- True to its recent habit, the US dollar is finishing the week on a firm note
- Japan released a mixed bag of data; Eurozone data was largely in line with expectations
- Better than expected UK data failed to lend much support to sterling
- There is a slew of North American data today
- After markets close tonight, China reports official September manufacturing PMI and Korea reports September trade
The dollar is mostly firmer against the majors. Kiwi and sterling are outperforming while the Swiss franc and the Swedish krona are underperforming. EM currencies are mostly weaker. INR and ZAR are outperforming while HUF and PLN are underperforming. MSCI Asia Pacific was down 1.1%, as the Nikkei fell 1.5%. MSCI EM is down 1.2%, as Chinese markets rose 0.3% ahead of a week-long holiday. Euro Stoxx 600 is down 1% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is down 2 bp at 1.54%. Commodity prices are mixed, with oil down 1.5-2%, copper down 0.1%, and gold up 0.5%.
True to its recent habit, the US dollar is finishing the week on a firm note. On the month, though, the greenback has fallen against most of the majors, but sterling, the Canadian dollar, and the Swedish krona.
Global equities are trading heavily, and investors’ angst is lending support to bond markets. The concerns about the contagion effect emanating from Germany’s largest bank are taking a toll on sentiment. Deutsche Bank stock fell to a new record low in the European morning but has turned higher in subsequent turnover. Nevertheless, the financial sector is Europe is off twice what the loss of the overall market. The Dow Jones Stoxx 600 is off 1%, while the financial sector is off more than 2%. The Italian bank share index is off 2.5% and is near two-month lows.
The MSCI Asia-Pacific Index fell 1%, to record its largest loss in three weeks. Japan’s Topix was off 1.5%, with financials off 2.2%. Chinese stock markets managed to buck the trend to post minor gains, but even in Shanghai, banks shares ended lower. Separately, China’s Caixin manufacturing PMI edged up to 50.1 from 50.0. The average in Q3 was 50.2. That is the highest quarterly average since Q3 2014, and provides another piece of data suggesting that Chinese economy has stabilized, albeit at lower levels and with higher debt. Chinese markets are closed the next week for national holidays, though official PMI data will be reported over the weekend.
Japan released a mixed bag of data. Prices pressures continue to ease. Household spending fell more than twice what was expected. Industrial output was stronger than forecast, helped by a surge in auto output. Unemployment ticked up to 3.1% from 3.0%.
Headline CPI remained negative (-0.5% vs. -0.4% year-over-year) in August for the fifth consecutive month. Excluding fresh food, which is the BOJ preferred measure, fell -0.5% from a year ago. The measure excluding food and energy slipped to 0.2% from 0.3%. Tokyo reports its inflation figures with less of a lag, but the September data give little hope of a recovery in the national price measures.
The BOJ reported that its staff, excluding managers, will be given a 0.2% pay increase in the base wage. This follows a 0.6% increase in the FY15. Although it is the third year that the base wage has increased, the small amount illustrates the similar pressure facing the private sector. Weak wage increases are one of the factors holding back consumption. Overall household spending fell 4.6% in August from a year ago. The Bloomberg median was for a 2.1% decline. Household spending has been contracting on a year-over-year basis since February.
Industrial output rose 1.5% in August, which is three times what the median guesstimate projected. The year-over-year pace rose to 4.6% from -4.2% in July. Vehicle production rose 8.8% after a 4.1% slide in July. Construction orders jumped 13.8% after a 10.9% fall in July. Japan will report the Q3 Tankan survey early Monday in Tokyo. Sentiment among the large manufacturers is expected to post a small increase, and capex plans are expected to improve from the 6.2% of Q2.
Eurozone data was largely in line with expectations. The unemployment rate was steady at 10.1% in August, while the preliminary September CPI rose to 0.4% from 0.2%. This picks up the gains in energy, as the core rate was steady at 0.8%.
