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EURUSD hovers around 1.1800 - AM Briefing
29 Sep 2017
Trump tax reform lifts Wall Street - AM Briefing
28 Sep 2017
What is the Fed trying to tell us? - PM Bulletin
27 Sep 2017
Yellen struggles with inflation - AM Briefing
27 Sep 2017
Can cable’s rally continue? - PM Bulletin
26 Sep 2017
Investors jittery after North Korean threat - AM Briefing
26 Sep 2017
EURUSD slips again - PM bulletin
25 Sep 2017
Merkel scrambles to form coalition - AM Briefing
25 Sep 2017
Caution ahead of weekend - AM Briefing
22 Sep 2017
Fed Meeting Post-Mortem - Video Update
21 Sep 2017
Fed signals another rate hike - AM Briefing
21 Sep 2017
Trading subdued ahead of Fed meeting - Video Update
20 Sep 2017
Fed expected to reduce balance sheet - AM Briefing
20 Sep 2017
FOMC and balance sheet reduction - PM Bulletin
19 Sep 2017
Dow hits fresh record high - AM Briefing
19 Sep 2017
EURUSD continues to trend higher - PM Bulletin
18 Sep 2017
Global indices storm higher - AM Briefing
18 Sep 2017
Investors shrug off NK missile test - AM Briefing
15 Sep 2017
Sterling soars after BoE meeting - Video Update
14 Sep 2017
Bank of England meeting in focus - AM Briefing
14 Sep 2017
Look-ahead to the BoE monetary policy meeting - Video Update
13 Sep 2017
Sterling bounces as inflation picks up - PM Bulletin
12 Sep 2017
Wall Street rally lifts sentiment - AM Briefing
12 Sep 2017
Euro storms higher - AM Briefing
08 Sep 2017
ECB meeting in focus - AM Briefing
07 Sep 2017
EURUSD soars during Draghi’s press conference - Video Update
07 Sep 2017
ECB meeting, a look-ahead to Thursday - Video Update
06 Sep 2017
Wall Street wobbles, but closes off lows - AM Briefing
06 Sep 2017
WTI recovering as clean-up continues - PM bulletin
05 Sep 2017
Investors shrug off North Korean threat - AM Briefing
05 Sep 2017
North Korean nuclear test boosts gold - PM Bulletin
04 Sep 2017
North Korea rattles markets - AM Briefing
04 Sep 2017
High hopes for the latest US jobs release - AM Briefing
01 Sep 2017
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 Wednesday 27 September 2017

Yellen struggles with inflation - AM Briefing

 

 

Early moves

·         Fed Chair indicates more rate hikes

·         “Imprudent” to wait for 2% inflation

European equities and US stock index futures are firmer this morning. This follows on from a speech last night from US Federal Reserve Chair Janet Yellen. There were two main takeaways from Dr Yellen’s speech, which was somewhat abstruse as usual. First, the Fed may have overstated the strength of the labour market and the rate of inflation. This suggested that the central bank should remain accommodative. But secondly she said the central bank shouldn’t wait for inflation to hit 2% before raising rates and that moving gradually could be risky. This is a turnabout from this summer when she emphasised the importance of the Fed’s inflation targeting. But at least she showed some humility by admitting that: “My colleagues and I may have misjudged the strength of the labor (sic) market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation.” But if the Fed wants to see the inflationary effects of their stimulus, they should cast an eye over global equities, bonds and housing.

Overall, her speech was taken as hawkish and this saw the dollar jump, gold slump and stocks slip lower. However, there’s been a turnaround overnight in equities as investors decided that monetary tightening is a vote of confidence in the US economy and rate increases won’t negatively impact growth.

Stock Index Update

·         Mixed close on Wall Street

·         Mixed message from Yellen

Last night the US majors ended mixed with a small loss for the Dow and modest gains for the S&P and NASDAQ. Equities initially sold off following a speech from Janet Yellen. In this the Fed Chair sounded hawkish as she warned that delaying monetary tightening and waiting for inflation to hit 2% could be risky. However, she also said that the Fed may have overstated both the strength of the labour market and the rate of inflation. Nevertheless, the probability of a 25 basis point rate hike before the year-end rose to 78% from 70%.

