"I can see clearly now the rain has gone..." Johnny Nash - 1970

When you can’t see clearly, most people slow down, perhaps that is the story for markets for the week ahead. The horizon is hazy, it’s the middle of summer, the economic and political calendar is light but the fear of markets abates with clear skies after a heavy week of news last week. The weather analogy for markets seems appropriate as we suffered another week of micro bursts between hot and humid days.

The US picture of “Goldilocks” markets holds as the US jobs report provided strong enough growth without much inflation. The FOMC will hike in September but the path ahead remains “gradual” and not likely to exceed expectations.  The ongoing strong 2Q corporate revenues justify US shares and the lack of any clear pain from US tariffs and retaliation abroad suggest waiting and seeing work.

Of course, this wasn’t so easy abroad, the BOE hiked 25bps but fears of a policy mistake rose wrapped around chances for a no-deal Brexit. The China PBOC raised its reserves on CNY forwards from 0% to 20% capping the USD rally and driving up Friday risk moods, leaving the data on growth and inflation in China in the week ahead as central to the storyline above.  

The porridge is just right for putting the plane on autopilot and catching a nap. But this seems riskier than logic would have it given the ongoing search for whether trade tariffs and the disruption of business as usual translates into higher inflation, lower growth and even worse outlooks for Autumn – these are the focal points for the week ahead and likely the rest of the summer as markets grapple with discontent amid the best of times.

News over the weekend that might matter to markets on Monday

 1) Venezuela Maduro survived a drone “attack” blamed on Colombia. Effect on LATAM is probably small but highlights the contagion of Venezuela on neighbors.  

2) Indonesia’s Bali suffers a 7.0 magnitude earthquake with tsunami alerts following. The disruption of commodities and tourism isn’t small and it highlights the other stories about heat waves in Europe and wildfires in Portugal and in California – global climate change is a problem and drag on growth.

3) North Korea and the US are continuing to spar over the path to denuclearization. The fear that this was PR in Singapore and nothing more rises with South Korea/US relationship in play if this fails.  

4) China leaders maybe in annual Beidaihe conclave – this would be the first meeting since Xi scrapped Presidential term limits in March. Key point maybe that China leaders are under some pressure to respond to trade war and the deleveraging slump in the economy.

5) Berkshire Hatahway posts surge in profits – has to report portfolio gains under new accounting rules. The rally up in 2Q shares is notable and has implications for expectations into 3Q with BH the portfolio everyone uses as best-in-class conglomerate.

Question for the Week Ahead: Do trade wars matter? 

The key focus on markets in the weeks ahead is how much geopolitical noise – namely US trade tariffs – matter to actual growth and inflation.The balancing act for the US has been seen in comparing the drop in PMI reports against the still robust outlooks from corporations as they report 2Q earnings and give 3Q outlooks. One place that seems to be important in answering trade impacts is on US equity market performance and outlooks.

For the second quarter, companies reporting earnings growth of 24.0% and revenue growth of 9.8%. According to FactsSet, analysts currently  expect earnings to grow near 20% for the remainder 2018, but also expect more moderate growth for early 2019

• For Q3 2018, analysts are projecting earnings growth of 20.7% and revenue growth of 7.7%.
• For Q4 2018, analysts are projecting earnings growth of 17.8% and revenue growth of 6.0%.
• For Q1 2019, analysts are projecting earnings growth of 7.3% and revenue growth of 6.2%.
• For Q2 2019, analysts are projecting earnings growth of 8.2% and revenue growth of 4.9%

Role of growth abroad still matters to US S&P500 performance

The markets have priced in a CNY devaluation because of the US tariffs with the risk of $200 billion with 25% driving the Chinese currency last week to 14-month lows with 6.90 line in play. The PBOC responded with a hike in the bank reserves for forwards – which did work in slowing the CNY gains back in 2017 but it’s not clear if that matters now. The CNY has become a new barometer for Asian stock market risks. At some level, CNY weakness will spur outflows and make US charges of a weaker currency real, whether Friday’s actions are a turning point remain to be seen.

