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August 2016 US Empire State manufacturing -4.2 vs 2.5 exp

Details form the August 2016 US Empire State manufacturing report 15 August 2016

  • Employment -1.0 vs -4.4 prior
  • New orders 1.0 vs -1.8 prior
  • Prices paid 15.5 vs 18.7 prior
  • 6m outlook 23.7 vs 29.2 prior
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Fed's Williams pushes dollar down to one-month low vs. yen

The dollar fell across the board on Tuesday, falling a full yen to a one-month low against the Japanese currency and down against the commodity-linked currencies most associated with growth and greater risk-taking by investors worldwide.

The greenback has been under pressure for the past week as the perceived chances of a rise in U.S. interest rates this year took a knock from several batches of data and the tone of some Federal Reserve policymakers.

The trigger for its weakness overnight was a paper from San Francisco Fed President John Williams arguing that central banks might have to raise inflation targets, focus more on growth and back much looser fiscal policy in future.

To market ears, that all added up to a strong argument for keeping the Fed's rates unchanged for the foreseeable future and the dollar fell 1 percent against yen and around half a percent against the euro as Asian and European markets came back online.

"The Williams paper yesterday was pretty dovish, so people are selling dollars. Dollar yields are lower pretty much across the curve since the release," said Citi strategist Josh O'Byrne.

Speculation of further aggressive monetary easing by Tokyo that would weaken the yen was quelled by last month's Bank of Japan meeting, and speculation on the chances of the government launching direct intervention in the FX market has also eased.

"There is this feeling that Japan may not have that much left up their sleeve and the Fed does seem to be backing off," said O'Byrne.

"The Japanese have been surprisingly quiet and people in general are talking about (intervention) a lot less. Verbal intervention really stepped up when we were seeing fast moves in the yen, and this has been more of a grind, so it's harder for them to argue that there have been disruptive markets."

The dollar traded as low as 100.15 yen, its lowest since the aftermath of Britain's vote in June to leave the European Union. It weakened to a 7-week low of $1.1258 per euro , and by 0.5 and 0.7 percent respectively against the Australian and New Zealand dollars.

Against a basket of six major currencies, it lost 0.6 percent to 95.051 (DXY).

"The dollar is being weighed on by the limited appetite for Fed trades, and this strength in emerging markets and the commodities currencies," said Stephen Gallo, a strategist with Canada's BMO in London.

The markets will look to U.S. data later in the day including consumer prices, housing starts and industrial output for another chance to gauge the health of the economy.

The dollar will probably fall further against the yen over the next few months, with the yen supported by factors such as Japan's rising current account surplus, said Heng Koon How, senior FX investment strategist for Credit Suisse (SIX:CSGN).

"Key risk to our view for more yen strength is of course more aggressive easing by the Bank of Japan when they next meet," said Heng, who expects the dollar to be trading at 96 yen three months from now.

"But so far this year, they have disappointed and failed to turn around sentiment," he added.


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July 2016 US CPI 0.8% vs 0.9% exp y/y

Details of the July 2016 US CPI inflation data report 16 August 2016

  • Prior 1.0%
  • 0.0% vs 0.0% exp m/m. Prior 0.2%
  • Core 2.2% vs 2.3% exp y/y. Prior 2.3%
  • 0.1% vs 0.2% exp m/m. Prior 0.3%
  • Real average weekly earnings 0.6% vs -0.1% prior m/m
  • 1.4% vs 1.2% prior y/y
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U.S. Dollar Index falls to 2-month low amid soft inflation, strong Pound

The U.S. Dollar Index fell sharply to a two-month trough on Tuesday, extending previous losses over the last week, as investors reacted to soft inflation figures and hints from a top Federal Reserve policymaker that it could be appropriate to raise interest rates in the coming months.

The Index, which measures the strength of the dollar versus a basket of six other major currencies, fell more than 0.90% to an intraday low of 94.38, before rallying slightly to 94.75 at the close of U.S. afternoon trading. The dollar is on pace for its third straight losing session and its fifth loss over the last six trading days. At session-lows on Tuesday, the index fell to its lowest level since June 9.

On Tuesday morning, the U.S. Bureau of Labor Statistics said its Consumer Price Index remained flat in July, in line with consensus forecasts, falling back slightly from a monthly gain of 0.2% in June. On an annual basis, consumer inflation rose by 0.8% from the previous 12 months, also slowing from June's yearly increase of 1.0%. It came as food prices remained flat and transportation experienced a slight contraction, offset by strength in medical and housing prices.

