Weekly Outlook: 2015, September 20 - 27

Greek Elections, USD Post-FOMC, Chinese data, Eurozone PMIs and the German IFO

EUR remains driven by two key drivers – policy divergence and market risk sentiment. These factors will also determine how the main releases next week will impact EUR. Starting with market risk sentiment, the Greek elections over the weekend and the Chinese PMI during the week could prove important drivers of risk sentiment – perhaps more the latter than the former.

Going into the Greek vote, investors will focus on the risk of a hung parliament and, indeed, new elections in Greece. Given that the two main parties – Syriza and New Democracy – have signalled willingness to stick to the bailout agreement, however, we doubt that the election will trigger to a surge in political uncertainty.

The Chinese data has been an important driver of risk sentiment of late and more disappointments next week could keep risk appetite subdued and prop-up EUR.

The Eurozone PMIs and the German ifo could signal that business confidence is eroded by fears about China. This could encourage renewed bets on more ECB easing and weigh on EUR.

The USD has been under some pressure, mainly on the back of the Fed remaining on hold, and as a more cautious assessment of the growth and inflation outlook may have increased expectations of the central bank remaining on hold for the reminder of the year. However, our economists are still of the view that a lift-off can be expected in October. Constructive domestic conditions should prevent inflation expectations from falling further.

Even if the September meeting was a setback for the USD-bulls it changed little in terms of the relative policy outlook between the Fed and other central banks. Indeed, the Fed’s inaction could soon spur the ECB and BoJ into action as they try to lean against FX appreciation.

This should keep risks for EUR and JPY to the downside against USD.
When it comes to risk sentiment it must be noted that weaker global growth uncertainty as related to Asia has been among the main reasons to keep rates on hold. This in turn should not be taken as a bullish signal for risk sensitive currencies. On the contrary, with China still casting a long shadow over the markets the risk remains for a return of risk aversion. We therefore maintain a cautious view on the G10 commodity and risk-correlated currencies.

The GBP, in contrast, could be the unlikely winner of the latest developments with the BoE still the only major central banks that is sending a fairly clear signal that rates will be heading higher before long.

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The dollar received a blow from the dovish Fed, but partially recovered. Apart from echoes from that all important decision, we have elections in Greece, Mario Draghi’s speech, US Durable goods orders, unemployment claims, GDP data and Janet Yellen’s speech. These are the main events for this week. Join us as we explore the market movers on Forex calendar.
The U.S. Federal Reserve decided to keep interest rates unchanged, amid concerns over the global economy, market instability and muted inflation in the US. Despite the dovish tone, the Fed left the door open for a rate hike later this year. Furthermore, FOMC Economic Projections released at the same time, showed 13 of 17 policymakers expected a rate hike this year, down from 15 at the last meeting in June. Will we still see a rate hike this year? The Fed’s worries probably cause worries for others as well, and we may see a dovish reaction from other central banks.

