Intraday Market Thoughts

The Five Great Debates

by Adam Button
May 31, 2017 23:48

No single theme is dominating markets right now so today we take a look at five fundamental drivers and where we stand. In May, the New Zealand dollar was the top performer while AUD lagged in a major antipodean divergence. 2 new Premium trades have been added; 1 in FX and 1 in a major European index.

الإسترليني و رقصة استطلاعات الرأي (للمشتركين فقط)

The UK election debate scheduled for today is a dud. While the polls continue to drive GBP, we look at five bigger debates elsewhere.

1) The Fed debate

The market is juggling with three options: Here they are with the probabilities in parentheses: No hike on June 14 (10%). It would take a string of weak data between then and now; A hike with similarly hawkish bias (35%). Fed officials have begun to worry about the data; A hike with a dovish bias (55%). The market is shifting towards this option and that's what is weighing on the US dollar. It would be signaled by something in the statement indicating that the Fed will need to see stronger evidence of growth and inflation before continuing to remove stimulus.

2) The great inflation debate

This feeds into the first theme. Eurozone inflation at 1.4% y/y compared to 1.5% on Wednesday missed expectations. Central banks are divided on whether slightly better growth and a tighter jobs market will producer inflation. The latest buzz phrase in economics circles is 'global overcapacity' which is fancy way of saying that globalization, technology and offshoring can keep prices and wages down. The Fed is holding on tight to models that show a tight domestic economy will mean domestic inflation but they may one day have to rethink it.

3) The China mystery

Yesterday's PMIs were both slightly stronger than expected but the opacity of Chinese policy and the latest drop in metals prices has planted a deep seed of doubt. The latest move is rapid yuan strengthening. Skeptics say it's a government-orchestrated squeeze on shorts designed to improve stability. We're watching closely.

4) The ECB shift debate

A leak on Tuesday indicated the ECB could move to a neutral stance and take away references to doing more as soon as next week. That was followed by today's disappointing eurozone data slate. In the bigger picture, the suspicions is that Draghi wants to setup a September taper announcement but doesn't want to spark EUR/USD strength or excessive run-up in yields.

5) Oil's toils

More Libyan production sent oil sharply lower Wednesday but it bounced on tighter US inventories in the API report. Every oil authority talks about a great inventory balancing that's coming before year end while every analyst has doubts. Russia's deputy finance minister might have tipped his hand Wednesday, saying to expect $40-$50 oil for seven years with risks of prices falling below. We're left with the question: Who or what could boost crude right now?

Act Exp Prev GMT
Chicago PMI
59.4 57.0 58.3 May 31 13:45
Final Manufacturing PMI [F]
52.5 52.5 Jun 01 13:45
ISM Manufacturing PMI
54.7 54.8 Jun 01 14:00
PMI Manufacturing
56.5 57.3 Jun 01 8:30
50.2 50.3 Jun 01 1:45
Eurozone Final PMI Manufacturing [F]
57.0 57.0 Jun 01 8:00

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