The Federal Reserve Bank’s Beige Book was not overwhelmingly positive on the pace of US economic growth, certainly not reflecting, at least, the very strong August ISM manufacturing and ISM non-manufacturing readings. Most of the descriptions of the economy in the Beige Book of the various regions were “modest”, “moderate” and “mixed”. See a USA Today article for more color.
It is clear that auto sales have been very strong of late, but other consumption data has been a bit mixed – though I wonder if some of that apparent weakness is due to measurement errors, for example, from under-weighting the increase in online shopping. Anyway, today’s ISM non-manufacturing report will provide additional detail, as it reflects the status of the dominant services sector of the US economy. The July ISM non-manufacturing survey saw the highest reading since December 2005.
The Bank of Japan meeting passed like a ship in the night, yet another meeting with no real developments amid the ongoing expression of belief that the current policy mix is having the desired effect. Governor Haruhiko Kuroda is out speaking at a press conference at pixel time. The 104.25/50 zone looks like the critical support zone for USDJPY on the other side of the US economic data through tomorrow’s employment report.
USDJPY
USDJPY has put together a smart sequence of rally waves that have taken it to the brink of multi-year highs (the 105.40 area high from the beginning of this year was the highest level since before the global financial crisis struck.) I have two questions as we ponder the breakout potential: First, can we really get a shift forward in Fed hike anticipation and an assumption of steeper hikes as soon as after tomorrow’s payrolls data and second, how will USDJPY perform if we get a steep correction in equities, say 6-8%?
I don’t have the answer, particularly to the latter. Sure, it’s easy to call the pair higher if risk appetite keeps an even keep and we see stronger US data. Meanwhile, a weak employment report and a risk sell-off would likely see us quickly back in the range. Tactical support comes in a the pivotal 104.25/50 area.
Yesterday’s Ukraine cease-fire news showed the degree to which this conflict is not priced into global markets, as the effect by the end of the day, was clearly mostly limited to Russian markets. That’s not to say that dramatic new headlines, especially of the negative variety, won’t trigger immediate reactions in the most risk-sensitive currencies, but an ongoing de-escalation will hardly see a wider reaction as the market was already extremely complacent (again, outside of the pressure on ruble and Russian markets more generally, where questions remain in terms of potential financial sanctions, even if the direct conflict on the ground cools.)
The Swedish Riksbank is up this morning, and will compete with developments at the ECB meeting later today for moving EURSEK higher or lower. This is considering the dramatic whack to rates at the last meeting in July and signs of a faltering Eurozone economy - Sweden's most important export market. Speculation is increasing that the Riksbank could suggest that all monetary policy tools, including quantitative easing, are a possibility to avoid a deflationary trap. The lines in the sand in EURSEK are 9.13 and 9.23 for the moment. Significant risk of dovish guidance today from the Riksbank.
The European Central Bank meeting is the main focus of the day, with speculation on potential details of the ABS program to emerge. Let’s keep in mind that, although it was back at the June meeting three months ago that we saw the ECB announcing the new targeted long-term refinancing operations, the first auction has yet to take place and won’t until September 18 (with seven further quarterly auctions to take place), so we don’t even know yet what the takeup will be at these auctions and therefore the growth rate of the ECB’s balance sheet.
I still see some risk of a squeeze on euro shorts, though Draghi will be likely to do his best to impress rhetorically this time around with the ECB’s continued capacity to act and on the dangers of deflationary trends after his Jackson Hole performance a few weeks ago.
Of course, the more he weighs in on the need for fiscal stimulus because the efficacy of ECB tools is somewhat limited, the less euro bearish. See more on potential trades around the ECB that I penned yesterday.
Economic Data Highlights
- New Zealand Aug. QV House Prices rose +6.9% YoY vs. +7.6% in Jul.
- Australia Jul. Trade Balance out at -1359M vs. -1750M expected and vs. -1564M in Jun.
- Australia Jul. Retail Sales out at +0.4% MoM as expected
- Bank of Japan left monetary base target unchanged at ¥270T as expected
- Germany Jul. Factor Orders out at +4.6% MoM and +4.9% YoY vs. +1.5%/+1.1% expected, respectively and vs. -2.0% YoY in Jun.
- Sweden Riksbank to announce interest rate (0730)
- Sweden Riksbank Governor discusses interest rate decision (0900)
- UK Bank of England to announce interest rate and asset purchase target (1100)
- Euro Zone ECB rate announcement (1145)
- US Aug. ADP Employment Change (1215)
- Canada Jul. International Merchandise Trade (1230)
- Euro Zone ECB’s Draghi holds press conference (1230)
- US Jul. Trade Balance (1230)
- US Weekly Initial Jobless Claims (1230)
- US Aug. ISM Non-manufacturing Survey (1400)
- Australia Aug. AiG Performance of Construction Index (2330)
- US Fed’s Fisher to Speak (0015)
- US Fed’s Kocherlakota to Speak (0100)