Dol­lar drops over in­ter­est rates path

NBK MONEY MAR­KETS RE­PORT

Kuwait Times - - BUSINESS -

The US dol­lar has fallen fur­ther in re­cent weeks as the Fed in­di­cated it is more con­cerned about the out­come of in­fla­tion. The shift in fo­cus to QE bal­ance sheet run down also points to a slower and more un­cer­tain path of Fed rate rises over the com­ing year. The Fed changed its lan­guage re­gard­ing its bal­ance sheet to say the wind down would hap­pen “rel­a­tively soon” rather than “this year” and that helped the mar­ket in­ter­pret the state­ment as a dovish one. The state­ment helped push US Trea­sury yields and the USD lower. Ad­di­tion­ally, mar­ket prob­a­bil­i­ties of a rate hike in De­cem­ber dropped to 37 per­cent from 42 per­cent earlier last week.

On the po­lit­i­cal side, the Trump ad­min­is­tra­tion has been trou­bled by in­ves­ti­ga­tions into the pres­i­dent’s cam­paign re­la­tions with Rus­sia, and more re­cently, Trump’s party failed to push through their health­care agenda in the Se­nate. The US Se­nate voted down a re­peal of the Af­ford­able Care Act (Oba­macare) and is now fo­cus­ing on slimmed down ver­sion of the bill in the hopes that has a bet­ter chance of pass­ing. This was the sec­ond failed at­tempt by Repub­li­cans to re­form health­care and sends more trou­bling sig­nals about pol­i­cy­mak­ing in the US. De­spite the Con­gress and Pres­i­dent be­ing aligned in the Repub­li­can Party, in­ter­nal di­vi­sions are mak­ing pol­i­cy­mak­ing as chal­leng­ing as dur­ing the years when Pres­i­dent Obama dealt with a Repub­li­can Con­gress. The odds of the Trump ad­min­is­tra­tion be­ing able to suc­cess­fully in­tro­duce new eco­nomic re­forms or ma­jor in­fra­struc­ture spend­ing pack­ages to sup­port growth next year look in­creas­ingly slim. These events con­tinue to weigh down on the dol­lar, which is cur­rently sit­ting on its low­est level since June of 2016.

On the eq­ui­ties front, the Dow Jones was back in record ter­ri­tory and other US eq­uity indices were mod­estly higher as prob­a­bil­i­ties for an in­ter­est rate hike in De­cem­ber dropped fol­low­ing a dovish FOMC meet­ing. More­over, ris­ing oil prices and strong cor­po­rate earn­ings also helped pave the way for US eq­ui­ties.

On the currency front, the US dol­lar fell sharply last week af­ter the Fed meet­ing. The dol­lar in­dex opened the week at 93.839 and man­aged to reach a high of 94.285 be­fore drop­ping to a low of 93.152 on Thurs­day. More­over, the US dol­lar re­mains clouded by the ap­proach­ing debt ceil­ing prob­lem that is in­ter­twined with bud­get and spend­ing bills. How­ever, con­sumer and busi­ness con­fi­dence re­mains el­e­vated since the elec­tion, the most re­cent US eco­nomic in­di­ca­tors have im­proved, and the la­bor mar­ket con­tin­ues to tighten. The in­dex was sup­ported by good eco­nomic fig­ures and man­aged to close the week at 93.31.

The Euro opened the week at 1.1658 and man­aged to reach a high of 1.1776 af­ter the Fed­eral Re­serve held in­ter­est rates steady. More­over, the low ex­pec­ta­tions from the ECB to ease pol­icy also sup­ported the pair. The currency closed the week at 1.1748.

The Swiss franc fell against most of its coun­ter­parts, ex­tend­ing a sell­off to reach the weak­est level against the Euro since the Swiss Na­tional Bank aban­doned its currency cap more than two years ago. In­vestors have been sell­ing the Swiss franc against euro on the back of the mone­tary pol­icy di­ver­gence be­tween the re­spec­tive cen­tral banks. While the Euro­pean Cen­tral Bank is mov­ing to­ward a tight­en­ing of pol­icy, the SNB is stick­ing to its dovish stance. Fur­ther­more, the ro­bust Euro­pean fig­ures helped push the EURCHF pair higher. The USDCHF opened the week at 0.9448 and ral­lied to the high of 0.9726 dur­ing the week. The pair man­aged to close the week at 0.9686.

