Futures Flat, Yields Slide As ECB Hawk Sends Dovish Message

US equity futures were trading flat on Tuesday as Bank of America unveiled solid second-quarter earnings (and Morgan Stanley on deck), with retail sales also due this morning (expect a miss as noted last night) giving the latest insight on the health of American consumers. Contracts for the S&P 500 and the Nasdaq 100 futures were fractionally lower at 4,551 as of 7:15 a.m. ET. Treasury yields declined across maturities, while the dollar weakened. A rally in European bonds gained steam Tuesday after prominent ECB hawk Klaas Knot raised hopes that the end of the rate-hiking cycle is in sight. Gold, bitcoin and oil prices rose, whereas iron ore was down slightly.

In premarket trading, Microsoft and Activision Blizzard dropped slightly after Bloomberg reported that their $69 billion deal was unlikely to close by its Tuesday deadline. Here are some other premarket movers:

• Bank of America rose as much as 1.6% after reporting earnings that beat on the top and bottom line.
• Trade Desk’s rating is cut to sell from neutral at New Street Research, which reckons that near-term estimate revisions at the advertising tech firm are unlikely to support the expansion in price multiples. Shares slip 1.7% in US premarket trading.
• CommScope shares fell as much as 4% in US premarket trading after the communications equipment firm was cut to hold at Deutsche Bank, which says lingering pressure on customer orders is likely to persist.

A reprieve in inflation is prompting dovish talk among central bankers and speculation they’re ready to back down from the fastest pace of hikes in four decades. Yields tumbled across the region, with those on Italian debt sinking 13 basis points after ECB Governing Council member Klaas Knot said monetary tightening beyond next week’s meeting is anything but guaranteed. The yield on 10-year German securities fell as much as 8 basis points to 2.4%, a two-week low. Meanwhile, ECB Governing Council member Ignazio Visco said inflation may come down more quickly as lower commodity prices start to trickle through the economy. Consumer price index reports are due out of the Eurozone and UK Wednesday, after data last week showed US price pressures cooled more than economists had forecast.

Analysts have described the current equity rally as a bet on receding inflation allowing the US Federal Reserve to end its tightening monetary cycle. To that end, Treasury Secretary Janet Yellen said in a Bloomberg TV interview on Monday that the US was on a “good path” to bringing down inflation while avoiding a recession, a view with which 68% of fund managers in Bank of America’s July global survey agreed (more on that in a latter post).

“It’s clear that it’s the receding inflation narrative which is driving everything,” said Gilles Guibout, a portfolio manager at Axa Investment Managers in Paris. Guibout added that in his view, the market’s direction of travel upwards was due to a general sense of optimism rather than hard data. 

“Investors are feeding on hope: hope that US rates will get down sooner and hope that China will launch a stimulus package to beef up consumption,” he said, arguing that the lack of evidence on both fronts explained some of the wait-and-see positioning palpable across the market.

Equities also staged a recovery from the steepest losses in more than a week Monday, as the Stoxx Europe 600 rose 0.2%, as health care, chemicals and media are the best performing sectors while telecommunications fall. Ocado Group Plc shares rose as much as 16% after the UK online grocer’s first-half earnings topped estimates. Novartis AG climbed after raising its profit outlook and announcing plans for a share buyback of up to $15 billion. Here are some other notable European movers:

• Novartis gains as much as 4% after the Swiss pharmaceutical giant beat expectations on both sales and profit, with analysts highlighting the strong performance for some of its key drugs
• Ocado shares rise as much as 16% after the UK online grocer reported 1H earnings that beat estimates and show “a strong shift to profitability,” according to Bernstein
• Swedish Orphan Biovitrum shares jump as much as 8.8%, the most since December 2021, after the biotech reported 2Q sales that beat estimates and increased its revenue outlook for the year
• Darktrace gains as much as 25% after saying an independent review by Ernst & Young didn’t find issues in its processes that weren’t already known to the company
• Investor AB rises as much as 3.4% as analysts digest the news in the industrial holding company’s latest quarterly report. Handelsbanken raises its long-term recommendation to outperform
• Schibsted rises as much as 7.9%, the most since November 2022, after the Norwegian classified advertising and media firm delivered its second-quarter results
• Atoss Software shares jump as much as 9.4% to a record high after Warburg says the company delivered “outstanding” first-half results, noting a significant beat to Ebit margins
• Tele2 drops as much as 11% and is the worst performer in the Stoxx 600 on Tuesday after the telecom operator announced a significant increase in capital expenditure
• SFS falls as much as 5.9% after the fastening systems firm reported first half sales that missed estimates. Vontobel says the results reflect reduced consumer demand and cost inflation

