The risk-on and risk-off barometer remains the USD and given that the US dollar index is up on the day and equity markets are mixed – it’s all about the US data and further political stories ahead. Many think the risk of Trump impeachment rose so the risk should logically be lower but for the fact that its August and the real event will be if Republicans lose control of Congress in the November mid-terms.

Today, markets are steeled for more political headlines but they aren’t just about Trump. The Australian leadership challenge grabbed early headlines overnight. The Senate there voted down a no-confidence motion but FinMin Bishop is the now running for Liberal Party leader against Turnbull.

The UK grabs some headlines as the government releases its “no-deal” Brexit contingency plans, but Raab remains upbeat. Of course, pain trade in EM today is Trump-related with ZAR off 1% on tweet that the US will look into recent farm seizures, raising the risk that South Africa could be the next victim of sanctions/tariffs. Land reform in South Africa remains unfinished and complicated business. The economic data today was the mainstay for the week and its mixed as well with Japan better, Europe overall better even as manufacturing stutters in Germany, it gains in France, and though overall export orders have the smallest rise in 2-years, Services counterbalance. Confidence is waning there and it’s clear that Trump trade issues matter. The US/China talks are not expected to stop the start of $16bn in tariffs today but many still see NAFTA and a US/China deal into the mid-terms. This macro hope matters to how to play the rest of the day and week as there is clearly fear about the Trump/Fed relationship and the role of the USD in the entire mess. The lesson for investors is that politics matter and that Australia is a teachable moment. The downtrend in AUD since January as helped steady the economy against geopolitical headwinds from the US and China but the politics opens another 0.72 test again.

Question for the Day: Did the FOMC minutes matter? If you look at the price action after the minutes you would say no and perhaps that isn’t a surprise but it should be. The focus on US rates mattering to Emerging Markets and global leverage has been one of the key themes for 2018. The fact that the markets have ignored the FOMC minutes is telling. There is more to be had in Jackson Hole than speeches. The connection of Fed members to the rest of the G20 banking world is at play and this makes the Jackson Hole event a bigger turning point for studying FOMC reaction functions. The biggest issue for the FOMC minutes was that this US economy is on track and seems set for needing more rate hikes but the outlook for the next 12 months seems more cloudy and uncertain. Politics matter even for an apolitical Federal Reserve. The risk for many maybe in the certainty of the rate hike path.

What Happened?

• Japan August flash Nikkei Manufacturing PMI 52.5 from 52.3 – better than 52 expected. Input and output inflation rises to multi-year highs. Overall demand rose but export orders fell for 3rd month. 
• Swiss 2Q industrial production up 8.3% y/y after 9% y/y while sales rose 9.2% y/y after 10% y/y - in comparison with the previous year, industrial production grew in April by 9.5%, in May by 7.6% and in June by 9.0%. For the whole of 2nd quarter 2018, production increased by 8.3% in comparison with the same quarter a year earlier.
• Sweden July unemployment drops to 6% from 7.2% - better than 6.2% expected – 7-month lows and compared to 6.6% in July 2017. But seasonally adjusted unemployment rose to 6.4% from 6.3%. There were 339,000 unemployed people in July, down from 403,000 in June. A year ago, the jobless figure totaled 362,000. The employment rate came in at 70.8 percent in July, up from 69.7 percent in the prior month.

Eurozone August flash Manufacturing PMI 54.6 from 55.1 – weaker than 55 expected – 21-month lows. The flash Services 54.4 from 54.2 – as expected – 2-month highs. The flash Composite PMI 54.4 from 54.3 – as expected – 2-month highs. The Manufacturing output flash PMI rose to 54.5 from 54.4 – 3-month highs. New orders picked up in both Services and Manufacturing but is still 3rd weakest since Dec 2016. Manufacturing new export orders were smallest in 2-years. Employment across sectors rose to 6-month high. IHS Market noted: “Warning lights are flashing. Analysis of past data indicates that demand needs to pick up to sustain current output and employment growth in coming months. Yet the risks seem tilted to the downside.” 

• French Aug flash Manufacturing PMI rises to 53.7 from 53.3 – better than 53.2 expected – 3-month highs. The flash Services rose to 55.7 from 54.9 – better than 55 expected – 2-month highs. This put the flash Composite at 55.1 from 54.4 – better than 54.6 expected – 4-month highs. Input prices rose further while output prices also rose but Services fell and Manufacturing rose. Manufacturing output was 52.6 from 52 – 3-month highs. Confidence fell overall to Nov 2016 lows. 
• German August flash Manufacturing PMI 56.1 from 56.9 – weaker than 56.5 expected. -2-month lows. The Manufacturing Output was flat at 56.7. The flash Services rose to 55.2 from 54.1 – better than 54.3 expected. This put the flash Composite at 55.7 from 55 – better than 55.1 expected – and 6-month highs. Prices for goods and services were up sharply and just below January peaks. Business confidence 12M forward was a 4-month highs. 

• French August business climate 105 from 106 – as expected. Manufacturing improves to 110 from 109. Building drops to 108 from 109, retail trade drops to 111 from 114 and Services fell to 104 from 105 – selling prices bounced, past employment fell but expected employment bounced. Overall, general outlook is markedly lower with past activity lower but future demand up slightly – all remain above the long-term averages. 
• UK August CBI retail trade sales volume 29% after 20% - better than 13% expected. Outlook for September 22% from 0%. Orders volume reported -19% from -8% while outlook for Sep -9% from -3%. Dissecting the month's rise in activity, growth was strongest amongst grocers, non-store goods and non-specialized stores. Meanwhile, carpet and furniture stores plunged further after falls in June and July to -75 units.
  Hardware and DIY stores also saw a marked drop from +36 units in July to -60 in August. "The summer heatwave has kept shoppers out on the high street, with consumers splurging on food and drink for barbecues and garden parties. That said, the outlook for retail remains challenging, with orders falling, prices rising, employment sliding, and investment drifting down," said Anna Leach, CBI Head of Economic Intelligence.

