As macro news continues to trickle in better than expected, the latest batch being benign (if completely fake) Chinese inflation data (CPI 2.6%, Exp. 2.6%, Last 2.7%) and trade data released overnight which saw ahigher than expected trade balance ($28.5bn vs Exp. $20.0; as exports rose from 5.1% to 7.2%, and imports dipped from 10.9% to 7.0%, missing expectations), markets remain confused: is good news better or does it mean even more global liquidity will be pulled. As a result, the release of an encouraging set of macroeconomic data from China failed to have a meaningful impact on the sentiment in Europe this morning and instead stocks traded lower, with the Spanish IBEX-35 index underperforming after Madrid lost out to Tokyo to win rights to host 2020 Olympic Games. Even though the news buoyed USD/JPY overnight, the pair faced downside pressure stemming from interest rate differential flows amid better bid USTs. The price action in the US curve was partly driven by the latest article from a prolific Fed watcher Jon Hilsenrath who said many Fed officials are undecided on whether to scale back bond purchases in September. Hilsenrath added that the Fed could wait or reduce the programme by a small amount at the upcoming meeting. Going forward, there are no major macroeconomic data releases scheduled for the second half of the session, but Fed’s Williams is due to speak.
There are little economic events in the US session today, with a modest $1.25-$1.75bn POMO at 11:00 am, when the Fed's Williams also speaks in San Fran, and Consumer Credit data at 3:00 pm will once again confirm that the only reason for the auto "boom" is an unprecedented injection of easy government (and subprime) debt fueling yet another spending spree. The key event may be Obama's address to the nation to push his Nobel peace prize winning agenda.
Overnight new bulletin brief from Bloomberg and RanSquawk:
- Chinese Trade Balance (USD) (Aug) M/M 28.52bln vs. Exp. 20.00bln (Prev. 17.82bln), Imports 7.0% vs. Exp. 11.3% (Prev. 10.9%)
- Spanish IBEX-35 index underperformed after Madrid lost out to Tokyo to win rights to host 2020 Olympic Games.
- Fed watcher Jon Hilsenrath said many Fed officials are undecided on whether to scale back bond purchases in September.
- Treasuries rise, led by 5Y and 7Y notes, extending gains seen Friday after weaker-than-expected Aug. employment report challenged expectations for possible Fed tapering of asset purchases.
- Many strategists still expect Fed to announce reduction of purchases at next week’s meeting;
- With U.S. lawmakers increasingly lining up against Obama, the looming congressional vote on air strikes against Syria threatens to undermine his policy agenda and weaken his clout internationally
- Investment-grade corporate calendar building, with Russia planning to sell 5Y, 10Y and 30Y debt in USD and 7Y, 12Y in EUR; Verizon plans investor meetings as it prepares to sell as much as $50b of debt
- Blackrock and other firms expect intensifying losses in emerging-market bonds as the Federal Reserve considers curtailing record stimulus
- Tony Abbott’s Liberal-National coalition won Australia’s election, was heading for biggest parliamentary majority since at least 2004
- The Nikkei gained 2.5% and JPY fell after Tokyo won its bid to host the 2020 Olympics and a report showed Japan’s economy grew more than forecast in 2Q
- China’s exports increased more than estimated in August and inflation stayed below a government target
- Sovereign yields, EU peripheral spreads mixed. Shanghai Composite +3.3% as Asian equity markets rise. European equities lower, U.S. equity index-futures gain. WTI crude, gold fall, copper rises
Asian Headlines
Chinese Trade Balance (USD) (Aug) M/M 28.52bln vs. Exp. 20.00bln (Prev. 17.82bln)
- Exports 7.2% vs. Exp. 5.5% (Prev. 5.1%)
- Imports 7.0% vs. Exp. 11.3% (Prev. 10.9%)
Chinese CPI (Aug) Y/Y 2.6% vs. Exp. 2.6% (Prev. 2.7%) and PPI (Aug) Y/Y -1.6% vs. Exp. -1.7% (Prev. -2.3%).
Hosting the 2020 Summer Olympics in Tokyo is likely push up Japan's gross domestic product by 0.5 percent in that year with positive economic effects worth JPY 4.2trl, due partly to expected growing demand for new construction and a boost to tourism, according to a research institute's projection.
Japanese GDP SA (Q2 F) Q/Q 0.9% vs. Exp. 1.0% (Prev. 0.6%).
EU & UK Headlines
Greece may receive EUR 1.14bln in unused aid that the country qualified for but did not use between 2000 - 2006, according to sources close to the EU Commission.
- The German finance minister Schaeuble has said Germany is ready to give Greece further aid if needed, but the assistance would be conditional.