Earlier in the session, Asian stocks declined, on course for a second day of losses, as Hong Kong played catch-up following weaker-than-expected Chinese economic growth. The MSCI Asia Pacific Index slipped as much as 0.3%, with Tencent and Alibaba among the biggest drags. Hong Kong’s benchmark dropped 2% with property stocks among the biggest losers as the market reopened after a typhoon cancelled Monday’s session. Equities fell in mainland China for a second day, with Taiwan, South Korea and Australia also posting notable declines. The main Asian stock benchmark has stumbled for the past two days after its best weekly rally since January. The gauge is up 8% this year, underperforming key US and global measures amid concerns over China’s slow recovery.

• Hang Seng and Shanghai Comp were lower with property stocks leading the declines in Hong Kong after the long-delayed results from the world’s most indebted developer Evergrande which suffered a net loss of CNY 476bln and CNY 105.9bln for 2021 and 2022, respectively. The US-China relationship also remained in focus with amicable comments in talks between US Climate Envoy Kerry and China’s top diplomat Wang Yi, although this was somewhat negated by reports the US aims to propose China investment limits by the end of next month and that President Biden is weighing new curbs on chips and semiconductor-making devices.
• ASX 200 was subdued as participants digested the RBA Minutes from the July 4th meeting which noted that the Board agreed some further tightening may be required and will reconsider at the August meeting, while it also noted the economy had slowed considerably and that consumer spending is seen weak in Q2.
• Nikkei 225 initially advanced on return from the long weekend but then suffered a reality check and momentarily faded all of its gains amid weakness in its peers.
• Indian stocks closed at new record highs on Tuesday, outperforming most regional peers, boosted by gains in Reliance Industries and information technology stocks. The S&P BSE Sensex rose 0.3% to 66,795.14 in Mumbai, while the NSE Nifty 50 Index advanced 0.2% to 19,749.25. Indian stocks have seen continued support from global funds, who bought net about $2.7 billion worth of local shares in July so far, taking the total inflows this year to $13.8 billion. Shares of Adani Group closed mostly higher after Founder Gautam Adani told shareholders that the group will improve corporate governance standards, while reaffirming its ambitious growth targets.  Infosys contributed the most to the Sensex’s gain, increasing 3.7%. Out of 30 shares in the Sensex index, 14 rose, while 16.

China’s stuttering recovery is leading to disquiet as investors consider the knock-on effects from a slowdown in the world’s growth engine. “Investors will be much more interested to understand the outlooks for Q3, as macro continues to deteriorate, mainly in Europe, and China’s expectation of a sudden recovery is faltering,” Luca Fina, head of equity at Generali Insurance Asset Management, wrote in a note to clients.

Investors are looking for possible announcements of further stimulus from Beijing after the slower-than-expected growth data for the second quarter. Joyce Chang, JPMorgan’s global research chair, said in an interview with Bloomberg TV that she expected “modest” measures and better third-quarter growth figures from Asia’s largest economy. Despite the weakness in Chinese equities, HSBC remains upbeat on the long-term outlook for the offshore market, “given the prospects for earnings growth and policies aimed at stimulating growth in China,” according to Raymond Liu, an equity strategist at the firm.

In FX, the dollar remained near its 15-month low on mounting expectations the Federal Reserve is set to wind down its hiking macrocycle. The Bloomberg Dollar Spot Index is down 0.1% while the kiwi is the weakest of the G-10’s, falling 0.5% versus the greenback. The euro pared a gain after Knot’s remarks, but remains on track for its longest winning daily streak since October 2004.

