Market movers today
Today preliminary August German HICP inflation ticks in. We expect it to hold pretty steady around zero, given that the German VAT was enacted in July.
Fed vice chair Clarida speaks on ‘US monetary policy’. Given his importance in the FOMC, we are looking forward to hear his views on the Fed’s new average inflation targeting regime and perhaps indications of what it intends to do at the upcoming September meeting to ensure the new regime is credible.
Very early Tuesday morning we get the private Chinese PMIs. After the solid reading of the official PMIs today, we expect the private ones to remain well in expansionary territory tomorrow morning.
The 60 second overview
Macro. The official Chinese PMIs this morning point to a continuing rebound in the Chinese economy. While the manufacturing PMI remained at 51, the service PMI edged higher to 55.2, which was higher than expected. Overall, the PMI release is good news for the global economy and European exports, as the second biggest economy is seeing a solid recovery.
On a different note, China over the weekend tightened its export rule to include technology-related companies. This could make it harder for TikTok to sell its US subsidiary ahead of the deadline set by the US administration on 15 September, which could lead to renewed tensions between US and China if such a sale fails to be completed.
Japan. On Friday, Prime Minister Shinzo Abe announced that he will step down due to health concerns. The search for a successor now begins, which can take weeks and raises uncertainty about economic policies. The JPY strengthened on Friday.
Equities. Asian equities are edging higher following the solid Chinese PMI release this morning and continuing the positive US session. Part of the optimism comes after the Fed on Thursday announced a new monetary policy framework, which in our view will keep the global reflation going, supporting risk assets. Equity futures point to a positive opening in the US and Europe today.
FI. The start of the issuance season in Europe coupled with drivers of new Fed strategy leading to higher US rates put a mark on fixed income markets last week, with a sell-off of around 10-15bp in most jurisdictions. We expect the ECB will start to scale up the QE purchases this week, both in government bond space but also in the covereds and corporate space as the ECB can participate in the primary market. In Reading the Markets EUR, we take a close look at supply versus demand for the remainder of the year. We expect the high purchase pace to be very supportive for spreads ahead and we recommend investors to participate in the new deals such as the 10Y Finland despite spreads being tight relative to the levels in June.
FX. How long time can the market trade on the Fed’s introduction of AIT? Based on inflation markets, it is not yet in the price that the Fed will deliver an inflation overshoot over the coming years. On this side of the 16 September FOMC meeting, it might take a leap of faith to stay long EUR/USD amid stretched long positioning and lack of details of how the Fed plans to pursue its new AIT objective.
Credit. Sentiment soured in the credit market towards the end of Friday’s trading session causing iTraxx Xover to widen 4bp during the day, while Main finished half a basis point wider.
Nordic macro and markets
Yesterday the Danish government published an updated borrowing requirement for 2020 and the first forecast for 2021. The full budget statement is released today. In the updated borrowing requirement for 2020 the forecast was revised upwards by DKK70bn from DKK294bn to DKK374bn. We had expected a downward revision of the borrowing requirement as it has not spent anything close to the amount expected back in May. Instead the government revised upwards the borrowing requirement due to primarily ‘the payment of holiday allowances (Feriepenge), as well as additional postponement of taxes agreed since the Economic Survey, May 2020’. However, the negative public finances for 2020 will change dramatically in 2021, where the government expects a surplus on the net financing requirement of DKK65bn (versus a deficit in 2020 of DKK248bn). Hence, the borrowing requirement declines from DKK374bn in 2020 to DKK209bn in 2021.
Today is a busy day on the data front in Denmark: National Accounts for Q2, property prices in June and unemployment figures for July, while the government is scheduled to present its budget, the latest Economic Survey and its fiscal policy framework going forward to 2025. The GDP indicator for Q2 surprised negatively two weeks ago with a fall of some 7.4% relative to Q1. The full National Accounts should enlighten us further on what exactly caused this record decline.
The Danish gross unemployment has risen from 3.7% to 5.5% of the workforce since February. However, daily figures from the Ministry of Employment point to the number of jobless remaining more or less stable in July and declining in August. Hence, we are not expecting any great movement in Monday’s unemployment figures.
