Friday July 31

Stocks fall as important economic data disappoints. The S&P500 loses 0.2% to 2,104 and the Dow falls 0.3% to 17,690. In spite of today’s losses, the S&P500 still gained 1.2% on the week. Markets fell today after employment cost data missed expectations. The Fed is paying close attention to the labor market, and disappointing wage growth casts doubt on September tightening. To reflect this, the dollar index fell 0.4%, with the euro closing at $1.0985. The two year lost seven basis points to 0.66% and the 10 year Treasury fell to 2.21% to finish the week. Weakness in commodities also contributed to downward movements as WTI oil lost $2 to $46.75.

Wage growth in the US misses expectations. Rate hike probabilities are down after quarterly wage growth was the lowest since 1982. Employment costs rose only 0.2% compared to the 0.6% expected increase. The US dollar and Treasury yields fall as a result on the expectation this may delay tightening. One economist describes this data as “not lift-off friendly.” Doves in the Fed will want to be more cautious. The 10 year yield lost 5 basis points to 2.21% and the 5 year lost seven basis points to 1.55%. A TD strategist says the odds of a rate hike in September are still above 50% however this is not reflected in markets.

Europe remains on the edge of deflation. According to Eurostat data today, inflation in the region remained at 0.2%. Energy price declines cancelled out the inflationary pressures associated with the ECB’s QE policy. Inflation in services was up 1.2% however this was offset by a 5.6% decline in energy prices in the month of July. Today’s 0.2% reading was in line with expectations. Inflation remains low even in the fast growing economy of Spain, which achieved 1% growth from the first quarter however prices were still down 0.1% in July from the previous year. Unemployment is 11.1% across the Eurozone. This number has been falling in Spain and Portugal however rising in Italy,Belgium, and Austria. The unemployment rate in Italy is 12.7% with youth joblessness at 44.2%.

The US dollar is set for further gains against almost all currencies. US dollars make up around 60% of global reserves. The Bank of International Settlements believes that around $8tn in debt is outstanding that is denominated in dollars. The dollar is up 20% since last fall and is set to rise even further with Fed tightening. Investors are focusing on the implications of this appreciation. Dollar strength can be due to a strong economy in the US or weakness abroad. The Fed pays little attention to global implications of the dollar as it is not in the mandate. The US is in some ways a closed economy with domestic conditions and demand outweighing overseas conditions. The IMF is more worried about the rising dollar as it could lead to “significant and abrupt rebalancing of international portfolios.”

Friday July 31

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