It takes all the running you can do, to keep in the same place Last week was really remarkable. So much action to go nowhere! Ten-year Treasury bonds had a 10-sigma day Wednesday and over the week had a 42 bp range, yet they finished Friday at 2.20%, compared to 2.28% a week earlier. The S & P 500 had a 5% range on the week but in the event finished the week down only 1%, with the VIX almost unchanged for the week at 22, even though the high for the week was 31. And the dollar index was down 0.2%, not much considering the rout we saw on several days. The US currency has even gained over the last week against NOK, CAD, JPY and GBP.
What calmed the market? In part, some half-hearted encouragement from the ECB. Council Member Coeure said the Eurozone is in “crisis times,” but although Nowotny said on Thursday the purchases would start in December “at the earliest,” Coeure said they will start buying ABS and covered bonds “within the next days.” Even uber-hawk Jens Weidmann got in the act, saying that the “ECB asset purchases suggest a shift to QE philosophy,” although he doesn’t necessarily think that’s a good thing. The gist of all these comments appears to be that the ECB is moving towards some approximation of QE in the not-too-distant future, which the markets found encouraging even if some members of the ECB Council clearly aren’t that happy with it. Meanwhile, things calmed down in Greece, where 10-year bond yields fell 90 bps Friday and the stock market soared around 7%.
The US Fedspeak saw some measure of mean reversion, too. Following Bullard’s surprising suggestion that the Fed shouldn’t end QE this month, the Wall Street Journal’s well-respected Fed reporter, Jon Hilsenrath, said “it is hard to see the Fed following his lead” for the same reason I noted: the Fed has decided on this move and it takes a lot to get them to change. Meanwhile, even the dovish Boston Fed President Eric Rosengren said he sticks to his forecast that rates will start to rise around the middle of next year. Oddly enough, it was Fed Chair Janet Yellen who added the least to our knowledge about the Fed’s view. Her talk on inequality focused, not surprisingly, on inequality, rather than the current economy or monetary conditions. (NOTE: On Friday, I said that Bullard is an extreme hawk. This was incorrect. In fact, Reuters rates him a centrist “3.”) Combined with several better-than-expected US economic indicators, this renewed expectation for the end of QE brought a bid back to the USD.
USD/JPY surged at the end of the US day Friday on a report in the Nikkei that the Government Pension Investment Fund (GPIF) is likely to double its allocation to Japanese stocks to around 25% from the current 12%. The assumption was that the news would send Tokyo stocks higher, and USD/JPY is positively correlated with the Tokyo stock market. Indeed it worked as expected, with Tokyo stocks jumping 3.8% Monday, the biggest daily gain in over a year.
IMM USD longs reached their highest level since May 2013 as all currencies except for JPY and MXN added to their long-USD, short-currency position, but that was before the astonishing moves on Wednesday.
Today’s indicators: German PPI is expected to fall at an accelerating pace indicating that the risk of deflation in Eurozone is worsening. Eurozone’s Current account for August is also coming out. From Canada, wholesale trade sales for August are to be released. There are no major US indicators coming out.
We have one speaker Monday, ECB Executive Board member Benoit Coeure. On Friday he called on Eurozone countries to speed up their structural reforms.
Rest of the week: The main events for the rest of the week are Tuesday’s data from China (see below). Wednesday there is a Bank of Canada meeting (expected to remain on hold at neutral) and the minutes from the latest Bank of England meeting, which will show us whether they’ve softened their stance in response to softer data. Thursday there is a Norges Bank meeting (expected to maintain loose stance) and global PMIs, the first indicators of activity in October. China’s PMI is expected to be unchanged, but the Eurozone is seen lower, which may hurt the EUR.
On Tuesday, China releases its Q3 GDP and retail sales and industrial production for September. The pace of growth is expected to decline a bit, which would corroborate the concerns about a global slowdown. AUD may weaken as a result. The Reserve Bank of Australia releases the minutes of its October policy meeting. The statement accompanying the decision dropped the line that the exchange rate “remains above most estimates of its fundamental value.” Yet it included the comment that the rate “remains high by historical standards,” as it did several times before. It is unlikely that the minutes will show a different picture.