Weekly Market Wrap: Fed holds rates. BoJ’s signals policy change

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The Fed decision and the BoJ meetings were the main events as the markets opened this week. Monday saw the usual lack of action with markets staying range bound on the lack of any fundamentals to fall back upon.

The soft fundamentals were however from China, which saw home prices rise 9.20% in August, which was the highest increase this year and advancing the gains of 7.20% from July. Higher housing prices have become the main theme amid a monetary policy easing cycle across the board. In the UK, Rightmove’s House price index showed moderation, with prices rising 0.70% in September after losing 1.20% in August. Rightmove Director Miles Shipside commented on the report saying, “The rising tide of prices is marooning more and more first-time buyers, out-stripping their ability to meet stricter lending criteria and afford the required deposits and monthly repayments.”

In the euro area, current account surplus data from the ECB showed a decline in July compared to a month ago. On a seasonally and a working day adjusted basis, Euro area current account surplus fell to 21.0 billion euro in July from June’s 29.5 billion.

On the commodity front, oil prices were attempting to push higher after a Reuters report showed that Venezuelan President Nicolas Maduro sounded positive that an OPEC production freeze could be possible.

Coming out of the meeting with Iran’s President Rouhani, Maduro said “We had a long bilateral meeting with Rouhani. We’re close to a deal between OPEC producer countries and non-OPEC.”

The economic calendar got a bit busy on Tuesday with the Asian session marked by the release of the RBA’s meeting minutes. It was the last policy meeting chaired by the now ex-RBA Governor Glenn Stevens. The minutes showed that the central bank was hinting at a period of stability. The RBA kept interest rates unchanged at 1.50% in the September policy meeting.

In Germany, producer price index data showed a decline in August. PPI fell 0.10% in August on a month over month basis, while falling 1.60% on a year over year basis. Still, the pace of declines was better than the previous month which saw a 2.0% year on year decline. Dragging PPI lower was energy prices which fell 5.50%.

In the US, building permits and housing starts fell more than expected in August. Official data showed that building permits fell at a rate of 0.40% in August from the previous month while housing starts declined 5.80% from the previous month. The US dollar continued to remain choppy with investors tuned into the upcoming BoJ and Fed meetings.

Wednesday was no doubt the busiest day this week as the BoJ kicked off the day early. The central bank left interest rate unchanged at -0.10% while leaving its QQE purchases unchanged to the tune of 80 trillion yen. The central bank, as promised came out with a new policy framework, targeting the yield curve in hopes to push long-term interest rates higher, while keeping short-term interest rates near zero. The 10-year bond yields in Japan briefly spiked on the news, rising above 0 percent but soon settled back as yields moved into the negative.

In Europe, UK’s budget deficit data narrowed in August, falling by 0.9 billion GBP. Despite the narrowing in the budget deficit, it was still larger than the 10.2 billion that was expected. The data also showed that UK’s public sector net debt was at 83.60% to the GDP, which was still considered high.

Later in the day, as the US markets opened, all eyes were on the FOMC meeting. The Federal Reserve left the fed funds rate unchanged at 0.50%, with a vote of 7 – 3. The Fed’s statement was, however, hawkish, noting that Fed members would prefer to see at least one more rate hike by the end of this year. The dollar fell sharply on the news with the hawkish statement failing to evoke much response. Gold prices which surged earlier in the day after the brief BoJ led declines rose over 1.50% on the day.

Later in the day, the RBNZ’s monetary policy meeting saw the OCR being unchanged at 2.0%. But the RBNZ said that further easing was necessary but acknowledged that economic data was improving and in line with the central bank’s forecasts. The kiwi edged higher on the news maintaining the gains from the previous Fed’s decision.

On Thursday, Norges bank’s meeting was the main event. The central bank held interest rates steady and signaled that further easing was unlikely until the end of the year. The decision came after Norges bank last lowered interest rates by 25bps to 0.50% in March 2016.

“Our current assessment of the outlook suggests that the key policy rate will most likely remain at today’s level in the period ahead,” Governor Olsen from Norges Bank said in the statement.

Data from the US showed that existing home sales fell for the second straight month in August. Sales of previously owned homes fell 0.90% from the month before to a seasonally adjusted rate of 5.33 million. Data from the National Association of Realtors showed on Thursday. It was slightly below forecasts of 5.46 million. Lawrence Yun, chief economist at NAR, said that the drop in existing home sales could be due to declining supply of homes in the market. “[It] is somewhat surprising given the broader economy continues to create jobs,” Yun said. “We go back to the same bottom line: lack of inventory choices, prices rising way too fast, hurting affordability,” he said, with no clear reasoning for the cause of the decline in existing home sales.

