Global stocks markets struggled for direction and US equity futures were flat in Monday's quiet session following a rally Friday that pushed the Nasdaq 100 nearly 2% higher amid optimism that a soft landing for the world’s biggest economy is within reach. Sentiment was shaken by early weakness in Treasuries - which briefly pushed the 10Y yield to 4.0% after the BOJ was forced to intervene unexpectedly in the bond market one day after "tweaking" its YCC - continued strength in the USD (which sent the yen tumbling contrary to what virtually all so-called experts predicted), and a rally in commodities, and especially oil (and gasoline) which has soared in recent days.
As of 7:30am, US equity futures were 0.1% higher at 4,612 while Nasdaq futures were largely unchanged. Treasury yields edged higher, mirroring moves in UK and European bond markets. Gold drifted lower, while Brent climbed over $85 and to a level where markets will soon realize that headline inflation is about to storm right back; Bitcoin rose 0.3%. Apple and Amazon.com are among companies reporting earnings in the coming days.
The yen tumbled against the dollar, crushing the BOJ's carefully laid plans to strengthen the currency, after the Bank of Japan announced unscheduled bond-purchase operations to buy debt. The BOJ was seeking to contain a selloff after it said Friday it will allow yields to rise above a 0.5% cap and JGBs promptly did just that.
In premarket trading, Johnson & Johnson shares fall 1.5%, after a judge dismissed the pharmaceutical company’s second attempt at using a unit’s bankruptcy case to press tens of thousands of cancer victims to drop their lawsuits and accept an $8.9 billion settlement. Wells Fargo said the decision should not be a surprise, while Cantor Fitzgerald sees potential liabilities being manageable. Ford Motor dropped after the stock was cut to hold at Jefferies “with a heavy heart,” following results which saw worse-than-expected losses on electric vehicles and a “strategic wobble.” MetLife Inc. gained after Bloomberg News reported that Singapore insurer Great Eastern Holdings Ltd. is in talks to buy the company’s Malaysian venture. Here are some other notable premarket movers:
In the world of confused central bankers, ECB President Christine Lagarde told Le Figaro newspaper the ECB could hike again, even if it pauses at its next meeting. In the US, Federal Reserve Bank of Minneapolis President Neel Kashkari described the inflation outlook as “quite positive,” despite the likelihood of job losses and slower growth. Yields on German bonds and US Treasuries climbed.
“The narrative that markets will be focused on is if it’s going to be a soft landing or not,” said Vivek Paul, senior portfolio strategist at BlackRock Investment Institute. “We’ll learn more about that once the upcoming data indicate if rapidly cooling inflation is indeed the start of a broader trend or it continues to be volatile.”
According to Mike Wilson, who in his latest weekly note once again refused to turn bearish thus assuring more stock market gains, was kind enough to explain again what is causing the rally he never saw coming: he suggests that US equities are tracking the same path they did in 2019, which was one of the best years for the S&P 500 over the past decade. The benchmark is set to close out a fifth month of gains, the longest such winning streak since August 2021.
“The data we have today suggests to us that we are in a policy-driven, late-cycle rally,” Wilson, a staunch equities bear, wrote in a note. The latest example of such a period occurred in 2019 when the Federal Reserve paused and then cut rates and its balance sheet expanded toward the end of the year. “These developments fostered a robust rally in equities that was driven almost exclusively by multiple and not earnings, as has been the case this year.”
Meanwhile, investors aren’t rushing to buy shares of companies that beat second-quarter profit estimates. These firms are still underperforming the S&P 500 Index by the most in 18 years on the day after results, according to Goldman chief equity strategist David Kostin. “Investors have not rewarded stocks posting positive surprises,” Kostin wrote in a note.
