Market Views For 2016 - page 13

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US Consumer Confidence at 11-Month High in August

US consumer confidence strengthened to 101.1 for August from a downwardly-revised 96.7 previously. This was also stronger than the expected reading of 97.2 for the month and the highest reading since September 2015.

The data overall should further boost Federal Reserve confidence in the labour market and outlook for consumer spending, increasing the potential for a September move to increase interest rates.

The present situation index improved to 123.0 from 118.8 while the expectations index also improved significantly to 86.4 from 82.0 previously.

In looking at current conditions, there was an increase in those stating that business conditions were good with little change in the number stating conditions were poor. Labour market indicators were mixed with a significant increase in those calling jobs plentiful to 26.0% from 23.0%, although the number stating that jobs were hard to get also edged higher to 23.4% from 22.1%.

There was also a more optimistic attitude to the outlook with those expecting business conditions to improve rising to 17.3% from 15.7%, while the proportion expecting a deterioration moved lower to 11.1% from 12.4%. In regards to the labour market, the outlook was slightly more favourable with a decline in the number expecting fewer jobs.

There was also a favourable swing in confidence surrounding personal incomes, with an increase in the proportion expecting an increase at 18.8% from 17.1% with a small fall in the number expecting incomes to decline.

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Week Ahead Central Banks to Face Tough Questions after Weak US Jobs


USD recovered from the NFP shock but September hike future uncertain

The U.S. dollar stumbled on the news that the economy added fewer jobs than expected in August. The U.S. non farm payrolls (NFP) report showed only 151,000 positions versus the forecast of 180,000. Unemployment rate kept steady at 4.9 percent. The American currency was able to recover and finish the week ahead versus major pairs but the disappointing employment report puts a big dent on the chances of a rate hike in September.

The U.S. Federal Reserve has been surprisingly hawkish about first the reduction of global risk and second about the pace of growth of the U.S. economy. The speech by Fed Chair Janet Yellen at Jackson hole put the September Federal Open Market Committee (FOMC) rate hike firmly in play, but as I mentioned earlier the next line was “Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.” The soft jobs report will not derail the Fed’s outlook but could now leave the fate of the next Fed rate hike up to the inflation and retail sales numbers in the middle of September.

The central bank calendar for the week of September 5 to 9 will bring into action the Reserve Bank of Australia (RBA) on Tuesday, September 6 at 12:30 am EDT. The Bank of Canada (BoC) on Wednesday, September 7 at 10:00 am EDT and the European Central Bank (ECB) on Thursday, September 8 at 7:45 am EDT. The RBA and the BoC are expected to leave rates unchanged with the only interventions being rhetoric from central bankers. The ECB is faces a bond buying challenge and might replicate the Bank of Japan (BOJ) strategy and purchase stocks, but it is not as straight forward for the central bank headed by Mario Draghi. Updates to the ECB’s forecasts and quantitive easing program are on the table but it is expected the central bank will stick to verbal easing as much as possible.

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3 Possible Changes To ECB's Purchase Rules Of Government Bonds


We expect the ECB to announce an extension of its QE program beyond its March 2017 expiration at this week’s meeting. In order to address concerns about scarcity of paper, we also expect changes to the rules governing the purchase of government bonds. Our rates team sees three possible changes 1) increasing the issue share limit; 2) removing deposit rate floor; 3) moving away from capital key based allocation of purchases. Our rates strategy team see risks that long-end core yields rise in the aftermath of the decision, even if the ECB does deliver.

However, with front-end rates likely to be anchored we would not anticipate meaningful benefit for the EUR. In any event, we look for the evolution of US rates to dominate EURUSD this week.

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A Scorecard Strategy To Trade FX Markets This Fall - Deutsche Bank


With investors returning from the beach to a market short fresh themes, Fed hike timing aside, what better time to reprise our G10 FX scorecard?

The Scandies are top, with SEK narrowly pipping NOK to number one...CAD secures the bronze, helped by decent FDI and portfolio inflows and relatively attractive bond risk premia. Bringing up the rear is NZD, which suffers from expensive FX and equity valuations, a weak outlook for the fiscal and current account balance and heavy positioning on CORAX. Next worst is CHF, also expensive, and seeing deterioration in the current surplus this year and the least attractive levels of bond risk premia. The USD also performs badly on our scorecard due to expensive equity valuations, weak fundamentals both levels and changes and expensive FX valuations.

While not a trading model per se, our scorecard supports our bullish outlook on the Scandies, while in NOK and CAD holding a constructive view on oil-sensitive FX, and a moderately bearish dollar bias. In NZD and CHF it picks two of G10’s most expensive currencies to short, although our discretionary views would be more in line with the latter as we see upside risks to milk prices and little prospect of the RBNZ over-delivering on rate cuts.

Interestingly, it seems fairly indifferent on currencies where positioning and our own discretionary views are strongest like AUD, JPY and GBP. For a fresh idea this fall, consider that an equally weighted basket of the top three currencies in the scorecard against their bottom three partners is at multi-decade lows and provides a reasonable hedge against dollar disappointment without much Fed noise.

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ECB expected to hold on rates, focus on bond purchase program extension


The European Central Bank (ECB) kicked off its two-day policy meeting on Wednesday with investors focusing on whether the euro zone monetary authority’s president Mario Draghi will announce an extension of the bond-purchase program.

While no change in interest rates currently at 0% or the deposit facility rate of minus 0.4% are expected out on Thursday at 7:45AM ET (11:45AM GMT), market players will look to Draghi’s press conference just 45 minutes later.

