Markets: Talking Down

The US President Trump talked down the USD and berated the FOMC for hiking yesterday and that remains the news today. Repeating news usually doesn’t move markets but for the fact that positions were too comfortably long USD and that markets are thin given the summer holidays. Markets didn’t get a lot of other news either and so the focus is on geopolitical games still more than economic progress.The comparisons of Trump to Erdogan dominate analysis with the clear difference between US and Turkey being the independence of the FOMC. Trump can’t get rid of Powel. This begs the question of what comes out of the Jackson Hole Symposium from the Fed Chair as many expect some thought shift on the role of emerging market disruptions, the USD and policy. If the path forward for US rates is 4% 10-year bonds, the pain trade abroad will be worse than at home and this is the point. Trump’s talking down the USD has had some unintended consequences that show the limits to his bluster – 

1)  Oil is higher, which hits the consumer harder and leaves focus on US supply next. 

2)  CNY is higher, which makes the arguments of FX depreciation as a tool in trade talks less convincing. 

3)  US debt fears rise – with funding of US deficits in play as the talking down of the USD puts the safe-haven status at risk.  

This puts the US 10-year yield back as the key driver for attention as to whether the Trump blast really matters. Talking down your own currency is usually seen as a path to crisis unless it’s followed by real action. This is the risk for September as the President grows increasingly worried about the US mid-term elections and the need for growth to support his voter base. The September 10-year bond futures look to be at the limit with 121 stops against 118.50 retests or yields 2.8% to 3.0% again in play.

Question for the Day: Are we back to US mid-term elections as a key focus? The focus shift in a quiet week has been notable overnight with the rise of US debt worries and the mid-term elections as a backdrop. The US deficit and the link of growth to keeping it in check remains a problem for the USD today. This has been one factor resurrected from the February turnabout. The stimulus from the US tax reform remains in play and part of the discussion for Jackson Hole. Most now expect a Congress controlled by Democrats leaving the US in gridlock with less hope on action and budget controls. In fact, many now see an October government shutdown risk as part of the US political gaming into the November vote.

What is different is the level of US stocks which the S&P500 less than 0.5% from new record highs. The role of the USD in financial conditions mixes with the level of stocks. The outlook for 2H growth matters to the vote and to the markets. The tightening of financial conditions seems to correlate well with the manufacturing ISM as Nordea Bank research notes.  

• What Happened?

• RBA Lowe: Repeats next rate move likely up. The RBA Governor Lowe spoke at a breakfast event launching the ASCIC National Financial Capability Strategy in Canberra. Lowe used the opportunity to reiterate his optimism on the economy. He said the economy has been improving. "If we continue on this current improving track, as we expect we will, it is likely that the next move in official interest rates will be up, not down," he said.
• RBA August board minutes: Improves view on consumption.  In contrast to the RBA statement and SOMP, the minutes leaned on the hawkish side. The RBA noted some of the uncertainty around the outlook for consumption has reduced. Growth in household disposable income due to increase in average earnings per hour and hours worked, along with recent increase in minimum wages, future tax cuts and expectations of a further tightening in labor market conditions had all provided "more comfort" that household income growth would increase gradually and support consumption outlook, the RBA said. The RBA appears more confident about its current monetary policy stance, which it said "would continue to support economic growth and allow further progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target." The RBA also reiterated that the next move in the cash would more likely be an increase than a decrease.
• Australian PM Turnbull Survives leadership challenge, calls for party unity. Turnbull defeated Dutton 48-35 in the party-room vote for the leadership of the Liberal Party, the senior party in the center-right government coalition, officials said. The vote came after a sharp fall in opinion poll ratings and talk of a challenge that have raised the possibility of an early election. Seeking to safeguard his leadership, Turnbull called on his party to back him or risk losing the next election to the opposition Labor party. “We know that instability undermines the ability of any government to get anything done. Unity is absolutely critical,” Turnbull told reporters in Canberra.

• Swiss July trade surplus steady at CHF2.255bn after CHF2.559bn – near expectations. Exports fell 1.4% m/m after -0.1% in June. Imports fell 1.4% m/m after -0.3% m/m. There was a notable bounce back in watches - Watch exports rose 6.6% y/y in nominal terms to CHF1.82bn.

• UK July PSNB -GBP2.008bn after +GBP4.53bn - better than +GBP2.3bn deficit expected – best year-to-date result in 16-years. The year-to-date borrowing (ex banks) shrank to GPB12.8bn -- the lowest Apr-Jul standing since 2002. July public sector debt ex BOE and banks was GBP1.584trn – 75.2% of GDP off 3.7% from July 2017. Key to July's surplus was a GBP1.0bn y/y rise in self-assessment receipts to GBP9.0bn -- the highest on record for a month of July.
• UK August CBI industrial trends slips to 7% from 11% - weaker than 9% expected.  Volume outlook 3M forward 20% from 14%, while past 3M 21% from 27%. The outlook for prices 3M forward 15% from 13%. While total order books faded slightly compared with the previous month, they were still comfortably above the long-run average. Export orders remained strong and well above the long run average.

Market Recap:

Equities: The US S&P500 futures are up 0.16% after a 0.24% gain yesterday. The Stoxx Europe 600 is up 0.3% on the day while the MSCI Asia Pacific is up 0.2% with a focus on China and Korea. 

