Weekly Market Outlook

Weekly Recap: US Data Mixed, BoE and RBA on hold

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USD swings on mixed data 

The ISM Manufacturing PMI for July was worse than expected at 58.5 vs 60.6 in June and 60.8 expected. ADP non-farm employment change came far below market expectation. The US private sector added 330 thousand jobs, the lowest print since February. This was well below the estimates of 695K and June’s figures of 680k.

While the ISM Services PMI surpassed expectations jumping to 64.1 points in July, vs market consensus at 60.5 and previous reading at 60.1. 

The US economy added 943K jobs in July, above market expectations of 870K, and marking the highest employment rate in eleven months. The employment fast recovery was boosted by the rapid pace of COVID-19 vaccinations which allowed the country to continue its re-opening efforts and prompted businesses to hire more workers to respond to growing demand. 

The unemployment rate declined to 5.4%, the lowest level since March 2020. The drop was better than market expectations of 5.7%.

RBA keeps tapering on the table

The Reserve Bank of Australia kept interest rates unchanged at a record low of 0.1% during its August meeting, as widely expected. The bank also maintained the target of 10 basis points for the April 2024 Australian Government bond and will continue to purchase government securities at the rate of $5 billion a week until early September and then $4 billion a week until at least mid-November.

The policy statement acknowledged that the economic recovery has been stronger than was earlier expected. However, the recent COVID-19 outbreaks were interrupting the recovery, and GDP is expected to decline in Q3, it added. 

The central bank stated that the economic outlook for the coming months is uncertain and will depend on the health situation and the containment measures. Except for that, the Bank’s central scenario is for the economy to grow by 4% in 2022 and by around 2-1/2% in 2023. 

The bank reiterated it will not increase the cash rate until inflation is within the 2 to 3% target range, a condition that will not be met before 2024. 

Strong Q2 Employment data support the NZD 

The Kiwi has been trading higher against major counterparts through the week, supported by the better-than-expected employment data for the second quarter. Strong jobs report backed the odds of a rate hike in 2021.

Employment in New Zealand rose by 28K or 1.0 % to 2.778 million in the second quarter of 2021.

The unemployment rate fell to a one-year low of 4.0% in the second quarter of 2021, down from 4.6% in the previous period and compared to market expectations of 4.5%. The labor force participation rate edged up from 70.4% to 70.5%.

Weekly Recap Market News

BoE on hold but ready to tighten 

The Bank of England left policy unchanged during its August meeting, with policymakers reiterating that they do not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. 

However, officials signaled some modest tightening of monetary policy over the next two years was likely to be necessary if the economy continues to improve. The central bank also said it would start reducing its stock of bonds when its policy rate reaches 0.5% by not reinvesting proceeds and it would start considering selling stock of purchased assets when the rate reaches at least 1%. 

UK GDP is projected to grow by 7.25% in 2021, unchanged from its May forecast, and by 6% in 2022 (vs 5.75% from its May forecast). The central bank also said it now saw inflation hitting a peak of 4% in late 2021 and early 2022 (vs 2.5% from its May forecast).

BoE Governor Andrew Bailey stated that the bank rate is BoE’s main tool for altering monetary conditions, and should the economy grow as expected, modest tightening will be needed but the recovery will be bumpy.

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