US equity futures are lower, following most European bourses and bonds in the red European after the latest round of German regional data suggested inflation may not yet be fully on the retreat in the euro region. As of 7:45am ET, S&P and Nasdaq 100 futures were both down about 0.1% after the S&P 500 jumped by the most since June on Tuesday after unexpectedly weak JOLTS jobs and consumer-confidence readings in the US raised hopes the Federal Reserve may be nearing the end of its tightening cycle.
German 10-year bund yields jumped as much as 7bps points to 2.58% after regional reports showed inflation accelerated in four of six German states in August, ahead of figures for the overall German economy due later Wednesday. A separate report showed Spanish inflation also quickened. The dollar weakened as the session has progressed and is trading lower against most G-10 currencies. Oil prices remain higher but metals are mixed, with copper slightly lower. Today, we get the latest ADP (which has been a terrible predictor of NFP numbers) and GDP revision which JPM expects to be revised down to 2.0% from 2.4%, below the consensus of no revision. China will release PMI-Mfg. and PMI-Srvcs tonight at 9.30pm ET.
In premarket trading, megacap tech names are mostly lower; with NVDA dropping -0.8% after closing at an all time high yesterday. HP Inc. slumped 10% after the technology hardware company cut its full-year cash flow and profit outlook. Treasury yields ticked higher and a gauge of the dollar was steady. Chinese stocks listed in the US fell in premarket trading, paring gains following a 6% rally in the Nasdaq Golden Dragon China Index in the previous two sessions. Alibaba -1.6%, Baidu -1.3%, PDD Holdings unchanged, JD.com -1.9%, NetEase -1.3%, Trip.com -2.3%, KE Holdings -2.4%, ZTO Express -4.8%. EV stocks lead losses; Nio falls 3.8%, extending a decline since reporting on Tuesday; Li Auto -3.9%, Xpeng -2.8%. Here are other notable premarket movers:
Investors will monitor reports on US economic growth and private-sector employment later Wednesday, as well as key non-farm payrolls numbers on Friday, to further ascertain the economy’s resilience amid high interest rates. “Data is king right now in terms of market sentiment,” said Susannah Streeter, an analyst at Hargreaves Lansdown Plc. “The non-farm payroll snapshot on Friday will crown the week, and if it points to a fresh slowdown in hiring, we could see another spurt in stock prices.”
Meanwhile, stronger than expected German and Spanish inflation data muddied the waters for European policy makers as they approach the September rates decision. Market pricing implies roughly even odds of a quarter-point increase by the European Central Bank to 4%. Further clouding the outlook was data showing that euro-area economic confidence slowed more than anticipated this month.
European stocks and bund futures are in the red after Spanish and German inflation data kept the possibility of another ECB rate hike firmly on the table. The Stoxx 600 is down 0.3%, led by declines in the utility, technology and consumer sectors. Banks and basis resources gained while utilities led the decline as Orsted A/S plunged more than 20% after the Danish power generator forecast potential impairments of up to $2.3 billion relating to its US portfolio. Among other individual movers, Prudential Plc climbed more than 4% after posting a rise in new business profit. Here are the most notable European movers:
In Asia, the MSCI Asia Pacific Index came off its highs after earlier rising as much as 1%, as the strong rally in Chinese equity markets gradually evaporated. Tech stocks such as TSMC and Samsung were the top contributors to the gauge’s gains. Benchmarks had earlier rallied, with the Hang Seng Index rising as much as 1.4%, after Chinese state-owned lenders were reported to prepare to reduce rates on the majority of outstanding mortgages, as well as on deposits.
"These little piecemeal policy shifts are probably very good in the short term for sentiment, but they don’t necessarily create this sort of surge in terms of the local economy,” Dwyfor Evans, head of APAC macro strategy at State Street Global Markets, said on Bloomberg Television. “There are still bigger issues at play here that I think are holding investors back still at this particular point.”
In FX, the Bloomberg Dollar Spot Index rose 0.1%; it dropped 0.4% on Tuesday as bets for a Federal Reserve hike by year-end were pared back significantly following weak US consumer confidence and JOLTS data
In rates, treasuries were under pressure as the US trading day begins, paced by bunds, where bear-flattening ensued after German inflation rose more than forecast. US yields remain inside Tuesday’s bull-steepening ranges. German 10-year yields rise 6bps to 2.57% while Treasuries also declined, paring some of Tuesday’s rally: yields were higher by 1bp-3bp across the maturity spectrum with the curve steeper, following short-end-led declines of more than 10bp Tuesday. Market-implied expectations for Fed policy are little changed, pricing in just over 50% odds of a quarter-point rate increase in November. Treasuries may draw support from expectations that month-end index rebalancing late Thursday, estimated to extend its duration by 0.12 year, will spur buying. Focal points of US session include August ADP employment change ahead of broader jobs report Friday, and the second estimate of 2Q GDP, a month after the first one exceeded economist estimates, sparking a bond market selloff.
