Forward guidance has been an important tool for the major central banks. The FOMC meeting of September 17-18 will release the Fed’s forecast of 2016. If it is in line with previous releases, US trend growth should be normalizing and rates should return to a more neutral stance, historically 4%.
The current Fed forecast for end 2015 is a Fed funds rate of 1% (with inflation at 1.5-2%, still negative). Given that previous tightening was done on the basis of economic overheating, a state nobody expects, they will try to convince the market that there will be a new “ neutral”, lower historically, in the area of 2%-2.5%.
The minutes of the July meeting will be released tomorrow, so there will intense scrutinizing and probable volatility. Not having the Fed’s insight, let us just remark that 2016 is far away, but one can expect a rocky bond market.
How will this influence the S&P Mini? In June based on the same tremors, the market lost roughly 7.5% and there was good support in terms of volume at the 1550 level. There is little reason to believe that September will not see the same, which would give us a 9% correction from the high. Volatility should increase, so one way to hedge this would be to go long the VIX.
In terms of the economic environment, there is no major change from our previous notes, rather a confirmation of the trends that have been established: Europe is doing better than expected, confirmed by better exports numbers from the US to the EU. The US continues to be pulled by private consumption, housing and exports. Japan is taking a breather, which we do not believe will last.
The flash PMI in China, to be released this week, should give us some indication if the pick seen in July is confirmed, which is important for the smaller Tigers. The slowdown in global manufacturing in 1H13 and lower inventories open the door to a turn in the inventory cycle which could give a positive lift for Q4 to the major economies.
In terms of the currencies we cover , USD-EUR-JPY, we continue to maintain a weekly policy based on fundamental news and our technical work. We see little reason this week to expect them to trade outside of the bands established since mid February. In the EUR-USD, as we get closer to mid-September, we shall probably test the lower part of the band at the 1.28-1.2750 level.
On the 13th, we said that we would go short EUR if we got close to the 1.3370 number. We did on Friday with a stop at 1.3410 for the week-end and a first target of 1.3230.
In JPY, we have not changed our outlook and do not recommend trading it as long as it stays in the middle of the range.
Weekly Pivots, based on September Futures:
EUR
PP 1.3053, R1 1.3437, R2 1.3480, R3 1.3655
S1 1.3229, S1 1.3130, S3 1.2955
J
PY
PP 0.010273, R1 1.01041, R2 0.1056, R3 0.1085
S1 0.1012, S2 0.00984, S3 0.00969
