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Another Day Of Gains As Futures Trade Within 1% Of All Time Highs

Another Day Of Gains As Futures Trade Within 1% Of All Time Highs

US futures, European bourses and Asian markets extended on recent sharp gains on Thursday, the 10Y yields rose above 1.30% after hitting 1.13% just two days earlier and oil…



Another Day Of Gains As Futures Trade Within 1% Of All Time Highs

US futures, European bourses and Asian markets extended on recent sharp gains on Thursday, the 10Y yields rose above 1.30% after hitting 1.13% just two days earlier and oil held onto sharp gains as investors seemed to set aside virus jitters for now and looked ahead to the European Central Bank for reassurance that policy support will continue; the dollar was steady. Japanese markets were closed for a holiday. At 7:15 a.m. ET, Dow e-minis were up 71 points, or 0.20%, S&P 500 e-minis were up 8 points, or 0.19%, and Nasdaq 100 e-minis were up 24.50 points, or 0.16%. Futures traded less than 1% from their record highs, completing a definitive V-shaped recovery from the recent slide.

The turnaround from the Monday selloff shows “corporations have been very resilient through all this,” David Mazza, Direxion head of product, said on Bloomberg Television. “Earnings estimates are quite remarkable, probably some of the best on record. Even through all this, we have central-bank liquidity remaining very abundant, economic growth being robust.”

Energy and mega-cap tech stocks gained ahead of a new batch of earnings reports, the latest initial claims data and the first ECB meeting to incorporate the bank's new strategic review. Energy stocks Chevron Corp, Exxon Mobil, Schlumberger NV, Occidental Petroleum and Marathon Petroleum Corp climbed between 0.1% and 1%, tracking crude prices. Some other notable pre-market movers:

  • Didi Global (DIDI) drops 3% in premarket trading after people familiar with the matter said Chinese regulators are considering serious, perhaps unprecedented, penalties for for the ride-hailing giant after its controversial initial public offering last month.
  • Texas Instruments (TXN) drops 4.8% after third-quarter sales and profit forecasts left analysts disappointed, with Barclays saying the “flat outlook leaves little to live for this late in the cycle.”
  • AT&T (T) added 0.9% as the telecom operator beat analysts’ estimates for monthly phone bill paying subscriber additions in the second quarter, fueled by more Americans converting to 5G phones.
  • Dow (DOW) rose 1.3% after its second-quarter profit doubled from the first, as prices for its chemicals used in plastics and packaging rose on the back of strong consumer and industrial demand as well as lower inventories.
  • Chembio Diagnostics (CEMI) gains 9.9% and NeuroMetrix (NURO) surges 33% amid discussions on message boards at Reddit and StockTwits.

There was no obvious catalyst for the recent rebound in stocks, or the drawdown on Friday and Monday, though a study on Wednesday showed both Pfizer and AstraZeneca vaccines were effective against the Delta coronavirus variant. "Every now and then investors look for reasons to take some profits off and that's what we saw," said Jun Bei Liu, portfolio manager at Tribeca Investment Partners in Sydney. "The market suddenly became worried about the delta variant and how it might affect the path to recovery," she said. "But what we have compared with 12 months ago is quite a few viable vaccines...eventually we will be coming out of this and we are much closer to the end than we were 12 months ago."

In Europe, investors awaited the European Central Bank’s policy decision and guidance as the Stoxx 600 index turned positive for the week only three days after Monday’s selloff. Travel and leisure stocks led the advance, with 19 of the 20 industry sectors in the green. Unilever Plc was an exception, tumbling the most since Feb. 4 in London after the company lowered its guidance for profitability, citing cost inflation. Here are some of the biggest European movers today:

  • EQT shares gain as much as 16% in the stock’s steepest intraday advance since Jan. 26 after the Swedish investment firm reported better-than-expected numbers for the first six months of the year.
  • Aalberts climbs as much as 5.3% to a record high, after the company reported half-year results ahead of expectations.
  • Flutter rises as much as 4.3% in London after RBC upgraded to outperform, saying concerns on the stock are overdone.
  • Huhtamaki jumps as much as 5.6% in Helsinki after the Finnish food- packaging maker reported 2Q results that beat analysts’ profit and revenue estimates.
  • Publicis climbs as much as 4.6% with analysts positive on the advertising firm’s growth in the second quarter.
  • Temenos drops as much as 8.5%. Jefferies says the software firm’s 2Q revenue looks in line, but expectations on the buyside for beat-and-raise may mean the results fall slightly short.

Earlier in the session, the MSCI index of Asia-Pacific shares rose for a second day, climbing as much as 0.9%, led by Hong Kong, as investors became more confident about economic growth after U.S. companies reported solid corporate earnings overnight despite persistent concerns about burgeoning outbreaks in unvaccinated populations and as nerves persist around China's regulatory crackdown on technology firms. Shares in heavily-indebted Chinese property developer Evergrande (3333.HK) rebounded about 11% in Hong Kong after it said it had resolved legal disputes with a lender.

Benchmarks in Hong Kong and Indonesia each added 1.8% as several sectors including materials and technology advanced in the region. “Strong U.S. earnings confirm the strength of global economic recovery and therefore demand for Asian exports, which is good for the region,” said Olivier d’Assier, head of applied research for Asia Pacific at Qontigo. Better-than-expected results for companies such as Verizon Communications Inc. and Coca-Cola Co. lifted sentiment and eased concerns over peak economic growth, while shifting investor focus away from the rapid spread of the delta variant that might dent the recovery. U.S. 10-year Treasury yields hovered close to 1.3%. Shares in Indonesia climbed after the central bank decided to hold its benchmark rate at 3.5%. The Jakarta Composite Index gained 1.8%, the biggest rise in three months. Japan’s stock market is closed Thursday and Friday for holidays.

Australia's S&P/ASX 200 index rose 1.1% to close at 7,386.40, a fresh record high, led by gains in miners and banks. Australia’s iron ore shipments climbed to a record last month, cushioning against the impacts of nationwide lockdowns. Orocobre was among the biggest gainers after reporting 4Q sales results. Zip was the biggest laggard after posting 4Q revenue of A$129.9m. In New Zealand, the S&P/NZX 50 index rose 0.1% to 12,720.84

Here are the latest coronavirus news:

  • Texas Tribune: 99.5% of the 8,787 people who died from Covid from 8th Feb to 14 July were unvaccinated (citing prelim numbers from Texas Dept of State Health Services)
  • China pushes back against WHO calls for another probe in to the virus’s origins, including whether leaked from a lab, saying no evidence and defies common sense
  • Thailand (13,655) and S Korea (1842) post record new cases
  • Queensland to close New South Wales border from 1am Friday
  • Biden urges more people to get vaccinated saying the pandemic is only among the unvaccinated
  • Texas reports 3,261 cases in past 24hrs, highest since 13 Apr, but no new fatalities in 4 of last 5 days

Elsewhere, the Labor Department’s report, due at 8:30 a.m. ET, is expected to show the number of Americans filing new claims for unemployment benefits fell to 350K (from 360K) for the week ended July 17, amid rampant worker shortages. Investors have been closely following the health of the jobs market on which monetary policy hinges, especially after a series of higher inflation reading recently sparked fears about a sooner-than expected paring of policy support as the economy reopens.

