Yellen tiptoes towards a rate hike
Friday may seem like a long time ago but in the absence of much news over the weekend, it is all we have to go on heading into an important data week. The setup was two-fold with both Janet Yellen’s latest policy speech at the Jackson Hole Symposium and the 2nd readings of both US and UK GDP for the 2nd quarter.
Yellen’s speech was not an overly optimistic speech but nor is it one steeped in pessimism. Instead this was a speech that slavishly toed a line of ‘data dependency’ into the end of the year. Unemployment is falling and while growth is not fantastic as the GDP report released earlier that afternoon showed, it may be enough to slowly create inflationary pressures. This is a speech that was designed to not scare the horses, nor drive the dollar through the roof at the expense of emerging markets. We think December will see a rate rise but Yellen kept September very much on the table. A good payrolls number this Friday and a hike next month will emerge as the market’s favoured outcome.
Dollar has strengthened since her speech with the probability of a hike rising to 1-in-3 with a December rate rise now seen as a 60% probability. If Friday’s payroll announcement smashes estimates as last month’s did then it may be tough to keep a lid on the greenback.
UK GDP maintain strength into Brexit
The most recent release of UK GDP showed that the UK economy entered the Brexit vote in remarkably fine fettle. Growth of 0.6% was exactly the same as the initial reading published a month previous and was double that of the Eurozone and the US economies over the same time period.
We will receive further news of what the post-Brexit landscape looks like with the release of the manufacturing and construction PMIs before the week’s out. In line with the post-Yellen USD strength, GBP/USD is being pushed back towards the 1.30 level but it will be the data picture that either maintains sterling’s backbone or sees another crumple lower from here.
Political news will stay on the back burner as Westminster has one more week of recess before it reconvenes.
Inflation in Germany to rise but will the euro follow?
Through today we have a little look at what, if any, inflation is building in Germany. Year on year the figure is only expected to have risen by about 0.5% and while the market may be focused on a stronger dollar in the short term given the likely movements of the Federal Reserve, that is not to say that the euro will not remain the surprise package of these markets and continue its strength, especially if the European Central Bank miss the market expectations of additional stimulus at their September meeting next Thursday.
For now, we will also be looking at Italian retail sales as a proxy for consumer confidence in an economy that is seeing pressures on both its banking and political systems.