Pressure on Europe remain part of the trade war fallout. The ability for Greece and Italy to have stable bond markets rests on the role of stability in other markets. Liquidity in all bonds has dropped since 2009 in part because of QE and regulations on banks. Bank shares tumbled last week in Italy and how they perform next week will be important. The connection to government debt remains in play. The new Italian government needs to be seen as following on the predecessors plans for reducing public debt levels. Inflation from tariffs and trade disruption will only make the ECB tapering plans more painful in the periphery. Watching 2Y Italy for signs of trade wars not mattering.

Finally, there is the role of oil in the mess of US/China trade. Talk of trade tariffs escalation drives up the USD and down the price of oil. The Iranian sanctions going into effect next week will be watched to see how China responds – they have said they won’t respect the US sanctions and that means more strife and trouble. Iran oil flows dwindling should be important enough but the drop in oil last week despite belligerent US/Iran talk make the role of China in the game important. Oil has also become a part of the trade war effect mattering. Higher prices indicate less impact.

Market Recap:

2Q earnings, US trade policy, US bond auction plans, BOJ, FOMC, BOE decisions and a slew of key economic data from global PMIs to US jobs dominated last week. US stock markets ignored fears of US/China trade escalation. The Trump administration’s threat to raise tariffs from 10% to 25% on $200 billion of Chinese imports led China to respond that it would retaliate with new tariffs on $60 billion in US imports.

Apple earnings were sufficient to offset Facebook from last week and despite calls for rotation out of tech into defensive cyclicals, tech shares rallied,

Friday’s nonfarm payroll report came in below expectations as employers added 157,000 jobs in July, but totals for May and June were revised up by a combined 59,000 and the unemployment rate ticked down to 3.9%. The FOMC meeting provided little color other than growth allows further rate hike gradualism ahead.

The BOJ decision to widen its yield bands and to become less certain on buying led to a touch more volatility in JGBs despite “forward guidance” plans and less steepeners in the US and France.

Europe was worried about US/China tariffs, Italian politics and growth with EU PMI reports lower except in France and Sweden which beat expectations. 2Q GDP in Europe missed but inflation was higher leaving EUR mixed.The PBOC acted against CNY weakness changing the Reserve Requirement on FX forwards from 0% to 20%. UK BOE raised rates 25bps but BOE Carney warned of risks for no-deal Brexit. In EM another rough week – CNY saw its 8th week lower, but Turkey was the headline grabber with US sanctions on Turkey leading to a 6% TRY drop and break of 5.00 key support.

Equities:

The MSCI all-country World index fell 0.23% to 519.53 on the week, while the MSCI EM index fell 1.77% to 1073.33. The big 8 bourses saw China lead the losses with Asia and Europe all suffering but the US rallied for 5th weekly gain and India also gained adding to its lead year-to-date performance. 

US 2Q earnings are almost done – 81% reporting with 80% beating EPS and 74% beating revenues – putting blended earnings growth at 24% - just behind 24.8% in 1Q.

• The US S&P 500 rose 0.76% to 2,840.35 on the week with the Thursday lows reversed to Friday highs with focus on earnings particularly Apple and Tesla along with US trade policy. DJIA rose 0.54% to 25,462.58 and the NASDAQ rose 0.12% to 7,812.02 with focus on Apple breaking $1 trilllion market cap and Facebook hangovers. The CBOE VIX fell to 11.64% off 1.29pp on the week.
• The Stoxx Europe 600 fell 0.74% to 389.16 on the week. The index rose 1.7% in July and is flat on the year. The German DAX fell 1.9% to 12,615.76 on the week, off 1.6% on the month and is off 2.3% on the year-to-date. The French CAC40 fell 0.59% to 5,478.98 on the week, up 1.9% on the month and up 3.1% on the ytd. The UK FTSE fell 0.55% to 7,659.10 on the week, up 0.5% on the month and off 0.4% on the ytd. The Italian FTSE MIB fell 1.68% to 21,586.85 on the week, off 1.5% on the month and off 1.2% ytd.
• The MSCI Asia Pacific Index fell 2.07% to 165.25 on the week.The Japan Nikkei fell 0.83% to 22,525.18 on the week giving back all the July gains and now down 1% on the ytd. The China Shanghai Composite fell 4.63% to 2740.44 on the week, off 0.2% on the month and down 17% ytd. The Hong Kong Hang Seng fell 3.92% to 27,676.32 on the week, off 2.2% on the month and off 7.5% ytd. Australia ASX all ords fell 1.02% to 6,326.4 on the week, off 0.45% on the month, up 2.6% ytd. The Korea Kospi fell 0.32% to 2,287.68 on the week up 0.65% on the month and off 7.3% ytd. The India Nifty 50 rose 073% to 11,360.80 on the week up 5.45% on the month, 7.9% ytd

