After a latter week thrashing on the back of QE3 expectations, the U.S dollar has attracted some moderate buying in early Asia, with risk currencies weaker across the board. Data from China released over the weekend has weighed on the Aussie dollar early this morning with the latest inflation print rising to 2 percent in yearly terms in August from 1.8 percent in July. Any indication that inflation is beginning to rear its ugly head is seen as a deterrent against new easing initiatives as authorities attempt to balance inflation risks while sustaining high levels of growth. The higher headline inflation rate was attributed to rise in food prices which rose 3.4 percent in annual terms from 2.4 percent in July. Retail Sales increased to 13.2 percent from 13.1 percent, while industrial output continued to reflect slower growth increasing 8.9 percent in August from 9.2 percent in July.
Recapping Friday movements, US stocks rallied and the greenback slid after the latest nonfarm payroll print reignited expectations the Federal Reserve will announce new stimulus measures at this week’s policy meeting. The US economy created 96,000 in August from a downwardly revised 141,000 in July, falling short of economists’ consensus estimates of 130,000 nonfarm payrolls. Downward revisions were made for both June and July totaling 41,000 fewer jobs than originally reported. The finer points of the release showed gains were driven by service based industry and health care, but were partially offset by manufacturing losses. A concession to the shortfall was a dip in the official unemployment rate, which edged down from 8.3 to 8.1 percent, although investors found little solace in the fall of the unemployment rate given it reflected a drop in the labor force participation rate. Since the beginning of this year, employment growth has averaged 139,000 per month, compared with an average monthly gain of 153,000 in 2011. Despite the rather uninspiring employment print, markets continue to look at the incoming data pulse in the context of how it affects the chances of further Federal Reserve stimulus. With sub-par employment growth a primary consideration for the Fed, we’ve seen a material swing back in favor of further stimulus initiatives unleashed at this week’s FOMC meeting.
While markets are clearly transfixed on what the Fed will do at this week’s meeting, there’s also some unfinished business across the Atlantic with the pressure now on Spanish PM Mariano Rajoy to ask for a bailout in exchange for assistance from Mario Draghi’s grand bond-buying program. For now it appears Mariano Rajoy is taking it all in his stride, but markets will be focusing on possible outcomes in the week ahead. Also in the frame this week will be the German Constitutional Court ruling on the European Stability Mechanism. The ruling which is set to take place this Wednesday, is the final hurdle in the ESM’s troubled inception, which is designed to serve as a 700 billion euro back-stop for European countries in need of financial assistance. If the court rules the plaintiff’s case untenable, this will then allow German President Joachim Gauck to sign the European Stability Mechanism into law, thus eliminating a critical hurdle, but if the court decides the plaintiff does indeed have a case, this will see temporary injunctions effectively veto the bailout fund at its birth, in-turn, triggering a fresh wave of negativity surrounding leaders ability to contain the crisis. Although a growing number of pundits believe the court will eventually rule in favour of the ESM, any conditions, limitations, or legal amendments may also pose considerable short-term risks to sentiment, given it is likely to see further delays before being ratified. Behind the case is thousands of German citizens, politicians, and the Die Linke or ‘left party’ in the German Bundestag who believe the ESM is unconstitutional given its places public finances at the mercy of other European countries at risk of a hard default and/or exit from the union. Germany is the largest contributor of the fund with a total stake of 27.14 percent with France representing 20.38 percent and Italy 17.91 percent.
Locally, after last week’s data onslaught, the local macro week ahead will be fairly light in comparison and we anticipate the same hybrid of factors to govern the local unit, with negativity surrounding China’s economic longevity while remaining at the mercy of central bank feedback from both sides of the Atlantic, but ultimately we consider this week’s FOMC policy decision to be of primary value.