The global capital markets are staging a convincing recovery. The strong sustained gains in US equities yesterday has fueled continued recovery in Asia and Europe. The strong rally of the Shanghai Composite in the last hour of domestic trading looked to be officially goosed, and some are linking to the redoubling of efforts to get the market to stabilize before the September 3 military celebration in which much political investment is being made.
The dollar has continued to recoup ground lost to the euro and yen at the start of the week. The euro has met our initial target cited yesterday near $1.1285. While there are some intermittent chart points near $1.1265 and $1.1220, the next significant target is near $1.1120.
The dollar has resurfaced above the JPY120.00-JPY120.10. The dollar's strength against the yen is noteworthy because it registers despite comments from BOJ Governor Kuroda denying plans to increase asset purchases. He maintained that the inflation target is reachable, while weakness in production and exports are temporary. Many economists expect QQE to expand as early as October. We are less sanguine, and instead the bar is higher than the consensus appreciates. The BOJ appears to be informally adopting a core-core measure of inflation that excludes food and energy, and appreciates the disruption that the current operations are having on the liquidity in the bond market.
Meanwhile, the backing up of US rates and the global equity market rally is helping lift the dollar. The next immediate target is near JPY120.75, the 200-day moving average, and then JPY121.30. US rates did back up even though the media played up the first part of NY Fed Dudley's comments that a September rate hike had become less compelling.
However, immediately following that statement was another, indicating that "Normalization could become more compelling by the time of the [September] meeting as we get additional information about how US economy is performing and more information on international and financial market developments." Although the implied yield of the September Fed funds eased a half a basis point, the US 2-year note yield jumped 7 bp. This was sufficient to see the US premium over Germany widen back out above 90 bp after dipping to 82 bp in the panic.
On one hand, the next batch of data will not reflect the reverberations from the international developments. On the other hand, the data will likely show that the US economy was in a position that the short-term shock could be absorbed. Not only did yesterday's durable goods orders suggest that business investment is off to a good start in Q3, but was also consistent with the upward revision expected to be reported today for Q2 GDP. Rather than expand by 2.3% as initially estimated, the US economy expects to have grown by 3.2%. Although inventories appear to have contributed more than the consensus had anticipated, personal consumption is also likely to rise above 3.0%.
Watch initial jobless claims too. It is the closest to a real time read of the US labor market. We expect a small decline from the previous week, though the four-week moving average may creep up a little. Weekly jobless claims averaged 273.6k in the five-week reporting period in July. The rolling four-week average is likely to be near there now.
While talk of QE4 seems wide of the mark for the Federal Reserve, the ECB meets next week and it may signal an expansion of the magnitude and duration of its asset purchases. Although M3 money supply was a bit stronger than expected (5.3% vs 4.9%) and private sector lending improved, the continued decline in energy prices and the rise in the euro make it more difficult to fight deflationary forces. Tomorrow, Spain and German release preliminary August inflation reports. Price pressures in both countries may have eased, and Spain may have slipped back into outright deflation.
Sterling is resisting the downward pull of the euro and yen, but remains below the $1.55 level that had been support. Some cite demand on the crosses. Support is near $1.5440 and then $1.5400.
The dollar-bloc currencies are enjoying a firmer tone. Higher industrial commodity prices, including oil, and the Chinese stock market rally, appeared to help. We note that the Australian dollar found bids near the monthly trend line drawn off the 2001 and 2008 lows that is around $0.7070 now. The RBA meets next week. It has signaled its intention of relying on the currency to provide the additional needed stimulus instead of cutting rates. A possible head and shoulders bottom on the hourly bar charts suggests near-term potential toward $0.7220.
The US dollar's momentum stalled near CAD1.3350. The firmer oil prices are handy reason to book some profits. The next target is CAD1.3140-50.
Lastly, here is a word about the S&P 500. Monday's sharply lower opening created a gap between last Friday's low near 1970.89 and Monday's high of 1965.15. That gap could fill today. There is another gap from last Friday's sharply lower opening. It is between 2034.08 and 2035.73. It is too far away to expect it to close today, but its closure is an important part of the repairing of the technical damage inflicted recently.