Surprise-Packed Tuesday: China Cut Rates, Japan's Q2 GDP Rises Twice as Fast as Expected, and UK Wages Accelerate
<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZ4SgkGnt1szjkoERGb6bWXSeG4y8YbBTHLOXP3Tx3mOz7tTnnYo5TWbD4yud_z-zF1rNbuuURVxwRIXaRGs3sTebiN8WNYg1wEm40VS17s35oFl7zMKsjn–D-nz2ZqItOsS0aa0kSJxrSSSgwlhngSvA92LcWkEj6Wj27golS-oXQtUHdfETAafArSA4/s402/Richie%20rich.jpg"><img alt="" border="0" data-original-height="402" data-original-width="388" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZ4SgkGnt1szjkoERGb6bWXSeG4y8YbBTHLOXP3Tx3mOz7tTnnYo5TWbD4yud_z-zF1rNbuuURVxwRIXaRGs3sTebiN8WNYg1wEm40VS17s35oFl7zMKsjn–D-nz2ZqItOsS0aa0kSJxrSSSgwlhngSvA92LcWkEj6Wj27golS-oXQtUHdfETAafArSA4/s400/Richie%20rich.jpg" /></a></div><p><b><span>Overview: </span></b><span>Today's highlights include a surprise rate
cut from China after another series of disappointing data and much stronger
than expected Japanese Q2 GDP (6% annualized pace). The UK reported an
unexpected sharp jump in average weekly earnings, which were sufficient to get
renew speculation of a 50 bp hike by the Bank of England next month. The US
dollar is mixed. The Swedish krona and dollar-bloc currencies are struggling,
while the Swiss franc and sterling are leading the other European currencies
higher. The yen is slightly lower and is threatening to extend its losing
streak for the seventh consecutive session. Gold is holding above yesterday's
low, which was slightly below $1903, but the upside has been capped near $1908.
<o:p></o:p></span></p><p><span>Stocks and bonds are selling
off. China's 10-year bond yield slipped nearly five basis points but that is
the exception. European benchmark yields are 5-10 bp higher, with peripheral
premiums widening. The 10-year US Treasury yield is about three basis points
higher, pushing above 4.20% for the first time since last November. Some of the
largest bourses in the Asia Pacific rose but not China, Hong Kong, or South
Korea. Europe's Stoxx 600 is off around 0.75% after rising 0.15% yesterday. US
index futures are also posting modest declines. September WTI is extending
yesterday's pullback after rallying for the past seven weeks. <o:p></o:p></span></p><p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p><p><b><span>Japan, the world's
third-largest economy, reported that Q2 GDP rose by 1.5%, nearly twice the pace
expected, a 6% annualized pace. </span></b><span>However, the details show a weak domestic economy. Private
consumption and business spending slowed. Consumption actually contracted
(-0.5%). Business spending was flat after a revised 1.8% increase in Q1
(initially 1.4%). Inventory destocking took 0.2 percentage points off GDP after
adding 0.4 percentage points in Q1. The key were net exports, which contributed
1.8 percentage points to GDP. It had shaved Q1 GDP by 0.3 percentage. It is the
most since Q3 20, which itself was the biggest contribution since Q2 14. Goods
exports were led by auto shipments to the US and Europe. Tourism was also
strong (export of hospitality services). Border controls were lifted in April. Tourism
may be boosted after China lifted its ban on group travel last week. Lastly,
Japan's June industrial production was revised to 2.4% from 2.0%,
month-over-month. Separately, the US 10-year yield has risen to almost 360 bp
on top of Japanese yields. The high for the year was set 363 bp in early July. Last
year's high was shortly after the dollar and 10-year US yields peaked. On
October 23, 2022, the US premium peaked near 400 bp, which was the most since
2002. <o:p></o:p></span></p><p><b><span>China's financial
difficulties, stemming from the property market and wealth management, will not
be helped by the disappointing economic data which sparked an immediate
reaction by the PBOC. </span></b><span>It
surprised by cutting the benchmark one-year medium term lending rate 15 bp to
2.50% and boosting the lending volumes (CNY401 bln from CNY103 bln). Adding to
the recent news of falling exports, and deflation, today China reported another
series of disappointing data. The year-over-year increases should be flattered
by the end of the zero-Covid policy but instead, industrial production and
retail sales slumped. Fixed asset investment (reported on year-to-date,
year-over-year basis) was weaker than expected and property investment fell at
