A mixed menu

Yesterday was an eventful day for the Euro as it made significant gains versus both Sterling and the Dollar. The British pound hit a 3 week low against the Euro as the UK Manufacturing PMI came in well below expectations at 54.3 in August following a reading of 56.9 in July. Nationwide house price data out overnight was also disappointing so we may see Sterling remaining on the back foot today. Robust economic readings in both China and Australia overnight, spurred on demand for higher-yielding assets prompting the Dollar and Japanese Yen to fall against most of their major counterparts. Australian GDP surprised strongly on the upside at 1.2% q/q, against the anticipated 0.9% q/q. This coupled with better than expected manufacturing numbers in China have led the market to the risk on trade.

Next on the menu for markets to digest is the US payrolls data tomorrow. Despite the ADP jobs report revealed a surprise 10k decline the employment component of the ISM manufacturing survey strengthened to 60.4, leading to an improvement in August manufacturing payrolls. Ahead of the payrolls release the US data slate today largely consists of second tier releases including July pending home sales, August chain store sales, weekly jobless claims, and factory orders. It is worth paying particular interest to jobless claims given that the four week moving average has been edging higher, suggesting renewed job market deterioration. The consensus is for a 475k increase in claims, which will still leave the 4-week average at an elevated level.

Given that much attention is being paid at present at whether the Fed will reinstate quantitative easing, comments by Fed officials overnight were closely watched for further clues. In the event, Fed Governor Kohn emphasized that the Fed’s reinvestment of the proceeds from mortgage-backed securities will not automatically lead to further QE, suggesting some indecision on his part. For now, Dallas Fed President Fisher noted his unwillingness to expand the Fed’s balance sheet until fiscal and regulatory fears are cleared up. Both sets of remarks draw attention to the complexity in gaining an agreement within the FOMC for a further boost in QE, suggesting that the difficulty for further balance sheet growth will be set quite high. Furthermore, such comments put the responsibility on Congress to move quickly in clearing up fiscal policy uncertainties

Finally, we have busy day in Europe with Gross Domestic Product, Interest rate rates both expected to remain unchanged followed by a lunch time chat with Mr Trichet of the ECB. This will be interesting press conference to see what is said in relation to the possibility of extending the full allotment of refinancing operations. While Q2 growth was strong, Trichet cautioned on the second half of the year at his previous press conference so again his comments on growth expectations will be closely monitored.

Report by Philip Ryan