Markets: Yellow Lights

There are plenty of reasons to pause in the bull run up in US equities today, but only if you think that a yellow light means stop rather than caution. The usual signals of trouble – like safe-havens gaining are in play – like CHF and JPY in FX gaining, with core bonds bid, with the steepening of the VIX and its break down with new highs in S&P500 not leading to new lows for the VIX, with EM FX like TRY, ZAR and ARS all sharply lower. The question is whether the contagion of EM means anything to US or other developed markets. Yesterday, the CNY weakness was ignored but today the drop in CNY seems to matter a bit more as the story line about how trade plays out begins to get more confusing.

The markets have been trading on the assumption that Trump will get a new NAFTA deal this week then move to Europe and others ahead of the US mid-terms. China isn’t in that timeline but some think they will be 2019 resolved. Trouble is that more tariffs may happen first and that is an unknown risk for China growth and EM in general. The 4.2% GDP for the US yesterday added to a rising view that US isolationism and protectionism isn’t a problem for the US but for everyone else. Whether that story remains in play as the day progresses will determine whether yellow flashing leads to red or not.

The economic data today seems to be another factor in the risk mood – with Japan retail sales better than expected but mostly due to fuel costs rising. New Zealand business confidence sank further leading to RBNZ rate cut hopes and smashing the NZD lower. The Australian capex was negative in 2Q – first drop in 6 quarters. The Swiss KoF fell back to near the long-term average ending hopes for a sustained above trend growth for 2018. The UK M4 and mortgage approvals both missed suggesting no pipeline for growth into the ever tenser Brexit deadlines this fall. German jobs were in line, inflation a bit lower while import prices remain higher leaving the EUR a bit soggy on the day. There is a clear drop in global confidence which maybe something that shows up in PMI flash reports tomorrow - witness the Eurozone ESI drop today with consumers clearly lagging. The chart that many are watching is EURCNY at 8 as this hits at the contagion from EM infecting the developed markets. Perhaps this is just another yellow-light but given the levels the 8 for the EUR maybe the same as 7 is for USD bringing the China NBS PMI tomorrow into play as another concern for risk.

Question for the Day: Are US assets over priced or just reflecting GDP? The shift from value to growth come out clearly with the US GDP release yesterday. The fear factor for markets in the US is that the FOMC is going to hike rates faster to match the faster growth. The supporting factor is that corporate profits are over 16% and justify the current pricing. The gap between potential and actual growth is the realm of R* and models which the FOMC Chair downplayed in his Jackson Hole speech. The big picture suggests we have room for more growth to play out before the models kick in. That maybe right but its going to be data dependent and that means uncertainty which supports the VIX bid despite the S&P500 record highs.

What Happened?

• Japan July retail sales rose 0.1% m/m, 1.5% y/y after 1.4% m/m, 1.8% y/y – better than 1.2% y/y expected. Fuel sales rose 17.5% y/y after 17% y/y while medicine and cosmetics rose 4.8% after 3.7% y/y. Bad weather hit apparel sales -3.8% y/y after -2.3% y/y. METI maintained its view that retail sales are "flat." 

• New Zealand August ANZ Business Confidence drops to -50.3 from -44.9 – near 10 year lows – with activity outlook steady at 3.8 – at 9-year lows, exports fell to 7.8 from 11.6 while investment plans -4.7% after +0.6. Inflation expectations drop to 2.16% from 2.24% and pricing intentions drop to 26.6 form 29.3. Commercial construction improved to -4.2 from -16.7 while residential slowed to 13 from 15.2. 
• Australia 2Q Private Capex -2.5% q/q after 1Q +1.2% q/q– weaker than 0.7% q/q expected – first drop in 6 quarters but this puts the 2018-2019 3rd estimate at A$101.9bn just slightly below the A$102bn expected. This is a significant upgrade from estimate two of A$87.7 billion. Mining was the main contributor to the 13.3% upgrade in buildings and structures, and services industries was the main contributor to the 20.0% rise in equipment, plant and machinery. However, the drop in 2Q Capex was mainly due to a 7.2% q/q fall in mining capex which was the biggest drop since a 14.9% fall in Q2 of 2016. Services capex also unexpectedly fell, down 0.9% to mark the first drop in seven quarters. Manufacturing rebounded from the 2.8% q/q fall in Q1 to rise 2.8% in the latest quarter
• Spain August preliminary CPI 0.2% m/m, 2.2% y/y after -0.7% m/m, 2.2% y/y – less than 2.3% y/y expected. The flash HICP was up 0.1% m/m, 2.2% y/y after 2.3% y/y – also less than the 2.4% y/y expected. 

