Compared to last week's macro-event juggernaut, this week will be an absolute bore, although with a bevy of Fed speakers on deck - both good and bad cops - there will be more than enough catalysts to preserve the "upward channel" scramble in the S&P and the zero volume levitation to new all time daily highs despite the lack of daily bad news. Speaking of Fed speakers, we have Fisher today, Evans’ tomorrow followed by both Plosser and Pianalto on Wednesday.
The key overnight data point was the continuation of July PMIs out of Europe, this time focusing on the service industry. As Goldman summarizes, the Final Euro area Composite PMI for July came in at 50.5, marginally above the Flash reading and consensus expectations (50.4). Relative to the June final reading, this was a sold 1.8pt increase, and building on consecutive increases in the past three months, the July Euro area PMI stands 4.0pts above the March print. Solid increases were observed across all of the EMU4 in July, most notably Italy. The July reading is the highest Euro area PMI level observed since July 2011.
That said, it is quite amusing how Europe is desperate to push its currency higher at all costs, thus all but guaranteeing the just like in 2011 and in early 2012, this brief gambit with recovery levels will be short lived. As a reminder, unless credit creation in the private sector picks up, all this is nothing but pure propaganda.
Prior to this, China Services PMI came just as expected on the HSBC side, and a tad better than consensus based on the original, even more manipulated official PMI data point. Of course, the main news of the weekend is that China is now set on creating another capital misallocation bubble, this time in the shipping industry (post coming shortly).
Looking at today's US data docket, with earnings season tapering the only two notable events are the Non-manufacturing ISM at 10am, and the largely irrelevant senior loan officers survey at 2 pm: irrelevant because total loan and lease creation at commercial banks now is the same as it was when Lehman filed. The gap has and continues to be filled by the Fed.
Overnight News Bulletin from Bloomberg:
- Treasuries steady after Friday’s rally on weaker-than-forecast nonfarm payrolls; Fed’s Bullard said after report that policy makers need more 2H data before deciding on whether to taper asset purchases.
- China’s services PMI rose to 54.1 in July from 53.9, the first acceleration since March, government data showed Aug. 3, following last week’s unexpected gain in a manufacturing PMI
- The HSBC/Markit services PMI was unchanged at 51.3
- A gauge of U.K. services rose to 60.2 in July from 56.9 the previous month, more than forecast and the highest level since Dec. 2006
- Job vacancies at London’s financial-services companies fell 12 percent last month, as tougher rules on capital deter banks from hiring, recruitment firm Astbury Marsden said
- Euro-area services PMI rose to 49.8 in July, higher than forecast, from from 48.3,
- Berlusconi’s party has rallied around its leader after his tax-fraud conviction, possibly seeking a presidential pardon and threatening a mass resignation of deputies in parliament, a move that could bring down the government
- NZD plunges against major counterparts after China and Russia halted imports of some milk powder from New Zealand’s Fonterra Cooperative Group Ltd. after the dairy exporter warned of a contaminated ingredient
- Reserve Bank of Australia will cut the overnight cash rate at tonight’s meeting by at least 25bps from 2.65%; government calls general elections for Sept. 7, just after bank’s Sept. 3 meeting
- At least 19 U.S. embassies and consulates in predominantly Muslim countries will remain closed through the week as the State Department stays on guard for potential terrorist attacks
- Sovereign yields mostly lower. Nikkei -1.4% as JPY gains, rising through 99 level. European equities higher, U.S. stock index futures mixed. WTI crude, copper lower; gold unchanged
WHAT TO WATCH:
Economic Data
- 10:00am: ISM Services, est. 53.0 (prior 52.2) Factory Orders, June, est. 2.3% (prior 2.1%) Central Banks
- 11:45am: Fed’s Fisher speaks on economy in Portland, Ore.
- 11:00am: Fed to purchase $1.25b-$1.75b debt in 2036-2043 sector
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SocGen recaps the macro/FX perspective:
Markets walked away disappointed from Friday's US employment report with the collapse in FX and bond market volatility showing that participants expect prices to oscillate in a narrow range over the coming week. For pairs like EUR/USD to return to the weekly close of the previous week (1.3279) was startling and is a reminder that major data releases or central bank meetings do not always live up to their billing of being market movers. The 10bp widening in the US/EU 10y rate spread on Thursday was completely reversed on Friday. No wonder FX markets are caught between two stools. In the end, the decline in the US participation rate (63.4% vs 63.5%) was the cloud to the silver lining but all things considered it is the faster drop in the unemployment rate from 7.6% to 7.4% that we think leaves the Fed on track to start reducing asset purchases next month. This did not immediately sink in and perhaps it may take a stronger non-manufacturing ISM and this week's US Treasury refinancing for markets to realise that the bias is for a stronger USD and higher yields. In contrast to the USD and bonds, equities did get the message on Friday as the Dow fell back only to rally back into positive territory in the last half hour of trading. The TOTO debate (‘taper on-taper off') will keep markets in its grip over the coming weeks. Four Fed speakers are lined up this week and may give us their reaction to Friday's data and the implications on their view for tapering. Dallas Fed president Fisher kicks off proceedings today. The non-manufacturing ISM is forecast to have improved to 53.0 vs 52.2.
