Noted economist Roubini casts a shadow over the recent optimism


MAJOR HEADLINES – PREVIOUS SESSION

  • US Q2 GDP estimate out at -1.0% vs. -1.5% expected. Q1 revised dramatically lower to -6.4% from -5.5%

  • US Q2 Employment Cost Index out at +0.4% vs. +0.3% expected and +0.3% prior

  • US Jul. Chicago PMI out at 43.4 vs. 43.0 expected and 39.9 prior

  • US NAPM-Milwaukee out at 45.0 vs. 52.0 expected and 50.0 prior

  • China Jul. Manufacturing PMI out at 53.3 vs. 53.2 prior

  • HK Jul. PMI out at 49.9 vs. 47.1 prior

  • AU Jul. AIG Performance of Manufacturing Index out at 44.5 vs. 38.4 prior

  • AU Jul. ANZ Job Advertisements out at -1.7% m/m vs. -6.7% prior

  • China CLSA Jul. manufacturing PMI out at 52.8 vs. 51.8 prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE Retail Sales (0600)

  • Swiss PMI (0730)

  • GE PMI Manufacturing (0800)

  • EU PMI Manufacturing (0800)

  • UK PMI manufacturing (0830)

  • HK Retail Sales (0830)

  • US ISM Manufacturing (1400)

  • US Construction Spending (1400)

Market Comments:

While the headline US GDP numbers for Q2 were above forecast, financial markets were not in over-ebullient mood afterward, with US equities barely making headway on the day. The sharp downward revision in Q1 numbers (to -6.4% from -5.5%) was probably a contributory factor for the additional caution. The USD selling that was spotted (normally associated with a “risk on” mood) was more likely a function of month-end fixing demand and an IMF report on the state of the US economy suggested that the greenback was “moderately overvalued”.

At the start of the Asian session we saw PMI data for Hong Kong and China for July. Both showed an improvement from June (Hong Kong’s fell just short of expansionary territory at 49.9 while China’s edged up one tick to 53.3, the fifth straight month of gains), and the most encouragement could be garnered from the continuing upward trend in new export orders.

Early activity in Asia centred around pushing the USD lower to its lowest in 7-1/2 months on the index, and thin liquidity helping a push for stops trigger a move above 1.43 in EURUSD, 1.6740 in GBPUSD and 0.8350 in AUDUSD. However, once stops were done, currencies soon reverted back to opening levels until mid-morning when we had market-moving comments from noted economist Nouriel Roubini.

Speaking from Australia, he commented that, while there has been a recovery in the major economies since March, the global economy was still in recession and was likely to stay that way until the end of the year, with deflation still the biggest threat. In his opinion the rebound in markets had come too far, too quickly. In particular he thought the surge in oil prices was “not justified” and down to speculation. On the US economy, he opined that the housing recession had yet to bottom, the financial system is still heavily damaged and unemployment is more likely to head to 11%. Elsewhere, he was more upbeat about Australia than others and expects commodity prices to potentially increase further in 2010 and singled out the AUD as a currency likely to strengthen further.

The reaction in currency markets was to lift the dollar further and EUR slid down to the lower-end of the perceived day’s trading range. AUD remained quite well supported with the RBA meeting tomorrow, while GBPUSD found buyers towards 1.67. Equity markets took a quick hit but returned back to positive territory soon after.

The improvement in the Hong Kong and China PMIs may set the stage for the slew of PMI numbers coming from a number of economies this week. Polls show that most are expected to show a similar improvement, with the US ISM releases looking the most positive. Latest polls suggest a 46.5 reading from 44.8 last but it is worth noting that, while we have seen steady signs of improvement since December’s low of 39.20, we still have to break into the expansive territory above 50.0.

It being the start of a new month we will be inundated with economic data this week. Notwithstanding the PMI releases, we have three central bank meetings (RBA, BOE and ECB) with each one holding its own corner for interest and/or surprises. The first of these is the RBA early tomorrow morning and, while no change in rates is expected, the focus will be on the accompanying statement. Gov. Stevens was especially bullish about the Australian situation last week and it would likely be no surprise to see any reference to easing bias removed from the statement. However, he may seek to delay expectations of an early rate hikes (futures currently pricing in a rate hike by year-end and 200bp of increases throughout 2010. The major focus on data will be on US non-farm payroll and unemployment numbers on Friday and if we haven’t broken out of recent ranges by then this would likely be the last chance for the near-term. For today, we have German retail sales, Swiss, German, EU and UK PMIs and the US manufacturing ISM and construction spending.