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Market movers today

In the US, CPI inflation for August will attract more attention than usual given that they will give the Fed its last impression of underlying price pressure before the FOMC meeting on 19-20 September. Out of the past five months, CPI headline has fallen in three and the weak numbers seem to be very broad based. In August, we estimate energy contributed around 0.1pp to the headline figure on top of our expectation of an increase in core CPI of 0.1% m/m. Thus, we estimate CPI headline to come in at 0.2% m/m (1.7% y/y, unchanged from July) and CPI core at 0.1% m/m (1.5% y/y vs 1.7% in July). Note that the fall in CPI core y/y is driven by an increase of 0.3% m/m in August last year, which falls out of the yearly increase in August this year.

In the UK, the Bank of England (BoE) meeting will be in focus. We expect BOE to keep the Bank Rate unchanged at 0.25% with an unchanged vote count of 7-2. It is one of the small meetings without an updated Inflation Report and a press conference, so we have to look for any changes to the policy stance in the minutes. It is not our expectation that the BoE will change its tone significantly, as the economy has developed more or less in line with the expectations set out in the latest Inflation Report of 3 August but the BoE may address the weaker GBP. We still expect the bank to remain on hold throughout the Brexit negotiations, which is also what markets have priced in.

Selected market news

Asian stocks held steady this morning, despite weaker-than-expected Chinese industrial output (6.0% y/y in August) and investment (7.8% YTD) data released this morning. Wall Street edged up to a record high yesterday, while US Treasury yields climbed to 2-1/2-week highs on an ongoing improvement in broader investor risk sentiment.

In his annual State of the European Union speech, Commission chief Juncker sketched out a vision of a post-2019 EU where ideally all member countries should adopt the euro at some point, with a eurozone finance minister to co-ordinate economic policy across the bloc. However, he also rejected French proposals of a special eurozone budget, as there are other measures available to help counter economic shocks. The French president Macron will present his ideas for reforming the eurozone on 26 September, two days after the German election. German politicians, including Angela Merkel, has recently voiced support for such reforms, but much will depend on the actual German government composition, which will probably only be known in end-October/mid-November (see also German Election Monitor No. 1: Next euro area election unlikely to rock the boat, 29 August).

In the US, we got news that Republicans leaders expected to release more details on tax reform on 25 September. The hope is to complete a budget by mid-October carrying tax language, which then needs to pass Congress, see POLITICO. The difficulty remains that Republicans must not only agree on taxes, but also need to agree on a budget to make changes to tax legislation without being filibustered in Senate. Although Trump has begun talking more with Democrats lately, it seems unlikely the Republican leaders want to do a tax reform with the Democrats, in our view.

August data further evidenced that China's economic growth has peaked in the first quarter. Following the sharper-than-expected slowdown in growth in July, the latest set of macroeconomic data also surprised to the downside. The moderation was a result of the government's tighter monetary policy in an attempt to curb excessive investment in certain areas, such as real estate. Renminbi's appreciation against US dollar since the beginning of the year probably has weighed on exports. This leads the PBOC to loosen capital control which has been adopted over the past years to prevent renminbi from severe depreciation.

Industrial production expanded +6% y/y in August, missing consensus of +6.6% and July's +6.4%. The deceleration in IP growth was unexpected. Indeed, the strong manufacturing PMI had led some to forecast a higher-than-consensus growth. The official manufacturing PMI rose to 51.7 in August, compared with consensus of 51.3 and July's 51.4, as driven by strong production and new orders. The Caixin/Markit index also soared to a 6-month high of 51.6 on robust demand. Retail sales growth moderated to +10.1% y/y, form +10.4% in July. The market had anticipated an improvement to +10.5%. Urban fixed assets investment rose +7.8% in the eight months through August, decelerating from +8.3% in the first 7 months of the year. The slowdown came in much more than expectations of +8.2%

Inflation

Due last week, China's CPI and PPI surprised to the upside. Headline CPI improved to +1.8% y/yin August from +1.4% a month ago. The market had anticipated a rise to +1.6%. The acceleration was mainly driven by one-off factors such as the rises in egg and vegetable prices due, respectively, to polluted egg incidents overseas and flood. Excluding volatile food and energy prices, core CPI picked up to +2.2% y/y in August, from July's +2.1%. PPI inflation accelerated to 6.3% y/y, from +5.5% in July. This came in much higher than consensus of +5.7%. the increase was driven by the rally in metal prices. The government's upcoming output curtailment in steel production has frontloaded production of the metal. This has raised the demand, and hence the prices, of base metals (such as nickel and iron ore) related to steel production. Meanwhile, the government's plan to ban imports of scrap metals, including copper, from the end of 2018, has lifted demand for the refined ones.

