Futures Unchanged Before Janet Yellen’s Congressional Testimony

It has been a mixed overnight session, following data out of China first showing that any hopes of ongoing PBOC tapering are dead and buried, following the June report showing money and loan creation (1.08 trillion Yuan up from 871 billion in May and above the 980 billion expected) in China soared, slamming expectations and indicating that Beijing is once again set on masking slowing growth with a surge in money creation. Should the Chinese not so secret any more money laundering channel be plugged this means local inflation may be set to surge in the coming months. More worrying was the release of a big drop in the German ZEW Survey expectations print at 27.1, down from 29.8 and below the expected 28.2. The low print has prompted several banks to warn that Europe’s growth spurt has finally ended and there may be substantial downside surprises ahead, and certainly even more cuts to the IMF “forecast” for European growth. Finally, the Portuguese situation may be out of sight, but it is certainly not out of mind as the stock of BES continues to tumble and now the contagion has finally moved over to Espirito Santo Financial Group whose shares dropped to the lowest since 1993. Keep a close eye on this “not so lonely” cockroach.

But the most importantly event of the day is certainly the first day of Janet Yellen’s Congressional testimony starting at 10am. As DB summarizes,  she will be testifying on behalf of the Fed and though it’s clear that she’s more dovish than most of her colleagues there is always a chance she will be more hawkish in her testimony than she is when putting forward her own views. However in her chair role so far she has tended be dovish even when fears mount that she might be on the turn or might be representing her committee’s views. Indeed, going by the June FOMC minutes, even the more hawkish elements of the FOMC are still fairly circumspect in their desire to see rates rise. In terms of the finer details of what to expect from her testimony today, there will probably be a focus on the recent pickup in inflation indicators. On this front, Yellen has said previously that there is a lot of statistical noise in the recent inflation numbers and we would expect that message to be reiterated today. On the unemployment front, we expect Yellen to highlight again the slack in the labour market and the room for improvement available in Yellen’s dashboard of alternative labour market indicators. We can also expect some questioning on the pace and manner of the Fed’s stimulus withdrawal policies.

In sum, European shares fall, though are off intraday lows, with tech and banks sectors underperforming and basic resources, health care outperforming. The Spanish and Italian markets are the worst-performing larger bourses, the Swiss the best.  6 out of 19 Stoxx Europe 600 sectors rise; basic resources, health care outperform, tech, banks underperform. 24.7% of Stoxx 600 members gain, 74.5% decline. Eurostoxx 50 -0.7%, FTSE 100 -0.1%, CAC 40 -0.4%, DAX -0.5%, IBEX -1.3%, FTSEMIB -1.2%, SMI +0.3%. The euro is weaker against the dollar. German 10yr bond yields fall; French yields decline. Commodities decline, with Brent crude, natural gas underperforming and gold outperforming.

In Asia, it’s been another positive session with the Nikkei (+0.6%) again leading the region’s equity markets higher, while Asia-Pac credit spreads are generally around 1-2bp firmer. The Bank of Japan’s latest meeting concluded with no changes in policy and no major changes to economic forecasts. The Bank said it sees Japanese CPI remaining at 1.25% for some time but left unchanged its forecast of 2.1% CPI in FY2016. The BoJ’s GDP growth forecasts were also largely unchanged from its last set of forecasts published in April. In China, Premier Li released a statement on the central government’s website saying that he is comfortable of achieving a medium-high level of growth. The Shanghai Comp, HSCEI and KOSPI are up 0.1%, 0.3% and 0.9%% respectively. The latest RBA minutes were fairly neutral, with the central bank reiterating its preference for a period of stable rates. AUDUSD is little changed at 0.94.

We have a busy day ahead for data, central bank speakers and corporate earnings. Starting in Europe, the German ZEW survey will be released this morning. Governor Carney speaks before the House of Commons Treasury Committee on the BoE’s June financial stability report at 10am London. This will be followed by the pre-market earnings from JPM, Johnson & Johnson and GS. Yellen’s testimony at the Senate Banking Committee starts at 3pm London time, but her prepared comments are likely to be posted online shortly before the official start. The US data docket is headlined by US retail sales, business inventories and the Empire Fed manufacturing survey. On retail sales, Bloomberg consensus sits at +0.6% MoM on the headline and +0.5% MoM ex-auto and gas. The Empire Manufacturing survey is expected to moderate to 17.0 (vs 19.3 in June). Intel’s earnings are due after the NY closing bell which will provide an important update on the state of consumer and business demand for PCs.

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