Fixed Income:

A pivotal week for global bonds as the rate up move stalls on US/China trade fears and Italian politics supported by BOJ remaining easy while BOE hiked 25bps as expected and FOMC seems set for September. The rate moves were about risk in equities and the US refunding where more supply puts next week’s sale into sharp focus. Global growth data seen as slowing while inflation seen controlled.

• US Bonds bid on the week – belly focus with US refunding, FOMC, BOJ, PBOC all driving.  2Y off 4bps to 2.63%, 3Y off 2bps to 2.74%, 5Y off 2bps to 2.82%, 10Y flat at 2.95%, 30Y up 1bps to 3.09%.
• Canadian 10-year bond yields up 5.5bps to 2.35% on the week – better trade, NAFTA hopes and growth views holding put BOC in play for September.
• Japan JGBs up 1.5bps to 0.11% on the week – with BOJ lifting band to 0.2% most see yields going there but 0.14% capped this week, growth key.
• Australian 10-year bond yields up 8.5bps to 2.725% on the week – mostly tracking US and Japan moves with RBA next key.
• UK Gilt yields up 5bps to 1.33% on the week – BOE hikes and less happens with Brexit still key concern, data next week 2Q GDP key focus
• German Bund yields up 1bps to 0.41% on the week – clearly 0.5% cap in play but Italy and other risk concerns holding.
• French OAT yields up 9.5bps to 0.79% on the week – tracking pain trades with PMI weak, Macron survives political test.
• Italian BTP up 20bps to 2.93% on the week – was to 3.10% Friday am before US/China stories with fear of EU and new government driving.
• Spanish Bono yields up 5.5bps to 1.42% on the week – dragged by Italy despite weaker PMI
• Portugal 10-year yields up 7.5bps to 1.78% on the week – unwinding of carry plays.
• Greek 10-year yields up 30.5bps to 4.10% on the week – hit by Italy and growth doubts

Foreign Exchange:

The US dollar index rose to 95.16 on the week. The 95.65 July 19 highs are back in play against 94.95 and 94.70 support. In EM FX – USD was mostly bid – LATAM: MXN up 0.4% to 18.56, BRL up 0.15% to 3.707; ASIA: CNY off 0.3% to 6.83, KRW off 0.65% to 1127.70, INR up 0.15% to 68.54; EMEA: RUB off 0.95% to 63.297, ZAR off 1.1% to 13.315, TRY 5.0950. In Crypto Currencies – tough week:  BTC $7060 off 16.1% on the week – futures off 10.1% on the week, ETH $407.70 off 13.9% on the week.

• EUR: 1.1570 off 0.7% on the week with Italy driving and 1.1540-1.1680 key range to watch still.
• JPY: 111.20 up 0.2% on the week and EUR/JPY 128.70 off 0.5% on the week – USD bid on BOJ/FOMC but cross shows equity strains with 110.50 key for $ against 112 again.
• GBP: 1.3000 off 0.7% on the week and EUR/GBP .8895 up 0.1% on the week. Focus is still on Brexit as BOE delivered but fears of mistake rising.
• CHF: .9940 off 0.7% on the week and EUR.CHF 1.1500 flat – nothing going on but Italy could drive larger 1.14 test in cross.
• AUD: .7400 flat on the week with .7320-.7480 range holding and focus on China, RBA and NZD .6745 off 0.55% with RBNZ next and Biz confidence crushed.
• CAD:1.2990 off 0.5% on the week – BOC September hike being priced with trade better and growth intact despite US tariffs.NAFTA hopes remain in play. 1.2880 next key.

Commodities:

The S&P/GSCI fell 0.50% to 2,706.74 on the week. Wheat and orange juice lead the winners while cocoa off 8.4% and Lumber off 7.1% lead the losers.

