Week Ahead: Is hot UK inflation here to stay?

Week Ahead

Quite a lot to look out for in terms of big data this week. First up, we have UK CPI data. Is inflation sticking around for longer than we thought? UK and EU flash PMIs come too at a time when it looks like economic activity is starting to slow down. It’s also US earnings season with leading tech players reporting in. 

UK CPI: circling hawks and hot prints 

On the data front, one of the week’s big releases are the latest UK Consumer Price Index numbers. 

September’s print showed that UK inflation had far exceeded the Bank of England’s 2% target in August. Consumer prices surged by 3.2% in the twelve months up to that month official data showed – the highest month-on-month increase since records began in 2017. 

The Office for National Statistics said the surge was “likely to be a temporary change” and flagged the government’s Eat Out to Help Out (EOHO) scheme may have been a contributing factor to the jump. 

“In August 2020 many prices in restaurants and cafes were discounted because of the government’s Eat Out to Help Out scheme, which offered customers half-price food and drink to eat or drink in (up to the value of £10) between Mondays and Wednesdays,” the ONS said in its statement. 

“Because EOHO was a short-term scheme, the upward shift in the August 2021 12-month inflation rate is likely to be temporary.” 

The official line has been that higher prices are transitionary – but voices from within the Bank of England warn it could be here for longer than first thought.  

The BoE’s new Chief Economist Huw Pill has said he believes hot inflation could be sticking around. 

“In my view, that balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated,” Pill said in September. 

Pill lends his voice to the hawkish chorus steadily building in the Bank of England’s council. A number of MPC members are calling for a rate hike early next year. As such, another high CPI print in September may lead to a turning up of the volume from the hawks. 

PMI rush to signpost economic slowdowns? 

It’s also the time of the month when flash PMI scores start landing thick and fast. 

British and EU data is released this week off the back of last month’s reports which indicate growth is slowing in these two major economies. 

Let’s start with the UK. The IHS Markit flash composite for September indicated output had dropped to the lowest level since February. The UK’s score came in at 54.1 that month, slipping from 54.8 in August. 

Recovery appears to be stalling as we head into the winter months. Lower economic activity matched with higher inflation does not create the most positive of outcomes for Britain’s economy going forward.  

The PMI for the services sector fell to 54.6 in September from 55.0 in August, its lowest level since February when Britain was still in lockdown. Manufacturing fell from 60.3 to 56.4, which is again the lowest level since February. 

It’s the same story across the Channel. European growth was stymied by supply constraints pushing input costs the 20-year highs throughout the EU last month. Will this month’s PMI data show the same? 

In terms of scores, the IHS composite reading showed economic growth had dropped to a five-month low in September. The EU scored 56.1 that month against 59.0 in August. 

This was well below market forecasts. A Reuters poll indicated economists and analysts believed output would slow, but at the much lower rate of 58.5. 

Supply line squeezes coupled with a general slowing of GDP growth appear to be the main factors here. The EU economy is approaching its pre-pandemic size, so a slowdown was always on the cards, but not one quite so drastic. 

I would expect to see a lower EU PMI print on Friday when the latest data lands. 

Wall Street earnings keep on coming – enter the tech stocks 

Next week, we’ll be in the thick of it when it comes to Q3 earnings season. Big banks, including Goldman Sachs, Citigroup, and JPMorgan, kicked things off for us last week. Now, it’s the turn of some big tech mega caps to share their latest financials. 

Netflix and Tesla are the two headliners to watch out for this week. Both reported strong Q1 and Q2 figures but have advised performance may start to drop off in 2021’s third quarter. 

For more information on which companies are reporting and when be sure to check out our US earnings season calendar. 

