Jackson Hole Begins As 10 Year Slouches Toward 3.00%

Following the market's shocking realization that the taper is coming prompting a kneejerk to the kneejerk reaction after the FOMC minutes, and yet another painful session in Asia, stocks were desperate for some good news from somewhere, which they got thanks to a Goldilocks PMI from China printing by the smallest possible expansionary quantum, or 50.1, and well above expectations, as well as a continuation of better than expected European PMI data with the August composite rising from 50.5 to 51.7 vs. Exp. 50.9, based pm a Services PMI rising into expansion to 51.0 from 49.8, (Exp. 50.2), and Manufacturing at 51.3 vs. Exp. 50.8 up from 50.3, the highest since June 2011.

It is perhaps stunning just how conflicting this "improving" broad MarkIt-owned and reported data is with company level, private sector industrial and manufacturing metrics (whatever you do, don't look a the CAT sales chart), but with the credit creation situation in Europe (read: all that matters) at record lows, and with banks retrenching and needing to delever by trillions, it is only a matter of time before this latest propaganda wave is exposed for what it is. The net effect of the overnight data is to push the USDJPY to nearly 99.00 which thanks to the ubiquitous correlation algos has dragged US equity futures higher, if only briefly (the 10 Year is at 2.91% - under 10bps from redline territory), while slamming the offsetting EURUSD despite the "better" than expected European data.

On the US docket is the start of the leaderless Jackson Hole meeting, which Brazil's Tombini announced late yesterday he would skip and if Kuroda is not present it may as well be Steve Liesman delivering the keynote address; then we have weekly initial claims (Exp. 330K, last 320K), the House Price Index (Exp. 0.6%, Last 0.7%), the Treasury refunding announcement, and of course the daily POMO which today is only $1.25-$1.75 bn.

Recapping the key headlines and market action with RanSquawk

  • Minutes from the July 30-31 FOMC meeting consistent with market expectations that QE taping is likely to begin in September.
  • Chinese HSBC Flash Manufacturing PMI (Aug) M/M 50.1 vs. Exp. 48.2 (Prev. 47.7) - a four month high.
  • Eurozone Manufacturing PMI (Aug A) M/M 51.3 vs. Exp. 50.8 (Prev. 50.3) - Highest since June 2011.

Market Re-Cap

Even though the FOMC minutes released yesterday indicated that QE tapering is on track for September, stocks in Europe have quickly closed the opening gap lower and moved into positive territory, with financials leading the move higher. While EM markets continued to come under pressure overnight in Asia, USD/JPY trended higher on the back of a firmer USD, while also benefiting from the release of better than expected Chinese HSBC Manufacturing PMI which rose back above the key expansionary 50.0 level, which in turn ensured that the Nikkei 225 settled with only minor losses. As such, in spite of the fact that the EuroDollar curve is marginally steeper and the USD index is trading back above its 200DMA line at 81.60, credit spreads in Europe are generally tighter, with iTraxx crossover down 3.5bps. At the same time, both EUR/USD and GBP/USD traded lower and failed to benefit from encouraging set of Eurozone PMIs.

Going forward, market participants will get to digest the release of the latest weekly jobs report, housing data and the US Treasury will announce financing plans for next week.

Overnight headline bulletin courtesy of Bloomberg:

  • Treasuries decline, with 10Y yields at highest in over two years, after stronger-than- forecast PMIs from China and Germany and FOMC minutes yesterday showed “almost all participants were comfortable” with outlook for tapering this year if eco data improved.
  • HSBC/Markit PMI for China rose to 50.1 in August, more than forecast, from final figure of 47.7 in July; gains were fueled by domestic demand
  • Germany’s manufacturing index rose to a 25-month high of 52 in August while the services guage increased to a six-month high of 52.4
  • Markit’s euro-area manufacturing index rose to 51.3 in August from 50.3, while services expanded for the first time in 19 months, gaining to 51 from 49.8
  • Banks and brokers may face EU curbs on the number of times a single asset can be passed on as collateral in repo and other secured trades, according to a person familiar with the plans
  • The crippled nuclear plant at Fukushima is losing its two-year battle to contain radioactive water leaks and its owner emphasized for the first time it needs overseas expertise to help contain the disaster
  • Sovereign yields higher across the board. EU peripheral spreads mostly tighter, Euro Stoxx Banks +2.5%, rising for first time this week. Nikkei falls 0.4% as JPY falls toward 99 level; most other Asian markets lower. European stocks, U.S. equity index-futures gain. WTI  crude and copper gain;  gold little changed

