Futures Flat With All Headline-Scanning Algo Eyes On Today's FOMC Minutes

While everyone's (algorithmic) attention will be focused on today's minutes from the July 29-30 FOMC meeting for views on remaining slack in U.S. economy following recent changes in the labor market (especially a particularly solid JOLTS report which indicates that at least on the openings front, there is no more) and any signal of policy change by the Fed ahead of Fed Chair Janet Yellen’s speech in Jackson Hole on Aug. 22, a curious thing happened overnight when a few hours ago the BoE's own minutes show the first [34]vote split since 2011, as Weale and McCafferty argue for a 0.75% bank rate. Then again, if the Russians are finally bailing on London real estate, the inflationary pressures at the top of UK housing may finally be easing. In any event, every FOMC "minute" will be overanalyzed for hints of what Yellen's speech on Friday morning will say, even if stocks just shy of all time highs know quite well she won't dare say anything to tip the boat despite her warnings of a biotech and social network bubble.

The Asian session overnight has been a mixed bag. North Asian equities are generally softer led by modest declines in China (-0.1%) and Korea (-0.2%). South East Asian indices are the notable outperformers overnight with Thai and Indonesian equities up +0.3% and +0.2%. The Chinese markets are perhaps taking a breather ahead of the HSBC flash PMI report tomorrow. Asian credit markets are unchanged to a touch firmer as cash technicals are also being supported by the lack of new supply. WTI crude dropped 2% yesterday to a 7-month low and is now 10% from the recent highs on reduced geopolitical concerns but also can be seen as another inflation friendly move for markets. MSCI Asia Pacific down 0.2% to 148.6; Nikkei 225 unchanged, Hang Seng up 0.1%, Kospi up 0.1%, Shanghai Composite down 0.2%, ASX up 0.2%, Sensex down 0.4%

European equity markets are trimming a minority of the week’s gains, as a Siemens (+0.33%) upgrade at Goldman Sachs fails to keep the DAX afloat (-0.4%) today, but still trades with gains of over 2.25% since Friday’s close. Elsewhere, Glencore (+0.14%) perform strongly after net income and revenues beat expectations, with a USD 1bln share buyback also lifting shares. The German and French markets are the worst-performing larger bourses, the Dutch the best. The euro is weaker against the dollar. Japanese 10yr bond yields rise; Irish yields decline. 3 out of 19 Stoxx 600 sectors rise; health care, utilities outperform, autos, personal & household underperform. 30.5% of Stoxx 600 members gain, 66.3% decline. Eurostoxx 50 -0.4%, FTSE 100 -0.4%, CAC 40 -0.4%, DAX -0.4%, IBEX -0.1%, FTSEMIB -0.1%, SMI -0%

US stock futures are moving in line with the European counterparts, indicating a modest pullback at the open as attention turns to the looming FOMC minutes. Commodities gain, with natural gas, corn underperforming and WTI crude
outperforming. U.S. mortgage applications, FOMC minutes due later.

Market Wrap

S&P 500 futures down 0.1% to 1974.9
Stoxx 600 down 0.1% to 335.1
US 10Yr yield at 2.4%
German 10Yr yield down 1bps to 0.99%
MSCI Asia Pacific down 0.2% to 148.6
Gold spot down 0.3% to $1292.4/oz

