Market Update – European Session: UK July CPI Misses Expectations (2nd Straight Month)

Notes/Observations

• Concerns over North Korea subside further; risk appetite back on; Kim Jong Un examined KPA Strategic Force’s plan for “enveloping fire” at Guam; discussed it with his commanding officers but decided he will “watch US’s conduct a little more
• Germany Q2 GDP data robust, but QoQ reading was somewhat weaker than expected
• UK July CPI misses expectations (2nd straight month), dents hawks bid for potential near-term hike
• Swedish July CPI moves above Riksbank 2% target for 1st time since late 2010
• German Federal Constitutional Court has reservations about ECB QE bond purchases; seeks guidance from European Court of Justice
• Assumption Day holiday keeps participation light in Europe (Italy, Greece and Poland closed)

Overnight

Asia:

• China Commerce Ministry (MOFCOM): Hoped US could be ‘prudent’ in review of China’s intellectual property (IP) policy; Would take steps if US takes actions that hurt bilateral trade relations
• RBA Minutes: Judged steady policy consistent with growth and inflation targets. Growth likely picked up pace in Q2 and saw GDP around 3% for both 2018 and 2019. Confident of a pick-up in inflation and jobs

Europe:

• UK Govt document to propose setting up an post-Brexit interim customs agreement with the EU to allow the freest possible trade of goods and seek the right to negotiate other trade deals

Americas:

• President Trump directs the USTR to study China’s actions on theft of US intellectual property. US will enforce fair, reciprocal trade rules
• Fed’s Dudley (voter, dove): Would support another 2017 rate hike if economy evolves as expected
• US Defense Sec Mattis: if North Korean missiles were considered to be a threat to Guam “then it’s game on”

Economic Calendar

• (DE) Germany Q2 Preliminary GDP Q/Q: 0.6% v 0.7%e; Y/Y: 2.1% v 1.9%e; GDP NSA Y/Y: 0.8% v 0.6%e
• (CH) Swiss July Producer & Import Prices M/M: 0.0% v 0.0%e; Y/Y: -0.1% v 0.0%e
• (SE) Sweden July CPI M/M: 0.5% v 0.3%e; Y/Y: 2.2% v 1.9%e
• (SE) Sweden July CPI CPIF M/M: 0.6% v 0.4%e; Y/Y: 2.4% v 2.1%e; CPI Level: 323.69 v 323.16e
• (CN) China July M2 Money Supply Y/Y: 9.2% v 9.5%e v 9.4% prior; M1 Money Supply Y/Y: 15.3% v 14.0%e; M0 Money Supply Y/Y: 6.1% v 6.5%e
• (CN) China July New Yuan Loans (CNY): 825.5B v 800Be v 1.54T prior
• (CN) China July Aggregate Financing (CNY): 1.22T v 1.00Te
• (UK) July CPI M/M: -0.1% v 0.0%e; Y/Y: 2.6% v 2.7%e; CPI Core Y/Y: 2.4% v 2.5%e; CPIH Y/Y: % v 2.7%e
• (UK) July RPI M/M: 0.2% v 0.1%e; Y/Y: 3.6% v 3.5%e; RPI-X (Ex-Mortgage Interest Payment) Y/Y: 3.9% v 3.7%e; Retail Price Index: 272.9 v 272.5e
• (UK) July PPI Input M/M: 0.0% v 0.4%e; Y/Y: 6.5% v 6.9%e
• (UK) July PPI Output M/M: 0.1% v 0.0%e; Y/Y: 3.2% v 3.1%e
• (UK) July PPI Output Core M/M: 0.1% v 0.1%e; Y/Y: 2.4% v 2.5%e
• (UK) Jun House Price Index Y/Y: 4.9% v 4.3%e

**Fixed Income Issuance:

• (ID) Indonesia sold total IDR5.71T in 2-year, 4-year, 7-year and 15-year Project-based Sukuk (PBS)

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx50 +0.1% at 3,460, FTSE +0.3% at 7,379, DAX +0.2% at 12,189, CAC-40 +0.3% at 5,139, IBEX-35 flat at 10,461, FTSE MIB +1.7% at 21,722, SMI -0.3% at 9,004, S&P 500 Futures +0.1%]

Market Focal Points/Key Themes: European stocks open higher and maintain position though; move higher attributed to easing of geopolitical tensions around Korea; macro data out of Germany also helped support equities; materials stocks outperforming along with healthcare; oil was largely flat, with the energy sector higher on Songa; Songa Offshore jumps after receiving takeover offer from Transocean; upcoming earnings in the US session include Home Depot, Coach and TJX Companies

Equities

• Consumer discretionary: Schibsted SCH.NO -6.5% (competition from facebook), Danone BN.FR 1.6% (activist stake)
• Materials: K+S SDF.DE -5.0% (earnings)
• Financials: Orascom Development ODHN.CH +6.3% (results)
• Telecom: TKH Group TK.NL -9.0% (results) – Healthcare: Nicox COX.NO -11.8% (financing update)
• Energy: Songa Offshore SONG.NO +30.3% (receives bid)

