Weak US inflation and housing starts data makes Fed puff out its chest in satisfaction on recent QE launch. But will the ugly data mean a renewal of the QE-driven speculative bubble or are those days behind us?
UK joins the Ireland debt crisis fray
As IMF representatives are set to arrive in Dublin tomorrow, the UK has declared its intention to do what it can to help Ireland work its way through the Irish debt crisis, an announcement that curiously saw little correction in the pound versus the broader market. If risk aversion remains at the fore here, one would expect GBP to underperform the greenback on this news. Still, the risks for the UK are relatively small, as it is only choosing to help Ireland because of the proximity and integration of its economy with Britain’s. Irish GDP is only a tiny fraction of the UK’s, though the estimated price tag on a Irish bailout, at EUR 50 billion, is some one-third of Irish GDP. The risk from Ireland remains far larger for the EuroZone, where we must follow the market’s pricing of contagion risk. On that account, most intra-Europe sovereign spreads are off their recent highs from a few days ago, but still very elevated.
As IMF representatives are set to arrive in Dublin tomorrow, the UK has declared its intention to do what it can to help Ireland work its way through the Irish debt crisis, an announcement that curiously saw little correction in the pound versus the broader market. If risk aversion remains at the fore here, one would expect GBP to underperform the greenback on this news. Still, the risks for the UK are relatively small, as it is only choosing to help Ireland because of the proximity and integration of its economy with Britain’s. Irish GDP is only a tiny fraction of the UK’s, though the estimated price tag on a Irish bailout, at EUR 50 billion, is some one-third of Irish GDP. The risk from Ireland remains far larger for the EuroZone, where we must follow the market’s pricing of contagion risk. On that account, most intra-Europe sovereign spreads are off their recent highs from a few days ago, but still very elevated.
Fed on the defensive
The Wall Street Journal’ “Fed insider” Hilsenrath discusses a number of Fed officials who were out defending the most recent QE2 decision. No surprises that it was the dovish quartet of Yellen, Dudley, outgoing Evans and incoming Rosengren that have spoken up most strongly in favor of the decision. The latter two suggested that QE could be expanded if conditions warrant. These seemed to be little fallout for the dollar on this news. Also, FOMC board of governors nominee Peter Diamond’s nomination was finally approved yesterday, despite the strenuous objections of Republican senator Shelby. There was no public spectacle made of his nomination vote, and little is known about the Nobel-prize winning economist in terms of his thoughts on monetary policy. It is important to look for clues from every FOMC voting member these days.
The Wall Street Journal’ “Fed insider” Hilsenrath discusses a number of Fed officials who were out defending the most recent QE2 decision. No surprises that it was the dovish quartet of Yellen, Dudley, outgoing Evans and incoming Rosengren that have spoken up most strongly in favor of the decision. The latter two suggested that QE could be expanded if conditions warrant. These seemed to be little fallout for the dollar on this news. Also, FOMC board of governors nominee Peter Diamond’s nomination was finally approved yesterday, despite the strenuous objections of Republican senator Shelby. There was no public spectacle made of his nomination vote, and little is known about the Nobel-prize winning economist in terms of his thoughts on monetary policy. It is important to look for clues from every FOMC voting member these days.
Miserable US Data
The US headline CPI was weaker than expected and the core number saw the lowest year-on-year inflation on record, as the runup in raw materials prices has apparently failed to feed through to core inflation so far. This and the absurdly weak housing starts data from October must be making the Fed doves feel more comfortable with their recent decision to launch the next round of quantitative easing. It’s tempting to believe that this bad US data might trigger the awful QE-logic of the cycle that led us to such heights in risk appetite starting in early September, namely that this means the unending Fed gravy train is guaranteed and therefore we should all speculate in risk again at the expense of the greenback. While this may be the case for a short time, the recent deterioration in the technicals for the pro-risk/anti-USD trade suggests that any such impulse will quickly fade in the days or weeks ahead, if it even gets started in the first place.
Looking ahead
Interesting data up tomorrow again with the latest weekly jobless claims number from the US. We seem to have a positive trend developing there and it would be interesting to see how the market would react to another drop in the claims data after last week’s data was close to the post-Lehman bankruptcy low. We also have the Philly Fed out, which will be closely watched after the Empire data mysteriously dove over a cliff this month.
Also interesting is the strong technical rejection of the rise in yields yesterday at the longest end of the US yield curve. What will this mean for JPY crosses?
Interesting data up tomorrow again with the latest weekly jobless claims number from the US. We seem to have a positive trend developing there and it would be interesting to see how the market would react to another drop in the claims data after last week’s data was close to the post-Lehman bankruptcy low. We also have the Philly Fed out, which will be closely watched after the Empire data mysteriously dove over a cliff this month.
Also interesting is the strong technical rejection of the rise in yields yesterday at the longest end of the US yield curve. What will this mean for JPY crosses?
Chart: AUDJPY
AUDJPY at an interesting inflection point here, deciding whether it is comfortable above this old 81.25 resistance area. We’ll watch the bond market with interest here – it would seem that bonds might find further buyers after the strong reversal in the US 30-year yesterday. The JPY’s traditional sweet spot is certainly a world of falling yields and risk aversion – and those conditions are anathema to the high-flying Aussie. Of course, if bonds don’t take a more definitive stand here, we probably just get more churning in this cross.
AUDJPY at an interesting inflection point here, deciding whether it is comfortable above this old 81.25 resistance area. We’ll watch the bond market with interest here – it would seem that bonds might find further buyers after the strong reversal in the US 30-year yesterday. The JPY’s traditional sweet spot is certainly a world of falling yields and risk aversion – and those conditions are anathema to the high-flying Aussie. Of course, if bonds don’t take a more definitive stand here, we probably just get more churning in this cross.
Economic Data Highlights
- US Weekly ABC Consumer Confidence out at -47 vs. -46 last week
- Australia Sep. Westpac Leading Index out at 0.0% vs. -0.1% in Aug.
- Australia Q3 Wage Cost Index rose 1.1% QoQ and 3.5% YoY vs. 1.1%/3.3% expected, respectively, and vs. +3.0% in Q2
- Sweden Oct. Average House Prices out at 1.952M vs. 1.902M in Sep.
- UK Bank of England voted 7-2 on most recent monetary policy statement
- UK Oct. Oct. Jobless Claims Change fell -3.7k vs. +6k expected
- UK Sep. Average Weekly Earnings ex Bonus rose 2.2% 3M/YoY vs. 2.3% expected and 2.0% in Aug.
- EuroZone Sep. Construction Output fell -2.1% MoM and -8.1% YoY vs. -7.3% YoY in Aug.
- US Oct. CPI out at +0.2% MoM and +1.2% YoY vs. +0.3%/+1.3% expected, respectively
- US Oct. CPI ex Food and Energy out at 0.0% MoM and +0.6% YoY vs. +0.1%/0.7% expected, respectively and vs. +0.8% YoY in Sep.
- US Oct. Housing Starts out at 519k vs. 598k expected and 588k in Sep.
- US Oct. Building Permits out at 550k vs. 568k expected and 547k in Sep.
Upcoming Economic Calendar Highlights
- US Fed’s Bullard to Speak (1415)
- US Weekly DoE Crude Oil and Product Inventories (1530)
- New Zealand Producer Prices Inputs/Outputs (2145)
- Australia Aug. Average Weekly Wages (0030)
- New Zealand ANZ Consumer Confidence (0200)
- Australia RBA’s Battellino to Speak (0505)
No comments:
Post a Comment