Weekly Market Update 31 July- Strong Advance GDP q/q Figures Propels Dollar Above 101.6
Weekly Market Update 31 July- Strong Advance GDP q/q Figures Propels Dollar Above 101.6
1. The dollar exhibited strength, surging above 101.6, driven by robust Advance GDP q/q figures. Flash manufacturing PMI revealed a slowdown in the deterioration of operating conditions, with a reading of 49.0 in July, surpassing expectations of 46.2. However, the Flash Services PMI indicated a deceleration in expansion, reporting a reading of 52.4, falling short of market forecasts of 54.0. Despite concerns among manufacturers and service providers, consumer sentiment regarding the US economy improved. The Conference Board (CB) consumer confidence index and the revised University of Michigan (UoM) consumer sentiment index rose to 117.0 and 71.6, respectively. This improvement was result of a resilient labour market and easing inflation. However, the UoM survey also revealed expectations of persistent inflation at around 3.4% for 2024. As anticipated, the Federal Reserve raised its rates by 25 basis points, bringing the target rate to 5.5%. The Fed remains committed to being data-dependent, especially as they approach terminal rates. Regarding economic indicators, the Core PCE price index increased by the expected 0.2% on a month-on-month basis, while the Advance GDP q/q showed a stronger growth of 2.4% in Q2 2023, surpassing estimates of 1.8% growth. This suggests underlying inflationary pressures amid heightened economic activity. However, the Employment Cost Index q/q rose by only 1.0% when the market anticipated 1.1%, and unemployment claims remained steady at 221K claims, below estimates of 234K. Looking ahead, markets are awaiting key economic data, including the ISM manufacturing and services PMI, non-farm payrolls, JOLTs data, and the unemployment rate.
2. Amid rate hike uncertainty and disappointing PMI data, the euro weakened against the dollar to close at $1.11 last week. Major European economies like Germany and France, reported below-expectation PMI readings, and the eurozone’s manufacturing and services PMI also came in weak. The euro slid as the ECB raised rates without clear forward guidance, and even remained “open-minded” to a rate pause. While German CPI matched estimates, markets anticipate a 5.3% growth in CPI flash estimates this week, adding further intrigue to the euro’s performance.
3. The pound sterling experienced significant turbulence throughout the week. However, market expectations of a forthcoming monetary report helped stabilize the currency against the dollar, resulting in a flat end to the week at $1.28. The flash manufacturing and services PMI data came in below market expectations at 45.0 and 51.5, respectively, indicating a slowdown in the UK’s economy. The country continues to grapple with high interest and inflation costs, adding to the economic challenges. Looking ahead, the market is anticipating a 25 basis points rate hike from the Bank of England (BoE) later this week, which would bring the official bank rate to 5.25%. Investors are eagerly awaiting BoE Governor Bailey’s speech on the future path of rates in the UK amidst the backdrop of a worsening economy.
4. The loonie initially gained from higher oil prices but later weakened, ending the week above 1.32 against the dollar. For Q2 2023, Canada’s economic momentum weakened, with GDP growing by 0.3% in May, but preliminary data showed a decrease of 0.2% in June. The slowdown in economic growth would be driven by a decrease in consumption, particularly in rate-sensitive goods and services, as households faced higher mortgage costs during refinancing. Market focus is now on employment change, expected to grow by 15.5K, and the unemployment rate, predicted to rise to 5.5%. The aussie fell against the dollar, closing below $0.67, in response to cooling CPI figures. Australian CPI growth was reported at 0.8%, falling short of the market’s expectation of 1.0%. This has eased the likelihood of further rate hikes and supported the Reserve Bank of Australia (RBA) in its decision to pause rates. The lower CPI figures have alleviated concerns about inflation, which were heightened by the tight labour market figures reported in July. As a result, the impetus for the RBA to raise rates by the expected 25 basis points has become less clear, leading to a drop in the value of the aussie ahead of the RBA’s upcoming rate decision. The kiwi experienced a slight rise against the dollar, closing the week above $0.61, driven by a spike in household living costs. According to Stats NZ’s quarterly household living-costs price indexes (HLPIs), the average household’s cost of living surged by 7.2% in the 12 months leading up to June 2023, primarily due to higher mortgage payments and grocery prices. This significant increase in living costs highlights the growing inflationary pressures and suggests a greater need for rate hikes to control inflation. The market will be anticipating economic news on employment change q/q and unemployment rate data this week.
5. Brent crude prices defied the strengthening dollar, soaring to a nearly 3-month high at $84 last week, driven by an improving demand outlook and tightened supply. Saudi Arabia is expected to extend a voluntary oil output cut of 1 million bpd for another month, while in the US, energy firms reduced the number of oil rigs for an eighth straight month but added natural gas rigs for the first time in three months. Additionally, analysts upgraded global oil demand forecasts for this year and next, as reduced recession risks in the US signal increased consumption prospects. However, gold prices yielded to the strength of the dollar, closing at $1950 an ounce. The positive advance GDP q/q data and upbeat consumer sentiments in the United States alleviated recession concerns, diminishing the appeal of the safe-haven asset and erasing previous gains made before Thursday’s GDP news. The possibility of future rate cuts might bolster bullion prices as the Fed nears its terminal rate and with subdued inflation in mind.
