Eyeing Scotland, Reviewing The Fed, ECB's Dismal Result And More

The Scotland vote today is the main event, and as important as a "yes" vote would be, it is not the only event today. And there is not much more to add to the discussion. While the polls remain a statistical dead heat, the wisdom of crowds implies giving more weight to the bookmakers and the markets, which clearly favor a "no" victory. There is some genuine concern that Scottish referendums will be a recurring theme (see Quebec) on a small victory for the unionists. Such fears, coupled with the fact that some have already positioned for such an outcome, may curtail the positive sterling response to the a "no" vote.

The results will not be known until the Asian markets open on Friday. Today, the markets will continue to digest yesterday's FOMC meeting. There was a clear difference between the FOMC statement (dovish) and the dot plot (hawkish). We suggest that they measure two different things, and it derives from the structure of the Federal Reserve. The FOMC minutes and the dot plot picks up the wide range of views at the Federal Reserve. This means all of the regional presidents.

The FOMC statement is about the voting members, and it reflects the Board of Governor views, and especially the Chair. In terms of policy signals, we put more weight on the statement than the dot-plot and minutes. This is consistent with our general approach to watching the Fed. Some opinions are more important than others in revealing the policy signal. Yellen, Fischer and Dudley are the signals and their views are diluted in the FOMC minutes and dot-plot.

Participation in the ECB's Targeted Long-Term Repo Operation was dismal. The take down was 82.6 bln euros. This is a little less than half of what the median expected. This stopped the euro as it poked through $1.29 while recovering from the post-FOMC slide that bottomed in early Asia near $1.2835. European bonds initially sold off, perhaps on ideas that low participation means less new fuel for carry trades. However, they recovered, perhaps on anticipation of additional policy response. Some banks began acknowledging participation. Those banks that have not paid back as much of the LTRO funds are thought to be the most likely candidates to participate in the TLTRO, and this means Italian and French banks.

Two other central banks met today. There had been some speculation that the Swiss National Bank would adopt a negative rate to defend the franc at CHF1.20 cap. We played this possibility down because the market had already moved away from it, and that would be an emergency measure. The SNB did keep its rate target (3-month LIBOR) unchanged at 0-0.25%. However, its statement highlighted the economic deterioration and risk of deflation.

Norway's Norges Bank dropped all reference to the risk of lower rates that was evident at the last meeting. It left policy on hold and seemed to signal no change until late 2015 at the earliest. It did raise its growth and inflation forecasts. The krone rallied strongly and is easily the best performing currency on the day, gaining 1.3% against the dollar and 1.2% against the euro. The NOK8.18 area represents a key retracement objective for the euro. The low from earlier this month was set near NOK8.095.

There were four other economic reports of note. First, UK retail sales for 0.4% as expected in August for a 3.9% year-over-year pace. Although two MPC members voted for an immediate rate hike due to the risk of future price pressures, current price pressures remain moderate. This was the take away from the CPI, average earnings data and today's retail deflator. Prices have fallen 1.2% on a year-over-year basis, the most in several years. Sterling looks confined to a $1.6250-$1.6350 range ahead of the referendum results.

Second, Japan reported a smaller than expected August trade deficit. The JPY948.5 bln deficit was about 8% smaller than expected, and down slightly sequentially from July. Exports fell half as much as expected (-1.3% vs consensus -2.6%). Imports fell a little more than expected (-1.5% vs consensus -1.2%). The dollar is trading at new 6-year highs against the yen, approaching JPY109. The weakness of the yen is helping lift Japanese shares.

Third, Sweden reported a sharp upward revision to Q2 GDP. The 0.2% initial estimate was revised to 0.7%, which lifted the year-over-year pace to 2.6% from 1.9%. While this is good news, the threat of deflation (yes, despite strong growth) remains the key worry of the central bank. The krona is trading at its best level against the euro since before the weekend election.

Fourth, China reported a continued dramatically slowing of new house prices, which some observers see as the proverbial canary in a coal mine. New house prices rose 0.5% year-over-year in 70 major cities. This is down from 2.5% in July and 9.6% at the start of the year. The yuan is little changed, but its appreciation in the face of US dollar gains elsewhere over the last few months seems over. The near-term range seems CNY6.13-CNY6.16, with a bias toward a break higher.

In North America, the US reports weekly initial jobless claims. We have warned of early signs that the labor market may be losing momentum, and note that weekly jobless claims bottomed two months ago. August housing starts are likely to slow from the heady 15.7% rise see in July. Permits, a leading indicator, are also expected to have slowed. Also note that the BLS provides its preliminary benchmark revisions to the recent employment data. The US household net worth figures for Q2 will also be reported today. Here we note that there are two issues. One is whether secular stagnation accurately portrays what is happening. The other is how the wealth is distributed.