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Major US stock indices fell significantly, as a closely monitored indicator of the US bond market indicated a renewed risk of recession after weak economic data from Germany and China.

Official data released on Wednesday showed that China's industrial output grew at its slowest pace in 17 years in July, while Germany's GDP fell 0.1% in the second quarter from the previous quarter, marking the first drop in the last three quarters. These data have returned to the focus of investors the protracted trade war between the US and China and its negative impact on global economic growth.

Against this background, the yield on 10-year treasury bonds on Wednesday was lower than the yield on 2-year bonds for the first time since 2007, which is a reliable indicator of the upcoming recession. In addition, the yield on 30-year treasury bonds reached a new record low.

Investors also evaluated the Department of Labor report, which showed that US import prices unexpectedly rose in July. According to the report, import prices rose 0.2% in July after falling by a revised 1.1% in June. Economists had predicted that import prices would remain unchanged from a sharp decline of 0.9%, which was originally reported the previous month. The report also showed an unexpected increase in export prices, which rose 0.2% in July after falling by a revised -0.6% in June. Export prices were also expected to remain unchanged from the 0.7 percent decline originally announced for the previous month.

All DOW components completed trading in the red (30 of 30). Outsiders were shares of Dow Inc. (DOW, -5.77%).

All S&P sectors recorded a decline. The largest drop was shown by the base materials sector (-3.2%).

At the time of closing:

Dow 25,479.42 -800.49 -3.05%

S&P 500 2,840.60 -85.72 -2.93%

Nasdaq 100 7,773.94 -242.42 -3.02%

• Economic outcomes are quite good for the U.S.
• Rates are included in tools that Fed's review could study

The U.S. Energy Information Administration (EIA) revealed on Wednesday that crude inventories rose by 1.580 million barrels in the week ended August 9. Economists had forecast a fall of 2.500 million barrels.

At the same time, gasoline stocks fell by 1.412 million barrels, while analysts had expected a gain of 0.615 million barrels. Distillate stocks decreased by 1. 934 million barrels, while analysts had forecast a surge of 0.874 million barrels.

Meanwhile, oil production in the U.S. was unchanged at 12.300 million barrels a day.

U.S. crude oil imports averaged 7.7 million barrels per day last week, up by 566,000 barrels per day from the previous week.

• Believes businesses will continue to shift supply chains out of China
• Says markets now have certainty that tariffs will move forward
• Says the yield curve is signaling to the Fed to lower interest rates "by 50 basis as quickly as possible"
• Says China will have to stop stealing intellectual property, forced technology transfer, shipments of fentanyl, dumping into U.S. markets, subsidizing state-run enterprises, hacking into U.S. computers, and currency manipulation 
• Repeats that U.S. and China will hold a phone call in 2 weeks

James Smith, a developed market economist at ING, notes that a 'no deal' Brexit has undoubtedly become more likely in recent days - the EU is unlikely to offer anything big, and Parliament faces an uphill battle to stop a prime minister set on exiting without a deal.

• "When British MPs return from their summer holidays at the beginning of next month, there will be less than two months until Brexit on 31 October. Markets are becoming increasingly worried that this won’t be enough time for Parliament to block a ‘no deal’ exit – the pound has fallen by 3% against the euro since Mr Johnson became leader.
• So just how likely is a scenario whereby the UK leaves the EU without a deal? We think the probability has risen in recent days - we'd now put it at 25%, maybe higher - but ultimately it all boils down to how you answer four key questions."

U.S. stock-index futures fell sharply on Wednesday, as weak economic data from China and Germany put the focus back on the impact of the U.S.-China trade war, which is pushing some major economies toward the brink of recession.

Global Stocks:

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

The Labor Department reported on Wednesday the import-price index, measuring the cost of goods ranging from Canadian oil to Chinese electronics, rose 0.2 percent m-o-m in July, following a revised 1.1 percent m-o-m drop in June (originally a 0.9 percent m-o-m decline). Economists had expected prices to remain unchanged m-o-m last month.

