By
Marc Chandler
:
The US dollar began Asia on a firm note, but quickly succumbed
to selling pressure. The euro initially fell to almost $1.28, its
lowest level since Sept 11, but rebounded smartly in late Asia and
through the European morning. The other major and emerging market
currencies have generally followed suit. That said, the short-term
momentum indicators are stretched, suggesting the North American
session will have difficult building significantly to the gains
already scored. Asian equities were mostly lower, with China, Hong
Kong and Korean markets closed. The MSCI Asia-Pacific Index lost
about 0.4%, but European shares are broadly higher with the Dow
Jones Stoxx 600 up about 1%, led by basic materials and financials.
Peripheral bonds are mostly firmer, while core bonds are
heavier.
There are three main issues that will vie for investors'
attention in the week ahead: the weakening of global growth, the
policy response, and political developments. Although tail-risks
were subdued in Q3 by the anticipation of ECB and Fed action, and
its delivery, they are likely to re-emerge in Q4.
Weakening Global Growth:
All the major countries will have a turn this week to provide
evidence of the continued vulnerability of the world economy. The
world's second and third largest economies have already delivered
their somber news. Japan's Tankan survey confirmed the
deterioration in sentiment (-3 from -1), with a fourth consecutive
negative reading. China's official PMI remained below 50 for the
second consecutive month. Some of the details in China's report
suggest the pace of the slowdown may be lessening as both new
orders and export orders firmed, (though remained below 50).
The eurozone's flash PMI has already signaled an economic
contraction in Q3. The final report today confirms it, and the
forward looking indicators like new orders (43.5 from 43.7) suggest
the contraction will likely spill over into this quarter as well.
The euro area PMI ticked up to 46.1 from 46.0 flash reading and
45.1 in August. It is the 14th month below 50.
Non-eurozone European countries also tended to disappoint. The
UK CIPS PMI fell to 48.4 from 49.6. The consensus expected a 49
reading. It is the fifth month below 50. Export orders fell and
manufacturers cut output for the third month. Switzerland came in
at 43.6 from 46.7, while the consensus had called for improvement.
Sweden's PMI fell to 44.7 from 45.1. The consensus had expected a
gain as well. Norway did report a small rise to 48.9 from 48.8, but
the market had expected more improvement. The general theme holds:
weak outlook and firm prices.
The US has reported a string of disappointing economic data. The
unexpectedly sharp drop in the Chicago ISM before the weekend warns
of downside risks to the national manufacturing ISM later today.
The service sector is holding up better, perhaps owing to its
reliance on the domestic economy, suffering less from the global
headwinds.
Auto sales seem to be one of the few bright spots. Auto sales in
August are expected to be near a 14.5 mln unit pace. This is well
above the 13.1 mln average over the past 24 months. Note that auto
sales bottomed out in February 2009 at an annualized rate of 9 mln
units.
The highlight of the week is the US jobs report. The Bloomberg
consensus has drifted up a little in recent days to stand at 130k
for the private sector. The government is expected to have shed a
net 15k positions. The ADP estimate has not proven especially
helpful lately, though if the August non-farm payrolls figure is
revised higher (in line with what many had expected at the time),
and its estimate this time (expected 145k), it could redeem
itself.
In some important ways QE3+ may take the near-term economic data
out of play in the sense that nearly regardless of what it is, it
is unlikely to show a significant and sustained improvement.
Therefore, the Fed remains on its path of unconventional easing of
monetary policy through not only this year, but through next year
as well.
Policy Response:
Four central banks meet this week. The Reserve Bank of Australia is
the most likely to cut rates. It is a close call. The poor PMI
reading (44.1 from 45.3) tilts the odds in the direction of a cut.
The recent RBA minutes appeared to open the door to easing,
primarily, it seemed, due to risks emanating from the global
economy, which have materialized. Indicative pricing suggests the
market is leaning slightly in favor of a cut, though opinion
surveys are less sanguine.
The Bank of England meets. The current gilt purchase program is
projected to be completed next month. A decision to extend the
program is likely, while possible this week, is more probable next
month, when it also issues its quarterly inflation report. That
said, the UK economy, which has contracted for the past three
quarters, likely managed to post meager growth in Q3.
The ECB will meet. The macroeconomic conditions justify lower a
rate cut. However, the ECB seems reluctant and the unexpected rise
in the September flash CPI reading of 2.7% (Bloomberg consensus was
2.4%) reported at the end of last week, will give it cover.
A subtext is because the ECB has knowingly gone against the
Bundesbank and its hard money stance with its Outright Market
Transaction program and its liberal collateral framework, some
concession must be made. Even though the BBK has as many votes as
say Cyprus or Luxembourg, it does not mean that it can be
consistently out-voted and its interests violated. Draghi's press
conference will be of more interest than the ECB's decision this
week, even if only filling in more details and providing more
color.
The Bank of Japan meets this week. Since it just expanded its
asset purchase program, it is too soon to expect a new move.
Political Developments:
When one tries to evaluate the independence of central banks, the
Hong Kong Monetary Authority is often seen at the top. The Federal
Reserve and the Bundesbank also get high marks. The BOE did not get
its formal independence until 1998. The BOJfrequently is perceived
to be less independent. The justification for having an independent
central bank is the concern that otherwise monetary policy would be
at the whims of shortsighted politicians. However, the less
independent BOJ has not delivered higher inflation than more
independent central banks. In any event, with an LDP victory likely
in the next election, the BOJ may see its leash tugged further by
the new government.
Spain's triple-debt challenge (sovereign, regions and banks) is
morphing into a constitutional crisis. Prime Minister Rajoy meets
with regional leaders on Tuesday, but it will be difficult to
diffuse the situation ahead of the local elections in Galicia and
Basque Country on Oct 21. Spain faces 20.3 bln euro bond (two
bonds) maturities at the end of the month. This will keep many
anticipating a formal request for aid sooner rather than later.
The Troika returns to Greece. A couple of German publications
apparently report the basis for a deal. It presupposes, as we have
consistently argued, that the costs of a Greek exit can be too
great. The Troika will, according to the reports, present Greece's
government with a list of reforms. When parliament agrees to the
reforms, the 31.5 bln euro tranche can be paid. This seems unlikely
to be completed before the Eurogroup summit on Oct 8.
The US holds its first presidential debate Wednesday. With a
campaign that appears to be faltering, Romney is seen to have to
put in a strong showing. Presidential debates are rarely the
knock-out blow. The Kennedy-Nixon and Carter-Reagan debates seem to
be the exceptions that prove the rule.
Lastly, we note that what has been regarded as one of the
largest geopolitical risks -- an Israeli strike on Iran -- has
eased following Israeli Prime Minister Netanyahu's speech at the
United Nations. The "red line" seems now to be next spring or
summer.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
See also
U.S. Credit Rating: No Risk Of A Debt Default?
on seekingalpha.com