7 Up for the RMB as risk appetite evaporates

Chris Scicluna
Emily Nicol

Overview:
Trump’s trade war continued to cast a pall over Asian markets today, with a weakening of the renminbi – through 7/$ for the first time since the GFC in 2008 (CNY is currently about 7.032/$ with the offshore CNH briefly moving through 7.10/$ for the first time) – among several striking developments. The marked risk-off tone to FX markets also inevitably boosted the yen, which sustained an appreciation through 106/$ for the first time since April 2018, while – weighed by trade tensions with Japan – Korea’s won weakened notably again, down about 1½% and through 1215/$ for the first time since early 2016. Korean indices led the declines in equity markets too, with the KOSDAQ down more than 7% and KOSPI down more than 2½%, the latter a feat matched also by Hong Kong’s Hang Seng, impacted again by the weekend’s ongoing protests as well as a steep decline in the region’s whole-economy PMI to its lowest since March 2009 (43.8). China’s CSI300 (down about 1½%) and Japan’s Topix (down 1.8% at the close) also chalked up substantive falls.

With risk appetite evaporating, the major bond markets predictably saw major gains. JGBs rallied, with 10Y yields down more than 2½bps to below -0.20% – the bottom of the BoJ’s informal target range – for the first time since June 2016. Yields on USTs, meanwhile, fell about 7bps or more across the curve, pushing 2Y yields to 1.64% for the first time since November 2017 and 10Y yields down to 1.77% for the first time since October 2016. Euro area govvies have inevitably opened higher too, with yields on 10Y Bunds down a further 3bps to a new record low below -0.53% and BTPs outperforming (10Y yields down almost 5bps to below 1.50%).

More prosaically, data-wise, today will see a focus on the services sector, with final July PMIs for the sector due (see the detail on the Japanese indices below) and the US non-manufacturing ISM also out. Looking ahead to the rest of the week, highlights include the latest RBA announcement tomorrow (with the Cash Rate widely expected to be left unchanged at 1.00%, although recent trade-war and market events might suggest an outside chance of a cut), and data on German factory orders and IP (Tuesday and Wednesday), Chinese trade (Thursday), and Japanese and UK Q2 GDP (Friday).

Japan:
In Japan, the final services PMI for July was somewhat disappointing, with the headline index revised down from the flash estimate by 0.5pt to 51.8. Admittedly, this left the business activity PMI just 0.1pt lower than June and broadly in line with the average of the past year two years. The survey’s other key components were also revised lower from the flash release, to leave them notably lower than the end of Q2. In particular, the new orders PMI was down 1pt compared with June at 51.9, a twelve-month low; the employment index was 1.3pts lower at 50.6, a nine-month low; and the output price index declined 0.5pt to 51.3, also a nine-month low. So, while the manufacturing PMI ticked slightly higher in July, at 49.4 it remained consistent with contraction. As such, the composite PMI fell 0.2pt in July to 50.6, a four-month low, with the new orders component down 0.6pt to 50.6, the lowest for almost three years. And at least as far as this survey is concerned, inflationary pressures softened further, with the output price PMI down 0.5pt to 50.6, the lowest for two years.

But the main Japanese data focus this week will be the first estimate of Q2 GDP on Friday. Not least given weaker global demand, we expect growth to have slowed significantly last quarter to 0.1%Q/Q, from 0.6%Q/Q in Q1. Indeed, while private consumption is expected to have recovered from the decline in Q1, net trade is set to be a significant drag on growth having been the main driver at the start of the year. Tomorrow’s household spending and Wednesday’s BoJ consumption activity figures for June will provide further insight into expenditure growth in Q2. Also of interest tomorrow will be the latest average labour earnings release, which is expected to report the sixth consecutive year-on-year decline in June. And the BoJ’s Summary of Opinion’s on Wednesday will be watched for further insight into the Policy Board’s willingness to provide further monetary support should it be required. Supply-wise, the MoF will sell 30Y JGBs tomorrow and 10Y index-linked JGBs on Thursday.

