As a consequence it was a quiet session. Watch for UK Q2 GDP data today, ahead of long UK weekend


MAJOR HEADLINES – PREVIOUS SESSION

  • US Q2 GDP second revision out at -1.0% q/q, unchanged vs. -1.5% expected

  • US Weekly Initial Jobless Claims out at 570k vs. 565k expected and 580k prior

  • US Weekly Continuing Claims out at 6,133k vs. 6,242k expected and 6,252k prior

  • NZ Jul. Building Permits out at +5.0% m/m vs. +8.0% expected and revised -9.6% prior

  • UK GfK Aug Consumer Confidence out at -25 vs. -24 expected and -25 prior

  • JP Jul. Jobless Rate out at 5.7% vs. 5.5% expected and 5.4% prior

  • JP Jul. Household spending out at -2.0% y/y vs. -0.5% expected and +0.2% prior

  • JP Aug. Tokyo CPI out at -1.6% y/y vs. -1.8% expected and -1.8% prior

  • JP Aug. National CPI out at -2.2% y/y, as expected, vs. -1.8% prior

  • NZ Jul. M3 Money Supply out at 3.8% y/y vs. 2.7% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Sweden PPI/Retail Sales (0730)

  • Norway Manufacturing Wage Index (0800)

  • UK Q2 provisional GDP (0830)

  • EU Euro-zone Business Climate Indicator (0900)

  • EU Confidence Indicators (0900)

  • Swiss KOF Leading Indicator (0930)

  • US Personal Income/Spending (1230)

  • CA Current Account Balance (1230)

  • CA Industrial Product/Raw materials Prices (1230)

  • US Final Univ. of Michigan Sentiment (1400)

Market Comments:

It was a volatile end to the US session in currency markets yesterday with a nasty bear squeeze catching traders unawares. Prior to the late move, it was looking as if risk aversion cascading from the Asian session was going to be the theme of the day with the USD and JPY adopting a bid tone. This was reversed in the closing stages though there appeared to be no specific news catalyst to trigger it and it was suggested that thin markets, poor liquidity and a market overly-positioned in one direction were to blame.

The early weakness was surprising given that the data releases were generally better than expected. The second US Q2 revision saw the quarter-on-quarter contraction holding at -1.0% (expectations were for a deterioration to -1.5% /q) while the weekly jobless claims showed some improvement to 570k from 580k last week though missed enthusiastic forecasts of an improvement to 565k.

After the sharp bounce in most of the major currency pairs, Asia found most order books wiped out by the start and it was difficult to get going. Attention is switching to the result of the Japanese election this weekend (more on that below) but the direction of the Shanghai stock market grabbed most of the headlines. Another weak session was seen with the index trading down over 3% at one stage, driven predominantly by a weak financial sector amid concerns over weak August bank lending figures (but not due for release until the September 11-15 window). Other bourses were mixed and as a result there was hardly any evidence of a “risk-off” day in currency markets, with prime pairs holding steady.

The Japanese data releases this morning highlighted the difficulties facing the domestic economy and the soon-to-be elected government. A rising unemployment rate (5.7%), another contraction in household spending and August CPI data pointing further deflationary tendencies are not the best scenario for a new government to inherit. While the JPY has not had a history of being politically-traded (perhaps because there has not been any change in the ruling party in the last 15 years!), the prospect of a change in government (the DPJ is widely expected to win with as much as a two-thirds majority) may see some excitement…or maybe not.

Come Monday there is a chance that we will see some JPY strength, partly because the event is now concluded and the result known, but also we may see an uptick in consumer sentiment as the new broom sweeps clean.
Certainly the DPJ manifesto was heavily tilted towards building consumer confidence. In turn, this could prove to be a negative for bond markets as funding and implementation of policies becomes a concern. Not forgetting that the DPJ commented earlier this month that they were more open to a JPY rally to help kick-start the ailing economy. However, USDJPY has been mired in a range during the past 2 months and we suspect that developments will lack near-term momentum to seriously challenge these recent parameters.

On the agenda today we have the first provisional Q2 GDP estimates from the UK. The advance estimates released at the start of this month were dismal, -0.8% q/q and -5.6% q/q and set GBP on its steady decline. Given the stronger Q2 performance reported by France, Germany and the EU since then, we will need an upward slant to any revision to afford GBP and kind of support. Even if this is the case, we feel a higher GBP will only give better levels to short.

Elsewhere on the data slate we have Euro-zone confidence indicators and Swiss leading indicators on tap. Into the close of the week we have US personal income and spending and final Michigan sentiment index while Canada sees industrial product and raw materials prices.