Politics boosts sentiment (for a change)

Chris Scicluna
Emily Nicol

A decent showing for US stocks yesterday (the S&P500 closed up 1.1%) has been followed by firm gains in most Asian markets, boosted by positive news on the trade-war front. The Chinese authorities confirmed that new high-level face-to-face talks will be held “in early October”, while the US side confirmed that discussions will take place in “the coming weeks”. The boost to risk appetite provided by those statements saw the yen (temporarily) weaken, and Japanese equities lead the gains, with the Topix closing up 1.8%, while China’s CSI300 closed up 1.0% as the renminbi strengthened for a second day. And most European markets have opened higher too.

In bond markets, the positive trade news saw USTs weaken, with 10Y yields now back to around 1.51%. JGBs lost ground too, with 10Y yields back to about -0.275%. And despite some weaker Aussie trade data (see below) and more dovish calls with respect to the outlook for RBA rates, ACGBs underperformed, with 10Y yields up about 4bps to 0.97%.

Of course, the positive news-flow has not been limited to US-China issues, with the probability of a no-deal Brexit at end-October having further diminished over the past few hours, to push sterling up to $1.225, and 10Y Gilt yields up another 5bps this morning to 0.52%, some 17bps higher than Tuesday morning’s trough. In particular, following key defeats for PM Johnson in each of his first four parliamentary votes over the past two days, the Conservative party leadership agreed overnight to allow the relevant anti-no-deal legislation to pass smoothly through the House of Lords by tomorrow evening. Assuming the bill becomes law at the start of next week, the key variable will then be the date of the imminent general election, which could also be determined on Monday (see more on this below).

Finally, with improved risk appetite, and ongoing uncertainty as to whether the ECB will press ahead with new QE next week, euro area govvies have lost ground across the board this morning. 10Y Bund yields are up a further 3bps to -0.65%, despite some further weak German factory orders data (see detail on these numbers below too).

After a further three defeats in the House of Commons yesterday for PM Johnson, a climb-down by the ruling Conservatives during the night means that the draft legislation designed by a cross-party group of MPs to prevent a no-deal Brexit at end-October will be able to complete its passage through the House of Lords by tomorrow afternoon. That will allow MPs on Monday to consider any legislative amendments imposed by the Lords, and allow the bill to be presented for royal assent, and entry into law, later that day. When approved, the legislation will demand that the Prime Minister request from the EU an extension of the Article 50 deadline to end-January 2020 if (as will inevitably be the case) no Brexit deal will have been reached by 19 October.

With adoption into law of the anti-no-deal legislation having been a pre-requisite for the opposition parties to give their consent to an early general election, the Tory climb-down means that the start of next week is likely to see confirmation that the UK will indeed soon be going to the polls. Johnson’s preference is for an election on 15 October, which would allow him to cash in on the PM’s ‘honeymoon’ ratings boost and retain backing of many Brexit Party supporters by leaving open the possibility of a no-deal Brexit at end-October. It would also, of course, leave scope for him to repeal the anti-no-deal legislation and press for a no-deal Brexit if he was to win a majority. In contrast, therefore, most Labour and other opposition MPs seem to prefer an election in November, which would reduce to near zero the risk of a no-deal Brexit next month.

Data-wise, this morning has just brought new UK car registrations figures for August, which is typically a light month for auto sales. As expected, these showed another decline compared with a year earlier when registrations were boosted ahead of the implementation of the new testing standards in September 2018. In particular, registrations fell 1.6%Y/Y in August, leaving them down 3.4%YTD/Y.

Euro area:
We have already seen today’s most noteworthy data release from the euro area, with German factory orders figures providing an update on demand for manufactured goods at the start of Q3. These were extremely disappointing, with total orders down a steeper-than-expected 2.7%M/M in July, the fourth substantial monthly decline so far this year. Of course, some payback for the sharp increase in June, which was upwardly revised to 2.7%M/M, had been anticipated. But this left orders still down 0.6%3M/3M and a hefty 5.6%Y/Y.

The weakness principally reflected a reversal in overseas orders that month (down 4.2%M/M), due to a notable drop in new orders from countries beyond the euro area (down 6.7%M/M). Indeed, orders from other member states posted a welcome, albeit modest, increase (up 0.3%M/M) for the first month in four. But domestic orders fell (0.5%M/M) for the sixth month out of the past seven in July, to leave them down a whopping 8.1%Y/Y, the steepest annual drop since September 2017.

Admittedly, orders data are notoriously volatile and often distorted by one-off major items. And when excluding such items, today’s figures were somewhat more positive in July with orders rising 0.5%M/M, and new orders from overseas up a stronger 1.3%M/M. But this still left the total level of orders on this basis down ½% compared with the average in Q2. Furthermore, domestic orders were still very weak when excluding major one-offs, declining for the fifth consecutive month (-0.7%M/M), underscoring the fragile state of Germany’s economy.

Today’s figures also showed that German manufacturing turnover – which typically closely aligns with production – failed to rise for a fourth consecutive month in July, with a decline of 1.0%M/M leaving it down a sizeable 1.7%3M/3M. This further suggests that tomorrow’s IP release will be soft. Indeed, while expectations are for a rise of ½%M/M in July, this would reverse only a fraction of the 1½%M/M drop in June.

Beyond the data, ECB Vice-President Luis de Guindos will be the latest in a string of Governing Council members to speak publicly.

While yesterday’s GDP report confirmed that net trade more than fully accounted for the 0.5%Q/Q growth in Q2, today’s trade figures for July, published by the ABS, suggested a much softer start to the third quarter. Indeed, the trade surplus narrowed by AUD0.7bn to AUD7.3bn, nevertheless still the second-highest on record. This partly reflects a softer increase in exports (0.6%Q/Q), as notable falls in shipments of coal and metal ores largely offset a jump in the volatile non-monetary gold exports. This still left exports up almost 16% compared with a year ago, with still-healthy rates of annual growth in shipments to China (46%Y/Y), the US (12½%Y/Y), EU (14%Y/Y) and Japan (3%Y/Y). But there was also a rebound in imports in July, rising 2.9%M/M, with consumption and intermediate goods posting strong gains too. As such, today’s data suggest that net exports were a drag on growth in the first month of Q3.

A busy day ahead in the US will bring several top-tier releases, including the non-manufacturing ISM and final Markit services PMI for August and factory orders data for July. Today will also see final unit labour costs and productivity data for Q2, the ADP employment report and Challenger job cuts figures for August, and weekly jobless claims numbers.

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