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Good Morning: The Long & the Short of it and The Bigger Picture - 16 September 2019 - ADM ISI


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Ostwald, Marc
09:04 (11 minutes ago)

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- Oil price surge after Saudi drone attack and soft China data in focus;
US NY Fed Manufacturing, busy run of ECB speakers and Johnson Juncker
Brexit meeting also due

- China: all round disappointment, though poor forecasting partly to blame,
e.g. Auto Sales continued heavy drag on Retail Sales; but embeds
expectations of more stimulus

- Week Ahead: Fed meeting in focus along with BoJ, SNB, BoE, Norges Bank &
Brazil's BCB; US data mostly manufacturing & housing, UK and dollar bloc
countries also see key data releases; quadruple witching at end of week;
politics and trade tensions still the 'elephant in the room'

- Charts: WTI and Brent oil futures; OPEC Oil Production; EUR/GBP & GBP/USD

- Audio preview:
https://www.mixcloud.com/MOstwaldADM/adm-isi-morning-call-16-september-2019/

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** EVENTS PREVIEW **
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The oil processing plant attacks in Saudi Arabia and the most dramatic spike in nearly 30 years and setback in oil prices overnight (see charts), and the overnight run of monthly China activity data will be the main talking points for today, with UK Rightmove House Prices and Indonesian trade data to be digested ahead of the US NY Fed Manufacturing survey (week ahead preview below). It will be interesting to see if anything other than platitudes and bravado emerge from the meeting between Johnson and Juncker on Brexit today. will also be a very busy day for ECB speakers, as is the case all week, and agricultural commodity markets will also be looking to the monthly EU MARS bulletin on weather & crop conditions. A couple of points are also worth noting in FX and rates space from Friday's CFTC COT report, firstly they underline that last week's squeeze in GBP was to a large extent driven by short-covering, given that the GBP net short had risen close to a 2-yr high. In USD rates, it is unusual to see net shorts in all US note & bond futures falling in any given week, but perhaps less surprising when one notes that primary dealers cash Treasury holdings had been at a 3-yr high; though also well worth noting the sharp swing to a net long in Fed Funds futures, and the fact that while well off the recent high, the net long in Eurodollars is still a whopping 2.261 Mln contracts, which underlines the obvious signs of a pain trade above all at the end of last week, as the strip took another battering.

** China - Aug FAI, Industrial Production, Retail Sales & Unemployment **
- The quick assessment on the China data run is all round disappointing, and below forecasts. In the detail Retail Sales missed at 7.5% y/y vs. a forecast of 7.9% and July's 7.6%, with Auto Sales sub-component once again THE culprit falling a very sharp -8.1% y/y vs. July -2.6% y/y, with other sectors actually holding around prior levels. Fixed Asset Investment (FAI) undershot at 5.5% y/y vs. a forecast of 5.7%, primarily due to slowing private sector FAI (4.9% vs. July 5.4%), while state owned held up at an unchanged 7.1%; however by sector the big drag continues to be the Railway, Shipping & others sub-index (-10.7% y/y vs. July -10.4%). But it will be the 17-yr low for Industrial Production at a paltry 4.4% vs. a forecast of 5.2% and July's 4.8% which will be the talking point, and that despite a rebound in auto output to 4.3% from July's -4.4%. Unsurprisingly Power & Heat decelerated to 5.1% from 6.5% and Agri Food Processing posted a flat y/y reading from 1.5%, while the rapidly slowing output in Telecoms was all too palpable at 4.7% y/y vs. prior month prints of 6.1% and 10.4%, and Mining also slowed to 3.7% from July's 6.6%; however the drop in Metal Products output to -0.9% y/y from +4.2% y/y was due to outages at Aluminium plants, and should recover. Given this array of weakness it is no surprise that more "stimulus" is being implemented and expected, though there will be scepticism that the Surveyed Unemployment Rate dipped back to 5.2% from July's 2019 high of 5.3%.


RECAP - The Week Ahead - Preview:

