Is the ECB unhappy about the rising euro?

Outlook:

Last week the economic news included GDP at a thundering 3.7% pace in Q2, after the horrible -5.1% drop in Q1 initially reported. This reversal of fortunes says as much about our data management capability as about the economy. It might be important to hand on to a fairly optimistic tone about the US economy as the week develops. We get the ADP private sector report on Wednesday and payrolls on Friday, considered the Big One for influencing the Fed. Market News has a median estimate of 210,000 with a range of 173,000 to 210,000. “The unemployment rate was seen steady at 5.3% and average hourly earnings are expected to rise by 0.2%.” In other words, very little change from recent releases.

The Beige Book is also out on Wednesday. We get activity from various regional Feds, including Chicago, Milwaukee and Dallas. We also get July construction, the manufacturing ISM, and August auto sales. Today’s Chicago PMI for Aug is expected to show a gain to 54.9 from 54.7 in July.

Probably one of the most influential factors will be the holidays—London today and the US next Mon-day (Sept 7). We also get an absence of Chinese equity trading from Sept 3 to 5 while China holds a cel-ebration for the 70th anniversary of the end of WWII. Weirdly, the Washington Post reports the US is preparing sanctions against China for cyber attacks that could become headline news just as we get a state visit by the Chinese president in two weeks.

While we are all obsessed with equity market crashes, let’s not forget the Main Event—the fixed income gang, which is also at sixes and sevens. Today’s early quote shows a dip to 2.168% from the Friday close at 1.281%--does that spell rising risk aversion? Maybe not—the 10-year bottomed last Monday at 1.905% (the lowest since April) and gyrated to 2.205% on Thursday. The Bund is equally messy—down to 0.735% this morning from 0.746% at the Friday close but better than the low around 0.512% last Monday.

At a guess, the Bund is being roiled not only by safe-haven effects, but also the prospect of a change in the ECB’s QE timing and extent, to be disclosed at the policy meeting this week. Some analysts expect the negative deposit rate to be widened from 0.20%, or at least a comment or two from Mr. Draghi. Market News reports Barclays said Friday the QE program could be extended another 6-9 months from Sept 2016 to end 2017. The ECB could “also extend the fixed rate full-allotment procedure (FRFA) from end 2016 until end 2017" and to influence the unwanted euro appreciation, cut the deposit rate by 10to 30 bp. The ECB doesn’t’ have to do it, just talk about it, to get the desired euro effect.

One of the more interesting developments was a NYT op-ed over the weekend by financial writer William Cohan headlined “Show Some Spine, Federal Reserve.” Cohan says normalization is a top goal in its own right. Nobody can figure out where proper prices should be given all the interference of the past few years. Krugman took offense and wrote a rebuttal that was heavy on some last-century theoretical ideas and completely incomprehensible. This is turn set off a round of nonsense about liquidity preference and who the hell was Wicksell, anyway? One trenchant comment is that supply and demand have seemingly nothing to do with the price of money today at either the short or the long end. For all we know, US rates at the short end would go negative, as they already are in Europe (including Switzerland). Be careful what you wish for.

Nobody in his right mind would try to forecast the major currencies this week. We guess that the market accepts and likes that US economic numbers are pretty good, or at least not horribly bad, but that’s punctuation, not the main story. The main story is whether it’s true the ECB is unhappy about the rising euro and willing to use monetary policy to rein it in. We say central banks should not do such things—policy should be foe the good of the economy, not the currency—but you never know. Stay tuned.

Note to Readers: Next Monday, Sept 7, is a national holiday in the US. We will not publish any reports.