A shift in attention to corporate earnings and the so-called value stocks have helped Wall Street recoup most of its declines from earlier in the week that were triggered by concerns about the fast-spreading Delta variant of the coronavirus. Q2 earnings are expected to grow 75% for S&P 500 companies, according to Refinitiv IBES estimates, with 88% of the 73 reported companies in the benchmark index beating consensus expectations. Abbott Laboratories, Domino’s Pizza Inc, Biogen Inc, Snap Inc and Intel Corp are among the major companies reporting results later in the day.

Investors also have one eye on a brewing partisan showdown in Washington over the U.S. debt ceiling, as the U.S. Treasury is projected to exhaust its borrowing authority in October, which put upward pressure on short-end rates overnight.

With a mostly bare data calendar on Thursday the European Central Bank's policy-setting decision, due at 745am ET, and the subsequent press conference from President Christine Lagarde are the main focus for markets (see preview here). Lagarde infused traders with a sense of anticipation after flagging an adjustment to the bank's rates guidance to reflect a new and more flexible inflation-targeting strategy. read more. "To really enforce their credibility, the ECB could tie their rate path to an explicit calendar date - i.e. no rate hike until late 2024," said Luke Suddards, a strategist at brokerage Pepperstone. "That would be a dovish surprise for FX markets and put pressure on euro crosses."

In rates, the 10Y Treasury yield edged above 1.3% as rates markets idled in Asia, with trade thinned by Tokyo's holiday, following a sell-off in Treasuries overnight. Losses were led by intermediates with 5- to 7-year yields cheaper by ~1bp on the day; 10-year around 1.30% lags bunds by ~1bp while gilts slightly underperform. Futures activity has been light with cash markets closed in Asia for Japanese holidays and resuming at 7am London time.

In FX, the dollar index sat at 92.812, off a three-month peak of 93.194 and the euro was steady just above recent lows at $1.1791. The Bloomberg dollar index edged lower with Treasuries as earnings optimism tempered concerns about the delta variant and its threat to economic growth. "The dollar has been trading on the front foot regardless of the risk sentiment swings in recent days," Westpac analysts said in a note, supported by the view that high inflation could drive U.S. rate rises. A shift to a more structurally dovish European Central Bank should cement the dollar index at higher levels, the analysts said, with a test of the year's highs likely this quarter. The risk-sensitive Norwegian krone and pound led G-10 gains while the Swiss franc underperformed

Bitcoin briefly rose above $32,000 after getting a boost from Elon Musk, who said his space exploration company SpaceX owns the digital token.

In commodities oil hung on to most of Wednesday's sharp price rise, its biggest one-day gain in three months. Brent crude futures were last 0.4% softer at $71.94 a barrel, but had gained more than 4% on Wednesday. Gold was steady at $1,801 an ounce and cryptocurrencies were firm after bouncing from lows when Tesla boss Elon Musk said the carmaker would likely restart accepting bitcoin payments after due diligence on its energy use.

To the day ahead now, and the main highlight will likely be the aforementioned ECB meeting and President Lagarde’s subsequent press conference. Otherwise, data releases from the US include the weekly initial jobless claims, June data on existing home sales and the Conference Board’s leading index. And over in Europe, there’s the EC’s advance consumer confidence reading for the Euro Area in July. Finally, earnings releases include Twitter, Intel, AT&T, Danaher, Unilever, Blackstone and Biogen, whilst BoE Deputy Governor Broadbent will be speaking.

Market Snapshot

  • S&P 500 futures up 0.2% to 4,357.50
  • STOXX Europe 600 up 0.7% to 457.11
  • MXAP up 0.9% to 202.70
  • MXAPJ up 1.3% to 680.01
  • Nikkei up 0.6% to 27,548.00
  • Topix up 0.8% to 1,904.41
  • Hang Seng Index up 1.8% to 27,723.84
  • Shanghai Composite up 0.3% to 3,574.73
  • Sensex up 1.1% to 52,783.51
  • Australia S&P/ASX 200 up 1.1% to 7,386.41
  • Kospi up 1.1% to 3,250.21
  • Brent Futures up 0.6% to $72.64/bbl
  • Gold spot down 0.5% to $1,794.06
  • U.S. Dollar Index little changed at 92.83
  • German 10Y yield rose 0.3 bps to -0.392%
  • Euro little changed at $1.1786

Top Overnight News from Bloomberg

  • Chinese regulators are considering serious, perhaps unprecedented, penalties for Didi Global Inc. after its controversial initial public offering last month
  • For credit investors, today’s ECB meeting is all about whether policymakers hint at any changes that could spell an end to the cheapest funding costs on record
  • Bank of England Deputy Governor Ben Broadbent said policy makers may be right to overlook a surge in inflation now, arguing that many of the increases are likely to be temporary
  • Britain is set to be handed a final warning from the European Union to meet its commitments under the Northern Ireland Protocol as the two sides struggle to work out their post-Brexit relationship

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks traded higher following the extended rebound across global counterparts including the continued cyclical outperformance stateside where the mood was also helped by several blue-chip earnings. ASX 200 (+1.1%) was led higher by strength in the commodity-related sectors as energy spearheaded the advances after oil prices gained by around 4.5% on Wednesday and with mining names also lifted by quarterly production updates which propelled Orocobre and Iluka Resources to the top performers list. The latest data releases also provided some slight encouragement including stable NAB Quarterly Business Confidence which benefitted from an upward revision to the prior and the preliminary trade data showed that Exports and Imports rose 8% M/M. Hang Seng (+1.8%) and Shanghai Comp. (+0.3%) were positive as reports that US Deputy Secretary of State Sherman is to visit China for talks between 25th-26th July, spurred some hopes for a potential de-escalation in tensions, although other commentary remained hawkish including from US Secretary of Defense Austin who vowed to counter 'unfounded' China claims in the South China Sea. Nonetheless, Hong Kong led the gains in the region as the broad strength permeated across various industries including property, energy, tech and financials, while Evergrande found some relief after resolving the dispute with Guangfa Bank, although the advances for the mainland were capped after the recent flooding catastrophe and with China’s trade-weighted currency rose to a fresh 5-year high. KOSPI (+1.1%) was also underpinned by the broad constructive mood in the region with some earnings releases helping divert attention away from another record daily increase in infections, and Japanese markets are closed for the rest of the week due to Marine Day and Sports Day holidays.

