US ISM Non-manufacturing in-line with expectations - still contracting. US Continuing Claims data sours the US employment picture.
MAJOR HEADLINES – PREVIOUS SESSION
* Australia Aug. AiG Performance of Services Index rose to 48.0 vs. 44.1 in Jul.
* Australia Jul. Trade Balance fell to -1556M vs. -880M expected and -538M in Jun.
* Sweden Riksbank Interest Rate left unchanged at 0.25% as expected
* Germany Aug. Final Services PMI adjusted lower to 53.8 vs. 54.1 original estimate
* EuroZone Aug. Final Services PMI adjusted higher to 49.9 vs. 49.5 original estimate
* EuroZone Jul. Retail Sales fell -0.2% MoM vs. +0.1% expected
* EuroZone ECB left interest rates unchanged at 1.00% as expected
* US Weekly Initial Jobless Claims out at 570k vs. 564k expected and 574k last week
* US Weekly Continuing Claims out at 6234k vs. 6130k expected and 6142k the previous week
* US Aug. ISM Non-manufacturing out at vs. 48.0 expected and 46.4 in Jul.
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
* Japan Q2 Capital Spending (2350)
* US Fed's Fisher to Speak (0100)
Market Comments:
Western equity markets were giddy again ahead of the US open as Chinese equities saw their strongest 1-day rally in six months. The rally was apparently due to statements from Chinese regulatory authorities promising a "stable and healthy" market. When you have an authoritarian regime, you can always promise a stable market, just like you can create economic growth by calling spending outlays and product shipments directly into GDP, regardless of whether the money is spent or customers are buying the goods. So while it is vastly important to follow the Chinese market as one measure of the Chinese bubble economy, the market there has always moved relatively independently of major markets worldwide (probably the most independent mover, in fact) and the eternal threat of manipulation from the regime of both the economy and its markets makes drawing any conclusions about the true nature of affairs there nearly impossible. Let's just say that world markets will need to rally on their own accord for signs of broader risk appetite to look healthier. Other measures of risk are looking iffy - especially for end-consumption related corporate CDS'.
The ECB left rates unchanged as expected. The focus was on Trichet's press conference and any guidance he could provide on QE shenanigans and the ECB's stance on forward policy trajectory. The most important news item from the press conference was the ECB decision to extend a new round of 12-month financing (apparently the June tender of 442 billion Euros wasn't quite enough to keep the creaking European economy from collapsing....) in September or October without a spread vs. the 1.00% rate. Earlier statements indicated that the ECB was considering creating a spread to make funds less easy to come by. Perhaps the ECB has had a more thorough peek inside a number of European banks' balance sheets. Oh, the horrors... In any case, the ECB has gone hard-core dovish and the currency market is largely shrugging its shoulders. This is surprising. After peaking out at over 1.6% in August, German 2-year rates have now descended to 1.14%. This is a huge change in forward expectations. Of course, rates have come down elsewhere as well, and the spread between German and US 2-year rates has been largely within the 20-30 bp range for over two months now, which has contributed heavily to the lack of directionality in EURUSD.
Sweden's Riksbank left the overnight repo rate unchanged at a paltry 0.25% and gave surprisingly dovish forward guidance by promising that the rate would remain at the same level "over the coming year". The bank also said it would loan Swedish banks 12-month loans of 100 billion kronor. The Riksbank has received a bit of notice since last month due to its policy of moving the deposit rate to a -0.25% to encourage lending activity. (Some commentators point out that Swedish banks apparently aren't big users of the Riksbank's deposit facility). The Riksbank deputy governor Svensson is the chief architect of this policy and worked with Bernanke back in their Princeton days. The move into negative rates on the deposit side did no damage to the krona, which saw vast appreciation recently until the latest hiccup in risk appetite. The kneejerk reaction to today's rhetoric was to sell the krona, but it is has already come back sharply from the lows on the day as SEK will always have at least one eye on global asset markets and risk appetite. The 10.37 area in EURSEK bears watching for a possible extension in the recent rally.
The US data today was nothing to get particularly excited about. The weekly jobless claims have stabilized at still rather high levels and the continuing claims showed a worrying uptick this week. The US ISM non-manufacturing data was still in recessionary territory below 50, and only very slightly better than expectations. Remember that this represents the lion's share of the US economy. Of the ISM components, the standouts were Prices Paid, at 63.1 vs. 41.3 in July and New Orders at 49.9 - the highest level since last September. Employment is still mired in the dumps down at 43.5, though this is still the strongest reading in that category in about a year as well.
Chart: EURSEK - the fight of the doves
Both Riksbank and ECB out today with very dovish performances. Which dove gains the upper hand? If the asset market sell-off continues here, we suspect that the 10.37 level in EURSEK will have a tough time holding and that the SEK will be the weaker of the two, even if the SEK remains undervalued for the longer term.
Analysis by:John Hardy
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