Markets: Equities bounce strongly as some data not as bad as might have been & Fed stimulus hopes continue to build, commodities generally stronger but gold sharply weaker, bonds generally a touch weaker.

USA: New home sales fall 0.7% in July, below mkt.

USA: Richmond Fed manufacturing index declines 9pts to -10 in Aug, below mkt, lowest since June '09.

USA: ICSC-GS chain store sales index falls 1% last wk.

USA: Fed's Bullard says FOMC will definitely act if economy weakens substantially, deflation risks reappear.

CAN: Retail sales up 0.7%mom in June, at market.

EUR: Adv. PMI Manufacturing falls 0.7pts to 49.7 in August, above market, a 25 month low.

EUR: Adv. PMI Services down 0.1pt to 51.5 in August, above market, a 25 month low.

EUR: Consumer confidence falls 5.4pts to -16.6 in Aug, below mkt.

UK: CBI orders index up 11pts to 1 in Aug, above mkt.

DEU: Adv. PMI Manufacturing unchanged at 52 in August, above mkt.

DEU: Adv. PMI Services down 2.5pts to 50.4 in August, below mkt.

DEU: ZEW economic sentiment drops 22.5pts to -37.6 in August, below mkt.

FRA: Adv PMI Manufacturing down 1.2pts to 49.3 in August, below mkt.

FRA: Adv PMI Services rises 1.9pts to 56.1 in Aug, above mkt.

DNK: Consumer confidence down 1.6pts to -2.2 in August, above mkt.

NOR: GDP grows 0.4%qoq in Q2, above mkt.

JPN: July final machine tool orders rise 34.8%yoy.

CHN: Flash HSBC manufacturing PMI rises 0.5pts to 49.8 in Aug, export orders index 49.6.

THE DAY AHEAD...

USA: Durable Goods Orders (Jul), MBA New Mortgage Applications, FHFA House Price Index (Jun), Treasury Auction 5 Yr

EUR: Industrial New Orders (Jun)

DEU: IFO Survey (Aug)

NOR: AKU Unemployment rate (Jun)

BEL: Business Confidence (Aug)

JPN: Corp Service Price Index (Jul)

AUS: Construction Work Done (Q2)

NZL: Trade Balance (Jul)

Some data not as bad as expected, but still worrying?

(Risk sentiment has improved over the last 24 hours with at least some of the key economic reports proving to be not quite as bad as expected. As we discuss further below, this is not to say that these were good reports - indeed in most cases far from it. Sentiment also appears to have been underpinned by mounting expectations that Fed Chairman Bernanke will pull a proverbial rabbit out of a hat when he speaks at Jackson Hole on Friday. We continue to think that the market is setting itself up for disappointment. We note that the title of the Chairman's speech is "Near- and Long-Term Prospects for the US Economy." Last year, it was "The Economic Outlook and Monetary Policy." That change in itself could be an indication that the Fed is trying to manage down expectations of policy action now, or at least of an announcement at Jackson Hole. This is not to say that the Fed might not feel compelled to act in coming weeks should the market react particularly negatively to the Jackson Hole speech. As the St Louis Fed's Bullard said yesterday, the FOMC will definitely act if the economy weakens substantially and deflation risks reappear. However, we don't think that the FOMC's central view is in this space yet. (Turning to the dataflow, risk sentiment improved a little in Asia yesterday when the HSBC variant of China's manufacturing PMI improved a modest 0.5pts to 49.8. This is still well below average for this survey, but the improvement was welcomed nonetheless. In Europe the focus was always going to be on the Euroland PMIs. The composite PMI proved stable at 51.1, a better than expected outcome, although the manufacturing PMI fell 0.7pts to 49.7 and the services PMI fell 0.1pts to 51.5. As our first chart reminds, this still implies a sharp loss of momentum in the Euroland economy, with my European colleagues suggesting that there is downside risk to their estimate that the Euroland economy will grow 0.1% qoq in Q3 (their models indicate a contraction of up to 0.4% qoq is possible). Whilst the market appeared to take heart from the resilience of the headline indices, my European colleagues argue that the details were more concerning. For example, within the German services PMI (which fell to 50.4 from 52.9), the new business index fell 4.8pts to 47.5 and the business expectations index fell 8pts to 49.2. The German manufacturing PMI was stable at 52.0 in August, thanks to an increase in the output index to 53.2. However, the new orders index fell to 48.7. We will be interested to see how the IFO survey looks today. As our second chart shows, even at the headline level, the German PMIs suggest that the IFO has room to decline significantly from here. In France, a surprisingly robust service sector PMI (56.1) more than offset a contractionary reading in the manufacturing sector (49.3). Given developments in consumer sentiment - as our third chart shows, confidence at the Euroland level has slumped to a 14-month low in August - we wonder how long this reading can be sustained. (In the US, markets shrugged off both poor data and a highly unusual earthquake on the eastern seaboard (federal agencies in the Washington DC area even sending staff home after the event, although damage appears to be relatively light). As our final chart shows, the Richmond Fed's manufacturing index slumped 9pts to -10, adding to the range of indicators pointing to a sub-50 reading on the manufacturing ISM (my US colleagues continue to pick a reading of 47.0, versus 50.9 in July). The July new home sales was unsurprisingly soft (given the lack of new building, there are few new homes to buy). More interesting was the fourth consecutive week-on-week decline in the ICSC-GS index of same store chain store sales, taking the annual growth rate back to 3% - its lowest since late June.

