As widely expected, the US Federal Reserve left interest rates unchanged on Wednesday, with the statement accompanying the decision providing no new signals as to when the Fed may hike next. The statement recognised that the labour market has improved since their June meeting; referring to the June non-farm payrolls data, they stated that “jobs gains were strong in June following week growth in May”. However, despite “household spending growing strongly” inflation remains below the committee’s 2% target noting “market-based measure of inflation compensation remain low” and “inflation is expected to remain low in the near-term”. Commentating on recent risk events such as the Brexit the committee stated that “near-term risks to the economic outlook have diminished” and “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”.
Overall, there is not anything particularly new in this statement and nothing that the market is not already well aware of, i.e. initial risks following the Brexit have receded. What this statement does do is leave the option open for the Fed to hike later in the year should economic conditions improve further while at the same time stressing rate hikes are expected to be gradual. In reaction, the S&P500 fell -0.12% while the Nasdaq100 gained +0.66% helped by better than expected earnings in Apple Inc (NASDAQ:AAPL), GoPro Inc. and Facebook Inc (NASDAQ:FB). The U.S. dollar index slipped -0.39% while the yield on 10 year government bonds fell 6.3 basis points to 1.4976% as did the 2 year government bond yield down 3.5 basis points to 0.7184%.
Further data out of the U.S. was also mildly disappointing, pending home sales (YoY Jun) missed forecasts of a 3.0% increase with an actual reading of 0.3% while durable goods orders (MoM Jun) fell further than expected down 4.0% against estimates of a 1.4% decline.
Despite the weaker USD, commodity prices were dragged lower as crude oil inventories for July 22nd unexpectedly increased by 1.671m barrels against an expected decline of 2m. Both WTI & Brent crude oil fell -2.33% & -3.36% respectively. Copper prices also fell -1.80% as did natural gas -1.47% while iron ore managed to climb +0.95%. The biggest beneficiaries of the weaker USD were precious metals spot gold & silver which both closed +1.50% & +3.69% higher, the first chart below highlights the reaction of the precious metals against the US Dollar index.
European equity markets were broadly higher on Wednesday as the German Gfk consumer confidence index surpassed expectations with both the DAX30 & Euro Stoxx 600 up +0.70% & +0.43% respectively, while the Euro was strongly higher against the USD, up +0.65%. In the U.K. GDP data showed the U.K. grew more than expected for the second quarter prior to the Brexit vote, increasing 0.6% over the quarter against forecasts of +0.5% and up 2.2% from a year prior beating estimates of 2.1%. Both the FTSE100 & FTSE250 gained +0.39% & +1.15% as did the Pound which finished +0.71% higher.
Japanese equity markets also received a boost on Wednesday following an announcement by Prime Minister Shinzo Abe of a US$265 billion fiscal package. The full details of this package are yet to be revealed, however given it is quite sizeable it is likely to be implemented over a number of years, attention will now turn to Friday’s Bank of Japan rate decision where further stimulus is widely expected by the market. Both the Nikkei & Topix indices closed +1.72% & +1.13% higher despite the Yen strengthening +0.57%.
Domestically, the ASX200 closed flat, up just 2.2 points (+0.04%) as CPI data for the second quarter was slightly better than expectations. Year on year, the RBA trimmed mean which exclude some of the more volatile outliers increased +1.7% beating estimates of +0.5% while the headline figure was slightly less than expected, increasing 1% with estimates of 1.1%. Quarter on quarter the headline figure meet market estimates of a +0.4% increase. The Australian dollar swung between gains and losses before finishing generally unchanged, down a modest -0.15%, shown on the second chart below, while the probability of an August rate cut by the RBA increased slightly from 53% to 56%. Finally, the market looks set to open slightly stronger this morning with ASX SPI200 futures up 11 points in overnight trading.
Data releases:
· German Unemployment (MoM Jul) 5:55pm AEST
· German CPI (MoM & YoY Jul) 10:00pm AEST
· U.S. Advance Goods Trade Balance (MoM Jun) 10:30pm AEST
· U.S. Initial & Continuing Jobless Claims (Jul 16 & 22) 10:30pm AEST
Source: Rivkin, Bloomberg
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.
