The FOMC voted this week to keep the punchbowl full, much to the surprise of many, and the word taper will continue to be the most overused term in our financial lexicons through at least Q1 2014. Summers ducked out of post-Bernanke contention, leaving Yellen in pole position, and the ‘Risk-On’ trade lived to grab another handle (or three). BoE MPC’s September meeting minutes were partially concessionary and provided evidence that Carney has not turned a deaf ear to the bond vigilantes. Here’s what we’re watching next week:
1. Merkel Locked in Fierce Re-Election Battle
It looks like Frau Merkel’s Christian Democratic Union and its compatriot, the Christian Social Union, will fend of Peer Steinbrueck this Sunday, but the Chancellor better be prepared for some serious horse-trading. Merkel and party will clearly not win a majority, and the key thing to watch is the success of the pro-business Free Democratic Party, the Chancellor’s governing partner that took nearly 15% of the vote in 2009 – and needs to take at least 5% to retain any parliamentary seats. Absent a parliamentary majority, Merkel will likely lead a grand coalition, much as she did between 2005 – 2009. That may lead to a watering down of her austerity agenda, and perhaps reduce Germany’s voice in dictating some terms for troika tomfoolery bailouts such as Greece’s bailout. The spanner may be a new party called Alternative for Germany that is calling for an “orderly breakup” of the Eurozone. If it gathers enough votes to enter Parliament, it may complicate Angie’s agenda and remit. EUR will take some cues early in the week from Sunday’s election results. Lassen Sie uns sehen, wie gut der Bundeskanzler die Verhandlungsgeschick sind.
2. Fedspeak
If one thinks the FOMC was in a data-dependent mode before last week’s drama, one might conclude the Fed is on high alert between now and 29-30 October when rate-setters will next attempt to wean us from Taperfest 2013. Consumer confidence, house prices, durable goods orders, home sales, Q2 GDP, personal spending, and more will keep our charts alive. The real ‘What were they thinking?’ insight will come from the major dose of Fedpeak ahead on the tape: Lockhart, Dudley, and Fisher on Monday; Pianalto and George on Tuesday; Kocherlakota on Thursday; and George, Rosengren, Evans, and Dudley on Friday. George – Queen of the Bernanke Dissent – might prove interesting.
3. United Nations General Assembly
When last we checked, Iran was a pariah and Netanyahu was talking tough against Tehran. The recent brinksmanship in Damascus may have spooked the Ayatollah, however, and the markets will look to detect a thaw between Obama and the new Rohani government on the sidelines of the annual UN pow-wow. We don’t expect the energy complex will move significantly if there is sideline smooching between Obama and Rohani, but the complex may prove elastic if there are any additional fireworks involving the Assad regime. Colour us skeptical, but how will the US lead a coalition to disarm Syria by the middle of next year? Note to self: Don’t play bridge with Vlad and Bash.
4. US Budget Impasse, Ad Infinitum…
…or Ad Nauseum, depending on your flavour of Ad. Speaking of adding, we don’t really understand the mathematics behind the US Treasury’s ongoing debt ceiling calculations. Have Obama and Lew figured out how to stop time and keep the US running below the national debt ceiling in the lead-up to Obamacare’s launch and continue to finance multiple theatres of war? Obama has vowed to firmly entrench his heels and refuse to negotiate with congressional Republicans over raising the debt ceiling, or cede to their attempts to defund his legacy-defining health care legislation. House Republicans would like to suspend the borrowing limit for one year and tie it to deficit reduction initiatives, including a one-year postponement on the launch of Obamacare. House Speaker Boehner and others will try to avoid a fiscal fisticuffs on 1 October, and at least one filibuster is anticipated. Reverberations may be felt in the USD and the US Treasury complex. The 10-year Note was a major beneficiary of Bernanke’s continued largesse last week, but may flirt with 3.00% again if a US government shutdown looks like a done deal.
5. Carry Trades, or The Official Guide to the Significance of Non-Resident NZD Bond Holdings
Three weeks into September and we have some significant FX trends in place. Current monthly action has not seen USD this weak since October 2011; CHF this weak since March 2013; JPY this weak since April 2013; AUD this strong since June 2012; and NZD this strong since March 2009. JPY and CHF remain excellent choices for funding carry trades, with the bearish USD crowd rolling the dice on an anything-but-hawkish Bernanke passing the torch to Yellen. The “Risk On” trade is clearly alive in the Antipodes, with Kiwi and RBNZ overshadowing an RBA that acknowledges China’s über-bid has thinned and labour market conditions will continue to soften through 2014. We’ll be attuned to NZ’s August trade balance numbers on Wednesday; absent that, the FX market’s best month-to-date outperformer may be forced to take its cues from the fickle fastidiousness of FX forepeople.