Last Wednesday, the minutes from the Federal Reserve’s meeting in July were released. It is clear the bank is keen to continue with their hiking cycle but there were some aspects of the update that were a little on the dovish side. The central bank predicts that unemployment will increase in the second half of the year. Some policymakers feel it will be appropriate to carry out smaller rate hikes at some stage. The fact that certain Fed members have already flagged up the risks of hiking rates too quickly indicates they might be looking to thread carefully. The US dollar saw modest gains because of the Fed minutes as some traders took the view the next rate move could be a lift of 50-basis points, instead of a 75-basis points hike. The greenback was driven higher as Fed member, Mary Daly, declared the war on inflation is not over, and that a 0.5% rise or 0.75% hike are both possibilities. Daly’s commentary removed some of the dovish sentiment from the Fed minutes.
Stocks markets rallied in the first half of last week as the DAX hit a two-month high, and the S&P 500 hit its highest mark since late April. Dealers trimmed their long positions in advance of the Fed minutes, and even though indices retreated from their multi-month peaks, there was not a major sell off at the same time, which is interesting considering the hawkish update from Daly.
Sterling saw a jump in volatility as the UK CPI rate hit 10.1%, a new 40-year high, the reading topped the 9.8% forecast. Broadly speaking, the pound gained ground as dealers reacted to the inflation numbers, but the positive run did not last long as sterling handed back much of those gains on Thursday as the realisation set in that rising costs is likely to chip away at demand.
Looking ahead to the coming week, the Jackson Hole Symposium will be held on Thursday to Saturday. It will be the most closely watched event of the week. Traders will be wondering whether the Fed will signal the beginning of smaller rates hikes or not. In the last few weeks, we have seen some mixed data from the US. On one hand, the unemployment rate fell to 3.5%, a two-year low. The Philly Fed manufacturing report swung from to 6.2, its highest mark in four months. On the other hand, CPI cooled to 8.5% and the PPI rate fell to 9.8%. The updates could be a sign that inflationary pressure is easing. There are arguments to be made for both for courses of action with respect to hiking rates, and that will be on traders’ minds. The preliminary reading of US GDP for the second quarter will be announced on Thursday. The advance report showed negative growth of 0.9% and keep in mind the economy shrank by 1.6% in the first three months – two consecutive quarters of negative growth is the definition of technical recession.
On Tuesday, the flash manufacturing and services PMI updates for the eurozone, the UK and the US will be posted. Economic activity is in decline across the board, but some sectors have been harder hit than others. The eurozone manufacturing report dropped to 49.8, its lowest reading in over two years. Keep in mind, a reading below 50.0 denotes a contraction. The services sector in the euro area fell to 51.2, its slowest growth rate in 15-months. Major eurozone economies like Germany and Italy are heavily dependant on Russian gas, and there are fears about energy shortages in the months ahead. There are concerns hanging over the US services industry as the last reading was 47.3 – a 25-month low. Services account for roughly 70% of US GDP, so when it’s the biggest industry is contracting, that does not bode well for the country.