By Dean Popplewell
Capital markets are beginning to thin out more so than normal. This is emphasizing that the holiday season is here and trader empathy is abundant. With both the FED and ECB all talk so far, few traders want to do anything of substance, with many preferring to go with the flow and wait until next month's FOMC meet and the German court ruling for direction conviction. Central Banks hold all the cards and the deck is stacked in their favor. Currently, rhetoric bullying rather than action is their weapon of choice. Last night's highly anticipated data from China should bring the PBoC on board the monetary easing train. Space is becoming limited and the train wants to depart. The market either gets a bigger train or someone gets off the “potential easing tour.”
Australasian data kept the market ticking over last night and what is more important, provided writers with copy. Will it be a hard or soft landing? Has China the capability to wildly surprise many just like in the “pool’? Again, these answers cannot accurately be delivered, it's a game of perception, smoke and mirrors. Remember, we investors “cannot handle the truth,” so we are served and we lap up what China gives us and last night their growth data disappointed while inflation softened, creating more room for the PBoC to cut interest rates. So we have another Cbank boarding the monetary easing train that is currently stationary. Chinese IP growth at +9.2%, y/y, moderated substantially from +9.5% in June and well below consensus (+9.7%). It’s long been known that the meteoric pace of growth cannot be sustained and “even with these wobbles” there are still estimates that Chinese GDP will top +8% this year. Any further easing will only serve up another boost. With headline inflation softening to +1.8%, y/y from +2.2% in June, coupled with the fact that domestic food prices are beginning to moderate along with demand slowing will create even more room for the PBoC to cut interest rates.
In Japan, the BoJ board voted unanimously to keep the target for the overnight call rate and total QE unchanged. However, policy makers have not surprisingly downgraded its assessment of the economic environment. In particular, the BoJ noted that the “pickup in exports has moderated, and the recent reading on production has been relatively weak.” The latest METI industrial production data showed a -2.2%, q/q decline in Q2, the first quarterly decline in four quarters. Now that the core G10 Cbankers are in a policy easing (apart from BoC Governor Carney who will publicly have to change his tune sooner) and balance sheet expansion mode, JPT, that go-to risk averse currency of choice, is expected to remain supported outright and against the trouble single currency. The BoJ remains in a tough spot, QE is currently not at the top of their change list, the overvalue of their currency is and their dilemma will be to internationally justify intervention on the currency’s behalf at current levels. All Cbanks have their international hangups!
Australia it seems can do no wrong. The only place it seems to be underperforming is at the Olympics. Last night the Aussie economy added +14k jobs last month, slightly above consensus. The unemployment rate remained steady at +5.23% compared to a revised +5.25% in the previous month, and far, far away from levels that would worry policy makers at the RBA. The shoe that fell was the mix of full and part-time gains. The headline was disappointing with only a +9k rise in full time following a-35k decline in the previous month. This benchmark data should keep the RBA in the corner for Q3 and the only time they should appear is when this one directional, world loving currency of their starts to become a problem.
This market empathy and lack of Cbank follow through again has the EUR testing some key support levels. It possible that the US yield advantage could pressurize the single currency back to 1.22 stratosphere, as an outperformance of 2-year German product versus its US counterpart suggests a move back to the spread wides of the summer. A EUR break below 1.23, with conviction, would very much dampen hopes for a 1.25 recovery. Technically, the momentum behind the short term bull wave, and whatever rectangle or triangle the techies want to call it, from the July 24 low at 1.2042 is clearly slowly down. Its not a surprise with the lack of enthusiasm that the retail sector have taken profit and currently sit EUR neutral. However, It’s a slippery slope!