The FOMC continued to taper and for the third consecutive time, made minimal changes to their formal statement. In addition, the reduction in their unemployment forecasts was not aggressive. This was just not enough to concern markets and Yellen’s press conference down played any inflationary concerns and offered little insight into considerable time debate.
Yellen did note that if employment comes in better than their expectations, then they would tighten soon than is currently expected. However, the overall outcome was bearish volatility. Equities rallied, the USD came under heavy pressure and emerging markets currencies continued their ascend. Equities moved to a new high for 2014 and volatility is at the lowest level since 2007. The coming US employment reports are clearly important but we will need consistently strong data to move the Fed away from its current stance
On the market side, although the Euro is becoming an increasingly more attractive currency for funding purposes, the currency has not been able to find its way lower. On the other side, Europe March’s net bond flows turned negative on a three-month cumulative basis for the first time since August 2013.
In summary, on the foreign exchange side, Markets closed the week with a relatively stronger EUR and GBP against the US Dollar. After reaching a high of 1.7070 on Friday, the Pound ended the week near the high of 1.7013. Euro on the other side behaved in a more tamed manner as investors hesitate to buy the currency. The currency closed the week at 1.3600.
In the commodities markets, the geopolitical problems in the Middle East have started to affect oil prices with international newspaper suggesting a major price increase if Iraqi production went completely off line and would cause major setback to the recovery of the world economy.
Jobless claims held near the post-recession lows and covered the June employment survey period. Indeed, initial claims decreased by 6,000 to 312,000 in the week ended June 14. The figure is definitely a proof of the continuing improvement in the labour market and matched expectations by analysts. Weekly claims are hovering around levels not seen steadily since mid-2007, before the recession began.
On a different front, Philadelphia Fed business survey “reported continued increases in overall activity, new orders, shipments, and employment this month. The index has been on the upswing since February, when it stood at minus-6.3. The report’s main measure, an index of current business activity, rose to 17.8, from May’s reading of 15.4. Index readings above zero indicate growth.
Finally, the employment component came also strong at 11.9 and prices paid rose to 35.0 versus 23.0 the prior month
According to data released this week, foreigners sold US long-term securities, including Treasuries and corporate bonds, in April. Indeed, as global investors await more clarity over the US interest rates path, we continue to see a poor portfolio flow picture into the US.
The net sales of long-term US assets notched $24.2bn in April following a net inflow of $4.1bn the month before. Long-term US Treasuries showed an outflow of $13.59bn from an inflow of $25.86bn in March. China’s holdings of US Treasuries also declined during the month by $8.9bn, but it remained the largest holder with $1.263tr in April, from
On the other side, IMF managing director Christine Lagarde said inflation’s resistance to the ECB’s latest measures would represent the “stubbornness” that triggers quantitative easing.
Investor confidence in Germany fell for the sixth month in a row, despite analysts expected a rise. The ZEW sentiment survey showed the indicator for economic expectations fell to 29.8 in June from 33.1 in May compared to markets expectations of 35.0. The indicator has been dropping since January, with mainly the European political crisis weighing on the indicator in recent months.
On the other side, in a report released earlier this week, Germany’s central bank said the German economy continues to move in the right direction.
The major news in Europe came at the end of last week from the governor of the Bank of England Mark Carney.
Indeed, we cannot under-estimate the significance of the governor’s speech. Carney acknowledged that the policy decision was becoming more balanced as opposed to the commitment to more accommodative policy and then added that tightening “could happen sooner than financial markets currently expect.” Sterling rallied hard, reaching a five and half year high at 1.7070 while EUR-GBP has accelerated its recent decline.
As the first rate hike was priced for April 2015, the market has now priced a 50/50 chance of a hike in December 2014.
Going over the Bank of England speech, there’s no denying that central banks are starting to sound more hawkish motivated by the combination of strengthening recoveries and an increased focus on financial stability.
In this context, comments from the Bank of England’s Carney are one of the most important developments in recent weeks, as this could a clear indication of a more widespread change in tone.
The recent economic data demonstrate that the Japanese economy has weathered the impact of the introduction of the sales tax earlier in the year. Faith in the Japan trade has been further buoyed by recent news flow on Government Pension Investment Fund asset reallocation plans, with the head of its investment committee saying last week that Japan’s $1.26trn public pension fund will likely announce their decision to increase stock and foreign-bond investments in early autumn, “potentially sending tens of billions of dollars into new markets”.
Chinese Premier Li Keqiang said on Wednesday that China’s economy would not suffer a hard landing and would continue to grow at a medium to high pace in the long term without strong stimulus. Li said he expected China’s economy to grow at a minimum clip of 7.5 percent. New home prices fell in May from April in 35 of the 70 cities polled, up from eight cities in April.
THE PENINSULA
