FOMC clouds the mar­ket

NBK MAR­KET RE­PORT

Kuwait Times - - BUSINESS -

Last week, cen­tral bank com­ments and rate ex­pec­ta­tions con­tin­ued to dic­tate move­ments in the global fi­nan­cial mar­kets. Mean­while, the US dol­lar found re­newed sup­port amid bet­ter than ex­pected ISM data and a mostly pos­i­tive job re­port. How­ever, the re­lease of the June FOMC meet­ing min­utes showed that Fed of­fi­cials were di­vided on sev­eral fronts.

The tim­ing of bal­ance sheet re­duc­tion, the out­look for in­fla­tion and em­ploy­ment, and the impact of these economic con­di­tions on the fu­ture of mon­e­tary policy were some of the main ar­eas of con­flict. These un­cer­tain­ties have con­tin­ued to weigh on the dol­lar. Mar­ket ex­pec­ta­tions re­main skewed to­wards one more Fed rate hike this year. But the prospects of such a hike, given these un­cer­tain­ties, are not as clear as they have pre­vi­ously been. Adding to doubts over Fed policy has been the re­cent US em­ploy­ment land­scape as the past three months have seen rel­a­tively weak non­farm pay­roll fig­ures.

Mean­while, the surge in global bond yields clearly re­flects the move­ment to­wards with­drawal from mon­e­tary stim­u­lus by ma­jor cen­tral banks. Specif­i­cally, Ger­man 10 year bund yields surged to an 18-month high amid the re­lease of the ECB’s hawk­ish meet­ing min­utes, Ger­man yields closed the week at 0.57%, ris­ing from 0.23%. Sim­i­larly, US trea­sury yields rose closed the week at 2.393% after reach­ing a low of 2.130%.

Ad­di­tion­ally, Fed Vice Chair­man Fis­cher said Thurs­day in a speech that the un­cer­tainty about US fis­cal policy could be hold­ing back economic growth, as a result of the neg­a­tive impact on busi­ness in­vest­ment. “By one mea­sure, US policy un­cer­tainty was el­e­vated for much of the re­cov­ery, sub­sided in 2013, and then rose again late last year, un­der­pinned by un­cer­tainty about poli­cies as­so­ci­ated with health care, reg­u­la­tion, taxes, and trade” he said and added that “mit­i­gat­ing the damp­ing ef­fect of un­cer­tainty by pro­vid­ing more clar­ity on the fu­ture di­rec­tion of gov­ern­ment policy is highly de­sir­able.”

On the cur­rency front, the US Dol­lar ini­tially gained across the board after the up­beat ISM data reach­ing 96.519. The cur­rency then lost trac­tion after dis­ap­point­ing ADP non-farm data and the re­lease of the FOMC min­utes from June’s meet­ing reach­ing a low 95.811. On Fri­day, the cur­rency traded in a volatile man­ner after the non-farm re­port and closed the week at 96.00. The Euro opened the week on a strong foot­ing at 1.1418. The sin­gle cur­rency then reached a high of 1.1427 as min­utes from the Euro­pean Cen­tral Bank’s June meet­ing re­vealed that mem­bers dis­cussed re­mov­ing the eas­ing bias from its lat­est mon­e­tary policy state­ment. How­ever, the cur­rency lost some its mo­men­tum and closed the week at 1.1399.

The Ster­ling Pound traded in a rel­a­tively tight range ini­tially. The cur­rency then dropped dra­mat­i­cally after a string of weaker-thanex­pected economic data that raised doubt on whether the Bank of Eng­land is ready to raise rates. The Pound fi­nally set­tled at 1.2891 at the end of the week.

The Ja­panese Yen dropped across the board last week as cen­tral bank ex­pec­ta­tions pushed global bond yields sharply higher. The drop in the Yen in­di­cates that the mar­ket ex­pects the di­ver­gence in policy be­tween the Bank of Ja­pan and other ma­jor cen­tral banks to widen fur­ther amid com­ments from the BoJ that it will con­tinue its QE pro­gram un­til its 2% in­fla­tion tar­get is met. The Yen opened the week at 112.12 and closed at 113.91.

On the com­modi­ties side, oil prices closed lower as data showed US pro­duc­tion and rig counts rose last week while OPEC ex­ports hit a 2017 high, cast­ing doubt over ef­forts by pro­duc­ers to curb global over­sup­ply. Brent fu­tures closed the week at $46.83 after fall­ing to a low of $46.28. Sim­i­larly, West Texas In­ter­me­di­ate closed at $44.36, after fall­ing to $43.78.

Man­u­fac­tur­ing and non­man­u­fac­tur­ing PMI surge

The ISM man­u­fac­tur­ing in­dex surged to 57.8 in June from 54.9 in May, the high­est read­ing in nearly 3 years, and well above an­a­lysts’ fore­casts. The em­ploy­ment com­po­nent of the ISM sur­vey rose sharply in June which bodes well for non­farm pay­rolls data which is due to be re­leased on Fri­day. As for the non-man­u­fac­tur­ing PMI the read­ing in­creases by half a point from May’s 56.9 to June’s 57.4 read­ing.

Mixed jobs data

Jobs data in the US has soft­ened ap­proach­ing the sum­mer time. The pri­vate sec­tor in the US added 158K jobs in June, ver­sus the fore­casted 184K. That was the low­est read­ing since Jan­uary 2017. Com­pa­nies added 158,000 po­si­tions for the month, a num­ber that economists who re­leased the re­port said was still strong but stood well be­low the ro­bust 230,000 num­ber the re­port showed in May. All of the June jobs in the ADP’s count came from ser­vices, with pro­fes­sional and busi­ness po­si­tions show­ing the big­gest gain at 69,000. Ad­min­is­tra­tive and sup­port ser­vices con­trib­uted 43,000 while the trade, trans­porta­tion and util­i­ties cat­e­gory grew by 30,000.