The final services PMIs and retail sales are due in the eurozone but both releases are likely to pass without much interest in the wake of the ECB message last week. Things will be different for the UK services PMI as we countdown for the BoE Inflation Report on Wednesday. The worst performing currency in the G10bar the AUD last month, sterling's best chances of a fight back this month must depend on an upgrade of the real (and nominal?) GDP growth forecast for this and next year in the IR, and a bear steepening of the yield curve.
The RBA rate decision is scheduled in the early hours of our time zone tomorrow. A rate cut to 2.50% is expected but it will be the statement that decides how quickly AUD/USD descends to 0.8771 and EUR/AUD breaches 1.50. Talk of SNB selling surfaced late on Friday which coincides with the cross looking technically overbought. Will a neutral RBA statement trigger profit taking?
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DB's Jim Reid recaps the key events of the weekend
It has been a somewhat mixed session for Asian equities overnight although the payrolls-led rally in Treasuries on Friday is propelling the broader fixed income space higher. These aside the weekend financial pages have been fairly quiet, largely dominated by a better PMI services data from China and negative headlines surrounding New Zealand’s dairy exporter Fonterra. We’ll briefly recap these below, a preview of the key events ahead, and finish off with a brief update of our usual earnings season tracker.
Starting with China, the official non-manufacturing PMI print came in 54.1 for July. This comes modestly ahead of the market consensus of 53.9 and has
spurred hopes that the Chinese economy might be stabilising. The HSBC variant of the same report also came in line with expectations overnight at 51.3. These data points are supporting the Chinese market overnight as we saw the Shanghai Composite (+0.15%) rose for the fifth consecutive day. With the Services PMI out of the way, the focus will shift to China’s monthly data release on Friday. In other Asian equity markets, the Nikkei (-0.9%) is the
notable underperformer whilst the Hang Seng (+0.1%) is a touch higher.
The Chinese market also benefitted from a rally in diary producers after the PRC government ordered the recall of potentially contaminated milk from Fonterra after the NZ-based company found bacteria in its products that could cause botulism. In an overnight development, Russia has also temporarily suspended purchases of NZ dairy products. The Kiwi Dollar has sold off on the back of this and is down by about 1% overnight to 0.776 against the US Dollar.
Moving on to the fixed income markets, 10-year government bond yields in Australia, New Zealand and South Korea are -21bp, -8bp and -6bp to around 3.58%, 4.19%, and 3.51%, respectively as we type. The performance came as the 10yr UST yield dropped by a sharp 15bps to close below 2.60% last Friday as payrolls were softer-than-expected. The headline number for July came in at +162k v +185k expected but the blow came from the -26k downward revisions to the prior two months. Also, the unemployment rate fell two-tenths to 7.4% and despite moderate gains in the payroll data, the Household survey showed an employment increase of +227k. On balance, Joe thinks the report was not weak enough to delay his expectations of a September tapering of QE. The market will look to the ISM-non manufacturing report today and jobless claims on Thursday for further hints on labour market conditions.
Looking at the week ahead, European and Chinese economic releases will be the main highlight given the post-payroll lull in US data. Indeed we’ll kick off the week with final services PMI from the Euroland, German, French, Italy, Spain and the US today. Markets are not expecting any changes to the final July print for the core economies but do look for a slight improvement in the Spanish and Italian readings. The US non-manufacturing reading for July is also expected to be almost a point higher at 53.1. Beyond today, the first print of Italy’s Q2 GDP and German factory orders will be tomorrow’s highlight.
Throughout the week we will also see the release of Industrial Production data for Italy (Tues), Germany (Wed), Spain (Thu) and France (Fri). In Asia the main data flow this week will be on the monthly data dump from China (CPI, PPI, IP, fixed asset investment, and retail sales for July) on Friday.
Data flow aside we also have a fairly eventful week of central bank activities. In the US, nearly a handful of Fed officials are lined up to speak starting with Fed’s Fisher today. Evans’ will speak tomorrow followed by both Plosser and Pianalto on Wednesday. In the UK, the BoE inflation report is due on Wednesday and Governor Carney will attend his first press conference since taking office last month. In Asia, we have central bank meetings in Korea, Australia and Japan but the main focus will likely be on the latter. The BoJ will start its two day policy meeting on Wednesday and Kuroda’s comments on the economic outlook on Thursday will be closely followed. For the record, the market is not expecting any rate changes in Korea but the RBA is widely expected to cut its benchmark rate by 25bps to 2.50% on Tuesday. Elsewhere, the US Treasury will sell a total of $72bn in 3yr, 10yr and 30yr debt, respectively throughout the week.