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29 July 2015, 02:50
JAPAN JUN RETAIL SALES YY DECREASE TO +0.9 % (FCAST 0.5 %) VS PREV 3.0 %
RBNZ signals that it intends to move cautiously on interest rates
29 July 2015, 02:34
This morning Reserve Bank Governor Graeme Wheeler delivered a speech titled
"Some Thoughts on the Inflation Outlook and Monetary Policy". The speech largely
reinforced the message of last week's OCR review statement, which revealed a
very cautious approach to the recent softening in New Zealand's economic
conditions. The RBNZ is prepared to cut the OCR again in September but seems to
be on the fence about a further cut this year, which is more or less where
market pricing currently stands.
The RBNZ remains reasonably positive on the domestic economy (pending a full review of its forecasts at the September Monetary Policy Statement). The plunge in world dairy prices is clearly a concern, and the OCR cuts to date were aimed at providing a buffer against this shock. But overall, the RBNZ sees growth running just "a little below trend", supported by easier financial conditions, high net migration, growth in construction and strength in the services sector.
Notably, the Governor had a pointed message for the market: "Some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession." This suggests two things: that the RBNZ is not inclined to move in increments of more than 25bps and that it doesn't currently expect to reduce the OCR much below its current level.
Financial markets were anticipating a less 'dovish' tone from today's speech in light of last week's OCR review, but seem to have been further surprised by the Governor's comments. The NZD trade-weighted index rose 0.5% after the speech, and is up more than 2% since the OCR review.
"We remain comfortable calling for a low point in the OCR of 2.00%. This view is not based on a forecast of recession, but on what will be needed to meet the RBNZ's inflation target over the medium term. We expect that the flow of information over the next few months will persuade the RBNZ to lower its interest rate projections further," says Westpac Research.
Annual inflation is currently just 0.3%, and it has been consistently below the 2% midpoint of the target range for almost four years. The RBNZ expects inflation to be close to the 2% midpoint by the first half of 2016 (a mild downgrade from the "early 2016" in last week's OCR statement), with the recent fall in the NZ dollar pushing up the prices of tradable goods. The RBNZ judges that this is an appropriate pace of adjustment back to its medium-term inflation target.
However, a fall in the exchange rate will only generate a transitory burst of inflation (with a lag of up to a year). Meanwhile, non-tradables inflation is already weak, and the softer growth outlook and the peak in the construction boom suggest any material pickup is some way off. So maintaining inflation close to 2% is likely to require sustained tradable goods inflation - which in turn requires a sustained decline in the NZ dollar - or a significant pickup in domestic activity. But neither of those will happen if the RBNZ cuts the OCR by only another quarter percent or so.
The RBNZ remains reasonably positive on the domestic economy (pending a full review of its forecasts at the September Monetary Policy Statement). The plunge in world dairy prices is clearly a concern, and the OCR cuts to date were aimed at providing a buffer against this shock. But overall, the RBNZ sees growth running just "a little below trend", supported by easier financial conditions, high net migration, growth in construction and strength in the services sector.
Notably, the Governor had a pointed message for the market: "Some local commentators have predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession." This suggests two things: that the RBNZ is not inclined to move in increments of more than 25bps and that it doesn't currently expect to reduce the OCR much below its current level.
Financial markets were anticipating a less 'dovish' tone from today's speech in light of last week's OCR review, but seem to have been further surprised by the Governor's comments. The NZD trade-weighted index rose 0.5% after the speech, and is up more than 2% since the OCR review.
"We remain comfortable calling for a low point in the OCR of 2.00%. This view is not based on a forecast of recession, but on what will be needed to meet the RBNZ's inflation target over the medium term. We expect that the flow of information over the next few months will persuade the RBNZ to lower its interest rate projections further," says Westpac Research.
Annual inflation is currently just 0.3%, and it has been consistently below the 2% midpoint of the target range for almost four years. The RBNZ expects inflation to be close to the 2% midpoint by the first half of 2016 (a mild downgrade from the "early 2016" in last week's OCR statement), with the recent fall in the NZ dollar pushing up the prices of tradable goods. The RBNZ judges that this is an appropriate pace of adjustment back to its medium-term inflation target.