Asian Headlines

Chinese HSBC Flash Manufacturing PMI (Aug) M/M 50.1 vs. Exp. 48.2 (Prev. 47.7) - a four month high. HSBC said it was mainly driven by initial filtering through of recent fine tuning measures and company restocking activities, despite the continuous external weakness, adding that they expect further filtering through which is likely to deliver some upside surprises to China's growth in the coming months.
The Japanese government could cut corporate tax on venture investments as part of the plan to encourage domestic growth, according to tax panel members.

EU & UK Headlines

Eurozone Composite PMI (Aug A) M/M 51.7 vs. Exp. 50.9 (Prev. 50.5)
Eurozone Services PMI (Aug A) M/M 51.0 vs. Exp. 50.2 (Prev. 49.8)
Eurozone Manufacturing PMI (Aug A) M/M 51.3 vs. Exp. 50.8 (Prev. 50.3) - Highest since June 2011.

German Services PMI (Aug) M/M 52.4 vs. Exp. 51.8 (Prev. 51.3)
German Flash Manufacturing PMI (Aug A) M/M 52.0 vs. Exp. 51.2 (Prev. 50.7)
German Flash Composite PMI (Aug A) M/M 53.4 (Prev. 52.8)

French Services PMI (Aug) M/M 47.7 vs. Exp. 49.2 (Prev. 48.6)
French Manufacturing PMI (Aug P) M/M 49.7 vs. Exp. 50.2 (Prev. 49.7)
French Composite PMI (Aug) M/M 47.9 (Prev. 49.1)

Economists at Citigroup revised their ECB interest rate forecast and no longer expect the ECB to cut interest rates in Q4, instead economists now expect rates to stay unchanged for a long period.

Also, analysts cut 0.1% off their 2013 global GDP forecast this month to 2.4%, but lifted their 2014 forecast by 0.1% to

BoE's Weale said he can envisage circumstances when further QE may be needed and as far as he is concerned, asset purchases remain a tool available to the committee if it feels the economy needs further support. He added that he would hope the recovery is well entrenched, but anyone who thinks the future will unfold smoothly is not taking account of everything that has happened in the past five years.

FOMC Minutes yesterday:

Fed considering setting up fixed rate overnight reverse repo facility to help keep rates at targeted levels A few said soon be time to taper based on timeline

Almost all FOMC members agreed change to Fed asset purchase program not yet appropriate at July meeting

A few on FOMC urged patience and others favoured QE tapering soon

Several Fed participants willing to consider lowering 6.5% unemployment threshold for interest rates if easier policy is needed.


Even though the FOMC minutes released yesterday indicated that QE tapering is on track for September, stocks in Europe have quickly closed the opening gap lower and moved into positive territory, with financials leading the move higher.


Both EUR/USD and GBP/USD traded lower and failed to benefit from encouraging set of Eurozone PMIs, as the USD index edged back above the key 200DMA line. With EUR spot trading heavy, 1m implied vol rose above the 200DMA line. However, in spite of GBP spot also under pressure, implied vols also traded lower. Upward trend by USD/JPY overnight in Asia and this morning in Europe saw the pair top the 50DMA line at 98.46, with the next resistance level at 98.98, which is also the 100DMA line.


Libya ports closures to end in next few days according to a Libyan oil guard. In latest news a Libyan official has said force majeure lifted on Brega oil terminal.

China's gasoline and diesel inventories shrank in July as refiners accelerated amid the biggest increase in domestic prices this year. Gasoline stockpiles dropped about 7.2% from June according to Xinhua.

Iran's oil minister has initiated plans to revive oil production to pre-2005 levels, hinting at a price war to win old customers.

The UN hasn't confirmed alleged chemical arms use and seeks access to area of Syrian alleged chemical weapon use, according to UN deputy-general Eliasson.

According to World Gold Council, sales of jewelry, coins and bars will reach as much as 1,000 metric tons in India and China in 2013, valued at a combined USD 87.6bln.

India April-July gem, jewelry exports fall 14% to USD 11bln and July gem, jewelry exports drop 17% to USD 2.49bln.

