The Summer Doldrums Are Upon Us

The summer doldrums continue.

Overnight news included an expected 25 bps rate cut in Australia to a new record low of 2.50%, although the statement surprised by not retaining its expected dovish outlook. Perhaps this is due to the PBOC finally folding and despite raging for weeks that it was dead serious about its tightening experiment, injected another CNY12 billion in its banks via 7-day reverse repos at 4.0% compared to the previous, July 30 CNY14 billion 7 day injection at 4.40%. The Chinese central bank came, saw, and didn't like what it found in the Chinese interbank liquidity situation. Whether and how this will change the Politburo's reform agenda, and whether the provided liquidity will do much if anything, remains to be seen. Elsewhere, in Europe, German factory orders soared 3.8% on expectations of +1.0%, however all driven by Paris airshow orders which boosted bulk orders, and without which orders would have fallen -0.7%.

The UK upward momentum continues with Industrial Production's turn now to soar to the highest since January 2011. This too will end just when Mark Carney's CTRL+P skills have to be unleashed.

Italian GDP declined less than expected, dropping -0.2%, on expectations of a -0.4% slide. In other words Europe continues to rep and warrant that it does not need any assistance from the ECB despite a complete lock up in private lending and credit creation. Good luck with all that.

Today's US event docket includes Trade Balance data and the weekly the API report. We also get earnings from Walt Disney, Emerson Electric and Archer-Daniels. Perhaps the most important data point will be the JOLTS survey which will show just how skewed, manipulated, fabricated the two key BLS data sets have become.

Bulletin of key news from Bloomberg:

Treasuries fall as quarterly refunding auctions begin with $32b 3Y notes; $24b 10Y auction due tomorrow, $16B 30Y bonds Thursday.
3Y notes to be sold today yield 0.63% in WI trading; drew 0.719% at July auction
Reserve Bank of Australia cut the overnight cash-rate target 25bps to 2.50% and said the Reserve Bank of Australia’s board “has previously noted that the inflation outlook could provide some scope to ease policy further”
German factory orders rose 3.8% in June, more than forecast; U.K. industrial production gained 1.1% vs 0.7% median estimate
China’s yuan closed 0.01% shy of its 19-year high after the PBOC boosted the currency’s reference rate and the government reiterated plans to open up the nation’s capital markets
Half of the economists in a Bloomberg News survey say non- performing local-government and corporate debt will probably have a “significant impact” on China’s credit and economic growth
Sovereign yields mixed. Nikkei +1% as JPY gains, rising toward 98 level. European equities higher, U.S. stock index futures decline. WTI crude, copper gain; gold falls

Summarizing the overnight highlights via RanSquawk:

UK Industrial Production rose to highest since Jan 2011 and Manufacturing Production to highest since June 2011.
German Factory Orders (Jun) M/M 3.8% vs. Exp. 1.0% (Prev. -1.3%, Rev. to -0.5%) - German finance minister says Paris air-show boosted bulk orders. Increase in orders would have fallen 0.7% M/M without big-ticket item orders.
The Reserve Bank of Australia cut rates by 25bps to 2.50% alongside expectations. However, the central bank did not retain a dovish outlook within the accompanying statement.
Japan's USD 80bln civil-service pension fund is considering changing allocation strategy following GPIF's allocation revision.

Market Re-Cap

Heading into the North American open, stocks in Europe are seen broadly higher, with tech and consumer goods sectors outperforming. Apart from benefiting from the release of another round of better than expected UK related macroeconomic data, it was really the case that no news is goods news. In turn, Bunds and Gilts trended lower, although Gilts generally underperformed given the supply from the DMO, which sold GBP 4.5bln worth of 5y Gilts. The offering was well met and benefited from the recent steepening bias, with 2/5s trading at its steepest level since early July at 101bps. However, trade volumes remained light, with only 200k traded in Bunds so far. Finally, going forward market participants will get to digest the release of the latest US Trade Balance data, as well as the weekly release of the API report. In terms of earnings, Walt Disney, Emerson Electric and Archer-Daniels are among the heavyweights which are due to report later on today.

Asian Headlines

Japan's USD 80bln civil-service pension fund is considering changing allocation strategy following GPIF's allocation revision. According to the report, the Japanese pension fund could cut its allocation target of JPY bonds from 80% and raise domestic stocks from 5%.

China 2013 GDP may grow about 7.6% this year, according to a state information centre report.

EU & UK Headlines

UK Industrial Production (Jun) M/M 1.1% vs. Exp. 0.7% (Prev. 0.0%) - strongest Y/Y rise since January 2011
- UK Industrial Production (Jun) Y/Y 1.2% vs. Exp. -0.8% (Prev. -2.3%)
UK Manufacturing Production (Jun) M/M 1.9% vs. Exp. 1.0% (Prev. -0.8%, Rev. to -0.7%) - strongest since June 2011
- UK Manufacturing Production (Jun) Y/Y 2.0% vs. Exp. 1.0% (Prev. -2.9%).

German Factory Orders (Jun) M/M 3.8% vs. Exp. 1.0% (Prev. -1.3%, Rev. to -0.5%)
German Factory Orders WDA (Jun) Y/Y 4.3% vs. Exp. 0.3% (Prev. -2.0%, Rev. to -1.8%)
- - German finance minister says Paris air-show boosted bulk orders. Increase in orders would have fallen 0.7% M/M without big-ticket item orders.

ECB's Praet said that the ECB forward guidance includes an easing bias, adding that this conveys notion we have not reached lower bound on key interest rates.

He also noted that the central bank has not run out of ammunition, further cuts an option if inflation outlook warrants.