However, a fall in the exchange rate will only generate a transitory burst of inflation (with a lag of up to a year). Meanwhile, non-tradables inflation is already weak, and the softer growth outlook and the peak in the construction boom suggest any material pickup is some way off. So maintaining inflation close to 2% is likely to require sustained tradable goods inflation - which in turn requires a sustained decline in the NZ dollar - or a significant pickup in domestic activity. But neither of those will happen if the RBNZ cuts the OCR by only another quarter percent or so.
FOMC preview: Fed to keep September hike in play
29 July 2015, 02:02
The Fed is unlikely to make any policy changes at this week's FOMC meeting,
which concludes tomorrow. However, we would see a FOMC statement asserting that
economic activity has continued to expand and that "underutilization of labor
resources" has continued to diminish as a clear signal that a September rate
hike is likely.
The key uncertainty related to this week's FOMC statement is how clearly the Fed will communicate the likely timing of the first rate hike, which the central bank still expects at some point before year-end, according to Fed Chair Yellen's Congressional Testimony two weeks ago.
Before the start of the last tightening cycle in 2004, Fed officials warned financial markets one meeting before they acted. In that episode, they dropped an assurance from their May 2004 FOMC statement that the Fed would be "patient" before raising rates and instead said that they would move at a "measured pace", then raised rates at the next meeting in June.
In April this year Fed officials debated whether to offer an "explicit indication" ahead of the expected first rate increase, as they did in 2004, but minutes of the meeting showed they chose a different approach.
Against this background, we would see a FOMC statement asserting that economic activity has continued to expand and that "underutilization of labor resources" has continued to diminish as a clear signal that a September rate hike is likely.
"We continue to expect the first 25 bp rate hike in September and see another in December. After Yellen's testimony earlier this month, it is our impression that it would take a notable downshift in Fed officials' outlook for growth, jobs or inflation for the Fed to wait until 2016 before raising rates," notes Nordea Research.
Rising inflation pressures will imply that the pace of tightening after the initial rate hike will be more rapid than currently signalled by the Fed and faster than is priced in by markets.
The FOMC statement will be released at 20.00 CET tomorrow. There is no press conference after the meeting, and no projections will be released. Meeting minutes, which will be published in three weeks, could provide more clues about how close officials believe they are getting to raising rates.
The key uncertainty related to this week's FOMC statement is how clearly the Fed will communicate the likely timing of the first rate hike, which the central bank still expects at some point before year-end, according to Fed Chair Yellen's Congressional Testimony two weeks ago.
Before the start of the last tightening cycle in 2004, Fed officials warned financial markets one meeting before they acted. In that episode, they dropped an assurance from their May 2004 FOMC statement that the Fed would be "patient" before raising rates and instead said that they would move at a "measured pace", then raised rates at the next meeting in June.
In April this year Fed officials debated whether to offer an "explicit indication" ahead of the expected first rate increase, as they did in 2004, but minutes of the meeting showed they chose a different approach.
Against this background, we would see a FOMC statement asserting that economic activity has continued to expand and that "underutilization of labor resources" has continued to diminish as a clear signal that a September rate hike is likely.
"We continue to expect the first 25 bp rate hike in September and see another in December. After Yellen's testimony earlier this month, it is our impression that it would take a notable downshift in Fed officials' outlook for growth, jobs or inflation for the Fed to wait until 2016 before raising rates," notes Nordea Research.
Rising inflation pressures will imply that the pace of tightening after the initial rate hike will be more rapid than currently signalled by the Fed and faster than is priced in by markets.
The FOMC statement will be released at 20.00 CET tomorrow. There is no press conference after the meeting, and no projections will be released. Meeting minutes, which will be published in three weeks, could provide more clues about how close officials believe they are getting to raising rates.
FOMC meeting tonight, forward guidance in the spotlight
29 July 2015, 01:23
For the FOMC tonight, it's all about forward guidance. At Yellen's
congressional testimony two weeks ago, the Fed Chair neither ruled out a
September hike, nor signalled September was a done deal. The non-committal
message will also be what is conveyed in tonight's statement.
"A September hike is still our official call, but our US team makes the argument that aesthetics matter to a data dependent Fed," notes RBC Capital Markets.
As a result, the Fed will opt to keep their options open and use the seven weeks between the September and July meetings to firm up their decision.