Market Recap:

Equities: The S&P500 futures are off 0.04% after losing 0.04% yesterday. The Stoxx Europe 600 is up 0.06% waffling between gains and losses. The MSCI Asia Pacific rose 0.1% with focus on Australia and politics.

• Japan Nikkei up 0.22% to 22,410.82
• Korea Kospi up 0.41% to 2,282.60
• Hong Kong Hang Seng off 0.49% to 27,790.46
• China Shanghai Composite up 0.37% to 2,724.63
• Australia ASX off 0.21% to 6,360.30
• India NSE50 up 0.18% to 11,591.40
• UK FTSE so far up 0.95% to 7,576
• German DAX so far off 0.1% to 12,376
• French CAC40 so far up 0.15% to 5,428
• Italian FTSE so far off 0.5% at 20,589

Fixed Income: German Bunds selling early on modest risk-on mood with little direction elsewhere. 10-year German yields up 0.5bps to 0.345%, France flat at 0.68%, UK Gilts up 0.5bps to 1.275% while periphery splits – Italy up 3bps to 3.08%, Spain off 1bps to 1.365%, Portugal flat at 1.785% and Greece off 1.5bps to 4.12%.

• US Bonds bear curve flatten with focus on housing data, Jackson Hole and 5Y $14bn TIPS sale next – 2Y up 1.2bps to 2.604%, 5Y up 0.9bps to 2.712%, 10Y up 0.7bps to 2.826%, 30Y up 0.5% bps to 2.983%. The 2-10Y curve now 21bps – new lows for cycle. 
• Japan JGB holding pattern in a quiet session.10Y flat at 0.084%, 30Y off 0.6bps to 0.834%.  MOF sold Y598.4bn in 5-15.5Y JGBS for liquidity enhancement with cover 3.11 down from 3.95. 
• Australian bonds bid up on politics – 3Y off 2bps to 1.99%, 10Y off 1bps to 2.53%. 
• China PBOC skips open market operations, leaves liquidity neutral. Monday market rates with O/N off 8bps to 2.424% and 7-day off 3bps to 2.614%.10Y bond yields fell 2bps to 3.605%. 

Foreign Exchange: The US dollar index is up 0.2% to 95.43 with 94.95 support against 95.65 resistance. In EM FX USD mostly bid – EMEA: ZAR off 0.45% to 14.22, TRY off 0.15% to 6.06. ASIA: KRW off 0.2% to 1121.30 with 55-day at 1115 key, INR off 0.4% to 70.11 with 70 break again key, TWD off 0.2% to 30.788 watching stocks.  

• EUR: 1.1580 off 0.15%. Range 1.1542-1.1600 with no follow-through – USD bid with 1.1520 pivot. 
• JPY: 110.75 up 0.2%. Range 110.52-110.93 with EUR/JPY up 0.1% to 128.30 with nothing going on new it’s about stocks and rates with 111.20 key. 
• GBP: 1.2890 off 0.15%. Range 1.2850-1.2919 with little but EUR driving – Brexit story also – EUR/GBP up 0.05% to .8985 with .90 pivot still
• AUD: .7295 off 0.75%. Range .7283-.7357 with politics key and .7250 and .7200 next. NZD off 0.3% to .6675 with .6650 pivot. 
• CAD: 1.3035 off 0.3%. Range 1.2993-1.3049 with risk of NAFTA no deal, A$ cross pressure and US rates in play with 1.2980 holding opens 1.3120 retest. 
• CHF: .9825 flat. Range .9822-.9854 with EUR looking wobble again, EUR/CHF in playoff 0.15% to 1.1380 with 1.1450 capping and 1.1250 back in target. 
• CNY: 6.8367 fixed 0.14% weaker from 6.8271 yesterday, trades weaker to 6.8795 into London from 6.8460 yesterday close. Now off 0.5% to 6.8720 with 6.8424-6.8806 range. 

Commodities: Oil lower, Gold Lower, Copper off 1.3% to $2.6790.

• Oil: $67.73 off 0.2%. Range $67.62-$68.12 – US inventories with crude draw was yesterday’s driver, ARAMCO IPO pulling today's story with $68 WTI important pivot for $66 test or $68.37 Aug 14 highs and breakout. Brent $74.43 off 0.45% with $72.50-$75.00 consolidation need to see $73 break for momentum to $70.30 Aug 15 lows or $75.79 July 30 highs for $78.87 bear trend resistance. 
• Gold: $1188.25 off 0.65%. Range $1187-$1196 – USD rebound sends gold back off the $1200 resistance zone – watching $1160.40 Aug 16 lows next. Silver off 1.3% to $14.57 – focus is on $14.338 Aug 16 lows then $14 test, Platinum off 1.75% to $780.30 and Palladium off 1.25% to $914.50. 

Conclusions: Is housing telling the markets something? The cost rise in housing from inflation linked to labor and supplies coupled with higher mortgage rates and flat wages leaves demand sagging. The tipping point for housing may be just a part of the puzzle for the Fed but its one that many fear given the links back to 2008. The animal spirits of markets may be more irrational about today’s new home sales than usual if only because of existing home sales weakness yesterday. 

Economic Calendar:

• 0830 am US weekly jobless claims 212k p 216k e
• 0900 am US June FHFA home price index 0.2%P 0.3%e
• 0945 am US August flash Manufacturing PMI 55.3p 55.1e / Services 56p 56.2e / Composite 55.7p 56.3e
• 1000 am US July new home sales -5.3%p +2.5%e / 0.631mn p 0.645mn e