Bulletin Headline Summary

BoE minutes show the first vote split since 2011, as Weale and McCafferty argue for a 0.75% bank rate, however GBP/USD remains capped by the 200DMA
EUR/USD fell below Nov’13 lows as reserve manager selling knocked out barriers at the 1.33 handle – keeping the USD index at Sep’13 highs
European equities ebb lower on profit-taking from the week’s strong run ahead of FOMC minutes due at 1900BST/1300CDT
Treasuries steady, curve spreads little changed as market awaits July Fed minutes release; yesterday’s lower than expected core CPI bolstered expectations for dovish Jackson Hole message from Yellen on Friday.
The Bank of England said two policy makers wanted an interest-rate increase this month, marking the first split on borrowing costs in more than three years
Fund managers are entitled to be paid millions of pounds if they’re delivering high returns for investors, the U.K. markets regulator said, the first sign it won’t seek to impose wage caps on the industry
Japan’s exports rose more than forecast in July, bouncing back from two straight declines to support an economy that contracted last quarter by the most since a record earthquake in 2011
Ukraine’s armed forces said they continue to push back separatists in fighting in country’s east ahead of a possible face-to-face meeting of the Russian and Ukrainian leaders next week
Islamic militants released a video showing the beheading of a man they said was kidnapped U.S. journalist James Foley and threatened to kill a second American unless Obama calls off airstrikes on Iraq
German Foreign Minister Frank-Walter Steinmeier said Germany is is ready to send weapons to northern Iraq to help Kurdish fighters opposing Islamic State troops
While the White House hasn’t ruled out an eventual trip to Ferguson, Missouri, visiting now would divert law- enforcement resources needed for keeping the peace, according to aides, who asked for anonymity to discuss their planning
U.S. Attorney General Holder will visit the violence-torn city amid growing calls for the police officer who shot an unarmed black teenager to face criminal charges
Sovereign yields mostly lower. Euro Stoxx Banks little changed. Asian, European equities mixed, U.S. stock futures decline. WTI crude and copper lower, gold higher

US Event Calendar

7:00am: MBA Mortgage Applications, Aug. 15 (prior -2.7%) Central Banks
2:00pm: Fed releases July FOMC minutes

FIXED INCOME

Gilt futures sharply underperformed after the Bank of England minutes showed external members Martin Weale and Ian McCafferty voting to raise the BoE bank rate by 25bps to 0.75% - against expectations of another 9-0 vote. Weale and McCafferty justified their dissention by indicating the reduction in slack and the uptick in UK growth means the economy can withstand higher rates, and an earlier rate hike will mean the tightening cycle could be gradual. The weight in Gilts has somewhat prevented Bund futures and T-notes from trading particularly firmly, but any downside has been limited by softer stocks in Europe.

EQUITIES

GBP/USD ran into resistance at the 200DMA of 1.6676 after the 7-2 vote split within the BoE minutes, as markets took the opportunity to re-engage shorts, as markets speculate recent weak wages and inflation data will keep any other MPC members from joining Weale and McCafferty in voting for a 0.75% bank rate. The USD-index broke above 82.00 this morning as EUR/USD fell below November 2013 lows after knockout options tripped stops on the way to cycle lows of 1.3285. Finally, USD/JPY reclaimed the 103.00 handle, with attention turning to approx. 1bln worth of options expiring at that level for today’s 10am (1500BST) NY cut.

COMMODITIES

Brent continues to cut the week’s losses, testing the USD 102.50 level once more, but remains lower by a USD 1/bbl on the week as tankers approach Es Sider in Libya to load 600,000bbls. Today’s DoEs provide the next flash point for energy markets, with the headline draw expected at 1.75mln bbls after yesterday’s 1.4mln bbl API draw. Spot gold suffers from over-riding USD strength, as the USD rose to its best levels since September last year. News from the Middle-East remains relatively quiet, however many leaders have called for a reconvening of international councils in order to discuss the execution of a US journalist by the Islamic State yesterday evening.

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DB's Jim Reid and team concludes the overnight recap

The combination of a stronger housing data but low inflation in the US was perhaps the goldilocks scenario that allowed markets to carry on with their grind higher. We’ll recap these data with a bit more details in a minute but yesterday proved to be yet another good day for US equities with the NASDAQ (+0.43%) making record highs for its fifth consecutive session. The S&P 500 added half a percent to close at 1,982, just whiskers away from the all-time closing highs of 1,988. The market gains have also brought back a period of low volatility even though we saw mixed progress on the geopolitical front. The VIX has inched lower in 9 of the past 12 trading sessions and US credit spreads were broadly unchanged as supply remains dry.

