- Ethereum broke violently higher with multiple drivers still looking supportive
- Crude prices stabilized this morning after a 2% drop yesterday on news that OPEC plans to boost crude production.
- Brazil's Q2 growth figures disappointed, but inflation remains the focus for now
- Moody's cut Peru's credit rating by one notch
- Eurozone PPI surprised on the upside, but the doves are firmly in control
The dollar is slightly weaker, but moves have been modest as markets start getting into the U.S. employment data mood. Still, the DXY has declined for nine of the last ten sessions and down 1.3% from the August highs. European equites are mixed and U.S. futures are higher in a quiet session. The same goes for Asia with the Nikkei closing at +0.3% and disparate gains in EM with China and India up 0.9% and Taiwan and Korea down by the same magnitude. There is not much to report on the fixed income front.
In the crypto space, Ethereum broke violently higher from its August range, rising some 15% over the last four sessions and pulling well ahead of bitcoin. Multiple forces are supporting Ethereum, including EIP 1559, which embeds a burn mechanism in transaction fees to reduce supply, leading to ETH inflation rate dropping from around 3% to 1%. Meanwhile, the boom in non-fungible tokens (NFT) and blockchain gaming continues. There are also some major developments to improve ETH's scaling and lower transaction costs in what is known as "layer 2" solutions, such as Optimism and Arbitrum, which just went live. These solutions may reinvigorate appetite for decentralized finance protocols, which are still recovering from the slump in Q3. All of this could mean the continued outperformance of ETH against BTC and a greater risk of a "flippening" – when the market cap of ETH ($434 bln) surpasses that of BTC ($906 bln). That said, BTC did manage to reclaim the $50,000 level this morning, while ETH is trading around the $3,750 level.
Crude prices stabilized this morning after a 2% drop yesterday on news that OPEC plans to boost crude production. The cartel expects demand to improve across the globe, thus decided to retain its plan to go ahead with the 400K barrel-a-day increase in production for October. Indeed, US data on crude stockpiles reinforces the notion that demand is holding up in the face of the delta variant.
Brazil's Q2 GDP disappointed at -0.1% q/q compared with expectations for +0.2%, suggesting that the generous stimulus has helped the economy gain much traction. The services sector was the silver lining, up 10.8% q/q as the reduction in mobility restrictions starts to take effect, and consumer confidence improves with the vaccines. That said, consumption was flat in the quarter and exports didn't provide much of a boost. Despite the disappointment, we doubt the data will change the BCB's hawkish directive and near-term emphasis on inflation. If anything, it might give the Bolsonaro government an even greater impetus to push for additional spending and try to offset its low popularity.
Moody's cut Peru's credit rating by one notch to Baa1 from A3, highlighting rising political risks in the country. The sovereign rating is still three notches above junk, and the move brings Moody's in line with the other major rating agencies. Still, we see the move as symbolic of the rising tide of political risk across the region. Or, as Moody's put it for Peru, "a continuously polarized and fracture political environment […] weakened policy marking capacity." Peru's CDS prices have remained amongst the lowest in the region (on par with Mexico's) given a comparatively favorable external position, but we expect a lot more uncertainty ahead.
Clues for the jobs data tomorrow have been mixed. Consensus currently sees 725k jobs added vs. 943k in July, while the unemployment rate is expected to fall two ticks to 5.2%. Average hourly earnings are seen steady at 4.0% y/y. ADP private sector jobs came in soft at 374k vs. 625k expected. July was revised to 326k from 330k previously. We know ADP and NFP don't always line up well but this reading will likely pull down the whisper number for tomorrow. That said, we note that NFP came in at 943k last month even though ADP was lower than expected at 330k. Will we get two big downside ADP misses in a row? Stay tuned.
ISM manufacturing PMI surprised on the upside. Headline came in at 59.9 vs. 58.5 expected and 59.5 in July. Details were mostly stronger, with new orders rising to 66.7 from 64.9 in July and prices paid falling to 79.4 from 85.7 in July. The only real disappointment was employment, which fell back below 50 to 49.0 from 52.9 in July. Yet, by all accounts, it's a labor supply issue and not demand. Emergency unemployment benefits end this month, and so we should see more jobs being filled, albeit perhaps at higher wages. ISM services and composite PMI readings will be reported Friday.
Weekly jobless claims are up next. Initial claims are expected at 345k vs. 353k the previous week, while continuing claims are expected at 2.808 mln vs. 2.862 mln the last week. Of note, continuing claims were down -434k (-510k not SA) for the August survey week compared to the July survey week. As such, the labor market continues to heal. August Challenger job cuts, July trade data (-$70.9 bln expected), and factory orders (0.3% m/m expected) will also be reported. Canada reports July building permits and trade data.
Eurozone PPI surprised on the upside at 12.1% y/y, expected at 11.0% y/y. The ECB hawks will be spooked by rising inflation. As we mentioned yesterday, Knot's and Holzmann remarked that the outlook might allow slower ECB stimulus and an end to PEPP. But at this point, we still think the doves are in control, and so policy is likely to remain loose for the time being. The region's market-implied inflation rates continue to trend higher but at a very gradual pace.
Australia's July trade data came in on the stronger side with a new record trade surplus. Exports rose 5% m/m and imports 3% m/m, both beating forecasts. Iron ore exports remain robust and the second-highest reading in terms of revenue (A$17.1 bln). The Reserve Bank of Australia should proceed with tapering at its next policy meeting on September 7. Some are calling for the RBA to delay tapering, as GDP could contract in Q3 due to the extended lockdowns. The Australian dollar is outperforming on the day, up 1% against the dollar, nearly breaking above the August highs of just over $0.74.
Korea's August CPI figures surprised on the upside. Headline was unchanged at 2.6% y/y vs. expectations for a drop to 2.4% (i.e., above the BoK's 2% target range), while core ticked higher to 1.8% y/y. The data helps justify the bank's latest tightening move, which we thought would have been delayed due to the delta variant outbreak. That said, we don't see a solid argument for accelerating the cycle and expect more tightening only later in the year or early next year.