Written Commentary
Seasonally typical rise in volatility getting amplified by Persian Gulf news and speculation on Japan interest rates; digesting Fed Beige Book and Asia/Europe Services PMIs, awaiting US Services ISM, weekly jobless claims and Fed’s Waller.
- USA: Fed Beige Book points to solid growth, increasing input price pressures on corporate margins, very modest labour demand.
- Japan: JPY rise probably more a function of BoJ rate expectation repricing than more intervention.
EVENTS PREVIEW
Volatility continues to rule the roost, not only related to Persian Gulf and Black Sea related news, but also on speculation about JPY intervention and BoJ rate hike trajectory. While the White House has said that the latest escalation in skirmishes between US and Iran is unlikely to be ‘too long’, such assertions have been made before and proven to be less short-lived, though, as another overnight story says, a ‘quiet period’ ahead of the mid-term elections would be desirable, but a re-escalation thereafter is quite likely.
Eminently much depends on whether Iran’s leadership (above all the IRGC) opts to provoke the US, precisely because of the proximity of the elections. As for the bounce in the JPY, the scale of the initial move in US hours look to be too modest to be intervention, though officials may have made some price enquiries, though a further move lower in USD/JPY in Asia leaves that open to question. It may well be mostly a function of BoJ rate re-pricing in the wake of the comments by BoJ’s Ueda and Takata, with markets perhaps more sensitive given that major investor hedging of their USD and other portfolios has dropped to a record low (see chart), above all due to rising hedging costs. The latter is likely to be a factor across all asset classes, particularly energy and commodities, as we enter the seasonally choppy period of September and October.
The day’s regular macro schedule has the latest Fed Beige Book to digest, which saw growth picking up slightly and labour demand growing at the margin. More poignantly, output price increases largely held steady, but input pressures are building: “Input price pressures were notably elevated in manufacturing and construction across multiple Districts, with widespread reports of price increases for energy, transportation, and raw materials, particularly metals and petrochemicals. Retail and manufacturing contacts continued to note tariff-related impacts in multiple Districts. Firms also broadly reported significant health care and insurance cost pressures. Consumer-facing contacts in a few Districts noted that heightened price sensitivity among customers was putting a limit on their ability to pass through input price increases.” Otherwise the focus is on Services PMIs, with the unexpected rebound in China’s RatingDog Services PMI perhaps more a function of its small sample size (650 companies) relative to the NBS survey (4,300), which by contrast fell.
Elsewhere, there remains sizeable divergence in Euro area Services between robust growth in Italy and Spain and the drop into contraction in Germany and France, while the UK showed continued modest growth. The US Services ISM is forecast to be unchanged at a solid 54.1, with Prices remaining elevated and labour demand easing, while weekly jobless claims are seen holding at historically very low levels. But the focus will likely be on Fed’s Waller’s comments on the economy, inflation and rate outlook, particularly as he has swung from being very dovish last year to being hawkish in recent months. There is also Germany’s IfW upgrade to its GDP forecast to 1.3% from 0.8%, but this is rather less impressive given that it maintained forecasts for the next two years at 1.0% and 0.5%, implying that the boost from increased government spending is not anticipated to get any meaningful traction in private sector CapEx, which it suggested will remain sluggish due to high energy prices and the array of economic and political uncertainties. The latter comes sharply into focus this weekend, when the state elections in Sachsen-Anhalt take place, with polls indicating the possibility of the far-right AfD gaining an absolute majority, which would send shockwaves through the domestic political establishment, though it should be noted that the state is small, with a population of just 2.1 million as against a national population of 83 Mln.
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