Short Note Ahead of the Weekend

(Sporadic updates continue as the first
of two-week business trip winds down)
North Korea missile launch
failed to have much impact in the capital markets. 
 The missile apparently flew the
furthest yet, demonstrating its ability to hit Guam. However, there was not an
immediate response from the US.  South Korea said it had simultaneously
conducted its own drill which included firing a missile into the Sea of Japan
(East Sea).  
The yen initially popped
greenback fell to around JPY109.55 after briefly pushing through JPY111.00 in
North America yesterday.  The dollar quickly bounced off the 20-day moving
average, which also coincided with a 38.2% retracement of this week’s dollar
gains (~JPY109.60).   Good buying was seen and the dollar returned to the
JPY110.80 by late in the Asia session.  
Korea shares rose 0.35%, its
fourth advance in the past five sessions, to bring the weekly gain to
 The rise
came despite continued foreign liquidation.  Foreign investors sold $305
mln worth of Korean shares ahead of the weekend, which was nearly half of the
week’s sales.  The Kospi closed near its best levels in a month.  The
won, on the other hand, slipped around 0.4% over the past week.  More
broadly, the MSCI Asia Pacific Index rose about 0.6% on the week, its fifth
weekly increase.  This regional benchmark has had one losing week since
early July.  
While media trumpets that
the Chinese yuan had its biggest weekly fall of the year, it needs to be put in
yuan’s decline was about 0.7%. Remember under the old Bretton Woods system, one
percent movement was consistent with a pegged regime.  Moreover, the yuan
had risen about 2.6% in the previous three weeks.  It was not simply a
case of a soft yuan, though the PBOC consistently set the fixing rate lower and
removed some disincentives to short the yuan, but the dollar was also generally
well bid.  The Dollar Index, for example, rose as much as the yuan fell.
 Chinese data disappointed and the Chinese shares traded heavily after the
data, giving back the gains scored earlier in the week.  
Sterling is the big winner
of the week.
BOE’s hawkish forward guidance sent sterling sharply higher yesterday and it is
building on those gains today, reaching $1.3450.   It had finished last
week near $1.32 and had finished last month near $1.2930.  The implied
yield on the December short-sterling futures contract rose 13 bp on the week
through yesterday, while the yield on the 10-year Gilt rose 18 bp.  
While sterling gained around
1.7% against the dollar (@~$1.3425), the euro slide about 2.6% against it
prospect that the BOE raises rates while the ECB announces an extension of its
purchases, which given the sequencing that has been outlined means that the UK
could be a year ahead of the ECB in raising rates, caught many participants
Given the importance the MPC
placed on high frequency data, sterling is likely to be particularly sensitive to
the data flow in the coming weeks.
  Interpolating from the OIS, the market appears to be
pricing in a greater chance that the BOE hikes this year (~64%) than the Fed
(Bloomberg ~47%; our own calculation suggests that a little less than a 40%
chance has been discounted).
Ahead of the weekend the US
reports a slew of data.
most important are the August retail sales and industrial output figures.
 We suggest there is upside risk to the median forecast that US retail
sales rose 0.1% August.  That risk stems partly from prices, like
gasoline, and partly from volume, as the Redbook weekly figures have been
rising.  The market has already seen that auto sales were softer. 
Industrial output is also
expected to have risen 0.1%.
  Here, although the bar is low, we are concerned about
downside risks stemming from auto related output and some slippage from the
energy sector.  Manufacturing itself may have fared better.  Recall
manufacturing employment rose by 36k in August, the largest increase since
August 2013, which itself was the largest since March 2012.    Many
economists are puzzled by the lack of more robust investment given the low
interest rates.  We are struck by the relatively low capacity utilization
give the maturity of the expansion cycle.  Capacity utilization rate was
76.7% in July and is expected to be unchanged in August.  
The US also reports the
Empire State manufacturing survey for September.
  It will be overshadowed by the
retail sales report.  Later, the University of Michigan’s consumer
sentiment and inflation expectations survey will be released.  The
long-term inflation expectation stood at 2.5% in August.  It is expected
to be unchanged.  It has not been above 2.6% since March 2016.  It
has not been below 2.4% this year.   This seems like the definition of
There are some large
currency options that expire today that could impact trading.
  There are 1.8 bln euros struck
at $1.19 that will be cut today.  There are 2.2 bln euros struck at $1.20,
which seem less relevant now with the euro around $1.1930.  There are $1.6
bln in options struck between JPY110.50 and JPY110.60 that expire today.
 There is a more modest GBP206 mln option struck at $1.34 that roll off


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