Global Market Analysis September 2, 2016 – Weekly Outlook
Jody Samuels, FX Trader’s EDGE
This week was filled with some key economic data as investors looked for more information on when the Fed will hike rates. Equities headed lower during the beginning of the week but reversed nicely to close the week up almost 13 points to 2,182.90. Oil closed the week $2.47 lower at $44.50, but remains roughly 16% lower from the start of July. The British Pound traded higher following positive economic data to close at $1.3297. Meanwhile, EUR/USD was roughly flat closing at 1.1156 while the Yen weakened following a hawkish Fed and a dovish BOJ with USD/JPY increasing by 1.68% this week. 10-year Treasury yields declined by 2 basis points to 1.60%.
US economic data for the week started off on a solid note as consumer spending for the month of July rose 0.4%, while personal income met analysts’ expectations with an increase of 0.3%. Core PCE, the Fed’s preferred gauge of inflation, rose 1.6% y-o-y, failing to meet the 2% target once again. In addition, consumer confidence beat consensus by climbing to an eleven-month high as business and employment prospects are continuing to show signs of improvement. On the other hand, the ISM manufacturing index disappointed as it fell into contractionary territory for the first time since February, declining by 3.2 points to 49.4 versus expectations for a decline to 52.0. The sector has been facing headwinds from sluggish foreign demand and a stronger dollar, suggesting that manufacturing in the US has yet to stabilize. Job numbers for the month of July was nothing to write home about as payrolls jumped by 151,000 in August compared to expectations for an increase of 180,000. Hourly wages rose by 0.1% m-o-m, but declined by 2.4% y-o-y. EUR/USD initially traded to a weekly high of 1.1251 following the release of the report, but then traded lower for the rest of the day to close at 1.1156.
All in all, economic data out of the US came in pretty mixed for the most part. Income growth remains robust and should fare well for a rise in spending. With that said, an inflation rate that continues to stay below the Fed’s 2% target, and slowing wage growth are reasons the Fed may consider in maintaining rates at current levels. On top of that, weakness in manufacturing suggests that headwinds from a lack of business investment continues to unfold. Last week in Jackson Hole, Janet Yellen stated that “the case for an increase in the federal funds rate has strengthened in recent months.” Hence, given the consistency within economic data over the last few months, fed fund futures are now pricing in a 21% probability of a rate hike this month, and 54.2% chance by the end of the year.
The European economy continues to disappoint as economic data was once again sluggish. Eurozone confidence for the month of August dropped by 1 point to 103.5 implying that the UK vote might be starting to take effect. Moreover, consumer prices in the EU was left unchanged at 0.2% in August as the ECB’s stimulus program has yet to revive inflation. Similarly, the unemployment rate in the EU was also left unchanged at 10.1% with many of the analysts now expecting additional stimulus at its policy meeting next week. On the bright side, British manufacturing soared in August as factories bounced back from the initial Brexit vote. The Markit PMI increased to 53.3 from July’s reading of 48.3. It is no doubt that consumers in the UK have been fairly resilient despite the outcome of the referendum. GBP/USD traded at 1.3144 prior to the release of the data and has since traded higher by closing the week at 1.3297.
Over to the Pacific, the Japanese Yen has weakened over the past week due to initial comments from Janet Yellen suggesting that a rate hike for the year is still in play. Additionally, BOJ Governor Haruhiko Kuroda stated late last week that he believes that there is more room for monetary easing by either increasing QE or slashing rates further into negative levels. This may be needed as capital expenditure for the second quarter came in at +3.1% below expectations of a +5.5% increase due to slowing corporate profits as a result of a stronger Yen.
Crude oil traded lower for the majority of the week as doubt of a deal taking place next month in order to stabilize the global supply glut increased. It is no surprise that Iran plans to increase their crude output to its pre-sanctions levels, which as a result is causing further downward pressure on oil prices. On Wednesday, the EIA reported that crude stock piles increased by 2.3 million barrels, coming in higher than the projected 1.1 million barrels. Oil traded at $45.98 and has traded lower since then closing the week at $44.50. Prices are likely to continue facing pressure as OPEC increased production in August by 120,000 bpd to a record of 33.69 million bpd. Russian president Vladimir Putin is looking to reach a deal with OPEC to freeze supply and deliver stability within the energy markets.
The S&P 500 had a choppy trading week as investors absorbed a potential rate hike this year. Prices initially traded higher following the solid increases from the personal income and spending. The index traded lower following the EIA report which showed that oil inventories increased by more than expected. Thereafter, a disappointing ISM manufacturing reading led the index to trade lower, but ended up finishing the week stronger to 2,179.25 following the jobs report.