It's groundhog day as S&P futures, European and Asian shares all rise overnight, while the dollar is poised to finally end its streak of monthly losses.
The Bloomberg Dollar Spot Index is finally headed for its first monthly gain since February, supported by renewed focus on better-than-forecast U.S. economic growth with the dollar getting an added boost after a Reuters report that Euro gains are worrying a growing number of ECB policy makers. The DXY is up 1.6% from multiyear low set on Tuesday while US Treasuries yields also rose in muted trading ahead of key core PCE inflation data due shortly Thursday and ahead of Friday’s jobs report.
Not helping the ECB case for a weaker Euro (and stronger dollar) was the latest Eurozone inflation data, which came in hotter than expected at the headline level, printing at 1.5% for August, above the 1.4% expected, and 1.3% in July, while inflation ex food and energy also came in stronger than the 1.2% expected, printing 1.3% in August, 0.1% higher than July. Core HICP inflation printed at 1.2%, matching the median forecast.
In addition to the ECB "trial balloon", investors rediscovered a taste for a stronger dollar and commodities as upbeat Chinese economic data on Thursday, as well as stronger U.S. economic news, whetted appetite for riskier assets globally, even as tensions over North Korea simmered in the background. As reported overnight, the latest official PMI survey showed Chinese factory growth unexpectedly accelerated in August, confounding forecasts for a slight slowdown. The official PMI firmed to 51.7, from 51.4 in July, even as the service PMI tumbled. That gave a fresh boost to industrial metals, with copper nearing its highest since late 2014 and on track for gains of 7 percent for August.
A big gainer was U.S. gasoline which surged 6% to two-year peaks as flooding and damage from Tropical Storm Harvey shut nearly a quarter of U.S. refinery capacity. Prices are now up more than 20 percent in the past week. Gasoline advanced as Harvey continued to pound the energy-rich Gulf of Mexico coast, home to more than half of the U.S.’s refining capacity.
European share markets opened firmer, despite stronger inflation data and a higher euro, with the Eurostoxx 600 rising 0.8%, after hitting a 6 month low earlier in the week. The Stoxx Europe 600 Index followed gains in equity benchmarks from Tokyo to Sydney after U.S. equities advanced for a fourth day. European bourses rallied from the open led by mining and construction stocks, with base metals pushing higher through Asian session and European morning. Retail sector heavily underperforms after weak Carrefour earnings sees stock trade -15.1%. Most European bonds declined.
Meanwhile, no matter the news, the generic reaction is just to buy anything and everything: “It is almost like we have ended up with a default risk-on, which is in part predicated by the very benign pricing for what central banks do next,” said head of global macro strategy at State Street Global Markets, Michael Metcalfe. “And that is why the inflation numbers now will be important,” especially with energy prices and commodity prices having risen over the last couple of months. “The period where we could have expected favorable inflation numbers (for keeping interest rates low) may have passed.”
In Asia, Japan’s Nikkei closed up 0.7 percent, its best level in two weeks, helped by a pullback in the yen. MSCI’s broadest index of Asia-Pacific shares outside Japan edged down 0.1% on the day but was a modest 0.3% firmer for the month. The Topix index rose 0.6 percent at the close in Tokyo, paring its first monthly drop since March. Australia’s S&P/ASX 500 Index added 0.8 percent. The Kospi retreated 0.4 percent. Benchmark indexes dropped 0.6 percent in Hong Kong and fell in Shanghai, led by declines in banking stocks that had recently been surging.
Emerging market stocks took a breather too. But August has been their eighth straight month of gains and are now up almost 30 percent since the start of the year.
In addition to the European inflation U.S. core inflation figures, which will be closely watched by traders and the Fed as it looks to push on with its recent run of rate hikes, are also due later.
The U.S. dollar index rose to 92.929 and away from a 2.5 year low of 91.621 touched on Tuesday. The dollar also bounced to 110.60 yen, off a 4-1/2-month low of 108.25. The euro retreated to $1.1850 from its top of $1.2069, weighed in part by speculation the European Central Bank might start to protest at the currency’s strength. “The ECB meeting is coming up next week and there are rising risks of verbal intervention from Mario Draghi,” said Deutsche Bank strategist George Saravelos. “Despite this the euro level does not appear particularly extreme and most importantly the ECB has not been driving recent appreciation anyway,” he added. “Verbal rhetoric may cause a correction but is unlikely to be enough to derail euro strength.”
