August 31, 2016

Markets Today: Make a new plan, Stan…

As we went home yesterday evening, there was pretty keen anticipation of a forthcoming Bloomberg TV interview with Fed vice-chair Stanley Fischer.

As we went home yesterday evening, there was pretty keen anticipation of a forthcoming Bloomberg TV interview with Fed vice-chair Stanley Fischer, after his suggestion to rival business TV broadcaster CNBC at Jackson hole last Friday that Fed chair Yellen’s just-delivered speech was consistent with potentially two Fed rate rises this year (a script no-one in truth really believed then, or now).

In the event, it was less what Fischer said than the unexpected surge in the Conference Board’s US consumer confidence reading – 101.1 up from 96.7 and the 97.0  expected and in contrast to the less stellar University of Michigan version last Friday – that looks to have been responsible for the fresh across-the-board gains in the US dollar. In contrast, US yields are actually lower than where they were trading ahead of either Fischer or the confidence data.

We seem to be back in a situation where FX is marching to a somewhat different drum than interest rate markets, the FX market seemingly more confident about Fed intentions to lift rates this year than the latter. Déjà vu. Or perhaps it’s that these clever bond market folks are surmising that if the dollar is going to start leaping ahead again, this in itself will play to Fed inaction as financial conditions tighten through the currency. Déjà vu all over again.

As for Stan Fischer, he wasn’t asked directly to clarify Friday’s remarks, but quizzed on whether the Fed is in a ‘one and done’ or ‘two and done’ situation or needs to deliver a measured series of hikes. He replied “I don’t think you can say one and done”. This might be more a rebuttal of St. Louis Fed president James Bullard’s now well-known views that the Fed should indeed be one and done from here, than a reference to the possibility of more than one rate hike this year alone. At a minimum though, Fischer appears keen to have markets price in more hikes down the road.

US consumer confidence aside, the other economic news of note overnight was a downside surprises on German CPI (down to 0.3% from 0.4% YoY on the HICP measure, not the expected rise to 0.5%). This suggests a similar downside surprise in the pan-Eurozone version due later today.

Looking across the G10 currency spectrum, the yen continues to be the favoured punch bag in G10, USD/JPY up 1.1% to ¥103 in the last 24-houers. Comments from Japan PM Abe’s adviser Honda that buying foreign bonds was an option for the BoJ if G7 peers consider FX intervention to be manipulation, might have helped here (as too month-end related demand for dollars).  However, since buying foreign bonds is tantamount to intervention on a large scale – and in a world of unconventional monetary policy, direct interference with other countries’ monetary policy – we doubt this is a serious starter.

The Australian dollar is also near the bottom of the FX leader board, a fairly typical occurrence during episodes of broad-based US dollar strength. It’s down over half a cent from where we left it yesterday to a low of 0.7501. The NZD has also come within kissing distance of 0.7200.

Commodities were lower across the board, seemingly re-establishing their (negative) correlation with the dollar, including oil and which failed to find support on noises from Iraq about supporting an oil production freeze when OPEC meets in Algeria next month.

Coming Up

There’s a fair smattering of data and events both locally and internationally today, though it’s questionable whether any of them will have a profound market impact as the clock ticks down to Friday’s US payrolls data and then (hopefully) the return of fuller northern hemisphere market participation from next week.

Here we have private sector credit data at 11:30am but this rarely springs much of a surprise or moves either currency or rates market – today’s numbers shouldn’t prove an exception.  We also have RBA assistant Governor Guy Debelle speaking at the FX Week Asia conference in Singapore but he has of late been trawling the world talking about the plumbing and code of conduct in the rates and FX market and today’s speech is unlikely to be an exception or veer onto the topic of RBA policy or currency values in any subsequent Q&A.

NZ has the ANZ business survey (11:00 AEST) and Japan July industrial production data (the latter following better than expected household spending and retail spending figures yesterday).  Also in our time zone, Boston Fed president Rosengren (considered dovish) and Chicago Fed president Charles Evans (an uber dove) both speak in Beijing, though not until 17:15 AEST. US data includes ADP employment, pending home sales and the Chicago PMI. ADP will grab the headlines, as unreliable a guide to US payrolls as it can be.


On global stock markets, the S&P 500 was -0.20%. Bond markets saw US 10-years +0.68bp to 1.57%. In commodities, Brent crude oil -1.91% to $48.32, gold-1.0% to $1,310, iron ore +0.3% to $59.31. AUD is at 0.751 and the range since yesterday 5pm Sydney time is 0.7501 to 0.7560.

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