With euro zone inflation far below the ECB’s 2% target rate, experts are convinced that Draghi will have to extend the asset purchase program beyond its current end-date of March 2017 and above the target of €1.7 trillion ($1.9 trillion). The ECB is currently buying €80 billion-a-month ($90 billion).

However, experts are divided over whether Draghi will make the announcement official on Thursday. A recent Bloomberg survey showed that more than 80% of economists expect the action to be taken this year, but less than half are betting it will take place on Thursday. The rest forecast that the announcement would come at the October or December meeting.

Though analysts do not believe there will be any new policy moves, most expect Draghi to maintain a dovish stance and hint at more easing further down the road.

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ECB leaves growth and inflation forecasts largely unchanged


Small shift to 2017 from 2016

  • 2016 GDP growth seen at 1.7% vs 1.6% in June
  • 2017 GDP seen at 1.6% vs 1.7% in June
  • 2018 GDP seen at 1.6% vs 1.7% in June

Inflation forecasts

  • 2016 inflation 0.2% vs 0.2% in June
  • 2017 inflation 1.2% vs 1.3% in June
  • 2018 inflation 1.6% vs 1.6% in June

The growth and inflation forecasts, on net, are fractionally lower but it's not enough to trigger any kind of shift from the ECB.

 

Sep ECB: ECB Disappoints But Will Act Soon


ECB leaves monetary policy unchanged… The ECB disappointed keeping its monetary policy stance completely unchanged. The inaction with regard to policy rates and the pace of QE purchases was as expected. However, we had expected the Governing Council to expand the horizon of its QE programme. The ECB also did not announce changes to its QE programme to increase the universe of eligible assets at the press conference.

…but signals action in the coming months. However, ECB President Draghi left the door open for action in the coming months. He said that the Governing Council had tasked committees to evaluate various options for the smooth implementation of QE, reflecting the necessity to increase the eligible universe of assets. The President clarified that the committees had a full mandate to look at all options (including adjustments to the capital key), though the Governing Council will make the final decision.

Second, although the ECB had not discussed an extension of the programme at this meeting, Mr Draghi asserted that it remained ready, willing and able to act. In addition, he said the ECB’s decision that action was not necessary was a judgement for ‘the time being’. Finally, the ECB continues to forecast that inflation will undershoot the goal (see below), and that it was a matter of concern that underlying inflationary pressures were not picking up. At the same time, the risks to the economic outlook remained tilted to the downside.

We think the ECB will expand the duration of its QE programme from March 2017 currently to September 2017 before the end of this year and most likely at the October meeting. The momentum behind the eurozone recovery has slowed and the overall pace of economic growth remains too moderate to generate significant underlying inflationary pressures any time soon.

Steps to increase universe of assets. As signalled, the ECB will also likely announce changes to its QE programme to increase the universe of eligible assets as it will not be able to meet even its current targets under the current structure. We think there are two possible options (either separately or in combination). The ECB could decide to start buying bonds that yield less than the deposit rate (so far restricted) as well as buying bonds below the 2y maturity. Second, it could increase the issue/issuer limit from the current 33%. We think that another often-mentioned option – the dropping of the capital key allocation system for purchases and moving to an outstanding debt allocation scheme – is not likely. Such a move is supported by only a minority of the Governing Council at this time and the ECB will likely opt for other options first.

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German Economy Under Pressure as Exports, Industrial Production Plunge


Germany’s trade picture worsened in July, while industrial output fell at the fastest pace in nearly two years, a sign Europe’s largest economy was buckling under the weight of weak international demand.

Exports plunged 2.6% in July and 10% from a year ago, the Federal Statistics Office, Destatis, reported Friday. In year-over-year terms, that marked the biggest fall since 2009. Imports also fell unexpectedly for the first time since April.

As a result, Germany’s trade surplus narrowed to €19.4 billion from €21.4 billion, the lowest since January.

Germany’s trade picture hasn’t seen much progress over the past 18 months. In adjusted terms, exports are back to their January 2015 level, according to The Wall Street Journal.

Destatis also reported this week that industrial production, a broad measure of factory output, fell 1.5% in July, confounding expectations for a 0.2% advance. That was the biggest drop since 2014. Compared to a year ago, industrial output declined 1.2%.

As the G20’s third largest exporter in absolute terms, Germany relies heavily on international trade. But with international demand waning, the German economy is expected to face stronger headwinds in the second half of the year.

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Germany's contribution to EU budget, big jump coming after Brexit


Der Spiegel reports that when Britain exits the Euorpean union Germany's contribution to the EU budget will increase by around 4.5bn euros a year in 2019 and 2020

The Der Speigel report is via Reuters, here
  • The numbers are according to an internal Finance Ministry report published on Saturday
  • Germany current contribution is around 15 billion euros a year
  • Britain's current contribution is around 12.5 billion
 

The more that Federal Reserve officials speak, the more confused investors become


Bloomberg are likely on the right track with that comment:

  • The more that Federal Reserve officials speak, the more confused investors and economists become.
The whole point of all these speeches and communications is to increase transparency & 'smooth' market response. But, well, it does seem that they are not doing the desired job.
Bloomberg add, with an example:
  • Fed Governor Daniel Tarullo repeated his cautious assessment of the economy during an interview Friday ... Boston Fed President Eric Rosengren argued there was a reasonable case for gradual tightening
  • Their remarks illustrate divisions on the FOMC that don't help clarify what officials will decide
  • Stephen Stanley, chief economist at Amherst Pierpont Securities in New York: "The Fed has been so arbitrary in shifting rationales, it's not systematic enough that people in my business can look at the data and be confident about what the Fed's going to do."
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