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Major US stocks rose sharply as China's optimistic comments on trade negotiations with the US reassured investors worried about the prospect of a recession.

Gao Feng, spokesman for the Chinese Ministry of Commerce, said the two sides are discussing the next round of talks scheduled for September, and China hopes US officials can cancel the introduction of additional tariffs to avoid escalation of trade tensions. In addition, he also made it clear that China would not immediately respond to planned tariffs.

Market participants also drew attention to several important macroeconomic reports. Thus, a report by the Department of Commerce showed that the US economy slowed down in the second quarter slightly more than originally expected, since the strongest growth in consumer spending over 4.5 years was offset by a decrease in exports and a smaller increase in stocks. According to the report, GDP grew in the second quarter by 2.0% year on year. This was revised from an initial rating of 2.1%. The economy grew by 3.1% in January-March. In the first half of the year, GDP grew by 2.6%. The downward revision met the expectations of economists.

At the same time, the Department of Labor has shown that the number of initial applications for unemployment benefits in the United States has risen modestly, indicating a steady labor market, despite a slowdown in economic growth. According to the ministry, the number of applications for unemployment benefits increased by 4,000 to 215,000, seasonally adjusted for the week ending August 24. The data for the previous week were revised to show 2,000 applications more than previously reported. The increase in claims for benefits last week was in line with economists' expectations.

A report by the National Association of Realtors (NAR) showed that contracts for the purchase of previously owned homes unexpectedly fell in July, suggesting that households might remain out of the market due to increased concern about the economy. According to the report, the NAR index of pending home sales transactions fell 2.5% last month to 105.6 points. Economists predicted that the index would remain unchanged.

Most DOW components completed trading in positive territory (25 out of 30). The biggest gainers were Caterpillar Inc. (CAT; + 2.55%). Johnson & Johnson (JNJ; -0.50%) were outsiders.

All S&P sectors recorded an increase. The industrial goods sector grew the most (+ 1.8%).

At the time of closing:

Dow 26,362.25 +326.15 +1.25%

S&P 500 2,924.58 +36.64 +1.27%

Nasdaq 100 7,973.39 +116.51 +1.48%

• says there is no need to resume QE program
• Sees no "value added" in ECB launching package of measures
• Would be relucatant to back peitring of deposit rates
• Sees "minor" revisions to September forecasts
• ECB should keep powder dry in case of new shock

• Says he will try Tuesday to stop PM Johnson from shutting down parliament
• Will put a vote of confidence "at the appropriate moment"
• Not my priority to have a Scottish independence referendum in early part of Labour government

• Says he is surprised that China has not made more moves to prevent Fentanyl coming to U.S.
• There is a "different level talk" with China scheduled for today
• He is not "going to put his hands up and give up" on China
• He is hopeful that Japan trade deal will be signed "over the next 3-4 weeks"

The National Association of Realtors (NAR) announced on Thursday its seasonally adjusted pending home sales index (PHSI) fell 2.5 percent m-o-m to 105.6 in July, down from 108.3 in June.

Economists had expected pending home sales to be flat m-o-m in July.

On y-o-y basis, the index decreased 0.3 percent.

According to the report, the pending home sales declined in all four regions in m-o-m terms. Pending home sales in the South decreased 2.4 percent m-o-m to an index of 122.7 in July, but that number is 0.1 percent higher than last July. The PHSI in the Northeast dropped 1.6 percent m-o-m to 93.0 in July and is now 0.9 percent lower than a year ago. The index in the West fell 3.4 percent m-o-m in July to 93.5 but still rose 0.3 percent above a year ago. The indicator in the Midwest went down 2.5 percent m-o-m to 101.0 in July, 1.2 percent less than July 2018.

Richard Franulovich, the head of FX strategy at Westpac, believes the BoC next week should fall into line with the dovish signaling from G10 peers and prepare the ground for at least one rate cut before the year is out, amid rising international trade risks.