European stocks edged higher although the food & beverage sector has struggled after Heineken slumped as much as 6.4% after the Dutch brewer reduced its earnings forecast, with consumption waning as consumers react to price increases. The Stoxx 600 is up 0.2%. Here are the most notable European movers:
Earlier in the session, Asia’s benchmark equity gauge was headed for its highest close since April 2022 as heavyweight markets China and Japan rallied on domestic drivers. The MSCI Asia Pacific Index advanced as much as 1.1%, climbing for a sixth straight day in its longest streak of gains in three months. Chinese stocks led the region higher on increasing signs that Beijing is determined to shore up economic growth and boost the stock market. The country’s property gauge is set to enter a bull market as the latest China Mfg PMI print beat expectations, rising to 49.3 vs. 49.2 survey; and up from 49.0 previously. The rally in China also boosted MSCI’s key emerging markets index, with the measure on track for its highest close in 2023 on Monday.
“The last two years have reminded us of the unpredictability of market events and the power of mean reversion,” said Bryan Cheung, associate director for manager research at Morningstar. “Investors should rebalance their portfolios from areas that have gotten more expensive, like the tech sector, into more attractively valued areas such as value-tilted sectors and non-US markets like Asia and emerging markets.” Elsewhere, Japanese gauges climbed more than 1% as the yen weakened after the Bank of Japan announced unscheduled bond-purchase operations and following a tweak to its yield-curve control policy Friday.
Asian stocks are poised to have their best month since January, amid improving prospects for the Chinese market, growing expectations of a soft landing in the US and the continued demand for artificial intelligence-linked shares. Still, the MSCI index’s gains are only about half that of the S&P 500. “Since last quarter, we have been recommending a balanced portfolio approach across Asia on one side chasing momentum in the region while also safeguarding against potential recession through high-yielding stocks,” Sanford C. Bernstein strategists including Rupal Agarwal wrote in a note. “We still find ample macro, valuation, earnings support” for these high-yielding names, they added.
Japan remains a focus for traders. On Friday, BOJ Governor Kazuo Ueda said the central bank would allow 10-year bond yields to rise above a ceiling it now calls a point of reference. The half-assed move, as is now widely understood, was meant not to signal normalization - as the BOJ is terrified what that would do to the bond market - but to boost the yen. Unfortunately, the latest YCC tweak has crashed and burned immediatley as the yen plunged after the Bank of Japan announced unscheduled bond-purchase operations to buy debt. The BOJ was seeking to contain a selloff after it said Friday it will allow yields to rise above a 0.5% cap.
“We had the BOJ today making sure yields remained capped,” said Jane Foley, head of currency strategy at Rabobank. “They clearly don’t want yields rising too much, so today’s action drove home the point it was perhaps more of a technical adjustment than a change in policy.”
Australia's ASX 200 lagged with strength in the commodity-related sectors offset by weakness in consumer stocks and financials, with the mood cautious ahead of tomorrow’s RBA rate decision where there is a discrepancy between money markets pricing and analysts’ median expectations on whether the central bank will hike or pause.
In FX, the Bloomberg Dollar Spot Index is up 0.1% while the Australian and New Zealand dollars are the best performers among the G-10’s. The yen plunged after the Bank of Japan announced unscheduled bond purchases, an indication that the dovish central bank isn’t yet ready to let yields soar. USD/JPY rose as much as 0.95% to 142.50, swinging from an intraday low of 140.70. BOJ said it would buy 300 billion yen ($2.1 billion) of five-to-10 year notes at market- level yields. On Friday, it said a previous yield ceiling of 0.5% for 10-year bonds is now a reference point rather than a limit, raising expectations it would let rates rise.
