6pt.
  3. The details of the Flash PMIs for Germany and France showed a reduction in the divergence between the two countries (Chart 1). In France, the composite PMI edged 0.6bp higher and now stands at 50.0. In Germany, the composite PMI eased 0.8bp (to 54.9).This helped to narrow slightly the sizeable gap that has existed between the two countries since mid-2013 (Chart 2). As with the Euro area aggregate, manufacturing developed weaker than services in August in France and Germany.
  4. The area-wide figure released today (as well as the German and French equivalents) suggests a 2pt decrease in the services PMI in Spain/Italy and a decline of just below -1pt in the manufacturing PMI outside Germany/France.
  5. At 52.8, the Euro area composite PMI is consistent with around +0.4%qoq of GDP growth. For Q3 so far, the Composite PMI has averaged 53.3, similar to the Q2 average. At +0.0%qoq, Euro area Q2 GDP printed notably weaker than what the average PMIs in Q2 indicated.

 

Asian equities are trading generally lower across the board probably affected by the disappointing PMI data out from China. The HSBC China Manufacturing flash PMI for August fell more than expected to 50.3. The market was looking for a decline to 51.5 from 51.7 in July. The Shanghai Composite, Hang Seng, and the HSCEI indices are down -0.9%, -0.9% and -1.3%, respectively as we type. Other Chinese growth proxies such as the AUD and spot Copper are also weaker. Those with a bullish persuasion may say that a softer PMI print creates room for more stimulus but the market is clearly in profit-taking mode this morning after the strong run-up over the past few months. Japan is offering some shelter with local equities doing better this morning. Weighed by the FOMC statement yesterday the Dollar strength against the JPY is helping the Nikkei and TOPIX are both around +0.7% higher overnight. Treasuries are broadly stable overnight with the 10yr still being wrapped around 2.43% as we type. The stability in rates and the lack of new issue supply are offering some support for Asian credit overnight. Supply remains dry in that part of the world as Chinese and HK corporates carry on with their earnings affairs. Staying on EM, Fitch in an overnight report said that the external funding needs for EM Asian sovereigns with more vulnerable external finances are moderating. This is supporting the credit profiles of the likes of India, Indonesia, and Sri Lanka. In other news, in Thailand the general who led the coup has been named the new PM overnight.

European equities trade in minor positive territory, with minor outperformance in the Italian FTSE-MIB as markets buy into comments from a Kremlin spokesman, who stated that August 26th’s Minsk meeting with the Russian President Putin and Ukraine President Poroshenko is a step toward de-escalation. The IT sector is outperforming, as Infineon Technology benefit from the confirmation of their acquisition of International Rectifier for USD 3bln. Separately, the Austrian bank index trades higher after Raiffeisen Bank’s particularly strong earnings release. US stock futures trade higher, with the e-mini S&P briefly touching an all-time high of 1987.25.

Looking to the day ahead the main focus will likely be on the latest European flash PMIs, particularly in light of the weak Q2 numbers we've had over the past couple of weeks. Today also sees the US Mark-it flash manufacturing PMI, which is expected to be marginally lower (55.7 vs. 55.8). Other data out in the US includes the Phily Fed and existing homes sales as well as the usual weekly jobless claims. The Phily Fed is expected to drop to 19.5 from 23.9, which was its highest reading since March 2011, while existing home sales are also expected to drop slightly. Finally in light of the outcome of the latest BoE minutes we have UK retail sales to look forward to with July expected to have seen a +0.4% rise in the headline number.