At the same time, Core CPI, which strips out volatile food and energy prices, rose by 0.1% in July, slightly below analysts' expectations for a 0.2% gain. Core Inflation increased by 2.2% on a year-over-year basis, also slowing from June's yearly gains of 2.3%. For the month, volatile energy prices declined by 1.6%. Despite strong signs of firming inflation at the start of the year, the Fed's long-term target for inflation still remains below its targeted objective.

Also on Tuesday, New York Fed president William Dudley jolted markets with hawkish comments on the likelihood that that the U.S. central bank could lift interest rates before the end of the year. Speaking exclusively with Fox Business, Dudley said the Fed is "getting closer" to that point when it "will be appropriate" to actually raise short-term rates. Following last December's historic interest rate hike, the Federal Open Market Committee (FOMC) has held the targeted range of its benchmark interest rate at its current level between 0.25 and 0.50% in each of its first five meetings this year.

The chances of a September rate hike from the CME Group's (NASDAQ:CME) Fed Watch tool doubled to 18% following Dudley's comments from around 9% during the previous session. In addition, the CME Group placed the probability of a December rate hike at 55.1%, up from around 41.9% in Monday's session.

GBP/USD surged by more than 1.25% to 1.3043, bouncing from near 31-year lows from the previous session. It came after the CPI in Britain firmed by 0.6% in July, following a 0.5% monthly gain a month earlier, providing further indications that the U.K. economy could be on solid footing following June's Brexit shock. As the British Pound fell sharply throughout the month, import costs accelerated by the highest amount since 2011. EUR/USD rose by more than 0.8% to an intraday high of 1.1322, clearing 1.13 for the first time since June 24 when voters in the U.K. approved the historic Brexit referendum.

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EIA US Weekly Crude Oil Stockpile Unexpectedly Declines 2.5 Million Barrels

The Energy Information Administration’s (EIA) released its weekly inventory figures today. The report unexpectedly showed US crude oil stockpiles drawing down by 2.5 million barrels during the week ending August 12. Analyst on average were looking for a build of 522 thousand barrels, according to a Thomson Reuters survey. The total US stockpile climbed to 521.1 million barrels. This marks the lowest level since February.

On Tuesday, the American Petroleum Institute reported a 1 million barrel draw, slightly larger than the 500 thousand barrels analyst were looking for.

U.S crude oil imports averaged 8.2 million barrels per day last week, lower by 211,000 barrels from the week before.

Crude oil refinery inputs averaged 268,000 barrels more per day than the prior week’s average, bringing the average inputs to 16.9 million barrels per day.

Gasoline production increased for the week, averaging 10.3 million barrels per day. The production of distillate fuel (fuel and diesel oils) also increased, averaging over 4.9 million barrels per day. The total motor gasoline inventory fell 2.7 million barrels last week. Inventories for finished gasoline rose while blending components declined. Distillate fuel inventories rose 1.9 million barrels while propane/propylene increased 1.8 million barrels. The total for commercial petroleum inventories rose 1.3 million barrels for the week.

In response to today’s report, crude oil shot up by 60 cents in the few minutes following the release. The September contract is still lower on the day at the time of writing, off by 0.27% to $46.42.

The price of oil in recent trade has continued to rebound sharply after falling under $40 per barrel at the beginning of the month, when the September WTI contract hit a low of $39.19 on August 3.

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US initial jobless claims 262k vs 265k exp

US initial jobless claims week ending 12 August 2016

  • Prior 266k
  • Continued claims 2.175m vs 2.140m exp. Prior 2.155. Revised to 2.160m
  • 4 week average 265.25k vs 262.75k prior
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US Markets Lack Direction on Confused Fed Messages

Despite making new record highs this month US markets have struggled to push on, capped by concerns about valuations as well as mixed comments from a number of Fed officials in recent days about the future direction of monetary policy.

It has become clear in recent days that Fed officials are increasingly divided over the timing of when to move on rates next, and their constant briefings to the market aren’t helping in this regard, which probably explains why US markets have struggled for direction in the past few weeks.

Last week’s FOMC minutes reinforced the nature of these divisions as have recent comments from William Dudley, New York Fed President and John Williams at the San Francisco Fed.

