There are three main talking points today: 1) The divergence in the trajectory of monetary policy, illustrated by Atlanta Fed's Lockhart yesterday, and to be tested today by the ADP private sector employment estimate; 2) The July service sector PMIs; and 3) The IMF's update on the yuan's inclusion in the SDR.
Lockhart suggested for some like himself, the burden of proof has shifted. Rather than the economy having to prove itself ready for the beginning of the normalization of monetary policy, only significantly disappointing data now would get him not to favor a rate hike in September.
The dollar advanced in response to his comments and has retained most of its gains. The US 2-year premium over German neared 100 bp earlier today, which is the highest level since early 2007. Various market-based measures of Fed expectations, like the Fed funds futures, a more complex use of Fed funds futures and options that Bloomberg has devised, and OIS all show that a rate hike next month is still not full discounted.
The dollar is trading on the firm side of its recent ranges. Key support for the euro is at $1.08. A convincing break of this area would signal a retest on the multi-year low set in March near $1.0450. The dollar's near-term ceiling against the yen in the JPY124.50-60 area is not as significant, but we note that the dollar has only traded above JPY125 on three occasions this year and managed to close above it once.
For its part, sterling is in the middle of its three-week range of roughly $.15470-$1.5670 range. The prospects of as many as three hawkish dissents at tomorrow BOE meeting, and a quarterly inflation report that upgrades the prospect that the inflation target will be reached in the medium term underpins sterling.
The Bloomberg consensus calls for 215k increase in the ADP estimate for private sector job growth. While off June's 237k pace, we note that the consensus is still above the 3- and 6-month averages, and if borne out in the national survey at the end of the week, would likely count toward the “some” improvement that the FOMC statement indicated policy maker wants to see.
