Major Events of Last Week
A pivotal event occurred last Friday when Janet Yellen, the Chairperson of the US Federal Reserve, delivered an important speech. She advised that the probabilities of an interest rate hike within the imminent future have undoubtedly increased during recent months because of improving economic growth and a strengthening labor market. However, she still refrained from providing an exact timetable for when a hike will be executed although she did endorsed the viewpoint that such an action could be implemented before the end of 2016. The topmost US indices produced mixed reactions last Friday typified by the Dow Jones Industrial Average plunging 43 points; the S&P500 dropping by 2 points while the NASDAQ climbed by 8 points.
Yellen presented her eagerly-awaited speech at Jackson Hole, Wyoming, USA, towards the end of a 3-day international convention for global central bankers. She emphasized that the US economy was now close to satisfying the Fed’s dual mandate of price stability and maximum employment. However, her statements were not endorsed by earlier US economic data releases which emphatically confirmed that growth was more sluggish than envisaged during the second quarter of 2016. Specifically, the Gross Domestic Product (GDP) for Q2 was revised downwards from 1.2% to 1.1%. On a more positive note, consumer spending, which accounts for about two-thirds of all US economic activity, did accelerate at its fastest pace in nearly 1.5 years.
Yellen also stated that the Fed now predicts further economic growth during the coming months underpinned by a robust and firming labor market. As such, she concluded that another interest rate hike will definitely be on the cards before the end of this year if the economy, employment and inflation continue to advance towards the Fed’s designated targets. Despite all these encouraging signs, she still endorsed the policy that all rate increases should be instigated gradually using a cautious approach.
Yellen did not provide any specifics about the precise details that need to be satisfy in order to convince the Fed that the time was now ripe to implement further monetary tightening policies. Investors were undoubtedly disturbed by this lack of clarification as they have been struggling for many months attempting to gain a handle on the Fed’s forward guidance advice. Instead, she opted to keep her options open about when precisely she will hit the button. The Fed increased its benchmark interest rates last December for the first time in practically a decade but has proceeded cautiously since then amid geopolitical uncertainties, disappointing US inflationary data and high stock market volatility.
What to Expect This Week
The USA will commence the week by presenting its ‘Personal Income and Outlays’ result (PIO) on Monday which should hover about its 0.2% mark. As the US Federal Reserve uses the PIO as one of its primary factors when assessing inflationary trends, investors will track this indicator carefully.
On Tuesday, the Eurozone will declare a key ‘Economic Sentiment Index’ which needs to surpass its previous print of 104.6 in order to provide confidence that the current monetary policies of the European Central Bank are beginning to bear fruit. Later, Japan will deliver its latest ‘Industrial Production’ data which is expected to drop below 1.8%.
Canada is scheduled to disclose its monthly ‘Gross Domestic Product’ (GDP) on Wednesday. Economists are hoping for a rebound from July’s disappointing -0.6% result. Australia will then reveal its ‘Retail Sales’ for this month. A value greater than 0.1% is required in order to confirm that consumer confidence is starting to gain traction. Japan will complete the session by posting its ‘Purchasing Managers Index’ (PMI) for its vitally important manufacturing section. Analysts are hoping that this parameter can register growth by surpassing its critical 50.0 mark.
On Thursday, the Eurozone will publish a spate of major inflationary indicators. The French PMI should contract once again by falling beneath 48.0. In contrast, the German PMI should extend recent gains by beating its prior reading of 53.8. The USA will next issue its ‘Jobless Claims’ for the previous week, ending 28th August, which should once again verify that the number of Americans filing first claims for unemployment benefits remained within the longstanding range of 240k to 290k. Later, the US Institute of Supply Management will release its important Manufacturing index should verify that this major trading sector is continuing to emerge out of recession by registering a value of 53.0+.
Great Britain will launch Friday by divulging its PMI for its construction sector. A recovery from July’s dismal 45.9 is definitely needed in order to validate that the British economy is successfully weathering the recent unexpected Brexit vote. The pivotal event of the month will then occur when the USA posts its ‘Labor Report’ for August. Will American employers be able to continue their recent trend of impressive job creation by once again creating 200+ new posts last month? At the same time, the USA will announce its latest ‘International Trade’ figure which should reside about its -$45 billion handle.