Major economic data 

Date  Time (GMT+1)  Asset  Event 
Mon 18-Oct  3:00am  CNY  GDP q/y 
  3:00am  CNY  Retail Sales y/y 
  2:15pm  USD  Industrial Production m/m 
  3:30pm  CAD  BOC Business Outlook Survey 
Tue 19-Oct   1:30am  AUD  Monetary Policy Meeting Minutes 
Wed 20-Oct  7:00am  GBP  CPI y/y 
  1:30pm  CAD  CPI m/m 
  1:30pm  CAD  Common CPI y/y 
  1:30pm  CAD  Median CPI y/y 
  1:30pm  CAD  Trimmed CPI y/y 
  3:30pm  USD  Crude Oil Inventories 
Thu 21-Oct  1:30pm  USD  Philly Fed Manufacturing Index 
    USD  Unemployment Claims 
Fri 22-Oct  7:00am  GBP  Retail Sales m/m 
  8:15am  EUR  French Flash Manufacturing PMI 
  8:15am  EUR  French Flash Services PMI 
  8:30am  EUR  German Flash Manufacturing PMI 
  8:30am  EUR  German Flash Services PMI 
  9:00am  EUR  Flash Manufacturing PMI 
  9:00am  EUR  Flash Services PMI 
  9:30am  GBP  Flash Manufacturing PMI 
  9:30am  GBP  Flash Services PMI 
  1:30pm  CAD  Core Retail Sales m/m 
  1:30pm  CAD  Retail Sales m/m 
  2:45pm  USD  Flash Manufacturing PMI 
  2:45pm  USD  Flash Services PMI 
  Tentative  USD  Treasury Currency Report 


Key earnings data 

Tue 19 Oct  Wed 20 Oct  Thu 21 Oct  Fri 22 Oct 
Philip Morris International (PM)   Verizon Communications Inc (VZ)   AT&T (T)   American Express (AXP)  
Johnson & Johnson (JNJ)   International Business Machines (IBM)  Intel Corp (INTC)   Schlumberger Ltd (SLB)  
Procter & Gamble (PG)  Tesla Inc (TSLA)   Snap Inc A (SNAP)    
Netflix Inc (NFLX)        


European stocks hit record high, euro highest since Jan

Morning Note

“I have some Bitcoin, and I have a very particular set of skills”.

Ok, Ray Dalio didn’t say the second bit, but it would have been good if he did. The guy hates cash; we know this, but now he hates on bonds too. For the founder of Bridgewater Associates, even the most volatile asset out there is better than picking up dimes from in front of the inflation steamroller. In a recorded interview shown yesterday at CoinDesk’s Consensus 2021 conference, Dalio said he would rather own Bitcoin than bonds. Dalio has a very particular set of skills: he’s good at making investment calls.

Or at least, he has been good for a long time. Last year, his main macro fund, the Pure Alpha II fund, lost 12.6%. Over the course of 2020, Dalio lost over $12bn whilst peers excelled. It was not a great performance in a year in which many investors were able to successfully call the bottom and ride the recovery in the stock market. He also famously said that ‘cash is trash’, which is kind of a pro-crypto statement in that it tells you he thinks that owning a depreciating asset (cash) is pointless. Dalio previously presented his views on Bitcoin in January, saying that Bitcoin “has features that could make it an attractive storehold of wealth”. The only problem with this argument is that anything that can depreciate by more than 30% in 24hrs is demonstrably not a good store of value. That’s a heck of a lot of years of inflation erosion compressed into a single day. Ok, it’s back up now a bit, but who’s telling where it will head next? Bitcoin bounced on Monday after a steep fall over the weekend. Price action ran into resistance at the $40k level and this morning trades a little below around the $39k area, but well above last week’s multi-month nadir of $30k.

Tech and reopening stocks rose in the US on Monday. Big tech gains helped the S&P 500 look at the 4,200 round number again. Apple rose as the judge in its case against Epic retired to consider her verdict. The case could have important implications for App Store margins. Crypto-exposed stocks like Tesla and MicroStratey both rallied 4% as Bitcoin rose, whilst Coinbase added just 0.4% as Goldman Sachs initiated coverage on the stock with a buy rating. That will be welcome news to Cathie Wood, as the stock is now a top-ten holding in her Innovation ETF. Coinbase offers traders the closest thing to real crypto exposure without actually owning any tokens. The crypto exchange recently listed shares on the Nasdaq via a direct listing but its start to life on the public market has been rocky to say the least. Shares opened on April 14th at $381 but closed the first day at $328 and have since slid to $225.30.

The euro hit its highest since Jan 8th this morning as Germany’s Q1 final GDP reading declined to –1.8% from the initial estimate of –1.7%. Forward-looking indicators were more positive – the Ifo business climate index hit 99.2, ahead of forecast and rising from 96.8 a month before. The expectations number rose to 102.9 from 99.5 a month before. EURUSD broke the resistance at 1.2240 to reach a four-month high at 1.2260. The breach calls for a retest of 2021 highs made at the start of Jan at 1.2350. The dollar index trades at its lowest since January, but sterling has not been able to latch on and GBPUSD holds a whisker under 1.42, a little shy of last week’s three-month high.