Oil prices continued their upward trend, but momentum was seen weakening. Most of the gains this week came with bullish fundamentals over the week. The weekly EIA inventory report showed a third consecutive week of drawdown. Oil prices also gained ahead of next week’s OPEC informal meeting in Algiers.

Gold prices remained well bid this week gaining from the BoJ and FOMC policy decisions. The price of the precious metal hit a 10-day high by Thursday’s close. However, the day closed with a doji which could indicate a near-term pullback in the precious metal.

Friday’s session opened with Japan’s flash manufacturing PMI signaling a return to expansion. Data showed the index rising to 50.3 which beat forecasts of 49.3 and higher than August’s 49.5. In the Eurozone, the focus was on flash manufacturing and services PMI’s, most of which came out better than expected. The Eurozone manufacturing PMI was seen rising to 52.6 in September beating forecasts of 51.5 but slightly below Augusts’ print of 51.7. Services PMI was soft, as the index fell to 52.1, below forecasts of 52.8 and down from Augusts’ reading of 52.8.

In the US session, Canadian data showed that retail sales in July fell 0.10% on the month, missing forecasts of a 0.10% increase. In volume terms, retail sales rose 0.30%. Simultaneously, inflation figures from Canada showed that inflation decelerated in August on lower food and recreation prices. The headline consumer price index advanced 1.10% from a year ago but slowed the 1.30% increase recorded in July. Economists expected to see inflation rise by 1.40%. The core inflation rate rose 1.80% in August, lower than July’s 2.10% increase.

Summary of Economic events this week

  • UK Rightmove HPI m/m 0.70% vs. -1.20% previously
  • China new home prices 9.20% vs. 7.20% previously
  • Eurozone current account 21.0bn vs. 27.2bn
  • German Bundesbank releases monthly report
  • NAHB housing market index 65 vs. 60
  • Australia CB leading index m/m 0.40% vs. 0.30% previously
  • RBA monetary policy minutes released
  • Australia HPI q/q 2.0% vs. 3.10%
  • Swiss trade balance 3.02bn vs. 3.27bn
  • Germany PPI m/m -0.10% vs. 0.10%
  • US building permits 1.139mn vs. 1.164mn
  • US housing starts 1.142mn vs. 1.119mn
  • BoC Gov. Poloz speech
  • New Zealand visitor arrivals m/m -1.90% vs. 2.80% previously
  • Japan trade balance 0.41tn vs. 0.50tn
  • Australia MI leading index m/m 0.0% vs. 0.10% previously
  • New Zealand credit card spending y/y 1.90% vs. 5.60% previously
  • BoJ policy rate -0.10% vs. -0.20%
  • UK Public sector net borrowing 10.1bn vs. 10.5bn
  • Canada wholesale sales m/m 0.30% vs. 0.30%
  • SNB releases quarterly bulletin
  • Crude oil inventories -6.2mn vs. 3.2mn
  • FOMC Fed funds rate 0.50% vs. 0.50%
  • RBNZ OCR 2.0% vs. 2.0%
  • RBA Gov. Lowe speech
  • ECB LTRO 45.3bn vs. 399.3bn previously
  • UK CBI industrial order expectations -5 vs. -5
  • Norges Bank interest rate 0.50% vs. 0.50%
  • US weekly unemployment claims 252k vs. 261k
  • US HPI m/m 0.50% vs. 0.30%
  • MPC Member Cunliffe speech
  • Eurozone consumer confidence -8 vs. -8
  • The US existing home sales 5.33mn vs. 5.45mn
  • CB leading index m/m -0.20% vs. 0.0%
  • Japan flash manufacturing PMI 50.3 vs. 49.3
  • Japan all industries activity m/m 0.30% vs. 0.20%
  • French flash manufacturing PMI 49.5 vs. 48.4; flash services PMI 54.1 vs. 52.0
  • German flash manufacturing PMI 54.3 vs. 53.2; flash services PMI 50.6 vs. 52.2
  • Eurozone flash manufacturing PMI 52.6 vs. 51.5; flash services PMI 51.2 vs. 52.8
  • Canada Core CPI m/m 0.00% vs. 0.20%; CPI m/m -0.20% vs. 0.10%
  • Canada core retail sales m/m -0.10% vs. 0.50%; retail sales m/m -0.10% vs. 0.20%

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