While the 'to and fro' on US/China trade negotiations clearly remains the 'elephant in the room' in terms of unscheduled news flow, G10 central banks will be the focal point in terms of the scheduled calendar, above all the Fed decision on Wednesday. There are also BoJ, BoE, SNB and Norges Bank policy meetings, with the latter still expected by a small majority of forecasters to deliver a rate hike, and there have also been plenty of rumblings about the SNB and BoJ easing policy, with a cut in official short-term rates (MLF) in China also heavily touted. There is a goodly volume of top level data, above all from China, US and UK, but this will inevitably be subordinated to central banks and volatile news flow on US/China trade, while the end of the week also brings expiry for US/European equity index/stock options and futures expiry (‘quadruple witching’). The weekend drone attacks on two Saudi refineries, one of which is Abqaiq the world's largest at 7.0 Mln bbls/day, i.e. it processes most of Saudi crude output, will force oil markets to shift their focus to supply side considerations (see this thread from the excellent Anas Alhajji for a discussion about what key questions need to be answered, above all to his opening point: "we have to be mindful of the gagging orders & Saudi laws governing reporting, videos, and pictures"). The key issues are how much production will actually be lost, with the new Saudi oil minister saying 5.5 mln bbls/day (i.e. half of Saudi output) may be halted, and just as importantly how long the disruption will last; as well as the risks of further attacks on, and disruptions to output. In respect of the latter, it is worth reminding ourselves that 2019 has seen the highest level of crude output disruption since the 1991 Gulf War. The UK Supreme Court will begin its hearing on the legality of the prorogation of the UK's parliament, following on from last week's Scottish Court of Sessions ruling that the prorogation was 'unlawful'. Tuesday sees the Israel holding another General Election, with PM Netanyahu vowing, if elected as polls suggest, to annex large parts of occupied West Bank Palestinian territories, regardless of this being in direct violation of UN Resolution 242 (see: https://en.wikipedia.org/wiki/United_Nations_Security_Council_Resolution_242 ). The ever closer ties, both economic and geo-strategic, between China and Russia are all too often ignored by financial markets, but this week's three day meeting between Xi and Putin nevertheless requires plenty of attention, and will doubtless feature a number of bilateral agreements. It will be a relatively light week for govt bond supply (Eurozone ca. EUR 17.0 Bln, US 12.0 Bln TIPS), which is perhaps a good thing for the recently beleaguered G7 bond markets, above all given the volume of central bank event risk. Adobe, Chewy, Darden Restaurants, FedEx and General Mills top a modest run of US Corporate earnings, while elsewhere Brickworks, Hurricane Energy, Kingfisher, Next and Rocket Internet may attract some attention.

- Statistically the US schedule is dominated by manufacturing and housing related items. Industrial Production and Manufacturing Output are both expected to rebound a modest 0.2% m/m, following falls of -0.2% and -0.4% m/m in July, with the strong rebound in Manufacturing Hours (0.5% m/m) doubtless predicating that anticipated bounce. The September NY and Philly Fed Manufacturing surveys are seen dropping to 4.0 from 4.8 and to 11.0 from 16.8 respectively, overall sending a less negative signal on the sector than the August Manufacturing ISM drop to 49.1 from 51.2. The rebound in US mortgage rates, after the summer's sharp falls, will probably not impact the NAHB Housing Market Index until October's survey (if sustained), with this month seen unchanged at a solid 66. Housing Starts are projected to rebound 5.0% m/m to a 1.25 Mln SAAR pace, after falling 4.4% in August, with the more forward looking Building Permits seen edging down 0.8% m/m to a very solid 1.307 Mln SAAR, while Existing Home Sales are forecast to see some payback at -0.9% m/m for July's stronger then forecast +2.5%. None of these items are likely to weigh very heavily in the FOMC's policy discussion, above all given the slightly higher than expected core CPI and PPI, and solid core Retail Sales last week. Q2 Current Account and TIC Portfolio Flows are also due.

China gets the week under way with its run of activity data, which is unlikely to offer any signals that the stimulus measures enacted earlier in the year are doing anything other than slowing the pace of deceleration in the economy. Industrial Production is forecast to rebound modestly to a still lowly 5.2% y/y from 4.8%, though the auto sector will likely remain a key drag amongst others, given the continued declines in Auto Sales (-6.9% y/y). Retail Sales are also projected to pick up slightly to 7.9% y/y from 7.6%, while Fixed Asset Investment is seen steady at 5.7% y/y with the balance between public and private sector trends the main focal point. Chinese authorities are clearly most concerned about rising Unemployment, which climbed back to its recent high at 5.3% in July, while Property Investment continues to show only modest signs of weakening (last 10.6% y/y), underlining that measures to curb it have been at best half hearted, doubtless a function of not wanting to add to already sizable pressures on the financial sector.