Headline bulletin summary from Bloomberg and RanSquawk

  • Treasuries fell as market awaits Yellen’s speech on labor markets at Jackson Hole tomorrow, followed by ECB’s Draghi.
  • USD-index touched a fresh 11-month high overnight, with September 2013’s high of 82.67 now within sight after yesterday’s hawkish FOMC minutes
  • E-Mini S&P hits an all-time high of 1987.25 as strong German PMI and the looming ‘de-escalatory’ meeting between Putin and Poroshenko lifted global equities
  • Many FOMC participants said it might be appropriate to begin removing accommodation sooner than they anticipated, almost all agreed to keep fed funds rate as key policy rate, minutes of their July 29-30 meeting show
  • A Chinese manufacturing gauge fell below analysts’ estimates in August, as credit slowdown and property slump add to risks that the world’s second-largest economy will miss its growth target this year
  • German services and manufacturing activity fell to 54.9 (est. 54.6) in August from 55.7 in July; French manufacturing contracted for a fourth month while a measure of services growth rose to a five-month high
  • Euro-area manufacturing and services activity slowed in August, signaling that region’s economy remains vulnerable to weak inflation and rising tensions with Russia
  • U.K. retail sales rose 0.5% in July, more than forecast, as demand for clothing helped lead a rebound from a drop in the previous month
  • Japan is considering earmarking 1t yen for stimulus measures in fiscal 2015 budget to boost the economy if the consumption tax is increased to 10% in Oct. next year as scheduled, Nikkei newspaper reports, without attribution
  • BofA plans to boost salaries by at least 20% next year for junior staff in trading and investment banking globally, while Goldman increases salaries for junior U.S. workers by about that much, according to people briefed on the decisions
  • JPM and Citi are considering similar plans, people with knowledge of those deliberations said; Morgan Stanley also decided this year to raise salaries for  some mid- level bankers
  • Norway’s $880b sovereign wealth fund, the world’s largest, is slowing its expansion into emerging markets as it scales back a two-year mission to tap  into the fastest growing markets
  • Argentina’s plan to pay holders of foreign bonds from local accounts looks doomed to fail even before it gets off the ground given concern that investors who participate could be  held in contempt of a U.S. court ruling, according to KBC Asset Management and JPM
  • The death toll mounted in the conflict between Ukraine’s armed forces and pro-Russian separatists in the east as the military said it continues to push back the rebels
  • Obama, interrupting his vacation on Martha’s Vineyard to speak to reporters, said the beheading of a U.S. journalist by Islamic radicals won’t deter him from a bombing campaign aimed at halting their advances
  • U.S. special forces made a failed attempt to rescue journalist James Foley and other Americans held hostage by Islamic extremists in Syria earlier this summer, the White House said in a statement
  • Sovereign yields rise. Asian stocks mixed, European equities gain. U.S. stock futures higher. WTI crude, gold and copper fall
  • Weekly jobless data, existing home sales figures and the beginning of
    Jackson Hole due today – but no speeches scheduled until tomorrow

US Event Calendar

  • Kansas City Fed symposium at Jackson Hole, Wyo. (runs  through Aug. 23)
  • 8:30am: Initial Jobless Claims, Aug. 16, est. 303k (prior 311k)
    • Continuing Claims, Aug. 9, est. 2.520m (prior 2.544m)
  • 9:45am: Markit U.S. Manufacturing PMI, Aug. preliminary, est. 55.7 (prior 55.8)
  • 9:45am: Bloomberg Consumer Comfort, Aug. 17 (prior 36.8); Bloomberg Economic Expectations, Aug. (prior 46)
  • 10:00am: Philadelphia Fed Business Outlook, Aug., est. 19.5 (prior 23.9)
  • 10:00am: Existing Home Sales, July, est. 5.02m (prior 5.04m)
  • Existing Home Sales m/m, July, est. -0.5% (prior 2.6%)
  • 10:00am: Index of Leading Economic Indicators, July, est. 0.6% (prior 0.3%)
  • 11:00am POMO: Fed to purchase $2.05b-$2.50b notes in 2021-2024 sector

ASIAN HEADLINES

The USD’s surge after the hawkish FOMC minutes markedly weakned the JPY, benefiting the Nikkei 225, which finished higher by 0.9%, marking the 9th consecutive gain. Elsewhere, Chinese equities (Shanghai Composite -0.5%, Hang Seng -0.7%) underperformed after Chinese HSBC Manufacturing PMI slumped to a three-month low of 50.3 vs. Exp. 51.5, new orders fell both domestically and internationally.

FIXED INCOME

T-notes remained on the back foot overnight after the hawkish FOMC minutes and the particularly large block trades in Eurodollars (77.5k purchase of short EDH5 puts) pressed fixed income lower. As such, Bund futures opened weaker, with the downside exacerbated by better-than-expected German manufacturing, services and composite PMI readings. Furthermore, a seller of 66k Dec14/Mar15 Euribor weighed on the short-end. In analyst forecasts, Citi cut their year-end German 10yr yield forecast to 0.75% from 1.45%, and cut year-end US 10yr yield forecasts to 2.70% from 2.90% previously.

