U.S. equity markets declined on Wednesday with commodity prices as the dollar strengthened ahead of Friday’s speech by Fed president Janet Yellen in Jackson Hole, Wyoming. Both the S&P 500 & Nasdaq 100 indices declined -0.52% & -0.73% respectively shown on the first chart below while the U.S. dollar index gained +0.26% as investors took risk off the table ahead of Friday. All ten sectors of the S&P500 closed weaker with the largest losses coming from healthcare & basic materials down -1.64% & -1.44% respectively.
Elsewhere existing home sales (MoM Jul) dropped -3.2% against estimates of -1.1% and the house price index (MoM Jun) remained stable at +0.2% missing forecast of a rise to +0.3%. A report by the National Association of Realtors suggested the slump in sales is likely to be temporary as a result of a decline of the number of properties on the market as well as citing improving employment and historically low rates.
Janet Yellen has tended to lean on the more dovish side of monetary policy however following hawkish comments from regional Fed presidents Bullard & Williams as well as vice chair Stanley Fischer over the past week has prompted speculation for a hike by the end of 2016. The market will be looking for any indication of a potential December rate hike with the implied probability of a hike in December is just over 50%, while the probability for an interest rate increase at the September meeting is just under 20%.
September would seem highly unlikely given the recent weak economic growth seen in the second quarter GDP print (1.2% annualised) as well as subdued inflation despite the recent strength in payroll numbers and a lack of unity around the outlook to raise rates shown in the FOMC minutes from its July meeting. A December rate hike is certainly a possibility if we see a pickup in inflation, economic growth and business investment, while the current situation would not justify a rate hike a lot can change over the next four months and we need to monitor the incoming data.
Commodity prices were broadly lower on Wednesday as the U.S. dollar strengthened and there was an unexpected increase in U.S. oil inventories for August 19th. Data showed that inventories increased by 2.5 million barrels against expectations for an 850,000 barrel decline, unsurprisingly both WTI & Brent crude oil finished -2.70% & -1.78% weaker respectively. The stronger dollar also weighed on copper prices which slipped -1.84% as did precious metals spot gold & Silver down -1.05% & -1.44%. The second chart below shows the price of both precious metals which have weakened over the past few weeks as the prospect of higher rate reduces the appeal of the metals which have no yield.
European equities were boosted by a weaker Euro and data that showed the German economy grew at 3.1% (YoY Q2) as expected, the Euro Stoxx 600 gained +0.39% as did the DAX +0.28% while the EUR/USD fell -0.35%. Meanwhile the GBP/USD continued to move higher following better than expected data over the past week, up +0.27% which weighed on the FTSE100 that closed -0.48% weaker.
The S&P/ASX 200 finished modestly higher on Wednesday up +0.14% while the market looks set to open weaker this morning with ASX SPI200 futures down 6 points in overnight trading.
Data releases:
- German IFO Current Assessment & Business Climate Survey (MoM Aug) 6:00pm AEST
- U.S. Durable Goods Orders (MoM Jul) 10:30pm AEST
- U.S. Continuing & Initial Jobless Claims (Aug 13th & 20th) 10:30pm AEST
- U.S. Markit Services & Composite PMI (MoM Aug) 11:45pm AEST
