Danske Daily: August 19, 2013

On the surface it looks like a relatively quiet day today. We have a completely empty calendar and liquidity will still be relatively low due to the holiday season in Europe. The crude oil market will probably continue to watch the developments in Egypt. If the anti-government demonstrations lose momentum, it could ease fears that tensions could have an impact on the important crude oil supply routes through Egypt.

In the week ahead the most important data releases are flash manufacturing PMIs. It will be interesting to see if European PMIs continue to improve and whether China is already bottoming out.

In the US the main focus will be the release of Fed minutes from the July meeting on Wednesday and the Jackson Hole conference for central bankers starting on the same day. No prominent Fed speakers are scheduled this year in Jackson Hole so we doubt it will provide new insights into Fed’s monetary policy thinking.

Selected Market News
Last week saw another large increase in bond yields particularly in the US and a continued narrowing of periphery spreads. The mix of better European growth data, core retail sales in the US picking up and a new low in US initial jobless claims were the main reasons. Markets did not push expectations for a first Fed funds rate hike much closer, though. The rise in yields was driven by a more aggressive pricing of Fed hikes from early 2015 to 2019, which helps to explain the muted impact on EUR/USD. In terms of stock markets, the tighter financial conditions implied by the increase in yields overshadowed the good news about economic growth. Equities ended last week lower and the negative sentiment has continued in Asian trading this morning except for Japan.

The Japanese trade deficit widened in July as imports surged 20% and exports rose 12%. The ongoing stimulus from easing fiscal and monetary policy has boosted private consumption in the country and thereby imports, but the weaker yen has helped to balance the impact on the trade deficit as exports have picked up and are set to increase further as global demand recovers in coming quarters.

In the US the debate on who will become the next Fed Chairman is ongoing. In a WSJ article this morning, the risk of a more divided FOMC when the consensus-minded Bernanke’s term ends, is highlighted. The FOMC consists of several regional Fed Presidents who tend to have strong views on monetary policy. If the coming Fed chairman chooses a less consensus-oriented way of conducting monetary policy, the debate that is now held at the FOMC meetings could easily end up in the newspapers instead and risk to create increased uncertainty.

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