August 25, 2016

Markets Today: (Janet’s) goin’ to Jackson

Only on line one and I already feel like I’m making this up, such is the state of market torpor in front of the Fed’s Jackson Hole symposium and as Sothern England basks in 30 degree summer sunshine – and uncharacteristically not for the first time this year.

Only on line one and I already feel like I’m making this up, such is the state of market torpor in front of the Fed’s Jackson Hole symposium and as Southern England basks in 30 degree summer sunshine – and uncharacteristically not for the first time this year.

The US dollar is overall slightly higher (about 0.2% in the last 24 hours and 0.1% from where we left off yesterday),  Treasury yields are largely unchanged (and following a well-received 5-year note auction that saw record indirect bidding, synonymous with foreign central bank demand) while stocks are struggling, the S&P 500 closing just over 0.5% lower.

Partly because of the dollar but also perhaps the confluence of several unrelated Emerging Market incidents,  commodity prices are in a sea of red, including oil (down over a $1) traded metals and agriculture, the exception being iron ore which continued to display resilience above $60 (the China 62% fines import price closing virtually flat at $61.70).

The EM stress points centre on South Africa, Turkey and Korea. The Won came under pressure at the open yesterday and later extended losses after news of another North Korea ballistic missile test. The Turkish stock market (but not as yet the currency) has been hurt by news of fresh military offences by the Turkish army against Syrian strongholds near the Turkish border. And in South Africa the Rand remain under strong downward pressure as Finance Minister Gordhan refuses to acquiesce to ‘requests’ to be interviewed over alleged misdemeanours. The backdrop of course is President Zuma’s demand that the Finance Ministry ‘re-prioritises’ its spending plans and as the ANC continues to lose support.

In the more mundane G10 world, Sterling continues to bask in the summer sunshine, with doubtless some covering of record extreme speculative short positioning in front of Jackson Hole one of the drivers.  Into the New York close, it has just been pipped by the NZD into second place on the leaderboard after Fonterra lifted its guidance on the 2016/17 dairy pay-out by 50 cents to $4.75 per kg.

The traditionally oil-sensitive CAD and NOK haven’t moved much on the latest oil price dip, while the AUD sits within 10 pips of where Sydney left it last night.

Yesterday, Australian construction work done in Q2 surprised to the downside (-3.7%) driven by lumpiness in the unwind of mining investment. Although a weaker than expected outcome, it does not look like it will present a significant risk to our preliminary Q2 GDP expectation of 0.3% q/q with part of the engineering component feeding from next week’s capex release.  US Data overnight was confined to July existing home sales and which fell by a bigger than expected 3.2%.

Coming Up

The great and the good in central banking and academic economics circles will be assembling in Jackson Hole tonight to kick off their 3-day annual Kansas Fed symposium.  Struggle as we do to believe that this will result in a much stronger steer from Fed officials about what’s the Fed near term (2016) intentions are, Janet Yellen’s appearance at the (AEST) midnight hour on Friday is the only big talking point in markets and in the meantime leaves FX, stocks and bonds lacking direction.

If there were to be shock from Yelled (it hasn’t happened yet) it would be that she plays up risk of a rate rise at the 20/21 September FOMC meeting – an event currently ascribed only a 27% probability by the US rates market. The most we might reasonably expect in this respect is that Yellen will now say that every meeting is now ‘live’.  This might provide at least a modest boost for the big dollar.

Whatever Yellen says Friday, we should remember that Jackson Hole is not designed to be about a talk-fest about near term policy matters. The bigger discussion in the context of ‘Designing resilient monetary policy frameworks for the future’ should be about what already highly stretched monetary policy can do in the event of a new downturn, and of course the debate already opened up by the likes of New York fed President Dudley and San Francisco Fed President Williams about what the long term neutral real interest rate might now be in a low growth/low productivity world.  If the view that this is not far from zero receives further succour, the dollar will struggle to go better out of Jackson Hole beyond whatever knee-jerk reaction Yellen might elicit.

All this is of course more than 24 hours in the future. There are a few snippets of interest before then, including the German IFO survey, US durable goods orders and weekly jobless claims and, following the blockbuster July UK retail sales report, the CBI’s August distributive (retail) sale report.


On global stock markets, the S&P 500 was -0.52%. Bond markets saw US 10-years +1.36bp to 1.56%. In commodities, Brent crude oil -1.96% to $48.98, gold-1.2% to $1,324, iron ore -0.1% to $61.70. AUD is at 0.7614 and the range since yesterday 5pm Sydney time is 0.7592 to 0.7633.

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