In the UK, all measures of CPI and RPI are expected to post a seasonally typical m/m rise (unwinding of sales discounts, and the usual summer rises for airfares, holidays and accommodation), but overall at a slower pace than 2018, with the consensus looking for CPI to dip to 1.9% y/y from 2.1%, core to 1.8% y/y from 1.9%, and RPI to 2.6% from 2.7%. Falling energy prices should account for much of the anticipated -0.3% m/m drop in PPI Input that would translate to a relatively sharp fall in the y/y rate to -0.1% from 1.3%, with headline and core PPI Output seen posting a 0.1% rise to leave y/y rates down 0.1 ppt at 1.7% and 1.9% respectively, overall very subdued. ONS House Price growth is unsurprisingly expected to continue to lose traction at 0.7% y/y from 0.9%. But it is Retail Sales which will perhaps garner most attention, having defied gloomy signals from most retail sector surveys in recent months. Very modest (and also holiday related) drops of 0.1% m/m for headline and -0.3% for ex-auto fuel are expected, which thanks to base effects would see y/y rates drop to 2.7% from 3.3%, and 2.3% from 2.9% respectively. This would suggest a flattish profile for consumer spending in Q2.

The Eurozone data schedule is very modest with EU27 New Car Registrations, along with German PPI and ZEW survey, the latter is likely to see the Current Situation fall to -15.0 from -13.5 amid a constant stream of poor news on the economy, though the equity market's sharp gains could offer a bigger boost to Expectations than the forecast -37.8 from August's -44.1. Asia see a number of key trade data reports, with a very sharp fall in Japanese Exports (-10.1% y/y vs. prior -1.6%) and Imports (-11.0% y/y vs. prior -1.2%) expected, and the picture elsewhere is not anticipated to be any better (notwithstanding some better signs for South Korea). Indonesian Exports are seen down 6.7% y/y, and Thai Exports are projected to reverse back into negative territory (-2.3% y/y vs. prior +4.3%). Meanwhile Singapore's Non-oil Domestic Exports are forecast to post a second consecutive m/m gain of 2.6%, but remain deep in negative territory in y/y terms at -10.9% vs. prior -11.2%. The 'dollar bloc' countries have a number of major data points to digest via way of Australia's labour data, where the Unemployment Rate is forecast to remain stubbornly above 5.0% at 5.2%, despite an expected further rise of 20K in Employment after July's +41.1K, while the participation rate is expected to edge back from a high of 66.1% in July to 66.0%. Across the Tasman Sea, New Zealand's Q2 GDP is likely to offer further backward looking support for the RBNZ's aggressive 50 bps rate cut, with the consensus seeing a rise 0.4% q/q vs. Q1 0.6%, which would push the y/y rate down to 2.0% from 2.5%. Last but not least, Canada looks to CPI, though all measures are forecast to be unchanged in y/y terms at or very close to the BoC's 2.0% target, with Manufacturing Sales seen down 0.2% m/m, while Retail Sales should get a modest boost (for a change) from Auto Sales with headline forecast at 0.6% m/m vs. June's flat m/m, and ex-Autos up a solid 0.4% m/m after rebounding 0.9% m/m in June. South Africa also has CPI and Retail Sales.

- Following on from the ECB's heavily contested easing (contested in the sense that the scale of dissent, and the failure to raise individual stock holdings limits hugely undermines open ended QE), the focus turns to the Fed, which has been fighting a rear-guard action to push back on market rate expectations, as best seen by the unwinding of almost 50 bps previously anticipated cuts in Dec 2020 EuroDollar (see chart), which has been echoed across the Treasury yield curve, aided and abetted to a certain extent by a deluge of USD high grade corporate issuance (>$130 bln September month to date). A 25 bps rate cut at this meeting is fully discounted, the question is what will be the guidance in terms future rate cuts, and the level of dissent, with George & Rosengren certain to reprise their dissent against a cut, though there are some suggestions that perhaps Bullard might dissent in favour of a more aggressive cut of 50 bps, even if his recent comments appear to make that unlikely. As ever the 'dot plot' (see prior projections and dot plot here: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190619.pdf ) will be the first point of call for markets to react, and it will be remembered that the medians back in June were: 2019 at 2.375, 2020 at 2.125% (implying no further rate cuts after the last one) and then back to 2.375% for 2021. The risk given Powell and others' recent cautious rhetoric is that the 2020 median may only be reduced to 1.875%, or at best 1.625%. Given incoming data and Fed comments on the economy, sharp cuts to its GDP and PCE deflator forecasts also seem unlikely, though they may shade the 2020 inflation forecasts down (prior estimates 2019 headline PCE 1.5%, 2020 1.9% ^ 2021 2.0%, core: 1.8%. 1.9% and 2.0% respectively). But after the communications debacle at the July meeting, the focus will above all be on Powell’s press conference, with the challenge being how to the chasm that still exists between market rate expectations and rather less dovish FOMC projections, and a clear desire not to encourage markets to over-anticipate Fed moves. This will again be very problematic, even if the phrase 'mid-cycle adjustment', which created so much trouble in July will likely be dropped, with Powell sticking rather to the description that the Fed will react 'as appropriate to sustain the economic expansion', and emphasizing that trade tensions, and weak growth in the Eurozone & Asia (primarily China), and Brexit related risks are the primary headwinds, while talking up the domestic economy. Inevitably Trump will criticize whatever decision and the Fed's rhetoric. On balance, the simple observation is that markets will need more positive news snippets on US/China trade talks to offset disappointment about the Fed's policy signals.

