*China's NDRC redacts comment advocating looser monetary policy:
More confusion on the potential and scope for Chinese monetary easing. Country’s top economic planner, the National Development and Reform Commission, dropped a reference to lowering interest rates and the reserve requirement ratio, in an updated statement on its website. NDRC originally stated Wednesday that among its policy prescriptions for countering slowing private investment growth were for appropriately-timed interest rate and RRR cuts. WSJ noted redaction reflected tensions between Chinese policymakers. While commission officials believe private sector problems relate to companies being unable to access cheaper borrowing, PBoC and its allies have instead voiced concerns about excessively loose credit. Central bank stuck to its talking points overnight, noting again it aims to keep liquidity at reasonably ample levels while fine tuning policy in a pre-emptive and timely way.
*Over 80% of the S&P 500 has now reported for Q2:
Today marked last peak day of Q2 earnings season (though still have to get through Jul Q reporters in next few weeks….dominated by retail). Over 80% of S&P 500 companies have now reported. This week has seen some deterioration in key metrics, but nothing to swing largely positive overall sentiment surrounding Q2 results. Blended earnings decline stands at (3.6%), still better than (5.5%) at end of Q2. Roughly 70% of S&P 500 companies have beat consensus estimates, slightly better than recent average. In the aggregate, companies reporting earnings that are 4.1% ahead of expectations, also in line with one-year average. Blended revenue decline is just (0.05%), better than the (0.8%) at end of June. Just over 54% have beat consensus revenue estimates, much better than 49% one-year average. In the aggregate, companies reporting revenues that are 0.8% above expectations, nicely ahead of 0.0% one-year average.
*Payrolls in focus for Friday:
Employment report expected to be highlight for the day on Friday. Street looking for a 180K gain in nonfarm payrolls following an outsized 287K increase in June that drove upgrade of Fed’s economic assessment in July FOMC statement. Unemployment rate expected to tick down to 4.8% from 4.9%, while average hourly earnings seen up 0.2% m/m. Some uncertainty about directional implications for stocks from meaningful surprises in either direction. Upside surprise dampens recent growth concerns from disappointing GDP data. Recall firmer data a widely cited driver of market strength in the first few weeks following Brexit. However, could also expose some complacency surrounding Fed policy normalization and depressed yields. Weak print seen confirming market view of a sidelined Fed, but also could renew worries about policy fatigue and extended earnings recession.
*Oil bounce continues:
Oil extended Wednesday’s bounce, with WTI settling up 2.7% after some overnight/early morning weakness. Nothing specific behind today’s move. Short covering seems to have received bulk of the credit. Recall some focus earlier this week on CFTC data that showed hedge funds boosted short position in WTI crude by nearly 39K futures and options in week-ended 6-Jul, which Bloomberg noted was biggest increase going back to 2006. Added that while short positions rose 28%, net longs fell to 23%, lowest since February. Reuters said build in short position was equivalent to 56M barrels. Also some focus today on latest Genscape report that stockpiles at key Cushing hub fell just over 89K in the week-ended 2-Aug. In addition, Reuters noted reports that BP was restarting units at its Whiting refinery following a weekend outage that forced it to cut production by 20-25%.
*BoE cut rates by 25 bps, expands asset purchases by £70B in total:
BoE cut rates by 25 bps to 0.25% as expected. Also announced series of unconventional measures at the upper end of expectations. Boosted Gilt purchases by £60B to £435B to be carried out over the next six months. In addition, will buy up to £10B in corporate bonds over the next 18 months. Also unveiled a new funding for lending scheme in order to mitigate the impact of low rates. Moreover, MPC said if incoming data proves broadly consistent with August Inflation Report forecast, majority of members expect to support further cut in official rate to effective lower bound. Currently judges this to be close to, but a little above zero. Growth outlook for 2017 cut to 0.8% vs 2.3% in May, while 2018 reduced to 1.8% from 2.3%.
*Sector performance bunched:
Little sector dispersion today. Earnings drove bulk of notable price action. Financials fared worst after several misses from life insurers, notably MET-US and PRU-US. Healthcare lagged. Nothing particularly notable outside of earnings. Biotech gave back some recent strength (BIIB-US continued to pull back following recent M&A speculation). Energy a bit weaker despite another oil bounce. Consumer discretionary little changed with a lot of moving pieces. Some laggards in media on earnings (FOXA-US, VIAB-US, TIMEUS). JACK-US a post-earnings standout in restaurants. Dept. stores better. Housing-leveraged retailers under pressure. Industrials also little changed. Distributors and airlines the better performers. Rails and ag-equipment lagged. Materials boosted by paper/packaging (BLL-US earnings) and precious metals strength. Tech best performer. Semis a standout despite lack of news.
