Greenback Firmer in Becalmed Markets

The US dollar is enjoying a firmer tone in quiet.  Sterling is
stabilizing after grinding down to its lowest level since late June.  The
Mexican peso, which had dropped in thin trading in Asia and Europe yesterday
following Trump’s threat to exit NAFTA and force Congress to fund the Wall or
face a government shutdown recovered fully and is now slightly higher on the

The dollar continues to chop around in well-worn ranges against most of the major currencies.  The euro has been confined to a little more than 15 pips on either side of $1.18.  The dollar fell to almost JPY108.80 in early Asia, but recovered and at pixel time is knocking on JPY109.40.  Sterling made a marginal new low at $1.2775.  It may have looked like it was breaking out, but is recovering back toward $1.2820.  A move above $1.2835 would stabilize the tone.  The dollar-bloc currencies are stabilizing–the Aussie with a softer bias and Canada with a slightly firmer bias.  The New Zealand dollar briefly wss pushed below $0.7200 for the first time since mid-June but also recovered.

Equities are mixed.  In Asia, Japan and Chinese markets fell,
but most other equity markets gained.  Nevertheless, the MSCI Asia Pacific
Index slipped marginally for the first time this week.  Of note, Japanese
steelmakers fell as Toyota reported is forcing suppliers
to cut prices. European bourses are mostly higher, and the Dow Jones Stoxx 600
is up about 0.4%  in subdued turnover, led by utilities, materials, and financials.  

Benchmark 10-year yields are mostly firmer
but at low levels.
  The US 10-year yield is up a single basis point
and remains below 2.2%.  It peaked near 2.40% in early July. 
Similarly, the yield on the 10-year German Bund peaked in mid-July near 62 bp
and is below 38 bp today.   Inflation appears to have
converged.  The Fed’s preferred measure, the core PCE deflator stood at
1.4% in June.  The ECB’s preferred measures, headline CPI was 1.3% in July
(core at 1.2%).  However, the similar rates of change disguise the fact
that the quantities (the baskets of goods and services) that are measured are
not the same. To avoid the problems associated with this discrepancy is why
there is a common methodology (HICP) in Europe, while many countries also track
their own metric.  

The highlight of what has been a quiet week is at hand.  The
Jackson Hole Symposium begins today, but the keen interest is on tomorrow’s
speakers.  Yellen is scheduled to speak at 10:00 am ET and Draghi at 3:00
pm ET.    Expectations appear quite modest going into the confab, and for
a good reason
.  Reuters reported earlier that Draghi would not address monetary policy.  The
consensus narrative in the market is that the ECB will be taking a step toward
the exit.  Some see that exit also being
by the limits of country exposure.   

We gently disagree.  We see the glass as more than half full and
increasing.  That is to say, that ECB’s balance sheet has not peaked, and the divergence between its balance
sheet and the Fed’s has also not peaked.  At the current pace, the ECB will buy 240 bln euros of assets
between Sept 1 and the end of the year.  The announcement we expected from
the ECB in early September is that it will extend its purchases but at half the
pace for the first half of 2018.  This
would add another 180 bln euros to the ECB’s balance sheet. 

Meanwhile, few now doubt that the FOMC has reached a consensus to begin
letting its balance sheet shrink. 
this process; the Fed will not
sell a single note or bond.  What it will do is simply not rollover the
full amount of Treasuries or MBS that are maturing.  It is meant to be the
least disruptive as possible.   There has been some suggestion in
light of Trump’s threat to close the government that such an event would delay the Federal

Given the congressional calendar and what are still contentious
issues,  the FOMC meeting that concludes on September 20 will likely make
its decision before the debt ceiling is lifted and new spending authorized.
The implementation of the FOMC’s balance sheet operation is very small and,
unless there is a protracted shutdown, which is not the most likely scenario,
the vagaries in Washington should have little impact.  

The North American economic calendar turns more active today, but it is
not the stuff that moves the market, and
this seems doubly true in the current environment. 
Investors know
that the US labor market continues to move in the right direction, so jobless
claims offer little new.  We note that the four-week average is about 5k
above its cyclical low reached in mid-May.  Existing home sales may
attract somewhat better attention after yesterday’s unexpected weakness in new
home sales.  Since last September, existing
home sales have alternated between rising and falling on a monthly basis.
Sales fell 2.9% in June and are expected to have risen by around 0.5% in
July.   The Kansas City Fed’s manufacturing survey attracts little
interest, but it is likely to be consistent with a pick up in US economic
activity in H2. 

The Korean won is the strongest of the emerging market currencies this
week, rising 1.2% as the bellicose rhetoric has ceased, though extensive
US-Korean military exercises are ongoing.
  Last year, North Korea
launched a ballistic missile from a submarine during the annual
exercises.  The Kospi is one of the strongest equity markets this week in
Asia, and foreign buying has returned, though even with the roughly $225 mln of
equities they bought, still leaves than
with about $1.1 bln of Korean shares that they own at the beginning of the


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