Top Asian News

  • KakaoBank to Raise $2.2 Billion as Korean IPO Boom Continues
  • As Singapore Frets Over the Elderly, Virus Rise Among Young
  • Iron Ore Futures Slump Amid Demand Fears, Improved Flows
  • Hyundai Has Biggest Profit in Seven Years, Warns About Chips

Major Euro bourses trade higher (Euro Stoxx 50 +1.1%) as the region adopted the positive performance seen across APAC. This come as earnings in the continent pick up in pace ahead of the ECB policy decision, which is expected to enforce a more dovish pursuit of its new inflation mandate. Meanwhile, the UK’s FTSE 100 (+0.3%) and Switzerland’s SMI (-0.2%) lag, with the former weighed on by a firmer Pound alongside the ill-effects of losses in both benchmarks’ heavyweight pharma sectors. US equity futures are flat with a positive bias, with the NQ (+0.2%) initially outperforming the ES (+0.2%), YM (+0.3%) and RTY (+0.2%) amid a more favourable yield environment, albeit that faded with the contracts now seeing modest broad-based upside. The yield picture is once again a cyclical. Travel & Leisure is again the winner, closely followed by Autos & Parts, Basic Resources and Tech. The other end of the spectrum consists of the defensives: Healthcare, Consumer Staples and Telecoms, albeit with some possible idiosyncratic influences. The former is weighed on by pharma-giant Roche (-1.1%) post-earnings, who in-spite of beating on main metrics, underwhelmed investors who expected upgraded guidance. Consumer Staples sees hefty losses in Unilever (-4.5%) as earnings were largely in-line with analyst expectations but the group expects FY margins to remain flat as a result of rising costs. Meanwhile, Telecoms have clambered off the lows seen at the cash open in the aftermath of Spain’s 5G auction, whereby Orange (+0.1%), Telefonica (+0.4%) and Vodafone (+1%) have together paid over EUR 1bln. In terms of other moves, NatWest (-1.5%) is pressured amid reports that the UK government is looking to offload NatWest shares, with the earliest sale to occur on August 12%. ABB (+1.9%) is bolstered by earnings beats alongside plans for its EV charging spin-off early next year.

Top European News

  • EQT Plans to Step Up Hiring as Assets Under Management Soar 95%
  • North Sea Green Hydrogen Pilot Gains Grant from Dutch Government
  • ABB Gains; Orders the Standout of Strong 2Q, JPMorgan Says
  • Euro Can Excite Markets Only on Downside Break: ECB Cheat Sheet

In FX, the ECB has been afforded top billing in terms of this week’s main events and potential market movers following the strategy review and shift to a new inflation target, and on this occasion the 12.45BST policy announcement may well take centre stage before the spotlight shifts to President Largarde for the post-meeting press conference and Q&A. Indeed, rate guidance will change by definition to reflect symmetry around 2% rather than the old ‘close to, but below’ remit, and the wording or phrasing could be pivotal from the perspective of perception and determining whether the GC retains a dovish bias or not, just as much as the tone of the text and responses to questions 45 minutes later. Note, a full preview is available via the Research Suite and will be re-posted on the Headline Feed in due course. In the run up to the ECB, the Euro remains relatively rangy and tactically, if not necessarily well positioned pending the outcome after almost guaranteed initial knee-jerk moves, with Eur/Usd hovering below 1.1800 where 1.3 bn option expiries start and end at 1.1810, Eur/Gbp pivoting 0.8600 and the 50 DMA that comes in at 0.8590 today, Eur/Jpy straddling 130.00 and Eur/Chf rotating around 1.0825.

  • GBP/AUD/DXY - Sterling seems to have weathered a set-back amidst fairly benign views on inflation from BoE’s Broadbent (see 9.30BST post on the Headline Feed for details) allied to a broad Buck bounce that pushed the index back over 92.800 between 92.868-704 parameters, as Cable consolidates recovery gains through 1.3700 and the 200 DMA, while the Aussie is also rebounding further and has breached half round number resistance against its US peer at 0.7350 with some traction coming via preliminary trade data overnight showing a wider surplus and acceleration in both exports and imports. However, hefty 1.5 bn option expiry interest between 0.7370-75 could cap Aud/Usd in the same vein as the psychological 1.0600 level in Aud/Nzd as attention turns to flash PMIs. Back to the DXY and Greenback in general, upcoming IJC tallies and existing home sales appear more influential than the national activity or leading indices as the increasingly buoyant risk backdrop detracts from a more supportive yield landscape (outright and curve profile).
  • JPY/CHF/CAD/NZD - The Yen is holding within 110.36-07 confines absent of many Japanese participants due to Marine Day and also braced for another market holiday before the weekend given Sports Day on Friday, so pointers and direction will largely be gleaned from elsewhere. Conversely, the Franc is closer to w-t-d peaks than lows having rebounded from 0.9232 to 0.9164, like the Loonie that has derived momentum from the improving market mood and pronounced revival in WTI crude to top Usd 71/brl compared to lows only a cent above Usd 65 on Tuesday. Usd/Cad is currently circa 1.2560 vs 1.2525 at one stage and 1.2800+ at the start of the week, while Nzd/Usd is meandering from 0.6971-47 following the turn in cross tides noted above that has undermined the Kiwi to an extent.
  • SCANDI/EM - More fuel to fire the Nok’s comeback from under 10.7000 against the Eur to 10.4000+ at one stage, as Brent nears Usd 73/brl for a Usd 5.5 or so surge from worst levels, and the Rub is also gleaning some traction. Elsewhere, the Cnh and Cny remain firmer following confirmation that the meeting between Chinese and US Deputy Secretaries of States is back on and the Zar is on the front foot into the SARB.

In commodities, WTI and Brent front month futures are firmer on the day as the complex experiences tailwinds from another risk-on day. Furthermore, the supply/demand balance remains in favour of a deficit over the second half the year. Analysts at Morgan Stanley reaffirmed their view that the oil market will be in a deeper deficit in H2 vs H1 2021. The bank maintained its forecast for Brent to trade in the mid-to-high 70s for the remainder of the year. Meanwhile, Barclays raised its 2021 oil price forecast by USD 3-5/bbl due to expectations of a faster-than-forecast normalisation in OECD inventories. The British bank does warn that prices could rise to USD 100/bbl over the coming months if OPEC+ is slow to meet demand. Looking ahead, MS sees OPEC maintaining a slight deficit in 2022. Note, other desks expect demand in H1 2022 to be somewhat sluggish before seeing a pick-up in H2. Barclays downgraded its 2022 oil price forecasts by USD 3/bbl. This sentiment also been echoed by sources via Energy Intel earlier this week who “see the potential for a significant dip in oil demand in the first half of next year…. it is likely they [OPEC+] will take a pause [from production hikes] from monthly increases this December." Over to the US, Barclays sees US oil demand growing by 1.6mln BPD YY this year vs 1.4mln BPD earlier, and forecast the Brent-WTI spread to average USD 2/bbl in H2 2021, with risks to the downside on a potentially continued inventory draw-down at the Cushing hub. WTI and Brent Sept reside north of USD 70.50/bbl and USD 72.50/bbl respectively from USD 69.88/bbl and USD 71.74/bbl at worst, with the benchmarks now closer to the round numbers on the upside. Elsewhere, spot gold and silver are swayed by the Buck. Spot gold briefly dipped below its 100DMA (USD 1,795/oz) to a base at USD 1,791/oz, whilst the 21DMA also resides nearby at USD 1,796.80/oz. LME copper is on a firmer footing with traders citing lower-than-expect sales plans by China, although the constructive risk tone is also providing the red metal with tailwinds. Finally, Dalian iron ore fell some 5% as participants point to a double whammy of factors with higher imports and lower demand from China.

