While Americans were Celebrating Labor Day

<br /> While Americans were Celebrating Labor Day – Marc to Market<br />


There were several
developments that took

place while US markets were closed for
its Labor Day holiday. 
Most of the
economic news was favorable.
included a strong snap back in the
UK service PMI,  more evidence that the moral suasion campaign to lift
wages in Japan is yielding some success
and a rise in the Caixin’s  China’s service PMI.  
What the market
did react to is also important. 
 The German election that saw the CDU
come in third place in Merkel’s home state elicited little reaction.  The
pro-democracy movement picked up a few
more seats in the Hong Kong legislature amid
the highest voter participation since direct election of the legislature began in 1991.  The
pro-democracy moved now has 30 seats in the 70 seat chamber, which is
sufficient to obstruct and embarrass, but little more.  Investors ignored
the news and instead boosted the Hang Seng Index by 1.65%, the most since mid-July.
On the other
hand, the investors over-responded to suggestions that Saudi Arabia and Russia
may agree to freeze output later this month.
  At its best, the price of Brent was
up by more than 5%, but as cooler heads prevailed, the gains were pared to less than 1%.  As we have
noted, assuming rational actors embracing realpolitik values,  we should
expect output to increase ahead of serious negotiations to freeze production.
 And that is exactly what has
An agreement to
refrain from increasing output is also something smaller producers, many of
whom are already producing near capacity, can agree to a freeze.
  They are not giving up anything.
  Iran is a different story.  It’s output has not returned to
pre-embargo levels, in part due to continued obstacles in securing financing
from US and European banks.  A freeze on the part of the Saudis without
Iran participation would be tantamount to a surrender of market share in a
rivalry that extends well beyond oil policy. 
The UK hit the
 Last week the manufacturing and
construction PMIs popped back from the July, Brexit-shock drop.  Today,
the service sector PMI joined.  It rose to 52.9 from 47.4, besting
expectations for a 50 reading.  To put it in perspective, consider that
the Q2 average was 52.7, 54.0 in Q1, and  55.4 in Q3 and Q4 15.  The
composite reading jumped to 53.6 from 47.6.  It is well above the Q2
average of 52.4, but below the 54.2 in Q1 and 55.4 in Q4 15.    
extended last week’s gains to reach $1.3375, surpassing by a few ticks the
August 3 high. However, sellers were lurking, and sterling eased to $1.3290 in late London dealings.
  It is flirting with a trendline,
drawn from the June 27, July 15 and September 1 highs, but has been unable to
close above it.  The trendline is found
near $1.3325 on September 6.  
The UK’s Brexit
Minister Davis is expected to explain in
broad terms the government’s strategy for negotiating with the EU later this
week before Parliament. 
 Prime Minister May also questioned the effectiveness
and desirability of an Australian point system for immigration, which many of
the leaders of Brexit have advocated.  
Over the last
couple of months, Japanese wages have begun rising. 
 Specifically, in both June and July, cash wages rose 1.4%
year-over-year.  The two-month
average is the largest since April 2010. There has also been a steady increase
in the averages.  The 12-month
average is 0.5%.  The six-month average is 0.8%, and the three-month average is 0.9%.  Adjusted for inflation, real cash wages are rising at their fastest
level since the middle of 2010.  At the end of last week, the BOJ
confirmed it had begun buying an ETF of companies with desired wage and
investment policies.  
Even though the
composite PMI, released early Monday in Tokyo, showed a return to sub-50, where
it has been since February, except July,
there is much talk that the BOJ may buy few long-term JGBs.
  The idea is later this month; the BOJ may announce intentions to
facilitate curve steepening and/or
introduce more flexibility into its asset purchase.  
This is an important factor that has been pushing up long-term Japanese interest rates.  The 10-year yield is near its
highest level in six months, though still
slightly negative.  The 30-early bond yield has risen from 2 bp in
early-July to nearly 54 bp now.   Over the past three months,
long-dated JGBs are among the worst performing bond markets.   
implications for the yen are clear.
  It is not just about the bond, but hedging decisions too.  The
dollar spent the Asian and European sessions confined to the pre-weekend
trading range, but the tone was heavy as
it was pushed away from the JPY104 level.
 Initial support is seen in around
JPY102.70-JPY102.80.  A break could signal a move toward
Leaving the tarmac issues aside, the G20 meeting was successful,
and the signing of the Paris Accords by
the Presidents of the two largest economies is notable. 
 Obama and Xi also pledged to avoid competitive
currency devaluations, which continues to strike us as an arms control
agreement of sorts, though one country has a current account surplus and the
other a deficit.  
Caixin’s non-manufacturing PMI rose to 52.1 from 51.7.
  Recall that last week, the government’s
measure to 53.5 from 53.9. In contrast, the government’s PMI for manufacturing
rose while the Caixin’s version slipped.  The recent string of data
suggests the Chinese economy is stabilizing though at the cost of greater
leverage, and foreign demand (growing trade surplus;
the August trade balance due later this week is expected to be a little
above $58 bln).  
The dollar has
been mostly moving higher against the yuan since the end of April. 
The dollar has fallen against the yuan in four of the past
18 weeks.   However, it has been trading broadly sideways between CNY6.65
and CNY6.70 here in Q3.
The eurozone’s
August service PMI was disappointing.
  It was
revised to 52.8 from the flash reading of 53.1.  In July it stood
at 52.9.  The culprit was not the usual suspects, but Germany.  Its
service PMI was revised to 51.7 from
53.3.  The composite fell to 53.3
from 55.3.  It averaged 54.2 in Q1 and Q2.  It is the lowest since
May 2015.  
It is not
particularly the kind of news Merkel would have wanted to hear, the day
following the embarrassing third place finish of the CDU in her home state.
  It is more embarrassing than consequential, as the CDU will most likely
will continue to be the junior partner of the SPD in the state government.
 The SPD may want to keep its options open, but the alternative is an
alliance with the Left Party, which they have so far spurned.
Italy’s service
PMI was a pleasant surprise at 52.3, up from 52.0. 
 Many expected a decline. However, the composite PMI
eased to 51.9 from 52.2.   Some earthquake relief and rebuilding funds
could help Renzi, but it appears that whatever forward momentum the economy had
is at risk of fading.  It may not provide a favorable backdrop for the
constitutional referendum in a couple of months.  
Spain political
deadlock continues, with Rajoy unable to secure even a plurality in last week’s confidence votes. 
 There are some ideas that he may try again after the
regional elections in Galicia and Basque next month.  Despite (not
because) the lack of an elected government (Rajoy is caretaker, with limited
mandate), the economy still expanding at an enviable clip even if it has lost
some momentum.  The August service PMI rose to 56.0 from 54.1, and the composite stands at 54.8, up from 53.7.
The euro
finished last week just above the session and week’s lows near $1.1150. 
 There was follow-through selling on Monday, but the
range extension took place in Europe, not
Asia.  The low was near $1.1140.  We have noted important technical support in the
$1.1115-$1.1130 area. It houses a retracement target of the rally since
late-July and the 200-day moving average.  
We note that
the US two-yield is above the similar German yield by 142 bp. 
 It had fallen to 126 bp a month ago but rebounded to multi-year high near 146
bp in late-August near where it is consolidating now.  


While Americans were Celebrating Labor Day
While Americans were Celebrating Labor Day

Reviewed by Marc Chandler

September 05, 2016

Rating: 5

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