In rates, treasuries advanced with 10-year futures exceeding Monday session highs, led by bunds after dovish comments from Klaas Knot, hawkish member of the ECB Board, who pushed back on expectations for a September rate hike. The Dutch central bank governor is widely known as one of the most hawkish members of the Governing Council but seemed to push back against market pricing for two more quarter-point interest rate hikes. German two-year yields are down 10bps at 3.09%, while US yields were richer by 3bp to 6bp across the curve with gains led by belly, extending Monday’s steepening move in 5s30s spread by an additional 2.5bp on the day; 10-year yields at ~3.75% are richer by 5bp vs Monday close with bunds outperforming by 2bp in the sector.  Swap contracts linked to Fed policy meetings edge closer to fully pricing in a quarter-point rate increase on July 26 for the first time since the June meeting; an additional increase after July continues to be about one-third priced in. The US session includes a raft of economic data led by retail sales and industrial production.   

In commodities, crude futures advanced, with WTI rising 0.7% to trade near $74.70. Spot gold rises 0.4%.

Bitcoin is a touch firmer but has slipped below the $30K mark despite the softer USD with catalysts light and the tone very much one of anticipation ahead of earnings and data.

To the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for June, along with the NAHB’s housing market index for July. Meanwhile in Canada, we’ll get the June CPI release. From central banks, we’ll hear from Fed Vice Chair for Supervision Barr. Finally, earnings releases include Bank of America and Morgan Stanley.

Market Snapshot

• S&P 500 futures little changed at 4,555.25
• MXAP little changed at 168.18
• MXAPJ down 0.7% to 530.15
• Nikkei up 0.3% to 32,493.89
• Topix up 0.6% to 2,252.28
• Hang Seng Index down 2.1% to 19,015.72
• Shanghai Composite down 0.4% to 3,197.82
• Sensex up 0.4% to 66,883.88
• Australia S&P/ASX 200 down 0.2% to 7,283.78
• Kospi down 0.4% to 2,607.62
• STOXX Europe 600 up 0.3% to 459.29
• German 10Y yield little changed at 2.41%
• Euro little changed at $1.1237
• Brent Futures up 0.2% to $78.65/bbl
• Gold spot up 0.3% to $1,961.39
• U.S. Dollar Index little changed at 99.81

Top Overnight News from Bloomberg

• Australia’s central bank said the case to leave interest rates unchanged this month was the “stronger one” following a series of line-ball decisions as policymakers focused on the long lags of transmission and the risk of a sharper economic downturn
• The Biden administration’s plans to restrict investments in China will be narrowly focused on cutting-edge technology, only new investments, and likely won’t go into effect until next year as the policy grinds through Washington’s bureaucracy
• Treasury Secretary Janet Yellen said China’s economic slowdown risks causing ripple effects across the global economy, though she doesn’t expect a recession in the US
• US bank regulators are set to release their plans next week for a sweeping overhaul of capital rules, with the latest draft including requirements for large lenders’ residential mortgages that go beyond international standards
• Mexico’s President Andres Manuel Lopez Obrador criticized Texas Governor Greg Abbott for installing buoys in the Rio Grande to prevent migrants from swimming across the border
• Brendan Murphy is shorting 10-year Japanese government bond futures on a wager that it’s only a matter of time before the nation’s central bank tightens monetary policy
• Shale oil production, which has revolutionized the energy industry and transformed the US economy, will stop growing in August, according to a government report
• Argentina’s overseas bonds climbed Monday after the nation’s opposition coalition pummeled the left-leaning incumbent in a primary gubernatorial election Sunday night

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly lower after the region failed to sustain the momentum from Wall St where tech and small caps outperformed after NY Fed Manufacturing data softened the blow from recent Chinese data. ASX 200 was subdued as participants digested the RBA Minutes from the July 4th meeting which noted that the Board agreed some further tightening may be required and will reconsider at the August meeting, while it also noted the economy had slowed considerably and that consumer spending is seen weak in Q2. Nikkei 225 initially advanced on return from the long weekend but then suffered a reality check and momentarily faded all of its gains amid weakness in its peers. Hang Seng and Shanghai Comp were lower with property stocks leading the declines in Hong Kong after the long-delayed results from the world’s most indebted developer Evergrande which suffered a net loss of CNY 476bln and CNY 105.9bln for 2021 and 2022, respectively. The US-China relationship also remained in focus with amicable comments in talks between US Climate Envoy Kerry and China’s top diplomat Wang Yi, although this was somewhat negated by reports the US aims to propose China investment limits by the end of next month and that President Biden is weighing new curbs on chips and semiconductor-making devices.

