PMI day; Week of the central banks The dollar is starting the day higher against most other currencies as the market focused on the prospects for an improving US economy. Friday’s data showed that personal income rose less than expected and personal spending dropped unexpectedly in July, but the market preferred to focus on the jump in the Chicago PMI and the surge in consumer confidence, which reinforced the bull case for the dollar. The rising tensions in Ukraine are also helping the US currency, as the likely impact of further sanctions on the Eurozone economy can no longer be ignored. As a result, it is opening higher than its early Frida levels against all the G10 currencies except NZD. Among the EM currencies, the dollar was little changed on average. It gained against the Eastern European currencies, particularly RUB, as the Ukrainian situation worsened, but fell vs BRL.
Overnight news: NZD rallied after its official terms of trade index rose 0.3% qoq in 2Q, contrary to expectations of a 3.5% drop. This belies the impression from ever-decreasing prices at the biweekly milk auctions. With Australia’s terms of trade weakening, the difference should depress AUD/NZD.
Japan’s corporate data showed that company sales and profits and capital spending plans slowed sharply in Q2, but this was dismissed as an aberration caused by the hike in the sales tax. JPY weakened against the rising dollar (although JPY strengthened a bit vs EUR) and stocks rose regardless.
China’s official manufacturing PMI for August was pretty much in line with expectations at 51.1, down from 51.7, while the HSBC/Markit final PMI for China was revised down to 50.2 from the initial 50.3. Both showed a slowing economy but at least they remained above the critical 50 barrier.
Today’s indicators: It’s a PMI day in Europe as well. It starts with the manufacturing PMI figures for August from several European countries, the Eurozone as a whole and the UK. As usual, the final forecasts for the French, the German and Eurozone’s figures are the same as the initial estimates. The UK manufacturing PMI is estimated to be slightly down to 55.1 from 55.4.
The UK manufacturing PMI is estimated to be slightly down. UK mortgage approvals for July are also coming out. Last month mortgage approvals rose after four consecutive declines, but they are expected to resume their decline this month. The combination of a lower PMI and lower mortgage acceptances could put downward pressure on the pound.
US and Canadian markets are closed for the Labor Day holidays.
As for the rest of the week, six of the G10 Central Banks hold their meetings. The spotlight will be on ECB policy meeting on Thursday, especially after the recent poor economic data from Euro area along with President Draghi’s comments on inflation expectations at Jackson Hole event. Given that the Bank has hired an outside advisor to advise on a possible ABS program, I expect further clarifications about the likelihood of ABS purchases – a form of “private sector QE” – at the press conference following the decision. On Tuesday, the Reserve Bank of Australia meets. Economists unanimously expect the RBA to keep rates steady, and I anticipate no significant changes in the statement accompanying the rate decision. On Wednesday, it’s the Bank of Canada’s turn. At their last meeting, the BoC kept a neutral stance and revised their GDP growth forecast down for 2014 and 2015. I expect them to repeat themselves and remain on hold. On Thursday, besides ECB, BoJ, Riksbank and BoE hold their policy meetings. Following Riksbank’s unexpected 50bps rate cut in early July and given that the country’s economics haven’t improved, we might see additional action from the Nordic central bank. The BoE is unlikely to change policy and therefore the impact on the market as usual should be minimal. The minutes of the meeting however should make interesting reading when they are released on 17th of September, especially after the two dissenting votes at last month’s meeting. The slowdown in Japan’s inflation could eventually trigger more action by the BoJ, and the statement from the policy meeting should give us more insights into n their next action.
On Tuesday, the Reserve Bank of Australia meets. Economists unanimously expect it to keep rates steady. Since the RBA last met on Aug. 5th, the Aussie is almost unchanged vs the USD. There are probably more worries about the Chinese economy, which has continued to weaken, and Australian unemployment has risen to a 12-month high, but capital spending, the biggest worry for the Australian economy recently, has managed to keep growing. As a result, I anticipate no significant changes in the statement accompanying the rate decision.
Finally on Friday, the major event will be the US non-farm payrolls for August. The market consensus is for a rise of 209k, down from 220k in July. At the same time the US unemployment rate is forecast to have declined to 6.1% from 6.2%. The seventh consecutive figure above 200k would show continued strong growth in jobs, bolstering the FOMC’s confidence and the dollar.
Eurozone’s preliminary Q2 GDP and Canada’s unemployment rate for August are also released Friday.