• Bank of Japan stand pat on rates, announce more flexibility in yields and forward guidance
• Eurozone GDP below expectations and inflation above expectations, EUR unmoved
• Looking ahead, highlights include, US PCE, Personal Spending, Canadian GDP, Chicago PMI and a slew of large cap earnings

ASIA

Asian equity markets traded mostly subdued after the continued tech sell-off in US where all majors declined and the Nasdaq posted its worst 3-day performance in 4 months, while disappointing Chinese PMI data and tightening concerns heading into the BoJ policy announcement added to the cautiousness. ASX 200 (+0.1%) and Nikkei 225 (-0.1%) were mixed with Australia just about kept afloat amid outperformance in telecoms and gains in commodity-related sectors, while the Japanese benchmark was weighed alongside widespread uncertainty regarding potential BoJ policy tweaks which proved to be less hawkish than some had feared as the central bank maintained its long-term yield target at 0% and provided forward guidance that rates will be maintained at very low levels for an extended period. Elsewhere, Hang Seng (-0.5%) and Shanghai Comp. (+0.3%.) were downbeat after the PBoC skipped repo operations for an 8th consecutive occasion and as participants digested Chinese Official Manufacturing and Non-Manufacturing PMI missed expectations in which the latter fell to its weakest in nearly a year. The Shanghai Comp., however, rebounded into positive territory before the close. Finally, 10yr JGBs initially began on the back-foot as yields continued to gain heading into the BoJ but then recovered after the central bank kept its long-term yield at 0.0% and although it announced more flexibility in allowing yields to move higher and lower, it also signalled to act if there is a rapid increase in yields.

PBoC skipped open market operations for a net daily drain of CNY 30bln. (Newswires)

PBoC set CNY mid-point at 6.8165 (Prev. 6.8131)

Chinese Manufacturing PMI (Jul) 51.2 vs. Exp. 51.3 (Prev. 51.5). (Newswires)

Chinese Non-Manufacturing PMI (Jul) 54.0 vs. Exp. 54.9 (Prev. 55.0); weakest since August 2017.

Chinese Composite PMI (Jul) 53.6 (Prev. 54.4)

BoJ kept policy unchanged with the bank rate kept at -0.1% and long-term yield target held at around 0.0% but announced more flexibility in yields and adopted forward guidance on rates which it will maintain at very low levels for an extended period. The BoJ said the decision on asset purchases was unanimous and decision on YCC was made by 7-2 vote with Kataoka and Harada the dissenters, while it added it will permit upward and downward moves in 10yr yields but will buy JGBs promptly in the event of a rapid increase in yields. Furthermore, the BoJ adjusted its ETF allocation to include more TOPIX inclusion and lowered the balance of reserves for which NIRP is applied. (Newswires)

Outlook Report:

Real GDP Fiscal 2018 forecast cut to 1.5% from 1.6%, Fiscal 2019 forecast maintained at 0.8%, Fiscal 2020 forecast maintained at 0.8%.

Core CPI Fiscal 2018 forecast cut to 1.1% from 1.3%, Fiscal 2019 forecast cut to 1.5% from 1.8% (excluding effects of sales tax hike), Fiscal 2020 forecast cut to 1.6% from 1.8% (excluding effects of sales tax hike)

BoJ Governor Kuroda said he sees no need for additional easing for now. Forward guidance means to keep rates extremely low for an extended period of time. Expects factors that delayed increase in inflation to dissipate in the future; adding that momentum towards 2% inflation is firmly in place. Said allow bond yields to move in double the range of +0.1% and -0.1%. Stated strengthened commitment to price target with forward guidance. Added that allowing bond yields to move more flexibly does not mean they intent to raise interest rate. Additionally said they have no plans to continue widening JGB 10-Yr yield range. finally he added that they will ease policy more if necessary and they don't believe in the theory that there is a limit to monetary easing

EU/UK/US

UK PM May is reportedly worried the "humble address" could be used to extend the Article 50 process and has warned senior Conservative lawmakers that the Labour party could use the old procedure to stop the UK leaving the EU without a deal if MPs vote to oppose her plans this Autumn. (FT)

Downing Street has announced that no second Brexit referendum will be held "in any circumstances", after a Sky Data poll showed most people would like to see another vote on Britain's exit from the EU. (Sky)

Italian PM Conte said they feel very comfortable as a member of EU and that there is no future for Italy in the direction the UK is proceeding in. (Newswires)

