We are often told that the world isn’t going to end by human hands but from a rock falling out of the sky, we have come close to proving this story many times. Close doesn’t count except in horseshoes and hand-grenades but it doesn’t help investors. While many see the return of bond vigilantes as the key driver for risk-off where global equities suffer, the mood change on US/China trade, UK Brexit and EU Italian budget issues also matters today ahead of the all encompassing jobs report for the US which many now expect to be stronger than the 185,000 NFP forecast after Services ISM employment and a drop in weekly claims despite the noise of the hurricanes this month. Markets are very close to that tipping point where bond yields matter again, where equities pay attention and where FX acts as an early barometer of change. The return of China Monday and the partial US Columbus Day holiday will make CNY a key focus next week. Today its GBP then the USD, then the EUR and ending with INR, as the news overnight was dull except for politics and policy: 

1) Brexit Deals? Reuters reporting that EU negotiators are “very close” to a deal on Brexit with the UK. Ireland’s EU Minister said there was “lots of common ground” on the border issue. 

2) China microchip hacking. The fall-out from the Bloomberg report yesterday won’t be fully understood for weeks. Both democrats and republicans agree this report puts China on par with Russia as a serious National Security Threat. Also, China responds to VP Pence accusations of meddling as “created out of thin air,” as the China foreign ministry statement argues he confuses “right and wrong.”

3) Italian people over markets? Reuters reports on the latest Italian deputy PM Di Maio blast that he will back the people over the markets. “We care about markets, but between the (BTP-Bund) spread and Italian people I choose the Italian people,” Di Maio said in an interview with RAI3 television. Also La Stampa reports that ECB Draghi met with President Mattarella obstensibly to warn him on the budget dangers.

4) India Reserve Bank blinks. The selling in the India shares and INR continues after the RBI keeps rates on hold– surprising the market. The INR touched 74 new record lows against the USD. The RBI left rates at 6.5% while many expected a hike to 6.75% as the currency is off 15% ytd. 

While the markets are going to obsess about US rates and the US jobs report, the pain trade in EM is still running with ARS, TRY the poster children but with BRL facing the election and INR facing stock outflows this market isn’t idiosyncratically led but very close to a crisis. Focus today is likely on USD/EUR 1.1450 and JPY 114.50 still but INR move is setting a tone to pay attention to for larger credit pain trades. Throw in that Putin visit and $5bn nuclear deal and you have a geopolitical story brewing as well. 

Question for the Day: Is Italian risk ring fenced? While the markets focus on US/China trade, US rates breaking out and the data on jobs today, the story of Italy and its ability to move EUR and Bunds remains in play but surprisingly, the move to 3.40% in Italian 10-year BTPs hasn’t brought down Spain or Portugal or really mattered to anyone in global markets. The WSJ Mackintosh column warns against this calm and is required reading for anyone trading fixed income and FX. Banking is on the front-lines in Europe and while Danke’s bank is the headline pain trade, Unicredit and others are also in play. The ongoing EM crisis adds to banking focus in Europe and its not likely to remain penned into Denmark and Italy. The spreads for government bonds might not be the right way to look at a festering contagion risk. 

What Happened?

• Japan August household spending up 3.5% m/m, +2.8% y/y after -1.1% m/m, +0.1% y/y – better than 0.4% m/m, -0.4% y/y expected – biggest jump in 3-years. The cabinet office upgraded its assessment on household spending for the second straight month, saying household spending "is picking up." Previously, the government said, it is "firm and flat." The August increase was led by the recent pickup in demand for cars and some mobile communications payments. Higher spending on education and housing also contributed to boosting household spending. On the downside, record high temperatures reduced spending on domestic travel. The average real income of households with salaried workers fell 0.6% on year, marking the second straight drop after a 1.6% drop in July.
• Japan August LEI 104.4 from 103.9 – better than 103.7 expected. The coincident indicator 117.5 from 116.1 – also better than 117.1 expected.
• Australia August retail sales up 0.3% m/m after 0% m/m – as expected. In trend terms, however, retail sales slowed to 0.2% m/m from 0.3% in July and also down from the 0.4% pace seen at the start of the year. The latest monthly gain was due to a part-rebound in the three categories which fell in July. Household goods retailing rose 0.2% versus a 1.3% fall in July. Clothing and footwear rose 0.8%, compared to a 2.1% decline, and department stores rose 0.9% after a 1.8% fall the month before.
• German August PPI up 0.3% m/m, 3.1% y/y after 0.2% m/m, 3.0% y/y – more than 0.2% m/m, 2.9% y/y expected. Energy rose 0.7% m/m, 7.3% y/y after 6.5% y/y, capital goods rose 0.1% m/m, 1.4% y/y after 1.3% y/y and basic goods 0% m/m, 2.9% y/y after 3.2% y/y. 

