• Asia-Pac stock markets were mostly negative as the downbeat mood rolled over from the US and Europe
• Chinese inflation data showed softer than expected consumer prices but firmer factory gate prices
• BoE Governor Bailey stated that the MPC was split as to whether minimum necessary conditions were met to raise interest rates
• In FX, the DXY heads into the European session with modest gains, EUR/USD holds on to 1.18 ahead of ECB
• Looking ahead, highlights include German Trade Balance, US IJC, Weekly DoEs, ECB Policy Decision, ECB’s Lagarde, Fed’s Evans, Daly, Bowman, Williams, Kaplan, Kashkari, Rosengren, BoC’s Macklem, Riksbank’s Ingves and supply from the US

CORONAVIRUS UPDATE

Japan's government confirmed it is seeking an extension to the state of emergency for Tokyo and other prefectures through September 30th and it was also reported that Japan is to cut quarantine to 10 days for the vaccinated. (Newswires/Nikkei)

Australia's New South Wales reported 1,405 new locally transmitted COVID-19 cases and its Premier announced that restrictions will be relaxed when 70% of adults are fully vaccinated although some parts of regional New South Wales will end lockdowns on Saturday. (Newswires)

ASIA

Asia-Pac stock markets were mostly negative as the downbeat mood rolled over from the US and Europe amid lingering global growth concerns, recent Fed taper rhetoric and China's ongoing regulatory crackdown. ASX 200 (-1.9%) declined beneath the 7,500 level and was heavily pressured by the losses in mining names, with sentiment also clouded by the rampant COVID-19 infection rates and despite the announcement by NSW Premier Berejiklian of the recovery road map whereby restrictions will be relaxed when 70% of adults are fully vaccinated but with some parts of regional New South Wales are to end lockdowns on Saturday. Nikkei 225 (-0.8%) was subdued amid currency headwinds and with Japan confirming plans to seek an extension of the state of emergency for Tokyo and other areas through to at least month-end although other reports suggested November was being considered for the easing virus restrictions. Hang Seng (-1.7%) and Shanghai Comp. (+0.1%) traded mixed with notable losses in tech names including Tencent after the government and cyberspace regulator summoned gaming companies to instruct them to implement measures against gaming and entertainment, as well as warned of severe punishment for those not implementing regulations. China also reiterated it is to crackdown on illegal behaviour in the ride-hailing industry and banned private tutors from offering courses through online platforms, while debt concerns surrounding Evergrande and mixed inflation data that showed softer than expected consumer prices but firmer factory gate prices to suggest an uneven recovery, further added to the cautious mood. Finally, 10yr JGBs were steady with only minimal gains despite the mostly negative risk tone across the region and amid mixed results at the 5yr JGB auction in which a higher b/c was counterbalanced by lower accepted prices.

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 6.4615 vs exp. 6.4629 (prev. 6.4674)

US Secretary of State Blinken tweeted that Hong Kong authorities must end ongoing threats against civil society and individuals with differing political viewpoints, while he added that arrests of Tiananmen vigil leaders are politically motivated and a blatant abuse of law. (Twitter)

BoK is to expand special lending program to small businesses impacted by the pandemic to KRW 6tln till March next year. BoK also stated that it will gradually adjust monetary policy amid inflationary pressures and that increasing policy rates will help reduce household debt. (Newswires)

• Chinese CPI MM (Aug) 0.1% vs. Exp. 0.5% (Prev. 0.3%)
• Chinese CPI YY (Aug) 0.8% vs. Exp. 1.0% (Prev. 1.0%)
• Chinese PPI YY (Aug) 9.5% vs. Exp. 9.0% (Prev. 9.0%)

UK/EU

BoE Governor Bailey said MPC members in August were split 4-4 as to whether minimum necessary conditions were met to raise interest rates, while he thinks minimum conditions for a rate rise have been met but are not sufficient for one. Bailey also said that on average, repayment of COVID loans may be easier than the Bank had thought but it will vary between sectors and noted that banks are saying that the rate of repayment of COVID loans is higher than they expected although it is still early days. (Newswires)

BoE's Broadbent said they are seeing big differences in wage growth between sectors and that labour market pressure on inflation could persist. Broadbent noted the latest tax rises are matched by the rise in spending and it is not a significant tightening of fiscal policy, while he thinks conditions for a rate rise have been met, but added that they need to focus on the medium term. (Newswires)