US Event Calendar

  • 8:30am: July Initial Jobless Claims, est. 350,000, prior 360,000; Continuing Claims, est. 3.1m, prior 3.24m
  • 8:30am: June Chicago Fed Nat Activity Index, est. 0.30, prior 0.29
  • 10am: June Existing Home Sales MoM, est. 1.7%, prior -0.9%
  • 10am: June Leading Index, est. 0.8%, prior 1.3%;
  • 11am: July Kansas City Fed Manf. Activity, est. 25, prior 27

DB's Jim Reid concludes the overnight wrap

Yesterday we launched our latest monthly survey, link here, which remains open until late morning tomorrow. We ask a number of questions about covid restrictions to judge how you feel about how life is progressing and will progress over the coming months. We also ask whether the UK has done the right or wrong thing by lifting all legal covid restrictions. In addition, we ask all the normal regular and market directional questions. All responses gratefully received. It should only take 3-4 minutes to complete and is totally anonymous.

The hot week continues here in the U.K.. This has made sleeping tough. Adding to my sleeping woes, last night my wife got woken up by our downstairs hallway light coming on at 2am and given it was on a sensor we went downstairs to investigate. Such a scare seems to happen a couple of times a year in our house. I had a golf club in our bedroom so I took that as a precaution. Just in case the intruder fancied a round. No one was there but when looking at the sensor we found two Daddy Long-Legs walking across it. I felt a bit silly wielding a golf club. It took a while to get back to sleep after that and then the wake-up alarm went off!! So I’m shattered.

There were few alarms in markets yesterday and the main story was the continued recovery after Monday’s rout, as decent corporate earnings releases outweighed investor concern about the rise in Covid casesand the more-infectious delta variant. In fact by the close of trade, it was almost as though the slump at the start of the week had never happened. The S&P 500 (+0.82%) is back into positive territory for the week and less than 1% from record highs thanks to further advances for cyclical industries. And Treasuries also continued their wild ride, moving 11bps off their London morning lows at one point and having now recovered by c.16.3bps since their intraday lows on Tuesday.

To run through the moves in more detail, equity indices rallied on both sides of the Atlantic, particularly in Europe as the STOXX 600 (+1.65%) recorded its strongest performance in over 2 months, and Spain’s IBEX 35 (+2.50%) had its best day since January. As mentioned, the rally was supported by positive corporate earnings releases, including from Johnson & Johnson, Coca-Cola and Verizon, although Netflix’s (-3.30%) relatively weak earnings the previous day meant that the FANG+ index of megacap tech stocks had a relatively subdued +0.30% gain - not helped by rising yields. On the other hand, small-cap stocks surged, with the Russell 2000 up +1.64%, which means that it’s performance over the last 2 sessions (+4.85%) is the strongest 2-day gain since we found out the results of the Georgia senate election back in January that paved the way for more fiscal stimulus.

Speaking of stimulus, Senate Republicans yesterday blocked the immediate debate on the infrastructure bill. Negotiators from both parties are continuing to work on the deal and expect the vote to pass early next week. In fact, Senate Majority Leader Schumer is reported to have received a note from 11 GOP members that they will vote to progress the legislation on Monday if a deal on spending can be reached. The legislation has stalled in recent weeks as the Senators could not agree on how to pay for the $579bn of new spending over the next 8 years.

Staying with politics, multiple outlets yesterday reported that top White House advisers broadly support giving Fed Chair Jerome Powell another term. However, no formal decision is expected on the matter until September. Chair Powell and Vice Chair Quarles’s terms currently expire in January. Former Fed Chair and current Treasury Secretary Yellen has yet to fully weigh in on the topic, telling CNBC last week she would be discussing it with President Biden soon. How the Fed maneuvers through the taper discussion into year-end may also have role to play in this as well.

The risk-on move and subsiding worries about Covid (at least for the time being) meant that sovereign bond yields rose across the board yesterday, with those on 10yr Treasuries up +6.7bps to 1.288% having been at 1.19% around London breakfast time. Both higher inflation breakevens (+3.1bps) and real rates (+3.5bps) contributed to the move, whilst the 2s10s curve steepened +6.4bps in its biggest daily move higher since March. It was a similar pattern in Europe too, where yields on 10yr bunds (+1.5bps), OATs (+1.1bps) and BTPs (+0.2bps) all moved higher, with the 2s10s curve steepening in all 3.

Overnight, Asian markets have taken Wall Street’s lead with the Hang Seng (+1.77%), Shanghai Comp (+0.33%) and Kospi (+1.12%) all up. Japanese markets are closed for a holiday. Futures on the S&P 500 have edged up +0.06% and those on the Stoxx 50 are up +0.40%. US treasuries haven’t traded this morning with it being a holiday in Japan. Elsewhere, Texas Instruments’ stock fell -4.6% in after hours trading as the company gave a revenue forecast that missed expectations raising doubts that a jump in chip demand caused by the pandemic will not be sustained.

In other overnight news, US President Joe Biden said at a CNN town hall that the inflation is likely to be transitory while adding that restaurants and other businesses in the hospitality and tourism sector may remain “in a bind for a while” due to hiring challenges as workers in the sectors are seeking better wages and working conditions. He has said that the businesses facing hiring challenges should offer higher pay in response, calling rising wages “a feature” of his economic plans.

Looking ahead now, one of the main highlights today will be the latest ECB decision at 12:45 London time and President Lagarde’s subsequent press conference at 13:30. This meeting has assumed an unexpected importance following the release of their Strategy Review earlier this month, which saw the inflation target changed to a symmetric 2%, along with a commitment to forceful or persistent policy easing when the effective lower bound is nearby, as at the moment. And as a result of this, our European economists write in their preview (link here), that they’re expecting some changes to the ECB’s forward guidance, with the wording needing to be updated to capture that 2% target and the commitment to persistence around the lower bound. They’re also expecting forward guidance to continue to refer to underlying inflation needing to be consistently on target. Generally speaking however, the ECB only conducts a deep dive into their policy stance once per quarter when the new staff forecasts are available, which would be at the September meeting, so our economists’ baseline is that it won’t be until then that they confirm that PEPP net purchases won’t continue beyond March 2022.

In terms of the latest on the pandemic, cases are unfortunately continuing to rise at the global level, as well as in every G7 economy except Canada. With increasing numbers being vaccinated throughout the developed world, this clearly isn’t the trajectory that many governments hoped to see by this point. However, as we looked at in my chart of the day yesterday (link here), the UK’s ONS now estimate that 92% of the adult population in England had antibodies in the week ending July 4. So an interesting one to follow as if a country with 92% of adults with antibodies (and rising since this study) continued to struggle then we could be in for a longer winter. On the other hand, if cases plateau in August and hospitals aren’t overwhelmed, the developed world may move on quicker than the delta-focused market currently expects. In fact, we got a slither of good news yesterday in that the number of daily cases reported was at 44,104, which is just +4% higher than the number on the previous Wednesday, and the smallest week-on-week growth number for a single day we’ve seen since May 25. Has the football effect started to wane? And might that offset some of the likely impact of this week’s reopening.

Back to Europe and there were some fresh Brexit headlines yesterday as the UK government said that it wanted to make changes to the Northern Ireland Protocol, which is a part of the Brexit deal put in place to prevent a hard border on the island of Ireland after the UK left the EU. This meant that goods wouldn’t see customs checks when passing between Northern Ireland and the Republic of Ireland, but instead meant that goods coming into Northern Ireland from the rest of the UK could instead be checked when they reached Northern Ireland, meaning that there was effectively an economic border within the UK. The two sides have had a number of disputes over the Protocol already, including a notable row last year over whether the UK’s proposed Internal Market Bill would break international law, although an agreement between the two sides was subsequently reached. This time around, the UK government have said that they believed there were grounds to trigger Article 16 that would suspend parts of the Brexit deal, but that they wouldn’t do so for now and instead “seek a consensual approach with the EU”. In response, the EU Commission Vice President Maroš Šefčovič said that they were “ready to continue to seek create solutions, within the framework of the Protocol”, but that they would “not agree to a renegotiation of the Protocol”.

