Central Banks comments highlight divergence

Market Brief

Asia equity markets are flat waiting to take their direction from the US markets. Overall price action so far in Europe has been subdued due to a bank holiday in the UK. The Nikkei is up 0.48%, Hang Seng up 0.30% yet Shanghai dropped 0.51%. Asia rates are higher while US treasuries yields are slightly lower (US 10yr yield 2.39%). USD was mixed after Yellen’s slightly less dovish speech in Jackson Hole. EURUSD fell to 1.3189 on the one-two punch of Yellen & Draghi. While USDJPY rallied to 104.49 on BoJ Gov Kuroda comments that additional easing was a possibility before reversing to 104.12. AUDUSD was in demand climbing to 0.9323. The divergence between central banks strategy become even more apparent in recent days. FOMC Chair Yellen sounded less dovish which contrasted significantly from ECB President Draghi’s and BoJ Governor Kuroda very dovish, pro-easing comments.

Markets are still analyzing central bank speak which came in hard and heavy in the last few days. Fed Chair Yellen's long-awaited Jackson Hole address remained true to her core view that the Fed would stay on an accommodating track till the labor markets, supported by aggregate demand, improved. However, she was clear to highlight that she would listen to other members analysis, understanding that gauging slack in the markets is a complex task. We believe the Fed is on a clear path, abet slow and careful, toward policy tightening next year. The timing of the tightening cycle will depend on data and the reaction of financial markets to higher rates. ECB president Daghi sounded exceedingly dovish (stealing the spotlight from Yellen) as he signaled that action would come as inflation continued to slide. He acknowledges that an expectation for inflation in the Eurozone has decreased. He stated that “the Governing Council will acknowledge these developments and within its mandate will use all of the available instruments needed to ensure price stability over the medium term.” German IFO was weaker across the board as business climate fell to 106.3 verse 107.0 exp, expectations 101.7 vs 102.1 exp and current assess 111.1 vs 112.0 exp. Clearly Draghi is ready to act after 16-straight months of dis-inflation with asset purchases or quantitative easing. In the near-term, we remains constructive on USD and GBP against the EUR and JPY due to policy divergence.