BoE’s Ramsden said stopping short of pre-announced QE would be tightening UK monetary conditions and he is comfortable continuing current QE programme, while he suggested necessary but not sufficient condition for a rate rise have been met and there were also relevant comments from BoE's Tenreyro that she does not think guidance conditions for a rate rise have been met. (Newswires)

UK Parliament voted to approve PM Johnson's health and social care tax increase. (Newswires)

UK's energy regulator Ofgem has warned that UK household energy bills will be affected by rising prices of fossil fuels globally. (BBC)

EU's Sefcovic said he will bring a range of proposals by end of September or early October to try and resolve the ongoing deadlock around the Irish protocol, while he hopes an overall deal can be reached with the UK by the end of the year, although cautioned that success was not guaranteed. (RTE)

• UK RICS Housing Survey (Aug) 73 vs. Exp. 75.0 (Prev. 79.0)

FX

In FX, the DXY was indecisive overnight as it took a breather from the prior day’s advances which was helped during US hours by risk aversion. In addition, there were several recent taper-related interjections including from Fed's Williams who suggested it could be appropriate to start reducing the pace of asset purchases this year assuming the economy continues to improve as anticipated, while Kaplan wants to taper at the earliest opportunity and would support beginning tapering in October if there is no fundamental change to the outlook by the September meeting. EUR/USD languished after taking a backseat to the recent strengthening of the greenback but with downside stemmed after finding support at 1.1800 as focus turns to the ECB policy meeting later today. GBP/USD was rangebound after the prior day’s whipsawing and with participants somewhat dumbfounded by comments from BOE Governor Bailey who stated that MPC members in August were split 4-4 as to whether minimum necessary conditions were met to raise interest rates and that he thinks the minimum conditions for a rate rise have been met but were not sufficient for a hike. USD/JPY and JPY crosses reflected the subdued risk appetite which also contained antipodeans, alongside weakness in metal prices and after CPI data suggested a soft Chinese consumer profile.

COMMODITIES

Commodities were uneventful overnight with the recent advance in WTI crude futures stalling near resistance at USD 69.50 although still holds on to most the prior day's gains after having weathered the risk aversion and firmer greenback, with prices recently fuelled amid disruptions in Libya where protestors blocked exports from the Es Sider and Harouge ports, while Baker Hughes were also bullish on prices and saw continued signs of a global economic recovery that should drive oil demand growth into 2022. Conversely, the latest EIA STEO reduced its global oil demand growth forecast for this year but raised next year's outlook and the holiday-delayed private sector inventory data failed to garner a price reaction despite printing a narrower than expected draw to headline stockpiles and a surprise gasoline build, as the data was expected to continue showing distortions from Hurricane Ida. Gold prices were lacklustre with the precious metal hampered by the recent taper talk and dollar strength, while copper was just about kept afloat despite the risk aversion after the prior day's support held and reports of extended strike action in Chile.

US Private Energy Inventory Data (bbls): Crude -2.9mln (exp. -4.6mln), Cushing +1.8mln, Gasoline +6.4mln (exp. -3.4mln), Distillate -3.7mln (exp. -2.6mln). (Newswires)

BSEE Gulf of Mexico offshore oil production shut-in at 77% or 1.40mln BPD on Wednesday (prev. 79% or 1.44mln BPD on Tuesday). There were also reports from the NHC that a new tropical storm formed in northeast Gulf of Mexico and that tropical storm warnings have been issued for the Florida panhandle due to Tropical Storm Mindy. (Newswires)

Shell (RDSA LN) said it is beginning the process of redeploying workers to the Appomattox asset and is continuing the redeployment to Enchilada/Salsa and Auger assets, although noted that 80% of its production remains offline. (Newswires)

EIA STEO cut 2021 world oil demand forecast by 370k BPD to 4.96mln BPD Y/Y increase but raised forecast for 2022 world oil demand growth by 10,000 BPD to 3.63mln BPD Y/Y increase. Furthermore, 2021 US crude output decline forecast deepened to a 200k BPD fall to 11.08mln BPD (prev. a 160k BPD fall last month) but 2022 US crude output rise forecast cut to a 640k BPD rise to 11.72mln BPD (prev. a 650k BPD rise last month). (Newswires)

Codelco's Andina copper workers are reported to have voted to extend strike. (Newswires)

GEOPOLITICAL

US Secretary of State Blinken said he had a productive meeting on Afghanistan with over 20 allies and partners, while he suggested there was strong unity in making clear we expect the Taliban to live up to commitments on inclusivity, safe passage, human rights and combatting terrorism. (Twitter)

