Dollar Needs Fed and BoJ Guidance

Friday September 16: Five things the markets are talking about

U.S retail sales and industrial production data yesterday supports the case that the Fed is not going to tighten next week, with many remaining sceptical whether the Fed could pull the trigger at all this year. According to fed fund futures it’s a coin toss for the December hike.

If it’s a ‘no go’ on Sept 21, expect the Fed to continue to signal that a hike remains on the table in 2016 while portraying an even shallower path for the tightening cycle. This rhetoric alone should be capable of capping U.S bond yields, including those on the long end of the curve.

With stocks, bonds and commodities having all lost ground this week amid concerns that the ECB and BoJ are becoming more hesitant to boost their stimulus the focus now shifts to this morning’s U.S CPI data at 08:30 EDT. A benign report will see the dollar once again playing defense.

1. Equities pressured by financials and commodities

Asian bourses were higher overnight, helped by gains in Apple Inc.’s suppliers.

However, volumes were thin, as investors remained cautious and refrained from trading aggressively before monetary policy decisions from the BoJ and the Fed.

Japan’s Nikkei Stock Average was up +0.5%, but posted a weekly loss of -2.6%. Australia’s S&P/ASX 200 was up +1.1% and down-0.8% on the week. New Zealand’s NZX-50 was +0.8% higher and Singapore’s Straits Times Index was up +0.8%.

(Note: Markets in China, Hong Kong, Taiwan, South Korea and Malaysia were closed for the mid-Autumn festival).

In Europe, indices are putting a halt to the overnight rallies. Bank stocks are adding weight to the losses seen after it was reported the U.S Justice Department said to have asked Deutsche Bank to pay +$14B to settle probe into mortgage securities (DB were expecting +$2-3B). Lending its weigh to the FTSE 100 loss are commodity, mining, and energy stocks also trading lower.

U.S futures are set to open down –0.3%.

Indices: Stoxx50 -0.7% at 2,956, FTSE -0.2% at 6,715, DAX -0.5% at 10,380, CAC-40 -0.5% at 4,350, IBEX-35 -0.7% at 8,661, FTSE MIB -1.3% at 16,382, SMI -0.2% at 8,168, S&P 500 Futures -0.3%

2. Crude under pressure from supply dynamics

Oil prices pulled back yesterday on the resumption of exports from Libya and Nigeria and on worries that U.S. rig counts would continue to rise and that story continues today.

Brent crude (Nov) has slid -0.5% to +$46.38 a barrel, extending losses for the week to -3.4%. U.S. crude WTI is trading lower -0.6% to +$43.66, poised to end the week down -4.8%.

The release of lackluster U.S data yesterday initially saw gold rally, however, the markets continued concerns over the possibility of a Fed rate hike next week and the lack of safe haven demand has many closing out their weak long positions. Gold prices fell to a two-week low overnight ($1,312.60 per ounce) and down about -1% for the week.

3. Yield curves steepen

The uncertainty surrounding G3 central bank action is steepening sovereign yield curves – investors are putting money to work in the short-term while stepping away somewhat from owning longer dated debt.

In the U.S, 30-year bond yields are back to levels last seen in June, amid speculation that monetary loosening around the world has about run its course.

In Japan, 30-year JGB yields have climbed to a six-month high on bets that the BoJ will adjust policy to steepen the yield curve next week. The pickup in yields has been damping Japanese demand for higher-yielding debt elsewhere.

In Europe, Germany’s 10-year Bund yield has turned negative for the first time in a week (-0.013%) amid decreasing likelihood of a Fed hike and on falling stock prices. U.S 10’s currently yield +1.67% ahead of the open.

4. Dollar looking lost ahead of Fed

This week’s currency moves have been dominated by fixed income dealers outlook for central bank policy in Europe and Japan.

Both the BoJ and ECB have been relying on the Fed to do most of the heavy lifting by hiking interest rates. However, if the Fed remains on hold next week there is a growing lack of belief that officials can do much to weaken either the EUR (€1.1223) or JPY (¥101.95) and reason why currency ranges remain relatively contained.

Given that the BoJ has a track record for disappointing the market this year, the risk is the yen could strengthen ahead of the FOMC announcement when most of Asia comes back on line next week.

Elsewhere, sterling is on the back foot outright, dropping -0.3% to £1.3186, on speculation that potential painful Brexit negotiations will force the BoE’s hand to further ease monetary policy.

5. More worries for ECB

Euro data this morning confirmed that regional wages increased at the slowest pace in almost six-years in Q2 – wages were just +0.9% higher than in the same period last year, the smallest increase since the Q3 of 2010 and a sharp slowdown from the +1.7% increase recorded in Q1. As a result, total labor costs were up just +1% on the year, the smallest increase since Q1 of 2014. Data like this will make it near impossible for the ECB to reach its inflation targets.

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