Markets: Explanations

The storyline for the week has been China trade talks and a stable CNY versus Turkey defiance as it goes its own way to fix the TRY and economic crisis as it battles the US over a jailed Pastor. The US Treasury Mnuchin threat for more sanctions on Turkey at the US close has led the TRY off 6% back to 6.20 on the day and so risk in Europe is lower. This offset hopes in Asia that the US/China talks in the next few weeks might lead to something, that the CNY stability is a peace offering and that Trump said NAFTA negotiators need to take their time to strike a deal. China shares maybe a better guide as they fell again. While the calm today has been attributed to the mixed hopes above after a volatile week, the answers aren’t satisfying. If you want more creative explanations for the markets perhaps ask your kid why the window is broken. Better even still read about how broken windows lead to lower morale.

The answer for the price action today returns to the mundane. There was little economic data to move markets either – Japan’s Reuters Tankan was better for manufacturing despite trade fears while services were worse. Korean jobs fell and the Moon government may feel some heat on the economic front RBA testimony from Lowe and a speech from Ellis didn’t move markets either. The HICP final reading for Europe was unrevized and as expected. This leaves the market watching US/China trade talk hopes, Turkey and its reactions to more US pressure – watch S&P today for a downgrade on the debt, and the upcoming Putin/Merkel meeting tomorrow for headlines. US data is light – with preliminary University of Michigan Sentiment likely to show some dip, Canadian CPI will be the main focus with most fearing higher locking in a BOC rate hike again. FX is in consolidation with the focus on EM still but the risks in Europe – with EUR set for more trouble – that is the place where risk remains – as Italy continues to trade poorly and the ECB/debt dynamic looks most at odds with the explanations above. Watching 1.1250 for 1.10 still as the target against 1.15 resistance.

Question for the Day: Is the risk mood USD dependent? The relationship of a stronger USD to EM and DM stock prices has been notably correlated of late. This maybe about to change. The rally up in fixed income overnight is based in part on the weaker US data – particularly from the Philly Fed – with little chance that the markets are going to find the right balance today. Regional Fed Surveys are pointing to a weaker US ISM. This means 3Q growth outlooks will be moderating and the effect of EM pain on FOMC thinking may have more importance. All of which shows up in the USD.

What Happened?

Japan August Reuters Manufacturing Tankan jumps to 30 from 25 – best in 7 months. Outlook for November rises to 32. The gains were driven by auto and transport equipment companies. It was the highest reading since January when it hit an 11-year peak of 35. However, Services drop to 25 from 34 – lowest since Dec 2016. Outlook for November is for modest gain to 26. The Services index was dragged down by information/communications, retailers/wholesalers, and other service firms.

Korea July unemployment rate rises to 3.8% from 3.7% - as expected - job creation up just 5000 y/y – worst since Jan 2010. The number of employed people reached 27.08 million in July, up just 5,000 from the same one-month period in 2017, the smallest gain since January 2010. Youth unemployment was flat at 9.3%. The employment rate fell 0.2% y/y to 67%. The manufacturing sector shed 127,000 jobs last month, marking a decline for a fourth straight month. The education service sector also saw its employment drop to 78,000 last month. “The structural changes in some industrial sectors contributed to a drop in job additions,” an official at Statistics Korea said. “The biggest factor is that corporate restructuring in the manufacturing sector is affecting the overall employment.”
RBA Lowe: Lower prices on good news. Lowe said that lower inflation due to slowing in administered prices isn't a sign that the economy is doing poorly or there is lack of pricing pressures but it is decision made by the government to alleviate cost of living pressures. "People have more money to spend on other things and that creates more demand in the economy. It is an unambiguously good news even if inflation remains a bit lower for bit longer," he added. On the exchange rate, Lowe said a "moderately lower" currency would help inflation and employment. He also said that it would be "problematic" if the Australian dollar depreciates in a crisis environment. But outside that depreciation would be helpful, he added.

RBA Ellis: Unclear about Australia NAIRU. Ellis said that it might just take a while before firms start to realize how hard it is to find suitable labor, and decide to offer higher wages. "So it could be that it takes a little while for wages to pick up once unemployment has fallen below the NAIRU." But there could also be a situation where employers change their definition of "suitable labor" and start hiring people they previously didn't consider. In such a situation the jobless rate could fall before wages start to rise. In other words, the NAIRU falls, Ellis said.

Eurozone July final HICP unrevised -0.3% m/m, 2.1% y/y after +0.1% m/m, 2.0% y/y – as expected. The core HICP also unrevized at 1.1%y/y from 0.9% y/y – Food up 2.5% y/y after 2.7% y/y while energy up 9.5% y/y after 8.0% y/y.
Eurozone June Current Account Surplus E24bn after E24bn revised – as expected. May revised from E22bn.June goods trade balance up E23bn from E22bn (revised from E21bn).