According to the report, rising fuel prices (+1.8 percent m-o-m) more than offset lower nonfuel prices (-0.1 percent m-o-m).

Over the 12-month period ended in July, import prices dropped 1.8 percent, weighed down by declines in both fuel (-5.5 percent) and nonfuel (-1.3 percent) prices.

The price index for U.S. exports also went up 0.2 percent m-o-m in July, following a revised 0.6 percent m-o-m decrease in the previous month (originally a 0.7 percent m-o-m decline).

Higher agricultural (+0.4 percent m-o-m) and nonagricultural (+0.2 percent m-o-m) prices both contributed to the advance.

Over the past 12 months, the price index for exports dropped 0.9 percent, weighed down by lower prices for nonagricultural exports (-1.5 percent). 

• Says research and public hearings were done before $300 bln tariff proposal, and decision was made to be more protective ahead of the holiday shopping season
• Any trade deal must include resolution to intellectual property theft, forced technology transfer, and must be enforceable
• He does not believe a date has been set for September in-person trade talks; the only date that is set is an upcoming phone call in two weeks (late August)
• He will have an update on Huawei on Monday

• Says government is already investing record amounts
• Still sees slight growth in the economy this year
• Currently no need for stimulus package

• EU is not compromising at all on Brexit deal
• Longer this situation goes on, more likely no-deal Brexit becomes
• More EU thinks parliament can block no-deal, less likely they will compromise

The Mortgage Bankers Association (MBA) reported on Wednesday the mortgage application volume in the U.S. surged 21.7 percent in the week ended August 9, following a 5.3 percent increase in the previous week.

According to the report, refinance applications climbed 37 percent to the highest level since July 2016, while applications to purchase a home rose 2 percent

Meanwhile, the average fixed 30-year mortgage rate decreased to 3.93 percent from 4.01 percent.

“The 2019 refinance wave continued, as homeowners last week responded to extraordinarily low mortgage rates. Fears of an escalating trade war, combined with economic and geopolitical concerns, once again pulled U.S. Treasury rates lower,” noted Joel Kan, MBA’s associate vice president of economic and industry forecasting.

Bert Colijn, a senior Eurozone economist at ING, notes that the second estimate of GDP growth in the Eurozone confirmed the slowdown to 0.2% QoQ. 

• "Most countries saw a slowdown compared to Q1, which had been inflated by one-off factors. Germany clearly stood out with a contraction of -0.1%, but Italian output growth also stagnated in Q2. French and Spanish GDP growth slowed too, making the Netherlands the largest economy to maintain its Q1 pace of growth.
• Eurozone industrial production provided more evidence that industry is currently the economy’s Achilles heel. Production for the Eurozone as a whole plummeted by -1.6% in June. German industry declined by -1.8% in June, but was not the worst performer by a long shot. France saw production decline by -2.3%, while some of the smaller countries recorded even deeper contractions in production. July surveys have painted a worrying picture about production, causing concerns about continued weakness in the third quarter.
• Today’s confirmation of a German contraction in the second quarter further ignites discussion about a possible broader downturn. With more downside risks down the line like Brexit, Italian political turmoil and trade war uncertainty, that debate seems to be legitimate. The ECB has all but decided on a next stimulus package for September, but the question is whether governments are willing to provide additional support if downside risks were to materialize."

FX Strategists at the UOB Group suggested the USD/JPY could see some rebound amidst shrinking downside pressure.

• "24-hour view: In yesterday’s update, we noted that although the undertone of USD is negative, “a strong sustained down move (below 105.00) is not expected.” USD printed a low of 105.05 before rebounding sharply towards 107.00. With the abrupt turnabout, momentum has started to rebuild on the upside. For today, USD is likely to be supported first at 106.10 then 105.85. On the topside, resistance at 107.10 may come into focus today.
• Next 1-3 weeks: Our last narrative was from 13-Aug (spot at 105.35) that “a move below 105.0 would not come as a surprise”. Overnight, USD printed a low of 105.05 before rebounding sharply towards 107.00. The abrupt and sharp move has effectively eased all the downside pressures and upside momentum is gradually building. That said, stiff resistance is still expected at 107.00, having held back buyers for a second time on 13-Aug (last was 6-Aug). The next level above that is 107.50 and only further gains to 108.00 would warrant a ‘positive phase’. On the downside, supports are expected at 105.10 and 104.60”.

