US: Atl Fed GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2015 is 1.3 percent on September 1, up from the nowcast of 1.2 percent released August 28. The nowcast for real GDP growth increased 0.2 percentage points to 1.4 percent after incorporating the U.S. Census Bureau's advance report on international trade in goods in July. This morning, it ticked down 0.1 percentage points to 1.3 percent following the construction spending release from the Census Bureau and the Manufacturing ISM Report On Business from the Institute for Supply Management.
OUTLOOK: Global Cal for Weds (GMT/ET) - 02-Sep 0130 / 2130* Australia Q2 GDP 02-Sep 0500 / 0100 Japan METI weekly gasoline prices 02-Sep - Germany Jul car registrations 02-Sep 0700 / 0300 Spain Aug unemployment 02-Sep 0830 / 0430 UK Aug CIPS/Markit Construction PMI 02-Sep 0900 / 0500 EMU Jul PPI
US TSYS: Speaking of Fed liftoff trades, of course traders will be watching the US jobs report out this Friday at 8:30 a.m. ET. MNI economist poll has a +210 median estimate (and a high estimate of +250K and a low estimate of +173K). And more near-term at Wed at 8:15 am ET, the MNI economist poll has a +205K ADP median estimate.
FED: Boston Fed Pres Rosengren (FOMC voter in '16) sounds dovish, says on timing of tightening, "without an expectation of growth above potential and further tightening of labor markets, I would lose my primary rationale for a forecast of rising inflation, diminishing my confidence that inflation will reach the 2% target within a reasonable time frame. Indications of a much weaker global economy would at least increase the uncertainty." Does not specify timing but says should be gradual and end at low level. Also finds "very good reasons to expect a much more gradual normalization process than occurred in the previous two tightening cycles" - prior was about 200bp/yr. Wants gradual pace, lower rate at end than prior.
US TSYS SUMMARY: US Tsys higher midday Tues after 1) Tsys opened higher with back end outperforming 2) Main story: weaker global equities after weak European, China PMIs but closer look suggested PMIs not so bad, so some thought excuse to sell 3) But on UK/NY cross, Tsys in lock step with stocks, trading up as US stocks improved. 4) Flows: big real money 30Y demand on move but that met very good strength sellers 5) Bias to sell but with DJIA looking to open 400 pnts lower, many sidelined early 6) Tsys backed off into stock open despite weaker prices on talk pensions will put a lot into equities:talk $50B 7) Tsys tick higher post 9:30 am ET stk open in NY; then hedge funds sold Bunds, systems bought Gilts, then dealers sold US 10Y, bought back, sold 8) Dec 5Y/Dec 30Y steepeners/ flattener unwinds, buying 2Y bundles in Eurodlr futures on riskoff 9) Tsys gyrated off intraday high 10) RV accounts buy older Tsys which had been sold in dribs and drabs by various foreign central bks,11) Midmorning seller of 3,124 Sep 30Y at 154-13 and seller of 2,665 Sep Ultras at 157-29 at 10:34 am ET on block trades 12) Swaps tight on payer unwinds, after earlier 5y/5y payers, steepeners 13) Accts said to be forced out of Fed liftoff, risk-parity trades
US TSYS: One veteran trader said that "there is enough evidence around the margins, that the Chinese have to be selling" in Tsys in his view more so in overnight action. However this is being offset overnight by good buying from other Japanese or Asian accounts. "There was pretty decent Asian real money buying last night, which could have been say Japanese buying, and that could be offsetting Asian central bank selling," and also account for why the market does not make straight up or down moves, he said. Presumably anyone who wants to sell, wants to do so on strength, he said.
US TSYS: One trader noted that "we are hearing of guys being forced out of trades, such as liftoff trades" around the odds of the Sept. FOMC meeting rate hike possibilities "and out of risk-parity trades."
US TSYS: /BILLS: Cash T-bills also see busy demand: Oct. 8th bill is at -0.075% bid/-0.0175% offer, with various bills showing similar action out to Oct. 5th. As noted in the repo market update earlier, some hedge funds and other accounts are exiting stocks and hiding out in the weeds of the cash assets or T-bills, as they wait to see what will happen at the Sept. 17th FOMC meeting, i.e., a rate hike or not. "There is a whole bunch of stuff going on," said one trader. "This is a case where you want to see the facts that are discernable. Most people are in the risk reduction mode. And Labor Day is not until Monday. And, the Tsys futures are very illiquid on the screens."
