By Ben Robson
There were some impressive growth figures out of the US last week, with both ISM manufacturing PMI and ISM services PMI exceeding expectations and Non-Farm Payrolls also posting a higher than expected number (although the July payrolls figure was revised downwards). These excellent growth numbers reinforce what we already know about US GDP insofar as it beat many peoples’ expectations at 4.2% on the 2nd quarter reading of 29 August. From a growth perspective, it suggests that a rate hike is in store when the Fed meets on 25-26th September. To complete the picture and increase the likelihood of a rate hike, evidence of inflation is also warranted, and we got this too in Friday’s payrolls report, with US hourly earnings increasing 0.4% in August for an annual rate of 2.9%. Watch out for more inflationary clues when the US Consumer Price Index is released on Thursday expected at 2.8% (Y.o.Y) for August and on Friday when US Retail Sales is expected at 0.4% (M.o.M) for August. I believe that all the recent data and the elevated level of US stocks means that a US rate hike is very likely.
On the subject of interest rate hikes, both the UK and the Eurozone will announce their interest rate decisions this week on Thursday. Falling house prices, and Brexit disarray will probably keep the UK on hold at 0.75%. The Eurozone interest rate is expected to stay on hold at zero percent.
The picture in Australia, I think may be slightly rosier than Reserve Bank of Australia governor Philip Lowe paints. Only a couple of weeks ago he was talking down the Australian dollar and stating that the CBA needs domestic growth, employment creation and inflation before it might consider raising interest rates. Well, he got a huge GDP boost last Wednesday with Australian 2nd quarter GDP coming in at 3.4% (Y.o.Y) versus analysts’ expectations of 2.8%. This week, Australian Employment is released early Thursday morning. It is expected to be positive at +18,400. If Australian employment beats expectations, then I see this as positive for the Australian dollar.
Canada posted a shocking employment report last Friday, with 51,600 jobs lost in August and the unemployment rate rising to 6 percent. There are no major announcements out of Canada this week, although NAFTA discussions are ongoing and without doubt there will be some strong rhetoric from the US and Canada about a fair deal for both sides. And given that the US wants change, then a deal is likely to be fairer for the US than Canada with a risk of trade tariffs if there is no deal. I expect the Canadian dollar to remain under a little bit of pressure.
Politically, however, the focus is more likely to be on new trade tariffs that the US is set to impose on China. In recent weeks, trade tensions have put pressure on stock markets on both sides of the world. As Chinese and many emerging market stock markets have faltered, so too have their currencies weakened. Last week we saw a few jitters in the Nasdaq, mostly caused by selling pressure in some technology stocks. Whilst US stock markets are riding high on a general wave of consumer confidence business sentiment, and strong economic data, people should be reminded that stock market contagion can spread and that there are many US stocks that trade on very high valuations despite being unprofitable. At some point US stocks will trade lower and overall volatility will increase. As volatility is relatively inexpensive at the moment, then it may be prudent for more risk-averse traders to protect their downside risk by investing in option puts or by buying the VIX. In recent years, when markets have fallen rapidly, then safe haven trades have typically been taken in Gold, Yen and Swiss Francs. I expect market volatility to rise and October has historically seen some very volatile trading behavior. Stay alert!
Watch out for me on video this Tuesday and Friday. Good luck and good trading.
This Article was prepared and accomplished by Mr. Ben Robson in his personal capacity. The opinions expressed in this article are Ben’s own and do not reflect the view of Equiti.