"A September hike is still our official call, but our US team makes the argument that aesthetics matter to a data dependent Fed," notes RBC Capital Markets.
As a result, the Fed will opt to keep their options open and use the seven weeks between the September and July meetings to firm up their decision.
Americas Roundup: USD/CAD slips to 1-week lows, as focus shifts to FOMC meeting- July 29th, 2015
29 July 2015, 01:14
Market Roundup
EUR/USD is supported around 1.1015 levels and currently trading at 1.1044 levels. It has made session high at 1.1064 and lows at 1.1020 levels. The pair rose from 1.1015 level to hit daily highs at 1.1060 after, US consumer confidence figures printed negative figures, which came negative at 90.9 against forecast of 100. U.S. dollar gained some ground later in the New York session against the euro, after traders took profits from gains and favored the greenback on expectations that the Federal Reserve could take a hawkish bias in a policy statement on Wednesday. To the upside, immediate resistance can be seen at 1.1130. To the downside, major support level is located at 1.1015.
GBP/USD is supported around 1.5524 levels and currently trading at 1.5598 levels. It has made session high at 1.5626 and low at 1.5575 levels. Sterling rose against the dollar on Tuesday's New York session after US consumer confidence printed negative figures. The pair was also supported stronger UK GDP figures. Gross domestic product grew 0.7 percent on the quarter in the April-June period in line with forecasts after a first-quarter expansion of 0.4 percent. Second-quarter output was 2.6 percent higher than a year earlier, supporting a view that the Bank of England could start raising interest rates in the coming months. Sterling rose to a high of $1.5618 having traded at around $1.5575 beforehand, up 0.3 percent on the day. The focus now shifts to the Federal Reserve's two-day policy meet that will end on Wednesday. To the upside, immediate resistance can be seen at 1.5645. To the downside, major support level is located at 1.5460.
USD/JPY is supported around 122.90 levels and currently trading at 123.63 levels. It has made session high at 123.75 and low at 123.49 levels. The pair traded in a very choppy range in the New York session on Tuesday. The pair retreated form 123.75 daily highs to reach lows at 123.50. The Chinese stock crisis had supported the Yen bulls of late but slowly bulls have vanished and bears are back. Shanghai shares closed 1.7 percent lower on Tuesday after plunging 8.5 percent on Monday. The plunge had led some traders to buy the safe-haven yen and close short bets against the euro, which in turn sent the currency higher. Tuesday's less dramatic move in Chinese shares allowed the dollar to regain some ground. The dollar was up 0.29 percent against the yen at 123.60 after hitting a nearly two-week low of 123.01 on Monday. To the upside, immediate resistance can be seen at 123.75. To the downside, major support level is located at 123.00 levels. Overall trend of this pair is bullish in the long term.
USD/CAD is supported around 1.2905 levels and currently trading at 1.2934 levels. It has made session high at 1.3009 and low at 1.2910 levels. The pair slipped from 1.3006 levels to hit 1- week lows at 1.2930 in the late New York session. The Canadian dollar firmed against its U.S. counterpart on Tuesday as investors positioned themselves ahead of Wednesday's Federal Reserve interest rate decision. The price of oil, a major Canadian export, remained under pressure amid a sell-off in Chinese stocks and concerns about oversupply, but was a touch higher after sliding earlier in the session. The U.S. central bank kicks off a two-day meeting on Tuesday and will issue its policy statement on Wednesday. Some expect the Fed to give a clearer signal as to when it will hike interest rates. A U.S. rate hike this year would be in divergence to the Bank of Canada, which has already cut rates by 25 basis points twice this year, and is expected to eventually drive the Canadian dollar toward even weaker levels. To the upside, immediate resistance can be seen at 1.2975. To the downside, major support level is located at 1.2900 levels.
Equity Recap
European equities ended the day on, surprisingly positive note, amid Chinese stock market concerns. The European equities bounced back to positive note after falling for five straight days, following the news of merger & acquisition (M&A) and corporate earnings.
