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 Friday 13 October 2017

US economic data in focus - AM Briefing

 

 

Early moves

·         All eyes on CPI and RPI

·         Sterling up on Brexit hopes

It’s been a relatively quiet start to Friday’s trade. European indices and US stock index futures are mixed and little-changed overall. Meanwhile, the US dollar and euro are both trading in narrow ranges. The British pound is the stand-out performer this morning as comments from yesterday’s Brexit meeting hint that the EU and UK may be close to agreeing a two-year transition period.

We have some major US data releases due out today with Retail Sales and CPI. Core Retail Sales are expected to pick up by 0.9% in September - a considerable improvement from the prior month’s tepid increase of just 0.2%. Core CPI is expected to rise 0.2% in September from the month before which would match August’s increase. This number will be watched closely as this week’s minutes from the last Federal Reserve meeting showed that members are particularly concerned about low inflation. But it is worth noting that the next few months of US data will be complicated by hurricane-related disruptions. There’s speculation that both numbers could come in stronger because of this, so there’s also scope for disappointment.

We also have trading updates from Bank of America and Wells Fargo. On Sunday Fed Chair Janet Yellen is due to speak about the economy and monetary policy in Washington DC. Audience questions are expected.

Stock Index Update

·         Earnings season kicks off

·         JP Morgan and Citigroup report

The third quarter earnings season got underway yesterday with reports from two of the world’s biggest financial institutions. Both JP Morgan and Citigroup reported better-than-expected revenues and earnings. However, JP Morgan also noted an annualised 27% decline in fixed income trading revenue and the shares ended down 0.9% on the day. Citigroup closed 3.4% lower as investors fretted about rising credit costs.

The news helped to propel the Dow, S&P and NASDAQ to fresh all-time record highs. Yet despite this, all the US majors finished yesterday’s session in negative territory. Investors took the opportunity to take profits and reduce their exposure following the strong gains earlier in the session. Now investors are on hold ahead of the release of Retail Sales and CPI later today. Market participants are desperate to get an update on inflation as this should help to forecast just how likely a December rate hike from the Fed will be. Unfortunately, today’s data releases look set to be complicated by the summer’s hurricane disruptions.

Commodities Update

·         Oil rally continues

·         Precious metals rise again

Oil prices were firmer again in early trade on Friday. Both Brent and WTI shot higher on a combination of stronger Chinese import data and a fall in US production and inventories. On Monday OPEC secretary general Mohammad Barkindo said that the global oil market was rebalancing after years of oversupply. Separately, there is evidence that US production costs are on the rise. This suggests that US output could begin to pull back after months of increases. This brings into doubt the Energy Information Administration’s (EIA) forecast that US crude production is set to top 10 million barrels per day early next year. Despite this, non-OPEC production is expected to increase next year due to projects that were approved before the 2014 price slump. But lower prices are beginning to weigh on US shale oil activity and industry analysis suggests that prices are expected to remain at $50-55 in 2018. A rise above that level would encourage US oil producers to up output while lower prices could see a pull-back in investment.

Gold and silver have put in strong performances over the last seven days. Investors have taken advantage of the recent sell-off to increase their exposure to both metals. Gold is once again closing in on $1,300 while silver is trading back above $17.20.This time last week both were trading at multi-month lows as the dollar put in a corrective bounce. Investors had been busy dumping the two precious metals as risk appetite grew and the geopolitical tensions which had done so much to boost gold and silver’s safe-haven appeal faded. All through the summer there had been concerns that there was going to be an outbreak of hostilities across the Korean peninsula. This followed on from a string of provocations from North Korea along with President Trump’s bellicose responses.  However, South Korea has repeatedly made it clear that it will not support military action against its neighbour and would prefer to put up with a nuclear-armed North Korea.

Forex Update

·         US dollar slips ahead of data

·         Sterling pops up on Brexit hopes

The dollar was a touch firmer first thing this morning but then drifted lower as the European session got underway. We shouldn’t expect too much movement in either the dollar or the euro as traders are unlikely to want to increase their exposure ahead of today’s data releases. We get US Retail Sales and CPI early this afternoon, and this will be followed by speeches from FOMC members Charles Evans and Robert Kaplan.

Sterling is sharply higher this morning against both the dollar and euro. This follows reports that the UK and EU are close to agreeing to a two-year transition period. Yesterday sterling fell sharply after the EU’s chief Brexit negotiator Michel Barnier said that talks had reached a deadlock.

On Wednesday the Federal Reserve released the minutes of its September meeting. There was little in the way of fresh detail and the probability of a December rate hike continues to hover just under 90%. However, the dollar sold off briefly as some members of the Fed’s FOMC expressed concern that inflation remains a long way below the 2% target - as measured by Core PCE.

Yesterday the Japanese yen rallied sharply against the dollar. This suggested that some investors were reducing their overall risk exposure, and this was confirmed by the modest pull-back across US stock indices last night. But traders also pointed to US bond yields. The 10-year treasury has fallen around 8 basis points this week suggesting that investors have become a little more wary concerning the strength of the US economy going forward. Typically bond yields rise as the economy picks up as investors anticipate higher interest rates in future. So the fact that they are drifting lower suggests doubts even as the Federal Reserve is actively reducing monetary stimulus.

Upcoming events

Today’s significant events and economic data releases are all from the US and include CPI, Retail Sales, Consumer Sentiment, Business Inventories and Inflation Expectations. We also have speeches from FOMC members Charles Evans and Robert Kaplan and the start of IMF meetings.

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Posted by David Morrison

Category: AM Bulletin


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