As to be expected on a day packed with event risk such as ADP employment, the advanced reading on Q2 GDP for the US, and the conclusion of the latest FOMC meeting, global equities traded with a cautious tone throughout the overnight session as market participants refuse to build positions too heavily in one direction prior to the data deluge. USDJPY was able to maintain its positioning north of the 102 overnight, with softness in the Yen continuing after industrial production numbers collapsed by 3.3% in June, well larger than the 1.2% contraction that had been expected, fueled by the impact of the April sales tax increase along with stagnating exports.
With European equities trading mixed ahead of the North American data release, the Euro is struggling to preserve its shaky ground, with EURUSD threatening to give up the 1.34 handle and succumb to further selling pressure. Preliminary inflation readings for some of the Euro-member countries have been released ahead of the flash estimate due out tomorrow, with results not all that conducive to the ECB’s hopes that consumer prices for the common-currency bloc are beginning to find a bottom. Spain reported it’s harmonized inflation reading at -0.3%, which is down from the flat reading in June, while Germany also saw its CPI figure slip to 0.8% on a y/o/y basis from the 1.0% registered in June. Despite a recent pick-up in bank lending throughout the zone, should inflation dip below 0.5% on the flash reading tomorrow, the call for more action from the ECB to end the disinflationary cycle would most likely put further downward pressure on the EUR.
As we head into the beginning of the North American session, the ADP employment report kicked things off with a disappointing release which showed the American economy was only able to create 218k private jobs over the month of July, just slightly below estimates of a 230k print. To some extent the headline readings for both ADP and the government Non-Farm Payrolls on Friday have seen their impact lessened given Yellen and the Fed’s increased focus on ancillary indicators such as average earnings and workweek hours, yet today’s modest disappointment will help markets position ahead of the NFP set to be released this Friday.
The discontent with the miss in ADP employment was quickly erased after the first estimate of Q2 GDP was released, coming in with a banger of a print at 4.0%, above the median consensus of 3.0%. The robust growth figure over the second quarter is no doubt partially due to a snap back from the sharp contraction experienced in Q1, though that was also revised from a 2.9% reduction to a decrease of only 2.1%. After the numbers hit the wires S&P equity futures jumped with exuberance, the DXY took off to hit fresh yearly highs, and the 10-year treasury yield climbed over the 2.5% handle as investors rotated out of fixed income. The Loonie is struggling to maintain its composure as a wave of buying demand for the big dollar has sent USDCAD in the high-1.08s this morning, though the weakness of the Loonie is relatively in line with the other majors, as the Euro, Pound, and Aussie are all facing similar declines after the strong US GDP figure.
On the docket for the remainder of the session is the conclusion of the FOMC’s July meeting, and subsequent statement for their prescription on the proper course of monetary policy. Given the Fed is expected to cull another $10bn in monthly asset purchases, and only tweak minor parts of their statement to reflect the ongoing progression of the economy, today’s update from the Fed is likely to be a snoozer. That being said, given Yellen’s testimony to Congress before the Fed’s quiet period began, the risk to today’s statement is that it may take a slightly hawkish tone should the FOMC add any language about the potential for rates rising sooner than anticipated if inflation elevates from its current levels and the labour market continues to pick-up steam.
Further reading:
Q2 GDP
ADP employment