Market Recap:

Equities: The S&P500 futures are off 0.1% after a 0.79% gain yesterday. The Stoxx Europe 600 is off 0.2% led by technology stocks.The MSCI Asia Pacific rose 0.5% - best gains in a week – despite China reversing early gains due to healthcare selling around its vaccine scandal.

Japan Nikkei up 0.35% to 22,270.38
Korea Kospi up 0.28% to 3,209.44
Hong Kong Hang Seng up 0.42% to 27,213.41
China Shanghai Composite off 1.33% to 2,669.10
Australia ASX off 0.21% to 6,426.20
India NSE50 up 0.75% to 11,470.75
UK FTSE so far off 0.15% to 7,543
German DAX so far off 0.4% to 12,190
French CAC40 so far off 0.2% to 5,338
Italian FTSE so far off 1.1% to 20,297

Fixed Income: Bonds are bid with flight to quality buying with Italy and Turkey the focus in Europe. German Bund 10-year yields off 2.6bps to 0.29%, UK Gilts off 4bps to 1.20%, French OATs off 2bps to 0.65% while Italy is up 2.5bps to 3.13%, Spain off 0.5bps to 1.43%, Portugal up 1bps to 1.84% and Greece up 1bps to 4.265%.

US Bonds holding bid despite equities – 2Y off 1.3bps to 2.604%, 3Y off 1.1bps to 2.67%, 5Y off 1.5bps to 2.726%, 10Y off 2% to 2.846%, 30Y off 1.7b sp to 3.009%.
Japan JGB see bull steepening – real yields drop 1bps to -0.375% in 10Y off 7bps from last months BOJ speculations. 5Y off 1bps to -0.095%, 10Y bond yields off 0.1bps at 0.085%, 30Y up 0.3bps to 0.842%. BOJ buying in 1-3Y and 3-5Y unchanged today.
Australian bonds rally with eye on RBA testimony – 3Y off 0.5bps to 2.005%, 10Y off 1bps to 2.545%
China PBOC adds CNY90bn via 7-day reverse repos on the day, net adds CNY513bn on the week. Money market rates rose with O/N up 7bps to 2.578%, 7-day up 7bps to 2.647%. 10Y bond yields up 5bps to 3.655%.

Foreign Exchange: The US dollar index is flat at 96.51 after losing 0.2% in Asia with focus on 96.25 and 97.00. In EM FX, USD mostly bid – EMEA the focus – TRY off 5.1% to 6.1280 now, ZAR off 0.9% to 14.87, RUB off 0.85% to 67.40.In Asia USD mixed – INR off 0.4% to 7.16, TWD up 0.15% to 30.787, KRW up 0.45% to 1125.

EUR: 1.1385 up 0.1%. Range 1.1367-1.1419 with focus on Turkey and Italy driving 1.1420-50 resistance holding for 1.1250.
JPY: 110.50 off 0.35%. Range 110.48-111.05 with EUR/JPY 125.85 off 0.25%. Risk turn down in Europe driving with 110 key risk is 108 again.
GBP: 1.2710 flat. Range 1.2697-12749 with EUR/GBP .8960 up 0.15%. Brexit politics still key. 1.26-1.2850.
AUD: .7265 up 0.1%. Range .7263-.7289 with China worries still key, RBA speeches non-events – watching .72 as hot spot against .7320 resistance. NZD up 0.25% to .6605 with focus on crosses.
CAD: 1.3155 flat. Range 1.3130-1.3170 with focus on CPI today and BOC reactions 1.305—1.32 still.
CHF: .9965 off 0.1%. Range .9946-.9978 with safe-haven status still in play. EUR/CHF 1.1345 flat.
CNY: 6.8894 fixed 0.09% stronger from 6.8946, trades 6.8638-6.8972, trades 6.8880 from 6.8960 close into London, now up further at 6.88.

Commodities: Oil up, Gold up, Copper off 0.85% to $2.6620.

Oil: $65.75 up 0.45%. Range $65.30-$65.81 – bouncing from 200-day tests. Brent $72.01 up 0.8% with same dynamic watching $70 base against $72.50 resistance.
Gold: $1177 up 0.25%. Range $1174-$1178 – with gold still suffering with USD gains and lack of safe-haven trust. Silver flat at $14.65, Platinum off 0.35% to $777, Palladium up 1% to $896.

Conclusions: Summer jobs? The WSJ has an interesting piece on how summer jobs are deflating wages. Whether this is true will be easy enough to see as the seasonal nature of the hiring and the risks for Autumn seem obvious.Training unskilled workers and paying them less isn’t a winning sustainable strategy.