US OUTLOOK/OPINION: MS "continue to see Q3 GDP growth tracking at 2.2%, with about a third of that accounted for by the combination of an estimated 12.6% (v. a prior 14.1% estimate) rise in residential investment, 5.5% (v. -2.5%) rise in business structures investment, and 5.7% (v. 11.7%) gain in S&L government structures investment."
EGB SUMMARY: German government bonds are trading mixed towards the close Tuesday with the belly of the curve underperforming in decent two-flow, with risk-off still the prevailing market theme, say traders. Sep Bunds opened lower, with prices weighed by further short-squeeze in crude oil prices overnight. The German yield curve then steepened as long-dates reversed lower induced by stop-loss selling in Sep Bunds. Risk-off move with weakness in stocks following weaker than expected EZ final Aug manufacturing PMI data at 52.3 vs 52.4 flash and 52.4 in July. Prices then saw another fade lower as traders reported buyer of TYA downside protection. Trade comes after Bobl/Bund Oct Puts were bought earlier today. In addition, prices also weighed by supply concession ahead of Austria bond auction results. Bunds then squeezed higher as stocks continued to look soggy and as Lloyds Bank priced E1.25bln 7Y bond at MS +77bps. Another fade was seen as USTs moved lower with prices weighed by upbeat US Aug Markit manufacturing PMI data and as US stocks (S&Ps Eminis) pared losses. Market sources say 22k Bund rolls blocked at -0.10 -- roll sold. German 10-year Bund 0.2bp higher at 0.797%.
US TSYS: /RISK: Credit Agricole's David Keeble also added that "there has been another large risk-off move by the ETF investor community. We can see USD$6.0Bn in outflows in each from the domestic and international ETFs in the past 10 days, which are pretty large amounts. In these up-to-date data, we see a strong move into government bond ETFs. The biggest inflow was a $1.0-billion inflow into iShares Short Treasury Bond, and biggest outflows were from iShares MSCI (MSCI) emerging markets (-USD1.4bn) and Vanguard FTSE emerging markets (-USD1.2bn)."
US TSYS: /TIPS: Traders called TIPS "cheap in the front end" but "otherwise it is hard to justify buying them, with oil doing what it's doing," as one put it. "This is an oil trade." And indeed TIPS demand wanes for intermediate and long end TIPS, as the NYMEX crude oil declines 6.42% on the day, said traders.
US DATA REACT: CS says 51.1 Aug mfg ISM is consistent with moderate pickup in global growth. JPM says "weakening in the ISM survey between July and August was spread across many of the main components and included declines in orders, production, and employment. Many other manufacturing surveys have also been soft lately, and the details of the ISM show that the stronger dollar and an inventory correction are likely weighing on the sector."
US DATA REACT: Amherst Pierpont says "ISM factory headline gauge slipped in August to 51.1, the softest reading since the spring of 2013. The manufacturing sector continues to languish." Construction data was robust-- Jul +0.7%, with "broad upward revisions to the May and June tallies" and auto sales are coming in strong. MUFG says to discount the ISM number with the real data being strong.
US TSYS/OVERNIGHT REPO: Pt II: Repo traders said tight bills action in RP mkt could reflect accounts exiting stocks and hanging out in the money funds, cash etc. "There could be hedge funds even buying there," said the trader. "A lot of buyers are in the short money space: a lot of people have stepped away from the stock market and want to see what the Fed does" at its September FOMC meeting before making new market moves in stocks.
