U.S. equity markets closed lower on Wednesday as momentum continues to wane following all-time highs earlier this month at 2,193.81. Both the S&P 500 & Nasdaq 100 finished -0.24% & -0.10% weaker with energy and basic material sectors weighing on the index, down -1.35% & -0.98% respectively while defensive sectors such as utilities and consumer non-cyclicals managed small gains of +0.38% & +0.14%.
Meanwhile the U.S. dollar paused following strong gains since Friday closing -0.05% weaker against a basket of major currencies as the ADP national employment report showed an increase of 177,000 jobs (MoM Aug) in line with expectations of a 175,000. This gives us an insight into roughly what we can expect in the upcoming non-farm payroll data on Friday.
There has been lots of commentary that a strong non-farm payroll figures (above 200,000) would likely see the FOMC move to increase borrowing costs at the September 20-21st meeting. The Fed is data dependent and we have seen two months of stronger than expected jobs gains with some firming in wages along with a slightly better than expected core inflation reading last week. However the recent data does not suggest that the FOMC will need to act urgently, it makes sense to err on the side of caution to ensure economic growth is not cut off too quickly. At the same time the minutes from the July 26-27th policy meeting showed a clear lack of unity between participants of the committee around the outlook and in order to raise rates we need to see a more broad agreement by members.
In the same meeting a number of participants noted they saw little risk that inflation would pick up too quickly and overshoot their 2% target despite strong job gains while at the same time feeling confident in the ability to raise rates quickly if necessary. Right now the December 13-14th meeting seems like the logical case IF we continue to see improving data between now and then, as always the Fed has reiterated it remains data dependent.
Oil prices dropped shown on the first chart below as data showed that U.S. crude oil inventories for the 26th of August increased more than expected. Forecasts were for an increase of 1.3 million barrels however the actual reading was an increase of 2.276 million, both WTI & Brent crude oil declined -3.21% & -2.75% respectively.
Natural gas futures gained +1.87% followed reduced supply as producers in the Gulf of Mexico halt work ahead of a tropical storm and warmer than expected weather in the U.S. has increased demand by electricity producers, helping to reduce a supply glut. Elsewhere commodities were generally mixed, copper prices gained +0.07%, as did spot silver up +0.24% while spot gold fell -0.17% and the Thomson Reuters CRB index -1.43%.
Japanese equity markets were stronger again on Wednesday as the Yen continued to weaken, both the Nikkei & Topix indices finished +0.97% & +1.27% higher respectively. The Yen closed -0.37% weaker against the U.S. dollar as data showed that Japanese Industrial production declined more than expected year-on-year for July, down -3.8% with estimates for a decline of -3.0% and a previous reading of -1.5%.
Looking to Europe we had key data out before the European Central Bank meets for its policy meeting on September 8th. German retail sales (YoY Jul) missed estimates of a +0.3% increase with an actual reading of -1.5% while the unemployment rate remained stable as forecast at 6.1% (MoM Aug). At the same time the Euro-zone unemployment rate remained stable at 10.1% (MoM Aug) missing forecasts for a slight drop to 10%.
Prices in Europe measured by the headline consumer price index rose +0.2% year-on-year for August missing estimates of an +0.3% increase. Meanwhile core CPI for the same period which excludes more volatile items such as food and energy missed forecasts to remain unchanged at +0.9% decreasing slightly to +0.8%. Despite this the Euro managed to close slightly higher against the U.S. dollar, up +0.15% weighing on equity markets which closed weaker led by declines in the Euro Stoxx 600 & DAX30 down -0.35% & -0.61% respectively.
Locally the S&P/ASX 200 finished weaker on Wednesday, down -0.83% and the market looks set to open lower again this morning with ASX SPI200 futures down 19 points in overnight trading.
Data releases:
- Japanese Capital Spending Ex. Software (QoQ Q2) 9:50am AEST
- Chinese Manufacturing & Non-manufacturing PMI (Mom Aug) 11:00am AEST
- Australian Retail Sales (MoM Jul) 11:30am AEST
- Chinese Caixin Manufacturing PMI (MoM Aug) 11:45am AEST
- Japanese Nikkei Manufacturing PMI (MoM Aug) 12:00pm AEST
- U.K. Markit Manufacturing PMI (MoM Aug) 6:30pm AEST
- U.S. Continuing & Initial Jobless Claims (Aug 20th & 27th)
- Candian RBC Manufacturing PMI (MoM Aug) 11:30pm AEST
- U.S. Construction Spending (MoM Jul) 12:00am AEST
- U.S. ISM Manufacturing, Prices Paid and New Orders (MoM Aug) 12:00am AEST
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd