Position Adjusting Ahead of the Weekend

The main feature of the capital markets is mild position squaring ahead of the weekend as next week's FOMC meeting looms large. The US dollar is a firmer, paring this week's declines, while equity markets are mostly lower, unwinding part of the gains seen in the first part of the week. Bond markets are also trading heavily. 

A Wall Street Journal survey found two-thirds continue to expect the FOMC to announce tapering next week, which is essentially the same margin as surveys suggested before last week's employment data. Most market participants expect Obama to nominate Summers as Bernanke's replacement at the Federal Reserve and this has been echoed in foreign press reports today. As Summers is seen as less sympathetic to QE, some link the heavier Treasury tone to those reports as well.

After a quiet economic calendar in recent days, the US reports PPI and retail sales today. Yesterday's softer than expected imported price index (flat vs consensus 0.5%) poses some downside risk to the consensus estimate of a 0.2% rise in Aug PPI. Producer inflation is running below consumer inflation, which suggests little so-called pipeline inflation, which underscores our understanding that while Fed officials may want to slow down asset purchases, there is not needed in terms of inflation (or nominal growth).

The US also reports August retail sales. Helped by increased auto sales, the headline increase is expected to be around 0.5% after a 0.2% increase in July. Excluding autos, though, retail sales appears to have slowed from 0.5% to 0.3% and the same holds true for the GDP component, which strips out autos, gasoline and building materials. Still, barring an outright decline in retail sales, which account for about 40% of personal consumption, it is tracking the strongest pace since Q4 12.

Market moving news in Asia and Europe has been minimal. Of note, our understanding that the Abe government has largely decided to go ahead with the retail sales tax hike (from 5% to 8%) has been confirmed in the local press, though the formal announcement may be a couple weeks away. Today the government upgraded its assessment of the economy for the first time in two months, citing improvement in capex, which was behind the upward revision to Q2 GDP announced at the start of the week. However, recall that machinery orders, reported at midweek, were considerably weaker than expected (flat vs 2.4% consensus). Ironically, while upgrading its economic assessment, the government also downgraded its assessment of consumption (which it wants to tax more) and exports. The focus is actually shifting from the tax to the supplemental budget that can help mitigate the impact. There drum beat for this package to include a corporate tax cut appears to be increasing.

The privatization of the UK mail service is capturing the imagination of many participants and this is a factor helping sterling outperform today. It joins the New Zealand dollar as the only two major currencies holding their own against the greenback. The IPO is expected to raise GBP2.5-3.0 bln. While 10% of the shares will be sold to employees, the workers are generally opposed and plan a strike in early October to protest. Sterling is trying to establish a foothold above $1.58, 10 cents above the lows set just two months ago. It near-term fortunes now seem to depend on the ability of the euro to convincingly break below GBP0.8400. While this has been broken on an intra-day basis in recent days, it has not managed to sustain it on a closing basis.

It is the Norwegian krone though that is the best performing high income currency this week with a 2.8% rise as the central bank was less dovish than expected. On the day, however, the krone is the worst performer, shedding about 0.5%, following comments by the prime minister-designate that objected to the rise of the krone and unemployment. Meanwhile, Sweden's Q2 GDP was revised down from the disappointing 0.1% contraction to 0.2%. The bigger hit was seen on the work-day adjusted measure, which saw growth cut to 0.1% year-over-year from 0.6%. This is producing some modest selling pressure on the krona, though monetary policy is expected to remain on hold.

The euro area finance ministers are meeting today and the latest official indications suggest Greece is not going to be a featured agenda item. Officials will apparently wait for the asset quality review to be complete and this makes more of an issue for the mid-Oct Eurogroup meeting. Note that next week the Troika will be in both Greece and Portugal to review progress.

The euro itself is trading within yesterday's range, which was within Thursday's range. That said, each day this week, the euro has recorded a slightly higher low, while the topside has been capped both Wednesday and Thursday near $1.3325.

The weekend election in the German state of Bavaria is seen as a bit of litmus test for the national election the following week. There are two elements to be particularly attentive to: first is if the CSU can re-capture an outright majority and second is if the FDP can secure the 5% threshold for parliamentary representation. There is greater confidence in the former than the latter. On a national level, a grand coalition remains the most likely scenario. Such an outcome might not change German policies toward Europe very much. After all, Merkel has often depended on the opposition SPD and Greens to pass her European program.

Position Adjusting Ahead of the Weekend Position Adjusting Ahead of the Weekend Reviewed by Marc Chandler on September 13, 2013 Rating: 5
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