Top Asian News

• China published measures to support household consumption which includes home appliances and it told financial companies to enhance household spending support. China stated that authorities will encourage companies to create online service platforms for household consumer services and will kick off household consumer goods promotion.
• China's NDRC said they will deepen SOE reforms, break the institutional barriers restricting private firms from participating in fair market competition and will boost private investment, as well as create a positive development environment for private firms. NDRC added that persistent economic recovery faces risks and challenges including insufficient demand, sluggish momentum and weak confidence, while it will boost household income through various channels and will strive to ensure household income growth is basically in line with economic growth.
• US aims to propose China investment limits by end-August with limits likely to not take effect until 2024, while US outbound investment curbs are focused on AI, chips and quantum computing, according to Bloomberg citing sources familiar with Biden administration's plans.
• US Climate Envoy Kerry met with China's top diplomat Wang Yi in Beijing and said their hope is that this could be the beginning of a new cooperation to solve the differences between the US and China, while Wang called Kerry 'our old friend' at the meeting in Beijing and Kerry noted that President Biden is very committed to stability in the US-China relationship and to achieve efforts that can make a difference to the world. Kerry also stated that President Biden values his relationship with President Xi and looks forward to being able to move forward and change the dynamics, while he added that they can begin to change the broader relationship through climate talks.
• RBA Minutes from the July 4th meeting stated that the Board considered holding rates steady or hiking by 25bps and that there was a strong case for both but Board judged arguments for holding steady were stronger, while it agreed some further tightening may be required and would reconsider at the August meeting. RBA stated that the current stance of monetary policy was clearly restrictive and would become more so, as well as noted the economy had slowed considerably with Q2 GDP growth seen around 0.2% Q/Q and consumer spending is seen weak in Q2 although a rebound in the housing market will support consumption.

Top European News

• UK food manufacturers reduced prices for the first time in three years last month which increases hopes that record-high grocery inflation could start to slow soon, according to a report in The Times citing data from the Lloyds monthly UK business tracker.
• ECB's Visco said underlying inflation is stubborn and is more complicated, while he also commented that manufacturing is slowing but services such as tourism are booming.
• ECB's Knot, re. a hike in July, describes this as a necessity. Hikes beyond July are possible, not a certainty. Could have hit an inflation plateau, via Bloomberg TV.

FX

• Buck fades after brief post-Empire State bounce, but DXY finds support ahead of 99.500 and last Friday's low.
• Euro extends gains on 1.1200 handle vs Dollar to probe Fib resistance at 1.1271 before knock-back from ECB's Knot.
• Yen rebounds sharply against Greenback from 138.92 to 138.10 as US Treasury yields retreat, Pound retests 1.3100 on the eve of UK CPI, but Loonie loses 1.3200+ status approaching Canadian inflation data.
• Aussie flanked by option expiries at 0.6800 and 0.6850, Kiwi loses momentum and grip of 0.6300 ahead of NZ Q2 CPI.
• PBoC set USD/CNY mid-point at 7.1453 vs exp. 7.1704 (prev. 7.1326)

Fixed Income

• Debt extends recovery rally towards or through current m-t-d highs.
• Bunds pull up just shy of 134.00 between 133.97-08 parameters, Gilts reach 95.72 from a 95.20 Liffe low and T-note tops 113-00 within a 113-02+/112-19 + range ahead of tier one US and Canadian data.
• 2053 UK sale came with lengthy tail, but new German Schatz well received.

