MNI US OPEN - PBOC Deliver Surprise Rate Cut as Recovery Stalls

NEWS

US (BBG): Yellen Says China’s Slowdown is ‘Risk Factor’ for US Economy

Treasury Secretary Janet Yellen called China’s economic woes a “risk factor” for the US, but one that doesn’t significantly dent her optimism for the American economy. “China’s slowdown will have the largest impact on its Asian neighbors, but there will be some spillovers to the United States,” Yellen told reporters following a speech in Las Vegas, where she’s touting the economic policy accomplishments of the Biden administration.

US (BBG): McCarthy Pushes for Short Stopgap to Avoid October Shutdown

Speaker Kevin McCarthy told House Republicans on a conference call Monday he expects a stopgap funding measure to avert a shutdown at the end of September, though he’s pushing for the continuing resolution to be short, a person familiar with the call said, speaking on condition of anonymity to discuss a private call. McCarthy (R-Calif.) said to members that he’s already told Senate Majority Leader Chuck Schumer (D-N.Y.) a continuing resolution to fund the government can’t run beyond early December, the person said, as McCarthy aims to avoid a standoff shortly before Christmas.

US (BBG): Trump Indicted By Georgia Prosecutor in 2020 Election Probe

Donald Trump and some of his top administration officials and associates were indicted in Atlanta over efforts to overturn the results of his 2020 election defeat in Georgia, the fourth criminal case against the former president as he campaigns for the White House. The sweeping indictment, approved by a grand jury on Monday, charges Trump and 18 other defendants, including former New York City Mayor Rudolph Giuliani, former White House Chief of Staff Mark Meadows, and former senior Justice Department official Jeffrey Clark, with racketeering and other crimes.

PBOC (MNI): PBOC in Surprise Rate Cut as Recovery Stalls

MNI (Beijing) The People’s Bank of China unexpectedly cut two key policy rates for a second time in three months Tuesday, as recent disappointing financial and economic indicators pointed to stronger headwinds. The central bank cut the rate of one-year medium-term lending facility by 15bp to 2.5% when rolling over the maturing CNY400 billion MLF with a renewed CNY401 billion facility. It also lowered the rate on the 7-day reverse repo rate by 10bp to 1.8%, while injecting a net of CNY198 billion via the instrument.

PBOC (MNI): PBOC Seen Helping Banks to Cut Existing Mortgage Rates

MNI (Beijing)The People’s Bank of China will need to provide incentives such as targeted reserve requirement ratio cuts if it is to persuade banks with squeezed interest margins to heed its recent call to lower rates on existing residential mortgages, advisors and analysts told MNI. Despite unconfirmed reports that banks have already received guidance to cut rates gradually by an unspecified amount in the fourth quarter, as Beijing looks for ways to hold up sagging consumption, lenders will drag their feet at a time when net interest margins fell to a new low of 1.74% in Q1, the sources said.

CHINA (MNI): China Suspends Youth Unemployment Survey - NBS

MNI (Beijing) China will suspend measuring youth unemployment as it seeks to improve survey statistics in the face of changes to the economy and society, Fu Linghui, spokesperson of the National Bureau of Statistics said. Youth unemployment, which measures those between ages of 16 to 24 has reached record levels in recent months, with June’s data print reading 21.3%.

JAPAN (MNI): Japan GDP Seen Slowing in Third Quarter

Bank of Japan officials expect the economy to slow in the third quarter but a moderate recovery to continue after net exports contributed to stronger-than-expected 6.0% annualised second-quarter growth, MNI understands. The economy still faces headwinds from slowing global demand and Japan’s output gap is likely to remain negative for some time.

JAPAN (MNI): Japan Govt Official Warns High Prices Risk to Consumption

Japanese private consumption is expected to continue rising on the back of favourable income and sentiment trends but the government continues to keep a close eye on the impact of high prices on spending, a senior official at the Cabinet Office said on Tuesday. Income and sentiment are improving in the wake of hefty wage hikes this year, so, while the rate of expansion of consumption slowed in the second quarter from the first quarter it is likely to continue growing, she told reporters.

MNI RBNZ PREVIEW - AUGUST 2023: On Hold, OCR Path Likely Unchanged

The RBNZ is unanimously expected to keep rates at 5.5% at its August 16 meeting, which will be the second consecutive pause. This is a statement meeting and will include revised forecasts and the focus will be on the expected paths for inflation and the OCR. They are unlikely to be revised significantly with the first rate cut expected in H2 2024 when inflation returns to the band.

RUSSIA (BBG): Russia Hikes Rates at Emergency Meeting After Ruble’s Crash

Russia’s central bank raised interest rates to the highest in over a year, increasing the pace of monetary tightening at an emergency meeting called after one of the steepest depreciations in emerging markets cast a pall over the economy. Policymakers lifted their benchmark to 12% from 8.5%, the second straight increase and the sharpest since the immediate aftermath of Russia’s invasion of Ukraine almost 18 months ago. The meeting was brought forward by a month after the ruble briefly broke through 100 to the dollar for the first time since March last year.