• Swiss August KoF Leading Indicator drops to 100.3 from 101.7 revised – weaker than 101.5 expected. July revised higher from 101.1. This puts growth outlooks near the 10-year average and likely not returning to 2017 growth levels. The strongest contributions to this negative result come from manufacturing, followed by the indicators from the exporting sector. On the other hand, the indicators related to private consumption give a positive signal. The indicators from the financial and the construction sectors have remained practically unchanged.
• UK July Mortgage Approvals 64,768 from 65,374 – less than 65,000 expected. The Consumer Credit slowed to GBP0.817BN after GBP1.521bn to 4M lows – also less than the GBP1.5bn expected - this reflected both weaker credit card lending and other loans and advances (which includes personal loans, overdrafts and car finance). M4 ex-banks slowed to 0% m/m, 3.4% y/y – lowest growth since Nov 2014. Households borrowed an extra GBP3.2bn secured against their homes in July, down from GBP3.9bn in June, and the lowest since April.

• Eurozone August Economic Sentiment 111.6 from 112.1 – weaker than 112 expected. The Business Climate drops to 1.22 from 1.30 – slightly less than 1.25 expected – but July revised from 1.29. By sector – Consumer confidence -1.9 from -0.5, industry +5.5 from +5.8, services 14.7 from 15.3, while both construction 6.4 from 5.4 and retail 1.7 from 0.3 notably improved.  
• German States August preliminary CPI up 0.1% m/m, 2.0% y/y after 0.3% m/m, 2.0% y/y – in line with expectations. The official flash HICP for German is expected at 2.1% y/y up from 2.0% y/y in July (due at 8 am ET). 
  • RW 0.1% m/m, 2.0% y/y after 2.0% y/y – as expected
  • Hesse -0.1% m/m 1.7% y/y after 1.8% y/y – less than expected
  • Brandenburg -0.1% m/m, 2.0% y/y after 2.2% y/y – as expected
  • BW 0% m/m, 2.1% y/y after 2.2% y/y – more than expected
  • Bavaria 0.2% m/m, 2.2% y/y after 2.2% y/y – more than expected
  • Saxony 0% m/m, 2.0% y/y after 2.2% y/y – as expected

• German August unemployment -8,000 after -6,000k –as expected. The unemployment rate holds steady at 5.2% - as expected – with 2.33mn total unemployed. The ILO July employment rose 47,000 to 44.750 while unemployed held 1.47mn leaving that rate at 3.4%. Job vacancies were unchanged after +5,000 in July while payroll jobs rose 45,000 from 31,000. 
• German July import prices -0.2% m/m, +5% y/y after 0.5% m/m, 4.8% y/y while export prices were 0% m/m, 1.9% y/y from 1.8% y/y. Import oil prices were up 0.4% m/m, NatGas up 0.7% m/m and products up 0.6% m/m. The ex-oil and products import prices -0.3% m/m, 2.1% y/y. 

Market Recap:

Equities: The US S&P500 futures are off 0.15% after a 0.57% gain to new record highs yesterday. The Stoxx Europe 600 is off 0.4% accelerating losses from the open. The MSCI Asia Pacific fell 0.2% with focus on trade and China.

• Japan Nikkei up 0.09% to 22,869.50
• Korea Kospi off 0.07% to 2,307.35
• Hong Kong Hang Seng off 0.89% to 28,164.05
• China Shanghai Composite off 1.14% to 2,737.74
• Australia ASX up 0.05% to 6,460.50
• India NSE50 off 0.13% to 11,676.80
• UK FTSE so far off 0.8% to 7,503
• German DAX so far off 0.95% to 12,444
• French CAC40 so far off 0.4% to 5,478
• Italian FTSE so far off 0.6% to 20,637

Fixed Income: Bonds are slightly bid as equities drop the most in 2-weeks and focus shifts to risks into long US Labor Day weekend and month-end flows. European bonds remain focused on Italy and Brexit issues.German 10-year bond yields off 1bps to 0.395%, France OATs off 1bps to 0.725% while UK Gilts off 0.5bps to 1.485%. The periphery is mixed with Italy up 1bps to 3.125% with auctions driving while Spain off 0.5bps to 1.455% and Portugal up 0.5bps to 1.99%. Greece worst of the lot up 3.5bps to 4.215%.

