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