• Japan Nikkei up 0.09% to 22,219.73
• Korea Kospi up 0.99% to 2,270.06
• Hong Kong Hang Seng up 0.56% to 27,752.79
• China Shanghai Composite up 1.31% to 2,733.83
• Australia ASX off 0.81% to 6,383
• India NSE50 up 0.17% to 11,570.90
• UK FTSE so far off 0.15% to 7,580
• German DAX so far up 0.65% to 12,412
• French CAC40 so far up 0.70% to 5,418
• Italian FTSE so far up 1.4% to 20,756

Fixed Income:  Risk-on helps periphery rally again with core bonds hit on supply and safe-haven reversals. Curve steeper in Germany despite weak 2Y sale. German 10-year Bund yields up 2.6bps to 0.325%, France up 1.7bps to 0.665%, UK Gilts up 3.5bps to 1.255% while periphery rallies with Italy off 5bps to 2.955%, Spain off 3.5bps to 1.347%, Portugal off 4bps to 1.735% and Greece off 6bps to 4.19%. 

• UK DMO sold GBP1.1bn of 10Y 0.125% Aug 2028 IL Gilts at -1.79% with 2.29 cover – previously -1.709% with 2.23 cover. 
• Germany sold E3.19bn of 2Y 0% Sep 2020 Schatz at -0.61% with 1.3 real cover – previously -0.63% with 2.0 cover – after Bundesbank back cover rises to 1.6 from 2.5. 
• Spain sold E1.755bn of 3M and 9M bills at lower rates and mixed demand – E0.325bn of Nov 2018 3M Letra at -0.521% with 5.38 cover – previously -0.47% with 3.44 cover – and E1.43bn of 9M May 2019 Letra at -0.434% with 2.8 cover – previously -0.387% with 3.36 cover. 
• US Bonds are lower with slight bear steepening trade– 2Y up 1.5bps to 2.60%, 3Y up 2bps to 2.665%, 5Y up 2.5bps to 2.72%, 10Y up 2.3bps to 2.842% and 30Y up 2.2bps to 3.007%. 
• Japan JGB see curve flattening after good 20Y sale– 10Y off 1bps to 0.08%. 30Y off 2.5bps to 0.815%. The MOF sold Y805.8bn of 20Y JGBs at 0.607% with 4.66 cover – previously 0.492% with 4.537 cover.
• Australian bonds see curve flattening with RBA hawkish minutes– 3Y up 2bps to 2.015%, 10Y up 1bps to 2.532%. 
• China PBOC injects net CNY50bn on the day after adding CNY50bn via 7-day reverse repos. Money market rates were mixed with O/N up 0.3bps to 2.628% while 7-day fell 1bps to 2.663%. 10Y bond yields were up 0.5bps to 3.64%. 

Foreign Exchange: The US dollar index off 0.3% to 95.56 on the day – with Trump Fed and USD comments driving – 95.53 and 95.20 next support. In EM FX – USD is mixed – Asia mostly USD offered: TWD up 0.15% to 30.708, KRW up 0.4% to 1118.70 with 1117.90 seen as key, INR off 0.1% to 69.88 with flooding still issue; EMEA mostly USD bid: ZAR up 0.7% to 14.42, RUB off 0.6% to 67.385 and TRY off 0.25% to 6.09.

• EUR: 1.1515 up 0.3%.Range 1.1481-1.1542 with 1.1450 base now for 1.1620-40 retests – resting on FOMC minutes, Jackson Hole and ECB.
• JPY: 110.25 up 0.15%.Range 109.78-110.29 with 110 stops washed out on Trump, risk-on helping back with 110.50 key. EUR/JPY up 0.5% to 127 with 125.50 holding opens 129.50 again.
• GBP: 1.2830 up 0.25%.Range 1.2794-1.2846 with EUR/GBP up 0.1% to .8980 – all about Brexit risks still with 1.26-1.29 key consolidation.
• AUD: .7355 up 0.25%.Range .7333-.7366 with .7250 base for .7420 again. Hawkish RBA views returning to help along with copper bounce – NZD up 0.35% to .6665with focus on .6720 next and trade data.
• CAD: 1.3025 off 0.2%.Range 1.3015-1.3047 with crosses driving, then rates and Trump but NAFTA, oil both bring 1.2880 target back in play
• CHF: .9875 off 0.4%.Range .9867-.9923 with EUR/CHF 1.1375 off 0.1% – suggests .98 before 1.00 again with Italy and Turkey still issues. 
• CNY: 6.8360 fixed 0.52% stronger from 6.8718, trades 6.8300-6.8502, stronger by 0.2% to 6.8440 into London from 6.8525 official close yesterday. CNH is off 0.1% to 6.8435 with 6.8337-6.8467 range. 

Commodities: Oil up, Gold up, Copper up 1% to $2.7295.

• Oil: $66.83 up 0.6%.Range $66.52-$66.83 – watching $64.43 Aug 16 lows as base with $68.37 Aug 14 highs as a ceiling - with Brent $72.29 up 0.1%. Oil shook off the JODI crude export increase story for Saudi yesterday and holds bid on USD weakness today with API next key. 
• Gold: $1193.90 up 0.3%.Range $1189-$1195. Gold consoildation continues with $1160 base and $1200 resistance. Silver $14.82 up 0.45% - watching $15.21 and $15.554 for upside breakouts. Platinum up 0.75% to $802.15 and Palladium up 0.25% to $919.40. 

Conclusions: Is this about liquidity first?  The current account deficit nations have been under the gun this summer – particularly in EM with Turkey, South Africa, Argentina and Chile the biggest losers so far – but UK also suffers in G10. The USD was immune to this story given its reserve status but the US Trump push back makes this less obvious. Against this is the global liquidity squeeze which many see as the key topic for Jackson Hole. Whether the USD starts to reflect the US debt worries and funding doubts versus the carry and safe-haven support its seen over the last 2 months will be key for risk.