Stocks rally with US mfg. data softening the blow from disappointing China GDP

Snapshot: Equities are up, Treasuries are flat, Crude is down, and the Dollar is flat.

Equities up; Treasuries down; Crude down; Dollar flat. REAR VIEW - Soft China data, NY Fed mfg surveys support soft landing. Ford reduces F-150 EV price. MSFT clears yet another hurdle regarding ATVI acquisition. Erroneous Saudi Oil headlines. NDX rebalancing deemed a non-event. US corporates receive tax relief.

NDX rebalancing deemed a non-event. US corporates receive tax relief. COMING UP - Data - US Retail Sales, Business Inventories & Industrial Production; Canadian CPI; New Zealand CPI; Events - RBA Minutes Speakers - Fed's Barr Supply & UK & Germany Earnings – Dassault Aviation & Novartis, Ocado & Morgan Stanley.

: US Retail Sales & Business Inventories & Industrial Production : RBA minutes : Fed’s Barr - UK & Germany ; Dassault Aviation, Novartis, Ocado, Morgan Stanley & Bank of America. WEEK AHEAD: Highlights are; China activity data (PBoC), US retail sales (US$), UK, NZ and Canada CPI, RBA Minutes & Aussie Jobs. Click here to download the report.

Highlights: China activity data, PBoC's LPR, US retail, UK, NZ and Canada CPI, RBA Minutes & Australian jobs. Click here to download the report. CENTRAL BANKS WEEEKLY: Reviewing RBNZ Minutes and BoC LPR. Click here to download the report.

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MARKET WRAP

US stocks rose on Monday, with the tech sector gaining ground after Nasdaq's rebalancing didn't have the impact that many had feared. NDX and Russell 2k were better than the SPX due to the NY Fed Empire Manufacturing Index, which supported the small-cap index. Global cyclicals performed much worse as a result of the disappointing Chinese GDP figures. US stocks are also performing well due to the latest Treasury Department negotiations, which have resulted in some relief for US companies from the global minimal tax deal. This either delays or lowers the taxes that will be paid by foreign countries. Ford (F), a notable underperformer with a 6% drop, was the result of announcing steep cuts in prices for its electric F-150 Lightning model. The company cited lower battery costs and an increased capacity at the plant as reasons, but the price cuts naturally caused concern over demand. Treasuries traded in a thin market, with Treasuries choppy at first and then flat. The losses were due to the Empire survey results not holding up ahead of Tuesday's retail figures. Separate NY Fed credit access data showed that the overall rejection rate of credit applications increased to 21,8%. This is the highest level since June 2018. This could be a drag on consumer spending for the months ahead. The DXY was slightly softer, with Euro and Swissy showing better performance, while Antipodes and Yuan were affected by the weak China data.

DATA

NY FED: While still exceeding the forecasted contraction of -4.3, the NY Fed Manufacturing Survey for July was a 1.1. This is a slight increase from 3.1. New orders increased marginally to 3.3, from 3.1. Shipments decreased to 13.4, from 22. (Note that the June reading was a significant jump from -16.4). Stocks continued to decline, dropping to -10.8. Prices moderated. Prices paid dropped to 16.7, from 22. This indicates that prices are rising, but at a slower rate than in the previous month. Meanwhile, prices received fell to 3.9, from 9. Prices paid index is down nearly fifty points in the last year. Prices received index is down a total of twenty-seven. The number of employees has returned to positive territory at 4.7. This is the first positive reading since January. The index for future conditions has decreased from 18.9 to 14.3, indicating that conditions will improve but optimism is still low. Employment, capex and shipments were also down. Prices were stable, with the price paid staying at 26.5. Prices received from 17 to 26 are up, but prices paid is down.

Pantheon Macroeconomics stated that the data indicated China's reopening recovery has faltered. "The initial release of the pent-up domestic demand that was built up during the zero-Covid era is losing momentum, while exports fall amid an ebbing global market." The PM points out that the annualised GDP growth acceleration in Q2 was distorted by base effect, due to the strict Covid locksdowns in Q2 2020. The data was backed by manufacturing and infrastructure investment, as China invests in grid upgrades and solar, wind, and coal power stations. The data highlights the slow consumer recovery. The Y/Y is again distorted by the base effect. PM cites the broad services index, as well as the PMIs for services, which show that the recovery in the services sector is beginning to fade. Pantheon, based on the aggregate data, argues that Chinese policymakers have concerns about the weakening of domestic demand and may be considering a stimulus package in order to reach their annual GDP target. They are aiming for high-quality, steady growth in the face of uncertainty and may take limited measures to increase infrastructure investment and ease restrictions on home purchases.

