MNI ASIA OPEN - US Second Quarter GDP Revised Lower

NEWS

North America

FED (MNI): Fed Probably Needs A Bit More Tightening - Aikman
The Federal Reserve will probably need to raise interest rates a bit further over the next six months in order to ensure wage growth cools in a way that’s consistent with returning inflation to its 2% target, David Aikman, a former Bank of England staffer who also spent two years at the Fed’s board of governors, told MNI.

US (BBG): Fed Ramps Up Demands for Corrective Actions by Regional Banks
US regulators are quietly demanding that regional lenders shore up their liquidity planning, part of a ramp-up in efforts to tighten supervision in the wake of three bank failures earlier this year. The Federal Reserve has issued a slew of private warnings to lenders with assets of $100 billion to $250 billion, including Citizens Financial Group Inc., Fifth Third Bancorp and M&T Bank Corp., according to people with knowledge of the matter. The wide-ranging notices have touched on everything from lenders’ capital and liquidity to their technology and compliance, the people said, asking not to be identified discussing confidential supervisory information.

US (BBG): Millions More Workers to Get Overtime Pay Under Biden Proposal
More than 3 million workers would be newly eligible for overtime pay when they work more than 40 hours a week, under a new proposal from the US Department of Labor. The highly-anticipated proposed rule, announced Wednesday by the Biden administration, would expand time-and-a-half pay protections to more workers by changing the exemptions to overtime eligibility under the Fair Labor Standards Act.

Europe

ECB (MNI): ECB Would Be "Lucky" If No More Hikes-Wieland
The European Central Bank would be lucky to avoid further tightening and may need to raise key interest rates significantly while tolerating negative growth if it is to tame inflation, former German Council of Economic Experts Chair Volker Wieland told MNI. Euro area inflation has stopped increasing, but much of the decline is attributable to falling energy prices, he said, adding that the question of whether there has been a change to the so-called neutral real rate of interest at which inflation is stable was key.

ECB (Reuters): Italy Propose Piero Cipollone For ECB Executive Board
Italy's deputy governor of the Bank of Italy Piero Cipollone was the only candidate put forward to succeed European Central Bank executive board member Fabio Panetta, according to a Eurogroup statement. Panetta, also an Italian, will resign from his position from 1 November and the 20 countries that share the euro had until Wednesday to propose a successor.

GERMANY (MNI): Scholz Commits To Less Infighting After Rows Between Coalition Partners
At the conclusion of a two-day Cabinet summit German Chancellor Olaf Scholz pledged that his tripartite coalition would limit its public disagreements. This is after internal rows eroded the image of gov't stability and raised concerns about the ability of the Scholz administration to agree on new policy. Speaking after the summit, Finance Minister Christian Lindner (from the pro-business liberal Free Democrats, FDP) said that "We are a government in which hammers and screws are at work, and that leads to noise, as you have noticed - but things come out of it,". Scholz (from the centre-left Social Democrats, SPD) added that "We will hammer and tap, but with sound absorbers. It shouldn't be heard any more."

ITALY (BBG): Italy Mulls Sale of Key State-Owned Stakes to Bolster Finances
Prime Minister Giorgia Meloni’s coalition is considering selling minority stakes in selected state owned companies to boost Italy’s public finances. Government ministers are evaluating the disposal of some assets, including a stake in the state railway, while still retaining control over the businesses, according to people familiar with the discussions.

Asia/Global

CHINA (BBG): PBOC Drafts Policy to Give Private Firms More Funding Access
The People’s Bank of China is drafting preliminary policies to give private businesses better access to funding as authorities ramp up efforts to boost economic growth. Central bank leaders and officials from other financial watchdogs met with representatives from more than 10 banks as well as private companies, including property developers and manufacturers, on Wednesday, according to local media reports.

RUSSIA/N KOREA (BBG): US Says Russia-North Korea Arms Deals Are ‘Actively Advancing’
The US has new information that Russia and North Korea are negotiating arms deals under which the isolated regime would provide President Vladimir Putin’s army with munitions and other support for its invasion of Ukraine, the White House said. Putin and North Korean leader Kim Jong Un have exchanged letters to increase cooperation, and Russian officials have visited Pyongyang for conversations about possible arms deals, National Security Council spokesman John Kirby said.

OIL (BBG): Saudi Arabia Expected to Prolong Oil Cut Again, Survey Shows
Saudi Arabia is expected to extend a 1 million-barrel oil supply cut into October, as it seeks to shore up prices against a faltering economic backdrop. While global crude markets are tightening as demand climbs toward record levels, this summer’s price rally has stalled on mounting concern over economic growth in China. The pullback poses risks for Riyadh, which has seen its foreign reserves slump to the lowest since 2009.