The pan-European FTSEurofirst 300 closed down, up by 1 percent, Germany's DAX closed down, up by 1 percent, FTSE 100 closed down up by 2.3 percent, and France's CAC 40 closed down up by 0.8 percent. Meanwhile Switzerland SMI, closed at 9,283.50 pts up by 0.97 percent
U.S. stocks closed higher after 5-day losing streak, as focus shifted from Chinese stock crisis to corporate earnings and Wednesdays FOMC meeting. Dow Jones closed up 188.54 points, or 1.08 percent, at 17,629.13, S&P 500 closed up 25.61 points, or 1.24 percent, at 2,093.25, Nasdaq closed up 50.21 points, or 1.00 percent, at 5,089.98.
Treasury Recap
U.S. Treasuries fell on Tuesday, with analysts and traders citing a stabilization of Chinese equities prices and a new supply of issuance exacerbated by seasonally low trading volumes.
In midmorning trade, the 10-year U.S. benchmark Treasury traded down 8/32 of a point in price, lifting the yield, which moves in the opposite direction, to 2.25 percent.
The 30-year Treasury bond fell 17/32 of a point in price, lifting the yield up to 2.97 percent.
Commodity Recap
Gold firmed on Tuesday but remained near 5-1/2-year lows as markets braced for this week's Federal Reserve meeting, at which policymakers are expected to give further clues on the timing of a U.S. rate increase.
Spot gold was up 0.2 percent at $1,095.28 an ounce at 2:26 p.m. EDT (1826 GMT), not far from Friday's low of $1,077, its weakest since early 2010.
U.S. gold futures for August delivery settled down 20 cents an ounce at $1,096.40.
U.S. crude futures extend gains in post-settlement trade after API reports larger-than-expected crude stock draw for last week
U.S. crude prices were up 0.08 percent to $47.43 a barrel, after going as low as $46.68, while Brent crude lost 0.94 percent to $52.97, after sliding to as low as $52.28.
- Stocks rebound, ignoring decline in Chinese markets.
- Oil up after 4-day loss; bets for drop in U.S. stockpiles.
- ECB approves Athens stock exchange reopening, timing undecided.
- Moody's: EFSF's creditworthiness resilient to any Greek debt restructuring, closely linked to creditworthiness of guarantors.
- US Consumer Confidence Jul 90.9, f/c 100, 99.8-previous.
- US Consumer Expectations Jul 79.9, 92.8-previous, lowest since Feb 2014.
- S&P cuts Brazil's outlook to negative from stable.
- S&P says assumes Brazil will avoid a rating downgrade, may cut rating if government backtracks on policy.
- 23:50 Japan Retail Sales YY Jun f/c 0.5%, 3%-previous
- No Significant Events
EUR/USD is supported around 1.1015 levels and currently trading at 1.1044 levels. It has made session high at 1.1064 and lows at 1.1020 levels. The pair rose from 1.1015 level to hit daily highs at 1.1060 after, US consumer confidence figures printed negative figures, which came negative at 90.9 against forecast of 100. U.S. dollar gained some ground later in the New York session against the euro, after traders took profits from gains and favored the greenback on expectations that the Federal Reserve could take a hawkish bias in a policy statement on Wednesday. To the upside, immediate resistance can be seen at 1.1130. To the downside, major support level is located at 1.1015.
GBP/USD is supported around 1.5524 levels and currently trading at 1.5598 levels. It has made session high at 1.5626 and low at 1.5575 levels. Sterling rose against the dollar on Tuesday's New York session after US consumer confidence printed negative figures. The pair was also supported stronger UK GDP figures. Gross domestic product grew 0.7 percent on the quarter in the April-June period in line with forecasts after a first-quarter expansion of 0.4 percent. Second-quarter output was 2.6 percent higher than a year earlier, supporting a view that the Bank of England could start raising interest rates in the coming months. Sterling rose to a high of $1.5618 having traded at around $1.5575 beforehand, up 0.3 percent on the day. The focus now shifts to the Federal Reserve's two-day policy meet that will end on Wednesday. To the upside, immediate resistance can be seen at 1.5645. To the downside, major support level is located at 1.5460.
