At some point on Friday, the 'Summer Doldrums' will come to an end as Yellen speaks and August nears its end. The waiting game was in fashion Thursday as markets traded in tight ranges and the euro led with the pound lagging. Japanese CPI is due up ahead of Jackson Hole. There are 9 Premium trades currently in progress, 2 metals, 2 indices and 5 in FX ahead of next week's US jobs report.
In the small picture, the market moves will centre around signals from Yellen about a hike in September or December. The market is pricing in a 32% chance of a move in Sept and 57% chance in December. That looks high to us but the durable goods report on Thursday added some optimism. In it, the key non-defense ex-air orders metric rose 1.6% compared to the 0.2% consensus.
In the big picture, the noose is tightening around the Fed. On Wednesday it was former Fed governor Warsh ripping into the Fed for a lack of flexibility. Thursday it was Hilsenrath shedding light on the failures of the Fed and mounting criticism.
The criticism is seeming coming from all corners and Yellen is surely feeling the pressure. It's not necessarily hawkish pressure either but frustration at the Fed for failure to forecast correctly and not delivering on its mandate. That's the kind of thing that would make a Fed leader shy about sending signals that could be criticized later. It's also likely to make the Fed deathly afraid of making a misstep.
So while Yellen's words at Jackson Hole will be important, we're closely watch the confidence with which she speaks. A fearful Fed is one that will freeze.
At the same time, we are keenly watching the mounting criticism and how it appears to be gaining momentum. That doesn't have any near term consequences but it has the power to reshape the Fed into a more activist organization.
Ultimately, that probably means more dovish policies. Nowhere is that clearer than Japan where increasingly hopeless programs are deployed. At 2330 GMT we get another look at the results with the July CPI report. The consensus estimate is that prices fell 0.4% y/y.
|Fed Chair Yellen Speaks|
|Aug 26 14:00|
|Tokyo Core CPI (y/y)|
|-0.3%||-0.4%||Aug 25 23:30|
|BoJ Core CPI (y/y)|
|0.8%||Aug 26 5:00|
August 25 might be the most-complacent day of the year. Even at the best of times it's a day that comes at the end of the slowest month. This year it precedes a Jackson Hole conference that's the only thing anyone has circled on the calendar this week.
There's a strong focus on Yellen and that's justified because of the delicate Fed-dictated balance in the market. The first risk is that she sends a genuinely strong signal on interest rates. But it's a low risk. The Yellen Fed has been burned by bad signals repeatedly and offering vague hawkish hints with a focus on data is the overwhelmingly likely scenario.
The bigger risks must be elsewhere. What's incredible to us is that the VIX is at 13 and other measures of stock market volatility are at extremely low levels while FX implied options implied volatility is high.
There's money to be made in watching closely when the market is asleep and we're searching for signs of what might trigger fears. The answer may be that the complacency itself is a fear. Late in the day in the S&P 500 the index was down 15 points. Had it closed there (it closed down 11 points), it would have been the worst day since June 27 – the Monday after the Brexit vote.
In that timeframe the oil has swung more than 20%, Libor has blown out and the costs in the FX swaps market have hit theoretically impossible levels.
At this point, it would almost be healthy if Yellen stirred things up, just to make sure the world is paying attention. Worse would be if she said something somewhat important and the market continued to grind.The signals might not be yet clear but whether it's commodities, China, money markets, bonds, central banks or governments; big moves are coming. Don't get sucked into the complacency.
|Existing Home Sales|
|5.39M||5.52M||5.57M||Aug 24 14:00|
One of the great paradoxes in the global market is the price of housing. Overvalued US houses were the source of the financial crisis and crashed afterwards but elsewhere, low rates have led to seemingly endless rise in home prices.
There are signs that US buyers are moving past crisis-era shyness about housing, in part because of low rates and a lack of alternativesThe big surprise on Tuesday was the new home sales report as it jumped to a nine-year high of 654K compared to 580K expected.
According to the FHFA house price index, US home still cost 2.25% less than at the 2007 peak. As that gap closes, there is the risk of the type of acceleration fueled by low rates that exists in many developed countries. In neighbouring Canada, prices have risen 49% since 2007 according to the Teranet home price index. In the UK, prices are up 18%.
Going back to 2000, which should smooth some of the boom-and-bust volatility, Canadian house prices are up 185% compared to the US at 65%.
US buyers were understandably wounded by the housing collapse but there is evidence that those psychological wounds are healing and that could leave considerable upside to the US housing market. An entire generation has sat on the sidelines but that pent-up demand may finally materialize.
What may come next is a jump in housing starts and that type of construction could boost US GDP. Meanwhile, further rises in prices could lead to looser purse strings and the creation of a wealth effect.
Elsewhere in markets Tuesday, oil remains in focus as murmurs of Iran considering joining OPEC curbs were counteracted by talk of Iraq pumping more and, later, a large US inventory build. CAD was taken along for the ride as the volatility continues.
Looking ahead, the Asia-Pacific calendar improves with Australian skilled vacancies due at 0100 GMT and Q2 construction work a half-hour later. On the latter, the consensus is for a 2.0% rise.
|Existing Home Sales|
|5.52M||5.57M||Aug 24 14:00|