U.S. equity markets closed higher on Tuesday as a disappointing ISM Non-manufacturing survey stemmed expectations of an interest rate hike by the FOMC at the September 20-21st meeting. The ISM Non-manufacturing PMI survey declined month-on-month in August to 51.4 from 55.5 in July reflecting continued growth at a slower rate in the services sector. The key sub-component of the non-manufacturing business activity index decreased to 51.8 from 59.3 in July with participants citing the traditionally lower activity across the midsummer months for the slump.
The new orders index also decreased significantly from 60.3 in July to just 51.4 in August while the employment sub-component also decreased from 51.4 in July to 50.7. While these results do not directly feed into GDP calculations the readings are certainly concerning given the size in the drop from July. While readings over 50 signal expansion which is positive, this is the third consecutive monthly drop with the larger trend over the past twelve months being down.
Equity markets gained, with both the S&P 500 & Nasdaq 100 finishing +0.30% & +0.64% higher respectively while the U.S. dollar index declined -1.08% as market participants wind back expectations of a rate hike with data compiled by Thomson Reuters suggesting around a 16% chance of a hike in September. Energy & Utilities sectors were the strongest performers, up +1.56% & +1.14% respectively while financials & industrials lagged behind, down -0.23% & -0.12%.
There are plenty of events that could see significant moves in the USD prior to the September 20-21st meeting including Fed Presidents John Williams (San Francisco), Eric Rosengren (Boston) and Dennis Lockhart (Atlanta) speaking on the 7th, 9th & 12 of September respectively as well as import & export prices on the 14th, retail sales, industrial & manufacturing production on the 15th, and core inflation & business inventories on the 16th.
Commodity prices were mixed with WTI crude oil gaining +0.88% while Brent crude declined -0.57% as the market assess comments from Saudi Arabia & Russian energy ministers at the G20 summit in China for the likelihood of an output freeze later this month. Realistically with most oil producers at or near maximum capacity with the exception of Iran the idea of capping output at current levels as opposed to reducing output would not do much to help the rebalancing of markets. However any plan is better than no plan and any agreement would certainly be bullish for oil prices in the medium term as it would send a positive message about stabilising prices.
Elsewhere copper prices rose +0.60% benefiting from the weaker U.S. dollar while natural gas prices declined -2.47% shown on the first chart below as forecasts are for cooler weather across the eastern U.S. over the coming weeks which will cool demand for the gas by electricity producers. Precious metals spot gold & silver closed significantly higher, up +1.75% & +2.74%.
European equity markets were generally mixed as the Euro gained +0.93% largely based on the lowering of hike expectations in the U.S. rather than the possibility of a more hawkish ECB at a monetary policy meeting this Thursday. The ECB now has six months left until the expiry of its current QE program and with inflation well below the 2% target, currently at 0.2% it is almost certain we will see an extension of this program.
The case can easily be made for the ECB to act to add further stimulus, with possible options including extending the QE program past the March 2017 expiry, increasing the size of purchase or range of assets purchased, removing the requirement that yields cannot be below the ECB deposit rate (currently at -0.4%) or changing capital allocation keys for member states based on debt size as opposed to GDP.
The DAX finished +0.14% higher, while the Euro Stoxx 600 declined -0.33% as did the FTSE100 down -0.78% weighed on by a stronger GBP/USD which closed +0.89% higher as a number of investment banks reduced their bearish forecasts citing the recent better than expected data from the U.K.
The Australian dollar AUD/USD gained +1.31% shown on the second chart below as the RBA left rates on hold at 1.5% as widely expected on Tuesday. Similar to the Euro these gains are predominantly a result of U.S. rate hike expectations rather than a more hawkish outlook for the RBA evidenced by the fairly limited appreciation following the rate decision.There is still certainly scope for the RBA to look to ease rates over the coming months however they are likely to remain in “wait and see” mode until at least the third quarter inflation readings out at the end of October just prior to their November 1st meeting. Today will give us a further indication of the economy with second quarter GDP figures released at 11:30am Sydney time with forecast for +0.6% quarter-on-quarter and +3.3% year-on-year.
The S&P/ASX 200 finished -0.29% weaker on Tuesday as it the market is set to open slightly weaker again this morning with ASX SPI200 futures down a further 10 points in overnight trading.
Data releases:
- Australian AiG Peformance of Construction Index (Mom Aug) 9:30am AEST
- Fed John Williams Speaks on Outlook In Nevada 11:15am AEST
- Australian GDP (QoQ & YoY Q2) 11:30am AEST
- German Industrial Production (YoY Jul) 4:00pm AEST
- U.K. Industrial & Manufacturing Production (YoY Jul) 6:30pm AEST
- Bank of Canada Rate Decision (Sep 7) 12:00am AEST
- U.K. GDP Estimate (MoM Aug) 12:00am AEST
- U.S. Federal Reserve Beige Book 4:00am AEST