After Jackson Hole Markets Refocus on Jobs

BBH CurrencyView

• Friday’s shift in sentiment spills over into Asian and European sessions; dollar broadly weaker
• This week’s attention shifts back to US and EZ data; Japanese select sixth PM (Noda) in five years
• Chinese shares were laggard in EM rally amid changes in the reserve requirement rules by the PBOC

The markets positive reaction to Bernanke’s Jackson Hole speech spilled over into the Asian and European sessions on Monday, with the broad dollar index declining for the second day in a row. Both the MSCI Asia Pacific index and the EuroStoxx advanced, with the former up over 1.5%, climbing for its third straight day (though the European market lacks liquidity due to today’s London market holiday). Nevertheless, Friday’s shift in sentiment remained intact as market participants still pin their hopes on future Fed action, which in turn is boosting risk-sensitive currencies. Against this backdrop, growth-sensitive currencies are firm with the antipodeans leading G10 gains against the dollar, while the yen is flat as the leadership election kept investors sidelined. The euro, meanwhile, is flat on the day after consolidating intraday gains of nearly 0.5% following a deceleration in German state CPI and lower Italian consumer confidence, with sterling trailing the euro’s moves. Oil and base metals continue to advance.

After Bernanke refrained from any policy commitments last week, market are keen to focus again on tier one US data reports out this week. The main focus will be on jobs this Friday, with the Bloomberg consensus expecting a moderate increase of 75k. The data are likely to be impacted by the recent market uncertainty but more importantly the headline print is likely to be skewed by the impact of the Verizon strike, which according to recent estimates may have sapped between 45-100k jobs off the August report. That means, while markets are likely to expect somewhat of a softer payroll report this week, markets may find it hard to digest another sharply negative report. Meanwhile, outside jobs the other key data reports this week are the Chicago PMI (Wednesday) and more importantly the ISM manufacturing (Thursday) with a print below the boom/bust level of 50 likely to stoke fears of a US double-dip. We continue to expect the US will avoid a recession in H2 2011 but suspect that soft data reads this week would likely to prompt a squeeze in dollar shorts. On the other hand, an upside surprise in US data is likely to intensify reserve diversification strategies, which would remain supportive of broad dollar weakness against the AUD, NZD and CAD in particular. On balance, we continue to expect that positive data surprises are negative for the dollar as positive risk appetite supports capital flows outside the US and vice versa. Elsewhere, many will also be monitoring the ongoing debt crisis in the EZ, with the upcoming Troika review of Greece likely to garner attention this week, along with Italian bond auctions (tomorrow). In addition, markets are also likely to monitor EZ survey data for indications of soft growth ahead. In our view, weaker European growth is likely to keep the market focus on the periphery’s ability to grow its way out of debt and in turn its ability to adhere to necessary structural and fiscal measures. Otherwise, there are important data releases in Canada and Australia and many will also monitor the political developments in Japan and the likely impact on the yen, which we view as limited. All told, we expect price action to remain choppy again this week yet we expect FX to remain stuck in recent ranges.

In the EM space, the outliner was the Shanghai equity index which closed 1.2% lower compared with a rise of 1.6% of the MSCI Asia as the PBoC widened the rules on reserve requirements to include margin deposits. The move is expected to drain 900bn yuan and will be effective on September 5th, though banks will have 3 months to fully comply with the new measures. We were expecting residual tightening from China but are surprised it came in the form of RR since officials have been sending signals suggesting that the recent moves could have made funding too restrictive for small and medium size banks. Still, we think that China is very close to a shift to a more neutral stance as underlying inflation data is to be come in more benign. Looking forward to this week, GDP for India, Poland and South Africa, will released tomorrow. On Wednesday, South Korea and Brazil will release IP numbers. On Thursday the Brazilian central banks meets – we expect no change in the base rate, though futures are pricing in about 10 bps of cuts. Then on Friday, we get CPI and trade data from South Korea and trade data out of India.