Euro area:
Like the other major economies, the main focus in the euro area today will be the final services and composite PMIs for July. While the flash estimates suggested that euro area services activity remained broadly stable at the start of the third quarter – the headline index declined just 0.3pt to 53.3 – weakness in the manufacturing sector meant that the preliminary composite PMI fell 0.7pt to 51.5. This marks one of the lowest readings of the past six years and is consistent with a further moderation in GDP growth at the start of Q3.

The data calendar for the remainder of the week focuses on national manufacturing production releases for June. Tomorrow brings German factory orders figures, followed by that country’s IP numbers on Wednesday. Both releases are likely to signal a weakening trend in Q2, with IP expected to have declined by more than ½%M/M in June. While manufacturing output in France (due Friday) and Spain (due Thursday) is likely to have declined in June, this followed solid growth in previous months and should likely remain positive over the quarter as a whole. The latest goods trade reports for June from France (Wednesday), Germany and Italy (Friday) will also be of interest.

Aside from economic data, Friday will see Fitch publish a scheduled review of Italy’s sovereign credit rating, which is currently on negative outlook. In the markets, meanwhile, Germany will sell 5Y Bunds on Wednesday.

UK:
The UK’s economic calendar in the coming week is bookended by the most noteworthy releases. Of principal focus will be the first estimate of Q2 GDP on Friday, which is expected to report a marked easing in growth from 0.5%Q/Q in Q1. The consensus expectation is for GDP to have moved sideways. But we see a significant chance that output contracted in Q2 for the first time since Q412, with the manufacturing sector expected to have been a significant drag on GDP growth, while services and construction output remained subdued. Friday will also bring the monthly output and trade figures for June.

Today will provide an update on economic conditions at the start of Q3, with the services and composite PMIs for July due for release. In June, the headline services index fell 0.8pt to 50.2, consistent with a broad stagnation. As such, the composite PMI fell below the key-50 level for the first time since the post-referendum plunge. And not least given the ongoing weakness in the manufacturing and construction sectors, we expect it to remain firmly in contractionary territory at the start of Q3. Other July releases include new car registrations figures (today), the BRC’s retail sales monitor (tomorrow) and the RICS house price balance (Thursday). In the markets, the DMO is due to sell 5Y Gilts tomorrow.

US:
In the US, today will bring the week’s most noteworthy release in the form of July’s non-manufacturing ISM. Having declined 1.8pts in June to 55.1, a near-two-year low, the headline index is expected to report only a modest improvement at the start of Q3. The remainder of the week will be much quieter for top-tier releases, with job opening figures (tomorrow), consumer credit numbers (Wednesday) and wholesale trade data (Thursday) for June, along with PPI figures (Friday) for July, with the latter likely to suggest pipeline price pressures remain subdued. Supply-wise, the US Treasury will sell 3Y notes (tomorrow), 10Y notes (Wednesday) and 30Y bonds (Thursday).

China:
With geopolitical tensions having risen at the end of last after Trump threatened to apply tariffs to an additional $300bn of Chinese goods, the main data focus in China this week will be July’s trade report on Thursday. While this is expected to show that exports were down from a year earlier for the second successive month, imports are likely to have declined at a faster pace. Also of interest will be Friday’s inflation figures, with headline CPI expected to remain elevated at 2.7%Y/Y on the back of higher food prices. In contrast, the headline PPI rate is expected to remain unchanged at 0.0%Y/Y.

Australia:
The main event in Australia this week will be the RBA’s monetary policy announcement tomorrow. Having cut the cash rate by 25bps a piece in the previous two meetings, the RBA is widely expected to be kept policy on hold is expected. But attention will be on the accompanying policy statement, Governor Lowe’s press conference and Friday’s publication of the central bank’s quarterly Monetary Policy Statement for any guidance to the near-term policy outlook. It should be relatively quiet on the data front, with tomorrow’s release of June’s trade report most significant. Wednesday will also bring the latest mortgage lending figures for June.

 

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