So, what do we know?
(A forex, index, and commodity market review)
The Bank of England delivered a rate rise of 0.25%, in line with market expectations. The rate setting committee voted six to three, with two members calling for a 0.5% hike whilst one member voted for no change. US employment data was mixed with the headline rate falling and average hourly earnings higher than the FESD would like. Overall equity markets had a tougher week than of late whilst the US Dollar pared some of its gains towards the end of the week following some disappointing data.
Weekly change (amount change and percentage change on the week)
FTSE -129 -1.69%
DAX -517 -1.73%
DOW -393 -1.10%
S&P -104 -2.27%
NASDQ -407 -2.85%
NIKKEI -566 -1.73%
Hang Seng -377 -1.89%
The Monetary Policy Committee of the Bank of England raised rates by 0.25% to 5.25%, a fifteen year high. Despite two committee members voting for a 0.5% hike, like the previous month, Andrew Baily (BoE Governor) said rates were likely near their peak but also suggested that rates might have to stay elevated for longer than some were expecting. The good news for borrowers is that the bank said headline inflation would likely fall to 6.9% in Q3 and to 4.9% in Q4 – Music to the ears of Rishi Sunak who promised in the spring to halve inflation to 5.4%. In the wake of the expected rate rise, standard variable and tracker mortgages went up but several lenders cut their 2 & 5-year fixed mortgage rates although these rates are still close to a 15-year high. In the US data was disappointing with both ISM Manufacturing and Service sector data coming in weaker than consensus as the Fed’s previous rate hikes continues to suppress economic activity, especially in the manufacturing sector. Couple with that were some earnings reports that also disappointed with Apple, the worlds largest company, falling 4.8% after reporting weak iPhone and iPad sales. Amazon which also reported Thursday, reporting better than expected sales numbers as the stock price jumped 8.3%. Combined, Apple and Amazon represent nearly 20% of the total capitalisation of the NASDAQ index.
Employment data was mixed with the more volatile ADP data indicating a robust labour market. However, the official data from the Bureau of Labor Statistics painted a less rosy picture with 42K fewer jobs created than expected. This was partially offset by a headline employment rate ticking down to 3.5%, close to a multidecade low and average hourly earnings higher than consensus at +0.4%. Overall, analysts believe the employment market is slowing which resulted in a softening of
interest rate expectations through Q3 and Q4, where the chance of a further rate hike dropped to 26% from 32%. News that the ratings agency, Fitch, downgraded US debt by a notch from AAA to AA+. The news came out late Tuesday evening last week and by Wednesday morning equities were in retreat following the news. The S&P500 and NASDAQ slumped as the implications of the news sunk in. Democrat politicians were outraged whilst the more cerebral bond market participants were relatively unmoved by the news.
The US bond market, or Treasury market, is the largest bond market in the world with global central banks, asset managers and investors large holders of the assets. Fitch made its move because it believes that the US government is at greater risk of default following the last-minute deal two months ago that averted a default. Politicians were outraged, with the move being described as absurd, as the US has experienced the strongest global post-pandemic recovery. Analysts said that it would have no impact on investors appetite for owning US government debt. The markets however were clearly rattled or was something else on their minds?
EURUSD Unchanged GBPUSD -1.10 -0.85% USDJPY +0.54 +0.38%
The US Dollar firmed slight last week but disappointing data to the shine of those gains last Friday, with the US Dollar Index closing up 0.6% on the week. As discussed, the paring of interest rate expectations, due to weaker economic data, was the main culprit as the US dollar sustained its worst day since Mid-July.
Sterling just about held its ground following the 0.25% rate hike on Thursday. Comments by the BoE were regarded as neutral for Sterling as the Bank suggested inflation could get to 4.9% by Q4 but also implied interest rates would need to remain elevated for longer to combat more deep-seated core inflation and inflationary expectations.
Gold -17 -0.86% UK OIL +1.51 +1.79% US OIL +1.83 +2.27%
The threat of more Saudi Arabia production cuts continues to push up global crude prices. Last Thursday, at the OPEC+ meeting in Vienna, Saudi Arabia voluntarily agreed to extend its production cut of 1 MBD into September. Saudi Arabia said that the productions cuts, in place since July, could be extended and increased in future months. Not something that the western developed countries want to hear as they prepare for the winter months demand.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
A less busy for economic data releases following rate decisions and employment data from last week.
US FOMC member speaking in Philadelphia. Clearly not much out this week!
No key releases.
China CPI and PPI inflation data. Unlike all developed economies, China is struggling to contain deflation which is as much a threat as inflation. CPI expected at -0.5%. PPI expected at -4% which does not bode well for a pick-up in inflation.
US CPI Inflation data. The core rate is expected to rise +0.2% month on month, which equates to an annual rate of 4.7% (last at 4.8%). This would be the smallest back-to-back gains in two years. The headline rate is expected to tick up to 3.3%, largely due to the base effect whereby data this time last year started to fall from of a high of 9.1%. Anything worse than forecast might start to unnerve investors. USD and US assets sensitive.
UK First reading of Q2 GDP. Expect +0.2%. monthly GDP expected flat for June. Sluggish growth here in UK, and even worse in Europe. Contrast this with the US, where growth is running around 2%. The Bank of England expect the UK to escape a recession in the coming months. Their forecasting record is not great! Backward looking data can effect sentiment. GBP sensitive.
US Core PPI. Monthly reading expected at +0.2%. A precursor to inflation. Base effects pushing PPI up slightly. USD sensitive.
US University of Michigan Consumer Sentiment. An unchanged reading from last month as sentiment remains elevated from earlier this year. Contrast this with inflationary expectations which have declined since May last year. USD and US assets sensitive.
What should we be trading?
(Analysis of the popular markets and what we like)
What’s the problem?
(Examining a problem many traders face and what to do about it)