Interest rate expectations remained dominant influence over the week
Interest rate expectations have remained the dominant influence over the past week as US and global economic trends remained under close scrutiny. Market liquidity started to weaken as the northern hemisphere summer holiday season became a significant factor and this contributed to the choppy market trading.
The US data had a mixed tone, although the net implications was to lower interest rate expectations slightly. The industrial sector data remained firm with a 3.1% increase for June durable goods orders while consumer confidence rose slightly in July. Jobless claims fell to below the 300,000 level in the latest week which underpinned confidence over the labour market trends.
The second-quarter US GDP figures were weaker than expected with growth slowing to an annual rate of 2.5% from a rate above 5.0% in the first quarter as business investment weakened. The inflation data within the GDP release was close to expectations with a headline rate of 3.3% from 3.5% in the first quarter with a core deflator of 2.9%.
The Fed’s Beige Book, which will be used as the basis for discussion at the next FOMC meeting, suggested that there was a slowdown in the housing sector in most regions during the June-July period while consumer spending also slowed in most regions. The housing slowdown was confirmed in the latest sales figures for new and existing homes which both recorded a slowdown in the July data, although the decline was modest.
The Fed report pointed to inflation risks, but the market considered that these pressures were under reasonable control. This position was supported by a 0.9% increase in employment costs for the second quarter which suggested that wage inflation had increased but only modestly.
Interest rate expectations fluctuated over the week, but the net result was a lowering of expectations with markets placing around a 30% chance of an increase in August.
The dollar strengthened to 1.2580 against the Euro in mid week before losses back to lows around 1.2770 as expectations over an August rate increase weakened.
The Japanese yen strengthened to beyond the 115.0 level against the dollar on Friday from lows beyond 117.0 earlier in the week. The yen was underpinned by a downward adjustment in US interest rate expectations and by regional currency pressures. There was a flurry of comments from Chinese institutions calling for the yuan to appreciate at faster pace, especially after the latest Chinese growth data increased pressure for a monetary tightening. The Japanese economic data failed to have a significant market impact
There was little in the way of UK data over the week, but Sterling retained a firm tone with gains to 0.6820 against the euro and 1.8650 against the dollar. There was some speculation over an August interest rate increase by the Bank of England while there were also suspicions of central bank support as part of reserve diversification.
The Australian inflation data was stronger than expected with a 1.6% increase in prices for the second quarter and a headline inflation rate of 4.0%. The underlying inflation rate also increased to 3.0%, the top of the Reserve Bank’s target range. Expectations that Australian interest rates would be increased next week pushed the Australian dollar to highs above 0.7650 against the US currency.
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