Wawasan Ekonomi Hari Ini

Economic Insights

Treasury bills selling activity may continue; strong rally for US equities

The US Treasury hurts tremendously after the US released a series of more than exciting data. The fixed income market immediately aimed to price out the further easing from the Federal Reserve (Fed) in the near term, while Financials and Technology lead the US equities surging to a triple digit gain.

Fed’s August statement fueled the demand for the US 10-year bill as the recent modest growth in the world’s largest economy may need some further aggressive monetary policy from Fed, although US officials released a more than upbeat jobs report in the early August. However, more and more different tiers of economic releases trimmed the earlier positions on the “Quantitative Easing (QE) bet” that echoe my “No QE3 in 2012″ view long time ago.

Vehicle sales and Mortgage Bankers Association (MBA) Mortgage Application released earlier of the month improved substantially compared with those in July. More importantly, the data released yesterday nearly made it impossible for any “big surprise” from the Federal Open Market Committee (FOMC) meeting next week, with the US Election getting nearer day after day.Source: Bloomberg, FXPRIMUS Global ResearchClick the image to enlarge

Risk for US dollar: Safe currency may not be safe tonight if affected by its “unsafe counterparties” once traders decide not to play safe

The ADP survey reported that the US added 201,000 workers in the private sectors, which is the highest number in the past five months; the contribution was mainly from the service industry that added 185,000 workers last month, manufacturing and construction’s slowing down are in line with the current environment of global slowing down.

However, there were still some “flags” in this upbeat survey as the multinational companies (MNCs) added the least jobs among all the different size of the companies, and the small and medium-sized enterprise (SMEs) outperformed the rest. The reluctance of the hiring from those big employers warns the outlook of the economy, and the worries are most likely only be able to solve until policy makers offer a clear solution for “fiscal cliff”, and a resilient rebound of the global fading business environment, especially from China.Source: Bloomberg, FXPRIMUS Global ResearchClick the image to enlarge

Initial jobless claims also fell to the lowest level in the past 4 weeks to 365,000, decreasing by 12,000. With the recent different kind of jobs report and improving service industry in the United States, there are signs of stability in the US labour market.

According to the previous trend, the ADP and the Non-Farm Payrolls (NFP) tend to have high correlation with each other, which may provide further upside room for the Greenback tonight; but the Q1 2012 puzzle may return. When the US economy turns stronger to trigger a strong US dollar and risk appetite in the market, where does the safe haven currency heading to? The answer has not been answered clearly 6 month ago.

Possibility of quantitative easing (QE3) nears ZERO

The recent US data suggested the economy unlikely to deteriorate further in Q3, the voice calling for further stimulus from Fed is going to be naturally softer. In addition, Fed has not been showing the strong willingness to transfer the script into action.

Practically speaking, with less than 60 days to the US election, further aggressive surprise from Fed might not be “appropriate” at this point of time. Even the recent data presents a further downside risk, which only offers a theoretical possibility of being further aggressive by the Fed, not practical.

From the “Taylor’s Model” approach, the Fed may have further reasons to be more dovish as lower inflation suggesting the rate could be 0.1% from the model while the current Fed’s rate is 0.25%. However even from here, it only offers a room for further ultra rate extension but far from enough to trigger one round of quantitative easing. The chart below shows that when the QE1 and QE2 were introduced in 2009 and 2010, the spread is around 2%, much higher than the current 0.15%.Source: Bloomberg, FXPRIMUS Global ResearchClick the image to enlarge

European Central Bank (ECB) agrees to the unlimited bond purchasing

The ECB left the interest rate unchanged at 0.75% yesterday, and Mario Draghi said the ECB and policy makers have agreed to the unlimited bond purchasing which was similar to the Swiss National Bank’s (SNB) tone in 2011. The only difference is that the SNB set a “floor”, but there is no “cap” set by the ECB at the current moment though it appeared in the proposals from some central bankers’ information.

The common currency was bolstered by Draghi’s ambitious comment and broke the key resistance level of 1.26. Although there is no details of bond purchasing yesterday, traders expected the outcome as there isn’t left too much options before the German constitutional court’s European Stability Mechanism (ESM) verdict, and which I believe the possibility of rejection is very low, but conditions might be attached.

Spanish 10-year yield lowered to close to 6% as more positions are betting on the bold action from the ECB and policy makers, and Germany-Spain shorter notes’ yield spread narrowed sharply.

So far the main opposing call is still from Bundesbank chief Jens Weidmann, who expressed the concern on “printing banknotes” discourage the determination of reforms.