MNI EUROPEAN MARKETS ANALYSIS: EU Recession Probability Estimates Near Zero

US TSYS: Tsys Little Changed Ahead Of Further Employment Data

• It has been a slow session for US tsys today, futures are off session highs and now trade little changed for the day. TUZ4 is trading at 104-02¾ vs 104-04 highs, while TYZ4 is 114-18 vs 114-22+ highs.
• The cash tsys curve has retraced some of the overnight bull-steepening move, yields are about 1bps higher. The 2yr is +0.8bps at 3.762%, with the 10yr also +0.8bps at 3.763%, the 2s10s is -0.069 at -0.345 after overnight un-inverting and hitting highs of 0.464.
• Earlier, the Fed's Daly stated that the Fed will need cut interest rates to maintain a healthy labor market, but the size of the cut will depend on incoming economic data. She emphasized the importance of avoiding overly tight policy, which could further slow the labor market, a scenario she finds undesirable. Daly expects the labor market to remain stable and continue expanding but is uncertain about the extent of the necessary rate cut.
• Fed funds was pricing in a 50/50 chance of the 50bps cut at the September meeting, before softening a touch into the close overnight. Projected rate cut pricing through year end vs Tuesday close levels: Sep'24 cumulative -36bp (-34.4bp), Nov'24 cumulative -72.6bp (-67.6bp), Dec'24 -110.3bp (-102.4bp).
• Later today we have Challenger Job Cuts, ADP private payrolls, nonfarm productivity, and weekly jobless claims. Additionally we get ISM Services (including its Employment component), and final August PMIs.

EUROZONE: Recession Probability Estimates Near Zero As Another ECB Cut Expected

The euro area saw a recovery in growth in H1 2024 with the quarterly increase rising to 0.3% from flat in H2 2023. Annual growth improved to 0.6% in Q2 from 0.2% in Q4 and our 6-month ahead recession probability estimates are now close to zero, despite the stagnation of the Germany economy, helped by stronger equities, lower oil prices, recovering economic sentiment and lower rates/yields. The ECB decision is announced on September 12, with revised forecasts, and a second full 25bp of easing is priced in, which should help to keep recession risks low. In June the ECB revised up its 2024 growth forecast to 0.9% and expected it to pick up to 1.4% in 2025. 

Euro area recession probability 6 months ahead

JGBS: Bull-Flattener After BoJ Takata & 30Y Supply

JGB futures are richer but well off the session high, +10 compared to settlement levels

• Outside of the previously outlined stronger-than-expected cash earnings data, the market has had a speech by BoJ board member Takata and 30-year supply to digest.
• (MNI) BoJ Takata said that the BoJ will raise the policy interest rate further if prices move in line with forecasts and solid capital investment and pass-through of cost increases are confirmed.
• However, Takata downplayed an imminent rate hike, saying the BoJ must monitor evolving market and economic conditions. “Developments of overseas economies following the rate hikes are the risk factor and the BoJ needs to monitor evolving conditions with high vigilance,” Takata told business leaders in Kanazawa City.
• Cash US tsys are ~1bp cheaper across benchmarks in today’s Asia-Pac session after yesterday’s solid post-data rally.
• The cash JGB curve has bull-flattened, with yields flat to 3bps lower after today’s 30-year supply. The 30-year supply was adequately absorbed, with the low price aligning with dealer expectations. The cover ratio remained steady, and the auction tail lengthened only slightly.
• Swap rates are little changed across the curve.
• Tomorrow, the local calendar will see Household Spending and Coincident & Leading Indices data alongside BoJ Rinban Operations covering 5-25-year+ JGBs.

JAPAN DATA: Labor Earnings Stronger Than Forecast, Should Aid Consumer Spending

Japan July labor earnings data was much stronger than expectations. Headline labor cash earnings were +3.6% y/y versus 2.9% forecast, although we were down on the June outcome of 4.5%. Real cash earnings were +0.4%y/y, versus -0.6% forecast, prior was +1.1%. On a same sample base, cash earnings were 4.8%y/y, against a 3.2% forecast (prior 5.1%). Full-time pay, same base y/y, was 3.0%y/y, versus 2.8% forecast and 2.7% prior. 