To the day ahead now, and the main highlight will likely be the aforementioned ECB meeting and President Lagarde’s subsequent press conference. Otherwise, data releases from the US include the weekly initial jobless claims, June data on existing home sales and the Conference Board’s leading index. And over in Europe, there’s the EC’s advance consumer confidence reading for the Euro Area in July. Finally, earnings releases include Twitter, Intel, AT&T, Danaher, Unilever, Blackstone and Biogen, whilst BoE Deputy Governor Broadbent will be speaking.

Tyler Durden Thu, 07/22/2021 - 07:41

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Lower for Longer

The Delta variant of the virus has emerged as an important economic force, just as more countries appeared to adopt the attitude that we should now live with it like we do with the flu, which kills hundreds of thousands every year.  While the existing…



The Delta variant of the virus has emerged as an important economic force, just as more countries appeared to adopt the attitude that we should now live with it like we do with the flu, which kills hundreds of thousands every year.  While the existing vaccines seem to have lost some of their ability to prevent the illness, they remain a power prophylactic against hospitalization and death.  Nevertheless, new social restrictions have been introduced in some high-income countries, even those like Israel, that have been fairly successful in vaccinating a large part of their population.  

The virus is once again raising the prospects of slowing the economic recovery that was unevenly unfolding.  The preliminary July PMI for Australia, UK, France, and the US disappointed. Expectations for the trajectory of monetary policy are being impacted.  Consider that the implied yield of the December 2022 Eurodollar futures fell to 40 bp in the middle of last week from 55 bp on July 1.  A similar futures contract in the UK, the December 2022 short-sterling implied yield fell from 58 bp in mid-July to almost 40 bp on "Freedom Day" as the UK dropped all social restrictions and mask requirements.  The implied yield of the December 2022 Bank Acceptances in Canada fell 20 basis points from July 14 to nearly 105 bp ahead of the weekend.   In Australia, the December 2022 bill futures contract's implied yield fell a little over 60 bp on July 6 to 36 bp last week.  

The December 2022 Euribor futures contract has been considerably steadier as it is widely accepted that the European Central Bank will not lift rates until after 2023.  The implied yield has been confined to a -42 bp to - 50 bp trading range since the end of April.  The yield finished last week at -49 bp, falling about five basis points since the ECB meeting.  The ECB's new forward guidance signaled that bond purchases and low rates will prevail until the staff forecasts that the 2% target can be sustained.  In June, the staff forecasts projected 2023 CPI at 1.4%.  

The signal of lower for longer helped drive European bond yields to new 3-4 month lows. The French 10-year bond yield had been offering a positive yield since the second half of April but recently moved back below zero.  One has to pay Greece 50 bp to lend to it for two years, which is a little more than one would pay to Italy for the same maturity.  Greece takes about 15 bp a year from those lending to it for five years, while Italy's five-year yield has dipped below zero for the first time since early April.  The amount of negative-yielding bonds in the world has increased to almost $16 trillion from below $13 trillion in late June, and that does not include Japan's 10-year bond, where the benchmark yield is less than a basis point. 

The ECB's dovishness likely minimizes the impact of the preliminary July CPI figures.  In July 2020, the eurozone saw consumer prices fall by 0.4% on the month and again in August.  This speaks to a likely acceleration of the year-over-year pace from 1.9% in June.  Also, note that since at least 2000, prices gained less in July than in June (and consistently rose more in August than July).  The monthly increase in June was 0.3%.  The Bloomberg survey shows economists anticipate sharp month-over-month declines in Italian and Spanish prices.   French CPI is also expected to have fallen slightly in July.  German inflation may have ticked up. These considerations suggest the year-over-year rate may have edged above 2%.  

The eurozone will provide its first estimate of Q1 GDP at the same time as the CPI figures on July 30. Recall that in Q4 19, before the pandemic struck, the eurozone economy was stagnant.  Last year contracted in H1 before recovering in Q3.  However, unlike the US experience, the eurozone economy contracted against in Q4 20 and Q1 21.  Despite the spread of the Delta mutation and the floods in parts of Europe, including Germany, the recovery now appears to be on more solid footing, and the EU Recovery Funds are at hand.   The regional economy likely expanded around 1.4%-1.5% in Q2 and is poised to accelerate further here in Q3. 

The highly contagious, though less lethal mutation (if vaccinated), has pushed investors to reconsider the recovery theme that had two drivers last November, the US election and the vaccine announcement.  Of course, this does not mean that it is the only development in the market, but it seems to be a relatively new and powerful one.  The US dollar rallied as the pandemic first struck, partly as a safe haven as US Treasuries were bought and partly as a function of the unwinding of dollar-funded purchases of risk assets (e.g., emerging markets).  

When things began to stabilize at the end of last March 2020, and the NBER now dates the end of the US recession as April 2020, the dollar trended lower and accelerated into the end of the year and began to recover in early January.   From the end of March through December last year, the Antipodeans and Scandis led the move against the greenback and appreciated roughly 20%-25% against the US dollar.  These currencies are often perceived to be levered to world growth and are often more volatile than the other majors.  Over the past three months, they have been the weakest, losing 3.0-6.50%.  

The opposite is also true in the sense that the Swiss franc and Japanese yen, other currencies often used for funding, hence the appearance of safe-haven appeal, were the worst performers against the dollar in the last nine months of 2020 (rising about 8.25% and 4.5% respectively). However, over the past three months, they have been among the most resilient in the face of the dollar's surge.  The Swiss franc is off less than three-quarters of a percent, while the yen is off by about 2.4%.  

A challenge for investors and policymakers is the evolution of the virus that renders some of the high-frequency data rather dated and arguably less impactful outside of the headline risk posed.  The Federal Reserve has succeeded in securing for itself much room to maneuver and is not tied to a particular time series, like the monthly jobs report or data point.  The FOMC statement is likely to hardly change from the previous one.

Discussions about the pace and composition of the Fed's bond-buying will continue.  Still, Fed Chair Powell was speaking for the central bank when he told Congress recently that the bar to adjust the purchases (substantial further progress toward the Fed's targets) has not been met.  The Jackson Hole symposium at the end of August has long been seen as the first realistic window of opportunity for the Fed to signal its intention to slow, possibly alter the composition of its bond purchase, and shape it more formally at the September FOMC meeting.  Ahead of Jackson Hole, there is one more jobs report, and the early call is for around a 750k increase.   

Reporters may try to draw Powell out but are unlikely to have much more success than the US Senators and Representatives.  There is ongoing interest in the size of the reverse repo facility, for which the Fed now pays five basis points at an annualized rate, the same as a six-month bill. In addition, Powell pushed back against suggestions by some officials that the central bank's MBS purchases are lifting house prices beyond the access of many American families.  Will reporters press him on this or the buying of inflation-protected securities that arguably distort the price discovery process and the break-even metric?  

