Greenback may Lose some Momentum Ahead of Yellen Tomorrow

The US dollar remains firm, but the upside momentum may slow ahead of Yellen's speech at Jackson Hole tomorrow.  The seemingly hawkish take away from the FOMC meeting may be corrected by the Fed's chair when she discusses the metrics of the labor market that lead her (and others) to conclude that there is still "significant slack".  

Market participants have had to digest a great deal of data today already.  There  are four highlights.  

First, HSBC's flash manufacturing PMI for China fell to 50.3 from 51.7 in July. The consensus had not expected such a deep pullback.  New orders (foreign and domestic) eased to 51.3 from 53.7.   The final reading and the official report are due out on August 31.  

Second, the Japan's manufacturing PMI was considerably more upbeat, hitting a five-month high of 52.4, up from 50.5.  Output rose to 54.2 from 49.8, and new orders rose to 54.4 from 51.2, helped by an increase in exports.  This is welcome news to the Abe government and BOJ.  Reports in the Nikkei had recently signaled that the government was considering earmarking JPY1 trillion in the next fiscal budget for extra stimulus if needed.  Today's report is the first sign that the economy may have begun finding traction after the April 1 sales tax increase.  

Third, UK retail sales disappointed.   Rather than rise 0.4% in July, after weakness in May and June, UK retail sales rose a slightly 0.1%.  The year-over-year rate fell to 2.6%, which is the slowest since last November.  It peaked in April over 6%.  The revision in June to 0.2% from 0.1% was small consolation. The price deflator eased to -0.9% from flat.  Separately, the government reported its monthly finances, and the main take away is that government revenue is less than projected.  

The data since the MPC meeting, which now includes softer CPI, negative earnings, weaker retail sales with a negative deflator, undermines the significance of the two dissents.  It seems unlikely that they will be able to convince others that an immediate rate hike is necessary. 

We have argued that the FOMC minutes, by their nature, give more play time to the regional Fed presidents, among which there is a greater range of opinion.  We think that the media is wrong to characterize the minutes as a debate about an early rate hike.  To the contrary, the conditions attached to it are not new--if  labor market improved faster than expected, or if inflation rose more than expected, an earlier removal of accommodation may be needed.  

Simply put, the informal central committee of the FOMC--Yellen, Fischer and Dudley, do not expect those conditions to be meet in the near-term.  At the same time, we recognize that the minutes did not contain a discussion of the FOMC's response if inflation eased or the labor market stalled.  The asymmetry of their concerns was not as revealing as confirming the growing confidence that the economy is gaining traction, and even if the labor market is not healthy, it is healing.  

Fourth, the euro area flash PMI was softer.  The composite reading eased to 52.8 from 53.8.  The consensus had expected some slippage, but not as much as delivered.   It matches the June reading, which was the lowest since the end of last year.  The silver lining was that the German report, while easing, was not as weak as expected, and French service activity improved more than expected.  

Germany's flash manufacturing came it at 52.0.  The consensus forecast was for 51.8 after 52.9 in July.  The service sector reading was 56.4, down from 56.7.  The market had expected a deeper pullback.  This produced a composite reading of   54.9, not 54.6 that the consensus expected.  At the same time, note that the PMI reports did not signal the 0.2% contraction in Q2 GDP that was reported.  

France's manufacturing sector continues to face hardships.  The PMI fell to 46.5 in August from 47.5 in July. The consensus had expected a small up tick.  Instead is got the poorest result since May 2013.  On the other hand, the service sector reading rose to 51.1 from 50.4, a larger gain than expected.  This lifted the composite to 50 from 49.4.  

Some observers will be quick to place some blame on the sanctions and counter-sanctions.  According to German government data, exports to Russia fell about 15.5% in H1 14, with the auto exports off nearly a quarter.  There is some speculation that Russia may extends its counter-sanctions to including European autos, but there has been no confirmation yet.  Meanwhile, the EU appears to be set to compensate agriculture producers who have been adversely impacted by Russia's sanctions.  

While the Jackson Hole gathering begins today, the much anticipated presentations by Yellen and Draghi will take place tomorrow.  In the mean time, investors will have weekly initial jobless claims, existing home sales and the Philly Fed survey with which to contend.   Canada reports CPI and retail sales tomorrow. 

The euro fell to almost $1.3240 before stabilizing.  Immediate risk extends to $1.3280-$1.3300.  Sterling is trying to stabilize as well, after falling to about $1.6565.   Initial resistance is seen  near $1.6600 and then $1.6640.  The dollar rose to almost JPY104, but it has seen those upticks pared.  First support is pegged near JPY103.60.  The Scandis are the strongest currencies, helped by Norway’s Q2 GDP, which at 1.2% (mainland) was twice what the consensus expected, and Sweden’s unemployment fell more than expected (7.7% from 8.0% in June and 7.9% consensus).