• GDP figures are a wake-up call and a warning signal
• We can avoid a recession if we take the right measures

The Federal Reserve is being “held hostage by markets” and will be forced to make two interest rate cuts before the end of the year, according to Mohamed El-Erian, the chief economic adviser to Allianz.

El-Erian said the Fed will “have no choice” but to drop rates to as low as 1.75% over the next five months to alleviate fears that trade tensions and slowing global growth will hurt the US economy.

“Even though further cuts are not justified by traditional economic metrics, the Fed will have no choice but to reduce rates. The markets are holding them hostage right now,” said El-Erian.

“The cuts will be made for negative reasons, not positive ones. The Fed is afraid of the market’s reaction if it doesn’t act,” he said.

The US central bank reduced rates last month for the first time in 11 years, cutting them by 25 basis points. 

El-Erian said: “This is not yet the start of a long series of cuts. We are not looking at six or seven straight reductions. The US economy is still in a good place, and for a recession to happen over the next 12 months would require either a policy mistake or a big market accident.”

According to estimates from Eurostat, in June 2019 compared with May 2019, seasonally adjusted industrial production fell by 1.6% in the euro area (EA19) and by 1.5% in the EU28. In May 2019, industrial production rose by 0.8% in the euro area and by 0.9% in the EU28. In June 2019 compared with June 2018, industrial production decreased by 2.6% in the euro area and by 1.9% in the EU28.

In the euro area in June 2019, compared with May 2019, production of capital goods fell by 4.0%, non-durable consumer goods by 2.8%, durable consumer goods by 1.2%, intermediate goods by 0.8% and energy by 0.2%. In the EU28, production of capital goods fell by 3.5%, non-durable consumer goods by 2.2%, durable consumer goods by 1.4%, intermediate goods by 0.9% and energy by 0.4%.

In the euro area in June 2019, compared with June 2018, production of capital goods fell by 4.4%, intermediate goods by 2.6%, durable consumer goods by 1.0% and energy by 0.1%, while production of non-durable consumer goods rose by 0.1%. In the EU28, production of capital goods fell by 3.7%, intermediate goods by 2.0% and durable consumer goods by 0.5%, while production of non-durable consumer goods rose by 0.2% and energy by 0.6%.

According to a flash estimate published by Eurostat, seasonally adjusted GDP rose by 0.2% in both the euro area (EA19) and in the EU28 during the second quarter of 2019, compared with the previous quarter. In the first quarter of 2019, GDP had grown by 0.4% in the euro area and by 0.5% in the EU28.

Compared with the same quarter of the previous year, seasonally adjusted GDP rose by 1.1% in the euro area and by 1.3% in the EU28 in the second quarter of 2019, after +1.2% and +1.6% respectively in the previous quarter.

The number of employed persons increased by 0.2% in both the euro area and the EU28 in the second quarter of 2019, compared with the previous quarter. In the first quarter of 2019, employment had grown by 0.4% in both the euro area and the EU28.

Compared with the same quarter of the previous year, employment increased by 1.1% in the euro area and by 1.0% in the EU28 in the second quarter of 2019, after +1.3% and +1.2% respectively in the first quarter of 2019.

Germany's growth outlook remains clouded as manufacturers are hit by escalating trade conflicts, Brexit uncertainty and other geopolitical crises, the economy ministry said on Wednesday.

"The outlook remains subdued for the time being. Trade conflicts have recently worsened and the prospects for an orderly Brexit have not improved," the economy ministry said in its monthly report.

Industrial orders data and sentiment indicators are currently not pointing to the sector providing positive impetus in the coming months, the ministry said. But it added that domestic demand remained robust thanks to rising incomes and fiscal stimulus.

