Overview:  Risk appetites snap back after easing in the waning hours last month.  The MSCI Asia Pacific equities jumped back after dropping 1.8% last week for the second week in a row.  Japan's Topix and China's CSI 300 rose by more than 2%, and Hong Kong, Taiwan, and Australia gained more than 1%.  Europe's Dow Jones Stoxx 600 is recouping the pre-weekend loss and is trading at new record highs.  US futures are at a higher opening.  Bond markets are nonplussed, with the US 10-year hovering around 1.22%, and European bonds are narrowly mixed, with the periphery outperforming the core.   Of note, China's 10-year benchmark yield is slightly above 2.80%, a new 12-month low.  The US dollar is softer against the majors and most emerging market currencies, but key levels, like $1.19 in the euro, $1.40 in sterling, and JPY109.50 against the yen, remain intact.  The JP Morgan Emerging Market Currency Index recouped the loss from the end of last week when it pared the first weekly gain in five weeks.  Gold is softer and looks poised to test support in the $1790-$1800 band.  Oil has come back heavier after reaching two-week highs before the weekend.  WTI for September delivery is straddling the $73-level after trading at a two-week high near $74.25.  Iron ore prices extended their decline for the fifth consecutive session and have risen only once in the past 11 sessions.  Copper prices are firm amid reports that three separate mines in Chile could strike.   

Asia Pacific

China's economy moderated in July, according to the official PMI released over the weekend.  The manufacturing PMI eased to 50.4 from 50.9, which was a little more than expected.  The non-manufacturing PMI showed a small decline to 53.3 from 53.5 and was in line with expectations.  The composite stands at 52.4 from 52.9.    A few details seem notable.  New export orders were below the 50 boom/bust level for the third consecutive month.  Overall, new orders slipped to 50.9 from 51.5. Price components increased.  The data also needs to be understood within a broader context. The Caixin manufacturing PMI also missed expectations, falling to 50.3 from 51.3.  It is the lowest since April 2020.  The virus outbreak in Nanjing and lockdown are disruptive.  China is experiencing the broadest breakout since the virus first struck. The flood and heatwave have also had a detrimental effect.  July is also a traditional maintenance period.  The PBOC has gone from tightening to easing policy, culminating with a 50 bp reduction in reserves.  Recall that aggregate (bank and non-bank) financing soared in June (CNY3.67 trillion, more than April and May combined).  

Despite formal and informal social restrictions, Japan has yet to get ahead of the pandemic curve. Both Tokyo and the country reported a record number of cases over the weekend. As a result, the fourth state of emergency for Tokyo was extended to the end of August.  It began July 12.  Five other prefectures are in a formal state of emergency, several others have implemented "intensive anti-virus measures."  One implication is that it pushes the much-anticipated recovery of the world's third-largest economy into Q4.  Separately, Japan's manufacturing PMI stands at 53.0, up from the 52.2 flash reading and 52.4 in June.  Australia's manufacturing PMI ticked up to 56.9 from the preliminary estimate of 56.8.  It stood at 58.6 in June and peaked in May at 60.4.  The RBA meets tomorrow and is widely anticipated to reverse directions and, instead of exiting from emergency measures, is likely to provide more support via bond purchases.  

South Korea reported strong July trade figures, even though exports and imports did not grow as fast (year-over-year) as expected, but the surplus was a magnitude greater than the median in Bloomberg's survey at $1.76 bln.  Exports of tech products (chips, computers, display monitors, rechargeable batteries) continue to rise sharply, which speaks to the demand abroad, while the nearly 60% rise in petrochemical exports is a function of higher prices.   China was the weakest of the four largest destinations for South Korean exports, up 15.7% year-over-year.  Exports to the US were up slightly more than 32%, while shipments to the EU were up nearly 44%.  Exports to Japan rose by 28%.  Overall exports stood at record levels.  Looking ahead, South Korea reports July CPI figures tomorrow and are expected to be unchanged at 2.4% and 1.5% for the headline and core, respectively.  The central bank meets on August 26.  The market expects a 25 bp hike in the seven-day repo rate from 50 bp over the next three months.  

The dollar has been confined to less than a 20-pip range above JPY109.60 in uneventful activity in the upper end of the pre-weekend range. Recall that before the weekend, the dollar slipped to almost JPY109.35, an eight-session low.  It has been recorded lower high.  The pre-weekend high was almost JPY109.85.  There is a $310 mln option at JPY109.75 that rolls off today.  The Australian dollar met sellers above $0.7400 in the last two sessions and is consolidating between $0.7330 and $0.7360 so far today.  A nearly A$1.2 bln option at $0.7400 expires today, and another at $0.7360 for about A$525 mln.  In the last four sessions, the greenback has gone from the three-month highs (~CNY6.5125) to the lower end of its six-week range (~CNY6.4500).  It traded above the pre-weekend high to reach CNY6.4685 but was sold to the lows just below CNY6.46 and is little changed on the session.  The PBOC set the dollar's reference rate at CNY6.4660, tightly near expectations CNY6.4662). 