The currency has risen sharply this year against the dollar as pessimism over the euro bloc has dissipated and its economy has started to gain some traction.
The bounce in the dollar shaved 0.5 percent off the price of gold to $1,302.50 an ounce, short of Tuesday’s 9-1/2-month high of $1,325.94. West Texas Intermediate crude increased 0.3 percent to $46.10 a barrel. Gasoline for September advanced for an eighth day, up more than 4.4 percent to $1.9673 a gallon. Earlier the front-month contract touched the highest since July 2015.
Economic data include jobless claims, July pending home sales, personal income and spending as well as August Chicago PMI. Discount retail store operator Dollar General and Palo Alto Networks are among companies reporting results.
Bulletin Headline Summary from RanSquawk
- Euro equities trade higher whereas EUR was relatively unmoved from the release of European inflation data
- Harvey continued to exert influence over the energy space despite being downgraded to a tropical depression
- Looking ahead, highlights include US PCE, Chicago PMI, Canadian GDP and BoE’s Saunders
- S&P 500 futures up 0.2% to 2,461.00
- Brent Futures little changed at $50.87/bbl
- Gold spot down 0.1% to $1,307.09
- U.S. Dollar Index up 0.07% to 92.95
Top Overnight News from Bloomberg
- Trump’s Tax-Cut Bid Hits New Obstacle: Hurricane Harvey’s Costs
- Trump’s Impatience Emerging as Biggest Threat to Nafta Agreement
- America’s Jobs Engine Keeps Defying Forecasts for 2017 Slowdown
- Mobius Says Investors Are Rotating Out of U.S. Stocks Into EM
- Carrefour Slumps on Warning, Raising Pressure on CEO for Reboot
- BofA CEO Says He’s Confident Clients Will Pay for Research
- Euro-Area Inflation Gathers Pace as ECB Weighs Future Stimulus
- Fox Said to Continue Ion Talks as 5 Sinclair Deals Renewed
- Southern Is Said to Seek $25 Billion Nuke Plant’s Completion
- Ctrip Second Quarter Revenue Beats Estimates
- Costco Aug. Comp. Sales Beat Estimates
Asia stocks traded mixed as the region mulled over a slew of data releases including varied Chinese PMIs. Nonetheless, ASX 200 (+0.79%) and Nikkei 225 (+0.72%) were positive as early momentum rolled over from Wall St where tech outperformed and US GDP data beat estimates, with Nikkei 225 coat-tailing on the advances in USD/JPY above 110.00. Shanghai Comp. (-0.08%) and Hang Seng (-0.44%) traded negative after the PBoC refrained from open market operations, and as participants also digested Chinese PMI data in which Official Manufacturing PMI topped estimates but Non-Manufacturing PMI slowed. Finally, 10yr JGBs are lower with demand sapped amid outperformance of Japanese stocks and mixed 2yr auction. Chinese NBS Manufacturing PMI (Aug) 51.7 vs. Exp. 51.3 (Prev. 51.4). NBS Non-Manufacturing PMI (Aug) 53.4 (Prev. 54.5) Bank of Korea 7-Day Repo Rate (Aug) 1.25% vs. Exp. 1.25% (Prev. 1.25%).
