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Weekly Wrap –Yield Curve Inversions, Trade, and Brexit Drove the Majors

Bob Mason

The Stats

It was a busy week on the economic calendar in the week ending 30th August.

A total of 57 stats were monitored throughout the week, compared with 35 in the week prior.

Of the 57 stats, 18 came in ahead forecasts, with 30 economic indicators coming up short of forecast. 9 stats were in line with forecasts in the week.

Looking at the numbers, 19 of the stats reflected an upward trend from previous figures. Of the remaining 38, 28 stats reflected a deterioration from previous.

While the economic data was skewed to the negative, the Dollar was on a roll through the week. Market reaction to a marked shift in trade rhetoric delivered the upside.

Geopolitical risk and economic data were in focus throughout the week.

The U.S Dollar Index (“DXY”) rallied by 1.25% in the week to 98.807. The rebound in the week left the Dollar with a 0.3% gain for the month of August.

Out of the U.S

It was a relatively busy week.

July durable goods orders kicked off the week on Monday. While the numbers were mixed, a larger than expected jump in durable goods orders offset an unexpected fall in core orders.

On the day, the Dollar found strength, however, as the markets recovered from the previous Friday’s twitter tantrum.

In spite of the extended trade war, consumer confidence held relatively steady on Tuesday but was not enough to support the Dollar on the day.

2nd estimate GDP numbers on Thursday came in as forecast, with the U.S economy growing by 2% in the 2nd quarter. The rest of the stats on the day had a muted impact on the Dollar.

Market focus on the U.S – China trade war was the key driver throughout the week. For Trump, the good news was a minor narrowing in the U.S goods trade deficit in July.

Moving on to Friday, the FED’s preferred Core PCE Price Index figures continued to support a September rate cut. The annual rate of inflation held steady at 1.6%.

On the positive, personal spending rose by 0.6% against a forecast of 0.5%, with the Chicago manufacturing sector returning to growth in August. The Chicago PMI rose from 44.4 to 50.4.

In the equity markets, the U.S majors closed out the week in positive territory for the 1st time in 5-weeks. The Dow led the way, rising by 3.02%, with the S&P500 and NASDAQ gaining 2.79% and 2.72% respectively.

While the major indices found support in the week, a Wednesday sell-off limited the upside. The 10-year – 2-year U.S Treasury yield curve did the damage, inverting to levels not seen since 2007.

The week’s gains in the U.S equity markets weren’t enough to reverse losses for the month of August, however. The NASDAQ slid by 2.6%, with the S&P500 and Dow falling by 1.81% and by 1.72% respectively.

Out of the UK

It was a particularly quiet week on the economic data front. Economic data was limited to housing sector figures that had a muted impact on the Pound.

Brexit remained the key driver in a week where the British PM formally obtained approval to suspend Parliament on 10th September.

The news caused a stir and ultimately left the Pound back at $1.21 levels.

The Pound ended the week down by 0.90% to $1.2156.

For the FTSE100, it was the 1st week in the red in 5-weeks, with support coming from a shift in sentiment towards trade and a softer Pound. The index rose by 1.56% for the week to cut the August loss to 5%.

Out of the Eurozone

It was another particularly busy week on the economic data front.

Economic data out of Germany was in focus through the 1st half of the week.

On Monday, Business confidence figures for August painted a darker picture of the German economy. The ifo Business Climate Index fell to its lowest level since 2012 in August. Pessimism in Germany’s all-important manufacturing sector sat at levels not seen since 2009.

On Tuesday, 2nd estimate GDP numbers out of Germany affirmed a contraction in the economy in the 2nd quarter.

On Wednesday, the GfK Consumer Climate indicator held steady in August. While the headline figure was positive, the devil was in the details…

The economic expectations indicator fell to its lowest level since 2013, with the threat of tariffs on German goods and Brexit adding to the negative sentiment towards the U.S – China trade war.

Through the 2nd half of the week, economic data out of France provided some support. Consumer spending was on the rise in July, with the 2nd estimate GDP for the 2nd quarter revised upwards from 0.2% to 0.3%.

With Germany’s unemployment rate holding steady, the ECB’s expectation of support from consumer spending seemed sound.

German retail sales figures on Friday, however, painted a different picture, with sales sliding by 2.1 in July.

On the inflation front, the Eurozone’s core annual rate of inflation held steady at 0.9% in August, supporting a September move by the ECB.