In rates, treasuries are slightly cheaper across the curve following rangebound Asia and early London sessions, while front-end outperforms slightly, steepening 2s10s spread by almost 2bp on the day. Downside pressure emerged during Asia session as Japanese bonds slid for a second day, prompting policy makers to step in to buy the notes. Japanese 10-year yields top 0.6% in Asia after the BOJ conducted an unscheduled bond-buying operation while the yen falls 0.9% versus the greenback. Bund futures are also lower although there was little reaction shown to euro-area CPI data. German 10-year yields are up 2bps. Treasuries also fall: US 10-year yields were around 3.96%, erasing an earlier spike to 4.0%, and cheaper by around 2bps vs Friday close with bunds and gilts trading broadly in line in the sector. Fed-dated OIS steady on the day with around 11bp of rate hike premium priced over the next two policy meetings, unchanged from Friday close. Monday’s few scheduled events include Fed’s Senior Loan Officer opinion survey release at 2pm New York time.
In commodities, crude futures advance with WTI rising 1%. Spot gold falls 0.3%.
Today’s macro data focus is SLOOS (which tends to precede moves in actual lending by ~2 quarters) and Chicago PMI.
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A more detailed look at global markets courtesy of Newsquawk
Asian stocks headed into month-end mostly on the front foot as the region sustained last Friday’s tech-led momentum from Wall St and as participants digested the latest support efforts from China and mixed PMI data. ASX 200 lagged with strength in the commodity-related sectors offset by weakness in consumer stocks and financials, with the mood cautious ahead of tomorrow’s RBA rate decision where there is a discrepancy between money markets pricing and analysts’ median expectations on whether the central bank will hike or pause. Nikkei 225 was boosted from the open and rose back above the 33,000 level amid a weaker currency and as markets digested the BoJ’s recent shift to a more flexible approach which provided early tailwinds for financials, while the central bank announced unscheduled bond purchases and participants also shrugged off disappointing Industrial Production data. Hang Seng and Shanghai Comp were higher amid stimulus-related optimism as Chinese officials are set to announce more measures for consumption, recovery and expansion, while the NDRC said it will solidly promote development and reform, as well as stick to the general principle of making economic stability a top priority. Furthermore, mixed official PMI data from China failed to dampen the mood in which headline Manufacturing PMI slightly topped forecasts but remained in contraction territory and Non-Manufacturing PMI disappointed with the slowest pace of increase since December 2022.
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European bourses are mixed/steady around the unchanged mark on month-end, Euro Stoxx 50 +0.3%. Action which follows a mostly firmer APAC handover given Friday's Wall St momentum and the latest Chinese stimulus, with mixed Chinese PMIs failing to offset the tone. Within Europe, sectors feature underperformance in Construction/Materials, perhaps after the latest HS2 update while Food, Beverage & Tobacco also lags after Heineken's -6.0% Q2 update featuring downbeat sector commentary. Stateside, futures are essentially unchanged with specifics limited and the earning docket sparse in the pre-market ahead of a relatively busy PM agenda.
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DB's Jim Reid concludes the overnight wrap
Given that the outcome of the September FOMC (19th-20th) will likely depend on the two CPIs and two payroll reports prior to the meeting, all roads this week lead to US payrolls on Friday. Ahead of that tomorrow JOLTs data will give clues as to the current tightness of the labour market underneath the headline numbers. For those of us who still believe old fashioned metrics of the cycle matter, then the quarterly Fed SLOOS later today could actually be the most informative for where the economy might be in 6-12 months. We also have the manufacturing (tomorrow) and services (Thursday) ISMs as a timely indicator of the momentum in the US economy.
Today’s Eurozone CPI and GDP prints will also be closely watched after the German and French prints on Friday. With the ECB now as data dependent as the Fed, these releases take on added significance ahead of their September 14th meeting.
Stand by also for a marginal 25bps vs 50bps BoE meeting on Thursday (DB at 25bps) and another close call for the RBA tomorrow where a 25bps hike is expected against no change. Another packed week for corporate earnings will feature names including Apple, Amazon (both Thursday), AMD (tomorrow) and Qualcomm (Wednesday). Otherwise, 169 S&P 500 and 87 Stoxx 600 companies will be reporting this week.
