Markets: Waiting For Snow

The markets appear to be holding for the US GDP release and more earnings reports. The shock of Facebook and the contrast to Amazon may be the standout stories for markets in the US this week but the macro world waits for US growth and compares it to the US Trump talk against the fears of one-off trade gains in anticipation of tariff pain later.

This is a world waiting for bad news and the risk-reward to trading is complicated by that with the focus squarely on the USD after the ECB Mario Draghi relative upbeat message about growth and policy shifts ahead was ignored.

Overnight the main story and big focus was about the BOJ as it again offered to buy 10-year bonds at a fixed rate – this time it was 0.10% and not like Monday 0.11%. From this action, more speculation starts about next week’s BOJ meeting and the rising expectation of some shift in policy there as the bond-buying game and steepening of the curve policy clash. There is also the annoying reality that inflation is far below target and won’t reach 2% anytime soon. The JPY stood out overnight in its gains in Asia even in the face of the BOJ action and in a relative bid equity market.

The risk barometers for macro remain confused and correlations everywhere a mess from copper to gold to CHF. The waiting game may be less fun than usual because even after 8.31am, the noise of US GDP, there will be earnings and more thinking about next week and month-end and the central bankers. For now, we are all USD traders, watching to see if there is a breakout on good news or a return to a range on bad.

Question for the Day: Does the market price the ECB correctly? The Draghi effect on markets was muted yesterday when many read his statements as bullish and hawkish, the reaction was less so. The results of the ECB survey of professional forecasters came out today and it's worth reviewing in the context of yesterday and the wait for September 18 and the next ECB meeting where they will have to talk to QE taper and reinvestment plans.

Inflation is not expected to reach the 2% target in 2020 by the majority of forecasts and its not even close this year or next but the survey did show an uptick mostly due to oil prices. Long-term inflation expectations are stable at 1.9%

Growth expectations revised lower by 0.2% in 2018 and 0.1% in 2019 – mostly a catch up to 1Q weakness and higher oil effects mixed with some global uncertainty.

What Happened?

• Japan July Tokyo core CPI 0.8% y/y after 0.7% y/y – more than 0.7% y/y expected. The headline index rose 0.3% m/m, 0.9% y/y from 0.8% y/y.The rise was due mainly to higher prices for processed food including yogurt, takeout food and beer (+0.8% y/y in July vs. +0.6% in June) and rents (+0.3% in July vs. unchanged in June). The rise in rents was the first in more than two years and caused by the exclusion of an old apartment building that was not for rent any longer. The core-core CPI up 0.5% after 0.4% y/y – also more than 0.3% y/y expected. The prices of goods excluding volatile fresh food rose 1.2% on year in July, with the pace of increase accelerating from +1.0% in June. The year-on-year rise in service prices was +0.5% in July, unchanged from +0.5% in June.
• Australian 2Q PPI up 0.3% q/q, 1.5% y/y after 0.5% q/q, 1.7% y/y – less than the 0.6% q/q, 1.7% y/y expected. Pipeline inflation was up 1.1% q/q, 4.4% y/y with intermediate 0.9% q/q, 4.1% y/y. The domestic PPI was 0.2% q/q, 1.5% while imports were 1.4% q/q, 1.4% y/y – reflecting the A$ weakness. 
• China June industrial profits rose 20% y/y to CNY658.29bn down from 21.1% y/y. Price changes dragged up profits by 0.3% m/m compared with a 4.3% jump in May. The ytd rose to 17.2% y/y to CNY3.39trn vs. Jan-May 16.5% y/y. The NBS attributed the growth to lower production costs and better operating efficiency. Out of the 41 main industrial sectors, 29 saw profit growth in H1, compared with 31 in the period from Jan to May, the NBS said. The NBS singled out five sectors whose profits contributed 67% of total industrial profit growth, including ferrous metal processing, chemical materials and products manufacturing, petroleum and natural gas extraction, non-mental mineral producing and electricity, thermal producing and supplying.

• French 2Q preliminary GDP 0.2% q/q, 1.7% y/y after 0.2% q/q, less than 0.3% q/q expected. Household consumption fell -0.1% after +0.2%, capital formation rose 0.7% after 0.1%. Overall, final domestic demand excluding inventory changes contributed as much to GDP growth as in Q1 (+0.2 points). Imports bounced back this quarter (+1.7% after −0.3%) as did exports to a lesser extent (+0.6% after −0.4%). All in all, foreign trade balance contributed negatively to GDP growth, −0.3 points, after a neutral contribution in Q1. Conversely, changes in inventories drove GDP on (+0.3 points after 0.0 points).
• French June consumer spending up 0.1% m/m, 0.3% y/y after +1% m/m – less than 0.6% m/m expected. The 2Q conumption was -1.3% q/q. Food 0% from 2% m/m, engineered goods 0.4% from 0.1%, Energy 0% from 0.9%. 

• German June import prices up 0.5% m/m, 4.8% y/y while export prices up 0.3% m/m, 1.8% y/y after 1.3% y/y. The import energy prices were up 2% m/m, 37.6% y/y, ex-oil the imports were up 0.6% m/m, 1.9% y/y. 

Market Recap:

Equities: The S&P500 futures up 0.1% after losing 0.3% yesterday. The focus is on GDP and earnings – Amazon vs. Facebook, oil companies. The Stoxx Europe 600 opened up 0.2% and extends to up 0.4% with a focus on earnings continuing. The MSCI Asia Pacific rose 0.3% with Japan leading and China lagging.

