It’s no surprise to see capital markets relatively subdued ahead of the two keynote speakers at Jackson Hole Economic Symposium later today. Federal Reserve Chair Janet Yellen speaks at 10 a.m. EDT, while European Central Bank (ECB) President Mario Draghi — who’s unlikely to be more dovish than his colleague — is scheduled to appear at 2:30 p.m. EDT.
The market expects Yellen to reassure investors that interest rates will stay low for some time, despite Fed minutes delivered midweek that showed policymakers had discussed hiking rates sooner rather than later. While the market is expecting dovish overtures from Yellen, if there is any indication that the more hawkish members on her team are beginning to influence her, then investors should expect a massive uptick in volatility.
One of the so-called hawks is Charles Plosser, the president of the Federal Reserve Bank of Philadelphia, who spoke after the U.S. market close yesterday expressing concern that U.S. monetary policy is not reacting to changing data. He gave warning that the Fed would have to move faster, and also noted that wage inflation is too “lagging an indicator” to determine monetary policy. Any hawkish hint and the U.S. curve will shift quickly, as Treasurys back up aggressively (U.S. 10-years +2.40%), while American equities should come under intense selling pressure just as indices print new record highs.
Draghi Needs To Do Whatever It Takes
The EUR has been under severe pressure for a number of months (€1.3280) as investors expect the ECB to consider fresh easing measures while the Fed moves toward a tighter monetary policy. With the real threat of deflation looming, the euro region is already experiencing alarmingly low inflation, and investors will be looking for any clues of new policies from the ECB chief. The eurozone’s best-case scenario for today’s speech will be a “no change to the ECB’s stance.” Draghi will have to tread very lightly in his speech; he cannot afford to stand in the way of the recent depreciation of the EUR.
The Greenback Could Use a Boost
The recent dollar rally against the majors has been silently aggressive but it is certainly on a determined run. It’s not a surprise to see that it has checked its stride ahead of the Jackson Hole speeches, stalling before the 61.8% Fibo of the move from July of last year at the U.S. dollar index of 82.51. In outright terms, that is the EUR/USD equivalent of €1.3222. This whole move has coincided with a fixed-income rally which may imply that caution is probably warranted. However, fixed income has been rallying all year. Today’s speeches are entitled, “Reevaluating Labor Market Dynamics,” and it will take all of Draghi’s oratory skills to weave a dollar story into this topic. The ECB president will be required to go offline a tad to say anything currency-related. The single unit has run into some heavy speculative selling at the €1.3300 psychological handle, and it is protected initially on the downside by more option barriers located one cent lower at €1.3200.
Chinese Recovery at Risk
The Asian bourse rally seems to have run out of steam, particularly the Shanghai Composite Index, after the surprise slowdown in China’s flash manufacturing purchasing managers’ index (PMI) data yesterday.
Growth in China’s vast factory sector slowed to a three-month low (50.3 versus 51.5) this month as output and new orders moderated despite the recent burst of government stimulus. The lukewarm reading came as China’s economic growth appears to be faltering again, with recent indicators ranging from lending to output and investment all pointing to weakness. More analysts are now calling for additional incentives and stronger scrutiny of growth targets.
This week’s PMI miss would suggest that there is possibly room for “two” interest rate cuts by the People’s Bank of China in the second half of the year. However, the knock-on effect from further policy easing could include “cuts in mortgage down payment requirements and rates.” On the flipside, further economic weakness could lead to softer property sales and starts — maybe a new norm for 2015 resulting in Chinese gross domestic product growth slowing to below the psychological +7% handle.