Top Asian News
- Don’t Blame the Secretary Over Noble Group Fracas, Says ISDA
- Jokowi Forms Task Force to Steer Indonesia’s Marquee Investors
- BOJ Cuts 5-to-10 Year Bond Buy Range by 50b Yen for September
- India Inflation More Likely to Guide RBI’s Hand, DBS Bank Says
- China Bonds Feel the Heat Again as PBOC Tightens, Stocks Advance
- ANA to Sell 140 Billion Yen of Bonds for Buyback, Jet Purchases
European equities trade higher across the board (Eurostoxx 50 +0.5%) with sentiment continued to be supported in the region despite mixed performance seen overnight in Asia. In terms of sector specifics, material names lead the way higher with prices in China supported by a beat on expectations for Chinese Official Manufacturing PMI. To the downside, energy names lag as prices continue to feel the squeeze from the fallout of Harvey, while consumer staples also linger in the red after French retailheavyweight Carrefour (-12.5%) trade markedly lower following a disappointing outlook. Fixed income markets have once again been hampered by the upside in equities despite an absence of supply from the Eurozone for the rest of the week. More specifically, Bunds have faced selling pressure throughout the session before finding support at the 165.00 handle with further support said to lie below at 164.81. There was no substantial change in bunds after the release of the EU data. US Treasuries tracked risk sentiment, with the belly of the curve underperforming following a couple of strong sections on the back of stellar supply in the area. The long end ended relatively flat. However, concerns over rising North Korean tensions, and risks surrounding the US debt ceiling remain at the forefront of investors’ thought processes. US Sep’17 10y T-note futures settled at 127.02+, down 3+ ticks.
Top European News
- German Unemployment Falls as Nation Braces for General Elections
- Devil in the Detail: Brexit Talks Are Making Little Progress
- UBS Is Said to Be Leaning Toward Frankfurt for EU Trading Hub
- Nasdaq Sees Nordic Power Primacy Challenged by German Rival
- AstraZeneca Made Bid for Daiichi Sankyo Last Yr: Nikkei Business
- European Mining Stocks Climb After China Steel Mill Gauge Jumps
In currencies, GBP is modestly lower by around 0.2% as Brexit headwinds keep GBP pressured yet again. This morning saw comments from BoE Hawk, Saunders who continued to outline the case for a rate hike, whilst also downplaying the importance of such action. Today we saw the release of Eurozone inflation which was a beat of 1.5 on the expected 1.4 with previous 1.3%. However, EUR finding some mild support this morning amid cross related buying in EUR/GBP which has broken back above 92.00. NZD downward spiral continues, which has largely been the case since the back-end of July amid recent soft domestic economic data, while uncertainty looms over the general election.
In commodities, Harvey continued to exert influence over the energy space despite being downgraded to a tropical depression, with RBOB futures rising to a fresh 2-year high after reports that the Colonial Pipeline (the largest refined products pipeline in the US) will shut its main gasoline line today. This pressured WTI crude futures although prices have since recovered, while gold (-0.4%) saw a mini flash crash and briefly slipped below USD 1300/oz before paring the majority of the move in the following minute, with the initial dip in prices attributed to a sudden large sell order. Russia produced 10.9mln bpd in Aug, subsequently exceeding their quota, according to IFAX citing sources.
Looking at the day ahead, the July PCE and personal income and spending data will be the focus, while initial jobless claims, continuing claims, pending home sales and Chicago PMI are also due. Away from the data, China President Xi Jinping will host the 9th BRICS summit.
US Event Calendar
- 7:30am: Challenger Job Cuts YoY, prior -37.6%
- 8:30am: Initial Jobless Claims, est. 238,000, prior 234,000; Continuing Claims, est. 1.95m, prior 1.95m
- 8:30am: Personal Income, est. 0.3%, prior 0.0%; Personal Spending, est. 0.4%, prior 0.1%; Real Personal Spending, est. 0.3%, prior 0.0%
- 8:30am: PCE Deflator MoM, est. 0.1%, prior 0.0%; PCE Deflator YoY, est. 1.4%, prior 1.4%
- PCE Core MoM, est. 0.1%, prior 0.1%; PCE Core YoY, est. 1.4%, prior 1.5%
- 9:45am: Chicago Purchasing Manager, est. 58.5, prior 58.9
- 9:45am: Bloomberg Consumer Comfort, prior 52.8
- 10am: Pending Home Sales MoM, est. 0.4%, prior 1.5%; Pending Home Sales NSA YoY, est. 0.5%, prior 0.7%
DB's Jim Reid concludes the overnight wrap
Just a quick one from me this morning before passing over to Craig and Jeff. At around 1.55pm on Tuesday James Montgomery John Reid and Edward (Eddie) Fitzwilliam John Reid entered this world weighing c.5lb 13oz (2.635kg) and c.4lb 15oz (2.222kg) respectively. Poor Eddie had his umbilical cord wrapped around him possibly restricting his recent growth so it was good to get them out when we did. They both had blood sugar issues for over 24 hours but with intense feeding and glucose gels have now seemingly stabilised. Fingers crossed all seems well now but they are so small. Trudi is absolutely exhausted after being up for nearly 40 hours at one point and I'm a little tired but difficult to moan when I sneaked 4 hours in here and there. For most of the pregnancy we were going to call them Montgomery and Bartholomew. We finally ruled out the latter because of fears of him being forever associated with Bart Simpson. He's one of my favourite TV characters but we were not sure it was wise to risk Bartholomew being shortened and little Bart having to play up to his name.
