• Practically all the incoming news has been a surprise on the upside
• PEPP could end in March
• We can reduce PEPP pace because financing conditions are favorable
• ECB's TLTROs have a serious distortive effect

MNI Indicators’ report revealed on Tuesday that business activity in Chicago expanded in August at a slower pace than in July.

The MNI Chicago Business Barometer, also known as Chicago purchasing manager's index (PMI) came in at 66.8 in August, down from an unrevised 73.4 in July.

Economists had forecast the index to drop to 68.0.

A reading above 50 indicates improving conditions, while a reading below this level shows worsening of the situation.

According to the report, Production plunged 7.8 points to a two-month low of 61, while New Orders decreased 4.4 points to 67.8, suggesting demand is growing at a slower pace compared to July. At the same time, Order Backlogs jumped 11.6 points to 81.6, its highest reading since 1951, while Supplier Deliveries climbed 6.3 points to 92.8, its three-month high, and Inventories increased 6.2 points to 48.8, its highest level since March though still signaling contraction. On the price front, Prices paid at the factory gate rose 2.3 points to 93.9, hitting the highest level since 1979 as companies continued to report higher costs for production materials.

The Conference Board announced on Tuesday its U.S. consumer confidence fell 11.3 points to 113.8 in August from 125.1 in July. This was the lowest reading since February.

Economists had expected consumer confidence to drop to 124.0.

July’s consumer confidence reading was revised down from the originally estimated 129.1.

The survey showed that the present situation index dropped from 157.2 in July to 147.3 this month. Meanwhile, the expectations index decreased from 103.8 last month to 91.4 in August.

Consumer confidence retreated in August to its lowest level since February 2021,” noted Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Concerns about the Delta variant - and, to a lesser degree, rising gas and food prices - resulted in a less favorable view of current economic conditions and short-term growth prospects. Spending intentions for homes, autos, and major appliances all cooled somewhat; however, the percentage of consumers intending to take a vacation in the next six months continued to climb. While the resurgence of COVID-19 and inflation concerns have dampened confidence, it is too soon to conclude this decline will result in consumers significantly curtailing their spending in the months ahead.”

S&P Dow Jones Indices (S&P DJI) reported on Tuesday its Case-Shiller Home Price Index, which tracks home prices in 20 U.S. metropolitan areas, soared 19.1 percent y-o-y in June, following a revised 17.0 percent y-o-y jump in May (originally a 17.1 percent y-o-y surge). 

Economists had expected a climb of 18.5 percent y-o-y.

Phoenix (+29.3 percent y-o-y), San Diego (+27.1 percent y-o-y) and Seattle (+25.0 percent y-o-y) recorded the highest y-o-y increases among the 20 cities in June. Overall, all 20 cities reported greater price gains in the year ending June 2021 versus the year ending May 2021.

Meanwhile, the S&P/Case-Shiller U.S. National Home Price Index, which measures all nine U.S. census divisions, climbed 18.6 percent y-o-y in June, following a 16.8 percent y-o-y surge in the previous month. This was the biggest annual rise on record.

June 2021 is the third consecutive month in which the growth rate of housing prices set a record, noted Craig J. Lazzara, Managing Director and Global Head of Index Investment Strategy at S&P DJI. “We have previously suggested that the strength in the U.S. housing market is being driven in part by reaction to the COVID pandemic, as potential buyers move from urban apartments to suburban homes. June’s data are consistent with this hypothesis. This demand surge may simply represent an acceleration of purchases that would have occurred anyway over the next several years. Alternatively, there may have been a secular change in locational preferences, leading to a permanent shift in the demand curve for housing. More time and data will be required to analyze this question.”

U.S. stock-index futures traded flat on Tuesday, as market participants looked for fresh catalysts.

Global Stocks:

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Statistics Canada announced on Tuesday that the country’s gross domestic product (GDP) grew 0.7 percent m-o-m in June after a revised 0.5 m-o-m decrease in May (originally a decline of 0.3 percent m-o-m).

That was in line with economists’ forecast for a growth of 0.7 percent m-o-m.

In the second quarter of 2021, the Canadian GDP shrank 0.3 percent q-o-q, following an unrevised 1.4 percent q-o-q increase in the first quarter. This marked the first decline in four quarters.

According to the report, the q-o-q decrease in GDP reflected the declines in exports (-4.0 percent q-o-q) and home ownership transfer costs (-17.7 percent q-o-q) that were partially offset by gains in investment in business inventories, government final consumption expenditures, business investment in machinery and equipment, and investment in new home construction and renovation.

Expressed at an annualized rate, Canada’s GDP contracted 1.1 percent in the second quarter after a revised 5.5 percent expansion in the previous quarter (originally a 5.6 percent surge). This was much worse than economists’ forecast of a 2.5 percent advance.

