REPORT
By Ovunc Kutlu & Gulbin Yildirim
U.S. Finance, Economy, Energy Letter, week beginning Aug. 1

What happened last week?

The most significant development last week in the U.S. economy was the Federal Reserve’s decision to keep its interest rate unchanged after the conclusion of its two-day July meeting in Washington, D.C. Although the Fed was not expected to make a rate hike, what made the meeting so important was the bank’s additional new wording to its July statement, stating "near-term risks to the economic outlook have diminished."

The new language was perceived mixed by analysts. Some suggested that the Fed was giving out a fresh signal that it could make a rate hike in its September meeting so that both investors and the U.S. stock market could begin to price in and prepare the outcome of such a decision. They noted that the Fed has more confidence in the U.S. economy, after strong numbers of June non-farm payrolls, producers price index and retail sales released in July. According to analysts, such strong figures, which beat market expectations, have removed the risk of a recession in the American economy. They also gave the Fed enough reason to seriously discuss a rate hike for September or December this year.

However, another group of analysts argue that the Fed will continue its “wait-and-see policy” and the new wording for its July statement is unlikely to immediately trigger a raise in the interest rate. Such analysts believe that when the Federal Open Market Committee’s (FOMC) July meeting minutes are announced on August 17, investors and the markets will have a better understanding of how FOMC members perceive the latest strong macroeconomic figures and how likely they see a rate hike in the following months. Analysts also point out that incoming macroeconomic data should be watched closely, a task that the Fed will also undertake. However, they still underline a few risks against the Fed’s possible rate hike decision.

One of these risks is the reason why the Fed would choose to increase its interest rate, while central banks in major economies – such as in the U.K., Europe and Japan – are considering lowering rates or even applying negative rates. If the Fed makes a rate hike, this could very well increase the value of the U.S. dollar against other currencies, lower the purchasing power of foreign economies, while hindering the volume of U.S. exports; thus negatively affecting the American economy.

Another risk of a Fed rate hike is in the U.S. stock market. Wall Street has been on the rise for the last few weeks, and the positive sentiment in the market could be adversely affected with sudden stock drops if the Fed increases the interest rate. The market still has time until September to price in a possible rate hike decision, but it is not expected to do so until August 17 when the Fed minutes are revealed.

The U.S. stock market began last week mixed, and failed to find a direction with the Fed’s July meeting. Even that shows how fragile the stock market is, even though the Fed did not raise interest rates nor made a crystal clear indication of a rate hike.

In Wall Street, the Dow Jones fell 0.8 percent for the week but posted a 2.8 percent increase in July. The S&P 500 was flat to end the week but also managed to record a 3.6 percent rise in July. The Nasdaq rose 1.2 percent last week, and jumped 6.6 percent in July -- its highest monthly gain since March – thanks to the better-than-expected second quarter earnings from major American tech companies.

The stock market has also been affected by the high volatility in oil prices. Worries over the glut of supply in the global crude market have re-emerged. However, over this period no unexpected production cuts were seen like a few months ago from Canada, Kuwait and Nigeria. U.S. producers seem to have adapted to the low price environment while domestic output continues to stall, adding to global oversupply on a weekly basis, which is keeping a downward pressure on the price of crude.

After falling for nine consecutive weeks, commercial crude inventories rose for the first time last week, taking the crude market by surprise and pushing prices to $41-$43 per barrel range. Weekly crude oil and gasoline stocks will be watched closely until the summer season comes to an end.

 

What to expect this week?

This Wednesday, the oil market will watch the U.S.’ weekly crude and gasoline stocks closely. Although another increase in inventories looks distant, the summer season appears to be less than promising for domestic demand. Also dubbed the driving season in the U.S., consumers’ demand for gasoline has remained weak, and refineries cannot find much incentive to draw crude from the market, thus keeping overall demand low.

This week, the markets will also pay attention to Monday’s manufacturing PMI figures and Tuesday’s consumer spending numbers. If the data beats expectations, Wall Street can begin the week with a good start and the momentum can be preserved until Friday’s major figures.

After Thursday’s weekly initial jobless claims, investors, the stock market, and especially the Fed will turn their head to July non-farm payrolls data that will be announced on Friday. In June, the data beat expectations, and triggered a rally in the U.S. stock market the following week. This data is also one of the figures that the Fed pays great attention to for its rate hike decision.

Also on Friday, the global rating agency Moody’s will announce its credit rating decision for Turkey. After the July 15 failed military coup, another rating agency, Standard & Poor’s lowered Turkey’s rating and outlook. Consequently, Moody’s decision on Friday is of upmost significance for foreign direct investment into the Turkish economy.

 

03 Aug,2016

Download
REPORTS