A heavy week for monetary policy and political history this week. RBA gets things started tonight. Tomorrow we have the US election and then the devaluing central bank onslaught later in the week with the Fed, BoE and BoJ all on tap.
Another PIGS reminder
An interesting piece by the always readable Ambrose Evans-Pritchard over at the Telegraph yesterday discusses the important risks to the EuroZone from the situation with PIGS sovereign debt. The Euro rally has been stopped in its tracks over the last couple of trading days as the market has rediscovered the PIGS and as the potential timetable for dealing with the eventuality of sovereign defaults at the PIGS periphery has been moved forward by a number of developments, now including the Greek local elections. These are scheduled for November 7 and the possibility of a snap national election in the wake of these elections raises the specter of a disgruntled populace voting those to power who promise to lift the debt albatross from around the nation’s neck. The most quotable tidbit from the article: “Investors will pay the price for failing to grasp the mechanical and obvious points that currency unions do not eliminate risk: they switch it from exchange risk to default risk.”. For more on the EU summit that concluded on Friday and to which Mr. Evans-Pritchard refers extensively, have a look at this FT article. So we must now add this treaty change to our long laundry list of event risks.
An interesting piece by the always readable Ambrose Evans-Pritchard over at the Telegraph yesterday discusses the important risks to the EuroZone from the situation with PIGS sovereign debt. The Euro rally has been stopped in its tracks over the last couple of trading days as the market has rediscovered the PIGS and as the potential timetable for dealing with the eventuality of sovereign defaults at the PIGS periphery has been moved forward by a number of developments, now including the Greek local elections. These are scheduled for November 7 and the possibility of a snap national election in the wake of these elections raises the specter of a disgruntled populace voting those to power who promise to lift the debt albatross from around the nation’s neck. The most quotable tidbit from the article: “Investors will pay the price for failing to grasp the mechanical and obvious points that currency unions do not eliminate risk: they switch it from exchange risk to default risk.”. For more on the EU summit that concluded on Friday and to which Mr. Evans-Pritchard refers extensively, have a look at this FT article. So we must now add this treaty change to our long laundry list of event risks.
RBA on tap tonight
One has to imagine that the RBA chooses to pass tonight, if for no other reason than the onslaught of event risks and uncertainty that markets face tomorrow and on Wednesday with the US election and FOMC meeting. On Friday, it was clear that the market was trying to put back on the QE trade, as bonds snapped higher again and especially with the new spike in precious metals (silver has even traded to a new high for the cycle today). These developments and a stronger than expected Chinese manufacturing PMI served as smelling salts for the AUD bulls, as Aussie snapped back higher in response from its sub -0.97 trough. As for actual rate expectations from the RBA, the market hasn’t budged at all over the last couple of days, so this is more about inter-market developments rather than any fundamental view on the RBA. The question tonight will be first: what is the guidance from the RBA and second, does the market even want to react much with such important event risks in the pipeline? Our immediate thought is that tactically, a bit too much upside is priced into Aussie at the moment, but anything can happen in a thin market and any whiff of hawkish guidance - even despite a pass on hiking this time around could send the pair spiking higher, even if only temporarily.
One has to imagine that the RBA chooses to pass tonight, if for no other reason than the onslaught of event risks and uncertainty that markets face tomorrow and on Wednesday with the US election and FOMC meeting. On Friday, it was clear that the market was trying to put back on the QE trade, as bonds snapped higher again and especially with the new spike in precious metals (silver has even traded to a new high for the cycle today). These developments and a stronger than expected Chinese manufacturing PMI served as smelling salts for the AUD bulls, as Aussie snapped back higher in response from its sub -0.97 trough. As for actual rate expectations from the RBA, the market hasn’t budged at all over the last couple of days, so this is more about inter-market developments rather than any fundamental view on the RBA. The question tonight will be first: what is the guidance from the RBA and second, does the market even want to react much with such important event risks in the pipeline? Our immediate thought is that tactically, a bit too much upside is priced into Aussie at the moment, but anything can happen in a thin market and any whiff of hawkish guidance - even despite a pass on hiking this time around could send the pair spiking higher, even if only temporarily.
