Fed’s Fischer Helped Revive Hopes of a September Hike
Despite the dovish take on Fed Yellen’s comments on Friday, later rhetoric from Fed’s Fischer helped revive hopes of a September hike
• Subsequently, the USD remained firm against its major counterparts with CME Fed futures now pricing in a 36% chance of a hike next month
• Looking ahead, highlights include US Personal Income & Core PCE Price Index, UK markets are closed for a Bank Holiday
• Although the initial USD strength pared shortly after Yellen’s speech, Fischer came out and stated that Yellen’s comments were consistent with a potential rate hike in September and therefore reduced some of the dovish takeaways from the Fed chairs speech
• CME Futures pricing shifted sharply in favor of a hike at both September (21% to 36%) and December (41.4% to 46.1%) meetings; November moved in line with the other two but is viewed as unlikely given its proximity to the election and lack of a press conference
Asia equity markets began the week mostly lower following a similar close in Wall St. on Friday amid hawkish Fed commentary at the Jackson Hole symposium. ASX 200 (-1.1%) declined by around 1%, while Chinese markets were weighed by earnings from AgBank and Sinopec H1 net profit dropped over 21% to its lowest in 8 years. However, Shanghai Comp. later recovered off its lows as the largest increase to Industrial Profits in 4 months helped stem losses. Nikkei 225 (+2.1%) advanced over 2% on JPY weakness and after BoJ Governor Kuroda stated that there is still ample room to ease including cutting rates deeper into negative territory.
BoJ Governor Kuroda said the central bank has ample room for further monetary easing and reiterated the BoJ could reduce interest rates deeper into negative territory.
The Shenzhen Stock Exchange has called on securities firms to finalize all preparation work for the Shenzhen-Hong Kong Stock Connect program by early November.
Chinese industrial profits rose by 11% to CNY 523bln in July, which was the fastest pace of growth in 4 months.
ECB's Coeure stated that the experience of negative interest rates has been positive thus far and added that interest rates could stay low if other policy areas don't contribute.
Greece PM Tsipras is calling for Greece's International creditors to honor pledges and implement specific measures by the end of 2016 to make the Greek debt load sustainable and support economic recovery.
UK PM May will begin drawing up Britain’s blueprint for Brexit this week, with her cabinet split over the terms of European Union withdrawal. Senior Tories say UK Chancellor Hammond is resisting plans by other ministers to pull out of the EU single market.
BoE's Haldane stated that property is a better investment rather than a pension for retirement and also commented that UK housing prices are to relentlessly keep increasing.
USD remained firmer following Friday’s Fed rhetoric, in which Fed Chair Yellen stated that the case for a rate hike was strengthening and Vice Chair Fischer later elaborated that Yellen’s comments were consistent with a possible move in September. This buoyed the greenback against its counterparts with USD/JPY reclaiming the 102.00 handle while EUR/USD fell below 1.1200. Commodity-linked currencies also suffered from the USD strength and weakness in crude prices with EUR/AUD surging above 1.4800 and USD/CAD breaking 1.3000 to the upside.
SNB’s Maechler said the central bank remains attached to negative interest rates and believes that the current environment is not conducive to monetary tightening.
Speculators, including hedge funds, racked up short positions on the pound worth GBP 5.9bln last week — the largest ever, according to US data.
Crude prices declined and tested a break below USD 47/bbl amid USD strength after the Fed kept the door open for a September hike. Elsewhere, gold (-0.4%) prices were pressured from the hawkish Fed comments at the Jackson Hole symposium, with the precious metal on track for a 7th consecutive daily loss and its longest losing streak since May, while copper nursed some of its losses.
Goldman Sachs states that copper is set to decline due to excess supply in the market and also slowing demand from China.
Barclays forecast WTI 2016 average prices at USD 43/bbl and USD 56/bbl in 2017.
Jackson Hole Commentary:
• Fed’s Yellen (Voter, Soft Dove) stated that a rate hike case has strengthened in recent months and economy is nearing the Fed's inflation and employment objectives.
• Fed's Fischer (Voter, Neutral) stated that Yellen's comments are consistent with a possible September hike and went on to state that the Fed remain data dependent and that a rate hike, or hikes are possible this year. Fischer further stated the US jobs report has been strong recently and the US economy is close to full employment.
• Fed’s Powell (Voter, Neutral) stated the Fed should be patient when raising rates and that caution is appropriate. Powell also commented that USD is an important factor when considering to increase interest rates.
• Fed's Mester (Voter, Soft Hawk) stated that case for a further hike in rates was compelling and that employment and inflation trends are moving in the right direction.
• Fed's Bullard (Voter, Soft Hawk) stated that 2 rate hikes are not really what the Fed's framework is calling for and that very good news would be required in H2 to get there.
• Fed's Lockhart (Non-Voter, Neutral) stated that if the economy continues to perform he sees at least one rate hike this year. Lockhart also commented that a cautious and gradual approach is the right approach and that a September rate hike needs serious discussion.
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