The DAX and Stoxx 600 both posted record highs in early trade as they returned from a long weekend. Deutsche Wohnen led the DAX’s 0.7% rally this morning as shares rallied 15% on €18bn takeover offer from German rival Vonovia. Shares in Vonovia fell 5% as the deal, which sees Deutsche Wohnen shareholders paid €0.52 per share an retain the rights to a €1.03 per share dividend, amounts to an 18% premium based on the stock’s undisturbed closing price on Friday. The FTSE 100 trades flat, but comfortably above the 7,000 pivot and towards the upper end of the six-week range.

Now two stocks showing two sides of the same rather tarnished coin: Restaurant Group shares rose ~3% as the casual dining operator reported an encouraging recovery in sales in the five weeks to May 16th. Both Wagamama and Pubs, with a combined 200 sites or so now open, reported comparable sales at 85% of 2019 levels. Leisure sites traded at around 60% of 2019 levels, which was in line with expectations. This ought to also be good news for UK plc and recovery in GDP in Q2 and Q3.

Meanwhile, Greencore tumbled ~11% as the sandwich maker reported revenue declined 19% to £577.1m in the six months to the end of March, noting the decline was driven by a reduction in consumer mobility as a result of tiered restrictions and lockdowns in the UK. Certainly, shares have enjoyed a good run so a bit of profit-booking on the results can be expected, but the reaction in the share price looks overdone – this is very much backward-looking data. Indeed, these results kind of underscore what we already know – anything up to the end of March was incredibly tough, but since then things are improving quickly.

The outlook from Greencore is positive, too. Management report ‘encouraging revenue momentum’ in the first seven weeks of the second half with pro forma revenue in food to go categories running at approximately 123% above prior-year levels and approximately 14% below the equivalent pre-COVID levels in FY19, they said. Pro forma revenue was approximately 64% above 2020 levels and approximately 5% below equivalent pre-COVID levels.

Elsewhere, Treasury yields declined, with the benchmark 10yr note under 1.6% again, as Fed officials sought to allay inflation fears. Gold trades near the top of the range close to $1,890. The weak dollar and lower nominal and real rates, plus fears about rising inflation, are all acting as valuable support for the metal. Oil is steady after a strong session on Monday with WTI (Jul) trading around $65.75 this morning. Demand growth is positive with vaccination efforts in major economies progressing well, whilst there is less confidence that Iranian oil will hit the market soon. Even if Iranian exports hit the market later this year, there is still scope for a summer spike in prices.

Life After Merkel: The upcoming German regional elections

After a long four terms in government, Angela Merkel is stepping down as Chancellor. The physical embodiment of stability, Merkel has built herself a successful persona of national and international renown. But all good things must come to an end (although no doubt we’ll all be reading her biography in a couple of years), and someone must take her place. The CDU have nevertheless managed to find the Chancellor’s reincarnation in its new leader, Armin Laschet. Once an MEP and journalist, Laschet is now on the brink of becoming one of the most powerful politicians in the EU.

But he’s not there yet. Inside the CDU’s sister party the CSU, the looming figure of Markus Söder hangs over him. Despite having repeatedly claimed that his “job [as leader of the CSU] is in Bavaria”[1], half of Germans consider him a suitable candidate for chancellor.[2] 65 percent of CDU/CSU supporters consider Laschet unsuitable as a candidate for chancellor (7% said they were “definitely” in favour of the new CDU boss while 11% were “more or less” so).[3] Söder, however, receives the greatest approval with a total of 79%. His challenge comes from fundamental distrust in the CSU to successfully secure the Chancellorship; two CSU politicians have been nominated as the CDU-CSU candidate in the past, but neither won the big national prize.

Then, of course, Mr Laschet has to worry about the other parties. The SPD has already nominated Olaf Scholz, the finance minister, whose ruthless blaming of the CDU for the vaccination program has signalled the fight to come. In a recent survey, Scholz was the third most popular minister after Merkel and Söder. Laschet, on the other hand, came in at a measly 7th place.[4]

Still, Laschet has a chance to prove himself as a worthy successor. On 14th March, two regional elections will take place, both of which will be vital in judging his success at the head of the CDU. One is in Baden-Württemberg and the other is in Rhineland-Palatinate.

