Week in Review: Yellen Signals Higher Rates Likely
Review of the week ended 26 August 2016
- Yellen: Case for an increase in the federal funds rate has strengthened
- Central Italy hit by devastating earthquake
- German business sentiment slumps
- US new home sales surge while sales of existing homes slip
- Sarkozy aims for French presidential encore
Global equities were little changed on the week, with many market participants sidelined in advance of US Federal Reserve Chair Janet Yellen’s remarks from Jackson Hole on Friday morning. The Chicago Board Options Exchange Volatility Index (VIX) rose to 12.4 from 11.8 a week ago while the yield on the 10-year US Treasury note fell to 1.54% from 1.58%. On the oil front, West Texas Intermediate crude fell to $47.65 from $48.00 a week ago. Global Brent crude edged lower to $49.94 from $50.46.
GLOBAL ECONOMIC NEWS
Fed’s Yellen opens door to Fed rate hike
Speaking at the Federal Reserve Bank of Kansas City conference in Jackson Hole, Wyoming, Fed chair Yellen prepared markets for a hike in the federal funds rate perhaps as early as the next Federal Open Market Committee meeting in September, depending on the outcome of next Friday’s US employment report. Markets are increasingly pricing in a hike by the end of 2016.
More than 250 perish in Italian earthquake
A strong earthquake struck a mountainous region of central Italy on Wednesday, killing more than 250 and leaving many more homeless. Innumerable buildings in the region were destroyed. Continued aftershocks have hampered rescue efforts.
German business sentiment shrinks
A poll of more than 7,000 German businesses saw a decline in confidence among those surveyed. The Ifo index fell to 106.2 in August versus 108.3 a month earlier, the steepest fall in more than four years. The weakening sentiment was blamed on a delayed reaction to the UK’s June Brexit vote.
US home sales uneven
Sales of new homes surged 12.4% in July to the highest level since October 2007, and 31% compared with a year ago. However, sales of existing homes, which outnumber new home sales by a factor of eight, fell 3.2% in July, muddying the outlook for the overall housing sector. A paucity of affordable inventory is stifling existing home sales, the National Association of Realtors reports.
Sarkozy announces run for French presidency
Former French president Nicolas Sarkozy announced he will run for his party’s nomination for president. Primaries take place in late November. Sarkozy was president of France from 2007 until 2012, when he lost his reelection bid to François Hollande. The presidential election will be held in April and May 2017.
US economic data roundup
Q2 US GDP was revised modestly lower, to an annual rate of 1.1% from an initial 1.2% reading. The US trade deficit shrank in July to $59.0 billion from $63.3 billion in June. Durable goods orders were surprisingly strong, rising 4.4% in July versus a consensus estimate for a 3.7% rise. Core capital goods orders rose a robust 1.6%.
UK economy shrugs off Brexit
UK Consumer sentiment rebounded strongly in August, more than reversing the post-Brexit shock from July, jumping to 109.8 from 106.6. The rise was the largest in over three years. UK GDP for Q2 was left unrevised at +0.6% quarter-over-quarter, but business investment was revised much higher, an unexpected outcome as businesses were expected to take a wait-and-see approach ahead of the late-June vote. Investment rose 0.5% on the quarter versus an initial -0.6% reading.
Iraq set to boost oil output
A week ago, the oil market rallied on hopes for an OPEC production cap. This week, OPEC member Iraq said it will boost production by 150,000 barrels per day, or roughly 5% of output. Fields in northern Iraq are coming back on line after an agreement to restart a pipeline between Iraq’s Northern Oil Company and the government of the semiautonomous region of Kurdistan.
India appoints new central bank chief
Urjit Patel was named this week to succeed Raghuram Rajan as the new governor of the Reserve Bank of India. Patel was deputy governor in charge of monetary policy prior to his appointment to the top spot, and is well known to the markets.
S&P warns of Mexican ratings downgrade
Credit rating agency Standard and Poor's downgraded its outlook for Mexico’s sovereign debt rating this week, citing disappointing economic growth and a rising debt load. The warning means there is at least a one in three chance of a ratings downgrade over the next two years. Mexico is currently rated BBB+ by S&P.
GLOBAL CORPORATE NEWS
US OKs ChemChina takeover of Syngenta
US regulators this week cleared the $43 billion takeover of Swiss seed and agrichemical maker Syngenta by ChemChina. Before the approval, some investors were concerned that the deal could be blocked on national security grounds, given Syngenta’s sizable US operations.
Medivation acquired by Pfizer
Pharma giant Pfizer agreed to purchase biotech firm Medivation this week in a $14 billion deal. Medivation is best known for its prostate cancer drug Xtandi.
THE WEEK AHEAD
- The US reports personal income and spending and the core personal consumption expenditures price index, the Fed’s preferred inflation measure, on Monday, 29 August
- The eurozone economic sentiment index is released on Tuesday, 30 August
- The harmonized index of consumer prices for the eurozone is released on Wednesday, 31 August
- Global manufacturing purchasing managers’ indices are released on Thursday, 1 September
- The US August employment report is released on Friday, 2 September
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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.
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