North American News
Monday Marvel: US Equities Kick Off the Week on a Positive Note
- Closing changes for the main US equity indexes
- S&P 500 +0.6%
- DJIA +0.6%
- Nasdaq Comp +0.8%
- Russell 2000 +0.8%
TD sees August non-farm payrolls at 180k and 3.5% unemployment
- Non-farm payrolls estimates
TD Securities has projected a 180k increase in Non-Farm Payrolls (NFP) for August, exceeding the consensus expectation of 168k.The bank also forecasts the unemployment rate to remain stable at 3.5%, aligning with the general consensus.According to TD, wage growth is likely to register at 0.3% month-on-month and 4.3% year-on-year.
Key Points:
- NFP Expectations: TD Securities anticipates that NFP will clock in at 180k for August, a number that would maintain the recent downtrend in the three-month pace unless there are significant revisions. The projection is higher than the general consensus, which stands at 168k.
- Unemployment Rate: TD concurs with the consensus that the unemployment rate will stay at 3.5%.This follows two consecutive months of decline in the unemployment rate and suggests a stable job market.
- Wage Growth: On the earnings front, TD forecasts a month-on-month wage growth of 0.3%, translating to a year-on-year increase of 4.3%. If accurate, this would signify a strong labor market not just in terms of job additions but also wage improvements.
Conclusion:
While the NFP increase is expected to stay below the 200k mark, TD Securities believes the August print could potentially exceed consensus expectations.The stability in the unemployment rate and positive outlook for wage growth further indicate that the labor market remains robust.These factors could play a critical role in shaping monetary policy and market sentiment in the coming months.
US sells 5-year notes at 4.400% vs 4.399% WI bid
- The US sells $46 billion in five-year notes
- Prior was 4.170%
US Treasury sells 2-year notes at 5.024% vs WI yield of 5.028%
- US sells $45 billion in two-year notes
- Prior was 4.823%
Dallas Fed August manufacturing index -17.2 vs -20.0 prior
- Dallas Fed manufacturing survey for August 2023
- Prior was -20.0
- Output (production) -11.2 vs -4.8 prior
- New orders -15.8 vs -18.1 prior
- Employment +4.3 vs +10.0 prior
- Outlook -18.4 vs -16.9 prior
- Prices paid for raw materials +17.4 vs +10.5 prior
- Prices received +1.8 vs +2.3 prior
- Wages +34.9 vs+19.1
Comments in the report:
Chemical manufacturing
- The chemical industry remains slow.
Computer and electronic product manufacturing
- High interest rates are affecting industrial production likenever before. In addition to reshoring heavy activity, supply-chain issues, lack of qualified labor and interest rates have placed an inverted incentive to grow due to a major slowdown in capital equipment expenditures.This is the time to stop raising interest rates and giveconfidence to the industrial segments to plan growth. Rehiring after major layoffs in this industry is not like in the consumer industry. It is costly, laborious and a long-term expedition. And with the lack of reforms in immigration and education, we are encountering major difficulties in running industrial operations. Never mind the demographics issue the U.S. is about to encounter in the short run. I think it is time for the Federal Reserve to take a creative approach when it comes to interest rate management.
- We have seen broader markets weaken with the exception of automotive. We have seen pull-ins from auto, likely due to preparationfor the potential UAW [United Auto Workers union] strikes.Revenues in China are especially weak.
- We are seeing increased issues with aluminum, especially casted products.
- [Our business is] performing as planned.
- For the first time in a long time, we are seeing customers reduce or cancel orders due to softening end-use demand. We expect this trend to continue over the next few months. We continue to make capital investments, focusing on buying high-quality used manufacturing equipment at a discount when other people are pulling back because of uncertainty.
- Customer orders came to a sudden halt. The overall volume dropped 51 percent year over year.
Fabricated metal product manufacturing
- For a lot of businesses, production is sold out until February 2024.
- Many RFQs [requests for quotation] are out with existing customers who have not been given the go ahead to start projects/improvements.
- Supply constraints are improving, but there are still ongoing challenges with some suppliers.
Food manufacturing
- It has been business as usual. We are working on new opportunities and satisfying existing customers. We are still in the “new normal” from a margins perspective.
- We have seen a contraction in government contracts.Customer discretionary spending capability has decreased.
Machinery manufacturing
- Slow and steady is the current environment. Hopefully, this is not the new normal.