Fortescue Metals said it expects 7.5% per year GDP growth in China and forecasts iron-ore staying at USD 110-130/MT in near term.

* * *

Finally, the traditional 24 hour recap with DB's Jim Reid

It was another tough day for EM yesterday after the release of FOMC minutes and a strong US existing home sales print. The stronger-than-expected Chinese PMI released overnight (50.1 vs 48.2 expected and the first above 50 reading in four months) is providing a small boost for risk assets but so far its impact has been relatively muted and we are seeing a continuation of EM pressure this morning.

In terms of the FOMC minutes, the line that best summed it up was that “all participants confirmed that they were broadly comfortable with....the contingent outlook for asset purchases”. Under that contingent outlook, the Committee would moderate the pace of its asset purchases later this year “if economic conditions improved broadly as expected”. In addition, the Fed would wind up its asset purchase “around the middle of 2014” if economic conditions continued to develop broadly as the committee anticipates. While the “contingent outlook” has been previously outlined by Bernanke, perhaps it was the lack of internal FOMC opposition to that outlook that caused the selloff in US rates and weakness in equities. Other interesting points from the minutes were the rather short discussion devoted to the back up in bond yields. The minutes noted that some participants felt that “overall financial market conditions had tightened significantly” but some participants also stated that “financial developments during the intermeeting period might have helped put the financial system on a more sustainable footing”. However we would highlight that bond yields have backed up another 30bp since the July 30-31 FOMC meeting and the S&P500 is down 43 points.

In other snippets, the FOMC also discussed the potential for “a fixed-rate, full allotment overnight reverse repurchase agreement facility” which could be used to eventually adjust financial system liquidity at a later stage. There was some consolation for the doves given there was some discussion about the Fed’s forward guidance thresholds with some members willing to contemplate lowering the unemployment threshold if further accommodation were necessary. Overall DB’s US economists think that the minutes signal that policymakers are willing to consider a taper in the near term, but they need decent data—in particular employment data—to support their decision. On that note, August payrolls will be the determining factor.

The equity market reaction to the minutes is worthy of highlighting. After initially trading lower in the immediate moments following the FOMC minutes, the S&P500 bounced more than 1% and even managed to trade briefly in positive territory towards the close. This was probably helped by an article from the WSJ’s Fed-watcher Hilsenrath who argued that Fed officials “showed some angst on the economy” and “remained unconvinced about labor market improvements”. That initial bounce was faded however, and the S&P500 weakened to close near the day’s lows (-0.58%). The high yielding sectors of the US stock market were the main laggards including utilities (-1.1%) and telcos (-1.2%). It’s fair to say that there was less ambiguity in the bond market reaction – the 10yr UST yield jumped almost 9bp and closed near the day’s highs - printing at a fresh 2 yr high of 2.89% in the process. In the EM space, the weakness in EM credit and currencies continued yesterday and accelerated following the Fed minutes. In currencies USDZAR, USDBRL and USDMXN gained 2.3%, 2.5% and 2.2% respectively. There was also broadbased weakness in LATAM bonds and CDS.

Yesterday’s price action is being followed up in Asia EM this morning. The 5yr CDS for Indonesia, Philippines and Thailand are 18bp, 10bp and 15bp wider. 10yr UST yields are tracking another 3bp higher in Asian trading and feel like they are on their way to breaking the 3.00% level soon. The US dollar index is up another 0.3% and the Indian Rupee has hit another all time low against the USD (trading at 65.1 at one stage). The firmer Chinese PMI helped pare losses in Asian equities but Chinese A-shares are the only major equity market trading in positive territory this morning (Shanghai Comp +0.1%). The Hang Seng (- 0.7%), KOSPI (-1.0%) and ASX200 (-0.54%) are all lower as we type.

Turning to the day ahead, after the initial focus on the latest round of PMI’s, attention should turn to the US initial jobless claims data. The Kansas City Fed releases its latest manufacturing activity survey today (markets expecting an unchanged reading of 6). Meanwhile, the Kansas City Fed’s three-day Jackson Hole Economic Summit begins today. While Bernanke is a well-noted absentee from this year’s summit and Yellen will be only moderating a panel, we could hear some interesting comments from the BoJ’s Kuroda and the IMF’s Lagarde.


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