Traders On Hold As "Super Thursday" Looms

Yesterday's brief late night dip in ES has been promptly bought with US equity futures fractionally lower, Asian shares inching higher on Thursday and Europe unchanged ahead of today's Super Thursday, where we get the Republican tax bill revealed shortly before noon, the BoE's rate hike announcement, and Trump appointing Jay Powell as the next Fed chair, as well as as earnings from companies including Apple and Starbucks. With the dollar dropping slightly, markets seem to have taken a shine to the euro and EM FX, specifically your high beta currencies.

“There is some element of uncertainty about the U.S. tax bill and next Fed chief, and this is having an effect on the U.S. market, though shares in Asia appear quite resilient today,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust. “Still, it would not be surprising if some investors used the uncertainty as a reason to take profits after recent strong gains,” she said.

Among the main events today, and as widely reported yesterday, the White House plans to nominate current Fed Governor Jerome Powell as the next chair when Janet Yellen’s term expires in February, a source familiar with the matter said on Wednesday. Powell’s nomination, which would need to be confirmed by the Senate, is expected later on Thursday before President Donald Trump leaves on a trip to Asia. Rising expectations that Trump will tap Powell, who is seen as more dovish on interest rates, have pressured U.S. Treasury yields and kept the dollar on the backfoot this week, according to Reuters.

The progress toward American tax reform is also on most investors’ radars, alongside corporate earnings and Friday’s U.S. jobs report. There have been conflicting reports about when and how the U.S. tax rate on companies would be lowered. US GOP tax bill said to propose 12% repatriation tax on cash and 5% rate on non-cash holdings. US House Republicans were reported to be mulling a corporate tax phase out after 10 years, while US House Tax Committee Chairman Brady said that a permanent corporate tax reduction could require several steps.

On Wednesday, the Fed held policy steady as expected and emphasized rising economic growth as well as a strengthening labor market, while downplaying the impact of recent hurricanes. Investors took that as a sign the U.S. central bank is on track for another hike next month, with federal fund futures putting the odds of a December rate hike at about 85% according to Bloomberg calculations.

With regards to the BoE, the market prices in a 90% probability of a hike today. Our economists see the outlook for the meeting as tilted towards hawkish messaging on the outlook for rates next year, at least relative to market pricing. But they struggle to see this as credible without more certainty over Brexit and more evidence of faster wage growth.

Both the dollar and sterling lag G-10 peers as investors awaited central bank news from both sides of the Atlantic, with BOE forecast to raise rates for the first time in a decade and Trump said to nominate Powell as the next Fed Chair. Bund futures set fresh day lows after soft French, Spanish auctions drive broad EGB weakness. Gilt and Treasury futures dip, though trade in tight ranges. European stocks mostly lower, with DAX leading losses while Italy’s FTSE MIB outperforms; health care leads sector declines, Sanofi weighing after trimming the outlook for its diabetes business. Rally in base metals pauses; most metals drop on LME, led by zinc and nickel.

In global equity markets, European stocks were little changed near their highest level since 2015 amid a slew of earnings, as investors braced for the BOE’s first rate hike in more than a decade. The Stoxx 600 rose 0.1%, with real estate shares leading gains, led by Intu Properties which rose after saying it sees sustained retailer demand and rising rents. Credit Suisse climbed as its assets under management rise to a record. Playtech slumped, dragging on travel-and-leisure shares after forecasting full-year performance below the bottom end of estimates. The U.K.’s FTSE 100 holds steady ahead of the BOE rate decision on Thursday.

Asian shares were mixed as a rally that drove prices to the highest level in 10 years showed signs of tiring. Materials stocks led gains in Asia amid a surge in nickel prices this week to a two-year high. The yen strengthened against the U.S. dollar after the Powell news hit the tap.e The MSCI Asia Pacific Index gained 0.1% percent to 169.86 as of 4:19 p.m. in Hong Kong, with the materials sector gauge touching a five-year high. Nickel has jumped 10 percent this week through Wednesday to the highest level since June 2015, while some investors are betting iron ore will command higher prices next year. Honda Motor Co. was the biggest boost to the index after raising its guidance and announcing a new shareholder returns policy. News about Trump’s decision to nominate Powell, first reported by the Wall Street Journal, followed the central bank’s policy statement that reinforced expectations of a rate hike in December and said growth in the world’s largest economy was “solid.” Investors expect the appointment of Powell, the Fed’s only Republican, to be an extension of the dovish policies under Janet Yellen that have contributed to the rise in global stock markets. "The biggest factor for today’s gain is the sudden rally of nickel prices on Tuesday and Wednesday, as its surge affects miners in Indonesia, Australia and New Zealand, in the midst of recent rallies of crude and iron ore," said Seo Sang-young, a strategist at Kiwoom Securities.

