Markets Today: Not much the wiser

By Ray Attrill

European and U.S markets on Friday failed to key off the 4.82% rise in the Shanghai Composite, in contrast to Thursday. The proximity to the weekend Jackson Hole talk-fest looks to have been a factor keeping trading subdued, as too an interview broadcast by CNBC with Fed Vice Chairman Stan Fischer during the day that neither ruled in nor out the possibility of raising rates in September.

Both the S&P 500 and Dow finished about flat, and meaning that on the week the S&P was +0.91% but month to date -5.46%. In FX the dollar continues its recovery, DXY +0.52% but the broader BBDXY up just 0.17%. AUD bucked the firmer USD trend, adding 0.1% to 0.7173. In rates market, US 2yr Treasuries ended the NY session +2.8bps at 0.7156 (so up 10bps on the week and just about fully reversing the prior week’s drop). 10s were -0.4bp at 2.18% (compared to Monday’s intra-week low of 1.96%). In commodities, gold added $8.60 to $1133.6. The LMEX index added 1.03% and iron ore $2.11 to $56.04. August to date, iron ore is +$2.59. Oil rallied by upwards of $2.50.

The July US core PCE deflator rose by just 0.07%, so +0.1% rounded, reducing the y/y rise to 1.2% from 1.3%, its lowest level of the year. So another argument if needed for delaying Fed lift-off beyond September. Personal income rose by 0.4% as expected and personal consumption expenditure by 0.3%, below the 0.4% expected. The final University of Michigan August Consumer Sentiment index fell a point to 91.9 from the 92.9 preliminary and below the 93.0 expected.

CFTC/IMM data for the week ended Tuesday 25 August shows a sharp reduction in net speculative shorts in JPY and EUR but an extension of the already short base in AUD – data that goes a long way in rationalising recent FX price action. Overall USD longs vs. G10 currencies reduced to 244k from 367.1k. EUR net shorts were pared to 66.1k from 92.7k (almost half what it was two weeks ago). JPY shorts came in to just 39.1k from 90.1k and the recent high of 105.2k two weeks ago, so down by almost two thirds.

AUD net shorts blew out to 63.7k from 49.9k, the largest since the week ended 10 March and now extreme. This is one reason to be cautious about extrapolating the recent weaker AUD trend, short term at least.

Fed VC Fischer was interviewed by CNBC’s Steve Liesman in Jackson Hole on Friday (while markets were still open). He said he wouldn’t want to decide now on the lift-off case. He said the previous case for September lift-off was pretty strong but that the Fed doesn’t have to move immediately. His says confidence in inflation moving up was ‘pretty high’.

On Saturday, Fischer said “I do not plan to upset your rational expectation that I cannot tell you what decision the Fed will reach by 17 September”.

Coming Up

For all the confidence being exuded by Fed vice chairman Fischer and other central bankers at Jackson Hole that inflation would head higher as ‘output gaps’ close further – a view not shared by many academics also in attendance in Wyoming some of whom accused central bankers of reliance on outmoded thinking on inflation dynamics – we have no doubt that financial market volatility will have as much or more bearing than economic data volatility on the Fed’s 17 September policy decision. In this respect we have to be mistrustful that the strong resurgence in Chinese stock prices will hold. Here’s what the FT has just written:

“China’s government has decided to abandon attempts to boost the stock market through large-scale share purchases, and will instead intensify efforts to find and punish those suspected of “destabilising the market”, according to senior officials”.

“After standing on the sidelines for more than a week, the government resumed large-scale stock-buying in the last hour of trade on Thursday. This helped to lift the Shanghai benchmark index from a small loss to end the day up more than 5 per cent. The market rose by almost 5 per cent again on Friday. Traders and officials said the latest intervention was aimed at providing a “positive market environment” in preparation for a big military parade this week to celebrate the 70th anniversary of the “victory of the Chinese people’s war of resistance against Japanese aggression”.

If the Thursday/Friday Shanghai rally proves to be a flash in the pan, we have no doubt so too will the recent rebound in global stocks, in which case we’ll have greater confidence in our current view that the Fed will not be moving next month.

The data flow will of course be important too. In this respect we have the August payrolls report on Friday. In recent years, these have tended to undershoot expectations only to be subsequently revised higher. The last three Augusts have produced an average ‘first release’ rise in payrolls of 172k, rising to 219k on average on revision. The other important US releases this week will be the manufacturing and non-manufacturing ISMs (Tuesday and Thursday respectively). China’s official PMis tomorrow (and the final Caixin manufacturing reading together with their services index) will be another key international focus. Locally we have the RBA tomorrow and GDP on Wednesday.

Overnight

On global stock markets, the S&P 500 was +0.10%. Bond markets saw US 10-years -0.35bp to 2.18%. On commodity markets, Brent crude oil +5.24% to $50.05, gold+1.0% to $1,134, iron ore +3.9% to $56.04. AUD is at 0.7161 and the range since Friday’s local close has been 0.7121 to 0.7179.

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