As FED's Liquidity Spigot Ends, ECB's Could Start

Market Drivers for August 29 2014

Japanese inflation stalls, consumption sinks
EZ core CPI stabilized at 0.9% vs. 0.8%
Nikkei -.23% Europe 0.39%
Oil $95/bbl
Gold $1289/oz.

Europe and Asia:
JPY Core CPI 2.7% vs. 2.7%
JPY Household Spending -5.9% vs. -2.7%
JPY IP 0.2% vs. 1.2%
EUR GE Retail Sales -1.4% vs. 0.1%
EUR CPI 0.9% vs. 0.8%

North America:
USD PI/PS 8:30 AM
CAD GDP 8:30
USD Chicago PMI 9:45 AM
USD U of M 10 AM

EZ core CPI data appears to have stabilized albeit at very low levels and that news helped to boost EUR/USD slightly in morning European trade today. The EUR/USD popped to 1.3195 after the data revealed that EZ core CPI rose to 0.9% from 0.8% forecast.

Although the inflation data in the EZ remains woefully low, tonight’s reading suggests that disinflationary pressures may have eased somewhat and that in turn could provide the ECB with some extra time before monetary authorities commit to any large QE program.
As we noted earlier this week, we do not anticipate any dramatic announcements from ECB at next week press conference, but we do expect that the central may prepare the market for the prospect of further monetary easing before the year end. Despite the fact that disinflationary pressures have abated – in no small part due to the lower exchange rate over the past few months – it is clear that ECB cannot rely on organic growth to pull the region out of its current economic slowdown. Price level remain at 5 year lows even with today’s better data readings.

With most EZ fiscal budgets still under the austerity regime and geopolitical problems with Russia continuing to dampen business demand and investment, the only stimulus available to the EZ must come from the monetary side. That is why many market participants expect Mr. Draghi to address these issue even if only obliquely at the meeting next week.
Elsewhere Japan saw its monthly a data deluge last night and the results were generally depressing. Inflation stalled, consumption sunk and Industrial Production missed its mark by a wide margin. Core inflation remained at 2.7% while household spending contracted markedly at -5.9% vs. -2.7% eyed and Industrial Production rose only 0.2% versus 1.2% forecast.

It is becoming clear that the hike in the national sales tax is having a very negative impact on consumer demand and may scuttle PM Abe attempts at reviving the Japanese economy. As some analysts have pointed out, Japanese corporations have too much money while Japanese consumers have too little and Mr. Abe’s reforms which have focused on tax cuts for corporates and tax increases for consumers may have only exacerbated the situation. This may leave the BOJ with no choice but to increase its QE commitments in order to maintain stimulus in the Japanese economy.

The net impact of all these developments is that while one liquidity spigot (the FED) may be on the verge of being turned off – two others (the ECB and the BOJ ) may soon increase their flow significantly. If that is indeed the case going into the end of the year, the added liquidity from the ECB and the BOJ should provide strong support for financial assets while keeping the dollar well bid.

In North American trade today the market will get a look at PI/PS from US as well as Chicago PMI data. The markets are looking for slight decline in the former and a slight increase in the later. However if personal income and spending surprise to the upside they could provide further support for USD/JPY and could push the pair towards the 104.00 figure as the day proceeds.