• Despite some loss of y/y momentum versus June, the July data should raise BOJ confidence in the wages backdrop. Real wages were positive in y/y terms for the second straight month, the first time this has happened since early 2022. Nominal earnings remain very elevated by historical standards. The chart below overlays real labor earnings (the orange line) against household spending. This points to firmer spending outcomes as we progress through Q3. this is a key watch point for the BoJ
• In terms of the detail, contracted and scheduled earnings were mostly firmer in y/y terms. Payments related to overtime were weaker, down in y/y terms. Employment edged up to 1.2% y/y, while hours worked was +0.6%y/y (versus -3.1% in June). 

Fig 1: Japan Real Earnings Should Aid Firmer Consumer Spending Backdrop 

Source: MNI - Market News/Bloomberg 

JAPAN DATA: Local Investors Continue To Buy Offshore Debt

The key feature of the weekly offshore Japan investment flow update was the continued surge in local purchases of offshore debt. We saw ¥1640.5bn in fresh inflows into this space by the local Japan investors base. This brings August flows to offshore bonds to over ¥7trln. As we noted last week, the shift in the global monetary policy outlook, particularly the Fed, is improving global bond returns (while also lowering hedging costs for domestic Japan investors). 

• Japan investors also continued to purchase offshore equities with a further ¥384.7bn in purchases into this segment.
• In terms of offshore investors, they sold local bonds, the first such sale since the start of August. Offshore investors also sold Japan equities, continuing the outflow trend that started in mid July. This accords with other tech sensitive markets, where outflow pressures have been evident (particularly Taiwan in recent months). 

Table 1: Japan Weekly Investment Flows

Source: MNI - Market News/Bloomberg 

AUSSIE BONDS: Richer But Off Bests After RBA Governor’s Speech

ACGBs (YM +3.0 & XM +2.0) are stronger but near Sydney session lows after RBA Governor Bullock’s Anika Lunch speech. 

• Outside of the previously outlined merchandise trade surplus, RBA Governor Bullock stuck to her view that it is “premature to be thinking about rate cuts” despite Treasurer Chalmers saying that current rates were “smashing the economy”, which she didn’t comment on.
• Her tone was unchanged from the August 6 meeting and press conference that underlying inflation is moderating slower than the Board expected and its priority remains to bring it down while preserving job gains, as it hurts everyone and disproportionately those on low incomes.
• Cash US tsys are ~1bp cheaper across benchmarks in today’s Asia-Pac session after yesterday’s solid post-data rally.
• Cash ACGBs are 2-3bps richer, with the AU-US 10-year yield differential at +16bps.
• Swap rates are 3bps lower.
• The bills strip is still holding a bull-flattener, with pricing flat to +4.
• RBA-dated OIS pricing is little changed across meetings. A cumulative 19bps of easing is priced by year-end.
• Tomorrow, the local calendar will see Home Loans and Foreign Reserves data. 

RBA: High Inflation More Damaging Than Restrictive Rates, No Easing “Near Term”

RBA Governor has stuck to her view that it is “premature to be thinking about rate cuts” despite Treasurer Chalmers saying that current rates were “smashing the economy”, which she didn’t comment on. Her tone was unchanged from the August 6 meeting and press conference that underlying inflation is moderating slower than the Board expected and its priority remains bringing it down while preserving job gains, as it hurts everyone and disproportionately those on low incomes.

• Board needs to see inflation come down to be able to consider rate cuts and may need to increase the “restrictiveness” of monetary policy if it doesn’t, which would slow the economy more and risk jobs.
• Bullock reiterated why high inflation is harmful to everyone and observed that people had forgotten how bad inflation can be. It is high inflation that is hurting people more so than rates. She also noted that allowing inflation to remain above target indefinitely would make the full employment goal harder to achieve.
• She explained that the level of demand continues to exceed supply due to strong growth post-Covid while the supply side has struggled and continues to require a pickup in productivity. This is causing capacity pressures, which some sectors continue to report.
• Bullock believes that governments are focused on bringing inflation down. Government spending is not the RBA’s main concern but if private consumption doesn’t recover as expected then that will be an important piece of information. The Board looks at the economy broadly and not just one data point.
• 5% of borrowers are facing challenging circumstances with a cash shortfall, which is not large enough to destabilise the financial system but needs to be monitored.

