The flash PMI reading is interesting in its own right. In August, it stood at 52.5, the low for the year. However, to keep it in perspective, the multi-year high was set in April at 54.0.
In light of the disappointing participation in the initial TLTRO offering, there is more talk that a sovereign bond purchase program is needed.
More immediately, the ECB is unlikely to rush to any conclusion.
The
December TLTRO is likely to go a bit better. The ABS/covered bond
program will be launched. Many observers have made a fetish of Draghi's
goal of about a one trillion increase in the ECB's balance sheet.
The second phase of the TLTROs begins in March 2015.
On the
political front, France's Prime Minister Valls, fresh off a (narrow)
confidence vote victory will visit Germany to start the week.
Whatever
smiling photo opportunities are recorded, there is little doubt that
there will be a heated exchange.
Second,
what Draghi had made implicit, fellow ECB Director Coeure from France,
former German ECB Director Asmussen (SPD) made explicit.
Coeure
and Asmussen called on Germany to exercise the fiscal space it has to
boost investment and reduce the tax wedge (the gap between wages and
take-home pay). Merkel and Schaeuble will object what the Financial
Times has called "intervention" by the ECB. They reject the substance
of the argument as well and will not waver from the aim of a balanced
budget next year.
Merkel and Schaeuble might take what Draghi says about monetary policy, namely that it is not a substitute for structural reforms in France, Italy and elsewhere, and apply it to fiscal policy.
In the US, there are two main issues.
The
first relates to wrestling with the seeming contradiction between the
dovish FOMC statement and the hawkish forecasts. The second is the
latest reading on the US economy.
On the surface, the numerous (at least seven) speeches by Fed officials in the week ahead will only add to the cacophony.
However,
our advice has been to concentrate on the policy signal, and that
emanates most consistently from Yellen, Fischer and Dudley.
Investors will likely learn this week that the US economy grew faster than previously estimated in Q2 of 4.2%.
The
consensus is now for 4.6% and there appears to be some upside risks.
Existing
house sales in the US have continued to recover, even though mortgage
rates have risen.
The same cannot be said for new homes. Both
will be reported in the week ahead. Existing home sales are expected
to have risen in August to extend the advancing streak to the fifth
month. The anticipated 5.20 mln unit annual pace would be the fastest
since last September. New single family home sales are languishing in
400k-450k range for the better part of the past two years (with a brief
exception last summer).
We were surprised by last week's unexpectedly sharp decline in weekly jobless claims.
We
had cited the recent increase as an early warning sign that the labor
market may be losing some momentum. The high-frequency data is noisy,
and the smoothed four-week moving average is well above the low made in
early August. Looking ahead of the August jobs data, the second
sub-200k private sector net job creation seems likely, as economists
await inputs, including the PMI/ISM reports.
However, it is too early to reasonably expect the sharp depreciation of the yen to have translated into higher prices, but it will.
While
a weakening yen has helped fuel gains the Japanese stock market,
foreign demand for Japanese bonds has been unusually strong recently.
Foreign
purchases have easeda bit since late-August, when the weekly MOF data
showed the strongest buying in three years. Large asset managers are
reportedly buying JGBs and swapping (basis swap) into dollars to earn a
yield superior to US Treasuries (as much as 80 bp).
Along the same line, last week Japan's one-year bill rates fell into negative territory for the first time ever.
This
is one sign of distortions caused by QQE. The BOJ has already bought 3
and 6-month bills with a negative yield and may soon purchase one-year
bills at negative rates too.
This is the longest streak under the modern era of floating exchange rates. It finished last week at four-year highs.
The movement of volatility would suggest that they were early, but maybe not wrong.
The euro's decline in the spot market last week saw a reversal of the recent pattern, and three-month implied volatility fell. Despite sterling's gyrations, volatility also fell. The dollar reached new multi-year highs against the yen and 3-month implied volatility is below the September 10 high. The medium term dollar trend is higher, but current conditions warrant caution.
