Markets: Same Old Hash?

Friday trading rules in play. There is a sense of glum relief today with the same-old hash of headlines about geopolitics driving markets. This obscures a few key technical moves that maybe more important for next week and the new month ahead. The economic news was light overnight with lower than hoped Japan CPI and unrevised German GDP. That yawn left markets reading between the lines. The political and policy stories that drove markets are listed below:

• Australia gets its 6th Prime Minister in 10-years as the Liberal Party fractures widen. Turnbull ousted by Morrison. Treasurer Morrison won the run off to become the new PM after Foreign Affairs Bishop lost the first round and Dutton lost the second. Morrison is viewed as more fiscally responsible than Peter Dutton. What maybe more important is the new PM approach to China and the US. 
• China/US trade talks end after 2-days with little progress. China's MOFCOM stated that they. had constructive and honest talks on trade matters, with communication lines set to be kept open and active going forwards. US deputy press secretary said the US and China exchanged views but didn’t say that any serious progress was made. 
• Trump has been advised against pardoning Paul Manafort, while the NYT suggests that the Manhattan D.A. is eying criminal charges against the Trump Organization over hush money payments revealed by Cohen guilty plea.
• Riksbank points to rate hikes before the end of the year – ignoring political uncertainty
• Italy PM Di Maio warns it will suspend EU funding if further steps on immigrants not taken. 
• FOMC Powell speaks today on "Monetary Policy in a Changing Economy" with much focus on Fed independence post Trump comments. There are no ECB executive board members attending the event nor is BOJ Kuroda – the two mainstays of QE. 
• No-deal Brexit fears remain in play with Chancellor Hammond warning of GBP80bn hole

The fear focus today remains on US rates with US 2Y higher after Dallas Fed Kaplan talked of 3-4 more hikes in the next year while Atlanta Fed Bostic said growth in the US remains above potential. The US curve continues to flatten and drives fears for recession risks into late 2019 something that many see Powell addressing today.On the inflation front, the story is changing in 3Q with oil bouncing off its 200-day moving average and set up for its first weekly gain in two months – something that is new and worthy of much thought today.Oil found a bid on US inventory draws, a strike in North Sea oilfields and ongoing Iran tensions with the US. Fear of demand destruction over global trade and US sanctions and higher rates.Oil is the risk barometer to watch today as the USD waffles in consolidation, bonds remain stuck in ranges and equities search for a new hash to chew on into the weekend of central bank discussions from Jackson Hole.

Question for the Day: Does the Powell Speech Matter? There are a number of things that the market wants to hear from the FOMC Chair today – and whether he answers some of the questions below clearly will matter to the direction of the markets going forward.

• Reiterating Fed Independence despite the Trump comments early this week and previously. 2) What he sees as the path of rates going forward, including where “neutral” is 2.9% or higher? And his R* as it compares to others. 
• What he thinks about the shape of the yield curve – whether flat means anything new – or if the ADM models on term-premium are correct in blaming BOE, ECB and BOJ QE vs. level of rates and portfolio demand vs. actual signals for deleveraging and risk. 
• Level of the USD – with the twist of how the Fed may react to further pressure from the Trump team if it wants to intervene in the USD to cap its nascent rally back to 95.Does the Fed watch the broad index for inflation or something else?  
• Is the Emerging Market pain – highlighted TRY and ARS a consideration and what is the role of Fed in EM crisis situations?

What Happened?

• New Zealand July trade deficit NZ$142mn after NZ$288mn – better than NZ$400mn expected. Even as exports rose at a faster rate than imports on the month the annual deficit for the year to July was the widest since March 2009 at NZ$4.4bn. Exports rose 9.7% m/m compared with a 8.8% fall in June, but on a y/y basis exports rose 16% to NZ$5.3 billion -- a record high for a July month. Imports rose 6.3% m/m versus 0.4% in June, and on a y/y basis it rose 21% to NZ5.5 billion -- the second highest on record. Exports were led higher by milk powder, butter and cheese which rose 31% y/y to NZ$1.5 billion. Imports rose 84% y/y to NZ$739 million due mainly to rise in crude oil prices.

• Japan July Core National CPI up 0.8% y/y same as June – less than 0.9% y/y expected. The core-core CPI rose 0.3% y/y after 0.2% y/y – as expected – while the national overall index rose 0.9% y/y after 0.7% y/y – reflecting inflation after damaged to crops due to rain storms. he CPI was weighed down by lower mobile communications charges, down 6.7% on year in July (vs. -6.7% in June), due to the base-year effect that continued through July. The prices for overseas holiday tours rose 4.0% in July, with the pace of year-on-year increase decelerating sharply from +11.7% in June. The prices for household durable goods were down 2.1% y/y. On the upside, processed food prices rose 0.8% on year in July, up from +0.7% in June dueto technical markups for potato chips.

• German 2Q GDP unrevised 0.5% q/q, 2.0% y/y – as expected. The inventory change added 0.4pp to 2Q after -0.1pp in 1Q. Net exports cut 0.4pp form 2Q after -0.1pp in 1Q.  Government consumptions +0.6% q/q after -0.3% q/q, overall domestic demand up 0.9% q/q from 0.4% q/q with private consumption up 0.3% q/q after 0.5% q/q. The total 2Q investment was up 2.6% q/q after 0.9% q/q with construction up 0.6% q/q after 1.6% q/q while equipment up 0.3% q/q from 2.3% q/q. 

