ShareKUWAIT: The latest month–on-month retail sales reading came at 0.7 percent, significantly higher than the previous reading of 0.3 percent, and well above the forecasted 0.4 percent. The core retail sales index also soared to 1.0 percent from 0.2 percent previously, with both readings at their highest levels since January. This indicates that high wages from the ever so tight labor market have kept demand high despite the vicious interest rate hikes by the Fed.
The data showed that the main driver behind the increase was online sales, which soared by 1.9 percent. Retail sales are highly valuable indicators for potential GDP figures, and this unexpected rise leads markets to believe that GDP figures will come in substantially higher. The current narrative is that the US will be able to achieve a “soft landing,” and such data adds to that narrative as inflation is cooling in the US, accompanied by a robust labor market.
FOMC meeting minutes
During the Federal Open Market Committee meeting, Federal Reserve officials expressed their concerns over the path of inflation. Officials said that an additional rate hike might be necessary in the future, unless current economic conditions change. The two-day meeting resulted in a quarter-percentage point rate hike that the market expects to be the last in this current cycle. During the meeting, most Federal officials showed that there is still a need for higher interest rates, while some officials are worrying about over tightening.
The minutes were largely consistent with Powell’s press conference, with a hawkish tone that left further tightening on the table, though avoided any firm commitments given the emphasis on data dependence. The latest increase brought the Federal funds rate to its current target range of 5.25 percent -5.50 percent, which is considered the highest level in more than twenty-two years. Markets are pricing an 88.5 percent probability of no hike in the Feds next meeting on September 20.
Unemployment claims
The number of Americans filing new claims for unemployment benefits fell last week, pointing to continued tightness in the labor market even as job growth slows. Initial claims for state unemployment benefits dropped 11,000 to a seasonally adjusted 239,000 for the week ended Aug 12, reversing half of the surge in the prior week, as per the Labor Department. Economists polled by Reuters had forecast 240,000 claims for the latest week. The labor market is only showing marginal signs of a slowdown, with job gains in July being the second-smallest since December 2020. The unemployment rate is around levels last seen more than 50 years ago.
There were 1.6 job openings for every unemployed person in June. Claims, relative to the size of the labor market, remain below the 280,000 level that economists say would signal a significant slowdown in job growth. The US dollar index traded higher across the board supported by safe haven demand on concerns over China’s economy and expectations that US rates will stay higher for longer. The US dollar index reached a three-month high of 103.68 on Thursday. The index closed slightly lower at 103.433 as market participants turn their focus to Jerome Powell’s speech in next week’s Jackson Hole Symposium, looking for signals on the future of interest rates in the US.
Europe
German investor confidence improved unexpectedly in August but it remains firmly in negative territory as the mood in Europe’s largest economy remains opaque. ZEW’s economic sentiment index rose to -12.3 points from -14.7 points in July. Analysts expected sentiment to stagnate in August with a reading of -14.7 as per a Reuters poll. The main driver behind the euro’s decline last week was elevated worries over China, fueling demand for the US dollar safety. The euro closed the week lower at 1.0867. Despite the drop, some analysts were expecting a lower euro given the region’s economic exposure to China.
UK inflation remains sticky
The latest inflationary data to come out of the UK showed that annual headline inflation dropped from 7.9 percent in June all the way to 6.8 percent. Core inflation on the other hand remained unchanged at 6.9 percent, unfortunately proving that the significant drop in headline inflation is mainly due to the drop in energy prices. Additionally, services have become more expensive, with services inflation rising to 7.4 percent from 7.2 percent previously. Meanwhile, wages in the UK have seen a 7.8 percent increase, hitting a figure that has not been seen since 2001. That along with the recent surprise economic growth, add more worries for the Bank of England (BoE).
Additionally, Retail sales showed a monthly drop of 1.2 percent and 1.4 percent for the core figure. The figures are weaker than market expectations which could indicate that higher interest rates are starting to slowdown the economy. It now seems inevitable that the BoE will hike interest rates once more in their next meeting as they continue to fight stubborn inflation, with markets now pricing in an 84 percent probability of a rate hike. Sterling showed resilience against the dollar as expectations of an imminent hike by the BoE continues to support the pound. Nevertheless, the GBP/USD pair remained range bound for the most part of the week and closed at 1.2735.
Japan GDP figures
Japan’s economy exceeded market expectations in April-June figures, due to the rapid growth in auto exports and tourism. The annual growth in Japan came in at 6 percent, but on a quarterly basis the economy gained 1.5 percent while it was expected to be at 0.8 percent. It is considered the fastest expansion since the first quarter of 2020. The recent depreciation in the Japanese Yen coincides with a rise in US treasury yields amid expectations that support higher US rates for longer, combined with an ever so dovish Bank of Japan. The pair reached a 9-month high of 146.56 on Thursday. The USDJPY eased on Friday and closed at 145.37. The move in the market indicates that traders are concerned that the pair’s current level (above 145) could trigger an intervention by the authorities similar to the intervention late last year.
China economic outlook
The world’s second largest economy, China, reported economic data that considerably missed expectations, sending the Yuan to a 9 month low. The country’s industrial production rose by 3.7 percent annually, significantly below the forecasted and previous figure of 4.4 percent. Furthermore, retail sales came in at 2.5 percent, down from 3.1 percent previously and widely off the expected figure of 4.5 percent. China’s fixed asset investment grew by3.4 percent annually, falling short of the previous and forecasted figure of 3.8 percent. Additionally, the urban unemployment rate ticked up to 5.3 percent from 5.2 percent previously.
Unlike prior reports, the National Bureau of Statistics did not include youth unemployment this time, which has soared to record highs in recent months. The People’s Bank of China (PBOC) unexpectedly cut rates following the disappointing economic releases, with the one year medium term lending facility falling by 15bps from 2.65 percent to 2.5 percent. The central bank also cut the seven day reverse repo rate to 1.8 percent, a fall of 10bps in what could be seen as a start for further easing measures in an economy that is battling deflation and weak consumer demand.
The Yuan continues its downtrend following weak economic figures and a surprising cut from the PBOC early last week. The yuan fell to 7.3098 in offshore trading, bouncing back from a nine month low of7.3494, after the PBOC set a much higher fixing of the official mid-point at 7.2006. The currency pair closed the week at 7.3068. Meanwhile the Australian dollar, which often trades as a proxy for China and has tended to track the yuan in recent days, reached a nine-month low of 0.6365.
Kuwait
Kuwaiti dinar USD/KWD closed last week at 0.30790.