(Looking at the day ahead most interest will likely centre on Germany's IFO survey and the durable goods orders report in the US. In the US we will also be interested to see the MBA's latest report given the solid decline in new purchase mortgage applications recorded last week.

Markets

KEY RELEASES

Source: Bloomberg Finance LP

NORTH AMERICA

USA: New home sales fall 0.7% mom in July, below mkt

( July new home sales were softer than expected, falling to 298k from a downwardly revised 300k in June. The outright inventory of new homes for sale has been falling to new, all-time lows in each of the past five months, down to 165k in July. Median new home prices were up 4.7% versus year-ago levels.

Until housing starts increase appreciably and boost the available supply, new home sales will remain at low levels. To be sure, the lack of new supply should translate into greater progress toward lowering existing home inventories.

USA: Richmond Fed manufacturing index falls 9pts to -10 in Aug, below mkt

( The Richmond headline slipped to -10 in August from -1 previously, which was the worst reading since June 2009. Shipments also fell to the lowest reading to date in the recovery (-17 vs. -1). New orders (-11 vs. -5) and employment (1 vs. 4) were weak, but they did not post cyclical lows. The next major manufacturing index to be released is the Chicago PMI on Wednesday, 31 August. We estimate the ISM at 47.0 in August versus 50.9 previously.

US: ICSC-GS chain store sales index down 1% last week, up 3% yoy

( The fourth weekly decline in a row took the year-on-year growth rate down to 3%, the least since late June..

CAN: Retail sales up 0.7%mom in June, at market

( Following an increase of 0.3% mom (previously 0.1%mom) in May, the total value of retail sales rose by 0.7% mom in June. This gain, the largest since November of 2010, was in line with the consensus but less than expected by DB (+1.2%), Excluding autos, sales declined by 0.1% mom, below both the consensus (+0.1%) and the DB (+0.3%) estimates for the month. In real terms, retail sales exhibited a very sharp (1.6%mom) jump in June, their largest one month gain since March of 2010. In June, a very large (3.4% mom) increase in retail sales of motor vehicles and parts dealers accounted for the bulk of the gain in overall sales (sales were boosted by a reduction in prices).

Although the volume of retail sales increased at a very healthy pace in June, it does not alter the prospect that growth of GDP in the second quarter will be, as indicated recently by BoC Governor Carney "minimal to slightly negative" and less than the 1.5% gain the Bank projected in July. Based on this prospect and given the persisting concern about the health of the US economy in the near term, the Bank will, as we have noted previously, likely remain on the sidelines, at least through October.

EUROPE

EUR: Adv. PMI Manufacturing falls 0.7pts to 49.7 in August, above market

( Growth stalled as both the manufacturing and services PMIs touched the lowest in 23 months. The German manufacturing PMI was unchanged at 52.0, whilst the French index dipped to a 25 month low of 49.3, below the expansion threshold.

EUR: Adv. PMI Services down 0.1pt to 51.5 in August, above market

( The PMI services index for Germany hit a 25-month low at 50.4, down from 52.9 in July. However, the services index in France climbed 1.9pts to a two month high of 56.1.

( The flash estimate of the Composite PMI was unchanged at 51.1, the lowest since September '09.

Overall, there appears to be downside risk even with respect to our 0.1%qoq euro-area GDP growth forecast for Q3.

EUR: Consumer confidence falls 5.4pts to -16.6 in August, below mkt

(This was the lowest reading in 14 months.

UK: CBI trends orders at 1 in August, well above market

( Orders rebounded from a balance of -10% in July and were well above the long term average of -18%. Pricing pressures eased with a net +9% of producers expected to raise prices over the coming quarter.