China stocks retreated as small caps fell to a one-month low. The ChiNext Index of small-cap and tech shares was the biggest loser Thursday, dropping to a one-month low, while the Shanghai Composite Index also declined and stocks in Hong Kong gave up earlier gains. The SHCOMP lost 0.3% to 3383, facing strong resistance at 3400; mid & small-caps selloff continues, Nasdaq-style Chinext down 1.3%. Tesla-related stocks tumbled as Elon Musk said Tesla would not spend major capital in China until 2019.

After initially rising following a strong ADP report, Treasury yields then fell on Wednesday and the yield curve flattened the most since 2007 after the Treasury Department said it would keep auction sizes steady in the coming months, despite the Fed’s plan to reduce its bond holdings. 10-year yields were at 2.359% in Asian trading, compared to their U.S. close of 2.376% on Wednesday, when they dipped as low as 2.349% . German 10Y yields rose one bps to 0.39 percent, the highest in a week. Britain’s 10% yield also climbed to 1.356 percent, +1bp, the highest in a week, while Japan’s 10Y declined 0.055 percent, -1bp, the lowest in four weeks.

In commodities, crude oil futures steadied, with Brent crude up 7 cents at $60.56 per barrel and U.S. crude down 1 cent at $54.29.  While oil settled lower on Wednesday after weekly U.S. government inventory data showed the latest crude stock draw was not as big as an industry trade group had reported, both Brent and U.S. crude futures remain near their highest levels since July 2015 as lower global supply pushed markets higher. Gold gained 0.1% to $1,276.34 an ounce, the highest in more than a week. Copper fell 0.7% to $3.12 a pound.

Elsewhere, bitcoin extended gains for the fourth consecutive day, hitting $7,000 to establish a fresh record.

Bulletin headline Summary from RanSquawk

  • Markets subdued as anticipation on the BoE
  • USD finds some support following overnight weakness, as Trump intends to select Powell as the next Fed Chair
  • Looking ahead, highlights include The BoE Rate Decision and QIR, Fed’s Powell, Dudley and Bostic

Market Snapshot

  • S&P 500 futures down 0.2% to 2,570.25
  • STOXX Europe 600 up 0.02% to 396.85
  • MSCi Asia up 0.1% to 169.84
  • MSCI Asia ex Japan down 0.05% to 556.24
  • Nikkei up 0.5% to 22,539.12
  • Topix up 0.4% to 1,794.08
  • Hang Seng Index down 0.3% to 28,518.64
  • Shanghai Composite down 0.4% to 3,383.31
  • Sensex down 0.04% to 33,588.29
  • Australia S&P/ASX 200 down 0.1% to 5,931.71
  • Kospi down 0.4% to 2,546.36
  • Gold spot up 0.1% to $1,276.28
  • U.S. Dollar Index down 0.2% to 94.67
  • German 10Y yield rose 1.1 bps to 0.384%
  • Euro up 0.2% to $1.1636
  • Brent futures down 0.4% to $60.28/bbl
  • Italian 10Y yield fell 2.3 bps to 1.538%
  • Spanish 10Y yield unchanged at 1.475%

Top headline News from Bloomberg

  • President Donald Trump plans to nominate Federal Reserve Governor Jerome Powell to the top job at the U.S. central bank, according to people familiar with the decision. The annoucement is due at 3 p.m. Washington time.
  • “Not only is he the continuity candidate given he is already on the Fed board, but he also has a good working relationship with the current FOMC,” Michael Hewson, chief market analyst at CMC Markets, writes of Powell.
  • House Republican leaders plan to unveil a tax bill Thursday that would cut the corporate tax rate to 20 percent -- though it may not stay there. The decision may come down to congressional scorekeepers who’ll assess the effect on the federal deficit
  • Euro-zone manufacturing PMI increased to 58.5 in October -- the highest since February 2011 and the second-highest in over 17 years, as companies boost hiring to cope with a surge in orders that is set to last
  • Japan’s Government Pension Investment Fund posted its fifth-straight quarterly gain, the longest run in more than two years, as global stocks advanced to new highs and weakness in the yen helped boost the value of overseas investments
  • Bitcoin climbed past $7,000 for the first time, breaching another milestone less than one month after it tore through the $5,000 mark
  • North Korea is working on an advanced version of the KN-20 intercontinental ballistic missile that could potentially reach U.S., CNN reports, citing unidentified U.S. official
  • Tesla Inc. still hasn’t figured out how to overcome manufacturing challenges that threaten its viability as an automaker, with battery factory- line glitches pushing out production targets for the Model 3 sedan
  • While Credit Suisse Group AG wasn’t immune to the third- quarter trading slump, Chief Executive Officer Tidjane Thiam’s pivot to wealth management drove assets to a record as the bank predicted continued strong performance
  • After two rocky days in Congress, Facebook and Twitter face rising momentum for regulation of political ads to curb Russian election meddling, although some key Republicans remain skeptical and urged the companies to do a better job on their own
  • German Unemployment Extends Decline as Economy Powers Ahead
  • Sex-Harassment Storm Hits U.K. Political Elites Amid Brexit

