Markets round up

August 15, 2016

Friday’s macro data from the world’s largest economies goes to show why the major central banks are still uber-dovish. China’s latest industrial production, retail sales and fixed asset investment figures all disappointed expectations overnight, capping a week full of disappointing data from the world’s largest economy that included weak trade figures on Monday. Data from the world’s largest economy, the US, has also been poor this week, causing the dollar to relinquish most of it gains made on the back of last Friday’s solid jobs report. On Tuesday we saw nonfarm business productivity, which measures the goods and services produced each hour by American workers, slumped by an annualised rate of 0.5% on a seasonally adjusted basis in the second quarter as hours worked increased faster that output. It was the third consecutive quarter of declining productivity, representing the longest such streak since 1979. In truth, the market only paid so much attention to this one piece of news because of the lack of any other significant data earlier this week. Nevertheless it did trigger a slid in the dollar as the odds of a 2016 rate increase were slashed once again. The focus was again on the dollar in today’s North American session as traders awaited the release of retail sales, producer price index and a closely-watched gauge of consumer sentiment. Well, as it turned out, headline retail sales were flat month-over-month in July, core sales fell 0.3% and PPI dropped 0.4%, while the UoM consumer sentiment index for August rose only slightly to 90.4 from 90.0 and inflation expectations declined to 2.5% from 2.7% previously. All of these figures were below expectations.

Yet, so strong is the downward pressure on the GBP/USD that not even a week full of disappointing US macro data was able to support it. The Cable dropped to a new weekly low of 1.2930 at the time of this writing. It was not helped by poor figures from the UK this week; among them, manufacturing production fell 0.3% and construction output declined 0.9% month-over-month.  Data from mainland Europe has been generally in line with the expectations, including the Eurozone GDP, which grew 0.3% in the second quarter. Thus, the EUR/GBP has been able to march higher and on Friday it hit its best level since August 2013. Will next week’s UK inflation and jobs figures be able to lend the downbeat pound some support? Time will tell.

But the dollar’s weakness was apparent against stronger currencies on Friday, such as the Japanese yen and some commodity currencies, including the Canadian dollar.  The Loonie tumbled below the key 1.30 handle yesterday as oil prices jumped. Next week’s Canadian data include manufacturing sales on Tuesday, followed CPI and retail sales on Friday. There will be some important employment data for the other two major commodity currencies too, namely the Australian and New Zealand dollars. But the most important data will probably be the US CPI on Tuesday, which should give us a clue in terms of how far or near we are to another rate increase from the Fed.

Meanwhile crude oil prices have stormed back to life over the past couple of weeks, albeit in a volatile manner. The latest trigger behind the rally has been attributed in the media to comments from Saudi Arabia’s energy minister, who on Thursday said his country, which is the largest OPEC oil producer, could participate in co-ordinated action to help balance the crude oil market.  I am not sure if this is the main reason, for prices had already bounced last week. What’s more, similar promises were made earlier this year and no action taken. Yet oil prices were able to march on regardless then. On top of this, I am not convinced that the previous $10 drop in oil prices was justified. Thus, short-covering seems to be a logical explanation for the oil price rally.

With this week’s data justifying central banks’ desire to remain uber-dovish and oil prices bouncing back, and bond yields hitting record lows, investors may continue to pile into equities next week.

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