The trading community is bracing for the Federal Reserve meeting, which is expected to become yet another round of policy tightening. The standard step forward by 0.25 bp. will be made almost certainly, and therefore the main interest for us will be the the economic projections for the second half of the year. Among the bullish signals are unemployment, wages, retail sales, consumer confidence from U. of Michigan and the CB, consumer and producer inflation, ISM manufacturing activity, and revised GDP. However, the housing market failed: the data on existing and new home sales, building permits and housing starts were all bearish. US stock market holds solid footing, despite the difficulties with putting Trump’s plans into practice and the cautious position of the Fed. It will be interesting to hear what the potential for accelerating economic growth, in particular, inflation, the regulator sees in declining unemployment. If the Fed rejects the forcedness of raising rates due to the rapid strengthening of the labour market and stresses the need to wait for good inflation figures – the dollar will continue to decline. If they hint that low unemployment exerts pressure – the dollar will receive a catalyst for growth. Also, much attention will be paid to the timing of tapering off the balance sheet and the importance of Trump’s fiscal and tax plans to gauge the stimulus bet. Political problems remain unresolved in Washington, as well as the outcome of investigating Trump’s relations with Moscow, which can also curb the actions of the regulator. Officials will probably try not to go far in their forecasts and will draw investors’ attention to the importance of emerging data to form correct expectations of future actions.
In the oil market, buyers are increasingly pressed to the wall, as the growth of commercial oil reserves in the US gives a clear and understandable signal for the selloff. According to the API report, reserves have increased by 2.75M barrels, but today’s EIA report will probably show an even bigger increase, given the frequent discrepancies in the data. Contrary to forecasts, US oil companies continue to increase production, what is quite obvious – OPEC voluntarily tied its hands, freeing the market share of US shale producers. Data on the CFTC, which showed growth in bullish positions last week, indicate continued optimism, but sooner or later patients may burst if OPEC cuts do not begin to yield results. The report of Baker Hughes last Friday was also disappointing – 21 more oil rigs returned to service, which argues for the further growth of commercial reserves in the USA.
Asian stock markets closed in a negative territory despite positive data on the growth of industrial production in China, which was reorganised by the Chinese authorities because of the fall in global demand after the collapse of oil prices. The increase was 6.5% compared to the same period last year, but the increase in fixed assets slowed, which may indirectly indicate a slowdown in production in the future. Data on money aggregates, foreign investment and aggregate financing (stimulating aggregate demand by increasing the money supply) will allow investors to correct fears about the credit bubble in the economy and inflation forecasts. The Australian dollar could be very sensitive to this data and react to the decline in case of growth of credit incentives in China.
The British pound was under pressure after the release of disappointing data on the labour market. The fall in wage growth to 2.1% with a forecast of 2.4%, combined with accelerating inflation, significantly worsened the forecast for consumption growth in the country, the main component of the UK GDP. Along with political uncertainty and the early start of the Brexit negotiations, this gives grounds for further selling the pound with a target at 1.2500. However, one must bear in mind the market reaction to the FED meeting, which peaceful policy can cause capital outflow from the American assets.
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