*Initial claims rise, factory orders decline less than consensus:
Initial jobless claims came in at 269K this week, up from last week’s 266K level but ahead of consensus for 265K. Streak of sub-300K claims now at 74 weeks. Four-week moving average at 260.25K, up from last week’s 256.5K level. Continuing claims at 2138K, slightly better than last week’s downwardly revised 2139K level and higher than consensus for 2130K. Today also saw July Challenger job-cut report showing employers announced planned cuts of 45,346 jobs, a rise from 38,536 in June and notably higher than May’s five-month low of 30,157. Elsewhere, factory orders fell 1.5% in June vs consensus for a 1.9% drop. Second consecutive decline, with May downwardly revised to a 1.2% drop. Transportation equipment led the decline. Shipments increased 0.7% for the month and inventories were down 0.3%.
*BoJ's Iwata says comprehensive assessment not a policy signal:
BoJ Deputy Governor Kikuo Iwata said comprehensive assessment of current policies and their effect on underlying economy to be presented in September not meant to signal policy direction. However, also stressed BoJ has no plan to dial back stimulus and defended mix of JGB and ETF purchases, as well as NIRP. Review announcement triggered some thoughts that central bank had become more cognizant about the limits of unconventional policy and its adverse side effects. This led to speculation it would shift stimulus onus to government, and played a role in big backup in JGB yields. However, others suggested BoJ may be just setting the stage for another rate cut and JGB purchase program expansion in September.
*ECB's Weidmann warns on adjusting QE rules:
ECB's Weidmann, one of the more hawkish members of the Governing Council, said in a wide ranging Die Weltinterview that it can customize the QE plan in order to address bond scarcity. However, he emphasized that use of capital keys has a meaning and if it moves away from rules it could end up buying more bonds of countries with high debt. Warned that this could move ECB away from core mandate and blurs boundaries between monetary and fiscal policy. Added this could challenge issue of central bank independence and result in interest rates being lower for longer than necessarily. Comments from Weidmann came prior to release of ECB Bulletin. No surprises; it reiterated willingness to use all instruments to fulfill mandate. Said better able to assess underlying macroeconomic conditions when more information is available in coming months.
*Red flags from aggressive use of adjusted earnings figures:
Earnings quality remains a big theme in the market. WSJnoted new research from consulting firm Audit Analytics showed companies that report significantly stronger earnings by using adjusted figures are more likely to encounter some kinds of accounting problems than those that adhere to standard measures. Study of S&P 1500 found that while 3.8% of companies that exclusively used GAAP metrics had formal earnings restatements from 2011 to 2015, rate jumped to 6.5% among heavy users of non-GAAP measures whose adjusted earnings were at least twice as high as GAAP net income. Added that 7.5% of GAAP-only group had material weaknesses in internal controls, while the figure was 11% for the non-GAAP group. Article also pointed out that a study in June showed non-GAAP metrics inflated 2015 earnings by $164.1B over GAAP at a group of 816 public companies.
*Markets continue to complicate Fed policy normalization:
More discussion in press about myriad complications facing Fed’s effort to start to normalize monetary policy. Bloomberg noted critics’ concerns that Fed has become so sensitive to risk of outsized volatility in financial markets that it is continuously refraining from raising rates. Highlighted worries that this perceived shift in strategy could further damage Fed’s credibility and make it increasingly difficult to carry out policy. Pointed out that while Fed officials have repeatedly denied the existence of a Fed “put”, they have conceded they pay attention to markets because of spillover effects moves can have on consumers, companies and overall economy. Also highlighted recent comments from NY Fed President Dudley, who admitted Fed has been forced to pare back tightening expectations due to worries accompanying dollar strength could lead to undesired tightening of financial conditions.
