Bracing For Bernanke
Equity market weakness translated into a firmer JPY in the G10 space, though conviction was predictably lacking given the proximity of Bernanke’s Jackson Hole speech. Though the Italian bond auctions went well, EUR sentiment was damaged by a growing sense that bolder action from Eurozone policy makers may come later rather than sooner. Indeed, the Hollande-Rajoy press briefing did not serve up anything to suggest that Spain was prepared to make a formal request for aid anytime soon, or refute press reports that the ECB will not have all the operational details behind its new bond-buying programme sorted in time for the September 6 meeting. Comments from Slovak Prime Minister Fico that a Eurozone break-up “is as equally possible as the alternative” reinforced the heavy EUR tone. AUD also continued to struggle amid equity declines and comments from the Australian Finance Minister that currency strength challenges companies and the RBA has room to ease if it chooses to act. The stage is now set for Bernanke’s speech to kick off the Jackson Hole Conference. We suspect he will flag all the potential easing options, but stop short of offering any clear guidance on what, if anything, the Fed will deliver on September 13. If the recent minutes are any indication, one risk would appear to be an extension of the forward rate guidance, though the absence of QE (our central view) would likely trigger a USD relief bounce. The latest US releases – July nominal consumer spending up 0.4% m/m; nominal income up 0.3% m/m; initial jobless claims unchanged at 374k – are unlikely to materially alter the Fed debate. Our forecast for August US payrolls is an increase of 135k, with the unemployment rate unchanged at 8.3%.
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UBS Investment Bank