I. Market focus
A relative calm prevailed in the foreign exchange markets at the beginning of the final session of the week. The major currency pairs, except for the yen pairs, moved within narrow ranges. The Japanese currency continued to suffer losses due to a decrease in demand for relatively safe assets on the back of the improvement in risk appetite, which resulted in a rally in the global stock markets. The U.S. stock gauges the Dow and S&P 500 closed at records on Thursday. The indices demonstrate growth, despite an escalating trade war between the U.S. and China and a fragile situation in the emerging markets. The indicators are supported by investor confidence in the U.S, economy, which, according to the latest macroeconomic data, is now in very good shape.
The outcomes of the informal meeting of the leaders of the 27 EU countries, which ended in the Austrian city of Salzburg yesterday and was devoted to a discussion of the Brexit-related issues, provided no new information to the markets. The comments of the meeting participants were ambiguous. Thus, summit host Austrian Chancellor Sebastian Kurz said the Brexit negotiations are supposed to be completed in October. Meanwhile, the President of the European Council Donald Tusk said that an extra Brexit summit might be held on the weekend of November 17-18.
Friday’s session will be busy with macroeconomic reports, the main of which will be the preliminary data on European PMI indices (07: 15-08: 00 GMT), as well as the Canadian statistics on inflation and retail sales (12:30 GMT).
II. The market highlights are:
The Labor Department reported on Thursday the number of applications for unemployment benefits unexpectedly fell last week, pointing to a tight labor market. According to the report, the initial claims for unemployment benefits decreased 3,000 to 201,000 for the week ended September 15. That was the lowest level since December 1969. Economists had expected 210,000 new claims last week. Claims for the prior week were unrevised at 204,000. Meanwhile, the four-week moving average of claims dropped 2,250 last week, to 205,750, also the lowest level since December 1969.
The Conference Board announced on Thursday its Leading Economic Index (LEI) for the U.S. rose 0.4 percent in August to 111.2 (2016 = 100), following a revised 0.7 percent increase in July (originally a 0.6 percent m-o-m gain). Economists had forecast an increase of 0.5 percent. Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board, said “The leading indicators are consistent with a solid growth scenario in the second half of 2018 and at this stage of a maturing business cycle in the U.S., it doesn’t get much better than this. The U.S. LEI’s growth trend has moderated since the start of the year. Industrial companies that are more sensitive to the business cycle should be on the lookout for a possible moderation in economic growth in 2019.” The report also revealed the Conference Board Coincident Economic Index (CEI) for the U.S. went up 0.2 percent to 104.3 in August, while its Lagging Economic Index (LAG) for the U.S. increased 0.2 percent to 105.4.
The National Association of Realtors (NAR) said on Thursday that the U.S. existing home sales were unchanged m-o-m at a seasonally adjusted rate of 5.34 million in August after four straight months of decline. Economists had forecast home resales increasing to a 5.35 million-unit pace last month. According to the report, single-family home sales stood at a seasonally adjusted annual rate of 4.75 million in August, unchanged from July, while existing condominium and co-op sales were at a seasonally adjusted annual rate of 590,000 units in August, also unchanged from last month. Compared to August 2017, sales were down 1.5 percent. The NAR’s chief economist Lawrence Yun noted the decline in existing home sales appeared to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.”
The Ministry of Internal Affairs and Communications reported on Thursday that Japan’s consumer prices rose 1.3 percent y-o-y in August after a 0.9 percent y-o-y gain in the prior month. That was the highest rate since February and exceeded economists’ forecast for a 1.1 percent y-o-y increase. Individually, the fuel, light and water charges (+3.4 percent y-o-y) rose the most last month, followed by prices for food (+2.1 percent y-o-y), transportation and communication (+2.0 percent y-o-y), culture and recreation (+1.6 percent y-o-y) and medical care (+1.1 percent y-o-y). On the contrary, prices for furniture and household utensils (-1.1 percent y-o-y) fell the most. Meanwhile, the nationwide core consumer price gauge, which excludes volatile fresh food prices, rose 0.9 percent y-o-y in August, following a 0.8 percent y-o-y advance in July. That was the highest reading since March and in-line with economists’ forecast of +0.9 percent y-o-y.
The preliminary data from IHS Markit revealed on Friday that growth of Japan’s manufacturing sector accelerated in September. The Nikkei Flash Manufacturing Purchasing Managers' Index (PMI) rose to 52.9 this month from 52.5 in July. That marked the fastest pace since June and exceeded economists’ forecast of 53.1. A reading above 50 signals an expansion in activity, while a reading below this level signals a contraction. According to the report, output, new orders and employment continued to expand. Meanwhile, business confidence dropped to 22-month, weighed down by the uncertainties over the impact of international trade tensions on the Japanese economy. Commenting on the Japanese Manufacturing PMI survey data, Joe Hayes, Economist at IHS Markit, which compiles the survey, said: “The manufacturing sector business cycle continued along its upward path in September, according to the flash survey, continuing a trend which PMI data indicates first began just over two years ago. Indeed, business conditions remained robust despite a number of natural disasters over the past month.”