Non-farm pay­roll re­port for June has shown the econ­omy cre­ated 222K jobs from 152K in the pre­vi­ous month, beat­ing the mar­ket ex­pec­ta­tions of 175K. Em­ploy­ment rose in health care, so­cial as­sis­tance, fi­nan­cial ac­tiv­i­ties, and min­ing. Em­ploy­ment growth has av­er­aged 180,000 per month thus far this year, in line with the av­er­age monthly gain of 187,000 in 2016. The un­em­ploy­ment rate in­creased slightly to 4.4% in June from 4.3% in the prior month.

Wages how­ever, grew a con­sis­tent 0.2% though be­low ex­pec­ta­tions for a 0.3% in­crease. Year over year, wages have grown around 2.5%. This marks the eighth year in which wages have not grown over 4% year over year. Slow wages growth may limit how high the Fed can hike rates and raises ques­tions about the longer-term health of the US econ­omy. This sug­gests more progress can be ex­tracted from the job mar­ket.

EUROPE & UK Euro area man­u­fac­tur­ing on the rise

Man­u­fac­tur­ing Pur­chas­ing Man­agers’ In­dex was slightly higher than fore­cast at 57.4 in the pre­vi­ous month. The sec­tor im­proved to its fastest in over six years in June, in­di­cat­ing con­tin­ued strong man­u­fac­tur­ing growth last month. Out­put ex­panded on the back of grow­ing in­flows of new work, boost­ing com­pa­nies to keep the pace of job cre­ation close to May’s 20year sur­vey record high. The PMI has now re­mained above the neu­tral 50.0 mark through­out the past four years.

Euro PPI de­clines

In Europe, the Producer Price In­dex con­tin­ued to post de­clines for the fourth month in a row. The fig­ure, re­leased at -0.4% missed the estimate of -0.2%, un­der­scor­ing weak in­fla­tion in the Eu­ro­zone. Mean­while, ECB Board Mem­ber Praet said on Tues­day that a con­tin­ued re­cov­ery in euro zone in­fla­tion is “cru­cially con­tin­gent” on low bor­row­ing costs and, in turn, on an easy mon­e­tary policy from the Euro­pean Cen­tral Bank.

UK PMIs send mixed sig­nals

The man­u­fac­tur­ing Pur­chas­ing Man­agers’ In­dex showed fur­ther ex­pan­sions of both pro­duc­tion and new order vol­umes in the prior month. How­ever, the PMI was dis­ap­point­ing in con­trast, drop­ping to 54.3 from 56.7 in May. The av­er­age PMI for sec­ond quar­ter came at 55.9, the high­est in 3 years sug­gest­ing that the weak­ness in the pound has sup­ported man­u­fac­tur­ing ex­ports and do­mes­tic demand has re­mained rel­a­tively strong.

Slow­ing mo­men­tum across UK’s service sec­tor in June in­di­cates that Brexit un­cer­tainty and weak con­sumer con­fi­dence is start­ing to take its toll on the econ­omy. Ac­tiv­ity in the service sec­tor fell to a four months low from a pre­vi­ous read­ing of 54.5 to 53.9. More­over, growth in new orders fell to a nine months low, in­di­cat­ing weaker prospects of fu­ture ac­tiv­ity. Over­all, the econ­omy is likely to lose mo­men­tum in the sec­ond half of 2017 that could dis­ap­point some BoE of­fi­cials who want to raise in­ter­est rates to con­trol in­fla­tion.

ASIA The RBA keeps its policy un­changed

The Re­serve Bank of Aus­tralia kept its bench­mark in­ter­est rate un­changed as it held the cash rate at 1.5 per­cent. Un­em­ploy­ment rate fell to 5.5 per­cent in the pre­vi­ous month, the RBA is wait­ing to see if wages will re­spond as a result. At the same time, re­tail sales ex­ceeded ex­pec­ta­tions, ris­ing 0.6 per­cent, fol­low­ing a strong fig­ure prior month as well.

Chinese PMI data im­proves

Last week economic data out of Asia came in bet­ter than mar­ket fore­casts. China’s Caixin man­u­fac­tur­ing Pur­chas­ing Man­agers’ In­dex in­creased to 50.4 in June from 49.6 in prior month, in­di­cat­ing a growth in the man­u­fac­tur­ing sec­tor in the pre­vi­ous month. Firms noted slightly stronger rises in pro­duc­tion and new orders. This prompted com­pa­nies to in­crease their pur­chas­ing ac­tiv­ity.

Sharp in­crease Ja­pan’s man­u­fac­tur­ing sec­tor

The Tankan Man­u­fac­tur­ing In­dex pointed to im­proved busi­ness con­di­tions in sec­ond quar­ter 2017 for both man­u­fac­tur­ing and service sec­tor firms. The Tankan in­dex for large man­u­fac­tur­ers in­creased for a third straight quar­ter, it came at 17 from 12 in the first quar­ter, the high­est read­ing in more than three years.

The BoJ on Fri­day an­nounced its first ‘fixe­drate’ bond buy­ing oper­a­tion since Fe­bru­ary, of­fer­ing to buy an un­lim­ited amount of 5-10y JGBs at 11bp. Nom­i­nal and real Ja­panese yields fell 1-2bp in re­sponse, which given the bear moves in global bond mar­kets, lifted USDJPY. The BoJ has pre­vi­ously com­mu­ni­cated that it sees dis­cus­sions around a policy exit as pre­ma­ture un­til sus­tain­able 2% in­fla­tion is achieved, re­gard­less of global de­vel­op­ments.

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