DATA

MNI CHINA LIQUIDITY INDEX: Liquidity Tighter, Economy Down
China’s interbank market liquidity tightened modestly in August but remained ample as the People’s Bank of China (PBOC) ensured funds were available to support the economic recovery. However, traders' outlook on the economy fell to the lowest level since May 2022, as authorities have struggled to inspire market confidence with recent policy announcements, the latest MNI Liquidity Conditions Index showed.

US (MNI) US Hiring Slows To 'Sustainable' Pace In Aug - ADP
U.S. hiring has finally made a transition from "exceptional to sustainable" in August, ADP chief economist Nela Richardson said Wednesday after the ADP Employment Report showed a gain of 177,000 new private payrolls last month, slowing markedly from 371,000 in July and coming in line with the pre-pandemic pace. Wage growth also decelerated in August, with job changers seeing a median change in annual pay of 9.5%, below 10% for the first time since July 2021, and job stayers saw an increase of 5.9%.

US GDP Q2 Growth Revised Down From Various Factors, GDI Still Lethargic

• Real GDP was softer than expected in the second Q2 release, revised down to 2.06% annualized (cons 2.4) after 2.41% in the first release, following 2.00% for Q1, and showing no sign of stronger momentum behind the surging Atlanta Fed GDPNow estimates for Q3.
• Personal consumption was revised higher by marginally less than expected to 1.67% (cons 1.8) from 1.64%. The main contributions to downward revisions instead came from changes in inventories (-0.23pps), non-residential investment (-0.19pps) and net exports (-0.1pps) rather than one category in isolation.
• First details for Gross Domestic Income (GDI) show a tepid 0.49% annualized in Q2 after two quarters averaging -2.6% annualized. It leaves an average for GDP/GDI growth at just 1.3% annualized albeit an acceleration from 0.1% in Q1 and -0.4% in Q4.

**MNI: US NAR JUL PENDING HOME SALES INDEX 77.6 V 76.9 IN JUN
US NAR JUL PENDING HOME SALES +0.9% MOM; -14.0% YOY

US TSYS: Treasuries Pare Further Gains To Broadly Consolidate Post JOLTS Rally

• Front end Treasuries have pared more than half of their gains seen on surprise downward revisions for GDP growth and core PCE inflation in Q2, along with ADP missing shortly beforehand albeit with a caveat of an upward revision.
• Yields are 0.5-1.5bp lower on the day, ultimately consolidating yesterday’s large rally on weaker than expected JOLTS and Conference Board boards ahead of tomorrow’s core PCE for July and Friday’s NFP report.
• Curves had seen a further steepening intraday, with 2s10s touching -72.9bps, but are now back at -76.5bps for only +0.5bps on the day, with the long-end reluctant to pare gains after weaker than expected growth.
• TYZ3 trades mid-range at 110-27 (+01) off highs of 111-03+, breaching resistance at the 20-day EMA to next open 111-13+ (Aug 11 high). The trend direction remains lower however, with support at 109-18+ (Aug 25 low).
• Near-term Fed Funds implied rates have reversed most of the hit from the softer US data but are down notably on pre-JOLTS levels. They show +3bp for Sept and a cumulative +12bp for Nov to 5.45% terminal, the latter down 5.5bps from pre-JOLTS levels. Cuts from terminal are seen at 49bp to Jun’24 and 121bp to Dec’24.
• Tomorrow sees a heavy US docket including the July PCE report, MNI Chicago PMI, challenger job cuts and weekly jobless claims data, along with Fedspeak from Bostic and Collins.

EGBs-GILTS CASH CLOSE: Repeating Afternoon Rally

In a near re-running of Tuesday's price action, core European FI weakened for most of the session Wednesday before rallying in the afternoon on weaker-than-expected US macro data.

• The flash August estimates of German state inflation was marginally higher than expected, with a North Rhine Westphalia upside surprise sinking Bund futures at 0630UK, and Gilts joined in the selloff on the open.
• After Spanish data was largely in line, Bunds and Gilts began rallying midday, and soared after more soft US data readings including a downward revision to Q2 GDP and below-expected private payrolls figures.
• The German curve finished mixed, with 10Y underperforming; the UK saw twist steepening with the short-end/belly outperforming. Yields finished off the lows but as noted, also well off session highs.
• Periphery EGB spreads widened modestly, having come off of the session's tightest levels into the close.
• Thursday's European calendar brings Dutch and French inflation data early, with Italian and Euro area figures later in the day; we also get the German unemployment report, the accounts of the ECB's July meeting, and appearances by BoE's Pill, and ECB's Schnabel and Guindos.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 3bps at 3.073%, 5-Yr is up 3.2bps at 2.573%, 10-Yr is up 3.5bps at 2.545%, and 30-Yr is up 2.5bps at 2.649%.
• UK: The 2-Yr yield is down 0.8bps at 5.238%, 5-Yr is down 2.1bps at 4.737%, 10-Yr is unchanged at 4.422%, and 30-Yr is up 1.7bps at 4.656%.
• Italian BTP spread up 0.7bps at 164.8bps / Spanish up 0.1bps at 101.6bps