Asian equity markets were mostly subdued as region failed to sustain the early momentum from US, where stocks printed fresh intraday record levels before some profit taking crept in. Furthermore, a deterioration in sentiment coincided amid a continued pullback in US equity futures due to tax plan uncertainty, with reports now suggesting the plan could include a phase out in corporate taxes after a decade. As such, ASX 200 (-0.1%) finished negative with financials pressured after big 4 NAB announced to drop 6,000 workers. Elsewhere, Nikkei 225 (+0.3%) was indecisive but extended on 21-year highs nonetheless, while Hang Seng (-0.2%) and Shanghai Comp. (-0.7%) were lower after the PBoC skipped its liquidity operations. Finally, 10yr JGBs saw marginal gains as they tracked upside in T-notes and amid an indecisive risk tone in Japan, while the BoJ were also in the market for JPY 710bln of JGBs in the belly to super-long end.

European Equity markets have traded mixed, with little way of direction, as participation focus moves to 12:00GMT and the BoE. Sectors also trade rangebound, with Telecoms out-performing, marginally so, up 0.30% with financials behind, as expectations are on a hike from the UK Central Bank. Healthcare and IT pull the bourses lower however, both down 0.50%. Fixed Income markets follow the subdued trading fashion, with yields relatively stagnant. Much attention was on auctions from Spain and France, particularly the former, as an increased scope has been on Spain following the recent political turmoil.

In FX, the central bank week continued yesterday evening, as the FOMC’s retained rates between 1.00% - 1.25%. Markets were seemingly unfazed, with much of the Greenback’s hinging on President Trump’s announcement of the next Fed chair, with market expectation increasingly looking toward an appointment of Governor Powell. The Dollar Index saw some selling pressure as we entered the morning’s Asian session, finding some support around the 94.40 area as Europeans came to market, aided by the rate hike expectations for Dec increasing to 92%, from a previous 83%. EUR/USD looks towards key support at last week’s low at 1.15, as GBP/USD trades in a range-bound fashion, as full focus is on the BoE interest rate decision. Sterling traders will await the MPC’s decision, followed by Carney’s 12.30 press conference 30 minutes later, with expectations on a 25bps hike (>90%) from the Central Bank. Concerns remain toward data from the UK however, with a larger trade deficit, weaker retail sales and manufacturing activity, accompanied by a slowdown in CPI growth, all possibly still on the mind of the MPC members. EUR/GBP trades around a key support level, above the 0.8750, despite the break seen yesterday, offers do remain around these levels.

In commodities, oil news has been light today, with the highlight coming from the SOMO stating Southern Iraqi Crude exports stood at 3.35mln bpd in October (3.24mln bpd in Sep). Markets are unfazed, with WTI consolidating within the day’s range.. Saudi Energy Minister Al-Falih said he expects oil market to continue proving and producers to renew resolve to normalize stockpiles. Kuwait said it sees oil output cut being announced in Vienna and that the length of extension and other alterations could be announced in Feb-Mar. (Newswires) OPEC wants to see the floor for oil prices at USD 60/bbl in 2018, according to a source familiar with Saudi oil thinking.

US Event Calendar

  • 7:30am: Challenger Job Cuts YoY, prior -27.0%
  • 8:30am: Initial Jobless Claims, est. 235,000, prior 233,000; Continuing Claims, est. 1.89m, prior 1.89m
  • 8:30am: Nonfarm Productivity, est. 2.6%, prior 1.5%; Unit Labor Costs, est. 0.4%, prior 0.2%
  • 9:45am: Bloomberg Consumer Comfort, prior 51

DB's Jim Reid concludes the overnight wrap

Today’s EMR is basically a therapy session and if I’m still writing the EMR in 30 years’ time (for anyone that will have me) you can trace the reason why back to today. For 43 years on this planet I’ve lived my life in a fairly prudent  manner making sure that there is a rainy day fund for any unforeseen circumstances. However guess what I’m doing today on the day the Bank of England likely raises rates for the first time in a decade and from the lowest level in the bank’s 323 year history? Yes I’m taking out a large loan and buying a new house. Likely at the top of a very expensive UK property market and as Brexit lurks around the corner.