USD/JPY is supported around 122.90 levels and currently trading at 123.63 levels. It has made session high at 123.75 and low at 123.49 levels. The pair traded in a very choppy range in the New York session on Tuesday. The pair retreated form 123.75 daily highs to reach lows at 123.50. The Chinese stock crisis had supported the Yen bulls of late but slowly bulls have vanished and bears are back. Shanghai shares closed 1.7 percent lower on Tuesday after plunging 8.5 percent on Monday. The plunge had led some traders to buy the safe-haven yen and close short bets against the euro, which in turn sent the currency higher. Tuesday's less dramatic move in Chinese shares allowed the dollar to regain some ground. The dollar was up 0.29 percent against the yen at 123.60 after hitting a nearly two-week low of 123.01 on Monday. To the upside, immediate resistance can be seen at 123.75. To the downside, major support level is located at 123.00 levels. Overall trend of this pair is bullish in the long term.
USD/CAD is supported around 1.2905 levels and currently trading at 1.2934 levels. It has made session high at 1.3009 and low at 1.2910 levels. The pair slipped from 1.3006 levels to hit 1- week lows at 1.2930 in the late New York session. The Canadian dollar firmed against its U.S. counterpart on Tuesday as investors positioned themselves ahead of Wednesday's Federal Reserve interest rate decision. The price of oil, a major Canadian export, remained under pressure amid a sell-off in Chinese stocks and concerns about oversupply, but was a touch higher after sliding earlier in the session. The U.S. central bank kicks off a two-day meeting on Tuesday and will issue its policy statement on Wednesday. Some expect the Fed to give a clearer signal as to when it will hike interest rates. A U.S. rate hike this year would be in divergence to the Bank of Canada, which has already cut rates by 25 basis points twice this year, and is expected to eventually drive the Canadian dollar toward even weaker levels. To the upside, immediate resistance can be seen at 1.2975. To the downside, major support level is located at 1.2900 levels.
Equity Recap
European equities ended the day on, surprisingly positive note, amid Chinese stock market concerns. The European equities bounced back to positive note after falling for five straight days, following the news of merger & acquisition (M&A) and corporate earnings.
The pan-European FTSEurofirst 300 closed down, up by 1 percent, Germany's DAX closed down, up by 1 percent, FTSE 100 closed down up by 2.3 percent, and France's CAC 40 closed down up by 0.8 percent. Meanwhile Switzerland SMI, closed at 9,283.50 pts up by 0.97 percent
U.S. stocks closed higher after 5-day losing streak, as focus shifted from Chinese stock crisis to corporate earnings and Wednesdays FOMC meeting. Dow Jones closed up 188.54 points, or 1.08 percent, at 17,629.13, S&P 500 closed up 25.61 points, or 1.24 percent, at 2,093.25, Nasdaq closed up 50.21 points, or 1.00 percent, at 5,089.98.
Treasury Recap
U.S. Treasuries fell on Tuesday, with analysts and traders citing a stabilization of Chinese equities prices and a new supply of issuance exacerbated by seasonally low trading volumes.
In midmorning trade, the 10-year U.S. benchmark Treasury traded down 8/32 of a point in price, lifting the yield, which moves in the opposite direction, to 2.25 percent.
The 30-year Treasury bond fell 17/32 of a point in price, lifting the yield up to 2.97 percent.
Commodity Recap
Gold firmed on Tuesday but remained near 5-1/2-year lows as markets braced for this week's Federal Reserve meeting, at which policymakers are expected to give further clues on the timing of a U.S. rate increase.
Spot gold was up 0.2 percent at $1,095.28 an ounce at 2:26 p.m. EDT (1826 GMT), not far from Friday's low of $1,077, its weakest since early 2010.
U.S. gold futures for August delivery settled down 20 cents an ounce at $1,096.40.
U.S. crude futures extend gains in post-settlement trade after API reports larger-than-expected crude stock draw for last week
U.S. crude prices were up 0.08 percent to $47.43 a barrel, after going as low as $46.68, while Brent crude lost 0.94 percent to $52.97, after sliding to as low as $52.28.
Reduction of Brazil's fiscal targets and the change in Congress incentives
29 July 2015, 00:56
Back in February, it was believed that the government would fail to meet the
fiscal targets for this and the next two years, and that the very fragmented
Congress, coupled with a weak president and supporting party (PT), would make
any structural change in fiscal expenditures unlikely. Thereafter, given the
commitment of the new economic team in improving the fiscal balance in Brazil,
the exit strategy would rely on a higher tax burden, which would hurt growth
conditions in the country and lead to markedly low potential growth, which in
the medium term would put at risk the investment-grade rating of
Brazil.