• Oil: $68.49 off 0.3% on the week (Sep). Brent off 2.07% to $73.21 on the week.Iran sanctions and military drills vs. US surprise crude build and USD gains leave markets stuck $72-$74 in Brent and WTI $67-$70.
• Gold: $1214.20 off 0.8% on the week (futures $1218.10 Oct). USD gains beat China/US trade fears with $1204.60 key against $1225 bounces.  Silver off 0.2% to $15.462. Platinum up 0.63% to $836.90. Palladium off 1.15% to $907.90.
• Corn: $369.6 up 2.14% on the week (Sep). WASDE and US weather ahead, tariffs and stronger USD behind. Wheat up 4.85% to $556.20 (Sep). Soybeans $886.25.
• Copper: $2.7830 off 2.1% on the week.  Futures off 1.37% to $2.7635 Sep on the week. Iron Ore fell 1.5% to $66.81 Sep. China worries dominate.

Calendar for the Week Ahead:

A summer lull after an overloaded last week. The RBA and RBNZ meetings are expected to leave rates unchanged. The economic data will focus on US and China inflation, trade from China and Germany, industrial production from UK and Eurozone, and UK preliminary 2Q GDP. US debt sales also a focus with $78bn in 3-10-30Y and $151bn in bills. Japan sells 10Y and 30Y which will test BOJ while UK sells 10Y Gilts. Ultimately, risk appetite won’t depend on growth or inflation or debt sales but trade outlooks and views on US/China and rest of the world geopolitical order.

Monday, August 6: Canada Holiday, German factory orders

• 0200 am German June Factory Orders (m/m) 2.6%p -0.2%e
• 0430 am Eurozone August Sentix Investor Confidence 12.1p
• 0500 am Eurozone July Retail PMI 51.8p
• 1130 am US sells 3M $51bn and 6M bills $45bn
• 0200 pm US Fed Senior Loan Officer Survey

Tuesday, August 7: RBA, German industrial production and trade, China FX reserves, US JOLTS

• 0730 pm Japan June household spending (y/y) -3.9%p -1.6%e
• 1230 am RBA rate decision – no change from 1.5% expected
• 1230 am Japan sells Y400bn in 10Y bonds
• 0100 am Japan June LEI 106.9p 107.0e
• 0200 am German June industrial production (m/m) +0.7%p -0.3%e
• 0200 am German June trade surplus E20.3bn p E20bn e / exports 1.8%p 0.8%e
• 0245 am French June trade deficit E6.01bn p E5bn e
• 0330 am Sweden June industrial production (m/m) 1.8%p 0.6%e (y/y) 1.9%p 3.7%e
• 0400 am China July FX Reserves CNY3.112trn p CNY3.099trn e
• 0700 am Bank of Brazil COPOM minutes
• 1000 am US June JOLTS job openings 6.638mn p 6.9mn e
• 1000 am US Aug IBD/TIPP economic optimism 56.4p 57.2e
• 1000 am Canada July Ivey PMI 63.1p 64.2e
• 1130 am US sells 4-week $65bn bills
• 0100 pm US sells 3Y $34bn notes
• 0200 pm US June consumer credit $24.56bn p $16bn e
• 0430 pm US weekly crude oil inventories 5.59mb p -0.7mb e
• 0500 pm Argentina central bank BCRA rate decision – no change from 40% expected

Wednesday, August 8: Japan trade and C/A, China trade, Thailand rate decision

• 0750 pm Japan BOJ meeting summary of opinions
• 0750 pm Japan June trade balance –Y303.8bn p +Y222bn e / C/A Y1.94trn p Y1.1trn e
• 0830 pm Australia Aug Westpac Consumer Confidence 3.9%p
• 0930 pm Australia June home loans (m/m) 1.1%p -0.1%e 
• 1100 pm China July trade surplus $41.6bn p $36bn e / exports 11.3%p 10%e / imports 14.1%p 17%e
• 1105 pm RBA Lowe speech
• 0100 am Japan July Ecowatcher current 48.1p 47.8e / outlook 50p 51e
• 0300 am Spain Jun industrial production (y/y) 1.6%p 2.8%e
• 0305 am Bank of Thailand rate decision – no change from 1.5% expected
• 0545 am UK 10Y Gilt GBP2.5bn sale
• 0830 am Canada June building permits 4.7%p -0.2%e
• 0845 am Richmond Fed Barkin speech
• 1030 am US weekly EIA crude oil inventories 3.803mb p -1.5mb e
• 0100 am US 10Y $26bn note sale