EQUITIES

European equities trade in minor positive territory, with minor outperformance in the Italian FTSE-MIB as markets buy into comments from a Kremlin spokesman, who stated that August 26th’s Minsk meeting with the Russian President Putin and Ukraine President Poroshenko is a step toward de-escalation. The IT sector is outperforming, as Infineon Technology benefit from the confirmation of their acquisition of International Rectifier for USD 3bln. Separately, the Austrian bank index trades higher after Raiffeisen Bank’s particularly strong earnings release. US stock futures trade higher, with the e-mini S&P briefly touching an all-time high of 1987.25.

FX

The surging USD has lifted the index to the highest levels seen since Sep’13, pressing EUR/USD below 1.3250 and GBP/USD below 1.6600 as the short-lived strength in GBP dissipates after the minutes release yesterday. GBP saw further weakness after a mixed set of retail sales (Incl Auto 0.1% vs Exp. 0.4%) with downward pressure in non-store retailing and petrol stations hitting July consumer purchases. Finally, AUD/USD remains lower after the poor Chinese PMI data but still remains in close proximity to an option expiry at 0.9250 with bids below at 0.9220.

COMMODITIES

WTI and Brent Crude futures trade markedly softer, WTI now just USD 1/bbl off YTD lows of USD 91.24 as the Kirkuk/Ceyhan pipeline re-opens after almost doubling capacity to 200,000bpd from 120,000bpd. This, alongside easing geopolitical tensions (Russia/Ukraine de-escalation meeting), has weighed on energy prices. Furthermore, the stronger USD has pushed commodities lower across the board, with spot gold breaking below the 200DMA earlier this morning, pushing gold to multi-month lows.

Deutsche Bank concludes the overnight summary with Jim Reid's team filling in the blanks

Consensus can be a marvelous thing when it comes to group decision making. It can also be difficult to maintain. We saw glimpses of quite how difficult getting broad consensus might become for two of the world’s major central bank governors yesterday as in the Bank of England’s August minutes we saw the first split rate vote in over three years whilst the July FOMC minutes indicated that debate in the Fed as to the tone of rate guidance and the timing of the first rate hike is heating up.

Yesterday’s July Fed minutes seemed to have a slightly more hawkish tone than previous meetings although they continued to stress that the Fed sees the risks to their outlook as balanced. Taken together these minutes seemed to indicate a slight shift of the Committee’s centre ground towards the hawks even as that centre remained in dovish territory. The minutes highlighted how, “the staff’s near term forecast for inflation was revised up a little, as recent data showed somewhat faster-than-anticipated increases that were judged to be only partly transitory.” They went on to suggest that, “many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.” Following on from this, two statements probably best highlighted the debate that seems to have occurred at the Fed’s meeting. First, “some participants viewed the actual and expected progress toward the Committee’s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation to avoid overshooting,” the Fed’s unemployment and inflation objectives in the medium term. And second some participants were said to be, “increasingly uncomfortable with the Committee’s forward guidance,” as, “in their view it suggested a later initial increase in the target federal funds rate as well as lower future levels of the funds rate than they judged likely to be appropriate.” Whilst to our eye there certainly seems to have been a pick up in the debate at the last meeting it shouldn’t be overemphasised. As the minutes went on they noted how, “most participants indicated that any change in their expectations for the appropriate timing of the first increase in the federal funds rate would depend on further information on the trajectories of economic activity, the labour market and inflation.” As we flagged at the start of this paragraph, our key take-away is that whilst the centre-ground at the Fed may have shifted a little towards the hawks at the July meeting, it remains firmly in dove territory and crucially future action remains heavily data dependant. As our US economists noted before the release, “Much of the recent economic data have fit conveniently with Fed Chair Yellen’s assessment of an economy that is improving, but not overheating,” including the back-up in the July unemployment rate, the moderate pace of recent hiring and the tame July CPI print. We will possibly get more colour on the debate in the Fed and on how to match up the Fed’s July minutes with more recent data releases during Chair Yellen’s Jackson Hole speech on Friday.

On the other side of the Atlantic, yesterday’s Bank of England minutes showed that two MPC members voted for a 25bp increase in rates (the other members voted for no change). Whilst some members argued that, “It was possible that, given the strength of the headwinds faced by the economy, even the current extraordinarily low level of Bank Rate was not providing a great deal of stimulus to activity,” the dissenters noted that, “the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market” along with the possibility that, “wages were lagging developments in the labour market” and “monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank Rate in advance of them.” In a world which continues to have mixed and fluctuating data and in which the atmosphere of the crisis years is dissipating such debates seem a natural outcome and will likely be repeated as time goes on.