• Japan Nikkei up 0.56% to 22,712.75
• Korea Kospi up 0.26% to 2,294.99
• Hong Kong Hang Seng up 0.08% to 28,804.28
• China Shanghai Composite off 0.30% to 2,873.59
• Australia ASX up 0.85% to 6,391.50
• India NSE50 up 0.99% to 11,278.35
• UK FTSE so far up 0.6% to 7,708
• German DAX so far up 0.50% to 12,873
• French CAC40 so far up 0.25% to 5,495
• Italian FTSE so far up 0.4% to 21,955

Fixed Income: ECB out of the way, BOJ and FOMC next focus – with Bunds seeing a modest steepening trade. Core is suffering while periphery gains in relative summer calm – UK Gilt 10-year yields suffer on Brexit doubts as well – Gilts up 0.8bps to 1.285%, German Bunds up 0.5bps to 0.407%, French OATs flat at 0.695%, while periphery gains with Italy off 1.5bps to 2.685%, Spain flat at 1.36%, Portugal off 1.7bps to 1.695% and Greece up 0.5bps to 3.79%.

• US Bonds rallied overnight with focus on BOJ and French GDP – 2Y off 0.6bps to 2.675%, 5Y off 0.7bps to 2.853%, 10Y off 0.4bps to 2.973%, 30Y off 0.2bps to 3.098%. 
• Japan JGBs sold but held by BOJ after a fixed-rate operation – 10Y up 1.5bps to 0.10% - touched 0.105% highest yield since July 2017 – but BOJ offered second fixed-rate buying at 0.10% rather than 0.11% Monday. They bought Y94bn of 10Y today. 
• Australian bonds bull flatten, eyes China still – 3Y off 2bps to 2.07%, 10Y off 4bps to 2.65%. 
• China PBOC skips open market operations again, net drained CNY370bn on the week. Money market rates still fell with 7-day off 1bps to 2.625%, and O/N off 3bps to 2.263%. 10Y bond yields steady at 3.53%. 

Foreign Exchange: The US dollar index is up 0.3% to 94.85 with focus on 94.95 and then 95.52 against 94.40 base. In Asia EM FX, USD gains – TWD off 0.1% to 30.59 but still up 0.4% on the week, stocks see foreign inflows. KRW up 0.3% to 1116.30 was off 0.5% early. INR up 0.1% to 68.67 – stocks driving. In EMEA, USD mixed ZAR flat at 13.239, RUB off 0.1% to 63.012, TRY off 0.1% to 4.8725.

• EUR: 1.1630 off 0.1%. Range 1.1622-1.1658 with 1.1610 back in play on US GDP and 1.1550 after that but most think 1.1720-40 again. 
• JPY: 111.15 flat. Range 110.92-111.25 with EUR/JPY 129.30 flat – focus is on US growth, BOJ, FOMC and rates with 110.50 pivot against 112. 
• GBP: 1.3095 off 0.1%. Range 1.3083-1.3123with EUR/GBP .8880 flat. EU comments on Brexit hurt with 1.30-1.33 still in play.  
• AUD: .7380 flat. Range .7370-.7394 with NZD .6770 off 0.2%. Little focus on A$ other than commodities/China and crosses with .7350 and .7270 in play. 
• CAD: 1.3065 off 0.1%. Range with 1.3053-1.3079 stuck with 1.3020 and 1.2950 in play if US GDP misses but most think 1.32 again. 
• CHF: .9970 up 0.3%. Range .9932-.9975 with EUR/CHF 1.1595 up 0.2%. No fears mean 1.00 tent with .9920-.1.0080. 
• CNY: 6.7942 fixed 0.4% weaker from 6.7662, trades weaker to 6.8250 off 0.6% from 6.7825 yesterday’s official close. CNH slips 0.15% to 6.8360. 

Commodities: Oil mixed, Gold lower, Copper flat at $2.8365

• Oil: $69.50 off 0.15%. Range $69.27-$69.67. WTI watching $70.60 July 13 highs against $68.92 yesterday lows. Brent up 0.05% to $74.59. 
• Gold: $1219.50 off 0.25%. Range $1218.50-$1226 with USD and technicals crushing $1204 and $1236 still key. Silver off 0.1% to $15.365, Platinum flat at $825 and Palladium off 0.1% to $928.50. 

Conclusions: Is the GDP report everything? The focus on the US 2Q GDP today is intense in part because it became more political thanks to US President’s Trump tweets and other comments. On Fox, he said this: "You're going to see what happens Friday, with GDP. A lot of predictions -- some with a 5 in front of it. It is very close, it could even happen." But the real issue for markets isn’t the number but the component parts. If US growth is based on a spike in exports ahead of tariffs then it's not sustainable, but if it's because of real increases in demand or business spending, perhaps that changes the mood. The Atlanta Fed GDPnowcast sees its estimate on capex to have slipped from 0.9pp to 0.7pp – the lowest since 3Q2017.

Economic Calendar:

• 0820 am US St.Louis Fed Bullard Speech
• 0830 am US 2Q preliminary GDP 2%p 4%e / PCE price index 2.5%p 2.2%e / Core PCE 2.3%p 2.2%
• 1000 am US July final Michigan consumer sentiment 98.2%p 97.1e