• German August factory orders rise 2% m/m, -2.1% y/y after -0.9% m/m – better than the +0.3% m/m expected. The year-to-date manufacturing orders decline is -4.6% y/y, but hold above recent averages. Intermediate goods orders, which were the only source of strength in July, fell back in August, albeit only by 0.1% m/m. Investment and consumer goods more than made up for their July declines, rising by 3.4% and 2.1% respectively.
• French August trade deficit E5.6bn after E3.49bn  - as expected. The exports were -0.1% m/m to E41.324bn, while imports +4.9% m/m to E46.956bn. The August French C/A deficit was E1.6bn after surplus of E0.3bn – also as expected. 
• Spanish August industrial output rose 1.2% y/y after 1.2% y/y – less than 1.6% y/y expected. The consumer goods output -1.2% y/y, capital goods up 5.4% y/y, intermediate goods up 0.6% y/y and energy up 1.8% y/y. 
• Swiss September CPI up 0.1% m/m, 1% y/y after 0% m/m, 1.2% y/y – less than 1.1% y/y expected. The HICP was 0% m/m, 1.1% y/y as expected. The core CPI (ex fresh food/energy) was 0% m/m, 0.4% y/y. 
• Italy August retail sales rose 0.7% m/m, 1.4% y/y after 0% m/m, -0.5% y/y – more than 0.2% m/m, +0.5% y/y expected. In value terms sales were up 2.2%. Sales rose 2.4% y/y for large scale retail and 1.3% y/y for smaller sellers. On-line sales were up 8.6% y/y. 

Market Recap:

Equities: S&P500 futures are off 0.1% after losing 0.82% yesterday. The Stoxx Europe 600 is off 0.4% with mining, tech and banks all suffering and Italy leading declines. The MSCI Asia Pacific fell 0.4% with tech shares the focus – Lenovo fell more than 20%. The MSCI all-country World is off 0.3% - worst in 3 weeks and EM index is off 0.8% lowest in 17 months. 

• Japan Nikkei off 0.80% to 23,783.72
• Korea Kospi off 0.31% to 2,267.52
• Hong Kong Hang Seng off 0.19% to 26,572.57
• China Shanghai Composite on holiday
• Australia ASX up 0.11% to 6,301.10
• India NSE50 off 2.67% to 10,316.45
• UK FTSE so far off 0.6% to 7,374
• German DAX so far off 0.6% to 12,172
• French CAC40 so far off 0.35% to 5,391
• Italian FTSE so far off 1.1% to 20,381

Fixed Income: Focus started with UK Gilts on Brexit deal hopes, then to German long-end with stronger factory orders, but remains wrapped in Italy and budget worries with BTPs. UK 10-year Gilt yields up 1.1bps to 1.675%, German Bunds up 2bps to 0.55%, French OATs up 1.8bps to 0.888% while periphery focus is on Italy still – up 8bps to 3.405%, Sapin up 1bps to 1.565%, Portugal up 1.5bps to 1.915% (faces afternoon rating change risk), Greece up 4bps to 4.48%. 