The August trade report sent mixed messages. Trade surplus narrowed to US$ 42B from 46.7B in July, as the growth in exports was overshadowed by that of imports. Exports increased +5.5% y/y, moderating from +7.2% in July. Import growth accelerated to +13.3% in august, from +11% in July. This scenario, weaker exports growth but strong imports growth, was indeed “predicted” in the new exports order and imports sub-indices in official PMI report. PBOC announced last Friday to cut the FX exchange forward reserve ratio from 20% to 0%. The rule was implemented in 2015 when renminbi received massive selloff after the government abruptly depreciated its currency by -2% on August 11, 2015. The move signaled that the government is less concerned about capital outflow as renminbi has steadily risen against the US dollar over the past several months, amidst the latter's broad-based weakness. It also suggested that the government does not want to see renminbi to go much higher as it can affect exports, as evidenced in the August trade data.

Daily Pivots: (S1) 1.2130; (P) 1.2174; (R1) 1.2219; More....

USD/CAD is staying in consolidation from 1.2061 temporary low and intraday bias remains neutral. We'll stay cautious on strong support from 1.2048 long term fibonacci level to bring sustainable rebound. But still, break of 1.2412 support turned resistance is needed to be the first sign of trend reversal. Otherwise, outlook will remain bearish. Firm break of 1.2048 will pave the way to next fibonacci level at 1.1424.

In the bigger picture, current downside acceleration is raising the chance that whole long term rise from 0.9406 (2011 low), and that from 0.9056 (2007 low) is completed at 1.4689. Focus is now on 50% retracement of 0.9406 to 1.4869 at 1.2048. As long as this level holds, we'd still favor that case that fall from 1.4689 is a correction. However, firm break of 1.2048 will indicate that fall fro 1.4689 is at least a medium term down trend and should target 61.8% retracement at 1.1424 and below.

Daily Pivots: (S1) 0.7955; (P) 0.8000; (R1) 0.8029; More...

AUD/USD's corrective trading from 0.8124 is still in progress but it's staying well above 0.7807 support. Intraday bias remains neutral first and another rise is in favor. Above 0.8124 will target 100% projection of 0.6826 to 0.7833 from 0.7328 at 0.8335 next. However, considering bearish divergence condition in 4 hour MACD, firm break of 0.7807 will indicate near term reversal and turn bias back to the downside for 0.7328 key support.

In the bigger picture, rise from 0.6826 medium term bottom is still in progress. At this point, there is no confirmation of trend reversal yet and we'll continue to treat such rebound as a corrective pattern. But in any case, break of 55 month EMA (now at 0.8090) will target 38.2% retracement of 1.1079 to 0.6826 at 0.8451. Break of 0.7807 support is needed to to be the first sign of completion of the rebound. Otherwise, further rise is now in favor.

Daily Pivots: (S1) 110.02; (P) 110.36; (R1) 110.81; More...

USD/JPY's rebound from 107.31 extended overnight and breached 110.66 resistance. But it cannot sustain above this level yet. Intraday bias remains neutral for the moment. Below 109.29 minor support will turn bias back to the downside for 107.31. Break of 107.31 will extend the whole fall from 118.65 to 61.8% retracement of 98.97 to 118.65 at 106.48 first. We'd look for support from there to bring rebound. Meanwhile, firm break of 110.66 will confirm short term bottoming and turn bias back to the upside for 114.49 resistance.

In the bigger picture, rise from 98.97 (2016 low) is now seen as the second leg of the corrective pattern from 125.85 (2015 high). It's unclear whether this this second leg has completed at 118.65 or not. But medium term outlook will be mildly bearish as long as 114.49 resistance holds. And, there is prospect of breaking 98.97 ahead. Meanwhile, break of 114.49 will bring retest of 125.85 high. But even in that case, we don't expect a break there on first attempt.

Daily Pivots: (S1) 0.9596; (P) 0.9628; (R1) 0.9673; More....

While the rebound from 0.9420 is strong, USD/CHF is still limited below 0.9679 resistance. Intraday bias remains neutral with near term bearish outlook. Another fall remains in favor. Below 0.9572 minor support will turn bias to the downside for 0.9420 low first. Sustained break of 0.9420 will target 61.8% projection of 1.0099 to 0.9437 from 0.9772 at 0.9363 first. However, break of 0.9679 will indicate near term reversal and turn bias to the upside for 0.9772 resistance for confirmation.

