The geopolitical storm continues, though risky assets are surviving the headwinds with aplomb. Still, I have a hard time believing we can continue to sail on to new record highs as the conflicts over Ukraine and Gaza rage and as the Federal Reserve Bank taper continues. But so far, the Russian ruble and Russian equities seem to be the only assets taking a hit from the latest escalation in the hostility between the West and Russia and the threat of new sanctions in the wake of the downed commercial airliner. See Bloomberg story for more.
USDJPY crept higher overnight as global rates edged higher and as equity markets – particularly in Asia – came back higher after yesterday’s nervousness. The Chinese stock market is positively on fire (I wonder it this is due to the same reasons that the 1933 market in the US was on fire – due to fears of a massive devaluation leaving people desperate to own assets that will retain some degree of value – ie, not cash and increasingly not real estate as the latter is probably more widely being seen as potentially losing value. The data out of Japan overnight was mixed, with a sudden jump in the jobless rate and weak retail sales data offset slightly by better-than-expected overall household spending data and a small business confidence survey that continues to bounce strongly from the post-VAT hike plunge. There was also a report suggesting that job availability is at its highest level in a generation, so the jobless rate jump might be for the positive reason that more job seekers are actively seeking work and bumping up the participation rate. USDJPYUSDJPY has pulled higher, actually above the Ichimoku daily cloud level, but still not clear of the 200-day moving average a bit higher. This week’s close will be critical for the near term outlook. If yields head higher in the wake of tomorrow’s Federal Open Market Committee (FOMC) this is a USDJPY positive, but if the risk appetite response to the same development is negative, it’s a USDJPY negative. Eventually, the rate differential should mean the most.
Looking ahead
It’s all about tomorrow’s FOMC meeting, where expectations appear to be minimal (in rate path terms, a bit more expectation is getting priced into the USD, it seems), but where one would think that the new statement needs to not only upgrade the language on the economy after some of the recent, very positive data releases, but also to upgrade the risks to interest rate path.
The timing of this FOMC meeting is a bit awkward, coming as it does before key data releases (particularly the employment data on Friday) and the Fed will likely need to upgrade the guidance on the potential for a sooner and steeper rate than the market currently expects. It would be embarrassing, in other words, if the Fed only tweaks the description of the economy and leaves the rest of the statement unchanged and then we print a +325,000 non-farm payrolls for July and a drop in the US unemployment rate to 6 percent or even 5.9 percent.
The risks are skewed to the upside for the USD on the other side of tomorrow’s FOMC, though USD bulls would very likely suffer a severe setback if the Fed rolls out a tone-deaf, noncommittal statement that looks too much like the previous one – still a sizable risk for all of the battle-scarred USD bulls that have seen hawkish Fed expectations dashed again and again over the last several years.
Economic Calendar Highlights
- Japan Jun. Jobless Rate jumped to 3.7% vs. 3.5% expected and 3.5% in May
- Japan Jun. Overall Household Spending out at -3.0% YoY vs. -4.0% expected and vs. -8.0% in May
- Japan Jun. Retail Trade out at +0.4% MoM vs. +0.8% expected
- Australia Jun. HIA New Home Sales out at +1.2%
- Japan Jul. Small Business Confidence out at 48.7 vs. 47.3 in Jun.
- UK Jun. Mortgage Approvals (0830)
- US May S&P/CaseShiler Home Price Index (1300)
- US Jul. Consumer Confidence Index (1400)
- New Zealand Jun. Building Permits (2245)
- Japan Jun. Industrial Production (2350)