As for Monty. We love that name. However with 2 days to go we tried it out at home to see how it sounded and every time we did Bronte ran in from the other room and demanded a treat. That seemed an untenable situation longer term. So Montgomery is a middle name. So James and Eddie were late bloomers but suit them perfectly. In case you're interested in between my many duties I created a rough video still collage of the boys' first 24 hours. The link to it is on my Bloomberg message header or I'm sure Craig can send it to you. See you in a couple of weeks. Over to Craig and Jeff.
It’s a bit difficult to compete with that news, but a decent run of macro data in the last 24 hours has proved to be a welcome distraction for markets from the recent geopolitical headlines. We’ll jump into the details further down but in summary higher than expected inflation prints in both Spain and Germany during the morning yesterday were then followed up by a stronger than expected ADP employment report in the US and a larger than expected upward revision to Q2 GDP. Overnight China has also reported a beat in its August manufacturing PMI which has added to the good news.
Looking ahead to today, macro data should remain front and centre as we’ll get the personal income and spending prints in the US this afternoon along with the Fed’s favored inflation measure in the July PCE data. So this will certainly be worth keeping an eye on given that we’d argue that inflation data and the outcome of the debt ceiling debate have taken over as the two most important considerations for the Fed outlook now. Our US economists expect the core PCE deflator to show a +0.2% mom rise while the market is slightly below that at +0.1% mom. Should our economists’ forecast be correct then the YoY rate should hold at +1.5% and unchanged versus June.
Over in markets, by the closing bell last night the S&P 500 finished +0.46% which believe it or not is actually the fourth consecutive daily gain for the index and the longest streak since May. President Trump didn’t completely stay out of the headlines after tweeting that “talking is not the answer” in response to the latest North Korea missile test but that appeared to be largely ignored, in part asDefence Secretary Mattis later said “we’re never out of diplomatic solutions”.
Separately, a headline from rating agency Standard & Poor’s suggesting that a failure to raise the debt limit would likely be more catastrophic than the failure of Lehman appeared punchy at first glance but was also taken with a pinch of salt. Elsewhere, the Nasdaq also finished +1.05% and the Dow +0.12%. In Europe the Stoxx 600 (+0.70%) snapped a run of three consecutive days closing in the red. That coincided with the Euro weakening -0.74% which means it is around -1.50% down from the peak level of 1.2070 made on Tuesday.
Staying with Europe, we thought it would be worth highlighting a couple of reports from DB research yesterday. The first is Mark Wall’s ECB preview in which he runs through his expectations for the ECB meeting on September 7th. In summary Mark is not expecting a policy announcement. A QE exit step is expected in the next few months, but concerns about market overshooting suggests the exit signal could be weak in September. Mark believes the ECB will leave the current rhetoric framework - “confidence, patience, persistence and prudence” - largely intact in September while adding a mild verbal warning that the EUR exchange rate is “important” to growth and inflation. Rather than signal exit in advance, Mark thinks that the ECB strategy will be to wrap the exit decision in dovishness when it is announced in October.
