By Ovunc Kutlu & Gulbin Yildirim
U.S. letter for week beginning Sept. 5

What happened last week?

The most important development last week was the much-awaited non-farm payrolls data for August that was highly significant for the Federal Reserve’s rate hike decision for September. The U.S.’ economy added 151,000 jobs last month, falling short of market expectations of 180,000. The data for June was revised to 271,000 from 292,000, while the data for July was revised to 275,000 from 255,000. Thus, the three-month average for non-farm payrolls rose to 232,000 from 190,000.

As the August jobs data was disappointing, the possibility of the Fed increasing its benchmark interest rate in September came under scrutiny.

Some analysts suggest that for a rate hike, which they predict will be only one in December, the Fed will await more positive incoming data from the U.S. economy as well as the presidential elections on Nov. 8.

However, in contrast another group of analysts claim the Fed is ready to make a rate hike on Sept. 21 citing the three-month average of non-farm payrolls which came in close to 200,000.

Last week, both the market and investors also watched the Federal Open Market Committee (FOMC) members’ speeches to discover indicators on whether the Fed will increase its interest rate this month.

Boston Fed President Eric Rosengren hinted in a statement on Wednesday that the Central Bank's goals of stable prices and maximum sustainable employment would likely be achieved "relatively soon.”

“Keeping interest rates low for a long time is not without risks," said the FOMC member who has a voting right in the interest rate decision this year. After the Fed Chair Janet Yellen and Vice President Stanley Fischer’s hawkish remarks the previous week, Rosengren was considered as joining the bandwagon of seeing a greater possibility of a rate hike this year.

In addition, Richmond Fed President Jeffrey Lacker said Friday that the Fed’s “rate should be significantly higher than it is now.” Although Lacker is not a voting member of the FOMC this year, his remarks were viewed by analysts as hawkish. "The way the data is playing out I think the longer we wait there is a material increase in risks that we run," he explained.

After the disappointing August jobs data, investors leaned on the position that it is less likely for the Fed to increase rates this year, and concentrated on buying in the U.S. stock market. Wall Street ended Friday with gains. On a weekly basis, the Dow Jones and the S&P 500 Indexes added 0.5 percent, while the Nasdaq marked a 0.6 percent increase. On a monthly basis, the Dow and the S&P were down 0.2 percent and 0.1 percent, while the Nasdaq posted a 1 percent gain in August.

Some other significant data in the U.S.’ economy last week were as following:

The unemployment rate remained unchanged in August at 4.9 percent, but fell short of market consensus of a 4.8 percent decrease. The participation rate also remained unchanged at 62.8. Meanwhile, average hourly earnings, which the Fed closely watches, rose only by 0.1 percent in August, despite the expectation of a 0.2 percent rise. Average weekly hours fell by 0.1 percent in August to reach 34.3.

The U.S.’ trade balance decreased 11.6 percent in August, from the previous month, to $39.5 billion, thanks to American exports reaching their highest level in the last two and a half years.

Meanwhile, ISM Manufacturing Purchasing Managers’ Index fell below 50 points to 49.4 in August showing a regression in the manufacturing sector for the first time since February.

Initial jobless claims fell to 263,000 last week, and jobs added in the U.S.’ private sector rose to 177,000 to beat expectations.

In addition, personal spending rose by 0.3 percent, and personal income increased by 0.4 percent in July – both in line with market consensus.

 What to expect from this week?

The disappointing August jobs data was viewed by investors that a rate hike would be less likely this month. Analysts believe that investors will maintain their buying position in Wall Street, and suggest the stock market will begin the new week with gains on Tuesday. Due to Labor Day, the American market will be closed on Monday.

It will be a data-poor week in the U.S. economy, but, since Labor Day marks the end of the summer season and investors return to the market, indexes in Wall Street are expected to reach their full transaction volume, according to analysts, which suggests that steeper rises and falls could be observed.

Here are some of the macroeconomic data that will be announced this week:

ISM Non-Manufacturing PMI and Services PMI for August will be revealed Tuesday. While the latter is not expected to change, the former could fall by 0.5 points, according to market expectations.

The U.S.’ job openings data for July is to be announced Wednesday, and, on the same day, the Fed will publish its “Beige Book” shedding light on how its views the American economy.

Two members of the Federal Open Market Committee (FOMC) will make speeches this week and investors and the market will try to form ideas about how officials perceive the economy and consider the likelihood of a Fed rate hike.

San Francisco Fed President John Williams is due to speak on Tuesday, and Boston Fed President Rosengren, who is a voting member in the FOMC, will speak on Friday.

With Rosengren’s hawkish remarks last Wednesday, coupled with Yellen and Fischer’s statements, the U.S. dollar gained against other major currencies.

Oil prices, which are indexed to the American dollar, fluctuated over the last couple of weeks, but disconnected from this relationship last Wednesday, returning to market fundamentals of supply and demand.

When the U.S.’ weekly crude oil inventories increased above expectations last week, oil prices lost more than 3 percent over worries of excess supply around the world.

The oil market will focus on weekly crude oil stocks in the U.S. this week, as investors await the critical informal meeting of OPEC countries and Russia to be held in Algeria at the end of this month.

05 Sep,2016