Japan's incoming Finance Minister shrugs shoulders at strong JPY.
Greenspan roils bond markets with comments.
MAJOR HEADLINES – PREVIOUS SESSION
-
US Weekly ABC Consumer Confidence out at -49 vs. -45 expected and -48 the previous week
-
Switzerland Jul. Retail Sales rose 1.0% YoY vs. +0.7% expected
-
UK Aug. Jobless Claims rose 24.4k vs. 25.0k expected and 25.2k in Jul.
-
UK Jul. Avg. Earnings Ex Bonus rose 2.2% YoY vs. 2.3% expected and 2.5% in Jun.
-
Switzerland Sep. ZEW Survey rose to 58 from 18. in Aug.
-
EuroZone Aug. CPI rose +0.3% and fell -0.2% YoY as expected. Core prices rose 1.3% YoY vs. 1.2% expected
-
Canada Jul. Manufacturing Sales rose 5.5% vs. 2.5% expected
-
US Aug. CPI rose +0.5$ and +0.1% Ex Food and Energy vs. +0.3%/0.1% expected
-
US Q2 Current Account Balance was -$98.8B vs. -$92.0B expected and -$104.5B in Q1
-
US Jul. Net Long-term TIC Flows fell to $15.3B vs. $60B expected
-
US Jul. Total Net TIC Flows out at -$97.5B vs. -$56.8B in Jun.
-
US Aug. Industrial Production out at +0.8 MoM vs. +0.6% expected
-
US Aug. Capacity Utilization out at 69.6% vs. 69.0% expected and 69.0% in Jul.
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
-
US Weekly Crude Oil and Product Inventories (1430)
-
US Sep. NAHB Housing Market Index (1700)
-
New Zealand Aug. Business PMI (2230)
-
Australia Q3 Westpac-ACCI survey of Industrial Trends (0100)
-
Japan BoJ Target Rate (no time given)
-
Japan BoJ's Yamaguchi to Speak (0700)
Market Comments:
The JPY jerked stronger overnight after incoming finance minister Fujii of the Democrats stated that he doesn't support a "weak yen", nor did he feel that the current action in the currency was rapid. He also indicated that he felt a strong yen had merits for the Japanese economy. An excellent article in Bloomberg from today discusses Fujii's background. It is clear that the new Japanese government's priorities are a strong departure from the LDP platforms of the past - a move to support families and low wage earners and a variety of more populist programs rather than the obsession with the large companies and the export industry that was always the LDP's economic policy mainstay. Whether the new government is able to do this without digging an even deeper hole in Japanese public finances is the critical question for the next couple of years and possibly also for the JPY.
The USD carry trade lives on, it appears, with most currencies advancing again versus the greenback while equities headed higher today. The market nodded its head today at 1.4720 resistance in EURUSD, which was near that high back in December, but few signs of any stiffer resistance to the persistent, if a bit grinding move of late. The S&P 500 is up over 20% from the July lows. A glance over at bonds just as we are going to press shows the bottom dropping out of the market on comments from Greenspan suggesting that congress may be unwilling to withdraw stimulus, which would risk "swamping" the long term bond market. We have noted recently that the sell-off in the USD and rally in the likes of AUD is beginning to diverge with developments in interest rate spreads at the short end of the curve - a departing from some measures of fundamental "reality" that is still jarring and not supportive of further USD weakness by itself. Could a bond rally actually support the USD? Things obviously in flux at the moment - more on this later...news items like this are often just temporary distractions.
Something is more than curious in the state of the US confidence surveys. While the Michigan and Conference Board Confidence indicators jumped much higher last month, the last two weeks of the ABC weekly number have declined sharply. Is this due to the price of gasoline - the debate over health care? Which survey is telling the truth. Our belief is that the weekly survey leads the others, but this last survey result does not at all sit well with the Bernanke's bold statements yesterday that the recession is "very likely over". The irony is that he can only make that statement due to the Fed's tremendous injection of liquidity that has cost the taxpayer and US economy untold growth potential down the road.
The US inflation data is nothing to get excited about and the headline numbers will very likely begin to turn around and show an increase for year-on-year comparisons over the next few months will likely begin to show an increase for several months very soon as we move away from year-on-year comparisons with the commodities bubble that peaked last summer. The Current Account Deficit shrinkage was in line with expectations, but is truly remarkable as it represents a near 8-year low that is less than half of the deficits of two years previously.
Of course, that contraction has come about due to a collapse in consumption, so the key going forward will be how the US production/consumption and export patterns change and whether they can sustain this trend. The TIC data shows why the USD was weak in the past rather than providing a forward indicator, so it is a relatively unimportant data point upon release.
Chart: AUDJPY
We're in a strange FX regime at the moment, with both AUD and JPY rallying at the same time. This is not sustainable - these currencies normally lie at the opposite end of the risk appetite spectrum. The JPY is gaining on comments from the incoming administration that suggest a lack of concern over the strong JPY, while the AUD seems to be the most popular currency to buy in the new USD carry trade. AUD is winning the race against the JPY over the last couple of days, and if risk appetite stays robust while bond yield rise a bit more, then we could be in for a retest of that 80.00 area again. If equities ever take a dive, however, look out below....