• “The BoC’s statement likely signals a preparedness to provide accommodation though falls short of an ironclad explicit commitment.
• Rates markets price in 18bp of a BoC cut at the BoC’s Oct 30 meeting and 25bp by the Dec 4 decision. A dovish tone next week likely sees markets embrace a full cut by their Oct 30 meeting even as the bank reiterates an upbeat message on domestic growth momentum.
• USD/CAD likely to firm toward 1.36-1.38 into Q4 though maintains a persistent bid tone against its dollar bloc cousins.”

Carsten Brzeski, the chief economist at ING, notes that German headline inflation came in at 1.0% year-on-year in August, from 1.1% in July, while the national inflation measure dropped to 1.4% YoY, from 1.7% in July. 

• "Looking at the available components in several regional states, there were opposing trends in price developments. While prices for heating oil have started to drop compared with last year, reflecting lower global prices, those for electricity and gas are still up. At the same time, prices for food have started to accelerate, probably early signs of the dry and warm summer, while costs for communication and durable goods continue to fall. Overall, these diverging trends seem to offset each other, keeping core inflation measures broadly unchanged.
• Looking ahead, lower oil prices will keep German headline inflation hovering around 1% in the coming months. While this is good news for consumers, who as Mario Draghi once said can “buy more stuff”, the low inflation combined with the prospects of an at best stagnating economy bolsters the case for new monetary stimulus from the ECB in two weeks from today. In fact, we think that the ECB doesn’t want to wait until the Eurozone economy is again caught in a possible deflationary spiral but will want to set another (maybe final) preemptive strike. In our view, the ECB will present a new stimulus package consisting of a 20bp cut in the deposit rate, a tiering system, a restart of QE with 30bn euro per month as well as a repricing of the TLTROs."

U.S. stock-index futures surged on Thursday after China provided some upbeat-sounding trade comments, which calmed investors unnerved by the prospect of a recession. 

Global Stocks:

(company / ticker / price / change ($/%) / volume)

Netflix (NFLX) target lowered to $451 from $458 at Imperial Capital

Bank of America (BAC) downgraded to Mkt Perform from Outperform at Raymond James

A report from the Commerce Department showed on Thursday that the U.S. economy grew slower than initially thought in the second quarter, due to downward revisions to state and local government spending, exports, private inventory investment, and residential investment that were partly offset by an upward revision to personal consumption expenditures (PCE).

According to the second estimate, the U.S. gross domestic product (GDP) grew at a 2.0 percent annual rate in the second quarter, slightly lower than 2.1 percent reported in the advance estimate.

Economists had expected the growth rate to come in at 2.0 percent, following the second quarter's increase of 3.1 percent.

The increase in real GDP in the second quarter reflected positive contributions from PCE, federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, exports, residential fixed investment, and nonresidential fixed investment. Imports increased.

Meanwhile, the deceleration in real GDP in the second quarter primarily reflected downturns in inventory investment, exports, and nonresidential fixed investment. These downturns were partly offset by accelerations in PCE and federal government spending. 

The data from the Labor Department revealed on Thursday the number of applications for unemployment benefits increased moderately last week, pointing to sustained labor market strength despite slowing economic growth.

According to the report, the initial claims for unemployment benefits rose by 4,000 to a seasonally adjusted 215,000 for the week ended August 24.

Economists had expected 215,000 new claims last week.

Claims for the prior week were revised upwardly to 211,000 from the initial estimate of 209,000.

Meanwhile, the four-week moving average of claims went down 500 to 214,500 last week.

Germany's Federal Statistical Office reported on Thursday the country’s consumer price index (CPI) is expected to decrease 0.2 percent m-o-m in August, following a 0.5 percent m-o-m advance in the previous month. That marked the first monthly drop since January.

On the y-o-y basis, Germany’s inflation rate is seen to rise 1.4 percent this month after a 1.7 percent gain in July.

Economists had predicted inflation would drop 0.1 percent m-o-m but increase 1.5 percent y-o-y in August.

According to the report, food price growth accelerated to 2.7 percent y-o-y in August from 2.1 percent y-o-y in July, while energy inflation slowed to 0.6 percent y-o-y from 2.4 percent y-o-y. Services costs rose 1.6 percent y-o-y, following a 1.5 percent y-o-y climb in the previous month.