1. Greek Parliamentary Election: Sunday. Former prime minister Alexis Tsipras resigned after seven months of his four-year term, following a strong protest from Syriza hardliners over the third bailout deal with Greece’s creditors, despite his announcement to end austerity. Tsipras announced a snap general election in hope of renewing his vote of confidence. The rebelling members formed a new party, Popular Unity, advocating Greece’s exit from Europe’s joint currency, but a recent poll shows the new party will not be able to get into Parliament. Syriza still leads the race, followed by the center-right New Democracy party. An absolute majority for either parties will be euro positive, while a hung parliament is euro negative.
2. Chinese Caixin Flash Manufacturing PMI: Wednesday, 1:45. This independent and forward looking measure of the Chinese economy is very important for the world, especially as Yellen put an emphasis on the slowdown of the Chinese economy. After a final read of 47.3 points in August, the preliminary number for September is expected to tick up to 47.6, meaning it still remains in contraction territory, below the 50 point mark.
3. Mario Draghi speaks: Wednesday, 13:00. ECB President Mario Draghi will speak before the European Parliament’s Economic and Monetary Committee, in Brussels. After The European Central Bank cut its inflation and growth forecasts for 2015 and the following two years Draghi hinted that another QE could be implemented to stimulate economic activity if necessary. He also admitted that inflation could turn negative in the near future. Market volatility is expected.
4. German Ifo Business Climate: Thursday, 8:00. German business Sentiment improved in August to 108.3 from 108 in July, following a positive manufacturing data release. Economy shows continuous growth in Q2 with a 0.4% gain, following 0.3% expansion in the January-March period. Responders were more positive regarding the current situation. However, the companies were somewhat less optimistic regarding future business. Business confidence is expected to decline to 107.8 in September.
5. US Durable Goods Orders: Thursday, 12:30. Orders for long-lasting manufactured goods continued to improve in July, rising for the second consecutive month. New orders edged up by 2.0%, to $241.1 billion in July, following a 4.1% gain in June. Economists expected a fall of 0.4% in orders. Meanwhile, Orders for manufactured goods, excluding transportation sector, gained 0.6% to $158 billion in July, after a downwardly revised increase of 0.6% in June. This positive release suggests continued growth in Q3. Durable goods orders is expected to contract 2.0%, while core orders are expected to gain 0.2%.
6. US Unemployment Claims: Thursday, 12:30. The number of Americans filing initial claims for unemployment assistance fell unexpectedly last week by 11,000 to 264,000, indicating continued growth in the US labor market. The four-week moving average declined to 272,500 from 275,250 in the previous week. Continuing jobless claims dropped to 2.237 million from 2.263 million in the preceding week. The number of claims is forecasted to reach 268,000 this week.
7. Janet Yellen speaks: Thursday, 21:00. Federal Reserve Chair Janet Yellen speaks at the University of Massachusetts. She may refer to the Federal Reserve’s decision to maintain rates and talk about a new timetable for the long awaited rate hike. Market volatility is expected as always. Yellen has kept quiet in the two months preceding the decision, but certainly had interesting things to say at the accompanying presser.
8. US GDP data: Friday, 12:30. The U.S. economy grew by 3.7% in Q2, according to the second publication. This release was a significant improvement in comparison to the initial publication and gave a boost to the greenback. In the third and final release, this figure is expected to be confirmed.

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Q: Is October on the table?

A: Not really. We believe that Chair Yellen’s baseline since the June meeting has been a December liftoff, and it would be very unnatural for her to pull forward given the information received in the meantime. Besides, there is only one round of monthly economic data on the calendar before then. Last but not least, the logistics are daunting. There will not be a fresh SEP, and the committee would need to announce an impromptu press conference in the October 29 FOMC statement announcing the rate hike itself; an earlier addition of a press conference to the calendar does not work because this would lead the market to conclude that the FOMC has decided to hike, without any room for explanation at that point. This all seems too sudden and dramatic for a Committee that, we think, would like the first hike to be as unexciting as possible.

Q: What could shift the liftoff into 2016?

A: Although we expect the conditions for liftoff regarding employment, inflation, and financial conditions to be in place by December, there is some risk of disappointment in each of them. Missing on any one of them would call December into question, missing on more than one would almost certainly shift liftoff into 2016. Regarding growth and employment, the data looked quite solid until recently but the early information for September has been weak so far. As shown in Exhibit 1, the average of the New York Empire State and Philly Fed index in September fell to the lowest level since the 2011 recession scare, and consumer sentiment also weakened significantly. These are all volatile indicators that could bounce back quickly, but we would put at least a bit of weight on the possibility that they indicate a larger-than-expected drag from the recent tightening in financial conditions and the weakness in global growth.

Finally, regarding financial conditions, our baseline expectation is an easing but the uncertainty is significant as always. And at least so far, the response of the financial markets to the FOMC—especially the sharp selloff in the stock market—has probably disappointed the committee’s expectations.

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