Long time readers will remember that 3-4 years ago we did extensive renovations on our current house which was supposed to be a forever home. However at that point we didn’t have any children and had to come to terms with the fact that we may never be lucky enough to have them. Not in our wildest dreams did we imagine that 3 years later we’d have 3 of them. So although our house is wonderful, after finding out we had twins coming we very vaguely explored the possibility of finding a house with a layout more appropriate for our expanded family and the next thing we knew we’d fallen in love with a place and made an offer. It completes today. We won’t move in for a year as we don’t do anything simply and it needs a fair amount of work. So I’m in state of shock still. One day I will weigh up the full lifetime monetary cost of the ‘incident’ last Xmas holidays that led to the twins arrival (e.g. new car, full time childcare help, new house, future school fees, university costs and deposit for a first home etc etc). However for now I’m burying my head in the sand

From the sand dunes welcome to super , super Thursday with a busy day ahead. First we have the European manufacturing PMIs delayed from yesterday due to holidays, then we’ll likely have the first BoE rate hike for a decade and then in the US session Mr Trump is going to be busy as he announced yesterday that today would see his Fed Chair pick revealed (WSJ say Powell chosen) and he’s also likely to stand with lawmakers to announce the House tax bill  (9am EST/3pm BST the time expected).

With regards to the BoE, the market prices in a 90% probability of a hike today. Our economists see the outlook for the meeting as tilted towards hawkish messaging on the outlook for rates next year, at least relative to market pricing. But they struggle to see this as credible without more certainty over Brexit and more evidence of faster wage growth.

This follows last night’s FOMC where the statement was largely designed to not tone down markets’ strong expectation of a rate hike in December (probability now up 9ppt to 92%). In the details, Fed officials voted unanimously to keep rates on hold this month. On the recent economic performance, the Fed has upgraded the description from rising “moderately” to “rising at a solid rate despite hurricane-related disruptions”. On unemployment, it changed from “has stayed low” to it has “declined further”. On inflation, it acknowledged that although the storms had boosted headline inflation, core inflation remained soft, but there was no change to the committee’s view that “inflation…is expected to remain somewhat below 2% in the near term, but (will) stabilize around the 2% objective over the medium term.” On the recent hurricane disruptions, it reiterated that it will continue to affect economic activity, “but past experience suggests that the storms are unlikely to materially alter the course of the economy over the medium term”. Overall, DB’s Peter Hooper continues to expect three more hikes next year with the voting committee shifting in a modestly hawkish direction. Refer to link for more details.

Now onto tax reform, as per Republican lawmakers involved in the discussions, the tax bill will impose a one-time tax of 12% (vs. 10% from prior reports) on US companies’ accumulated offshore earnings that are held as cash and 5% for non-cash holdings (per Bloomberg). Finally, Treasury Secretary Mnuchin is reportedly resisting a gradual phase-in of tax cuts over 5 years (ie: from 35% to 20% by 2022, -3ppt p.a) as it would not boost growth as much as expected. We can’t wait to find out more later today.

As for the Fed Chair announcement this afternoon, the WSJ claimed last night that Powell has got the job. According to people familiar with the matter, the White House has notified Powell that President Trump intends to nominate him as the next Chairman and that Trump has also personally spoken with Powell on Tuesday too. Such an outcome had been increasingly priced in so it’s unlikely to impact markets too much.

This morning in Asia, markets are trading a bit lower, but the Nikkei is up 0.19% to a fresh 21 year high following Honda’s corporate result (shares +5%). Although we’re at 21-year highs we first saw these levels 30 years ago so three decades of treading water for the index in reality. Across the region, the Hang Seng (-0.15%), Kospi (-0.39%), Shanghai Comp. (-0.58%) and ASX 200 (-0.08%) are all down as we type.

Looking forward, most eyes this morning will be on the final revisions to the October manufacturing PMIs, which also includes a first look at the data for the periphery. The consensus is for no change to the flash reading for the Eurozone at 58.6. As a reminder, if that holds it will be the highest reading in 80 months. We’ll actually have to wait until next week to get the remaining services and composite prints. In terms of the country specific details today, Germany and France are expected to broadly stay put relative to their flash readings, while Spain is expected to nudge up half a point to 54.8. Italy is also expected to see a modest rise of 0.2pts to 56.5. For completeness, yesterday’s data in the Netherlands (60.4) was the second highest on record while Greece softened a bit to 52.1 – although more significantly held above 50 for the fifth month in a row following nine sub-50 prints. Elsewhere the  UK firmed 0.3pts to 56.3 (vs. 55.9 expected), a solid level but still below levels of other G10 nations.