• US Bonds watching EU bonds, continue bear steepening– 2Y up 1.3bps to 2.881%, 5Y up 1.2bp to 3.057%, 10Y up 1.5bps to 3.202% and 30Y up 1.5bps to 3.362%. 
• Japan JGBs see curve flattening after BOJ keeps Rinban unchanged. 2Y off 0.7bps to –0.13%, 5Y off 0.8bps to -0.075%, 10Y off 0.4bps to 0.145% and 30Y off 1.2bps to 0.933%. The BOJ bought Y255bn from the market with offer to cover ratios: 10-25 Year 2.01 from. 2.67; 25+ Year 3.88 from 3.41. 
• Australian bonds chop around, end nearly flat with steeper curve, watching US and equities– 3Y off 0.2bps to 2.015%, 10Y up 0.5bps to 2.867%. The AOFM sold A$500mn of 4Y 2.25% Nov 2022 #TB153 bonds at 2.1725% with 5.898 cover – previously 2.1168% with 4.6833 cover. 

Foreign Exchange: The US dollar index is up 0.1% to 95.81 with 95.72-90 range – muted trading with equities/bonds leading. In EM, USD is mixed – EMEA USD offered: ZAR up 0.7% to 14.765, TRY flat at 6.165, RUB up 0.2% to 66.76; ASIA USD bid: TWD off 0.15% to 30.848, KRW off 0.1% to 1130.50 – with 1130 pivotal close for week – INR off 0.3% to 73.79. 

• EUR: 1.1500 off 0.1%.Range 1.1487-1.1520 with 1.1450 and 1.1580 keys ahead of US jobs and long weekend.
• JPY: 113.90 flat. Range 113.79-114.10 with EUR/JPY 131.00 off 0.1% - some calls for 110 again on risk-off with 112 base for 115 barrier.
• GBP: 1.3040 up 0.15%.Range 1.3003-1.3060 with EUR/GBP off 0.25% to .8820 as Brexit deal hopes drive. 1.3120 and 1.3250 next. 
• AUD: .7075 flat. Range .7054-.7084 with copper driving as retail sales not enough, NZD off 0.15% to .6470 with .6420 still key. 
• CAD: 1.2920 flat. Range 1.2916-1.2941 with BOC and data today keys and crosses driving 1.2880-1.2950 consolidation but risk for 1.3050 again. 
• CHF: .9940 up 0.2%.Range .9914-.9949 with EUR/CHF 1.1430 up 0.1% - despite Italy noise, CHF lower, focus is on SNB and rates. 

Commodities: Oil mixed, Gold up, Copper off 1.6% to $2.8030. 

• Oil: $74.56 up 0.3%.Range $74.47-$74.94 with focus on $76.50 and $74 for consolidation after yesterday’s 2% plus pullback. Brent off 0.1% to $84.50 with focus on $85 as pivot for $87 target still and $80 base. 
• Gold: $1202.25 up 0.2%.Range $1199.50-$1203. Gold, 55-day at $1202.40 holding for hopes of $1215 again, while $1180.90 Sep 28 base does as well. Silver $up 0.2% to $14.63, with 55-day at $14.736 and $14.50 pivotal base holding. Platinum up 0.4% to $828.15 and Palladium up 0.2% to $1059. 

Conclusions: Is the 30Y 3.25% breakout the earthquake for risk-parity? The idea that stocks go up and bonds go down has hedged portfolios well for over 50-years particularly since the 1980s and Greenspan. But the recent shift in FOMC policy with the end of QE and its unwind has called into question the Powell S&P500 put. The risk of a bond bear market enticed traders to risk-off selling in stocks in February and we appear to be on the start of another such story in October. The Jeff Gunlack warnings on the 30Y are catching a lot of press and worth considering even after the 8.31am NFP story.

Economic Calendar:

• 0830 am US Sep non-farm payrolls 201k p 185k e / AHE (m/m) 0.4%p 0.3%e (y/y) 2.9%p 3.0%e / UR 3.9%p 3.8%e / participation rate 62.7%p 62.6%e
• 0830 am US Aug trade deficit $50.1bn p $53.0bn e
• 0830 am Canada Sep employment -51.6k p +25k e / rate 6%p 5.9%e / participation 65.3%p 65.3%e
• 0830 am Canada Aug trade deficit C$0.11bn p C$1.4bn e
• 0300 pm US Aug consumer credit $16.65bn p $15bn e