In our week ahead preview we talked quite a bit about the implications of this week’s data deluge for yields, the dollar, and especially for EURUSD.
The context for that discussion is of course the exceptionally dour sentiment around the greenback and the widely-held belief that the euro has become something of a “sure thing” – at least in the near-term.
Yellen and Draghi did nothing to disabuse the market of that on Friday in Jackson Hole.
Quick aside: spot the central banker who doesn’t see what everyone is so goddamn concerned about…
As former trader Richard Breslow writes in his first daily missive of the week, one reason for the lack of conviction at Jackson Hole probably has to do with the fact that this week’s data has the potential to either reinforce or completely change the narrative and so, saying anything definitive ahead of it would have set the vaunted policymakers up to look silly.
Read more below from Breslow…
Well so much for base cases. As widely anticipated, Chair Yellen and President Draghi said nothing and then the markets were off to the races. It’s one thing to have a flutter on the off-chance one of them surprised with some juicy policy details. But it looks like either traders got themselves conned into joining a well over-subscribed set of short-term hope and pray trades, or, more likely, misunderstood just how much liquidity was on offer late on a Friday afternoon before a U.K. bank holiday weekend.
- In any case, we did get additional proof, if it was required, that the dollar is on its back foot, the euro bid and the weak side of bonds remains for lower yields. Now ignore everything you think you learned
- First of all, once you heard from Yellen, there was little reason to continue to hold out for the hope that Draghi wouldn’t follow her lead and stay mum. This was on her turf, after all, and that wouldn’t be his style. They do talk
- I know it’s a big world out there, but it’s still a long weekend for many and it’s still August. If these trends continue to have legs, the trades will be there tomorrow, too and it’s an iffy thing to chase from here, unless you want to forget Friday’s shorts and buy on Monday with renewed gusto
- But there was a far smarter reason why Jackson Hole reverted back to an academic exercise and post-GFC policy retrospective. This coming Thursday we get a double dose of euro-zone and U.S. inflation numbers. And the last thing either of them wants at this juncture is to be proven out of touch by the one set of data points which really means anything for believable policy prescriptions
- Friday’s NFP is important but only to the extent that it keeps alive the fiction that the Phillips Curve isn’t truly a relic of history. On a PCE that has an upside surprise, NFP would be largely irrelevant
- The Chair can’t talk hawkish unless she takes exception to the analyst forecasts for another less than robust PCE deflator. And in any case, a rate hike is a December decision and the battle for the hearts and minds of investors on that subject doesn’t need to be fought now. And can’t be let to distract from getting on with the balance sheet groundwork. Which will require some willing suspension of disbelief on the part of investors about how asset prices will take it. If the number beats, we can all lurch more hawkish together
- Similarly, the European inflation numbers are expected to be pretty good. At least in a directional if not absolute sense. Should that happen, talking down the euro last week would have caused a ruckus that accomplished nothing. On the other hand, on a miss, it will be obvious to every commentator, without him having to say it, that 1.20 to the dollar is getting ahead of the political events driving this thing
- In trading, you can rely on the philosophy that “tomorrow is another day.” But at least by staying quiet the central bankers didn’t add more stress to their jobs by also, in effect, putting down an extra wager on the coming numbers. Data dependence gives them a free look