Article / 23 September 2016 at 5:00 GMT

3 Numbers: Watch for rate clues as Fed presidents speak after FOMC

Blogger / MoreLiver's Daily
Finland
  • Euro area’s flash PMIs likely to show a slight decline
  • Brexit fallout could have an impact on Germany's PMI
  • The US manufacturing PMI likely to disprove the huge drop in the ISM survey
  • Fed presidents to speak, including one who wanted a hike in September
  • The consensus view is that the Fed will hike in December and once only in 2017

By Juhani Huopainen

After all the big central bank meetings have been dealt with, investors’ focus will next shift to macroeconomic data, as the big guesses continue being the real impact of the Brexit vote and guesswork about whether the Federal Reserve will hike in December.

European Central Bank vice president Vitor Constancio will be chairing a conference session entitled “Low interest rates and the implications for financial stability” at 0645 GMT in Frankfurt, Germany. While the topic is of interest as the ECB approaches the limits of its monetary easing, it is unlikely Constancio will reveal anything important at this point.

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 On track for slowing exports ... German manufacturers are vulnerable to any fallout from Brexit; the weaker pound has curbed British imports from the top EU economy. Photo: iStock

Euro area September Flash Purchasing Manager Index (0800 GMT). Euro area’s flash PMIs are expected to decline slightly in September. The composite index is expected to dip to just 52.8 from 52.9 a month ago. For country-specific numbers, France’s (0700 GMT) still-contracting manufacturing sector and the expected large slump in Germany’s (0730 GMT) outlook are the biggest notables.

Germany is seen to be particularly vulnerable to the fallout from Brexit. Of the most immediate effect is the weaker GBP, which hurts German exporters. UK manufacturing data will be released on October 3, followed by services data on October 5.

PMI september
Source: Saxo Bank

The next ECB meetings are on October 20 and December 8 – the ECB is expected to run out of eligible sovereign bonds to buy before the year is over, so some sort of change to the current self-imposed limits is to be expected at the October meeting.

As the ECB is widely believed to continue the sovereign bond purchases beyond the current end date in March 2017, and further rate cuts are unlikely because of the suffering banking sector, the ECB’s reaction function to economic data is almost broken. There is nothing that the ECB would do for now, barring a disaster. The weakish economy and political troubles at least suggest quarrelsome Brexit negotiations are unlikely.

US September Manufacturing Purchasing Manager Index (1345 GMT). The Markit preliminary manufacturing index is expected to have declined a bit to 51.9 from 52 in August. The reading in July was 52.9, which was an eight-month high.

The manufacturing index published by the ISM manufacturing PMI fell in August to 49.4 from July’s 52.6. The reading is the weakest in over two years and the steepness of the fall was unexpected by investors. Falling below the 50-level, the index was suggesting a contracting manufacturing sector.

The Markit and ISM have often had their indices diverging from each other in the short term. While the ISM index was hardly a lethal sign for the recovery, it probably contributed to the Fed’s eventual decision this week not to hike the interest rate. Thus, if the Markit’s index does not follow the ISM index today, it should be US dollar-positive.

Federal Reserve presidents speak (1600 GMT). These will be the first speeches after the Fed’s recent meeting, and any hints on whether the rate hike will be coming in December would be appreciated by investors. The futures-implied probability of a rate hike in December has increased from pre-meeting 50% to roughly 60%, which suggests many investors still do not believe the Fed can hike rates.

In fact, for the September 2017 meeting the implied probability of no hike at all is still 25%. The consensus view seems to be that the Fed will hike in December and then once only in 2017. This sounds terribly pessimistic, and there is a sort of a meme of “once a year-Yellen” floating on the finance twitter.

Even with such a glacial hiking speed, in a world full of zero or negative rate central banks, the Fed would still remain ahead of almost everyone else and keep the US dollar the least ugly currency for a long time to come.

Meanwhile Federal Open Market Committee members Patrick Harker, Dennis Lockhart and Loretta Mester will participate in the 2016 Reinventing Our Communities conference. Harker will present keynote remarks, followed by a dialogue involving all three FOMC officials.

With no fresh new economic data, and the conference topic being a bit unrelated to monetary policy and the apparently heated meeting with three dissenters, I guess they will avoid making strong statements at this juncture. Mester was one of the three dissenters, so her comments could be interesting.

The EURUSD daily chart shows the pair near resistance areas, with plenty of downside available.

EURUSD chart
EURUSD daily
Source: Saxo Trader

The hourly version of the same chart shows a brief visit to 1.1250, which was reversed quickly. I'd try to sell the spikes.

Hourly chart, EURUSD

EURUSD hourly
Source: Saxo Trader. Create your own charts with SaxoTrader; click here to learn more.

– Edited by Robert Ryan

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.
23 September
Patto Patto
Fed Presidents are second class citizens on the FOMC. When it comes to the crunch, the permanent members - the Governors - call the shots..........
23 September
Juhani Huopainen Juhani Huopainen
True that they're not equal
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