UK inflation pulls back in the wake of sterling's recent rebound

Notes/Observations

- UK Jun CPI comes in below expectations (YoY: 2.6% v 2.9%e) but still above BOE target for 5th straight month

- Reform momentum of the Trump administration has received another blow as 4 GOP Senators have rejected the recent proposal of the Obamacare Repeal Act

- Broad based USD weakness taken hold in wake of US health care bill problems; means a delay to dealing with debt ceiling, Art of the Deal' has not worked so far in US politics (Six months in office and with no major legislation signed into law)

Overnight

Asia:

- New Zealand Q2 CPI Q/Q: 0.0% v 0.2%e; Y/Y: 1.7% v 1.9%e

- Reserve Bank of Australia (RBA) July Policy Meeting Minutes: current economic conditions in Australia, and the outlook for growth and inflation, meant that developments in the labor and housing markets continued to warrant careful monitoring. Steady policy stance consistent with growth/inflation targets

- China PBOC affirms monetary policy to be prudent and neutral; to strengthen macro-prudential management and counter cycle adjustments; Vows to prevent systemic financial risks

- Bank of Japan (BOJ) sustainability of exchange-traded funds (ETFs) said to raise concerns among some officials but saw no need for immediate action

Americas:

- Two Republican senators join opposition to revised healthcare bill and delivering a serious blow to the legislation

- McCain's surgery may be more serious than thought, sparking fears among Republicans over fate of Trumpcare

Energy:

- Ecuador Oil Min Perez: Will be unable to honor its OPEC pledge to cut output by 26k b/d through March; planning a gradual production increase

Economic Data

- (ES) Bank of Spain: May non-performing loans Ratio at 8.7% v 8.9% m/m

- (UK) Jun CPI M/M: 0.0% v 0.2%e; Y/Y: 2.6% v 2.9%e; CPI Core Y/Y: 2.4% v 2.6%e; CPIH Y/Y: 2.6% v 2.7%e

- (UK) Jun RPI M/M: 0.2% v 0.4%e; Y/Y: 3.5% v 3.6%e; RPI Ex Mortgage Interest Payments (RPIX) Y/Y: 3.8% v 3.8%e prior, Retail Price Index: 272.3 v 272.7e

- (UK) Jun PPI Input M/M: -0.4% v -0.9%e; Y/Y: 9.9% v 9.4%e

- (UK) Jun PPI Output M/M: 0.0% v 0.1%e; Y/Y: 3.3% v 3.4%e

- (UK) Jun PPI Output Core M/M: 0.2% v 0.1%; Y/Y: 2.9% v 2.8%e

- (UK) May ONS House Price Index Y/Y: 4.7% v 3.0%e

- (HK) Hong Kong Jun Unemployment Rate: 3.1% v 3.2%e

- (DE) July Zew Current Situation Survey: 86.4 v 88.0e; Expectation Survey: 17.5 v 18.0e

- (EU) Euro Zone July Zew Expectations Survey: 35.6 v 37.7 prior

**Fixed Income Issuance:

- (EU) EFSF opened book to sell EUR-denominated 2027 and 2056 bonds

- (SE) Sweden opened its book to sell $2.75B in 2-year notes; guidance seen -6bps to mid-swaps

- (ES) Spain Debt Agency (Tesoro) sold total €2.985 vs. €2.5-3.5B indicated rangein 3-month and 9-month Bills

- (ID) Indonesia sold total IDR7.12T vs. IDR target in 2-year, 4-year, 7-year and 15-year Project-based Sukuk (PBS)

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx600 -0.3% at 386, FTSE +0.1% at 7414, DAX -0.4% at 12533, CAC-40 -0.1% at 5222, IBEX-35 +0.2% at 10670, FTSE MIB +0.1% at 21503, SMI +0.4% at 9075, S&P 500 Futures +0.1%]

Market Focal Points/Key Themes: European Indices have rebounded off earlier lows after a flurry of earnings notably from Ericsson which reported results which fell short of estimates. Lufthansa, Puma, Software Ag reported preliminary results, whilst Novartis beat on both the top and bottom line helping the Swiss SMI outperform. Earnings will continue to be the dominant them in the US morning with Goldman Sachs, JNJ and Bank of America all due to report.

