S&P futures point to a higher open after China officially entered into deflation with -0.4% CPI print, continuing the buying momentum from the second half of yesterday’s session while European stocks rebound sharply from yesterday's rout led by a rebound in Italian banks after the government backtracked on part of its new windfall tax on lenders. As of 7:45am ET, both S&P and Nasdaq 100 futures are 0.2% higher with other global markets also in risk-on mode, with the euro strengthening, copper rebounding, 10Y TSY yields rising to 4.03% ahead of another closely watched bond auction later today (US government is selling $38 billion of new 10-year notes, $3 billion larger than the last 10-year note debut in May) and oil rising by $1, just inches away from 2023 highs. Rice in Asia soared to its highest level since 2008.
China’s CPI - coming one day before the US inflation number - printed negatively for the first time in two years which is likely to produce a deflationary impulse on core goods inflation, and which according to JPM's trading desk could prove useful to the Fed (and markets) if we see the US Consumer shift back from Services demand to Goods demand this year (more in the full JPM trading desk note this morning available to pro subs). Today’s macro data and earnings focus is on mortgage applications (down 3.1% after sliding 3.0% last week) and DIS earnings. Homebuilders have outperformed the SPX by 23% YTD.
In premarket trading, all the megacap techs are higher, with both KRE and XLF indicated marginally higher. Commodities are higher led by Energy, which also saw a late day rally. WeWork shares crashed 17% after the co-working business said there is “substantial doubt” about its ability to continue operating. Here are some other notable premarket movers:
The tentative improvement in sentiment faces a test on Thursday when the latest US CPI data is published. It takes place as a closely watched bond-market gauge of inflation expectations is rising back toward a nine-year high, signaling elevated price pressures for years. The US five-year inflation breakeven - which basically is a proxy for oil prices - has risen to around 2.5%, just shy of the peak in April 2022, when it reached the highest since 2014.
The “inflation report will be key if today’s rally is to be sustained.” said Lewis Grant, a senior portfolio manager at Federated Hermes. “Investor risk aversion has started to wane but remains volatile and investors are anxiously searching for the next signal.”
European stocks are ahead, led by a rebound in Italian banks after the government backtracked on part of its new windfall tax on lenders. The Stoxx 600 is up 1% while the Euro Stoxx Banks Index adds 1.7% after falling 3.5% on Tuesday. UniCredit SpA and Intesa Sanpaolo SpA, at the center of Tuesday’s declines when the new tax was unveiled, became some of Wednesday’s biggest gainers, boosting the Stoxx Europe 600 as much as 1% Wednesday. Here are some of Europe's top movers:
Asian stocks were mixed after two days of declines, weighed by losses in some Chinese stocks as latest economic data showed further acceleration of deflationary pressures in the economy. The MSCI Asia Pacific Index was up 0.1% for the day. “Investors are clamoring for broad-based stimulus in China. I don’t think we are going to get that,” David Chao, strategist at Investec Asset Management, said on Bloomberg Television. Chao sees China moving ahead with piecemeal measures to support consumption and private investment that may result in “a pop in Chinese equities later this year.”
In FX, the Bloomberg Dollar Index falls 0.1%. The Swedish krona and Norwegian krone are the best performers among the G-10 currencies. The Aussie climbed as much as 0.3% to 65.64 US cents after the People’s Bank of China set the dollar-yuan rate at 548 pips below traders’ estimate, signaling it’s in no rush to withdraw support for the currency. China’s state-owned banks were also seen selling dollars, according to Asia-based FX traders.
In rates, 10-year Treasury yields ticked up ahead of another closely watched bond auction later today, while the treasuries curve was flatter with front-end yields modestly cheaper and long-end little changed vs Tuesday’s closing levels, outperforming bunds and gilts. The US government is expected to sell $38 billion of new 10-year notes, $3 billion larger than the last 10-year note debut in May. Treasury 10-year yields around 4.03%, marginally cheaper on the day with bunds and gilts lagging by additional 2.5bp and 1.5bp in the sector; long-end outperforms ahead of 10- and 30-year supply over Wednesday and Thursday, with 2s10s and 5s30s spreads flatter by 1bp and 1.5bp on the day. Japan bonds drew support during Asia session from data showing China experiencing deflation. Focal point of US session is upsized 10-year note auction, following strong demand for Tuesday’s 3-year note sale. The Treasury auction cycle resumes with $38b 10-year new issue at 1pm New York time and concludes with $23b 30-year bond sale Thursday. WI 10-year at around 4.03% is ~17bp cheaper than July’s stop-out and above auction stops since November.
