REPORT
By Ovunc Kutlu & Gulbin Yildirim
U.S. Letter for the week beginning July 4

U.S. Letter for the week beginning July 4

Last week, the Brexit was the number one issue on the American economic agenda.

Markets started the week with a sharp decline following the Brexit vote, but quickly recovered amid rising expectations for more stimulus from major central banks and governments to support the economy.

U.S. macroeconomic data was either better or in line with market forecasts, and also contributed to the positive environment, prompting investors to push indices up.

According to official figures, Gross Domestic Product (GDP) grew 1.1 percent in the first quarter of 2016, narrowly exceeding expectations of 1 percent growth.

The Consumer Confidence Index for June came in at 98 and surpassed expectations by reaching its highest level since October 2015.

Additionally, the ISM Manufacturing Index for June marked its highest level in the last 15 months at 53.2.

Personal spending for May rose 0.4 percent, in line with market expectations, while personal income came in slightly below with a 0.2 percent increase.

- S&P lowered U.S. growth forecast

While markets recovered from the Brexit shock quickly, the questions about its repercussions on the U.S. economy remained at the top of debates. 

Fed's Vice President Stanley Fischer said Friday that it was too soon to tell whether Britain's vote to leave the European Union had changed the U.S. economic outlook.

On the other hand, Standard & Poor's lowered its forecast for U.S. economic growth the same day, stating "Brexit will almost certainly be a drag on U.S. GDP." The global ratings company said it now expects U.S. real GDP to grow by 2 percent this year, down from 2.3 percent previously, and 2.4 percent next year, down from 2.5 percent.

S&P said it also sees a 20 percent to 25 percent chance of a recession in the next 12 months, up from a 15 percent to 20 percent forecast previously.

Experts at Goldman Sachs, Barclays and Bank of America also lowered their forecasts for U.S. economic growth.  

- New week: Employment Report, FOMC Minutes 

The new week in the U.S. begins with a federal holiday and markets will be closed in observation of Independence Day.

Undoubtedly the most important economic development of the week will be the June Employment Report, which will be released on Friday, July 8.

Markets will focus on non-farm payrolls since job gains fell to their lowest level in May with only 38K. Current expectations regarding June non-farm payrolls are around 180K.

A figure close to that level will likely indicate that the May report was a hiccup. If that happens, the dollar may strengthen as this would raise the likelihood that the Fed will increase interest rates this year.

On the contrary, a number below 100K would suggest a serious slowdown in the labor market, destroying the Fed's plans for gradual normalization. Such a development could lead to losses in the stock market as well as in the value of the dollar.

The minutes of Federal Open Market Committee's (FOMC) June meeting will be announced on Wednesday and will also make headline news.

Markets will also closely follow the New York Fed President William Dudley's statements.

04 Jul,2016

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