an accelerated pace. Residential property sales slowed, and the surveyed
jobless rate rose. China has stopped reporting some data and details and
announced today it would stop reporting youth (16–24-year-olds) unemployment. It
had hit 21.3% in June. Separately, reports indicated that officials are also
considering a cut in the stamp tax on stock transactions. China's 10-year bond
yield fell around six basis points before stabilizing. China also announced an
extra bill sale in Hong Kong, which may helped support the
currency, <o:p></o:p></span></p><p><b><span>The dollar is rising for the
seven consecutive session. </span></b><span>It
is the longest streak since last October, which ended on October 21 when the
BOJ intervened in the foreign exchange market, and it marked the high of the
10-year Treasury (4.33%). Meanwhile, the 10-year JGB yield is being pulled
higher and BOJ could show its hand again too. It is above 0.62%, within a
couple of basis points of this month's peak. So far, the benchmark three-month
implied yen volatility is at the lower end of this year's range (~8.8%-14.5%). The
low last week around 9.3%, was the lowest in more than a month, but is pushing above
9.8% today. <b>There are two big strikes against the Australian dollar. </b>First,
disappointing economic activity in China is a knock on the Aussie. Second, the
broad strength of the US dollar also contributes to the Aussie's weakness. Note
that the US offers more than 100 bp than Australia on two-year borrowings.
Except for a period from last August through last April, it has not offered
more. After setting a new low for the year in early North American trading
yesterday (~$0.6455), the Australian dollar rebounded to challenge the $0.6520
area today before being knocked back to almost $0.6460. <b>China's
economic malaise is currency-negative, but the greenback's broad strength is
also a weight on the yuan. </b>The dollar gapped higher for the third
consecutive session and reached nearly CNY7.29, its highest level since last
November. It peaked last year around CNY7.3275. The dollar rose above CNH7.32
against the offshore yuan. Last year's high was about CNH7.3750. The PBOC set
the dollar's reference rate at CNY7.1668. The average estimate in Bloomberg's
survey was for CNY7.2354. The dollar is allowed to move 2% from the reference
rate. This means that cap was about CNY7.3120 today. The market typically
respects the band in the offshore market. Today is did not. <o:p></o:p></span></p><p><b><span>Europe</span></b><span><o:p></o:p></span></p><p><b><span>Germany's ZEW is one of the
few high-frequency data points this week. </span></b><span>It ought not to be surprising that sentiment is poor and
expectations are weak. The energy shock is still disruptive to Germany industry
broadly, and its world-class auto sector has fallen behind Chinese producers
and Tesla in the EV space. It has managed, with the help of government
subsidies, to attract TSMC and Intel chip fabrication investments. The
assessment of the current situation deteriorated and by more than expected. It
fell to -71.3 from -59.5. The median forecast was for -63.0. The expectations
component ticked up to a still weak -12.3 from -14.7. <o:p></o:p></span></p><p><b><span>The number of people on UK
payrolls unexpectedly rose by 97k after falling by 9k in June. </span></b><span>Jobless claims rose by 29k in July. They
rose by nearly 16k in June (initially 25.7k). The unemployment, as measured by
the ILO surprisingly rose to 4.2% from 4.0%, where it had been expected to
remain. The most important part of the report for policy makers and investors
was the rise in average weekly earnings. They accelerated with and without
bonuses. Including bonuses, average weekly earnings surged to 8.2% from a
revised 7.2% (6.9% initially). Excluding bonuses, average weekly earnings rose
7.8% from a revised 7.5% (7.3% originally) on the three-months, year-over-year
basis. Officials will not see this as consistent with the 2% inflation target. The
swaps market has been confident of a 25 bp hike but with today's report, the
odds of a 50 bp move has been increased to a little better than 20%. Another
quarter point hike is expected in Q4. Tomorrow, the UK reports CPI (and PPI). Two
things look likely. First, that the headline will fall and second, given the
base effect, the year-over-year rate can fall sharply (6.7% vs. 7.9% in June).
