• Asia-Pac bourses gradually improved and managed to shrug off the early cautiousness stemming from the weak Wall St. handover
• The RBNZ kept rates unchanged at 0.25%; cited lockdown and uncertainty
• NZD recovered from initial losses with the RBNZ projecting a hike by year-end and another 100bps of increases in 2022
• The DXY, remains above 93.00, EUR/USD eyes 1.17 to the downside, JPY & CHF modestly lags vs. the USD
• Fed's Kashkari stated that the end of this year and beginning of next year are reasonable possibilities for the start of tapering
• Looking ahead, highlights include UK, Eurozone (Final) and Canadian CPI, US Building Permits, Housing Starts, DoEs, FOMC Minutes. Earnings from Cisco

CORONAVIRUS UPDATE

The US is set to extend the transportation mask mandate until mid-January and US agencies informed airlines of the planned extension yesterday giving the reason due to an increase in the Delta variant, according to sources. In separate news, White House said the US believes it can both donate shots and give boosters. (Newswires)

Canada's Ontario is to offer a third COVID-19 vaccine dose to high-risk people as early as this week, according to the Chief Medical Officer. (Newswires)

New Zealand Prime Minister Ardern told radio New Zealand that there were four new cases of COVID-19 which were all confirmed as the Delta variant, while she later confirmed another two new cases and that they were linked to the outbreak in Australia. Furthermore, there were comments from New Zealand Health Chief Bloomfield that they can expect 50-100 cases in the latest outbreak. (Newswires)

ASIA

Asia-Pac bourses gradually improved and managed to shrug-off the early cautiousness stemming from the weak handover from Wall Street where the major indices snapped their streak of record closes. Upside in Asia was limited as participants digested a plethora of earnings releases. ASX 200 (+0.1%) was indecisive with outperformance in utilities and financials offset by losses in the mining-related sectors, while there was an abundance of earnings releases including BHP and Woodside Petroleum although their shares failed to benefit despite printing firmer results and the announcement a petroleum merger, with the headwinds due to weakness in underlying commodity prices. NZX 50 (+0.9%) was underpinned after the RBNZ surprisingly kept rates unchanged at 0.25% in which it cited the lockdown and uncertainty for its decision to refrain from a lift-off, while Nikkei 225 (+0.7%) gradually strengthened despite the initially choppy mood which was at the whim of the domestic currency and after mixed machinery orders and trade data. Hang Seng (+0.9%) and Shanghai Comp. (+1.0%) conformed to the mild positive bias with focus shifting to incoming earnings including Tencent which are due later today, while reports also noted that China vowed to increase the proportion of the middle-income group and is said to be seeking to raise rural consumption to as much as CNY 10tln. Finally, 10yr JGBs were lacklustre amid mixed data from Japan and with demand sapped after risk sentiment in Tokyo gradually improved, but with downside also stemmed given the BoJ’s presence in the market for over JPY 1.3tln of JGBs with 1yr-10yr maturities.

PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a net neutral daily position. (Newswires) PBoC set USD/CNY mid-point at 6.4915 vs exp. 6.4909 (prev. 6.4765)

US Republican Senator Rubio called on President Biden to block TikTok in the US. (Newswires)

• Japanese Trade Balance (JPY)(Jul) 441.0B vs. Exp. 202.3B (Prev. 384.0B)
• Japanese Exports YY (Jul) 37.0% vs. Exp. 39.0% (Prev. 48.6%)
• Japanese Imports YY (Jul) 28.5% vs. Exp. 35.1% (Prev. 32.7%)
• Japanese Machinery Orders MM (Jun) -1.5% vs. Exp. -2.8% (Prev. 7.8%)
• Japanese Machinery Orders YY (Jun) 18.6% vs. Exp. 15.8% (Prev. 12.2%)

UK/EU

UK is aiming to strike an 'interim' trade deal with India, while the UK Department for International Trade said that they we're currently in the pre-negotiation scoping phase of a free trade agreement with India. (Newswires/City A.M.)

UK Chancellor Sunak has reportedly come under further pressure to suspend the pension triple lock. The Chancellor is understood to be mulling a new formula to calculate the rise in the basic state pension for next year. (Guardian)

The recent climbdown from Poland in the rule-of-law dispute with the European Commission might only grant it temporary reprieve from EU sanctions. (Politico)

FX

In FX markets, the DXY held on to most of the prior day’s gains and recently reclaimed 93.00 level despite the miss on Retail Sales data as it found support from a haven bid. The latest Fed rhetoric had little influence on the currency whereby Fed Chair Powell stated it is not yet clear if the COVID-19 Delta variant will have important effects on the economy and that the Fed is in the process of fully putting away its tools designed for actual emergencies. Furthermore, Kashkari noted the economy is reopening but was uneven and suggested that the end of this year and beginning of next year are reasonable possibilities for the start of tapering, while focus turns to the upcoming FOMC minutes due later today. EUR/USD was lacklustre and briefly tested 1.1700 to the downside where it eventually found support and GBP/USD was also pressured as the gains in the greenback overshadowed the recent better-than-expected UK jobs data. USD/JPY consolidated around 109.50 after the slight miss in Japanese exports and imports were counterbalanced by the beat on machinery orders, while antipodeans were indecisive with AUD/USD contained amid weakness in Chinese commodity prices and NZD/USD was pressured after the RBNZ surprisingly kept the OCR unchanged citing the lockdown and health uncertainty. However, NZD/USD later recovered after the dust settled as the central bank made its hawkish intentions clear and projected a hike by year-end and another 100bps of increases next year.