III. Market Situation
The currency pair EUR/USD consolidated near the opening level, as investors took a breather after the previous day’s rally in the pair, which was mainly attributable to a drop in the U.S. dollar index. In addition, market participants were preparing to the releases In August, the manufacturing PMI missed economists’ forecast and dropped slightly to 54.6 percent, while the services PMI rose to 54.4. Since the service sector represents a large share of the Eurozone economy, the last month’s gain could be a positive signal for strengthening overall economic growth if the trend continues in coming months. The subdued GDP growth in the Eurozone so far this year has supported the ECB’s continued accommodative monetary policy stance. The European regulator has signaled that it must first wrap up its asset-purchase program at the end of this year before hiking interest rates. The ECB policymakers are also likely to watching today’s PMI releases closely for signs of a possible acceleration in the region’s economic growth. According to economists’ forecasts, the manufacturing PMI fell to 54.4 in September from 54.6 in August, while the services PMI remained at 54.4. Resistance level - $1.1851 (high of June 14). Support level - $1.1649 (low of September 19).
The currency pair GBP/USD stabilized near the opening level, following a significant growth the day before, which was underpinned by a decline in the U.S. dollar index, better-than-expected UK retail sales statistics for August and optimism about Brexit talks. Today, market participants will pay attention to the release of the UK’s data on public sector net borrowing in August, as well as the Bank of England’s (BoE) Quarterly Bulletin. In addition, the focus will be on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - $1.3362 (high of July 9). Support level - $1.3097 (low of September 19).
The currency pair AUD/USD rose slightly, hitting a three-week high, helped by the weakness in the U.S. dollar, improved investor risk appetite, as well as the latest statements of the Chinese prime minister Li Keqiang, who said that China won't devalue the yuan to stimulate exports. China is Australia‘s major trading partner. Today, investors’ focus will be on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Resistance level - AUD0.7313 (high of August 30). Support level - AUD0.7141 (low of September 17).
The currency pair USD/JPY increased noticeably, refreshing its two-month high, despite the release of favorable inflation data in Japan. The pressure on the yen was exerted by a rise in the U.S. Treasury yields and a weaker demand for safe assets amid views that the impact of the U.S.-China trade conflict would be less harmful to global growth than initially expected. With regard to the data, the Ministry of Internal Affairs and Communications reported that Japan’s consumer prices rose 1.3 percent y-o-y in August after a 0.9 percent y-o-y gain in the prior month. That was the highest rate since February and exceeded economists’ forecast for a 1.1 percent y-o-y increase. Meanwhile, the nationwide core consumer price gauge, which excludes volatile fresh food prices, rose 0.9 percent y-o-y in August, following a 0.8 percent y-o-y advance in July. That was the highest reading since March and in-line with economists’ forecast of +0.9 percent y-o-y. Resistance level - Y113.17 (high of July 19). Support level - Y112.04 (low of September 20).
U.S. stock indexes closed solidly higher on Thursday, with the Dow and the S&P 500 finishing at new all-time highs, amid raising hopes the U.S. and China will be able to resolve their trade disputes and avert an all-out trade war. The focus also was on the weekly data on initial jobless claims, the Conference Board's leading economic index (LEI) and the existing home sales for August. The Labor Department reported the initial claims for unemployment benefits decreased 3,000 to 201,000 for the week ended September 15. That was the lowest level since December 1969. Economists had expected 210,000 new claims last week. Meanwhile, the Conference Board announced its LEI for the U.S. rose 0.4 percent in August to 111.2, following a revised 0.7 percent increase in July. Economists had forecast an increase of 0.5 percent. The National Association of Realtors (NAR) said that the U.S. existing home sales were unchanged m-o-m at a seasonally adjusted rate of 5.34 million in August after four straight months of decline. Economists had forecast home resales increasing to a 5.35 million-unit pace last month.
Asian stock indexes closed higher on Friday, following record highs on Wall Street overnight and upbeat economic reports.
European stock indexes are expected to trade higher in the morning trading session.
Yields of US 10-year notes hold at 3.08% (+2 basis points)
Yields of German 10-year bonds hold at 0.47% (0 basis points)
Yields of UK 10-year gilts hold at 1.44% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in November settled at $70.39 (+0.10%). The crude oil prices rose slightly, as market participants awaited the release of the weekly data on the U.S. oil rig count by Baker Hughes later today, as well as Sunday’s meeting of the joint OPEC/non-OPEC ministerial monitoring committee. The focus also remains on a global supply outlook as the U.S. sanctions are expected to target Iran's oil sector from November.
Gold traded at $1,209.10 (+0.14%). Gold prices rose slightly, supported by the weakness in the U.S. currency. However, the further growth in gold prices was limited by a rise in the U.S. Treasury yields. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, fell by 0.03% to 93.90. Since gold prices are tied to the dollar, a weaker dollar makes the precious metal cheaper for holders of foreign currencies.
IV. The most important scheduled events (time GMT 0)
BOE Quarterly Bulletin
Consumer price index
Bank of Canada Consumer Price Index Core
Baker Hughes Oil Rig Count
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