The euro has been pushed to new lows for the week, just below $1.1170. Last week’s low was seen near $1.1125. Barring new news, the intraday technicals suggest that the downside may have largely been exhausted in the European morning. The dollar has largely matched yesterday’s range against the yen. The greenback found sellers at JPY101.80 was approached, while buyers appeared after a big figure pullback.
Better than expected UK data failed to lend much support to sterling. Yesterday’s losses were extended, but the week’s low near $1.2920 remains intact. The intraday technicals warn that the low for the day, though, may not be in place.
Still, the UK could not have hoped for better data today. The Q2 GDP estimate unexpectedly rose to 0.7% from 0.6 but somehow, in the machinations of GDP calculations, this turned into a 2.1% year-over-year pace, down from 2.2%. The Q2 current account deficit was also smaller than anticipated, while investment was stronger than expected, rising 1.0% or twice the median forecast. Most promising for Q3 was news that the index of services for July rose 0.4%. This is the second best of the year thus far. The median forecast was for a 0.1% increase. The June series was also revised higher (0.3% from 0.2%).
There is a slew of North American data today. In the US, the personal consumption expenditures will be used to calculate Q3 GDP. After the improvement in the advance merchandise trade balance and inventory data, look for Q3 estimates to be raised again, with many, perhaps even the Atlanta Fed, returning toward 3% forecasts. The core PCE deflator, the Fed’s preferred inflation measure is expected to tick up to 1.7%, which would represent new two-year highs. The Chicago PMI may attract attention. It is expected to improve from the 51.5 reading in August. Lastly, the University of Michigan’s consumer confidence report and the inflation expectation will be reported.
For its part, Canada reports July GDP. It is expected to have risen by 0.3% after a 0.6% rise in June. The monthly GDP readings in Q1 16 and Q2 16 have averaged zero. Industrial and raw material prices are expected to have fallen in August. The US dollar bottomed near CAD1.3050 yesterday and tested CAD1.32 in the European morning. However, the greenback’s momentum appears to have stalled. Similarly, the Australian dollar, which posted an outside down day yesterday, saw follow through selling today, but the enthusiasm waned below $0.7600 and near the 20-day moving average (~$0.7595). There is scope toward $0.7630-$0.7640.
In addition to the Chinese data, there are two other events this weekend to note. The first is a formality. The Chinese yuan will be included in the IMF’s SDR starting October 1. The second is more substantive. Hungary holds a referendum on the EU’s immigration policies. It is likely to reject plans to relocate refugees, setting the stage for an escalation of the simmering confrontation with the EU.
Brazil reports consolidated fiscal data for August. Yesterday, the central government primary deficit came in larger than expected at -BRL20.3 bln. The 12-month total jumped to -BRL172.2 bln, the highest on record. August tax revenues also came in lower than expected, and so the data point to upside risks to the consolidated budget data out today. Consensus for the primary deficit is -BRL22.4 bln, which would lead to a big jump in the 12-month total too. The fiscal outlook is the wild card for COPOM. The fiscal numbers are still getting worse, and we think that any delays to passing fiscal reforms would make it hard for COPOM to start the easing cycle October 19.
The Colombian central bank is expected to keep rates steady at 7.75%. Inflation appears to have peaked, while the peso has stabilized. The tightening cycle has likely ended, but we do not see easing until 2017.
China Caixin September manufacturing PMI ticked up to 50.1, as expected. Official September manufacturing PMI reading will be reported after markets close tonight. It is expected to tick up to 50.5. The economy stabilized in August, and so the September readings will be important to show this is continuing.
Korea provides the first snapshot of global trade for September tonight after markets close. Exports are expected at -4.2% y/y, while imports are expected at -2.7% y/y. Korea should benefit from the stabilizing Chinese economy, but we think Bank of Korea will maintain a dovish stance for now. Earlier today, Korea reported August IP up 2.3% y/y. It was expected to rise 1.6% y/y.