DEU: ZEW economic sentiment drops 22.5pts to -37.6 in August, below mkt

( The index fell further below the historical average of 25.9pts, building on US recession fears and debt crisis in Europe. The current situation outlook also deteriorated 37.1pts to 53.5.

( The economic sentiment index for Eurozone also slumped 33pts to -40.

CHE: Trade surplus widens CHF1.06bn to CHF2.83bn in July

DNK: Consumer confidence down 1.6pts to -2.2 in August, above market

( Unemployment expectations however, improved from -1.2 in July to 10.5.

NOR: GDP grows 0.4%qoq in Q2, above market

( Extraction of crude oil and natural gas recovered, falling 1.9%qoq compared to a 4.4% fall in Q1. Net exports also improved with exports rising 0.4%qoq and imports dropping 8.4%qoq. Domestic consumption also rose 0.8%qoq. The mainland GDP increased 1.0% over the quarter.

JAPAN/CHINA

JPN: July final machine tool orders rise 34.8%yoy

CHN: HSBC flash manufacturing PMI rises 0.5pts to 49.8 in August

( The export orders index improved to a 49.6.

AUS COMMENTARY

RBA's Battellino's speech: little that is new, focus to remain on Governor's testimony on Friday

( The speech itself contains little on the outlook, apart from noting that since the August board meeting "market volatility has become more extreme. An important issue ahead of us will be to assess what impact this is likely to have on global and domestic economic activity, commodity prices and inflation. As yet, there is little information on which to base such judgements."

( The rest of the speech is a retrospective look back over the past year or so and offers little new information. Indeed it's hard to see this speech as anything but a 'place-holder' ahead of the Governor's testimony on Friday; and also greater clarity from the economic data on whether the events in markets over the past few weeks have spilt over into the global and domestic economies.

NZ COMMENTARY

Inflation expectations ease modestly in RBNZ survey

( Today the RBNZ published the results of its quarterly Survey of Expectations - a small sample survey (67 respondents) covering mainly the financial and business sectors. The main points to note are:

- the 1-year ahead mean inflation expectation fell to 2.94% from 3.12% (the median fell to 2.85% from 3.1%)

- the 2-year ahead mean inflation expectation fell to 2.86% from 3.00% (the median was steady at 3%)

- one-year ahead expectations of GDP growth rose to 2.9% from 2.1% and 2-year ahead expectations rose to 2.9% from 2.8%

- one-year ahead expectations of wage growth rose to 2.9% from 2.5% and 2-year ahead expectations rose to 3.1% from 3.0%

- respondents expected the 90-day interest rate to rise from its current 2.9% to 3.6% by June next year.

( The RBNZ also published the results of its quarterly survey of household inflation expectations. The main points are:

- the mean househould thinks the current annual inflation rate is 4.0% (it is actually 5.3%) and they expect it to be 4.7% a year from now (up from 4.5% in the last survey).

As far as the RBNZ is concerned, even with a small decline in inflation expectations over the past three months, we think that the level of expected inflation will continue to be regarded as too high (the charts below plot the history of these series), leaving the Bank inclined to tighten policy a little if economic conditions allow (which they don't at the moment). Fortunately, surveyed expectations are highly correlated with headline inflation and the latter will drop noticeably when the Q4 CPI report is released in mid January 2012.

Source: DBGMR, RBNZ

DIARY

AUSTRALIA

Today

Preliminary construction work done (Q2) [DB:2.4%qoq/2.7%yoy, Previous 0.7%qoq/4.9%yoy]

Public construction work done (Q2) [DB: -4.8%qoq/-11.5%yoy, Prev.: -3.6%qoq/-3.8%yoy]

Private construction work done (Q2) [DB: 5.2%qoq/8.9%yoy, Previous 2.5%qoq/8.8%yoy]

Thursday

No data

Friday

RBA Governor Stevens parliamentary testimony in Melbourne

NEW ZEALAND

Today

Overseas Merchandise Trade (Jul)

[Balance: DB -$25m mth/ $1,182m ann; Mkt n/a; Prev $230m mth/$1,021m ann

Exports: DB $4,055m, Imports DB: $4,080m]

Thursday

Food Prices (Jul) [Previous 1.4%mom]

Retail Sales (Q2)

[Nominal: DB 2.5%qoq/4.5%yoy, Mkt Previous 2.0%qoq/3.5%yoy

Real: DB 1.3%qoq/1.4%yoy, Mkt Previous 0.9%qoq/0.6%yoy]