Baden-Württemberg is the more significant. As the third largest state in Germany, the result will be a strong indicator of how each party is doing on a national level. In the last regional election the Greens stormed to victory, for the first time becoming the largest party in any German state. They pushed the CDU into second place.

Rhineland-Palatinate is currently controlled by the SDP, FDP, and the Greens. At the last election in 2016, the Greens lost a significant chunk of their support, letting the FDP into the ruling coalition.

If the CDU can translate their national poll lead into gains in these elections, then the more likely that Laschet can be sure he will be put forward as Chancellor Candidate. The less successful he is, the more likely Söder will be the CDU/CSU’s nominee.

In a recent INSA poll, the Greens are on around 31% of the vote in Baden-Württemberg, the CDU 28% (a 1% increase from 2016), the AfD and SPD on 11% each and the FDP on 10%. Meanwhile, the SPD and CDU are neck and neck in Rhineland-Palatine at 30% and 31% respectively, with the Greens trailing behind at 12%[5]. Here, the CDU has dropped its vote share by 0.8%, but has narrowed the gap with the SPD, who won 36.2% in 2016.

These numbers are neither good nor bad for Laschet. If the result is in line with these polls then he’s not done well enough to be confident of a huge groundswell of support in the September national election. But nor will it be bad enough for the party to replace him. He is exactly the safe pair of hands that he was expected to be when the CDU made him their leader.

On a national level, the initial boost for Merkel on her handling of the pandemic last year has ebbed away although the CDU is still ahead of the polls at 32.5%. The question is who will they govern with? It’s up for grabs with the SPD and the Greens both at 17%, and the FDP at 10%. One certainty is that nobody will rule with the increasingly toxic right-wing AfD at 11%[6].

One politician who is supportive of Laschet’s potential to be chancellor is FDP leader Christian Lindner.[7] With Laschet – who currently governs North-Rhine Westphalia with the FDP – as CDU/CSU Chancellor candidate, this combination could be carried into the federal government. If Söder were to come out victorious, Germany is more likely to find itself in a CDU-Green coalition; the CSU leader has spent much of this year attempting to tighten relationships with the party.

Either way, the Merkel era is over. That is going to leave a leadership vacuum in Europe at precisely the time that it is facing not a significant economic crisis. The Recovery Fund is a huge step forward for the institutions of the EU – but it needs strong and consistent leadership to ensure the bloc doesn’t take a huge step back. Even if Laschet does become Chancellor, he is unlikely to be able to meet the challenge ahead.

[1] https://www.bild.de/politik/inland/politik-inland/markus-soeder-im-interview-jetzt-ist-nicht-die-zeit-fuer-lockerungen-72168988.bild.html

[2] https://www.spiegel.de/politik/deutschland/armin-laschet-markus-soeder-und-die-kanzlerfrage-umfrage-zeigt-klare-vorteile-fuer-soeder-a-cf352340-9dd9-4371-9dd4-7ab06ab7da9f

[3] https://www.spiegel.de/politik/deutschland/armin-laschet-markus-soeder-und-die-kanzlerfrage-umfrage-zeigt-klare-vorteile-fuer-soeder-a-cf352340-9dd9-4371-9dd4-7ab06ab7da9f

[4] https://de.statista.com/statistik/daten/studie/1817/umfrage/noten-fuer-spitzenpolitiker/

[5] http://infratest-dimap.de/umfragen-analysen/bundeslaender/rheinland-pfalz/laendertrend/2021/februar/

[6] https://www.wahlrecht.de/umfragen/insa.htm

[7] https://www.spiegel.de/politik/deutschland/fdp-chef-christian-lindner-ueber-armin-laschet-cdu-laschet-kann-kanzler-a-20455c33-1e47-4bfa-8a22-6c851197f043


Week ahead: UK leads vaccine charge, Salesforce picks up (the) Slack

Week Ahead

The big news this week is the UK’s rollout of Pfizer-BioNTech’s Covid-19 vaccine. Could normality be coming finally after a topsy turvy year? Also, Salesforce buys Slack Tech, and the ECB holds its latest press conference to detail the EU’s financial outlook. 

UK Vaccine Rollout 

The UK approved the Pfizer-BioNTech two-dose vaccine as safe last week – and this week it begins and ambitious roll out programme designed to get the most vulnerable immunized as quickly as possible. 