Back to markets Asian equities are trading generally lower across the board probably affected by the disappointing PMI data out from China. The HSBC China Manufacturing flash PMI for August fell more than expected to 50.3. The market was looking for a decline to 51.5 from 51.7 in July. The Shanghai Composite, Hang Seng, and the HSCEI indices are down -0.9%, -0.9% and -1.3%, respectively as we type. Other Chinese growth proxies such as the AUD and spot Copper are also weaker. Those with a bullish persuasion may say that a softer PMI print creates room for more stimulus but the market is clearly in profit-taking mode this morning after the strong run-up over the past few months. Japan is offering some shelter with local equities doing better this morning. Weighed by the FOMC statement yesterday the Dollar strength against the JPY is helping the Nikkei and TOPIX are both around +0.7% higher overnight. Treasuries are broadly stable overnight with the 10yr still being wrapped around 2.43% as we type. The stability in rates and the lack of new issue supply are offering some support for Asian credit overnight. Supply remains dry in that part of the world as Chinese and HK corporates carry on with their earnings affairs. Staying on EM, Fitch in an overnight report said that the external funding needs for EM Asian sovereigns with more vulnerable external finances are moderating. This is supporting the credit profiles of the likes of India, Indonesia, and Sri Lanka. In other news, in Thailand the general who led the coup has been named the new PM overnight.

Back to yesterday's session and beyond the central bank minutes yesterday was a relatively quiet day for data with the most notable number being German PPI inflation which disappointed on the downside. Expectation was for a 0% MoM growth rate in July however it actually slipped to -0.1%. Small changes but in a European economy which at the moment is struggling with worryingly low and falling inflation it is worth watching. Markets seemed to be in wait-and-see mode yesterday with the FOMC minutes in view as European equities closed slightly down, US equities marginally up and non-US fixed income broadly flat. The Stoxx 600 closed the day -0.1% down whilst the CAC and FTSE 100 fell -0.42% and -0.38% respectively. In the US, after a weak open the S&P500 closed up +0.25% on the day at 1986.5 near its all time high close of 1988, hit in late July. Outside of the US, fixed income was largely unchanged yesterday, although in the UK the 10Y Gilt initially widened 4bps on the BoE before ending the day almost 2bps wider at 2.41%, whilst in the US the 10Y rate did end the day over 2.5bps higher at 2.43% after ticking higher on the release of the Fed minutes.

In other news yesterday developments in the Argentina default saga saw bonds fall to a two month low as President Fernandez de Kirchner said her government would submit a bill that lets overseas bond holders swap into new dollar bonds governed by domestic law allowing the government to pay the foreign-currency debt locally (Bloomberg). This would sidestep the US court ruling and goes against that ruling in which the Judge said any swap would be illegal and reduces the chances of a deal with the holdout creditors. In Gaza Israel continued its air strikes as both sides blame one another for the collapse of peace talks whilst Israeli PM Netanyahu stated he was, “determined to continue the campaign with all means and as is needed” (BBC). In Ukraine government forces have continued their assault on rebels in the east with both sides claiming to control the town of Ilovaisk in Donetsk. It also seems that Russia’s aid convoy has now moved into the Ukrainian customs zone near the border.

Looking to the day ahead the main focus will likely be on the latest European flash PMIs, particularly in light of the weak Q2 numbers we've had over the past couple of weeks. The overall Eurozone composite is expected to have fallen marginally to 53.4 from 53.8 with the consensus for the German number expected to be around a point lower at 54.6 while in France the market estimate is for a marginal rise to 49.6. Today also sees the US Mark-it flash manufacturing PMI, which is expected to be marginally lower (55.7 vs. 55.8). Other data out in the US includes the Phily Fed and existing homes sales as well as the usual weekly jobless claims. The Phily Fed is expected to drop to 19.5 from 23.9, which was its highest reading since March 2011, while existing home sales are also expected to drop slightly. Finally in light of the outcome of the latest BoE minutes we have UK retail sales to look forward to with July expected to have seen a +0.4% rise in the headline number.