Weekly Market Update 24 July- Dollar Soars Above 101 Upon Persistent Unemployment Claims Data

Weekly Market Update 24 July- Dollar Soars Above 101 Upon Persistent Unemployment Claims Data

1. The Dollar surpassed 101.0, driven by positive readings in the Empire State Manufacturing Index and persistent unemployment claims figures. The Index reported readings of 1.1, surpassing market estimates of -3.5, indicating enhanced business efficiency among manufacturers. Despite retail sales falling short of estimates, consumer spending resilience remained evident with positive growth of 0.2%. Housing starts growth declined to 1.43M in June due to material shortages, below the market’s forecasted growth of 1.48M. Unemployment claims came in at 228K, lower than market expectations, reinforcing the likelihood of another 25bps rate hike from the Fed. This week, economic data will be closely monitored, with expectations of cooling Flash Manufacturing and Service PMI indicating more challenging business conditions. Meanwhile, Conference Board Consumer Confidence and University of Michigan Consumer Sentiment are expected to show optimism for economic recovery. The Federal rate decision is also anticipated to reveal a 25bps rate hike, bringing the Federal Funds Rate to 5.50%. Furthermore, markets are bracing for a slowdown in advance Gross Domestic Product (GDP) growth, and attention will be on economic indicators such as Core PCE Price Index m/m, Unemployment Claims, and Employment Cost Index (ECI) to gauge inflationary pressures in the economy.

2. The Euro relinquished its previous week’s gains and weakened against a strengthened Dollar, closing near $1.11, while investors anticipate the ECB rate decision this week. The Final CPI y/y was reported at 5.5%. However, the Final Core CPI y/y increased to 5.5%, surpassing estimates of 5.4%, and remaining close to a recent peak of 5.7%. This has fueled expectations of further rate hikes in the coming months. The Euro received some support from positive German PPI m/m data, which outperformed expectations of a 0.4% contraction. Despite the positive data, dovish comments from traditionally hawkish council member Klass Knot, suggesting uncertainty about rate hikes beyond July’s meeting, indicate a possible slowdown in the ECB’s tightening policy. As a result, market sentiment remains data-dependent, awaiting manufacturing and service PMI data from major eurozone economies, as well as the main refinancing rate decision from the ECB, with an anticipated 25bps rate hike. Additionally, the market expects German Preliminary CPI m/m to report higher than previous readings of 0.3%.

3. The gains made by the pound sterling quickly eroded following the release of moderating CPI figures last week, resulting in the currency closing the week below $1.29. The CPI y/y statistics reported growth of 7.9%, falling below expectations and marking the first time in five months that the headline reading came in lower than anticipated. Consequently, market expectations for future rate hikes from the BoE were scaled back. Investors now anticipate rates to peak below 6%, with an additional 50bps hike in August’s meeting. The likelihood of a half-point hike in August, which was almost fully priced in before the release, dropped to 50%. This has alleviated broader concerns over the major mortgage refinancing crisis triggered by the surge in borrowing costs. On a positive note, retail sales m/m came in at 0.7%, surprising the markets and indicating strong consumer spending. However, expectations of a general slowdown in business conditions, as suggested by forecasts for PMI data this week, are likely to continue putting downward pressure on the pound sterling.

4. The loonie gave up its early gains and remained unchanged against the dollar, closing at 1.32, as conflicting economic data emerged. Median CPI y/y provided an upside surprise with growth at 3.9%, exceeding market estimates of 3.7%. However, retail sales m/m growth slowed down and came in below expectations at 0.2%, indicating a weakening of consumer spending as the high-interest environment starts to impact. Looking ahead, the market expects GDP m/m to grow by 0.3%. Last week, the aussie weakened below $0.68 against the dollar as the RBA adopted a cautious approach on further rate hikes. The RBA decided to keep interest rates unchanged, recognising their already restrictive nature and the potential risks to household finances, which could lead to a sharp downturn in the economy and higher unemployment. Amidst the cautious tone from the RBA, the aussie briefly recovered from its losses earlier in the week following the release of strong employment data on Thursday. The labour market surprised the markets with the creation of 32.6K new jobs and a decline in the unemployment rate to 3.5%. Consequently, the robust employment data increased pressure on the RBA to consider resuming interest rate hikes, with money market bets indicating a probability of over 50% for a rate hike to 4.35% at the upcoming August meeting. Looking ahead, this week, market participants are focusing on CPI data, with most anticipating a slowdown in prices. The kiwi declined against the dollar and closed the week below $0.62, even though its economy experienced higher inflation. The CPI q/q surpassed estimates, showing growth of 1.1% compared to the expected 0.9%. However, the RBNZ officials have reaffirmed their commitment to maintaining the Official Cash Rate (OCR) at 5.50% for the remainder of the year. This decision to pause rate hikes led to capital outflows to other economies offering higher interest rates, putting bearish pressure on the kiwi.

5. Brent crude oil experienced fluctuations throughout the week, eventually closing above $80, driven by China’s economic stimulus measures and tightened oil supply. Brent crude faced an initial decline due to weak GDP data from China and the resumption of Libyan oil output, but these losses were quickly reversed as China announced proactive economic stimulus and supportive policies to bolster its recovery, leading to increased expectations of crude oil demand. Throughout the week, the rise of dollar strength kept the price of Brent crude relatively subdued. However, the UAE Energy Minister, Suhail al-Mazrouei, stated on Friday that OPEC+ actions to support the oil market are currently sufficient, and the group stands ready to take further action if necessary. Additionally, commodity markets were affected by an escalating conflict in Ukraine after Russia withdrew from a grain exports agreement. Gold prices remained relatively stable at $1960 an ounce as investors eagerly anticipated the upcoming U.S. Federal Reserve meeting. During this meeting, the central bank could potentially indicate a pause in interest rate hikes starting from July. The downside for gold appears to be limited at this time as the Federal Reserve is nearing the end of its monetary tightening cycle, providing support for gold prices near-term.