- Separately, the IMF expects Greece’s funding gap in the period from 2015 to 2020 to amount to EUR 46.8bln, according to a report by German news agency DPA-AFX on Friday.
Eurozone Sentix Investor Confidence (Sep) M/M 6.5 vs. Exp. -3.5 (Prev. -4.9).
Ahead of the September 22nd elections, The SPD have closed the gap with Merkel's CDU/CSU, rising to 25% against Merkel's 40%, according to the weekly Bild am Sonntag poll. At an election rally in Dusseldorf, the German Chancellor Merkel reiterated her opposition to Eurobonds, despite the SPD's calls for the policy tool.
BoE's Fisher has said ‘read our lips: there are no plans to raise rates’, adding that the bank could hold off from further QE if forward guidance is successful, adding that it will take time for markets to to understand the new policy.
Fed watcher Jon Hilsenrath said many Fed officials are undecided on whether to scale back bond purchases in September. Hilsenrath added that the Fed could wait or reduce the programme by a small amount at the upcoming meeting. Hilsenrath said Fed officials face a cliffhanger September meeting after mixed jobs report and said the QE programme's future is data dependent. US Treasury under secretary Brainard considered for Fed Board of Governors, according to Fed watcher Hilsenrath who added that the Fed board faces 3 vacancies in the coming months.
Equities
The release of an encouraging set of macroeconomic data from China failed to have a meaningful impact on the sentiment in Europe this morning and instead stocks traded lower, with the Spanish IBEX-35 index underperforming after Madrid lost out to Tokyo to win rights to host 2020 Olympic Games. Renewed concerns over the banking system in the joint currency bloc also weighed on the sentiment, with Italy's Banca Monte dei Paschi di Siena trading lower by 3% after the bank said that it expected to approve a new, tougher restructuring plan. Elsewhere, basic materials related stocks have bucked the trend, which was largely a by-product of elections outcome in Australia where Abbott's win gave the conservative opposition power after six years of leadership under the Labor party.
FX
Even though the decision to allow Tokyo to host 2020 Olympic Games buoyed USD/JPY overnight, the pair faced downside pressure stemming from interest rate differential flows amid better bid USTs. The price action in the US curve was partly driven by the latest article from a prolific Fed watcher Jon Hilsenrath who said many Fed officials are undecided on whether to scale back bond purchases in September.
As a result, softer USD supported both EUR/USD and GBP/USD, with EUR/USD advancing towards 1.3200 level, which also marks an intraday option expiry for today's NY cut. Once topped, market participants will look to test the key 50DMA line, located at 1.3204, to the upside. Of note, analysts at Bank of America expect EUR/GBP to remain under pressure, citing surge in real-money and hedge-fund buying of GBP, with flows positive for GBP in last 2 weeks.
Commodities
Abbott has won a decisive Australian election victory over Labor, giving the conservative opposition power after six years of leadership under the Labor party. (FT-More)
Abbott said his conservative administration would move quickly to cut taxes and take swift action to boost the slowing economy as a long mining boom fades. (WSJ)
Analysts at JP Morgan have closed their underweight position in precious metals given positive momentum, cleaner positions and the impending start to the debt ceiling negotiations. At the same time, the bank is now overweight base metals and copper in addition to longstanding energy overweight position.
US Secretary of State Kerry has said the US will consider the French suggestion of returning to the UN Security Council on Syria but Obama has not yet made a decision on this. Furthermore, Kerry said the number of countries ready to join a possible military strike in Syria were in the double digits.
- The EU have issued their first joint statement on Syria, saying there is strong evidence Bashar al-Assad's forces were behind the chemical attack in Damascus some weeks ago.
- Syrian President Assad denied that he was behind the chemical attack on the Syrian people and said evidence was not conclusive that there had been an attack. Assad also suggested that there would be retaliation by those aligned with him for any attack on Syria.
Saudi Arabia may raise oil output if prices hit USD 120/bbl according to the Head of Oil Research at Societe Generale. Saudi Arabia's current production is at approximately 10mln bpd, with a production capacity of 11.5mln bpd, that could potentially rise to 12.5mln bpd with investment. Also of note, Morgan Stanley says Q4 2013 USD 113 Brent bull case is weakening.