Starting with care home residents and their carers, down nine steps to over 50s, a host of priority groups have been identified. No such luck for those under 50, who will have to wait, but once the priority groups have been jabbed, younger generations will get their shot. 

800,000 doses will have been delivered in the first vaccine wave. 

A vaccine that works will be essential for returning to normalcy in all walks of life, including trading. The UK is something of a guinea pig here, being the first developed nation to a) approve one of the myriad vaccines under development and b) tackling a mass vaccination programme. 

PM Boris Johnson has said the UK now faces a “massive logistical challenge” to get the vaccine where it’s needed, perhaps ignoring the fact the NHS rolls out immunization programmes to millions of vulnerable people every year. Still, this is an extraordinary event for an extraordinary twelve months, so we’ll have to wait and see how the roll out is managed.  

Economic implications of a vaccine are broadly very positive. For instance, it should support cyclical parts of the market forecast to struggle. It could provide the basis for a broader rally in equities too, and spur on rotation from big tech stocks that have been real pandemic winners. 

The FTSE 100 started December in the same vein as November’s big rally. Could UK equities start to shine again? A vaccine may be the shot in the arm they need to start performing once more. 

Still, it’s early days. The important thing is the vaccine has been approved and beginning to circulate. All eyes will be on the UK and its (hopefully) immunized population.  

Slack announces Q3 earnings as Salesforce prepares to buy company 

Work communications software provider Slack announces its Q3 2021 earnings this week just days after Salesforce announced its attentions to buy the company last week. 

Q2 2021 earnings for Slack showed a 49% year-on-year revenue increase, reaching a total $215.9m. Customer growth also accelerated in 30% y/y, with over 130,000 customers utilising Slack software. 

Will its Q3 earnings reflect further growth and pay off for Salesforce? 

At $27.7bn, Slack will be the biggest acquisition that Marc Benioff-owned Salesforce has made to date. It’s hoped that with the deal, the distance between it and Microsoft will become somewhat shorter in the corporate communications race. 

Slack’s software offer is similar to Microsoft teams. No doubt readers, very likely working from home for the past several long months, will now be intimate with Teams – the de facto choice of work communications software for businesses globally. 

Slack shareholders will receive $26.79 in cash and 0.0776 shares of Salesforce common stock under the deal. Salesforce agreed to pay a 55% premium to Slack stock’s November 24th 2020 closing price. 

ECB press conference 

The ECB will reveal its latest policy decisions at its December press conference this week. 

Stimulus is grabbing all the headlines. The Bank’s chief economist, Philip Lane, has said “worrying signals” that financial conditions for banks and small businesses are getting tighter.  

The minutes from the ECB’s last set of meetings are not painting a glowing picture of economic stability within the EU. The bloc’s economy, like pretty much everyone’s, has taking a hefty hit from a one-two combo of Covid-19 and lockdown. 

“It could not be excluded that the euro area, or at least some countries, would experience a double-dip recession,” they warned. 

According to comments made in October, the ECB is “recalibrating” its monetary instruments and will announce the outcomes at its December 10th press conference. Analysts expect it to expand both its bond-buying programme and ultra-cheap loans to banks. 

Essentially, investors have interpreted this that another substantial package of monetary easing measures is on the way. It should be pointed out that not all EU member states are particularly happy with this, expressing concern over “possible non-linearities, side effects and ‘diminishing returns’ in an environment of high uncertainty and very favourable financial conditions”, per October’s meeting minutes. 

Market participants will also be watching for any comments about the single currency’s appreciation. The euro jumped to multi-year highs against the dollar last week, breaking the psychologically important 1.20 level, which has in the past triggered attempts by policymakers to jawbone the currency lower. 

Webinars to watch 

Trading pro Mark Leigh is once again holding a suite of educational trading-focussed webinars this week to help you get further insights into the nitty gritty of trading. Highlights include: 

Mark Leigh’s Trader Clinic 

Monday 7th December – 2.00pm GMT 

See how a professional uses the ups and downs of trading to hone their strategy and improve their returns with our Trader Clinic. 

Sign up 

Technical Indicators to Understand and Apply to your Trading Strategy 

Monday 7th December – 5.00pm GMT 

Although there are hundreds of different technical indicators, this can often lead to confusion and contradictory signals. Learn Mark Leigh’s indicators of choice and how to use them together with your trading strategy. 