In commodities, crude futures advance, with WTI rising 0.6% to trade near $81.70. Spot gold rises 0.1%.
Bitcoin is under modest pressure despite the relatively directionless USD action. Currently, BTC resides at the low end of USD 27.29-27.75k parameters, which are well within Tuesday's more pronounced USD 26-28.14k bounds.
To the day ahead now, and data releases include the German and Spanish CPI readings for August, UK mortgage approvals for July, whilst in the US there’s the ADP’s report of private payrolls for August, the second estimate of Q2 GDP, along with pending home sales for July. Today’s earnings releases include Salesforce.
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APAC stocks traded positively across the board following the JOLTS-induced gains seen on Wall Street and in the run-up to month end. ASX 200 saw its upside driven by the industrial sector and closely followed by its gold sector, with a further boost seen from the softer-than-expected Aussie CPI data. Nikkei 225 saw its machinery sector leading the gains, although the index’s upside is hampered by the recent gains in the JPY. Hang Seng and Shanghai Comp both opened with gains as the region conformed to the global risk appetite, with the Shanghai Comp on a more cautious footing after US Commerce Secretary Raimondo suggested US firms complain that China is “un-investable”, while participants also awaited the speculated mortgage rates cuts. In other news, China is reportedly exploring ways to make its own AI memory chips despite US sanctions, according to SCMP sources.
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European bourses are in the red, Euro Stoxx 50 -0.6%, with stocks generally soft after yesterday's upside. The current session's pressure is a function of more hawkish ECB expectations for September after German-state and Spanish metrics. Sectors are mostly in the red with Tech underperforming as yields rise, a narrative which is supporting Banking/Insurance names. Stateside, futures are modestly softer, ES -0.2% ahead of a busy US agenda; NQ -0.3% lags incrementally given the mentioned yield moves.
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DB's Jim Reid concludes the morning wrap
I was back in the office yesterday after two weeks high up in the French Alps. For our entire trip it was mostly over 30 degrees even at altitude. However the day after we got back it snowed there. I think it would have blown the kids’ mind to have seen that after the weather we had. Talking of the kids, my twins were 6 yesterday. The biggest problem with that is that we bought them new bikes, plus one for Maisie. However this is the first ones we’ve bought that have not come preassembled. So last night my wife and I cursed, swore, and injured ourselves in the pursuit of building three bikes. If you happen to see me in the next few days I guarantee if you look closely enough you'll see oil somewhere on me that I haven’t been able to get out.
It's certainly not been a dull second half of August in my absense. To be fair the first half when I was around wasn't dull either. Markets have swung from narrative to narrative with the soft landing one winning out handsomely yesterday or as a minimum the narrative that the Fed is more likely than not to be done hiking. Although with two whole days left of this choppy month, there's plenty of time for that to change again.
The big driver yesterday was the latest JOLTS report which showed a further, and large, softening in the US labour market. That came alongside a weak consumer confidence print from the Conference Board, where the present situation component fell to a 9-month low. Together, those two releases led to growing hopes that the Fed would call it a day on their rate hikes, which sent yields on 10yr Treasuries down -8.2bps on the day to 4.12% with 2yrs falling a sizeable -15.4bps, the largest yield decline in nearly 4 months. Equities also rallied strongly on the back of those headlines, with the S&P 500 having its best day since early June (+1.45%) as it advanced for a third day in a row to 2-week highs.
In terms of the details of the JOLTS report, the main headline was that job openings fell to 8.827m in July (vs. 9.5m expected), which was the lowest it had been since March 2021. That meant that the ratio of job openings per unemployed individuals fell back to 1.51 as well, which is the lowest since September 2021, although above the levels around 1.2 seen before the Covid-19 pandemic. The other big story from the release was the decline in the quits rate of those voluntarily leaving their jobs, which is also a good metric for how confident workers are feeling about their prospects. That fell back to 2.3% in July, which is the first time it’s been back at its pre-pandemic level since the current surge in inflation began.
So far at least, this decline in job openings has occurred even as unemployment has remained at historically low levels. Or in other words, the fall in job openings doesn’t appear to have been at the expense of jobs, which is exactly what the Fed are wanting to see. But once these metrics have started falling in the past, it can be hard to know when they’re going to stop, not least since monetary policy operates with time lags that make it hard to feel your way through in real time. So outside of a sudden shock, any path to a hard landing will almost certainly be via signs of a soft landing first.