The pound ster­ling opened the week at 1.2983. The ca­ble ral­lied to a high of 1.3157 af­ter the Fed meet­ing on Wed­nes­day. How­ever, the pair lost that mo­men­tum as po­lit­i­cal un­cer­tainty emerged be­tween UK and North­ern Ire­land. North­ern Ir­ish politi­cians who are prop­ping up Bri­tish Prime Min­is­ter Theresa May’s mi­nor­ity gov­ern­ment re­acted with fury on Fri­day to a re­port that Ire­land wants the Ir­ish Sea to be its bor­der with Bri­tain af­ter Brexit. The bor­der be­tween the Ir­ish Repub­lic, a mem­ber of the Euro­pean Union, and the Bri­tish prov­ince of North­ern Ire­land will be the only land fron­tier be­tween the United King­dom and the Euro­pean Union once Bri­tain leaves the bloc in early 2019. The pair closed the week at 1.3133.

The Ja­panese yen opened the week at 111.05 and reached a high of 112.18 against US dol­lar ahead of the Fed meet­ing. How­ever, the Yen was sup­ported on Fri­day af­ter the Bank of Ja­pan Sum­mary of Opin­ions showed that ad­di­tional mone­tary eas­ing is not needed, the pair dropped to a low of 110.53. The currency closed the week at 110.65.

In the com­modi­ties space, it was a ro­bust week for oil prices as it gained up­ward mo­men­tum ev­ery day and rose by nearly 8 per­cent last week. The main boost in the price of oil was due to in­ven­to­ries de­clin­ing glob­ally and the world’s largest oil ex­porter stated it would fur­ther re­duce oil out­put in Au­gust by al­most a mil­lion bar­rels a day. Data out of the US, Europe, Sin­ga­pore and Ja­pan point to over­all in­ven­tory de­clin­ing by 83 mil­lion bar­rels since March. Brent crude oil started the week at 47.59 and closed on Fri­day at 52.04.

FOMC kept rates un­changed

The Fed­eral Open Mar­ket Com­mit­tee re­leased its state­ment last Wed­nes­day, in which it de­clared that in­ter­est rates will be kept on hold for the time be­ing, which was widely ex­pected by mar­kets. The Fed also sig­naled that it will start shrink­ing its bal­ance sheet rel­a­tively soon. Ad­di­tion­ally, the Fed noted that in­fla­tion has been weak in re­cent months, say­ing that in­fla­tion on a 12-month ba­sis is ex­pected to re­main be­low 2 per­cent in the near term, but should sta­bi­lize “around” the Com­mit­tee’s 2.0 per­cent ob­jec­tive in the medium term. How­ever, the Fed noted that the over­all econ­omy would con­tinue to strengthen.

US ex­ist­ing home sales fell

US home sales dropped more than ex­pected in June as a short­age of prop­er­ties amid strong de­mand pushed prices to a record high, keep­ing first time buy­ers on the side­lines. The hous­ing mar­ket has ex­pe­ri­enced an acute short­age of homes for sale for about two years. The monthly fig­ure of home sales came in slightly be­low ex­pec­ta­tions at 5.52M, ver­sus the ex­pected 5.59M. Com­pared to last year, the me­dian house price rose to an all-time high of $263,800 in June. This marks the 64th straight month of year-on-year in­creases. Nev­er­the­less, the Na­tional As­so­ci­a­tion of Realtors said the in­crease in prices do not in­di­cate a hous­ing bub­ble, high­light­ing that the in­fla­tion­ad­justed me­dian price was be­low its peak in 2006.