Meanwhile, the harmonized index of consumer prices for Germany (HICP), which is calculated for European purposes, is expected to fall 0.1 percent m-o-m and to increase 1.0 percent y-o-y.

Analysts at TD Securities are expecting the second release of Q2 GDP figures for the U.S. to unveil a minor deceleration in growth to a still above-trend 2.0% rate, down 0.1pp from the advance release.

• “Separately, the advance goods trade balance likely remained unchanged at the start of Q3, posting a deficit at USD -74.4bn in July. This would stand modestly below the average for Q2, suggesting an initial drag by the external sector on Q3 activity.”

Frances Cheung, the head of macro strategy at Westpac, notes that USD/CNY and USD/CNH have continued to edge higher in the past week, after breaking resistance at 7.10.

• “With a couple of psychological levels out of the way, the flexibility for the RMB to move based on market forces and fundamentals has increased – where fundamentals argue for a higher USD/CNY and there is general upside pressure on Dollar/Asia.
• Risk is to the upside to our year-end forecast of 7.20. There were days when USD/CNY fixings were lower than expected, but efforts to smooth market movement do not contradict with a gradual upward grind in USD/CNY.
• Offshore-onshore forward point spreads narrowed somewhat, but there is room for a re-widening given an easing bias onshore and a limited liquidity pool offshore.”

• We will use every mechanism we can to stop a no-deal Brexit

Bert Colijn, the senior economist at ING, notes that better-than-expected Economic Sentiment Indicator confirms that activity in August has maintained a subdued growth pace, defying further slowdown concerns. 

• "Just like the PMI, the Economic Sentiment Indicator recorded a surprise increase in August, from 102.7 to 103.1. While this is a marginal improvement and by no means suggests a growth recovery, it at least shows that the eurozone is not moving closer to a recession in these rather uncertain economic times.
• Eurozone industry saw sentiment recover a little as the deep decline in production that the industry observed in July reversed in August. The decline was mainly limited to Germany and some surrounding economies and this quick bounce back suggests that this was a one-off. Mind
• you, the indicator for Germany is still at -5.5, well below the June reading of 0.7 but much better than July’s -21.9.
• The service sector outlook became somewhat less positive in August, raising concerns about whether domestic demand is not getting impacted by the continued weakness in global industry. The decline from 10.6 to 9.3 nevertheless corresponds with decent growth in the sector, but slowing hiring expectations could cause a vicious circle as service sector demand is relatively dependent on improving employment.
• With selling price expectations more or less steady this month compared to the last, the ECB has not received many indications of an improving core inflation outlook.
• The modest gain in the headline ESI suggests some stabilisation, but with downside risks aplenty, it does not provide much reason to become more hawkish ahead of the big September decision on stimulus."

Deutsche Bank's analysts note that overnight we’ve seen some fresh trade headlines which have highlighted the continued uncertain nature of the U.S.-China trade talks.

• “Firstly, the US Treasury Secretary Steven Mnuchin said that the US trade officials expect Chinese negotiators to visit Washington, but declined to say whether the September encounter would happen. He also added that “we will have a separate dialog and discussion on currency as part of the trade discussion but separate from the trade discussion,” and said, “we’ve had conversations with the IMF and directly with our counterparts in China, including the governor of the PBOC,” since the U.S. formally labeled China a currency manipulator on August 5.
• Separately, the White House trade adviser Peter Navarro said in an interview that market optimism on a US trade deal with China is neither misplaced nor well placed but “somewhere in the middle,” while adding that it’s “unlikely anything quick will happen,” from the talks because the U.S. is asking China to make big, structural changes. He also commented on the Fed, saying the Fed needs “to do its job and cut rates” in the next month or two.
• Elsewhere, Mnuchin said that the Trump administration doesn’t intend to intervene in the dollar market right now but added, “situations could change in the future but right now we are not contemplating an intervention.”

Robert Rennie, Head of FM Strategy at Westpac, suggests that we have yet to see any obvious signs of heightened commentary over the strength of the JPY, but with US tariffs for the first wave of approximately US$144bn coming into effect at 15% this weekend and a possible vote of confidence in the UK government as early as next week, it’s hard to see what will stop the ¥ from strengthening further.

