From Marc to Market:
Yellen's presentation at Jackson Hole today
is the highlight of the week. It also marks the end of the summer
for many North American and European investors. It may be a bit of a
rolling start for US participants, until after Labor Day. However, with US
employment data next Friday, many will return in spirit if not in body.
While the FOMC
has shifted from signaling four hikes this year to two formally, and next
month's FOMC meeting may shift to only
one. It has become something of a sport
to show how poorly the Fed has forecast the economy and its policy. The
market expectations have also fluctuated, though it never accepted the
likelihood of four hikes this year. The odds of a September hike implied by the
Fed funds futures now stands at about 32% compared with 18% on August 1 and 10%
on July 26. As we have since midweek, we suspect there is greater
scope for Yellen to disappoint than to overshoot expectations. The
market hopes for a clear signal from Yellen, and although she is among the
plainest speaking Fed chairs, we suspect she will give little away.
Japanese prices are
moving in the wrong direction. For
the fifth consecutive month, the BOJ's self-selected core measure of CPI, which
excludes fresh food, has fallen. The -0.5% reading in July exceeded
expectations that prices fell 0.4% from a year ago. It represents a three-year
low.
Even if Japan
were to exclude food and energy, the Federal Reserve and ECB's definition of
core, CPI has rose a lowly 0.3% from a year ago. The median expectation was for a
0.4% increase. An argument can be made to exclude rents in Japan, which
may be falling due structural factors, like demographics, but that would be
only sufficient to lift a core measure to around 0.6%.
Japan's
monetary policy is unprecedented. The lack of historical experience
implies risks. The BOJ's balance sheet is 80% of GDP (compared to the
Fed's 25%), and no end is in sight. It has also adopted negative
interest rates. BOJ Governor Kuroda has started a comprehensive review of
monetary policy, but the results will be asymmetrical. He is looking to
do more not less. A risk-adjusted return on Japan's course seems
like a poor investment. It is important to recognize that the Fed's
asset purchases were not justified or explained by top Fed officials to boost
CPI.
The UK reported
details of Q2 GDP. The highlights include a 0.9% rise
in household spending, which is the most in two years and a contraction in
government spending (-0.2% vs. +0.5% in
Q1). The external sector was a bigger drag as exports rose 0.1% (not the 0.7%
increase of the median expectation), while imports were stronger than expected
(rising 1.0% vs. expectations for a 0.8% increase). Economic momentum did
seem to stall though as the quarter progressed and as the referendum
approached. In June manufacturing and construction contracted. The
key, of course, is the how the economy is doing in Q3. Next week's PMIs
will help clarify the picture.
The eurozone reported M3 slowed to 4.8% in July
from 5.0% in June. It is the slowest growth since
April. Lending to nonfinancial businesses edged up to 1.9% from 1.7%,
while lending to households was steady at 1.8%. Even in the most of
times, money supply, and lending figures are not market movers.
The euro has been trapped in about a one cent range this week
(~$1.1245-$1.1355). The North American session will start with the euro near
mid-range. The intraday technicals suggest scope for initial though
limited gains....MORE