- The phone is not ringing. Our sales team is working harder with less results. Projects are being postponed and, perhaps even more telling, payments are increasingly protracted.
- Business is slowing down, but we are adding new products to produce. This should be positive for our business long term.
Paper manufacturing
- We have seen a very slight increase in orders for August and September.
Primary metal manufacturing
- Our industry is in a technical recession. In addition to that, foreign imports are at a very high percentage if not the highest in our history.Mexico is a leading exporter to the U.S. now.They have a raw material advantage of not having Section 232 tariffs on their aluminum. Domestic companies in our industry are affected by the 10 percent duty, which Mexico is not, giving our competitors in Mexico a significant cost advantage.
Printing and related support activities
- We have been very fortunate to have a large job that has sustained us for most of the summer and will continue into September. Without this large job, we would have been stupid slow like a lot of our competitors are. There seems to be a softness in our industry right now, and because of that, we are worried about what six months from now looks like.
Textile product mills
- [There were] no major changes this month in terms of pricing, staffing or outlook. Things have not deteriorated nor have they materially improved (still status quo, which is good and profitable). We are hoping to see an uptick in consumer spending and order volumes in the fourth quarter, similar to what we’ve seen in prior years.
Transportation equipment manufacturing
- Vendor price increases have slowed but have not been rolled back. Interest rates are killing our industry.
Goldman Sachs: “USD remains tough to beat as key economic data loom”
- Goldman Sachs highlights the playbook for USD trading this week
As the US dollar holds steady ahead of a critical week of economic data releases, its resilience in the global financial markets remains unshaken. While some analysts are eyeing potential factors that could soften the currency, Goldman Sachs suggests that the USD will continue to be a challenging currency to dethrone.
Key Economic Data to Influence Fed Decisions:
- Non-Farm Payroll (NFP) Report: This employment data serves as a critical indicator for the Federal Reserve’s policy-setting moves. Goldman Sachs points out that an upside surprise in the NFP could prompt the market to reprice the odds of a September rate hike.
- JOLTS and ISM Manufacturing: Alongside the NFP, Goldman Sachs notes that these additional indicators offer vital clues about the U.S. economy and could tilt the balance in rate hike expectations.
- Upcoming Inflation Data: Goldman Sachs underscores the importance of PCE inflation figures, due on August 31, and CPI data set for release on September 13. A significant beat on these numbers could set the stage for market expectations about inflation and interest rates.
Baseline Scenario: No Hike in September
Goldman Sachs’ economic team currently expects no rate hike from the Fed in September. They believe that any further tightening could be unnecessary given the current data landscape. However, the investment bank admits that this narrative could swiftly change if the upcoming data releases come in stronger than expected.
Challenges to USD Downside:
In Goldman Sachs’ assessment, substantial downside to the U.S. dollar would likely require a combination of better growth in Europe and China, along with continuing disinflationary pressures in the U.S. The analysts note that this is becoming increasingly difficult to achieve, making the USD a hard bar to beat.
Conclusion:
While the USD may waver slightly based on short-term economic data and market sentiment, Goldman Sachs maintains that the currency remains formidable. Their analysts argue that any significant downward pressure on the USD would necessitate a highly specific set of conditions, which seem increasingly unlikely. Therefore, as key U.S. economic data releases approach, the investment bank views the USD as a resilient player in the global financial markets.
Goldman Sachs says again they expect July was the final FOMC interest rate rise
Goldman Sachs response to the speech from Federal Reserve Chair Powell at Jackson Hole.
- Powell’s speech noted that the FOMC will ‘proceed carefully’
- We continue to expect that the FOMC will ultimately decide that further policy tightening is unnecessary, making the hike at the July FOMC meeting the last of the cycle
Weekend – Fed’s Mester sees another interest rate hike, says cuts may have to wait
Loretta Mester is President and CEO of Federal Reserve Bank Cleveland branch.She spoke with Reuters in an interview at the Fed’s conference in Jackson Hole, Wyoming on Saturday.
- does not want policy so tight that the economy collapses
- wants to set it so that inflation reaches the Fed’s 2% goal by the end of 2025 … “We just don’t want it to keep drifting farther out”
Judge schedules Trump trial for election interference case for March 4, 2024
- D.C. judge sets the trial date for March 4, 2024
The trial will begin one day before the Super Tuesday, which is a major voting day in selecting the Republican nominee for prersident.
Trump’s team had asked to delay the trial until 2026 and undoubtedly, they will continue to push for delays.