Over the weekend Federal Reserve vice Chairman Stanley Fischer, who tends to be one of the more hawkish Fed members was quoted as saying that the central bank was close to meeting its inflation and employment targets. Unfortunately for Mr Fischer this has been the case for most of this year and yet the Fed has failed to act so his intervention doesn’t really add to the overall debate, particularly since he stated at the beginning of this year that 4 rate rises this year was very much in the “ball park”. Yet here we are heading into September and we’ve yet to see one, is it any wonder the markets look at the Fed and shrug?

In company news reports that US pharmaceutical giant Pfizer is bidding $14bn for Medivation a small California based cancer drug maker, has seen a rally in equivalent sector shares in early trading in Europe. It’s not the first time Medivation has been courted by its larger peers with Sanofi also previously interested. It’s likely that today’s reports could well trigger speculation about further M&A in the sector.

Housing stocks have also enjoyed a bit of a pickup as they continue to shrug off their post Brexit hangover and recover some of the losses seen in the aftermath of the June “Brexit” vote, with Taylor Wimpey, Berkeley Group and Barratt Developments leading the way.

On the downside mining stocks have slid back as gold and silver prices have come under pressure on a stronger US dollar, with Fresnillo and Randgold Resources the biggest losers.

Oil prices have also come under pressure after failing to hold on to the $50 a barrel mark, prompted in some part by Iraq’s announcement that it will increase exports by 5% in the next few days, while US rig counts increased again at the end of last week by another 10 to 491. The stronger US dollar is also helping pull it back lower.


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July Chicago Fed National Activity Index Hits 2016 High

The Chicago Fed National Activity Index (CFNAI) strengthened to 0.27 for July from a downwardly revised 0.05 in June and was the strongest reading for 12 months. The three-month index improved to -0.10 from -0.19 previously and there is a strong chance that this measure will turn positive for August as poor data from May drops out of the calculation.

The data overall offers reassurance over underlying economic trends, although there is no significant evidence of acceleration or boom conditions within the data.

Over the month, 49 of the indicators improved from the June reading and 36 deteriorated, while 53 of the indicators made a positive contribution to the index.

The production index was stronger at 0.23 from 0.07 in June, while the sales, orders and inventories component was little changed and again broadly neutral. The contribution from personal consumption and housing also moved little at -0.06 for the month.

The employment reading improved to 0.09 from 0.05 in June and was boosted by the robust July employment report and will maintain overall confidence in the labour market.

In historic terms, a reading below -0.70 after a period of expansion indicates an increased likelihood that a recession has begun. The further improvement in July’s index and more solid grounding in positive territory will continue to offer near-term reassurance and the focus now will again be on whether the improvement can be sustained.

The inflation indicators remained subdued with no significant evidence of rising inflation pressures at this stage.

The index brings together the key national releases and provides a useful snapshot of conditions, although the components are already in the public domain, which limits the impact.

There was no significant reaction as bond markets in the US and Europe continued to recover from a weak opening with US Treasuries into positive territory as the 10-year yield dipped back to near 1.55% from 1.59%.


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July US new home sales 654K vs 580K expected

New home sales numbers from the US Census Bureau

  • Prior was 592K (revised to 582K)
  • Up 12.4% m/m
  • Sales up 31.3% y/y
  • Prior was +3.5% m/m (revised down to +1.7%)
  • New home supply 4.3 months vs 4.9 prior
  • Median sale price -0.5% m/m

That's a fresh nine-year high in new home sales in a big beat. The US dollar shrugged it off, however. Probably in part because of the soft Richmond Fed that was released at the same time.

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US July building permits revised lower to -0.8% vs -0.1% prev

US Commerce Department out with the revisions 24 Aug 2016

  • annual rate revised down to 1.144m units vs 1.152m prev

USD sees a small amount of supply with EURUSD up to 1.1268 but GBPUSD lower at 1.3228 as EURGBP finds demand below 0.8510

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US initial jobless claims for Aug 20 week 261K vs. 265K estimate

4 week average 264.0 vs 265.25

The US initial jobless claims came in at 261K vs 265K expectations.  The 4-week moving average fell slightly to 264K versus 265.25K the prior week.
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US August Flash Services PMI Declines to 6-Month Low

The Markit US PMI flash services-sector reading declined to 50.9 for August from 51.4 the previous month and the lowest reading since February. The data will maintain a cautious attitude towards the overall outlook, although this data series been relatively downbeat throughout 2016.

