Last night’s data dump from the US was both revealing yet surprisingly uneventful – markets remain pacified by a combination of strong US growth and the subsequent announcement that the FOMC decided to remove a further 10 Billion per month from its QE program. Both announcements could be considered positive for the USD, however given the market positioning ahead of the releases the reaction was quite muted. The USD has been strengthening in recent days and reaction to the news was focused in USD/JPY – which rallied 85 pips in the subsequent hours.
US Advance GDP was announced as 4.0% overnight, well above expectations of 3.1% and far from the previous quarter’s -2.9% contraction. With most of the movement confined to USD/JPY and other Yen based pairs, the Euro fell only a quarter of a cent and the AUD only half a cent on the news. Moves in both the Euro and AUD were almost entirely retraced after the FOMC statement, in which it was revealed that the Federal Reserve would remove a further 10 Billion from its monthly QE purchases. The FOMC remains on track to wind up their extraordinary stimulus program at the end of October, with the focus set to shift towards interest rates. The outstanding growth figure puts pressure on Friday’s Non-Farm Payrolls to deliver a big number, and positioning ahead of the release would suggest the market is also expecting a decent figure.
Ahead of Friday’s closely watched Non-Farm Payrolls release, will be inflation data out of the Euro Area today. Economists expect that inflation in the Euro Area will remain steady at 0.5% indicating a potential bottom for inflation and inflation expectations. PMI figures are also set to trickle out over the course of Friday, with Manufacturing PMI’s for China, the UK and the US to be released. Non-Farm will be the focus of the day, however, and all eyes will be watching for a good employment figure to confirm the Advance GDP reading.
A series of high impact data releases out of the US should create some market turbulence this week. The news picks up on Wednesday with the release of three important data points in ADP Employment Change, US Advance GDP and the FOMC Statement. This is followed up by US Non-Farm Payrolls on Friday, and there should be some heightened volatility over these announcements.
US GDP will be quite significant, given that the growth rate of US real GDP was -2.9% in the first quarter of this year. The poor reading to start the year did little to faze markets, as the number was blamed on worse than usual winter weather holding back economic activity. Because of the seasonal interpretation of this negative growth, economists are expecting a strong rebound in economic activity for Q2 of 3.1% due to the delayed activity from Q1 being brought forward to Q2 as weather improved. While it will be some time before the final GDP figure is released, the Advance figure is often the highest impact and can later be revised significantly.
While a strong growth rate is expected, a weak GDP print could be a sign of trouble for the US economy, given that the Federal Reserve is expected to continue removing its QE program over the remainder of the year, and policy intentions of FOMC members are edging towards tightening. Later on in the day, the FOMC gives its statement on monetary policy – as with previous meetings the committee is expected to continue tapering at a pace of 10 Billion this month, with a final decrease of 15 Billion in October. There should not be much surprise if this is the move that the Fed makes, however as always around such policy announcements volatility can be expected.
Outside of the US, Euro Area Flash CPI and Canadian GDP are out on Thursday. Inflation in the Euro Area is expected to remain stable at 0.5% on the announcement of several easing measures in June – Flash CPI has been reported at 0.5% for the last 2 months, after disinflation since 2011 has seen the inflation rate fall from 3%. A print of 0.5% this month could be indicative that the bottom is finally in for the Euro’s slide towards deflation. Canadian GDP is expected to pick up from last month’s read of 0.1%, with analysts forecasting a growth of 0.3% month on month.
Markets have remained fairly settled late in the week, with most of the action occurring in the NZD and Pound – both currencies fell on their data releases. The Euro also moved, staging a rally on some strong German PMI figures released yesterday. The market remains in wait-and-see mode ahead of some important data next week.
The New Zealand dollar fell one and a half cents on the announcement that the RBNZ raised the overnight interest rate by 0.25% to 3.50%. The counter-intuitive reaction was partly related to the wording of the statement. The statement both suggesting that the exchange rate was too high and that following this rate increase there would be a period of assessment before future rate changes:
“Over recent months, export prices for dairy and timber have fallen, and these will reduce primary sector incomes over the coming year. With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.”
“It is important that inflation expectations remain contained. Today’s move will help keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained. Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year. It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level.”
The market reacted negatively to the release.
The Pound also fell after the release of UK retail sales. The figure rose to 0.1% from -0.5%, however the market was expecting a higher read of 0.2%. The currency fell 80 pips after the release, reaching a low of 1.6966 overnight. UK GDP is yet to be released, and is due today – economists expect the data to be unchanged from last quarter, with a read of 0.8% quarter on quarter.
Euro PMI was fairly positive, with both German and Euro Area PMI readings showing strong expansion in the currency union. German PMI came in at 52.9 and 56.6 for the Manufacturing and Services PMI’s respectively. Any reading over 50 indicates expansion in the industry, and both numbers out of Germany indicated expansion which surpassed expectations. The Euro rallied 30 pips on the data, ending a period of weakness to settle at 1.3465 this morning.