Commodities

• Crude benchmarks are little changed this morning despite a choppy start to the week on Monday with catalysts thin thus far.
• Spot gold is deriving some incremental support from the softer USD and tentative risk tone, though action is very much in a holding pattern before US earnings and data thereafter.
• Base metals are pressured in a continuation of the China story and despite a number of support measures being flagged in APAC trade for the region.
• Kazakhstan's KazMunayGas says all three oil refineries are operating normally, following the power outage at the beginning of July, via Tass.

Geopolitics

• Ukrainian President Zelensky said he agreed with UN Secretary-General Guterres to work together on ensuring Black Sea grain shipments and food security, according to Reuters.
• Taiwan's VP and ruling party candidate Lai is to visit the US in August as part of a South American trip although the trip will not involve high-profile engagements or locations that could provide a pretext for a reaction from Beijing, according to FT citing sources.
• US Secretary of State Blinken said there's no reason for China to use the transit in the US of Taiwan’s presidential frontrunner Lai as a pretext for provocative action.
• Senior US, Japanese and South Korean officials are to meet in Japan on Thursday to discuss recent developments in North Korea, according to a Japanese Foreign Ministry statement. Furthermore, South Korean President Yoon said the new nuclear consultative group meeting with the US will be a starting point to build strong, effective deterrence against North Korea, according to Reuters.

US Event Calendar

• 08:30: June Retail Sales Advance MoM, est. 0.5%, prior 0.3%
  • June Retail Sales Ex Auto MoM, est. 0.3%, prior 0.1%
  • June Retail Sales Ex Auto and Gas, est. 0.3%, prior 0.4%
  • June Retail Sales Control Group, est. 0.3%, prior 0.2%
• 09:15: June Industrial Production MoM, est. 0%, prior -0.2%
  • June Manufacturing (SIC) Production, est. 0%, prior 0.1%
  • June Capacity Utilization, est. 79.5%, prior 79.6%
• 10:00: May Business Inventories, est. 0.2%, prior 0.2%
• 10:00: July NAHB Housing Market Index, est. 56, prior 55
• 16:00: May Total Net TIC Flows, prior $48.4b

DB's Jim Reid concludes the overnight wrap

I'll be wearing a hard hat and steel capped boots in the office today. No I'm not giving my team their appraisals but am going to have a look around Deutsche Bank's brand new London HQ which is currently in the last few months of being built. The CGI mock ups look phenomenal and there is everything you could possibly want in one building (apart from a golf simulator). However I do remember when I moved from the City to Canary Wharf in around 1996 at my old firm, we were each given a promo video for the move that included doing horse riding, rowing, dragon boat racing and feeding farmyard animals in your lunch break. It's fair to say none of that ever materialised. The place was a ghost town for a few years!

Investors in certain pockets of the market had to don hard hats themselves yesterday as weak Chinese data dominated markets during a weak Asia and European session. Risk sentiment improved during US hours with the S&P 500 (+0.39%) and NASDAQ (+0.93%) managing to hit fresh 15-month highs, while European stocks most exposed to China suffered.

As a reminder, China’s Q2 GDP growth came in at +6.3% on a year-on-year basis (vs. +7.1% expected), which added to the series of underwhelming data there over recent months. On the back of the release, our China economists have lowered their GDP growth view for 2023 from +6.0% to +5.3%, and for 2024 from +6.1% to +5.0%, noting evidence of lacklustre domestic consumption demand and a deterioration in the property sector. They expect additional monetary easing to come through in H2 2023, and see the need for fiscal easing as well. See their report here for more.

The data weighed in particular on European equities, being generally more exposed to China than their US counterparts. Most notably, the CAC 40 (-1.12%) was the biggest underperformer, because the French index has a concentration in luxury goods that are more affected by demand from China, whilst the Swiss Market Index was down -1.21% as well. In turn, that dragged down the broader STOXX 600 (-0.63%), with LVMH (-3.73%) and Hermès (-4.21%) among the worst performers.

This weakness wasn’t anywhere near as obvious in the US, where the S&P 500 (+0.39%) posted a decent advance that took it to another 15-month high. However, if you looked at the NASDAQ Golden Dragon China Index (-0.17%), which covers US-traded stocks where a majority of business is conducted in China, there was a visible underperformance. Indeed, that index is now only up +5.77% on a YTD basis, which is some way beneath the +17.80% gain for the S&P 500. That said, broader US equities had a positive day, with the NASDAQ (+0.93%) also hitting a 15-month high and the FANG+ index of tech megacap stocks (+1.21%) outperforming to reach a new all-time high.

