Summary and Price Action Rundown
Global risk assets are mostly higher morning as investors continue to digest the monetary policy shift announced by Fed Chair Powell last week and ponder incoming global economic data. S&P 500 futures indicate a 0.3% higher open after the index climbed 0.7% on Friday, increasing its year-to-date gain to 8.6% and registering its sixth straight all-time high. Equities in the EU are modestly higher, while Asian stocks were mixed overnight, with the Nikkei outperforming on news of Berkshire Hathaway investments in Japanese companies (more below). The dollar is hovering around its more than two-year low, while longer-dated Treasury yields are edging back to the top of their recent range, with the 10-year yield near its highest level since June at 0.74%. Brent crude is advancing above $46 per barrel.
Global Economic Data Points to Continued but Uneven Recovery
China’s purchasing managers’ indexes (PMIs) for August signaled ongoing recovery, though with a muted pace for manufacturing, while Japanese data for July was mixed. China’s August PMIs were broadly upbeat, with the manufacturing gauge only slightly below estimates of 51.2, registering 51.0, which is roughly equivalent to the 51.1 pace of July, while services were strong at 55.2, topping a consensus estimate and the prior month’s reading of 54.2. For context, PMI readings over 50 denote expansion in the sector. The resulting composite PMI was 54.5, bettering July’s 54.1. Tomorrow, the privately-compiled Caixin PMI readings for China are due, with expectations for a slightly easing pace of expansion in this data series, which features more input from mid-sized and private sector enterprises than China’s official PMI gauges. Meanwhile, Japanese industrial production data for July outperformed expectations, rising 8.0% month-on-month (m/m) versus estimates of 5.0% after June’s 1.9% m/m pace. Nevertheless, the year-on-year (y/y) reading remained very depressed at -16.1%, though this was better than the -17.5% forecast and -18.2% y/y in June. Japan’s retail sales for last month, however, undershot projections at -3.3% m/m and -2.8% y/y, with both of these figures representing a deterioration from the prior month. This comes after Japanese assets have been whipsawed since Friday by news of Prime Minister Abe’s resignation and then news that Warren Buffett has significantly upped his investments in Japan (more below).
Dog Days for the Dollar
US economic figures continue to generally surprise to the upside though the overall recovery trend appears to be slowing and traders are focused on the murkier outlook for August and beyond, as well as Fed easing, all of which pressures the dollar. US economic data has thus far held up better than expected through the late July and August period that featured a resurgence in Covid-19 cases in a number of US hotspots. Though weekly initial jobless claims indicated a modest setback in mid-August, last Thursday’s reading for the week ending August 22nd showed a renewed improvement trend. Meanwhile, US preliminary PMIs for August were stronger than forecast across the board, signaling continued expansion, and Friday’s U. Michigan metric of consumer confidence also topped estimates. The relatively encouraging US economic data, however, has not been supportive of the dollar, which continues to slide. A broad dollar index registered its lowest level since spring of 2018 on Friday, a trough it lingers near this morning. Traders are focused on a variety of headwinds for the dollar, including doubts about the sustainability of the US economic recovery, particularly in light of the failure to agree on the latest pandemic relief bill. The Fed’s proactive accommodation, resulting in increasingly negative real interest rates, is considered another key downside catalyst for the dollar. Market consensus is for continued depreciation, with speculative bets on further appreciation of the euro versus the dollar at their highest level of the past decade, according to the CFTC. Nonfarm payrolls this week could provide some interim support for the dollar but prior readings have been strong and still provided scant support.
Warren Buffett Ups Japan Stakes – New that Berkshire Hathaway has spent roughly $6 billion accumulating stakes in Japanese trading companies lifted the Nikkei 1.1% and the yen, which tends to depreciate in response to positive market atmospherics, is down 0.5% versus the dollar this morning. The positions are said to be roughly 5% in Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo and Warren Buffett suggested that he might look to increase from this level. Shares of the conglomerates soared, and today’s upbeat price action in Japanese assets retraced a portion of Friday’s downbeat trading following the news that Prime Minister Abe is stepping down due to health reasons. Analysts suggest that the likely successor, Chief Cabinet Secretary Suga, is a continuity candidate and will ease investor concerns over the transition.
This Week – There is plenty of global economic data on the calendar this week and August nonfarm payrolls will be in the spotlight on Friday ahead of Labor Day weekend, along with another reading of weekly initial jobless claims on Thursday. Final readings of August PMIs in the US, EU, and Japan are also due. On the central bank front, the Reserve Bank of Australia has a meeting at which policy settings are expected to be held steady.