European stock indices swung between negative and positive territory yesterday, but ultimately ended the session with modest losses. They got some support from euro weakness after the EURUSD slumped below 1.1800 in afternoon trade. But most of the buying interest came as the US majors pushed higher early in the session, making back all of Monday’s losses which followed an escalation in tensions between the US and North Korea.

Commodities Update

·         Crude oil consolidates

·         Gold and silver give back Monday’s gains

At the beginning of the week WTI hit its highest level since mid-April while Brent traded at its best level in more than two years. Monday’s gains were driven by threats from Turkey’s President Tayyip Erdogan to cut off the pipeline which carries oil from Northern Iraq to the rest of the world. This came as Kurds held a referendum on independence. Oil was also lifted by the statement from North Korea’s foreign minister who insisted that one of President Trump’s latest tweets was a declaration of war. Consequently, North Korea said it was prepared to engage with US military aircraft irrespective of whether they were flying in the rogue state’s airspace or not.

There’s been quite a shift in sentiment towards crude since mid-June. Back then both WTI and Brent were in a downtrend. Investors and speculators were betting on shale oil production continuing to increase and so keep a lid on prices. But since then a number of agencies have downgraded their production estimates for US shale. At the same time OPEC and the International Energy Agency have raised their global demand growth estimates. On Monday Brent broke above an area of resistance around $57/57.50. If it can hold above here over the coming week then this should encourage further buying. This should give WTI a boost and help it move up towards its own significant area of resistance around $54.50. Brent has extended its premium to WTI to $6. It was a little over $2 in August.

Gold and silver came under sustained selling pressure yesterday, giving back most of their gains from earlier in the week. Both precious metals shot higher in Monday afternoon’s trading session following a statement from North Korea’s foreign minister. He claimed that a tweet from President Trump was a declaration of war. As a consequence the regime was prepared to shoot down US military aircraft even if not flying over North Korean airspace. Investors calculated that this threat raised the possibility of a shooting match breaking out and rushed into safe haven assets of gold and silver. However, this trade unwound yesterday thanks in a large part to a statement from South Korea who once again said they had no interest in provoking hostilities. The US would want to have South Korea’s blessing before taking on the North. There was more selling later in the day after a speech from Janet Yellen. The Fed Chair indicated that the US central bank should push ahead with monetary tightening irrespective of its 2% inflation target being met.

Forex Update

·         EURUSD breaks below 1.1800

·         Merkel works on coalition

There were some big moves in FX yesterday with the most significant being the EURUSD’s break below 1.1800. The area around here acted as resistance in August just before the currency pair rallied up to break 1.2000. However, the euro failed to consolidate above here on a number of occasions. This failure encouraged some profit-taking and now sellers are seeing just how much lower they can drive the EURUSD pair down. Sunday’s disappointing German election result has provided the perfect excuse to bash the euro. Commentators are concerned that there may have to be a re-run if Angela Merkel is unable to form a workable coalition. Last night’s speech from Janet Yellen has also helped lift the dollar. Dr Yellen said there was a danger in the central bank raising rates too slowly and that they shouldn’t wait until they hit their 2% inflation target.

There’s little doubt that the euro is overdue a correction against the dollar. After all, it was up around 15% from January’s low to its high point for this year hit earlier this month. But it remains to be seen just how much of a correction is due. Technically, the EURUSD broke out of a two year trading range back in July. Much now depends on not just how hawkish/dovish the US Federal Reserve and European Central Bank prove to be, but also on Mrs Merkel’s skills of persuasion.

Upcoming events

Today’s significant events and economic data releases include Euro zone M3 Money Supply and Private Loans. From the US we have Durable Goods, Pending Home Sales and Crude Oil Inventories. FOMC-voting member Lael Brainard is scheduled to speak at 19:00 BST and later on the Reserve Bank of New Zealand will announce its latest rate decision.

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Posted by David Morrison

Category: AM Bulletin


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