FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Cautious optimism appears to be the order of affairs as the market looks to a series of growth figures and Bernanke’s key Jackson Hole speech today. Most Asian equity indices are trading higher, though again investors would need to ponder how much of this is artificial as the short-selling ban currently in place in France, Italy, Spain and Belgium has been extended. We believe markets are skewed towards a “risk on” posture heading into the speech, especially given this week’s price action, though not aggressively so. There are other worries to consider, such as yesterday’s jitters in Germany over its credit rating and an impending hurricane along the US east coast. As such, any disappointment on the part of Bernanke with regard to QE3 would not be welcomed, but the ultimate scope for downside may not be as aggressive as feared. Yesterday’s US jobless claims were higher than consensus expectations at 417K (cons. 405K), but the reaction was limited as today’s GDP numbers are probably the last market-moving figures before the focus shifts to policy. We expect the US economy to have expanded by 1.0% annualised in Q2 (cons. 1.10%). Growth numbers are also out in the UK, and the Swiss KoF leading indicator might give some direction on how the Swiss economy is currently faring with an ‘overvalued’ currency, according to the SNB. Overnight EURUSD traded 1.4370-1.4426 and USDJPY 77.20-77.50.
EUR
The ECB and the BoE extended their reciprocal swap lines, although these have never been used. The lines were originally set up in Dec 2010, and were due to expire in Sept 2011. However, following the extension, they are now due to remain in place until Sept. 2012. Should funding strains increase, the lines are designed to ensure a ready supply of sterling for Eurozone banks, up to GBP 10 bn in total.
German Finance Minister Schaeuble said the euro will “definitely” be around in 10 years’ time. He said the German parliament might delay until Sept 29 a vote on extending the powers of the EFSF.
France, Italy, Spain and Belgium extended their bans on short selling financial stocks to Sept 30. The original ban came into force on Aug 3.
Yesterday all three ratings agencies affirmed Germany’s credit rating at AAA, according to CNBC
Denmark’s central bank lowered the policy rate by 10 bp. The move is a reaction to falling Eurozone money market interest rates which have encouraged DKK inflows. Markets are now pricing in 17 bp of ECB cuts over the next 12 months. Our European economists think the ECB will keep the refi rate at 1.50% for all of 2012.
GBP
BOE MPC member Weale gave a dovish speech, suggesting that the fall in oil prices may feed through into lower inflationary pressure in the longer term. He said he does not see the need for more QE at the moment but said he was certain the BOE would do more if the economic situation warranted it. Weale was one of the two hawks voting for rate hikes up until the August 4 meeting, so this fairly sudden change in tone is significant.
UK CBI reported sales for August fell to -14, lower than expectations for -10 and after -5 in July.
Ahead today UK GDP is due, we expect an expansion in growth of 0.1% on the quarter, vs. market’s 0.2% view.
JPY
Prime Minister Naoto Kan has formally resigned as party head, and said he would also step down as PM once the party had chosen its new leader next week.
Inflation numbers overnight were slightly higher than expected, headline and core CPI came in at 0.2% and 0.1% annualised respectively.
AUD
RBA Governor Stevens’ parliamentary testimony was broadly cautious, consistent with our views that the central bank will remain on hold for the rest of the year. He noted external conditions were challenging and caused the domestic outlook to become more cautious. Warning that global growth ‘did not look as strong’ as six months ago, the policy outlook appeared particularly volatile but argued against immediate policy cuts due to persistent inflation concern. Our economists note the overall tone suggests current market pricing of cuts is too aggressive.
NZD
Our NZ economist has updated his thinking on when the RBNZ might hike next. For now, he continues to expect 25 bp of tightening in December, provided markets stabilise, confidence rebounds, and the recovery remains on track. However, given the risks and uncertainties at the current moment, he notes it is difficult to be confident about this timing – he recognises that it is not difficult to envisage a scenario where the RBNZ does not touch the OCR until sometime in 2012.
SCHEDULE
Please visit GCI’s Economic Calendar for a schedule of market news and events.
