- Treasuries trim hopes of near-term Fed easing, supporting USD in turn.
- Beijing hints at further monetary stimulus ahead, lifting Asian equities.
- Main data releases today are UK retail sales, US housing data and Philly Fed.
The ease or no-ease trade has been revived overnight. Bets that the Fed will deliver further quantitative easing (QE3) in the near-term have faded, whereas comments from Beijing suggest that the People’s Bank of China (PBOC) may in contrast be ready to deliver more from the monetary side.
The mixed bag of US data out yesterday on the whole appears to have dented hopes of Fed delivering QE in the near-term. Inflation data and the Empire manufacturing survey were softer than expected but the NAHB housing market index rose unexpectedly and industrial production for July came in stronger than forecast.
Although slightly down on yesterday’s numbers, it is worth noting that the US index of economic surprises touched a 4M high earlier this week, albeit the index remains in negative territory. This underlines that while data have generally come out weaker than forecasts recently, the picture of the US economy has become less bleak of late. We still look for QE3 to be announced at the September FOMC meeting, see Yield Forecast Update: Slow growth and monetary easing to keep long rates low, 15 August.
Overnight China’s premier Wen has been out saying that downward pressure on the Chinese economy is “relatively large” and that easing inflation means monetary policy can be eased further. Separately, July data on foreign direct investment (FDI) fell to a 2Y low, underlining the challenges facing the Chinese economy at present. Wen’s comments have increased speculation that Beijing could soon cut banks’ reserve requirements and/or policy rates again. Indeed, as we argue in Global Scenarios: Stuck in the mud, 15 August, China has room for manoeuvre on both the monetary and fiscal side,which should help to lift growth in Q4.
In equity markets, US indices ended the day little changed whereas Asian trading has been more upbeat with stocks lifted by Wen’s hints of further stimuli for the Chinese economy. US bond yields were higher with not least the far end of the US treasury curve being sold off and yields rose close to 8bp in the 10Y segment.
FX markets have seen broad-based dollar strength on the likelihood of near-term Fed easing being priced out; notably USD/JPY reached a 1M high. Asian currencies have rallied on the prospects of China easing however. Oil prices surged Wednesday afternoon with Brent above USD116 per barrel this morning as data showed US inventories fell to a 4M low and supported by Israel stepping up its rhetoric against Iran.
Global Daily
Focus today: Core UK retail sales are expected to show an 0.2% decline in July after increasing 0.3% in June. The only euro-area release is details on the July CPI. In the US we will get a new round of US housing market data. We expect annualized housing starts to moderate to 747, 000 in July after last month’s decline in building permits and look for a very modest increase in building permits to 764,000 in July. However, the NAHB index released yesterday leaves some upside risks to our and consensus estimates of a stabilization in housing activity, as the NAHB suggests a further acceleration into August.
We expect the Philly Fed regional PMI to rebound to catch up with the ISM following two months of exceptionally weak readings. It is also worth keeping an eye on initial jobless claims. The seasonal distortions which made interpretations difficult over the summer should have faded by now and it will be interesting to see whether last week’s surprisingly good reading of only 361,000 new applicants is durable.
Fixed income markets: The bearish trend in both US treasuries and German Bunds continued yesterday and seems relatively well established. It might even have some further room to go as global macro data have stabilised and risk sentiment remains moderately positive. A test of the 140 level in the bund future therefore cannot be ruled out in the coming weeks. The crucial question is then whether the current 140-146 range will hold or if Bunds will move back down into the old 133-140 range.
With the ECB on easing bias, European leading indicators still in recession territory and remaining uncertainty about the Spanish aid request, 140 will probably be a major level of support for the bond market. For now, we expect the current range to hold. Today focus will be on the US Philly Fed. A failure in this index to improve from the recent weak reading would confirm yesterday’s weak Empire index and be supportive for the bond markets. In the fixed income market UK is printing GBP1.5bn 2034 bonds.
FX markets:
Yesterday we sent out our new FX Trends: The great policy response to hurt the dollar in which we argue that although global growth is set to remain weak, the recent stabilisation in macro surprises suggests that the period of downward revisions is coming to an end. However, whether this will be enough to secure a stable market and thus a euro rebound will depend on policymakers. In our main scenario, Spain asks for help and the ECB restarts its bond purchase programme, China delivers further stimuli, and Fed delivers QE3.
This should reduce the EUR risk premium, lead to further unwinding of long dollar positions and support the cyclical commodity currencies. While the US fiscal cliff will be a key obstacle for the market towards year-end, unless we see a recovery in global growth, the expected euro rebound should prove temporary, and we forecast a lower EUR/USD in 2013. We expect the Scandies to continue attracting foreign inflow and despite the latest rally we see more value in both NOK and SEK.
Scandi Daily
No major data releases in Scandinavia today.
Disclosure
This research report has been prepared by Danske Research, a division of Danske Bank A/S ("Danske Bank").
Analyst certification
Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report.
Regulation
Danske Bank is authorized and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request.
The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of the Danish Securities Dealers Association.
Conflicts of interest
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the research policies of Danske Bank. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to the Research Management and the Compliance Department. Danske Bank Research Departments are organised independently from and do not report to other business areas within Danske Bank.
Research analysts are remunerated in part based on the over-all profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions.
Financial models and/or methodology used in this research report
Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request.
Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text.
Expected updates
Danske Daily is updated on a daily basis.
First date of publication
Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price from the day before publication.
General disclaimer
This research has been prepared by Danske Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ("Relevant Financial Instruments").
The research report has been prepared independently and solely on the basis of publicly available information which Danske Bank considers to be reliable. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness, and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report.
The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgment as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in the research report.
This research report is not intended for retail customers in the United Kingdom or the United States.
This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior written consent.
Disclaimer related to distribution in the United States
This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to "U.S. institutional investors" as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to “U.S. institutional investors.”
Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA, but satisfy the applicable requirements of a non-U.S. jurisdiction.
Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in nonU.S. financial instruments may entail certain risks. Financial instruments of non-U.S.issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.