The bad economic news started with Japan's Large Manufacturing Tankan missing expectations of +13, printing at +12 while, as Goldman summarized, "outlook DIs show across-the-board deterioration in both manufacturing and non-manufacturing industries" once again bringing up the question whether the BOJ will boost QE later this month.
Then it was China's official and Caixin PMIs which as we reported, confirmed the economy remains in contraction, even if it is no longer in freefall mode. The Markit final September print was 47.2, the lowest since March 2009 while the Composite PMI was the lowest ever. And since Chinese stocks were closed for the next week, it was up to S&P futures to set the mood, which they did by soaring as soon as the disappointing PMI numbers hit:
Then it was Europe's turn, where disappointing PMI came fast and furious. The final Euro area manufacturing PMI came in at 52.0 in September, in line with the flash. Between August and September, the Euro area manufacturing PMI fell by 0.3pt from 52.3 to 52.0
On a country basis, German manufacturing PMI fell on the month (53.3 to 52.3), as did the Italian (53.8 to 52.7) and Spanish prints (53.2 to 51.7). Ironically the only rebound was in what many suggest is core Europe's worst performing economy, France, where the manufacturing PMI strengthened from 48.3 to 50.6.
According to Goldman, "The PMI breakdown across subcomponents in September was weak. Both manufacturing output and employment fell, by 0.4pt and 0.5pt respectively. The order-to-stock difference fell marginally by 0.9pt in September, reflecting a weakening in new orders and an increase in stocks of finished goods."
Of particular attention was Spain where the recent miracle "recovery" has now fizzled and the economy appears to have entered the downward phase of the dead cat bounce.
In short, between bad and/or deteriorating data in Japan, China and Europe, at least someone will step up and add to the liquidity spigots. That, in a nutshell, is the conditioned Pavlovian markets' thinking as usual.
Finally, a catalyst that may be helping the market's mood start the new quater on the right foot is the rebound, at least for now, in Glencore stock which as of moments ago managed to wipe out its entire 27% Monday plunge, as even more sellside analysts - all of whom have been wrong on the stock - came out in defense of the company.
Any incremental price increases from here will be far more complicated.
Looking around at regional market action, Asian equity markets tracked the gains seen on Wall Street, where US equities pared some of their worst quarterly losses since 2011. The rebound in commodities bolstered the ASX 200 (+1.8%), while Nikkei 225 (+1.9%) extended on yesterday's gains as USD/JPY remained near its highs, while the BoJ Tankan survey showed capex plans are firmer than expected, despite Large Tankan Manufacturing Outlook (10 vs. Exp. 10) declining the 1st time in 3 quarters. Furthermore, Japanese lawmaker Yamamoto continued to call for BoJ easing at the end of the month. While the Nikkei reported that Japan's GPIF is to invest in foreign junk bonds. As noted above, markets in mainland China are closed until Oct. 7th due to the Golden Week Holiday and Hong Kong is also closed for a holiday.
Stocks in Europe came off the best levels of the session but remain in the green (Euro Stoxx: +1.0%) following the release of less than impressive EU based PMIs. At the same time , the downside in equities supported the recovery by Bunds, which too had to contend with a raft of supply from Spain and France. Nevertheless, the upside was led by energy and basic materials sectors, amid the ongoing recovery by Glencore (+5.8%) and VW (+3.7%).
In FX, markets have seen the USD-index (+0.1%) reside in modest positive territory ahead of the North American open amid the pickup in sentiment, with USD/JPY residing around the 120.00 level, at which a large option expiry (1.6bIn) is set to roll off at the 10am NY cut. Elsewhere gains across energy and base metals complex supported commodity sensitive currencies such as AUD and CAD. Going forward, market participants will get to digest the release of the latest US weekly jobs report, manufacturing PMI, ISM manufacturing as well as comments from ECB's Draghi and Fed's Williams.
Looking at commodities there has been an uptick today on the back improved sentiment after Chinese official manufacturing and Caixin PMI's printed better than expected, with WTI and Brent crude futures both higher by around USD 1.00 today. Meanwhile, gold trades relatively flat with the precious metal remaining around 2-week lows following the slump seen yesterday, amid gains in equities and a firmer USD seeing gold post its longest run of quarterly losses (5) since 1997.
