Fischer Joins Dudley; Waiting for Yellen

Last week, some market participants were
giving more credence to what seemed like dovish FOMC minutes than to NY Fed
President Dudley’s remarks that accused investors of complacency over the
outlook for rates.
  Yesterday, Vice-Chairman of the
Federal Reserve Fischer seemed to echo Dudley’s sentiment,
and this has underpinned the dollar and
is the major spur of today’s price action.
Fischer’s speech was focused on the
slowdown in productivity, he reaffirmed that the Federal Reserve was close to
meeting its objectives. 
 He expected growth to strengthen in
the coming quarters.  He pointed to the “remarkable” resilience
of the labor market and anticipates
stronger investment going forward.  
Our approach to
the Federal Reserve has been to consistently put
more weight in the signals from the Fed’s leadership than the regional
 We quickly recognized Dudley’s
comments to reflect the Fed’s leadership, and anticipated that Fed Chair Yellen
would offer a broadly similar assessment at Jackson Hole later this week.
 Although some observers do not accept our heuristic approach, Fischer’s
comments are harder to shrug off.
Dudley and
Fischer’s comments underscore one side of the divergence, while developments in
Europe and Japan play up the other side
of the divergence. 
 Reports suggest that the ECB’s negative interest
rates are finally being passed on the some (mostly large)
depositors.   There are press reports that Irish and German banks may have
begun to charge large depositors, while a UK-based bank will also reported pass
through negative rates.

BOJ’s Kuroda acknowledged that there was technically room to lower rates
coverage of his remarks seemed to emphasize
what was translated a “sufficient chance” to ease next month.  
It is not clear that Kuroda is tipping his hand, but that is the way the market
responded.  The yen was sold.
 Government bonds and stocks were bought.  

Japanese stocks
bucked the regional trend, and the Nikkei gained 0.3%, after posting a similar gain before the weekend.
  The MSCI Asia-Pacific Index fell
0.2%, for its third consecutive decline.   The dollar rose to almost
JPY101 before easing in the European morning, but intraday technicals suggest the
North American session may push it higher.  Initial resistance is seen near JPY101.10, but the JPY101.50 is a
more important test.  Note the dollar
has not closed above its five-day moving average against the yen since August
9.  That moving average is found near JPY100.30 today.  
The divergence
between the US and European rates has weighed on the euro. 
 The US-German 2-year interest rate differential has
jumped six basis points today to 138 bp.   It is the highest since
early-June.  Last week, the euro met the 61.8% retracement objective of
its decline since early May. That retracement objective
was found near $1.1350.  Recall the
euro closed above there on August 18 and then consolidated before the weekend.
 Today, the euro has been pushed down to return toward the 50% retracement
that is found near $1.1265. A break of it
could spur a move toward $1.1180.   
Sterling is the
sole exception today among the major currencies, as it is up about 0.2% against
the greenback.  
 These upticks should not be exaggerated.  Sterling is well within
the pre-weekend range, and its gains appear to be a results of some unwinding
of cross positions against the euro and yen.  Last week’s high was set near $1.3185.  Today’s high is
about $1.3120.  Sterling has not fully recovered from the drop before the
weekend that was sparked by a press
report quoting two unnamed UK officials suggesting that Prime Minister May was
inclined to trigger Article 50 to formally begin
the negotiations for the separation with the EU by April next year,
ahead of the French and German elections.   
While there has
not been official confirmation, our understanding is that this is the most
likely scenario at this juncture. 
 May reportedly has indicated to
other EU leaders that her intent is to begin the negotiations next year  
 When she first assumed office, she is believed to have explained that her new government would need a few months to
sort things out, but that she was committed to do so in a reasonable time.
 And this seemed acceptable to Merkel.  Others who wanted an
immediate trigger, as Cameron had initially indicated, moved into line with
Merkel.  Some observers think the UK and EU are so entwined that the separation is too difficult and will be put off
European stocks
are higher today. 
 The Dow Jones Stoxx 600 fell four of
five sessions last week, but is 0.4% higher today, led by telecoms and
financials.  Of note, Italian bank shares that were hit hard last week
(~-8%) have begun the new week with a 2.25% advance, it strongest since August
5.   The Italian economy stagnated in Q2, and surveys show that the
constitutional referendum to be held later this year is likely to lose.
 Both the Five-Star Movement and the center-right are opposed, and Renzi
acknowledged his error of linking the referendum to the future of the
Renzi appears
to be walking it back in the sense that he reaffirmed that the next election
will be held as scheduled in 2018, even
if the referendum fails.  
That suggests 2017 could be “caretaker” year without fresh reforms or legislation.  Renzi needs
to get ahead of the curve.  One way this may be done is by picking a fight
with the EU over the 2017 budget, due a few weeks before the referendum.
 Italy’s Minister of Industry suggested that the EU could grant Italy
further fiscal leeway.   With the economy apparently not yet on a
self-sustaining path, Renzi may look to provide more stimulus.  
Lastly, we note that the dollar-bloc currencies are lower, led by the
Canadian dollar.
  Canada reported soft inflation data,
but especially disappointing retail sales before the weekend.  The
disappointing economic news snapped the Canadian dollar’s nine-day advancing
streak.  The US dollar traded down to CAD1.2765 last week and now is
testing resistance near CAD1.2935.  Above there, near-term potential
extends toward CAD1.3000-CAD1.3030. 
There are no important economic reports or FOMC speeches in
North America today. 


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