The FOMC is up Wednesday – more ambiguous rhetoric or is this a set-up meeting for a September QE3 move? And the ECB will need to see Draghi following up on last week’s rhetoric or else…
The Euro rally was given pause late Friday and today’s lack of development generally encouraged a reasonable consolidation of the single currency’s rally back below 0.7800 in EURGBP and back below 1.2250 in EURUSD. With the major bond markets recovering a bit on the day, EURJPY went from over 97.00 late Friday to well under 96.00 today.
Somewhat curiously, however, risk appetite maintained a very even keel into the early US hours, allowing AUDUSD to poke at the 1.0500 level ahead of the US equity trading session. The current market logic may be on the lines of “We know QE is coming, it’s just a game of which of the major currencies’ central banks will be printing the most, so one might as well remain long the risk currencies and risk in general and short those major currencies engaged in the competitive devaluation game.” As I have discussed before, and as Hussman very eloquently outlines in his latest weekly commentary (http://www.hussmanfunds.com/wmc/wmc120730.htm), this game is all fine and good as long as market fear remains very low, but mind the gap if the general complacency melts away in the coming days or weeks.
Indeed, that’s what this cycle in the market is all about – the market’s cat and mouse game of trying to front-run central bank easing and whether that very front running might actually be delaying its eventuality. Meanwhile, the backdrop shows a very weak economy and the question is whether the market is engaged in a confidence game while the fundamentals that used to count are pointing toward more trouble ahead.
Chart: EURJPY
EURJPY bit off more than it could chew Friday as it rose above the 97.00 level briefly before heading back below 96.00 today. Still, the very sharp rally has weakened the downtrend and could mean at least a bout of range trading behaviour ahead. Looking ahead, the key indicators for the pair are bonds (if they really a bit from here it’s a further JPY support) and the degree to which Draghi moves on Thursday. Remember, that while risk spreads might come in more within Europe on further ECB action, any action would more or less amount to money printing, which is eventually a Euro negative from a competitive devaluation angle.
Today’s Economic Data
Spain’s Q2 GDP first estimate was in line with very weak expectations. Swedish GDP, meanwhile, massively overshot expectations and the strong SEK got even stronger today as the EURSEK downtrend kicked back in gear with a new 12-year low. While the year 2000 low just below 8.05 is some way off, keep in mind that since the Euro began trading back in 1999, EURSEK has only seen two monthly closes below the current 8.35 level. Look out for verbal intervention from the Riksbank to get cranking in a much higher gear in the weeks to come.
The UK house market should be headed for a significant correction this fall and winter, as lending standards have been tightened, the economy is in recession and considering that UK house prices are some of the developed world’s most over-priced. Activity is falling rapidly and prices may soon follow (and would have long ago were it not for housing shortages in the most critical UK markets). The only thing recommending the sterling remains the fact that it is not the Euro – I’m beginning to ponder revisiting my longer term GBPUSD projections (mostly flat, with a forecast of 1.50 to 1.48 a year out), though I’ll hold off for now.
Looking ahead
The rest of this week is a minefield of interesting event risks, here is a bullet point rundown for what to look for in the days ahead:
Wednesday:
ADP Employment Change: Bloomberg expectations running at 120k, which would be the second weakest reading in the last nine months. The ADP survey badly predicted nonfarm the last time around, so not much faith placed in this number
US ISM Manufacturing Survey: preceded by the Chicago PMI tomorrow, which might tip us off to which way the nationwide ISM survey will fall after we saw a strong Empire reading and an extremely weak Philly Fed reading. The June survey showed a recessionary reading for the first time since early 2009
US FOMC monetary policy statement: is this a tip-off meeting for QE3 in September or do we get more vague promises of support as the Fed want to wait as long as possible? The Fed is probably most worried about the fiscal cliff. If so, the time to act is now, but it is also a highly charged political season and the Fed would probably prefer to wait as long as possible. I lean toward mere hints that the Fed stands ready rather than a call to imminent action, though if the Fed has had a peak at Friday’s data and it proves very bad, it might mean we get a strong hint on Wednesday.
Thursday
ECB: It’s most definitely show-time for the ECB as Draghi must follow up on last week’s comments or else. We’re more likely to get another rate cut to 0.50% now and some new ECB initiative designed to bring. The other question this week is the whether we get the Bundesbank’s Weidmann changing his tune on resistance to ECB bond buying (doubtful) as well as the usual ad hoc risks of political rhetoric. Still, this does not change the long term situation: politicians remain far behind the curve and any ECB move will prove short lived if it is merely the introduction of more liquidity.
BoE: no developments expected here since the BoE raised its purchase target at the last meeting
Friday
US Employment Report: divided opinion on how strong this report will be – a very weak report moves forward QE – but does the market celebrate a weak report because of more QE anticipation, or is too much QE already priced in and the market reverts to risk off behaviour? I’m beginning to lean toward the latter almost no matter the outcome of the report, though the ECB meeting may overshadow everything else this week.
US Jul. ISM non-manufacturing: Consensus expects almost no change here, though there have been signs of the consumer on strike in the US and the previous reading was the lowest since January 2010. This survey reflects activity in the bulk of the US economy and a reading any lower from here suggests the US is teetering on the brink of a recession.
Economic Data Highlights
- Japan Jun. Preliminary Industrial Production out at -0.1% MoM and -2.0% YoY vs. +1.5%/-0.1% expected, respectively and vs. +6.0% YoY in May
- Spain Q2 preliminary GDP estimated at -0.4% QoQ and -1.0% YoY as expected and vs. -0.4% YoY in Q1.
- Sweden Q2 preliminary GDP out at +1.4% QoQ and +2.3% YoY vs. +0.2%/+0.6% expected, respectively and vs. +!.5% YoY in Q1
- UK Jun. Net Consumer Credit out at +0.6B vs. +0.4B expected and vs. +0.8B in May
- UK Jun. Mortgage Approvals out at 44.2k vs. 48.0k expected and 50.5k in May
- Euro Zone Jul. Economic Confidence out at 87.9 vs. 88.9 expected and 89.9 in Jun.
- Euro Zone Jul. Industrial Confidence out at -15.0 vs. -14.0 expected and -12.8 in Jun.
- Euro Zone Jul. Services Confidence out at -8.5 vs. -8.0 expected and -7.4 in Jun.
- UK Jul. CBI Reported Sales out at 11 vs. 20 expected and vs. 42 in Jun.