AUSTRALIA DATA: Soft Prices & Volumes Of Key Commodities Weigh On Export Growth

The merchandise trade surplus widened around $500mn to $6009mn in July with exports outpacing imports. Exports rose 0.7% m/m driven by rural goods, while imports fell 0.8% m/m due to fuels. The series are nominal and so are impacted by moves in global prices. 

Australia merchandise trade balance A$mn

Source: MNI - Market News/ABS

• July exports fell 1.4% y/y improving from -2.8% in June. Rural goods rose 6% m/m to be down 2.9% y/y while non-rural fell 0.4% m/m to be down 4.5% y/y, due to weak coal and other mineral fuel shipments.
• Coal, iron ore and LNG unit values were lower in July and then volumes were also down on the month for iron ore and coal ex thermal, making the shipments of our key commodities weak around mid-year.
• Exports to China and Japan remain soft but have picked up to Korea, helped by commodities, India, UK and US.
• Import growth has been easing since it peaked at 10.2% y/y in February and was only 3% y/y in July. The monthly drop was due to a 3.7% m/m decline in intermediate goods while consumer items rose 1.0% m/m and capex +1.6% m/m, which may be signalling some improvement in domestic demand. Machinery & equipment imports rose 6.3% m/m. 

Australia goods trade y/y% 3-mth ma

NZGBS: Richer But Mid-Range

NZGBs closed mid-range, with benchmark yields 3-6bps lower and the 2/10 curve steeper. 

• The key data today was CoreLogic house values. NZ’s housing market began to recover in H2 '23 with a pickup in transactions and prices, but it has been deteriorating again over 2024 as affordability remains stretched and sentiment soft. Residential building consents are on the RBNZ’s list of higher frequency indicators, and they remain weak, weighing on overall growth. A further deterioration in residential property could drive larger-than-expected monetary easing.
• Unlike Australia, increased demand from immigration doesn’t appear to have sustainably boosted house prices. Like Australia though, it has put pressure on rents with NZ Q2 CPI rents +4.8% y/y, the highest rate since the series began in 2000.
• Today’s weekly supply saw adequate demand, with cover ratios ranging from 1.86x (may-34) to 2.61x (May-30) across the lines.
• Cash US tsys are ~1bp cheaper across benchmarks in today’s Asia-Pac session after yesterday’s solid post-data rally.
• Swap rates closed 3-7bps lower.
• RBNZ dated OIS pricing closed 2-7bps softer, led by mid-2025 meetings. A cumulative 77bps of easing is priced by year-end.
• Tomorrow, the local calendar will see Q2 Volume of All Buildings data. 

NEW ZEALAND: Housing Market Weak, Affordability Should Improve

NZ’s housing market began to recover in H2 '23 with a pickup in transactions and prices, but it has been deteriorating again over 2024 as affordability remains stretched and sentiment soft. Residential building consents are on the RBNZ’s list of higher frequency indicators and they remain weak, weighing on overall growth. A further deterioration in residential property could drive larger-than-expected monetary easing. 

• Unlike Australia, increased demand from immigration doesn’t appear to have sustainably boosted house prices. Like Australia though, it has put pressure on rents with NZ Q2 CPI rents +4.8% y/y, the highest rate since the series began in 2000.
• CoreLogic’s August home value index fell 0.5% m/m to be up 1.1% y/y down from 2.7%. It recently peaked at 4.6% y/y in April. Moderately higher prices plus elevated mortgage rates have pressured housing affordability but it looks like it turned in Q1 2024 and we estimate that continued in Q2 and Q3.
• August’s 25bp RBNZ rate cut should speed up the improvement in affordability, assuming that house prices don’t jump in response in coming months. But in the RBNZ’s Q3 household survey only 35% expected higher house prices, the lowest in a year, and the median change was zero. 

NZ % deviation from trend

• Housing is undervalued when looking at house prices to rents. The deviation from trend has been negative since Q1 2023 and deteriorated to -8.6% in Q2 from -5.8%.
• With deteriorating valuations and lengthening selling times, it is not surprising that building consents are low. In July they picked up 26.2% m/m to their highest level since October but are still down 15.3% y/y smoothed with a 3-month average.

