Federal Reserve Chair Janet Yellen noted that the case for a rate hike before the end of 2016 is strengthening while speaking on designing resilient monetary policy frameworks for the future at an annual symposium of central bankers in Jackson Hole Wyoming hosted by the Kansas City Fed. Touching on the current economic situation and outlook Yellen stated “in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months”.
This increases the likelihood of one rate hike by the end of 2016 with the probability of a hike priced by Fed Fund futures now at 33% for September and 56% for December. It is important to note that the Fed remains data dependent and nothing is written in stone, in the same speech Yellen also stated that “our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook”. The Fed has also stressed continuously that the expected path of hikes is to be very gradual so as not to cut off economic growth so the prospect of a 25 basis point hike by the end of 2016 doesn’t feel too concerning with rates remaining near historical lows continuing to support growth.
Looking to data releases on Friday, U.S. advanced goods trade balance was better than anticipated at -$59.3 billion vs -$63 billion estimated while a second estimate of second quarter GDP decreased from 1.2% to 1.1% in line with expectations. The GDP price index which is an important indicator for inflation beat estimates to remain unchanged at 2.2% with an actual reading of 2.3% and personal consumption increased 4.4% against expectations of 4.2%.
Attention will now shift to Thursday’s ADP employment figures and Friday’s non-farm payroll data for August with estimates of 188,000 new jobs added and a slight drop in the unemployment rate from 4.9% to 4.8%. PCE inflation data is also released this evening and the market will look for further signs of prices moving towards the Fed’s 2% target.
The U.S. dollar index gained on Friday following Yellen’s remarks to finish +0.84% higher with the first chart below showing the reaction in both the EURUSD and USDJPY. Yields on U.S. government bonds moved higher with the 2 year yield up 5.9 basis points to 0.8450 and the yield on the 10 year bonds increased 5.7 basis points to 1.633. Equity markets swung between gains and losses with the S&P500 closing -0.16% weaker while the Nasdaq100 managed to finish +0.17% higher. The healthcare sector was the best performer on Friday up +0.35% having been relatively oversold over the past few sessions following comments from Presidential candidate Hilary Clinton over price increases.
Technology gained +0.14% and Financials who will benefit from any rate hike through increased margins finished +0.04% higher while defensive sectors such as Telecommunications & Utilities were the weakest performers down -1.08% & -2.05% respectively.
Japanese equities were lower on Friday while the Yen weakened against the U.S. dollar after trading closed as prices of goods and services declined for a fifth consecutive month. Year on year prices declined -0.4% in July as forecast while a measure excluding volatile items such as fresh food and energy was lower than anticipated, up just +0.5% vs estimates of a +0.7% gain. Both the Nikkei & Topix indices finished -1.18% & -1.26% weaker respectively, as did the USD/JPY which closed -1.27% lower.
The GBP/USD reversed initial gains to finish -0.4% weaker despite positive GDP figures on Friday that showed the economy expanded at 2.2% from a year earlier as expected and up +0.6% from the previous quarter. Elsewhere in Europe the French economy grew 1.4% over the past year as expected while a measure of German consumer confidence was slightly better than expected, the GfK survey (MoM Sep) reading 10.2 vs estimates of 10. The EUR/USD also reversed initial gains to finished -0.78% lower while equity markets were broadly higher led by gains in the Euro Stoxx 600 & DAX30 up +0.50% & +0.55% respectively, as were U.K. equities with both the FTSE100 & FTSE250 up +0.31% & +0.27% respectively.
Commodity prices posted modest gains despite the stronger dollar with both WTI & Brent crude oil up +0.65% & +0.50% respectively as speculation continues around a potential output freeze at an informal meeting next month. Natural gas prices shown on the second chart below continued to move higher up +0.88% on expectations of warmer weather into early September boosting demand from electricity producers while copper futures were unchanged, elsewhere spot gold closed -0.03% weaker while spot silver gained +0.62%.
Locally the S&P/ASX 200 finished -0.48% lower on Friday, down 26.42 points at 5,515.47 and the market is set for a slightly softer open this morning with ASX SPI200 futures down 4 points.
Data releases:
- Japanese Jobless Rate, Household Spending and Retail Trade (MoM Jul) 9:30am AEST
- German CPI (MoM & YoY Aug) 10:00pm AEST
- U.S. PCE Inflation, Core PCE Inflation and Personal Income (MoM & YoY Jul) 10:30pm AEST
- U.S. S&P/Case-Shiller Home Price Index (YoY Jun) 11:00pm AEST
- U.S. Consumer Confidence (MoM Aug) 12:00am AEST
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.