Going through some of the key releases now and starting with payrolls. While our economists expect some payback from state and local government education hiring for the headline print (+175k forecast, consensus at +200k vs. +209k previously), they expect a slight pick up in private (+175k vs. +149k) payrolls inline with consensus. This would be below the three-month averages for headline (+244k) and private (+196k) payrolls gains. Watch out for average hourly earnings and hours worked as well. Also keep an eye out for the unpredictable and less reliable ADP (Wednesday). Last month's +497k blew away all forecasts, and led to a yield sell-off, but this week our economists are expecting a more normal +175k.
Unit labour costs and productivity numbers on Thursday will also be in focus following the GDP and ECI data last week. Our team forecasts preliminary Q2 growth in productivity to come in at +1.1% following a -2.1% print previously. Unit labour costs are seen moderating from +4.2% to +2.6%.
Our UK economist Sanjay Raja previews the BoE meeting on Thursday here. He expects a +25bps hike taking the Bank Rate to 5.25%, although it is a close call between that and +50bps. Beyond next week's decision, Sanjay sees two more +25bps hikes, with rate cuts potentially starting from Q2-24. The central bank's Decision Maker Panel survey will be out that day as well.
In Europe, the main events will be today with the July flash CPI and Q2 GDP prints for the euro area. Country prints out on Friday have already given a good sense of the direction of travel. July inflation came in at +6.5% in Germany, (+6.6% exp), +5.1% in France (+5.0% exp) and +2.1% in Spain (+1.6% exp). Our European economists now see euro area headline inflation tracking at a low +5.4% (consensus +5.3%), and at +5.5% for core (consensus +5.4%). This would be the lowest headline inflation since January 2022, but with core inflation only a couple of tenths below its peak this March. Meanwhile, our economists now expect a +0.3% qoq Q2 GDP print (with risks tilted to +0.4%), though the upside versus consensus (+0.2%) is mostly due a distorted +3.3% print in Ireland last Friday. Elsewhere, growth disappointed in Germany, stagnating in Q2 (0.0% qoq vs +0.1% exp) after the technical recession seen during the winter. But it was stronger in France (+0.5% vs +0.1% exp) and Spain (+0.4% qoq, in line with exp).
After the official China PMI earlier today (more below), we see the Caixin indicators for manufacturing (tomorrow) and services (Thursday) to further enhance our understanding of the current state of the Chinese economy as we wait for fresh stimulus announcements. Our Chief China economist recaps last Monday's Politburo meeting and highlights its market implications here.
In earnings, with around half of the S&P 500 companies having already reported results, all eyes will be on Apple and Amazon, releasing earnings Thursday. Elsewhere in tech, AMD and Qualcomm will be closely watched when it comes to chips. Uber, Shopify and PayPal also report. See Binky Chadha’s review of the strong reporting season so far here.
Asian equity markets are rallying this morning following Friday’s gains on Wall Street. As I check my screens, the Nikkei (+1.54%) is leading gains with the Hang Seng (+1.37%), the KOSPI (+0.80%), the CSI (+0.78%) and the Shanghai Composite (+0.49%) also higher. S&P 500 (-0.15%) and NASDAQ 100 (-0.22%) futures are slightly lower. Meanwhile, yields on 10yr USTs (+3.79 bps) have edged higher trading at 3.99% as we go to print.
Data from China showed that the official manufacturing activity contracted for the fourth straight month as the manufacturing PMI came in at 49.3 in July (v/s 48.9 expected) and compared to a reading of 49.0 in June. Meanwhile, the official non-manufacturing PMI dropped to 51.5 in July (v/s 53.0 expected) from a level of 53.2 in June, marking its lowest reading this year thus highlighting that the world’s second biggest economy is struggling to revive growth momentum amid soft global demand. There is encouraging stimulus talk though, hence the equity rally this morning. Elsewhere in Japan monthly activity data was a bit mixed. Retail sales contracted -0.4% m/m in June (v/s -0.7% expected), against the prior month’s upwardly revised +1.4% increase. Meanwhile, industrial output rebounded +2.0% m/m in June (v/s +2.4% expected, -2.2% in May).