If you have that concern it would have been heightened by the Conference Board’s latest consumer confidence print. It showed a decline in the headline measure to 106.1 (vs. 116.0 expected), with drops in the present situation and expectations components as well. On top of that, there was another signal that the labour market was weakening, since the gap between the number saying jobs were “plentiful” compared to those saying they were “hard to get” fell to the narrowest since April 2021. So this print and the JOLTS numbers set the stage nicely for Friday's payrolls.
For now the data put an abrupt stop to the growing narrative that the Fed would still deliver another rate hike in the current cycle. Indeed, the chance of another rate hike by November fell from 71% immediately before the JOLTS report to 51% by yesterday’s close.
For equities, the prospect of fewer rate hikes outweighed any concerns around the data being weak. The S&P 500 saw a near-continuous rally during the day to rise by +1.45%, its strongest gain since 2 June, ironically the last time we saw a strong US payrolls beat. So for a completely opposite reason. All 24 industry groups of the S&P 500 gained, with tech stocks leading the advance. This helped the NASDAQ (+1.74%) to hit a 3-week high, whilst the FANG+ Index rose +3.10% (its largest gain since late May).
Back in Europe, there was also a decent market rally following the releases, with yields on 10yr bunds (-5.3bps), OATs (-5.6bps) and BTPs (-7.2bps) all falling back. Likewise for equities, the STOXX 600 (+0.97%) posted a strong advance, although that was helped by the UK’s return from holiday, since the FTSE 100 (+1.72%) caught up with the previous day’s gains. Today however, attention will turn to the flash CPI numbers for August, with the country releases from Spain and Germany out today ahead of the Euro Area-wide release tomorrow. That’s the biggest remaining input for the ECB’s next decision in a couple of weeks’ time, with markets still narrowly expecting that the ECB will finally pause their hiking cycle after 9 consecutive increases.
In the cryptocurrency space, Bitcoin saw its strongest gain in two months, up +7.15% to $28,005, as the prospects for a first spot Bitcoin ETF improved after a court ruling in the US. It was also a positive day for commodities, with Brent crude (+1.27% to $85.49/bl) moving back above $85 for the first time in two weeks. Across asset classes, the US dollar was the one notable loser of the day, with the broad dollar index (-0.51%) having its weakest day in over three weeks.
Asian equity markets are also trading higher with the S&P/ASX 200 (+1.36%) leading gains across the region as Australia’s inflation softened in July (more below) with the Nikkei on track for its third consecutive day of gains (+0.94%), with the KOSPI (+0.62%) and the Hang Seng (+0.47%) also trading in positive territory. Elsewhere, stocks in mainland China are struggling to gain traction with the CSI (+0.04%) and the Shanghai Composite (+0.03%) both just above flat after losing earlier gains. S&P 500 (+0.17%) and NASDAQ 100 (+0.27%) futures are edging higher again. 10yr USTs (+1.37 bps) yields have edged back up a bit after the big rally yesterday.
Coming back to Australia, data showed that the inflation rate moderated to +4.9% y/y in July (v/s +5.2% expected), its lowest level in 17 months as against a level of +5.4% in June thus reducing the possibility of the Reserve Bank of Australia (RBA) raising interest rates again. Following the release, the Australian dollar lost ground against what has been a weak 24 hours for the US dollar and is down -0.14% at $0.6472 as I type.
News from various sources (like Bloomberg) are indicating that some Chinese state-owned banks are preparing to slash interest rates on existing mortgages and deposits very soon as Beijing is ramping up its efforts to revive growth in the world’s second-largest economy. So watch for headlines there.
Back to yesterday and the other US data release was on housing for June. According to the 20-City index from S&P CoreLogic Case-Shiller, prices were up another +0.92% that month (vs. +0.80% expected), which is the third consecutive month that prices grew by at least +0.9%. Clearly, housing is only one sector of the economy, but it’s highly sensitive to interest rates, and this is a further sign that it’s picking back up again. On a year-on-year basis, the 20-city index is now only down by -1.17% (vs. -1.60% expected). That said, the house price resilience may be as much about the drag from higher rates on supply of housing in a still solid economy as it as sign of resilient demand.
To the day ahead now, and data releases include the German and Spanish CPI readings for August, UK mortgage approvals for July, whilst in the US there’s the ADP’s report of private payrolls for August, the second estimate of Q2 GDP, along with pending home sales for July. Today’s earnings releases include Salesforce.