As noted above, the Fed is anything but alone this week in terms of monetary policy decisions. At least the Bank of England can safely be assumed to stand pat, being hostage as it is to very elevated Brexit uncertainty, though it will be interesting to see if it makes any tweaks to its forecasts, even though these tend to be generally reactions (above all at the current juncture) to the flow of data since the prior meeting, on balance marginally positive, rather than signalling a genuine shift in their forward outlook. The challenge for the BoJ and the SNB, both of whom have rather limited scope to ease policy without ratcheting up negative side effects, is whether to stick to promising to take action if needed, or to expend some of the limited ammunition that is available. In both cases, the ebbing of flight to safety flow pressures on their respective currencies, the recovery in equity indices and the rebound in bond yields suggest that they will hold fire, while also trying to stress even more emphatically that they will take robust action should such pressures re-emerge. But in the BoJ's case, this will likely be a close call, though the re-steepening of the JGB curve (if sustained) may be just enough to stay its hand, while markets continue to discount more than a 1 in 3 chance of a 25 bps SNB rate cut.

The big question for the week in China, outside of the run of economic data and US/China trade news is whether there is a cut this week in the PBOC's key medium-term lending facility (MLF) rate (for the first time in 4 years), following on from cut in Reserve Requirement Ratios (RRR), and ahead of Friday's LPR (loan prime rate) announcement, where the expectation is currently for a marginal 5 bps cut to 4.20% for the 1-yr & 4.80% for 5-yr rates. As a reminder, and notwithstanding the recent move to reform PBOC policy rates and implementation, interest rate moves in China are predicated on inflation, while RRR adjustments are activity (growth) driven. The weak level of non-Food CPI and the negative PPI trend offer a sound rationale for a rate cut. BUT with the very large pressures on the financial sector related to bad/non-performing loans, and major concerns about putting fuel to the fire in the property sector, whatever cuts are made to the MLF, to which the LPR is effectively indexed, the PBOC will likely be very cautious with any rate cuts.

Elsewhere Norway's central bank has been a lone beacon for monetary policy tightening thus far in 2019, but markets are very unsure that it will stick with the previously signalled 25 bps rate hike to 1.50% for this month, because it has recently placed greater emphasis on the risks posed to the economy from trade tensions and Brexit. Be that as it may, 2019 GDP remains on course to post its best pace of growth since 2012, above all due to strength in the oil sector and fiscal stimulus, and while the NOK has recovered some of the ground lost against the EUR in August, it remains relatively weak. Nevertheless, it may err on the side of caution, and signal that it still intends to hike once more this year, and again in 2020, but is staying its hand until some clarity emerges on Brexit and trade tensions.

In the EM space, the focus will be on Brazil and Indonesia, though in situation terms the respective central banks are at very different stages and situations in their rate cutting cycles, while in South Africa the SARB is expected to hold rates at 6.50%, above all given risks to the ZAR due to sovereign credit ratings concerns, related to major fiscal challenges against the backdrop of a weak economy, and an increasingly very divided ANC government. Brazil's BCB is expected to deliver another 'big' 50 bps rate cut to a fresh all-time low of 5.50%, but the focus is on whether it will signal that the current easing cycle is complete. Inflation remains well below the 4.25% target at 3.4% y/y, with inflation expectations also low, and the BCB having cut its 2019 inflation forecast to 3.6% at its last meeting; government growth forecasts have been revised slightly higher, but only to 0.85% for 2019, which would be slower than the tepid 1.1% seen in 2017 & 2018, and paltry by any standards for a major EM economy. On the other hand, the BRL fell sharply vs the USD in August (down ca. 8.0%), not far from its all-time low of 4.25, and even with the recent "risk on" rally back to 4.08, the risk of an all too familiar currency driven uptick in inflation is again quite potent. As for Bank Indonesia, forecasters are evenly divided on whether it opts for a third consecutive 25 bps rate cut to 5.25%. On the one hand inflation is now well contained, and the central bank has suggested that 2019 GDP will likely 'only' be around 5.0%, against its forecast range of 5.0%-5.4%, primarily due to weakness in manufacturing, and has said that it will continue to keep policy accommodative. On the other the IDR has been volatile of late, as has been the case with most EM currencies, but it recovered smartly into the end of last week, which should allow a rate cut this week, if the move is sustained.