US con­sumer con­fi­dence

US con­sumer con­fi­dence jumped in July to the sec­ond high­est level in 16 years as con­sumers are less in­flu­enced by pol­i­tics than busi­nesses and took heart in the best la­bor mar­ket in a decade. The Con­fer­ence Board said its con­sumer con­fi­dence in­dex in­creased to 121.1 this month from 117.3 in June. The in­crease came above mar­ket ex­pec­ta­tions of 116.9. The high level of con­fi­dence in July was only ex­ceeded by a 124.9 read­ing in March just as the Trump ad­min­is­tra­tion was get­ting started. The big rea­son is the cre­ation of mil­lions of jobs since 2010 that’s driven the un­em­ploy­ment rate down to as low as 4.3 per­cent. That’s the low­est level since the turn of the cen­tury.

US durable goods

The US econ­omy is ex­pe­ri­enc­ing steady but slower growth in busi­ness in­vest­ment as or­ders for cap­i­tal equip­ment eased last month fol­low­ing a May in­crease that was big­ger than pre­vi­ously re­ported. Or­ders for long-last­ing US fac­tory goods posted the big­gest gain in nearly three years in June. The rise is mainly at­trib­uted to a 131.2 per­cent leap in or­ders for civil­ian air­craft, which is known to be volatile. In de­tails, durable goods or­ders climbed to 6.5 per­cent in June from -0.8 per­cent in the prior month, above mar­ket ex­pec­ta­tions of 3.9 per­cent. How­ever, spend­ing on durable goods ac­counts for a small part of Amer­i­can eco­nomic out­put

Mixed US data

Real Gross Do­mes­tic Prod­uct in­creased at an an­nual rate of 2.6 per­cent in the sec­ond quar­ter of 2017 above 1.2 per­cent growth recorded in the prior quar­ter. Pickup in con­sumer and busi­ness equip­ment spend­ing pow­ered the eco­nomic re­bound in the sec­ond quar­ter, sig­nal­ing the eight-year ex­pan­sion is on track to be sus­tained. On the other hand, the em­ploy­ment cost in­dex came be­low mar­ket ex­pec­ta­tions. The in­dex came at 0.5 per­cent q/q, less than the 0.6 per­cent ex­pected and worse than the pre­vi­ous quar­ter rise of 0.8 per­cent, which now seems to have fu­eled con­cerns of slow­ing in­fla­tion­ary pres­sures. Europe & UK Euro Zone Flash Man­u­fac­tur­ing PMI Came Be­low Ex­pec­ta­tions Euro­zone man­u­fac­tur­ing fig­ures re­leased yes­ter­day were mostly be­low mar­ket ex­pec­ta­tions. They in­di­cated the slow­est rate of ex­pan­sion since Jan­uary. The Flash Euro­zone PMI Com­pos­ite Out­put In­dex fell to 55.8 in July from 56.3 in the pre­vi­ous month. Euro­zone flash PMI fig­ures sig­naled that “the re­cent growth spurt lost mo­men­tum for a sec­ond straight month, but still re­mained im­pres­sive,” said Chris Wil­liamson of IHS Markit. He added: “The slow­ing pace of eco­nomic growth sig­naled by the sur­veys and the ac­com­pa­ny­ing eas­ing of price pres­sures adds to the be­lief that ECB pol­i­cy­mak­ers will be in no rush to ta­per pol­icy, and will leave all op­tions open un­til the cen­tral bank sees a clearer pic­ture of the sus­tain­abil­ity of the up­turn.”

Ger­man Ifo Busi­ness cli­mate

Ger­man busi­ness con­fi­dence sur­pris­ingly climbed in July, hit­ting the third record high in three months as Europe’s largest econ­omy pow­ered ahead and op­ti­mism in­creased across in­dus­tries. The Mu­nich-based Ifo eco­nomic in­sti­tute said its busi­ness cli­mate in­dex, based on a monthly sur­vey of some 7,000 firms, in­creased to 116.0 from 115.2 in June com­pared with mar­ket ex­pec­ta­tions for a value of 114.9. Ifo chief Cle­mens Fuest said that Com­pa­nies’ sat­is­fac­tion with their cur­rent busi­ness sit­u­a­tion reached its high­est level since Germany’s re­uni­fi­ca­tion. He also added that Germany’s econ­omy is pow­er­ing ahead.