*Demographics a drag on productivity:
Weak productivity remains a major headwind US economic growth, though economists seem divided about why it has been so sluggish. WSJ (Greg Ip article) discussed new research from Harvard University and the Rand Corp. that showed demographics may be a meaningful drag. Noted that every 10% increase in the share of a state’s population over age of 60 reduced per capita growth in GDP by 5.5%. While one-third of the hit came from a slowdown in labor force growth, bigger effect was through reduced productivity of remaining workers. Authors of the new research pointed out that an older worker’s experience increases not only his own productivity, but also the productivity of those who work with him. Article also discussed how rapid retirements may explain weakness of wages. Pointed out that while average hourly earnings up just 2.6% in past year, when adjusted for demographics, they are up 3.6%.
*UK Institute of Directors call for bumper fiscal stimulus:
Latest survey carried out by Institute of Directors (IoD) called on UK Chancellor Hammond to carry out a bumper fiscal stimulus package when he reveals Autumn Statement in November. According to survey, business leaders think the BoE can do little to revive confidence on its own and more government help is needed. Director General of IOD Simon Walker said more tax breaks needed for businesses and a cut in corporation tax to head off a stop in hiring and investment. Calls from IoD come as group of progressive economists publish a letter in the Guardian urging a reset in economic policy. Said it is unclear that BoE has tools to meet challenges. Wants Treasury support on design of alternative policies, such as infrastructure investment or direct cash handouts to households and businesses financed by BoE money creation.
*Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Ltd. (NAB) & Westpac Banking Corp Fully Paid Ord. Shrs (WBC):
The big four bank bosses have grudgingly submitted to regular public grillings by politicians, escalating the fallout after holding back the Reserve Bank’s full rate cut from mortgage holders and inflaming the political fire engulfing the industry. Amid ongoing calls from Labor and crossbenchers for greater action, Malcolm Turnbull yesterday told the bank chiefs they would be called to appear at least annually before the House of Representatives standing committee on economics. As the banks reluctantly fell into line, Australian Bankers’ Association chief Steven Munchenberg labelled it “unprecedented” to haul companies before a committee to explain commercial pricing decisions and dismissed concerns that the industry had not explained how mortgage pricing works in recent years. Along with moves in funding costs and interest rates, Commonwealth Bank’s Ian Narev, National Australia Bank’s Andrew Thorburn, Westpac’s Brian Hartzer and ANZ’s Shayne Elliott will be probed on the industry’s response to scandals
More confusion on the potential and scope for Chinese monetary easing. Country’s top economic planner, the National Development and Reform Commission, dropped a reference to lowering interest rates and the reserve requirement ratio, in an updated statement on its website. NDRC originally stated Wednesday that among its policy prescriptions for countering slowing private investment growth were for appropriately-timed interest rate and RRR cuts. WSJ noted redaction reflected tensions between Chinese policymakers. While commission officials believe private sector problems relate to companies being unable to access cheaper borrowing, PBoC and its allies have instead voiced concerns about excessively loose credit. Central bank stuck to its talking points overnight, noting again it aims to keep liquidity at reasonably ample levels while fine tuning policy in a pre-emptive and timely way.
*Over 80% of the S&P 500 has now reported for Q2:
Today marked last peak day of Q2 earnings season (though still have to get through Jul Q reporters in next few weeks….dominated by retail). Over 80% of S&P 500 companies have now reported. This week has seen some deterioration in key metrics, but nothing to swing largely positive overall sentiment surrounding Q2 results. Blended earnings decline stands at (3.6%), still better than (5.5%) at end of Q2. Roughly 70% of S&P 500 companies have beat consensus estimates, slightly better than recent average. In the aggregate, companies reporting earnings that are 4.1% ahead of expectations, also in line with one-year average. Blended revenue decline is just (0.05%), better than the (0.8%) at end of June. Just over 54% have beat consensus revenue estimates, much better than 49% one-year average. In the aggregate, companies reporting revenues that are 0.8% above expectations, nicely ahead of 0.0% one-year average.
*Payrolls in focus for Friday:
Employment report expected to be highlight for the day on Friday. Street looking for a 180K gain in nonfarm payrolls following an outsized 287K increase in June that drove upgrade of Fed’s economic assessment in July FOMC statement. Unemployment rate expected to tick down to 4.8% from 4.9%, while average hourly earnings seen up 0.2% m/m. Some uncertainty about directional implications for stocks from meaningful surprises in either direction. Upside surprise dampens recent growth concerns from disappointing GDP data. Recall firmer data a widely cited driver of market strength in the first few weeks following Brexit. However, could also expose some complacency surrounding Fed policy normalization and depressed yields. Weak print seen confirming market view of a sidelined Fed, but also could renew worries about policy fatigue and extended earnings recession.