Looking ahead
On the economic data front, watch out, of course, for the ISM manufacturing data, though it is clear that the feared contraction in manufacturing has been slow to materialize after mostly strong results from the various regional surveys this month . There are worrying signs in the far more important non-manufacturing ISM, though that data is not on tap until Wednesday and risks getting lost in the anticipation of the FOMC meeting and the new monetary policy statement.
On the economic data front, watch out, of course, for the ISM manufacturing data, though it is clear that the feared contraction in manufacturing has been slow to materialize after mostly strong results from the various regional surveys this month . There are worrying signs in the far more important non-manufacturing ISM, though that data is not on tap until Wednesday and risks getting lost in the anticipation of the FOMC meeting and the new monetary policy statement.
We’ll not add to the endless speculation on the upcoming FOMC statement Wednesday, but the market is back on leaning on the accelerator on the QE theme – which raises the stakes for the Fed and makes the surprise side more volatile (i.e., that a ho-hum announcement in line or on the hawkish side of expectations triggers risk aversion and a sharp consolidation in the USD back to the strong side as a knee jerk reaction). Also, the renewed rally in government treasuries - with Europe joining the fray today - is putting pressure on the JPY to rally again. That pressure has not lessened with the very low US PCE core data today (so ironic as commodity inflation is pressing in from all sides – terrible for end demand and for JPY as well as USD fundamentals).
One thing that is very important to remember with the US election as the results begin to roll in late tomorrow: the stronger the victory for the tea party, the more likely it is that Bernanke’s Fed meets resistance sooner rather than later. The tea party will quickly discover after Election Day that the Fed should perhaps be a bigger target than the Obama administration – and one that it might be easier to assault head on if a debate develops about the proper extent of Fed powers. The electorate has no idea what the Fed does and its role in the US economy – but it might understand more in the months to come as it receives plenty of attention from the new tea party faction of the Republican party – perhaps spearheaded by Mr. End the Fed himself, Ron Paul. As well, the more hawkish contingent in the Fed could be emboldened by such a development and begin to speak more forcefully against QE. The market seems to assume that Mr. Bernanke can operate without answering to any higher power indefinitely. That idea will be sorely tested in the coming year as QE fails to improve the US economy and has already provoked the risk of increasing impoverishment through cost-push inflation driven by the fear and reality of the greenback’s devaluation.
Stay on your toes this week and be careful out there.
Stay on your toes this week and be careful out there.
Economic Data Highlights
- Australia AiG Performance of Manufacturing Index out at 49.4 vs. 47.3 in Sep.
- UK Oct. Hometrack Housing Survey out at -0.9% MoM and -0.1% YoY vs. +1.0% YoY in Sep.
- Australia Q3 House Price Index out at +0.1% QoQ and +11.5% YoY vs. 0.0%/+13.4% expected, respectively and vs. +16.3% YoY in Q2
- China Oct. PMI Manufacturing out at 54.7 vs. 53.8 expected and 53.8 in Sep.
- China Oct. HSBC Manufacturing PMI out at 54.8 vs. 52.9 in Sep.
- Sweden Oct. PMI Survey out at 61.8 vs. 61.3 expected and 63.3 in Sep.
- Norway Oct. PMI out at 54.2 vs. 53.0 expected and 53.1 in Sep.
- Switzerland Oct. SVME PMI out at 59.2 vs. 59.3 expected an d59.7 in Sep.
- UK Oct. PMI Manufacturing out at 54.9 vs. 53.0 expected and 53.5 in Sep.
- US Sep. Personal Income out at -0.1% MoM vs. +0.2% expected
- US Sep. Personal Spending out at +0.2% MoM vs. +0.4% expected
- US Sep. PCE Deflator out at +1.4% YoY as expected and vs. 1.4% in Aug.
- US Sep. PCE Core out at 0.0% MoM and +1.2% YoY vs. +0.1%/+1.3% expected, respectively and vs. +1.3% YoY in Aug.
Upcoming Economic Data Highlights (all times GMT)
- US Oct. ISM Manufacturing (1400)
- US Sep. Construction Spending (1400)
- New Zealand Q3 Average Hourly Earnings (2145)
- Japan BoJ Meeting Minutes (2350)
- Australia RBA Cash Target (0330)
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