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We conclude with the traditional event wrap up with DB's Jim Reid
It’s been a strong start to the week for markets, helped by some positive data and news out of Japan and China. Starting with Japan first, there have been a number of positive headlines over the weekend including news that Tokyo has won the right to host the 2020 Summer Olympics after beating out Istanbul and Madrid. Japanese media say that the event will likely boost Japan’s GDP by 0.5% in 2020 with positive effects worth JPY4.2 trillion through boosts to tourism and to a lesser extent, through construction investment. The Nikkei (+2.5%) has responded positively overnight led by tourism (+4.6%) and construction (+5.9%) stocks. Staying in Japan, GDP revisions released overnight showed that Q2 growth was 0.9% qoq or 3.8% annualised which is a touch below consensus estimates of 1.0% and 3.9% respectively. Nevertheless, the final growth figures were significantly higher than respective preliminary estimates (0.6% and 2.6%). Japan’s current account balance for July was JPY334bn which is a mildly above estimates of JPY314bn. USDJPY is 0.4% higher at 99.57 this morning, but it has given up some gains following the GDP numbers.
In China, the dataflow continues to show some signs of improvement. Over the weekend, the latest trade numbers for August showed that exports grew 7.2% YoY (vs 5.5% expected). However, imports grew at a lesser 7.0% rate (vs 11.3% expected) so overall it was a mixed trade report. DB’s Jun Ma is not overly concerned about the weaker-than-expected import figures. He thinks that market expectations for August were distorted by the abnormally high July import growth, which may have reflected a sharp sequential increase due to restocking. Overnight China also released its latest CPI (+2.6% YoY) and PPI (- 1.6% YoY) which were both broadly in line with market expectations. Jun points out that CPI inflation remained modest while sequential PPI inflation turned positive. This is a good combination for the economy, as monetary policy (reacting mainly to CPI) will likely remain accommodative, while corporate profitability could improve due to rising output prices. A number of Chinese growth assets are trading firmer this morning including copper (+0.7%), A-shares (+3.0%) and the AUSUSD (+0.1%) – the latter is also supported by a Coalition victory in the weekend’s Australian federal elections.
Heading into the London open, UST yields (2.94%) are little changed from Friday’s turbulent session when 10yr yields rallied by 10bp post-payrolls, but reversed most of those gains through the US session to close only about 2bp lower at 2.93%. The change in nonfarm payrolls and private payrolls was +169k and +152k respectively in August (vs expectations of 180k in both). Perhaps the biggest miss was on the downward revisions where a total of -74k was taken off the prior two months payroll prints. The unemployment rate fell to 7.3% (vs 7.4% expected and previous) due to a 0.2ppt drop in the participation rate. As a result of the payrolls report, DB expect a mini-taper in this month’s FOMC — $10bn Treasuries and $5bn MBS. Meanwhile, the WSJ’s Fed-watcher Hilsenrath wrote that Fed officials face a “cliffhanger” September meeting after the jobs report.
Over the rest of the week ahead, we have a typically quiet post-payrolls data docket in the US but the focus will be on congress as it officially returns from summer recess today. On the legislative agenda is a potential vote on a resolution authorising military action in Syria which may come as early as Wednesday. Politico is reporting that the number of “yes” votes in the House of Representatives is “stunningly low” and if the House voted today on the resolution, the “no” vote would win by a significant margin. The same article says that the loss would have serious reverberations throughout the next three months, when Obama faces off against Congress in a series of fiscal battles.
Indeed, we can expect to hear more on the debt ceiling this week and some are expecting congressional members to begin considering a stopgap funding bill to keep the government running for a short period starting Oct. 1. In terms of data flow, the highlight on the docket will be the consumer-focused data on Friday including retail sales and the preliminary UofMichigan consumer sentiment report. Other data to keep an eye on include today’s consumer credit, Wednesday’s wholesale inventories and Friday’s business inventories.
At a more micro level, Verizon Communications, who is acquiring a 45% stake in Verizon Wireless from Vodafone, is reportedly going to tap the market this week with a record-breaking bond issue of anywhere between US$20bn to US$30bn, possibly as early as Wednesday. Given the recent turbulence in rates markets, the offering of potential 10 and 30-year notes will be a significant test of investor appetite for duration. Verizon Communication’s deal is poised to beat Apple Inc’s $17bn bond offering in April 2013, which was then billed as the largest corporate bond issue ever. The Verizon deal also comes after Sprint Corp raised US$6.5bn from the US high yield market last week which represented the largest high-yield offering since 2008 and the second largest on record. And while we’re on the subject of Apple, the company is expected to unveil the latest version of its iPhone, together with a lower-cost variant, on Tuesday.
In Europe, a light data docket features Italian Q2 GDP (Tues), UK employment (Wed) and Euroarea industrial production (Thu). BoE Governor Mark Carney testifies to the U.K. Parliament’s Treasury Committee on the central bank’s August inflation report on Thursday. A two-day Eurogroup/ECOFIN meeting commences on Fri. In Italy a Senate committee is due to begin hearing arguments on removing Berlusconi from Parliament.