The fiscal situation increases the risks for the IG rating, adding to the weak growth conditions. Last week the economic team announced the reduction of the fiscal targets not only for this year (to 0.15% of GDP, from 1.1%), but also for the next two years (0.7% for 2016 and 1.3% of GDP for 2017, from 2.0%) arguing that lower-than-expected revenues due to the growth recession made it nearly impossible to meet the former targets. While this is a credible reason for this year, the disappointment with the fiscal measures approved in Congress during the first half of the year, with meaningfully lower benefit reductions, is also to blame.
By reducing the primary surplus target up to 2017, the government removes any urgency for the fiscal consolidation, losing an important bargaining point when negotiating with the Congress. Members of Congress will be even more reticent in discussing and approving unpopular measures of fiscal austerity if the targets are now perceived to be easier to reach. This decision of the economic team, signals a setback from the strong commitment that it has being showing since late last year.
"Our preliminary assessments are that it also means that the gross debt will not stabilize anytime soon and actually should increase at a faster pace than we had previously estimated," notes Barclays.
The fiscal situation increases the risks for the IG rating, adding to the weak growth conditions. Last week the economic team announced the reduction of the fiscal targets not only for this year (to 0.15% of GDP, from 1.1%), but also for the next two years (0.7% for 2016 and 1.3% of GDP for 2017, from 2.0%) arguing that lower-than-expected revenues due to the growth recession made it nearly impossible to meet the former targets. While this is a credible reason for this year, the disappointment with the fiscal measures approved in Congress during the first half of the year, with meaningfully lower benefit reductions, is also to blame.
By reducing the primary surplus target up to 2017, the government removes any urgency for the fiscal consolidation, losing an important bargaining point when negotiating with the Congress. Members of Congress will be even more reticent in discussing and approving unpopular measures of fiscal austerity if the targets are now perceived to be easier to reach. This decision of the economic team, signals a setback from the strong commitment that it has being showing since late last year.
"Our preliminary assessments are that it also means that the gross debt will not stabilize anytime soon and actually should increase at a faster pace than we had previously estimated," notes Barclays.
Brazil’s S&P rating: A negative outlook means the clock has started to tick
29 July 2015, 00:35
Today S&P put the Brazil sovereign rating (BBB-) outlook to negative,
citing a one-year time horizon in order to re-assess the fundamentals of the
economy as well as the fiscal indicators. Among the factors that drove the
downgrade are (i) the economic growth recession, which is proving to be longer
and deeper than previously anticipated, and (ii) the political situation that
increases the odds of seeing a reversion of the various policy corrections that
are underway by the new economic team. Finally, the agency also sees the
external fundamentals of Brazil deteriorating to some extent. This event, in the
short term, increases the risks that other rating agencies not only downgrade
the sovereign rating during the next few months, but also keep the negative
outlook.
Based solely on the economic outlook, it will be very hard to avoid a downgrade one year from now. Given the change in incentives for the Congress from last week's event, the fiscal accounts should lead to higher debt levels, and there are risks of a wider recession this year coupled with possible negative growth next year, as sentiment continues only to fall.
All together, a still-deteriorated fiscal and growth situation (which are quite linked) will make it very hard to build a case to keep the investment-grade rating one year from now. The external fundamentals of Brazil are not weak, and could serve as a counterpoint, especially if the international reserves are kept at relatively high levels and the capacity to pay external debt is not changed.
In the medium term, only a change in the relationship between the government and the Congress could help avoid an extreme event. There are a couple of ways that this could be achieved, such as members of Congress being sensitive to the more imminent than ever threat of losing the investment-grade rating, although the odds are low given the lack of popularity of the president.
Another way is if the speakers of the House of Representatives or the Senate are forced to step down from their position due to involvement in the corruption investigations held by the Prosecution Service of the Union. The two speakers define the agenda of Congress and have been very vocal in their opposition of the fiscal measures that the government proposed, and any replacement of them could represent a window of opportunity for the government to improve its relationship with the Congress and increase the likelihood of seeing changes in the fiscal path that is currently outlined.
Based solely on the economic outlook, it will be very hard to avoid a downgrade one year from now. Given the change in incentives for the Congress from last week's event, the fiscal accounts should lead to higher debt levels, and there are risks of a wider recession this year coupled with possible negative growth next year, as sentiment continues only to fall.