According to the report from Office for National Statistics, the Consumer Prices Index (CPI) 12-month rate was 2.1% in July 2019, increasing from 2.0% in June 2019. Economists had expected a 1.9% increase

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 2.0% in July 2019, increasing from 1.9% in June 2019.

In July 2019, the largest upward contribution to the CPIH 12-month rate continues to come from housing and household services, with prices rising by 1.9% on the year. Housing and household services has provided the largest contribution for the last nine months.

Within this group (which contributed 0.58 percentage points to the overall rate), the largest contributions were from owner occupiers’ housing costs (a 0.20 percentage point contribution), electricity, gas and other fuels (a 0.18 percentage point contribution), and Council Tax and Rates (a 0.12 percentage point contribution).

There were also large upward contributions to the CPIH 12-month rate from recreation and culture, and restaurants and hotels, where prices rose in the year to July 2019 by 2.4% and 3.1%, respectively.

Clothing and footwear also produced an upward contribution to the CPIH 12-month rate, reflecting that prices fell between June and July 2019 by less than a year ago. Until July, the contribution from this category had been negative for the last 10 months. This means that for July 2019, all CPIH broad groups (also known as divisions) produced an upward contribution to the overall 12-month rate.

Karen Jones, Team Head FICC Technical Analysis at Commerzbank, suggested occasional pullbacks in EUR/USD should meet support in the 1.1150/06 area.

“EUR/USD is consolidating tightly sideways just below resistance at 1.1285 and the 200 day ma at 1.1293. The consolidation is viewed in a positive light, intraday Elliott wave counts remain positive, however lack of upside progress is worrying and it is possible that we will see a minor sell off first. Key resistance is 1.1354/71, the 2018-2019 down channel and the 55 week ma. A weekly close above this latter level is needed for us to adopt an outright bullish stance. Dips lower are likely to find some support circa 1.1150/06. Key support is the 1.0961 2018-2019 support line and below here lies the 78.6% retracement at 1.0814/78.6% retracement”.

Italy’s Deputy Prime Minister Matteo Salvini said the citizen’s income scheme introduced earlier this year would need reviewing if the League won elections.

“With our government (pension reform plans) are untouchable... it will rather be necessary to reassess the citizen’s income,” Salvini said in an interview in daily Corriere della Sera.

Salvini said last week the governing alliance had become unworkable and said he wanted elections as soon as October.

Salvini, who is head of the right-wing League, said he would want cabinet undersecretary Giancarlo Giorgetti to be Treasury minister if his party won elections.

• Confident that parliament has a clear view, has means to express it.

• Any ideal of bypassing parliament would provoke a constitutional crisis.

• There is no mandate for leaving with no deal.

• Government of national unity is not the answer.

• Hopes do not need a second referendum.

The TD Securities Analysts believe the UK July Core Consumer Price Index (CPI) is expected to remain unchanged from the June month reading.

“We look for core CPI to hold steady at 1.7% y/y in July (mkt 1.8%), with the recent depreciation of the pound unlikely to have any material impact quite yet. For headline CPI, we look for a 1.9% y/y (mkt 1.9%), which is a touch above the BoE's forecast from the August IR for a 1.8% print.”

Analysts at ING are out with their afterthoughts on the German Q2 GDP release after the economy shrank by 0.1% QoQ in the second quarter.

“The available monthly data and the press release of the Statistical Agency suggest that private and government consumption were slightly up but trade and the construction sector were a drag on growth. Today’s GDP report definitely marks the end of a golden decade for the German economy. Since the end of the 2008/09 recession, the economy has grown by an average of 0.5% QoQ every quarter. In fact, the economy grew in 35 out of the last 40 quarters. However, under the surface of these impressive headline numbers, a worrisome trend has emerged. Since 3Q 2018, the economy has been in a de facto stagnation, with quarterly GDP growth at an average of zero percent.”