NZ dwelling consents

FOREX: USD/JPY Can't Sustain Post Wages Dip, Central Bank Speak In Focus

At this stage, G10 FX changes are very limited versus end Wednesday levels in the US. The USD BBDXY index is unchanged, just under 1233.00 at the time of writing. 

• USD/JPY dipped as far as 143.19 in the first part of trade, as we saw much stronger than expected July wages data. The second positive y/y gain for real earnings bodes well for the consumption outlook. This dip was fresh lows back to August 5, but the pair quickly recovered ground. We were last 143.70, little changed for the session.
• BoJ board member Takata stated further rate hikes could occur if data outcomes align with the central banks forecasts. Takata also stated that the fallout from the early August moves needs to be assessed. This hints at no policy changes in the near term. The next BoJ meeting is on the 20th of September.
• Both AUD and NZD are steady. The A$ is near 0.6720. We heard from RBA Governor Bullock, but not a lot was learned about the monetary policy outlook compared to earlier comments. Fresh lows in iron ore haven't impact AUD sentiment.
• NZD/USD was soft in early trade, but from lows sub 0.6180 we have rebounded back to 0.620, little changed for the session.
• In the cross asset space, US equity futures have weakened this afternoon, although losses are currently in the 0.10-0.20% range. These shifts didn't impact FX sentiment though. US yields have ticked higher, but gains are not much beyond 1bps at this stage. US Fed San Francisco head Daly stated in an interview with Reuters that rates will come down, but upcoming data outcomes will determine the magnitude of the move.
• Looking ahead, euro area July retail sales and German factory orders are due. In the US, August Challenger job cuts and ADP employment, services/composite PMI/ISM, jobless claims and Q2 final productivity/ULC are all due. 

ASIA STOCKS: APAC Equities Off Earlier Highs As Tech Stocks Slip

Asian stocks trimmed earlier gains, and US futures dipped as with Nasdaq futures leading the way as Asian tech stocks ticked lower while traders await more jobs data due later today. The MSCI Asia Pacific Index erased most of its 0.8% rise, with Japan's Nikkei 225 down over 1% while benchmarks in China, Hong Kong and South Korea have also turned lower, Australian & New Zealand tech stocks are higher following Blackstone announcing they are buying Airtrunk in a A$26b deal. Markets remain cautious, particularly due to concerns about AI hype, with Nvidia facing its largest two-day decline since October 2022. JPMorgan downgraded Chinese stocks, citing weak policy support and potential volatility ahead of the US election. Traders are closely watching the US jobs report, which could influence the Fed’s rate cuts later this month.

• China & Hong Kong: CSI300 +0.10%, Banks are the worst performing with CSI 300 Bank Index -0.40%, while Property is the best with the CSI 300 Real Estate Index +1.70%. The HSI is -0.45%, HS Mainland Banks -1.18%, HSTech is -0.40% while HSProp is +1.65%.
• South Korea: Samsung is -0.30%, Sk Hynix is 2.33% after being up over 4% earlier, this follows a 8% drop on Wednesday. The KOSPI is -0.43% while the KOSDAQ is -1.53%.
• Taiwan: TSMC is +1.30%, Hon Hai is -1.90% while the Taiex is -1.10%
• Australia & New Zealand: ASX 200 is 0.16%, with Financials contributing the most to gains, while Tech stocks also trade higher. The NZX 50 is +0.67%.
• In Asia EM, the Thai SET is the top performer up 2%, with most other markets trade little changed. 

ASIA STOCKS: Tech Heavy Asian Markets Continue To See Heavy Outflows

The tech heavy Asian markets continue to see outflows, Taiwan saw the largest outflow in over 3 years. Indonesian & Malaysian continue to benefit from expected Fed rate cuts, while Indian equities keep making new all time highs.