Stable coins' regulatory framework may be questioned.  Recall that just before Biden took office, the Comptroller of the Currency allowed federally chartered banks to used distributed ledgers (blockchain) and conduct business with stable coins.  There is a push to treat stable coins as securities for regulatory purposes.  While the ECB recently announced it was going forward with a research and design phase of its development of a digital euro, the Federal Reserve's report is expected in September.  Powell said what many officials seem to believe that the introduction of a digital dollar would likely dry up demand for stable coins and crypto.  

The day after the FOMC meeting concludes, the US reports its first estimate of Q2 GDP.  The median forecast in Blomberg's survey has crept up in recent days to 8.5% at an annualized pace, up from 6.4% in Q1.  The NY Fed's GDPNow model puts growth at 3.2%, while the Atlanta Fed's model is closer to the market at 7.6%, while the St. Loius Fed Nowcast stands at 9%.  

Even before this surge in the virus in the US, where about half of the adult population is fully vaccinated, we suggested there was a reasonable chance that Q2 marks the peak in growth.  Fiscal policy will increasingly be a drag, pent-up consumer demand will be satiated. Monetary policy is near a peak. Perhaps the recent increase in the rate paid on deposits at the Fed and on the reverse repo facility and the recent sales of corporate bonds bought in 2020 mark the end of the easing cycle.   We have also underscored the restrictive impact of doubling the oil price since the end of last October.  

While there does not appear to be an iron law, it would not be surprising to see price pressures peak with a bit of a lag.  This dovetails with the timeframe suggested by both Powell and Yellen. Some recent industry data suggests that the US used car market (accounting for around a third of the recent monthly increases in CPI) is normalizing in terms of inventory, and prices have softened in the wholesale markets.  We note that input prices and prices paid components Markit PMI have fallen in June, and the preliminary report suggests a further decline is taking place this month.  Airfare and the price of hotel accommodations, and food out of the house, appear to be a one-off adjustment rather than persistent increases.  

The US will report June personal income and consumption figures ahead of the weekend, but the data will already be embedded in the GDP estimate.  On the other hand, the PCE deflator, which the Fed targets rather than the CPI, may draw attention.  It is expected to post a sharp 0.7% increase on the month for around a 4.2% year-over-year.  It rose by 0.4% in May and a 3.9% year-over-year rate. The core rate, which the Fed does not target but makes references from time to time, is expected to accelerate to 3.7% from 3.4%.   

Lastly, the infrastructure debate in the US Senate looks to come to a head in the days ahead.  It could, in turn, shape the political climate until next year's midterm elections. The latest wrinkle is that what might serve as the basis of a compromise in the Senate may be rejected by a number of Democrats in the House.  The failure to find a bipartisan solution for even the physical infrastructure components will not defeat the Biden administration but force it to rely on the reconciliation mechanism, which is confined to fiscal policy.  It would likely hamper the administration on non-budgetary fiscal issues.  The debt ceiling looms.  The Congressional Budget Office sees the Treasury running out of room to maneuver in October or November.  Biden's spearheading of a 15% minimum corporate tax rate might not need their approval, but the approval of 60 Senators may be needed for the other component of the global tax reform, the agreement to link the sales and taxes for the largest companies.     


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Shortest Recession In History Sets Up Next Recession

Shortest Recession In History Sets Up Next Recession

Authored by Lance Roberts via,

It’s now official that the recession of 2020 was the shortest in history. 

According to the National Bureau of Economic Research, t



Shortest Recession In History Sets Up Next Recession
Authored by Lance Roberts via, It’s now official that the recession of 2020 was the shortest in history.  According to the National Bureau of Economic Research, the contraction lasted just two months, from February 2020 to April 2020. However, during those two months, the economy fell by 31.4% (GDP), and the financial markets plunged by 33%. Both of those declines, as shown in the table below, are within historical norms. Here it is graphically. The chart shows the historical length of each recession and the corresponding market decline. However, while the effects of the “recession” were all within historical norms, the recession itself was not. Let me explain.

A Non-Standard Recession

The statement from the NBER is as follows:
“In determining that a trough occurred in April 2020, the committee DID NOT conclude that the economy has returned to operating at normal capacity. The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession associated with the February 2020 peak. The basis for this decision was the length and strength of the recovery to date.”
As I said, the recession was non-standard. Conventionally, the NBER defines a recession as two consecutive quarters of negative GDP growth. Notably, while the recession did technically meet the criteria after GDP fell 5% in Q1, recessions tend to last more than three months historically. The difference was the massive interventions of 20% of GDP beginning in Q2, which created an “artificial growth surge” in the economy by pulling forward consumptive activity. That led to an explosive recovery in GDP in Q3 of nearly 30%. It is essential to note that the NBER stated that any subsequent downturn would get labeled as a “new” recession. That view accounts for the recovery driven by massive interventions even though that growth is not sustainable. As such, the “next recession” may not be as far off as many currently expect.

Why Recessions Are Important

Our discussion must begin with a basic concept: “recessions” are not a “bad thing.”  It is a given you should never mention the “R” word. People immediately assume you mean the end of the world: death, disaster, and destruction. But, unfortunately, the Federal Reserve and the Government also believe recessions “are bad.” As such, they have gone to great lengths to avoid them. However, what if “recessions are a good thing,” and we just let them happen?
“What about all the poor people that would lose their jobs? The companies that would go out of business? It is terrible to think such a thing could be good.”
Sometimes destruction is a “healthy” thing, and there are many examples we can look to, such as “forest fires.”
Wildfires, like recessions, are a natural part of the environment. They are nature’s way of clearing out the dead litter on forest floors, allowing essential nutrients to return to the soil. As the soil enrichens, it enables a new healthy beginning for plants and animals. Fires also play an essential role in the reproduction of some plants.
Ask yourself this question: “Why California has so many wildfire problems?”  Is it just bad luck and negligence? Or, is it decades of rushing to try and stop fires from their natural cleansing process as noted by MIT:
“Decades of rushing to stamp out flames that naturally clear out small trees and undergrowth have had disastrous unintended consequences. This approach means that when fires do occur, there’s often far more fuel to burn, and it acts as a ladder, allowing the flames to climb into the crowns and takedown otherwise resistant mature trees.
While recessions, like forest fires, have terrible short-term impacts, they also allow the system to reset for healthier growth in the future.

No Tolerance For Recessions

Following the century’s turn, the Fed’s “constant growth mentality” not only exacerbated rising inequality but fostered financial instability. Rather than allowing the economy to perform its Darwinian function of “weeding out the weak,” the Fed chose to “mismanage the forest.” The consequence is that “forest fires” are now more frequent. Deutsche Bank strategists Jim Reid and Craig Nicol previously wrote a report that echos this analysis.
“Actions are taken by governments and central banks to extend business cycles and prevent recessions lead to more severe recessions in the end.” 
Prolonged expansions had become the norm since the early 1970s, when President Nixon broke the tight link between the dollar and gold. The last four expansions are among the six longest in U.S. history. Why so? Freed from the constraints of a gold-backed currency, governments and central banks have grown far more aggressive in combating downturns. They’ve boosted spending, slashed interest rates or taken other unorthodox steps to stimulate the economy.” – MarketWatch
But therein also lies the problem.

