US jobs report in focus
Personal spending and income came in roughly in line with expectations, though the former printed slightly lower, suggesting that personal consumption should continue to improve in the third quarter. Moreover, June’s personal spending was revised to the upside from a flat reading to +0.2%m/m. However, investors should remain cautious regarding the outlook as Hurricane Harvey will surely weigh on those measures in the coming months.
On the inflation front, the Fed’s favourite gauge of inflation matched expectation with the core personal consumption expenditure printing at 1.4%y/y in July, down from 1.5% in the previous month. This lacklustre inflation data if of bad omen for the Fed monetary policy normalization process. However, the economy has recently gather momentum and it should translate into a pick-up in consumer prices at some point.
The August’s jobs report, which is due for release later today, will be key to restore confidence in the inflation outlook. Indeed, a strong read in average hourly earnings will likely please investors as it should, at some point, help to lift inflation as US workers have more disposable income. Wages are expected to rise 2.6%y/y in August, up from 2.5% in the previous month. After printing at 209k in July, NFPs are anticipated to come in at 180k. We remain cautious regarding August data in general as it has proved to be subject to significant statistical distortions. Therefore investors will most likely ignore NFPs to focus on wages data.
EUR/USD has bounced back in late European session yesterday after free falling as much as 2% over the last three days. With the ECB meeting taking place next week, investors are in a period expectancy as they try to determine whether Draghi will make one step back amid a strengthening single currency. We still anticipate that Draghi will under-deliver and Yellen announce the beginning of the balance sheet unwinding program.
Short CHF on risk appetite
The swing in USDCHF this week has been stomach turning. The North Korean missile test reintroduced geopolitical tensions forcing FX markets to rotate back into traditional safe-haven currencies against the USD (EURCHF was basic unmoved due to the nature of the conflict). Yet, investors’ concern was short-lived prompting a sharp reversal. While our conviction in carry trades has moderated slightly (see Weekly Market Brief) in the near term, loose monetary policy conditions will support risk-taking. Capital inflows indicated that higher yielding assets especially in EM continued to benefit from the lower global risk premium. Highlighting the decline in risk aversion, the US 10-year yields have fallen into 2.12% challenging June 17 lows. In regards to the CHF, the SNB remains on the defensive despite the franc rapid depreciation against the Euro.
The SNB balance sheet continues to expand to offset CHF strength and member that indicate that a 20% proportional investment into equities. Elsewhere, the ability of create capital and buy “real” equities (all the while negative interest rate push investors out of cash into stocks) has generated investors demand for the Swiss National Bank stock (SNBN). The stock has now to climb safely above the chf3000 handle. The solid proposition of a risk-taking environment and a central bank focused on debasing their currency makes CHF the ideal carry funding currency. With demand for EM FX high CHF should stay weak.