US Commerce Sec says US stable economic relationship with China is profoundly important
U.S. Secretary of Commerce Gina Raimondo comments crossing:
- Says it is profoundly important that the US has stable economic relationship with China
- Thinks the US can make progress with China if both sides are ‘direct, open and practical’
Former Fed Kansas George says “you don’t want to declare victory too soon” on inflation
Former Kansas City Federal Reserve President Esther George spoke in an interview in Jackson Hole over the weekend.
The United States has seen two months of “encouraging data” around inflation, George says. However, “it doesn’t yet make us convinced that we’re on the right path. And I think one of the lessons from past committees is, you don’t want to declare victory too soon,” George warns, adding that “you want to keep your eye on that inflation and really have a level of confidence.”
Commodities
Gold Lingers in Enigmatic Woods as Investors Pine for Economic Data
- Gold price turns sideways after a solid recovery as investors await fresh triggers for further action.
- Fed’s Powell kept doors open for further policy tightening to ensure price stability.
- Fed’s Mester supports one more interest rate hike, though not necessarily in September.
Gold price turned lackluster after defending the critical support of $1,900.00 on Monday. The precious metal consolidates as investors prepare for crucial economic indicators such as Nonfarm Payrolls (NFP) and ISM Manufacturing PMI for August, which will be released later this week. The impact of August economic data will be very significant as Federal Reserve Chair Jerome Powell reiterated at the Jackson Hole Symposium that further policy action will be data-dependent.
Jerome Powell at Jackson Hole said that the achievement of price stability has a long way to go.
Powell kept doors open for further policy tightening if economic data continues to remain supportive. After Powell’s commentary, investors expect that the central bank could raise interest rates in November as a last nail in the coffin.
Seasonally, there’s a case for buying gold later in the year but there may be nearer-term tailwinds from sovereign buying as BRICS countries shift reserves away from the US dollar and towards gold.
Brent oil breaks above $85 as Friday’s high gives way
- More signs of tightening in the oil market
Energy is leading the way today as the market feels better about China and the overall risk picture. Brent crude oil is leading the charge today, up around 0.6% and above $85 for the first time in a week.
In the bigger picture. there is mounting evidence that OPEC+ is serious and delivering cuts in a big way.
Some numbers show global oil inventories tightening by as much as 5 million barrels per day.
That’s been couple by falling US oil rig counts for weeks, even with oil around $80.
Refinery problems in the US could dampen demand for oil temporarily but after further tightening the product market. In addition, tropical storm Idalia is set to become a major hurricane, though it’s tracking towards the eastern gulf.
Brent oil – Biggest US Oil ETF to shift holdings to front of curve starting September
The $1.2 billion United States Oil Fund (USO) is the biggest US oil ETF.Its rebooting its pre-pandemic investment strategy that drew the scrutiny of regulators and helped roil markets in 2020. In September it’ll begin to back to allocating the majority of its holdings to the nearest oil futures contract, rather than spread exposure across the futures curve.
- the strategy was cited as a factor that contributed to the 2020 oil crash, exacerbating the volatility that followed.
- USO at the time had ballooned to more than $3 bn, at times holding 20% of all positions in near-term oil contracts
Bloomberg with the news, adding that:
- After the crash. CME Group Inc. ordered the fund to reallocate its funds across contracts.
- About 20% of USO’s current holdings are invested in October 2023 contracts. 20% in November. 15% in December. 15% in January 2024 contracts. 10% in February, 5% in March. and 15% in June.
- USO said in a statement it retains the ability to invest in later-dated contracts and other products such as OTC swaps if market conditions, regulatory requirements or other factors require it.
Bloomberg have more on this, link is here (gated):
In brief:
- The biggest US oil ETF is reviving the pre-pandemic investment strategy
- United States Oil Fund will, in September, begin reallocating the majority of its holdings to the nearest oil futures contract, rather than spread exposure across the futures curve
- The fund’s decision to pile into the front of the curve prior to the 2020 oil crash exacerbated the market turmoil that followed
Brent oil price likely anchored around $80 / bbl says Morgan Stanley
Oil could be anchored near $80 a barrel according to a Morgan Stanley note from late last week.
The main points made are that:
- a more balanced oil market could be close by
- oil market is likely to remain in a deficit in the second of half of 2023 before returning to a small surplus next year.
