If we thought yesterday was quiet, then today will be positively deathly.
US consumer confidence yesterday rose to a six year high, another piece of the recovery puzzle for the US economy and the dollar. The strange thing with the reading however is how high it is without a subsequent pull higher in retail sales. Sales have been sluggish throughout the past quarter while confidence has remained high. A function of this will be wages – people can feel more secure and confident but still have relatively little spare income – and means something for next quarter’s growth. With the increase in jobs, production of goods and services has increased. Without the demand to soak it up though, those goods remain in warehouses unsold. Demand needs to increase for the near-term recovery to be sustained.
The dollar was kept firm by the announcement, also helped by a strong durable goods orders number, boosted by aircraft orders for Boeing and Lockheed Martin at the recent Farnborough Air Show. The US calendar is quiet today ahead of tomorrow’s GDP revision.
Some of the recent geo-political factors affecting markets seem to be calming down. Israel and Hamas accepting a ceasefire to end the seven week conflict is obviously good news but will have little effect on the markets. It has been overawed by actions in Syria, Iraq and Ukraine, and while they lie front and centre, the market will continue to remain watchful of these tinder boxes.
The main market focus remains the Eurozone and what Draghi’s ECB will eventually end up doing. Some members of the economic fraternity believe that next week’s meeting of the European Central Bank will see another loosening of monetary policy via a further push into negative rates. Cutting rates would increase the amount of cash demanded by banks from the ECB’s latest TLTRO liquidity provision and, in the near term at least, reduce the pressure on the Bank and politicians to ratify plans for a QE program.
An estimate of Eurozone CPI is due this Friday and with thoughts of a slip to new cyclical lows of 0.3% YoY on the cards, we can easily see pressure on the euro continuing. The key is more likely the core figure, which discounts away food and energy prices, and currently sits at 0.8% YoY. Should that move any lower, the ECB will feel compelled to ratchet up the aid.
The largest riser in a quiet session overnight has been the New Zealand dollar following news of a lucrative tie-up for its influential dairy co-operative Fonterra. A dairy company tying up with a Chinese company makes similar sense to the mergers and agreements we saw between Australian miners and Chinese smelters and manufacturers in the early 00s. China’s demand for dairy goods is only increasing as Western tastes become more popular and dairy makes up around a third of the NZ economy.
Sterling has remained quiet once again in the past session, a phenomenon we expect to continue through the rest of the week. Despite the bluster and politicking of the Scottish referendum, options markets are pricing in so little volatility in GBP pairs that one would think the vote was a mirage. We continue our near-term thoughts of GBP to remain range bound in coming months against most of its crosses, drifting lower versus a resurgent dollar and breaking higher against the beleaguered euro.
The data calendar is clear today, and kicks off tomorrow with inflation from Saxony at 8am.
