LONDON (Reuters) – 1/ EURO-WATCHING
There’s plenty for the ECB to chew over at its meeting on Thursday. The euro hit $ 1.20 for the first time since 2018 – not a big deal if that reflects optimism about the future, something that may be reinforced when EU finance ministers meet in coming days to discuss implementing their 750 bln euro recovery fund.
But on a trade-weighted basis, the euro is near six-year highs, weighing on prices. Inflation turned negative in August for the first time since 2016 – a red flag for an ECB charged with keeping it near 2%.
Aggressive stimulus due to the COVID-19 shock buys time and no major action is expected. Yet the deflation alarm and a firm euro suggest it won’t be long before the ECB acts again. Markets will looking for clues on just when that might be.
Graphic: Euro during the coronavirus crisis – https://fingfx.thomsonreuters.com/gfx/mkt/xegpbobwbvq/Pasted%20image%201599140904172.png
2/EXPORTS JOIN THE CHINA SHINDIG
China’s August trade data should be an added bonus for an economy already firing on several cylinders. Pent-up consumption demand, massive foreign flows into yuan bonds and a rising currency already attest to what is easily the world’s fastest recovery from the pandemic.
Nationalism and Beijing’s drive for technological self-sufficiency have fuelled a sizzling IPO and stock market boom. Upcoming lending and money supply data is likely to confirm what bond investors are betting on: China won’t ease or tighten in a hurry.
China’s July imports dipped 1.4%. But record inflows of and China turning a net aluminium importer for the first time since 2009 shows increased momentum.
Graphic: China TSF, GDP and markets Image – https://fingfx.thomsonreuters.com/gfx/mkt/12/6912/6843/Pasted%20Image.jpg
3/ IT’S ALL ABOUT LABO(U)R
Less focus on inflation, more on labour markets: That was Fed boss Jerome Powell’s message at last month’s virtual Jackson Hole summit. Essentially that means the Fed, now aiming for an average, won’t worry about inflation exceeding the 2% target, which is seen as giving it room to keep interest rates low as long as it wants.
That’s good news for stock markets, property and other sectors that benefit from cheap money. Inflation seems to have little chance of getting to 2% anytime soon, even though inflation expectations have nudged higher of late.
Friday’s August inflation readings are expected to show core CPI up 0.2% month-on-month after July’s 0.6% gain. For 12 months through August, it is expected at 1.2% versus 1% last month. The Fed’s preferred gauge – core personal consumption expenditure (PCE) index excluding food and energy – was up 1.3% in July. At this rate, asset price inflation might pose a bigger headache for the Fed.
Graphic: Inflation – https://fingfx.thomsonreuters.com/gfx/mkt/dgkvllqoyvb/Pasted%20image%201599167085763.png
Britain’s government apparently sees just a 30%-40% chance of a post-Brexit trade deal with the European Union. Little optimism, then, before talks resume on Sept 8. Previous rounds ended in impasse, with each side accusing the other of unwillingness to compromise before the transition period expires at the end of 2020.
The squabbling is over several issues, from fishing quotas to Britain’s desire to use state aid to build up its tech sector. And less than a month remains before the Oct. 2 deadline for a deal that must then be ratified by a mid-month EU summit.
The prospect of no-deal is frightening, given the trillion dollars of annual trade at stake. Failure to progress will mean getting dangerously close to the wire. UK stocks are showing nerves, lagging European peers by 10% year-to-date and Britain’s economy may contract more than any other developed nation. Sterling has benefited from dollar weakness but its days in the sun might be numbered.
Graphic: Poised for losses – https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdogonvo/Pasted%20image%201599214157904.png
5/ SUGA NEEDS SPICE
Yoshihide Suga has found his way from the snowy farmlands of northern Honshu, via a cardboard factory in Tokyo and local politics in Yokohama to the cusp of Japan’s top job. He looks set to win a Sept. 14 ballot for his party’s leadership and take over as prime minister.
Yet his reputation as a lieutenant rather than leader has investors wondering if determination will be enough to cement public support and prevent more revolving-door premierships.
A poll on Friday showing Suga vaulting former Defence Minister Shigeru Ishiba to become the preferred popular candidate is a positive sign. But with an election due in 2021, and the yen yet to fully recover from the shock of Shinzo Abe’s departure, he must quickly win hearts and minds.
Graphic: Can Suga keep Abenomics flowing? – https://fingfx.thomsonreuters.com/gfx/mkt/dgkvllkxzvb/Pasted%20image%201599206775210.png