We saw employment data on Friday that showed steady improvement and according to Stanley Fischer, the Vice Chairman of the Fed, the US economy is now close to full employment.
By Peter Martin
Monday, August 10, 2015
In an interview with Bloomberg TV, Mr Fischer said that employment has improved quickly, yet inflation is very low and there remains a need to reflate the economy. ‘The concern about the situation is not to move before we see inflation, as well as employment, returning to more normal levels,’ said Mr Fischer. He added that a large part of current low inflation levels was temporary, tied to declines in the prices of oil and raw materials, which he would expect to ‘stabilize at some point’, but the Fed would be driven by data.
The dual mandate of the Fed, to seek maximum growth and price stability, does indeed suggest that the Fed’s hands are tied until it is confident that inflation will pick up. The Fed can afford to be patient and has plenty of ammunition to combat inflation should prices start to rise unexpectedly sharply.
In the forex market, the Aussie dollar and the New Zealand dollar have made notable moves today, both declining sharply as result of concerns over the growth of the Chinese economy. Chinese trade figures released over the weekend were jaw-droppingly weak compared to expectations, with exports plummeting 8.9% in July, against a consensus estimate of -3.0%, while the Merchandise Trade surplus was just $43.0 billion, versus an expected $53.7 billion and down from $46.6 billion in June. Furthermore, the Chinese Producer Price Index shrank 0.7% in July for a yearly decline of 5.4%. China is a major consumer of raw materials and such strong signals of slowing for its economy does not bode well for commodity prices, which in turn is bad news for commodity-reliant economies such as Australia and New Zealand. NZD/USD fell 0.82%, while AUD/USD dropped 0.80% to 0.7359.
Beyond the weekend’s Chinese reports, the economic calendar at the start of this week is very thin, and the major economic releases are loaded up towards the end of the week. The highlights include Thursday’s release of July’s retail sales data (a rise of 0.5% is expected) and July’s industrial production index on Friday (+0.4% expected). Also on Friday we will have the preliminary reading for August of the University of Michigan’s index of consumer sentiment. This indicator showed a decline in July and a small pick-up is expected for this month. Consumer sentiment is closely followed because it is viewed as a good guide for future consumer spending, which is a major driver of US GDP growth.
Stocks have opened in positive territory on Wall Street, with investors responding favorably to suggestions that a deal to provide further funding to Greece could be close at hand and also to the day’s mergers & acquisitions news. Shares in aerospace components manufacturer Precision Castparts jumped close to 20% after Berkshire Hathaway announced it intends to acquire the company for an all-cash deal of $37.2 billion, while Alibaba said it will purchase a 19.9% stake (worth around $4.6 billion) in Chinese electronics retailer Suning Commerce.
Shortly after the opening bell, the Dow Jones was up 150 points or 0.87% at 17,523 and the S&P 500 Index had gained the same percentage to stand at 2095.3. Such strong early gains have greatly tilted the percentage chances in favor of the major indices finishing up on the day, based on Binary Option prices. At the time of writing, with nearly the whole trading session still remaining, the bid/offer for the US500 to finish up was 93.3/97.7 on Nadex.
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