Fixed Income

T-NOTE (U3) SETTLES 5 TICKS HIGHER 114-22

Treasuries were in a choppy trade, with losses following hot Empire State survey results and soft China GDP numbers. 2s +0.2bps, 3s-1.1bps, 5s-1.1bps, 7s-0.7bps, 10s-0.9bps, 20s-0.2bps, 30s-1.0bps.

INFLATION BREAKEVENS : 5yr BEI +1.33bps at 2.184, 10yr BEI +1.25bps at 2.279, 30yr BEI +1.65bps at 2.377.

The T-Notes continued their downward slide from Friday to the troughs at 112-14 on Sunday, when futures reopen. The APAC markets were closed, so there was no additional selling pressure in APAC. Contracts tentatively recovered, and later hit initial resistance at 112-20 following the soft China GDP numbers. Initial two-way flows occurred as European trade began, but new highs soon followed. Desks cited the China GDP data, in addition to the bullish trend of govvies following the US CPI. T-Notes reached a peak of 112-19+, before easing slightly after the NY handover.

The NY cash bond opened saw a 7.5k 2yr block fut buy, accompanied by a short spurt upwards. However, the price action reversed downwards after Empire State Manufacturing. The survey for July recovered into positive territory despite lower prices paid. The selling was more pronounced out of the curve. Desks pointed to the hot eco data, which only gave weight to the view that the neutral rate has now increased, ergo more term premium is required.

Due to the thin tape, supply hedging flows create a bigger dent in the tape as there is less depth available to absorb the flow. T-Notes extended past their APAC Globex 112-14 open low to eventually trough at 112.13. The contracts then slowly recovered until the afternoon in NY, recovering all of their losses on a particularly thin summer trading day. Retail sales on Tuesday will be closely watched to see if they confirm the uptick that was expected. This would add to the (dare I call it Goldilocks?) economic backdrop created by Monday's Empire survey.

STIRS:

SR3U3 -0.5bps at 94.60, Z3 +1.5bps at 94.695, H4 +2bps at 95.03, M4 +1bps at 95.435, U4 +0.5bps at 95.845, Z4 +1bps at 96.175, H5 +2bps at 96.41, M5 +3bps at 96.555, U5 +3.5bps at 96.635, U6 +4.5bps at 96.775, U7 +4bps at 96.735.

Volumes increase to USD 1.448tln, up from USD 1.445tln.

NY Fed RRP Op Demand falls to USD 1.7228tln (from 1.741tln), across 96 counterparties. Note the small cash outflow of USD 5 billion from coupon settlement.

US sold USD 70bln in 3-month bills, at 5.250%. Covered 3.11x. US sold USD 63bln in 6-month bills, at 5.250%.

Volumes fall from 122bln to 115bln USD, EFFR is flat.

THIS WEEK

TUE: US Retail sales (Jun), Industrial production (Jun), NAHB Index (Jul), Canadian CPI(Jun), New Zealand CPI (2Q), RBA Minutes and SARB Press release.

WED: US Housing Starts/Building permits (Jun), USD12bln Bond Auction, UK Inflation(Jun), EZ final CPI (Jun).

THU: Philly Fed, Jobless Claims (Jul), Existing Home Sales, USD 17bln TIPS 10yr Auction, PBoC, CBRT announcement, Japanese Trade Balance, Australian Jobs Report, (Jun).

FRI: CBR Announcement, Japanese CPI (Jun), UK Retail Sales.

CRUDE

WTI (Q3) SETTLES US$ 1.27 LOWER, AT 74.15/BBL. BRENT(U3) SETTLES US$ 1.37 LOWer, AT 78.50/BBL

WTI August contracts expire on Monday. Futures interest is now being rolled into September contracts.

The oil futures market fell on Monday, as the disappointing China GDP numbers accelerated the decline from recent peaks. Some misleading OPEC headlines provided a temporary spike higher. The technical breakdown of late June/early August bullish trend continued with front-month WTI futures and Brent futures re-entering the range of USD 75.06/bbl (and multi-month peaks) respectively after peaking at USD 77.33/bbl et USD 81.75/bbl late last week. Prices quickly retreated from the highs, but if you look at the chart it is easy to see that Reuters had re-run an old headline that stated that Saudi Arabia would extend their voluntary production cuts until the end December 2024. Otherwise, desks were attributing the selling to both the slower-than-anticipated Q2 China GDP data, but also the weekend's news of two of Libya's three oilfields resuming output.