"Today, the EU has reached a crucial milestone with 70% of the adult population now fully vaccinated", the European Commission stated in its release. "In total, over 256 million adults in the EU have now received a full vaccine course. Seven weeks ago already, the Commission's delivery target was met, ahead of time: to provide Member States, by the end of July, with enough vaccine doses to fully vaccinate 70% of the adult EU population."

FXStreet reports that economists at TD Securities think Canada's economic recovery slowed as the pandemic's third wave took hold, but they do not expect a significant reaction in USD/CAD. 

“We look for Q2 GDP slightly above BoC forecasts at 2.6% as the 3rd wave of COVID-19 weighs on the recovery. However, Q2 should end on a decent note with a 0.6% increase for June, slightly below StatCan estimates and consistent with a mixed picture from labour market data.”

“We think the CAD will remain more sensitive to overall risk sentiment and US fixed income performance (particularly 10y breakevens). We do not expect this to change ahead of the US payrolls reading slated for this week. We also do not think this data will do much for BOC pricing.”

“For USD/CAD, variation will mostly come from the USD-leg, given Powell's less cavalier attitude to tapering (compared to his colleagues) puts near-term emphasis on US data to inform taper's initiation date.” 

“Our expectations for a below-consensus NFP print has us expecting modest USD downside, but we expect USD/CAD to find support into 1.25.”

FXStreet reports that economists at UBS think strong earnings and supportive policy will push the S&P 500 higher, led by cyclical sectors like energy and financials.

“The S&P’s rally has been underpinned by robust earnings growth, and this run of strength should continue. We expect revenues to be supported by robust consumer and business spending. Consumer balance sheets are the strongest in decades after households amassed significant savings over the last year. Meanwhile, businesses are struggling to keep up with demand, suggesting a long pipeline of investment projects and a need to rebuild inventories, both of which are supportive for the growth outlook.”

“Top Federal Reserve officials at last week’s Jackson Hole symposium restated that policy will remain supportive, even after bond purchases are scaled back. The Fed’s gradual approach aligns with our view that policymakers are eager to avoid a repeat of the 2013 taper tantrum.”

“Progress toward economic normalization - though uneven - continues. Globally, the pace of vaccinations accelerated last week to around 38 million daily, below the peak in June of 43 million, but up from around 20 million in May, according to Our World in Data."

“Our S&P 500 targets are 4,800 for June 2022 and 5,000 for end-2022. At a sector level we prefer financials, which should be well-supported by rising 10-year Treasury yields, and energy, which we expect to benefit from a further rise in oil prices in the second half of the year.”

FXStreet reports that economists at Société Générale suggest that an erosion of the 0.86 level would open EUR/GBP the path towards 0.8675 and may beyond.

“EUR/GBP has established itself above short-term Moving Averages and daily MACD has entered positive territory denoting potential upside.”

“A break above 0.8600 can result in a rebound towards 0.8675 and even towards graphical levels of 0.8860.”

“Consolidation above 0.8460/0.8450 will be crucial for further up move.”

Zoom Video (ZM) reported Q2 FY 2022 earnings of $1.36 per share (versus $0.92 per share in Q2 FY 2021), beating analysts’ consensus estimate of $1.16 per share.

The company’s quarterly revenues amounted to $1.022 bln (+54.0% y/y), beating analysts’ consensus estimate of $0.990 bln.

The company also issued mixed guidance for Q3 FY 2022 and upside guidance for the full FY 2022.

ZM fell to $309.43 (-10.96%) in pre-market trading.

FXStreet reports that economists at DBS Bank expect the U.S. Dollar Index (DXY) to break above the 93-level on strong U.S. jobs figures for August, set to be released on Friday. DXY is currently hovering around 92.50.

“Unless we get a big miss like the April NFP, the DXY index is unlikely to trade below 92 this week. Conversely, a stronger jobs report could propel DXY above 93 too.”

“In the short-term, our models indicate no strong trend in the short-term. Best to pay attention to key levels first."

• Says ECB should de-link guidance on rates, APP purchases
• APP does not need same kind of flexibility as PEPP
• Says he would advocate for slowdown of PEPP purchases in Q4

FXStreet reports that strategists at OCBC Bank suggest that weak Friday's report on U.S. labour market could propel gold (XAU/USD) towards $1900.

“Fed Chair Powell revealed the central bank is likely to begin tapering this year but said little about the pace and timing of how the tapering process might be conducted.” 

“Gold closed above $1800 once more on Friday after a two-day hiatus, suggesting interest in gold as an inflation hedge may be returning.”

“We expect gold to possibly head towards $1830 in the near term if the rally continues and possibly to $1900 if this Friday’s job report disappoints.”