On a related topic, George Saravelos published a report yesterday morning addressing what might be next for the Euro now that his 1.20 EUR/USD target had been met so soon. He notes the risk of verbal intervention from Draghi at the ECB meeting. However George also notes that despite this the Euro level does not appear particularly extreme and most importantly the ECB has not been driving recent appreciation anyway. ECB verbal rhetoric may cause a correction but is unlikely to be enough to derail Euro strength. George and his team see the risks as still skewed towards the Euro overshooting above 1.20 at some point this year rather than permanently reversing lower.
Jumping to the latest in Asia now where the highlight has been China’s August manufacturing PMI which was slightly stronger than expected at 51.7 (vs 51.3 expected) and up from 51.4 in July. In the details new orders and business activity rose during the month. The non-manufacturing PMI did however weaken 1.1pts to 53.4. In Japan industrial production has slowed to a still solid +4.7% yoy (vs. +5.2% expected).
Markets have been a bit more mixed in Asia. Led by a retreat for banks, the Shanghai Comp (-0.65%) and Hang Seng (-0.57%) are both in the red, along with the Kospi (-0.20%). By contrast the Nikkei (+0.75%) and ASX (+0.69%) have firmed. Elsewhere, WTI Oil is flat following a third consecutive decline yesterday as Tropical Storm Harvey has now impacted c.20% of US’s refining capacity, but US gasoline prices continue to surge, up +6.12% this morning and so bringing the cumulative gain to around 20% over the past four days and prices to a fresh two-year high.
Away from the markets, yesterday Trump spoke in Missouri on his tax plan, warning Congress not to miss a “once in a generation opportunity” to boost the economy with a massive overhaul of the US tax code. However, the speech was more focused on “why” the US tax system needed to change, rather than providing details on “how” it can be change. He did say “Ideally….we would like to bring our business tax rate down to 15%” and that “I am fully committed to working with Congress to get this job done, and I don’t want to be disappointed by Congress”. Elsewhere on the Brexit talks, EU negotiator Barnier said he can’t agree to UK demands to be flexible until he knows what the UK wants, he said “to be flexible you need two points, our point and their point”, and that “we need to know their position and then I can be flexible”.
Back to that macro data yesterday. In the US, ahead of payrolls on Friday, the ADP employment change for August was higher than expected at 237k (vs 188k), the most since March. In light of this, our US team has raised the estimate for Friday’s official payrolls report by 15k to 200k. Elsewhere, US 2Q GDP was revised higher from 2.6% qoq to 3.0% qoq and stronger than expected (vs 2.7% expected) lifting through-year growth to 2.2% saar. While the stats are backward looking, it is encouraging that the revision has pushed quarterly growth to its highest level since 1Q15 after being driven by firmer estimates of final demand. Within the details, personal consumption was revised up to 3.3% qoq (vs 3.0% expected) and business investment was revised up 1.7pps to 6.9% saar. There were no revisions to the core PCE (+0.9% qoq).
Over in Germany, inflation data for August was slightly higher than expected at +0.2% mom (vs +0.1% expected), lifting the annual growth rate to +1.8% yoy (vs +1.7% expected). Spain’s HICP also rose +0.2% mom in August, lifting through-year inflation to +2.0% yoy. Elsewhere, the Eurozone’s August economic confidence index was better than expected at 111.9 (vs 111.3), which is the highest reading since July 2007. Confidence firmed across the industrial and service sectors in August, while the final reading for consumer confidence was in line at -1.5. Back to the UK, the BOE July mortgage approvals was slightly higher than expecte d at 68.7k (vs 65.5k), to be the strongest reading since March last year. Elsewhere, the credit lending was modestly softer than expected, with net consumer credit at 1.2bln (vs 1.5bln) and net lending on dwellings at 3.6bln (vs 3.8bln).
Looking at the day ahead, Germany’s July retail sales will be out in early morning (+2.9% yoy expected). Then we have the July unemployment rate for the Eurozone (9.1% expected) and Italy, along with the August unemployment change stats for Germany. Thereafter inflation data for the Eurozone (+1.2% yoy at the core), Italy and France are also due. Over in the US, as mentioned earlier the July PCE and personal income and spending data will be the focus, while initial jobless claims, continuing claims, pending home sales and Chicago PMI are also due. Away from the data, China President Xi Jinping will host the 9th BRICS summit.