Sign up 

How to use Japanese Candlesticks to Recognise Trade Setups 

Tuesday 8th December – 6.00pm GMT 

Candlestick charts are the accepted industry standard for technical traders. Learn how to read and understand Japanese candlesticks and how to use this information in your trade making decisions. 

Sign up 

FXtrademark has a Proprietary Scorecard System for every Trade Setup 

Wednesday 9th December – 5.00pm GMT 

Learn to use the FXtrademark scorecard where you will score each trade set-up on a scale from 0 to 10 based on predetermined criterion. This system will allow you to trade with a system and a plan as opposed to making arbitrary decisions based on emotions. 

Sign up 

Putting it All Together with Money Management, Psychology and Analysis 

Thursday 10th December – 6.00pm GMT 

No strategy, signal or trading plan can succeed without proper calculated money management. Risk/reward practices and position sizing is paramount in developing your trading plan. Although new traders only want strategies and signals to start their trading careers, all experienced and successful traders understand and know that it’s all about the psychology of trading that separates successful from unsuccessful traders. 

Sign up 

Major Economic Data

Date  Time (GMT)  Currency  Event 
Sun Dec 6  9.30pm  AUD  AIG Services Index 
Mon Dec 7  3.00pm  CAD  Ivey PMI 
  Tentative  CAD  Annual Budget Release 
  11.50pm  JPY  Final GDP q/q 
Tue Dec 8  12.01am  GBP  BRC Retail Monitors y/y 
  6.45am  CHF  Unemployment Rate 
  Tentative  GBP  FPC Meeting Minutes 
  Tentative  GBP  FPC Statement 
Wed Dec 9  1.30am  CNH  PPI y/y 
  3.00pm  CAD  BOC Rate Statement 
  3.00pm  CAD  Overnight Rate 
  3.30pm  USD  Crude Oil Inventories 
Thu Dec 10  7.00am  GBP  GDP m/m 
  12.45pm  EUR  Main Referencing Rate 
  12.45pm  EUR  Monetary Policy Statement 
  1.30pm  EUR  ECB Press Conference 
  1.30pm  USD  Core CPI m/m 
  1.30pm  USD  CPI m/m 
  1.30pm  USD  Unemployment Claims 
Fri Dec 11  1.30pm  USD  Core PPI m/m 
  1.30pm  USD  PPI m/m 


Key earnings data

Date  Company  Event 
Mon Dec 7  Coupa Software Inc.  Q3 2021 Earnings 
Tue Dec 8  Brown-Forman Corp.  Q2 2021 Earnings 
  AutoZone Inc.  Q1 2021 Earnings 
  Ashtead plc.  Q3 2021 Earnings 
  MongoDB  Q3 2021 Earnings 
  Guidewire Software Inc.  Q1 2021 Earnings 
Wed Dec 9  Adobe Inc.  Q4 2020 Earnings 
  Campbell Soup Co.  Q1 2021 Earnings 
Thu Dec 10  Oracle Corp.  Q2 2021 Earnings 
  Costco Wholesale Corp.  Q1 2021 Earnings 
  Broadcom  Q24 2020 Earnings 
  Lululemon   Q3 2020 Earnings 
  Vail Resorts   Q1 2021 Earnings 
Fri Dec 11  Carl Zeiss Meditec AG  Q4 2020 Earnings 

Stocks retreat before ECB, US + UK jobless numbers in focus

Morning Note

European stocks pulled back a little after a rally in the previous session as upward pressure on equities continues to hold firm despite rising case numbers as hopes for a vaccine are the new hopes for a US-China trade deal. Moderna has reported encouraging results from initial trials, while there is a lot of hope being pinned on AstraZeneca’s phase one trials, results of which are due to be published July 20th.

Whilst nothing is certain, it seems things are moving in the right direction for a vaccine to emerge by next year.

Shanghai fell 4% and Hong Kong was down almost 2% overnight after a mixed bag of Chinese economic data. US stocks rallied yesterday with the S&P 500 posting its highest close since the June peak, though futures point to the index opening around 20 points lower. The Dow is seen opening about 200 points lower.

