Last week global events took centre stage for investors, as weak industrial production data emerged across Europe also fears over Portugal’s banking sector further added uncertainty on the Euro zones economic recovery. As a result, risk-off sentiment drove the US 10 year Treasury yields down by 12 basis points to 2.51pc.
Minutes of the FOMC meeting held on June 17-18 acknowledged the improvements in the US labour market despite the fact that wage growth remains subdued, the minutes also revealed a broad agreement that QE would come to an end in October. While, there were no new signals on the timing of the first rate hike, in preparing for it, the Fed began to outline broad plan for the path toward normalization of monetary policy.
In the euro zone, the euro currency held steady against its US dollar counterpart on Friday, after Portugal’s largest bank sought to reassure investors about its financial stability. The Euro currency traded all last week in tight range of 1.3574-1.3650.
The pound fell slightly against the US dollar on Friday, after weak UK construction numbers added to signs that UK’s recovery may be losing momentum; the Sterling fell against the dollar to 1.7082 before recovering and closing for the week at 1.7122, just shy of its 6 year high of 1.7180 it marked earlier this month.
Last month’s JOLTS report indicated that the US Job Market Continues to strengthen. The US Bureau of Labour Statistics reported that there were 4.6 Million job openings on the last business day of May, little changed from 4.5 Million in April. The hires rate was up by 3.4% reaching 4.7 Million hires in May and the separations rate rose by 3.2% to 4.5 Million total separations in May. The Job Openings and Labour Turnover Survey was considered by Ex-Fed Chair Ben Bernanke as a wider measure of unemployment, also the current Fed Chair Janet Yellen highlighted its importance.
According to the minutes of the Federal open Market meeting held on July 17-18. The Federal Reserve has begun detailing how it plans to ease the US economy out of an ultra-loose monetary policy, appearing near agreement on a strategy to manage interest rates in the future. Most participants agreed that adjustments in the rate of interest on excess reserves should play a central role during the normalization process. A staff presentation outlined design features of a potential ON RRP facility and discussed options for the Committee’s policy of rolling over maturing Treasury securities at auction and reinvesting principal payments on all agency debt and agency mortgage-backed securities. However , there was no specific indication concerning when the US Central Bank plans to raise interest rates, currently expected in the middle of next year.
On the Tapering side, the Federal Reserve is preparing to end the quantitative easing after the FOMC’s October meeting, given the economy continues to improve as the central bank expects. Since the Fed began unwinding its QE program, it has cut the pace of purchases by 10 Billion US Dollar with each meeting, meaning that the final reduction would come with a single 15 Billion cut. Fed policy makers expressed confidence that moderate economic expansion will continue, while unemployment and inflation will gradually move towards the Fed’s targets.
Initial claims for state unemployment benefits dropped by 11,000 to a seasonally adjusted 304,000 for the week ended July 5. The four-week moving average for new claims, considered a better measure of underlying labour market conditions, declined by 3,500 to 311,500 last week. That was the second-lowest reading for the moving average since August 2007. However, the labour market is still not fully healed, although companies added 288,000 jobs to their payrolls in June and the unemployment rate fell to 6.1% near a six year low.
Last week, the European Central Bank President Mario Draghi dedicated most of a speech in London, pressing for closer European integration to improve growth and jobs. The ECB President advised Euro Zone states to respect their joint fiscal rules and extend their cooperation to economic reforms, telling governments they must “learn to govern together”. Draghi also said the European Union would benefit from an authority that could push governments to strengthen their economies, “This is because the outcome of structural reforms and continuously high level of productivity and competitiveness is not merely in a country’s own interest. It is in the interest of the union as a whole.” Draghi has repeatedly said the ECB’s ultra-loose monetary policy is not sufficient to sustain the euro area’s fragile recovery.
German exports and imports dropped much more than expected in May. The Federal Statistical Office said that exports fell 1.1% to 92.8 Million Euros from the previous month and well below the 0.4% decline economists expected. On the other hand, the imports dropped faster than exports, dropping 3.4pc to 74.1 Billion Euros, marking the largest month-on-month decrease in imports since November 2012. The German Trade Balance showed a surplus of 17.8 Billion Euros in May 2014.
UK’s factory output unexpectedly dropped in May, raising questions about the pace of the country’s recovery. Factory output fell by 1.3 % in May, its biggest fall since January 2013 and well below market expectation of 0.4% rise the Office for National Statistics said. The decline comes after the sector recorded its strongest growth in nearly four years .The Bank of England expects in May that Britain’s economic growth would start to slow in the second half of this year, though more recently Governor Mark Carney said he had seen little sign that this was about to happen.
Last week, the Bank of England left its interest rates at their record low and asset purchase target unchanged. The Monetary Policy Committee agreed to hold off on adding to the 375 Billion pounds of asset purchases and left its benchmark interest rate at an ultra-low level of 0.5%. The Bank of England is broadly expected to raise rates either at the end of this year or in early 2015, probably before the US Federal Reserve, which last week detailed how it plans to make its own exit from the era of ultra-loose monetary policy.
The Peninsula