The Darwinian Process Of Recessions

As we discussed in our series on “Capitalism,” if allowed to operate, is a “Darwinian System.” As with Darwin’s theory of evolution, corporate evolution has the same essential components as biological evolution: competition, adaptation, variation, overproduction, and speciation. In other words, as an economic system, companies either adapt, evolve, and survive or become extinct.  However, in 2008, the Government and Federal Reserve began a process of “bailing” out companies that should have been allowed to go “bankrupt.”  The consequence of that process is the failure to enable the system to “clear itself” of the excess debt, which diverts capital away from productive uses. I have illustrated the continual increases in debt used to create minimal economic growth. Specifically, since 2008, the Federal Reserve and the Government have pumped more than $43 Trillion into the economy. But, in exchange, that debt generated just $3.5 trillion in economic growth, or rather, $12 of monetary stimulus for each $1 of growth. Such sounds okay until you realize it came solely from debt issuance. As Ruchir Sharma previously penned:
“Modern society looks increasingly to government for protection from major crises. Whether recessions, public-health disasters or, as today, a painful combination of both. Such rescues have their place. Few would deny that the Covid-19 pandemic called for dramatic intervention. But there is a downside to this reflex to intervene, which has become more automatic over the past four decades. Our growing intolerance for economic risk and loss is undermining the natural resilience of capitalism and now threatens its very survival.”
Such is an important concept to comprehend. Just as poor forest management leads to more wildfires, not allowing “creative destruction” to occur in the economy leads to a financial system that is more prone to crises.

Structural Fagility

Given the structural fragility of the global economic and financial system, policymakers remain trapped in the process of trying to prevent recessions from occurring due to the extreme debt levels. Unfortunately, such one-sided thinking ultimately leads to skewed preferences and policymaking. As such, the “boom and bust” cycles will continue to occur more frequently at the cost of increasing debt, more money printing, and increasing financial market instability. It is clear the Fed’s foray into “policy flexibility” did extend the business cycle. However, those extensions led to higher structural budget deficits. The cancerous byproduct of increased private and public debt, artificially low-interest rates, negative real yields, and inflated financial asset valuations is problematic. However, these policies have all but failed to this point. From “cash for clunkers” to “Quantitative Easing,” economic prosperity worsened. Pulling forward future consumption, or inflating asset markets, exacerbated an artificial wealth effect. Such led to decreased savings rather than productive investments.

The Fed’s “Moral Hazard”

A growing body of research shows that constant government stimulus is a significant contributor to many of modern capitalism’s most glaring ills. Wealth inequality is the most obvious. However, another more important but not noticeable side effect is that it keeps alive heavily indebted “zombie” firms.  When a company is “kept alive,” it comes at the expense of startups, which typically drive innovation. All of this leads to lower productivity which is the prime contributor to the slowdown in economic growth and a shrinking pie for everyone. (See chart above.) By not allowing “recessions” to perform their natural “Darwinian” function of “weeding out the weak,” it creates a macroeconomic problem. As previously noted by Axios:
“Zombie firms are less productive, and their existence lowers investment in, and employment at, more productive firms. In short, a side effect of central banks keeping rates low for a long time is it keeps unproductive firms alive. Ultimately, that lowers the long-run growth rate of the economy.”
If “recessions” are allowed to function, the weak players will fail. Stronger market players would acquire failed company assets. Bond-holders would receive some compensation for their debt holdings. Shareholders, the ones who accepted the most risk, would get wiped out. Furthermore, assuming capitalism was allowed to function, investors would require appropriate compensation for the risk when loaning money to companies. As such, credit-related investors would get compensated for their risk rather than the current state of abnormally low yields for junk-rated debt. The consequence, of course, is that since the “Darwinistic process” of a recession did not occur, and the macroeconomic system is even more fragile than previously, the next downturn could happen sooner than later.

The Next Recession

While the interventions certainly salvaged the economy from a more prolonged recessionary event, they also made the economy more fragile. Furthermore, by dragging forward future consumption, the interventions only gave the appearance of economic activity. As excess stimulus fades and assuming interventions don’t repeat, the economy will return its pre-covid growth trend of 2% or less. Such should not be a surprise given that economic growth is roughly 70% consumption. With wage growth well below inflationary pressures, consumption will get impacted by higher prices. With Treasury yields dropping and the yield curve reversing, these are early warning signs that economic growth is indeed slowing. While the NBER declared the 2020 recession the shortest in history, such does not preclude another recession from occurring sooner than later. All the excesses that existed before the last recession have only worsened since then.
  • Excess Debt
  • High Stock Market Valuations
  • Investor Complacency
  • Financial System Fragility
  • Weak Economic Underpinnings
  • Declining Monetary Velocity
  • Low Interest Rates Detering Productive Activity
  • Financial Liquidity Required To Keep Asset Prices Elevated
Given the dynamics for an economic recession remain, it will only require an unexpected, exogenous event to push the economy back into contraction. Such is why the NBER is clear in saying they will classify the next downturn as a separate recession. If you are quick to dismiss the idea, remember no one expected a recession in 2020 either. But we did warn you about it in 2019.
Tyler Durden Sat, 07/24/2021 - 10:30

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New Record Cases in Sydney Casts a Pall over Australia

Overview: The combination of the dovish ECB’s forward guidance and the unexpected rise in weekly US jobless claims to a two-month high sent bond yields tumbling.  The US 10-year pulled back from 1.30%, and benchmark yields in the eurozone fell to new…



Overview: The combination of the dovish ECB's forward guidance and the unexpected rise in weekly US jobless claims to a two-month high sent bond yields tumbling.  The US 10-year pulled back from 1.30%, and benchmark yields in the eurozone fell to new 3-4 month lows. The $16 bln 10-year TIPS auctioned yesterday resulted in a record low yield of a little more than -1.0%.  The bond market is quieter today, with the US 10-year yield little changed at 1.29% and European bond yields mostly 1-3 basis points higher.  Equities were mixed in the Asia Pacific region.   China's crackdown on Didi may be scaring investors.  Chinese, Hong Kong, and Taiwanese markets fell, while South Korea, Australia, and Indian markets advanced.  European shares are higher for the fourth consecutive session, lifting the Dow Jones Stoxx 600 to around 0.2% from record levels.  US futures are firm.  The dollar is firm against most of the major currencies.  On the week, the Canadian dollar is the strongest of the majors, up about 0.35%. The Swedish krona is the only other major currency to have gained against the greenback this week.  Emerging market currencies are mixed.  South Africa's central bank did not hike rates yesterday, and the rand was the weakest emerging market currency yesterday and retained that distinction today.  The JP Morgan Emerging Market Currency Index is slightly softer for the second consecutive session.  The dollar is falling for the fourth consecutive session against the Russian rouble as the central bank announces as expected that is hiking rates 100 bp to 6.50%.  Gold is consolidating between $1800 and $1810, but it needs to get back above $1812 if it is going to extend its recovery for the fifth week.  Crude oil is softer after three strong advances that recouped most of Monday's sharp losses.  September WTI stalled near $72 and is little changed on the week.  Canadian wildfires are raising concerns about lumber supply, and the September futures contract rallied 10% yesterday on top of 7.7% on Wednesday.  Copper is up for the fourth consecutive session, and the CRB Index is up about 1.8% this week, coming into today.  