And with the global PMI parade out of the way, we now look to the day ahead In the US as well as the final read on the September manufacturing PMI and the latest vehicle sales numbers we will also have the September US ISM. Any deviations either way will be keenly watched for. On the central bank front we are expecting to receive the record of the BoE’s Financial Policy Committee September meeting as well as hearing from Lockhart and Williams from the Fed. David Einhorn (who is now down 17% YTD) darling Micron Tech reports after the close.
Bulletin Overnight Summary from Bloomberg and RanSquawk
- Asian equity markets tracked the gains seen on Wall Street, while better than expected China PMIs also underpinned sentiment
- Stocks in Europe came off the best levels of the session but remain in the green following the release of less than impressive EU based PMIs, with the downside in equities supporting a recovery by Bunds
- Going forward, market participants will get to digest the release of the latest US weekly jobs report, manufacturing PMI, ISM manufacturing as well as comments from ECB's Draghi and Fed's Williams
Treasuries decline, 10Y yields rise for first time in four days, as better than expected China factory data spurs rally in global stocks.
- China’s official PMI rose to 49.8 in September, near a three-year low and better than forecast; Caixin/Markit’s separate PMI gauge also showed improvement from its initial reading, with the final September number climbing to 47.2
- Japan’s Tankan index for large manufacturers fell to 12 in September from 15 in June, lower than the median estimate of 13 in a Bloomberg survey of economists
- Almost three years into Abe’s administration, there’s increasing concern Japan hasn’t sufficiently freed up regulations on businesses and workers. The cost could be a third lost decade
- U.K. manufacturing grew at a sluggish pace last month, with Markit’s manufacturing PMI slipping to 51.5 from 51.6 in August; employment fell for the first time in more than two years, indicating concern about the outlook among executives
- European factory-gate prices fell in September for the first time in six months as input costs declined at the fastest pace since January, Markit said, while a manufacturing PMI fell to 52 last month from 52.3
- When the Fed raises rates and the cost of capital increases, corporate bond issuers will have to instate covenants and protections for buyers that have fallen to the wayside in recent years, according to Pimco’s Mark Kiesel
- $120b IG priced in September, $22.8b HY. BofAML Corporate Master Index OAS widens +1bp to +178bp, new YTD wide and widest since Sept. 2012; YTD low 129. High Yield Master II OAS widens +2 to new YTD wide +662, widest since June 2012; YTD low 438
- Sovereign 10Y bond yields mostly lower. Asian and European stocks gain, U.S. equity-index futures rise. Crude oil and copper gain, gold falls
US Event Calendar
- 7:30am: Challenger Job Cuts y/y, Sept. (prior 2.9%)
- 8:30am: Initial Jobless Claims, Sept. 26, est. 271k (prior 267k)
- Continuing Claims, Sept. 19, est. 2.230m (prior 2.242m)
- 9:45am: Markit US Manufacturing PMI, Sept. F, est. 53 (prior 53)
- 9:45am: Bloomberg Consumer Comfort, Sept. 27 (prior 41.9)
- 10:00am: Construction Spending m/m, Aug., est. 0.5% (prior 0.7%)
- 10:00am: ISM Mfg, Sept., est. 50.6 (prior 51.1)
- ISM Prices Paid, Sept., est. 40 (prior 39)
- 11:00am: U.S. to announce plans for auction of 3M/6M bills, 3Y/10Y notes, 30Y bonds
- TBA: Wards Domestic Vehicle Sales, Sept., est. 13.8m (prior 13.8m)
- Wards Total Vehicle Sales, Sept., est. 17.6m (prior 17.72m)
- 4:30am: Bank of England Financial Policy Committee issued record of Sept. meeting
- 1:00pm: Fed’s Lockhart speaks in Atlanta
- 2:30pm: Fed’s Williams speaks in Salt Lake City, Utah
- 9:30pm: ECB’s Draghi speaks in Washington
DB's Jim Reid completes the overnight wrap
Q4 has kicked off in positive fashion in Asia taking a lead from the European and US sessions and helped by some stability in data with the final Chinese and Japanese PMI reads coming in slightly stronger. We also had the September official PMI from China which came in at 49.8 vs 49.7 expected, a small improvement from Augusts’ read of 49.8 suggesting at least some stability in the index even as it remains just in sub-50 contraction territory. Asian equities are up across the board with the best of the performance coming in Japanese equities, with the Nikkei up +2.2%. Asia IG is also around -4bps tighter.
