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IronFX Daily Commentary | 03/09/15

03.09.2015, 10am

• Below-consensus ADP sets market up for asymmetrical response to NPF Wednesday’s ADP employment report was slightly below estimates at 190k (market median estimate: 200k) but was still within the one standard deviation range of estimates (189k-217k). Also it must be said that August tends to be a weak month for payroll data anyway, so I’m not sure a miss would be that significant. Last year’s nonfarm payroll figure for August was a shockingly low rise of only 142k but that was followed by gains of 248k, 214k, 321k and 252k, so clearly the August shortfall didn’t signal any abrupt change in the labor market. (In fact the August 2014 figure was eventually revised up to 213k, demonstrating that even the NFP figure itself is not a very reliable leading indicator of the NFP figure.) Indeed, the somewhat weak ADP report may have inoculated the market against a weak NFP number tomorrow. That is to say, market participants may be revising down their estimate for NFP (market consensus: 217k) in light of the ADP number, so a surprise on the downside could have less impact than a surprise on the upside.

• In any event, we are starting to hear talk about a rate hike in the US at the October meeting as a possible compromise between those who hesitate to hike while the markets are in such a jittery mood and those who are pretty much committed to starting the process this year. The October meeting does not have a press conference scheduled, but Fed Chair Yellen has said in the past that that wouldn’t be an obstacle.

• Australia data adds to AUD woes The data out overnight for Australia added to the currency’s woes. Retail sales for July unexpectedly fell on a mom basis instead of rising as expected, while the June figure was revised lower. This was the first decline since May 2014 and calls into question whether domestic demand can substitute for shrinking export demand as China slows. Q2 GDP growth was only half as strong as expected and this July figure suggests Q3 is getting off to a slow start too. At the same time, the trade deficit for July was narrower than expected, but the June figure was revised to be wider than initially thought. All in all it seems only a matter of time to me before AUD/USD falls decisively below the 0.70 level.

• All eyes on ECB today During the European day, all eyes will be on the ECB. Following the Jackson Hole Symposium, ECB President Draghi will be the first major central banker to address a monetary policy meeting. Both the BoE and the Fed will meet later this month. On the 25th of August, ECB Vice President Vitor Constancio said that it is too early for the ECB to react to China’s situation as it is not clear how it would impact Eurozone’s economy. We agree with him, and we do not expect the Bank to take any action at this meeting. We do expect the Council to reiterate its easing bias and to stress again that in case of an unwarranted tightening of monetary policy or material change in the inflation outlook, “the Governing Council would respond to such a situation by using all the instruments available within its mandate.” Note that inflation expectations began to rise earlier this year, following the introduction of the ECB’s QE program, but they have been falling back recently, indicating that QE has not been successful in changing the inflation outlook. As a result, we expect the ECB to leave the door open for further action and we will look for hints on what actions they could possibly take, such as increasing the size of the monthly allotment or extending the duration of the QE program.

• Along with the policy decision, we will get a new set of staff projections for growth and inflation until the end of 2017. We believe that Bank officials are likely to lower their growth projections slightly because of the lower than anticipated Q2 GDP figure and the recent strength of EUR. The stronger EUR, alongside the recent fall in oil prices, is likely to also weigh on the near-term projections for inflation.

• Sweden’s Riksbank expected to stand pat too At their last meeting on 2 July, the Bank surprised the market by cutting its key interest rate further into negative territory and expanding its bond purchases program. Since then, the country fell back into deflation in July and the krona has become stronger than the Bank had forecast, especially as its QE program undermined liquidity in the country’s bond market and drove yields higher instead of lower. Although the market expects no change in rates at this meeting, I see the possibility for the Bank to act. That would probably weaken the krona and push USD/SEK back above the psychological zone of 8.5000.

• China on holiday China’s markets are closed for a holiday today and tomorrow. Much of the volatility in global markets has originated in the Chinese stock market, so we may have two days of relative calm – depending of course on the ECB and tomorrow’s NFP figure.

• Today’s indicators: We get the final service-sector PMIs for August from the countries we got the manufacturing data for on Tuesday. As usual, the final forecasts for France, Germany and Eurozone are the same as the initial estimates, therefore the market reaction is usually limited at these releases. Eurozone’s retail sales for July are coming out as well.

• The UK service-sector PMI is forecast to have risen slightly, to 57.7 from 57.4. Given that on Wednesday, the construction index missed estimates and that the manufacturing one unexpectedly declined on Tuesday, another miss in the service-sector PMI looks possible.

• In the US, the both the final Markit service-sector and the ISM non-manufacturing PMIs are expected to have declined. The market pays more attention to the ISM index. A possible decline in ISM non-manufacturing composite will be in line with the decline in the manufacturing index, and could push USD lower, at least temporarily. The nation’s trade balance for July and the initial jobless claims for the week ended on Aug. 29 are also coming out.

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