With UK GDP and the Ifo Business Climate release today, the volatility may pick up yet, however given that next week sees a combination of US GDP, the FOMC statement and Non-Farm Payrolls, the main event may be forthcoming.
Euro weakness and Australian dollar strength has characterised early trading this week – this was felt most strongly in the EUR/AUD cross, which has fallen almost 2 cents over the past two days. The Aussie was given a boost by both Glenn Stevens speech at the Anika Foundation and this morning’s CPI release.
The speech was not used as an opportunity to jawbone the high AUD and Stevens only mentioned the exchange rate twice – in the context of lessons learned from the great depression: “This means not resorting to trade protectionism, or ‘beggar thy neighbour’ exchange rate policies.”. Nevertheless, the currency edged upwards after the speech, before breaking higher today. Australian CPI increased at a 0.5% quarterly, and 3% annual rate – largely in line with expectations, and led by healthcare and alcohol/tobacco increases. The Aussie rallied half a cent on the release, which sits in the upper range of the RBA’s target band of 2-3%.
The Euro broke lower on little news yesterday, before US CPI nudged the currency further to a low of 1.3460. Core US CPI increased only 0.1% from the previous month, down from 0.3% last month and below the 0.2% expected by analysts. For the moment it appears sentiment has soured on the Euro, after markets initially failed to react negatively to the ECB’s announced easing measures. The currency has finally pushed through a major trend-line that began in June 2012. Though Euro weakness has continued, it should be noted that T-LTRO’s are not scheduled to occur until September and December this year.
Still in focus this week will be UK Bank Rate votes released later today and Preliminary GDP on Friday, as well as the cash rate decision from the RBNZ early tomorrow morning. The RBNZ is expected to hike its policy rate by 0.25% this month, after the NZD has trended lower for the last 2 weeks on weak data. The Bank Rate Votes out of the UK are not yet expected to show any dissent from unanimous ‘hold’ votes, however given the recent uptick in inflation and the strong rise in house prices there may be expectations of a change, even if none eventuates – the data will affect positioning ahead of Friday’s UK GDP data. The week is rounded off by the release of PMI figures out of Europe and China – all PMI figures are anticipated by analysts to firm slightly.
After a quiet Monday, news flow should begin to pick up with the release of US and Australian CPI, as well as European and Chinese PMI data. Markets are still reeling after the shock downing of Malaysian Airways flight 17 last week, however given a lack of escalation over the weekend markets are currently retracing risk-off moves – the Ruble has halted its slide after falling dramatically last week.
RBA governor Glenn Stevens speaks at the Anika Foundation tomorrow, followed by quarterly Australian CPI on Wednesday – the CPI data will be followed closely. With little clear direction on interest rates due to subdued economy contrasted with strongly rising house prices, inflation data will help swing sentiment either way. Given the AUD’s persistent rise since the start of the year, the exchange rate may provide deflationary pressure. Analysts are expecting a quarterly inflation rate of 0.5%, slightly down from 0.6% last quarter.
US Core CPI will be the news feature of Tuesday night. Some market participants have begun to expect rate increases early into next year, and hawkish FOMC members are expecting rates to begin rising in 2015 – the hawks will be keen to see some confirmation in the inflation data. Interest rate rises have been expected from early on in recovery from the GFC, however expectations have been continually revised downwards towards zero as the reality of a sluggish economy meaning that inflationary pressures have been weak.
However, with US unemployment trending lower towards normal levels the economy may be entering an environment where wage cost pressures begin to gain traction. With tapering of QE all but set in stone, the focus has come to rest on the Fed Funds Rate, or more specifically a combination of the Fed Funds Rate, Interest on Excess Reserves and the Fed’s new Overnight Reverse Repurchase Facility – all will be used to set a band for short term interest rates when the Fed finally tightens policy.
The Pound will face volatility this week as traders look towards the MPC Bank Rate Votes and Mark Carney’s speech later that day. Like last month, there is not yet an analyst forecast for dissent from keeping rates on hold at 0.50% – but with inflation data ticking up and house prices showing dramatic increases, this unanimous voting is unlikely to hold indefinitely. The votes come ahead of the Preliminary GDP figure to be released on Friday.
Risk-off made a return last night, with the shock attack of Malaysian Airlines flight 17. The flight – bound for Kuala Lumpur from Amsterdam – was downed by surface to air missiles at an altitude of 10,000 metres. The missiles were reportedly fired from pro-Russian rebel held territory in the Ukraine, however at this stage all reports are preliminary and nothing is confirmed. The shock has sparked strong demand for safe havens.
The Russian Ruble fell dramatically on the news of the terrorist attack, with USD/RUB rising 750 pips in the aftermath to settle at 35.20 – the Ruble’s lowest value since May. The fear and loathing in the markets was further exacerbated by Israel’s first ground invasion of the Gaza strip since 2009. The country sent troops and tanks in to Gaza to stop further missile attacks, after tit-for-tat escalation resulted in over 1000 missiles being fired in to Israeli territory and 200 Gaza residents killed.
