Friday night was very light on the data front giving little direction for markets as the U.S. dollar index strengthened modestly ahead of this week’s meeting of central bankers in Jackson Hole Wyoming. The U.S. dollar index finished +0.38% higher on Friday while the S&P 500 & Nasdaq 100 attempted to reverse initial losses, finishing modestly lower down -0.14% & -0.05% respectively.
Janet Yellen’s speech at the conference will be closely watched by the market for any clues as to the timing of potential rate hikes and the overall state of the economy. Over the past week, Fed presidents Dudley & Lockhart have stated a hike this year is a very likely possibility with markets currently pricing in roughly a 50% chance of a 25 basis point hike by the end of 2016. Federal Reserve Vice Chairman Stanley Fischer seemed to agree with this view in a speech on Sunday stating they are “close to their targets” and that “employment has been remarkably resilient”.
Despite recent weakness in GDP which he described as “mediocre at best” he expects “GDP growth to pick up in coming quarters” citing a recovery in investment and reduced drag from earlier appreciation of the U.S. dollar. The majority of this speech focused on the lack of productivity growth which will be a key driver of economic growth with an ageing population and shrinking workforce highlighting “monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth”. Instead he notes that this should be addressed by both fiscal and regulatory policies, likely a combination of “improved public infrastructure, better education, more encouragement for private investment, and more-effective regulation”.
A stronger U.S. dollar on Friday weighed on commodity prices in general, while WTI crude managed to gain +0.62%. Brent crude finished flat, down just -0.02%, while both copper & natural gas prices were also weaker, down -0.02% & -3.37% respectively as were precious metals with both spot gold & Silver declining -0.79% & -2.24%.
The first chart below shows the USD/CAD which gained +0.59% against the USD on Friday and the Toronto Stock Exchange Composite (TSX) was flat down -0.06% as the Bank of Canada’s core consumer price index for July remained unchanged at 0.0% from June and at 2.1% from a year earlier as forecast. Meanwhile the consumer price index including the more volatile items was lower than expected, declining -0.2% from a month earlier with expectations of 0.0% while prices increased 1.3% from a year prior slightly below estimates of 1.4%. Retail sales (MoM Jun) also declined -0.1% with estimates for a +0.5% gain.
European equity markets were also broadly lower on Friday with the DAX & Euro Stoxx 600 declining -0.55% & -0.81% respectively as the EUR/USD dropped -0.22%. The FTSE100 also finished lower, down -0.15% as the Pound dropped -0.71% following an earlier bounce this week on better than anticipated inflation, unemployment and retail sales.
Locally, the S&P/ASX 200 finished +0.34% higher on Friday while the market looks set for a modestly lower open this morning with ASX SPI200 futures down 6 points. There is no significant data release today or tonight the give the markets some direction however later this week we will have Euro-zone & US PMI data, German GDP, U.S. durable goods orders, Japanese CPI, U.K. & U.S. GDP and finally Janet Yellen’s speech in Jack Hole to look forward to.
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via james.woods@rivkin.com.au or by phoning +612 8302 3600.