Fed Drives Markets
Market attention quickly shifted towards the US as the dollar traded on a soft note overnight. Despite, Italy and Spain fixed income markets coming under pressure once again, the euro pushed higher as part of the broader dollar move. German PMI data was mixed, with services falling to 487.3 in August (below consensus) but manufacturing rebounding to 45.1. Investors are clearly assigning a greater probability of Fed easing following yesterdays August 1 meeting minutes and this force is allowing investors to look past soft Chinese PMI data prints and widening in periphery fixzed income in Europe. FOMC members considered several policy tools to provide additional monetary stimulus, including “a new large-scale asset purchase programme” and an extension of the rate guidance beyond 2014. Crucially, “many” members felt additional monetary accommodation (in some form) could be warranted “fairly soon”. Though the economic data flow in recent weeks has shown some improvement, a greater risk of additional QE is now being priced in, and investor interest in the Jackson Hole symposium on August 31 is now likely to intensify. Elsewhere, Greece’s Prime Minister Samaras announced he will submit a EUR11.5 bn austerity plan “within weeks” and added that he “personally guarantees” repayment of the rescue funds. After a meeting with Samaras, Eurogroup head Juncker said he is convinced that the Greek government will take all the necessary measures, but added that any extension of the deadline to meet deficit targets is contingent on the Troika report, which is not due until late September. Juncker also noted that no decision on further Greek aid can be taken before October. Elsewhere, Swedish data continued to show signs of domestic resilience in the economy, unemployment dropped to 7.0% though there is a lot of seasonality effects embedded in these figures. German Chancellor Merkel, who is scheduled to meet Samaras later today said there “will not be any decisions” made in the meeting.
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