Major Overnight Headlines
• UK headline YoY CPI at 2.7% in August (in-line) as transport and clothing costs weigh; core unchanged at 2.0%
• Car sales in Europe drop to the lowest since 1990; VW sags with Fiat, Bloomberg
• German ZEW investor sentiment at 30.6 in September versus a rise to 20.0 expected
We anticipate that the USD will remain rather soft and distinctly lack the ability to rally heading into US CPI later this afternoon. This would be a direct result of the prevailing market psychology since Summers withdrew from the Fed leadership race. With Yellen in the mix of potential Bernanke successors, we suspect market participants will be more heavily disposed to being extrapolative regarding weaker US data points, not stronger ones. Thankfully, however, we’re now just over 24 hours out from the September FOMC statement. It’s a bit unfortunate that Summers has managed to inject an added layer of uncertainty into the outlook for US monetary policy, in light of the enormous impasse financial market participants have hit with the first layer. Specifically, how will Fed monetary policy evolve after the September FOMC?
However, we should recall that Fed tapering does not solely concern the US macro economic picture. The Fed also has the global monetary system and the flow of capital worldwide to look after as well. If the markets are likely to be comfortable with Yellen at the helm, then the administration should waste absolutely no time in confirming her nomination. If Yellen is already basking in the approval of financial market participants at large, it may actually be easier for the Fed to be firm with tapering from time to time with a known “dove” at the helm. Yellen can serve as a “human
anchor” regarding the Fed’s commitment to keeping volatility in rates and output to a minimum.
To close, we find it difficult to get overly excited by indicators such as the September ZEW Index. If anything, we think the private sector is likely to find itself in the position of reducing rather than boosting its forecasts for underlying Euro Area growth over the next 3-6 months. As of today, our view of the European “growth curve” is quite flat. Given the Euro Area’s impaired financial sector, neither improvements in financial market sentiment nor monetary stimulus can be transmitted to the real economy effectively, or with significant momentum.
Read the full report: FX Daily
BMO