“So while we see 105 as acting as short term support, unless the BoJ is willing to ‘tweak’ policy and/or the MoF to commence ‘verbal’ intervention, risks are for another leg lower in USD/JPY. Thus we will stick with last week’s view that sub105, USD/JPY is a buy. However, through September, we see this level giving way as the ¥ takes on more of a safe haven role.”

Imre Speizer, analyst at Westpac, notes that NZD/USD continues to decline, this week’s break below 0.6350 signalling a move to the 0.6250 area which was last seen in Sep 2015.

“Markets have been attuned to the RBNZ’s newfound boldness since the 50bp cut in early August, and will continue to price NZ interest rates with a dovish skew. Today’s business confidence survey captured that 50bp cut, one interpretation of the plunge in confidence to 11-year lows being the magnitude of easing caused some alarm. That aside, confidence has been falling for some time, and the further decline in the “own activity” component – a good contemporaneous indicator of GDP growth – suggests a weak Q3 is on the cards. The main risk to our bearish view is the Fed lowers its rate by more than the 75bp we expect this year (or signals such).”

According to the report from European Commission, in August 2019, the Economic Sentiment Indicator (ESI) increased slightly in the euro area (by 0.4 points to 103.1), while it continued to decline in the EU (by 0.6 points to 101.4).

The slight improvement of euro-area sentiment resulted from markedly higher confidence in industry and retail trade, while confidence deteriorated significantly in services and construction and, to a lesser extent, among consumers.

The strong increase in industry confidence (+1.4), partially offsetting the significant decline observed in July, resulted from managers' more optimistic views on all three components, i.e. production expectations, the current level of overall order books and the stocks of finished products. The marked decline in services confidence (−1.3) was driven by managers' more pessimistic views on the past business situation and past demand, as well as their demand expectations. The slight decline in consumer confidence (−0.5) reflected the deterioration in households’ expectations about the general economic situation, while their assessments of both their past and future financial situation improved somewhat, and their intentions to make major purchases remained unchanged. 

The strong increase in retail trade confidence (+1.2) was fuelled by more optimistic views on the present business situation and, to a lesser extent, the adequacy of the volume of stocks, while expectations about the business situation worsened. Lower construction confidence (−1.3) resulted from managers' lower employment expectations, as well as their more pessimistic assessment of the level of order books. Finally, financial services confidence (not included in the ESI) decreased markedly (−4.8), reflecting strong deterioration in managers' assessment of the past business situation and past demand, while their demand expectations remained virtually unchanged.

In August 2019, the Business Climate Indicator (BCI) for the euro area increased markedly (by 0.22 points to +0.11). Managers’ assessments of past production and of export order books improved sharply. Also their production expectations, as well as their views on overall order books and the level of stocks of finished products improved markedly.

Germany is looking to cap its corporate tax burden at 25% as the country seeks to help smaller businesses amid signs the economy is lurching into a recession.

The proposal was made by Economy Minister Peter Altmaier on Thursday as part of a package aimed at supporting the so-called Mittelstand -- small and medium-sized businesses that account for nearly 60% of the country’s jobs. According to Deloitte, Germany’s overall tax rate on companies is about 30%-33%.

The German government is under increasing pressure to prop up the economy, with export demand hobbled by trade wars and Brexit uncertainty at a time when the country’s manufacturers need to invest in digital technologies to stay competitive. The tax changes could help ease the strain on German companies, but would take time to make an impact.

The timing of Altmaier’s initiative is another indication that Merkel’s government is becoming increasingly willing to act to prop up the economy. The DIW institute on Wednesday predicted that German output will probably shrink by 0.2% in the third quarter, putting Europe’s largest economy into technical recession. The government is still expecting a recovery toward the end of the year.

Richard Franulovich, head of FX strategy at Westpac, suggests that there’s no reasonable prospect of a lifting of trade uncertainty anytime soon as certainly there’s no deal that gives the appearance of Chinese concessions ahead of the PRC 70th anniversary celebrations in October, not to mention one that involves a rewriting of domestic laws regarding intellectual property.

