August 28, 2015

Markets Today: I’m going to Jackson (Hole)

In the immortal words of Johnny Cash (singing) “I ‘m going to Jackson…” Nope, can’t do it justice, although Ray (MT’s co-author) is definitely having an influence on me. But we do see the central bankers heading to Jackson Hole (JH)

In the immortal words of Johnny Cash (singing) “I ‘m going to Jackson…” Nope, can’t do it justice, although Ray (MT’s co-author) is definitely having an influence on me. But we do see the central bankers heading to Jackson Hole (JH) and the main event will be the speakers starting with the SNB President Jordan. He is then followed by: the BoE’s Carney, the Fed’s Fisher and the ECB’s Constancio. So no matter the events of last night or through the day today, what matters are the speakers over the weekend; particularly at this sensitive time for markets.

The Chinese equity market rallied hard into the close yesterday as investors got behind the idea that the Chinese pension funds were about to invest in the local market and there was talk of more official assistance. The Shanghai ended the day +5.3%. This buoyed other markets, with Europe up strongly, and the US putting in a fairly good effort at an upswing. Commodities were supported and this duly was reflected in the currencies, with the USD higher, and AUD, CAD and NZD outperforming. The EUR and JPY underperformed. Bond yields were higher.

There was additional news that China had eased the pressures in the CNY swap market, as well as equities. We head into a long holiday in China next week (Sep 3-5) and the newsflow suggests that an easing of market stresses is desired before that holiday. It appeared to have worked in the last 24 hours at least.

The data was good overnight, with the US GDP second release showing a strong upward revision, and was consistent across the categories. With some stability in China expected this week, and good data, the chatter at JH is going to get just that bit more interesting.

The USD has been under pressure of late, and US yields are rising. On the other side has been continued intervention in the FX market to slow EM currency depreciation from their central banks. That requires a selling of USD and purchase of the currency in question. This intervention will necessarily result in the sale of underlying reserve assets such as US Treasuries at some point; with or without disruption to broader markets. With the USD making up (on average) 64% of reserve holdings the main channel of reserve asset change is through the US. However, the US market is particularly large, and while not immune to selling by this large investor, it has some alternative buyers. It is something to keep an eye on but not over-react for the moment.

But since the reserve managers started diversifying their reserve portfolios into other currencies, there is the likelihood that as reserves are drawn down (in USDs) that some rebalancing may be required, at some point (it doesn’t have to be done immediately). That means selling EURs (with QE in place, the ECB are buyers), JPY (the BoJ are also QE buyers), as well as GBP (which has a large pool to sell into). It is the rise in holdings in currencies of the smaller markets, which were driven up in the accumulation phase, which might experience some interesting times as reserves are drawn down and rebalanced. That includes AUD and CAD, as well as other smaller currencies. This may not happen in the short term, but as reserves decline, these pressures are more likely to build. So if you see a higher positive correlation between currencies and bonds (prices) then this might be your answer.

Yesterday, Australia released its capital expenditure data for Q2. This showed a greater than expected decline in capex for the quarter. On the upside, there was a pickup in the expected capex for the third estimate of 2015/16, although it remains well below that of the 2014/15 equivalent.

Coming Up

The Jackson Hole symposium is held by the Kansas Fed every year and focuses of a topic of the central bank’s choosing. This year it is inflation dynamics and monetary policy. With economies still running below (past) potential and commodity prices declining, the ability to hit inflation targets and thus justify normalising interest rates is a very pertinent topic.

The BoE’s Carney likes to mix things up a little and his to and fro-ing about the BoE’s proximity to normalising rates has generated a fair amount of volatility. Thus his comments should be closely monitored. The key speaker is likely to be Fed Deputy Chair Fisher (Yellen is not attending). What he has to say will underpin more definitively the market’s view of when the Fed can raise interest rates. Given we know that they have turned their attention away from employment and towards inflation, add the current market volatility, it would be more of a surprise if he were upbeat and raring to hit the hike button.

Speaking of inflation, we get Japan’s CPI today; the BoJ’s Kuroda told us yesterday that there was no deflationary problem in Japan, so that’s ok then. The CPI official data might tell us different. The US’s PCE deflator is released; with the Fed’s inflation focus this is important but it might get lost amongst the Fed speak.


On global stock markets, the S&P 500 was +1.70%. Bond markets saw US 10-years +1.42bp to 2.19%. On commodity markets, Brent crude oil +9.81% to $47.37, gold-0.2% to $1,122, iron ore +0.5% to $53.93. AUD is at 0.7169 and the range was 0.7099 to 0.7181.

  • US GDP +3.7%A, 3.2E, 2.3P
  • US pending home sales +0.5A, 1E, -1.7P

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