• South Korea:  Saw $718m of outflows yesterday, with past 5 sessions now -$1.308b, while ytd is +$15.45b. The 5-day average is -$262m, well below both 20-day average of -$98m & 100-day average of +$19m.
• Taiwan: Saw $3.09b of outflows yesterday, the largest outflow since March 2021, past 5 sessions have seen a outflow of $4.05b while ytd is -$12.78b the worst in the region. The 5-day average is -$811m, well below the 20-day average of -$120m, and 100-day average of -$172m.
• India: Saw an inflow of $362m Tuesday, with the past 5 sessions now +$2.89b, while ytd is +$19.14b. The 5-day average is +$740m, well above the 20-day average of +$180m, and the 100-day average of +$52m.
• Indonesia:  Saw an inflow of $12m yesterday, with the past 5 sessions now +$910m, while ytd has seen +$1.93b. The 5-day average +$182m, above the 20-day average of $94m, and well above the 100-day average of $2m.
• Thailand:  Saw an outflow of $17m yesterday, with the past 5 sessions now +$145m, while ytd flows are -$3.53b. The 5-day average is -$29m below both the 20-day average of -$9m, and the 100-day average of -$16m.
• Malaysia:  Saw an inflow of $66m yesterday, with the past 5 sessions now +$283m, while ytd flow are +$820m. The 5-day average is +$57m above both the 20-day average of +$39m and the 100-day average of +$11m.
• Philippines: Saw a small inflow of $3m yesterday, with the past 5 sessions now +$21m, ytd flows are -$314m. The 5-day average +$4m, below the 20-day average of $8m and slightly above the 100-day average of -$5m.

Table 1: EM Asia Equity Flows

OIL: Crude Holding Onto Losses, EIA US Stock Data Out Later

Crude has held onto this week’s losses with only a small increase during today’s APAC trading. It has lost the gains made over the last 12 months. WTI is up 0.4% to $69.45/bbl off the intraday high of $69.69, while Brent is 0.3% higher at $72.95/bbl after rising to $72.85. The USD index is little changed.

• There have been comments from some OPEC delegates that the start of output cut reductions is likely to be delayed but this news has been unable to support prices. Markets are likely to want to hear a definite decision from the group before beginning to recover, especially given concerns re the demand outlook.
• Bloomberg reported that US crude inventories fell 7.4mn barrels last week, according to people familiar with the API data. Gasoline stocks fell 300k and distillate 400k. The official EIA data is out later today but has been showing steady crude drawdowns since the start of July.
• Later there are US August Challenger job cuts and ADP employment, services/composite PMI/ISM, jobless claims and Q2 final productivity/ULC, as well as euro area July retail sales and German factory orders. The ECB’s Tuominen speaks. Friday’s US payrolls data are a focus for crude markets as they await Fed easing to support demand.

GOLD: Steady Despite Speculation Of A 50bp Cut In September

Gold is broadly unchanged at $2,496/oz over the past 24 hours. 

• This occurred despite a sizeable rally in US Treasuries, as soft US job openings data rekindled speculation of a 50bp Fed cut two weeks from now.
• With Friday's crucial nonfarm payrolls report intensifying the focus on labour market indicators, the July JOLTS report saw job openings fall to 7.673m (cons 8.10m) in July after a downwardly revised 7.91m (initial 8.184m) in June.
• Adding to the dovish tone was a BoC rate cut (as expected) and a Fed Beige Book that highlighted softer economic activity alongside moderating inflation and employment.
• For the first time since mid-August, the US STIR market briefly showed around 50/50 implied probability of a 50bp cut in September - with 112bps of total cuts this year - though those extremes faded by a couple of basis points (last 36bps, i.e. 44% prob of 50bp Sept cut, and 110bps respectively).
• Lower rates are typically positive for gold, which doesn’t pay interest.
• According to MNI’s technicals team, the trend in gold remains bullish with a focus on $2,536.4 next, a Fibonacci projection. Initial support to watch lies at $2,485.4, the 20-day EMA, which has been pierced.

IRON ORE: Sub $91/Ton, Broader Metal Weakness An Additional Headwind

The active SGX iron ore contract is sub $91/ton, off close 1.80% for the session. This is fresh lows in the active contract back to  August 2023. Lows at that juncture were around the $87.50/ton level. 

• Familiar headwinds look to be in play for iron ore. China property sentiment remains soft. The CSI 300 real estate sub index is bottoming along at lows, with upticks not sustained. Sell-side China growth expectations for GDP this year and next also have downside biases.
• Other metal prices are also softer. The Bloomberg metals sub index has fallen for 5 straight sessions, it sits 5.5% off its late August peak. As we noted yesterday, the Global PMI trend is pointing to softer industrial production/global trade trends. This is likely an iron ore headwind, outside of China concerns.
• Onshore steel prices are also moving lower, steel rebar futures close to CNY 3100. This is near fresh cycle lows.
• Friday focus will rest with onshore inventory levels at China ports. 