Europe

The eurozone flash July manufacturing PMI was revised to 62.8 from 62.6 after peaking at 63.4 in June.  The revision seems solely owed to better German figures.  Its manufacturing PMI was revised to 65.9 from 65.6 and 65.1 in June.  The multi-year peak was set in March at 66.6. Separately, Germany reported June retail sales jumped by 4.2%, more than twice the median forecast in Bloomberg's survey, and the May series was revised to show a 4.6% gain from 4.2%.  France's manufacturing PMI slipped to 58.0 from the flash reading of 58.1.  In June, it stood at 59.0.  Spain's manufacturing PMI was softer than expected at 59.0.  The median forecast in Bloomberg's survey was 59.5 after June's 60.4. Finally, Italy's 60.3 July manufacturing PMI cannot be considered weak though it was softer than anticipated (61.5) and down from the 62.2 reading in June.   

The UK's final July manufacturing PMI was unchanged from the preliminary reading at 60.4.  It stood at 63.9 in June and peaked in May at 65.6.  The highlight this week is the Bank of England meeting on Thursday.  The uncertainty over the trajectory of the virus and the fact income/job support programs continue would seem to discourage new action.  However, a couple of MPC members have expressed concern about inflation and could dissent in favor of slowing the bond purchases.  It is possible that the BOE announced the result of its view on policy sequencing--balancing the future rate hikes with a reduction in government bond holdings.  Currently, the BOE does not plan on reducing the stock of bonds until the policy rate rises to 1.5%. However, there is speculation that the rate threshold could be reduced to 1%.

The euro traded above $1.19 briefly ahead of the weekend before falling to session lows near $1.1850 as European markets closed ahead of month-end.  Today, the euro is firmer but holding below $1.1900, where an option for nearly 1.4 bln euros is set to expire today.  Session highs are being recorded in the European morning, but the intraday technicals are stretched as North American dealers return to their posts.  For its part, sterling encountered offers in front of $1.40 in the last two sessions and has found support a little below $1.39.  It recorded the session high around $1.3935 in the European morning, but here too, the intraday momentum studies are stretched.  The $1.3940-$1.3960 area offers nearby resistance.  

America

While a strong US employment report is expected at the end of the week, there are several other moving parts.  First, the two-year suspension of the debt ceiling expired. The Treasury has already begun implementing the maneuvers that have deployed over the past quarter of a century.  What is seen dysfunction of the US political system and cost it the AAA rating from S&P a decade ago, there is little material impact from the macabre dance outside of possibly a T-bill auction.  It is not precisely clear when Yellen's options would be exhausted, but there are probably at least two months. Second, despite a last-ditch effort to prevent it, the eviction moratorium expired, and reports suggest that as many as 18% of adult renters nationally are behind in payments.  That said, emergency rental assistance disbursement has lagged.  

Third, the $550 bln bipartisan physical infrastructure bill is expected to face a final vote in the Senate this week.  Assuming it is approved, the House of Representatives is not expected to take it up until next month.  Meanwhile, another $450 bln roadway bill also has bipartisan support.  The remainder of the Biden administration's broader infrastructure initiative will be included in a "reconciliation process." Fourth, the demand for the Fed's reserve repo edged over $1 trillion for the first time ahead of the weekend.  The Fed pays 5 bp (annualized) for the funds, as much as a six-month T-bill.  The vast sums reflect the Fed's QE, which creates reserves to swap for Treasuries and Agency MBS, lower T-bill supply, and the reduced Treasury cash balances at the Fed.   With the debt ceiling reinstated, the pressure on the Treasury to lower cash balances slacken.  Many observers are concerned about the huge volume that the RRP is drawing.  There is something to be said that at five basis points, the yield is attractive in its own right, which was not true before the June FOMC meeting. Nevertheless, while recognizing the high usage, Powell showed no concern and seemed to suggest that the facility is acting as the Fed anticipated and desired. 

Canada reports the July manufacturing PMI tomorrow and June merchandise trade figures on Thursday.  The highlight of the week is the employment report on Friday.  Recall that Canada lost about 275k jobs in April and May.  It stormed back in June, with nearly 231k job growth, but still lost 33k full-time positions.  It was the third monthly loss of full-time jobs for a 175k loss over the period.  Economists in Bloomberg's survey look for Canada to have grown 170k jobs and for the unemployment rate to fall to 7.4% from 7.8%, even as the participation rate improves to 65.5% from 65.2%.  For comparison, the Canadian unemployment rate stood at 5.6%-5.7% before the pandemic struck, and the participation rate was about 65.5%.  

The US dollar bounced off support near CAD1.2425 and approached CAD1.2490 ahead of month-end.  It has made no further headway today and has come back better offered.  At the end of last week, the five-day moving average slipped below the 20-day moving average for the first time since early June, picking up the US dollar's pullback since poking briefly above CAD1.28 on July 19.  A convincing break of CAD1.24 could confirm a topping pattern that projects back toward CAD1.20, though the first target would be near CAD1.23. The US dollar is encountering resistance around MXN19.93 and looks poised to challenge support near MXN19.80.  There is a band of congestion in the MXN19.70-MXN19.75 area that could slow the greenback's descent.  The low for the year was set in January, slightly below MXN19.55.  A more recent low was set in June, just below MXN19.60.  Mexico reports June worker remittances (which are larger than trade as a source of hard currency), the manufacturing PMI (48.8 in June), and the IMEF activity index.  Brazil reports its PMI and July trade balance (both imports and exports are expected to have slowed to produce a smaller trade surplus).  The dollar jumped nearly 2.6% against the real at the end of last week to snap a five-day slide.  Month-end considerations and political worries were the main culprits.  The central bank meets late on Wednesday and is expected to hike the Selic rate by 100 bp to 5.25%.  It began the year at 2.0%.  

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