In the bigger picture, current development suggests that 0.9443 key support (2016 low) could be taken out firmly as down trend form 1.0342 extends. There are various interpretation of the price actions. But in any case, medium term outlook will stay bearish as long as 0.9772 resistance holds. Current down trend could extend to 38.2% retracement of 0.7065 (2011 low) to 1.0342 (2016 high) at 0.9090. However, break of 0.9772 will indicate that USD/CHF has successfully defended 0.9443 again and turn outlook bullish for 1.0099 resistance.

Daily Pivots: (S1) 1.1840; (P) 1.1917 (R1) 1.1962; More...

EUR/USD's pull back from 1.2091 extends lower but it's staying above 1.1822 support. Intraday bias neutral with bullish near term outlook. That is, another rise is in favor. Break of 1.2091 will extend larger rise from 1.0339 and target next key fibonacci level at 1.2516. But considering bearish divergence condition in 4 hour MACD, break of 1.1822 will confirm short term topping and bring deeper fall back to 1.1661 support and below.

In the bigger picture, rise from medium term bottom at 1.0339 is still in progress for 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. However, it should be noted that there is no confirmation of trend reversal yet. That is, such rebound from 1.0399 could be a correction. And the long term fall fro 1.6039 (2008 high) could resume. Hence, we'd be cautious on strong resistance from 1.2516 to limit upside. But after all, break of 1.1661 is needed to indicate medium term topping. Otherwise, outlook will remain bullish in case of pull back.

Daily Pivots: (S1) 1.3150; (P) 1.3240; (R1) 1.3297; More...

GBP/USD retreated after forming a temporary top at 1.3328. Intraday bias is turned neutral first. Outlook outlook is unchanged. Another rise could be seen in GBP/USD and above 1.3328 will target 1.3444 key resistance next. At this point, we'd maintain that price actions from 1.1946 are still seen as a corrective pattern. Hence, we'd expect strong resistance from 1.3444 to limit upside to bring larger down trend reversal eventually. Firm break of 38.2% retracement of 1.2773 to 1.3328 at 1.3116 will raise the chance of reversal and turn bias to the downside for 61.8% retracement at 1.2985. However, on the upside, firm break of 1.3444 will carry larger bullish implication and target 1.3835/5016 resistance first zone first.

In the bigger picture, overall, price actions from 1.1946 medium term low are seen as a corrective pattern. While further rise cannot be ruled out, larger outlook remains bearish as long as 1.3444 key resistance holds. Down trend from 1.7190 (2014 high) is expected to resume later after the correction completes. And break of 1.2773 support will be the first sign that such down trend is resuming. However, considering bullish convergence condition in monthly MACD, firm break of 1.3444 will argue that whole down trend from 2.1161 (2007) has completed. And stronger rise would be seen back to 38.2% retracement of 2.1161 to 1.1946 at 1.5466.

Dollar rebounded strongly overnight on news that the so called Big Six Republicans are finally going to release the framework of tax reforms in the week of September 25. Also, there is some optimism on the White House as US President Donald Trump seems to be employing a new strategy to reach out to Democrats. Also thanks to return of risk appetite and rebound in treasury yields, the greenback is now trading as the second strongest major currency for the week, next to Sterling. Nonetheless, technically, there is no confirmation of a trend reversal in Dollar yet. Markets could remain cautious on it until something concrete is delivered. For now, focus will turn to SNB and BoE rate decisions first, US CPI next.

House Ways and Means Committee Chairman Kevin Brady, the chief house tax writer, said the tax overhaul framework will be released in the week of September 25. Brady noted that the document will include "core elements of tax reports. And he emphasized that there is "really the consensus of the tax writers themselves so that we're working from the same page". The group of writers include Speaker Paul D. Ryan, Senate Majority Leader Mitch McConnell, Senate Finance Committee Chairman Orrin G. Hatch, Treasury Secretary Steven Mnuchin, and White House economic adviser Gary Cohn. Trump also seemed to be using the hurricanes as pressure on the Congress for tax reforms. He tweeted that "with Irma and Harvey devastation, Tax Cuts and Tax Reform is needed more than ever before. Go Congress, go!"

Separately, Trump had a dinner with Democratic leaders of the House and Senate, Nancy Pelosi and Chuck Schumer, on Wednesday. After striking a deal with the Democrats for suspending the debt limit last week, it's reported that Trump also reached a tentative "Dreamers" deal. It's a legislation to protect around 800k undocumented children immigrants from deportation. At the same time, it's reported that some Democrats are open to working on a bipartisan tax reform.

