U.S. Housing Data Rattles Markets

Focus this week will continue to be on US bond markets and the emerging markets (EM) turmoil. If US yields continue to calm down, it will be positive for risk assets and the EM region.

We expect US durable goods orders to have declined 3.5% in July following a sharp rise in June. Also watch out for shipments that have been soft in recent months, whereas orders have been quite robust. Shipments should catch up with orders soon.

ECB's Jens Weidman (hawk!) will speak at 10:00 CET in Berlin on the subject ‘A new old debate - the struggle for a stable framework for monetary union’.

In the Scandi calendar Swedish PPI and the announcement of the Danish state financing needs are the key events. For more on Scandi markets see page 2.

Selected market news

US housing data rattled the markets on Friday after July data showed new home sales fell more than expected. However, in light of the decent rise in existing home sales reported earlier last week, there is in our view little in these data to suggest the Fed would hesitate to initiate the QE tapering process in September. Still, US longer-dated yields fell almost 10bp, EUR/USD briefly went above 1.34, and Brent oil above 111 on the release. US equities fell on impact but ended the day in positive territory. While data out this week should do little to change Fed tapering decision, next week’s payrolls and ISM reports could be instrumental in setting the scene. We expect these to confirm the US recovery is ongoing, leaving Fed with no excuses to postpone its exit.

This year’s central bankers’ gathering at Jackson Hole, Wyoming, was expected to be a dull affair in the absence of the likes of Bernanke and Draghi. However, the discussions centred on a pertinent issue: will the EM region be able to withstand the drop in global liquidity when Fed tapers its QE scheme? Indeed, after years during which we have seen EM struggle with currency appreciation and hot money flows as a result of the unconventional policies pursued in developed markets, the complaints are changing in nature. A range of papers presented at the conference questioned the efficiency and potential downside effects of asset purchases. Comments from Bullard (centrist) that the Fed could firm its forward guidance by promising to stay away from rate hikes as long as inflation is below 1.5% however underline that the FOMC still has decent confidence in the programme. Notably one paper suggested the buying of mortgage-backed securities rather than Treasuries was more effective, with the possible implication that the Fed should scale down buying of the latter first. Regarding the ECB, IMF chief Lagarde said on the sidelines of the conference that the governing council has "room to manoeuvre". This came after conflicting comments last week from ECB’s Nowotny that there are not "many reasons now for a rate cut", and from Demetriades that a rate cut is "still in the cards".