Thursday, August 9: RBNZ, China CPI and PPI, US PPI

• 0500 pm New Zealand RBNZ rate decision – no change from 1.75% expected
• 0600 pm RBNZ Orr Press Conference
• 0750 pm Japan June machinery orders (m/m) -3.7%p -1.5%e (y/y) 16.5%p 9.5%e
• 0900 pm Australia Aug consumer inflation expectations 3.9%p
• 0930 pm China July CPI (m/m) -0.1%p 0.1%e (y/y) 1.9%p 2%e
• 0930 pm China July PPI (y/y) 4.7%p 4.4%e
• 1200 am Japan sells Y700bn in 30Y bonds
• 0145 am Swiss July unemployment 2.6%p 2.6%e
• 0300 am Philippines BSP rate decision 50bps hike to 4% expected
• 0400 am ECB Economic Bulletin
• 0440 am Spain sells 10Y bonds
• 0815 am Canada July housing starts 248.1k p 220ke
• 0830 am Canada July new home prices (m/m) 0%p 0%e
• 0830 am US July PPI (m/m) 0.3%p 0.2%e (y/y) 3.4%p 3.2%e / core 2.8%p 2.8%e
• 0830 am US weekly jobless claims 218k p 217k e
• 1000 am US July wholesale inventories 0%p 0%e
• 1230 pm Chicago Fed Evans press conference
• 0100 pm US 30Y $18bn bond sale

Friday, August 10: Japan and UK 2Q GDP, UK and French IP, UK trade, US CPI, Canada jobs

• 0630 pm New Zealand July Business PMI 52.8p 50e
• 0750 pm Japan July domestic corporate goods prices (m/m) 0.2%p 0.1%e (y/y) 2.8%p 2.9%e
• 0750 pm Japan 2Q preliminary GDP (q/q) -0.2%p 0.3%e (y/y) -0.6%p +1.4%e
• 0930 pm RBA SOMP (statement of monetary policy)
• 0245 am French June industrial production (m/m) -0.2%p 0.5%e
• 0330 am Sweden July CPIF (m/m) 0.3%p 0.5%e (y/y) 2.2%p 2.2%e / CPI 2.1%p 2%e
• 0400 am China July M2 8%p 8.2%e /new loans CNY1.84trn p CNY1.2trn e
• 0430 am UK 2Q preliminary GDP (q/q) 0.2%p 0.4%e (y/y) 1.2%p 1.3%e
• 0430 am UK June industrial production (m/m) -0.4%p 0.4%e (y/y) 0.8%p 0.7%e /manufacturing 0.4%p 0.3% (y/y) 1.1%p 1%e
• 0430 am UK June goods trade deficit G12.36bn p G12.5bn / total G2.79bn p G3bn
• 0600 am UK NIESR 3Q GDP estimate 0.4%p 0.4%e
• 0830 am US July CPI (m/m) 0.1%p 0.2%e (y/y) 2.9%p 3%e /core 2.3%p 2.3%e
• 0830 am Canada July jobs 31.8k p 20k e / unemployment 6%p 5.9%e
• 1200 pm US WASDE report
• 0200 pm US July budget deficit $75bn p $59bn e

Conclusions:

Are US jobs telling us this is the best of times, CPI maybe the worst? The forecasts for US unemployment in the next 12 months is down to 3.5% or lower as the consensus. Growth is seen at 2.5% or higher.US job gains are significant and the ability for the US to now have wage inflation from that remains the key part of FOMC gradualism and the ongoing “Goldilocks” view on market risks. 

The problem is that next week’s inflation expected at 2.9% y/y is still higher than last week’s wage inflation at 2.7% y/y. The ability for growth to remain robust and above 3.5% rests on consumers and the threat of tariff induced inflation mixed with sticky energy costs will be playing against the market storyline. For anyone that wants to try and understand how we can have the best of jobs and the worst from inflation – read the ECRI blog on employment and education. Employers are finding that workers that need to be trained maybe a better deal and that means the wages vs. benefits components of costs are in play with the US data. Eventually this plays out, but not yet.