Scottish referendum fever continues to grip market price action. European bourses (Stoxx Euro 600 +0.4%, FTSE 100 +0.2%) have been thrown a lifeline, helped by the most recent poll on Scottish sovereignty which shows a lead for those in favor of remaining in the U.K. Gains for GBP (£1.6245) are expected to remain small until the September 18 vote.
The recent shock to sterling seems to have been overcome. Fundamentally, there is no reason for a much deeper pullback from the pound. Governor Mark Carney’s assurances that the Bank of England has emergency plans to ensure financial stability if Scotland happens to vote “yes” is helping sterling find some sort of base right now.
The most recent poll suggests that Scotland will vote to remain part of the U.K. Odds have been slashed — there is roughly a +20% probability of a “Yes” vote, down from +35% following last weekend’s tight polls.
No surprises from Germany’s latest consumer-price growth data. It stabilized at a very low rate last month, an annual rate of +0.8% on the month. Unlike Germany, Europe’s annual inflation rate slowed to +0.3% from +0.4% in July, way below the European Central Bank’s desired +2% level.
Fears of the Federal Reserve taking a more hawkish stance at its two-day meeting next week is keeping both European and U.S. bond yields elevated, where policymakers are expected to shed some light on plans to raise interest rates. Currently, higher front-end U.S. yields continue to pressure emerging market currencies.
As expected, the Reserve Bank of New Zealand (RBNZ) held its cash rate steady at +3.5% after four consecutive increases. The accompanying policy statement was mixed: RBNZ affirmed its 2014 gross domestic product (GDP), raised its first-quarter 2015 GDP, and cut its projections for 90-day bill rates to imply a pause until the first quarter of 2015. The NZD has fallen to a new seven-month low (NZD$0.8166) after Governor Graeme Wheeler indicated that NZD levels are unjustified. The governor also noted that this is just a pause, and that the current rate of +3.5% is still below the “neutral level” of 4.5%.
Australian employment saw a record high +121k net change last month, almost nine times consensus levels, and the highest in the data series for more than three decades. The unemployment rate fell for the first time in four months (+6.1%), while the labor participation rate hit a 16-month high. The AUD spiked to $0.9210 to match a weekly high despite analysts’ warnings of a “sample error” that would equate to the U.S. creating +1.5M new jobs in a given month. The AUD has fallen by nearly a cent post-Aussie jobs numbers (AUD$0.9128).
The Bank of Japan’s Governor, Haruhiko Kuroda, and Japanese Prime Minister Shinzo Abe are reportedly holding their first direct talks in nearly six months amid chatter that Abe is pushing for further monetary stimulus. Abe’s aim is to help offset the next round of sales tax hikes (¥106.98). Japan’s Ministry of Finance released its quarterly Business Survey Index recently and it managed to hit a one-year high for large manufacturing, while also increasing its projections for the full-year 2014-15 corporate capital expenditure to +5.7% from +4.5%. Japan continues to seek a weaker yen for growth.
China’s inflation figures were generally soft, with the latest consumer-price index hitting a four-month low (+2% versus +2.3%), while its producer-price index came in negative for the 30th straight month (-1.2% versus -0.9%). Authorities lay blame on the decline in material prices and warned that the outlook for industrial demand is not optimistic. A gradual slowdown in the economy will only translate into lower price growth. Consumer inflation was once again skewed toward food prices — up +3% year-over-year, compared to +0.2% for non-food items.
The International Energy Agency has again trimmed its forecast for the rise in oil demand this year for the third consecutive month. It expects oil demand to grow by 0.9M barrels a day for the remainder of the year, down -65k barrels a day since last month’s projections, and down a massive -300k barrels a day from July. Oil demand growth in the second quarter was the lowest in nearly three years, dented by European and Chinese economic weakness.