Equities

- Consumer discretionary [Lufthansa [LHA.DE] -2.0% (Prelim results), Puma [PUM.DE] +1.2% (prelim results), Royal Mail [EMG.UK] +2.9% (Q1 update), Zalando [ZALG.DE] -7% (prelim Q2)]

- Materials: [Rio tinto [RIO.UK] -1.2% (Cuts outlook)]

- Financials: [ IG Group [IGG.UK] +9.0% (Trading update), Gecina [GFC.FR] -1.2% (rights issue)]

- Technology: [Software Ag [SOW.DE] flat (prelim Q2)]

- Telecom: [Ericsson [ERICB.SE] -10% (Earnings, cost cuts)]

- Healthcare: [Novartis [NOVN.CH] +2.2% (Earnings)]

Speakers

- Sweden Central Bank (Riksbank) July Minutes: Several members stress that important that inflation was sustained close to 2%. International developments had improved (in-line with expectations). Government bond purchases to continue during H2

- Gov Ingves: Important that future rate hikes were not pre-empted. Inflation just touching 2% short-term was not stable enough

- Member Skingsley: Still signs that inflation to remain low

- Member AF Jochnick: Likelihood of further cuts has decreased

- German ZEW Economists noted that the outlook for German economic growth continued to be positive

- ECB Bank Lending Survey: Net demand for business loans expected to increase in Q3. Banks expected easing of credit standards for business loans in Q3

- Japan Chief Cabinet Sec Suga: Strong economic growth more important than a temporary deficit cut; reiterates govt view that strive for primary balance

Currencies

- The European session began with broad based USD weakness in wake of US health care bill problems. Reform momentum of the Trump administration had received another blow as 4 GOP Senators have rejected the recent proposal of the Obamacare Repeal Act. EUR/USD approached the 1.1540 area before consolidating. Dealers noted that ECB chief Draghi faced the challenge of preparing markets for a gradual change in the monetary policy while, at the same time, preventing yields from continuing to surge excessively

- The GBP saw its early advance dissipate after UK Jun CPI came in below expectations (YoY: 2.6% v 2.9%e). UK inflation pulled back" in the wake of sterling's recent rebound. Although the data remained above BOE target for 5th straight month dealers took note that it might have seen its peak in May. GBP/USD holding around 1.3030 after testing 1.3120 earlier in the session.

Fixed Income

- Bund futures trade at 161.55 up 17 ticks and back towards the middle of July's trading range. Resistance lies near the 162.10 level followed by 162.75. A break of the 160.00 support level could see lows target 159.25 followed by 157.50.

- Gilt futures trade at 125.87 higher by 45 ticks following softer inflation data. Price finds key support at the 125.42 support level. An acceleration lower could test the 122.88 region. Resistance remains the noted 126.00 region, followed by 126.72.

- Tuesday's liquidity report showed Monday's excess liquidity fell to €1.656T a drop of €13B from €1.669T prior. Use of the marginal lending facility fell to €60M from €192M prior.

- Corporate issuance saw $18.55B come to market via 8 issuers headlined by Citigroup $5.75B 3-part senior unsecured offering and JP Morgan $4B 2-part senior unsecured note offering

Looking Ahead

- 05:30 (UK) Weekly John Lewis LFL sales data

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-month Bills

- 06:00 (TR) Turkey to sell 2022, 2027 bonds (3 tranches)

- 06:30 (EU) ESM to sell €1.5B in 6-Month Bills

- 06:45 (US) Daily Libor Fixing

- 07:45 (US) Weekly Goldman Economist Chain Store Sales

- 08:00 (HU) Hungary Central Bank (NBH) Interest Rate Decision: Expected to leave Base Rate unchanged at 0.90%

- 08:00 (PL) Poland Jun Employment M/M: 0.2%e v 0.0% prior; Y/Y: 4.3%e v 4.5% prior

- 08:00 (PL) Poland Jun Average Gross Wages M/M: +1.6%e v -2.2% prior; Y/Y: 5.0%e v 5.4% prior

- 08:15 (UK) Baltic Dry Bulk Index

- 08:30 (US) May Import Price Index M/M: -0.2%e v -0.3% prior; Y/Y: 1.3.%e v 2.1% prior; Import Price Index (ex-petroleum) M/M: 0.2%e v 0.0% prior

- 08:30 (US) May Export Price M/M: 0.1%e v -0.7% prior; Y/Y: No est v 1.4% prior

- 08:55 (US) Weekly Redbook Sales

- 09:00 (EU) Weekly ECB Forex Reserves:

- 09:00 (HU) Hungary Central Bank Gov Matolcsy post rate decision statement

- 09:30 (UK) BOE Gov Carney introduces new 10 pound note

- 10:00 (US) July NAHB Housing Market Index: 67e v 67 prior

- 11:30 (US) Treasury to sell 4-Week and 52-week Bills

- 16:00 (US) May Total Net Tic Flows: No est v $65.8B prior; Long-Term Tic Flows: No est v $1.8B prior

- 16:30 (US) Weekly API Oil Inventories