*Oil bounce continues:
Oil extended Wednesday’s bounce, with WTI settling up 2.7% after some overnight/early morning weakness. Nothing specific behind today’s move. Short covering seems to have received bulk of the credit. Recall some focus earlier this week on CFTC data that showed hedge funds boosted short position in WTI crude by nearly 39K futures and options in week-ended 6-Jul, which Bloomberg noted was biggest increase going back to 2006. Added that while short positions rose 28%, net longs fell to 23%, lowest since February. Reuters said build in short position was equivalent to 56M barrels. Also some focus today on latest Genscape report that stockpiles at key Cushing hub fell just over 89K in the week-ended 2-Aug. In addition, Reuters noted reports that BP was restarting units at its Whiting refinery following a weekend outage that forced it to cut production by 20-25%.
*BoE cut rates by 25 bps, expands asset purchases by £70B in total:
BoE cut rates by 25 bps to 0.25% as expected. Also announced series of unconventional measures at the upper end of expectations. Boosted Gilt purchases by £60B to £435B to be carried out over the next six months. In addition, will buy up to £10B in corporate bonds over the next 18 months. Also unveiled a new funding for lending scheme in order to mitigate the impact of low rates. Moreover, MPC said if incoming data proves broadly consistent with August Inflation Report forecast, majority of members expect to support further cut in official rate to effective lower bound. Currently judges this to be close to, but a little above zero. Growth outlook for 2017 cut to 0.8% vs 2.3% in May, while 2018 reduced to 1.8% from 2.3%.
*Sector performance bunched:
Little sector dispersion today. Earnings drove bulk of notable price action. Financials fared worst after several misses from life insurers, notably MET-US and PRU-US. Healthcare lagged. Nothing particularly notable outside of earnings. Biotech gave back some recent strength (BIIB-US continued to pull back following recent M&A speculation). Energy a bit weaker despite another oil bounce. Consumer discretionary little changed with a lot of moving pieces. Some laggards in media on earnings (FOXA-US, VIAB-US, TIMEUS). JACK-US a post-earnings standout in restaurants. Dept. stores better. Housing-leveraged retailers under pressure. Industrials also little changed. Distributors and airlines the better performers. Rails and ag-equipment lagged. Materials boosted by paper/packaging (BLL-US earnings) and precious metals strength. Tech best performer. Semis a standout despite lack of news.
*Initial claims rise, factory orders decline less than consensus:
Initial jobless claims came in at 269K this week, up from last week’s 266K level but ahead of consensus for 265K. Streak of sub-300K claims now at 74 weeks. Four-week moving average at 260.25K, up from last week’s 256.5K level. Continuing claims at 2138K, slightly better than last week’s downwardly revised 2139K level and higher than consensus for 2130K. Today also saw July Challenger job-cut report showing employers announced planned cuts of 45,346 jobs, a rise from 38,536 in June and notably higher than May’s five-month low of 30,157. Elsewhere, factory orders fell 1.5% in June vs consensus for a 1.9% drop. Second consecutive decline, with May downwardly revised to a 1.2% drop. Transportation equipment led the decline. Shipments increased 0.7% for the month and inventories were down 0.3%.
*BoJ's Iwata says comprehensive assessment not a policy signal:
BoJ Deputy Governor Kikuo Iwata said comprehensive assessment of current policies and their effect on underlying economy to be presented in September not meant to signal policy direction. However, also stressed BoJ has no plan to dial back stimulus and defended mix of JGB and ETF purchases, as well as NIRP. Review announcement triggered some thoughts that central bank had become more cognizant about the limits of unconventional policy and its adverse side effects. This led to speculation it would shift stimulus onus to government, and played a role in big backup in JGB yields. However, others suggested BoJ may be just setting the stage for another rate cut and JGB purchase program expansion in September.
*ECB's Weidmann warns on adjusting QE rules:
ECB's Weidmann, one of the more hawkish members of the Governing Council, said in a wide ranging Die Weltinterview that it can customize the QE plan in order to address bond scarcity. However, he emphasized that use of capital keys has a meaning and if it moves away from rules it could end up buying more bonds of countries with high debt. Warned that this could move ECB away from core mandate and blurs boundaries between monetary and fiscal policy. Added this could challenge issue of central bank independence and result in interest rates being lower for longer than necessarily. Comments from Weidmann came prior to release of ECB Bulletin. No surprises; it reiterated willingness to use all instruments to fulfill mandate. Said better able to assess underlying macroeconomic conditions when more information is available in coming months.