Aussie lifted mildly by strong job data

Australian Dollar is given a mild lift by better than expected employment data. The job market expanded by 54.2k in August, nearly triple of expectation of 19.2k. That consists of decent growth in full-time jobs by 40.1k and part-time jobs by 14.1k. Unemployment rate was unchanged at 5.6%, in line with consensus. Participation rate also rose to 65.3%. There is slight change in expectation of RBA policies after the data. Markets are pricing in roughly 50% chance of a hike in June 2018.

RBA board member Ian Harper said yesterday that while there is "terrific" full time job growth, it's a "concern" to see sluggishness in underemployment. And, the Australian economy is still "operating below its potential". And it cannot justify a rate hike yet. Nonetheless, improvements in the economy prompted market analysts to reverse their forecast of RBA rate path. National Australia Bank predicted two rate cuts by RBA in 2017 earlier this year. But now's NAB is expecting a total for four rate hikes by RBA over the next two years. Stronger employment, GDP growth and investment are the main reasons for the change in NAB's forecast.

China data disappointed

The latest set of macroeconomic data from China came in weaker than expected. Industrial production expanded 6% yoy in August, missing consensus of 6.6% and July's 6.4%. Retail sales growth moderated to 10.1% yoy, form 10.4% in July. The market had anticipated an improvement to 10.5%. Urban fixed assets investment rose 7.8% in the eight months through August, decelerating from 8.3% in the first 7 months of the year. The slowdown came in much more than expectations of 8.2%.

BoE as the main focus, SNB watched too

The focus today is undoubtedly the BOE meeting. Overshooting inflation has raised bet for a rate hike. However, we expect the members to vote 7-2 to leave the Bank rate unchanged at 0.25% and the asset purchase at GBP 435b. Most members would remain cautious and cite slow economic growth and Brexit uncertainty as reasons for keeping the monetary policy accommodative. However, the MPC is expected to adopt a more hawkish tone, attributing the strong inflation to Sterling depreciation and cautioning over the underestimation of the urgency of a BOE rate hike. More in BOE To Maintain Status Quo With New Comer On Dovish Side. SNB would be meeting today. It is widely anticipated that the central bank would maintain the status quo, warning that the franc remains "overvalued" and the reiterating the commitment to combat deflation.

Elsewhere

Canada will release new housing price index today. US will release jobless claims, and more importantly, August CPI

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.3150; (P) 1.3240; (R1) 1.3297; More...

GBP/USD retreated after forming a temporary top at 1.3328. Intraday bias is turned neutral first. Outlook outlook is unchanged. Another rise could be seen in GBP/USD and above 1.3328 will target 1.3444 key resistance next. At this point, we'd maintain that price actions from 1.1946 are still seen as a corrective pattern. Hence, we'd expect strong resistance from 1.3444 to limit upside to bring larger down trend reversal eventually. Firm break of 38.2% retracement of 1.2773 to 1.3328 at 1.3116 will raise the chance of reversal and turn bias to the downside for 61.8% retracement at 1.2985. However, on the upside, firm break of 1.3444 will carry larger bullish implication and target 1.3835/5016 resistance first zone first.

In the bigger picture, overall, price actions from 1.1946 medium term low are seen as a corrective pattern. While further rise cannot be ruled out, larger outlook remains bearish as long as 1.3444 key resistance holds. Down trend from 1.7190 (2014 high) is expected to resume later after the correction completes. And break of 1.2773 support will be the first sign that such down trend is resuming. However, considering bullish convergence condition in monthly MACD, firm break of 1.3444 will argue that whole down trend from 2.1161 (2007) has completed. And stronger rise would be seen back to 38.2% retracement of 2.1161 to 1.1946 at 1.5466.

Economic Indicators Update

STOCKS

Dow, Dax and Nikkei looks bullish while Shanghai may trade sideways attempting to move up eventually. /nifty trades below the all time high of 10140. Need to watch price action at those levels.

Dow (22158.18, +0.18%) continued to rise as expected and could re-test the previous high of 22200 seen in August. As mentioned yesterday, the upward momentum looks strong just now and the index may possibly break above 22200 to make fresh highs in the near term.

Dax (12553.57, +0.23%) is also headed up just like the Dow and could target higher levels of 12750-13000 in the medium term. Also note there could be a slight pause near 12675 levels before resuming the rise towards 12750 and higher.