SOUTH KOREA DATA: GDP 2Q Contracts – Opening Door for BOK.

• Second quarter GDP contracted 0.2% in line with expectations.
• Overall the economy grew 2.3% yoy in line with estimates.
• Manufacturing for 2Q grew 0.8%
• Construction contracted 6%
• Services in line with estimates unchanged on quarter, +1.7% yoy
• The key takeaway for the BOK will be the construction decline. In an environment where ongoing concerns as to property price rises in Seoul continue, changes in construction and how that impacts property prices going forward will be watched closely.
• With CPI moderating, and the economy contracting, the BOK appears now (depending on the trajectory of property prices) to be inching towards a better environment to cut rates to support the consumer.

THAILAND: Inflation Expected To Return To Band In Q4

Inflation in Thailand remains very low with headline moderating to 0.4% y/y in August from 0.8% and core up only 0.1pp to 0.6% y/y, in line with expectations. The Bank of Thailand (BoT) has said that it doesn’t see signs of deflation and will focus on the outlook and monitor developments in subsidies. With rates around neutral and only two meetings before year end, it may not ease before 2025 but Governor Sethaput said that it will adjust monetary policy if needed.

• The Ministry of Commerce said that September inflation may be boosted by higher oil prices and the impact of flooding. Base effects are also likely to boost the annual rate. It expects the CPI to be 1-1.5% in Q4, back within BoT’s target band.
• Higher food inflation of 1.8% y/y in July was driven by fruit and vegetables, non-alcoholic beverages and meat. This was offset by lower transportation prices and energy in general, due to lower global prices. Government price controls also keep a cap on transport prices.
• Imported inflation remains elevated at 8% y/y but off the May peak as both consumer goods and raw materials are high.

Thailand CPI y/y%

ASIA FX: KRW Lags Firmer CNH & TWD

North East Asia currency trends have been mixed, with CNH and TWD firmer, but KRW softer. Overall moves haven't been large though. 

• USD/CNH tested under 7.1000, with positive CNH impetus post the fixing result (which delivered a -34pip surprise in USD/CNY terms). Lows in the pair came at 7.0948, but we sit slightly higher now. USD/CNY onshore spot has followed a similar trajectory. The yuan has outperformed the G10 majors at the margins, up nearly 0.20% so far in Thursday trade.
• Spot USD/KRW has edged a little higher, but remains sub recent highs, the pair last near 1337.55. Earlier Q2 GDP revisions were unchanged in terms of the headline (growth contracting -0.2% q/q).  With CPI moderating, and the economy contracting, the BOK appears now (depending on the trajectory of property prices) to be inching towards a better environment to cut rates to support the consumer. The Kospi is weaker, off 0.45% at this stage, with a further -$279.9mn in equity outflows from offshore investors.
• Spot USD/TWD has ticked back lower, last near 32.10, around 0.30% stronger in TWD terms. Yesterday saw very large outflows from offshore investors (over $3bn,as tech sentiment faltered), but onshore equity sentiment is better today, the Taiex last up 0.90%. 

ASIA FX: THB & MYR Lead South East Asia FX Gains

All of South East Asia (SEA) has rallied against the USD so far today. THB FX has been the standout, up over 1.30% at this stage. USD/THB is to fresh lows into the 33.75/80 region. These levels were last seen back in July 2023. Thailand equities have rallied strongly today, up over 2%, with the index connivingly above its simple 200-day MA. The index has lagged broader markets so far in 2024 and with focus shifting away from tech it may be seeing some benefit as a result. Thailand CPI data was close to expectations for core and headline. 

• USD/MYR is back to the low 4.3300 region. Recent lows for the pair rest at 4.3100 which is likely to be a downside target on further USD weakness.
• Philippines inflation was softer than expected. CPI rose 3.3% yoy in August versus prior of 4.4%. Local equities are flat for the day, but USD/PHP is down sub 56.40. This is still up from recent lows.
• USD/IDR has softened but hasn't been able to test sub 15400 at this stage.