The dollar has firmer back some following yesterday underperformance

September 23, 2016

US Data Reports: Revealed weak August data for existing home sales and leading indicators, but a tight initial claims report for the BLS survey week of September that left mixed signals that were positive on net, with aid from a 0.5% July rise in the FHFA home price index. The 0.9% August existing home sales drop to a 5.33 mln rate left a Q3 trimming of Q2 gains, though the median price decline to $240,200 was largely seasonal and left that figure close to the $247,600 all-time high in June. The 0.2% August leading indicators drop tracked estimates, with weakness that reflects declines in the factory sensitive sectors. Most importantly, an 8k initial claims drop to 252k in the BLS survey week left that measure just above the 42-year low of 248k in mid-April, as claims tighten into the end of Q3 to signal upside risk for the 170k September nonfarm payroll estimate.

U.S. VIX equity volatility slumped 10%: It fell below 12.0 after the Fed on Wednesday and that’s put the VIX within a hair of 11.65 September lows compared to highs of 20.51 earlier in the month when the ECB held rates pat rather than easing again as expected (nothing to see here, no correlation). Year lows of 11.02 appear to be within reach, while life lows of 8.2 lie below as the markets continue to disbelieve the “cry wolf” hawkish Fedspeak, though 3 dissenters would suggest the Fed is very close to a second hike. Should the pendulum swing back again, that could put the 26.72 Brexit high back on the radar. Meanwhile, after bottoming at 2,119.1 in September, the S&P 500 looks poised to take another stab at 2,193.81 life highs set on August 15, barring a swing in the polls ahead of November elections.

European Outlook: Asian stock markets are mostly slightly down (Nikkei closed -0.32%) . Australia’s ASX outperformed, as mining and energy stocks and especially gold led the way. U.S. and FTSE 100 futures meanwhile are also slightly in the red and oil prices are down from highs of over USD 46 per barrel. Consolidation after yesterday/s celebration of the Fed’s steady hand policy, seems to be the order of the day, but while European stocks are likely to see some correction investors seem to be breathing more easily now. The 10-year Bund future already moved off highs in after hour trade yesterday and yields, which dropped sharply in Europe yesterday, are likely to pick up somewhat. The European calendar focuses on preliminary PMI readings for September, which we expect to stabilise after the mixed August numbers. The final reading for French Q2 GDP meanwhile is not expected to hold any surprise.

FX Update: The dollar has firmer back some following yesterday’s underperformance as the fizz of the post-FOMC risk-on theme abated. EURUSD has ebbed back to the 1.1200 area after peaking yesterday at an eight-day at 1.1257, and Cable has breached below yesterday’s low in making 1.3030. The yen also recouped from weakness, with the currency following its usual inverse correlative pattern with global stock market performance. USDJPY clocked a two-session high at 101.24 earlier in Tokyo, and has since ebbed back to the 100.90 area. EUR-JPY and other yen crosses are also softer. Commodity and emerging market currencies have also given back some of the gains seen in the wake of the FOMC announcement. Not much near-term downside potential in the dollar as market participants will, like the Fed, be data dependent in forming their commitment.

Main Macro Events Today        

Eurozone PMI – After the mixed August numbers, expectations are for a stabilization in September with only a slight dip in the manufacturing PMI to 51.5, from 51.7 in the previous month, which should partly be compensated by the expected uptick in the services reading to 52.9 from 52.8 and thus leave the Composite PMI broadly stable at 52.8, versus 52.9 in August.

Canadian Inflation and Retail Sales – July Retail Sales are expected to pick up from -0.1% reading in June to 0.1% (MoM) whilst CPI YoY for August is also expected to tick up to 1.4% from 1.3%. The MoM figure should rise to 0.1% for August from -0.2% in July.

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