data showed on Monday added weight for the potential for a rate hike by the end of 2016. In contrast to Friday’s weak GDP figure of 1.1% the core personal consumption index, a key indicator watched by the Fed, surpassed expectations of a 1.5% gain year on year with an actual reading of 1.6% while increasing +0.1% over the past month as expected. Meanwhile the standard PCE index which includes volatile items such as food and energy increased +0.8% slightly down from the +0.9% previously. In FOMC meetings the Fed has commented on what it considers to be transitionary factors including oil declines that have weighed on the headline figure for inflation which remains below its 2% target.
At the same time personal income (MoM Jul) picked up +0.4% from +0.3% previously and in line with expectations while personal spending adjusted for inflation was modestly better than anticipated, up +0.3% against estimates of +0.2%. This data is certainly positive and adds to the case to suggest we will see a rate hike by the end of 2016 if this positive trajectory continues, however it does not suggest that the Fed should be in a hurry to raise rates in September. As I’ve mentioned many times previously, it makes sense for the Fed to err on the side of caution when it comes to raising rates to be certain of reaching their 2% inflation target rather than potentially cutting off economic growth too soon.
The U.S. dollar index which measures the dollar against a basket of currencies was relatively flat, up just +0.01% while equity markets rallied. Both the S&P500 & Nasdaq100 finished +0.52% & +0.15% higher with all ten sectors finishing positive led by gains in basic materials (+1.03%) and financials (+0.98%).
The Yen initially weakened as much as -0.57% against the U.S dollar before eventually closing -0.07% lower. This weakness during the Asian session was helped by comments from BoJ Governor Kuroda in Jackson Hole on the weekend that the central bank “will continue to carefully examine risks and take additional easy measures without hesitation”. This statement was certainly bullish for Japanese equity markets which also benefited for the initially weaker Yen, with both the Nikkei & Topix indices up +2.30% & +1.97% respectively.
The first chart below highlights the high correlation between the USDJPY and Nikkei index, as the Yen strengthens the benchmark index tends to be weaker. The stronger currency weighs on the profits of Japanese exporters as well as providing headwinds for the economy and inflation by making imports cheaper. With the increased focus on the potential for the Fed to hike rates by the end of the year it is likely we will see a reigniting of the divergence trade between central bank policies, helping to weaken the Yen and boost equities.
U.K. equity markets were closed for a bank holiday while European equity benchmarks were broadly lower led by losses in the Euro Stoxx 600 & DAX30 which finished -0.15% & -0.41% weaker respectively. Both the British Pound and Euro were finished lower against the USD, down -0.25% & -0.08% respectively.
Commodity prices were also lower led by oil prices with both WTI & Brent crude oil down -1.39% & -1.32% respectively. Copper finished -0.12% weaker, as did natural gas -0.63% while spot gold & silver prices gained +0.16% & +1.24% respectively. Oil prices shown on the second chart below have rallied strongly over the past month helped by speculation of an oil output freeze at informal talks in Algeria next month along with covering of previously short positions by money managers. This momentum appears to be waning now in the face of a stronger USD and supply news including increased output from Iran as well as ceasing of hostilities in Nigeria, Africa’s largest oil producer, between rebels and the government. From this we may see the price correct lower leading into this September 26-28th meeting as the market waits for further direction.
Domestically the ASX200 finished -0.84% weaker on Monday however we look to take a positive lead from the U.S. session with ASX SPI200 futures up 18 points in overnight trading.
Data releases:
- Japanese Jobless Rate, Household Spending, Retail Trade (MoM Jul) 9:30am AEST
- German CPI (MoM & YoY Aug) 10:00pm AEST
- U.S. S&P/Case-Shiller US Home Price Index (YoY Jun) 11:00pm AEST
- U.S. Consumer Confidence (MoM Aug) 12:00am AEST