Manufacturing PMIs dominate start of month; US ADP Employment, Auto Sales
and Construction Spending also due; Fed, RBI and Brazil COPOM rate
decisions; slew of corporate earnings, German 5-yr sale & EIA Crude
Inventories report
- Asia Manufacturing PMIs: trade fears clearly weighing quite heavily,
though Korea Exports suggest actual activity still solid
- UK Manufacturing PMI: seen very steady at solid level, despite Brexit
and trade war fears, but Construction & Services PMIs of greater
significance for economic outlook
- Eurozone PMIs: Spain and Italy seen following France lower, despite
strength in Germany
- US Manufacturing ISM: modest setback expected, but still indicative of
very robust activity levels, mirroring regional surveys
- FOMC: on hold, may tweak text on economy modestly, door to be left wide
open for a September hike
- US Auto Sales: expected to dip after June jump, first drop in incentives
in 54 months implies downside risks
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** EVENTS PREVIEW **
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A new month begins, but the overarching themes for financial markets remain much the same: trade and geopolitical tensions (occasionally weighing on so-called risk appetite), Brexit negotiations, an absence of political leadership in the western world and the permafrost of financial repression, above all due to 'unconventional' central bank policies. Be that as it may, the focal points for the day statistically are the run of Manufacturing PMIs & US ISM, ADP Employment, Construction Spending and Auto Sales. There are central bank policy meetings in India, USA and Brazil, a 10-yr German Bund sale, and another busy schedule of earnings reports, with ArcelorMittal, BNP Paribas, Infineon, Intesa SanPaolo, Lloyds Bank, Rio Tinto and VW featuring in Europe, while the US looks to Bunge, Metlife, Molson Coors and US Steel. EIA Oil inventory numbers 2will get particular attention today after the API survey saw an unexpectedly large 5.6 Mln bbls increase against expectations of a 2.8 Mln bbls drawdown, Gasoline on the other hand saw only a marginally smaller than expected draw (-791K), though Distilates saw a sharper than expected 2.9 Mln increase. Also worthy of note was the rebound in 10-yr JGB yields after yesterday's post BoJ fall, suggest markets are clearly still willing to test the BoJ's resolve in maintaining in its new wider YCC target range.
** World - July Manufacturing PMIs **
- While trade tensions & tariffs are clearly the overarching theme for the Manufacturing sector, the picture from the flash and today's PMIs has not been uniform, with the setbacks in Japan (though smaller in the final reading), China (as expected), India & South Korea echoing a soft unchanged flash reading in France, while Germany saw an unexpected rebound, and the US maintained a solid pace of activity, though the ISM is expected to continue to signal a much stronger pace than the Markit PMI, even if it is seen edging down from 60.2 to 59.3. For all the Brexit related uncertainties, the UK Manufacturing PMI has been remarkably steady in recent months and is again expected to be little changed at 54.2 vs. June's 54.4. The remaining question is then whether Spain and Italy follow France lower or Germany higher, with the both seen dipping to 53.0 from 53.4 & 53.3 respectively.
** U.S.A. - FOMC meeting **
- This is a non-press conference meeting, and the FOMC is expected to maintain the Fed Funds target at 1.75-2.0%, while signalling (in its accompanying statement) that further rate hike is likely at its September 26 meeting. Outside of replacing the rate hike text in June with a no change on rate, and having gradually progressively stripped the statement down to basics, it seems likely that it will be little changed relative to June (see:
https://www.federalreserve.gov/newsevents/pressreleases/monetary20180613a.htm ). At a push it might tweak the wording on inflation and the unemployment rate to acknowledge recent data, but not in any way that would push back on near-term rate expectations, and they will doubtless continue to eschew any direct references to trade tensions9 . Per se, the FOMC remains on auto-pilot, and while its debate on the 'neutral rate will 'hot up' in coming months, any reference to that will be in the minutes (due in 3 weeks) rather than the statement.
** U.S.A. - July ADP Employment / Auto Sales **
- As noted on many an occasion over the past year US labour data, above all the payrolls component, simply does not have the influence on markets that it once had, even if it still commands a lot of anticipatory attention. That said consensus forecasts for today's ADP at 186K and Friday's Payrolls at 190K have the look of a very familiar agnostic feel to them. The fact remains that any reading above 100K is above what the Fed sees as the breakeven rate for labour demand, and as such the minutiae of a miss of even 25-50K are in truth moot. Auto Sales are expected to drop back to 17.03 Mln SAAR pace after a modestly better than expected 17.35 Mln in June, with J.D. Power/ LMC Automotive expecting new vehicle sales of 1.3 million in July, which in calendar adjusted terms would be a fall of ca. 2.0% y/y, which is also the Edmunds.com estimate. Underlying those estimates is the assumption that incentives were less aggressive after the Independence Day holiday, that according to JD Power, which estimates the "average incentive spend per unit at $3,665", down around 5.0% yr/yr and also representing the first fall in 54 months.
** India / Brazil - Rate meetings **
- That the tide is going out (i.e. tighter monetary conditions beckon) for many EM central banks goes without saying, with a strong USD and rising oil prices playing a significant role. For India's RBI, which in June signalled that policy would be "data dependent", the array of key inputs have been divergent. On the one hand Q2 growth indicators suggest solid underlying momentum. Inflation indicators have to a certain extent been mixed. To be sure, June headline CPI at 5.0% y/y was well above its 4.0% target (though below the consensus for 5.3%), but food price pressures have moderated; that said core CPI was 6.3% y/y, which will not sit easy with the RBI, the more so as it stares down the barrel of a sharp hike in the government's minimum support prices for key crops. On the other hand, overall financial conditions have clearly tightened significantly, and the economy would clearly be vulnerable to a further escalation in trade tensions. As such the choice the RBI faces is whether to hike 25 bps at today's meeting, as is expected by a majority of those economists surveyed, or defer a move until its next meeting in October, with a very clear tightening bias signal. By contrast Brazil's COPOM is universally expected to keep its Selic rate target at 6.50%, despite a spike higher in the IPCA IBGE inflation measure to 4.5% y/y in June, the latter owing much to a combination of adverse base effects and the impact of the truckers' strike in protest to diesel price hikes, which also served to stall the economy (May Economic Activity Index aka monthly GDP slumping 3.3% m/m, down 2.9% y/y), with Unemployment remaining very high at 12.4% in June, even if lower than May's 12.7%. COPOM has already conceded that it continues to be very difficult to ascertain what are transitory effects on the economy, and what is a trend change. Against that backdrop, and with the outcome of October's presidential election being as clear as mud, COPOM appears to have little choice but to sit on its hands for the time being.
From Marc Ostwald