Chinese equities fell 6.7% yesterday (Shanghai Composite), spooking US equity investors and depressing the S&P500 at the opening bell by around 1% where it remained throughout the session. At 1018, the index sits on the 7 August support level. The Chicago PMI report beat consensus, but was ignored by the market. Commodities followed equities' lead, oil futures down 4.2% and copper down 4.0%. US 10yr treasuries were initially correlated with the equities and commodities move, selling off by 6bp, but soon after the opening bell rallied 8bp to 3.39%. Libor nudged 1bp lower to 0.35%.
Currencies ignored the other asset classes and focussed on the month-end London fix at . As expected, the monthly gains in US equities resulted in USD selling by fund managers, with the dollar index recording a 0.8% drop between London noon and 4pm. EUR rallied from 1.4260 to 1.4367, drifting back to 1.4320 during late NY. JPY bounced around 93.00.
AUD continued to weaken after Sydney closed, to 0.8340, but fixing dynamics propelled it to 0.8454, that gain largely holding until this morning's 0.8420. Further commentary suggesting an October hike was seen last night.
NZD behaved similarly, bouncing from a London low of 0.6793 to 0.6861, and opening this morning around 0.6840. AUD/NZD held above 1.2260, and opens at 1.2300 this morning.
US Chicago PMI surged to 50.0 in August from 43.4 in July. The Chicago region is heavily exposed to the auto sector, and the big gains in the last two surveys, from relatively depressed readings in May and June, reflect GM and Chrysler's emergence from bankruptcy and more recently the 'cash for clunkers' programme. Production and new orders both rose above 50, while employment rose more modestly to 38.7 - consistent with a slower pace of factory job shedding in Friday's payrolls report.
In other regional surveys, the Dallas Fed manufacturing index rose from -23.4 to -9.1 in August, the highest since November 2007, while the Milwaukee NAPM (which in June was the first of the regional surveys to return to the 50 mark) rose from 45 to 56.
Japanese industrial production rose 1.9% in July. That is the fifth rise in succession and the official METI projection is anticipating that run will extend to seven. Progress on inventory adjustment continues, with clear inroads being made across key sectors such as autos, ferrous metals, tech components and general machinery. Also on the manufacturing sector, the August Nomura PMI improved sharply to 53.6 from 50.4 in July.
Japanese earnings report less weak but still dire. Overall labour cash earnings fell 4.8%yr in July, up from -7.1%yr in June. Bonuses (-11.0%yr) and overtime (-17.3%yr) are the major drags on the overall measure, consistent with the stage of the cycle, but regular earnings are also well down (-1.1%yr).
Japanese retail sales fell 2.5%yr in July, better than expected. Against the awful earnings backdrop described above consumption has been reasonably resilient, with real PCE down just 1.0%yr in Q2 (with fiscal policy helping things along of course) and Q3 looking respectable.
Japanese construction sector in deep recession. The annualised level of housing starts, at 746k, are the third lowest in the history of the series, with only the policy induced collapse of Aug/Sep 2007 showing weaker activity levels. Overall construction orders look little better, down 42.8%yr.
Eurozone CPI rose to -0.2% yr in August from -0.7% yr in July. Inflation is set to rise modestly in coming months, as the annual comparisons switch from the surge in oil prices in the first half of 2008 to the steep plunge in the second half.
Canada GDP rose 0.1% in June, ending a string of ten monthly declines. For the June quarter, GDP was down 3.4% annualised, following a downwardly revised -6.1% in Q1.
AUD and NZD outlook today: The 0.8480 and 0.6900 resistance levels continue to obstruct further gains, but data in US, AU and NZ this week could be a catalyst for a break higher. Alternatively, a break below 0.8220 and 0.6760 would argue for corrections of the post-March rally. Today's calendar highlight is the RBA meeting. For NZ, Fonterra's online milk powder auction at 1300GMT will be closely watched.
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Tue 31 July 2018 AA JP- Bank of Japan A 06:00 DE- Retail Sales A 09:00 EZ- flash HICP/GDP AA 12:30 US- Core PCE Deflator A 14:00 US- CB Consumer Confidence Wed 1 Aug 2018 A Final Mfg PMIs AA 12:15 US- ADP Private Payrolls A 15:00 US- EIA Crude AA 18:00 US- Federal Reserve Decision Thu 2 Aug 2018 AA 11:00 GB- Bank of England Decision A 13:30 US- Weekly Jobless Fri 3 Aug 2018 A Final Services PMIs AA 12:30 US- Employment A 12:30 US/CA- Trade
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