European Outlook: Asian stock markets broadly headed south, yields declined, as investors headed for safety, after North Korea launched a missile that flew over Japan before plunging into the sea. U.K. and U.S. stock futures are also under pressure and with the EUR remaining above 1.19 against the dollar, Eurozone stock markets are likely to extend yesterday’s losses, thus adding to pressure on bond yields. The 10-year Bund is back at levels last seen at the end of June, as the ECB remains cautious on the future of QE next year. Geopolitical events are likely to overshadow the local calendar.
FX Update: The dollar has come under fresh pressure as the London inter-bank take to their desks. EURUSD has punched out new 31-month highs, this time above 1.1990, while the narrow trade-weighted USD index hit a 16-month low at 92.06. USDJPY dove to a four-month low at 108.33 in early Asia-Pacific dealings before settling in the upper 108.0s. The low was seen following news that North Korea fired a missile that flew over Japan before landing in the sea. Markets are also factoring the storm damage and disruption in Texas, and a tumultuous political backdrop in Washington DC. This backdrop has maintained dollar weakness and demand for safe havens, such as the Japanese yen. Japanese data today showed unemployment falling to 2.8% in July and job availability rising for a fifth straight month, though to little market impact. Elsewhere, Cable hit a two-week high at 1.2954, and commodity currencies under-performed.
Today’s German GfK consumer confidence unexpectedly improved to 10.9 in the September projection, from 10.8 in August. The breakdown, which is only available for August, shows a renewed pick up in income expectations and the willingness to buy, despite the fact that economic expectations actually fell back markedly in August. The willingness to save meanwhile dropped with price expectations. Another very strong German confidence number that confirms that economic activity remains very strong over the summer quarter.
US reports: revealed July figures for the trade deficit and inventories that tracked our assumptions on net, though both exports and imports were weaker than expected, and a downward tweak in the June wholesale trade figures trimmed our Q2 GDP estimate to 3.0% from 3.1%, versus the 2.6% advance figure. Though we don’t have damage estimates for Harvey yet, we’ve lowered our industrial production and mining assumptions for August and September and have trimmed our housing sector assumptions, while boosting estimates for building material sales and construction. We will see a boost in factory activity outside of the region that will mitigate some of the local lost output, and we have left our Q3 GDP estimate at 3.5%. Note that today’s August Dallas Fed index, with survey data that predates Harvey, rose slightly to a robust 17.0 from 16.8.
Main Macro Events Today
- US Consumer Confidence- August consumer confidence is out Tuesday and we expect the headline to climb to 122.0 (median 120.0) from 121.1 in July and 117.3 in June. Other measures of confidence for August have been stronger with Michigan Sentiment rising to 97.6 from 93.4 in July and the IBD/TIPP Poll climbing to 52.2 from 50.2 in July.
- Canadian IPPI – The industrial product price index is seen falling 0.5% in July (m/m, NSA) after the 1.0% drop in June.
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