COMMODITIES (BBG): Iron Ore Climbs as China’s PBOC Cuts Rates to Support Recovery

Iron ore gained and copper fluctuated as China’s central bank cut rates to support a sputtering recovery, with another slew of data underscoring challenges across Asia’s largest economy. The steel-making staple rose after the People’s Bank of China cut the rate on one-year loans by 15 basis points — the most since 2020 — to 2.5%. The surprise move came shortly before the release of July data that showed industrial output, retail sales and fixed-assets investment grew less than expected.

COMMODITIES (BBG): Wheat Holds Loss as Black Sea Exports Continue Amid Hostilities

Wheat held losses as grain shipments continued from Black Sea ports even as tensions escalated in the key export region. Benchmark futures in Chicago traded near $6.40 a bushel after sliding 1.9% on Monday. Russia opened fire on a ship over the weekend to force the vessel to stop for checks, a continuation of hostilities in the waterway after Ukrainian drones attacked Russian vessels earlier this month. Despite the escalation, Rabobank says exports continue from both Ukraine and Russia. Wheat remains 19% lower this year due to bumper harvests.

DATA

UK DATA (MNI): Soaring UK Wages an Inflation Concern for BOE

• UK JUN AVE WEEKLY EARNINGS +8.2% YY
• UK JUN AVE WEEKLY EARNINGS EX-BONUS +7.8% YY
• UK JUN ILO UNEMPLOYMENT RATE +4.2%
• UK JUL CLAIMANT RATE +4%

UK wages rose sharply in the three months to June, again highlighting the dangers the Bank of England faces to drive inflation and inflation expectations lower in coming months. According to the Office for National Statistics, annual growth in regular pay (excluding bonuses) was 7.8% in April to June 2023, the highest regular annual growth rate since comparable records began in 2001.

GERMANY AUG ZEW CURRENT CONDITIONS -71.3 (MNI)
GERMANY ZEW AUG ECONOMIC EXPECTATIONS -12.3 (MNI)

SWEDEN DATA (MNI): Energy Drives Downside Inflation Surprise

• SWEDEN JULY CPI +9.3% Y/Y; JUNE +9.3%
• SWEDEN JULY CPI 0.0% M/M; JUNE +0.1%

The small downside surprise for Swedish July inflation looks to be driven by energy - with CPIF ex energy printing in line with expectations at 8.0%Y/Y and 0.4%M/M but the inc energy measure a tenth lower than expected Y/Y (remaining at 6.4%Y/Y) and fell -0.2%M/M (expected flat). At first glance there's little on the headline side to really alter expectations for the Riksbank here - and we still have the August print ahead of the September policy decision.

CHINA DATA (MNI): China July Production, Spending Slower than Expected

• CHINA JUL INDUSTRIAL OUTPUT +3.7% Y/Y VS MEDIAN +4.3% Y/Y
• CHINA JUL RETAIL SALES +2.5% Y/Y VS MEDIAN +3.8% Y/Y
• CHINA JUL UNEMPLOYMENT RATE +5.3% VS JUN +5.2%

MNI (Beijing) China's production, consumption and investment slowed more than expected in July despite efforts to boost domestic demand, data released by the National Bureau of Statistics on Tuesday showed. Industrial production rose 3.7% y/y in July, underperforming the 4.3% forecast and decelerating from June's 4.4%. Retail sales increased 2.5% y/y in July to hit the lowest level this year, missing expectations for 3.8% and slowing from June's 3.1%.

JAPAN DATA (MNI): Japan Q2 GDP Rises 1.5% Q/Q; Annualized 6.0%

• JAPAN Q2 REAL GDP +1.5% Q/Q; MNI MEDIAN +0.8%
• JAPAN Q2 REAL GDP +6.0% ANNUALIZED; MNI MEDIAN +3.3%
• JAPAN Q2 CAPEX +0.0% Q/Q; 0.0 PP CONTRIBUTION

Japan's economy grew for a second straight quarter in Q2, boosted by stronger net exports, although capital investment and private consumption slowed, preliminary GDP data released by the Cabinet Office Tuesday showed. Q2 GDP rose 1.5% q/q, or an annualized 6.0%, following a revised 0.9% q/q gain in Q1.The Q2 growth was much stronger than the MNI median forecast that pointed to a rise of 0.8% q/q, or an annualized +3.3%.

FOREX: USD/JPY Shrugs Off Currency Commentary to Print a New High

• USD/JPY notched a new high at 145.87 overnight - again a YTD best - as markets shrugged off comments from finance minister Suzuki, who commented directly on FX - the first official to do so in close to a month. Suzuki stated that the Japanese authorities will take action if they see excessive FX moves - which he deems as undesirable. He was cautious not to impact market prices, however, stating that he won't discuss specific levels, even hypothetically.
• GBP was an early riser, rallying on the back of a better-than-expected jobs report, which saw wages rise at a faster pace than expected. As such, BoE pricing has inched higher to support the currency - putting EUR/GBP at the lowest levels since August 1st.
• An early dose of risk-off helped support the dollar, with a steeper US yield curve aiding equities lower and putting pressure on the likes of EUR/USD and GBP/USD.
• SEK is the poorest performer in G10 as inflation pressures ebbed in the July CPI release. M/M and and the CPIF figure fell short of expectations, helping EUR/SEK hold close to resistance at the week's highs of 11.8882.
• Focus ahead turns to July US retail sales and Empire manufacturing releases as well as the Canadian CPI release for July. Markets expect Canada's core CPI trim to slow by 0.1ppts to 3.6% - despite an uptick in both M/M and Y/Y measures. Fed's Kashkari speaks at 1600BST/1100ET.