The EUR ended the week down by 1.45% to $1.0982 against the Dollar. The weekly loss left the EUR down by 0.85% for the month of August.

For the European major indexes, it was a 2nd consecutive week in the green. The CAC40 and DAX30 rose by 2.88% and 2.82% respectively.

The gains came in spite of particularly weak stats out of Germany, with positive chatter on trade delivering.

For the EUR, the negative stats, Brexit and a resurgent Dollar did the damage…

Elsewhere

It was another bearish week for the Aussie and Kiwi Dollars. The Aussie Dollar fell by 0.34% to $0.6733, with the Kiwi Dollar down by 1.20% to $0.6328.

The losses for the week left the Aussie down by 1.64% for the month of August, while the Kiwi tumbled by 3.52%.

For the Aussie Dollar

It was a relatively busy week, with the housing sector in focus. On Wednesday construction work down slumped by 3.8% for 2nd quarter, following on from a 1.9% fall in the 1st.

New home sales and building approvals also saw deep red according to figures released on Friday. New home sales slid by 7.2%, following a 12.4% fall in the previous month. Building approvals slumped by 9.7% in July, following a 1.2% fall in June.

On the business investment front, private new CAPEX fell by 0.5% in the 2nd quarter, following on from a 1.7% fall in the 1st.

Private sector credit, however, rose by 0.2% in July, following a 0.1% increase in June, supported by the recent RBA rate cuts.

While there was a material shift in sentiment towards the U.S – China trade war, the 10-year – 2-year yield curve inversion and the threat of a recession pressured the Aussie in the week.

For the Kiwi Dollar

Economic data included July trade data on Monday and business confidence figures on Thursday.

Weighing on the Kiwi from the get-go, was a widening in the trade deficit from NZ$4,980m to NZ$5,460m in July.

Adding to the downside for the Kiwi was a marked deterioration in business confidence in August. The ANZ Business Confidence Index fell from -44.3 to -52.3, its lowest level since 2008.

The lack of confidence and widening in the trade deficit suggests that the RBNZ may need to do more to bolster the economy.

Hopes of a resolution to the U.S- China trade war failed to provide support in the week, where yield curve inversions sounded the alarm bells once more.

For the Loonie

It was a relatively busy week on the economic data front.

GDP numbers on Friday were the key stats of the week, delivering some much-needed support to the Loonie.

Quarter-on-quarter, the economy grew by 0.9%, up from 0.1% in the 1st, with the annualized 2nd quarter GDP coming in at 3.7%, up from 0.5% in the 1st.

July’s RMPI was also on the up, rising by -6.1 to 1.2%.

In spite of the positively skewed numbers, the Loonie failed to make up lost ground on Friday, suggesting that the BoC will deliver a dovish policy outlook on Wednesday.

The Loonie ended the week down by 0.21% to C$1.3311 against the Greenback.

For the Japanese Yen

The markets needed to wait until Friday for stats out of Japan, which were once more skewed to the negative.

In July, retail sales tumbled by 2%, with the jobs/applications ratio narrowing from 1.61 to 1.59.

Tokyo’s core annual rate of inflation softened from 0.9% to 0.7%, adding further pressure on the Yen.

On the positive side, industrial production rose by 1.3%, partially reversing a 3.3% slide in June. While forecasts are for production to rise further in August, production is expected to return to the red in September.

Negatively skewed stats and concerns over the global economic outlook overshadowed the improved sentiment towards trade in the week, leaving the Yen in the red.

For the week, the Japanese Yen fell by 0.84% to ¥106.28.

Out of China

There were no material stats for the markets to consider until after the market close on Friday.

August private sector PMI numbers are due out later this morning. While we can expect some sensitivity to the numbers, come Monday, a planned resumption of trade talks with the U.S would limit any damage for weak numbers.

The Trade War

Following the previous week’s escalation in the trade war, rhetoric from both Beijing and Washington provided support to the global equity markets.

Beijing announced a desire to calmly resolve the extended trade war with the U.S, with Trump affirming that face to face talks will take place in September.

While the change in tack provided support, China will likely be looking for the U.S to make the 1st move. Punitive tariffs on Chinese goods may need to be removed and then there’s Huawei to consider… Will the U.S President be willing to take the first step?

This article was originally posted on FX Empire

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