*Red flags from aggressive use of adjusted earnings figures:
Earnings quality remains a big theme in the market. WSJnoted new research from consulting firm Audit Analytics showed companies that report significantly stronger earnings by using adjusted figures are more likely to encounter some kinds of accounting problems than those that adhere to standard measures. Study of S&P 1500 found that while 3.8% of companies that exclusively used GAAP metrics had formal earnings restatements from 2011 to 2015, rate jumped to 6.5% among heavy users of non-GAAP measures whose adjusted earnings were at least twice as high as GAAP net income. Added that 7.5% of GAAP-only group had material weaknesses in internal controls, while the figure was 11% for the non-GAAP group. Article also pointed out that a study in June showed non-GAAP metrics inflated 2015 earnings by $164.1B over GAAP at a group of 816 public companies.
*Markets continue to complicate Fed policy normalization:
More discussion in press about myriad complications facing Fed’s effort to start to normalize monetary policy. Bloomberg noted critics’ concerns that Fed has become so sensitive to risk of outsized volatility in financial markets that it is continuously refraining from raising rates. Highlighted worries that this perceived shift in strategy could further damage Fed’s credibility and make it increasingly difficult to carry out policy. Pointed out that while Fed officials have repeatedly denied the existence of a Fed “put”, they have conceded they pay attention to markets because of spillover effects moves can have on consumers, companies and overall economy. Also highlighted recent comments from NY Fed President Dudley, who admitted Fed has been forced to pare back tightening expectations due to worries accompanying dollar strength could lead to undesired tightening of financial conditions.
*Demographics a drag on productivity:
Weak productivity remains a major headwind US economic growth, though economists seem divided about why it has been so sluggish. WSJ (Greg Ip article) discussed new research from Harvard University and the Rand Corp. that showed demographics may be a meaningful drag. Noted that every 10% increase in the share of a state’s population over age of 60 reduced per capita growth in GDP by 5.5%. While one-third of the hit came from a slowdown in labor force growth, bigger effect was through reduced productivity of remaining workers. Authors of the new research pointed out that an older worker’s experience increases not only his own productivity, but also the productivity of those who work with him. Article also discussed how rapid retirements may explain weakness of wages. Pointed out that while average hourly earnings up just 2.6% in past year, when adjusted for demographics, they are up 3.6%.
*UK Institute of Directors call for bumper fiscal stimulus:
Latest survey carried out by Institute of Directors (IoD) called on UK Chancellor Hammond to carry out a bumper fiscal stimulus package when he reveals Autumn Statement in November. According to survey, business leaders think the BoE can do little to revive confidence on its own and more government help is needed. Director General of IOD Simon Walker said more tax breaks needed for businesses and a cut in corporation tax to head off a stop in hiring and investment. Calls from IoD come as group of progressive economists publish a letter in the Guardian urging a reset in economic policy. Said it is unclear that BoE has tools to meet challenges. Wants Treasury support on design of alternative policies, such as infrastructure investment or direct cash handouts to households and businesses financed by BoE money creation.
*Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Ltd. (NAB) & Westpac Banking Corp Fully Paid Ord. Shrs (WBC):
The big four bank bosses have grudgingly submitted to regular public grillings by politicians, escalating the fallout after holding back the Reserve Bank’s full rate cut from mortgage holders and inflaming the political fire engulfing the industry. Amid ongoing calls from Labor and crossbenchers for greater action, Malcolm Turnbull yesterday told the bank chiefs they would be called to appear at least annually before the House of Representatives standing committee on economics. As the banks reluctantly fell into line, Australian Bankers’ Association chief Steven Munchenberg labelled it “unprecedented” to haul companies before a committee to explain commercial pricing decisions and dismissed concerns that the industry had not explained how mortgage pricing works in recent years. Along with moves in funding costs and interest rates, Commonwealth Bank’s Ian Narev, National Australia Bank’s Andrew Thorburn, Westpac’s Brian Hartzer and ANZ’s Shayne Elliott will be probed on the industry’s response to scandals
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