Market movers today
In Germany, we receive factory orders for July. The June figures beat all expectations with an increase of 7% m/m. However, the positive surprise was driven by a base effect from a large drop in May together with a large increase in major orders in June; the latter was likely due to a large order from the aerospace company Airbus. Excluding major orders, German factory orders declined 2.6% m/m, which is more in line with the dire readings from other activity indicators such as the PMIs. Due to the large one-off increase last month, we will likely see a decline today in the July figures.
Today also brings the July retail sales for the euro area. Retail sales in real terms has been weak this year and surprised on the downside in June. The latest increases in consumer confidence should give some support to the figures, but consensus is looking for a 0.2% m/m decline.
In the US, we get ISM non-manufacturing. Leading data indicates they will be on the weak side.
In Poland, we expect the central bank to cut the base rate to 6.5% from 6.75%.
Overnight, we also get trade balance figures from China, where weak exports have caught attention lately.
The 60 second overview
Yesterday Saudi Arabia announced that it is extending its 1mb/d unilateral output cut through the rest of the year. This sent oil prices to new year-highs with Brent briefly trading above USD 90/bbl. On the one hand, markets and economies now need to deal with the consequences of a higher oil price. On the other hand, markets and economies, and in particular oil importers, should find comfort in the fact that by keeping its oil production at a very low level Saudi Arabia has only managed to increase oil prices so much. We think it reveals that demand is weak, e.g. due to weak growth in Europe and China, and it shows that other producers are gaining market shares. For example the US likely will produce record amounts of crude this year and new producers, e.g. Guyana, are emerging. Furthermore, the USD is on the rise again, which dampens oil demand outside US. We doubt Saudi Arabia will cut production further; however, it may opt to extend cuts into 2024. But for the reasons above, we doubt it will have great impact on oil prices. We keep our forecast for Brent to average USD 80/bbl the next year.
The USD/JPY rapid rise since the latter part of last week, from below 145 to above 147.5, spurred verbal intervention from the Japanese authorities overnight. Vice finance minister for international affairs Masato Kanda stated that “if these moves continue, the government will deal with them appropriately without ruling out any options”. Following the announcement USD/JPY dropped below 147.50 but later hit a 10-month high at 147.80. At the time of writing, the cross is trading at 147.50. The Japanese authorities last intervened in October 2022 of an estimated USD 62bn. If authorities resort to actual intervention this may cap the topside in USD/JPY in the near term but we still expect that the main drivers of USD/JPY to be more fundamental, such as an exit from the accommodative monetary policy. Overnight, Bank of Japan (BoJ) board member Takata said that there are positive signs that will support the BoJ’s objective of a 2% inflation target although he stated that “we need to continue patiently with large-scale easing as uncertainties are extremely high.” Likewise, we expect central banks in advanced economies likely not to be far from turning dovish. See FX markets comment below for further details.
Equities: Global equities were lower yesterday with Japanese stocks going against the trend. It is the same picture today with Japan outperforming other markets in Asia. Japan currently holds the loosest monetary policy and the strongest macro momentum in the western world. This has benefited the equity market and in our opinion will continue to do so. Yes, Japanese CPI is rising and above target (currently 3.4% y/y) but in our minds it makes sense to continue with an extraordinary loose monetary policy as structural deflation scare takes more than just 12 months to battle.
In the rest of the world, it is interesting to see energy and tech outperforming together while utilities, materials and industrial are lower and the worst performers. Again, this very muddy sector picture just shows that there is no clear narrative in equities driven by one dominating macro factor. In US yesterday, Dow -0.6%, S&P 500 -0.4%, Nasdaq -0.1% and Russell 2000 -2.1%.
FI: Global rates were subject to a selling pressure all through yesterday. The long end was the underperformers as markets had to digest the supply from especially Austria in the 10y and 30y areas. While ECB’s Lane in an interview on 31 August said that the recent inflation release was welcoming it was not enough to support EGBs on the day.
FX: Yesterday, the sour sentiment, mainly from China, supported the USD with the DXY index hitting the highest level since March and EUR/USD breaking below 1.0750. USD/JPY rose above 147.5 in yesterday’s session, triggering verbal intervention from the Japanese authorities overnight. The cyclically sensitive SEK ran into to a double-whammy yesterday after weak PMI services, where China fell to 51.8 and Sweden to 49.0. Saudi Arabia’s announcement yesterday of extending its 1mb/d unilateral output cut through the rest of the year sent oil prices to a new year-high briefly above USD90/bbl.
Credit: Softish equity markets set the tone on Tuesday, but credit market were somewhat more directionless. Itrax Main widened 0.3bp to close at 69.7bn, while Itrax Xover widened 0.9bp to close at 392.2bp. Primary market supply continued to be ample, which (among others) was exemplified by a USD2.35bn multi-tranche offering by cigarette-giant Phillip Morris.
