Wednesday’s equity markets surge in the USA wasn’t underpinned by what many cynical investors refer to as “hopium” (a mixture of hope and helium), the fact that inflation appears to be rising, as evidenced by the data published on Wednesday, suggests that the U.S. economy will be strong enough to absorb the interest rate rises that the Fed have apparently pencilled in for 2017. The inflation rate came in at 2.5%, the fastest pace rise since 2012. The Fed chair, Janet Yellen, also stated in her semi-annual testimony in front of U.S. lawmakers, that they didn’t need, or have to wait to see Trump’s fiscal stimulus plans, in order to raise rates. Despite the rise in equities and the overall bullish market for the dollar, there was some data released that didn’t necessarily chime with the pervading sense of optimism.
The latest USA mortgage application figures fell by -8%, from a previous reading of +2.5%, analysts are fearing that potential borrowers have reached a tensile breaking point, in terms of their affordability. Industrial production fell by -0.3% in January and average weekly wages fell by -0.6%. The wage data should be off concern, given that inflation is moving ahead of wages by some distance, whilst a fall of industrial production also suggests there’s still some major fault lines developing and cracks being papered over in the USA economy.
Wage issues also caused sterling investors to sell off the UK’s currency, versus its major peers. Wage rises annually in the UK came in at 2.6%, missing expectations to remain static at 2.8%. Again, similar to the USA, in consumer driven economies relying on citizens emptying their pockets and handing over cash to retailers, wages need to stay above inflation. In other UK related economic calendar news, the unemployment level remained at 4.8%, as 37k jobs were added in the final three months of 2016.
The DJIA closed up 0.52% at 20,611. The SPX closed up 0.5% at 2,349. The NASDAQ closed up 0.64% at 5,829, all three indices posting record highs. European equity markets also rallied, STOXX 50 closed up 0.45% at 3,323, FTSE 100 closed at 7,302, DAX at 11,793, CAC at 4,924, the continued political issues in France and Greece are failing to dent overall Eurozone investor sentiment.
GBP/USD fell to $1.238 after the U.S. inflation data numbers, to then recover ground to trade flat for the day at circa $1.2466. EUR/GBP rose to €85.20. Sterling also fell versus the Aussie and Kiwi. The dollar index, measuring the currency versus its six major peers, was close to being flat on the day at 101.21 after reaching a session high of 101.76, the highest level printed since Jan. 12th.
The euro bounced from its one month low versus the dollar, EUR/USD ended the day up circa 0.3% close to $1.0601. The dollar initially rose versus yen, but the momentum faded towards the end of the day, with USD/JPY ending at $114.19
WTI oil fell back towards $52.8 per barrel in New York as a consequence of government data revealing that U.S.A. crude inventories rose to the highest levels (in weekly data) as far back as 1982. Only OPEC, broadcasting that their members are honouring their cuts, has kept the oil price continually strong.
Gold rose by 0.7% to $1,234 an ounce, whilst silver rose to the $18 dollar handle per ounce. The declines in the euro, yen and pound over recent months, combined with gold buying season in Asia, has caused a significant increase in gold buying, as investors in Asia and Europe also invest in alternative safe havens.
Economic calendar events for February 16th, all times quoted are London (GMT) times
13:30, currency effected USD. Housing Starts (MoM) (JAN). The forecast is for housing starts to have slumped (due to seasonal factors) to 0.1%, from the previous reading of 11.3%.
13:30, currency effected USD. Initial Jobless Claims (FEB 11th). Weekly jobless claims are predicted to have risen marginally, to a more representative mean level of 245k, from the previous unexpected drop in the previous week of 234k
13:30. Currency effected USD. Philadelphia Fed Business Outlook (FEB). The Philly Fed data publications are monitored carefully for signs of economic activity and overall levels of sentiment. The prediction is for a fall to 17.5, from the previous reading of 23.6.