China's Stats Bureau announced on Monday that June crude oil output increased 1.9% year-on-year to 17.5mln tons. H1 crude production rose 2.1% to 105.1mln tones. June natgas produced rose 5.5% to 18.3BCM, while H1 natgas rose 5.4% to 115.5BCM. BNP, ahead of the release of data, said that it believed current sentiment regarding Chinese oil demand was too bearish. "This is due to an inaccurate reading of monthly data and a reaction to expectations which did not come to fruition." The desks continues, "While we believe China's oil consumption growth will moderate from the healthy 1.4mbd in H1, we continue to assume a full-year increase of approximately 1mbd, supporting our positive narrative for oil through 2023."

RUSSIA: Reuters reported that India’s Russian oil imports may decline due to payment problems and disagreements over discounts. Iraq is reportedly willing to provide more oil at lower prices and offers more volumes to India. This follows reports last week that the price of Russian crude oil had risen over USD 60/bbl. India, a major buyer of Russian crude oil now, will have contributed to the higher prices that the sanctioned country has received. Reuters reported on Monday that Russia’s seaborne oil products exports in June were up +1.2% compared to May levels.

Reuters reports that Venezuela's PDVSA restarted Amuay's FCC, and the refinery is now processing 70k BPD compared to its capacity of 108k BPD. Report also stated that the nearby 310k BPD Cardon Refinery, which is out of service since June 1, has not been able to restart its FCC. In order to increase the production of motor gasoline, workers are working to bring back a naphtha-reformer in this refinery in the next few days.

EQUITIES

CLOSES: SPX +0.39% at 4,523, NDX +0.95% at 15,713, DJIA +0.22% at 34,585, RUT +1.04% at 1,951.

SECTORS: Health –0.43%, Communications Svs –0.65%, Real estate –0.83%, Utilities –1.18%.

EUROPEAN CLOSES: Euro Stoxx 50 -0.98% at 4,356, FTSE 100 -0.38% at 7,406, DAX 40 -0.23% at 16,068, CAC 40 -1.12% at 7,291, FTSE MIB -0.19% at 28,608, IBEX 35 0.00% at 9,438, SMI -1.21% at 10,975.

Tesla (TSLA), after nearly four long years of revealing its prototype, has finally started production on its electric pickup truck called the Cybertruck. According to WSJ, citing recent documents, the automaker also plans to double the size its factory near Berlin in order to produce up one million electric vehicles a year. This could make it the largest auto manufacturing plant in Germany. Ford (F), which lowered the price of its F-150 Lightning, said it was taking advantage increased plant capacity and continued work to scale production and costs, as well as improving battery raw materials. Norway's data protection agency said that Meta (META), if it does not take remedial measures, will be fined up to USD 100k a day for privacy violations. Variety reported that "Mission: Impossible: Dead Reckoning Part One", a film by Paramount (PARA), performed below expectations in the weekend box office. Goldman Sachs upgraded Chewy (CHWY); said the company has an attractive risk/reward profile, and margins could expand. Morgan Stanley downgraded PepsiCo's (PEP); the company's strong earnings report, potential upside and stock price are already priced in. This means that there is limited upside. Citi downgraded AT&T (T). Citi believes that the historical use of lead-sheathed cable in the telecommunications industry will continue to be a factor for stocks and valuations at least for a few more months, and possibly longer until the market is able to better assess the financial risks. State Street (STT), was downgraded by UBS, JPM and Keefe Bruyette. STATnews reports that a safety bulletin sent to eye doctors warned about six cases of occlusive vasculitis (a serious inflammatory reaction) in patients who had been injected with the recently approved Apellis Pharmaceuticals eye disease treatment. FTC announces that it will sue IQVIA over the acquisition of Propel Media, citing antitrust issues. Alzheimer's Association statement on phase 3 donanemab data showed Eli Lilly's drug (LLY), significantly slowed cognitive decline and functional decline among people with early symptoms of Alzheimer's. Black Knight (BKI), announced that it would sell its Optimal Blue division to a Constellation Software subsidiary for USD 700mln. This will pave the way for Intercontinental Exchange's (ICE) acquisition of Black Knight. BridgeBio Pharma reported positive results for ATTRibute CM, its Phase 3-study of acoramidis against transthyretin-amyloid cardiomyopathy. Bloomberg reports that Lockheed (LMT), a major defense contractor, could face a payment delay of USD 400mln due to faulty software on the F-35.

