Monday started with a huge fall in Chinese equity indices, the Shanghai Composite down over 8%. It has stabilised since then, though remains just below the Monday close. The result of this move was that any feelgood effects from the Greek crisis being in remission was washed away as commodity prices fell and EM currencies suffered.
The Euro fell and the dollar rallied steadily on Tuesday, Wednesday and Thursday, as the market positioned for and then reacted to a marginally hawkish FOMC statement, and was unconcerned by the softer US Q2 GDP growth rate. But the Q2 Employment Cost Index, the broadest measure of labour costs, rose by only a third of the 0.6% expected and that has reversed all the G10 trends, taking the dollar to the bottom of the pile for this week. The FX move is mirrored by 2-year swap rates dropping back to 0.9%, reversing the gradual increase from that level to a high of 0.98 on Thursday. The market is Sisyphus and yields are the rock which is pushed slowly uphill before falling inevitably back from whence it came! There’s precious little differentiation among the rest of the G10, though chatter that the Norges Bank is ‘done’ with rate hikes helped NOK and the Swiss franc weakened at the start of the week, in a move that looked as though it was SNB-driven.
The Rouble fell today as the CBR cut rates 50bp to 11% (expected) and made dovish comments that point to further action. The rest of the CEEMEA trends mirror those for July as a whole, with the TRY and ZAR rather ominously unable to benefit from the improved risk tone. HUF continues to benefit from the end of the policy easing cycle.
In Latam, the clear winner is the MXN as the central bank quadrupled daily dollar sales in an effort to prop it up. It’s still down 2% vs. the USD during the month as a whole, and 8% down so far this year, though that makes it the pick of the major Latam currencies since BRL, CLP and COP are all down more. Copper prices made a new post-2009 low this week and oil too has remained under pressure.
EM-Asian FX moves were small. INR continues to out-perform, but the whole EM group has fallen again vs. JPY, USD, CNY and most of all, NZD and AUD.
On the monetary policy front there weren’t really any surprises. Rates were hiked in Brazil by 50bp to 14.25%, and the move worked up to a point as the BRL: steadied. Mexico left rates on hold at 3%, and Russia cut the key rate 50bp to 11%., The SNB FX reserve allocation data were significant for the news of a USD 52bn loss on their reserve portfolio after the FX moves (CHF up, gold and EUR down,) in H1
The big news of the week was supposed to be the FOMC Statement from the US on Wednesday. Some marginal changes to the text gave it a tiny hawkish bias and kept talk of a September rate hike intact, a feeling that lasted through the release of Q2 GDP data on Thursday. Those showed a softer than expected 2.3% increase, though this was offset y a sharp upward revision to Q1 (to 0.6% from -0.2%) as seasonal adjustments were updated. H1 GDP is 2.6% higher than H1 2014, which probably paints a reasonably accurate picture of what is going on. I.E, moderate growth. Friday though, saw the release of the Employment Cost Index for Q2, which posted a 0.2% quarterly increase (the lowest quarterly increase in over 20 years). Annual growth in employment costs is at 2%, which is less startling but even so, on this broader measure there is no more sign of wage growth than in the hourly wage series.
The IMF is unwilling to participate in the third bailout for Greece, out of concern about the lack of debt forgiveness and the fear, therefore that the bailout will not succeed. The Greek Government is holding talks on Sunday which could potentially trigger early elections. On the data front, money supply figures were steady, M3 at 5% y/y, and core CPI inflation edged up to 1%.
UK Q2 GDP data posted a 0.7% increase, in line with expectations though some sectors – notably construction – were weak. CBI sales were soft, mortgage lending strong.
