China Steps Up Stimulus

Market movers today

It is non-farm payroll day and markets are geared up for a soft number after disappointing labour market data this week from JOLTS, ADP and the consumer confidence survey. We look for a rise in payrolls of 160k, slightly below consensus of 170k. Also keep an eye on hourly earnings, which were a bit high in July at 0.4% m/m.

In addition, we get US ISM manufacturing, which has been moving sideways at a low level in the past months. Recent manufacturing data such as US and euro PMI manufacturing has been weak, so markets are prepared for a soft reading.

In the Scandies, we get PMI manufacturing in both Norway and Sweden.

The 60 second overview

This morning, China announced a 200bp cut to financial institutions’ foreign exchange reserve requirements (from 6 to 4%) with an aim to increase USD liquidity and stabilise renminbi. The move comes after the PBOC yesterday released a statement saying nationwide minimum down payments would be uniformly set at 20% for first-time home buyers, and at 30% for second-time buyers. The statement also encouraged local banks to cut down rates on existing mortgages and deposits. This latest spree of stimulus comes after yesterday’s data showed that the value of new home sales by China’s 100 largest real estate companies fell 34% compared to a year earlier.

Yesterday, euro area headline inflation came in unchanged compared to last month at 5.3%. Core inflation fell 0.2pp to 5.3%. Also, service inflation edged slightly lower to 5.5% (-0.15pp), which is an important step for ECB to eventually end its hiking cycle. The overall take is that the disinflationary process is underway, but in our view, it is still not enough for ECB to be confident to the timely return to the 2% target. We keep our call for one more hike in September.

Oil prices have climbed this week in the anticipation of production cuts. Yesterday, Russia’s deputy prime minister said the country has agreed with OPEC+ countries to reduce exports.

Equities: After a strong week, equities took a breather on Thursday. Macro should not be blamed though, but wait-and-see mode ahead of the US job report today. Equities were lower, with both Stoxx 600 and S&P 500 down -0.2% and Nordics -0.8%. It was not a risk-off session though. Defensives underperformed (utilities and health care) while large cap growth cyclicals rose, most notably in the US but also in the Nordics with EQT and NIBE outperforming. US futures are higher this morning while many Asian markets are closed due to weather conditions.

FI: A strong rally dominated the trading session yesterday from the sub 5y point as markets repriced the expectations of an ECB rate hike at the September meeting. This took the sub 5y point almost 10bp lower on the day. This happened amid headline inflation beating expectations (which country releases earlier had suggested) and staying unchanged from July at 5.3%. Core inflation declined 0.2pp, but still printed at elevated levels at 5.3%. The key takeaway from the August inflation release is that disinflationary forces are underway but the question remains of the pace of decline, which means that the August inflation, report has something for both the doves and the hawks in the Governing Council. Also, moderately hawkish minutes and Schnabel’s speech on inflation did not lead to higher yields.

FX: Yesterday’s session was primarily characterised by a drop in EUR/USD below the 1.09 mark and a slight outperformance of the commodity FX sphere amid a rise in commodity prices incl. energy.

Credit: Primary activity in the credit market remained high yesterday albeit lower than the red hot market seen at the beginning of the week. Secondary activity stayed muted with iTraxx Main 1bp wider at 70bp while iTraxx Xover was 4bp wider at 396bp.

Nordic macro: The Norwegian unemployment rate has been stable at 1.8% since Easter, but the total number of people out of work – including those on job creation schemes and the partially unemployed – increased by almost 3,000 in July. Job growth also seems to have levelled off somewhat, so we think the unemployment rate may well rise to a seasonally adjusted 1.9% in August.

Danske Bank
Danske Bank
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