Dollar lower on the week
The dollar gave up ground last week, most of its losses coming after the US Treasury’s bond buyback announcement on Wednesday. The euro and sterling rose for a fourth week running against the US currency, both adding about a cent to just under $1.17 and $1.3650 respectively. EURGBP traded in a very narrow range (£0.8545 to £0.8585) over the course of the week and opens this morning at around £0.8555. For the week ahead, the focus will be on Fed Chair Warsh’s speech at the Jackson Hole economic conference on Friday. His last outing following the July monetary policy meeting caused something of a stir in markets, with long-term interest rates rising and the dollar falling, amid concerns about the strength of his commitment to returning inflation to the 2% target, so he will have a chance to address this on Friday if he chooses to do so. On the data economic data front, the main release is the PCE inflation report for July on Wednesday.
US government 10-and 30-year bond yields edged up again on Friday to end 5bps higher and flat on the week respectively. This was despite the Treasury’s bond buyback announcement, which only fleetingly lowered yields on Wednesday before they headed north again. German yields were broadly flat on Friday but rose by 3-6bps on the week, while UK yields were largely unchanged on the day and on the week overall. In equity markets, the S&P 500 gained around 0.5% on Friday but was down almost 1.5% on the week, while the Stoxx Europe 600 shed around 0.5% on the week despite closing 0.6% higher on Friday.
The Euro area economy is expanding at a steady if unspectacular pace judging by the latest PMI data. The composite index was largely unchanged in August but remained above the key 50 level – at 52.1 – with the pace of activity in the manufacturing sector picking up notably this month. It’s a similar story for the UK economy, with the composite index nudging up to 52.5 in August (from 52.2 in July) albeit driven by strengthening services sector activity.
Fed member Kashkari says “there’s every indication that the US Treasury market is functioning as it should, that trades are taking place, that there’s liquidity in the market, and so that enables us to focus on the federal funds rate as our primary policy tool to get inflation back down.” On the latter point, Kashkari – who dissented in favour of a 25bps rate hike at the July meeting – says he doesn’t want to “prejudge the next meeting (in September)” but he’s “not feeling confident right now that inflation is heading back down to target in a short period of time.”
For the week ahead, as mentioned, the main focus for markets will be on Warsh’s Jackson Hole speech on Friday. On the economic data front, as well as Wednesday’s PCE inflation report for July, other US data scheduled include the Conference Board’s consumer confidence indicator for August on Tuesday and a second estimate of Q2 GDP growth on Wednesday (the initial estimate showed the economy grew by 0.4% on the quarter and by 2.1% on the year).