- Philly Fed plunge brings double-dip fears to the fore, raising the stakes for next week’s Jackson Hole meet.
- Anxious wait now for Eurozone PMI/ZEW data next week.
- Another Lazarus-like revival in risk appetite looks unlikely into the weekend; USD, CHF and JPY to stay bid.
Concerns over the Eurozone and global growth meant that stock markets were already in poor shape before the US data calendar started to unfold Thursday, with weakness broad based across sectors, not just banks. Certainly the latter were not helped by the news that the SNB exercised $200mn of its dollar swap facility with the Fed this week and presumably to lend to one of the Swiss banks, coming as it did after Wednesday’s news of an ECB $500mn loan to a eurozone bank. Out of the US, if the stronger CPI number was seen as negative in the sense that it was seen as raising the bar for early Fed action, the other data may ironically have worked in favour of stabilisation. We had flagged the Philly Fed survey as the standout release, and the sense of ‘double-dip’ fear when the index printed at -30.7 was palpable. There is now a clear risk that ISM could plunge into negative territory next month (see Chart).
While the USD was up across the board (bar a flat performance against the JPY), and the high beta/high risk FX counters – AUD, SEK and NZD – led the sell off, it was notable that ‘risk’ currencies haven’t sold off nearly as much as the plunge in stocks and rally in bonds would ordinarily dictate. This tells us that the perceived odds of more Fed QE have risen – potentially providing a fresh layer of support for risk assets. Indeed our economists share this view, looking for next week’s Bernanke speech “to be on the dovish side and very suggestive of, if not explicitly mentioning, an extension of the target duration and QE3 as possible tools for easing.”
In the meantime, the focus is now very much on whether incoming Eurozone data will paint a similarly dismal picture. For this, we will really have to wait until next Tuesday, when ‘flash’ PMIs and the ZEW surveys are released. In the meantime, the fact that yesterday’s comments from ECB’s Council member Nowotny, suggesting risk of a Japan style period of low growth and low inflation, failed to be countered elsewhere within the ECB, was notable to some observers. A wave of more vocal support from European leaders today should not come as a surprise.
Given today’s generally light data calendar, FX markets are likely to take their cue once again from European equities – with the focus on whether they can follow the late US equity markets in stabilising. In the absence of some brighter economic news, it is hard to argue for an early repeat of last week’s Lazarus-like revival in risk sentiment and global equities. USD is therefore prone to at least hold on to its Thursday gains, while USDCHF and EURCHF may now trade more heavily even if SNB FX swaps activity succeeds in pushing money market rates further into negative territory. This threatens to keep financials pressured and with that EURUSD at risk of further slippage. But ahead of the weekend we would watch for some short covering if speculation grows that the G7 might deliver on the coordinated action suggested two weeks ago – Japanese FinMin Noda today said that he would work closely with his G7 counterparts. Comments from the Fed’s Dudley may also be a threat to the shorts.
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BNP Paribas
Corporate & Investment Banking