Good Morning: The Long & the Short of it and The Bigger Picture - 12 June 2019 - ADM ISI
08:39 (20 minutes ago)
- Digesting Japan Orders, China CPI & PPI, as Trump comments on US/China
trade talks weigh; looking ahead to US and India CPI, raft of ECB
speakers, Turkey rate decision; plenty of govt bond sales in Euro area,
UK and USA
- China CPI Food price pressures the driver, non-food still very subdued;
renewed PPI dip paced by energy, few signs of any boost from infrastructure
- US/China trade: Trump red line on structural reforms very much a
- US CPI: energy set to weigh on headline, core to see boost from medical
care, support from OER, perhaps a correction to sharp drops in apparel
and air fares in recent months
There's certainly no mistaking that today is 'inflation day' with China, US and India all publishing CPI, and the only other data items of note being the better than expected overnight Japan Machinery Orders, which again defied expectations of a drop in CapEx due to the global manufacturing malaise with a 5.2% m/m rise against forecasts of -0.8% and a 3.8% m/m rise in March. In event terms, there a good number of ECB speakers after a bevy of RBA speakers, with Turkey's TCMB expected to keep its key rate unchanged at 24.0%, with inflation still needing to fall a lot further and an adverse political backdrop to improve in leaps and bounce to open a window to a significant easing cycle. It will also be a busier day for govt bond auctions sees sales in Germany (10-yr), UK (29-yr I-L), Portugal (10 & 15-yr) and USA (10-yr), with Italy syndicating a new 20-yr BTP. As has oft been observed, markets have always been blighted by positivism, i.e. the inherent bias to construct a 'good news' story out of what are often clearly negative developments, though the current meme around Fed rate expectations looks to be a particularly virulent variety of 'wishful seeing' and 'wilful blindness'. Indeed perhaps the key aspect is simply this, US 2-yr yields are down just over 100 bps since mid-November, and 10-yr yields are 106 bps lower, so even if the Fed were to cut rates next week, this is more than already discounted, even if they were to signal an easing bias. Meanwhile on the US/China Trade war front, Trump's comments yesterday underline that the prospect for any sort of deal in the near term look to be rather dim, as the very idea that China would allow a foreign country to dictate reforms to domestic structural legislation is very antithesis of the very raison d'etre of the one party state, and takes the trade war into a not dissimilar arena to the Cold War, namely a case of two starkly different doctrines being pitted against each other, even if for the time being neither are deploying Armageddon as their ultimate point of defence, as was the case during the Cold War. For more on this please see my article in the latest edition of the Ghost in the Machine - https://content.yudu.com/web/400wi/0A400wk/MayJune2019/html/index.html?page=8&origin=reader
** China - May CPI / PPI **
- Both CPI and PPI were exactly in line with forecasts at 2.7% y/y and 0.6% y/y. As has been well flagged, food prices are pressuring CPI higher, with food CPI jumping to 7.7% y/y (a 9-yr high) from 6.1% on the back of pork and fruit price surges, while non-food prices edging down to 1.6% y/y from 1.7%, and thus underlining that outside of food, sluggish demand continues to restrain prices. As for PPI, the setback to 0.6% y/y after the recent rebound was paced by oil, LNG and non-ferrous metals prices, and as yet shows little sign of any pressure from the authorities moves to ramp up infrastructure spending.
** U.S.A. - May CPI **
- A modest dip in energy and food prices are expected to drag modestly on headline CPI and PPI, with the former seen up 0.1% m/m to edge the y/y rate down to 1.9%, while core CPI is seen up by the very usual 0.2% for an unchanged 2.1%, in other words around target. This would represent something of a shift from recent months, in which headline inflation posted its biggest gains in the past two years (0.4% and 0.3% m/m), while core CPI undershot forecasts at 0.1% m/m. Food prices are also likely to exercise a modest drag on headline, while the sharp falls in clothing and airline fares in recent months suggest scope for some mean reversion; medical care (with the equivalent PPI sub-index jumping to 3.7% annualized rate in the past two months, vs. just 0.6% in Q1) from and OER (housing) should continue to sustain the rise in core CPI, even if OER is rising at a slightly slower pace than seen in most of the past two years.
RESEND Good Morning: The Long & the Short of it and The Bigger Picture - 13 June 2019 - ADM ISI
08:31 (21 minutes ago)
- Tanker fires and run of news from China and Hong Kong likely to relegate
run of scheduled events to a sideshow; digesting UK RICS, Oz labour data,
Japan BSI survey, awaiting SNB rate decision, Italy Q1 Unemployment,
US jobless claims and Import Prices; Euro group meeting and Italy & US
- SNB: CHF assessment in focus
- Charts: WTI, Hong Kong 1 mth, 3mth and 1 yr interest rates
Today's run of data is unlikely to have anything more than a very passing impact, with surprise rebound in the UK RICS House Price Balance and a drop in the Japan Q2 BSI (business spending intentions) survey to digest along with relatively strong Australian labour data, while ahead lies Italian Unemployment and US weekly jobless claims and Import Prices. The events schedule has rather 'more meat on the bone' with an expected no change rate decision from Switzerland's SNB, accompanying a Euro group meeting that will consider an excessive deficit procedure for Italy, the first round of the UK Conservative party leadership vote, and OPEC's monthly Oil Market Report. The s SNB is unsurprisingly seen holding policy, and indicating that it will fight any unwanted CHF strength by all means necessary, while doubtless echoing other central banks in highlighting downside risks to the economic outlook. The critical element will as ever be whether the SNB sticks to the prior assessment that the CHF is 'highly valued' or whether it opts to revert to 'significantly overvalued'. But as ever, US/China trade and a wary market being cast in the direction of next week's FOMC meeting (given that so much has been discounted in terms of the Fed's rate trajectory), and increasingly FX, rates and equity markets look to be in thrall to the two key risk events for June a) next week's FOMC meeting, and b) the G20 meeting in Buenos Aires on 28/29 June, and the meeting between Trump and Xi, with both sides seemingly dialling back quite hard in expectations terms.
The overnight news from China, Hong Kong and the Persian Gulf looks as though it will more than sweep aside anything on the schedule in any case. As we write there are numerous reports of two tankers being on fire in the Sea of Oman - the two vessels involved in the incident are the Front Altair (Marshall Islands flag) and Kokuka Courageous (Panama Flag), we would strongly suggest following @Samir_Madani and @TankerTrackers on Twitter for updates on the situation. As for the China news, various articles in the Chinese media continues to point to China digging in for a long trade war, see also https://www.bloomberg.com/news/articles/2019-06-12/tour-of-china-shows-a-nation-girding-for-protracted-trade-war . Meanwhile the HK protests against the extradition bill and the authorities response has sent HK rates sharply higher, which bodes poorly for local property stocks, given that most HK mortgages are linked wither to 1- or 3-mth HIBOR rates.
========================== ** THE DAY AHEAD ** ===========================