Asia Pacific

New record virus cases in Sydney cast a pall over Australia.  The preliminary PMI's weakness gives a sense of the economic impact.  Manufacturing slowed to 56.8 from 58.6, but it was services that are bearing the brunt.  The service PMI fell to 44.2 from 56.8.  This was sufficient to drive the composite below the 50 boom/bust level to 45.2 from 56.7.  This is the lowest since last May.  The poor report will fuel ideas that the RBA will provide more support through increased bond purchases at its meeting in early August.  

Don't expect much from the weekend meeting between the US Deputy Secretary of State Sherman and the Chinese Foreign Minister Wang.  It is the highest-level meeting since March and apparently almost was aborted when China offered to have Sherman meet one of Wang's deputies.  The underlying purpose seems to lay the groundwork for a possible Biden/Xi meeting at the October G20 meeting that has long been anticipated.  Although the Biden administration has made it clear that it is not ready to renew regular high-level talks, it does not mean that there is no communication between the two rivals.  While China is a poor actor on the world stage, Biden is using the confrontation with Beijing to further its domestic agenda and shape its efforts to reassert America's leadership.   

The US dollar was tested at JPY109 at the start of the week and is now near JPY110.50, a seven-day high, and could close above the 20-day moving average (JPY110.40) for the first time in two weeks.  Tokyo markets were closed yesterday and today.  The preliminary July PMI will be reported as the markets re-open on Monday.  The composite PMI stood at 48.9 in June.  Nearby resistance is in the JPY110.70-JPY110.80 area.  The Australian dollar approached resistance near $0.7400 and was turned back.  A A$460 mln option at $0.7380 expires today.  Without closing above $0.7400 today, the Aussie will extend its loss for the fourth consecutive week and six of the past seven.  The dollar edged higher against the Chinese yuan for the second consecutive session. The upticks were minor, and the greenback is set to finish the week less than 0.1% lower but sufficient to snap a seven-week advance. The PBOC set the dollar's reference rate at CNY6.4650, near the median projection picked up by the Bloomberg survey of CNY6.4655. Note that floods in the Henan region, which is an important transportation and logistics hub, maybe a disruptive economic force, are slowing activity and boosting prices. Stay tuned.   


The ECB did not disappoint.  It had to bring its forward guidance in alignment with its new 2% symmetrical inflation target.  ECB President Lagarde seemed more resolute.  Rates will not be hiked while inflation is below 2%. Next week, the risk is that headline CPI moves above 2%.  Lagarde, like the Fed's leadership, sees the current price pressures as temporary. The staff forecasts take on more significance.  It sees CPI at 1.4% in 2023.  While the Fed now targets the average rate of inflation, which means that it will encourage somewhat higher than average to offset the past undershoot.  Lagarde explained that in the eurozone, an overshoot is incidental, not deliberate.  The ECB was buying bonds before the pandemic struck and will do so after the economic emergency passes and the PEPP envelope closes (now March 2022).  

In broad strokes, the ECB is buying around 80 bln euros a month in bonds under PEPP and about 20 bln euros under the previously launched asset purchase program.  This latter facility has limits (issuer limit, capital key) that make it less than an ideal flexible tool.  Yet, it is precisely these limits that made it acceptable to  Germany's constitutional court.  At the same time, the ECB re-committed itself to buying bonds under this facility until just before it raises interest rates.  Finally, some reservations expressed by the German, Belgian, and Dutch central bankers are not very surprising. The unanimity of the new inflation target still masked underlying differences, and the hawkish contingent could be a little larger than those that expressed reservations now.  The Bank of England and the Federal Reserve seem to be entering a phase where dissents may be expressed as well.

The preliminary July PMI showed a divergence between Germany and France.  German readings were stronger than expected, and the composite PMI rose to a new high of 62.5 (from 60.1).  The French reports were softer than expected, and the composite slipped to a still firm 56.8 from 57.4.  For the region as a whole, the preliminary manufacturing eased to 62.6 from 63.4.  The preliminary services PMI rose to 60.4 from 58.3, which was stronger than expected.  The result was that the composite stands at 60.6 compared with 59.5 in June.  Next week, the eurozone reports the initial estimate for July CPI and Q2 GDP.   The CPI is expected to push above 2%, while the regional economy is expected to have expanded by 1.5% in the quarter.  

The UK reported stronger than expected June retail sales but a bit softer of a flash PMI.  Retail sales rose by 0.5%.  The median projection in the Bloomberg survey was for a small decline.  Excluding gasoline, retail sales edged up by 0.3%.  May's slide was pared slightly (-1.3% vs. -1.4% at the headline level).  The PMI shows a strong economy that slowed slightly.  The manufacturing PMI stands at 60.4, down from 63.9.  The service PMI moderated to 57.8 from 62.4.  The composite slowed to 57.7 from 62.2. 

The euro set the week's high as the ECB's initial headlines with the wires near $1.1830 but quickly came back off.  It is in about a quarter-cent range so far today, mostly below $1.1785.  Support has been found near $1.1750 this week, but it may not be solid.  There is an option for 920 mln euros at $1.1725 that will be cut today.  The euro has managed to close higher only twice in the past two weeks and in only two weeks since the end of May.  This looks like the first week since the end of last October that the euro settles below $1.18.  Sterling recorded five-month lows on July 20 near $1.3570.  Its bounce stalled yesterday around $1.3790 (the 20-day moving average is slightly below $1.3800). The roughly GBP455 mln option at $1.3775 may expire today with little fanfare.   A close below the $1.3705-$1.3715 would likely keep sterling under pressure at the start of next week.  


There appears to have been some progress on the bipartisan infrastructure initiative in the United States, but to appease some Republicans may alienate some Democrats.  The key to the compromise was to delay Medicare regulation approved by the Trump administration that would eliminate the drug companies give to benefit managers under Medicare Part D.  The goal was to reduce out-of-pocket costs.  However, the Congressional Budget Office estimates that it will boost Medicare spending by the government by $177 bln in the 2020-2029 period. If this forms the basis of the deal in the Senate, the progressive-wing of Democrats in the House could resist.

The US sees the preliminary PMI today, and expectations are for it to be little changed at elevated levels.  The US reports its first estimate of Q2 GDP next week.  The median forecast in the Bloomberg survey calls for an 8.3% annualized expansion after 6.4% in Q1.  Canada reports May retail sales today, and a 3.0% loss is anticipated after a 5.7% drop in April.  Nevertheless, subsequent data suggest the Canadian economy has emerged from the soft patch. The economic highlight next week is the June CPI and May GDP figures.   Mexico's May retail sales are on tap today, and a modest gain of 0.5% is expected after a 0.4% decline in April.  Mexico reports its Q2 GDP next week.  Economists look for around 1.6% quarter-over-quarter expansion, twice the Q1 pace.  

The US dollar is trading quietly within yesterday's narrow range against the Canadian dollar (~CAD1.2530-CAD1.2595).  It finished last week slightly below CAD1.2615.  The momentum indicators have turned lower, but a break of CAD1.2500 is needed to boost confidence that a high is in place.  The greenback peaked in the middle of the week near MXN20.25 and has been slipping since it was recorded.  It is trading at a three-day low in the European morning (below MXN20.09).  Support is seen in the band from MXN19.98-MXN20.02.  However, provided it stays above the MXN19.90, the greenback will secure its third consecutive weekly advance.  


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