Focus shifts to GDP…
July 30, 2015 · by Mike Meyer
Good day. And welcome to Thursday morning. As far as the data that everyone was wanting to see this week, its one down and one to go. But first, let’s see what Frank Trotter has for us this morning.
July 30, 2015 – Vancouver, BC. The day slid into night and then the fireworks began. We’ve been here many years for the country competitions. Tonight was Brazil and the Samba Boys delivered. Colors. Reports. Cascading storm-showers of light materialized over English Bay delivering light and sound all the way up into our viewpoint on the roof at the Fairmont downtown. Color. Sound. Experience. You need to be here.
We’ve been feeling the love here in Vancouver for downtrodden assets. Gold, silver, and copper are well up on the list. China as an underinvested market gets attention. Small cap resources and even oil are on the hit list. Point is there are bear markets and bull markets and they trade off. When does the new bull market appear? Don’t know but maybe it’s sooner than later.
Friend Dr. Steve Sjuggerud notes that there is, in his estimation, massive underinvestment in China and says get in before others fill it up. Makes sense to us in the trenches.
Thanks Frank. Before I dive a little deeper into the Fed meeting, I’ll first touch on the housing data that was released yesterday. The number of contracts to buy previously owned homes in June slipped a bit as they fell 1.8% and the May reading was revised downward to 0.6%. Since it usually takes a month or two before closing, this report tends to be a leading indicator so it looks like there was a pause heading into summer and is also consistent with the disappointment in new home sales. The general outlook is still positive for housing and the recovery remains on track, but that can change if these disappointments become a trend.
As we expected, the July Fed meeting was largely a non-event and since there was no press conference, the markets were left to make their own interpretations of the prepared statement. We didn’t see any heightened indications one way or the other as to whether a September rate hike was any more or less likely than what had existed heading into the meeting. At the end of the day, we’re splitting hairs as to whether the inclusion or exclusion of a certain word within a given sentence has any significance. For example, the Fed said they see the risks to the outlook for economic activity and the labor market as ‘nearly’ balanced. This statement didn’t change from the previous meeting, so what does that really mean.
Does that mean that September is not likely since the risks are not yet ‘balanced’ at this point? Let’s compare these two sentences. 1. On balance, a range of labor market conditions suggest that underutilization of labor resources has diminished since early this year. 2. On balance, a range of labor market conditions suggest that underutilization of labor resources has diminished somewhat since early this year. Since the word ‘somewhat’ was dropped during this meeting, the markets are viewing this as a hawkish development. In a vacuum, I can buy into that concept but the overall context and message of the statement didn’t project a hawkish tone or suggest a September hike was more likely than it was last week.
The Fed has left itself plenty of wiggle room to justify not moving rates if they decided to push out until next year. When its all boiled down, they said the job market is still moving in the right direction but would like to see further improvement while inflation remains lower than target. Speaking of inflation, I don’t think the Fed has motivation right now to raise rates on a needs basis. If the reports are telling us that inflation isn’t a worry and economic growth isn’t lighting the world on fire, what’s the rush to raise rates. If they want to hike just because they don’t want to be on zero any longer, that’s one thing, but the data is not forcing their hand right now. Any rate hikes are going to be minimal at best, so we’re just talking about a rate hike(s) that are largely symbolic in nature.
With that said, the July meeting minutes and any jobs data over the next couple of months will likely see more scrutiny than usual as we head into the September meeting. Moving into currencies, there really wasn’t much to talk about. The holding pattern leading up to the Fed meeting was firmly in place for much of the day since we didn’t have any significant data from abroad that was in play. The dollar saw a bit of a jump after the meeting as the euro dipped below 1.10. The Brazilian real clawed its way back a bit and finished in the top spot with a 1% gain after being oversold the past few days so we’ll see if its able to find some firm ground.
The Swedish krona ended up in last place after a disappointing consumer confidence report sent it in a downward trajectory but then a weaker euro later in the day took it even lower. Like I mentioned earlier, the dollar did firm up against most currencies as the markets think they have come across a hawkish aftertaste from the Fed meeting but the pound sterling was able to hold its ground after better British housing data. I saw where the IMF isn’t concerned at this point with the volatility in the Chinese stock market after Christine Lagarde, IMF director, indicated that she didn’t think it was going to impact their decision to include the renminbi into its special drawing rights basket of currencies.
As I came in this morning, the dollar has picked up some steam and it looks like the markets are fairly confident that second quarter GDP will not disappoint. Most currencies, except for the pound, are trading will losses this morning and gold is down $10, so we’ll see if that has staying power. We had some improved data out of Europe after the European Commission’s index of executive and consumer sentiment increased to a four year high. We also saw Spanish GDP in the second quarter expand at the best clip in eight years and the German labor market remains on solid footing. Lastly, Brazil’s central bank raised interest rates by 0.50% and indicated this could be the last move by saying inflation should begin moving toward the target in this environment.
Currencies today 7/30/15. American Style: A$ .7265, kiwi .6604, C$ .7704, euro 1.0952, sterling 1.5625, Swiss $1.0309, . European Style: rand 12.6847, krone 8.1663, SEK 8.6455, forint 281.75, zloty 3.7809, koruna 24.687, RUB 59.5510, yen 124.37, sing 1.3744, HKD 7.7513, INR 64.0632, China 6.1165, pesos 16.3825, BRL 3.3545, Dollar Index 97.334, Oil $49.01, 10-year 2.30%, Silver $14.63, Platinum $981.50, Palladium $615.25, and Gold. $1,085.46
EverBank World Markets
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