After a tumultuous week, the global capital markets are struggling to stabilize. Chinese equities were under sharp downward pressure following news reports that the large-scale intervention was to end. However, stocks roared back in late dealings, and other reports indicated that brokerages were being asked to boost their contribution to the equity market rescue fund by another CNY100 bln (~$15.7 bln).
Meanwhile, the message from Jackson Hole was the officials in US, Japan and Europe expect inflation pressures to increase. The signal from Fed officials was a rate hike this year remained likely, and a move in September could not be ruled out.
The macro economic data seemed less important in comparison. Japanese data was simply disappointing. July industrial output was expected to rise by a minor 0.1%, but instead it fell 0.6%. This pushed the year-over-year rate to 0.2% from 2.3% in June. The consensus was for a 0.8% increase. Housing starts rose 7.4% in July year-over-year. The consensus expected an 11.0% increase after 16.3% in June. More broadly, construction orders collapsed to -4% in July (year-over-year) after a 15.4% rise in June.
The yen advanced in the foreign exchange market. Its two main pulls, equities and US yields helped lift it. The dollar slipped below JPY120.90, but held the pre-weekend low near JPY120.65 before finding a better bid in the European session in which London markets are closed for a bank holiday. The JPY121.40 area capped the bounce. A break now of JPY121.00 could see a retest on the lows.
In the eurozone, the unchanged year-over-year CPI rate of 0.2% and 1.0% core rate were only favorable because the consensus had expected a small softening. The news was not sufficient to blunt expectations that ECB President Draghi will emphasize the flexibility of its asset purchase program that can be expanded or extended as needed. European debt markets are firm and equities are heavy.
The euro held the $1.1160 area and traded to $1.1260 before easing to test $1.12. In North America today, the risk is on the upside.
The strong bounce in oil prices at the end of last week did not help the Canadian dollar, but the setback in oil today has weighed on it. Tomorrow, Canada is likely to report that, like Japan, its economy contracted in Q2. Trade figures are due Thursday before the employment data on Friday. The US dollar is in a CAD1.32-CAD1.33 range. We are more inclined to see an upside break of this range.
The Reserve Bank of Australia meets tomorrow. It is expected to keep the cash rate unchanged at 2.0%, for the fourth meeting. The macroeconomic data shows that while the credit conditions are improving, the negative terms of trade shock continues to be felt. Before the RBA meets, the government is expected to report a A$15.9 bln balance of payments deficit in Q2; That's a sharp increase from the A$10.7 deficit in Q1. Net exports are expected to have contracted by 0.3% in Q2 after a 0.5% increase in Q1.
A rate cut may become more likely when the Australian dollar stops falling. The Aussie tested $0.7200 before the weekend but could not sustained the positive momentum and has been set back toward $0.7125 today. A retest on $0.7160-80 in North America today looks likely.
The data-filled US week begins slowly, with the Chicago and Milwaukee PMI/ISM reports, and the Dallas Fed survey. The Chicago PMI is the most important in terms of reflecting national patterns, but the Dallas Fed survey may be useful in monitoring the economic impact of the drop in oil prices. Tomorrow features July construction spending, manufacturing ISM, and August auto sales. ADP and the Fed's Beige Book are Wednesday's highlights as the market gears up for Friday's employment report.