Movement but Little Change

Norges Bank:  As widely expected, Norway hiked rate for the first time since 2011.  Paradoxically, it was seen as a dovish hike.  The rate path was lower than many expected.  The next hike is seen in Q1 2019.   The krone was sold, and it is the only major currency that is not gaining against the US dollar today.    With the dollar near NOK8.21, the krone is off a little more than 0.7%.  

New Zealand GDP:  Stronger than expected Q2 growth (1.0% vs. 0.5% in Q1) gave the New Zealand dollar a lift.  It is the strongest of the major currencies today with around a 0.7% gain (~$0.6660).  However, it is important to recognize that Kiwi has been rallying and if today’s gains are sustained, it will be the seventh consecutive advance.   From April through last week, the Kiwi had depreciated by 12.25% against the US dollar.  A move above $0.6730 would give greater confidence that a low of some importance could be in place.  

Swiss National Bank:  There was little doubt about the outlook for the SNB.  It left rates steady.  It did not change the assessment of the franc, despite its recent appreciation against the euro. It was still referred to as “highly valued”, rather than “overvalued”.   On the one hand, Switzerland is one of the fastest growing high-income economies with a 0.7% growth in Q2 with a 3.4% year-over-year rate.  However, the currency is the strongest among the majors this year, rising a little less than 1% against the US dollar and almost 3.5% against the euro.  The OECD’s PPP model puts the franc as the most overvalued major currency at a little more than 20% overvalued.  At its peak in 2011, the franc was about 45% rich to PPP.  

Brexit: The string of constructive developments between the UK and EU over Brexit came to a screeching halt yesterday as the Irish border remains a critical stumbling block.  Ireland’s  Prime Minister Varadkar complained that there has been no progress for six months.  UK Prime Minister May reportedly rejected the EU demands for a backup plan, just in case the EU and UK do not reach an agreement that allows not customs or regulatory check.  The EU’s backup is to put the hard border, that is customs, between the mainland and the Northern Ireland to preserve a seamless border between it and the Republic of Ireland.  May, who depends on the Democratic Unionist Party to support her minority government cannot accept the division of the UK into two customs territories.  The UK does not have much of an alternative and says that no backstop is necessary.

UK Retail Sales: Stronger than expected retail sales are helping sterling shrug off the Brexit pessimism.  The retail sales cap a string better data, including July GDP and wage growth.  August retail sales rose 0.3% excluding auto fuel.  Many had expected a decline after the strong July gain.  Instead, the July gain was revised to 1.1% from 0.9%.   Note that the year-over-year rate eased to 3.5% from a revised 4.0%.  We suspect a seasonal distortion may be at work.  

China:  US-Chinese trade tensions are running high, but many investors seem to see the glass as half full rather than half empty.  There is this lingering idea that the US is just posturing and that an agreement will be likely be struck after the November election, perhaps as we have suggested when the heads of both governments can meet on at the G20 meeting.  We are less sanguine than many others.  China appears to be taking steps for a protracted confrontation.  It has signaled plans intentions to cut the average tariff on a majority of its trading partners.  This is partly to facilitate substitutes for US goods.  It is unlikely to be praised by the US, though it eases trade restrictions.  China also indicated that it may allow foreign financial to have full licenses.  

US Data:  There is a full slate of data today.  The weekly jobless claims have extra meaning as they cover the period in which the non-farm payroll survey was conducted.  Weekly jobless claims are at cyclical lows.  Although they are near the lowest in a generation, it is difficult to make long-term comparisons because the rules of access have changed over the years.  In any event, the US labor market remains strong.  The US reports the Philly Fed survey.  It is among the first reports for September.  August leading economic indicators are expected to have risen by 0.5%, which would match this year’s and last year’s average.   Existing home sales have fallen for four consecutive months through July.  Economists expect a small increase but have consistently been disappointed since the end of Q1.

Equities: The MSCI Asia Pacific Index extended its rally for a third session (and fifth of past six) with a 0.2% gain.  Mainland Chinese shares slipped lower, but the H-shares that trade in Hong Kong rose nearly 0.5%.   Japanese shares edged higher, for a fifth consecutive session and the Nikkei remained above 23,000 previous cap. It is approaching the highs from January near 24,130. Abe’s reelection as head of the LDP was widely assumed.  European shares are also advancing for a fifth session.  The Dow Jones Stoxx 600 is up 0.5%, led by materials, financials, and utilities.  The S&P 500 climbed to its best level of the month yesterday.  It rose every session last week before falling (~0.5%) on Monday and advanced Tuesday and Wednesday.  The record high was set at the end of August near 2916.50.  The MSCI Emerging Market Index is up 0.45% ahead of the Latam session.  It is currently testing the 20-day moving average.  A portfolio rotation appears underway ahead of the end of the quarter, but it is not the first time in recent months that some encourage trying to pick a bottom in emerging markets.  

Bonds:  Even though US 10-year yields are below the year’s high set in May, many are talking about a breakout.  We had noted that after September 15, the market would lose a bid as it was the last day US corporates could use last year’s higher tax rate to deduct pension contributions. Also, starting next month, the Federal Reserve increases the balance sheet reduction to $50 bln a month, up from $40 bln in Q3.  European bonds are well bid, with peripheral yields off two-five basis points, with Italy’s recovery leading the way.  Italy’s 10-year yield has fallen nearly 45 bp since the start of the month.  In comparison, the Germany 10-year Bund yield has risen about 16 bp this month.  Asia-Pacific bond yields were mostly higher, dragged up by the US Treasuries.  

Currencies:  The euro is firm but within recent ranges.  There are two option expires that are in play.  The first is 1 bln euro at $1.17 and the other is nearly 640 mln euros at $1.1730.  Yesterday’s high was near $1.1715, and Tuesday’s high was $1.1725.  The dollar is holding above JPY112.00, where a $345 mln option expiring option has been struck.  There is another option that will be cut today at JPY112.15 for about $435 mln.  Sterling is firm, poking through yesterday’s high (~$1.3215) to set a new two-month best.  The next technical target is near $1.3270. Despite NAFTA negotiations continuing, the Canadian dollar is benefiting from the heavier US dollar tone and is extending its advance for a third session.  The US dollar is slipping through CAD1.29 for the first time this month and is entering a congestion area from the end of last month, which extends toward CAD1.2885.  Below there, CAD1.28 beckons.  There is an option at CAD1.29 for $1.1 bln that will be cut today.  The Australian dollar is firm as its the extends rally for a fourth session and eighth of past nine.  A move above previous support now resistance near $0.7300 may see some profit-taking or the re-establishment of shorts.  


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