Lower jobless claims help ease recession worries in US market
KUWAIT: Business activity in the US services sector returned to expansion territory in July, with the PMI reading coming in at 51.4 from 48.8 previously.
Several components of the index also surprised to the upside, including employment at 51.1 from 46.1 in June, and new orders rising to 52.4 from 47.3. Furthermore, the prices component also ticked higher to 57.0. The reading helped slightly ease concerns of muted growth and a potential recession following last week’s NFP jobs data and the subsequent sell-off in equities.
Initial jobless claims in the US fell more than expected, alleviating some concerns that the labor market is in free fall, with the reading coming in at 233,000 initial claims, down from 250,000 previously and below the 240,000 forecasted figure. The print represents the first reading related to the labor market since last week’s weaker than expected jobs report that had markets worried about recession.
Additionally, it offers some semblance of relief for the Fed, after several economists and market participants criticized the central bank for not cutting rates earlier, citing a deteriorating labor market as a reason to lower interest rates. Following the reading, markets are pricing in a 52 percent probability that the Fed will deliver a 25 bps rate cut in the upcoming September meeting, after previously heavily favoring a 50 bps cut. The US dollar index closed the week at 103.13.
Retail sales in eurozone
Eurozone’s retail sales declined by 0.3 percent in June after increasing by 0.5 percent in May, highlighting the struggles faced by European consumers amid elevated interest rates. The reading missed the consensus estimate of a 0.1 percent rise. The eurozone failed to achieve two consecutive months of retail sales increases so far this year, highlighting the volatile nature of consumer spending and the complicated path towards lower rates.
The European Central Bank (ECB) delivered a widely expected 25 bps rate cut in June, taking the deposit rate down to 3.75 percent. However, the central bank has since held interest rates steady, citing concerns over inflationary pressures, and reiterating that future moves will depend on the data. Markets are currently pricing in three more 25 bps rate cuts until year-end, taking the deposit rate all the way down to 3 percent. The EUR/USD currency pair closed the week at 1.0916.
Bank of Japan meeting
The BoJ kept rates steady in June however they hiked at the subsequent meeting in July. Minutes from the June meeting show that at least two of the nine voting members called for early hikes. Additionally, “Members agreed that the yen’s recent falls were among factors that push up inflation, and must warrant close attention in guiding monetary policy.” The discussions in June’s meeting underline how the movement of the yen and concerns about inflation were key factors influencing the central bank to tighten in July and raise interest rates to levels not seen in 15 years.
Ever since the June meeting, the yen staged a remarkable recovery to hit a 7-month high, reaching 141.67 at one point before easing. At present, BOJ Governor Kazuo Ueda refuses to rule out another rate hike following July’s decision, while markets are pricing in a potential hike in December’s meeting. The USD/JPY currency pair closed the week at 146.61.
The Reserve Bank of Australia held the cash rate at 4.35 percent, in line with market expectations. RBA Governor Michele Bullock delivered hawkish guidance, stating that inflation might take longer to return to the target range, and that interest rates could remain higher for longer. In their policy statement, the board said that “Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range. Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.” The AUD/USD pair gained following a hawkish RBA rate decision and guidance. The AUD/USD currency pair closed the week at 0.6572.
China inflation
Consumer prices in China rose more than expected, with annual CPI up 0.5 percent versus 0.2 percent previously and 0.3 percent expected. High temperatures and rainfall played a big role in pushing food prices up, therefore partially contributing to the overall rise in CPI. Meanwhile, producer price inflation came in unchanged, falling 0.8 percent annually. The readings come amid concerns about shrinking manufacturing and weak consumer demand.
Authorities in the world’s second largest economy introduced a series of stimulus measures, including lowering key rates, lowering down payment requirements for real estate purchases, and lowering the reserve ratio requirement. However, a prolonged property sector crisis, higher unemployment among nationals, especially youth, and high levels of local government debt are weighing on consumer’s ability to purchase and the government’s ability to introduce further easing measures. The USD/CNY currency pair closed the week at 7.1660.
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USD/KWD closed last week at 0.30560.