FXStreet reports that FX Strategists at UOB Group suggest that USD/CNH faces further losses on a close below 6.4500.

24-hour view: “Our expectations for USD to weaken yesterday were incorrect as it traded in a surprisingly quiet manner and within a tight range of 68 pips (between 6.4620 and 6.4688). Indicators are mostly ‘flat’ and USD is expected to trade sideways for today, likely between 6.4600 and 6.4730.”

Next 1-3 weeks: “As highlighted, the downside risk has increased but USD has to close below 6.4500 before a sustained decline can be expected. The downside risk is intact as long as USD does not move above 6.4820 within these few days. Looking ahead, the next support below 6.4500 is at 6.4300.

EUR traded mixed against other major currencies in the European session on Tuesday, as investors digested the data, which showed inflation in the eurozone accelerated more than forecast in August, hitting a 10-year high.

The single European currency rose against USD, JPY, GBP and CAD, but declined against CHF, AUD and NZD.

Eurostat announced earlier today that its flash estimate revealed Euro area inflation rose 3.0 percent y/y in August, sharply accelerating from 2.2 percent y/y in July. This represented the highest rate since November 2011. Economists had forecast the rate to increase to 2.7 percent y/y. Meanwhile,  the core indicator, which excludes volatile energy and unprocessed food prices, jumped 1.6 percent y-o-y in August after a 0.7 percent y-o-y gain in the previous month. This was the highest reading since July 2012. Economists had expected a 1.5 percent y-o-y advance.

It is expected that today’s hotter-than-expected CPI data will put pressure on the ECB’s policymakers, when they gather on September 9 in Frankfurt to discuss the prospects of the monetary stimulus.

The accounts of the ECB’s July 21-22 meeting revealed that some policymakers thought that the central bank’s stance was underestimating the risk of higher inflation.

FXStreet reports that economists at HSBC believe that USD/JPY is likely to remain roughly stable before slowly grinding higher in 2022.

“On the one hand, the JPY is an anti-cyclical “safe-haven” currency, like the USD is. Hence, slower global growth and weaker risk appetite should drive the JPY stronger. But, on the other hand, the JPY is very sensitive to rising short-term US Treasury yields which reflect market expectations of changes in the Fed’s monetary policy. The JPY is a very low-yielding currency, thereby being highly susceptible to depreciation amid rising US interest rates.”

“We believe the JPY’s sensitivity to US yields is likely to overshadow the JPY’s role as a relative ‘safe haven’ at least when measured against the USD, which has a similar risk personality.”

“We expect the JPY to outperform many other currencies, but not necessarily the USD. We see USD/JPY remaining roughly stable for the rest of the year, before slowly grinding higher in 2022 once the Fed’s tapering commences and the focus switches to its policy rate’s lift-off next.”

Eurostat, the statistical office of the European Union (EU), announced on Tuesday its flash estimate revealed Euro area annual inflation rose 3.0 percent in August, sharply accelerating from 2.2 percent in July. This represented the highest rate since November 2011. Economists had forecast the rate to increase to 2.7 percent.

Looking at the main components of euro area inflation, energy had the highest annual rate in August (+15.4 percent y-o-y), followed by non-energy industrial goods (+2.7 percent y-o-y), food, alcohol & tobacco (+2.0 percent y-o-y) and services (+1.1 percent y-o-y).

Meanwhile, the core indicator, which excludes volatile energy and unprocessed food prices, jumped 1.6 percent y-o-y in August after a 0.7 percent y-o-y gain in the previous month. This was the highest reading since July 2012. Economists had expected a 1.5 percent y-o-y advance.

The Bank of England’s (BoE) monthly Money and Credit statistical release revealed that consumer credit in the UK decreased to -GBP0.04 billion in July, following a revised GBP0.31 billion gain in June (originally GBP0.30 billion), indicating that individuals did not borrow additional consumer credit on net. Economists had forecast a GBP0.44 billion advance. In y-o-y terms, consumer credit dropped 2.7 percent in July, following a 2.2 percent drop in June. 

Meanwhile, net mortgage borrowing by the UK households stood at -GBP1.4 billion in July compared to a revised GBP17.7 billion in June (originally GBP17.9 billion). Net repayments are relatively rare, with only one other repayment (in April 2020) in the past decade, the BoE noted. Economists had forecast an increase of GBP3.1 billion. Gross lending decreased to GBP16.5 billion, its lowest level since June 2020, while gross repayments stood at GBP18.1 billion, being little below its twelve-month average.

The report also showed that the number of mortgages approvals for house purchase, an indicator of future borrowing, fell to 75,200 in July (the lowest level since July 2020) from a revised 80,300 (originally 81,300) in June, missing market expectations of 78,600.

Net lending to individuals in the UK was -GBP1.4 billion in July compared to GBP18.0 billion in June.

