US, EZ, UK: Time for action?

US: Reflecting on Jackson Hole
After the great expectation for the revelations of Bernanke at Jackson Hole last Friday, the reality was perhaps a disappointment to many. Interestingly the immediate views of commentators could not have been more varied with some suggesting that the rhetoric put QE3 firmly ‘off’ the table and others proclaiming its imminence. As I see things Bernanke remains dovish. Attention will now likely turn to Friday’s US August employment report, where a very weak report could swing sentiment dramatically in favour of action.

With stagnation in the labour market a “grave concern” and with the US facing “daunting economic challenges”, Bernanke exclaimed that he would not rule out further asset purchases. Despite any explicit reference or inference to the likely path of further action, the speech very carefully gave a positive detailed appraisal of the Fed’s past actions, from Quantitative Easing, to the Fed’s rate guidance, in lowering rate paths, expectations and boosting confidence. As I read the speech it was a carefully structured précis of the empirical impacts of past actions (perhaps aimed at the critics of Bernanke and the current Federal Reserve Board Members) and the benefits to the broader economy, ultimately ending with the commitment to do more in light of continued weakness. I now see the chance of QE3 at the September meeting at around 50-50.

Eurozone: Focus on Draghi
The month of September is likely to be a very important juncture across the globe, and not just in the US Monetary policy debate.  Within the Eurozone, September is likely to be equally defining. First up we have the European Central Bank meeting on Thursday, where all eyes will be on president Draghi for details of the ‘Modalities’ of his proposal for ECB bond buying to “maintain the transmission mechanism for monetary policy”. In addition to the fact that this is a very sensitive subject in relation to broad German objection, issues of seniority, and of intervention levels will be key. The imposition of fixed bond yield limits could potentially open the ECB up to unlimited intervention, which Draghi will clearly wish to avoid. However, after his explicit exclamations at last month's ECB meeting that he would do “whatever it takes” and that the details would be explained over the coming weeks, Draghi is under great pressure to “put his money where his mouth is”!

The rest of September will likely be just as critical for the Eurozone, with the German constitutional court ruling on the European Stability Mechanism (September 12) along with a Dutch Parliamentary election, a possible Troika report on Greece and a number of Eurogroup and EU meetings.

UK: It’s the Politics stupid
In the UK there is also a Monetary Policy Committee (MPC) this week, however, while we are mid cycle on the latest bout of Bank of England asset purchases the chances of further action are minimal. The big focus in the UK is becoming the political debate. Infighting and policy divergence from a number of strands of the coalition government have become a significant factor in the UK economic debate and suggestions of an imminent cabinet reshuffle may further add to this.

Over the weekend the government announced a number of new measures aimed at removing some of the red tape (and thus uncertainty) surrounding some (mini – or short hours) employment and planning laws. In addition, the plans include infrastructure finance guarantees; support for first time buyers and perhaps most significantly a scheme to create a new ‘government business bank’ where the government will seek to directly back small businesses and entrepreneurs.

Global weakness
Elsewhere in the world the theme of broad global economic slowdown continued with a weaker than expected manufacturing PMI out of China that took AUD lower in the Asian session.  Asian equities were broadly positive, with the exception of Nikkei as JPY strength continues to weigh on Japanese domestic sentiment.

With the US bank holiday today, it is likely to be a slower start to the week but as the workforce returns back from their summer holidays and the economic and political events begin to hot up, markets are likely to have a greater degree of energy than the past month or so. In the very short term I still continue to favour a weaker USD scenario, however, going into Thursday’s ECB meeting (despite the huge bias of commentators expecting to be disappointed) the risks become slightly more balanced.