Cen­tral Banks com­ments and ta­per­ing ex­pec­ta­tions still dic­tate the mar­ket

NBK ECO­NOMIC UP­DATE

Kuwait Times - - BUSINESS -

The ma­jor event last week was Yellen’s semi­an­nual con­gres­sional tes­ti­mony, wherein mar­kets per­ceived her tone as less op­ti­mistic com­pared to the pre­vi­ous tes­ti­mony. Yellen ac­knowl­edged re­cent im­prove­ments in the econ­omy, high­light­ing the strength of the job mar­ket and claim­ing the econ­omy is healthy enough to with­stand a rate hike and a slow ta­per­ing of its bal­ance sheet re­main. Mean­while, in the sec­ond day of her tes­ti­mony, Yellen stated that the Fed­eral Re­serve was in no rush to tighten mon­e­tary con­di­tions given the de­pressed path of in­fla­tion.

Look­ing at other Fed of­fi­cials, Phil­a­del­phia Pres­i­dent Harker noted “the re­cent slow­ing path of US in­fla­tion gives him pause over whether the Fed should raise rates for a third time this year.”More­over, two Fed mem­bers con­cluded that the fed­eral funds rate isn’t too far from the neu­tral stance. If that is the case, the cen­tral bank may be near the limit in terms of rate hikes. Global equities rose and the ma­jor­ity of bond yields around the globe fell af­ter Yellen’s sec­ond day of tes­ti­mony.

The highly an­tic­i­pated rate hike by Canada’s cen­tral bank makes it the first ma­jor cen­tral bank to fol­low the foot­steps of the Fed­eral Re­serve in tight­en­ing mon­e­tary pol­icy in the wake of the 2007-2009 fi­nan­cial cri­sis. The BoC in­creased its overnight lend­ing rate by 25 ba­sis points to 0.75%, boost­ing the Cana­dian dol­lar to the high­est since June 2016 ver­sus the US dol­lar.

Canada’s growth era is ex­pe­ri­enc­ing the strong­est ex­pan­sion shoot since the 2008-2009 re­ces­sion, with the pace of ex­pan­sion above 3% over the past four quar­ters. That’s the fastest among Group of Seven coun­tries and dou­ble what the cen­tral bank con­sid­ers Canada’s ca­pac­ity to grow with­out fu­el­ing in­fla­tion. The BoC an­tic­i­pates real GDP growth will mod­er­ate in the com­ing years from 2.8% in 2017 to 2.0% in 2018 and 1.6% in 2019. In re­gards to fu­ture mon­e­tary pol­icy prospects, the bank sig­naled it did not want to com­mit to a pre­de­ter­mined path of more hikes un­til guided by in­com­ing data as they in­form the Bank’s in­fla­tion out­look.

On the cur­rency front, the green­back con­tin­ued its down­ward trend last week and eased on Wed­nes­day to a low of 95.464 in the af­ter­math of Yellen’s tes­ti­mony in front of Congress, which was per­ceived by the mar­kets as dovish. The cur­rency then con­tin­ued it’s de­cent to a 10-months low of 95.04 as in­fla­tion and re­tail sales data dis­ap­pointed, rais­ing con­cerns about the strength of the US econ­omy and less­en­ing the out­look of the Fed­eral Re­serve adopt­ing a faster pace of rate hikes. The DXY opened the week at 96.00 and closed on Fri­day’s ses­sion at 95.728.

The sin­gle cur­rency be­gan its up­ward mo­men­tum on Tues­day due to the weak­ness of the dol­lar. The EUR/USD grasped a 14-month high on Wed­nes­day at 1.1489. Af­ter that rise, the pair lost its bullish flow as po­lit­i­cal con­cerns in the US in­creased the de­mand for euro zone gov­ern­ment bonds push­ing yields lower and in­vestors tak­ing their prof­its on long euro po­si­tions. The pair started its weekly ses­sion at 1.1400 and closed the week at 1.1467.

The GBP/USD was on the down­side last week as BoE’s deputy gover­nor Ben Broad­bent stated that he is not in fa­vor of an early rate hike push­ing the cur­rency lower from $1.29 to 1.2846 its low­est level in July. The de­cline in the cur­rency pair did not last for long, fol­low­ing the re­lease of an em­ploy­ment re­port that was pos­i­tive for the most part. The pound found more strength and man­aged to close the week on a pos­i­tive note amid hawk­ish com­ments from BoE pol­icy mem­ber McCaf­ferty. Ma­caf­ferty stated that the BoE should con­sider un­wind­ing its GBP435 bil­lion quan­ti­ta­tive eas­ing pro­gram. The GBP/USD be­gan its weekly ses­sion at 1.2887 and ended on Fri­day at 1.3095.

The safe haven Ja­panese yen has de­pre­ci­ated nearly 5% over the past month against the USD as the di­verg­ing trend among a hawk­ish Fed and a dovish Bank of Ja­pan widened. The yen re­cov­ered some of its losses last week af­ter the green­back weak­ened. The USD/JPY opened on Mon­day at 114.00 and re­mained on a down­ward path un­til clos­ing on Fri­day at 112.50. In the com­modi­ties com­plex, gold found sup­port last week fol­low­ing Yellen’s less op­ti­mistic re­marks and po­lit­i­cal un­cer­tainty in the US. The pre­cious metal ap­pre­ci­ated from $1,207 on Tues­day to a five day high of $1,225.60. The price of gold per ounce on Fri­day’s close was $1228.58.