Nikkei (19876.42, +0.05%) could head towards 20500 in the next couple of weeks; looking at the weekly candle chart. Immediate target is 20200 where the index may take a pause. Long term target is seen at 20500.

Shanghai (3386.15, +0.06%) continues to trade below 3400. An eventual break above 3400 is possible after a couple of sessions. For now sideways consolidation within 3400-3360 looks more likely. A break above 3400, if seen could take it higher towards 3420-3440 in the long term.

Nifty (10079.30, -0.14%) is all ready to test the high of 10140 from where a corrective dip is possible towards 10000. If not a sharp fall, the index could trade sideways within 10140-10050 region to gather more force for a sharp upmove later on. For now the index looks bullish towards 10140.

COMMODITIES

Commodity metals are in a corrective mode after the recent rally in the last few weeks. Only Crude prices look bullish for the enar term as they are on the verge of breaking immediate resistances to surge higher in the coming sessions.

Gold (1321.38) might have possibly made a near term top just below 1360 and the current dip could possibly take it back towards 1300 levels.

Silver (17.70) could get some support at 17.50 from where a bounce looks possible.

Copper (2.9815) has been coming off sharply since the last 2-sessions and could possibly test 2.90 over today and tomorrow before taking a pause. This is the first sharp correction after the price started rising from levels near 2.50 in June.

Brent (55.03) has broken above immediate resistance near 54 and is now indicative of a sharp rise in the coming sessions. While above 54, Brent could target 58.00-58.40 levels in the coming sessions. Also note that 55.60 is an important level and that needs to break to move higher towards 58. Near term looks bullish.

WTI (49.20) is on the verge of breaking above an important near term resistance and if that breaks, WTI could target towards 50.20-52.00 in the longer run.

FOREX

Dollar Index (92.42) has risen past our target of 92.25 to test 92.50. A rise past this level, if seen, could be very bullish for the Dollar.

This is reflected in the Euro (1.1878), which, contrary to the expectation of a slow rise to 1.2050, has broken below important support at 1.19. This threatens the uptrend since 1.1119 (June 2017) and suggests chances of a further dip to 1.1810.

Dollar-Yen (110.52) has also broken above stated resistance at 110.50 to see a high near 110.73 and may now test 111.00 (21-week Moving Average) on the upside. However, the Resistance at 132 on Euro-Yen (131.27) has held well due to the fall in the Euro. A further decline towards 130.35 may be seen in the Euro-Yen, which might limit the upside in Dollar-Yen to 111 for now.

Also contrary to expectation of a rise to 1.3400-20, there has been decent profit-taking in the Pound (1.3202) from levels just above 1.33. While the Pound does not look as weak as the Euro, the 1.33-34 region can now be seen as a strong medium-term Resistance.

Like the Euro, the Aussie (0.8007) has also dipped instead of moving up further towards 0.8070. But, it has done better than the Euro by bouncing from 0.7966 today, just above Support at 0.7950. It might be able to regain bullishness if it is able to sustain the rise today. Need to watch.

It is possible that Dollar-Yuan (USDCNY = 6.5571) has made a significant bottom on the dip below 6.45. A rise past 6.55 (if seen) can lead to much higher levels. Dollar-Rupee (63.9950) traded up to almost 64.20 in the NDF market overnight, but is quoting near 64.00/05 on the NDF now. It can move up a bit towards 64.10-15 today within an overall range of 63.80-64.20.

INTEREST RATES

US Yields have been rising since Friday. The US 10Yr (2.20%) is coming close to testing 2.22-25%. The 5Yr (1.77%) has moved up from 1.75% yesterday while the 30Yr (2.79%) is up from 2.76% yesterday. That said, the 30Yr also has an important Resistance at 2.80%. However, the 2Yr (1.34%) has remained stable over the last three days. There is a chance that the ongoing trend of Curve flattening could ease up for a while.

The August US CPI data is due tonight. See the chart at http://kshitij.com/graph-gallery/fundamentals/uscpi . If it moves up towards 2.00% compared to the last reading of 1.73%, it could trigger a further rise in US yields. We need to watch that tonight. Brent (55.04) has been moving up from levels near 44.50 in June and might suggest an uptick in the CPI.

Watch Resistance near current level on the US-Japan 10Yr Spread (2.16%). If this holds, it could help restrict the rise in Dollar-Yen to 111.00.

The German-US 10Yr Spread (-1.79%) has been unable to rise past -1.72%. A further decline from here, if seen, could break the uptrend since -2.16% and could even pull the Euro lower. Need to watch this closely.