- Has St .Louis Fed’s Bullard let the Bernanke cat out of the bag? We think he may have.
- Our guess is risk sentiment may not come to too much harm Friday, in which case USD may be back on sale
- KOF a key release that may harden Swiss resolve to prevent CHF re-appreciating.
Heading into Friday’s main event, expectations for ‘affirmative action’ from Fed chairman Ben Bernanke at Jackson Hole have been sufficiently downplayed by all the media claiming ties to the Fed that by rights there shouldn’t be too much scope for disappointment. Flows-wise, scaling back on short USD/Asia exposure and some sizeable stop loss selling of USDCHF such as we witnessed on Thursday (the latter after suggestions of imminent fresh SNB action against CHF strength proved false) suggests that a good amount of short USD ‘risk on’ positioning has been reduced. The EURUSD setback owed much more to a heavy sell off in the German DAX as a proxy trade given the extension of the short selling ban in most of the other big Eurozone bourses. It nevertheless leaves the market less long EURUSD.
It is now possible that simply listing a range of potential future policy options without explicitly ruling out, in particular, additional QE (and which is indeed what we expect) will be considered worthy of a positive risk-market reaction. As the chart opposite shows, at Jackson Hole last August, Mr. Bernanke did just that – examine a range of options – and the equity markets were very quickly off to the races. We don’t expect the same reaction this time around, with Mr. Bernanke perhaps stressing that any additional action beyond the most recent FOMC commitment to low rate through mid-2013, is not yet deemed warranted. He could suggest it would require a further downgrade to the Fed’s already more pessimistic assessment of the economy expressed after the August 9 FOMC meeting.
We might have got a strong flavour of what to expect from Mr. Bernanke from St Louis Fed President James Bullard after the NY close, saying that the Fed is ready to act if the economy weakens further or deflationary risks rise. Bullard downplayed the virtue of Fed balance sheet extension-duration saying it’s unlikely to have much impact. We agree, it would represent a very light form of additional QE. But Bullard extolled the virtues of Fed bond buying, saying it has proved an effective tool. We very much expect Mr. Bernanke to defend past QE efforts today (‘show me the counterfactual’ he might demand of his critics).
We do have a few data points of interest as we count down to 10am ET. Uppermost in our view is the August Swiss KOF Leading Indicator. Expected at 1.80 from 2.04, an ‘as expected’ outcome would be the lowest print since December 2009. Much weaker than this and we could see some knee jerk negative CHF response on the view that this will harden SNB and government resolve to ensure that recent CHF slippage does not reverse. Also of interest are updated figures for Q2 US GDP and the University of Michigan CSI; the former seen revised down from 1.3% to 1.1% and the latter up to 55.8 from 54.9. The latter though comes 5 minutes before Big Ben strikes. EZ Money supply and credit, final Spanish GDP, and UK 2nd estimate GDP (seen unchanged at 0.2%) will all rate a mention.
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