Returning briefly to America, Chair Yellen's intimation of a possible hike in December was initially dismissed by investors but has now gained a measure of credibility. Post-Yellen, a number of major hedge fund managers and other market players made the point that the zero interest rate policy may have outlived its usefulness, and that it was time for the Fed to be 'normalising' rates. Dollar bulls bought aggressively on those sentiments.
In the True North, Friday's release of July Retail Sales (-0.1% vs call +0.1%) and CPI (+1.1% yoy vs call +1.4%) disappointed and subsequently fueled a major selloff in CAD as core inflation hit a 2-year low. The currency had actually rallied sharply post-Fed and briefly traded under 1.3000 before losing ground, ending the week at virtually the same level it had started last Monday. This week sees nothing until July GDP on Friday. It will be worth a look, as Q2 growth ended sharply stronger than expected.
Down Under, the AUD was the big winner on the week. Philip Lowe was sworn in as new governor of the Reserve Bank of Australia and made a number of interesting remarks. Of note to investors, Mr. Lowe indicated the RBA would look at cutting administered rates from 1.50% to 1.25% depending on economic conditions, but appeared to rule out any sort of QE or 'highly unconventional monetary policy' as he termed it. Aussie rates, even if cut (and Mr. Market is giving that possibility 50/50 odds), are still relatively high and the currency bounced higher.
There was little of note in the Eurozone, save for the ongoing banking crisis which, presumably, will be resolved either by bailout or muddling through, although the latter appears increasingly ineffective. Germany's namesake bank, Deutsche Bank, beset already on many fronts, was slapped with a $14 billion USD fine for mortgage irregularities and may be forced to seek state aid to pay it. And in Italy, Monti dei Paschi, the ancient Italian banking house whose many woes have been detailed on this newsletter before, may finally have to seek a state bailout. The politics of any rescue are extremely messy and, given an upcoming constitutional referendum in
November, area politicians are loathe to get involved, given the implicit 'QuItaly" (Italian version of Brexit) nature of the vote. But events may force their hand.
In the UK, about the only event of note was the high-profile resignation of treasury official Jim O'Neill, one-time chief economist with Goldman Sachs. Mr. O'Neill is widely known for coining the phrase "BRICS", an acronym for the emerging economies of Brazil, Russia, India, China and South Africa; and resigned amid reported tensions over Theresa May's approach to China.
The takeaway from all this is quite straightforward. Central banks, for good or for ill, are still in the driver's seat, none more so than the Fed. This week sees a large number of US economic releases as well as a bevy of Fed speakers – in addition to the statistics there will doubtless be a wide range of opinions expressed by the Fed members – and investors will have the unhappy task of dissecting these, respectively, numbers and words for clues to Fed thinking going forward.