• Italy sold 5Y and 10Y bonds at higher rates and weaker demand - E3.75bn of 5Y 2.45% Oct 2023 BTP at 2.44% with 2.12 cover – previously 1.8% with 1.47 cover – and E2.25bn of 10Y 2.8% Dec 2028 BTP at 3.25% with 1.37 cover – previously 2.87% with 1.42 cover. 
• Italy sold E1.75bn of 6Y and 7Y CCTeu as expected – E0.995bn of 6Y Oct 2024 CCTeu at 2.32% with 1.62 cover and E0.755bn of 7Y Sep 2025 CCTeu at 2.31% with 2.77 cover. 
• US Bonds see curve steeper with eye on equities, PCE next – 2Y off 0.6bps to 2.669%, 5Y off 0.5bps to 2.777%, 10Y flat at 2.885% and 30Y up 0.6bp to 3.026%> 
• Japan JGBs see bear curve steeper after strong 2Y sale.2Y up 0.2bps to -0.124%, 5Y up 0.4bps to -0.08%, 10Y up 0.8bps to 0.097% and 30Y up 0.6bps to 0.837%.  The MOF sold Y1.7485trn of 2Y JGB at -0.112% with 5.262 cover – previously -0.112% with 4.375 cover. 
• Australian bonds sold despite Capex and NZ biz confidence, rethinking mortgage hike reactions – 3Y up 0.8bps to 2.005%, 10Y up 2bps to 2.565%. 
• China PBOC skips money market operations for 7th day – leaves liquidity neutral.Money market rates fell with O/N off 11bps to 2.262% and 7-day off 1.7bps to 2.614%. The 10-year bond yields fell 0.5bps to 3.605%. 

Foreign Exchange: The US dollar index is up 0.1% to 94.54 still watching 94.40 and 94.65 for momentum. In EM FX, USD is bid – pain in ARS grabbing headlines with IMF story off 8% to 33.9. ASIA: KRW up 0.15% to 1008.80 – the exception for Asia – INR off 0.3% to 70.79, TWD flat at 30.683. EMEA: ZAR off 1.8% to 14.62, TRY off 3.3% to 6.675, RUB off 0.15% to 68.15.

• EUR: 1.1695 off 0.1%. Range 1.1675-1.1718 with focus on 1.1650 support against 1.1720 resistance and US rates/equities driving with Trump policy. 
• JPY: 111.55 off 0.1% Range 111.52-111.76 with EUR/JPY 130.45 off 0.2% – all about equities and rates with 110.70-112 keys. 
• GBP: 1.3015 off 0.1%. Range 1.2990-1.3043 with EUR/GBP .8990 flat – focus is on Brexit with EU Barnier vs. German comments. BOE M4 troubling. 
• AUD: .7300 off 0.15%. Range .7275-.7315 with crosses in play and focus on equities/commodities. NZD off 0.8% to .6660 with Biz Confidence driving RBNZ cut hopes .6645 key. 
• CAD: 1.2925 up 0.15%. Range 1.2903-1.2935 with focus on NAFTA deal deadline and then rates with 1.2880-1.30 keys. 
• CHF: .9705 flat. Range .9686-.9716 with EUR/CHF 1.1350 off 0.1% - flashing yellow for risk with 1.1250-1.1450 consolidation and .9550 $ risk. 
• CNY: 6.8113 fixed 0.06% weaker from 6.8072, trades weaker at 6.8375 into London from 6.8218 closing yesterday, now 6.83 off 0.15% with 6.8182-6.8424 range, The USD/CNH trades 6.8375 off 0.2% over yesterday’s highs as well. 

Commodities: Oil up, Gold off, Copper off 0.25% to $2.7410.

• Oil: $69.93 up 0.6%. Range $69.55-$69.93. Iraqi comments vs. Iran production cuts still in play for oil. WTI watching $68 as the pivot for $65.50 restest or $70 break out for $71.05 July 10 highs. Brent $77.62 up 045% - watching $78.87 bear trend resistance and $74.48 55-day m.a. as support. 
• Gold: $1204.90 off 0.15%. Range $1202-$1207. Watching $116.04 Aug 16 lows as base for $1217.10 Aug 10 highs still. Silver$14.67 off 0.6%, watching $14.483 Aug 23 lows still as base against $15 and then $15.554 Aug 3 highs. Platinum off 0.35% to $794.80. Palladium $982.70 up 1.8%. 

Economic Calendar:

• 0830 am US July personal spending 0.4%p 0.4%e / personal income 0.4%p 0.3%e / core PCE prices (y/y) 1.9%p 2.0%e
• 0830 am US weekly jobless claims 210k p 213k e
• 0830 am Canada 2Q GDP (q/q) 1.3%p 3%e  /June (m/m) 0.5%p 0.1%e