US Secretary of State Blinken said Iran's nuclear advances means we are closer to the point where the benefits of the original deal will no longer apply and he specifically said he wouldn't put a date on this. This follows claims by a Walla News agency journalist that the US is close to giving up on the nuclear deal with Iran which WSJ have refuted. (Newswires/WSJ)

North Korea conducted a military parade for the anniversary of its founding. It was also reported that Chinese President Xi congratulated North Korean leader Kim and told him that China is willing to push forward with North Korea ties. (Newswires/Yonhap/AFP)

US

Treasuries bull-flattened after a solid 10yr auction eases supply woes in another IG-heavy session. 2s -0.4bps at 0.218%, 3s -0.7bps at 0.446%, 5s -1.5bps at 0.806%, 7s -2.7bps at 1.111%, 10s -3.7bps at 1.334%, 20s -3.2bps at 1.875%, 30s -3.1bps at 1.954%. Inflation breakevens widened by a few bps; 5yr TIPS -2.4bps at -1.799%, 10yr TIPS -4.9bps at -1.037%, 30yr TIPS -4.3bps at -0.292%. Another quiet session in Eurodollars, which tracked the Treasury flattening on light volumes. SOFR and EFFR both unchanged at 5bps and 10bps. A rocky open for European stocks ramped up the haven bid for govvies, led by Bunds as they attempt to recover some recent heavy losses ahead of Thursday's ECB confab. T-Notes struggled breaking above 133-06 before another heavy issuance slate build-up led to rate-lock related hedging flows, seeing pressure lower into the NY handover with close to 20 IG issuers tapping the dollar market, close to Tuesday's amount. Similar to Tuesday too, interim lows were printed for bonds (133-01/cash 10s just north of at 1.36%) right as those hedging related flows began to subside. Prices then gradually recovered for T-Notes into the NY afternoon, aided by a sloppy risk tone for US stocks. That strength extended on another solid 10yr note auction, seeing T-Notes spike to session highs of 133-10+ from 133-05+, with not much concern over the heavy amount of corporate deals left to price. Williams spoke later in the session on the possibility for tapering this year, but ultimately, didn't have much impact on price action. Attention now moves to Thursday where the ECB meeting will coincide with preparation for the 30yr bond auction, and most likely another busy day of IG corporate supply, with a ton of Fed speak to contend with in the background. T-note (Z1) futures settled 8 ticks higher at 133-08.

Fed’s Beige Book stated the economic growth downshifted slightly to a moderate pace in early July through August and that the stronger sectors of the economy of late included manufacturing, transportation, nonfinancial services, and residential real estate. It also noted that economic growth downshifted slightly to a moderate pace in early July through August and that deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions, while stronger sectors of the economy of late included manufacturing, transportation, nonfinancial services, and residential real estate. (Newswires)

Fed's Williams (voter) said assuming the economy continues to improve as anticipated, it could be appropriate to start reducing the pace of asset purchases this year and that he wants to see more progress on the employment goal. Williams added that even after the asset purchases end, the stance of monetary policy will continue to support a strong and full economic recovery, while he also stated that even with the strong pace of growth they are seeing, a full recovery from the pandemic will take quite some time to complete. Furthermore, Fed's Williams said any decision on tapering is not indicative of timing for rate liftoff and that the pacing and timing for tapering asset purchases will be decided in future Fed discussions based on achievement of substantial further progress. (Newswires)

Fed's Kaplan (2023 voter) said the coronavirus resurgence is impacting travel, hospitality and leisure, while he lowered his FY GDP growth forecast to 6.0% from 6.5% and expects 2022 GDP at 3.0%, as well as slower job growth ahead. However, he also stated that he would support tapering in October if there is no fundamental change to the outlook by the September meeting and that Fed's asset purchases are not well suited to the current situation, while he would like to taper at the earliest opportunity. (Newswires)

White House said it expects Congress will act responsibly on the debt ceiling and hopes Congress will act on it before the deadline, while it stated that the reconciliation bill will be paid for regardless of the final price tag. There were also separate comments from US Labour Secretary Walsh that he doesn't see the need for states to extend jobless benefits and that a rise in labour movement can build the middle class. (Newswires)

US Progressive Democratic Representative Mondaire Jones said USD 1.5trln is not going to cut it when asked about the reconciliation price tag that Moderate Democratic Senator Manchin had floated. (CNN)

US Comptroller of the Currency has proposed removing the recently updated fair lending rules, as the agency begins work on drafting a new, unified regulation with other bank watchdogs. (Newswires)