New work expanded at the slowest pace since May and below historic trends with concerns surrounding political uncertainty having some negative impact. There was, however, a further increase in order backlogs to the fastest rate since April 2015.

The increase in employment was at the slowest pace for 20 months with the need to cut costs and subdued demand conditions leading to more cautious hiring plans. According to Markit, the employment reading would be consistent with average monthly employment growth of around 130,000 and the Fed would be uneasy over tightening with employment growth at this pace unless there was clear evidence of rising inflationary pressures.

Although the overall rate of cost increases remained moderate, there were comments surrounding higher staff costs and food prices. The rate of increase in prices charged continued to increase at a subdued rate in August.

Service providers were more upbeat surrounding the prospects for growth during the next 12 months and well above June lows with expectations of a rebound in activity following the Presidential election.
The composite PMI output index declined to 51.5 from 51.8 the previous month.

The data overall maintains the relatively weak run of Markit services-sector data seen during 2016. Although persistent weakness will tend to lessen the impact expectations of an acceleration in growth will be muted.

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US Q2 GDP (second reading) +1.1% vs +1.1% expected

  • The initial estimate was +1.2%
  • Personal consumption 4.4% vs +4.2% exp
  • Core PCE q/q +1.8% vs +1.7% exp
  • GDP price index +2.3% vs +2.2% exp
  • Corporate profits -2.4% (unchanged from first estimate)
  • Durables spending +9.9% vs +8.4% first estimate
  • Business investment -0.9% vs -2.2% first estimate
  • Business investment in IP/software +8.6% vs +3.5% first estimate
  • Home investment -7.7% vs -6.1% first estimate
  • GDP ex motor vehicles +1.0% vs +1.2% first estimate

The goods news is that business investment wasn't quite as dismal as it looked and the consumer spending was even stronger. The worry is that the consumer isn't going to hold up, especially if auto sales tail off as anticipated.

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U.S. Dollar Skyrockets As Fed Talks Rate Hike

Friday turned out to be a great day for the U.S. dollar. The greenback moved higher against all major currencies following Fed Chair Janet Yellen’s speech at Jackson Hole. Interestingly enough, it wasn’t her words that sent the dollar soaring. While Yellen said the rate-hike case strengthened in recent months, it was Fed Vice Chair Fischer’s comments that really sparked the rally in the greenback. He was explicit when he said Yellen’s comments were consistent with a possible September rate hike and that 2 rate hikes this year is possible. Throughout the past week, we heard consistently hawkish comments from U.S. policymakers who all seem to agree that the country is close to full employment and that inflation is on the rise. While some members like Fed President Powell still believe the central bank can afford to be patient, if next Friday’s nonfarm payrolls report is strong, the odds for a September hike will rise significantly.

Friday’s Fed comments served as a strong reminder to the market that no one is as hawkish as the Fed although Fed Fund futures are currently pricing in a 63% chance of a December rate hike, which is only slightly above even. But if jobs and wages surprise to the upside, those odds could shoot above 75%. Yellen and Fischer have done a great job of setting the bottom for the dollar and we anticipate further gains in the coming week. However Friday’s strong move took many major currency pairs to key technical levels -- 1.12 EUR/USD, 102 USD/JPY and 1.30 USD/CAD. Some of those levels have been broken while others have been tested, but either way, traders should look to buy the dollar on any shallow corrections. We expect USD/JPY to hit 104, EUR/USD to drop below 1.11 and GBP/USD to test 1.30.

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US personal income for July 0.4% vs. +0.4% est. Spending 0.3% vs. +0.3% est

Data for July 2016

The US personal income for July was up 0.4% which was as expected. The longer work hours and job growth helped to support wages.  The prior month was revised higher at +0.3% vs +0.2%.

Personal spending was up 0.3% vs 0.2% estimate.   Like wages, the prior month was revised higher to +0.5% vs +0.4%.  This is the 4th straight increase in spending. 

Real Personal spending, however, was lower in July at +0.2% vs +0.3% estimate. The prior month was revised higher to +0.4% from +0.3%.

On the surface, the data - with revisions - is not too bad. It gets the 3rd quarter off to a good start.   With the Fed still focused on the data, this data supports the notion of an economy moving forward and rebounding from the slow 1st half.