Gold found demand after its recent dramatic sell-off – the metal rallied 250 pips, reversing the week’s earlier sell-off and reaching highs of 1324 overnight. Similarly, USD and JPY also found some strength, with the Yen acting as the slightly stronger safe haven with USD/JPY falling half a cent. With the lack of volatility recently, it has been easy to forget that surprise news events still occur – however last night’s news overpowered data releases and became the main focus for traders.
The remaining trading day is light on data, with only Canadian CPI and US University of Michigan Consumer Sentiment to be released. Given the overnight drama in global conflicts, there is a reasonable chance that politicians could spark some further action – the world will be looking to the US and other global powers to see what further actions can be taken to stem the rising conflicts
Overnight data has proved interesting, with shifting CPI readings for the UK and New Zealand bringing some larger currency moves. Central bank statements proved uneventful for the Yen, Euro and Australian Dollar – Mario Draghi’s introductory statement on Monday night did little to spark heavy trading, as little new information was revealed. Similarly, the Bank of Japan left monetary policy unchanged as it was felt that the economy continued to recover despite the recent sales tax hike. The RBA’s meeting minutes revealed little change in wording or sentiment and failed to create much interest.
Far more interesting was the CPI data out of the UK and New Zealand. UK CPI showed an increase in the rate of inflation to 1.9% year on year, up from 1.5% last month and beating expectations of 1.6%. The Pound rallied 125 Pips after the news release, which was accompanied by another strong House Price Index increase of 10.5%. The two data points indicate that Mark Carney may have been correct in telling market participants that interest rate rises were likely to come sooner than expected. The Pound has settled slightly lower at 1.7130 after the news.
New Zealand CPI data was also released early this morning, showing quarterly inflation of 0.3% – lower than expectations of a 0.4% increase. While the data wasn’t dramatically low, traders have been getting used to interest rate rises from the RBNZ, and given macro-prudential controls on house prices and controlled inflation, today’s news sparked a sell off in the NZD of three quarters of a cent.
Chinese GDP data was also out this morning, which showed the economy firmed slightly – growing 7.5% from the same quarter last year. Analysts expected growth to hold steady at 7.4%, so the news was a positive surprise; however, the reaction was decidedly negative, with the Australian dollar falling 30 pips throughout the day. The reaction was slightly surprising given that the GDP data was accompanied by positive surprises in Industrial Production and Fixed Asset Investment – two areas that make up a large portion of demand for Australian iron ore exports. The AUD has found some support at 0.9330 ahead of the European session.
US Retail Sales were also announced overnight, showing weak numbers for both the Core and Non-Core figures, at 0.4% and 0.2% respectively. Janet Yellen began day one of her testimony before the senate banking committee last night, and continues with the Q&A session tonight. Traders will be looking out for any surprises and guidance on the future path of interest rates, now that the tapering of QE appears to be on auto-pilot.
Central banks are again the focus this week, with several speeches, statements and minutes out from around the world. Early in the week, the focus will be on Europe, Japan and Australia, before shifting over to the US and UK through the middle of the week. With so many different central bank speeches and testimonies released in succession, it looks set to be an interesting trading week.
Mario Draghi testifies tonight at the Committee on Economic and Monetary Affairs of the European Parliament. Traders will be looking for clues about any further actions the ECB might undertake, as well as any further details on the ECB’s T-LTRO’s. There is a French Bank Holiday today also, so liquidity may be slightly lower than usual.
Tuesday should see a lively Asian session – with the RBA meeting minutes set to be watched over for any changes in perceptions of the economy, as well as the BoJ’s Monetary policy statement and press conference. The BoJ is not yet expected to expand its massive easing program, however some beliefs are building that a change could be implemented towards the end of the year, to ensure the BoJ meets its policy goals.
The RBA has held rates at 2.50% for some time now, however anaemic growth has kept open the possibility for further rate cuts. Expected rate movements are currently far from finding a consensus, with different bank analysts calling for moves both up and down in the overnight cash rate. Far from being a clear cut case, this will depend heavily on whether the RBA begins to lean towards Macro-prudential Regulation, like the BoE and RBNZ. Such an inclination would allow the RBA to begin moving rates lower to help the wider economy, whilst also helping to ensure that the housing market does not get out of control. As well as this, developments in Chinese growth will have an outsized effect on policy choice – Chinese GDP is out on Wednesday morning, which should give some indication.
Tuesday also sees some attention on the Pound – CPI data is due, followed by a testimony by Mark Carney on the Financial Stability Report. The CPI data is important, however expectations of rate rises are equally driven by considerations on the housing market at present. CPI is expected to remain low and stable, at 1.6% – however the testimony that comes later in the day will be important for traders, as it pertains to stability in the housing market and how the BoE might address this with or without rate increases.
Janet Yellen is also set to testify before the Senate Banking Committee over Tuesday and Wednesday. It will be the Wednesday meeting which is particularly important, as the Chairwoman is open to Q & A, and any surprise answers may spook or excite the markets.
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