Asian bourses oscillated between gains and losses as it digested Federal Reserve Chairman, Janet Yellen’s testimony to the Senate Banking Committee where she cautioned that some sectors within the US equity market, in particular social media and biotechnology, have excessive valuations. Yellen, was perhaps most candid about the labor market – albeit June’s unemployment rate print of 6.1%, other key gauges have remained stagnant as evidenced by the labor participation rate which was at 62.8%, its lowest level since 1978 and wage growth has seen little growth. These factors coupled with sluggish inflation suggest that the US economy still has a ways to go before reaching full capacity and thus warrants the Federal Reserve to maintain interest rates low for a “considerable period†after the Fed winds down its asset purchase program, projected to conclude following the October meeting.
Antipodean currencies continued its descent despite an uptick in fundamental data from China where its economy expanded at a pace of 7.5% in the second quarter, slightly higher than the consensus of 7.4%, bolstered by government measures that boosted railway spending, tax reduction and cut in reserve requirements for some lenders to offset the threat of a weak property sector. Typically, this set of data should have boosted the Aussie due to its reliance of China as its top trading partner; however, there is apprehension that Chinese growth is due more to credit expansion as opposed to real growth and how the print of 7.5% could discourage the Chinese government from injecting further stimulus into the economy. In other data from China, industrial production increased 9.2% in June, higher than the 8.8% registered in May and retail sales rose 12.4% year on year boosted by strong figures in the online sector. For the kiwi, its weakness was further exacerbated by a weaker than anticipated inflation rate of 0.3% in June against 0.4% expected and a decline in diary prices.
The Stoxx Europe 600 Index has recovered 1.06% at time of writing following last week’s drop on news that Banco Espirito Santo’s holding company failed to pay back a portion of its debt, sparking concern about lenders in the euro zone’s periphery nations. Although the shares of Banco Espirito Santo have broken seven consecutive days of losses, advancing 16% today, there is fear that Portugal Telecom may be faced with a default due to its €897 million investment into Espirto Santo International.
The euro continues to be weak, propelled by Yellen’s testimony yesterday and could target the 1.3500 handle in the near term. In fundamental data, the euro zone registered a trade surplus of €15.4B where exports rose 0.6% m/m and imports increased 0.5% m/m. Focus will not turn to tomorrow’s release of inflation data, anticipated to come in at 0.8% on core.
The pound’s ascent on Tuesday close to the 1.7200 handle, following a solid annualized inflation figure of 1.9% in June has eased on the back of a mix bag of data. On one hand, although June claimant count improved to -36,000 from consensus of – 27,000 and the unemployment rate declined to 6.5%, the lowest level since December 2008, on the other, wage growth continue to stagnate at 0.3%. With the cost of food, shoes and clothes rising sharply, it means that prices are running ahead of wages and may delay the Bank of England in embarking on its first interest rate hike.
As we head into the North American session, markets will have plenty to digest with producer price index, industrial production, capacity utilization and net TIC flows on the docket. Yellen will also continue her semi-annual testimony to the House Committee and is expected to maintain a dovish tilt. In June, Producer Price Index gained 0.4% m/m and 1.9% y/y, led by energy prices. Industrial Production for the same month is expected to come in at 0.4%.
The Canadian dollar has weakened over 1% in the last two sessions ahead of the Bank of Canada interest rate decision where the central bank is fully anticipated to maintain the policy rate at 1.0% and the Monetary Policy Report. Focus will be on the press conference by Bank of Canada Governor Poloz where he could maintain a dovish tone following last month’s weak employment report and April’s soft GDP figure. Poloz is likely to highlight the correlation between the loonie and exports, the economic backdrop and how it plays into monetary policy which will weigh on the Canadian dollar. In domestic data, manufacturing shipments for the month of May rose to 1.6% from the previous print of -0.2%.
Further reading:
FX Motivators & Global Decision Making
Producer Price Index