Microsoft (MSFT), Sony (SONY) have reached an agreement allowing "Call of Duty", to be available on PlayStation, even after Microsoft purchased Activision Blizzard. This resolves Sony's concerns about Microsoft gaining exclusivity over the game. Bloomberg reports that MSFT has also overcome another obstacle. The UK Competition Appeal Tribunal announced last week that a case against the UK CMA’s proposed ban can be conditionally suspended after the decision to begin new talks about remedies. Microsoft (MSFT), meanwhile, will be subject to an EU investigation over concerns about its bundling Office and Teams. According to FT citing anonymous sources, the European Commission may issue formal charges against Microsoft in the autumn. Sources said that discussions with EU were stalled because Brussels wanted to implement the concessions made by MSFT worldwide. Even though talks continue this week, sources say it is unlikely that MSFT will avoid a formal investigation.

US FX WRAP

The dollar was mostly flat on Monday. It traded either side of 100, with highs around the NY expiry cut. UST yields at their highest were also at the time. DXY briefly peaked at 100.18 and then sharply dropped to trade below 100 for the remainder of the session. USD/JPY also saw a similar price movement, rebounding from lows in the European session of 138.00 to highs in the NY cut at 139.40. This was in response to the change in yields and some possible option flow as 1bln rolled off at 140.00. The only US data worth digesting was the NY Fed Manufacturing Report, which beat the headline, while prices eased, and employment returned into expansionary territory. This is a sign in favor of those who are looking for a softer landing or no landing. The Fed has entered its blackout phase ahead of the FOMC meeting on July 26th. The initial focus Monday was on China's activity data, which showed a disappointing GDP and retail sales, highlighting the downbeat reopening effort in the country. However, industrial output was above expectations. The data weighed down on the Yuan, along with PBoC's action. It left the 1-year MLF rate at 2.65% as expected. This also indicates that the PBoC is likely to maintain its benchmark LPRs Thursday. The Yuan fix was 7.1326, which is slightly weaker than before but not as weakly as expected.

The Euro gained marginally against the dollar, holding its 1,12 handle through the session. Final Italian CPI figures were in line with expectations and not revised. ECB's Nagel stated that he expected a 25bp increase in July, but he is dependent on data for September. He added that a hard landing was unlikely, and he did not see a current risk of an over-tightening. The Bundesbank also released its monthly report, which noted that inflation would begin to fall in September due to the fading of unfavourable base effects such as fuel subsides and discounted rail tickets.

The cyclical currencies, AUD and NZD, were generally weaker compared to the greenback. They did not benefit from the rise in US stock prices. Instead they fell victim to China's soft data. AUD briefly dropped below 0.68 at the Dollar's peak, but the cross was able to reclaim it shortly thereafter and has held above that level ever since. NZD/USD found a support level at 0.6300. GBP was flat against the dollar but weaker versus the Euro as all eyes were on CPI Wednesday. CAD gained versus the buck on Tuesday ahead of CPI. Markets currently give a 25% chance of a further hike in September, after successive 25bp increases in June and in July.

EMFX, especially LatAm FX, was weaker following the China data. Copper prices were down, which weighed on CLP. BRL, MXN, and COP were all softer, although COP made a notable recovery after paring its earlier weakness. The BRL's weakness was also accompanied with the disappointing economic data. In May, the index of economic activity fell 2% after a 0.566% increase in April. Meanwhile, the IGP-10 inflation rate dropped 1.1% in July, continuing the 2.2% drop previously. Both signs are building the case for BCB to reduce rates. Markets currently assign a probability of 32% of a cut of 50bp in August, and 68% of a cut of 25bp. In a Bloomberg article Greg Coffey believes that the BCB can cut rates by 100 bps. The TRY also weakened against the dollar due to a significant deterioration of the Turkish budget and an increase in special consumption tax for oil, gasoline, and petroleum (the latter in the range of 200%), in the lead up to the CBRT rate-setting meeting on Thursday. ZAR gained a lot of ground on SARB Thursday, while Fitch affirmed South Africa's credit rating at BB- and a stable outlook.