The markets were eagerly waiting what FED Chair Yellen had to say on Friday at the Jackson Hole Symposium, and her message interpreted first as hawkish, then as dovish, but in the end, with Stanley Fischer coming in and more analysis, the comments were interpreted as hawkish. We can see the moves very clearly in almost every chart, but what did she say?
She started by saying that the case for an interest rate hike has strengthened in recent months as both the economy and the labor market have improved. This was interpreted as hawkish, as it means that the FED is (very) close to raising the rates and also reinforces the earlier comments by several FED members earlier in the week. However, the lack of a specific mention of September as well as some other general comments were interpret by some as more dovish, and an attempt to play both sides of the field.
Nevertheless. The comments thereafter from Stanley Fischer created a new momentum, as he said that the comments from Yellen are in line with a rate hike in September, and that if the data continues to be strong it would be possible for the FED to raise the interest rate at least once, and possibly even twice this year.
This makes this week likely the deciding week regarding the interest rate, as on Friday we will get the NFP. The NFP report is always much anticipated, but this time it looks like it will be the deciding factor in whether or not the FED will raise the interest rate. A strong NFP which also shows wage growth, would make it hard for the FED not to raise the interest rate, and would certainly build up pressure for them to do so. However, a bad report would make it very unlikely the FED would act in September and possibly even this year, although December would still remain an option.
This week promises once more to be an important one, with the NFP on Friday as its climax. On Wednesday we also have inflation data out of the Eurozone and the ADP data, as well as Canadian GDP data. Thursday will give us important data out of China. In addition we have the manufacturing and construction PMI out of the UK on Thursday and Friday.
Currencies
EUR/USD – as could be expected with the increased chances of a rate hike in September, we saw a move downwards of 125 pips in the hours after Yellen’s comments. At the moment we are trading slightly below the 1.12 level again.
USD/JPY – broke out of the triangle, which was expected, after the comments from FED Chair Yellen, and further after the comments from Stanley Fischer. In addition, BOJ Governor Kuroda said that he would not hesitate to add more stimulus and that there is more than enough room to do so, and could also push the interest rate further into the negative.
GBP/USD – obviously also here the USD strengthened and we saw a move down, although over the week it was able to still close higher against the USD as one of the few currencies. The big question is if that will happen also this week, as the USD is posed to strengthen further, especially if the data continues to be strong, although we also get some data out of the UK later this week.
USD/CAD –was able to cross the 1.30 level again on the backdrop of the comments from Yellen and Fischer and also because of the drop in oil prices.
Indices
Dollar Index – jumped up and reached the highest level in nearly 2 weeks as the prospects of a rate hike have increased. We are still relatively far from the highs of late July, but if the data this week remains strong, we could get there pretty quickly.
S&P 500 – saw quite a bit of volatility on Friday in the aftermath of Yellen’s comments at the Jackson Hole Symposium. However, as mentioned already before, the likelihood for a rate hike in September have increased and with that, the equity markets are moving down. We can see that is closed right at the support level around the 2167 level, at which it is trading at the moment as well.
T-Notes – dropped all sharply as the prospects of higher interest rates makes holding on T-Notes less attractive as it is a fixed income asset.
Commodities
Gold – was very volatile as expected and moved nearly $25 on Friday. It closed lower as well, but not that much lower if we compare gold to other instruments. The main reason for this is that we already saw gold move lower over the course of last week, something that didn’t really happen with other instruments.
Oil – is moving down as the USD is strengthening, something which is pressuring commodities across the board, and oil is no exception here. The number of active rigs remained unchanged compared to last week, a break of the trend of recent weeks in which we saw the number of active rigs increase steadily.
More doubts on the likelihood of a production freeze over the weekend, as production in Iraq increase more and also Iran said it would only agree if the other countries accept that Iran will continue to increase production until it has regained its market share within OPEC, something that the other countries are unlikely to accept.
Wheat – saw a large drop again on Friday and reached the lowest level in 10 years. The reason we are seeing wheat trade higher at the moment than the close on Friday is due to the contract rollover to the December 2016 contract.