Note that inflation will take another large leg lower when the October data are
reported. Headline UK CPI surged by 2% in October 2022. This reflected the
energy shock and rising food prices. The Bank of England forecast CPI to finish
the year at 5.0%, down from 9.1% at the end of last year. It forecasts a 2.5%
rate 2024 and 1.5% in 2025. <o:p></o:p></span></p><p><b><span>The euro was sold below
$1.09 yesterday for the first time since July 7. </span></b><span>It reached $1.0875 before recovering to
around $1.0935. It has not made much headway to the upside today (reached a
high near $1.0945 in late European morning turnover) and it has held above
$1.09. The $1.0880 area corresponds with the (61.8%) retracement of the euro's
rally from the June low (~$1.0635). There are 1.4 bln euros of options expiring
tomorrow at $1.0850. The euro's four-week losing streak matches the longest
since February-March 2022. Initial resistance is seen near $1.0950 and then
$1.0970. <b>Sterling approached key support around $1.2600 yesterday (low
~$1.2615) and snapped back to a little above $1.2700. </b>Its recovery has
reached almost $1.2725 in the European morning today. A move above $1.2740
would target the $1.2800 area again. Support now is seen near $1.2680. <o:p></o:p></span></p><p><b><span>America</span></b><span><o:p></o:p></span></p><p><b><span>The US reports July retail
sales. </span></b><span>According to the
Bureau of Labor Statistics, retail sales captured about 37% of personal
consumption expenditures last year. Retail sales rose by an average of 0.4% in
H1 23, and 1.1% in the first half of 2022. Auto sales were essentially flat,
but the average price of retail gasoline rose by nearly 7%. However,
methodologically, the rise in gasoline and food is likely to be picked up in
the August report. Large US retailers report earnings and provide guidance over
the next week or so, and this may help frame expectations. Separately, July
import price likely rose for the first time since April and for only the second
time this year. On the other hand, exports prices are expected to have snapped
a four-month decline. The Empire State's August manufacturing survey, which is
among first reports for a new month, may dip again below zero after holding
above it in June and July. The Atlanta Fed's GDP tracker, which saw the economy
growing 4.1% this quarter will be updated later today. And later, the June TIC
data is due. Through the first five months of the year, portfolio capital
inflows were about $206 bln. This is the lowest for a five-month period since
November 2020. The IMF estimates that the current account deficit will be about
$1.3 trillion this year ($1.1 trillion in 2022). <o:p></o:p></span></p><p><b><span>Canada reports July CPI. The
year-over-year rate had slumped to 2.8% in June, the slowest past since March
2021. </span></b><span>However, given the
base affect, the 0.3% monthly rise will boost the year-over-year measure back
to 3.0%. More important for the Bank of Canada, the underlying core rates may
continue to moderate. The central bank holds a policy making meeting on
September 6. The swaps market is pricing in little more than a 20% chance of a
hike, which is about twice the odds of a Fed hike. <o:p></o:p></span></p><p>
</p><p><b><span>The US dollar peaked near
CAD1.3480 early in the North American session yesterday. </span></b><span>It finished close to CAD1.3460, but the
risk-off mood has lifted the greenback to CAD1.3395, just in front of last
week's high (~CAD1.3500). Although we had thought the CAD1.3500 spike had
exhausted the US dollar buying, the risk is that new highs are seen. The next
target above CAD1.3500 may be closer to CAD1.3565-70. <b>For the third
consecutive session, the dollar dipped below MXN17.00 intraday, but failed to
close above it. </b>Nearby resistance is seen in the MXN17.15-20 area. The peso
seems to be being tarred with the same brush that has led back-to-back losses
of both the JP Morgan and MSCI emerging market currencies indices in the past
two week. <o:p></o:p></span></p><p><br /></p><p><a href="http://www.marctomarket.com/p/disclaimer_28.html" target="_blank"><span>Disclaimer</span></a></p>
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