WTI crude quickly bounced back to session highs

August 4, 2016

FX News Today

European Outlook: Asian stock markets are mostly higher, following the rebound on Wall Street yesterday. Risk appetite is returning as U.S. and FTSE 100 futures are posting gains. Positive leads then for European markets head of today’s BoE statement, with the Old Lady widely expected to cut the benchmark rate by 25 bp to a record low of 0.25%. The BoE also releases its updated inflation report, while the ECB publishes the latest economic bulletin. The calendar is quiet otherwise, with only a French bond sale and unemployment data for Greece.

US Data Reports: Yesterday revealed firm July reading for the ISM-NMI and ADP that signal upside risk for Friday’s July jobs report, though we still expect a 180k nonfarm payroll gain. The ISM-NMI slipped to a still-firm 55.5 after a June pop to a 7-month high of 56.5 from a 2-year low of 52.9 in May, while the ISM-adjusted measure fell to 55.2, after popping to an 8-month high of 56.3 from a 53.1 two-year low in May. For ADP, we saw a 179k July rise that beat our 170k private payroll estimate with a 180k total payroll increase, and this signals slight upside risk given the downward bias in “as reported” ADP. Yesterday’s vehicle sales figures added to the mix with a 6.7% July surge to a solid 17.8 mln rate, despite mounting growth concerns after last week’s lean GDP data.

Fedspeak: Fed’s Evans said “perhaps 1 rate increase this year is appropriate,” in comments to reporters from Chicago. He wants to make sure that the 2% inflation target is achieved, however, and worries that the risks of not getting there during this cycle could be long-lasting (noting the experience of Japan). He does not believe the 2% goal will be hit until 2018 and thinks it’s worthwhile for the FOMC to wait. The real economy is “doing quite well, especially given all the headwinds.. and uncertainty from abroad,” he added. He projects growth in the 1.0% to 1.75% area this year (we ask, that’s “quite good?”). The natural rate of unemployment is around 4.75%. He doubts the labor market will generate much inflationary pressure. Evans is a long-time dove, but is not a voter this year.

WTI crude: Quickly bounced back to session highs of $41.39 from $39.24 lows, with the rally coming on the back of higher gasoline prices. The much larger than expected draw in RBOB gasoline inventories resulted in that contract rallying overnight. It currently trades at $41.00; the ten day losing streak finally broken.

Main Macro Events Today        

BOE Preview  – We expect a 25 bp chop of the repo rate, which would dislodge it from 0.5%, where it’s been since March 2009, and put it at a new record low of 0.25%. Other policy measures are possible, though we and most expect the QE program to left in a dormant state, and remain at GBP 375 bln of total of assets accumulated between 2009 and 2012. The BoE has already been injecting liquidity into the banking system. BoE MPC’s Weale, who is by reputation a relatively hawkish member, last week summed up the likely sentiment among fellow Committee members, admitting that the preliminary PMI report for July was “a lot worse than I had thought.”

 BOE Press Conference –  Mr Carney is normally unflappable and very firm and assertive in the 60 minute press conference.  Todays could be particularly spikey if the Bank is seen not been as assertive as has been widely touted. Mr Carney has mentioned a number of times since the Brexit vote of “necessary adjustments”.

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