Now recapping market’s performance from yesterday. US bourses edged higher back towards their record highs, with the S&P (+0.16%) and Dow (+0.25%) up slightly, while the Nasdaq dipped 0.17% following strongerperformance back on Tuesday. Within the S&P, gains were led by energy (+1.09%) and materials stocks, with partial offsets from telco and utilities names. After the bell, Facebook was down c2% despite posting higher than expected quarterlyrevenue, although the stock is already up c56% YTD (vs. S&P up c15% YTD). European markets were also broadly higher, as the DAX jumped 1.78% to a fresh record high as trading resumed post a holiday. Across the region, the Stoxx gained 0.39% to a 2 year high driven by materials and tech stocks, while the FTSE (-0.07%) and Spain’s IBEX (-0.16%) fell marginally. The VIX was broadly steady at 10.2.

Over in government bonds, yields were mixed but little changed. The UST 10y pared back intraday gains to be 0.7bp lower, while core European bond yields rose c1bp (Bunds +0.9bp; Gilts +1.1bp; OATs +0.8bp). At the 2y part of the curve, Bunds were flat while Gilts rose 2.9bp ahead of the potential BOE rate hike today.

Turning to currencies, the US dollar index gained 0.28% following the marginally hawkish FOMC meeting, while the Euro and Sterling weakened 0.23% and 0.29% respectively. In commodities, WTI oil dipped 0.15% following an API report that showed a slightly less than expected decline in US crude and gasoline stockpiles. Precious metal strengthened modestly (Gold +0.25%; Silver +2.53%) while other base metals fell marginally (Copper -0.04%; Zinc -0.59%; Aluminium -0.73%).

Away from the markets, the UK trade secretary Fox said the EU is being “unreasonable” by requiring UK to pay a Brexit bill before allowing talks to move onto trade and transition deal. He noted “the idea that the UK would actually agree to a sum of money before we knew what the end state looked like… I think is a non-starter”. However, this partly contradicts Brexit Secretary Davis earlier comments where he noted “the withdrawal agreement…will probably favour the EU in terms of things like money and so on”. Elsewhere, the CEO of BOE’s prudential regulation authority Sam Woods noted that Oliver Wyman’s estimate of up to 75,000 job loss in banking and insurance is “plausible” if the UK leaves the EU bloc without a trade deal. With all this bubbling along, we shall find out more with the next round of Brexit talks to resume from 9th November.

Over in Japan, Mr Abe has been officially reappointed as PM following his clear election win. On the choice of the next BOJ governor whose term ends next April, PM Abe said “the slate is completely blank”, although he also noted “I’ve faith in (existing) governor Kuroda’s abilities and I leave monetary policy up to him”.

Before we take a look at today’s calendar, we wrap up with other data releases from yesterday. In the US, the macro data was a bit mixed. The October ADP employment change was above expectations at 235k (vs. 200k expected), although there was a 25k downward revision to the prior month’s reading. The October ISM manufacturing remains solid as it eased from last month’s 13 year high to 58.7 (vs. 59.5 expected). In the details, 16 of 18 industries reported expansion and the new orders index eased 1.2pts to a still very solid reading of 63.4. The final reading for the October Markit manufacturing PMI was broadly in line at 54.6 (vs. 54.5 expected). Elsewhere, construction spending came in at 0.3% mom (vs. -0.2% expected) and total car sales in October were above expectations at 18m (vs. 17.5m expected) as demand continues to be supported by post storm purchases. Finally, the Atlanta Fed’s early GDPNow model estimate of 4Q GDP growth is now 4.5% saar. If true, this would only mark the 4th quarter since the great recession has the US economy ever reached this high level.

Finally in the UK, the October Nationwide house price index was in line at 0.2% mom, leaving an annual growth of 2.5% yoy and Sweden’s manufacturing PMI was 59.3 (vs. 63.5 expected) in October. Looking at the day ahead, we have the BoE meeting outcome due around lunchtime. BoE Governor Carney will follow while the Bank’s latest inflation report will also be released alongside this. Datawise we’ll receive the final October PMI revisions in Europe along with the October unemployment print in Germany and initial jobless claims and Q3 nonfarm productivity and until labour costs in the US. The Fed’s Bostic is also due to speak along with the IMF’s Lagarde. Today the new Fed Chair and draft tax plans are expected to be announced. Apple and Credit Suisse are amongst the notable corporate reporters.