UK GDP

UK econ­omy ex­panded by 0.3 per­cent in the sec­ond quar­ter af­ter what gov­ern­ment statis­ti­cians called a “no­table slow­down” in the first half of the year. The growth in the sec­ond quar­ter fol­lowed a 0.2 per­cent growth in the first quar­ter and was in line with mar­ket ex­pec­ta­tions. Year on year, the GDP grew by 1.7 per­cent in sec­ond quar­ter mainly due to ex­pan­sion in the ser­vices sec­tor. Of­fi­cial data for gross do­mes­tic prod­uct showed that of the three big sec­tors of the econ­omy, only the ser­vice sec­tor grew at the end of June com­pared to March, post­ing growth of 0.5 per­cent over the quar­ter. The slow­down in the GDP re­duced the ex­pec­ta­tions that the Bank of Eng­land would raise in­ter­est rates in the near fu­ture.

Ja­panese PMI

Ja­pan’s Man­u­fac­tur­ing Pur­chas­ing Man­agers In­dex (PMI) came out at 52.2, be­low the read­ing of 52.4 in June. The re­port, pre­pared by IHS Markit, in­di­cated that slow­down was driven by stag­na­tion in ex­port or­ders, amid re­ports of weaker de­mand from South East Asia mar­kets. More­over, Flash Man­u­fac­tur­ing Out­put In­dex dropped to 52.2 to 51.4. It was the weak­est growth in 10 months. How­ever, the sec­tor con­tin­ues to add jobs, with em­ploy­ment growth re­main­ing amongst the best since the fi­nan­cial cri­sis, while op­ti­mism hit its high­est level in five years of data col­lec­tion.

Ja­panese con­sumer prices rose at a steady pace last month, as over­all con­sumer spend­ing snapped a 15-month los­ing streak, adding fur­ther ev­i­dence of a re­bound­ing econ­omy. Core CPI rose at an an­nu­al­ized 0.4 per­cent in June, the Ja­panese Statis­tics Bureau re­ported Fri­day. The read­ing came in line with mar­ket ex­pec­ta­tions, mark­ing the sixth straight monthly gain for the core in­dex. Although in­fla­tion has been marginally pos­i­tive since Oc­to­ber last year, it still re­mains far be­low the Bank of Ja­pan price sta­bil­ity tar­get of 2.0 per­cent.

A sep­a­rate re­port on Fri­day showed over­all house­hold spend­ing surged 2.3 per­cent year-over-year in June, snap­ping 15 con­sec­u­tive months of de­cline. An­a­lysts had fore­cast house­hold con­sump­tion to in­crease just 0.6 per­cent. Mean­while, Ja­pan’s un­em­ploy­ment rate dropped to 2.8 per­cent from 3.1 per­cent in May per­cent, the low­est read­ing since June 1994.

Aus­tralian in­fla­tion

Aus­tralian in­fla­tion fig­ures were re­leased on Wed­nes­day, com­ing in be­low mar­ket ex­pec­ta­tions. The con­sumer price in­dex in­creased 0.2 per­cent q/q against ex­pec­ta­tions of 0.4 per­cent by mar­kets. On the mone­tary front, in­ter­est rates in Aus­tralia are cur­rently at record lows, and are likely to re­main there for a while. Re­serve Bank of Aus­tralia Gov­er­nor Philip Lowe de­fended the low in­ter­est rate pol­icy, hint­ing that they may con­tinue to be un­changed due to sub­dued wages and high house­hold debt. Aus­tralia’s wage growth stands at 1.9 per­cent, ris­ing at a very slow pace, and un­em­ploy­ment is cur­rently at 5.6 per­cent. Kuwait Kuwaiti di­nar at 0.30185 The USDKWD opened at 0.30185 yes­ter­day morn­ing.

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