BOE Minutes and FOMC rate decision are the major focus today


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Jul. Retail Sales out at -0.6% m/m vs. +0.7% expected and +1.0% prior 

  • US Sep. Richmond Fed Manufacturing Index out at 14 vs. 16 expected and 14 prior 

  • US Jul. House Price Index out at 0.3% vs. 0.6% expected and revised 0.1% prior 

  • US Weekly ABC Consumer Confidence out at -46 vs. -49 prior

  • NZ Q2 GDP out at +0.1% q/q, -2.1% y/y vs. -0.2%/-2.6% expected and revised -0.8%/-2.6% prior 

  • AU Sep. DEWR Skilled Vacancies out at +1.2% m/m, unchanged from revised data prior 

  • SI Aug. CPI out at -0.3% y/y vs. -0.4% expected and -0.5% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • GE PMI Manufacturing/Services (0730) 

  • EU Euro-zone PMI Manufacturing/Services/Composite (0800) 

  • Norway Unemployment (0800)

  • UK BOE Minutes (0830)

  • UK BBA Loans for House Purchase (0830) 

  • EU Euro-zone Industrial New Orders (0900) 

  • US Weekly MBA Mortgage Applications (1100) 

  • CA BOC’s Longworth to speak (1120) 

  • Norway Rate Decision (1200) 

  • UK BOE’s Barker to speak (1210) 

  • US Treasury’s Geithner to testify (1330) 

  • EU ECB’s Nowotny to speak (1700) 

  • US FOMC Rate Decision (1815)

Market Comments:

The dollar continued its slide yesterday, after only a short-lived blip of profit-taking recovery. Various inputs contrived to drive the dollar lower, including an upbeat assessment of prospects in Asia from the Asian Development Bank. ECB’s Weber also appeared to send a signal that the ECB was nonchalant about the EUR’s rise on the back of the weak dollar when he said “behavior of foreign exchange markets is not out of line with stronger data coming from the Euro-zone compared to some other reason”.

While sentiment and confidence appear to be on the rise, Canada received a bit of a shock overnight when actual economic activity failed to match expectations. Retail sales slumped 0.6% in July compared to a month earlier following 1% growth in June and the market forecast of +0.7%. The surprise confirmed comments from BOC’s Carney that, while there were signs of economic growth in all major regions, the rebound still lacks signs of the self-sustaining private demand to underpin it. He forecast a long way to go before true growth is seen in the Canadian economy and predicted a poor job market for some time to come. These job markets sentiments were echoed in a CNBC interview with PM Harper who added that, while he was looking for modest growth in H2, it was still important to continue stimulus measures.

Appetite to hold US debt appear still strong after a record $43 bln in 2-yr T-notes were sold last night at yield of 1.034%, bang on where the market was pre-results. Bid-to-cover was a strong 3.23 versus 2.68 last month, and compares to 6-month average of 2.83. Indirect bidders, which include foreign central banks was a bit smaller at 45.2%, below last month’s 49.4% and the 6-month average of 47.8%. This completes first leg of $112 bln in note sales this week. In the pipeline are $40 bln in 5-yr notes on Wednesday and $29 bln in 7-yr paper the next day.
Wednesday's auction could be a bit tricky as FOMC issues its policy statement later in the afternoon, with keen focus on what they may say about their asset buying program as it relates to MBS/agency.

Once again it was the NZD that led currencies higher during the Asian session. A better than expected print for Q2 growth allowed the Kiwi to flap its wings and head further skywards, touching a new 2009 high at 0.7315.
Growth increased 0.1% q/q in Q2, better than the 0.2% contraction expected and in addition Q1 growth was revised higher (less-negative) to -0.8% from -1.0%. While the rebound into positive is only modest, at least it marks an end to the five consecutive quarters of contraction. In the details, growth was lead by business investment and private spending while construction remained weak and government spending also shrank.

Once we had touched new levels, a report late-morning that the Fed is discussing plans with Treasury and bond dealers on using reverse repos at some point to unwind/drain the level of reserves in the banking system provided some modest support for the greenback. While the idea is nothing new (July’s monetary report mentioned reverse repos as one of the "traditional" ways to withdraw (tighten) the massive liquidity put into the system), and the August FOMC meeting minutes also showed that Fed staff noted reverse repos as one of a few exit-strategy option, it is a possible indication that the Fed could well be starting to lay the groundwork for an eventual exit strategy; and once they do begin to drain, the USD should ultimately receive a lift.

Looking ahead to today’s European and US sessions, the major focus in Europe will be the release of the minutes of the last Bank of England MPC meeting. Recall that since the meeting BOE’s King has talked about reducing the rate of interest paid on bank reserves to spur lending. We would need further assertions of such a move in the minutes to preserves the pound’s recent downtrend. Later in the session, the FOMC rate decision will grab the attention and likely provide some volatility afterwards.

Other releases include flash PMI data from Germany and the Euro-zone together with EU industrial new orders.