Italian GDP WDA (Q2 P) Q/Q -0.2% vs. Exp. -0.4% (Prev. -0.6%)
Italian GDP WDA (Q2 P) Y/Y -2.0% vs. Exp. -2.2% (Prev. -2.4%)

US Headlines

President Obama will urge Congress to shutter Fannie Mae and Freddie Mac, as part of a strategy to buffer taxpayers from future housing market downturns. Officials said Obama will insist that the government only step in to pay out mortgage guarantees after private capital has been exhausted and that private capital bear the substantial majority of any losses. He will also call for Fannie and Freddie's investment portfolios to be wound down by at least 15% per year.

Fed's Fisher recommends tapering starting 'this fall' and says "we shall see if majority at Fed also want to trim bond buys this fall." Said Fed is closer to dialling down purchases, assuming no reversal in economic momentum and Fed must avoid 'market havoc' in bond purchase tapering.

Equities

Standard Chartered reported H1 Net Profit USD 2.18bln vs. Prev. USD 2.86bln which initially saw prices come under selling pressure, however prices reversed course after co. CFO said that the bank enters H2 with good momentum.

The Reserve Bank of Australia cut rates by 25bps to 2.50% alongside expectations. However, the central bank did not retain a dovish outlook within the accompanying statement. The RBA did say that is possible the AUD could fall further.

- In turn, AUD strength was observed across the board, however even though AUD/USD briefly traded above 0.9000 level, tha pair failed to make a convincing break above the psychological level, which is also an intraday option expiry for today's NY cut.

In spite of the lack of any positive Eurozone related news flow, EUR/USD traded in tandem with GBP/USD, where the release of solid Industrial and Manufacturing Production reports from the UK resulted in broad based USD weakness.

Commodities

Crude flow through the Iraq Kirkuk to Turkey Ceyhan pipeline, which transports average 350,000BPD, has been halted today, the reason however is yet to be known. This comes soon after flow through the pipeline was resumed on Friday.

European Union regulators aim to finish their antitrust probe into alleged manipulation of oil prices by cos including BP and Royal Dutch Shell as quickly as possible.

Gold prices will rebound as output remains little changed or declines this year with producers cutting spending and shuttering some costly operations, according to World Gold Council.

Standard Chartered said copper inventories in China's bonded warehouses fell 63% in the 4 months through July.

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DB's Jim Reid recaps the remainder of the news

It seems we’ve now reached a postnonfarm payrolls and summer-induced lull, if volumes across a number of markets are anything to go by. Indeed according to Bloomberg data, yesterday’s S&P500 volumes were the lowest for a Monday since 12th November 2012 excluding the Monday just before Christmas Day. The absence of any major headlines in the last 48 hours and the slow run-off of the US/European reporting calendar have also added to the temporary pause we’re experiencing. Nonetheless, some would say this is a welcome respite given the recent slew of economic data, policy meetings and company earnings that have hit our screens over the past several weeks.

The next 24 hours features a bit more for the markets to digest. The first event has just happened with the Reserve Bank of Australia cutting rates 25bp to a record low of 2.5%. The meeting has been a key focus for markets amid the recent fall in the AUD, the slowing in the mining-led investment boom and the fact that it is the first time in an election cycle that the central bank has eased monetary policy since it started publishing an official cash rate in 1990. Coming into the meeting, money markets and virtually all economists surveyed by Bloomberg were expecting the 25bp cut. The RBA’s limited forward guidance in today’s policy statement has resulted in a decent bounce for the AUD (+0.3%) while the ASX200 is ticking down slightly following the RBA's announcement. Interestingly, house price data released today showed Australia home prices rose 2.4%qoq in Q2 in its sharpest quarterly rise since Q1 2010 – no doubt helped by the recent round of RBA rate cuts.

Outside of Australia, Asian equities are trading weaker, led by the lower close on Wall St yesterday. The Nikkei (+0.3%) is poised to break its run of eight straight daily gains/losses of +/- 1% or more. The Hang Seng is amongst the key laggards (-1.6%) following the disappointing HSBC 1H results yesterday and the bank’s warning about slowing growth rates in emerging markets. 10yr UST yields are consolidating around the 2.63% mark and S&P500 futures are -0.2% as we type. In commodities, gold prices slipped back below $1300/oz for the first time in almost three weeks ($1295 as we type) and corn is down 1% extending its decline to the lowest level since October 2010.

US rates continue to be a focus and yesterday saw 10yr treasury yields unwind some of the 11bp fall that we saw after the soft non-farm payrolls report on Friday. US yields spent much of the European and US session trying to track higher and received a 4bp boost following the non-manufacturing ISM. The survey registered a 56.0 reading in July compared to 52.2 in June and 53.1 expected by economists. This is the highest reading since February. The business activity component, which used to be the featured nonmanufacturing ISM figure before an average weighted headline was produced, jumped 8.7 points to 60.4, the largest monthly gain since February 2008.

Before we preview the day ahead, there was an interesting article published in the FT late yesterday suggesting that Silvio Berlusconi’s eldest daughter could take over the reins in running her father’s People of Liberty party. The article says that there is a real possibility that Silvio Berlusconi’s conviction for tax fraud will lead not just to one year under house arrest but also a ban on running for elected office for the next six years and hence Marina Berlusconi could be anointed as her father’s political and business heiress, as early as next month.

Turning to the day ahead, the focus returns to the data flow including Germany’s factory orders for June and a preliminary Italian Q2 GDP print (markets are expecting -0.4%qoq). Industrial production numbers for the UK and Italy round out the European dataflow. In the US, an interview with the Chicago Fed’s Charles Evans will be closely followed given that Evans is a FOMC member. The interview is with representatives of various news agencies and is embargoed until 1pm US Eastern time. Highlights of the US data docket include the IBD/TIPP Economic Optimism survey, US JOLTs job openings (a Yellen favourite) and the US trade balance.