Checking our screens this morning, the Asian session overnight has been a bit of a mixed bag. North Asian equities are generally softer led by modest declines in China (-0.1%) and Korea (-0.2%). South East Asian indices are the notable outperformers overnight with Thai and Indonesian equities up +0.3% and +0.2% as we go to print. The Chinese markets are perhaps taking a breather ahead of the HSBC flash PMI report tomorrow. Asian credit markets are unchanged to a touch firmer as cash technicals are also being supported by the lack of new supply. WTI crude dropped 2% yesterday to a 7-month low and is now 10% from the recent highs on reduced geopolitical concerns but also can be seen as another inflation friendly move for markets.

On that note, heavy fighting was reported in eastern Ukraine as the Ukrainian army continued to make advances against the rebels. Importantly there are encouraging signs at least at the diplomatic level. The Kremlin yesterday announced that President Putin will meet his Ukrainian counterpart Petro Poroshenko in Minsk (capital of Belarus) on the 26 August. The summit will also be attended by three top officials by the European Union. This would be the first talk between the two figureheads since June and Poroshenko said that stabilising the situation in eastern Ukraine would be a key agenda at the meeting. Poroshenko will also host German chancellor Angela Merkel this weekend (23 August) ahead of the Minsk summit next Tuesday. As for the status of the Russian humanitarian convoy, Ukraine’s foreign minister has said that it has ready to provide security guarantees (required by the Red Cross), but only in the area controlled by Ukraine’s anti-terrorist forces. Russia’s permanent representative to the UN yesterday said the delivery of the Russian aid could start in the next couple of hours.

Whilst there seems to be some kind of progress in Ukraine, we are back to square one in Gaza. After 8 days of peace, yesterday saw a fresh round of violence with after Hamas broke a ceasefire by firing rockets towards the Southern Israeli town of Beersheba shortly before 4pm local time. Israel retaliated with airstrikes and withdrew its negotiation team from Cairo. There was also more finger-pointing from both sides. The head of the Palestinian delegation Azzam al-Ahmad claimed that Israel had always intended to break the truce and were not serious about reaching an agreement. Israel said that the rocket launches was viewed as a “grave and direct violation” of the 24 hour truce extension agreed earlier (BBC and Guardian). Palestinians said they have offered concessions during the peace talks via a “two-stage solution” with the immediate focus being the opening of the crossings and reconstruction measures while agreeing to deal with the airport/seaport and the prisoners in the West Bank in negotiations next month. Interestingly a poll published by the Israel Democracy Institute found that 92% of Jewish Israelis believed the war was justified and 48% of those questioned thought appropriate amount of force had been used by the Israeli military. Only 6% thought too much had been used, while 45% said too little force was used.

Before we delve back into yesterday’s data flow, we find it interesting that Germany is set to auction a EUR5bn 0% coupon 2-year government notes (also known as Schatz) today at 10am London time. Whilst this won’t be the first time a 0% coupon 2Y debt was issued by the German Treasury, it is a reflection of the demand for safe haven assets. Short dated 0% coupon bonds were issued several times since the height of the eurozone crisis in middle of 2012 but more recently these notes have been sold at a coupon set at 0.25%. Indeed despite another strong session for European equities (DAX, CAC and FTSE up +0.96%, +0.56% and +0.56%, respectively) the chase for risk failed to deter the hunt for safe haven assets. The 10Y Bund again traded through 1% yesterday before widening later in the day to close just 1bp tighter at 1.001%.

Taking a closer look at yesterday’s data, both US housing starts and building permits came in above % mom in July against consensus call of +8.1%. Building permits rose 8.1% in July which compares favourably against forecasts of 2.8%. While housing is showing encouraging signs of recovery, inflation data was softer than what our US economists were looking for. Both the headline and core CPI rise 0.1% in July. The headline rate is now 2.0% year-on-year, while the core held at 1.9%. The unrounded core was 0.0958%. UK inflation was also soft with July CPI and Core CPI YoY falling to +1.6% (vs. expectation of +1.8%) and +1.8% (vs. expectation of +1.9%) respectively.

In terms of today we expect a fairly quiet one as far as data is concerned. The highlight will be the release of the BoE and FOMC minutes from their previous meetings all ahead of the key Jackson Hole event this Friday.