Category: Economic Conditions

Are Shifting Views on Fed Policy Moving the Dollar?

The US dollar is being sold across the board today.  The US Dollar Index is off 0.65% late in the European morning, which, if sustained, would make it the largest drop in two weeks.  The proximate cause being cited by participants and the media is weak US data that is prompting a Fed re-think.

However, we are a bit skeptical.  It is not that the US data has been strong, or that Fed officials have been touting the need to hike like many regional Fed Presidents did earlier this year.  Rather our skepticism is based in the prices themselves.

So Much to Watch with Only Two Eyes

Japan’s Q2 GDP:  The week begins off with the first estimate of Japan’s Q2 GDP.  Growth is expected to slow from 0.6% in Q1 to 0.2%-0.3% in Q2. Consumption likely slowed more than investment increased.  The GDP deflator, another measure of prices, is expected to have eased to 0.7% from 0.9% (year-over-year).

Economic Data may not Help the Dollar

The dollar’s push lower that we anticipate until later in the month gained momentum following the disappointing US retail sales report before the weekend.  The dollar’s technical tone has deteriorated, while the economic data is unlikely to be sufficient to reverse sentiment.

Retail Sales, Japanese Nuclear Power and Spanish Politics for Your Weekend

There is a general consolidative tone in the capital markets as the week draws to a close.  The US retail sales report may offer a brief distraction, but it is unlikely to significantly shift expectations about the trajectory of Fed policy.  Indeed, it might not really change investors’ information set.  The US consumer was busy in Q2 and is likely to have stayed active in Q3.  Consumption is not the main challenge of the US economy (see inventories and investment).

Relatively Quiet Markets (for Some) Should Liven Up this Fall

US LIBOR continues to rise.  LIBOR may not be what it was before the Great Financial Crisis, or before the scandalous revelations.  However, it remains an important benchmark. 

Three-month LIBOR rose from around 25 bp before last December’s Fed hike to a little more than 60 bp.  It gravitated around there until edging a few basis points higher around the UK referendum and the end of H1.  This month it has taken another leg up to 70 bp. 

Nothing New to Change the Lower Rates for Longer Theme

The robust US jobs report at the end of last week had arrested the down draft seen the previous week in response to the disappointing Q2 GDP report.  The mostly sideways movement has given way to a broader pullback today.  The greenback is heavier against all the major and most emerging market currencies today.

A Heavy Pound

In an otherwise uneventful foreign exchange market, sterling’s slide for its fifth consecutive session is the highlight.  It was pushed below $1.30 for the first time since July 12.  Initial resistance for the North American session is seen near $1.3020, while the $1.2960 area corresponds to a minor retracement objective. 

Sterling has been sold-off since the middle of last week.  Today’s data may have simply provided a little more ammo for what the market was already doing.

Pre-weekend Equity Rally Shows Increased Risk Appetite

Investors favor risk assets today.  Global stocks are moving higher in the wake of the pre-weekend US rally that saw the S&P 500 close at record levels.  Bond yields are mostly firmer, again with US move in response to the robust employment report setting the tone in Asia.

European bonds participated in most of the pre-weekend move and are consolidating today with a slightly heavier tone.  UK Gilts are outperforming, with a new record low of 64 bp on the benchmark 10-year issue. 

The Macroeconomic Picture Comes to the Fore

The drip-feed of high frequency economic data from the major economies slows in the week ahead. The data that is reported is unlikely to have much impact on the expectations of policy going forward.

The state of play is fairly straightforward.  The Federal Reserve is finding it difficult to take the next step in the normalization of monetary policy.  According to Bloomberg calculations, the Fed funds futures strip does not show greater than a 42% chance of a rate hike at any meeting through the end of next year.