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Weekly Market Update 7 August- Strong Dollar Surges Past 102 Despite Disappointing Jobs Report

Weekly Market Update 7 August- Strong Dollar Surges Past 102 Despite Disappointing Jobs Report

1. Amidst positive market sentiments regarding the soft-landing in the US economy, the dollar surged to nearly 103.0 before settling at 102.0 last week due to disappointing Non-Farm Payroll (NFP) figures. Although the ISM Manufacturing PMI improved slightly to 46.4 compared to the previous month, it still fell short of market estimates due to weak demand. In June, the JOLTS Jobs Opening reported 9.58M jobs created, the lowest in over two years, but the labor market demonstrated resilience with 1.61 job openings per unemployed person, up from 1.58 in May. ADP NFP exceeded market expectations, reaching 324K employed personnel. On Thursday, the dollar’s ascent halted as unemployment claims rose by 227K, and the ISM Services PMI reported a survey reading of 52.7, below the market’s anticipated 53.1. The decline was exacerbated by the lower-than-expected NFP readings, which came in at 187K, falling short of the market forecast of 205K. However, with improved average hourly earnings and an unemployment rate of 0.4% and 3.5% respectively, the dollar index ended the week higher than its Monday opening. Beyond economic events, the US government’s credit downgrade by Fitch from AAA to AA+ highlighted the nation’s increasing debt situation. This downgrade was influenced by the substantial debt accumulated in recent years, primarily due to pandemic stimulus and tax cuts, as well as investments in infrastructure, technology, and clean energy. Additionally, the cost of borrowing rose as the Fed raised interest rates to a 22-year high. Despite the credit downgrade, the market seems to overlook its impact, and the dollar remains strong due to positive economic data. This week, the market awaits the CPI y/y forecasted at 3.3% and PPI m/m forecasted at 0.2%. Moreover, the Preliminary University of Michigan Consumer Sentiment Survey will provide insights into consumer sentiments.

2. The euro experienced a slight setback against the dollar, closing at $1.10. This decline was attributed to a decrease in inflationary pressures, as indicated by the CPI flash estimate figures. The flash estimate revealed that consumer prices in categories such as food, alcohol, and tobacco eased, resulting in a CPI growth rate of 5.3%, in line with expectations, but lower than the 5.5% growth seen in the previous month. Additionally, the services PMI across eurozone economies, including Spain, Italy, and France, came in lower than expected. The market will likely gain a clearer understanding of the inflation outlook as major eurozone economies such as Germany and France report their Final CPI month-on-month figures.

3. The pound sterling weakened against the dollar, closing at $1.27, as the BOE signaled a shift away from its aggressive monetary tightening approach. As widely anticipated by the markets, the BOE raised its interest rate by 25bps, bringing the bank rate to 5.25%. The decision was supported by a 6-3 vote within the Monetary Policy Committee, suggesting that the majority within the committee leans toward a more cautious, data-dependent approach in managing inflationary pressures in the economy. BOE Governor Bailey reinforced this sentiment in his post-monetary report speech, rejecting the idea of a 50bps rate hike and emphasizing a data-dependent approach. Despite this shift, the strength of the pound sterling is still supported, as the committee remains committed to maintaining a “sufficiently restrictive” bank rate to ensure inflation returns to 2%. Additionally, the BOE’s inflation forecast has been updated, with inflation expected to fall to 4.9% by the end of the year, showing a quicker decline compared to previous projections in May. This indicates that the market can still expect interest rates to rise if future economic data points to sustained inflationary pressures. The market will closely monitor the UK’s labour market data, as Bailey highlighted the significance of wages in driving inflation within the economy. This week, market participants are anticipating GDPm/m and Preliminary GDP q/q data, as these figures play a crucial role in the UK’s future rate decisions. It’s noteworthy that the BOE’s inflation path report did not account for the possibility of the UK entering a recession.

4. The loonie weakened against the dollar, closing the week at 1.32, following disappointing employment change data. In July, the Canadian economy lost 6.4K jobs, and the unemployment rate increased to 5.5%, up from 5.4% the previous month. However, there was a positive note as wage growth reaccelerated to 5%, surpassing expectations for a 4.1% gain and improving from 3.9% in the prior month. Hence, markets scaled back their expectations of another 25bps rate hike, with swaps markets now indicating odds of less than two-thirds at the October meeting, down from over 75% previously. The aussie continues its decline against the dollar, to close the week below $0.66, upon rate pause from the RBA. Last week, the RBA held interest rates at 4.10% once again as recent data revealed that inflation growth was aligned with RBA’s forecast horizon as output and employment continues to flourish. However, RBA’s attention remains fixated on services inflation, like surging rents. Moreover, resilience in the labour market and soaring house prices created a positive wealth effect, which encourages more spending, are stubborn contributors to inflation. Bolstered by China’s strong demand for iron ore and coal, a surplus of 11.32B in the trade balance, which is above the market’s forecast of 10.87B, was recorded and it assisted in stemming the aussie’s slide against the dollar. This week, market awaits NAB Business Confidence survey. Last week, the kiwi declined against the dollar, closing below $0.61, due to a rise in the unemployment rate. On Wednesday, the employment change quarter-on-quarter showed a positive growth of 1.0%, surpassing market estimates of 0.6%. However, the unemployment rate came in above market forecasts, reporting at 3.6%. This week, market participants are eagerly anticipating the results of the inflation expectation survey to gain insights into consumer sentiments regarding New Zealand’s economy.

5. Spurred by the supply cuts and increased global demand, brent crude continued its rally to hold above $86 by close of last week. In addition, a Russian warship was last week seriously damaged in a Ukrainian naval drone attack on Russia’s Black Sea navy base at Novorossiysk. The port that handles 2% of the world’s oil supply has resumed operations. In line with production cuts, Saudi Aramco raised on Saturday the official selling prices for most grades it sells to Asia for a third month in September. Gold prices recovered from their initial losses to close the week at $1940 an ounce, driven by a weak US employment report last Friday. A potential factor behind the decline in gold prices is the reduction in Venezuela’s gold reserves. According to central bank data released on Friday, Venezuela’s gold reserves decreased by eight metric tons during the first half of the year. This ongoing reduction in reserves is a result of the country’s prolonged economic crisis.

Salzworth Asset Management