EU HICP Flash YY Jul 2.1% vs. Exp. 2.0% (Prev. 2.0%)

EU CPI ex-Food, Energy, Alcohol & Tobacco Flash YY 1.1% vs. Exp. 1.0% (Prev. 0.9%)

EU GDP Flash Prelim YY Q2 2.1% vs. Exp. 2.2% (Prev. 2.5%) QQ 0.3% vs. Exp. 0.4% (Prev. 0.4%)

EQUITIES

European equities are trading with no firm direction (Eurostoxx 50 +0.1%) in the aftermath of a slew of pre-market earnings. Italy’s FTSE MIB outperforms its peers as Leonardo (+8.8%) lifted the index after a guidance upgrade, local banks are also supporting the Italian benchmark. Sector-wise, Energy names are fuelled amid oil giant BP (+0.8%) reporting strong numbers, while Financials are boosted by optimistic earnings from Credit Suisse (+1.2%) in-turn lifting its peers with Deutsche Bank (+2.0%), SocGen (+1.3%) Commerzbank (+0.8%), UBS (+1.0%) all higher in sympathy. Looking ahead, FTSE 100 giant Shire are to report around mid-day, while major auto-producing countries are meeting in Geneva today to discuss US Auto tariffs.

FIXED INCOME

Bunds and Gilts have both retreated further from early peaks to stand just off fresh Eurex and Liffe lows of 161.50 and 122.54 respectively. The former has responded to mostly better than expected Eurozone data to considerably whittle away gains to just 7 ticks from 62 ticks at one stage, while the latter has recoiled in sympathy to sit just 6 ticks above parity vs +38 ticks at best, with reports about a major fund maintaining a short position perhaps also weighing. However, the marked downturn is also indicative of the overall bear-steepening trend in core bonds and attention switching to the rest of this week’s major events, like the Fed, BoE and NFP. Indeed, US Treasuries have also handed back a chunk of their advances, although still firm, and probably reflecting on much bigger borrowing projections too.

FX

AUD/JPY - Flanking the G10 spectrum into month end, with the Aud boosted by much stronger than expected Aussie building approvals overnight and forming a firmer foothold above 0.7400 vs the Usd, but possibly hampered by hefty option expiry interest between 0.7410-25. Conversely, the Jpy is underperforming after the BoJ policy meeting and more flexible or technical changes to its QE framework rather than any real hawkish shift, not to mention the addition of very dovish rate guidance. Hence, Usd/Jpy is back over 111.00 and testing 111.50+ close to 10 and 21 DMA convergence around 111.47 plus a Fib at 111.51, while Japanese exporters were reportedly on the offer from 111.30-50 for month end. Note, however, Aud/Jpy has rallied through 82.50.

GBP/EUR - Both extending gains vs the Greenback as the DXY dips towards recent 94.200 lows, with Cable up over 1.3150 again and absorbing the first offers said to be sitting between 1.3150-70, while the single currency is consolidating its recovery above 1.1700 with little net reaction to mixed Eurozone data (flash inflation prints all higher than anticipated vs softer prelim growth), but perhaps some expiry-related flow to contend with given 1bn options running off from 1.1700-20 later today.

CAD/NZD - Also bucking the firmer overall trend and down vs their US peer, albeit not as weak as the Jpy. The Loonie has been undermined by Canada’s exclusion from high level NAFTA talks between the US and Mexico, although off worst levels approaching 1.3100 and back near the middle of a 1.3020-95 range ahead of a raft of data, including May GDP, June PPI and raw materials prices. Meanwhile, the Kiwi is still hovering above the 0.6800 handle, but not helped by a deterioration in NZ business sentiment or activity outlook.

USD - Although the Dollar has benefited from yet another bout of Yuan weakness on fixed and free-floating grounds, ‘strong’ sell signals from end of July portfolio rebalancing models are still weighing overall.

COMMODITIES

WTI (-0.5%) and Brent (-0.6%) prices are ebbing lower in early European trade with oil prices set for their biggest monthly loss in 2 years. News flow remains light for the complex while Iranian President Rouhani continues to defend the nation’s “rights” to export oil. Meanwhile, spot gold (-0.2%) prices are relatively uneventful in recent trade while the DXY remains rangebound ahead of a few key risk events this week. Elsewhere, Shanghai rebar steel posted its best month in eight amid output curbs in China tightening supply.