Speakers

• Brexit Min Davis: Negotiations with EU were going fine. Probably would not have to pay customs union in interim period following Brexit but likely to be lots of turbulence during talks. There would NOT be a number on the Brexit divorce bill by Oct. Probably will not have to pay customs union in interim period following Brexit ( transition would last a year or two). European Court of Justice (ECJ) would not be the arbiter of the interim customs deal with EU; to set – out proposals for details of post Brexit-ECJ jurisdiction during week of Aug 21st
• EU Commission took note of UK request for Brexit implementation period; would only address after sufficient progress on terms of withdrawal. Working on position paper on customs issues related to the orderly withdrawal of the UK. Friction-less trade was not possible outside single market
• German Constitutional Court sent a lawsuit targeting ECB QE program to European Court of Justice. Believed ECB QE might violate EU treaties but sought EU colleagues for help on issue
• South Africa Court scraped the grafts Ombudsman bid to alter SARB’s mandate (**Note: Ombudsman instructed Parliament to begin a process to amend the constitution to make the SARB focus on socioeconomic well-being of its citizens rather than inflation)
• Iran President Rouhani: Could abandon the nuclear agreement within hours should US continue to impose new sanctions upon the country
• IEA Atkinson: OPEC might have to ‘dig in’ for long haul to curb supplies; US shale presents a big challenge. difficult to see price going beyond mid-$50 range

Currencies

• GBP was on soft footing heading into the UK CPI reading. The annual inflation did come in-line with expectations as falling oil prices offset higher prices for clothing and food. Overall the July inflation data undershot market expectations thus dealing another blow to expectations of a rate increase in the coming months. GBP/USD hit a 5-week low of 1.2910 following the data release. The GBP did find some supports as BOE previously noted that they expected annual inflation to accelerate later this year and still believed interest rates would need to rise more rapidly than investors expect to keep price rises in check.
• Some easing of tensions on the Korean Peninsula saw USD/JPY climb another 0.7% to test 110.40.
• SEK currency (Krona) was firmer in the session after Sweden’s inflation print for July came in higher than forecast. The annual p[ace of 2.25 was above Riksbank target for 1st time in six years and raised the possible of a rate hike in early 2018. Dealers noted that Riksbank, would likely to wait until the ECB showed signs of QE tapering to speak about its own policy stance. In the past the Riksbank had been s concerned about an overly strong krona hampering inflation.

Fixed Income

• Bund futures trades at 164.06 down 2 ticks, paring opening losses as risk assets partially reverse earlier moves with stocks trimming gains and credit spreads edging wider. Downside targets 163.75 followed by 162.56. To the upside the 165.00 to 165.20 remains key resistance.
• Gilt futures trades at 127.59 down 24 ticks as UK inflation holds steady in July as price pressures ease. A resumption to the upside could eye 128.25 then 128.75. A move back below 126.51 targets 125.97
• Tuesday’s liquidity report showed Monday’s use of the marginal lending facility rose to €428M from €189M prior.
• Corporate issuance saw $2.65B come to market via 3 issuers headlined by Philip Morris $1.25B 2 part offering, and Lear Corp $750M senior unsecured note offering.

Looking Ahead

• (PE) Peru July Unemployment Rate: 7.0%e v 6.9% prior
• (PE) Peru Jun Economic Activity Index (Monthly GDP) Y/Y: 3.5%e v 3.4 % prior
• 05:30 (UK) Weekly John Lewis LFL sales data
• 05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills
• 06:00 (IE) Ireland Jun Trade Balance: No est v €4.3B prior
• 06:00 (TR) Turkey to sell Floating rate 2024 bond
• 06:45 (US) Daily Libor Fixing
• 07:45 Weekly Chain store sales
• 08:00 (IS) Iceland July Unemployment Rate: No est v 1.8% prior
• 08:00 (BR) Brazil Jun Retail Sales M/M: No +0.4%e v -0.1% prior; Y/Y: 2.1%e v 2.4% prior
• 08:00 (BR) Brazil Jun Broad Retail Sales M/M: +1.8%e v -0.7% prior; Y/Y: 3.2%e v 4.5% prior
• 08:00 (UK) Baltic Dry Bulk Index
• 08:30 (US) July Import Price Index M/M: +0.1%e v -0.2% prior; Y/Y: 1.5%e v 1.5% prior; Import Price Index ex Petroleum M/M: 0.1%e v 0.1% prior
• 08:30 (US) July Export Price Index M/M: +0.2%e v -0.2% prior; Y/Y: No est v 0.6% prior
• 08:30 (US) Aug Empire Manufacturing: 10.0e v 9.8 prior
• 08:30 (US) July Advance Retail Sales M/M: +0.3%e v -0.2% prior; Retail Sales Ex Auto M/M: +0.3%e v -0.2% prior; Retail Sales Ex Auto and Gas: +0.4%e v -0.1% prior; Retail Sales Control Group: +0.4%e v -0.1% prior
• 08:55 (US) Weekly Redbook Same Store Sales data
• 09:00 (CA) Canada July Existing Home Sales M/M: No est v -6.7% prior
• 09:00 (EU) Weekly ECB Forex Reserve data
• 09:00 (RU) Russia announces weekly OFZ bond auction
• 09:30 (NZ) Fonterra Dairy Auction
• 10:00 (US) Aug NAHB Housing Market Index: 64e v 64 prior
• 10:00 (US) Jun Business Inventories: 0.4%e v 0.3 % prior
• 10:00 (MX) Mexico weekly International Reserves
• 11:30 (IL) Israel July CPI M/M: +0.1%e v -0.7% prior; Y/Y: -0.5%e v -0.2% prior
• 11:00 (BR) Brazil to sell 2022, 2026, 2035 and 2055 I/L bonds
• 11:30 (US) Treasury to sell 4-Week and 52-week Bills
• 12:00 (CO) Colombia Q2 GDP Q/Q: +0.5%e v -0.2% prior; Y/Y: 1.2%e v 1.1% prior
• 15:00 (CO) Colombia Jun Economic Activity Index (Monthly GDP) Y/Y: 1.2%e v 1.2% prior
• 16:00 (US) Jun Total Net TIC Flows: No est v $91.9B prior; Net Long-term TIC Flows: No est v $57.3B prior
• 16:30 (US) Weekly API Oil Inventories