ShareAfter weeks of markets anticipating the Jackson Hole speech, main points raised by Fed chair Yellen were the fact that the case for the next rate increase has "strengthened" in recent months as the US economy has approached the central bank's goals on full employment and stable prices. Although she did not give specific timing of the next move, she mentioned that the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. Subsequently, markets repriced the odds of the Fed moving interest rates higher to 42 percent in September and 65 percent in December.
Subsequently, the puck was passed to Bank of Japan's Kuroda who mentioned the BoJ will act decisively as we move on and will carefully consider how to make the best use of the policy scheme in order to achieve the price stability target. The "zero lower bound is no longer insurmountable" as a policy constraint "in practice"; "It is natural to assume another lower bound exists," and the current rate is "still far from such a lower bound."
Benoit Coeure added that the European Central Bank will fulfill the price stability mandate given to them by the Treaty"; "But if other actors do not take the necessary measures in their policy domains, they may need to dive deeper into our operational framework and strategy to do so Equity markets were initially hit on the back of concerns about a Fed hike in September, but recovered a bit of the losses by the close of the market on Friday to finish the week on average down less than one percent.
On the currency front, the US dollar index initial move was a spike higher. Then on inspection, the dollar reversed, however managed to end the week higher at 95.59 after Yellen's speech. Market confusion continues demonstrating the division of opinions amongst the FOMC members. Esther George continues to push her dissenting view for a hike, having voted for a move in July. Meanwhile, Robert Kaplan said the Fed should raise interest rates "patiently, and gradually, and cautiously".
The euro opened the week at 1.1302 against the US dollar and managed to reach a short lived high at 1.1354. The pair slowly weakened as speculations heightened over further stimulus measures by the ECB and the strong coming US data. The currency closed the week at 1.1200.
The pound sterling opened the week at 1.3058 and reached a low of 1.3026 against USD. However, the pound quickly recovered as UK Q2 GDP second estimate, confirmed solid growth in the Brexit quarter. The currency closed the week at 1.3140 on the back of a stronger dollar.
In Asia, the Japanese yen remains as a safe haven for investors and keeps on extending its value compared to the other currencies. The outperformance on the yen continues to pressure Japanese equities as it takes its toll on exports. The USDJPY opened the week at 100.41 and managed to reach a low of 99.91. The pair closed the week at 101.85 after Yellen's speech perceived as relatively hawkish.
On the commodities side, oil extended its losses as US crude and gasoline inventory unexpectedly rose to 2.5 million barrels versus a forecast of -0.5 million. Furthermore, analysts claimed that the oil price rally in August was over exaggerated and proposed oil production freeze at current near-record levels would not help decrease an oversupplied market. Moreover, gold stands at a one month low as investors remain vigilant after Yellen's speech. Gold prices are highly sensitive to rising US interest rates, which increases the opportunity cost of holding a non-yielding asset. Gold prices reached a low of $1317.46
US new home sales
New home sales in the US surged to the highest in nearly eight years in July as home builders picked up the pace while buyer demand remained strong. New home sales jumped tremendously by 12.4 percent to 654,000 in July to the highest in nearly eight years as the demand for new homes remained resilient. The new figures are 31.3 percent higher than a year ago and easily beat the forecasts of a 581,000.
US existing home sales lost momentum in July and decreased by 3.2 percent m/m to 5.39 million (annualized) after reaching a post-recession high of 5.57 million in June. Sales dropped for the first time since November 2015, as a lack of inventory limited the choices for buyers. On the other hand, a rise in prices suggests the housing market remains on solid ground. Sales of single-family homes fell by 2 percent m/m to 4.82 million. However, the market remains in short supply, which is keeping pressure on home prices. Median prices advanced by 5.3 percent y/y, up from a 4.8 percent pace in June.
US durable goods
Orders for business equipment climbed in July for a second month, which indicates that US companies are willing to invest more in the economy. Durable goods orders impressed with sharp gains of 4.4 percent, compared to the forecast of 3.4 percent. This marked the strongest gain since January. The positive readings point to stronger demand for durable goods, which translates into an increase in new jobs in the near future of the business sector. Moreover, core durable goods orders rebounded after two declines, posting an excellent gain of 1.5 percent. The latest data easily beats the market forecast of 0.4 percent.
The number of Americans who applied for unemployment benefits last week dropped by 1,000 to 261,000 and remained near post recession lows, indicating a healthy labor market in which few people are losing their jobs. The average of new jobless claims over the past month dropped by 1,250 to 264,000, the Labor Department said. There were no special factors impacting this week's initial claims. Claims fell below the key 300,000 threshold in early 2015 and have remained there for 77 straight weeks, the longest streak since 1970.
The US economic growth was a bit more sluggish than initially thought in the second quarter. US growth expanded at a 1.1 percent annual rate in its second estimate of GDP. That was slightly down from the 1.2 percent rate reported last month. The revision also reflected weak spending by state and local governments and the economy has struggled to regain momentum since output started slowing in the last six months of 2015. The third quarter data so far has been mixed a strong labor market should continue to support consumer spending and growth in the coming quarters.
Europe & UK
The eurozone service Purchasing Managers' Index inched up to a seven-month high to 53.1 in August, from a 52.9 in July, concluding that the Euro economy continues expanding at a steady pace. On the other hand, the manufacturing Purchasing Managers' Index fell to 51.8 in August from a 52 in July. The strong growth in France helps the Euro zone stay steady but growth rates is slow in Germany, although it is still expanding.
German business sentiment surprisingly fell to the lowest level in six months in August in a sign that companies are still weighing the consequences of Brexit on future demand. The Munich-based Ifo institute's business climate index dropped to 106.2 in August from 108.3 in July. That's the lowest since February. The market forecast was for an increase to 108.5. With the UK acting as Germany's third-largest export market, weaker demand there has the potential to damp output in Europe's largest economy.
UK economy grows
The UK GDP rose to 0.6 percent in the second quarter of 2016 from a 0.5 percent in the first quarter, aligned with the expectations of analysts and up by 2.2 percent y/y. British consumers and businesses showed no signs of weakness in their spending ahead of the country's Brexit vote in June, although It is still too early to see the effects of Brexit on the UK and its business partners. Meanwhile, business investment unexpectedly climbed up by a seasonally adjusted 0.5 percent in the second quarter versus a forecasted decline of 0.8 percent. Year-on-year, business investment fell by 0.8percent in Q2, compared to a forecasted drop of 1.4percent as foreign investors are taking advantage of new investments after Brexit which led to a weaker Sterling pound.
Japan's consumer prices index dropped in July for a fifth consecutive month at an annualized 0.4 percent pace, following a 0.4 percent drop the previous month. This increased the pressure on the central government to follow through with Prime Minister Shinzo Abe's promise of more stimulus. Although the government kept its assessment of the economy unchanged in August and offered a slightly more downbeat view on consumer inflation than last month, as prices slid on weak household spending and a strong yen pushed down import costs. The Bank of Japan expanded its ETF purchase program at its July 29 policy meeting, but stopped short of reducing interest rates. The BOJ's next meeting is scheduled for 21 September. Analysts widely expect the BOJ to increase the stimulus package.
Kuwait
Kuwaiti dinar at 0.30155
The USDKWD opened at 0.30155 yesterday morning.