The BOJ earlier announced an unscheduled Japanese Government Bond (JGB) purchase operation as yields on the 10yr JGBs rose to a fresh nine-year high of 0.607% before moving back to 0.587% after the BOJ’s surprise decision. They bought 300 billion yen ($2.1 billion) of 5-to-10 year notes at market yields. Meanwhile, the Japanese yen has given back most of its post BOJ gains after Friday’s YCC tweak and is currently trading at 141.81 versus the dollar.
Looking back on last week now, after the short, sharp risk-off as a result of the BoJ YCC surprise, a positive mood returned to markets on Friday as several US economic data releases added to optimism that the world’s largest economy could achieve a soft landing yet. The first release was the US June core PCE price index, which rose 4.1% year-on-year, below the anticipated 4.2%. In month-on-month terms, this was at 0.2% (as expected), down from 0.3% in the previous month, adding support to the narrative of softening inflation that had picked up pace following the US CPI data release earlier in the month. Building on this, the US employment cost index for Q2 increased 1.0% (vs 1.1% expected), another piece of evidence for the decelerating inflation story. On the back of the data, market pricing for the chances of another Fed hike by November (around terminal timing) eased to 37% (from 40% on Thursday), but this was still up from 33% a week earlier.
Against the backdrop of a potential soft landing, US 10yr Treasuries rallied on Friday, as yields fell -4.9bps, but were still up +11.4bps in weekly terms. 2yr yields followed suite, falling -5.3bps on Friday, but this time reversing much of their rise earlier in the week (+3.5bps week-on-week).
Over in Europe, 10yr bund yields gained +2.6bps week-on-week (and +2.0bps on Friday). However, 2yr bunds rallied by -4.2bps on Friday as ECB rate expectations moved lower with ECB commentary consistent with a slightly dovish take on the ECB meeting the previous day. A 44% chance of a 25bp hike is now priced in for September, the first time this has been below 50% since mid-June.
The US fixed income rally on Friday was a partial reversal of the sell off late on Thursday that came after a Nikkei report that the Bank of Japan may make changes to its YCC policy, a move confirmed by the BoJ on Friday as it effectively moved the upper end the YCC band to +1%. The change was seen as an initial step towards policy normalisation in Japan, though BoJ’s Ueda said he did not expect long-term yields to rise to 1%. Against this backdrop, the Nikkei fell -0.40% on Friday, but this failed to erase the week’s gains of +1.41%, its largest weekly up move since mid-June. Yields on 10-year Japanese government bonds jumped to their highest level since 2014, climbing +11.8bps on the week to 0.57%. However, the FX market response saw the yen reversing its earlier gains after a volatile day, closing the day lower at 141.16, virtually in line with its pre-Nikkei story level, having traded just above 138 early on Friday.
Equities rallied on Friday off the back of the positive US economic data. The S&P 500 gained +1.01% week-on-week, and +0.99% on Friday as 9 out of the 11 major constituent sectors rallied, securing its third consecutive week of gains. The NASDAQ relatively outperformed, gaining +1.90% week-on-week (and +2.02% on Friday), with outperformance by the tech megacaps. The STOXX 600 likewise gained +1.16% on the week in its third consecutive week of gains, although the rally stumbled on Friday with the index closing down -0.20%.
Finally, turning to commodities, oil recorded another weekly gain. Brent crude rose +0.89% on Friday, with a weekly increase of +4.84% to $84.99/bbl, buoyed by the improving growth outlook for the US and China’s recent pledge to boost stimulus. This marks its fifth weekly rise in a row, with Brent up +17.6% since 27 June. WTI crude was similarly up +4.55% on the week, to $80.58/bbl (and +0.61% on the week).