The Federal Employment Agency (Bndesagentur für Arbeit) announced on Tuesday that the seasonally adjusted number of unemployed people in Germany dropped by 53,000 in August, following a revised decline of 90,000 in the previous month (originally a fall of 91,000). Economists had expected a decrease of 40,000.

Meanwhile, Germany's unemployment rate edged down to 5.5 percent from a revised 5.6 percent in July (originally, a 5.7 percent). Economists had forecast the reading to come in at 5.6 percent. 

USD depreciated against other major currencies in the Asian session on Tuesday, as investors’ focus shifted towards the U.S. August jobs data, which would be released on Friday and could provide clues on the Fed’s taper timing. 

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, fell 0.17% at 92.50.

Progress on employment is crucial for the U.S. central bank. In an address to the Fed's annual Jackson Hole policy symposium last week, the Fed’s Chairman Jerome Powell suggested that he would like to assess incoming data on the labor market before committing to a taper timeline. That means the August jobs report could be more consequential than usual.

INSEE reported on Tuesday that the French economy expanded more than initially estimated in the second quarter of 2021.

According to the final estimate, France’s gross domestic product (GDP) grew 1.1 percent q-o-q in the second quarter, slightly better than a 0.9 percent q-o-q advance reported in the initial estimate. Still, the country’s GDP remained 3.2 percent below its pre-pandemic level.

Economists had expected the growth rate to stay unrevised at 0.9 percent q-o-q, after being unchanged q-o-q in the first quarter.

The data showed the household consumption rose 1.0 percent in the second quarter, following a flat performance in the previous quarter. Meanwhile, fixed investment increased 2.4 percent after a 0.4 percent gain in the first quarter. Inventory changes added 0.1 points to GDP Q2 growth, while foreign trade subtracted 0.2 points as imports increased more than exports.

The Australian Bureau of Statistics (ABS) announced Tuesday the total number of building permits issued in the country fell 8.6 percent m-o-m in seasonally adjusted terms in July, following a revised 5.5 percent m-o-m decline in June (originally a 6.7 percent m-o-m drop). That marked the fourth straight monthly decrease in building permits and was the sharpest one since January.

Economists had forecast a 5.0 percent m-o-m fall.

According to the report, approvals for private sector dwellings excluding houses plunged 12.3 percent m-o-m in July, while private sector houses approvals went down 5.8 percent m-o-m.

In y-o-y terms, total approvals surged 21.5 percent.

The National Bureau of Statistics (NBS) reported Tuesday the Chinese manufacturing purchasing managers' index (PMI), which mainly tracks large state-owned companies, came in at 50.1 in August, down from 50.4 in the prior month, pointing to a continuation of activity growth in China’s manufacturing sector, albeit at the slowest pace since a contraction in February 2020.

Economists had expected a number to slip to 51.3.

A reading above the 50-level indicates expansion, while one below 50 suggests contraction.

Meanwhile, China's official non-manufacturing PMI, also released Thursday, dropped to 47.5 in August from 53.3 in July. This marked the first contraction in services sector activity since February 2020.

A report from the Ministry of Internal Affairs and Communications revealed on Tuesday that the seasonally adjusted unemployment rate in Japan fell to 2.8 percent in July from 2.9 percent in June. This was the lowest jobless rate since April.

Economists had forecast the reading to remain unchanged m-o-m at 2.9 percent.

According to the official data, the number of unemployed decreased by 120,000 from the previous month to 1.90 million, while employment rose by 420,000 to 67.08 million. Meanwhile, the labor force increased by 280,000 to 68.99 million and those detached from the labor force fell 310,000 to 41.34 million. Elsewhere, the job-to-applicant ratio increased from 1.13 in June to 1.15 in July. The participation rate came in at 62.5 in July, up from 62.4 a month earlier.

The preliminary estimates by the Ministry of Economy, Trade and Industry (METI) showed Tuesday that the industrial production in Japan fell 1.5 percent m-o-m in July. Economists had forecast a drop of 2.5 percent m-o-m after a 6.5 percent m-o-m surge in June

The main contributors to the July decrease were lower production in such industries as motor vehicles, electrical machinery & Information & communication electronics equipment, and inorganic & organic chemicals. On the contrary, production machinery, pulp, paper & paper products, and electronic parts & devices had a positive impact on the reading.

In y-o-y terms, Japan’s industrial output jumped 11.6 percent in July after a 23.0 percent climb in June.

The METI also said that shipments dropped 0.6 percent m-o-m, but surged 10.8 y-o-y in July, while inventories decreased 0.6 percent m-o-m and 4.3 percent y-o-y.

According to the survey of production forecast, industrial production is projected to increase 3.4 percent m-o-m in August and 1.0 percent m-o-m in September.