Market Recap:

Equities: US S&P500 futures up 0.2% after losing 0.17% yesterday. The Stoxx Europe 600 is up 0.25% from 0.1% open while the MSCI Asia Pacific was mixed up 0.2% with focus on China and Australia.

• Japan Nikkei up 0.85% to 22,601.77
• Korea Kospi up 046% to 2,293.21
• Hong Kong Hang Seng off 0.43% to 27,671.87
• China Shanghai Composite up 0.18% to 2,729.43
• Australia ASX up 0.05% to 6247.33
• India NSE50 off 0.22% to 11,557.10
• UK FTSE so far up 0.1% to 7,573
• German DAX so far up 0.2% to 12,394
• French CAC40 so far up 0.4% to 5,444
• Italian FTSE so far up 0.5% to 20,707

Fixed Income: Global bonds softer into FOMC Powell and Jackson Hole speeches after a quiet but risk-on overnight.Slight risk on in equities offset a bit by ongoing Italy pain – German 10-year Bund yields up 0.5bps to 0.34%, French OATs up 0.5bps to 0.68% and UK Gilts up 1bps to 1.28% while periphery remains mixed – Italy up 5bps to 3.125%, Spain up 1bps to 1.38%, Portugal up 2.5bps to 1.81% and Greece up 0.5bps to 4.12%.

• US Bonds see bear steepening into Jackson Hole – 2Y up 0.4bps to 2.62%, 5Y up 0.5bps to 2.729%, 10Y up 0.7bps to 2.833% and 30Y up 0.6bps to 2.986%. 
• Japan JGBs stuck despite lower CPI, BOJ leaving Rinban unchanged – curve flatter with 2Y up 0.2bps to -0.13%, 10Y up 0.5bps to 0.09%, 30Y off 1bps to 0.825% – BOJ Rinban was unchanged at Y950bn and saw cover drop in all 3 buckets – 1-3Y 3.71 from 3.88, 3-5Y 2.84 from 3.70, 5-10Y 2.91 from 3.35. Kuroda is not in Jackson Hole, so weekend Wakatabe comments under watch. 
• Australian bonds sold after equities bounce on new PM – 3Y up 1.5bps to 2.005%, 10Y up 0.5bps to 2.532%. 
• China PBOC net adds CNY59bn on the day after it injects CNY149bn via 1-year MLF and as CNY90bn in reverse repos mature today.  Money market rates fell with O/N off 5bps to 2.37% and 7-day off 3bps to 2.58%. 10Y bonds yields are up 2bps to 2.63% on the day but off 2bps on the week. 

Foreign Exchange: The US dollar index is off 0.25% to 95.43 with focus still on 94.95 and 95.65. For EM FX USD lower – ASIA: KRW up 0.2% to 1119 with focus still on 1115. INR up 0.2% to 69.95 with 70.235 todays $ highs – TWD flat at 30.779; EMEA: ZAR up 0.85% to 14.28, RUB up 0.7% to 67.76 and TRY up 1% to 6.06.  

• EUR: 1.1575 up 0.3%. Range 1.1535-1.1580 with 1.16 the key on the day and Powell the driver – focus is on US rates and growth mixed with usual politics. 
• JPY: 111.40 up 0.1%. Range 111.25-111.49 with EUR/JPY up 0.35% to 129.90 with 130 key- all about rates and equities with 110 holding means 112 back in play
• GBP: 1.2855 up 0.35%. Range 1.2800-1.2857 with EUR/GBP .9000 off 0.1% - focus is on Brexit still with .9050 next resistance. 
• AUD: .7285 up 0.5%. Range .7238-.7290 with new PM Morrison driving relief rally with .72 still key against .74. NZD up 0.3% to .6655 with focus on trade drag today and RBNZ Orr steady comments. 
• CAD: 1.3070 off 0.1%. Range 1.3066-1.3103 – focus is on NAFTA, oil and US rates with 1.2980 and 1.3120 keys. 
• CHF: $.9840 off 0.2%. Range .9833-.9865 with EUR/CHF 1.1385 flat – focus is on JPY as leader less than EUR with safe-havens out of demand despite some BTP pain
• CNY: 6.8710 fixed 0.5% weaker from 6.8387 yesterday. Trades stronger up 0.35% to 6.85 with 6.8943-6.8484 range. CNH up 0.3% to 6.8450 as well but down 0.55% on the week against the $. 

Commodities: Oil up, Gold up, Copper flat at $2.6985.

• Oil: $68.66 up 1.2%. Range $67.78-$68.71 -WTI watching $66.49 as base – Aug 21 highs – against $68.86 the Aug 7 highs and then $69.19 July 30 highs. The 200-day m.a. at $62.95 seems far away again. Brent $75.66 up 1.2% - watching $73 as base with $70.30 Aug 15 lows behind that against $75.79 – July 30 highs and $78.85 downtrend resistance. 
• Gold: $1191.60 up 0.5%. Range $1185-$1192. Watching $1160.40 the August 16 lows against the key $1201.60 Aug 22 highs – with gold still driving on USD and safe-haven demand. Silver up 0.95% to $14.64, Platinum up 1.1% to $786.2 and Palladium up 1.3% to $928.30.

Economic Calendar:

• 0830 am US July durable goods (m/m) 1%p -0.8%e / ex transport 0.5%p 0.4%e
• 1000 am Jackson Hole opening speeches