By Ovunc Kutlu & Gulbin Yildirim
U.S. Letter for week beginning August 29

What happened last week?

The most important event last week was the U.S. Federal Reserve Chair Janet Yellen’s speech on Friday.

"In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months," she said in a speech Friday in Jackson Hole, Wyoming. Yellen emphasized that the economy is now closer to the Fed's goals of maximum employment and price stability, hinting that a rate hike is likely in the coming months. She failed, however, to provide any timing as to when the Central Bank would raise rates.

Although Yellen’s comments were more hawkish compared to her previous statements this year, the U.S. stock market on Friday stayed in positive territory and appeared to have taken no heed of any hints of a rate hike. The U.S. dollar decreased since investors were unsure about when the rate hike would likely be made.

However, the direction of both the stock market and the greenback changed after the comments of Fed Vice President Stanley Fischer. Shortly after Yellen’s speech, Fischer said Yellen's comments were consistent with the possibility of as many as two rate hikes this year.

When Fischer said the Fed could increase interest rates twice this year, the U.S. stock market began to drop and moved into negative territory. With concerns over two rate hikes, investors’ demand for the dollar increased and the greenback posted gains against other major currencies.

Other developments last week included important macroeconomic data in the U.S.

New homes sales rose by 579,000, or 12.4 percent, in July, marking the strongest monthly gain since October 2007. But new home sales for June were revised downward to 582,000 from 592,000.

Existing home sales for July were disappointing, falling 3.2 percent, compared to the previous month, despite a market consensus of a 1.3 percent increase.

Durable goods orders for July rose by 4.4 percent, compared to the previous month, and had its strongest monthly increase this year.

Weekly initial jobless claims fell to its lowest level in the last five weeks. 

The U.S.’ gross domestic product, however, was revised to a 1.1 percent increase in the second quarter of 2016, from 1.2 percent.

On the global oil market, prices fluctuated mostly with the change in the U.S. dollar which was moved by the Fed officials’ remarks. The market is now focused on OPEC’s informal meeting in Algeria at the end of next month.

Net oil export revenues of OPEC countries last year dropped to their lowest level in over a decade, according to the U.S. Energy Information Administration (EIA) Friday. Due to low oil prices, OPEC members earned a total of $404 billion in net oil export revenues in 2015, the EIA estimates. It is the lowest level since 2004. Earnings in 2015 fell 46 percent from $753 billion in 2014. The EIA said it expects OPEC’s revenues to fall to $341 billion in 2016, before rising to $427 billion in 2017.

What to expect from this week?

After Yellen and Fischer’s statements, the U.S. stock market will be looking for direction. The Fed, investors and the markets will closely watch the incoming data in the American economy.

On Monday, before the market opening, personal spending and personal income for July will be announced. This data is important for the Fed to see if inflation will reach its 2 percent target.

On Wednesday, Boston Fed President Eric Rosengren will speak. The market and the dollar could react to Rosengren’s remarks since he is a voting member of the Federal Open Market Committee (FOMC).

Chicago Fed President Charles Evans, who does not have a voting right in the FOMC this year, will also speak on Wednesday.

Also on Wednesday, pending home sales for July will be announced. The data could hint at future consumer spending.

Weekly initial jobless claims are due out on Thursday, while Cleveland Fed President Loretta Mester, who is a voting member of the FOMC, will make a speech.

If Rosengren and Mester give positive signals about a rate hike this year, the U.S. stock market could see losses, while the dollar could rise against other currencies.

Friday is the most important day of the week for macroeconomic data since unemployment rates and nonfarm payrolls for July will be announced. The Fed closely watches both data, and if they come in strong, the likelihood will increase of the Central Bank making a rate hike next month.

Although the global oil market is focused on OPEC’s informal meeting in Algeria at the end of September, oil prices will find direction this week with the U.S. dollar which will be impacted by FOMC speeches and incoming data. In addition, change in the U.S.’ weekly crude oil and gasoline inventories, to be announced Wednesday, will also impact the direction for oil prices. 

29 Aug,2016