- “We still see undersupply – and hence inventory draws – for the remainder of 3Q as well as 4Q. However, this turns into small builds in the early part of next year”
- “We suspect that the likely inventory trajectory anchors the market around $80/bbl, probably in a $75-85/bbl range”
- raised its Brent price forecast for the third quarter to $85 per barrel from $75, and for the fourth quarter to $82.50 from $70.
“Strong refined products markets and deep OPEC cuts have been supporting crude oil prices”. Counterveiling factors MS point out include:
- OPEC’s production cuts will have a bullish impact on oil prices in the near future
- spare capacity is at its highest in 20 years and a decline in the group’s market share could weigh on prices in the longer term
Morgan Stanley raised its 2023 oil demand forecast to 2.1 mn barrels per day from 1.8 mn.
EU News
European equity close: Great start to the week with Spanish stocks leading the way
- Closing changes for the main European bourses
- Stoxx 600 +0.9%
- German DAX +1.0%
- UK FTSE 100 closed for holiday
- French CAC +1.4%
- Italy MIB +1.2%
- Spain IBEX +1.9%
Eurozone July M3 money supply +0.4% vs 0.0% y/y expected
- Latest data released by the ECB – 28 August 2023
- Prior +0.6%
Broad money growth did not slow as much as estimated but it is still reflecting a further tightening in credit conditions. The credit crunch is starting to become more evident in Europe and that will be a key consideration that the ECB needs to be mindful of in the months ahead.
SNB total sight deposits w.e. 25 August CHF 471.4 bn vs CHF 476.2 bn prior
- Latest data released by the SNB – 28 August 2023
- Domestic sight deposits CHF 461.7 bn vs CHF 466.4 bn prior
ECB’s Holzmann: There is a case for rate hike if no surprises turn up
- Remarks by ECB policymaker, Robert Holzmann
- Not in the clear yet on inflation
- ECB is behind the curve, can assess policy once at 4%
- Should start debate on ending PEPP reinvestments
France’s Le Maire: There will not be any reduction in interest rates in the coming months
- Remarks by French finance minister, Bruno Le Maire
So, he is now doing the ECB’s job for them? It would be bad form for him to overstep such a line I would say. But at least he is being consistent with what ECB policymakers themselves are preaching, that being rates will stay restrictive for a sufficient period of time – whatever subjective interpretation that may be.
Weekend – BoE’s Broadbent says interest rates may have to stay high ‘for some time yet’
Bank of England Deputy Governor Ben Broadbent spoke on Saturday at the Fed’s Jackson Hole symposium.
Said that the added effects of the surge in prices, such as pressure to push up wages that has led to record growth in pay, were unlikely to fade away as rapidly as they emerged.
Other News
Xi Jinping deep-rooted philosophical objections to Western-style consumption-driven growth
A weekend article in the Wall Street Journal says that
- Chinese Communist Party Chairman Xi Jinping has deep-rooted philosophical objections to Western-style consumption-driven growth, people familiar with decision-making in Beijing say.
- Xi sees such growth as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse, they say.
- Xi believes Beijing should stick to fiscal discipline, especially given China’s deep debt. That makes stimulus or welfare policies akin to those in the U.S. and Europe less likely, the people said.
In H1 of 2023 Chinese auto exports were up 75.7% y/y
In the first six months of 2023, Chinese auto exports +75.7% year-on-year to 2.14 million vehicles
- H1 overseas shipments of new energy vehicles (NEVs) — a category that consists mainly of pure electric and hybrid models — more than doubled to 534,000 units, accounting for nearly a quarter of the total car exports
- Europe is now the biggest overseas market for Chinese automakers
- The U.S. imposes a 27.5% import tariff on Chinese-made cars
In Q1 of 2023 China overtook Japan as the world’s largest car exporter for the first time. (data via the China Association of Automobile Manufacturers (CAAM)).
China scraps the last of its Covid travel requirement measures
- This will come into effect starting 30 August
It has been the case that inbound travellers to China will still need to take an antigen rapid test (ART) at least 48 hours before their flight to the country. That is despite airlines no longer checking the Covid test results of passengers but it is part of the entry requirements for people wishing to travel to China.
But the Chinese foreign ministry has now announced that the ART will no longer be required for inbound travellers, starting from 30 August. I reckon with the domestic economy struggling, they are looking to at least make it easier for foreigners to come in to boost the tourism sector at least. And considering the Covid timeline, it has definitely took them long enough to reach this step.