“Persistent elevated uncertainty likely lends a continuing safe haven bid to the USD vs EM and dollar bloc currencies. Related to that, Fed policy, trade policy and the “strong” USD policy are all effectively at the mercy of an impulsive tweet, an environment hardly conducive to strong risk appetite. USD index likely to persist at upper end of recent ranges (97-99). Unilateral US FX intervention a continuing non-negligible risk. Beyond that, the broad sweep of US data still points to reasonable growth momentum, certainly more than the Eurozone.”

German jobless claims rose in August, in line with expectations, adding fresh evidence that the country's economic slowdown is starting to impact the still-robust labor market.

Jobless claims rose by 4,000 in August, after increasing by 1,000 in July, data from the Federal Employment Agency showed. 

"The weak economic phase is also leaving its mark on the labor market," said Detlef Scheele, head of the agency. Unemployment and underemployment increased in August, while employment growth continues but is losing ground, he added.

The adjusted jobless rate remained unchanged at 5.0% in August, in line with expectations.

The number of registered job vacancies stood at 795,000 in August, down by 33,000 on the year. Nonetheless, it remains at high levels, the agency said.

Britain’s defense secretary Ben Wallace said that the suspension of parliament is an annual occurrence, as he arrived in Helsinki for talks with his European Union counterparts.

“It happens every year,” Wallace told reporters when asked about the government’s controversial move on Wednesday to prorogue parliament. The move has sparked outrage among opposition lawmakers and many others in Britain, and led to a sharp weakening in sterling as it was seen as increasing the risk of a no-deal Brexit.

EU’s foreign and defense ministers are meeting to discuss a raft of issues from hybrid threats to climate risks to security to tensions in the Middle East. 

Austria’s defense minister was asked if Brexit would weigh on EU defense capabilities. “Of course there will be consequences but it (Brexit) has also driven a dynamic to make the EU more self-reliant in this area,” Thomas Starlinger told.

• China reiterates that it opposes escalation of a trade war

• Hopes that US will show sincerity and concrete action

• Hopes that US will meet China halfway on trade issues

• Says willing to resolve the issue via a calm attitude

• Both sides are discussing the previously discussed September talks

• Important thing is both sides continue negotiations and create conditions for that

• If Chinese officials do go to the US next month, both sides should create conditions for progress in negotiations

According to TD Securities analysis team, the key data point today will be German HICP for August, where they see downside risks and look for slowdown to 1.0% y/y (mkt 1.2%).

“Core inflation has been incredibly volatile for the last several months, but August tends to be a much more stable month on a m/m basis, which should leave core CPI unchanged at 0.9% y/y. The contribution from energy prices is likely to decline a bit, weighing on the headline figure. We also get German unemployment data for August today, which we'll be watching more closely than normal for any sign that the contraction in manufacturing activity translates into job losses.”

TD Research discusses EUR outlook and sees room for further downside toward the 1.1027 low in the near-term.

"Besides Europe, much of the attention rests on the slowdown implications of the US yield curve inversion. For many, its hard to ignore the gap between US equities and points of the curve. Still, the Fed's Q3 Nowcast sits around 1.76%, suggesting it not panic time," TD notes.

"In turn, EURUSD should retest the 1.1027 lows, though still prefer EURSEK upside. That's a trade which capturesthe pricing mismatch to cyclicals," TD adds.

According to the report from Insee, in July 2019, household consumption expenditure on goods rebounded in volume* (+0.4% after –0.2%). This increase was mainly due to the consumption of manufactured goods (+0.6%). Food consumption recovered a little in July.

In July, manufactured good consumption increased for the third consecutive month (+0.6%), driven in particular by durable good purchases (+1.6%) and despite the decline in clothing consumption (–1.2%).

In July, the consumption of durable manufactured goods accelerated (+1.6% after +0.5%), driven by the dynamism of transport equipment sales (+1.4%) and housing equipment expenditure (+1.9%). In particular, the purchases of second-hand and recreational vehicles rebounded significantly compared to the previous month.

Textile-clothing expenditure fell in July (–1.2% after +0.7%). Indeed, both clothing and shoe consumption declined after two consecutive months of increase.

In July, the consumption of "other manufactured goods" increased slightly (+0.1%), driven by an increase in perfume purchases.