US TSYS/OVERNIGHT REPO: US Treasury 10-yr note burst further out into tight special on heavy volume, while the T-bills that mature within this year trade tight too, said traders. The 10-year notes would be expected to see auction-tied shorts ahead of next week's 3/10/30-year auctions, but this is different or at least only 1 cause of tightness, said traders. "Typically this is part of their cycle, where they do start to pick up value," said a trader. "But today's richness is unnatural." He added, "There has not been that big of a chance in the cash market. "When you see issues that trade deeply special, and you find spikes in volume, you know these are not the normal flows. And indeed we have traded $14 billion in Broker-Tec in 10-year notes in repo. So, they are in play, in a game with big shorts." Meanwhile one-month and three-month T-bills also traded tight, said traders. "All the bills are tight inside of this year," said a trader. "The congressional/budget uncertainty in the fall is part of it. But this is a finely balanced supply and demand situation, which kicks in. "So there are a lot of buyers in the cash market," which then feeds into money market funds then T-bills, said trader.
US BONDS: A buyside account that specializes in agency MBS said he remains cautious on MBS for the following reasons: 1) Fed has been a larger of MBS and continues to be very important to this market and thus potential rate hikes and the eventual adjustments in the MBS reinvestment program are major issues; 2) While housing is not anywhere near its former glory days, it continues in recovery mode. That means more new MBS bond are being issued when the Fed is buying less than it was; spreads are not wide enough for private investors to take up the slack; it is unclear if private investors will take up the slack down the road and what price it will take. "MBS valuations are not cheap from a long-term perspective," he said.
US DATA REACT: BNP says July construction spending increased by 0.7%. "Residential construction spending continued to outpace non-residential construction spending, with the former increasing 1.1% m/m (last: 0.9%) and the latter picking up 0.5% m/m (last: 0.6%). A pickup in private construction (+1.3% m/m) completely offset a 1.0% m/m decline in public construction spending."
ECB: Below are bank views on ECB policy outcome at Thursday's meeting: - BAML says ECB's approach this week could be confined to words rather than action. "In our view, announcing that QE will continue beyond September 2016 would be a powerful form of forward guidance." - Barclays (BCS) expects Draghi to maintain an accommodative stance during introductory statement, likely insisting that the Governing Council still has tools available should monetary and financial conditions tighten further. - Citi sees room for a more dovish tone in the ECB language. Easy solution for Draghi is to allude to "panoply of policy options at the ECB's disposal". - Deutsche Bank (DB) says "the ECB is likely to refrain from announcing new measures but remind the market that duration of QE is conditional on inflation outlook." - Nomura expects ECB dovish rhetoric and threat level to remain elevated, firmly underlining that the Council stands ready to act and change its monetary policy stance if the medium-term outlook is materially challenged. - Goldman Sachs (GS) does not expect any changes at Sept meeting, while at same time signal willingness to act should this be deemed necessary.
US DATA REACT: MS says "Soft report showing the manufacturing sector continuing to struggle. The composite ISM fell 1.6 points in August to a two-year low of 51.1. After dropping from the high 57's in October and November to 51.5 in March and April, the index rebounded to 53.5 in June, but it's now down to a new low, hurt by renewed dollar strength and continued weak global growth."
US DATA REACT: BMO says data did a tug-of-war: "below-expected U.S. manufacturing (thank the strong USD and low oil prices on capex) versus stronger private sector construction. And better preliminary U.S. auto sales results." Mfg worldwide is weak.
US DATA REACT: Pantheon Macroecon says in ISM "The hit to the headline reflects a hefty 4.8-point drop in the new orders index to just 51.7, also the lowest since May 2013 and particularly alarming given that very favorable seasonals in recent years have pushed the orders index up over the late spring and summer. In August last year, it stood at 63.9. Production, inventories and employment have all dipped too."
US DATA: Aug Dallas Fed Svcs Survey: "service sector activity continued to reflect expansion in August, according to business executives responding to the Texas Service Sector Outlook Survey. The revenue index, a key measure of state service sector conditions, remained positive but retreated from 19.1 to 9.3. Labor market indicators reflected slower employment growth and slightly longer workweeks this month. The employment index fell 4 points to 6.1. The hours worked index dipped from 5.3 to 2.3. Perceptions of broader economic conditions reflected less optimism in August. The general business activity index declined from 7.9 to 2.1... Retail sales declined in August, according to business executives responding to the Texas Retail Outlook Survey. After two consecutive months in positive territory, the sales index plunged from 11.5 to -3.6. Inventories increased at the same pace as last month. Labor market indicators worsened in August."