Weekend data: China’s industrial profits fell 6.7% m/m in July, y/y down 7 months in a row
Profits at China’s industrial firms fell 6.7% y/y
- prior -8.3%
- down 15.5% y/y for the YTD (January – July), following a 16.8% fall from January – June
- State-owned enterprises earnings -20.3% in the first seven months
- private-sector companies -10.7% ytd
- profits fell for 28 of 41 major industrial sectors ytd
From China’s National Bureau of Statistics (NBS):
- “Commodity prices are running low, the pressure on raw material costs in the midstream and downstream industries has eased. Unit cost of industrial enterprises has improved overall,”
- unit costs in July posted the first year-on-year decrease since the beginning of this year
Japan maintains overall assessment of its economy in August
- The economy is still viewed as recovering at a moderate pace
The only standout is that the Japanese government raised the view on exports for the first time in three months, noting that it is “showing movements of picking up recently”. Besides that, here is the rest of the overall assessments:
- Private consumption is picking up
- Business investment is picking up
- Industrial production shows signs of picking up
- Corporate profits are improving moderately as a whole
- The employment situation shows movements of improvement
- Consumer prices are rising
BOJ Gov. Ueda spoke on the weekend: “underlying inflation is still a bit below our target”
Bank of Japan Governor Ueda spoke at Jackson Hole on Saturday.
His pertinent remark was:
Australian data: July retail sales +0.5% m/m (expected +0.3%)
Australian July retail sales +0.5% m/m is a good headline for this series. Its not a game changer, but a welcome bounce from the June drop.
- expected +0.3%, prior -0.8%
- for the y/y +2.1%
Australian Treasurer on the 2 biggest risks to Australian economy: China & RBA rate hikes
Australian Treasurer Chalmers spoke in an interview with Sky News, saying the two biggest risks he sees to the Australian economy are:
- the lagged impact of the Reserve Bank’s sharp increase in interest rates
- the slowdown hitting China’s economy
- “A big risk to the outlook … (is) what’s happening in China and the way these interest rate rises are biting in our economy here at home,”
- “(I) expect the Australian economy to grow but some of these challenges are growing …Our economy is weakening as a consequence of what’s happening in the world and what’s happened with interest rates at the same time as inflation is moderating.”
Cryptocurrency News
South Korea requires crypto exchanges to set aside at least $2.3 million in reserves for customer protection
- Korea Federation of Banks requires crypto exchanges in South Korea to hold minimum reserves of 3 billion won, local media reports.
- Upbit and Bithumb are on track to comply with the requirement outlined in guidelines titled Virtual Asset Real-Name Account Operation Guidelines.
- The reserves will be used to fulfill the liability of damage to the exchange’s users.
The Korea Federation of Banks is a bankers’ association, similar to the American Bankers Association. Its members are banks and financial institutions and it sets guidelines in lieu of protecting customer funds.
The association recently issued guidelines for crypto exchanges, requiring a sum of 3 billion won or 30% of the average daily deposits to be set aside as reserves. This reserves would be used to make customers whole in the event of an event that results in a loss of funds for users.
South Korean crypto exchanges required to maintain $2.3 million in reserves
South Korea has ramped up efforts to protect crypto traders from loss of funds at the behest of crypto exchanges. In its latest effort, the Korea Federation of Banks issued guidelines titled “Virtual Asset Real-Name Account Operation Guidelines,” according to reports by a local news agency News1.
The guidelines require crypto exchanges operational in South Korea, like Upbit and Bithumb, to set aside reserves of $2.3 million (3 billion won) or higher, capped at $20 billion won. The actual value of reserves to be maintained is a minimum of $2.3 million or 30% of the exchange’s daily average deposits by users, starting September.
According to the Federation, the funds from these reserves will come in handy when the exchange owes “damages” to users or has a liability for damage.
ICYMI – JP Morgan see limited downside for crypto markets over the near term
A report from JPM late last week says the downside shift for Bitcoin looks to be ending.
JPM cite their analysis of open interest in Chicago Mercantile Exchange’s (CME) bitcoin (BTC) futures:
- shows the unwinding of long positions appears to be in its end phase rather than its beginning
- “As a result we see limited downside for crypto markets over the near term,”
- the move in crypto markets in August, “which reversed the post Securities and Exchange Commission (SEC) versus Ripple court decision rally” can be partly credited to the “broader correction in risk assets such as equities and in particular tech, which in turn appears to have been induced by frothy positioning in tech, higher U.S. real yields and growth concerns about China”
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