According to the report from INSEE, in July 2019, the Consumer Prices Index (CPI) fell back by 0.2% over a month, after a rise by 0.2% in June. This dip resulted from a seasonal fall in manufactured product prices (−2.8% after a stability in June) due to summer sales, and a sharp decline in energy prices (−1.1% after −0.1%). Contrariwise, services prices gathered pace (+1.0% after +0.5%), essentially due to airfares with the beginning of school holidays. Food prices were also more dynamic than in the previous month (+0.5% after +0.1%). Finally, tobacco prices rose slightly by 0.2% over a month after a stability in June. 

Seasonally adjusted, consumer prices slowed down to +0.1% in July 2019, after +0.3%.

Year on year, consumer prices rose by +1.1%, after +1.2% in June. This slight drop in inflation came from a year-on-year slowdown in energy, services and tobacco prices. Contrariwise, a sharp acceleration in food prices and a smaller drop in the prices for manufactured products limited the drop in inflation.

Year on year, core inflation was unchanged: +0.9%, as in the previous month. The Harmonised Index of Consumer Prices (HICP) slowed down, over a month, to −0.2% in July, after +0.3% in June; year on year, it grew by +1.3%, after +1.4% in the previous month.

According to data from the National Institute of Statistics and Economic Studies (INSEE), France's unemployment rate fell to 8.5% in the second quarter from 8.7% in the first, marking the lowest jobless rate in the euro zone's second-biggest economy since the end of 2008. Economists had forecast an unemployment rate of 8.7% for the second quarter.

In metropolitan France, the number of unemployed decreased by 66,000 over a quarter to 2.4 million people; the unemployment rate declined by 0.2 points, to 8.2 % of the labour force. It decreased for all age groups. The fall is more pronounced among young people (−0.6 points) than among persons aged 25 to 49 (−0.2 points) and those aged 50 and over (−0.2 points).

Over a year, the unemployment rate in metropolitan France decreased by 0.6 points, but fell more markedly among the youth (−1.5 points), in particular young women (−1.8 points).

A steady improvement in the jobs market has offered French President Emmanuel Macron some relief in the face of months of street protests against government policies often criticised for favouring the wealthier members of society.

Federal Statistical Office (Destatis) said, in the second quarter of 2019, the real (price-adjusted) gross domestic product in Germany decreased by 0.1% on the first quarter of 2019, after adjustment for seasonal and calendar variations. The first quarter of 2019 showed an increase of 0.4% compared with the fourth quarter of 2018.

The quarter-on-quarter comparison (in real terms and adjusted for seasonal and calendar variations) shows that positive contributions came from domestic demand, according to provisional calculations. Compared with the first quarter, household final consumption expenditure increased, together with government final consumption expenditure. In addition, more was invested than in the first quarter, however, gross fixed capital formation in construction declined. The development of foreign trade slowed down economic growth because exports recorded a stronger quarter-on-quarter decrease than imports.

Compared with the previous year, real GDP stagnated. After calendar adjustment, GDP was up by 0.4% because the second quarter of 2019 had one working day less than the same quarter a year earlier. Economists had expected a 0.1% increase. In the first quarter of 2019, real GDP was 0.8% (calendar adjusted: 0.9%) higher than in the same quarter of the preceding year.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1291 (4372)

$1.1263 (1909)

$1.1227 (753)

Price at time of writing this review: $1.1169

Support levels (open interest**, contracts):

$1.1141 (5992)

$1.1112 (3673)

$1.1077 (4933)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date September, 6 is 103393 contracts (according to data from August, 13) with the maximum number of contracts with strike price $1,1400 (9085);

GBP/USD

Resistance levels (open interest**, contracts)

$1.2250 (1149)

$1.2189 (875)

$1.2145 (322)

Price at time of writing this review: $1.2052

Support levels (open interest**, contracts):

$1.1984 (1968)

$1.1958 (1453)

$1.1928 (1550)

Comments:

- Overall open interest on the CALL options with the expiration date September, 6 is 29755 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 23025 contracts, with the maximum number of contracts with strike price $1,2100 (1968);

- The ratio of PUT/CALL was 0.77 versus 0.78 from the previous trading day according to data from August, 13

* - 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.