US DATA REACT: HFE says "Construction spending was up 0.7% m/m in July, near the +0.6% consensus. Revisions were positive: May is now +2.3 m/m, instead of +1.8%, and June 0.7% m/m, instead of +0.1%." This "is an important example of the strength in non-manufacturing relative to manufacturing."
US BONDS: Has been a little harder recently to follow the flows and the logic of some of the flows. For example, was surprise Tsys were not better bid when Shanghai down 4% right out of the gate before they recovered. Then Tsys seemed to have muted react to large losses in US stock futures and then in cash when opened. Now they are reacting to weaker ISM as this could signal caution on Fed front. But other things at play too: talk of large rebalancing on first day of new month in stocks; belief China (and others?) selling assets amid currency weakness; always unsubstantiated rumors of selling in Tsys; Fed custody data last week showed drop in agency MBS holdings of $10B and we know China is large holder of these assets. One thing about the MBS market that is worth noting: its TBA market is second only to Tsys so when there is "risk off" mood, people might opt to sell MBS instead of other paper because they can. Also, as one market veteran points out, "People forget that China owns US equities, too." Finally, of course, there is a lack of confidence in what is really going on with China's economy and its various stock markets. When trouble hits, liquidity and transparency are key.
US DATA REACT: HFE says weak ISM data incl "export orders index fell to 46.5 from 48.0. The prices paid index fell to 39.0 from 44.0 -- it is dominated by commodity prices, including oil." BNP says Aug mfg ISM at 51.1 was below expected, shows mfg weaker.
US DATA REACT: CIBC says Aug ISM "dropped to a below consensus 51.1 from 52.7 the prior month, which looks scary, but really only puts it marginally below where it was two months ago. Not surprisingly, the new orders component was off sharply."
US TSYS: Treasuries cut losses amid soft 51.1 Aug ISM report, after earlier sales as stocks managed to cut losses in choppy 2-way trades outright and on the curves. Traders also eyed talk of potential large pension rebalancing into stocks, see 9:58am ET bullet details. Cash 10Y is at 2.165%, 5/30Y 4.8 bps steeper on day, 2/30Y 2.50 bps steeper on day, 2/7Y 2 bps flatter on day.
US DATA: Aug ISM text: "PMI registered 51.1 percent, a decrease of 1.6 percentage points from the July reading of 52.7 percent. The New Orders Index registered 51.7 percent, a decrease of 4.8 percentage points from the reading of 56.5 percent in July. The Production Index registered 53.6 percent, 2.4 percentage points below the July reading of 56 percent. The Employment Index registered 51.2 percent, 1.5 percentage points below the July reading of 52.7 percent. Inventories of raw materials registered 48.5 percent, a decrease of 1 percentage point from the July reading of 49.5 percent. The Prices Index registered 39 percent, down 5 percentage points from the July reading of 44 percent, indicating lower raw materials prices for the 10th consecutive month. The New Export Orders Index registered 46.5 percent, down 1.5 percentage points from the July reading of 48 percent. Comments from the panel reflect a mix of modest to strong growth."
US DATA: July construction spending +0.7%, matching the median expectation of a MNI survey. June construction rev up to +0.7% (prev +0.1%). July private construction +1.3% and public construction -1.0%. Private residential construction +1.1% with 1-family home construction +2.1% and multi-family -2.2%.Residential construction excluding new homes +0.9%. Private nonresidential construction +1.5%.
MNI: US ISM PURCHASING MANAGERS INDEX 51.1 AUG VS 52.7 JULY US ISM PRICES PAID INDEX 39.0 AUG VS 44.0 JULY (NSA) US ISM NEW ORDERS INDEX 51.7 AUG VS 56.5 JULY US ISM EMPLOYMENT INDEX 51.2 AUG VS 52.7 JULY US ISM PRODUCTION INDEX 53.6 AUG VS 56.0 JULY US ISM SUPPLIER DELIVERY INDEX 50.7 AUG VS 48.9 JULY US ISM ORDER BACKLOG INDEX 46.5 AUG VS 42.5 JULY (NSA)
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