RBNZ kept the OCR unchanged at 0.25% vs expectations for a 25bps hike and noted the decision was in context of the imposition of level 4 restrictions on activity across New Zealand and in light of health uncertainty, while it noted that the need to reinstate containment measures highlights the serious risks to health and the economy from the virus. RBNZ stated that it will assess inflation and employment outlook on an ongoing basis with a view to reduce the level of monetary stimulus over time and the Committee agreed the least regrets policy stance is to further reduce monetary policy stimulus. Furthermore, it sees the OCR at 0.59% in December 2021 (prev. 0.25%), 1.38% in September 2022 (prev. 0.49%), 1.62% in December 2022 (prev. 0.67%) and 2.14% in September 2024. (Newswires)

COMMODITIES

Commodities were mixed with WTI crude futures rangebound beneath the USD 67/bbl level amid the recent COVID-19 concerns and weak data releases, while the latest private inventory report failed to spur prices despite showing a slightly larger-than-expected draw for crude, given that most components of the data didn't deviate much from the consensus. Elsewhere, geopolitical concerns continued to linger after the IAEA noted that Iran accelerated enrichment of uranium to near weapons-grade. Gold prices were rangebound amid a similar performance in the greenback, while copper nursed some of its recent losses as risk appetite improved and amid concerns regarding the ongoing strike action in Chile but with the recovery limited alongside further declines in Chinese iron ore prices which fell to its lowest in five months due to restrictions on steel output growth slowdown concerns.

US Energy Inventory Data (bbls): Crude -1.2mln (exp. -1.1mln), Cushing -1.7mln (exp. -2.1mln), Gasoline -1.2mln (exp. -1.7mln), Distillate +0.5mln (exp. +0.3mln). (Newswires)

India has begun selling oil from strategic reserves after a policy shift and as part of a plan to commercialise its storage and lease space. (Newswires)

GEOPOLITICAL

US President Biden agreed with UK PM Johnson to hold a virtual G7 leaders' meeting next week to discuss a common strategy and approach regarding Afghanistan, according to the White House. (Newswires)

Syrian press noted Israeli shelling targeted military positions near the town of Hadar, which includes Iranian militias in Quneitra. (Newswires)

US

Treasuries were little changed Tuesday (slight selling bias in the belly) as US participants reversed overnight strength, with traders little phased by disappointing Retail Sales and eyes ahead to taper clues at FOMC minutes. By settlement, 2s +1.0bps at 0.215%, 3s +0.8bps at 0.422%, 5s +1.1bps at 0.762%, 7s +0.3bps at 1.037%, 10s +0.0bps at 1.257%, 20s -0.8bps at 1.811%, 30s -0.6bps at 1.918%. TYU1 volumes were average. Inflation breakevens continued their decline, with 5yr TIPS +3.1bps at -1.800%, 10yr TIPS +3.0bps at -1.077%, 30yr TIPS +2.4bps at -0.278%. SOFR and EFFR unchanged at 5bps and 10bps, respectively. T-Notes hit their peak at 134-19+ in the European morning, only to see selling pressures pick up on the back of the disappointing Retail Sales (priors revised up). Traders noted a perhaps "sell the news" event, with some notable sell side analysts forecasting some even chunkier declines for the July data, while the data is not deemed to reverse Fed tapering expectations. T-Notes hit a low not long after at 134-05, with Eurodollar futures also cheapening by a few bps, with belly of the Treasury curve also weakest ahead of FOMC minutes Wednesday and not any particular pressure in the cash 20yr ahead of the auction. Yields pared off their highs (1.27% for cash 10s) into the US afternoon as stocks saw some selling, only to rise slightly again as stocks found their lows ahead of the futures settlement. There was an interesting block flattener trade reported also supporting the belly weakness, with 15k FVU1 (5yr futures) sold against 2.2k WNU1 (Ultra Bond futures) bought. One desk speculated that the trade is a position ahead of the FOMC Minutes which could show an appetite to taper MBS purchases to a larger degree than Treasuries, which would affect the 5yr/7yr maturities the most. T-note (U1) futures settled 2 ticks lower at 134-08+.

Fed Chair Powell stated it is not yet clear if the COVID-19 Delta variant will have important effects on the economy and that they are not simply going back to a pre-pandemic economy, while he added that millions of people in the service sector are out of work and that is the part of the recovery that is far from complete. Powell also stated that the Fed is in process of fully putting away its tools designed for actual emergencies and commented that he does not see the financial sector as a risk to the economy. (Newswires)

Fed's Rosengren (2022 voter) said he supports a QE taper announcement next month for a start this fall and get on track to halt purchases by the middle of 2022, while he also noted that the rising pricing and debt loads fuelled in part by QE could eventually jeopardise the recovery. (FT)

Fed's Kashkari (2023 voter) stated that the economy is reopening although it is uneven and despite the strong July jobs report, there are still 6-8mln Americans not working who would have been had the pandemic not happened. Kashkari stated the timing of the taper will depend on progress in the labour market, while he added that the end of this year and beginning of next year are reasonable possibilities for the start of tapering and his best guess is the Fed is still a few years away from raising interest rates. (Newswires)