Jackson Hole Economic Policy Symposium Trumps US GDP Amid Thin Docket
The period of calm dominating global markets right now doesn’t look like it will break this week, though there are a number of significant events on the docket that could stir volatility and force breakouts in the first week of September. With two G-7 growth readings this week, key data out of Germany, and the Jackson Hole Economic Policy Symposium, a great deal of important information will be revealed that will dictate future price action significantly. As always, given the relative calm, we believe that it’s best to keep an eye on the newswires for chatter from the European Central Bank in re: bond-buying program as well as headlines from Greece and Spain about possible bailouts.
08/29 Wednesday // 12:00 GMT: EUR German Consumer Price Index (AUG P)
Price pressures in Europe’s largest economy are starting to pick back up, according to a Bloomberg News survey. The Consumer Price Index increased at rate of +1.9% in August on a yearly-basis, up from +1.7% y/y in July in Germany, although the monthly-reading is due to show that price pressures were only up by +0.2% in August from +0.4% m/m in July. Similarly, the EU Harmonized figures are expected to tick up as well on a yearly-basis, from +1.9% to +2.0%. Inflation is important as it is arguably the main hesitation that German leaders have for endorsing a European Central Bank sponsored bond-buying program. Higher readings are likely to increase this hesitation, which is unsupportive for the Euro. The key pairs to watch are EURGBP, EURJPY, and EURUSD.
08/29 Wednesday // 12:30 GMT: USD Gross Domestic Product (2Q S)
The revision of the second quarter US Gross Domestic Product should relieve some stress about the world’s largest economy, with the revised reading expected to tick higher to an annualized rate of +1.7% from the initial +1.5% reading. The Federal Reserve’s baseline growth case calls for output north of +2.0%, so if the actual print meets the forecast, only a little bit of the pressure on the Federal Reserve to implement more accommodative policies will be relieved. If there is a miss here, it will damage the US Dollar further and setup a weak Greenback headed into Friday’s Jackson Hole Economic Policy Symposium. The key pair to watch is the USDJPY.
08/30Thursday // 07:55 GMT: EUR German Unemployment Change (AUG)
The German labor market has remained particularly resilient over the past few years, and the trend did not change in August, according to a Bloomberg News survey. While periphery countries such as Greece and Spain face Unemployment Rates near 25.0%, the German economy enjoys an Unemployment Rate of 6.8%, its lowest rate ever. This is expected to remain true in August, marking the ninth consecutive month in which the Unemployment Rate has remained at an all-time low. While this data typically goes under the radar, during such a quiet week, it is important to keep an eye on as it is a potential elephant in the room: what happens if the German labor market starts to suffer – will Germany be more open to sweeping efforts to resolve the Euro-zone crisis? The key pairs to watch are EURGBP, EURJPY, and EURUSD.
08/31Friday // 12:30 GMT: CAD Gross Domestic Product (JUN, 2Q)
The Canadian economy has remained quite strong despite a decline across most major Western economies, although the second quarter GDP print is expected to weaken slightly. The readings due are mostly skewed to the downside, though ‘downside’ for the Canadian economy would be deemed ‘terrific’ for most of Europe at present time. On a monthly-basis, growth is expected to have increased by +0.1% in June, the same as the month prior. On a yearly-basis, growth is expected to have increased at a rate of +2.2%, slightly lower than the +2.4% growth experienced in May; this is the third consecutive month with a y/y rate greater than or equal to +2.0%.
Overall, this pegs the second quarter annualized figure at +1.6%, lower than the +1.9% figure seen in the first quarter. Accordingly, this would be the lowest annualized growth rate since the second quarter of 2011, when growth contracted by -1.0%. The Canadian Dollar has been quite strong in recent weeks, though with data starting to undershoot expectations, it is possible that these figures come in a little softer. Similarly, with US economic growth slowing (the US is Canada’s largest trading partner and Canada is the largest exporter of oil to the US) in the first and second quarters, there is likely to be some knock-on effect here. The softer the growth figure, the more likely it is to hurt the Canadian Dollar. The key pairs to watch are CADJPY and USDCAD.
08/31 Friday // 14:00 GMT: Federal Reserve’s Jackson Hole Economic Policy Symposium
Global central bankers will descend on Jackson Hole, Wyoming this week, for the Federal Reserve’s annual Economic Policy Symposium. The event has garnered a great deal of attention over the past few years, and especially since 2010, when Federal Reserve Chairman Ben Bernanke hinted at a major bond-buying program aimed at the middle portion of the yield curve. This program was quantitative easing round two (QE2) and was implemented in November. Ultimately, the program’s effect has done little to help the real economy, although the S&P 500 hovered near four-year highs at the program’s completion while US Treasury note yields fell to all-time lows.
Now, expectations are riding high again. The Federal Reserve’s Minutes from the July 31 to August 1 meeting suggested that new QE was on the way, and that if the US’ economic recovery continued to move at stall speed, the Federal Reserve would pull the trigger on more accommodative measures. However, we don’t believe that the “New QE” necessarily means “QE3,” or a bond-buying program aimed at lower yields. Similarly, we don’t believe that the “New QE” necessarily means a large-scale asset purchase program (LSAP) aimed at asset-backed securities (ABS) or mortgage-backed securities (MBS), like QE1.
Instead, we think it is possible that the New QE means a program aimed to help consumers in a more tangible sense to help the recovery further; it is clear that despite all-time low mortgage rates, the housing market still can’t catch a break. Any form of housing assistance would make sense for a number of reasons. This would satisfy the innovative stimulus idea that many have searched for, and would restore credibility to the Federal Reserve, as it would show that there are a number of policies that could be deployed to help the US economy, not just LSAP or debt monetization.
The idea is simple: free up income for consumers to dispose of, and growth will strengthen (consumption represents nearly 75% of the headline growth figure in the US now). If the Federal Reserve doesn’t resort to QE3 a la QE1 or QE2, then it saves that bullet for a more crucial time, when yields start to spike, for example. This fits in very neatly with the approaching “fiscal cliff,” which could very-well push yields up. In that sense, then, if yields do climb in the beginning of the year, QE3 could be implemented to help cushion the economy.
If QE3 is announced, we should expect the US Dollar to take a severe beating, especially against the Euro and the Japanese Yen. However, if any form of New QE is announced which doesn’t suppress the yield curve, the US Dollar could actually gain. The key pairs to watch are EURUSD and USDJPY.
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--- Written by Christopher Vecchio, Currency Analyst
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