UK jobless data reveals first wage drop in six years

The number of employees on payrolls in the UK fell by 650,000 between March and June, but the worst of the employment is still in front of us. Vacancies are at their lowest level since records began in 2001, earnings fell for the first time in six years, and the ONS noted that the standard definition of unemployment does not include half a million employees temporarily away from their jobs specifically for coronavirus-related reasons, who are receiving no pay while their job was on hold.

Unemployment claims were better than feared but we can pin this on furlough schemes which are extending the pretence, delaying the worst and providing a soft landing; but the jobless numbers clearly do not reflect the true extent of what’s coming. Meanwhile the number of hours worked – a key metric for the nation’s productivity – has collapsed.

China GDP rebounds, consumption lags

Chinese GDP grew 3.2% in Q2, up from the –6.8% contraction in Q1, which was better than forecast, albeit we apply the usual caveats about Chinese economic data. Industrial production rebounded 4.8%, but retail sales were down –1.8% vs an expected +0.3% improvement.  Richemont flagged a strong recovery in China despite sales globally falling 47% in its first quarter, with luxury goods stocks weaker. Burberry shares fell another 3%.

US data was solid enough, with industrial production +5.4% in June whilst the Empire State manufacturing index hit 17.2, a beat on the 10 expected and a big jump from the –0.2 in the prior month. It remains to seen however to what extent the rate of change in the recovery turns lower as data starts to reflect the ‘second wave’ of cases and the imposing of some fresh lockdown restrictions in some key states.

In the Fed’s Beige Book, the Dallas Fed noted that while the outlook has improved, the upward trend in new COVID-19 cases has increased uncertainty. “Economic activity increased in almost all Districts, but remained well below where it was prior to the COVID-19 pandemic,” the national summary read.

US-China tensions are bubbling away – plans by the White House to impose travel restrictions on millions of Chinese Communist party members is the latest in the saga.

Goldman Sachs earnings crushed expectations with a stunning quarter of trading revenues. Bond trading revenue jump 150% to $4.24bn, while equities trading revenue climbed 46% to $2.94bn. For me all it did was underscore the divergence we are seeing between the real economy and the market, which is benefitting hugely from two-pronged monetary and fiscal stimulus.

Oil still rangebound after OPEC agrees to begin tapering production cuts

Oil couldn’t break free from its narrow range as OPEC+ extended cuts but began tapering with production curbs in August down from 9.7m barrels per day to 7.7m bpd, although the total effective cuts will be around 8.1m-8.3m barrels a day as countries which overproduced in May and June would make additional compensation cuts in August and September. OPEC will need to play this carefully – the longer its barrels are off the market the more it could encourage higher cost US oil to come back on.

Inventory data from the States was bullish with the –7.5m drawdown much higher than the –1.3m expected. Gasoline inventories also fell by more than expected at –3m. WTI (Aug) rallied from the medium-term trend support around $39.20 yesterday to press on the $41 handle but it continues to lack momentum – the CCI divergence on the daily timeframe chart points to the rally running out of legs and buyer exhaustion that could call for a further pullback.

In focus today: ECB, Netflix, US jobless claims and retail sales

Lots coming up today…

ECB meeting: Following the top-up to the PEPP programme in June to €1.35tn, the European Central Bank should be keeping its powder dry with the key EU summit starting tomorrow to hammer out the budget.

I expect Christine Lagarde to stress the importance of the fiscal side and leave policy unchanged but stress that ECB’s accommodative position – this is not the time for a discussion of tapering or the details of how much of the envelope you need to use.

In a recent interview she said the central bank had ‘done so much that we have quite a bit of time to assess [the incoming economic data] carefully’. The EU recovery fund is more important for EUR crosses right now – agreement this week may push EURUSD beyond the key 1.15 level.

Netflix earnings: The ultimate stay-at-home company, Netflix (NFLX) has made hay in the pandemic, with the stock hitting an all-time high and clearing $520. In the March quarter, Netflix added 15.77m new subscribers, which was more than double the original forecast of 7m net adds.

The company has forecast 7.5m new adds in the June quarter and may easily beat this with around 10m subscriber additions.  Sequentially lower net adds should not weigh on the stock given the exceptional performance in the first quarter. ARPU could benefit from a depreciation in the dollar since it last reported.

As Netflix itself noted in its Q1 report, there is a lot of unknown to its forecasts. “Given the uncertainty on home confinement timing, this is mostly guesswork. The actual Q2 numbers could end up well below or well above that, depending on many factors including when people can go back to their social lives in various countries and how much people take a break from television after the lockdown.”

