Trifecta of US Data

What have we got this morning that going to keep us from falling into another stupor? A trifecta of US data. The markets gets to be updated on the US manufacturing outlook, employment and CPI. Consensus has the Philly Fed manufacturing survey falling to 2.0 from 3.2 in July. Jobless claims look to be a safer bet to report a negative print (+420k) to reverse some of the ‘falls’ witnessed in the last couple of weeks. Further proof of slowing activity. Finally inflation, analysts expect July’s CPI inflation to reverse the prior months drop and rise to a +0.4% headline print, with the core again expected to expand. Certainly not strong enough reason to start a QE3 implementation!

The US$ is stronger in the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ session.

It was only last week that the Fed promised to keep its benchmark short term rates close to zero for the next two years. Yesterday’s PPI (+0.2%) and core-prices (+0.4%) could constrain the Cbank from taking further action if producers pass on higher costs to consumers and inflation stays above the informal target of close to +2%. The rises were fueled by higher costs for food (+0.6%-second consecutive gain), trucks and pharmaceuticals. The report comes amid mixed signals for the economy and worries about a weaker US outlook. A small blessing was fuel costs falling (-2.8%). However, energy continues to have a minimal affect on core-prices (+0.4%), which jumped for the eight consecutive month. Market gets to see if CPI paints a similar picture this morning.

The dollar is higher against the EUR -0.28%, GBP -0.28%, CHF -0.45% and JPY -0.02%. The commodity currencies are weaker this morning, CAD -0.51% and AUD -1.00%.

The loonie continues to range, bound by safe heaven appeal and risk appetite, depending what day and what hour it is. The market is trading tired after what we have witnessed over the last ten-trading sessions.

Yesterday’s data showed that foreigners reduced their holdings of Canadian securities for the first time in more than a year in June, as the value of bonds maturing exceeded new purchases. Foreign investors sold a net -$3.5b of Canadian securities, the first reduction in 15-months. Also weighing on the loonie was US equities yesterday paring their gains and a market anticipating that tomorrows data will reveal that Canadian inflation slowed last month. With governor Carney speaking along with CPI should provide for an interesting end to the week.

Over the past three trading sessions, the loonie has managed to advance from almost its lowest level in seven-months as equities stateside stabilized, reducing the demand for the buck as a refuge. This month, the loonie has dropped -3.1% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse. In the O/N market, investors have been better sellers of dollars on rallies (0.9848).

The AUD fell from a two-week high yesterday outright as Asian stocks declined o/n, curbing demand for higher-yielding assets. This week’s Cbank’s August minutes showed policy makers are concerned that turmoil in financial markets could slow global economic growth. Investors have been paring bets of an interest rate hike any time soon.

The RBA’s August minutes were largely in line with the post-policy meeting statement, however, concerns over developments in Europe and the US continue to overshadowed the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as ‘risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy’. If global turmoil continues, it could temper domestic inflation over time and ease pressure on the RBA to raise interest rates. Some futures traders now expect the RBA to reduce its key interest rate by-128bp over the next 12-months. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite. Currently, investors are better sellers of the currency on rallies (1.0438).

Crude is lower in the O/N session ($86.28 down -$1.30c). Crude prices pared most of their initial gains yesterday, fueled by an equity rally and after the weekly EIA report showing an unexpected increase in inventories.

Oil stocks rose +4.23m barrels to +354m versus an expected inventory decline of-500k barrels, and are above the upper limit of the average range for this time of year. In contrast, gas inventories fell by -3.5m barrels, a week after dipping by -1.6m barrels in the prior week, but are in the upper limit of the average range. Oil refinery inputs averaged +15.4m barrels per day during the week, which were-205k below the previous week’s average as refineries operated at +89.1% of their operable capacity. Over the last four weeks, imports have averaged +9.30m barrels per day, which were-606k below the same four-week period last year.

Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term. However, markets appetite is telling us different in the short term.

The gold bulls have now found another reason to own the commodity, inflation. The commodity climbed for a third day yesterday as investors bought the metal as a hedge against inflation, after US data showed that wholesale costs rose more than forecasted last month. Already for most of this week the commodity has rallied as a weaker dollar revived demand for the metal as an alternative investment. Apart from the administration side effects of owning the commodity, the metal continues to be a recipient of safe-haven flows in times of uncertainty.

Gold’s prices have more than doubled since the recession began in late 2007. The metals climb has accelerated on the back of the European debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,000 is very much in the realms of possibility over the next six months ($1,796 +$3).

The Nikkei closed at 8,943 down-114. The DAX index in Europe was at 5,769 down-180; the FTSE (UK) currently is 5,242 down-90. The early call for the open of key US indices is lower. The US 10-year eased 7bp yesterday (2.18%) and another 7bp (2.11%) in the O/N session.

Yesterday’s US wholesale prices initially pressured the US yield curve with longer dated securities baring the brunt. The data confirms that the US economy is showing a little bit more inflation pressure than in recent months. The spread between 10’s and their equivalent maturing TIPS shrank to +2.15%, the least in a week when it reached this year’s low of +2.14%.

Now that the short end of the yield curve is resigned to trading on top of or close to o/n fed funds, dealers will expect longer-dated product to trade more volatile as investors reach for yield and on speculation that the Fed may extend bond buying away from shorter-dated notes and towards 10-year product to help stimulate the economy. For the near term, bond investors are likely to continue to keep a close eye on equities as they are dictating treasury moves.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.