BONDS: Testing Key Supports

• The biggest driver in core FI markets this morning has been the higher-than-expected wage growth data from the UK. This has helped gilt futures move to their lowest level since July 11 while Bund futures have just breached their July 10 low to touch their lowest level since March. TY1 futures hit their lowest level since November 2022.
• The wage data in the UK labour market report has led to a bear flattening of the gilt curve with markets now pricing in more than 30bp for the September meeting (up from 23bp pre-data) and a peak in excess of 6.00% (76bp priced by March 2023 - up 13bp on the day and up 20bp from last week's close). This is despite the rest of the report being rather disappointing.
• 10-year Bunds have actually moved more than 10-year gilts at the time of writing - with the German curve seeing a largely parallel shift. The ZEW survey didn't move Bunds bit saw expectations improve while current conditions were worse than expected.
• The UST curve has steepened with 2-year yields little changed.
• Looking ahead US retail sales, Canadian CPI and US TIC flow data will be the highlights for the remainder of the session.
• TY1 futures are down -0-9 today at 109-23 with 10y UST yields up 3.1bp at 4.224% and 2y yields down -0.1bp at 4.969%.
• Bund futures are down -0.64 today at 130.63 with 10y Bund yields up 5.9bp at 2.694% and Schatz yields up 6.0bp at 3.128%.
• Gilt futures are down -0.55 today at 926.63 with 10y yields up 5.2bp at 4.615% and 2y yields up 9.1bp at 5.151%.

EQUITIES: E-Mini S&P Dips Through the European Open

A bearish threat in Eurostoxx 50 futures remains present following the recent reversal from 4513.00, the Jul 31 high. Short-term gains are considered corrective. Price remains below both the 20- and 50-day EMAs and attention is on support at 4276.00, the Aug 8 low. Clearance of this level would strengthen a bearish threat and expose 4220.00, the Jul 7 low. Initial firm resistance is 4420.00, Aug 10 high. Bearish conditions in the E-mini S&P contract remain intact and short-term gains are considered corrective. Price is trading closer to its recent lows. Last Friday’s move lower resulted in a test of the 50-day EMA at 4464.19. A clear break of this average would expose 4456.29, the base of a bull channel drawn from the Mar 13 low. Clearance of this support would strengthen a bearish threat. Resistance to watch is 4560.75, Aug 4 high.

• Japan's NIKKEI closed higher by 178.98 pts or +0.56% at 32238.89 and the TOPIX ended 9.42 pts higher or +0.41% at 2290.31.
• Elsewhere, in China the SHANGHAI closed lower by 2.251 pts or -0.07% at 3176.176 and the HANG SENG ended 192.44 pts lower or -1.03% at 18581.11.
• Across Europe, Germany's DAX trades lower by 118.88 pts or -0.75% at 15788.95, FTSE 100 lower by 95.88 pts or -1.28% at 7409.11, CAC 40 down 71.52 pts or -0.97% at 7278.25 and Euro Stoxx 50 down 38.21 pts or -0.88% at 4292.7.
• Dow Jones mini down 165 pts or -0.47% at 35214, S&P 500 mini down 19.25 pts or -0.43% at 4488.25, NASDAQ mini down 54.5 pts or -0.36% at 15219.

COMMODITIES: WTI Futures Respect Recent Ranges

The uptrend in WTI futures remains intact and the latest pullback appears to be a correction. Last week’s gains confirmed a resumption of the bull cycle. Price breached resistance at $83.59, the Nov 7 2022 high. The break strengthened a bullish condition and has paved the way for a climb towards $87.43, a Fibonacci projection. Moving average studies are in bull-mode condition highlighting an uptrend. Initial firm support lies at $78.69, Aug 3 low. Gold remains bearish and the yellow metal traded lower yesterday, maintaining the bear cycle that started Jul 20. Sights are on key support at $1893.1, the Jun 29 low. A break of this level would strengthen bearish conditions. On the upside, initial firm resistance to watch is $1943.2, the 50-day EMA. A break of this level would highlight a possible short-term reversal.

• WTI Crude up $0.02 or +0.02% at $82.43
• Natural Gas up $0.04 or +1.5% at $2.836
• Gold spot down $2.36 or -0.12% at $1904.55
• Copper down $4.2 or -1.12% at $371.5
• Silver down $0.07 or -0.3% at $22.537
• Platinum down $6.42 or -0.71% at $898.03