FOREX: Greenback Weakness Drags USD Index Back Below 200-Day Moving Average

• A weaker than expected second reading of Q2 GDP in the US prompted another session of weakness for the greenback, extending on Tuesday’s declines following similarly soft data. Broad dollar weakness has seen the USD index briefly slide back below the 200-day moving average and hit the lowest level in two weeks ahead of further key data this week.
• Less optimistic price action in equities relative to Tuesday’s session has seen the likes of AUD and NZD trade lower, countering the theme of broad dollar weakness but extensions for EUR and GBP have been notable, both rising around half a percent.
• Recent bearish technical outlooks for both EURUSD and GBPUSD are now being tested with the former recovery from the channel base extending and the latter piercing resistance at the 20-day EMA. Potential profit taking ahead of the key jobs data on Friday could well be exacerbating the price momentum for both pairs.
• With the slightly backward looking US data, the impact on US yields has been more moderate than Tuesday’s significant bull steepening move. Thus, despite USDJPY briefly making a new low for the week at 145.56, actually sits a little higher on the day around 146.20 as we approach the APAC crossover.
• China manufacturing and non-manufacturing PMIs headline the overnight docket on Thursday, before French and Eurozone CPI data. The greenback and broader currency markets will remain focused on the key data releases due later this week - NFP, Core PCE and ISM.

US STOCKS: Holding Clearance Of Resistance At Bull Channel Base

• The S&P e-mini at 4526 has dipped just slightly off session highs of 4530.75 having earlier cleared resistance at 4515.52 (former bull channel base drawn from Mar 13) as Treasuries rallied on softer US data.
• A clear break could open next resistance at 4560.75 (Aug 4 high) whilst support is seen at the 50-day EMA of 4450.02.
• SPX trades +0.4% with the largest contributions from Apple (+1.7%) and Nvidia (+2.1%) in a mirror of yesterday, to see IT lead on the day (+0.95%).
• Utilities lag (-0.5%) with WTI giving up earlier gains, whilst overall financials at +0.3% belies weakness in banks (-0.4%). The latter’s weakness did however come before Bloomberg quoting sources on the Fed privately ramping up demands for corrective actions by regional banks (KBW regional banking index -0.6% but off lows seen before the headlines), although the news has prevented any further intraday recovery.
• Nasdaq outperforms the S&P 500 with +0.6%, whilst the Dow again underperforms with 0.2%.

COMMODITIES: Crude Pulls Back After Resistance Clearance Despite Large Inventory Drop

• Crude again sees a volatile day but heads towards the end of the US session mid-range for small increase on the day with little clear positive impulse from another substantial inventory drop (DOE crude inventories -10.58M vs cons -1.6M). Softer growth implications from downward revisions to Q2 GDP growth/core PCE inflation and lower than expected ADP employment growth have mostly countered any tailwind from further USD weakness.
• There have been concerns about Hurricane Idalia which has barreled through the rich oil and gas producing Gulf of Mexico but there has been limited production and supply impact so far.
• Barclays raised its 2024 Brent price forecast to $97/bbl, up by $8/bbl previously as market balances are expected to further tighten next year, the bank said in a note.
• Russian Deputy PM Novak said it plans to cut oil exports in Sept by 300kbpd against June levels according to Interfax. Russia is likely to export around 3.1mbpd of crude oil in Sept, which is around 300kbpd lower than June levels, according to Bloomberg vessel tracking.
• WTI is +0.3% at $81.39 off a high of $82.05 that easily cleared resistance at $81.75 (Aug 21 high) to set up a run to its bull trigger at $84.16 (Aug 10 high).
• Brent is +0.0% at $85.49 off its high of $86.23 that cleared $85.86 (Aug 21 high) to open the bull trigger at $88.10 (Aug 10 high).
• Gold is +0.3% at $1944.10 off a high of $1948.95 as the USD slipped after weaker data. It just about cleared $1948.3 (61.8% retrace of Jul 20- Aug 21 bear leg) but will need a more concerted push higher to test next resistance at $1963.3 (76.4% retrace of the same move).