Trading with point and figure

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Ostwald, Marc
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08:20 (10 minutes ago)
to Marc

- Digesting as expected no change from BoJ and solid Japan Trade data,
awaiting UK inflation run, US Housing Starts, speeches from Haldane &
Draghi, Brazil rate decision; Salzburg summit tops political schedule,
as markets take blase view of China/US trade war escalation;
German 10-yr sale

- UK CPI: seasonal discounting unwind to push CPI in m/m terms, but base
effects (mostly petrol) predicate expected dip in y/y terms; PPI set
to show ebbing pipeline pressures, but watch food prices in PPI Input

- US Housing Starts: rebound expected after sluggish June/July, Permits
continue to suggest underlying strength despite supply side headwinds

- Brazil rates: BCB on hold, but BRL weakness likely to prompt shift to
signal next move in rates will be higher

- Charts: Japan & China holdings of US Treasuries; China Soymeal and other
feed prices

..........................................................................

********************
** EVENTS PREVIEW **
********************

A much busier day for data and central banks will continue to try and do battle with the overarching forces of trade and politics in terms of market influence. Statistically The UK's full run of inflation data takes top billing, with Japanese Trade to be digested, while South Africa has likely very sensitive CPI, the US looks to Housing Starts and the Q2 Current Account, while the evening brings Agrentine and NZ Q2 GDP. Unsurprisingly the BoJ left rates and its QQE policy parameters unchanged, with Kuroda's comments offering no fresh insights into the outlook, and the Bank of Thailand (1.5%) and Brazilian central bank (6.5%) are also seen on hold, with speeches from Draghi, BoE's Haldane and German Finance Minister Scholz completing the events schedule. Germany also holds a modest EUR 3.0 Bln 10-yr Bund auction. On the political / trade front, a) the markets' ostensible 'relief' that the retaliatory measures from China were not as aggressive as the US measures is a prima facie example of ongoing financial repression and the over prevalence of algo trading begetting yet another edition of the Emperor's New Clothes, and per se a store for trouble ahead (which most market participants appear to take a very antediluvian of, underlining that no lessons have been learnt from the GFC, all that has changed is a decimation of market liquidity, for which there will also be a price to pay). b) The informal Salzburg EU Summit will be mostly closely watched for Brexit negotiation related developments, with a compromise on the Irish border problem being signalled, though the details on this look to be woefully lacking; a close eye also require a good deal of attention on migration policy related negotiations, which remain unsurprisingly a major source of tension within the EU.

** U.K. - August CPI, RPI, & PPI **
- A seasonally typical 0.5% m/m uptick in CPI is expected as summer sales discounts are unwound, offset by a very marginally slower rise in petrol prices than in August 2017, and thanks to base effects, this should see y/y rates on headline and core drift down by 0.1 ppt to 2.4% and 1.8% respectively, though the much maligned RPI measure is seen unchanged at 3.2%. All in all this would underline the lack of pressure on the BoE to tighten policy in the near future (with the very dovish Vlieghe expressing some disappointment overnight at the painfully slow uptick in wage growth), and all the more so given Brexit uncertainties. PPI Input pressures are expected to ease a little with a 0.4% m/m implying a base effect paced drop back in y/y terms to 9.1% from 10.9%, with headline and core PPI Output expected to see a tame 0.2% m/m rise, allowing y/y rates to dip to 2.9% and 2.1%; at some point rising food prices (primarily weather related) are likely to pressure prices a little higher. ONS House Prices (for July) are also expected to extend their recent deceleration, with a dip to 2.7% y/y from 3.0% seen, bringing this measure rather more into line with other house price measures.

** U.S.A. - August Housing Starts **
- Following from yesterday's unchanged NAHB Housing Market Index (67), today's Housing Starts are seen rebounding from the soft readings in June (1.158 Mln SAAR) and July (1.168 Mln) to a 1.238 Mln pace (5.7% m/m), in no small part predicated on still solid levels of Building Permits in recent months (last 1.303 Mln, forecast 1.31 Mln) suggesting a still solid pipeline. That September data will be heavily distorted by Hurricane Florence is a given, making today's reading the last 'clean' one for a number of months. That said, Housing Investment is again likely to be a drag on Q3 GDP, even if in contribution terms the effect will as modest as in Q1 and Q2.

** Brazil - BCB rate decision **
- For all that the BRL has been dragged into the EM FX woes, in no small part due to electoral uncertainties, thus far the impact on inflation has been muted, with this week's IBGE IPCA-15 inflation seen up just 0.17% m/m, to edge the y/y rate up to 4.36% from August's 4.30%. Given that a clearer post truckers strike picture on growth is still to emerge, but will likely remain sluggish with Unemployment staying high, and what is something akin to a total fog on the election outcome (2nd round Oct 28), the BCB is seen sitting on its hands and leaving its Selic rate target unchanged at 6.50%. That said, it will more than likely stress that the risk in terms of the rate outlook is firmly skewed to a rate hike, above all given the weakness of the BRL.


from Marc Ostwald
 
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