US Job open­ings eases from record high

The num­ber of avail­able job open­ings in the US econ­omy de­scended sharply by 5% in May to 5.7 mil­lion as em­ploy­ers retained em­ploy­ees from the la­bor mar­ket reached the high­est level since March 2004. Fur­ther­more, the num­ber of Amer­i­cans who vol­un­tar­ily quit their jobs in­creased by 7.1% to 3.2 mil­lion, sug­gest­ing strong con­fi­dence in the la­bor mar­ket.

De­spite the la­bor mar­ket near the wall of full em­ploy­ment and the un­em­ploy­ment rate at 4.4%, wage growth has re­mained frus­trat­ingly slug­gish. When un­em­ploy­ment is this low, wages gen­er­ally rise. How­ever, av­er­age hourly earn­ings have in­creased just 2.5% over the past 12 months. The last time the un­em­ploy­ment rate was this low, wages were ris­ing by about 4%. A sep­a­rate sur­vey by an in­flu­en­tial lob­by­ing group for Amer­i­can small busi­nesses showed that find­ing qual­i­fied work­ers is still one of their big­gest wor­ries.

Price growth may take longer than an­tic­i­pated

Both pro­ducer in­fla­tion and core PPI slightly notched up­wards by 0.1% for the month of June. The min­i­mal uptick in monthly head­line in­fla­tion was en­hanced by prices for ser­vices gain­ing 0.2%, which ac­counts for al­most 80 per­cent of the in­crease in the PPI. Al­though, in­fla­tion on both fronts are down from the pre­vi­ous year. Whole­sale in­fla­tion year on year is down from May’s read­ing of 2.4% to 2% and core data is down from 2.1% to 2%, pro­vid­ing fur­ther ev­i­dence of cool­ing in­fla­tion.

The cost for goods and ser­vices paid by Amer­i­cans was flat dur­ing the month of June, while mar­kets an­tic­i­pated a rise of 0.1%. Last month, gaso­line costs con­tin­ued to de­cline down­ward by 2.6%, af­ter drop­ping 6.4% in May. On an an­nual ba­sis, con­sumer in­fla­tion in­creased 1.6%, slower than the 1.9% read­ing reg­is­tered in May and down from five-year high of 2.7% just five months ago. Core in­fla­tion edged up by 0.1% in June and was un­changed at 1.7% over the past 12 months. The lack of a re­bound in prices for goods and ser­vices could trou­ble Fed of­fi­cials who have largely viewed the re­cent mod­er­a­tion in price pres­sures as tran­si­tory.

In­dus­trial pro­duc­tion in Europe’s sin­gle econ­omy ac­cel­er­ated at a monthly rate of 1.3% in May. The growth in the in­dus­trial sec­tor is mainly due to pro­duc­tion of cap­i­tal goods ris­ing by 2.3%, durable con­sumer goods by 1.8% and non-durable con­sumer goods by 1.2%. The coun­tries that at­trib­uted the most to the sec­tor were Lithua­nia, Ro­ma­nia and the Czech Re­pub­lic. On an an­nual ba­sis, in­dus­trial sec­tor grew 5% in May.

The Euro­zone Man­u­fac­tur­ing PMI boomed to a 74-month high in June, re­flect­ing the strong­est trend for the sec­tor in more than six years. At cur­rent lev­els, the PMI read­ing sug­gests for fac­tory out­put to ex­pand at an an­nual rate of around 5%. In the wake of up­beat num­bers gen­er­ally for the Euro­zone in re­cent months, it’s likely that May’s hard data on in­dus­trial ac­tiv­ity will pro­vide fur­ther sup­port to Europe’s boom­ing eco­nomic ac­tiv­ity.

Euro­zone price growth re­mains well be­low the tar­get

ECB mem­bers hop­ing for hints of a steady rise in in­fla­tion­ary pres­sures to back their re­cent hawk­ish­ness en­coun­tered mixed sig­nals from Europe’s two largest economies. On a yearly mea­sure­ment, the Ger­man con­sumer in­fla­tion edged slightly higher by 0.1% to 1.5%, while France’s fell by 0.1% to 0.8% in June. The Ger­man CPI rose 0.2%, while French con­sumer prices re­mained flat for the month. Euro­zone in­fla­tion level re­mains well be­low the ECB’s tar­get of 2% and en­ergy prices have been de­scend­ing for four con­sec­u­tive months. Sub­dued in­fla­tion may pro­long the ECB’s loose mon­e­tary pol­icy, in a pe­riod of ro­bust eco­nomic data out of the sin­gle econ­omy.

Real wages turns neg­a­tive

Bri­tain’s un­em­ploy­ment rate in the three months through May eased fur­ther by 0.1% to 4.5%, the low­est rate in 42 years and the em­ploy­ment rate is at a record high of 74.9%. An­nual earn­ings growth in May was up 2% com­pared with a 1.8% recorded in April. Tak­ing into ac­count for in­fla­tion, real wages fell for the third con­sec­u­tive month and turned neg­a­tive for the first time in over two years, in­creas­ing the prob­a­bil­ity of a slow­down in con­sumer spend­ing.

The de­pre­ci­a­tion in con­sumers’ con­fi­dence is likely to make work­ers even less will­ing to find new jobs, there­fore de­creas­ing the pres­sure on em­ploy­ers to of­fer higher salaries to re­tain staff. Even af­ter the pick-up in reg­u­lar pay, liv­ing stan­dards are be­ing di­min­ished. Prices are gain­ing more mo­men­tum than wages and that is trans­lat­ing into weaker con­sumer spend­ing. Per­haps not too far away, this might lead to higher un­em­ploy­ment and lower in­fla­tion.

Europe & UK Fur­ther ev­i­dence of ro­bust Euro­pean econ­omy

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