Comments from China, and analysis of the latest China data, grab the attention


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Jul. Housing Starts out at 132.1k vs. 145.0k expected and revised 137.8k prior

  • US Q2 Non-farm Productivity out at 6.4% vs. 5.5% expected and revised 0.3% prior

  • US Q2 Unit Labour Costs out at -5.8% vs. -2.5% expected and -2.7% prior

  • US Jun. Wholesale Inventories -1.7% vs. -0.9% expected and revised -1.2% prior

  • US Aug. IBD/TIPP Economic Optimism out at 50.3 vs. 50.0 expected and 46.3 prior

  • US ABC weekly Consumer Confidence out at -47 vs. -48 expected and -49 prior

  • JP Jul. Domestic CGPI out at +0.4% m/m, -8.5% y/y vs. flat/-8.7% expected and -0.4%/-6.7% prior

  • AU Aug. Westpac Consumer Confidence out at 3.7% vs. 9.3% prior

  • AU Q2 Wage Cost Index out at 0.8% q/q, 3.8% y/y, both as expected, vs. 0.8%/4.2% prior

  • JP Jun. Industrial Production out at 2.3% vs 2.4% prior

  • JP Jun. Capacity Utilization out at 2.3% vs 8.0% prior

  • KR July. South Korea Unemployment Rate 3.8% vs 4.0% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Norway Retail Sales (0800)

  • UK Claimant Count Change (0830)

  • UK Jobless Claims Change (0830)

  • UK Avg. Earnings (0830)

  • UK Manufacturing Unit Wage Costs (0830)

  • EU Euro-zone Industrial Production (0900)

  • UK BOE Quarterly Inflation Report (0930)

  • US MBA Mortgage Applications (1100)

  • Norway Norges Bank Rate Decision (1200)

  • US Trade Balance (1230)

  • CA Int’l Merchandise Trade (1230)

  • CA New Housing Price Index (1230)

  • US FOMC Announcement (1615)

Market Comments:

With all eyes on the FOMC announcement later today, markets continue to trade with a slight risk aversion undertone. Wall St headed lower and the S&P capitulated under the 1,000 mark for the first time since the beginning of the month. On the data front, US Q2 non-farm production came in better than f/c (+6.4% vs. +5.5%) and labour costs were below expectations (-5.8% vs. -2.5%) but hidden behind the positive headlines is the theme of companies enhancing profitability by slashing costs, at all costs.

On a more positive note, the 3-year US Treasury auction was well received with a slightly below expectation yield of 1.78% (versus 1.791% expected) with a bid/cover ratio of 2.89 and indirect bidding accounting for 62.5% of the allocation. However, this is viewed as the “easy part of the curve” given penchant for Sovereign names to concentrate at the shorter-end of the curve recently. A better litmus test of demand will be seen at today’s 10-year auction with $23 bln on offer.

The global press has been awash with analysis of the slew of China data yesterday. The fall in loans growth in July appears to have grabbed the most headlines with talk shifting to a so-called tightening. Noted commentator Ambrose Evans-Pritchard featured in the Telegraph highlighting that Beijing was walking a tightrope by trying to offset the fall in exports with an investment blitz in infrastructure and flooding financial markets with liquidity.
However, the difficulty in implementing this project was highlighted by a Reuters story mid-way through the Asian morning that reported China’s Commerce Ministry had said that domestic demand would not be able to offset the drop in China’s exports. The ministry described the overcapacity in Chinese industry as “pronounced’, adding that some sectors and companies faced operational difficulties. The statement added to the general risk aversion mood that was handed back to Asia this morning, with JPY crosses pushing lower and Shanghai stock markets down over 2%.

Looking ahead to the rest of the day, 2 central bank events will grab the attention. First off the Bank of England will release its quarterly inflation report amid early-week speculation that the BOE would lower its growth forecast for the UK economy, still put on an extremely cautious face regarding the current situation and provide backup for its surprise expansion of the QE measures at the last MPC meeting.

Late in the session the FOMC announces its latest stance on interest rates. While no change in rates is expected, most market players will be anxious to see how the Fed reacts to the latest series of more positive economic data. Interesting to note that US yields have eased back close to pre-non-farm payroll levels, despite the slew of auctions on tap this week, and this may indicate a more cautious attitude to the Fed statement. It looks more likely that the Fed will reiterate that rates will continue to stay at low levels for some time while better credit conditions in the market will likely reduce the need to tweak, or alter, its current asset buying program.