The week's debt auctions will gauge how concerned investors are about a rising US budget deficit, a week after Fitch Ratings decided to strip the US of its top credit rating. Tuesday’s $42 billion sale of three-year notes had a lower-than-expected yield, a sign that demand was stronger than anticipated.
In crypto, the Fed announced the creation of an activities supervision program to oversee bank tech initiatives which will focus on activities related to crypto, blockchain tech and non-bank tech partnerships, while the Fed said state member banks should receive written non-objection from the Fed before issuing, holding or transacting in dollar tokens, according to Reuters.
In commodities, US crude futures advance, with WTI rising 1% to trade near $83.70. Spot gold adds 0.1%. Bitcoin is down 0.6%.
Looking ahead to today, it will be quiet in terms of data, with weekly mortgage applications in the US and Canada’s monthly building permits. Meanwhile, as the earnings season starts to wind down, we will hear from the likes of Walt Disney, Sony, Vestas and Illumina.
Market Snapshot
Top Overnight News
A more detailed look at global markets courtesy of Newsquawk
APAC stocks traded mixed as participants digested a deluge of earnings releases and the latest inflation data from China which was mixed but showed consumer prices in deflationary territory for the first time in more than two years. ASX 200 was just about kept afloat by the outperformance in its top-weighted financial sector after Australia’s largest lender CBA posted a record FY profit. Nikkei 225 ultimately weakened with trade initially indecisive amid an influx of earnings releases and with the biggest winners and losers all driven by corporate results including SoftBank which was near the bottom end of the spectrum after its surprise loss. Hang Seng and Shanghai Comp were subdued as markets reflected on the mixed inflation data from China which showed CPI Y/Y slipped into deflation territory, albeit at a narrower-than-expected drop in prices, while factory gate prices continued to fall at a steeper than forecast pace.
Top Asian News
European bourses are firmer across the board, Euro Stoxx 50 +1.4%, with newsflow light and the main mover being banks clawing back downside from the Italian windfall tax following an adjustment. As such, the FTSE MIB +1.9% outperforms while the OMX Copenhagen +0.4% is the relatively underperformer as Novo Nordisk pares some of Tuesday's pronounced gains. Stateside, futures are on the front foot and making up for some of the prior session's downside, ES +0.3%, as risk sentiment improves and was further assisted by Fed's Harker.
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FX
Fixed Income
Commodities
Geopolitics
US Event Calendar
DB's Jim Reid concludes the overnight wrap
In what is proving to be a volatile August so far, with negative headlines outpacing positive ones, yesterday saw a return to risk-off leaving the S&P 500 down -0.42% on the day, and -1.95% for the month so far. This occurred on the back of weaker Chinese trade data we reported yesterday coupled with negative news on both sides of the Atlantic for the banking sector. However, sentiment improved during the US session, with S&P 500 recovering after being -1.2% down at the lows, in part following a strong 3yr Treasury auction. China has slipped into deflation this morning as expected but the data was broadly inline so there been no additional sell-off momentum so far, with fresh stimulus hopes still in the background.
In the US, the regional banking story reappeared in the headlines after Moody’s downgraded ten small and midsize banks and put a number of larger firms on review or negative outlook. 29 banks in total saw some kind of action. The US regional bank index traded more than -4% lower following the news but recovered to close at -1.38%. The broader banking sector also underperformed, with S&P 500 banks down -1.07%. The regional banking index had reached a post-SVB high the previous day, with a +34% increase since its low in mid-May, having reversed about two thirds of the post-SVB decline. Moody’s cited higher funding costs, potential regulatory capital weakness and increasing commercial real estate risks. In my mind, until we truly know where CRE will bottom its impossible to call the all clear for this cycle. This story won’t fully play out for some time though.
Over in Europe, Italian banks saw a sharp decline (-8.27%) after the Italian government announced a one-off windfall tax of banks that will amount to 40% of the excess net interest margin earned in 2023 (or 2022 if that is higher). However, in the evening the government issued a clarification that the levy would not exceed 0.1% of a firm’s assets. In an update published overnight, our European bank analysts estimate that such a cap would reduce the overall size of the tax by over 40%, though it would still take more than 10% from 2023 profits. See here for more. So this adjustment should improve sentiment today. The broader European banking index had declined -3.54% yesterday, though it is still up +13.6% year-to-date (versus + 7.93% ytd for the broader STOXX 600). The Italian FTSE-MIB (-2.12%) led the declines in Europe with the DAX and CAC -1.10% and -0.69% respectively. Beyond the immediate market impact, the story is a reminder that the burden-sharing of the costs and benefits from higher rates has a habit of becoming a political issue.