A Bank of Japan board member warned of potential dangers if the central bank's already massive stimulus is ramped up, a view suggesting there is no consensus on how quickly it should ease policy again to head off the risk of recession.

Hitoshi Suzuki, a former commercial banker turned BOJ policymaker, said further declines in borrowing costs would do more harm than good as financial institutions might mitigate the pain by charging fees on households' deposits.

"If bank deposit rates effectively turn negative, it could hurt the economy by cooling consumer sentiment," Suzuki told.

Excessively low interest rates would also discourage financial institutions from lending and diminish the impact of monetary easing, he added.

"Once the financial system destabilises, it will become very difficult to achieve price stability," he said, stressing that the BOJ needed to pay more attention to the health of Japan's banking system in guiding monetary policy.

Suzuki's remarks underscore a rift within the nine-member board that could make it hard for Governor Haruhiko Kuroda to meet his pledge to ease policy "without hesitation" to underpin the economy's recovery.

The European Central bank has in the past gone too far in seeking to meet market expectations and should be prepared to disappoint the market sometimes, outgoing ECB policymaker Ewald Nowotny said.

Nowotny's remarks echoed comments on Tuesday by ECB Vice President Luis de Guindos, who said the ECB must be critical of market expectations and base its decisions on macroeconomic data.

"In past years we perhaps followed markets' expectations too intensively and avoided disappointing them," Nowotny, whose term as governor of the Austrian National Bank ends this weekend, told.

"I am of the opinion that central banks should be the decisive institution and must therefore sometimes disappoint markets," said Nowotny, who will be succeeded by pensions specialist Robert Holzmann.

He did not elaborate on what kind of disappointment he had in mind.

Nowotny said he favours inflation targeting along the lines of what the Czech, Israeli or Swedish central banks do -- aiming for 2% plus or minus one percentage point. "I would support such a view because it means that inflation of 1.6% is also within the target area and therefore requires no monetary policy measures," Nowotny said.

According to figures released today by the Society of Motor Manufacturers and Traders (SMMT), British car manufacturing output declined -10.6% in July, with 108,239 units produced. This was the 14th successive month of decline as ongoing weakness in major EU and Asian markets coupled with some key model changes affected performance.

Production for export fell -14.6% in the month, although overseas demand remained the main driver of overall volumes, accounting for 8 in 10 cars built. Meanwhile, output for the domestic market rose by 10.2%, or just fewer than 2,000 units, following a steep -35.1% fall in July last year, when multiple factors, including preparation for WLTP affected output.

In the year-to-date, some 774,760 cars have been made in Britain, 180,864 fewer than in the same timeframe last year and representing a fall of -18.9%. With exports accounting for the vast majority of orders, their decline is primarily responsible for the overall fall in output with overseas shipments down -20.2% since January, while year-on-year production for the UK is down -13.5%.

Mike Hawes, SMMT Chief Executive, said: "Another month of decline for UK car manufacturing is a serious concern. The sector is overwhelmingly reliant on exports and the global headwinds are strong, with escalating trade tensions, softening demand and significant technological change".

EUR/USD

Resistance levels (open interest**, contracts)

$1.1205 (2187)

$1.1162 (2534)

$1.1130 (1000)

Price at time of writing this review: $1.1082

Support levels (open interest**, contracts):

$1.1065 (4612)

$1.1034 (4017)

$1.0993 (7476)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date September, 6 is 110162 contracts (according to data from August, 28) with the maximum number of contracts with strike price $1,1400 (8825);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2349 (2241)

$1.2293 (1265)

$1.2260 (772)

Price at time of writing this review: $1.2204

Support levels (open interest**, contracts):

$1.2136 (1141)

$1.2069 (2076)

$1.1986 (1611)

Comments:

- Overall open interest on the CALL options with the expiration date September, 6 is 30802 contracts, with the maximum number of contracts with strike price $1,2750 (4128);

- Overall open interest on the PUT options with the expiration date September, 6 is 26760 contracts, with the maximum number of contracts with strike price $1,2100 (2076);

- The ratio of PUT/CALL was 0.87 versus 0.85 from the previous trading day according to data from August, 28

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.