Fed member James Bullard signaled in a paper released yesterday that the US is closer to the Japanese style deflation than ever before. He said that while it’s not a done deal yet, the Fed should consider buying more treasuries to lift inflation expectations, just as the Bank of England did. While we don’t think deflationary worries will dominate the markets in the near term, investors will pay even more attention to the US macroeconomic data. We underlined a relation between labor market, sentiment and private demand on many occasions and the latest data on this front certainly doesn’t bring comfort.
Stock markets reacted nervously to the comments even keeping in mind good results from German and Japanese companies. One reason for a profit taking was a resistance at 10530 pts. for the Dow futures which the bulls failed to conquer. The macroeconomic figures released today and (especially) next week will decide if it was just a start of a larger correction.
On the currency front we saw little reaction on the dollar pairs with the euro and the British pound. This is perhaps because the comments were dollar negative but a slide on stock markets was dollar positive, at least against European currencies. Both factors were dollar negative against the yen, and consequently the USDJPY is at the lows of 86,00. Should the pair move below that level, 2009’s low of 84,85 will be within a reach.
Events to watch – GDP, sentiment, Chicago PMI, Chinese PMIs
The advance GDP report is the key one today (8.30 ET, 14.30 CET). The market expects an expansion of 2,5%. That wouldn’t be much lower than in Q1 (2,7%) but one should remember than just few weeks ago the consensus stood at ca. 4%. Investors will also look at the structure, since a large part of a rebound in previous quarters was attributed to inventory rebuilding process. On top of the GDP figures, there is Chicago PMI activity index (9.45 ET, 15.45 CET, consensus 55,8 pts.) and UoM sentiment index (9.55 ET, 15.55 CET, consensus 67 pts.). One should also remember about the Chinese PMIs due on Monday during the Asian trade. Two consecutive slides of the Chinese PMIs gave ground to worries about the slowdown in Asia. The worst case scenario for the markets is the slowdown in both US and China taking place at the same time.