The risk-off mood led a decline in long-term yields, with 10yr treasuries down -6.7bps and 30yr -6.3bp (4-5bps up from the day’s lows though). The 2yr had seen a modest sell-off earlier in the day, but ended up closing -1.3bp lower, falling a few bps after a strong 3yr Treasury auction. This saw $42bn of 3yr notes issued at 4.398%, nearly 2bps below its pre-auction trading, with strong indirect demand and record low primary dealer take down. So a successful start to the increased refunding supply of Treasuries. This will be tested more with the 10yr auction today and 30yr auction tomorrow. Yesterday, our US rates strategists published a chart that nicely visualises the large increase in supply that’s due in the coming months – see here for more.
Back in Europe, yields saw an even stronger bull flattening rally. 2yr bund yields were down -6.9bps, while the 10yr yield declined by -13.3bps, its sharpest daily fall since mid-June as the China and banking story dominated.
As discussed earlier, it was a bad day for US equities, but better than it might have been, with the S&P 500 closing -0.42% down. Financials (-0.88%) led the decline. Tech also had a bad day, with the NASDAQ down -0.79% and tech mega caps underperforming, although Apple managed to stem its losses (+0.53%) after five days of decline. A notable outperformer was healthcare, led by a positive reaction to Eli Lilly & Co results the previous evening, which saw its shares jump up by +14.9%. Energy also gained (+0.49%), as oil moved higher during the day (WTI crude +1.20% to $82.92/bl). Comments by Ukraine’s President Zelensky warning that it could target Russian ports if Russia continues to block Ukrainian waters added to oil supply concerns.
In Fed speak, we heard from Philadelphia Fed President Harker. For someone generally perceived to be around the median on the FOMC (and a voter this year), his comments leaned dovish, noting that “we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work”. He also spoke in favour of a soft landing path, saying that “I expect only a modest slowdown in economic activity to go along with a slow but sure disinflation”. Meanwhile, Richmond Fed President Thomas Barkin (non-voter) gave little colour on the policy front, saying he was “leaning toward waiting until September to decide” if another hike is appropriate. In terms of Fed fund expectations, the market continued to see a 34% chance of a hike across the next two meeting but moved to price slightly more cuts for 2024, with end-24 pricing down -2.6bps to 3.97%, its lowest in nearly three weeks.
Overnight, Chinese annual CPI fell in July for the first time in 28 months, slipping -0.3% y/y (v/s -0.4% expected), having flatlined in the previous month. Additionally, PPI extended its decline for the 10th straight month, down -4.4% y/y in July following a -5.4% drop in June as against a market forecast for a -4.0% fall. With CPI and the PPI both falling simultaneously for the first time since 2020, it confirms economy wide deflation which will increase the drumbeat for more stimulus.
Given the inflation data was pretty much inline, Asian equities are more playing catch down to the US move rather than starting a fresh sell-off. The Nikkei (-0.42%), Hang Seng (-0.12%), CSI (-0.19%) and the Shanghai Composite (-0.36%) are seeing losses whilst the KOSPI (+1.08%) is actually higher. S&P 500 (+0.08%) and NASDAQ 100 (+0.18%) futures are trading slightly higher. Meanwhile, yields on the 10yr USTs (-0.6bps) are broadly steady, trading at 4.02% as we go to press.
Looking back at the data yesterday, US data was sparce. The NFIB small optimism ticked up to 91.9 in July (91.3 exp, 91.0 prev.), its highest since last autumn. On the other hand, wholesale trade sales saw a larger-than-expected decline in June (-0.7% vs -0.2% exp).
Over in Europe, we had the ECB’s latest consumer expectations survey. This showed a further moderate decline in inflation expectations in June. However, our economists’ dbDIG consumer survey shows inflation expectations stabilising in July, suggesting that yesterday’s print may mark the end of the decline in the ECB survey. Elsewhere, Germany’s July CPI print was confirmed at +6.2% yoy.
Looking ahead to today, it will be quiet in terms of data, with weekly mortgage applications in the US and Canada’s monthly building permits. Meanwhile, as the earnings season starts to wind down, we will hear from the likes of Walt Disney, Sony, Vestas and Illumina.