The market expects $6.1bn in sales and EPS of $1.8, with paid subscribers to hit 190m.

US weekly unemployment claims: Last Thursday’s data was better than expected for the week ending Jun 27th, however the total number of people claiming benefits in all programmes, including both regular state and all others, and including Covid-related programmes, rose 1.4m to 32.9m in the week to Jun 20th.

Initial claims today are seen falling again to 1250k from 1314k the previous week, with continuing claims seen down to 17500k from 18062k last week.

US retail sales: Expect to see continued improvement as the economy recovers off the lockdown lows. Retail sales should print another strong reading as consumers binge on their $600-a-week stimulus checks, which are due to finish this month.

German court ruling update


The euro and Euro-area sovereign bonds dropped but were not exactly going into freefall after the German constitutional court gave a mixed ruling on the ECB’s bond buying programme. Judges said the asset purchase programme partially violated the German constitution, but on a key point it did not say the ECB’s actions constituted monetary financing. And it said the ruling has no bearing on the Pandemic Emergency Purchase Programme for the Covid-19 response.

Relating to long-standing Public Sector Purchase Programme going back some years under Mario Draghi, the court said the ECB needs to show that the scheme is ‘not disproportionate to the economic and fiscal policy effects.

Essentially the Bundesbank won’t be allowed to take part in PSPP unless the ECB proves, within the next three months, that QE was proportionate. If not, the Bundesbank won’t be allowed to take part, and would need to pay back bonds already bought under the scheme.

Without being German constitutional experts, it seems to boil down to the central bank ‘proving’ to a German constitutional court that its actions were taken in good faith and were proportional to the economic risks. Are the German judges saying the ECB didn’t know what it was doing? How do you retrospectively argue that your actions were proportionate? It seems absurd to think that the ECB ever committed to anything that it considered disproportionate.

PEPP is not affected by the decision, despite the looser rules. This may imply that it is already viewed as ‘proportionate’, in the eyes of the judges. However, the point was this case dates back years to PSPP and never was about PEPP – what is to stop cases being lodged now in relation to PEPP?

Fundamentally, anything that throws doubt on the ability of the ECB to provide the backstop to the bond market is a concern. The market is trying to figure this one out as the ruling is complex. For now, downside risks persist for the euro and bonds, especially peripheral debt, will be under pressure. We await the ECB’s response with the utmost interest.

Little help for rangebound yen likely from Bank of Japan commentary


The Bank of Japan releases its Summary of Opinions and monetary policy meeting minutes this week. Policy normalisation is moving at a glacial pace, so the safe-haven yen is unlikely to find support on the latest comments from policymakers.

Central banks around the world are tilting towards the dovish end of the spectrum. This is epitomised by the futures market’s pricing in of a rate cut from the Federal Reserve this year. However, when it comes to caution, the Bank of Japan is the archetype – it was the first to implement quantitative easing and continues to pump trillions into the economy while tinkering with the yield curve and keeping rates negative.

The plan is unlikely to change any time soon, especially now that global conditions appear to be weakening. There is little certainty on a macro level to suggest the BOJ’s work is anywhere near done, even if the fears of a worldwide recession that tanked markets at the end of 2018/beginning of 2019 were overdone.

This leaves the yen facing more of the same; a narrow trading range against its major peers.

USD/JPY edges higher as fears over US growth fears ease

The US dollar has been slowly pressuring the yen lower over the course of the past few months. Strong US data has helped ease fears over the need for the Federal Reserve to pivot too severely into dovish territory.

EUR/JPY rangebound as ECB and BOJ battle for dovish crown

The EUR/JPY pairing was almost slap-bang in the middle of its multi-week trading range at the time of writing. While the European Central Bank could bring quantitative easing back into play later in the year, which would be yen-supportive, the long-term outlook remains that it will be the weakening of overseas policy outlooks that push JPY higher in the near-term, not the machinations of its own BOJ.

Yen unable to take advantage as Brexit uncertainty keeps pound floored

GBP/JPY is just a pinch overbought on the Relative Strength Index. The chart above shows how the pairing has settled into a narrow channel over the past few weeks. Brexit uncertainty is keeping sterling on pause, however the yen is unable to capitalise on this due to the lack of optimism surrounding Japanese monetary policy.


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