Aside from the effect on equities, the more cautious outlook for China led investors to dial back their expectations of future rate hikes. The moves were fairly modest, but futures pricing for the Fed’s terminal rate in November came down -0.5bps to 5.40%, and is down another -1.3bps this morning to 5.39%. Looking further out, the rate for the June 2024 meeting fell -3.3bps to 4.64%, with another -1.8bps fall this morning to 4.62%. That helped yields to decline across most of the curve, with the 2yr Treasury yield down -2.7bps to 4.74%, whilst the 10yr yield was down -2.4bps to 3.81%. That trend was further supported by a decline in commodity prices, with Brent Crude oil prices (-1.72%) down to a one-week low of $78.50/bbl.

When it came to the ECB, there was also a bit more caution about the near-term hiking profile. For instance, markets continue to remain very confident in the likelihood of a hike next week, with a 94% chance of a move priced in. But there’s more caution about the meeting after that in September, where a 70% chance is priced of a second hike. That was echoed again in ECB commentary, with Bundesbank President Nagel saying yesterday that “we have to hike next time”. However, he remained more cautious about September, saying that “we will see what the data will tell us”. So a clearly data dependent tone from one of the most hawkish Governing Council members.

This trend helped European sovereign bonds, with yields on 10yr bunds (-3.5bps), OATs (-3.2bps) and BTPs (-1.8bps) all coming down. UK gilts were a relative underperformer, but the 10yr yield still fell -1.1bps on the day. That comes ahead of tomorrow’s CPI print for June, which will be closely watched for whether the BoE will deliver another 50bp hike in August. Remember that the last 4 CPI prints in a row have all seen upside surprises, so that’ll be one to watch when it comes out.

On the geopolitical side, there was significant news after Russia suspended its participation in the grain deal with Ukraine, the previous extension of which ran until yesterday. The move will be bad news for food prices given Ukraine’s role as a key exporter, although our EM economists note that volumes exported under the deal had already declined in recent months. There was a market reaction in response, with wheat prices spiking higher, before paring back the gains to end the day up +1.91%.

Overnight in Asia, equities have seen further declines this morning, despite an announcement from China’s Ministry of Commerce to support household consumption. That includes encouragement for financial institutions to strengthen credit support. In part, that’s down to more negative news on the earnings side, with Evergrande posting a full-year loss for 2022 of 105.9bn yuan, which has led to a decline among Chinese developers overnight.

In terms of the specific moves, the Hang Seng (-2.17%) is the biggest underperformer, with the CSI 300 (-0.30%) and the Shanghai Comp (-0.35%) also losing ground. That’s been echoed for the KOSPI (-0.44%), although the Nikkei (+0.08%) has been the exception with a modest gain. Looking forward, US equity futures are also pointing lower, with those on the S&P 500 down -0.09%.

Elsewhere overnight, the minutes from the Reserve Bank of Australia’s latest meeting on July 4 policy meeting pointed away from another hike in the near term, saying that the case to leave rates on hold was the “stronger one”. Their next meeting is on August 1, but overnight index swaps are only pricing in a 22% chance of another 25bp hike then.

There was very little data to speak of yesterday, although one release was the Empire State manufacturing survey from the US. That saw the headline general business conditions index fall to 1.1 in July, which was slightly better than the -3.5 reading expected by the consensus. There were some positive trends on inflation as well, with the prices paid component down to 16.7, and the prices received component down to 3.9. The last time either were that low was back in the summer of 2020, so it adds to the positive signal from last week’s CPI report.

To the day ahead now, and data releases include US retail sales, industrial production and capacity utilisation for June, along with the NAHB’s housing market index for July. Meanwhile in Canada, we’ll get the June CPI release. From central banks, we’ll hear from Fed Vice Chair for Supervision Barr. Finally, earnings releases include Bank of America and Morgan Stanley.