- Digesting German orders, awaiting run of BoE and ECB speakers, US ADP
Employment and Non-Manufacturing ISM; France and Spain to sell bonds
- German Factory Orders hint strong that Q1 weakness was largely
weather, flu outbreak and strike related, strength in capital and
consumer goods encouraging
- Trump, OPEC and Oil: Trump can moan all he likes, the fact is that
spare output capacity is limited
- US FOMC minutes: discussion on upside and downside risks to outlook
the key point of focus, as well as any chatter on balance sheet
reduction programme plans
- US ADP Employment: consensus forecast agnostic as ever, and value
as a predictor of official data in question after serial misses
- Chart: US Oil Exports to China
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** EVENTS PREVIEW **
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As U.S. markets return to the fray of the financial world, it is the events side of the equation that dominates with an array of central bank speakers (BoJ, RBA, BOE, ECB) and the June FOMC minutes. That said, Germany's Factory Orders will offer some insights into whether 'hard' data can match the improved optimism evident in this week's survey data (though less so in manufacturing terms), while across the pond, the US has the ADP Employment estimate ahead of tomorrow's official labour report, along with weekly jobless claims and the Non-manufacturing ISM. Govt bond supply comes in the shape of multi-tranche offerings from France and Spain, for which little in the way of a concession has been factored after a charge towards the longer end of Eurozone curves, in response to the ECB's proposed 'operation twist' on its QE reinvestments. It remains the case that scheduled data and events remain secondary to trade tensions and political risk news, with the former weighing above all on EM currencies and assets, as well as non-oil commodities, in conjunction with USD strength. Inevitably there will be some chatter about the ECB hawks being unhappy that markets have pushed back on the timing of the first ECB rate hike to December, the more so given that two hawks Weidmann and Mersch will both be speaking today. However this all looks to be a case of 'splitting hairs' in so far as this 'sources story' suggests that this group is only looking at a Sept/Oct 2019 rate hike. The Weekly EIA oil market inventories is also due, following on from API data showing a larger than expected drawdown in crude inventories, though the Trump twitter rant on OPEC and oil prices will garner more attention. However the key point on that is a simple one: if the Saudi's do use their spare output capacity (estimated at 2.0 Mln bbls/day), then that will effectively exhaust all the spare capacity that there is in the world, therefore if Venezuelan and Angolan output remain depressed (likely) and there is a sanctions related drop in Iranian output (also possible as the economy in Iran is grinding to a halt due to strikes and mass protests against the IRGC and Clerical Govt, with power cuts of up to 4 hours per day across most of the country), then the output deficit (3.0-4.0 Mln??) will be greater than the spare capacity, implying an output gap of around 1.0-1.5 Mln. Trump can tweet all he wants, because he knows that high US gasoline prices will be a vote loser for the Republicans at the November mid-term elections, but the fundamentals will still assert themselves at the end of the day.
** U.S.A. - June ADP Employment / Non-manufacturing ISM **
- That US labour demand remains strong is well known, that consensus forecasts for the ADP estimate and the official payrolls are rarely distinguishable and over the past year inevitably pegged near the 6-mth average is also well established, as is the fact that for all the evident strength of labour demand, and the gradual fall in the Unemployment Rate, significant upward pressure on wages remains notable for its absence. While there is always the temptation to extrapolate from ADP to Payrolls, the last 6 months have seen notable misses (above & below). As such today's report is perhaps mostly of academic interest, above all given the clear focus on wage growth trends as the component which might prompt a Fed policy shift. As for the Non-manufacturing ISM, this is projected to slip marginally to a still very solid 58.3 from 58.6, with the better than expected Manufacturing ISM and other survey data implying some upside risks. As ever a reminder that the Non-manufacturing ISM Employment sub-index has become largely uncorrelated with official Services Payrolls in month to month terms, and is as such of little use as a predictor for tomorrow's report.
** U.S.A. - June FOMC minutes **
- Given that the June FOMC meeting was also a press conference and forecast update meeting, today's minutes may offer little in the way of fresh insights. However the discussion of the upside and downside risks to the economy, and by extension the policy outlook may offer one or other nugget. Fed statements have thus far eschewed making any specific references to trade tensions, in no small part because tariff imposition has thus far been very specific and limited. It seems unlikely that EM currency woes will have featured much in the Fed's discussions, both from the aspect that there is no evidence of any offshore USD shortages, which would be a point of concern if these threatened a negative feedback loop into onshore markets, and also given the fact that the CNY drop only happened after the FOMC meeting; though here again, the FOMC will be wary of overreacting given the lessons of 2015/2016, where the FOMC clearly di overreact. Of rather more interest would be any discussion about how its balance sheet reduction programme is going, particularly in the light of some evidence of some GC Repo market pressures, as well as some (idle? Ed.) market speculation & chatter that it might end sooner than perhaps previously envisaged.
** Germany - May Factory Orders **
- Th anecdotal evidence from Ifo's Orders monitoring index had signalled this in June, but the proof of the pudding is in the eating as they say, but this does offer support for the view that orders are clearly turning the corner and adding to the evidence that the early H1 weakness was mostly weather, flu outbreak and strike related - May Orders +2.6% m/m 4.4% y.y, Apr revised to -1,.6% m/m from -2.5% - fitting well with the broadly stronger PMIs seen this week. The deatils were also encouraging, Capital Goods +4.7% m/m and Consumer Goods 4.9% m/m lead the way; with strength in Domestic and Eurozone Orders +4.3% and 6.7% respectively, while non-Eurozone -1.3% m/m though that follows April's +5.9% m/m
from Marc Ostwald