Asian stock markets are mixed

July 27, 2016

FX News Today

European Outlook: Asian stock markets are mixed, with Japanese equities outperforming as the Yen retreated and amid Abe stimulus hopes. U.S. and U.K. stock futures are also higher ahead of today’s FOMC announcement and the BoJ decision later in the week. The Fed is expected to maintain a steady policy and the tone of the statement will be scrutinized for insights on the policy path over the rest of the year. The outlook should be biased to optimistic side given the improved data. Today’s European calendar focuses on U.K. Q2 GDP, which is seen at 0.5% q/q and 2.1% y/y (medians same), after 0.4% q/q and 2.0% y/y in Q1. The more time post-Brexit CBI distributive trades survey for July, however, is expected to confirm that confidence was hit by the referendum result. Germany has GfK consumer confidence at the start of the session and the Eurozone also has M3 money supply growth.

Japan stimulus: Japanese prime minister Shinzo Abe said he would next week announce a huge economic stimulus package worth more than 28 trillion yen ($266bn, £202bn) in a bid to boost the country’s stumbling economy. He gave few details except to say it would include about 13 trillion yen in government spending, according to reports. Those measures are likely to include spending by national and local government, as well as loan schemes.

US Market Reports: Beat estimates and solidified both the ongoing housing market recovery and the upturn in producer sentiment from winter lows, alongside restraint in consumer confidence with a 97.3 July reading that was slightly better than assumed. For new home sales, we saw a 3.5% July rise to a cycle-high 592k in June after net upward revisions, alongside a 6.2% median price bounce and a 1.2% inventory rise back to a six-year high of 244k. For sentiment, the Richmond Fed surged to 10.0 in July from a three-year low of -9.6 (was -7.0) in June, with annual revisions that trimmed the March bounce and ensuing drop-back to leave a more stable recovery path from an ugly winter. Yesterday’s Dallas Fed surge to -1.3 in July from -18.3 in June left the strongest reading since December of 2014, as this index recovers with oil prices from the -34.6 expansion-low in January.

Australia signs of inflation:  Australian consumer prices rose 1.0% from a year earlier, just under expectations of a 1.1% rise. The Reserve Bank of Australia targets an inflation rate of between 2% and 3%. This flat inflation data will give the central bank room to cut rates when it meets in August to stoke inflation and growth. Whether this data is poor enough to prompt an August move, time will tell, but they will have to move before year end, unless we see a significant uptick in CPI.


Main Macro Events Today        

UK 2Q GDP  – Expectations are for 0.5% q/q and 2.1% y/y. All pre Brexit data less one week. Likely to be the top of the growth for 2016 “as good as it gets” for a post Brexit UK.

US Durable Goods – June durable goods data is out on Wednesday and should reveal a 0.5% (median -1.0%) decline for orders on the month with shipments up 1.0% and inventories down 0.2%. This compares to May figures which had orders down 2.3%, shipments down 0.2% and inventories down 0.3%. Data in line with this forecast would leave the I/S ratio falling to 1.63 after holding at 1.65 in both May and April.

FOMC Monetary Policy Statement  – The better than expected data add to rate hike worries and beliefs the Fed could get back on its normalization path as soon as September. However, December may still be the better bet given the very cautious posture seen in recent Fedspeak and the FOMC minutes to June. There could also be a pick up in market volatility ahead of the October 14 deadline for money market reforms that could see an additional $200 bln to $400 bln in prime fund outflows (on top of the $400 bln that’s fled since mid-2015) to government only accounts. Implied rates on Fed funds futures reflect only slight chance for action this week, at about 10%, though it was 0% right after the Brexit vote a month ago. The market is still pricing in about 30% chance for a move in September; it too was 0% post Brexit. Risk that the funds rate target band is boosted 25 basis points by year end has risen to about 50-50, from only about 18% last month.

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