All together, a still-deteriorated fiscal and growth situation (which are quite linked) will make it very hard to build a case to keep the investment-grade rating one year from now. The external fundamentals of Brazil are not weak, and could serve as a counterpoint, especially if the international reserves are kept at relatively high levels and the capacity to pay external debt is not changed.
In the medium term, only a change in the relationship between the government and the Congress could help avoid an extreme event. There are a couple of ways that this could be achieved, such as members of Congress being sensitive to the more imminent than ever threat of losing the investment-grade rating, although the odds are low given the lack of popularity of the president.
Another way is if the speakers of the House of Representatives or the Senate are forced to step down from their position due to involvement in the corruption investigations held by the Prosecution Service of the Union. The two speakers define the agenda of Congress and have been very vocal in their opposition of the fiscal measures that the government proposed, and any replacement of them could represent a window of opportunity for the government to improve its relationship with the Congress and increase the likelihood of seeing changes in the fiscal path that is currently outlined.
29 July 2015, 00:01
U.S. TREASURY'S LEW URGES CONGRESS TO GRANT PUERTO RICO ACCESS TO BANKRUPTCY
COURTS
US July consumer confidence considerably missed expectations
28 July 2015, 23:54
The US July consumer confidence considerably missed expectations, with the
headline print showing a sizable decline to 90.9 (est. 100.0) from 99.8
prior.
"Our US strategists note how rare such disappointments are, in pointing out that this recovery has only seen two other occasions with declines of this magnitude," says RBC Capital Markets.
Digging through the details, one small silver lining is that it was lower income consumers that drove the decline, while above average earners (50k+) showed greater confidence. This is important insofar as the higher income earners are the bigger driver of spending.
"Our US strategists note how rare such disappointments are, in pointing out that this recovery has only seen two other occasions with declines of this magnitude," says RBC Capital Markets.
Digging through the details, one small silver lining is that it was lower income consumers that drove the decline, while above average earners (50k+) showed greater confidence. This is important insofar as the higher income earners are the bigger driver of spending.
UK GDP grew by 0.7% q/q, in line with market expectations
28 July 2015, 23:45
The UK GDP grew by 0.7% q/q, in line with market expectations. Not
surprisingly, the services sector (78% of economy) was the main driver as it
grew 0.7% q/q while IP expanded 1.0% q/q. In terms of policy implications, the
Q2 growth number matches the BoE's projection so should not derail the view that
come August, some of the more hawkish members will start voting for rate
increases.
OIS markets aren't pricing a full rate rise until April/May next year, so GBP has plenty of scope to rally if rates markets start moving towards an earlier hike by the MPC.
"Our trade of the week is long GBP/JPY," says RBC Capital Markets.
It was also announced that GertJan Vlieghe will replace David Miles as the next external MPC member.
OIS markets aren't pricing a full rate rise until April/May next year, so GBP has plenty of scope to rally if rates markets start moving towards an earlier hike by the MPC.
"Our trade of the week is long GBP/JPY," says RBC Capital Markets.
It was also announced that GertJan Vlieghe will replace David Miles as the next external MPC member.
US services PMI rose to 55.2, beating expectations
28 July 2015, 23:26
The US services PMI rose to 55.2, beating expectations. House prices for 20
cities rose 1.1% in May, for a yoy gain of 4.9% (disappointing expectations of
5.6%). Consumer confidence (Conference Board) slumped 9% in July, its biggest
fall in nearly four years and the largest negative surprise relative to
consensus forecasts since 2003.
The fall looks exaggerated though - the survey was out in the field through to 16 July, before Grexit risk had been taken off the table and near the low point for Chinese stocks, so the survey was exquisitely timed as uncertainty and volatility was hitting a crescendo a couple weeks ago.Richmond Fed manufacturing index rose from 7 to 13, beating expectations.
The fall looks exaggerated though - the survey was out in the field through to 16 July, before Grexit risk had been taken off the table and near the low point for Chinese stocks, so the survey was exquisitely timed as uncertainty and volatility was hitting a crescendo a couple weeks ago.Richmond Fed manufacturing index rose from 7 to 13, beating expectations.