Back to markets yesterday and what was generally a better day across the board for risks assets on both sides of the pond. With little new news again and instead a relatively mixed batch of economic releases, the S&P 500 closed up 1.91% with all sectors closing in positive territory. Prior to this in Europe we saw the Stoxx 600 finish +2.52%, with the culprits of the some of the recent weakness, Glencore and VW, finishing up +14% and +3% respectively. With two consecutive days of gains now, the former has in fact more than erased the huge losses on Monday. Meanwhile, credit markets were also well supported with Crossover (-6bps) and CDX HY (-6bps) both finishing tighter, while the US primary market came back to life in style, helped by a bumper offering from Hewlett Packard. The largely better sentiment saw 10y Treasury yields rise as much as 5bps shortly following a solid ADP employment change reading, however some softer data later in the session saw yields move south in a hurry with the 10y eventually finishing down 1.4bps at 2.037%.
Taking a look at that data further. Raising hopes for a supportive payrolls report, the September ADP employment change reading of 200k came in a touch ahead of expectations of 190k and followed a downwardly revised 186k in the prior month. Data following this was certainly less supportive however. The September ISM Milwaukee reading fell some 8pts to 39.4 (vs. 48.5 expected), while shortly after we saw the Chicago PMI drop 5.7pts to 48.7 (vs. 53.0 expected) for the month. The sub-50 reading marked the fifth month this year that we’ve seen a contraction in the data and combined with some other softish regional manufacturing readings of late (Empire, Philadelphia, Dallas, Kansas) will likely heap pressure on today’s ISM manufacturing print, currently expected to decline half a point to 50.6. In other news Congress managed to avoid a government shutdown as it passed a stopgap US government spending bill which will fund the government through Dec.11
Prior to this in Europe and hot on the heels of a weaker than expected headline German CPI read, there was further disappointment in the Euro area CPI print after the September headline reading fell back into negative territory unexpectedly (-0.1% yoy vs. 0.0% expected). The core was unmoved at +0.9% yoy while on the employment front we saw unemployment print at 11% after expectations for a slight decline to 10.9%. It was in fact a busy day for data in Europe yesterday. We learned that German retail sales contracted by -0.4% mom in August versus an expectation they would grow by +0.2%. We saw a similar story in the French consumer spending read which came in at +0.0% mom (vs. +0.4% expected). The German unemployment read also came in weaker than expected with the number of unemployed rising 2k vs expectation of a -5k fall in September although the Italian August unemployment rate nudged down one-tenth unexpectedly to 11.9%. Meanwhile in the UK we saw the final Q2 GDP reading confirmed at +0.7% qoq, although the annualized rate was however revised lower, by two-tenths to +2.4% yoy.
In terms of the Fedspeak yesterday, as largely expected there was little to come out of Fed Chair Yellen’s and Bullard’s comments at a community banking conference, with neither choosing to comments on the economy or monetary policy. Away from this and focusing his comments more on market liquidity, NY Fed President Dudley commented that the evidence to date that liquidity has diminished markedly is somewhat mixed and a clearer picture ‘may only emerge as monetary policy is normalized’.
Looking to the day ahead now we have the first September manufacturing PMI reads from Spain, Italy and the UK (all expected to weaken) as well as the final reads on French, German, US and Euro area manufacturing PMI’s (no change expected). We will also have the first September read out of Greece. In the US as well as the final read on the September manufacturing PMI and the latest vehicle sales numbers we will also have the September US ISM. Any deviations either way will be keenly watched for. On the central bank front we are expecting to receive the record of the BoE’s Financial Policy Committee September meeting as well as hearing from Lockhart and Williams from the Fed.