Fed to keep the $85 billion monthly monetary stimulus active whilst USA GDP rises by 1.7%
As we mentioned in our Mind The Gap section and yesterday's Between The Lines section, all eyes were on the Fed Chairman Ben Bernanke as he conducted his FOMC statement. Did he disappoint? Well if you were looking for fireworks, or a diversion from the path he has set and resolutely stuck to, then yes. However, if you were expecting consistency then he served up exactly what the markets expected; no deviation from the previous script.
We could snip many parts of the FOMC statement to illustrate Bernanke and the committee's commitment to their current course, but we'll highlight this one paragraph as key, as it confirms the "no change" from the current set course agenda;
"To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
USA GDP in surprise rise to 1.7%
Although not ranking as a high impact new event many analysts' attention centered on the GDP figures pre the FOMC statement. Despite being embargoed and market sensitive many commentators suspected that should FOMC suspect the number coming in below expectations, and some economists were predicting a print as low as 0.5%, then a radical change to the current Fed policy may emerge. Those suspicions disappeared as the print came in far better than most analysts' predictions.
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"Real gross domestic product; the output of goods and services produced by labor and property located in the United States, increased at an annual rate of 1.7 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.1 percent (revised). The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency."
It wasn't all positive news with regards to the USA economy, mortgage applications have fallen by 4% to a two year low.
Despite the rising house prices in the USA, mortgage applications in the week ended July 26 fell nearly 4% to the lowest level in two years, according to data released Wednesday. The Mortgage Bankers Association said applications fell as purchase applications fell 3% and refinance applications dropped 4%. The drop comes as, per MBA numbers, the average interest rate for 30-year fixed-rate mortgages was unchanged at 4.58%.
Employment numbers in USA rise by 200K
As if to re-enforce the FOMC determination to aim for a 6.5% unemployment rate, the private payroll firm ADP published its latest jobs data and the news was considered good. Private sector employment increased by 200,000 jobs from June to July, according to the July ADP National Employment Report. The report is derived from ADP’s actual payroll data and measures the change in total non-farm private employment each month on a seasonally-adjusted basis. June’s job gain was revised upward from 188,000 to 198,000.
Market overview
So with all the good news emanating from the USA the anticipation was for the DJIA, SPX and NASDAQ to rise accordingly. However, the markets did not follow the script; the DJIA closed down 0.14%, the SPX down 0.01% and the NASDAQ closed up 0.27%. On reflection the reaction to all the news circulating, particularly the FOMC statement, was neutral. European bourses had mixed fortunes closing mainly positive. The UK FTSE closed up 0.76%, CAC up 0.15%, DAX up 0.06%. IBEX closed down 0.27%, MIB down 0.37% and the PSI down 1.16%.
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WTI Oil broke its weekly losing streak by closing up 1.89% on ICE at $105.89 per barrel. NYMEX natural closed up 0.12% at $3.45. COMEX gold closed up 0.94% at $1325.6 per ounce.
Focus on FX
The dollar declined for the first time in three days as the Federal Reserve maintained its $85 billion monthly bond purchases, stating that persistently low inflation could hamper the U.S. economic expansion.
The Australian dollar fell to its weakest level in close on three years due to speculation that the country’s central bank will soon cut interest rates. The Aussie declined 0.9 percent to 89.82 U.S. cents after dropping to 89.36 cents, the weakest level witnessed since September 2010.
The Bloomberg U.S. Dollar Index fell 0.1 percent to 1,025.74 midway in the New York session. It decreased by 1.4 percent in July. The U.S. currency dropped 0.3 percent at $1.3302 per euro. The greenback weakened 0.2 percent to 97.88 per yen after reaching 98.59.
The euro has gained 2.2 percent versus the greenback in July, the yen has appreciated 1.3 percent. New Zealand’s dollar has led all the major currencies with a 3.2 percent increase.
Sterling declined by 0.5 percent to 87.45 pence per euro late in the London session after touching 87.61, the weakest level seen since March 12th posting a 2.3 percent drop this month, the most since January. Sterling slid 0.4 percent to $1.5181. The four-day losing streak is now the longest witnessed since June 28th.
High impact news events and fundamental policy decisions that could affect sentiment on August 1st
PMIs, published courtesy of Markit Economics, take centre stage today as the high impact news events. Combined with this the UK BoE's monetary policy committee will issue its latest edict on its asset purchase facility and the decision on base rates; neither of which is expected to alter from the current situation.
Focus also turns to Europe in terms of the interest rate policy decision, to be accompanied by Europe's version of an FOMC statement, as Mario Draghi holds centre stage delivering the ECB press conference.
The USA manufacturing PMI will be of interest, particularly given the optimistic GDP print of 1.7% on Wednesday. One news item and publication that doesn't resister as high impact is the 'Challenger job cuts' revealing 'mass' layoffs by the firms polled. It can be considered a canary in the coal mine in relation to future job prospects, naturally the smaller the amount of mass layoffs the better the landscape for American jobs moving forward.
