There are three main talking points today: 1) The divergence in
the trajectory of monetary policy, illustrated by Atlanta Fed's Lockhart
yesterday, and to be tested today by the ADP private sector employment
estimate; 2) The July service sector PMIs; and 3) The IMF's update on
the yuan's inclusion in the SDR
Lockhart suggested for some like himself, the burden of proof has
shifted. Rather than the economy having to prove itself ready for the
beginning of the normalization of monetary policy, only significantly
disappointing data now would get him not to favor a rate hike in
September.
The dollar advanced in response to his comments and has retained most of
its gains. The US 2-year premium over German neared 100 bp earlier
today, which is the highest level since early 2007. Various market-based
measures of Fed expectations, like the Fed funds futures, a more complex use of
Fed funds futures and options that Bloomberg has devised, and OIS all show that
a rate hike next month is still not full discounted.
The dollar is trading on the firm side of its recent ranges.
Key support for the euro is at $1.08. A convincing break of this area
would signal a retest on the multiyear low set in March near $1.0450. The
dollar's near-term ceiling against the yen in the JPY124.50-60 area is not as
significant, but we note that the dollar has only traded above JPY125 on three
occasions this year and managed to close above it once.
For its part, sterling is in the middle of its three-week range of
roughly $.15470-$1.5670 range. The prospects of as many as three
hawkish dissents at tomorrow BOE meeting, and a quarterly inflation report that
upgrades the prospect that the inflation target will be reached in the medium
term underpins sterling.
The Bloomberg consensus calls for 215k increase in the ADP estimate for
private sector job growth. While off June's 237k pace, we note
that the consensus is still above the 3- and 6-month averages, and if borne out
in the national survey at the end of the week, would likely count toward the
"some" improvement that the FOMC statement indicated policy maker
wants to see.
Separately, the June trade balance will be reported as well.
The significance lies with its ability to spur revisions in Q2 GDP. The
ISM service ISM may pose some headline risk, but its importance lies the employment
component which some economists will use, along with the ADP report, to fine
tune estimates for the nonfarm payroll report.
The eurozone service PMI rose to 54.0 from the 53.8 flash reading.
The composite reading stands at 53.9, a little better than the flash, and while
below the 54.2 peak in June matches the 3-month average. Germany's
reading was revised to 54.0 from the 53.8 flash report while France was
unchanged at 52.0 (down from 54.1 in June). Italy also fell to 52.0 from
53.4. Spain continues to impress. The July service PMI rose to 59.7
from 58.5. The consensus had expected a decline.
The euro area also reported disappointing June retail sales, illustrating
the ongoing weakness in domestic demand despite the expanding economies.
Retail sales fell 0.6% in June after the May series was revised to show a 0.1%
rise rather than 0.2%.
The UK's service PMI also disappointed. It fell to 57.4 from
58.5, which leaves it just below the 3- and 6-month averages of 57.5 and 57.9
respectively. Sterling barely reacted to the news with the focus on tomorrow's
events. We note that the tube strike later today (and all day tomorrow)
may make for unpleasant commutes, and may make for somewhat thinner market
conditions.
Japan PMI for services slipped to 51.2 from 51.8, though the composite
was unchanged at 51.5. Although the composite remains in an expansion mode,
it appears that Japanese economy contracted in the April-June period. GDP
will be reported on August 16. The Bloomberg consensus forecasts a 0.5%
quarterly contraction after a 1% expansion in Q1.
China’s Caixin service PMI rose to
53.8 in July from 51.8 in June. This
was insufficient to lift the composite after the weak manufacturing report out
earlier. The composite PMI slipped to
50.2 from 50.6. There was good two way
activity Chinese shares, butr ultimately the sellers prevailed, and the Shangahi Composite fell 1.7%. Volume was about a third of what it has
averaged over the past month. The restrictions
on intraday short sales and the investigations
into algorithmic trading appears to have deterred activity.
The IMF provided a timely update to the SDR review.
While it recognizes important progress, it suggests that
"significant work" is needed. Still, it appears to
be a close call, and one in which, the IMF acknowledged is not simply a
technocratic decision, but rather a large scope for judgment. By most measures,
like reserves, global debt securities, and foreign exchange transactions the
yuan is not in the top five currencies. In cross border payments and
letters of credit, the yuan ranks higher. However, the caveat, which we have
emphasized in the context of the internationalization of the yuan, and the IMF
recognizes in the report, it must still be determined whether yuan payments
between Mainland China and Macau, Hong Kong, and Taiwan counts as international
transactions.
The report mentions the possibility of a delay in the implementation of
the decision until September 2016. It is indicating that this would
make for a smoother transition. Technically speaking, the current SDR
basket expires at the end of this year. In recognition of the challenges
of January 1 launch, the IMF staff has proposed a nine-month extension of the
current basket. It could be that in the interim period China would likely
be committed to additional measures.
Chinese officials are in difficult position. They need to take
addition measures to allow greater use of the yuan while at the same time
taking strong action in the equity market. As we have suggested, the
intervention in the stock market is not particularly or directly relevant for
the SDR decision. Lagarde confirmed as much in an interview last week.
There has been much speculation that the PBOC will widen the allowable band for
the dollar-yuan movement from 2% to 3% around the daily fix.
While this
is possible, we do not see how that would bring the yuan any closer to
inclusion in the SDR. The current band has not been used for months.
Looking at a chart of the dollar against the other currencies in the SDR
and a chart of the dollar against the yuan, it is quite clear which is the
outlier. It appears that CNY has been re-pegged to the dollar.
Alphabet Soup Day: SDR, PMI, ADP
Reviewed by Marc Chandler
on
August 05, 2015
Rating:
Reviewed by Marc Chandler
on
August 05, 2015
Rating:
