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Article / 26 August 2016 at 5:00 GMT

3 Numbers: Janet Yellen speaks – September hike in question

Blogger / MoreLiver's Daily
  • Fed Chair Janet Yellen speaks at Jackson Hole – is September 'live'?
  • Eurozone's monetary aggregates play dead, credit formation remains slow
  • US consumer sentiment index range-bound for now, but risks in the horizon 

By Juhani Huopainen

Today’s top event is the central banking symposium in Jackson Hole – but I doubt its effects will be as great as many are hoping. August has been a slow month; the VIX volatility index is close to record lows and many of the currency pairs seem completely directionless and above all clueless about the next policy shifts.

The latest estimates of the gross domestic production’s growth rate in the second quarter are published for the UK (0830) and US (1230). They will be hard to trade. The consensus forecast expects practically no changes, and even if there were surprises, the data is already old news and a bit irrelevant for policymakers: especially the UK data from the time before the Brexit referendum, which is of little value. Better safe than sorry – try to avoid these hours, or at a minimum, be prepared.

 The Jackson Hole symposium's main event, Janet Yellen's speech, is
undoubtedly today's most important. Photo: iStock

Euro area July M3 money supply and lending (0800). The M3 monetary aggregate is expected to have increased by 4.9% from a year ago, down from 5.0% in June. Loan growth to the private sector remains subdued as an increase of 1.8% is expected. While it is slightly higher than the 1.7% in June, it will be simply too low to accelerate the inflation toward the European Central Bank’s target.

In the past M3 and lending data has been a relatively important data release to watch, but corporate bond markets have to a large extent disintermediated corporate credit financing in Europe after the crisis started. Thus, the ECB seems to be concentrating more on its asset purchase programmes, which include corporate bonds, and the inflation outlook.

The ECB’s willingness to “do more” is limited – while a continuation of the sovereign bond purchase programme is practically guaranteed beyond the current deadline in the first quarter of 2017, further rate cuts or increasing asset purchases seem unlikely at the moment.

Most probably the next easing avenue in the euro area will be via fiscal policy. Terrorism, migration, approaching elections and infrastructure needs – and most importantly, a shift in thinking – are all aligning in such a manner. If the ECB thinks fiscal policy is about to turn easier, it will refrain from big changes to its policy and largely concentrate on delivering what it has already promised or hinted.

If the ECB is not going to react to monetary aggregates, then for now the data release has become irrelevant for our purposes.
US Federal Reserve’s Chair Janet Yellen speaks (1400). This week’s supposed main event is the Jackson Hole symposium, and especially Yellen’s speech. Most other Fed speakers have been giving hawkish comments recently, bringing back the threat of an early rate hike. The futures prices imply there is roughly a 30% chance of a rate hike in September: Countdown to the FOMC.

The implied probability of a hike in September plummeted after the UK’s Brexit referendum to effectively zero. After the initial panic was over and the US economic data kept providing positive surprises, suggesting a relatively strong third quarter, the probability started climbing. The probability has still not reached the high 40%-45% levels seen before the Brexit referendum, but we are very close to that. 

With the economy doing OK, stock prices near record highs and the USD index stable in the bottom half of the 2015-16 trading range, the opportunity is there for a rate hike.

The Fed would love to have interest rates higher before the economic cycle turns – otherwise it could not perform rate cuts when the next recession hits. Recessions always tend to come sooner than one thinks, and a lot sooner than one is prepared for. On the other hand, the Fed is to some extent afraid that a too hasty hike could hurt the recovery, and push the Fed again to the troubles that the zero lower bound presents in monetary policy.

Yellen carries more weight as the chair, and as she is generally considered to be more dovish than the other members of the Federal Open Market Committee, if she hints at a rate hike, then it is practically guaranteed.  

My guess is the Fed really wants to make one rate hike in 2016. With the markets aligned as they are, one rate hike now would not hurt anyone. Yellen will provide enough guidance that a rate hike in September remains an option, and the implied probability will continue climbing toward the pre-referendum highs of 40%-45%.

This should be USD-positive, and if something bad happens, by not hiking rates in September the Fed could provide “free easing” – by first almost promising a hike and then not doing it. I wrote about this flip-flopping last March, and not much has changed since.

The daily chart suggests EURUSD has reached its high during the August rally. The pair has still not turned convincingly lower:

 Source: SaxoTrader

Close to 1.13 should be a good shorting opportunity even on shorter time frames. If one manages to catch a trade entry and EURUSD begins moving lower following Yellen’s speech, then the immediate target is 1.1230-1.1240:
EURUSD short
Source: SaxoTrader

The real beef of Jackson Hole will be the papers and the discussions. Somehow the decision-makers will have to figure out what they should do after quantitative easing has not improved inflation and lending growth remains subdued. The solution will be some form of helicopter money – most likely continuing QE but with higher budget deficits.

Further reading: In 2015 I wrote how Jackson Hole is a “sign of the times” and how the agenda reflects the current situation and slowly but surely also affects policy.

In 2014 I wrote how Draghi surprised me by his brutal treatment of the euro area’s situation, crisis management and slow reactions. He became my last and biggest hope, but I felt that his advice was not listened to carefully. But perhaps the euro area’s recent tendency of not complaining too loudly about the excessive budget deficits of member countries is a silent acceptance of Draghi’s views.

US August U.Michigan Survey of Consumers (1400) US consumer sentiment index remains range-bound, so the small expected jump from July’s 90 to 90.8 is really not a big issue. The higher oil price and the upcoming presidential elections could begin to affect sentiment, so negative disappointments today or in the coming months are quite possible.

 Source: Saxo Bank

The US presidential elections remind me of the UK’s Brexit referendum. Everyone seems to be expecting the “sane” solution to win, and if it doesn’t, they are surprised and panic, only to learn later that even the less “sane” solutions are usually more of the same, and nothing more. A negative surprise from the sentiment index is USD-negative, but it would be fleeting.

– Edited by Gayle Bryant

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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