Asian stock markets mostly headed south

28 July, 2016

European Outlook: Asian stock markets mostly headed south, with Japan underperforming (closing down 1.13%) as the Yen strengthened USDJPY 10477). U.K. stock futures are also down, and oil prices remain under pressure (see more below). Bund futures already moved higher in after hour trade yesterday and are likely to open with gains, supported by risk aversion. The Fed left policy unchanged yesterday and delivered a slightly more upbeat statement, as expected, which leaves rate normalisation on the cards, but the timing of any hike remains in the dark. Today’s calendar has the last of the Eurozone’s major surveys for July, with the ESI seen falling to 104.0 (med 103.7), from 104.4 in the previous month. The risk as with the other survey is to the upside as real sector sentiment so far has weathered the Brexit referendum much better than expected. Germany has unemployment data for July, which is expected to confirm a still robust labour market, and preliminary inflation data for July, with HICP inflation seen rising to 0.3% y/y from 0.2% y/y.

Fed Tightens Statement, but Hike Timing Still Loose: The FOMC held rates unchanged and opted for a slightly more upbeat outlook, as was the risk. The Fed inserted “Near-term risks to the economic outlook have diminished,”which appeared to be a stepping stone towards reviving a “balance of risks” assessment. It also upgraded the employment picture, while cutting the expansion back to a “moderate rate,” and remaining wary of the inflation shortfall. All told, the statement nudged the markets a tiny step closer to resumption of normalization, but specific timing remains a mystery.

US Market Reports: The U.S. durables report was disappointing across the board, given a huge 4.0% June headline orders drop with a 0.5% ex-transportation decline after downward May revisions, alongside weak equipment orders and shipments figures, and a sixth consecutive inventory drop. We lowered our Q2 GDP growth estimate to 2.5% from 2.7%, with a 3% (was 5%) clip for real equipment spending. We expect a $23 (was $19) bln Q2 inventory subtraction that leaves a slightly elevated $45 bln accumulation rate, following three consecutive quarterly subtractions of $10.0 bln in Q1, $7.2 bln in Q4, and $28.0 bln in Q3. We expect a 0.1% June factory inventory drop with a 0.1% total business inventory rise, given today’s 0.2% factory durable inventory decline. We assume a 1.7% June factory orders drop with a 0.5% factory shipments increase, given an assumed 0.6% price-led nondurable shipments and orders rise. The factory durable inventory-to-sales (I/S) ratio fell to 1.64 from 1.65 in April and May as we continue to unwind the December spike to 1.68, versus a 1.70 three-year high in February of 2015 and a 1.59 recovery-low in November of 2013.

Energy Action: WTI crude crashed to three-month lows of $42.11 from over $43.10 following the EIA inventory data which showed a 1.7 mln bbl rise in crude stocks. The street had been expecting a 2.0 mln bbl decrease. Meanwhile, gasoline supplies, seen flat actually rose 0.5 mln bbls, while distillate stocks were down 0.8 mln bbls, versus expectations for a 0.5 mln bbl increase. Refinery usage fell to 92.4% from 93.2%. The report is bearish on the crude and gasoline fronts, with inventories remaining above historical averages for this time of year. Overnight the contract has continued to weaken and traded as low as $41.66 before recovering to a little under $42.

Main Macro Events Today        

US Initial Jobs Claims U.S. initial claims data for the week of July 23 is out Thursday and should reveal a claims increase to a 262k (median 260k) headline following a 253k headline in the week of July 16 and 254k in the two weeks prior to that. July is typically a volatile month as we move through auto retooling season. We expect a stronger July average of 255k compared to 265k in June and 276k in May.

Japanese Data – A raft of Japanese data later (Thursday into Friday) including CPI, Unemployment rate Household Spending, Industrial Production and some Retail figures. Together with the BOJ Statement.

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